UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW

A.Y 2022 - 2023

PERSONAL PROPERTY SECURITY ACT

R.A. 11057

2F
CREDIT TRANSACTIONS

MEMBERS:
CORTEZ, CLARISSE SYDNEY
JALLORINA, ALDYNNE GENISE
PAGDONSOLAN, MARK MOSES
PICHAY, JAMES GABRIEL
URSAL, VINICE NICOLE

PROFESSOR:
ATTY. IRVIN JOSEPH FABELLA
I. Preliminaries
REPUBLIC ACT No. 11057 | An Act Strengthening the Secured Transactions Legal
Framework in the Philippines, Which Shall Provide for the Creation, Perfection,
Determination of Priority, Establishment of a Centralized Notice Registry, and
Enforcement of Security Interests in Personal Property, and for Other Purposes
Section 1. TITLE. -This Act shall be known as the "PERSONAL PROPERTY
SECURITY ACT".

The Personal Property Security Act ("PPSA") is a consolidation of House Bill No. 6907
and Senate Bill. No. 1459.

PRE-PPSA SECURITY DEVICES OVER PERSONAL PROPERTY

Before the approval of the PPSA, the pledge and the chattel mortgage are the security
devices commonly used to create a security interest in personal property. These
security devices were governed by the Civil Code (see Civil Code, Arts. 2035-2123;
2140-2141.); in addition, chattel mortgages were governed by the Chattel Mortgage
Law. (Act No. 1508.3

EFFECT ON THE LAWS GOVERNING PLEDGE AND CHATTEL MORTGAGE

1. PPSA repealed the provisions of the Civil Code on Pledge (Art. 2085 – 2123),
Chattel Mortgage (Art. 2140- 2141) and Sec. 1-16 of the Chattel Mortgage law
(Act. No. 1508). (Sec. 9.01 of PPSA IRR.)

2. No more Pledge and Chattel Mortgage, under the PSSA, contracts creating a
security interest over a movable property are referred to simple as “security
agreement”. (Rabuya, Pre-Bar Reviewer in Civil Law, 2021 Ed, 553)

SOURCE OF THE PPSA

The PPSA is patterned after the United Nations Commission on International Trade Law
(UNCITRAL) the Model Law on Secured Transactions (2016.) The Model Law is based
on:

1. The United Nations Convention on the Assignment of Receivables in

International Trade;

2. The UNCITRAL Secured Transactions Guide on Secured Transactions;

3. The Supplement on Security Interests in Intellectual Property; and

4. The UNCITRAL Guide on the Implementation of a Security Rights Registry.

The PPSA also incorporates concepts derived from the Uniform Commercial Code of
the United States.
FRAMEWORK OF THE PPSA

Like the UNCITRAL Model Law, the PPSA follows a unitary, functional, and
comprehensive framework in creating security interests over personal property.

1) UNITARY APPROACH: The PPSA provides a "unified" framework for securing

obligations with personal property (Sec. 2) and introduced a unitary security
device that replaced the pledge and the chattel mortgage. In lieu of the wide
array of prior terminology (such as pledge, pledgor, pledgee, chattel mortgage,
mortgagor, mortgage, and so on), the PPSA substituted one device and a set of
basic terms: "security agreement," "security interest," "grantor," "secured
creditor”.
2) FUNCTIONAL APPROACH: The PPSA applies "to all transactions of any form
that secure an obligation with movable collateral (PPSA, Sec. 4.)
3) COMPREHENSIVE APPROACH: The PPSA applies to all types of movable
collateral (except aircrafts and ships), all types of obligations, and all types of
grantors and secured creditors (see PPSA, Secs. 3[c]; 3[i]; 4.)

Section 2. DECLARATION OF POLICY. -It is the policy of the State to promote

economic activity by increasing access to least cost credit, particularly for micro, small,
and medium enterprises (MSMEs), by establishing a unified and modern legal
framework for securing obligations with personal property.

POLICY BEHIND THE LAW: The PPSA seeks to promote economic activity by
increasing access to least cost credit, particularly for micro, small, and medium
enterprises (MSMEs). (PPSA, Sec. 2, Rules, Sec 1 04).
KEY BENEFITS OF THE PPSA: The PPSA is said to provide these key benefits:

1. USE OF ALMOST ALL TYPE OF MOVABLES AS COLLATERAL: The PPSA

allows the grantor to provide almost any type of movable property as collateral.
2. NO REQUIREMENT OF POSSESSION BY SECURED CREDITOR OF
COLLATERAL: The PPSA allows a security interest over the collateral even if the
secured creditor does not take physical possession.
3. SECURITY INTEREST OVER FUTURE ASSETS: The PPSA makes it possible
for a business to give security over a movable property not yet owned by the
business (such as future inventory), with the security interest automatically
attaching to that property as soon as the business acquires rights in it.
INTERPRETATION: If there is a conflict between a provision of this Act and a provision
of any other law, this Act shall govern unless the other law specially cites and amends
the conflicting provisions of this Law.

KINDS OF AGREEMENT:

1. COMMODITY CONTRACT
2. CONTROL AGREEMENT
3. SECURITY INTEREST
Section 3. DEFINITION OF TERMS. -As used in this Act, the following terms shall
mean:

(a) COMMODITY CONTRACT – a commodity futures contract, an option on a

commodity futures contract, a commodity option, or another contract if the
contract or option is:
(1) Traded on or subject to the rules of a board of trade that has been
designated as a contract market for such a contract; or
(2) Traded on a foreign commodity board of trade, exchange, or market, and
is carried on the books of a commodity intermediary for a commodity
customer;

1. COMMODITY CONTRACT: A commodity futures contract means "a contract

providing for the making or taking delivery at a prescribed time in the future of a
specific quantity and quality of a commodity or the cash value thereof, which is
customarily offset prior to the delivery date, and includes standardized contracts
having the indicia of commodities futures, commodity options and commodity
leverage, or margin contracts”.
Suspension of registration and trading of commodities futures contract:
Under the Securities Regulation Code (SRC), and without prejudice to Bangko
Sentral ng Pilipinas rules and circulars, the public trading of commodities futures
contracts is suspended until further ordered otherwise by the Securities and
Exchange Commission (SEC).
(b) CONTROL AGREEMENT –
(1) With respect to securities, means an agreement in writing among the issuer or
the intermediary, the grantor and the secured creditor, according to which the
issuer or the intermediary agrees to follow instructions from the secured creditor
with respect to the security, without further consent from the grantor;
(2) With respect to rights to deposit account, means an agreement in writing among
the deposit-taking institution, the grantor and the secured creditor, according to
which the deposit-taking institution agrees to follow instructions from the secured
creditor with respect to the payment of funds credited to the deposit account
without further consent from the grantor;
(3) With respect to commodity contracts, means an agreement in writing among the
grantor, secured creditor, and intermediary, according to which the commodity
intermediary will apply any value distributed on account of the commodity
contract as directed by the secured creditor without further consent by the
commodity customer or grantor;

2. CONTROL AGREEMENT: refers to an agreement in writing between the grantor,

the secured creditor and the issuer or intermediary (in the case of securities) or
the deposit-taking institution (in the case of rights to payment of funds credited to
a bank account), according to which the issuer, intermedia the deposit-taking
 institution agrees to follow the instructions of the secured creditor without the
further consent of the grantor. It also refers to an agreement in writing between
the grantor, the secured creditor, and the intermediary, according to which the
commodity intermediary will apply any value distributed on account of the
commodity contract as directed by the secured creditor without further consent
by the commodity customer or grantor. (PPSA, Sec. 3[b][3].)
Under the Rules, a control agreement is an agreement in writing between the
grantor and the secured creditor which perfects the security interests over
intangible assets. (Rules, Sec. 1.05[d].)

Parties to, form and contents of a control agreement.

(1) With respect to intermediated securities, a control agreement shall:

a. Be executed in writing by the issuer or the intermediary, the grantor
and the secured creditor.
b. Stipulate that the issuer or the intermediary agrees to follow
instructions from the secured creditor with respect to the security,
without further consent from the grantor.
(2) With respect to rights to deposit account, a control agreement shall:
a. Be executed in writing among the deposit-taking institution, the
grantor and the secured creditor;
b. Stipulate that the deposit-taking institution agrees to follow
instructions from the secured creditor with respect to the payment
of funds credited to the deposit account without further consent
from the grantor.
(3) With respect to commodity contracts, a control agreement shall:
a. Be executed in writing among the grantor, secured creditor, and
intermediary;
b. Stipulate that the commodity intermediary will apply any value
distributed on account of the commodity contract as directed by the
secured creditor without further consent by the commodity
customer or grantor.

Purpose of a control agreement.

A control agreement achieves two (2) purposes:

a. It renders a security interest effective against third parties.

b. It establishes the priority of the secured creditor that has entered into the control
agreement. (see PPSA, Sec. 18; Guide to Enactment, ch. I, par. 43.)

In addition, a control agreement can help ensure the cooperation of the deposit-taking
institution or the issuer of securities if the secured creditor needs to enforce its security
right.

(j) SECURITY INTEREST – a property right in collateral that secures payment or other
performance of an obligation, regardless of whether the parties have denominated it as
a security interest, and regardless of the type of asset, the status of the grantor or
secured creditor, or the nature of the secured obligation; including the right of a buyer of
accounts receivable and a lessor under an operating lease for not less than one (1)
year; and

3. SECURITY INTEREST: A security interest is a property right in movable

collateral that secures payment or other performance of an obligation. While the
definition states "regardless of the type of asset," the PPSA applies only to
movable collateral.
PARTIES UNDER THE PPSA
1. GRANTOR
2. SECURED CREDITOR

(c) Grantor –

(1) The person who grants a security interest in collateral to secure its own
obligation or that of another person;
(2) A buyer or other transferee of a collateral that acquires its right subject to a
security interest;
(3) A transferor in an outright transfer of an accounts receivable; or
(4) A lessee of goods;

1. GRANTOR may be: (a) the debtor that secures its own obligation; or (b) a person
that secures the obligation of the debtor.
A buyer or other transferee of a collateral that acquires its right subject to a
security interest is also considered a grantor to ensure that the PPSA remains
applicable even if the grantor has disposed of the collateral. (Guide to
Enactment, ch. I, par. 47.)

A transferor in an outright transfer of an accounts receivable is also treated as a

grantor. As discussed under Section 4, the PPSA also applies to the outright
transfer of receivables.

The PPSA also treats the lessee of goods as a grantor.

(i) Secured creditor – a person that has a security interest. For the purposes of
registration and priority only, it includes a buyer of account receivable and a lessor of
goods under an operating lease for not less than one (1) year;
2. SECURED CREDITOR is a person that has a security interest over the collateral.
The term "secured creditor" includes a buyer of account receivable and a lessor
of goods under an operating lease for not less than one (1) year for purposes of
registration and priority only.
MEANING OF TERMS

SECURITIES refer to shares, participation or interests in a corporation or in a

commercial enterprise or profit-making venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character. It includes but is not limited to:

(a) Shares of stocks, bonds, debentures, notes as evidence of indebtedness,

asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit-sharing
agreement, certificates of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like options and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting
trust certificates or similar instruments;
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Securities and
Exchange Commission. (Rules, Sec. 1.05[i); see R.A. No. 8799, Sec. 3.1.)

An ISSUER is the originator, maker, obligor, or creator of the security.

An INTERMEDIARY is defined as:

- a person (including a central securities depository) who in the course of a

business or other regular activity or maintains securities accounts for others or
both for others and for its own account and is acting in that capacity.
- a clearing corporation or a person, including a bank or broker, that in the ordinary
course of its business maintains securities accounts for others and is acting in
that capacity.
- Under the Rules, it is a person, including, but not limited to, a bank, trust entity,
depositary, broker, or central r securities depositary, that in the ordinary course of
business bs or regular activity maintains an account for such securities 10 or
assets, for another person, and is acting in that capacity.

​DEPOSIT ACCOUNT means a demand, time, savings, passbook, or similar account

maintained with a bank; it does not include investment property or account evidenced
by an instrument.

DEPOSIT TAKING INSTITUTION refers to a bank as defined under Republic Act No.
8791, otherwise known as the "General Banking Law," a non-stock savings and loan
association as defined under Republic Act No. 4367, or the "Revised Non-stock Savings
and Loan Association Act of 1997," or a cooperative as defined under Republic Act NO.
3520 otherwise known as the "Philippine Cooperative Code."

(c) NON-INTER MEDIATED SECURITIES – securities other than securities credited to

a securities account and rights in securities resulting from the credit of securities to a
securities account;
Types of securities.

(1) Types of security based on certification. – In terms of certification, a security may

be certificated or non-certificated.
(a) A certificated security is a security that is represented by a certificate.
(b) A non-certificated security is a security that is not represented by a
certificate.
(2) Types of security based on intermediation. - In terms of intermediation, a security
may be non-intermediated or intermediated.
(a) Intermediated securities are securities credited to a securities account and
rights in securities resulting from the credit of securities to a securities
account. They are securities held through an intermediary.
(b) Non-intermediated securities are securities other than securities credited
to a securities account and rights in securities resulting from the credit of
securities to a securities account. In other words, they are securities other
than intermediated securities.

(e) NOTICE – a statement of information that is registered in the Registry relating to

a security interest or lien. The term includes an initial notice., amendment notice,
and termination notice;

The Notice is a statement of information relating to: (1) a security interest; and (2) a lien.

(f) PROCEEDS – any property received upon sale, lease or other disposition of
collateral, or whatever is collected on or distributed with respect to collateral,
claims arising out of the loss or damage to the collateral, as well as a right to
insurance payment or other compensation for loss or damage of the collateral;

PROCEEDS cover proceeds of the sale or other disposition, or lease of an encumbered

asset; proceeds of proceeds; and natural fruits (e.g., the calves of encumbered cows) or
civil fruits

(g) PURCHASE MONEY SECURITY INTEREST – a security interest in goods

taken by the seller to secure the price or by a person who gives value to enable
the grantor to acquire the goods to the extent that the credit is used for that
purpose;

In both instances, a security interest must be taken or created. Under Section 5(a), a
security interest is created through a security agreement.

(h) REGISTRY – the centralized and nationwide electronic registry established in

the Land Registration Authority (LRA) where notice of a security interest and a
lien in personal property may be registered;

The Registry is the electronic registry where notices of the security interests and liens
over personal property may be registered. (See Rules, Sec. 1.05[f].)
Liens: The PPSA also covers liens. This pertains to encumbrances that are not security
interests created and perfected under the PPSA. The Rules broadly define a lien as a
qualified right or a proprietary interest, which may be exercised over the property of
another.

The PPSA contains these rules on liens:

(a) A notice of lien may be registered by a lien holder without the consent of the
person against whom the lien is sought to be enforced.
(b) The PPSA defines "notice" as a statement of information registered in the
Registry relating to a security interest or lien.
(c) The Registry is the electronic registry where notice of a security interest or lien in
personal property may be registered.
(d) The priority of security interests and liens in the same collateral shall be
determined according to time of registration of a notice or perfection by other
means, without regard to the order of creation of the security interests and liens.
(e) The purchase money security interest in equipment or consumer goods perfected
timely shall have priority over the rights of a buyer, lessee, or lien holder which
arise between delivery of the equipment or consumer goods to the grantor and
the time the notice is registered.
(f) A lien holder is entitled to redeem.
(g) A lien holder who, five (5) days before the date notification is sent to the grantor,
held a lien in the collateral that was perfected by registration, is entitled to notice
of disposition
(h) A lienholder may commence enforcement but a higher-ranking creditor may take
over.
(i) If the collateral is disposed of, excess proceeds must be applied to the
satisfaction of obligations secured by any lien in the collateral.
(j) If a secured creditor sells the collateral, the buyer shall acquire the grantor's right
in the asset free of the rights of any secured creditor or lien holder.
(k) A lienholder is entitled to object to any proposed retention by the secured creditor
of the collateral.

(c) WRITING – for the purpose of this Act includes electronic records.

Electronic writing. The definition of the term "writing" is intended to ensure that where
that term is referred to in the PPSA, this reference will include electronic records.

Section 4. SCOPE OF THE ACT.— This Act shall apply to all transactions of any form
that secure an obligation with movable collateral, except interests in aircrafts subject to
Republic Act No. 9497, or the "Civil Aviation Authority Act of 2008", and interests in
ships subject to Presidential Decree No. 1521, or the "Ship Mortgage Decree of 1978".
GR: The PPSA shall apply to all transactions of any form that secure an obligation with
movable collateral. (Sec. 4, RA 11057)
A security interest may be created over all forms of tangible or intangible asset or
personal property as defined by the Civil Code, including, but not limited to:

1. Right arising from a contract, including but not limited to:

a. Securities
b. Commodity contracts
c. Lease of goods including financial leases and operating leases for a
period of not less than one (1) year
2. Equipment;
3. Inventory;
4. Deposit accounts;
5. Negotiable instruments;
6. Negotiable documents of title;
7. Consumer goods;
8. Intellectual property;
9. Livestock;
10. Fixture, accessions, and commingled goods; or
11. Future property or after-acquired assets.

XPN:

1. Interests in aircrafts subject to RA No. 9497, or the "Civil Aviation Authority Act of
2008"; and
2. Interests in ships subject to Presidential Decree (PD) No. 1521, or the "Ship
Mortgage Decree of 1978".

SECURITY INTERESTS IN AIRCRAFTS: The manner Sec. 4 is written implies that the
PPSA does not apply to the creation of security interest in aircrafts. The creation of a
security interest in an aircraft is allowed under the PPSA, but perfection and priority
shall be made based on the registration of the conveyance with the Civil Aviation
Authority.

SECURITY INTERESTS IN SHIPS: The Ship Mortgage Decree applies to the creation
and perfection of a mortgage over ships. It provides rules, among others, on the
registration of the mortgage over the ship and on preferences regarding liens and other
priorities over the ship.

II. Creation and Perfection of Security Interest

Section 5. Creation of a Security Interest.—

(a) A security interest shall be created by a security agreement,

(b) A security agreement may provide for the creation of a security interest in a future
property, but the security interest in that property is created only when the grantor
acquires rights in it or the power to encumber it.
Creation vs. Effectiveness
When the security interest is created, the security interest is effective between the
parties. On the other hand, when the security interest is perfected, the security is
effective against third parties.

Creation of Security Interest

A security interest shall be created by a security agreement.

Parties to the Security Agreement

1. Grantor
● Person who grants a security interest to secure its own obligation or
another’s
● A buyer or other transferee that acquires its right subject to a security
interest
● A transferor in an outright transfer of an accounts receivable
● A lessee of goods
2. Secured Creditor - A person that has security interest including a buyer of
account receivable and a lessor of goods under an operating lease for not less
than 1 year.

Debtor - The debtor is the person that owes payment or other performance of a secured
obligation, whether or not that person is the grantor of the security right securing
payment or other performance of that obligation, including a secondary obligor such as
a guarantor of a secured obligation.

