The Warehouse Receipts Law

A. Definitions

Warehouse
o A building or a place where goods are deposited and stored for profit.
Warehouseman
o A person lawfully engaged in the business of warehousing. (Section 58(A))
If he only happens to own a warehouse without habitually storing
goods for profit, he is not a warehouseman under the contemplation of
the Warehouse Receipts Law.
The business of warehousing
o storing goods for profit.
Warehouse Receipt
o A bilateral contract that imports that goods are in the hands of a
warehouseman; it is a symbolical representation of the property itself.
This definition was looked upon with the most favor in class.
o A simple written contract between the owner and the goods and the
warehouseman to pay the compensation for that service.
o A written acknowledgement by the warehouseman that he has received and
holds certain goods therein described in store for the person to whom it is
issued. (NB: Sir didnt approve of the latter two definitions when recited in
class)

B. The Issue of Warehouse Receipts

Governing Law, Scope and Application

Act No. 2137, which took effect on Feb. 5, 1912.

Covers all warehouses, whether public or private, bonded or not
If the receipt issued is not a warehouse receipt as contemplated, it is an ordinary
deposit and so is covered by the Civil Code.

Who may issue

Section 1. Persons who may issue receipts. Warehouse receipts may be issued by any
warehouseman.

A warehouseman, as defined above.

o lawfully engaged
Has all the requisite licenses, clearances, etc. to do business.
However, no special licenses are required of warehousemen,
Except for customs bonded warehouses.
A duly authorized officer or agent of a warehouseman.

Parties to a warehouse receipt

The owner of the goods or the original depositor.

The warehouseman, who in this case is the depositary.
For negotiable instruments, the holder of the receipt.
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Form and contents

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.

No particular form is required, but all the terms listed must be present.
Mnemonic: DOwNLOADeRS
o Date
o Ownership of the warehouseman, if any
o Number, consecutive
o Location of the warehouse
o Owner, bearer, or to specific persons
o Advances made by warehouseman
o Description of the Goods
o Rate of storage Charges
o Signature of the Warehouseman
Why are all of these things needed?
1. Location of warehouse-to determine where the goods are deposited, especially if the
warehouseman has more than one warehouse.
2.
Date of issue and receipt - indicates prima facie the date when the contract of
deposit is perfected and when the storage charges shall begin
3. Consecutive number of receipt - to identify each receipt with the goods for which it
was issued
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4. Person to whom goods are deliverable - determines the person or persons who shall
prima facie be entitled lawfully to the possession of the goods deposited. Also, if it is to
bearer or to order, the receipt is negotiable.
5.
Rate of storage charges - consideration for the contract from the view of the
warehouseman
6. Description of goods or packages - for identification
7. Signature of warehouseman - best evidence of the fact that the warehouseman has
received the goods and has bound himself to assume all obligations in connection
therewith
8.
Warehousemans ownership of or interest in the goods - purpose is to prevent
abuses in the past when warehouseman issued receipt on their goods
9.
Statement of advances made and liabilities incurred (if present) - purpose is to
preserve the lien of the warehouseman over the goods stores or the proceeds thereof in
his hands
Effect of omission of any of the essential terms

Validity not affected.

Negotiability, if any, not affected.
The contract will be converted into an ordinary deposit.
If the receipt is negotiable, the warehouseman is only liable for damages to those
injured by the omission.
o EXCEPTION: Omission of statement of warehousemans ownership of goods
covered by the receipt.
Criminal offense under Sec. 53, infra.

Other terms and conditions

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.

Generally, may insert any other terms and conditions.

Exceptions
1. Those contrary to the provisions of the Act.
a) Exemption from liability for misdelivery (Sec. 10)
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 xxx

b) Exemption from the requirement to give statutory notice in case of sale of

goods (Secs. 33 and 34)
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Sec. 33. Satisfaction of lien by sale. A warehouseman's lien for a claim which has become
due may be satisfied as follows:
The warehouseman shall give a written notice to the person on whose account the goods are
held, and to any other person known by the warehouseman to claim an interest in the goods.
Such notice shall be given by delivery in person or by registered letter addressed tot eh last
known place of business or abode of the person to be notified. The notice shall contain:
xxx
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 storedto satisfy the lien upon such
goods and to remove them from the warehousexxx

2. An exemption from liability for the negligence in the safekeeping of the goods.
a) E.g. For the account and at the risk of the depositor
b) Standard to be followed is the degree of care in the safekeeping of the goods
which a reasonably careful man would exercise in regard to similar goods of
his own.
3. Those contrary to law, morals, good customs, public order or public policy.
If any of these prohibited conditions is included in the receipt, the condition will
be void, but otherwise the receipt would be valid.
Special requirements for form of negotiable receipts

1. If duplicate, must be so marked.

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.

This section only applies to negotiable receipts.

Issuance of a duplicate negotiable receipt, not so marked, is a criminal offense

punished under Sec. 52, infra.

The warehouse man is liable to those who:

o Purchased the duplicate receipt for value, and
o Supposing it to be the original
o Even if the purchase was made after the goods had already been delivered
to the holder of the original receipt.

2. If non-negotiable, must be so marked.

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.

This section makes supposedly non-negotiable receipts, which have not been so
marked, in essence, negotiable ones.
If warehouseman failed to so mark it, a holder of the receipt who purchased it in
good faith and for value may choose to treat the receipt as a negotiable one.
o Unless its a letter, memorandum or written acknowledgement of an
informal character. In which case its not really a warehouse receipt.

Construction of warehouse receipts

If the action is against the warehouseman, the receipt is liberally construed in

favor of bona fide holders of the receipt.
The rule does not apply against other parties to the transaction.
As to matters not provided for

Sec. 56. Case not provided for in Act. Any case not provided for in this Act shall be governed
by the provisions of existing legislation, or in default thereof, by the rule of the law merchant.

1.

C. Obligations of the Depositor

Pay the fee to the warehouseman.

The business of warehousing, by definition, is for profit. There is no such thing

as gratuitous warehousing.

2.

Law merchant-collection of rules gleaned from centuries of common law

tradition.

Deliver the goods to the warehouseman.

It must be remembered that the warehouse receipt covers a special form of

deposit. Thus, the transaction is still a real obligation. Without delivery, the
warehouse receipt wouldnt cover anything.
In fact, if there is no delivery, and a warehouse receipt is issued, its a crime.
D. Obligations and Rights of the Warehouseman upon his receipt
Issue the Warehouse Receipt

With all of the requirements as just enumerated

o Most important requirementidentify
duplicates.

as

non-/negotiable,

even

on

3. Take Care of the Goods

Standard of care
o That which a reasonably careful man would exercise in regard to his own
goods, (Sec. 3 (b), supra.)
o Otherwise known as ordinary diligence or the diligence of a good father of
the family.
Liability for failure to care for goods (Sec. 21, infra.)
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o Warehouseman liable for any loss or injury to the goods caused by his
failure to exercise the proper standard of care.
o Exception
Not liable for any loss or injury to the goods which could not have
been avoided by the exercise of ordinary diligence
Exception to the Exception
1. When there is a stipulation to the contrary.
4. Answer for all the charges in the lien, especially insurance.

The full list of charges is found under H., infra, but in class, the most important of
these is to pay for insurance.
By implication, that means that the warehouseman has the obligation to insure
the goods.

5. Deliver the goods to the holder of the receipt or the depositor upon demand.
Sec. 8. Obligation of warehousemen to deliver. A warehouseman, in the absence of some
lawful excuse provided by this Act, is bound to deliver the goods upon a demand made either
by the holder of a receipt for the goods or by the depositor; if such demand is accompanied
with:
(a) An offer to satisfy the warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable, with such indorsements as would be
necessary for the negotiation of the receipt; and
(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 warehousemostan to
establish the existence of a lawful excuse for such refusal.

General Rule: The warehouseman must deliver the goods upon demand
o Upon demand
Unless demand is evidently useless, as when the warehouseman has
rendered it beyond his power to deliver the goods.

To whom delivery must be made

Sec. 9. Justification of warehouseman in delivering. A warehouseman is justified in
delivering the goods, subject to the provisions of the three following sections, to one who is:
(a) The person lawfully entitled to the possession of the goods, or his agent;
(b) A person who is either himself entitled to delivery by the terms of a non-negotiable receipt
issued for the goods, or who has written authority from the person so entitled either indorsed
upon the receipt or written upon another paper; or
(c) A person in possession of a negotiable receipt by the terms of which the goods are
deliverable to him or order, or to bearer, or which has been indorsed to him or in blank by the
person to whom delivery was promised by the terms of the receipt or by his mediate or
immediate indorser.

General Rule: the holder of the receipt, a transferee after notice, or the depositor.
A person entitled to delivery under a non-negotiable receipt, or the person he has
authorized in writing.
1. NB: the indorsement in paragraph (b) does not contemplate indorsement in
the sense of negotiation; it just means that the authority has been written on
the receipt itself.
2. If the warehouseman refuses to deliver to someone not specified in a nonnegotiable receipt, there is no liability.
o
Exception:
If
there
is
collusion
between
the
warehouseman and the person originally named.

A holder of a negotiable receipt

1. Whether by indorsement, by delivery in the case of a bearer instrument, or by
delivery to someone after a blank indorsement.
Exceptions: Other persons aside from the holder of the receipt, the depositor or their
agents
1.
Person to whom delivery of the goods has been ordered. (Secs.
14 and 17)
2.
Attaching creditor (Sec. 25)
3.
Purchaser of goods to satisfy warehousemans lien (Sec. 33)
4.
Purchaser of perishable or hazardous goods (Sec. 34)
o
Requirements to demand delivery

NB: Not applicable to non-holders and non-depositors as

contemplated in Sec. 9(a), supra.
Sec. 8 expressly imposes the requirements on a holder of the receipt for the
goods or the depositor.
1. Offer to satisfy the warehousemans lien (see discussion on warehousemans
lien, infra.)
a. If the lien is not satisfied, the warehouseman may choose to refuse to
deliver the goods. (Sec. 31, infra.)
b. In fact, if the warehouseman delivers to goods even when he has a lien, he
loses that lien. (Sec. 29, infra.)
2. Offer to surrender the receipt, if negotiable.
a. For the protection of the warehouseman.
b. Especially since delivery of the goods without obtaining the possession of
the negotiable receipt therefore is a criminal offense punishable under Sec.
54, infra.
c. This is subject to waiver, as when the warehouseman refuses to deliver due
to reasons other than non-production of receipt.
3. Offer to sign when the goods are delivered, if so requested by the
warehouseman.
When the warehouseman may refuse to deliver the goods.

1 Any of the conditions listed in Sec. 8 is not complied with.

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2 Other lawful excuses, if the warehouseman can prove them as an affirmative

defense, including
1) Request by the person lawfully entitled to the goods not to make delivery.
(Sec. 10)
2) Information that delivery is about to be made to one not lawfully entitled to
the goods. (Ibid.)
3) Acquisition of title to the goods by the warehouseman due to transfer by
depositor at the time of or subsequent to the deposit for storage. (sec. 16)
4) Acquisition of title to the goods due to the warehousemans lien (ibid.)
5) When the warehouseman has information that someone other than the
depositor or the one claiming under him has title to the goods, until he has
reasonable time to ascertain the validity of the adverse claim or to bring
legal proceedings to compel the claimants to interplead. (Sec. 18)
6) If the goods have been lost in such a way unavoidable by the exercise of
ordinary diligence over them, unless otherwise stipulated. (Sec. 21)
7) If the goods had been lawfully sold to satisfy a warehousemans lien. (Sec.
36)
8) If the goods had been lawfully sold or disposed of due to their perishable or
hazardous nature. (ibid.)
What a warehouseman may not claim as a valid cause for refusal to deliver.

1. Title in himself
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.

General Rule: The warehouseman cannot refuse to deliver the goods on the ground that
he has a title or right to the possession of the goods, unless such title is derived from:
a.
A transfer made by the depositor at the time of the deposit
for storage or subsequent thereto, or
b.
The warehousemans lien.
o Impliedly, a transfer made by the depositor before the time of deposit is not
a valid ground.
2. Adverse claim by several parties.
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.

General Rule: Adverse claim by third party is not a defense for failure to deliver
by the warehouseman.
o Exceptions:
a. When warehouseman requires all claimants to interplead
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.

Interpleader- An equitable proceeding brought by a third person to have a court

determine the ownership rights of rival claimants to the same money or property that is
held by that third person.
If there is a dispute as to the title over or possession of the goods, the
warehouseman may require all the claimants to interplead.
o Whether or not a suit against him has already been filed.
The end result of the interpleader is that the court will decide to whom the
warehouseman is to deliver the goods. Once that has been decided, the goods
must be delivered to that person.
b. When warehouseman takes a reasonable time to ascertain the validity of the adverse
claim or bring legal proceedings.
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.

If there is an adverse claim, and the warehouseman has information of the claim,
he may refuse to deliver the goods to either the depositor or the adverse claimant
until he has reasonable time to ascertain the validity of the adverse claim or to
bring legal proceedings to compel claimants to interplead.
The warehouseman becomes liable:
o If he makes a mistake in ascertaining the validity (Sec. 10 (misdelivery))
o He fails to compel the parties to interplead.
o A reasonable time lapses, at which point he will be liable for conversion.
Reasonable time is dependent on the circumstances.

The warehouseman cannot himself assert the adverse claim. (Sec. 16, supra.)
c. When delivered to a person, not a holder or depositor, who is lawfully entitled to the
goods (Sec. 9, supra.)
d. When goods have been lawfully sold (sec. 36, infra.)
E. Liabilities of a Warehouseman

Before issue:
1. Failure to Issue a Receipt
At issue:
2. Failure to stamp duplicate on copies of a negotiable receipt (Sec. 6 and 15)
3. Failure to place non-negotiable on a non- negotiable receipt (Sec. 7)
4. Issuing receipt for non-existing goods or misdescribed goods (Sec. 20):
After issue, but before delivery of goods:
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5. Failure to take care of the goods (Sec. 12)

6. Commingling of goods without authorization. (Secs. 22-24)
7. In case of altered receipts (Sec. 13)
8. In case of lost or destroyed receipts (Sec. 14)
At delivery:
9. Misdelivery of the goods (Sec. 10)
10. Failure to effect cancellation of a negotiable receipt upon delivery of the goods
(Sec. 11)
11. Failure to Deliver
After delivery:
12. Failure to give notice in case of sales of goods to satisfy his lien (Sec. 33) or
because the goods are perishable and hazardous (Sec.34)
1. For failure to issue the receipt
2. For misdelivery
Sec. 10. Warehouseman's liability for misdelivery. Where a warehouseman delivers the
goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman
shall be liable as for conversion to all having a right of property or possession in the goods if
he delivered the goods otherwise than as authorized by subdivisions (b) and (c) of the
preceding section, and though he delivered the goods as authorized by said subdivisions, he
shall be so liable, if prior to such delivery he had either:
(a) Been requested, by or on behalf of the person lawfully entitled to a right of property or
possession in the goods, not to make such deliver; or
(b) Had information that the delivery about to be made was to one not lawfully entitled to the
possession of the goods.

When the warehouseman delivers the goods to persons aside from those
enumerated in Secs. 8-9, supra, he is liable as if for conversion1
o To all persons having a right of property or possession in the goods,
If he delivered in contravention of Sec. 9 (b) (c), i.e. to someone other
than a claimant under a non-negotiable receipt or his agent, or a valid
holder of a negotiable receipt.
And even if he delivered to such a claimant or holder, if he was
requested not to deliver by a person lawfully entitled to the property,
or
If he had information that the delivery was about to be made to one
not lawfully entitled to the possession of the goods. (collusion)
NB. The warehouseman only has an action against the person to whom he
misdelivered if the depositor also sues that person.

1 For those not blessed with blissful Crim 2 memories, conversion is the unauthorized
assumption and exercise of the right of ownership over goods belonging to another
through the alteration of their condition or the exclusion of the owners right.
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3. For failure to mark a duplicate negotiable receipt.

Sec. 6, supra.

The warehouseman is liable to those who:

o Purchased the duplicate receipt for value, and
o Supposing it to be the original
o Even if the purchase was made after the goods had already been delivered
to the holder of the original receipt.
Cf. Effect of duplicate receipt
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.

In case a duplicate of a negotiable receipt is issued, and the word duplicate is

plainly placed on its face, the warehouseman warrants that:
o The duplicate receipt is an accurate copy of the original receipt, and
o The original receipt had not yet been cancelled at the date of issue of the
duplicate.
No other liability shall be imposed on the warehouseman
NB. Cf. Duplicate non-negotiable receipt.
There is no requirement to mark a duplicate non-negotiable receipt as duplicate.
This is because unlike a duplicate negotiable receipt, possession of a duplicate
non-negotiable receipt does not ipso facto give title to the goods via symbolic
possession.
However, just because the receipt is non-negotiable does not mean that there
would be no problems if a duplicate one is not so marked.
o The possessor of a duplicate may claim his own title over it, e.g. that it was
transferred to him.
o In such a case, the best recourse of a warehouseman is to have the parties
interplead.
4. For Failure to cancel negotiable receipt upon delivery
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.
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

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be liable to any one who purchases for value in good faith such receipt, for failure to deliver all
the goods specified in the receipt, whether such purchaser acquired title to the receipt before
or after the delivery of any portion of the goods by the warehouseman.

Applicable only to delivery of the goods covered by a negotiable receipt.

o If the receipt is non-negotiable, the warehouseman may make delivery
without requiring their surrender and cancellation.

The point of canceling the negotiable receipt is that if it went

uncancelled, another person might acquire it and use it to claim goods
which had already been delivered.

If the receipt is non-negotiable, such other person would not be able to

claim the goods anyway.
1. However, it would still be best for the warehouseman to cancel
the non-negotiable receipt, as if he did not, someone else might
use it to try to claim the goods again, or sell the receipt to
someone else.

If the goods have all been delivered, and the negotiation of the receipt would have
effected the transfer of the right of possession over the goods (i.e. the holder was
entitled to the delivery of the goods)
o The warehouseman must take up and cancel the receipt
o Otherwise, the warehouseman is liable for failure to deliver to anyone who

Purchases the uncancelled receipt

1. For value and
2. In good faith

Whether the purchaser in good faith acquired the receipt before or

after the delivery of the goods.

If some of the goods have been delivered,

o The warehouseman must either

Take up the receipt and cancel it, or

Place plainly upon it a statement of what goods have been delivered

o Otherwise, the warehouseman is liable for failure to deliver all the goods
specified in the receipt to anyone who

Purchases the uncancelled receipt

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1. For value and

2. In good faith

Whether the purchaser in good faith acquired the receipt before or

after the delivery of the goods.

Exceptions to liability: (Sec. 36, infra.)

o The goods have already been sold to satisfy the warehousemans lien.
o The goods have already been sold due to their perishable or dangerous
nature.

5. Liability under an altered receipt

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.

General Rule: the warehouseman will be liable according to the terms of the
receipt as originally issued.
Effects of alterations:
o Alteration immaterial
Whether fraudulent or not, authorized or unauthorized, the
warehouseman is liable on the altered receipt according to the
original tenor.
o Alteration material, authorized
Warehouseman liable according to the terms of the receipts as
altered.
o Alteration material, unauthorized, innocently made
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Warehouseman liable according to the original tenor.

o Alteration material, unauthorized, fraudulently made
Warehouseman liable according to original tenor to
1. Purchaser of the receipt for value without notice, and
2. To alterer and subsequent purchasers with notice, but only
limited to delivery. He is excused from any other liability.
Thus, the only true exception is an authorized, material alteration.
o An additional exception is an unauthorized, material, but fraudulent
alteration, but the effect here is that the warehouseman is only liable for
delivery to the alterer and subsequent purchasers with notice of the
alteration.
Even a fraudulent alteration cannot divest the title of the owner of stored goods.
o However, a bona fide holder acquires no right to the goods under a
negotiable receipt which has been stolen or lost or where the indorsement
has been forged.

6. Liability for lost or damaged receipt

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.

Applies only to negotiable receipts.

Remember the General Rule: If a holder of a negotiable receipt wants to claim the
goods it covers, he must surrender the receipt to the warehouseman.
o This is an exception.
o If the receipt is lost, generally, the warehouseman is not bound to deliver
the goods to the person claiming it was lost.
o However, a court may order the delivery of the goods upon:
Proof of the loss or destruction of the receipt
The giving of a bond with sufficient sureties to be approved by the
court.
1. This is to protect the warehouseman from any liability or
expense which he or another person injured by the delivery by
reason of the original receipt being left outstanding.
o The court may also order the payment of reasonable costs and attorneys
fees to the warehouseman.
14

However, even if the goods are delivered in accordance to the court order, the
warehouseman is still liable to an eventual holder in good faith for value.
o Dont feel bad for the warehouseman. Thats what the bond was given for.

7. For issuing receipt for non-existing goods or misdescribed goods

Sec. 20. Liability for non-existence or misdescription of goods. A warehouseman shall be
liable to the holder of a receipt for damages caused by the non-existence of the goods or by
the failure of the goods to correspond with the description thereof in the receipt at the time of
its issue. If, however, the goods are described in a receipt merely by a statement of marks or
labels upon them or upon packages containing them or by a statement that the goods are said
to be goods of a certain kind or that the packages containing the goods are said to contain
goods of a certain kind or by words of like purport, such statements, if true, shall not make
liable the warehouseman issuing the receipt, although the goods are not of the kind which the
marks or labels upon them indicate or of the kind they were said to be by the depositor.

General Rule: The warehouse man must deliver the exact same property
described by the receipt.
o If the goods do not correspond with the description, the warehouseman is
liable to the holder for damages.
o As to bona fide purchasers of warehouse receipts, the warehouseman is
estopped from denying that he has received the goods therein described.
o Exception:
The goods are described in the receipt merely by a statement of
marks and labels on the goods or the package which contains them
1. e.g. a sealed box which says Contents: 100 gold bars,
If the goods turn out not to match the marks or labels, the
warehouseman is not liable.
1. The warehouseman, for practical reasons, cannot, and for
reasons of public policy, should not be expected to open every
box or package deposited with him for storage.

8. Failure to take care of the goods

Sec. 21. Liability for care of goods. A warehouseman shall be liable for any loss or injury to
the goods caused by his failure to exercise such care in regard to them as reasonably careful
owner of similar goods would exercise, but he shall not be liable, in the absence of an
agreement to the contrary, for any loss or injury to the goods which could not have been
avoided by the exercise of such care.

Warehouseman must exercise ordinary diligence in the care of goods (see

discussion, supra.)

Cannot stipulate that he be exempted from this responsibility.

o However, he can agree to limit his liability to an agreed value of the property.

9. Liability in case of commingled goods

15

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.
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.
Sec. 24. Liability of warehouseman to depositors of commingled goods. The warehouseman
shall be severally liable to each depositor for the care and redelivery of his share of such mass
to the same extent and under the same circumstances as if the goods had been kept separate.

General Rule: the warehouseman shall keep the goods of each depositor separate
from the goods of the other depositors.
Exception:
o If authorized by agreement or by custom, the warehouseman may mingle
fungible goods with other such goods of the same kind and grade.
o In such a case, all of the depositors whose goods have been commingled
become co-owners of the entire mass of commingled goods, but shall only
be entitled to share of the mass proportionate to the amount deposited by
him.
o If the warehouseman has validly commingled the goods, he shall be liable to
each depositor for the care and delivery of an amount of the commingled
goods to the extent of his share.
Cf. Rule in ordinary deposits

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.

10.
For Failure to give notice in case of sales of goods to satisfy his
lien or because the goods are perishable and hazardous (see discussion on
sale to satisfy warehousemans lien, infra.)
11.
For Failure to deliver goods or unjust refusal to deliver the goods.
This isnt in any provision, but logically if the warehouseman fails to fulfill his
obligations he is liable.
F. Judicial Processes on the Goods covered by Warehouse Receipts

Attachment or Levy of Negotiable Receipts

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

16

enjoined.
The warehouseman shall in no case be compelled to deliver up the actual
possession of the goods until the receipt is surrendered to him or impounded by the court.

General Rule: The goods covered by a negotiable receipt cannot be attached or

levied upon under an execution.
o The general obligation of a warehouseman to a bona fide holder of a
negotiable receipt is to deliver the goods to whomever the receipt has been
negotiated.
o The warehouseman cannot be compelled to deliver the goods unless the
receipt is surrendered to him or impounded by the court.

Otherwise, as previously mentioned, its a crime.

Exceptions:
o The person who delivered the goods did not have title over the goods
sufficient to allow him to convey them for value.

Simply speaking, the person who delivered the goods was not the
owner of the goods, a holder of a validly negotiated instrument, or an
agent of either

o The receipt is first surrendered

o Its negotiation is enjoined.
o The document is impounded by the court.
o Actions for replevin by the real owner
o When attachment is made before the issuance of the negotiable receipt.

Overall exception: Attachment of the receipt itself, not of the goods covered by it.

Interpleader
See discussion under Secs. 18-19, supra.
Creditors Remedies
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 creditor of a debtor who is the owner of a negotiable receipt is entitled to aid
from the appropriate court in:
o Injunction
17

o Attaching the receipt

o Satisfying the claim by other means allowed by law or equity in regard to
property which cannot readily be attached or levied upon.

But I thought that the goods under the receipt couldnt be attached?
o Yep. But this article talks about attaching the receipt, not the goods.
G. The Warehousemans Lien

Definitions
Warehousemans lien - right of a warehouseman to retain goods until all storage
charges have been paid
How the lien works

The warehouseman is not bound to deliver the goods if he has not yet been paid the
storage charges which the depositor agreed to pay him.
Until such charges are paid, the warehouseman may retain possession of the goods
deposited as a sort of security against the obligation of the depositor to pay him.
If the depositor pays the warehouseman the necessary amount, the warehouseman will
deliver the goods, thereby ending the lien.
If the depositor, however, fails to pay the charges, then the warehouseman may enforce
the lien by selling the goods deposited with him and applying the proceeds to the
outstanding obligations.
o It is similar to the foreclosure of a pledge.

PNB v. Se
Facts
Noahs Ark Sugar Refinery issued 5 different Warehouse Receipts which were endorsed to Luis Ramos
and Cresencia Zoleta, both of whom endorsed them to PNB. Ramos and Zoleta defaulted on the payments
of their loan, PNB sought the delivery of the quedans. SC ordered respondents to either deliver the
quedans or pay actual damages. Respondents made a claim for warehousemans lien. Trial court granted
it but PNB sought for nullification of the TCs order.
Held:
SC held that private respondents were entitled to warehousemans lien. PNB is legally bound to stand by
the express terms and conditions on the face of the Warehouse Receipts as to the payment of storage
fees. Even in the absence of such a provision, law and equity dictate the payment of the warehousemans
lien pursuant to Sec. 27 and 31 of the Warehouse Receipts Law.

What the lien includes

When the receipt is non-negotiable
Sec. 27. What claims are included in the warehouseman's lien. Subject to the provisions of
section thirty, a warehouseman shall have a lien on goods deposited or on the proceeds
thereof in his hands, for all lawful charges for storage and preservation of the goods; also for
all lawful claims for money advanced, interest, insurance, transportation, labor, weighing,
coopering and other charges and expenses in relation to such goods, also for all reasonable
charges and expenses for notice, and advertisements of sale, and for sale of the goods where
default had been made in satisfying the warehouseman's lien.

1. All lawful charges for storage and preservation of the goods

18

2. All lawful claims for

a.
b.
c.
d.
e.
f.
g.
h.
relation to the goods
3. All reasonable charges and expenses for
a.
b.
c.
to satisfy the lien
Cf. When the receipt is negotiable

Money advanced
Interest
Insurance
Transportation
Labor
Weighing
Coopering (making barrels)
Other charges and expenses in

Notice
advertisements of sale
the sale of the goods where made

Sec. 30. Negotiable receipt must state charges for which the lien is claimed. If a negotiable
receipt is issued for goods, the warehouseman shall have no lien thereon except for charges
for storage of goods subsequent to the date of the receipt unless the receipt expressly
enumerated other charges for which a lien is claimed. In such case, there shall be a lien for
the charges enumerated so far as they are within the terms of section twenty-seven although
the amount of the charges so enumerated is not stated in the receipt.

1. General Rule: Only charges for storage of goods subsequent to the date of receipt
2. Exception: when the receipt expressly enumerates other charges for which a lien is
claimed
o The lien would then cover the charges enumerated even if the amount is not
stated in the receipt.
Goods subject of lien
Sec. 28. Against what property the lien may be enforced. Subject to the provisions of
section thirty, a warehouseman's lien may be enforced:
(a) Against all goods, whenever deposited, belonging to the person who is liable as debtor for
the claims in regard to which the lien is asserted, and
(b) Against all goods belonging to others which have been deposited at any time by the person
who is liable as debtor for the claims in regard to which the lien is asserted if such person had
been so entrusted with the possession of goods that a pledge of the same by him at the time
of the deposit to one who took the goods in good faith for value would have been valid.

1.

Goods belonging to the depositor or his

principal
a. If this person is liable for the claims against which the lien is being
enforced.
2.
Goods belonging to someone other than the
depositor or his principal
b. If that someone other is liable for the claims
19

c. And if he has sufficient title to the goods to pledge them.

i. I dont know how this is supposed to work, seeing as one has to be the
absolute owner of the thing to pledge it.-ed.
How Lien is lost
Sec. 29. How the lien may be lost. A warehouseman loses his lien upon goods:
(a) By surrendering possession thereof, or
(b) By refusing to deliver the goods when a demand is made with which he is bound to comply
under the provisions of this Act.

1.

voluntarily surrender of possession of goods

a.
constitutes
a
waiver
or
abandonment of the lien
b.
must be voluntary.
i.
Where goods taken by force, lien subsists.
ii.
When goods taken under legal process, such as replevin, lien subsists.
iii.
Warehouseman may not claim a lien on other goods of the same
depositor for unpaid charges on the goods surrendered, if the said goods are
covered by different receipts.
2. Wrongfully refusing to deliver the goods to a person who holds the receipt or the
depositor when properly demanded
a. See discussion on requirements for delivery, supra.
b. However, here, the loss of the lien does not necessarily mean the
extinguishment of the obligation to pay warehousing charges and fees.
Enforcement of the LienRemedies available to the warehouseman
1.
Refusal to deliver
Sec. 31. Warehouseman need not deliver until lien is satisfied. A warehouseman having a
lien valid against the person demanding the goods may refuse to deliver the goods to him
until the lien is satisfied.

2.

All the remedies allowed by law to a creditor against a debtor,

as well as those allowed by law for the enforcement of a lien against personal
property.

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.
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.

Here, the warehouseman can recover all charges and advances from the
depositor that the latter has bound himself to pay.
o With or without lien, i.e. whether or not he has lost the lien
2 options:
20

1) Remedies allowed by law to a creditor against a debtor.

o E.g. specific performance, accion pauliana, etc.
2) Remedies allowed by law for the enforcement of a lien.
o E.g. civil action for collection of the unpaid charges
o Counterclaim in an action to recover property from him.
Extrajudicial Sale to satisfy lien.

3.

Sec. 33. Satisfaction of lien by sale. A warehouseman's lien for a claim which has become
due may be satisfied as follows:
The warehouseman shall give a written notice to the person on whose account the goods are
held, and to any other person known by the warehouseman to claim an interest in the goods.
Such notice shall be given by delivery in person or by registered letter addressed tot eh last
known place of business or abode of the person to be notified. The notice shall contain:
(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 be held. The sale shall not be held less than fifteen days from the time of the
first publication. If there is no newspaper published in such place, the advertisement shall be
posted at least ten days before such sale in not less than six conspicuous places therein.
From the proceeds of such sale, the warehouseman shall satisfy his lien including the
reasonable charges of notice, advertisement and sale. The balance, if any, of such proceeds
shall be held by the warehouseman and delivered on demand to the person to whom he would
have been bound to deliver or justified in delivering goods.
At any time before the goods are so sold, any person claiming a right of property or
possession therein may pay the warehouseman the amount necessary to satisfy his lien and to
pay the reasonable expenses and liabilities incurred in serving notices and advertising and
preparing for the sale up to the time of such payment. The warehouseman shall deliver the
goods to the person making payment if he is a person entitled, under the provision of this Act,
to the possession of the goods on payment of charges thereon. Otherwise, the warehouseman
shall retain the possession of the goods according to the terms of the original contract of
deposit.

Process of extrajudicial sale to satisfy the lien:

21

1.

Written notice to the person

a.
b.

on whose account the goods are held, or

who the warehouseman knows has an
adverse claim over the goods
Which must contain

2.
a.

An
itemized
statement
of
the
warehousemans claim, including the sums due at the time of notice and the date
when the claim became due.
b.
A brief description of the goods subject
of the lien
c.
A demand that the claim be paid on or
before a certain date, which must be not less than 10 days from
i.
Delivery of notice, if personally
delivered
ii.
The time when the notice reached
its destination if sent by mail.
d.
A statement that a failure to pay the
claim within the specified time will result in the goods being advertised for sale
and sold for auction, the time and place of which must also be specified.
3.
If time specified elapses without claim being answered, the sale will
be advertised, such advertisement stating
a.
Description of the goods to be sold
b.
The name of the owner or person on
whose account the goods are held
c.
The time and place of the sale
4.
The advertisement must be published once a week in a newspaper
published in the place where the sale is to be held for two consecutive weeks
a.
If there is no newspaper in that place,
it shall be posted for at least 10 days before the sale in at least 6 conspicuous
places therein.
5.
After publication, the sale by auction may be held.
a.
In accordance with the terms set out
in the notice
b.
At the place where the lien was
acquired

Unless such place is manifestly

unsuitable for holding a sale, at which point, it will be held at the nearest
suitable place.
c.
At least 15 days after first publication
of the advertisement or the posting thereof.
6.
After the sale, the proceeds will be applied as follows:
To the satisfaction of the warehousemans lien
Additionally, to the reasonable charges or notice, advertisement and sale
22

NB. If there is a remaining balance after the application to the first two
items, such balance shall be held by the warehouseman and delivered on
demand to the person to whom he would have been bound to deliver the
goods.
i. i.e. the excess belongs to the depositor.
NB. Any time before the goods are sold, any person may pay the warehouseman for his
lien and the other expenses.
The warehouseman shall deliver the goods to that person if he is entitled to the
possession of the goods.
Otherwise, the warehouseman shall retain ownership of the goods.
4.
Extrajudicial sale of perishable or dangerous goods.
Sec. 34. Perishable and hazardous goods. If goods are of a perishable nature, or by keeping
will deteriorate greatly in value, or, by their order, leakage, inflammability, or explosive
nature, will be liable to injure other property , the warehouseman may give such notice to the
owner or to the person in whose names the goods are stored, as is reasonable and possible
under the circumstances, to satisfy the lien upon such goods and to remove them from the
warehouse and in the event of the failure of such person to satisfy the lien and to receive the
goods within the time so specified, the warehouseman may sell the goods at public or private
sale without advertising. If the warehouseman, after a reasonable effort, is unable to sell such
goods, he may dispose of them in any lawful manner and shall incur no liability by reason
thereof.
The proceeds of any sale made under the terms of this section shall be disposed of in the same
way as the proceeds of sales made under the terms of the preceding section.

If the goods are

Perishable
By their nature
o deteriorate greatly in value,
o liable to injure other property,
The warehouseman may
give notice to the owner of depositor to
o satisfy the warehousemans lien and
o remove the goods from the warehouse.
Sell the goods, publicly or privately, without need of advertisement if the
depositor does not so satisfy the lien and remove the goods.
o The proceeds of the sale shall be disposed of in the same way as in a sale to
satisfy a lien. (6th, supra.)
Dispose of the goods in any lawful manner, without liability, if he fails to sell the
goods after reasonable effort.
Effect of sale
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.

23

Warehouseman not liable for non- delivery

However, if the sale was made without the publication required and before the
time specified by law, it is void and the purchaser of the goods acquires no title in
them.
o The warehouseman would also be liable for misdelivery.
H. PrimerNegotiability2

Negotiability means the ability of a given instrument, for our purposes a

warehouse receipt, to be transferred by mere delivery or by indorsement (signing
on the back of the receipt, either like soI indorse this check to X (signed) or
just by signing it.)
o Negotiable warehouse receipts and instruments are usually marked by the
so-called words of negotiability-to order or to bearer.
Negotiation is the transfer of the receipt, either by mere delivery or by
indorsement, with the effect that the new holder of the receipt has the same right
as the owner to ask for the goods from the warehouseman.
o Delivery, only applicable to bearer instruments, means the turning over of
possession to another.
o Indorsement (note the I), only applicable to order instruments, is the
signing on the back of the receipt, in one of two ways:
I indorse this receipt to _______. (signature)
Just a signature.
These have effects, which will be discussed infra.
o I say mere because thats all that needs to be done to transfer the right to
the goodsdelivery or indorsement.
Negotiable warehouse receipts come in two forms:
o To order
This means that it is to be delivered to a specific person, to the
persons to whom he indorses it, or people to whom the indorsees
further indorse it.
This is a receipt negotiable by indorsement only. Although it may
become a bearer instrument by blank indorsement.
o To bearer
This means that delivery may be made to whoever is in the possession
of the receipt.
It may be expressly deliverable to bearer, or the indorsement is in
blank, e.g. _____________, (signed, Roberto Martinez). In the latter
case, the order instrument is converted to a bearer instrument.

2 Disclaimer: This is glossing over a lot of details as to what and how negotiation works,
in the negotiable instrument sense. This is not a sufficient discussion for nego, but Im
hoping its enough so that you can understand what a negotiable warehouse receipt is.
24

I.

NEGOTIATION AND TRANSFER OF RECEIPTS

DEFINITIONS
Non-Negotiable Receipt
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 nonnegotiable receipt.

Negotiable Receipt

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.

Cf. Negotiable Instruments

A negotiable instrument is an instrument which acts as a cash substitute. It must

comply with the provisions of the Negotiable Instruments Law. But thats another
subject.

Instead, negotiable warehouse receipts fall under the category of negotiable

documents.

See discussion on warranties, infra.

PNB v. Noahs Ark

Facts:
Noah issued quedans to its vendees who in turn negotiated it to PNB. When PNB tried to demand the
sugar covered by the quedans, Noah refused because the check its vendees issued for the quedans were
dishonoured.
Held:
Noah should deliver the quedans to PNB. The fact that Noah was not paid does not make the negotiation
to PNB invalid since PNB paid value in good faith.

Transfer

Can refer to any of several ways by which the rights over goods contained in a
warehouse receipt may be acquired by another person. Includes sale, donation,
barter, and negotiation. Typically must be with the consent of or notice to the
warehouseman.

Negotiation

Specific form of transfer done merely by the transfer of the instrument itself,
whether by delivery or indorsement. Does not need notice to the warehouseman.
How negotiable receipts are negotiated
1) By delivery
Sec. 37. Negotiation of negotiable receipt of delivery. A negotiable receipt may be
negotiated by delivery:

25

(a) Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the
bearer, or
(b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to
the order of a specified person, and such person or a subsequent indorsee of the receipt has
indorsed it in blank or to bearer.
Where, by the terms of a negotiable receipt, the goods are deliverable to bearer or where a
negotiable receipt has been indorsed in blank or to bearer, any holder may indorse the same
to himself or to any other specified person, and, in such case, the receipt shall thereafter be
negotiated only by the indorsement of such indorsee.

A negotiable receipt may be negotiated by delivery, i.e. is a bearer receipt, when

1. The receipt states that it is to bearer.
2. The receipt is to order, but it has been indorsed in blank or to bearer.
See discussion on negotiability, supra.
2) By indorsement
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.

A negotiable instrument may be negotiated by indorsement, i.e. is an order receipt,

when
1. By its terms it is deliverable to a specified person or his order
2. Having been previously indorsed in blank or to bearer, the holder then indorses the
receipt to himself or to a specified person.
A person to whom an order instrument is indorsed may subsequently indorse it to
Another specified person
To blank or to bearer.
Transfer of non-negotiable receipt v. Delivery of negotiable receipt.
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 cannot be negotiated, and the indorsement of such a receipt gives
the transferee no additional right.

When the receipt is non-negotiable, obviously, it cannot be negotiated.

However, it may be transferred to another person by virtue of a sale or a donation
and by delivery to such vendee or donee.
If the non-negotiable receipt is indorsed, it does not give any additional rights to
the holder.

26

In order to fully effect the transfer of all the rights over the goods via a transfer of
a non-negotiable receipt, NOTICE3 is necessary.
o Once notice has been effected
If there is no NOTICE, the transferees rights can be defeated by an unpaid
sellers lien, stoppage in transitu, etc.
When there is a series of transfers, the last transferors only right is to NOTIFY
the warehouseman.
The notice to the warehouseman is the indication of the transferors authorization
for the transferee to claim the goods.
Cf. transfer of order receipt that has not been indorsed
Sec. 43. Transfer of negotiable receipt without indorsement. Where a negotiable receipt is
transferred for value by delivery and the indorsement of the transferor is essential for
negotiation, the transferee acquires a right against the transferor to compel him to indorse
the receipt unless a contrary intention appears. The negotiation shall take effect as of the
time when the indorsement is actually made.

When an order receipt that has not been indorsed is transferred for value and
delivered, and the transferors indorsement is essential for negotiation, the transferee
acquires the right
The transferee acquires the right to compel the transferor to indorse the receipt.
o Unless a contrary intention appears.
o The negotiation takes effect when the indorsement is actually made, not at
the time of transfer.
Process of negotiation/transfer:
Negotiation of Bearer Negotiation of Order Transfer
instrument
instrument
1. Deliver.
1. Indorse. 3 options:
1. Agree to transfer
2. Repeat as necessary.
a. To a specific person
2. Transfer takes place
3. Holder claims goods.
b. To bearer
between transferor and
c. In blank
transferee.
Can
be
2. Indorsee claims goods,
sale, donation, etc.
OR
3. Receipt turned over to
3. If indorsed to specific
transferee.
person, return to 1.
Authorization
of
4. If to bearer or in blank,
transferor
usually
treat
as
bearer
attached to receipt.
instrument.
Title not yet passed.
4. Transferee
notifies
warehouseman.
Transferees
title
perfected.
5. Transferee
claims
3 This is a very important word. We had 3 lectures revolving around this one.
27

goods.

Better rights given by a negotiable receipt

The goods thereunder cannot be garnished or attached except in certain cases
(Sec. 25, supra.)
If negotiated, the holder acquires the direct obligation of the warehouseman to
hold possession of the goods for him to without notice to the warehouseman
(Sec. 41)
The goods it covers are not subject to sellers lien or stoppage in transitu. (Sec.
49, infra.)
Vices of consent generally do not affect title. E.g. mistaken negotiation to another
party does not affect such other partys title to the goods.
Rights of a person to whom a receipt has been negotiated
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.

1. The same title over the goods as the person negotiating the receipt had.
2. The same title over the goods as the person to whose order the receipt was
originally issued.
3. The direct obligation of the warehouseman to hold possession of the goods for him
as if the warehouseman directly contracted with him.
4. Title cannot be defeated by sellers lien, stoppage in transitu, attachment, levy,
fraud.
Cf. Rights of a person to whom a receipt has been transferred.
Sec. 42. Rights of person to whom receipt has been transferred. A person to whom a receipt
has been transferred but not negotiated acquires thereby, as against the transferor, the title
of the goods subject to the terms of any agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the right to notify the
warehouseman of the transfer to him of such receipt and thereby to acquire the direct
obligation of the warehouseman to hold possession of the goods for him according to the
terms of the receipt.
Prior to the notification of the warehouseman by the transferor or transferee of a nonnegotiable receipt, the title of the transferee to the goods and the right to acquire the

28

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.

This provision applies to persons to whom a receipt has been transferred, but not
negotiated. Their rights depend on whether the receipt is:
Negotiable (thus being an order receipt, unindorsed)
o The title to the goods subject to the terms of any agreement with the
transferor.
o Right to compel transferor to indorse. (supra.)
Non-negotiable
o Acquires right to the title subject to the terms of any agreement to the
transferor
o Right to notify warehouseman of transfer to him of the receipt.
Notice to the warehouseman gives him the direct obligation with the
latter to hold possession of goods for him.
Prior to such notice, a levy on the goods or an attachment thereof by a
creditor of the transferor will defeat the transferees claim.
As will a notice to the warehouseman by the transferor or a
subsequent purchaser therefrom.
As will a sale of goods by the transferor.
Who can negotiate
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.

Basically,
The owner of the receipt
An indorsee of an order receipt
The holder of a bearer receipt
Neither a thief or a finder is covered by the provision.
However, if the owner of the goods permits another to have possession or custody
of negotiable receipts running to the order or bearer, this is representation as to
title, which purchasers in good faith can rely upon despite breaches or trust or
violations of agreement.
o As such, the owner may be estopped from denying the title of the holder.
Warranties of a negotiator or transferor
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

29

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.

These warranties are similar to those under the Negotiable Instruments Law.
Each indorsee warrants the same to subsequent indorsees.
However,
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.

Thus, unlike a holder or a transferor of a negotiable instrument, an indorsee does not

become liable for the failure to deliver by the warehouseman.
Under the negotiable instruments law, the list of endorsers is like a chain of
guarantors. If indorsee no. 3 fails to pay the amount upon demand by the current
holder, indorsee 2 can be held to answer for the debt. If he fails, indorsee 1 can be
held, and so on until the liability reaches the original issuer. (Contract of
warranty)
However, for negotiable warehouse receipts, a failure on the warehousemans
part to deliver does not make past indorsers liable.
Comparative transactions:
o Negotiable Instrument (contract of warranty)
1. Johnny issues a check to Joey or his order.
2. Joey indorses the check to Tommy.
3. Tommy indorses the check to Marky.
4. Marky uses the check to pay Dee Dee for a bottle of olive oil.
5. Dee Dee tries to cash the check. It bounces.
6. Dee Dee attempts to collect from Marky. Marky cannot pay.
7. Dee Dee can then go down the line, going after Tommy, then Joey, all
the way up to Johnny to enforce his claim.
In effect, the previous indorsers are guarantors of subsequent
indorsees.
o Negotiable Receipt (no contract of warranty)
1. Johnny deposits a box of olive oil with Joey.
2. Joey issues a negotiable warehouse receipt.
3. Johnny indorses it to Tommy.
4. Tommy indorses it to Marky.
30

5.
6.
7.
8.

Marky sells the receipt to Dee Dee.

Dee Dee tries to claim the olive oil from Joey.
Joey says that the olive oil had already been sold by Johnny.
Dee Dees recourse is against Joey, the warehouseman and/or Johnny,
the depositor, only. He can go after Marky only if Marky had
something to do with the sale. He cannot go after Tommy.
Here, Tommy, the previous indorser, does not guaranty the
subsequent indorsees obligation.
Other rules regarding negotiation
1. Liability of mortgagee, pledgee, or holder for security.
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.

A mortagee, pledge, or holder for security who demands or receives payment of the debt
which the receipt secures does not warrant the genuineness of the receipt or the
quantity or quality of the goods covered by such receipt.

Thus, if the receipt mortgaged or pledged turns out to be fake, or the goods
described therein are less than described, the mortgagee or pledgee is not liable.

