LECTURE NOTES ON CREDIT TRANSACTIONS OTHER SPECIAL

COMMERCIAL LAWS
by: atty. jonathan a. cristobal, cpa

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS has quite an

expanded subject matter. One of the covering topics is CREDIT TRANSACTIONS
namely: PLEDGE, MORTGAGE (Real and Chattel). The better title should have been
LAW ON SECURED TRANSACTIONS.

While the LAW ON PLEDGE and MORTGAGE cover Articles 2085 to 2131 of the
CIVIL CODE, only the following topics were included in the CPA Syllabus.

“1.5 CREDIT TRANSACTIONS

1.5.1 PLEDGE, REAL MORTGAGE AND CHATTEL NORTGAGE
1.5.1.1 Similarities
1.5.1.2 Requisites
1.5.1.3 Indivisibility
1.5.1.4 Pactum Comissorium
1.5.1.5 Third Party Pledgors/Mortgagors
1.5.2 Requirements to bind third parties/third persons
1.5.3 Obligations and Rights of Pledgor and Pledgee
1.5.4 Obligations and Rights of Mortgagor and Mortgagee
1.5.5 Modes of Extinguishment”

Let us start.

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

“Art. 2085 of the Civil Code provides: “The following requisites are essential to
the contract of pledge and mortgage:

a. That they be constituted to secure the fulfillment of a principal obligation;

b. That the pledgor and mortgagor be the absolute owner of the thing pledged
or mortgaged;

c. That the persons constituting the pledge or mortgage have the free disposal
of their property, and in the absence thereof, that they be legally authorized
for the purpose.

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

DISCUSSION:

(A)KINDS OF PRINCIPAL OBLIGATION that may be secured by a pledge or

mortgage. The principal obligation MUST BE A VALID OBLIGATION, as a
rule, because being an accessory contracts, pledge and mortgage OWE their
existence upon the principal obligation. Thus, a pledge or mortgage may
secure all kinds of obligation whether pure or subject to suspensive condition

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 or resolutory condition (Art. 2091) or even VOIDABLE, UNENCFORCEABLE
AND NATURAL OBLIGATIONS.

(B) That the PLEDGOR OR MORTGAGOR be the ABSOLUTE OWNER of the

THING pledged or mortgaged.

GENERAL RULE, OWNERSHIP at the time pledged or mortgaged is

constituted. Thus, a pledge/mortgage executed by an IMPOSTOR is void.
Also, a pledge or mortgage constituted on FUTURE PROPERTY IS VOID.

But note: Where the pledge/mortgage is NOT VALID or it is VOID, as where

it is executed by one who is NOT THE OWNER, the PRINCIPAL
OBLIGATION which is guarantees still subsists, it is NOT thereby rendered
null and void. The PRINCIPAL OBLIGATION shall mature and becomes
demandable in accordance with the stipulations embodied in the said
contract. The voidness of the SECONDARY CONTRACT DOES NOT VOID
THE PRINCIPAL CONTRACT.

EXCEPTION: Third persons may pledge and mortgaged their property. Thus,
it is not required for the validity of a pledge or mortgage that the debtor be
the owner of the thing pledged or mortgaged. Third persons may pledge or
mortgage their property to secure ANOTHER PERSON’S DEBT (see Art. 2085
above). However, they can be held liable to the EXTENT OF THE VALUE OF
THE PROEPRTY. With respect to mortgage, they may be held liable for any
DEFICIENCY in case of foreclosure IF THEY EXPRESSLY AGREED TO
ASSUME the principal obligation.

(C) That the persons constituting the pledge or mortgage have the free disposal
of the property, and in the absence thereof, THAT THEY LE LEGALLY
AUTHORIZED FOR THE PURPOSE. (Art. 2085).

Meaning of free disposal- Free disposal means that the property being given
in pledge or mortgage is free from claims and encumbrances.

For example, if the pledge or mortgage was constituted on the property of a

corporation under receivership, the pledge or mortgage is not valid, because
the corporation does not have the FREE DISPOSAL OF THE THING.

DEFINITION OF TERMS:

WHAT IS A PLEDGE? A pledge is an accessory contract by virtue of which the

DEBTOR or a third person DELIVERS to the CREDITOR or to a third person
MOVABLE PROPERTY as a security for the PERFORMANCE of the principal
obligation, upon fulfillment of which the thing pledged, with all its accessions and
accessories, shall be return to the debtor or to the third person.

REMEMBER this, IN PLEDGE, THAT THE THING PLEDGED BE PLACED IN

POSSESSION OF THE CREDITOR OF PLEDGEE.

WHAT IS A REAL ESTATE MORTGAGE? A real estate mortgage is a contract

embodied in a public instrument recorded in the Registry of Property, by which the

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OWNER of an IMMOVABLE (or an alienable real right imposed upon immovable)
directly and immediately subjects it, whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted.

It is a contract in which the debtor guarantees to the creditor the fulfillment of a

PRINCIPAL OBLIGATION, subjecting for the faithful compliance therewith a REAL
PROPERTY in case of non-fulfillment of said obligation at the time stipulated.

A mortgage is regarded as nothing more than a lien, encumbrance, or security

for a debt, and passes no title or estate to the MORTGAGEE an gives him no right or
claim to the possession of the property

REMEMBER this, IN MORTGAGE, THE MORTGAGOR CONTINUES TO BE

IN POSSESSION OF THE PROPERTY.

TWO CONTRACTUAL MODES BY WHICH PERSONAL PROPERTY CAN BE USED

TO SECURE A PRINCIPAL OBLIGATION:

There are at least two contractual modes under the Civil Code by which
PERSONAL PROPERTY can be used to secure a PRINCIPAL OBLIGATION. The first is
through a CONTRACT OF PLEDGE, while the second is through a chattel mortgage.

PERSONAL PROPERTY:
(1) Contract of PLEDGE.
(2) Contract of CHATTEL MORTGAGE.

A PLEDGE would require the PLEDGOR to surrender possession of the thing

pledged, e.g. car, membership share, or any personal property to the PLEDGEE in order
that the contract of pledge may be constituted.

A CHATTEL MORTGAGE, the mortgagor WILL NOT SURRENDER

POSSESSION of the thing mortgaged, e.g. car, laptop or any personal property the
MORTGAGEE in order that the contract of chattel mortgage may be constituted.

Art. 2086: The provisions of Article 2052 are applicable to a PLEDGE OR MORTGAGEE.

In turn, Art. 2052 states: “A guaranty cannot exist without a VALID

OBLIGATION. Nevertheless, a guaranty may be constituted to guarantee the
performance of a VOIDABLE OR AN UNENFORCEBALE CONTRACT. It may also
guarantee a natural obligation.

Read case law of Central Bank of the Philippines vs. Court of Appeals and
Suplico M. Tolentino, G. R No. L-45710, October 3, 1985, pp. 379-380 of your book.

Facts: T obtained a loan from a bank in the amount of 80,000.00 A real estate
mortgage was constituted on his 100-hectare property. The bank made only a partial
release of Php 17,000.00, and did not release the remaining Php 63,000.00. However, T
was unable to re-pay his loan for the Php 17,000.00.

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 Issue: Can the Bank foreclose the 100-hectare property where T executed a real
estate mortgage?

Ruling: The Court said: “In the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage is the existence of a VALID,
VOIDABLE OR UNENFORCEABLE DEBT. (Art. 2086 in relation to 2052)

Since the bank failed to release the Php 63,000.00 balance of the Php 80,000.00
loan, the real estate mortgage became UNENFORCEBALE to such extent. Php 63,000.00
is 78.75% of Php 80,000.00, hence the real estate mortgage covering 100 hectares is
UNENFORCEABLE to the extent of 78.75%. But the mortgage covering the remainder
of 21.25 hectares subsists as a security for the Php 17,000.00 debt, 21.25 hectares is more
than sufficient to secure a Php 17,000.00 debt.

“Art. 2087. It is also the essence of these contracts that when the PRINCIPAL
OBLIGATION becomes DUE, the THINGS in which the PLEDGE OR MORTGAGE
consists may be alienated for the PAYMENT TO THE CREDITOR.”

When the PRINCIPAL OBLIGATION becomes DUE and the DEBTOR fails to
perform his obligation, the creditor may foreclose on the pledge or mortgage of the
purpose of alienating the property to satisfy his CREDIT.

WHEN THE THING PLEDGED OR MORTGAGED MAY BE SOLD OR ALIENATED

TO PAY THE DEBT:

A. BEFORE MATURITY OF THE PRINCIPAL DEBT-the thing pledged or

mortgaged CANNOT BE SOLD OR ALIENATED since payment cannot yet
be compelled. The principal debt has not yet matured.

EXCEPTION: If the PLEDGOR OR MORTGAGOR fails to fulfill certain

conditions stated in the PRINCIPAL CONTRACT, the violation of which will
make the DEBT DUE and entitle the pledgee or mortgagee to have the thing
sold through the formalities required by law.

B. AT MATURITY OF THE PRINCIPAL DEBT- Upon default of the debtor to

pay the obligation at maturity, the thing pledged or mortgaged may be sold
or otherwise alienated to pay the creditor as provided in Art. 2087.

“Art. 2088. The creditor CANNOT APPROPRIATE THE THING GIVEN by of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is NULL AND VOID.”

The appropriation of the mortgaged/pledged properties by the

mortgagee/pledgee even if stipulated by the parties would be null and void for
being what is known as PACTUM COMMISSORIUM.

CONCEPT OF PACTUM COMMISSORIUM-is a contractual stipulation that is deemed

contrary to law. It is defined as “a stipulation empowering the creditor to appropriate
the thing given as guaranty for the fulfillment of the obligation in the event the obligor
fails to live up to his undertakings, without further formality, such as foreclosure
proceedings, and a public sale.

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 This is a stipulation in a pledge or mortgage which provides for
AUTOMATIC FORFEITURE, i.e., that ownership of the thing pledged or
mortgaged shall pass to the creditor by the mere default of the debtor.

Under the law, the creditor is allowed only to move FOR THE SALE OF
THE THING PLEDGED OR MORTGAGED after the principal obligation
becomes due, in order to collect the amount of his claims from the proceeds. The
stipulation however, that the pledgee or mortgagee may purchase the thing
pledged or mortgaged at their current price if the debt is not paid on time is
valid. The pledgee or mortgagee may also bid at the public auction of the things
pledged or mortgaged.

APPROPRIATION IN PLEDGE AND APPROPRIATION IN MORTGAGE:

1. Appropriation in pledge- is allowed only if the thing pledged is not

sold at TWO PUBLIC AUCTIONS. The pledgee is required in this case
to give an acquittance for his entire claim, as provided in Art. 2112.
2. Appropriation in mortgage- in no case is appropriation of the property
mortgaged allowed.

INTENTION OF PACTO COMMISSORIO- The prohibition against a pacto

commissorio is intended to protect the obligor, pledger or mortgagor against being
overreached by his creditor who holds a pledge or mortgage over property whose value
is much more than the debt.

Read case law of Victoria Yau Chu vs. Court of Appeals, G. R No. L-
785519, pp. 381-382 of your book.

Facts: V purchased on credit bags of cement from C CORPORATION, to secure or

guarantee the payment, she executed DEEDS OF ASSIGNMENT of her TIME
DEPOSITS maintained with BANK.
She failed to pay her debt thus C CORPORATION asked the bank to encashed the time
deposit which had been assigned by V.

Issue: Is this a PACTO COMISSORIO stipulation?

Ruling: NO. This is not a pacto commissorio stipulation. In this case the
SECURITY FOR THE DEBT IS ALSO MONEY deposited in a bank, the amount of
which is even less than the debt, it was not illegal for the creditor to encash the time
deposit certificates to pay the debtor’s overdue obligation, with the latter’s consent.

ELEMENTS OF PACTUM COMMISSORIUM: There are two (2) elements for pactum
commissorium to exists:

1. That there should be a pledge or mortgage wherein a PROPERTY is pledged

or mortgaged by way of a security for the payment of the principal obligation
and;
2. That there should be a stipulation for an AUTOMATIC APPROPRIATION by
the creditor of the thing pledged or mortgaged in the event of nonpayment of
the principal obligation within the stipulated period.

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ESSENCE OF PACTUM COMMISSORIUM- the essence of this rule is that
OWNERSHIP OF THE SECURITY WILL PASS TO THE CREDITOR by the mere default
of the debtor. This has been repeatedly declared by the Supreme Court as CONTRARY
TO MORALS AND PUBLIC POLICY.

Example: H and W obtained a loan from Spouses G and L for Php 100,000. To secure the
debt, H and W executed a DEED OF SALE of their residential house and lot covered by
TCT No. 12345. H and W failed to pay the loan at maturity causing Spouses G and L to
register the sale and obtain ownership of the house and lot. This is pactum
commissorium. The ownership of the security was transferred to the creditor upon
mere default, without the proper foreclosure proceedings.

“Article 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in
mortgage or pledge, each one of them guarantees only a determinate portion of the
credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is
satisfied.”

INDIVISIBILITY OF PLEDGE AND MORTGAGE:

General Rule: A pledge or mortgage is INDIVISIBLE, even though the debt may
be divided among the successors in interest of the debtor or of the creditor. This rule
applies even if the debtors are jointly liable (Art. 2090).

1. INDIVISIBILITY AMONG HEIRS OF THE DEBTOR- the debtor’s heir who

has paid a part of the debt cannot ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not completely satisfied (Art.
2089).

2. INDIVISIBILITY AMONG HEIRS OF THE CREDITOR- the creditor’s heir

who received his share of the debt cannot return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid (Art.
2089)

3. EXCEPTION: The pledge or mortgage is divisible if SEVERAL THINGS are

given in pledge or mortgage and each one of them guarantees only a
determinate portion of the credit.

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 The debtor in this case, shall have the right to the extinguishment of the
pledge or mortgage as the portion of the debt for which each thing is
answerable is satisfied.

CLASS EXERCISES: pp. 386 of your book.

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

Example: A and B jointly borrowed Php 50,000.00 from C. To secure the debt, A
pledged his necklace and B his ring. If A pays C Php 25,000.00, he cannot ask for the
extinguishment of the of the pledge of his necklace. Although the debtors are jointly
liable, the pledge constituted on the necklace and the ring is indivisible.