Essential Requisites of Security Agreement

1. Consent of the contracting parties

2. Cause of the Contract
3. Object certain which is the subject matter of the contract

a. Tangible movable assets

b. Intangible movable assets

All forms of tangible and intangible assets

(a) Rights arising from contracts, including but not limited to:

1. Securities;
2. Commodity contracts;
3. Lease of goods including financial leases and operating leases for a
period of not less than one (1) year.

(b) Equipment
(c) Inventory
(d) Deposit accounts
(e) Negotiable instruments
(f) Negotiable documents of title
 (g) Consumer goods
(h) Intellectual property
(i) Livestock
(j) Fixtures, accessions, and commingled goods, or
(k) Future property or after-acquired assets

Present and Future Assets

The grantor may create a security interests over:

1. An asset that the grantor already owns;

2. An asset that the grantor acquires with the proceeds of the secured loan;
3. Its inventory, including inventory that the grantor does not yet own but may
acquire;
4. Its receivables, including receivables that the grantor might not yet own but may
acquire;
5. Its rights under one or more contracts; OR
6. All its movable property, both present and future.

Rule on the Effectiveness of Security Interest

The parties can defer the effectiveness of the security interest to a later time. However,
the parties cannot agree to a time of effectiveness earlier than the time they actually
reach their agreement.

Future Property Defined

It refers to any movable property which does not exist or which the grantor does not
have rights in or the power to encumber at the time the security agreement is
concluded.

Rule on Security Agreement for Future Property

A security agreement may provide for the creation of a security interest in a future
property, but the security interest in that property is created only when the grantor
acquires rights in it or the power to encumber it.

Example: The grantor may execute a security agreement with the secured creditor to
create a security interest over goods that it will manufacture using the equipment or
another piece of equipment that it will purchase.

In both cases, the security interest is not created during the execution of the security
agreement but when the goods are manufactured and when the grantor acquires rights
in the new piece of equipment.

Section 6. Security Agreement.— A security agreement must be contained in a

written contract signed by the parties. It may consist of one or more writings that, taken
together, establish the intent of the parties to create a security interest.
The security agreement shall likewise provide for the language to be used in
agreements and notices. The grantor shall be given the option to have the agreement
and notices in Filipino. The Department of Finance (DOF) shall prepare model
agreements in plain English and Filipino.

Minimum Contents

1. Reflect the intent of the parties to create a security interest, except for contracts
that the PPSA considers security agreements notwithstanding absence of intent
between the parties to constitute a security;
2. Identify the parties (the secured creditor and the grantor);
3. Describe the secured obligation; and
4. Describe the encumbered assets.

Notarization
The PPSA does not mention that the security agreement must be notarized.

Format
A security agreement must be contained in a written contract signed by the parties.

Separate Agreement
It may consist of one or more writings that, taken together, establish the intent of the
parties to create a security interest.

Function
This provides objective evidence of the existence of the security agreement and its key
terms.

Section 7. Description of Collateral.— A description of collateral shall be considered

sufficient, whether it is specific or general, if it reasonably identifies the collateral. A
description such as "all personal property", "all equipment", "all inventory", or "all
personal property within a generic category" of the grantor shall be sufficient.

Description of Collateral to be Sufficient

A description of collateral shall be considered sufficient, whether it is specific or general,
if it reasonably identifies the collateral.

Delivery of the Collateral

The delivery of the collateral is not an essential requisite of the contract. The PPSA
provides for the creation of both possessory and non-possessory security interests in
movable assets.

Non-possessory security interests is possible through the registration of a notice with

the registry.

Section 8. Right to Proceeds and Commingled Funds and Money.—

(a) A security interest in personal property shall extend to its identifiable or traceable
proceeds.

(b) Where proceeds in the form of funds credited to a deposit account or money are
commingled with other funds or money:

(1) The security interest shall extend to the commingled money or funds,
notwithstanding that the proceeds have ceased to be identifiable to the extent
they remain traceable:

(2) The security interest in the commingled funds or money shall be limited to the
amount of the proceeds immediately before they were commingled: and

(3) If at any time after the commingling, the balance credited to the deposit
account or the amount of the commingled money is less than the amount of the
proceeds immediately before they were commingled, the security interest against
the commingled funds or money shall be limited to the lowest amount of the
commingled funds or money between the time when the proceeds were
commingled and the time the security interest in the proceeds is claimed.

Rule on Security Interest and Right to Proceeds

A security interest in personal property shall extend to its identifiable or traceable
proceeds.

Rule on Security Interest in a Tangible Asset that is Commingled

A security interest in a tangible asset that is commingled in a mass extends to the mass.
A security interest that extends to a mass is limited to the same proportion of the mass
as the quantity of the encumbered asset bore to the quantity of the entire mass
immediately after the commingling.

Note: The creation of a security interest over commingled funds occurs by operation of
law. The parties need not expressly so provide in the security agreement.

Rules Where Proceeds in the Form of Funds Credited to a Deposit Account or

Money are Commingled with ther Funds or Money

1. The security interest shall extend to the commingled money or funds,

notwithstanding that the proceeds have ceased to be identifiable to the extent
they remain traceable;
2. The security interest in the commingled funds or money shall be limited to the
amount of the proceeds immediately before they were commingled; and

Example: If proceeds amounting to P10M are deposited to a bank account with

a credit balance of P50M, the security interest in the proceeds extends to P10M
only.
 3. If at any time after the commingling, the balance credited to the deposit account
or the amount of the commingled money is less than the amount of the proceeds
immediately before they were commingled, the security interest against the
commingled funds or money shall be limited to the lowest amount of the
commingled funds or money between the time when the proceeds were
commingled and the time the security interest in the proceeds is claimed.

Reason: If the total amount of commingled money falls below the amount of the
proceeds, funds deposited or money added cannot be deemed to be proceeds of
the original assets.

Section 9. Continuity of Security Interest.— A security interest shall continue in

collateral notwithstanding sale, lease, license, exchange, or other disposition of the
collateral, except as otherwise provided in Section 21 of this Act, or agreed upon by the
parties.

GR: Security interest shall continue in collateral notwithstanding sale, lease, license,
exchange, or other disposition of the collateral.

The exceptions are:

1. When the parties agree otherwise;

2. If a party obtains in good faith the movable property in the ordinary course of
business.

Determination of Good faith

If the security interest is registered before the transferee acquired it, he is deemed to be
a buyer in bad faith because registration is notice to the whole world.

Application: This applies only to a non-enforcement situations.

Section 10. Contractual Limitation on the Creation of a Security Interest.—

(a) A security interest in an account receivable shall be effective notwithstanding any

agreement between the grantor and the account debtor or any secured creditor limiting
in any way the grantor’s right to create a security interest.

(b) Nothing in this section shall affect any obligation or liability of the grantor for breach
of the agreement in subsection (a).

(c) Any stipulation limiting the grantor’s right to create a security interest shall be void.

(d) This section shall apply only to accounts receivable arising from:
 (1) A contract for the supply or lease of goods or services other than financial
services;

(2) A construction contract or a contract for the sale or lease of real property; and

(3) A contract for the sale, lease or license of intellectual property.

Rule on Contractual Limitation on the Creation of Security Interest

GR: A contractual limitation on the creation of a security interest is valid.

Exceptions: Any stipulation limiting the grantor’s right to create a security interest shall
be void with respect to account receivables arising from:

1. A contract for the supply or lease of goods or services other than financial
services;
2. A construction contract or a contract for the sale or lease of real property; and
3. A contract for the sale, lease, or license of intellectual property.

When not applicable

This does not apply to other types of receivables – receivables arising from a loan and
finance receivables.

Liability
While a security interest is effective notwithstanding an agreement to the contrary, a
person that creates a security interest in a receivable in breach of the agreement is not
excused from liability to its counter-party for damages caused.

CHAPTER 3
PERFECTION OF SECURITY INTEREST

Section 11. Perfection of Security Interest.—

(a) A security interest shall be perfected when it has been created and the secured
creditor has taken one of the actions in accordance with Section 12.

(b) On perfection, a security interest becomes effective against third parties.

Perfection
A security interest shall be perfected when it has been created and the secured creditor
has taken one of the actions in accordance with Section 12.

Note: Upon perfection, a security interest becomes effective against third parties.

Section 12. Means of Perfection.— A security interest may be perfected by:

(a) Registration of a notice with the Registry;

(b) Possession of the collateral by the secured creditor; and

(c) Control of investment property and deposit account.

A security interest in any tangible asset may be perfected by registration or possession.

A security interest in investment property and deposit account may be perfected by
registration or control.

Creation and Perfection

There must be creation of a security interest and perfection of the security interest by
any of the means. Absent a security agreement, even if the means of perfection of
security interest are present, it will not be effective against third parties.

Creation of Security Interest is effective upon the parties to the security agreement,
while a perfected security interest is effective against third parties

Means of Perfection of Security Interest

a. Registration of a notice with the Registry;

It is the process of filing a notice as determined under the Rules with the
Registry. The LRA is mandated to establish and administer a centralized and
nationwide electronic registry where notice of a security interest and a lien in
personal property may be registered and searched for.

b. Possession of the collateral by the secured creditor; and

Perfection through possession is similar to the Civil Law pledge.

The concept of possession under the PPSA refers to actual. Mere possession of
a tangible assets does not create a security interest. For the security interest to
be binding upon the parties, they must execute a written security agreement.

c. Control of investment property and deposit account.

For purposes of determining the time of perfection of the security interest, the
control agreement shall be executed under oath, and shall indicate the date and
time of its execution.

Rules

1. A security interest in any tangible asset may be perfected by registration or

possession.
2. A security interest in investment property and deposit account may be
perfected by registration or control.
Section 13. Perfection by Control.—

(a) A security interest in a deposit account or investment property may be perfected by

control through:

(1) The creation of the security interest in favor of the deposit-taking institution or
the intermediary;

(2) The conclusion of a control agreement; or

(3) For an investment property that is an electronic security not held with an
intermediary, the notation of the security interest in the books maintained by or
on behalf of the issuer for the purpose of recording the name of the holder of the
securities.

(b) Nothing in this Act shall require a deposit-taking institution or an intermediary to

enter into a control agreement, even if the grantor so requests. A deposit-taking
institution or an intermediary that has entered into such an agreement shall not be
required to confirm the existence of the agreement to another person unless requested
to do so by the grantor.

Creation of the security interest in favor of the deposit-taking institution or the

intermediary
If the secured creditor is the deposit-taking institution that holds the deposit account, the
mere creation of the security interest in favor of the deposit-taking institution perfects
the security interest.

The conclusion of a control agreement

If the secured creditor is a party other than the deposit taking institution, the security
interest may be perfected through the conclusion of a control agreement.

Uncertificated non-intermediated securities

The security interest over uncertificated non-intermediated securities may be perfected
by a notation of the security interest in the books maintained by or on behalf of the
issuer for the purpose of recording the name of the holder of the securities.

Section 14. Perfection in Proceeds.—

(a) Upon disposition of collateral, a security interest shall extend to proceeds of the
collateral without further act and be continuously perfected, if the proceeds are in the
form of money, accounts receivable, negotiable instruments or deposit accounts.

(b) Upon disposition of the collateral, if the proceeds are in a form different from money,
accounts receivable, negotiable instruments or deposit accounts, the security interest in
such proceeds must be perfected by one of the means applicable to the relevant type of
collateral within fifteen (15) days after the grantor receives such proceeds; otherwise,
the security interest in such proceeds shall not be effective against third parties.
Proceeds in the form of money, etc —
The perfection of the security interest in the collateral extends automatically to the
proceeds if these requisites are met:

a. There is a perfected security interest in the collateral;

b. The collateral is disposed;
c. The proceeds take the form of money, accounts receivable, negotiable
instruments or deposit accounts.

Proceeds not in the form of money, etc —

If the proceeds are not in the form of money, etc., the security interest in the proceeds
will remain perfected only if the security interest in such proceeds is perfected by the
means applicable to that type of collateral within fifteen (15) days after the grantor
receives such proceeds; otherwise, the security interest in such proceeds shall not be
effective against third parties

Example
If the GRANTOR sold the tractor given as collateral to secure GRANTOR’s obligation to
the SECURED CREDITOR, and if the proceeds are in the form of money, account
receivables, negotiable instruments, or deposit accounts, SECURED CREDITOR need
not do anything to make its security interest binding against third parties.

However, if the proceeds are another equipment, such as when the tractor is exchanged
for another tractor, SECURED CREDITOR has 15 days during which SECURED
CREDITOR needs to perfect its security interest in the new tractor.

Section 15. Change in Means of Perfection.— A security interest shall remain

perfected despite a change in the means for achieving perfection: Provided, That there
was no time when the security interest was not perfected.

Q: Can there be a change in means of perfection?

YES. A security interest shall remain perfected despite a change in the means for
achieving perfection: Provided, That there was no time when the security interest was
not perfected.

Section 16. Assignment of Security Interest.— If a secured creditor assigns a

perfected security interest, an amendment notice may be registered to reflect the
assignment.

Q: Is assignment of security interest possible?

YES. A security interest is a property right that may be assigned. If a secured creditor
assigns a perfected security interest, an amendment notice may be registered to reflect
the assignment.
III. Priority of Security Interest

Section 17. Priority Rules.— The priority of security interests and liens in the same
collateral shall be determined according to time of registration of a notice or perfection
by other means, without regard to the order of creation of the security interests and
liens.

Priority - The right of a person in an encumbered asset in preference to the right of a

competing claimant

Competing claimant - A creditor of a grantor or other person with rights in an

encumbered asset that may be in competition with the rights of a secured creditor in the
same encumbered asset

There may be instances where there is a competition between more than one security
interest crested by the same grantor in the same asset. The rule is that priority between
competing security interests and liens is determined by the order in which the security
interest was perfected.

Priority rules

1. Perfection by registration alone - Determined by order of registration, regardless

of the order of creation
2. Perfection not involving registration - Determined by order of perfection
3. Perfection involving different means of perfection - Determined according to time
of registration of a notice or perfection by other means, without regard to the
order of creation of the security interests and liens

Rules on the priority of security interests

A. Tangibles - Order of priority:

a. Priority given to the security of a person who provides services or
materials with respect to goods, in the ordinary course of business, and
retains possession of the goods
b. Priority given to registered purchase money security interest in equipment,
consumer goods, inventory, intellectual property and livestock
c. Priority given to security interest perfected by registration or possession,
which priority shall be determined according to the time of perfection by
registration or possession
B. Deposit account - Order of priority:
a. Priority given to a deposit-taking institution with right to set-off
b. Priority given to the perfected security interest of a deposit-taking
institution
c. Priority given to security interest perfected through a control agreement,
which priority is determined based on the time of conclusion of the control
agreements
 d. Priority given to security interest perfected by registration, which priority
shall be determined according to the time of registration
C. Investment property in the form of certificated securities - Order of priority:
a. Priority given to the security interest perfected by possession of the
certificate
b. Priority given to security interest perfected by registration of a notice with
the Registry, which priority shall be determined according to the time of
registration
D. Investment property consisting of securities held with an intermediary - Order of
priority:
a. Priority given to the security interest of the intermediary
b. Priority given to the security interest perfected by a control agreement,
which priority will be determined based on the time of conclusion of the
control agreements
c. Priority given to the security interest perfected by a registration of a notice
with the Registry, which priority shall be determined according to the time
of registration
E. Investment property consisting of electronic securities not held with an
intermediary - Order of priority:
a. Priority given to the security interest perfected by a notation of the security
interest in the books maintained for that purpose by or on behalf of the
issuer
b. Priority given to the security interest perfected by a control agreement,
which priority shall be determined based on the time of conclusion of the
control agreement
c. Priority given to the security interest perfected by a registration of a notice
with the Registry, which priority shall be determined according to the time
of registration
F. Investment property consisting of negotiable instruments - Order of priority:
a. Priority given to the security interest perfected by possession
b. Priority given to the security interest perfected by a registration of a notice
with the Registry, which priority shall be determined according to the time
of registration

Section 18. Priority for Perfection by Control.—

(a) A security interest in a deposit account with respect to which the secured creditor is
the deposit-taking institution or the intermediary shall have priority over a competing
security interest perfected by any method.

(b) A security interest in a deposit account or investment property that is perfected by a

control agreement shall have priority over a competing security interest except a
security interest of the deposit-taking institution or the intermediary.

(c) The order of priority among competing security interests in a deposit account or
investment property that were perfected by the conclusion of control agreements shall
be determined on the basis of the time of conclusion of the control agreements.
(d) Any rights to set-off that the deposit-taking institution may have against a grantor’s
right to payment of funds credited to a deposit account shall have priority over a security
interest in the deposit account.

(e) A security interest in a security certificate perfected by the secured creditor’s

possession of the certificate shall have priority over a competing security interest
perfected by registration of a notice in the Registry.

(f) A security interest in electronic securities not held with an intermediary perfected by a
notation of the security interests in the books maintained for that purpose by or on
behalf of the issuer shall have priority over a security interest in the same securities
perfected by any other method.

(g) A security interest in electronic securities not held with an intermediary perfected by
the conclusion of a control agreement shall have priority over a security interest in the
same securities perfected by registration of a notice in the Registry.

(h) The order of priority among competing security interests in electronic securities not
held with an intermediary perfected by the conclusion of control agreements is
determined on the basis of the time of conclusion of the control agreements.

Priority rules for deposit account and investment property

1. If the secured creditor is the deposit-taking institution or the intermediary, it shall

have priority over all competing security interests perfected by any method.
2. Security interest over the deposit account or investment property perfected by
control vs Security interest perfected by a method other than control -
PERFECTION OVER CONTROL PREVAILS OTHER MEANS OF PERFECTION
3. Security interest over the deposit account or investment property perfected by
control vs Subsequent security interests over the same deposit account or
investment property that have all been perfected by control - DETERMINED BY
THE ORDER OF CONCLUSION OF THE CONTROL AGREEMENTS
4. Security interest of various secured creditors in the deposit account vs Right to
set-off of the deposit-taking institution that holds the deposit account - RIGHT TO
SET OFF SHALL PREVAIL, PROVIDED THE DEPOSIT-TAKING INSTITUTION
HAS THE RIGHT TO SET-OFF UNDER THE LAW OR UNDER CONTRACT

Priority rules of securities

1. Security interest in a certificated security perfected by possession of the secured

creditor of the certificate vs Security interest in the same security perfected by a
registration of a notice in the Registry - POSSESSION PREVAILS OVER
REGISTRATION
2. Security interest in an uncertificated non-intermediated security (i.e., an
electronic security credited to a securities account) perfected by possession of
the secured creditor of the certificate (i.e., an electronic security credited to a
securities account) vs Security interest in the same security perfected by a
 registration of a notice in the Registry - NOTATION PREVAILS OVER
REGISTRATION
3. Security interest in an uncertificated non-intermediated security (i.e., an
electronic security credited to a securities account) perfected by conclusion of a
control agreement vs Security interest in the same security perfected by a
registration of a notice in the Registry - NOTATION PREVAILS OVER CONTROL
AND REGISTRATION
4. Security interest in an uncertificated non-intermediated security (i.e., an
electronic security credited to a securities account) perfected by conclusion of a
control agreement vs Security interest in the same security perfected by
subsequent conclusions of other control agreements - DETERMINED BASED
ON THE TIME OF CONCLUSION OF THE CONTROL AGREEMENTS

Section 19. Priority for Instruments and Negotiable Documents. - A security interest
in an instrument or negotiable document that is perfected by possession of the
instrument or the negotiable document shall have priority over a security interest in the
instrument or negotiable document that is perfected by registration of a notice in the
Registry.