2. Effect of fraud, mistake or duress.

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.

General Rule: Negotiation induced by fraud, mistake, or duress is invalid.

Exception: when the person to whom the receipt was negotiated, or a person to
whom the receipt is subsequently negotiated, paid value in good faith for the
receipt.

3. Effect of subsequent negotiation

Sec. 48. Subsequent negotiation. Where a person having sold, mortgaged, or pledged goods
which are in warehouse and for which a negotiable receipt has been issued, or having sold,
mortgaged, or pledged the negotiable receipt representing such goods, continues in
possession of the negotiable receipt, the subsequent negotiation thereof by the person under
any sale or other disposition thereof to any person receiving the same in good faith, for value
and without notice of the previous sale, mortgage or pledge, shall have the same effect as if
the first purchaser of the goods or receipt had expressly authorized the subsequent

31

negotiation.4

When the goods covered by a negotiable receipt, or the negotiable receipt itself have
been sold, mortgaged, or pledged, and the person who did so continues in possession of
the receipt,

The subsequent negotiation by the vendor, mortgagor or pledgor, as the case may
be, to a purchaser for value in good faith shall be valid, as if the vendee,
mortgagee or pledge authorized the negotiation.

THUS, if a person buys a negotiable receipt or the goods covered by it, or they have
been mortgaged or pledged to him, he must have the receipt negotiated to him, or else
the vendor, mortgagor or pledgor can validly subsequently negotiate the receipt to
purchasers in good faith for value.
e.g. Negotiable warehouse receipt (to bearer) issued to Bob over 500 sacks of rice. Bob
sells the rice to Kenny, but does not negotiate the receipt to him. If Kenny does not
compel Bob to deliver the receipt to him, and Bob subsequently negotiates the receipt to
Nick, Nick shall be the valid holder of the receipt, and thus owns the rice. Kenny got
screwed, but the law says its his fault, and so he cant complain. Tough noogies.
4. Effect of negotiation as regards vendors lien.
Sec. 49. Negotiation defeats vendor's lien. Where a negotiable receipt has been issued for
goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser
for value in good faith to whom such receipt has been negotiated, whether such negotiation
be prior or subsequent to the notification to the warehouseman who issued such receipt of the
seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged
to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first
surrendered for cancellation.

When goods are covered by a negotiable receipt, purchasers in good faith for value are
protected from a sellers lien or the right of stoppage in transitu.
For those of us without the benefit of sales,
o Sellers lien and Right of stoppage in transitu are reliefs granted to unpaid
sellers of goods.
o Sellers lien means that the seller can refuse to deliver the goods until the
price is paid.
o Stoppage in transitu contemplates a situation where the unpaid seller has
already given the goods to a carrier for delivery to the buyer. However,
being unpaid, he has the right to stop the goods from getting to the buyer,
generally by asking the carrier not to deliver the goods, or to return the
goods to him if they are already in transit.
J.

Criminal Liability

Sec. 50. Issue of receipt for goods not received. A warehouseman, or an officer, agent, or

4 Candidate for worst-constructed provision of all time.-ed.

32

servant of a warehouseman who issues or aids in issuing a receipt knowing that the goods for
which such receipt is issued have not been actually received by such warehouseman, or are
not under his actual control at the time of issuing such receipt, shall be guilty of a crime, and,
upon conviction, shall be punished for each offense by imprisonment not exceeding five years,
or by a fine not exceeding ten thousand pesos, or both.
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.
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.
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.
Sec. 54. Delivery of goods without obtaining negotiable receipt. A warehouseman, or any
officer, agent, or servant of a warehouseman, who delivers goods out of the possession of such
warehouseman, knowing that a negotiable receipt the negotiation of which would transfer the
right to the possession of such goods is outstanding and uncanceled, without obtaining the
possession of such receipt at or before the time of such delivery, shall, except in the cases
provided for in sections fourteen and thirty-six, be found guilty of a crime, and, upon
conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a
fine not exceeding two thousand pesos, or by both.
Sec. 55. Negotiation of receipt for mortgaged goods. Any person who deposits goods to
which he has no title, or upon which there is a lien or mortgage, and who takes for such goods
a negotiable receipt which he afterwards negotiates for value with intent to deceive and
without disclosing his want of title or the existence of the lien or mortgage, shall be guilty of a
crime, and, upon conviction, shall be punished for each offense by imprisonment not
exceeding one year, or by a fine not exceeding two thousand pesos, or by both.

Summary of criminal offenses under the Warehouse Receipts Act:

B.

Major offenses5
Punishable by imprisonment not exceeding 5 years and/or a fine not exceeding
P10,000.6

5 Classifications not supported by anything except the extent of the penalties for
violations.
33

1)
2)
C.

2)
3)
4)

5)

Issuing a warehouse receipt over goods not received or not

under the warehousemans control at the time of issuance.
Issuing a duplicate receipt without marking it as such.
Minor offenses
Punishable by imprisonment not exceeding 1 year and/or a fine not exceeding
P2,000
Fraudulently issuing a receipt with knowledge that it
contains false statements
Issuing a receipt for the warehousemans goods without
stating that he owns them
Delivering the goods covered by a negotiable receipt without
acquiring the receipt, except under Secs. 14 and 36, supra. (Delivery after
compulsion by court in case of lost or destroyed receipt, After sale to satisfy lien,
or sale of perishable or dangerous goods)
Depositing goods to which one has no title, or which have a
lien or mortgage upon them, in order to receive a negotiable receipt, and
subsequently negotiating such receipt
K. Summary Lists/Tables

Table 1. Negotiable v. Non-Negotiable

Negotiable Receipt
Non-Negotiable Receipt
Title over goods Symbolic Possession over goods follows receipt
Notice
to
warehouseman
How title over Negotiation
after transfer
goods
transferred
Obligation
of Deliver goods to holder in Only deliver to depositor or
good faith
person named in the receipt.
the
warehouseman
upon issue
Effect
of Presumption of ownership Not tantamount to ownership
unless otherwise proven
unless validly transferred
possession
with
notice
to
warehouseman.
Can never defeat BFVGFs Transferees rights may be
Sellers
defeated before notice to
lien/stoppage in rights
warehouseman
transitu
Attachment/Lev Cannot attach goods, but can Both goods and receipt can
attach receipt.
be attached.
y
No effect as to rights of Available as a defense
Defective Title
BFVGF
Rights
of 1. Same title over the goods 1. Acquires right to the
6 Fun Fact: If Ive got my computations correct, this is the equivalent of P4.7 million
pesos in todays money. P2,000 in 1912 comes out to P931,401 pesos.
34

Holder

as the person negotiating

receipt or person to
whose order the receipt
was issued.
2. Direct obligation of the
warehouseman to hold
possession of the goods
for him.

Table 2. Negotiation v. Transfer

Negotiation of Negotiable
Receipt
Delivery (Bearer instrument)
How effected
or
Indorsement
(Order
Instrument)
Title
over Attaches immediately upon
negotiation
goods
Only by invalidity of title of
How
depositor, e.g. stolen goods,
defeatable
illegal goods.

title subject to the terms

of any agreement to the
transferor
2. Right
to
notify
warehouseman
of
transfer to him of the
receipt.

Transfer of Non-negotiable
Receipt
Sale, donation, barter, etc.

Does not attach until notice to

the warehouseman
Until notice, may be defeated
by
unpaid
sellers
lien,
stoppage in transitu or claim
of defect in title.

Table 3. WHR v. Ordinary Deposits

Consideration
To whom goods entrusted

Effect of written contract

Warehouse Receipt
Always for a fee
Warehousemanone who is
in the business of storing
goods for profit.
Warehouse
receipt
symbolic representation of
the goods themselves.

How rights transferred

Transfer or negotiation

Rule on commingling goods

Generally,
cannot
commingle.
Answered
by
warehouseman, but goods
may be subjected to a lien
for
their
payment
by
depositor

Expenses

Ordinary deposit
Generally gratuitous, but
can be onerous
Anyone capacitated, called
depositary
Written contract of deposit
mere evidence of the
transaction;
possession
thereof does not create title
over the goods
Assignment of rights, as
governed
by
general
Oblicon provisions.
Generally, can commingle
If
gratuitous,
necessary
expenses to be reimbursed.

If onerous, necessary
expenses to be taken on
by depositary as part of
35

compensation.

36

Guaranty and Suretyship

Guaranty
a. General Concepts
Types of Contracts of Security
1. Contract of PERSONAL SECURITY
- fulfillment by the principal debtor of the obligation is supported only by the
promise to pay
- based on the character of the person and is founded on trust and confidence
Ex: Guaranty and Suretyship
2. Contract of REAL Security
- supported by collateral / encumbrance of property with authority to collect the
debt from its proceeds
Ex: Real mortgage (2124) &antichresis (2132) involving immovable property
Chattel mortgage (2140) & pledge (2093) involving movable property
Definition
Article 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.

A guaranty is a promise to answer for the payment of some debt or the

performance of some duty, in the case of failure of the one who is primarily liable.
It is a personal security transaction that involves the CONDITIONAL
OBLIGATION of the guarantor to fulfill the principal obligation in favor of a
creditor, in case the debtor fails to do so.
o The condition precedent in the case of guaranty is the inability of the
principal debtor to pay, not merely his failure to pay.
The obligations of the guarantor always arise as a consequence of CONTRACT.
Characteristics of Guaranty
1. Accessory its existence depends on the principal obligation guaranteed by it
2. Subsidiary& conditional takes effect only when the principal debtor fails in
her obligation, subject to limitations (see Arts. 2053 continuing guaranty &
conditional obligation, 2058 excussion/exhaustion, 2063 prejudicial compromise,
2065 division among co-guarantors)
3. Unilateral
- only the guarantor has a duty in relation to the creditor (principal debtor
becoming liable to the guarantor is only an incident to the contract)
- may be entered into even without the intervention (knowledge/consent) of the
principal debtor
4. Guarantor must be a person distinct from the debtor a person cannot be
the personal guarantor of herself, being against the purpose of the guaranty (i.e.,
creditor to proceed against a 3rd person if the debtor defaults in her obligation)
Navoa and Navoa v. CA
Facts: Olivia owed Teresita several sums. Teresita filed an action against Olivia for collection of these
sums of money based on the loans obtained by them. Olivia claims that Teresita failed to specify a fixed
period within which Teresita should pay, and failed to make a formal demand.
Held: Court held that it is clear that the loans were payable one month after they were contracted. Court
invoked art. 1169, stating that those obliged to deliver or to do something incur in DELAY from the time

37

the obligee JUDICIALLY OR EXTRAJUDICIALLY DEMANDS from them the fulfillment of their obligation.
Teresitas continued refusal to heed demand of the Domdomas shows the existence of a cause of action.

Classification of Guaranty
Article 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.

1. Origin:
a. CONVENTIONAL (agreement of the parties)
b. LEGAL (provision of law)
c. JUDICIAL (required by court to guarantee the eventual right of one of the
parties in the case)
2. Valuable consideration received by guarantor: GRATUITOUS vs. ONEROUS
3. Person guaranteed: SINGLE (principal debtor) vs. DOUBLE/SUB-GUARANTY
(prior guarantor)
4. Scope of guaranty:
a. DEFINITE (principal obligation only/specific portion thereof)
b. INDEFINITE/SIMPLE (principal and accessory obligations including judicial
costs but only those incurred after the guarantor has been judicially required
to pay)
Article 2055, par 2. 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.

If the guaranty specifies a FIXED amount but also provides for liability for
INTEREST & EXPENSES, the guarantor will be liable for the latter amounts even
if these EXCEED the specified fixed amount.
Cause of Guaranty
Same cause which supports the obligation as to the principal debtor
Despite absence of direct consideration/benefit to the guarantor, the
guaranty/surety remains valid because the consideration moving to the principal
will suffice.
Garcia v. CA
Facts: WMC obtained a loan from PISO (who assigned the credit to Lasal). Garcia bound himself to be
surety. WMC, and eventually Garcia could not pay, so Lasal sued Garcia.
Held: SC denied Garcias contention that the surety agreement was invalid because no consideration had
been paid to him (Garcia) by PISO for executing the contract. SC held that the consideration that
supports the principal contract supports the subsidiary contract. Thus, the surety is liable for anothers
debt although he has no direct interest over the obligation. The consideration necessary to support a
surety obligation need not pass directly to the surety. Lasal would not be unjustly enriched if Garcia were
to be held liable for WMCs obligation. Lasal, as creditor, would only be recovering the amount of its loan.
Garcia can still go against WMC for the amount he may have to pay Lasal

Essentially Gratuitous
Article 2048. A guaranty is gratuitous, unless there is a STIPULATION TO THE CONTRARY.

38

Guaranty can be entered into without the knowledge/consent, or against the will of the
debtor
Article 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.
Article 1236. The creditor is not bound to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
Article 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.

Why? Guaranty exists for the benefit of the creditor, not the debtor. Creditor has
every right to take all possible measures to secure the payment of her credit

However, these shall be the effects:

a. Guarantor can recover only insofar as the payment has been beneficial to the
debtor
b. Guarantor cannot compel the creditor to subrogate her in her rights

b. Form
Express
Article 2055. A guaranty is NOT PRESUMED; it must be EXPRESS and cannot extend to more
than what is STIPULATED therein.

The limits of the obligations of a guarantor must therefore be determined from the
terms of the guaranty since her obligations cannot extend by presumption beyond
what is stipulated.
Guaranty must be strictly interpreted against the creditor and in favor or the
guarantor
Requires the expression of consent on the part of the guarantor to be bound

Must be written to be Enforceable

Article 1403. The following contracts are unenforceable, unless they are ratified:
(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: X X X

39

(b) A SPECIAL PROMISE TO ANSWER for the debt, default, or miscarriage of another

Guaranty and Suretyship both are covered by Statute of Frauds.

Under Art. 1358, it does not need to appear in a public document to be
valid/enforceable.

c. Obligations Secured
Valid, Voidable, Unenforceable and Natural Obligations
Article 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.

This is an indispensable condition given that it is an accessory contract.

If the principal obligation is void, the guaranty is also void. But the guaranty may
secure the performance of the ff. obligations:
a. Voidable binding unless annulled by a proper court action
b. Unenforceable because it is not void
c. Natural When the debtor offers a guaranty, he impliedly recognizes her natural
obligation thereby transforming it into a civil one.

Future Debts in the case of Continuing guaranty/suretyship

Article 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...

Contemplates a series of transactions generally for an indefinite time or until

revoked, including those arising in the future within the contemplation of the
contract of guaranty until its expiration
Indicia of continuing guaranty/suretyship:
a. To secure the payment of the loan at maturity
b. To secure payment of any debt to be subsequently incurred
c. To give standing credit to the principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to recall is expressly
reserved. Uses the ff. phrases:
from time to time
obligations now in force or hereafter made
guaranty of any transaction
money to be furnished the principal debtor at any time
on such time that the principal debtor may require
40

* But continuing guaranties are not always prospective.

d. To secure the payment of existing unliquidated debts these exist at the time of
the constitution of the guaranty although the amount is unknown (not to debts not
yet incurred)
Dino v. CA
Facts: Petitioners executed separate Continuing Suretyship Agreements to secure credit
accommodations procured by UTEFS from Metrobank. UTEFS executed an irrevocable letter of credit
without petitioners, but failed tot comply with the obligatory stipulations. Metrobank thus demanded
payment from the petitioners, who denied liability on the ground that this was a new obligation and
the one they guaranteed had already been paid.
Held: They are liable up to the maximum limits in their agreements, plus interest beginning from the
date the complaint was filed in the lower court by Metrobank as well as attorney's fees and costs.
Guaranties may be continuing and may secure future transactions or an indefinite series of
transactions, and it was clearly stipulated in the Continuing Surety Agreements that they are indeed
continuing and thus also cover the irrevocable letter of credit, which was executed while they were
still in full force and effect.

Conditional Obligations
Article 2053. A conditional obligation may also be secured.

a. Principal obligation subject to a suspensive condition guarantor becomes

liable only after the fulfillment of the condition
b. Principal obligation subject to a resolutory condition the happening of the
condition extinguishes both the principal obligation and the guaranty
Guarantors Liability CANNOT Exceed the Principal Obligation
Article 2054. A guarantor may bind himself for LESS, BUT NOT FOR MORE than the principal
debtor, both as regards the AMOUNT and the ONEROUS nature of the conditions.
Should he have bound himself for more, his obligations shall be REDUCED to the limits of that
of the debtor.

General Rule: Being a subsidiary & accessory contract: guarantors liability

principal obligation, both as regards the amount and the onerous nature of the
conditions
IF the guarantor bound himself for more, it shall be reduced to the limits of the
principal obligation.
Exceptions:
a. Interest at legal rate, judicial costs &attys fees when appropriate even without
stipulation
- May be recovered by creditors suing on a suretyship bond as part of their
damages, not by reason of the contract, but the reason of her failure to pay
when demanded and for having compelled the creditor to resort to courts to
obtain payment
- Interest runs from the filing of the complaint (judicial demand) / from the time
(extra-judicial) demand was made upon the surety until the principal obligation
is fully paid
b. Penalty may be provided for in a bond for violation of the condition therein

41

d.
1.
2.
3.

Parties7
Creditor
Principal Debtor
Guarantor
A MARRIED WOMAN can subject not only her paraphernal property to guaranty
but also the community property as long as it benefits the community assets.

Article 2049. A married woman may guarantee an obligation without the husband's consent,
but shall not thereby bind the conjugal partnership, except in cases provided by law.

Reasons for the change:

a. ABSOLUTE COMMUNITY OF PROPERTY is now the default property regime,
where all property owned by the spouses at the time of the celebration of the
marriage or acquired thereafter form part of the community property, unlike in
CPG.
Family Code, Art. 91. Unless otherwise provided in this Chapter or in the marriage settlements,
the community property shall consist of all the property owned by the spouses at the time of
the celebration of the marriage or acquired thereafter.

b. Joint administration of the property by the spouses

Art. 96. The ADMINISTRATION AND ENJOYMENT of the community property shall belong to
both spouses jointly. In case of disagreement, the husband's decision shall prevail, subject to
recourse to the court by the wife for proper remedy, which must be availed of within five years
from the date of the contract implementing such decision.

Reservation that it should benefit the community property:

- neither spouse has the absolute right to squander away the community property
- if this precondition is not met, the wife will be personally liable with her own
property
Qualifications of a Guarantor
Article 2056. One who is obliged to furnish a guarantor shall present a person who possesses
integrity, capacity to bind himself, and sufficient property to answer for the obligation which he
guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where
this obligation is to be complied with.

a. He possesses integrity
b. He has capacity to bind himself hence, a minor cannot be a guarantor
c. He has sufficient property to answer for the obligation he guaranteed
Exception: creditor waives the requirement/s
Effect of subsequent loss of qualifications
Guaranty continues (guarantor will not be exonerated of the eventual liability he
has contracted) but the creditor may demand another with proper qualifications.
If he doesnt, hes waiving the qualifications lost.
If the guarantor is convicted in first instance of a crime involving dishonesty or
should become insolvent (judicial declaration unnecessary), the creditor may
demand another who has all the qualifications.
7 De Leon: Guaranty is a contract between the creditor & guaranty. Somera: The parties to a guaranty are creditor,
debtor & guarantor.

42

Exception: Creditor has required and stipulated that a specified person should be
the guarantor.

Article 2057. If the guarantor should be convicted in first instance of a crime involving
dishonesty or should become insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is excepted where the creditor has
required and stipulated that a specified person should be the guarantor.

Selection of Guarantor:
1. Creditor stipulated a specified person guarantors substitution may not be
demanded even by the creditor who as a party is bound by such condition in
the agreement
2. Creditor personally designated a guarantor responsibility for the selection
should fall upon the creditor
3. Principal debtor selects the guarantor Debtor answers for the integrity,
capacity and solvency of the guarantor who must possess such until the
extinguishment of the debt

Special kinds of guarantors

Sub-guarantor
o guarantor of a guarantor
Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with
respect to the guarantor and to the principal debtor.

Co-guarantor
o Another guarantor for the same debt.

Article 2065. Should there be several guarantors of only one debtor and for the same debt, the
obligation to answer for the same is divided among all.

e. Rights available to the Guarantor

i.
Benefit of Excussion (distinguishing element of guaranty)
Definition
Article 2058. The guarantor cannot be compelled to pay the creditor unless the latter has
EXHAUSTED ALL THE PROPERTY of the debtor, and has RESORTED TO ALL THE LEGAL
REMEDIES against the debtor.

Reason: guaranty is an accessory and subsidiary contract

Distinguishes guaranty from suretyship
Legal remedies include actions for the rescission of fraudulent alienations of
property made by the debtor.
43

Exceptions
Article 2059. The excussion shall not take place:
(1) If the guarantor has EXPRESSLY RENOUNCED it;
(2) If he has bound himself SOLIDARILY with the debtor;
(3) In case of INSOLVENCY of the debtor;
(4) When he has ABSCONDED, or CANNOT BE SUED within the Philippines unless he has
left a manager or representative;
(5) If it may be presumed that an execution on the property of the principal debtor would
NOT RESULT in the SATISFACTION of the obligation.

Further explanation per item:

1. Benefit of excussion is a personal right and thus can be waived.
2. He becomes a surety with primary liability as a solidary co-debtor so he
renounces in the contract itself the benefit of excussion.
3. Guarantor guarantees her solvency.
Insolvency must be actual and may be proven by the return of a writ of execution
unsatisified or by other means (but NOT by the mere fact that he was declared
insolvent in insolvency proceedings because her inability to pay is not determined
until final liquidation of her estate).
4. Creditor is not required to go after such debtor.
5. Here, the debtor is not required to be judicially declared insolvent/bankrupt.

Additional Exceptions provided by law & jurisprudence:

a. If the guarantor does not comply with Art. 2060 (set up benefit of excussion then
point out the debtors property within the Phils. sufficient to cover the debt)
b. If he is a judicial bondsman and sub-surety
Article 2084. A judicial bondsman cannot demand the exhaustion of the property of the
principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the property of the
debtor or of the surety.

c. Where pledge/mortgage has been given by him as a special security

44

d. If he fails to interpose it as a defense before judgment is rendered against him

Thus, the full list of exceptions to the right to excussion:
1. Waiver
2. Surety
3. Debtor Absconds
4. Insolvency of Debtor
5. Execution would be useless
6. Failure to point out available property of the debtor.
7. Failure to invoke excussion as a defense
8. Judicial bondsmen and sub-sureties
9. Pledge or mortgage given as special security

Creditor has the right to secure a judgment against the guarantor prior to the excussion
(EXCEPTION)

General Rule: An ordinary personal guarantor (not a pledgor/mortgagor) may

demand exhaustion of all the property of the debtor before he can be compelled to
pay.
Exception: Creditor may secure prior judgment against the guarantor (e.g., by
impleading the guarantor as co-defendant for trial convenience [permissive joinder
of parties]). Execution of a judgment against the guarantor will be deferred until
after the principal debtors properties are exhausted.
Creditor has the duty to make the prior demand for payment from guarantor
Article 2060. In order that the guarantor may make use of the benefit of exclusion, he must set
it up against the creditor upon the latter's demand for payment from him, and point out to the
creditor available property of the debtor within Philippine territory, sufficient to cover the
amount of the debt.

Actual demand must be made and not simply joining the guarantor in the suit against
the principal debtor
Guarantor has the duty to set up the benefit of excussion and point out debtors
available property in the Phils. sufficient to cover the debt (SEE Art. 2060 above)
Upon creditors demand for payment
Available property means not in litigation/encumbered
Failure to point out such properties forecloses her right to set up this defense
45

Creditor has the duty to resort to all legal remedies to exhaust all the properties the
guarantor pointed out
Article 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.

Duty arises after the guarantor has set up the defense of excussion and pointed out
the debtors properties
If he is negligent in exhausting the property pointed out, he shall suffer the loss, to
the extent of said property, for the insolvency of the debtor
Creditor has the duty to notify the guarantor in the action against the debtor
Article 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.

Procedure when creditor sues:

a. Creditor must sue principal debtor alone
- Guarantor cannot be sued with his principal, much less alone.
- General Rule: Creditor may hold the guarantor liable only after judgment against
the debtor has been obtained and he is unable to pay
- Exceptions: cases under Art. 2059 where the guarantor is not entitled to excussion
b. Guarantor must be notified so he may appear if he desires and set up defenses he
may want to offer
- His voluntary appearance is not renunciation of his right to excussion which he
still has despite an eventual judgment being rendered against him
- His non-appearance shall not constitute default with its consequential effect.8
- If he does not appear, he may no longer question the validity of the judgment
rendered against the debtor.9
c. Hearing before execution can be issued against the guarantor
- Notice and hearing constitute the essence of procedural due process
A compromise shall not prejudice the person not a party to it
Article 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.

A compromise is a contract whereby the parties, by making reciprocal concessions,

avoid a litigation or put an end to one already commenced.
a. A compromise between the creditor and the principal debtor benefits (e.g., amount
of debt reduced) the guarantor but does not prejudice him.
b. A compromise entered into between the guarantor and the creditor benefits (e.g.,
extension of time to pay) but does not prejudice the principal debtor
8 2010 UP Bar reviewer
9 De Leon
46

Sub-guarantors right to excussion with respect to both the principal debtor &
guarantor
Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with
respect to the guarantor and to the principal debtor.

He stands with respect to (wrt) the guarantor on the same footing as the latter does
wrt the principal debtor

Defenses available to the guarantor against the creditor

Article 2081. The guarantor 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.

ii.
Right to Protection
Guarantors right to proceed against the debtor even before payment is made
Article 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for
payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a period
longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.

Right to protection is the right of the guarantor as against the principal debtor to:
1. Obtain RELEASE from the guaranty
2. Demand SECURITY
Purpose: Guarantor to protect herself from:
a. Any proceeding by the CREDITOR
b. Danger of INSOLVENCY of the debtor
47

Time frame contemplated: after the guarantor has become liable but before she has
paid.
It is preliminary remedy in anticipation of the payment of a debt that is due and
demandable.
Only procedure to enforce the right to protection is BY ACTION.
BUT while the guarantor has the right to OBTAIN A JUDGMENT against the
principal debtor, she will NOT be allowed to realize on the judgment to the point
of ACTUAL COLLECTION until she has SATISFIED or caused to be satisfied the
PRINCIPAL OBLIGATION.
Otherwise, COLLUSION and improper practices between the guarantor and
principal debtor may prejudice the creditor.
Unclear: how the guarantor will obtain RELEASE. By definition, guarantor binds
herself to the creditor so ONLY THE CREDITOR can grant her release, so the ONLY
way the guarantor can seek effective release is to COMPEL the debtor to
EXTINGUISH the obligation.

iii.
Right to Indemnification
Guaranty is a contract of indemnity
Article 2066. The guarantor who pays for a debtor must be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the debtor, even
though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had
been demanded of him;
(4) Damages, if they are due.

How it works:
Generally, GUARANTOR binds herself to the principal CREDITOR, granting the
latter the right to proceed against the guarantor in case principal debtor defaults.
However, there is another legal tie created between the GUARANTOR and the
principal DEBTOR to which the principal creditor is not privy.
Once the guarantor fully answers for the principal obligation, such is
extinguished. But the principal debtor now has the DUTY TO INDEMNIFY or
make good any loss, damage or liability incurred by the guarantor.
Right to indemnification is the guarantors substantive right of action (AFTER it has
PAID the debt) as against the principal debtor to recover the 4 items listed in Art.
2066.
Further explanation on certain items in Art. 2066:
48

2. Interest - notice is in effect a demand so if the debtor does not pay, he incurs in
delay
3. Expenses - only those that the guarantor has to satisfy in accordance with law as
a consequence of the guaranty, as in the case of a simple surety (2055 par.2)
Article 2055, par 2. 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.

REQUISITE for this right to exist: contract of guaranty must have been entered into
with the principal DEBTORs KNOWLEDGE & CONSENT.

Article 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.
Article 1236. The creditor is not bound to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.

Exceptions (no indemnity):

a. Guaranty is constituted without the knowledge / against the will of the principal
debtor: former can only recover insofar as the payment has been beneficial to the
debtor (2050)
b. Right to demand reimbursement is subject to a waiver
c. Payment by a 3rd person not intending to be reimbursed is deemed a donation
which requires debtors consent. In any case, payment is valid as to the creditor who
accepted it (1238)
If guarantor paid before it became due, he cannot demand reimbursement until the
expiration of the period
Art. 2069 If the debt was for a period and the guarantor paid it before it became due, he cannot
demand reimbursement of the debtor until the expiration of the period unless the payment has
been ratified by the debtor.

Since it is only a subsidiary contract, the guarantor is not liable before maturity so
theres no need to accelerate payment
Exception: Debtor consented to or subsequently ratified the payment
expressly/impliedly
Guarantor has the duty to notify the debtor before paying the creditor
Art. 2068 If the guarantor should pay without notifying the debtor, the latter may enforce
against him all the defenses which he could have set up against the creditor at the time the
payment was made

Otherwise, the debtor may enforce against him all the defenses which he could have
set up against the creditor at the time the payment was made (e.g., previous
extinguishment of the obligation)
General Rule: Not being aware of the payment, debtor repeats it, the guaranty has
no remedy whatever against the debtor, but only against the creditor.
49

Exception, all conditions must be present: (guaranty can still recover from debtor
despite lack of notice)
- gratuitous guaranty
- creditor becomes insolvent
- guarantor was prevented by a fortuitous event from advising the debtor of the
payment
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.

Guarantor of a 3rd person (absentee) at request of another

Art. 2072 If one, at the request of another, becomes a guarantor for the debt of a third person
who is not present, the guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.

Guarantors right to reimbursement after satisfaction is from either the person so

requesting or the debtor.
iv.
Right to Subrogation
Guarantor has the right to be subrogated to the rights of the creditor
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.

Right to subrogation is the right of a GUARANTOR WHO PAYS, as against the

principal debtor, to be substituted to all the RIGHTS, REMEDIES AND SECURITIES
the creditor had against the principal debtor. Credit with all its rights is transferred
to the guarantor.
REQUISITE for this right to exist: contract of guaranty must have been entered into
with the principal DEBTORs KNOWLEDGE & CONSENT.

Article 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.
Article 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.

Except only to the change in the person of the creditor by the guarantor, the
obligation subsists in all respects as before payment.
Extend to sureties
Arises by operation of law upon payment based on the principles of natural justice,
not on a contract
Cannot be invoked when the guarantor has no right to be reimbursed
Release when by some act of the creditor, guarantor cannot be subrogated
Article 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.

50

Example of creditors fault for non-subrogation: creditor releases or fails to register

a mortgage
Creditor has a duty to account for his lien on principal debtors property. Any release
or impairment of such security as the primary source for payment of debt, will
discharge the surety to the extent of the value of the property/lien released
v.
Rights of Co-Guarantors
1. Benefit of Division
-

Right of a co-guarantor, as against the creditor, to pay only the divided share that
she is bound to pay

May be claimed by the co-guarantor from the very moment the obligation is
contracted, except where there is contrary stipulation.

Article 2065. Should there be several guarantors of only one debtor and for the same debt, the
OBLIGATION TO ANSWER for the same is divided among all. The creditor cannot claim from
the guarantors except the SHARES which they are respectively bound to pay, UNLESS
SOLIDARITY has been expressly stipulated.
The benefit of division against the co-guarantors CEASES in the same cases and for the same
reasons as the BENEFIT OF EXCUSSION against the principal debtor.

N/A: many debtors (even if solidary) of 1 debt, each with different guarantors; same
debtor but different debts
Unlike their benefit of excussion, this benefit of division does not require them to
point out any property (of his co-guarantors) because his obligation wrt his principal
debtor is subsidiary but wrt his co-guarantors, direct.
General Rule: Joint obligation. They are not liable beyond their respective shares.
Exceptions: (Creditor may claim the ENTIRE amount from a co-guarantor)
a. Solidarity is expressly stipulated

b. Presence of any of the circumstances that would cease the benefit of excussion
(see list, supra.)
Release of guarantor without the consent of others
Article 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.

P9,000 total debt

Without consent of G2 & G3
With consent of G2 & G3
With consent of G2 only

G1 released
X
X
X

G2s liability
P3,000
P4,500
P6,000

G3s liability
P3,000
P4,500
P3,000

2. Right to Reimbursement
Paying co-guarantors right to contribution

51

Article 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.

RIGHT TO REIMBURSEMENT is the right of the CO-GUARANTOR who PAYS , as

against the other co-guarantors, to recover the SHARES DUE from the coguarantors, but ONLY if the ff. conditions CONCUR:
There are 2/more guarantors of the same DEBTOR and for the same DEBT.
One of the co-guarantors has paid.
Payment is made by virtue of a JUDICIAL DEMAND / the principal debtor is
INSOLVENT.
Co-guarantors right to set up defenses
Article 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.

In the action filed by the paying guarantor against his co-guarantors for their
proportionate shares in the obligation, the latter may avail themselves of all the
defenses (except those purely personal like minority) which the debtor would have
interposed against the creditor
Examples: payment, fraud, prescription, remission, illegality
SUB-guarantors liability in case of insolvency of guarantor
Article 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.

vi.

Extinguishment and Right of Release:

Extension of Time
Same causes as all other obligations (e.g., Payment)

Payment,

Dacion

en

Pago,

Article 2076. The obligation of the guarantor is extinguished at the SAME TIME AS THAT OF
THE DEBTOR, and for the same causes as all other OBLIGATIONS.
Article 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.

52

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription, are governed elsewhere in this Code.

Principal debtors death is not a defense of the surety under a performance bond
because the obligation is merely passed on to the estate.
Guaranty may itself be extinguished (e.g., made by the creditor) although the
principal obligation subsists.\

Cochingyan v. R&B Surety and Insurance Co.

Facts:
1) PNB increased the line of credit of PAGRICO
2) PAGRICO secured the first obligation through an R&B Surety Bond.
3) R&B Surety got CCM, PAGRICO, and PACOCO, and petitioners as Indemnitors.
4) CCM entered a Trust Agreement where CCM obligated itself to pay the obligation of PAGRICO to
PNB
Held: Trust Agreement merely brought in an additional party to the agreement but did not novate it.
CCM as trustor, R & B as surety and PAGRICO as the principal debtor are directly and solidarily liable to
PNB.
Security Bank v. Cuenca
Facts: Sta. Ines was granted by Security Bank a credit line in the amount of Php 8M. To secure payment,
it executed a chattel mortgage over some of its machineries and equipment. And as an additional
security, its President and Chairman of the Board of Directors Rodolfo Cuenca, executed an Indemnity
agreement in favor of Security Bank binding himself jointly and severally with Sta. Ines. After Cuenca
resigned, Sta. Ines obtained another Php 6M loan. Because of its difficulty in making the amortization
payments, in 1989 it requested Security Bank a complete restructure of its indebtedness, which was
approved without prior notice to, or prior consent of Cuenca. Still it was unable to pay. Security Bank
filed a complaint to collect the sum of money.
Held: Cuenca is absolved from liability, stating that the contract was novated and since his consent was
not obtained, he was no longer a party to the newer contract.

Dacion en Pago / Release by conveyance of property

Article 2077. If the CREDITOR VOLUNTARILY ACCEPTS immovable or other PROPERTY IN
PAYMENT of the debt, even if he should afterwards lose the same through EVICTION, the
guarantor is RELEASED.

Eviction revives the principal obligation, not the guaranty

Extension of Time
Article 2079. An EXTENSION granted to the debtor by the creditor WITHOUT THE CONSENT
OF THE GUARANTOR extinguishes the guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of itself constitute any extension of
time referred to herein.

Why? Guarantor has the right to pay the creditor and be subrogated to her remedies
against the principal upon maturity date
Actual prejudice to the guarantor is immaterial
Extension must be based on a new agreement and NOT the mere failure on the part
of the creditor to demand payment after the debt has become due (2079)
Wrt the surety, creditor is under no obligation to exercise diligence in enforcing her
rights
53

Surety has no right to sue creditor for delay as protection against the risks of
possible insolvency of the debtor
Material alteration (making the obligation more onerous) in the contract between
the creditor & principal debtor varying the essential terms of the contract without
the suretys consent releases the latter, except if the creditor demands the original
terms.

People's Bank and Trust Co. v. Tambunting

Facts: PBTC executed a contract denominated as overdraft agreement and pledge with the spouses
Tambunting as the principal debtors and Santana as guarantor. The spouses Tambunting and Santana
pledged shares of stock of a corporation as collateral security for the payment of any debt that may arise
from the overdraft. When the spouses were notified of the approval of their application for extension, the
banks board of directors also authorized the release to them of the aforementioned shares of stock.
However, they eventually defaulted. Demand was made upon them and upon Santana but to no avail,
prompting the Bank to file a complaint against them to recover the money due. Santana, invoking Art.
2080 of the Civil code, contends that he had been released from the guaranty because the bank had
extended the time of payment and released the shares of stock to the spouses Tambunting without his
consent.
Held: The contract of absolute guaranty expressly authorized the Bank to extend the time of payment
and to surrender any security or part thereof held by it without notice to nor consent of Santana. He had
consented in advance the release. Thus, he cannot now complain that the release of the pledge was
without his consent and that it deprived him of the right to be subrogated to the rights of the creditor.
Toh v. Solid Bank
Facts: Solid Bank extended an omnibus line credit facility to FBPC. One of the documents required was a
Continuing Guaranty providing that the signatories will be released only upon written revocation
executed by the sureties with notice to the Bank. Such instrument was signed by the Sps Toh and Sps Li.
FBPC then opened 13 letters of credit. Solid Bank received information that Sps Li, who were signatories
of the Continuing Guaranty, fraudulently departed from their conjugal home. Solid Bank immediately
demanded payment and filed a complaint for sum of money against FBPC and Sps Toh (since they were
the only ones known to be within territorial jurisdiction as sureties).
Held: Continuing Guaranty is still valid with respect to Sps Toh since they failed to execute a written
revocation and give the required notice thereof to the Bank. Besides, there is no basis for Sps Toh to limit
their responsibility so long as they were officers and stockholders of FBPC. If they intended to not be
charged as sureties after withdrawal from FBPC, they could have terminated the agreement by serving
the required notice of revocation upon the Bank. However, Sps. Toh are NOT liable to pay Solid Bank due
to illicit extensions made by the latter in favor of FBPC. Such extensions were made despite noncompliance with the conditions set forth in the letter-advise. The stipulation in the Continuing Guaranty
is confined to authorized extensions.

Release by fault of Creditor

Article 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.
PNB v. Manila Surety
Facts: ATACO bought asphalt from Edgington on credit from PNB. This was guaranteed by MFS up to
PHP 75,000. ATACO assigned PNB its rights to funds collectible from BPW (who presumably bought
asphalt from ATACO). However, after some time, PNB stopped collecting and only resumed after
discovering that some of the collectible funds were exhausted by other creditors of ATACO. PNB
therefore sued MFS and ATACO.
Held: The SC held that MFS is exonerated because PNB had been negligent in failing to collect the full
amount of the debt even as it had been granted the power of attorney to do so.

54

55

IV.

Suretyship

a. General Concepts
Definition
Article 2047. If a person binds himself SOLIDARILY with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.

A suretyship is 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.
Although the surety is bound solidarily, the liability of the surety is not an original
and direct one for the performance of her own act, but merely accessory to the
obligation contracted by the principal debtor. Nevertheless, the suretys liability to
the creditor is direct, primary and absolute, although the surety possesses no
direct/personal interest over the obligations nor does it receive any benefit
therefrom.
The obligations of a surety always arise as a consequence of CONTRACT even if the
suretyship is legal (law) or judicial (judicial order). The BONDSMAN is the surety in
a legal and judicial suretyship.

Zobel Inc. v. CA
Facts: Respondents spouses Claveria, applied for a loan with Solidbank which granted it subject to 2
conditions: 1) execution of chattel mortgage over the 3 vessels, and 2) execution of Continuing Guaranty
in favor of Solidbank by petitioner E. Zobel. Spouses Claveria defaulted.
Held: Based on the terms of the Continuing Guaranty, E. Zobel actually signed as SURETY. Even though
the contract is denominated as a Continuing Guaranty, its terms categorically obligate E. Zobel as surety
to induce Solidbank to extend credit to the spouses Claveria. Thus, Solidbank does NOT have to resort to
all other legal remedies/exhaust the spouses Claverias properties before it can hold E. Zobel liable for
the obligation. Art. 2080, Civil Code (cited by E. Zobel as basis for extinguishing its liability) does NOT
apply where the liability is as a surety, not as a guarantor. Assuming arguendo that Art. 2080 is
applicable, Solidbanks failure to register the chattel mortgage did NOT release E. Zobel from the
obligation, as it bound itself to the contract irrespective of the existence of any collateral, and even
released Solidbank from any fault/negligence that may impair the contract.
RCBC v. Cerro
Facts: Chua and Go were guarantors of Daicor pursuant to a surety agreement, but when they obtained a
loan from RCBC, only Go signed the promissory note. Chua did not want to pay up when Daicor
defaulted.
Held: Chua is liable pursuant to the surety agreement, which induced RCBC to grant a loan to them, and
not
the
PN.
Willex v. CA
Facts: Inter-Resin and Willex executed a Continuing Guaranty in favor of Interbank(formerly IUCP) for
amounts which the latter may have paid Manilabank on behalf of Inter-Resin Industrial. When Interbank
paid Manilabank a sum representing Inter-Resins outstanding obligation, it then demanded from InterResin and Willex the payment of what it (IUCP) had paid to Manilabank.
Held: Willex was held to be solidarily liable with Inter-Resin, it being a guarantor of the latter. This
ruling is based on a provision in the Continuing Guaranty which states: If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly proceed against Me/Us
without first proceeding against and exhausting DEBTOR/s properties in the same manner as if all such
liabilities constituted My/Our direct and primary obligations.
IFC v. ITM

56

Facts: IFC loaned PPIC $7M. A Guarantee Agreement was then executed by IFC, Imperial Textile Mills
and Grand Textile Manufacturing Co, where ITM and Grandtex agreed to guarantee PPICs obligations
under the loan agreement. PPIC defaulted.
Held: The creditor (International Finance Corp) was able to show convincingly that, although
denominated as a Guarantee Agreement, the Contract was actually a surety. Notwithstanding the use
of the words guarantee and guarantor, the subject Contract was indeed a surety, because its terms
specifically stated that it was jointly and severally liable. It emphasized that ITM was a primary obligor,
not a mere surety.

COMPENSATED Suretyship
The rule holding sureties to be favorites of the law and their contracts to be
strictissimi juris (strictest letter of the law) does NOT APPLY to compensated
sureties.
The underlying principle of the rule is that, formerly, parties become sureties not for
hire but as a matter of accommodation. Consequently, the strictissimi juris rule has
no application to sureties organized for conducting an indemnity business at
established rates of compensation.
CONTINUING Suretyship
This is not limited to 1 transaction but contemplates a prospective or future course
of dealing, covering a series of transactions, which are within the stipulations of the
contract of surety, until the expiration/termination thereof.
Nature
1. Liability is contractual & accessory but direct
- Suretyship is a contractual relation
- Although the suretys obligation is accessory/collateral to the principal obligation,
his liability to the creditor is direct, immediate, primary & absolute
- He is equally bound with the principal as original promisor although he possesses
no personal interest over the latters obligations nor does he receive any benefit
therefrom
- Surety is usually bound with the principal by the same instrument, executed at
the same time and upon the same consideration
- It is for the surety (not the creditor) to see to it that the principal debtor pays or
performs
2. Liability is limited by the terms of the contract
- Suretyship is not presumed; it cannot be extended by implication beyond the
terms of the contract
- The extent of the liability is determined only by the clause of the contract of
suretyship as well as the conditions stated in the bond
- A surety is not released by a change in the contract that does not make the
obligation more onerous
3. Liability arises only if the principal debtor is held liable
- Surety contract is made principally for the benefit of the creditor as ensured by
its solidary nature, but the surety does not incur liability until the principal debtor
is held liable
- Surety is privy to all proceedings against its principal. In the absence of collusion,
he is bound to a judgment against the principal even if hes not made a party.
However, as a matter of procedural due process, a surety not given notice must
57

be heard when the judgment for damages against the principal is sought to be
enforced against the suretys replevin bond
A creditors right to proceed against the surety exists independently of his right to
proceed against the principal. Hence, a distressed corporations surety can be
sued separately to enforce his liability, notwithstanding a SEC order declaring the
corporation under a state of suspension of payment
Notice of default is NOT required to fix suretys liability except where required by
the provisions of the contract of suretyship
A surety bond is void where there is no principal debtor as it is not the suretys
intention to be the sole person obligated thereby.
* Surety bond = contract between the surety and creditor. Suretys signature is
his representation of the existence of the principal debtor and is a manifestation
of his consent to be liable in case of default by the principal debtor. Unless
required by law, the lack of the principal debtors signature should not affect the
bonds validity where the existence of a debtor is not in issue.

Government v. Tizon
Facts: Tizon won abiding by the government and took out security to insure its performance in relation to
the bid. It was unable to do all that was required to it, so the government sued it and the surety. The
government won and Tizon appealed, with the surety not appealing and only reproducing its previously
filed answer with Tizons appeal. The government moved to have the suretys motion to reproduce its
answer stricken out and have the decision remanded for execution with regard to the surety.
Held: SC ruled that whatever result Tizons appeal may yield would inure to the suretys benefit, so
execution should be held at bay until such appeal is settled.