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

PURE OBLIGATION- An obligation whose performance does not depend upon a

future or uncertain even or upon a past event unknown to the parties and which is
demandable at once, (Art. 1179). There is nothing to exempt the obligor from
compliance therewith.

CONDITIONAL OBLIGATION- An obligation where the acquisition of rights, as well

as the extinguishment of loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition, (Art. 1181).

SUSPENSIVE CONDITION-the fulfillment of the condition results in the acquisition of

rights arising out of the condition.

When the contract is subject to a suspensive condition, the birth or effectivity can
take place only if and when the event which constitutes the condition happens or is
fulfilled, and if the suspensive condition does not take place, the parties would stand as
of the conditional obligation has never existed.

RESOLUTORY CONDITION-the fulfillment of the condition results in the

extinguishment of rights out of the obligation.

“Article 2092. A promise to constitute a pledge or mortgage gives rise only to a

personal action between the contracting parties, without prejudice to the criminal
responsibility incurred by him who defrauds another, by offering in pledge or mortgage
as unencumbered, things which he knew were subject to some burden, or by
misrepresenting himself to be the owner of the same.”

A promise to constitute a pledge or mortgage gives rise only to a PERSONAL

ACTION between the contracting parties. Thus, a right of action exists to compel the
fulfillment of the promise to create or constitute the agreed pledge or mortgage.

The debtor then can be compelled by the creditor to fulfill his promise by
executing the pledge or mortgage. Until the mortgage has been executed, no real right
on the property is created. In the case of pledge, the same shall not be perfected until
the delivery of the object of the pledge.

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 Should the debtor fail to comply with his promise to constitute the pledge or
mortgage, he loses the benefit of the period. Accordingly, the creditor may demand
immediate payment, (Art. 1198)

E.g. DEBTOR borrowed Php 50,000.00 from CREDITOR. The loan is payable in
12 months. DEBTOR promise to execute a mortgage on his land within one (1) month to
secure the debt. CREDITOR accepted the promise. In this case, no mortgage has been
constituted. Thus, CREDITOR has a PERSONAL RIGHT to demand the constitution of
the mortgage. Once the mortgage has been constituted, the mortgage created a real
right in favor of CREDITOR over the land as security. But if DEBTOR does not
constitute the mortgage as agreed within one-month period, the CREDITOR may
demand immediate payment of the debt.

PLEDGE

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

in order to constitute the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement.

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 In a contract of pledge, the creditor is given the right to retain his debtor’s
movable property in his possession, or in that of a third person to whom it has been
delivered, until the debt is paid.

KINDS OF PLEDGE:
1. Conventional Pledge or Voluntary- that which is constituted by the mutual
consent of the pledger and the pledgee.
2. Legal- that which is created by operation of law. Example. Articles 546, 1731
and 1994 of the Civil Code

REQUISITES OF PLEDGE:

a. That they be constituted to secure the fulfillment of a principal obligation;

b. That the pledgor be the absolute owner of the thing pledged;

c. That the person constituting the pledge have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the
purpose.

d. That the thing pledge be placed in the possession of the creditor or of a third
person by common agreement.

NECESSITY OF ACTUAL PHYSICAL DELIVERY: A pledge, being a real

contract, requires for its perfection the DELIVERY OF THE THING to the
creditor or to a third person by common agreement. The delivery required
here is ACTUAL DELIVERY.

CASE LAW: TAMBUNTING PAWNSHOP VS. COMMISSIONER OF

INTERNAL REVENUE, G.R. NO. 171138, April 7, 2009 at pp. 391 and 392 of
your book.

FACTS: A pre-assessment then later an assessment letter with the

corresponding demand letter to pay was issued by the CIR against
TAMBUNTING PAWNSHOP for the payment of DOCUMENTARY STAMP
TAX.

TAMBUNTING filed its WRITTEN PROTEST to the ASSESSMENT

contending that DST applies only to CONTRACTS OF PLEDGE under the tax
law and NOT TO PAWNSHOP TRANSACTIONS. In short, TAMBUNTING
argues that PAWNSHOP TRANSACTION are NOT PLEDGE CONTRACTS.

RULING: A pawn ticket is required to contain the same ESSENTIAL

INFORMATION that would be found in a pledge agreement. Only the
nomenclature of the requirements in the pawn ticket is changed to refer to
specific kind of pledge transactions undertaken by pawnshops. The property or
thing pledged is referred to as the PAWN, the creditor pledgee is referred to as
the PAWNEE and the debtor pledger is referred to as the PAWNEE.

A pledge is a real contract, hence, it is necessary in order to constitute the

contract of pledge, that the thing pledged BE PLACED IN THE POSSESSION OF
THE CREDITOR, or of a third person by common agreement. Thus, the issuance

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of a pawn ticket by the pawnshop means that the thing pledged has already been
placed in the possession and that the pledge has been constituted.

TAMBUNTING is liable is to pay DST.

OBJECTS OF PLEDGE

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

IMMOVABLE PROPERTIES cannot be placed.

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of

lading, shares of stock, bonds, warehouse receipts and similar instruments may
also be pledged. The instrument proving the right pledged shall be delivered to
the creditor and if negotiable, must be indorse.

PLEDGE OF INCORPOREAL RIGHTS:

1. The instrument proving the right pledged shall be delivered to the
creditor.
2. If the instrument is negotiable, it must be indorsed.

FORM OF PLEDGE

Art. 2096. A pledge shall not take effect against third persons if a description of
the thing pledged and the date of the pledge do not appear in a public
instrument.

1. BETWEEN THE PARTIES- the pledge may be in any form as in fact the
mere delivery of the object is sufficient to bind the parties.

2. AS REGARDS THIRD PERSONS- to take effect against third persons,

the pledge must be in a public instrument SHOWING A
DESCRIPTION OF THE THING PLEDGED AND THE DATE OF THE
PLEDGE.

Art. 2097. With the consent of the pledgee, the thing pledge may be alienated by
the pledgor or owner, subject to the pledge. The ownership of the thing pledged
is transmitted to the vendee or transferee as soon as the pledgee consents to the
alienation, but THE LATTER SHALL CONTINUE IN POSSESSION.

The pledger retains ownership of the thing pledged. Thus, the pledgor
retains the right to alienate the thing pledged WITH THE CONSENT OF THE
PLEDGEE

E.g. D pledged his watch in favor of C in the amount of 15K. To secure his
obligation, the watch was delivered to perfect the pledge. So, if D wants to sell
the watch, it should be with the consent of C. If D sold the watch to E with the
consent of C, the sale is valid. However, the ownership of the thig pledged is
transmitted to E but C SHALL CONTINUE IN POSSESSION.

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Art. 2098. The contract of pledge gives a right to the creditor to RETAIN THE
THING IN HIS POSSESSION or in that of a third person to whom it has been
delivered, UNTIL THE DEBT IS PAID.

This article provides the right of the creditor to retain possession of the
pledged items UNTIL THE DEBT IS PAID.

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

DEGREE OF CARE REQUIRED: It is ordinary diligence, the diligence of a good

father of a family. BONOS PATER FAMILIA!

Article 2100. The pledgee cannot deposit the thing pledged with a third person,
unless there is stipulation authorizing him to do so. The pledgee is responsible
for the acts of his agents or employees with respect to the thing pledged.

GENERAL RULE: The pledgee cannot deposit the thing pledged with a third
person.

EXCEPTION: There is a stipulation authorizing the pledgee to do so.

Article 2101. The pledgor has the same responsibility as a bailor in commodatum
in the case under Article 1951.

Article 2102. If the pledge earns FRUITS, INCOME, DIVIDENDS, OR

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

In case of pledged of animals, their offspring shall pertain to the pledgor

or owner of animals pledged, but shall be subject to the pledgee, if there is no
stipulation to the contrary

E.g. D owns C Php 50,000.00 with 1% monthly interest. To secure the debt,
he delivered his XEROX MACHINE. The machine earns income. For this, C shall
compensate what he receives with those which are owing to him. If he amount
exceeds that which is due, C shall apply it to the principal of Php 50,000.00.

In case of pledged of animals, their offspring shall be included in the

pledge, except if there is a contrary stipulation.

Article 2103. Unless the thing pledged is expropriated, the debtor continues to be
the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the
owner of the thigs pledged in order to recover it from or defend it against a third
person

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Article 2104. The creditor cannot use the thing pledged, without the authority of
the owner, and if he should do so, or should misuse the thing in any other way,
the owner may ask that it be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be used by the creditor
but only for that purpose.

RIGHTS OF THE PLEDGOR TO ASK THAT THE THING BE DEPOSITED:

1. If the creditor uses the thing without authority.
2. If the creditor should misuse the thing in any other way.

Article 2105. The debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt and its interest, with
expenses in a proper case.

The debtor cannot ask for the return of the thing pledged against the will
of the creditor unless and until he has paid the debt and its interest

Article 2106. If through negligence or willful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may require that it be
deposited with a third person.

If there is willful or neglectful act of the pledgee while in possession, the

pledgor can require the pledged items be DEPOSITED with a third person.

Article 2107. If there is reasonable grounds to fear the destruction or impairment

of the thing pledged, without the fault of the pledgee, the pledgor may demand
the return of the thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality and without
prejudice to the right of the pledgee under the provisions of the following article.

The pledgee is bound to advise the pledgor, without delay, of any danger
to the thing pledged.

Article 2108. If, without the fault of the pledgee, there is danger of destruction,
impairment or diminution in value of the thing pledged, he may cause the same
to be sold at public sale. The proceeds of the same auction shall be a security for
the principal obligation in the same manner as the thing originally pledged.

REMEDY OF THE PLEDGOR- he may demand the return of the thing, upon
offering another in pledge.

REMEDY OF THE PLEDGEE- he may cause the same to be sold at public

auction.

In both cases, the pledgee is without fault.

Article 2109. If the creditor is deceived on the substance or quality of the thing
pledged, he may either claim another thing in its stead or demand immediate
payment of the principal obligation.

IN CASES OF DECEPTION ON THE SUBSTANCE OR QUALITY:

1. The pledgee may claim another thing in its stead.
2. The pledgee may demand immediate payment of the principal
obligation.

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Article 2110. If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary shall be void.

If subsequent to the perfection of the pledge, the thing is in the possession of the
pledgor or owner, there is a prima facie presumption that the same has been
returned by the pledgee. This same presumption exists if the thing pledged is in
the possession of a third person who has received it from the pledgor or owner
after the constitution of the pledge.

E.g. D pledged his watch as security for a loan of Php 50,000.00. The loan and
pledge is for ONE MONTH. After two weeks and upon the request of D, C
returned the laptop with the agreement that the pledge will not be extinguish.

In such a case, the PLEDGE IS EXTINGUISHED. Any contrary stipulation

is void.

BUT NOTE: The extinguishment of the pledge does not mean the
extinguishment of the principal obligation.

Article 2111. A statement in writing by the pledge that he renounces or abandons

the pledge is sufficient to extinguish the pledge. For this purpose, neither the
acceptance by the pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary.

E.g. D pleged his mobile phone to C for the loan of Php 10,000.00. C
renounces the pledge in writing thru a letter. In this case, the pledge is
extinguish. There is no need for acceptance even the return of the thing pledged.
While the thing pledged has not been returned, C becomes the depositary.

Article 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 public auction and with notification to the debtor and the owner
of the thing pledged in a proper case, stating the amount for which the public
sale is to be held. If at the first auction, the thing is not sold, a second one with
the same formalities shall be held; and if 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.

When the PRINIPAL OBLIGATION had not been paid at maturity, the
creditor may proceed with the sale by public auction by engaging the services of
a NOTARY PUBLIC.

The creditor pledgee CANNOT APPROPRIATE WITHOUT

FORECLOSURE the things given by way of pledge. Any stipulation shall be
considered pactum commissorium. The law requires foreclosure in order to
allow the transfer of title of the goods given by way of security rom its pledgor
and before any such foreclosure, the pledgor (not the pledgee) IS STILL THE
OWNER OF THE GOODS.

“Article 2113. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the highest
bidder.

13
 The pledgee may also bid, but his offer shall not be valid if he is the only
bidder.”

Under this article, the pledgor and the pledgee may bid at the public
auction. But the pledgor has a better right if he should offer the same terms as
the highest bidder. The pledgee’s offer shall not be valid if he is the only bidder.

“Article 2114. All bids at the public auction shall offer to pay the purchase price
at once. If any other bid is accepted, the pledgee is deemed to have received the
purchase price, as far as the pledgor or owner is concerned.”

“Article 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount of the
principal obligation, interest and expense in a proper case. If the price of the sale
is more than said amount, the debtor shall NOT be entitled to the excess, unless
it is otherwise agreed. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.”

The foreclosure of the thing pledged results in FULL SATISFACTION of

the LOAN LIABILITIES to the pledgee of the pledgor.

The rule is ONCE A PLEDGED ITEM IS SOLD, neither the pledgee nor
the pledgor can recover whatever deficiency or excess there may be between the
purchase price and the amount of the principal obligation.

RULES AS TO THE PROCEEDS OF THE SALE:

1. If the price of the sale is MORE THAN the amount of obligation, the
debtor shall not be entitled to the excess, unless it is otherwise agreed.
2. If the price of the sale is LESS, neither shall the creditor be entitled to
recover the deficiency, notwithstanding any stipulation to the contrary.

DIFFERENCE IN DEFICIENCY CLAIM IN MORTGAGE VS. PLEDGE:

If the proceeds of the sale are insufficient to cover the debt in an

extrajudicial foreclosure of the MORTGAGE, the MORTGAGEE is entitled to
claim the deficiency from the debtor.

When the Legislature intends to DENY the right of the creditor to sue for
any deficiency resulting from foreclosure of security given to guaramtee an
obligation, it expressly provides as in the case of PLEDGES, in Article 2115 and
in CHATTEL MORTGAGES of a thing SOLD ON INSTALLMENT BASIS, see
Article 1484 (3).

ACT NO. 3135 which governs extrajudicial foreclosure of REAL ESTATE

MORTGAGE, while silent as to the mortgagee’s right to recover, does not, on the
other hand, prohibit recovery of deficiency. Accordingly, it had been held that a
deficiency judgment arising from the extrajudicial foreclosure is allowed.