Priority for instruments and negotiable instruments - POSSESSION PREVAILS OVER

REGISTRATION

Section 20. Priority and Plight of Retention by Operation of Law. - A person who
provides services or materials with respect to the goods, in the ordinary course of
business, and retains possession of the goods shall have priority over a perfected
security interest in the goods until payment thereof.

Highest Priority Rule - A person who provides services or materials with respect to the
goods, in the ordinary course of business, and retains possession of the goods shall
have priority over a perfected security interest in the goods until payment thereof. This
priority rule prevails overl all other perfected security interests over the goods.

Requisites:

1. A person (the supplier) provides goods or services with respect to the goods
2. The supplier provides these goods or services in the ordinary course of business
3. The supplier is unpaid
4. The supplier retains possession of the goods

Coverage:

1. Credits for the making, repairs, safekeeping, or preservation of personal property

2. Credits for the transportation of goods and incidental expenses
3. Warehouseman’s lien
4. Hotel-keeper’s lien
Section 21. Transferee Exceptions. - Any party who obtains, in the ordinary course of
business, any movable property containing a security interest shall take the same free
of such security interest provided he was in good faith. No such good faith shall exist if
the security interest in the movable property was registered prior to his obtaining the
property.

Alienation by the grantor of the collateral - Buyer may take the property subject to the
security interest, provided in good faith. XPN: No such good faith shall exist if the
security interest in the movable property was registered before he obtained the property.

Section 22. Effect of the Grantor’s Insolvency on the Priority of a Security

Interest. - Subject to the applicable insolvency law, a security interest perfected prior to
the commencement of insolvency proceedings in respect of the grantor shall remain
perfected and retain the priority it had before the commencement of the insolvency
proceedings.

Grantor’s insolvency, effect - A perfected security interest generally retains its priority
as against competing claimants notwithstanding the commencement of insolvency
proceedings with respect to the grantor. During insolvency proceedings, the perfected
security interest constitutes a lien over the collateral.

Section 23. Purchase Money Security Interest.—

(a) A purchase money security interest in equipment and its proceeds shall have priority
over a conflicting security interest, if a notice relating to the purchase money security
interest is registered within three (3) business days after the grantor receives
possession of the equipment.

(b) A purchase money security interest in consumer goods that is perfected by

registration of notice not later than three (3) business days after the grantor obtains
possession of the consumer goods shall have priority over a conflicting security interest.

(c) A purchase money security interest in inventory, intellectual property or livestock

shall have priority over a conflicting perfected security interest in the same inventory,
intellectual property or livestock if:

(1) The purchase money security interest is perfected when the grantor receives
possession of the inventory or livestock, or acquires rights to intellectual property;
and

(2) Before the grantor receives possession of the inventory or livestock, or

acquires rights in intellectual property, the purchase money secured creditor
gives written notification to the holder of the conflicting perfected security interest
in the same types of inventory, livestock, or intellectual property. The notification
sent to the holder of the conflicting security interest may cover multiple
transactions between the purchase money secured creditor and the grantor
without the need to identify each transaction.
(d) The purchase money security interest in equipment or consumer goods perfected
timely in accordance with subsections (a) and (b), shall have priority over the rights of a
buyer, lessee, or lien holder which arise between delivery of the equipment or consumer
goods to the grantor and the time the notice is registered.

Consumer goods, Priority - A purchase money security interest in consumer goods shall
have priority over a conflicting security interest provided that:

a. the grantor obtains possession of the consumer goods; and

b. the purchase money security interest is perfected by registration of notice not
later than 3 business days after the grantor obtains possession of the consumer
goods.

Inventory, Priority - A purchase money security interest in inventory shall have priority
over a conflicting perfected security interest in the same inventory if:

a. the purchase money security interest is perfected when the grantor receives
possession of the inventory; and
b. before the grantor receives possession of the inventory, the purchase money
secured creditor gives written notification to the holder of the conflicting perfected
security interest in the same types of inventory.

Intellectual property, Priority - A purchase money security interest in intellectual property

shall have priority over a conflicting perfected security interest in the same intellectual
property if:

a. the purchase money security interest is perfected when the grantor acquires
rights to intellectual property; and
b. before the grantor acquires rights in intellectual property, the purchase money
secured creditor gives written notification to the holder of the conflicting perfected
security interest in the same intellectual property. The notification sent to the
holder of the conflicting security interest may cover multiple transitions between
the purchase money secured creditor and the grantor without the need to identify
each transaction.

Livestock, Priority - A purchase money security interest in livestock in shall have priority
over a conflicting perfected security interest in the same livestock if:

a. the purchase money security interest is perfected when the grantor received
possession of the livestock; and
b. before the grantor receives possession of the livestock, the purchase money
secured creditor gives written notification to the holder of the conflicting perfected
security interest in the same livestock.

Equipment, Priority - A purchase money security interest in equipment and its proceeds
shall have priority over a conflicting perfected security interest in the same equipment
and proceeds if:
 a. the grantor obtains possession of the equipment; and
b. the purchase money security interest is perfected by registration of notice not
later than 3 business days after teh grantor receives possession of the
equipment.

Section 24. Livestock. - A perfected security interest in livestock securing an obligation

incurred to enable the grantor to obtain food or medicine for the livestock shall have
priority over any other security interest in the livestock, except for a perfected purchase
money security interest in the livestock, if the secured creditor providing credit for food
or medicine gives written notification to the holder of the conflicting perfected security
interest in the same livestock before the grantor receives possession of the food or
medicine.

Security interests over livestock will have this order of priority:

1. perfected purchase money security interest in the livestock

2. perfected security interest in the livestock securing an obligation to enable the
grantor to obtain food or medicine over the livestock (subject to the notice
requirement)
3. perfected security interest over the livestock to secure other obligations

Section 25. Fixtures, Accessions, and Commingled Goods. - A perfected security

interest in a movable property which has become a fixture, or has undergone accession
or commingling shall continue provided the movable property involved can still be
reasonably traced. In determining ownership over fixtures, accessions, and commingled
goods, the provisions of Book II of Republic Act No. 386 or the "Civil Code of the
Philippines" shall apply.

A perfected security interest in a movable property which has become a fixture, or has
undergone accession or commingling shall continue provided the movable property
involved can still be reasonable traced.

IV. Registration-Registry

Section 26. Establishment of Electronic Registry.—

(a) The Registry shall be established in and administered by the LRA.

(b) The Registry shall provide electronic means for registration and searching of notices.

Establishment of Electronic Registry

RA No. 11057 and its IRR provide that an electronic registry shall be established and
administered by the LRA. The Registry shall provide the public an electronic means for
registration and searching of registered notices relating to transactions on personal
property.

Registered notices, which shall be part of the Registry and considered as public
records, shall contain personal information such as the names of grantors, borrowers
and creditors for identification purposes.

Section 27. Public Record.—

(a) Information contained in a registered notice shall be considered as a public record.

(b) Any person may search notices registered in the Registry.

(c) The electronic records of the Registry shall be the official records.

The respective contact information of the grantors, borrowers and creditors such as
addresses, email addresses and mobile and phone numbers shall also be collected
during the online registration process for notification purposes, but shall not be
disclosed to the public.

Taking these into consideration, the collection and subsequent disclosure of personal
information through the Registry is necessary in the exercise of the LRA’s regulatory
mandate.

Section 28. Sufficiency of Notice.—

(a) An initial notice of security interest shall not be rejected:

(1) If it identifies the grantor by an identification number, as further prescribed in the

regulations;

(2) If it identifies the secured creditor or an agent of the secured creditor by name;

(3) If it provides an address for the grantor and secured creditor or its agent;

(4) If it describes the collateral: and

(5) If the prescribed fee has been tendered, or an arrangement has been made for
payment of fees by other means.

(b) If the Registry rejects to register a notice, it shall promptly communicate the fact of
and reason for its rejection to the person who submitted the notice.
(c) Each grantor must authorize the registration of an initial notice by signing a security
agreement or otherwise in writing.

(d) A notice may be registered before a security agreement is concluded. Once a

security agreement is concluded, the date of registration of the notice shall be reckoned
from the date the notice was registered.

(e) A notice of lien may be registered by a lien holder without the consent of the person
against whom the lien is sought to be enforced.

(f) Description of the collateral in a notice shall be entered in English.

Procedure

1. The grantor, or any person authorized by the grantor, submits the notice to the
Registry, and pays the prescribed fee. The notice is considered sufficient if it:

a. Identifies the grantor by an identification number

b. Identifies the secured creditor by name

c. Provides an address for the grantor and secured creditor

d. Describes the collateral [Sec. 28].

2. The Registry either accepts or rejects the notice for registration. However, if the
notice meets the minimum requirements and the fee is paid, it shall not be rejected
[Sec. 28(a)]

a. The Registry does not determine the correctness, authenticity, or validity of the
information contained in the notice.

b. Thus, questions regarding the validity of the security agreement are expected
to be decided in a proper litigation after registration [Somera]

3. If the Registry rejects the registration of a notice, it shall promptly communicate the
fact and reason for its rejection to the person who submitted the notice [Sec. 28(b)]

4. If the Registry accepts the registration of a notice, it shall be effective, from the time it
is discoverable on the records of the Registry, until such time that the duration indicated
on the notice lapses [Sec. 30]

a. Any person may search notices registered in the Registry [Sec. 27].

b. The electronic records of the Registry shall be the official records [Sec. 27].
Effects of Registration

1. The security interest becomes binding on third parties [Sec. 11].

2. The registered notice is considered a public record [Sec. 27].

3. Subsequent purchasers of the collateral are charged with notice of the security
interest burdening the title of said collateral.

• Such notice cannot be overcome by proof of good faith [Legarda & Prieto v.
Saleeby, G.R. No. L-8936 (1915)]

4. Establishes the basis of priority of security of interest according to time of registration

[Sec. 17].

Section 29. One Notice Sufficient for Security Interests Under Multiple Security
Agreements. -The registration of a single notice may relate to security interests created
by the grantor under one (1) or more than one security agreement.

Notices are statements that relate to a security interest or lien, and may refer to an initial
notice, an amendment notice or a termination notice. The agency tasked with the
responsibility of establishing and administering the said Registry, including the
responsibility of issuing guidelines on the use and management of the Registry, is the
Land Registration Authority (“LRA”).

NOTE: The registration of a single notice may relate to security interests created by the
grantor under one (1) or more than one security agreement. (Sec. 29, Ibid.)

Section 30. Effectiveness of Notice.—

(a) A notice shall be effective at the time it is discoverable on the records of the
Registry.

(b) A notice shall be effective for the duration of the term indicated in the notice unless a
continuation notice is registered before the term lapses.

(c) A notice substantially complying with the requirements of this Chapter shall be
effective unless it is seriously misleading.

(d) A notice that may not be retrieved in a search of the Registry against the correct
identifier of the grantor shall be ineffective with respect to that grantor.
Effectiveness of Notice

A notice shall be effective at the time it is discoverable on the records of the Registry
and for the duration of the term indicated in the notice unless a continuation notice is
registered before the term lapses. Substantial compliance of the requirements would
still give effectiveness to the notice unless it is seriously misleading. (Sec. 30, Ibid.)

Section 31. Seriously Misleading Notice. -A notice that does not provide the
identification number of the grantor shall be seriously misleading.

Section 32. Amendment of Notice.—

(a) A notice may be amended by the registration of an amendment notice that:

(1) Identifies the initial notice by its registration number; and

(2) Provides the new information.

(b) An amendment notice that adds collateral that is not proceeds must be authorized
by the grantor in writing.

(c) An amendment notice that adds a grantor must be authorized by the added grantor
in writing.

(d) An amendment notice shall be effective only as to each secured creditor who
authorizes it.

(e) An amendment notice that adds collateral or a grantor shall be effective as to the
added collateral or grantor from the date of its registration.

Amending of Notice

A notice may be amended by the registration of an amendment notice that:

1. Identifies the initial notice by its registration number; and

2. Provides the new information. (Sec. 32, Ibid.)

Section 33. Continuation of Notice.—

(a) The period of effectiveness of a notice may be continued by registering an

amendment notice that identifies the initial notice by its registration number.

(b) Continuation of notice may be registered only within six (6) months before the
expiration of the effective period of the notice.
Section 34. Termination of Effectiveness of a Notice.—

(a) The effectiveness of a notice may be terminated by registering a termination notice

that:

(1) Identifies the initial notice by its registration number; and

(2) Identifies each secured creditor who authorizes the registration of the termination
notice.

(b) A termination notice terminates effectiveness of the notice as to each authorizing

secured creditor.

Termination of Effectiveness of a Notice

The effectiveness of a notice may be terminated by registering a termination notice that:

a. Identifies the initial notice by its registration number; and

b. Identifies each secured creditor who authorizes the registration of the termination
notice.

A termination notice terminates effectiveness of the notice as to each authorizing

secured creditor. (Sec. 34, Ibid.)

Section 35. Registry Duties.—

(a) For each registered notice, the Registry shall:

(1) Assign a unique registration number;

(2) Create a record that bears the number assigned to the initial notice and the date and
time of registration; and

(3) Maintain the record for public inspection.

(b) The Registry shall index notices by the identification number of the grantor and, for
notices containing a serial number of a motor vehicle, by serial number.

(c) The Registry shall provide a copy of the electronic record of the notice, including the
registration number and the date and time of registration to the person who submitted it.

(d) The Registry shall maintain the capability to retrieve a record by the identification
number of the grantor, and by serial number of a motor vehicle.

(e) The Registry shall maintain records of lapsed notices for a period of ten (10) years
after the lapse.
(f) The duties of the Registry shall be merely administrative in nature. By registering a
notice or refusing to register a notice, the Registry does not determine the sufficiency,
correctness, authenticity, or validity of any information contained in the notice.

Section 36. Search of Registry Records and Certified Report.—

(a) The Registry shall communicate the following information to any person who
requests it:

(1) Whether there are in the Registry any unlapsed notices that indicate the grantor's
identification number or vehicle serial number that exactly matches the relevant criterion
provided by the searcher;

(2) The registration number, and the date and time of registration of each notice; and

(3) All of the information contained in each notice.

(b) If requested, the Registry shall issue a certified report of the results of a search that
is an official record of the Registry and shall be admissible into evidence in judicial
proceedings without extrinsic evidence of its authenticity.

Section 37. Disclosure of Information.—

(a) The secured creditor must provide to the grantor at its request:

(1) The current amount of the unpaid secured obligation; and

(2) A list of assets currently subject to a security interest.

(b) The secured creditor may require payment of a fee for each request made by the
grantor in subsection (a) in this section, but the grantor is entitled to a reply without
charge once every six (6) months.

(c) A security interest in a deposit account shall not:

(1) Affect the rights and obligations of the deposit-taking institution without its consent;
or

(2) Require the deposit-taking institution to provide any information about the deposit
account to third parties.

Section 38. Fees Set by Regulation.—

(a) The fees for registering a notice and for requesting a certified search report shall be
set by regulation issued by the DOF for the recovery of reasonable costs of establishing
and operating the Registry.

(b) The fee structure or any change thereof under subsection (a) shall further consider
that the same shall not be burdensome to either lender or grantor.
(c) There shall be no fee for electronic searches of the Registry records or for the
registration of termination notices.

(d) The Registry may charge fees for services not mentioned above.

Section 39. When the Grantor May Demand Amendment or Termination of Notice.
-A grantor may give a written demand to the secured creditor to amend or terminate the
effectiveness of the notice if:

(a) All the obligations under the security agreement to which the registration relates
have been performed and there is no commitment to make future advances;

(b) The secured creditor has agreed to release part of the collateral described in the
notice;

(c) The collateral described in the notice includes an item or kind of property that is not
a collateral under a security agreement between the secured creditor and the grantor;

(d) No security agreement exists between the parties; or

(e) The security interest is extinguished in accordance with this Act.

Section 40. Matters That May be Required by Demand. -Upon receipt of the demand
submitted under Section 39, the secured creditor must register, within fifteen (15)
working days, an amendment or termination notice:

(a) Terminating the registration in a case within subsections (a), (d) or (e) of Section 39;

(b) Amending the registration to release some property that is no longer collateral in a
case within subsection (c) of Section 39 or that was never collateral under a security
agreement between the secured creditor and the grantor in a case within subsection (c)
of Section 39.

Section 41. Procedure for Noncompliance with Demand. -If the secured creditor fails
to comply with the demand within fifteen (15) working days after its receipt, the person
giving the demand under Section 39 may ask the proper court to issue an order
terminating or amending the notice as appropriate.

Section 42. Compulsory Amendment or Termination by Court Order.—

(a) The court may, on application by the grantor, issue an order that the notice be
terminated or amended in accordance with the demand, which order shall be conclusive
and binding-on the LRA: Provided, That the secured creditor wrho disagrees with the
order of the court may appeal the order.

(b) The court may make any other order it deems proper for the purpose of giving effect
to an order under subsection (a) of this section.
(c) The LRA shall amend or terminate a notice in accordance with a court order made
under subsection (a) of this section as soon as reasonably practicable after receiving
the order.

Section 43. No Fee for Compliance of Demand. -A secured creditor shall not charge
any fee for compliance with a demand received under Section 39.

Section 44. When Registration and Search Constitutes Interference with Privacy
of Individual. -A person who submitted a notice for registration or carried out a search
of the Registry with a frivolous, malicious or criminal purpose or intent shall be subject
to civil and criminal penalties according to the relevant laws.

Compulsory Amendment or Termination by Court Order

The court may, on application by the grantor, issue an order that the notice be
terminated or amended in accordance with the demand, which order shall be conclusive
and binding on the LRA: Provided, That the secured creditor who disagrees with the
order may appeal the order.

The court may take any order it deems proper for the purpose of giving effect to the
order made under the first paragraph. The LRA shall amend or terminate a notice in
accordance with a court order as soon as reasonably practicable after receiving the
order. (Sec. 42, Ibid.)