4. Surety is not entitled to exhaustion

- Due to the solidary nature of a suretys liability from the beginning
- But when demanded by the requirements of justice, the principal debtor may be
required to pay the insured obligation such as where the former has the
necessary amount it got under the bond
Tupaz IV v. CA
Facts: Jose and Petronila, officers of El Oro, signed trust receipts in behalf of the company, and in favor
of BPI. They were not able to fulfill their obligations under the trust receipts. BPI filed estafa charges
against them. They were acquitted but were held solidarily liable with El Oro in the payment of the debt
to BPI.
Held: Jose and Petronilla are not liable under one trust receipt because they signed it in their capacities
as officers of the corporation. But, Jose is liable for the other trust receipt because he signed it in his
personal capacity. However, his liability is not solidary with El Oro; he is liable only as guarantor. The
solidary guaranty clause makes guarantors signing the trust receipt solidarily liable with each other; it
does not operate to make them solidarily liable with the company. But, the suit against Jose still stands
because excussion is not a pre-requisite to secure judgment against a guarantor. In fact, excussion can be
waived

5. Undertaking is to creditor, not debtor

- Unless otherwise expressly provided, the surety makes no covenant with the
principal debtor so the latter cannot claim that there has been a breach of the
suretys obligation to her when the surety refuses or fails to pay the debt for the
principals account
6. Surety is not entitled to notice of principals default
- Demand on the surety is not necessary before bringing suit against them since
the commencement of the suit is sufficient demand.
7. Prior demand by the creditor upon principal not required
58

As soon as the principal is in default, the surety likewise is in default. The proper
remedy of the surety is to pay the debt and pursue the principal.
- A creditor can go directly against the surety although the principal debtor is
solvent and is able to pay, or no prior demand is made on the principal debtor
(Ong v. PCIB)
8. Surety is not exonerated by neglect of creditor to sue principal
- The neglect of the creditor to sue the principal at the time the debt falls due does
not discharge the surety, even if such delay continues until the principal becomes
insolvent. The creditors rights against the surety are not affected unless the
surety requires her by appropriate notice to sue on the obligation.
- In the absence of proof of the resultant injury, a surety is not discharged by the
creditors mere statement that she will not look to the surety.
Ong v. PCIB
Facts: E-PCIB filed a case for collection of a sum of money against Sps. Ong for various loans where the
Sps. Ong acted as sureties for BMC. BMC filed a petition for rehabilitation and suspension of payments
with the Securities and Exchange Commission (SEC) after its properties were attached by creditors. A
MOA was executed by BMC, the Sps. Ong as its President and Treasurer, and the consortium of creditor
banks of BMC. The MOA provided that during its effectivity, there shall be a suspension of filing or
pursuing of collection cases against the BMC. Sps. Ong filed a motion to dismiss the complaint against
them, arguing that as sureties of BMC, the benefits of the MOA should extend to them as well.
Held: Sps. Ong are not guarantors but sureties of BMCs debts. The Sps. Ong relied on provisions
relating to guaranty. Respondent banks right to collect payment from the surety exists independently of
its right to proceed directly against the principal debtor.

b. Legal and Judicial Bonds

Definitions
Bond undertaking that is sufficiently secured and not cash/currency;
contractual in nature including judicial bonds which are in addition, given in
virtue of a judicial order
Bondsman surety offered in virtue of a law/judicial order
Qualifications of a personal bondsman
Article 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial
order shall have the qualifications prescribed in article 2056 and in special laws.

same as the general qualifications of a guarantor (integrity, capacity and solvency),

and those in special laws such as Rule 114, Sections 12:
(a) Each must be a resident owner of real estate within the Philippines;
(b) Where there is only one surety, his real estate must be worth at least the amount
of undertaking;
(c) If there are two or more sureties, each may justify in an amount less than that
expressed in the undertaking but the aggregate of the justified sums must be
equivalent to the whole amount of the bail demanded.
In all cases, every surety must be worth the amount specified in his own
undertaking over and above all just debts, obligations and properties exempt from
execution
Pledgor/Mortagagor in lieu of bond

59

Article 2083. If the person bound to give a bond in the cases of the preceding article, should
not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be
admitted in lieu thereof.

If the person bound to give a legal/judicial bond should not be able to do so, a pledge
or mortgage considered sufficient to cover his obligation shall be admitted in lieu
thereof
Guaranty/suretyship is a personal security while pledge/mortgage is a property/real
security
Bondsman NOT entitled to Excussion
Article 2084. A judicial bondsman cannot demand the exhaustion of the property of the
principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or
of the surety.

A judicial bondsman and a sub-surety are not entitled to the benefit of excussion
because they are not mere guarantors, but sureties whose liability is primary and
solidary

Luzon v. Sia
Facts: Luzon sued Sia for breach of contract. Sias properties were attached. The attachment was lifted
upon a counter-bond executed by Sia (principal) and Times Surety (solidary guarantor). Luzon and Sia
made a compromise and the court rendered judgment on the basis of such compromise. But Sia was not
able to comply with the terms of the compromise and a writ of execution was issued against Sia and the
counter-bond. Upon motion of Times Surety, the writ was quashed and the bond was cancelled.
Held: Court should not have cancelled the counter-bond on the theory that the compromise discharged
the obligation of the surety. The liability of the sureties was fixed and conditioned on the finality of the
judgment rendered regardless of whether the decision was based on the consent of the parties or on the
merits. Also, the relationship between Sia and Times Surety was solidary. Thus, there was no need to
exhaust the properties of Sia before going after the counter-bond

c. Indemnification v. Reimbursement

d. SURETYSHIP distinguished from:

i.
Guaranty
GUARANTY
SURETYSHIP
Insurer of debtors solvency and binds Insurer of the debt itself and obligates
herself to pay if the principal debtor herself to pay if the principal debtor
FAILS/IS UNABLE to pay
DOES NOT pay
Liability
depends
upon
an Liability as a regular party to the
60

independent agreement to pay the

obligation if primary debtor fails to do
so
Engagement
is
a
collateral
undertaking
Subsidiary liability (obliged to pay if
principal cannotor is unable to pay)
Guarantor is not bound to take notice
of principals default
Guarantor is often discharged by the
mere indulgence of the creditor & is
usually not liable unless notified of
principals default

undertaking

Surety is charged as an original

promisor
Primary liability (bound to pay if
principal does not pay, without
reference to his solvency)
Surety is ordinarily held to know every
default of her principal
Surety is usually not discharged
either by the mere indulgence of the
creditor, or by want of notice of default
of principal, no matter how much he
may be injured thereby
Enjoys only the rights to protection,
indemnification and subrogation, but
NOT the benefit of excussion

Enjoys the benefit of excussion, and

rights to protection, indemnification
and subrogation
ii.
Standby Letter of Credit
STANDBY LETTER OF CREDIT
Creditor-beneficiary reasonably expects
that:
he will receive cash in the event of
nonperformance
he will receive it promptly upon
presentation
of
the
required
documents
he will receive it before any litigation
over the nature of the debtorapplicants performance takes place

SURETYSHIP
Upon the obligors default, the surety
undertakes to complete the obligors
performance, usually by hiring someone
to complete that performance.
o Often involve costs of determining
whether the obligor defaulted (a
matter over which the surety and the
creditor often litigate) plus the cost of
performance.
o Such performance must await the
sometimes
lengthy
and
costly
determination that the obligor has
defaulted (after litigation). In addition,
the suretys performance takes time.
The DEBTOR-APPLICANT bears the The CREDITOR bears the financial
financial burden of parties during burden of parties during litigation
litigation
It may be that the applicant has, in fact, There is no duty to indemnify the
performed and that the beneficiarys beneficiary
until
the
beneficiary
presentation of those documents is not establishes the fact of the obligors
rightful. In that case, the applicant may performance which may be established in
sue the beneficiary in tort, in contract, or litigation.
in breach of warranty; but,
During the litigation, the CREDITOR- During the litigation, the SURETY holds
61

BENEFICIARY, (not the applicant) holds the money and the beneficiary bears most
the money.
of the cost of delay in performance.
iii.
Solidary Co-debtor
- Creditor has the right to compel full payment from both surety and solidary
co-debtor
SOLIDARY CO-DEBTOR
SURETY
Primary obligation
Accessory,
ancillary
or
collateral
obligation
Has only the right to REIMBURSEMENT Has the right to INDEMNIFICATION and
as against her co-debtors
right to SUBROGATION as against the
principal debtor

62

Letters of Credit

Letters of Credit
A. Primer, sans legalese10

A letter of credit is a promise to pay, issued by a bank, assuring a seller that he

will be paid if he does what he promises, usually delivery of the goods, as proven
by a bill of lading.
o The issuing bank promises to pay the seller the money that the buyer took
on as purchase price.

Legitimately called L/C, LC or LOC..

Usually used in international transactions of large value or worth, where it would
be risky to rely only on the personal security of the buyer.
o This is due to factors such as distance, differing laws in each country and
difficulty in knowing each party personally.
o Basically, because the buyers and sellers are in different countries, the
seller has to make sure hes going to get paid. And the best way to do that is
to have a bank promise to pay him, not the seller himself.

In essence, the buyers bank promises to pay the seller, whether or not the buyer
actually pays, thereby taking on the risk that the buyer does not pay.

In text form, this is how the transaction works.

o Seller and Buyer agree to a transaction.
o Buyers bank issues letter of credit to seller.
o Now there are two different timelines:
As to the Letter of Credit/payment price

As to

Letter of Credit forwarded to sellers bank.

Sellers bank forwards letter of credit to seller himself.
Seller consigns goods and complies with other requirements(see
below)
Sellers bank forwards bill of lading to buyers bank.
o Buyers bank forwards amount of purchase price to
Sellers bank. (NB. Must do this whether or not buyer
pays.)
o Sellers bank remits price to Seller.
Buyers bank presents bill of lading to buyer for payment.
Buyer pays price in exchange for bill of lading.
the goods/bill of lading
Upon receipt of letter of credit, Seller consigns goods to the
carrier for delivery to buyer.

10 NB. This is written from the perspective of business, not law. Its just a primer on
how L/Cs are used.
63

Seller receives bill of lading in return.

Seller resents proof thereof and whatever other required
documents, usually a bill of lading, to his bank.
Sellers bank forwards bill of lading to buyers bank.
Buyers bank forwards bill of lading to buyer in exchange for
payment.
Buyer presents bill of lading to carrier for delivery of goods.

Now, in visual form. There are some extra transactions (application for LOC,
advisement of issuance, etc.) in there, but basically, its the same flow.

Its important to note that there are three contracts involved here:
o Sale between buyer and seller

o The agreement between the issuer and the beneficiary, which is the Letter
of Credit itself; and
o The agreement between the issuer and the applicant, which includes the
applicants obligation to reimburse the issuer for any draws made on the
Letter of Credit.
o Agreement between the issuing bank and the advising bank, if any.
Kicking the terminology up a notch, the sellers bank is called an advising or
confirming bank, while the buyers is called the issuing bank. Also, the seller
is also called the beneficiary, while the buyer is called the applicant.

Illustration, from a movie:

Vito wants to import 400 tons of Olive Oil from Corleone, Sicily to New York, USA. He
gets in touch with Don Ciccio in Sicily for that purpose. Vito makes an offer Ciccio
64

cannot refuse-$3,000,000. While Vito and Ciccio have a previous working relationship,
Ciccio does not completely trust Vito, and requires him to open a letter of credit before
executing the sale.
1. Thus, after telegramming Vito confirming the sale,
2. Vito applies to his bank (lets call it the Five Families) for a letter of credit.
a. The L/C requires that Ciccio present the Bill of Lading and Customs
documents for payment by the Five Families.
3. The Five Families issue a L/C to Vito.
4. Vito, or his bank, forwards the L/C to Ciccios bank (lets say Cosa Nostra).
5. Upon receipt, Cosa Nostra advises Ciccio of the same.
6. Ciccio puts the 400 tons of olive oil on a ship, the SS Mafia, headed to New York,
and receives a bill of lading and customs documents in return.
7. Ciccio then presents the bill of lading and documents to Cosa Nostra.
8. Cosa Nostra forwards them to the Five Families.
9. Five Families gives Cosa Nostra $3M as purchase price.
10.
Cosa Nostra releases the $3M to Ciccio. As far as Ciccio is concerned, the
transactions finished.
11.
Meanwhile, Five Families receives the bill of lading and customs documents.
12.
Five Families forwards the same to Don Vito.
13.
Don Vito, in exchange, pays $3M.
14.
Presenting the Bill of Lading to the port authority of New York upon arrival
of the SS Mafia, Vito receives his olive oil. Transaction finished.
B. Defined
A letter of credit is an instrument issued by a bank on behalf of one of its
customers, authorizing an individual or a firm to draw drafts on the bank or one
of its correspondents for its account under certain conditions of the credit
C. Nature
Governed by the provisions of the Code of Commerce, though Villanueva
considers these to be obsolete. He believes these to now be purely bank to bank
transactions.
Which is wrong in my opinion, because the governing law is the Uniform Customs
and Practice 600, an international list of standards concerning letters of credit.
A form of security transaction, by which the bank substitutes its financial
strength for that of another with the undertaking to be conditioned on the
presentation of a draft or demand for payment.
o Thus, the applicant can present the letter of credit to the beneficiary as a
form of security.
D. Parties
1. Buyer - who procures the letter of credit and obliges himself to reimburse the
issuing bank upon receipt of the documents title;
2. Issuing bank - which undertakes to pay the seller upon receipt of the draft and
proper documents of titles and to surrender the documents to the buyer upon
reimbursement; and
65

3. Seller - who in compliance with the contract of sale ships the goods to the buyer
and delivers the documents of title and draft to the issuing bank to recover payment.
(Articles 240-242, Code of Commerce)11
The number of the parties may be increased and may include:
1. Advising (notifying) bank - may be utilized to convey to the seller the existence of
the credit.
2.
Confirming bank - which will lend credence to the letter of credit issued by a
lesser known issuing bank; the confirming bank is directly liable to pay the sellerbeneficiary;
3. Paying bank - which undertakes to encash the drafts drawn by the exporter/seller
4. Instead of going to the place of the issuing bank to claim payment, the buyer may
approach another bank, termed the negotiating bank, to have the draft discounted
Liabilities of Parties
1. Drawer liable to person on whom it was issued provided identity proven, for the
amount paid within fixed maximum.
2. Bearer has no right of action if not paid by person who issued it.
3. Drawer may annul the letter of credit, informing the bearer and to whom it
is addressed.
4. Bearer shall pay the amount received to drawer, otherwise action for execution
may be filed with interest and current exchange in place where payment made on place
where repaid.
5. If a bearer does not make use of letter of credit within agreed period, or if none,
within6 months from date if in the Philippines, and 12 months if outside the Philippines,
it shall be void.
(Articles 569-572, Code of Commerce)
Types of Letters of Credit:12
Commercial Letters of Credit
Mainly used as a primary payment tool in international trade such as exporting
and importing transactions.
Means of payment to be utilized when the principal perform its duties.
Majority of commercial letters of credit are issued subject to the latest version of
UCP (Uniform Customs and Practice for Documentary Credits).
The ICC publishes UCP, which are the set of rules that governs the commercial
letters of credit procedures.
Standby Letters of Credit
11 Code of Commerce has been repealed. However, the concepts are still the same. Just
dont cite the Code of Commerce.
12 https://www.letterofcredit.biz
66

A payment is made to the beneficiary of a standby letter of credit when there is a

breach of the principal's obligation.
As an example, let us consider a construction company that has been awarded
with a tender. If this construction company cannot fulfill its obligations under the
project contract beneficiary of the standby letter of credit can apply to the
nominated bank for the payment. However, the nominated bank considers only
the terms and the conditions of the standby letter of credit and the rules
governing the credit when deciding a complying presentation.
Standby letters of credit have their own rules, which are called The International
Standby Practices 1998 (ISP98). They are also published by ICC.
However, a standby letter of credit can be issued subject to either the UCP or the
ISP.
Revocable Letters of Credit
Give issuer the amendment or cancellation right of the credit any time without
prior notice to the beneficiary.
Since revocable letters of credit do not provide any protection to the beneficiary,
they are not used frequently.
In addition, UCP 600 has no reference to revocable letters of credit.
All credits issued subject to UCP 600 are irrevocable unless otherwise agreed
between the parties.
Irrevocable Letters of Credit
Cannot be amended or cancelled without the agreement of the credit parties.
Unconfirmed irrevocable letters of credit cannot be modified without the written
consent of both the issuing bank and the beneficiary.
Confirmed irrevocable letters of credit need also confirming bank's written
consent in order any modification or cancellation to be effective.
E. Principles
a. Independence Principle

a bank, in determining compliance with the terms of a letter of

credit is required to examine only the shipping documents presented by the seller
and is precluded from determining whether or not the main contract is actually
accomplished or not.

Recall that there are 3 contracts in a contract of loanthe sale, the

agreement between the issuer and the applicant, and the letter of credit itself.

The 3 transactions are independent of one another. Thus, when the

letter of credit is presented, the bank can only look into whether the
seller/beneficiary.
o
Going further, if the goods never arrive, or the buyer never pays the
issuing bank, the issuing bank still has to pay the seller. This is because, as
the phrase independence principle implies, all of these obligations are
independent from that evidenced by the L/C.
67

Exception: Fraud Exception Rule

Requirements:
1. Clear proof of fraud
2. Fraud constitutes fraudulent abuse of the independent purpose of the LOCand
not only fraud under the underlying obligation.
3. Irreparable injury might follow if injunction is not granted or the recovery of
damages would be seriously affected.

Transfield v. Luzon Hydro

Facts:
Petitioner and LHC entered into a Turnkey contract. To secure performance of petitioners obligation, it
opened in favor of LHC 2 standby letters of credit. It defaulted in its obligations which gave rise to
arbitration proceedings. While these were pending, LHC called on the securities for the payment of
liquidated damages for the delay. Petitioner filed an action to enjoin LHC from calling on the Securities
pending resolution of the disputes.
Held:
LHC could call on the Securities pursuant to the first principle in credit law INDEPENDENCE
PRINCIPLE-- that the credit itself is independent of the underlying transaction and that as long as the
beneficiary complied with the credit. LHC also has a right rooted in the Contract to call on the Securities.
Both parties can invoke this principle, not only the issuing bank.

b. Rule of Strict Compliance

The documents tendered by the seller or beneficiary must strictly
conform to the terms of the letters of credit, i.e., they must include all documents
required by the letter of credit.
Thus, a correspondent bank which departs from what has been
stipulated under the L/C, e.g. accepting faulty tender, acts on its own risk, and
may not be able to recover from the buyer of the issuing bank.
Conversely, if the issuer of the Letter of Credit refuses to pay a draft
accompanied by documents that are conforming in all respects, it will be guilty of
wrongful dishonor, with sanctions.
The sanction for wrongful dishonor is loss of the right of
reimbursement

Feati Bank v. CA
Facts:
Villaluz agreed to sell logs to Christiansen logs. LOC issued by a bank in the States in favor of Villaluz,
requiring certification from Christiansen as Ship and Merchandise Broker that the logs have been
approved prior to shipment. Christiansen never complied, and then disappeared, so Villaluz went after
Feati Bank.
Held:
Feati Bank is not liable due to the missing document. Rule of strict compliance applies. Also, wellaccepted rules (e.g. UCP) apply in our jurisdiction insofar as there are no existing/applicable laws.
Hence, the bank may only negotiate, accept, or pay, if the documents tendered to it are on their face in
accordance with the terms and conditions.

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Trust Receipts

A. Primer
A trust receipt is a document whereby one party, called the entruster, which is usually
the bank, delivers the goods and the possession thereof to another, called the
entrustee, who promises to hold the goods in trust (thus the name) for the entruster.
o The entrustee is given the possession of the goods so that he can do something
with them, usually to sell them.

The main point of Trust Receipts is that the entrustee can sell the goods or in any
other way use them for his business, while the entruster retains ownership over the
goods. In return, the entrustee must turn over any proceeds to the entruster.
Why would they want to do that?
On the part of the entruster, the bank can retain ownership over the goods, while still
being able to receive proceeds on their sale or use.
On the part of the entrustee, he may use the goods for his business, without having to
buy them first. If he can sell it at a higher price than the amount for which the trust
receipt is issued, he can keep the profits.
How
Lets
1.
2.
3.

this works:
continue from the Olive Oil Example Above.
The olive oil arrives in New York.
Vito feels that he needs more money. Who doesnt?
He takes out a loan from Five Families for $3,000,000. The bank requires a
security. There is nothing more convenient than the olive oil itself.
4. Thus, the olive oil is used as a security, and a Trust Receipt covering the oil and
for $3,000,000 is issued to Vito. By the terms of the receipt, Vito is to sell the olive
oil and remit proceeds therefrom to the amount of his loan.
5. Heres the important bit: After issuing the trust receipt, the bank releases the
olive oil to Vito, subject to the terms and conditions thereon, i.e. for him to pay
back the loan using the proceeds from the sale.
6. Vito then sells the olive oil.
a. If he sells it for exactly $3,000,000, he breaks even.
b. If he sells it for less, he still owes the bank the deficit.
c. If he sells it for more, he gets to keep the profits.
B. Defined

Sec. 2, (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.

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Section 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: xxx

Lets break that down.13

o
a written/printed document,
o
signed and delivered by the entrustee in favor of the entruster,
o
whereby the entruster,

who owns or holds absolute title or security interest over the goods,
documents on instruments,
o
releases said goods, documents or instruments to the possession of the
entrustee,
o
upon the entrustees promise, as embodied in a document called a trust
receipt
to hold said goods in trust for the entruster, and
to sell or otherwise dispose of the goods, documents or instruments with the
obligation to turn over the proceeds thereof to the extent of what is owing to the
entruster; or
to return the goods if unsold, or not otherwise disposed of, or
for other purposes equivalent to those listed. (See Rights acquired, infra.)
Cf. What is not a trust receipt.
Sec. 4. Xxx
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.

This paragraph differentiates trust receipts from sales where at the start of the
transaction, the seller has general property rights as against the buyer over the goods,

13 In fact, lets break everything down. The TR Law is fairly straightforward, and the
only obstacle is the TL:DR-ness of the provisions.
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documents, or instruments, or when there is a credit sale and the seller invokes the
unpaid sellers lien.
Colinares v. CA
Facts: Petitioners were convicted of estafa and violation of Trust Receipt Law after failing to pay the
balance of a loan from PBC, which they took out to buy construction materials to build a structure for a
convent. According to the bank, the petitioners signed a trust receipt as security and violation of this
constituted estafa. Petitioners countered by saying that their agreement was for an ordinary loan, and
should they be liable it must be for the loan only.
Held: Court acquitted petitioners of estafa. Petitioners did not have intent to defraud, and the
circumstances showed that the transaction intended by the parties was a loan and not a trust receipt
agreement. Also, the petitioners were not importers of goods as defined by the Trust Receipt Law. Title
over the goods the petitioners bought from the loan proceeds never passed to the bank. These facts
impress vagueness and ambiguity upon the trust receipt, which should not be the basis for criminal
prosecution in the event of violation of its provisions.

Governing Law
PD 115, which took effect on Jan. 29, 1973.
Nature
1. A trust receipt agreement is merely a collateral agreement, the purpose of which is
to serve as security for a loan.
2. As the name implies, the trust receipt agreement is a kind of trust; the relation
between entruster and entrustee is therefore a fiduciary one.
3. In relation to a letter of credit, a letter of credit is a separate document from a trust
receipt. While the trust receipt may have been executed as a security on the letter of
credit, still the two documents involve different undertakings and obligations.
4. That being said, it is common for a letter of credit and a trust receipt to be issued for
the same transaction. Usually, the bank finances the purchase via a loan evidenced
by a letter of credit between the issuing bank and the buyer. As security for that
loan, a trust receipt is issued over the goods. (Possible Test Question)
Parties
Section 3. Definition of terms. As used in this Decree, unless the context otherwise requires,
the term

2. Entruster
(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.

Apparently an entruster cant be a warehouseman because the latter is engaged

in the business of warehousing. Therefore, not just anyone can be a
warehouseman.
Need not be the absolute owner. An unpaid seller or the issuer of a letter of credit
both have sufficient interest in the goods to issue a trust receipt.

3. Entrustee
(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.

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4. Purchaser for value in good faith

Strictly speaking, a purchaser in good faith for value acquires by such purchase a
superior title to the Trust Receipt, but that doesnt really make him a party
thereto.
Subject Matter
Goods, Documents, or Instruments
(a) "Document" shall mean written or printed evidence of title to goods.
(d) "Goods" shall include chattels and personal property other than: money, things in action, or
things so affixed to land as to become a part thereof.
(e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument
Law; any certificate of stock, or bond or debenture for the payment of money issued by a public
or private corporation, or any certificate of deposit, participation certificate or receipt, any
credit or investment instrument of a sort marketed in the ordinary course of business or
finance, whereby the entrustee, after the issuance of the trust receipt, appears by virtue of
possession and the face of the instrument to be the owner. "Instrument" shall not include a
document as defined in this Decree.

NB. Documents cannot be instruments.

Goods must be movables, and cannot include money or things in action.
o Things in actionusually rights to an obligation, e.g. rights of a mortgagee,
pledgee.

Form
Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form,
but every such receipt must substantially contain (a) a description of the goods, documents or
instruments subject of the trust receipt; (2) the total invoice value of the goods and the amount
of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the entrustee
(a) to hold in trust for the entruster the goods, documents or instruments therein described;
(b) to dispose of them in the manner provided for in the trust receipt; and (c) to turn over the
proceeds of the sale of the goods, documents or instruments to the entruster to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return the goods,
documents or instruments in the event of their non-sale within the period specified therein.
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.

Trust receipts are formal contracts, and thus must be written. However, what must be
on the face of the trust receipt need not appear in any particular form, but must
substantially contain:
1. A description of the goods, documents or instruments subject of the trust receipt
2. The total invoice value of the goods and the amount of the draft to be paid by
the entrustee
a. Also known as the face value of the trust receipt.
b. No need for there to be a separate fee
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c. That being said, a trust receipt transaction is ordinarily for a fee, in that a
part of the excess proceeds from the disposition of the goods is generally
turned over to the entruster.
i. However, for this to be valid, it must
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,
i. or as appears in the trust receipt or
ii. to return the goods, documents or documents in the event of their
non-sale within the period specified therein.
May contain other terms and conditions, so long as they are not contrary to the
Big 5. (LMGCPOPP.)
As to Currency
Section 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.

The trust receipt may be denominated

a. In Philippine currency, or
b. Any foreign currency acceptable and eligible as part of the international
reserves of the Phils. However,
i. This is subject to any contrary provision in law, executive orders or
rules and regulations;
ii. If foreign currency is used, payment shall be made in its equivalent in
Philippine currency computed at the prevailing exchange rate on the
date the proceeds of the sale are turned over to the entruster,
or on another date as may be stipulated.
Rights and Obligations arising from the Trust Receipt
Obligations of the Entrustee.
Section 9. Obligations of the entrustee. The entrustee shall

73

(1) hold the goods, documents or instruments in trust for the entruster and shall dispose of
them strictly in accordance with the terms and conditions of the trust receipt;
(2) receive the proceeds in trust for the entruster and turn over the same to the entruster to
the extent of the amount owing to the entruster or as appears on the trust receipt;
(3) insure the goods for their total value against loss from fire, theft, pilferage or other
casualties;
(4) keep said goods or proceeds thereof whether in money or whatever form, separate and
capable of identification as property of the entruster;
(5) return the goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to
the provisions of this Decree.

Generally, the entrustee is to comply with the undertaking embodied in the trust
receipt:
1. To hold the designated goods, documents or instruments in trust for the
entruster
Sec. 9, (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;
Section 4. A trust receipt transaction, xxx is any transaction xxxe, whereby the entruster, xxx
releases the same to the possession of the entrustee upon the latter's execution xxx of a xxx
"trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or instruments in
trust for the entruster xxx

2. Sell or otherwise dispose of the goods, documents or instruments

Sec. 9, (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;
Sec. 4. Xxx and to sell or otherwise dispose of the goods, documents or instruments in
accordance with the terms and conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following: xxx

How goods, etc. are supposed to be disposed of.

a. In general , according to the terms and conditions set forth in the trust receipt.
a. Primarily contemplates sale.
b. If there are no such terms and conditions, the use of the goods or documents
must be substantially equivalent to:
For goods or documents:
Sec 4. xxx
1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case
of goods delivered under trust receipt for the purpose of manufacturing or processing before
its ultimate sale, the entruster shall retain its title over the goods whether in its original or
processed form until the entrustee has complied fully with his obligation under the trust

74

receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner
preliminary or necessary to their sale; or

i.
ii.

iii.

Sale
Manufacture or processing of goods ultimately for the purpose of sale.
a. In this case, the entruster retains ownership of the goods, whether as raw
materials or processed goods, until the entrustee has fully complied with his
obligations under the trust receipt.
Load, unload, ship or transship, or otherwise deal with them in a manner
preliminary or necessary to their sale.

For Instruments
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

i.
ii.
iii.
iv.

Sale or procurement of sale or exchange

Delivery to a principal
Effect consummation of transaction which requires delivery to a depository or
register, or
Effect presentation, collection or renewal.

3. Turn over the proceeds or return the undisposed goods

Sec. 9 (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;
(5) return the goods, documents or instruments in the event of non-sale or upon demand of
the entruster;
Sec. 4. xxx 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 xxx

The entrustee must either

Turn over the proceeds to the extent of his obligation to the entruster, or
Return the goods, documents or instruments themselves if he has failed to
dispose of them.
4. Insure the goods.
(3) insure the goods for their total value against loss from fire, theft, pilferage or other
casualties;

5. Keep the goods or proceeds thereof separate and capable of identification.

(4) keep said goods or proceeds thereof whether in money or whatever form, separate and
capable of identification as property of the entruster;

75

6. Observe all other terms and conditions.

(6) observe all other terms and conditions of the trust receipt not contrary to the provisions
of this Decree.

7. Bear the risk of loss.

Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss
of goods, documents or instruments which are the subject of a trust receipt, pending their
disposition, irrespective of whether or not it was due to the fault or negligence of the
entrustee, shall not extinguish his obligation to the entruster for the value thereof.

The entrustee, being in possession of goods over which he does not have title, and
which have been entrusted to him, bears the risk of loss.
From the provisions of the article, fault or negligence on the part of the entrustee
is immaterial. By implication, he is liable for loss even due to a fortuitous event.
The liability for loss is that such loss, even if it be due to a fortuitous event, does
not extinguish the obligation, and the entrustee is liable for the value of the
obligation.
Rights of the Entruster
1. To the proceeds from the sale of the goods.
Section 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.

Counterpart right to the entrustees obligations to dispose of the goods and remit
the proceeds to the entruster.

2. To cancel the trust and take possession of the goods

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,

If the entrustee defaults or fails to comply with the terms and conditions of the
Trust Receipt, or any other agreement, the entruster may cancel the trust and
take possession of the goods.

3. Sell the goods upon default.

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.

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xxx
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.

Having taken possession of the goods, the entruster may sell the goods to
the obligation, after following the ff. procedure:
i. Notify the entrustee of intention to sell.
a. Notice is sufficient if it is in writing, and either personally served
entrustee or sent by post-paid ordinary mail to the entrustees last
business address.
ii. Not less than 5 days after the serving or sending of notice, selling the
either at a public or private sale.
a. At such sale, the entruster himself may be a purchaser.
iii. After such sale, the proceeds shall be applied,

satisfy

on the
known
goods,

(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.

4. Security interest as against creditors of the entrustee

Section 12. Validity of entruster's security interest as against creditors. The entruster's security
interest in goods, documents, or instruments pursuant to the written terms of a trust receipt
shall be valid as against all creditors of the entrustee for the duration of the trust receipt
agreement.

Security

Interest

Sec. 3(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.

A property interest only to secure performance of some obligation.

In a trust receipt, the entruster has a security interest in the goods, documents or
instruments covered thereby in order to secure the performance of the obligation
for which the receipt was issued.
Such interest is much like a pledgees or a mortgagees interest, and is valid
against all creditors of the entrustee for the duration of the trust receipt
agreement.

Vintola and Vintola v. IBAA

Facts: The Vintolas entered into a letter of credit with the IBAA. A trust receipt was also executed where
the Vintolas agreed to hold the goods in trust for IBAA as IBAAs property with the liberty to sell it and in
case of sale, to turn over the proceeds to IBAA. The Vintolas were unable to pay off the debt to IBAA or
sell the goods.
Held: The nature of the transaction between the Vintolas and IBAA is that of a LETTER OF CREDITTRUST RECEIPT ARRANGEMENT. The transaction involves a loan feature represented by the letter of
credit and a security feature which is the trust receipt. A trust receipt is a security arrangement pursuant
to which the bank acquires security interest in the goods. SECURITY INTEREST means a property
interest in goods, documents or instruments to secure performance of some obligations of the entrustee

77

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. Thus IBAA did not become the
real owner of the goods. The IBAA merely held a security title over the goods.

Cf. Rights of BFVGFs

Section 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.

In contrast, the rights of a purchaser for value in good faith over the goods he
purchased defeats the entrusters security interest, if he purchased such goods
from an entrustee with the right to sell or transfer the goods or instruments.
5. Freedom from liability as vendor.
Section 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.

The entruster is not liable principally as a vendor under and sale or contract to
sell made by the entrustee.
This is a departure from the general rule. The entruster still owns the goods
covered by the trust receipt. Generally, the owner of the goods would be liable as
vendor. However, here, the entruster has a mere security interest, and as such is
not merely thereby made responsible as a vendor or primarily.
Effect of Failure to comply with the Trust Receipts Law
Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.

For once, an express pronouncement: failure to turn over the proceeds of the sale
of the goods, documents, or instruments, or to return the unsold goods,
documents or instruments constitute the crime of estafa, under Art. 315, 1 (b),
More specifically, this is estafa by misappropriation or conversion.

Interpretation of Trust Receipts

In case of doubt, the presumption is for good faith compliance.

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Pledge, Mortgage and Antichresis

A. Common Provisions

Definition
Pledges and mortgages are real security transactions constituted to secure the
fulfillment of a principal obligation.
When such obligations become due, the property pledged or mortgaged (the
collateral) may be alienated. The proceeds from such alienation shall be used to
satisfy the debt.
Essential Requisites
Article 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.

Elements 2 and 3 are important because mortgage and pledge require total
alienation of the subjected property to answer for the principal obligation
In other words, the property used as collateral must be alienable.
What do free disposal and capacity to dispose of the property mean?
1. FREE DISPOSAL means that the property is not subject to any claim by a third
person.
2. CAPACITY TO DISPOSE means that the pledgor or mortgagor has the capacity
or authority to dispose of the property
Is absolute ownership the same as free disposal? (possible exam question)
No. Absolute ownership refers to the title over the property. Free disposal refers to
the ability of the owner of the property to alienate the same.
Lopez v. CA
Facts: Lopez obtained a P20K loan from the Prudential Bank and Trust Company. He executed a
promissory note for the same amount and a Surety Bond with Philamgen as surety. In turn, he executed
in favor of Philamgen an indemnity agreement and a deed of assignment of 4,000 shares of the Baguio
Military Institution entitled "Stock Assignment Separate from Certificate". Lopez' obligation matured
without it being settled. Philamgen was forced to pay Prudential Bank. Philamgen brought an action
against Lopez for reimbursement. CFI dismissed the complaint on the ground that the shares of stock
were actually transferred to Philamgen. CA reversed, stating that the stock assignment was a mere
pledge.
Held: The stock assignment is a pledge. A transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in
existence and is not discharged by the transfer. The following requirements of a contract of pledge have
been satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the
pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has
the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose.

Gratuitous Mortgage
79

When mortgage or pledge is purely gratuitous, it must be strictly construed (Art.

1378 should be interpreted as to effect least transmission of rights or interests)

Collateral may be alienated to answer for principal obligation

Article 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.

This is the essence of pledge and mortgage. Even if not expressly in the contract,
this is an inherent element of the transaction of mortgage or pledge.
The collateral is made to answer for the principal obligation when it is sold after
foreclosure, not by its transfer to the creditor.
The mortgagee or pledgee is given the option to have the security given sold at a
public auction and the proceeds applied to the payment of the obligation.

Manila Banking v. Teodoro

Facts:Teodoro Jr executed in favor of Bank a Deed of Assignment of Receivables from the EEA for P44k,
which provided that it was for and in consideration of certain credits, loans, overdrafts and other credit
accommodations extended to the Teodoros as security for the payment of said sum and interest. The bank
thereafter extended loans to the Teodoros on the basis of certain contracts entered into by them and EEA
for the fabrication of fishing boats. Later, the Teodoros conveyed 3 promissory notes of which they
partially paid but left some unpaid balance. All the promissory notes indicated that any interest due if
not paid at the end of every month shall be added to the total amount then due. Due to this failure to pay
the promissory notes, an action was filed against the Teodoros.
Held: Contrary to the claim of the Teodoros, the Court held that the former remain as the principal
debtors of bank rather than mere guarantors, because the deed of assignment merely guarantees said
obligations. Art. 2058 does not therefore apply to them. Because the Teodoros are both the principal
debtors and the pledgors or mortgagors, resort to one is, therefore, resort to the other.

3rd party pledge or mortgage

Accommodation Pledge or Mortgage:
- Accommodation Party: one who lends his name or property in favor of another for
free (gratuitous 3rd party pledgor/mortgagor)
- The fact that the loan was for the sole benefit of the debtor does not invalidate the
pledge or mortgage.
Duty of mortgagee to make proper inquiry:
- The creditor must exercise due diligence whenever a debtor offers to mortgage a 3 rd
persons property.
- He is guilty of negligence if he relies solely on the representation made by the
debtor, especially if the creditor is a bank.
- If he acts with undue haste in granting the mortgage loans without checking the
ownership of the property being mortgaged and the authority of the agent executing
the mortgage, he is not an innocent mortgagee.
Liability for Deficiency
- General Rule: The 3rd party pledgor or mortgagor is not liable for the payment of any
deficiency remaining after the sale of the property.
80

o Exception: The silver bullet. Stipulation. .

Not solidarily bound with principal obligor
An SPA authorizing a 3rd person to mortgage ones property as security for the 3 rd
persons debt does not of itself constitute a mortgage.
Liability extends only to the value of the property and not to the value of the entire
loan
Can avail of some of the defenses of a guarantor. See discussion infra.

Property pledged or mortgaged

Main Rule: Only property absolutely owned by pledgor or mortgagor may be used as
collateral. The pledge or mortgage over property not so owned is null and void.
Corollaries:
1. Future property cannot be pledged or mortgaged. The pledgor or mortgagor
cannot own what is not yet existent.
2. Co-owners, who have absolute ownership over their respective shares of the
property, may mortgage the property, but only to the extent of his share
3. Under a conjugal partnership of gains, a mortgage by one of the spouses is valid
only up to of the entire property. 14

Subject
Matter
Possession
of
Collateral

How
3rd
parties
bound

Pledge
Movables

Real Estate Mortgage

Immovables

Must be delivered to pledgee.

No requirement; generally remains

with
mortgagor,
but
nothing
prohibits mortgagor from giving
possession
to
3rd
person
or
mortgagee.
Public instrument with description Registration
of thing and date of the pledge.

CHATTEL Mortgage
of Not required

Delivery
Personal
Property
Registration
in
the Registry of
Property
Right to excess
proceeds of sale

Pledge
Required for the validity of the
pledge

Necessary for the validity of Not

necessary.
Public
rd
the CM against 3 persons
document is enough to bind
3rd persons
The
excess
goes
to The
excess
goes
to
debtor/mortgagor
pledgee/creditor
unless
otherwise stipulated
can Creditor/pledgee
is
not
Right to recover Creditor/mortgagee
14 Applying previous discussions on limitations brought about by CPGs and ACPs, this
rule would not apply to ACPs.
81

deficiency

recover
from
the
debtor/mortgagor, except if
covered
by
Recto
Law
(covered by Articles 1484 to
1486 of the NCC)

entitled
to
recover
any
deficiency after the property
is
sold,
notwithstanding
contrary stipulation

CREDITOR IS NOT REQUIRED TO SUE TO ENFORCE HIS CREDIT

To do so would be a nullification of his lien and would defeat the purpose of the pledge
or mortgage which is to give him preference over the property given as security for the
satisfaction of his credit.
CRIMINAL RESPONSIBILITY OF PLEDGOR/MORTGAGOR
- Under the RPC, ESTAFA is committed by a person who, pretending to be the owner
of any real property, shall convey, sell, encumber, or mortgage the same or knowing
that the real property is encumbered shall dispose of the same as unencumbered
(Art 316 RPC).
- It is essential that fraud or deceit be practiced upon the vendee at the time of the
sale.
Obligations Secured
Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage.

Article 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.

Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they
pure or subject to a suspensive or resolutory condition.

These are the same rules as guaranty and suretyship. See discussion supra.
The pledge agreement may stipulate that the pledge will also stand as security for
any future advancements or renewals thereof that the pledgor may procure from the
pledgee. See discussion of dragnet clause under Real Estate Mortgage, infra. Cf.
Contrary rule under Chattel Mortgage.

Bank v. CA
Facts: Castro applied for a P3,000 loan from the Rural Bank, assisted by the Spouses Valencia, who
arranged everything with the bank and supplied all the required data. The loan was secured by Castros
house and lot in Sampaloc, Manila. However, when the Valencias applied for their own P3,000 loan, they
defrauded Castro into signing another mortgage over her house and lot. The property was eventually sold
at an extra-judicial foreclosure sale when Castro did not pay the total of P6,000 (the total of both loans)
demanded of her. Instead, she consigned the amount she personally owed with the court.
Castro challenged the validity of the Valencias promissory note, the mortgage securing it, and the
foreclosure sale. The CFI ruled in her favor. CA affirmed. The Rural Bank then challenged that decision in
the SC.

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Held: The SC held that the Valencias had defrauded both Castro and the bank, and so, there being a
mutual mistake caused by the fraud, the promissory note and mortgage were invalid insofar as they
exceeded Castros personal P3,000 debt to the bank. Thus, if the principal obligation is void, the
mortgage is also void.

Contract to Pledge or to Mortgage

Article 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.

A promise to constitute a pledge or mortgage, if accepted, gives rise only to a

personal right binding upon the parties and creates no real rights in the property.
- What exists is a right of action to compel fulfillment of the promise but there is not
yet a pledge or mortgage.
Remedies of Pledgee and Mortgagee
-

Upon default, the creditor may choose only one of two alternative remedies. The
pursuit of one of the ff. bars that of the other. They emanate from different obligations
and are thus independent of one another.
5. Specific Performance
-

This remedy emanates from the principal obligation. It seeks to recover the principal
debt through court intervention.15 That being the case, it may only be availed of
through a court action.

However, Sir believes that there can be extrajudicial specific performance, through
demand. Thus, a creditor may compel performance by the debtor either through
demand or by filing the action. In fact, if no extra-judicial demand is made, then
prescription begins to run, and estoppel by laches may result.

That being said:

o The editor maintains that specific performance refers only to court
intervention to compel performance of a contract.
o Besides, to hold that extrajudicial demand constitutes an availment of
specific performance would lead to absurd consequences:

There can be no default without demand, generally. Default is the

condition precedent to the demandability of security contracts. If

15 This is the definition of specific performance according to the Adapt CD legal

dictionary.
83

demand already is specific performance, then upon default the

security contract can no longer be foreclosed upon.

A creditor may avail of specific performance or rescission. To hold

that specific performance is extrajudicially available would also mean
that rescission is so available, in direct contravention of UP v. de Los
Angeles.

But Im not the professor.

Of note is that a successful action for specific performance allows all property of the
debtor to answer for the debt, including the previously mortgaged property.
However, foreclosure is still barred if there is deficiency.

6. Foreclosure
Emanates from the accessory obligation of pledge or mortgage.
This is the legal remedy to terminate the pledgors/mortgagors interest and
ownership in the collateral, in order to force a sale thereof to satisfy the secured
unpaid obligation.
- Generally, the terms of the agreement and a statute may authorize a power-of-sale
foreclosure (sale of the collateral at a non-judicial public sale by a public official, the
creditor, or his trustee)
Indivisibility of a Pledge or Mortgage
-

Article 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.
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the
debtors are not solidarily liable.

The concept of indivisibility of pledge or mortgage is that no matter how many

properties are used are collateral for a single debt in a single mortgage, all of them
can be made to answer for the whole debt.
To understand the concept, consider a 100,000 peso loan, payable secured by 2
P50,000 necklaces in a pledge. Even if the debtor manages to pay P50,000, both
84

necklaces are still encumbered by the pledge. Upon default of the other P50,000,
both necklaces must be sold to satisfy such deficit.
In other words, from the mortgagors perspective, just because a debt has been
partially paid does not release any of the collateral, even if the total value of the
latter exceeds the remaining debt.
On the other hand, the mortgagee cannot choose to foreclose only upon one, subject
to other provisions of equity, especially the rule that only so much as is necessary to
answer for the debt. (see discussion on foreclosure, infra.)
The rule applies whether co-debtors are joint or solidary. Typically, each co-debtor
supplies his own collateral to secure the debt. The rule, then, is that even if one of
the joint debtors fulfills his part of the obligation, the property he gave as collateral
remains subject of the pledge as regards the remaining obligations.
It also applies even if the principal obligation is divisible.

General Rule: Pledges and mortgages are indivisible.

Exceptions:
1. Each one of several things guarantees a determinate portion of credit.
Actually it is not an exception because in such a case, there would be as many
pledges or mortgages as there are things given in pledge.
2. Only a portion of the loan was released.
3. There was failure of consideration.
E.g. Creditor took over management but the business failed. (Rose Packing v. CA)
4. There is no debtor-creditor relationship
The indivisibility concept arises only when there is a debt, that is, there is a
debtor-creditor relationship. It is NOT applicable to the right of redemption of an
accommodation mortgagor and his assignee wrt whom this relationship is not
present. Fair play and justice demand that petitioners, who are not indebted to
the mortgage, redeem only the property belonging to their assignor. (Belo v. PNB)
Dayrit v. CA
Facts: Dayrit, Sumbillo and Angeles entered into a Loan & Mortgage agreement where they borrowed
P150,000, which was secured by a mortgage on 2 parcels of land. They failed to pay, causing TC to
render judgment for the payment of the loan. Dayrit contends that since the obligation is joint and is for a
simple money judgment, the fulfillment of his share would cause the release of the mortgaged properties.
Held: SC dismissed Dayrits motion. The court found that the complaint was for full satisfaction of the
indebtedness. And examining the loan & mortgage agreement, the collateral was intended to secure the
entire loan, not merely the share of 1 of the parties.

NB. Judicial Foreclosure of Mortgages constituted on several properties.

The rule that real property, consisting of several lots, should be sold separately, applies
to sales in execution (Sec. 19 Rule 39 ROC) and NOT to foreclosure of mortgages. Thus,
even in judicial foreclosure, the mortgage is indivisible.
Pactum Commissorium
Article 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.

85

Article 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.

General Rule: A pactum commissorium is void.

- A pactum commissorium is a provision in the pledge, mortgage, or antichresis, that
upon default, title over the collateral automatically passes to the creditor.
- The essence of a pledge/mortgage is that, when the principal obligation becomes
due, the collateral may be alienated for purposes of payment to the creditor. This
requires foreclosure.
- It must be noted that even in foreclosure title does not pass to the creditor; he
merely is allowed to possess the property for the sole purpose of selling it.
- The pactum commissorium is prohibited because it allows for fraudulent and/or
oppressive situations whereby land is appropriated by the creditor.
o In the real world, mortgages usually secure the payment of loans far less
valuable than the land itself. E.g. P3M land mortgaged to secure a P1M
loan. To allow automatic appropriation of the land would be to allow land to
be taken for a much lower consideration, thus being against public policy.
o Further, this would open the door to fraud and machinations on the part of
the mortgagee, who would, obviously, prefer the land over the much smaller
amount of the loan.
Elements:
1. There should be a pledge, mortgage, or antichresis of property by way of security for
the payment of the principal obligation; and
2. There is a stipulation for automatic appropriation by the creditor upon non-payment
of the principal obligation within the stipulated period.
- Exception:16
o Article 2112 provides that if the thing pledged or mortgaged is not sold in
two public auctions, the creditor may appropriate the same.
- Not pactum commissorium, and therefore valid:
o An agreement, after the perfection of the original contract, to cede the
property as payment of debt. In effect, this is a dacion en pago.
o An agreement to assign or sell the property as payment of the obligation.
Not a pactum commissorium because both parties agree to the sale. The
transfer of title to the creditor is not automatic. Therefore, the intent behind
the prohibition is protected.
o Stipulation allowing creditor to take possession of the property upon
foreclosure, because title is not passed, but only possession.
o Forfeiture of sums paid in a contract to sell in case of failure to pay, as title
over the thing does not pass until full payment.
o Alienation of payment only by way of security.

