Credit Transactions Notes

SGS QUESTIONS: (and other notes from class appear in this CREDIT: is the debtor’s ABILITY to borrow money
orrow money by virtue of

box) the confidence or trust reposed by the creditor that the debtor
Which is the best security transaction that should govern the will pay what he promised.
situation?
What would you do if you were counsel for: It mitigates the risk of loss using SECURITY.
a. Debtor
Creditor Civil Code does not have a definition of credit
Others who may be parties/involved Under the Truth in Lending Act, RA No. 3765, Sec. 3(2):
(surety/guarantor/etc) "Credit" means any loan, mortgage, deed of trust, advance,
In a case, what would the remedy have been (for the losing or discount; any conditional sales contract; any contract to
party)? sell, or sale or contract of sale of property or services, either
for present or future delivery, under which part or all of the
INTRODUCTION: THE CONCEPT OF CREDIT price is payable subsequent to the making of such sale or
contract; any rental-purchase contract; any contract or
A. Credit, Debt and Security arrangement for the hire, bailment, or leasing of property;
any option, demand, lien, pledge, or other claim against, or
Credit, which means “belief or trust” is from Latin “Credere” for the delivery of, property or money; any purchase, or
= “I believe”/to trust or to believe other acquisition of, or any credit upon the security of, any
Greek law: non-payment of a debt was categorized as a obligation of claim arising out of any of the foregoing; and
capital crime similar to murder any transaction or series of transactions having a similar
Roman law: creditor was allowed to seize the debtor and purpose or effect.  this is primarily an enumeration
sell or kill him in foreclosure, since a sum of money owed
was equated with human life Jurisprudence defined credit as “a sum credited on the
Judaic law: creditor was allowed to take the children of the books of a company to a person who appears to be entitled
debtor for nonpayment of a debt to it. It presupposes a creditor-debtor relationship, and may
Constitutional mandate now: “No person shall be imprisoned be said to imply ability, by reason of property or estates, to
for debt…”  shows that concepts of credit and debt have make a promised payment … It is the correlative to debt or
been dramatically altered indebtedness, … that which is due to any person, as
Concept of security was devised to have a rational and distinguished from that which he owes.”
kinder, system of ensuring the payment of debt – security is Debt has been defined as a demand for an amount actually
a transaction by which a creditor mitigates the risk of non- ascertained. There must be an ascertained amount and not
payment of debt by equating a sum of money owed with a mere unliquidated demand or liability, a certain sum that a
property or another person’s undertaking to pay person may recover “in numero and not to be repaired in
Without credit, and without a rational system of dealing with damages”
non-payment of debt, trade and commerce would not have
flourished in the 14th to 19th century People v. Concepcion (1922)
By the 20th century, modern-day merchants were Plaintiff: People of the Phils.
translating concepts of credit, debt and security into Defendant: Venancio Concepcion
increasingly complicated and sophisticated transactions Concept: Credit & Credit Transactions Defined
required by the global economy
Doctrine:
B, Credit and Credit Transactions Defined Credit is the “ability to borrow money by virtue of the confidence
or trust reposed by a lender that he will pay what he may
RA 3765, Sec. 3 (2) "Credit" means any loan, mortgage, deed promise.” Loan, on the other hand, is “the delivery by one party
of trust, advance, or discount; any conditional sales contract; and the receipt by the other party of a given sum of money, upon
any contract to sell, or sale or contract of sale of property or an agreement, express or implied, to repay the sum of money,
services, either for present or future delivery, under which part upon an agreement, express or implied, to repay the sum
or all of the price is payable subsequent to the making of such loaned, with or without interest.“
sale or contract; any rental-purchase contract; any contract or
arrangement for the hire, bailment, or leasing of property; any Brief Facts:
option, demand, lien, pledge, or other claim against, or for the Concepcion, president of PNB, issued a special authorization for
delivery of, property or money; any purchase, or other an extension of credit in favor of copartnership Puno y
acquisition of, or any credit upon the security of, any obligation Concepcion, with his wife being one of the copartners. The line
of claim arising out of any of the foregoing; and any transaction of credit was issued with no other securities demanded. He was
or series of transactions having a similar purpose or effect. charged with violation of Sec. 35 of Act No. 2747, which prohibits
the granting of loans to members of the board of directors of the
bank, and was found guilty.
TIMELESS REVIEWERS B2017 | CREDIT TRANSACTIONS | PROF. STEPHANIE GOMEZ-SOMERA 1

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ISSUES: 3. YES; it constitutes an indirect loan.
WON the grant of a line of credit of P300k by the defendant to What may not be done directly, cannot be done indirectly.
the copartnership… The object of Congress in enacting the provision in the said
…a “loan” within the meaning of Sec. 35? (NO) question was to prevent the director of a bank from being
…a loan or a discount? (LOAN) tempted to serve his financial interests.
…an indirect loan within the meaning of Sec. 35? (YES) Making the grant of credit in question to a copartnership
WON defendant may be convicted of the offense even if the where the defendant’s own wife is a shareholder is an
same were already repealed before the information was filed indirect circumvention of the provision and therefore, also
and judgment was rendered (YES) falls under its prohibition; it amounts to an indirect loan by
…was covered of the prohibition by the law? (YES) the defendant to himself.
WON good faith is a defense (NO)
4. YES; he may still be convicted
RATIO: The past cases of US v. Cuna, Ong Chang Wing and Kwong
1. NO; record shows that authority was not for a loan but Fok v. US, etc., have already ruled that the repeal of the
only for a concession of credit penal provision for which a defendant is being held
Court finds that the documents on the record only speak of responsible for, does not deprive the courts of their
credit (credito), and not of a loan (prestamo). jurisdiction to try the case and sentence him the appropriate
Credit is the “ability to borrow money by virtue of the penalty, if found guilty.
confidence or trust reposed by a lender that he will pay what
he may promise.” 5. YES; the provision covers him.
Loan, on the other hand, is “the delivery by one party and While the provision talks of the National Bank being
the receipt by the other party of a given sum of money, upon prohibited to do a certain act, such prohibition extends to the
an agreement, express or implied, to repay the sum of board of directors, and to each director, separately and
money, upon an agreement, express or implied, to repay the individually.
sum loaned, with or without interest.“ Defendant, being the President of the bank is, therefore,
However, the Court also points out that the concession of a properly covered by the provision as well.
credit necessarily results to the grant of loans up to the limit
of the amount fixed in the credit. 6. NO; good faith is not a defense
Definition provides a conceptual framework for The Court holds that since the penal provision in question is
understanding credit in relation to credit transactions malum prohibitum, it does not matter if the defendant acted
J. Malcolm borrowed from Bouvier’s Law Dictionary and in good faith or that the loans that came about from the
defined credit as a person’s “ability to borrow money by extension of credit were already paid. The law punishes the
virtue of the confidence or trust reposed by a lender that he very commission of the crime and not the intent behind it, on
will pay what he may promise.” account of public interest and policy.
Credit, therefore, is an evaluation, made in the present, by
virtue of the trust and confidence reposed by a creditor, of DISPOSITIVE: CFI affirmed.
a debtor’s future worth or ability.
All obligations, that is, the juridical necessity to give, to do or
not to do, that arise as a consequence of this evaluation, are
credit transactions.
2. The grant was one of loan and is therefore covered by the

penal provision.
A 1916 ruling by the Insular Auditor held that the provision
prohibits loans but not discount transactions; it now, then,
becomes important to determine the nature of the
transaction in question.
The grant by the defendant was a loan and NOT a discount
transaction:
o Discounts (1) involves a deduction of the interest in
advance, and (2) is written on a double-name paper
o The transaction however, did not involve such a
deduction at the said point in time and was written on a
single-name paper. These are characteristic of a loan.

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C. Commercial Credit Transactions LOAN
COC, Art. 1 The following are merchants for the purposes of I. THE CONCEPT OF LOAN
this Code:
Those who, having legal capacity to trade, customarily The concept of loan is a question of civility. It came from Roman
devote themselves thereto. cdasia law, a contract of neighborliness.
Commercial or industrial associations which are formed in
accordance with this Code. A. General Concepts
COC, Art. 2 Commercial transactions, be they performed by Art. 1933 By the contract of loan, one of the parties delivers to
merchants or not, whether they are specified in this Code or another, either something not consumable so that the latter
not, shall be governed by the provisions contained in the same; may use the same for a certain time and return it, in which
in the absence of such provisions, by the commercial customs case the contract is called a commodatum; or money or other
generally observed in each place; and in the absence of both, consumable thing, upon the condition that the same amount of
by those of the common law. the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum. Commodatum is
Commercial transactions shall be considered those essentially gratuitous.
enumerated in this Code and any others of a similar character.
Simple loan may be gratuitous or with a stipulation to pay
COC, Art. 3 The legal presumption of a customary interest.
engagement in commerce exists from the time the person who
In commodatum the bailor retains the ownership of the thing
desires to trade gives notice through circulars, newspapers,
loaned, while in simple loan, ownership passes to the
handbills, posters exhibited to the public, or in any other
manner whatsoever, of an establishment, the purpose of which borrower.
is to conduct any commercial transaction.
Art. 1305 A contract is a meeting of minds between two
Most credit transactions are commercial in nature, generally persons whereby one binds himself, with respect to the other,
entered into by merchants to give something or to render some service.
Commercial credit transactions usually take the form of
ready-made contracts – contracts of adhesion, Art. 1933 defines loan as a contract where one party
agreements where one party imposes a ready-made form of delivers to another either something not consumable so
contract on the other who is free to reject it entirely, or if it that the latter may use the same for a certain time and
adheres, to give its consent; just as binding as ordinary return it (commodatum), or money or other consumable
contracts; in case of ambiguity, it will be construed against thing, upon the condition that the same amount of the same
the party who prepared it kind and quality shall be paid (mutuum)
D. Relevance of Trust and Confidence A loan is an obligation that always arises from a contract
A loan, whether commodatum or mutuum, is a contract for
Money: anything generally accepted as payment in a permissive use
transaction, recognized as a standard of value, and
authorized or adopted by a State as part of its currency. It is The source of the obligation is a contract.
viewed as “trust inscribed,” a “matter of belief” in the State
issuing it. Money approximates absolute credit as it Essential Elements:
represents the trust and confidence reposed in the State Mutuum Commodatum
A common view arose (only those with money could procure Object Consumableor Non-consumable
more money on credit): by 2007, debtors lured by deferred money
payment terms failed to make payments; securities became Consideration Creditor: Liberality Bailor: Liberality
worthless; 21st cen. witnessed first global credit crisis Debtor: Permissive Bailee: Permissive
By late 20th century microfinance and microcredit gained use use
recognition as poverty alleviation strategies. As a credit and Consent Consent
savings mobilization program exclusively for the poor, the
avowed purpose is to improve their asset base and expand
their access to savings.
o Underlying credit transaction – quite simply a loan – is
unique because of the small amount of money involved,
the general absence of security over property, and the
partnering of private and public sector entities
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1. Obligation to Deliver
ISSUE: WON there was a contract of loan; if so, W it was Thio or
Art. 1934 An accepted promise to deliver something by way of Santiago who borrowed money from Garcia [YES, Thio]
commodatum or simple loan is binding upon parties, but the
commodatum or simple loan itself shall not be perfected until RATIO: YES, there was a contract of loan, where Thio
the delivery of the object of the contract. borrowed money from Garcia.
(On existence of a loan)
Primary obligation of the creditor in a loan is the delivery, A loan is a real contract, not consensual, and is perfected
that is, the formal act of transferring, or the giving or yielding only upon the delivery of the object of the contract
of possession or control, of property for permissive use by o Art. 1934: An accepted promise to deliver something by
the debtor way of commodatum or simple loan is binding upon
Reason why a loan is considered a real contract, a contract parties, but the commodatum or simple loan itself
in which property passes from one party to another, shall not be perfected until the delivery of the
requiring something more than mere consent object of the contract. (n)
Delivery is essential for perfection o Upon delivery of the object of the contract of loan
(money received by the debtor when the checks were
encashed), the debtor acquires ownership of such
The obligation to DELIVER makes it a REAL CONTRACT
money or loan proceeds and is bound to pay the
because it is perfected upon the delivery of the object.
creditor an actual amount
Undisputed that the checks were delivered to Thio, but the
Consent is still necessary because consent is still an essential
checks were crossed and payable, not to Thio, but to
element of a CONTRACT.
Santiago
(On identity of borrower)
MUTUUM: Obligations of the Parties
Garcia: Thio insisted that both checks be made payable to
Creditor: To DELIVER
Santiago; and once Thio received the checks, she had
Debtor: To PAY the same amount of the same kind and
possession and control of them such that she had the
quality
choice to either forward them to Santiago (who was already
her debtor), to retain them or to return them to Garcia
COMMODATUM: Obligations of the Parties
SC: We agree with Garcia
Bailor: To DELIVER
o Delivery is the act by which the res or substance
Bailee: To RETURN
thereof is placed within the actual or constructive
possession or control of another
Difference in the obligation of the DEBTOR arises from the
o Although she did not physically receive the proceeds, the
nature of the object of the contract:
instruments were placed in her control and possession
CONSUMABLE (mutuum): consumed by its use
under an arrangement whereby she actually re-lent the
NON-CONSUMABLE (commodatum): not consumed by its
amounts to Santiago
use Several factors that support conclusion that instruments
were placed in Thio’s control and possession:
Garcia v. Thio (2007) – Corona
o That Garcia did not personally know Santiago, and it was
Petitioners: Carolyn Garcia
highly improbable that Garcia would grant 2 loans to a
Respondents: Rica Marie Thio
complete stranger without requiring promissory notes or
Concept: Loan - Obligations to Deliver acknowledgment of the debt. Thio already had
transactions with Santiago back then
Doctrine:
o A friend of both Garcia and Thio testified that Thio’s plan
A loan is a real contract, not consensual, and is perfected only
was for Garcia to lend her money at 3% monthly
upon the delivery of the object of the contract. Delivery is the act
interest, after which Thio would lend the same amount
by which the res or substance thereof is placed within the actual to Santiago at 5% and realize profit of 2%
or constructive possession or control of another. o Thio admitted issuing her own checks in the amount of
P76,000, but she merely accommodated Garcia’s
Brief Facts:
request that Thio use her own checks since Garcia was
Garcia gave Thio 2 crossed checks in Feb and June 1995, and
not personally acquainted with Santiago; difficult to
Thio gave Garcia amounts of money for several months believe Thio would put herself in a position where she
thereafter. Garcia filed a complaint for sum of money and would be compelled to pay interest, from her own
damages against Thio, alleging that Thio borrowed money from funds, for loans she allegedly did not contract
her but failed to pay on the maturity dates. Thio denied o In petition for insolvency by Santiago, Thio (not Garcia)
contracting the 2 loans, and alleged that it was a Santiago who was listed as one of Santiago’s creditors
contracted the loans and Thio was merely tasked to deliver said
checks to her.

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Thio never presented Santiago as a witness to Commodatum Mutuum Money or
corroborate story Non-consumable, whether other consumable property
SC: Thio should be liable for the principal amounts of the loans movable or immovable
(US$100,000 and P500,000) but she shouldn’t be liable for the Purpose of the delivery by the Purpose of the delivery by the
3% and 4% monthly interest because there was no written proof creditor is for the permissive creditor is for the permissive
of the interest payable except for the verbal agreement AND use of the property by the use of the property by the
Art. 1956 states that “[n]o interest shall be due unless it has debtor by taking ownership
debtor for a certain time
been expressly stipulated in writing” (use of consumable property
(On interest) results in its extinguishment)
No stipulated interest, but there can be legal interest Debtor takes ownership
Creditor retains ownership
pursuant to Art. 2209 (breach of an obligation which Consequent obligation of the
Obligation on the part of the
consists in the payment of a sum of money, i.e., a loan or debtor to return the very same debtor is to pay the same
forbearance of money) in the amount of 12% per annum property to the creditor amount, or kind and quality to
o 12% from Nov. 21, 1995, when Thio received Garcia’s
the creditor
demand letter
3. Consideration of a Loan
DISPOSITIVE: Petition GRANTED.
Art. 1933 By the contract of loan, one of the parties delivers to
Garcia v. Thio another, either something not consumable so that the latter
From one crossed check, there are 2 contracts of loan:
may use the same for a certain time and return it, in which
Garcia giving check to Thio: delivery
case the contract is called a commodatum; or money or other
Thio passes on to Santiago (presumably)
consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid, in which case the
2. Object of a Loan
essentially gratuitous.
Art. 1933 By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter Simple loan may be gratuitous or with a stipulation to pay
may use the same for a certain time and return it, in which interest.
case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of In commodatum the bailor retains the ownership of the thing
the same kind and quality shall be paid, in which case the loaned, while in simple loan, ownership passes to the
contract is simply called a loan or mutuum. borrower.
Commodatum is essentially gratuitous.
Contract of loan is a reciprocal obligation, not a unilateral
Simple loan may be gratuitous or with a stipulation to pay contract
interest. The promise of the debtor to pay is the consideration of the
obligation of the creditor to furnish the loan
In commodatum the bailor retains the ownership of the thing COMMODATUM: essentially gratuitous, that is, the only
loaned, while in simple loan, ownership passes to the consideration for the creditor is always liberality
borrower. MUTUUM: may be gratuitous or with a stipulation to pay interest
Art. 418 Movable property is either consumable or

nonconsumable. To the first class belong those movables
which cannot be used in a manner appropriate to their nature
without their being consumed; to the second class belong all
the others.
Object is either property that is non-consumable, or

money or other consumable property:
Consumable object is extinguished by its use.

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4. Obligation to Return or Pay B. Contract to Loan
Art. 1933 By the contract of loan, one of the parties delivers to Art. 1934 An accepted promise to deliver something by way of
another, either something not consumable so that the latter commodatum or simple loan is binding upon parties, but the
may use the same for a certain time and return it, in which commodatum or simple loan itself shall not be perfected until
case the contract is called a commodatum; or money or other the delivery of the object of the contract.
the same kind and quality shall be paid, in which case the Contract to loan and contract of loan, distinguished.
contract is simply called a loan or mutuum. Contract To Loan Contract Of Loan
Commodatum is essentially gratuitous. Consensual contract perfected Real contract perfected upon
by mere consent delivery
Simple loan may be gratuitous or with a stipulation to pay A binding obligation arising Once the debtor in a contracts
interest. from contract between a to loan delivers the property to
debtor, the party who promises the creditor, a contract of loan
In commodatum the bailor retains the ownership of the thing to deliver the property, and the is perfected and the roles of
loaned, while in simple loan, ownership passes to the creditor, the party who the parties are reversed
borrower. accepted the promise
Art. 1232 Payment means not only the delivery of money but Saura Import and Export Co. Inc. v. Development Bank of the
also the performance, in any other manner, of an obligation. Philippines (1972) – Makalintal, J.
Plaintiff-appellee: Saura Import & Export Co., Inc.
Art. 1233 A debt shall not be understood to have been paid Defendant-appellant: Development Bank of the Philippines
unless the thing or service in which the obligation consists has (DBP)
been completely delivered or rendered, as the case may be. Concept: Contract to Loan
COMMODATUM: Primary obligation of the debtor is to Doctrine:

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

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RATIO: Brief Facts:
1. There was a perfected consensual contract Roa obtained a loan from Ayala (BPI’s predecessor) for the
Art. 1954: An accepted promise to deliver something by construction of a house and lot, with the house and lot securing
way of commodatum or simple loan is binding upon the the loan by a mortgage. Roa sold the house and lot to ALS and
parties, but the commodatum or simple loan itself shall Litonjua, with the latter assuming the balance of Roa’s debt to
not be perfected until the delivery of the object of the Ayala. Ayala proposed to grant a P500k loan to ALS and
contract Litonjua which would be applied to Roa’s debt (that they
There was an offer and acceptance – the application of assumed), which the 2 parties accepted. ALS updated Roa’s
Saura Inc. was approved and the corresponding debt by paying P190k, reducing the balance to P457k, to which
mortgage was executed and registered the P500k loan was applied. BPI initiated foreclosure
proceedings for failure to pay the mortgage indebtedness. ALS
2. Obligation was extinguished by mutual desistance of claimed that they were not behind on payments, and that the
parties amortization period began when the P500k loan was actually
It is undisputed that RFC entertained the loan released, not the stipulated date. Both lower courts held that the
application of Saura Inc. on the assumption that it will perfection of the loan occurred when the P500k was released.
utilize local raw materials
Saura Inc. realized that it could not meet the conditions ISSUE:
When RFC turned down Saura Inc.’s request to permit WON a contract of loan is a consensual contract, per the ruling
the use of imported raw materials, the negotiations in Bonnevie v. CA (NO)
reached an impasse
And so, Saura Inc. requested for the cancellation of the RATIO: A contract of loan is a real contract, perfected by
mortgage executed in favor of RFC delivery of the object of the contract.
The action taken by both parties was in the nature of What the Court declared as a consensual contract in Bonnevie
mutual desistance which is a mode of extinguishing was not a contract OF loan but a contract TO loan; it was an
obligations accepted promise to deliver something by
Subsequent conduct of Saura Inc. confirms desistance way of simple loan.
o Its request for cancellation of mortgage did not A contract to loan does not constitute the real contract of
contain any reservation of rights it believed it might loan, which requires delivery of the object and gives rise
have against RFC to obligations only on the part of the borrower.
o It even applied with DBP for another loan to finance In the present case, what is involved is a contract of loan.
a rice and corn project, which application was And such contract was only perfected on September 1982,
disapproved when BPI released the balance of the P500k loan after
applying it to the debt. And following the parties’ intent on
DISPOSITIVE: Judgment appealed from is reversed and how amortization should proceed, ALS was only required to
complaint is dismissed pay amortization on October 1982, a month after the
contract’s perfection.
There is a perfected consensual contract to loan. Its breach can The Court also agrees with the contention of ALS that a
give rise to damages. contract of loan is a reciprocal obligation. And one of the
rules regarding reciprocal obligations is that neither party
This case shows the importance of definite acceptance of an incurs in delay if the other is not ready to comply. It is only
offer, as opposed to a counter-offer, for the perfection of the when one party has performed his obligation that he can
consensual contract to loan. demand the performance of the other party’s obligation. If
the latter fails, that is when delay sets in.
Court cites mutual desistance between the parties. While the mortgage deed does state that the amortization
were supposed to begin on May 1981, it was not until
BPI Investment Corp v. CA and ALS Mgmt. (2002) September 1982 that the loan was released. BPI, then,
Petitioner: BPI Investment Corp (BPI) could not have demanded that ALS start to pay its
Public Respondent: Court of Appeals amortization since it had not even released the loan at the
Private Respondent: ALS Management & Dev’t Corp. time of May 1981.
Concept: Contract to Loan
DISPOSITIVE: CA affirmed.
Doctrine:
A contract of loan is a real contract, perfected by the delivery of Following the money:
the object of the contract. Bank --(loan)-> ALS&Litonjua --(sale)-> Roa --(loan payment)->
bank

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Pantaleon v. American Express International, Inc. (2010) – fee for the privilege of being a cardholder of the
Brion Petitioner-Plaintiff: Polo S. Pantaleon company, unlike the City Scores case.
Respondent-Defendant: American Express International Inc. As a rule, we adhere to the Gray ruling where the
(AMEX) relationship between holder and company is contractual in
Concept: Contract to Loan nature and bound by the terms and conditions found in the
card membership agreement, which provides the rights and
Doctrine: liabilities of a credit card company to its cardholders and
Focusing particularly on the LOAN contract, the new creditor- vice-versa.
debtor relationship will only exist once there is offer (holder o Due to practice, the rule on ”contract of adhesion” is
swipes the card for his payment) and acceptance (company applied and such terms are construed strictly against
approves the use of the credit card for the transaction). Only the companies since they are the ones who draft the
after the company approves the purchase requests that the card membership agreement.
parties enter into a binding loan contracts, pursuant to Article
1319, NCC. RATIO: NO, AMEX is not liable.
Pantaleon presumes that he has two privileges as
Brief Facts: cardholder of AMEX: first, for AMEX to approve his charges
Pantaleon was a holder of an AMEX card. While he and his since he has no preset spending limit and second, even if
family were in Europe, they experienced difficulty transacting AMEX were to reject the same, it was still obligated to act
with the Coster Diamond House. They were on a guided tour, on his charges within a specific period of time.
and during the stopover at the Diamond House, they were While the Court notes that we follow the Gray ruling, it
supposed to be ready to leave by 9:30. However, when they distinguished that there is a separate creditor-debtor
tried to purchase, the transaction took 78 minutes, delaying their relationship (besides that of acceptance by the cardholder of
tour group and missing the next destination. Upon request for an the terms of the card membership) that arises ONLY after a
apology, AMEX refused, so Pantaleon filed an action for credit card company has approved the charge request of the
damages. In 2009, the Court ruled that AMEX was guilty of mora holder.
solvendi, then this MR was filed. o The first one merely an agreement to provide credit
facility to the cardholder while the latter involves the
ISSUE: actual credit loaned by the company to the holder, in
WON AMX is liable for damages for violation of the credit card view of the 3 contracts involved: the SALES contract,
membership agreement (NO) the LOAN contract and the PROMISE to pay.
o Focusing particularly on the LOAN contract, the new
The Nature of Credit Card Transactions creditor-debtor relationship will only exist once there is
A credit card is defined as “any card, plate, coupon book, or offer (holder swipes the card for his payment) and
other credit device existing for the purpose of obtaining acceptance (company approves the use of the credit
money, goods, property, labor or services or anything of card for the transaction). Only after the company
value on credit.” approves the purchase requests that the parties enter
Every credit card transaction involves 3 contracts: into a binding loan contracts, pursuant to Article 1319,
o SALES contract between the holder and the NCC.
store/business which accepted the credit card Now, under Par. 10 of the card membership agreement, it is
o LOAN contract between the holder and the credit card clearly stated that AMEX “reserves the right to deny
company authorization for any requested charge.” Hence, the first
o PROMISE to pay between credit card company and the privilege claimed by Pantaleon does not exist; AMEX is
aforementioned store/business under no obligation to approve any and all charges made by
Now, as to the relationship of the holder of the credit card its card holders.
and the company, there are two opposing schools of There being no obligation to approve, there can also be no
thought, represented by two rulings from American delay, per Article 1169, NCC. Hence, the second privilege
jurisprudence: claimed also must be rejected. To be in delay, the first
o City Scores Co. v. Henderson: That a credit card is requisite is that the obligation must be liquidated and
issued only amounts to an offer to extend an open line demandable. However, since no such obligation exists in
of credit. The offer may be withdrawn and such the first place, no delay can exist as well. The use of a credit
withdrawal is not a breach and violates no rights. Each card to pay for a purchase is only an offer to the credit card
use of the credit card is considered as a separate offer company to enter a loan agreement with the cardholder.
and acceptance. Even if in the past, Pantaleon’s charge requests were
o Gray v. American Express: The card issuance is a always approved timely, it could not have been done in this
binding contract between the holder and the company. case since every time Pantaleon has a charge request, the
However, in this Gray case, the holder pays an annual company would still have to evaluate whether they will
approve it, based on the credit history/charge pattern of

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Pantaleon. And in this specific case, the amount was Art. 1939 Commodatum is purely personal in character.
problematic since it did not fit his credit history. Consequently:
Also, no specific provision of law exists that requires credit
card companies to act on all charge requests within a The death of either the bailor or the bailee extinguishes the
specifically defined period of time. As a general rule, a contract;
practice or custom is not a source of a legally demandable The bailee can neither lend nor lease the object of the
or enforceable right. contract to a third person. However, the members of the
Neither was there any provision in the credit card bailee's household may make use of the thing loaned, unless
membership agreement that obligates AMEX to act on all there is a stipulation to the contrary, or unless the nature of the
cardholder purchase requests within a specifically defined thing forbids such use.
period of time.
Commodatum is the gratuitous lending of goods to be used
by the borrower and then return undamaged to the lender.
Pantaleon v. AMEX
This is a flawed analysis by the SC. Commodatum is entered into regularly in ordinary life.
Focus on the loan agreement between the credit card issuer and It came from Roman law as one of the “contracts of
the credit card holder.
neighborliness.”
There was a contract of loan (upon approval), which was
perfected upon delivery. Delivery occurs WHEN money is It is a contract where the creditor (or bailor) gratuitously delivers
delivered to the merchant. to the debtor (or bailee) non-consumable property so that the
If there is no delivery, it should not be considered a contract
latter may use the same for a certain time and return it.
of loan UNLESS it has been shown that there was
constructive delivery to Pantaleon. Two Kinds of Commodatum:
In reality, there was no delivery (physically) to Pantaleon. Ordinary Commodatum (Art. 1933)
Precarium – one whereby the bailor may demand the thing
. COMMODATUM A. loaned at will; exists in cases where:
Neither the duration of the contract nor the use to which
General Concepts the thing loaned should be devoted has been stipulated
Art. 1933 By the contract of loan, one of the parties delivers to If the use of the thing is merely tolerated by the owner
another, either something not consumable so that the latter (Art. 1947)
may use the same for a certain time and return it, in which
case the contract is called a commodatum; or money or other 1. Consideration in Commodatum
the same kind and quality shall be paid, in which case the It is a contract that is essentially gratuitous in nature,
contract is simply called a loan or mutuum. The liberality on the part of the bailor is the consideration
for the contract.
Commodatum is essentially gratuitous. It is for this reason that this contract is highly personal and
that the death of either party will suffice in its
Simple loan may be gratuitous or with a stipulation to pay extinguishment.
interest. Once a compensation to be paid by the bailee exists, the
contract ceases to be one of commodatum and becomes
In commodatum the bailor retains the ownership of the thing some other contract (ex. lease).
loaned, while in simple loan, ownership passes to the
borrower.
Art. 1935 The bailee in commodatum acquires the used of the

thing loaned but not its fruits; if any compensation is to be paid
by him who acquires the use, the contract ceases to be a
commodatum.

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2. Object of Commodatum issued by Doronilla in the amount of P212,000 (P12K
more than what was deposited)
Art. 1937 Movable or immovable property may be the object of Moreover, Vives sued Sanchez for failure to recover
commodatum. this money  shows that the transaction was not
merely gratuitous, but “had a business angle”
VIVES: The transaction is not a mutuum but an
Art. 1936 Consumable goods may be the subject of
accommodation, since he didn’t part with the ownership of
commodatum if the purpose of the contract is not the
his money; he asked his wife to open the account, and he
consumption of the object, as when it is merely for exhibition.
retained some degree of control because of his wife who
was made a signatory and in whose possession the
GR: The object of commodatum is a non-consumable
passbook was given
property, whether movable or immovable
SC: No error by the CA when it ruled that the transaction
EX: The object may be a consumable if the purpose of the
was a commodatum and not a mutuum
contract is NOT the consumption of the object (i.e., display). Art. 1933, NCC distinguishes the two kinds of loans:
Art. 1933: By the contract of loan, one of the parties
delivers to another, either something not consumable
Producers Bank v. CA (2003) – Callejo, Sr.
so that the latter may use the same for a certain time
Petitioners: Producers Bank of the Philippines (now First
and return it, in which case the contract is called a
International Bank)
commodatum; or money or other consumable thing,
Respondents: CA and Franklin Vives
upon the condition that the same amount of the same
Concept: Object of Commodatum kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Doctrine: Commodatum is essentially gratuitous.
The object of a commodatum is non-consumable thing. Simple loan may be gratuitous or with a stipulation to
However, there are instances when a commodatum may have pay interest.
for its object a consumable thing. If consumable goods are In commodatum the bailor retains the ownership of the
loaned only for the purposes of exhibition, or when the thing loaned, while in simple loan, ownership passes to
intention of the parties is to lend consumable goods and to the borrower. (1740a)
have the very same goods returned at the end of the period Provision seems to imply that if the subject is a
agreed upon, the loan is a commodatum, not a mutuum consumable thing, such as money, the contract would
be a mutuum
Brief Facts: BUT there are instances where a commodatum may have
Vives was asked for help by Sanchez in incorporating Col. for its object a consumable thing
Doronilla’s business. Sanchez asked Vives to deposit money in Art. 1936: Consumable goods may be the subject of
Sterela’s (the company’s) bank account for purposes of commodatum if the purpose of the contract is not the
incorporation, but assured Vives that he could withdraw the consumption of the object, as when it is merely for
money within a month’s time. Vives issued a check, relying on exhibition. (n)
the assurances and representations of Sanchez and Doronilla, SC: If consumable goods are loaned only for the
and Vives’ wife deposited the check. Vives filed a complaint for purposes of exhibition, or when the intention of the
recovery of sum of money. parties is to lend consumable goods and to have the
very same goods returned at the end of the period
ISSUE/S: agreed upon, the loan is a commodatum, not a mutuum
W the transaction between Vives and Doronilla is a simple
loan (mutuum) or commodatum [COMMODATUM] Rule is that the intention of the parties shall be accorded
WON Mr. Atienza could be faulted for allowing Doronilla to primordial consideration in determining the actual character
withdraw from the savings account [YES] of a contract. In case of doubt, the contemporaneous and
WON Producers should be held liable to Vives [YES] subsequent acts of the parties shall be considered in such
determination
RATIO: No merit in the petition. Vives agreed to deposit his money specifically for the
The transaction between Vives and Doronilla is purpose of making it appear “that said firm had sufficient
commodatum. capitalization for incorporation, with the promise that the
PRODUCERS: The transaction is a simple loan (mutuum) amount shall be returned within thirty (30) days.”
because all the elements are present: He merely “accommodated” Doronilla by lending his
o First, what was delivered was money, a consumable money without consideration, as favor to Sanchez
thing But it WAS CLEAR that the money would not be
o Second, the transaction was onerous as Doronilla was removed from Sterela’s savings account and would be
obliged to pay interest, as evidenced by the check returned to Vives after thirty (30) days

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Doronilla’s attempt to return the P200,000 with an additional 3. Producers should be held solidarily liable with Doronilla
P12,000, allegedly representing interest on the mutuum, did and Dumagpi as Atienza’s employer.
not convert the transaction from a commodatum into a PRODUCERS: It cannot be held liable for the return of the
mutuum because such was not the intent of the parties P200,000 because it is not privy to the transaction between
o P12,000 also corresponds to the fruits of the lending of Vives and Dornilla; since there was no wrongful act or
the P200,000 omission on its part, it cannot be held liable for actual,
o Art. 1935: The bailee in commodatum acquires the used moral, or exemplary damages and attorney’s fees
of the thing loaned but not its fruits; if any compensation VIVES: Producers should be liable for the return of the
is to be paid by him who acquires the use, the contract money because of Mr. Atienza’s behavior
ceases to be a commodatum. (1941a) Under Art. 2180, ERs shall be primarily and solidarily liable
o It was proper for Doronilla to remit to Vives the interest for damages caused be their EEs acting within the scope of
their assigned tasks
2. Mr. Atienza should be faulted for allowing Doronilla to SC: Atienza was an EE of Producers and was acting within
withdraw the money from the savings account. the scope of his authority as Asst. Branch Manager when he
assisted Doronilla, which were done in furtherance of
PRODUCERS: Mr. Atienza cannot be faulted for allowing Producers’ interests, while violating some of its rules
Doronilla to withdraw because he was the sole proprietor of SC: Under Art. 2180, Producers should be held liable for the
the company, and who alone had legal title to the savings return since it failed to prove that it exercised due diligence
account to prevent the unauthorized withdrawals and that it was not
VIVES: Mr. Atienza connived with Doronilla in defrauding negligent in the selection and supervision of Atienza
him since it was Atienza who facilitated the opening of the
account as well as the approval of the authority to debit the DISPOSITIVE: Petition DENIED.
account
Producers’ rules for savings deposits written on the Producers Bank v. CA
passbook states that “neither a deposit nor a withdrawal will THIS IS WRONG.
be permitted except upon the production of the depositor
savings bank book” BUT Doronilla was permitted to Reasons why it was considered a Commodatum:
withdraw even without presenting the passbook, not just Purpose of the contract: for the corporation
once, but several times P12,000 are the fruits  it is not for the bailee, so it pertains
Both CA and TC found that Atienza allowed the withdrawals to the bailor and was rightly returned
because he was party to Doronilla’s “scheme” to defraud Vives would be able to retrieve the money
Vives
o It was made in the branch where Atienza was a key SGS says this is a MUTUUM because the obligation is to repay
officer because “it will be easier for them to get a the owner. Ownership passes to Doronilla in order for the him to
certification” present it to the SEC (as proof). Inevitably, he becomes the
o Atienza knew that the money didn’t belong to Doronilla
owner. The result of the case would’ve still been the same
or Sterela because of the “coordination” he had with
because the obligation would’ve still been to repay Vives.
Doronilla AND because he was explicitly told by Mrs.
Vives that the money belonged to her and her husband Questions from A2015 reviewer:
and the deposit was just to accommodate Doronilla If the object of the commodatum was money, then was it the
o Although the only ones empowered to withdraw from the
intention of the parties for the bailee to return the very same
savings account were Mrs. Vives and Sanchez notes delivered?
(authorized signatories), it was admitted by Atienza that If the bailor in commodatum retained ownership of the
the procedure wasn’t followed because Sterela was money delivered, then what was the relationship between
owned by Doronilla, and Doronilla had the full authority
Sterela and Producers Bank?
to withdraw
Is the use of money for purposes of incorporation even if
o It was an accepted practice to present the passbook
only for “accommodation,” the same as “exhibition?
whenever a withdrawal is made in a savings deposit, How is the case reconciled with Art. 1980, which provides
but the procedure was dispensed with; instead, a
that fixed, savings, and current deposits of money in banks
certification for a duplicate passbook was issued
are governed by the provisions on mutuum?
because the original was allegedly surrendered to a
branch, but the original was never surrendered because
it remained in the possession of Mrs. Vives
SC: Atienza’s active participation in the perpetration of the
fraud and deception caused the laws; he committed
wrongful acts

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B. Parties to a Commodatum 2. Use by Bailee
The parties to a contract of commodatum are called the Art. 1935 The bailee in commodatum acquires the used of the
bailor (creditor) and the bailee (debtor). thing loaned but not its fruits; if any compensation is to be paid
These terms find their root from the common law concept of by him who acquires the use, the contract ceases to be a
bailment, where there is a delivery of personal property by commodatum.
the bailor to the bailee who shall hold the same for a certain
purpose under an express or implied contract. Art. 1940 A stipulation that the bailee may make use of the
fruits of the thing loaned is valid.
1. Ownership by Bailor
Art. 1939 Commodatum is purely personal in character.

Art. 1938 The bailor in commodatum need not be the owner of
Consequently:
the thing loaned.
The death of either the bailor or the bailee extinguishes the
Art. 1933 By the contract of loan, one of the parties delivers to contract;
another, either something not consumable so that the latter
may use the same for a certain time and return it, in which The bailee can neither lend nor lease the object of the
case the contract is called a commodatum; or money or other contract to a third person. However, the members of the
consumable thing, upon the condition that the same amount of bailee's household may make use of the thing loaned, unless
the same kind and quality shall be paid, in which case the there is a stipulation to the contrary, or unless the nature of the
contract is simply called a loan or mutuum. thing forbids such use. (n)
Commodatum is essentially gratuitous. GR: The bailee acquires the permissive use of the property
loaned but NOT its fruits.
Simple loan may be gratuitous or with a stipulation to pay
EX: Unless the parties stipulate otherwise; such stipulation
interest.
is considered valid.
In commodatum the bailor retains the ownership of the thing

GR: The contract of commodatum is personal in character
loaned, while in simple loan, ownership passes to the and the bailee cannot lend nor lease the property loaned to
borrower. a third person
EX: However, members of the bailee’s household may
The bailor in a commodatum need NOT be the owner of the make use of the property loaned.
property being loaned. EX to EX: Unless there is a stipulation to the contrary or the
However, as against the bailee, the bailor shall be nature of the property forbids its use by anyone other than
considered to have retained ownership over the property the bailee.
loaned.
3. Solidary Liability of Bailees
A commodatum MUST BE gratuitous.
Art. 1945 When there are two or more bailees to whom a thing
is loaned in the same contract, they are liable solidarily.

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C. Liability for Expenses and Damages While there was no obligation to pay rent, the agreement
was still not essentially gratuitous as it imposed an
1. Ordinary Expenses obligation upon Guevarra to maintain the property in good
condition
Art. 1941 The bailee is obliged to pay for the ordinary The effects of the agreement are also different from that of a
expenses for the use and preservation of the thing loaned. commodatum
Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant relationship
Art. 1943 The bailee does not answer for the deterioration of
where the withdrawal of permission would result in the
the thing loaned due only to the use thereof and without his
termination of the lease. The tenant’s withholding of the
fault.
property would then be unlawful
Even assuming that the relationship was a commodatum,
Having acquired the permissive use of the property loaned,
Guevarra as bailee would still have the duty to return
the bailee is the one liable for ordinary expenses for its use
possession of the property
and preservation.
The obligation to deliver or to return attaches to contracts for
However, the bailee is not liable for ordinary wear and tear
safekeeping, or contracts of commission, administration,
or deterioration of the property.
and commodatum
Pajuyo v. CA (2004) – Carpio, J.
DISPOSITIVE: Petition granted
Petitioner: Colito T. Pajuyo
Respondents: CA and Eddie Guevarra
In a commodatum, there is permissive use of the property
Concept: Commodatum; liability for expenses and damages;
loaned and the obligation to return the very same property. It is
ordinary expences
the bailee who is liable for the ordinary expenses for its use and
preservation. This does not mean that the bailee is only liable for
Doctrine:
The imposition of an obligation makes the contract different from deterioration of the property due to the use and without fault.
Bailee will be liable for property loaned that will suffer ordinary
a commodatum. A contract that is not essentially gratuitous is
wear and tear that arises from actual use by the bailee.
not a commodatum.
Pajuyo v. CA
Brief Facts:
A commodatum MUST BE gratuitous. In this case, there was an
Pajuyo, who paid P400 for rights over land to Perez, constructed
obligation to maintain the cleanliness and orderliness of the
a house of light materials on said land and resided there with his
house. The obligation to maintain cleanliness and orderliness of
family. Pajuyo and Guevarra executed an agreement whereby
the property loaned was equated/considered by the Court
Guevarra would live in the house for free, provided Guevarra
with/as compensation. The contract was considered a
would maintain the cleanliness and orderliness of the house, and
commodatum, which is essentially gratuitous.
that he would vacate upon demand. Pajuyo demanded Guevarra
Question: How is this case reconciled with Art. 1941?
to vacate but the latter refused, so Pajuyo filed an ejectment
case against Guevarra.
ISSUE:
WON the agreement between the parties is a commodatum
(NO)
RATIO: The agreement is not a contract of commodatum as

it was not purely gratuitous
Aside from being essentially gratuitous, a commodatum
involves the use of a thing belonging to another for a certain
period
o Thus, the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated, or
after accomplishment of the use for which the
commodatum is constituted
o If the bailor should have urgent need of the thing, he
may demand its return for temporary use
o If the use of the thing is merely tolerated by the bailor, he
can demand the return of the thing at will, in which case
the contractual relation is called a precarium, a kind of
commodatum

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2. Extraordinary Expenses 5. Right of Retention by Bailee
Art. 1949 The bailor shall refund the extraordinary expenses Art. 1944 The bailee cannot retain the thing loaned on the
during the contract for the preservation of the thing loaned, ground that the bailor owes him something, even though it may
provided the bailee brings the same to the knowledge of the be by reason of expenses. However, the bailee has a right of
bailor before incurring them, except when they are so urgent retention for damages mentioned in Article 1951.
that the reply to the notification cannot be awaited without
danger. Art. 1951 The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be liable
If the extraordinary expenses arise on the occasion of the to the latter for the damages which he may suffer by reason
actual use of the thing by the bailee, even though he acted thereof.
without fault, they shall be borne equally by both the bailor and
the bailee, unless there is a stipulation to the contrary. The primary obligation on the part of the bailee is to return
the property loaned.
GR: Since the bailor retains the ownership of the property,
he is liable for the extraordinary expenses for the GR: Bailee has no right of retention over the property
preservation of the property. loaned if the bailor refuses to pay for expenses and
EX: The bailor is not liable for these expenses if the bailee damages that pertain to it. The former has a right of action
incurs them without informing the bailor before incurring to demand payment for such expenses incurred
them. EX: When the bailor, knowing the flaws of the property
EX to EX: If the need for these extraordinary expenses are loaned, does not advise the bailee of the same, and the
so urgent that waiting for the bailor’s approval would bailee suffers damages by reason thereof, bailee shall have
endanger the property loaned, then the general rule applies a right of retention over the property until the bailor answers
(bailor is liable) for damages.
GR: As for the extraordinary expenses arising from use, The object of the right to retention is to guarantee payment
both bailor and bailee are liable. of what may be due.
EX: Unless it is stipulated otherwise It has an accessory character, which means it is an
o Because bailor retains ownership of the property loaned accessory to a principal obligation, which is the payment of
and the bailee acquires its use the incurred expenses.
Such right is considered not as a coercive measure to oblige
3. Other Expenses the debtor to pay, but as a means of obtaining
compensation for the debt and as a means of extinguishing
Art. 1950 If, for the purpose of making use of the thing, the an obligation
bailee incurs expenses other than those referred to in Articles
1941 and 1949, he is not entitled to reimbursement.
⠀ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ
he bailee is liable for all other expenses incurred for
purposes of making use of the property loaned, other than
ordinary and extraordinary expenses for use and
preservation
Question: What would these other expenses cover?
4. Abandonment by Bailor
Art. 1952 The bailor cannot exempt himself from the payment
of expenses or damages by abandoning the thing to the bailee.
The bailee has a right to compel the bailor to pay for the
pertinent expenses

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D. Liability for Loss Republic v. Bagtas (1962)
Plaintiff: Republic of the Phils.
Art. 1942 The bailee is liable for the loss of the thing, even if it Defendant: Felicidad Bagtas
should be through a fortuitous event: Concept: Liability for Loss
If he devotes the thing to any purpose different from that for Doctrine:
which it has been loaned; The bailee is liable for the loss of the thing, if he keeps it longer
that the stipulated period and if the thing loaned was delivered
If he keeps it longer than the period stipulated, or after the with an appraisal of its value (unless a stipulation provides that
accomplishment of the use for which the commodatum has the bailee is exempt from liability in case of a fortuitous event),
been constituted; among others.
If the thing loaned has been delivered with appraisal of its Brief Facts:
value, unless there is a stipulation exemption the bailee from Jose Bagtas borrowed from the Republic 3 bulls, subject to
responsibility in case of a fortuitous event; charging of breeding fees. When the contract expired, there was
a request to renew it, but the Sec. of Agriculture and Natural
If he lends or leases the thing to a third person, who is not a Resources approved only the renewal of the contract for 1 bull,
member of his household; while the other 2 were requested to be returned. Bagtas was
compelled to return the bulls or pay their value. The TC ruled
If, being able to save either the thing borrowed or his own that Jose should pay the value of the bulls and the unpaid
thing, he chose to save the latter. breeding fees. The Republic moved ex parte for a writ of
execution, which was granted. Bagtas (Felicidad), administratrix
GR: Since the bailor retains ownership of the property loaned, of deceased Jose, alleged that the bulls were already returned
generally, it is the bailor who bears the liability for loss of the (but 1 bull was killed during the Hukbalahap raid).
property loaned due to fortuitous events.
EX: However, such liability whether due to fortuitous events or ISSUE:
not is shifted to bailee in the following instances: WON Felicidad is still liable under the writ of execution (YES)
If bailee devotes the property to a different purpose, for
this constitutes breach of the conditions of the RATIO: Felicidad is liable for the loss of the third bull.
commodatum The Court found that it is true that the other two bulls were
If the bailee keeps the property after the accomplishment already returned to the plaintiff. Hence, she cannot be held
of the stated use, for this amounts to delay. liable for them.
o If the bailee keeps the property longer than the stipulated For the third bull, she contends that its death was caused by
period, also delay. force majeure. Now, since the contract was one of
If the property loaned was delivered with an appraised commodatum, the Republic retained of ownership and
value, unless there is a stipulation that exempts the bailee therefore bears the loss on its own.
from loss due to fortuitous event. This contention was found by the Court to be without merit.
If the bailee lends or leases the property to a third person o If it was indeed a contract of commodatum, then the
that is not a member of the household, for this also contract should essentially be gratuitous. However, there was
constitute breach. a breeding fee, a form of compensation. The Court then
If being able to save the property loaned or property considered the contract to be one of lease and not
owned by the bailee, the bailee chooses to save the of commodatum.
latter. Since the consideration of a commodatum is the o And even if it was a contract of commodatum, Felicidad
liberality of the bailor, this amounts to an act of would have still been held liable under Art 1942, which
ingratitude. states that the bailee is liable for the loss of the thing, if
he keeps it longer that the stipulated period and if the
Art. 1942(5) amounts to ingratitude. Similar to donation because thing loaned was delivered with an appraisal of its value
liberality is also the consideration. (unless a stipulation provides that the bailee is exempt
from liability in case of a fortuitous event), among others.
o The original period off the loan was only from May 1948
to May 1949 and was renewed for one year to end May
1950, with respect to one bull. But they kept the bull until
1953, when it was gunned down during the raid.
Moreover, the bulls were loaned with an appraisal of their
value. There was also no stipulation exempting the bailee
from liability from loss through fortuitous event.

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- Felicidad’s contention that the court lost jurisdiction over - EX: The bailor may demand for the return of the property
Jose when his civil personality ceased to exist due to his loaned at any time if:
death, is untenable. Moreover, their counsel failed to inform o The bailor has an urgent need for the property, in which
the trial court of his death, as was required by the rules of case he may:
civil procedure. The notice by the probate court and its  Demand the return of the property, thereby
publication in a newspaper was not sufficient notice, as per extinguishing the commodatum; or
the rule.  Demand the temporary use of the property,
- However, the Court ruled that that the demand for the suspending the commodatum while the property is in
payment of the value of the third bull should be presented the possession of the bailor.
in the intestate proceedings o If the commodatum is a precarium, (whereby one allows
another the use of a thing or the exercise of a right
DISPOSITIVE: Writ of execution appealed from is SET ASIDE. gratuitously till revocation) or a contractual relation where
the bailor may demand the property loaned at will,
Republic v. Bagtas specifically if
The contract here was not a commodatum, but the SC made  Neither the duration nor the use has been stipulated.
pronouncements on the case based on the concepts in a  Where the use of the bailee is merely tolerated by the
commodatum. bailor.
o If the bailee commits any acts of ingratitude:
E. Obligation to Return  The bailee commits some offense against the person,
the honor, or property of the bailor, or the bailor’s
Art. 1946 The bailor cannot demand the return of the thing wife, or the children under parental authority.
loaned till after the expiration of the period stipulated, or after  The bailee imputes to the bailor any criminal offense,
the accomplishment of the use for which the commodatum has or any act involving moral turpitude, even though it
been constituted. However, if in the meantime, he should have be proved, unless the crime or act has been
urgent need of the thing, he may demand its return or committed against the bailee, or the bailee’s wife, or
temporary use. children under parental authority.
 The bailee unduly refuses the bailor support when the
In case of temporary use by the bailor, the contract of former is legally or morally bound to give support to
commodatum is suspended while the thing is in the possession the latter.
of the bailor.
Quintos v. Beck (1939) – Imperial
Art. 1947 The bailor may demand the thing at will, and the Plaintiffs-Appellants: Margarita Quintos and Angel Ansaldo
Defendant-Appellee: Beck
contractual relation is called a precarium, in the following
Concept: Commodatum – Obligation to Return
cases:
Doctrine:
(1) If neither the duration of the contract nor the use to which
Under a contract of commodatum, a party assumes the
the thing loaned should be devoted, has been stipulated; or
obligation to return the object upon demand. Placing them at
the disposal of the demanding party is not compliance with this
(2) If the use of the thing is merely tolerated by the owner.
obligation.
Art. 1948 The bailor may demand the immediate return of the
Brief Facts:
thing if the bailee commits any act of ingratitude specified in Bent was a tenant of Quintos in her house. When their contract
Article 765. of lease was novated, Quintos gratuitously granted Beck the use
of the furniture, subject to the condition that Beck would return
- GR: The primary obligation of the bailee in a commodatum them upon demand. Later, Quintos sold the property so Sps.
of returning the property only arises: Lopez, notifying Beck and giving him 60 days to vacate the
o After the expiration of the period stipulated. premises and return the furniture. Beck informed them that he
o After the accomplishment of the use for which the could not give up 3 gas heaters and 4 electric lamps because he
commodatum was constituted. would use them until the expiry of the lease. When Beck
informed them that they may proceed to recover the properties
at the house, Quintos refused to get them in view of the fact that
Beck refused to make delivery of them.
ISSUE:
WON Beck breached the contract between them (YES)

!
RATIO: YES, Beck breached the contract. A. General Concepts
To decide the case, it is only necessary to decide whether
Beck complied with his obligation to return the furniture Art. 1933 By the contract of loan, one of the parties delivers to
upon the plaintiff’s demand. another, either something not consumable so that the latter
The contract between the two of them is one of may use the same for a certain time and return it, in which
commodatum, because under it, Quintos gratuitously case the contract is called a commodatum; or money or other
granted the use of the furniture to Beck, reserving for consumable thing, upon the condition that the same amount of
himself the ownership thereof, and at the same time, bound the same kind and quality shall be paid, in which case the
Beck to return them upon Quintos’ demand. contract is simply called a loan or mutuum.
The obligation assumed by Beck upon the demand of
Quintos means that he should return all of the furniture to Commodatum is essentially gratuitous.
the plaintiff at the latter’s residence or house, which he
failed to do. Simple loan may be gratuitous or with a stipulation to pay
The obligation was not complied with by merely placing the interest.
furniture at the disposal of Quintos and even retained for his
benefit 3 gas heaters and 4 electric lamps. In commodatum the bailor retains the ownership of the thing
Quintos cannot also be legally compelled to bear the loaned, while in simple loan, ownership passes to the
expenses of the deposit made by Beck since the latter was borrower.
not entitled to place the furniture on deposit; nor is the
former under any duty to accept the offer to return the
Art. 1953 A person who receives a loan of money or any other
furniture, because Beck refused to return all of them.
fungible thing acquires the ownership thereof, and is bound to
Costs borne by Beck because Quintos is winning party.
pay to the creditor an equal amount of the same kind and
quality.
DISPOSITIVE: CFI reversed
Art. 1954 A contract whereby one person transfers the

Quintos v. Beck
ownership of non-fungible things to another with the obligation
There were 3 contracts involved:
A contract of lease: Quintos to Beck on the part of the latter to give things of the same kind,
A contract of sale: Quintos to Sps. Lopez quantity, and quality shall be considered a barter.
A contract of commodatum: Quintos to Beck
Art. 1980 Fixed, savings, and current deposits of money in
Here, there was a perfected contract of commodatum because banks and similar institutions shall be governed by the
there was delivery. Therefore, the obligation to return arose. provisions concerning simple loan.
Legal advice to Beck: Constructive notice that the objects are Act 2137, Sec. 58 (a) "Fungible goods" means goods of which
under the DISPOSAL AND CONTROL of Quintos, and that the any unit is, from its nature by mercantile custom, treated as the
latter may take over and take possession at any time. equivalent of any other unit.
III. SIMPLE LOAN Simple loan, mutuum, or loan for consumption – the creditor
delivers to the debtor money or other consumable property
A contract of simple loan is the most common credit upon the condition that the same amount of the same kind
transaction. and quality shall be paid.
Borrower acquires ownership of the money or consumable
The most common object is money. property for the permissive use of the property loaned. As
owner, the borrower can dispose of the property loaned and
Interest is the consideration paid for the permissive use of the this act of disposition will not be considered
money. misappropriation.
The use of the property generally results in its
extinguishment, which is why the obligation of the borrower
is to pay an equal amount of the same kind and quality,
effectively replacing or substituting the property loaned
It is for this reason that the provisions on simple loan also
refer to the object of a simple loan as fungible property,
that is, property commercially interchangeable with other
property of the same kind.

!
In a simple loan, the primary purpose of the contract is still RATIO:
the permissive use of the money or consumable property. 1. Yes; the bank acquires ownership of the money
deposited by its clients and hence is the real party-in-
o Since the use of a consumable property generally results interest in the criminal case
in its consumption, ownership is transferred as a A
necessary consequence of the permissive use of the s correctly pointed out by petitioner, the bank is the owner of
property loaned. the monies allegedly misappropriated
If the primary purpose of the contract is the transfer of o Art. 1953 NCC: A person who receives a loan of money
ownership of a non-fungible property and payment is made or any other fungible thing acquires ownership thereof,
by giving something of the same kind, quantity, and quality, and is bound to pay to the creditor an equal amount of
it is a contract of barter. the same kind and quality.”
The most common of all commercial credit transactions is a o Art. 1980 NCC: Fixed, savings, and current deposits of
simple loan: the deposit by a depositor of money in a fixed, money in banks and similar institutions shall be
savings, or current deposit account with a bank. governed by the provisions concerning simple loans.
o Fixed deposit account: Interest on a fixed deposit is paid H
in accordance with the prices displayed in all bank ence, the element of ‘taking without the consent of owners’
branches. Interest is payable at maturity date. was sufficiently alleged in the information
o Savings deposit account: If you have a credit balance in T
a savings account you may be entitled to receive interest he Court has consistently considered the allegations in the
depending on the type of account. The rate of interest may Information that such employees acted with grave abuse of
be fixed or varied as the bank determines. o Current confidence, to the damage and prejudice of the Bank,
deposit account: Interest is not payable on a current without particularly referring to it as owner of the money
account unless specified otherwise for the deposits, as sufficient to make out a case of Qualified Theft
particular type of current account.
2. Yes; the exact phrase “dependence, guardianship or
“Fungible goods” vigilance between the respondents and the offended
party that would have created a high degree of
People v. Puig and Porras (2008) – Chico-Nazario, confidence between them which the respondents could
J. Petitioners: People of the Philippines have abused,” need not be alleged in the information
Respondents: Teresita Puig and Romeo Porras
Concept: Simple loan; general concepts It is beyond doubt that tellers, cashiers, bookkeepers and
other employees of a Bank who come into possession of the
Doctrine: monies deposited therein enjoy the confidence reposed in
The relationship between bankds and depositors has been held them by their employer.
to be that of creditor and debtor. A bank acquires ownership of It is sufficient that the following be alleged in the complaint
the money deposited by its clients; hence, it is the bank, and not or information:
its depositors, who is the real party-in-interest in a complaint for o The positions held by Puig and Porras
Qualified Theft against the bank’s cashier and bookkeeper. o That the crime was committed with grave abuse of
confidence, with intent to gain and without the
Brief Facts: knowledge and consent of the Bank
112 cases of Qualified Theft was filed by the Rural Bank of
Pototan, Inc. against Puig and Porras but was dismissed by the DISPOSITIVE: Petition for Review on Certiorari granted. RTC
judge due to lack of probable cause. The judge found that the order reversed. RTC Judge in criminal case ordered to proceed
element of ‘taking without the consent of the owners’ was lacking with the trial.
since it is the depositors-clients, and not the bank, who are the
owners of the money stolen, and are the real parties-in-interest. Fungible things are those which are capable of being substituted
by others of the same kind, not having a distinct individuality.
There are qualifications as to the object to make them of the
ISSUES: same kind and quality.
WON the bank acquires ownership of the money deposited
by its clients, thereby rendering it as the real party-in- People v. Puig and Porras
interest in the complaint for Qualified Theft filed against its The depositor is actually the CREDITOR of the bank. The bank
cashier and bookkeeper (YES) owns the money.
WON the information sufficiently alleged the abuse of trust
and confidence (YES)

!
BPI Family Bank v. Franco – Nachura, J. Basis of Mutuum (Simple Commodatum
Petitioner: BPI Family Bank (BPI) Comparison Loan)
Respondent: Amado Franco Object Money or other Ordinarily non-
Concept: Simple Loan; General Concepts consumable thing consumable
Ownership of Ownership is Ownership is
Doctrine: the thing transferred to the retained by the
In the contract of simple loan, the debtor acquires ownership of borrower lender
the money or consumable loaned. This ownership, however, has Cause Gratuitous or onerous Essentially gratuitous
the obligation to pay what has been loaned.. (w/stipulation to pay
interest)
Brief Facts: Thing to be Borrower need only Borrower must return
Franco opened an account with BPI. When it was learned that returned pay the same maount the same thing
the funds for these accounts were purportedly the result of of the same kind and loaned
unauthorized transfers, BPI refused to release the funds to quality
Franco, claiming ownership over such funds. Subject Only personal property May involve real or
matter personal property
ISSUE: Purpose Loan for consumption Loan for use or
WON Franco had a right to amount in the frozen accounts? (YES)
temporary
possession
RATIO: YES. Franco was entitled to those amounts. When to Lender may not Bailor may demand
- BPI: The bank owns the amounts. The situation applicable, return demand its return the return of the
therefore, is that of an owner of a personal property whose
before the lapse of the thing loaned before
possession he regains after it was stolen, pursuant to Art.
term agreed upon the expiration of the
559.
term in case of
- SC: Theory is incorrect and Art. 559 is inapplicable as well.
urgent need
o What is involved in Art. 559 is a specific/determinate Who bears Borrower suffers the Loss of the subject
thing. In this case, the property involved is money,
risk of loss loss (even if caused matter is suffered by
which is generic and fungible; it is capable of being
exclusively by a the bailor since he is
substituted by others of the same kind and does not fortuitous event and the owner
have distinct individuality
he is not therefore
o BPI, therefore, only claims ownership of the
discharged from his
equivalent amount of money, unlike the situation
duty to pay
contemplated in the said article, which involves an
Nature Not purely personal Purely personal
owner trying to recover a distinct movable from the
(From A2015 reviewer)
current possessor.
o Money, by its very function, is to pass from hand to
hand as a medium of exchange, without other evidence Basis Mutuum Commodatum Barter
of its title. (Simple Loan)
- SC: BPI does own the money, but not as a Subject Money or any Personal or real Non-
consequence of the unauthorized transfer of FMIC’s matter other fungible property fungible or
deposit. Rather, it is a consequence of the contract things/personal (generally non- non-
of simple loan or mutuum, between BPI (bank) and property consumable) consumable
Franco (account holder). things
o BPI is the debtor and Franco is the creditor, in this Obligation Pay or deliver Return the The
contract of simple loan. of the the same kind identical thing equivalent
o And since the relationship of BPI and Franco is bailee or quality borrowed when thing is
governed by the provisions on the contract of simple loaned to the the time has given in
loan, BPI’s ownership of the amounts comes with a bailee expired or the return for
corresponding obligation to pay Franco the amount purpose has what has
equal to what he deposited, upon the latter’s demand. been served been
o Thus, Franco had every right, as the creditor, to expect received
that the checks he issued would be honored. And Nature of May be Always Onerous
consequently, BPI had no right to dishonor the checks the gratuitous gratuitous
as they had the obligation to pay the amount contract
demanded when such demand was made. (From A2015 reviewer)
DISPOSITIVE: Decision AFFIRMED with MODIFICATION.

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

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1. Conventional Interest Central Bank Circular 416-74 By virtue of the authority
granted to it under Section 1 of Act No. 2655, as amended,
Art. 1933 By the contract of loan, one of the parties delivers to otherwise known as the "Usury Law," the Monetary Board, in
another, either something not consumable so that the latter its Resolution No. 1622 dated July 29, 1974, has prescribed
may use the same for a certain time and return it, in which that the rate of interest for the loan or forbearance of any
case the contract is called a commodatum; or money or other money, goods or credits and the rate allowed in judgments, in
consumable thing, upon the condition that the same amount of the absence of express contract as to such rate of interest,
the same kind and quality shall be paid, in which case the shall be twelve per cent (12 %) per annum.
essentially gratuitous. This Circular shall take effect immediately.
Simple loan may be gratuitous or with a stipulation to pay Act 2655, Sec. 7 All covenants and stipulations contained in
interest. conveyances, mortgages, bonds, bills, notes, and other
contracts or evidences of debts, and all deposits of goods or
In commodatum the bailor retains the ownership of the thing other things, whereupon or whereby there shall be stipulated,
loaned, while in simple loan, ownership passes to the charged, demanded, reserved, secured, taken, or received,
borrower. directly or indirectly, a higher rate or greater sum or value for
the loan or renewal or forbearance of money, goods, or credits
Art. 1956 No interest shall be due unless it has been expressly than is hereinbefore allowed, shall be void: Provided, however,
stipulated in writing. That no merely clerical error in the computation of interest,
made without intent to evade any of the provisions of this Act,
Art. 1253 If the debt produces interest, payment of the shall render a contract void: Provided, further, That parties to a
principal shall not be deemed to have been made until the loan agreement, the proceeds of which may be availed of
interests have been covered. partially or fully at some future time, may stipulate that the rate
of interest agreed upon at the time the loan agreement is
entered into, which rate shall not exceed the maximum allowed
Art. 1958 In the determination of the interest, if it is payable in
by law, shall prevail notwithstanding subsequent changes in
kind, its value shall be appraised at the current price of the
the maximum rates that may be made by the Monetary Board:
products or goods at the time and place of payment.
And Provided, finally, That nothing herein contained shall be
construed to prevent the purchase by an innocent purchaser of
Art. 1960 If the borrower pays interest when there has been no a negotiable mercantile paper, usurious or otherwise, for
stipulation therefor, the provisions of this Code concerning valuable consideration before maturity, when there has been
solutio indebiti, or natural obligations, shall be applied, as the no intention on the part of said purchaser to evade the
case may be. provisions of this Act and said purchase was not a part of the
original usurious transaction. In any case, however, the maker
Art. 2154 If something is received when there is no right to of said note shall have the right to recover from said original
demand it, and it was unduly delivered through mistake, the holder the whole interest paid by him thereon and, in case of
obligation to return it arises litigation, also the costs and such attorney's fees as may be
allowed by the court.
Art. 1423 Obligations are civil or natural. Civil obligations give
a right of action to compel their performance. Natural Sec. 7-a Parties to an agreement pertaining to a loan or
obligations, not being based on positive law but on equity and forbearance of money, goods or credits may stipulate that the
natural law, do not grant a right of action to enforce their rate of interest agreed upon may be increased in the event that
performance, but after voluntary fulfillment by the obligor, they the applicable maximum rate of interest is increased by law or
authorize the retention of what has been delivered or rendered by the Monetary Board: Provided, That such stipulation shall
by reason thereof. Some natural obligations are set forth in the be valid only if there is also a stipulation in the agreement that
following articles. the rate of interest agreed upon shall be reduced in the event
that the applicable maximum rate of interest is reduced by law
or by the Monetary Board: Provided, further, That the
Act 2655, Sec. 1 The rate of interest for the loan or
adjustment in the rate of interest agreed upon shall take effect
forbearance of any money goods, or credits and the rate
on or after the effectivity of the increase or decrease in the
allowed in judgments, in the absence of express contract as to
maximum rate of interest.
such rate of interest, shall be six per centum per annum or
such rate as may be prescribed by the Monetary Board of the
Central Bank of the Philippines for that purpose in accordance
with the authority hereby granted.

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Simple Loan To avoid one-sidedness, there must be a de-escalation
May be gratuitous or onerous clause that authorizes a corresponding reduction in the
Onerous: compensation to be paid by borrower is called interest rates
interest To be valid, the clause cannot give the creditor the unbridled
right to adjust interest rates unilaterally; it must still be the
Interest result of an agreement or a meeting of the minds on the
Payable in money or payable in kind actual increase in interest rates
o Payable in money: a stated amount or a computed
amount based on an interest rate (percentage of the ESCALATION CLAUSES
principal payable for a given period) Not per se invalid
o Payable in kind: value appraised at the time of payment J. Sereno’s Concurring Opinion laid down 3 rules:
As a matter of equity and consistent with P.D. 1684, the
Conditions for Payment of Interest to Be Allowed: escalation clause must be paired with a DE-
There is an express stipulation for the payment of interest, ESCALATION CLAUSE
and The escalation clause must be PEGGED to the PREVAILING
The stipulation for the payment of interest is in writing MARKET RATES (not merely a generalized reference to
“any increase or decrease in the interest rate” in the event
If the conditions do not concur and the borrower pays interest: of a law or Central Bank regulation
If the borrower paid by mistake, the creditor is obliged to Proposed modification must be the RESULT OF AN
return what was delivered AGREEMENT between the parties
If the borrower voluntarily paid, the creditor is authorized to
retain Spouses Juico v China Banking Corp (2013) – Villarama, Jr.,
J. Petitioner: Sps. Juico
Conventional Interest Respondents: China Banking Corporation
Interest paid as compensation in simple loan Concept: Conventional Interest
It is the interest agreed to by the parties themselves as
distinguished from that prescribed by law Doctrine:
“Escalation clauses” are valid provided that changes made shall
Monetary Interest (Regular Interest) be mutually agreed upon by both parties to not violate the
Conventional interest in a simple loan of money principle of mutuality essential to contracts.
Payment of both principal and interest is made in money
gradually extinguishing the loan Brief Facts:
It is viewed as the cost of money Sps. Juico obtained a loan from China Banking Corp secured by
a Real Estate Mortgaged on the spouses’ property in White
Usury Law (Act No. 2655) applies the concept of interest to: Plains, QC. Spouses failed to pay amortization due upon
The loan of money, goods, or credits, which must be demand, and the mortgaged property was foreclosed. The Bank
understood as simple loan or mutuum; and filed an action for the collection of sum of money for the
The forbearance, that is, the act of refraining, tolerating or deficiency after applying the proceeds of the foreclosure.
abstaining from enforcing a right or obligation of money,
goods, or credits, even if the principal obligation or ISSUE:
agreements is not a simple loan WON the Bank unilaterally increased the interest rates (YES)
The applicable interest to the 2 enumerated above shall be RATIO: NO; the bank did not comply with the notice
determined as follows: requirement, violating the rule on mutuality of contracts
Conventional interest: If there is an interest amount or rate
stipulated, then the interest stipulated Article 1308. The contract must bind both contracting
Legal interest: If there is no stipulation on interest amount parties; its validity or compliance cannot be left to the will of
or rate then the interest prescribed by statute one of them. Article 1956 of the Civil Code likewise ordains
that "no interest shall be due unless it has been expressly
Escalation Clauses stipulated in writing."
Clauses in long-term credit transactions that authorize the The binding effect of any agreement between parties to a
increase in conventional interest rates as a means of contract is premised on two settled principles: (1) that any
maintaining fiscal stability and retaining the value of money obligation arising from contract has the force of law between
GR: they are valid as they do not contravene public policy the parties; and (2) that there must be mutuality between the
XPN: unconsented increase in interest rates, which parties based on their essential equality.
transgresses the principle of mutuality of contracts

!
Escalation clauses refer to stipulations allowing an increase note without any advance notice to me/us in the event a law
in the interest rate agreed upon by the contracting parties. or Central Bank regulation is passed or promulgated by the
The Court has long recognized that there is nothing Central Bank of the Philippines or appropriate government
inherently wrong with escalation clauses, which are valid entities, increasing or decreasing such interest rate or
stipulations in commercial contracts to maintain fiscal service charge.”
stability and to retain the value of money in long term Such escalation clause is similar to that involved in the case
contracts. Such stipulations are not void per se. of Floirendo, Jr. v. Metropolitan Bank and Trust Company
Nevertheless, an escalation clause "which grants the where this Court ruled: The provision in the promissory note
creditor an unbridled right to adjust the interest authorizing respondent bank to increase, decrease or
independently and upwardly, completely depriving the otherwise change from time to time the rate of interest
debtor of the right to assent to an important modification in and/or bank charges "without advance notice" to petitioner,
the agreement" is void. A stipulation of such nature violates "in the event of change in the interest rate prescribed by law
the principle of mutuality of contracts. or the Monetary Board of the Central Bank of the
In Banco Filipino Savings & Mortgage Bank v. Navarro, the Philippines," does not give respondent bank unrestrained
Court ruled that escalation clauses in general are freedom to charge any rate other than that which was
considered valid, we ruled that Banco Filipino may not agreed upon. Here, the monthly upward/downward
increase the interest on respondent borrower’s loan, adjustment of interest rate is left to the will of respondent
pursuant to Circular No. 494 issued by the Monetary Board bank alone. It violates the essence of mutuality of the
on January 2, 1976, because said circular is not a law contract.38
although it has the force and effect of law and the escalation Escalation clauses are not basically wrong or legally
clause has no provision for reduction of the stipulated objectionable as long as they are not solely potestative but
interest in the event that the applicable maximum rate of based on reasonable and valid grounds. Obviously, the
interest is reduced by law or by the Monetary Board" (de- fluctuation in the market rates is beyond the control of
escalation clause). private respondent.
Subsequently, in Insular Bank of Asia and America v. Here, the escalation clause in the promissory notes
Spouses Salazar, the Court reiterated that escalation authorizing the respondent to adjust the rate of interest on
clauses are valid stipulations but their enforceability are the basis of a law or regulation issued by the Central Bank
subject to certain conditions. The increase of interest rate of the Philippines, should be read together with the
from 19% to 21% per annum made by petitioner bank was statement after the first paragraph where no rate of interest
disallowed because it did not comply with the guidelines was fixed as it would be based on prevailing market rates.
adopted by the Monetary Board to govern interest rate While the latter is not strictly an escalation clause, its clear
adjustments by banks. import was that interest rates would vary as determined by
In 1996, the Court invalidated escalation clauses authorizing prevailing market rates. Evidently, the parties intended the
PNB to raise the stipulated interest rate at any time without interest on petitioners’ loan, including any upward or
notice, within the limits allowed by law. The Court observed downward adjustment, to be determined by the prevailing
that there was no attempt made by PNB to secure the market rates and not dictated by respondent’s policy.
conformity of respondent borrower to the successive There is no indication that petitioners were coerced into
increases in the interest rate. The borrower’s assent to the agreeing with the foregoing provisions of the promissory
increases cannot be implied from their lack of response to notes. In fact, petitioner Ignacio, a physician engaged in the
the letters sent by PNB, informing them of the increases. medical supply business, admitted having understood his
It is now settled that an escalation clause is void where the obligations before signing them. At no time did petitioners
creditor unilaterally determines and imposes an increase in protest the new rates imposed on their loan even when their
the stipulated rate of interest without the express conformity property was foreclosed by respondent.
of the debtor. Such unbridled right given to creditors to This notwithstanding, we hold that the escalation clause is
adjust the interest independently and upwardly would still void because it grants respondent the power to impose
completely take away from the debtors the right to assent to an increased rate of interest without a written notice to
an important modification in their agreement and would also petitioners and their written consent. Respondent’s monthly
negate the element of mutuality in their contracts. While a telephone calls to petitioners advising them of the prevailing
ceiling on interest rates under the Usury Law was already interest rates would not suffice. A detailed billing statement
lifted under Central Bank Circular No. 905, nothing therein based on the new imposed interest with corresponding
"grants lenders carte blanche authority to raise interest rates computation of the total debt should have been provided by
to levels which will either enslave their borrowers or lead to the respondent to enable petitioners to make an informed
a hemorrhaging of their assets."35 decision. An appropriate form must also be signed by the
The two promissory notes signed by petitioners provide:“IWe petitioners to indicate their conformity to the new rates.
hereby authorize the CHINA BANKING CORPORATION to Modifications in the rate of interest for loans pursuant to an
increase or decrease as the case may be, the interest escalation clause must be the result of an agreement
rate/service charge presently stipulated in this between the parties.

!
Based on the August 29, 2000 demand letter of China Bank, Central Bank, leaving the determination thereof at the sole will
petitioners’ total principal obligation under the two and control of petitioner.
promissory notes which they failed to settle is P10,355,000.
However, due to China Bank’s unilateral increases in the While it may be acceptable, for practical reasons given the
interest rates from 15% to as high as 24.50% and penalty fluctuating economic conditions, for banks to stipulate that
charge of 1/10 of 1% per day or 36.5% per annum for the interest rates on a loan not be fixed and instead be made
period November 4, 1999 to February 23, 2001, petitioners’ dependent upon prevailing market conditions, there should
balance ballooned to P19,201,776.63. Note that the original always be a reference rate upon which to peg such variable
amount of principal loan almost doubled in only 16 months. interest rates. An example of such a valid variable interest rate
The Court also finds the penalty charges imposed excessive was found in Polotan, Sr. v. Court of Appeals. In that case, the
and arbitrary, hence the same is hereby reduced to 1% per contractual provision stating that "if there occurs any change in
month or 12% per annum. the prevailing market rates, the new interest rate shall be the
Petitioners’ Statement of Account, as of February 23, 2001, guiding rate in computing the interest due on the outstanding
the date of the foreclosure proceedings, should thus be obligation without need of serving notice to the Cardholder other
modified as follows: In the case at bar, it is explicitly than the required posting on the monthly statement served to the
provided that all correspondence relative to the mortgage Cardholder" was considered valid. The aforequoted provision
shall be sent to the mortgagor. However, no such notice was upheld notwithstanding that it may partake of the nature of
was sent by the bank to the spouses. an escalation clause, because at the same time it provides for
In spite of said breach, however, the spouses may not the decrease in the interest rate in case the prevailing market
recover the property sold since the Asaje Realty appears to rates dictate its reduction. In other words, unlike the stipulation
be an innocent purchaser in good faith. It purchases the subject of the instant case, the interest rate involved in the
property when the title was already in the name of the bank Polotan case is designed to be based on the prevailing market
and was under no obligation to look beyond what appears rate. On the other hand, a stipulation ostensibly signifying an
therein. agreement to "any increase or decrease in the interest rate,"
without more, cannot be accepted by this Court as valid for it
DISPOSITIVE: Petition Partially Granted leaves solely to the creditor the determination of what interest
rate to charge against an outstanding loan.
CONCURRING OPINION: Sereno, J.
SERENO, J.: Evidently, the point of difference in the cited escalation clauses
lies in the use of the phrase "any increase or decrease in the
Sereno clarifies that not all escalation clauses in loan interest rate" without reference to the prevailing market rate
agreements are void per se. It is actually the rule that "escalation actually imposed by the regulations of the Central Bank.
clauses are valid stipulations in commercial contracts to maintain
fiscal stability and to retain the value of money in long term Based on jurisprudence, therefore, these points must be
contracts." In The Consolidated Bank and Trust Corporation v. considered by creditors and debtors in the drafting of valid
Court of Appeals, citing Polotan, Sr. v. Court of Appeals, this escalation clauses. Firstly, as a matter of equity and consistent
Court already accepted that, given the fluctuating economic with P.O. No. 1684, the escalation clause must be paired with a
conditions, practical reasons allow banks to stipulate that interest de-escalation clause. Secondly, so as not to violate the principle
rates on a loan will not be fixed and will instead depend on of mutuality, the escalation must be pegged to the prevailing
market conditions. In adjudging so, we differentiated a valid market rates, and not merely make a generalized reference to
escalation clause from an otherwise invalid proviso in this wise. "any increase or decrease in the interest rate" in the event a law
or a Central Bank regulation is passed. Thirdly, consistent with
Neither was error when the lower court and the Court of Appeals the nature of contracts, the proposed modification must be the
set aside as invalid the floating rate of interest exhorted by result of an agreement between the parties. In this way, our
petitioner to be applicable. The pertinent provision in the trust credit system would be facilitated by firm loan provisions that not
receipt agreement of the parties fixing the interest rate states: only aid fiscal stability, but also avoid numerous disputes and
litigations between creditors and debtors.
“I, WE jointly and severally agree to any increase or decrease in
the interest rate which may occur after July 1, 1981, when the
Central Bank floated the interest rate, and to pay additionally the
penalty of I% per month until the amount/s or installments/s due
and unpaid under the trust receipt on the reverse side hereof
is/are fully paid.”
The respondent Court of Appeals that the foregoing stipulation is

invalid, there being no reference rate set either by it or by the

!
Sps. Juico v. China Banking Corp. PNB: Spouses are estopped because they failed to question
- There is no dispute as to the loan or as to the mortgage the imposed rates and they continued to pay without
- It is difficult to dispute the principal, but it is ALWAYS the opposition
interest that is always the bone of contention In a number of decided cases, the Court struck down
Banco Filipino Sps. Juico provisions in credit documents issued by PNB to, or
No de-escalation With de-escalation clause required of, its borrowers which allow the bank to increase
Violates mutuality principle Violates mutuality principle or decrease interest rates “within the limits allowed by law at
any time depending on whatever policy it may adopt in the
Increased based on Circular Increased without following a
(invalidated in its law or Central Bank Circular future”
implementation because it (no pegging) PNB v. CA (1991): stipulation and similar ones were
based it on a circular, NOT a declared in violation of Art. 1308 NCC
law) PNB v. CA (1994): again invalidated
Bank relied on the escalation clause, which is
Advise of ma’am: PEG A MARGIN; Follow Polotan, follow a authorized by Sec. 2 of PD 1684, which amended
Act No. 2655 (“The Usury Law”)
margin
Sec. 1 of PD 1684 also empowered the Monetary
Spouses Silos v. PNB (2014) – Del Castillo Board to prescribe maximum rates of interest for
Petitioner: Sps. Eduardo and Lydia Silos loans and certain forbearances and the Central
Bank Circular (issued by the Monetary Board)
Respondent: Philippine National Bank
provides that the rate of interest shall not be
Concept: Conventional Interest
subject to any ceiling prescribed under or pursuant
Doctrine: to the Usury Law
Escalation clauses providing for unilateral increases made by Court here held that while PD 1684 and CB
one party violates the principle of mutuality of contracts. Circular No. 905 allowed contracting parties to
stipulate freely regarding adjustments in the
Although these provisions are deemed part of the contract, there
interest rate, the law and circular did not
cannot be a unilateral increase by one party because there must
authorize either party to unilaterally raise the
still be assent by the other party. In a loan contract, since
interest rate without the other’s consent
interest rates are an essential part, any changes to it must be
There can be no contract in the true sense in the
mutually assented to by both parties.
absence of the element of agreement or of mutual
Brief Facts: assent of the parties
Spouses Silos secured a credit line with PNB involving a Credit Contract changes must be made with the consent
Agreement and a mortgage to secure such an agreement. The of the contracting parties, especially when it affects
an important aspect of the agreement; rate of
spouses also issued several promissory notes to cover their
interest is always a vital component of loan
payment. In all documents, there were escalation
contracts
clauses/provisions allowing PNB to increase or reduce interest
Cannot countenance PNB’s posturing that the
rates unilaterally. These were found to be violative of the
escalation clause gives it unbridled right to
principle of the mutuality of contracts.
unilaterally upwardly adjust the interest because it
ISSUE: would take away the respondents’ right to assent to
WON the interest rate provision in the Credit Agreement and the an important modification in their agreement and
Amendment to Credit Agreement is null and void for giving PNB would negate the element of mutuality of contracts
the sole power to fix the rates [YES]
Sps. Almeda v. CA (1996): court invalidated the same
RATIO: The provision giving PNB the sole unilateral provisions as in the instant case’s Credit Agreement
determination to fix the interest is void. Here, PNB unilaterally altered the terms of its
Spouses: The provision relegates to PNB the sole power to contract by increasing the interest rates on the loan
fix the rates based on arbitrary criteria and the promissory without the prior assent of the petitioners
notes were left blank for PNB to unilaterally fill  violates Escalation clauses are not basically wrong or
the principle of mutuality of contracts legally objectionable so long as they are not solely
PNB: Since the Credit Agreement and promissory notes potestative but based on reasonable and valid
contained both an escalation clause and a de-escalation grounds
clause, the bank did not violate the principle of mutuality;
plus, the parties mutually agreed, as shown by the
continuous payment without protest by the spouses
Spouses: Principle of estoppel doesn’t apply because no
estoppel can proceed from an illegal act

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PNB v. CA (1996): thereof must be mutually agreed upon; otherwise, it has no
The Court in Banco Filipino Savings & Mortgage binding effect.
Bank v. Navarro said that there must be a de- The stipulations here don’t even provide that the parties will
escalation clause to mitigate the one-sidedness of agree upon the interest rate – they are worded in such
the escalation clause because of concern for the a way that the borrower shall agree to whatever interest
unequal status of borrowers vis-à-vis the banks rate PNB fixes (ABSURD)
and any increase in the rate of interest made SC: with the present credit agreement, the element of
pursuant to an escalation clause must be the result consent or agreement by the borrower is now completely
of agreement between the parties lacking, which makes respondent’s unlawful act all the more
Court, citing a PNB v. CA case, declared that reprehensible.
increases unilaterally imposed by PNB are in SC: petitioners are correct in arguing that estoppel should
violation of the principle of mutuality as embodied not apply to them, for “estoppel cannot be predicated on an
in Art. 1308, NCC illegal act.
Court cited another PNB v. CA case which stated Since PNB violated the Truth in Lending Act (RA 3765),
that while the Usury Law ceiling on rates was lifted, which was enacted to protect citizens from a lack of
nothing could be read as granting the bank carte awareness of the true cost of credit to the user by using
blanche authority to raise interest rates to levels a full disclosure of such cost
which would either enslave its borrowers or lead to By requiring the spouses to sign the documents and notes
a hemorrhaging of their assets; Court found that in blank, and then unilaterally filling them up later on,
there was no attempt by PNB there to secure the PNB violated the Truth in Lending Act, and was remiss
conformity of the borrowers, and the assent to the in its disclosure obligations
increases CANNOT be implied from the lack of BUT the 1-year period to file a case prescribed already
response to the letters of PNB informing them of SC: Cannot subscribe to PNB’s argument that in every
increases repricing, the spouses are given the right to question the
New Sampaguita Builders Construction, Inc. v. PNB interest rates  if only one questions PNB’s practice, the
(2004): court said that excessive interests, penalties rest will still be victim to the questionable practice and the
and other charges not revealed in disclosure Court cannot condone this
statements issued by banks, even if stipulated in the Since the escalation clause is annulled, the principal amount
promissory notes, cannot be given effect under the of the loan is subject to the original or stipulated rate of
Truth in Lending Act interest, and upon maturity, the amount due shall be subject
PNB v. Sps. Rocamora (2009): above pronouncements to legal interest at the rate of 12% per annum
were reiterated to debunk PNB’s repeated reliance on Interests to be applied first to the payment of the stipulated
its invalidated contract stipulations or legal and unpaid interest, and later, to the capital or
PNB’s argument that the spouses failure to contest principal
the increased interest rates amounted to implied Because only the interest rates are found to be improper,
acceptance increase should fail the obligation to pay interest subsists, fixed at the legal
All the cases, including the present one, involve identical or rate of 12% per annum (only until June 30, 2013).
similar provisions Starting July 1, 2013, it shall be 6% per annum,
SC: These stipulations must be once more invalidated, as pursuant to Nacar v. Gallery Frames and Monetary
was done in previous cases. The common denominator in Board Circular No. 799
these cases is the lack of agreement of the parties to the
DISPOSITIVE: Petition granted. CA Decision ANNULLED and
imposed interest rates
o Lack of consent: spouses signed the promissory notes in SET ASIDE.
blank (credible testimony by Lydia)
o PNB Branch Manager even admitted that interest rates
were fixed solely by its Treasury Department, and the
factors considered do not include factors which affect
PNB’s borrowers
o PNB’s method of fixing interest rates is arbitrary based
on one-sided, indeterminate, and subjective criteria
SC: any modification in the contract, such as the interest
rates, must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if not
the most important component. Thus, any modification

!
Procedure outlined by the SC for the remand to the lower court Likewise, if the overpayment exceeds the total amount of
for proper accounting and computation: interest (4.) and award of 1% attorney’s fees (6.), the trial
The 1st Promissory Note with the 19.5% interest rate is court shall INVALIDATE THE EXTRAJUDICIAL
deemed proper and paid; FORECLOSURE AND SALE;
All subsequent promissory notes (from the 2nd to the 26th HOWEVER, if the total amount of interest (4.) and award of
promissory notes) shall carry an interest rate of only 12% 1% attorney’s fees (6.) exceed petitioners’ overpayment,
per annum.104 Thus, interest payment made in excess of then the excess shall be DEDUCTED from the bid price of
12% on the 2nd promissory note shall immediately be P4,324,172.96;
applied to the principal, and the principal shall be The difference in (13.) [P4,324,172.96 LESS sum total of
accordingly reduced. The reduced principal shall then be the interest (4.) and 1% attorney’s fees (6.)] shall be
subjected to the 12%105 interest on the 3rd promissory DELIVERED TO THE PETITIONERS;
note, and the excess over 12% interest payment on the 3rd Respondent may then proceed to consolidate its title to
promissory note shall again be applied to the principal, TCTs T-14250 and T-16208. The outstanding penalties, if
which shall again be reduced accordingly. The reduced any, shall be collected by other means.
principal shall then be subjected to the 12% interest on the
4th promissory note, and the excess over 12% interest From the above, it will be seen that if, after proper accounting, it
payment on the 4th promissory note shall again be applied turns out that the petitioners made payments exceeding what
to the principal, which shall again be reduced accordingly. they actually owe by way of principal, interest, and attorney’s
And so on and so forth; fees, then the mortgaged properties need not answer for any
After the above procedure is carried out, the trial court shall outstanding secured amount, because there is not any; quite the
be able to conclude if petitioners a) still have an contrary, respondent must refund the excess to petitioners. In
OUTSTANDING BALANCE/OBLIGATION or b) MADE such case, the extrajudicial foreclosure and sale of the
PAYMENTS OVER AND ABOVE THEIR TOTAL properties shall be declared null and void for obvious lack of
OBLIGATION (principal and interest); basis, the case being one of solutio indebiti instead. If, on the
Such outstanding balance/obligation, if there be any, shall other hand, it turns out that petitioners’ overpayments in interests
then be subjected to a 12% per annum interest from do not exceed their total obligation, then the respondent may
October 28, 1997 until January 14, 1999, which is the date consolidate its ownership over the properties, since the period
of the auction sale; for redemption has expired. Its only obligation will be to return
Such outstanding balance/obligation shall also be charged a the difference between its bid price (P4,324,172.96) and
24% per annum penalty from August 14, 1997 until January petitioners’ total obligation outstanding – except penalties – after
14, 1999. But from this total penalty, the petitioners’ applying the latter’s overpayments.
previous payment of penalties in the amount of P202,000.00
made on January 27, 1998106 shall be DEDUCTED; Sps. Silos v. PNB
To this outstanding balance (3.), the interest (4.), penalties Lack of an agreement violates the mutuality of contracts
(5.), and the final and executory award of 1% attorney’s fees Depends on its own policy (solely on the will of the PNB;
shall be ADDED; purely potestative)  no pegging
The sum total of the outstanding balance (3.), interest (4.) and Only some had de-escalation clauses
1% attorney’s fees (6.) shall be DEDUCTED from the bid price Signed in blank by the spouses
of P4,324,172.96. The penalties (5.) are not included because
they are not included in the secured amount; Valid de-escalation clauses
The difference in (7.) [P4,324,172.96 LESS sum total of the In Solidbank
outstanding balance (3.), interest (4.), and 1% attorney’s o There is a de-escalation
fees (6.)] shall be DELIVERED TO THE PETITIONERS; o It is pegged (but Ma’am is iffy about ‘among others’)
Respondent may then proceed to consolidate its title to o Consent (prepayment)
TCTs T-14250 and T-16208; In Polotan – benchmark for valid escalation
ON THE OTHER HAND, if after performing the procedure in clauses o Change = increase/decrease
(2.), it turns out that petitioners made an OVERPAYMENT, o Pegged at prevailing market rate (3%)
the interest (4.), penalties (5.), and the award of 1% PEGGING: at any other rate fixed by a third party
attorney’s fees (6.) shall be DEDUCTED from the
overpayment. There is no outstanding balance/obligation Question: Is it enough to get assent/consent from the signing if
precisely because petitioners have paid beyond the amount other 2 requisites are present?
of the principal and interest; SGS: Consent can be manifested upon signing, PROVIDED
If the overpayment exceeds the sum total of the interest (4.), escalation clause is very clear and leaves no doubt (there is
penalties (5.), and award of 1% attorney’s fees (6.), the margin/tracking) and notice would be enough
excess shall be RETURNED to the petitioners, with legal
interest, under the principle of solutio indebiti;107

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PNB v. CA and Ambrosio Padilla (1991) – Grino-Aquino, That there can be an increase in interest if increased by law
J Petitioner: Philippine National Bank Respondents: or by the Monetary Board
CA and Ambrosio Padilla It must include a provision for reduction of the interest in the
Concept: Simple Loan; interest event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board
Doctrine: The unilateral increases is likewise violative of the mutuality
In order for an escalation clause to be valid, the ff. must of contracts
concur: o Art. 1308 CC: “ The contract must bind both contracting
That there can be an increase in interest if increased by parties; its validity or compliance cannot be left to the
law or by the Monetary Board will of one of them”
It must include a provision for reduction of the interest The increases were likewise violative of their Credit
in the event that the applicable maximum rate of Agreement which provided that its terms may be amended
interest is reduced by law or by the Monetary Board only by an instrument in writing signed by the party to be
Increases in interest rate shall likewise not be made oftener bound as burdened by such amendment.
than once every 12 months. The increases also contravene Art. 1956 CC which provides
Unilateral increases is likewise violative of mutuality of that “no interest shall be due unless it has been expressly
contracts. stipulated in writing”
o Padilla never agreed in writing to pay the interest
Brief Facts: increases beyong 24%
Padilla contracted a loan with PNB for P1.8M. He was charged
with 18% interest per annum. Upon renewal of his loan, PNB DISPOSITIVE: CA Affirmed
informed him that the interest will be increased to 32%. Padilla
did not express his conformity to said increase. PNB further PNB v. CA (1994) – Puno, J.
Petitioner: Philippine National Bank
increased the interest rate to 41% and again to 48%. Said
Respondents: CA, Remedios Jayme-Fernandez and Amado
increases were all made within 4 months. Padilla filed a
Fernandez
complaint against PNB, contending that said unilateral increases
Concept: Simple Loan; interest
were illegal and not valid or binding to him
ISSUE: Doctrine:
WON the unilateral increases of interest were valid (NO) Increase in interest rate cannot be made without both parties
agreeing to it.
RATIO: PNB cannot unilaterally increase interest rates. It is
likewise prohibited from increasing interest rates more than Brief Facts:
once within a period of 12 months. Fernandez obtained two loans from PNB with 12% interest per
PD 116 grants the Monetary Board of the Central Bank the annum. PNB unilaterally increased the interest rate to 25%; and
authority to increase rates of interest for loans or renewals again to 30%; and again to 42%. Fernandez filed a complaint
thereof but expressly provided that such changes shall not against PNB contending that said increases were unilaterally
be made oftener than once every twelve months made and this illegal.
o PNB increase interest rates 3 times; if the Monetary
Board itself was not authorized to make changes ISSUE:
oftener than once in a year, even less so may a bank WON unilateral increases of interest were valid (NO)
which is subordinate to the Board
Even if Padilla did agree in the Deed of Real Estate RATIO: The unilateral increases made by PNB is violative of
Mortgage that the interest rate may be increased “to such the mutuality of contracts
increase within the rate allowed by law,” as the Board of The validity of escalation clauses is affirmed by PD 1684.
Directors of PNB may prescribe, no law was ever passed in o Said PD provides that parties may stipulate that interest
July to November 1984 increasing the intrest rates on loans rates may be increased in the event that the applicable
or renewals thereof to 32%, 41% and 48% per annum, and max. rate of interest is increased by law or by the
no documents were executed and delivered by Padilla to Monetary Board
effectuate the increase (such documents were agreed upon o Said increases shall be valid only if there is also a
by the parties to be made prerequisites for any increase in stipulation that the rate of interest shall be reduced in
interest) the event that the applicable max. rate of interest is
The escalation clause agreed upon by the parties was reduced by law or by the Monetary Board.
likewise invalid as it did not contain a de-escalation clause Central Bank Circular No 905, Series of 1982 provides that
that permits a decrease in interest rate. In order for an the rate of interest on any loan or forbearance shall not be
escalation clause to be valid, the ff. must concur: subject to any ceiling prescribed under or prescribed
pursuant to the Usury Law

!
PD 1684 and CB Circular No. 905 allowed contracting merely to pay 21% interest, subject to a possible escalation
parties to freely stipulate interest rate which they may agree or de-escalation, when 1) the circumstances warrant such
to increase or decrease. However, changes in interest rates escalation or de-escalation; 2) within the limits allowed by
cannot be made unilaterally as the same would violate the law; and 3) upon agreement.
mutuality of contracts under Art. 1308 PNB also violated the terms of its own credit agreement with
o There can be no contract in the true sense in the the spouses. By express provision, Section 9.01 provides
absence of the element of agreement that its terms “may be amended only by an instrument in
o Similarly, contract charges must be made with the writing signed by the party to be bound as burdened by such
consent of the contracting parties amendment.
Sps. Fernandez are likewise not estopped from assailing the Central Bank Circular No. 905 – which lifted the Usury Law
unilateral increases made by PNB; their silence cannot be ceiling - cannot be used by bank as carte blanche authority
construed as an acceptance to raise interest rates to such an unbelievable and
Circumstances do not show that Fernandez agreed to the burdensome amount.
proposed increases in interest rate While escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but
DISPOSITIVE: CA affirmed. are based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only the increases of the interest
Sps. Almeda v. CA (1997) – Kapunan, J. rates on the basis of the escalation clause patently
Petitioner: Sps. Almeda unreasonable and unconscionable, but also there are no
Respondents: Court of Appeals; and Philippine National Bank valid and reasonable standards upon which the increases
(PNB) are anchored.
Concept: Interest
DISPOSITIVE: CA reversed. PNB unilateral increases null and
Doctrine: void. REMANDED to TC.
While escalation clauses are not basically wrong or legally !
objectionable so long as they are not solely potestative but are PNB v. CA (1996) – Mendoza, J.
based on reasonable and valid grounds Petitioner: PNB
Respondents: Court of Appeals; Sps. Bascos
Brief Facts: Concept: Interest
Sps. Almeda loaned P18M from PNB. Credit agreement
provided for an escalation clause. PNB raised the original 21% Doctrine:
interest rate to as high as 68% within 4 years. “Escalation clauses” are valid provided that changes made shall
be mutually agreed upon by both parties to not violate the
ISSUE: principle of mutuality essential to contracts.
WON PNB authorized to increase the interest rate to as high as
68% (NO) Brief Facts:
Sps. Concepcion loaned P1.4M from HSTBC. In the promissory
RATIO: NO; such increases contravene the mutuality note executed to secure the loan, the spouses authorized the
principle of contracts, Art. 1956, as well as the terms and bank to increase the interest rate without advance notice if the
conditions of its own credit agreement Central Bank increases the interest rate. The bank increased the
The binding effect of any agreement between parties to a interest rate thrice, spouses eventually defaulted, and the real
contract is premised on two settled principles: (1) that any estate mortgage they executed was foreclosed and sold to
obligation arising from contract has the force of law between another corporation.
the parties; and (2) that there must be mutuality between the
parties based on their essential equality. ISSUE:
Any contract which appears to be heavily weighed in favor WON the increases made by PNB are valid (NO)
of one of the parties so as to lead to an unconscionable
result is void, and any stipulation regarding the validity or RATIO: NO; the absence of a de-escalation clause is not
compliance of the contract which is left solely to the will of only against P.D. 1684 but it made the clause so one-sided
one of the parties, is likewise, invalid as to make it unreasonable.
In the case at bar, it is clear that PNB unilaterally altered the Following the decision laid down in Banco Filipino Savings
terms of its contract by increasing the interest rate without v. Navarro, there must be a de-escalation clause to mitigate
the prior assent of the spouses. Besides, Art. 1956 explicitly the one-sidedness of the escalation clause.
provides that interest shall only be due if it is stipulated in Furthermore, any increase in the rate of interest made
writing. What has been “stipulated in writing” from a perusal pursuant to an escalation clause must be the result of an
of interest rate provision of the credit agreement signed agreement between the parties.
between the parties is that petitioners were bound

!
In the case at bar, there was no attempt made by the PNB First, the payments were applied to debts that were already
to secure the conformity of the spouses to the successive due. Thus, when the first payment was made and applied on
increases made. Their assent cannot be implied from their January 5, 1990, all Promissory Notes were already due.
lack of response to the letters PNB sent, informing them of Second, payments of the principal were not made until the
the increases. No one receiving a proposal to change a interests had been covered. For instance, the first payment
contract is obliged to answer the proposal. on January 15, 1990 had initially been applied to all
interests due on the notes, before deductions were made
DISPOSITIVE: CA affirmed from their respective principal amounts. The resulting
! decrease in interest balances served as the bases for
New Sampaguita Builders v PNB (2004) – Panganiban., subsequent pro-ratings.
J. Petitioner: New Sampaguita Builders Inc. Third, payments were proportionately applied to all interests
Respondents: Philippine National Bank Concept: that were due and of the same nature and burden.
Conventional Interest Fourth, since there was no stipulation on capitalization, no
interests due and unpaid were added to the principal;
Doctrine: hence, such interests did not earn any additional interest.
One-sided impositions do not have the force of law between the The simple — not compounded — method of interest
parties, because such impositions are not based on the parties’ calculation was used on all Notes until the date of public
essential equality. Although escalation clauses are valid in auction.
maintaining fiscal stability and retaining the value of money on In fine, under solutio indebiti or payment by mistake, there is
long-term contracts, giving respondent an unbridled right to no deficiency receivable in favor of PNB, but rather an
adjust the interest independently and upwardly would completely excess claim or surplus payable by respondent; this excess
take away from petitioners the “right to assent to an important should immediately be returned to petitioner-spouses or
modification in their agreement” and would also negate the their assigns — not to mention the buildings and
element of mutuality in their contracts. The clause cited earlier improvements on and the fruits of the property — to the end
made the fulfillment of the contracts “dependent exclusively upon that no one may be unjustly enriched or benefited at the
the uncontrolled will” of respondent and was therefore void. expense of another.
Such surplus is in the amount of P3,686,101.52
Brief Facts: Sampaguita loaned money from PNB. PNB 2. Sampaguita’s accessory duty to pay interest did not give
unilaterally increased rates of interest in the loan w/o informing PNB unrestrained freedom to charge any rate other than
Sampaguita. PNB claimed they were authorized to do it as there that, which was agreed upon.
was a clause in the agreement that they may do so. Besides, No interest shall be due, unless expressly stipulated in
Usury law was no longer in force. writing. It would be the zenith of farcicality to specify and
agree upon rates that could be subsequently upgraded at
ISSUES: whim by only one party to the agreement. The “unilateral
1. WON the loan accounts are bloated (YES) determination and imposition” of increased rates is “violative
2. WON PNB could unilaterally increase interest rates (NO) of the principle of mutuality of contracts ordained in Article
1308 of the Civil Code.”
RATIO: One-sided impositions do not have the force of law between
1. There is no deficiency; there is actually an overpayment the parties, because such impositions are not based on the
of more than 3M based on the computation of the SC. parties’ essential equality. Although escalation clauses are
valid in maintaining fiscal stability and retaining the value of
The excessive interest rates in the Statements of Account money on long-term contracts, giving respondent an
sent to petitioners are reduced to 19.5 percent and 21.5 unbridled right to adjust the interest independently and
percent, as stipulated in the Promissory Notes; upwardly would completely take away from petitioners the
upon loan conversion, these rates are further reduced to the “right to assent to an important modification in their
legal rate of 12 percent. Payments made by petitioners are agreement” and would also negate the element of mutuality
pro-rated, the charges on penalty and insurance eliminated, in their contracts. The clause cited earlier made the
and the resulting total unpaid principal and interest of fulfillment of the contracts “dependent exclusively upon the
P6,582,077.70 as of the date of public auction is then uncontrolled will” of respondent and was therefore void.
subjected to 1 percent attorney's fees.
The total outstanding obligation is compared to the bid price. Besides, the pro forma promissory notes have the character
On the basis of these rates and the comparison made, the of a contract of adhesion, “where the parties do not bargain
deficiency claim receivable amounting to P2,172,476.43 in on equal footing, the weaker party’s [the debtor’s]
fact vanishes. participation being reduced to the alternative ‘to take it or
Instead, there is an overpayment by more than P3 million leave it.’”

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Circular that lifted the ceiling of interest rates of usury law PNB v. Spouses Rocamora (2009) – Brion, J.
did not authorize either party to unilaterally raise the interest Petitioner: Phil. National Bank (PNB) Respondent:
rate without the other’s consent. The interest ranging from Spouses Agustin and Pilar Rocamora Concept:
26 percent to 35 percent in the statements of account -- Simple Loan; Interest; Conventional Interest
“must be equitably reduced for being iniquitous,
unconscionable and exorbitant.” Doctrine:
Rates found to be iniquitous or unconscionable are void, as While an escalation clause may be valid, it does not sanction a
if it there were no express contract thereon. Above all, it is unilateral increase of the interest rates. Parties must still come to
undoubtedly against public policy to charge excessively for an agreement to such an increase. Otherwise, such increase will
the use of money. not have a binding effect.
It cannot be argued that assent to the increases can be
implied either from the June 18, 1991 request of petitioners Brief Facts:
for loan restructuring or from their lack of response to the Spouses Rocamora contracted a P100k loan from PNB. They
statements of account sent by respondent. Such request executed two mortgages as security for the loan. These
does not indicate any agreement to an interest increase; mortgages contained an escalation clause and a de-escalation
there can be no implied waiver of a right when there is no clause as well. When the spouses became unable to pay, PNB
clear, unequivocal and decisive act showing such purpose. foreclosed the mortgages and filed a suit for the deficiency
Besides, the statements were not letters of information sent judgment.
to secure their conformity; and even if we were to presume
these as an offer, there was no acceptance. ISSUE:
No one receiving a proposal to modify a loan contract, WON the principle of mutuality of contracts was violated by PNB
especially interest -- a vital component -- is “obliged to (YES)
answer the proposal.” Besides, PNB did not comply with its
own stipulation that should the loan not be paid 2 years after RATIO: YES, PNB violated the principle of mutuality of
release of money then it shall be converted to a medium contracts in its unilateral increase of the interest rates.
term loan. PNB: The escalation clauses were valid; they met the
Court applied 12% interest rate instead for being a standards set in Banco Filipino Savings and Mortgage Bank
forbearance of money (there were some pieces of evidence Navarro, as the clauses also contained a de-escalation
presented by PNB in court that Sampaguita objected to. clause
Lower courts overruled the objections but SC said the SC: Presence of valid escalation clauses still do NOT
objections were correct and the evidence should not have authorize unilateral increase of interest rates, in observance
been admitted. i.e. contract wasn’t signed by the parties, a of the mutuality principle of contracts.
part of the contract wasn’t properly annexed/no reference Any increase in the interest rate pursuant to an escalation
was made in the main contract.) clause MUST be the result of parties’
In addition to the preceding discussion, it is then useless to agreement thereto.
labor the point that the increase in rates violates the Otherwise, it carries no binding effect.
impairment clause of the Constitution, because the sole The presence of de-escalation clauses is not determinative
purpose of this provision is to safeguard the integrity of valid of the increase’s validity; it is the consent
contractual agreements against unwarranted interference by of both parties thereto that gives it effectivity.
the State in the form of laws. Private individuals’ intrusions Failure of the spouses Rocamora to contest the increases
on interest rates is governed by statutory enactments like that PNB made cannot is NOT consent thereto. “No one
receiving a proposal to change a contract is obliged to
the Civil Code.
answer the proposal.
DISPOSITIVE: Petition set aside. PNB: The amount being claimed was a result of the original
! 12% rate agreed upon.
! SC: Our computation + examination of PNB’s ledgers point
! that this statement is incorrect; PNB clearly imposed
! more than 12% to get to this amount.
!
! DISPOSITIVE: Decision AFFIRMED with MODIFICATION.
!
Complaint dismissed.
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Concepcion v. CA (1997) – Vitug, J. parties to be valid. The minds of all parties must meet as to
Petitioner: Sps. Concepcion the proposed modification especially when it affects an
Respondents: Court of Appeals; Home Savings Bank and Trust important aspect of the agreement. In case of loan
Company (now Insular Life); and Asaje Realty Corporation contracts, the rate of interests is always a vital component.
Concept: Conventional Interest Thus, any change must be mutually agreed upon to create a
binding effect.
Doctrine: A contract containing a condition which makes its fulfillment
“Escalation clauses” are valid provided that changes made shall dependent exclusively upon the uncontrolled will of one of
be mutually agreed upon by both parties to not violate the the contracting parties is void for being violative of the
principle of mutuality essential to contracts. principle of mutuality essential in contracts.
Even arguendo, that the spouses are bound with the
Brief Facts: aforementioned provision in the promissory note in allowing
Sps. Concepcion loaned P1.4M from HSTBC. In the promissory increase in the interest rate without advance notice, the
note executed to secure the loan, the spouses authorized the escalation should still be subject, as also provided, to a
bank to increase the interest rate without advance notice if the corresponding increase by the Central Bank of its rediscount
Central Bank increases the interest rate. The bank increased the rate, or of the interest rate on savings and time deposit, or of
interest rate thrice, spouses eventually defaulted, and the real interest rate on such loans.
estate mortgage they executed was foreclosed and sold to A perusal of the notices sent by the bank would reveal that it
another corporation. provides no sufficient justification for the unilateral increases
since it shows no corresponding increase made by the
ISSUES: Central Bank during each time. In fact, the notice only
1. WON HSTBC complied with the requirements of an provides vague excuses for the increase such as “prevailing
extrajudicial foreclosure (NO) business and economic condition.”
2. WON HSTBC may unilaterally increase the interest rates
pursuant to the provision in the loan agreement (NO) DISPOSITIVE: CFI affirmed with modification that HSBTC shall
pay spouses the excess, if any, of the bid price it received from
RATIO: Asaje Realty for the foreclosed property over and above the
1. NO; the bank did not comply with notice requirement unpaid balance of the loan computed at the original interest rate.
provided in their mortgage contract. REMANDED to TC for determinations
General Rule: Extrajudicial foreclosure, as provided for in
Sec. 3, Act. No. 3135, only requires that (1there be posting Concepcion v. CA
of notices of sale in 3 public places, and (2) publication of Amortization came from the word “mort”, meaning “death”  to
the same in a newspaper of general circulation. However, deaden the loan (killing the loan slowly)
parties are not precluded from providing additional
requirements. Frias v. San Diego-Sison (2007) – Austria-Martinez, J.
In the case at bar, it is explicitly provided that all Petitioner: Bobie Rose Frias, represented by her Attorney-in-
correspondence relative to the mortgage shall be sent to the fact, Marie Fujita
mortgagor. However, no such notice was sent by the bank Defendant: Flora San Diego-Sison
to the spouses. Concept: Conventional Interest
In spite of said breach, however, the spouses may not
recover the property sold since the Asaje Realty appears to Doctrine:
be an innocent purchaser in good faith. It purchases the The agreement between the parties is the law between them and
property when the title was already in the name of the bank must be respected. If the terms are clear, their literal meaning
and was under no obligation to look beyond what appears must be given. Also, the provisions of an agreement must be
therein. taken in the context of the entire agreement. An agreement to
pay interest continues for so long as the debtor continues in
2. NO; it violates the mutuality of contracts provided for in possession of the principal; otherwise, it would constitute unjust
Art. 1308, NCC enrichment.
The validity of “escalation” or “escalator” clauses in
contracts was already upheld in the case of Banco Filipino Brief Facts:
Savings and Mortgage Bank v. Navarro. In that case, SC Frias and San Diego-Sison (SDS) entered into a MOA over a
ruled that such clauses is not substantively unconscionable house and lot for a consideration of P3-M. The MOA involved
and are widely used in commercial contracts in an effort to two 6-month periods: first, for SDS to decide WON to buy the
maintain fiscal stability and to retain “real dollar” value to the property; second, for Frias to pay back the money if SDS
price terms of long term contracts. decides not to buy the property. If SDS decides not to buy the
However, the SC elaborated in PNB v. CA that contract house and lot, Frias must pay back the P3-M with interest only
changes must be made with the consent of the contracting for the second 6-month period.