DEFICIENCY CLAIM IN CHATTEL MORTGAGE VS. PLEDGE:

The effects of foreclosure under the Chattel Mortgage law run inconsistent
with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing

14
pledged extinguishes the entire principal obligation, such that the pledgor may
no longer recover proceeds of the sale in excess of the amount of principal
obligation. Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs.

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

“Article 2117. Any third person who has any right in or to the thing pledged may
satisfy the principal obligation as soon as the latter becomes due and
demandable.”

Article 2118. If a credit which had been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He shall apply
the same to the payment of his claim, and deliver the surplus, should there be
any, to the pledgor.

E,g. X owes D the amount of Php 50,000.00 covered by a promissory note.

In turn, D pledge this credit to C to secure his own loan in the amount of Php
35,000.00. On maturity, C may collect the Php 50,000.00 from X and deliver Php
15,000.00 to D.

“Article 2119. If two or more thing are pledged, the pledgee may choose which
he will cause to be sold, unless there is a stipulation to the contrary. He may
demand the sale of only as many things as are necessary for the payment of the
debt.”

Under the law, it is the pledgee and not the pledgor who is given the
RIGHT TO CHOOSE which items should be sold if two or more things are
pledged.

“Article 2120. If a third party secures an obligation by pledging his own movable
property under the provisions of Article 2085 he shall have the same rights as a
GUARANTOR under Articles 2066 to 2070, and Articles 2077 to 2081. He is not
prejudiced by any waiver of defense by the principal obligor.”

“Article 2121. Pledges created by operation of law, such as those referred to in

Articles 546, 1731, and 1994, are governed by the foregoing articles on the
possession, care and sale of the things as well as on the termination of the pledge.
However, after payment of the debt and expenses, the remainder of the price of
the sale shall be delivered to the obligor.

Pledges created by operation of law refers to the RIGHT OF RETENTION.

“Article 2122. A thing under a pledge by operation of law may be sold only after
demand of the amount for which the thing is retained. The public auction shall
take place within one month after such demand. If, without just grounds, the
creditor does not cause the public sale to be held within such period, the debtor
may require the return of the thing.”

15
 There is only one public auction which shall take place within one month
after such demand.

“Article 2123. With regard to pawnshops and other establishments which are
engaged in making loans secured BY PLEDGES, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions of this Title.

With regards to PAWNSHOPS and other establishments which are

engaged in making loans secured by pledges, it the special law that shall govern,
which is PD NO. 114, the PAWNSHOP REGULATION ACT, and only
subsidiarily by the provisions of the Civil Code on PLEDGE.

The property or thing pledge is referred to as the PAWN, the creditor

(PLEDGEE) is referred to as the PAWNEE, and the debtor (pledgor) is referred to
as the PAWNER.

SUMMARY:

RIGHTS OF THE DEBTOR/PLEDGOR:

1. To alienate, with the consent of the pledgee, the thing pledged. The
ownership of the thing pledged is transmitted to the vendee or
transferee as soon as the pledgee consents to the alienation, but the
pledge shall continue in possession. (Art. 2097)
2. To ask that the thing pledged be judicially or extra-judicially
deposited, if it is used without authority or for a purpose other than
for its preservation. (Art. 2104).
3. To continue to be the owner of the thing pledged unless it is
expropriated. (Art. 2103).

16
 4. To ask for the return of the thing pledged after he has paid the debt
and its interest, with its interest, with expenses in a proper case. (Art.
2105)
5. To require that the thing pledged be deposited with a third person of it
is in danger of being lost or impaired through the negligence or willful
act of the pledgee. (Art. 2106)
6. To demand the return of the thing pledged, upon offering another
thing in pledge, provided the latter is of the same kind and quality, if
there are reasonable grounds to far the destruction or impairment of
the thing pledged without the fault of the pledgee. (Art. 2107)

This right however, is without prejudice to the right of the pledgee to

have the thing sold at a public sale. The proceeds of the auction shall
be security for the principal obligation in the same manner as the thing
originally pledged. (Art. 2107, 2108)

OBLIGATIONS OF THE DEBTOR/PLEDGOR:

1. To pay the debt and its interest, with expenses in a proper case, when
they are due (Art. 2105)
2. To pay damages that the pledgee may suffer by reason of the flaws of
the thing pledged, if he was aware of such flaws but did not advise the
pledgee of the same. (Art. 1951, 1201)

RIGHTS OF THE CREDITOR/PLEDGEE:

1. To retain in his possession the thing pledged until the debt is paid.
(Art. 2098)
2. To demand reimbursement of the expenses made for the preservation
of the thing pledged. (Art. 2099)
3. To bring actions which pertain to the owner of the thing pledged in
order to recover it from, or defend it against, third persons. (Art. 2103)
4. To use the thing pledged if he is authorized to do so, or when its use is
necessary for the preservation of the thing. (Art. 2104)
5. If he is deceived of the substance of the thing pledged, he may:
a. Claim that another thing be given to him in place of the thing
pledged, or
b. Demand immediate payment of the principal obligation. (Art.
2109)
6. To cause the sale of the thing pledged at a public sale, if there is a
danger of destruction, impairment or diminution in value of the thing
pledged without his fault.

The proceeds of the auction shall be security for the principal

obligation in the same manner as the thing originally pledged. (Art.
2108)

7. To collect and receive the amount due if the thing pledged is a credit
which has become due before it is redeemed, and to apply the same to
the payment of his claim. He shall apply what he has collected to the
payment of his claim, and deliver the surplus, should there be any, to
the pledgor. (Art. 2118)
8. To sell he thing pledged upon default of the debtor. (Art. 2087)

17
OBLIGATIONS OF THE CREDITOR/PLEDGEE:

1. To take care of the thing pledged with the diligence of a good father of
a family. (Art. 2099)
2. To be liable for the loss or deterioration of the thing pledged unless it
is due to fortuitous event. (Art. 2099)
3. Not to deposit the thing pledged with a third person, unless
authorized. (Art. 2100)
4. To be responsible for the acts of his agents or employees with respect
to the thing pledged. (Art. 2100)
5. Not to use the thing pledged, except:
a. When he is authorized by the owner.
b. When the use of the thing is necessary for its preservation.
6. To deliver to the debtor the surplus after paying his claim from what
he has collected on a credit that was pledged and which has become
due before it is redeemed.

RIGHTS OF A THIRD PERSON WHO PLEDGES HIS OWN MOVABLE

PROPERTY TO SECURE DEBT OF ANOTHER:

1. To be indemnified by the debtor if he pays the creditor. The indemnity

consist of the following:

a. The total amount of the debt.

b. The legal interest thereon from the time payment was made known
to the debtor, even though it did not earn interest for the creditor.
c. The expenses incurred by the debtor after having been notified the
debtor that payment had been demanded of him.
d. Damages, if they are due. (Art. 2066, 2120)

2. To be subrogated to all the rights of the creditor against the debtor if

he pays the creditor. (Art. 2067, 2120)

The pledgor is considered a third person interested in the

fulfillment of the obligation, hence, he is entitiled to be subrogated
to the creditor’s rights upon payment. (Art. 1236 and 1302).

E.g. D obtained a loan pf Php 10,000.00 from C. The debt is secured

by the guarantee of G and the pledge by T of his ring.

If T pays C, T steps into the place of C. Thus, T can demand the

indemnification mentioned in No. 1 above from D. If D cannot pay,
T can go after G.

3. To be released from liability in the following cases:

a. If the creditor voluntarily accepts the immovable or other

property in payment of the debt even if the creditor thereafter
loses the same by eviction (Art. 2077, 2120)

E.g. D borrowed Php 50,000.00 from C. The debt is secured by a

pledge of T’s ring. On due date, C accepted a parcel of land
from D in payment of the debt. T can demand that he be

18
 released from the pledge. T shall be released even if later, C
should lose the lot by eviction in case there is a rightful owner.

NOTE: The acceptance by the creditor of a property in payment

of the debt is in the nature of a dacion en pago.

b. If an extension of time is granted to the debtor by the creditor

without his (pledgor’s) consent. (Art. 2079, 2080).

c. If through some act of the creditor, the pledge cannot be

subrogated to the rights, mortgages and preferences of the
creditor. (Art. 2080, 2120)

Thus, if in the example No. 2, C cancels G’s guarantee, T is

released from liability because if T pays C, T can no longer go
after G if D cannot pay the indemnification due to him (T).

EXTINGUISHMENT OF PLEDGE:

PLEDGE may be extinguished directly or indirectly:

1. INDIRECT CAUSE- When the principal obligation secured by the

pledge is extinguish, the pledge, being merely an accessory contract is
likewise extinguished.

Any third person who has any right in or to the thing pledged may
satisfy the principal obligation as soon as the latter becomes due and
demandable.

Example: D owes C Php 50,000.00. The debt is secured by a pledge of

D’s wristwatch. If D pays C Php 50,000.00, the debt is extinguished
together with the pledge.

2. DIRECT CAUSES- Pledge may be extinguished directly as follows:

a. RETURN by the pledgee of the thing pledged to the pledgot or
owner.
1. Any stipulation that the pledge is not extinguished by the
return of the thing is void.
2. Prima facie presumption that the pledgee returned the thing
pledged:
a. If the thing pledged is found in the possession of the
pledgor or owner.
b. If the thing pledged is in the possession of a third person
who has received it from the pledgor or owner. (Art. 2110)

b. RENUNCIATION OR ABANDONMENT in writing by the pledgee

of the pledge:
a. The acceptance by the pledgor or owner of the renunciation,
or return of the thing pledged, is not necessary for such mode of
extinguishing pledge.
b. The pledgee becomes a depositary upon renunciation (Art.
2111) if in the meantime, the thing pledged is not yet returned
to the owner.

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 c. SALE OF THE THING PLEDGED:

1. FORMALITIES OF THE SALE- The sale shall be:

a. By public auction,
b. Through a Notary Public,
c. With notice to the debtor and the owner of the thing
pledged, stating the amount for which the public sale is
to be held (Art. 2112)

2. WHO MAY BID AT THE PUBLIC AUCTION-

a. The pledgor or owner- he shall be preferred if he should
offer the same terms as the highest bidder.
b. The pledgee- however, his offer shall not be valid if he is
the only bidder (Art. 2113)
c. Third persons.

3. REQUIRED AMOUNT OF BIDS- All bids shall offer to pay the

PURCHASE PRICE AT ONCE. If any other bid is accepted, the
pledgee is deemed to have received the purchase price, as far as
the pledgor or owner is concerned. (Art. 2114)

4. EFFECTS OF SALE- The principal obligation shall be

extinguished whether or not the proceeds of the sale are equal
to the amount of the principal obligation, interest and expenses
in a proper case. (Art. 2115)

a. If the price or more than the amount of the obligation, the

debtor shall not be entitled to the excess, UNLESS THERE IS
AN AGREEMENT TO THAT EFFECT.
b. If the price is less, the creditor cannot recover EVEN IF
STIPULATED.

5. RULE WHEN TWO OR MORE THINGS ARE PLEDGED- the

pledgee may choose which he will cause to be sold, unless there
is a contrary stipulation. He may demand the sale of only as
many of the things as are necessary for the payment of the debt.
(Art. 2119)

d. APPROPRIATION OF THE THING PLEDGED- If the thing pledged is

NOT sold in the first and second public auctions, the creditor may
appropriate the thing pledged. In this case, he shall be obliged to give an
ACQUITTANCE for his entire claim. (Art. 2112)

LEGAL PLEDGE

CONCEPT: Legal Pledge or pledge by operation of law refers to the

RIGHT OF A PERSON TO RETAIN A THING until he receives the
payment of his claim.

EXAMPLES:
1. POSSESSORY LIEN BY A POSSESSOR IN GOOD FAITH- a
possessory lien in good faith may retain the movable upon which he

20
 has incurred necessary and useful expenses until he has been
reimbursed therefor. (Art. 546)
2. Possessory lien of worker- He who has executed a work upon a
movable has a right to retain it by way of pledge until he is paid )Art.
1731)
3. Depositary’ right of retention- the depositary may retain the thing
deposited until the full payment of what may have been due him by
reason of the deposit (Art. 1994).

RULES APPLICABLE TO LEGAL PLEDGES: The provisions on

conventional pledge on the possession, care and SALE of the thing as well
as on the TERMINATION of pledge shall be applicable to legal pledge
except to the sale of the thing pledged as follows:

1. The thing may be sold only after demand of the amount for
which the thing is retained.
2. The public auction shall take place within one month after such
demand.
3. If without just grounds, the creditor does not cause the public
sale TO BE HELD WITHIN SUCH PERIOD, the debtor may
require the return of the thing. (Art. 2122)
4. After the payment of debt and expenses, the remainder of the
price of sale shall be delivered to the OBLIGOR.

SPECIAL LAWS ON PAWNSHOPS AND SIMILAR ESTABLISHMENT-

PAWNSHOPS and other establishments engaged in making loans secured
by pledges shall be governed primarily by the SPECIAL LAWS AND
REGULATONS concerning them, and subsidiarily by the provisions of
pledge in the Civil Code. (Art. 2123).

MORTGAGE:

CONCEPT OF MORTGAGE: It is a contract in which the debtor guarantees to

the creditor the fulfillment of a PRINCIPAL OBLIGATION, subjecting for the
faithful compliance therewith a REAL PROPERTY in case of non-fulfillment of
the said obligation at the time stipulated.

The essence of a mortgage contract is that a property has been set apart
from the mass of property of the debtor mortgagor as a security for the fulfilment
in case of default of payment.

REQUISITES OF REAL ESTATE MORTGAGE:

1. That it be constituted to secure the fulfillment of a principal obligation;

2. That the mortgagor be the absolute owner of the thing pledged or

mortgaged;

3. That the person constituting the mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for
the purpose.

21
 4. That the document in which the mortgage appears be recorded in the
Registry of Property. (Art. 2125)

This requirement is necessary to BIND THIRD PERSONS but NOT for

validity of the real mortgage which may be entered into in any form.