16 Referring to instances when the collateral may be automatically appropriated by the

creditor.
86

Effect of Pactum Commissorium on contract of Pledge or Mortgage

Only the stipulation is void; the principal contract will subsist and the
creditor/pledgee/mortgagee may still take action on the collateral when the debtor fails
to pay.
Equitable Mortgages
Article 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument extending
the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is
that the transaction shall secure the payment of a debt or the performance of any other
obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee
as rent or otherwise shall be considered as interest which shall be subject to the usury laws.

Protip: Memorize this list.

Crap Mnemonic: TRIPPI (Taxes, Right to repurchase, Instrument, Price retained,
Possession, Intention)
Article 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall
be construed as an equitable mortgage.
Article 1604. The provisions of article 1602 shall also apply to a contract purporting to be an
absolute sale.
Article 1605. In the cases referred to in articles 1602 and 1604, the apparent vendor may ask
for the reformation of the instrument.

An equitable mortgage is a contract, which, although lacking some formality, or form

or words, or other requisites demended by a statute, nevertheless reveals the
intention of the parties to charge the property as security for a debt, but contains
nothing impossible or contrary to law.
Best encapsulated in no. 6 of the list above, an equitable mortgage is any contract
where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other
obligation.

87

These provisions were designed to prevent circumvention of the laws on usury and
the prohibition against pactum commissorium. A common example would be
contracts of sale with the right to repurchase (pacto de retro sales).17
Note that the list of circumstances above only establishes a disputable presumption
of equitable mortgage, which may be defeated by evidence.
Elements:
a. Parties enter into a contract entitled contract of sale
b. Their true intention is to secure and existing debt by way of mortgage.

Reyes v. Sierra
Facts: Reyes wanted to register property in antipolo claiming it was inherited from his father. It turns out
that his father got the land from Beltran through a mortgage contract.
HELD: Reyes cant register it under his name. Contract between father of Reyes and Beltran was that of
a mortgage and not a sale hence ownership didnt pass to him.
Olea v. CA
Facts: Sps Pacardo executed a deed of sale con Pacto De Retro with Palabrica on the condition that they
repurchase the property in three years or Palabrica becomes owner of it. 40 years pass with the propery
still being in possession of the Pacardo children. Olea, daughter of Palabrica files for recovery of
possession on the ground that she is true owner by virtue of the deed of sale and the failure to
repurchase.
Held: The SC ruled that it is settled that where in a contract of sale with pacto de retro the vendor
remains in physical possession of the land sold as lessee or otherwise, the contract should be considered
an equitable mortgage. The same presumption applies when the vendee was given the right to
appropriate the fruits thereof in lieu of receiving interest on the loan.

RISK OF LOSS OF PROPERTY MORTGAGED/PLEDGED Res Perit Domino Suo

Debtor-owner bears the loss of the property. Principal obligation not extinguished by
the loss of the subject property.

17 Sales Time! A pacto de retro sale is a sale with a stipulation that the seller can buy
the (typically) land back within a certain period and for a certain price. The Code
Commission did not look favourably upon pacto de retro sales because it leaves the title
over the property in limbo. Also, as recognized by the provisions.
88

B. Pledge

Definition
It is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable or a document involving incorporeal rights for the purpose of
securing the fulfillment of a principal obligation with the understanding that when
the obligation is fulfilled, the thing delivered shall be returned with all its fruits and
accessions. (Art. 2085 in relation to 2093).
Characteristics:
1. Real because it is perfected by delivery of the thing pledged.
2. Acessory, because it has no independent existence.
3. Unilateral because it creates an obligation solely on the part of the creditor to
return the thing pledged upon fulfillment of the principal obligation.
4. Subsidiary because the obligation of the creditor does not arise until fulfillment of
the principal obligation.
Kinds of Pledge
- Pledge may be either:
1. Voluntary or conventional (created by agreement of the parties) or
2. Legal (by operation of law).
- Special laws applies to pawnshops and establishments engaged in making loans
secured by pledges. Provisions of the Civil Code shall apply subsidiarily to them
(2123)
o The governing law on pawnshops is PD 114, the Pawnshop Regulation Act.
The pertinent provisions are:
Operators of pawnshops must be registered with the DTI, the city or
municipality in which it is located and the Central Bank.
Must be at least 70% Filipino owned.
Must issue a pawn ticket for every transaction.
The loans granted shall be in an amount not less than 30% of the
value of thing pledged.
Provides for a 90-day redemption period from the time of maturity of
the obligation.
1. Form of Pledge
Article 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.

No prescribed form except with regard to the right of third persons.

The contract of pledge is not effective against third persons unless in addition to
the delivery of the thing pledge it is embodied in a public instrument where the ff:
should appear:
a. Date
b. Description of the Pledge
2. Object of Pledge
-

Article 2094. All movables which are within commerce may be pledged, provided they are
susceptible of possession.

89

MOVABLE PROPERTY
within the commerce of man
susceptible of possession

Article 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.

The instruments representing the pledged rights shall be delivered to the

creditor; if negotiable, they must be indorsed.
3. Consideration
- If the pledgor is also the debtor, the consideration is the principal contract.
-

If the pledgor is a third person, the cause it the compensation received or the
liberality of the pledgor.

4. Ownership of Collateral
Article 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.

The pledgor continues to be the owner of the collateral until the following occur:
- Expropriation of the collateral
- Sale by public auction under Arts 2108 and 2112
Ong v. Roban Lending Corporation (2008)
Facts : Ong spouses obtained several loans from Roban Lending Corp totalling P4M and secured by real
estate mortgage on land in Tarlac. They executed a Dation in Payment Assignment (DPA) where the
spouses assigned their parcel of land to RLC to settle their obligation, and MOA with a promise to pay in
a year, otherwise DPA will be enforced.
Held: DPA and MOA void for being pactum commissorium which enables the mortgagee to acquire
ownership of the mortgage property without the need of foreclosure proceedings. The DPA and MOA
contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent
the right to enforce the Dacion in Payment transferring to it ownership of the properties. In effect,
respondent automatically acquires ownership of the properties upon petitioners failure to pay their debt
within the stipulated period.
DBP v. CA and Lydia Cuba (1998)
Facts: Cuba obtained 3 loans from DBP, she executed two deeds of assignment of her leasehold rights
over her fishpond as security. Cuba defaulted and DBP foreclosed her property with an offer for Cuba to
repurchase the same. Cuba defaulted in her repurchase payments and DBP sold the leasehold rights at a
public auction. Cuba filed a complaint holding that DBPs appropriation of her leasehold rights as
contrary to Art. 2088 which forbids a creditor from appropriating, or disposing of, the thing given as
security for the payment of a debt.
Held: The Court held that the assignment of leasehold rights to DBP as security was a mortgage contract
and thus the foreclosure was contrary to the aforecited Civil Code provision. DBP exceeded the authority
vested by Condition of the deed of assignment. As they had admitted themselves, it had "without
foreclosure proceedings, whether judicial or extrajudicial, appropriated the leasehold rights of Cuba over
the fishpond in question. It did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon Cuba's failure to pay the loan on time. 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 real rights, in case of default by Cuba, and to apply the proceeds to the payment of the loan.

90

Provisions Regarding Fruits

Article 2102. If the pledge earns or produces fruits, income, dividends, or interests, the
creditor shall compensate what he receives with those which are owing him; but if none are
owing him, or insofar as the amount may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest
and earnings of the right pledged.

In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of
animals pledged, but shall be subject to the pledge, if there is no stipulation to the
contrary.
- The creditor who receives the fruits should apply them to whatever amount is
owing (obligations due and payable), if not due, the fruits just form part of the
pledge.
- If the period is for the benefit of the pledgee, even if the obligation is not due, he
may compensate against the interest or the principal, as the case may be.
Liability for damages due to flaws of the thing pledged
Article 2101. The pledgor has the same responsibility as a bailor in commodatum in the case
under 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.
(1752)

The pledgor who, knowing the flaws of the thing pledged, does not advise the
pledgee of the same, shall be liable to the latter of the damages which he may
suffer by reason thereof.

Right to substitute thing

Article 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.

If the thing is in danger of diminution or destruction, without the pledgees

fault, the pledgor may demand its return, provided he replaces it with another of
the same kind and quality.
Requisites for application of 2107:
1. Pledgor has reasonable grounds to fear destruction or impairment of thing
pledged;
2. No fault on the part of the pledgee;
3. Pledgor is offering in place of the thing another thing in pledge which is of the
same kind and quality as the former; and
4. The pledgee does not choose to exercise his right to cause the thing pledged to be
sold at public auction
- The pledgors right under 2107 is INFERIOR to the pledgees right to have the
thing sold at public sale (see Art. 2108)
-

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Cf. Right of Pledgee to sell thing

Article 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.

Here, it is the pledgee who has the right to act on the danger of loss without his
fault or negligence.
Sale must be a public sale. The pledgee shall keep the proceeds of the sale as
security for the principal obligation. The proceeds shall belong to the pledgor.
As mentioned, the pledgees right to sell is superior to the pledgors right to
substitute.

Cf. Right to Deposit thing with 3rd person

Article 2106. If through the negligence or willful 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.

Though the pledgor cannot demand return of the thing unless the obligation is
fulfilled, if the thing pledged is in danger of being lost or impaired through
the pledgees willful act or negligence, he may require its deposit with a third
person.

Rights of Third Party Pledgor

Defenses of Guarantor
Article 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.

Rights available to 3rd party pledgers/mortgagors

- Indemnity
- Subrogation
- Release
- Defenses available to creditor
- Division
- Reimbursement from co-mortgagors, if any
- Protection-according to discussion. However, the provision abovequoted does
not expressly grant this right to a 3rd party pledgor.
Rights not available
- Excussion
To pay
Article 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.

Major Rights of Pledgee

1. Right to Possession
Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to

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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.

The pledge is not constituted until the thing is delivered to the pledgee. From that
point, the pledgee has the right to possess the thing.

2. Right of Retention
Article 2098. The contract of pledge gives a right to the creditor to retain the thing in his
possession or in that of a third person to whom it has been delivered, until the debt is paid.

The possession of the pledgee constitutes his security. Hence, the debtor cannot
demand for its return until the debt secured by it is paid.
- But the right is limited only to the principal obligation for which the pledge was
created.
3. Right to Payment
-

Art. 2102 supra

Article 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.

Under this article, the thing pledged is a credit which has become due. The
creditor can thus collect the amount due and compensate, delivering the surplus
to the debtor.
- The pledgee has the duty to collect any due credits, in line with the ordinary
diligence required of him.
- If the collateral earns fruits, income, dividends, or interests, the pledge, as a
general rule, extends to these earnings. If the collateral is a credit and the same
becomes due before the credit is redeemed, the creditor shall apply what he
receives from the credit to the payment of his claim. Both result in the payment of
the principal obligation.
4. Right to Foreclosure
A. Who May Bid
-

Article 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.
Article 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.

The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
- The pledgor is allowed to bid and all things being equal, his bid shall be preferred
over that of others.
- The law wants to conserve the property in the owner.
- The pledgee may also bid, but his offer shall not be valid if he is the only bidder
because the law seeks to prevent fraud. Fraud is possible if the parties had
stipulated that the debtor shall be allowed to the excess and the creditor, who is
bidding alone, bids low.
B. Effect of Foreclosure
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i.

Extinction of Principal Obligation

Article 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.

The obligation is extinguished when the pledge is sold regardless of whether the
proceeds are less or more than the amount of the obligation. Unlike in a
mortgage, there can be no recovery of deficiency.

Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner
of the result thereof.

This is to allow the debtor to take reasonable steps if he suspects that the sale
was not honest.
ii. No Right of Redemption
- The right of redemption, i.e. the right to repurchase the collateral
(pledgor/mortgagor) after a sale, is a statutory right.
- As neither the Civil Code nor any other law grants the right of redemption to a
pledgor, it does not apply to pledge.
iii. Right to Surplus or Deficiency
- The foreclosure sale of the thing pledged extinguishes the principal obligation
whether the price is exactly the same as the obligation, more than the obligation,
or less than the obligation.
o Thus, the debtor is generally not entitled to the excess. However, the parties
can stipulate otherwise.
o Neither is the creditor entitled to the deficiency. A contrary stipulation is
void.
This is because by electing to foreclose, the creditor waives any other
remedy.
- Also, because the pledgee had been in possession of the property, he is presumed
to have known the value of the thing.
-

Manila Surety and Fidelity Company v. Velayo (1967)

Facts: Velayo pledged jewelries to Manila Surety for a bond of P2,800. Velayo could not pay, so Manila
Surety sold the jewelries, but they were only able to earn P235. Manila Surety sued Velayo for the
remaining P2,565.
Held: The Court ruled in favor of Velayo and cited Art. 2115, which states that if the creditor sells the
pledged thing and the price of the sale is less than the amount of the principal obligation, he is not
entitled to recover the deficiency. The provision is clear. By electing to sell the articles pledged, instead of
suing on the principal obligation, the creditor Manila Surety has waived any other remedy, and must
abide by the results of the sale. No deficiency is recoverable. This rule is an extension of the legal
prescription in Art. 1484(3) which stated :

Obligations of the pledgee

To take care of the thing pledged
Article 2099. The creditor shall take care of the thing pledged with the diligence of a good
father of a family; he has a right to the reimbursement of the expenses made for its
preservation, and is liable for its loss or deterioration, in conformity with the provisions of this
Code.

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Loss of the thing

- The pledgor bears the loss. As there has not been any transfer of ownership, the
owner, i.e. the pledgor, bears the loss.
- The pledge or mortgage is extinguished.
- However, the pledge or mortgage only being accessory, the principal obligation is
not extinguished., but the debtor must replace the thing or lose the benefit of the
period.
Not to deposit thing pledged with another
Article 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is
a stipulation authorizing him to do so.

Q: What is the remedy of pledgor if pledgee deposits it with a third party without
authority?
A: The pledgor may demand extrajudicial deposit of the thing under 2104 or deposit
with a third person/s in 2106.
Not to use the thing pledged
Article 2104. The creditor cannot use the thing pledged, without the authority of the owner,
and if he should do so, or should misuse the thing in any other way, the owner may ask that it
be judicially or extrajudicially deposited.

General Rule: Pledgee cannot use thing pledge.

Exceptions:
1. Stipulation
2. When preservation of the thing requires its purpose, but only for such purpose.
Relief in case of misuse: extrajudicial deposit.
Minor Rights of pledgee
To demand substitute or immediate payment when deceived on the quality
of thing pledged
Article 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.

Situation: pledgor deceives creditor as to the substance or quality of the thing

pledged.
Creditor has 2 alternative remedies:
o Demand immediate payment (Debtor loses period)
o Demand delivery of another security.

To Compensate earnings of pledge with debt

- To clarify: Pledgee has no right to use the thing or appropriate the fruits without
authority of the owner.
- However, he can apply the fruits, income, dividends, or interests earned or
produced by the thing pledged to the any interest owed, and thereafter to the
principal of his credit.
95

o Cf. rule in mortgages that fruits can only apply to interest. If the fruits are
applied to the principal, the contract is one of antichresis.
Further, unless otherwise stipulated, the interest and earnings of the right
pledged and in case of animals, their offspring, are included in the pledge.

Against third persons

Art. 2103 supra

The right of a pledgee is a real right enforceable against third persons but it is
necessary that the contract of pledge be embodied in a public instrument.

Extinguishment of Pledge
a. Return
Main principle: The pledge is extinguished if the object is returned by the pledgee,
even if there is a stipulation to the contrary.
Corollaries:
- If the thing pledged is found in the possession of the pledgor after the perfection
of the pledge, it is presumed, prima facie, that the thing was returned, and so that
the pledge was extinguished. Of course, this presumption can be rebutted by
evidence.
Yuliongsiu vs. PNB (1968)
Facts: Yuliongsiu obtained a loan from PNB and pledged 2 vessels and its equity in another as security
for the loan. His loan became due and was charged with estafa by PNB. Together with the criminal
action, PNB took possession of the vessels and later executed a contract of sale which transferred the 2
vehicles and the equity on the 3rd to PNB.
Held: The action of PNB (taking physical possession of the vessels) was valid. PNB was entitled to the
physical possession of the pledged vessels as pledgee. Yulioungsiu was merely holding the vessels as
mere trustee for PNB (even though he was operating them). While actual delivery is required in chattels,
the type of delivery still depends on the circumstances (like in this case, pledged properties were
vessels). Also, the sale was valid. Only real estate mortgages require public sale with notice. In pledge, if
the sale is public, then the bank could purchase the properties free from right of redemption on the part
of the pledgor, but if it is private, pledgor can try to redeem. In this case, Yuliongsiu did not.

b. Payment
Art. 2105, supra

c. Renunciation
d. Abandonment
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.

The pledge is a personal right of the pledgee which may be waived.

Renunciation and Abandonment must be in writing to extinguish the pledge, and
such is not conditioned upon the acceptance by the pledgor or owner nor upon
the return of the thing pledged.
- The waiver transforms the pledgee into a depositary.
e. Other causes prescription, loss of the thing, merger, compensation, novation,
etc.
-

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Legal Pledges
Article 2121. Pledges created by operation of law, such as those referred to in articles 546,
1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the
thing as well as on the termination of the pledge. However, after payment of the debt and
expenses, the remainder of the price of the sale shall be delivered to the obligor .

In legal pledges, the remainder of the price of the sale shall be delivered to the
obligor.
1. Examples of Legal Pledges
-

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.
Art. 1707. The laborer's wages shall be a lien on the goods manufactured or the work done.
Art. 1731. He who has executed work upon a movable has a right to retain it by way of pledge
until he is paid.
Art. 1914. The agent may retain in pledge the things which are the object of the agency until
the principal effects the reimbursement and pays the indemnity set forth in the two preceding
articles.
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.
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.
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.

2. Foreclosure of Legal Pledge

Article 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.

Demand is essential prior to the foreclosure of a legal pledge, and the public sale
must be conducted within one month after such demand. Proceeds of the sale
shall be applied to the debt and expenses, and the surplus shall be delivered to
the debtor unless otherwise agreed upon
Public auction of legal pledges may only be executed after demand of the amount
for which the thing is retained. It shall take place within one month after the
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demand, otherwise the pledgor may demand the return of the thing
pledged, provided she is able to show that the creditor did not cause the public
sale without unjustifiable grounds.

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C. Chattel Mortgage
i. General Concepts
Definition
- A real security transaction whereby a movable, although in the possession of the
debtor/mortgagor, is made collateral to a principal obligation.
Characteristics
1. ACCESSORY contract
2. FORMAL contract registration in the Chattel Mortgage Register is
indispensable for its VALIDITY (De Leon)
BUT Sir said that its only to protect 3rd persons; and
SC ruled that if CM is not recorded, it is nevertheless binding
between the parties18
3. UNILATERAL contract it produces only obligations on the part of the
creditor to free the thing from the encumbrance on fulfillment of the
obligation
Requisites of a Chattel Mortgage
Article 2085, supra.

Recording the Chattel Mortgage; Difference with Pledge

Article 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.

The act of recording serves as CONSTRUCTIVE DELIVERY to the mortgagee

(Vasquez); it PERFECTS the contract of chattel mortgage and grants the chattel
mortgagee the SYMBOLIC POSSESSION of the collateral (Somera)
EFFECTS of REGISTRATION
1. Creates a real right/lien which, being recorded, follows the chattel wherever it goes
- Registration is a binding notice to other creditors of its existence.
-

It also makes the chattel mortgage effective against 3rd persons, and the whole
world!19

Doctrine of Mortgagee in Good Faith (see discussion under Real Estate

Mortgages, infra.) applies by analogy to certain chattels, especially to
vessels/ships which are required by law20 to be registered with the Philippine
Coastal Guard
Rule states a mortgagee has the right to rely in good faith on the mortgagors
certificate of title to the property given as security AND in the absence of any

18 Filipinas Marble Corp v. IAC, 142 SCRA 180; 1986

19 (insert supervillain laugh here)
20 See the Ship Mortgage Decree of 1978 for more details. Its in the appendices of de
Leon.
99

sign that might arouse suspicion, has no obligation to undertake further

investigation.
2. Adds nothing to the instrument, considered as a source of title and affects nobodys
rights except as a species of notice
- The legal effects of the contract must be discovered in the instrument itself in
relation with the fact of notice.
MINISTERIAL duty of the Register of Deeds
The Register of Deeds does not have any discretion to determine the nature of any
document for which registration as a chattel mortgage is sought.
o Instead, it is the Registers ministerial duty to record the chattel mortgage
upon the payment of the proper fees.
Not even the ground that the property mortgaged do not appear to be personal
property can be used to refuse registration.
Any questions regarding the effects of registration should be determined by the
courts, not the register. ASSIGNMENT of Mortgage
Article 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. (1526)
Art. 1627. The assignment of a credit includes all the accessory rights, such as a guaranty,
mortgage, pledge or preference. (1528)

Assignee is subrogated to the assignor-mortgagees rights and obligations with

respect to the CM.
No law expressly requires the RECORDING of the assignment of mortgage. While it
may be recorded, law is PERMISSIVE and not mandatory.
Recording of the assignment will NOT operate as a CONSTRUCTIVE NOTICE to the
debtor who PAYS his creditor without actual knowledge that the debt has been
assigned.21
Only notice to the debtor of the assignment of credit is required; not his consent.
Thus, an alienation or assignment of a mortgage credit is valid between the parties
thereto, even if not registered.
However, to bind third parties, it must be recorded in the Registry of Property.
Essence of CM

Article 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.

Applicable Provisions
Article 2141. The provisions of this Code on PLEDGE, insofar as they are NOT IN CONFLICT
with the CHATTEL MORTGAGE LAW shall be applicable to chattel mortgages
Laws governing CM:

a. Chattel Mortgage Law (Act No. 1508)

b. Civil Code
21 Article 1626. The debtor who, before having knowledge of the assignment, pays his creditor shall be released
from the obligation.

100

c. Revised Administrative Code

d. Revised Penal Code
e. Ship Mortgage Decree of 1978 in mortgages of vessels of domestic ownership
SC ruled that provisions of Act 1508 with regard to the effects of the foreclosure of
CM are precisely CONTRARY to Art. 211522 of the Civil Code; accordingly, the CM
creditor may maintain an action for DEFICIENCY. Note that Act 1508 is SILENT on
the matter of recovering deficiency after foreclosure.

Form
Form for Validity against any person EXCEPT the Mortgagor, his executors or
administrators
SEC. 4. A chattel mortgage shall not be valid against any person except the mortgagor, his
executors or administrators, 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.
Period within which registration should be made

Law does not provide any specific time

CA held that the law is substantially complied with where registration is made by
the mortgagee
o before the mortgagor has complied with his principal obligation AND
o no right of innocent 3rd persons is prejudiced.
Law does not intend that its provisions be used as a shield to avoid performance
of an obligation under what would otherwise be a valid contract.23
SUBSTANTIAL COMPLIANCE and AFFIDAVIT OF GOOD FAITH
Act 1508, SEC. 5. A chattel mortgage shall be deemed to be sufficient when made substantially
in accordance with the following form, and shall be SIGNED by the person or persons
executing the same, in the presence of TWO WITNESSES, who shall sign the mortgage as
witnesses to the execution thereof, and
each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney,
shall make and subscribe an AFFIDAVIT in substance as hereinafter set forth, which affidavit,
SIGNED by the parties to the mortgage as above stated, and
the CERTIFICATE OF THE OATH signed by the authority administering the same, shall be
appended to such mortgage and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT
XXX
"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

22 Article 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.

23 Ledesma v. Perez, 2 CA Rep 126

101

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 other obligation aside from
the payment of promissory notes, describe correctly but concisely the obligation to be
performed.)
"The conditions of this obligation are such that if the mortgagor, his heirs, executors,
or administrators shall well and truly perform the full obligation (or obligations)
above stated according to the terms thereof, then this obligation shall be null and
void.
FORM OF OATH AFFIDAVIT OF GOOD FAITH
"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
XXX
(Notary public, justice of the peace, or oilier officer, as the case may be)

AFFIDAVIT OF GOOD FAITH

2 statements made:
1. Made solely for the purpose of securing the obligation specified in the CM
2. Principal obligation is a just and valid obligation and one not entered into for
the purpose of fraud
Effect of ABSENCE: vitiates a mortgage ONLY as against 3rd persons without
notice like creditors & subsequent encumbrancers.
It is required only to transform an already valid mortgage into a PREFERRED
mortgage.

Who makes/subscribes to the AFFIDAVIT OF GOOD FAITH in the case of a

CORPORATION / PARTNERSHIP
SEC. 6. 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.

ii. Obligations Secured

VALID, Voidable, Unenforceable and Natural obligations
Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage.
Article 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.

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EXISTING obligations
Act 1508, SEC. 5 X X X
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."
XXX
Since the parties are required to make an oath that the debt is just, honestly due and

owing from the mortgagor to the mortgagee, CM cannot be made to secure future
debts.
Once the existing obligations are paid, the mortgage is likewise extinguished so
there can be NO foreclosure in new loans concluded AFTER the execution of the
chattel mortgage.
VOID CM: security is for the payment of any and all obligations hereinbefore
contracted and which may HEREAFTER be contracted
To cover a newly contracted debt, parties may either conclude a new CM or amend
the old one conformably with the form prescribed by Act 1508.
Transferee of a mortgagee cannot increase the credit with the corresponding
extension of the CM thereto without executing a new CM or amending the old CM.
INCREASE/EXTENSION of CM obligation becomes a new CM in itself and will be
effective only from the date it is made (not from the date of the original CM)
A contract TO MORTGAGE that includes FUTURE debts is a binding commitment.
But the CM contract itself is not PERFECTED until after an agreement covering
the newly contracted debt is executed conformably with the form prescribed by
Act 1508.
Debtors refusal to execute the agreement covering the after-incurred obligation
may constitute DEFAULT of the contract TO mortgage.
But remedy of FORECLOSURE will only cover the debts EXISTING at the time of
constitution of the contract OF CM.
Cf. pledge, REM & antichresis may secure future obligations so long as these are
accurately described.

Acme Shoe Rubber v. CA

Facts: In 1978, President of Acme Corporation, executed in its behalf a chattel mortgage in favor of
Producers Bank of the Philippines, as security for Loan #1. One provision of the CM reads: This
mortgage shall also stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been
contracted before, during or after the constitution of this mortgage. Acme paid off Loan #1 in due time.
In 1981, it obtained Loan #2 from the bank, which it likewise paid in due time. In 1984, Acme obtained
Loan #3 from the bank, but due to financial constraints it wasnt able to pay on time. So the bank applied
for extrajudicial foreclosure of the CM with the Regional Sheriff. Acme filed action for injunction with
damages and prayer for writ of prelim injunction. RTC dismissed it and CA affirmed.
Held: SC reversed. A clause in a CM that extends its coverage to obligations yet to be contracted or
incurred is NOT valid because it can only cover obligations existing at the time the mortgage is
constituted. By virtue of Sec. 3 of the Chattel Mortgage Law, the payment of the obligation automatically
rendered the chattel mortgage void or terminated. Since the 1978 CM ceased to exist coincidentally with
the full payment of loan#1, there no longer was any CM that could cover the new loans that were
concluded thereafter.

Object
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1. Personal Property
Article 2124 Nevertheless, movables may be the object of a chattel mortgage.
Article 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.
Article 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.

Certain deviations allowed include the ff:

Shares of stock (registration is made in both provinces of owner of shares and of
the corporation)
Interest in the business, being a personal property capable of appropriation
Machinery immobilized by incorporation24 or by destination25 treated by the
parties as personal property subsequently installed on leased land
An immovable may be considered as personal property if there is a stipulation, as
when CM is executed over it, but only insofar as the contracting parties are
concerned. Basis: principle of estoppel.
Motor Vehicles to be effective against the public and LTO, CM must be
registered in the LTO and with respect to public vehicles, CM must also carry the
approval of the LTFRB26 (recording provisions in the Land Transportation and
Traffic Code)
o EFFECT of mortgagees failure to register the CM in LTO: CM ineffective
against a purchaser in good faith who registers the same vehicle in the LTO
House of mixed materials personal property by nature and expressly designated
by parties
House intended to be demolished its materials are the subject matter of CM
House built on rented land object placed on land by one who only had a
temporary right to it (e.g., lessee/usufructuary) does not become immobilized by

24 Article 415. The following are immovable property: (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

25 Article 415 (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

26 LTO Land Transportation Office; LTFRB Land Transportation Franchising and Regulatory Board.
104

attachment. That it is the subject of a CM does NOT make it personal for

purposes of NOTICE to be given for its sale at public auction, as demanded by an
orderly regulation for official & public guidance to prevent confusion. Sales on
execution affect the public and 3rd persons.
House of strong materials if the parties agree and no innocent 3rd parties will be
prejudiced thereby
CM on a building of strong materials is void so its registration cannot affect the
rights of a subsequent real estate mortgagee of such building.
o It cannot be divested of its character as an immovable by the fact that it belongs
to another. Otherwise, the permanent fixture changes its nature as the ownership
of the land changes hands.
Both GROWING CROPS and LARGE CATTLE can be the subject matter of CM, per
Act No. 1508.
NO absolute criterion between personal and real property
o Articles 415 & 416 are subject to the agreement of the parties and may be
different from the classification for purposes of taxation.

Tumalad v. Vicencio
Fact: Chattel mortgage over a house
Held: (1) Foreclosure and designation as personalty are considered as valid between the parties based
on estoppel. Parties to a contract may by agreement treat as personal property that which by nature
would be real property. Such agreement is good only insofar as the contracting parties are concerned. In
the parties contract, it was specifically provided that the mortgagor voluntarily CEDES, SELLS and
TRANSFERS by way of Chattel Mortgage the property together with its leasehold rights showing that
they meant to convey the house as chattel. Also, since the house stood on a rented lot to which the
Simeons only had a temporary light as lessees, they clearly could only treat the house as personalty. They
had no right to constitute a real estate mortgage over the same. (2) The purchaser, however, is not
entitled to the rents during the 1-year redemption period. These rentals still pertain to the
debtor/mortgagor. The rationale for the Rule is to secure for the benefit of the debtor/mortgagor, the
payment of the redemption amount and the consequent return to him of his properties sold at public
auction.
Makati Leasing & Finance Corp v. Wearever Textile Mills
Facts: Wearever executed chattel mortgage over raw materials and machinery (supposedly bolted to the
ground) to secure its obligation to petitioner. Upon default, the sheriff seized the drive motor of the
machinery. CA ruled that the property was real property.
Held: Personal property. Parties can agree to treat real property as personal property for chattel
mortgage purposes as long as innocent third persons are not prejudiced. Once a person agrees, he is
barred by estoppel. If a house of strong materials in Tumalad case can be considered personal property
for chattel mortgage purposes upon agreement of the parties and as long as no innocent third party will
be prejudiced, then there is no reason why machinery, movable by nature and immobilized only by
destination or purpose, may not be treated the same way.

2. Reasonable Description Rule

Act 1508, SEC. 7. The description of the mortgaged property shall be such as to enable the
parties to the mortgage, or any other person, after REASONABLE INQUIRY AND
INVESTIGATION, to IDENTIFY the same.

Law requires compliance with the Reasonable Description Rule only, and not a
minute & specific description of the collateral.
EFFECT of noncompliance: mortgage is INVALID.
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In the case of a LARGE CATTLE27

Act 1508, SEC. 7. X X X
If the property mortgaged be "large cattle," as defined by section one of Act Numbered Eleven
hundred and forty-seven, 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 reniclinos, 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. X X X

In the case of GROWING CROPS

Act 1508, SEC. 7. X X X
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 MORTGAGEE 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 he paid to the MORTGAGOR or those
entitled to the same. X X X

3. After Acquired Properties

Act 1508, SEC. 7. X X X
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.

General Rule: Chattel Mortgage can only cover property described in the deed
describing it. Thus, the property must already be existent at the time of registration.
N/A to RETAIL STORES where property is constantly sold and substituted with new
stock.
CM must EXPRESSLY STIPULATE that such after acquired properties are
included in the CM (e.g., all goods, stock in trade, furniture and fixtures
hereafter purchased by the mortgagor)
Ex. Drugstores, grocery stores, dry goods stores and bazaars
Otherwise, it would be impossible to constitute CM without closing the stores
contrary to the purpose of Act 1508 which is to promote business.
Limitation found in the provision makes reference to like or substituted property
thereafter acquired by the mortgagor, NOT to those already existing and originally
included at the date of the constitution of the CM. A contrary view will unduly
impose a more rigid condition than the reasonable description rule.
VALID stipulation extending the scope to AFTER ACQUIRED properties: authorizes
the mortgagor to sell the covered property and to REPLACE/RENEW/SUBSTITUTE it
with another property thereafter acquired, OR to USE THE PROCEEDS to
PURCHASE another property.
Where parties treat immobilized machineries as chattels, the after acquired
properties which are of the SAME DESCRIPTION as the properties enumerated in
the contract must also be TREATED AS CHATTELS.

27 Oh the wonders of law in an agricultural colony of a foreign power.

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Ownership of Collateral
Absolute ownership + Free disposal/Legal authority to constitute CM
Article 2085, supra.

RESTRICTED Right to ALIENATE

Offenses involving CM according to RPC Art. 319:
1. KNOWINGLY REMOVING any personal property mortgaged under Act 1508 to any
province/city other than the one in which it was located at the time of the
EXECUTION of the mortgage WITHOUT the WRITTEN CONSENT of the mortgagee
2. SELLING/PLEDGING personal property already mortgaged, or any part thereof,
under the terms of Act 1508 WITHOUT the CONSENT of the mortgagee WRITTEN
on the back of the mortgage and duly RECORDED in the Chattel Mortgage Register.
Under the pain of penal liability, mortgagor is obliged to secure the consent of the
mortgagee or his assignee before the property can be alienated.
Absence of the mortgagees written consent to the SALE in favor of a 3rd person
AFFECTS NOT THE VALIDITY of the sale, but ONLY the:
penal liability of the mortgagor and
binding effect of such sale on the mortgagee under the CM (his consent is
necessary to bind him)
NOTE: Although the mortgagor may be criminally prosecuted, the SALE IS VALID.
Inferable from Art. 319: Chattel mortgagee has the symbolical possession and has
the preferential right to have the physical possession. Therefore, his lien is
SUPERIOR to the levy made by the assignee of the unsecured judgment creditor of
the mortgagor. Judgment-creditor can only attach the EQUITY/RIGHT of redemption.
Essential element common to both offenses: property removed/repledged should be
the same/identical property that was mortgaged/pledged BEFORE such
removal/repledging.
Mortgagor is NOT RELIEVED of criminal liability even if:
- the mortgage indebtedness is thereafter PAID IN FULL, or
- the mortgagor-seller INFORMED the PURCHASER about the mortgage
iii.Extra-Judicial Foreclosure (no judicial)

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REMEDY of other mortgagees NOT informed of the foreclosure sale

File a case for CANCELLATION of the extra-judicial foreclosure (deprived of
due process and equity of redemption
REMEDIES available to a MORTGAGEE when the Debtor DEFAULTS on his
obligation OR FAILS to COMPLY with the CONDITIONS of the CM:
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a. Action for Specific Performance

- Independent action for enforcement of credit is NOT required. Otherwise, it
will defeat the purpose of the CM which is to give him preference over the
chattels for the satisfaction of his credit.
- By instituting a civil action to recover the amount of the loan from the
mortgagor and by securing a judgment in his favor, the mortgagee
ABANDONS HIS LIEN for he thereby clearly manifests his lack of desire
and interest to go after the mortgaged property as security.
b. Private Sale
- Nothing illegal, immoral or against public order in an agreement for a
private sale VS. the prohibited automatic appropriation of the mortgagee
upon default (pactum commissorium). WHY?
Private sale is initiated by the mortgagor.
Notice is given.
Mortgagee has no control over who will purchase the property; the
public may participate because no one is prevented from being a party to
the sale.
- The mortgagor is in estoppel to question it except on the ground of
fraud/duress.
c. Public Sale
- Requirements of the law on notices and registration must be complied with.
-

Mortgagee as a sole bidder = in itself does not warrant the conclusion that
there was fraud which is a serious allegation that requires full & convincing
evidence.
1. Equity of Redemption
SEC. 13. When the condition of a chattel mortgage is broken a mortgagor or person
holding a subsequent mortgage, or a attaching creditor may REDEEM the same by
PAYING OR DELIVERING to the mortgagee the AMOUNT DUE on such mortgage and
the REASONABLE COSTS AND EXPENSES incurred by such breach of condition
BEFORE THE SALE thereof. An ATTACHING CREDITOR who so redeems shall be
SUBROGATED to the rights of the mortgagee and entitled to FORECLOSE the
mortgage in the same manner that the mortgagee could foreclose it by the terms of
this Act.
SEC. 14. The mortgagee, his executor, administrator, or assign may, AFTER THIRTY
DAYS from the time of condition broken, cause the mortgaged property, or any part
thereof, to be sold at PUBLIC AUCTION

Right of the mortgagor in default to recover the collateral before a

foreclosure sale by paying the principal + interest + other costs that are
due, thereby alleviating as a matter of equity the severity of the legal rule
on default
Right of the mortgagor to extinguish the mortgage and retain the 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 period of grace (30 days) granted by
law.
109

- May be exercised by the:

Mortgagor-debtor or 3rd party mortgagor or his representative
Senior lienholder should include the junior lienholders in the foreclosure proceedings;
otherwise the junior lienholders will have an unforeclosed equity of redemption.
Junior lienholder holds the property subject to the better rights of the senior
lienholders; will not be paid until all prior claims are fully paid, because the junior
lienholder only acquires the equity of redemption.
Subsequent attaching creditor subrogated to the rights of the mortgagee including
the right to foreclose; he is not entitled to the actual possession and delivery of the
property without first paying the mortgage debt.
2. Right of Redemption (statutory right)
- Right of the mortgagor in default to repurchase the collateral even AFTER
THE FORECLOSURE SALE but within the periods prescribed by law
- NONE because no law grants it
- Hence, title will vest OR all rights of ownership will leave the mortgagor
and become vested in the purchases from the MOMENT OF
FORECLOSURE SALE.
3. Right of Possession
- Mortgagee is not entitled to possession of the collateral upon the execution
of the CM; otherwise, the contract becomes a pledge.
- Mortgagee acquires the right of possession when the principal debtor
DEFAULTS and the former SEEKS TO FORECLOSE.
Customarily upon default, the contract constitutes the mortgagee as an
ATTORNEY-IN-FACT of the mortgagor to act for and in behalf of the
owner of the collateral. Hence, the mortgagee is authorized to take
possession of the collateral.
Even without stipulation, mortgagees right to possess is clearly implied
from the provision which gives him the RIGHT TO SELL.
- Right of possession is conditioned upon the fact of actual default aside from
the existence of CM and this may be the subject of a controversy. The
mortgagee cannot lawfully take the property by force against the will of the
mortgagor or an adverse possessor who cannot simply be deprived of his
possession, let alone be bound by the terms of CM, simply because the
mortgagee brings up an action for replevin.
- Mortgagee has the right to maintain an action to recover possession of the
collateral or REPLEVY, instead of merely asking for a writ of possession, to
give the mortgagor the opportunity to be heard not only regarding
possession but also regarding the obligation covered by the mortgage
Defendants:
o Plaintiffs right to possession is EVIDENT: ANY PERSON IN
POSSESSION even if not privy to the CM. Where the mortgagee is
constituted as the attorney-in-fact, he may maintain the action against
the mortgagor or the any person in whose hands he may find the
chattel.
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o Plaintiffs right to possession is put to GREAT DOUBT: PERSON IN

POSSESSION and ALL OTHERS contesting the legal basis for
plaintiffs cause of action OR asserting an adverse & independent
claim of ownership/right of possession.
REPLEVIN determines nothing more than the right of possession.
Replevin first before foreclosure. Why? Sheriff is a mere agent of the
mortgagee so he has no authority in the 1st instance to seize the
collateral.
- Mortgagee may recover from the mortgagor REASONABLE EXPENSES
including those incurred in effecting seizure of the chattel and the
attorneys fees in prosecuting the action for replevin, where the mortgagor
plainly refuses to deliver the chattel upon his failure to pay 2/more
instalments, or if he conceals the chattel to place it beyond the reach of the
mortgagee.
An unpaid seller of goods sues a mortgagee who already foreclosed such
goods owned by the mortgagor-buyer. SC held that the unpaid seller has no
cause of action against the mortgagee but only against the mortgagor-buyer
whose failure to pay the purchase price does NOT ipso facto revert the
ownership of the goods to the seller UNLESS THE SALE WAS FIRST
INVALIDATED.
4. Right to Surplus or Deficiency

GENERAL RULE: Mortgagee has a right to RECOVER the DEFICIENCY.

The Mortgagee may maintain an action for deficiency even if the law is silent.
WHY?
111

CM is given only as a security in contrast to pledge wherein the sale

extinguishes the principal obligation so the pledgee cannot recover.
The express entitlement granted by law of the excess proceeds to the
MOR creates a corollary obligation on his part to pay the deficiency in
case of a reduction in the price at the public auction.
No express/implied prohibition in law in contrast to pledge and sales of
personal property in instalments.
PRESCRIPTIVE period to bring the action for DEFICIENCY is 10 YEARS
Article 1142. A MORTGAGE ACTION prescribes after ten years.
Article 1144. The following actions must be brought within ten years from the time
the right of action accrues:
(1) Upon a written contract;
(2) Upon an obligation CREATED BY LAW; X X X

Even if it is NOT upon a written contract, period is still 10 years because

the obligation of the mortgagor to pay the deficiency is one created by
LAW.
Furthermore, the action is in the nature of a MORTGAGE ACTION
because its purpose is precisely to enforce the mortgage contract.
EXCEPTION: CM is constituted (whether by the debtor-buyer/3 rd person)
as security for purchase of personal property payable in INSTALLMENTS.
Article 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies: ALTERNATIVE
remedies
(1) Exact fulfillment of the obligation, should the vendee fail to pay
XXX
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee's failure to pay cover TWO OR MORE INSTALLMENTS. In this case,
he shall have NO further action against the purchaser to RECOVER ANY UNPAID
BALANCE of the price. Any agreement to the contrary shall be VOID.

No deficiency judgment can be asked; contrary stipulation is void.

Once the mortgagee-seller chose to foreclose the CM, he is precluded
from proceeding against the security put up by a 3RD PERSON.
Should the 3rd person be compelled to pay the balance of the purchase price, he will in
turn be entitled to recover from the debtor-buyer28 so ultimately, it will be the latter
28 Article 2066. The guarantor who pays for a debtor must be indemnified by the latter. The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the debtor, even though it did not
earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of
him;

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who will bear the payment of such balance, thereby indirectly subverting the protection
granted by Art. 1484.
BUT if mortgagee-seller chose #1, he is entitled to deficiency judgment
in an action for specific performance where the property is subsequently
attached and sold. Such execution sale is NOT a foreclosure sale.

G. Summary Tables
ii. Pledge and Chattel Mortgage
PLEDGE
Delivery of
Essential to perfection of the
personal property contract
to the mortgagee
Registration
NOT necessary (Registry of
Property)
Excess of sales
General Rule: Creditor
proceeds over the Exceptions (Debtor):
a. Contrary agreement
amount due
b. Legal pledge
Deficiency after
Creditor cannot recover
foreclosure
notwithstanding a contrary
stipulation.

CHATTEL MORTGAGE
NOT necessary

Required by law (Chattel

Mortgage Register)
Debtor

General Rule: Creditor is

entitled to recover
Exception: CM is a security for
the purchase of personal
property in installments

Similarities:
Executed to secure the performance of a principal obligation
Constitute a lien on the property
Constituted only on personal property
Indivisible
Creditor cannot appropriate the property to himself in payment of the debt
Extinguished by the fulfillment of the principal obligation OR by the
destruction of the property
When the debtor defaults, property must be sold for the payment of the debt
(but Sir says the creditor can opt to extrajudicially demand the performance of
the obligation)

(4) Damages, if they are due.

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D. Real Estate Mortgage

Real Estate Mortgage29
Definition (General)
A mortgage is a contract whereby the debtor secures to the creditor the fulfilment of a
principal obligation, specially subjecting to such security immovable property or real
rights over immovable property, which obligation shall be satisfied with the proceeds of
the sale of said property or rights in case the said obligation is not complied with at the
time stipulated.
Parties:
1. Mortgagor
a. 3rd party mortgagor
2. Mortgagee
These parties are the same as the pledger and pledgee with different names. See
discussion supra.
Characteristics
1. Real
a. Note that here, it is not that the mortgaged property must be delivered, in
the usual sense of the term, for the contract to be perfected; rather, it is
perfected by registration.
b. The mortgagee need not be placed in actual possession by actual delivery.
Instead, he is placed in symbolic possession by registration in the Registry
of Property, which is an act [or] legal formality established for acquiring
[the right of mortgage]. (Art. 531)
2. Accessory
3. Subsidiary
4. Unilateral
Essence
o A property has been identified or set apart from the mass of the property of
the debtor-mortgagor as security for the fulfilment of his obligation.
As to possession
o As mentioned, the mortgagee need not be placed in actual possession. In
fact, usually the mortgagor remains in possession of the thing mortgage.
Consider the difference between chattel mortgage and pledge. It is a pledge
when the thing is actually delivered, and a mortgage when it remains in the
possession of the mortgagor.
o Thus, a mortgagee cannot claim possession over the mortgaged property
merely by virtue of the mortgage. However, the mortgagor may deliver the
property to the mortgagee, without changing the nature of the REM.
29 Hereinafter referred to as a REM. I know technically its supposed to be an REM,
but in my head, a REM reads as a Real Estate Mortgage. Deal with it.
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As to interest
o Not an essential requirement of mortgage.
o If it exists, though, it may be in the form of a certain percentage of the
fruits.
NB. For the transaction to remain a REM, the fruits must only be
applied to the interest of the principal obligation.
If the fruits are to be applied to the interest, and thereafter to the
principal obligation, then the transaction is not a mortgage; it is a
contract of antichresis.

Kinds of REM
1. Voluntary
Constituted by will of the parties or by the owner of the property.
2. Legal
Required by law to be executed in favour of certain persons.
E.g. Legal Bond, where the person bound to give a bond is unable to do so.
In such a case, a pledge or mortgage sufficient to cover his obligation will
be admitted in lieu thereof (A2083).
The parties thereto only have the right to demand the execution and
recording of the document in which the mortgage is formalized. (A2125)
3. Equitable
One which, although lacking the proper formalities or other requisites of a
mortgage required by law, nonetheless reveals an intention to burden real
property as a security for a debt.
Governed by Arts. 1365, 1450, 1454, 1602, 1603, 1604, and 1607.
Pertinently,
i. A contract purported to be a sale with a right of redemption (1603) or
an absolute sale (1604) is presumed to be an equitable mortgage
1. When the price of a sale with right to repurchase is unusually
inadequate;
2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase
another instrument extending the period of redemption or
granting a new period is executed;
4. When the purchaser retains for himself a part of the purchase
price;
5. When the vendor binds himself to pay the taxes on the thing
sold;
6. In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.