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ISSUE: expectation that such amount would be paid within the date
WON the compounded bank interest should be limited to 6 stipulated. Since Frias failed to pay the amount, the
months as contained in the MOA (NO) monetary interest for the last 6 months continued to accrue
until actual payment of the loaned amount
RATIO: The compounded bank interest should not be Payment of regular interest constitutes the price or cost of
limited to just 6 months, but should be imposed until fully the use of money and until the principal sum due is
paid. returned to the creditor, regular interest continues to
Frias contends: accrue since the debtor continues to use such principal
o That the interest, whether at 32% or 25% per annum amount
which should run from June 7, 1991 until fully paid is For the debtor to continue in possession without payment of
contrary to the MOA the monetary interest would constitute unjust
o That the MOA provides that if San Diego-Sison would enrichment
decide not to purchase the property, Frias has the The parties stipulated that the loaned amount shall earn
period of another 6 months to pay the loan with the compounded bank interests; per certification by Prudential
compounded bank interest for the last 6 months Bank, the interest rate for loans in 1991 ranged from 25% to
only 32% per annum, which was no longer assailed by Frias 
o That the CA’s ruling that a loan always bears interest The interest at 25% per annum for a P2-M loan is fair and
otherwise it is not a loan is contrary to Art. 1956 of the reasonable
NCC, which provides that no interest shall be due
unless it has been expressly stipulated in writing DISPOSITIVE: CA affirmed with modification. Attorney’s fees
SC: We are not persuaded: deleted.
o The CA’s conclusion that a loan always bears interest
otherwise it is not a loan, is flawed since a simple loan Frias v. San Diego-Sison
may be gratuitous or with a stipulation to pay interest The MOA contains several different contracts, one of which is an
o NO ERROR in awarding 25% interest per annum on the OPTION CONTRACT, which has a separate consideration from
P2-M loan even beyond the second 6 months stipulated the purchase price.
period
The MOA is the law between the parties, and in resolving an 2. Interest on Interest
issue based upon a contract, the contract must first be
examined, especially the provisions which are relevant to
Art. 1959 Without prejudice to the provisions of Article 2212,
the controversy
interest due and unpaid shall not earn interest. However, the
o GR: If the terms are clear and leave no doubt as to the
contracting parties may by stipulation capitalize the interest
intention of the contracting parties, the literal meaning
due and unpaid, which as added principal, shall earn new
of its stipulations shall prevail AND the various
interest.
stipulations of the contract shall be interpreted together,
attributing to the doubtful ones that sense which may
result from all of them taken jointly Art. 2212 Interest due shall earn legal interest from the time it
The phrase “for the last six months only” should be taken in is judicially demanded, although the obligation may be silent
context of the entire agreement; SC agrees with CA that: upon this point.
o The agreement speaks of 2 periods of 6 months each
o First 6-month period: for San Diego-Sison to make up It is a subset of conventional interest
her mind WON to purchase the property
o Second 6-month period: for Frias to pay the P2-M loan in GR: Interest will NOT earn interest
the event San Diego-Sison decides not to buy the XPNs:
property, in which case the interest will be charged “for Parties stipulate (compounded interest)
the last six months only,” referring to the second 6- Principal: P5,000
month period Conventional: 2% per annum
o No interest for the first 6-month period, while San Diego- Interest on interest: (add unpaid 2% to 1st principal) = new
Sison makes up her mind; interest would only be principal
charged for the second period of 6 months after she Amounts to compounding of interest
decides not to buy the property Judicial demand (filing of a complaint)
o Nothing in the agreement suggests that interest will be Principal: P5,000
charged for 6 months only even if it takes Frias an Conventional: 2% per annum
eternity to pay the loan Interest on interest: legal interest (now 6% multiplied by 2%)
The agreement does not mean that interest will no longer be Note: For this to apply, there must first be CONVENTIONAL
charged after the second 6-month period since the INTEREST
stipulation was made on the logical and reasonable

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GR: Conventional interest is paid on the principal only (simple Art. 2209 If the obligation consists in the payment of a sum of
interest) money, and the debtor incurs in delay, the indemnity for
XPN: Interest on interest damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence of
Interest on interest stipulation, the legal interest, which is six per cent per annum.
Compensation for interest that is due and unpaid
GR: not demandable
XPN: demandable if: Art. 2213 Interest cannot be recovered upon unliquidated
o There is conventional interest (express stipulation in
claims or damages, except when the demand can be
writing to pay interest), AND
established with reasonably certainty.
o Any or both of the following instances:
When by stipulation of the parties, compounding or
capitalizing of interest is agreed upon (compound Art. 2226 Liquidated damages are those agreed upon by the
interest) parties to a contract, to be paid in case of breach thereof.
When interest that is due and unpaid is judicially
demanded, whether or not there is an agreement Art. 2227 Liquidated damages, whether intended as an
or stipulation to this effect (judicial demand is indemnity or a penalty, shall be equitably reduced if they are
reckoned from date of filing of a complaint, and the iniquitous or unconscionable.
rate shall be 12%)
Compensatory interest
3. Compensatory, Penalty, or Indemnity Interest Also called penalty interest or indemnity interest
It is the indemnity for damages arising from delay on the
Art. 1169 Those obliged to deliver or to do something incur in part of the debtor of an obligation consisting in the payment
delay from the time the obligee judicially or extrajudicially of a sum of money
demands from them the fulfillment of their obligation. Interest allowed by law in the absence of a promise to pay,
as compensation for delay in paying a fixed sum
However, the demand by the creditor shall not be necessary in Does not need to be expressly stipulated in writing, but
order that delay may exist: parties may stipulate on compensatory interest through a
penalty or penal clause
When the obligation or the law expressly so declare; or It may be equitably reduced by the court if it is iniquitous or
unconscionable
When from the nature and the circumstances of the
obligation it appears that the designation of the time when the Penal clause
thing is to be delivered or the service is to be rendered was a It is an accessory obligation of the debtor to assume greater
controlling motive for the establishment of the contract; or liability in case of breach
It strengthens the coercive nature of the principal obligation;
When demand would be useless, as when the obligor has it provides, in effect, liquidated damages resulting from
rendered it beyond his power to perform. breach
Debtor is bound to pay without the necessity of proof
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper LEGAL INTEREST
manner with what is incumbent upon him. From the moment Delegated interest to the Central Bank from Congress
one of the parties fulfills his obligation, delay by the other
begins. There must be EXPRESS stipulation for interest but actual rate
is not provided.
Art. 1226 In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment
of the obligation.
The penalty may be enforced only when it is demandable in

accordance with the provisions of this Code.

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Eastern Shipping Lines v. CA – Vitug, J. When such certainty cannot be so reasonably
Petitioner: Eastern Shipping Lines (ESL) established at the time the demand is made, the
Respondents: CA and Mercantile Insurance Company (MIC) interest shall begin to run only from the date the
Concept: Simple Loan: Interest; Compensatory, Penalty or judgment of the court is made
Indemnity Interest When the judgment of the court awarding a sum of money
becomes final and executory
Doctrine: o rate of legal interest shall be 12% per annum from such
When an obligation, not constituting a loan or forbearance of finality until its satisfaction because interim period is
money, is breached, the interest on the amount of damages deemed to be by then an equivalent to a forbearance of
awarded may be imposed at the discretion of the court at the credit
rate of 6% per annum. When such certainty cannot be so
reasonably established at the time the demand is made, the Siga-an v. Villanueva (2009) – Chico-Nazario,
interest shall begin to run only from the date the judgment of the J. Petitioner: Sebastian Siga-an
court. It becomes 12 % when the judgment of the court awarding Respondent: Alicia Villanueva
a sum of money becomes final and executory. Concept: Compensatory, Penalty or Indemnity Interest
Brief Facts: Doctrine:

Insurer-subrogee Mercantile sued carrier Eastern Shipping In the absence of stipulation regarding interest to be paid,
because one drum from the shipment was damaged. Eastern interest may still be charged pursuant to Art. 2209 and Art. 2212,
questions the grant of interest on Mercantile’s claim which was which covers situations when interest is imposed as penalty or
12% from the date of filing of the complaint because Mercantile’s damages for breach of contractual obligations and NOT as
claim was unliquidated. compensation for use or forbearance of money.
ISSUE: Brief Facts:

What are the applicable rules on interest? Villanueva borrowed money from Siga-an, but their agreement
was not reduced in writing and there was no stipulation for the
RATIO: Eastern Shipping Rule on Interest: payment of interest. She repaid him with interest, but he was
Obligation (regardless of its source) is breached and unsatisfied, and coerced her to pay more. She eventually
contravenor is held liable demanded a refund of the excess payment since she was not
o Provisions under Title 18 on "Damages" of the CC obligated to pay the same.
govern in determining the measure of recoverable
damages ISSUES:
On rate of interest and accrual in the concept of actual and WON interest is due to Siga-an (NO)
compensatory damages WON the principle of solutio indebiti applies (YES)
o When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance RATIO:
of money 1. NO, Villanueva is not obligated to pay interest to Siga-
the interest due should be that which may have an.
been stipulated in writing Interest is a compensation fixed by the parties for the use
earn legal interest from the time it is judicially or forbearance of money, referred to as monetary interest
demanded
absence of stipulation-> 12% per annum to be o Interest imposed by law or by courts as penalty or
computed from from judicial or extrajudicial indemnity for damages is called compensatory
demand subject to the Article 1169 CC interest
When an obligation, not constituting a loan or o The right to interest arises only by virtue of a contract or
forbearance of money, is breached by virtue of damages for delay or failure to pay the
interest on the amount of damages awarded may principal loan on which interest is demanded
be imposed at the discretion of the court at the Art. 1956, NCC, refers to monetary interest, and specifically
rate of 6% per annum mandates that no interest shall be due unless it has been
General rule-> No interest adjudged on expressly stipulated in writing
unliquidated claims or damages o Payment of monetary interest is allowed only with the
Exception-> When or until the demand can be concurrence of the two conditions:
established with reasonable certainty There was an express stipulation for the payment
Where the demand is established with of interest; and
reasonable certainty, interest shall begin to The agreement for the payment of interest was
run from the time the claim is made judicially reduced in writing
or extrajudicially

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The collection of interest without any stipulation in return of payment made by mistake, and the
writing is prohibited by law person who has no right to receive such payment
Siga-an and Villanueva did not agree on the payment of becomes obligated to return the same
interest, neither was there convincing proof of written It harks back to the ancient principle that no one
agreement between the two; there was no verbal or written shall enrich himself unjustly at the expense of
agreement for her to pay interest on the loan; monetary another
interest is due only if there was an express stipulation in It applies where: 1) a payment is made when there
writing for the payment of interest exists no binding relation between the payor, who
Villanueva’s explanation that the promissory note was has no duty to pay, and the person who received
borne out of Siga-an’s threats and his making her copy the payment; and 2) the payment is made through
the promissory note in her own handwriting was not mistake, and not through liberality or some other
rebutted by Siga-an  this cannot pertain to an express cause
stipulation of interest or written agreement of interest Villanueva paid interest to Siga-an, but she was under no
The agreed 7% interest admitted by Villanueva in her duty to make such payment because there was no express
testimony in the BP 22 cases was not ruled upon by the stipulation in writing to that effect
RTC; what the RTC found was that the parties never o There was no binding relation between the two parties
intended the payment of interest and what Villanueva as regards the payment of interest and the payment
testified to was that after paying the total amount of the was clearly a mistake
loan, Siga-an ordered her to pay the interest  this was o Since Siga-an received something when there was no
not a categorical declaration that she and Siga-an right to demand it, he has an obligation to return it
made an express stipulation in writing as regards The reimbursable amount is P335,000 (the excess
payment of interest P160,000 from the amount paid by checks, and P175,000
(relevant to syllabus topic) Instances when interest may paid in cash as admitted by Siga-an in his Reply Affidavit)
be imposed even in the absence of stipulation: Although Villanueva was convicted for violating BP 22, it
Art. 2209, NCC, which states that if the obligation doesn’t affect the ruling because the two checks amounting
consists in the payment of a sum of money, and the to P700,000 (to cover the P540,000 loan) were not among
debtor incurs in delay, a legal interest of 12% per the checks found to be dishonored or bounced
annum may be imposed as indemnity for damages if
no stipulation on the payment of interest was agreed (Other amounts to be received by Villanueva)
upon Damages awarded: moral (150,000), exemplary (P50,000),
Art. 2212, NCC provides that interest due shall earn attorney’s fees (25% of amount paid as interest)
legal interest from the time it is judicially demanded, The RTC and CA imposed a 12% rate of legal interest on
although the obligation may be silent on this point. the amount refundable computed from Mar. 3, 1998 until full
The interest under these two instances may be payment  this is erroneous
imposed only as a penalty or damages for breach of o In Eastern Shipping Lines v. CA, it was held that when
contractual obligations; it cannot be charged as an obligation, not constituting a loan or forbearance of
compensation for the use or forbearance of money, i.e., money is breached, an interest on the amount of
these apply only to compensatory interest and not to damages awarded may be imposed at the rate of 6%
monetary interest (case at bar involves monetary per annum; when the judgment of the court awarding a
interest) sum of money becomes final and executory, the rate of
Compensatory interest is not chargeable here because legal interest, whether for loan/forbearance of money or
it was not duly proven that Villanueva defaulted in not, shall be 12% per annum from such finality until its
paying the loan PLUS no interest was due on the loan satisfaction (interim period equivalent to forbearance of
because there was no written agreement as regards credit)
payment of interest o Siga-an’s obligation arose from a quasi-contract of
solutio indebiti, not a loan or forbearance: 6% per
2. YES, the principle of solutio indebiti applies. annum imposed on amount to be refunded as well as
Under Art. 1960, NCC, if the borrower of loan pays interest on the damages from extrajudicial demand on Mar. 3,
when there has been no stipulation therefor, the provisions 1998 up to finality of this decision  interest shall
of the CC concerning solutio indebiti shall be applied become 12% per annum from finality of the Decision up
o Art. 2154, NCC, explains the principle, which provides to its satisfaction
that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, DISPOSITIVE: Decision of the CA AFFIRMED with
the obligation to return it arises
MODIFICATIONS.
A creditor-debtor relationship is created under a
quasi-contract, whereby the payor becomes the Siga-an v. Villanueva
creditor who then has the right to demand the Compensatory interest based on solutio indebiti

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Ligutan v. CA (2002) – Vitug, J. the application of which is addressed largely to the sound
Petitioner-Defendant: Tolomeo Ligutan & Leonidas dela Llana discretion of the court.
CA decision affirmed, in reducing the penalty rate form 5%
Respondents-Plaintiffs: Court of Appeals; Security Bank and to 3% given the circumstances and the repeated acts of
Trust Company breach by Ligutan and dela Llana of their contractual
Concept: Compensatory, Penalty or Indemnity Interest obligation
Doctrine: 2. YES. Said interest rate does not appear as being

Penalty clauses may be validly agreed to by parties provided excessive.
they do not contravene law, morals, good customs, public order, A penalty stipulation is not necessarily preclusive of interest,
or public policy. However, the courts may equitably reduce such the two being distinct concepts which may be separately
penalty if it is iniquitous or unconscionable or if the principal demanded. The essence or rationale for the payment of
obligation has been partly or irregularly complied with. interest is not exactly the same as that of a penalty.
Brief Facts: DISPOSITIVE: CA affirmed

Ligutan et al., loaned P120, 000 from Security Bank, covered by
promissory note binding themselves to pay 15% interest per Ligutan v. CA
annum upon maturity and to pay a penalty of 5% per month in Penalty clause is coercive  do not have to prove damages
case of default. They also agreed to pay 10% of the total amount anymore
due as attorney’s fees in case a suit for collection would be filed.
Ligutan et. al defaulted. Estores v. Spouses Supangan (2012) – Del Castillo, J.
Petitioner: Hermojina Estores
ISSUES: Respondents: Spouses Arturo and Laura Supangan
WON penalty clause agreed upon by parties is valid (YES) Concept: Compensatory, Penalty or Indemnity Interest
WON the 15% interest rate is reasonable (YES)
Doctrine:
RATIO: Interest may be imposed even in the absence of stipulation in
1. YES. A penalty clause is expressly recognized by law, the contract. In obligations arising out of a loan or forbearance of
and may be validly agreed upon by parties, but may still money, goods or credits, the applicable rate of interest is 12%
be equitably reduced by the courts as the case may be. per annum from the date of demand. Such interest is deemed a
compensatory interest which serves as an indemnification for
SBTC: The penalty sought to be deleted was even Estores’ continued use of their money, despite demand for its
insufficient to fully cover and compensate for the cost of return.
money brought about by the radical devaluation and
decrease in the purchasing power of the peso, vis-à-vis the Brief Facts:
US dollar, considering the time frame of its occurrence. Estores and Spouses Supangan entered into a Conditional Deed
Furthermore, there was no partial compliance since only P5, of Sale. Estores, as vendor, failed to fulfill the conditions in the
584 had been paid out of the entire loan of P120, 000. contract and was thereby adjudged to be in breach thereof.
SC: A penalty clause, as expressly recognized by law in Art. Estores was ordered to pay the spouses the principal amount of
1226, is an accessory undertaking to assume greater P3.5M with an interest of 6% compounded annually starting
liability on the part of an obligor in case of breach. It Sept. 27, 2000 (date of formal demand) until its full payment.
functions to strengthen the coercive force of the obligation Estores now contests the propriety of the imposition of interest
and to provide a stipulated indemnity as liquidated damages as the same was not expressly stipulated in their contract.
resulting from such breach.
While parties may validly agree to such terms and ISSUES:
conditions, a stipulated penalty may nevertheless be WON the imposition of interest was proper even in the
equitably reduced by the courts if it is iniquitous or absence of stipulation in the contract (YES)
unconscionable or if the principal obligation has been partly What interest rate should be applied (12%)
or irregularly complied with, in relation to Art. 2227 and Art.
1229.
The determination of WON a penalty is reasonable or
iniquitous can be partly subjective and partly objective, and
dependent on such factors such as the type, extent, and
purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, etc.,

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RATIO: Forbearance of money, goods, or credits refer to
1. Yes; interest may be imposed even in the absence of arrangements other than loan agreements, where a
stipulation in the contract person acquiesces to the temporary use of his money,
Art. 2210 CC: Interest may, in the discretion of the court, be goods or credits pending happening of certain events
allowed upon damages awarded for breach of contract. or fulfillment of certain conditions.
There is no question that Estores is legally obligated to The instant case involves a forbearance of money o In
return the P3.5M because of her failure to fulfill her the instant case, Sps. Supangan parted with
obligations under the contract, despite demand their money even before the conditions were
Estores is already in default of her obligation to return said fulfilled
amount from the date of demand which was made on Sept. o They have therefore allowed or granted
27, 2000. forbearance to Estores to use their money
The interest must then be computed from said date pending fulfillment of the conditions. They were
deprived of the use of their money for the period
2. The interest at the rate of 12% is applicable since the pending fulfillment of the conditions and when
obligation arises out of a loan or a forbearance of those conditions were breached, they are entitled
money, goods or credits. not only to the return of the principal amount paid,
General rule: the applicable interest shall be computed in but also to compensation for the use of their
accordance with the stipulation of the parties. Absent any money. And the compensation for the use of their
stipulation, the applicable interest shall be 12% per annum money, absent any stipulation, should be the
or 6% per annum, as the case may be same rate of legal interest applicable to a loan
o Art. 2209: If the obligation consists in the payment of a since the use or deprivation of funds is similar to a
sum of money, and the debtor incurs in delay, the loan.
indemnity for damages, there being no stipulation to o Estores’ unwarranted withholding of the money
the contrary, shall be the payment of interest agreed which rightfully pertains to the spouses amounts
upon, and in the absence of stipulation, the legal to forbearance of money which can be considered
interest, which is 6% per annum. as an involuntary loan.
o Central Bank Circular No. 416, series of 1974: When The accrual of interest shall be reckoned from the date of
the obligation arises out of a loan or forbearance of extrajudicial demand which was on Sept. 27, 2000; the said
money, goods or credits, the applicable rate of interest date was satisfactorily established. (If it weren’t, accrual of
shall be 12% per annum interest is reckoned from the date of judicial demand)
In the instant case, 12% is applicable since the obligation Eastern Shippine Lines, Inc. v. CA: With regard particularly
herein involved arises out of a loan or forbearance of to an award of interest in the concept of actual and
money, goods or credits. 6% is applicable in all other compensatory damages, the rate of interest, as well as the
cases. accrual thereof, is imposes, as follows:
o The contract involved in this case is admittedly not a When the obligation is breached, and it consists in the
loan but a Conditional Deed of Sale. However, the payment of a sum of money, i.e., a loan or forbearance
contract provides that the vendor must return the of money, the interest due should be that which may
payment made by the vendee if the conditions are not have been stipulated in writing.
fulfilled. Furthermore, the interest due shall itself earn legal
o Estores failed to return the money and is considered in interest from the time it is judicially demanded.
default from the time demand was made on Sept. 27, In the absence of stipulation, the rate of interest shall
2000. be 12% per annum to be computed from default, i.e.,
o Crismina Garments, Inc. v. CA: “forbearance” was form judicial or extrajudicial demand under and
defined as a “contractual obligation of lender or subject to the provisions of Art. 1169 CC
creditor to refrain during a given period of time, from When the judgment of the court awarding the sum of
requiring the borrower or debtor to repay a loan or money becomes final and executory, the rate of legal
debt then due and payable” interest, whether the case involves a loan or
This definition described a loan where a debtor is forbearance of money, goods or credits, or any other
given a period within which to pay a loan or debt. case, shall be 12% per annum from such finality until
In such a case, “forbearance of money, goods or satisfaction, this interim period being deemed to be by
credits” will have no distinct definition from a loan. then an equivalent to a forbearance or credit.
The court believes however, that the same is DISPOSITIVE: Petition for Review DENIED. CA Decision
meant to have a separate meaning from a loan, AFFIRMED with MODIFICATIONS.
otherwise there would have been no need to add
that phrase as a loan is already sufficiently
defined in the CC.

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Estores v. Sps. Supangan money, the interest due should be that which may have
This is a PROBLEMATIC DECISION AGAIN. been stipulated in writing. Furthermore, the interest due
- Forbearance of money shall itself earn legal interest from the time it is judicially
- Money owed must earn 12% demanded. In the absence of stipulation, the rate of interest
- There was already a definition of forbearance in Crismina shall be 12% per annum to be computed from default, i.e.,
Garments, but this case changed the meaning of from judicial or extrajudicial demand under and subject to
forbearance the provisions of Article 1169 of the Civil Code.
o Crismina Garments 2. When an obligation, not constituting a loan or
 Loan is a type of forbearance forbearance of money, is breached, an interest on the
 Creditor refrains from collecting on debt amount of damages awarded may be imposed at the
o Estores discretion of the court at the rate of 6% per annum. No
 Loan is different from a forbearance interest, however, shall be adjudged on unliquidated claims
 Creditor acquiesces (temporary) use or damages except when or until the demand can be
- It is required that the obligations are due, but here, in this established with reasonable certainty. Accordingly, where
case, NOT YET DUE the demand is established with reasonable certainty, the
- The 120 days = acquiescence to the use interest shall begin to run from the time the claim is made
- J. del Castillo called this forbearance an involuntary loan judicially or extrajudicially (Art. 1169, Civil Code) but when
BUT, by definition, this is NOT a loan because there is NO such certainty cannot be so reasonably established at the
INVOLUNTARY LOAN for want of consent time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at
Nacar v Gallery Frames (2013) – Peralta., J. which time the quantification of damages may be deemed
Petitioner: Dario Nacar to have been reasonably ascertained). The actual base for
Respondents: Gallery Frames and/or Felipe Bordey Jr. the computation of legal interest shall, in any case, be on
Concept: Conventional Interest the amount finally adjudged.
3. When the judgment of the court awarding a sum of
Doctrine: money becomes final and executory, the rate of legal
When the judgment of the court awarding a sum of money interest, whether the case falls under paragraph 1 or
becomes final and executory, the rate of legal interest shall be paragraph 2, above, shall be 12% per annum from such
6% per annum from such finality until its satisfaction, this interim finality until its satisfaction, this interim period being
period being deemed to be by then an equivalent to a deemed to be by then an equivalent to a forbearance of
forbearance of credit. credit.
- Recently, however, the Bangko Sentral ng Pilipinas
Brief Facts: Monetary Board (BSP-MB), in its Resolution No. 796 dated
Dario Nacar filed a labor case against Gallery Frames and its May 16, 2013, approved the amendment of Section 234 of
owner Felipe Bordey, Jr. Nacar alleged that he was dismissed Circular No. 905, Series of 1982 and, accordingly, issued
without cause by Gallery Frames on January 24, 1997. On Circular No. 799,35 Series of 2013, effective July 1, 2013.
October 15, 1998, the Labor Arbiter (LA) found Gallery Frames Specifically, the rules on interest are now as follows:
guilty of illegal dismissal hence the Arbiter awarded Nacar
P158,919.92 in damages consisting of backwages and separation 1. Monetary Obligations ex. Loans:
pay. Nacar filed a motion with the LA to recomputed his a. If stipulated in writing:
backwages a.1. shall run from date of judicial demand (filing of the
case)
ISSUE: a.2. rate of interest shall be that amount stipulated
WON the Labor Arbiter was correct in the computation of b. If not stipulated in writing
interest in the form of actual or compensatory damages (NO). b.1. shall run from date of default (either failure to pay
upon extra-judicial demand or upon judicial demand
RATIO: When the judgment of the court awarding a whichever is appropriate and subject to the provisions
sum of money becomes final and executory, the rate of of Article 1169 of the Civil Code)
legal interestshall be 6% per annum from such finality b.2. rate of interest shall be 6% per annum
until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit.
With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of

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2. Non-Monetary Obligations (such as the case at bar) Exercise
Here are the values:
a. If already liquidated, rate of interest shall be 6% per Conventional: 16%
annum, demandable from date of judicial or extra-judicial Penalty: 6%
demand (Art. 1169, Civil Code) b. If unliquidated, no interest Principal: P
Situation: Neither principal, penalty, interest paid. Calculate the
Except: When later on established with certainty. Interest total amount due.
shall still be 6% per annum demandable from the date of
judgment because such on such date, it is already deemed How to calculate conventional interest (conv)
that the amount of damages is already ascertained. 16P x period
Period: time of maturity (from date it is due until final
3. Compounded Interest judgment)
This is applicable to both monetary and non-monetary How to calculate penalty
obligations .06P x period
6% per annum computed against award of damages Period: from demand (time it is due and not paid) until
(interest) granted by the court. To be computed from the finality of judgment
date when the court’s decision becomes final and executory How to calculate interest on interest (IOI)
until the award is fully satisfied by the losing party. Unpaid interest: either stipulation or legal interest (6%)
Period: from filing until finality of judgment
4. The 6% per annum rate of legal interest shall be How to calculate total
applied prospectively: [P + conv + penalty + IOI] x LI
Final and executory judgments awarding damages prior to Period: From finality of judgment until paid
July 1, 2013 shall apply the 12% rate;
Final and executory judgments awarding damages on or Note: See RCBC v. Alpha Ready to Wear
after July 1, 2013 shall apply the 12% rate for unpaid
obligations until June 30, 2013; unpaid obligations with
respect to said judgments on or after July 1, 2013 shall still
incur the 6% rate.
DISPOSITIVE: Order of CA reversed and set aside.
Nacar v. Gallery Frames

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

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4. Finance Charges A Finance Charge not only refers to conventional interest, but
also includes fees, service charges, discounts, and such other
RA 3765 charges incident to the extension of credit as the Monetary
Sec. 4 Any creditor shall furnish to each person to whom credit Board of the Central Bank of the Philippines may by regulation
is extended, prior to the consummation of the transaction, a prescribe.
clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the UCPB v. Sps. Samuel and Odette Beluso (2007) – Chico-
Board, the following information: Nazario Petitioner: United Coconut Planters Bank (UCPB)
Respondents: Samuel and Odette Beluso (Spouses Beluso)
the cash price or delivered price of the property or service Concept: Interest; Finance Charges
to be acquired;
the amounts, if any, to be credited as down payment and/or Doctrine:
trade-in; Determining interest in reference to the DBD retail rate or by the
the difference between the amounts set forth under clauses branch head violates the mutuality of contracts. Interest
and (2); determined by such practice is void. When interest provision is
the charges, individually itemized, which are paid or to be void, the legal rate applies.
paid by such person in connection with the transaction but
which are not incident to the extension of credit; Brief Facts:
the total amount to be financed; Spouses Beluso had a loan with UCPB, secured by a parcel of
the finance charge expressed in terms of pesos and land, wherein the latter would determine interest in reference to
centavos; and the DBD retail rate or by the branch head. The spouses availed
the percentage that the finance bears to the total amount to of the credit line and entered into loans evidenced b promissory
be financed expressed as a simple annual rate on the notes. Eventually, the spouses defaulted and were unable to
outstanding unpaid balance of the obligation. make payments, so the bank foreclosed on the property. The
spouses filed a petition for annulment against UCPB.
Sec. 6 (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in ISSUES:
violation of this Act or any regulation issued thereunder shall WON the interest rates used were valid (NO)
be liable to such person in the amount of P100 or in an amount WON there was an error in the re-computation of the debt
equal to twice the finance charged required by such creditor in (YES)
connection with such transaction, whichever is the greater, WON the compounding of interest is valid. (YES)
except that such liability shall not exceed P2,000 on any credit WON the liability for violation in Truth in Lending Act was
transaction. Action to recover such penalty may be brought by validly imposed. (YES)
such person within one year from the date of the occurrence of
the violation, in any court of competent jurisdiction. In any RATIO:
action under this subsection in which any person is entitled to a 1. No, the stipulated interest rates were void.
recovery, the creditor shall be liable for reasonable attorney's RTC and CA: held that the interest rates used were invalid
fees and court costs as determined by the court. for not being numerically quantified on the face of the
Except as specified in subsection (a) of this section, nothing promissory notes.
contained in this Act or any regulation contained in this Act or UCPB: argued that this was not so because the interest was
any regulation thereunder shall affect the validity or determined in reference to the DBD retail rate. The provision
enforceability of any contract or transactions. providing for such reference must also be read with the
Any person who willfully violates any provision of this Act or stipulation on interest rate review.
any regulation issued thereunder shall be fined by not less than o claimed that the reference was valid and was akin to
P1,00 or more than P5,000 or imprisonment for not less than 6 prevailing rates and prime rates allowed in the case of
months, nor more than one year or both. Polotan vs. Court of Appeals.
No punishment or penalty provided by this Act shall apply to o argued that even if the provision that the head of the
the Philippine Government or any agency or any political branch may determine the rate is void, the separability
subdivision thereof. clause of the contract would save the other provisions
A final judgment hereafter rendered in any criminal from being affected.
proceeding under this Act to the effect that a defendant has
willfully violated this Act shall be prima facie evidence against
such defendant in an action or proceeding brought by any
other party against such defendant under this Act as to all
matters respecting which said judgment would be an estoppel
as between the parties thereto.

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SC: no merit in these contentions for the following reasons: on the exactness of the computations, which are too
o The provision on interest rates violated the mutuality of often contested.
contracts as provided under Article 1308 of the Civil since there was a valid demand, the interests and
Code. penalties began to run at the point where UCPB first
cited the case of Philippine National Bank vs. Court made demand.
of Appeals where there was a similar factual milieu, the RTC actually recognized that the legal interest should be
i.e., the bank having the power to review and raise imposed.
the interest rate without and the debtor having on spouses Beluso even originally asked the RTC to impose
say or whatsoever. In that case, the provision on the legal rate in their original pleading.
interest rate was declared void. although the Court recognized that there was an error in the
in this case, the provision on interest rate was re-computation, the rate of penalty to be imposed when
dependent solely on UCPB for if either the two the original contract was to be followed
choices in the interest rate provision presented an was considered iniquitous for it was already over and
opportunity for UCPB to fix the rate at will, the bank above the compounded interest imposed in the
can easily choose such an option, hence it violated contract.
the mutuality of contracts. iniquitous or unconscionable rates of penalty may also be
the provision that the rate may be determined by reduced by the courts.
the branch head gave the bank an unfettered
discretion on what rate to use, and the 3. Yes, compounding of interest is valid.
determination referencing the DBD retail rate was the provision was neither nullified by the RTC or the Court of
not akin to the prevailing rates or prime rates Appeals, nor assailed by the spouses Beluso in their original
allowed in the Polotan case, for in the latter case, petition.
there was a fixed margin over the reference rate, compounding of interest had also been declared legal by the
which was absent in this case, hence, again, it Court in Tan vs. Court of Appeals.
gave the bank unfettered discretion.
the clause on interest rate review violated the 4. Yes, the liability under the Truth in Lending Act was
mutuality of contracts, for the bank could give as validly imposed.
much weight as it desired to the enumeration Section 6 (a) of the Truth in Lending Act provides that action
considerations. to recover penalty under said section may be brought by
The provision on interest rates violated the Truth in person injured within one year from the date of the
Lending Act. For not having numerically quantified the occurrence of the violation in any court of competent
interest and other charges, the provision failed to jurisdiction.
disclose the true finance charges in connection with the o UCPB: argued that since the spouses Beluso did not
extensions of credit, which is a form of deception specifically allege violation of the act, then the penalty
prohibited under the said act and the Court could not could not be imposed.
countenance. o SC: said that it is not the title of the pleadings or
The interest rate stipulated being void, the legal rate of 12% allegations which are controlling, but the contents of the
allegations themselves.
would apply.
when the spouses Beluso alleged that contract did not
provide for the quantity of interest, it was implied that they
2. Yes, there was error in the re-computation of the debt.
were alleging a violation of the act.
o UCPB: argued that since violations of the Truth in
UCPB: claimed that the interest charges, penalty charges,
Lending Act are criminal offenses, allegations cannot
and attorney’s fees had been erroneously excluded by the
be implied.
RTC and the Court of Appeals.
o SC: said that UCPB failed to distinguish between
Spouses Beluso: argued that since the demand for
Section 6 (a) and Section 6 (c). The first imposes a civil
collection made by UCPB was for a considerably bigger
penalty and the latter, a criminal penalty. The spouses
amount that the proper amount, the demand was void,
Beluso may choose which remedy to pursue.
hence, there would have been no default, and so interests
UCPB: argued that its right to due process was violated for
and penalties would not commence to run.
the action was filed in the wrong venue.
SC: agreed with UCPB.
SC: said that the joinder of causes of action under the act,
o default commences upon judicial or extrajudicial
as provided under Section 5 thereof, was to be made in the
demand. The Amount demanded in excess of the
RTC. This was so in this case.
proper amount does not nullify a demand, which
remains valid with respect to the proper amount. A
DISPOSITIVE: The petition was partly granted. The stipulated
contrary ruling would put commercial transactions in
interest rate was void, but there was error in the re-computation
disarray, as validity of demands would be dependent
of the debt.

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5. Usury The rate of increase in the price levels; and
a. General Concepts Such other relevant criteria as the Monetary Board may
adopt.
Art. 1175 Usurious transactions shall be governed by special
laws. Sec. 5 In computing the interest on any obligation, promissory
note or other instrument or contract, compound interest shall
Art. 1957 Contracts and stipulations, under any cloak or device not be reckoned, except by agreement: Provided, That
whatever, intended to circumvent the laws against usury shall whenever compound interest is agreed upon, the effective rate
be void. The borrower may recover in accordance with the of interest charged by the creditor shall not exceed the
laws on usury. equivalent of the maximum rate prescribed by the Monetary
Board, or, in default thereof, whenever the debt is judicially
claimed, in which last case it shall draw six per centum per
Art. 1961 Usurious contracts shall be governed by the Usury
annum interest or such rate as may be prescribed by the
Law and other special laws, so far as they are not inconsistent
Monetary Board. No person or corporation shall require
with this Code.
interest to be paid in advance for a period of more than one
year: Provided, however, That whenever interest is paid in
Act 2655
advance, the effective rate of interest charged by the creditor
Sec. 1 The rate of interest for the loan or forbearance of any
shall not exceed the equivalent of the maximum rate
money goods, or credits and the rate allowed in judgments, in prescribed by the Monetary Board.
the absence of express contract as to such rate of interest,
shall be six per centum per annum or such rate as may be Sec. 9-a The Monetary Board shall promulgate such rules and
prescribed by the Monetary Board of the Central Bank of the regulations as may be necessary to implement effectively the
Philippines for that purpose in accordance with the authority provisions of this Act.
hereby granted.
Central Bank Circular No. 905-82, Sec. 1 The rate of interest,
Sec. 1-a The Monetary Board is hereby authorized to prescribe
including commissions, premiums, fees and other charges, on
the maximum rate or rates of interest for the loan or renewal
a loan or forbearance of any money, goods, or credits,
thereof or the forbearance of any money, goods or credits, and
regardless of maturity and whether secured or unsecured, that
to change such rate or rates whenever warranted by prevailing
may be charged or collected by any person, whether natural or
economic and social conditions.
juridical, shall not be subject to any ceiling prescribed under or
In the exercise of the authority herein granted, the Monetary pursuant to the Usury Law, as amended.
Board may prescribe higher maximum rates for loans of low
Historically, the lending of money at an interest was frowned
priority, such as consumer loans or renewals thereof as well as
upon. An example of this was the view of Christian law that
such loans made by pawnshops finance companies and other
usury is a sin and a ground for excommunication.
similar credit institutions although the rates prescribed for
Under Roman law, a ceiling was imposed for interest rate
these institutions need not necessarily be uniform. The
that may be charged. It was very close to the modern-day
Monetary Board is also authorized to prescribe different
legal interest rate of 12%
maximum rate or rates for different types of borrowings,
In our jurisdiction, the Civil Code and Act. 2655 (or the
including deposits and deposit substitutes, or loans of financial
Usury Law) declares usury, or the lending of money at
intermediaries.
interest in excess of the maximum rates allowed by law,
as an illegal act.
Sec. 4-a The Monetary Board may eliminate, exempt from, or
However, Central Bank Circular No. 905 has effectively lifted
suspend the effectivity of, interest rate ceilings on certain types
the ceilings on interest rates; usury, in effect, is legally non-
of loans or renewals thereof or forbearances of money, goods,
existent.
or credit, whenever warranted by prevailing economic and
The circular, however, did not repeal the Civil Code
social conditions.
provisions on usury nor did it repeal the Usury Law; it merely
Sec. 4-b In the exercise of its authority to fix the maximum rate suspended the operation of both.
or rates of interest under this Act, the Monetary Board shall be
guided by the following:
The existing economic conditions in the country and the

general requirements of the national economy;
The supply of and demand for credit;

!
Advocates for Truth in Lending, Inc. and Olaguer v. Bangko implied repeal is not taken lightly by the court. In the
Sentral Monetary Board (2013) – Reyes absence of an express repeal, a subsequent law cannot
Petitioner: Advocates for Truth in Lending, Inc. and Eduardo B. be construed as repealing a prior law unless an
Olaguer (ATL) irreconcilable inconsistency and repugnancy exists. The
Respondents: Bangko Sentral Monetary Board Court found no such thing between the Usury Law and
Concept: Usury; General Concepts RA 7653.
Doctrine: DISPOSITIVE: Deny petition.

See notes below on the application of interest rate as provided in
the Eastern Shipping Lines Case. Notes on application of interest (from Eastern Shipping
Lines vs. Court of Appeals):
Brief Facts:
The Monetary Board issued CB Circular No. 905, which provided For breach of obligations consisting of payment of a sum of
that the rate of interest shall not be subject to any ceiling prescribed money.
under or pursuant to the Usury Law. Pres. Ramos signed RA 7653, Apply rate as stipulated.
which replaced the CB with the Bangko Sentral. ATL filed a petition If rate is not stipulated, but interest is intended, apply legal
for certiorari to prohibit the Monetary Board of the Bangko Sentral rate of 12% per annum.
from implementing CB Circular No. 905. Interest due shall earn legal interest from judicial demand.
For breach of obligations other than sum of money.
ISSUES: 6% per annum at the discretion of the court.
WON the Monetary Board of the Central Bank was within Interest applied from demand when liquidated, otherwise,
the bounds of law when it issued CB Circular 905. (YES) from promulgation of judgment.
WON the Monetary Board of the Bangko Sentral may When judgment becomes final, 12%.
continue to implement CB Circular 905. (YES)
b. Usurious Acts
RATIO:
1. Yes, the Monetary Board of the Central Bank was within Act 2655
the bounds of law. Sec. 2 No person or corporation shall directly or indirectly take
ATL: argued that the Monetary Board of the Central Bank or receive in money or other property, real or personal, or
committed an act without the bounds of law for it was only choses in action, a higher rate of interest or greater sum or
authorized to prescribe or set the maximum rates of interest value, including commissions, premiums, fines and penalties,
and nothing in PD 1684 authorized it to lift or suspend the for the loan or renewal thereof or forbearance of money,
limits of interest on all credit transactions. The CB was also goods, or credits, where such loan or renewal or forbearance is
promulgated without the benefit of a public hearing. secured in whole or in part by a mortgage upon real estate the
SC: admitted that the CB suspended the Usury Law. title to which is duly registered, or by any document conveying
However, the Court did not find anything illegal or such real estate or an interest therein, than twelve per centum
unconstitutional in this suspension. per annum or the maximum rate prescribed by the Monetary
o a law cannot be repealed by a circular issued by an Board and in force at the time the loan or renewal thereof or
executive agency, for only a law can repeal a law. This forbearance is granted: Provided, That the rate of interest
principle was not violated by the CB, for it merely under this section or the maximum rate of interest that may be
suspended the usury law. prescribed by the Monetary Board under this section may
o implementation of the CB does not mean that banks or likewise apply to loans secured by other types of security as
financial institutions may demand any rate of interest. may be specified by the Monetary Board.
Iniquitous rates may be declared void.
Sec. 3 No person or corporation shall directly or indirectly
2. Yes, the Monetary Board of the Bangko Sentral may demand, take, receive or agree to charge in money or other
continue implement CB Circular 905. property, real or personal, a higher rate or greater sum or value
ATL: argued that even if the Monetary Board of the Central for the loan or forbearance of money, goods, or credits where
Bank had the power to suspend the Usury Law, this power such loan or forbearance is not secured as provided in Section
was not vested in the Monetary Board of the Bangko two hereof, than fourteen per centum per annum or the
Sentral, for RA 7653 expressly repealed RA 265 and did not maximum rate or rates prescribed by the Monetary Board and
reenact Section 109 thereof.
in force at the time the loan or forbearance is granted.
SC: said that Section 109 covered only loans extended by
banks, whereas Section 1-a of the Usury Law applies to all
loans or renewals thereof.
o had RA 7653 intended to repeal Section 1-a of Act 2655
(Usury Law), it would have been so stated.

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Sec. 4 No pawnbroker or pawnbroker's agent shall directly or the rates fixed in this Act.
indirectly stipulate, charge, demand, take or receive any higher
rate or greater sum or value for any loan or forbearance than Sec. 7 All covenants and stipulations contained in
two and one-half per centum per month when the sum lent is conveyances, mortgages, bonds, bills, notes, and other
less than one hundred pesos; two per centum per month when contracts or evidences of debts, and all deposits of goods or
the sum lent is one hundred pesos or more, but not exceeding other things, whereupon or whereby there shall be stipulated,
five hundred pesos; and fourteen per centum per annum when charged, demanded, reserved, secured, taken, or received,
it is more than the amount last mentioned; or the maximum rate directly or indirectly, a higher rate or greater sum or value for
or rates prescribed by the Monetary Board and in force at the the loan or renewal or forbearance of money, goods, or credits
time the loan or forbearance is granted. A pawnbroker or than is hereinbefore allowed, shall be void: Provided, however,
pawnbroker's agent shall be considered such, for the benefits That no merely clerical error in the computation of interest,
of this Act, only if he be duly licensed and has an establishment made without intent to evade any of the provisions of this Act,
open to the public. shall render a contract void: Provided, further, That parties to a
loan agreement, the proceeds of which may be availed of
It shall be unlawful for a pawnbroker or pawnbroker's agent to partially or fully at some future time, may stipulate that the rate
divide the pawn offered by a person into two or more fractions of interest agreed upon at the time the loan agreement is
in order to collect greater interest than the permitted by this entered into, which rate shall not exceed the maximum allowed
section. by law, shall prevail notwithstanding subsequent changes in
the maximum rates that may be made by the Monetary Board:
It shall also be unlawful for a pawnbroker or pawnbroker's And Provided, finally, That nothing herein contained shall be
agent to require the pawner to pay an additional charge as construed to prevent the purchase by an innocent purchaser of
insurance premium for the safekeeping and conservation of the a negotiable mercantile paper, usurious or otherwise, for
article pawned. valuable consideration before maturity, when there has been
no intention on the part of said purchaser to evade the
The Usury Law is only applicable in a case of loan or provisions of this Act and said purchase was not a part of the
forbearance of money, goods, or credit. original usurious transaction. In any case, however, the maker
It does NOT apply to other contracts, such as conditional of said note shall have the right to recover from said original
sales based on installment plans. holder the whole interest paid by him thereon and, in case of
o The increase in the price is not considered a mere pretext litigation, also the costs and such attorney's fees as may be
to cover a usurious loan. allowed by the court.
o Such increase when the sale is on credit, is called a time
price differential and is not the interest within the meaning Sec. 8 All loans under which payment is to be made in
of the Usury Law agricultural products or seed or in any other kind of
o It serves to cover expenses in such sales on credit and commodities shall also be null and void unless they provide
also encourages cash sales. that such products or seed or other commodities shall 6e
appraised at the time when the obligation falls due at the
c. Remedies current local market price: Provided, That unless otherwise
stated in a document written in a language or dialect intelligible
Art. 1413 Interest paid in excess of the interest allowed by the to the debtor and subscribed in the presence of not less than
usury laws may be recovered by the debtor, with interest two witnesses, any contract advancing money to be repaid
thereon from the date of the payment. later in agricultural products or seed or any other kind of
commodities shall be understood to be a loan, and any person
Act 2655 or corporation having paid otherwise shall be entitled in case
Sec. 6 Any person or corporation who, for any such loan or action is brought within two years after such payment or
renewal thereof or forbearance, shall have paid or delivered a delivery to recover all the products or seed delivered as
higher rate or greater sum or value than is hereinbefore interest, or the value thereof, together with the costs and
allowed to be taken or received, may recover the whole attorney's fees in such sum as may be allowed by the court.
interest, commissions, premiums penalties and surcharges Nothing contained in this section shall be construed to prevent
paid or delivered with costs and attorneys' fees in such sum as the lender from taking interest for the money lent, provided
may be allowed by the court in an action against the person or such interest be not in excess of the rates herein fixed.
corporation who took or received them if such action is brought
within two years after such payment or delivery: Provided,
however, That the creditor shall not be obliged to return the
interest, commissions and premiums for a period of not more
than one year collected by him in advance when the debtor
shall have paid the obligation before it is due, provided such
interest, and commissions and premiums do not exceed
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Sec. 9 The person or corporation sued shall file its answer in 2) Remedy of Creditor
writing under oath to any complaint brought or filed against
said person or corporation before a competent court to recover The nullity of the usurious interest stipulated does not bar the
the money or other personal or real property, seeds or creditor from collecting the principal amount of the loan from
agricultural products, charged or received in violation of the the debtor.
provisions of this Act. The lack of taking an oath to an answer The principal amount, therefore, may still be recovered
to a complaint will mean the admission of the facts contained in through judicial action. And in case of such demand, and the
the latter. debtor incurs in delay, then the principal amount shall earn
interest from date of the demand.
Sec. 9-a The Monetary Board shall promulgate such rules and
regulations as may be necessary to implement effectively the DEPOSIT
provisions of this Act.
I. THE CONCEPT OF DEPOSIT
Sec. 10 Without prejudice to the proper civil action violation of
this Act and the implementing rules and regulations Art. 1962 A deposit is constituted from the moment a person
promulgated by the Monetary Board shall be subject to criminal receives a thing belonging to another, with the obligation of
prosecution and the guilty person shall, upon conviction, be safely keeping it and of returning the same. If the safekeeping
sentenced to a fine of not less than fifty pesos nor more than of the thing delivered is not the principal purpose of the
five hundred pesos, or to imprisonment for not less than thirty contract, there is no deposit but some other contract.
days nor more than one year, or both, in the discretion of the
court, and to return the entire sum received as interest from the Art. 1964 A deposit may be constituted judicially or
party aggrieved, and in the case of non-payment, to suffer extrajudicially.
subsidiary imprisonment at the rate of one day for every two
pesos: Provided, That in case of corporations, associations,
Art. 1967 An extrajudicial deposit is either voluntary or
societies, or companies the manager, administrator or gerent
necessary.
or the person who has charge of the management or
administration of the business shall be criminally responsible
A deposit is an obligation constituted from the moment of
for any violation of this Act.
delivery of the property belonging to another for the purpose
of safekeeping and eventual return.
The Usury Law is only applicable in a case of loan or
It may be judicial, extrajudicial, voluntary and necessary.
forbearance of money, goods, or credit.
The principal obligation in any kind of deposit is the
It does NOT apply to other contracts, such as conditional
safekeeping of the thing and its eventual return.
sales based on installment plans.
o The increase in the price is not considered a mere pretext
Sources of deposit: not just by contract
to cover a usurious loan.
o Such increase when the sale is on credit, is called a time
Object:
price differential and is not the interest within the meaning
of the Usury Law GR: movable
o It serves to cover expenses in such sales on credit and XPN: judicial deposit can involve even immovable
also encourages cash sales.
Obligation:
1) Remedy of Debtor Depositary: safekeeping then return
Depositor: transfer object
Should the debtor pay under the usurious agreement, his
remedy is to recover the amount he paid as interest under Deposit: If there is a stipulation on penalty
such usurious agreement. Roman law concept of depositum, a contract of
There is no conflict between Sec. 6 of the Usury Law and Art. neighborliness, which is the gratuitous deposit of goods for
1413 of the Civil Code; both allow for the recovery of the the benefit of the depositor
whole interest paid under the usurious interest. It is an obligation constituted from the moment of delivery of
o Art. 1413 only adds that the whole interest to be property belonging to another for the purpose of
recovered shall be recovered with interest, accruing from safekeeping and eventual return
the date of payment. Principal obligation and distinguishing characteristic is the
Sec. 9 of the Usury does not apply when the defendant is the safekeeping and its eventual return
one alleging usury.

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Types of Deposit: An extrajudicial deposit that arises out of a contract
Judicial – the obligation arises as a consequence of law, o Thus, meeting if the minds is required between the
allowing the issuance of a judicial order constituting a depositor and the chosen depositary.-
deposit o A deposit is a real contract, requiring delivery for its
Extrajudicial perfection
Voluntary – obligation arises as a consequence of a o May be oral or written, may be gratuitous or onerous
contract o A contract to deposit, or an agreement to constitute a
Necessary – obligation arises as a consequence of law deposit, is a valid consensual contract.
or quasi-contract
BPI v. IAC (1988) – Cortes, J.
Deposit Mutuum Petitioner: Bank of the Philippine Islands
For safekeeping or custody Respondent: Intermediate Appellate Court and Rizaldy
For consumption Period
Depositor can demand return to return must be respected Zshornack
at any time by lender Compensation Concept: Voluntary Deposit
Compensation is essentially may be gratuitous, or with
gratuitous (except by mutual a stipulation to pay interest Doctrine:
agreement) In a deposit, the safekeeping of the object is the principal
Fungible thing
Any property Lender and borrower purpose. This is constituted from the moment a person receives
Depositor and depositary a thing belonging to another, with the obligation of safely keeping
relationship
relationship it and of returning the same. The intention and the subsequent
acts of the parties determine the nature of the arrangement
between the parties.
. VOLUNTARY DEPOSIT
Brief Facts:
Zshornack entrusted $3,000 to COMTRUST for safekeeping.
A. General Concepts
When the amount was requested to be returned, the bank
refused, alleging that the amount was already credited to
Art. 1963 An agreement to constitute a deposit is binding, but
Zshornack’s account. Zshornack filed a complaint against
the deposit itself is not perfected until the delivery of the thing.
COMTRUST for the recovery of the $3,000.
ISSUES:
Art. 1968 A voluntary deposit is that wherein the delivery is W the delivery of the cash was to sell it at prevailing
made by the will of the depositor. A deposit may also be made currency rates or for safekeeping (SAFEKEEPING)
by two or more persons each of whom believes himself entitled WON the bank is liable (NO)
to the thing deposited with a third person, who shall deliver it in
a proper case to the one to whom it belongs. RATIO:
The delivery was for safekeeping.
Art. 1969 A contract of deposit may be entered into orally or in Document states that the US$3,000.00 was received by the
writing. bank for safekeeping
o Subsequent acts also show that the intent of the parties
Art. 1965 A deposit is a gratuitous contract, except when there was really for the bank to safely keep the dollars and to
is an agreement to the contrary, or unless the depositary is return it to Zshornack at a later time  he did demand
the return on May 10, 1976 (over 5 months later)
engaged in the business of storing goods.
o This arrangement is that contract defined under Art.
1962: A deposit is constituted from the moment a
Art. 1966 Only movable things may be the object of a deposit.
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not
Art. 1995 A deposit its extinguished: the principal purposes of the contract, there is no
deposit but some other contract.
Upon the loss or destruction of the thing deposited;
In case of a gratuitous deposit, upon the death of either the

depositor or the depositary.

!
O bject of the contract between Zshornack and BPI v. IAC
COMTRUST was foreign exchange SGS: Remember this case – contract of deposit
o Transaction governed by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Triple-V Food Services Inc. v. Filipino Merchants Insurance Co.
Transactions, which provide the following (2005) – Nachura, J.
Transactions shall NOT be effected when they are Petitioner: Triple-V Food Services Inc.
owned by and in the name of banks: money Respondent: Filipino Merchants Insurance Company (FMIC)
expressed in foreign currencies Concept: Deposit; Voluntary Deposit; General Concepts
All receipts of foreign exchange shall be sold daily
to the Central Bank within one business day Doctrine:
following the receipt of such foreign exchange In a contract of deposit, the depositary receives an object
Document and subsequent acts show that they belonging to the depositor, and has the obligation of safely
intended to safekeep the foreign exchange, and return keeping the object and returning the same to the latter. The
it later to Zshornack contract of deposit may be constituted without consideration. It is
a real contract, perfected upon the delivery of the object by the
Parties did not intend to sell the US dollars to the depositor to the depositary.
Central Bank within one business day from receipt; Brief Facts:
otherwise, contract of depositum would never have De Asis, an employee of Crispa Textile Inc., dined at Triple-V’s
been entered into at all Kamayan Restaurant. She availed of the valet parking service of
The mere safekeeping of the greenbacks, without selling
the restaurant for the company car assigned to her. However,
them to the Central Bank within one business day from the
after dining, the car was discovered to be lost and could not be
receipt, is a transaction which is not authorized by CB
recovered. Covered under a policy, Crispa Textile was
Circular No. 20 and makes it fall under the general class of
indemnified by FMIC; in turn, FMIC was subrogated into Crispa’s
prohibited transactions
rights and filed suit against Triple-V for the loss of the car.
Art. 5 of the NCC provides that it is void, having been
executedagainsttheprovisionsofa
ISSUES:
mandatory/prohibitory law
WON Triple-V was liable (YES)
It affords neither of the parties a cause of action  pari
WON the provision in the parking ticket served as a valid
delicto
waiver (NO)
No, the bank is NOT liable. Since the nullity arises from
RATIO:
an illegal act, the parties will be left as they are, as a
1. YES. Triple-V is liable under the contract of deposit.
result of being in pari delicto.
BPI: It is not liable because it is Garcia who is personally
When De Asis availed of the valet service of Triple-V in its
liable, having exceeded his powers when he entered into
restaurant, De Asis expected the safe return of the vehicle
the transaction
at the end of her meal. Triple-V, therefore, was constituted
SC: Bank did not question the document, which is an
as a depositary of the said car.
actionable document, thereby admitting Garcia’s authority,
o In a contract of deposit, the depositary receives an
and the bank’s power, to enter into the contract
object belonging to another (depositor), with the
o Stranger deals with the corporation on the faith of the
obligation of safely keeping and returning the said
ostensible authority exercised by some of the corporate
object.
officers; reasonable that the corporation should be
o A deposit may be constituted even without any
required, if it denies its authority, to state such defense
consideration; the depositary need not be paid a fee
in his answer
before the obligation attaches.
o To absolve a corporation every time an officer enters
Triple-V clearly failed in complying with its obligation as the
into a contract beyond corporate powers, is to cast
depositary of the car. Hence, its liability.
corporations in so perfect a mold that transgressions
and wrongs by such artificial beings become impossible
“When the nullity proceeds from the illegality of the cause or
object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
cause of action against each other.” (Art. 1411)
Only remedy is for the State to prosecute the parties
DISPOSITIVE: AFFIRMED with MODIFICATIONS.

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2. NO. There was no waiver. Art. 1977 The depositary cannot make use of the thing
SC: The ticket was a ‘contract of adhesion’ since Triple-V deposited without the express permission of the depositor.
alone prepared it. While they are valid by nature, the Court
“will not hesitate to rule out blind adherence thereto if they Otherwise, he shall be liable for damages.
prove to be one-sided under the attendant fact and
circumstances.” However, when the preservation of the thing deposited
De Asis deposited the car partly of Triple-V’s enticement for requires its use, it must be used but only for that purpose.
customers: providing a safe parking space within which to
leave their vehicles while they dine.
Art. 1978 When the depositary has permission to use the thing
De Asis having fully entrusted the vehicle, she fully expects
deposited, the contract loses the concept of a deposit and
the safe return of the vehicle after her visit in Kamayan was
becomes a loan or commodatum, except where safekeeping is
over.
still the principal purpose of the contract.
Hence, Triple-V cannot be allowed to use the ticket as a
“shield from any esponsibility for any loss or damage to The permission shall not be presumed, and its existence must
vehicles or to the valuables contained therein.”
be proved.
DISPOSITIVE: RTC and CA affirmed.

Art. 1981 When the thing deposited is delivered closed and
sealed, the depositary must return it in the same condition, and
Triple-V v. Filipino Merchants
Are all contracts for parking contracts of deposit? Or are there he shall be liable for damages should the seal or lock be
critical factors in the case that, if not present in another situation, broken through his fault.
would lead to a different conclusion?
Fault on the part of the depositary is presumed, unless there is
If not valet parking, it is a contract of lease (use of space) proof to the contrary.
because no transfer of object and expectation is different – just
As regards the value of the thing deposited, the statement of
to use the space
the depositor shall be accepted, when the forcible opening is
A valet is a contract of deposit. imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility of
B. Obligation to Safekeep the depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the

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

Art. 1975 The depositary holding certificates, bonds, securities
Delivery in a specific manner to the depositary by the
or instruments which earn interest shall be bound to collect the
depositor of the object of the deposit for safekeeping
latter when it becomes due, and to take such steps as may be
necessary in order that the securities may preserve their value
and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes.
Art. 1976 Unless there is a stipulation to the contrary, the

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

!
Rules to be Followed by the Depositary Brief Facts:
The depositary may not change the way of the deposit Agro-Industrial and Sps. Pugao rented a safety deposit box from
unless: Security Bank which was kept in the latter’s possession.
There is a presumption of consent based on the Certificates of title of 2 lots sold by Pugaos to Agro-Industrial
circumstances, and were kept in the box until Agro-Industrial has fully paid the
The depositary notifies the depositor and waits for the purchase price of the sale. In order for the box to be opened, a
decision. The obligation to notify does not apply if delay key in the possession of the renters and the guard key in the
would cause danger to the object of the deposit possession of the bank were needed. Joint signatures of the
The depositary must: renters were likewise required. When Agro-Industrial and the
Collect the interest of certificates, bonds, securities or Pugaos went to the bank to have the safety deposit box opened,
instruments when they become due, and it was found that its contents were missing. Agro-Industrial
Must take necessary measures to preserve their value missed out on an offer to purchase said lots due to the delay in
and corresponding rights. This obligation does not the reconstitution of titles. As a result, it sued the bank for
apply if the certificates, bonds, securities or instruments damages. The bank invokes the conditions in their lease
are kept pursuant to a contract for the rent of safety agreement of the safety deposit box, wherein the bank explicitly
deposit boxes. declared that it is not a depositary of the contents and assumes
The depositary may commingle grain or other articles of the no liability in connection therewith.
same kind and quality unless there is a stipulation to the
contrary ISSUES:
The depositary cannot use the thing deposited unless: WON the contract for rent od a safety deposit box is a
There is express and proven permission of the contract of lease (NO)
depositor, in which case the deposit is considered an WON the stipulation that the bank should not be held liable
irregular deposit. In this first exception, the principal for any loss is valid (NO)
purpose of the irregular deposit is still safekeeping. If
safekeeping is not the principal purpose, then the RATIO:
contract is not a deposit and may be a loan. 1. No. The contract is a special kind of deposit.
The preservation of the object of the deposit requires its The questioned contract is not an ordinary contract of lease
use. In this second exception, use of the object by the o It cannot be characterized as an ordinary lease contract
depositary is for the limited purpose of preservation. because the full and absolute possession and control of
the safety deposit box was not given to the renters.
The depositary must return a closed and sealed object in o The guard key of the box remained with the bank and
the same condition and must keep the secret of the deposit without this key, neither of the renters could open the
if the seal or lock is broken box
The depositary may open a locked box or receptacle only if: o The bank could not likewise open the box without the
There is express authority, since the parties are free to renter’s key
stipulate on this. Neither could Art. 1975 (cited by the CA in its decision) be
There is presumed authority, such as when the key to invoked as an argument against the deposit theory because
the lock has been delivered, or the instructions of the clearly, the first paragraph of such provision cannot apply to
depositor as regards the deposit cannot be executed a depositary of certificates, bonds, securities, or instruments
which earn interest if such documents are kept in a rented
without opening the box or receptacle.
safety deposit box which the depositary cannot open without
CA Agro-Industrial Development Corporation v. CA (1993) – the renter being present.
Davide, Jr., J It cannot be considered as an ordinary contract of deposit
Petitioner: CA Agro-Industrial Development Corp. as the absolute control and possession over the thing
Respondents: CA and Security Bank and Trust Company deposited is not given to the depositary
Concept: Voluntary deposit; Obligation to safekeep However, we adopt the prevailing rule in the US that banks
who rent out safety deposit boxes are depositaries
Doctrine: o Sec. 72 of the General Banking Act 23 provides that
Banking institutions who receive in custody funds, documents, banking institutions who receive in custody funds,
and valuable objects, and rent safety deposit boxes for documents, and valuable objects, and rent safety
safeguarding of such effects are depositaries. The primary deposit boxes for safeguarding of such effects are
function is still found within the parameters of a contract of depositaries
deposit. The renting out of the safety deposit boxes is not o The primary function is still found within the parameters
independent from, but related to this principal function. of a contract of deposit
o The renting out of the safety deposit boxes is not
Stipulations exempting a depositary from liability in case of loss
independent from, but related to this principal function
are contrary to law and public policy.

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2. No. Such is contrary to law and public policy ISSUE:
A contract of deposit may be entered into orally or in writing WON estate of Fr. Agustin is obliged to pay back the P6, 641
and parties thereto may establish such stipulations they may (trust-money) which was part of the money confiscated by the
deem convenient provided they are not contrary to law, government (NO)
morals, good customs, public order or public policy
The responsibility of the depositary is governed by Title I, RATIO:
Book IV CC (Obligations and Contracts) NO; the confiscation of the U.S. government is a fortuitous
o Accordingly, the depositary would be liable if, in event which has the effect of excusing the debtor (Fr.
performing its obligation, it is found guilty of fraud, Agustin) to comply with his obligation
negligence, delay or contravention of the tenor of the The Roman maxim of major casus est, cui humana
agreement infirmitas resistere non pottest is effected by the Civil Code
o In the absence of any stipulation prescribing the degree in Art. 1105 (now Art. 1174, NCC) which governs the rule on
of diligence required, that of a good father of a family is fortuitous events.
to be observed By placing the money in the bank and mixing it with his
o Hence, any stipulation exempting the depositary from personal funds, De la Pena did not assume an obligation
any liability arising from the loss of the thing deposited different from that under which he would have lain if such
on account of fraud, negligence or delay would be void deposit had not been made, nor did he make himself liable
for being contrary to law and public policy to repay at all hazards.
It is not correct to assert that the bank has neither the In the case at bar, that the money had been confiscated by
possession nor control of the contents of the box since the the government is considered a fortuitous event for it is “an
said box itself is located in its premises and under its event which could not be foreseen, or which having been
absolute control. Moreover, the guard key is in the foreseen were inevitable.”
possession of the bank and the renters cannot open the box The fact that he placed the trust fund in the bank in his
without the same. personal account does not add to his responsibility, and
such deposit did not make him a debtor who must respond
DISPOSITIVE: Petition for review partially granted by deleting at all hazards.
award of attorney’s fees There is no need to consider the question of WON he was
negligent in depositing them instead of leaving them at his
CA Agro-Industrial v. CA house, or WON he was negligent in depositing them in his
The object of the deposit: titles personal account instead of a separate account as trustee,
since there was no law prohibiting him from depositing
The SDB = the way of the deposit it as he did and there was no law which changed his
There is no effect on the contract of deposit because what is responsibility by reason of the deposit.
affected is only the way of the deposit
Roman Catholic Bishop of Jaro v. De la Pena(1913) – Powell, DISPOSITIVE: CFI reversed. The money was forcibly taken from
J. Petitioner: Bishop of Jaro the bank by the U.S armed forces; thus, Fr. Agustin was not
Respondents: Gregorio de la Pena, as administrator of the responsible for its loss.
estate of Father Agustin dela Pena !
Concept: Obligation to Safekeep DISSENT: J. Trent
The sum of P6, 641, being part of a trust fund, was then
Doctrine: clothed with all the immunities and protection the law seeks
Fortuitous events constitute a defense, with the effect of relieving to invest trust funds. However, when he mixed them with his
the debtor of his obligation to the creditor. personal account, he unclothed it of all the protection it had.
Brief Facts: If the money was deposited in a separate account as trustee

Fr. De la Pena was a made a trustee by the Bishop of Jaro to or agent, it may be presumed that the military would not
collect and safekeep funds to be used for the construction of a have confiscated for the reason that they were looking for
leper hospital. He then deposited the collected money in his insurgent funds only.
personal account. When war and the revolution broke out, he Citing US v Thomas, trustees may be held liable even for
was arrested as a political prisoner and his funds in the account fortuitous events in cases where they mix the trust-money
were confiscated by the government, as it was allegedly being with their own, whereby it loses its identity, and they
used for revolutionary purposes. Bishop wants the estate of the become mere debtors.
trustee to repay the trust-money which was also confiscated by While the majority is correct in saying that there is no law
the US armed forces. prohibiting the act of mixing trust-money with personal
account, the very nature of the trust itself prohibits such act,
since the position of trustee is one of trust.

!
- While there is no showing that Fr. De la Pena used the trust- Art. 1981 When the thing deposited is delivered closed and
money for personal purposes, considering the considerable sealed, the depositary must return it in the same condition, and
length of time intervened from time of deposit until he shall be liable for damages should the seal or lock be
confiscation, as well as the records stating that several broken through his fault.
withdrawals and deposits have been made, the facts
strongly indicate that he had as a matter of fat been using Fault on the part of the depositary is presumed, unless there is
the money in violation of the trust imposed in him. proof to the contrary.
Roman Catholic Bishop of Jaro v. De La Pena As regards the value of the thing deposited, the statement of
The Judge would hold the Father liable because he lost the thing the depositor shall be accepted, when the forcible opening is
and violated the deposit imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility of
The counsel should advise him to open another account, saying the depositor with respect to the value claimed by him.
it is owned by the Bishop, with the Father acting as agent
When the seal or lock is broken, with or without the
2.Liability for Loss and Damage depositary's fault, he shall keep the secret of the deposit.
Art. 1972 The depositary is obliged to keep the thing safely Art. 1979 The depositary is liable for the loss of the thing
and to return it, when required, to the depositor, or to his heirs through a fortuitous event:
and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to the If it is so stipulated;
safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book. If he uses the thing without the depositor's permission;
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must If he delays its return;
observe.
If he allows others to use it, even though he himself may
Art. 1973 Unless there is a stipulation to the contrary, the have been authorized to use the same.
depositary cannot deposit the thing with a third person. If
deposit with a third person is allowed, the depositary is liable Art. 1990 If the depositary by force majeure or government
for the loss if he deposited the thing with a person who is order loses the thing and receives money or another thing in its
manifestly careless or unfit. The depositary is responsible for place, he shall deliver the sum or other thing to the depositor
the negligence of his employees.
Art. 1977 The depositary cannot make use of the thing Art. 1993 The depositor shall reimburse the depositary for any
deposited without the express permission of the depositor. loss arising from the character of the thing deposited, unless at
the time of the constitution of the deposit the former was not
Otherwise, he shall be liable for damages. aware of, or was not expected to know the dangerous
character of the thing, or unless he notified the depositary of
However, when the preservation of the thing deposited the same, or the latter was aware of it without advice from the
requires its use, it must be used but only for that purpose. depositor.
Purpose of safekeeping is the distinguishing characteristic

of a contract of deposit
Responsibility for loss and damage are subject to specific
rules under the Civil Code

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a. Liability of Depositary C. Obligation to Return
Responsibility for loss and damage will attach to the 1. By Whom and To Whom
DEPOSITARY if:
The depositary deposits the object with a third person, Art. 1972 The depositary is obliged to keep the thing safely
unless there is a stipulation allowing it. and to return it, when required, to the depositor, or to his heirs
If deposit with a third person is allowed, the depositary and successors, or to the person who may have been
deposits the thing with a person who is manifestly careless designated in the contract. His responsibility, with regard to the
or unfit. safekeeping and the loss of the thing, shall be governed by the
The employees of the depositary are negligent. provisions of Title I of this Book.
The depositary uses the object of the deposit, unless there
was express permission of the depositor, or the use was If the deposit is gratuitous, this fact shall be taken into account
necessary for the limited purpose of preservation. in determining the degree of care that the depositary must
The seal or lock of a thing delivered closed and sealed is observe.
broken through the fault of the depositary. Fault is
presumed, unless there is proof to the contrary. If the Art. 1970 If a person having capacity to contract accepts a
forcible opening of a thing delivered closed and sealed is deposit made by one who is incapacitated, the former shall be
imputable to the depositary, the value of the thing deposited subject to all the obligations of a depositary, and may be
shall be based on the statement of the depositor, unless: compelled to return the thing by the guardian, or administrator,
of the person who made the deposit, or by the latter himself if
There is contrary proof, and
he should acquire capacity.
The courts determine otherwise based on the credibility
of the depositor.
Even in case of a fortuitous event, depositary is liable if: Art. 1971 If the deposit has been made by a capacitated
It has been stipulated, person with another who is not, the depositor shall only have
The depositary uses the thing without the depositor’s an action to recover the thing deposited while it is still in the
permission, possession of the depositary, or to compel the latter to pay him
The depositary delays the return of the object of the the amount by which he may have enriched or benefited
deposit, or himself with the thing or its price. However, if a third person
The depositary allows others to use it, even though the who acquired the thing acted in bad faith, the depositor may
depositary may have been authorized to use the same. bring an action against him for its recovery.
Even if the depositary is not liable, if the depositary loses
the thing by force majeure or government order, but Art. 1984 The depositary cannot demand that the depositor
receives money or a replacement, the depositary shall prove his ownership of the thing deposited.
deliver the money or replacement to the depositor.
Nevertheless, should he discover that the thing has been
b. Liability of Depositor (only instance of liability) stolen and who its true owner is, he must advise the latter of
Responsibility for loss or damage will attach to the depositor the deposit.
ONLY IF the depositor delivers a thing the character of which
causes any loss to the depositary, unless: If the owner, in spite of such information, does not claim it
At the time of the constitution of the deposit the within the period of one month, the depositary shall be relieved
depositor was not aware of, or was not expected to of all responsibility by returning the thing deposited to the
know the dangerous character of the thing, or depositor.
The depositor notified the depositary of the dangerous
character, or the depositary was in any case aware of If the depositary has reasonable grounds to believe that the
the character. thing has not been lawfully acquired by the depositor, the
former may return the same.
c. Liability for Expenses
Art. 1985 When there are two or more depositors, if they are
Art. 1992 If the deposit is gratuitous, the depositor is obliged to not solidary, and the thing admits of division, each one cannot
reimburse the depositary for the expenses he may have demand more than his share.
incurred for the preservation of the thing deposited.
When there is solidarity or the thing does not admit of division,
If the deposit is gratuitous, the depositor bears the the provisions of Articles 1212 and 1214 shall govern.
expenses for the preservation of the thing deposited However, if there is a stipulation that the thing should be
If the deposit is onerous, the depositary bears the returned to one of the depositors, the depositary shall return it
expenses of preservation only to the person designated

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2. What to Return
Art. 1212 Each one of the solidary creditors may do whatever
may be useful to the others, but not anything which may be Art. 1983 The thing deposited shall be returned with all its
prejudicial to the latter. products, accessories and accessions.
Art. 1214 The debtor may pay any one of the solidary Should the deposit consist of money, the provisions relative to
creditors; but if any demand, judicial or extrajudicial, has been agents in article 1896 shall be applied to the depositary.
made by one of them, payment should be made to him.
Art. 1986 If the depositor should lose his capacity to contract
Art. 1986 If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned
after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his
except to the persons who may have the administration of his property and rights.
property and rights.
Thing itself
Plus all its products, accessories and accessions
Art. 1991 The depositor's heir who in good faith may have sold
Interest on sums applied to depositary’s own use from day
the thing which he did not know was deposited, shall only be
on which he did so and on those which he still owes after
bound to return the price he may have received or to assign his
right of action against the buyer in case the price has not been extinguishment of agency
paid him.
3. Where to Return
SGS: Art. 1991 should read “The depositary’s heir”

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

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

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4. When to Return . NECESSARY DEPOSIT
Art. 1988 The thing deposited must be returned to the A. General Concepts
depositor upon demand, even though a specified period or
time for such return may have been fixed. Art. 1964 A deposit may be constituted judicially or
extrajudicially.
This provision shall not apply when the thing is judicially
attached while in the depositary's possession, or should he Art. 1967 An extrajudicial deposit is either voluntary or
have been notified of the opposition of a third person to the
necessary.
return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the
Art. 1996 A deposit is necessary:
attachment or opposition.
When it is made in compliance with a legal obligation;
Art. 1989 Unless the deposit is for a valuable consideration,
the depositary who may have justifiable reasons for not When it takes place on the occasion of any calamity, such
keeping the thing deposited may, even before the time
as fire, storm, flood, pillage, shipwreck, or other similar events.
designated, return it to the depositor; and if the latter should
refuse to receive it, the depositary may secure its consignation
Art. 1966 Only movable things may be the object of a deposit.
from the court.
Principal purpose of delivering object to depository:

A deposit may be constituted:
safekeeping
Judicially
One of the primary obligations: return object upon demand
Extrajudicially
GR: Return upon demand, even though a specified period
o Voluntary
or time has been fixed
o Necessary
XPN:
In compliance with a legal obligation
o Thing deposited is judicially attached while in the
Takes place on the occasion of any calamity
depositary’s possession; or
o Depository was notified of the opposition of a third
NECESSARY DEPOSIT
person to the return or the removal of the thing
deposited Extrajudicial deposit constituted over movable property as a
For the above exceptions, depository must immediately consequence of law or quasi-contract, so that no unjust
inform the depositor of the attachment or the opposition, but enrichment will result from the juridical relation
it does not imply that obligation to return ceases
o They are exceptions to return upon demand B. Examples of Necessary Deposit
o Depository may take measures to protect itself, such as
seeking appropriate protective measures from a court 1. Compliance with a Legal Obligation
5. Right to Retention Art. 1996 A deposit is necessary:
Art. 1994 The depositary may retain the thing in pledge until When it is made in compliance with a legal obligation;
the full payment of what may be due him by reason of the
deposit. When it takes place on the occasion of any calamity, such
as fire, storm, flood, pillage, shipwreck, or other similar events.
Depository has a right of retention as a means or device
for the depository to be able to obtain payment of what may Art. 1997 The deposit referred to in No. 1 of the preceding
be due article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall

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

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2. On the Occasion of a Calamity 4. Hotels or Inns
Art. 1996 A deposit is necessary: Art. 1998 The deposit of effects made by the travellers in
hotels or inns shall also be regarded as necessary. The
When it is made in compliance with a legal obligation; keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to their
When it takes place on the occasion of any calamity, such employees, of the effects brought by the guests and that, on
as fire, storm, flood, pillage, shipwreck, or other similar events. the part of the latter, they take the precautions which said
hotel-keepers or their substitutes advised relative to the care
Art. 1997 The deposit referred to in No. 1 of the preceding and vigilance of their effects.
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on Art. 1999 The hotel-keeper is liable for the vehicles, animals
voluntary deposit. and articles which have been introduced or placed in the
annexes of the hotel.
The deposit mentioned in No. 2 of the preceding article shall
be regulated by the provisions concerning voluntary deposit Art. 2000 The responsibility referred to in the two preceding
and by Article 2168. articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
Art. 2168 When during a fire, flood, storm, or other calamity, the keepers of hotels or inns as well as strangers; but not that
property is saved from destruction by another person without which may proceed from any force majeure. The fact that
the knowledge of the owner, the latter is bound to pay the travellers are constrained to rely on the vigilance of the keeper
former just compensation. of the hotels or inns shall be considered in determining the
degree of care required of him.
If it is saved from destruction during a calamity without the
knowledge of the owner, the owner is bound to pay the one Art. 2001 The act of a thief or robber, who has entered the
who saved just compensation hotel is not deemed force majeure, unless it is done with the
Person who saves movable property from destruction is use of arms or through an irresistible force.
considered by law as the depositary
Owner of the property is bound to pay just compensation
Art. 2002 The hotel-keeper is not liable for compensation if the
and is considered by law as the depositor loss is due to the acts of the guest, his family, servants or
visitors, or if the loss arises from the character of the things
3. Passenger Baggage with Common Carriers
brought into the hotel.
Art. 1754 The provisions of Articles 1733 to 1753 shall apply to

Art. 2003 The hotel-keeper cannot free himself from
the passenger's baggage which is not in his personal custody
responsibility by posting notices to the effect that he is not
or in that of his employee. As to other baggage, the rules in
liable for the articles brought by the guest. Any stipulation
Articles 1998 and 2000 to 2003 concerning the responsibility of
between the hotel-keeper and the guest whereby the
hotel-keepers shall be applicable.
responsibility of the former as set forth in articles 1998 to 2001
is suppressed or diminished shall be void.
Common carriers: persons, corporations, firms or
associations engaged in the business of carrying or
Art. 2004 The hotel-keeper has a right to retain the things
transporting passengers or goods or both, by land, water, or
air, for compensation, offering their services to the public brought into the hotel by the guest, as a security for credits on
Law on common carriers governs baggage not in the account of lodging, and supplies usually furnished to hotel
custody of the passenger or the passenger’s employees  guests.
requires extraordinary diligence in the vigilance over goods
Passenger baggage deposited with the common carrier is
considered a necessary deposit, subjecting the common
carrier, considered by law as the depository, to the same
rules on necessary deposit as hotels or inns

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YHT Realty Corporation vs. Court of Appeals – Tinga, J. consummation, unless the reason for the loss is force
Petitioners: YHT Realty Corporation (YHT), Erlinda Lainez majeure, which in case something is stolen, force
(Lainez) and Anicia Payam (Payam) majeure only occurs when the stealing is done with the
Respondents: Court of Appeals (CA) and Maurice McLoughlin use of arms or through an irresistible force.
(McLoughlin) The management also failed to notify McLoughlin of the
Concept: Deposits with Hotels or Inns incident and waited for him to discover the taking before
it disclosed the matter to him.
Doctrine: That Tan was close to McLoughlin was not a defense. Mere
Disclaimer of liability by a hotel or inn or items deposited with it close companionship and intimacy are not enough to
contravenes Article 2003 of the Civil Code. The hotel or inn can warrant the conclusion that Tan was his wife or that she
only be exculpated from liability when loss occurs through force was authorized to have access to the safety deposit
majeure, which in case of stolen items, when the stealing is done box.
with the use of arms or through an irresistible force, or when the That Tan was a visitor of McLoughlin was also not a
loss is due to acts of the guest, his family or visitors, but in the defense. While Article 2002 of the Civil Code provides
latter case, only when there is no concurrent negligence on part that the hotel-keeper is not liable for compensation if
of the hotel or inn. the loss is due to the acts of the guest, his family,
servants or visitors, this is only the case when there is
Brief Facts: no concurrent negligence on part of the hotel.
Tropicana, owned by YHT, rents safety deposit boxes to its Tropicana was negligent.
guests, disclaiming, through the rental agreement, liability for lost
items. On two occasions, McLoughlin lost money placed within 2. No, YHT, Lainez, and Payam cannot disclaim liability
under paragraph 2 of the terms on the rental of the
the safety deposit box rented by him from the hotel.
safety deposit box.
ISSUES: SC: The paragraph contravenes Article 2003 of the Civil
Whether or not the conclusion anent the loss and the finding Code, which provides that the hotel-keeper cannot free
of negligence on part of YHT was supported by evidence. himself from responsibility by posting notices to the effect
Yes. that he is not liable for the articles brought by the guest and
Whether or not YHT, Lainez, and Payam can disclaim that any stipulation between the hotel-keeper and the guest
liability under paragraph 2 of the terms on the rental of the whereby the responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall be
safety deposit box. No.
void.
RATIO: o The provision is an expression of public policy. The hotel
Yes, the conclusion anent the loss and the finding of business like the common carrier’s business is imbued
negligence were supported by evidence. with public interest. Hotelkeepers are bound to provide
RTC (affirmed by CA): these were sufficiently shown by not only lodging for hotel guests but also security to
McLoughlin’s direct and straightforward manner of testifying their persons and belongings. These twin duties are the
in court. If he had not lost his dollars, he would not have essence of the business and cannot be negated or
gone through the trouble and personal inconvenience of diluted by any contrary stipulation.
seeking aid and assistance from the Office of the President, o To hold hotelkeepers or innkeepers liable for the effects
DOJ, police authorities, and the City Fiscal’s Office. of their guests, it is not necessary that they be actually
o As to the loss prior the one where a confrontation took delivered to the innkeepers or their employees. It is
place, considering the admission of Lainez, and Payam enough that such effects are within the hotel or inn.
that they allowed Tan to open the box, it was logical Thus, a fortiori, liability should be enforced when the
and reasonable to presume that his personal assets missing items are taken without the guest’s knowledge
were taken by Tan through the cooperation of Payam and consent from a safety deposit box provided by the
and Lainez. hotel itself.
SC: the petition was a review through Rule 45, and the
thrust of said rule is the resolution only of questions of law DISPOSITIVE: Affirm CA decision.
and any peripheral factual question addressed to the Court
is beyond the bounds of this mode of review. YHT Realty Corp. v. CA
o As to the finding of negligence, since the safety deposit Is this a VOLUNTARY or a NECESSARY deposit?
box cannot be opened through the personal request of a
registered guest and with assistance from the
management, with more reason that access to safety
deposit box should be denied if the one requesting is a
stranger. Thus, in case of loss, the inevitable conclusion is
that the management had at least a hand in its

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IV. JUDICIAL DEPOSIT V. WAREHOUSE RECEIPTS
Art. 1964 A deposit may be constituted judicially or A. General Concepts

extrajudicially.
Act 2137, Sec. 1 Persons who may issue receipts —
Art. 2005 A judicial deposit or sequestration takes place when Warehouse receipts may be issued by any warehouseman.
an attachment or seizure of property in litigation is ordered.
Act 2137, Sec. 2 Form of receipts; essential terms —
Art. 2006 Movable as well as immovable property may be the Warehouse receipts need not be in any particular form but
every such receipt must embody within its written or printed
object of sequestration.
terms:
The location of the warehouse where the goods are stored,
Art. 2007 The depositary of property or objects sequestrated
cannot be relieved of his responsibility until the controversy
The date of the issue of the receipt,
which gave rise thereto has come to an end, unless the court
so orders. The consecutive number of the receipt,
Art. 2008 The depositary of property sequestrated is bound to A statement whether the goods received will be delivered to
comply, with respect to the same, with all the obligations of a the bearer, to a specified person or to a specified person or his
good father of a family. order,
Art. 2009 As to matters not provided for in this Code, judicial The rate of storage charges,
sequestration shall be governed by the Rules of Court
A description of the goods or of the packages containing
A judicial deposit or sequestration is a deposit constituted them,
by judicial order, as a consequence of litigation.
It is suppletorily governed by the provisions of the Rules of The signature of the warehouseman which may be made by
Court on attachment and seizure of the property. his authorized agent,
Unlike the general rule on deposit, judicial deposit is the
only type of deposit that may have for its object an If the receipt is issued for goods of which the
immovable property. warehouseman is owner, either solely or jointly or in common
with others, the fact of such ownership, and
A statement of the amount of advances made and of

liabilities incurred for which the warehouseman claims a lien. If
the precise amount of such advances made or of such
liabilities incurred is, at the time of the issue of, unknown to the
warehouseman or to his agent who issues it, a statement of
the fact that advances have been made or liabilities incurred
and the purpose thereof is sufficient.
A warehouseman shall be liable to any person injured thereby

for all damages caused by the omission from a negotiable
receipt of any of the terms herein required.
Act 2137, Sec. 3 Form of receipts. — What terms may be

inserted — A warehouseman may insert in a receipt issued by
him any other terms and conditions provided that such terms
and conditions shall not:
Be contrary to the provisions of this Act.
In any wise impair his obligation to exercise that degree of

care in the safe-keeping of the goods entrusted to him which is
reasonably careful man would exercise in regard to similar
goods of his own.

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Act 2137, Sec. 4 Definition of non-negotiable receipt — A A readiness and willingness to sign, when the goods are
receipt in which it is stated that the goods received will be delivered, an acknowledgment that they have been delivered, if
delivered to the depositor or to any other specified person, is a such signature is requested by the warehouseman.
non-negotiable receipt.
In case the warehouseman refuses or fails to deliver the goods
Act 2137, Sec. 5 Definition of negotiable receipt — A receipt in in compliance with a demand by the holder or depositor so
which it is stated that the goods received will be delivered to accompanied, the burden shall be upon the warehouseman to
the bearer or to the order of any person named in such receipt establish the existence of a lawful excuse for such refusal.
is a negotiable receipt.
Act 2137, Sec. 9 Justification of warehouseman in delivering
No provision shall be inserted in a negotiable receipt that it is — A warehouseman is justified in delivering the goods, subject
non-negotiable. Such provision, if inserted shall be void. to the provisions of the three following sections, to one who is:
Act 2137, Sec. 6 Duplicate receipts must be so marked — The person lawfully entitled to the possession of the goods,
When more than one negotiable receipt is issued for the same or his agent;
goods, the word "duplicate" shall be plainly placed upon the
face of every such receipt, except the first one issued. A A person who is either himself entitled to delivery by the
warehouseman shall be liable for all damages caused by his terms of a non-negotiable receipt issued for the goods, or who
failure so to do to any one who purchased the subsequent has written authority from the person so entitled either indorsed
receipt for value supposing it to be an original, even though the upon the receipt or written upon another paper; or
purchase be after the delivery of the goods by the
A person in possession of a negotiable receipt by the terms
warehouseman to the holder of the original receipt.
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
Act 2137, Sec. 7 Failure to mark "non-negotiable" — A non-
whom delivery was promised by the terms of the receipt or by
negotiable receipt shall have plainly placed upon its face by the
his mediate or immediate indorser.
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 Act 2137, Sec. 10 Warehouseman's liability for misdelivery
negotiable, may, at his option, treat such receipt as imposing — Where a warehouseman delivers the goods to one who is
upon the warehouseman the same liabilities he would have not in fact lawfully entitled to the possession of them, the
incurred had the receipt been negotiable. warehouseman shall be liable as for conversion to all having a
right of property or possession in the goods if he delivered the
This section shall not apply, however, to letters, memoranda, goods otherwise than as authorized by subdivisions (b) and
(c) of the preceding section, and though he delivered the
or written acknowledgment of an informal character.
goods as authorized by said subdivisions, he shall be so liable,
It is a formal contract because although the law states that if prior to such delivery he had either:
a warehouse receipt need not be in a particular form, the
Been requested, by or on behalf of the person lawfully
Warehouse Receipts Law requires that it must be written
entitled to a right of property or possession in the goods, not to
and must contain specific terms.
make such deliver; or
B. Obligations and Rights of a Warehouseman 1.
Had information that the delivery about to be made was to
Obligation to Deliver one not lawfully entitled to the possession of the goods.
Act 2137, Sec. 8 Obligation of warehousemen to deliver — A Act 2137, Sec. 11 Negotiable receipt must be cancelled when
warehouseman, in the absence of some lawful excuse goods delivered — Except as provided in section thirty-six,
provided by this Act, is bound to deliver the goods upon a where a warehouseman delivers goods for which he had
issued a negotiable receipt, the negotiation of which would
demand made either by the holder of a receipt for the goods or
transfer the right to the possession of the goods, and fails to
by the depositor; if such demand is accompanied with:
take up and cancel the receipt, he shall be liable to any one
An offer to satisfy the warehouseman's lien; who purchases for value in good faith such receipt, for failure
to deliver the goods to him, whether such purchaser acquired
An offer to surrender the receipt, if negotiable, with such title to the receipt before or after the delivery of the goods by
indorsements as would be necessary for the negotiation of the the warehouseman.
receipt; and

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Act 2137, Sec. 12 Negotiable receipts must be cancelled or Act 2137, Sec. 15 Effect of duplicate receipts — A receipt
marked when part of goods delivered — Except as provided in upon the face of which the word "duplicate" is plainly placed is
section thirty-six, where a warehouseman delivers part of the a representation and warranty by the warehouseman that such
goods for which he had issued a negotiable receipt and fails receipt is an accurate copy of an original receipt properly
either to take up and cancel such receipt or to place plainly issued and uncanceled at the date of the issue of the duplicate,
upon it a statement of what goods or packages have been but shall impose upon him no other liability.
delivered, he shall be liable to any one who purchases for
value in good faith such receipt, for failure to deliver all the Act 2137, Sec. 16 Warehouseman cannot set up title in
goods specified in the receipt, whether such purchaser himself — No title or right to the possession of the goods, on
acquired title to the receipt before or after the delivery of any the part of the warehouseman, unless such title or right is
portion of the goods by the warehouseman. derived directly or indirectly from a transfer made by the
depositor at the time of or subsequent to the deposit for
Act 2137, Sec. 13 Altered receipts — The alteration of a storage, or from the warehouseman's lien, shall excuse the
receipt shall not excuse the warehouseman who issued it from warehouseman from liability for refusing to deliver the goods
any liability if such alteration was: according to the terms of the receipt.
Immaterial, Act 2137, Sec. 17 Interpleader of adverse claimants — If more

than one person claims the title or possession of the goods,
Authorized, or the warehouseman may, either as a defense to an action
brought against him for non-delivery of the goods or as an
Made without fraudulent intent. original suit, whichever is appropriate, require all known
claimants to interplead.
If the alteration was authorized, the warehouseman shall be
liable according to the terms of the receipt as altered. If the
Act 2137, Sec. 18 Warehouseman has reasonable time to
alteration was unauthorized but made without fraudulent intent,
determine validity of claims — If someone other than the
the warehouseman shall be liable according to the terms of the
depositor or person claiming under him has a claim to the title
receipt as they were before alteration.
or possession of goods, and the warehouseman has
information of such claim, the warehouseman shall be excused
Material and fraudulent alteration of a receipt shall not excuse
from liability for refusing to deliver the goods, either to the
the warehouseman who issued it from liability to deliver
depositor or person claiming under him or to the adverse
according to the terms of the receipt as originally issued, the
claimant until the warehouseman has had a reasonable time to
goods for which it was issued but shall excuse him from any
ascertain the validity of the adverse claim or to bring legal
other liability to the person who made the alteration and to any
proceedings to compel claimants to interplead.
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 Act 2137, Sec. 19 Adverse title is no defense except as above
purchaser would have acquired if the receipt had not been provided — Except as provided in the two preceding sections
altered at the time of purchase. 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
Act 2137, Sec. 14 Lost or destroyed receipts — Where a
failure to deliver the goods according to the terms of the
negotiable receipt has been lost or destroyed, a court of
receipt.
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 Act 2137, Sec. 36 Effect of sale — After goods have been
the court to protect the warehouseman from any liability or lawfully sold to satisfy a warehouseman's lien, or have been
expense, which he or any person injured by such delivery may lawfully sold or disposed of because of their perishable or
incur by reason of the original receipt remaining outstanding. hazardous nature, the warehouseman shall not thereafter be
The court may also in its discretion order the payment of the liable for failure to deliver the goods to the depositor or owner
warehouseman's reasonable costs and counsel fees. of the goods or to a holder of the receipt given for the goods
when they were deposited, even if such receipt be negotiable.
The delivery of the goods under an order of the court as
provided in this section, shall not relieve the warehouseman
from liability to a person to whom the negotiable receipt has
been or shall be negotiated for value without notice of the
proceedings or of the delivery of the goods.

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Act 2137, Sec.58 Definitions — (a) In this Act, unless the 2. Liability for Goods
content or subject matter otherwise requires:
Act 2137, Sec. 20 Liability for non-existence or misdescription
"Action" includes counterclaim, set-off, and suits in equity as of goods — A warehouseman shall be liable to the holder of a
provided by law in these islands. receipt for damages caused by the non-existence of the goods
or by the failure of the goods to correspond with the description
"Delivery" means voluntary transfer of possession from one thereof in the receipt at the time of its issue. If, however, the
person to another. goods are described in a receipt merely by a statement of
marks or labels upon them or upon packages containing them
"Fungible goods" means goods of which any unit is, from its or by a statement that the goods are said to be goods of a
nature by mercantile custom, treated as the equivalent of any certain kind or that the packages containing the goods are said
other unit. to contain goods of a certain kind or by words of like purport,
such statements, if true, shall not make liable the
"Goods" means chattels or merchandise in storage or which warehouseman issuing the receipt, although the goods are not
has been or is about to be stored. of the kind which the marks or labels upon them indicate or of
the kind they were said to be by the depositor.
"Holder" of a receipt means a person who has both actual
possession of such receipt and a right of property therein.
Act 2137, Sec. 21 Liability for care of goods — A
"Order" means an order by indorsement on the receipt. warehouseman shall be liable for any loss or injury to the
goods caused by his failure to exercise such care in regard to
"Owner" does not include mortgagee. them as reasonably careful owner of similar goods would
exercise, but he shall not be liable, in the absence of an
"Person" includes a corporation or partnership or two or more agreement to the contrary, for any loss or injury to the goods
persons having a joint or common interest. which could not have been avoided by the exercise of such
care.
To "purchase" includes to take as mortgagee or as pledgee.
Act 2137, Sec. 22 Goods must be kept separate — Except as

"Receipt" means a warehouse receipt.
provided in the following section, a warehouseman shall keep
the goods so far separate from goods of other depositors and
"Value" is any consideration sufficient to support a simple
from other goods of the same depositor for which a separate
contract. An antecedent or pre-existing obligation, whether for
receipt has been issued, as to permit at all times the
money or not, constitutes value where a receipt is taken either
identification and redelivery of the goods deposited.
in satisfaction thereof or as security therefor.
"Warehouseman" means a person lawfully engaged in the Act 2137, Sec. 23 Fungible goods may be commingled if
warehouseman authorized — If authorized by agreement or by
business of storing goods for profit.
custom, a warehouseman may mingle fungible goods with
A thing is done "in good faith" within the meaning of this Act other goods of the same kind and grade. In such case, the
when it is in fact done honestly, whether it be done negligently various depositors of the mingled goods shall own the entire
or not. mass in common and each depositor shall be entitled to such
portion thereof as the amount deposited by him bears to the
The obligation of the warehouseman to deliver is not the whole.
delivery required for the perfection of real contracts, but is
similar to the obligation of the depositary to return. Act 2137, Sec. 24 Liability of warehouseman to depositors of
Because of the commercial nature of the transactions of a commingled goods — The warehouseman shall be severally
warehouseman, this obligation is subjected to stricter rules. liable to each depositor for the care and redelivery of his share
of such mass to the same extent and under the same
circumstances as if the goods had been kept separate.

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Act 2137, Sec. 25 Attachment or levy upon goods for which a A demand that the amount of the claim as stated in the
negotiable receipt has been issued — If goods are delivered to notice of such further claim as shall accrue, shall be paid on or
a warehouseman by the owner or by a person whose act in before a day mentioned, not less than ten days from the
conveying the title to them to a purchaser in good faith for delivery of the notice if it is personally delivered, or from the
value would bind the owner, and a negotiable receipt is issued time when the notice shall reach its destination, according to
for them, they can not thereafter, while in the possession of the the due course of post, if the notice is sent by mail,
warehouseman, be attached by garnishment or otherwise, or
be levied upon under an execution unless the receipt be first A statement that unless the claim is paid within the time
surrendered to the warehouseman or its negotiation enjoined. specified, the goods will be advertised for sale and sold by
The warehouseman shall in no case be compelled to deliver up auction at a specified time and place.
the actual possession of the goods until the receipt is
surrendered to him or impounded by the court. 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
Act 2137, Sec. 26 Creditor's remedies to reach negotiable warehouseman for which he has a lien on the goods. The sale
receipts — A creditor whose debtor is the owner of a shall be had in the place where the lien was acquired, or, if
negotiable receipt shall be entitled to such aid from courts of such place is manifestly unsuitable for the purpose of the claim
appropriate jurisdiction, by injunction and otherwise, in specified in the notice to the depositor has elapsed, and
attaching such receipt or in satisfying the claim by means advertisement of the sale, describing the goods to be sold, and
thereof as is allowed at law or in equity in these islands in stating the name of the owner or person on whose account the
regard to property which can not readily be attached or levied goods are held, and the time and place of the sale, shall be
upon by ordinary legal process. published once a week for two consecutive weeks in a
newspaper published in the place where such sale is to be
The liability of a warehouseman for the goods stored is held. The sale shall not be held less than fifteen days from the
similar to the liability of the depositary for the safekeeping of time of the first publication. If there is no newspaper published
the property deposited. in such place, the advertisement shall be posted at least ten
The rules on warehouseman’s liability for goods take into days before such sale in not less than six conspicuous places
consideration the commercial nature of the credit therein.
transaction.
From the proceeds of such sale, the warehouseman shall
3. Warehouseman’s Lien 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
Act 2137, Sec. 31 Warehouseman need not deliver until lien is
to the person to whom he would have been bound to deliver or
satisfied — A warehouseman having a lien valid against the
justified in delivering goods.
person demanding the goods may refuse to deliver the goods
to him until the lien is satisfied.
At any time before the goods are so sold, any person claiming
a right of property or possession therein may pay the
Act 2137, Sec. 32 Warehouseman's lien does not preclude warehouseman the amount necessary to satisfy his lien and to
other remedies — Whether a warehouseman has or has not a pay the reasonable expenses and liabilities incurred in serving
lien upon the goods, he is entitled to all remedies allowed by notices and advertising and preparing for the sale up to the
law to a creditor against a debtor for the collection from the time of such payment. The warehouseman shall deliver the
depositor of all charges and advances which the depositor has goods to the person making payment if he is a person entitled,
expressly or impliedly contracted with the warehouseman to under the provision of this Act, to the possession of the goods
pay. on payment of charges thereon. Otherwise, the warehouseman
shall retain the possession of the goods according to the terms
Act 2137, Sec. 33 Satisfaction of lien by sale — A of the original contract of deposit.
warehouseman's lien for a claim which has become due may
be satisfied as follows:
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,
A brief description of the goods against which the lien

exists,

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Act 2137, Sec. 34 Perishable and hazardous goods — If Act 2137, Sec. 38 Negotiation of negotiable receipt by
goods are of a perishable nature, or by keeping will deteriorate indorsement — A negotiable receipt may be negotiated by the
greatly in value, or, by their order, leakage, inflammability, or indorsement of the person to whose order the goods are, by
explosive nature, will be liable to injure other property , the the terms of the receipt, deliverable. Such indorsement may be
warehouseman may give such notice to the owner or to the in blank, to bearer or to a specified person. If indorsed to a
person in whose names the goods are stored, as is reasonable specified person, it may be again negotiated by the
and possible under the circumstances, to satisfy the lien upon indorsement of such person in blank, to bearer or to another
such goods and to remove them from the warehouse and in specified person. Subsequent negotiation may be made in like
the event of the failure of such person to satisfy the lien and to manner.
receive the goods within the time so specified, the
warehouseman may sell the goods at public or private sale Act 2137, Sec. 39 Transfer of receipt — A receipt which is not
without advertising. If the warehouseman, after a reasonable in such form that it can be negotiated by delivery may be
effort, is unable to sell such goods, he may dispose of them in transferred by the holder by delivery to a purchaser or donee.
any lawful manner and shall incur no liability by reason thereof.
non-negotiable receipt can not be negotiated, and the
Act 2137, Sec. 35 Other methods of enforcing lien — The indorsement of such a receipt gives the transferee no
remedy for enforcing a lien herein provided does not preclude additional right.
any other remedies allowed by law for the enforcement of a
lien against personal property nor bar the right to recover so Act 2137, Sec. 40 Who may negotiate a receipt — A
much of the warehouseman's claim as shall not be paid by the negotiable receipt may be negotiated:
proceeds of the sale of the property.
By the owner thereof, or
Act 2137, Sec. 36 Effect of sale — After goods have been
lawfully sold to satisfy a warehouseman's lien, or have been By any person to whom the possession or custody of the
lawfully sold or disposed of because of their perishable or receipt has been entrusted by the owner, if, by the terms of the
hazardous nature, the warehouseman shall not thereafter be receipt, the warehouseman undertakes to deliver the goods to
liable for failure to deliver the goods to the depositor or owner the order of the person to whom the possession or custody of
of the goods or to a holder of the receipt given for the goods the receipt has been entrusted, or if, at the time of such
when they were deposited, even if such receipt be negotiable. entrusting, the receipt is in such form that it may be negotiated
by delivery.
The warehouseman’s lien is the warehouseman’s legal right or
interest in the depositor’s property. It is similar to the depository’s Act 2137, Sec. 41 Rights of person to whom a receipt has
right of retention under the NCC, which is a means or device by been negotiated — A person to whom a negotiable receipt has
which the depositary is able to obtain payment of what may be been duly negotiated acquires thereby:
due because of the deposit.
Such title to the goods as the person negotiating the receipt
C. Negotiation and Transfer 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
Act 2137, Sec. 37 Negotiation of negotiable receipt of delivery person to whose order the goods were to be delivered by the
— A negotiable receipt may be negotiated by delivery: terms of the receipt had or had ability to convey to a purchaser
in good faith for value, and
Where, by terms of the receipt, the warehouseman The direct obligation of the warehouseman to hold
undertakes to deliver the goods to the bearer, or possession of the goods for him according to the terms of the
receipt as fully as if the warehouseman and contracted directly
Where, by the terms of the receipt, the warehouseman with him.
undertakes to deliver the goods to the order of a specified
person, and such person or a subsequent indorsee of the
receipt has indorsed it in blank or to bearer.
Where, by the terms of a negotiable receipt, the goods are

deliverable to bearer or where a negotiable receipt has been
indorsed in blank or to bearer, any holder may indorse the
same to himself or to any other specified person, and, in such
case, the receipt shall thereafter be negotiated only by the
indorsement of such indorsee.

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Act 2137, Sec. 42 Rights of person to whom receipt has been Act 2137, Sec. 46 No warranty implied from accepting
transferred — A person to whom a receipt has been payment of a debt — A mortgagee, pledgee, or holder for
transferred but not negotiated acquires thereby, as against the security of a receipt who, in good faith, demands or receives
transferor, the title of the goods subject to the terms of any payment of the debt for which such receipt is security, whether
agreement with the transferor. 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
If the receipt is non-negotiable, such person also acquires the warrant the genuineness of such receipt or the quantity or
right to notify the warehouseman of the transfer to him of such quality of the goods therein described.
receipt and thereby to acquire the direct obligation of the
warehouseman to hold possession of the goods for him Act 2137, Sec. 47 When negotiation not impaired by fraud,
according to the terms of the receipt. mistake or duress — The validity of the negotiation of a receipt
is not impaired by the fact that such negotiation was a breach
Prior to the notification of the warehouseman by the transferor of duty on the part of the person making the negotiation or by
or transferee of a non-negotiable receipt, the title of the the fact that the owner of the receipt was induced by fraud,
transferee to the goods and the right to acquire the obligation mistake or duress or to entrust the possession or custody of
of the warehouseman may be defeated by the levy of an the receipt to such person, if the person to whom the receipt
attachment or execution upon the goods by a creditor of the was negotiated or a person to whom the receipt was
transferor or by a notification to the warehouseman by the subsequently negotiated paid value therefor, without notice of
transferor or a subsequent purchaser from the transferor of a the breach of duty, or fraud, mistake or duress.
subsequent sale of the goods by the transferor.
Act 2137, Sec. 48 Subsequent negotiation — Where a person
Act 2137, Sec. 43 Transfer of negotiable receipt without having sold, mortgaged, or pledged goods which are in
indorsement — Where a negotiable receipt is transferred for warehouse and for which a negotiable receipt has been issued,
value by delivery and the indorsement of the transferor is or having sold, mortgaged, or pledged the negotiable receipt
essential for negotiation, the transferee acquires a right against representing such goods, continues in possession of the
the transferor to compel him to indorse the receipt unless a negotiable receipt, the subsequent negotiation thereof by the
contrary intention appears. The negotiation shall take effect as person under any sale or other disposition thereof to any
of the time when the indorsement is actually made. person receiving the same in good faith, for value and without
notice of the previous sale, mortgage or pledge, shall have the
Act 2137, Sec. 44 Warranties of a sale of receipt — A person who, same effect as if the first purchaser of the goods or receipt had
for value, negotiates or transfers a receipt by indorsement or expressly authorized the subsequent negotiation.
delivery, including one who assigns for value a claim secured by a
receipt, unless a contrary intention appears, warrants: Act 2137, Sec. 49 Negotiation defeats vendor's lien — Where
a negotiable receipt has been issued for goods, no seller's lien
That the receipt is genuine, or right of stoppage in transitu shall defeat the rights of any
purchaser for value in good faith to whom such receipt has
That he has a legal right to negotiate or transfer it, been negotiated, whether such negotiation be prior or
subsequent to the notification to the warehouseman who
That he has knowledge of no fact which would impair the issued such receipt of the seller's claim to a lien or right of
validity or worth of the receipt, and stoppage in transitu. Nor shall the warehouseman be obliged
to deliver or justified in delivering the goods to an unpaid seller
That he has a right to transfer the title to the goods and that
unless the receipt is first surrendered for cancellation.
the goods are merchantable or fit for a particular purpose
whenever such warranties would have been implied, if the
contract of the parties had been to transfer without a receipt of
the goods represented thereby.
Act 2137, Sec. 45 Indorser not a guarantor — The

indorsement of a receipt shall not make the indorser liable for
any failure on the part of the warehouseman or previous
indorsers of the receipt to fulfill their respective obligations.