CHARACTERISTICS OF REAL MORTGAGE:

1. ACCESSORY- because it cannot exist without a principal obligation.

2. INDIVISIBLE- because it creates a lien on the whole or all of the
properties mortgaged, which lien continues until the obligation it
secures has been fully paid.
3. INSEPARABLE- because it SUBJECTS THE PROPERTY UPON
WHICH IT IS IMPOSED, whoever the possessor may be, to the
fulfillment for whose security is was constituted. (Art. 2126)

E.g. D obtained a loan from C amounting to Php 1M. To secure the

debt, D constituted a mortgage on his lot which C registered with the
Register of Deeds. Before the due date of the loan, D sold the lot to X
who knew nothing of the mortgage. If D later defaults in the payment
of his loan, C can foreclose the mortgage although X was not a party
thereto and even if he was not aware of the existence of the mortgage
at the time he purchased the lot.

4. REAL RIGHT- because it creates a lien on the property mortgaged

whereby the mortgagee has a right to have the mortgaged property
sold to satisfy his claim.
5. REAL PROPERTY- because it is a real right over immovable property.

KINDS OF REAL MORTGAGE:

1. Voluntary or Conventional- it is created by the agreement of the

parties.
2. Legal- it is required by law.

3. Equitable Mortgage- one which reveals an intent to make the property

as security, even if the contract lacks the proper formalities of a real
estate mortgage.

“Article 2124. Only the following property may be the object of a contract of

mortgage:

(1) Immovables;

(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage.”

OBJECT OF MORTGAGE:

22
 1. Immovables, see Art. 415 of the Civil Code for the enumeration of
what is an immovable.

“Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the
soil;

(2) Trees, plants, and growing fruits, while they are attached to the
land or form an integral part of an immovable;

(3) Everything attached to an immovable in a fixed manner, in such a

way that it cannot be separated therefrom without breaking the
material or deterioration of the object;

(4) Statues, reliefs, paintings or other objects for use or ornamentation,

placed in buildings or on lands by the owner of the immovable in such
a manner that it reveals the intention to attach them permanently to
the tenements;

(5) Machinery, receptacles, instruments or implements intended by the

owner of the tenement for an industry or works which may be carried
on in a building or on a piece of land, and which tend directly to meet
the needs of the said industry or works;

(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding

places of similar nature, in case their owner has placed them or
preserves them with the intention to have them permanently attached
to the land, and forming a permanent part of it; the animals in these
places are included;

(7) Fertilizer actually used on a piece of land;

(8) Mines, quarries, and slag dumps, while the matter thereof forms
part of the bed, and waters either running or stagnant;

(9) Docks and structures which, though floating, are intended by their
nature and object to remain at a fixed place on a river, lake, or coast;

(10) Contracts for public works, and servitudes and other real rights
over immovable property.”

2. Alienable real rights in accordance with laws, imposed on immovable.

“Article 2125. In addition to the requisites stated in article 2085, it is

indispensable, in order that a mortgage may be validly constituted, that the
document in which it appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is nevertheless binding between the
parties.

The persons in whose favor the law establishes a mortgage have no other right
than to demand the execution and the recording of the document in which the
mortgage is formalized.”

23
 Under this Article, if the mortgage is not recorded in the Registry of
Deeds, it is not effective against third parties. However, the mortgage is
nevertheless binding between the parties.

REGISTRATION only operates as a NOTICE TO THE WHOLE WORLD

on the existence of the mortgage to others, but neither adds to its validity nor
convert an invalid mortgage into a valid one between the parties.

FORM OF REAL MORTGAGE:

1. BETWEEN THE PARTIES- the real estate mortgage may be in any

form since it is a consensual contract. The contract is binding between
the parties even if not registered in the Registry of Property.

However, since a real mortgage creates a real right, the same must be
in a public instrument for the convenience of the parties (Art. 1358).
The person in whose favor the law establishes a mortgage have no
other recourse other than to demand the execution and the recording
of the document in which the mortgages is formalized. (Art. 2125)

2. AS REGARDS THIRD PERSONS- the real mortgage must be recorded

in the Registry of Property. (Art. 2125). However, the real mortgage is
nevertheless binding against third persons who have knowledge of the
same.

DIFFERENCE BETWEEN PLEDGE AND MORTGAGE:

1. In RM, it is constituted on IMMOVABLES, in PLEDGE, it is constituted on

MOVABLES.
2. In RM, DELIVERY is not required. In PLEDGE, property is delivered to the
pledgee or by common agreement, to a third person.

3. In RM, it is not valid against third persons, unless it is registered. In PLEDGE,

it is also NOT VALID as to third persons unless a description of the thing
pledged and the date of pledge appear in a public instrument.

“Article 2126. The mortgage directly and immediately subjects the property

upon which it is imposed, whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted.”

EFFECTS OF MORTGAGE:

1. It creates a REAL RIGHT. The mortgage directly and immediately

subjects the property upon which it is imposed, whoever the possessor
may be, to the fulfilment of the PRINCIPAL OBLIGATION whose
security it was constituted.

Thus, even if the mortgagor sells the mortgaged property, the property
REMAINS subject to the fulfillment of the obligation secured by it.

24
 2. It creates an ENCUMBRANCE. A mortgage is merely a security for a
debt and an encumbrance upon the property. It does not extinguish
the title of the debtor who remains an owner.

The only right of the MORTGAGEE in case of non-payment of a debt

secured by a mortgage would be to FORECLOSE THE MORTGAGE
and have the encumbered property sold to satisfy outstanding
obligation.

These two (2) effects is applicable even if the mortgagor is NOT THE
PRINCIPAL DEBTOR.

“Article 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet received when the
obligation becomes due, and to the amount of the indemnity granted or owing to
the proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.”

EXTENT OF MORTGAGE:

1. Natural accessions.
2. Improvements.

3. Growing fruits.

4. Rents or income not yet received when the obligation.

5. Amount of indemnity granted or owing to the proprietor from:

a. The insurers of the property mortgaged.

b. Expropriation for public use.

The ownership of such ACCESSIONS AND IMPROVEMENTS

subsequently introduced BELONGS TO THE MORTGAGOR, who is still
the owner of the property.

“Article 2128. The mortgage credit may be alienated or assigned to a third

person, in whole or in part, with the formalities required by law.”

The mortgage credit, being a REAL RIGHT, may be alienated (SOLD) OR

ASSIGNED to a third person. The assignment even if it is not registered is valid
between the parties, however, registration is needed to affect third persons.

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

25
 E.g. D mortgaged his LAND to C, to secure his loan of Php 1M.
Thereafter, D sold the LAND to X. On maturity date of the loan, C will demand
payment from D, so that if D cannot pay, the remedy of C is to FORECLOSE THE
MORTGAGE.

In the alternative, C may claim from X the payment of the credit secured
by the property.

“Article 2130. A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.”

E.g. D mortgaged his land to C. They agreed that D is prohibited from

selling the land during the mortgage period. What is the status of the stipulation?
It is VOID, being contrary to Art. 2130.

“Article 2131. The form, extent and consequences of a mortgage, both as to its

constitution, modification and extinguishment, and as to other matters not
included in this Chapter, shall be governed by the provisions of the Mortgage
Law and of the Land Registration Law”.

FORECLOSURE: It is the remedy available to the mortgagee by which he

subjects the mortgaged property to the satisfaction of the obligation to secure
that for which the mortgage was given.

WHEN TO FORECLOSE:

1. When the principal obligation is not paid when due; and

2. When the debtor has violated the terms and conditions of the
mortgage contract.

WHO CAN FORECLOSE: The mortagee or his assigns.

KINDS OF FORECLOSURE:

1. JUDICIAL- it is the ordinary action for foreclosure under Rule 68 of the

Rules of Court. It is based on a personal claim against a specific
property of the mortgagor.

a. If the defendant fails to pay the amount due within the time
directed by the Court, the property shall be sold.

b. The proceeds of sale shall be distributed as follows:

b.1 The cost/expenses of sale.

b.2 Claim of the person foreclosing the mortgage.

b.3 Claims of junior encumbrancers in the order of priority.

b.4 BALANCE, after the above are paid, shall be given to the
MORTGAGOR.

c. The mortgagee is specifically given the right to claim for

DEFICIENCY, if the proceeds of sale is insufficient.

26
 2. EXTRA-JUDICIAL- It is when a mortgagee is given a special power of
attorney to sell the mortgaged property by public auction under Act
3135:

a. Where there is a stipulation in the mortgage contract that the

mortgage may be foreclosed extra-judicially.

b. Where such extra-judicial foreclosure sale is made under a special

power of attorney inserted in the contract

DISTRIBUTION OF PROCEEDS OF SALE:

a. Same as in judicial foreclosure as above enumerated.

RECOVERY OF DEFICIENCT:

Aa. A deficiency claim is also allowed by filing a court action.

EFFECT OF INADEQUACY OF PRICE IN FORECLOSURE SALE:

General Rule: When there is RIGHT TO REDEEM, inadequacy of price is

immaterial, because the judgment debtor may RE-ACQUIRE THE PROPERTY
easier at a low price or sell his right to redeem.

Exception: When the price is SO INADEQUATE as to shock the

conscience of the Court taking into the consideration the peculiar circumstance
attending the sale.

REDEMPTION:

CONCEPT: A transaction through which the mortgagor or one claiming in his

right, by means of payment or the performance of the condition, reacquires or
BUYS BACK THE VALUE OF THE TITLE which may have passed under the
mortgage, or divests the mortgaged premises of the lien which the mortgaged
may have created.

KINDS OF REDEMPTION:

1. EQUITY OF REDEMPTION- this refers to the right of the mortgagor to

redeem the mortgaged property after his default in the performance of
the obligation BUT BEFORE THE PROEPRTY IS SOLD.

a. In JUDICIAL FORECLOSURE- the mortgagor is given not less than

90 days to pay the mortgage debt before the property is sold.

b. In EXTRA-JUDICIAL FORECLOSURE- the mortgagor may avail

himself of this right after his default but before the sale of the
property.

2. RIGHT OF REDEMPTION- this refers to the right of the mortgagor to

REPURCHASE the property within a certain period after it was sold
for the payment of the mortgaged debt.

27
 a. In JUDICIAL FORECLOSURE- the mortgagor may redeem the
property after the sale and before the confirmation by the court of
the sale.

b. In EXTRA-JUDICIAL SALE- the mortgagor has one year from the

date of sale to redeem the property.

CHATTEL MORTGAGE

WHAT IS A CONTRACT OF CHATTEL MORTGAGE: A contract where

personal property is recorded in the Chattel Mortgage Register, as a SECURITY
FOR THE PERFORMANCE OF A PRINCIPAL OBLIGATION.

REQUISITES OF CHATTEL MORTGAGE:

1. That it be constituted to secure the fulfillment of a principal obligation;

2. That the mortgagor be the absolute owner of the thing pledged or

mortgaged;

3. That the person constituting the mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for
the purpose.

28
 4. That the document in which the mortgage appears be recorded in the
Chattel Mortgage Register (Art. 2140)

This requirement is necessary FOR THE VALIDITY OF THE CHATTEL

MORTGAGE SINCE REGISTRATION is part of the definition of the
contract.

“Article 2140. By a chattel mortgage, personal property is recorded in the Chattel

Mortgage Register as a security for the performance of an obligation. If the
movable, instead of being recorded, is delivered to the creditor or a third person,
the contract is a pledge and not a chattel mortgage.”

“Article 2141. The provisions of this Code on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages.”

OBJECT OF CHATTEL MORTGAGE: Only personal property may be the

object of a chattel mortgage. The following things are deemed personal property.

1. Those movables susceptible of appropriation which are not included in the

list of immovable in Art. 415.
2. Real property which by any provision of law is considered personalty. E.g.
Sec. 6 of the Chattel Mortgage Law, a chattel mortgage can be executed on
GROWING CROPS which under Art. 415 of the Civil Code are real property.

3. Forces of nature which are brought under the control of science.

4. In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed. (Art. 416 Civil Code)

5. Obligations and actions which have for their objects movables or demandable
sums.

6. Shares of stock of agricultural, commercial and industrial entities, although

they may have real estate.

FORM OF CHATTEL MORTGAGE:

1. BETWEEN THE PARTIES: The mortgage MUST be RECORDED in the

Chattel Mortgage Register of the province where the mortgagor resides
and also of the province where the property is located, if it is different
from the residence of the mortgagor.

If the mortgagor is domiciled OUTSIDE THE PHILIPPINES, the

mortgage must be registered in the Chattel Mortgage Register of the
province where the property is located (ACT 1508, CHATTEL
MORTGAGE LAW)

The above REGISTRATION IS REQUIRED FOR THE VALIDITY OF THE

CHATTEL MORTGAGE between the parties. (STANDARD OIL VS.
JARAMILLO, 44 PHIL 530).

29
 PLACE OF REGISTRATION:

A. Motor Vehicles- Chatel Mortgage Register and LTO.

B. Shares of Stock- Chattel Mortgage Register in the place where the
corporation has its principal office and in the domicile of the
mortgagor, unless their domicile is the same, in which case a single
transaction is sufficient.

C. Vessels- Office of the Collector of Customs as the port of entry.

2. AS REGARDS THIRD PERSONS: An affidavit of good faith must be

appended in the DEED OF CHATTEL MORTGAGE and
RECORDED/REGISTERED IN THE CHATTEL MORTGAGE REGISTER.

AFFIDAVIT OF GOOD FAITH: It is an oath in case of contract of chattel

mortgage wherein the parties “SEVERALLY SWEAR that the mortgage contract
is made for the purpose of securing the obligation specified in the conditions
thereof and for no other purposes and that the same is a JUST AND VALID
OBLIGATION and one not entered into for the purpose of FRAUD.

The absence of an AFFIDAVIT OF GOOD FAITH makes the chattel

mortgage VALID ONLY AS BETWEEN THE PARTIES.

EFFFECT OF REGISTRATION: The registration of the chattel mortgage is an

EFFECTIVE AND BINDING NOTICE to the other creditors of its existence and
creates a real right or a lien which, being recorded, follows the chattel mortgage
wherever it goes. The registration gives the chattel mortgagee SYMBOLIC
POSSESSION.

CHATTEL MORTGAGE VS. REAL ESTATE MORTGAGE:

1. In CM, it is constituted on MOVABLES. In REM, it is constituted on

IMMOVABLES.
2. CM cannot guarantee FUTURE OBLIGATIONS. In REM, it may guarantee
future obligations.