Security interest shall be perfected when it has been created and the secured creditor
has taken one of the actions mentioned above. On perfection, a security interest
becomes effective against third parties. (Sec. 11, Ibid.)

Significance of the Registry

The significance of the establishment of the Registry cannot be underestimated

considering that under the PPSA, the registration of a notice with the Registry is one
mode of perfecting a security interest. The other modes of perfecting a security interest
are through possession of the collateral by the secured creditor and control of
investment property and deposit account.

More importantly, the PPSA provides that the priority of security interests and liens in
the same collateral is determined according to the time of registration of a notice or
perfection by other means, without regard to the order of creation of the security
interests and liens.

Individual Users may create and register their Individual User Accounts online through
the PPSR without requiring any further approval from the LRA. On the other hand,
Juridical Entities, through their representative, may create and register their Juridical
User Accounts either by Self-Service Online Mode, which is done through the PPSR, or
by LRA-Assisted Offline Mode, which is facilitated by a designated LRA Officer.

Juridical Entities that require multiple user accounts need to coordinate with the LRA on
the creation of their Juridical Entity Account.

V. Enforcement of Security Interest

● The personal security may be enforced after default through sale or disposition of
the collateral publicly or privately.
● The enforcement of security interest under the PPSA is different from the
enforcement of security interest under the Chattel Mortgage Law and the law on
pledge because of the following:
○ The PPSA provides for a simplified and expedited private and public
disposition of collateral;
○ The PPSA provides for the right to take over the enforcement process by
a higher-ranking secured creditor (Sec. 46);
○ There is a remedy for expedited repossession of collateral in the PPSA
(Sec. 47);
○ Under the PPSA, collection and application is expressly allowed for
deposit accounts and negotiable instruments (Sec. 48);
○ Retention of the collateral is allowed under the PPSA in certain cases
(Sec. 54).
● Section 8.11 of the Implementing and Regulations provided that the expedited
hearing/proceedings shall be conducted in a summary manner.
Overview of Enforcement of Security Interests
1. The debtor incurs in default.
2. The secured creditor effects repossession of the collateral. The repossession
may be done without judicial process if:
a. so stipulated in the security agreement; and
b. the possession can be taken without a breach of the peace.
3. If the collateral is a fixture, the secured creditor, if it has priority over all owners
and mortgagees, may remove the fixture from the real property to which it is
affixed without judicial process. The secured creditor shall exercise due care in
removing the fixture.
4. If, upon default, the secured creditor cannot take possession of the collateral
without breach of the peace, he must apply with the courts for an order granting
him possession of the collateral. The secured creditor must prove that a default
has occurred under the security agreement and that the secured creditor has a
right to take possession of the collateral.
5. The secured creditor must give notice of the intended disposition not later than
ten (10) days before the disposition. The requirement to send a notification
 shall not apply if the collateral is perishable or is threatened to decline speedily in
value or is of a type customarily sold on a recognized market.
6. The proceeds of disposition shall be applied in the following order:
a. The reasonable expenses of taking, holding, preparing for disposition, and
disposing of the collateral, including reasonable attorney’s fee and legal
expenses incurred by the secured creditor;
b. The satisfaction of the obligation secured by the security interest of the
enforcing secured creditor; and
c. The satisfaction of obligations secured by any subordinate security
interest or lien in the collateral if a written demand and proof of the interest
are received before distribution of the proceeds is completed.
7. The secured creditor shall account to the grantor for any surplus, and, unless
otherwise agreed, the debtor is liable for any deficiency.
Section 45. Right of Redemption.—
(a) Any person who is entitled to receive a notification of disposition in accordance with
this Chapter is entitled to redeem the collateral by paying or otherwise performing the
secured obligation in full, including the reasonable cost of enforcement.
(b) The right of redemption may be exercised, unless:
(1) The person entitled to redeem has not, after the default, waived in writing the
right to redeem;
(2) The collateral is sold or otherwise disposed of, acquired or collected by the
secured creditor or until the conclusion of an agreement by the secured creditor
for that purpose; and
(3) The secured creditor has retained the collateral.

Secured Creditor’s Rights

1. Right to require payment for a fee for a request of disclosure of information from
the grantor; (Sec. 37)
2. Right to take over enforcement; (Sec. 46)
3. Right to expedite Repossession of the Collateral; (Sec. 47)
4. Right to recover in special cases; (Sec. 48)
5. Right to Dispose of Collateral; (Sec. 49 - 51) and
6. Right to retain collateral (Sec. 54).
Section 46. Right of Higher-Ranking Secured Creditor to Take Over
Enforcement.—
(a) Even if another secured creditor or a lien holder has commenced enforcement, a
secured creditor whose security-interest has priority over that of the enforcing secured
creditor or lien holder shall be entitled to take over the enforcement process.
(b) The right referred to in subsection (a) of this section may be invoked at any time
before the collateral is sold or otherwise disposed of, or retained by the secured creditor
or until the conclusion of an agreement by the secured creditor for that purpose.
(c) The right of the higher-ranking secured creditor to take over the enforcement
process shall include the right to enforce the rights by any method available to a
secured creditor under this Act.
● A secured creditor whose security interest has priority over that of the enforcing
secured creditor or lien holder (even if another secured creditor or a lien holder
has commenced enforcement) shall be entitled to take over the enforcement
process.
● The right of higher-ranking secured creditor to take over enforcement may be
invoked at any time before the collateral is sold or otherwise disposed of or
retained by the secured creditor or until the conclusion of an agreement by the
secured creditor for that purpose. This right shall include the right to enforce the
rights by any method available to a secured creditorunder PPSA.

Section 47. Expedited Repossession of the Collateral.—

(a) The secured creditor may take possession of the collateral without judicial process if
the security agreement so stipulates: Provided, That possession can be taken without a
breach of the peace.
(b) If the collateral is a fixture, the secured creditor, if it has priority over all owners and
mortgagees, may remove the fixture from the real property to which it is affixed without
judicial process. The secured creditor shall exercise due care in removing the fixture.
(c) If, upon default, the secured creditor cannot take possession of collateral without
breach of the peace, the secured creditor may proceed as follows:
(1) The secured creditor shall be entitled to an expedited hearing upon
application for an order granting the secured creditor possession of the
collateral. Such application shall include a statement by the secured creditor,
under oath, verifying the existence of the security agreement attached to the
application and identifying at least one event of default by the debtor under the
security agreement;
(2) The secured creditor shall provide the debtor, grantor, and, if the collateral is
a fixture, any real estate mortgagee, a copy of the application, including all
supporting documents and evidence for the order granting the secured creditor
possession of the collateral; and
(3) The secured creditor is entitled to an order granting possession of the
collateral upon the court finding that a default has occurred under the security
 agreement and that the secured creditor has a right to take possession of the
collateral. The court may direct the grantor to take such action as the court
deems necessary and appropriate so that the secured creditor may take
possession of the collateral: Provided, That breach of the peace shall include
entering the private residence of the grantor without permission, resorting to
physical violence or intimidation, or being accompanied by a law enforcement
officer when taking possession or confronting the grantor.
Section 48. Recovery in Special Cases.— Upon default, the secured creditor may
without judicial process:
(a) Instruct the account debtor to make payment to the secured creditor, and apply such
payment to the satisfaction of the obligation secured by the security interest after
deducting the secured creditor’s reasonable collection expenses. On request of the
account debtor, the secured creditor shall provide evidence of its security interest to the
account debtor when it delivers the instruction to the account debtor;
(b) In a negotiable document that is perfected by possession, proceed as to the
negotiable document or goods covered by the negotiable document;
(c) In a deposit account maintained by the secured creditor, apply the balance of the
deposit account to the obligation secured by the deposit account; and
(d) In other cases of security interest in a deposit account perfected by control, instruct
the deposit-taking institution to pay the balance of the deposit account to the secured
creditor’s account.
● Note: The IRR enumerated the documents needed in the case mentioned in
paragraph d. These are:
○ a copy of the security agreement that creates or provides for a security
interest; and
○ the secured party’s affidavit stating that a default has occurred, and that
the secured party is entitled to enforce the security interest non-judicially.
Disposition
Section 49. Right to Dispose of Collateral.—
(a) After default, a secured creditor may sell or otherwise dispose of the collateral,
publicly or privately, in its present condition or following any commercially reasonable
preparation or processing.
(b) The secured creditor may buy the collateral at any public disposition, or at a private
disposition but only if the collateral is of a kind that is customarily sold on a recognized
market or the subject of widely distributed standard price quotations.

Section 50. Commercial Reasonableness Required.—

(a) In disposing of collateral, the secured creditor shall act in a commercially reasonable
manner.
(b) A disposition is commercially reasonable if the secerned creditor disposes of the
collateral in conformity with commercial practices among dealers in that type of property.
(c) A disposition is not commercially unreasonable merely because a better price could
have been obtained by disposition at a different time or by a different method from the
time and method selected by the secured creditor.
(d) If a method of disposition of collateral has been approved in any legal proceeding, it
is conclusively commercially reasonable.
● The grantor and any other secured creditor (who holds security interest in the
collateral at least five days before the date of notification) are entitled to receive
notice 10 days before the disposition of the collateral. Any other person from
whom the secured creditor received notification of a claim of an interest in the
collateral prior to the service of a notification of disposition to the grantor is also
entitled to the notice required under section 51(a).
● The secured creditor may also propose to the debtor and grantor to take all or
part of the collateral in total or partial satisfaction of the secured obligation by
sending a proposal to the debtor and the grantor, and such other secured creditor
or lien holder or other person with interest in the collateral as specified in Section
54(a) of this act.

Section 51. Notification of Disposition.—

(a) Not later than ten (10) days before disposition of the collateral, the secured creditor
shall notify:
(1) The grantor;
(2) Any other secured creditor or lien holder who, five (5) days before the date
notification is sent to the grantor, held a security interest or lien in the collateral
that was perfected by registration; and
(3) Any other person from whom the secured creditor received notification of a
claim of an interest in the collateral if the notification was received before the
secured creditor gave notification of the proposed disposition to the grantor.
(b) The grantor may waive the right to be notified.
(c) A notification of disposition is sufficient if it identifies the grantor and the secured
creditor; describes the collateral; states the method of intended disposition; and states
the time and place of a public disposition or the time after which other disposition is to
be made.
(d) The requirement to send a notification under this section shall not apply if the
collateral is perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market.

Section 52. Application of Proceeds.—

(a) The proceeds of disposition shall be applied in the following order:
(1) The reasonable expenses of taking, holding, preparing for disposition, and
disposing of the collateral, including reasonable attorneys’ fees and legal
expenses incurred by the secured creditor;
(2) The satisfaction of the obligation secured by the security interest of the
enforcing secured creditor; and
(3) The satisfaction of obligations secured by any subordinate security interest
or hen in the collateral if a written demand and proof of the interest are received
before distribution of the proceeds is completed.
(b) The secured creditor shall account to the grantor for any surplus, and, unless
otherwise agreed, the debtor is liable for any deficiency.
● The reasonable expenses of holding the collateral shall include all expenses
incurred by the secured creditor in the preservation and care of the collateral in
his possession with the diligence of a good father of a family (Section 7.11(c) of
Implementing Rules and Regulations).
● The secured creditor shall be liable to the grantor for the value of the loss and
deterioration that may be suffered due to his failure to preserve and care for the
collateral (Section 7.11(d) of Implementing Rules and Regulations).
● Effect of Section 52(b) on the Recto Law (Article 1484 of the New Civil Code) - It
should not be construed as PPSA removing the third remedy (foreclosure of the
chattel mortgage) and the prohibition on recovery of deficiency in case of
foreclosure. It is believed that the cases covered by the Recto Law is an
exception to Section 52(b) because the evil sought to be prevented by the Recto
Law (mortgagees seizing the mortgaged property, buying it at foreclosure sale for
a low price, then bringing a suit against the mortgagor for a deficiency
judgement) still exists. (Aquino, Essentials of Credit Transactions and Insolvency
Law 2021 edition)
Section 54. Retention of Collateral by Secured Creditor.—
(a) After default, the secured creditor may propose to the debtor and grantor to take all
or part of the collateral in total or partial satisfaction of the secured obligation, and shall
send a proposal to:
(1) The debtor and the grantor;
 (2) Any other secured creditor or lien holder who, five (5) days before the
proposal is sent to the debtor and the grantor, perfected its security interest or
lien by registration; and
(3) Any other person with an interest in the collateral who has given a written
notification to the secured creditor before the proposal is sent to the debtor and
the grantor.
(b) The secured creditor may retain the collateral in the case of:
(1) A proposal for the acquisition of the collateral in full satisfaction of the
secured obligation, unless the secured creditor receives an objection in writing
from any person entitled to receive such a proposal within twenty (20) days after
the proposal is sent to that person; or
(2) A proposal for the acquisition of the collateral in partial satisfaction of the
secured obligation, only if the secured creditor receives the affirmative consent
of each addressee of the proposal in writing within twenty (20) days after the
proposal is sent to that person.
● Section 7.13(c) of Implementing Rules and Regulations provides that a proposal
for the retention of the collateral is sufficient if it includes:
1. A statement of the amount required at the time the proposal is given to
satisfy the secured obligation, including interest and the reasonable cost
of enforcement, and the amount of the secured obligation that is proposed
to be satisfied;
2. A statement that the secured creditor proposes to acquire the encumbered
asset described in the proposal in total or partial satisfaction of the
secured obligation;
3. A statement of the date after which the secured creditor will acquire the
encumbered asset.
● Note: Automatic appropriation of the collateral is not allowed under the PPSA.

Rights of Buyers and other Third Parties

Section 53. Rights of Buyers and Other Third Parties.—
(a) If a secured creditor sells the collateral under this Chapter, the buyer shall acquire
the grantor’s right in the asset free of the rights of any secured creditor or lien holder.
(b) If a secured creditor leases or licenses the collateral under this Chapter, the lessee
or licensee shall be entitled to the benefit of the lease or license during its term.
(c) If a secured creditor sells, leases or licenses the collateral not in compliance with this
Chapter, the buyer, lessee or licensee of the collateral shall acquire the rights or
benefits described in subsections (a) and (b) of this section: Provided, That it had no
knowledge of a violation of this Chapter that materially prejudiced the rights of the
grantor or another person.

Remedies for Secured Party’s Failure to Comply with the Rules

Section 7.14. Remedies for Secured Party’s Failure to Comply with the Rules -
(a) Judicial orders concerning noncompliance - If it is established that a secured
party is not proceeding in accordance with these Rules, a court may order or
restrain collection, enforcement, or disposition of collateral on appropriate terms
and conditions.
(b) Damages for noncompliance - A party or interested person who fails to comply
with the provisions of these Rules shall be liable in the amount of any loss
resulting from such failure. Loss caused by a failure to comply may include loss
resulting from the debtor’s inability to obtain, or increased costs of, alternative
financing.
(c) Person entitled to recover damages - A person that, at the time of the failure, was
a debtor, a grantor, or held a security interest in or other lien on the collateral may
recover damages under subsection (b) for its loss.
Transitional Provisions
Section 55. Interpretation of Transitional Provisions.— For this Chapter, unless the
context otherwise requires:
(a) Existing secured creditor – means a secured creditor with a prior security interest;
(b) Prior law – means any law that existed or in force before the effectivity of this Act;
(c) Prior interest – means a security interest created or provided for by an agreement or
other transaction that was made or entered into before the effectivity of this Act and that
had not been terminated before the effectivity of this Act, but excludes a security
interest that is renewed or extended by a security agreement or other transaction made
or entered into on or after the effectivity of this Act; and
(d) Transitional period - means the period from the date of effectivity of this Act until the
date when the Registry has been established and operational.
● Section 8.06 of the Implementing and Regulations provided that the transitional
period shall begin on February 9, 2019.
Section 56. Creation of Prior Interest.—
(a) Creation of prior interest shall be determined by prior laws.
(b) A prior interest remains effective between the parties notwithstanding its creation did
not comply with the creation requirements of this Act.
 ● Section 8.07 of the Implementing and Regulations provided that security interests
created during the Transitional Period are governed by the PPSA.
Section 57. Perfection of Prior Interest.—
(a) A prior interest that was perfected under prior law continues to be perfected under
this Act until the earlier of:
(1) The time the prior interest would cease to be perfected under prior law; and
(2) The expiration of the transitional period.
(b) If the perfection requirements of this Act are satisfied before the perfection of a prior
interest ceases in accordance with subsection (a) of this section, the prior interest
continues to be perfected under this Act from the time when it was perfected under the
prior law.
(c) If the perfection requirements of this Act are not satisfied before the perfection of a
prior interest ceases in accordance with subsection (a) of this section, the prior interest
is perfected only from the time it is perfected under this Act.
(d) A written agreement between a grantor and a secured creditor creating a prior
interest is sufficient to constitute authorization by the grantor of the registration of a
notice covering assets described in that agreement under this Act.
(e) If a prior interest referred to in subsection (b) of this section was perfected by the
registration of a notice under prior law, the time of registration under the prior law shall
be the time to be used for purposes of applying the priority rules of this Act.
● Section 8.08 of the Implementing and Regulations provided that the perfection of
all existing security interests created during the transitional period shall be
governed by the PPSA provided that during the transitional period, registration of
the security agreement with the LRA shall be in accordance with Section 4 of the
Chattel Mortgage Law.
● The LRA shall also determine a system of provisional registration of such
agreements during such transitional period.
a. A written agreement between a grantor and a secured creditor creating a
prior interest is sufficient to constitute authorization by the grantor of the
registration of a notice covering assets described in that agreement under
these Rules.
b. If the perfection requirements of these Rules are satisfied before the
perfection of a prior interest ceases in accordance with Rule 8.03, the prior
interest continues to be perfected under these Rules from the time when it
was perfected under the prior law.
c. If a prior interest referred to in subsection (b) of this section was perfected
by the registration in the registry of a notice under prior law, the time of
registration under the prior law shall be the time to be used for purposes of
applying the priority rules of these Rules.
 d. If the perfection requirements of these Rules are not satisfied before the
perfection of a prior interest ceases in accordance with Rule 8.03, the prior
interest is perfected only from the time it is perfected under these Rules.
Section 58. Priority of Prior Interest.—
(a) The priority of a prior interest as against the rights of a competing claimant is
determined by the prior law if:
(1) The security interest and the rights of all competing claimant arose before
the effectivity of this Act; and
(2) The priority status of these rights has not changed since the effectivity of this
Act.
(b) For purposes of subsection (a)(2) of this section, the priority status of a prior interest
has changed only if:
(1) It was perfected when this Act took effect, but ceased to be perfected; or
(2) It was not perfected under prior law when this Act took effect, and was only
perfected under this Act.
● Section 8.09 of the Implementing and Regulations provided that the priority of
competing security interests shall be determined during the Transitional Period
by applying the PPSA.
Section 59. Enforcement of Prior Interest.—
(a) If any step or action has been taken to enforce a prior interest before the effectivity
of this Act, enforcement may continue under prior law or may proceed under this Act.
(b) Subject to subsection (a) of this section, prior law shall apply to a matter that is the
subject of proceedings before a court before the effectivity of this Act.
● Section 8.10 of the Implementing and Regulations provided that the enforcement
of all existing security interests during the Transitional Period shall be governed
by the PPSA.