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D. Criminal Liability Act 2137, Sec. 54 Delivery of goods without obtaining
negotiable receipt — A warehouseman, or any officer, agent,
Act 2137, Sec. 50 Issue of receipt for goods not received — A or servant of a warehouseman, who delivers goods out of the
warehouseman, or an officer, agent, or servant of a possession of such warehouseman, knowing that a negotiable
warehouseman who issues or aids in issuing a receipt knowing receipt the negotiation of which would transfer the right to the
that the goods for which such receipt is issued have not been possession of such goods is outstanding and uncanceled,
actually received by such warehouseman, or are not under his without obtaining the possession of such receipt at or before
actual control at the time of issuing such receipt, shall be guilty the time of such delivery, shall, except in the cases provided
of a crime, and, upon conviction, shall be punished for each for in sections fourteen and thirty-six, be found guilty of a
offense by imprisonment not exceeding five years, or by a fine crime, and, upon conviction, shall be punished for each offense
not exceeding ten thousand pesos, or both. by imprisonment not exceeding one year, or by a fine not
exceeding two thousand pesos, or by both.
Act 2137, Sec. 51 Issue of receipt containing false statement
— A warehouseman, or any officer, agent or servant of a Act 2137, Sec. 55 Negotiation of receipt for mortgaged goods.
warehouseman who fraudulently issues or aids in fraudulently — Any person who deposits goods to which he has no title, or
issuing a receipt for goods knowing that it contains any false upon which there is a lien or mortgage, and who takes for such
statement, shall be guilty of a crime, and upon conviction, shall goods a negotiable receipt which he afterwards negotiates for
be punished for each offense by imprisonment not exceeding value with intent to deceive and without disclosing his want of
one year, or by a fine not exceeding two thousand pesos, or by title or the existence of the lien or mortgage, shall be guilty of a
both. crime, and, upon conviction, shall be punished for each offense
by imprisonment not exceeding one year, or by a fine not
Act 2137, Sec. 52 Issue of duplicate receipt not so marked exceeding two thousand pesos, or by both.
— 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 A fundamental distinction between special commercial laws on
negotiable receipt for the same goods or any part of them is credit transactions and their Civil Code counterparts, such as the
outstanding and uncanceled, without plainly placing upon the Warehouse Receipts Law in relation to deposits, is the inclusion
face thereof the word "duplicate" except in the case of a lost or of provisions criminalizing certain acts and omissions relating to
destroyed receipt after proceedings are provided for in section the credit transaction.
fourteen, shall be guilty of a crime, and, upon conviction, shall
be punished for each offense by imprisonment not exceeding E. General Bonded Warehouses
five years, or by a fine not exceeding ten thousand pesos, or
by both. Act 3893
Sec. 1 This Act shall be known by the short title of "BONDED
Act 2137, Sec. 53 Issue for warehouseman's goods or receipts WAREHOUSE ACT."
which do not state that fact — Where they are deposited with
or held by a warehouseman goods of which he is owner, either Sec. 2 As used in this Act, the term "warehouse" shall be
solely or jointly or in common with others, such deemed to mean every building, structure, or other protected
warehouseman, or any of his officers, agents, or servants who, inclosure in which rice is kept for storage. The term "rice" shall
knowing this ownership, issues or aids in issuing a negotiable be deemed to mean either palay in bundles, or in grains, or
receipt for such goods which does not state such ownership, clean rice, or both. "Person" including corporation or
shall be guilty of a crime, and, upon conviction, shall be partnership or two or more persons having joint or common
punished for each offense by imprisonment not exceeding one interest; "warehouseman" means a person engaged in the
year, or by a fine not exceeding two thousand pesos, or by business receiving rice for storage; and "receipt" means any
both. receipt issued by a warehouseman for rice delivered to him.
For the purpose of this Act, the business of receiving rice for
storage shall include (1) any contract or transaction wherein
the warehouseman is obligated to return the very same rice
delivered to him or pay its value;(2) any contract or transaction
wherein the rice delivered is to be milled for and on account of
the owner thereof; (3) any contract or transaction wherein the
rice delivered is commingled with the rice delivered by or
belonging to other persons and the warehouseman is obligated
to return the rice of the same kind or pay its value.

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Sec. 3 No person shall engage in the business of receiving rice Sec. 9 Every warehouseman licensed under this Act shall keep
for storage without first securing a license therefore from the a complete record of the rice received by him, of the receipts
Director of the Bureau of Commerce and Industry. Said license issued therefor of the withdrawals, of the liquidations and of all
shall be annual and shall expire on the thirty-first day of receipts returned to and cancelled by him. He shall make
December. reports to the Director of Bureau of Commerce and Industry
concerning his warehouse and the conditions, contents,
Sec. 4 Any person applying for a license to engage in the operations, and business thereof in such form and at such time
business of receiving rice for storage shall set forth in the as the said Director may require, and shall conduct said
application the place or places where the business and warehouse in all other respects in compliance with this Act and
warehouse are to be established or located and the maximum the rules and regulations made in accordance therewith.
quantity of rice to be received. The application shall be
accompanied by a cash bond or a bond secured by real estate Sec. 10 The Director of Bureau of Commerce and Industry
or signed by a duly authorized bonding company, the amount shall from time to time make such rules and regulations as he
of which shall be fixed by the Director of the Bureau of may deem necessary for the efficient execution of the
Commerce and Industry at not less than thirty-three and one provisions of this Act.
third percent of the market value of the maximum quantity or
rice to be received. Said bond shall be so conditioned as to Sec. 11 Any person engaging in the business of receiving rice
respond for the market value of the rice actually delivered and for storage in violation of Section three of this Act shall be
received at any time the warehouseman is unable to return the deemed guilty of misdemeanor, and upon conviction thereof
rice or to pay its value. The bond shall be approved by the shall be punished by imprisonment of not less than one month
Director of the Bureau of Commerce and Industry before or by a fine of not more than five thousand pesos, or both, in
issuing a license under this Act, to satisfy himself concerning the discretion of the court.
the sufficiency of such bond, and to determine whether the
warehouse for which such license is applied for is suitable for Sec. 12 Any warehouseman licensed under this Act receiving
the proper storage of rice. a quantity of rice greater than that specified in his application
and license, shall, upon conviction, be fined double the market
Sec. 5 Whenever the Director of the Bureau of Commerce and value of the rice so received in excess of the quantity of rice he
Industry shall determine that a bond approved by him, is or any is authorized to receive.
cause, has become insufficient, he may require an additional
bond or bonds to be given by the warehouseman concerned, Sec. 13 Any person entering into connivance or combination
conforming with the requirements of the preceding section, and with any warehouseman that is not licensed under this Act,
unless the same be given within the time fixed by a written with the purpose of evading the provisions of section three of
demand therefor the license of such warehouse may be this Act, shall be deemed guilty of misdemeanor, and upon
suspended or revoked. conviction thereof, shall be fined not more than two hundred
pesos or imprisonment for not more than one months, or both,
Sec. 6 Every person licensed under this Act to engage in the in the discretion of the court.
business of receiving rice for storage shall insure the rice so
received and stored against fire. Sec. 14 The Director of the Bureau of Commerce and Industry
may, after opportunity for hearing has been afforded to the
Sec. 7 Any person injured by the breach of any obligation to license concerned, suspend or revoke any license issued to
secure which a bond is given, under the provisions of this Act, any warehouseman, conducting a warehouse under this Act,
shall be entitled to sue on the bond in his own name in any for any violation or failure to comply with any provision of this
court of competent jurisdiction to recover the damages he may Act or of the rules and regulations made by virtue thereof.
have sustained by such breach. Nothing contained herein shall
except any property of assets of any warehouseman from Sec. 15 This Act shall not be applicable to cooperative
being sued on in case the bond given is not sufficient to marketing associations of rice producers organized under Act
respond for the full market value of the rice received by such Numbered Three Thousand Four Hundred and Twenty-five
warehouseman. known as the "Cooperative Marketing Law," provided such
associations shall not receive, for storage, rice from non-
Sec. 8 Every warehouseman licensed under this Act shall members which is greater in quantity than one-half of the total
receive for storage, so far as his license and the capacity of his quantity of rice received from members, at any time.
warehouse permit, any rice, of the kind customarily stored
therein by him, which may be tendered to him in a suitable
condition for warehousing, in the usual manner and in the
ordinary and usual course of business, without making any
discrimination between persons desiring to avail themselves of
warehouse facilities.

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Sec. 16 If any clause, sentence, or paragraph, or part of this Brief Facts:
Act shall, for any reason, be adjusted by any court of In accordance with Act No. 2137, the Warehouse Receipts Law,
competent jurisdiction to be invalid, such judgment shall not Noah’s Ark Sugar Refinery issued on several dates, 5
affect, impair, or invalidate the remainder thereof, but shall be Warehouse Receipts (Quedans). These were endorsed and
confined in his operation to the clause, sentence, paragraph or negotiated to Ramos and Zoleta. They failed to pay their loans
part thereof directly involved in the controversy in which such upon maturity so PNB wrote to Noah’s Ark Sugar Refinery
judgment shall have been rendered. demanding delivery of the sugar stocks covered by the quedans
endorsed to it by Zoleta and Ramos. Noah’s Ark Sugar Refinery
Sec. 17 This Act shall take effect on January First, nineteen refused. PNB filed a complaint for “Specific Performance with
hundred and thirty-two. Damages and Application for Writ of Attachment”.
Purpose: to regulate the business of receiving commodities for ISSUE:

storage in order to protect persons who may want to avail WON PNB is liable for warehouseman’s lien (YES)
themselves of warehouse facilities and to encourage the
RATIO: YES; prior judgment holding that a party is a
establishment of more warehouses.
warehouseman obligated to deliver sugar stocks covered
The business: includes entering into any contract or transaction by thewarehouse receipts does not necessarily carry with it
wherein: a denial of its lien over the same sugar stocks.
The warehouseman is obligated to return the very same
commodity to the person depositing or pay its value; Under the subject Warehouse Receipts provision, storage
The commodity delivered is to be milled for the owner fees are chargeable. PNB is legally bound to stand by the
thereof; express terms and conditions on the face of the Warehouse
The commodity delivered is commingled with the commodity Receipts as to the payment of storage fees. Even in the
belonging to other persons, and the warehouseman is absence of such a provision, law and equity dictate the
obligated to return the commodity of the same kind or to pay payment of the warehouseman’s lien pursuant to Sections
27 and 31 of the Warehouse Receipts Law (R.A. 2137)
its value.
to wit: SECTION 27. What claims are included in the
Duties of the bonded warehouseman: warehouseman’s lien. – Subject to the provisions of section
To insure the commodity received for storage against fire; thirty, a warehouseman shall have lien on goods deposited
To receive for storage any commodity of the kind or on the proceeds thereof in his hands, for all lawful
customarily stored by him in the warehouse so far as his charges for storage and preservation of the goods; also for
license and the capacity of his warehouse will permit, all lawful claims for money advanced, interest, insurance,
without making any discrimination between the persons transportation, labor, weighing coopering and other charges
desiring to avail themselves of warehouse facilities; and expenses in relation to such goods; also for all
To keep a complete record of all commodities received by reasonable charges and expenses for notice, and
him, of the receipts issued therefor, of the withdrawals, of advertisement of sale, and for sale of the goods where
the liquidation, and of all the receipts returned to and default has been made in satisfying the warehouseman’s
lien.
cancelled by him.
SECTION 31. Warehouseman need not deliver until lien is
Philippine National Bank v. Se (1996) – Hermosisima, Jr., satisfied. – A warehouseman having a lien valid against the
J. Petitioner: Philippine National Bank person demanding the goods may refuse to deliver the
Respondents: Hon. Benito C. Se Jr. & Noah’s Ark Sugar goods to him until the lien is satisfied.
Refinery After being declared as the warehouseman, Noah’s Ark
Concept: General Bonded Warehouses Act cannot legally be deprived of their right to enforce their claim
for warehouseman’s lien, for reasonable storage fees and
Doctrine: preservation expenses. Pursuant to Section 31 the goods
Where the judgment creditor makes an unconditional under storage may not be delivered until said lien is
presentment of warehouse receipts for delivery of sugar stocks satisfied.
against the warehouseman, it thereby admits the existence and
validity of the terms, conditions and stipulations written on the
face of the warehouse receipts, including the unqualified
recognition of the payment of warehouseman’s lien for storage
fees and preservation expenses.

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Considering that PNB does not deny the existence, validity 1. Distinguished from Securities
and genuineness of the Warehouse Receipts on which it
anchors its claim for payment against Noah’s Ark, it cannot RA 8799, Sec. 3 Definition of Terms - 3.1. "Securities" are
disclaim liability for the payment of the storage fees shares, participation or interests in a corporation or in a
stipulated therein. PNB is in estoppel in disclaiming liability commercial enterprise or profit-making venture and evidenced
for the payment of storage fees due the PRs as by a certificate, contract, instruments, whether written or
warehouseman while claiming to be entitled to the sugar electronic in character. It includes:
stocks covered by the subject Warehouse Receipts on the
basis of which it anchors its claim for payment or delivery of Shares of stocks, bonds, debentures, notes evidences of
the sugar stocks. The unconditional presentment of the indebtedness, asset-backed securities;
receipts by PNB for payment against PRs on the strength of
the provisions of the Warehouse Receipts Law (R.A. 2137) Investment contracts, certificates of interest or participation
carried with it the admission of the existence and validity of in a profit sharing agreement, certifies of deposit for a future
the terms, conditions and stipulations written on the face of subscription;
the Warehouse Receipts, including the unqualified
recognition of the payment of warehouseman’s lien for Fractional undivided interests in oil, gas or other mineral
storage fees and preservation expenses. rights;
PNB may not now retrieve the sugar stocks without paying
the lien due Noah’s Ark as ware houseman. Derivatives like option and warrants;
RULE: While the PNB is entitled to the stocks of sugar as
the endorsee of the quedans, delivery to it shall be effected Certificates of assignments, certificates of participation,
only upon payment of the storage fees. Imperative is the trust certificates, voting trust certificates or similar instruments
right of the warehouseman to demand payment of his lien at
this juncture, because, in accordance with Section 29 of the Proprietary or nonproprietary membership certificates in
Warehouse Receipts Law, the warehouseman loses his lien corporations; and
upon goods by surrendering possession thereof. In other
words, the lien may be lost where the warehouseman Other instruments as may in the future be determined by
surrenders the possession of the goods without requiring the Commission.
payment of his lien, because a warehouseman’s lien is
possessory in nature. SECURITIES
From the Securities Regulation Code (SRC) (RA 8799)
DISPOSITIVE. Petition dismissed for lack of merit Sec. 3.1 – Securities are shares, participation or interests in
a corporation or in a commercial enterprise or profit-making
SECURITY TRANSACTIONS venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character
I. THE CONCEPT OF SECURITY o It includes bonds, debentures, notes, evidences of
indebtedness, asset-backed securities
A. General Concepts Bonds, notes, and debentures are evidences of indebtedness
and are the common commercial forms that contracts of
CONTRACT OF SECURITY (Security Transaction) loan take BUT in the SRC, these contracts of simple loan or
The means by which the parties to a principal obligation mutuum are securities, whether secured or unsecured
ensure its enforcement, protect an interest in property, or
ensure that the person to be made secure (secured SECURITY SECURITIES
creditor) can be compensated for loss Civil Code Securities Regulation Code
It is an accessory obligation that mitigates the risk that the Accessory obligation Principal obligation
debtor will default on a principal obligation Decrease/mitigate loss
If the principal obligation is ensured by a contract of security
= secured obligation
If the principal obligation is NOT ensured by a contract of
security = unsecured obligation

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2. Distinguished From Securitization
In credit transactions, it is customary for parties to define
SECURITIZATION other events of default (for the principal obligation) such
Process by which loans and other debts with an expected as, but not limited to, failure to submit required reports,
cash payment stream (interest on simple loans) are sold on maintain and file appropriate tax returns, and maintain and
a without recourse basis by a seller to a special purpose preserve the security
entity (the issuer) which in turn issues securities (bond or In the event of a default that occurs and is continuing, then
other instrument) that depend, for their repayment, on the the creditor is given the right to declare, or accelerate, all
expected cash payment stream outstanding obligations as immediately due and payable
To securitize is to convert assets into securities for resale in o Acceleration clause is valid and binding on the parties
the financial market and the creditor is justified in invoking it to declare the
It is a process of distributing the risk of default or non- entire principal obligation immediately due and payable,
payment of loans and other debts by aggregating these and to enforce the security
debts and then issuing new securities backed by the
aggregated debt C. Kinds of Security Transactions
Securities issued by the special purpose entity (issuer) are
called asset-backed securities 1. Personal Security Transactions
Contracts of loan and expected principal and interest
payments, sold by the original creditors to a special purpose PERSONAL SECURITY TRANSACTION
entity, are aggregated into tranches based on risk and Contractual obligation for the repayment of a debt binding a
packaged as new securities person, as distinguished from property
o Securities with higher risks provide higher yields It is an obligation of a person, natural or juridical, other than
Unlike a security transaction that mitigates risk, the principal debtor to ensure the fulfillment of a principal
securitization distributes the risk of default or non-payment obligation
to those willing to assume it Example: guaranty, where the faithful performance of the
obligation by the principal debtor is secured by the personal
SECURITIZATION SECURITY TRANSACTION commitment of another
Distributes the risk of default Mitigates risk
or non-payment to those 2. Real Security Transactions
willing to assume it
REAL SECURITY TRANSACTION
B. Events of Default Encumbrance of property (collateral) given to guarantee
Essential condition of a security transaction: if the the fulfillment of an obligation, especially the assurance that
principal obligation is duly complied with, then, proceeding a creditor will be repaid with money or credit extended to a
from its accessory character, the security is automatically debtor, usually with interest
extinguished Example: mortgage (Latin: dead security), where the
o Once the principal obligation is complied with, the creditor acquires a security interest in the collateral for
security transaction becomes, ipso facto, null and void purposes of securing the fulfillment of the principal
o If the principal obligation becomes due and the debtor obligation
defaults, the creditor may elect: o Security interest is a property interest created by
To bring an ordinary action for specific agreement or by operation of law to secure the
performance of the principal obligation; or performance of an obligation
As a secured creditor, elect to enforce the According to PD 115, Sec. 3(h): it is “a property
security interest in goods, documents or instruments to
Enforcement of the security is proper in case of mora secure performance of an obligation and includes
solvendi (debtor’s default) or in case of delay in the title, whether or not expressed to be absolute,
fulfillment of the principal obligation by a cause imputable to whenever such title is in substance taken or
the debtor retained for security only”
REQUISITES FOR DEFAULT:

Principal obligation is demandable and liquidated
Demandable – enforceable in Court
Liquidated – existence and amount are determined or
determinable
Debtor delays performance
Creditor judicially or extrajudicially requires the debtor’s
performance

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3. In the Context of Insolvency . LETTERS OF CREDIT
RA 10142, Sec. 4 Definition of Terms - As used in this Act, the A. General Concepts
term:
CoC, Art. 567 Letters of credit are those issued by one
Insolvent shall refer to the financial condition of a debtor merchant to another, or for purpose of attending to a
that is generally unable to pay its or his liabilities as they fall commercial transaction.
due in the ordinary course of business or has liabilities that are
greater than its or his assets. CoC, Art. 568 The essential conditions of letters of credit shall
be:
Secured claim shall refer to a claim that is secured by a lien.
To be issued in favor of a determined person and not to
Secured creditor shall refer to a creditor with a secured order.
claim.
To be limited to a fixed and specified amount, or to one or
Secured party shall refer to a secured creditor or the agent more indeterminate amounts, but all included in a maximum
or representative of such secured creditor. sum the limit of which must be exactly stated.
Unsecured claim shall refer to a claim that is not secured Letters of credit which do not have one of these conditions
by a lien. shall be considered simply as letters of recommendation.
Unsecured creditor shall refer to a creditor with an CoC, Art. 2 Commercial transactions, be they performed by
unsecured claim. merchants or not, whether they are specified in this Code or
not, shall be governed by the provisions contained in the same;
Lien shall refer to a statutory or contractual claim or judicial
in the absence of such provisions, by the commercial customs
charge on real or personal property that legality entities a
generally observed in each place; and in the absence of both,
creditor to resort to said property for payment of the claim or
by those of the common law. LET05cd
debt secured by such lien.
Commercial transactions shall be considered those
Financial Rehabilitation and Insolvency Act of 2010 enumerated in this Code and any others of a similar character.
Sec. 4(p): Condition of being INSOLVENT is the financial
condition of a debtor that is generally unable to pay its or his A letter of credit is an instrument that involves three parties:
liabilities as they fall due in the ordinary course of business the issuer (usually a bank), the applicant, and the
or has liabilities that are greater than its or his assets beneficiary
o Under this instrument, the issuer, at the applicant’s
o Liabilities refers to monetary claims against the debtor
request, agrees to honor a draft or other demand for
payment made by the beneficiary, provided that the
Sec. 4(ll) classifies creditors: draft or demand by the beneficiary complies with the
o Secured party: secured creditor or agent or specified conditions under the letter.
representative of such secured creditor o The issuer shall honor the draft or demand regardless of
o Secured creditor: creditor with a secured claim whether any underlying obligation between the applicant
o Secured claim: claim that is secured by a lien and beneficiary is satisfied.
o Unsecured creditor: creditor with an unsecured claim Our Code of Commerce, under Art. 567, further defines it as
an instrument issued by one merchant to another, or for
o Unsecured claim: claim that is not secured by a lien attending to a commercial transaction.
o Lien: statutory or contractual claim or judicial charge on Its effect, as a security transaction, is to substitute the
real or personal property that legally entitles a creditor financial strength of the issuer (usually a bank) for that of
to resort to said property for payment of the claim or the applicant, in order to convince the beneficiary to transact
debt secured with the latter.
In the context of insolvency: o Having such letter of credit, the beneficiary is assured
A secured creditor is a creditor that has in its favor a real that he/she may call upon such instrument as security,
security transaction, that is, a claim secured by a in case the applicant fails to perform his obligation.
statutory, contractual or judicial charge on real or
personal property (collateral) that legally entitles a
creditor to resort to the property for payment of its claim
An unsecured creditor is a creditor who only has in its
favor a personal security transaction

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Transfield Phils. v. Luzon Hydro Corp., et al (2004) – Tinga, standardize practices in the area of letters of credit. As a
J. Petitioner: Transfield Philippines, Inc. (TPI) result, most letters of credit incorporate the UCP provisions.
Respondent: Luzon Hydro Corp (LHC), Australia and New In the past cases of BPI v. De Reny Fabric and Bank of
Zealand Banking Grp. Limited (ANZ), and Security Bank Corp. America v. CA, the SC has ruled that there being no specific
(SBC) provisions in the Code of Commerce and other statutes, the
Concept: Security Transactions; Letters of Credit; General UCP is applicable under the principle that usages and
Concepts customs generally observed shall be followed.
Now, Art. 3 of the UCP, provides that credits, by their
Doctrine: nature, are separate transactions from the sales contract or
The “independence principle” of letters of credit means that (1) any other type of contracts that they may be based on;
assures the beneficiary of prompt payment, notwithstanding any hence, banks are in no way concerned or bound by such
breach of the main contract and (2) precludes the bank from contracts.
determining whether the main contract (sales or non-sale) is o Consequently, the undertaking of the bank (as the
actually accomplished or not. Both the bank and beneficiary may addressee) to pay, accept and pay drafts, or negotiate
invoke this principle to their benefit. and/or fulfill any other obligation under the letter of
credit is not subject to claims or defenses by the
Brief Facts: applicant, resulting from his relationships with the
TPI and LHC entered into a turnkey contract wherein TPI is issuing bank or the beneficiary.
obligated to build a power plant. To secure the obligation, TPI o In the same token, a beneficiary can in no case avail
executed two letters of credit in favor of LHC, which the former himself of the contractual relationships existing between
opened in two banks (one letter each). When TPI failed to the banks or between the applicant and the issuing
complete the project on the target date, LHC attempted to draw bank.
upon the funds under the letter of credit. There still being o Thus the engagement of the issuing bank is to pay the
ongoing proceedings on the issue of whether TPI was in delay, beneficiary of the credit once the draft and the required
TPI sought to retrain LHC from drawing upon the letters of credit. documents are presented to it. The so-called
“independence principle” (1) assures the beneficiary of
prompt payment, notwithstanding any breach of the
ISSUES: main contract and (2) precludes the bank from
WON LHC can withdraw the funds under the letters of determining whether the main contract (sales or non-
credit, by invoking “independence principle” of letters of sale) is actually accomplished or not.
credit (YES) o Under this “independence principle,” the banks assume
WON LHC can withdraw the funds even before the arbitration no liability or responsibility for the form, sufficiency,
proceedings are resolved (YES) accuracy, genuineness, falsification or legal effect of
WON the banks are justified in releasing the amounts despite any documents or superimposed theron, nor do they
assume any liability responsibility for the description,
TPI’s notice to them (YES)
quantity, weight, quality, condition, packing, delivery,
On Letters of Credit value, or existence of the goods.
A letter of credit is a written instrument whereby the writer The independence of the letter of credit may be: (1)
independence in toto where the credit is independent from
requests or authorizes the addressee to pay money or
the justification aspect and is a separate obligation from the
deliver goods to a third person and assumes
underlying agreement, or (2) independence only with respet
responsibility for payment of debt therefor to the addressee.
as to the justification aspect, which is identical with the
It is a financial device developed by merchants as a same obligations in the underlying agreement.
o In both cases, payment may be enjoined if in the light of
convenient and relatively safe mode of dealing with
sales of goods in a manner that satisfies the seemingly the purpose of credit, its payment would constitute
irreconcilable interests of a seller, who refuses to part fraudulent abuse of the credit.
with his goods before he is paid, and a buyer, who
RATIO:
wants to have control of the goods before paying.
1. YES. LHC can invoke the “independence principle” and
It serves to reduce the risk of nonpayment of the purchase withdraw the funds.
TPI: The independence principle is a defense that only the
price.
However, they may also be used in non-sale settings issuing bank may interpose.
(such as in this instant case). These credits used in non- LHC: It is against common sense to deny the benefit of an
sale transactions are called standby credits. independent contract for whom the benefit is intended,
Gaining acceptability in international trade transactions, the which is the beneficiary.
SC: Given the irrevocable nature of the letter of credit, the
ICC has periodically published updates on the Uniform
Customs and Practices (UCP) for Documentary credits to bank’s undertaking to pay the beneficiary once documents

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are presented is definite and binding. This obligation is - Furthermore, LHC was entitled to call upon the letters of
independent of the related and originating contract (the credit to begin with, under the provisions of the turnkey
turnkey contract). contract.
o Bearing this in mind, TPI’s argument is untenable, as it o “8.7.2 The Employer may, without prejudice to any
would render nugatory the purpose for which letters of other method of recovery, deduct the amount of such
credit are used in commercial transactions. The damages from any monies due, or to become due to
independence principle works to the benefit of both the Contractor and/or by drawing on the Security.”
the issuing bank and the beneficiary. o Following the rule that the terms of a perfected
o Letters of credit, from the point of view of the writer, contract constitute law between the parties, the
serves as a security, which he may confidently present provision should be upheld as it reveals the intention of
to convince the beneficiary to enter into the the parties to make the letters of credit answerable for
transaction. On the other hand, from the point of the of the liquidated damages brought own by the delay in
the beneficiary, the letter of credit assures the latter the performance.
that he may call on it when the commercial transaction o Hence, even without the independence principle, LHC
fails or when the writer fails to perform his part of the is entitled to the amounts under the letter of credit.
obligation.
DISPOSITIVE: RTC and CA affirmed. Petition dismissed.
2. YES. There was NO need to wait for the proceedings
before the CIAC and ICC to be resolved. B. Kinds of Letters of Credit
SC: To wait for the proceedings to be resolved before LHC 1. Commercial Letters of Credit
could call upon the letters of credit is to convert the letters of
credit into a mere guaranty. This kind of letter of credit, also known as a commercial
o Jurisprudence has already clearly distinguished the two, letter of credit or, simply, commercial credit, is utilized in
in that a settlement of a dispute is not a pre-requisite for a contract of sale of goods between the applicant (buyer)
the release of funds under a letter of credit. and the beneficiary (seller).
The Court, citing Prof. John F. Dolan: The Court, in Transfield Phils v. Luzon Hydro, explained that
o The surety and the letter of credit share the same this kind of letter of credit was developed by merchants as a
purpose: ensure against the obligor’s non-performance. o “convenient and relatively safe mode of dealing with the sale
In a traditional surety, however, there is a need to of goods to satisfy the seemingly irreconcilable interests
determine first if the obligor really defaulted (usually of a seller-beneficiary who refuses to part with its goods
resulting in litigation) and after that, a need to before it is paid, and that of a buyer-applicant who wants
determine the cost of performance which the surety will to have control of the goods before paying.”
undertake to pay.
o The letter of credit, meanwhile, entitles the beneficiary to Commercial credits, being involved in a contract of sale of
promptly receive payment in the event of non- goods, becomes payable only upon the presentation by
performance and that he shall receive such payment the seller-beneficiary of documents that show it has
before any litigation with the obligor.
taken affirmative steps to comply with the contract of
o In a surety, the financial burden during litigation is with
sale.
the beneficiary. The surety holds the money and the
beneficiary bears most of the cost of the delay in the 2. Standby Letters of Credit
performance.
o A letter of credit reverses the financial burden; the This kind of letter of credit, also known as a standby letter
beneficiary may receive payment even before litigation, of credit, or, simply, standby credit, is used as a guarantee
as soon as he presents the required document. He is or security for either a monetary or non-monetary
entitled to receive those payments even if it is later on obligation.
determined after litigation that the obligor did in fact In a standby credit arrangement, the issuer agrees to pay
performed the obligation. In such case, the obligor the creditor-beneficiary if the debtor-applicant defaults
becomes entitled to sue the beneficiary in tort, in or fails to perform the obligation.
contract or in breach of warranty. The standby credit becomes payable upon certification of
the debtor-applicant’s default or failure to perform the
YES. The banks performed their obligation,
obligation.
pursuant to the letter of credit.
SC: Given the nature and purpose of the letter of credit, the
banks were left with little to no alternative but to honor
LHC’s call upon the letter of credit.

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C. Rule of Strict Compliance o For the food faith, or acts, or omission, solvency,
performance, or standing of the consignor, the carriers, or
Under this rule, the documents tendered by the the insurers of the goods, or any other persons.
beneficiary must strictly conform to the terms of the EX: Fraud Exception Rule; an injunction against the payment
letter of credit. will be granted upon the showing of all of the following
o The tender of documents must include all the requisites:
documents required by the letter. o Clear proof of fraud
Should the honoring entity accept the tender by the o Such fraud constitutes a fraudulent abuse of the
beneficiary, but such tender does not comply with what is independent purpose of the letter of credit, and not only
required (i.e., a faulty tender), then the issuer acts on its own fraud under the principal obligation
risk and may not thereafter recover from the applicant or the o A showing that irreparable injury might follow if injunction
issuer, as the case may be, the money it paid to the is not granted, or that recovery of damages would be
beneficiary. seriously affected.
An honoring entity deals only with the documents; it is not in
a position to determine whether the documents required by . TRUST RECEIPTS
the letter of credit is important or superfluous to the applicant.
A. General Concepts
o As a rule, the honoring entity should assume that the
document is of vital importance to the applicant by the PD 115, Sec. 3 Definition of terms – As used in this Decree,
mere fact that it was specified as a required document unless the context otherwise requires, the term
under the letter of credit.
"Document" shall mean written or printed evidence of title to
D. Independence Principle goods.
The independence principle is a rule on letters of credit "Entrustee" shall refer to the person having or taking
that: possession of goods, documents or instruments under a trust
o Assures the beneficiary of prompt payment, independent receipt transaction, and any successor in interest of such
of any breach of the principal obligation, the reason by person for the purpose or purposes specified in the trust
which the letter of credit was procured
receipt agreement.
o Precludes the issuer from making a determination
whether the principal obligation is actually accomplished "Entruster" shall refer to the person holding title over the
or not.
goods, documents, or instruments subject of a trust receipt
Under this principle, the letter of credit is a separate and
transaction, and any successor in interest of such person.
distinct obligation with respect to the principal obligation for
which the letter of credit was constituted.
"Goods" shall include chattels and personal property other
o The settlement of a dispute between the parties is not a
than: money, things in action, or things so affixed to land as to
pre-requisite for the release of funds under a letter of
become a part thereof.
credit.
The independence principle only admits of one exception:
"Instrument" means any negotiable instrument as defined in
the fraud exception rule.
the Negotiable Instrument Law; any certificate of stock, or bond
o Under this exception, the falsity of a certificate
or debenture for the payment of money issued by a public or
accompanying the demand for payment under a letter of
private corporation, or any certificate of deposit, participation
credit may qualify as fraud, sufficient to support an
certificate or receipt, any credit or investment instrument of a
injunction against the payment, upon showing of three
sort marketed in the ordinary course of business or finance,
requisites.
whereby the entrustee, after the issuance of the trust receipt,
GR: The issuer of the letter of credit shall make payment appears by virtue of possession and the face of the instrument
upon the tender of documents required by the beneficiary, to be the owner. "Instrument" shall not include a document as
and it shall assume NO liability or responsibility: defined in this Decree.
o For the form, sufficiency, accuracy, genuineness,
"Purchase" means taking by sale, conditional sale, lease,
falsification, or legal effect of any documents, or for the
general or particular conditions stipulated in the mortgage, or pledge, legal or equitable.
documents or superimposed thereon
"Purchaser" means any person taking by purchase.
o For the description, quantity, weight, quality, condition,
packing, delivery, value, or existence of the goods
represented by any documents

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"Security Interest" means a property interest in goods, 2. In the case of instruments,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the to sell or procure their sale or exchange; or
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained to deliver them to a principal; or
for security only.
to effect the consummation of some transactions involving
"Person" means, as the case may be, an individual, trustee, delivery to a depository or register; or
receiver, or other fiduciary, partnership, corporation, business
trust or other association, and two more persons having a joint to effect their presentation, collection or renewal
or common interest.
The sale of goods, documents or instruments by a person in
"Trust Receipt" shall refer to the written or printed the business of selling goods, documents or instruments for
document signed by the entrustee in favor of the entruster profit who, at the outset of the transaction, has, as against the
containing terms and conditions substantially complying with buyer, general property rights in such goods, documents or
the provisions of this Decree. No further formality of execution instruments, or who sells the same to the buyer on credit,
or authentication shall be necessary to the validity of a trust retaining title or other interest as security for the payment of
receipt. the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this
"Value" means any consideration sufficient to support a Decree.
simple contract.
Trust Receipt
PD 115, Sec. 4 What constitutes a trust receipt transaction – A Convenient business device that assists importers and
trust receipt transaction, within the meaning of this Decree, is merchants
any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Trust Receipt Transaction
Decree as entrustee, whereby the entruster, who owns or A real security transaction
holds absolute title or security interests over certain specified A person who owns or holds absolute title or security
goods, documents or instruments, releases the same to the interests over certain specified goods, documents or
possession of the entrustee upon the latter's execution and instruments (entruster) releases the same to the possession
delivery to the entruster of a signed document called a "trust of another person (entrustee)
receipt" wherein the entrustee binds himself to hold the The entrustee binds himself to hold the goods, documents
designated goods, documents or instruments in trust for the or instruments in trust for the entruster and to sell or
entruster and to sell or otherwise dispose of the goods, otherwise dispose of the goods, documents or instruments,
documents or instruments with the obligation to turn over to the with the obligation to turn over to the entruster the proceeds
entruster the proceeds thereof to the extent of the amount thereof, or the goods, documents or instruments
owing to the entruster or as appears in the trust receipt or the themselves, if they are unsold or otherwise not disposed of,
goods, documents or instruments themselves if they are in accordance with the terms and conditions in the trust
unsold or not otherwise disposed of, in accordance with the receipt
terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following: B. Form of Trust Receipts
In the case of goods or documents, (a) to sell the goods or PD 115, Sec. 5 Form of trust receipts; contents – A trust
procure their sale; or (b) to manufacture or process the goods receipt need not be in any particular form, but every such
with the purpose of ultimate sale: Provided, That, in the case of receipt must substantially contain (a) a description of the
goods delivered under trust receipt for the purpose of goods, documents or instruments subject of the trust receipt;
manufacturing or processing before its ultimate sale, the the total invoice value of the goods and the amount of the
entruster shall retain its title over the goods whether in its draft to be paid by the entrustee; (3) an undertaking or a
original or processed form until the entrustee has complied commitment of the entrustee (a) to hold in trust for the
fully with his obligation under the trust receipt; or (c) to load, entruster the goods, documents or instruments therein
unload, ship or tranship or otherwise deal with them in a described; (b) to dispose of them in the manner provided for in
manner preliminary or necessary to their sale; or the trust receipt; and (c) to turn over the proceeds of the sale of
the goods, documents or instruments to the entruster to the
extent of the amount owing to the entruster or as appears in
the trust receipt or to return the goods, documents or
instruments in the event of their non-sale within the period
specified therein.

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deemed sufficiently given if in writing, and either personally
The trust receipt may contain other terms and conditions served on the entrustee or sent by post-paid ordinary mail to
agreed upon by the parties in addition to those hereinabove the entrustee's last known business address.
enumerated provided that such terms and conditions shall not
be contrary to the provisions of this Decree, any existing laws, PD 115, Sec. 8 Entruster not responsible on sale by entrustee.
public policy or morals, public order or good customs. The entruster holding a security interest shall not, merely by
virtue of such interest or having given the entrustee liberty of
PD 115, Sec. 6 Currency in which a trust receipt may be sale or other disposition of the goods, documents or
denominated – A trust receipt may be denominated in the instruments under the terms of the trust receipt transaction be
Philippine currency or any foreign currency acceptable and responsible as principal or as vendor under any sale or
eligible as part of international reserves of the Philippines, the contract to sell made by the entrustee.
provisions of existing law, executive orders, rules and
regulations to the contrary notwithstanding: Provided, however, D. Obligations of Entrustee
That in the case of trust receipts denominated in foreign
currency, payment shall be made in its equivalent in Philippine PD 115, Sec. 9 Obligations of the entrustee – The entrustee
currency computed at the prevailing exchange rate on the date shall (1) hold the goods, documents or instruments in trust for
the proceeds of sale of the goods, documents or instruments the entruster and shall dispose of them strictly in accordance
held in trust by the entrustee are turned over to the entruster or with the terms and conditions of the trust receipt; (2) receive
on such other date as may be stipulated in the trust receipt or the proceeds in trust for the entruster and turn over the same
other agreements executed between the entruster and the to the entruster to the extent of the amount owing to the
entrustee. entruster or as appears on the trust receipt; (3) insure the
goods for their total value against loss from fire, theft, pilferage
A trust receipt is a formal contract or other casualties; (4) keep said goods or proceeds thereof
Although the law states that it need not be in any particular whether in money or whatever form, separate and capable of
form, the Trust Receipts Law requires that it must be written identification as property of the entruster; (5) return the goods,
or printed and must contain specific terms documents or instruments in the event of non-sale or upon
demand of the entruster; and (6) observe all other terms and
C. Rights of Entruster conditions of the trust receipt not contrary to the provisions of
this Decree.
PD 115, Sec. 7 Rights of the entruster – The entruster shall be
entitled to the proceeds from the sale of the goods, documents PD 115, Sec. 10 Liability of entrustee for loss – The risk of loss
or instruments released under a trust receipt to the entrustee to shall be borne by the entrustee. Loss of goods, documents or
the extent of the amount owing to the entruster or as appears instruments which are the subject of a trust receipt, pending
in the trust receipt, or to the return of the goods, documents or their disposition, irrespective of whether or not it was due to the
instruments in case of non-sale, and to the enforcement of all fault or negligence of the entrustee, shall not extinguish his
other rights conferred on him in the trust receipt provided such obligation to the entruster for the value thereof.
are not contrary to the provisions of this Decree.
PD 115, Sec. 11 Rights of purchaser for value and in good
faith – Any purchaser of goods from an entrustee with right to
The entruster may cancel the trust and take possession of the
sell, or of documents or instruments through their customary
goods, documents or instruments subject of the trust or of the
form of transfer, who buys the goods, documents, or
proceeds realized therefrom at any time upon default or failure
instruments for value and in good faith from the entrustee,
of the entrustee to comply with any of the terms and conditions
acquires said goods, documents or instruments free from the
of the trust receipt or any other agreement between the
entruster's security interest.
entruster and the entrustee, and the entruster in possession of
the goods, documents or instruments may, on or after default,
give notice to the entrustee of the intention to sell, and may, not PD 115, Sec. 12 Validity of entruster's security interest as
less than five days after serving or sending of such notice, sell against creditors – The entruster's security interest in goods,
the goods, documents or instruments at public or private sale, documents, or instruments pursuant to the written terms of a
and the entruster may, at a public sale, become a purchaser. trust receipt shall be valid as against all creditors of the
The proceeds of any such sale, whether public or private, shall entrustee for the duration of the trust receipt agreement.
be applied (a) to the payment of the expenses thereof; (b) to
the payment of the expenses of re-taking, keeping and storing
the goods, documents or instruments; (c) to the satisfaction of
the entrustee's indebtedness to the entruster. The entrustee
shall receive any surplus but shall be liable to the entruster for
any deficiency. Notice of sale shall be
!
PD 115, Sec. 13 Penalty clause – The failure of an entrustee
to turn over the proceeds of the sale of the goods, documents ISSUE:
or instruments covered by a trust receipt to the extent of the W the transaction was a trust receipt transaction or a simple loan
amount owing to the entruster or as appears in the trust receipt (SIMPLE LOAN)
or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the RATIO: The transaction was a simple loan, not a trust
trust receipt shall constitute the crime of estafa, punishable receipt agreement.
under the provisions of Article Three hundred and fifteen, Sec. 4, PD No. 115 defines a trust receipt transaction as
paragraph one (b) of Act Numbered Three thousand eight any transaction by and between a person referred to as the
hundred and fifteen, as amended, otherwise known as the entruster, and another person referred to as the entrustee,
Revised Penal Code. If the violation or offense is committed by whereby the entruster who owns or holds absolute title or
a corporation, partnership, association or other juridical security interest over certain specified goods, documents or
entities, the penalty provided for in this Decree shall be instruments, releases the same to the possession of the
imposed upon the directors, officers, employees or other entrustee upon the latter’s execution and delivery to the
officials or persons therein responsible for the offense, without entruster of a signed document called a “trust receipt”
prejudice to the civil liabilities arising from the criminal offense. wherein the entrustee binds himself to hold the designated
goods, documents or instruments with the obligation to turn
E. Rights of Purchaser 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
PD 115, Sec. 11 Rights of purchaser for value and in good
if they are unsold or not otherwise disposed of, in
faith – Any purchaser of goods from an entrustee with right to
accordance with the terms and conditions specified in the
sell, or of documents or instruments through their customary
trust receipt
form of transfer, who buys the goods, documents, or
Two possible situations in a trust receipt transaction:
instruments for value and in good faith from the entrustee,
o Money received under the obligation involving the duty to
acquires said goods, documents or instruments free from the
deliver it (entregaria) to the owner of the merchandise
entruster's security interest.
sold
o Merchandise received under the obligation to “return” it
Colinares v. CA (2000) – Davide, Jr., J.
(devolvera) to the owner
Petitioner: Melvin Colinares and Lordino Veloso
Failure of the entrustee to turn over the proceeds of the
Respondent: CA and People of the Philippines
sale, covered by the trust receipt to the entruster OR to
Concept: Trust Receipts; Rights of the Purchaser return the goods if they were not disposed of in accordance
with the terms of the trust receipt shall be punishable as
Doctrine:
estafa under Art. 315 (1) of the RPC without need of
The ownership of merchandise in a trust receipts transaction
proving intent to defraud
remains vested in the person who had advanced payment until
SC: Transaction was NOT a trust receipt
he has been paid in full. He acquires a “security interest” in the
o Colinares and Veloso received the merchandise from
goods as holder of a security title for the advances made to the
CM Builders on Oct. 30, 1979 (ownership was already
entrustee. He takes full title to the goods at the very beginning
transferred to be used for the construction project)
and continues to hold that title as his indispensable security
o ONE DAY LATER, they applied to the bank for a loan to
until the goods are sold and the vendee is called upon to pay for
pay for the merchandise
them. o This belies what normally happens in a pure trust receipt
(Note: This is under Sec. 11, which provides that a purchaser for
transaction where goods are owned by the bank and
value and in good faith is free from the entruster’s security only released to the importer in trust subsequent to the
interest. However, this wasn’t discussed in the ratio, so maybe grant of the loan
it’s about security, in general, under PD No. 115) Bank acquires a “security interest” in the goods as
holder of a security title for the advances it made to
Brief Facts: the entrustee
Colinares and Veloso contracted with the Carmelite Sisters to Ownership remains with the person who had
renovate their convent. The contractors obtained several advanced the payment until he has been paid in
materials from CM Builders, and, the day after, applied for a full or if the merchandise has been sold, the
commercial letter of credit with the PBC to cover the invoice of proceeds should be turned over to him
the goods. They were made to sign a pro-forma trust receipt as To secure that the bank shall be paid, it takes full
security. Despite demands, they failed to pay, so PBC charged title to the goods at the very beginning and
them with the violation of PD No. 115 (Trust Receipts Law). continues to hold that title as his indispensable
Lower court and CA convicted the two. SC reversed, held that security until the goods are sold and the vendee is
the transaction was NOT a trust receipt transaction, but a simple called to pay for them
loan.

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Importer has never owned the goods and is not IV. GUARANTY
able to deliver possession
Trust receipts partake of the nature of a conditional A. General Concepts
sale where the importer becomes absolute owner
as soon as he pays the price Art. 2047 By guaranty a person, called the guarantor, binds
Trust receipts were intended to aid in financing himself to the creditor to fulfill the obligation of the principal
importers and retail dealers who do not have sufficient debtor in case the latter should fail to do so.
funds or resources to finance the importation or
purchase of merchandise and who may not be able to If a person binds himself solidarily with the principal debtor, the
acquire credit except through utilization, as collateral, provisions of Section 4, Chapter 3, Title I of this Book shall be
of the merchandise imported or purchased observed. In such case the contract is called a suretyship.
Antecedent acts in a trust receipt transaction:
application and approval of the letter of credit, making
Art. 2048 A guaranty is gratuitous, unless there is a stipulation
of the marginal deposit, and the effective importation of
the goods to the contrary.
Trust Receipts Law does not seek to enforce payment
but punishes the dishonesty and abuse of confidence in Art. 2051 A guaranty may be conventional, legal or judicial,
the handling of money or goods gratuitous, or by onerous title.
Here, NO dishonesty nor abuse of confidence because
they continually endeavored to meet their obligations It may also be constituted, not only in favor of the principal
(several receipts issued by PBC acknowledging debtor, but also in favor of the other guarantor, with the latter's
payment) consent, or without his knowledge, or even over his objection.
They did not employ an artifice in dealing with PBC
and they never evaded payment nor attempted to
abscond Guaranty
They are not importers acquiring the goods for re- a promise to answer for the payment of some debt or the
sale performance of some duty, in case of the failure of another
They are contractors who obtained fungible goods who is liable in the first instance.
for their construction project; title over the A personal security transaction that involves the conditional
construction materials never passed to the bank obligation of a person (guarantor) to fulfill a principal
(directly to Colinares and Veloso) obligation in favor of a creditor, in case the debtor fails to do
Practice of banks making borrowers sign trust receipts to so.
facilitate the collection of loans and placing them under Obligation of the guarantor always a rise as a consequence
threats of criminal prosecution should they be unable to pay of a contract
may be unjust and inequitable, if not reprehensible It may be conventional, legal, or judicial.
These are contracts of adhesion
This leaves poor and hapless borrowers at the mercy of B. Form of Guaranty
banks and is prone to misinterpretation (as what
happened in this case) Art. 2055 A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
DISPOSITIVE: Decision REVERSED and SET ASIDE.
If it be simple or indefinite, it shall compromise not only the
Colinares v. CA principal obligation, but also all its accessories, including the
What would the remedy have been? judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after he
Letters of Credit distinguished from Trust Receipt
has been judicially required to pay.
LETTERS OF CREDIT TRUST RECEIPT
Code of Commerce PD 115 Art. 1403 The following contracts are unenforceable, unless
Benefits the Benefits the bank/protects they are ratified:
supplier/protects the seller the bank
No assurance that bank will So bank can be assured to be Those entered into in the name of another person by one
be paid paid who has been given no authority or legal representation, or
No criminal penalties Has a criminal penalty (estafa) who has acted beyond his powers;
Only a credit extension Bank owns the goods

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Those that do not comply with the Statute of Frauds as set C. Obligations Secured
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the Art. 2052.A guaranty cannot exist without a valid obligation.
same, or some note or memorandum, thereof, be in writing,
and subscribed by the party charged, or by his agent; Nevertheless, a guaranty may be constituted to guarantee the
evidence, therefore, of the agreement cannot be received performance of a voidable or an unenforceable contract. It may
without the writing, or a secondary evidence of its contents: also guarantee a natural obligation.
An agreement that by its terms is not to be performed Art. 2053 A guaranty may also be given as security for future
within a year from the making thereof; debts, the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated. A
A special promise to answer for the debt, default, or
conditional obligation may also be secured.
miscarriage of another;
Art. 2054 A guarantor may bind himself for less, but not for
An agreement made in consideration of marriage, other
more than the principal debtor, both as regards the amount
than a mutual promise to marry;
and the onerous nature of the conditions.
An agreement for the sale of goods, chattels or things in
Should he have bound himself for more, his obligations shall
action, at a price not less than five hundred pesos, unless the
be reduced to the limits of that of the debtor.
buyer accept and receive part of such goods and chattels, or
the evidences, or some of them, of such things in action or pay
Guaranty cannot exist if the principal obligation is void, but it
at the time some part of the purchase money; but when a sale
can exist even if the contract is voidable or unenforceable.
is made by auction and entry is made by the auctioneer in his
It can also secure future debt, even if the amount due is not
sales book, at the time of the sale, of the amount and kind of
yet known. In this case, the guarantor will not be liable until
property sold, terms of sale, price, names of the purchasers
the amount is known. It can also secure a future obligation.
and person on whose account the sale is made, it is a
Article 2053 is the basis for continuing guaranty, i.e., one
sufficient memorandum;
which governs a course of dealing for an indefinite time or
by a succession of credits. It is not limited to a single
An agreement of the leasing for a longer period than one
transaction but contemplates a prospective or future course
year, or for the sale of real property or of an interest therein;
of dealing, covering a series of transactions, which are
within the stipulations of the contract of guaranty, until the
A representation as to the credit of a third person.
expiration or termination thereof.
The object of a continuing guaranty is to grant to the
Those where both parties are incapable of giving consent to
principal debtor a standing credit to be used from time to
a contract.
time either indefinitely or until a certain period.
Terms used for continuing guaranty: any debt, any
indebtedness, any sum, any transaction, money to be
Guaranty: a special promise to answer for debt, default, or
furnished the principal debtor from time to time, at any time,
miscarriage of another.
It is covered by the Statute of Frauds. on such time
It is an accessory contract.
D. Parties to a Guaranty
The obligation of the guarantor must be express and not
presumed and it cannot extend to more than what is
Art. 2056 One who is obliged to furnish a guarantor shall
stipulated.
Simple or indefinite guaranty: that which extends to the present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation
principal obligation as well as accessories and judicial costs.
which he guarantees. The guarantor shall be subject to the
Definite guaranty: that which extends only to a specified jurisdiction of the court of the place where this obligation is to
amount. be complied with.
If the guaranty specifies a fixed amount but nevertheless
also provides for liability for interest and expenses, the Art. 2057 If the guarantor should be convicted in first instance
guarantor will be liable for the latter amounts even if these of a crime involving dishonesty or should become insolvent,
exceed the specified fixed amount. the creditor may demand another who has all the qualifications
required in the preceding article. The case is excepted where
the creditor has required and stipulated that a specified person
should be the guarantor.

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Art. 2049 A married woman may guarantee an obligation Art. 2061 The guarantor having fulfilled all the conditions
without the husband's consent, but shall not thereby bind the required in the preceding article, the creditor who is negligent
conjugal partnership, except in cases provided by law. in exhausting the property pointed out shall suffer the loss, to
the extent of said property, for the insolvency of the debtor
Art. 2064 The guarantor of a guarantor shall enjoy the benefit resulting from such negligence.
of excussion, both with respect to the guarantor and to the
principal debtor. Art. 2062 In every action by the creditor, which must be
against the principal debtor alone, except in the cases
Art. 2065 Should there be several guarantors of only one mentioned in Article 2059, the former shall ask the court to
debtor and for the same debt, the obligation to answer for the notify the guarantor of the action. The guarantor may appear
same is divided among all. The creditor cannot claim from the so that he may, if he so desire, set up such defenses as are
guarantors except the shares which they are respectively granted him by law. The benefit of excussion mentioned in
bound to pay, unless solidarity has been expressly stipulated. Article 2058 shall always be unimpaired, even if judgment
should be rendered against the principal debtor and the
The benefit of division against the co-guarantors ceases in the guarantor in case of appearance by the latter.
same cases and for the same reasons as the benefit of
excussion against the principal debtor. Art. 2063 A compromise between the creditor and the principal
debtor benefits the guarantor but does not prejudice him. That
There are at least three parties to a which is entered into between the guarantor and the creditor
guaranty o The creditor benefits but does not prejudice the principal debtor.
o The debtor of the principal obligation o
The guarantor Art. 2064 The guarantor of a guarantor shall enjoy the benefit
A sub-guarantor is a guarantor of a guarantor of excussion, both with respect to the guarantor and to the
A co-guarantor is one of several guarantors of only one principal debtor.
debtor for the same debt
Qualifications of a guarantor The benefit of excussion (or exhaustion or exclusion) is the
A guarantor must possess integrity, capacity to contract right of the guarantor to demand that the creditor first:
and sufficient property for the guaranteed obligation. Exhaust all of the properties of the principal debtor,
Loss of these qualifications gives the creditor the right AND
to demand a new guarantor unless the creditor had Resort to all legal remedies against the principal
stipulated a specified person to act as guarantor. debtor…before the guarantor is liable to fulfill the
A married woman requires the consent of her husband to bind obligation of the principal debtor. It is the distinguishing
conjugal property. mark of guaranty.
For the creditor to enforce the guaranty:
E. Benefit of Excussion The creditor must bring an action against the principal
debtor alone, except in the cases mentioned in Art.
Art. 2058 The guarantor cannot be compelled to pay the 2059.
creditor unless the latter has exhausted all the property of the The creditor shall ask the court to notify the guarantor of the
debtor, and has resorted to all the legal remedies against the action.
debtor. The guarantor may appear so that it may, if it so desires, set
up such defenses as are granted by law. The benefit of
Art. 2059 The excussion shall not take place: excussion shall always be unimpaired, even if judgment
If the guarantor has expressly renounced it; should be rendered against the principal debtor and the
If he has bound himself solidarily with the debtor; guarantor in case of appearance by the latter.
In case of insolvency of the debtor; In order that the guarantor may make use of the benefit of
When he has absconded, or cannot be sued within the excussion, it must:
Philippines unless he has left a manager or representative; Set it up against the creditor upon demand for
If it may be presumed that an execution on the property of payment, AND
the principal debtor would not result in the satisfaction of the Point out to the creditor available property of the
obligation. debtor within Philippine territory, sufficient to cover
the amount of the debt.
Art. 2060 In order that the guarantor may make use of the
benefit of exclusion, he must set it up against the creditor upon
the latter's demand for payment from him, and point out to the
creditor available property of the debtor within Philippine
territory, sufficient to cover the amount of the debt.

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Tupaz IV & Tupaz v. CA and BPI (2005) By signing in such capacity, they did not bind themselves
Petitioners: Jose C. Tupaz IV and Petronila C. Tupax personally liable for El Oro Corporation’s obligation
Respondents: CA and Bank of the Philippine Islands A corporate representative who signs a solidary guaranty
Concept: Security Transactions; Guaranty clause in a trust receipt does not undertake to
guarantee personally the payment of the corporation’s
Doctrine: debts (Ong. V. CA)
A corporate officer who signs a trust receipt containing a solidary
guaranty clause merely binds himself as a guarantor and not a 2. Jose bound himself as a guarantor of El Oro
surety. The solidary liability is not with the principal debtor, but Corporation’s debt. He is not a surety who is solidarily
with other guarantors who sign the trust receipt. Nonetheless, liable.
when the trust receipt contains a waiver of excussion, the Trust receipt dated Sept. 30, 1981 reads as
guarantor can no longer demand for the assets of the principal follows: o To the Bank of the Philippine Islands
debtor to be exhausted before payment by the former can be In consideration of your releasing to _____________
had. under the terms of this Trust Receipt the goods described
herein, I/We, jointly and severally, agree and promise to
Brief Facts: pay to you, on demand, whatever sum or sums of money
Jose and Petronila, corporate officers of El Oro Corporation, which you may call upon me/us to pay to you, arising out
obtained letters of credit from BPI to finance the purchase of raw of, pertaining to, and/or in any way connected with, this
materials for the manufacture of survival bolos. To secure the Trust Receipt, in the event of default and/or non-fulfillment
debt, two trust receipts were signed. The first was signed by in any respect of this undertaking on the part of the said
Jose alone, in his personal capacity. The second was signed by __________________
Jose and Petronila, in their capacity as corporate officers. In the I/we further agree that my/our liability in this guarantee
trust receipts, the signatories bound themselves “jointly and shall be DIRECT AND IMMEDIATE, without any need
severally” to pay the debt of El Oro Corporation. El Oro defaulted whatsoever on your part to take any steps or
in its obligation, prompting BPI to file a case for estafa against exhaust any legal remedies that you may have
Jose and Petronila. The two were acquitted of the criminal against the said __________________
charge but were ordered to pay the corresponding amounts due before making demand upon me/us.
under their obligation as sureties of El Oro. Lower Courts interpreted this to mean that Jose bound
himself solidarily liable with El Oro Corporation—THIS IS
ERROR!
ISSUES: Prudential Bank v. IAC – the court interpreted a substantially
Whether Jose and Petronila bound themselves personally identical clause and ruled that a corporate officer signing the
liable for El Oro Corporation’s debts under the trust receipts same is merely liable as a guarantor
(ONLY JOSE IS PERSONALLY LIABLE IN THE FIRST o The phrase “without any need whatsoever on
TRUST RECEIPT) your part to take any steps or exhaust any legal
What is the nature of Jose’s liability (THAT OF A remedies” found at the end of the trust receipt
GUARANTOR) speaks of a waiver of exhaustion
WON BPI’s suit against Jose stands despite the Court’s The defense of exhaustion (excussion) may be
raised by a guarantor before he may be held
finding that he is liable as a guarantor only (YES)
liable for the obligation
RATIO: The inclusion of said waiver of exhaustion
1. Jose is personally liable for El Oro Corporation’s debt could only mean that the Jose is signing is a
under trust receipt dated Sept. 30, 1981 guarantor
Trust receipt #1 dated Sept. 30, 1981 “I/We, jointly and severally, agree and promise
o Jose signed alone, in his personal capacity to pay to you” is actually a solidary guaranty
o He did not indicate that he was signing as El Oro clause
Corporation’s Vice-President for Operations Signatories are not binding themselves
o Hence, he bound himself personally liable for the solidarily with the principal debtor, but with
corporation’s debt other guarantors who sign the same
o Petronila is not liable under this trust receipt
Trust receipt #2 dated Oct. 9, 1981
o Jose and Petronila signed as officers of El Oro
Corporation
o Under their signatures appeared their respective
corporate positions (Vice President Operations; Vice
President Treasurer)

!
3. Although Jose is a mere guarantor, he is still liable to F. Right to Protection
pay without the necessity of exhausting the assets of El
Oro Corporation Art. 2071 The guarantor, even before having paid, may
Excussion is not a pre-requisite to secure judgment against proceed against the principal debtor:
a guarantor
o The guarantor can still demand deferment of the When he is sued for the payment;
execution of judgment against him until after the assets
of the principal debtor shall have been exhausted In case of insolvency of the principal debtor;
The benefit of excussion may be waived
o Jose waived the benefit of excussion when he When the debtor has bound himself to relieve him from the
agreed his liability in the gauranty shall be DIRECT guaranty within a specified period, and this period has expired;
AND IMMEDIATE without any need whatsoever on the
part of BPI to take any steps to exhaust any legal When the debt has become demandable, by reason of the
remedies
expiration of the period for payment;
As guarantor, he is liable to pay the principal debt as well as
other accessory liabilities After the lapse of ten years, when the principal obligation
o The trust receipt provided for payment of: has no fixed period for its maturity, unless it be of such nature
Attorney’s fees (10% of total amount due)
that it cannot be extinguished except within a period longer
Interest (7% per annum)
than ten years;
The letters of credit are subject to interest (18% per
annum) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
DISPOSITIVE: GRANT the petition in part. AFFIRM the CA
Decision and Resolution with MODIFICATIONS. If the principal debtor is in imminent danger of becoming
insolvent.
Tupaz v. CA
There is solidarity with each other (co-guarantors) BUT not with In all these cases, the action of the guarantor is to obtain
the creditor. release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the
There is a guarantee but there is a WAIVER of the benefit of
danger of insolvency of the debtor.
excussion. Since it is waived, there is no longer a need to
proceed against the debtor before proceeding against the Right to Protection: right of the guarantor as against the
guarantor. principal debtor to:
Obtain release from guaranty, or
Reasons why Tupaz was made liable to the bank even before
Demand security
excussion is resorted to:
Purpose: for guarantor to protect itself from
Excussion is not a pre-requisite to secure judgment against
Any proceeding by the creditor
a guarantor.
The danger of insolvency of the debtor
The benefit of excussion may be waived (which was present
in this case) This right is exercised by the guarantor as against the principal
There is still a remedy for the guarantor, which is to demand debtor.

deferment of the execution of the judgment against it until after
Since a guarantor binds himself to the creditor, it is also only the
the assets of the principal debtor is exhausted.
creditor that can release the guarantor from its guaranty.
This case is basis for saying that a creditor may secure judgment
against a guarantor even before excussion is resorted to.

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G. Right to Indemnification In guaranty, there is also a legal tie created between the
guarantor and principal debtor to which the principal creditor
Art. 2066 The guarantor who pays for a debtor must be is not privy
indemnified by the latter. Right to indemnification is the substantive right of action of
The indemnity comprises: the guarantor, after it has paid the principal debt, as against
the principal debtor, to recover:
The total amount of the debt; the totality of the debt
the legal interests thereon from the time the payment was
The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn
made known to the debtor, even though it did not earn interest interest from the creditor
for the creditor; the expenses incurred by the guarantor after having notified
the debtor that payment had been demanded of it, and
The expenses incurred by the guarantor after having damages, if they are due
notified the debtor that payment had been demanded of him; the right to indemnification is more than a real right to
reimbursement of what was paid
Damages, if they are due. but for the right to exist in favor of the guarantor, contract of
guaranty must have been entered into with the knowledge
Art. 2050 If a guaranty is entered into without the knowledge or and consent of the principal debtor
consent, or against the will of the principal debtor, the
It is not just reimbursement, but involves indemnification.
provisions of Articles 1236 and 1237 shall apply.
H. Right to Subrogation
Art. 1236 The creditor is not bound to accept payment or
performance by a third person who has no interest in the
Guarantor steps into the shoes of the creditor. However, this
fulfillment of the obligation, unless there is a stipulation to the
right only arises when the guarantor has already paid the
contrary.
principal debt and the contract of guaranty was enetered with the
Whoever pays for another may demand from the debtor what knowledge and consent of the principal debtor.
he has paid, except that if he paid without the knowledge or
Art. 2067 The guarantor who pays is subrogated by virtue
against the will of the debtor, he can recover only insofar as
thereof to all the rights which the creditor had against the
the payment has been beneficial to the debtor.
debtor.
Art. 2069 If the debt was for a period and the guarantor paid it
If the guarantor has compromised with the creditor, he cannot
before it became due, he cannot demand reimbursement of the
demand of the debtor more than what he has really paid.
debtor until the expiration of the period unless the payment has
been ratified by the debtor.
Art. 2050 If a guaranty is entered into without the knowledge or
consent, or against the will of the principal debtor, the
Art. 2070 If the guarantor has paid without notifying the debtor,
provisions of Articles 1236 and 1237 shall apply.
and the latter not being aware of the payment, repeats the
payment, the former has no remedy whatever against the
Art. 1237 Whoever pays on behalf of the debtor without the
debtor, but only against the creditor. Nevertheless, in case of a
gratuitous guaranty, if the guarantor was prevented by a knowledge or against the will of the latter, cannot compel the
fortuitous event from advising the debtor of the payment, and creditor to subrogate him in his rights, such as those arising
the creditor becomes insolvent, the debtor shall reimburse the from a mortgage, guaranty, or penalty.
guarantor for the amount paid.
Art. 2068 If the guarantor should pay without notifying the
Art. 2072 If one, at the request of another, becomes a debtor, the latter may enforce against him all the defenses
guarantor for the debt of a third person who is not present, the which he could have set up against the creditor at the time the
guarantor who satisfies the debt may sue either the person so payment was made.
requesting or the debtor for reimbursement.
Art. 2080 The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter.

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Right of subrogation is the right of the guarantor who pays, 2. Right to Reimbursement
as against the principal debtor, to be substituted to all the
rights and remedies and securities that the creditor had Art. 2073 When there are two or more guarantors of the same
against the principal debtor debtor and for the same debt, the one among them who has
Contract of guaranty must have been entered into with the paid may demand of each of the others the share which is
knowledge and consent of the principal debtor proportionally owing from him.
The benefit of division against the co-guarantors ceases in If any of the guarantors should be insolvent, his share shall be
the same cases and for the same reasons as the benefit of borne by the others, including the payer, in the same
excussion against the principal debtor. proportion.
I. Rights of Co-Guarantors The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or
1. Benefit of Division unless the principal debtor is insolvent.
Art. 2065 Should there be several guarantors of only one Art. 2074 In the case of the preceding article, the co-
debtor and for the same debt, the obligation to answer for the guarantors may set up against the one who paid, the same
same is divided among all. The creditor cannot claim from the defenses which would have pertained to the principal debtor
guarantors except the shares which they are respectively against the creditor, and which are not purely personal to the
bound to pay, unless solidarity has been expressly stipulated. debtor.
The benefit of division against the co-guarantors ceases in the

Art. 2075 A sub-guarantor, in case of the insolvency of the
same cases and for the same reasons as the benefit of
guarantor for whom he bound himself, is responsible to the co-
excussion against the principal debtor.
guarantors in the same terms as the guarantor.
Art. 2078 A release made by the creditor in favor of one of the

The right to reimbursement is the right of the co-guarantor
guarantors, without the consent of the others, benefits all to the who pays as against the other co-guarantors to recover the
extent of the share of the guarantor to whom it has been shares due from the co-guarantors, but only if the following
granted. conditions concur:
There are 2 or more guarantors of the same debtor and fro
There is co-guaranty when two or more persons answer for the same debt
the same debt of the same debtor One of the co-guarantors has paid
Among co-guarantors, the benefit of division is the right of a Payment is made by virtue of a judicial demand or the
co-guarantor, as against a creditor, to pay only the divided principal debtor is insolvent
share that it is bound to pay If any of the co-guarantors is insolvent, the share of the
The benefit of division will cease and the creditor may claim insolvent co-guarantor shall be born by the other co-
the entire amount from the co-guarantor if: guarantors, including the co-guarantor paying, in the same
The co-guarantor against whom the creditor is making
proportion as that established in the co-guaranty
the claim has expressly renounced the benefit of
division Allegedly 2 ways of looking at Art .2078:
The co-guarantor has bound itself solidarily with the co- The amount of the benefit of release will be divided among
guarantor all debtors; or
In case of insolvency of the co-guarantor The other co-guarantors may seek reimbursement from the
When a co-guarantor has absconded, or cannot be
co-guarantor that was released.
sued within the Philippines unless it has left a manager
or representative Insolvency of debtor & one of co-guarantors paid creditor  the
If it may be presumed that an execution on the property
remedy of co-guarantor is to go against principal debtor
of the co-guarantor would not result in the satisfaction
of the obligation RIGHT OF GUARANTOR
Against Creditor: Benefit of excussion
Against Debtor: Protection, indemnification, subrogation

!
J. Extinguishment and Right of Release Art. 2082 The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the qualifications
Art. 2076 The obligation of the guarantor is extinguished at the prescribed in article 2056 and in special laws. (1854a)
same time as that of the debtor, and for the same causes as all
other obligations. Art. 2056 One who is obliged to furnish a guarantor shall present
a person who possesses integrity, capacity to bind himself, and
Art. 2077 If the creditor voluntarily accepts immovable or other sufficient property to answer for the obligation which he
property in payment of the debt, even if he should afterwards guarantees. The guarantor shall be subject to the jurisdiction of
lose the same through eviction, the guarantor is released. the court of the place where this obligation is to be complied
with. (1828a)
Art. 2079 An extension granted to the debtor by the creditor Art. 2083 If the person bound to give a bond in the cases of the
without the consent of the guarantor extinguishes the guaranty. preceding article, should not be able to do so, a pledge or
The mere failure on the part of the creditor to demand payment mortgage considered sufficient to cover his obligation shall be
after the debt has become due does not of itself constitute any admitted in lieu thereof. (1855)
extention of time referred to herein.
Art. 2084 A judicial bondsman cannot demand the exhaustion of
Art. 2080 The guarantors, even though they be solidary, are the property of the principal debtor.
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, A sub-surety in the same case, cannot demand the exhaustion
and preference of the latter. of the property of the debtor or of the surety.
Extinguishment by payment or performance of principal SURETYSHIP

obligation. Legal relation that arises when one party assumes liability
for a debt, default or other failing of a second party
The guaranty is also consequently extinguished once the A contractual relation
principal obligation is extinguished. Results from an agreement whereby one person (surety)
engages to be answerable for the debt, default or
V. SURETY miscarriage of another (principal or principal debtor)
A personal security transaction that involves the
A. General Concepts obligation of the surety to fulfill a principal obligation in case
the principal debtor, to whom the surety is solidarily bound,
Art. 2047 By guaranty a person, called the guarantor, binds does not do so
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. Suretyship as an accessory, ancillary or collateral obligation
If a person binds himself solidarily with the principal debtor, the Obligation is not an original and direct one, but merely
provisions of Section 4, Chapter 3, Title I of this Book shall be accessory or collateral to the obligation contracted by the
observed. In such case the contract is called a suretyship. (1822a)
principal debtor
Surety is solidarily bound, but the liability is consequent
upon the liability of the principal debtor and is so dependent
Art. 1211 Solidarity may exist although the creditors and the
on that of the principal debtor (considered in law as the
debtors may not be bound in the same manner and by the same
same party)
periods and conditions. (1140)
If principal debtor is liable, liability of the surety would be
solidary
Art. 1216 Novation, compensation, confusion or remission of the Nature of surety’s undertaking: no liability unless the
debt, made by any of the solidary creditors or with any of the
principal debtor is liable
solidary debtors, shall extinguish the obligation, without prejudice
to the provisions of article 1219. Surety’s Liability
To the creditor is direct, primary and absolute
The creditor who may have executed any of these acts, as well Surety is directly and equally bound with the principal
as he who collects the debt, shall be liable to the others for the Surety becomes LIABLE for the debt or duty of another
share in the obligation corresponding to them. (1143) although it possesses no direct or personal interest over
the obligations nor does it receive benefit therefrom

!
Obligations of Surety SURETY
The obligations always arise as a consequence of a Constitutes a special promise to answer for the debt,
contract, whether it is legal or judicial default, or miscarriage of another
o Legal: offered in virtue of a provision of law Under the Statute of Frauds, the agreement, note, or
o Judicial: offered in virtue of a judicial order memorandum must be:
In a legal and judicial suretyship, the surety (bondsman) o In writing; and
must possess the qualifications required of a guarantor: o Subscribed by the party charged or by his agent
o Integrity If it does not comply with the above requisites, it shall be
o Capacity to bind itself unenforceable
o Sufficient property to answer for the obligation which it
guarantees C. Obligations Secured
B. Form of Surety Art. 2053 A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no
Art. 1403 The following contracts are unenforceable, unless they claim against the guarantor until the debt is liquidated. A
are ratified: conditional obligation may also be secured. (1825a)
Those entered into in the name of another person by one On the Consideration in a Contract of Suretyship
who has been given no authority or legal representation, or who Peculiar nature of a suretyship: it is valid despite the
has acted beyond his powers; absence of any direct consideration received by the surety
either from the principal debtor or the creditor
Those that do not comply with the Statute of Frauds as set Generally, it must be supported by a sufficient consideration
forth in this number. In the following cases an agreement o Consideration need not pass directly to the surety
hereafter made shall be unenforceable by action, unless the o If it goes to the principal debtor alone, this will suffice
same, or some note or memorandum, thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence, On the Extend of the Obligation of the Surety
therefore, of the agreement cannot be received without the Obligation of the surety cannot be extended by implication
writing, or a secondary evidence of its contents: beyond its specified limits (terms of the contract)
To the extent, and in the manner, and under the
An agreement that by its terms is not to be performed within a circumstances pointed out in the obligation, the surety is
year from the making thereof; bound, and no farther
GR: Contracts are strictissimi juris (Law Dictionary: “of the
A special promise to answer for the debt, default, or strictest right or law”)
miscarriage of another; o XPN: Compensated sureties
o Why the XPN? Formerly, parties became sureties, not
An agreement made in consideration of marriage, other than for hire but as a matter of accommodation
a mutual promise to marry; o Strictissimi juris has no application to sureties organized
for the purpose of conducting an indemnity business at
An agreement for the sale of goods, chattels or things in established rates of compensation
action, at a price not less than five hundred pesos, unless the
buyer accept and receive part of such goods and chattels, or the Aside from the contract of suretyship being the law between
evidences, or some of them, of such things in action or pay at the parties and confining the obligations of the surety to
the time some part of the purchase money; but when a sale is what is stipulated, Art. 2053 applies to suretyships as well
made by auction and entry is made by the auctioneer in his sales Applies to a continuing surety
book, at the time of the sale, of the amount and kind of property o CONTINUING SURETY: not limited to a single
sold, terms of sale, price, names of the purchasers and person transaction but contemplates a prospective or future
on whose account the sale is made, it is a sufficient course of dealing, covering a series of transactions,
memorandum; which are within the stipulations of the contract of
surety, until the expiration or termination thereof
An agreement for the leasing for a longer period than one Applies to a succession of liabilities for which the
year, or for the sale of real property or of an interest therein; surety becomes liable as they accrue
( f ) A representation as to the credit of a third person.
Those where both parties are incapable of giving consent to a

contract.

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Security Bank and Trust Company, Inc. vs. Cuenca (2000) – surety should be extinguished pursuant to Art. 2079, as he
Panganiban, J. did not sign or consent to the restructuring agreement.
Petitioner: SBTC
Respondents: Rodolfo M. Cuenca DISPOSITIVE: CA affirmed
Concept: Surety – Obligations Secured
SBTC v. Cuenca
Doctrine: This is a consensual CONTRACT TO LOAN
Suretyship Agreements, being accessory obligations, shall also
be extinguished when the principal obligation is also Make sure solidary liability is with the co-principal debtor, not
extinguished. with the co-guarantors
Brief Facts: There is a surety, which is valid. No benefit of excussion.

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

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

!
The promissory note was a contract of adhesion be used as an aid in determining whether a party’s
prepared by MB and any apparent ambiguity should be undertaking is that of a surety or a guarantor.
strictly construed against MB. Several acts by the petitioner also showed that the contract
SC: Article 2047 of the Civil Code provides that by was that of suretyship. When petitioner was informed
guarantee, a person called the guarantor binds himself to about the failure of the principal debtor to pay, she
the creditor to fulfill the obligation of the principal debtor in immediately offered to settle the account. Petitioner
case the latter should fail to do so. If a person binds himself also presented receipts of payments already made,
solidarily with the principal debtor, the contract is called a which were all issued in her name and of the Azarraga
suretyship. spouses. The concomitant and simultaneous
The contract must be interpreted literally since it was compliance of Palmares’ obligation with that of her
clear and left no doubt as to the intention of the parties. principals only goes to show that, from the very start,
Palmares expressly bound herself to be jointly petitioner considered herself equally bound by the
and severally or solidarily liable with the principal maker contract.
of the note. Her liability is that of a surety. A surety usually enters into the same obligation as that of
Her pretensions that the terms jointly and severally or his principal, and the signatures of both usually appear
solidarily liable could not be easily understood was upon the same instrument, and the same consideration
diametrically opposed to her manifestation in the usually supports the obligation for both the principal and
contract that she fully understood the contents and was the surety. This was so in this case.
fully aware of her solidary liability. She admitted to
signing voluntarily, hence she could not be heard to 2. Yes, Palmares was liable.
claim otherwise. Palmares: There was fraud on part of MB and there was
A surety is an insurer of the debt, whereas a guarantor misapprehension of her part.
is an insurer of the debt, whereas a guarantor is an SC: Claim of fraud was unavailing since Palmares only
insurer of the solvency of the debtor. A suretyship is an presented her own uncorroborated and, expectedly, self-
undertaking that the debt shall be paid; a guaranty, an serving allegations. Having entered into a contract
undertaking that the debtor shall pay. Stated differently, voluntarily, Palmares was stopped to assert that she did so
a surety promises to pay the principal’s debt if the under misapprehension or ignorance of the legal effect of
principal will not pay, while a guarantor agrees that the the contract. Mistake of a surety as to the legal effect of her
creditor, after proceeding against the principal, may obligation is ordinarily no reason for relieving her of liability.
proceed against the guarantor if the principal is unable o In the absence of a statutory or contractual
to pay. A surety binds himself to perform if the principal requirement, it is not necessary that payment or
does not, without regard to his ability to do so. A performance of the obligation be first demanded of the
guarantor, on the other hand, does not contract that the principal. It is not a requisite, before proceeding against
principal will pay, but simply that he is able to do so. In the sureties, that the principal be called on to account.
other words, a surety undertakes directly for the
payment and is so responsible at once if the principal o A surety is liable as much as his principal is liable and
debtor makes default, while guarantor contracts to pay absolutely liable as soon as default is made, without
if, by the use of due diligence, the debt cannot be made any demand upon the principal whatsoever (Is the
out of the principal debtor. Quintessentially, the Court saying that default in a contract of surety means
undertaking to pay upon default of the principal debtor ordinary delay and not the default as contemplated by
does not automatically remove it the Civil Code?) or any notice of default.
from the ambit of a contract of suretyship. Palmares: There was neither demand upon her nor notice
It has not been shown, either in the contract or the of the principal’s default.
pleadings, that MB agreed to proceed against Palmares SC: Demand on the sureties is not necessary before brining
only if and when the default principal has become a suit against them, since the commencement of the suit is
insolvent. A contract of suretyship is that wherein one a sufficient demand.
lends his credit by joining in the principal debtor’s o A surety is not even entitled, as a matter of right, to be
obligation, so as to render himself directly and primarily given notice of the principal’s default. The creditor owes
responsible with him, and without reference to the no duty of active diligence to take care of the interest of
solvency of the principal. the surety. The creditor’s mere failure to give
The rule of strictissimi juris—that the liability of the information to the surety of the default of the principal
surety, under his contract, as thus interpreted and cannot have the effect of discharging the surety. The
construed, is not to be extended beyond its strict surety is bound to take notice of the principal’s default
meaning—did not apply because it only does after it and to perform the obligation. The surety cannot
has been definitely ascertained that the contract is one complaint that the creditor has not notified him in the
of suretyship and not a contract of guaranty. It cannot absence of a special agreement to that effect in the
contract of suretyship.

!
- Palmares: Questioned the propriety of filing a complaint RATIO:
solely against her to the exclusion of the principal debtors 1. YES; The use of the term "guarantee" does not
who allegedly were the only ones who benefitted from the ipso facto mean that the contract is one of
proceeds of the loan. guaranty.
- SC: Palmares, as surety, was solidarily liable. The creditor - Under A contract of surety is an accessory promise by which
can sue any of the solidarily liable, each or several, for the a person binds himself for another already bound, and
entire obligation. agrees with the creditor to satisfy the obligation if the
- Palmares: Failure to sue her immediately exonerated her. debtor does not. A contract of guaranty, on the other hand,
- SC: Mere failure to immediately sue Palmares did not is a collateral undertaking to pay the debt of another in case
release her from liability. Mere want of diligence or the latter does not pay the debt.
forbearance does not affect the creditor’s rights vis-à-vis the - Strictly speaking, guaranty and surety are nearly related, and
surety, unless the surety requires him by appropriate notice many of the principles are common to both. However, under
to sue on the obligation. Even neglect of the creditor to sue our civil law, they may be distinguished thus: A surety is
the principal does not absolve surety. usually bound with his principal by the same instrument,
o In order to constitute an extension discharging the executed at the same time, and on the same consideration.
surety it should appear that: 1) the extension was for a He is an original promissor and debtor from the beginning,
definite period, pursuant to an enforceable agreement and is held, ordinarily, to know every default of his principal.
between principal and creditor; and 2) it was made Usually, he will not be discharged, either by the mere
without the consent of the surety or with a reservation indulgence of the creditor to the principal, or by want of
of rights with respect to him. These requirements were notice of the default of the principal, no matter how much
not shown to exist. In fact, if the facts are reviewed, it he may be injured thereby.
was Palmares’s acts that caused the collection period to - On the other hand, the contract of guaranty is the
be prolonged. guarantor's own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of
DISPOSITIVE: CA decision affirmed with modification. the principal, and is often supported on a separate
consideration from that supporting the contract of the
Palmares v. CA principal. He is often discharged by the mere indulgence of
Creditor can go after the surety or the debtor or both. the creditor to the principal, and is usually not liable unless
notified of the default of the principals.
E. Zobel v CA (1998) – Martinez, J. - Based on the aforementioned definitions, it appears that
Petitioner: E. Zobel the contract executed by petitioner in favor of SOLIDBANK,
Respondents: SOLIDBANK albeit denominated as a "Continuing Guaranty," is a
Concept: Surety – Distinguished from Guaranty contract of surety. The terms of the contract categorically
obligates petitioner as "surety" to induce SOLIDBANK to
Doctrine: extend credit to respondent spouses. This can be seen in
The use of the term "guarantee" does not ipso facto mean that the following stipulations.to wit: ...undersigned is now
the contract is one of guaranty. obligated to you as surety and in order to induce you..; ...!
the undersigned agrees to guarantee, and does hereby
Brief Facts: guarantee, the punctual payment, at maturity or upon
Respondent spouses applied for a loan with respondent demand, to you of any and all such instruments, loans,
SOLIDBANK. The loan was granted subject to the condition that advances, credits and/or other obligations herein before
spouses execute a chattel mortgage over the 3 vessels to be referred to, and also any and all other indebtedness of every
acquired by them, and that a continuing guarantee be executed kind which is now or may hereafter become due or owing to
by petitioner EZ, Inc. in favor of Solid Bank. The spouses you by the Borrower..
defaulted in payment of the entire obligation upon maturity. - The contract clearly discloses that petitioner assumed
SolidBank filed a complaint for the sum of money against EZ liability to SOLIDBANK, as a regular party to the
Zobel. Zobel moved to dismiss the complaint on the ground that undertaking and obligated itself as an original promissor. It
its liability as guarantor of the loan was extinguished pursuant to bound itself jointly and severally to the obligation with the
Article 2080. respondent spouses. In fact, SOLIDBANK need not resort to
all other legal remedies or exhaust respondent spouses'
ISSUE: properties before it can hold petitioner liable for the
WON Zobel, under the “Continuing Guaranty”, obligated obligation.
himself as a surety (YES).
DISPOSITIVE. Petition dismissed for lack of merit
E. Zobel v. CA
Art. 2080 does not apply to a surety

!
International Finance Corporation v. Imperial Textile Mills, Inc. The obligations of the guarantors are meticulously
(2005) – Panganiban expressed:
Petitioner: International Finance Corporation (IFC) o Section 2.01. The Guarantors jointly and severally,
Respondent: Imperial Textile Mills, Inc. (ITM) irrevocably, absolutely and unconditionally
Concept: Surety: Distinguished from Guaranty guarantee, as primary obligors and not as sureties
merely, the due and punctual payment of the principal
Doctrine: of, and interest and commitment charge on, the Loan,
Although denominated as a Guarantee Agreement, ITM has and the principal of, and interest on, the Notes, whether
bound itself solidarily with PPIC. Under Art. 2047, when the at stated maturity or upon prematuring, all as set forth
guarantor binds itself solidarily, it becomes a suretyship and the in the Loan Agreement and in the Notes.”
provisions on Joint and Solidary Obligations will apply. The
creditor may then proceed against any of the solidary debtors or SC: The Agreement uses “guarantee” and “guarantors” but
some or all of them simultaneously for so long as the debt has the Court is not convinced that the use of the two words
not been fulfilled. A suretyship, as compared to a guaranty limits the Contract to a mere guaranty because the
involves a situation where the guarantor is solidarily liable to the stipulations show otherwise
creditor. o The Agreement stated that the corporation was “jointly
and severally” liable
Brief Facts: o To emphasize the nature of that liability, Contract stated
IFC granted a loan to PPIC in the amount of US$7-M. IFC that ITM was a primary obligor, not a mere surety
contracted with ITM and Grandtex to secure the loan granted to
PPIC, denominating it as a Guarantee Agreement and using the o At bottom, and to all legal intents and purposes, it was
words “guarantor” and “guarantee.” When PPIC defaulted and a surety
an extrajudicial foreclosure of the mortgage was unable to satisfy o ITM bound itself to be solidarily liable with PPIC for the
the outstanding obligation, IFC filed a complaint against PPIC latter’s obligations under the Loan Agreement with IFC;
it brought itself to the level of PPIC and could not be
and ITM for the balance.
deemed merely secondarily liable
ISSUE: o Initially, it was a stranger to the Loan Agreement, but its
WON ITM is a surety, and thus solidarily liable with PPIC for loan liability commenced when it guaranteed PPIC’s
obligation
payment (YES)
o Became a surety when it bound itself solidarily with
the principal obligor
RATIO: YES, ITM is a surety. It is solidarily liable with PPIC
Art. 2047 By guaranty, a person, called the
for the payment of its loan.
guarantor binds himself to the creditor to fulfill the
2 Contracts involved: 1) Loan Agreement (IFC and PPIC); 2)
obligation of the principal in case the latter should
Guarantee Agreement (ITM & Grandtex and IFC)
fail to do so.
IFC: Under the Guarantee Agreement, ITM bound itself as
If a person binds himself solidarily with the principal
surety to PPIC’s obligations proceeding from the Loan
debtor, the provisions of Sec. 4, Chap. 3, Title I of
Agreement
this Book shall be observed. In such case the
ITM: By the terms of the Guarantee Agreement, it was
contract shall be called suretyship.
merely a guarantor, not a surety
The cited provisions refer to Arts. 1207 to 1222,
The premise of the Guarantee Agreement:
NCC on Joint and Solidary Obligations, and what is
o (A) By an Agreement of even date herewith between
relevant is Art. 1216
IFC and PHILIPPINE POLYAMIDE INDUSTRIAL
Art. 1216 The creditor may proceed against any
CORPORATION (herein called the Company), which
one of the solidary debtors or some or all of them
agreement is herein called the Loan Agreement, IFC
simultaneously. The demand made against one of
agrees to extend to the Company a loan (herein called
them shall not be an obstacle to those which may
the Loan) of seven million dollars ($7,000,000) on the
subsequently be directed against the others, so
terms therein set forth, including a provision that all or
part of the Loan may be disbursed in a currency other long as the debt has not been fully collected.
than dollars, but only on condition that the Pursuant to Art. 1216, IFC was justified in taking action
Guarantors agree to guarantee the obligations of directly against ITM
SC: There is no ambiguity in the provisions of the
the Company in respect of the Loan as hereinafter
Guarantee Agreement
provided.
o (B) The Guarantors, in order to induce IFC to enter into When qualified by the term “jointly and severally,” the use of
the word “guarantor” to refer to a “surety” does not
the Loan Agreement, and in consideration of IFC
violate the law
entering into said Agreement, have agreed so to
guarantee such obligations of the Company.

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Art. 2047 (see above) provides that a suretyship is ISSUES:
created when a guarantor binds itself solidarily with the WON Ching could be held liable for the obligations that were
principal obligor constituted after the execution of the deed of suretyship
The phrase “as primary obligor and not merely as (YES)
surety” stresses that ITM is being placed on the same WON Ching may still be held liable for his undertaking under
level as PPIC  the words emphasize the nature of the the trust receipts when TRB prevented their fulfillment (YES)
liability, which the law characterizes as suretyship WON TRB may collect a larger amount from Ching as surety
Use of the word “guarantee” does not ipso facto make of PBM than the amount in the SEC-approved rehabilitation
the contract one of guaranty; very terms of a contract plan (YES)
govern the obligations of the parties
Execution of the Agreement was a condition precedent for RATIO:
the approval of the loan; IFC required a higher degree of 1. YES. Ching is still liable for these obligations
liability from ITM in case PPIC committed a breach; ITM SC: This appeal is, in effect, a disguised motion for
agreed with the Sec. 2.01 stipulation and is now estopped reconsideration of the earlier ruling in Traders Royal Bank v.
from feigning ignorance CA.
CA: denied solidary liability on the theory that the parties The SC has already ruled that Ching’s liability as surety is
would not have executed a Guarantee Agreement if they separate from that of the liability of PBM which has already
intended to name ITM as a primary obligor; that ITM’s been under the rehabilitation proceedings under the SEC.
undertaking was collateral to and distinct from the Loan Under Art. 1216 of the Civil Code, Ching can be sued
Agreement separately to enforce his liability as surety.
SC: A suretyship is merely an accessory or a collateral As for the obligations being constituted after the execution
to a principal obligation; however, the liability of the of the deed, the SC held that under Art. 2053 of the Civil
surety is direct, primary and absolute, or equivalent to Code, there can be a surety for “future debts”
that of a regular party to the undertaking Diño v. CA: A continuing suretyship is one which covers all
Surety becomes liable to the debt and duty of the transactions, including those arising in the future, which are
principal even without possessing a direct or within the description or contemplation of the contract of
personal interest in the obligations guaranty, until the expiration or termination thereof.
The very instrument of the deed of suretyship states that
DISPOSITIVE: Petition GRANTED and the assailed decision is Ching shall answer for amounts that PBM “may now be
MODIFIED. ITM is declared a surety to PPIC and is ordered to indebted or may hereafter become indebted” to TRB.
pay IFC the same amounts.
2. YES. Ching is still liable under the trust receipts
IFC v. ITM Ching is still liable for the amounts under these
This case serves only to emphasize liability corresponding trust receipts and letters of credit since he
has not shown proof of payment or settlement with TRB.
Phil. Blooming Mills & Ching v. CA (2003) – Carpio, J. TRB was empowered by express provisions in the trust
Petitioners: Phil. Blooming Mills (PBM) and Alfredo Ching receipts and also by the provisions of PD 115 (Trust
Respondents: Court of Appeals and Traders Royal Bank Receipts Law) to take possession of the merchandise
(TRB) Concept: Surety; Distinguished from Guaranty covered by the trust receipts.
Under. Sec. 7 of PD 115, once the entruster (in this case,
Doctrine: TRB) has taken possession, it may sell the merchandise
A continuing suretyship is one which covers all transactions, and the proceeds of such sale shall be applied to the
including those arising in the future, which are within the expenses that the entruster made for retaking and keeping
description or contemplation of the contract of guaranty, until the the merchandise, as well as the indebtedness of the
expiration or termination thereof. entrustee. Should there be any surplus, the entrustee shall
be entitled to them. But if there is any deficiency between
Brief Facts: the indebtedness and the proceeds, the entrustee shall be
Ching, Senior VP of PBM, bound himself, in his personal liable to pay the same.
capacity, to be the surety of PBM in its transactions with TRB. Thus, even if TRB took the merchandise covered by the
PBM defaulted and was placed under receivership by the SEC. trust receipts, Ching remains liable.
TRB now proceeds against Ching as the surety of PBM in a
separate suit while Ching contends that since PBM was placed
under receivership, the regular courts have no jurisdiction over
his case.

!
3. YES. TRB may collect a larger amount and is not bound Art. 2067 The guarantor who pays is subrogated by virtue
by the amount set in the rehabilitation plan. thereof to all the rights which the creditor had against the debtor.
Ching: Under Art. 1222 of the Civil Code, wherein the surety
is allowed to raise the defenses personal to the debtor, he
argues that he is entitled to a reduction of his liability in view If the guarantor has compromised with the creditor, he cannot
of the reduced amount that TRB is set to receive under the demand of the debtor more than what he has really paid. (1839)
rehabilitation plan.
SC: Ching’s theory is incorrect. Under Art. 1216 of the Civil Art. 1217 Payment made by one of the solidary debtors
Code, TRB is entitled to pursue against Ching the full
extinguishes the obligation. If two or more solidary debtors offer
amount of PBM’s loan.
to pay, the creditor may choose which offer to accept.
SC: TRB proceeded in the transaction with PBM in light of
the fact that Ching undertook to pay the amount as surety, He who made the payment may claim from his co-debtors only
should PBM fail to pay what it owed TRB. This is Ching’s the share which corresponds to each, with the interest for the
very purpose as surety. Hence, it cannot use PBM’s failure payment already made. If the payment is made before the debt
to pay to justify a reduced liability.
is due, no interest for the intervening period may be demanded.
DISPOSITIVE: CA affirmed. When one of the solidary debtors cannot, because of his
insolvency, reimburse his share to the debtor paying the
PBM v. CA
obligation, such share shall be borne by all his co-debtors, in
1st debt: 10M
proportion to the debt of each. (1145a)
Final debt: 19M
Debt after receivership: 1.3M
Surety Joint and Solidary
Ching has to pay 20M to bank (creditor) Debtor
Has a right to indemnification Has a right to reimbursement
Ching can only go after PBM for 2M (principal debtor) because it and subrogation as against the as against his co-debtors
principal debtor
is under receivership
Entitled to the total amount of Entitled to be reimbursed for
Ching, as asurety, assumes the risk – it is a RISK THAT YOU HAVE the debt he has paid and to be the share that corresponds to
subrogated to all the rights that each co-debtor
TO BEAR (as counsel, advise your client surety of that fact)
the creditor had against the
F. Distinguished from Joint and Solidary Obligations principal debtor
Suretyship is an accessory,
ancillary or collateral obligation
Art. 2047 By guaranty a person, called the guarantor, binds
Since this is an Person is still bound as part of
himself to the creditor to fulfill the obligation of the principal
ancillary/accessory obligation, the principal obligation
debtor in case the latter should fail to do so.
not part of principal obligation
If a person binds himself solidarily with the principal debtor, the Requires a PRINCIPAL There is already a PRINCIPAL
provisions of Section 4, Chapter 3, Title I of this Book shall be
obligation obligation
Right of indemnification Right of reimbursement
observed. In such case the contract is called a suretyship. (1822a)
Art. 2066 The guarantor who pays for a debtor must be

indemnified by the latter.
The indemnity comprises:
The total amount of the debt;
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;
The expenses incurred by the guarantor after having notified

the debtor that payment had been demanded of him;
Damages, if they are due. (1838a)

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Escano & Silos v. Ortigas Jr. (2007) – Tinga, J. The mere fact that Escaño et al. identified themselves as
Petitioners: Salvador P. Escaño and Mario M. Silos “Sureties” in the Undertaking does not render them solidarily
Respondent: Rafael Ortigas liable
Concept: Surety; distinguished from joint and solidary In order for the conclusion of Ortigas to hold (that the
obligations designation “surety” conclusively entails a suretyship
agreement), the Court would have to be satisfied that
Doctrine: among Escaño, Silos, and Matti, there is one who stand as
In cases where there are several obligors, in the absence of the principal debtor to Ortigas and another as surety who
an express stipulation that liability is solidary, it is presumed has the right to full reimbursement from the principal debtor
the liability is merely joint, unless the nature of the obligation or debtors—HOWEVER, such is not the case
requires solidarity. The Court is likewise not convinced that the nature of the
Art. 1217 makes plain that the solidary debtor who effected obligation requires solidarity
the payment to the creditor may claim from his co-debtors o Even if the liability of Escaño et al. were merely joint, the
only the share which corresponds to each with the full relief and reimbursement of Ortigas arising from his
interest for the payment already made. Such solidary debtor payment to PDCP would still be accomplished through
will not be able to recover from the co-debtors the full complete execution of such judgment
amount already paid to the creditor, because the right to
recovery extends only to the proportional share of the other Discussion on suretyship vis-à-vis solidary obligation
co-debtors, and not as to the particular proportional share of Art. 2047 provides for the definition of “surety”
the solidary debtor who already paid. In contrast, even as o “By guaranty a person, called the guarantor, binds
the surety is solidarily bound with the principal debtor to the himself to the creditor to fulfill the obligation of the
creditor, the surety who does pay the creditor has the right principal debtor in case the latter should fail to do so. If
to recover the full amount paid, and not just any proportional a person binds himself solidarily with the principal
share, from the principal debtor. Such right to full debtor, the provisions of Section 4, Chapter 3, Title I of
reimbursement falls within the other rights, actions and this Book shall be observed. In such case the
benefits which pertain to the surety by reason of the contract is called a suretyship.”
subsidiary obligation assumed by the surety. A suretyship requires a principal debtor to whom the surety
is solidarily bound by way of an ancillary obligation of
segregate identity from the obligation between the principal
Brief Facts: debtor and the creditor
Escaño, Silos, and Matti, executed an Undertaking whereby they o The suretyship does bind the surety to the creditor,
designated themselves as sureties of Ortigas et al. who in turn inasmuch as the latter is vested with the right to
guaranteed the loan obligation of Falcon from PDCP. Falcon proceed against the former to collect the credit in lieu of
defaulted in the payment of its obligation prompting PDCP to file proceeding against the principal debtor for the same
a complaint for collection of a sum of money against Escaño et obligation
al. (sureties) and Ortigas et al. (principal obligors). Ortigas o There is also a legal tie created between the surety
amicably settled with PDCP, paying P1.3M as his share in the and the principal debtor to which the creditor is not privy to
o The moment the surety fully answers to the creditor for
obligation. He now files a complaint against Escaño et al. to
the obligation created by the principal debtor, such
reimburse him of what he paid.
obligation is extinguished
o Surety may seek reimbursement from the principal
ISSUE:
WON Escaño and Silos bound themselves to be solidarily liable debtor for the amount paid, for the surety does in fact
become subrogated to all the rights and remedies of the
under the 1982 Undertaking (NO; JOINTLY ONLY)
creditor
Suretyship vs. Solidary Obligation
RATIO: No. Escaño and Silos are merely jointly liable as the
o Dr. Tolentino: A surety, outside of the liability he
Undertaking did not provide for express solidarity. The
assumes to pay the debt before the property of the
nature of the obligation likewise does not require solidarity.
principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him
Art. 1207 CC: “there is solidary liability only when the
by reason of the fiansa; while a solidary co-debtor has
obligation expressly so states, or when the law or the nature
no other rights than those bestowed upon him in
of the obligation requires solidarity”
Section 4, Chapter 3, Title 1, Book IV of the CC
Art. 1210 CC: “the indivisibility of an obligation does not
o In the case of joint several debtors, Art. 1217 makes
necessarily give rise to solidarity, nor does solidarity itself
plain that the solidary debtor who effected the payment
imply indivisibility”
to the creditor may claim from his co-debtors only the
Absent any express stipulation for solidarity, the
share which corresponds to each with the interest for
presumption is that the liability is JOINT
the payment already made

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Such solidary debtor will not be able to recover Art. 2087 It is also of the essence of these contracts that when
from the co-debtors the full amount already paid to the principal obligation becomes due, the things in which the
the creditor, because the right to recovery extends pledge or mortgage consists may be alienated for the payment
only to the proportional share of the other co- to the creditor. (1858)
debtors, and not as to the particular proportional
share of the solidary debtor who already paid Security transactions constituted to secure the fulfillment of
a principal obligation
In contrast, even as the surety is solidarily bound with Unlike guaranty and surety, a pledge and mortgage are real
the principal debtor to the creditor, the surety who does security transactions
pay the creditor has the right to recover the full amount Essence: when the principal obligation becomes due, the
paid, and not just any proportional share, from the property pledged or mortgaged (the collateral) may be
principal debtor. Such right to full reimbursement falls alienated for purposes of payment to the creditor of the
within the other rights, actions and benefits which principal obligation
pertain to the surety by reason of the subsidiary It is essential that the pledgor or mortgagor be the absolute
obligation assumed by the surety owner of the collateral and that it have the free disposal of
The right to full reimbursement by the surety comes from the property; or that it be legally authorized to constitute the
Art. 2066 which assures that “the guarantor who pays for a pledge or mortgage, otherwise the same is void
debtor must be indemnified by the latter.” Further, Art. 2067 A pledge or mortgage is void and ineffective if it were
establishes that “the guarantor who pays is subrogated by constituted over future property
virtue thereof to all the rights which the creditor had against However, the law allows third persons, which are not parties
the debtor” to the principal obligation, to secure the latter by pledging or
Both articles pertain to guarantors mortgaging their own property
However, the reference in the second paragraph of Art.
Pledgo or mortgagor remains the owner of the collateral; no
2047 to the provisions of Sec. 4, Chapter 3, Title 1,
title passes to the creditor
Book IV of the CC, on solidary obligations does not
If there may have been delivery of the collateral, the delivery
mean that suretyship is withdrawn from the applicable
is only to secure the fulfillment of the principal obligation and
provisions governing guaranty
does not empower the creditor to convey the collateral in
For if that were not the implication, there would be no
favor of another person
material difference between the surety as defined under
Art. 2047 and the joint and several debtors, for both
Essential Elements of Pledge and Mortgage
classes of obligors would be governed by exactly the
That they be constituted to SECURE the fulfillment of a
same rules and limitations
principal obligation
That the pledgor or mortgagor be the ABSOLUTE OWNER
DISPOSITIVE: Escaño, Silos, and Matti JOINTLY liable to
of the thing pledged or mortgaged
Ortigas for P1.3M
That the persons constituting the pledge or mortgage have
the FREE DISPOSAL of their property, and in the absence
VI. PLEDGE AND MORTGAGE
thereof, that they be LEGALLY AUTHORIZED for the
purpose
A. General Concepts
Collateral may be ALIENATED AS PAYMENT of the
principal obligation
Art. 2085 The following requisites are essential to the contracts
of pledge and mortgage: Essence of Pledge and Mortgage (Art. 2087): When the
principal obligation becomes due, the thing pledged or
That they be constituted to secure the fulfillment of a
mortgaged may be alientated for the payment to the creditor.
principal obligation;
Nature: Real security transaction.
That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged; Purpose: To secure the fultfillment of a principal obligation.

When Contracts of Pledge/Mortgage are Void:
the free disposal of their property, and in the absence thereof,
Pledgor or mortgagor is NOT the absolute owner of the
that they be legally authorized for the purpose.
thing pledged/mortgaged
Third persons who are not parties to the principal obligation may
Pledgor or mortgagor has NO free disposal of the property
secure the latter by pledging or mortgaging their own property.
In the absence of right of free disposition, pledgor or
(1857) mortgagor is not legally authorized to constitute the
pledge/mortgage
Pledge/mortgage constituted over future property

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Who may constitute the pledge/mortgage? C. Contract to Pledge or to Mortgage
Principal debtor
Third persons (third party pledgers/third party mortgagors) Art. 2092 A promise to constitute a pledge or mortgage gives
rise only to a personal action between the contracting parties,
Who owns the thing pledged/mortgaged? Pledgor/mortgagor, without prejudice to the criminal responsibility incurred by him
but they need not be the principal obligor who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some
The creditor does not have the right to dispose of the collateral burden, or by misrepresenting himself to be the owner of the
same. (1862)
Right to donate, sell, pledge or mortgage are attributes of
ownership. Since debtor remains the owner, creditor cannot A promise to constitute a pledge or mortgage is a valid
dispose of the collateral. consensual contract.
B. Obligations Secured Contract to Pledge or Mortgage: Promise to constitute a

pledge or mortgage; it is a valid consensual contract
Art. 2086 The provisions of article 2052 are applicable to a
pledge or mortgage. (n) For what: specific performance to constitute the pledge or
mortgage
Art. 2052 A guaranty [pledge or mortgage] cannot exist without a
valid obligation. When liability arises:
When a person defrauds another by offering in pledge or
Nevertheless, a guaranty may be constituted to guarantee the mortgage as “unencumbered,” things which he knew were
performance of a voidable or an unenforceable contract. It may subject to some burden
also guarantee a natural obligation. (1824a) When a person misrepresents himself to be the owner of the
thing described above
Art. 2091 The contract of pledge or mortgage may secure all
D. Remedies of Pledgee and Mortgagee
kinds of obligations, be they pure or subject to a suspensive or
resolutory condition. (1861)
The creditor (the pledgee or mortgagee) may institute a
foreclosure, either to gain title, or to force a sale, in order to
As accessory obligations, the validity of a pledge and
satisfy the unpaid obligation secured by the collateral. A
mortgage is dependent on the existence of a valid principal
foreclosure is a legal proceeding to terminate a pledgor’s
obligation, whether the latter is voidable, unenforceable,
or mortgagor’s interest in the collateral
natural, pure, or conditional.
Generally, the contract and a statute may authorize a
The consideration of a pledge or mortgage is the very
power-of-sale foreclosure, or the sale of the collateral at a
consideration of the principal contract, from which they
non-judicial public sale by a public official, the creditor, or
receive their right, and without which they cannot exist as
trustee.
independent contracts.
If the principal obligation becomes due and the debtor
defaults, the pledgee or mortgagee may elect to do two
Pledge or Mortgage is an ACCESSORY OBLIGATION:
things:
Pledge or mortgage cannot exist without a valid obligation
o To foreclose the pledge or mortgage, in accordance
Validity dependent on existence of a VALID obligation
with its terms; or
CONSIDERATION in pledge and mortgage is the
Foreclosure: means/legal proceedings by which
consideration of principal contract property is ALIENATED for payment  governed
by the rules depending on the kind of
Pledge or Mortgage is a Guarantee to:
pledge/mortgage  look to the law that governs
Performance of voidable or unenforceable contract
the contract
Natural obligation
To elect and waive the security and bring an action for
specific performance to recover the indebtedness.
Pledge or Mortgage may secure ALL kinds of obligations: The remedies are available are alternative and not
cumulative, and the election of one remedy operates as a
Pure
waiver of the other.
Subject to suspensive condition
Subject to resolutory condition
Right to Election: Pledgee or mortgagee may pursue EITHER
Note: Obligation is at least not void of 2 remedies, but not both. Remedies available to pledgee or
mortgagee are ALTERNATIVE. Election of 1 operates as waiver
of another.