CHATTEL MORTGAGE VS. PLEDGE

1. In CM, delivery is not essential element of the contract. In PL, delivery is an

essential element of the contract.
2. In case of foreclosure of CM, the excess of the amount due goes to the debtor.
In case of foreclosure in PL. the debtor is NOT entitled to the excess unless it
is otherwise agreed.
3. In case of foreclosure of CM, the creditor is entitled to recover the deficiency
from the debtor, except if the chattel mortgage is a security for the purchase
of personal property in installments. In case of foreclosure of PL, the creditor
is NOT entitled to recover deficiency notwithstanding any stipulation to the
contrary.

FORECLOSURE OF CHATTEL MORTGAGE: If the mortgagor defaults in the

payment of the PRINCIPAL OBLIGATION OR OTHERWISE FAILS TO
COMPLY WITH THE CONDITIONS OF THE MORTGAGE, the creditor has no

30
right to appropriate to himself the personal property because he is permitted
only to RECOVER HIS CREDIT FROM THE PROCEEDS OF THE SALE OF THE
PROPERTY AT A PUBLIC AUCTION.

a. GROUNDS FOR FORECLOSURE:

1. When the principal obligation is not paid when due.
2. When there is any violation of any condition, stipulation or
warranty by the mortgagor.

b. KINDS OF FORECLOSURE:
1. JUDICIAL FORECLOSURE- this is foreclosure made by instituting
a court action, following the provisions of the CHATTEL
MORTGAGE LAW as far as practicable.
2. EXTRA-JUDICIAL FORECLOSURE- this is foreclosure following
the provisions of the CHATTEL MORTGAGE LAW. Instituting a
court action is necessary only to secure possession of the thing
PREPARATORY TO EXTRAJUDICIAL FORECLOSURE if the
debtor refuses to deliver the thing.

c. FORECLOSURE SALE- the proceeds of the sale shall be distributed as

follows:

1. Costs and expenses of keeping the property and its sale.

2. Payment of the obligation secured by the mortgage.
3. Claims of persons holding subsequent mortgages in their order
and;
4. The balance if any, shall be paid to the mortgagor or person
holding under him

d. RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY:

General rule: The creditor mortgagee may maintain an action for

deficiency as the chattel mortgage is only given as a security and not as
payment for the debt in case of failure of payment.

Exception: Where the chattel mortgage is constituted as security for

the purchase of property payable in installments (see Art. 1484). In this
case, there is no deficiency judgment and any contrary stipulation is
void.

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 SPECIAL LAWS INCLUDED IN THE CPA SYLLABUS STARTING
OCTOBER 2022 LICENSURE EXAMINATION:

“2.0 BOUNCING CHECKS 2%

2.1 Discuss and apply the requisites to be liable under BP 22
2.1.1 Checks with insufficient funds
2.1.2 Evidence of Knowledge of insufficient funds
2.1.3 Duty of the Drawer
2.1.4 Credit Construes
2.2 Compare Bouncing Checks with Estafa (Art. 315 (2) (c)”

“BATAS PAMBANSA BLG. 22

AN ACT PENALIZING THE MAKING OR DRAWING AND ISSUANCE OF A

CHECK WITHOUT SUFFICIENT FUNDS OR CREDIT AND FOR OTHER
PURPOSES.

32
Section 1. Checks without sufficient funds. - Any person who makes or draws and issues
any check to apply on account or for value, knowing at the time of issue that he does
not have sufficient funds in or credit with the drawee bank for the payment of such
check in full upon its presentment, which check is subsequently dishonored by the
drawee bank for insufficiency of funds or credit or would have been dishonored for
the same reason had not the drawer, without any valid reason, ordered the bank to
stop payment, shall be punished by imprisonment of not less than thirty days but not
more than one (1) year or by a fine of not less than but not more than double the
amount of the check which fine shall in no case exceed Two Hundred Thousand Pesos,
or both such fine and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who, having sufficient funds in
or credit with the drawee bank when he makes or draws and issues a check , shall fail
to keep sufficient funds or to maintain a credit to cover the full amount of the check
if presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons
who actually signed the check in behalf of such drawer shall be liable under this Act.

Section 2. Evidence of knowledge of insufficient funds. - The making, drawing and issuance
of a check payment of which is refused by the drawee because of insufficient funds in or
credit with such bank, when presented within ninety (90) days from the date of the
check, shall be prima facie evidence of knowledge of such insufficiency of funds or
credit unless such maker or drawer pays the holder thereof the amount due thereon, or
makes arrangements for payment in full by the drawee of such check within (5)
banking days after receiving notice that such check has not been paid by the drawee.

Section 3. Duty of drawee; rules of evidence. - It shall be the duty of the drawee of any
check, when refusing to pay the same to the holder thereof upon presentment, to cause
to be written, printed, or stamped in plain language thereon, or attached thereto, the
reason for drawee's dishonor or refusal to pay the same: Provided, That where there
are no sufficient funds in or credit with such drawee bank, such fact shall always be
explicitly stated in the notice of dishonor or refusal. In all prosecutions under this Act,
the introduction in evidence of any unpaid and dishonored check, having the drawee's
refusal to pay stamped or written thereon or attached thereto, with the reason therefor
as aforesaid, shall be prima facie evidence of the making or issuance of said check,
and the due presentment to the drawee for payment and the dishonor thereof, and
that the same was properly dishonored for the reason written, stamped or attached by
the drawee on such dishonored check.

Not with standing receipt of an order to stop payment, the drawee shall state in the
notice that there were no sufficient funds in or credit with such bank for the payment
in full of such check, if such be the fact.

Section 4. Credit construed. - The word "credit" as used herein shall be construed to
mean an arrangement or understanding with the bank for the payment of such check.

Section 5. Liability under the Revised Penal Code. - Prosecution under this Act shall be
without prejudice to any liability for violation of any provision of the Revised Penal
Code.

Section 6. Separability clause. - If any separable provision of this Act be declared

unconstitutional, the remaining provisions shall continue to be in force.

33
Section 7. Effectivity. - This Act shall take effect fifteen days after publication in the
Official Gazette.1âwphi1

Approved: April 3, 1979.”

COVERAGE: From its title and entire context of the law, BP. 22 covers and applies
ONLY TO CHECKS. A “check” is defined as a bill of exchange DRAWN ON A BANK
AND PAYABLE ON DEMAND (see, Sec. 185 of the NEGOTIABLE INSTRUMENTS
LAW).

The language of BP 22 is broad enough to cover ALL KINDS OF CHECKS,

whether present dated or post-dated, or whether issued in payment of pre-existing
obligation, or given in mutual or simultaneous exchange for something of value.

CROSSED CHECKS OR RESTRICTED CHECKS are within the coverage of BP

22. The law also applied to a check drawn in a FOREIGN CURRENCY.

TWO ACTS OR CRIMES PUNISHABLE UNDER BP 22:

1. Under the first paragraph, the crime is committed by a person who issues a
check knowing at a time of ISSUE that he does not have sufficient funds. This
is referred to as the crime of commission.
2. Under the second paragraph, the crime is committed by a person who,
having sufficient funds in or credit with the drawee bank when he draws and
issues a check shall fail to keep sufficient funds to cover the check within a
period of ninety (90) days from the date appearing thereon. This is referred to
as the crime of omission.

To “MAKE” a check means to prepare a check by FILLING UP the details on THE

FACE OF THE CHECK like date, amount, and the name of the PAYEE.

To “DRAW” a check means to sign the check and the person signing it is called a
DRAWER.

To “ISSUE” a check means the FIRST DELIVERY of the check complete in form to a
person to takes it as a HOLDER. “HOLDER” means the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof

“ACCOUNT” means any claim, demand or obligation or credit.

“VALUE” is any consideration sufficient to support a simple contract. Any antecedent

or pre-existing debt constitute value.

“FUND” means any MONEY OR DEPOSIT in the custody of the drawee bank available
for use by the drawer to cover a check issued.

“CREDIT” means an arrangement between the DRAWER AND DRAWEE BANK for
the latter to make available money to fund a check issued by the drawer. This
arrangement could be in the form of a loan, credit line or other credit accommodation.

34
ELEMENTS OF BP 22 UNDER THE FIRST PARAGRAPH:

1. The offender makes the check by completing the face of the check, draws the
check by signing as DRAWER AND ISSUES the check by delivering the check
in favor of the PAYEE to apply for account of for value.

2. The maker, drawer or issuer KNOWS AT THE TIME OF ISSUE that he does
not have sufficient funds or credit with the drawee bank to cover the check

But since “knowledge” of the sufficiency is something only the issuer knows
by himself internally, the law established a prima facie or disputable
presumption that the making, drawing, or issuance of a check payment which is
refused by the drawee because of insufficiency of funds or credit with such bank,
when presented within NINETY (90) days from date of the check, shall be prima
facie evidence of knowledge of insufficiency of fund or credit

However, this presumption arises only AFTER THE ISSUER OR DRAWER

RECEIVED A WRITTEN NOTICE OF DISHONOR AND THAT, within FIVE (5)
DAYS from receipt, he failed to pay the amount of the check or to make
arrangements for its payment.

3. The check is subsequently dishonored by the drawee bank for insufficiency of

funds or credit or dishonor for the same reason had not the drawer, without
any valid cause, ordered the bank to stop payment.

For this purpose, “it shall be the duty of the drawee of any check, when
refusing to pay the same to the holder thereof upon presentment, to cause to
be written, printed or stamped in plain language thereon, or attached thereto,
THE REASON FOR THE DRAWEE’S DISHONOR OR REFUSAL TO PAY
THE SAME.

Moreover, “where there are no SUFFICIENT FUNDS IN OR CREDIT with

such drawee bank, such fact shall always be explicitly stated in the notice of
dishonor or refusal.

And where the reason for the return or dishonor is a STOP PAYMENT
ORDER, the drawee bank shall state in the notice that there was NO
SUFFICIENT FUNDS IN OR CREDIT which such bank for the payment in
full or such check, if such was the fact. This is required because it is also a
crime under BP 22 to issue a check which would have been dishonored for
insufficiency of funds had not the drawer, without any valid reason, ordered
the bank to stop payment.

ELEMENTS OF BP 22 UNDER THE SECOND PARAGRAPH: The second paragraph of

Sec.1 makes it also a crime for “any person, who having who, having sufficient funds in
or credit with the drawee bank when he makes or draws and issues a check, shall fail to
keep sufficient funds or to maintain a credit to cover the full amount of the check if
presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.

The elements are:

1. The drawer had sufficient funds in or credit with the drawee bank when he
drew the check.

35
 2. The drawer shall fail to keep sufficient funds or to maintain a credit to cover
the check for a period of ninety (90) days from the date of the check.
3. The check is presented to the bank within ninety (90) days from the date of
check and dishonored for insufficiency of funds.

In this crime of omission, the drawer had sufficient funds at the time of drawing
and issuance of the check but fails to maintain sufficient balance for a period of ninety
(90) days from the date appearing on the check, so much so that the check when
presented after its issuance, there remains no or insufficient balance for which reason
the check is dishonored or bounces.

In this case, the check must be presented within ninety (90) days from date of the
check, not from the date of issuance.

TO DISTINGUISH THE TWO CRIMES:

1. In the former, the drawer had no sufficient funds at the time he drew the
check and is presumed to know that he had insufficient balance. In the latter,
the drawer had sufficient balance at the time he drew the check but fails to
maintain sufficient balance for ninety (90) days from the date of the check.
2. In the former, the holder must present the check within a reasonable time, in
the latter, “reasonable time” has been defined and limited to ninety (90 days
from the DATE OF THE CHECK.

PERSONS LIABLE: The law holds liable the “person who MAKES OR DRAWS AND
ISSUES” the bouncing check. Where the check is drawn by a corporation, company or
entity, the PERSON WHO ACTUALLY SIGNED THE CHECK IN BEHALF OF SUCH
DRAWER SHALL BE LIABLE.
PENALTY: The penalty for violation of BP 22 or issuing a bouncing check is
imprisonment of not less than thirty days but not more than one (1) year or by a fine of
not less than but not more than double the amount of the check which fine shall in no
case exceed Two Hundred Thousand Pesos, or both such fine and imprisonment at the
discretion of the court.

LIABILITY UNDER THER REVISED PENAL CODE: The SAME ACT of issuing a
bouncing may also constitute ESTAFA under Article 315 (2) (d) of the Revised Penal
Code which penalizes the act of POSTDATING A CEHCK OR ISSUING A CHECK in
payment of an obligation when the offender had no funds in the bank or his funds
deposited therein were not sufficient to cover the amount of the check. The law states:
“Prosecution under this Act shall be without prejudice to any liability for violation of
any provision of the Revised Penal Code”.

ESTAFA UNDER ARTICLE 315 2 (d), OF THE REVISED PENAL CODE:

“Article 315. SWINDLING (ESTAFA). Any person who shall DEFRAUD another by any
of the means mentioned herein below x x x

36
 3. By means of any of the following FALSE PRETENSES OR FRAUDELENT
ACTS executed prior to or simultaneously with the commission of the
FRAUD:

Xxx

(d) By postdating a check, or issuing a check in payment of an obligation

when the offender had not funds in the bank, or his funds deposited therein
were not sufficient to cover the amount of the check. The failure of the drawer
of the check to deposit the amount necessary to cover his check within three
(3) days from receipt of the notice from the bank and/ or the payee or holder
that said check has been dishonored for lack or insufficiency of funds shall be
prima facie of DECEIT constituting FALSE PRETENSE OR FRAUDULENT
ACT.

ELEMENTS OF THIS CRIME ARE:

(1) Postdating or issuing a check in payment of an obligation contracted

AT THE TIME THE CHECK WAS ISSUED.
(2) Lack of sufficient funds to cover the check.

(3) Knowledge on the part of the offender of such circumstances.

(4) DAMAGE to the complainant.

This crime is committed by an offender WHO DECEIVES the offended party into
parting with MONEY OR GOODS OR RENDERING SERVICES in favor of the offender.
The DECEPTION CONSIST IN THE ISSUANCE OF A WORTHLESS CHECK because
of insufficiency of funds. There is FRAUD OR DECEIT because the offended party
would not have parted with money, goods or services were it not for the worthless
check.

Example:

Mr. A bought cartons of cigarettes from a Chinese store, deceiving the

Chinese that he had money in the bank and thus he issued a check. Later the
check bounced. Mr. A is liable for ESTAFA. He used deceit by assuring he has
funds in the bank but bounced. The Chinese would not have sold to him
cigarettes if not for his DECEIT. The delivery of the check was executed PRIOR
TO OR SIMULTANEOUSLY WITH THE FRAUD made by Mr. A.