Congressional Oversight and Miscellaneous Provisions -

Section 60. Congressional Oversight and Periodic Review.— A Congressional
Oversight Committee shall be created that will conduct a periodic review every five (5)
years commencing from the effectivity of this Act. The Congressional Oversight
Committee shall be composed of the Chairperson of the Senate Committee on Banks,
Financial Institutions and Currencies, the Chairperson of the House of Representatives
Committee on Banks and Financial Intermediaries, and representatives of other relevant
congressional committees.
Section 61. Interpretation.— If there is conflict between a provision of this Act and a
provision of any other law, this Act shall govern unless the other law specifically cites or
amends the conflicting provisions of this law.
Section 62. Implementing Rules and Regulations.— Within six (6) months from the
passage of this Act, the DOF in coordination with the Department of Justice, through the
LRA, shall promulgate the necessary rules and regulations for’ the effective
implementation of this Act.
Section 63. Rules on Enforcement Procedure.— Subject to Section 47, the expedited
hearing/proceedings shall be conducted in a summary manner consistent with the
declared policies of this Act and in accordance with the rules of procedure that the
Supreme Court may promulgate.
Section 64. Sourcing of Funds.— The funds needed for the implementation of this Act
shall be taken from the Special Account arising from revenues collected by the LRA
under Section 111 of Presidential Decree No. 1529, without need for any further
government approval.
Section 65. Separability Clause.— Should any provision herein be declared
unconstitutional, the same shall not affect the validity of the other provisions of this Act.
Section 66. Repealing Clause.— The following laws, and all laws, decrees, orders,
and issuances or portions thereof, which are inconsistent with the provisions of this Act,
are hereby repealed, amended, or modified accordingly:
(a) Sections 1 to 16 of Act No. 1508, otherwise known as "The Chattel Mortgage Law";
(b) Articles 2085-2123, 2127, 2140-2141, 2241, 2243, and 2246-2247 of Republic Act
No. 386, otherwise known as the "Civil Code of the Philippines";
(c) Section 13 of Republic Act No. 5980, as amended by Republic Act No. 8556,
otherwise known as the "Financing Company Act of 1998";
(d) Sections 114-116 of Presidential Decree No. 1529, otherwise known as the
"Property Registration Decree";
(e) Section 10 of Presidential Decree No. 1529, insofar as the provision thereof is
inconsistent with this Act; and
(f) Section 5(e) of Republic Act No. 4136, otherwise known as the "Land Transportation
and Traffic Code".
Section 67. Effectivity.— This Act shall take effect fifteen (15) days after publication in
at least two (2) newspapers of general circulation.
Section 68. Implementation.— Notwithstanding the entry into force of this Act under
Section 67, the implementation of the Act shall be conditioned upon the Registry being
established and operational under
 REFERENCES
BOOKS
Aquino, T. (2021). Essentials of Credit Transactions and Insolvency Law. Rex
Bookstore.
De Leon, H. (2021). Comments and Cases on Credit Transactions Fourteenth Edition.
Rex Bookstore.

LAWS
Republic Act No. 11057 or “Personal Property Security Act”

WORLD WIDE WEB SOURCES

A Registry that will increase your access to secured loans. (2021) Retrieved May, 2023,
from A REGISTRY THAT WILL INCREASE YOUR ACCESS TO SECURED
LOANS | CDA
Explanatory notes to the draft implementing rules and regulations of the Personal
Property Security Act. (n.d). Retrieved May, 2023, from
https://www.dof.gov.ph/download/draft-irr-and-explanatory-notes/?wpdmdl=24121
&refresh=6450ab0475f5c1683008260
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
A.Y 2022 - 2023

REAL MORTGAGE

2F

CREDIT TRANSACTIONS

MEMBERS:

CORPUZ, LEANDRO JR.

CRUZ, CHARLENE ANNE
DELA CRUZ, KRISTAN MICHO
FRANCIA, MARI LOREN
MANANQUIL, SHAIRA JANE
MIRADOR, KYSSER ALLAIN
RAPSING, KAZELYN

PROFESSOR:
ATTY. IRVIN JOSEPH FABELLA
REAL MORTGAGE
Q: What is a real estate mortgage?
A: It is a contract whereby a debtor secures
to the creditor the fulfillment of a principal
obligation subjecting to such security,
immovable property or real rights over
immovable property in case the principal
obligation is not paid or complied with at the
time stipulated. (Manresa)
Q: What are the kinds of real mortgage?
A:
1. Conventional mortgage
- One that is constituted
voluntarily by the contracting
parties.
2. Legal mortgage
- One that is required by law to
secure performance or
payment to be executed in
favor of certain persons.
3. Equitable mortgage
- One where the intention of
the parties is to make an
immovable merely as
security for the performance
of an obligation, but the
formalities of a real mortgage
are not complied with.
Q: What are the characteristics of a real
mortgage?
1. Accessory contract
- It can only exist if there is a
principal obligation.
2. Indivisible
- Even though the debt is
divided among the debtors or
their successors in interest of
the debtor, or the credit
among the creditors or
successors in interest, the
mortgage remains undivided
3. Inseparable
- The mortgage attaches to the
property regardless of who
will be its subsequent owner.
4. Subsidiary
- Once the obligation is
satisfied, the property must
be released from the
encumbrance imposed.
5. Real right
- When the mortgage is duly
registered or when the buyer
knows of its existence, it is
binding upon the latter. Being
a right in rem, there is a lien
inseparable from the property
mortgaged.
6. Real Propertry
- REM is real property by
analogy.
7. Comprehensive
- It secures all kinds of
obligations which are not
void.
Q: Distinguish REM from Chattel
Mortgage.
A: A real mortgage is constituted on
immovable property, while a chattel
mortgage is on personal property.
Q: What is the cause or consideration in a
Real Mortgage?
A: Being an accessory contract, its
consideration is that of the principal
contract, from which it receives life, and
without which, it cannot exist as an
independent contract.
PNB vs. RBL Enterprises Inc.
Facts: Respondents applied for and was
approved a loan of P2,000,000.00, by
Petitioner PNB. To secure its payment,
[respondents] executed in favor of PNB, a
real estate mortgage over two (2) parcels of
land, located at Bago City, Negros
Occidental, and another real estate and
chattel mortgage over the buildings, culture
tanks and other hatchery facilities.
PNB partially released on several dates, the
total sum of P1,000,000.00 less the advance
interests but refused to release the balance of
P1,000,000.00 allegedly because
respondents failed to comply with the banks
requirement that Nelly Bedrejo should
execute an undertaking or a lessors
conformity provided in Real Estate and
Chattel Mortgage contract.
Issue: Is there a valid consideration for the
REM?
Ruling: Petitioner had ample security to
protect its interest. As correctly held by the
appellate court, the lessor's nonconformity
to the Mortgage Contract would not cause
petitioner any undue prejudice or
disadvantage, because the registration and
the annotation were considered sufficient
notice to third parties that the property was
subject to an encumbrance.
Since PNB failed to release the P1,000,000
balance of the loan, the Real Estate and
Chattel Mortgage Contract became
unenforceable to that extent. The
consideration of the accessory contract of
real estate mortgage is the same as that of
the principal contract. For the debtor, the
consideration of his obligation to pay is the
existence of a debt. Thus, 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.
Q: Does the mortgagee have the right to
retain the property pending actual
payment to him of the amount of
indebtedness by the mortgagor?
A: In the case of Isaguirre vs. De Lara, the
Court held that as a general rule, the
mortgagor retains possession of the
mortgaged property since a mortgage is
merely a lien and title to the property does
not pass to the mortgagee. Further, the
petitioner's contention that "[t]o require
[him] . . . to deliver possession of the
Property to respondent prior to the full
payment of the latter's mortgage loan would
be equivalent to the cancellation of the
mortgage" is without basis.
Regardless of its possessor, the mortgaged
property may still be sold, with the
prescribed formalities, in the event of the
debtor's default in the payment of his loan
obligation.
A simple mortgage does not give the
mortgagee a right to the possession of the
property unless the mortgage should contain
some special provision to that effect."
Regrettably for petitioner, he has not
presented any evidence, other than his own
gratuitous statements, to prove that the real
intention of the parties was to allow him to
enjoy possession of the mortgaged property
until full payment of the loan.
Art. 2124
Q: What is provided under Art. 2124?
A: 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.
Q: Can a valid real estate mortgage be
constituted on the building erected on the
land belonging to another?
A: In the case of Prudential Bank vs. Judge
Panis, the Court held that a valid real estate
mortgage can be constituted on the building
erected on the land belonging to another
because a building by itself may be
mortgaged upon the land on which it is
erected.
In Article 415, the building is separate and
distinct from the land. It can only mean that
a building by itself is an immovable
property
Art. 2125
Q: What is provided under Art. 2125?
A: 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.
Q: What are the essential requisites to a
real estate mortgage pursuant to Art.
2085?
A: 1.That they be constituted to secure the
fulfillment of a principal obligation;
2.That the pledgor or mortgagor be the
absolute owner of the thing pledged or
mortgaged;
3.That the persons constituting the pledge or
mortgage have the free disposal of their
property, and in the absence thereof, that
they be legally authorized for the purpose.
Tambunting vs. Rehabilitation Finance
Corp.,
Facts: Spouses Jose and Eleuteria Escueta
obtained a loan from the Rehabilitation
Finance Corporation (RFC) in the aggregate
sum of P59,000.00. The loans were secured
by a mortgage constituted by said spouses
over land (and improvements thereon)
owned by them.
Later, and with the consent of the RFC, the
Escuetas created a second mortgage over the
same property as security for a loan in the
amount of P l6,000.00 obtained by them
from the Spouses Antonio and Aurora
Tambunting.
The Escuetas defaulted in the payment of
both loans.
Issue: W/N the subsequent sale made by the
petitioners valid anent the provision stated in
the mortgage which contains “the property
mortgaged shall not be . . the subject of any
new or subsequent contracts or agreements,
saving and excepting those having
connection with the first mortgage with the
RFC, without first securing the written
permission and consent of the
MORTGAGEE”
Ruling: The Court held in the affirmative. It
furthered that the provision can only be
construed as directed against subsequent
mortgages or encumbrances, not to an
alienation of the immovable itself. For while
covenants prohibiting the owner from
constituting a later mortgage over property
registered under the Torrens Act have been
held to be legally permissible, stipulations
"forbidding the owner from alienating the
immovable mortgaged," are expressly
declared void by law. It is clear then that the
stipulation against "subsequent agreements"
above mentioned had not been breached by
the assignment by the Escuetas (to the
Hernandezes) of their right of redemption in
connection with the mortgage constituted in
favor of the RFC. The assignment was not a
subsequent mortgage or encumbrance, licitly
comprehended by the prohibitory
stipulation, but was actually a sale or
conveyance of all their rights in the
encumbered real property-in truth, an
alienation of the immovable-which could
not lawfully be forbidden.
Q: Is a subsequent sale of a mortgaged
property valid even without prior consent
of the mortgage?
A: In PNB vs. Mallorca, the Court held in
the affirmative. It ruled that "a real mortgage
is merely an encumbrance; it does not
extinguish the title of the debtor, whose right
to dispose — a principal attribute of
ownership — is not thereby lost."
Spouses Litonjua vs. L&R Corporation
Facts: Spouses Litonjua obtained loans
from L&R Corporation in the sum of
400,000. The loans were secured by a
mortgage1 constituted by the spouses upon
their two parcels of land and the
improvements thereon.
On July 14, 1979, the spouses Litonjua sold
to Philippine White House Auto Supply, Inc.
(PWHAS) the parcels of land they had
previously mortgaged to L & R Corporation
for the sum of P430,000.00.
Spouses Litonjua having defaulted in the
payment of their loans, L & R Corporation
initiated extrajudicial foreclosure
proceedings The mortgaged properties were
sold at public auction to L & R Corporation
as the only bidder.
Issue: W/N the subsequent sale was valid
without the consent of L&R Corporation.
Ruling: The Court held in the affirmative.
According to the Court, "insofar as the
validity of the questioned stipulation
prohibiting the mortgagor from selling his
mortgaged property without the consent of
the mortgagee is concerned, therefore, the
ruling in the Tambunting case is still the
controlling law. Indeed, we are fully in
accord with the pronouncement therein that
such a stipulation violates Article 2130 of
the New Civil Code."
Art. 2130 of the NCC provides that a
stipulation forbidding the owner from
alienating the immovable mortgaged shall
be void.
Q: What is/are additional requisite/s to
REM pursuant to Art. 2125?
A: It is indispensable in order that a
mortgage may be validly constituted that it
appears in a public document duly recorded
in the Registry of Property.
Q: What is the effect when the REM is in
a Private Document?
A: No valid mortgage is constituted and the
creditor has the right to compel the debtor to
execute a contract of mortgage in a public
instrument.
Q: What is the effect when the REM is
not registered?
A: If the instrument of mortgage is not
recorded, the mortgage is nevertheless
binding between the parties. Registration
only operates as a notice of the mortgage to
others but neither adds to its validity nor
converts an invalid mortgage into a valid
one between the parties.
Q: Was the lower court correct in denying
plaintiff’s motion for foreclosure on
account of unregistered REM in the case
of Mobil Oil vs. Diocares?
A: No. The Supreme Court held that the
lower court ignored the succeeding sentence
in the provision which states that: "If the
instrument is not recorded, the mortgage is
nevertheless binding between the parties."
Its conclusion, however, is that what was
thus created was merely "a personal
obligation but did not establish a real estate
mortgage."
Even if the instrument were not recorded,
"the mortgage is nevertheless binding
between the parties." The law cannot be any
clearer. Effect must be given to it as written.
The mortgage subsists; the parties are
bound. As between them, the mere fact that
there is as yet no compliance with the
requirement that it be recorded cannot be a
bar to foreclosure.
Q: What is the effect of invalidity of
mortgage on principal obligation?
A: Principal obligation remains valid.
Mortgage deed remains as evidence of a
personal obligation.
Q: What is the Doctrine of Good Faith?
A: Even if the mortgagor is not the rightful
owner of, or does not have a valid title to,
the mortgaged property, the mortgagee in
good faith is nonetheless entitled to
protection. In the absence of any sign that
might arouse suspicion, mortgagee has no
obligation to undertake further investigation.
Q: What is the presumption if the title of
the property is in the name of the
mortgagor and not of the rightful owner?
A: That the mortgagor, who is not the
rightful owner of the property, has already
succeeded in obtaining a Torrens title over
the property in his name and that, after
obtaining the said title, he succeeds in
mortgaging the property to another who
relies on what appears on the said title.
Q: What is the exception, if any, to the
above-mentioned presumption?
A: Where the title is still in the name of the
rightful owner and the mortgagor is a
different person pretending to be the owner.
The mortgagee is not an innocent mortgagee
for value and the registered owner will
generally not lose his title.
Q: Is there a duty on the part of the
mortgagee to look beyond the certificate
of title?
A: The general rule is that where there is
nothing on the certificate of title to indicate
any cloud or vice in the ownership of the
property, or any encumbrance thereon, the
purchaser is not required to explore further
than what the Torrens Title upon its face
indicates in quest for any hidden defect or
inchoate right that may subsequently defeat
his right thereto.
Q: What is the exception, if any, to the
above-mentioned presumption?
A: Where the purchaser or mortgagee has
knowledge of a defect or lack of title in the
vendor, or the mortgagee does not directly
deal with the registered owner of real
property or that he was aware of sufficient
facts to induce a reasonably prudent man to
inquire into the status of a property in
litigation.
Q: What is provided under Art. 2126?
A: 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.
1. Creates real rights - a registered
mortgage creates right in rem, a real
right, a lien inseparable from the
property mortgaged, which is
enforceable against the whole world,
affording specific security for the
satisfaction of a debt. The
personality of the owner is
disregarded. (De Leon)
2. Creates merely on encumbrance - A
mortgage is merely a security for a
debt, an encumbrance upon the
property and does not extinguish the
title of the debtor who does not lose
his principal attribute as owner, that
is, the right to dispose.
An important characteristic of real mortgage
is provided under At. 2126 which talks of
real mortgage as an inseparable part of the
property. It 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.
Q: What is the extent of real mortgage as
provided in Art. 2127?
A: 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.
Q: What is the extent of a real mortgage?
A: A real estate mortgage constituted on
immovable property is not limited to the
property itself but also extends to all its
accessions, improvements, growing fruits
and rents or income (see Art. 2102.) as well
as to the proceeds of insurance should the
property be destroyed, or the expropriation
value of the property should it be
expropriated. The law is predicated on the
assumption that the ownership of such
accessions and accessories and
improvements subsequently introduced also
belongs to the mortgagor is the owner of the
principal. (Castro, Jr. vs. Court of Appeals,
250 SCRA 661 [1995].)
To exclude them, it is necessary that there be
an express stipulation to that effect.
A contract of real mortgage shall cover the
following:
1. The property mortgaged;
2. Natural accessions;
3. Improvements;
4. Growing fruits;
5. Rents and income not yet received
when the obligation becomes due;
6. Indemnity granted or owing to the
proprietor from the insurers of the
property mortgaged, or in virtue of
expropriations for public use.
In the case of Lim Julian vs. Lutero, the
Supreme Court held that the rule is well
settled that an action to foreclose a mortgage
must be limited to the amount mentioned in
the mortgage. The exact amount, for which
the mortgage is given need not always be
specifically named. The amount for which
the mortgage is given may be stated in
definite or general terms, as is frequently the
case in mortgages to secure future
advancements. The amount named in the
mortgage does not limit the amount for
which it may stand as security, if, from the
four corners of the document, the intent to
secure future indebtedness or future
advancements is apparent.
• Banate vs. Philippine Countryside Rural
Bank (Liloan, Cebu), Inc., G.R. No.
163825, 13
FACTS:
Petitioner Spouses Rosendo Maglasang and
Patrocinia Monilar obtained a loan from
PCRB for P1,070,000, evidenced by a
promissory note, and was payable on
January 18, 1998. To secure the loan, the
spouses executed a real estate mortgage over
their property, including the house, in favor
of PCRB. The property was owned by
petitioners Mary Melgrid and Bonifacio
Cortel, the spouses’ daughter and
son-in-law. Aside from the subject loan, the
spouses, Maglasang, obtained two other
loans from PCRB, which were covered by
separate promissory notes and secured by
mortgages on their other properties.
Before the loan became due, spouses
Maglasang and Cortel asked PCRB’s
permission to sell the subject properties.
They requested the same be released from
the mortgage since the other mortgages
adequately covered the two other loans.
PCRB, through its branch manager,
Pancrasio Mondigo, verbally agreed but
required first the full payment of the loan.
Thereafter, the spouses sold the properties to
Violeta Banate and used the proceeds of the
sale to pay the loan. PCRB gave the owner’s
duplicate certificate of title to Banate, which
carried the mortgage lien in favor of PCRB.
Petitioners instituted an action for specific
performance before the RTC to compel
PCRB to execute the release deed.
ISSUE:
Whether or not the purported agreement
between the petitioners and Mondigo
novated the mortgage contract over the
subject properties and is thus binding upon
PCRB. (NO)
RULING:
The purported verbal agreement did not
novate the mortgage contract, particularly
the cross-collateral stipulation thereon.
As a general rule, a mortgage liability is
usually limited to the amount mentioned in
the contract. However, the amounts named
as consideration in a contract of mortgage
do not limit the amount for which the
mortgage may stand as security if, from the
four corners of the instrument, the intent to
secure future and other indebtedness can be
gathered. This stipulation is valid and
binding between the parties and is known as
the "blanket mortgage clause" (also known
as the "dragnet clause)."
In the present case, the mortgage contract
indisputably provides that the subject
properties serve as security, not only for the
payment of the subject loan, but also for
"such other loans or advances already
obtained, or still to be obtained." The
cross-collateral stipulation in the mortgage
contract between the parties is thus simply a
variety of a dragnet clause. After agreeing to
such stipulation, the petitioners cannot insist
that the subject properties be released from
mortgage since the security covers not only
the subject loan but the two other loans as
well.
Q: How is a dragnet clause construed?
A: A "blanket mortgage clause," also known
as a "dragnet clause" in American
jurisprudence, is one which is specifically
phrased to subsume all debts of past or
future origins. Such clauses are "carefully
scrutinized and strictly construed."
Mortgages of this character enable the
parties to provide continuous dealings, the
nature or extent of which may not be known
or anticipated at the time. They also avoid
the expense and inconvenience of executing
a new security on each new transaction.
(Prudential Bank vs. Alviar)
Q: May a collateral for a debtor’s
obligation can also be the collateral for
his other obligations with the same
creditor?
A: YES. It was in the REM executed for the
Credit Line Agreement that said REM over
the Cebu properties also covers all other
obligations of the Suicos and Suico Rattan
of whatever kind or nature, that have been
contracted before, during, and after the
constitution of the REM for the said Credit
Line Agreement. Therefore, a collateral for a
debtor’s obligation can also be the collateral
for his other obligations with the same
creditor. (Suico Rattan v CA)
Spouses Torres vs. Medina, G.R. No.
166730, 10 March 2010
FACTS;
In 1994, Medina applied with the RTC-QC
for the extrajudicial foreclosure of mortgage
of the property of the Spouses Torres which
was a subject of a Deed of Mortgage,
wherein it was granted.
In 1997, a public auction was held, and
Medina was declared the highest bidder. The
Certificate of Sale was thereafter issued to
Medina.
In 1999, the spouses Torres filed a complaint
with the same court for the declaration of
nullity of the extrajudicial foreclosure of
mortgage, contending that Deed of Real
Estate Mortgage does not contain a period or
term; hence, performance of the obligation
has not yet become due as there is a need for
judicial determination of the period or term;
and that for violation of Batas Pambansa
Blg. 22, there could arise a situation of
double recovery of damages which is
proscribed by law. If the extrajudicial
foreclosure will be allowed and if they will
be made to pay the amount of the checks
subject of the criminal suit under B.P. Blg.
22, it would result in the unjust enrichment
of Medina.
ISSUE: Whether the real estate mortgage is
valid. (YES)
RULING:
Spouses Torres have already lost their right
to question the validity of the real estate
mortgage, for most part due to the
negligence of their counsel. More
importantly, the decision upholding the
validity of the real estate mortgage is
already final; hence, the same can no longer
be questioned in another proceeding by
simply varying the form of the action, or
adopting a different method of presenting
their case.
• Chieng vs. Spouses Santos, G.R. No.
169647, 31 August 2007
FACTS:
On August 1989, petitioner Antonio Chieng
extended a loan in favor of respondent
spouses Eulogio and Teresita Santos.
Respondents executed a Deed of Real Estate
Mortgage over a piece of land in Olongapo
City as security for the loan.
Eulogio issued several checks in favor of the
petitioner, some of which were dishonored.
Cheing filed a criminal case against (BP 22)
Eulogio before the RTC Olongapo. They
entered into a compromise agreement during
the pre-trial conference (to pay P20,000
each month for the P200,000 total debt).
Eulogio failed to comply with his obligation
in the compromise agreement. Chieng filed
an action with the RTC Olongapo for
foreclosure of the mortgage, alleging that he
extended a loan of P600,000 in favor of the
respondents. The respondents failed to pay
the loan despite repeated demands.
The spouses sought the dismissal of the case
for lack of cause of action because their total
indebtedness was only around P200,000, not
P600,000. They supposedly agreed to make
the loan amount appear as P600,000 to
protect respondents from other claims of
creditors trying to attach or levy their
property. Furthermore, they averred that the
petitioner refused to issue receipts and
render an accounting.
The CA held that once a collection suit is
filed, the action to foreclose the mortgage is
barred.
ISSUE: Whether or not by filing a criminal
case for violation of BP 22 against the
respondent was already barred or precluded
from availing himself of the other civil
remedy of the foreclosure of the real estate
mortgage. (YES)
RULING:
The impliedly instituted civil action in
Criminal Cases No. 612-90 to No. 615-90
for violation of Batas Pambansa Blg. 22
was, in effect, a collection suit or suit for the
recovery of the mortgage-debt since the
dishonored checks involved in the said
criminal cases were issued by respondent to
petitioner for the payment of the same loan
secured by the Deed of Real Estate
Mortgage. Following the rule on the
alternative remedies of a mortgage-creditor,
petitioner is barred from subsequently
resorting to an action for foreclosure.
• Tambunting, Jr. vs. Sumabat, 470 SCRA
92
FACTS:
Respondent spouses obtained a loan from
Tambunting for the amount of P7,727.95
and as security, a parcel of land owned by
the spouses and situated in Caloocan was
mortgaged to Tambunting. However, for
failure to pay the monthly amortizations, it
ballooned to P 15,000.
When they defaulted in their obligation,
Commercial House of Finance, the assignee
of the mortgage, initiated foreclosure
proceedings but it was not push through due
to an injunction order from the court.
On March 16, 1979, respondents filed an
action for declaratory relief with the CFI of
Caloocan City, seeking a declaration of the
extent of their actual indebtedness. The
motion was denied for having been filed out
of time and petitioners had already been
declared in default.
On January 8, 1981, the CFI rendered its
decision. It fixed respondents’ liability at
₱15,743.83 and authorized them to consign
the amount to the court for proper
disposition and it was complied with.
In 1995, the spouses received a notice that
the mortgage had been foreclosed by CHFI,
the assignee and it was declared the highest
bidder. Days later, respondents instituted
Civil Case No. C-16822, a petition for
preliminary injunction, damages and
cancellation of annotation of encumbrance
with prayer for the issuance of a temporary
restraining order.
On February 11, 2000, the RTC issued the
assailed decision. It ruled that the 1981 CFI
decision in Civil Case No. C-7496 (fixing
respondents’ liability at ₱15,743.83 and
authorizing consignation) had long attained
finality. The mortgage was extinguished
when respondents paid their indebtedness by
consigning the amount in court. Moreover,
the ten-year period within which petitioners
should have foreclosed the property was
already barred by prescription.
ISSUE: Whether the mortgage action had
already prescribed. (YES)
RULING: An action to enforce a right
arising from a mortgage should be enforced
within ten years from the time the right of
action accrues. Otherwise, it will be barred
by prescription and the mortgage creditor
will lose his rights under the mortgage.
above, the court lacked jurisdiction over the
action for declaratory relief. All proceedings
therein were without legal effect. Thus,
petitioners could have enforced their right
under the mortgage, including its
foreclosure, only until November 7, 1987,
the tenth year from the dismissal of Civil
Case No. C-6329. Thereafter, their right to
do so was already barred by prescription.
The foreclosure held on February 8, 1995
was therefore some seven years too late. The
same thing can be said about the public
auction held on March 27, 1995, the
consolidation of title in CHFI’s favor and
the issuance of TCT No. 310191 in its name.
They were all void and did not exist in the
eyes of the law.