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E. Indivisibility of a Pledge or Mortgage Purpose of indivisibility: To protect the pledgee or
mortgagee
Art. 2089 A pledge or mortgage is indivisible, even though the
debt may be divided among the successors in interest of the When is Art. 2089 applicable? When the debtor or creditor has
debtor or of the creditor. several heirs
Therefore, the debtor's heir who has paid a part of the debt GR: There can be no release of any portion of the collateral
cannot ask for the proportionate extinguishment of the pledge or unless the loan has been fully paid
mortgage as long as the debt is not completely satisfied. No proportionate extinguishment of the pledge or mortgage
even if there is partial payment
Neither can the creditor's heir who received his share of the debt No partial foreclosure of only a portion of the collateral or a
return the pledge or cancel the mortgage, to the prejudice of the number of several properties pledged or mortgaged
other heirs who have not been paid. corresponding to the unpaid portion of the debt
From these provisions is excepted the case in which, there being XPN: When there are several things given in mortgage or pledge
several things given in mortgage or pledge, each one of them and each one of them guarantees only a determinate portion of
guarantees only a determinate portion of the credit. the credit
The debtor, in this case, shall have a right to the extinguishment F. Pactum Commissorium
of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied. (1860) Art. 2087 It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the
Art. 2090 The indivisibility of a pledge or mortgage is not pledge or mortgage consists may be alienated for the payment
affected by the fact that the debtors are not solidarily liable. (n) to the creditor. (1858)
Indivisibility of a pledge or mortgage is understood in the Art. 2088 The creditor cannot appropriate the things given by
sense that each and every parcel of the collateral answers way of pledge or mortgage, or dispose of them. Any stipulation
for the totality of the debt. to the contrary is null and void. (1859a)
It proscribes the foreclosure of only a portion of the
collateral or a number of the several properties pledged or The essence of a pledge or mortgage is that when the
mortgaged corresponding to the unpaid portion of the debt debtor defaults in the fulfillment of the obligation, the
where before the foreclosure proceedings the debtor collateral may be alienated for purposes of payment to the
partially paid the total outstanding obligation. creditor. However, the law requires resort to a legal
A debtor who has partially fulfilled the obligation/ paid a part proceeding (foreclosure) to terminate the debtor’s (pledger
of the debt cannot ask for the proportionate extinguishment or mortgagor) ownership of the collateral.
of the pledge or mortgage as long as the debt is not A stipulation that allows the creditor to appropriate or
completely satisfied. otherwise dispose of the collateral, in contravention of the
Intended for the protection of the pledgee and provisions of foreclosure, is considered a pactum
mortgagee, as it refers to the release of the pledge or commissorium or pacto comisorio, and is null and void.
mortgage which secures the satisfaction of the For there to be a case of pactum commissorium, it is first
indebtedness and naturally presupposes that the pledge or necessary that a pledge or mortgage does exist and is valid.
mortgage exists. No pledge or mortgage, no pactum commissorium.
But Art. 2089 presupposes several heirs of the debtor or
creditor and does not apply in the absence of such 1. Elements
stipulation. a. There is property pledged or mortgaged (collateral) by
way of security for the payment of the principal
Doctrine of Indivisibility of Pledge or Mortgage: Each and obligation, and
every parcel of the collateral answers for the totality of the debt There is a stipulation for automatic appropriation by the
creditor of the collateral in case of non-payment of the
Indivisibility applies even if the debtors are NOT solidarily principal obligation within the stipulated period.
liable
Once the pledge or mortgage is extinguished by a complete A case of pactum commissorrum is null and void for being
foreclosure, the doctrine of indivisibility ceases to apply contrary to law and public policy, as it contravenes the
because with the full payment of the debt, there is nothing express prohibition stated in Art. 2088. [Editor’s Note]
more to secure When the debtor defaults, the creditor is merely entitled to
forecloses, but he is not authorized to appropriate the
collateral in order to recover the amount due.
!
Nevertheless, a pledger or mortgageor may validly sell the Aforementioned provision is actually a standard condition in
collateral to the pledgee or mortgagee for the amount of the mortgage contracts and is in conformity with Art. 2087.
debt, when the latter becomes due, if the parties stipulate HOWEVER, DBP exceeded the authority vested with it
upon the sale, or mere promise to sell, of the collateral under said condition when it appropriated the rights without
should the obligation secured by it not be complied with in foreclosure proceedings. Condition No. 12 does not provide
time, stipulating the conditions of the alienation; that default would operate to vest DBP ownership of the
leasehold rights of Cuba.
DBP’s act of appropriating was violative of Art. 2088, which
2. Effect on Pledge or Mortgage forbids a creditor from appropriating, or disposing of, the
thing given as security for the payment of a debt.
The nullity of the pactum commissorium does not Estoppel could also not be used as defense by DBP as
substantially affect the validity of the contract of pledge or estoppel cannot give validity to an at that is prohibited by
mortgage, and it subsists although the parties have not law or against public policy.
agreed on the manner by which the creditor shall recover its Instead of taking ownership upon default, DBP should have
credit. foreclosed the mortgage.
In such cases, the provisions of the law on foreclosure sale
shall apply. DISPOSITIVE: CA reversed. Remanded to Trial Court
DBP v. CA (1998) – Davide, J. DBP v. CA

Petitioner: Development Bank of the Philippines There is a valid stipulation, but DBP did not follow the stipulation
Respondents: Court of Appeals; Lydia Cuba
Concept: Pactum Commissorium Natalia P. Bustamante vs. Spouses Rodito F. Rosel and Normal
Rosel—Pardo, J.
Doctrine: Petitioner: Natalia P. Bustamante
For a mortgage to be considered as pactum commissorium, thus Respondents: Rodito F. Rosel and Norma A. Rosel (Spouses
void, the two requisites must be present: (1) that there should be Rosel)
a property mortgaged by way of security for the payment of the Concept: Pactum Commissorium
principal obligation; and (2) that there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged. Doctrine:
The elements of pactum commissorium are as follows: 1) there
Brief facts: should be a property mortgaged by way of security for the
Cuba’s loan from DBP was secured by two deeds of assignment payment of the principal obligation, and 2) there should be a
over her fishpond leasehold rights granted by the government. stipulation for automatic appropriation by the creditor of the thing
When she defaulted on her payments, DBP appropriated said mortgaged in case of non-payment of the principal obligation
rights without foreclosure proceedings and sold it in a public within the stipulated period.
bidding. Cuba contends that this violates the prohibition on
pactum commissorium provided in Art. 2088 Brief Facts:
The Bustamantes borrowed money from the Rosels. The loan
ISSUE: was secured by collateral (land). It was stipulated that in case of
WON this was a case of pactum commisorium (NO) non-payment, the Rosels could purchase the land, with the
unpaid principal and interest considered as downpayment.
RATIO: NO. The elements of pactum commissorium are
missing. ISSUE:
Elements of pactum commissorium Whether or not the spouses Rosel had the right to enforce the
o There should be a property mortgaged by way of sale of the collateral. No.
security for the payment of the principal obligation
o There should be a stipulation for automatic appropriation RATIO: No, the spouses Rosel had no right to enforce the
by the creditor of the thing mortgaged in case of non- sale of the collateral.
payment of the principal obligation within the stipulated SC: The sale of the collateral is an obligation with a
period. suspensive condition. It is dependent upon the happening of
Condition No. 12 did not provide that the ownership over an event, without which the obligation to sell does not arise.
rights would automatically pass to DBP upon default; it Since the event did not occur, the spouses Rosel had no
merely provided for the appointment of DBP as attorney-in- right to demand the sale.
fact with authority, among other things, to sell or otherwise o Furthermore, while the Court acknowledges the principle
dispose of the said rights, in case of default, and to apply of freedom to contract, contractual provisions must not
the proceeds to the payment of the loan. be contrary to law, morals, good customs, public order,
or public policy.

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A scrutiny of the stipulation of the parties reveals the subtle Roban executed several agreements - dacion in payment
intention of the spouses Rosel to acquire the property wherein spouses Ong assigned their mortgaged properties to
given as security for the loan. This is embraced Roban to settle their total obligation and Memorandum of
in the concept of pactum commissorium, which is Agreement (MOA). Spouses On.g filed a complaint to declare
prohibited by law. the mortgage contract, dacion in payment agreement, and MOA
The elements of pactum commissorium are as follows: void. Spouses Ong allege that the dacion in payment agreement
there should be a property mortgaged by way of is pactum commissorium
security for the payment of the principal obligation, and
there should be a stipulation for automatic ISSUE:
appropriation by the creditor of the thing mortgaged in WON the dacion in payment agreement entered into by Spouses
case of non-payment of the principal obligation within Ong and Roban constitutes pactum commissorium (YES)
the stipulated period.
In Nakpil vs. Intermediate Appellate Court, the Supreme
Court said: RATIO: YES; the elements of pactum commissorium were
The arrangement entered into between the parties, present in the case
whereby Pulong Maulap was to be The Court found that the Memorandum of Agreement and
“considered sold to him (respondent) xxx in case Dacion in Payment constitute pactum commissorium, which
petitioner fails to reimburse Valdes, must then be is prohibited under Article 2088 of the Civil Code which
construed as tantamount to pactum commissorium provides that the creditor cannot appropriate the things
which is expressly prohibited by Art. 2088 of the given by way of pledge or mortgage, or dispose of them.
Civil Code. For, there was to be automatic Any stipulation to the contrary is null and void
appropriation of the property by Valdes in the The elements of pactum commissorium, which enables the
event of failure of petitioner to pay the value of the mortgagee to acquire ownership of the mortgaged property
advances. Thus, contrary to respondent’s without the need of any foreclosure proceedings, are: (1)
manifestation, all the elements of a pactum there should be a property mortgaged by way of security for
commissorium were present: there was a creditor- the payment of the principal obligation, and (2) there should
debtor relationship between the parties; the be a stipulation for automatic appropriation by the creditor of
property was used as security for the loan; and the thing mortgaged in case of non-payment of the principal
there was automatic appropriation by respondent obligation within the stipulated period.
of Pulong Maulap in case of default of petitioner. In the case at bar, Memorandum of Agreement and the
In this case, the intent to appropariate the property given as Dacion in Payment contain no provisions for foreclosure
collateral in favor of the creditor appears to be evident, for proceedings nor redemption. Under the Memorandum of
the debtor is obliged to dispose of the collateral at the pre- Agreement, the failure by the Ong spouses to pay their debt
agreed consideration amounting to practically the same within the one-year period gives respondent the right to
amount as the loan. In effect, the creditor acquires the enforce the Dacion in Payment transferring to it ownership
collateral in the event of non-payment of the loan. This is of the properties covered by TCT No. 297840. Respondent,
within the concept of pactum commissorium. Such in effect, automatically acquires ownership of the properties
stipulation is void. upon Spouses Ong’s failure to pay their debt within the
stipulated period.
DISPOSITVE: Motion for reconsideration granted. In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.
Bustamante v. Rosel Here, the alienation of the properties was by way of security,
To be a valid stipulation, it should have a separate consideration and not by way of satisfying the debt. The Dacion in
apart from the purchase price. Payment did not extinguish Spouses Ong’s obligation to
Roban. On the contrary, under the Memorandum of
Ong v Roban (2008) – Carpio-Morales, J. Agreement executed on the same day as the Dacion in
Petitioner: Wilfredo N. Ong and Edna Shiela Paguio-Ong Payment, petitioners had to execute a promissory note for
Respondents: Roban Lending Corporation P5, 916, 117.50 which they were to pay within one year
Concept: Pactum Commissorium
Doctrine: DISPOSITIVE: CA reversed
Lack of provisions for foreclosure proceedings may be evidence
of pactum commissorium Ong v. Roban
There was a valid dacion entered into, which extinguishes the
Brief Facts: obligation:
Sps. Ong obtained obtained several loans from respondent Debt due and demandable
Roban Lending Corporation. These loans were secured by real Default
estate mortgage on Spouses Ong‘s parcel of lands. Ong and

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G. Equitable Mortgage What quantum of evidence is needed to prove an
equitable mortgage? It may be proven in court by the
Art. 1602 The contract shall be presumed to be an equitable apparent vendor or vendor a retro to be one of a loan with
mortgage, in any of the following cases: mortgage through, as with any civil case, preponderance of
evidence. Parole evidence becomes competent and
When the price of a sale with right to repurchase is unusually admissible.
inadequate;
Presumption that there is an equitable mortgage:
When the vendor remains in possession as lessee or When the price of a sale with right to repurchase is
otherwise; unusually inadequate;
Not the true consideration; actually the loan
When upon or after the expiration of the right to repurchase When the vendor remains in possession as lessee or
another instrument extending the period of redemption or otherwise;
granting a new period is executed; Attribute of ownership
If ownership was transferred, possession would’v been
When the purchaser retains for himself a part of the purchase transferred
price; Be suspicious when attributes of ownership are divorced
from each other
When the vendor binds himself to pay the taxes on the thing When upon or after the expiration of the right to repurchase
sold; another instrument extending the period of redemption or
granting a new period is executed;
In any other case where it may be fairly inferred that the real Goes against the right of a vendee a retro
intention of the parties is that the transaction shall secure the Would normally want absolute title
payment of a debt or the performance of any other obligation. When the purchaser retains for himself a part of the
In any of the foregoing cases, any money, fruits, or other benefit purchase price;
to be received by the vendee as rent or otherwise shall be Essentially, an interest for the loan
considered as interest which shall be subject to the usury laws. When the vendor binds himself to pay the taxes on the thing
(n) sold;
Owner pays taxes
Art. 1603 In case of doubt, a contract purporting to be a sale Attribute of ownership
In any other case where it may be fairly inferred that the real
with right to repurchase shall be construed as an equitable
intention of the parties is that the transaction shall secure
mortgage. (n)
the payment of a debt or the performance of any other
obligation
Art. 1604 The provisions of article 1602 shall also apply to a
contract purporting to be an absolute sale. (n) Note: Equitable mortgage is not a type of mortgage
Art. 1605 In the cases referred to in articles 1602 and 1604, the
apparent vendor may ask for the reformation of the instrument.
(n)
Equitable mortgage: a contract, which, although lacking in

some formality, or form or words, or other requisites by a
statute, nevertheless reveals the intention of the parties to
charge property as security for a debt, but contains nothing
impossible or contrary to law.
Essential requisites of an equitable mortgage:
The parties entered into a contract denominated as a
contract of sale; and
Their true intention was to secure an existing debt by
way of mortgage.
Why does the law provide for equitable mortgages? It is
to prevent the circumvention of the laws on usury and the
prohibition against pactum commissórium. Pacto de retro
sales have been frequently used to conceal the true nature
of the contract, i.e., a loan secured by a mortgage.

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VII. PLEDGE B. Form of Pledge
A. General Concepts Art. 2096 A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do
Art. 2085 The following requisites are essential to the contracts not appear in a public instrument. (1865a)
of pledge and mortgage:
To bind third parties, a description of the collateral and the
That they be constituted to secure the fulfillment of a date of the pledge must appear in a public instrument
The public instrument must be presented before a notary public.
thing pledged or mortgaged; C. Obligations Secured
That the persons constituting the pledge or mortgage have A pledge may exceptionally secure after-incurred obligation
the free disposal of their property, and in the absence thereof, so long as these debts that are yet to be contracted (or
that they be legally authorized for the purpose. future debts) are accurately described.
Dragnet clause: a stipulation specifically phrased to
Third persons who are not parties to the principal obligation may subsume all debts, whether past or future.
secure the latter by pledging or mortgaging their own property. o It is carefully and strictly construed, although the
(1857) pledge containing such provision is valid and legal.
The amounts stated as consideration in the pledge do not
Art. 2087 It is also of the essence of these contracts that when limit the amounts for which the pledge may stand as security
the principal obligation becomes due, the things in which the if from the four corners of the whole instrument the intent to
pledge or mortgage consists may be alienated for the payment secure future and other indebtedness can be gathered.
to the creditor. (1858) A pledge given to secure future debts is a continuing
security and is not discharged by repayment of the amount
Art. 2123 With regard to pawnshops and other establishments, named in the pledge, until the full amount of the principal
which are engaged in making loans secured by pledges, the obligation is paid.
special laws and regulations concerning them shall be observed,
D. Object of Pledge
and subsidiarily, the provisions of this Title. (1873a)
Pledge or conventional pledge (pignus in Roman law): a Art. 2094 All movables which are within commerce may be
real security transaction constituted to secure the fulfillment pledged, provided they are susceptible of possession. (1864)
of a principal obligation by the absolute owner (the pledgor)
of a movable property who has free disposal of the property, Art. 2095 Incorporeal rights, evidenced by negotiable
or in the absence thereof, is legally authorized for the instruments, bills of lading, shares of stock, bonds, warehouse
purpose, subjecting the pledged property (or collateral) to receipts and similar documents may also be pledged. The
the condition that when the principal obligation becomes instrument proving the right pledged shall be delivered to the
due, the collateral may be alienated for payment to the creditor, and if negotiable, must be indorsed. (n)
creditor.
How is pledge perfected? It is perfected by mere delivery Art. 416 The following things are deemed to be personal
of the movable property to the creditor (the pledge) or to a property:
third person.
In case of doubt as to whether a transaction is a pledge or Those movables susceptible of appropriation which are not
dación en pago, the presumption is that it is a pledge. included in the preceding article;
As with respect to whether or not a transaction is a pledge
or a dacion in payment, the presumption is that it is pledge Real property which by any special provision of law is
(lesser transmission of rights according to the Supreme considered as personalty;
Court; greater reciprocity of rights according to Ma’am)
Forces of nature which are brought under control by science;
and
In general, all things which can be transported from place to

place without impairment of the real property to which they are
fixed. (335a)

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Art. 417 The following are also considered as personal property: 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,
Obligations and actions which have for their object movables and with notification to the debtor and the owner of the thing
or demandable sums; and 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
Shares of stock of agricultural, commercial and industrial second one with the same formalities shall be held; and if at the
entities, although they may have real estate. (336a) second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged to
What can be pledged? Any of the following can be give an acquittance for his entire claim. (1872a)
pledged:
Movables within commerce and susceptible of Art. 2097 With the consent of the pledgee, the thing pledged
possession may be alienated by the pledgor or owner, subject to the pledge.
Incorporeal rights evidenced by: The ownership of the thing pledged is transmitted to the vendee
Negotiable instruments or transferee as soon as the pledgee consents to the alienation,
Bills of lading but the latter shall continue in possession. (n)
Shares of stock
Bonds It is essential that the pledgor be the absolute owner of the
Warehouse receipts collateral and that it have the free disposal of the property,
And similar documents or, in the absence of the right of free disposition, that it be
legally authorized to constitute the pledge.
E. Ownership of Collateral The pledgor continues to be the owner of the collateral
unless the following occur:
Art. 2103 Unless the thing pledged is expropriated, the debtor Expropriation of the collateral
continues to be the owner thereof. Sale by public auction under Articles 2108 and 2112
Voluntary sale under Article 2097
Nevertheless, the creditor may bring the actions which pertain to The pledgor’s right to alienate is restricted by the
the owner of the thing pledged in order to recover it from, or requirement imposed by law for the consent of the pledge to
defend it against a third person. (1869) the alienation. Ownership passes to buyer when pledge
grants consent, otherwise, the sale is invalid.
Art. 2102 If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he GR: Ownership remains with pledgor
receives with those which are owing him; but if none are owing XPN: Pledgor loses ownership when:
him, or insofar as the amount may exceed that which is due, he • Expropriation
shall apply it to the principal. Unless there is a stipulation to the • Public auction
contrary, the pledge shall extend to the interest and earnings of • Notarial sale
the right pledged. o Extrajudicial
o Foreclosure
In case of a pledge of animals, their offspring shall pertain to the • Voluntary sale
pledgor or owner of animals pledged, but shall be subject to the o If no consent, no transfer of ownership
pledge, if there is no stipulation to the contrary. (1868a) o Ownership only transferred by consent
Art. 2101 The pledgor has the same responsibility as a bailor in

commodatum in the case under article 1951. (n)
Art. 1951 The bailor who, knowing the flaws of the thing loaned,
does not advise the bailee of the same, shall be liable to the
latter for the damages which he may suffer by reason thereof.
(1752)
Art. 2108 If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale. The
proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged. (n)

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Estate of George Litton v. Mendoza (1988) – Gancayco, J. (2) That the pledgor or mortgagor be the absolute
Petitioner: Estate of George Littion owner of the thing pledged or mortgaged;
Respondent: Ciriaco B. Mendoza & CA (3) That the persons constituting the pledge or
Concept: Pledge: Ownership of Collateral mortgage have the free disposal of their property, and
in the absence thereof, that they be legally authorized
Doctrine: for the purpose.
In guaranteeing an obligation, the pledgor remains the owner of Third persons who are not parties to the principal
the collateral (what is pledged; in this case, the litigatious credit). obligation may secure the latter by pledging or
However, this right of ownership (and the right to alienate mortgaging their own property. (1857)
pursuant to said ownership) is not absolute because of the - Although Tan may validly alienate the litigatious credit
restriction provided by law under Art. 2097, NCC, requiring the pursuant to Art. 1634 (NCC), it should not be taken to mean
consent of the pledgee to the alienation. Ownership of said as a grant of an absolute right on the part of Tan to
collateral is only upon the granting of the consent by the indiscriminately dispose of the thing or the right given as
pledgee. Absent such consent, the sale (or assignment) is security by way of a compromise agreement
invalidated. o SC: This right should be read in consonance with Art.
2097, NCC
Brief Facts:  Art. 2097, NCC: With the consent of the
Tan brought an action against Mendoza for the collection of a pledgee, the thing pledged may be alienated by
sum of money in relation to the credit granted by Tan to the pledger or owner, subject to the pledge. The
facilitate the sale to the Bernals of textile materials. Pending the ownership of the thing pledged is transmitted to
resolution of the case, he assigned his litigatious credit (in the the vendee or transferee as soon as the pledgee
amount of P76,000) to George Litton, Sr. to secure his obligation consents to the alienation, but the latter shall
to Litton, Sr. Later, Tan and Mendoza entered into a compromise continue in possession.
agreement waiving all rights and actions (including the right  Although the pledgee/assignee, Litton, Sr., did not
assigned to Litton, Sr.) against each other and declaring ipso facto become the creditor of Mendoze, the
Mendoza absolved from liability. When the compromise pledge being valid, the incorporeal right assigned
agreement was approved, Mendoza sought to have the CA by Tan in favor of Litton can only be alienated with
resolution holding him liable set aside. due notice to and consent of Litton, Sr.
 To allow the assignor to dispose of or alienate the
ISSUES: security without notice and consent of the assignee
1. WON the compromise agreement was valid (NO) will render nugatory the very purpose of a pledge
2. WON Mendoza is estopped from invoking the compromise or an assignment of credit
agreement as a ground for dismissing the action against o Under Art. 1634, the debtor has a corresponding
him (YES) obligation to reimburse the assignee, Litton, Sr. for the
price he paid or for the value given as consideration for
RATIO: the deed of assignment; failing this, the alienation of
1. NO. The compromise agreement was invalid the litigated credit made by Tan in favor of Mendoza by
because the alienation of the security without way of a compromise agreement does not bind the
notice and consent of the assignee will render assignee, Litton (now, his Estate)
nugatory the very purpose of a pledge or  Art. 1634: When a credit or other incorporeal
assignment of credit. right in litigation is sold, the debtor shall have a
- Estate: Compromise agreement should be set aside right to extinguish it by reimbursing the assignee
because previous thereto, Tan (one of the compromising for the price the latter paid therefor, the judicial
parties) executed a deed of assignment in favor of George costs incurred by him, and the interest on the price
Litton, Sr. involving the same litigated credit from the day on which the same was paid. A credit
- The purpose of a compromise is to replace and terminate or other incorporeal right shall be considered in
controverted claims; courts encourage the same, and a litigation from the time the complaint concerning
compromise once approved by final order of the court has the same is answered. The debtor may exercise his
the force of res judicata between parties and should not be right within thirty days from the date the assignee
disturbed except for vices of consent or forgery demands payment from him.
The validity of the guaranty or pledge in favor of Litton has
not been questioned; it fulfills the requisites of a valid pledge
or mortgage, pursuant to Art. 2085, NCC
o Art. 2085. The following requisites are essential to the
contracts of pledge and mortgage:

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YES, Mendoza had knowledge of the deed of Art. 2067 The pledgorr who pays is subrogated by virtue thereof
assignment. Now, he is estopped from invoking the to all the rights which the creditor had against the debtor.
compromise agreement (which violates the
deed of assignment) from absolving himself of liability.
If the guarantor has compromised with the creditor, he cannot
Mendoza has been fully aware of the deed of assignment demand of the debtor more than what he has really paid. (1839)
executed by Tan in favor of Litton, Sr. because the deed
was duly submitted to the CFI Manila in a Civil Case where
Art. 2068 If the pledgor should pay without notifying the debtor,
C.B.M. Products is one of the defendants and the parties
the latter may enforce against him all the defenses which he
were notified through their counsel (Mendoza is the
could have set up against the creditor at the time the payment
President of C.B.M.)
was made. (1840)
His contention that he is not aware of the deed of
assignment deserves scant consideration from the Court
Art. 2069 If the debt was for a period and the pledgor paid it
The Estate has also pointed out that Mendoza (and his
counsel) were served with a copy of the deed of before it became due, he cannot demand reimbursement of the
assignment, which allegation remains uncontroverted debtor until the expiration of the period unless the payment has
SC: Mendoza is now estopped from entering into a been ratified by the debtor. (1841a)
compromise agreement involving the same litigated credit
without notice to and consent of the assignee, especially Art. 2070 If the pledgor has paid without notifying the debtor,
because no reimbursement was made in favor of Litton and the latter not being aware of the payment, repeats the
Mendoza acted in bad faith and in connivance with payment, the former has no remedy whatever against the debtor,
assignor Tan in entering into the compromise but only against the creditor. Nevertheless, in case of a
agreement to defraud Litton, Sr. gratuitous guaranty, if the pledgor was prevented by a fortuitous
event from advising the debtor of the payment, and the creditor
DISPOSITIVE: Petition is GRANTED.CA resolution is SET becomes insolvent, the debtor shall reimburse the pledgor for
ASIDE. the amount paid. (1842a)
Estate of Litton v. Mendoza Art. 2079 An extension granted to the debtor by the creditor
Principal Obligation: between Tan and Litton without the consent of the pledgor extinguishes the guaranty.
Security: Litigations credit The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
F. Rights of Third Party Pledgor extension of time referred to herein. (1851a)
Art. 2120 If a third party secures an obligation by pledging his Art. 2080 The pledgors, even though they be solidary, are
own movable property under the provisions of article 2085 he released from their obligation whenever by some act of the
shall have the same rights as a guarantor under articles 2066 to creditor they cannot be subrogated to the rights, mortgages, and
2070, and articles 2077 to 2081. He is not prejudiced by any preference of the latter. (1852)
waiver of defense by the principal obligor. (n)
Art. 2081 The pledgor may set up against the creditor all the
Art. 2117 Any third person who has any right in or to the thing defenses which pertain to the principal debtor and are inherent in
pledged may satisfy the principal obligation as soon as the latter the debt; but not those that are personal to the debtor. (1853)
becomes due and demandable. (n)
Although the principal debtor may be the pledgor, the law
Art. 2066 The pledgor who pays for a debtor must be allows third persons (or third party pledgors), which are not
indemnified by the latter. parties to the principal obligation, to secure the latter by
pledging their own property.
The indemnity comprises: Third party pledgor: one who is not a party to the principal
The total amount of the debt; obligation but secures the latter by pledging his own
property.
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;
The expenses incurred by the guarantor after having notified

the debtor that payment had been demanded of him;
Damages, if they are due. (1838a)

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G. Right to Possession Art. 2104 The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should misuse
Art. 2093 In addition to the requisites prescribed in article 2085, the thing in any other way, the owner may ask that it be judicially
it is necessary, in order to constitute the contract of pledge, that or extrajudicially deposited. When the preservation of the thing
the thing pledged be placed in the possession of the creditor, or pledged requires its use, it must be used by the creditor but only
of a third person by common agreement. (1863) for that purpose. (1870a)
Art. 2110 If the thing pledged is returned by the pledgee to the Art. 2106 If through the negligence or wilful act of the pledgee,
pledgor or owner, the pledge is extinguished. Any stipulation to the thing pledged is in danger of being lost or impaired, the
the contrary shall be void. pledgor may require that it be deposited with a third person. (n)
If subsequent to the perfection of the pledge, the thing is in the Possession by the pledgee of the collateral constitutes the
possession of the pledgor or owner, there is a prima facie pledge.
presumption that the same has been returned by the pledgee. The right of retention is a means or device by which the
This same presumption exists if the thing pledged is in the pledgee is able to obtain payment of the principal obligation.
possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge. (n)
Severance of ownership and possession
The primary obligation of the pledgor is the delivery, i.e., the
formal act of transferring, or the giving or yielding of Logical rules provided by the Civil Code
possession or control, of the collateral.
A pledge is a real contract. Similar to rights involved in deposit
If the creditor returns the thing pledged, the pledge is
extinguished. 2. Right to Payment
Possession lies with the pledgee Art. 2102 If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he
No transfer of possession, no pledge 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
Pledgee must have possession shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and earnings of
1. Right of Retention the right pledged.
Art. 2098 The contract of pledge gives a right to the creditor to In case of a pledge of animals, their offspring shall pertain to the
retain the thing in his possession or in that of a third person to pledgor or owner of animals pledged, but shall be subject to the
whom it has been delivered, until the debt is paid. (1866a) pledge, if there is no stipulation to the contrary. (1868a)
Art. 2109 If the creditor is deceived on the substance or quality Art. 2118 If a credit which has been pledged becomes due
of the thing pledged, he may either claim another thing in its before it is redeemed, the pledgee may collect and receive the
stead, or demand immediate payment of the principal obligation. amount due. He shall apply the same to the payment of his
(n) claim, and deliver the surplus, should there be any, to the
pledgor. (n)
Art. 2099 The creditor shall take care of the thing pledged with
the diligence of a good father of a family; he has a right to the In case of certain types of collateral, Articles 2102 and 2118
reimbursement of the expenses made for its preservation, and is give the pledgee not only the right to possession but also
liable for its loss or deterioration, in conformity with the the right to payment of the principal obligation without the
provisions of this Code. (1867) need of a foreclosure sale.
Those mentioned in the said articles are used to
Art. 2100 The pledgee cannot deposit the thing pledged with a compensate for the interest, then to the principal. If the
principal is fully paid as a result, the pledge is extinguished.
third person, unless there is a stipulation authorizing him to do
If the collateral earns or produces fruits, income, dividends,
so.
or interests, the pledge, as a general rule, extends to the
interests and earnings.
The pledgee is responsible for the acts of his agents or
But the law allows the creditor to compensate what he
employees with respect to the thing pledged. (n)
receives as fruits, income, dividends or interests with the
interest owed under the principal obligation

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If no interest is due or if the amount received exceeds the The character it may assume determines its requisites and
interest due, then the creditor is allowed to apply the same effects, its regulation, and the capacity of the of the parties to
to the principal that is die execute it; in every case, the obligations between the
The result is the payment of the obligation assignor and assignee will depend upon the judicial relation
which is the basis of the assignment.
Manila Banking Corp. v. Teodoro, Jr. and Teodoro – Bidin, J.
Plaintiff-Appellee: The Manila Banking Corp. (MBC) RATIO
Defendant-Appellants: Anastacio Teodoro, Jr. and Grace Anna 1. No. The deed was merely a contract of security by way of
Teodoro pledge and not a mode of payment through dacion en
Concept: Pledge; Right to Possession; Right to Payment pago
Contracts: 3 Promissory Notes, and a “Deed of Assignment of The deed of assignment executed did not transfer ownership
Receivables” (later considered as one of pledge) over the receivables from the Teodoros to MBC.
o The deed provided that “it was for and in consideration of
Doctrine: certain credits, loans, overdrafts, and their credit
Even if the instrument allows for the full alienation of the title and accommodations in the sum of P10,000.00 extended to
rights, it may still be considered as a contract of pledge “if the appellants by appellee bank, and as security”
debt continues in existence and is not discharged by the o It was further stipulated that the deed shall act as a
transfer, and that accordingly, the use of the terms ordinarily continuing guaranty for future loans.
importing conveyance, of absolute ownership will not be given Teodoros: Deed contained terms that they “remise, release
that effect in such a transaction if they are also commonly used and quitclaim” their rights, title and interest in favor of MBC.
in pledges and mortgages and therefore do not unqualifiedly Hence it should be considered payment and not merely
indicate a transfer of absolute ownership, in the absence of clear security/guaranty.
and ambiguous language or other circumstances excluding an SC: Character of the transaction is determined not by
intent to pledge.” language but by intention.
o Lopez v. CA, quoting AmJur: “…even though a transfer, if
Brief Facts: regarded by itself, appears to have been absolute, its
Initially, the Teodoros and MBC entered into an agreement object and character might still be qualified and explained
where the Teodoros assigned its title and rights over credit by a contemporaneous writing declaring it to have been a
against EEA (now PFC) to MBC, in order to be able to make deposit of the property as collateral security. It has been
loans from the MBC. Two years later, the Teodoros made such said that a transfer of property by the debtor to a creditor,
loans, as evidenced by promissory notes. When the Teodoros even if sufficient on its face to make an absolute
failed to pay, MBC tried to collect money from the PFC. When it conveyance, should be treated as a pledge if the debt
failed, MBC went after the Teodoros. Now the Teodoros are continues in existence and is not discharged by the
claiming that by the virtue of the assignment of credit, their transfer, and that accordingly, the use of the terms
obligation had been extinguished. ordinarily importing conveyance, of absolute ownership
will not be given that effect in such a transaction if they
ISSUES: are also commonly used in pledges and mortgages and
1. WON the assignment of the amounts receivables has the therefore do not unqualifiedly indicate a transfer of
effect of payment of all the loans evidenced by the 3 absolute ownership, in the absence of clear and
promissory notes ambiguous language or other circumstances excluding an
2. WON MBC must first exhaust all legal remedies against the intent to pledge.”
Phil. Fisheries Commission before it can proceed Also, it cannot be dacion en pago because at the time the
deed was executed (1964), the loans were not in existence
Obiter: Assignment of Credit yet, which would only have been contracted two years later
An assignment of credit is an agreement by virtue of which after the execution of the deed (1966).
the owner of a credit, known as the assignor, by a legal o Even if the deed were considered to be a form of
cause, such as sale, dation in payment, exchange or payment, there was no obligation to be extinguished yet. o
donation, and without the need of the consent of the debtor, Moreover, it is imperative that the deed should have stated
transfers his credit and its accessory rights to another, known expressly and unequivocally that it was executed in order to
as the assignee, who acquires the power to enforce it to the extinguish an existing obligation, for it do so, or that the old
same extent as the assignor could have enforced it against and new obligations be, on every point,
the debtor. incompatible with each other.
It may be in the form of a sale but may also be a dacion en Intent reveals that the deed was for security and not for
pago (it is made in order to obtain release from one’s debt by payment.
o In cases where there is doubt as to whether a transaction
assigning to the creditor a credit which he has against a third
person), or even a donation. It may also be done by way of is a pledge or dacion en pago, the presumption is in favor
of pledge, there being lesser transmission of rights.
guaranty.

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2. No. MBC need not have exhausted all legal remedies Though the said deed of assignment by way of security
against the Phil. Fisheries Commission. avoids the necessity of going through public
The obligation of the Teodoros not having been extinguished sale/foreclosure imposed by the prohibition on pactum
yet by the deed of assignment, they remain as the principal commisorium, by, in effect, placing the sale of the
debtors and not guarantors. collateral up front.
The deed merely guarantees the obligation and does not Had the terms that the deed was also executed as a security
make them guarantors. arrangement, then the deed would have taken effect only as
o Hence, they cannot avail of the benefit of excussion. complete alienation of rights and would have become a
The essence of pledge is that when the principal obligation mode of payment/dacion en pago, as the Teodoros have
becomes due, the things in which the pledge consists may be been contending.
alienated for payment to the creditor (Art. 2087). In order that an absolute conveyance of title to the credits
o The Teodoros being the principal debtors and the being assigned be treated or qualified as a security,
pledgors, MBC may resort to them directly. language to such effect must be found in the document itself.
MBC did try to collect the amounts receivable from the PFC
but had to course it to the Office of the President, which It should also be noted that the deed in question in this case
denied their claim. Hence the deed of assignment acting as a simply follows a form in standard use in commercial banking.
guarantee for the loan, became worthless. It is only proper
thereafter that the Teodoros settle their accounts, given the Manila Banking v. Teodoro
repeated demands for payment made by MBC. No point in going after the security because now defunct.
DISPOSITIVE: Appeal is DISMISSED for lack of merit. Chu v. CA (1989) – Grino-Aquino, J.

Petitioners: Victoria Yau Chu and husband Michael Chu
CONCURRING: Feliciano, J. Respondents: Family Savings Bank and/or CAMS Trading
While the ponencia stated that “the character of the Enterprise, Inc.
transactions between the parties is not… determined by the Concept: Pledge; Right to Possession; Right to Payment
language used in the document but by their intention,” it must
be noted that intent is determined, in the first instance, by the Doctrine:
very language used. Where the security for the debt is also money deposited in the
The language of the deed contains terms that intend to effect bank, it is not illegal for the creditor to encash the time deposit
a complete alienation of title and rights over the amounts certificates to pay the debtor’s overdue obligation, with the
receivable, from the Teodoros to MBC. latter’s consent.
o Terms like remise, release and quitclaim were used.
o The Teodoros were even to be considered as “agents” of Brief Facts:
the assignee (MBC) when it comes to the collection of the Mrs. Chu assigned her time deposit certificates to CAMS Trading
amounts. as collateral for cement she purchased from the latter, on credit.
However, while the form itself is sufficient to effect a When she defaulted in payment, CAMS Trading encashed the
complete alienation, these terms have to be read and time deposit certificates, with Mrs. Chu’s conformity. However,
considered with the rest of the other parts of the contract. after the encashment, Mrs. Chu demanded its restoration,
o In this case, there was other language evincing intent to arguing that the encashment is a pacto commissorio prohibited
pass the title on for the limited purpose of securing by law.
another principal obligation owed by the Teodoros to
MBC. ISSUES:
o The title does move between the parties but such title is WON the encashment of her time deposit certificates was a
defeasible being designed to collateralize the principal pacto commissorio and hence, must be annulled (NO)
obligation. WON the debts have been paid, as claimed by Mrs. Chu
A complete alienation of the title was made for the
(NO)
convenience of MBC.
o If the conveyance was not complete, MBC would have
been forced to treat it as one of pledge or of chattel
mortgage.
o MBC, if it wanted to proceed upon the security, would still
have needed to go through foreclosure proceedings, as
pactum commissorium is prohibited.
Pactum Commissorium - a mortgagee or pledgee is
prohibited from simply taking and appropriating the
personal property turned over to him as security for
the payment of a principal obligation

!
RATIO: RATIO:
1. No. The encashment is not a pacto commissorio and 1. YES. This is a case of Legal Compensation expressly
hence, valid provided for under Art. 1278-1279, NCC
A pacto commissorio is a provision for automatic Art. 1279 provides the requisites necessary for there to be
appropriation of the pledged or mortgaged property by the legal compensation:
creditor in payment of the loan upon its maturity. o That each one of the obligors be bound principally, and
The prohibition is intended to protect the obligor, pledgor, or that he be at the same time a principal creditor of the
mortgagor against being overreached by his creditor who other;
holds a pledge or mortgage over property whose value is o That both debts consist in a sum of money, or if the
much more than the debt things due are consumable, they be of the same kind,
Where the security for the debt is also money deposited in and also of the same quality if the latter has been
the bank, the amount of which is even less than the debt, it stated;
was not illegal for the creditor to encash the time deposit o That the two debts be due;
certificates to pay the debtor’s overdue obligation, with the o That they be liquidated and demandable;
latter’s consent o That over neither of them there be any retention or
controversy, commenced by third persons and
2. Payment was not proven by evidence communicated in due time to the debtor.
Mrs. Chu signed on July 18, 1980 a letter admitting her All of said requirements are met in the case at bar:
indebtedness to be in the sum of P404,500 Citibank was creditor of Sabeniano for her outstanding
She presented receipts for payments prior to July 18, 1980 loans, and at the same time, she was a creditor of the
There is no proof of payment made by her thereafter to bank, as far as her deposit account was concerned,
since bank deposits, should be considered as a simple
reduce or extinguish her debt
loan by the depositor to the banking institution.
DISPOSITIVE: Petition denied. Both debts consisted in sums of money.
At the time, all of her PNs had matured and became
Chu v. CA demandable, while her savings account was
Money for money demandable anytime.
No retention or controversy over the Ps and the deposit
Why will you bid for money? It is illogical to bid for cash. account.
Compensation takes place by operation of law; therefore,
Citibank, N.A. vs. Sabeniano (2006) – Chico-Nazario, J. even in the absence of an expressed authority from
Petitioners: Citibank; and Investors’ Finance Corporation Sabeniano, Citibank had the right to effect the partial
(FNCB) compensation or off-set her outstanding loans with the
Respondents: Modesta Sabeniano deposit account amounting to P31, 079.
Concept: Pledge
2. YES. Off-set was made pursuant to the Deed of
Doctrine: Assignment she executed in favor of Citibank
Under Art. 2118, credit which has been pledged, which becomes There can be no legal compensation with regards to the
money market placements as Sabeniano was the creditor
due before it is redeemed by the pledger, may be collected by
and FNCB Finance the debtor; while, as the to the
the pledgee and receive the amount of due.
outstanding loans, Citibank was the creditor and she was
Brief Facts: the debtor. The first requirement under Art. 1278 is not
Sabeniano obtained several loans from Citibank, totaling present.
P1.92M, secured by a Declaration of Pledge for her dollar What Citibank actually did was to exercise the rights to the
proceeds of her money market placements by virtue of the
accounts in Geneva, and Deeds of Assignment for her money
Deeds of Assignment executed in its favor.
market placements. When she defaulted, Citibank off-set her
As said deed was notarized, it carries with it the
balance with her account deposit in said bank, with the money
presumption that it was duly executed, and the burden fell to
market placements pursuant to the Deed of Assignment, and her
Sabeniano to present evidence of any defect or irregularity
dollar accounts per the Declaration of Pledge. Sabeniano filed a
complaint questioning the propriety of the ‘off-set’ made by the in its execution. This, however, she failed to do, as she
bank. presented nothing but her bare denial of its execution.
ISSUES: (LOOK AT FACT # 2) Citibank was only acting upon the

WON the off-set made by the bank is valid with regard to: authority granted it under the Deeds when it used the
Savings Account with Citibank PH (YES) proceeds of the PNs, paid by FNCB, to partly pay for her
Money Market Placements with FNCB Finance (YES) outstanding loans.
Dollar Accounts with Citibank- Geneva (NO)

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This was not a case of legal compensation or offset under doubts as to the authenticity and due execution of the
Art. 1278, but rather, it partly extinguished her obligations same. Said document had passed through several bank
through the application of the security given by her for her officers in the country and abroad, yet surprisingly and
loans. Although the said documents were entitled implausibly, no one noticed such a glaring mistake.
‘Deeds of Assignment,’ they were in reality more of a Sabeniano claimed that her signature was a forgery: In
pledge by Sabeniano to Citibank for her credit due from such a claim, the best evidence rule applies. Without
FNCB Finance by virtue of her money market the original document containing the alleged forged
placements. It was effected under Art. 2118, NCC. signature, one cannot make a definitive comparison
which would establish forgery. It also failed to present
The principal amounts and interests earned by the money any evidence to convince SC that it had exerted diligent
market placements, amounting to P1.02M has been applied efforts to secure the original copy; nor did it proffer the
to her outstanding loans. reason why Citibank-Geneva obstinately refused to give
it back. Thus, there is no justification to allow the
3. NO. presentation of a mere photocopy in lieu of the original.
Citibank: As there still remained a balance of P1.06M in her Without the Declaration of Pledge, Citibank had not
outstanding loan, it proceeded to applying Sabeniano’s authority to demand the remittance of her dollar
dollar accounts with Citibank-Geneva against her balance, accounts. It cannot effect legal compensation since
pursuant to a Declaration of Pledge supposedly executed by Citibank-Geneva is a distinct and separate entity. Thus, the
her in its favor. 1st requisite under Art. 1278 is again missing.
SC: The Declaration of Pledge is exceedingly suspicious Therefore, remittance of Sabeniano’s dollar accounts from
and irregular: Citibank-Geneva was illegal, and null and void. Citibank is
It is not notarized: SC would think that Citibank would obligated to return to respondent US$149,632.99.
take greater cautionary measures with the preparation Sabeniano still obligated to pay P1.06M for the balance of
and execution of said document because it involved the her outstanding loans.
deposits of Sabeniano with a Citibank branch in another
country. As it is not notarized, it could not enjoy the DISPOSITIVE: Petition partly granted.
same prima facie presumption of due execution that is
extended to notarized documents, and Citibank must Citibank v. Sabeniano
discharge the burden of proving due execution and This is the case on right to payment.
authenticity.
Bank was unable to establish the date when it was There were several loans. The remedy of Citibank:
actually executed: The photocopy that Citibank PH Savings account of Citibank:
submitted was undated. The original copy that Citibank- Legal Compensation
Geneva forwarded bore the note 24 September 1979. Arts. 1278-1279
Sabeniano, however, presented her passport and plane Money market placement with FNCB:
tickets to prove that she was out of the country on the Deed of Assignment
said date and could not have signed the pledge. As Art. 2118 – pledge
Citibank could not provide an explanation as to how Dollar deposits with Citibank Geneva:
and why the said date was written on the pledge, SC Declaration of Pledge
shall abide by the presumption that the written Invalid pledge
document is truly dated. If pledge were valid, Citibank could proceed against
Declaration of Pledge is irregularly filled-out: The Sabeniano under Art. 2118
pledge was in a standard printed form constituted in
favor of Citibank. However, in the space which should
have named the pledger, the name of Citibank was
typewritten, to wit –
“The pledge right herewith constituted shall secure all

claims which the Bank now has or in the future acquires
against Citibank N.A., Manila xxx”
The pledge, therefore, made no sense, the pledger and

pledgee being the same entity. Even if it was made as
an honest mistake, considering the value of such a
document, the mistake as to a significant detail in the
pledge could only be committed with gross
carelessness on the part of Citibank, and raised serious

!
H. Return of Collateral Art. 2119 If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a
Art. 2105 The debtor cannot ask for the return of the thing stipulation to the contrary. He may demand the sale of only as
pledged against the will of the creditor, unless and until he has many of the things as are necessary for the payment of the debt.
paid the debt and its interest, with expenses in a proper case. (n)
(1871)
1. Who May Bid
Art. 2107 If there are reasonable grounds to fear the destruction
or impairment of the thing pledged, without the fault of the Art. 2113 At the public auction, the pledgor or owner may bid.
pledgee, the pledgor may demand the return of the thing, upon He shall, moreover, have a better right if he should offer the
offering another thing in pledge, provided the latter is of the same terms as the highest bidder.
same kind as the former and not of inferior quality, and without
prejudice to the right of the pledgee under the provisions of the The pledgee may also bid, but his offer shall not be valid if he is
following article. the only bidder. (n)
The pledgee is bound to advise the pledgor, without delay, of Art. 2114 All bids at the public auction shall offer to pay the
any danger to the thing pledged. (n) purchase price at once. If any other bid is accepted, the pledgee
is deemed to have been received the purchase price, as far as
Art. 2108 If, without the fault of the pledgee, there is danger of the pledgor or owner is concerned. (n)
destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale. The 2. Effect of Notarial Sale
proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged. (n) a. Extinction of Principal Obligation
Art. 2115 The sale of the thing pledged shall extinguish the
Art. 2110 If the thing pledged is returned by the pledgee to the principal obligation, whether or not the proceeds of the sale are
pledgor or owner, the pledge is extinguished. Any stipulation to equal to the amount of the principal obligation, interest and
the contrary shall be void. 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,
If subsequent to the perfection of the pledge, the thing is in the unless it is otherwise agreed. If the price of the sale is less,
possession of the pledgor or owner, there is a prima facie neither shall the creditor be entitled to recover the deficiency,
presumption that the same has been returned by the pledgee. notwithstanding any stipulation to the contrary. (n)
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the Art. 2116 After the public auction, the pledgee shall promptly
pledgor or owner after the constitution of the pledge. (n) advise the pledgor or owner of the result thereof. (n)
Art. 2111 A statement in writing by the pledgee that he The essence of the pledge is its accessory
renounces or abandons the pledge is sufficient to extinguish the
pledge. For this purpose, neither the acceptance by the pledgor character b. Right of Redemption
or owner, nor the return of the thing pledged is necessary, the
pledgee becoming a depositary. (n) Statutory right granted to the owner of collateral to
repurchase the collateral even after confirmation of a
I. Foreclosure of Pledge foreclosure sale but within the periods prescribed by law
Effectively eliminates the lien created on the title to the
Art. 2112 The creditor to whom the credit has not been satisfied collateral
in due time, may proceed before a Notary Public to the sale of But the right of redemption doesn’t exist preternaturally, in
the thing pledged. This sale shall be made at a public auction, this jurisdiction, there is no statute that vests a right of
and with notification to the debtor and the owner of the thing redemption over personal property
pledged in a proper case, stating the amount for which the public
sale is to be held. If at the first auction the thing is not sold, a
second one with the same formalities shall be held; and if at the
second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged to
give an acquittance for his entire claim. (1872a)

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Paray and Espeleta vs. Rodriguez—Tiñgá actually extrajudicial in character. It did not direct the sale by
Petitioners: Bonifacio and Faustina Paray (Spouses Paray) and public auction, but instead upheld the right of the spouses
Vidal Espeleta (Espeleta) Paray to conduct such sale at their own volition.
Respondents: Abdulia C. Rodriguez, Miguela Jariol, Leonora While the Courrt of Appeals asserted that pledged property,
Nolasco, Dolores Soberano, Julia Generoso, Teresita R. necessarily personal in character, may be redeemed after
Natividad, Genoveva R. Soronio (Respondents) Concept: Right being sold at public auction, no law or jurisprudence
of Redemption (Pledge) establishes or affirms such right. The right to redeem does
not exist preternaturally. It is not predicated on proprietary
Doctrine: Things pledged are not subject to redemption. The right, instead, it is a bare statutory privilege to be exercised
buyer of the thing pledged automatically becomes the owner. only by persons named in the statute. The right to redeem
mortgaged real property sold extrajudicially is established by
Brief Facts: Pursuant to a court order allowing foreclosure, the RA 3135, but the said law does not extend the same benefit
spouses Paray foreclosed the pledged constituted to secure the to personal property. Act No. 1508, the Chattel Mortgage
loans of the respondents. Before the foreclosure sale, the law, governs the extrajudicial sale of mortgaged personal
respondents tried to tender payment, but the same was not property, but the statute is definitely silent on redemption of
accepted, and foreclosure was made. Respondents sued the personal property extrajudicially sold. Section 39 of the 1997
spouses Paray. CA ruled that the tender of payment must be Rules of Civil Procedure, relied upon by the Court of
treated as redemption following the policy of liberal Appeals, utters that the right of redemption applies to real
interpretation/construction of redemption rules. CA also said that properties, not personal properties, sold on execution.
the buyer of a foreclosed thing pledged does not become ipso
facto the owner of the thing. The Supreme Court, as early as 1927, rejected the
proposition that personal property may be covered by the
ISSUES: right of redemption. In Sibal vs. Valdez, the Court ruled that
Whether or not the consignation made by the respondents sugar cane crops are personal property and are not subject
extinguished their principal loan obligations and the pledge to the right of redemption.
contracts. (NO) Since the pledged shares are not subject to redemption, the
Whether or not the buyer at a public auction of pledged Court of Appeals had no business invoking and applying the
property ipso facto becomes the owner of the property sold. inexistent right of redemption.
(YES) If the principal obligation is satisfied, the pledges should be
Whether or not the procedure in the auction sale was faulty. terminated as well. Article 2098 of the Civil Code provides
(NO) the right of the creditor to retain possession of the pledged
items until the debt is paid. Article 2105 clarifies that the
RULING: debtor cannot ask for return of the thing pledged against the
1. No, the principal loan obligations and the pledge creditor’s will, unless and until he has paid the debt and its
contracts were not extinguish because the tender of interest. The Civil Code also establishes the right of the
payment and consignations could not be treated as pledgee to foreclose the pledge.
redemption and that the amounts tendered were The consignations did not discharge the respondents from
insufficient to cover the interests due. the loan and the pledge agreements. The amounts
consigned could answer for their respective principal loan
A pledge is an accessory contract, and is necessarily obligations, but were not sufficient to cover the interests due
discharged if the principal obligation is extinguished. on these loans, which were pegged at 5% per month.
The right of redemption involves payments made by the The respondents, save for Soberano, never challenged the
debtors after the foreclosure of their properties, and not interest rate in the Supreme Court. It was mentioned in the
those made or attempted to be made before the foreclosure RTC decision, but it was held that it was doubtful whether
sale. the interests were exorbitant or excessively usurious for
The sale in this case was an extrajudicial sale, specifically a usury has become legally inexistent. Because of the
notarial sale, as distinguished from a judicial sale as typified foregoing, the Court found no reason to disagree that in
by an execution sale. The foreclosure of a pledge occurs order that the consignation could have the effect of
extrajudicially, without intervention by the courts. All the extinguishing the pledge contracts, the amounts should
creditor needs to do, if the credit has not been satisfied in cover not just the principal loans, but also the interests
due time, is to proceed before a notary public to the sale of thereon.
the thing pledged. The spouses Paray’s right to proceed was also affirmed not
The fact the judgment of the RTC during the first attempt to only by law, but also by a final court judgment. Any ruling
foreclose read “giving due course to the foreclosure…” does enjoining them from exercising such right would have the
not mean that it was judicial in character. While it did effect of superseding a final and executor judgment.
authorize the sale by public auction, such declaration could
not detract from the fact that the sale so authorized is

!
The respondents may have saved themselves much trouble c. Right to Surplus or Deficiency
if they simply participated in the auction sale, as they are
permitted to bid themselves on their pledged properties. Art. 2115 The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
2. Yes, the buyer is ipso facto rendered the owner. equal to the amount of the principal obligation, interest and
It was argued that the buyer does not become ipso factor expenses in a proper case. If the price of the sale is more than
the owner of the pledged property sold because the pledgor said amount, the debtor shall not be entitled to the excess,
has a one-year period to redeem the property. However, unless it is otherwise agreed. If the price of the sale is less,
since the right to redeem is inexistent in pledge, the buyer, neither shall the creditor be entitled to recover the deficiency,
thus, automatically become the owner. notwithstanding any stipulation to the contrary. (n)
3. No, the auction was not tainted with irregularity. If stipulated in the contract of pledge, the debtor may
CA: Since there were several pledgeors, the shares should recover the excess of the price of the sale over the amount
have been sold in different lots identifying the owners of the principal obligation
thereof, and the amount of proceeds applied to their loans But by electing to sell the collateral, instead of suing on the
so that they would know how much to spend for redemption. principal obligation, the creditor waives any other remedy,
and must abide by the results of the foreclosure sale with no
SC: this was rendered non-issue by the fact that there can
right to recover any deficiency
be no right to redemption in the first place. There are no
provisions in the Rules of Court or in any law that require J. Legal Pledges
pledged properties to be sold at auction separately.
o It is the pledgee, not the pledgeor, who has the right to
Art. 2121 Pledges created by operation of law, such as those
choose which items should be sold if two or more things referred to in articles 546, 1731, and 1994, are governed by the
are pledged. There is no option given to pledgeors
foregoing articles on the possession, care and sale of the thing
under the Civil Code. There is also no prohibition that
as well as on the termination of the pledge. However, after
the pledgee of several different pledge contracts should
payment of the debt and expenses, the remainder of the price of
not auction all of the pledged properties on a single
the sale shall be delivered to the obligor. (n)
occasion or that the buyer should not pay a single
purchase price.
Pledges that arise by operation of law
o A different ruling, however, would obtain if at the auction,
Grants pledgee the right of retention over the property as a
a bidder expressed the desire to bid on a different
means or device by which the pledgee is able to obtain
number or portion of pledged shares. In such case,
payment of what may be due
there may lie the need to ascertain with particularity
which of the shares are covered by the bid price, since
1. Examples of Legal Pledges
not all shares may be sold at the auction and
correspondingly not all of the pledge contracts
Art. 1944 The bailee cannot retain the thing loaned on the
extinguished. The same situation would lie if one or
ground that the bailor owes him something, even though it may
some of the owners of the pledged property participated
in the auction, bidding only on their respective pledged be by reason of expenses. However, the bailee has a right of
property. retention for damages mentioned in article 1951. (1747a)
DISPOSITIVE: CA decision reversed. 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
Paray v. Rodriguez latter for the damages which he may suffer by reason thereof.
Right of redemption is a statutory right found in law. There is no (1752)
law for redemption of a pledge.
Art. 1994 The depositary may retain the thing in pledge until the
NCC provides no right of redemption. ROC are procedural rules, full payment of what may be due him by reason of the deposit.
not a law. (1780)
Art. 2004 The hotel-keeper has a right to retain the things

brought into the hotel by the guest, as a security for credits on
account of lodging, and supplies usually furnished to hotel
guests. (n)

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Art. 546 Necessary expenses shall be refunded to every VIII. CHATTEL MORTGAGE
possessor; but only the possessor in good faith may retain the
thing until he has been reimbursed therefor. A. General Concepts
Useful expenses shall be refunded only to the possessor in good Art. 2085 The following requisites are essential to the contracts
faith with the same right of retention, the person who has of pledge and mortgage:
defeated him in the possession having the option of refunding
the amount of the expenses or of paying the increase in value That they be constituted to secure the fulfillment of a
which the thing may have acquired by reason thereof. (453a) principal obligation;
Art. 1731 He who has executed work upon a movable has a That the pledgor or mortgagor be the absolute owner of the
right to retain it by way of pledge until he is paid. (1600) thing pledged or mortgaged;

Article 1731 Articulates the concept of a mechanic’s lien,
which is akin to a warehouseman’s lien, in that by way of the free disposal of their property, and in the absence thereof,
pledge, the repairman has the right to retain possession of that they be legally authorized for the purpose.
the movable until he is paid.
However, said right of retention is conditioned upon the
execution of work upon the movable secure the latter by pledging or mortgaging their own property.
Creation of mechanic’s lien does not depend upon non- (1857)
payment by the owner
Rather, the contractor creates his own lien by performing Art. 2087 It is also of the essence of these contracts that when
the work or furnishing the materials the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
2. Foreclosure of Legal Pledge to the creditor. (1858)
Art. 2122 A thing under a pledge by operation of law may be Art. 2140 By a chattel mortgage, personal property is recorded
sold only after demand of the amount for which the thing is in the Chattel Mortgage Register as a security for the
retained. The public auction shall take place within one month performance of an obligation. If the movable, instead of being
after such demand. If, without just grounds, the creditor does not recorded, is delivered to the creditor or a third person, the
cause the public sale to be held within such period, the debtor contract is a pledge and not a chattel mortgage. (n)
may require the return of the thing. (n)
Art. 2141 The provisions of this Code on pledge, insofar as they
Art. 2121 Pledges created by operation of law, such as those are not in conflict with the Chattel Mortgage Law shall be
referred to in articles 546, 1731, and 1994, are governed by the applicable to chattel mortgages. (n)
foregoing articles on the possession, care and sale of the thing
as well as on the termination of the pledge. However, after Chattel Mortgage
payment of the debt and expenses, the remainder of the price of Is a real security transaction constituted to secure the
the sale shall be delivered to the obligor. (n) fulfillment of a principal obligation by the absolute
owner (the mortgagor) of personal property who has
Demand is essential prior to the foreclosure of a legal free disposal of the property, and in the absence
pledge thereof, is legally authorized for the purpose
Public sale must be conducted within one month after Is perfected by the recording of the personal
demand property in the Chattel Mortgage Register as a security
Proceeds of public sale shall be used to pay debts and Subjects the collateral to the condition that when the
expenses, and the surplus to be delivered to the debtor principal obligation becomes due, the collateral may be
alienated for payment to the creditor (the mortgagee)
Art. 2140: adheres to the equitable concept of a chattel
mortgage; preserves the distinction between pledge and
chattel mortgage
Act of recording grants the chattel mortgagee the symbolic
possession of the collateral
In commercial transactions, it greatly facilitates the sale of
goods and merchandise; sales of merchandise would be
sluggish and insubstantial if a chattel mortgage did not
adequately protect sellers against the defaults and
delinquencies of buyers
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Old definition of Chattel Mortgage (repealed by the CC) In Cebu Contractors Consortium v CA, where the client
A conditional sale of personal property as security for the already owned the equipment, but needed additional
payment of a debt, or the performance of some other working capital and the finance company purchased
obligation specified therein, the condition being that the sale such equipment with the intention of leasing it back to
shall be void upon the seller paying the purchaser a sum of him, the lease agreement was simulated to disguise the
money or doing some other act named. If the condition is true transaction that was a loan with security.
performed according to the terms the mortgage and sale Intention of the parties was not to enable the client to
immediately becomes void, and the mortgagee is thereby acquire and use the equipment, but to extend to him a
divested of his title. loan.
Originally regarded as a conditional sale of personal Similarly, in Investors Finance Corporation v. CA, a borrower
property, similar to a pacto de retro sale came to Investors Finance Corporation (IFC) to secure a
loan with his heavy equipment and machinery as collateral.
PCI Leasing and Finance vs. Trojan Metal Industries—Carpio, The parties executed documents where IFC was made to
J. Petitioner: PCI Leasing and Finance Respondents: Trojan appear as the owner of the equipment and the borrower as
Metal Industries (TMI) the lessee. As consideration for the lease, the borrower-
Concept: Chattel Mortgage – General Concepts lessee was to pay monthly amortizations over a period of
36 months. The parties executed a lease agreement
Doctrine: covering various equipment described in the lease
Upon default, creditor-mortgagee was entitled to seize the schedules attached to the lease agreement. As security,
mortgaged properties, not as owner, but as creditor-mortgagee, the borrower-lessee also executed a continuing
for the purpose of foreclosing the chattel mortgage.
guaranty.
Brief Facts: In Investors Finance Corporation v. Court of Appeals, the
TMI came to PCI to seek a loan. Instead of extending a loan, transaction between the parties was held not to be a
PCI offered to buy various equipment TMI owned, in exchange true financial leasing because the intention of the
for P2.8M. Deeds of sale were executed and both parties parties was not to enable the borrower-lessee to
acquire and use the heavy equipment and machinery,
entered into a lease agreement.
which already belonged to him, but to extend to him a
ISSUE: loan to use as capital for his construction and logging
WON the sale with lease agreement the parties entered into was businesses. The Court held that the lease agreement
was simulated to disguise the true transaction between
a financial lease (NO).
the parties, which was a simple loan secured by heavy
RATIO: No, the sale with lease agreement was a simple loan equipment and machinery owned by the borrower-
secured by a chattel mortgage. lessee. The Court differentiated between a true
PCI: transaction between the parties was a sale and financial leasing and a loan with mortgage in the guise
leaseback financing arrangement, which is not contrary to of a lease. The Court said that financial leasing
law, morals, good customs, public order or public policy; contemplates the extension of credit to assist a buyer in
guaranty deposit should be forfeited in its favor, as provided acquiring movable property, which he can use and
in the lease agreement eventually own. If the movable property already
TMI: transfer of ownership to PCI was never the intention of belonged to the borrower-lessee, the transaction
the parties; guaranty deposit will only be forfeited if TMI between the parties, according to the Court, was a loan
returned the leased equipment to PCI before expiration of with mortgage in the guise of a lease.
the lease agreement. Since TMI never returned the lease Financial leasing contemplates the extension of credit to
property voluntarily, but through writ of replevin, the assist a buyer in acquiring movable property which he
guaranty deposit should not be forfeited. can use and eventually own.
SC: In a true financial leasing, whether under RA 5980 or The transaction between the parties was simply a loan
RA 8556, a finance company purchases on behalf of a secured by chattel mortgage. Thus upon TMI's default, PCI
was entitled to seize the mortgaged equipment, not as
cash-strapped lessee the equipment the latter wants to buy,
owner but as creditor-mortgagee for the purpose of
but, due to financial limitations, is incapable of doing so. The
foreclosing the chattel mortgage.
finance company then leases the equipment to the lessee in
exchange for the latter's periodic payment of a fixed amount PCI's sale to a third party of the mortgaged equipment and
of rental. collection of the proceeds of the sale can be deemed in the
o Here, TMI already owned the subject equipment before it exercise of its right to foreclose the chattel mortgage as
transacted with PCI. Therefore the transaction between creditor-mortagee.
the parties cannot be deemed to be in the nature of a
DISPOSITVE: CA affirmed with modification
financial leasing as defined in law.

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B. Form of Chattel Mortgage "(If the mortgage is given for the performance of some other
obligation aside from the payment of promissory notes, describe
Act No. 1508, Sec. 4 Validity. — A chattel mortgage shall not be correctly but concisely the obligation to be performed.)
valid against any person except the mortgagor, his executors or
administrators, unless the possession of the property is delivered "The conditions of this obligation are such that if the mortgagor,
to and retained by the mortgagee or unless the mortgage is his heirs, executors, or administrators shall well and truly
recorded in the office of the register of deeds of the province in perform the full obligation (or obligations) above stated according
which the mortgagor resides at the time of making the same, or, to the terms thereof, then this obligation shall be null and void.
if he resides without the Philippine Islands, in the province in
which the property is situated: Provided, however, That if the "Executed at the municipality of _________, in the Province of
property is situated in a different province from that in which the ________, this _____ day of 19_____
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 (Signature of mortgagor.)
for the purposes of this Act the city of Manila shall be deemed to
be a province. "In the presence of
Act No. 1508, Sec. 5 Form. — A chattel mortgage shall be "_________________

deemed to be sufficient when made substantially in accordance "_________________
with the following form, and shall be signed by the person or (Two witnesses sign here.)
persons executing the same, in the presence of two witnesses,
who shall sign the mortgage as witnesses to the execution FORM OF OATH.
thereof, and each mortgagor and mortgagee, or, in the absence "We severally swear that the foregoing mortgage is made for the
of the mortgagee, his agent or attorney, shall make and purpose of securing the obligation specified in the conditions
subscribe an affidavit in substance as hereinafter set forth, which thereof, and for no other purpose, and that the same is a just
affidavit, signed by the parties to the mortgage as above stated, and valid obligation, and one not entered into for the purpose of
and the certificate of the oath signed by the authority fraud."
administering the same, shall be appended to such mortgage
and recorded therewith. FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, personally
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT. appeared ____________, the parties who signed the foregoing
affidavit and made oath to the truth thereof before me.
"This mortgage made this ____ day of ______19____ by
_______________, a resident of the municipality of "_____________________________"
______________, Province of ____________, Philippine Islands (Notary public, justice of the peace, 1 or other officer, as the
mortgagor, to ____________, a resident of the municipality of case may be.)
___________, Province of ______________, Philippine Islands,
mortgagee, witnesseth: Act No. 1508, Sec. 6 Corporations. — When a corporation is a
party to such mortgage the affidavit required may be made and
"That the said mortgagor hereby conveys and mortgages to the subscribed by a director, trustee, cashier, treasurer, or manager
said mortgagee all of the following-described personal property thereof, or by a person authorized on the part of such
situated in the municipality of ______________, Province of corporation to make or to receive such mortgage. When a
____________ and now in the possession of said mortgagor, to partnership is a party to the mortgage the affidavit may be made
wit: and subscribed by one member thereof.
(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).

!
To be valid against any person: Affidavit of Good Faith
o Recorded in the office of the register of deeds: Unique requirement, required to be executed by the parties
Resident: Province in which the mortgagor resides under the Chattel Mortgage Law
at the time of making the same Affidavit states that the chattel mortgage is:
Non-resident: Province in which the property is Made solely for the purpose of securing the obligation
situated specified in the chattel mortgage, and
If property is situated in a different province from The principal obligation is a just and valid obligation, and
which the mortgagor resides: Both the province in one not entered into for the purpose of fraud
which the mortgagor resides and in which the
property is situated Increase or Extension of Chattel Mortgage
Form (see Sec. 5, Act No. 1508) Becomes a new chattel mortgage in itself
o Signed by the person or persons executing the same o Will take effect only from the date the same are made (not
In the presence of two witnesses, who shall sign as from original CM)
witnesses to the execution
o Each mortgagor and mortgagee, or, in the absence of Obligations Secured
the mortgagee, his agent or attorney, shall make and Unlike a pledge, can only cover obligations existing at the
subscribe an affidavit in substance, signed by the time the mortgage is constituted
parties Cannot secure after-incurred obligations even if these
o Certificate of oath signed by the authority future debts are accurately described
administering the same Cannot be made to secure a debt to be thereafter
o Appended to the mortgage and recorded contracted because the law provides that the parties must
When a corporation is a party: affidavit may be made and make oath that the debt is a just debt, honestly due and
subscribed by a director, trustee, cashier, treasurer, or owing from the mortgagor to the mortgagee
manager thereof, or by a person authorized An increase or an extension of the chattel mortgage
When a partnership is a party: affidavit may be made and
obligation becomes a new chattel mortgage in itself, and
subscribed by one member will take effect only from the date the same are made and
NOT from the date of the original chattel mortgage
Unrecorded Chattel Mortgage is not valid against any
person except: Contract to Mortgage
Mortgagor If it includes future debts is a binding commitment
Executor But chattel mortgage itself, is not perfected until after an
Administrator agreement covering the newly contracted debt is executed
Note: These 3 have the right to compel compliance wit hthe conformably with the form prescribed
formalities required by law. Refusal of the debtor to execute the agreement to cover the
after-incurred obligation may consist in an event of default of
C. Obligations Secured the contract to mortgage
o Remedy of foreclosure will only cover the debts existing
Act No. 1508, Sec. 5 Form. — xxx at the time of constitution of the contract of chattel
FORM OF OATH. mortgage
"We severally swear that the foregoing mortgage is made for the
purpose of securing the obligation specified in the conditions ACME Shoe, Rubber & Plastic Corp. v. CA (1996) – Vitug, J.
thereof, and for no other purpose, and that the same is a just Petitioner: Acme Shoe, Rubber & Plastic Corporation and Chua
and valid obligation, and one not entered into for the purpose of Pac
fraud." Respondent: CA, Producers bank of the Philippines and
Regional Sheriff of Caloocan City
FORM OF CERTIFICATE OF OATH. Concept: Chattel Mortgage: Obligations Secured
"At ___________, in the Province of _________, personally
appeared ____________, the parties who signed the foregoing Doctrine:
affidavit and made oath to the truth thereof before me. A chattel mortgage can only cover obligations existing at the
time the mortgage is constituted. A promise to include debts yet
"_____________________________" to be contracted can be a binding commitment that can be
(Notary public, justice of the peace (now municipal judge), or compelled upon, but the security itself does not come into
other officer, as the case may be.) existence until a new chattel mortgage is created or the old one
is amended conformably with the Chattel Mortgage Law.

!
Brief Facts: until after a chattel mortgage agreement covering the
Acme obtained a loan worth P3-M from Producers Bank, with newly contracted debt is executed either by concluding
Chua Pac executing a Chattel Mortgage Agreement to secure a fresh chattel mortgage or by amending the old
said loan. In the Agreement, there was a stipulation providing for contract conformably with the form prescribed by the
the mortgage securing subsequent/future loans. Later, Acme Chattel Mortgage Law (Act No. 1508)
obtained 2 more loans from Producers, fully paying the first and Refusal on the part of the borrower to execute the
defaulting in the second. The Bank applied for the extrajudicial agreement to cover the after-incurred obligation can
foreclosure of the mortgage, which was opposed by Acme. constitute an act of default on the pat of the borrower
(whereon the promise is written) BUT the remedy of
ISSUE: foreclosure can only cover the debts extant at the
WON Producers could validly foreclose the chattel mortgage time of constitution and during the life of the chattel
executed by Acme (NO) mortgage sought to be foreclosed
RATIO: NO, Producers could not validly foreclose the A chattel mortgage must comply substantially with the form
chattel mortgage because the chattel mortgage ceased to prescribed in the Chattel Mortgage Law
exist coincidentally with the payment of the P3-M loan. Affidavit of good faith (Sec. 5), but if not appended,
would still be valid between the parties
Contracts of security are either personal or real: Parties must execute an oath that “xxx(the) mortgage is
Contracts of personal security: the faithful made for the purpose of securing the obligation
performance of the obligation by the principal debtor is specified in the conditions thereof, and for no other
secured by the personal commitment of another purpose, and that the same is a just and valid
Guarantor secures the guaranty obligation, and one not entered into for the purpose of
Surety secures the suretyship fraud” – Civil Code by Aquino & Griño-Aquino
Contracts of real security: the fulfillment of the Debt referred to in the law is a current, not an obligation
that is yet merely contemplated
obligation is secured by an encumbrance of property
SC: The only obligation specified in the chattel mortgage
In pledge, the movable property is placed in the contract was the P3-M loan which Acme has fully paid  By
possession of the creditor virtue of Sec. 3 of the Chattel Mortgage Law, the payment of
In a chattel mortgage, a corresponding deed is the obligation rendered the chattel mortgage void or
executed substantially in the form prescribed by terminated
law Belgian Catholic Missionaries, Inc. v. Magallanes Press, Inc. et
In real estate mortgage, a public instrument is al.: “A mortgage that contains a stipulation in regard to
future advances in the credit will take effect only from the
executed encumbering the real property covered
date the same are made and not from the
In antichresis, a written instrument grants the
creditor the right to receive the fruits of an date of the mortgage.”
immovable property with the obligation to apply Since the 1978 mortgage ceased to exist coincidentally with
such fruits to the payment of interest, if owing, and the full payment of the P3-MM loan, there was no
thereafter to the principal of his credit longer any chattel mortgage that could cover the
In all the abovementioned, the essential condition new loans that were concluded thereafter
is that if the principal obligation becomes due and
DISPOSITIVE: Decisions of appellate court and the lower court
the debtor defaults, then the property encumbered
are set aside without prejudice to the appropriate legal recourse
can be alienated for the payment of the obligation,
by private respondent as may still be warranted as an unsecured
but that should the obligation be duly paid, then the
creditor. No costs.
contract is automatically extinguished proceeding
from the accessory character of the agreement
Acme Shoe v. CA
What would the remedy of Producers be to fix the CM? Remove
Once the obligation is complied with, the contract
the clause “without the necessity of executing a new contract”
of security becomes, ipso facto, null and void
to have valid contract to mortgage, and may include after-
While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as acquired properties
these future debts are accurately described, a chattel
mortgage, however, can only cover obligations existing at
the time the mortgage is constituted
A promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security
itself, however, does not come into existence or arise

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D. Object of Chattel Mortgage Makati Leasing and Finance Corp v. Wearever Textile Mills – De
Castro, J.
Art. 2124 Only the following property may be the object of a Petitioner: Makati Leasing and Finance Corp. (MLFC)
contract of mortgage: Respondents: Wearever Textile Mills Inc. (WTM) and Court of
Appeals
Immovables; Concept: Chattel Mortgage; Object of Chattel Mortgage
Alienable real rights in accordance with the laws, imposed Doctrine:

upon immovables. Parties may treat real property as personal property for a chattel
mortgage, as long as (1) they validly agree/consent to it, and (2)
Nevertheless, movables may be the object of a chattel no third persons are prejudiced by such an arrangement.
mortgage. (1874a)
Brief Facts:
When WTM defaulted on its obligation to MLFC, MLFC sought to
Art. 416 The following things are deemed to be personal
execute the deed of chattel mortgage (subject of which was an
property:
immobilized machine) securing the obligation. The CFI found for
Those movables susceptible of appropriation which are not MLFC and issued a writ of replevin. However, the CA reversed
the CFI and ruled that the immobilized machine is n invalid
included in the preceding article;
subject of the writ and of the chattel mortgage.
Real property which by any special provision of law is
ISSUES:
considered as personalty;
WON the machine may be the valid subject of the writ and
Forces of nature which are brought under control by science; the chattel mortgage (YES)
WON WTM is estopped from arguing that the machine is
and
realty (YES)
In general, all things which can be transported from place to
RATIO:
place without impairment of the real property to which they are
1. YES. The property was treated as personalty; hence,
fixed. (335a)
WTM is estopped to claim otherwise.
SC: Tumalad v. Vicencio is highly applicable in this case.
Art. 417 The following are also considered as personal property:
Tumalad v. Vicencio: “Although there is no specific statement
referring to the subject [real property] as personal property,
yet by ceding, selling or transferring a property by way of
Obligations and actions which have for their object movables
chattel mortgage defendants-appellants could only have
or demandable sums; and meant to convey the [real property] as chattel, or at least,
intended to treat the same as such, so that they should not
Shares of stock of agricultural, commercial and industrial
now be allowed to make an inconsistent stand by claiming
entities, although they may have real estate. (336a) otherwise.”
SC: There is no legal justification why the above case should
Act No. 1508, Sec. 2 All personal property shall be subject to not apply to the current case.
mortgage, agreeably to the provisions of this Act, and a o As long as parties to the contract validly agree and no
mortgage executed in pursuance thereof shall be termed chattel third persons are prejudiced, they may treat immobilized
mortgage. machinery, which is a real property, as personalty.
o Moreover, machinery, by its nature, is really a
GR: Movable/Personal properties are the object of a chattel movable/personalty and becomes immovable/realty only
mortgage. when it is immobilized by destination or purpose.
WTM: Tumalad does not apply because, in that case, the
EX: Jurisprudence provides that immovable/real properties may house treated as chattel was on a land that did not belong to
be the object of a chattel mortgage when (1) parties validly the owners of the house.
agree/consent to treat them as movable/personal properties, and o SC: Argument is untenable. The law makes no distinction
(2) no third persons are prejudiced by such an agreement. as to the ownership over the land on where the house is
(Makati Leasing and Finance Corp v. Wearever Textile Mills, built. Hence, no distinctions should be laid down.
citing Tumalad v. Vicencio). Standard Oil Co. of NY v. Jaramillo: Parties to a contract may
treat as personal property that which by nature would actually
be real property, as long as no interest of third parties would
be prejudiced thereby.

!
2. YES. WTM is estopped from claiming that machine is not Sec. 7 of Act 1508 (Chattel Mortgage Law) does NOT require
personal property a specific and thorough definition.
WTM: Never agreed nor represented that machine was The Reasonable Description Rule under the said provision
personal property. Was only required and dictated to sign the only requires that the description must enable the parties to
deed of chattel mortgage, which was in blank form at the time identify the collateral, after reasonable inquiry and
it was signed. investigation.
SC: Such allegation is not proven.
o Moreover, it would only be a ground for a voidable 2. After Acquired Properties
contract and not a contract void ab initio.
o No action for annulment was filed. Act No. 1508, Sec. 7 Descriptions of property. — The
o WTM actually benefitted from the deed as it was able to description of the mortgaged property shall be such as to enable
enter into financial accommodations with MLFC. the parties to the mortgage, or any other person, after
o Hence, it is estopped from taking a contrary position as to
reasonable inquiry and investigation, to identify the same.
the deed.
If the property mortgaged be large cattle," as defined by section
DISPOSITIVE: Petition granted. CA reversed and CFI affirmed. one of Act Numbered Eleven and forty-seven, (Now section 511
of the Administrative Code) and the amendments thereof, the
1. Reasonable Description Rule description of said property in the mortgage shall contain the
brands, class, sex, age, knots of radiated hair commonly known
Act No. 1508, Sec. 7 Descriptions of property. — The as remolinos, or cowlicks, and other marks of ownership as
description of the mortgaged property shall be such as to enable described and set forth in the certificate of ownership of said
the parties to the mortgage, or any other person, after animal or animals, together with the number and place of issue
reasonable inquiry and investigation, to identify the same. of such certificates of ownership.
If the property mortgaged be large cattle," as defined by section If growing crops be mortgaged the mortgage may contain an
one of Act Numbered Eleven and forty-seven, (Now section 511 agreement stipulating that the mortgagor binds himself properly
of the Administrative Code) and the amendments thereof, the to tend, care for and protect the crop while growing, and faithfully
description of said property in the mortgage shall contain the and without delay to harvest the same, and that in default of the
brands, class, sex, age, knots of radiated hair commonly known performance of such duties the mortgage may enter upon the
as remolinos, or cowlicks, and other marks of ownership as premises, take all the necessary measures for the protection of
described and set forth in the certificate of ownership of said said crop, and retain possession thereof and sell the same, and
animal or animals, together with the number and place of issue from the proceeds of such sale pay all expenses incurred in
of such certificates of ownership. caring for, harvesting, and selling the crop and the amount of the
indebtedness or obligation secured by the mortgage, and the
If growing crops be mortgaged the mortgage may contain an surplus thereof, if any shall be paid to the mortgagor or those
agreement stipulating that the mortgagor binds himself properly entitled to the same.
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 A chattel mortgage shall be deemed to cover only the property
performance of such duties the mortgage may enter upon the described therein and not like or substituted property thereafter
premises, take all the necessary measures for the protection of acquired by the mortgagor and placed in the same depository as
said crop, and retain possession thereof and sell the same, and the property originally mortgaged, anything in the mortgage to
from the proceeds of such sale pay all expenses incurred in the contrary notwithstanding.
caring for, harvesting, and selling the crop and the amount of the
indebtedness or obligation secured by the mortgage, and the
surplus thereof, if any shall be paid to the mortgagor or those
entitled to the same.
A chattel mortgage shall be deemed to cover only the property

described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository as
the property originally mortgaged, anything in the mortgage to
the contrary notwithstanding.

!
GR: A chattel mortgage will only cover the property described E. Ownership of Collateral
therein, and shall not cover property acquired after its execution.
It is essential that (1) the mortgagor be the absolute owner
EX: However, Sec. 7 allows for a stipulation in the chattel of the collateral, and (2) that the mortgagor have the free
mortgage that the mortgagor may sell the chattel that is covered disposal of the collateral OR, if it does not have such right to
by the mortgage, and is thereafter obligated to replace, renew or freely dispose of the collateral, be legally authorized to
substitute the sold chattel with other property thereafter constitute the mortgage.
acquired. Such provision is valid and binding and effectively A mortgagor retains the right to alienate the collateral.
widens the scope of a chattel mortgage to “after acquired However, such right is restrained by requirements imposed
properties.” by law: the mortgagor MUST obtain the consent of the
The purpose of allowing such a provision is to promote mortgagee to make such alienation.
economic and business transactions. o Otherwise, he shall be liable under RPC Art. 319, Par. 2
Had it not been allowed, it would have been impossible to (Sale or Pledge of Mortgaged Property)
constitute a chattel mortgage over, for example, a retail store,
the stocked goods of which are bought and sold frequently, SGS: While it is already established that failure to obtain consent
without requiring them to close down. This is contrary to the of the mortgagee with respect to the alienation will affect criminal
purpose of the Chattel Mortgage Law. liability, how does it affect the validity of the alienation (ex. sale)
It is only required that the chattel mortgage expressly to a third person?
stipulate that such “after acquired properties” are included
under the coverage of the chattel mortgage. Dy v. CA (1991) – Gutierrez, Jr., J
Petitioner: Perfecto Dy, Jr.
Exceptions: Respondent: Gelac Trading Inc. and Antonio Gonzales
Stipulation in a chattel mortgage authorizing the mortgagor Concept: Chattel mortgage; ownership of collateral
to sell the property and to replace, renew or substitute them
with other property Doctrine:
Based on jurisprudence only, not statute. Be careful The mortgagor who gave the property as security under a chattel
when using it. If you want to include after-acquired mortgage did not part with the ownership of the same. Hence,
property, the solution: there must be stipulation in the the mortgagor could validly alienate the property mortgaged but
mortgage to contract to the effect that will compel the sale can only bind the mortgagee if the same be done with the
mortgagor to enter into a NEW MORTGAGE latter’s consent.
CONTRACT each time (contract to mortgage)
Retail stores where property is constantly sold and Brief Facts:
substituted when there is stipulation to such effect Wilfredo purchased a tractor and truck through financing
Would be impossible to constitute a chattel mortgage extended by Libra Finance. He sold the tractor to his brother
on such stores without closing them, contrary to the Perfecto, who assumed the mortgage debt with the consent of
purpose for which the Chattel Mortgage Law was Libra. After the consummation of the sale through the execution
enacted. of a Deed of Absolute Sale in favor of perfecto, the tractor was
Purpose: promotion of business and economic seized by the provincial sheriff of Cebu to satisfy the judgment
development. debt of Wilfredo in a civil case filed against the latter by Gelac
Trading. Perfecto is now questioning the validity of the seizure of
Note: This is a case where jurisprudence amends the law. the tractor, claiming that he and not Wilfredo was the owner of
the same at the time it was taken into custody by the sheriff,
hence could not be levied upon to satisfy a judgment against
Wilfredo.
ISSUES:
WON Wilfredo had the right to alienate the tractor which
was mortgaged to Libra (YES) and WON the sale binds
Libra (YES)
Who was the owner of the tractor at the time it was seized
and levied by the sheriff (PERFECTO)
WON the sheriff validly levied upon the tractor for the
satisfaction of the judgment debt of Wilfredo (NO)

!
RATIO:
1. The mortgagor who gave the property as security 2. Perfecto is the owner at the time the tractor was seized
under a chattel mortgage did not part with the and levied as there has been constructive delivery to
ownership of the same. Hence, the mortgagor him before the execution of judgment by the sheriff
could validly alienate the property mortgaged but
the sale can only bind the mortgagee if the same - Actual delivery could not be made because the tractor was
be done with the latter’s consent. The written still in the possession of Libra pending the clearance of the
consent of Libra was obtained in this case check issued in payment for the loan
therefore, the sale and assumption of mortgage is - Libra was in possession of the tractor due to Wilfredo’s
binding not only between the brothers, but to Libra, as failure to pay the amortization as preliminary step to
mortgagee, as well foreclose
Service Specialists Inc. v. Intermediate Appellate Court As mortgagee, Libra has the right to foreclose upon
o Chattel mortgagor continues to be the owner of the default by the mortgagor
property thus, has the power to alienate the same The law implies that the mortgagee is entitled to
o However, he is under pain of penal liability (Article 319, possess the mortgaged property because possession is
par. 2 RPC1) to secure the consent of the mortgagee necessary in order to enable him to have the property
The instruments of mortgage are binding not only upon sold
parties executing them but also upon those who later, - However, there was constructive delivery to Perfecto upon
by purchase or otherwise, acquire the properties the execution of the Deed of Absolute Sale pursuant to
referred to therein Article 1498 CC and upon the consent or agreement of
The absence of the written consent of the mortgagee to Wilfredo and Perfecto when the thing sold cannot be
the sale affects not the validity of the sale, but only the immediately transferred to the possession of Perfecto
penal liability of the mortgagor and the binding effect of (Traditio Longa Manu under Art. 1499 CC) as the same was
such sale on the mortgagee under the Deed of Chattel pending release by Libra
Mortgage Article 1498. When the sale is made through a public
In a letter dated Aug. 27, 1979, Libra allowed Perfecto to instrument, the execution thereof shall be equivalent to
purchase the tractor and assume the mortgage debt of the delivery of the thing which is the object of the
Wilfredo therefore, the sale was binding between the contract, if from the deed the contrary does not appear
brothers and to Libra as well or cannot clearly be inferred.
While it is true that Wilfredo was not in actual possession Article 1499. The delivery of movable property may
and control of the tractor (the same being in the possession likewise be made by the mere consent or agreement of
and control of Libra as preliminary step to foreclosure) the contracting parties, if the thing sold cannot be
Wilfredo’s right of ownership was not divested from him transferred to the possession of the vendee at the time
upon his default of the sale, or if the latter already had it in his
Mortgaged property continues to belong to mortgagor possession for any other reason.
and the only remedy given to the mortgagee is to have - The consummation of the sale did not depend upon the
said property sold at public auction and proceeds of encashment of the check issued as payment of the loan to
the sale applied to the payment of the debt secured by Libra. The sale was consummated upon the execution of the
the mortgagee public instrument
There is no showing that Libra has already foreclosed the The payment of the check was actually intended to
mortgaged and that it was the new owner of the property extinguish the mortgage obligation so that the tractor
Libra gave its consent to the sale and was aware of the could be released to the Perfecto
transfer of rights to Perfecto It was never intended nor could it be considered as
o Where a third person purchases the mortgaged property, payment of the purchase price because the relationship
he automatically steps into the shoes of the original between Libra and Perfecto is not one of sale but still
mortgagor; his right of ownership shall be subject to the mortgage. The transaction between the brothers (sale)
mortgage is distinct and apart from the transaction between Libra
Perfecto was fully aware of the mortgage and even and Perfecto (mortgage)
volunteered to assume the remaining balance of the - Timeline:
mortgage debt of Wilfredo which Libra undeniably Sept. 4, 1979 – Wilfredo executed a Deed of Absolute
agreed to Sale in favor of Perfecto
Dec. 1979 – Tractor levied upon by the sheriff
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !
Hence, the tractor was no longer owned by Wilfredo when it
1 Art. 319. Removal, sale or pledge of mortgaged property. – The penalty or arresto -
xxx was levied upon by the sheriff
(2) Any mortgagor who shall sell or pledge personal property already pledged, or
any part thereof, under the terms of the Chattel Mortgage Law, without the consent 3. No, as Wilfredo was no longer the owner of the tractor
of the mortgagee written on the back of the mortgage and noted on the record
hereof in the office of the Register of Deeds of the province where such property is
at the time of execution
located.
!
Well settled is the rule that only properties owned by the F. Foreclosure of Chattel Mortgage
judgment debtor and which are not exempt from execution
should be levied upon Act No. 1508, Sec. 8 Failure of mortgagee to discharge the
Power of the court in the execution of its judgment extends mortgage. — If the mortgagee, assign, administrator, executor,
only over properties belonging to the judgment debtor or either of them, after performance of the condition before or
after the breach thereof, or after tender of the performance of the
DISPOSITIVE: Petition granted. condition, at or after the time fixed for the performance, does not
within ten days after being requested thereto by any person
Dy v. CA entitled to redeem, discharge the mortgage in the manner
Wherever the property is, the lien follows. provided by law, the person entitled to redeem may recover of
the person whose duty it is to discharge the same twenty pesos
How to Reconcile Dy and Servicewide for his neglect and all damages occasioned thereby in an action
You can use both cases (as both are still good law) for either in any court having jurisdiction of the subject-matter thereof.
statement. However, SGS believes that it is necessary to obtain
the consent in a mortgage in order to protect said mortgagee.
Act No. 1508, Sec. 14 Sale of property at public auction;
Servicewide Officer's return; Fees; Disposition of proceeds. — The
Property: Holden Torana mortgagee, his executor, administrator, or assign, may, after
Owner: C.R. Tecson  Sps. Ponce  Conrado Tecson thirty days from the time of condition broken, cause the
mortgaged property, or any part thereof, to be sold at public
Credit: Chattel mortgage & assignment auction by a public officer at a public place in the municipality
Owner: C.R. Tecson  Filinvest  Servicewide where the mortgagor resides, or where the property is situated,
provided at least ten days' notice of the time, place, and purpose
To assign a credit, do you need to the consent of the debtor?
of such sale has been posted at two or more public places in
No, notice only, so that the debtor knows whom to pay. This such municipality, and the mortgagee, his executor,
case is the legal basis to say consent is required. administrator, or assign, shall notify the mortgagor or person
holding under him and the persons holding subsequent
GR: Consent of assignee (of the mortgage) is needed if the
mortgages of the time and place of sale, either by notice in
debtor wishes to sell the property. Art. 2097, WRT 2141.
writing directed to him or left at his abode, if within the
Without the consent of the mortgagee, there is no transfer of
municipality, or sent by mail if he does not reside in such
ownership; sale is ineffectual. municipality, at least ten days previous to the sale.
Dy The officer making the sale shall, within thirty days thereafter,
There is a statement in Dy citing 1989 Servicewide that says make in writing a return of his doings and file the same in the
lack of consent does not affect the validity of the sale. This case office of the register of deeds where the mortgage is recorded,
is the legal basis to say consent is NOT required. 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
SGS:
sale on execution as provided in Act Numbered One hundred
In pledge, consent is needed to transfer ownership in order to and ninety, (Now Rule 141, sec. 7 ROC) and the amendments
protect the pledgee. Possessor is the pledgee, so consent is thereto, and the fees of the register of deeds for registering the
needed even if said pledgee is in possession. 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
In chattel mortgage, property is personal. Possessor is the
particularly describe the articles sold, and state the amount
mortgagor. Consent is needed (and even more important) received for each article, and shall operate as a discharge of the
because possession is NOT with the mortgagee. It is all the lien thereon created by the mortgage. The proceeds of such sale
more important in a mortgage to obtain the consent. shall be applied to the payment, first, of the costs and expenses
of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be
paid to persons holding subsequent mortgages in their order,
and the balance, after paying the mortgages, shall be paid to the
mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as

required by section sixteen of Act Numbered Eleven hundred
and forty-seven (Now Section 523 of the Admin. Code) shall be
issued by the treasurer of the municipality where the sale was
held to the purchaser thereof.

!
A.M. No. 99-10-05-0 August 7, 2001 covering one indebtedness, only one filing fee corresponding to
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF such indebtedness shall be collected. The collecting Clerk of
MORTGAGE Court shall, apart from the official receipt of the fees, issue a
In line with the responsibility of an Executive Judge under certificate of payment indicating the amount of indebtedness, the
Administrative Order No. 6, dated June 30, 1975, for the filing fees collected, the mortgages sought to be foreclosed, the
management of courts within his administrative area, included in real estates and/or chattels mortgaged and their respective
which is the task of supervising directly the work of the Clerk of locations, which certificate shall serve the purpose of having the
Court, who is also the Ex-Office Sheriff, and his staff, and the application docketed with the Clerks of Court of the places where
issuance of commissions to notaries public and enforcement of the other properties are located and of allowing the extrajudicial
their duties under the law, the following procedures are hereby foreclosures to proceed thereat.
prescribed in extrajudicial foreclosure of mortgages:
The notices of auction sale in extrajudicial foreclosure for
All applications for extra-judicial foreclosure of mortgage publication by the sheriff or by a notary public shall be published
whether under the direction of the sheriff or a notary public, in a newspaper of general circulation pursuant to Section 1,
pursuant to Act 3135, as amended by Act 4118, and Act 1508, Presidential Decree No. 1079, dated January 2, 1977, and non-
as amended, shall be filed with the Executive Judge, through the compliance therewith shall constitute a violation of Section 6
Clerk of court who is also the Ex-Officio Sheriff. thereof.
Upon receipt of an application for extra-judicial foreclosure of The Executive Judge shall, with the assistance of the Clerk of
mortgage, it shall be the duty of the Clerk of Court to: Court, raffle applications for extrajudicial foreclosure of mortgage
under the direction of the sheriff among all sheriffs, including
receive and docket said application and to stamp thereon the those assigned to the Office of the Clerk of Court and Sheriffs IV
corresponding file number, date and time of filing; assigned in the branches.
collect the filing fees therefore pursuant to rule 141, Section The name/s of the bidder/s shall be reported by the sheriff or
7(c), as amended by A.M. No. 00-2-01-SC, and issue the the notary public who conducted the sale to the Clerk of Court
corresponding official receipt; before the issuance of the certificate of sale.
examine, in case of real estate mortgage foreclosure, whether This Resolution amends or modifies accordingly Administrative
the applicant has complied with all the requirements before the Order No. 3 issued by then Chief Justice Enrique M. Fernando
public auction is conducted under the direction of the sheriff or a on 19 October 1984 and Administrative Circular No. 3-98 issued
notary public, pursuant to Sec. 4 of Act 3135, as amended; by the Chief Justice Andres R. Narvasa on 5 February 1998.
sign and issue the certificate of sale, subject to the approval The Court Administrator may issue the necessary guidelines for
of the Executive Judge, or in his absence, the Vice-Executive the effective enforcement of this Resolution.
Judge. No certificate of sale shall be issued in favor of the
highest bidder until all fees provided for in the aforementioned The Clerk of Court shall cause the publication of this Resolution
sections and in Rule 141, Section 9(1), as amended by A.M. No. in a nuewspaper of general circulation not later than August 14,
00-2-01-SC, shall have been paid; Provided, that in no case 2001 and furnish copies thereof to the Integrated Bar of the
shall the amount payable under Rule 141, Section 9(1), as Philippines.
amended, exceed P100,000.00;
after the certificate of sale has been issued to the highest defaults, the creditor, as mortgagee, may elect to foreclose
bidder, keep the complete records, while awaiting any the collateral, by causing its alienation in accordance with
redemption within a period of one (1) year from date of the procedures allowed by law.
registration of the certificate of sale with the Register of Deeds The Chattel Mortgage Law authorizes the extrajudicial
concerned, after which, the records shall be archived. foreclosure of chattel mortgage.
Notwithstanding the foregoing provision, juridical persons whose
property is sold pursuant to an extra-judicial foreclosure, shall Creditor’s rights in case of default:
have the right to redeem the property until, but not after, the Extrajudicial foreclosure OR
registration of the certificate of foreclosure sale which in no case Specific performance
shall be more than three (3) months after foreclosure, whichever
is earlier, as provided in Section 47 of Republic Act No. 8791 (as
amended, Res. Of August 7, 2001).
Where the application concerns the extrajudicial foreclosure of

mortgages of real estates and/or chattels in different locations

!
PRO CEDURE: 1. Equity of Redemption
File with the executive judge through the clerk of court (but it
is the sheriff who conducts the sale) Act No. 1508, Sec. 13 When the condition of a chattel mortgage
You file with the executive judge in order to avail of the is broken, a mortgagor or person holding a subsequent
services of the sheriff mortgage, or a subsequent attaching creditor may redeem the
Notice requirement #1 (posting): 10 days before the sale same by paying or delivering to the mortgagee the amount due
(post in 2 or more public places in the municipality where on such mortgage and the reasonable costs and expenses
the collateral is located or where the mortgagor resides) incurred by such breach of condition before the sale thereof. An
Usually posted in the bulletin board attaching creditor who so redeems shall be subrogated to the
Notice requirement #2 (personal notice): 10 days before rights of the mortgagee and entitled to foreclose the mortgage in
sale, sheriff must notify: a) mortgagor; b) person holding the same manner that the mortgagee could foreclose it by the
under him (assignee of mortgagor); c) persons holding terms of this Act.
subsequent mortgages personally or by mail
Effected: personally, abode, or mail Act No. 1508, Sec. 14 Sale of property at public auction;
A person holding under mortgagor is a successor-in- Officer's return; Fees; Disposition of proceeds. — The
interest mortgagee, his executor, administrator, or assign, may, after
Equity of redemption or grace period: Wait for 30 days from thirty days from the time of condition broken, cause the
time of default mortgaged property, or any part thereof, to be sold at public
Public sale is conducted (where property situated/mortgagor
auction by a public officer at a public place in the municipality
resides), then sheriff should make a return where the mortgagor resides, or where the property is situated,
provided at least ten days' notice of the time, place, and purpose
The return operates to discharge the lien
of such sale has been posted at two or more public places in
Payment of the proceeds (in order)
such municipality, and the mortgagee, his executor,
Costs and expenses of sale
administrator, or assign, shall notify the mortgagor or person
Payment of demand/obligation secured by mortgage
holding under him and the persons holding subsequent
(principal obligation)
mortgages of the time and place of sale, either by notice in
Residue shall be paid to persons holding subsequent
writing directed to him or left at his abode, if within the
mortgages (principal obligation of 2nd/3rd/etc mortgages) municipality, or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.
Balance: mortgagor/person holding under him
Winning bidder acquires ownership The officer making the sale shall, within thirty days thereafter,
1st mortgagee: has the right to foreclose, and the make in writing a return of his doings and file the same in the
exercise of the right to foreclose wipes out any lien until
office of the register of deeds where the mortgage is recorded,
it is the only one that subsists
and the register of deeds shall record the same. The fees of the
2nd mortgagee: has an inferior right to the first
officer for selling the property shall be the same as in the case of
mortgagee, and can only participate in the proceeds to sale on execution as provided in Act Numbered One hundred
put an end to the claim against the debtor and ninety, (Now Rule 141, section 7 of the Rules of Court) and
the amendments thereto, and the fees of the register of deeds
for registering the officer's return shall be taxed as a part of the
costs of sale, which the officer shall pay to the register of deeds.
The return shall particularly describe the articles sold, and state
the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. The
proceeds of such sale shall be applied to the payment, first, of
the costs and expenses of keeping and sale, and then to the
payment of the demand or obligation secured by such mortgage,
and the residue shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying the
mortgages, shall be paid to the mortgagor or person holding
under him on demand.
If the sale includes any "large cattle," a certificate of transfer as

required by section sixteen of Act Numbered Eleven hundred
and forty-seven (Now Section 523 of the Administrative Code)
shall be issued by the treasurer of the municipality where the
sale was held to the purchaser thereof.

!
The redemption cited in Section 13 of the Chattel Mortgage Rizal Commercial Banking Corporation v. Royal Cargo
Law partakes of an equity of redemption. Corporation (2009) – Carpio-Morales, J.
Equity of Redemption Petitioners: Rizal Commercial Banking Corporation (RCBC)
o The right of the mortgagor in default to recover the Respondents: Royal Cargo Corporation (ROYAL)
collateral before a foreclosure sale by paying the Concept: Foreclosure of Chattel Mortgage – Right of
principal, interest, and other costs that are due, thereby Redemption
alleviating, as a matter of equity, the severity of the
legal rule on default (Black’s Law Dictionary, Ninth Doctrine:
Edition) An equity of redemption under Sec. 13 of CM law, is different
o The right of the mortgagor to extinguish the mortgage from the right to redemption under Sec. 14. An equity of
and retain ownership of the collateral after default in redemption may be exercised only after default of the mortgagor
the performance of the principal obligation but before in the performance of the conditions in the mortgage but before
the foreclosure sale of the collateral, by paying the the sale of the property.
principal obligation within a grace period of 30 days
granted by the Chattel Mortgage Law Brief Facts:
If the equity of redemption is exercised not by the mortgagor Upon Terrymanila’s petition for voluntary insolvency, RCBC was
but by a subsequent attaching creditor, who effectively granted permission to foreclose the chattel mortgage executed
pays the mortgagee, the rights acquired by the attaching over Terrymanila’s assets. A foreclosure sale subsequently
creditor are the rights that pertain to the mortgagee, happened, in which RCBC was the winning bidder. ROYAL filed
granting the attaching creditor the right to foreclose the an annulment of said foreclosure sale, as it included some of the
chattel mortgage. properties of Terrymanila it had already attached to secure a
judgment award against it, and that RCBC failed to notify them of
2. Right of Redemption the auction sale pursuant to Sec. 14 of the CM law.
Right of Redemption ISSUE:

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

!
In attaching some of Terrymanila’s assets to secure the 3. Right to Possession
satisfaction of the P296, 662 judgment, what ROYAL
effectively attached was Terrymanila’s equity of redemption. A mortgagee, unlike a pledgee, is generally not in
That its claim is much lower that the P1.5M actual bid of possession of the collateral unless and until the principal
RCBC at the auction sale does not defeat its equity of debtor defaults and the mortgagee seeks to foreclose.
redemption.
Having thus attached Terrymanila’s equity of redemption, The chattel mortgage contract constitutes the mortgagee,
ROYAL had to be informed of the date of sale of the upon the principal debtor’s default, as an attorney-in-fact of
mortgaged assets for it to exercise such equity of the mortgagor, enabling the mortgagee to act for and in
redemption over some of the foreclosed properties, as behalf of the owner of the collateral
provided for in Sec. 13. o The mortgagee is authorized to take possession of the
Thus, even prior to receiving a mailed notice of the auction collateral on default of the principal debtor
sale, ROYAL was already put on notice of the impending o Foreclosure is not a condition sine qua non to taking
foreclosure sale when it filed a motion for reconsideration of possession
the Bataan RTC order which authorized the foreclosure of o When possessor of collateral refuses to yield
the CM. It could have expediently exercised its equity of possession, the mortgage has the right to maintain an
redemption when it received the denial of the M4R. action to recover possession, or replevy, the collateral,
Despite this opportunity, however, ROYAL chose to be from the mortgagor or from any person in possession
technically shrewd about its chances, preferring instead to Replevin – possessory in nature and determines nothing
seek annulment of the auction sale, which was the result of more than the right of possession; only the person in
the foreclosure of the mortgage, which it had earlier possession needs to be impleaded
opposed before the insolvency court. ROYAL’s negligence Section 14 of the Chattel Mortgage Law does not require
or omission to exercise its equity of redemption within that foreclosure of the collateral is caused before instituting
an action for replevin
a reasonable time, warrants a presumption that it had
o Rationale: right of possession of the collateral is
either abandoned it or opted not to assert it.
conditioned upon fact of actual default of debtor, and
Parenthetically, ROYAL has not shown it was prejudiced by this may be subject to controversy, hence foreclosure
the auction sale since it has already been determined by the cannot be the first recourse since the sheriff has no
insolvency court that even if the mortgaged properties were duty or authority in the first instance to seize the
foreclosed, there were still sufficient, unencumbered assets collateral, but also because whenever the sheriff
of Terrymanila to cover the obligations owing to other proceeds under Section 14, he becomes a mere agent
creditors. of the mortgagee. In this case, an action to recover
In any case, even if ROYAL did participate in the auction possession or replevin should be instituted first.
sale and matched RCBC’s bid, the superiority of the latter’s
lien over the mortgaged assets would preclude ROYAL from Servicewide Specialists vs. CA—Purisima, J. Petitioner:
recovering the chattels. Servicewide Specialists, Inc. (Servicewide) Respondents: Court
It bears noting that the CM in favor of RCBC was registered of Appeals (CA), Hilda Tee (Tee), and Alberto M. Villafraca
more than 2 years before the issuance of a writ of (Villafranca)
attachment over some of Terrymanila’s chattels in favor Concept: Right to Possession (Chattel Mortgage)
ROYAL. This is significant in determining who between the
two should be given preference over the subject properties. Doctrine: In an action for replevin arising from a chattel
Since the registration of a CM is an effective and mortgage, if the plaintiff’s right to possess the thing is not or
binding notice of its existence and creates a real right cannot be disputed, then it is enough to file the complaint against
or lien that follows the property wherever it may be, the the possessor of the thing mortgaged; otherwise, other persons
right of ROYAL, as an attaching creditor or as a purchaser, need to be impleaded. Plaintiff’s right to possession is in
had it purchased them at the auction sale, is subordinate to controversy, for example, when ownership rights to the thing or
the lien of the mortgagee RCBC who has in its favor a valid default of the mortgagor is disputed.
chattel mortgage.
Brief Facts: Laus bought a motor vehicle on credit, issuing
DISPOSITIVE: CA reversed. Foreclosure sale valid. therefor a promissory note secured by a chattel mortgage over
the vehicle. Laus failed to pay despite demands from
RCBC v. Royal Servicewide. Servicewide, for the purpose of foreclosing the
Attachment is a provisional remedy whereby the debtor answers mortgage, filed a replevin suit against Tee, alleged possessor of
the motor vehicle, who was later substituted by Villafranca, who
for obligations with all attachments (in the case if creditor wins)
alleged that he owned the motor vehicle. Laus was not
Attaching creditor is subrogated into the rights of the first impleaded in the suit for replevin.
mortgagee.