Mr. X induced Ms. Y that he would buy her DIAMONG WATCH and
saying he is very rich. Ms. Y delivered the DIAMONG WATCH AND Mr. X
delivered a check in the amount of Php 10M. Later, the check issued by X
bounced. X is guilty of estafa. The delivery of the check was executed PRIOR TO
OR SIMULTANEOUSLY WITH THE FRAUD perpetrated by X.

It is to be NOTED that there are two very IMPORTANT ELEMENTS OF

THIS CRIME. First, there is FRAUD OR DECEIT and second, DAMAGE. These
two (2) elements are not required for prosecution under BP 22.

Hence, where the drawer issued a postdated check believing in good faith that he
could fund the check when presented for payment, but was unable to do so, and he

37
informed the payee accordingly, no estafa is committed because there is NO DECEIT.
But the same act would make him liable for BP 22, where fraud or deceit is NOT AN
ELEMENT.

PENALTY FOR ESTAFA UNDER Art. 315 (2) (d)- the penalty for estafa under Article
315 (2) (d) had been increased by Presidential Decree No. 818 effective on October 22,
1995 as follows:

1st. The penalty of reclusion temporal if the amount of the fraud is over 12,000 but
does not exceed 22,000 pesos and if such amount exceeds the latter sum, the penalty
provided in this paragraph shall be imposed in its maximum period, adding one year
for each additional 10,000 but the total penalty which may be imposed shall in no case
exceed thirty years. In such cases, and in connection with the accessory penalties which
may be imposed under the Revised Penal Code, the penalty shall be termed reclusion
perpetua.

2nd. The penalty is prision mayor in its maximum period, if the amount of the
fraud is over 6,000.0 pesos but does not exceed 12,000.00 pesos.

3rd The penalty of prision mayor in its medium period, if the amount of the fraud
is over 200 pesos.

4th. By prision mayor in its maximum period, if such amount does not exceed 200
pesos (Effective October 22, 1975)

DURATION OF PENALTIES:

1. RECLUSION TEMPORAL- 12 YEARS AND ONE DAY TO 20 YEARS.

2. PRISION MAYOR- SIX YEARS AND ONE DAY TO TWELVE YEARS.

8.0 LAW ON OTHER BUSINESS TRANSACTIONS

8.1 PDIC LAW 2%

8.1.1 Describe the insurable deposits
8.1.2 Compute the maximum liability
8.1.3 Identify the requirement for claims

BANGKO SENTRAL NG PILIPINAS------- ALL BANKS------------PDIC

(RA 7653) (RA 8791) (ACT 3591, June 22,
June 14, 1993 April 12, 2000 1963, as amended
By RA 9302, August
12, 2004 and
RA 9576, April 29,
2009

First, a group of individuals who wants to organize a BANK shall

organize a CORPORATION under RA 11232 (the NEW CORPORATION CODE.
After the SEC grants is CERTIFICATE OF INCORPORATION (referred to as the
PRIMARY FRANCHISE), it has to obtain CERTIFICATE OF AUTHORITY from
the BSP (referred to as the SECONDARY FRANCHISE OR LICENSE) in order to
OPERATE. Two (2) things: ORGANIZE OR INCORPORATE, then OPERATE.

38
 By way of analogy, SFC incorporates as a CORPORATION with the SEC,
but BEFORE it could operate as a SCHOOL, it has to obtain a LICENSE from the
DEPED and CHED. So, ORGANIZE then OPERATE.

Going back to BANKS, it is the BSP who grants CERTIFICATES OF

AUTHORITY before a BANK could operate. ALL BANKS- entities engaged in
the lending of FUNDS OBATINED IN THE FORM OF DEPOSITS (universal
banks, commercial banks, thrift banks, rural banks, cooperative banks, Islamic
banks and other classification of banks), are ALL under the control and
supervision of the BSP.

To safeguard the DEPOSITING PUBLIC, ACT 3591 dated June 22, 1963
provides for the creation of the PHILIPPINE DEPOSIT INSURANCE
CORPORATION (PDIC) a government corporation financed completely by the
CENTRAL BANK (now Bangko Sentral ng Pilipinas). It is now OBLIGATORY
for banks to insure their deposits and pay INSURANCE PREMIUM to the PDIC.

“SECTION 1. There is hereby created a Philippine Deposit Insurance

Corporation hereinafter referred to as the "Corporation" which shall insure, as
herein provided, the deposits of all banks which are entitled to the benefits of
insurance under this Act, and which shall have the powers hereinafter granted.

As added by RA 9302, the Corporation, as a BASIC POLICY, promote and

safeguard the interest of the depositing public by way of providing
PERMANENT AND CONTINUING INSURANCE coverage on ALL INSURED
DEPOSITS.”

Likewise, the law (RA 9302) increased the PERMANENT INSURANCE

FUND OF THE CORPORATION TO THREE BILLION PESOS (Php
3,000,00,000.00)

With this back drop (and I want you to see and observe the inter-relation
of different laws on the matter).

What are the DEPOSITS that are insurable under the new PDIC LAW Sec. 3 (f) of
RA 9302:

(f) The term "deposit" means the unpaid balance of money or its equivalent
received by a bank in the usual course of business and for which it has
given or is obliged to give credit to a commercial, checking, savings,
time or thrift account, or issued in accordance with Bangko Sentral Rules
and Regulations and other applicable laws, together with such other
obligations of a bank, which, consistent with banking usage and practices,
the Board of Directors shall determine to be DEPOSIT LIABILITIES OF
THE BANK: Provided, That any obligation of a bank which is payable at
the office of the bank located outside of the Philippines shall not be a
deposit for any of the Purposes of this Act or included as part of the total
deposits or of insured deposit: Provided, further, That SUBJECT to the
approval of the Board of Directors, any insured bank which is
incorporated under the laws of the Philippines which maintains a branch

39
 outside the Philippines may elect to include for insurance its deposit
obligation payable only at such branch.

The Corporation shall NOT PAY DEPOSIT INSURANCE for the

following accounts or transactions, WHETHER denominated,
documented, recorded or booked as DEPSOSIT BY THE BANK

"(1) Investment products such as bonds and securities, trust accounts, and
other similar instruments;

"(2) Deposit accounts or transactions which are unfunded, or that are

fictitious or fraudulent;

"(3) Deposits accounts or transactions constituting, and/or emanating

from, unsafe and unsound banking practice/s, as determined by the
Corporation, in consultation with the BSP, after due notice and hearing,
and publication of a cease and desist order issued by the Corporation
against such deposit accounts or transactions; and

"(4) Deposits that are determined to be the proceeds of an unlawful

activity as defined under republic act 9160, as amended.

"The actions of the Corporation taken under this section shall be final and
executory, and may not be restrained or set aside by the court, except on
appropriate petition for certiorari on the ground that the action was taken
in excess of jurisdiction or with such grave abuse of discretion as to
amount to a lack or excess of jurisdiction. The petition for certiorari may
only be filed within thirty (30) days from notice of denial of claim fare or
deposit insurance."

PROBLEM: Mr. Z maintains Php 100,000.00 savings account, Php 200,000.00

checking account, Php 300,000.00 money market placement and Php 400,000.00
trust fund with METRO BANK. Which of the four accounts are insured by the
PDIC?

ANSWER: Only the Php 100,000.00 savings account and the Php 200,000.00
checking account are deemed insured by the PDIC, as they are embraced by the
word “DEPOSIT”. Deposit as defined in Section 3 (f) may be constituted only if
MONEY OR THE EQUIVALENT OF MONEY IS RECEIVED by the bank.

DEPOSIT INSURANCE COVERAGE: Sec. 5 of the law states “The deposit

liabilities of any bank or banking institutions, which is engaged in the business of
receiving deposits as herein defined in the effective date of this ACT, or which
thereafter may engage in the business of receiving deposits shall be INSURED WITH
THE CORPORATION. (As amended by RA 6037, August 4, 1969, renumbered from
Sec. 4 by RA 9302).

What is “INSURED DEPOSIT”? Sec. 3 (g) of the law states:

40
 "(g) The term "insured deposit" means the amount due to any bona fide depositor
for legitimate deposits in an insured bank net of any obligation of the depositor
to the insured bank as of date of closure, but not to exceed Five hundred
thousand pesos (P500,000.00). Such net amount shall be determined according to
such regulations as the Board of Directors may prescribe, In determining such
amount due to any depositor, there shall be added together all deposits in the
bank maintained in the same right and capacity for his benefits either in his
own name or in the name of others. A joint account regardless of whether the
conjunction 'and,' 'or,' 'and/or' is used, shall be insured separately from any
individually-owned deposit account: Provided, That (1) If the account is held
jointly by two or more natural persons, or by two or more juridical persons or
entities, the maximum insured deposit shall be divided into as many equal
shares as there are individuals, juridical persons or entities, unless a different
sharing is stipulated in the document of deposit, and (2) If the account is held by
a juridical person or entity jointly with one or more natural persons, the
maximum insured deposits shall be presumed to belong entirely to such juridical
person or entity: Provided, further, That the aggregate of the interest of each co-
owner over several joint accounts, whether owned by the same or different
combinations of individuals, juridical persons or entities, shall likewise be subject
to the maximum insured deposit of Five hundred thousand pesos
(P500,000.00): Provided, Furthermore, The provisions of any law to the contrary
notwithstanding, no owner/holder of any negotiable certificate of deposit shall
be recognized as a depositor entitled to the rights provided in this Act unless his
name is registered as owner/holder thereof in the books of the issuing
bank: Provided, Finally, That, in case of a condition that threatens the monetary
and financial stability of the banking system that may have systemic
consequences, as defined in section 17 hereof, as determined by the monetary
board, the maximum deposit insurance cover may be adjusted in such amount,
for such a period, and/or for such deposit products, as may be determined by a
unanimous vote of the Board of Directors in a meeting called for the purpose and
chaired by the Secretary of Finance, subject to the approval of the President of
the Philippines."

PROBLEM: X has three separate deposits in LBP namely: 1.5 SAVINGS

DEPOSIT, 1.5 TIME DEPOSITS AND 1.5M CURRENT DEPOSITS (Checking
account). Later on the bank ran into financial trouble and was ordered by the BSP
to close and liquidate. How much X may recover from the PDIC.

ANSWER: X may recover up to Php 500,000.00. For purposes of recovery from

the PDIC, all deposit accounts of a depositor opened by him in the same capacity
(personal capacity in the problem above) shall be lumped together and his
recovery from all said deposits is limited to Php 500,000.00

ASSESSMENT OF MEMBER BANKS: Section 6 (a) provides:

SEC. 6. (a) The assessment rate shall be determined by the Board of Directors:
Provided, That the assessment rate shall not exceed one-fifth (1/5) of one per centum
(1%) per annum. The semi-annual assessment for each insured bank shall be in the
amount of the product of one-half (1/2) the assessment rate multiplied by the
assessment base but in no case shall it be less than Five thousand pesos (P5,000.00). The

41
assessment base shall be the amount of the liability of the bank for deposits as defined
under subsection (f) of Section 4 without any deduction for indebtedness of depositors.

"The semi-annual assessment base for one semi-annual period shall be the
average of the assessment base of the bank as of the close of business on March thirty-
one and June thirty and the semi-annual assessment base for the other semi-annual
period shall be the average of the assessment base of the bank as of the close of business
on September thirty and December thirty-one: Provided, That when any of said days is
a non-business day or legal holiday, either national or provincial, the preceding
business day shall be used. The certified statements required to be filed with the
Corporation under subsections (b) and (c) of this Section shall be in such form and set
forth such supporting information as the Board of Directors shall prescribe. The
assessment payments required from the insured banks under subsections (b) and (c) of
this Section shall be made in such manner and at such time or times as the Board of
Directors shall prescribe, provided the time or times so prescribed shall not be later than
sixty (60) days after filing the certified statement setting forth the amount of
assessment."

"(d) All assessment collections and income from operations after expenses and
charges shall be added to the Deposit Insurance Fund under Section 13 hereof. Such
expenses and charges are: (1) the operating costs and expenses of the Corporation for
the calendar year; (2) additions to reserve to provide for insurance and financial
assistance losses, net of recoverable amounts from applicable assets and collaterals,
during the calendar year; and (3) the net insurance and financial assistance losses
sustained in said calendar year."

"(h) The Corporation shall not terminate the insured status of any bank which
continues to operate or receive deposits. Should any insured bank fail or refuse to pay
any assessment required to be paid by such bank under any provision of this Act, and
should the bank not correct such failure or refusal within thirty (30) days after written
notice has been given by the Corporation to an officer of the bank citing this subsection,
and stating that the bank has failed or refused to pay as required by the law, the
Corporation may, at its discretion, file a case for collection before the appropriate
court without prejudice to the imposition of administrative sanctions allowed under
the provisions of this Law on the bank officials responsible for the non-payment of
assessment fees."

PAYMENT OF INSURED DEPOSITS- Section 14 to 16 of the law provides for the

payment of INSURED DEPOSITS:

SEC. 14. Whenever an insured bank shall have been closed by the Monetary Board
pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed
bank shall be made by the Corporation as soon as possible either (1) by cash or (2) by
making available to each depositor a transferred deposit in another insured bank in
an amount equal to insured deposit of such depositor: Provided, however, That the
Corporation, in its discretion, may require proof of claims to be filed before paying the
insured deposits, and that in any case where the Corporation is not satisfied as to the
viability of a claim for an insured deposit, it may require final determination of a court
of competent jurisdiction before paying such claim: Provided, further, That failure to
settle the claim, within six (6) months from the date of filing of claim for insured
deposit, where such failure was due to grave abuse of discretion, gross negligence, bad
faith, or malice, shall, upon conviction, subject the directors, officers or employees of the
Corporation responsible for the delay, to imprisonment from six (6) months to one (1)

42
year: Provided, furthermore, That the period shall not apply if the validity of the claim
requires the resolution of issues of facts and or law by another office, body or agency
including the case mentioned in the first proviso or by Corporation together with such
other office, body or agency."