Here, petitioners’ right of action accrued in

May 1977 when respondents defaulted in
their obligation to pay their loan
amortizations. It was from that time that the
ten-year period to enforce the right under the
mortgage started to run. The period was
interrupted when respondents filed Civil
Case No. C-6329 sometime after May 1977
and the CFI restrained the intended
foreclosure of the property. However, the
period commenced to run again on
November 9, 1977 when the case was
dismissed.

The respondents’ institution of Civil Case

No. C-7496 in the CFI on March 16, 1979
did not interrupt the running of the ten-year
prescriptive period because, as discussed
General Banking Law (RA No.
8791)
Q: What is General Banking Law?
A: It is the law that generally governs the
regulation, organization and operation of
banks, quasi-banks, and other quasi-entities.
Q: What is Bank?
A: Banks are entities engaged in the lending
of funds obtained in the form of deposits
from the public. This is usually referred to
as “core-banking functions” of mobilizing
savings (through deposit-taking) and
allocating resources (through lending).
Q: What is the nature of GBL?
A: Sec. 2 of GBL provides that “the State
recognizes the vital role of banks in
providing an environment conducive to the
sustained development of the national
economy and the fiduciary nature of banking
that requires high standards of integrity and
performance.”
Q: What is Foreclosure of Mortgage?
A: In the event of foreclosure, whether
judicially or extrajudicially, of any mortgage
on real estate which is security for any loan
or other credit accommodation granted, the
mortgagor or debtor whose real property has
been sold for the full or partial payment of
his obligation shall have the right within one
year after the sale of the real estate, to
redeem the property by paying the amount
due under the mortgage deed, with interest
thereon at the rate specified in the mortgage,
and all the costs and expenses incurred by
the bank or institution from the sale and
custody of said property less the income
derived therefrom.
Art. 2128
Q: What is the mortgage credit?
A: It is a real right and directly and
immediately subjects the mortgaged
property to the fulfillment of the principal
obligation.
Art. 2129
Q: What is the right of the creditor
against the transferee of mortgaged
property?
A: The fact that the mortgagor has
transferred the mortgaged property to a third
person does not relieve him from his
obligation to pay the debt to the mortgage
creditor in the absence of novation. The
mortgage on the property may still be
foreclosed despite the transfer.
Q: What is a recorded real estate
mortgage?
A: It is merely an accessory contract. It is
inseparable from the property subject thereto
regardless of who its owner may
subsequently be.
Art. 2130
Q: What is the stipulation forbidding
alienation of mortgaged property?
A: The law considers void any stipulation
forbidding the owner from alienating the
mortgaged property. “Such a prohibition
would be contrary to the public good
inasmuch as the transmission of property
should not be unduly impeded.”
Q: What is the stipulation granting right
of first refusal?
A: There is nothing wrong in a stipulation
granting the mortgagee the right of first
refusal over the mortgaged property in the
event the mortgagor decides to sell the same.
The right of first refusal has long been
recognized as valid in our jurisdiction. The
consideration for the loan-mortgage may be
said to include the consideration for the right
of first refusal.
• Belisario vs. Intermediate Appellate
Court, G.R. No. 73503, 30 August 1988
FACTS:
The subject matter of this case is a piece of
land originally covered by OCT, pursuant to
Homestead Patent No. 45183 issued in the
names of Rufino Belisario and Felipa Lauga
located in Valencia, Bukidnon. On August 3,
1948, upon the death of Rufino Belisario,
the ownership of the land was
extra-judicially settled among his children
(petitioners herein), namely: Benjamin,
Pacita, Victoria Silverio, Francisco, Anatolia
Felipe and Teresita, all surnamed Belisario
and his widow, Felipa Lauga and in whose
names TCT No. T-124 was issued. On 1950,
on the strength of a special power of
attorney executed by some of the petitioners
in favor of petitioner, Benjamin Belisario,
said land was mortgaged to the Philippine
National Bank (PNB) to secure a promissory
note in the sum of P1, 200.
Petitioners-mortgagors defaulted in the
payment of the loan. Consequently, the
mortgage was extra-judicially foreclosed
and on January 31, 1963 the land was sold at
public auction for P3, 134.76 with
respondent PNB as the highest bidder. On
April 21, 1971, petitioners wrote to
respondent PNB making known their "desire
to redeem and/or repurchase the said
property for and in the same price as the
auction sale, P3,134.76," and enclosed
therein a postal money order in the amount
of P630.00 as partial payment, with the
balance to be paid in twelve equal monthly
installments. At the time petitioners offered
to redeem the subject property, the Sheriff's
Certificate of Sale covering the sale at
public auction to the respondent PNB was
not yet registered. Having been apprised of
the non-registration, the respondent PNB
caused the registration of the Sheriff's
Certificate of Sale with the Register of
Deeds of Bukidnon and a Transfer
Certificate of Title was later issued in the
name of respondent bank. On August 24,
1971, respondent PNB sent a reply letter to
petitioners, refusing the tender of P630.00 as
partial payment of the total obligations of
P7, 041.41 due from petitioners (which
included the amount of P2, 027.02 allegedly
paid by respondent Vicente Cabrera to
respondent PNB) and stating further that
under existing regulations of the bank,
payment by way of redemption must be paid
in full and not by installments. On February
8, 1973, respondent PNB sold the land in
question to respondent Cabrera for P5,000
and the corresponding TCT was issued in
his name. Respondent Cabrera filed an
action for Recovery of Possession and
Damages against herein petitioners, together
with their tenants, who were actual
possessors of the land, with the RTC of
Bukidnon. The petitioners filed an action for
Repurchase of Homestead against the
respondents PNB and Cabrera. After
pre-trial but before trial on the merits,
respondent Cabrera filed a Motion to
Dismiss the petitioners' action for
Repurchase of Homestead. The trial court
granted the Motion to Dismiss. After their
motion for reconsideration and/or new trial
was denied by the trial court, petitioners
appealed to the Intermediate Appellate
Court. Respondent appellate court affirmed
the lower court's decision in toto. Hence,
this instant petition.
ISSUE:
W/N the petitioners validly exercise their
right to repurchase the subject property
under Public Land Act?
RULING:
YES. Under Act. 3135, the petitioners may
redeem the property until July 22, 1972. In
addition, Section 119 of Commonwealth Act
141 provides that every conveyance of land
acquired under the free patent or homestead
patent provisions of the Public Land Act,
when proper, shall be subject to repurchase
by the applicant, his widow or legal heirs,
within the period of five years from the date
of conveyance. The five-year period of
redemption fixed in Section119 of the Public
Land Law of homestead sold at extrajudicial
foreclosure begins to run from the day after
the expiration of the one-year period of
repurchase allowed in an extrajudicial
foreclosure. Hence, petitioners still had five
(5) years from July 22, 1972 (the expiration
of the redemption period under Act 3135)
within which to exercise their right to
repurchase under the Public Land Act.
• GC Dalton Industries, Inc. vs. Equitable
PCI Bank, G.R. No. 171169, 24 August
2009
FACTS:
In 1999, respondent Equitable PCI Bank
extended a ₱30-million credit line to
Camden Industries, Inc. (CII) allowing the
latter to avail of several loans (covered by
promissory notes) and to purchase trust
receipts. To facilitate collection, CII
executed a "hold-out" agreement in favor of
respondent authorizing it to deduct from its
savings account any amounts due. To
guarantee payment, petitioner GC Dalton
Industries, Inc. executed a third-party
mortgage of its real properties in Quezon
City and Malolos, Bulacan as security for
CII’s loans. CII did not pay its obligations
despite respondent’s demands. By 2003, its
outstanding consolidated promissory notes
and unpaid trust receipts had reached a
staggering ₱68,149,132.40. Consequently,
respondent filed a petition for extrajudicial
foreclosure of petitioner’s Bulacan
properties in the Regional Trial Court (RTC)
of Bulacan on May 7,2004. On August 3,
2004, the mortgaged properties were sold at
a public auction where respondent was
declared the highest bidder. Consequently, a
certificate of sale was issued in respondent’s
favor on August 3, 2004. On September 13,
2004, respondent filed the certificate of sale
and an affidavit of consolidation of
ownership in the Register of Deeds of
Bulacan pursuant to Section 47 of the
General Banking Law. Hence, petitioner’s
TCTs covering the Bulacan properties were
canceled and new ones were issued in the
name of respondent. The respondent filed an
ex parte motion for the issuance of a writ of
possession in the RTC of Bulacan. However,
CII had filed an action for specific
performance and damages in the RTC of
Pasig, asserting that it had allegedly paid its
obligation in full to the respondent. CII
sought to compel respondent to render an
accounting in order to prove that the bank
fraudulently foreclosed on petitioner’s
mortgaged properties. Pasig RTC ruled in
favor of CII. Respondent filed an appeal
with the RTC Pasig which was dismissed.
The Bulacan RTC granted the motion and a
writ of possession was issued in
respondent’s favor. Petitioner immediately
assailed the order of the Bulacan RTC via a
petition for certiorari in the Court of
Appeals (CA)but the said court dismissed
the appeal.
ISSUE:
Whether or not the writ of possession issued
to the respondent is valid?
RULING:
The issuance of a writ of possession to a
purchaser in an extrajudicial foreclosure is
summary and ministerial in nature as such
proceeding is merely an incident in the
transfer of title. The trial court does not
exercise discretion in the issuance. For this
reason, an order for the issuance of a writ of
possession is not the judgment on the merits
contemplated by Section 14, Article VIII of
the Constitution. Hence, the CA correctly
upheld the order of the Bulacan RTC.
Furthermore, the mortgagor loses all legal
interest over the foreclosed property after
the expiration of the redemption period.
Under Section 47 of the General Banking
Law, if the mortgagor is a juridical person, it
can exercise the right to redeem the
foreclosed property until, but not after, the
registration of the certificate of foreclosure
sale within three months after foreclosure,
whichever is earlier. Thereafter, such
mortgagor loses its right of redemption. In
this case, respondent filed the certificate of
sale and affidavit of consolidation with the
Register of Deeds of Bulacan. This
terminated the redemption period granted by
Section 47 of the General Banking Law
because consolidation of title became a right
upon the expiration of the redemption
period, respondent became the owner of the
foreclosed properties. Therefore, when
petitioner opposed the ex parte motion for
the issuance of the writ of possession in the
Bulacan RTC, it no longer had any legal
interest in the Bulacan properties.
Nevertheless, even if the ownership of the
Bulacan properties had already been
consolidated in the name of respondent,
petitioner still had the remedy provided in
Section 8 of Act 3135. It could have filed a
petition to annul the August 3, 2004 auction
sale and to cancel the December 19, 2005
writ of possession, within 30 days after
respondent was given possession. But it did
not. Thus, inasmuch as the 30-day period to
avail of the said remedy had already lapsed,
petitioner could no longer assail the validity
of the August 3, 2004 sale.
• Sy vs. Court of Appeals, 172 SCRA 125
FACTS:
On March 2, 1979, Carlos Coquinco
executed in favor of private respondent State
Investment House, Inc. a real estate
mortgage over a parcel of land in San Juan,
Metro-Manila, together with all the
improvements thereon, as security for the
payment of a loan in the amount of
P1,000,000.00. For failure of Carlos
Coquinco to pay his outstanding balance the
mortgaged property was extrajudicially
foreclosed by SIHI and was sold at public
auction to SIHI as the only bidder. SIHI
filed before the Regional Trial Court (RTC)
of Manila an action against Carlos Coquinco
for the collection of the sum of P612,031.84,
representing the deficiency of his
indebtedness. In the meantime, petitioner
acquired by virtue of a deed of assignment
Carlos Coquinco's right of redemption for
and in consideration of P500,000.00. Before
the expiration of the one-year redemption
period, petitioner offered to redeem the
foreclosed property from SIHI by tendering
to the latter two (2) manager's checks issued
by SOLIDBANK. SIHI rejected this offer.
The petitioner filed an action for
consignation with the RTC, to compel SIHI
to accept the P851,200.00 as payment of the
redemption price for the foreclosed property,
to order SIHI to surrender the title over the
property and to issue a certificate of
redemption in favor of petitioner. The
petitioner decided to redeem the foreclosed
property directly from the Ex-Officio
Regional Sheriff of Rizal, who accepted
from him the amount of P851,200.00 as
redemption price and P4,269.00 as
percentage fee of collection, and issued to
him the corresponding certificate of
redemption. SIHI filed a motion to dismiss
on the ground of lack of cause of action,
alleging that the amount sought to be
consigned was insufficient for purposes of
redemption pursuant to Section 78 of the
General Banking Act. The RTC dismissed
petitioner's action on the ground that there
being no valid tender of payment, there was
no valid consignation. The SIHI
consolidated its ownership over the
foreclosed property, and caused the issuance
of TCT No. 44775 covering the same
property in its name. After learning of this
development, petitioner instituted a
complaint for annulment and cancellation of
title, with damages, against SIHI and the
Register of Deeds for the Province of Rizal.
During the pendency of the action, SIHI sold
the subject property to spouses Domingo
Lim and Lim Siu Keng. The Defendant
Register of Deeds issued TCT No. 46409 in
the name of the spouses. On July 7, 1986,
the court a quo dismissed petitioner's
complaint holding that it stated no cause of
action because petitioner failed to effect a
valid redemption as required under Section
78 of the General Banking Act, as amended
by P.D. No. 1828. Petitioner then appealed
to the respondent appellate court. The
respondent appellate court affirmed the trial
court's judgment with the modification of
the award for temperate and exemplary
damages. Not satisfied with the above
decision, petitioner filed the instant petition
for review on certiorari
ISSUE:
Whether the Sec. 78 of General Banking
Law is the applicable law in determining the
redemption price? YES
RULING:
Section 78 of the General Banking Act is
applicable not only to "banks and banking
institutions", but also to "credit institutions".
And, as certified by the Central Bank*, SIHI
is a credit institution, i.e. financial
intermediary engaged in quasi-banking
functions, within the purview of Section 78,
it being an entity authorized to engage in the
lending of funds or purchasing of
receivables or other obligations with funds
obtained from the public as provided in the
General Banking Act under Section 2-A(a);
and, to lend, invest or place funds deposited
with them, acquired by them or otherwise
coursed through them, either for their own
account or for the account of others under
Section 2-D(c). In this case, the petitioner by
virtue of the deed of assignment of Carlos
Coquinco's right of redemption must be
deemed subrogated to the rights and
obligations of his assignor, and bound by
exactly the same conditions, relative to the
redemption of the subject property that
bound the latter as debtor and mortgagor
Had Carlos Coquinco attempted to redeem
the subject foreclosed property, he would
have had to pay "the amount due under the
mortgage deed with interest thereon at the
rate specified in the mortgage and all costs
and other expenses incurred by reason of the
execution [or foreclosure] and sale and as a
result of the custody of said property less the
income received from the property, pursuant
to Section 78 of the General Banking Act in
order to effect a valid redemption. Since
petitioner merely stepped into the shoes of
Carlos Coquinco, his assignor, petitioner
should have tendered and paid that same
amount in order to redeem the property. The
General Banking Act partakes of the nature
of an amendment to Act No. 3135 insofar as
the redemption price is concerned, when the
mortgagee is a bank or banking or credit,
institution, Section 6 of Act No. 3135 being,
in this respect, inconsistent with Section 78
of the General Banking Act. Although the
foreclosure and sale of the subject property
was done by SIHI pursuant to Act No. 3135,
as amended, Section 78 of the General
Banking Act, as amended, provides the
amount at which the subject property is
redeemable from SIHI, which is, in this
case, the amount due under the mortgage
deed, or the outstanding obligation of Carlos
Coquinco, plus interest and expenses. Thus,
inasmuch as petitioner failed to tender and
pay the required amount for the redemption
of the subject property pursuant to Section
78 of the General Banking Act, as amended,
no valid redemption was effected by him.
Consequently, there was no legal obstacle to
the consolidation of title by SIHI.
• Medida vs. Court of Appeals, G.R. No.
98334, 8 May 1992
FACTS:
The plaintiff-spouses, alarmed of losing
their right of redemption over lot 4731 of the
Cebu City Cadastre and embraced under
TCT no. 14272 from Mr. Juan Gadioncho,
purchaser of the aforesaid lot at the
foreclosure sale of the previous mortgage in
favor of Cebu City Development Bank. He
went to Teotimo Abellana, president of
defendant Association, to obtain a loan of
P30,000. Prior thereto, their son Teofredo
Dolino filed a similar loan application for
P25,000 with lot no. 4731 offered as a
security for the P30,000 loan from defendant
association. Subsequently, they executed a
promissory note in favor of defendant
association. Both documents indicated that
the principal obligation is for P30,000
payable in one year with interest at 12% per
annum. When the loan became due and
demandable without plaintiff paying the
same, defendant association caused the
extrajudicial foreclosure of the mortgage.
After the posting and publication
requirements were complied with, the land
was sold at public auction to defendant
association being the highest bidder. The
certificate of sale was issued and registered
with the Register of Deeds. No redemption
having been effected by plaintiff, TCT no.
14272 was cancelled and in lieu thereof
TCT no. 68041 was issued in the name of
defendant association. Private respondents,
as plaintiffs therein, assailed the validity of
the extrajudicial foreclosure sale of their
property, claiming that the same was held in
violation of Act no. 3135, as amended, and
prayed for the cancellation of TCT no.
68041 issued in favor of the defendant City
Savings and Loan Association, Inc., now
known as City Savings Bank and one of the
petitioners herein. Defendant association
therein denied the material allegations of the
complaint and averred, among others, that
the present private respondent spouses may
still avail of their right of redemption over
the land in question. The lower court
rendered judgment upholding the validity of
the loan and the real estate mortgage, but
annulling the extrajudicial foreclosure sale
inasmuch as the same failed to comply with
the notice requirements in Act no. 3135, as
amended. CA modified the decision of the
lower court, declared the real estate
mortgage in question null and void for the
reason that the mortgagor spouses were no
longer the owners of the lot, having
supposedly lost the same when the lot was
sold to a purchaser in the foreclosure sale
under the prior mortgage.
ISSUE:
W/N a mortgagor, whose property has been
extrajudicially foreclosed and sold at the
corresponding foreclosure sale, may validly
execute a mortgage contract over the same
property in favor of a third party during the
period of redemption?
RULING:
SC held that CA’s decision cannot be
sustained. The issue of the ownership of the
mortgaged property was never alleged in the
complaint nor was the same raised during
the trial, hence that issue should not have
been taken cognizance of the CA. What is
presently involved is a mortgage, not a sale
to petitioner bank. There is no obstacle to
the legal creation of such a lien even after
the auction sale of the property but during
the redemption period, since no distinction
is made between a mortgage constituted
over the property before or after the auction
sale thereof. Redemptioner is a creditor
having a lien by attachment, judgment or
mortgage on the property sold, or on some
part thereof, subsequent to the judgment
under which the property was sold. Since the
mortgagor remains as the absolute owner of
the property during the redemption period
and has the free disposal of his property,
there would be compliance with the
requisites of Art. 2085 of the Civil Code for
the constitution of another mortgage on the
property. To hold otherwise would create the
inequitable situation wherein the mortgagor
would be deprived of the opportunity, which
may be his last recourse, to raise funds
wherewith to timely redeem his property
through another mortgage thereon. It is
undisputed that the REM in favor of
petitioner bank was executed by respondent
spouses during the period of redemption.
During said period it cannot be said that the
mortgagor is no longer the owner of the
foreclosed property since the rule up to now
is that the right of a purchaser at a
foreclosure sale is merely inchoate until
after the period of redemption has expired
without right being exercised. The title to
land sold under mortgage foreclosure
remains in the mortgagor or his grantee until
the expiration of the redemption period and
conveyance by the master’s deed. The rules
has always been that it is only upon the
expiration of the redemption period, without
the judgment debtor having made use of his
right of redemption, that the ownership of
the land sold becomes consolidated in the
purchaser. The American rule is similar to
the effect that the redemption of property
sold under a foreclosure sale defeats the
inchoate right of the purchaser and restores
the property to the same condition as if no
sale had been attempted. Further, it does not
give to the mortgagor a new title, but merely