!
ISSUE: entertained under Rule 45. Leticia Laus is an indispensible
WON in a case for replevin arising from a chattel mortgage, it is party (for the purpose of ascertaining her default) and
enough to file the complaint against the possessor of the thing should have been impleaded in the complaint for replevin
mortgaged. It depends on the circumstances, as shown below. and damages.
RATIO: If the plaintiff’s right to possess the thing is not or DISPOSITIVE: Petition is denied and the Decision of the CA
cannot be disputed, then it is enough to file the complaint affirmed.
against the possessor of the thing mortgaged; otherwise,
other persons need to be impleaded. Servicewide Specialists v. CA
Only extrajudicial foreclosure, so you go to court to gain
Rule 60 ROC requires that an applicant for replevin must possession (replevin).
show that he is the owner of the property claimed,
particularly describing it, or is entitled to the possession SGS: Don’t just go after the possessor, but go after the
thereof. Where the right of the plaintiff to possession is so defaulting mortgagor as well. The moment of default is the
conceded or evident, the action need only be maintained moment the mortgagee obtains his rights.
against him who so possesses the property. In rem actio est
per quam rem nostram quae ab alio possidetur petimus, et 4. Right to Surplus or Deficiency
semper adversus eum est qui rem possidet. (By action upon
the thing, one asks for a thing in the possession of another, Act No. 1508, Sec. 14 Sale of property at public auction;
and it is always against him who possesses the thing.) Officer's return; Fees; Disposition of proceeds. — The
Northern Motors, Inc. vs. Herrera: …persons having a mortgagee, his executor, administrator, or assign, may, after
special right of property in the goods the recovery of which thirty days from the time of condition broken, cause the
is sought, such as a chattel mortgage, may maintain an mortgaged property, or any part thereof, to be sold at public
action for replevin therefor. …[the mortgagee] may maintain auction by a public officer at a public place in the municipality
an action to recover possession of the mortgaged chattels where the mortgagor resides, or where the property is situated,
from the mortgagor or from any person in whose hands he provided at least ten days' notice of the time, place, and purpose
may find them. of such sale has been posted at two or more public places in
In default of the mortgagor, the mortgagee is thereby such municipality, and the mortgagee, his executor,
constituted as attorney-in-fact of the mortgagor, enabling the administrator, or assign, shall notify the mortgagor or person
mortgagee to act for and in behalf of the owner. That the holding under him and the persons holding subsequent
defendant is not privy to the chattel mortgage should be mortgages of the time and place of sale, either by notice in
inconsequential. By the fact that the object of replevin is writing directed to him or left at his abode, if within the
traced to his possession, one can properly be a defendant in municipality, or sent by mail if he does not reside in such
an action for replevin. It is here assumed that the plaintiff’s municipality, at least ten days previous to the sale.
right to possess the thing is not or cannot be disputed.
In case the right of possession of the plaintiff, or his The officer making the sale shall, within thirty days thereafter,
authority to claim possession or that of his principal, is put to make in writing a return of his doings and file the same in the
great doubt, it could become essential to have other office of the register of deeds where the mortgage is recorded,
persons involved and impleaded for a complete and the register of deeds shall record the same. The fees of the
determination and resolution of the controversy. officer for selling the property shall be the same as in the case of
In a suit for replevin, a clear right of possession must be sale on execution as provided in Act Numbered One hundred
established. Foreclosure under a chattel mortgage may be and ninety, (Now Rule 141, section 7 of the Rules of Court) and
commenced only once there is default on part of the the amendments thereto, and the fees of the register of deeds
mortgagor of his obligation. It is essential to show the for registering the officer's return shall be taxed as a part of the
existence of the chattel mortgage and the default of the costs of sale, which the officer shall pay to the register of deeds.
mortgagor. Since the mortgagee’s right of possession is The return shall particularly describe the articles sold, and state
conditioned upon the actual fact of default which itself may the amount received for each article, and shall operate as a
be controverted, the inclusion of other parties, like the discharge of the lien thereon created by the mortgage. The
debtor or mortgagor himself, may be required in order to proceeds of such sale shall be applied to the payment, first, of
allow a full and conclusive determination of the case. An the costs and expenses of keeping and sale, and then to the
adverse possessor, who is not the mortgagor, cannot just be payment of the demand or obligation secured by such mortgage,
deprived of his possession, let alone be bound by the terms and the residue shall be paid to persons holding subsequent
of the chattel mortgage contract, simply because the mortgages in their order, and the balance, after paying the
mortgagee brings up an action for replevin. mortgages, shall be paid to the mortgagor or person holding
Applying the rules above: It is not disputed that there was an under him on demand.
adverse and independent claim of ownership by Villafranca,
but this is a question of fact which cannot be

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If the sale includes any "large cattle," a certificate of transfer as Petitioners are not the first to posit the theory of the
required by section sixteen of Act Numbered Eleven hundred applicability of Article 2115 to foreclosures of chattel
and forty-seven (Now Section 523 of the Administrative Code) mortgage.
shall be issued by the treasurer of the municipality where the In the leading case of Ablaza vs. Ignacio, the lower court
sale was held to the purchaser thereof. dismissed the complaint for collection of deficiency
judgment in view of Art. 2141 of the CC, which provides that
Mortgagor is entitled to the balance (or surplus) of the price the provisions of the Civil Code on pledge shall also apply to
of sale over the amounts required to be paid under Section chattel mortgages, insofar as they are not in conflict with the
14 Chattel Mortgage Law. It was the lower court’s opinion that,
In case of insufficient proceeds, the mortgagor is likewise by virtue of Art. 2141, the provisions of Art. 2115 which deny
liable to pay the deficiency (although the law is silent on the the creditor-pledgee the right to recover deficiency in case
the proceeds of the foreclosure sale are less than the
matter)
amount of the principal obligation, will apply.
2 Rights of Subsequent Mortgagees: In the said case, the Court reversed the ruling of the lower
Right to residue of the proceeds court and held that the provisions of the Chattel Mortgage
Right to equity of redemption Law regarding the effects of foreclosure of chattel mortgage,
Note: No real right of foreclosure. When all else fails, they only being contrary to the provisions of Article 2115, Article 2115
have the right to demand specific performance. in relation to Article 2141, may not be applied to the case.
When Foreclosure is Made by Subsequent Mortgagee: Section 14 of Act No. 1508, as amended, or the Chattel
First mortgagee will still have the right to foreclose again Mortgage Law, states:
Therefore, the buyer in the foreclosure of the subsequent The officer making the sale shall, within thirty days
mortgage acquires no right thereafter, make in writing a return of his doings and file the
First mortgage will always defeat others; hence, there is no same in the office of the Registry of Deeds where the
mortgage is recorded, and the Register of Deeds shall
use in foreclosing subsequent mortgages
record the same. The fees of the officer for selling the
PAMECA Wood Treatment Plant Inc vs. Court of Appeals – property shall be the same as the case of sale on execution
Gonzaga-Reyes, J. as provided in Act Numbered One Hundred and Ninety, and
Petitioner: PAMECA, Herminio and Victoria Teves, Hiram Dida the amendments thereto, and the fees of the Register of
Pulido Deeds for registering the officer’s return shall be taxed as a
Respondents: Development Bank of the Philippines part of the costs of sale, which the officer shall pay to the
Register of Deeds. The return shall particularly describe the
Concept: Chattel Mortgage
articles sold, and state the amount received for each article,
Doctrine: Since the Chattel Mortgage Law bars the creditor- and shall operate as a discharge of the lien thereon created
by the mortgage. The proceeds of such sale shall be applied
mortgagee from retaining the excess of the sale proceeds there
to the payment, first, of the costs and expenses of keeping
is a corollary obligation on the part of the debtor-mortgagee to
and sale, and then to the payment of the demand or
pay the deficiency in case of a reduction in the price at public
obligation secured by such mortgage, and the residue shall
auction
be paid to persons holding subsequent mortgages in their
order, and the balance, after paying the mortgage, shall be
Brief Facts: Pameca loaned P2mil from DBP and executed a
paid to the mortgagor or persons holding under him on
promissory note, secured by its inventory of furniture and
demand.”
equipment. A monthbefore the mortgage contract, its supposed
It is clear from the above provision that the effects of
market value was P2.5mil. They defaulted so DBP extrajudicially
foreclosure under the Chattel Mortgage Law run
foreclosed on thechattels. It was the only bidder so it was able to
inconsistent with those of pledge under Article 2115.
buy it for around P322,000. Then for the deficiency, it filed a
Whereas, in pledge, the sale of the thing pledged
complaint against Pameca and its solidary debtors (Teveses and
extinguishes the entire principal obligation, such that the
Pulido) according to the promissory note it signed.
pledgor may no longer recover proceeds of the sale in
ISSUE: excess of the amount of the principal obligation, Section 14
WON NCC 1484 and 2115 should be applied by analogy (NO) of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction
RATIO: No, these provisions are inconsistent with the of the principal obligation and costs.!
Chattel Mortgage Law Since the Chattel Mortgage Law bars the creditor-
Pameca argues that NCC 1484 and 2115 should be applied mortgagee from retaining the excess of the sale proceeds
there is a corollary obligation on the part of the debtor-
by analogy reading the spirit of the law
mortgagee to pay the deficiency in case of a reduction in the
price at public auction!

!
Neither did the Court find tenable the application by analogy Art. 2087 It is also of the essence of these contracts that when
of Article 1484 of the Civil Code to the instant case. the principal obligation becomes due, the things in which the
As pointed out by the trial court, the said article applies pledge or mortgage consists may be alienated for the payment
clearly and solely to the sale of personal property the price to the creditor.
of which is payable in installments. Although Article 1484,
paragraph (3) expressly bars any further action against the It is a real security transaction constituted to secure the
purchaser to recover an unpaid balance of the price, where fulfillment of a principal obligation by the absolute owner
the vendor opts to foreclose the chattel mortgage on the (the mortgagor) of immovable or alienable real rights, which
thing sold, should the vendee’s failure to pay cover two or has free disposal of the property, and in the absence
more installments, this provision is specifically applicable to thereof, is legally authorized for the purpose; subjecting the
a sale on installments. mortgaged property (or collateral) to the condition that
when the principal obligation becomes due, the collateral
DISPOSITIVE: CA affirmed may be alienated for payment to the creditor (the
mortgagee)
PAMECA v. CA
The remedies in a mortgage are alternative: A real security transaction is an encumbrance of property
Specific performance; or
given to guarantee the fulfillment of an obligation
Foreclosure
Note: Choosing one will bar recourse to another REQUISITES
1. Principal obligation
COA here: Claim for deficiency, so it doesn’t violate the rule on 2. Absolute ownership over the property
alternative remedies 3. Free disposal with legal authority
4. Written document recorded in the Registry of Deeds – must
SGS: Suppose there is a situation where there is a principal be notarized
obligation that is secured by: 1) surety and 2) chattel mortgage a. Attach a TCT/OCT – to identify the metes and bounds
(a lien)
b. Recorded
Question 1: Which would you rely on first?
Chattel mortgage first because there is a lien on the property.
CHATTEL MORTGAGE REM
You can invoke PAMECA to claim the deficiency.
Thing mortgaged must be Thing mortgaged must be
personal or movable real or immovable property
Question 2: If it is a pledge with a surety as security?
property
It depends on the value of the object of the pledge and the Affidavit of Good Faith Not required
capacity of the surety to pay. required
If the value of the object is sufficient, pledge first.
Mortgagor cannot alienate Mortgagor can alienate the
If the value is insufficient, then surety first.
the thing mortgaged without thing mortgaged without
If the surety is not capacitated, pledge.
written consent of mortgagee consent of mortgagee and
If the surety is capacitated, surety.
any such prohibition is void
Can secure future obligations Cannot secure future
IX. REAL ESTATE MORTGAGE
obligations
No right of redemption There is a right of redemption
A. General Concepts
in extrajudicial foreclosure
and in judicial foreclosure by
banks
of pledge and mortgage:


thing pledged or mortgaged;

the free disposal of their property, and in the absence thereof,
secure the latter by pledging or mortgaging their own property.

!
may stand as security, provided that the instrument reveals
the intention to secure future and other indebtedness.
B. Form of Real Estate Mortgage A real estate mortgage given to secure future debts is a
continuing security and is not discharged by repayment of
Art. 2125 In addition to the requisites stated in Article 2085, it is the amount named in the real estate mortgage, until the full
indispensable, in order that a mortgage may be validly amount of the principal obligation is paid.
constituted, that the document in which it appears be recorded in
the Registry of Property. If the instrument is not recorded, the Prudential Bank v. Alviar (2005) – Tinga, J.
mortgage is nevertheless binding between the parties. Petitioner: Prudential Bank
Respondent: Don A. Alviar and Georgia B. Alviar
The persons in whose favor the law establishes a mortgage Concept: Real Estate Mortgage: Obligations Secured
have no other right than to demand the execution and the
recording of the document in which the mortgage is formalized. Doctrine:
Mortgages given to secure future advancements, or those with
Art. 2131 The form, extent and consequences of a mortgage, “blanket mortgage clauses” and “dragnet clauses” are valid and
legal contracts. The mortgage will not secure subsequent
both as to its constitution, modification and extinguishment, and
obligations if such obligations have separate securities provided.
as to other matters not included in this Chapter, shall be
The SC followed the 2nd school of thought that a “blanket
governed by the provisions of the Mortgage Law and of the Land
mortgage clause” will not secure a note that secures in its
Registration Law.
entirety a subsequent obligation. The “blanket mortgage clause”
To bind third parties, a real estate mortgage must be will only secure the portion not covered by the security of the
recorded in the Registry of Property. subsequent obligation.
An unregistered or unrecorded real estate mortgage still
Brief Facts:
binds the parties to the mortgage, but it only gives the
Sps. contracted a loan amounting to P250,000 from Prudential
mortgagee the right to demand the execution and recording
Bank, secured by a real estate mortgage with a blanket
of the real estate mortgage.
mortgage clause. Several other loans were contracted by the
spouses with their own securities. Prudential applied for the
It must be in a written document.
foreclosure of the real estate mortgage for the failure of the
spouses to pay 3 loans evidenced by 3 promissory notes (Loans
Even if not required in law, have it notarized.
1-3).
An unrecorded REM: right to demand execution/recording.
ISSUES:
An unregistered REM: still valid but it only binds the parties.
WON the “blanket mortgage clause” is valid (YES)
WON the “blanket mortgage” clause applies even to
C. Obligations Secured
subsequent advancements for which other securities were
intended, specifically, PN BD#76/C-345 covering Loan # 2
General Rule: Real Estate Mortgage is limited to the
(NO)
principal obligations mentioned in the contract of real estate
mortgage.
RATIO:
o Literal accuracy in describing the obligations is not
Yes, the “blanket mortgage clause” is valid and was
required, but the description must be correct and full
intended to cover not just the P250,000 loan but also
enough to direct the attention to the sources of the
future credit facilities and advancements.
correct information, and must not mislead or deceive.
Prudential: The “blanket mortgage clause” or “dragnet
o Terms of the contract must be sufficiently clear to put all
clause” is valid, relying on several cases which upheld the
parties who may have occasion to deal with the
collateral upon inquiry. validity of mortgage contracts securing future advancements
Exceptions: It may also secure future advancements or
Spouses: The “blanket mortgage clause” would apply only
future debts so long as these debts that are yet to be
to loans obtained jointly by the spouses, and not to loans
contracted are also accurately described.
obtained by other parties
Thus, most real estate mortgages contain a stipulation
SC: A “blanket mortgage clause,” also known as a “dragnet
known as dragnet or blanket mortgage clause, which is
clause” in AmJur, is one which is specifically phrased to
specifically phrased to subsume all debts, whether past or
subsume all debts of past or future origins; these are
future. (Future debts and after-incurred obligations)
“carefully scrutinized and strictly construed”
Dragnet clause shall be carefully and strictly construed.
o Mortgages of this character enable the parties the
The amount stated as consideration in the mortgage
provide continuous dealings, the nature or extent of
contract do not limit the amounts for which the mortgage
which may not be known or anticipated at the time, and

!
they avoid the expense and inconvenience of executing A “dragnet clause” so worded as to be broad enough to
a new security on each new transaction cover all other debts in addition to the one specifically
A “dragnet clause” operates as a convenience and secured will be construed to cover a different, although
accommodation to the borrowers – makes available such other debt is secured by another mortgage
additional funds without having to execute additional
security documents  saves time, travel, loan closing A mortgage with such a clause will not secure a note that
costs, costs of extra legal services, recording fees, etc. expresses on its face that it is otherwise secured as to
Jurisprudence has settled that mortgages given to its entirety, at least to anything other than a deficiency
secure future advancements are valid and legal after exhausting the security specified therein, such
contracts, and the amounts named as consideration deficiency being an indebtedness within the meaning of
do not limit the amount for which the mortgage may the mortgage, in the absence of a special contract
stand as security if from the 4 corners of the instrument, excluding it from the arrangement 
the intent to secure future and other indebtedness can BETTER POSITION
be gathered Since the parties conformed to the “blanket mortgage
That for and in consideration of certain loans, overdraft and clause” or “dragnet clause,” it is reasonable to conclude that
other credit accommodations obtained from the Mortgagee they also agreed to an implied understanding that
by the Mortgagor and/or ________________ subsequent loans need not be secured by other securities,
hereinafter referred to, irrespective of number, as as the subsequent loans will be secured by the first
DEBTOR, and to secure the payment of the same and mortgage
those that may hereafter be obtained, the principal or all o The sufficiency of the first security is a corollary
of which is hereby fixed at Two Hundred Fifty Thousand component of the “dragnet clause”
(P250,000.00) Pesos, Philippine Currency, as o “Reliance on the security test” – when the mortgagor
well as those that the Mortgagee may extend to the takes another loan for which another security was given
Mortgagor and/or DEBTOR, including interest and and it could not be inferred that such loan was made in
expenses or any other obligation owing to the reliance solely on the original security with the “dragnet
Mortgagee, whether direct or indirect, principal or clause,” but rather, on the new security given
secondary as appears in the accounts, books and
records of the Mortgagee, the Mortgagor does hereby o Rationale, according to the California court, was that the
transfer and convey by way of mortgage unto the “dragnet clause” in the first security instrument
Mortgagee, its successors or assigns, the parcels of constituted a continuing offer by the borrower to
land which are described in the list inserted on the back secure further loans under the security of the first
of this document, and/or appended hereto, together security instrument, and that when the lender accepted
with all the buildings and improvements now existing or a different security, he did not accept the offer
which may hereafter be erected or constructed thereon, o In some instances, it has been held that in the absence
of which the Mortgagor declares that he/it is the of clear, supportive evidence of a contrary intention, a
absolute owner free from all liens and incumbrances… mortgage containing a “dragnet clause” will not be
extended to cover future advances unless the
SC: Parties intended the real estate mortgage to secure not document evidencing the subsequent advance refers to
only the P250,000 loan but also future credit facilities the mortgage as providing security therefor
and advancements that may be obtained SC: While the existence and validity of the “dragnet clause”
o Terms above are clear and unambiguous – neither need cannot be denied, there is a need to respect the existence
nor excuse to construe it otherwise of the other security given for PN BD#76/C-345
2. NO, there is a need to respect the existence of the other DISPOSITIVE: Petition DENIED.
security given for a subsequent obligation.
Prudential: It expressly covers not only the P250,000 loan, Prudential Bank v. Alviar
but also the 2 other promissory notes included Remember this case for the RELIANCE ON SECURITY TEST
Spouses: The “dragnet clause” cannot be applied to and for the dragnet & blanket security clause.
subsequent loans extended to Don Alviar and Donalco
Trading, Inc. since these are covered by separate PNs that
expressly provide for a different form of security
SC: The PN issued to Donalco Trading, Inc. is considered
EXCLUDED from the coverage (see start of ratio)
Under American Jurisprudence, 2 schools of thought have
emerged on the question: WON the “blanket mortgage”
clause applies even to subsequent advancements for which
other securities were intended:

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Consequently, an assignment by way of guaranty of
such rights is a real estate mortgage, inasmuch as it is
D. Object of Real Estate Mortgage executed to guarantee a principal obligation.
Although dominated an assignment, since its purpose is to
Art. 2124 Only the following property may be the object of a guarantee a principal obligation, and it is not an absolute
contract of mortgage: conveyance of title that confers ownership on the assignee,
then it is a mortgage; especially if it is stipulated that if the
Immovables; assignor should comply with a principal obligation, the
Alienable real rights in accordance with the laws, imposed assignment would become null and void, otherwise it would
upon immovables. remain in full force.
Nevertheless, movables may be the object of a chattel 1. After Acquired Properties

mortgage.
Stipulation in a registered real estate mortgage that all
Art. 415 The following are immovable property: property taken in exchange or replacement by the
mortgagor (after acquired property) shall become subject
Land, buildings, roads and constructions of all kinds adhered to the mortgage is binding  real estate mortgage need not
be registered a second time in order to bind the after-
to the soil;
acquired properties and affect third parties
Trees, plants, and growing fruits, while they are attached to
Property taken in exchange or replacement must be specifically
the land or form an integral part of an immovable;
for substitution or replacement.
Everything attached to an immovable in a fixed manner, in
such a way that it cannot be separated therefrom without People’s Bank and Trust Co. v. Dahican Lumber Co. (1967) –
Dizon, J.
breaking the material or deterioration of the object;
Plaintiff-Appellants: People’s Bank and Trust Co. (PBTC) and
Statues, reliefs, paintings or other objects for use or Atlantic, Gulf and Pacific Co. of Manila (AGPM)
ornamentation, placed in buildings or on lands by the owner of Defendant-Appellants: Dahican Lumber Co (DALCO), Dahican
the immovable in such a manner that it reveals the intention to American Lumber Corp (DAMCO), and Connell Bros. Co.
attach them permanently to the tenements;
Concept: REM; Object of REM; After Acquired Properties
Machinery, receptacles, instruments or implements intended
by the owner of the tenement for an industry or works which may Doctrine:
Stipulations that “after acquired” properties are to be immediately
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; subject to the lien are not unjust nor immoral; they are
commonplace and actually logical when the collateral is
Animal houses, pigeon-houses, beehives, fish ponds or perishable, subject to wear and tear or is intended for resale.
breeding places of similar nature, in case their owner has placed
them or preserves them with the intention to have them Brief Facts:
DALCO executed 2 deeds of mortgage in favor of AGP on the
permanently attached to the land, and forming a permanent part
one hand and PBTC on the other, in view of its obligations to
of it; the animals in these places are included;
both. In both deeds of mortgage, it was stated that properties
Fertilizer actually used on a piece of land; acquired thereafter would be immediately subject to the lien
under the 2 deeds of mortgage. After the execution of the 2
Mines, quarries, and slag dumps, while the matter thereof deeds, DALCO bought machines, parts and supplies, allegedly
forms part of the bed, and waters either running or stagnant; from Connell and DAMCO. Later on, DALCO rescinded the sale
it had with Connell and DAMCO. AGP and PBTC protested,
Docks and structures which, though floating, are intended by arguing that they were already covered by the lien.
their nature and object to remain at a fixed place on a river, lake,
ISSUES:
or coast;
WON the “after-acquired” properties are subject to and
Contracts for public works, and servitudes and other real covered by the deed of mortgage (YES)
WON they were binding even if not registered under the
rights over immovable property.
Chattel Mortgage Law (YES)
Alienable real rights – includes rights, title and interest in a
contract of lease, as well as the rights, title, and interest
acquired in the land on which the building was constructed.

!
RATIO: 2. Effect and Extent
YES. The “after acquired” properties were subject to and
covered by the mortgages. Art. 2126 The mortgage directly and immediately subjects the
The provision was clear and binding: “all property of every property upon which it is imposed, whoever the possessor may
nature…taken in exchange or replacement…shall be, to the fulfillment of the obligation for whose security it was
immediately be and become subject to the lien.” constituted.
Such a stipulation is common and logical in cases where the
collateral is perishable or subject to wear and tear.
Art. 2127 The mortgage extends to the natural accessions, to
Such a stipulation is neither unlawful nor immoral since its
the improvements, growing fruits, and the rents or income not
purpose is to maintain the security. yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from
YES. They were still binding even if not registered under
the insurers of the property mortgaged, or in virtue of
the Chattel Mortgage Law
expropriation for public use, with the declarations, amplifications
The stipulation on “after acquired” properties belies the
and limitations established by law, whether the estate remains in
argument of DALCO that it was required to register them
the possession of the mortgagor, or it passes into the hands of a
under the Chattel Mortgage Law.
third person.
SC: That law is inapplicable under this case since the “after
acquired” properties were immobilized, pursuant to Art.
Art. 2129 The creditor may claim from a third person in
415 (5) and Art. 2127.
Berkenkotter v. Cu Unjieng and Cu Unjieng v. Mabalacat possession of the mortgaged property, the payment of the part of
Sugar Co.: machineries destined for the purpose of an the credit secured by the property which said third person
industry become immobilized and considered as possesses, in the terms and with the formalities which the law
real/immovable property. establishes.
The “after acquired” properties in this case must be deemed
as immobilized since they were purchased in addition to Under Art. 2126, a registered or recorded real estate
and/or as replacement for machines and supplies that mortgage is a right in rem
DALCO already had. Right in rem: a lien or legal right or interest that a creditor
Davao Sawmill Co. v. Castillo, cited by DALCO is has in another’s property whoever its owner may be
inapplicable; the case involved machinery being treated The real estate mortgage is inseparable from the collateral
as personal property in a chattel mortgage while the and until discharged, follows the property
present case treated the “after acquired” properties as The sale of the property cannot affect or release the
real properties. mortgage; the purchaser of the collateral is bound to
Also, it was ruled in Davao Sawmill that “while under the acknowledge and respect the encumbrance, whether the
general law of Puerto Rico machinery placed on property transfer to them has the consent of the mortgagee or not
by a tenant does not become immobilized, yet, when the
tenant places it there pursuant to contract that it shall Star Two (SPV-AMC) Inc. v. Paper City Corp. – Perez, J.
belong to the owner, it then becomes immobilized as to Petitioner: Star Two (SPV-AMC) Inc. (note: it substituted RCBC
that tenant and even as against his assignees and in this action)
creditors.” Respondent: Paper City Corp. of the Phils.(PC)
In this case, the provision on “after acquired” properties Concept: Real Estate Mortgage; Object of Real Estate
stated that such would be immediately subject to the Mortgage; Effect and Extent
lien. Pursuant to this provision, DALCO is barred from
Doctrine:
arguing that the properties were not yet immobilized.
Much as real property may be considered as personalty for
DISPOSITIVE: Modified. a chattel mortgage, the reverse is also true; personalty may
be the subject of a real estate mortgage.
People’s Bank v. Dahican Accessory follows the principal.
Failed rescission  mortgage would follow Bischoff v. Pomar and Cia. General de Tabacos: Even if the
machinery were not expressly included in the mortgage, the
(old) Mortgage Law provides that chattels permanently
located in a building, either useful or ornamental, or for the
service of some industry even though they were placed there
after the creation of the mortgage, shall be deemed part of
the mortgage, provided they belong to the owner of the
mortgaged land.

!
Brief Facts: Indenture properties of the [Paper City] composed of newly
PC entered into a loan agreement with RCBC, secured by constructed two (2)-storey building, other land improvements
chattel mortgages over its machineries. Later on, this was and machinery and equipment all of which are located at the
novated into an Mortgage Trust Indenture with 2 more banks and existing Plant Site in Valenzuela, Metro Manila and more
now secured by real estate mortgages over the lands and particularly described in Annex "A" hereof…”
buildings of PC. When PC defaulted, an extrajudicial foreclosure
sale was executed. A dispute arose when PC moved to take the
machineries out of the foreclosed lands and buildings, From the foregoing, it has been repeatedly stipulated by the
contending that they were not part of the real estate mortgage parties that the mortgaged properties are the various
and consequently, not covered by the foreclosure. RCBC argued parcels of land AND the existing improvements thereon, as
otherwise. well as the machineries and equipment.
Gateway Electronics v. Landbank of the Phils: “Contracting
ISSUE: parties may establish any agreement, term, and condition
WON the machines in question were included when the they may deem advisable, provided they are not contrary to
mortgaged lands and buildings which contained them were law, morals or public policy.”
foreclosed (YES) Norton Resources and Dev’t Corp. v. All Asia Bank Corp,
reiterating Benguet Corp v. Cabildo: “Where the written
RATIO: YES. The machines were covered by the real estate terms of the contract are not ambiguous and can only be
mortgages and were included in the extrajudicial read one way, the court will interpret the contract as a
foreclosure sale. matter of law.”
The original MTIs and the subsequent amendment and SC: Doctrine applies in this case, since the MTI +
supplements contained the following pertinent terms: succeeding additions to it are clear.
The MTI was clear that the machines contained by the lands
Original MTI and buildings mortgage were included. This cannot be
“…it will assign, transfer and convey as it has hereby interpreted in any other way.
ASSIGNED, TRANSFERRED and CONVEYED by way of a Granting in this case that even if it were not expressly
registered first mortgage unto [RCBC] . . . the various parcels provided that the machines would be covered, law and
of land covered by several Transfer Certificates of Title issued jurisprudence provide that they will still be included.
by the Registry of Deeds, including the buildings and NCC Art. 2217 provides that the mortgage extends to the
existing improvements thereon, as well as of the natural accessions and improvements, among others.
machinery and equipment more particularly described and Bischoff v. Pomar and Cia. General de Tabacos: Even if the
listed that is to say, the real and personal properties listed in machinery were not expressly included in the mortgage,
Annexes "A" and "B" hereof of which the MORTGAGOR is the the (old) Mortgage Law provides that chattels
lawful and registered owner” permanently located in a building, either useful or
ornamental, or for the service of some industry even
Deed of Amendment though they were placed there after the creation of the
“…by way of a first mortgage and for pari-passu and pro-rata mortgage, shall be deemed part of the mortgage,
benefit of the existing and new creditors, various machineries provided they belong to the owner of the mortgaged
and equipment owned by the [Paper City], located in and land.
Cu Unjieng v. Mabalacat Sugar Co.: Reiterated the legal
bolted to and forming part of the following, generally
truism that the accessory follows the principal.
describes as . . . more particularly described and listed in
CA was incorrect in appreciating the MTI and the additions
Annexes "A" and "B" which are attached and made integral
thereto; they sufficiently state that the machineries were
parts of this Amendment. The machineries and equipment
included
listed in Annexes "A" and "B" form part of the
Moreover, the real estate mortgage over the machineries
improvements listed above and located on the parcels of
and equipment is fully supported by the fact that under NCC
land subject of the Mortgage Trust Indenture and the Real
Art. 415 (5) , immobilized machinery are considered as real
Estate Mortgage.
property and, hence, is the proper subject of a real estate
mortgage.
Second Supplement
“…to be secured against the existing properties composed DISPOSITIVE: Petition granted. CA reversed and RTC affirmed.
of land, building, machineries and equipment and
inventories more particularly described in Annexes "A" and
"B" of the INDENTURE…” Star-Two v. Paper City
GR: Accessory follows the principal (property: real estate)
Third Supplement Art. 2217: The mortgage extends to the natural accessions and
“…there shall be added to the collateral pool subject of the improvements.

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E. Right to Alienate Real Estate Mortgage Credit Why (b) is a violation of Art. 2130: it achieves the same
intent and purpose of a stipulation forbidding the mortgagor
Art. 2128 The mortgage credit may be alienated or assigned to a from alienating the collateral.
third person, in whole or in part, with the formalities required by A stipulation prohibiting the mortgagor from entering into
law. second or subsequent mortgages is valid since there is no
law forbidding it
A grant of right of first refusal in favor of the mortgagee is
Art. 1625 An assignment of a credit, right or action shall produce
valid
no effect as against third person, unless it appears in a public
Consideration for the real estate mortgage is the same for
instrument, or the instrument is recorded in the Registry of
the right of first refusal
Property in case the assignment involves real property.
Right to Alienate - The right is in favor of the mortgagor.

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

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

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

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RATIO: “It is also of the essence of these contracts that
1. Yes, the second mortgage was valid. when the principal obligation becomes due, the
The restriction on further encumbrances without the things in which the pledge or
mortgagee’s prior consent was not contained in the Deed of mortgage consists may be alienated for the
Real Estate Mortgage executed in favor of Villar but was payment to the creditor.”
merely annotated on Gala’s TCT - Galas’ decision to eventually sell the property to Villar for an
As the Deed became the basis for the annotation on additional P1,500,000 was well within the scope of her rights
Galas’ title, its terms and conditions take precedence as the owner of the subject property
over the standard, stamped annotation placed on her The property was transferred to Villar by virtue of
title another and separate contract, which is the Deed of
If it were the intention of the parties to impose such Sale
restriction, they would have and should have stipulated Garcia never alleged that the transfer was automatic
such in the Deed of Real Estate Mortgage itself upon Galas’ failure to pay or that the sale was
simulated to cover up such automatic transfer
2. Yes, the sale to Villar was valid.
- The Deed of Real Estate Mortgage likewise did not 4. Yes, Garcia’s right to foreclose subsisted despite the
proscribe the sale of the subject property during the lifetime transfer of ownership of the property to Villar. The real
of the mortgages - nature of a mortgage is described in Art. 2126, CC:
It merely provided for the options Villar may undertake in
case Galas or Pingol fail to pay their loan o “The mortgage directly and immediately subjects
Nonetheless, such proscription would have been void, as it the property upon which it is imposed, whoever the
is not allowed under Art. 2130, CC: possessor may be, to the fulfillment of the
“A stipulation forbidding the owner from alienating obligation for whose security it was constituted.”
the immovable mortgaged shall be
void.” - A mortgage is a real right, which follows the property even
after subsequent transfers by the mortgagor
3. No. The prohibition on pactum commissorium was - A registered mortgage lien is considered inseparable from
not violated. the property inasmuch as it is a right in rem
- The stipulation referred to by Garcia reads as follows: - A sale or transfer of the mortgaged property cannot affect or
release the mortgage
Power of Attorney of MORTGAGEE. — Effective upon the - Thus, the purchaser or transferee is necessarily bound to
breach of any condition of this Mortgage, and in addition to the acknowledge and respect the encumbrance
remedies herein stipulated, the MORTGAGEE is likewise - It may still be foreclosed despite transfer, as provided by
appointed attorney-in-fact of the MORTGAGOR with full power Art. 2129, CC:
and authority to take actual possession of the mortgaged “The creditor may claim from a third person in
properties, to sell, lease any of the mortgaged properties, to possession of the mortgaged property, the
collect rents, to execute deeds of sale, lease, or agreement that payment of the part of the credit secured by the
may be deemed convenient, to make repairs or improvements property which said third person possesses, in
on the mortgaged properties and to pay the same, and perform terms and with the formalities
any other act which the MORTGAGEE may deem convenient for which the law established.”
the proper administration of the mortgaged properties. - However, Vilar, in buying the subject property with notice
Elements of Pactum Commissorium: that it was mortgaged, only undertook to pay such
There should be a property mortgaged by way of mortgage or allow the subect property be sold upon
security for the payment of the principal obligation failure of the mortgage creditor to obtain payment from
There should be a stipulation for automatic the principal debtor once the debt matures. Villar did
appropriation by the creditor of the thing mortgaged in not obligate herseld to replace the debtor in the
case of non-payment principal obligation, and could not do so in law without
The power of attorney provision did not provide that the the creditor’s consent, as the same constitutes a
ownership of the subject property would automatically pass novation
to Villar upon Galas’ failure to pay the loan on time o Art. 1293. Novation which consists in substituting a
o What it granted was the mere appointment of Villar as new debtor in the place of the original one, may be
attorney-in-fact, with authority to sell or otherwise made even without the knowledge or against the
dispose of the subject property, and the apply the will of the latter, but not without the consent of the
proceeds to the payment of the loan creditor.”
- Obligation to pay the mortgage indebtedness
o This provision is customary in mortgage contracts, and
is in conformity with Art. 2087, CC: REMAINS WITH THE ORIGINAL DEBTORS, GALAS AND
PINGOL

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E.C. McCullough & Co. v. Veloso:
o “The obligation of the new possessor to pay the debt
originated only from the right of the creditor to demand 1. Judicial Foreclosure
payment of him, it being necessary that a demand for
payment should have previously been made upon the a. Complaint for Foreclosure
debtor and the latter should have failed to pay. And
even if these requirements were complied with, still the Rule 68, Sec. 1 Complaint in action for foreclosure — In an
third possessor might abandon the property mortgaged, action for the foreclosure of a mortgage or other encumbrance
and in that case it is considered to be in the possession upon real estate, the complaint shall set forth the date and due
of the debtor.” execution of the mortgage; its assignments, if any; the names
Rodriguez v. Reyes: and residences of the mortgagor and the mortgagee; a
o “The maxim "caveat emptor " applies only to execution description of the mortgaged property; a statement of the date of
sales, and this was not one such. The mere fact that the note or other documentary evidence of the obligation
the purchaser of an immovable has notice that the secured by the mortgage, the amount claimed to be unpaid
acquired realty is encumbered with a mortgage does thereon; and the names and residences of all persons having or
not render him liable for the payment of the debt claiming an interest in the property subordinate in right to that of
guaranteed by the mortgage, in the absence of the holder of the mortgage, all of whom shall be made
stipulation or condition that he is to assume payment of defendants in the action.
the mortgage debt. The reason is plain: the mortgage is
merely an encumbrance on the property, entitling the
A judicial foreclosure is initiated by a complaint.
mortgagee to have the property foreclosed, i.e., sold, in
case the principal obligor does not pay the mortgage
The complaint must contain:
debt, and apply the proceeds of the sale to the
Date and due execution of mortgage
satisfaction of his credit. Mortgage is merely an
Assignments, if any
accessory undertaking for the convenience and security
Names and residences of the mortgagors and the
of the mortgage creditor, and exists independently of
mortgagee
the obligation to pay the debt secured by it. The
Description of mortgaged property
mortgagee, if he is so minded, can waive the mortgage
Date of note or other documentary evidence regarding the
security and proceed to collect the principal debt by
mortgage
personal action against the original mortgagor.”
Unpaid amount
Garcia has no cause of action against Villar in the absence
Names and residences of all persons having or claiming an
of evidence to show that the second mortgage executed in
interest in the property with subordinate right to the
favor of Garcia has been violated by his debtors, Galas and
mortgagor
Pingol, i.e., that Garcia has made a demand on said debtors
for the payment of the obligation and failed to pay b. Judgment on Foreclosure
Rule 68, Sec. 2 Judgment on foreclosure for payment or sale
— If upon the trial in such action the court shall find the facts set
Garcia v. Villar
forth in the complaint to be true, it shall ascertain the amount due
The same property is securing 2 mortgages. Still satisfies the
to the plaintiff upon the mortgage debt or obligation, including
elements of a mortgage.
interest and other charges as approved by the court, and costs,
and shall render judgment for the sum so found due and order
SGS: The lawyer of Garcia misread Art. 2129.
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
G. Foreclosure of Real Estate Mortgage
one hundred twenty (120) days from the entry of judgment, and
that in default of such payment the property shall be sold at
defaults, the creditor, as mortgagee, may elect to foreclose public auction to satisfy the judgment.
the collateral
Foreclosure of a real estate mortgage may be judicial or
extrajudicial

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Korea Exchange Bank vs. Filkor Business Integrated, Inc. (2002) mortgaged property; a statement of the date of the note or
– Quisumbing J. other documentary evidence of the obligation secured by the
Petitioners: Korea Exchange Bank mortgage, the amount claimed to be unpaid thereon; and the
names and residences of all persons having or claiming an
Respondents: Filkor Business Integrated; Kim Eung Joe; Lee
interest in the property subordinate in right to that of the holder of
Han San
Concept: Foreclosure of Real Estate Mortgage – Judgment on the mortgage, all of whom shall be made defendants in the
Foreclosure, Rules of Court action.
Doctrine: It is a basic principle in Civil Procedure that what In said complaint, the date and execution of the real estate
determines the nature of an action are the allegations in the mortgage are alleged. The properties mortgaged are stated
complaint and the reliefs sought. If the complaint sufficiently and described therein as well. In addition, the names and
complies with the requirements for REM foreclosure in the residence of the mortgagee and mortgagor are also alleged,
Rules, then the action should be treated as one for foreclosure. while the dates of the obligations secured by the mortgage
and the amounts unpaid thereon are alleged in the first to
Brief Facts: For Filkor’s failure to pay the loan, Korea Exchange twenty-seventh causes of action.
filed a complaint with TC, seeking payment of the former’s Moreover, the very prayed of the complaint reads as follows:
obligation and the foreclosure and sale of the REM executed “Ordering that the property mortgaged be foreclosed and
between the two. TC rendered judgment, ordering the payment sold at public auction in case defendants fail to pay plaintiff
of the obligation but did not order the foreclosure in case of non- within ninety (90) days from entry of judgment.”
payment, as it treated the complaint as one for collection of a Bank’s allegations in its complaint, and its prayer that the
sum of money and not an action for foreclosure. As such, it held mortgaged property be foreclosed and sold at public
that the bank has in effect waived its right to foreclose the auction, indicate that petitioner’s action was one for
mortgaged property. foreclosure of real estate mortgage. We have consistently
ruled that what determines the nature of an action, as well
ISSUE: as which court or body has jurisdiction over it, are the
WON complaint before the TC was an action for foreclosure of allegations of the complaint and the character of the relief
REM, or an action for collection of a sum of money (action for sought.
foreclosure) In addition, we find no indication whatsoever that petitioner
had waived its rights under the real estate mortgage
RATIO: A look at the complaint and the prayer sought for by executed in its favor.
the bank reveals that the action it filed was one for Thus, the trial court erred in concluding that the bank had
foreclosure of the REM and not a collection suit abandoned its mortgage lien on Filkor’s property, and that
To resolve the issue, SC looked at the complaint filed by the what it had filed was an action for collection of a sum of
bank: money.
As the action was one for foreclosure of REM, it was
To secure payment of the obligations of defendant incumbent upon the TC to order that the mortgaged property
Corporation under the First to the Twenty-Seventh Cause of be foreclosed and sold at public auction in the event that
Action, on February 9, 1996, defendant Corporation Filkor fails to pay its outstanding obligations, pursuant to
executed a Real Estate Mortgage by virtue of which it Sec. 2, Rule 68:
mortgaged to plaintiff the improvements standing on Block
13, Lot 1, Cavite Export Processing Zone, Rosario, Cavite, SEC. 2. Judgment on foreclosure for payment or sale.-If
belonging to defendant Corporation covered by Tax upon the trial in such action the court shall find the facts set
Declaration No. 5906-1 and consisting of a one-story building forth in the complaint to be true, it shall ascertain the
called warehouse and spooling area, the guardhouse, the amount due to the plaintiff upon the mortgage debt or
obligation, including interest and other charges as approved
cutting/sewing area building and the packing area building. 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
This allegation satisfies in part the requirement of Sec. 1, than ninety (90) days nor more than one hundred twenty
Rule 68 of 1997 Rules of Civil Procedure on foreclosure of (120) days from entry of judgment, and that in default of
real estate mortgage.
such payment the property shall be sold at public auction
SECTION 1. Complaint in action for foreclosure. – In an action to satisfy the judgment.
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
DISPOSITIVE: TC reversed.
names and residences of the mortgagor and the
mortgagee; a description of the

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c. Equity of Redemption Upon the finality of the order of confirmation or upon the
expiration of the period of redemption when allowed by law, the
Rule 68, Sec. 2 Judgment on foreclosure for payment or sale purchaser at the auction sale or last redemptioner, if any, shall
— If upon the trial in such action the court shall find the facts set be entitled to the possession of the property unless a third party
forth in the complaint to be true, it shall ascertain the amount due is actually holding the same adversely to the judgment obligor.
to the plaintiff upon the mortgage debt or obligation, including The said purchaser or last redemptioner may secure a writ of
interest and other charges as approved by the court, and costs, possession, upon motion, from the court which ordered the
and shall render judgment for the sum so found due and order foreclosure.
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 Rule 68, Sec. 4 Disposition of proceeds of sale — The amount
one hundred twenty (120) days from the entry of judgment, and realized from the foreclosure sale of the mortgaged property
that in default of such payment the property shall be sold at shall, after deducting the costs of the sale, be paid to the person
public auction to satisfy the judgment. foreclosing the mortgage, and when there shall be any balance
or residue, after paying off the mortgage debt due, the same
Equity of Redemption: the right of the mortgagor to extinguish shall be paid to junior encumbrancers in the order of their
the collateral and retain ownership of it. priority, to be ascertained by the court, or if there be no such
Exercised after default in the performance of the condition of encumbrancers or there be a balance or residue after payment
the mortgage but before the foreclosure sale of the collateral to them, then to the mortgagor or his duly authorized agent, or to
the person entitled to it
Exercised by paying the mortgage obligation
Period is no less than 90 days but no more than 120 days Rule 68, Sec. 5 How sale to proceed in case the debt is not all
from the entry of judgment (Rule 68, Sec. 2) 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
Equity of Redemption on Mortgagor’s Successors-In- sufficient portion of the property has been sold to pay the total
Interest
amount and the costs due, the sale shall terminate; and
All junior lien-holders acquire the right to subordinate to the
afterwards, as often as more becomes due for principal or
superior lien of the 1st mortgagee. interest and other valid charges, the court may, on motion, order
more to be sold. But if the property cannot be sold in portions
Unforeclosed Equity of Redemption
without prejudice to the parties, the whole shall be ordered to be
decree of foreclosure where junior lien-holders are not parties,
sold in the first instance, and the entire debt and costs shall be
the equity of redemption in their favor remains unforeclosed and paid, if the proceeds of the sale be sufficient therefor, there
unaffected being a rebate of interest where such rebate is proper.
A separate foreclosure proceeding should be brought to require

Rule 68, Sec. 7 Registration — A certified copy of the final order
them to redeem from the first mortgagee under penalty of losing
of the court confirming the sale shall be registered in the registry
the prerogative to redeem
of deeds. If no right of redemption exists, the certificate of title in
Whose rights are defeated? Mortgagee’s right to foreclose (or the name of the mortgagor shall be cancelled, and a new one
issued in the name of the purchaser.
assignee’s)
Where a right of redemption exists, the certificate of title in the
d. Foreclosure Sale
name of the mortgagor shall not be cancelled, but the certificate
of sale and the order confirming the sale shall be registered and
Rule 68, Sec. 3 Sale of mortgaged property; effect — When the
a brief memorandum thereof made by the registrar of deeds
defendant, after being directed to do so as provided in the next
upon the certificate of title. In the event the property is
preceding section, fails to pay the amount of the judgment within
redeemed, the deed of redemption shall be registered with the
the period specified therein, the court, upon motion, shall order
registry of deeds, and a brief memorandum thereof shall be
the property to be sold in the manner and under the provisions of
made by the registrar of deeds on said certificate of title.
Rule 39 and other regulations governing sales of real estate
under execution. Such sale shall not affect the rights of persons
If the property is not redeemed, the final deed of sale executed
holding prior encumbrances upon the property or a part thereof,
by the sheriff in favor of the purchaser at the foreclosure sale
and when confirmed by an order of the court, also upon motion,
shall be registered with the registry of deeds; whereupon the
it shall operate to divest the rights in the property of all the
certificate of title in the name of the mortgagor shall be cancelled
parties to the action and to vest their rights in the purchaser,
and a new one issued in the name of the purchaser.
subject to such rights of redemption as may be allowed by law.

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Rule 68, Sec. 8 Applicability of other provisions — The Amount claimed to be paid thereon
provisions of sections 31, 32 and 34 of Rule 39 shall be Names and residences of all persons having or claiming an
applicable to the judicial foreclosure of real estate mortgages interest in the property subordinate to the mortgagee
under this Rule insofar as the former are not inconsistent with or (they shall be made defendants)
may serve to supplement the provisions of the latter How will you know who they are? They will be
annotated at the back of the title
Rule 39, Sec. 31 Manner of using premises pending redemption; If the court finds the facts in the complaint to be true, it shall:
waste restrained — Until the expiration of the time allowed for
redemption, the court may, as in other proper cases, restrain the Ascertain amount due to the plaintiff (judgment oblige)
Order that the same be paid to the court or judgment oblige
commission of waste on the property by injunction, on the
within a period of not less than 90 days and not more
application of the purchaser or the judgment obligee, with or
than 120 days (equity of redemption)
without notice; but it is not waste for a person in possession of
An order presupposes a trial was conducted
the property at the time of the sale, or entitled to possession
90-120 days = period of grace
afterwards, during the period allowed for redemption, to continue
Equity of redemption expires (assuming judgment obligor
to use it in the same manner in which it was previously used; or
did not pay)
to use it in the ordinary course of husbandry; or to make the
Sale will be conducted, where the purchaser is the highest
necessary repairs to buildings thereon while he occupies the
bidder
property.
- Acceptance of a bid at the foreclosure sale confers no title
on the purchaser
Rule 39, Sec. 32 Rents, earnings and income of property
- Until the court has validly confirmed the foreclosure sale,
pending redemption — The purchaser or a redemptioner shall
the purchaser is nothing more than a preferred bidder
not be entitled to receive the rents, earnings and income of the
property sold on execution, or the value of the use and A hearing will be conducted for interested parties to show
occupation thereof when such property is in the possession of a cause why the sale should not be confirmed
tenant. All rents, earnings and income derived from the property Court will issue a confirmation order (upon MOTION) (Rule
pending redemption shall belong to the judgment obligor until the 68, Sec. 3)
expiration of his period of redemption. - The order of confirmation operates to divest the
mortgagor’s rights in the property and vests it in the
Rule 39, Sec. 34 Recovery of price if sale not effective; revival of purchaser, subject only to right of redemption (if it
judgment — If the purchaser of real property sold on execution, exists)
or his successor in interest, fails to recover the possession - Purchaser acquires certain rights
thereof, or is evicted therefrom, in consequence of irregularities Finality of confirmation order or expiration of redemption
in the proceedings concerning the sale, or because the judgment period (if there is a right of redemption)
has been reserved or set aside, or because the property sold - Consequence: purchaser is entitled to possession unless a
was exempt from execution, or because a third person has third party is actually holding the same adversely to the
vindicated his claim, to the property, he may on motion in the judgment obligor (mortgagor). In such a case, the
same action or in a separate action recover from the judgment possession will also have to be litigated
obligee the price paid, with interest, or so much thereof as has Proceeds of the sale paid in this order:
not been delivered to the judgment obligor; or he may, on Costs of the sale
motion, have the original judgment revived in his name for the Mortgage debt specified in the contract
whole price with interest, or so much thereof as has been Junior encumbrancers in order of priority
delivered to the Mortgagor
judgment obligor. The judgment so revived shall have the same Registration: at the Register of Deeds, present the final
force and effect as an original judgment would have as of the order of court confirming the sale
date of the revival and no more. No right of redemption: Certificate of title is cancelled and
a new one issued in the name of the purchaser
PROCEDURE
Demand by the creditor or failure to pay within the period Right of redemption exists:
File a complaint for foreclosure of mortgage, indicating: Certificate is not cancelled: (1) certificate of sale and
Date and due execution of the mortgage confirmation order are registered and a brief
Its assignments, if any memo made by registrar of deeds
Names and residences of mortgagor and mortgagee Redeemed: deed of redemption registered
Description of the mortgaged property Not redeemed: final deed of sale registered and new
Statement of the date of the note or other documentary certificate of title issued
evidence of the obligation secured by the mortgage Move for the court to render judgment on deficiency, if any

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e. Right of Redemption When are these crucial stages?
On September 7, 1994, when Huerta Alba filed an
Right of Redemption is a statutory right. In order to claim it, ex-parte motion for clarification, it failed to allege
there must be a specific law that exceptionally allows it (a that SMGI’s predecessor in interest was a credit
statutory right). institution. It merely asked for clarification whether
Look to a law. The Rules cannot grant this right. the sale was execution sale or judicial foreclosure.
On October 13, 1994, when it presented an
This right is defeated by the inchoate rights of a purchaser over exception to the order and motion to set aside
the property. order of the trial court, Huerta Alba was silent
regarding its right of redemption. It merely claimed
RA 8791 (General Banking Law of 2000) that an order by the trial court altered a prior order.
In a judicial foreclosure by a bank/quasi-bank or trust entity, On February 10, 1995, when the trial court
the mortgagor shall have the right within 1 year after the confirmed the foreclosure sale, nothing was heard
sale of the collateral to redeem the property by paying the from Huerta Alba regarding its right of redemption.
amount due under the mortgage deed with interest and all It did not invite attention to its stance that SMGI’s
costs and expenses incurred by the bank from the sale less predecessor in interest was a credit institution.
costs for custody of the property less income (rent) derived
therefrom) If Huerta Alba acted in good faith, it would have ventilated
before the CA its alleged right under Section 78 of RA 337,
Huerta Alba Resort, Inc. vs. Court of Appeals – Purísima, J. but it never did.
Petitioner: Huerta Alba Resort, Inc. (Huerta Alba) The earliest opportunity to invoke the right of redemption
Respondents: Court of Appeals (CA) and Syndicated would have been when it submitted its answer to the action
Management Group, Inc. (SMGI) for judicial foreclosure.
Following the ruling in Limpin vs. IAC, when the foreclosure
Doctrine: sale is confirmed by an order of the court, it shall operate to
Generally, the right of redemption exists only in extrajudicial divest the rights of all the parties to the action and to vest
foreclosures. In case of judicial foreclosures, there exists only an their rights in the purchaser, subject to such rights of
equity of redemption. However, even if the foreclosure is judicial, redemption as may be allowed by law.
the right of redemption exists when the mortgagee is the PNB, a The right of redemption, in this case, hinged on the factual
bank, a banking institution, or a credit institution. The right of issue of whether Intercon was a bank, banking institution, or
redemption under Sec. 78 of RA 337 is a compulsory credit institution. It is in the nature of a compulsory
counterclaim that must be averred in the answer. Failing to counterclaim, which should have been averred in the
invoke it in a timely fashion shall bar a person from claiming its answer.
benefits in later part of proceedings. (See further discussion The very purpose of a counterclaim would have been
based on the cited case of Limpin vs. IAC below) served had the petitioner alleged in its answer its purported
right under Section 78 of RA 337. The rules of counterclaim
Brief Facts: are designed to enable the disposition of a whole
Huerta Alba’s mortgaged properties were judicially foreclosed. In controversy of interested parties’ conflicting claims, at one
a series of proceedings it did not invoke its right of redemption time and in one action.
under Sec. 78 of RA 337. After the foreclosure sale was The failure of petitioner to seasonably assert its alleged right
confirmed, it invoked for the first time its right of redemption under Section 78 of RA 337 precluded it from doing so in a
under the said provision. later stage of the case. Estoppel may be successfully
invoked if the party fails to raise the question in the early
ISSUE: stages of the proceedings.
WON Huerta Alba had the right of redemption. (NO)
DISPOSITIVE: Petition DENIED. CA ruling affirmed.
RATIO: Huerta Alba only had the equity of redemption. It
could not claim the right of redemption because it failed to Discussion on equity of redemption and right of redemption
invoke the right in a timely fashion. (as enunciated in the cited case of Limpin vs. IAC):
Huerta Alba: theorized that it invoked the right in a timely Right of redemption: a prerogative to re-acquire
fashion, i.e., after the confirmation by the court of the mortgaged property after registration of the foreclosure sale
foreclosure sale and within one year from the date of the
registration of the certificate of sale. The right of redemption in relation to a mortgage exists only
SC: It was too late for petitioner to invoke the right of in the case of the extrajudicial foreclosure of the mortgage.
redemption. It failed to assert the right in several crucial
stages of the proceedings.

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There is no right of redemption recognized in a judicial Rule 86, Sec. 7 Mortgage debt due from estate — A creditor
foreclosure except only where the mortgagee is either of the holding a claim against the deceased secured by mortgage or
following: other collateral security, may abandon the security and
o The Philippine National Bank prosecute his claim in the manner provided in this rule, and
o A bank or a banking institution or a credit institution share in the general distribution of the assets of the estate; or he
When redemption is granted by law in case of judicial may foreclose his mortgage or realize upon his security, by
foreclosure, the right to redeem the property sold—after action in court, making the executor or administrator a party
confirmation by the court of the foreclosure sale—may be defendant, and if there is a judgment for a deficiency, after the
exercised within a period of one year from the date of sale of the mortgaged premises, or the property pledged, in the
registration of the certificate of sale in the registry of foreclosure or other proceedings to realize upon the security, he
property. may claim his deficiency judgment in the manner provided in the
When a mortgage is extrajudicially foreclosed, Act 3135 preceding section; or he may rely upon his mortgage or other
grants a right of redemption within one year from the security alone, and foreclose the same at any time within the
registration of the sheriff’s certificate of foreclosure sale. period of the statute of limitations, and in that event he shall not
When the foreclosure is judicially affected, and the entity is be admitted as a creditor, and shall receive no share in the
not the PNB, a bank, a banking institution, or a credit distribution of the other assets of the estate; but nothing herein
institution, only the equity of redemption exists. contained shall prohibit the executor or administrator from
Equity of redemption: right of the defendant mortgagor to redeeming the property mortgaged or pledged, by paying the
extinguish the mortgage and retain ownership of the debt for which it is held as security, under the direction of the
property by paying the secured debt within the 90-day court, if the court shall adjudge it to be for the best interest of the
period after the judgment becomes final, in accordance with estate that such redemption shall be made.
RULE 68 of ROC, or even after the foreclosure sale BUT
prior to its confirmation. Mortgagor: entitled to surplus
After the order of confirmation, no redemption can be made Mortgagee: entitled to deficiency judgment (by Motion for
any longer. The order of confirmation operates to divest the
Deficiency Judgment for the balance)
rights of all the parties to the action and to vest their rights in
the purchaser. The right to recover deficiencies by the mortgagee extends to
the judicial foreclosure of mortgage arising out of a settlement of
Herta Alba v. CA an estate (Rule 86), and it gives the mortgagee 3 distinct,
There was no exercise of the equity of redemption. This case independent and mutually exclusive remedies:
involved a judicial foreclosure sale. Waive mortgage and claim the principal obligation from the
estate as an ordinary claim
f. Right to Surplus or Deficiency Judicial foreclosure and prove deficiency as an ordinary
claim
Rule 68, Sec. 4 Disposition of proceeds of sale — The amount Rely on the mortgage exclusively without the right to
realized from the foreclosure sale of the mortgaged property deficiency
shall, after deducting the costs of the sale, be paid to the person
foreclosing the mortgage, and when there shall be any balance FOR DEFICIENCIES:
or residue, after paying off the mortgage debt due, the same Against the MORTGAGOR: Action for Deficiency Judgment
shall be paid to junior encumbrancers in the order of their Against the mortgagor’s ESTATE:
priority, to be ascertained by the court, or if there be no such ORDINARY CLAIM: of his principal obligation from the
encumbrancers or there be a balance or residue after payment estate; operates as a waiver of the mortgage
to them, then to the mortgagor or his duly authorized agent, or to JUDICIAL FORECLOSURE of mortgage: any deficiency by
the person entitled to it. ordinary claim
EXTRAJUDICIAL FORECLOSURE alone: no deficiency
Rule 68, Sec. 6 Deficiency judgment — If upon the sale of any
real property as provided in the next preceding section there be This does not apply to 2nd mortgages because the 2nd mortgage
a balance due to the plaintiff after applying the proceeds of the is not a full mortgage.
sale, the court, upon motion, shall render judgment against the
defendant for any such balance for which, by the record of the
case, he may be personally liable to the plaintiff, upon which
execution may issue immediately if the balance is all due at the
time of the rendition of the judgment; otherwise, the plaintiff shall
be entitled to execution at such time as the balance remaining
becomes due under the terms of the original contract, which time
shall be stated in the judgment.

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2. Extrajudicial Foreclosure thereon the corresponding file number, date and time of
filing;
a. Special Powers
collect the filing fees therefore pursuant to rule 141,
Act No. 3135, Sec. 1 When a sale is made under a special Section 7(c), as amended by A.M. No. 00-2-01-SC, and
power inserted in or attached to any real-estate mortgage issue the corresponding official receipt;
hereafter made as security for the payment of money or the
fulfillment of any other obligation, the provisions of the following examine, in case of real estate mortgage foreclosure,
election shall govern as to the manner in which the sale and whether the applicant has complied with all the
redemption shall be effected, whether or not provision for the requirements before the public auction is conducted
same is made in the power. under the direction of the sheriff or a notary public,
pursuant to Sec. 4 of Act 3135, as amended;
Mortgagee has the right to foreclose a real estate mortgage
upon the mortgagor’s failure to pay his obligation sign and issue the certificate of sale, subject to the
This right must be exercised according to its clear mandate approval of the Executive Judge, or in his absence, the
– requirements of the law must be complied with, otherwise, Vice-Executive Judge. No certificate of sale shall be
valid exercise of the right ends issued in favor of the highest bidder until all fees provided
for in the aforementioned sections and in Rule 141,
Extrajudicial foreclosure Section 9(1), as amended by A.M. No. 00-2-01-SC, shall
May be exercised only if there is a special power inserted have been paid; Provided, that in no case shall the
or attached to the document in which the REM appears, and amount payable under Rule 141, Section 9(1), as
only in accordance with the provisions of Act No. 3135 amended, exceed P100,000.00;
The SPA is not a pactum commissorium. It is a special power after the certificate of sale has been issued to the
required to extrajudicially foreclose. highest bidder, keep the complete records, while awaiting
any redemption within a period of one (1) year from date
b. Foreclosure Sale of registration of the certificate of sale with the Register of
Deeds concerned, after which, the records shall be
Act No. 3135, Sec. 2 Said sale cannot be made legally outside archived. Notwithstanding the foregoing provision,
of the province in which the property sold is situated; and in case juridical persons whose property is sold pursuant to an
the place within said province in which the sale is to be made is extra-judicial foreclosure, shall have the right to redeem
subject to stipulation, such sale shall be made in said place or in the property until, but not after, the registration of the
the municipal building of the municipality in which the property or certificate of foreclosure sale which in no case shall be
part thereof is situated. more than three (3) months after foreclosure, whichever
is earlier, as provided in Section 47 of Republic Act No.
8791 (as amended, Res. Of August 7, 2001).
A.M. No. 99-10-05-0, as amended
Procedure In Extra-Judicial Foreclosure Of Mortgage
In line with the responsibility of an Executive Judge under
mortgages of real estates and/or chattels in different locations
Administrative Order No. 6, dated June 30, 1975, for the
covering one indebtedness, only one filing fee corresponding to
management of courts within his administrative area, included in
such indebtedness shall be collected. The collecting Clerk of
which is the task of supervising directly the work of the Clerk of
Court shall, apart from the official receipt of the fees, issue a
Court, who is also the Ex-Office Sheriff, and his staff, and the
certificate of payment indicating the amount of indebtedness, the
issuance of commissions to notaries public and enforcement of
filing fees collected, the mortgages sought to be foreclosed, the
their duties under the law, the following procedures are hereby real estates and/or chattels mortgaged and their respective
prescribed in extrajudicial foreclosure of mortgages: locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places where
All applications for extra-judicial foreclosure of mortgage
the other properties are located and of allowing the extrajudicial
whether under the direction of the sheriff or a notary public,
foreclosures to proceed thereat.
pursuant to Act 3135, as amended by Act 4118, and Act
1508, as amended, shall be filed with the Executive Judge, The notices of auction sale in extrajudicial foreclosure for
through the Clerk of court who is also the Ex-Officio Sheriff. publication by the sheriff or by a notary public shall be
published in a newspaper of general circulation pursuant to
Upon receipt of an application for extra-judicial foreclosure
Section 1, Presidential Decree No. 1079, dated January 2,
of mortgage, it shall be the duty of the Clerk of Court to:
1977, and non-compliance therewith shall constitute a
violation of Section 6 thereof.
receive and docket said application and to stamp

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The Executive Judge shall, with the assistance of the Clerk GR: Under normal circumstances, statutory provisions governing
of Court, raffle applications for extrajudicial foreclosure of posting of notice of REM foreclosure sales must be strictly
mortgage under the direction of the sheriff among all sheriffs, complied with
including those assigned to the Office of the Clerk of Court Even slight deviations will invalidate the notice and render
and Sheriffs IV assigned in the branches. the sale voidable
Examples:
The name/s of the bidder/s shall be reported by the sheriff o If the sheriff sells the collateral without the required
or the notary public who conducted the sale to the Clerk of notice, and induced by the mortgagee, and the
Court before the issuance of the certificate of sale. purchaser is the mortgagee, the sale is absolutely
void and no title passes
o If mistakes or omissions occur in the notice of sale,
WHERE: Province in which the property is situated
calculated to deter or mislead bidders, to depreciate
As stipulated (within the province) or
the value of the property, or to prevent it from bringing a
In the municipal building of the municipality in which the
fair price, such mistakes will be fatal to the validity of
property or part of it is located
the notice and the consequent foreclosure sale
XPN: If the objectives are attained, immaterial errors and
NOTICE:
mistakes may not affect the sufficiency of the notice
For all: 3 public places of the municipality or city (for at least
Examples:
20 days)
o If what is lacking is the posting in three public places,
If property > P400: newspaper of general circulation (once a
not the publication in a newspaper of general
week for 3 consecutive weeks)
circulation, and considering the attendant
circumstances, the publication of the notice of
PROCEDURE:
sale in a newspaper general circulation alone has
Apply for extrajudicial foreclosure sale filed with the
been held to be more than sufficient
executive judge through the clerk of court
compliance with the notice-posting requirement of
Duties of the clerk of court:
the law, specifically if the objectives are attained and
Ensure SPA is inserted/attached to the deed of REM
there is no showing that the collateral was sold for a
Docket the application
price far below its value to insinuate any bad faith, nor
Collect filing fee and issue a receipt
that there was collusion
XPN: Coperatives, thrift banks, rural banks
o There is a greater probability that a notice published in a
Issue certificate of payment if collateral is located
newspaper of general circulation, which is distributed
separately and covers only 1 indebtedness
nationwide, shall be read by more people than a notice
Raffle among the sheriffs with the supervision of the
posted in a public bulletin board, no matter how
executive judge
strategic its location
Duties of sheriff assigned
Prepare notice of extrajudicial sale
Grand Farms, Inc. vs. CA (1991) – Regalado, J.
Cause publication
Petitioners: Grand Farms, Inc. & Philippine Shares Corporation
Executive judge will distribute copies to newspaper
Respondents: CA; Esperanza Echiverri, as Clerk of Court & Ex-
companies for publication
officio Sheriff; Sergio Cabrera as Deputy Sheriff-in-Charge; and
Debtor-mortgagor need not be served a copy of notice
Banco Filipino Savings and Mortgage Bank. Concept:
unless the mortgage contract requires it (case of Grand
Requirement of Notice
Farms)
For loans < P100,000 by rural/thrift banks: no more
Doctrine:
need for publication, only notice posted for 60 days in
The need of personal notice to the mortgagor, while not
conspicuous areas of municipality where property is
generally required by law, could be validly stipulated in the
located (municipal building, municipal public market,
mortgage contract, and the failure to comply with such is fatal to
rural bank, barangay hall)
the foreclosure proceedings.
1) Requirements of Notice
Brief Facts:
Grand Farms sought to annul the foreclosure proceedings
Notice
instituted by Banco Filipino. Banco Filipino impliedly admitted
Its object is to inform the public of the nature and condition
that no personal notice was sent to Grand Farms, although it
of the collateral to be sold (and the time, place and terms of
argues that notice by publication in a newspaper of general
the sale)
circulation is sufficient. Grand Farms claims that this lack of
For the purpose of securing bidders and to prevent a
notice violates paragraph (k) of the mortgage contract, and is
sacrifice of the collateral
fatal to the foreclosure proceedings. Consequently, it filed a
motion for summary judgment.

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ISSUE: the payment of the loan to prevent foreclosure or to
WON a summary judgment may be promulgated by the TC, subsequently arrange for redemption of the property
given that there was no notice of foreclosure sent by the foreclosed.
mortgagee to the mortgagor (YES) As it was the respondent bank which caused the formulation
and preparation of the printed mortgage contract, any
RATIO: YES obscurity should be construed against it.
The real test, therefore, of a motion for summary judgment
is whether the pleadings, affidavits and exhibits in support of DISPOSITIVE: Petition granted. Case is remanded to TC for
the motion are sufficient to overcome the opposing papers summary judgment.
and to justify a finding as a matter of law that there is no
defense to the action or that the claim is clearly meritorious. 2) Conduct of Sale
Applying said criteria to the case at bar, we find that the
present action is ripe for summary judgment. Act No. 3135, Sec. 4 The sale shall be made at public auction,
between the hours or nine in the morning and four in the
Banco Filipino tacitly admitted in its answer to the request afternoon; and shall be under the direction of the sheriff of the
for admission that it did not send any formal notice of province, the justice or auxiliary justice of the peace of the
foreclosure to petitioners. Stated otherwise, there has been municipality in which such sale has to be made, or a notary
no denial the bank that no personal notice of the public of said municipality, who shall be entitled to collect a fee
extrajudicial foreclosure was ever sent to Grand Farms. of five pesos each day of actual work performed, in addition to
This omission, by itself, rendered the foreclosure his expenses.
defective and irregular for being contrary to the express
provisions of the mortgage contract. There is thus no Act No. 3135, Sec. 5 At any sale, the creditor, trustee, or other
further necessity to inquire into the other issues cited persons authorized to act for the creditor, may participate in the
by the trial court, for the foreclosure may be annulled bidding and purchase under the same conditions as any other
solely on the basis of such defect. bidder, unless the contrary has been expressly provided in the
mortgage or trust deed under which the sale is made.
While Banco Filipino was constituted as their attorney-in-fact
by Grand Farms, the inclusion of the aforequoted
A.M. No. 99-10-05-0
paragraph (k) in the mortgage contract nonetheless
(AS FURTHER AMENDED, AUGUST 7, 2001)
rendered personal notice to the latter indispensable.
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
Paragraph (k) is an additional stipulation between the MORTGAGE
parties, forming the law between them and as it is not
In line with the responsibility of an Executive Judge under
contrary to law, morals, good customs, and public policy, the
same should be complied with faithfully. Administrative Order No. 6, dated June 30, 1975, for the
Thus, while publication of the foreclosure proceedings management of courts within his administrative area, included in
in the newspaper of general circulation was complied which is the task of supervising directly the work of the Clerk of
with, personal notice is still required when the same Court, who is also the Ex-Office Sheriff, and his staff, and the
was mutually agreed upon by the parties as additional issuance of commissions to notaries public and enforcement of
condition of the mortgage contract. Such failure of the their duties under the law, the following procedures are hereby
bank to comply with the stipulation is fatal to its cause. prescribed in extrajudicial foreclosure of mortgages:
All applications for extra-judicial foreclosure of mortgage

The CA ruling that paragraph (k) was intended only to
whether under the direction of the sheriff or a notary public,
indicate the address of the mortgagor should be rejected, as
the SC interpreted an identically worded provision in pursuant to Act 3135, as amended by Act 4118, and Act 1508,
Community Savings & Loan Association, Inc. as a valid as amended, shall be filed with the Executive Judge, through the
stipulation obligating the mortgagee-bank to send Clerk of court who is also the Ex-Officio Sheriff.
personal notice of foreclosure to mortgagor.
Upon receipt of an application for extra-judicial foreclosure of
There is also no irreconcilable conflict between paragraphs mortgage, it shall be the duty of the Clerk of Court to:
(b), (d), and (k). The notices respectively mentioned in
receive and docket said application and to stamp thereon the
paragraphs (d) and (k) are addressed to the particular
purposes contemplated therein, while those mentioned in corresponding file number, date and time of filing;
paragraph (k) are specific and additional requirements
collect the filing fees therefore pursuant to rule 141, Section
intended for the mortgagors so that, thus apprised, they
7(c), as amended by A.M. No. 00-2-01-SC, and issue the
may take the necessary legal steps for the protection of
corresponding official receipt;
their interests such as

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examine, in case of real estate mortgage foreclosure, whether How: By public auction, with the supervision of the sheriff,
the applicant has complied with all the requirements before the justice/auxillary justice of municipality, or notary public
public auction is conducted under the direction of the sheriff or a
notary public, pursuant to Sec. 4 of Act 3135, as amended; When: Between 9 AM and 4 PM
sign and issue the certificate of sale, subject to the approval Where:
of the Executive Judge, or in his absence, the Vice-Executive GR: In the province in which the real property is situated
Judge. No certificate of sale shall be issued in favor of the XPN: When the place within said province is subject of
highest bidder until all fees provided for in the aforementioned stipulation, sale shall be made in the place in the municipal
sections and in Rule 141, Section 9(1), as amended by A.M. No. building of the municipality in which the property or part
00-2-01-SC, shall have been paid; Provided, that in no case thereof is situated
shall the amount payable under Rule 141, Section 9(1), as
amended, exceed P100,000.00; Conducted by whom:
Sheriff of the province;
after the certificate of sale has been issued to the highest Justice or auxiliary justice of the peace of the municipality in
bidder, keep the complete records, while awaiting any which such sale has to be made;
redemption within a period of one (1) year from date of Notary public of said municipality – entitled to a fee of P5
registration of the certificate of sale with the Register of Deeds each day, in addition to his expenses
concerned, after which, the records shall be archived.
Notwithstanding the foregoing provision, juridical persons whose Who may participate:
property is sold pursuant to an extra-judicial foreclosure, shall GR: (they are in the same condition as any other bidder)
have the right to redeem the property until, but not after, the
registration of the certificate of foreclosure sale which in no case Creditor
shall be more than three (3) months after foreclosure, whichever Trustee
is earlier, as provided in Section 47 of Republic Act No. 8791 (as Other persons authorized to act for the creditor (agent)
amended, Res. Of August 7, 2001). XPN: Contrary has been expressly provided in the mortgage or
trust deed
mortgages of real estates and/or chattels in different locations How Conducted:
covering one indebtedness, only one filing fee corresponding to Bidding: Through sealed bids, submitted to the Sheriff
such indebtedness shall be collected. The collecting Clerk of In case of a tie, open bidding shall be conducted between
Court shall, apart from the official receipt of the fees, issue a the highest bidders
certificate of payment indicating the amount of indebtedness, the Payment: In cash or in manager’s check (in Philippine
filing fees collected, the mortgages sought to be foreclosed, the currency), within 5 days from notice
real estates and/or chattels mortgaged and their respective Fees: Collected by the Clerk of Court, NON-REFUNDABLE
locations, which certificate shall serve the purpose of having the (even if property subsequently redeemed)
application docketed with the Clerks of Court of the places where Report: Sheriff or notary public shall report name/s of the
the other properties are located and of allowing the extrajudicial bidder/s to the Clerk of Court
foreclosures to proceed thereat. Certificate of Sale: Issued and signed by the Clerk of Court
upon presentation of the appropriate receipts
The notices of auction sale in extrajudicial foreclosure for Subject to approval of the Exec. Judge (in his absence,
publication by the sheriff or by a notary public shall be published Vice-Executive Judge)
in a newspaper of general circulation pursuant to Section 1,
Presidential Decree No. 1079, dated January 2, 1977, and non- Rabat v. PNB (2012) – Bersamin, J.
compliance therewith shall constitute a violation of Section 6 Petitioner: Spouses Francisco and Merced Rabat
thereof. Respondent: Philippine National Bank
Concept: Real Estate Mortgage: Extrajudicial Foreclosure –
The Executive Judge shall, with the assistance of the Clerk of Conduct of Sale
Court, raffle applications for extrajudicial foreclosure of mortgage
under the direction of the sheriff among all sheriffs, including Doctrine:
those assigned to the Office of the Clerk of Court and Sheriffs IV Inadequacy of the price in an extrajudicial foreclosure does not
assigned in the branches. invalidate the sale, and said sale is still valid. If the proceeds of
the sale are insufficient to satisfy the principal obligation, the
The name/s of the bidder/s shall be reported by the sheriff or mortgagee is entitled to the deficiency owing it.
the notary public who conducted the sale to the Clerk of Court
before the issuance of the certificate of sale.

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Brief Facts: property “within the term of one year from and after
A loan accommodation of P4-M was granted to the Sps. Rabat the date of the sale”
by PNB, with a REM securing said obligation. The aggregate SC: PNB’s bid price might not even be said to be
amount of the spouses’ loan was P3,517,380 (as evidenced by outrageously low as to be shocking to the conscience; as
promissory notes). The spouses failed to pay the balance when the CA noted, that bid price was almost equal to both the
it became due, so PNB filed a petition for the extrajudicial P4-M applied for as a loan, and the total sum of P3,517,380
foreclosure of the REM. At the 2 auction sales, PNB was the actually availed of by the spouses
highest bidder with a bid of P3,874,800. As the proceeds were
insufficient (entire obligation amounted to P14,745,398.25), PNB 2. YES, PNB had the legal right to recover the deficiency
sent demand letters to the spouses, and when they failed to amount.
comply, PNB filed a complaint for sum of money. The Sps. In PNB v. CA, SC held:
Rabat filed a counterclaim, questioning the validity of the auction o “If the proceeds of the sale are insufficient to cover the
sales, and the RTC and CA initially declared the 2 auction sales debt in an extrajudicial foreclosure of the mortgage, the
void. On remand from the SC, the CA declared the auction sales mortgagee is entitled to claim the deficiency from the
valid and ruled that the PNB was entitled to be paid the debtor”
remainder of the obligation still owing it because of the o When the Legislature intends to deny the right to sue for
inadequacy of the auction proceeds. any deficiency resulting from foreclosure of security
given to guarantee an obligation, it expressly provides
ISSUES: (pledges – Art. 2115 and chattel mortgages on things
WON the inadequacy of the bid price invalidated the forced sold on installment basis – Art. 1484(3))
sale (NO) o Act No. 3135, governing extrajudicial foreclosure of
WON PNB is entitled to recover any deficiency (YES) mortgages, while silent as to the mortgagee’s right to
recover, does not, on the other hand, prohibit recovery
RATIO: No merit in the appeal. of deficiency. Accordingly, it has been held that a
1. NO, the inadequacy of the bid price at a forced sale, deficiency claim arising from the extrajudicial
unlike in an ordinary sale, is immaterial and does not foreclosure is allowed
nullify the sale. As the SC indicated in Prudential Bank v. Martinez, the fact
A forced sale is considered more beneficial to the mortgage that the mortgaged property was sold at an amount less
debtor because it makes redemption of the property easier than its actual market value should not militate against the
BPI v. Reyes: Inadequacy of price at a forced sale is right to such recovery
immaterial and doesn’t nullify a sale since, in a forced sale, SC: No question that PNB was legally entitled to recover the
a low price is more beneficial to the mortgage debtor for it penalty charge of 3% per annum and attorney’s fees
makes redemption of the property easier equivalent to 10%  documents relating to the loan and the
o Cited The National Loan and Investment Board v. REM show that the Sps. Rabat expressly conformed to such
Meneses: Inadequacy of the price of the sale … is not additional liabilities and could not now insist otherwise
of itself sufficient to annul said sale, where there has o Contract is the law between the parties; Sps. Rabat did
been strict compliance with all the requisites marked not challenge the legitimacy and efficacy of the
out by law to obtain the highest possible price, and additional liabilities, and cannot now bar PNB from
where there is no showing that a better price is recovering deficiencies
obtainable
o Cited Hulst v. PR Builders, Inc.: Where there is a right to DISPOSITIVE: Second amended decision AFFIRMED.
redeem, inadequacy of price should not be material
because the judgment debtor may re-acquire the c. Right of Redemption
property or else sell his right to redeem and thus
recover any loss he claims to have suffered by reason Act No. 3135, Sec. 6 In all cases in which an extrajudicial sale is
of the price obtained at the execution sale. Thus, made under the special power hereinbefore referred to, the
respondent stood to gain rather than be harmed by the debtor, his successors in interest or any judicial creditor or
low sale value of the auctioned properties because it judgment creditor of said debtor, or any person having a lien on
possesses the right of redemption the property subsequent to the mortgage or deed of trust under
o Since the mode of forced sale was an extrajudicial which the property is sold, may redeem the same at any time
foreclosure of REM, governed by Act No. 3135, law within the term of one year from and after the date of the sale;
reveals nothing to the effect that there should be a and such redemption shall be governed by the provisions of
minimum bid price or that the winning bid should be sections four hundred and sixty-four to four hundred and sixty-
equal to the appraised value of the foreclosed property six, inclusive, of the Code of Civil Procedure, in so far as these
What is provided is that the mortgage debtor is are not inconsistent with the provisions of this Act.
given the opportunity to redeem the foreclosed

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A.M. No. 99-10-05-0 mortgages of real estates and/or chattels in different locations
(AS FURTHER AMENDED, AUGUST 7, 2001) covering one indebtedness, only one filing fee corresponding to
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF such indebtedness shall be collected. The collecting Clerk of
MORTGAGE Court shall, apart from the official receipt of the fees, issue a
In line with the responsibility of an Executive Judge under certificate of payment indicating the amount of indebtedness, the
Administrative Order No. 6, dated June 30, 1975, for the filing fees collected, the mortgages sought to be foreclosed, the
management of courts within his administrative area, included in real estates and/or chattels mortgaged and their respective
which is the task of supervising directly the work of the Clerk of locations, which certificate shall serve the purpose of having the
Court, who is also the Ex-Office Sheriff, and his staff, and the application docketed with the Clerks of Court of the places where
issuance of commissions to notaries public and enforcement of the other properties are located and of allowing the extrajudicial
their duties under the law, the following procedures are hereby foreclosures to proceed thereat.
prescribed in extrajudicial foreclosure of mortgages:
The notices of auction sale in extrajudicial foreclosure for
All applications for extra-judicial foreclosure of mortgage publication by the sheriff or by a notary public shall be published
whether under the direction of the sheriff or a notary public, in a newspaper of general circulation pursuant to Section 1,
pursuant to Act 3135, as amended by Act 4118, and Act 1508, Presidential Decree No. 1079, dated January 2, 1977, and non-
as amended, shall be filed with the Executive Judge, through the compliance therewith shall constitute a violation of Section 6
Clerk of court who is also the Ex-Officio Sheriff. thereof.
Upon receipt of an application for extra-judicial foreclosure of The Executive Judge shall, with the assistance of the Clerk of
mortgage, it shall be the duty of the Clerk of Court to: Court, raffle applications for extrajudicial foreclosure of mortgage
under the direction of the sheriff among all sheriffs, including
receive and docket said application and to stamp thereon the those assigned to the Office of the Clerk of Court and Sheriffs IV
corresponding file number, date and time of filing; assigned in the branches.
collect the filing fees therefore pursuant to rule 141, Section The name/s of the bidder/s shall be reported by the sheriff or
7(c), as amended by A.M. No. 00-2-01-SC, and issue the the notary public who conducted the sale to the Clerk of Court
corresponding official receipt; before the issuance of the certificate of sale.
examine, in case of real estate mortgage foreclosure, whether Right of Redemption is a statutory right generally conferred on
the applicant has complied with all the requirements before the the mortgagor but may be exercised by other persons. It
public auction is conducted under the direction of the sheriff or a extinguishes the inchoate right of the purchaser that is acquired
notary public, pursuant to Sec. 4 of Act 3135, as amended; at the foreclosure sale.
sign and issue the certificate of sale, subject to the approval The right acquired by a purchaser at the foreclosure sale is
of the Executive Judge, or in his absence, the Vice-Executive merely inchoate. The ownership remains with the mortgagor
Judge. No certificate of sale shall be issued in favor of the until eexpiration of the grace period for the right of redemption.
highest bidder until all fees provided for in the aforementioned
sections and in Rule 141, Section 9(1), as amended by A.M. No. For the party to claim the right of redemption, there must be a
00-2-01-SC, shall have been paid; Provided, that in no case specific law that exceptionally allows it.
shall the amount payable under Rule 141, Section 9(1), as
amended, exceed P100,000.00; Who may redeem:
Debtors
after the certificate of sale has been issued to the highest Successors in interest
bidder, keep the complete records, while awaiting any Any judicial creditor or judgment creditor of said debtor
redemption within a period of one (1) year from date of Any person having a lien on the property subsequent to the
registration of the certificate of sale with the Register of Deeds mortgage or deed of trust under which the property is sold
concerned, after which, the records shall be archived. Juridical persons: May redeem until the registration of the
Notwithstanding the foregoing provision, juridical persons whose certificate of foreclosure sale (shall not be more than 3 months
property is sold pursuant to an extra-judicial foreclosure, shall after foreclosure)
have the right to redeem the property until, but not after, the
registration of the certificate of foreclosure sale which in no case When:
shall be more than three (3) months after foreclosure, whichever Act 3135: 1 year from date of registration of certificate of
is earlier, as provided in Section 47 of Republic Act No. 8791 (as sale
amended, Res. Of August 7, 2001). RA 8791: After the foreclosure or before registration of
certificate of foreclosure, whichever is earlier (which shall
Where the application concerns the extrajudicial foreclosure of not exceed 3 months) – bank must be the mortgagee

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How: Rules of Court, Secs. 27-33 Goldenway Merchandising Corp. v. Equitable PCI Bank (2013) –
Villarama, Jr., J.
Extrajudicial foreclosure sale Petitioner: Goldenway Merchandising Corp. (GMC)
Right acquired by the purchaser: is merely inchoate Respondent: Equitable PCI Bank
Ownership remains in the mortgagor until the expiration of Concept: Extrajudicial Foreclosure; Right of Redemption
the period granted for the right of redemption
Doctrine:
Right of redemption The right of redemption is a statutory right that must be
Upon its expiration, without the mortgagor having exercised exercised in the manner prescribed and the period provided
the right of redemption, the ownership becomes by the statute that grants such right, for it to be effective.
consolidated in the purchaser (not inchoate right anymore) Under the General Banking Law of 2000 (RA 8791), juridical
To claim a right of redemption, there must be a specific law persons, as mortgagors, have a redemption period which
that exceptionally allows it commences from the date of the foreclosure sale and
expires upon (a) registration of the certificate of sale, or (b)
GR: When a REM is foreclosed extrajudicially, Act 3135 grants three months after the foreclosure, whichever is earlier.
the right of redemption within 1 year from the date of
registration of the certificate of the foreclosure sale Brief Facts:
Provision says from date of sale, but jurisprudence GMC attempted to redeem its foreclosed properties from
interpreted it to be from date of registration Equitable. Equitable rejected the attempt to redeem, arguing that
the period for redemption, as provided for by RA 8791, which
XPN: RA 8791 (General Banking Law of 2000) provides that amended Act No. 3135, has already lapsed and that the title to
when the REM is foreclosed extrajudicially by a bank, quasi- the properties had already been consolidated in its favor. GMC
bank or trust entity, juridical mortgagors are granted the right to now comes to the Court to argue against the application of RA
redeem until, but not later than the registration of the 8791.
certificate of foreclosure sale (in no case shall be more than 3
months after foreclosure) ISSUE:
WON Sec. 47 of RA 8791 applies to the contract (YES)
How to determine if a right of redemption exists?
Identify the law that allows the right of redemption RATIO: Sec. 47’s shorter period of redemption applies to
Apply its provisions to the specific case the contract.
On the issue of non-impairment of contracts:
On the price of the sale of the collateral: o There is an impairment of obligations under contracts
Immaterial if the collateral is sold at an amount less than its when the subsequent law changes the terms of a
actual market value contract between the parties, imposes new conditions,
o Mere inadequacy of the price obtained at the foreclosure dispenses with those already agreed upon, or
sale will not be sufficient to set it aside if there is no withdraws remedies for the enforcement of the rights of
showing that in the event of a regular sale, a better the parties.
price can be obtained o Sec. 47 did not divest parties the right to redeem their
o XPT: the amount is “shocking to the conscience” foreclosed properties; it only modified the time to
When there is a right to redeem, the mortgagor can: exercise such right.
o Exercise the right and sell the collateral; OR o It reduced the one-year period in Act No. 3135. The new
o Sell the right to redeem to a third party redemption period, for juridical persons who are
Either of the 2 abovementioned situations allows the mortgagors, now commences from the date of the
mortgagor to recover any alleged loss suffered by reason of foreclosure sale and expires upon (a) registration of the
the low price at the foreclosure sale certificate of sale, or (b) three months after the
foreclosure, whichever is earlier.
o There is likewise no retroactive application; it only covers
foreclosure sales executed during its effectivity and
exempts those that are executed prior to June 13,
2000.

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On the issue of equal protection: 1) Who may Redeem
o GMC: Law discriminates against mortgagors who are
juridical persons. Act No. 3135, Sec. 6 In all cases in which an extrajudicial sale is
o SC: Equal protection does not require absolute equality made under the special power hereinbefore referred to, the
but that all person be treated alike under like conditions, debtor, his successors in interest or any judicial creditor or
both as to privileges conferred and liability imposed. It judgment creditor of said debtor, or any person having a lien on
permits of reasonable classification, which is based on the property subsequent to the mortgage or deed of trust under
real and reasonable distinctions, and such classification which the property is sold, may redeem the same at any time
is germane to the purpose of the law. within the term of one year from and after the date of the sale;
o CA is correct in ascertaining the legislative intent behind
and such redemption shall be governed by the provisions of
RA 8791. sections four hundred and sixty-four to four hundred and sixty-
The difference of treatment between natural and
six, inclusive, of the Code of Civil Procedure, in so far as these
juridical persons was based on the nature of the
are not inconsistent with the provisions of this Act.
properties foreclosed – whether these are used for
residence, in which case the one-year redemption
period applies, or used for industrial or commercial
Rule 39, Sec. 27 Who may redeem real property so sold — Real
purposes, in which case a shorter term is deemed
property sold as provided in the last preceding section, or any
necessary to allow mortgagees (usually banks) to
dispose of these acquired assets as soon as part thereof sold separately, may be redeemed in the manner
possible and reduce the period of uncertainty in the hereinafter provided, by the following persons:
ownership over such acquired assets.
The judgment obligor, or his successor in interest in the
RA 8791 came in the aftermath of the 1997
Southeast Asian financial crisis which sought to whole or any part of the property;
reform the 1949 version of the law and create a
A creditor having a lien by virtue of an attachment, judgment
safer and more sound banking system.
The classification in this case is highly germane and or mortgage on the property
pertinent to the law.
sold, or on some part thereof, subsequent to the lien under
Legislative intent taken into account, which is for the
furtherance of public interest, GMC’s theory of which the property was sold. Such redeeming creditor is termed
impairment of contract is further weakened. a redemptioner.
The right to redemption is a statutory right which must
Act No. 3135, Sec. 6 Rule 39, Sec. 27, ROC
be exercised the manner prescribed and within the time
Debtors Judgment obligor, or his
period provided in the statute. RA 8791, being the
Successors in interest successor in interest in
controlling law providing such right of redemption,
should be observed. Any judicial creditor or the whole or any part of
judgment creditor of said the property
The freedom to contract is not absolute; it is subject to
debtor Creditor having a lien by
the police power of the state. Such power extends to
Any person having a lien virtue of an attachment,
the banking industry which the Court has always
ontheproperty judgment or mortgage on
recognized to be imbued with public interest.
subsequent to the the property sold, or on
DISPOSITIVE: Petition DENIED. mortgage or deed of trust some part therefor,
under which the property subsequent to the lien
is sold under which the property
was sold. Such redeeming
creditor is termed a
redemptioner
GR: It is the mortgagor who has the right to redeem the

collateral sold at an extrajudicial foreclosure sale
XPN: Parties who acquire a right to the collateral under certain

conditions are also granted the right to redeem

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Successor in interest: includes, but not limited to: Brief Facts:
One to whom the mortgagor has transferred the Sps. Dolino obtained a loan from a bank and executed a real
statutory right of redemption estate mortgage over their property to secure payment of the
One to whom the mortgagor has conveyed its interest loan. They defaulted in payment and the mortgage was
in the collateral for the purpose of redemption foreclosed. It was purchased in the public auction by
Giandoncho. For fear that they might lose their right of
One who succeeds to the interest of the mortgagor by redemption, they obtained another loan from CSB and
operation of law mortgaged the same property to secure payment of the loan.
One or more joint debtor-mortgagors who were joint They again defaulted in payment, and CSB foreclosed the
owners of the collateral sold mortgage and was sold to the latter as highest bidder. The
Note: A surety CANNOT redeem the collateral of the spouses now assail the validity of the foreclosure and sale. The
debtor-mortgagor because the surety, by paying the CA passed upon the issue of ownership over the subject
debt of the debtor-mortgagor, stands in the place of the property, without it being raised by either of the parties, and
creditor, not the debtor-mortgagor, and consequently is ruled that the second mortgage was not valid, as the spouses
NOT a successor in interest in the collateral could not have validly constituted a mortgage over subject
property, it being sold to CSB in the public auction.
Redemptioner: a creditor of the mortgagor with a lien on
the collateral subsequent to the lien was the basis of the ISSUE:
foreclosure sale (said creditor is called a junior WON a mortgagor, whose property has been extrajudicially
encumbrancer) (example: second mortgagee) foreclosed and sold at the corresponding foreclosure sale, may
If the lien of the creditor is PRIOR to the lien under validly execute a mortgage contract over the same property in
which the collateral was sold (senior encumbrancer favor of a third party during the period of redemption (YES)
as, for example, a senior mortgagee), it is NOT a
redemptioner and cannot redeem RATIO: Yes, the second real estate mortgage was valid.
o But said senior encumbrancer is fully protected,
since any purchaser at the foreclosure sale of the The obiter dictum in Dizon v. Gaborro relied upon by the CA
collateral takes the property subject to such prior is erroneous
lien (mortgage follows the property), which must o Court in abovementioned case said that purchaser at a
first be satisfied foreclosure sale merely acquired an inchoate right to
Unlike a mortgagor, a redemptioner must PROVE its the property which could ripen into ownership only upon
right to redeem by producing the documents required the lapse of the redemption period (1 year) without his
by Rule 39 credit having been discharged. Inconsistent with such
pronouncement, the Court further stated that during the
Medida, et al. v. CA (1992) – Regalado, J. same period of redemption, the mortgagor was
Petitioners: Manuel D. Medida, Deputy Sheriff of the Province “divested” of his ownership
of Cebu, City Savings Bank (formerly Cebu City Savings and o This is absurd since the land will consequently be
Loan Association, Inc.) and Teotimo Abellana without an owner although it remains registered in the
Respondents: Sps. Andred Dolino and Pascuala Dolino name of the mortgagor
Concept: Foreclosure of Real Estate Mortgage; Extrajudicial The abovementioned case would have no application in the
Foreclosure; Who may Redeem case at bar and need not here be resolved since what is
presently involved is a mortgage, not a sale, to CSB. Such
Doctrine: mortgage does not involve a transfer, cession or
There is no obstacle to the legal creation of such lien even after conveyance of the property but only constitutes a lien
the auction sale of the property but during the redemption period, thereon
since no distinction is made between a mortgage constituted There is no obstacle to the legal creation of such lien even
over the property before or after the auction sale thereof. A after the auction sale of the property but during the
redemptioner is defined as a creditor having a lien by redemption period, since no distinction is made between a
attachment, judgment or mortgage on the property sold mortgage constituted over the property before or after the
subsequent to the judgment under which the property was sold. auction sale thereof
While in extrajudicial foreclosure, the sale contemplated is not A redemptioner is defined as a creditor having a lien by
under a judgment but the proceeding pursuant to which the attachment, judgment or mortgage on the property sold
mortgaged property was sold, a subsequent mortgage could subsequent to the judgment under which the property was
nevertheless be legally constituted thereafter with the sold.
subsequent mortgagee becoming and acquiring the rights of a
redemptioner, aside from his right against the mortgagor.

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While in extrajudicial foreclosure, the sale contemplated is 2) How to Redeem
not under a judgment but the proceeding pursuant to which
the mortgaged property was sold, a subsequent mortgage PROCEDURE:
could nevertheless be legally constituted thereafter with the To determine the PERIOD, look at the nature of the
subsequent mortgagee becoming and acquiring the rights of MORTGAGOR:
a redemptioner, aside from his right against the mortgagor. For natural persons: 12 months from the date of the
registration of the sale in the Office of the Register of
Since the mortgagor remains as the absolute owner of the Deeds (Act 3135)
property during the redemption period and has free disposal For juridical entities: after foreclosure but before registration
of his property, he can therefore constitute another of the certificate of foreclosure, whichever is earlier, and
mortgage on the property which should not exceed 3 months
To hold otherwise would create the inequitable situation To determine the AMOUNT, look at the nature of the
wherein the mortgagor would be deprived of the opportunity, MORTGAGEE:
which may be his last recourse, to raise funds wherewith to For natural persons: pay the purchase price of the collateral
timely redeem his property through another mortgage involved, plus 1% interest per month thereon, together
thereon with the amount of any assessments or taxes if any,
It is only upon the expiration of the redemption period, paid by the purchaser after the sale with the same rate
without the judgment debtor having made use of his right of of interest; it does not extinguish the obligation
redemption, that the ownership of the land sold becomes For banks: pay the amount due under the mortgage, and the
consolidated in the purchaser same extinguishes the obligation
What actually effected where redemption is exercised is not Can pay either to the purchaser or to the sheriff/officer who
the recovery of ownership of his land, which he never lost, conducted the sale
but the elimination from his title thereto of the lien created by Written notice of the redemption must be served on the
levy on attachment or judgment or the registration of a officer who made the sale and a duplicate filed with the
mortgage thereon. Register of Deeds of the province
Court cannot review the findings of TC that the extrajudicial An actual and simultaneous tender of payment must
foreclosure and sale of property to CSB was void for not accompany the statement of intention
complying with notice requirements in Act No. 3135, as CSB Certificate of redemption issued by person to whom the
failed to appeal on the matter in the CA redemption payment is made (purchaser/redemptioner)
Certificate of redemption recorded in the registry of deeds
DISPOSITIVE: CA decision REVERSED. Proof of right to redeem
Copy of final judgment or order
Medida v. CA If under mortgage or other lien
During period to redeem: Memo/record thereof OR
May mortgagor constitute a 2nd mortgage? Original certified copy of assignment AND
YES, he is still the absolute owner. Affidavit showing amount due on the lien
What right does the purchaser acquire?
The inchoate right over the property, subject only to the right Bona fide redemption: Actual and simultaneous tender of
of the mortgagor to redeem. payment accompanied by statement of intention OR filing of
If there is no right of redemption exercised, who will own the complaint to enforce redemption. (Piecemeal redemptions are
property? allowed)
The purchaser.
What should the buyer of the mortgagor’s rights do? Rule 39, Sec. 28 Time and manner of and amounts payable on,
Must exercise the right to redeem so it can defeat the successive redemptions; notice to be given and filed — The
inchoate right in favor of the purchaser. judgment obligor, or redemptioner, may redeem the property
What right does the 2nd mortgagee acquire? from the purchaser, at any time within one (1) year from the date
Only the right to redeem. It becomes the only mortgagee of the registration of the certificate of sale, by paying the
equivalent to the 1st mortgage (before it foreclosed). purchaser the amount of his purchase, with one per centum per
Who acquires the right to own? month interest thereon in addition, up to the time of redemption,
Purchaser 1. The only time it is defeated is during the together with the amount of any assessments or taxes which the
exercise of the right of redemption. purchaser may have paid thereon after purchase, and interest on
such last named amount at the same rate; and if the purchaser
If there are 2 mortgages: be also a creditor having a prior lien that of the redemptioner,
If the 2nd mortgagee exercises the right to foreclose, it is still other than the judgment under which such purchase was made,
subject to the right of the 1st mortgagee. the amount of such’ other lien, with interest.

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Property so redeemed may again be redeemed within sixty (60) Rule 39, Sec. 33 Deed and possession to be given at expiration
days after the last redemption upon payment of the sum paid on of redemption period; by whom executed or given — If no
the last redemption, with two per centum thereon in addition, and redemption be made within one (1) year from the date of the
the amount of any assessments or taxes which the last registration of the certificate of sale, the purchaser is entitled to a
redemptioner may have paid thereon after redemption by him, conveyance and possession of the property; or, if so redeemed
with interest on such last-named amount, and in addition, the whenever sixty (60) days have elapsed and no other redemption
amount of any liens held by said last redemptioner prior to his has been made, and notice thereof given, and the time for
own, with interest. The property may be again, and as often as a redemption has expired, the last redemptioner is entitled to the
redemptioner is so disposed, redeemed from any previous conveyance and possession; but in all cases the judgment
redemptioner within sixty (60) days after the last redemption, on obligor shall have the entire period of one (1) year from the date
paying the sum paid on the last previous redemption, with two of the registration of the sale to redeem the property. The deed
per centum thereon in addition, and the amounts of any shall be executed by the officer making the sale or by his
assessments or taxes which the last previous redemptioner paid successor in office, and in the latter case shall have the same
after the redemption thereon, with interest thereon, and the validity as though the officer making the sale had continued in
amount of any liens’ held by the last redemptioner prior to his office and executed it.
own, with interest.
Under the expiration of the right of redemption, the purchaser or
Written notice of any redemption must be given to the officer redemptioner shall be substituted to and acquire all the rights,
who made the sale and a duplicate filed with the registry of title, interest and claim of the judgment obligor to the property as
deeds of the place, and if any assessments or taxes are paid by of the time of the levy. The possession of the property shall be
the redemptioner or if he has or acquires any lien other than that given to the purchaser or last redemptioner by the same officer
upon which the redemption was made, notice thereof must in like unless a third party is actually holding the property adversely to
manner be given to the officer and filed with the registry of the judgment obligor.
deeds; if such notice be not filed, the property may be redeemed
without paying such assessments, taxes, or liens Requisites for a valid redemption:
The redemption must be made within 12 months from the
Rule 39, Sec. 29 Effect of redemption by judgment obligor, and date of registration of the sale in the Office of the Register of
a certificate to be delivered and recorded thereupon; to whom Deeds
payments on redemption made — If the judgment obligor Payment of the purchase price of the collateral involved,
redeems, he must make the same payments as are required to plus 1% interest per month, together with the amount of any
effect a redemption by a redemptioner, whereupon, no further assessments or taxes if any, paid by the purchaser after the
redemption shall, be allowed and he is restored to his estate. sale with the same rate of interest
The person to whom the redemption payment is made must Under RA 8791, Art. III, Sec. 47, the right to redeem is
execute and deliver to him a certificate of redemption exercised by paying the amount due under the
acknowledged before a notary public or other officer authorized mortgage deed (not the purchase price, as above
to take acknowledgments of conveyances of real property. Such indicated)
certificate must be filed and recorded in the registry of deeds of Written notice of the redemption must be served on the
the place in which the property is situated, and the registrar of officer who made the sale and a duplicate filed with the
deeds must note the record thereof on the margin of the record Register of Deeds of the province
of the certificate of sale. The payments mentioned in this and the
last preceding sections may be made to the purchaser or GR: Not sufficient that a person offering to redeem manifests its
redemptioner, or for him to the officer who made the sale desire to do so; actual and simultaneous tender of payment must
accompany the statement of intention
Bona fide redemption necessarily implies a reasonable
Rule 39, Sec. 30 Proof required of redemptioner — A
redemptioner must produce to the officer, or person from whom and valid tender of the entire redemption price; otherwise,
he seeks to redeem, and serve with his notice to the officer a the rule on the redemption period may easily be
copy of the judgment or final order under which he claims the circumvented
right to redeem, certified by the clerk of the court wherein the
BUT filing of a judicial action, made simultaneously with the
judgment or final order is entered; or, if he redeems upon a
deposit of the redemption price, within the redemption period,
mortgage or other lien, a memorandum of the record thereof,
may be necessary to preserve the right of redemption for future
certified by the registrar of deeds; or an original or certified copy
enforcement even beyond such period
of any assignment necessary to establish his claim; and an
Filing of a complaint to enforce redemption, within the
affidavit executed by him or his agent, showing the amount then
redemption period, is equivalent to an offer to redeem and
actually due on the lien.
has the effect of preserving the right of redemption
Nothing in the law prohibits piecemeal redemption of
collateral sold at a foreclosure (Yap v. Dy, et al.)

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Sps. Yap v. Sps. Dy (2011) – Villarama, J. - It is also consistent with the fact that Lots 1, 4, 5, 6 and 8
In G.R. 171868 are covered by only one real estate. Indeed, that the
Petitioners: Sps. Yap foreclosure sale refers only to Lots 1, 4, 5, 6 and 8 is clear
Respondents: Sps. Dy; Sps. Maxino; DBRI from the fact that Lots 1, 4, 5, 6 and 8 and Lot 3 are covered
In G.R. 171991 by two separate real estate mortgages. DRBI failed to refute
Petitioners: DBRI these pieces of evidence against it.
Respondents: Sps. Dy; Sps. Maxino; Sps. Yap
Concept: Right of Redemption - How to Redeem 2. YES, as vendees of the said lots, they qualify as
successors-in-interest of the original debtor-mortgagor,
Doctrine: Sps. Tirambulo
Nothing in the law prohibits the piecemeal redemption of the - DBRI: The sale of Tirambulos to Dys and Maxinos was void
properties sold at a foreclosure proceeding, as the right of the for it was done without the bank’s consent. Consequently,
mortgagor or redemptioner to redeem one or some of the they could not have assumed the character of debtors
foreclosed properties is recognized. The doctrine of indivisibility because a novation of the contract of mortgage did not take
of mortgage no longer applies once foreclosure is effected. place, there being no consent of the creditor, pursuant to
Art. 1293, NCC. There being no valid redemption by the
Brief Facts: Tirambulos within the redemption period, DRBI has become
Sps. Tirambulo mortgaged 7 lots to DBRI to secure loans. They the absolute owner of the properties mortgaged when the
sold all of them to Sps. Dy and Maxino without the consent and period expired.
knowledge of the bank. Upon default of Sps. Tirambulo, DBRI - SC: First of all, the Dys and Maxinos have the legal
foreclosed the mortgage on the first loan, and being the highest personality to redeem the subject properties despite the fact
bidder, sold 3 of the 5 lots to Sps. Yap. When the Dys and that the sale to them was made without DBRI’s consent.
Maxinos tried to tender the redemption lot for 2 of the 3 lots, Sec. 6 of Act 3135 itself gives not only the mortgagor-debtor
DBRI and the Yaps refused, contending that piecemeal the right to redeem, but also his successor-in-interest. As
redemption is not allowed pursuant to the doctrine of vendees of Lots 1 and 6, the Dys and Maxinos qualify as
indivisibility and mortgage, and as such, they should have such a successor-in-interest of Sps. Tirambulo.
tendered the whole auction price for all of the properties
foreclosed. 3. YES. The mortgagor is allowed to redeem only one or
some of the foreclosed properties, as the doctrine of
ISSUES: indivisibility no longer applies once the mortgage is
WON Lot 3 was among the foreclosed properties (NO) foreclosed.
2. WON the Dys and Maxinos had legal personality to redeem - At the outset, we rule that the Sps Dy and Maxino correctly
the lots (YES) tendered the redemption price with Atty. Disputado, the
WON the Dys & Maxinos validly redeemed Lots 1 & 6 (YES) Provincial Sheriff. Sec. 31, Rule 39 provides that “... the
payments mentioned in this and the last preceding sections
RATIO: may be made to the purchaser or redemptioner, or for him
1. NO, as shown by the testimony of the Provincial to the officer who made the sale.”
Sheriff. - In the case at bar, they initially attempted to pay not only to
As Atty. Diputado, the Provincial Sheriff, testified, the the purchaser, DBRI, but also to the Yaps. Both however
application for foreclosure was only for five parcels of land, refused, insisting that they pay the whole purchase price at
namely, Lots 1, 4, 5, 6 and 8. Accordingly, only said five which all the foreclosed lots were sold during the foreclosure
parcels of land were included in the publication and sold at sale. Because of said refusal, the Dys and Maxinos correctly
the foreclosure sale. availed of the alternative remedy by going to the sheriff who
When he was shown a copy of the Sheriff’s Certificate of made the sale, who, in turn, has the duty to accept the
Sale consisting of three pages, he testified that it was tender and execute the certificate of redemption.
altered because Lot 3 and Lot 846 were included beyond
the “xxx” that marked the end of the enumeration of the lots
foreclosed.
Also, a perusal of DRBI’s application for foreclosure of real
estate mortgage shows that it explicitly refers to only one
deed of mortgage to settle the Tirambulos’ indebtedness
amounting to P216, 040.93. This is consistent with the
Notice of Extrajudicial Sale of Mortgaged Property,
published in the Dumaguete Star Informer on February 18,
25 and March 4, 1982, announcing the sale of Lots 1, 4, 5, 6
and 8 for the satisfaction of the indebtedness amounting to
P216, 040.93.