Section 15. The Corporation, upon payment of any depositor as provided for in
subsection (c) of this Section, shall be subrogated to all rights of the depositor against
the closed bank to the extent of such payment. Such subrogation shall include the right
on the part of the Corporation to receive the same dividends and payments from the
proceeds of the assets of such closed bank and recoveries on account of stockholders’
liability as would have been payable to the depositor on a claim for the insured deposits
but, such depositor shall retain his claim for any uninsured portion of his deposit. All
payments by the Corporation of insured deposits in closed banks partake of the nature
of public funds, and as such, must be considered a preferred credit similar to taxes due
to the National Government in the order of preference under Article 2244 of the New
Civil Code: Provided, further, That this preference shall be likewise effective upon
liquidation proceedings already commenced and pending as of the approval of this Act,
where no distribution of assets has been made.

SEC. 16 (a) The Corporation shall commence the determination of insured deposits due
the depositors of a closed bank upon its actual takeover of the closed bank. The
Corporation shall give notice to the depositors of the closed bank of the insured
deposits due them by whatever means deemed appropriate by the Board of Directors:
Provided, That the Corporation shall publish the notice once a week for at least three
(3) consecutive weeks in a newspaper of general circulation or, when appropriate, in a
newspaper circulated in the community or communities where the closed bank or its
branches are located.

"(b) Payment of an insured deposit to any person by the Corporation shall discharge
the Corporation, and payment of a transferred deposit to any person by the new bank
or by an insured bank in which a transferred deposit has been made available shall
discharge the Corporation and such new bank or other insured bank, to the same extent
that payment to such person by the closed bank would have discharged it from liability
for the insured deposit.

"(c) Except as otherwise prescribed by the Board of Directors, neither the Corporation or
such other insured bank shall be required to recognize as the owner of any portion of a
deposit appearing on the records of the closed bank under a name other than that of the
claimant, any person whose name or interest as such owner is not disclosed on the
records of such closed bank as part owner of said deposit, if such recognition would
increase the aggregate amount of the insured deposits in such closed bank.

"(d) The Corporation may withhold payment of such portion of the insured deposit of
any depositor in a closed bank as may be required to provide for the payment of any
liability of such depositor as a stockholder of the closed bank, or of any liability of such
depositor to the closed bank or its receiver, which is not offset against a claim due from
such bank, pending the determination and payment of such liability by such depositor
or any other liable therefor.

"(e) Unless otherwise waived by the Corporation, if the depositor in the closed bank
shall fail to claim his insured deposits with the Corporation within two (2) years
from actual takeover of the closed bank by the receiver, or does not enforce his claim
filed with the corporation within two (2) years after the two-year period to file a

43
claim as mentioned hereinabove, all rights of the depositor against the Corporation
with respect to the insured deposit shall be barred; however, all rights of the depositor
against the closed bank and its shareholders or the receivership estate to which the
Corporation may have become subrogated, shall thereupon revert to the depositor.
Thereafter, the Corporation shall be discharged from any liability on the insured
deposit."

Payment by the PDIC or by a bank designated by the PDIC starts from the date
the BSP declares the insured bank as INSOLVENT. Payment by the PDIC subrogates it
to claims of the insured bank against other persons. CLAIMS by the depositors of the
insured bank should be made within TWO years from the actual takeover of the closed
bank by the RECEIVER.

Under the law, the PDIC is now given the priority to be appointed as the
RECEIVER of any banking institution.

8.2 SECRECY OF BANK DEPOSITS 2%

8.2.1 Explain the purpose
8.2.2 Illustrate the prohibited acts
8.2.3 Discuss the types of deposit covered
8.2.4 Apply the exceptions
8.2.5 Explain garnishment of deposits including foreign
Deposits

REPUBLIC ACT No. 1405

AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO, DEPOSITS WITH

ANY BANKING INSTITUTION AND PROVIDING PENALTY THEREFOR.

Section 1. It is hereby declared to be the policy of the Government to give

encouragement to the people to deposit their money in banking institutions and to
discourage private hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the country.

Section 2.  All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby considered as
of an absolutely confidential nature and may not be examined, inquired or looked into
by any person, government official, bureau or office, except upon written permission
of the depositor, or in cases of impeachment, or upon order of a competent court in
cases of bribery or dereliction of duty of public officials, or in cases where the money
deposited or invested is the subject matter of the litigation.

Section 3. It shall be unlawful for any official or employee of a banking institution to
disclose to any person other than those mentioned in Section two hereof any
information concerning said deposits.

44
Section 4. All Acts or parts of Acts, Special Charters, Executive Orders, Rules and
Regulations which are inconsistent with the provisions of this Act are hereby repealed.

Section 5. Any violation of this law will subject offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty thousand
pesos or both, in the discretion of the court.

Section 6. This Act shall take effect upon its approval.

Approved: September 9, 1955

PURPOSE OF THE LAW:

1. To encourage people to deposit money in banks.
2. Discourage private hoarding of money, so that the MONEY may be properly
utilized by BANKS by way of LOANS to assist in the economic development
of the country.

COVERAGE OF THE LAW:  All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds issued by the
Government of the Philippines, its political subdivisions and its instrumentalities, are
hereby considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office.

It is also unlawful for any official or employee of a banking institution TO

DISCLOSE TO ANY PERSON except in the cases set forth below, ANY
INFORMATION CONCERNING DEPOSITS.

EXCEPTIONS TO THE CONFIDENTIALITY RULE: The DEPOSITS including

investment in BONDS can be examined, inquired and looked into by a person,
government official, bureau or office in the following instances:

1. Upon written permission of the depositor;

2. In cases of impeachment;
3. Upon order of a competent court in cases of bribery or dereliction of duty of
public officials;
4. In cases where the money deposited or invested is the subject matter of the
litigation.
5. In graft cases. (see PNB vs. Gancayco, 16 SCRA 92)

45
 8.3 TRUTH IN LENDING ACT 2%
8.3.1 Describe the purpose
8.3.2 Illustrate the obligation of creditors to persons to whom
Credit is extended
8.3.3 Compare covered and excluded transactions
8.3.4 Describe the consequences of non-compliance with
obligation

“REPUBLIC ACT No. 3765

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH

EXTENSIONS OF CREDIT.

Section 1. This Act shall be known as the "Truth in Lending Act."

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens
lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a
preventing the uninformed use of credit to the detriment of the national economy.

Section 3. As used in this Act, the term

(1) "Board" means the Monetary Board of the Central Bank of the Philippines.

(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional sales con
contract to sell, or sale or contract of sale of property or services, either for present or future delivery
which part or all of the price is payable subsequent to the making of such sale or contract; any renta
contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, deman
pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquis
any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any tra
series of transactions having a similar purpose or effect.

(3) "Finance charge" includes interest, fees, service charges, discounts, and such other charges incide

46
extension of credit as the Board may be regulation prescribe.

(4) "Creditor" means any person engaged in the business of extending credit (including any person wh
regular business practice make loans or sells or rents property or services on a time, credit, or installme
either as principal or as agent) who requires as an incident to the extension of credit, the payment of a
charge.

(5) "Person" means any individual, corporation, partnership, association, or other organized group of p
the legal successor or representative of the foregoing, and includes the Philippine Government or any
thereof, or any other government, or of any of its political subdivisions, or any agency of the foregoing

Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consumm
the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance
rules and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with
transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annu
the outstanding unpaid balance of the obligation.

Section 5. The Board shall prescribe such rules and regulations as may be necessary or proper in carry
provisions of this Act. Any rule or regulation prescribed hereunder may contain such classifications an
differentiations as in the judgment of the Board are necessary or proper to effectuate the purposes of th
to prevent circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or regulati
thereunder.

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any perso
information in violation of this Act or any regulation issued thereunder shall be liable to such perso
amount of P100 or in an amount equal to twice the finance charged required by such creditor in conne
such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any cred
transaction. Action to recover such penalty may be brought by such person within one year from the d
occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection
any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court
determined by the court.

(b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation
in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or
transactions.

(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder sh
by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than
or both.

47
(d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any a
any political subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a d
has willfully violated this Act shall be prima facie evidence against such defendant in an action or proc
brought by any other party against such defendant under this Act as to all matters respecting which sa
judgment would be an estoppel as between the parties thereto.

Section 7. This Act shall become effective upon approval.

Approved: June 22, 1963.

PURPOSE OF THE LAW:

1. To protect the debtor from the effects of misrepresentation or concealment,

commonly known as HIDDEN CHARGES.
2. Permitting the debtor to fully appreciate and evaluate the REAL COST OF
BORROWING before consummating the transaction.

3. Avoid circumvention of the USURY LAW.

Case law: CONSOLIDATED BANK VS COURT OF APPEALS, 246 SCRA 193

(1995)

Banks and non-bank financial intermediaries AUTHORRIZED to engage

in quasi-banking ARE REQUIRED TO SRICTLY adhere to the provisions of the
TRUTH IN LENDING ACT, by making true and effective cost of borrowing, AN
INTEGRAL PART OF EVERY LOAN TRANSACTION. Consequently, when
the promissory note signed by the borrower contains NO PROVISION ON THE
PAYMENT OF HANDLING CHARGES, the bank has NO AUTHORITY to
collect the same.

REQUIREMENT UNDER SEC. 4- Any person extending CREDIT (loan, sale on

installments, lease with option to buy) MUST GIVE THE DEBTOR in writing, prior to
the consummation of the transactions, a RECITAL OF THE FOLLOWING:

(A) Cash price;

(B) Amount credited if on installment;

(C) Difference between cash and installment price;

(D) Recital of FINANCE CHARGES AND WHAT THESE CHARGES BEAR to

the amount to be financed in PERCENTAGE.

SAMPLE OF DISCLOSURE STATEMENT: (Insert pic)

48
CONSEQUENCES: Non-compliance would authorize the debtor to recover any
interest/charges/fees payments made to the creditor.

PENAL CLAUSE: Failure to comply with the law makes the creditor liable for double
finance charges plus attorney’s fees.

PRESCRIPTIVE PERIOD: One (1) year from the occurrence of the violation.

49
ANTI-MONEY LAUNDERING ACT (RA 9160 as amended):

8.4 AMLA LAW 6%

8.4.1 Discuss the purpose, policies and principles

8.4.2 Discuss the definition of terms
8.4.3 Illustrate unlawful activities
8.4.4 Determine who are covered persons
8.4.5 Describe money laundering, terrorism, and financing
And asset forfeiture
8.4.6 Apply and illustrate preventive measures and obligations
Of covered persons
8.4.6.1 Prohibited accounts
8.4.6.2 Customer due diligence
8.4.7 Explain and apply beneficial ownership
8.4.8 Identify record keeping requirements
8.4.9 Discuss safe harbor

The original law RA 9160 was approved last September 22, 2001. The changes in
the law had been so rapid that the law undergone fast amendments: RA 9194 last March
7, 2003; RA 10167 last June 6, 2013.

In relation to this law, RA 10168 was legislated, AN ACT DEFINING THE

CRIME OF FINANCING TERRORISM, PROVIDING PENALTIES THEREFOR
AND FOR OTHER PURPOSES last July 25, 2011.

Amendments thereafter was made to the organic law by RA 10365, AN ACT

FURTHER STRENGTHENING THE ANTI-MONEY LAUNDERING LAW,
AMENDING FOR THE PURPOSE REPUBLIC ACT NO. 9160, OTHERWISE KNOWN
AS THE “ANTI-MONEY LAUNDERING ACT OF 2001”, AS AMENDED, was made
last July 23, 2012; RA 10927 made further amendments last July 25, 2016.

50
 RA 11479 was enacted, “AN ACT TO PREVENT, PROHIBIT AND PENALIZE
TERRORISM, THEREBY REPEALING REPUBLIC ACT NO. 9372, OTHERWISE
KNOWN AS THE "HUMAN SECURITY ACT OF 2007", last July 3, 2020.

Finally, the latest amendment to the organic law, RA 11521 was made last
January 29, 2021, AN ACT FURTHER STRENGTHENING THE ANTI-MONEY
LAUNDERING LAW, AMENDING FOR THE PURPOSE REPUBLIC ACT NO. 9160,
OTHERWISE KNOWN AS THE "ANTI-MONEY LAUNDERING ACT OF 2001", AS
AMENDED.

POLICY: To protect and preserve the integrity and confidentiality of bank

accounts and to ensure that the Philippines shall not be used as a money laundering site
for the proceeds of any unlawful activity. Consistent with such foreign policy, the State
shall extend cooperation in transnational investigations and prosecutions of persons
involved in money laundering activities whenever committed.

MONEY LAUNDERING: a CRIME whereby the proceeds of an unlawful activity

are transacted, thereby making them appear to have originated from LEGITIMATE
SOURCES.

MONETARY INSTRUMENT- refers to:

a. Coins and currency of legal tender of the Philippines or of any other

country.
b. Drafts, checks and notes.

c. Securities or negotiable instruments, bonds, commercial papers,

deposit certificates, trust certificates, custodial receipts or deposit
substitute instruments, trading orders, transaction tickets, and
confirmations of sale or investments and money market instruments;
and

d. Other similar instruments where title thereto passes to another by

endorsement, assignment or delivery.

HOW COMMITTED:

1. Any person knowing that any monetary instrument or property represents,

involved or related to, the proceeds of any unlawful activity:

a. Transacts said money instrument or property;

b. Converts, transfers, disposes of, moves, acquires, possesses or uses

said monetary instrument or property.

c. Conceals or disguises the true nature, source, location, disposition,

movement or ownership of or rights with respect to said monetary
instrument or property;

d. Attempts or conspires to commit money laundering offenses referred

to in (a), (b), or (c);

51
 e. Aids, abets, assist in or counsels the commission of the money
laundering offenses referred in (a), (b) or (c).

f. Performs or fails to perform any act as a result of which he facilitates

the offense of money laundering referred to in (a), (b) or (c).

2. Any person who knowing that a covered or suspicious is required to be

reported to the AMLC, fails to do so.

PROSECUTION: Any person may be charged with and convicted of BOTH the
offense of money laundering and the unlawful activity. The prosecution of any
offense under AMLA shall proceed independently of any proceeding relating to
the unlawful activity.

COVERED TRANSACTION: a transaction in cash or other equivalent monetary

instrument involving a total amount IN EXCESS OF PHP 500,000.00 within ONE
BANKING DAY; for covered persons like CASINOS, a single casino cash
transaction (involving the receipt of cash by a casino paid by or behalf of a
customer or payout of cash by a casino to a customer or to any person in his/her
behalf) involving an amount in EXCESS OF PHP 5,000,000.00 or its equivalent in
any other currency.