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ii. If a contract is supposed to be a sale with a right to repurchase, and

there is doubt as to whether it is so or an equitable mortgage, it shall
be presumed to be an equitable mortgage. (1603)
iii. In cases of equitable mortgages, any money, fruits or other benefits to
be received by the vendee shall be considered as interest, subject to
usury laws.
Requirements
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging
or mortgaging their own property. (1857)
Art. 2087. It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor. (1858)

See discussion, supra. on general provisions.

In addition to these requirements, there are special provisions on form and Object of
Mortgage.
Form
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. (1875a)
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. (1880a)

As elucidated in class with our mock Jessup thing, the rules are as ff.:
1. In general, a REM must be, at the very least, in writing. If a mortgage has not
been recorded, though in writing, the parties have a right to demand the
execution and recording of the document in which the mortgage is formalized.
a. As between the parties, however, the mortgage is binding, so long as it is in
writing.
b. As a REM is a special promise to answer for the debt, default or miscarriage
of another, it must be in writing for it to be enforceable, even if between 2
parties.
i. As to other contentions, including the invocation of Art. 1358, that
article expressly provides that the transactions therein shall be
subject to 1403, which famously includes the statute of frauds.
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c. Besides, the provision says if the instrument is not recorded, meaning

that the mortgage is binding between parties if there is, in fact, an
instrument.
2. That being said, for the mortgage to be validly constituted and binding upon 3rd
parties, the document in which it appears must be recorded in the Registry of
Property.
a. The registration of mortgages is governed by PD 1529 if the land is
registered, and the Administrative Code of 1987, as amended by RA 9344, if
its unregistered.
b. In either case, the document in which the mortgage appears must be in a
public instrument in order for it to be recordable.
3. To summarize then, in all cases, a mortgage must be in writing, but in order for
it to be validly constituted, and thus binding upon third parties, it must appear in
a public document and registered in the Registry of Property.
Registration
1. Matter of Right
a. The contract of mortgage is voluntary, but its registration is a matter of
right.
b. This is due to the concept of reciprocity of contracts. The mortgagor, by
executing the contract, is presumed to have given his consent of the
registration. The mortgagee has the commensurate right to have the
mortgage registered, in order for the mortgage to be valid.
i. If the mortgagor had to agree to the registration, then the validity
would, in essence, be left to the will of one of the parties.
2. Not determinative of validity of mortgage
a. Just because a mortgage has been registered does not ipso facto mean that
it is valid.
b. However, as a matter of public policy, mortgages can only be impugned
after registration, not before.
3. BFVGFs right is superior to that of registered mortgagor.
a. Ownership remains in mortgagor.
i. Thus, mortgagor can alienate the property. (2130)
ii. Also, if the property had already been sold prior to the mortgage, then
the mortgagor did not have absolute title over the property, and
there was no valid mortgage.
b. However, does not apply to contracts to sell before full payment.
i. Ownership remains in seller until full price paid.
ii. Thus, the buyer does not own the property, and so cannot mortgage it.
4. Defeats subsequent registration of adverse claim.
a. Prior registration of lien creates preference.
Object of Real Estate Mortgage
Art. 2124. Only the following property may be the object of a contract of mortgage:

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(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)

As a refresher, that means the ff:

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.
(334a)

Remember: MADAMo CLiT FagS30

On future property
o General Rule: Future property cannot be subject of REM.
o Exceptions
By stipulation, improvements subsequently acquired, installed, or
used in connection with real property already mortgaged may be
subjected to the mortgage lien.
In this case, the lien retroacts to the recording and registration
of the mortgage, not the time of construction.
By stipulation, all property taken in exchange or by replacement of
the original property.

Doctrine of Mortgagee in Good Faith

30 Mines, Attached, Docks, Animals, Machinery placed by owner, Contracts over real
property, Land and its improvements, Trees, Fertilizer at ground, Statues.
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The doctrine of a mortgagee in good faith means that the mortgagee has the right to
rely in good faith on the certificate of title of the mortgagor of the property given as
security. Thus,
GR: The mortgagee has no obligation to investigate the title of the mortgagor any
further than the certificate of title. If the certificate seems valid on its face, the
mortgagee can rely on it in good faith.
Exceptions:
o Mortgagor presents title in his name, not in that of the rightful owner.
o Mortgagee has knowledge of defect of lack of title in the vendor.
o Mortgagee does not deal directly with the registered owner of real property.
o Mortgagee was aware of sufficient facts to induce a reasonably prudent
man to inquire into the status of a property in litigation.
o Mortgagee is a bank.
As banks are engaged in a business imbued with public interest, they
are required to exercise a greater degree of diligence before
entereing into a mortgage contract.
Relief in case of fraud
o Damages against the one who caused the fraud.
o If he is insolvent, action against Treasurer of the Philippines for recovery of
damages against the Assurance Fund.
Duran v. IAC
Facts: Fe Duran (the mother of the original owner of the lot) mortgaged it in favor of Tiangco after
acquiring title in her name. She did not pay so the property was foreclosed.
Held: Tiangco is a buyer in good faith and for value. Even if the sale was void, the fraudulent or
forged document of sale may become the ROOT of a valid title if the certificate of title has already
been transferred from the name of the true owner to the name of the forger or the name indicated by
the forger.

Obligations Secured
Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n)
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. (1824a)

See discussion, supra.

Dragnet Clauses
Refer to clauses by which the mortgage is extended
advancements.
Aka blanket mortgage clause.
Similar to a continuing guaranty or surety.
Generally valid, as an exception to the general rule.

to

cover

future

119

o General Rule: An action to foreclose a mortgage must be limited to the

amount mentioned therein.
o Exception: from said terms it can be gathered that the mortgage is intended
to secure future debts.
Such clauses are strictly construed, particularly when made part of a contract of
adhesion.

Effect of Mortgage
Art. 2126. The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the Uulfilment of the obligation for whose security it
was constituted. (1876)

1. Directly and Immediately subjects the property to the fulfilment of the obligation
for whose security it was constituted.
a. In other words, after the registration of the mortgage, the property may be
foreclosed upon if the debtor defaults.
2. Creates a real right.
a. Enforceable against the whole world.
b. If property is sold, the mortgage subsists, and the property remains subject
to the fulfilment of the obligation thereby secured.
c. Mortgagee is an indispensable party in a proceeding to nullify the TCT upon
which the mortgage is annotated.
d. However, a lessee may not be ejected upon the ground that the leased
premises have been mortgage, whether or not the mortgage has been
registered.
3. However, it merely creates an encumbrance, and does not extinguish the title of
the mortgagor.
a. In fact, even the mortgagors jus disponendi is not limited. The mortgagor
has the absolute right to still dispose of the mortgaged property, but such
property is subject to a lien.
b. Rather, it is the rights conferred by the act of disposal that is restricted.
i. NB. In a discussion regarding the general provisions of pledge and
mortgage, Sir said that it is jus disponendi that is limited.
Extent of Mortgage
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing
fruits, and the rents or income not yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person. (1877)

GR: The ff. are subject to the mortgage lien:

1. The property itself
2. Natural Accessions
3. Improvements
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4.
5.
6.
7.

Growing Gruits
Rents or income not yet received when the obligation becomes due.
Proceeds of insurance should the property be lost
Proceeds from expropriation proceedings should the property be
expropriated.
Exception: Stipulation.

Right to Alienate Real Estate Mortgage Credit

Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in
part, with the formalities required by law. (1878)
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. (1526)
Art. 1627. The assignment of a credit includes all the accessory rights, such as a guaranty,
mortgage, pledge or preference. (1528)

See discussion on Assignment of Chattel Mortgage Credit, supra.

Effect of Placing Collateral in the possession of a 3 rd person.

Art. 2129. The creditor may claim from a third person in possession of the mortgaged property,
the payment of the part of the credit secured by the property which said third person
possesses, in the terms and with the formalities which the law establishes. (1879)

Even if the mortgagor has placed the mortgaged property in the possession of
another, e.g. he has leased the property, the mortgage is not extinguished.
In fact, the mortgagee can claim payment of the debt secured by the property
from its possessor.
o According to De Leon, however, demand must be made on the debtor, and
the latter must default.

Right to Alienate Collateral

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall
be void. (n)
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
xxx
(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. xxx

As previously mentioned, the jus disponendi of the mortgagor is not limited at all.
Rather, it is the rights transferred upon such transfer that are limited.
Again, this is because the mortgagor retains the ownership over the property.
o Thus, the mortgagor can always alienate or dispose of the property, whether
by sale, donation, or any other means.
o In fact, the mortgagee cannot stipulate otherwise.
This is a matter of public policy. If it could otherwise be stipulated, the
mortgagee could simply withhold consent and thereby prevent the
mortgagor from selling the propertyan unconscionable advantage,
(Litonjua v. L&R)
121

That being said, if the property is alienated, the encumbrance is not extinguished.
As previously mentioned, the property is still subject to the security over the
original, principal obligation, even if title over it is in a third person.

Right of First Refusal

A stipulation that the mortgagee has first refusal over the property in the event of
the mortgagor selling it is valid.
If there is such a stipulation, the mortgagor must offer to sell the property to the
mortgagee at the same price and under the same terms and conditions as any
prospective buyer. If the mortgagee accepts, the mortgagor must sell the property
to the mortgagee.

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Registration of Mortgage

123

E. Foreclosure

Foreclosure of Real Estate Mortgage

Foreclosure: The remedy available to the mortgagee by which he subjects the
mortgaged property to the satisfaction of the obligation to secure that for which
the mortgage was given
1. Judicial Foreclosure
- ordinary action for foreclosure under Rule 68 of the Rules of Court
b. Complaint for Foreclosure
-

Rule 68. 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 or other documentary evidence of the obligation secured by the mortgage,
the amount claimed to be unpaid thereon; and the names and residences of all persons having
or claiming an interest in the property subordinate in right to that of the holder of the
mortgage, all of whom shall be made defendants in the action.

c. Judgment on Foreclosure
Section 2. Judgment on foreclosure for payment or sale. the court shall ascertain the
amount due to the plaintiff upon the mortgage debt or obligation, including interest and other
charges as approved by the court, and costs, and shall render judgment for the sum so found
due and order that the same be paid to the court or to the judgment obligee within a period of
not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of
judgment, and that in default of such payment the property shall be sold at public auction to
satisfy the judgment.

- Judgment shall be rendered after trial

o
For the amount of the mortgage debt + interest and other charges to be
paid within the grace period granted by Rule 68(90-120 days)
o
In default of such payment, collateral shall be sold at public auction to
satisfy the judgment.
- Equity or redemption: right of mortgagor to extinguish the mortgage and retain
ownership of the collateral, after default in the performance of the condition of the
mortgage but before the foreclosure of the property, by paying the mortgage
obligation
o
Equity of redemption is conferred by law on the mortgagors successors-ininterest or on third persons acquiring rights over the collateral from the
mortgagor subsequent. It is subordinate to the mortgagees lien (Rule 68. Sec. 1)
o
These junior lien-holders/junior mortgagee is a proper and in a sense, a
necessary party to a foreclosure proceeding, he is not an indispensible party to the
proceeding.
o
A decree of foreclosure in a proceeding wherein the junior lien-holders are
not parties, leaves their equity of redemption unforeclosed and unaffected. They
retain the unforeclosed equity of redemption
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o
A separate foreclosure proceeding should be brought to require them to
redeem from the first mortgagee, or the party who acquired the property at the
foreclosure sale, under penalty of losing the prerogative to redeem
d. Equity of Redemption
Section 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the
court shall find the facts set forth in the complaint to be true, it shall ascertain the amount
due to the plaintiff upon the mortgage debt or obligation, including interest and other charges
as approved by the court, and costs, and shall render judgment for the sum so found due and
order that the same be paid to the court or to the judgment obligee within a period of not less
than ninety (90) days nor more than one hundred twenty (120) days from the entry of
judgment, and that in default of such payment the property shall be sold at public auction to
satisfy the judgment.

- Judgment shall be rendered after trial

o
For the amount of the mortgage debt + interest and other charges to be
paid within the grace period granted by Rule 68(90-120 days)
o
In default of such payment, collateral shall be sold at public auction to
satisfy the judgment.
- Equity or redemption: right of mortgagor to extinguish the mortgage and retain
ownership of the collateral, after default in the performance of the condition of the
mortgage but before the foreclosure of the property, by paying the mortgage
obligation
o
Equity of redemption is conferred by law on the mortgagors successors-ininterest or on third persons acquiring rights over the collateral from the
mortgagor subsequent. It is subordinate to the mortgagees lien (Rule 68. Sec. 1)
o
These junior lien-holders/junior mortgagee is a proper and a necessary
party to a foreclosure proceeding, but he is not an indispensible party to the
proceeding.
o
A decree of foreclosure in a proceeding wherein the junior lien-holders are
not parties, leaves their equity of redemption unforeclosed and unaffected. They
retain the unforeclosed equity of redemption
o
A separate foreclosure proceeding should be brought to require them to
redeem from the first mortgagee, or the party who acquired the property at the
foreclosure sale, under penalty of losing the prerogative to redeem
e. Foreclosure Sale
Section 3. Sale of mortgaged property; effect. When the defendant, after being directed to
do so as provided in the next preceding section, fails to pay the amount of the judgment
within the period specified therein, the court, upon motion, shall order the property to be sold
in the manner and under the provisions of Rule 39 and other regulations governing sales of
real estate under execution. Such sale shall not affect the rights of persons holding prior
encumbrances upon the property or a part thereof, and when confirmed by an order of the
court, also upon motion, it shall operate to divest the rights in the property of all the parties
to the action and to vest their rights in the purchaser, subject to such rights of redemption as
may be allowed by law.

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Upon the finality of the order of confirmation or upon the expiration of the period of
redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if
any, shall be entitled to the possession of the property unless a third party is actually holding
the same adversely to the judgment obligor. The said purchaser or last redemptioner may
secure a writ of possession, upon motion, from the court which ordered the foreclosure.

Section 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.

Section 5.
How sale to proceed in case the debt is not all due. If the debt for which the
mortgage or encumbrance was held is not all due as provided in the judgment as soon as a
sufficient portion of the property has been sold to pay the total amount and the costs due, the
sale shall terminate; and afterwards as often as more becomes due for principal or interest
and other valid charges, the court may, on motion, order more to be sold. But if the property
cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be
sold in the first instance, and the entire debt and costs shall be paid, if the proceeds of the
sale be sufficient therefor, there being a rebate of interest where such rebate is proper.

Section 7.
Registration. A certified copy of the final order of the court confirming the sale
shall be registered in the registry of deeds. If no right of redemption exists, the certificate of
title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the
purchaser.

Where a right of redemption exists, the certificate of title in the name of the mortgagor shall
not be cancelled, but the certificate of sale and the order confirming the sale shall be
registered and a brief memorandum thereof made by the registrar of deeds upon the
certificate of title. In the event the property is redeemed, the deed of redemption shall be
registered with the registry of deeds, and a brief memorandum thereof shall be made by the
registrar of deeds on said certificate of title.

If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the
purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon
the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in
the name of the purchaser.

Section 8.
Applicability of other provisions. The provisions of sections 31, 32 and 34 of
Rule 39 shall be applicable to the judicial foreclosure of real estate mortgages under this Rule
insofar as the former are not inconsistent with or may serve to supplement the provisions of
the latter.

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Section 31. Manner of using premises pending redemption; waste restrained. Until the
expiration of the time allowed for redemption, the court may, as in other proper cases,
restrain the commission of waste on the property by injunction, on the application of the
purchaser or the judgment obligee, with or without notice; but it is not waste for a person in
possession of the property at the time of the sale, or entitled to possession afterwards, during
the period allowed for redemption, to continue to use it in the same manner in which it was
previously used, or to use it in the ordinary course of husbandry; or to make the necessary
repairs to buildings thereon while he occupies the property.

Section 32. Rents, earnings and income of property pending redemption. The purchaser or
a redemptioner shall not be entitled to receive the rents, earnings and income of the property
sold on execution, or the value of the use and occupation thereof when such property is in the
possession of a tenant. All rents, earnings and income derived from the property pending
redemption shall belong to the judgment obligor until the expiration of his period of
redemption.

Section 34. Recovery of price if sale not effective; revival of judgment. If the purchaser of
real property sold on execution, or his successor in interest, fails to recover the possession
thereof, or is evicted therefrom, in consequence of irregularities in the proceedings concerning
the sale, or because the judgment has been reversed or set aside, or because the property
sold was exempt from execution, or because a third person has vindicated his claim to the
property, he may on motion in the same action or in a separate action recover from the
judgment obligee the price paid, with interest, or so much thereof as has not been delivered to
the judgment obligor, or he may, on motion, have the original judgment revived in his name for
the whole price with interest, or so much thereof as has been delivered to the judgment
obligor. The judgment so revived shall have the same force and effect as an original judgment
would have as of the date of the revival and no more.

- Rule 68. Sec. 3: acceptance of a bid does not confer title on the purchaser. He
only becomes a preferred bidder until the court has validly confirmed the
foreclosure sale (Reckoning point where the title is vested)
- Until the confirmation of the foreclosure sale, it is not complete. The court retains
control of the proceedings and may grant or withhold confirmation as the rights
and interest of the parties and the ends of justice may require.
- Court may even grant the judgment debtor or mortgagor the equity of redemption
o Equity of redemption: an opportunity to pay an amount equal to the proceeds
of the sale and refrain the foreclosure of the sale.
- For a valid confimartion of a foreclosure sale. A hearing is necessary to be given
the interested parties, to show cause why the sale should not be confirmed.
o Notice to the mortgage is required, otherwise, confirmation is vitiated. (twin
requirements of notice and hearing)
o Necessary to inform the parties of the time when the equity of redemption is cut
off.
o If confirmation is void, mortgagor may still exercise equity of redemption
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b. Right of Redemption
- after the confirmation of a foreclosure sale, mortgagor is divested of his rights to
the collateral (and is vested in the purchaser) subject to the right of redemption
allowed by law
- rule 68 and rule 39 mentions right of redemption that are not grants of this
statutory prerogative
- For there to be right of redemption in Judicial foreclosure, there must be a law
which exceptionally allows it. ( RA 8791 Banking law of 2000 grants right of
redemption for a period of 1 year after the sale +interest and expenses)
c. Right to Surplus or Deficiency

Section 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.

Section 6.
Deficiency judgment. If upon the sale of any real property as provided in the
next preceding section there be a balance due to the plaintiff after applying the proceeds of
the sale, the court, upon motion, shall render judgment against the defendant for any such
balance for which, by the record of the case, he may be personally liable to the plaintiff, upon
which execution may issue immediately if the balance is all due at the time of the rendition of
the judgment; otherwise; the plaintiff shall be entitled to execution at such time as the
balance remaining becomes due under the terms of the original contract, which time shall be
stated in the judgment.

Section 7.
Registration. A certified copy of the final order of the court confirming the sale
shall be registered in the registry of deeds. If no right of redemption exists, the certificate of
title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the
purchaser.

Where a right of redemption exists, the certificate of title in the name of the mortgagor shall
not be cancelled, but the certificate of sale and the order confirming the sale shall be
registered and a brief memorandum thereof made by the registrar of deeds upon the
certificate of title. In the event the property is redeemed, the deed of redemption shall be
registered with the registry of deeds, and a brief memorandum thereof shall be made by the
registrar of deeds on said certificate of title.

If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the
purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon

128

the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in
the name of the purchaser.

- Mortgagor is entitled to surplus if there is any.

- Mortgagee is entitled to a deficiency judgment in the same proceeding for
judicial foreclosure in sec. 6. This right extends to the judicial foreclosure arising
out of a settlement of estate.
- In such a case Rule 68 grants to the mortgagee distinct, independent and
mutually exclusive remedies
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 mortgage exclusively, extrajudicially foreclose the same at any
time before it prescribes, without a right to claim for any deficiency

Extrajudicial Foreclosure
- when mortgagee is given a special power of attorney to sell the mortgaged
property by public auction, under Act No. 3135
a. Special powers

Act. 3135. 31SECTION 1. When a sale is made under a special power inserted in or attached to
any real-estate mortgage hereafter made as security for the payment of money or the
fulfillment of any other obligation, the provisions of the following election shall govern as to
the manner in which the sale and redemption shall be effected, whether or not provision for
the same is made in the power.

- Although the right of the mortgagee to foreclose is recognized by law, the

requirements of law must be complied with
- It can only be extrajudicially foreclosed if there is a special power inserted or
attached to the document in which the real estate mortgage appears.
b. Foreclosure Sale
SECTION 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.

SECTION 3. Notice shall be given by posting notices of the sale for not less than twenty days in
at least three public places of the municipality or city where the property is situated, and if

31 Act no. 3135 (1924) an Act to Regulate the Sale of Property under Special Powers inserted in or Annexed to Real
Estate Mortgages, as amended

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such property is worth more than four hundred pesos, such notice shall also be published once
a week for at least three consecutive weeks in a newspaper of general circulation in the
municipality or city.

A.M. No. 99-10-05-0 as amended. Sec. 1. All applications for extra-judicial foreclosure of
mortgage, whether under the direction of the Sheriff or a notary public pursuant to Art.No.
3135, as amended, and Act 1508, as amended, shall be filed with the Executive Judge, through
the Clerk of Court, who is also the Ex-Officio Sheriff (A.M. No. 99-10-05-0, as amended, March
1, 2001).

Sec. 2. Upon receipt of the application, the Clerk of Court shall:

a. Examine the same to ensure that the special power of attorney authorizing the extrajudicial foreclosure of the real property is either inserted into or attached to the deed of real
estate mortgage (Act No. 3135, Sec. 1, as amended);
b. Give a file number to the application and endorse the date and time of its filing and
thereafter docket the same, keeping, in this connection, separate docket books for extrajudicial foreclosure sales conducted by the Sheriff and those conducted by notaries public;
c. For the conduct of extra-judicial foreclosure of real estate or chattel mortgage under the
direction of the sheriff, collect the appropriate filing fees and issues the corresponding official
receipt (Section 7 (c), Rule 141, Rules of Court, as amended by A.M. No. 00-2-01-SC,
February 1, 2000).

Cooperatives, thrift banks, and rural banks are not exempt from the payment of filing fees and
other fees under these guidelines (A.M. No. 98-9-280-RTC, September 29, 1998; A.M. No. 99-393-RTC, April 20, 1999; and A.M. No. 92-9-408-0).

d. In case the application is for the extra-judicial foreclosure of mortgages of real estates
and/or chattels in different locations covering one indebtedness, issue, apart from the official
receipt for the fees, 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, for purposes of having the application docketed
with the Clerks of Court in the places where the other properties are located and of allowing
the extra-judicial foreclosure to proceed thereat. (A.M. No. 99-10-05-0, par. 2(e)).

Sec. 4. The Sheriff to whom the application for extra-judicial foreclosure of mortgage was
raffled shall do the following:
a. Prepare a Notice of Extra-judicial Sale using the following form:
NOTICE OF EXTRA-JUDICIAL SALE
Upon extra-judicial petition for sale under Act 3135 / 1508 filed __________________ against
(name and address of Mortgator/s) to satisfy the mortgage indebtedness which as of ___________

130

amounts to P _________________, excluding penalties, charges, attorneys fees and expenses of

foreclosure, the undersigned or his duly authorized deputy will sell at public auction on (date
of sale) _______________ at 10:00 A.M. or soon thereafter at the main entrance of the ___________
(place of sale) to the highest bidder, for cash or managers check and in Philippine Currency,
the following property with all its improvements, to wit:
(Description of Property)
All sealed bids must be submitted to the undersigned on the above stated time and date.
In the event the public auction should not take place on the said date, it shall be held on
_______________, _______________ without further notice.
________________ (date)
SHERIFF
b. (1) In case of foreclosure of real estate mortgage, cause the publication of the notice of sale
by posting it for not less than twenty (20) days in at least three (3) public places in the
municipality or city where the property is situated and if such property is worth more than
four hundred (P400.00) pesos, by having such notice published once a week for at least three
(3) consecutive weeks in a newspaper of general circulation in the municipality or city (Sec. 3,
Act No. 3135, as amended). The Executive Judge shall designate a regular working day and
definite time each week during which said notice shall be distributed personally by him for
publication to qualified newspapers or periodicals as defined in Sec. 1 of P.D. No. 1079, which
distribution shall be effected by raffle (A.M. No. 01-1-07-SC, Oct. 16, 2001). Unless otherwise
stipulated by the parties to the mortgage contract, the debtor-mortgagor need not be
personally served a copy of the notice of the extra-judicial foreclosure.
For real estate mortgages covering loans not exceeding P100,000.00, exclusive of interests
due and unpaid, granted by rural banks (RA No. 7353, Sec. 6) or thrift banks (RA No. 7906,
Sec. 18),publication in a newspaper shall be dispensed with, it being sufficient that the notices
of foreclosure are posted for a period of sixty (60) days immediately preceding the public
auction in the most conspicuous areas of the municipal building, the municipal public market,
the rural bank, the barangay hall, and the barangay public market, if any, where the land
mortgaged is situated. Proof of publication shall be accomplished by an affidavit of the Sheriff
and shall be attached to the records of the case.

1. The requirement of Notice

- Object of notice: to inform the public of the nature and condition of the collateral
to be sold, time, place and terms of the sale; to secure bidders and prevent a
sacrifice of the collateral
- General Rule: requirement of posting of notice of real estate mortgage
foreclosure sale must be strictly complied with. Mistakes or omissions will be fatal
to the validity of the notice and the consequent foreclosure sale
- Exception: if the objectives of a notice of sale are attained, immaterial errors and
mistakes may not affect the sufficiency of notice. (e.g. published in newspaper but
not in 3 public places). Publication of the notice of sale in a newspaper of general
circulation alone: more than sufficient compliance with the notice requirement
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2. Conduct of Sale
Act 3135. SECTION 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 of 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.

SECTION 5. At any sale, the creditor, trustee, or other 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. Sec. 5. Conduct of the extra-judicial foreclosure sale

a. The bidding shall be made through sealed bids which must be submitted to the Sheriff who
shall conduct the sale between the hours of 9 a.m. and 4 p.m. of the date of the auction (Act
3135, Sec. 4). The property mortgaged shall be awarded to the party submitting the highest
bid and, in case of a tie, an open bidding shall be conducted between the highest bidders.
Payments of the winning bid shall be made either in cash or in managers check, in Philippine
currency, within five (5) days from notice.
b. The sale must be made in the province in which the real property is situated and, in case
the place within the said province in which the sale is to be made is the subject of stipulation,
such sale shall be made in said place in the municipal building of the municipality in which the
property or part thereof is situated (Act No. 3135, as amended, Sec. 2)

Sec. 6. After the sale, the Clerk of Courts shall collect the appropriate fees The amount paid
shall not be subject to a refund even if the foreclosed property is subsequently redeemed.

Sec. 8. The Sheriff or the notary public who conducted the sale shall report the name/s of the
bidder/s to the Clerk of Court.

Sec. 9. Upon presentation of the appropriate receipts, the Clerk of Court shall issue and sign
the Certificate of Sale, subject to the approval of the Executive Judge or, in the latters
absence, the Vice-Executive Judge

c. Right of Redemption
Act. 3135. SECTION 6. In all cases in which an extrajudicial sale is made under the special
power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or
judgment creditor of said debtor, or any person having a lien on the property subsequent to

132

the mortgage or deed of trust under which the property is sold, may redeem the same at any
time within the term of one year from and after the date of the sale; and such redemption
shall be governed by the provisions of sections four hundred and sixty-four to four hundred
and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent
with the provisions of this Act.

A.M. No. 99-10-05-0. Sec. 10. After the Certificate of Sale has been issued, the Clerk of Court
shall keep the complete records for a period of one (1) year from the date of registration of
the certificate of sale with the Register of Deeds, after which the records shall be archived.
Notwithstanding the foregoing, juridical persons whose property is sold pursuant to an extrajudicial foreclosure shall have the right to redeem the property until, but not later than, the
registration of the certificate of foreclosure sale which in no case shall be more than three (3)
months after foreclosure, whichever is earlier (R.A. 8791, Section 47). In case the property is
redeemed, the Clerk of Court shall assess the redemptioners fee as provided in Section 7 (k),
Rule 141, as amended. If the property is not redeemed, the Clerk of Court shall, as a requisite
for the issuance of the final Deed of Sale, assess the highest bidder the amount of P300.00 as
provided in Section 20(d), Rule 141, as amended.

- Right of a purchaser of collateral at an extrajudicial foreclosure sale is merely

inchoate. Ownership is still with the mortgagor until the period of right of
redemption expires. Afterwards, ownership is consolidated in the purchaser.
- Right of redemption must be allowed by a specific law.
1. Act 3135: 1 year from the date of registration of the certificate of foreclosure
sale
2. RA 8791 (General Banking law of 2000): until, but not later than, the
registration of the certificate of foreclosure sale (no more than 3 months after
foreclosure)
- Collateral may be sold at an amount less than its actual market value unless
shocking to the conscience. This will not invalidate the sale.
- Mortgagor has the option to exercise the right or sell the right to redeem. Either
option will let the mortgagor recover any alleged loss he may have suffered by
reason of the low price
i. Who may redeem
Act 3135. Sec. 6 supra

Rule 39. Section 27.Who may redeem real property so sold. Real property sold as provided
in the last preceding section, or 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;

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(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 under which the property was
sold. Such redeeming creditor is termed a redemptioner.

- Generally, mortgagor has the right to redeem. But parties who acquire a right to
the collateral under certain conditions are also granted the right to redeem.
- Successor in interest:
1. one to whom the mortgagor has transferred the right of redemption;
2. one to whom the mortgagor has conveyed its interest in the collateral for the
purpose of redemption
3. one who succeeds to the interest of the mortgagor by operation of law
4. one or more joint debtor-mortgagors who were joint owners of the collateral
sold.
- Surety cannot redeem collateral, not a successor in interest in the collateral if he
pays the principal obligation, effect is subrogation.
- Redemptioner: creditor of mortgagor with a lien on the collateral subsequent to
the lien that was the basis of the foreclosure sale (second mortgagee). If his lien is
prior, then he is not a redemptioner but his lien is fully protected (his lien should
have been first satisfied
- A redemptioner, unlike a mortgagor must prove its right to redeem by producing
documents required by Rule 39.
ii. How to redeem
Section 28. Time and manner of, and amounts payable on, successive redemptions; notice to
be given and filed. The judgment obligor, or redemptioner, may redeem the property from
the purchaser, at any time within one (1) year from the date of the registration of the
certificate of sale, by paying the purchaser the amount of his purchase, with the per centum
per month interest thereon in addition, up to the time of redemption, together with the
amount of any assessments or taxes which the purchaser may have paid thereon after
purchase, and interest on such last named amount at the same rate

Section 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.

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Section 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.

Section 33. Deed and possession to be given at expiration of redemption period; by whom
executed or given. If no redemption be made within one (1) year from the date of the
registration of the certificate of sale, the purchaser is entitled to a conveyance and possession
of the property; or, if so redeemed whenever sixty (60) days have elapsed and no other
redemption has been made, and notice thereof given, and the time for redemption has
expired, the last redemptioner is entitled to the conveyance and possession; but in all cases
the judgment obligor shall have the entire period of one (1) year from the date of the
registration of the sale to redeem the property. The deed shall be executed by the officer
making the sale or by his successor in office, and in the latter case shall have the same validity
as though the officer making the sale had continued in office and executed it.

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 adversely to the
judgment obligor.

- Requisites for a valid redemption

1. Must be made within 12 months from date of registration of the sale in the
Office of the Register of Deeds
2. Payment of the purchase price of the collateral + 1% interest per month +
assessments or taxes if any paid by the purchaser.
3. Written notice of redemption served on the officer who made the sale.
Duplicate filed with Register of Deeds of the province
- Not sufficient to show intention. Must be coupled with actual and simultaneous
tender of payment.
- Nothing in the law prohibits the piecemeal redemption of collateral sold at a
foreclosure.
d. Right to deficiency
Section 7.
Mortgage debt due from estate. A creditor holding a claim against the
deceased secured by mortgage or other colateral security, may abandon the security and
prosecute his claim in the manner provided in this rule, and share in the general distribution
of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by
action in court, making the executor or administrator a party defendant, and if there is a
judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged,
in the foreclosure or other proceeding to realize upon the security, he may claim his deficiency
judgment in the manner provided in the preceding section or he may rely upon his mortgage

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or other security alone, and foreclosure 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 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.

- Act 3135 does not contain any provision on right to recover deficiency but neither
does it prohibit such recovery.
- REM is a security transaction. Its purpose is to ensure fulfillment of principal
obligation. it does not in any way limit nor minimize the amount of the principal
obligation.
- Mortgagee then may proceed in a proper action against the debtor for deficiency
but he must be able to prove this.
- But this right does not extend to extrajudicial foreclosure of mortgage arising out
of a settlement of estate. In that case mortgagee has 3 distinct, independent, and
mutually exclusive remedies:
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 mortgage exclusively, extrajudicially foreclose the same at any
time before it prescribes, without a right to claim for any deficiency
e. Right to surplus
- Unjust enrichment does not allow the mortgagee to keep the surplus of the sale
of the foreclosed property. He can only foreclose it to the extent of the loan secured
by it
- Right of mortgagor to surplus is a substantial right that prevails over rules of
technicality.
- Surplus gains significance if there are junior encumbrancers on the property.
Surplus is applied to the second or third mortgage.
- Second mortgagee, aside from the right of redemption, also has a right to apply to
his credit, the surplus of the proceeds of the sale after first mortgagee has been
paid.
- First mortgagee then acts as a trustee for the benefit of the junior encumbrancers
when proceeds from foreclosure sale are more than the amount of the debt.
- If mortgagee retains more than what he is entitled to, sale is still valid. This only
gives the mortgagor a cause of action to recover surplus
f. Right to possession
i. During Redemption period
SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the
Court of First Instance of the province or place where the property or any part thereof is
situated, to give him possession thereof during the redemption period, furnishing bond in an

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amount equivalent to the use of the property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act. Such petition shall be made under oath and filed
in form of an ex parte motion in the registration or cadastral proceedings if the property is
registered, or in special proceedings in the case of property registered under the Mortgage
Law or under section one hundred and ninety-four of the Administrative Code, or of any other
real property encumbered with a mortgage duly registered in the office of any register of
deeds in accordance with any existing law, and in each case the clerk of the court shall, upon
the filing of such petition, collect the fees specified in paragraph eleven of section one
hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act
Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the sheriff of the province in which the
property is situated, who shall execute said order immediately.

SECTION 8. The debtor may, in the proceedings in which possession was requested, but not
later than thirty days after the purchaser was given possession, petition that the sale be set
aside and the writ of possession cancelled, specifying the damages suffered by him, because
the mortgage was not violated or the sale was not made in accordance with the provisions
hereof, and the court shall take cognizance of this petition in accordance with the summary
procedure provided for in section one hundred and twelve of Act Numbered Four hundred and
ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all
or part of the bond furnished by the person who obtained possession. Either of the parties
may appeal from the order of the judge in accordance with section fourteen of Act Numbered
Four hundred and ninety-six; but the order of possession shall continue in effect during the
pendency of the appeal.

SECTION 9. When the property is redeemed after the purchaser has been given possession,
the redeemer shall be entitled to deduct from the price of redemption any rentals that said
purchaser may have collected in case the property or any part thereof was rented; if the
purchaser occupied the property as his own dwelling, it being town property, or used it
gainfully, it being rural property, the redeemer may deduct from the price the interest of one
per centum per month provided for in section four hundred and sixty-five of the Code of Civil
Procedure.

- Sec 7 of Act. 3135 expressly directs the issuance of a writ of possession in favor of
purchaser that seeks possession of the property during the redemption period.
- No discretion left to the court. Having merely followed an express provision,
court cannot be charged with having acted without jurisdiction or with grave abuse
of discretion in issuing writ
- Writ is ex parte. It is for the benefit of one party only and relief is granted without
an opportunity to be heard for the person against whom the relief is sought
- Sec. 8 provides for the plain, speedy and adequate remedy in opposing issuance
of writ. May even petition to set aside foreclosure sale aside from cancelling the
writ of possession. But if writ of possession is granted, it shall continue to be in
effect during the pendency of the appeal (to cancel writ)
ii. After consolidation of Ownership
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Rule 39 Sec. 33 supra.

- Writ of possession can still be issued after expiration of redemption period.

- After consolidation of ownership and issuance of new title, writ of possession will
issue as a matter of course without the filing and approval of bond. Issuance would
be merely a ministerial function.
iii. When held by a third party
Rule 39. Sec. 33 supra

Section 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 copy thereof, stating
the grounds of such right or tittle, and a serves the same upon the officer making the levy and
a copy thereof upon the judgment obligee, the officer shall not be bound to keep the property,
unless such judgment obligee, on demand of the officer, files a bond approved by the court to
indemnity 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 or keeping of the property, to any
third-party claimant if such bond is filed. Nothing herein contained shall prevent such claimant
or any third person from vindicating his claim to the property in a separate action, or prevent
the judgment obligee from claiming damages in the same or a separate action against a thirdparty claimant who filed a frivolous or plainly spurious claim.

When the writ of execution is issued in favor of the Republic of the Philippines, or any officer
duly representing it, the filing of such bond shall not be required, and in case the sheriff or
levying officer is sued for damages as a result of the levy, he shall be represented by the
Solicitor General and if held liable therefor, the actual damages adjudged by the court shall be
paid by the National Treasurer out of such funds as may be appropriated for the purpose.

- Exception: Possession of the collateral may be awarded to a purchaser in

extrajudicial foreclosures unless a third party is actually holding the collateral
adversely to the mortgagor.
- Purchasers right of possession is only against the mortgagor and its successor-ininterest but not against persons whose right of possession is adverse to that of the
debtor.
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- Rule 39. Sec. 16 grants to remedies to the third party holding the collateral
adversely to the mortgagor
1. Terceria- filed against sheriff or officer effecting writ. Officer shall not be
bound to keep the collateral and could be answerable for damages if he does
2. Separate action to vindicate claim of ownership or possession over the
property (accion reinvindicatoria?)- must be filed in the proper court
- Remedies are cumulative and may be availed of separately from each other

Foreclosure of Pledge
Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed
before a Notary Public to the sale of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the owner of the thing pledged in a proper
case, stating the amount for which the public sale is to be held. If at the first auction the thing
is not sold, a second one with the same formalities shall be held; and if at the second auction
there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be
obliged to give an acquittance for his entire claim.

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) ARTICLE 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.

Formal requisites for sale under Art. 2112

o Debt is due and unpaid
o Sale must be at a public auction
o There must be notice to the pledgor and owner, stating the amount due
o Sale must be made with the intervention of a notary public

Note: 2112 does not require posting of notice of sale and publication, notification
to the pledgor and owner is sufficient. Essential condition of a pledge is that if the
principal obligation is duly paid, pledge is automatically extinguished (accessory
character of pledge)

If the principal obligation becomes due and the debtor defaults, the
creditor/pledgee may choose to foreclose the collateral in the manner allowed by
law. He may even extrajudicially foreclose a pledge by notarial sale

If after the 2nd auction, the thing pledged is still not sold, pledgee may appropriate
the thing. An exception to the prohibition against pacto commisorio. After
appropriation, it shall serve as the full payment for his entire claim, debtor is not
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entitled to the excess in case the value of the thing is more than the principal
obligation

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.

Article 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.

Both the pledgor and the pledgee may bid. Pledgor shall eb preferred if he offers
the same terms as the highest bidder.

Pledgee is not allowed to acquire the thing if he is the only bidder

2. Effect of Notarial Sale

a. Extinction of principal obligation
Article 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.

Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner
of the result thereof.

2115 is clear when it provides that the principal obligation is extinguished by the
sale of the collateral. The fact that the pledge is not the principal obligation is of
no significance

Effects of sale of the thing pledged: Principal obligation extinguished, whether or not
the proceeds are equal to the amount of the principal obligation, interest and
expenses in a proper case.
b. Right of Redemption
140

Right of redemption is a statutory right granted to the owner of collateral

(pledgor or mortgagor) to repurchase the collateral even after confirmation of a
foreclosure sale but within the periods prescribed by law.

When the owner of the collateral exercises the right of redemption, it does not
reacquire the property since ownership was never lost. It eliminates the lien on
the title to the collateral.

It defeats the inchoate right of the purchaser at the foreclosure sale and restores
the collateral to the same condition as if no foreclosure sale had been conducted.

In our jurisdiction, there is no statute that vests a right of redemption over

personal property, hence, no right of redemption over property sold pursuant to
2115
c. Right to surplus or deficiency

Art. 2115 If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency, notwithstanding any stipulation to the contrary.

Exception: parties may stipulate that excess or surplus may be recovered by the
debtor

But by choosing to foreclose on the collateral, the creditor waives any other
remedy and must abide by the result of the foreclosure sale.

If there is deficiency, he has no right to recover. (even if there is a contrary

stipulation)

Foreclosure of Chattel Mortgage

Act No. 1508. Sec. 8. Failure of mortgagee to discharge the mortgage. If the mortgagee,
assign, administrator, executor, or either of them, after performance of the condition before or
after the breach thereof, or after tender of the performance of the condition, at or after the
time fixed for the performance, does not within ten days after being requested thereto by any
person entitled to redeem, discharge the mortgage in the manner provided by law, the person
entitled to redeem may recover of the person whose duty it is to discharge the same twenty
pesos for his neglect and all damages occasioned thereby in an action in any court having
jurisdiction of the subject-matter thereof.
Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds.
The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of
condition broken, cause the mortgaged property, or any part thereof, to be sold at public
auction by a public officer at a public place in the municipality where the mortgagor resides, or
where the property is situated, provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public places in such municipality, and
the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person
holding under him and the persons holding subsequent mortgages of the time and place of

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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, 4 and the amendments thereto, and the fees of the register of deeds for
registering the officer's return shall be taxed as a part of the costs of sale, which the officer
shall pay to the register of deeds. The return shall particularly describe the articles sold, and
state the amount received for each article, and shall operate as a discharge of the lien thereon
created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of
the costs and expenses of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after paying the mortgages, shall be
paid to the mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as required by section sixteen of
Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of the
municipality where the sale was held to the purchaser thereof.

AM No. 99-10-05-0 Sec. 1 All applications for extra-judicial foreclosure of mortgage, whether
under the direction of the Sheriff or a notary public pursuant to Art.No. 3135, as amended, and
Act 1508, as amended, shall be filed with the Executive Judge, through the Clerk of Court, who
is also the Ex-Officio Sheriff (A.M. No. 99-10-05-0, as amended, March 1, 2001).

Sec. 2. Upon receipt of the application, the Clerk of Court shall:

b. Give a file number to the application and endorse the date and time of its filing and
thereafter docket the same, keeping, in this connection, separate docket books for extrajudicial foreclosure sales conducted by the Sheriff and those conducted by notaries public;
c. For the conduct of extra-judicial foreclosure of real estate or chattel mortgage under the
direction of the sheriff, collect the appropriate filing fees and issues the corresponding official
receipt
d. In case the application is for the extra-judicial foreclosure of mortgages of real estates
and/or chattels in different locations covering one indebtedness, issue, apart from the official
receipt for the fees, 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, for purposes of having the application docketed
with the Clerks of Court in the places where the other properties are located and of allowing
the extra-judicial foreclosure to proceed thereat.

Sec. 3. The application for extra-judicial foreclosure shall be raffled under the supervision of
the Executive Judge, with the assistance of the Clerk of Court and Ex-Oficio Sheriff, among all
Sheriffs including those assigned to the Office of the Clerk of court and Sheriffs assigned in the
branches of the court. A Sheriff to whom the case has been raffled shall be excluded in the

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succeeding raffles and shall participate again only after all other Sheriffs shall have been
assigned a case by raffle

Sec. 4. The Sheriff to whom the application for extra-judicial foreclosure of mortgage was
raffled shall do the following:
a. Prepare a Notice of Extra-judicial Sale using the following form:
NOTICE OF EXTRA-JUDICIAL SALE
Upon extra-judicial petition for sale under Act 3135 / 1508 filed __________________ against
(name and address of Mortgator/s) to satisfy the mortgage indebtedness which as of ___________
amounts to P _________________, excluding penalties, charges, attorneys fees and expenses of
foreclosure, the undersigned or his duly authorized deputy will sell at public auction on (date
of sale) _______________ at 10:00 A.M. or soon thereafter at the main entrance of the ___________
(place of sale) to the highest bidder, for cash or managers check and in Philippine Currency,
the following property with all its improvements, to wit:
(Description of Property)
All sealed bids must be submitted to the undersigned on the above stated time and date.
In the event the public auction should not take place on the said date, it shall be held on
_______________, _______________ without further notice.
________________ (date)
SHERIFF
b. (2) In case of foreclosure of a chattel mortgage, post the notice for at least ten (10) days in
two (2) or more public places in the municipality where the mortgagor resides or where the
property is situated (Sec. 14, Act No. 1508, as amended).

Sec. 5. Conduct of the extra-judicial foreclosure sale

b. in case of a chattel mortgage, the sale shall be made at a place in the municipality where
the mortgagor resides or where the property is situated

Sec. 6. After the sale, the Clerk of Courts shall collect the appropriate fees

Sec. 7. In case of foreclosure under Act No. 1508, the Sheriff shall, within thirty (30) days from
the sale, prepare a return and file the same in the Office of the Registry of Deeds where the
mortgage is recorded.

Sec. 8. The Sheriff or the notary public who conducted the sale shall report the name/s of the
bidder/s to the Clerk of Court.

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Sec. 9. Upon presentation of the appropriate receipts, the Clerk of Court shall issue and sign
the Certificate of Sale, subject to the approval of the Executive Judge or, in the latters
absence, the Vice-Executive Judge.

If the principal obligation becomes due and the debtor defaults, the mortgagee
may elect to foreclose the collateral by causing its alienation in accordance with
the procedures allowed b law. Chattel mortgage law allows extrajudicial
foreclosure
o According to sir: always extrajudicial
Foreclosure sale in public auction under Act no. 1508 is by public auction, but the
parties may stipulate that it be by private sale.

1. Equity of Redemption
Act. 1508. SECTION 13. When the condition of a chattel mortgage is broken, a mortgagor or
person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the
same by paying or delivering to the mortgagee the amount due on such mortgage and the
reasonable costs and expenses incurred by such breach of condition before the sale thereof.
An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and
entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it
by the terms of this Act.