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Requisites of a valid redemption: amount paid by the Dys and Maxinos within the redemption
o The redemption must be made within twelve (12) months period for the redemption of just two parcels of land was not
from the time of the registration of the sale in the Office only P40, 000 but totaled to P134, 223.92, which is more
of the Register of Deeds; than 60% of the purchase price for the five foreclosed
o Payment of the purchase price of the property involved, properties, to think the Dys and Maxinos were only
plus 1% interest per month thereon in addition, up to redeeming two properties.
the time of redemption, together with the amount of any We find that it can be considered a sufficient amount if we
assessments or taxes which the purchaser may have were to base the proper purchase price on the proportion of
paid thereon after the purchase, also with 1% interest the size of Lots 1 and 6 with the total size of the five
on such last named amount; and foreclosed properties. The two subject properties to be
o Written notice of the redemption must be served on the redeemed, Lots 1 and 6, have a total area of 77,458 square
officer who made the sale and a duplicate filed with the meters or roughly 52% of the total area of the foreclosed
Register of Deeds of the province. properties. Even with this rough approximation, there is no
It is undisputed that the first and third requisites are present. reason to invalidate the redemption of the Dys and Maxinos
It is the second requisite, the proper redemption price since they tendered 60% of the total purchase price for
that is the subject of the controversy. properties constituting only 52% of the total area.
However, there is a need to remand the case for
Yaps: There is no valid redemption, as the P40, 000 cannot computation of the pro-rata value of Lots 1 and 6 based on
be considered as valid tender since the amount of the their true values at that time of redemption for the purposes
auction sale is P216, 040. In any case, a valid tender of of determining if there is any deficiency or overpayment on
payment can only be made to DBRI since at that time, their the part of the Dys and Maxinos.
rights were subordinate to the final consolidation of
ownership by the bank. DISPOSITIVE: Petition denied.
SC: Citing PNB v. De los Reyes, the doctrine of indivisibility
of mortgage does not apply once the mortgage is d. Right to Deficiency
extinguished by a complete foreclosure thereof. The said
doctrine presupposes that a mortgage is existing. However, Rule 86, Sec. 7 Mortgage debt due from estate — A creditor
once the mortgage is foreclosed, and with the full payment holding a claim against the deceased secured by mortgage or
of the debt, there is nothing more to secure. There is no other collateral security, may abandon the security and
partial payment nor is there partial extinguishment of the prosecute his claim in the manner provided in this rule, and
obligation to speak of. share in the general distribution of the assets of the estate; or he
Nothing in the law prohibits the piecemeal redemption of may foreclose his mortgage or realize upon his security, by
properties sold at one foreclosure proceeding. In fact, in action in court, making the executor or administrator a party
several early cases decided by this Court, the right of the defendant, and if there is a judgment for a deficiency, after the
mortgagor or redemptioner to redeem one or some of the sale of the mortgaged premises, or the property pledged, in the
foreclosed properties was recognized: foreclosure or other proceedings to realize upon the security, he
o Castillo v. Nagtalon: ten parcels of land were sold at may claim his deficiency judgment in the manner provided in the
public auction. Nagtalon, who owned three of the ten preceding section; or he may rely upon his mortgage or other
parcels of land sold, wanted to redeem her properties. security alone, and foreclose the same at any time within the
Though the amount she tendered was found as period of the statute of limitations, and in that event he shall not
insufficient to effectively release her properties, the be admitted as a creditor, and shall receive no share in the
Court held that the tender of payment was made timely distribution of the other assets of the estate; but nothing herein
and in good faith and thus, in the interest of justice,
contained shall prohibit the executor or administrator from
Nagtalon was given the opportunity to complete the
redeeming the property mortgaged or pledged, by paying the
redemption purchase of three of the ten parcels of land
debt for which it is held as security, under the direction of the
foreclosed.
court, if the court shall adjudge it to be for the best interest of the
o Dulay v. Carriaga: wherein Dulay redeemed eight of the
estate that such redemption shall be made.
seventeen parcels of land sold at public auction, the
trial court declared the piecemeal redemption of Dulay
While Act 3135 does not specifically provide for a
as void. Said order, however, was annulled and set
mortgagee’s right to recover the deficiency from the
aside by the Court on certiorari and the Court upheld
application of the proceeds of the foreclosure sale, the said
the redemption of the eight parcels of land sold at
public auction. law ALSO does NOT prohibit it.
Thus, since the Dys and Maxinos can effect the redemption
of even only two of the five properties foreclosed, they are
not required to pay the P216, 040 purchase price at the
public auction. Contrary to the Yaps’ contention, the

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The mortgagee’s recovery of the deficiency is supported by claim; b) foreclose the mortgage judicially and prove the
the principle that a real estate mortgage is a security deficiency as an ordinary claim; and c) rely on the mortgage
transaction and not a satisfaction of indebtedness of the exclusively, or other security and foreclose the same before it is
debtor. barred by prescription, without the right to file a claim for any
o The REM does not in, in any way, limit nor minimize the deficiency. The options are alternative, not cumulative. In case
amount of the principal obligation, as its only function is the third option is chosen, the procedure governing extra-judicial
to secure its fulfillment. foreclosures set forth in Act No. 3135 shall be observed.
Hence, the creditor-mortgagee may proceed against the
debtor-mortgagor in a proper action to recover such Brief Facts:
deficiency. Flaviano had a loan with MBC. His loan was secured by a real
o By filing a complaint for the collection of a sum of money estate mortgage. He died. Respondent (substitute of MBC)
o The creditor-mortgagee must be able to prove the basis extra-judicially foreclosed the mortgage. There was a deficiency
for the deficiency judgment that it seeks. in the proceeds. Respondent wanted to recover the deficiency.
o The right to recovery of the deficiency only arises
when the proceeds are determined to be insufficient ISSUE:
to cover the obligation and other costs of the sale. WON a creditor who extra-judicially forecloses the mortgage
made by a deceased is entitled to recover any deficiency in the
o Hence, the amount of the obligation prior to the proceeds of the foreclosure. (NO)
foreclosure and the proceeds of the foreclosure are
important in enforcing a claim for the deficiency. RATIO: NO. The remedy of extra-judicial foreclosure under
The exception to the rule that the creditor-mortgagee may Section 7, Rule 86, ROC does not give the
recover the deficiency is when the extrajudicial foreclosure of creditor/mortgagee the right to recover any deficiency in the
a mortgage arises out of a settlement of estate. proceeds of the foreclosure.
o In such a case, Rule 86 grants three distinct and What provision is applicable to the case of a mortgagee
independent remedies to the creditor-mortgagee. obtaining remedy for an obligation of a deceased?
Sec. 7, Rule 86, ROC. A creditor holding a claim against the
GR: The creditor-mortgagee, in a separate action, may recover
deceased secured by a mortgage or other collateral
the deficiency from the debtor-mortgagor when it has been security, may abandon the security and prosecute his claim
established that the proceeds of the foreclosure sale is in the manner provided in this rule, and share in the general
insufficient to pay the amount of the obligation and the other distribution of the assets of the estate; or he may foreclose
costs of the sale. his mortgage or realize upon his security, by action in court,
making the executor or administrator a party defendant, and
EX: If the extrajudicial foreclosure of mortgage arises out of a if there is a judgment for a deficiency, after the sale of the
settlement of the estate, then the right to recover the deficiency mortgaged premises, or the property pledged, in the
does NOT apply. However, Rule 86 privedes for three distinct, foreclosure or other proceeding to realize upon the security,
independent, and mutually exclusive remedies, which the he may claim his deficiency judgment in the manner
mortgagee may pursue, alternatively, to satisfy the principal provided in the preceding section; or he may rely upon his
obligation. These three remedies are: mortgage or other security alone, and foreclose the same at
WAIVE the mortgage and CLAIM the principal obligation from any time within the period of the statute of limitations, and in
the estate of the mortgagor as an ORDINARY CLAIM. that event he shall not be admitted as creditor, and shall
FORECLOSE the mortgage judicially and prove any receive no share in the distribution of the other assets of the
deficiency as an ORDINARY CLAIM, estate; but nothing herein contained shall prohibit the
RELY on the mortgages exclusively, EXTRAJUDICIALLY
executor or administrator from redeeming the property
FORECLOSING the same at any time BEFORE it is barred by mortgaged or pledged, by paying the debt for which it is held
prescription, WITHOUT right to file a claim for any deficiency. 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
Heirs of the Late Spouses Maglasang vs. Manila Banking redemption shall be made.
Corporation – Perlas-Bernabé, J.
o As the foregoing generally speaks of “[a] creditor holding
Petitioners: Heirs of Spouses Maglasang (petitioners)
a claim against the deceased secured by a mortgage or
Respondent: Manila Banking Corporation (MBC), substituted by
other collateral security,” it may be reasonably
First Sovereign Asset Management, Inc. (Respondent) concluded that the aforementioned section covers all
secured claims, whether by mortgage or any other form
Doctrine:
of collateral, which a creditor may enforce against the
Section 7, Rule 86, ROC applies when a secured creditor wants
estate of the deceased debtor.
to recover his claims against the estate of a deceased. The
provision gives three options: a) waive the mortgage and claim
the entire debt from the estate of the mortgagor as an ordinary

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Nowhere from its language can it be fairly deducible e. Right to Surplus
that the said section would narrowly apply only to
mortgages made by the administrator over any Should there be a surplus from the proceeds of the
property belonging to the estate of the decedent. foreclosure sale, the mortgagee MUST account for them.
Reliance of the CA on PNB vs. CA was misplaced; Note that the application of the proceeds from the
decision did not limit the scope of Sec. 7, Rule 86, foreclosure sale is an act of payment and does NOT
ROC, but merely stated that the section equally applies constitute a dacion en pago.
to cases where the administrator mortgages the o The mortgagee’s right to foreclosure extends only up to
property of the estate to secure the loan he obtained. It the amount of the principal obligation, and, hence, he
was a ruling of inclusion and not one which created cannot keep the excess.
distinction. o To sanction the mortgagee to keep the expense, he
Applying the above ruling to this case: would have been to allow unjust enrichment.
Flaviano was a deceased debtor of the respondent, The surplus stands in the place of the collateral itself.
whose loan was secured by mortgage. o It belongs to the mortgagor, and may be constructively
This case fell squarely under Sec. 7, Rule 86, ROC. considered as real property.
What about Act No. 3135? This act does not entirely o This right of the mortgagor over the surplus is a
discount the application of Section 7, Rule 86, ROC, or substantial right that will not be defeated by rules of
vice versa; they complement each other. Sec. 7, Rule technicality.
86, ROC lays down the options for the secured creditor The surplus gains importance in cases where there are junior
to claim against the estate. Act No. 3135 provides for, encumbrancers (ex, subsequent mortgagees).
after extra-judicial foreclosure is chose, the procedure o The surplus is applied to the subsequent mortgages in the
governing the manner in which the extra-judicial order of their priority.
foreclosure should proceed. This is because Sec. 7, o A second mortgagee’s right not only includes redemption
Rule 86, ROC is a special rule applicable to claims but the right to apply, to the payment of its credit, the
against the estate, and at the same time, since this surplus from the foreclosure sale.
provision does not detail the procedure for extra-judicial o In effect, a junior mortgagee’s lien on the collateral is
foreclosures, the formalities governing the same must transferred to the surplus; in turn, the senior mortgagee is
be governed by the said act. considered are a trustee for the benefit of the junior
Was the respondent entitled to recover any deficiency in the encumbrancers,
proceeds of the foreclosure? No. o Even if the mortgagee retains the surplus, such will not
Under Sec. 7, Rule 86, ROC, the secured creditor has affect the validity of the sale but only gives the mortgagor
three remedies/options that he may alternatively adopt a cause of action for the recovery of the surplus.
for the satisfaction of his credit: a) waive the mortgage
and claim the entire debt from the estate of the GR: Payment of purchase price is to the sheriff.
mortgagor as an ordinary claim; b) foreclose the XPN: Payment to the mortgagee (only the amount of the
mortgage judicially and prove the deficiency as an mortgage), then pay the surplus to the sheriff
ordinary claim; and c) rely on the mortgage exclusively,
or other security and foreclose the same before it is Suico v. PNB (2007) – Chico-Nazario, J.
barred by prescription, without the right to file a claim Petitioner: Sps. Esmeraldo and Elizabeth Suico
for any deficiency. Respondent: Philippine National Bank and CA
The remedies are distinct and independent and Concept: Real Estate Mortgage: Extrajudicial Foreclosure –
mutually exclusive from each other. Election of 1 Right to surplus
effectively bars the exercise of the others, as ruled in
Bank of America vs. American Realty Corporation. Doctrine:
What option did the respondent choose? It chose Pursuant to Rule 68, Sec. 4, the disposition of the proceeds of
the third option, i.e., extra-judicial foreclosure. It did the sale in foreclosure shall be as follows: (a) first, pay the costs;
not choose the first option of directly filing a claim secondly, pay off the mortgage debt; (c) thirdly, pay the junior
against the estate since it merely notified the encumbrancers, if any, in the order of priority; and (d) fourthly,
probate court of the outstanding amount of its claim give the balance to the mortgagor, his agent or the person
against the estate of Flaviano and that it was entitled to it. Since the application of the proceeds from the sale
currently restructuring the account. of mortgaged property is an act of payment, it is the mortgagee’s
The plain result of adopting the third option is that the duty to return any surplus in the selling price to the mortgagor.
creditor waives his right to recover any deficiency from
the estate, as discussed in PNB vs. CA, citing Perez vs.
PNB.
DISPOSITIVE: Petition partly granted. Complaint dismissed.

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Brief Facts: - SC: Cases cited by RTC do not apply
The Sps. Suico obtained a loan from PNB, secured by a REM on o San Jose v. CA: Notice did not state the correct number
real parties in the names of the Sps Because they were unable to of the TCTs of the property to be sold  substantial
pay their obligation, PNB extrajudicially foreclosed the and fatal error which invalidated the entire notice
mortgage over their properties. A year later, PNB secured a o Community Savings and Loan Association, Inc. v. CA:
certificate of final sale and had the subject properties registered Extrajudicial foreclosure tainted with fraud by the
in its name. The spouses filed a complaint for declaration of petitioners, which denied respondents the right to
nullity of the extrajudicial foreclosure of mortgage, the certificate redeem the property (no reference to a Notice of Sale)
of sale and the final deed of sale. RTC declared the sale null and
void because of the error in the notice of sale. CA reversed RTC 2. YES, PNB should tender the surplus.
and held that the sale was valid. - Spouses: PNB did not pay its bid in cash or deliver the
surplus, which is required under the law
ISSUES: - PNB: The spouses’ loan obligations reflected in the Notice
1. WON the extrajudicial foreclosure sale is null and void (NO) dated March 10, 1992 did not include their other obligations
2. WON PNB should tender the surplus (YES) (which became due on the date of the auction sale on
October 10, 1992), interests, penalties, other charges, and
RATIO: attorney’s fees due
1. NO, the extrajudicial foreclosure sale is NOT null - Rule 39, ROC:
and void. It is valid. o Sec. 21. Judgment obligee as purchaser. – When the
- Spouses: Since the Notice of Sheriff’s Sale stated that the purchaser is the judgment obligee, and no third-party
obligation was only P1,991,770.38 and PNB bid P8,511,000, claim has been filed, he need not pay the amount
the Notice and the consequent sale were null and void of the bid if it does not exceed the amount of
- SC: While statutory provisions governing publication of his judgment. If it does, he shall pay only the
notice of mortgage foreclosure sales must be strictly excess.
complied with and even slight deviations will invalidate the o Sec. 39. Obligor may pay execution against obligee. –
Notice and render the sale at least voidable, the purpose of After a writ of execution against property has been
the Notice must be considered issued, a person indebted to the judgment obligor
o PURPOSE: The publication of the Notice of Sheriff’s may pay to the sheriff holding the writ of execution
Sale is to inform all interested parties of the date, the amount of his debt or so much thereof as may be
time and place of the foreclosure sale of the real necessary to satisfy the judgment, in the manner
property subject thereof prescribed in section 9 of this Rule, and the sheriff’s
o Logically, this requires not just the appearance of the receipt shall be a sufficient discharge for the amount so
correct date, time and place in the Notice, but also that paid or directed to be credited by the judgment
any and all interested parties be able to determine obligee on the execution.
that what is about to be sold at the foreclosure sale is - Sec. 21 emphasizes:
the real property in which they have an interest o That IF the amount of the loan is equal to the amount
- SC: We disagree with the RTC that the discrepancy of the bid = no need to pay the amount in cash
between the amount of the spouses’ obligation as reflected o In the absence of a 3rd party claim, purchaser need not
in the Notice of Sale and the amount actually due and pay his bid IF it does NOT exceed the amount of the
collected at the time of the auction sale constitute fraud judgment; if it does, he shall pay only the excess
which renders the extrajudicial foreclosure sale null and void o Raison d’etre is that it would be senseless for the
o Notices are given for the purpose of securing bidders Sheriff or the Notary Public conducting the foreclosure
and to prevent a sacrifice of the property. If these sale to go through the idle ceremony of receiving the
objects are attained, immaterial errors and mistakes will money and paying it back to the creditor; lawmaking
not affect the sufficiency of the notice body did not contemplate a pointless application of the
o But if mistakes or omissions occur in the notices of sale, law in requiring that the creditor must bid under the
which are calculated to deter or mislead bidders, to same conditions as any other bidder
depreciate the value of the property, or to prevent it o Rule ONLY holds true where the amount of the bid
from bringing a fair price, such mistakes or omissions represents the total amount of the mortgage debt
will be fatal to the validity of the notice, and also to the
sale made pursuant thereto
SC: The Notice of Sale in this case is valid. Spouses failed
to convince the Court that the difference between the
amount stated in the Notice of Sale and the amount of
PNB’s bid resulted in discouraging or misleading bidders,
depreciated the value of the property or prevented it from
commanding a fair price.

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Rule 68, Sec. 4: Disposition of proceeds of sale. – The involve loans or forbearance of money, pursuant to Art.
amount realized from the foreclosure sale of the mortgaged 2209
property shall, after deducting the costs of the sale, be paid Since the obligation of PNB arises not from a loan or
to the person foreclosing the mortgage, and when there forbearance of money, the proper rate of interest is only
shall be any balance or residue, after paying off the 6% from the time of filing of the complaint
mortgage debt due, the same shall be paid to junior Once the judgment becomes final and executory and until
encumbrancers in the order of their priority, to be payment, the obligation is deemed to be equivalent to a
ascertained by the court, or if there be no such forbearance of credit, and pursuant to Eastern
encumbrancers or there be a balance or residue after Shipping, the rate of 12% per annum should be
payment to them, then to the mortgagor or his duly imposed until fully satisfied (Note: According to Nacar, it
authorized agent, or to the person entitled to it. should now be 6%)
o Disposition of proceeds: SC: This ruling does not preclude PNB from proving and
First, pay the costs recovering in a proper proceeding any deficiency in the
Secondly, pay off the mortgage debt amount of the spouses’ loan obligation that may have
Thirdly, pay the junior encumbrancers, if any, in the accrued after the date of the auction sale
order of priority
Fourthly, give the balance to the mortgagor, his DISPOSITIVE: Decision of the CA is MODIFIED.
agent or the person entitled to is
SC: Application of the proceeds to the mortgagor’s Sps. Suico v. PNB
obligation is an act of payment, not payment by dacion; Surplus should have been given to the sheriff.
hence, it is the mortgagee’s duty to return any surplus
in the selling price to the mortgagor The cited Monzon case (in SGS’ book) is insufficient because it
o Mortgagee is considered a custodian of the fund and, will lead you to go around in circles. Look at Suico or choose
being bound to apply it properly, is liable to the persons from the many cases.
entitled thereto if he fails to do so
o Although the mortgagee is not strictly considered a This is the legal basis for applying Rule 68 to an extrajudicial
trustee, the mortgagee is deemed a trustee for the foreclosure.
mortgagor or owner of the equity of redemption
o If the mortgagee is retaining more of the proceeds of the f. Right to Possession
sale than he is entitled to, this will not affect the validity
of the sale, but simply give the mortgagor a cause of 1) During Redemption Period
action to recover such surplus Act No. 3135, Sec. 7 In any sale made under the provisions of
SC: On record is the spouses’ Statement of Account as this Act, the purchaser may petition the Court of First Instance of
prepared by PNB, where it states that the spouses’ principal the province or place where the property or any part thereof is
obligation with interest/penalty and attorney’s fees as of situated, to give him possession thereof during the redemption
October 30, 1992, already amounted to P6,409,814.92 period, furnishing bond in an amount equivalent to the use of the
o Although spouses denied the amounts, they did not property for a period of twelve months, to indemnify the debtor in
interpose a defense to refute the computations; they case it be shown that the sale was made without violating the
had nothing to offer by way of evidence and will not mortgage or without complying with the requirements of this Act.
suffice to overcome the computation of their loan Such petition shall be made under oath and filed in form of an ex
obligations as presented in the Statement of Account
parte motion in the registration or cadastral proceedings if the
o It is the ONLY piece of evidence available to determine
property is registered, or in special proceedings in the case of
the amount of the outstanding obligation
property registered under the Mortgage Law or under section
o The letters sent by the spouses to PNB offering to
one hundred and ninety-four of the Administrative Code, or of
redeem the foreclosed properties for several amounts
any other real property encumbered with a mortgage duly
cannot be used as bases; there was no computation
registered in the office of any register of deeds in accordance
and they could have offered such an amount on the
with any existing law, and in each case the clerk of the court
basis of the value of the foreclosed properties rather
shall, upon the filing of such petition, collect the fees specified in
than their total obligation
paragraph eleven of section one hundred and fourteen of Act
SC: Since the outstanding obligation amounted to
Numbered Four hundred and ninety-six, as amended by Act
P6,409,814.92 and the bid amounted to P8,511,000, there
Numbered Twenty-eight hundred and sixty-six, and the court
is clearly an excess in the bid price which PNB must
return with interest shall, upon approval of the bond, order that a writ of possession
o SC cited Eastern Shipping Lines v. CA on the rules of issue, addressed to the sheriff of the province in which the
property is situated, who shall execute said order immediately.
interest and PNB v. CA, which stated that the interest is
6% per annum for monetary judgments which do not

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Act No. 3135, Sec. 8 The debtor may, in the proceedings in 2) After Consolidation of Ownership
which possession was requested, but not later than thirty days
after the purchaser was given possession, petition that the sale Rule 39, Sec. 33 Deed and possession to be given at
be set aside and the writ of possession cancelled, specifying the expiration of redemption period; by whom executed or given —
damages suffered by him, because the mortgage was not If no redemption be made within one (1) year from the date of
violated or the sale was not made in accordance with the the registration of the certificate of sale, the purchaser is entitled
provisions hereof, and the court shall take cognizance of this to a conveyance and possession of the property; or, if so
petition in accordance with the summary procedure provided for redeemed whenever sixty (60) days have elapsed and no other
in section one hundred and twelve of Act Numbered Four redemption has been made, and notice thereof given, and the
hundred and ninety-six; and if it finds the complaint of the time for redemption has expired, the last redemptioner is
debtor justified, it shall dispose in his favor of all or part of the entitled to the conveyance and possession; but in all cases the
bond furnished by the person who obtained possession. Either judgment obligor shall have the entire period of one (1) year
of the parties may appeal from the order of the judge in from the date of the registration of the sale to redeem the
accordance with section fourteen of Act Numbered Four property. The deed shall be executed by the officer making the
hundred and ninety-six; but the order of possession shall sale or by his successor in office, and in the latter case shall have
continue in effect during the pendency of the appeal. the same validity as though the officer making the sale had
continued in office and executed it.
Act No. 3135, Sec. 9 When the property is redeemed after
the purchaser has been given possession, the redeemer shall be Under the expiration of the right of redemption, the purchaser or
entitled to deduct from the price of redemption any rentals that redemptioner shall be substituted to and acquire all the rights,
said purchaser may have collected in case the property or any title, interest and claim of the judgment obligor to the property
part thereof was rented; if the purchaser occupied the property as of the time of the levy. The possession of the property shall
as his own dwelling, it being town property, or used it gainfully, it be given to the purchaser or last redemptioner by the same
being rural property, the redeemer may deduct from the price officer unless a third party is actually holding the property
the interest of one per centum per month provided for in section adversely to the judgment obligor.
four hundred and sixty-five of the Code of Civil Procedure.
- If the purchaser is entitled to the possession of the
Right to possession should be granted to the purchaser. foreclosed collateral, then it is all the more reason that such
possession be granted to the purchaser once ownership has
- Sec. 7 of Act 3135 directs the issuance of a writ of possession been consolidated in his favor.
in favor of the purchaser that seeks possession of the - Sec. 7 of Act 3135 again provides for the issuance of such a
foreclosed collateral during the redemption period. writ.
- In issuing this writ, there is no discretion left on the part of - At this point however, there is no need to file a bond and
the court; any question regarding the validity and regularity have it approved, as the writ of possession shall be issued as
of the sale must be ventilated in a subsequent proceeding. a matter of course and as a matter of right.
- This writ is issued in an ex-parte proceeding, involving only o Such issuance by the Court is merely a ministerial function
the purchaser, without need for notice to or consent from any and may be compelled through mandamus.
person who is adversely interested (ex. mortgagor). - Once possession is secured, the purchaser’s unassailable
- Sec. 8 provides that the plain, speedy and adequate remedy right to possession is now founded on the right of ownership.
in opposing the issuance of such a writ. A party may file a - Inchoate right is now ripened into full ownership
petition to set aside the foreclosure sale and to cancel the
Chu, et al. v. Lacqui and PBC (2010) – Carpio, J.
writ of possession. This may be filed in the Court which
issued the writ of possession. Petitioner: Cua Lai Chu, Claro G. Castro and Juanita Castro
- However, if the appeal interposed was from an order Respondent: Hon. Hilario Lacqui (Presiding Judge, RTC QC)
granting the issuance of the writ, then the order shall and Philippine Bank of Communication
continue to be in effect during the pendency of the appeal. Concept: Real Estate Mortgage: Extrajudicial Foreclosure –
Right to possession after consolidation of ownership
Doctrine:
Failure to redeem within the 1-year redemption period grants
the purchaser an absolute right to the writ of possession.
Moreover, once ownership has been consolidated, issuance of a
writ of possession becomes a ministerial duty because, as
purchaser of the property at the foreclosure sale, the right over
the property had become absolute, vesting in the purchaser the
corollary right of possession.

!
Brief Facts: of the property for a period of twelve months, to
Chu and the Sps. Castro obtained a P3.2-M loan from PBC, indemnify the debtor in case it be shown that the
which was secured by a REM. Later, the Deed of REM was sale was made without violating the mortgage or
amended to increase the loan amount to P5-M. Upon demand, without complying with the requirements of this Act.
Chu and the sps. Castro failed to pay the loan, and PBC applied Such petition shall be made under oath and filed
for the extrajudicial foreclosure of the REM. At the sale, PBC in form of an ex parte motion x x x and the court
emerged as the highest bidder and a certificate of sale was shall, upon approval of the bond, order that a
executed in its favor and annotated on the TCT. After the lapse writ of possession issue, addressed to the sheriff
of the 1-year redemption period, PBC filed an affidavit of of the province in which the property is situated,
consolidation to consolidate its ownership, which was granted, who shall execute said order immediately.
and a new TCT was issued in its favor. Later, it applied for the
issuance of a writ of possession on the foreclosed property,
which Chu and the sps. Castro opposed. (As applied to the case)
By the expiration of the 1-year redemption period, PBC had
ISSUE: the right to the right of possession:
WON the writ of possession was properly issued despite the o Certificate of sale of the foreclosed property was
pendency of a case questioning the validity of the extrajudicial annotated on June 7, 2002, so the redemption period
foreclosure sale (YES) lapsed June 7, 2003 (one year after registration of sale)
o When PBC applied for the issuance of a writ of
RATIO: YES, the writ of possession was properly issued possession on Aug. 18, 2004, the redemption period
because the 1-year redemption period has lapsed and had long lapsed; since the property was not redeemed
because ownership has already been vested in the within one year from registration of the extrajudicial
purchaser. foreclosure sale, PBC had acquired an absolute
(Court’s jurisprudence and legal bases) right, as purchaser, to the writ of possession
SC: Banco Filipino Savings and Mortgage Bank v. Pardo o It became the ministerial duty of the lower court to
squarely ruled on the right to possession of a purchaser at issue the writ of possession upon mere motion,
an extrajudicial foreclosure of mortgage pursuant to Sec. 7, Act No. 3135, as amended
o Case involved a REM as security for a loan obtained By virtue of its consolidated ownership, PBC had the
from the bank. Upon mortgagor’s default, the bank corollary right of possession
extrajudicially foreclosed the mortgage and was the o Once ownership has been consolidated, the issuance of
highest bidder at the auction sale. A certificate of sale the writ of possession became a ministerial duty of the
was duly issued and registered, so the bank applied for court, upon proper application and proof of title
the issuance of a writ of possession o When PBC applied for the issuance of a writ, it
o Court held that the purchaser at the auction sale was presented a new TCT issued in its name; the right to
entitled to a writ of possession pending the lapse of the the possession of the property was founded on its right
redemption period upon a simple motion and upon the of ownership
posting of a bond o As purchaser of the property at the foreclosure sale, in
SC: In Navarra v. CA, purchaser at an extrajudicial whose name title over the property was already issued,
foreclosure sale applied for a writ of possession after the the right over the property had become absolute,
lapse of the 1-year redemption period vesting in it the corollary right of possession
o Court held that the purchaser at an extrajudicial
foreclosure sale has a right to the possession of the Chu and the Sps. Castro were not denied due process by
property even during the 1-year redemption period being declared in default despite filing their opposition
provided the purchaser filed an indemnity bond o Application for the issuance of a writ of possession in
o After the lapse of the said period with no redemption an ex parte motion: it issues as a matter of course once the
having been made, that right becomes absolute and requirements are fulfilled; no discretion left to the court o
may be demanded by the purchaser even without the The order cannot be opposed or appealed; their
posing of a bond remedy is to have the sale set aside and the writ of
o Possession may be obtained under a writ which may possession cancelled in accordance with Sec. 8, Act
be applied for ex parte pursuant to Sec. 7 of Act No. No. 3135:
3135, as amended by Act No. 4118: The debtor may, in the proceedings in which
In any sale made under the provisions of this Act, possession was requested, but not later than thirty
the purchaser may petition the Court of First days after the purchaser was given possession,
Instance of the province or place where the petition that the sale be set aside and the writ of
property or any part thereof is situated, to give him possession cancelled, specifying the damages
possession thereof during the redemption period, suffered by him, because the mortgage was not
furnishing bond in an amount equivalent to the use

!
violated or the sale was not made in accordance
with the provisions hereof. x x x The officer shall not be liable for damages for the taking or
Any question regarding the validity of the extrajudicial keeping of the property, to any third-party claimant if such bond
foreclosure sale and the resulting cancellation of the is filed. Nothing herein contained shall prevent such claimant or
writ may be determined in a subsequent proceeding, any third person from vindicating his claim to the property in a
not as a justification for opposing the issuance of a writ separate action, or prevent the judgment obligee from claiming
of possession damages in the same or a separate action against a third-party
Right to possession of a purchaser at an extrajudicial claimant who filed a frivolous or plainly spurious claim.
foreclosure sale is not affected by a pending case
questioning the validity of the foreclosure proceeding; even When the writ of execution is issued in favor of the Republic of
pending such latter proceeding, purchaser is entitled to the the Philippines, or any officer duly representing it, the filing of
possession of the foreclosed property 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
DISPOSITIVE: Petition for review DENIED. shall be represented by the Solicitor General and if held liable
therefor, the actual damages adjudged by the court shall be paid
3) When Held by a Third Party by the National Treasurer out of such funds as may be
appropriated for the purpose.
Rule 39, Sec. 33 Deed and possession to be given at expiration
of redemption period; by whom executed or given — If no GR: In extrajudicial foreclosures, possession of the collateral
redemption be made within one (1) year from the date of the may be awarded to the purchaser during the redemption period,
registration of the certificate of sale, the purchaser is entitled to a or after its lapse, without the need of a separate and
conveyance and possession of the property; or, if so redeemed independent action.
whenever sixty (60) days have elapsed and no other redemption
has been made, and notice thereof given, and the time for EX: Such rule will not apply where a third party holds/possesses
redemption has expired, the last redemptioner is entitled to the the collateral adversely to the debtor-mortgagor.
conveyance and possession; but in all cases the judgment
obligor shall have the entire period of one (1) year from the date Sec. 16 of Rule 39 provides two remedies to a third party
of the registration of the sale to redeem the property. The deed who holds the foreclosed property adversely against the
shall be executed by the officer making the sale or by his debtor-mortgagor:
successor in office, and in the latter case shall have the same Terceria, in order to determine whether the sheriff has
validity as though the officer making the sale had continued in rightly or wrongly taken hold of a property not belonging
office and executed it. to the mortgagor. This action is filed against the sheriff or
officer effecting the writ, by serving on him an affidavit of
Under the expiration of the right of redemption, the purchaser or title with a copy to the purchaser.
redemptioner shall be substituted to and acquire all the rights, By this action, the sheriff/officer is not bound to keep
title, interest and claim of the judgment obligor to the property as the collateral and could be held liable for damages if
of the time of the levy. The possession of the property shall be he does.
given to the purchaser or last redemptioner by the same officer An independent and separate action to vindicate its claim of
unless a third party is actually holding the property adversely to ownership or possession over the collateral, filed before a
the judgment obligor. forum of competent jurisdiction, even before or without
filing a claim in the court that issued the writ of
Rule 39, Sec. 16 Proceedings where property claimed by third possession.
person — If the property levied on is claimed by any person The object of this action is the recover of ownership
other than the judgment obligor or his agent, and such person and/or possession of the collateral seized by the
makes an affidavit of his title thereto or right to the possession sheriff or officer who effected the writ of possession.
thereof, stating the grounds of such right or title, and serves the These remedies can be exercised cumulatively; they can be
same upon the officer making the levy and a copy thereof upon availed of, independently or separately from each other.
the judgment obligee, the officer shall not be bound to keep the
property, unless such judgment obligee, on demand of the If the property is held by a third party, there must be a separate
officer, files a bond approved by the court to indemnify the third- action.
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.

!
BPI Family Savings Bank v. Golden Power Diesel Sales Center accordance with any existing law, and in each case the clerk
(2011) – Carpio, J. of the court shall, upon the filing of such petition, collect the
Petitioner: BPI Family Savings Bank Inc. (BPI) fees specified in paragraph eleven of section one hundred
Respondents: Golden Power Diesel Sales Center Inc. (Golden) and fourteen of Act Numbered Four hundred and ninety-six,
and Renato Tan as amended by Act Numbered Twenty-eight hundred and
Concept: REM; Foreclosure; Extrajudicial Foreclosure; Right to sixty-six, and the court shall, upon approval of the bond,
Possession; When Held by Third Party order that a writ of possession issue, addressed to the
sheriff of the province in which the property is situated, who
Doctrine: shall execute said order immediately.
GR: A purchaser in a public auction sale of a foreclosed
property is entitled to a writ of possession and, upon an ex SC: The procedure above may also be availed of by the
parte petition of the purchaser; it is ministerial upon the trial purchaser seeking possession of the foreclosed property
court to issue the writ of possession in favor of the purchaser. after the redemption period has expired without redemption
EX: If it can be shown that (a) the foreclosed property is in having been made.
the possession of a third party and (b) that such third party Furthermore, the SC has held in China Banking Corp v.
possesses such property adversely to the judgment obligor, Lozada that the “possession of the land then becomes an
the duty to issue the writ ceases to be ministerial. absolute right of the purchaser as confirmed owner. Upon
proper application and proof of title, the issuance of the writ
Brief Facts: of possession becomes a ministerial duty of the court.”
BPI was able to foreclose upon the properties mortgaged by Thus, the general rule is that a purchaser in a public auction
CEDEC in its favor. However, the writs of possession it prayed sale of a foreclosed property is entitled to a writ of
for and issued by the RTC was not implemented because possession and, upon an ex parte petition of the purchaser,
Golden had taken possession of the foreclosed properties, by it is ministerial upon the trial court to issue the writ of
virtue of a deed a sale between Golden and CEDEC. The RTC possession in favor of the purchaser.
eventually stayed the implementation of the writs of possession, However, the rule dos admit of an exception, under Sec. 33
finding Golden to be in the nature of a third party possessing the of Rule 39:
property adversely as against CEDEC, the judgment debtor, ROC, Rule 39, Sec. 33 Deed and possession to be given at
which is a situation recognized as an exception to the rule that expiration of redemption period; by whom executed or given
writs of possession are issued as a matter of ministerial duty. —...
Hence, the petition. Upon the expiration of the right of redemption, the purchaser
or redemptioner shall be substituted to and acquire all the
ISSUE: rights, title, interest and claim of the judgment obligor to the
WON Golden is indeed claiming rights that are adverse to property as of the time of the levy. The possession of the
CEDEC, the judgment obligor (NO) property shall be given to the purchaser or last redemptioner
by the same officer unless a third party is actually holding
RATIO: Golden’s claims are not adverse to that of CEDEC. the property adversely to the judgment obligor.
Hence, it does not fall under the exception; the alias writ
was improperly suspended. Hence, if it can be shown that (a) the foreclosed property is
The issuance of writs of possession in extrajudicial in the possession of a third party and (b) that such third
foreclosure of REMs are governed by Sec. 7 of Act No. party is possessing such property adversely to the
3135: Act 3135, Sec. 7 In any sale made under the judgment obligor, the duty to issue the writ ceases to be
provisions of this Act, the purchaser may petition the Court ministerial.
of First Instance (Regional Trial Court) of the province or SC: Golden’s allegations that it is an adverse possessor as
place where the property or any part thereof is situated, to against the judgment obligor (CEDEC) is untenable.
give him possession thereof during the redemption period, o Golden acquired the property by virtue of the Deed of
furnishing bond in an amount equivalent to the use of the Absolute Sale with Assumption of Mortgage.
property for a period of twelve months, to indemnify the o The said deed provides that CEDEC shall “sell, transfer,
debtor in case it be shown that the sale was made without and convey” to Golden the foreclosed properties “free
violating the mortgage or without complying with the from all liens and encumbrances exception the
requirements of this Act. Such petition shall be made under mortgage as may be subsisting in favor of BPI.”
oath and filed in form of an ex parte motion in the o In Roxas v. Buan, the Court has held that in a situation
registration or cadastral proceedings if the property is where the property had already been sold at a public
registered, or in special proceedings in the case of property auction pursuant to an extrajudicial foreclosure, the only
registered under the Mortgage Law or under section one interest transferred from the vendor to the vendee is the
hundred and ninety-four of the Administrative Code, or of right to redeem the property within the period
any other real property encumbered with a mortgage duly prescribed. The vendee merely ‘steps into the vendor’s
registered in the office of any register of deeds in shoes’

!
By virtue of the ruling above, Golden only acquired the Brief Facts:
right of redemption. Sps. Nagtalon entered into a Credit Accommodation Agreement
Also, in China Banking Corp v. Lozada, Court has with UCPB. To secure payment of their obligation, they executed
defined the meaning of a “third party holding the a Real Estate Mortgage over properties in Kalibo, Aklan. Having
property adversely against a judgment debtor” to be defaulted in payment, the mortgage was foreclosed and subject
one who “holds the property by adverse title or right, properties were sold to UCPB at the public auction, as highest
such as that of a co-owner, tenant or usufructuary. The bidder. The redemption period expired without the spouses
co-owner, agricultural tenant, and usufructuary possess exercising their right of redemption. UCPB sought for the
the property in their own right, and they are not merely issuance of a writ of possession, having consolidated its
the successor or transferee of the right of possession of ownership of the subject properties. Nagtalon opposes the
another co-owner or the owner of the property.” issuance of said writ, citing the pendency of a civil case wherein
In this case, Golden’s rights are not analogous to the the validity of the mortgage, foreclosure, and sale is at issue.
cases provided in the definition above. They have no
independent right of possession other than what they ISSUE:
derived from the deed of sale with CEDEC. WON the pendency of a civil case challenging the validity of the
They are not in any way holding the property adverse to credit agreement, the promissory notes and the mortgage can
the latter but are actually in the nature of CEDEC’s bar the issuance of a writ of possession after the foreclosure and
successors-in-interest. Hence, the suspension of the
sale of the mortgaged properties and the lapse of the one-year
alias writ of possession was improper.
period of redemption (NO)
Furthermore, the Court has already held in Spouses
Ong v. CA that an action to annul a mortgage or RATIO: No. The issuance of a writ of possession is a
foreclosure sale does not stay the issuance of a writ of ministerial function of the Court. The pendency of the civil
possession. The purchaser is entitled to the writ of case challenging the validity of the credit agreement,
possession, without prejudice to the outcome of the promissory notes and the mortgage and foreclosure is not a
pending annulment case.
bar to the issuance of a writ of execution
DISPOSITIVE: Petition GRANTED. Once title to the property has been consolidated in the
buyer’s name upon failure of the mortgagor to redeem the
Nagtalon v. United Coconut Planters Bank (2013) – Brion, property within the one-year period of redemption, the writ of
J. Petitioner: Donna C. Nagtalon possession becomes a matter of right belonging to the
Respondent: United Coconut Planters Bank buyer
Concept: Foreclosure of Real Estate Mortgage; Extrajudicial The buyer can demand possession of the property at any
Foreclosure; Right to Possession; When Held by a Third Party time
Its right to possession has then ripened into the right of a
Doctrine: confirmed absolute owner
Once title to the property has been consolidated in the Pursuant to Act 3135, the writ of possession may be issued
buyer’s name upon failure of the mortgagor to redeem the either
property within the one-year period of redemption, the writ of Within the one-year redemption period, upon the filing of a
possession becomes a matter of right belonging to the bond, or
buyer. The pendency of a civil case questioning the validity After the lapse of the redemption period, without need of a
of the mortgage, its foreclosure, and subsequent sale of bond
mortgaged properties is not a bar for the issuance of the writ During the one-year redemption period (Act 3135, Sec. 7),
of possession. The same does not constitute the presence the purchaser may apply for a writ of possession by filing an
of peculiar and equitable circumstances that can be ex parte motion under oath in the registration or cadastral
considered as an exception to the general rule that issuance proceedings if the property is registered, or in special
of said writ is the ministerial duty of the court when proceedings in case the property is registered under the
ownership of properties has been consolidated in buyer’s Mortgage Law
name. o In this case, a bond is required before the court may
An exception the said general rule is when there is a third
issue a writ of possession
party claiming right adverse to debtor/mortgagor. The
obligation of the court to issue a writ of possession in favor
of the purchaser in a foreclosure mortgage ceases to be
ministerial when a third party in possession of the property
claims a right adverse to that of the debtor-mortgagor.
Where such third party claim and possession exist, the trial
court should conduct a hearing to determine the nature of
the adverse possession

!
Upon the lapse of redemption period (Act. 3135, Sec. 6), a X. ANTICHRESIS
writ of possession may be issued in favor of the purchaser
in a foreclosure sale, also upon a proper ex parte motion. A. General Concepts
o This time, no bond is necessary for its issuance
o The mortgagor is now considered to have lost any Art. 2132 By the contract of antichresis the creditor acquires the
interest over the foreclosed property right to receive the fruits of an immovable of his debtor, with the
o Purchaser becomes the owner of the property, and he obligation to apply them to the payment of the interest, if owing,
can demand possession at any time following the and thereafter to the principal of his credit.
consolidation of ownership and the issuance of TCT in
his/her name
Art. 544 A possessor in good faith is entitled to the fruits
Pendency of the civil case is not a bar to the issuance of a
writ of execution received before the possession is legally interrupted.
o The same does not constitute the presence of peculiar
Natural and industrial fruits are considered received from the
and equitable circumstances and cannot stay the
issuance of the writ (Sps. Tolosa v. UCPB) time they are gathered or severed.
o Questions on the regularity and validity of mortgage and
Civil fruits are deemed to accrue daily and belong to the
foreclosure cannot be invoked as justification for
opposing the issuance of a writ of possession in favor possessor in good faith on that proportion. (451)
of the new owner
The court in Sps. Tolosa v. UCPB outlined the exceptions Art. 2133 The actual market value of the fruits at the time of the
that would warrant the suspension of the issuance of writ of application thereof to the interest and principal shall be the
possession: measure of such application.
Gross inadequacy of purchase price – Cometa v.
IAC: value of property sold in execution sale was Art. 2135 The creditor, unless there is a stipulation to the
P500,000 but it was sold only for P57,000. Court contrary, is obliged to pay the taxes and charges upon the
perceived that injustice would result in issuing a writ of estate.
possession
Third party claiming right adverse to He is also bound to bear the expenses necessary for its
debtor/mortgagor – Barican v. IAC: The obligation of preservation and repair.
the court to issue a writ of possession in favor of the
purchaser in a foreclosure mortgage ceases to be The sums spent for the purposes stated in this article shall be
ministerial when a third party in possession of the deducted from the fruits.
property claims a right adverse to that of the debtor-
mortgagor. Art. 2138 The contracting parties may stipulate that the interest
In this case, there was a pending civil suit involving
upon the debt be compensated with the fruits of the property
the rights of third parties who claimed ownership
which is the object of the antichresis, provided that if the value of
over the disputed property
the fruits should exceed the amount of interest allowed by the
Court found the circumstances to be peculiar,
laws against usury, the excess shall be applied to the principal.
necessitating an exception to the general rule
Where such third party claim and possession exist,
Art. 2139 The last paragraph of Article 2085, and Articles 2089
the trial court should conduct a hearing to
determine the nature of the adverse possession to 2091 are applicable to this contract.
Failure to pay surplus proceeds of the sale to
mortgagor – equitable considerations demanded the Art. 2085 The following requisites are essential to the contracts
deferment of the issuance of the writ as it would be of pledge and mortgage:
highly unfair for the mortgagor, who as a redemptioner That they be constituted to secure the fulfillment of a
might choose to redeem the foreclosed property, to pay principal obligation;
the equivalent amount of the bid clearly in excess of the
total mortgage debt That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;
DISPOSITIVE: Petition denied. CA Affirmed.
Nagtalon v. UCPB the free disposal of their property, and in the absence thereof,
This is the case that provides the exceptions ot the wirt of that they be legally authorized for the purpose.
possession.
secure the latter by [antichresis of] their own property.

!
Art. 2089 A[n antichresis] is indivisible, even though the debt Indivisibility of an antichresis:
may be divided among the successors in interest of the debtor or GR: An antichresis is indivisible. There can be no proportionate
of the creditor. extinguishment or cancellation of antichresis due to partial
payment of the debt
Therefore, the debtor's heir who has paid a part of the debt XPN: There being several things given in antichresis, each one
cannot ask for the proportionate extinguishment of the of them guarantees only a determinate portion of the credit.
[antichresis] as long as the debt is not completely satisfied. Here, the debtor has a right to extinguish the antichresis as the
portion of the debt corresponding to a thing is satisfied. This
Neither can the creditor's heir who received his share of the debt applies even if debtors are not solidarily liable.
cancel the [antichresis], to the prejudice of the other heirs
who have not been paid. Sums spent are deducted from the fruits
From these provisions is expected the case in which, there being APPLICATION OF THE FRUITS:
several things given in [antichresis], each one of them Without interest: Fruits are applied ot the principal of the
guarantees only a determinate portion of the credit. debtor’s credit
With interest:
The debtor, in this case, shall have a right to the extinguishment Value of fruits < amount of interest: fruits applied to interest
of the [antichresis] as the portion of the debt for which each Value of fruits = amount of interest: fruits applied to interest
thing is specially answerable is satisfied. Value of fruits > amount of interest: fruits applied to interest,
EXCESS applied to principal
Art. 2090 The indivisibility of a[n antichresis] is not affected by
B. Form of Antichresis
the fact that the debtors are not solidarily liable.
Art. 2134 The amount of the principal and of the interest shall be
Art. 2091 The contract of [antichresis] may secure all kinds of
specified in writing; otherwise, the contract of antichresis shall be
obligations, be they pure or subject to a suspensive or resolutory
void.
condition.
C. Right of Retention
Definition: Antichresis, from the Latin, in place of interest, is
a real security transaction that arises by contract, with
the antichretic creditor acquiring the right to receive the Art. 2136 The debtor cannot reacquire the enjoyment of the
fruits of an immovable of the antichretic debtor, and the immovable without first having totally paid what he owes the
obligation to apply them to the payment of the interest, if creditor.
owing, and thereafter to the principal
But the latter, in order to exempt himself from the obligations
This is a real security transaction because the property may be imposed upon him by the preceding article, may always compel
foreclosed if after the period agrees upon, the principal obligation the debtor to enter again upon the enjoyment of the property,
hasn’’t been paid yet. Immovables may be alienated to satisfy except when there is a stipulation to the contrary.
the principal application.
RIGHT OF RETENTION
Obligations of the Creditor: GR: Debtor cannot reacquire enjoyment of the immovable
GR: Creditor is obliged to pay the following: without full payment of the debt
Taxes and charges upon the estate XPN: Creditor compels debtor to enter again upon the
Necessary expenses for preservation and repair of enjoyment of the property to exempt himself (creditor) from the
property XPN: Stipulation to the contrary obligations imposed upon him under Act 3135
XPN to XPN: Stipulation to the contrary
Parties to an Antichresis:
Creditor Purpose of right to retention: means of extinguishing the
Owner of the property subject of an antichresis obligation
Debtor in the principal obligation
Third person securing the principal obligation using Right of retention is used as a means of extinguishing the
their own property obligation
The debtor cannot reacquire enjoyment of the immovable
Object of Antichresis: Secures all kinds of obligations until he has actually paid what he owes the creditor
Pure
Subject to suspensive condition
Subject to resolutory condition

!
D. Foreclosure of Antichresis Brief Facts:
Diego and Fernando entered into a contract of loan secured by
Art. 2137 The creditor does not acquire the ownership of the real REM over several properties. After execution of the mortgage,
estate for non-payment of the debt within the period agreed possession over the subject parcels of land was turned over to
upon. the mortgagee, Diego. Fernando now claims that the transaction
that they intended to enter was one of antichresis and not one of
Every stipulation to the contrary shall be void. But the creditor mortgage.
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 ISSUES:
foreclosure of mortgages shall apply. WON the contract between the parties is one of mortgage or
of antichresis (MORTGAGE)
Because of the right of the creditor to judicially foreclose WON the mortgagee will be allowed to appropriate the fruits
on the immovable owned by the debtor, antichresis is for himself (NO)
viewed as a species of real estate mortgage in which the
mortgagee retains possession of the collateral and takes RATIO:
the fruits (such as rents) of the property in lieu of interest 1. It is a contract of mortgage.
on the debt To be antichresis, it must be expressly agreed between the
creditor and debtor that the former, having been given
Who owns the property subject of antichresis? possession of the properties given as security, is to apply
Antichretic debtor/third person their fruits to the payment of the interest, if owing, and
thereafter to the principal of his credit.
Effect of non-payment of debt? o Article 2132: By the contract of antichresis the creditor
Triggers availability of either of 2 remedies: acquires the right to receive the fruits of an immovable
Specific performance of his debtor, with the obligation to apply them to the
Foreclosure payment of the interest, if owing, and thereafter to the
principal of his credit.
Void stipulation: Creditor does not acquire ownership of real If a contract of loan with security does not stipulate the
payment of interest but provides for the delivery to the
estate for non-payment of a debt. Every stipulation to the
creditor by the debtor of the property given as security, in
contrary shall be void.
order that the latter may gather its fruits, without stating that
Likened to REM but differences are: Mortgagee retains said fruits are to be applied to the payment of interest, if
possession of the collateral and takes fruits in lieu of interest on any, and afterwards that of the principal, the contract is a
the debt. Retention of possession allows the creditor to apply the mortgage and not antichresis.
fuits to the interest. The fact that the possession of the properties given as
Possession also involves symbolic possession even if there security was turned over to the mortgagee is of no moment
is a third party as it is not an essential requisite of a mortgage that
Possession also allows the creditor to foreclose on the possession be retained by the mortgagor.
property
2. NO. The fact that the debtor consented and asked the
Diego vs. Fernando (1960) – Reyes, J. B. creditor to take charge of managing his property "does
not entitle the latter to appropriate to itself the fruits
L. Petitioners: Cecilio Diego
thereof unless the former has expressly waived his
Respondents: Segundo Fernando
right thereto."
Concept: Antichresis
TC erred in inferring from the transfer of possession alone
Doctrine: that the parties had verbally modified their written
It is not an essential element of a mortgage that possession of agreement, which provided that the loan was to be without
the mortgaged property remains with the mortgagor. For a interest, and substituted another giving the mortgagee the
contract of antichresis to exist, it must be expressly agreed right to receive the fruits of the mortgaged properties as
between the creditor and debtor that the former, having been interests.
given possession of the properties given as security, is to apply
their fruits to the payment of the interest, if owing, and thereafter
to the principal of his credit.

!
The true position of appellee herein under his contract with INSOLVENCY
appellant is a "mortgage in possession" … American equity
jurisprudence; that is "one who has lawfully acquired actual I. THE CONCEPT OF INSOLVENCY
or constructive possession of the premises mortgaged to
him, standing upon his rights as mortgagee and not claiming Insolvency is a trigger event. It changes the rules of the game.
under another title, for the purpose of enforcing his security
upon such property or making its income help to pay his Pre-FRIA: cases brought before the SEC.
debt" As such mortgagee in possession, his rights and Post-FRIA: now brought before commercial courts.
obligations are, similar to those of an antichretic creditor,
which includes the ff: Art. 2236 is our contract with the State because CON protects us
o That if the mortgagee acquires possession in any lawful against imprisonment for debt. It is the legal basis for ROC
manner, he is entitled to retain such possession until remedies which allow the Court to seize property for the
the indebtedness is satisfied and the property payment of an obligation.
redeemed;
o That the non-payment of the debt within the term agreed Art. 2236. The debtor is liable with all his property, present and
does not vest the ownership of the property in the future, for the fulfillment of his obligations, subject to the
creditor;
exemptions provided by law. (1911a)
o That the general duty of the mortgagee in possession
towards the premises is that of the ordinary prudent
Art. 2237. Insolvency shall be governed by special laws insofar
owner;
o That the mortgagee must account for the rents and as they are not inconsistent with this Code. (n)
profits of the land, or its value for purposes of use and
occupation, any amount thus realized going towards the RA 10142, Sec. 2 Declaration of Policy - It is the policy of the
discharge on the mortgage debt; that if the mortgage State to encourage debtors, both juridical and natural persons,
remains in possession after the mortgage debt has and their creditors to collectively and realistically resolve and
been satisfied, he becomes a trustee for the mortgagor adjust competing claims and property rights. In furtherance
as to the excess of the rents and profits over such debt; thereof, the State shall ensure a timely, fair, transparent,
and effective and efficient rehabilitation or liquidation of debtors. The
o Lastly, that the mortgagor can only enforce his rights to rehabilitation or liquidation shall be made with a view to ensure
the land by an equitable action for an account and to or maintain certainly and predictability in commercial affairs,
redeem. preserve and maximize the value of the assets of these debtors,
Citing Enriquez vs. National Bank, a creditor with a lien on recognize creditor rights and respect priority of claims, and
real property who took possession thereof with the consent ensure equitable treatment of creditors who are similarly
of the debtor, held it as an "antichretic creditor with the right situated. When rehabilitation is not feasible, it is in the interest of
to collect the credit with interest from the fruits, returning to the State to facilities a speedy and orderly liquidation of these
the antichretic creditor the balance, if any, after deducting debtor's assets and the settlement of their obligations.
the expenses," because the fact that the debtor consented
and asked the creditor to take charge of managing his RA 10142, Sec. 4 (h, k, n) Definition of Terms - As used in this
property "does not entitle the latter to appropriate to itself Act, the term:
the fruits thereof unless the former has expressly waived his Creditor shall refer to a natural or juridical person which has a
right thereto." claim against the debtor that arose on or before the
In the present case, the parties agreed that the loan was to commencement date.
be without interest, and Fernando has not expressly waived Debtor shall refer to, unless specifically excluded by a
his right to the fruits of the properties mortgaged during the provision of this Act, a sole proprietorship duly registered with
time they were in the mortgagee’s possession. As such, the Department of Trade and Industry (DTI), a partnership duly
Diego, like an antichretic creditor, must account for the registered with the Securities and Exchange Commission (SEC),
value of the fruits received by him, and deduct it from the a corporation duly organized and existing under Philippine laws,
loan obtained by appellant. or an individual debtor who has become insolvent as defined
According to the findings of the trial court, he had received a herein.
net share of 55 cavans of palay out of the mortgaged Group of debtors shall refer to and can cover only: (1)
properties up to the time he filed the present action; at the corporations that are financially related to one another as parent
rate of P9.00 per cavan (a rate admitted by the parties), the corporations, subsidiaries or affiliates; (2) partnerships that are
total value of the fruits received by appellee is P495.00. owned more than fifty percent (50%) by the same person; and (3)
Deducting this amount from the loan of P2, 000, Fernando single proprietorships that are owned by the same person. When the
has only P1, 505 left to pay Diego. petition covers a group of debtors, all reference under these rules to
debtor shall include and apply to the group of debtors.
DISPOSITIVE: Petition partially granted.

!
RA 10142, Sec. 146 Application to Pending Insolvency, Proceedings in insolvency
Suspension of Payments and Rehabilitation Cases. - This Act Bankruptcy, in other jurisdictions
shall govern all petitions filed after it has taken effect. All further o From Latin bancus ruptus, or broken table
proceedings in insolvency, suspension of payments and o From medieval Italian custom of banca rotta, literally,
rehabilitation cases then pending, except to the extent that in the breaking of the counter of a financially failed
opinion of the court their application would not be feasible or merchant
would work injustice, in which event the procedures set forth in Needed because there is a risk that the debtor will still be
unable to pay its debt as they fall due in the usual course of
prior laws and regulations shall apply.
business or as they mature
o Civil Code recognizes that even if the law requires the
RA 10142, Sec. 147 Application to Pending Contracts. - This Act
debtor to answer with all of its property for the fulfillment
shall apply to all contracts of the debtor regardless of the date of
of its obligations, there is that risk
perfection.
Insolvency Proceedings
RA 10142, Sec. 148 Repeating Clause. - The Insolvency Law Statutory procedures by which a debtor obtains financial
(Act No. 1956). As amended is hereby repealed. All other laws, relief and undergoes judicially supervised reorganization or
orders, rules and regulations or parts thereof inconsistent with liquidation of its assets for the benefit of its creditors
any provision of this Act are hereby repealed or modified With the express repeal of Act No. 1956, or the Insolvency
accordingly. Law, the FRIA, is the special law that currently governs
insolvency
Debtor is constitutionally guaranteed non-imprisonment for a
debt, but CC subjects all the debtor’s property, present and Policy/purpose of insolvency proceedings:
future, to the fulfillment of the debtor’s obligations To encourage insolvent debtors, and their creditors to
Provided the requirements of the law are followed, a creditor collectively and realistically resolve and adjust competing
is given the right to: attach, garnish, foreclose, execute claims and property rights, while maintaining certainty and
upon, and otherwise seize the property of a debtor for the predictability in commercial affairs, preserving and
fulfillment of the obligations to the creditor maximizing creditor rights and respecting priority of claims,
o Debtor is allowed to reserve only the property that is and ensuring equitable treatment of creditors who are
exempted by law similarly situated
Debtor: As to rehabilitation and liquidation: Ensure a timely, fair,

Sole proprietorship registered with DTI transparent, effective and efficient rehabilitation or liquidation of
Partnership registered with SEC debtors.
Corporation
Individual debtor who has become insolvent Rehabilitation or liquidation shall be made to:
Ensure or maintain certainty and predictability in commercial
GR: Debtor is liable with all his property affairs
XPNs: Rule 39, Sec. 13 Preserve and maximize the value of assets of debtors
Family home or homestead Recognize creditor rights and respect priority of claims
Ordinary tools and implements personally used in trade, Ensure equitable treatment of creditors who are similarly
employment or livelihood situated
3 horses, 3 cows, 3 carabaos, or other beast of burden
Necessary clothing and articles for personal use RIGHTS OF THE DEBTOR:
Household furniture and utensils necessary for Guaranteed non-imprisonment for non-payment of debt
housekeeping (value < 100k) Right to retain possession of property exempt from
Provisions for individual or family use sufficient for 4 months execution
Professional libraries and equipment of judges, lawyers,
physicians, pharmacists, dentists, engineers, surveyors, RIGHTS OF CREDITOR:
clergymen, teachers, and other professionals (value < 300k) Right to attach, garnish, foreclose, execute upon, and
1 fishing boat and accessories (value < 100k) otherwise seize the property of a debtor for the fulfillment of
Some salaries, wages, or earnings for personal services the obligation
within 4 months before levy for support of family Debtor can only reserve property exempted by law
Lettered gravestones
Monies, benefits, privileges, or annuities accruing Rationale for Insolvency Proceedings: Even if debtor’s
Right to receive legal support, or money or property properties answer for the obligations, there is still a risk that the
obtained as such support, or any pension or gratuity from debtor would be unable to pay when the debt falls due in the
the Government usual course of business or as debts mature
13. Properties exempted by law
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Condition of being insolvent: the related enterprise is beneficial to all concerned and promotes
Under the FRIA, and insofar as the debtor is concerned, the the objectives of rehabilitation.
condition of being insolvent is defined as follows: Provided, finally, That nothing in this section shall prevent the
Insolvent shall refer to the financial condition of a debtor court from joining other entities affiliated with the debtor as
that is generally unable to pay its or his liabilities as they fall parties pursuant to the rules of procedure as may be
due in the ordinary course of business or has liabilities that promulgated by the Supreme Court.
are greater than its or his assets.
Liabilities shall refer to monetary claims against the
RA 10142, Sec. 6 Designation of Courts and Promulgation of
debtor, including stockholder's advances that have been
Procedural Rules. - The Supreme Court shall designate the court
recorded in the debtor's audited financial statements as
or courts that will hear and resolve cases brought under this Act
advances for future subscriptions.
and shall promulgate the rules of pleading, practice and
FRIA has broadened the concept of insolvency by including
procedure to govern the proceedings brought under this Act.
in its ambit illiquidity or equity insolvency, or the financial
condition of a debtor that may possess sufficient property
Nature: In rem, binding upon the whole world
but is unable to pay its liabilities when they fall due, as well
as balance sheet insolvency, or the financial condition of a
How is jurisdiction acquired: Upon publication of the notice of
debtor that has liabilities that are greater than, or that
exceed, its assets commencement of proceedings in any newspaper of general
o Under the FRIA definition, an illiquid debtor is an circulation in the Philippines
insolvent debtor
o Under the FRIA, the state of being insolvent is calculated How conducted: Summary and non-adversarial
based on liabilities, that is, the monetary claims
Parties to the Proceedings (Sec. 4(dd) and (bb)):
against the debtor
Debtor
A. Nature of Insolvency Proceedings Creditor
Unsecured creditors’ committee
Stakeholder
RA 10142, Sec. 3 Nature of Proceedings. - The proceedings
Party with an ownership interest in property held by the
under this Act shall be in rem. Jurisdiction over all persons
debtor
affected by the proceedings shall be considered as acquired
Secured creditor
upon publication of the notice of the commencement of the
Rehabilitation receiver
proceedings in any newspaper of general circulation in the
Liquidator
Philippines in the manner prescribed by the rules of procedure to
Other juridical or natural person who stands to be benefited
be promulgated by the Supreme Court.
The proceedings shall be conducted in a summary and non- or injured by outcome of the proceedings
adversarial manner consistent with the declared policies of this
On juridical entities parties to the proceeding (Sec. 7)
Act and in accordance with the rules of procedure that the
GR: Each juridical entity is a separate entity. Thus, assets and
Supreme Court may promulgate.
liabilities of a debtor may not be commingled or aggregated with
those of another.
RA 10142, Sec. 7 Substantive and Procedural Consolidation. - XPN: Unless the other is a related enterprise that is owned or
Each juridical entity shall be considered as a separate entity controlled directly or indirectly by the same interest. The
under the proceedings in this Act. Under these proceedings, the commingling or aggregation of assets and liabilities of the debtor
assets and liabilities of a debtor may not be commingled or with related enterprise are allowed where:
aggregated with those of another, unless the latter is a related There was commingling in fact of assets and liabilities prior
enterprise that is owned or controlled directly or indirectly by the to the commencement of the proceedings;
same interests: Provided, however, That the commingling or They have common creditors and it will be more convenient
aggregation of assets and liabilities of the debtor with those of a to treat them together rather than separately;
related enterprise may only be allowed where: The related enterprise voluntarily accedes to join the debtor
there was commingling in fact of assets and liabilities of the as party petitioner and to commingle its assets and liabilities
debtor and the related enterprise prior to the commencement of with the debtor’s; and
the proceedings; Consolidation is beneficial to all concerned and promotes
the debtor and the related enterprise have common creditors
the objectives of rehabilitation
and it will be more convenient to treat them together rather than
separately;
the related enterprise voluntarily accedes to join the debtor as
party petitioner and to commingle its assets and liabilities with
the debtor's; and
The consolidation of assets and liabilities of the debtor and

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B. Civil and Criminal Liability in Insolvency Proceedings . CONCURRENCE & PREFERENCE OF CREDITS A.
General Concepts
RA 10142, Sec. 10 Liability of Individual Debtor, Owner of a Sole
Proprietorship, Partners in a Partnership, or Directors and RA 10142, Sec. 62 Contents of a Rehabilitation Plan – The
Officers - Individual debtor, owner of a sole proprietorship, Rehabilitation Plan shall, as a minimum:
partners in a partnership, or directors and officers of a debtor
shall be liable for double the value of the property sold, specify the underlying assumptions, the financial goals and
embezzled or disposed of or double the amount of the the procedures proposed to accomplish such goals;
transaction involved, whichever is higher to be recovered for
benefit of the debtor and the creditors, if they, having notice of compare the amounts expected to be received by the
the commencement of the proceedings, or having reason to creditors under the Rehabilitation Plan with those that they will
believe that proceedings are about to be commenced, or in receive if liquidation ensues within the next one hundred twenty
contemplation of the proceedings, willfully commit the following (120) days;
acts:
Dispose or cause to be disposed of any property of the contain information sufficient to give the various classes of
debtor other than in the ordinary course of business or creditors a reasonable basis for determining whether supporting
authorize or approve any transaction in fraud of creditors or the Plan is in their financial interest when compared to the
in a manner grossly disadvantageous to the debtor and/or immediate liquidation of the debtor, including any reduction of
creditors; or principal interest and penalties payable to the creditors;
Conceal or authorize or approve the concealment, from
the creditors, or embezzles or misappropriates, any property establish classes of voting creditors;
of the debtor.
The court shall determine the extent of the liability of an owner, establish subclasses of voting creditors if prior approval has
partner, director or officer under this section. In this connection, been granted by the court;
in case of partnerships and corporations, the court shall consider
the amount of the shareholding or partnership or equity interest indicate how the insolvent debtor will be rehabilitated
of such partner, director or officer, the degree of control of such including, but not limited to, debt forgiveness, debt rescheduling,
partner, director or officer over the debtor, and the extent of the reorganization or quasi-reorganization. dacion en pago, debt-
involvement of such partner, director or debtor in the actual equity conversion and sale of the business (or parts of it) as a
management of the operations of the debtor. going concern, or setting-up of a new business entity or other
similar arrangements as may be necessary to restore the
RA 10142, Sec. 145 Penalties - An owner, partner, director, financial well-being and visibility of the insolvent debtor;
officer or other employee of the debtor who commits any one of
the following acts shall, upon conviction thereof, be punished by specify the treatment of each class or subclass described in
a fine of not more than One million pesos (Php 1, 000,000.00) subsections (d) and (e);
and imprisonment for not less than three(3) months nor more
than five (5) years for each offense; provide for equal treatment of all claims within the same class
if he shall, having notice of the commencement of the or subclass, unless a particular creditor voluntarily agrees to less
proceedings, or having reason to believe that proceedings favorable treatment;
are about to be commented, or in contemplation of the
proceedings hide or conceal, or destroy or cause to be ensure that the payments made under the plan follow the
destroyed or hidden any property belonging to the debtor or if priority established under the provisions of the Civil Code on
he shall hide, destroy, after mutilate or falsify, or cause to be concurrence and preference of credits and other applicable laws;
hidden, destroyed, altered, mutilated or falsified, any book,
deed, document or writing relating thereto; if he shall, with maintain the security interest of secured creditors and
intent to defraud the creditors of the debtor, make any preserve the liquidation value of the security unless such has
payment sale, assignment, transfer or conveyance of any been waived or modified voluntarily;
property belongings to the debtor
if he shall, having knowledge belief of any person having disclose all payments to creditors for pre-commencement
proved a false or fictitious claim against the debtor, fail to debts made during the proceedings and the justifications thereof;
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 describe the disputed claims and the provisioning of funds
property by fictitious losses or expense; or to account for appropriate payments should the claim be
if he shall knowingly violate a prohibition or knowingly fail to ruled valid or its amount adjusted;
undertake an obligation established by this Act.

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identify the debtor's role in the implementation of the Plan; and the value of such property is insufficient to pay in full all
the claims. As a result thereof, some creditors will not be
state any rehabilitation covenants of the debtor, the breach of paid or some creditors will not obtain the full satisfaction of
which shall be considered a material breach of the Plan; their claims. In such a situation, the claims may be paid
concurrently and pro-rata, that is, in proportion to the
identify those responsible for the future management of the amount of the respective credits; or a preference of credits
debtor and the supervision and implementation of the Plan, their may be established to determine the priority of payments or
affiliation with the debtor and their remuneration; which of the creditors will be paid ahead of the others.
address the treatment of claims arising after the confirmation A preference of credits does not necessarily create a lien on
of the Rehabilitation Plan; property. While a lien creates a charge on a particular
property, a preference of credits is merely a method
require the debtor and its counter-parties to adhere to the adopted to determine and specify the order in which credits
terms of all contracts that the debtor has chosen to confirm; should be paid.
Clearly, the aforementioned provisions do not apply when
arrange for the payment of all outstanding administrative the situation does not involve two or more creditors having
expenses as a condition to the Plan's approval unless such separate and distinct claims against the same debtor who
condition has been waived in writing by the creditors concerned; has insufficient property.
Elements: (impliedly)
arrange for the payment" of all outstanding taxes and That a debtor has two or more creditors, each
assessments, or an adjusted amount pursuant to a compromise having a separate and distinct claims against him
settlement with the BlR Or other applicable tax authorities; That the debtor do not have sufficient property to
satisfy all the valid claims against him
include a certified copy of a certificate of tax clearance or Consequently, concurrence and preference of credits can
evidence of a compromise settlement with the BIR; only be ascertained in the context of some proceedings
such as insolvency proceedings, where the claims of all
include a valid and binding r(,solution of a meeting of the the creditors may be bindingly adjudicated. Under the FRIA
debtor's stockholders to increase the shares by the required or Financial Rehabilitation and Insolvency Act, both
amount in cases where the Plan contemplates an additional rehabilitation proceedings and liquidation proceedings
issuance of shares by the debtor; are considered insolvency proceedings, and the rules on
concurrence and preference of credits are applicable to
state the compensation and status, if any, of the rehabilitation both.
receiver after the approval of the Plan; and
REMEMBER: The rehabilitation plan and the liquidation plan
contain provisions for conciliation and/or mediation as a must ensure that the concurrence and preference of credits are
prerequisite to court assistance or intervention in the event of complied with.
any disagreement in the interpretation or implementation of the
Rehabilitation Plan. Concurrence of credit: The creditors are paid concurrently and
pro-rata (in proportion) to the amount of the respective credits.
RA 10142, Sec. 133 Concurrence and Preference of Credits -
The Liquidation Plan and its Implementation shall ensure that the
Preference of credit: A method adopted to determine and
concurrence and preference of credits as enumerated in the Civil
Code of the Philippines and other relevant laws shall be specify the order in which credits should be paid. It determines
observed, unless a preferred creditor voluntarily waives his the priority of payments or which creditors will be paid ahead of
preferred right. For purposes of this chapter, credits for services others.
rendered by employees or laborers to the debtor shall enjoy first
When applied:
preference under Article 2244 of the Civil Code, unless the
When there are 2 or more creditors having separate and
claims constitute legal liens under Article 2241 and 2242 thereof.
distinct claims against the same debtor who has insufficient
property
The Civil Code establishes a system of concurrence and
When debtor cannot pay his debts in full
preference of credits in the context of insolvency
Ascertained in the context of some proceedings
proceedings in order to properly recognize creditor rights,
respect priority of claims, and ensure the equitable
treatment of similarly situated creditors. Such a situation
arises only when the debtor cannot pay his debts in full.
There is concurrence of credits when property of the
debtor is subjected to the claims of two or more creditors

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B. Classification of Credits (6) Claims for laborers' wages, on the goods manufactured or the
work done;
1. Special Preferred Credits
O: Wages
For these special preferred credits, identify the following: D: Employer
1. What is the object? C: Laborer
2. Who is the debtor?
3. Who is the creditor? (7) For expenses of salvage, upon the goods salvaged;
Art. 2241 With reference to specific movable property of (8) Credits between the landlord and the tenant, arising from the
the debtor, the following claims or liens shall be preferred: contract of tenancy on shares, on the share of each in the fruits
or harvest;
(1) Duties, taxes and fees due thereon to the State or any
subdivision thereof; (9) Credits for transportation, upon the goods carried, for the
price of the contract and incidental expenses, until their delivery
O: Movable and for thirty days thereafter;
D: Owner of prop
C: State (10) Credits for lodging and supplies usually furnished to
travellers by hotel keepers, on the movables belonging to the
(2) Claims arising from misappropriation, breach of trust, or guest as long as such movables are in the hotel, but not for
malfeasance by public officials committed in the performance of money loaned to the guests;
their duties, on the movables, money or securities obtained by
them; O: Movable belonging to the guests
D: Lodger
O: Moneys or securities C: Hotel keeper
D: Public official
C: State or whover owns the object (11) Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;
(3) Claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the debtor, (12) Credits for rent for one year, upon the personal property of
up to the value of the same; and if the movable has been resold the lessee existing on the immovable leased and on the fruits of
by the debtor and the price is still unpaid, the lien may be the same, but not on money or instruments of credit;
enforced on the price; this right is not lost by the immobilization
of the thing by destination, provided it has not lost its form, (13) Claims in favor of the depositor if the depositary has
substance and identity; neither is the right lost by the sale of the wrongfully sold the thing deposited, upon the price of the sale.
thing together with other property for a lump sum, when the
price thereof can be determined proportionally; D: Depositary
C: Depositor
O: Unpaid purchase price Note: Compare this with #5
D: Purchaser
C: Unpaid vendor In the foregoing cases, if the movables to which the lien or
preference attaches have been wrongfully taken, the creditor
(4) Credits guaranteed with a pledge so long as the things may demand them from any possessor, within thirty days from
pledged are in the hands of the creditor, or those guaranteed by the unlawful seizure.
a chattel mortgage, upon the things pledged or mortgaged, up
to the value thereof;
D: Mortgagor
C: Mortgagee
(5) Credits for the making, repair, safekeeping or preservation of

personal property, on the movable thus made, repaired, kept or
possessed;
D: Depositor
C: Depositary

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Art. 2242 With reference to specific immovable property and real RA 10142, Sec. 136 Liquidation of a Securities Market
rights of the debtor, the following claims, mortgages and liens Participant - The foregoing provisions of this chapter shall be
shall be preferred, and shall constitute an encumbrance on the without prejudice to the power of a regulatory agency or self-
immovable or real right: regulatory organization to liquidate trade-related claims of clients
or customers of a securities market participant which, for
(1) Taxes due upon the land or building; purposes of investor protection, are hereby deemed to have
absolute priority over other claims of whatever nature or kind
Land/building insofar as trade-related assets are concerned.
Owner
Gov’t For purposes of this section, trade -related assets include cash,
securities, trading right and other owned and used by the
For the unpaid price of real property sold, upon the securities market participant in the ordinary course of this
immovable sold; business.
Claims of laborers, masons, mechanics and other workmen, Credit: Trade-related claims of clients or customers of a
as well as of architects, engineers and contractors, engaged in securities market participant.
the construction, reconstruction or repair of buildings, canals or
other works, upon said buildings, canals or other works; There is a preference over trade-related assets (for now)
pursuant to the FRIA.
O: Buildings, canals, other works
Generally, those who commissioned the work Trade-related assets:
Laborers Cash
Securities
Claims of furnishers of materials used in the construction, Trading right
reconstruction, or repair of buildings, canals or other works, upon Other assets owned and used by the securities market
said buildings, canals or other works; participant in the ordinary course of business
Note: This special preferred credit enjoys absolute priority over
Mortgage credits recorded in the Registry of Property, upon other claims and amends the order of preference of Art. 2241
the real estate mortgaged; and 2242.
Property Art. 2243 The claims or credits enumerated in the two preceding
Mortgagor
articles shall be considered as mortgages or pledges of real or
Mortgagee
personal property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No. 1, Article 2241,
Expenses for the preservation or improvement of real
and No. 1, Article 2242, shall first be satisfied.
property when the law authorizes reimbursement, upon the
immovable preserved or improved;
In all cases, Art. 2241 and 2242 shall be first satisfied.
Credits annotated in the Registry of Property, in virtue of a

Art. 2246 Those credits which enjoy preference with respect to
judicial order, by attachments or executions, upon the property
specific movables, exclude all others to the extent of the value of
affected, and only as to later credits;
the personal property to which the preference refers.
Property
Defendant Art. 2247 If there are two or more credits with respect to the
Creditor of owner of property adjudged to be owner same specific movable property, they shall be satisfied pro rata,
Note: There is a preference within (based on date) after the payment of duties, taxes and fees due the State or any
subdivision thereof.
Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus divided; Art. 2248 Those credits which enjoy preference in relation to
specific real property or real rights, exclude all others to the
Claims of donors or real property for pecuniary charges or extent of the value of the immovable or real right to which the
other conditions imposed upon the donee, upon the immovable preference refers.
donated;
Credits of insurers, upon the property insured, for the

insurance premium for two years.

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Art. 2249 If there are two or more credits with respect to the De Barreto vs. Villanueva (1961-1962) - Gutiérrez-David, J.
same specific real property or real rights, they shall be satisfied Petitioners: Magdalena C. de Barreto, et al. (appellants)
pro rata, after the payment of the taxes and assessments upon Respondents: José G. Villanueva, et al. (appellees)
the immovable property or real right. Concept: Special Preferred Credits (Insolvency)
Among special preferred credits, only taxes enjoy preference. Doctrine in the original decision:
Art. 2249 in relation to Art. 2242 is applicable to vendor’s lien
Those enumerated in Art. 2241 (2) to (13) and 2242 (2) to (10) even if it be unrecorded or unregistered and even when the
are liens. They are not preferred over any other inter se. There is debtor is not insolvent.
only CONCURRENCE OF CREDIT.
Doctrine in the resolution of the motion for reconsideration:
Two-tier Order of Preference:
TIER 1: Taxes, duties, and fees due on specific movable or Art. 2249 in relation to Art. 2242 is applicable to the case of
immovable property concurrent of credits only when there has been a proceeding—
TIER 2: All other special preferred credits insolvency proceeding, estate settlement, liquidation
Note: The latter are satisfied pari passu and pro rata out of any proceedings, and the likes—to ascertain the claims of the
residual value of specific property to which other credits relate. concurrent creditors.
Brief Facts:
Art. 2250 The excess, if any, after the payment of the credits
Villanueva is indebted as a buyer of a parcel of land to Cruzado.
which enjoy preference with respect to specific property, real or
She is also indebted as a borrower to Barreto. Her loan to
personal, shall be added to the free property which the debtor
Barreto was secured by a real estate mortgage over the
may have, for the payment of the other credits.
aforementioned land. She failed to perform her obligations to
Cruzado and Barreto. Cruzado had her vendor’s lien annotated
Art. 2241 and 2242 enumerate the special preferred
at the back of the certificate of title issued to Villanueva. Barreto
credits that enjoy preference with respect to specific
foreclosed the mortgage, but it was subjected to the vendor’s
movable and specific immovable property of the debtor, and
lien.
exclude all other claims to the extent of the value of the
affected property.
ISSUE:
Moreover, these claims are considered as liens within the
WON Cruzado was entitled to a pro rata share of the proceeds
purview of legal provisions governing insolvency.
of the foreclosure sale.
Among those enumerated, only taxes enjoy preference; the
claims listed in Art. 2241 (2) to (13) and Art. 2242 (2) to
Ruling in the original case: NO.
(1), all come after taxes in order of precedence.
Although such claims enjoy their privileged character as
Ruling in the resolution of the motion for reconsideration:
liens, they are not preferred over any other inter se; there is
only a concurrence of credits. YES.
Art. 2241 & 2242 and Art. 2246 & 2249 establish a two-tier
RATIO IN THE ORIGINAL CASE: Art. 2249 in relation to Art.
order of preference: the first tier includes only taxes, duties
2242 is applicable to vendor’s lien even if it be unrecorded
and fees due on specific movable or immovable property,
while the second tier includes all other special preferred or unregistered and even when the debtor is not insolvent.
credits, which are to be satisfied, pari passu and pro rata,
Appellants: decision in the recovery case filed by Cruzado
out of any residual value of the specific property to which
could not be the basis for vendor’s lien because it was merely a
such other credits relate.
case to recover the balance of the promissory note.
However, Sec. 136 of FRIA creates a special preference of
SC: While the action was to recover the remaining
credit in favor or trade-related claims of clients or customers
obligation of promisor Villanueva on the note, the fact
upon the trade-related assets, such as cash, securities, and
remained that Cruzado was an unpaid vendor of the realty
trading rights, of a securities market participant. This special
in question, and the promissory note was, precisely, for the
preferred credit enjoys absolute priority over other claims
unpaid balance of the purchase price.
and amends the order of preference in Art. 2241 and 2242.

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Under Art. 2242 of the Civil Code, the unpaid price of a real Conflict among creditors under the Old Civil Code is
property sold, upon the immovable sold, constitute an governed by Art. 1927 where there was a system of
encumbrance on the specific immovable property. Mortgage priorities. One class of creditors could exclude creditors
credits recorded in the Registry of Property is also an of lower order until all the claims of the former were fully
encumbrance under this article. Art. 2249 provides that if satisfied out of the proceeds of the sale of the real
there are two or more credits with respect to the same property, and could even exhaust such proceeds if
specific real property or real rights, they shall be satisfied necessary.
pro-rata, after the payment of the taxes and assessments Under the present Civil Code, only taxes enjoy such
upon the immovable property or real rights. Applying these absolute preference. The remaining classes of
provisions, Cruzado, as an unpaid vendor, has the right to preferred creditors under Art. 2242 enjoy no priority
share pro rata with the appellants the proceeds of the among themselves, but must be paid pro rata, as
foreclosure sale. provided for under Art. 2249.
Appellants: Since the unpaid vendor’s lien was not Under the present Civil Code, to make the prorating fully
registered, it should not prejudice their registered rights over effective, the preferred creditors (nos. 2-14 of Art. 2242)
the property. must necessarily be convened and the import of their claims
SC: While Art. 2242 require mortgage credits on ascertained. Such proceeding may be an insolvency
immovables to be registered in order to be given preference, proceeding, estate settlement proceeding, or other
this is not the case for vendor’s lien. If the legislative intent liquidation proceedings of similar import.
was to impose the same requirement in the case of the This requirement for a proceeding explains the rule of Art.
vendor’s lien, or the unpaid price of the real property sold, 2243 which states that “the claims or credits enumerated in
the lawmakers could have easily inserted the same the two preceding articles (Art. 2242 is one of these) shall
qualification. Since the law does not make any distinction, it be considered as mortgages or pledges of real or personal
goes to show that any vendor’s lien enjoys the preferred property, or liens within the purview of legal provisions
credit status. governing insolvency…”
Appellants: To give the unrecorded vendor’s lien the same One preferred creditor’s third-party claim to the proceeds of
standing as the registered mortgage credit would be to a foreclosure case (as the appellee’s vendor’s lien from the
nullify the principle in the land registration system that prior unpaid purchase price) is not the proceeding contemplated
unrecorded interests cannot prejudice persons who by law for the enforcement of preferences under Art. 2242,
subsequently acquire interests over the same property. unless the claimant were enforcing a credit for taxes that
SC: The Land Registration Act itself respects without enjoy absolute priority.
reserve or qualification the paramount rights of lien holders If none of the claims is for taxes, a dispute between two
on real property. This is provided for under Section 70 of the creditors will not enable the court to ascertain the pro rate
said Act. dividend corresponding to each, because their rights cannot
Appellants: The articles mentioned above are applicable be ascertained.
only to the insolvent debtor. In the absence of insolvency proceedings or other
SC: Nothing in the law shows any such limitation. If we are equivalent liquidation proceedings, the conflict between the
to interpret this portion of the Code as intended only for parties must be decided pursuant to the well established
insolvency cases, then other creditor-debtor relationships principle concerning registered lands: that a purchaser in
where there are concurrence of credits would be left without good faith and for value (such as the appellants) takes
any rules to govern them, and it would render purposeless registered property free from liens and encumbrances other
the special laws on insolvency. than statutory liens and those recorded in the certificate of
title.
DISPOSITIVE: Decision a quo affirmed. Since there was no insolvency or liquidation proceeding, the
claim of the appellee did not acquire the haracter and rank
RATIO IN THE RESOLUTION OF THE MOTION FOR of a statutory lien co-equal to the mortgagee’s recorded
RECONSIDERATION: Art. 2249 in relation to Art. 2242 is encumbrance and must remain subordinate to the latter.
applicable to the case of concurrent of credits only when
there has been a proceeding—insolvency DISPOSITIVE: Original decision reconsidered and reversed.
proceeding, estate settlement, liquidation proceedings, and
the likes—to ascertain the claims of the concurrent
creditors.
The previous decision failed to take fully into account the
radical changes introduced by the present Civil Code into
the system of priorities among creditors ordained by the
Civil Code of 1889.
-

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DBP vs. CA (2001) - Kapunan, J. meantime, the buyer Villanueva was able to secure a clean
Petitioner: Development Bank of the Philippines certificate of title (No. 32626), and mortgaged the property
Respondents: Remington Industrial Sales Corporation to appellant Magdalena C. Barretto, married to Jose C.
Concept: Special Preferred Credits Baretto, to secure a loan of P30,000.03, said mortgage
having been duly recorded.
Doctrine: Pura Villanueva defaulted on the mortgage loan in favor of
The preferences named in Articles 2261 and 2262 (now 2241 and Barretto. The latter foreclosed the mortgage in her favor,
2242) are to be enforced in accordance with the Insolvency Law. obtained judgment, and upon its becoming final asked for
execution on 31 July 1958. On 14 August 1958, Cruzado
Brief Facts: filed a motion for recognition for her "vendor's lien" in the
Marinduque Mining-Industrial Corporation (Marinduque Mining), amount of P12,000.00, plus legal interest, invoking Articles
obtained from PNB various loan accommodations. To secure the 2242, 2243, and 2249 of the new Civil Code. After hearing,
loans, Marinduque Mining executed on a Deed of Real Estate the court below ordered the "lien" annotated on the back of
Mortgage and Chattel Mortgage in favor of PNB. The mortgage Certificate of Title No. 32526, with the proviso that in case of
covered all of Marinduque Mining's real properties, located at sale under the foreclosure decree the vendor's lien and the
Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, mortgage credit of appellant Barretto should be paid pro rata
Rizal, including the improvements thereon. from the proceeds. Our original decision affirmed this order
of the Court of First Instance of Manila.
ISSUE: In its decision upholding the order of the lower court, the
WON there exists in Remington’s favor a lien on all unpaid Court ratiocinated thus: Article 2242 of the new Civil Code
purchases of Marinduque Mining (NO) enumerates the claims, mortgages and liens that constitute
an encumbrance on specific immovable property, and
RATIO: NO. There is no lien in favor of Remington. among them are: (2)For the unpaid price of real property
The Court of Appeals held that there exists in Remington's sold, upon the immovable sold"; and (5) Mortgage credits
favor a "lien" on the unpaid purchases of Marinduque recorded in the Registry of Property."
Mining, and as transferee of these purchases, DBP should Article 2249 of the same Code provides that "if there are two
be held liable for the value thereof. or more credits with respect to the same specific real
In the absence of liquidation proceedings, however, the property or real rights, they shall be satisfied pro-rata, after
claim of Remington cannot be enforced against DBP. Article the payment of the taxes and assessments upon the
2241 of the Civil Code provides: immovable property or real rights."
“With reference to specific movable property of the debtor, Application of the above-quoted provisions to the case at
the following claims or liens shall be preferred: bar would mean that the herein appellee Rosario Cruzado
Claims for the unpaid price of movables sold, on said as an unpaid vendor of the property in question has the right
movables, so long as they are in the possession of the to share pro-rata with the appellants the proceeds of the
debtor, up to the value of the same; and if the movable has foreclosure sale.
been resold by the debtor and the price is still unpaid, the As to the point made that the articles of the Civil Code on
lien may be enforced on the price; this right is not lost by the concurrence and preference of credits are applicable only to
immobilization of the thing by destination, provided it has not the insolvent debtor, suffice it to say that nothing in the law
lost its form, substance and identity, neither is the right lost shows any such limitation. If the Court was to interpret this
by the sale of the thing together with other property for a portion of the Code as intended only for insolvency cases,
lump sum, when the price thereof can be determined then other creditor-debtor relationships where there are
proportionally; concurrence of credits would be left without any rules to
Credits guaranteed with a pledge so long as the things govern them, and it would render purposeless the special
pledged are in the hands of the creditor, or those laws on insolvency.
guaranteed by a chattel mortgage, upon the things pledged Upon motion by appellants, however, the Court
or mortgaged, up to the value thereof;” reconsidered its decision. Justice J.B.L. Reyes, speaking for
In Barretto vs. Villanueva, the Court had occasion to construe the Court, explained the reasons for the reversal: The
Article 2242, governing claims or liens over specific immovable previous decision failed to take fully into account the radical
property. The facts that gave rise to the case were summarized changes introduced by the Civil Code of the Philippines into
by the Court in its resolution as follows: the system of priorities among creditors ordained by the
x x x Rosario Cruzado sold all her right, title, and interest Civil Code of 1889.
and that of her children in the house and lot herein involved
to Pura L. Villanueva for P19,000.00. The purchaser paid
P1,500 in advance, and executed a promissory note for the
balance of P17,500.00. However, the buyer could only pay
P5,500 on account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the

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Pursuant to the former Code, conflicts among creditors foreclosure instituted by PNB and DBP is not the liquidation
entitled to preference as to specific real property under proceeding contemplated by the Civil Code, Remington
Article 1923 were to be resolved according to an order of cannot claim its pro rata share from DBP.
priorities established by Article 1927, whereby one class of
creditors could exclude the creditors of lower order until the DISPOSITIVE: Petition granted
claims of the former were fully satisfied out of the proceeds
of the sale of the real property subject of the preference, J.L. Bernardo Construction v. CA (2000) – Gonzaga-Reyes, J.
and could even exhaust proceeds if necessary. Petitioner: J.L. Bernardo Construction, represented by attys-in-
Under the system of the Civil Code of the Philippines, fact Santiago Sugay, Edwin Sugay and Fernando Erana
however, only taxes enjoy a similar absolute preference. All Respondent: CA and Mayor Jose Salonga
the remaining thirteen classes of preferred creditors under Concept: Concurrence and Preference of Credits: Classification
Article 2242 enjoy no priority among themselves, but must of Credits – Special Preferred Credits
be paid pro rata, i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:"If there are Doctrine:
two or more credits with respect to the same specific real Art. 2242 granting a preference of credits only finds application
property or real rights, they shall be satisfied pro rata, after where there is a concurrence of credits (same specific property
the payment of the taxes and assessments upon the of the debtor is subjected to the claims of several creditors and
immovable property or real rights." the value of such property of the debtor is insufficient to pay in
But in order to make this prorating fully effective, the full all the creditors) and the question of preference will arise.
preferred creditors enumerated in Nos. 2 to 14 of Article This statutory lien should only be enforced in the context of a
2242 (or such of them as have credits outstanding) must proceeding where the claims of all the preferred creditors may
necessarily be convened, and the import of their claims be bindingly adjudicated, such as insolvency proceedings
ascertained. It is thus apparent that the full application of
Articles 2249 and 2242 demands that there must be first Brief Facts:
some proceeding where the claims of all the preferred J.L. Bernardo et al. won the bid to construct the Public Market of
creditors may be bindingly adjudicated, such as insolvency, San Antonio. According to them, the Municipality undertook to
the settlement of decedent's estate under Rule 87 of the demolish, clear, and fill the site of the public market; however,
Rules of Court, or other liquidation proceedings of similar upon the latter’s representation, the bidders were made to
import. undertake the same, and would later be reimbursed. Despite
This explains the rule of Article 2243 of the new Civil Code demands, they were not reimbursed, so they filed a complaint
that: "The claims or credits enumerated in the two preceding against the municipality. The TC granted a writ of preliminary
articles shall be considered as mortgages or pledges of real attachment due to alleged contractual fraud, and granted
or personal property, or liens within the purview of legal possession and the right to operate the market in lieu because
provisions governing insolvency” they stand in the position of an unpaid contractor with a
And the rule is further clarified in the Report of the Code preferred lien. The CA reversed, nullifying the writ and ruling that
Commission, as follows Art. 2242 does not apply, and that its enforcement cannot be
"The question as to whether the Civil Code and the expanded to the use of the building.
Insolvency Law can be harmonized is settled by this Article
(2243). The preferences named in Articles 2261 and 2262 ISSUE:
(now 2241 and 2242) are to be enforced in accordance with WON the CA was correct in reversing the grant of a contractor’s
the Insolvency Law." (Italics supplied) lien (YES)
Thus, it becomes evident that one preferred creditor's third-
party claim to the proceeds of a foreclosure sale (as in the RATIO: The grant of the contractor’s lien was correctly
case now before us) is not the proceeding contemplated by reversed. Art. 2242 only finds application when there is a
law for the enforcement of preferences under Article 2242, concurrence of credits and the question of preference will
unless the claimant were enforcing a credit for taxes that arise. It should only be enforced in, for example, insolvency
enjoy absolute priority. If none of the claims is for taxes, a proceedings, as explicitly stated in Art. 2243.
dispute between two creditors will not enable the Court to
ascertain the pro rata dividend corresponding to each, Art. 2241 and 2242 enumerate certain credits which enjoy
because the rights of the other creditors likewise enjoying preference with respect to specific personal or real
preference under Article 2242 can not be ascertained. property of the debtor
The ruling in Barretto was reiterated in Phil. Savings Bank o Contractor’s lien is granted under 3rd paragraph of Art.
vs. Hon. Lantin, Jr., etc., et al. and in two cases both entitled 2242 – provides that the claims of contractors engaged
Development Bank of the Philippines vs. NLRC. in the construction, reconstruction or repair of buildings
Although Barretto involved specific immovable property, the or other works shall be preferred with respect to the
ruling therein should apply equally in this case where specific building or other immovable property
specific movable property is involved. As the extrajudicial constructed

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Art. 2242 only finds application when there is a J.L. Bernardo v. CA
concurrence of credits – when the same specific property Preference of credits only applies when there is a proceeding to
of the debtor is subjected to the claims of several creditors adjudicate the claims of all the creditors, such as insolvency.
and the value of such property of the debtor is insufficient to Here, there is only a BREACH of contract. The only remedy that
pay in full all of the creditors  the question of preference Bernardo has is a money claim and an action for damages.
will arise, and there will be a need to determine which of
the creditors will be paid ahead of the others 2. Ordinary Preferred Credits
o This statutory lien should only be enforced in the context Art. 2244 With reference to other property, real and personal, of
of some kind of proceeding where the claims of all the the debtor, the following claims or credits shall be preferred in
preferred creditors may be bindingly adjudicated, such the order named:
as insolvency proceedings
o Explicit in Art. 2243 that claims and liens in Arts. 2241 Proper funeral expenses for the debtor, or children under his
and 2242 shall be considered as mortgages or pledges or her parental authority who have no property of their own,
of real or personal property, or liens within the purview
when approved by the court;
of legal provisions governing insolvency
SC: Action by J.L. Bernardo et al. does not partake of the Credits for services rendered the insolvent by employees,
nature of an insolvency proceeding; it is basically for specific laborers, or household helpers for one year preceding the
performance and damages
commencement of the proceedings in insolvency;
o Even if finally adjudicated that they stand in the position
of unpaid contractors and are entitled to invoke the Expenses during the last illness of the debtor or of his or her
contractor’s lien, such lien cannot be enforced for spouse and children under his or her parental authority, if they
there is no way of determining WON there exist
have no property of their own;
other preferred creditors with claims over the San
Antonio Public Market Compensation due the laborers or their dependents under
o Records do not contain allegations that they are the only
laws providing for indemnity for damages in cases of labor
creditors with respect to the property
accident, or illness resulting from the nature of the employment;
o That no third party claims have been filed will not bar
other creditors from subsequently bringing actions and Credits and advancements made to the debtor for support of
claiming they also have preferred liens
himself or herself, and family, during the last year preceding the
o This is consistent with the SC’s ruling in Philippine
insolvency;
Savings Bank v. Lantin, where they disallowed a
contractor from enforcing his lien in an action filed for
Support during the insolvency proceedings, and for three
the collection of unpaid construction costs
months thereafter;
SC: They may only obtain possession and use of the public
market by means of a preliminary attachment upon the
Fines and civil indemnification arising from a criminal offense;
property in the event that they obtain a favorable judgment
in the TC
Legal expenses, and expenses incurred in the administration
o Under ROC, a writ of attachment over registered real
of the insolvent's estate for the common interest of the creditors,
property is enforced by the sheriff by filing with the
when properly authorized and approved by the court;
registry of deeds a copy of the order of attachment,
together with a description of the property attached, and
Taxes and assessments due the national government, other
a notice that it is attached, and by leaving a copy of
such order, description, and notice, with the occupant of than those mentioned in Articles 2241, No. 1, and 2242, No. 1;
the property, if any
Taxes and assessments due any province, other than those
If judgment is recovered by the attaching party, and
execution issues, the sheriff may satisfy the referred to in Articles 2241, No. 1, and 2242, No. 1;
judgment by selling so much of the property as
Taxes and assessments due any city or municipality, other
may be necessary to satisfy the judgment  only
in the event that they purchase the property will than those indicated in Articles 2241, No. 1, and 2242, No. 1;
they acquire possession and use of it
Damages for death or personal injuries caused by a quasi-
TC’s order granting possession and use does not adhere to
the procedure for attachment under ROC and TC delict;
gravely abused its discretion in issuing it
Gifts due to public and private institutions of charity or
DISPOSITIVE: CA upheld insofar as it nullifies the contractor’s beneficence;
lien. REVERSE CA’s order nullifying the writ of attachment.

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Credits which, without special privilege, appear in (a) a Sec. 133 of FRIA reiterates jurisprudence to the effect that
public instrument; or (b) in a final judgment, if they have been the Art. 110, LC does not create a lien in favor of workers or
subject of litigation. These credits shall have preference among employees for unpaid wages upon the property owned by
themselves in the order of priority of the dates of the instruments the employer. Such claims for unpaid wages do not fall
and of the judgments, respectively. within the category of special preferred credits, except to the
extent that such claims are already covered by Art. 2241
and 2242 (3).
Labor Code, Art. 110 Worker preference in case of bankruptcy -
What Art. 110, LC actually does is it modifies the order of
In the event of bankruptcy or liquidation of an employer’s
preference in Art. 2244 by removing the 1 year limitation
business, his workers shall enjoy first preference as regards their
found in Art. 2244 (2) and by moving claims for unpaid
wages and other monetary claims, any provisions of law to the
wages of laborers or workers from second priority to first
contrary notwithstanding. Such unpaid wages and monetary
priority in the order of preference established by Art. 2244.
claims shall be paid in full before claims of the government and
The taxes and assessments enumerated in Art. 2244 (9) to
other creditors may be paid.
do not have the overriding preference that Art. 2241 (1) and
2242 (2) have.
RA 10142, Sec. 133 Concurrence and Preference of Credits - Art. 2244 (14) further establishes a preference among
The Liquidation Plan and its Implementation shall ensure that the credits that appear in a public instrument or in a final
concurrence and preference of credits as enumerated in the Civil judgment, if they have been subjects of litigation, in the
Code of the Philippines and other relevant laws shall be order of priority of the dates of the instruments or of the
observed, unless a preferred creditor voluntarily waives his judgments.
preferred right. For purposes of this chapter, credits for services
rendered by employees or laborers to the debtor shall enjoy first 3. Common Credits
claims constitute legal liens under Article 2241 and 2242 thereof. 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
Art. 2251 Those credits which do not enjoy any preference with no preference.
respect to specific property, and those which enjoy preference,
as to the amount not paid, shall be satisfied according to the Art. 2251 Those credits which do not enjoy any preference with
following rules: respect to specific property, and those which enjoy preference,
as to the amount not paid, shall be satisfied according to the
In the order established in Article 2244;
following rules:
Common credits referred to in Article 2245 shall be paid pro
In the order established in Article 2244;
rata regardless of dates.
Common credits referred to in Article 2245 shall be paid pro
Art. 2244 enumerates the ordinary preferred credits that
rata regardless of dates.
enjoy a preference, excluding the credits that are later in
order, but only as against the value of property not
Art. 2245 enumerates the common credits that enjoy no
otherwise subjected to any special preferred credit.
preference and must only be paid after payment of the
In contrast with Art. 2241 and 2242, Art. 2244 creates no
ordinary preferred credits.
lien on specific property but simply creates rights in favor
As among these credits, there is only a concurrence of
of certain creditors to have the free property of the debtor,
credits and these must be paid pro-rata, that is, in proportion
or property not subjected to any special preferred credit,
to the amount of the respective credits, regardless of dates.
applied in accordance with an order of preference.
Thus, special preferred credits must be discharged first out

of the proceeds of the property to which they relate, before
ordinary preferred credits are paid.
If the value of the specific property is greater than the total
of the special preferred credits, the residual value will form
part of the free property of the insolvent. In contrast, if the
value of the property is less than the total of the special
preferred credits, the unsatisfied balance of the credits are
to be treated as provided in Art. 2251.

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Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law When the proceeds became commingled with the assets of
Offices (2007) – Corona, J. PhilFinance, Cordova’s remaining remedy was to file a claim
Petitioner: Jose C. Cordova against the whole mass of these assets.
Respondents: Reyes Daway Lim Bernardo Lindo Rosales Law o Unfortunately for Cordova, the whole mass was also
Offices (RLO), and the Securities and Exchange Commission subject to claims from other creditors and also
(SEC) PhilFinance’s investors.
Concept: Concurrence and Preference of Credits; Classification; Cordova’s right of action became a “claim” which should be
Common Credits litigated in the liquidation proceedings.
o Finasia Investments and Finance Corp. v. CA: A claim is:
Doctrine: Right to payment, WON such right is reduced to
With respect to ordinary creditor, common credits shall be paid judgment, liquidated, unliquidated, fixed, contingent,
pro rata regardless of dates. matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or
Brief Facts: Right to equitable remedy for breach of performance if
Cordova bought certain shares, particularly CSPI shares, from such breach gives rise to a right to payment, WON
PhilFinance. When PhilFinance was placed under receivership such right to an equitable remedy is reduced to
by the SEC, its appointed liquidators withdrew the CSPI shares judgment, fixed, contingent, matured, unmatured,
and sold them without Cordova’s knowledge and consent, and disputed, undisputed, secured, unsecured.
without the SEC’s authority. The proceeds were included as
PhilFinance’s assets in the liquidation proceedings. Cordova 2. As one of the ordinary creditors, Cordova can only
now files a claim for the full amount of the shares, believing recover 15% of the value of the shares.
himself to be a preferred creditor. The SEC (as affirmed by the Cordova: preferred creditor because the shares were illegally
CA) has held him to be an ordinary creditor/claimant and, hence, withdrawn and sold without his knowledge and consent.
should only receive 15% of the shares’ value, as it was the rate o He cites Art. 2241 (2):
of recovery approved by the SEC for PhilFinance’s creditors. “With reference to specific movable property of the
Hence, the petition. debtor, the following claims or liens shall be preferred:
Claims arising from misappropriation, breach of trust,
ISSUES: or malfeasance by public officials committed in the
WON Cordova should be considered as a preferred creditor performance of their duties, on the movables, money or
(NO; not preferred) securities obtained by them;”
WON Cordova was can recover the full value of the shares or As such, he argues that he is entitled to the full value of the
only 15% thereof, like all other ordinary creditors (Only 15%) shares.
SC: The cited provision cannot apply because it
RATIO: contemplates specific movable property; Cordova’s claim
1. NO; Cordova is only an ordinary creditor. was reduced to the value of the shares (i.e., money), which is
First question: Was Cordova a creditor of PhilFinance? (YES) generic. Hence, the provision cannot apply.
SC: No dispute as to Cordova’s ownership of the shares. Considering that the other provisions on preferred creditors
o Hence, when RLO sold them without authority, Cordova do not apply, he is deemed an ordinary creditor
became entitled to the proceeds of the sale, making him a under Art. 2245:
creditor of PhilFinance. “Credits of any other kind or class, or by any other right or
o SC: We agree with the SEC and CA, however, that title not comprised in the four preceding articles, shall
Cordova was only an ordinary creditor. enjoy no preference.”
o As soon was the shares were sold, the property became This provision is now in conjunction with Art. 2251 (2):
generic because it was converted to cash. “Common credits referred to in Article 2245 shall be paid
Unlike shares of stock, money is a generic thing, pro rata regardless of dates.”
designated merely by its class or genus, and has no Hence, like all other ordinary creditors/claimants, he is only
particular designation and is not physically entitled to 15% of the shares, which is the rate approved
segregated from all other of the same class. by the SEC.
Once a certain amount is included to a cash balance,
no one can pinpoint anymore the specific amount that DISPOSITIVE: Petition denied.
became part of the whole mass of money.
The proceeds actually became commingled with the assets
of PhilFinance in the receivership proceedings.
Second question: What is Cordova’s status as a creditor?
(Ordinary)

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Cordova v. Reyes Daway Lim – Remedies of Cordova: RA 10142, Sec. 94 Petition. - An individual debtor who,
Against Philfinance: up to 15% possessing sufficient property to cover all his debts but
Against receiver: for breach of trust foreseeing the impossibility of meeting them when they
Against buyer of shares: because sold by receiver NOT as respectively fall due, may file a verified petition that he be
owner; owner is Cordova declared in the state of suspension of payments by the court of
the province or city in which he has resides for six (6) months
SGS: Note that a receiver is a public officer. But Art. 2241(2) prior to the filing of his petition. He shall attach to his petition, as
WILL NOT apply because it is supposed to be the debtor who is a minimum: (a) a schedule of debts and liabilities; (b) an
an insolvent public officer. The law office, as the receiver, is NOT inventory of assess; and (c) a proposed agreement with his
THE DEBTOR. creditors.
PROCEDURE RA 10142, Sec. 95 Action on the Petition. - If the court finds the
Identify the debts petition sufficient in form and substance, it shall, within five
Inventory the assets (5) working days from the filing of the petition, issue an Order:
Look at specific movable/immovable properties over which
there may be a lien created by Art. 2241 and 2242, then calling a meeting of all the creditors named in the schedule of
apply the preference debts and liabilities at such time not less than fifteen (15) days
Unpaid specially preferred creditors have no preference nor more than forty (40) days from the date of such Order and
after  become ordinary creditors in the free property
designating the date, time and place of the meeting;
After checking whether there is a preference of credits, all
leftover property is FREE PROPERTY directing such creditors to prepare and present written
Apply order in 2244 and special laws:
evidence of their claims before the scheduled creditors' meeting;
Labor Code: unpaid wages and other monetary claims
Art. 2244: #4 is now #1, #2 residue is now just
household helpers directing the publication of the said order in a newspaper of
general circulation published in the province or city in which the
. SUSPENSION OF PAYMENTS petition is filed once a week for two (2) consecutive weeks, with
the first publication to be made within seven (7) days from the
A. General Concepts time of the issuance of the Order;
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the directing the clerk of court to cause the sending of a copy of
State to encourage debtors, both juridical and natural persons, the Order by registered mail, postage prepaid, to all creditors
and their creditors to collectively and realistically resolve and named in the schedule of debts and liabilities;
adjust competing claims and property rights. In furtherance
thereof, the State shall ensure a timely, fair, transparent, forbidding the individual debtor from selling, transferring,
effective and efficient rehabilitation or liquidation of debtors. The encumbering or disposing in any manner of his property, except
rehabilitation or liquidation shall be made with a view to ensure those used in the ordinary operations of commerce or of industry
or maintain certainly and predictability in commercial affairs, in which the petitioning individual debtor is engaged so long as
preserve and maximize the value of the assets of these debtors, the proceedings relative to the suspension of payments are
recognize creditor rights and respect priority of claims, and pending;
ensure equitable treatment of creditors who are similarly
situated. When rehabilitation is not feasible, it is in the interest of prohibiting the individual debtor from making any payment
the State to facilities a speedy and orderly liquidation of these outside of the necessary or legitimate expenses of his business
debtor's assets and the settlement of their obligations. or industry, so long as the proceedings relative to the
suspension of payments are pending; and
RA 10142, Sec. 4
Insolvent shall refer to the financial condition of a debtor that appointing a commissioner to preside over the creditors'
is generally unable to pay its or his liabilities as they fall due in meeting.
the ordinary course of business or has liabilities that are greater
than its or his assets. Suspension of payment: a judicial insolvency proceeding
by which an individual debtor submits, for approval by his
Liabilities shall refer to monetary claims against the debtor, creditors, a proposed agreement containing propositions
including stockholder's advances that have been recorded in the delaying or extending the time of payment of his debts. It is
debtor's audited financial statements as advances for future a statutory device allowing a distressed debtor to defer
subscriptions. payment of his debts by presenting a plan to repay creditors
over time.