restores to him the title freed of the
encumbrance of the lien foreclosed.
• Idolor vs Court of Appeals, 450 SCRA
396
FACTS:
Petitioner Teresita V. Idolor obtained a loan
from respondent-spouses Gumersindo and
Iluminada De Guzman secured by a real
estate mortgage over a property covered by
Transfer Certificate of Title No. 25659.
Upon default by petitioner in the payment of
her obligation, respondent-spouses instituted
extra-judicial foreclosure proceedings
against the real estate mortgage. During the
auction sale, respondent-spouses emerged as
the highest bidder and were issued a
Certificate of Sale. The sheriff’s certificate
of sale was registered with the Registry of
Deeds of Quezon City on June 23, 1997. On
June 25, 1998, petitioner filed with the
Regional Trial Court of Quezon City, a
complaint for annulment of the Certificate of
Sale with prayer for the issuance of a
temporary restraining order and a writ of
preliminary injunction. The trial court issued
a writ of preliminary injunction, however,
the Court of Appeals in a petition for
certiorari filed by respondent-spouses,
annulled the same for having been issued
with grave abuse of discretion.
ISSUE:
Whether the petitioner was entitled a writ of
injunction?
RULING:
NO. Injunction is a preservative remedy
aimed at protecting substantive rights and
interests. Before an injunction can be issued,
it is essential that the following requisites be
present: 1) there must be aright in esse or the
existence of a right to be protected; 2) the
act against which the injunction is to be
directed is a violation of such right. Hence
the existence of a right violated, is a
prerequisite to the granting of an injunction.
Injunction is not designed to protect
contingent or future rights. Failure to
establish either the existence of a clear and
positive right which should be judicially
protected through the writ of injunction or
that the defendant has committed or has
attempted to commit any act which has
endangered or tends to endanger the
existence of said right, is a sufficient ground
for denying the injunction. The controlling
reason for the existence of the judicial
power to issue the writ is that the court may
thereby prevent a threatened or continuous
irremediable injury to some of the parties
before their claims can be thoroughly
investigated and advisedly adjudicated. It is
to be resorted to only when there is a
pressing necessity to avoid injurious
consequences which cannot be remedied
under any standard of compensation. In this
case, SC agrees with the respondent Court
that petitioner has no more proprietary right
to speak of over the foreclosed property to
entitle her to the issuance of a writ of
injunction. Petitioner had one year from the
registration of the sheriff’s sale to redeem
the property but she failed to exercise her
right on or before June 23, 1998, thus
spouses de Guzman are now entitled to a
conveyance and possession of the foreclosed
property.
• Villanueva vs Cherdan Lending
Investors Corp., G.R. No. 177881, 13
October 2010
FACTS:
Spouses Peñaredondo obtained from
respondent Cherdan Lending Investors
Corporation a loan secured by a real
estate mortgage over a parcel of land.
Despite demand, spouses Peñaredondo
failed to pay the obligation. Hence,
respondent extrajudicially foreclosed the
mortgage. Cherdan won the bid. Upon the
expiration of the redemption period,
the title to the property was
consolidated and a new title was issued in
respondent’s name. Writ of possession was
issued for Cherdan. Villanueva moved for
the reconsideration of the order and the
setting aside of the writ of possession on
the ground that he is the owner and is
in actual possession of the subject
property. RTC granted Villanueva’s
motion and ordered that the same be
allowed possession of the property pending
finality of decision of the matter and writ of
possession previously issued in favor of
Cherdan was recalled. Cherdan instituted a
special civil action for certiorari before
the CA. CA granted the petition. The CA
held that the pendency of the case for
annulment of the foreclosure proceedings
was not a bar to the issuance of the
writ of possession. The CA refused to
apply Section 33, Rule 39 of the Rules
of Court, which authorizes the giving
of possession of the property to
the purchaser or last redemptioner
unless a third party is actually holding the
property adverse to the judgment obligor,
ratiocinating that the provision applies
only to execution sales and not to
extrajudicial foreclosures of real estate
mortgage under Act 3135.
ISSUE:
Whether a case for annulment of foreclosure
is a bar to issuance of writ of possession?
RULING:
YES. It is settled that the buyer in a
foreclosure sale becomes the absolute owner
of the property purchased if it is not
redeemed within one year after the
registration of the sale. As such, he is
entitled to the possession of the property
and can demand that he be placed in
possession at any time following the
consolidation of ownership in his name
and the issuance to him of a new TCT.
SC held that it is ministerial upon the court
to issue a writ of possession after the
foreclosure sale and during the period
of redemption. Upon the filing of an ex
parte motion and the approval of the
corresponding bond, the court issues the
order for a writ of possession. The writ of
possession issues as a matter of course even
without the filing and approval of a bond
after consolidation of ownership and the
issuance of a new TCT in the name of
the purchaser. This rule, however, is not
without exception. Under Section 33,
Rule 39 of the Rules of Court, which
is made to apply suppletorily to the
extrajudicial foreclosure of real estate
mortgages by Section 6, Act 3135, as
amended, the possession of the mortgaged
property may be awarded to a purchaser
in the extrajudicial foreclosure unless a
third party is actually holding the
property adversely to the judgment debtor.
Act No. 3135
Q: What is the coverage of Act 3135?
A: Act 3135 governs sales made under a
special power inserted in or attached to any
real-estate mortgage, which is made as
security for the payment of money or the
fulfillment of any other obligation. (Sec. 1)
Q: Can the said sale be made outside the
province in which the property sold is
situated?
A: No, said sale cannot be made legally
outside the province where in which the
property is located; and in case the place
within said province in which the sale is to
be made is subject to stipulation, such sale
shall be made in said place or in the
municipal building of the municipality in
which the property or part thereof is
situated. (Sec. 2)
Q: Is publication required in an
extrajudicial foreclosure sale?
A: Yes, notice shall be given by posting
notices of the sale for not less than twenty
days in at least three public places of the
municipality or city where the property is
situated, and if such property is worth more
than four hundred pesos, such notice shall be
published once a week for at least three
consecutive weeks in a newspaper of general
circulation in the municipality or city.
(Sec. 3)
Q: How is the extrajudicial foreclosure
sale made?
A: The sale shall be made at public auction,
between the hours of nine in the morning
and four in the afternoon; and shall be under
the direction of the sheriff of the province,
the justice or auxilliary justice of the peace
of the municipality in which such sale has to
be made, or a notary public of said
municipality, who shall be entitled to collect
a fee of five pesos each day of actual work
performed, in addition to his expenses. (Sec.
4)
Q: Who may participate during bidding
and purchase during extrajudicial
foreclosure sale?
A: At any sale, the creditor, trustee, or other
persons authorized to act for the creditor,
may participate in the bidding and purchase
under the same conditions as any other
bidder, unless the contrary has been
expressly provided in the mortgage or trust
deed under which the sale is made. (Sec. 5)
Q: Who may redeem in case an
extrajudicial sale is made under the
special power?
A: The debtor, his successors in interest or
any judicial creditor or judgment creditor of
said debtor, or any person having a lien on
the property subsequent to the mortgage or
deed of trust under which the property is
sold, may redeem the same at any time
within the term of one year from and after
the date of the sale. (Sec. 6)
A.M. No. 99-10-05-0 (as amended
by Supreme Court Resolution dated
January 30, 2000)
Q: Where are applications for
extra-judicial foreclosure of mortgage
filed?
A: Applications for extra-judicial
foreclosure of mortgage whether under the
direction of the sheriff or a notary public,
pursuant to Act 3135, as amended by Act
4118, and Act 1508, as amended, shall be
filed with the Executive Judge, through the
Clerk of Court who is also the Ex-Officio
Sheriff.
Q: What are the duties of the Clerk of
Court upon receipt of an application for
extra-judicial foreclosure of mortgage?
A: Upon receipt of an application for
extra-judicial foreclosure of mortgage, it
shall be the duty of the Clerk of Court to:
1. Receive and docket said application and
to stamp thereon the corresponding file
number, date and time of filing;
2. Collect the filing fees therefor and issue
the corresponding official receipt;
3. Examine, in case of real estate mortgage
foreclosure, whether the applicant has
complied with all the requirements before
the public auction is conducted under the
direction of the sheriff or a notary public,
pursuant to Sec. 4 of Act 3135, as amended;
4. Sign and issue the certificate of sale,
subject to the approval of the Executive
Judge, or in his absence, the Vice-Executive
Judge; and
5. After the certificate of sale has been
issued to the highest bidder, keep the
complete records, while awaiting any
redemption within a period of one (1) year
from date of registration of the certificate of
sale with the Register of Deeds concerned,
after which the records shall be archived.
• PNB vs. Maraya, Jr., G.R. No. 164104,
11 September 2009
FACTS
Spouses Maraya secured a loan and
constituted a real estate mortgage over their
property located in Maasin, Leyte. For one
reason or another, the spouses defaulted
payment of their loan obligation. Upon their
failure, herein petitioner initiated an
extra-judicial foreclosure of the mortgaged
property without having the intended
foreclosure sale published in the newspaper
of general circulation. PNB emerged as the
highest bidder and was awarded by the
Sherifs’s certificate of sale. For failure to
redeem the property and to buy back the
same despite several periods granted by
PNB after the one year allowed by law, PNB
decided to sell the property. The subject
property was awarded to Jesus Cerro after
having emerged as the successful bidder
during the public bidding, of which, a Deed
of Absolute Sale was issued in favor of
Cerro. When the Spouses Maraya refused to
vacate the property, after being demanded
by Cerro, a complaint for unlawful detainer
was filed before the MTC which rendered a
decision in favor of Cerro. During pendency
of appeal, Sps Maraya filed a complaint for
Annulment of Sale and Quieting of Title
against PNB and the spouses Cerro before
the RTC. The trial court ruled in favor of the
Spouses MAraya and ruled that there was no
valid extrajudicial foreclosure sale of real
property because of PNB’s failure to comply
with the substantive requirement of Sec. 3,
Act No. 3135. On appeal, the CA affirmed
the decision of the trial court.
ISSUE
Whether or not the extrajudicial sale
conducted is valid even in the absence of the
publication of the notice of foreclosure of
mortgage considering that owners of the
subject property had knowledge of the
extrajudicial proceedings. (No)
RULING
In Tambunting v. Court of Appeals, the
statutory provisions governing publication
of notice of mortgage foreclosure sales must
be strictly complied with, and that even
slight deviations therefrom shall invalidate
the notice and render the sale at least
voidable. Indeed, one of the most important
requirements of Act No. 3135 is that the
notice of the time and place of sale shall be
given. If the sheriff acts without notice, or at
a time and place other than that designated
in the notice, the sheriff acts without warrant
of law. Publication is required to give the
extrajudicial foreclosure sale as reasonable
wide publicity such that those interested
might attend the public sale. To allow the
parties to waive this jurisdictional
requirement would result in converting into
a private sale what ought to be a public
auction.
• Tambunting vs. Court of Appeals, 167
SCRA 16
​FACTS
Spouses Cruz obtained a loan from Spouses
Tambunting and secured by a Deed of Real
Estate Mortgage executed by the Cruzes in
favor of the Tambuntings. Due to debtors
failure to pay the obligation at maturity, a
petition for extrajudicial foreclosure of
mortgage was filed by the creditors. A
notice of sheriff’s sale was posted
announcing the auction sale on August 2,
1967. As shown on the affidavit of
publication, the notice of sale was published
in a newspaper of general circulation on
three consecutive weeks. At the date of the
auction, the Cruzes instituted an action
against the Tambuntings for annulment of
mortgage and damages with prayer for writ
of preliminary injunction. When the
injunction was dissolved, the proposed sale
was moved to 20 October 1967. Posting of
the sheriff’s notice of sale were made and
with republication for three consecutive
weeks. However, the sale was held in
abeyance in relation to the motion for
reconsideration in regard to the lifting of the
temporary restraining order filed by the
Cruzes. Upon denial of the Cruzes’ motion
for reconsideration, petitioners published on
20 December 1967, the sheriffs notice of
scheduled sale on 26 January 1968. The
Cruzes thru counsel wrote to the Sheriff of
Rizal asking that the auction sale be
postponed considering that there was no
compliance with the notices required by law.
The mortgage property was nonetheless sold
at public auction on said date to Aurora
Tambunting. Private respondents then filed a
civil case impleding Tambunting Realty, the
Provincial Sheriff, and the Register of Deeds
of Rizal. The CFI ruled in favor of the
respondents and declared the Deed of Sale
as null and void. The CA affirmed the
judgement of the CFI and reasoned that the
petitioners deviated from the posting and
publication requirements of law, which
rendered the notice of dale ineffective and
voided the auction sale of 26 January 1968.
ISSUE
Whether or not the CA erroneously nullified
and set aside the auction sale for lack of
compliance with the formalities of law,
when the sale on 26 January 1968 was
purely a postponement of previously
scheduled sales, notices of which had been
posted and published as required by law.
(No)
RULING
The rule is that statutory provisions
governing publication of notice of mortgage
foreclosure sales must be strictly complied
with, and that even slight deviations
therefrom will invalidate the notice and
render the sale at least voidable. Interpreting
sec. 457 of the Code of Civil Procedure
(reproduced in sec. 18 (c) of Rule 39, Rules
of Court and in sec. 3 of Act No. 3135) in
Campomanes v. Bartolome and German &
Co., this Court held that if a sheriff sells
without the notice prescribed by the Code of
Civil Procedure induced thereto by the
judgment creditor, and the purchaser at the
sale is the judgment creditor, the sale is
absolutely void and no title passes. This is
regarded as the settled doctrine in this
jurisdiction whatever the rule may be
elsewhere.
Where required by the statute or by the
terms of the foreclosure decree, public
notice of the place and time of the mortgage
foreclosure sale must be given, a statute
requiring it being held applicable to
subsequent sales as well as to the first
advertised sale of the property. It has been
held that failure to advertise a mortgage
foreclosure sale in compliance with statutory
requirements constitutes a jurisdictional
defect invalidating the sale and that a
substantial error or omission in a notice of
sale will render the notice insufficient and
vitiate the sale.
• Ouano vs. Court of Appeals, 446 Phil
690
FACTS
Respondent Julieta Ouano obtained a loan
from the Philippine National Bank and as
security, she executed a real estate mortgage
over two parcels of land in Mandaue City.
She defaulted payment and PNB filed a
petition for extrajudicial foreclosure with the
City Sheriff of Mandaue City.The sheriff
then prepared a notice of sale and set the
date of public auction. He caused the notice
to be published in a newspaper of general
circulation in Mandaue and likewise posted
copies thereof in public places in Mandaue
City. However, the sale as scheduled and
published did not take place as the parties,
on for separate dates, executed Agreements
to Postpone Sale. These agreements were
addressed to the sheriff, requesting the latter
to defer the auction sale to another date at
the same time and place, “without any
further republication of Notice.” In all of the
postponements, no new notice of sale was
issued, nor was there any republication or
reposting of notice for the rescheduled dates.
Eventually, the sheriff conducted the auction
sale and awarded it to PNB, the only bidder.
As Julieta failed to redeem the property,
PNB consolidated its titled and on the same
year, it conveyed said properties to herein
petitioner Alfredo Ouano under a Deed of
Promise to Sell. Julieta filed a complaint for
nullification of the foreclosure sale. The
RTC rendered a decision in favor of Julieta,
holding that the lack of republication
rendered the foreclosure void. The CA
affirmed the lower courts decision, hence,
this petition.
ISSUE
Whether republication may be waived
voluntarily by parties. (No)
RULING
In Tambunting v. Court of Appeals, we
held that republication in the manner
prescribed by Act No. 3135 is necessary for
the validity of a postponed extrajudicial
foreclosure sale. Thus we stated: Where
required by the statute or by the terms of the
foreclosure decree, public notice of the place
and time of the mortgage foreclosure sale
must be given, a statute requiring it being
held applicable to subsequent sales as well
as to the first advertised sale of the property.
Publication, therefore, is required to
give the foreclosure sale a reasonably wide
publicity such that those interested might
attend the public sale. To allow the parties to
waive this jurisdictional requirement would
result in converting into a private sale what
ought to be a public auction.
• Olizon vs. Court of Appeals, 236 SCRA
148
FACTS
Spouses Olizon obtained a loan from
respondent Prudential Bank and, as a
security therefor, they executed in favor of
said bank a real estate mortgage over a
parcel of land registered under their names.
The spouses failed to pay their obligation
upon its maturity, so private respondent
extrajudicially foreclosed the real estate
mortgage. At a public auction, the subject
property was sold to respondent bank as the
highest bidder.Three years later, due to the
failure of petitioner spouses to redeem
foreclosed property within the period of
redemption, title to property was
consolidated in favor of respondent bank.
Respondent then filed a petition for the
issuance of writ of possession against
petitioner spouses. By way of opposition,
petitioner spouses filed a petition wherein
they sought the cancellation of writ of
possession, nullification of the certificate of
sale, and/ or nullification of the foreclosure
proceedings. In support thereof, they alleged
the lack of notice of auction sale and lack of
posting of the notice of sale as required by
Section 3 of Act 3135, as amended. After
trial, the court declared the foreclosure of
the real estate executed by spouses Olizon
null and void. The CA reversed the decision
and upheld the validity of the foreclosure
sale of the real estate mortgage.
ISSUE
Whether or not the lack of personal
notice to the mortgagors about the
foreclosure sale, and the failure of the
mortgagee bank to comply with the posting
requirement under Section 3 of Act No.
3135 be a sufficient ground to annul the
foreclosure sale. (No)
RULING
It is now a well-settled rule that
personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not
necessary. Section 3 of Act No. 3135
governing extrajudicial foreclosure of real
estate mortgages, as amended by Act No.
4118, requires only the posting of the notice
of sale in three public places and the
publication of that notice in a newspaper of
general circulation. Hence, the lack of
personal notice to the mortgagors, herein
petitioners, is not a ground to set aside
the foreclosure sale.
We take judicial notice of the fact that
newspaper publications have more
far-reaching effects than posting on bulletin
boards in public places. There is a greater
probability that an announcement or notice
published in a newspaper of general
circulation, which is distributed nationwide,
shall have a readership of more people than
that posted in a public bulletin board, no
matter how strategic its location may be,
which caters only to a limited few. Hence,
the publication of the notice of sale in the
newspaper of general circulation alone is
more than sufficient compliance with the
notice posting requirement of the law. By
such publication, a reasonably wide
publicity had been effected such that those
interested might attend the public sale, and
the purpose of the law had been thereby
subserved.
• GSIS vs. Court of Appeals, 170 SCRA
533
FACTS
Private respondents, Spouses Racho,
together with Spouses Lagasca executed a
deed of mortgage in favor of petitioner GSIS
and subsequently another deed of mortgage,
in connection with two loans granted by the
latter. A parcel of land co-owned by said
mortgagor spouses was given as security
under the aforesaid two deeds. Later on,
spouses Lagasca executed an instrument
denominated as “Assumption of Mortgage''
under which they obligated themselves to
assume aforesaid obligation to the GSIS and
to secure the release of the mortgage
covering the portion of land belonging to
private respondents and which was
mortgaged to GSIS. Upon failure of the
mortgagors to comply with the conditions of
the mortgage, GSIS extrajudicially
foreclosed the mortgage and caused the
mortgaged property to be sold at public
auction. More than two years later, spouses
Lagasca filed a complaint against petitioner
in the CFI of Quezon City, praying that the
extrajudicial foreclosure be declared null
and void and that they be allowed to recover
said property, and/ or the GSIS be ordered to
pay the value thereof. The trial court
dismissed the complaint for failure to
establish cause of action. Said decision was
reversed by the respondent CA which held
as to the notice of publication published in
the newspaper “Daily Record '' is not the
notice to which the mortgagor is entitled
upon the application made for an
extrajudicial foreclosure.
ISSUE
Whether or not Act 3135 requires personal
notice on the mortgagor of the extrajudicial
foreclosure sale. (No)