SECTION 14. Sale of property at public auction; Officers return; Fees; Disposition of proceeds.
The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of
condition broken, cause the mortgaged property, or any part thereof, to be sold at public
auction

Redemption mentioned in Sec. 13 of the Chattel Mortgage Law refers to Equity of

Redemption
Equity of redemption: 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.
Period: 30 days. Such period is the minimum period after violation of the
mortgage condition for the creditor to cause the sale at public auction with at
least 10 days notice to the mortgagor and posting of public notice of time, place,
and purpose of such sale, and is a period of grace for the mortgagor, to discharge
the obligation.
Note: period of redemption in CM is after default and until the sale of the thing
(not always 30 days, can redeem as long as it is not sold yet)
Who may redeem:
o Mortgagor
o Person holding a subsequent mortgage
o Subsequent attaching creditor
If the equity of redemption is exercised not by the mortgagor but by a subsequent
attaching creditor who pays the mortgagee, he acquires the rights that pertain to
144

the mortgagee, including the right to foreclose the chattel mortgage.

(subrogation)
How made: by paying or delivering o the mortgagee the amount due on such
mortgage and the costs and expenses incurred by such breach of condition before
the sale

2. Right of Redemption
- Not the same as Equity of redemption.
- Right of mortgagor to repurchase the collateral even after confirmation of a
foreclosure sale but within the periods prescribed by law. It is a statutory right of
a mortgagor in default
- Chattel mortgage law only grants equity of redemption hence, mortgagor in a
chattel mortgage has only an equity of redemption but no right of redemption
over the property sold.
3. Right to Possession
- Mortgagee is generally not in possession of the collateral unless and until the
debtor defaults and the mortgagee seeks to foreclose
- Mortgagee is authorized to take possession of the collateral on default by the
principal debtor. (as a preliminary step for its sale)
- If principal debtor refuses to deliver, Mortgagee has the right to maintain an
action to recover possession, or replevy, the collateral from any one in possession.
- Replevin: possessory in nature and determines nothing more than possession.
Person in possession is the proper and only necessary defendant, not necessary to
include others claiming a right over the property but not in possession.
- Sec. 14 of the CML does not require mortgagee to first seek foreclosure before
filing an action for replevin.
4. Right to Surplus or Deficiency
SECTION 14. Sale of property at public auction; Officers return; Fees; Disposition of proceeds.
The proceeds of such sale shall be applied to the payment, first, of the costs and expenses
of keeping and sale, and then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding subsequent mortgages in their
order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person
holding under him on demand

Application of proceed of sale:

o Costs and expenses of keeping and sale
o Payment of the obligation secured by the mortgage
o Claims of persons holding subsequent mortgages in their order
o The balance, if any, shall be paid to the mortgagor or person holding under
him
Mortgagor is entitled to surplus of the sale over the amounts required to be paid
under sec. 14. Corollarily, if the proceeds of the sale are insufficient, mortgagor is
obliged to pay deficiency.
145

o Deficiency becomes an ordinary claim and may be subject of judicial action.

Exception: if the chattel mortgage is constituted as security for the purchase of
personal property payable in installments (art. 1484)

146

F. Antichresis
A. General Concepts
Article 2132. By the contract of antichresis the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal of his credit. (1881)

Article 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. (n)

Article 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. (1882)

Article 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. (1885a)

Article 2139. The last paragraph of article 2085, and articles 2089 to 2091 are applicable to
this contract. (1886a)

Article 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their

147

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)

Article 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)

Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the
debtors are not solidarily liable.

Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they
pure or subject to a suspensive or resolutory condition.

Definition: art. 2132

Characteristics
o Accessory- secures the performance of a principal obligation
o It must be in writing
Special requisites:
o Can cover only the fruits of an immovable property
o Delivery of immovable is necessary only so that the creditor may receive the
fruits and not for it to be binding.
o Amount of principal and interest must be specified in writing
o Express agreement that debtor will give possession of the property to
creditor and that the latter will apply the fruits to the interest, if any, then
to the principal of his credit.
148

Obligation to pay interest is not essential. Antichresis is susceptible of

guaranteeing all kinds of obligations, pure or conditional.
Antichresis

Pledge

1. Refers to real property

1. Refers to personal property

2. Perfected by mere consent

2. Perfected by delivery of the thing pledged

3. Consensual contract

3. Real Contract

Antichresis

Real Mortgage

1. Property is delivered to creditor

1. Debtor usually retains possession of the property

2. Creditor acquires only the right to receive the fruits

of the property, hence, it does not produce a real right

2. Creditor does not have any right to receive the fruits;

but the mortgage creates a real right over the property

3. The creditor, unless there is stipulation to the

contrary, is obliged to pay the taxes and charges upon
the estate

3. The creditor has no such obligation

4. It is expressly stipulated that the creditor given

possession of the property shall apply all the fruits
thereof to the payment of interest, if owing, and
thereafter to the principal

4. There is no such obligation on part of mortgagee

Subject matter of both is real property

Measure of application of fruits to interest and principal. Fruits must be

appraised at their actual market value at the time of the application
- Obligations of antichretic creditor
o To pay taxes and charges on the estate, including necessary expenses
creditor may avoid said obligation by:
Compelling debtor to reacquire enjoyment of the property or
By stipulation to the contrary
o To apply all the fruits, after receiving the, to the payment of interest, if
owing, and thereafter to the principal
o To render an account of the fruits to the debtor (Note: according to sir this
is important because the creditor may receive the fruits but these can only
be applied if debtor defaults. Accounting will help them determine how
much is applied to the interest/principal.)
o To bear the expenses necessary for its preservation and repair.
B. Form of antichresis
Article 2134. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void.

must be in writing to be valid not only to third persons

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- if void, principal obligation is still valid.

- Purpose: to forestall the use of antichresis for purposes of usury
C. Right of Retention
Article 2136. The debtor cannot reacquire the enjoyment of the immovable without first having
totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations imposed upon him by the
preceding article, may always compel the debtor to enter again upon the enjoyment of the
property, except when there is a stipulation to the contrary. (1883)

The property delivered stands as a security for the payment of the obligation of
the antichretic debtor. The latter cannot demand its return until the debt is totally
paid.
If the creditor does not want to pay the taxes and incur the expenses necessary
for the preservation and repair of the property, he may compel the debtor to
reacquire it, unless there is a contrary stipulation

D. Foreclosure of Antichresis
Article 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. (1884a)

Remedy of an antichretic creditor in case of non-payment of debt

o Action for specific performance
o Petition for the sale of the real property as in a foreclosure of mortgages
under Rule 68 of the Rules of Court.
Stipulation authorizing creditor to appropriate the property upon the nonpayment
of the debt within the agreed period is void (pactum commissorium)
Antichretic creditor also cannot acquire property by prescription. His possession
of the property is not that of an owner, hence acquisitive prescription cannot be
applied.

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Concurrence and Preference of Credits

GENERAL CONCEPTS
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.

Scope of provisions
Title XIX applies to creditor-debtor relationships. Nothing in the Civil Code indicates
that its provisions on concurrence and preference of credits are applicable only to an
insolvent debtor. If the provisions were intended for insolvency cases, then other
creditor-debtor relationships where there are concurrence and preference of credits
would be left without governing rules, a view that would render purposeless the laws on
insolvency. [Barreto v. Villanueva]
- This is the view subscribed to by Sir, although Professor Somera in her book
states that concurrence and preference is only important when two or more
creditors have claims and the debtors assets are insufficient. Although she does
say that concurrence and preference should be ascertained in the context of
some proceeding, such as insolvency [which doesnt rule out other
proceedings], she argues that insufficiency in property is necessary for the
concepts to even matter. But doesnt insufficiency in assets logically connote
insolvency in the balance-sheet concept?
-

Examples of when concurrence and preference would kick in: liquidation

proceedings, dissolution of an estate, after dissolution of a partnership,
dissolution of community property after a marriage has been annulled

It is also important to note that the law applies to credits which are already due and
demandable.
What is Concurrence? Concurrence is the possession by two or more creditors of
equal rights or privileges over the same property or all of the property of a debtor.
- When the debtor has insufficient property to pay the competing claims of two or
more creditors [there being no established preference], the claims may be paid
concurrently and pro-rata, i.e. in proportion to the amount of the respective
credits .
What is Preference? It is the right held by a creditor to be preferred in the payment of
his claim above others, i.e. to be paid first out of the debtors assets.
- A preference is an exception to the general rule and hence the law as to
preferences is strictly construed.
-

Preference does not create an interest in property but simply a right of a

creditor to be paid first the proceeds of the sale of property.

The right of preference is one which can be made effective only by being
asserted and maintained. If it is not asserted and maintained, it is lost. [Molina
v. Somes]
151

The preferential right of credit attains significance only after the properties of the
debtor have been inventoried and liquidated, and the claims held by his various
creditors have been established.

There is a distinction between preference of credit and a lien. A preference

applies only to claims which do not attach to specific properties. A lien creates a
charge on a particular property.

Properties Exempt from Execution

1. As to present property, the exceptions are:
a. The family home [Arts. 152 155, FC]
b. Money or property obtained as support [Art. 205, FC]
c. Those provided in Sec. 13, Rule 39 of the Rules of Court:
[Paraphrased according to Kat Lucas report on the matter]
(1)Family home
(2)Three horses/cows/carabaos
(3)Provisions for individual/family use [4 months]
(4)Professional libraries P300K
(5)Household furniture and utensils P100K
(6)Ordinary tools
(7)Necessary clothing
(8)Earnings [4 months before levy]
(9)Support
(10)

Fishing boat 100K

(11)

Exempted by law

(12)

Lettered gravestones

(13)

Life insurance benefits

Kats mnemonic: FTP PHONES FELL

d. Homesteads
2. As to future property, a debtor who obtains a discharge from his debts on account
of his insolvency is not liable for the unsatisfied claims of his creditors with said
property, subject to certain exceptions expressly provided by law. [This is from De
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Leon and he refers to the Insolvency Law. I do not know if this still applies under
the FRIA.]
3. Property in custodia legis and of public dominion [as to the latter, the example
given by De Leon is property owned by municipal corporations necessary for
governmental purposes].
DBP v. NLRC [1994]
When ATLAS mortgaged properties were foreclosed, ATLAS workers filed a claim for unpaid wages etc.
pursuant to Article 110 of the Labor Code. The Court said that the workers claims do not create a lien on
employers properties. Article 110 of the Labor Code, as amended, must be viewed and read in
conjunction with the provisions of the Civil Code on concurrence and preferences of credits. RA 6715 has
the effect of expanding the "worker preference" to cover not only unpaid wages but also other monetary
claims of laborers, to which even claims of the Government must be deemed subordinate. However, the
amendatory provisions of R.A. 6715, which took effect on March 21, 1989, should only be given
prospective application.

CLASSIFICATION OF CREDITS
A. Special Preferred Credits
Art. 2241. With reference to specific movable property of the debtor, the following claims or
lieans shall be preferred:
Duties, taxes, and fees due thereon to the State or any subdivision thereof;
Claims arising from misappropriation, breach of trust, or malfeasance by public officials
committed in the performance of their duties, on the movables, money, or securities obtained
by them;
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;
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;
Credits for the making, repair, safekeeping, or preservation of personal property, on the
movable thus made, repaired, kept or possessed;
Claims for laborers wages, on the goods manufactured or the work done;
For expenses of salvage, upon the goods salvaged;
Credits between the landlord and the tenant, arising from the contract of tenancy on shares,
on the share of each in the fruits or harvest;
Credits for transportation, upon the goods carried, for the price of the contract and incidental
expenses, until their delivery and for thirty days thereafter;
Credits for lodging and supplies usually furnished to travelers by hotel keepers, on the
movables belonging to the guest as long as such movables are in the hotel, but not for money
loaned to the guests;

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Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the
fruits harvested;
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;
and
Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon
the price of the sale.
In the foregoing cases, if the movables to which the lien or preference attaches have been
wrongfully taken, the creditor may demand them from any possessor, within thirty days from
the unlawful seizure.
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 and
encumbrance on the immovable or real right:
Taxes due upon the land or building;
For the unpaid price of real property sold, upon the immovable sold;
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;
Claims of furnishers of materials used in the construction, reconstruction, or repair of
buildings, canals and other works, upon said buildings, canals or other works;
Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;
Expenses for the preservation or improvement of real property when the law authorizes
reimbursement, upon the immovable preserved or improved;
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;
Claims of co-heirs for warranty in the partition of an immovable among them, upon the real
property thus divided;
Claims of donors of real property for pecuniary charges or other conditions imposed upon the
donee, upon the immovable donated; and
Credits of insurers, upon the property insured, for the insurance premium for two years.
R.A. No. 10142, Sec. 136. xxx trade-related claims of clients or customers of a securities
market participant [broker, dealer, underwriter, transfer agent or other juridical persons
transacting securities in the capital market] which, for purposes of investor protection are
hereby deemed to have absolute priority over all other claims of whatever nature or kind
insofar as trade-related assets are concerned. For the purposes of this section, trade-related
assets include cash, securities, trading right and other assets owned and used by the
securities market participant in the ordinary course of its business.
Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered
as mortgages or pledges of real or personal property, or liens within the purview of legal
provisions governing insolvency.

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Taxes mentioned in No. 1, Art. 2241 and No. 1, Art. 2242, shall first be 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.
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.

Two-Tier Order of Preference

Among the special preferred credits enumerated in Arts. 2241 and 2242, only
taxes enjoy a preference over the other items listed. Taxes [and duties and fees
due on specific movable or immovable property] therefore occupy the first tier of
preference. All the other items listed after taxes still enjoy their privileged character
as liens, but they are not preferred over any other inter se and are only concurrent
credits. In other words, simply because No. 2 is listed as No. 2 does not mean that it is
preferred over No. 3. All other special preferred credits stand on the same
second tier to be satisfied, pari passu and pro rata.
However, it is important to note the amendment made by Sec. 136 of the
FRIA, which created a special preference of credit, or another tier in the order of
preference, in favor of trade-related claims of clients or customers of securities market
participants. This only applies to trade-related assets such as cash, securities, and
trading rights, but such special preferred credit enjoys absolute priority over all other
claims.
De Barretto, et al. v. Villanueva, et al. [1961]
Facts: Cruzado obtained a loan worth 11K from RFC and used the land issued in her name and her
husband as security. Cruzado failed to pay and the mortgage was foreclosed. RFC acquired the property
in the auction, subject to Cruzados rights to repurchase. The land was sold back to her conditionally.
With court authority, and with the consent of RFC, she sold the land to Villanueva for 19K. Villanueva
paid 1.5K in advance and executed a promissory note for the unpaid balance. Because Villanueva was
only able to pay 5.5K out of the 17.5K balance, Cruzado obtained a judgment against Villanueva for the
unpaid balance of 12K.
In the meantime, Villanueva was able to secure a clean certificate of title and mortgaged the
property to Barretto to secure a loan of 30K (mortgage was fully recorded). Villanueva failed to pay the
mortgage loan. Barretto then foreclosed the mortgage in her favor, obtained judgment, and asked for
execution. Cruzado then filed a motion for recognition of her vendors lien in the amount of 12K +
interest. The lower court ordered the lien annotated on the back of the Certificate of Title with the
proviso that in case of sale under the foreclosure decree, the vendor's lien and the mortgage credit of

155

appellant Barretto should be paid pro rata from the proceeds. The Barrettos are assailed the Order giving
due course to Cruzados Vendors Lien over the property.
Held: Order of the lower court is affirmed. Although the action for recovery is based on the promissory
note, the fact remains that Cruzado is an unpaid vendor who has the right to share pro-rata with the
Barrettos the proceeds of the foreclosure sale. Contrary to the Barrettos argument, there is no need to
register Cruzados vendors lien, and such non-registry does not make it invalid. Also, the Barrettos
argued that provisions on concurrence and preference are applicable only in insolvency cases, but the
Court said that there is no such limitation prescribed in the law.
Note on this case: The resolution on the MR filed by the Barrettos was issued a year later, setting aside
the original decision and entering a new one where the Barrettos were favored. Essentially the Court said
that title had already passed to RFC before Cruzado sold the land to Villanueva, so she was not a
vendor in the proper sense of the word. Also, the Court found that concurrence and preference
provisions applied only to insolvency cases.
Atlantic Erectors v. Herbal Cove [2003]
Atlantic filed a complaint for recovery of sum of money against Herbal Cove for payment of the cost of
labor and materials for the townhouses it constructed for Herbal Cove on Herbal Coves land. It also filed
a notice of lis pendens which were annotated on the titles. The issue before the Court was whether the
notice of lis pendens was proper, and the Court ruled in the negative. Atlantic claimed that it was
enforcing a contractors lien over Herbal Coves property under Art. 2242 (3) and (4). However, Atlantics
complaint does not allege any enforcement of a lien which would necessitate a notice of lis pendens as a
proper remedy. An examination of the complaint would yield the conclusion that the case was simply one
of collection and hence a personal action without any enforceable lien over the property.
Furthermore, even if there was a valid and enforceable contractors lien alleged in the complaint, the
notice of lis pendens would still be unjustified because a complaint for collection and damages is not the
proper mode for the enforcement of a contractors lien. Art. 2242 (3) applies when there is a concurrence
of credits i.e., when the same specific property of the debtor is subjected to the claims of several
creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. It can
only be enforced in the context of some kind of a proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency proceedings.
Consuelo Metal Corporation v. Planters Development Bank [2008]
CMC filed a petition with SEC to be declared in a state of suspension of payment, and for rehabilitation.
SEC issued an order suspending all actions against CMC. SEC eventually ordered the liquidation of CMC,
and ordered that the liquidation be commenced at the RTC. Planters then commenced the foreclosure of
CMC's real estate mortgage. CMC filed for an injunction with SEC, but the case was transferred to the
RTC. RTC denied the application for an injunction. The mortgage was eventually foreclosed. CMC
questions the jurisdiction of the RTC and the validity of the foreclosure.
The Court ruled that SEC has jurisdiction to order the dissolution, but the trial court has jurisdiction over
the liquidation. Planters, as a secured creditor, enjoys preference over a specific mortgaged property and
has a right to foreclose the mortgage under Section 2248 of the Civil Code. The creditor-mortgagee has
the right to foreclose the mortgage over a specific real property whether or not the debtor-mortgagor is
under insolvency or liquidation proceedings.
DBP v. CA [2001]
Marinduque Mining Industrial Corporation (MMIC) owed some billions of pesos to the Philippine National
Bank (PNB) and the Development Bank of the Philippines (DBP), for which it mortgaged its properties.
MMIC also bought certain construction materials from Remington Industrial Sales Corp. (Remington).
MMIC defaulted on its loans and on its purchases. The banks foreclosed on the properties and assigned
them to three different corporations which would manage the mines in the stead of the banks. Remington
sued MMIC and included as defendants the banks and the other mining corporations. The RTC and CA
found for Remington. The SC, however, found for the banks. It held that the banks and the other mining

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corporations cannot be made to pay for MMIC's obligations since they are totally separate corporate
entities and the absence of liquidation proceedings prevents the parties from determining how the
creditors should be paid.

2. Ordinary Preferred Credits

Art. 2244. [See discussion after provision, the order here has been amended] With reference
to other property, real and personal, of the debtor, the following claims or credits shall be
preferred in the order named:
Proper funeral expenses for the debtor, or children under his or her parental authority who
have no property of their own, when approved by the court;
Credits for services rendered the insolvent by employees, laborers, or household helpers for
one year preceding the commencement of the proceedings in insolvency;
Expenses during the last illness of the debtor or of his or her spouse and children under his or
her parental authority, if they have no property of their own;
Compensation due the laborers or their dependents under laws providing for indemnity for
damages in cases of labor accident, or illness resulting from the nature of the employment;
Credits and advancements made to the debtor for support of himself or herself, and family,
during the last year preceding the insolvency;
Support during the insolvency proceedings, and for three months thereafter;
Fines and civil indemnification arising from a criminal offense;
Legal expenses, and expenses incurred in the administration of the insolvents estate for the
common interest of the creditors, when properly authorized and approved by the court;
Taxes and assessments due the national government, other than those mentioned in Articles
2241, No. 1, and 2242, No. 1;
Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1,
and 2242, No. 1;
Taxes and assessments due any city or municipality, other than those indicated in Articles
2241, No. 1, and 2242, No. 1;
Damages for death or personal injuries caused by a quasi-delict;
Gifts due to public and private institutions of charity or beneficence;
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.
P.D. No. 442, Art. 110. In the event of bankruptcy or liquidation of an employers business, his
workers shall enjoy first preference as regards their wages and other monetary claims, any
provisions of law to the contrary notwithstanding.
Such unpaid wages and monetary claims shall be paid in full before claims of the government
and other creditors may be paid.
R.A. No. 10142, Sec. 133. xxx For purposes of this chapter, credits for services rendered by

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employees or laborers to the debtor shall enjoy first preference under Art. 2244 of the Civil
Code, unless the claims constitute legal liens under Arts. 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:
In the order established in Art. 2244; and
Common credits referred to in Art. 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.
Table Comparison of Special and Ordinary Preferred Credits [Taken from Group
2s handout]
Special Preferred Credits
Ordinary
Preferred
Credits
Articles 2241, 2242
Article 2244
Basis
Determinate, existing and Free assets (free from
Property
identified
whose
value mortgages, pledges and
involved
cannot satisfy all the claims. liens)
Unencumbered and may
thus be the subject of
future claims
There is order of priority
Order
of No order of priority
Priority
Creates lien on determinate Only creates simple rights
Effects
property
in favor of certain creditors
to have the free property of
the insolvent debtor, or
property not subject to any
special preferred credit,
applied
in
a
certain
sequence or order of
priority.
Absolute preference (No.1)
Nos. 9, 10, 11
Taxes
What happens when there are creditors with special and ordinary preferred
credits?
1. Special preferred credits take precedence over ordinary preferred credits only
insofar as the property to which the liens attach is concerned. Hence, special
preferred credits must be discharged first out of the proceeds of the property to
which they relate before ordinary preferred credits are paid.

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2. If the value of the specific property involved is greater than the total of the
special preferred credits, the residual value will form part of the free property of
the insolvent.
3. If the value of the specific 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 [which provides that the order in Art. 2244, on ordinary credits, will be
followed].

Notes on Specific Nos. in Art. 2244 [Taken substantially from Group 2s handout]
a. #2 Credits for services rendered the insolvent by employees, laborers, or
household helpers.
Claims for unpaid wages are not specially preferred claims established under
Articles 2241 and 2242, except to the extent that such claims for unpaid wages are
already covered by Article 2241 (No.6) and Article 2242 (No.3). These claims do not
create a lien in favor of workers or employers either upon all of the properties or upon
any particular property owned by their employer.
As to the effects of Art. 110 of the Labor Code on Art. 2244
Summary: THE CIVIL CODE SCHEME OF CREDITS IS PRESERVED.
The LC did not upgrade the workers claim to an absolutely preferred credit or
special preferred credit. Creditors with liens over a certain property under Arts. 2241
and 2242 are still given preferences over the proceeds of that property. The use of the
phrase first preference in Art. 110 LC indicates that what it intends to modify is the
order of preference found in Article 2244.
What did Art. 110, LC do?
1. Removed the one-year limitation found in No.2 of Art. 2244;
2. Moved up the claims for unpaid wages (and other monetary claims) of
laborers or workers of insolvent from second priority to first priority in
the order of preference established by Art. 2244; Most important change.
So when you read Art. 2244, swap Nos. 1 and 2 so that claims for unpaid wages
come first.

Note that the provisions on concurrence and preference of credit and Art. 110 of the LC
require judicial proceedings in rem in order to adjudicate the creditors claims against
the debtors assets. A declaration of bankruptcy or a judicial liquidation must be
present before the workers preference may be enforced.

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For purposes of definition workers preference as defined in the LC includes all

remunerations, unpaid wages, and other monetary claims of laborers to which even the
claims of the Government must be deemed subordinate.

b. #8 Legal expenses, and expenses incurred in the administration of the

insolvents estate for the common interest of the creditors, when properly
authorized and approved by the court.
By intervention or otherwise, a judgment creditor is a proper party to distribution
proceedings of the funds of the estate of the judgment debtor, and the former duly
asserts his rights as a preferred creditor.
c. #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.
To determine the order of preference among several credits appearing in public
instruments or final judgments, simply consider the date. First in time, priority in right.
If credits in a public instrument and final judgment fall on the same date, there will be
pro rata sharing.
On the other hand, where several judgments have been secured upon various
installments of a single debt set out in a public instrument, preference among them is
determined by the date of the public instrument and not by the date of the judgments
secured. Such public instrument is not merged in any judgment obtained under it.
Examples of credits which retain the character of a claim evidenced by a public
instrument:
(1)Unpaid balance left by a credit secured by a mortgage after foreclosure; and
(2)Credit made subject of a subsequent judicial action and judgment.
3. Common Credits
Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the
four preceding articles, shall enjoy no preference.
Art. 2251. Those credits which do not enjoy any preference with respect to specific property,
and those which enjoy preference, as to the amount not paid, shall be satisfied according to
the following rules: xxx
(2) Common credits referred to in Art. 2045 shall be paid pro rata regardless of dates.

Among common credits there is only a concurrence of credits. These ordinary

credits are not liens, as they do not attach to any specific property of the debtor.
Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices, et al. [2007]
Cordova bought from Philfinance certificates of stock of CSPI and other corporations. He was issued a
confirmation of sale. The CSPI shares were held by Filmanbank and Philtrust Bank, as custodian banks,

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in behalf and for the benefit of Cordova. Philfinance was subsequently placed under receivership by the
SEC and the respondents were appointed as liquidators. Without knowledge and consent of Cordova and
without authority from the SEC, the respondents withdrew the CSPI shares and sold them to Northeast
Corp., the proceeds of such sale thereafter included in the funds of Philfinance.
Cordova filed a complaint for the return of the shares. In the meantime, the SEC approved a 15%
rate of recovery for Philfinances creditors and investors then granted the claims of Cordova and treated
him as an ordinary creditor. Cordova argued that he was a preferred creditor because the withdrawal of
his CSPI shares was illegal.
The Court held that the return of his shares was thus impossible and that he was an ordinary
creditor. Although his shares were specific or determinate movable properties, after they were sold they
became generic property which were commingled with the cash and other assets of Philfinance. These
assets were in custodia legis, ready for distribution to its creditors and/or investors. The creditors of an
institution under receivership shall stand on equal footing. Applying Art. 2251(2), since Cordova was then
a claimant for the value of the shares, he had to be treated as an ordinary creditor insofar as the value of
his shares was concerned. He was entitled to a rate of recovery of only 15% of his money claim.

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RA 10142The Insolvency Law

THE FINANCIAL REHABILITATION AND INSOLVENCY ACT [R.A. 10142, FRIA]

GENERAL CONCEPTS
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.
Art. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent
with this Code.
R.A. 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
insolvent debtors. The rehabilitation or liquidation shall be made with a view to ensure or
maintain certainty and predictability in commercial affairs, preserve and maximize the value of
the assets of these debtors, recognize creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not
feasible, it is in the interest of the State to facilitate a speedy and orderly liquidations of these
debtors assets and the settlement of their obligations.
Sec. 4. Definition of terms.
(h) Creditor shall refer to a natural or juridical person which has a claim against the debtor
that arose on or before the commencement date.
(k) Debtor shall refer to, unless specifically excluded by a provision of this Act, a sole
proprietorship duly registered with the Department of Trade and Industry (DTI), a partnership
duly registered with the Securities and Exchange Commission (SEC), a corporation duly
organized and existing under Philippine laws, or an individual debtor who has become
insolvent as defined herein.
(n) Group of debtors shall refer to and can cover only: (1) corporations that are financially
related to one another as parent corporations, subsidiaries or affiliates; (2) partnerships that
are owned more than fifty percent (50%) by the same person; and (3) single proprietorships
that are owned by the same person. When the petition covers a group of debtors, all reference
under these rules to debtor shall include and apply to the group of debtors.
(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.
(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.
Section 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

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injustice, in which event the procedures set forth in prior laws and regulations shall apply.
Section 147. Application to Pending Contracts. This Act shall apply to all contracts of the
debtor regardless of the date of perfection.
Section 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.

Although constitutionally a debtor is guaranteed non-imprisonment for nonpayment of a debt, the Civil Code subjects all the debtors property, present and future,
to the fulfillment of his obligations. Even so, there is still a risk that the debtor will be
unable to pay the debt as it falls due, hence the need for proceedings in insolvency.
Fun Fact! Bankruptcy is the same as insolvency, but the former term is not formally
used in our jurisdiction. It is from the Latin bancus ruptus, or broken table and the
medieval Italian custom of banca rotta, literally the breaking of the counter of a
financially failed merchant. I miss Sir Labitag.
Two Concepts of Insolvency [Based on Sec. 4(p)]
1. Illiquidity the debtor possesses sufficient property but is unable to pay its
liabilities when they fall due; and
2. Balance Sheet Insolvency the debtors liabilities [i.e. the monetary claims
against the debtor] are greater than its assets.
What are insolvency proceedings?
Section 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.
Sec. 4. (bb) Party to the proceedings shall refer to the debtor, a creditor, the unsecured
creditors' committee, a stakeholder, a party with an ownership interest in property held by the
debtor, a secured creditor, the rehabilitation receiver, liquidator or any other juridical or
natural person who stands to be benefited or injured by the outcome of the proceedings and
whose notice of appearance is accepted by the court.
(cc) Possessory lien shall refer to a lien on property, the possession of which has been
transferred to a creditor or a representative or agent thereof.
(dd) Proceedings shall refer to judicial proceedings commenced by the court's acceptance of a
petition filed under this Act.

Insolvency proceedings are the statutory procedures by which a debtor obtains

financial relief and undergoes judicially supervised reorganization or liquidation of its
assets for the benefit of its creditors. The purpose of insolvency proceedings is found in
Sec. 2 of the FRIA.
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Civil and Criminal Liability in Insolvency Proceedings

For emphasis, the insolvent debtor will not be punished for non-payment of debt.
What is punished by the FRIA is [generally] dishonesty or fraud perpetrated by any
person listed in the provision after the commencement of insolvency proceedings.
Section 10. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a
Partnership, or Directors and Officers. Individual debtor, owner of a sole proprietorship,
partners in a partnership, or directors and officers of a debtor shall be liable for double the
value of the property sold, embezzled or disposed of or double the amount of the transaction
involved, whichever is higher to be recovered for benefit of the debtor and the creditors, if
they, having notice of the commencement of the proceedings, or having reason to believe that
proceedings are about to be commenced, or in contemplation of the proceedings, willfully
commit the following acts:
(a) Dispose or cause to be disposed of any property of the debtor other than in the ordinary
course of business or authorize or approve any transaction in fraud of creditors or in a manner
grossly disadvantageous to the debtor and/or creditors; or
(b) Conceal or authorize or approve the concealment, from the creditors, or embezzles or
misappropriates, any property of the debtor.
The court shall determine the extent of the liability of an owner, partner, director or officer
under this section. In this connection, in case of partnerships and corporations, the court shall
consider the amount of the shareholding or partnership or equity interest of such partner,
director or officer, the degree of control of such partner, director or officer over the debtor, and
the extent of the involvement of such partner, director or debtor in the actual management of
the operations of the debtor.
Section 145. Penalties. An owner, partner, director, officer or other employee of the debtor who
commits any one of the following acts shall, upon conviction thereof, be punished by a fine of
not more than One million pesos (Php 1, 000,000.00) and imprisonment for not less than
three(3) months nor more than five (5) years for each offense;
(a) if he shall, having notice of the commencement of the proceedings, or having reason to
believe that proceedings are about to be commented, or in contemplation of the proceedings
hide or conceal, or destroy or cause to be destroyed or hidden any property belonging to the
debtor or if he shall hide, destroy, after mutilate or falsify, or cause to be hidden, destroyed,
altered, mutilated or falsified, any book, deed, document or writing relating thereto; if he
shall, with intent to defraud the creditors of the debtor, make any payment sale, assignment,
transfer or conveyance of any property belongings to the debtor
(b) if he shall, having knowledge belief of any person having proved a false or fictitious claim
against the debtor, fail to disclose the same to the rehabilitation receiver of liquidator within
one (1) month after coming to said knowledge or belief; or if he shall attempt to account for
any of the debtors property by fictitious losses or expense; or
(c) if he shall knowingly violate a prohibition or knowingly fail to undertake an obligation
established by this Act.

SUSPENSION OF PAYMENTS
Section 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

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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 assets; and (c) a proposed agreement with his creditors.
Section 95. Action on the Petition. If the court finds the petition sufficient in form and
substance, it shall, within five (5) working days from the filing of the petition, issue an Order:
(a) calling a meeting of all the creditors named in the schedule of debts and liabilities at such
time not less than fifteen (15) days nor more than forty (40) days from the date of such Order
and designating the date, time and place of the meeting;
(b) directing such creditors to prepare and present written evidence of their claims before the
scheduled creditors' meeting;
(c) directing the publication of the said order in a newspaper of general circulation published
in the province or city in which the petition is filed once a week for two (2) consecutive weeks,
with the first publication to be made within seven (7) days from the time of the issuance of the
Order;
(d) directing the clerk of court to cause the sending of a copy of the Order by registered mail,
postage prepaid, to all creditors named in the schedule of debts and liabilities;
(e) forbidding the individual debtor from selling, transferring, encumbering or disposing in any
manner of his property, except those used in the ordinary operations of commerce or of
industry in which the petitioning individual debtor is engaged so long as the proceedings
relative to the suspension of payments are pending;
(f) prohibiting the individual debtor from making any payment outside of the necessary or
legitimate expenses of his business or industry, so long as the proceedings relative to the
suspension of payments are pending; and
(g) appointing a commissioner to preside over the creditors' meeting.

Definition
Suspension of payments is a judicial insolvency proceeding by which an individual
debtor submits, for approval by his creditors, a proposed agreement containing
propositions delaying or extending time of payment of his debts. In other words,
suspension of payments is a statutory device allowing a distressed debtor to defer
payment of his debts by presenting a plan to repay creditors over time.
Applicability of Provision to Debtors [And more things on debtors, haha]
Given the wording, only an individual debtor can file a petition for suspension of
payments.
Partnerships and corporations may only properly avail of rehabilitation, not
suspension of payments. On the other hand, an individual debtor may not avail of
rehabilitation unless he is a sole proprietorship duly registered with the DTI. [I guess
the reason is what Sir pointed out, the grey area of whether a sole proprietorship is a
juridical debtor or an individual one. A sole proprietorship, unlike an individual debtor
or other juridical debtors, is not precluded from availing of any of the remedies under
the FRIA.]
Effects/Corollaries of Petition
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Section 96. Actions Suspended. Upon motion filed by the individual debtor, the court may issue
an order suspending any pending execution against the individual debtor. Provided, 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.

1. Automatic Stay
From the time of the filing of the petition and for so long as the proceedings are
pending, there is an automatic stay that prevents all creditors, except those specifically
excepted by law, from suing or instituting proceedings to collect claims from the debtor.
2. Suspension Order
An individual debtor may file a motion before the court asking for a suspension
order. Only from the time the court issues it will any pending execution against the
debtors property be suspended. This suspension order will lapse three months after its
issuance if no agreement is accepted by the creditors, or as soon as the agreement is
denied.
Properties held as security by secured creditors do not fall under the prohibition
of a suspension order. [E.g. pledge]
b) As soon as such agreement is denied
3. Injunction Against Debtor
If the petition is found to be sufficient in form and substance, the court shall issue
an order that among other things prohibits the debtor from:
a. Selling, transferring, encumbering, or disposing in any manner 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.
Procedure
Section 97. Creditors' Meeting. The presence of creditors holding claims amounting to at least
three-fifths (3/5) of the liabilities shall be necessary for holding a meeting. The commissioner
appointed by the court shall preside over the meeting and the clerk of court shall act as the
secretary thereof, subject to the following rules:
(a) The clerk shall record the creditors present and amount of their respective claims;
(b) The commissioner shall examine the written evidence of the claims. If the creditors present
hold at least three-fifths (3/5) of the liabilities of the individual debtor, the commissioner shall
declare the meeting open for business;

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(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.
Section 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.
Section 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.
Section 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 court
shall declare the proceedings terminated and the creditors shall be at liberty to exercise the
rights which may correspond to them.
Section 101. Effects of Approval of Proposed Agreement. If the decision of the majority of the
creditors to approve the proposed agreement or any amendment thereof made during the
creditors' meeting is uphold by the court, or when no opposition or objection to said decision
has been presented, the court shall order that the agreement be carried out and all parties
bound thereby to comply with its terms.
The court may also issue all orders which may be necessary or proper to enforce the
agreement on motion of any affected party. The Order confirming the approval of the proposed
agreement or any amendment thereof made during the creditors' meeting shall be binding
upon all creditors whose claims are included in the schedule of debts and liabilities submitted

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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.
Section 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.

1. Duties of the Appointed Commissioner

a. Preside over the creditors meeting;
b. Examine the written evidence of the claims. If the creditors present hold at
least 3/5 of the liabilities of the individual debtor, the commissioner shall
declare the meeting open for business;
c. 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 the creditors taking part in the voting
shall sign the affirmed propositions.
2. Creditors Meeting
a. For there to be any meeting at all, the creditors present must hold claims amounting
to 3/5 of the debtors liabilities [quorum].
b. The creditors and the individual debtor shall discuss the propositions in the
agreement and put them to a vote. A majority is necessary for a proposition to pass.
That majority is determined by
i. 2/3 of the creditors voting unite upon the same proposition; and
ii. claims represented by the majority vote amount to at least 3/5 of the total
liabilities of the debtor
c. Protests or objections to the majority decision on any proposition shall be drawn up
after voting. A creditor may file an objection with the court within ten days from the
date of the last creditors meeting, but it is necessary that the dissenter was present at
the meeting where the proposition objected to was approved. The law provides specific
causes of action for filing the objection. These are:
i. Defects in the call for that meeting, in the holding thereof, and in the
deliberations thereat which prejudiced the rights of the creditors;
ii. Fraudulent connivance between one or more creditors and the individual
debtor to vote in favor of the proposed agreement; or
iii. 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.
What happens if the court decides to annul the creditors meeting on any of the
above grounds? The proceedings will be terminated and the creditors shall be at
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liberty to exercise the rights which may correspond to them.

3. Approval of the Proposed Agreement
The creditor-approved agreement still needs to be submitted to the court, which
will decide whether to uphold it or not. If there are no objects or oppositions, the court
shall order [confirmation order] the agreement to be carried out and all parties bound
thereby to comply with its terms.
Exceptions to the binding effect of the confirmation order:
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 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.
The court may also issue all orders which may be necessary or proper to enforce
the agreement, on motion of any affected party.
4. Failure of Debtor to Perform Agreement
Whole or partial failure of the debtor to perform will result in the creditors
reacquiring the rights they had against the debtor before the agreement.
Treatment of Claims
1. Secured Creditor [one whos claim is secured by a lien, i.e. a statutory or
contractual claim or judicial charge on real or personal property that legally
entitles a creditor to resort to said property for payment of the claim or debt
secured by such lien]
a. Claims are not covered by the automatic stay;
b. Property held as security is similarly not covered by the suspension order;
c. Secured creditors need not attend or vote during the creditors meeting and
are not bound by the proposed agreement UNLESS they waive this right by
voting during the meeting; and
d. Secured creditors are not bound by the agreement confirmed by the court,
unless they waived this right by voting during the meeting.
2. Exempt Claims [Creditors having claims for personal labor, maintenance,
expenses of last illness and funeral of the wife or children of the debtor, incurred
in the 60 days immediately prior to the filing of the petition]
a. Not covered by the automatic stay;
b. Exempt creditors need not attend or vote during the creditors meeting and are
not bound by the proposed agreement UNLESS they waive this right by voting
during the meeting; and
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c. Exempt creditors are not bound by the agreement confirmed by the court,
unless they waived this right by voting during the meeting.
3. Excluded Claims [Claims of creditors who were not properly summoned]
Creditors whose claims were excluded are not bound by the proposed agreement
confirmed by the court.
REHABILITATION
General Concepts
Definition
Sec. 4, (gg) Rehabilitation shall refer to the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of payments
projected in the plan, more if the debtor continues as a going concern than if it is immediately
liquidated.

Rehabilitation is the process of reorganizing a debtors financial affairs so that the

debtor may continue to exist as a financial entity, with creditors satisfying their claims
from the debtors future earnings. It contemplates a continuance of financial life and
activities in an effort to restore and reinstate a debtor to its former position of
successful operation and solvency. Considering the definition in the law, there are two
important conditions for rehabilitation:
1. Economic feasibility; and
2. Present value recovery for creditors.
Absent these conditions, rehabilitation is not proper.
Purpose
The purpose of rehab is to enable an insolvent debtor to gain a new lease on life
while allowing creditors to be paid from the debtors earnings. It benefits the
employees, creditors, owners, and in a larger sense the general public.
State of Assets
During rehab 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 another
through the expediency of an attachment, execution, or otherwise.
Relationship of Creditors
According to Professor Somera, the key phrase is equality is equity. All the creditors
should stand on equal footing, and not one of them should be given any preference by
paying one or some of them ahead of the others.
Court-Supervised Rehabilitation
A. Voluntary Proceedings
Section 4 (rr) Voluntary proceedings shall refer to proceedings initiated by the debtor.
Section 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

170

members, in a stockholder's or member's meeting duly called for the purpose, an insolvent
debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation
with the court and on the grounds hereinafter specifically provided. The petition shall be
verified to establish the insolvency of the debtor and the viability of its rehabilitation, and
include, whether as an attachment or as part of the body of the petition, as a minimum the
following:
(a) Identification of the debtor, its principal activities and its addresses;
(b) Statement of the fact of and the cause of the debtor's insolvency or inability to pay its
obligations as they become due;
(c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on the form of relief
requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors with their
addresses, amounts of claims and collaterals, or securities, if any;
(g) An inventory of all its assets including receivables and claims against third parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of rehabilitation receiver; and
(j) Other documents required to be filed with the petition pursuant to this Act and the rules of
procedure as may be promulgated by the Supreme Court.
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 the group is essential under the terms and conditions of the proposed Rehabilitation Plan.

Who may file the petition?

By definition, voluntary proceedings are initiated by the debtor. The debtor in
rehabilitation is a juridical person. The debtor may file the petition for rehabilitation
proceedings upon approval of
1. For Sole Proprietorships, the owner;
2. For Partnerships, the majority of the partners; and
3. For corporations, the majority of the board of directors or trustees, and
authorized by stockholders representing 2/3 outstanding capital stock [stock
corp] or a vote of 2/3 of the members [non-stock].
B. Involuntary Proceedings
Section 4, (r) Involuntary proceedings shall refer to proceedings initiated by creditors.
Section 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

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(Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital stock or

partners' contributions, whichever is higher, may initiate involuntary proceedings against the
debtor by filing a petition for rehabilitation with the court if:
(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that the due
and demandable payments thereon have not been made for at least sixty (60) days or that the
debtor has failed generally to meet its liabilities as they fall due; or
(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the
debtor that will prevent the debtor from paying its debts as they become due or will render it
insolvent.
Section 14. Petition to Initiate Involuntary Proceedings. The creditor/s' petition for
rehabilitation shall be verified to establish the substantial likelihood that the debtor may be
rehabilitated, and include:
(a) identification of the debtor its principal activities and its address;
(b) the circumstances sufficient to support a petition to initiate involuntary rehabilitation
proceedings under Section 13 of this Act;
(c) the specific relief sought under this Act;
(d) a Rehabilitation Plan;
(e) the names of at least three (3) nominees to the position of rehabilitation receiver;
(f) other information that may be required under this Act depending on the form of relief
requested; and
(g) other documents required to be filed with the petition pursuant to this Act and the rules of
procedure as may be promulgated by the Supreme Court.

In order to initiate the involuntary rehabilitation proceedings, the essential

requisites are:
1. The required value of claims: at least 1M pesos [aggregate, if more than one
creditor] or 25% of the subscribed capital stock or partners contributions,
whichever is higher; and
2. The circumstance requiring rehabilitation is alleged [and must thereafter be
established]. These circumstances are:
a. Payments on established claims [no genuine issue of fact or law confronting
said claim] that are due and demandable have not been made for at least 60
days; or
b. The debtor has failed generally to meet its liabilities as they fall due
[illiquidity]; or
c. A creditor, other than the petitioners, has initiated foreclosure proceedings
against the debtor that will prevent the debtor from paying its debts as they
become due [illiquidity] or will render it insolvent [in the balance-sheet
concept].
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C. Provisions Common to Voluntary and Involuntary Proceedings

1. The Commencement Order
Section 4 (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.
(e) Commencement Order shall refer to the order issued by the court under Section 16 of this
Act.
Section 15. Action on the Petition. If the court finds the petition for rehabilitation to be
sufficient in form and substance, it shall, within five (5) working days from the filing of the
petition, issue a Commencement Order. If, within the same period, the court finds the petition
deficient in form or substance, the court may, in its discretion, give the petitioner/s a
reasonable period of time within which to amend or supplement the petition, or to submit such
documents as may be necessary or proper to put the petition in proper order. In such case, the
five (5) working days provided above for the issuance of the Commencement Order shall be
reckoned from the date of the filing of the amended or supplemental petition or the
submission of such documents.
Section 16. Commencement of Proceedings and Issuance of a Commencement Order. The
rehabilitation proceedings shall commence upon the issuance of the Commencement Order,
which shall:
(a) identify the debtor, its principal business or activity/ies and its principal place of business;
(b) summarize the ground/s for initiating the proceedings;
(c) state the relief sought under this Act and any requirement or procedure particular to the
relief sought;
(d) state the legal effects of the Commencement Order, including those mentioned in Section
17 hereof;
(e) declare that the debtor is under rehabilitation;
(f) direct the publication of the Commencement Order in a newspaper of general circulation in
the Philippines once a week for at least two (2) consecutive weeks, with the first publication to
be made within seven (7) days from the time of its issuance;
(g) If the petitioner is the debtor direct the service by personal delivery of a copy of the
petition on each creditor holding at least ten percent (10%) of the total liabilities of the debtor
as determined from the schedule attached to the petition within five (5) days; if the
petitioner/s is/are creditor/s, direct the service by personal delivery of a copy of the petition
on the debtor within five (5) days;
(h) appoint a rehabilitation receiver who may or not be from among the nominees of the
petitioner/s and who shall exercise such powers and duties defined in this Act as well as the
procedural rules that the Supreme Court will promulgate;
(i) summarize the requirements and deadlines for creditors to establish their claims against
the debtor and direct all creditors to their claims with the court at least five (5) days before
the initial hearing;
(j) direct Bureau of internal Revenue (BIR) to file and serve on the debtor its comment on or
opposition to the petition or its claim/s against the debtor under such procedures as the

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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.
Section 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

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Provided. However, That the court may allow the continuation of cases on other courts where
the debtor had initiated the suit.
Attempts to seek legal of other resource against the debtor outside these proceedings shall be
sufficient to support a finding of indirect contempt of court.
Section 19. Waiver of taxes and Fees Due to the National Government and to Local
Government Units (LGUs). Upon issuance of the Commencement Order by the court, and until
the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the
imposition of all taxes and fees including penalties, interests and charges thereof due to the
national government or to LGUs shall be considered waived, in furtherance of the objectives of
rehabilitation.
Section 21. Effectivity and Duration of Commencement Order. Unless lifted by the court, the
Commencement Order shall be for the effective for the duration of the rehabilitation
proceedings for as long as there is a substantial likelihood that the debtor will be successfully
rehabilitated. In determining whether there is substantial likelihood for the debtor to be
successfully rehabilitated, the court shall ensure that the following minimum requirements are
met:
(a) The proposed Rehabilitation Plan submitted complies with the minimum contents
prescribed by this Act;
(b) There is sufficient monitoring by the rehabilitation receiver of the debtor's business for the
protection of creditors;
(c) The debtor has met with its creditors to the extent reasonably possible in attempts to
reach consensus on the proposed Rehabilitation Plan;
(d) The rehabilitation receiver submits a report, based on preliminary evaluation, stating that
the underlying assumptions and the goals stated in the petitioner's Rehabilitation Plan are
realistic reasonable and reasonable or if not, there is, in any case, a substantial likelihood for
the debtor to be successfully rehabilitated because, among others:
(1) there are sufficient assets with/which to rehabilitate the debtor;
(2) there is sufficient cash flow to maintain the operations of the debtor;
(3) the debtor's, partners, stockholders, directors and officers have been acting in good faith
and which due diligence;
(4) the petition is not s sham filing intended only to delay the enforcement of the rights of the
creditor's or of any group of creditors; and
(5) the debtor would likely be able to pursue a viable Rehabilitation Plan;
(e) The petition, the Rehabilitation Plan and the attachments thereto do not contain any
materially false or misleading statement;
(f) If the petitioner is the debtor, that the debtor has met with its creditor/s representing at
least three-fourths (3/4) of its total obligations to the extent reasonably possible and made a
good faith effort to reach a consensus on the proposed Rehabilitation Plan if the petitioner/s
is/are a creditor or group of creditors, that/ the petitioner/s has/have met with the debtor and
made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; and
(g) The debtor has not committed acts misrepresentation or in fraud of its creditor/s or a

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group of creditors.