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It is always voluntary and may be properly availed of and From the time of the filing of the petition for suspension of
instituted only by an individual debtor, i.e., a natural person payments and for so long as the proceedings are pending,
who is a resident and citizen of the Philippines that has there is an automatic stay against the institution of claims
become insolvent as defined under the FRIA. During the automatic stay, no creditor, except those
Partnerships and corporations may only properly avail of specifically excepted by law, shall sue or institute
rehabilitation. proceedings to collect its claim
To be declared in a state of suspension of payments, an
individual debtor must be insolvent under the illiquidity Period of stay: From time of filing of petition and as long as
or equity concept, i.e., he must be illiquid proceedings remain pending
A debtor insolvent under the balance sheet concept, his only Reason: So votes can be made during the creditors’
course of action is to file for liquidation meeting
No value requirement WRT amount of debts of insolvent
debtor Secured creditors are exempted because they have a lien on
the property
Purpose: To encourage debtors and creditors to collectively and This includes special preferred creditors, mortgagee,
realistically resolve and adjust competing claims and property pledgee
rights  “Give me time so I can pay my debts” Sureties and guarantors are not included because they are
personal securities and do not create a lien over the
What to file: Verified petition to be declared in a state of property
suspension of payments
2. Suspension Order
Who may file: Individual debtor (because voluntary)
RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by
When to file: Insolvent in illiquid/equity aspect = When the the individual debtor, the court may issue an order suspending
debtor possesses sufficient property to cover his debts but any pending execution against the individual debtor. Provide,
foreseeing the impossibility of meeting them when they fall due That properties held as security by secured creditors shall not be
the subject of such suspension order. The suspension order
Where to file: Province or city where individual debtor resides shall lapse when three (3) months shall have passed without the
for 6 months prior to the filing of the petition proposed agreement being accepted by the creditors or as soon
as such agreement is denied.
Required attachments:
Schedule of debts and liabilities No creditor shall sue or institute proceedings to collect his claim
Inventory of assets from the debtor from the time of the filing of the petition for
Proposed agreement with creditors suspension of payments and for as long as proceedings remain
Note: These are required to establish if the debtor is illiquid pending except:
1. Automatic Stay those creditors having claims for personal labor,

maintenance, expense of last illness and funeral of the wife or
RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by children of the debtor incurred in the sixty (60) days immediately
the individual debtor, the court may issue an order suspending prior to the filing of the petition; and
any pending execution against the individual debtor. Provide,
That properties held as security by secured creditors shall not be secured creditors.
the subject of such suspension order. The suspension order
shall lapse when three (3) months shall have passed without the It is only upon motion filed by the individual debtor, and from
proposed agreement being accepted by the creditors or as soon the time the court issues a suspension order, that any
as such agreement is denied. pending execution against the individual debtor may be
suspended.
No creditor shall sue or institute proceedings to collect his claim o Upon motion, NOT automatic
from the debtor from the time of the filing of the petition for o Pending execution presupposes a FINAL judgment
suspension of payments and for as long as proceedings remain The suspension order shall lapse after three months have
pending except: passed without the proposed agreement being accepted by
those creditors having claims for personal labor, the creditors, or as soon as the agreement is denied.
children of the debtor incurred in the sixty (60) days immediately
prior to the filing of the petition; and
secured creditors.

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3. Injunction Against Debtor B. Commissioner
RA 10142, Sec. 95 Action on the Petition. - If the court finds the RA 10142, Sec. 95 Action on the Petition. - If the court finds the
petition sufficient in form and substance, it shall, within five petition sufficient in form and substance, it shall, within five
working days from the filing of the petition, issue an Order: working days from the filing of the petition, issue an Order:
xxx
xxx appointing a commissioner to preside over the
creditors' meeting.
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 RA 10142, Sec. 97 Creditors' Meeting. - The presence of
debtor is engaged so long as the proceedings relative to the creditors holding claims amounting to at least three-fifths (3/5) of
suspension of payments are pending; 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,
prohibiting the individual debtor from making any subject to the following rules:
payment outside of the necessary or legitimate expenses of
his business or industry, so long as the proceedings The clerk shall record the creditors present and amount of
relative to the suspension of payments are pending; and their respective claims;
The commissioner shall examine the written evidence

appointing a commissioner to preside over the creditors' of the claims. If the creditors present hold at least three-
meeting. fifths (3/5) of the liabilities of the individual debtor, the
commissioner shall declare the meeting open for business;
If the petition is found to be sufficient in form and substance,
from the time the court issues an order and for long as the
proceedings are pending, the individual debtor is subjected The creditors and individual debtor shall discuss the
to an injunction order against: propositions in the proposed agreement and put them to a vote;
Selling, transferring, encumbering or disposing, in any
manner, of his property, except those used in the To form a majority, it is necessary:
ordinary operations of commerce or of industry in which
the individual debtor is engaged; and that two-thirds (2/3) of the creditors voting unite upon the
Making any payment outside of the necessary or same proposition; and
legitimate expenses of his business or industry.
that the claims represented by said majority vote amount to at
This injunction is in favor of creditors. least three-fifths (3/5) of the total liabilities of the debtor
mentioned in the petition; and
Injunction against debtor:
GR: Selling, transferring, encumbering, or disposing, in any After the result of the voting has been announced, all
manner, of his property protests made against the majority vote shall be drawn up,
XPN: Those used in the ordinary operation of commerce or and the commissioner and the individual debtor together
of industry in which the individual debtor is engaged with all creditors taking part in the voting shall sign the
Making any payment outside of the necessary or legitimate affirmed propositions.
expenses of his business or industry
No creditor who incurred his credit within ninety (90) days prior
to the filing of the petition shall be entitled to vote.
Participation of Commissioner:
Examine written evidence of claims
Commissioner signs affirmed propositions

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C. Creditors’ Meeting had thereat which prejudice the rights of the creditors; (b)
fraudulent connivance between one or more creditors and the
RA 10142, Sec. 97 Creditors' Meeting. - The presence of individual debtor to vote in favor of the proposed agreement; or
creditors holding claims amounting to at least three-fifths (3/5) of fraudulent conveyance of claims for the purpose of obtaining
the liabilities shall be necessary for holding a meeting. The a majority. The court shall hear and pass upon such objection as
commissioner appointed by the court shall preside over the soon as possible and in a summary manner.
meeting and the clerk of court shall act as the secretary thereof,
subject to the following rules: In case the decision of the majority of creditors to approve the
individual debtor's proposal or any amendment thereof made
The clerk shall record the creditors present and amount of during the creditors' meeting is annulled by the court, the court
their respective claims; shall declare the proceedings terminated and the creditors shall
be at liberty to exercise the rights which may correspond to
The commissioner shall examine the written evidence of the them.
claims. If the creditors present hold at least three-fifths (3/5) of
the liabilities of the individual debtor, the commissioner shall A suspension of payments is only effective if the required
declare the meeting open for business; majority vote of creditors is obtained approving the
proposed agreement or any amendments to the agreement.
The creditors and individual debtor shall discuss the
propositions in the proposed agreement and put them to a vote; A quorum of creditors holding claims amounting to 3/5 of the
liabilities shall be necessary
To form a majority, it is necessary: Determination of majority vote (DOUBLE MAJORITY):
Concurrence of the following:
that two-thirds (2/3) of the creditors voting unite upon the As to the number of creditors-2/3 of the creditors voting
same proposition; and approve the proposed agreement; and
As to value of the claims-the claims represented by the
that the claims represented by said majority vote amount to at majority vote amount to at least 3/5 of the total liabilities
least three-fifths (3/5) of the total liabilities of the debtor of the debtor.
mentioned in the petition; and Note: If there is one creditor who holds the bulk, GET
HIS VOTE
After the result of the voting has been announced, all protests
made against the majority vote shall be drawn up, and the When Proposed Agreement is Deemed Rejected:
commissioner and the individual debtor together with all creditors No quorum
taking part in the voting shall sign the affirmed propositions. Double-majority in Sec. 97 not in favor of the proposed
agreement
No creditor who incurred his credit within ninety (90) days prior Effect of Rejection of Proposed Agreement: Proceedings are
to the filing of the petition shall be entitled to vote. terminated, and parties shall be at liberty to enforce the rights
which may correspond to them
RA 10142, Sec. 99 Rejection of the Proposed Agreement. - The
proposed agreement shall be deemed rejected if the number of ONLY 3 GROUNDS FOR OBJECTING (Sec. 100):
creditors required for holding a meeting do not attend thereat, or Defects in the call for the meeting, in the holding thereof
if the two (2) majorities mentioned in Section 97 hereof are not in and in the deliberations had thereat, which prejudices the
favor thereof. In such instances, the proceeding shall be rights of creditors (invalidates the agreement)
terminated without recourse and the parties concerned shall be Fraudulent connivance between one or more creditors and
at liberty to enforce the rights which may correspond to them. the individual debtor to vote in favor of the proposed
agreement (invalidates the agreement); or
Fraudulent conveyance of claims for the purpose of
RA 10142, Sec. 100 Objections. - If the proposal of the obtaining a majority
individual debtor, or any amendment thereof made during the
creditors' meeting, is approved by the majority of creditors in
accordance with Section 97 hereof, any creditor who attended
the meeting and who dissented from and protested against the
vote of the majority may file an objection with the court within ten
(10) days from the date of the last creditors' meeting. The
causes for which objection may be made to the decision made
by the majority during the meeting shall be: (a) defects in the call
for the meeting, in the holding thereof and in the deliberations
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D. Proposed Agreement XPNSs:
Creditors having claims for:
RA 10142, Sec. 94 Petition. - An individual debtor who, Personal labor
possessing sufficient property to cover all his debts but Maintenance
foreseeing the impossibility of meeting them when they Expense of last illness
respectively fall due, may file a verified petition that he be Funeral of the wife or children of the debtor incurred in the
declared in the state of suspension of payments by the court of 60 days immediately prior to the filing of the petition
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 Secured creditors who failed to attend the meeting or
a minimum: (a) a schedule of debts and liabilities; (b) an refrained from voting therein
inventory of assess; and (c) a proposed agreement with his
creditors. Effect of failure of insolvent debtor to perform agreement:
All rights which the creditors had against the individual debtor
RA 10142, Sec. 101 Effects of Approval of Proposed before the proposed agreement shall be revested in the creditors
Agreement. - If the decision of the majority of the creditors to
approve the proposed agreement or any amendment thereof
E. Treatment of Claims
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 RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by
out and all parties bound thereby to comply with its terms. the individual debtor, the court may issue an order suspending
any pending execution against the individual debtor. Provide,
The court may also issue all orders which may be necessary or That properties held as security by secured creditors shall not be
proper to enforce the agreement on motion of any affected party. the subject of such suspension order. The suspension order
The Order confirming the approval of the proposed agreement or shall lapse when three (3) months shall have passed without the
any amendment thereof made during the creditors' meeting shall proposed agreement being accepted by the creditors or as soon
be binding upon all creditors whose claims are included in the as such agreement is denied.
schedule of debts and liabilities submitted by the individual
debtor and who were properly summoned, but not upon: (a) No creditor shall sue or institute proceedings to collect his claim
those creditors having claims for personal labor, maintenance, from the debtor from the time of the filing of the petition for
expenses of last illness and funeral of the wife or children of the suspension of payments and for as long as proceedings remain
debtor incurred in the sixty (60) days immediately prior to the pending except:
filing of the petition; and (b) secured creditors who failed to
attend the meeting or refrained from voting therein. those creditors having claims for personal labor,
children of the debtor incurred in the sixty (60) days immediately
RA 10142, Sec. 102 Failure of Individual Debtor to Perform prior to the filing of the petition; and
Agreement. - If the individual debtor fails, wholly or in part, to
secured creditors.
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 RA 10142, Sec. 98 Persons Who May Refrain From Voting. -
such case the individual debtor may be made subject to the Creditors who are unaffected by the Suspension Order may
insolvency proceedings in the manner established by this Act. refrain from attending the meeting and from voting therein. Such
persons shall not be bound by any agreement determined upon
Court Order: at such meeting, but if they should join in the voting they shall be
Orders that agreement be carried out and all parties are bound in the same manner as are the other creditors.
bound to comply with the proposed agreement
Court may issue all orders which may be necessary or
proper to enforce the agreement on motion of any affected
party
GR: Approved proposed agreement or any amendment thereof

shall be binding upon all creditors whose claims are included in
the schedule of debts and liabilities submitted by the debtor and
who were properly summoned

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RA 10142, Sec. 101 Effects of Approval of Proposed Notes:
Agreement. - If the decision of the majority of the creditors to In a suspension of payments proceeding, the treatment of
approve the proposed agreement or any amendment thereof such exempt claims is as follows:
made during the creditors' meeting is uphold by the court, or The exempt claims are not covered by the automatic stay of
when no opposition or objection to said decision has been all suits and proceedings for the collection of claims
presented, the court shall order that the agreement be carried against the debtor.
out and all parties bound thereby to comply with its terms. Exempt creditors need not attend or vote during the
creditors’ meeting and are not bound by the proposed
The court may also issue all orders which may be necessary or agreement approved during the meeting, unless they
proper to enforce the agreement on motion of any affected party. waive this right by voting during the meeting.
The Order confirming the approval of the proposed agreement or Exempt creditors are not bound by the proposed agreement
any amendment thereof made during the creditors' meeting shall confirmed by the court, unless they waive this right by
be binding upon all creditors whose claims are included in the voting during the meeting.
schedule of debts and liabilities submitted by the individual
debtor and who were properly summoned, but not upon: (a) 3. Excluded Claims
those creditors having claims for personal labor, maintenance,
expenses of last illness and funeral of the wife or children of the “Creditors whose claims are [not] included in the schedule of
debtor incurred in the sixty (60) days immediately prior to the debts and liabilities submitted by the individual debtor and
filing of the petition; and (b) secured creditors who failed to [creditors] who were [not] properly summoned.” (RA 10142, Sec.
attend the meeting or refrained from voting therein. 101, par. 2, 2nd sentence)
In a suspension of payments proceedings, creditors whose

1. Secured Creditor Claims claims are excluded are not bound by the proposed
agreement confirmed by the court.
RA 10142, Sec. 4
Secured creditor shall refer to a creditor with a secured These excluded claims are the debtor’s fault, and they cannot be
claim. included nor can they be bound by the agreement.
(jj) Secured claim shall refer to a claim that is secured by a lien. Excluded claims: not bound by the proposed agreement
confirmed by the court
Lien shall refer to a statutory or contractual claim or judicial Subject to automatic stay
Subject to suspension order
IV. REHABILITATION
A. General Concepts
In a suspension of payments proceeding, the treatment of
secured creditor claims is as follows:
The claims of secured creditors are not covered by the RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the
automatic stay State to encourage debtors, both juridical and natural persons,
The property held as security is not covered by any and their creditors to collectively and realistically resolve and
suspension order that may be issued against pending adjust competing claims and property rights. In furtherance
executions against the debtor thereof, the State shall ensure a timely, fair, transparent,
Secured creditors need not attend or vote during the effective and efficient rehabilitation or liquidation of debtors. The
creditors’ meeting and are not bound by the proposed rehabilitation or liquidation shall be made with a view to ensure
agreement approved during the meeting, unless they or maintain certainly and predictability in commercial affairs,
waive this right by voting during the meeting. preserve and maximize the value of the assets of these debtors,
Secured creditors are not bound by the proposed recognize creditor rights and respect priority of claims, and
agreement confirmed by the court, unless they waive ensure equitable treatment of creditors who are similarly
this right by voting during the meeting. situated. When rehabilitation is not feasible, it is in the interest of
the State to facilities a speedy and orderly liquidation of these
2. Exempt Claims debtor's assets and the settlement of their obligations.
“Those creditors having claims for personal labor, maintenance, Rehabilitation in the context of insolvency, is the process of
expenses of last illness and funeral of the wife or children of the reorganizing a debtor’s financial affairs so that the debtor may
debtor incurred in the sixty (60) days immediately prior to the continue to exist as a financial entity, with creditors satisfying
filing of the petition.” (RA 10142, Sec. 101, par. 2, (a)) their claims from the debtors future earnings.

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Rehabilitation is the restoration of the debtor to a condition of 3 Modes of Rehabilitation under FRIA
successful operation and solvency, if it is shown that: Court-supervised rehabilitation: judicial, may either be
Its continuance of operation is economically feasible; and voluntary or involuntary
Its creditors can recover by way of present value of payments Pre-negotiated rehabilitation
projected in the plan more if the debtor continues as a Out-of-court rehabilitation
growing concern than if it is immediately liquidated
Value of recovery plan as a growing concern v. value of B. Court-Supervised Rehabilitation
recovery plan if company is liquidated
1. Voluntary Proceedings
Invariably triggered by a crisis that unaduly strains the
financial affairs of a previously solvent debtor RA 10142, Sec. 4
Purpose is to enable an insolvent debtor to have a new lease Voluntary proceedings shall refer to proceedings initiated by
on life, while allowing creditors to be paid from the debtor’s the debtor.
earnings.
Rehabilitation benefits debtors employees, creditors, and a RA 10142, Sec. 12 Petition to Initiate Voluntary Proceedings by
larger sense, the general public Debtor. - When approved by the owner in case of a sole
During rehabilitation, the assets of the debtor are held in trust proprietorship, or by a majority of the partners in case of a
for the equal benefit of all creditors to preclude one from partnership, or in case of a corporation, by a majority vote of the
obtaining an advantage or preference over the other; as board of directors or trustees and authorized by the vote of the
between creditors, the key phrase is equality is equity o stockholders representing at least two-thirds (2/3) of the
Purpose: for the equal benefit of all creditors to outstanding capital stock, or in case of nonstock corporation, by
preclude one from obtaining an advantage or the vote of at least two-thirds (2/3) of the members, in a
preference over another by the expediency of an stockholder's or member's meeting duly called for the purpose,
attachment, execution or otherwise an insolvent debtor may initiate voluntary proceedings under this
o All creditors should stand on equal footing; not one of Act by filing a petition for rehabilitation with the court and on the
them should be given preference (by paying one or grounds hereinafter specifically provided. The petition shall be
some of them against the others verified to establish the insolvency of the debtor and the viability
of its rehabilitation, and include, whether as an
Rehabilitation proceedings have both equitable and attachment or as part of the body of the petition, as a minimum
rehabilitative purposes. the following:
Equitable Provides for the efficient and (a) Identification of the debtor, its principal activities and its
equitable distribution of an addresses;
insolvent debtor’s remaining
assets to its creditors (b) Statement of the fact of and the cause of the debtor's
Rehabilitative Provides the insolvent debtor insolvency or inability to pay its obligations as they become due;
with a fresh start
How: by relieving it of the (c) The specific relief sought pursuant to this Act;
weight of its outstanding
debts and permitting it to (d) The grounds upon which the petition is based;
reorganize its affairs
(e) Other information that may be required under this Act
Sec. 4 depending on the form of relief requested;
Rehabilitation shall refer to the restoration of the debtor to a
condition of successful operation and solvency, if it is shown that (f) Schedule of the debtor's debts and liabilities including a list of
its continuance of operation is economically feasible and its creditors with their addresses, amounts of claims and collaterals,
creditors can recover by way of the present value of payments or securities, if any;
projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated. (g) An inventory of all its assets including receivables and claims
against third parties;
Definition of rehabilitation provided by jurisprudence has thus
been expanded by FRIA to include two conditions (1) (h) A Rehabilitation Plan;
economic feasibility and (2) present value recovery
If these two conditions are not present, the proper recourse is (i) The names of at least three (3) nominees to the position of
not rehabilitation but liquidation rehabilitation receiver; and

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Other documents required to be filed with the petition PROCEDURE:
pursuant to this Act and the rules of procedure as may be Filing of a verified complaint by the debtor
promulgated by the Supreme Court. Sole When approved by the owner
proprietorship
A group of debtors may jointly file a petition for rehabilitation Partnership When approved by majority of the
under this Act when one or more of its members foresee the partners
impossibility of meeting debts when they respectively fall due, Corporation - When approved by a majority
and the financial distress would likely adversely affect the vote of the board of directors or
financial condition and/or operations of the other members of the trustees; and
group and/or the participation of the other members of the group Authorized by the vote of:
is essential under the terms and conditions of the proposed Stockholders representing at
Rehabilitation Plan. least 2/3 of outstanding
capital stock in a
Judicial insolvency proceedings inititated by debtor that may stockholder’s meeting duly
be a called for the purpose; or
Sole proprietorship At least 2/3 of the members
Partnership (nonstick corporation) in a
Corporation member’s meeting duly
In every case, the debtor is insolvent either under the called for the purpose
illiquidity concept: the debtor is illiquid, possessing Petition is verified: to establish the insolvency of the debtor
sufficient property to cover all its liabilities but foreseeing the and the viability of its rehabilitation
impossibility of meeting them when they respectively fall due On the grounds specifically provided in the FRIA
Attach the following as part of the body of the petition:
Or the balance sheet concept: the assets of the debtor are a. Indentification of the debtor, debtor’s principal activities,
insufficient to cover its liabilities debtor’s addresses
Statement of the fact of and cause of the debtor’s
Sec. 4 insolvency or inability to pay its obligations as they
Insolvent shall refer to the financial condition of a debtor that become due
is generally unable to pay its or his liabilities as they fall due in Specific relief sought
the ordinary course of business or has liabilities that are greater Ground for the petition
than its or his assets. Other information that may be required under the Act
depending on the form of relief requested
Liabilities shall refer to monetary claims against the debtor, Schedule of the debtor’s debts and liabilities and list of
including stockholder's advances that have been recorded in the creditors with their addresses, amounts of claims,
debtor's audited financial statements as advances for future collaterals, or securities (if any)
subscriptions. Inventory of all its assets
Rehabilitation Plan
Since the purpose of the rehabilitation is to restore and Names of at least 3 nominees to the position of
reinstate a debtor to its former position, an individual debtor rehabilitation receiver
that is not a sole proprietorship may not institute voluntary Other documents required to be filed
arbitration proceedings. Available recourses are: to petition
for suspension of payments or liquidation Group of Debtors May File:
FRIA does not impose a value requirement with respect to When one or more of its members foresee the impossibility
of meeting debts when they respectively fall due
the amount of debts of the insolvent debtor
When the financial distress would likely adversely affect the
financial condition and/or operations of the other members
of the group and/or participation of the other members of the
group is essential under the terms and conditions of the
proposed Rehabilitation Plan

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2. Involuntary Proceedings For involuntary rehabilitation, FRIA imposes a value
requirement of:
RA 10142, Sec. 4 o At least p1 million; or
Involuntary proceedings shall refer to proceedings initiated by o At least 25% of the subscribed capital stock or partners’
creditors. contributions, whichever is higher, without regard to the
number of creditors who file
RA 10142, Sec. 13 Circumstances Necessary to Initiate
Involuntary Proceedings. - Any creditor or group of creditors with Sec. 4
Claim shall refer to all claims or demands of whatever nature
a claim of, or the aggregate of whose claims is, at least One
or character against the debtor or its property, whether for
Million Pesos (Php1,000,000.00) or at least twenty-five percent
money or otherwise, liquidated or unliquidated, fixed or
(25%) of the subscribed capital stock or partners' contributions,
contingent, matured or unmatured, disputed or undisputed,
whichever is higher, may initiate involuntary proceedings against
including, but not limited to; (1) all claims of the government,
the debtor by filing a petition for rehabilitation with the court if:
whether national or local, including taxes, tariffs and customs
there is no genuine issue of fact on law on the claim/s of the duties; and (2) claims against directors and officers of the debtor
petitioner/s, and that the due and demandable payments thereon arising from acts done in the discharge of their functions falling
have not been made for at least sixty (60) days or that the debtor within the scope of their authority: Provided, That, this inclusion
has failed generally to meet its liabilities as they fall due; or does not prohibit the creditors or third parties from filing cases
against the directors and officers acting in their personal
capacities.
a creditor, other than the petitioner/s, has initiated
foreclosure proceedings against the debtor that will prevent the Although the status of being insolvent is calculated based
debtor from paying its debts as they become due or will render it on liabilities (monetary claims), the FRIA bases the value
insolvent. requirement for involuntary rehabilitation proceedings on the
creditor’s claims
RA 10142, Sec. 14 Petition to Initiate Involuntary Proceedings.
Basis of Calculation
The creditor/s' petition for rehabilitation shall be verified to
Status of being insolvent Value requirement for
establish the substantial likelihood that the debtor may be
rehabilitation
rehabilitated, and include:
proceedings
identification of the debtor its principal activities and its Calculated based on Calculated based on
address; liabilities (monetary claims) creditor’s claims
the circumstances sufficient to support a petition to initiate

involuntary rehabilitation proceedings under Section 13 of this Circumstances requiring rehabilitation:
Act; No genuine issue of fact or law on the claims of the creditors
and that the due and demandable payments have not been
the specific relief sought under this Act; made for at least 60 days
The debtor has failed generally to meet its liabilities as they
a Rehabilitation Plan; fall due
A creditor, other than the petitioners, has inititated
the names of at least three (3) nominees to the position of foreclosure proceedings against the debtor that will prevent
rehabilitation receiver; the debtor from paying its debts as they become due or will
render it insolvent
other information that may be required under this Act
depending on the form of relief requested; and
other documents required to be filed with the petition

pursuant to this Act and the rules of procedure as may be
promulgated by the Supreme Court.
Judicial insolvency proceedings instituted by creditor or a

group of creditors against an insolvent debtor, provided that
the requirements of law on the number of creditors or value
of claims, or both, is met, and provided the circumstance
requiring rehabilitation is alleged and thereafter, established

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PRO CEDURE: Note: 5 working days for the issuance of the
Creditor/s’ verified petition for rehabilitation Commencement Order shall be reckoned from the
Verified in order to establish the substantial likelihood filing date of (i) or (ii)
that the debtor may be rehabilitated
The following are included in the petition: RA 10142, Sec. 16 Commencement of Proceedings and
Identification of the debtor, debtor’s principal activities, Issuance of a Commencement Order. - The rehabilitation
and debtor’s address proceedings shall commence upon the issuance of the
Circumstances sufficient to support a petition to initiate Commencement Order, which shall:
involuntary rehabilitation proceedings under Sec. 13 of
the FRIA identify the debtor, its principal business or activity/ies and its
Specific relief sought principal place of business;
Rehabilitation Plan
Names of at least 3 nominees to the position of summarize the ground/s for initiating the proceedings;
rehabilitation receiver
Other information that may be required under this Act
depending on the form of relief requested state the relief sought under this Act and any requirement or
Other documents required to be filed with the petition procedure particular to the relief sought;
3. Provisions Common to Voluntary and Involuntary state the legal effects of the Commencement Order,
Rehabilitation Proceedings including those mentioned in Section 17 hereof;
a. Commencement Order declare that the debtor is under rehabilitation;
RA 10142, Sec. 4 direct the publication of the Commencement Order in a

Commencement Order shall refer to the order issued by the newspaper of general circulation in the Philippines once a week
court under Section 16 of this Act. for at least two (2) consecutive weeks, with the first publication to
be made within seven (7) days from the time of its issuance;
Commencement date shall refer to the date on which the
court issues the Commencement Order, which shall be If the petitioner is the debtor direct the service by personal
retroactive to the date of filing of the petition for voluntary or delivery of a copy of the petition on each creditor holding at least
involuntary proceedings. ten percent (10%) of the total liabilities of the debtor as
determined from the schedule attached to the petition within five
RA 10142, Sec. 15 Action on the Petition. - If the court finds the (5) days; if the petitioner/s is/are creditor/s, direct the service by
petition for rehabilitation to be sufficient in form and substance, it personal delivery of a copy of the petition on the debtor within
shall, within five (5) working days from the filing of the petition, five (5) days;
issue a Commencement Order. If, within the same period, the
court finds the petition deficient in form or substance, the court appoint a rehabilitation receiver who may or not be from
may, in its discretion, give the petitioner/s a reasonable period of among the nominees of the petitioner/s and who shall exercise
time within which to amend or supplement the petition, or to such powers and duties defined in this Act as well as the
submit such documents as may be necessary or proper to put procedural rules that the Supreme Court will promulgate;
the petition in proper order. In such case, the five (5) working
days provided above for the issuance of the Commencement summarize the requirements and deadlines for creditors to
Order shall be reckoned from the date of the filing of the establish their claims against the debtor and direct all creditors to
amended or supplemental petition or the submission of such their claims with the court at least five (5) days before the initial
documents. hearing;
direct Bureau of internal Revenue (BIR) to file and serve on

PROCEDURE OF ACTION ON PETITION:
File a petition for rehabilitation the debtor its comment on or opposition to the petition or its
If court finds petition: claim/s against the debtor under such procedures as the
Sufficient in form and substance: issue a Supreme Court provide;
Commencement Order within 5 working days from filing
prohibit the debtor's suppliers of goods or services from
date
withholding the supply of goods and services in the ordinary
Deficient in form or substance (discretionary): Give the
petitioner a reasonable period of time within which: course of business for as long as the debtor makes payments for
To amend or supplement the petition; or the services or goods supplied after the issuance of the
To submit such documents as may be necessary or Commencement Order;
proper to put the petition in proper order
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authorize the payment of administrative expenses as they serve as the legal basis for rendering null and void any setoff
become due; after the commencement date of any debt owed to the debtor by
any of the debtor's creditors;
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 serve as the legal basis for rendering null and void the
purpose of determining whether there is substantial likelihood for perfection of any lien against the debtor's property after the
the debtor to be rehabilitated; commencement date; and
make available copies of the petition and rehabilitation plan consolidate the resolution of all legal proceedings by and
for examination and copying by any interested party; against the debtor to the court Provided. However, That the court
may allow the continuation of cases on other courts where the
indicate the location or locations at which documents debtor had initiated the suit.
regarding the debtor and the proceedings under Act may be
reviewed and copied; Attempts to seek legal of other resource against the debtor
outside these proceedings shall be sufficient to support a finding
state that any creditor or debtor who is not the petitioner, may of indirect contempt of court.
submit the name or nominate any other qualified person to the
position of rehabilitation receiver at least five (5) days before the RA 10142, Sec. 19 Waiver of taxes and Fees Due to the
initial hearing; National Government and to Local Government Units (LGUs). -
Upon issuance of the Commencement Order by the court, and
include s Stay or Suspension Order which shall: until the approval of the Rehabilitation Plan or dismissal of the
petition, whichever is earlier, the imposition of all taxes and fees
suspend all actions or proceedings, in court or otherwise, for including penalties, interests and charges thereof due to the
the enforcement of claims against the debtor; national government or to LGUs shall be considered waived, in
furtherance of the objectives of rehabilitation.
suspend all actions to enforce any judgment, attachment or
other provisional remedies against the debtor;
RA 10142, Sec. 21 Effectivity and Duration of Commencement
Order. - Unless lifted by the court, the Commencement Order
prohibit the debtor from selling, encumbering, transferring or
shall be for the effective for the duration of the rehabilitation
disposing in any manner any of its properties except in the
proceedings for as long as there is a substantial likelihood that
ordinary course of business; and
the debtor will be successfully rehabilitated. In determining
whether there is substantial likelihood for the debtor to be
prohibit the debtor from making any payment of its liabilities
successfully rehabilitated, the court shall ensure that the
outstanding as of the commencement date except as may be
following minimum requirements are met:
provided herein.
The proposed Rehabilitation Plan submitted complies with
RA 10142, Sec. 17 Effects of the Commencement Order. -
the minimum contents prescribed by this Act;
Unless otherwise provided for in this Act, the court's issuance of
a Commencement Order shall, in addition to the effects of a Stay There is sufficient monitoring by the rehabilitation receiver of
or Suspension Order described in Section 16 hereof: the debtor's business for the protection of creditors;
vest the rehabilitation with all the powers and functions The debtor has met with its creditors to the extent reasonably
provided for this Act, such as the right to review and obtain possible in attempts to reach consensus on the proposed
records to which the debtor's management and directors have Rehabilitation Plan;
access, including bank accounts or whatever nature of the
debtor subject to the approval by the court of the performance The rehabilitation receiver submits a report, based on
bond filed by the rehabilitation receiver; preliminary evaluation, stating that the underlying assumptions
and the goals stated in the petitioner's Rehabilitation Plan are
prohibit or otherwise serve as the legal basis rendering null realistic reasonable and reasonable or if not, there is, in any
and void the results of any extrajudicial activity or process to case, a substantial likelihood for the debtor to be successfully
seize property, sell encumbered property, or otherwise attempt rehabilitated because, among others:
to collection or enforce a claim against the debtor after
commencement date unless otherwise allowed in this Act, there are sufficient assets with/which to rehabilitate the
subject to the provisions of Section 50 hereof; debtor;
there is sufficient cash flow to maintain the operations of the

debtor;
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the debtor's, partners, stockholders, directors and officers prohibit the debtor from selling, encumbering, transferring or
have been acting in good faith and which due diligence; disposing in any manner any of its properties except in the
ordinary course of business; and
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 prohibit the debtor from making any payment of its liabilities
creditors; and outstanding as of the commencement date except as may be
provided herein.
the debtor would likely be able to pursue a viable
Rehabilitation Plan; RA 10142, Sec. 4
Claim shall refer to all claims or demands of whatever nature
The petition, the Rehabilitation Plan and the attachments or character against the debtor or its property, whether for
thereto do not contain any materially false or misleading money or otherwise, liquidated or unliquidated, fixed or
statement; contingent, matured or unmatured, disputed or undisputed,
including, but not limited to; (1) all claims of the government,
If the petitioner is the debtor, that the debtor has met with its whether national or local, including taxes, tariffs and customs
creditor/s representing at least three-fourths (3/4) of its total duties; and (2) claims against directors and officers of the debtor
obligations to the extent reasonably possible and made a good arising from acts done in the discharge of their functions falling
faith effort to reach a consensus on the proposed Rehabilitation within the scope of their authority: Provided, That, this inclusion
Plan if the petitioner/s is/are a creditor or group of creditors, that/ does not prohibit the creditors or third parties from filing cases
the petitioner/s has/have met with the debtor and made a good against the directors and officers acting in their personal
faith effort to reach a consensus on the proposed Rehabilitation capacities.
Plan; and
RA 10142, Sec. 20 Application of Stay or Suspension Order to
The debtor has not committed acts misrepresentation or in
Government Financial Institutions. - The provisions of this Act
fraud of its creditor/s or a group of creditors.
concerning the effects of the Commencement Order and the
Stay or Suspension Order on the suspension of rights to
The Commencement Order operates as a preservative
foreclose or otherwise pursue legal remedies shall apply to
measure to ensure that there is, and there will continue to
government financial institutions, notwithstanding provisions in
be, a substantial likelihood for successful rehabilitation.
their charters or other laws to the contrary.
Upon the issuance of the Commencement Order, the
powers and functions of the Rehabilitation Receiver are
1) General Concepts
vested, with specific emphasis on its right to review and
obtain all records of the debtor
Stay/Suspension Order covers:
After the commencement date, all extrajudicial attempts to
All actions and proceedings in court for enforcement of
collect or enforce a claim, all setoff of claims, and the
claims against the debtor or property
perfection of all liens are voided.
Provisional remedies
All legal proceedings against the debtor, except those
Injunction against the debtor from transferring,
excepted by the FRIA or by order of the rehabilitation court,
encumbering, selling
are consolidated in the rehabilitation court, and any attempt
XPN: Ordinary course of business/day-to-day operations
to circumvent the mandate constitutes indirect contempt of
debtor has been engaged in
court.
Stay or Suspension Order (2 Distinct Orders)
b. Stay or Suspension Order
A stay order as against creditors:
Suspending all actions or proceedings, in court or
RA 10142, Sec. 16 Commencement of Proceedings and otherwise, for the enforcement of claims against the
Issuance of a Commencement Order. - The rehabilitation debtor; and
proceedings shall commence upon the issuance of the Suspending all actions to enforce any judgment,
Commencement Order, which shall: attachment or other provisional remedies against the
xxx debtor
include s Stay or Suspension Order which shall: An injunction against the debtor:
Prohibiting the sale, encumbrance, transfer of disposal in
suspend all actions or proceedings, in court or otherwise, for
any manner of any of its properties except in the
the enforcement of claims against the debtor; ordinary course of business; and
Prohibiting any payment of its liabilities outstanding as of
suspend all actions to enforce any judgment, attachment or
the commencement date except as provided in the
other provisional remedies against the debtor;
FRIA

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

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RATIO: tribunal, or board, without distinction as to whether
1. No. Preferred creditors of distressed corporations stand or not a creditor is secured or unsecured, shall be
on equal footing with all other creditors only upon the suspended effective upon the appointment of a
appointment of a management committee, rehabilitation management committee, rehabilitation receiver,
receiver, board, or body board or body in accordance with PD 902-A
The provisions of PD 902-A are not yet applicable and it Secured creditors retain their preference over
may still be allowed to assert its preferred status unsecured creditors, but enforcement of such
because it foreclosed on the mortgage prior to the preference is equally suspended upon the
appointment of the management committee appointment of a management committee,
Sec. 6(c), PD 902-A provides: rehabilitation receiver, board or body. In the event
o xxx That upon appointment of a management that the assets of the corporation, partnership or
committee, a rehabilitation receiver, board or body, association are finally liquidated, secured and
all actions for claims against corporations, preferred credits under the applicable provisions of
partnerships or associations under management or the CC will definitely have preference over
receivership pending before any court, tribunal or unsecured ones
body shall be suspended accordingly This suspension shall not prejudice or render ineffective the
Clearly, suspension of claims happens only upon status of a secured creditor as compared to a totally
appointment of a management committee, a unsecured creditor. The suspension should give the
rehabilitation receiver, board or body receiver a chance to rehabilitate the corporation if there
A petition for rehabilitation does not always result in the should still be a possibility for doing so
appointment of a receiver or the creation of a In the event rehabilitation is no longer feasible and claims
management committee against the distressed corporation would eventually have
o SEC has to initially determine whether such to be settled, the secured creditors shall enjoy preference
appointment is appropriate and necessary under over unsecured creditors, subject only to the concurrence
the circumstances and preferences of credit
o Sec. 6(d) provides certain situations that must be
shown to exist before a management committee 3. Yes. Since suspension of actions for claims
may be created: commences only from the time a management
When there is imminent danger of dissipation, committee or receiver is appointed by the SEC
loss, wastage or destruction of assets or other RCBC rightfully moved for the extrajudicial foreclosure of its
properties mortgage because a management committee has not
When there is paralization of business
been appointed by SEC at that time
operations which may be prejudicial to the
interest of minority stockholders, parties- DISPOSITIVE: MR granted
litigants or to the general public
Before receivers may be appointed: RCBC v. IAC
Necessary in order to preserve the rights of
This was decided under PD 902-A (creating the SEC). Still valid
the parties-litigants
case law under the FRIA. Its enumeration of the guidelines in the
Protect the interest of the investing public and
treatment of claims has been enshrined in the FRIA.
creditors
When such circumstances are not obtaining or when SC ruled in this case: The suspension of claims is effective only
SEC finds no such imminent danger of losing corporate
upon the appointment of the rehabilitation receiver. Said
assets, a management committee or rehabilitation
appointment occurs only when there are serious circumstances.
receiver need not be appointed and suspension of
actions for claims may not be ordered by the SEC
The FRIA mandated that the issuance of the Commencement
When the SEC does not deem it necessary, it may be
Order contains the appointment of the Receiver. Once the Court
assumed that there are sufficient assets to sustain the
finds that the petition is sufficient in form and substance, it will
rehabilitation plan and that the creditors and investors issue said Order (and appointment of the receiver). It just made
are amply protected the issuance of the suspension coincide with the appointment of
the receiver.
2. Yes. It is only upon the appointment of a management
committee, rehabilitation receiver, board or body, that
preference over secured creditors is suspended,
although not lost.
The following Rules shall be observed:
All claims against corporations, partnerships or
associations that are pending before any court,

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Sobrejuanite vs. ASB Development Corporation – Ynares - management or receivership pending before any court,
Santiago, J. tribunal, board or body shall be suspended
Petitioners: Sps. Sobrejuanite accordingly.
Respondents: ASB Development Corporation (ASBDC)
Concept: Provisions Common to Voluntary and Involuntary Thus, it is necessary to determine whether the complaint for
Rehabilitation Proceedings: Stay or Suspension Order rescission of contract with damages is a claim within the
contemplation of PD No. 902-A in order to resolve WON
Doctrine: suspension is proper.
The purpose of the suspension of the proceedings is to prevent In Finasia Investments v. CA, SC construed claims to refer
a creditor from obtaining an advantage or preference over only to debts or demands pecuniary in nature. Thus:
another and to protect and preserve the rights of party litigants
as well as the interest of the investing public or creditors. Such [T]he word 'claim' as used in Sec. 6(c) of P.D. 902-A refers
suspension is intended to give enough breathing space for the to debts or demands of a pecuniary nature. It means "the
management committee or rehabilitation receiver to make assertion of a right to have money paid. It is used in
business viable again, without having to divert attention and special proceedings like those before administrative
resources to litigations in various fora, and enable the receiver to court, on insolvency."
exercise its powers free from any judicial or extra-judicial
interference that might duly hinder or prevent the rescue of the The word "claim" is also defined as:
debtor company. Right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent,
Brief Facts: matured, unmatured, disputed, undisputed, legal, equitable,
ASBDC failed to comply with its obligation to deliver the condo secured, or unsecured; or right to an equitable remedy for
unit the spouses purchased from them. Spouses filed a breach of performance if such breach gives rise to a
complaint to rescind the contract with HLURB. However, ASBDC right to payment, whether or not such right to an equitable
filed a motion to suspend the proceedings in view of the SEC’s remedy is reduced to judgment, fixed, contingent, matured,
approval of their rehabilitation plan and the appointment of a unmatured, disputed, undisputed, secured, unsecured. In
rehabilitation receiver, citing Sec. 6(c) of PD No. 902-A. conflicts of law, a receiver may be appointed in any
state which has jurisdiction over the defendant who
ISSUE: owes a claim.
WON the proceedings with HLURB should be suspended (YES)
RATIO: YES. As the complaint is considered a “claim” As used in statutes requiring the presentation of claims
under Sec. 6(c) of PD NO. 902-A, HLURB should have against a decedent's estate, "claim" is generally
suspended the proceedings. construed to mean debts or demands of a pecuniary
The purpose of the suspension of the proceedings is to nature which could have been enforced against the
prevent a creditor from obtaining an advantage or deceased in his lifetime and could have been reduced
preference over another and to protect and preserve the to simple money judgments; and among these are
rights of party litigants as well as the interest of the investing those founded upon contract.
public or creditors.
Such suspension is intended to give enough breathing
space for the management committee or rehabilitation In Arranza v. BF Homes Inc., the interim rules define a claim
receiver to make business viable again, without having to as referring to all claims or demands. Of whatever nature
divert attention and resources to litigations in various fora, or character against a debtor of its property, whether
and enable the receiver to exercise its powers free from any for money or otherwise. The definition is all-encompassing
judicial or extra-judicial interference that might duly hinder or as it refers to all action whether for money or otherwise.
prevent the rescue of the debtor company. There are no distinctions or exemptions.
This power of SEC to suspend such proceedings is expressly
provided for by Sec. 6(c) of PD. No. 902-A, which states that: Clearly, the complaint filed by the spouses is a claim as
To appoint one or more receivers of the property, real defined under the Interim Rules. Incidentally, although the
and personal, which is the subject of the action pending complaint was filed before the effectivity of the interim rules,
before the Commission . . . whenever necessary in order to the same would still apply pursuant to Sec. 1 of Rule 1.
preserve the rights of the parties-litigants and/or protect the The complaint would still fall under the category of a claim
interest of the investing public and creditors: . . . Provided, even following the rulings of Finasia and Arranza, as the
finally, That upon appointment of a management committee, rescission with damages is still for pecuniary considerations.
rehabilitation receiver, board or body, pursuant to this As such, the HLURB should have suspended the
Decree, all actions for claims against corporations, proceedings upon approval by the SEC of the rehabilitation
partnerships or associations under plan and the appointment of the rehabilitation receiver.

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It is to be noted that even the execution of final judgments ISSUE:
may be held in abeyance when the corporation is under WON the properties, which were foreclosed and whose
rehabilitation. Hence, there is more reason to order a certificate of sale was recorded before rehabilitation
suspension, as with what happened in the instant case, proceedings, must be included among the properties subject of
when the motion to suspend was filed soon after the the rehabilitation and the stay order. NO
institution of the complaint. By allowing the proceedings to
proceed, HLURB unwittingly gave undue preference to the RATIO: No, because by the time the stay order was issued,
spouses over the other creditors and claimants of ASBDC, TCEI was no longer the owner of the property since the
which is precisely the evil sought to be prevented by Sec. 6. ownership of Metrobank was consolidated when TCEI failed
With regards to the period provided for in the contract, while to exercise its right of redemption.
ASBDC was obliged to deliver the property on or before A principal feature of corporate rehabilitation is the stay
December 1999, the same was deemed extended due to order which defers all actions or claims against the
the financial reverses experienced by the company, corporation seeking corporate rehabilitation from the date of
pursuant to Sec. 7 of the same contract which allows the its issuance until the dismissal of the petition or termination
developer to extend the period on account of causes of the rehabilitation proceedings.
beyond its control. TCEI: When the rehabilitation plan was approved, the
properties of TCEI were placed in custodia legis and the
DISPOSITIVE: Petition denied. CA affirmed. grant of writ of possession in favor of Metrobank was
tantamount to taking properties away from the rehabilitation
Sobrejuanite v. ASBDC receiver. The receiver must be considered a third person
This was decided undr PD 902-A and the Interim Rules of whose possession of the foreclosed properties was an
Procedure. If the case were decided under the FRIA, the exception to the rule that the grant of a writ of possession is
outcome would have been the same since the FRIA’s definition ministerial.
of “claims” is broader. SC: TCEI’s position lacked merit because Metrobank
The FRIA definition of “claims” is similar to, but broader than, already acquired ownership over the foreclosed properties
that of the Interim Rules. prior to the petition for rehabilitation and the issuance of the
Reason: FRIA further elaborates on types of claims (“liquidated stay order.
or unliquidated, fixed or contingent, matured or unmatured, Although Metrobank invoked Act 3135 when it extrajudicially
disputed or undisputed”) foreclosed the mortgage, the General Banking Act must be
applied, and the General Banking Act provides that when
Town and Country Enterprises, Inc. vs. Honorable Norberto J. the property of a mortgagor, which is a juridical person is
Quisumbing, Jr., et al.; Town and Country Enterprises, Inc. vs. foreclosed, it only has three months to redeem it.
Metropolitan Bank and Trust Co. (2012) – Pérez
Petitioner: Town and Country Enterprises, Inc. (TCEI) TCEI did not exercise its right of redemption, thus after the
Respondents: Norberto J. Quisumbing, Jr. (Quisumbing) and three-month period of redemption, Metrobank consolidated
Metropolitan Bank and Trust Co. (Metrobank) Concept: Stay or its ownership on 6 February 2002. It matters little that
suspension order Metrobank caused the registration of the certificate of sale
on 10 April 2002 and/or executed an affidavit consolidating
Doctrine: its ownership on 25 April 2003. The mortgagor loses all
Properties already foreclosed and whose ownership was interest over the foreclosed property after the expiration of
consolidated before rehabilitation proceedings cannot be the redemption period and the purchaser becomes the
affected by a stay order. First, there is no longer a debt/claim to absolute owner.
stay and second, ownership already passed to the purchaser. Writ of possession cannot be denied when the mortgagor
did not redeem the property.
Brief Facts: The stay order could not affect the mortgage obligations
TCEI failed to pay its debt to Metrobank. Metrobank foreclosed owing to Metrobank since these were already enforced even
the real estate mortgage. TCEI did not exercise its right of before the petition for rehabilitation. Meaning, there was no
redemption within the 3-month redemption period. Months after longer a debt/claim to stay.
the end of the redemption period, TCEI filed rehabilitation In equitable PCI Bank, Inc. vs. DNG Realty, where there
proceedings. A stay order was issued and rehabilitation plan was were similar facts, the Court upheld the validity of the
approved. Metrobank filed for writ of possession of the issuance of possession to the purchaser. After the
foreclosed property. The writ was issued. TCEI claimed that writ redemption period expired without the respondent
could not issue because the property was subject to the redeeming the foreclosed property, purchaser becomes the
possession of the rehabilitation receiver and that it would violate absolute owner of the property and it was within its right to
the stay order. ask for consolidation of title

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The foreclosed properties could not be said to have been to the actions of a licensed broker or dealer to sell pledged
placed in custodia legis. While the issuance of writ of securities of a debtor pursuant to a securities pledge or margin
possession ceases to be ministerial when the property is in agreement for the settlement of securities transactions in
possession of a third person with adverse right, the accordance with the provisions of the Securities Regulation
rehabilitation receiver’s power to take possession, control Code and its implementing rules and regulations;
and custody of the property is far from adverse. A
rehabilitation officer is appointed for the protection of the clearing and settlement of financial transactions through
corporate investors and creditors. the facilities of a clearing agency or similar entities duly
Even if the one-year redemption period is used, as can be authorized, registered and/or recognized by the appropriate
gleaned from the record, Metrobank’s acquisition of the regulatory agency like the Bangko Sentral ng Pilipinas (BSP)
subject properties would still pass muster. and the SEC as well as any form of actions of such agencies or
Summary: The properties cannot be subject of the entities to reimburse themselves for any transactions settled for
rehabilitation because ownership has transferred even the debtor; and
before rehabilitation proceedings. Ownership was
transferred because TCEI failed to exercise its right of any criminal action against individual debtor or owner,
redemption. Failing to exercise such right, it cannot be partner, director or officer of a debtor shall not be affected by any
heard to complain about the issuance of new TCTs in favor proceeding commend under this Act.
of Metrobank.
RA 10142, Sec. 16 Commencement of Proceedings and
DISPOSITIVE: Decisions affirmed.
Issuance of a Commencement Order. - The rehabilitation
proceedings shall commence upon the issuance of the
Town and Country v. Quisumbing Commencement Order, which shall:
This case reiterates that the concept of a claim must involve a xxx
debtor or his property, not third parties. prohibit the debtor's suppliers of goods or services from
withholding the supply of goods and services in the ordinary
2) Exceptions to Stay or Suspension Order course of business for as long as the debtor makes payments for
the services or goods supplied after the issuance of the
RA 10142, Sec. 18 Exceptions to the Stay or Suspension Order. Commencement Order;
- The Stay or Suspension Order shall not apply:
authorize the payment of administrative expenses as they
to cases already pending appeal in the Supreme Court as of become due;
commencement date Provided, That any final and executory
judgment arising from such appeal shall be referred to the court RA 10142, Sec. 4
for appropriate action; Administrative expenses shall refer to those reasonable and
necessary expenses:
subject to the discretion of the court, to cases pending or filed
at a specialized court or quasi-judicial agency which, upon
incurred or arising from the filing of a petition under the
determination by the court is capable of resolving the claim more
provisions of this Act;
quickly, fairly and efficiently than the court: Provided, That any
final and executory judgment of such court or agency shall be arising from, or in connection with, the conduct of the
referred to the court and shall be treated as a non-disputed proceedings under this Act, including those incurred for the
claim;
rehabilitation or liquidation of the debtor;
to the enforcement of claims against sureties and other

incurred in the ordinary course of business of the debtor
persons solidarily liable with the debtor, and third party or
after the commencement date;
accommodation mortgagors as well as issuers of letters of credit,
unless the property subject of the third party or accommodation for the payment of new obligations obtained after the
mortgage is necessary for the rehabilitation of the debtor as
commencement date to finance the rehabilitation of the
determined by the court upon recommendation by the
debtor;
rehabilitation receiver;
incurred for the fees of the rehabilitation receiver or
to any form of action of customers or clients of a securities
liquidator and of the professionals engaged by them; and
market participant to recover or otherwise claim moneys and
securities entrusted to the latter in the ordinary course of the that are otherwise authorized or mandated under this Act or
latter's business as well as any action of such securities market
such other expenses as may be allowed by the Supreme
participant or the appropriate regulatory agency or self-
Court in its rules.
regulatory organization to pay or settle such claims or liabilities;

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Ordinary course of business shall refer to transactions in the Surety’s liability to the creditor: Primary, direct, and absolute
pursuit of the individual debtor's or debtor's business operations (not stayed or suspended)
prior to rehabilitation or insolvency proceedings and on ordinary
business terms. Stay or Suspension Order
Acts as a stay order against the creditors and an injunction
PROCEDURE OF COMMENCEMENT PROCEEDINGS AND against the debtor
ISSUANCE OF COMMENCEMENT ORDER: Rehabilitation
proceedings shall commence upon the issuance of the Exceptions to Stay Order (against the creditor)
Commencement Order. Listed in the FRIA – matters expressly excepted
Exceptions (Sec. 18):
The Commencement Order shall: Cases already pending appeal in the SC as of
Identify the debtor, its principal business or activities, and its commencement date; provided, that any final and
principal place of business executory judgment arising from such appeal shall be
Summarize the ground/s for instituting the proceedings; referred to the court for appropriate action;
State the relief sought and any requirement or procedure Subject to the discretion of the court, to cases pending or
particular ot the relief sought; filed at a specialized court or quasi-judicial agency
State the legal effects of the CO; which, upon determination by the court, is capable of
Declare that the debtor is under rehabilitation; resolving the claim more quickly, fairly and efficiently
Direct the following: than the court; provided, that any final and executory
Publication of the CO in a newspaper of general judgment of such court or agency shall be referred to
circulation in the Philippines: once a week for 2 the court and shall be treated as a non-disputed claim;
consecutive weeks, the first publication to be made To the enforcement of claims against sureties and other
within 7 days from the time of CO’s issuance persons solidarily liable with the debtor, and third party
Service by personal delivery of a copy of the petition or accommodation mortgagors as well as issuers of
within 5 days: letters of credit, unless the property subject of the third
If petitioner is the debtor: On each creditor holding party or accommodation mortgage is necessary for the
at least 10% of debtor’s total liabilities (determined rehabilitation of the debtor as determined by the court
from the schedule attached to the petition) upon recommendation by the rehabilitation receiver;
If petitioner is the creditor/s: On the debtor To any form of action of customers or clients of a securities
Appointment of a rehabilitation receiver who may or market participant to recover or otherwise claim
may not be from among the petitioner’s nominees moneys and securities entrusted to the latter in the
Summary of requirements and deadlines for creditors to ordinary course of the latter’s business as well as any
establish their claims against the debtor and direct all action of such securities market participant or the
creditors to their claims with the court at least 5 days appropriate regulatory agency or self-regulatory
before the initial hearing organization to pay or settle such claims or liabilities;
BIR to file and serve on the debtor its comment on or To the actions of a licensed broker or dealer to sell pledged
opposition to the petition or its claim/s against the securities of a debtor pursuant to a securities pledge or
debtor margin agreement for the settlement of securities
Prohibit the debtor’s supplier of goods or services from transactions in accordance with the provisions of the
withholding the supply of goods and services in the ordinary Securities Regulation Code and its implementing rules
course of business for as long as the debtor makes and regulations;
payments for the services or goods supplied after the The clearing and settlement of financial transactions through
issuance of the CO the facilities of a clearing agency or similar entities duly
Authorize the payment of administrative expenses as they authorized, registered and/or recognized by the
become due appropriate regulatory agency like the Bangko Sentral
Initial hearing set not more than 40 days from the ng Pilipinas (BSP) and the SEC as well as any form of
petitioner’s filing date for the purpose of determining actions of such agencies or entities to reimburse
whether there is substantial likelihood for the debtor to be themselves for any transactions settled for the debtor;
rehabilitated and
Make available copies of the petition and rehabilitation plan Any criminal action against the individual debtor or owner,
for examination and copying by any interested party partner, director or officer of a debtor shall not be
Indicate the location/s at which documents regarding the affected by any proceeding commenced under this Act
debtor and the proceedings may be reviewed and copied
State that any creditor/debtor (not the petitioner) may
nominate any other qualified person to the position of rehab
receiver at least 5 days before the initial hearing
13. Includes the stay or suspension order

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Exceptions to Injunction (against the debtor) RATIO: YES the rehabilitation court acted in excess of its
Administrative expenses is critical authority or jurisdiction when it enjoined petitioner from
GR: All claims for administrative expenses are excepted seeking the payment of concession fees from the banks that
o Reason: purpose of rehabilitation is to restore and issued the Irrevocable Standby Letter of Credit in its favor.
reinstate a debtor to its former position of successful The petition for certiorari is granted. The Order of November 27,
operation and solvency  payment of administrative 2003 of the RTC of Quezon City 90, is hereby declared null and
expenses allows the debtor to effectively continue its void and set aside.
financial life and activities First, the claim is not one against the debtor but against an
entity that respondent Maynilad has procured to answer for
MWSS vs. Daway and Maynilad—Azcuna, J. its non-performance of certain terms and conditions of the
Petitioner: Metropolitan Waterworks and Sewerage System Concession Agreement, particularly the payment of
Respondents: Hon. Reynaldo Daway and Maynilad Water concession fees.
Services Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not
Concept: Provisions Common to Voluntary and Involuntary enjoin the enforcement of all claims against guarantors and
Rehabilitation Proceedings  Stay or Suspension Order  sureties, but only those claims against guarantors and
Exceptions to Stay or Suspension Order sureties who are not solidarily liable with the debtor.
Respondent Maynilads claim that the banks are not
Doctrine: solidarily liable with the debtor does not find support in
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules jurisprudence. Letters of credit were developed for the
does not apply to herein petitioner as the prohibition is on the purpose of insuring to a seller payment of a definite amount
enforcement of claims against guarantors or sureties of the upon the presentation of documents and is thus a
debtors whose obligations are not solidary with the debtor. The commitment by the issuer that the party in whose favor it is
participating banks obligation are solidary with respondent issued and who can collect upon it will have his credit
Maynilad in that it is a primary, direct, definite and an absolute against the applicant of the letter, duly paid in the amount
undertaking to pay and is not conditioned on the prior exhaustion specified in the letter
of the debtors assets. These are the same characteristics of a They are in effect absolute undertakings to pay the money
surety or solidary obligor. And being solidary, the claims against advanced or the amount for which credit is given on the faith
them can be pursued separately from and independently of the of the instrument. They are primary obligations and not
rehabilitation case. accessory contracts and while they are security
arrangements, they are not converted thereby into contracts
Brief Facts: of guaranty. What distinguishes letters of credit from other
MWSS granted MWSI a 20-year period to manage, operate, accessory contracts, is the engagement of the issuing bank
repair, decommission and refurbish the existing MWSS water to pay the seller once the draft and other required shipping
delivery and sewerage services in the WestZone Service Area, documents are presented to it. They are definite
for which MWSI undertook to pay the corresponding concession undertakings to pay at sight once the documentsstipulated
fees. To secure the concessionaire’s performance of its therein are presented.
obligations, MWSI was required to put up a bond, bank The prohibition under Sec 6 (b) of Rule 4 of the Interim
guarantee or other security acceptable to MWSS. In compliance Rules does not apply to herein petitioner as the prohibition
with this requirement, MWSI arranged for a 3-year facility with a is on the enforcement of claims against guarantors or
number of foreign banks, led by Citicorp International Limited, for sureties of the debtors whose obligations are not solidary
the issuance of an Irrevocable Standby Letter of Credit in favor with the debtor. The participating banks obligation are
of MWSS. A few years later, MWSI served upon MWSS a Notice solidary with respondent Maynilad in that it is a primary,
of Event of Termination, claiming that MWSS failed to comply direct, definite and an absolute undertaking to pay and is not
with its obligations under the agreement. conditioned on the prior exhaustion of the debtors assets.
These are the same characteristics of a surety or solidary
ISSUE: obligor. And being solidary, the claims against them can be
WON the rehabilitation court sitting as such, act in excess of its pursued separately from and independently of the
authority or jurisdiction when it enjoined herein petitioner from rehabilitation case.
seeking the payment of the concession fees from the banks that
issued the Irrevocable Standby Letter of Credit in its favor (YES)

!
The terms of the Irrevocable Standby Letter of Credit do not Brief Facts:
show that the obligations of the banks are not solidary with Corporate officers of Silahis Int’l Hotel filed a petition for
those of respondent Maynilad. On the contrary, it is issued suspension of payments and rehabilitation with the SEC while
at the request of and for the account of Maynilad in favor of there were pending criminal cases against them for violation of
the MWSS as a bond for the full and prompt performance of the SSS Law, in relation to Art. 315 RPC (on estafa). They
the obligations by the concessionaire under the Concession petitioned the court to suspend the criminal proceedings, saying
Agreement and herein MWSS is authorized by the banks to that the suspension order issued by the RTC should affect said
draw on it by the simple act of delivering to the agent a criminal cases as well.
written certification substantially in the form of the Letter of
Credit. ISSUE:
Taking into consideration our own rulings on the nature of WON the suspension of “all claims” as an incident to a corporate
letters of credit and the customs and usage developed over rehabilitation also contemplates the suspension of criminal
the years in the banking and commercial practice of letters charges filed against the corporate officers of the distressed
of credit, we hold that except when a letter of credit corporation (NO)
specifically stipulates otherwise, the obligation of the banks
issuing letters of credit are solidary with that of the person or RATIO: NO, the stay order issued by Branch 24 does not
entity requesting for its issuance, the same being a direct, cover a violation of the SSS Law for the non-remittance of
primary, absolute and definite undertaking to pay the premiums and violations of the RPC.
beneficiary upon the presentation of the set of documents (On corporate rehabilitation)
required therein. Corporate rehabilitation connotes the restoration of the
The public respondent, therefore, exceeded his jurisdiction, debtor to a position of successful operation and solvency, if
in holding that he was competent to act on the obligation of it is shown that its continued operation is economically
the banks under the Letter of Credit under the argument that feasible and its creditors can recover more, by way of the
this was not a solidary obligation with that of the debtor. present value of payments projected in the rehabilitation
Being a solidary obligation, the letter of credit is excluded plan, if the corporation continues as a going concern than if
from the jurisdiction of the rehabilitation court and therefore it is immediately liquidated
in enjoining petitioner from proceeding against the Standby o It contemplates a continuance of corporate life and
Letters of Credit to which it had a clear right under the law activities in an effort to restore and reinstate the
and the terms of said Standby Letter of Credit, public corporation to its former position of successful
respondent acted in excess of his jurisdiction. operation and solvency
o The purpose is to enable the company to gain a new
DISPOSITIVE: Petition for certiorari granted. lease on life and allow its creditors to be paid their
claims out of its earnings
MWSS v. Daway
The ruling is now enshrined in Sec. 18(c) of the FRIA, which (On suspension of claims)
provides that the suspension order does not cover the A principal feature of corporate rehabilitation is the
enforcement of claims against persons solidarily liable with the SUSPENSION OF CLAIMS against the distressed
debtor, including issuers of letters of credit. corporation
o Sec. 5, PD 902-A, as amended provided for
Panlilio v. RTC, Br. 51, City of Manila (2011) – Peralta, J. suspension of claims against corporations undergoing
Petitioner: Jose Marcel Panlilio, Erlinda Panlilio, Nicole Morris & rehabilitation:
Mario T. Cristobal “Section 6(c). xxx
Respondent: RTC, Br. 51, City of Manila, represented by Hon. xxx Provided, finally, that upon appointment of a
Presiding Judge Antonio M. Rosales; People of the Philippines; management committee, rehabilitation receiver, board
and the Social Security System or body, pursuant to this Decree, all actions for claims
Concept: Provisions Common to Voluntary and Involuntary against corporations, partnerships or associations
Rehabilitation Proceedings  Stay or Suspension Order  under management or receivership pending before any
Exceptions to Stay or Suspension Order court, tribunal, board or body, shall be suspended
accordingly.”
Doctrine:
Criminal cases against the corporate officers are personal in
nature. They are not affected by the stay or suspension order
issued by the court in relation to rehabilitation proceedings.

!
The SC promulgated the Interim Rules of Procedure on The civil action is merely incidental to and
Corporate Rehabilitation consequent to the conviction of the accused –
o Sec. 6, Rule 4 provides a stay order on all claims intended solely to indemnify the private
against the corporation: complainant
“Stay Order. – If the court finds the petition to be SC: Rosario is at fours with the case at bar. Officers are
sufficient in form and substance, it shall, not later than charged with violations of Sec. 28(h) of the SSS Law, in
five (5) days from the filing of the petition, issue an relation to Art. 315(1)(b) of the RPC for estafa
Order xxx; (b) staying enforcement of all claims, o The SSS law clearly “criminalizes” the non-remittance of
whether for money or otherwise and whether such SSS contributions by an employer to protect employees
enforcement is by court action or otherwise, against the from unscrupulous employers. Public interest requires
debtor, its guarantors and sureties not solidarily liable that said criminal acts be immediately investigated and
with the debtor; xxx” prosecuted for the protection of society
In Finasia Investments and Finance Corporation v. CA, the SC: Rehabilitation of SIHI and the settlement of claims
term “claim” has been construed to refer to debts or against the corporation is not a legal ground for the
demands of a pecuniary nature, or the assertion to have extinction of the officers’ criminal liabilities – no reason why
money paid criminal proceedings should be suspended during corporate
o Purpose for suspending actions (for claims against rehabilitation, more so, since the prime purpose of the
the corporation in a rehabilitation proceeding):To criminal action is to punish the offender in order to deter
enable the management committee or rehabilitation him and others from committing the same or similar offense
receiver to effectively exercise its/his powers free from
any judicial or extrajudicial interference that might o As pointed out in Rosario, it would be absurd for one
unduly hinder or prevent the rescue of the debtor who has engaged in criminal conduct to escape
company punishment by the mere filing of a petition for
rehabilitation by the corporation of which he is an officer
(On the suspension of all claims as an incident of corporate
rehabilitation; criminal charges not included) o Prosecution of the officers of the corporation has no
In Rosario v. Co, the issue resolved by the Court was WON bearing on the pending rehabilitation of the
during the pendency of rehabilitation proceedings, criminal corporation, especially since they are charged in their
charges for violation of BP 22 should be suspended individual capacities
o The gravamen of the offense published by BP 22 is the o The purpose of the law for the issuance of the stay order
act of making and issuing a worthless check – a check is NOT compromised, since the appointed rehabilitation
that is dishonored upon its presentation for payment receiver can still fully discharge his functions as
o In Lozano v. Martinez, the Court declared that it is not mandated by law
the nonpayment of an obligation which the law Note: The receiver is not charged to defend the
punishes, but rather the making and circulation of officers of the corporation; if anything, the receiver
worthless checks. It is an offense punished for being an might be remotely interested in WON the court
offense against public order, and the prime purpose is rules the officers as civilly liable
to punish the offender in order to deter him and others That the officers may be civilly liable is NOT a reason to
from committing the same or similar offense suspend the proceedings because, as discussed in
o The filing of the case for violation of BP 22 is not a Rosario, should the court find that an award or
“claim” that can be enjoined within the purview of indemnification is warranted, such award would fall
PD 902-A under the category of claims, the execution of which
Although conviction of the accused for the alleged would be subject to the stay order issued by the
crime could result in the restitution, reparation or rehabilitation court
indemnification of the private offended party for the The penal sanctions as a consequence of the
damage or industry he sustained by reason of the violation of the SSS Law, in relation to the RPC,
felonious act of the accused, nevertheless, can be implemented if they are found guilty after
prosecution for violation of BP 22 is a criminal trial; however, any civil indemnity awarded as a
action result of their conviction would be subject to the
A criminal action has a dual purpose: 1) the punishment stay order issued by the rehabilitation court
of the offender and 2) indemnity of the offended party Only to that extent can the order of suspension be
The dominant and primordial objective is the considered obligatory
punishment of the offender – they are primarily
intended to vindicate an outrage against the
sovereignty of the state and to impose the
appropriate penalty for the vindication of the
disturbance to the social offender

!
(On FRIA) – but this is obiter there is a substantial likelihood for the debtor to be
Court would like to point out that Congress has recently successfully rehabilitated;
enacted RA 10142, or the Financial Rehabilitation and
Insolvency Act of 2010, Sec. 18 of which explicitly provides the petition should be dismissed; and
that criminal actions against the individual officer of a
corporation are not subject to the Stay or Suspension Order the debtor should be dissolved and/or liquidated.
in rehabilitation proceedings
“The Stay or Suspension Order shall not apply: xxx RA 10142, Sec. 25 Giving Due Course to or Dismissal of
any criminal action against individual debtor or owner,
Petition, or Conversion of Proceedings. - Within ten (10) days
partner, director or officer of a debtor shall not be affected
from receipt of the report of the rehabilitation receiver mentioned
by any proceeding commenced under this Act.”
in Section 24 hereof the court may:
DISPOSITIVE: Petition DENIED. give due course to the petition upon a finding that:
Panlilio v. RTC the debtor is insolvent; and

Decision would still be the same under FRIA, now enshrined in
Sec. 18(g). there is a substantial likelihood for the debtor to be
successfully rehabilitated;
c. Subsequent Actions
dismiss the petition upon a finding that:
RA 10142, Sec. 22 Action at the Initial Hearing. - At the initial
hearing, the court shall: debtor is not insolvent;
determine the creditors who have made timely and proper the petition i8 a sham filing intended only to delay the
filing of their notice of claims; enforcement of the rights of the creditor/s or of any group of
creditors;
hear and determine any objection to the qualifications of the
appointment of the rehabilitation receiver and, if necessary (3)the petition, the Rehabilitation Plan and the attachments
appoint a new one in accordance with this Act; thereto contain any materially false or misleading statements;
or
direct the creditors to comment on the petition and the
Rehabilitation Plan, and to submit the same to the court and to (4)the debtor has committed acts of misrepresentation or in
the rehabilitation receiver within a period of not more than twenty fraud of its creditor/s or a group of creditors;
(20) days; and
(c)convert the proceedings into one for the liquidation of the
direct the rehabilitation receiver to evaluate the financial debtor upon a finding that:
condition of the debtor and to prepare and submit to the court
within forty (40) days from initial hearing the report provided in (1)the debtor is insolvent; and
Section 24 hereof.
(2)there is no substantial likelihood for the debtor to be
RA 10142, Sec. 24 Report of the Rehabilitation Receiver. - successfully rehabilitated as determined in accordance with
Within forty (40) days from the initial hearing and with or without the rules to be promulgated by the Supreme Court.
the comments of the creditors or any of them, the rehabilitation
receiver shall submit a report to the court stating his preliminary RA 10142, Sec. 26 Petition Given Due Course. - If the petition is
findings and recommendations on whether: given due course, the court shall direct the rehabilitation receiver
to review, revise and/or recommend action on the Rehabilitation
the debtor is insolvent and if so, the causes thereof and any Plan and submit the same or a new one to the court within a
unlawful or irregular act or acts committed by the owner/s of a period of not more than ninety (90) days.
sole proprietorship partners of a partnership or directors or
officers of a corporation in contemplation of the insolvency of the The court may refer any dispute relating to the Rehabilitation
debtor or which may have contributed to the insolvency of the Plan or the rehabilitation proceedings pending before it to
debtor; arbitration or other modes of dispute resolution, as provided for
under Republic Act No. 9285, Or the Alternative Dispute
the underlying assumptions, the financial goals and the Resolution Act of 2004, should it determine that such mode will
procedures to accomplish such goals as stated in the petitioner's resolve the dispute more quickly, fairly and efficiently than the
Rehabilitation Plan are realistic, feasible and reasonable; court.

!
RA 10142, Sec. 27 Dismissal of Petition. - If the petition is B. Actions To Be Taken: Along with the dismissal of the
dismissed pursuant to paragraph (b) of Section 25 hereof, then petition, the court, in its discretion, may require the
the court may, in its discretion, order the petitioner to pay petitioner to pay damages to any creditor or to the debtor,
damages to any creditor or to the debtor, as the case may be, as the case may be, who have been injured by the filing
who may have been injured by the filing of the petition, to the of the petition.
extent of any such injury. !
. Conversion to Liquidation Proceedings A.
Requisites for Conversion
Procedure in Initial Hearing
Debtor is insolvent; and,
The Court is tasked to do the following:
No substantial likelihood of debtor’s successful
Determine which creditors have timely and properly filed their
notice of claims. rehabilitation
Hear and determine objections to the qualifications or the
d. Rehabilitation Receiver
appointment of the rehabilitation receiver.
a. And if necessary, appoint a new one.
1) General Concepts
Direct creditors to comment of the petition and the
Rehabilitation Plan, and to submit them to the court and the
receiver within a period of not more than 20 days. RA 10142, Sec. 4
Direct the receiver to evaluate the financial condition of the Rehabilitation receiver shall refer to the person or persons,
debtor and, within 40 days from the initial hearing, submit the natural or juridical, appointed as such by the court pursuant to
report. this Act and which shall be entrusted with such powers and
duties as set forth herein.
Procedure in Disposing of the Petition
Within 10 days after receiving the receiver’s report, the Court has RA 10142, Sec. 28 Who May Serve as a Rehabilitation
3 courses of action that it may take, with respect to the petition: Receiver. - Any qualified natural or juridical person may serve as
a rehabilitation receiver: Provided, That if the rehabilitation
I. Give Due Course receiver is a juridical entity, it must designate a natural person/s
Requisites for Granting who possess/es all the qualifications and none of the
Debtor is insolvent; and, disqualification’s as its representative, it being understood that
There is substantial likelihood for debtor’s successful the juridical entity and the representative/s are solidarily liable for
rehabilitation all obligations and responsibilities of the rehabilitation receiver.
Actions To Be Taken
Court will direct the receiver to review, revise and or
recommend action on the Rehabilitation Plan and RA 10142, Sec. 29 Qualifications of a Rehabilitation Receiver. -
submit the same plan or a new one to court within a The rehabilitation receiver shall have the following minimum
period of not more than 90 days.
qualifications:
If there is any dispute relating to the Rehabilitation
Plan or to the proceedings pending before it, the court (a)A citizen of the Philippines or a resident of the Philippines in
may refer it to arbitration or other modes of dispute the six (6) months immediately preceding his nomination;
resolution, should it determine that such method will
be more quick, fair and efficient than resolving it in (b)Of good moral character and with acknowledged integrity,
court. impartiality and independence;
!
II. Dismissal (c)Has the requisite knowledge of insolvency and other relevant
A. Grounds for Dismissal commercial laws, rules and procedures, as well as the relevant
1. Debtor is NOT insolvent training and/or experience that may be necessary to enable him
2. The petition is a sham filing, intended to delay to properly discharge the duties and obligations of a
creditors (or a group of creditors) in enforcing their rehabilitation receiver; and
rights.
3. The petition, Rehabilitation Plan and the attachments (d)Has no conflict of interest: Provided, That such conflict of
thereto contain any materially false or misleading interest may be waived, expressly or impliedly, by a party who
statements. may be prejudiced thereby.
4. Debtor has committed acts of misrepresentation or in
fraud of its creditors (or a group of creditors) Other qualifications and disqualification’s of the rehabilitation
! receiver shall be set forth in procedural rules, taking into
! consideration the nature of the business of the debtor and the
! need to protect the interest of all stakeholders concerned.
!
!
RA 10142, Sec. 30 Initial Appointment of the Rehabilitation
Receiver. - The court shall initially appoint the rehabilitation RA 10142, Sec. 35 Vacancy. - Incase the position of
receiver, who mayor may not be from among the nominees of rehabilitation receiver is vacated for any reason whatsoever. the
the petitioner, However, at the initial hearing of the petition, the court shall direct the debtor and the creditors to submit the
creditors and the debtor who are not petitioners may nominate name/s of their nominee/s to the position. The court may appoint
other persons to the position. The court may retain the any of the qualified nominees. or any other person qualified for
rehabilitation receiver initially appointed or appoint another who the position.
mayor may not be from among those nominated.
RA 10142, Sec. 40 Conflict of Interest. - No person may be
In case the debtor is a securities market participant, the court appointed as a rehabilitation receiver, member of a_
shall give priority to the nominee of the appropriate securities or management committee, or be employed by the rehabilitation
investor protection fund. receiver or the management committee if he has a conflict of
interest.
If a qualified natural person or entity is nominated by more than
fifty percent (50%) of the secured creditors and the general An individual shall be deemed to have a conflict of interest if he
unsecured creditors, and satisfactory evidence is submitted, the is so situated as to be materially influenced in the exercise of his
court shall appoint the creditors' nominee as rehabilitation judgment for or against any party to the proceedings. Without
receiver. limiting the generality of the foregoing, an individual shall be
deemed to have a conflict of interest if:
RA 10142, Sec. 32 Removal of the Rehabilitation Receiver. –
The rehabilitation receiver may be removed at any time by the he is a creditor, owner, partner or stockholder of the debtor;
court either motu proprio or upon motion by any creditor/s
holding more than fifty percent (50%) of the total obligations of he is engaged in a line of business which competes with that
the debtor, on such grounds as the rules of procedure may of the debtor;
provide which shall include, but are not limited to, the following:
Incompetence, gross negligence, failure to perform or failure he is, or was, within five (5) years from the filing of the petition, a
to exercise the proper degree of care in the performance of his director, officer, owner, partner or employee of the debtor or any of
duties and powers; the creditors, or the auditor or accountant of the debtor;
Lack of a particular or specialized competency required by he is, or was, within two (2) years from the filing of the
the specific case; petition, an underwriter of the outstanding securities of the
debtor;
Illegal acts or conduct in the performance of his duties and
powers; he is related by consanguinity or affinity within the fourth civil
degree to any individual creditor, owners of a sale proprietorship-
Lack of qualification or presence of any disqualification; debtor, partners of a partnership- debtor or to any stockholder,
director, officer, employee or underwriter of a corporation-debtor;
Conflict of interest that arises after his appointment; and or
Manifest lack of independence that is detrimental to the he has any other direct or indirect material interest in the
general body of the stakeholders. debtor or any of the creditors.
RA 10142, Sec. 33 Compensation and Terms of Service. The Any rehabilitation receiver, member of the management
rehabilitation receiver and his direct employees or independent committee or persons employed or contracted by them
contractors shall be entitled to compensation for reasonable fees possessing any conflict of interest shall make the appropriate
and expenses from the debtor according to the terms approved disclosure either to the court or to the creditors in case of out-of-
by the court after notice and hearing. Prior to such hearing, the court rehabilitation proceedings.
rehabilitation receiver and his direct employees shall be entitled
to reasonable compensation based on quantum meruit. Such Any party to the proceeding adversely affected by the
costs shall be considered administrative expenses. 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
RA 10142, Sec. 34 Oath and Bond of the Rehabilitation
withheld, the court may disregard the conflict of interest, taking
Receiver. Prior to entering upon his powers, duties and
into account the general interest of the stakeholders.
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.
!
Rules on Rehabilitation Receivers Lack of particular or required specialized
The Rehabilitation Receiver competency required by the case
o May be a natural or juridical person. Illegal acts or conduct in the performance of duties
o If it is a juridical person, it must designate one or more
natural persons who shall possess all the qualifications Lack of qualification or presence of any
and none of the disqualifications (see below) as its disqualification
representative. Conflict of interest, which arose after appointment
The representative(s) shall be solidarily liable with the Manifest lack of independence that is detrimental
juridical entity for the obligations and responsibilities to the stakeholders
as the appointed receiver
Compensation
Qualifications o The receiver, and his employees and/or independent
o Citizen of the Phils., OR a resident of the Phils. for at least contractors are entitled to compensation on a quantum
6 months preceding his/her/its nomination meruit basis, in accordance with terms approved by the
o Of good moral character and with acknowledged integrity, court.
impartiality and independence o The compensation of the receiver et. al. is considered as
o Has requisite knowledge of insolvency laws, and other administrative expenses
relevant commercial laws, rules, and procedures, as well
as relevant training and/or experience Oath and Bond
o No conflict of interest (see more rules below) o Prior to assumption of his duties, the receiver is required
This requirement may however be waived expressly or to take an oath and file a bond, the amount of which shall
impliedly by the party who may be prejudiced be fixed by the court.
NOTE: Other qualifications and disqualifications shall be set
forth in the procedural rules, considering the nature of the Conflicts of Interest
o GR: No person with conflict of interest may be
debtor’s business, and the interest of all stakeholders.
appointed as receiver or part of the management
Appointment and Vacancy committee, or employed by both. EX: The party, who may
Court shall initially appoint the receiver (may or may not be be injured, may expressly or
among the nominees of the petitioner) impliedly waive this disqualification. PROV: If waiver is
During the initial hearing, creditors and the debtor, who are unreasonably withheld, the court may disregard the
not petitioners, may nominate other persons. conflict of interest, with the general interest of the
Court may retain the receiver initially appointed OR appoint stakeholders in mind.
a new one (may or may not be among new nominees) Badges of Conflict of Interest:
PROV: If debtor is a securities market participant, the He is a creditor, owner, partner, or stockholder of the
court shall give priority to the nominee of the debtor
appropriate securities or investor protection fund. Is a business competitor of the debtor
If the qualified receiver is nominated by more than 50% of Was a director, officer, owner, partner, or employee of
the secured creditors and the general unsecured the debtor, or any of the creditors, or the auditor or
creditors, AND satisfactory evidence is submitted, the accountant of the debtor, WITHIN the last 5 years
said qualified receiver shall be appointed by the court. preceding the filing of the petition
In case the position becomes vacated for any reason, the An underwriter of the outstanding securities of the
court shall direct the debtor and the creditors to submit debtor WITHIN the last 2 years preceding the filing of
names of nominees. The court may appoint from this list the petition
or any other person qualified. Related to by consanguinity or affinity within the 4th
civil degree to any of the ff:
Removal creditor,
The Court may, either motu proprio, OR upon motion by any owner(s) of a sole proprietorship-debtor,
creditor(s) holding more than 50% of the debtor’s total partners of a partnership-debtor,
obligations, remove the receiver on the following grounds: Stockholder, director, officer, employee, or
Those provided by the rules of procedure; and/or underwriter of a corporation-debtor
Including the ff. but not limited to: He has any other direct or indirect material interest in
Incompetence, gross negligence, failure to the debtor or any of the creditors
perform, or failure to exercise the proper degree of Conflicts of interest should be disclosed appropriately by the
care in the performance of duties receiver or members of the management committee, to
the court, or to the creditors (in case of out-of-court
rehabilitation proceedings)

!
2) Powers, Duties and Responsibilities (d)To evaluate the validity, genuineness and true amount of all
the claims against the debtor;
RA 10142, Sec. 47 Management. - Unless otherwise provided
herein, the management of the juridical debtor shall remain with (e)To take possession, custody and control, and to preserve the
the existing management subject to the applicable law/s and value of all the property of the debtor;
agreement/s, if any, on the election or appointment of directors,
managers Or managing partner. However, all disbursements, (f)To sue and recover, with the approval of the court, all amounts
payments or sale, disposal, assignment, transfer or owed to, and all properties pertaining to the debtor;
encumbrance of property , or any other act affecting title or
interest in property, shall be subject to the approval of the (g)To have access to all information necessary, proper or
rehabilitation receiver and/or the court, as provided in the relevant to the operations and business of the debtor and for its
following subchapter. rehabilitation;
RA 10142, Sec. 24 Report of the Rehabilitation Receiver. - To sue and recover, with the. approval of the court, all
Within forty (40) days from the initial hearing and with or without property or money of the debtor paid, transferred or disbursed in
the comments of the creditors or any of them, the rehabilitation fraud of the debtor or its creditors, or which constitute undue
receiver shall submit a report to the court stating his preliminary preference of creditor/s;
findings and recommendations on whether:
To monitor the operations and the business of the debtor to
the debtor is insolvent and if so, the causes thereof and any ensure that no payments or transfers of property are made other
unlawful or irregular act or acts committed by the owner/s of a than in the ordinary course of business;
sole proprietorship partners of a partnership or directors or
officers of a corporation in contemplation of the insolvency of the With the court's approval, to engage the services of or to
debtor or which may have contributed to the insolvency of the employ persons or entities to assist him in the discharge of his
debtor; functions;
the underlying assumptions, the financial goals and the To determine the manner by which the debtor may be best
procedures to accomplish such goals as stated in the petitioner's rehabilitated, to review) revise and/or recommend action on the
Rehabilitation Plan are realistic, feasible and reasonable; Rehabilitation Plan and submit the same or a new one to the
court for approval;
there is a substantial likelihood for the debtor to be
To implement the Rehabilitation Plan as approved by the
successfully rehabilitated;
court, if 80 provided under the Rehabilitation Plan;
the petition should be dismissed; and
To assume and exercise the powers of management of the
the debtor should be dissolved and/or liquidated. debtor, if directed by the court pursuant to Section 36 hereof;
To exercise such other powers as may, from time to time, be

RA 10142, Sec. 31 Powers, Duties and Responsibilities of the
conferred upon him by the court; and
Rehabilitation Receiver. - The rehabilitation receiver shall be
deemed an officer of the court with the principal duty of
To submit a status report on the rehabilitation proceedings every
preserving and maximizing the value of the assets of the debtor
quarter or as may be required by the court motu proprio. or upon
during the rehabilitation proceedings, determining the viability of
motion of any creditor. or as may be provided, in the
the rehabilitation of the debtor, preparing and recommending a
Rehabilitation Plan.
Rehabilitation Plan to the court, and implementing the approved
Rehabilitation Plan, To this end, and without limiting the
Unless appointed by the court, pursuant to Section 36 hereof,
generality of the foregoing, the rehabilitation receiver shall have
the rehabilitation receiver shall not take over the management
the following powers, duties and responsibilities:
and control of the debtor but may recommend the appointment
of a management committee over the debtor in the cases
(a)To verify the accuracy of the factual allegations in the petition
provided by this Act.
and its annexes;
(b)To verify and correct, if necessary, the inventory of all of the

assets of the debtor, and their valuation;
(c)To verify and correct, if necessary, the schedule of debts and

liabilities of the debtor;

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RA 10142, Sec. 39 Employment of Professionals. - Upon e. Creditors’ Committees
approval of the court, and after notice and hearing, the
rehabilitation receiver or the management committee may RA 10142, Sec. 42 Creditors' Committee. - After the creditors'
employ specialized professionals and other experts to assist meeting called pursuant to Section 63 hereof, the creditors
each in the performance of their duties. Such professionals and belonging to a class may formally organize a committee among
other experts shall be considered either employees or
independent contractors of the rehabilitation receiver or the themselves. In addition, the creditors may, as a body, agree to
management committee, as the case may be. The qualifications form a creditors' committee composed of a representative from
and disqualification’s of the professionals and experts may be each class of creditors, such as the following:
set forth in procedural rules, taking into consideration the nature
of the business of the debtor and the need to protect the interest Secured creditors;
of all stakeholders concerned.
Unsecured creditors;
RA 10142, Sec. 41 Immunity. - The rehabilitation receiver and all
persons employed by him, and the members of the management Trade creditors and suppliers; and
committee and all persons employed by it, shall not be subject to
any action. claim or demand in connection with any act done or Employees of the debtor.
omitted to be done by them in good faith in connection with the
In the . election of the creditors' representatives, the
exercise of their powers and functions under this Act or other
actions duly approved by the court.1awp++il rehabilitation receiver or his representative shall attend such
meeting and extend the appropriate assistance as may be
Since the purpose of rehabilitation is to preserve a defined in the procedural rules.
floundering business as a going concern, presuming that the
assets of the business are more valuable if maintained, RA 10142, Sec. 43 Role of Creditors' Committee. - The
rather than liquidated. creditors' committee when constituted pursuant to Section 42 of
o “Going concern” – a concept in accounting which refers to this Act shall assist the rehabilitation receiver in communicating
an underlying assumption that a company or other entity with the creditors and shall be the primary liaison between the
will be able to continue operating for a period of time that rehabilitation receiver and the creditors. The creditors' committee
is sufficient to carry out its commitments, obligations, cannot exercise or waive any right or give any consent on behalf
objectives, and so on. In other words, the company will of any creditor unless specifically authorized in writing by such
not have to liquidate or be forced out of business in the creditor. The creditors' committee may be authorized by the
foreseeable future.2 court or by the rehabilitation receiver to perform such other tasks
Hence, the effect is that the debtor maintains control of its and functions as may be defined by the procedural rules in order
business and property, referred to as the principle of debtor- to facilitate the rehabilitation process.
in-possession/debtor-in-place.
RA 10142, Sec. 8 Decisions of Creditors. - Decisions of creditors
Debtor-in-Possession or Debtor-in-Place shall be made according to the relevant provisions of the
GR: The debtor maintains control of his business and Corporation Code in the case of stock or nonstock corporations
property. or the Civil Code in the case of partnerships that are not
The receiver is instead tasked with the following inconsistent with this Act.
responsibilities:
o Preserving and maximizing the value of the assets of the
RA 10142, Sec. 9 Creditors Representatives. - Creditors may
debtor during the rehabilitation proceedings
designate representatives to vote or otherwise act on their behalf
o Determining the viability of the rehabilitation of the debtor
by filing notice of such representation with the court and serving
a copy on the rehabilitation receiver or liquidator.
o Preparing and recommending a Rehabilitation Plan to the
court; and,
o Implementing the Rehabilitation Plan Classification of Creditors, in context of insolvency:
PROV: The debtor needs to secure the approval of the Secured Creditors – creditors who have in their favor
receiver or the court for the ff. acts: special preferred credits under Art. 2241 & 2242
o Disbursements affecting title or interest in property Unsecured Creditors – creditors having only personal
o Payments affecting title or interest in property security transactions in their favor
o Sale, disposal, assignment, transfer, or encumbrance of
property
o Any other act affecting title or property
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2!Source: http://www.accountingcoach.com/blog/going-concern

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Rules on Creditors’ Committees In case the court appoints the rehabilitation receiver to assume
Classes of Creditors the powers of management of the debtor. the court may:
o Secured
o Unsecured require the rehabilitation receiver to post an additional bond;
o Trade Creditors and Suppliers
o Employees of the Debtor authorize him to engage the services or to employ persona or
entities to assist him in the discharge of his managerial
Formation functions; and
o Creditors belonging to a class may form a committee.
o The creditors, as a whole, may also form a committee, authorize a commensurate increase in his compensation.
with each class having one representative each, sitting in
the committee.
RA 10142, Sec. 37 Role of the Management Committee. –
When appointed pursuant to the foregoing section, the
Role and Powers
management committee shall take the place of the management
o Assist the receiver in communicating with the creditors by
and the governing body of the debtor and assume their rights
acting as the primary liaison of the class of creditors.
GR: The committee cannot exercise or waive any rights of and responsibilities.
the creditors they represent, nor give any consent on
behalf of any creditor. EX: Unless specifically authorized The specific powers and duties of the management committee,
whose members shall be considered as officers of the court,
in writing by such creditor.
shall be prescribed by the procedural rules.
The committee may be authorized by the court or by the
rehabilitation receiver to perform such other tasks and RA 10142, Sec. 38 Qualifications of Members of the
functions as may be necessary. Management Committee. - The qualifications and
disqualification’s of the members of the management committee
Management Committee shall be set forth in the procedural rules, taking into
consideration the nature of the business of the debtor and the
RA 10142, Sec. 47 Management. - Unless otherwise provided need to protect the interest of all stakeholders concerned.
herein, the management of the juridical debtor shall remain with
the existing management subject to the applicable law/s and GR: The principle of debtor-in-possession/debtor-in-place is
agreement/s, if any, on the election or appointment of directors, observed. Rehabilitation Receiver DOES NOT take over control
managers Or managing partner. However, all disbursements, and management of the debtor.
payments or sale, disposal, assignment, transfer or
encumbrance of property , or any other act affecting title or EX: The FRIA authorizes the Receiver or a Management
interest in property, shall be subject to the approval of the Committee, when ordered by the court, to assume the powers of
rehabilitation receiver and/or the court, as provided in the management of the debtor’s business upon a showing of clear
following subchapter. and convincing evidence of:
Actual or imminent danger of dissipation, loss, wastage, or
RA 10142, Sec. 36 Displacement of Existing Management by destruction of the debtor’s assets or other properties; OR,
the Rehabilitation Receiver or Management Committee. – Upon Paralysis of the business operations of the debtor; OR,
motion of any interested party, the court may appoint and direct Gross mismanagement of the debtor, or fraud, or other
the rehabilitation receiver to assume the powers of management wrongful conduction on the part of, or gross or willful violation
of the debtor, or appoint a management committee that will of the FRIA by the existing management of the debtor, or the
undertake the management of the debtor. upon clear and owner, partner, director, officer, or representatives in
convincing evidence of any of the following circumstances: management of the debtor.
Actual or imminent danger of dissipation, loss, wastage or

destruction of the debtor’s assets or other properties;
Paralyzation of the business operations of the debtor; or
Gross mismanagement of the debtor. or fraud or other

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

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g. Claims
Creditors should file the claims with the court at least 5 days
RA 10142, Sec. 4 before the initial hearing
Claim shall refer to all claims or demands of whatever nature The claims must be supported by sufficient evidence, to be
or character against the debtor or its property, whether for properly included in the registry of claims.
money or otherwise, liquidated or unliquidated, fixed or Claims may be subject to an opposition or a challenge as to
contingent, matured or unmatured, disputed or undisputed, their validity, within 30 days from the expiration of the 20-day
including, but not limited to; (1) all claims of the government, period given to the receiver to make available the registry of
whether national or local, including taxes, tariffs and customs claims.
duties; and (2) claims against directors and officers of the debtor Goal: to have undisputed claims
arising from acts done in the discharge of their functions falling
within the scope of their authority: Provided, That, this inclusion Determination of Claims
does not prohibit the creditors or third parties from filing cases The Rehab Receiver will “clean up” all the claims (one side
against the directors and officers acting in their personal of the equation). The other side involves the assets, which
capacities. will be used to pay for the claims
The Rehab Receiver will fix all the claims and assets
1) Determination of Claims (complete and stable condition) for purposes of arriving at a
Rehabilitation Plan that is viable
Determination of claims is important for the TREATMENT OF Start with a PETITION (important) because it contains the
CLAIMS, which are contained in the Rehabilitation Plan. To schedule of the debtor’s debts and liabilities
arrive at the Rehab Plan, you must have a Registry of Claims
where you determine the Claims against the debtor. 2) Treatment of Claims
RA 10142, Sec. 16 Commencement of Proceedings and Once you identify the claims, you determine how they are going
Issuance of a Commencement Order. - The rehabilitation to be treated.
proceedings shall commence upon the issuance of the
Claims are stayed first, then you determine if they are preferred
Commencement Order, which shall: xxx
or not.
summarize the requirements and deadlines for creditors to
establish their claims against the debtor and direct all creditors to a) Secured Creditor Claims
their claims with the court at least five (5) days before the initial
hearing; RA 10142, Sec. 4
Secured creditor shall refer to a creditor with a secured
RA 10142, Sec. 44 Registry of Claims. - Within twenty (20) days claim.
from his assumption into office, the rehabilitation receiver shall
establish a preliminary registry of claims. The rehabilitation RA 10142, Sec. 60 No Diminution of Secured Creditor Rights.
receiver shall make the registry available for public inspection The issuance of the Commencement Order and the Suspension
and provide publication notice to the debtor, creditors and or Stay Order, and any other provision of this Act, shall not be
stakeholders on where and when they may inspect it. All claims deemed in any way to diminish or impair the security or lien of a
included in the registry of claims must be duly supported by secured creditor, or the value of his lien or security, except that
sufficient evidence. his right to enforce said security or lien may be suspended
during the term of the Stay Order.
RA 10142, Sec. 45 Opposition or Challenge of Claims. – Within
The court, upon motion or recommendation of the rehabilitation
thirty (30) days from the expiration of the period stated in the
receiver, may allow a secured creditor to enforce his security or
immediately preceding section, the debtor, creditors,
lien, or foreclose upon property of the debtor securing his/its
stakeholders and other interested parties may submit a
claim, if the said property is not necessary for the rehabilitation
challenge to claim/s to the court, serving a certified copy on the
of the debtor. The secured creditor and/or the other lien holders
rehabilitation receiver and the creditor holding the challenged
shall be admitted to the rehabilitation proceedings only for the
claim/so Upon the expiration of the thirty (30)-day period, the
balance of his claim, if any.
rehabilitation receiver shall submit to the court the registry of
claims which shall include undisputed claims that have not been
subject to challenge.
RA 10142, Sec. 46 Appeal. - Any decision of the rehabilitation

receiver regarding a claim may be appealed to the court.

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RA 10142, Sec. 61 Lack of Adequate Protection. - The court, on During the proceedings, the Court, on motion or motu proprio
motion or motu proprio, may terminate, modify or set conditions may terminate, modify, or set conditions for the
for the continuance of suspension of payment, or relieve a claim continuance of the Stay or Suspension Order, or relieve a
from the coverage thereof, upon showing that: (a) a creditor claim from its coverage, if:
does not have adequate protection over property securing its A secured creditor does not have adequate protection over
claim; or its security, or
The value of the claim secured by a lien on the property,
the value of a claim secured by a lien on property which is not which is not necessary for rehabilitation, exceeds the fair
necessary for rehabilitation of the debtor exceeds the fair market market value of the property.
value of the said property. The Rehabilitation Plan shall specify the treatment of each
class or subclass of creditors, and shall provide equal
For purposes of this section, a creditor shall be deemed to lack treatment of all claims within the same class or subclass,
adequate protection if it can be shown that: UNLESS a particular creditor voluntarily agrees to a less
favorable treatment.
the debtor fails or refuses to honor a pre-existing agreement The Rehabilitation Plan must ensure that the payments under
with the creditor to keep the property insured; the plan follow the priority established by the Civil Code on
concurrence and preference of credits, and MUST maintain
the debtor fails or refuses to take commercially reasonable the security interest of secured creditors and preserve the
steps to maintain the property; or liquidation value of the security, UNLESS waived or modified
voluntarily.
the property has depreciated to an extent that the creditor is
under secured. b) Employee Claims
Upon showing of a lack of protection, the court shall order the
debtor or the rehabilitation receiver to make arrangements to This is stayed first, then determine whether preffered or not.
provide for the insurance or maintenance of the property; or to
make payments or otherwise provide additional or replacement RA 10142, Sec. 56 Treatment of Employees, Claims.
security such that the obligation is fully secured. If such Compensation of employees required to carry on the business
arrangements are not feasible, the court may modify the Stay shall be considered an administrative expense. Claims of
Order to allow the secured creditor lacking adequate protection separation pay for months worked prior to the commencement
to enforce its security claim against the debtor: Provided, date shall be considered a pre- ommencement claim. Claims for
however, That the court may deny the creditor the remedies in salary and separation pay for work performed after the
this paragraph if the property subject of the enforcement is commencement date shall be an administrative expense.
required for the rehabilitation of the debtor.
RA 10142, Sec. 16 Commencement of Proceedings and
Rules on Treatment of Secured Creditors Issuance of a Commencement Order. - The rehabilitation
Upon the issuance of the Commencement Order, all proceedings shall commence upon the issuance of the
creditors, including secured creditors, are precluded by the Commencement Order, which shall:
Stay or Suspension Order from obtaining an advantage or authorize the payment of administrative expenses as they
preference over one another. The principle observed is become due;
‘equality is equity,’ and all creditors, secured or unsecured,
stand on equal footing. (q) include s Stay or Suspension Order which shall:
The issuance of the said Commencement Order, however,
does NOT diminish or impair the security or lien of a secured prohibit the debtor from making any payment of its liabilities
creditor, nor its value; it only suspends the right of the outstanding as of the commencement date except as may be
secured creditor to enforce the security or lien during the provided herein.
term of the Stay or Suspension Order accompanying the
Commencement Order. Rules on Treatment of Employee Claims
During the proceedings, the Court, upon motion or Compensation of employees required to carry on the
recommendation of the receiver, may allow a secured business are treated as administrative expenses.
creditor to enforce the security or lien, or foreclose upon the Claims of separation pay for months worked PRIOR to the
property, IF the property is not necessary for the commencement date are treated as pre-commencement
rehabilitation of the debtor. claims.
Claims for salary and separation pay AFTER the
commencement are treated as administrative expenses.

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c) Excluded Claims in order to provide a substitute lien, mortgage or pledge of
property under this Act;
RA 10142, Sec. 23 Effect of Failure to File Notice of Claim. - A
creditor whose claim is not listed in the schedule of debts and for payments made to meet administrative expenses as they
liabilities and who fails to file a notice of claim in accordance with arise;
the Commencement Order but subsequently files a belated claim
shall not be entitled to participate in the rehabilitation for payments to victims of quasi delicts upon a showing that
proceedings but shall be entitled to receive distributions arising the claim is valid and the debtor has insurance to reimburse the
therefrom. debtor for the payments made;
Those with excluded claims cannot vote. They cannot be part of for payments made to repurchase property of the debtor that
creditors’ committees or management committees. is auctioned off in a judicial or extrajudicial sale under this Act; or
h. Treatment of Assets for payments made to reclaim property of the debtor held
pursuant to a possessory lien.
RA 10142, Sec. 47 Management. - Unless otherwise provided
herein, the management of the juridical debtor shall remain with Unencumbered Asset – property which has no lien attached
the existing management subject to the applicable law/s and thereto
agreement/s, if any, on the election or appointment of directors,
managers Or managing partner. However, all disbursements, On Use and Disposition
payments or sale, disposal, assignment, transfer or GR: No funds or property of the debtor shall be used or
encumbrance of property , or any other act affecting title or disposed of.
interest in property, shall be subject to the approval of the EX: Except in the ff. cases:
rehabilitation receiver and/or the court, as provided in the o In the ordinary course of the debtor’s business; or,
following subchapter. o If necessary to finance the administrative expenses of the
rehabilitation proceedings
1) Unencumbered Assets
On Sale (because of principle of debtor-in-place)
The court may authorize the receiver’s application to sell the
RA 10142, Sec. 48 Use or Disposition of Assets. - Except as
unencumbered property of the debtor, outside the ordinary
otherwise provided herein, no funds or property of the debtor
course of the debtor’s business, upon showing that the
shall he used or disposed of except in the ordinary course of property, by its nature or because of other circumstances, is
business of the debtor, or unless necessary to finance the o Perishable
administrative expenses of the rehabilitation proceedings. o Costly to maintain
o Susceptible to devaluation; or,
RA 10142, Sec. 49 Sale of Assets. - The court, upon application
o Otherwise in jeopardy
of the rehabilitation receiver, may authorize the sale of
unencumbered property of the debtor outside the ordinary On Rescission
course of business upon a showing that the property, by its GR: Court may rescind/declare as null and void, any
nature or because of other circumstance, is perishable, costly to sale/payment/transfer/conveyance of the unencumbered
maintain, susceptible to devaluation or otherwise injeopardy. property, or encumbering thereof by the debtor or its
agents/representatives after the commencement date, which
RA 10142, Sec. 52 Rescission or Nullity of Sale, Payment, are not in the ordinary course of the business of the debtor.
Transfer or Conveyance of Assets. - The court may rescind or PROV: Unencumbered property may be sold, encumbered,
declare as null and void any sale, payment, transfer or or otherwise disposed of, upon order of the court, after notice
conveyance of the debtor's unencumbered property or any and hearing if:
encumbering thereof by the debtor or its agents or o Such are in the interest of the administration of the debtor
representatives after the commencement date which are not in and facilitating the preparation and implementation of
the ordinary course of the business of the debtor: Provided, Rehab Plan
however, That the unencumbered property may be sold, o In order to provide a substitute lien, mortgage orpledge of
encumbered or otherwise disposed of upon order of the court property under this act
after notice and hearing: o For payments made to meet administrative expenses as
they arise
if such are in the interest of administering the debtor and o For payments to victims of quasi-delicts, upon a showing
facilitating the preparation and implementation of a Rehabilitation that the claim is valid and the debtor has insurance to
Plan; reimburse the debtor for payments made

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For payments made to repurchase property of the debtor RA 10142, Sec. 51 Assets of Debtor Held by Third Parties. – In
that is auctioned off in a judicial or extrajudicial sale under the case of possessory pledges, mechanic's liens or similar
this act claims, third parties who have in their possession or control
If foreclosed prior to commencement, it is NOT property of the debtor shall not transfer, conveyor otherwise
STAYED dispose of the same to persons other than the debtor, unless
If instituted after, it is STAYED upon prior approval of the rehabilitation receiver. The
For payments made to reclaim property of the debtor held rehabilitation receiver may also:
pursuant to a possessory lien demand the surrender or the transfer of the possession or
control of such property to the rehabilitation receiver or any other
Encumbered Assets
person, subject to payment of the claims secured by any
possessory Iien/s thereon;
RA 10142, Sec. 4
Encumbered property shall refer to real or personal property allow said third parties to retain possession or control, if such
of the debtor upon which a lien attaches. an arrangement would more likely preserve or increase the value
of the property in question or the total value of the assets of the
RA 10142, Sec. 17 Effects of the Commencement Order. - debtor; or
Unless otherwise provided for in this Act, the court's issuance of
a Commencement Order shall, in addition to the effects of a Stay undertake any otI1er disposition of the said property as may
or Suspension Order described in Section 16 hereof: be beneficial for the rehabilitation of the debtor, after notice and
hearing, and approval of the court.
prohibit or otherwise serve as the legal basis rendering null
and void the results of any extrajudicial activity or process to RA 10142, Sec. 53 Assets Subject to Rapid Obsolescence,
seize property, sell encumbered property, or otherwise attempt Depreciation and Diminution of Value. - Upon the application of a
to collection or enforce a claim against the debtor after secured creditor holding a lien against or holder of an ownership
commencement date unless otherwise allowed in this Act, interest in property held by the debtor that is subject to
subject to the provisions of Section 50 hereof; potentially rapid obsolescence, depreciation or diminution in
value, the court shall, after notice and hearing, order the debtor
RA 10142, Sec. 50 Sale or Disposal of Encumbered Property of or rehabilitation receiver to take reasonable steps necessary to
the Debtor and Assets of Third Parties Held by Debtor. The court prevent the depreciation. If depreciation cannot be avoided and
may authorize the sale, transfer, conveyance or disposal of such depreciation is jeopardizing the security or property interest
encumbered property of the debtor, or property of others held by of the secured creditor or owner, the court shall:
the debtor where there is a security interest pertaining to third allow the encumbered property to be foreclosed upon by the
parties under a financial, credit or other similar transactions if, secured creditor according to the relevant agreement between
upon application of the rehabilitation receiver and with the the debtor and the secured creditor, applicable rules of
consent of the affected owners of the property, or secured procedure and relevant legislation: Provided. That the proceeds
creditor/s in the case of encumbered property of the debtor and, of the sale will be distributed in accordance with the order
after notice and hearing, the court determines that: prescribed under the rules of concurrence and preference of
such sale, transfer, conveyance or disposal is necessary for credits; or
the continued operation of the debtor's business; and
upon motion of, or with the consent of the affected secured
the debtor has made arrangements to provide a substitute creditor or interest owner. order the conveyance of a lien against
lien or ownership right that provides an equal level of security for or ownership interest in substitute property of the debtor to the
the counter-party's claim or right. secured creditor: Provided. That other creditors holding liens on
such property, if any, do not object thereto, or, if such property is
Provided, That properties held by the debtor where the debtor not available;
has authority to sell such as trust receipt or consignment
arrangements may be sold or disposed of by the .debtor, if such order the conveyance to the secured creditor or holder . of an
sale or disposal is necessary for the operation of the debtor's ownership interest of a lien on the residual funds from the sale of
business, and the debtor has made arrangements to provide a encumbered property during the proceedings; or
substitute lien or ownership right that provides an equal level of
security for the counter-party's claim or right. allow the sale or disposition of the property: Provided. That
the sale or disposition will maximize the value of the property for
Sale or disposal of property under this section shall not give rise the benefit of the secured creditor and the debtor, and the
to any criminal liability under applicable laws. proceeds of the sale will be distributed in accordance with the
order prescribed under the rules of concurrence and preference
of credits.

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Encumbered Asset – property upon which a lien attaches Assets Subject to Rapid Obsolescence, Depreciation and
Diminution of Value
On Sale Who Are Concerned o
Object Secured Creditor(s)
o Encumbered property of the debtor; or, o Holder of An Ownership Interest
o Property of others held by the debtor where there is a Object
security interest pertaining to third parties under a o Property held by debtor, subject to rapid obsolescence,
financial, credit or other similar transactions depreciation, or diminution in value
Process Process
o Rehabilitation receiver makes an application o Concerned entity makes an application
o Consent of the ff. is secured: o Notice and hearing
Affected owners of the property if object of sale is o Court makes order to debtor or rehabilitation receiver to
their property; or, take reasonable steps necessary to prevent depreciation.
Secured creditor(s) if object of sale is the encumbered If the depreciation is inevitable and such depreciation
property of the debtor jeopardizes the security/property interest, the Court shall:
Notice and hearing o Allow property to be foreclosed upon by the secured
Requisites creditor, provided that proceeds of the sale will be
Such sale, transfer, conveyance or disposal of encumbered distributed according to rules on concurrence and
property is necessary for the continued operation of the preference of credits; or,
business; and, o Upon motion of or with consent of the affected secured
Debtor has made arrangements to provide a substitute lien creditor/interest owner, order the conveyance of a lien
or ownership right that provides an equal level of security against, or ownership interest in substitute property of the
for the counter-party’s claim or right. debtor to the secured creditor; provided that other
Proviso creditors holding liens on such property, if any, do not
Properties held by debtor, where it has authority to sell such object thereto, or if such property is not available:
properties under a trust receipt or consignment
arrangement, may be sold by it if such sale or disposal is Order conveyance to secured creditor/interest owner
(requisites): of a lien on the residual funds from the sale of the
Necessary for the operation of the debtor’s business; encumbered property during the proceedings; or,
AND, Allow the sale or disposition of the property, provided
Debtor has made arrangements to provide a that the sale or disposition will maximize the value of
substitute lien or ownership right that provides an the property for the benefit of the secured creditor and
equal level of security for the counter-party’s claim or the debtor, and the proceeds of the sale will be
right distributed in accordance with the order prescribed
No Criminal Liability under the rules of concurrence and preference of
Sale or disposal of property under this act shall not give rise credits.
to any criminal liability under the applicable laws.
On Assets of Debtor Held by Third Parties

GR: Third parties who have in their possession or control the
property of the debtor, shall not transfer, convey, or
otherwise dispose of the property.to other persons.
EX:
o Transfer is to the debtor itself.
o Rehabilitation Receiver approves such transfer/disposal
PROV:
o Demand the surrender or the transfer of the possession
or control of such property to the rehabilitation receiver or
any other person, subject to payment of the claims
secured by any possessory Iien(s) thereon;
o Allow said third parties to retain possession or control, if
such an arrangement would more likely preserve or
increase the value of the property in question or the total
value of the assets of the debtor; or,
o Undertake any other disposition of the said property as
may be beneficial for the rehabilitation of the debtor, after
notice and hearing, and approval of the court.