COVERED PERSONS-natural and juridical, refer to:

1. banks, non-banks, quasi-banks, trust entities, foreign exchange

dealers, pawnshops, money changers, remittance and transfer
companies and other similar entities and all other persons and their
subsidiaries and affiliates supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP);
2. insurance companies, pre-need companies and all other persons
supervised or regulated by the Insurance Commission (IC);

3. securities dealers, brokers, salesmen, investment houses and other

similar persons managing securities or rendering services as
investment agent, advisor, or consultant, (ii) mutual funds, close-end
investment companies, common trust funds, and other similar persons,
and (iii) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects,
cash substitutes and other similar monetary instruments or property
supervised or regulated by the Securities and Exchange Commission
(SEC);

4. jewelry dealers in precious metals, who, as a business, trade in

precious metals, for transactions in excess of One million pesos
(P1,000,000.00);

5. jewelry dealers in precious stones, who, as a business, trade in

precious stones, for transactions in excess of One million pesos
(P1,000,000.00);

52
 6. company service providers which, as a business, provide any of the
following services to third parties: (i) acting as a formation agent of
juridical persons; (ii) acting as (or arranging for another person to act
as) a director or corporate secretary of a company, a partner of a
partnership, or a similar position in relation to other juridical persons;
(iii) providing a registered office, business address or accommodation,
correspondence or administrative address for a company, a
partnership or any other legal person or arrangement; and (iv) acting
as (or arranging for another person to act as) a nominee shareholder
for another person; and

7. persons who provide any of the following services:

(i) managing of client money, securities or other assets;

(ii) management of bank, savings or securities accounts;

(iii) organization of contributions for the creation, operation or

management of companies; and

(iv) creation, operation or management of juridical persons or

arrangements, and buying and selling business entities.

8. Casinos, including internet and ship based casinos, with respect to

their casino cash transactions related to their gaming operations.
(added by RA 10927)

EXCLUDED PERSONS: Lawyers and accountants acting as independent legal

professionals in relation to information concerning their clients or where
disclosure of information would compromise client confidences or attorney-
client relationship.

OBLIGATIONS OF COVERED PERSONS:

1. CUSTOMER INDENTIFICATION- Sec. 8 states: “Covered persons

shall establish and record the TRUE IDENTITY of its clients based on
official documents. They shall maintain a system of VERIFYING THE
TRUE IDENTITY OF THER CLIENTS and in cases of CORPORATE
CLIENTS, require a system of VERIFYING THER LEGAL EXISTENCE
AND ORGANIZATIONAL STRUCTURE, as well as authority and
identification of all persons purporting to act on their behalf.

This is known as the KYC POLICY- know your client policy by

establish their identity through official documents.

Under the same section, it is now explicit: “The provisions of existing

laws to the contrary notwithstanding, ANONYMOUS ACCOUNTS,
ACCOUNTS UNDER FICTITIUS NAMES AND ALL OTHER
SIMILAR ACCOUNTS SHALL BE ABSOLUTE PROHIBITED. Pesos
and foreign non-checking numbered accounts shall be allowed. The
BSP may conduct ANNUAL TESTING solely limited to the

53
 determination of the existence and true identity of the owners of the
such accounts.

2. RECORD KEEPING- all records of all transactions of covered

institutions shall be maintained and safely stored for 5 YEARS from
the DATE OF TRANSACTION.

With respect to closed accounts, the records of CUSTOMER

IDENTIFICATION, ACCOUNT FILES AND BUSINESS
CORRESPONDENCE, shall be preserved and safely stored for at least
five (5) years from the date they were closed.

3. REPORT OF COVERED AND SUSPICIOUS TRANSACTIONS-

covered persons shall REPORT to the AMLC all covered and
suspicious transactions within 5 working days from occurrence
thereof, unless the AMLC concerned prescribes a different working
period not exceeding 15 WORKING DAYS.

4. Should a transaction be determined to be both a covered and a

suspicious transaction, it shall be reported as a suspicious transaction.

5. WHEN REPORTING, it shall not be considered a violation of bank

secrecy laws and similar laws. It shall be prohibited from
communicating, directly or indirectly, in any manner or by any means,
to any person the fact that a covered or suspicious transaction report
was made, the content thereof, or any other information in relation
thereto.

6. SAFE HARBOR- No administrative, criminal or civil proceeding, shall

lie against any person for having a transaction report in the regular
performance of his duties and in good faith, whether or not such
results in any criminal prosecution under Philippine laws.

SUSPICIOUS TRANSACTIONS: transactions with covered institutions,

regardless of the amount involved, where any of the following circumstances
exist:

1. There is no underlying legal or trade obligation, purpose or

justification.
2. The client is not properly identified.

3. The amount involved is not commensurate with the business or

financial capacity of the client.

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 4. Taking into account all known circumstances, it may be perceived that
the client’s transaction is structured in order to avoid being the subject
of reporting requirements under the ACT.

5. Any circumstance relating to the transaction which is observed to

deviate from the profile of the client and or the client’s past transaction
with the covered institution.

6. The transaction is in any way related to an unlawful activity or offense

under this ACT that is about to be, is being or has been committed.

7. Any transaction that is similar or analogous to any of the foregoing.

UNLAWFUL ACTIVITIES: Any act or omission or series or combination thereof

involving or having relation to the following:

1. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise
known as the Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No.
9165, otherwise known as the Comprehensive Dangerous Drugs Act of
2002;

3. Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as

amended, otherwise known as the Anti-Graft and Corrupt Practices
Act;

4. Plunder under Republic Act No. 7080, as amended;

5. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and
302 of the Revised Penal Code, as amended;

6. Jueteng and Masiao punished as illegal gambling under Presidential

Decree No. 1602;

7. Piracy on the high seas under the Revised Penal Code, as amended
and Presidential Decree No. 532;

8. Qualified theft under Article 310 of the Revised Penal Code, as

amended;

9. Swindling under Article 315 and Other Forms of Swindling under

Article 316 of the Revised Penal Code, as amended;

10. Smuggling under Republic Act Nos. 455 and 1937;

11. Violations of Republic Act No. 8792, otherwise known as the Electronic
Commerce Act of 2000;

12. Hijacking and other violations under Republic Act No. 6235;
destructive arson and murder, as defined under the Revised Penal
Code, as amended;

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13. Terrorism and conspiracy to commit terrorism as defined and
penalized under Sections 3 and 4 of Republic Act No. 9372;

14. Financing of terrorism under Section 4 and offenses punishable under

Sections 5, 6, 7 and 8 of Republic Act No. 10168, otherwise known as
the Terrorism Financing Prevention and Suppression Act of 2012:

15. Bribery under Articles 210, 211 and 211-A of the Revised Penal Code,
as amended, and Corruption of Public Officers under Article 212 of the
Revised Penal Code, as amended;

16. Frauds and Illegal Exactions and Transactions under Articles 213, 214,
215 and 216 of the Revised Penal Code, as amended;

17. Malversation of Public Funds and Property under Articles 217 and 222
of the Revised Penal Code, as amended;

18. Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and
176 of the Revised Penal Code, as amended;

19. Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise

known as the Anti-Trafficking in Persons Act of 2003;

20. Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No.

705, otherwise known as the Revised Forestry Code of the Philippines,
as amended;

21. Violations of Sections 86 to 106 of Chapter VI, of Republic Act No.

8550, otherwise known as the Philippine Fisheries Code of 1998;

22. Violations of Sections 101 to 107, and 110 of Republic Act No. 7942,
otherwise known as the Philippine Mining Act of 1995;

23. Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147,
otherwise known as the Wildlife Resources Conservation and
Protection Act;

24. Violation of Section 7(b) of Republic Act No. 9072, otherwise known as
the National Caves and Cave Resources Management Protection Act;

25. Violation of Republic Act No. 6539, otherwise known as the Anti-
Carnapping Act of 2002, as amended;

26. Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as

amended, otherwise known as the decree Codifying the Laws on
Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or Explosives;

27. Violation of Presidential Decree No. 1612, otherwise known as the

Anti-Fencing Law;

28. Violation of Section 6 of Republic Act No. 8042, otherwise known as

the Migrant Workers and Overseas Filipinos Act of 1995, as amended
by Republic Act No. 10022;

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 29. Violation of Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines;

30. Violation of Section 4 of Republic Act No. 9995, otherwise known as

the Anti-Photo and Video Voyeurism Act of 2009;

31. Violation of Section 4 of Republic Act No. 9775, otherwise known as

the Anti-Child Pornography Act of 2009;

32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of

Republic Act No. 7610, otherwise known as the Special Protection of
Children Against Abuse, Exploitation and Discrimination;

33. Fraudulent practices and other violations under Republic Act No.
8799, otherwise known as the Securities Regulation Code of 2000; and

34. Felonies or offenses of a similar nature that are punishable under the
penal laws of other countries.”

JURISDICTION: it the authority to HEAR AND DECIDE A CASE, AND TO

EXECUTE THE DECISION.

1. Regional Trial Court- all cases of money laundering.

2. SANDIGANBAYAN- if committed by public officers and private
persons who are in conspiracy with such public officers.

ANTI-MONEY LAUNDERING COUNCIL (AMLC)- composed by:

1. Chairman- BSP GOVERNOR.

2. Members: (a) Commissioner of Insurance Commission; (b) Chairman
of the Securities and Exchange Commission (SEC)

Note: It shall act unanimously in discharging its functions.

FUNCTIONS OF THE AMLC:

1. to require and receive covered transaction reports from covered

institutions;

(2) to issue orders addressed to the appropriate Supervising Authority or

the covered institution to determine the true identity of the owner of any
monetary instrument or property subject of a covered transaction report or
request for assistance from a foreign State, or believed by the Council, on the
basis of substantial evidence, to be, in whole or in part, wherever located,
representing, involving, or related to, directly or indirectly, in any manner or by
any means, the proceeds of an unlawful activity;

(3) to institute civil forfeiture proceedings and all other remedial

proceedings through the Office of the Solicitor General;

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 (4) to cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offenses;

(5) to initiate investigations of covered transactions, money laundering

activities and other violations of this Act;

(6) to freeze any monetary instrument or property alleged to be proceeds

of any unlawful activity;

(7) to implement such measures as may be necessary and justified under

this Act to counteract money laundering;

(8) to receive and take action in respect of, any request from foreign states
for assistance in their own anti-money laundering operations provided in this
Act;

(9) to develop educational programs on the pernicious effects of money

laundering, the methods and techniques used in money laundering, the viable
means of preventing money laundering and the effective ways of prosecuting
and punishing offenders; and

(10) to enlist the assistance of any branch, department, bureau, office,

agency or instrumentality of the government, including government-owned and
-controlled corporations, in undertaking any and all anti-money laundering
operations, which may include the use of its personnel, facilities and resources
for the more resolute prevention, detection and investigation of money
laundering offenses and prosecution of offenders.

(11) To imposed administrative sanctions for the violation of laws, rules,

regulations, orders, and resolutions issued pursuant to law.

FREEZING: The COURT OF APPEALS, upon application ex-parte by the AMLC

and after determination that probable cause exists that any monetary instrument
or property is in any law related to an unlawful activity, may issue a FREEZE
ORDER which shall be effective immediately (for a period of twenty 20 days
unless extended by the Court upon application by the AMLC; total period shall
not exceed 6 months).

NOTE: Considering the INTRICATE AND DIVERSE WEB OF RELATED AND

INTERLOCKING ACCOUNTS pertaining to the monetary instrument or
properties that any person may create in the different covered institutions, their
branches and/or units, the AMLC may apply to freeze monetary instruments or
properties in the names of the reported owners/holders, and monetary
instruments or properties named in the application of the AMLC, including all
other related web of accounts pertaining to other monetary instruments and
properties, the funds and sources of which originated from or are related to other
monetary instruments or properties subject of the FREEZE ORDERS.

RELATED WEB OF ACCOUNTS: those accounts, the funds and sources of which
originate from and/or are materially linked to the monetary instruments or
properties subject of the freeze orders.

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AUTHORITY TO INQUIRE INTO BANK DEPOSITS: the AMLC may inquire
into OR EXAMINE any particular deposit or investment, with ANY BANKING
INSTITUTION OR NON-BANK FINANCIAL INSTITUTION upon order of the
Court when there is probable cause that the deposits OR INVESTMENTS,
including related accounts involved are related to an unlawful activities
defined in Section 3 (i) or a money laundering offense under Section 4.

However, a court order is NOT even necessary when the offense or

unlawful activity involved is any of the following:

1. Kidnapping for ransom under Article 267 of the Revised Penal Code.
2. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14, 14 and 16 of the Comprehensive
Dangerous Drugs Act (RA 9165).

3. Hijacking and other violations under RA 6235.

4. Destructive arson and murders as defined in the RPC.

5. Felonies or offenses of a nature similar to 1, 2, 3, and 4 which are

punishable under the penal laws of other countries.

6. Terrorism and conspiracy to commit terrorism under RA 9372

7. Financing Terrorism under Section 4 and offenses punishable under

Section 5, 6, 7 and 8 of RA 10168.

The Court of Appeals shall act on the application to inquire into or

examine any deposit or investment with any with ANY BANKING
INSTITUTION OR NON-BANK FINANCIAL INSTITUTION WITHIN TWENTY
(24) HOURS from the filing of the application.

As to INQUIRY AND EXAMINATION OF RELATED ACCOUNTS, a

court order must first be obtained before the AMLC can inquire into these
RELATED ACCOUNTS. The procedure for the ex-parte court order for the
PRINCIPAL ACCOUNT shall be the same with that of the related accounts.

AUTHORITY TO INSTITUTE FORFEITURE PROCEEDINGS: (a) Civil

Forfeiture- Upon determination by the AMLC that probable cause exists that any
monetary instrument or property is in any way related to an unlawful activity
(defined in Section 3 (i) OR a MONEY LAUNDERING OFFENSE (defined in
Sec. 4), the AMLC is authorized to institute civil forfeiture proceedings and all
other remedial proceedings through the Office of the Solicitor General, a verified
ex-parte PETITION FOR FORFEITURE, and the Rules of court on Civil Forfeiture
shall apply.

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