Effectivity of the Commencement Order

The order is effective for the duration of the rehab proceedings, as long as there is a
substantial likelihood that the debtor will be successfully rehabbed. Sec. 21, supra, lists
the bases for determination of that substantial likelihood.
Effects of Commencement Order
If the court finds that the petition is sufficient in form and in substance, it will
issue the commencement order that operates as a preventive measure to ensure that
there is and will continue to be a substantial likelihood for successful rehabilitation.
This means that upon issuance
1. The powers of the Rehabilitation Receiver are vested, with emphasis on its right
to review and obtain all records of the debtor;
2. All extrajudicial attempts to collect or enforce a claim, setoffs, and the perfection
of all liens are voided;
3. All legal proceedings by and against the debtor, except those excepted by the
FRIA or by order of the rehab court, are consolidated in the rehab court and any
attempt to circumvent its mandate constitutes indirect contempt;
4. All taxes and fees, including penalties, interests, and charges thereof, due to the
national government or to LGUs shall be considered waived, in furtherance of the
objectives of rehab. This applies only from the time of issuance until the approval
of the rehab plan or dismissal of the petition, whichever is earlier.
2. Stay or Suspension Order
Sec. 16 (q) includes 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.
Section 4, (c) Claim shall refer to all claims or demands of whatever nature or character
against the debtor or its property, whether for money or otherwise, liquidated or unliquidated,
fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited
to; (1) all claims of the government, whether national or local, including taxes, tariffs and
customs duties; and (2) claims against directors and officers of the debtor arising from acts
done in the discharge of their functions falling within the scope of their
authority:Provided, That, this inclusion does not prohibit the creditors or third parties from
filing cases against the directors and officers acting in their personal capacities.
Section 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

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shall apply to government financial institutions, notwithstanding provisions in their charters

or other laws to the contrary.

Purpose
The stay or suspension order is issued 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. To allow other actions or proceedings
to continue would only add to the burden of the receiver. The 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 to litigations in various fora.
Two Orders
The provision covers two distinct orders
a. The Stay Order Against the Creditors which:
i.
Suspends all actions or proceedings, in court or otherwise, for the
enforcement of claims against the debtor; and
ii.
Suspends all actions to enforce any judgment, attachment, or other
provisional remedies against the debtor.
b. The Injunction Against the Debtor which:
i.
Prohibits the sale, encumbrance, transfer, or disposal in any manner of its
properties except in the ordinary course of business; and
ii.
Prohibits any payment of its liabilities outstanding as of the commencement
date except as provided in the FRIA.
Ruby Industrial v. CA [1998]
RUBY had liquidity problems, for which it petitioned the SEC for help. A rehabilitation plan where
BENHAR would help RUBY was drawn up, but such faced opposition from the unsecured creditors of
RUBY. Despite the implementation of the BENHAR/RUBY Rehabilitation Plan being enjoined by an
injunction issued by the SEC, BENHAR still paid off some of RUBYs secured debtors and deeds of
assignment were executed in its favor. The CA declared such to be void. BENHAR later proposed that it
be reimbursed by RUBY for what it paid and that it be appointed in a new management committee
formed by SEC- which plan, the SEC approved. The SC held that the SEC acted erroneously, having gone
against the previous final decision of the CA. It also held that in rehabilitation, there must be equality in
equity between the creditors of a floundering corporation- no one must be a step ahead of the others.
RCBC v. IAC [1999]
BF Homes filed a Petition for Rehabilitation and for Declaration of Suspension of Payments with the
SEC. One of the creditors listed in its inventory of creditors and liabilities was RCBC. RCBC requested
the Provincial Sheriff to extra-judicially foreclose its real estate mortgage on some properties of BF
Homes. BF Homes contended that SEC had already assumed exclusive jurisdiction over those assets from
the filing of the petition.
The Court ruled that the issue of whether or not preferred creditors of distressed corporations
stand on equal footing with all other creditors gains relevance and materiality only upon the appointment
of a management committee, rehabilitation receiver, board, or body. Insofar as RCBC is concerned, the
provisions of PD No. 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. In fine,
suspension of actions for claims commences only from the time a management committee or receiver is
appointed by the SEC [or the court, in the case of the FRIA].

2-A. Exceptions to Stay or Suspension Order

Section 18. Exceptions to the Stay or Suspension Order. The Stay or Suspension Order shall not
apply:

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(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 nondisputed claim;
(c) to the enforcement of claims against sureties and other persons solidarily liable with the
debtor, and third party or accommodation mortgagors as well as issuers of letters of credit,
unless the property subject of the third party or accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court upon recommendation by the
rehabilitation receiver;
(d) to any form of action of customers or clients of a securities market participant to recover
or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the
latter's business as well as any action of such securities market participant or the appropriate
regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;
(e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant
to a securities pledge or margin agreement for the settlement of securities transactions in
accordance with the provisions of the Securities Regulation Code and its implementing rules
and regulations;
(f) the clearing and settlement of financial transactions through the facilities of a clearing
agency or similar entities duly authorized, registered and/or recognized by the appropriate
regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form
of actions of such agencies or entities to reimburse themselves for any transactions settled for
the debtor; and
(g) any criminal action against individual debtor or owner, partner, director or officer of a
debtor shall not be affected by any proceeding commend under this Act.
Section 16, The Commencement Order shall
(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;
Section 4, (a) Administrative expenses shall refer to those reasonable and necessary
expenses:
(1) incurred or arising from the filing of a petition under the provisions of this Act;
(2) arising from, or in connection with, the conduct of the proceedings under this Act,
including those incurred for the rehabilitation or liquidation of the debtor;
(3) incurred in the ordinary course of business of the debtor after the commencement date;
(4) for the payment of new obligations obtained after the commencement date to finance the
rehabilitation of the debtor;

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(5) incurred for the fees of the rehabilitation receiver or liquidator and of the professionals
engaged by them; and
(6) that are otherwise authorized or mandated under this Act or such other expenses as may
be allowed by the Supreme Court in its rules.
Pacific Wide v. Puerto Azul [2009]
PALI, at the height of its business venture, entered into different loans with different banks, and
mortgaged several of its properties as well as those of its accommodation mortgagors. It went bankrupt
later. The RTC ordered rehabilitation instead of liquidation. Meanwhile, one of the properties mortgaged
was being foreclosed. The RTC ordered the exclusion of the said property, and that it could be foreclosed.
This property actually belonged to one of PALIs accommodation mortgagors. The SC upheld this
decision, citing the new Rules on Corporate Rehabilitation, where it is provided that the stay order shall
not cover foreclosure by a creditor of a property not belonging to a debtor under corporate
rehabilitation.
MWSS v. Judge Daway [2004]
The story started when MWSS granted Maynilad a 20-year period to manage existing MWSS water
delivery and sewerage services. In exchange, Maynilad would pay concession fees. To ensure payment,
Maynilad opened a Letter of Credit with Citicorp in the amount of US$120M in MWSS favor. After a few
years of disagreements, MWSS obtained a ruling from the Appeals Panel that Maynilad should pay up.
The crafty Maynilad lawyers filed a petition for corporate rehabilitation with Judge Daways court. Judge
Daway granted the petition and issued a Stay Order, effectively prohibiting Maynilads assets from being
touched. When MWSS wrote to Citicorp to collect on the Letter of Credit Judge Daway issued another
Order to stop MWSS on pain of contempt.
The SC found that the RTC of QC had gravely abused its discretion in issuing the second Order.
The SC found that the Letter of Credit did not fall under the assets of Maynilad that were protected by
the Stay Order. The SC found that the claim being made was not on the assets of Maynilad, but on an
entity that Maynilad itself put forward to answer for non-performance of the terms of the Concession
Agreement.
It is necessary that the assets of the debtor come within the courts jurisdiction to secure
the same for the benefit of creditors. The reference to all those affected by the proceedings covers
creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation
which should be reflected in its audited financial statements. Maynilads Financial Statements as of
December 31, 2001 and 2002 do not show the Irrevocable Standby Letter of Credit as part of its assets or
liabilities, and by Maynilads own admission it was not. In issuing the Nov. 27, 2003 Order, enjoining
MWSS from claiming from an asset that did not belong to the debtor and over which it did not acquire
jurisdiction, the rehabilitation court acted in excess of its jurisdiction.

3. Subsequent Actions
Section 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.

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Section 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.
Section 24. Report of the Rehabilitation Receiver. Within forty (40) days from the initial
hearing and with or without the comments of the creditors or any of them, the rehabilitation
receiver shall submit a report to the court stating his preliminary findings and
recommendations on whether:
(a) the debtor is insolvent and if so, the causes thereof and any unlawful or irregular act or
acts committed by the owner/s of a sole proprietorship partners of a partnership or directors
or officers of a corporation in contemplation of the insolvency of the debtor or which may have
contributed to the insolvency of the debtor;
(b) the underlying assumptions, the financial goals and the procedures to accomplish such
goals as stated in the petitioner's Rehabilitation Plan are realistic, feasible and reasonable;
(c) there is a substantial likelihood for the debtor to be successfully rehabilitated;
(d) the petition should be dismissed; and
(e) the debtor should be dissolved and/or liquidated.
Section 25. Giving Due Course to or Dismissal of Petition, or Conversion of Proceedings. Within
ten (10) days from receipt of the report of the rehabilitation receiver mentioned in Section 24
hereof the court may:
(a) give due course to the petition upon a finding that:
(1) the debtor is insolvent; and
(2) there is a substantial likelihood for the debtor to be successfully rehabilitated;
(b) dismiss the petition upon a finding that:
(1)debtor is not insolvent;
(2) the petition i8 a sham filing intended only to delay the enforcement of the rights of the
creditor/s or of any group of creditors;
(3)the petition, the Rehabilitation Plan and the attachments thereto contain any materially
false or misleading statements; or
(4)the debtor has committed acts of misrepresentation or in fraud of its creditor/s or a group
of creditors;
(c)convert the proceedings into one for the liquidation of the debtor upon a finding that:
(1)the debtor is insolvent; and
(2)there is no substantial likelihood for the debtor to be successfully rehabilitated as
determined in accordance with the rules to be promulgated by the Supreme Court.
Section 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

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Plan and submit the same or a new one to the court within a period of not more than ninety
(90) days.
The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation
proceedings pending before it to arbitration or other modes of dispute resolution, as provided
for under Republic Act No. 9285, Or the Alternative Dispute Resolution Act of 2004, should it
determine that such mode will resolve the dispute more quickly, fairly and efficiently than the
court.
Section 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 Broken-Down:
a. After the commencement orders and stay or suspension orders are issued, there
will be an initial hearing.
At this initial hearing the court will
i.

Determine creditors who have made timely and proper filing of their
notice of claims
Q: What happens if the creditor does not file a notice of claim? He will
not be able to participate in the proceedings but will still be entitled to
distribution, provided he submits a belated claim. If he does not submit
at all, sorry nalang.

ii.

Hear and determine any objection to the rehab receiver/appoint a new

one if necessary

iii.

Direct creditors to comment on the petition and rehab plan

iv.

Direct the receiver to evaluate the financial condition of the debtor, after
which the receiver must submit a rehab report within 40 days from the
initial
hearing

b. The court may decide to

i.

Give the petition due course upon a finding that

The debtor is insolvent; and
There is a substantial likelihood for the debtor to be successfully
rehabbed
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In this instance the court will direct the receiver to review, revise, and/or
recommend action on the rehab plan within a period of 90 days.
ii.

Dismiss the petition because

The debtor is not insolvent;
The petition is a sham intended to delay the enforcement of the creditors
rights;
The petition/rehab plan/any attachments thereto contain materially false
or misleading statements; or
Debtor has committed acts of misrepresentation or in fraud of creditors;
In this instance, the court at its discretion may order the payment of
damages to the parties who may have been injured by the petition, to the
extent of such injury.

iii.

Convert the proceedings into liquidation proceedings if

The debtor is insolvent; and
No chance that it will be rehabbed.

4. The Rehabilitation Receiver

Section 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.
Section 28. Who May Serve as a Rehabilitation Receiver. Any qualified natural or juridical
person may serve as a rehabilitation receiver: Provided, That if the rehabilitation receiver is a
juridical entity, it must designate a natural person/s who possess/es all the qualifications and
none of the disqualifications as its representative, it being understood that the juridical entity
and the representative/s are solidarily liable for all obligations and responsibilities of the
rehabilitation receiver.
Section 29. Qualifications of a Rehabilitation Receiver. The rehabilitation receiver shall have
the following minimum qualifications:
(a)A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately
preceding his nomination;
(b)Of good moral character and with acknowledged integrity, impartiality and independence;
(c)Has the requisite knowledge of insolvency and other relevant commercial laws, rules and
procedures, as well as the relevant training and/or experience that may be necessary to
enable him to properly discharge the duties and obligations of a rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such conflict of interest may be waived, expressly

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or impliedly, by a party who may be prejudiced thereby.

Other qualifications and disqualifications of the rehabilitation receiver shall be set forth in
procedural rules, taking into consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.
Section 30. Initial Appointment of the Rehabilitation Receiver. The court shall initially appoint
the rehabilitation receiver, who may or may not be from among the nominees of the petitioner,
However, at the initial hearing of the petition, the creditors and the debtor who are not
petitioners may nominate other persons to the position. The court may retain the
rehabilitation receiver initially appointed or appoint another who mayor may not be from
among those nominated.
In case the debtor is a securities market participant, the court shall give priority to the
nominee of the appropriate securities or investor protection fund.
If a qualified natural person or entity is nominated by more than fifty percent (50%) of the
secured creditors and the general unsecured creditors, and satisfactory evidence is submitted,
the court shall appoint the creditors' nominee as rehabilitation receiver.
Section 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 all the claims against the debtor;
(e)To take possession, custody and control, and to preserve the value of all the property of the
debtor;
(f)To sue and recover, with the approval of the court, all amounts owed to, and all properties
pertaining to the debtor;
(g)To have access to all information necessary, proper or relevant to the operations and
business of the debtor and for its rehabilitation;
(h) To sue and recover, with the. approval of the court, all property ormoney of the debtor
paid, transferred or disbursed in fraud of the debtor or its creditors, or which constitute undue
preference of creditor/s;
(i) To monitor the operations and the business of the debtor to ensure that no payments or
transfers of property are made other than in the ordinary course of business;
(j) With the court's approval, to engage the services of or to employ persons or entities to
assist him in the discharge of his functions;
(k) To determine the manner by which the debtor may be best rehabilitated, to review) revise

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and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the
court for approval;
(1) To implement the Rehabilitation Plan as approved by the court, if 80 provided under the
Rehabilitation Plan;
(m) To assume and exercise the powers of management of the debtor, if directed by the court
pursuant to Section 36 hereof;
(n) To exercise such other powers as may, from time to time, be conferred upon him by the
court; and
To submit a status report on the rehabilitation proceedings every quarter or as may be
required by the court motu proprio. or upon motion of any creditor. or as may be provided, in
the Rehabilitation Plan.
Unless appointed by the court, pursuant to Section 36 hereof, the rehabilitation receiver shall
not take over the management and control of the debtor but may recommend the appointment
of a management committee over the debtor in the cases provided by this Act.
Section 32. Removal of the Rehabilitation Receiver. The rehabilitation receiver may be removed
at any time by the court either motu proprio or upon motion by any creditor/s holding more
than fifty percent (50%) of the total obligations of the debtor, on such grounds as the rules of
procedure may provide which shall include, but are not limited to, the following:
(a) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree
of care in the performance of his duties and powers;
(b) Lack of a particular or specialized competency required by the specific case;
(c) Illegal acts or conduct in the performance of his duties and powers;
(d) Lack of qualification or presence of any disqualification;
(e) Conflict of interest that arises after his appointment; and
(f) Manifest lack of independence that is detrimental to the general body of the stakeholders.
Section 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.
Section 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.
Section 35. Vacancy. In case the position of rehabilitation receiver is vacated for any reason
whatsoever, the court shall direct the debtor and the creditors to submit the name/s of their
nominee/s to the position. The court may appoint any of the qualified nominees. or any other
person qualified for the position.

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Section 39. Employment of Professionals. Upon approval of the court, and after notice and
hearing, the rehabilitation receiver or the management committee may employ specialized
professionals and other experts to assist each in the performance of their duties. Such
professionals and other experts shall be considered either employees or independent
contractors of the rehabilitation receiver or the management committee, as the case may be.
The qualifications and disqualifications of the professionals and experts may be set forth in
procedural rules, taking into consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.

Section 40. Conflict of Interest. No person may be appointed as a rehabilitation receiver,

member of a_ management committee, or be employed by the rehabilitation receiver or the
management committee if he has a conflict of interest.
An individual shall be deemed to have a conflict of interest if he is so situated as to be
materially influenced in the exercise of his judgment for or against any party to the
proceedings. Without limiting the generality of the foregoing, an individual shall be deemed to
have a conflict of interest if:
(a) he is a creditor, owner, partner or stockholder of the debtor;
(b) he is engaged in a line of business which competes with that of the debtor;
(c) he is, or was, within five (5) years from the filing of the petition, a director, officer, owner,
partner or employee of the debtor or any of the creditors, or the auditor or accountant of the
debtor;
(d) he is, or was, within two (2) years from the filing of the petition, an underwriter of the
outstanding securities of the debtor;
(e) he is related by consanguinity or affinity within the fourth civil degree to any individual
creditor, owners of a sale proprietorship-debtor, partners of a partnership- debtor or to any
stockholder, director, officer, employee or underwriter of a corporation-debtor; or
(f) he has any other direct or indirect material interest in the debtor or any of the creditors.
Any rehabilitation receiver, member of the management committee or persons employed or
contracted by them possessing any conflict of interest shall make the appropriate disclosure
either to the court or to the creditors in case of out-of-court rehabilitation proceedings. Any
party to the proceeding adversely affected by the appointment of any person with a conflict of
interest to any of the positions enumerated above may however waive his right to object to
such appointment and, if the waiver is unreasonably withheld, the court may disregard the
conflict of interest, taking into account the general interest of the stakeholders.
Section 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.

Broken Down:
a. What does it take to be a rehab receiver?
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The qualifications listed in Sec. 29 + no conflict of interest

b. How does one become a rehab receiver?
One is initially appointed, but at the initial hearing the creditors and the debtor
who are not petitioners may nominate other persons to the position. The court has
the choice to retain the first one appointed or appoint someone else, even if not
nominated. The only time that a qualified person may be appointed apparently
without the courts discretion is if the nominee gets the support of more than 50%
of the secured creditors and the general unsecured creditors [with satisfactory
evidence].
c. May a rehab receiver be removed?
Yes, at any time motu proprio or upon motion by any creditor/s holding more than
50% of the total obligations of the debtor, on grounds provided in the rules of
procedure and including but not limited to those listed in Sec. 32.
d. Does the receiver get paid?
Yes. Those costs will be considered administrative expenses and must always be
reasonable. [Sir says that this is how the Dean got rich, so I suppose reasonable
for a company is a big slice.]
e. Will the receiver have to take over management?
No, as a general rule. But 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 receiver and/or the
court.
f. What are the duties/responsibilities of a receiver?
The principal duties are:
i.

the preservation and maximization of the value of the assets of the debtor
during rehab;

ii.

determining the debtors viability to be rehabbed;

iii.

preparing and recommending the rehab plan to the court; and

iv.

implementing the approved plan.

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For other specific duties, see the list in Sec. 31, but note that such list is not
exclusive. For instance, a further power not listed is that found in Sec. 39
[employment of professionals].
g. Can the receiver get in trouble for being a receiver?
As a general rule, NO, as long as he acts in good faith. As usual, the general
exception is fraud.
5. Creditors Committees
Section 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.
Section 43. Role of Creditors' Committee. The creditors' committee when constituted pursuant
to Section 42 of this Act shall assist the rehabilitation receiver in communicating with the
creditors and shall be the primary liaison between the rehabilitation receiver and the
creditors. The creditors' committee cannot exercise or waive any right or give any consent on
behalf of any creditor unless specifically authorized in writing by such creditor. The creditors'
committee may be authorized by the court or by the rehabilitation receiver to perform such
other tasks and functions as may be defined by the procedural rules in order to facilitate the
rehabilitation process.
Section 8. Decisions of Creditors. Decisions of creditors shall be made according to the
relevant provisions of the Corporation Code in the case of stock or nonstock corporations or
the Civil Code in the case of partnerships that are not inconsistent with this Act.
Section 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.

Broken Down:
a. What is it?
Its a committee made up of representatives from each class of creditors:
i. Secured creditors
ii. Unsecured creditors
iii. Trade creditors and suppliers
iv. Employees of the debtor
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b. What does it do?

It assists the receiver in communicating with creditors and acts as the primary
liaison between the receiver and creditors. Note that the primary purpose is just
to spread information/give notice, so the committee cant act on behalf of
creditors unless given authority to do so. Neither can it act on behalf of the court
or rehab receiver unless authorized to do so.
6. Management Committee
Section 47. Management. - Unless otherwise provided herein, the management of the juridical
debtor shall remain with the existing management subject to the applicable law/s and
agreement/s, if any, on the election or appointment of directors, managers Or managing
partner. However, all disbursements, payments or sale, disposal, assignment, transfer or
encumbrance of property , or any other act affecting title or interest in property, shall be
subject to the approval of the rehabilitation receiver and/or the court, as provided in the
following subchapter.
Section 36. Displacement of Existing Management by the Rehabilitation Receiver
or Management Committee. Upon motion of any interested party, the court may appoint and
direct the rehabilitation receiver to assume the powers of management of the debtor, or
appoint a management committee that will undertake the management of the debtor. upon
clear and convincing evidence of any of the following circumstances:
(a) Actual or imminent danger of dissipation, loss, wastage or destruction of the debtors
assets or other properties;
(b) Paralyzation of the business operations of the debtor; or
(c) Gross mismanagement of the debtor. or fraud or other wrongful conduct on the part of, or
gross or willful violation of this Act by. existing management of the debtor Or the owner,
partner, director, officer or representative/s in management of the debtor.
In case the court appoints the rehabilitation receiver to assume the powers of management of
the debtor. the court may:
(1) require the rehabilitation receiver to post an additional bond;
(2) authorize him to engage the services or to employ persona or entities to assist him in the
discharge of his managerial functions; and
(3) authorize a commensurate increase in his compensation.
Section 37. Role of the Management Committee. When appointed pursuant to the foregoing
section, the management committee shall take the place of the management and the
governing body of the debtor and assume their rights and responsibilities.
The specific powers and duties of the management committee, whose members shall be
considered as officers of the court, shall be prescribed by the procedural rules.
Section 38. Qualifications of Members of the Management Committee. The qualifications and
disqualifications of the members of the management committee shall be set forth in the
procedural rules, taking into consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.

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When does a management committee come into the picture?

There must be a motion filed in court by any interested party, after which the court may
decide that it is in the best interest of the company that someone else manage it. Recall
that the general rule is that management of the company does not change hands, but if
the circumstances provided in Sec. 36 are established before the court, the court may
decide that the receiver or a management committee take over.
7. Claims
Sec. 4, (c) Claim shall refer to all claims or demands of whatever nature or character
against the debtor or its property, whether for money or otherwise, liquidated or
unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed,
including, but not limited to:
(1) all claims of the government, whether national or local, including taxes, tariffs and
customs duties; and
(2) claims against directors and officers of the debtor arising from acts done in the
discharge of their functions falling within the scope of their authority; Provided, That,
this inclusion does not prohibit the creditors or third parties from filing cases against
the directors and officers acting in their personal capacities.
7-A. Determination of Claims
Section 44. Registry of Claims. Within twenty (20) days from his assumption into office, the
rehabilitation receiver shall establish a preliminary registry of claims. The rehabilitation
receiver shall make the registry available for public inspection and provide publication notice
to the debtor, creditors and stakeholders on where and when they may inspect it. All claims
included in the registry of claims must be duly supported by sufficient evidence.
Section 45. Opposition or Challenge of Claims. Within thirty (30) days from the expiration of
the period stated in the immediately preceding section, the debtor, creditors, stakeholders
and other interested parties may submit a challenge to claim/s to the court, serving a certified
copy on the rehabilitation receiver and the creditor holding the challenged claim/so Upon the
expiration of the thirty (30)-day period, the rehabilitation receiver shall submit to the court
the registry of claims which shall include undisputed claims that have not been subject to
challenge.
Section 46. Appeal. Any decision of the rehabilitation receiver regarding a claim may be
appealed to the court.

Broken Down: [Taken from Group 4s handout]

a. Within 20 days from assumption into office, the rehabilitation receiver shall
establish a preliminary Registry of Claims. Registry shall be available for public
inspection.
b. Within 30 days from the expiration of the aforementioned 20-day period, debtors,
creditors, stakeholders, and other interested parties may submit a challenge to
the claim/s in court.
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c. Upon expiration of the 30-day oeriod, the rehabilitation receiver shall submit to
the court the Registry of Claims which shall include unisputed claims that have
not been subject to challenge.
d. Decision of the rehabilitation receiver regarding a claim may be appealed to the
court.
7-B. Treatment of Claims
a. Secured Creditors
General Rule: Secured creditors claims are not affected or impaired by rehabilitation
proceedings BUT his right to enforce his security may be suspended. But if the court
finds that the security is not necessary for the rehab of the debtor, it may permit the
secured creditor to foreclose/enforce his claim. Even if the court does not permit the
secured creditor to foreclose, the secured creditor enjoys priority in the rehab plan.
Section 60. No Diminution of Secured Creditor Rights. The issuance of the Commencement
Order and the Suspension or Stay Order, and any other provision of this Act, shall not be
deemed in any way to diminish or impair the security or lien of a secured creditor, or the value
of his lien or security, except that his right to enforce said security or lien may be suspended
during the term of the Stay Order.
The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured
creditor to enforce his security or lien, or foreclose upon property of the debtor securing
his/its claim, if the said property is not necessary for the rehabilitation of the debtor. The
secured creditor and/or the other lien holders shall be admitted to the rehabilitation
proceedings only for the balance of his claim, if any.
Section 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.

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b. Employee Claims
General Rule: Compensation of employees are considered an administrative expense,
hence EXEMPTED from the stay or suspension orders. In other words, they must be
paid as they fall due. The exception is for claims of separation pay for months worked
prior to commencement of rehab, which shall be treated as a pre-commencement claim
and suspended.
Section 56. Treatment of Employees, Claims. Compensation of employees required to carry on
the business shall be considered an administrative expense. Claims of separation pay for
months worked prior to the commencement date shall be considered a pre- ommencement
claim. Claims for salary and separation pay for work performed after the commencement date
shall be an administrative expense.

c. Excluded Claims
Section 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.

8. Treatment of Assets
a. Unencumbered Assets
Section 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.
Section 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.
Section 52. Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets. The court
may rescind or declare as null and void any sale, payment, transfer or conveyance of the
debtor's unencumbered property or any encumbering thereof by the debtor or its agents or
representatives after the commencement date which are not in the ordinary course of the
business of the debtor:Provided, however, That the unencumbered property may be sold,
encumbered or otherwise disposed of upon order of the court after notice and hearing:
(a) if such are in the interest of administering the debtor and facilitating the preparation and
implementation of a Rehabilitation Plan;
(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.

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Broken Down [Taken from Group 4s handout]:

a. No funds or property shall be 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.
b. Court may authorize the sale of unencumbered property outside the ordinary
course of business upon a showing that the property, by its nature, is a)
perishable; b) costly to maintain; c) susceptible to devaluation; or d) otherwise in
jeopardy.
c. Court may rescind or declare as null and void any sale, payment, transfer or
conveyance of the debtors unencumbered property or any encumbring threof by
the debtor or its agents or representatives after the commencement date which
are not in the ordinary course of the business. In certain instances, court may
allow property to be sold, encumbered or otherwise disposed of after notice and
hearing.
b. Encumbered Assets
Section 50. Sale or Disposal of Encumbered Property of the Debtor and Assets of Third Parties
Held by Debtor. The court may authorize the sale, transfer, conveyance or disposal of
encumbered property of the debtor, or property of others held by the debtor where there is a
security interest pertaining to third parties under a financial, credit or other similar
transactions if, upon application of the rehabilitation receiver and with the consent of the
affected owners of the property, or secured creditor/s in the case of encumbered property of
the debtor and, after notice and hearing, the court determines that:
(a) such sale, transfer, conveyance or disposal is necessary for the continued operation of the
debtor's business; and
(b) the debtor has made arrangements to provide a substitute lien or ownership right that
provides an equal level of security for the counter-party's claim or right.
Provided, That properties held by the debtor where the debtor has authority to sell such as
trust receipt or consignment arrangements may be sold or disposed of by the .debtor, if such
sale or disposal is necessary for the operation of the debtor's business, and the debtor has
made arrangements to provide a substitute lien or ownership right that provides an equal
level of security for the counter-party's claim or right.
Sale or disposal of property under this section shall not give rise to any criminal liability under
applicable laws.
Section 51. Assets of Debtor Held by Third Parties. In the case of possessory pledges,
mechanic's liens or similar claims, third parties who have in their possession or control
property of the debtor shall not transfer, conveyor otherwise dispose of the same to persons
other than the debtor, unless upon prior approval of the rehabilitation receiver. The
rehabilitation receiver may also:
(a) demand the surrender or the transfer of the possession or control of such property to the
rehabilitation receiver or any other person, subject to payment of the claims secured by any

192

possessory Iien/s thereon;

(b) allow said third parties to retain possession or control, if such an arrangement would more
likely preserve or increase the value of the property in question or the total value of the
assets of the debtor; or
(c) undertake any otI1er disposition of the said property as may be beneficial for the
rehabilitation of the debtor, after notice and hearing, and approval of the court.
Section 53. Assets Subject to Rapid Obsolescence, Depreciation and Diminution of Value. Upon
the application of a secured creditor holding a lien against or holder of an ownership interest
in property held by the debtor that is subject to potentially rapid obsolescence, depreciation
or diminution in value, the court shall, after notice and hearing, order the debtor or
rehabilitation receiver to take reasonable steps necessary to prevent the depreciation. If
depreciation cannot be avoided and such depreciation is jeopardizing the security or property
interest of the secured creditor or owner, the court shall:
(a) allow the encumbered property to be foreclosed upon by the secured creditor according to
the relevant agreement between the debtor and the secured creditor, applicable rules of
procedure and relevant legislation: Provided. That the proceeds of the sale will be distributed
in accordance with the order prescribed under the rules of concurrence and preference of
credits; or
(b) upon motion of, or with the consent of the affected secured creditor or interest owner.
order the conveyance of a lien against or ownership interest in substitute property of the
debtor to the secured creditor: Provided. That other creditors holding liens on such property, if
any, do not object thereto, or, if such property is not available;
(c) order the conveyance to the secured creditor or holder . of an ownership interest of a lien
on the residual funds from the sale of encumbered property during the proceedings; or
(d) allow the sale or disposition of the property: Provided. That the sale or disposition will
maximize the value of the property for the benefit of the secured creditor and the debtor, and
the proceeds of the sale will be distributed in accordance with the order prescribed under the
rules of concurrence and preference of credits.

Broken Down [Taken from Group 4s handout]:

a. Issuance of Commencement Order shall prohibit or serve as the legal basis for
rendering null and void the results of any extrajudicial activity or process to seize
property, sell encumbered property, or otherwise attempt to collect on or enforce
a claim against the debtor after the commencement date.
b. Court may authorize the sale, transfer, conveyance or disposal of encumbered
property of the debtory or property of others upon application of the
rehabilitation receiver and with the consent of the affected owners or secured
creditors.
c. Third parties who have in their possession or control property of the debtor shall
not transfer, convey or otherwise dispose of the same to persons other than the
debtor, unless upon prior approval of the rehabilitation receiver.
d. Upon application of a secured creditor holding a lien against or holder of an
ownership interest in property held by the debtor that is subject to potentially
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rapid obsolescence, depreciation or diminution in value, the court shall, after

notice and hearing, order the debtor or rehabilitation officer to take reasonable
steps necessary to prevent the depreciation.
9. Treatment of Contracts
a. Confirmation/Termination of Contracts
Section 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
subsisting contracts of the debtor with creditors and other third parties as at the
commencement date shall continue in force: Provided, That within ninety (90) days following
the commencement of proceedings, the debtor, with the consent of the rehabilitation receiver,
shall notify each contractual counter-party of whether it is confirming the particular contract.
Contractual obligations of the debtor arising or performed during this period, and afterwards
for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed
within the required deadline shall be considered terminated. Claims for actual damages, if any,
arising as a result of the election to terminate a contract shall be considered a precommencement claim against the debtor. Nothing contained herein shall prevent the
cancellation or termination of any contract of the debtor for any ground provided by law.

Broken Down: For contracts to remain in force, the debtor must [with consent of the
receiver] notify each contractual counter-party as to whether it is confirming that
particular contract. If confirmed, contractual obligations will be considered
administrative expenses. If not, the contract will be deemed terminated.
b. Avoidance Proceedings
Section 58. Rescission or Nullity of Certain Pre-commencement Transactions. Any transaction
occurring prior to commencement date entered into by the debtor or involving its funds or
assets may be rescinded or declared null and void on the ground that the same was executed
with intent to defraud a creditor or creditors or which constitute undue preference of
creditors. Without limiting the generality of the foregoing, a disputable presumption of such
design shall arise if the transaction:
(a) provides unreasonably inadequate consideration to the debtor and is executed within
ninety (90) days prior to the commencement date;
(b) involves an accelerated payment of a claim to a creditor within ninety (90) days prior to the
commencement date;
(c) provides security or additional security executed within ninety (90) days prior to the
commencement date;
(d) involves creditors, where a creditor obtained, or received the benefit of, more than its pro
rata share in the assets of the debtor, executed at a time when the debtor was insolvent; or
(e) is intended to defeat, delay or hinder the ability of the creditors to collect claims where the
effect of the transaction is to put assets of the debtor beyond the reach of creditors or to
otherwise prejudice the interests of creditors.
Provided, however, That nothing in this section shall prevent the court from rescinding or
declaring as null and void a transaction on other grounds provided by relevant legislation and
jurisprudence: Provided, further, That the provisions of the Civil Code on rescission shall in any
case apply to these transactions.

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Section 59. Actions for Rescission or Nullity. (a) The rehabilitation receiver or, with his
conformity, any creditor may initiate and prosecute any action to rescind, or declare null and
void any transaction described in Section 58 hereof. If the rehabilitation receiver does not
consent to the filing or prosecution of such action,
(b) If leave of court is granted under subsection (a), the rehabilitation receiver shall assign
and transfer to the creditor all rights, title and interest in the chose in action or subject matter
of the proceeding, including any document in support thereof.
(c) Any benefit derived from a proceeding taken pursuant to subsection (a), to the extent of
his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the
surplus, if any, belongs to the estate.
(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.

Broken Down:
a. What is it?
An avoidance proceeding is one wherein certain transactions are rescinded or nullified
and whatever assets transferred pursuant to such transactions, or their value, can be
recovered for the benefit for the creditors.
b. What transactions are those?
Generally, fraudulent conveyances and preferential transfers. Broadly, they are those
which have all of the following characteristics:
i. Entered into by the debtor or involve the debtors funds or assets;
ii. Prior to the commencement date; and
iii. Executed in fraud of creditors or constituting an undue preference of creditors.
10. Rehabilitation Plan
Section 4. (ii) Rehabilitation Plan shall refer to a plan by which the financial well-being and
viability of an insolvent debtor can be restored using various means including, but not limited
to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en
pago, debt-equity conversion and sale of the business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed in Section 62 hereof, or other similar
arrangements as may be approved by the court or creditors.
Section 62. Contents of a Rehabilitation Plan. The Rehabilitation Plan shall, as a minimum:
(a) specify the underlying assumptions, the financial goals and the procedures proposed to
accomplish such goals;
(b) compare the amounts expected to be received by the creditors under the Rehabilitation
Plan with those that they will receive if liquidation ensues within the next one hundred twenty
(120) days;
(c) contain information sufficient to give the various classes of creditors a reasonable basis for
determining whether supporting the Plan is in their financial interest when compared to the
immediate liquidation of the debtor, including any reduction of principal interest and penalties
payable to the creditors;
(d) establish classes of voting creditors;

195

(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, debtequity conversion and sale of the business (or parts of it) as a going concern, or setting-up of
a new business entity or other similar arrangements as may be necessary to restore the
financial well-being and visibility of the insolvent debtor;
(g) specify the treatment of each class or subclass described in subsections (d) and (e);
(h) provide for equal treatment of all claims within the same class or subclass, unless a
particular creditor voluntarily agrees to less favorable treatment;
(i) ensure that the payments made under the plan follow the priority established under the
provisions of the Civil Code on concurrence and preference of credits and other applicable
laws;
(j) maintain the security interest of secured creditors and preserve the liquidation value of the
security unless such has been waived or modified voluntarily;
(k) disclose all payments to creditors for pre-commencement debts made during the
proceedings and the justifications thereof;
(1) describe the disputed claims and the provisioning of funds to account for appropriate
payments should the claim be ruled valid or its amount adjusted;
(m) identify the debtor's role in the implementation of the Plan;
(n) state any rehabilitation covenants of the debtor, the breach of which shall be considered a
material breach of the Plan;
(o) identify those responsible for the future management of the debtor and the supervision
and implementation of the Plan, their affiliation with the debtor and their remuneration;
(p) address the treatment of claims arising after the confirmation of the Rehabilitation Plan;
(q) require the debtor and its counter-parties to adhere to the terms of all contracts that the
debtor has chosen to confirm;
(r) arrange for the payment of all outstanding administrative expenses as a condition to the
Plan's approval unless such condition has been waived in writing by the creditors concerned;
(s) arrange for the payment" of all outstanding taxes and assessments, or an adjusted amount
pursuant to a compromise settlement with the BlR Or other applicable tax authorities;
(t) include a certified copy of a certificate of tax clearance or evidence of a compromise
settlement with the BIR;
(u) include a valid and binding r(,solution of a meeting of the debtor's stockholders to increase
the shares by the required amount in cases where the Plan contemplates an additional
issuance of shares by the debtor;
(v) state the compensation and status, if any, of the rehabilitation receiver after the approval
of the Plan; and
(w) contain provisions for conciliation and/or mediation as a prerequisite to court assistance or
intervention in the event of any disagreement in the interpretation or implementation of the

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Rehabilitation Plan.
Section 54. Post-commencement Interest. The rate and term of interest, if any, on secured and
unsecured claims shall be determined and provided for in the approved Rehabilitation Plan.
Section 55. Post-commencement Loans and Obligations. With the approval of the court upon
the recommendation of the rehabilitation receiver, the debtor, in order to enhance its
rehabilitation. may:
(a) enter into credit arrangements; or
(b) enter into credit arrangements, secured by mortgages of its unencumbered property or
secondary mortgages of encumbered property with the approval of senior secured parties with
regard to the encumbered property; or
(c) incur other obligations as may be essential for its rehabilitation.
The payment of the foregoing obligations shall be considered administrative expenses under
this Act.

Broken Down [Taken in substance from Group 4s handout]:

What is it?
It is the plan by which the financial well-being and viability of an insolvent debtor can
be restored using various means, including but not limited to:
a. Debt forgiveness condonation or waiver of certain claims
b. Debt rescheduling extension of time for payment
c. Reorganization or quasi-reorganization change in the equity, corporate or
operating structure of the debtor
d. Dacion en pago assignment of assets as payment for certain claims
e. Debt-equity conversion issuance of ownership interests as payment for certain
claims
f. Sale of the business (or parts of it) as going concern sale to generate income to
pay off claims
g. Setting-up of new business entity
h. Other similar arrangements as approved by court and creditors
Procedure:
a. Rehabilitation receiver confers with the debtor and all the classes of creditors,
and may consider their views and proposals in the review, revision, or preparation
of a new Rehabilitation Plan.
b. Rehabilitation receiver shall notify the creditors and stakeholders that the Plan is
ready for their examination.
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c. Within 20 days from the notification, the receiver shalll convene the creditors for
purposes of voting on the approval of the plan.
d. The Plan shall be deemed rejected unless approved by all classes of creditors
whose rights are adversely modified or affected by the Plan.
e. Deemed approved by a class of creditors if members holding at least 50% of
claims of class are in favor of the Plan.
f. Notwithstanding rejection of the Rehabilitation Plan, court may still confirm it
under Cram Down.
g. If the Rehabilitation Plan is approved, the receiver will submit it to the court for
confirmation. Within 5 days from receipt, court shall notify the creditors of such
submission.
h. A creditor may file an objection to the Rehabilitation Plan within 20 days from
receipt of notice from the court. Grounds shall be limited to:
i.

Creditors support was induced by fraud

ii.

Documentation or data relied upon in the Rehabilitation Plan are materially

false
or
misleading
Rehabilitation Plan is in fact not supported by the voting creditors.

iii.

Hearing will be conducted on the objections. If there is merit in the

objection, the defect must be cured. If the court sees the debtor acted in
bad faith or that it is not feasible to cure the defect, court shall convert
proceedings into one for liquidation.

iv.

If no objections are filed within the relevant period or objections are filed
but they are found to be found to be lacking in merit or that the basis of the
defect was cured or the debtor has complied with the order to cure, the
court shall issue an order confirming the Rehabilitation Plan.

10-A. Cram Down Effect

Summary [Taken from Group 4s handout]
Occurs when the court confirms a Rehabilitation Plan over the objection of the
creditors. Its effect is that the confirmed Rehabilitation Plan binds not only the
insovent debtor but also all persons affected by it, regardless of whether such
persons participated in the proceedings or opposed the Rehabilitation Plan.
Requisites for Cram Down to be permitted:
1) The Rehabilitation Plan complies with all the requirements specified in the
FRIA.
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2) The Rehabilitation
Rehabilitation Plan

Receiver

recommends

the

confirmation

of

the

3) The shareholders, owners or partners of the juridical debtor lose at least

their controlling interest as a result of the Rehabilitation Plan.
4) 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.
Court may also confirm a Rehabilitation Plan over the objection of the owners,
partners, or stockholders of the insolvent debtor, if the terms of the Plan are
necessary to restore the financial wellbeing and viability of the insolvent debtor.
Section 63. Consultation with Debtor and Creditors. If the court gives due course to the
petition, the rehabilitation receiver shall confer with the debtor and all the classes of
creditors, and may consider their views and proposals ill the review, revision or preparation of
a new Rehabilitation Plan.
Section 64. Creditor Approval of Rehabilitation Plan. The rehabilitation receiver shall notify the
creditors and stakeholders that the Plan is ready for their examination. Within twenty (2Q)
days from the said notification, the rehabilitation receiver shall convene the creditors, either
as a whole or per class, for purposes of voting on the approval of the Plan. The Plan shall be
deemed rejected unless approved by all classes of creditors w hose rights are adversely
modified or affected by the Plan. For purposes of this section, the Plan is deemed to have been
approved by a class of creditors if members of the said class holding more than fifty percent
(50%) of the total claims of the said class vote in favor of the Plan. The votes of the creditors
shall be based solely on the amount of their respective claims based on the registry of claims
submitted by the rehabilitation receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the
Rehabilitation Plan if all of the following circumstances are present:
(a)The Rehabilitation Plan complies with the requirements specified in this Act.
(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they would have received
if the debtor were under liquidation.
Section 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.
Section 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

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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.
Section 67. Hearing on the Objections. If objections have been submitted during the relevant
period, the court shall issue an order setting the time and date for the hearing or hearings on
the objections.
If the court finds merit in the objection, it shall order the rehabilitation receiver or other party
to cure the defect, whenever feasible. If the court determines that the debtor acted in bad
faith, or that it is not feasible to cure the defect, the court shall convert the proceedings into
one for the liquidation of the debtor under Chapter V of this Act.
Section 68. Confirmation of the Rehabilitation Plan. If no objections are filed within the
relevant period or, if objections are filed, the court finds them lacking in merit, or determines
that the basis for the objection has been cured, or determines that the debtor has complied
with an order to cure the objection, the court shall issue an order confirming the Rehabilitation
Plan.
The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over
claims if the Rehabilitation Plan has made adequate provisions for paying such claims.
For the avoidance of doubt, the provisions of other laws to the contrary notwithstanding, the
court shall have the power to approve or implement the Rehabilitation Plan despite the lack of
approval, or objection from the owners, partners or stockholders of the insolvent
debtor: Provided, That the terms thereof are necessary to restore the financial well-being and
viability of the insolvent debtor.
Section 69. Effect of Confirmation of the Rehabilitation Plan. The confirmation of the
Rehabilitation Plan by the court shall result in the following:
(a) The Rehabilitation Plan and its provisions shall be binding upon the debtor and all persons
who may be affected by . it, including the creditors, whether or not such persons have
participated in the proceedings or opposed the Rehabilitation Plan or whether or not their
claims have been scheduled;
(b) The debtor shall comply with the provisions of the Rehabilitation Plan and shall take all
actions necessary to carry out the Plan;
(c) Payments shall be made to the creditors in accordance with the provisions of the
Rehabilitation Plan;
(d) Contracts and other arrangements between the debtor and its creditors shall be
interpreted as continuing to apply to the extent that they do not conflict with the provisions of
the Rehabilitation Plan;
(e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be
binding on creditors regardless of whether or not the Plan is successfully implement; and
(f) Claims arising after approval of the Plan that are otherwise not treated by the Plan are not
subject to any Suspension Order.

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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.
Section 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.
Section 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.
Section 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 .
Section 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.