!
i. Treatment of Contracts 2) Avoidance Proceedings
1) Confirmation or Termination of Contracts RA 10142, Sec. 58 Rescission or Nullity of Certain Pre-

commencement Transactions. Any transaction occurring prior to
RA 10142, Sec. 57 Treatment of Contracts. - Unless cancelled commencement date entered into by the debtor or involving its
by virtue of a final judgment of a court of competent jurisdiction funds or assets may be rescinded or declared null and void on
issued prior to the issuance of the Commencement Order, or at the ground that the same was executed with intent to defraud a
anytime thereafter by the court before which the rehabilitation creditor or creditors or which constitute undue preference of
proceedings are pending, all valid and subbsisting contracts of creditors. Without limiting the generality of the foregoing, a
the debtor with creditors and other third parties as at the disputable presumption of such design shall arise if the
commencement date shall continue in force: Provided, That transaction:
within ninety (90) days following the commencement of
proceedings, the debtor, with the consent of the rehabilitation provides unreasonably inadequate consideration to the
receiver, shall notify each contractual counter-party of whether it debtor and is executed within ninety (90) days prior to the
is confirming the particular contract. Contractual obligations of commencement date;
the debtor arising or performed during this period, and
afterwards for confirmed contracts, shall be considered involves an accelerated payment of a claim to a creditor
administrative expenses. Contracts not confirmed within the within ninety (90) days prior to the commencement date;
required deadline shall be considered terminated. Claims for
actual damages, if any, arising as a result of the election to provides security or additional security executed within ninety
terminate a contract shall be considered a pre-commencement (90) days prior to the commencement date;
claim against the debtor. Nothing contained herein shall prevent
the cancellation or termination of any contract of the debtor for involves creditors, where a creditor obtained, or received the
any ground provided by law. benefit of, more than its pro rata share in the assets of the
debtor, executed at a time when the debtor was insolvent; or
RA 10142, Sec. 16
Commencement of Proceedings and Issuance of a is intended to defeat, delay or hinder the ability of the
Commencement Order. - The rehabilitation proceedings shall creditors to collect claims where the effect of the transaction is to
commence upon the issuance of the Commencement Order, put assets of the debtor beyond the reach of creditors or to
which shall: otherwise prejudice the interests of creditors.
authorize the payment of administrative expenses as they
Provided, however, That nothing in this section shall prevent the
become due;
court from rescinding or declaring as null and void a transaction
(q) include s Stay or Suspension Order which shall: on other grounds provided by relevant legislation and
prohibit the debtor from making any payment of its liabilities jurisprudence: Provided, further, That the provisions of the Civil
outstanding as of the commencement date except as may be Code on rescission shall in any case apply to these transactions.
provided herein.
RA 10142, Sec. 59 Actions for Rescission or Nullity. - (a) The
Confirmation – a valid and subsisting contract is confirmed rehabilitation receiver or, with his conformity, any creditor may
by notice to the contractual counter-party within 90 days from initiate and prosecute any action to rescind, or declare null and
the commencement of the proceedings void any transaction described in Section 58 hereof. If the
Termination – a valid and subsisting contract is terminated if rehabilitation receiver does not consent to the filing or
the 90-day period lapses without giving notice to the counter- prosecution of such action,
party for confirmation, but subject to a claim for actual
damages arising from the termination If leave of court is granted under subsection (a), the
rehabilitation receiver shall assign and transfer to the creditor all
Default: Valid and subsisting contracts shall continue to be in rights, title and interest in the chose in action or subject matter of
force, PROVIDED that within 90 days following the the proceeding, including any document in support thereof.
commencement of proceedings, a notification of confirmation
would be sent to notify the counter-party with the consent of the Any benefit derived from a proceeding taken pursuant to
rehabilitation receiver subsection (a), to the extent of his claim and the costs, belongs
exclusively to the creditor instituting the proceeding, and the
Confirmed Contracts: Considered administrative expenses surplus, if any, belongs to the estate.
Terminated Contracts: Claims arising from tese shall be
considered a pre-commencement claim against the debtor

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Where, before an order is made under subsection (a), the j. Rehabilitation Plan
rehabilitation receiver (or liquidator) signifies to the court his
readiness to institute the proceeding for the benefit of the 1) General Concepts
creditors, the order shall fix the time within which he shall do so
and, m that case, the benefit derived from the proceeding, if RA 10142, Sec. 4
instituted within the time limits so fixed, belongs to the estate. Rehabilitation Plan shall refer to a plan by which the financial
well-being and viability of an insolvent debtor can be restored
This proceeding permits certain transactions to be rescinded using various means including, but not limited to, debt
or nullified, and the asset transferred pursuant to the said forgiveness, debt rescheduling, reorganization or quasi-
rescinded or nullified transaction to be recovered for the reorganization, dacion en pago, debt-equity conversion and sale
benefit of the creditors. 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
Who may initiate: other similar arrangements as may be approved by the court or
Rehabilitation receiver or creditor, with the rehab receiver’s creditors.
conformity
If without rehabilitation receiver’s consent, creditor may seek RA 10142, Sec. 62 Contents of a Rehabilitation Plan. – The
leave of court Rehabilitation Plan shall, as a minimum:
Requisites for Rescission/Nullification specify the underlying assumptions, the financial goals and
Transactions were entered into by the debtor or involve the the procedures proposed to accomplish such goals;
debtor’s funds and assets;
Prior to the commencement date; compare the amounts expected to be received by the
Executed in fraud of creditors OR constitutes an undue creditors under the Rehabilitation Plan with those that they will
preference of creditors; generally, all fraudulent conveyances receive if liquidation ensues within the next one hundred twenty
and all preferential transafers. (120) days;
Badges of Fraud or Undue Preference of Creditors

The ff. transactions raise a disputable presumption of fraud
or undue preference of creditors: contain information sufficient to give the various classes of
o Those that provide unreasonably inadequate creditors a reasonable basis for determining whether supporting
consideration to the debtor and is executed 90 days prior the Plan is in their financial interest when compared to the
to the commencement date immediate liquidation of the debtor, including any reduction of
o Those which involves an accelerated payment of a claim principal interest and penalties payable to the creditors;
to a creditor within the 90 days prior to the
commencement date establish classes of voting creditors;
o Those which provide security or additional security
executed within the 90 days prior to the commencement establish subclasses of voting creditors if prior approval has
date
been granted by the court;
o Those involving creditors, where a creditor obtained or
received the benefit of more than its pro rata share in the
indicate how the insolvent debtor will be rehabilitated
assets of the debtor, which was executed during the time
including, but not limited to, debt forgiveness, debt rescheduling,
that debtor was insolvent
reorganization or quasi-reorganization. dacion en pago, debt-
o Those intended to defeat, delay, or hinder the ability of
equity conversion and sale of the business (or parts of it) as a
the creditors to collect claims where the effect of the
going concern, or setting-up of a new business entity or other
transaction to put the assets of the debtor beyond the
similar arrangements as may be necessary to restore the
creditors’ reach.
financial well-being and visibility of the insolvent debtor;
specify the treatment of each class or subclass described in

subsections (d) and (e);
provide for equal treatment of all claims within the same class
or subclass, unless a particular creditor voluntarily agrees to less
favorable treatment;
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;

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maintain the security interest of secured creditors and RA 10142, Sec. 54 Post-commencement Interest. - The rate and
preserve the liquidation value of the security unless such has term of interest, if any, on secured and unsecured claims shall
been waived or modified voluntarily; be determined and provided for in the approved Rehabilitation
Plan.
disclose all payments to creditors for pre-commencement
debts made during the proceedings and the justifications thereof; RA 10142, Sec. 55 Post-commencement Loans and Obligations.
- With the approval of the court upon the recommendation of the
rehabilitation receiver, the debtor, in order to enhance its
describe the disputed claims and the provisioning of funds to rehabilitation. may:
account for appropriate payments should the claim be ruled valid enter into credit arrangements; or
or its amount adjusted;
enter into credit arrangements, secured by mortgages of its
identify the debtor's role in the implementation of the Plan; unencumbered property or secondary mortgages of encumbered
property with the approval of senior secured parties with regard
state any rehabilitation covenants of the debtor, the breach of
to the encumbered property; or
which shall be considered a material breach of the Plan;
incur other obligations as may be essential for its
identify those responsible for the future management of the
rehabilitation.
debtor and the supervision and implementation of the Plan, their
affiliation with the debtor and their remuneration; The payment of the foregoing obligations shall be considered
administrative expenses under this Act.
address the treatment of claims arising after the confirmation
of the Rehabilitation Plan; FRIA – provides means for execution of the Rehabilitation
Plan, which may include:
require the debtor and its counter-parties to adhere to the Debt forgiveness, or Condonation or waiver of certain
terms of all contracts that the debtor has chosen to confirm; claims
Debt rescheduling, or extension of time for payment of
arrange for the payment of all outstanding administrative
claim
expenses as a condition to the Plan's approval unless such Reorganization or quasi-reorganization, or change in
condition has been waived in writing by the creditors concerned; equity, corporate or operating structure of the debtor
Dacion en pago, or the assignment of assets as payment
arrange for the payment" of all outstanding taxes and
for certain claims
assessments, or an adjusted amount pursuant to a compromise Debt to equity conversion, or the issuance of ownership
settlement with the BlR Or other applicable tax authorities; interests as payment for certain claims
Sale of the business to generate income to pay off claims
include a certified copy of a certificate of tax clearance or
evidence of a compromise settlement with the BIR; Setting up of new business entities, as part of a
reorganization
include a valid and binding r(,solution of a meeting of the
debtor's stockholders to increase the shares by the required 2) Cram Down Effect
amount in cases where the Plan contemplates an additional
issuance of shares by the debtor; The goal is to have creditor approve the Rehabilitation Plan.
state the compensation and status, if any, of the rehabilitation

The concept of classes of creditors is found in the Registry of
receiver after the approval of the Plan; and
Claims, based on the creditor’s submissions.
contain provisions for conciliation and/or mediation as a

RA 10142, Sec. 63 Consultation with Debtor and Creditors. – if
prerequisite to court assistance or intervention in the event of
the court gives due course to the petition, the rehabilitation
any disagreement in the interpretation or implementation of the
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.
RA 10142, Sec. 4
Voting creditor shall refer to a creditor that is a member of a
class of creditors, the consent of which is necessary for the approval
of a Rehabilitation Plan under this Act.

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RA 10142, Sec. 64 Creditor Approval of Rehabilitation Plan. – RA 10142, Sec. 67 Hearing on the Objections. - If objections
The rehabilitation receiver shall notify the creditors and have been submitted during the relevant period, the court shall
stakeholders that the Plan is ready for their examination. Within issue an order setting the time and date for the hearing or
twenty (2Q) days from the said notification, the rehabilitation hearings on the objections.
receiver shall convene the creditors, either as a whole or per
class, for purposes of voting on the approval of the Plan. The If the court finds merit in the objection, it shall order the
Plan shall be deemed rejected unless approved by all classes of rehabilitation receiver or other party to cure the defect, whenever
creditors w hose rights are adversely modified or affected by the feasible. If the court determines that the debtor acted in bad
Plan. For purposes of this section, the Plan is deemed to have faith, or that it is not feasible to cure the defect, the court shall
been approved by a class of creditors if members of the said convert the proceedings into one for the liquidation of the debtor
class holding more than fifty percent (50%) of the total claims of under Chapter V of this Act.
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 RA 10142, Sec. 68 Confirmation of the Rehabilitation Plan. – If
based on the registry of claims submitted by the rehabilitation no objections are filed within the relevant period or, if objections
receiver pursuant to Section 44 hereof. are filed, the court finds them lacking in merit, or determines that
the basis for the objection has been cured, or determines that
Notwithstanding the rejection of the Rehabilitation Plan, the court the debtor has complied with an order to cure the objection, the
may confirm the Rehabilitation Plan if all of the following
court shall issue an order confirming the Rehabilitation Plan.
circumstances are present:
(a)The Rehabilitation Plan complies with the requirements
specified in this Act. The court may confirm the Rehabilitation Plan notwithstanding
unresolved disputes over claims if the Rehabilitation Plan has
The rehabilitation receiver recommends the confirmation of
made adequate provisions for paying such claims.
the Rehabilitation Plan;
For the avoidance of doubt, the provisions of other laws to the
The shareholders, owners or partners of the juridical debtor contrary notwithstanding, the court shall have the power to
lose at least their controlling interest as a result of the approve or implement the Rehabilitation Plan despite the lack of
Rehabilitation Plan; and approval, or objection from the owners, partners or stockholders
of the insolvent debtor: Provided, That the terms thereof are
The Rehabilitation Plan would likely provide the objecting necessary to restore the financial well-being and viability of the
class of creditors with compensation which has a net present insolvent debtor.
value greater than that which they would have received if the
debtor were under liquidation. RA 10142, Sec. 69 Effect of Confirmation of the Rehabilitation
Plan, - The confirmation of the Rehabilitation Plan by the court
RA 10142, Sec. 65 Submission of Rehabilitation Plan to the
shall result in the following:
Court. – If the Rehabilitation Plan is approved, the rehabilitation
receiver shall submit the same to the court for confirmation. The Rehabilitation Plan and its provisions shall be binding
Within five (5) days from receipt of the Rehabilitation Plan, the upon the debtor and all persons who may be affected by . it,
court shall notify the creditors that the Rehabilitation Plan has including the creditors, whether or not such persons have
been submitted for confirmation, that any creditor may obtain participated in the proceedings or opposed the Rehabilitation
copies of the Rehabilitation Plan and that any creditor may file Plan or whether or not their claims have been scheduled;
an objection thereto.
The debtor shall comply with the provisions of the
RA 10142, Sec. 66 Filing of Objections to Rehabilitation Plan. – Rehabilitation Plan and shall take all actions necessary to carry
A creditor may file an objection to the Rehabilitation Plan within out the Plan;
twenty (20) days from receipt of notice from the court that the
Rehabilitation Plan has been submitted for confirmation. Payments shall be made to the creditors in accordance with
Objections to a Rehabilitation Plan shall be limited to the the provisions of the Rehabilitation Plan;
following:
(a) The creditors' support was induced by fraud; Contracts and other arrangements between the debtor and
its creditors shall be interpreted as continuing to apply to the
(b)The documents or data relied upon in the Rehabilitation Plan extent that they do not conflict with the provisions of the
are materially false or misleading; or Rehabilitation Plan;
(c)The Rehabilitation Plan is in fact not supported by the voting Any compromises on amounts or rescheduling of timing of
creditors. payments by the debtor shall be binding on creditors regardless
of whether or not the Plan is successfully implement; and
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Claims arising after approval of the Plan that are otherwise not proceedings or opposed the Rehabilitation Plan, or
treated by the Plan are not subject to any Suspension Order. whether or not their claims were scheduled
Although contracts and other arrangements between the
The Order confirming the Plan shall comply with Rules 36 of the debtor and its creditors are interpreted as continuing
Rules of Court: Provided, however, That the court may maintain to apply, this is only applicable to the extent that the
jurisdiction over the case in order to resolve claims against the contracts and arrangements do not conflict with the
debtor that remain contested and allegations that the debtor has provisions of the Rehabilitation Plan
breached the Plan. Requisites for a CRAM DOWN (must concur):
The Rehabilitation Plan complies with the
requirements specified in the FRIA
RA 10142, Sec. 70 Liability of General Partners of a Partnership
The Rehabilitation Receiver recommends the
for Unpaid Balances Under an Approved Plan. - The approval of
confirmation
the Plan shall not affect the rights of creditors to pursue actions
The shareholders, owners or partners of the
against the general partners of a partnership to the extent they
juridical debtor lose at least their controlling interest
are liable under relevant legislation for the debts thereof.
as a result of the Rehabilitation Plan
The Rehabilitation Plan would likely provide the
objecting class of creditors with compensation that
RA 10142, Sec. 71 Treatment of Amounts of Indebtedness or
has a net present value greater than that which
Obligations Forgiven or Reduced. - Amounts of any
they would have received if the debtor were under
indebtedness or obligations reduced or forgiven in connection
liquidation
with a Plan's approval shall not be subject to any tax in
furtherance of the purposes of this Act. The Court may also confirm a Rehabilitation Plan over the
objection of the owners, partners or stockholders of the
RA 10142, Sec. 72 Period for Confirmation of the Rehabilitation insolvent debtor, if the terms of the Plan are necessary to
Plan. - The court shall have a maximum period of one (1) year restore the financial wellbeing and viability of the insolvent
from the date of the filing of the petition to confirm a debtor
BPI v. SEC (2007) – Tinga, J.
If no Rehabilitation Plan is confirmed within the said period, the Petitioner: Bank of the Philippine Islands (formerly the FEBTC)
proceedings may upon motion or motu propio, be converted into Respondents: SEC, ASB Holdings, et. al.
one for the liquidation of the debtor . Concept: Rehabilitation Plan; Cram-Down Effect
RA 10142, Sec. 73 Accounting Discharge of Rehabilitation Doctrine:

Receiver. - Upon the confirmation of the Rehabilitation Plan, the The right against non-impairment of contract has no
rehabilitation receiver shall provide a final report and accounting application to an exercise of non-legislative power (i.e.,
to the court. Unless the Rehabilitation Plan specifically requires judicial or administrative powers for example)
and describes the role of the rehabilitation receiver after the The inclusion of a dacion en pago provision in the
approval of the Rehabilitation Plan, the court shall discharge the Rehabilitation Plan does not compel the creditor to accept
rehabilitation receiver of his duties. such an arrangement. Dacion en pago, being a form of sale
and hence, contractual by nature, will always require the
Creditors may approve a Rehabilitation Plan mutual consent of both parties.
Provided all classes of creditors whose rights are
adversely modified or affected by the Rehabilitation Brief Facts:
Plan approve it BPI lent P86.8 million to ASB. ASB executed a REM over 2
Rehabilitation plan is deemed approved by a class of properties in Greenhills as security for the loan. ASB was
creditors if members holding more than 50% of the subsequently placed under rehabilitation proceedings. The
total claims of the said class vote in favor of the Plan proposed Rehabilitation Plan in the said proceedings contained
FRIA refers to claims for calculating the minimum a stipulation that one of the mortgaged properties to BPI would
required vote be sold to fully satisfy the loan (a dacion en pago) while the
remaining property mortgaged would be released to be part of
The Court may confirm a Rehabilitation Plan over the the free property of ASB. BPI objected to the stipulation, claiming
objection of the creditors that it violated the right to and freedom of contract.
Referred to as a CRAM DOWN
The effect is that the confirmed Rehabilitation Plan ISSUE:
binds not only the insolvent debtor but also all WON the freedom to contract of BPI is violated by the
persons affected by it, including creditors, whether or Rehabilitation Plan (NO)
not such persons participated in the

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RATIO: There is no violation of the right and freedom to Pryce Corp v China Banking Corp (2014) – Leonen, J.
contract on the part of BPI. Petitioner: Pryce Corporation
SC: We have already resolved a similar issue in Metropolitan Respondents: China Banking Corporation
Bank & Trust Co. v. ASB Holdings. Concept: Cram Down Effect
o In that case, MBTC (who was also a secured creditor like
BPI) also refused to enter into a similar dacion en pago Doctrine:
arrangement in ASB’s proposed Rehabilitation Plan. CRAM-DOWN:
o MBTC argued under those provisions, there would be a The court may approve a rehabilitation plan even over the
forced transfer of properties and a diminution of its right to opposition of creditors holding a majority of the total
enforce its lien on the mortgaged properties, which runs liabilities of the debtor if, in its judgment, the rehabilitation
afoul against its right and freedom to contract, as well as of the debtor is feasible and the opposition of the
its right to due process. creditors is manifestly unreasonable.
o SC: There is no impairment of contract since the
approval of the Rehabilitation Plan and the appointment The rehabilitation plan, once approved, is binding upon the
of a receiver only suspends the actions for claims against debtor and all persons who may be affected by it, including
the debtor. Secured creditors like MBTC (and BPI, in the creditors, whether or not such persons have participated in
case at bar) may still enforce their preferred rights when the proceedings or have opposed the plan or whether or not
the assets of ASB will be liquidated. If the rehabilitation is their claims have been scheduled
found to be no longer feasible, the secured creditors will
still enjoy preference over unsecured ones. Brief Facts:
o SC: There is also no compulsion to enter into the dacion Pryce filed a petition for rehabilitation, which was found to be
en pago arrangement, nor to waive the interests, sufficient in form and substance. The rehabilitation receiver
penalties and charges since the provisions in the submitted an amended rehabilitation plan, which included the
Rehabilitation Plan that provide for them are merely
payment of the indebtedness to China Banking Corp. and BPI
considered as proposals; if they reject such proposals,
through a dacion en pago. The rehabilitation plan was approved,
then the Rehabilitation Plan provides that the obligations
finding Pryce eligible to be placed in a state of corporate
to the secured creditors will be settled with the mortgaged
rehabilitation. CBC appealed the order, and argued that the
properties at their selling prices.
approval impaired the obligation of contracts, while BPI filed a
The right against non-impairment of contracts is a right that
separate petition raising the same issues. The CA granted the
limits the exercise of legislative power, and not judicial nor
petitions. Pryce appealed the CA’s decision, but this was denied,
quasi-judicial powers.
along with subsequent MRs.
o Hence, the SEC’s approval the proposed plan containing
the provisions objected to by BPI cannot be considered ISSUES:
as a violation of the right against non-impairment of WON Rehabilitation Plan may be approved despite
contracts because the SEC was exercising quasi-judicial
objection of CBC (YES)
power then.
Whether the rehabilitation court is required to hold a hearing
SC: Also, by the contractual nature of dacion en pago, which
to comply with the “serious situations” test before issuing a
is a form of payment, it requires the consent of the parties
stay order (NO)
involved as one of its essential elements for its validity.
WON approval of rehabilitation plan violates constitutional
o Hence, dacion en pago may not validly be compelled
proscription against impairment of contractual obligations
upon BPI, contrary to its theory.
The SC also notes that the objected dacion en pago (NO)
arrangement is not the only proposed solution in the
RATIO:
1. Yes, the Rehabilitation Plan may be approved following
o It provides that if the said arrangement is rejected, then
the cram-down principle.
the mortgaged properties would be sold by ASB at selling
Interim Rules adopts the cram-down principle which
prices.
consists of 2 things:
Approval despite opposition
DISPOSITIVE: Petition denied; CA affirmed.
Binding effect of the approved plan
FIRST, Rehabilitation Court is allowed to approve
rehabilitation plan even over the opposition of creditors
holding a mahority of the total liabilities of the debtor if, in its
judgment, (1) the rehabilitation of the debtor is feasible
and (2) opposition of the credits is manifestly
unreasonable

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SECOND, Upon approval by the court, the rehabilitation suspension of actions takes effect only upon
plan and its provisions shall be binding upon the debtor and appointment of Rehabilitation Receiver
all persons who may be affected by it, including creditors, - Nevertheless, while the Interim Rules does not require a
whether or not such persons have participated in the hearing, neither does it prohibit the holding of one.
proceedings, or opposed the plan or whether or not their Trial court has ample discretion to call a hearing when it
claims have been scheduled is not confident that the allegations in the petition are
sufficient in form or substance, for so long as this
2. No, the “serious situations” test has been replaces with hearing is held within the 5-day period from the filing of
the “sufficiency in form and substance” test the petition
RCBC v. IAC: “Serious situations” – suspension of claims is This is in consonance with the important objectives of
counted only upon the appointment of a rehabilitation the Interim Rules: to promote a speedy disposition of
receiver and certain situations serious in nature must be corporate rehabilitation cases
shown to exist before one is appointed
o PD 902-A, certain situations must be shown to exist 3. No, the case does not involve a law or an executive
before a management committee may be created: issuance declaring the modification of the contract
(1) When there is imminent danger of dissipation, loss, hence, non-impairment clause may not be invoked
wastage or destruction of assets or other
properties; OR - Non-impairment clause must yield to the police power of
When there is a paralization of business operations the State. Property rights and contractual rights are not
of such corporations or entities which may be absolute.
prejudicial to the interest of minority stockholders, Successful rehabilitation of a distressed corporation will
party-litigants, or to the general public benefit its debtors, creditors, employees, and the
PD 902-A, certain situations must be shown to exist economy in general.
before a rehabilitation receiver may be appointed: - CRAM-DOWN:
Appointment is necessary in order to preserve the The court may approve a rehabilitation plan even over
rights of the parties-litigants; AND/OR the opposition of creditors holding a majority of the total
Protect the interest of the investing public and liabilities of the debtor if, in its judgment, the
creditors rehabilitation of the debtor is feasible and the
When SEC does not deem it necessary to appoint a opposition of the creditors is manifestly
receiver or create a management committee, it may be unreasonable.
assumed that there are sufficient assets to sustain the The rehabilitation plan, once approved, is binding upon
rehabilitation plan, and that creditors and investors are the debtor and all persons who may be affected by it,
amply protected. Suspension of actions for claims not including creditors, whether or not such persons have
necessary. participated in the proceedings or have opposed the
RCBC v. IAC was promulgated prior the effectivity of interim plan or whether or not their claims have been
rules (Dec. 15, 2000) scheduled
- Interim Rules states: “if court finds that the petition is - Corporate rehabilitation is one of the remedies for
sufficient in form and substance, it shall, not later than 5 businesses that experience a downturn.
days from the filing of petition, issue an Order (a) appointing Rather than leave the various creditors unprotected,
a rehabilitation receiver and (b) staying enforcement of all legislation now provides for an orderly procedure of
claims equitably and fairly addressing their concerns.
o Sufficient that the petition alleges all the material facts It provides a corporation’s owners a sound chance to
and includes all the documents required re-engage the market, hopefully with more vigor and
o Stay order and appointment of rehabilitation receiver is enlightened services, having learned from a painful
experience
an “extraordinary, preliminary, ex parte remedy”
 Effectivity period of a stay order is only from the A business that is about to incur tremendous losses
may not be able to pay all its creditors. Rather than
date of its issuance until dismissal of the petition or
leave it to the strongest and most resourceful amongst
termination of rehabilitation proceedings
them, the state steps in to equitably distribute the
 It is not a final disposition of the case
corporation’s limited resources
 It is an interlocutory order
Cram-down principle, in effect, dilutes contracts. When it
o Interim Rules does not require a hearing before the -
permits the approval of a rehabilitation plan over the
issuance of a stay order
opposition of creditors, or when it imposes a binding effect
Interim Rules removed the concept of an Interim
on all parties including those who did not participate in the
Receiver and replaced it with a Rehabilitation
proceedings, the burden of loss is shifted to creditors to
Receiver. This is to justify the immediate issuance
allow the corporation to rehabilitate itself from
of the stay order, because under PD 902-A,
insolvency

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Rather than let struggling corporations slip and vanish, the Doctrine:
better option is to allow courts to come in and apply the A rehabilitation plan may be approved even over the
process of corporate rehabilitation opposition of the creditors holding a majority of the
This option is preferred so as to avoid the TRAGEDY OF corporation’s total liabilities if there is a showing that
COMMONS (Garrett Hardin) rehabilitation is feasible and the opposition of the creditors is
o Coercive government regulation is necessary to prevent manifestly unreasonable. If a creditor, whose interests remain
the degradation of common-pool resources since well-preserved under the rehabilitation plan, still declines to
individual resource appropriators receive the full benefit accept interests pegged at reasonable rates and in turn
of their use and bear only a share of their cost proposes rates which are largely counter-productive to the
GAME THEORY rehabilitation, then it may be said that the creditor’s opposition is
o Since no individual has the right to control or exclude manifestly unreasonable.
others, each appropriator has a very high discount rate
with little incentive to efficiently manage the resource in Brief Facts:
order to guarantee future use Sarabia obtained a loan from BPI to finance the construction of a
o The cure is an exogenous policy (intervention) to new hotel building. Sarabia’s contractor defaulted in the
equitable distribute scarce resources performance of its obligations which caused the delay in the
o This will incentivize future creditors to continue lending, completion of the new building. Sarabia had to take over its
resulting in something productive rather than resulting construction, and as a result, its projected revenues tilted.
in nothing Sarabia filed a Petition for Rehabilitation as it foresaw the
GENERAL THEORY OF SECOND BEST
impossibility of meeting its maturing obligations when they fall
o Correction of one market imperfection will not
due. The Rehabilitation Plan fixed a uniform interest rate of
necessarily be efficiency-enhancing unless there is also
6.75% p.a. for all outstanding debts of Sarabia. BPI opposed the
simultaneous correction of all other market
interest rate, claiming that the same will not cover its cost of
imperfections
funds, which was at 10%.
o The correction of one market imperfection may adversely
affect market efficiency elsewhere
ISSUES:
o This theory is one justification for the passing of
WON Sarabia’s Rehabilitation Plan is feasible (YES)
corporate rehabilitation laws allowing the
WON the fixed interest rate of 6.75% p.a. should be affirmed
suspension of payments so that corporations can
(YES)
get back on their feet
Environment is never guaranteed; there are always risks.
RATIO:
Contracts are sacred as the law between parties but these
1. YES. Sarabia’s Rehabilitation Plan is feasible.
contracts exist within a society where nothing is risk-free,
Rehabilitation shall be undertaken when it is shown that the
and the government is constantly being called to attend
continued operation of the corporation is economically more
to the realities of the times
feasible and its creditors can recover, by way of present
Corporate rehabilitation is preferred for addressing social
value of payments projected in the plan, more, if the
costs:
corporation continues as a going concern than if it is
o Allowing corporation to rehabilitate will retain if not
immediately liquidated
increase employment; services will benefit the market,
Wonder Book Corporation v. Philippine Bank of
etc.
Communications
o Rehabilitation is available to corporations which, while
DISPOSITIVE: Motion GRANTED.
illiquid, have assets that can generate more cash if
used in its daily operations than sold
Pryce v. China Banking Corp.
o The remedy should be denied to corporations whose
This shows that interference in the proceedings is a valid
insolvency appears to be irreversible and whose sole
exercise of police power. purpose is to delay the enforcement of any of the rights
of its creditors, which rendered obvious by the
BPI v. Sarabia Manor Hotel Corp. (2013) – Perlas-Bernabe, following:
J. Petitioner: Bank of the Philippine Islands (BPI) Absence of a sound and workable business plan
Respondent: Sarabia Manor Hotel Corporation Concept: Baseless and unexplained assumptions, targets
Rehabilitation Plan and goals
Speculative capital infusion or complete lack
thereof for the execution of the business plan
Cash flow cannot sustain daily operations
Negative net worth and assets are near full
depreciation or fully depreciated

!
- Considerations: 2. YES. BPI’s opposition is unreasonable.
(1) If the examination of financial data show that there is a - Sec. 23, Rule 4 of the Interim Rules of Procedure on
real opportunity to rehabilitate the corporation in view Corporate Rehabilitation states that: “A rehabilitation plan
of the assumptions made and financial goals stated in may be approved even over the opposition of the
the proposed rehabilitation plan, then it may be said creditors holding a majority of the corporation’s total
that a rehabilitation is feasible liabilities if there is a showing that (1) rehabilitation is
If the results indicate that there lies no reasonable feasible and the (2) opposition of the creditors is
probability that the distressed corporation could be manifestly unreasonable.” – “Cram-down” clause
revived and that liquidation would better serve the This clause is necessary to curb the majority creditors’
interests of its stakeholders, then it may be said that natural tendency to dictate their own terms and
rehabilitation would not be feasible. In such case, the conditions to the rehabilitation, absent due regard to the
rehabilitation court may convert the proceedings into greater long-term benefit of all stakeholders.
one for liquidation. It forces the creditors to accept the terms and
Sarabia’s Rehabilitation Plan is feasible for the conditions of the rehabilitation plan, preferring long-term
following reasons: viability over immediate but incomplete recovery
(a) Sarabia has the financial capability to undergo - BPI’s proposal: original escalating interest rates of 7%, 8%,
rehabilitation 10%, 12%, and 14%, over 17 years be applied instead
- Financial history shows that it has the inherent - Court points out that oppositions which push for high
capacity to generate funds to repay its loan interest rates are generally frowned upon in rehabilitation
obligations if applied through the proper financial proceedings given that the inherent purpose is to find ways
framework and means to minimize the expenses during rehabilitation
Its business is not only an on0going but also a period
growing concern - If a creditor, whose interests remain well-preserved under
Despite financial constraints, Sarabia likewise the rehabilitation plan, still declines to accept interests
continues to be profitable pegged at reasonable rates and in turn proposes rates
Prospect of substantial and continuous revenue which are largely counter-productive to the rehabilitation,
generation is a realistic goal then it may be said that the creditor’s opposition is
Sarabia has the ability to have sustainable manifestly unreasonable
profits over a long period of time - Court finds BPI’s opposition to be manifestly unreasonable
Sarabia’s projected revenues shall have a steady considering that:
year-on-year growth from the time that it applied for The 6.75% p.a. interest rate already constitutes a
rehabilitation until the end of its rehabilitation plan reasonable interest rate which is concordant to
Sarabia’s projected rehabilitation
o 26% in 2003 BPI’s proposed escalating interest rates remain hinged
o 5% in 2004-2007 on the theoretical assumption of future fluctuations in
o 3% in 2008-2018 the market
Should projections come through, Sarabia would The 6.75% p.a. is actually higher than BPI’s perceived
have the ability not just to pay off its existing debts cost of money as evidenced by its published time
but also to carry on with its intended expansion deposit rate which is at 5.5%
Projected sustainability makes its rehabilitation a 6.75% p.a. is also higher than the benchmark ninety
more viable option to satisfy interests of its one-day commercial paper, which is used by banks to
stakeholders in the long run as compared to its price their loan averages to 6.4% p.a. in 3005, and has
immediate liquidation a three-year average rate of 6.57% p.a.
Interests of Sarabia’s creditors are well-protected. BPI’s interests are adequately protected by the
Adequate safeguards such as: maintenance of real estate mortgages and surety
Deficiency in the required minimum payments to agreement
creditors based on the presented amortization
schedule shall be paid personally by Sarabia’s
stockholders
Capital expenditures which are over and above
what is provided in the cash flow of the
rehabilitation plan are subject to Court’s approval
Maintenance of existing real estate mortgages over
hotel properties as collaterals and securities in
favor of BPI
Reinstatement of surety agreement of Sarabia’s
stockholders regarding the debt to BPI

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Notes: The Court on Rehabilitation: Upon a breach of, or upon a failure of the Rehabilitation Plan the
Rules on corporate rehabilitation have been crafted in order court, upon motion by an affected party may:
to five companies sufficient leeway to deal with debilitating Issue an order directing that the breach be cured within a
financial predicaments in the hope of restoring a sustainable specified period of time, falling which the proceedings may be
operating form if only to best accommodate the various converted to a liquidation;
interests of all its stakeholders: its stockholders, creditors,
and even the general public. Issue an order converting the proceedings to a liquidation;
Case law has defined corporate rehabilitation as an attempt
to conserve and administer the assets of an insolvent Allow the debtor or rehabilitation receiver to submit
corporation in the hope of its eventual return from financial amendments to the Rehabilitation Plan, the approval of which
stress to solvency shall be governed by the same requirements for the approval of
It contemplates the continuance of corporate life and a Rehabilitation Plan under this subchapter;
activities in an effort to restore and reinstate the corporation
to its former position of successful operation and liquidity Issue any other order to remedy the breach consistent with
Its purpose is to enable the company to gain a new lease on the present regulation, other applicable law and the best
life and thereby allow creditors to be paid their claims from interests of the creditors; or
its earnings
Enforce the applicable provisions of the Rehabilitation Plan
DISPOSITIVE: Petition denied. through a writ of execution.
BPI v. Sarabia Under breach or failure of Rehabilitation Plan:

Feasibility of manifest unreasonableness no longer applies. Numbers 1-2 result in a conversion.
Numbers 3-5 do not result in a termination.
k. Termination of Proceedings #3: starts all over again
#4: remedy of the breach
RA 10142, Sec. 74 Termination of Proceedings. - The #5: enforcement
rehabilitation proceedings under Chapter II shall, upon motion by
any stakeholder or the rehabilitation receiver be terminated by RA 10142, Sec. 75 Effects of Termination. - Termination of the
order of the court either declaring a successful implementation of proceedings shall result in the following:
the Rehabilitation Plan or a failure of rehabilitation. The discharge of the rehabilitation receiver subject to his
submission of a final accounting; and
The lifting of the Stay Order and any other court order
There is failure of rehabilitation in the following cases:
holding in abeyance any action for the enforcement of a claim
against the debtor.
Dismissal of the petition by the court;
Provided, however, That if the termination of proceedings is due
The debtor fails to submit a Rehabilitation Plan; to failure of rehabilitation or dismissal of the petition for reasons
other than technical grounds, the proceedings shall be
Under the Rehabilitation Plan submitted by the debtor, there
immediately converted to liquidation as provided in Section 92 of
is no substantial likelihood that the debtor can be rehabilitated
this Act.
within a reasonable period;
l. Conversion to Liquidation Proceedings
The Rehabilitation Plan or its amendment is approved by the
court but in the implementation thereof, the debtor fails to
RA 10142, Sec. 92 Conversion by the Court into Liquidation
perform its obligations thereunder or there is a failure to realize
Proceedings. - During the pendency of court-supervised or pre-
the objectives, targets or goals set forth therein, including the
negotiated rehabilitation proceedings, the court may order the
timelines and conditions for the settlement of the obligations due
conversion of rehabilitation proceedings to liquidation
to the creditors and other claimants;
proceedings pursuant to
Section 25(c) of this Act; or
The commission of fraud in securing the approval of the
Section 72 of this Act; or
Rehabilitation Plan or its amendment; and
Section 75 of this Act; or
Section 90 of this Act; or at any other time upon the
Other analogous circumstances as may be defined by the
recommendation of the rehabilitation receiver that the
rules of procedure.
rehabilitation of the debtor is not feasible. Thereupon, the court
shall issue the Liquidation Order mentioned in Section 112
hereof.

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Sec. 25 Giving Due Course to or Dismissal of Petition, or C. Pre-negotiated Rehabilitation
Conversion of Proceedings. - Within ten (10) days from receipt of
the report of the rehabilitation receiver mentioned in Section 24 RA 10142, Sec. 76 Petition by Debtor. - An insolvent debtor, by
hereof the court may: itself or jointly with any of its creditors, may file a verified petition
(c)convert the proceedings into one for the liquidation of the with the court for the approval of a pre-negotiated Rehabilitation
debtor upon a finding that: Plan which has been endorsed or approved by creditors holding
at least two-thirds (2/3) of the total liabilities of the debtor,
(1)the debtor is insolvent; and including secured creditors holding more than fifty percent (50%)
of the total secured claims of the debtor and unsecured creditors
(2)there is no substantial likelihood for the debtor to be holding more than fifty percent (50%) of the total unsecured
successfully rehabilitated as determined in accordance with claims of the debtor. The petition shall include as a minimum:
the rules to be promulgated by the Supreme Court.
Sec. 72 Period for Confirmation of the Rehabilitation Plan. - The a schedule of the debtor's debts and liabilities;
court shall have a maximum period of one (1) year from the date
an inventory of the debtor's assets;
of the filing of the petition to confirm a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed within the said period, the the pre-negotiated Rehabilitation Plan, including the names of
proceedings may upon motion or motu propio, be converted into at least three (3) qualified nominees for rehabilitation receiver;
one for the liquidation of the debtor . and
a summary of disputed claims against the debtor and a report

Sec. 75 Effects of Termination. - Termination of the proceedings
on the provisioning of funds to account for appropriate payments
shall result in the following:
should any such claims be ruled valid or their amounts adjusted.
The discharge of the rehabilitation receiver subject to his
submission of a final accounting; and
RA 10142, Sec. 77 Issuance of Order. - Within five (5) working
The lifting of the Stay Order and any other court order days, and after determination that the petition is sufficient in form
holding in abeyance any action for the enforcement of a claim and substance, the court shall issue an Order which shall;
against the debtor.
identify the debtor, its principal business of activity/ies and its
Provided, however, That if the termination of proceedings is due principal place of business;
to failure of rehabilitation or dismissal of the petition for reasons
other than technical grounds, the proceedings shall be declare that the debtor is under rehabilitation;
immediately converted to liquidation as provided in Section 92 of
summarize the ground./s for the filling of the petition;
this Act.
direct the publication of the Order in a newspaper of general

Sec. 90 Voluntary Liquidation. – xxx
circulation in the Philippines once a week for at least two (2)
At any time during the pendency of court-supervised or pre-
consecutive weeks, with the first publication to be made within
negotiated rehabilitation proceedings, the debtor may also
initiate liquidation proceedings by filing a motion in the same seven (7) days from the time of its issuance;
court where the rehabilitation proceedings are pending to
direct the service by personal delivery of a copy of the
convert the rehabilitation proceedings into liquidation
petition on each creditor who is not a petitioner holding at least
proceedings.
ten percent (10%) of the total liabilities of the debtor, as
xxx
determined in the schedule attached to the petition, within three
(3) days;
Rehabilitation and Liquidation cannot be undertaken at the
same time
state that copies of the petition and the Rehabilitation Plan are
Generally, it is only if there is a showing that the
available for examination and copying by any interested party;
rehabilitation of the insolvent debtor is no longer
economically feasible or does not provide better present
value recovery for the creditors that rehabilitation may be state that creditors and other interested parties opposing the
converted into liquidation petition or Rehabilitation Plan may file their objections or
comments thereto within a period of not later than twenty (20)
Rehabilitation = rescue
days from the second publication of the Order;
Liquidation = surrender

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appoint a rehabilitation receiver, if provided for in the Plan; RA 10142, Sec. 82 Effect of Approval. - Approval of a Plan
and under this chapter shall have the same legal effect as
confirmation of a Plan under Chapter II of this Act.
include a Suspension or Stay Order as described in this Act.
RA 10142, Sec. 92 Conversion by the Court into Liquidation
RA 10142, Sec. 78 Approval of the Plan. - Within ten (10) days Proceedings. - During the pendency of court-supervised or pre-
from the date of the second publication of the Order, the court negotiated rehabilitation proceedings, the court may order the
shall approve the Rehabilitation Plan unless a creditor or other conversion of rehabilitation proceedings to liquidation
interested party submits an objection to it in accordance with the proceedings pursuant to (a) Section 25(c) of this Act; or (b)
next succeeding section. 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
RA 10142, Sec. 79 Objection to the Petition or Rehabilitation the rehabilitation receiver that the rehabilitation of the debtor is
Plan. - Any creditor or other interested party may submit to the not feasible. Thereupon, the court shall issue the Liquidation
court a verified objection to the petition or the Rehabilitation Plan Order mentioned in Section 112 hereof.
not later than eight (8) days from the date of the second
publication of the Order mentioned in Section 77 hereof. The Pre-negotiated Rehabilitation
objections shall be limited to the following: an insolvency proceeding that commences as an
The allegations in the petition or the Rehabilitation Plan or the extrajudicial proceeding but terminates as a judicial one
attachments thereto are materially false or misleading; involves the negotiation and eventual approval of a Pre-
negotiated Rehabilitation Plan
The majority of any class of creditors do not in fact support
the Rehabilitation Plan; Pre-negotiated Rehabilitation Plan
A consensual contract between an insolvent debtor and its
The Rehabilitation Plan fails to accurately account for a claim creditors that amends or modifies the terms of the claims
against the debtor and the claim in not categorically declared as against the debtor
a contested claim; or Implies that the insolvent debtor has been able to obtain the
endorsement or approval of its creditors
The support of the creditors, or any of them was induced by
fraud. If the minimum vote requirement is reached, the debtor, by
itself or jointly with any of its creditors, may file a verified
Copies of any objection to the petition of the Rehabilitation Plan petition for the court approval of the Pre-negotiated
shall be served on the debtor, the rehabilitation receiver (if Rehabilitation Plan
applicable), the secured creditor with the largest claim and who If the minimum vote requirement is not reached, the
supports the Rehabilitation Plan, and the unsecured creditor with alternative is to file a petition under the provisions on
the largest claim and who supports the Rehabilitation Plan. Court-Supervised Rehabilitation
The MINIMUM VOTE REQUIREMENT under the FRIA for Pre-

RA 10142, Sec. 80 Hearing on the Objections. - After receipt of
negotiated Rehabilitation Plan is:
an objection, the court shall set the same for hearing. The date
Approval of the creditors holding at least 2/3 of the total
of the hearing shall be no earlier than twenty (20) days and no
liabilities of the debtor, including:
later than thirty (30) days from the date of the second publication
Secured creditors holding more than 50% of the total
of the Order mentioned in Section 77 hereof. If the court finds
secured claims of the debtor, and
merit in the objection, it shall direct the debtor, when feasible to
Unsecured creditors holding more than 50% of the total
cure the detect within a reasonable period. If the court
determines that the debtor or creditors supporting the unsecured claims of the debtor
Rehabilitation Plan acted in bad faith, or that the objection is
FRIA refers to liabilities insofar as all creditors are
non-curable, the court may order the conversion of the
concerned but refers to claims insofar as the two classes of
proceedings into liquidation. A finding by the court that the
creditors are concerned.
objection has no substantial merit, or that the same has been
o Ma’am Somera: Is the distinction appropriate, given the
cured shall be deemed an approval of the Rehabilitation Plan.
expansive definition of claims?
The confirmation of the Pre-negotiated Rehabilitation Plan
RA 10142, Sec. 81 Period for Approval of Rehabilitation Plan. -
by the court shall result in a CRAM DOWN—it binds not
The court shall have a maximum period of one hundred twenty
only the insolvent debtor but also all persons affected by it
days from the date of the filing of the petition to approve the
Rehabilitation Plan. If the court fails to act within the said period,
the Rehabilitation Plan shall be deemed approved.

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D. Out-of-Court Rehabilitation 2. Benefits of Out-of-Court Rehabilitation
RA 10142, Sec. 83 Out-of-Court or Informal Restructuring RA 10142, Sec. 85 Standstill Period. - A standstill period that
Agreements and Rehabilitation Plans. - An out-of-curt or informal may be agreed upon by the parties pending negotiation and
restructuring agreement or Rehabilitation Plan that meets the finalization of the out-of-court or informal restructuring/workout
minimum requirements prescribed in this chapter is hereby agreement or Rehabilitation Plan contemplated herein shall be
recognized as consistent with the objectives of this Act. effective and enforceable not only against the contracting parties
but also against the other creditors: Provided, That (a) such
RA 10142, Sec. 84 Minimum Requirements of Out-of-Court or agreement is approved by creditors representing more than fifty
Informal Restructuring Agreements and Rehabilitation Plans. - percent (50%) of the total liabilities of the debtor; (b) notice
For an out-of-court or informal restructuring/workout agreement thereof is publishing in a newspaper of general circulation in the
or Rehabilitation Plan to qualify under this chapter, it must meet Philippines once a week for two (2) consecutive weeks; and
the standstill period does not exceed one hundred twenty
the following minimum requirements:
(120) days from the date of effectivity. The notice must invite
The debtor must agree to the out-of-court or informal creditors to participate in the negotiation for out-of-court
restructuring/workout agreement or Rehabilitation Plan; rehabilitation or restructuring agreement and notify them that
said agreement will be binding on all creditors if the required
It must be approved by creditors representing at least sixty- majority votes prescribed in Section 84 of this Act are met.
seven (67%) of the secured obligations of the debtor;
RA 10142, Sec. 86 Cram Down Effect. - A restructuring/workout
It must be approved by creditors representing at least agreement or Rehabilitation Plan that is approved pursuant to an
seventy-five percent (75%) of the unsecured obligations of the informal workout framework referred to in this chapter shall have
debtor; and the same legal effect as confirmation of a Plan under Section 69
hereof. The notice of the Rehabilitation Plan or restructuring
It must be approved by creditors holding at least eighty-five agreement or Plan shall be published once a week for at least
percent (85%) of the total liabilities, secured and unsecured, of three (3) consecutive weeks in a newspaper of general
the debtor. circulation in the Philippines. The Rehabilitation Plan or
restructuring agreement shall take effect upon the lapse of
1. General Concepts fifteen (15) days from the date of the last publication of the notice
thereof.
Out-of-Court Rehabilitation is an extra-judicial insolvency
proceeding which involves the negotiation and eventual approval RA 10142, Sec. 87 Amendment or Modification. - Any
of an Out-of-court or Informal Restructuring amendment of an out-of-court restructuring/workout agreement
Agreement/ Informal Workout Agreement/ Informal or Rehabilitation Plan must be made in accordance with the
Rehabilitation Plan, a consensual contract between an terms of the agreement and with due notice on all creditors.
insolvent debtor and its creditors that amends or modifies the
terms of the claims against the debtor.
RA 10142, Sec. 88 Effect of Court Action or Other Proceedings.
This implies that that the insolvent debtor and is creditors
- Any court action or other proceedings arising from, or relating
have agreed on a restructuring of the claims against the
to, the out-of-court or informal restructuring/workout agreement
debtor without having filed a petition in court.
or Rehabilitation Plan shall not stay its implementation, unless
It may be preceded by a standstill agreement, wherein the
the relevant party is able to secure a temporary restraining order
debtor is allowed to not pay its liabilities as they fall due and
or injunctive relief from the Court of Appeals.
prevents the creditors from taking further action or enforcing
its claims, usually during the period of negotiation of the
Out-of-Court Restructuring Agreement.
Like any contract, such agreements generally bind only the RA 10142, Sec. 89 Court Assistance. - The insolvent debtor
and/or creditor may seek court assistance for the execution or
contracting parties.
implementation of a Rehabilitation Plan under this Chapter,
FRIA imposes a minimum vote requirement for Out-of-court under such rules of procedure as may be promulgated by the
Restructuring Agreements as follows: Supreme Court.
It must be approved by the debtor.
It must be approved by secured creditors representing at
least 67% of the secured obligations of the debtor;
It must be approved by unsecured creditors representing at
least 75% of the unsecured obligations of the debtor; and
It must be approved by creditors holding at least 85% of the
total liabilities, secured and unsecured, of the debtor.

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Under the FRIA: Art. 2239 If there is property, other than that mentioned in the
Any standstill agreement between the debtor and creditors preceding article, owned by two or more persons, one of whom
upon pending the negotiation of the Out-of-Court is the insolvent debtor, his undivided share or interest therein
Restructuring Agreement (OOCRA) is effective and shall be among the assets to be taken possession of by the
enforceable not only against the contracting parties but also assignee for the payment of the insolvent debtor's obligations.
against the other creditors, provided that: (n)
The standstill agreement is approved by creditors
representing more than 50% of the total liabilities of the
Art. 2240 Property held by the insolvent debtor as a trustee of
debtor
an express or implied trust, shall be excluded from the
Notice of the standstill agreement is published in a
insolvency proceedings. (n)
newspaper of general circulation in the PH once a week
for two consecutive weeks. The notice must invite
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the
creditors to participate in the negotiation of the OOCRA
State to encourage debtors, both juridical and natural persons,
and inform them that the agreement would bind all
and their creditors to collectively and realistically resolve and
creditors if the minimum vote requirements were met.
adjust competing claims and property rights. In furtherance
The standstill period does not exceed 120 days from thereof, the State shall ensure a timely, fair, transparent,
the date of effectivity. effective and efficient rehabilitation or liquidation of debtors. The
The OOCRA that meets the minimum vote requirement shall rehabilitation or liquidation shall be made with a view to ensure
result in a cram down, as it binds not only the insolvent or maintain certainly and predictability in commercial affairs,
debtor but also all persons who may be affected by it, preserve and maximize the value of the assets of these debtors,
including the creditors, whether or not such persons have recognize creditor rights and respect priority of claims, and
participated in the proceedings or opposed the OOCRA or ensure equitable treatment of creditors who are similarly
whether or not their claims have been scheduled, provided situated. When rehabilitation is not feasible, it is in the interest of
that: the State to facilities a speedy and orderly liquidation of these
The notice of the OOCRA shall be published once a debtor's assets and the settlement of their obligations.
week for at least three consecutive weeks in a
newspaper of general circulation in the PH RA 10142, Sec. 4
The OOCRA shall take effect upon the lapse of 15 days Liquidation shall refer to the proceedings under Chapter V of
from the date of the last publication of the notice. this Act.
Any court action or other proceedings arising from, or
relating to, the OOCRA that meets the minimum vote Liquidation in insolvency generally connotes a winding up; it
requirement shall not stay its implementation, unless is the settling of debtors with their creditors so that the
the relevant party is able to secure a TRO or injunctive debtor’s assets may be distributed to those entitled to
relief from the CA receive them.
In Out-of-Court Rehabilitation, no petitions are filed with It is the process of reducing the debtor’s assets to cash,
the court, but the parties may seek court assistance for discharging its liabilities, and dividing the surplus or re-
the execution or implementation of the OOCRA that allocating the loss.
meets the minimum requirement The concept of liquidation is therefore diametrically opposed
to the concept of rehabilitation, and both cannot be
V. LIQUIDATION undertaken at the same time.
While FRIA fails to define liquidation, a definition may be
A. General Concepts derived from Sec. 119 on powers, duties and responsibilities
of the Liquidator and Sec. 131 on the sale of assets in
Art. 2238 So long as the conjugal partnership or absolute liquidation:
Liquidation is a judicial insolvency proceeding by which
community subsists, its property shall not be among the assets
assets of an insolvent debtor are recovered and their value
to be taken possession of by the assignee for the payment of the
preserved and maximized for the purpose of converting the
insolvent debtor's obligations, except insofar as the latter have
same into money, and discharging, to the extent possible,
redounded to the benefit of the family. If it is the husband who is
all the claims against the insolvent debtor.
insolvent, the administration of the conjugal partnership of
It is a procedure in rem and is binding against the whole
absolute community may, by order of the court, be transferred to
world, binding all interested persons regardless of
the wife or to a third person other than the assignee. (n)
knowledge of the parties, and notice regarding such
proceedings.

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Liquidation may apply to: 2. Involuntary Liquidation
An insolvent individual debtor [Sec. 4 (o)]
Individual debtor shall refer to a natural person who is a a. Acts of Insolvency
resident and citizen of the Philippines that has become
insolvent as defined herein. RA 10142, Sec. 105 Petition; Acts of Insolvency. - Any creditor
An insolvent juridical debtor, which the FRIA does not or group of creditors with a claim of, or with claims aggregating
define, but by process of exclusion, it is referred to in [Sec. 4 at least Five hundred thousand pesos (Php500, 000.00) may file
(k)] a verified petition for liquidation with the court of the province or
Debtor shall refer to, unless specifically excluded by a city in which the individual debtor resides.
provision of this Act, a sole proprietorship duly registered
with the Department of Trade and Industry (DTI), a The following shall be considered acts of insolvency, and the
partnership duly registered with the Securities and petition for liquidation shall set forth or allege at least one of such
Exchange Commission (SEC), a corporation duly organized acts:
and existing under Philippine laws, or an individual debtor
who has become insolvent as defined herein. That such person is about to depart or has departed from the
Republic of the Philippines, with intent to defraud his creditors;
B. Liquidation of Insolvent Individual Debtor
That being absent from the Republic of the Philippines, with
1. Voluntary Liquidation intent to defraud his creditors, he remains absent;
RA 10142, Sec. 4 That he conceals himself to avoid the service of legal process
Voluntary proceedings shall refer to proceedings initiated by for the purpose of hindering or delaying the liquidation or of
the debtor. defrauding his creditors;
RA 10142, Sec. 103 Application. - An individual debtor whose That he conceals, or is removing, any of his property to avoid
properties are not sufficient to cover his liabilities, and owing its being attached or taken on legal process;
debts exceeding Five hundred thousand pesos (Php500,000.00),
may apply to be discharged from his debts and liabilities by filing That he has suffered his property to remain under attachment
a verified petition with the court of the province or city in which or legal process for three (3) days for the purpose of hindering or
he has resided for six (6) months prior to the filing of such delaying the liquidation or of defrauding his creditors;
petition. He shall attach to his petition a schedule of debts and
liabilities and an inventory of assets. The filing of such petition That he has confessed or offered to allow judgment in favor of
shall be an act of insolvency. any creditor or claimant for the purpose of hindering or delaying
the liquidation or of defrauding any creditors or claimant;
RA 10142, Sec. 104 Liquidation Order. - If the court finds the
That he has willfully suffered judgment to be taken against
petition sufficient in form and substance it shall, within five (5)
him by default for the purpose of hindering or delaying the
working days issue the Liquidation Order mentioned in Section
liquidation or of defrauding his creditors;
112 hereof.
That he has suffered or procured his property to be taken on
Voluntary Liquidation is a judicial insolvency proceeding
legal process with intent to give a preference to one or more of
instituted by a debtor that is insolvent.
his creditors and thereby hinder or delay the liquidation or
In the case of an individual debtor, he must be insolvent in
defraud any one of his creditors;
the balance sheet concept (assets are insufficient to cover
liabilities)
That he has made any assignment, gift, sale, conveyance or
Purpose of VL is for the debtor to seek a discharge from his
transfer of his estate, property, rights or credits with intent to
debts and liabilities, thus freeing the debtor of legal
responsibility for certain specified obligations. hinder or delay the liquidation or defraud his creditors;
FRIA imposes a value requirement of more than P500, 000
That he has, in contemplation of insolvency, made any
on the debts of the individual debtor.
payment, gift, grant, sale, conveyance or transfer of his estate,
The filing by the insolvent debtor of a petition for voluntary
property, rights or credits;
insolvency is an act of insolvency
That being a merchant or tradesman, he has generally

defaulted in the payment of his current obligations for a period of
thirty (30) days;

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That for a period of thirty (30) days, he has failed, after A show-cause order is issued upon the filing of a petition for
demand, to pay any moneys deposited with him or received by involuntary liquidation but an injunction order, issued prior to
him in a fiduciary; and the Liquidation Order, forbidding the individual debtor from
making payments of his debts and transferring property
That an execution having been issued against him on final belonging to him, is only issued upon good cause.
judgment for money, he shall have been found to be without However, an injunction issued pursuant to Sec. 106 cannot
sufficient property subject to execution to satisfy the judgment. impair the rights of a secured creditor to enforce its lien.
The petitioning creditor/s shall post a bond in such as the court c. Absent Individual Debtor
shall direct, conditioned that if the petition for liquidation is
dismissed by the court, or withdrawn by the petitioner, or if the RA 10142, Sec. 108 Absent Individual Debtor. - In all cases
debtor shall not be declared an insolvent the petitioners will pay where the individual debtor resides out of the Republic of the
to the debtor all costs, expenses, damages occasioned by the Philippines; or has departed therefrom; or cannot, after due
proceedings and attorney's fees. diligence, be found therein; or conceals himself to avoid service
of the Order to show cause, or any other preliminary process or
Involuntary Liquidation is a judicial insolvency proceeding orders in the matter, then the petitioning creditors, upon
instituted by a creditor or group of creditors against an insolvent submitting the affidavits requisite to procedure an Order of
debtor, provided the requirements of the law on number of publication, and presenting a bond in double the amount of the
creditors or value of claims, or both, is met, and provided an act aggregate sum of their claims against the individual debtor, shall
of insolvency is alleged and thereafter established. be entitled to an Order of the court directing the sheriff of the
Value Requirement by FRIA: at least P500, 000 on the province or city in which the matter is pending to take into his
amount of claims, regardless of the number of creditors who custody a sufficient amount of property of the individual debtor to
fie. satisfy the demands of the petitioning creditors and the costs of
It is sufficient that the petition allege only one act of the proceedings. Upon receiving such Order of the court to take
insolvency. into custody of the property of the individual debtor, it shall be
the duty of the sheriff to take possession of the property and
G.R.: It is necessary to establish the intent or purpose of the act effects of the individual debtor, not exempt from execution, to an
was to delay liquidation or defraud creditors extent sufficient to cover the amount provided for and to prepare
XPN: When intent or purpose is irrelevant: within three (3) days from the time of taking such possession, a
Debtor is a merchant or tradesman has generally defaulted complete inventory of all the property so taken, and to return it to
in the payment of current obligations for a period of 30 days. the court as soon as completed. The time for taking the inventory
and making return thereof may be extended for good cause
Debtor has failed, for a period of 30 days, and after demand, shown to the court. The sheriff shall also prepare a schedule of
to pay more money deposited with him or received by him in the names and residences of the creditors, and the amount due
a fiduciary capacity. each, from the books of the debtor, or from such other papers or
Debtor shall be without sufficient property to satisfy and data of the individual debtor available as may come to his
execution issued against him on a final judgment for money. possession, and shall file such schedule or list of creditors and
inventory with the clerk of court.
b. Show Cause Order; Injunction; Default
RA 10142, Sec. 106 Order to Individual Debtor to Show Cause. -

Upon the filing of such creditors' petition, the court shall issue an
Order requiring the individual debtor to show cause, at a time
and place to be fixed by the said court, why he should not be
adjudged an insolvent. Upon good cause shown, the court may
issue an Order forbidding the individual debtor from making
payments of any of his debts, and transferring any property
belonging to him. However, nothing contained herein shall affect
or impair the rights of a secured creditor to enforce his lien in
accordance with its terms.
RA 10142, Sec. 107 Default. - If the individual debtor shall

default or if, after trial, the issues are found in favor of the
petitioning creditors the court shall issue the Liquidation Order
mentioned in Section 112 hereof.

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d. Custody of Property; Sale of Property o Giving of a bond by the creditors is necessary
Sheriff holds the property for the benefit of all the creditors;
RA 10142, Sec. 109 All Property Taken to be Held for All proceeds of the sale shall abide by the result of liquidation
Creditors; Appeal Bonds; Exemptions to Sureties. - In all cases proceeding
where property is taken into custody by the sheriff, if it does not
embrace all the property and effects of the debtor not exempt C. Liquidation of Insolvent Juridical Debtors
from execution, any other creditor or creditors of the individual
debtor, upon giving bond to be approved by the court in double RA 10142, Sec. 93 Powers of the Securities and Exchange
the amount of their claims, singly or jointly, shall be entitled to Commission (SEC). - The provisions of this chapter shall not
similar orders and to like action, by the sheriff; until all claims be affect the regulatory powers of the SEC under Section 6 of
provided for, if there be sufficient property or effects. All property Presidential Decree No. 902-A, as amended, with respect to any
taken into custody by the sheriff by virtue of the giving of any dissolution and liquidation proceeding initiated and heard before
such bonds shall be held by him for the benefit of all creditors of it.
the individual debtor whose claims shall be duly proved as
provided in this Act. The bonds provided for in this section and 1. Voluntary Liquidation
the preceding section to procure the order for custody of the
property and effects of the individual debtor shall be conditioned RA 10142, Sec. 90 Voluntary Liquidation. - An insolvent debtor
that if, upon final hearing of the petition in insolvency, the court may apply for liquidation by filing a petition for liquidation with the
shall find in favor of the petitioners, such bonds and all of them court. The petition shall be verified, shall establish the insolvency
shall be void; if the decision be in favor of the individual debtor, of the debtor and shall contain, whether as an attachment or as
the proceedings shall be dismissed, and the individual debtor, part of the body of the petition;
his heirs, administrators, executors or assigns shall be entitled to
recover such sum of money as shall be sufficient to cover the a schedule of the debtor's debts and liabilities including a list
damages sustained by him, not to exceed the amount of the of creditors with their addresses, amounts of claims and
respective bonds. Such damages shall be fixed and allowed by collaterals, or securities, if any;
the court. If either the petitioners or the debtor shall appeal from
the decision of the court, upon final hearing of the petition, the an inventory of all its assets including receivables and claims
appellant shall be required to give bond to the successful party in against third parties; and
a sum double the amount of the value of the property in
controversy, and for the costs of the proceedings. the names of at least three (3) nominees to the position of
liquidator.
Any person interested in the estate may take exception to the At any time during the pendency of court-supervised or pre-
sufficiency of the sureties on such bond or bonds. When negotiated rehabilitation proceedings, the debtor may also
excepted to the petitioner's sureties, upon notice to the person initiate liquidation proceedings by filing a motion in the same
excepting of not less than two (2) nor more than five (5) days, court where the rehabilitation proceedings are pending to
must justify as to their sufficiency; and upon failure to justify, or convert the rehabilitation proceedings into liquidation
of others in their place fail to justify at the time and place proceedings. The motion shall be verified, shall contain or set
appointed the judge shall issue an Order vacating the order to forth the same matters required in the preceding paragraph, and
take the property of the individual debtor into the custody of the state that the debtor is seeking immediate dissolution and
sheriff, or denying the appeal, as the case may be. termination of its corporate existence.
RA 10142, Sec. 110 Sale Under Execution. - If, in any case, If the petition or the motion, as the case may be, is sufficient in
proper affidavits and bonds are presented to the court or a judge form and substance, the court shall issue a Liquidation Order
thereof, asking for and obtaining an Order of publication and an mentioned in Section 112 hereof.
Order for the custody of the property of the individual debtor and
thereafter the petitioners shall make it appear satisfactorily to the In the case of juridical debtor, it must be insolvent either
court or a judge thereof that the interest of the parties to the under the illiquidity or equity concept, or the balance sheet
proceedings will be subserved by a sale thereof, the court may concept.
order such property to be sold in the same manner as property is But in every case, the rehabilitation of the juridical debtor is
sold under execution, the proceeds to de deposited in the court not economically feasible or does not result in better present
to abide by the result of the proceedings. value recovery for the creditors.
The purpose is to seek the dissolution of its juridical
existence.
Taking of property under the custody by the Sheriff and the FRIA does not impose a value requirement with respect to
sale are interim measures in liquidation proceedings of an the amount of the debts of the insolvent debtor.
individual debtor

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2. Involuntary Liquidation The acts of insolvency that must be alleged are:
Due and demandable payments on claims of creditors there
RA 10142, Sec. 91 Involuntary Liquidation. - Three (3) or more being no genuine issue of fact or law on the claims,
creditors the aggregate of whose claims is at least either One have not been made for at least 180 days, and there is
million pesos (Php1,000,000,00) or at least twenty-five percent no substantial likelihood that the debtor may be
(25%0 of the subscribed capital stock or partner's contributions rehabilitated; or
of the debtor, whichever is higher, may apply for and seek the The debtor has failed generally to meet its liabilities as they
liquidation of an insolvent debtor by filing a petition for liquidation fall due, and there is no substantial likelihood that he
of the debtor with the court. The petition shall show that: may be rehabilitated.
D. Provisions Common to Liquidation of Individual and

there is no genuine issue of fact or law on the claims/s of the Juridical Debtors
petitioner/s, and that the due and demandable payments thereon
have not been made for at least one hundred eighty (180) days RA 10142, Sec. 111 Use of Term Debtor. - For purposes of this
or that the debtor has failed generally to meet its liabilities as chapter, the term debtor shall include both individual debtor as
they fall due; and defined in Section 4(o) and debtor as defined in Section 4(k) of
this Act.
there is no substantial likelihood that the debtor may be
rehabilitated. RA 10142, Sec. 4
Individual debtor shall refer to a natural person who is a
At any time during the pendency of or after a rehabilitation court- resident and citizen of the Philippines that has become insolvent
supervised or pre-negotiated rehabilitation proceedings, three (3) as defined herein.
or more creditors whose claims is at least either One million
pesos (Php1,000,000.00) or at least twenty-five percent (25%) of Debtor shall refer to, unless specifically excluded by a
the subscribed capital or partner's contributions of the debtor, provision of this Act, to a sole proprietorship duly registered with
whichever is higher, may also initiate liquidation proceedings by the Department of Trade and Industry (DTI), a partnership duly
filing a motion in the same court where the rehabilitation registered with the Securities and Exchange Commission (SEC),
proceedings are pending to convert the rehabilitation a corporation duly organized and existing under Philippine laws,
proceedings into liquidation proceedings. The motion shall be or an individual debtor who has become insolvent as defined
verified, shall contain or set forth the same matters required in herein.
the preceding paragraph, and state that the movants are seeking
the immediate liquidation of the debtor. 1. Liquidation Order
If the petition or motion is sufficient in form and substance, the

RA 10142, Sec. 4
court shall issue an Order: Liquidation order shall refer to the Order issued by the court
under Section 112 of this Act.
directing the publication of the petition or motion in a
newspaper of general circulation once a week for two (2)
Date of liquidation shall refer to the date on which the court
consecutive weeks; and
issues the Liquidation Order.
directing the debtor and all creditors who are not the
RA 10142, Sec. 112 Liquidation Order. - The Liquidation Order
petitioners to file their comment on the petition or motion within
fifteen (15) days from the date of last publication. shall:
If, after considering the comments filed, the court determines declare the debtor insolvent;
that the petition or motion is meritorious, it shall issue the
order the liquidation of the debtor and, in the case of a
Liquidation Order mentioned in Section 112 hereof.
juridical debtor, declare it as dissolved;
Involuntary Liquidation is a judicial insolvency proceeding
order the sheriff to take possession and control of all the
instituted by a creditor or group of creditors against an insolvent
debtor, provided the requirements of the law on number of property of the debtor, except those that may be exempt from
creditors or value of claims, or both, is met, and provided an act execution;
of insolvency is alleged and thereafter established.
order the publication of the petition or motion in a
FRIA imposes a requirement on the number of creditors (at
newspaper of general circulation once a week for two (2)
least three) and the value of the claims (at least P1M or at
last 25% of the subscribed capital stock or partner’s consecutive weeks;
contributions of the debtor, whichever is higher)

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direct payments of any claims and conveyance of any The legal postulate that a creditor may enforce its right to
property due the debtor to the liquidator; collect payment from surety becomes more cogent.
A case against a surety is not affected by an insolvency
prohibit payments by the debtor and the transfer of any proceeding instituted. The surety is also not freed from
property by the debtor; liability.
Liquidation order should properly result not only in the
direct all creditors to file their claims with the liquidator within dissolution of a juridical debtor, but also in the discharge of
the period set by the rules of procedure; an individual debtor.
authorize the payment of administrative expenses as they 2. Liquidator

become due;
a. General Concepts
state that the debtor and creditors who are not petitioner/s
may submit the names of other nominees to the position of RA 10142, Sec. 4
liquidator; and Liquidator shall refer to the natural person or juridical entity
appointed as such by the court and entrusted with such powers
set the case for hearing for the election and appointment of and duties as set forth in this Act: Provided, That, if the liquidator
the liquidator, which date shall not be less than thirty (30) days is a juridical entity, it must designated a natural person who
nor more than forty-five (45) days from the date of the last possesses all the qualifications and none of the disqualifications
publication. as its representative, it being understood that the juridical entity
and the representative are solidarity liable for all obligations and
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the responsibilities of the liquidator.
issuance of the Liquidation Order:
RA 10142, Sec. 115 Election of Liquidator. - Only creditors who
the juridical debtor shall be deemed dissolved and its have filed their claims within the period set by the court, and
corporate or juridical existence terminated; whose claims are not barred by the statute of limitations, will be
allowed to vote in the election of the liquidator. A secured
legal title to and control of all the assets of the debtor, except creditor will not be allowed to vote, unless: (a) he waives his
those that may be exempt from execution, shall be deemed security or lien; or (b) has the value of the property subject of his
vested in the liquidator or, pending his election or appointment, security or lien fixed by agreement with the liquidator, and is
with the court; admitted for the balance of his claim.
all contracts of the debtor shall be deemed terminated and/or The creditors entitled to vote will elect the liquidator in open
breached, unless the liquidator, within ninety (90) days from the court. The nominee receiving the highest number of votes cast in
date of his assumption of office, declares otherwise and the terms of amount of claims, ad who is qualified pursuant to
contracting party agrees; Section 118 hereof, shall be appointed as the liquidator.
no separate action for the collection of an unsecured claim RA 10142, Sec. 116 Court-Appointed Liquidator. - The court
shall be allowed. Such actions already pending will be may appoint the liquidator if:
transferred to the Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes the claim, the court on the date set for the election of the liquidator, the creditors
shall allow, hear and resolve such contest except when the case do not attend;
is already on appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment therein for a the creditors who attend, fail or refuse to elect a liquidator;
claim against the debtor shall be filed and allowed in court; and
after being elected, the liquidator fails to qualify; or
no foreclosure proceeding shall be allowed for a period of
one hundred eighty (180) days. a vacancy occurs for any reason whatsoever, In any of the
cases provided herein, the court may instead set another
Declaration of insolvency (or adjudication of hearing of the election of the liquidator.
insolvency) in the liquidation order is the trigger event that
results in the application of legal provisions that require the Provided further, That nothing in this section shall be construed
status of insolvency. to prevent a rehabilitation receiver, who was administering the
Upon the issuance of the liquidation order, the benefit of debtor prior to the commencement of the liquidation, from being
excussion of a guarantor is lost, and special preferred appointed as a liquidator.
credits acquire the status of pledges and mortgages.

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RA 10142, Sec. 117 Oath and Bond of the Liquidator. -Prior to b. Powers, Duties and Responsibilities
entering upon his powers, duties and responsibilities, the
liquidator shall take an oath and file a bond, In such amount to RA 10142, Sec. 119 Powers, Duties and Responsibilities of the
be fixed by the court, conditioned upon the proper and faithful Liquidator. - The liquidator shall be deemed an officer of the
discharge of his powers, duties and responsibilities. court with the principal duly of preserving and maximizing the
value and recovering the assets of the debtor, with the end of
RA 10142, Sec. 118 Qualifications of the Liquidator. - The liquidating them and discharging to the extent possible all the
liquidator shall have the qualifications enumerated in Section 29 claims against the debtor. The powers, duties and
hereof. He may be removed at any time by the court for cause, responsibilities of the liquidator shall include, but not limited to:
either motu propio or upon motion of any creditor entitled to vote
to sue and recover all the assets, debts and claims, belonging
for the election of the liquidator.
or due to the debtor;
RA 10142, Sec. 29 Qualifications of a Rehabilitation Receiver. -
to take possession of all the property of the debtor except
The rehabilitation receiver shall have the following minimum
property exempt by law from execution;
qualifications:
to sell, with the approval of the court, any property of the
(a)A citizen of the Philippines or a resident of the Philippines in
debtor which has come into his possession or control;
the six (6) months immediately preceding his nomination;
to redeem all mortgages and pledges, and so satisfy any
(b)Of good moral character and with acknowledged integrity,
judgement which may be an encumbrance on any property sold
impartiality and independence;
by him;
(c)Has the requisite knowledge of insolvency and other relevant
to settle all accounts between the debtor and his creditors,
commercial laws, rules and procedures, as well as the relevant
subject to the approval of the court;
training and/or experience that may be necessary to enable him
to properly discharge the duties and obligations of a
to recover any property or its value, fraudulently conveyed by
rehabilitation receiver; and
the debtor;
(d)Has no conflict of interest: Provided, That such conflict of
to recommend to the court the creation of a creditors'
interest may be waived, expressly or impliedly, by a party who
committee which will assist him in the discharge of the functions
may be prejudiced thereby.
and which shall have powers as the court deems just,
Other qualifications and disqualification’s of the rehabilitation reasonable and necessary; and
receiver shall be set forth in procedural rules, taking into
upon approval of the court, to engage such professional as
consideration the nature of the business of the debtor and the
may be necessary and reasonable to assist him in the discharge
need to protect the interest of all stakeholders concerned.
of his duties.
RA 10142, Sec. 120 Compensation of the Liquidator. - The In addition to the rights and duties of a rehabilitation receiver, the
liquidator and the persons and entities engaged or employed by liquidator, shall have the right and duty to take all reasonable
him to assist in the discharge of his powers and duties shall be steps to manage and dispose of the debtor's assets with a view
entitled to such reasonable compensation as may determined by towards maximizing the proceedings therefrom, to pay creditors
the liquidation court, which shall not exceed the maximum and stockholders, and to terminate the debtor's legal existence.
amount as may be prescribed by the Supreme Court. Other duties of the liquidator in accordance with this section may
be established by procedural rules.
RA 10142, Sec. 122 Discharge of Liquidator. - In preparation for
the final settlement of all the claims against the debtor , the A liquidator shall be subject to removal pursuant to procedures
liquidator will notify all the creditors, either by publication in a for removing a rehabilitation receiver.
newspaper of general circulation or such other mode as the
court may direct or allow, that will apply with the court for the RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the
settlement of his account and his discharge from liability as issuance of the Liquidation Order:
liquidator. The liquidator will file a final accounting with the court,
with proof of notice to all creditors. The accounting will be set for legal title to and control of all the assets of the debtor, except
hearing. If the court finds the same in order, the court will those that may be exempt from execution, shall be deemed
discharge the liquidator. vested in the liquidator or, pending his election or appointment,
with the court;

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RA 10142, Sec. 123 Registry of Claims. - Within twenty (20) 3. Claims
days from his assumption into office the liquidator shall prepare
a preliminary registry of claims of secured and unsecured RA 10142, Sec. 4
creditors. Secured creditors who have waived their security or Claim shall refer to all claims or demands of whatever nature
lien, or have fixed the value of the property subject of their or character against the debtor or its property, whether for
security or lien by agreement with the liquidator and is admitted money or otherwise, liquidated or unliquidated, fixed or
as a creditor for the balance , shall be considered as unsecured contingent, matured or unmatured, disputed or undisputed,
creditors. The liquidator shall make the registry available for including, but not limited to;
public inspection and provide publication notice to creditors, (1) all claims of the government, whether national or local,
individual debtors owner/s of the sole proprietorship-debtor, the including taxes, tariffs and customs duties; and
partners of the partnership-debtor and shareholders or members (2) claims against directors and officers of the debtor arising
of the corporation-debtor, on where and when they may inspect from acts done in the discharge of their functions falling within
it. All claims must be duly proven before being paid. the scope of their authority: Provided, That, this inclusion does
not prohibit the creditors or third parties from filing cases against
RA 10142, Sec. 126 Submission of Disputed to the Court. - The the directors and officers acting in their personal capacities.
liquidator shall resolve disputed claims and submit his findings
thereon to the court for final approval. The liquidator may a. Determination of Claims
disallow claims.
RA 10142, Sec. 112 Liquidation Order. - The Liquidation Order
RA 10142, Sec. 129 The Liquidation Plan. - Within three (3) shall:
months from his assumption into office, the Liquidator shall direct all creditors to file their claims with the liquidator within
submit a Liquidation Plan to the court. The Liquidation Plan shall, the period set by the rules of procedure;
as a minimum enumerate all the assets of the debtor and a
schedule of liquidation of the assets and payment of the claims. RA 10142, Sec. 123 Registry of Claims. - Within twenty (20)
RA 10142, Sec. 131 Sale of Assets in Liquidation. - The a preliminary registry of claims of secured and unsecured
liquidator may sell the unencumbered assets of the debtor and creditors. Secured creditors who have waived their security or
convert the same into money. The sale shall be made at public lien, or have fixed the value of the property subject of their
auction. However, a private sale may be allowed with the security or lien by agreement with the liquidator and is admitted
approval of the court if; (a) the goods to be sold are of a as a creditor for the balance , shall be considered as unsecured
perishable nature, or are liable to quickly deteriorate in value, or creditors. The liquidator shall make the registry available for
are disproportionately expensive to keep or maintain; or (b) the public inspection and provide publication notice to creditors,
private sale is for the best interest of the debtor and his creditors. individual debtors owner/s of the sole proprietorship-debtor, the
partners of the partnership-debtor and shareholders or members
of the corporation-debtor, on where and when they may inspect
With the approval of the court, unencumbered property of the it. All claims must be duly proven before being paid.
debtor may also be conveyed to a creditor in satisfaction of his
claim or part thereof. RA 10142, Sec. 124 Right of Set-off. - If the debtor and creditor
are mutually debtor and creditor of each other one debt shall be
RA 10142, Sec. 132 Manner of Implementing the Liquidation set off against the other, and only the balance, if any shall be
Plan. - The Liquidator shall implement the Liquidation Plan as allowed in the liquidation proceedings.
approved by the court. Payments shall be made to the creditors
only in accordance with the provisions of the Plan. RA 10142, Sec. 125 Opposition or Challenge to Claims. - Within
thirty (30 ) days from the expiration of the period for filing of
RA 10142, Sec. 121 Reporting Requiremen5ts. - The liquidator applications for recognition of claims, creditors, individual
shall make and keep a record of all moneys received and all debtors, owner/s of the sole proprietorship-debtor, partners of
disbursements mad by him or under his authority as liquidator. the partnership-debtor and shareholders or members of the
He shall render a quarterly report thereof to the court , which corporation -debtor and other interested parties may submit a
report shall be made available to all interested parties. The challenge to claim or claims to the court, serving a certified copy
liquidator shall also submit such reports as may be required by on the liquidator and the creditor holding the challenged claim.
the court from time to time as well as a final report at the end of Upon the expiration of the (30) day period, the rehabilitation
the liquidation proceedings. 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.

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The treatment of secured creditors is as follows:
RA 10142, Sec. 126 Submission of Disputed to the Court. - The Upon the issuance of the liquidation order, a secured
liquidator shall resolve disputed claims and submit his findings creditor is subject to the temporary stay of foreclosure
thereon to the court for final approval. The liquidator may proceedings for a period of 180 days.
disallow claims. The liquidation plan shall ensure that the concurrence and
preference of credits as enumerated in the Civil Code
b. Treatment of Claims shall be observed, unless a preferred creditor
voluntarily waives its preferred right.
1) Secured Creditor Claims During the proceedings, a secured creditor may:
Waive its security or lien, prove its claim and
share in the distribution of the assets of the
RA 10142, Sec. 4
debtor, in which case it will be admitted as an
Secured creditor shall refer to a creditor with a secured
unsecured creditor; or
claim.
Maintain its rights under the security or lien, in
which case
(jj) Secured claim shall refer to a claim that is secured by a lien.
o The value of the property may be fixed in a
manner agreed upon by the creditor and the
Lien shall refer to a statutory or contractual claim or judicial
liquidator:
If the value of the property is less than
the claim, the creditor will be admitted as
an unsecured creditor for the balance;
If the value of the property is greater than
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the the claim, the liquidator may convey the
issuance of the Liquidation Order: property to the creditor, collect the
no foreclosure proceeding shall be allowed for a period of surplus from the creditor, and waive the
one hundred eighty (180) days. debtor’s right of redemption; or
The liquidator may sell the property and
RA 10142, Sec. 114 Rights of Secured Creditors. - The satisfy the secured creditor’s entire claim
Liquidation Order shall not affect the right of a secured creditor from the proceeds of the sale; or
to enforce his lien in accordance with the applicable contract or The secured creditor may enforce the lien or
law. A secured creditor may: foreclose the property pursuant to applicable
laws.
waive his right under the security or lien, prove his claim in
the liquidation proceedings and share in the distribution of the Consuelo Metal Corporation vs. Planters Development Bank
assets of the debtor; or (2008) – Carpio, J.
Petitioners: Consuelo Metal Corporation
maintain his rights under the security or lien: Respondents: Planters Development Bank
Concept: Liquidation – Treatment of Claims
If the secured creditor maintains his rights under the security or
lien: Doctrine:
Secured creditors may either pursue their security interest or
the value of the property may be fixed in a manner agreed lien, or they may choose to abandon the preference and prove
upon by the creditor and the liquidator. When the value of the their credits as ordinary claims. The right of the creditor-
property is less than the claim it secures, the liquidator may mortgagee to foreclose is only suspended during rehabilitation
convey the property to the secured creditor and the latter will be proceedings, but may be exercised after the proceedings have
admitted in the liquidation proceedings as a creditor for the been lifted or terminated.
balance. If its value exceeds the claim secured, the liquidator
may convey the property to the creditor and waive the debtor's Brief Facts:
right of redemption upon receiving the excess from the creditor; CMC was put under rehabilitation by the SEC. Finding that
rehabilitation is no longer feasible, SEC ordered its dissolution
the liquidator may sell the property and satisfy the secured and liquidation. PDB, one of the creditors, extrajudicially
creditor's entire claim from the proceeds of the sale; or foreclosed the REM it constituted over property owned by CMC.
CMC questioned the validity of said foreclosure
the secure creditor may enforce the lien or foreclose on the
property pursuant to applicable laws.

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ISSUES: SC: The SEC’s jurisdiction does not extend to the liquidation
W the jurisdiction of the case lies with the RTC or the SEC of a corporation. While the SEC has jurisdiction to order the
(RTC) dissolution of a corporation, jurisdiction over the liquidation
WON the foreclosure of the REM is valid ((YES) of the corporation now pertains to the appropriate RTCs
RATIO: o This is the reason why the SEC, in its Omnibus Order,
1. While the SEC has jurisdiction to order the dissolution directed that the “proceedings on and implementation of
of a corporation, jurisdiction over the liquidation of the the order of liquidation be commenced at the RTC to
corporation now pertains to the appropriate RTCs. which this case shall be transferred.”
o This is the correct procedure because the liquidation
CMC: of a corporation requires the settlement of claims for
o Agrees with CA that the SEC has jurisdiction over CMC’s and against the corporation, which clearly falls under
dissolution and liquidation the jurisdiction of the regular courts
o Argues that CA remanded case to SEC on wrong The TC is in the best position to convene all the creditors of
premise that the applicable law is Sec. 21 of the Corp. the corporation, ascertain their claims, and determine
Code their preferences
o SEC retained jurisdiction over its dissolution and Note: The jurisdiction over the actual liquidation lies with the
liquidation because it is only a continuation of the RTC because it is in a better position to rule on the claims of the
SEC’s jurisdiction over CMC’s original petition for creditors. The SEC exercises its jurisdiction over the case during
suspension of payment which had not been “finally the rehabilitation proceedings (until its termination) and loses
disposed of as of 30 Jun 2000” jurisdiction at the termination. It may reacquire jurisdiction when
Planters Bank: the corporation is dissolved and removed from the list of SEC
o The TC has jurisdiction over CMC’s dissolution and corporations.
liquidation
o Dissolution and liquidation are entirely new proceedings 2. The foreclosure of the REM is valid.
for the termination of the existence of the corporation CMC: The foreclosure is void because it was undertaken
which are incompatible with a petition for suspension of without the knowledge and previous consent of the
payment which seeks to preserve corporate existence liquidator and other lien holders
o The rules on concurrence and preference of credits
RA 8799 transferred to the appropriate RTCs the SEC’s should apply in foreclosure proceedings
jurisdiction defined under Sec. 5(d) of PD 902-A o Assuming Planters Bank can foreclose, CMC
o The Commission's jurisdiction over all cases argues that foreclosure is still void because it was
enumerated under Sec. 5 of Presidential Decree No. 902-A conducted in violation of Sec. 15, Rule 39 of the
is hereby transferred to the Courts of general jurisdiction or ROC which states that the sale “should not be
the appropriate Regional Trial Court: Provided, That the earlier than 9 o’clock in the morning and not later
Supreme Court in the exercise of its authority may than 2 o’clock in the afternoon”
designate the Regional Trial Court branches that shall Planters Bank: It has the right to foreclose the REM
exercise jurisdiction over these cases. The Commission because of non-payment of the loan obligation
shall retain jurisdiction over pending cases involving o The rules on concurrence and preference of credits
intra- corporate disputes submitted for final resolution and the rules on insolvency are not applicable in
which should be resolved within one (1) year from the this case because CMC has not been declared
enactment of this Code. The Commission shall retain insolvent and there are no insolvency proceedings
jurisdiction over pending suspension of against CMC
payments/rehabilitation cases filed as of 30 June 2000 until In RCBC v. IAC, SC held that if rehabilitation is no longer
finally disposed. (Emphasis supplied) feasible and the assets of the corporation are finally
The SEC assumed jurisdiction over CMC’s petition for liquidated, secured creditors shall enjoy preference
suspension of payment and issued a suspension order on 2 over unsecured creditors, subject only to the provisions
Apr 1996 after it found CMC’s petition to be sufficient in form of the CC on concurrence and preference of credits
and substance o Creditors of secured obligations may pursue their
o While the petition was pending with the SEC as of 30 security interest or lien, or they may choose to
Jun 2000, it was finally disposed of on 29 Nov 2000 abandon the preference and prove their credits as
when the SEC issued its Omnibus Order directing the ordinary claims
dissolution of CMC and the transfer of the liquidation Art. 2248 CC: Those credits which enjoy preference in
proceedings before the appropriate TC relation to specific real property or real rights, exclude
o The SEC finally disposed of CMC’s petition for all others to the extent of the value of the immovable or
suspension of payment when it determined that CMC real right to which the preference refers.
could no longer be successfully rehabilitated

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SC: Planters Bank, as secured creditor, enjoys Yngsón vs. PNB (2012) – Villarama, Jr., J.
preference over a specific mortgaged property and has Petitioner: Manuel D. Yngsón, Jr. [in his capacity as the
a right to foreclose the mortgage under Art. 2248 liquidator of Arcam and Company, Inc. (Arcam)] Respondent:
NCC Philippine National Bank (PNB)
o Creditor-mortgagee has the right to foreclose Concept: Treatment of Claims
WON the debtor-mortgagor is under insolvency or
liquidation proceedings Doctrine:
o Said right to foreclose is merely suspended upon A mortgagee retains the right to foreclose the mortgage property
the appointment of a management committee or whether or not the debtor is under insolvency or liquidation
rehabilitation receiver or upon the issuance of a proceedings. Preference of credit is different from a lien. While a
stay order by the TC lien attaches to a specific property, preference of credit does not.
o HOWEVER, the creditor-mortgagee may exercise The property subject to the lien may be properly foreclosed by
his right to foreclose the mortgage upon the the holder of the lien for the lien excludes all other claims as to
termination of the rehabilitation proceedings or the specific property. Preference of credit is a method of
upon the lifting of the stay order determining the order of payment from the proceeds of
properties not subject to any lien.
Foreclosure proceedings have in their favor the
presumption of regularity and the burden of evidence to Brief Facts:
rebut the same is on the party that seeks to challenge Arcan had debts from PNB, secured by REM and CM. Arcam
the proceedings could not pay its debt to PNB, so PNB initiated extrajudicial
o CMC’s challenge has no merit foreclosure proceedings. Before the scheduled foreclosure sale,
o Notice of sale clearly specified that the auction sale Arcam filed a petition for suspension of payments. SEC granted
will be held “at 10 o’clock in the morning or soon Arcam’s petition. Six years after, SEC determined that Arcam
thereafter but not later than 2 o’clock in the could not be rehabilitated and ordered that the proceedings be
afternoon” converted to liquidation proceedings. PNB revived the
o Sheriff’s Minutes of Sale stated that the extrajudicial foreclosure proceedings. A TRO was issued, but it
foreclosure sale was actually opened at expired without the issuance of an injunction. PNB foreclosed on
10AM and commenced at 2:30PM – the property, and Yngson (liquidator of Arcam) filed a motion to
NOTHING IRREGULAR ABOUT THE
nullify the sale.
FORECLOSURE PROCEEDINGS
ISSUE:
DISPOSITIVE: Petition DENIED. SEC Omnibus Order directing the WON PNB, as a secured creditor, can foreclose on the
RTC to immediately undertake the liquidation is REINSTATED. SC mortgaged properties of a corporation under liquidation without
AFFIRMS the ruling of the CA that the Planters Dev’t Bank’s the knowledge and prior approval of the liquidator or the SEC
extrajudicial foreclosure of the REM is valid. (YES)
Consuelo Metal Corp. v. Planters RATIO: YES, PNB can foreclose the mortgaged properties.
Question: Is it the same if decided under the FRIA?
YES. Secured creditors can enforce their claims, except during Consuelo Metal Corporation v. Planters Development Bank
the 180 days (Sec. 113(e)) involved factual antecedents similar, and the Court had
already settled the question and upheld the right of the
Question: What would you advise the creditor to do? secured creditor to foreclose the mortgages in its favor
To still foreclose on the property prior to the institution of the during the liquidation of a debtor corporation
proceedings. o CMC filed a petition to be declared in a state of
suspension of payment, for rehabilitation, and for
Question: What is the policy behind the 180 days? appointment of a rehabilitation receiver or management
To maintain the status quo while the liquidator determines the committee
claims. o SEC, finding petition sufficient in form and substance,
declared that “all actions for claims against CMC
Question: What if it was a proceeding converted from pending before any court, tribunal, office, board, body
rehabilitation? and/or commission are deemed suspended
There would be no need to wait during the 180-day period immediately until further orders”
because if the stay or suspension order during the rehabilitation o Upon management committee’s recommendation, SEC
proceedings where the creditor’s rights were already stayed and issued an Omnibus Order directing dissolution and
the rehabilitation receiver already determined the claims. liquidation of CMC

!
Thereafter, Planters Bank, one of CMC’s creditors, SC: In DBP v. NLRC, a distinction should be made between
commenced the extrajudicial foreclosure of CMC’s a preference of credit and a lien
REM; Planters Bank extrajudicially foreclosed because o A preference applies only to claims which do not
CMC failed to secure a TRO attach to specific properties
CMC questioned the validity of the foreclosure because o A lien creates a charge on a particular property
it was done without the knowledge and approval of the o The right of first preference of unpaid wages recognized
liquidator by Art. 110 of the LC does not constitute a lien on the
RCBC v. IAC: xxx Creditors of secured obligations may property of the insolvent debtor in favor of workers
pursue their security interest or lien, or they may
choose to abandon the preference and prove their It is but a preference of credit in their favor, a
credits as ordinary claims. preference of application
The creditor-mortgagee has the right to foreclose It is a method adopted to determine and specify
the mortgage over a specific real property WON the order in which credits should be paid in the final
the debtor-mortgagee is under insolvency or distribution of the proceeds of the insolvent’s
liquidation proceedings assets
The right to foreclose such mortgage is merely It is a right to a first preference in the discharge of
suspended upon the appointment of a the funds of the judgment debtor
management committee or rehabilitation receiver SC: The right of first preference for unpaid wages may not
or upon the issuance of a stay order by the TC be invoked in this case to nullify the foreclosure sales
Under RA 10142 (the Financial Rehabilitation and pursuant to PNB’s right as a secured creditor to enforce
Insolvency Act of 2010) the right of a secured creditor to its lien on specific properties of the debtor,
enforce his lien during liquidation proceedings is retained ARCAM
Sec. 114 Rights of Secured Creditors. – The
Liquidation Order shall not affect the right of a secured DISPOSITIVE: Petition is DENIED.
creditor to enforce his lien in accordance with the
applicable contract or law. A secured creditor may: Yngson v. PNB
waive his rights under the security or lien, prove Question: If the claim was for taxes, would the creditor still be
his claim in the liquidation proceedings and share able to enforce his claim?
in the distribution of the assets of the debtor; or YES. In the distribution of proceeds, taxes would have to be paid
maintain his rights under his security or first (first tier).
lien;
If the secured creditor maintains his rights under the Question: And after taxes?
security or lien: Other credits paid pro rata.
the value of the property may be fixed in a
manner agreed upon by the creditor and the Question: What then would the liquidator do (after foreclosure)
liquidator. When the value of the property is less with the proceeds, with respect to the employee’s claim?
than the claim it secures, the liquidator may convey Follow Art. 2244. Labor claims now number 1.
the property to the secured creditor and the latter
will be admitted in the liquidation proceedings as a 2) Unsecured Creditor Claims
creditor for the balance; if its value exceeds the
claim secured, the liquidator may convey the RA 10142, Sec. 4
property to the creditor and waive the debtor’s right Unsecured creditor shall refer to a creditor with an
of redemption upon receiving the excess from the
unsecured claim.
creditor;
the liquidator may sell the property and satisfy Unsecured claim shall refer to a claim that is not secured by
the secured creditor’s entire claim from the
a lien.
proceeds of the sale; or
the secured creditor may enforce the lien or Lien shall refer to a statutory or contractual claim or judicial
foreclose on the property pursuant to applicable
laws. (Emphasis supplied)
SC: In this case, PNB elected to maintain its rights under
the security or lien; hence, its right to foreclose the
mortgaged properties should be respected, in line with the
pronouncement in Consuelo Metal Corporation
Yngson: There is a right of first preference as regards
unpaid wages

!
RA 10142, Sec. 123 Registry of Claims. - Within twenty (20) transaction:
a preliminary registry of claims of secured and unsecured provides unreasonably inadequate consideration to the
creditors. Secured creditors who have waived their security or debtor and is executed within ninety (90) days prior to the
lien, or have fixed the value of the property subject of their commencement date;
security or lien by agreement with the liquidator and is admitted
as a creditor for the balance , shall be considered as unsecured involves an accelerated payment of a claim to a creditor
creditors. The liquidator shall make the registry available for within ninety (90) days prior to the commencement date;
public inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-debtor, the provides security or additional security executed within ninety
partners of the partnership-debtor and shareholders or members (90) days prior to the commencement date;
of the corporation-debtor, on where and when they may inspect
it. All claims must be duly proven before being paid. involves creditors, where a creditor obtained, or received the
benefit of, more than its pro rata share in the assets of the
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the debtor, executed at a time when the debtor was insolvent; or
issuance of the Liquidation Order:
no separate action for the collection of an unsecured claim is intended to defeat, delay or hinder the ability of the
shall be allowed. Such actions already pending will be creditors to collect claims where the effect of the transaction is to
transferred to the Liquidator for him to accept and settle or put assets of the debtor beyond the reach of creditors or to
contest. If the liquidator contests or disputes the claim, the court otherwise prejudice the interests of creditors.
shall allow, hear and resolve such contest except when the case
is already on appeal. In such a case, the suit may proceed to Provided, however, That nothing in this section shall prevent the
judgment, and any final and executor judgment therein for a court from rescinding or declaring as null and void a transaction
claim against the debtor shall be filed and allowed in court; and on other grounds provided by relevant legislation and
jurisprudence: Provided, further, That the provisions of the Civil
4. Treatment of Contracts Code on rescission shall in any case apply to these transactions.
a. Termination or Breach of Contracts RA 10142, Sec. 128 Actions for Rescission or Nullity. - (a) The
liquidator or, with his conformity, a creditor may initiate and
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the prosecute any action to rescind, or declare null and void any
issuance of the Liquidation Order: transaction described in the immediately preceding paragraph. If
all contracts of the debtor shall be deemed terminated and/or the liquidator does not consent to the filling or prosecution of
breached, unless the liquidator, within ninety (90) days from the such action, any creditor may seek leave of the court to
date of his assumption of office, declares otherwise and the commence said action.
contracting party agrees;
if leave of court is granted under subsection (a) hereof, the
b. Avoidance Proceedings liquidator shall assign and transfer to the creditor all rights, title
and interest in the chose in action or subject matter of the
RA 10142, Sec. 127 Rescission or Nullity of Certain proceeding, including any document in support thereof.
Transactions. - Any transaction occurring prior to the issuance of
Any benefit derived from a proceeding taken pursuant to
the Liquidation Order or, in case of the conversion of the
subsection (a) hereof, to the extent of his claim and the costs,
rehabilitation proceedings prior to the commencement date,
belongs exclusively to the creditor instituting the proceeding, and
entered into by the debtor or involving its assets, may be
the surplus, if any, belongs to the estate.
rescinded or declared null and void on the ground that the same
was executed with intent to defraud a creditor or creditors or
Where, before an orders is made under subsection (a)
which constitute undue preference of creditors. The
hereof, the liquidator signifies to the court his readiness to the
presumptions set forth in Section 58 hereof shall apply.
institute the proceeding for the benefit of the creditors, the order
shall fix the time within which he shall do so and, in that case the
RA 10142, Sec. 58 Rescission or Nullity of Certain Pre- benefit derived from the proceedings, if instituted within the time
commencement Transactions. Any transaction occurring prior to limits so fixed, belongs to the estate.
commencement date entered into by the debtor or involving its
funds or assets may be rescinded or declared null and void on An avoidance proceeding, which permits certain transactions
the ground that the same was executed with intent to defraud a to be rescinded or nullified, and an asset transferred pursuant to
creditor or creditors or which constitute undue preference of the transaction, or its value, to be recovered for the benefit of the
creditors. Without limiting the generality of the foregoing, a creditors, is also available as a consequence of the liquidation of
disputable presumption of such design shall arise if the
a debtor.

!
Transactions that may be nullified of rescinded: RA 10142, Sec. 132 Manner of Implementing the Liquidation
those entered into by the debtor or involve the debtor’s Plan. - The Liquidator shall implement the Liquidation Plan as
assets approved by the court. Payments shall be made to the creditors
prior to the issuance of the Liquidation Order, or prior to the only in accordance with the provisions of the Plan.
commencement date of the rehabilitation proceeding, if
converted into a liquidation proceeding; and are
RA 10142, Sec. 133 Concurrence and Preference of Credits. -
excecuted in fraud of creditors, or constitutes and undue
The Liquidation Plan and its Implementation shall ensure that the
preference of creditors. Generally, all fraudulent
concurrence and preference of credits as enumerated in the Civil
conveyances, or transfers of property made by an insolvent
Code of the Philippines and other relevant laws shall be
debtor for little or no consideration, made for the purpose of
observed, unless a preferred creditor voluntarily waives his
hindering of delaying creditors, or putting funds or assets
preferred right. For purposes of this chapter, credits for services
beyond reach of creditors, and all preferential transfers, or
rendered by employees or laborers to the debtor shall enjoy first
transfers made by the insolvent debtor to or for the benefit
of a creditor, thereby allowing the creditor to receive more
claims constitute legal liens under Article 2241 and 2242 thereof.
than its proportionate share, may be rescinded or nullified.
Primary goal of liquidation proceedings, liquidator and
5. Liquidation Plan
liquidation plan is to sell the assets of the insolvent debtor
and convert the same into money for payment to the
RA 10142, Sec. 129 The Liquidation Plan. - Within three (3)
creditors
months from his assumption into office, the Liquidator shall
submit a Liquidation Plan to the court. The Liquidation Plan shall, 6. Termination of Proceedings
as a minimum enumerate all the assets of the debtor and a
schedule of liquidation of the assets and payment of the claims. RA 10142, Sec. 121 Reporting Requiremen5ts. - The liquidator
shall make and keep a record of all moneys received and all
RA 10142, Sec. 130 Exempt Property to be Set Apart. - It shall disbursements mad by him or under his authority as liquidator.
be the duty of the court, upon petition and after hearing, to He shall render a quarterly report thereof to the court , which
exempt and set apart, for the use and benefit of the said report shall be made available to all interested parties. The
insolvent, such real and personal property as is by law exempt liquidator shall also submit such reports as may be required by
from execution, and also a homestead; but no such petition shall the court from time to time as well as a final report at the end of
be heard as aforesaid until it is first proved that notice of the the liquidation proceedings.
hearing of the application therefor has been duly given by the
clerk, by causing such notice to be posted it at least three (3)
RA 10142, Sec. 134 Order Removing the Debtor from the List of
public places in the province or city at least ten (10) days prior to
Registered Entitles at the Securities and Exchange Commission.
the time of such hearing, which notice shall set forth the name of
- Upon determining that the liquidation has been completed
the said insolvent debtor, and the time and place appointed for
according to this Act and applicable law, the court shall issue an
the hearing of such application, and shall briefly indicate the
Order approving the report and ordering the SEC to remove the
homestead sought to be exempted or the property sought to be
debtor from the registry of legal entities.
set aside; and the decree must show that such proof was made
to the satisfaction of the court, and shall be conclusive evidence
RA 10142, Sec. 135 Termination of Proceedings. - Upon receipt
of that fact.
of evidence showing that the debtor has been removed from the
registry of legal entities at the SEC. The court shall issue an
RA 10142, Sec. 131 Sale of Assets in Liquidation. - The
Order terminating the proceedings.
liquidator may sell the unencumbered assets of the debtor and
convert the same into money. The sale shall be made at public
As for the insolvent individual debtor, the liquidation
auction. However, a private sale may be allowed with the
proceeding logically terminates upon a determination that
approval of the court if; (a) the goods to be sold are of a
the liquidation has been completed.
perishable nature, or are liable to quickly deteriorate in value, or
are disproportionately expensive to keep or maintain; or (b) the
In making payments, follow the Liquidation Plan.
private sale is for the best interest of the debtor and his creditors.
First, look at unencumbered assets.
Then, look at unsecured creditors.
With the approval of the court, unencumbered property of the
debtor may also be conveyed to a creditor in satisfaction of his
claim or part thereof.

!
E. Ancillary Proceedings RA 10142, Sec. 141 Provision of Relief. - The court may issue
orders:
1. Securities Market Participant
suspending any action to enforce claims against the entity or
RA 10142, Sec. 136 Liquidation of a Securities Market otherwise seize or foreclose on property of the foreign entity
Participant. - The foregoing provisions of this chapter shall be located in the Philippines;
without prejudice to the power of a regulatory agency or self-
regulatory organization to liquidate trade-related claims of clients requiring the surrender property of the foreign entity to the
or customers of a securities market participant which, for foreign representative; or
purposes of investor protection, are hereby deemed to have
absolute priority over other claims of whatever nature or kind providing other necessary relief.
insofar as trade-related assets are concerned.
RA 10142, Sec. 142 Factors in Granting Relief. - In determining
For purposes of this section, trade -related assets include cash, whether to grant relief under this subchapter, the court shall
securities, trading right and other owned and used by the consider:
securities market participant in the ordinary course of this
business. the protection of creditors in the Philippines and the
inconvenience in pursuing their claim in a foreign proceeding;
Sec. 136 of FRIA creates a special preference of credit in
favor of trade-related claims of clients or customers upon the just treatment of all creditors through resort to a unified
the trade-related assets, such as cash, securities and insolvency or rehabilitation proceedings;
trading rights, of a securities market participant. This
special preferred credit enjoys absolute priority over other whether other jurisdictions have given recognition to the
claims. foreign proceeding;
2. Banks and Other Financial Institutions Under the extent that the foreign proceeding recognizes the rights of
Rehabilitation Receivership Pursuant to a State-funded or creditors and other interested parties in a manner substantially in
State-mandated Insurance System accordance with the manner prescribed in this Act; and
RA 10142, Sec. 137 Provision of Assistance. - The court shall

issue orders, adjudicate claims and provide other relief the extent that the foreign proceeding has recognized and
necessary to assist in the liquidation of a financial under shown deference to proceedings under this Act and previous
rehabilitation receivership established by a state-funded or state- legislation.
mandated insurance system.
Cross-border insolvency occurs when an insolvent debtor
RA 10142, Sec. 138 Application of Relevant Legislation. - The has assets in, and creditors from, several States, giving rise
liquidation of bank, financial institutions, insurance companies to the possibility that insolvency proceedings may be
and pre-need companies shall be determined by relevant commenced in several jurisdictions
legislation. The provisions in this Act shall apply in a suppletory The Model Law on Cross-border Insolvency of the United
manner. Nations Commission on International Trade Law
(UNCITRAL), referred to in the FRIA, focuses on the
3. Cross-Border Insolvency Proceedings legislative framework needed to facilitate cooperation and
coordination in cross-border insolvency proceedings,
RA 10142, Sec. 139 Adoption of UNCITRAL Model Law on specifically cooperation between the courts and the other
Cross-Border Insolvency. - Subject to the provision of Section competent authorities of the enacting states and foreign
136 hereof and the rules of procedure that may be adopted by States involved, greater legal certainty for trade and
investment, fair and efficient administration of the
the Supreme Court, the Model Law on Cross-Border Insolvency
proceedings that protects the interests of all creditors and
of the United Nations Center for International Trade and
other interested persons, including the debtor protection and
Development is hereby adopted as part of this Act.
maximization of the value of the debtor’s assets, and
facilitation of the rescue of financially troubled businesses,
RA 10142, Sec. 140 Initiation of Proceedings. - The court shall
thereby protecting investment and preserving employment.
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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SGS QUESTIONS: (and other notes from class appear in this CREDIT: is the debtor’s ABILITY to borrow money

orrow money by virtue of

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

2. The grant was one of loan and is therefore covered by the

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Art. 418 Movable property is either consumable or

Object is either property that is non-consumable, or

Consumable object is extinguished by its use.

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COMMODATUM: Primary obligation of the debtor is to Doctrine:

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Art. 1935 The bailee in commodatum acquires the used of the

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Art. 1939 Commodatum is purely personal in character.

In commodatum the bailor retains the ownership of the thing

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RATIO: The agreement is not a contract of commodatum as

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Question: What would these other expenses cover?

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Art. 1954 A contract whereby one person transfers the

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DISPOSITIVE: Decision AFFIRMED with MODIFICATION.

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The respondent Court of Appeals that the foregoing stipulation is

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The penalty may be enforced only when it is demandable in

TIMELESS REVIEWERS B2017 | CREDIT TRANSACTIONS | PROF. STEPHANIE GOMEZ-SOMERA 34

Brief Facts: Doctrine:

ISSUE: Brief Facts:

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Doctrine: 2. YES. Said interest rate does not appear as being

Brief Facts: DISPOSITIVE: CA affirmed

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DISPOSITIVE: Order of CA reversed and set aside.

Nacar v. Gallery Frames

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The existing economic conditions in the country and the