11. Termination of Proceedings

Section 74. Termination of Proceedings. The rehabilitation proceedings under Chapter II shall,
upon motion by any stakeholder or the rehabilitation receiver be terminated by order of the
court either declaring a successful implementation of the Rehabilitation Plan or a failure of
rehabilitation.
There is failure of rehabilitation in the following cases:
(a) Dismissal of the petition by the court;
(b) The debtor fails to submit a Rehabilitation Plan;
(c) Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood
that the debtor can be rehabilitated within a reasonable period;
(d) The Rehabilitation Plan or its amendment is approved by the court but in the
implementation thereof, the debtor fails to perform its obligations thereunder or there is a
failure to realize the objectives, targets or goals set forth therein, including the timelines and
conditions for the settlement of the obligations due to the creditors and other claimants;
(e) The commission of fraud in securing the approval of the Rehabilitation Plan or its
amendment; and
(f) Other analogous circumstances as may be defined by the rules of procedure.
Upon a breach of, or upon a failure of the Rehabilitation Plan the court, upon motion by an
affected party may:

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(1) Issue an order directing that the breach be cured within a specified period of time, falling
which the proceedings may be converted to a liquidation;
(2) Issue an order converting the proceedings to a liquidation;
(3) Allow the debtor or rehabilitation receiver to submit amendments to the Rehabilitation
Plan, the approval of which shall be governed by the same requirements for the approval of a
Rehabilitation Plan under this subchapter;
(4) Issue any other order to remedy the breach consistent with the present regulation, other
applicable law and the best interests of the creditors; or
(5) Enforce the applicable provisions of the Rehabilitation Plan through a writ of execution.
Section 75. Effects of Termination. Termination of the proceedings shall result in the following:
(a) The discharge of the rehabilitation receiver subject to his submission of a final accounting;
and
(b) The lifting of the Stay Order and any other court order holding in abeyance any action for
the enforcement of a claim against the debtor.
Provided, however, That if the termination of proceedings is due to failure of rehabilitation or
dismissal of the petition for reasons other than technical grounds, the proceedings shall be
immediately converted to liquidation as provided in Section 92 of this Act.

12. Conversion to Liquidation Proceedings

Section 92. Conversion by the Court into Liquidation Proceedings. During the pendency of
court-supervised or pre-negotiated rehabilitation proceedings, the court may order the
conversion of rehabilitation proceedings to liquidation proceedings pursuant to (a) Section
25(c) of this Act; or (b) Section 72 of this Act; or (c) Section 75 of this Act; or (d) Section 90 of
this Act; or at any other time upon the recommendation of the rehabilitation receiver that the
rehabilitation of the debtor is not feasible. Thereupon, the court shall issue the Liquidation
Order mentioned in Section 112 hereof.

Pre-Negotiated Rehabilitation
Summary: Basically this is a kind of rehab where the debtor and its creditors have
agreed before going to court and drawn up a rehab plan of their own. It is an insolvency
proceeding that commences extrajudicially but terminates judicially, i.e. the provisions
under Termination of Proceedings [above] are still applicable to it. It is a consensual
contract between an insolvent debtor and its creditors that amends or modified the
terms of the claims against the debtor.
1. An insolvent debtor, by itself or jointly with any of its creditors, must file a verified
petition in court, asking for the courts approval of a pre-negotiated Rehabilitation
Plan, which has been endorsed or approved by creditors holding at least 2/3 of
the debtors liabilities;

202

2. If the court finds that the petition is sufficient in form and substance, it shall issue
an order which shall contain
a.
b.
c.
d.
e.

identity of debtor, its principal business and principal place of business

declaration that debtor is under rehabilitation
order to publish Order in newspaper of general circulation
appoint rehabilitation receiver, if provided in the Rehabilitation Plan
a stay/Suspension Order

3. If there are any objections, any creditor or interested party may submit to the
court a verified objection not later than 8 days after the second publication of the
Order. The grounds are provided in Sec. 79;
4. If there are any objections, the hearing on such much be held no earlier than 20
days and no later than 30 days from the second publication.
If objections meritorious, the court shall direct the debtor to cure the defect
within a reasonable amount of time.
If the objection is not meritorious, or the defect is cured, the plan will be
deemed approved.
If the supporters of the plan act in bad faith or the objection cannot be cured,
the court may order the conversion of proceedings to liquidation.
5. If there is no objection, within ten days from the date of the second publication
the court shall approve the plan.
Section 76. Petition by Debtor. An insolvent debtor, by itself or jointly with any of its creditors,
may file a verified petition with the court for the approval of a pre-negotiated Rehabilitation
Plan which has been endorsed or approved by creditors holding at least two-thirds (2/3) of the
total liabilities of the debtor, including secured creditors holding more than fifty percent (50%)
of the total secured claims of the debtor and unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of the debtor. The petition shall include as a
minimum:
(a) a schedule of the debtor's debts and liabilities;
(b) an inventory of the debtor's assets;
(c) the pre-negotiated Rehabilitation Plan, including the names of at least three (3) qualified
nominees for rehabilitation receiver; and
(d) a summary of disputed claims against the debtor and a report on the provisioning of funds
to account for appropriate payments should any such claims be ruled valid or their amounts
adjusted.
Section 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;

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(a) identify the debtor, its principal business of activity/ies and its principal place of business;
(b) declare that the debtor is under rehabilitation;
(c) summarize the ground/s for the filling of the petition;
(d) direct the publication of the Order in a newspaper of general circulation in the Philippines
once a week for at least two (2) consecutive weeks, with the first publication to be made
within seven (7) days from the time of its issuance;
(e) direct the service by personal delivery of a copy of the petition on each creditor who is not
a petitioner holding at least ten percent (10%) of the total liabilities of the debtor, as
determined in the schedule attached to the petition, within three (3) days;
(f) state that copies of the petition and the Rehabilitation Plan are available for examination
and copying by any interested party;
(g) state that creditors and other interested parties opposing the petition or Rehabilitation
Plan may file their objections or comments thereto within a period of not later than twenty
(20) days from the second publication of the Order;
(h) appoint a rehabilitation receiver, if provided for in the Plan; and
(i) include a Suspension or Stay Order as described in this Act.
Section 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.
Section 79. Objection to the Petition or Rehabilitation Plan. Any creditor or other interested
party may submit to the court a verified objection to the petition or the Rehabilitation Plan not
later than eight (8) days from the date of the second publication of the Order mentioned in
Section 77 hereof. The objections shall be limited to the following:
(a) The allegations in the petition or the Rehabilitation Plan or the attachments thereto are
materially false or misleading;
(b) The majority of any class of creditors do not in fact support the Rehabilitation Plan;
(c) The Rehabilitation Plan fails to accurately account for a claim against the debtor and the
claim in not categorically declared as a contested claim; or
(d) The support of the creditors, or any of them was induced by fraud.
Copies of any objection to the petition of the Rehabilitation Plan shall be served on the debtor,
the rehabilitation receiver (if applicable), the secured creditor with the largest claim and who
supports the Rehabilitation Plan, and the unsecured creditor with the largest claim and who
supports the Rehabilitation Plan.
Section 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 noncurable, the court may order the conversion of the proceedings into liquidation. A finding by
the court that the objection has no substantial merit, or that the same has been cured shall be

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deemed an approval of the Rehabilitation Plan.

Section 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.
Section 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.

Out-of-Court Rehabilitation
How this works [Taken substantially from Group 4s handout]:
1. The insolvent debtor and its creditors agree to restructure debtors claims,
without filing a petition in court.
2. The parties negotiate and finalize the Out-of-Court Rehabilitation Plan.
During this period, the parties may also enter into a standstill agreement.
A standstill agreement is a contract between the insolvent debtor and its
creditors that allows the debtor not to pay its liabilities as they fall due and
prevents the creditors from taking further action or enforcing claims
against the debtor, usually during the period of negotiation for the Out-ofCourt rehab plan. As a general rule, it shall be binding only between the
parties UNLESS the creditors involved have claims making up at least 50%
of the debtors total liabilities and adequate notice [publication once a week
in newspaper of general circulation, for two consecutive weeks] has been
given.
3. Once finalized, the Rehabilitation Plan is approved by the insolvent debtor and the
creditors (both secured and unsecured).
If approval meets the minimum vote requirements, the rehab plan will
a. Be recognized as consistent with the FRIAs objectives; and
b. Result in a cram down.
Same legal effect as confirmation of Rehabilitation Plan under Sec. 69
Binding upon the insolvent debtor and all persons who may be affected by
the Rehabilitation Plan, including creditors
Whether or not such creditors have participated in proceedings
Whether or not such creditors have opposed the Rehabilitation Plan
Whether or not their claims have been scheduled
The insolvent debtor must comply with the provisions of the Rehabilitation
Plan and take all actions necessary to carry it out
Contracts and other arrangements between the insolvent debtor and its
creditors shall continue to apply, to the extent that they do not conflict with the
Rehabilitation Plan
Compromises or rescheduling of timing of payments by the insolvent debtor
shall be binding on creditors, whether or not the Rehabilitation Plan is
successfully implemented
Claims arising after approval of the Rehabilitation Plan that are otherwise
not treated by the Plan are not subject to any suspension order
What are the minimum requirements?
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a. Must be approved by the insolvent debtor

b. Must be approved by secured creditors representing at least 67% of the
secured obligations of the debtor
c. Must be approved by unsecured creditors representing at least 75% of the
unsecured obligations of the debtor
d. Must be approved by creditors holding at least 85% of the total liabilities
(secured and unsecured) of the debtor
4. The Rehabilitation Plan is executed and implemented.
5. The insolvent debtor and/or creditor may seek court assistance for the execution
or implementation of the Rehabilitation Plan.
6. Later on, the Rehabilitation Plan may be amended or modified in accordance with
the terms of the agreement and with due notice to all creditors.
Section 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.
Section 84. Minimum Requirements of Out-of-Court or Informal Restructuring Agreements and
Rehabilitation Plans. For an out-of-court or informal restructuring/workout agreement or
Rehabilitation Plan to qualify under this chapter, it must meet the following minimum
requirements:
(a) The debtor must agree to the out-of-court or informal restructuring/workout agreement or
Rehabilitation Plan;
(b) It must be approved by creditors representing at least sixty-seven (67%) of the secured
obligations of the debtor;
(c) It must be approved by creditors representing at least seventy-five percent (75%) of the
unsecured obligations of the debtor; and
(d) It must be approved by creditors holding at least eighty-five percent (85%) of the total
liabilities, secured and unsecured, of the debtor.
Section 85. Standstill Period. A standstill period that may be agreed upon by the parties
pending negotiation and finalization of the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable not
only against the contracting parties but also against the other creditors: Provided, That (a)
such agreement is approved by creditors representing more than fifty percent (50%) of the
total liabilities of the debtor; (b) notice thereof is publishing in a newspaper of general
circulation in the Philippines once a week for two (2) consecutive weeks; and (c) the standstill
period does not exceed one hundred twenty (120) days from the date of effectivity. The notice
must invite creditors to participate in the negotiation for out-of-court rehabilitation or
restructuring agreement and notify them that said agreement will be binding on all creditors if
the required majority votes prescribed in Section 84 of this Act are met.
Section 86. Cram Down Effect. A restructuring/workout agreement or Rehabilitation Plan that
is approved pursuant to an informal workout framework referred to in this chapter shall have
the same legal effect as confirmation of a Plan under Section 69 hereof. The notice of the
Rehabilitation Plan or restructuring agreement or Plan shall be published once a week for at
least three (3) consecutive weeks in a newspaper of general circulation in the Philippines. The
Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15)

206

days from the date of the last publication of the notice thereof.
Section 87. Amendment or Modification. Any amendment of an out-of-court
restructuring/workout agreement or Rehabilitation Plan must be made in accordance with the
terms of the agreement and with due notice on all creditors.
Section 88. Effect of Court Action or Other Proceedings. Any court action or other proceedings
arising from, or relating to, the out-of-court or informal restructuring/workout agreement or
Rehabilitation Plan shall not stay its implementation, unless the relevant party is able to
secure a temporary restraining order or injunctive relief from the Court of Appeals.
Section 89. Court Assistance. The insolvent debtor and/or creditor may seek court assistance
for the execution or implementation of a Rehabilitation Plan under this Chapter, under such
rules of procedure as may be promulgated by the Supreme Court.

LIQUIDATION
Section 4, (u) Liquidation shall refer to the proceedings under Chapter V of this Act.

Definition
Liquidation is a judicial insolvency proceeding by which assets of an insolvent
debtor are recovered and their value preserved and maximized for the purpose of
converting the same into cash, and discharging, to the extend as possible, all claims
against the insolvent debtor.
Nature
It is a proceeding in rem and all interested persons are equally bound.
Application of Provisions
Sec. 4, (o) Individual debtor shall refer to a natural person who is a resident and citizen of the
Philippines that has become insolvent as defined herein.

(k) Debtor shall refer to, unless specifically excluded by a provision of this Act, a sole
proprietorship duly registered with the DTI, a partnership duly registered with the SEC, a
corporation duly organized and existing under Philippine laws, or an individual debtor who has
become insolvent as defined herein.

Liquidation provisions are applicable to both individual and juridical debtors.

[Note that the definition of a juridical debtor is only inferred from Sec. 4, (k).]
Kinds
1. Voluntary
Judicial insolvency proceeding instituted by a debtor that is insolvent. The
purpose of voluntary liquidation is for the debtor to seek a discharge from his
debts and liabilities and ultimately freeing himself of legal responsibility for
specific obligations.
2. Involuntary
Judicial insolvency proceeding instituted by a creditor or group of creditors
against an insolvent debtor.
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Procedure
1. Individual Debtor
Voluntary
Section 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.
Section 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.

o Requirements for filing application (by insolvent debtor):

a. A verified petition filed in the province/city he has resided in for 6
months prior to the filing.
b. Attachment of a schedule of debts and liabilities and an inventory of
assets to the petition.
c. Debts owed exceeding P500,000.00

Involuntary

Section 105. Petition; Acts of Insolvency. Any creditor or group of creditors with a claim of, or
with claims aggregating at least Five hundred thousand pesos (Php500, 000.00) may file a
verified petition for liquidation with the court of the province or city in which the individual
debtor resides.
The following shall be considered acts of insolvency, and the petition for liquidation shall set
forth or allege at least one of such acts:
(a) That such person is about to depart or has departed from the Republic of the Philippines,
with intent to defraud his creditors;
(b) That being absent from the Republic of the Philippines, with intent to defraud his creditors,
he remains absent;
(c) That he conceals himself to avoid the service of legal process for the purpose of hindering
or delaying the liquidation or of defrauding his creditors;
(d) That he conceals, or is removing, any of his property to avoid its being attached or taken
on legal process;
(e) That he has suffered his property to remain under attachment or legal process for three (3)
days for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of any creditor or claimant for
the purpose of hindering or delaying the liquidation or of defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by default for the purpose

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of hindering or delaying the liquidation or of defrauding his creditors;

(h) That he has suffered or procured his property to be taken on legal process with intent to
give a preference to one or more of his creditors and thereby hinder or delay the liquidation or
defraud any one of his creditors;
(i) That he has made any assignment, gift, sale, conveyance or transfer of his estate, property,
rights or credits with intent to hinder or delay the liquidation or defraud his creditors;
(j) That he has, in contemplation of insolvency, made any payment, gift, grant, sale,
conveyance or transfer of his estate, property, rights or credits;
(k) That being a merchant or tradesman, he has generally defaulted in the payment of his
current obligations for a period of thirty (30) days;
(l) That for a period of thirty (30) days, he has failed, after demand, to pay any moneys
deposited with him or received by him in a fiduciary; and
(m) That an execution having been issued against him on final judgment for money, he shall
have been found to be without sufficient property subject to execution to satisfy the
judgment.
The petitioning creditor/s shall post a bond in such as the court shall direct, conditioned that if
the petition for liquidation is dismissed by the court, or withdrawn by the petitioner, or if the
debtor shall not be declared an insolvent the petitioners will pay to the debtor all costs,
expenses, damages occasioned by the proceedings and attorney's fees.

o Requirements for filing petition (by petitioning creditor):

a. A verified petition filed in the province/city here the insolvent debtor
resides.
b. The claim of a single debtor OR the aggregate claim of all the debtors
make up a total of at least P500,000.00
c. Allegations of acts of insolvency by the debtor [as listed above]
d. Filing creditors will post a bond, in the amount that the court shall
direct
Bond ensures that if the petition filed is dismissed or
withdrawn by the petitioning creditors, or if the debtor shall not
be declared an insolvent, the petitioning creditors will pay the
debtor all costs, expenses, damages and attorneys fees that will
arise from the proceedings.
Section 106. Order to Individual Debtor to Show Cause. Upon the filing of such creditors'
petition, the court shall issue an Order requiring the individual debtor to show cause, at a time
and place to be fixed by the said court, why he should not be adjudged an insolvent. Upon
good cause shown, the court may issue an Order forbidding the individual debtor from making
payments of any of his debts, and transferring any property belonging to him. However,
nothing contained herein shall affect or impair the rights of a secured creditor to enforce his
lien in accordance with its terms.

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Section 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.
Section 108. Absent Individual Debtor. In all cases where the individual debtor resides out of
the Republic of the Philippines; or has departed therefrom; or cannot, after due diligence, be
found therein; or conceals himself to avoid service of the Order to show cause, or any other
preliminary process or orders in the matter, then the petitioning creditors, upon submitting
the affidavits requisite to procedure an Order of publication, and presenting a bond in double
the amount of the aggregate sum of their claims against the individual debtor, shall be
entitled to an Order of the court directing the sheriff of the province or city in which the
matter is pending to take into his custody a sufficient amount of property of the individual
debtor to satisfy the demands of the petitioning creditors and the costs of the proceedings.
Upon receiving such Order of the court to take into custody of the property of the individual
debtor, it shall be the duty of the sheriff to take possession of the property and effects of the
individual debtor, not exempt from execution, to an extent sufficient to cover the amount
provided for and to prepare within three (3) days from the time of taking such possession, a
complete inventory of all the property so taken, and to return it to the court as soon as
completed. The time for taking the inventory and making return thereof may be extended for
good cause shown to the court. The sheriff shall also prepare a schedule of the names and
residences of the creditors, and the amount due each, from the books of the debtor, or from
such other papers or data of the individual debtor available as may come to his possession,
and shall file such schedule or list of creditors and inventory with the clerk of court.
Section 109. All Property Taken to be Held for All Creditors; Appeal Bonds; Exemptions to
Sureties. In all cases where property is taken into custody by the sheriff, if it does not
embrace all the property and effects of the debtor not exempt from execution, any other
creditor or creditors of the individual debtor, upon giving bond to be approved by the court in
double the amount of their claims, singly or jointly, shall be entitled to similar orders and to
like action, by the sheriff; until all claims be provided for, if there be sufficient property or
effects. All property taken into custody by the sheriff by virtue of the giving of any such bonds
shall be held by him for the benefit of all creditors of the individual debtor whose claims shall
be duly proved as provided in this Act. The bonds provided for in this section and the
preceding section to procure the order for custody of the property and effects of the individual
debtor shall be conditioned that if, upon final hearing of the petition in insolvency, the court
shall find in favor of the petitioners, such bonds and all of them shall be void; if the decision
be in favor of the individual debtor, the proceedings shall be dismissed, and the individual
debtor, his heirs, administrators, executors or assigns shall be entitled to recover such sum of
money as shall be sufficient to cover the damages sustained by him, not to exceed the amount
of the respective bonds. Such damages shall be fixed and allowed by the court. If either the
petitioners or the debtor shall appeal from the decision of the court, upon final hearing of the
petition, the appellant shall be required to give bond to the successful party in a sum double
the amount of the value of the property in controversy, and for the costs of the proceedings.
Any person interested in the estate may take exception to the sufficiency of the sureties on
such bond or bonds. When excepted to the petitioner's sureties, upon notice to the person
excepting of not less than two (2) nor more than five (5) days, must justify as to their
sufficiency; and upon failure to justify, or of others in their place fail to justify at the time and
place appointed the judge shall issue an Order vacating the order to take the property of the
individual debtor into the custody of the sheriff, or denying the appeal, as the case may be.
Section 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

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make it appear satisfactorily to the court or a judge thereof that the interest of the parties to
the proceedings will be subserved by a sale thereof, the court may order such property to be
sold in the same manner as property is sold under execution, the proceeds to de deposited in
the court to abide by the result of the proceedings.

o After filing petition:

a. Court will issue a show cause order to the individual debtor requiring
him to explain why he should not be adjudged insolvent.
b. Upon good cause shown, court may issue an injunction to the debtor
forbidding him from paying any of his debts or transferring any
property he owns.
c. Secured creditor of the individual debtor may still enforce their liens
according to the terms in their security contract.
d. If the individual debtor defaults during the proceedings, or if the
issues are found in favor of the creditor(s), the court shall issue a
Liquidation Order.
o Interim measures petitioning creditors can invoke during the
proceedings:
a. Taking of property under the custody of the sheriff
b. Sale of property under custody and deposit if the proceeds with the
court
Interim measures can only be availed of when the debtor is:
a. not a resident of the Philippines;
b. has left the country;
c. cannot, after due diligence be found within the country; or
d. conceals himself to avoid service to him of the show cause order or
any other process or order of the court.
The creditors who filed for liquidation of his assets are entitled to an
execution on the absent individual debtors properties after they submit
affidavits stating that they have complied with the requirements of
publication and present a bond double the amount of their aggregate
claims.
o Duties of the Sherriff of the province or city where the matter is
pending:

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a. Take into his custody (1) a sufficient amount of property of the

individual debtor to satisfy the demands of the petitioning creditors
and (2) the costs of the proceedings.
Shall be undertaken upon receipt of a court order telling him
to do so and to prepare within three days from the time of
taking such possession, extendible for good cause, a complete
inventory of all the property so taken, and to return it to the
court as soon as completed.
b. Prepare a (1) schedule of the names and residences of the creditors,
and the (2) 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.
c. File report and inventory with the clerk of court.
o Other creditors of individual debtor:
a. Entitled to execution on the properties via the sheriff as well as long
as the properties are sufficient to answer for their claims after giving
a bond in double the amount of such claims.
Why? Said bonds are conditioned that if, upon final hearing of
the petition in insolvency, the court shall find in favor of the
creditors, all such bonds shall be void; if the decision be in favor
of the individual debtor, the proceedings shall be dismissed, and
the individual debtor shall be entitled to recover such sum of
money sufficient to cover damages sustained by him, not to
exceed the amount of the bonds.
b. When the creditors have filed the proper affidavits and bonds and
satisfactorily persuade the court that the interest of the parties to the
proceedings will be subserved by a sale thereof, the court may order
the property to be sold in the same manner under execution (Rule 39,
Sec 10), the proceeds will be deposited in the court to abide by the
result of the proceedings.
2. Juridical Debtor
Voluntary
Section 90. Voluntary Liquidation. An insolvent debtor may apply for liquidation by filing a
petition for liquidation with the court. The petition shall be verified, shall establish the
insolvency of the debtor and shall contain, whether as an attachment or as part of the body of
the petition;
(a) a schedule of the debtor's debts and liabilities including a list of creditors with their
addresses, amounts of claims and collaterals, or securities, if any;

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(b) an inventory of all its assets including receivables and claims against third parties; and
(c) the names of at least three (3) nominees to the position of liquidator.
At any time during the pendency of court-supervised or pre-negotiated rehabilitation
proceedings, the debtor may also initiate liquidation proceedings by filing a motion in the
same court where the rehabilitation proceedings are pending to convert the rehabilitation
proceedings into liquidation proceedings. The motion shall be verified, shall contain or set
forth the same matters required in the preceding paragraph, and state that the debtor is
seeking immediate dissolution and termination of its corporate existence.
If the petition or the motion, as the case may be, is sufficient in form and substance, the court
shall issue a Liquidation Order mentioned in Section 112 hereof.

o Requirements and process for filing petition (debtor)

1. Petition must be verified and should establish the insolvency of the
debtor.
a. Rehabilitation is not economically feasible or does not result in
better present value recovery for the creditors.
2. Schedule of the debtors debts and liabilities
3. List of creditors with their addresses, amounts of claim and collaterals
or securities, if any;
4. Inventory of all its assets including receivables and claims against
third parties; and
5. The names of at least three nominees to the position of liquidator.
6. If court-supervised or pre-negotiated rehabilitation proceedings are
already underway the debtor may file a motion in the court where the
rehabilitation proceedings are pending to convert the same into
liquidation proceedings.
Must have the contents required in a petition, as well as a
statement that the debtor is seeking immediate dissolution and
termination of its corporate existence.
7. If the petition or motion is sufficient in form and substance, the court
shall issue a Liquidation Order.

Involuntary

Section 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:

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(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.

o Requirements for filing of petition:

1. There must be three or more creditors;
2. Claims amount to an aggregate of at least
a. 1 Million; or
b. 25% of the subscribed capital stock or partners contributions of
the debtor; and
3. An act of insolvency is alleged and thereafter established. As provided
in the law, there are only two possible acts of insolvency for juridical
debtors:
a. Due and demandable payments on claims [there being no 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
b. The debtor has failed generally to meet its liabilities as they fall
due, and there is no substantial likelihood that the debtor may
be rehabilitated.
o Procedure:
1. Petition must clearly state the act of insolvency.
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2. If court-supervised or pre-negotiated rehabilitation proceedings are

already pending, the creditors may file a motion in the same court
where the proceedings are pending to convert the same into
liquidation proceedings. Apart from stating the act of insolvency, the
creditors must state that they are seeking the immediate liquidation
of the debtor.
3. If the petition or motion is sufficient in form and substance, the court
shall issue an order that:
a. Directs the publication of the petition or motion in a newspaper
of general circulation once a week for two consecutive weeks;
and
b. Directs the debtor and all creditors who are not petitioners to
file their comments within 15 days from the date of last
publication.
4. If, after considering all comments filed, the court determines that the
petition or motion is meritorious, it shall issue a Liquidation Order.
Common Aspects of Liquidation of Individual and Juridical Debtors
1. Liquidation Order
It is the Order issued by the court under Section 112 of this Act. Once a
declaration of insolvency or adjudication of insolvency is made in the liquidation
order,legal provisions that require the status of insolvency apply.
Section 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 they become due;
(i) state that the debtor and creditors who are not petitioner/s may submit the names of other
nominees to the position of liquidator; and

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(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.
Section 113. Effects of the Liquidation Order. Upon the issuance of the Liquidation Order:
(a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence
terminated;
(b) legal title to and control of all the assets of the debtor, except those that may be exempt
from execution, shall be deemed vested in the liquidator or, pending his election or
appointment, with the court;
(c) all contracts of the debtor shall be deemed terminated and/or breached, unless the
liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise
and the contracting party agrees;
(d) no separate action for the collection of an unsecured claim shall be allowed. Such actions
already pending will be transferred to the Liquidator for him to accept and settle or contest. If
the liquidator contests or disputes the claim, the court shall allow, hear and resolve such
contest except when the case is already on appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment therein for a claim against the debtor shall be
filed and allowed in court; and
(e) no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.

The proper result of a liquidation order is the dissolution of a juridical debtor and the
discharge of the individual debtor.
2. The Liquidator
Section 4, (w) Liquidator shall refer to the natural person or juridical entity appointed as such
by the court and entrusted with such powers and duties as set forth in this
Act: Provided, That, if the liquidator is a juridical entity, it must designated a natural person
who possesses all the qualifications and none of the disqualifications as its representative, it
being understood that the juridical entity and the representative are solidarity liable for all
obligations and responsibilities of the liquidator.
Section 115. Election of Liquidator. Only creditors who have filed their claims within the period
set by the court, and whose claims are not barred by the statute of limitations, will be allowed
to vote in the election of the liquidator. A secured creditor will not be allowed to vote, unless:
(a) he waives his security or lien; or (b) has the value of the property subject of his security or
lien fixed by agreement with the liquidator, and is admitted for the balance of his claim.
The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the
highest number of votes cast in terms of amount of claims, ad who is qualified pursuant to
Section 118 hereof, shall be appointed as the liquidator.
Section 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

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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.
Section 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.
Section 118. Qualifications of the Liquidator. The liquidator shall have the qualifications
enumerated in Section 29 hereof [Qualifications of a Receiver]. 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.
Section 119. Powers, Duties and Responsibilities of the Liquidator. The liquidator shall be
deemed an officer of the court with the principal duly of preserving and maximizing the value
and recovering the assets of the debtor, with the end of liquidating them and discharging to
the extent possible all the claims against the debtor. The powers, duties and responsibilities of
the liquidator shall include, but not limited to:
(a) to sue and recover all the assets, debts and claims, belonging or due to the debtor;
(b) to take possession of all the property of the debtor except property exempt by law from
execution;
(c) to sell, with the approval of the court, any property of the debtor which has come into his
possession or control;
(d) to redeem all mortgages and pledges, and so satisfy any judgement which may be an
encumbrance on any property sold by him;
(e) to settle all accounts between the debtor and his creditors, subject to the approval of the
court;
(f) to recover any property or its value, fraudulently conveyed by the debtor;
(g) to recommend to the court the creation of a creditors' committee which will assist him in
the discharge of the functions and which shall have powers as the court deems just,
reasonable and necessary; and
(h) upon approval of the court, to engage such professional as may be necessary and
reasonable to assist him in the discharge of his duties.
In addition to the rights and duties of a rehabilitation receiver, the liquidator, shall have the
right and duty to take all reasonable steps to manage and dispose of the debtor's assets with
a view towards maximizing the proceedings therefrom, to pay creditors and stockholders, and
to terminate the debtor's legal existence. Other duties of the liquidator in accordance with this
section may be established by procedural rules.
A liquidator shall be subject to removal pursuant to procedures for removing a rehabilitation
receiver.
Section 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

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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.
Section 121. Reporting Requirements. The liquidator shall make and keep a record of all
moneys received and all disbursements mad by him or under his authority as liquidator. He
shall render a quarterly report thereof to the court , which report shall be made available to all
interested parties. The liquidator shall also submit such reports as may be required by the
court from time to time as well as a final report at the end of the liquidation proceedings.
Section 122. Discharge of Liquidator. In preparation for the final settlement of all the claims
against the debtor , the liquidator will notify all the creditors, either by publication in a
newspaper of general circulation or such other mode as the court may direct or allow, that will
apply with the court for the settlement of his account and his discharge from liability as
liquidator. The liquidator will file a final accounting with the court, with proof of notice to all
creditors. The accounting will be set for hearing. If the court finds the same in order, the court
will discharge the liquidator.

Broken Down:
Definition
-

The natural person or juridical entity appointed as such by the court.

Entrusted with powers and duties set forth in the FRIA.

Provided, if the liquidator is a juridical entity, it must designate a
natural person who possesses all the qualifications as its
representative,
The juridical entity and the representative are solidarity liable for
all obligations and responsibilities of the liquidator.

Ways to determine liquidator

a. Election by creditors
(1)Qualification of creditors who may vote
(1) Those who have filed their claims within the period set by the
court, and whose claims are not barred by the statute of limitations
(2) A secured creditor will not be allowed to vote, unless
i. he waives his security or lien; or
ii. 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.
(2)Procedure
(1)Liquidator nominated and elected in open court.
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(2)Nominee receiving the highest number of votes cast in terms of

amount of claims
b. Court-Appointed
(1)The court may appoint the liquidator if:
i. creditors do not attend on the day of election;
ii. the creditors who attend, fail or refuse to elect a
liquidator;
iii. after being elected, the liquidator fails to qualify; or
iv. a vacancy occurs for any reason whatsoever
In any of the cases provided, the court may instead set another
hearing of the election. This does not prevent a rehabilitation receiver, who
was administering the debtor prior to the commencement of the liquidation,
from being appointed as a liquidator.

Compensation
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 be determined by the liquidation court, which shall not
exceed the maximum amount as may be prescribed by the Supreme Court.

Powers, Duties and Responsibilities

a. Duties and Responsibilities
(1)Sue and recover all the assets, debts and claims, belonging or due to
the debtor;
(2)Take possession of all the property of the debtor except property
exempt by law from execution;
(3)Sell, with the approval of the court, any of the debtors property in his
possession or control;
(4)Redeem all mortgages and pledges, and so satisfy any judgment
which may be an encumbrance on any property sold by him;
(5)Settle all accounts between the debtor and his creditors, subject to
the approval of the court;
(6)Recover any property or its value, fraudulently conveyed by the
debtor;
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(7)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;
(8)Engage such professional necessary and reasonable upon approval of
the court, to assist him in the discharge of his duties;
(9)Take all reasonable steps to manage and dispose of the debtor's assets
with a view towards maximizing the proceeds to pay creditors and
stockholders, and to terminate the debtor's legal existence; and
(10)

Other duties as established by procedural rules.

b. Power
The liquidator shall have 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.

Discharge of liquidator
a. In preparation for the final settlement of all the claims against the debtor,
the liquidator will notify all the creditors, by publication in a newspaper of
general circulation or other mode 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.
b. 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.

3. The Liquidation Plan

Section 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.
Section 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.

Procedure

Section 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

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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.

a. The liquidator may sell the unencumbered assets of the debtor and convert
the same into money. The sale shall be made at PUBLIC AUCTION.
(1)However, a PRIVATE SALE may be allowed with the approval of the
court if:
(1)goods to be sold are:
i. perishable
ii. liable to quickly deteriorate in value
iii. disproportionately expensive to keep or maintain
(2)for the best interest of the debtor and his creditors.
b. 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.

Property Exempt

Section 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.

a. Kinds
(1)Real and personal property exempt from execution
(2)Homestead
b. Initiated and set apart by the court upon petition and after hearing
Notice of the hearing of the application necessary.
(1)Posted it at least 3 public places in the province or city at least
10 days prior to the time of hearing.

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(2)Include the name of the said insolvent debtor, and the time and
place appointed for the hearing of such application.
(3)Indicate the homestead sought to be exempted or the property
sought to be set aside and
(4)Must show that such proof was made to the satisfaction of the
court, and shall be conclusive evidence of that fact.

Reporting Requirements

Section 121. Reporting Requirements. The liquidator shall make and keep a record of all
moneys received and all disbursements mad by him or under his authority as liquidator. He
shall render a quarterly report thereof to the court , which report shall be made available to all
interested parties. The liquidator shall also submit such reports as may be required by the
court from time to time as well as a final report at the end of the liquidation proceedings.

In numerical form, the liquidator shall:

(1)make and keep a record of all moneys received and all disbursements
made by him or under his authority as liquidator;
(2)render a quarterly report thereof to the court, which report shall be
made available to all interested parties. Contents are:
i. All money received
ii. Disbursements made by him;
(3)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; and
(4)final Report at end of liquidation proceedings
Claims
Section 112. Liquidation Order. The Liquidation Order shall: xxx (g) direct all creditors to file
their claims with the liquidator within the period set by the rules of procedure;
Section 123. Registry of Claims. Within twenty (20) days from his assumption into office the
liquidator shall prepare a preliminary registry of claims of secured and unsecured creditors.
Secured creditors who have waived their security or lien, or have fixed the value of the
property subject of their security or lien by agreement with the liquidator and is admitted as a
creditor for the balance , shall be considered as unsecured creditors. The liquidator shall make
the registry available for public inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-debtor, the partners of the partnershipdebtor 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.
Section 124. Right of Set-off. If the debtor and creditor are mutually debtor and creditor of
each other one debt shall be set off against the other, and only the balance, if any shall be
allowed in the liquidation proceedings.

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Section 125. Opposition or Challenge to Claims. Within thirty (30 ) days from the expiration of
the period for filing of applications for recognition of claims, creditors, individual debtors,
owner/s of the sole proprietorship-debtor, partners of the partnership-debtor and shareholders
or members of the corporation -debtor and other interested parties may submit a challenge to
claim or claims to the court, serving a certified copy on the liquidator and the creditor holding
the challenged claim. Upon the expiration of the (30) day period, the rehabilitation receiver
shall submit to the court the registry of claims containing the undisputed claims that have not
been subject to challenge. Such claims shall become final upon the filling of the register and
may be subsequently set aside only on grounds or fraud, accident, mistake or inexcusable
neglect.
Section 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.

Broken Down:
Determination of Claims
a. The liquidation order shall direct all creditors to file their claims with the
liquidator within the period set by the rules of procedure.
If the debtor and creditor are mutually debtor and creditor of each other
one debt shall be set off against the other, and only the balance, if any shall
be allowed in the liquidation proceedings.
b. Opposition or Challenge to Claims
(1)The following 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:
(1)Creditors
(2)Individual debtors
(3)Owner/s of sole proprietorship-debtor
(4)Partners of the partnership-debtor
members of the corporation-debtor

and

shareholders

or

(5)Other interested parties

(2)Challenge must be submitted within 30 days from the expiration of
the period for filing of applications for recognition of claims
(1)Upon the expiration of the 30-day period, the rehabilitation
receiver/liquidator shall submit to the court the registry of
claims containing the undisputed claims that have not been
subject to challenge.

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(2)Such claims shall become final upon the filling of the register
and may be subsequently set aside only on grounds or fraud,
accident, mistake or inexcusable neglect.
(3)Submission of disputed claims to court: The liquidator shall resolve
disputed claims and submit his findings thereon to the court for final
approval. The liquidator may disallow claims.

Registry
a. Within 20 days from assumption into office the liquidator shall prepare a
preliminary registry of claims of secured and unsecured creditors.
b. Make the registry available for public inspection and provide publication
notice to:
(1)Creditors
(2)Individual debtors
(3)Owner/s of the sole proprietorship-debtor
(4)Partners of the partnership-debtor and shareholders or members of
the corporation-debtor, on where and when they may inspect it.
c. All claims must be duly proven before being paid.

Rights of the Secured Creditor

1. Claims not affected by liquidation order
2. During the proceedings, a secured creditor may:
a. waive his right under the security or lien and 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
The value of the property may be fixed in a manner agreed upon by
the creditor and the liquidator.
- If the value is less than claim secured: 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 the 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.
The liquidator may sell the property and satisfy the secured creditor's
entire claim from the proceeds of the sale; or
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Avoidance Proceedings
Please see discussion of avoidance proceedings under Rehabilitation, supra.
Termination Proceedings
Section 121. Reporting Requirements. The liquidator shall make and keep a record of all
moneys received and all disbursements mad by him or under his authority as liquidator. He
shall render a quarterly report thereof to the court, which report shall be made available to all
interested parties. The liquidator shall also submit such reports as may be required by the
court from time to time as well as a final report at the end of the liquidation proceedings.
Section 134. Order Removing the Debtor from the List of Registered Entitles at the Securities
and Exchange Commission. Upon determining that the liquidation has been completed
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.
Section 135. Termination of Proceedings. Upon receipt of evidence showing that the debtor
has been removed from the registry of legal entities at the SEC. The court shall issue an Order
terminating the proceedings.

1. As to individual debtors, termination of proceedings takes place when all the assets
have been sold and applied to the liabilities, and the debtor discharged, i.e. when
liquidation has been completed. [As culled from discussion with Sir.]
2. As to juridical debtors, once liquidation is complete the proceedings are terminated
upon removal of the debtor from the SECs registry of legal entities.
Ancillary Proceedings
Section 136. Liquidation of a Securities Market Participant. The foregoing provisions of this
chapter shall be without prejudice to the power of a regulatory agency or self- regulatory
organization to liquidate trade-related claims of clients or customers of a securities market
participant which, for purposes of investor protection, are hereby deemed to have absolute
priority over other claims of whatever nature or kind insofar as trade-related assets are
concerned.
For purposes of this section, trade -related assets include cash, securities, trading right and
other owned and used by the securities market participant in the ordinary course of this
business.
Section 137. Provision of Assistance. The court shall issue orders, adjudicate claims and
provide other relief necessary to assist in the liquidation of a financial under rehabilitation
receivership established by a state-funded or state-mandated insurance system.
Section 138. Application of Relevant Legislation. The liquidation of bank, financial institutions,
insurance companies and pre-need companies shall be determined by relevant legislation. The
provisions in this Act shall apply in a suppletory manner.
Section 139. Adoption of Uncitral Model Law on Cross-Border Insolvency. Subject to the
provision of Section 136 hereof and the rules of procedure that may be adopted by the
Supreme Court, the Model Law on Cross-Border Insolvency of the United Nations Center for
International Trade and Development is hereby adopted as part of this Act.
Section 140. Initiation of Proceedings. The court shall set a hearing in connection with an
insolvency or rehabilitation proceeding taking place in a foreign jurisdiction, upon the
submission of a petition by the representative of the foreign entity that is the subject of the
foreign proceeding.

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Section 141. Provision of Relief. The court may issue orders:

(a) suspending any action to enforce claims against the entity or otherwise seize or foreclose
on property of the foreign entity located in the Philippines;
(b) requiring the surrender property of the foreign entity to the foreign representative; or
(c) providing other necessary relief.
Section 142. Factors in Granting Relief. In determining whether to grant relief under this
subchapter, the court shall consider;
(a) the protection of creditors in the Philippines and the inconvenience in pursuing their claim
in a foreign proceeding;
(b) the just treatment of all creditors through resort to a unified insolvency or rehabilitation
proceedings;
(c) whether other jurisdictions have given recognition to the foreign proceeding;
(d) the extent that the foreign proceeding recognizes the rights of creditors and other
interested parties in a manner substantially in accordance with the manner prescribed in this
Act; and
(e) the extent that the foreign proceeding has recognized and shown deference to proceedings
under this Act and previous legislation.

Securities Market Participant

1. Clients or customers of a securities market participant are given absolute
priority as regards their trade-related claims over trade-related assets. This
absolute priority is to be enforced by a regulatory agency or a self-regulatory
organization.
Securities refer to stocks and futures and debentures.
2. Gives clients or customers of the securities market participant priority above
all other claims, so long as such claims are trade-related
May be considered a special preferred credit
3. If a company that sells bonds or stocks undergoes liquidation, the first claims
that will be answered will be those of its investors. These claims will be paid out
of the company assets used in the general business of the company, and such
payment will be in accordance with the rules of the SEC or of the self-regulating
organization involved.

Banks and Other Financial Institutions Under Rehabilitation Receivership

Pursuant to a State-funded or State-mandated Insurance System
Relevant laws: The liquidation proceedings are governed by RA 7653 (The New
Central Bank Act) and RA 8791 (The General Banking Law of 2000).
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Done by the PDIC with the assistance of the courts.

a. Occurs after PDIC receivership fails.
a. Receivership, in turn, happens if the bank has been closed
for various acts of insolvency:
i. Unable to pay its liabilities as they become due in
the ordinary course of business
ii. Insufficient realizable assets to meet its liabilities
iii. Cannot continue without involving probable losses
to its depositors or creditors
iv. Wilfully violated a cease and desist order from the
Monetary Board that has become final, involving
acts or transactions which amount to fraud or a
dissipation of the assets of the institution
v. Notifies the Bangko Sentral or publicly announces a
bank holiday, or in any manner suspends the
payment of its deposit liabilities continuously for
more than thirty (30) days

Procedure
a. PDIC files ex parte with RTC, and without requirement of prior
notice or any other action, a petition for assistance in the
liquidation of the bank pursuant to a liquidation plan adopted by
PDIC for general application to all closed banks
b. Upon acquiring jurisdiction, the court shall, upon motion by the
receiver after due notice
a. Adjudicate disputed claims against the bank
b. Assist in the enforcement of individual liabilities of the
stockholders, directors and officers
c. Decide on other issues as may be material to implement
the liquidation

Cross-border Insolvency Proceedings

This occurs when an insolvent debtor has assets in, and creditors from, several
states, giving rise to the possibility may be commenced in several jurisdictions.

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 The UNCITRAL (United Nations Center for International Trade Law) Model
Law on Cross-border insolvency focuses on the legislative framework needed
to facilitate cooperation and coordination in cross-border insolvency
proceedings.
Initiation of Proceedings:
The court shall set a hearing in connection with an insolvency or
rehabilitation proceeding taking place in a foreign jurisdiction, upon
the submission of a petition by the representative of the foreign entity
that is the subject of the foreign proceeding.
Relief

The court may issue orders

a. suspending any action to enforce claims against the entity
or otherwise seize or foreclose on property of the foreign
entity located in the Philippines;
b. requiring the surrender property of the foreign entity to
the foreign representative; and
c. other necessary reliefs.

Factors for granting relief

a. protection of creditors in the Philippines and the
inconvenience in pursuing their claim in a foreign
proceeding;
b. just treatment of all creditors through resort to a unified
insolvency or rehabilitation proceedings;
c. whether other jurisdictions have given recognition to the
foreign proceeding;
d. the extent that the foreign proceeding recognizes
i. the rights of creditors and other interested parties
in a manner substantially in accordance with the
manner prescribed in this Act;
ii. and shown deference to proceedings under this Act
and previous legislation.

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Appendix:

A discussion on Defective Title (adapted from Sales)

General Rule: A sale is void if the seller does not own the goods sold. No title is
passed, and in general a buyer for value in good faith does not acquire any better title.
Exceptions: When valid sale can be made by non-owner
1. Estoppel
2. Recording Laws; Torrens System PD 1529
Not really. The Torrens System does not by itself constitute ownership ; it merely
evidenshes it. Therefore, even if there is a Torrens title over the land, if such title
was fraudulently acquired, the sale is still valid.
3. Statutory Sale, i.e. sale conducted by the court;e.g.
4. Sale in Merchants Store, Market or Fair
Sort-of exception: Sale by seller with voidable title.
A seller who has voidable title over the goods sold can validly transfer valid title
to an innocent purchaser for value, unless title was annulled before the sale is
perfected.
o So long as the goods are still in the possession of the 1st buyer, they may
still be recovered by the vendor in an action for annulment.
o But once it has been transferred to an innocent purchaser for value before
the contract is annulled, the latter has acquired a valid title.
The sticking point is the extent of the defect of title.
o If the defect of title is force, threats, intimidation, fraud, or mistake, i.e. that
the contract is voidable, then a BFVGF may be protected, subject to the ff:
The title had not been voided at the time of the sale.
The buyer bought them in good faith, for value, and without notice of
the sellers defect of title.
o If the defect of title is that the thing was acquired due to loss or the goods
were stolen, then the principle of BFVGF does not apply, and the goods
sold may be recovered by the true owner.
In general, the goods will be returned without need to pay for the
price for which it was sold.
Exception: if the goods were bought in good faith at a public sale, 32
the owner cannot recover the goods without reimbursing the price
therefor.

32 Which means a public auction which was advertised to the public, NOT TO
FRICKING MALLS AND MERCHANT STORES.
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Possible Test Questions:

These topics were noted down by sir on his notes. Based on the mids, that means that
they will probably come out in the exam. Obviously this list is by no means exclusive.
1. Expect a mixed transaction problem with a Letter of Credit, a Trust Receipt, and
maybe a Warehouse Receipt. The question will be about liability and expenses and
who answers for both.
2. Differentiate absolute ownership and free disposal in the context of pledge and
mortgage.
3. Differentiate pledge and chattel mortgage.
4. Differentiate chattel and real mortgages.
5. Explain the concept of indivisibility of pledge or mortgage.

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