RULING
Act 3135 does not require personal notice on
the mortgagor of the extrajudicial
foreclosure sale. In Bonnevie, et al. v. Court
of Appeals, et al., the Court ruled that Act
No. 3135, as amended, does not require
personal notice on the mortgagor, quoting
the requirement on notice in such cases as
follows: “Section 3. Notice shall be given
by posting notices of the sale for not less
than twenty days in at least three public:
places of the municipality or city where the
property is situated, and if such property is
worth more than four 'hundred pesos, such
notice shall also be published once a week
for at least three consecutive weeks in a
newspaper of general circulation in the
municipality or city.”
• Global Holiday Ownership Corp. vs.
MBTC, G.R. No. 184081, 19 June 2009
FACTS
Global Holiday obtained on various dates
several loans from Metrobank secured by a
real estate mortgage over a condominium in
Makati City. Upon default in payment,
Global requested for restructuring for its
loan which was granted twice. Hence, a
Debt Settlement Agreement (DSA) was
executed by the parties detailing the
schedule of payment. Global failed to
comply with the terms of the DSA. Despite
demands made upon it for payment, Global
still failed and refused to pay Metrobank the
loans which are all past due. Metrobank then
requested the Clerk of Court of RTC Makati
City to cause the sale at public auction of the
mortgaged condominium. Four days before
the auction sale, Global filed the instant
complaint for annulment of judicial
foreclosure proceedings, damages and
injunction with application of TRO and/or
writ of preliminary injunction. Global’s
application for preliminary injunction was
granted. Metrobank then filed a petition for
certiorari arguing that Global is not entitled
to injunctive relief because it has not shown
that it had legal right that must be protected.
The CA granted Metrobank’s petition and
found that Global had no right to an
injunction; that Metrobank had undeniable
right to foreclose on the real estate mortgage
in view of Global’s default in settlement of
its obligation to the bank; that it is not
required that Global be personally informed
of the foreclosure of the mortgaged property,
since personal notice is not necessary; the
applicable law - Act 3135- requires only
notice by publication and posting.
ISSUE
Whether or not Metrobank’s failure to serve
personal notice upon Global of the
foreclosure proceedings renders the same
null and void. (Yes)
RULING
Personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not
necessary, unless stipulated.The stipulation
in the mortgage agreement requiring notice
to the mortgagor of extrajudicial actions to
be taken operates as a contractual
undertaking for the latter’s sole benefit, such
that the mortgagee is mandated to strictly
abide by the same. Paragraph 14 is clear that
“all correspondence relative to this
mortgage, including demand letters,
summonses, subpoenas or notifications of
any judicial or extrajudicial actions shall be
sent to the mortgagor at the address herein
above given or at the address that may
hereafter be given in writing by (it).
It must be recalled that the principal
object of a notice of sale in a foreclosure of
mortgage is not so much to notify the
mortgagor as to inform the public generally
of the nature and condition of the property to
be sold, and of the time, place, and terms of
the sale. Notices are given to secure bidders
and prevent a sacrifice of the property.
Clearly, the statutory requirements of
posting and publication are mandated, not
for the mortgagor’s benefit, but for the
public or third persons.Taking this into
context, the stipulation in the mortgage
agreement
requiring notice to the mortgagor of
extrajudicial actions to be taken operates as
a contractual undertaking for the latter’s sole
benefit, such that the mortgagee is mandated
to strictly abide by the same.
ART. 2131. The form, extent and
consequences of a mortgage, both as to its
constitution, modification and
extinguishment, and as to the other matters
not included in this Chapter, shall be
governed by the provisions of the Mortgage
Law and of the Land Registration Law.
Q: What are the Laws governing
mortgage?
A: A. The Land Registration Law (Act No.
496, as amended.)
- An Act To Provide For The Adjudication
And Registration Of Titles To Lands In The
Philippine Islands
B. The Revised Administrative Code, more
particularly Section 194, as amended by Act
No. 3344,
-govern the form, extent, and consequences
of a mortgage, and also its constitution,
modification and extinguishment.
C. Republic Act No. 4882
-As to aliens becoming mortgagees
Q: What is the meaning of foreclosure (of
mortgage)?
A: Foreclosure is the remedy available to
the mortgagee by which he subjects the
mortgaged property to the satisfaction of the
obligation to secure which the mortgage was
given.
It presupposes something more than a mere
demand to surrender possession of the object
of the mortgage. It denotes the procedure
adopted by the mortgagee to terminate the
rights of the mortgagor on the property and
includes the sale itself.
Q: When is the Validity and effect of
foreclosure?
A: (1) In a real estate mortgage, when the
principal obligation is not paid when due,
the mortgagee has the right to foreclose the
mortgage and to have the property seized
and sold with a view to applying the
proceeds to the payment of the principal
obligation.
(2) A mortgage contract may contain an
acceleration clause which is a stipulation
stating that, on the occasion of the
mortgagor’s default, the whole sum
remaining unpaid automatically becomes
due and payable.
(3) The essence of a contract of mortgage
indebtedness is that a property has been
identified or set apart from the mass of the
property of the debtor-mortgagor as security
for the payment of money or the fulfillment
of an obligation to answer the amount of
indebtedness in case of default of payment.
(4) Once the proceeds have been applied to
the payment of the obligation, the debtor
cannot anymore be required to pay, unless,
of course, there is a deficiency between the
amount of the loan and the foreclosure sale
price.
(5) The rule is that statutory provisions
governing public notice of foreclosure sales
must be strictly complied with, and even
slight deviations therefrom will invalidate
the sale or render it at least voidable.
(6) The only rights which a mortgagor can
legally transfer, cede and convey after the
foreclosure of his property are the right to
redeem the same and the possession, use,
and enjoyment of the same during the period
of redemption.
(7) The mortgagee may take steps to recover
the mortgaged property to enable him to
enforce or protect his foreclosure right.
(8) Foreclosure proceedings have in their
favor the presumption of regularity and the
burden of evidence to rebut the same is on
the party that seeks to challenge the
proceedings.
Q: What are the kinds of foreclosure?
A: Foreclosure may be effected either:
A. Judicially
B. Extrajudicially
Q: What is Judicial foreclosure under the
Rules of Court.
A: This is governed by Rule 68 of the Rules
of Court.
(1) Judicial action for the purpose. — A
mortgage may be foreclosed judicially by
bringing an action for that purpose, in the
proper court which has jurisdiction over the
area wherein the real property involved or a
portion thereof, is situated.
(2) Order to mortgagor to pay mortgage
debt. — If the court finds the complaint to
be well-founded, it shall order the mortgagor
to pay the amount due upon the mortgage
debt or obligation with interest and other
charges within a period of not less than 90
days nor more than 120 days from the entry
of judgment.
(3) Sale to highest bidder at public auction.
— If the mortgagor fails to pay at the time
directed in the order, the court, upon motion,
shall order the property to be sold to the
highest bidder at public auction.
(4) Confirmation of sale. — The sale when
confirmed by an order of the court, also
upon motion, shall operate to divest the
rights of all parties to the action and to vest
their rights in the purchaser subject to such
right of redemption as may be allowed by
law.
(5) Execution of judgment. — No judgment
rendered in an action for foreclosure or
mortgage can be executed otherwise than in
the manner prescribed by the law on
mortgages, because parties to an action are
not authorized to change the procedure
which it prescribed.
(6) Application of proceeds of sale. — The
proceeds of the sale shall be applied to the
payment of the:
(a) costs of the sale;
(b) the amount due the mortgagee;
(c) claims of junior encumbrancers or
persons holding subsequent mortgages in the
order of their priority; and
(d) the balance if any, shall be paid to the
mortgagor or his duly authorized agent, or to
the person entitled to it.
(7) Execution of sheriff’s certificate. — In
judicial foreclosures, the “foreclosure” is not
complete until the sheriff’s certificate is
executed, acknowledged and recorded.
Q: What is Extrajudicial foreclosure
under Act No. 3135?
A: This is governed by Act No. 3135, as
amended. This law prescribes a procedure
which effectively safeguards the rights of
both debtor and creditor.
(1) Express authority to sell given to
mortgagee. — The law covers only real
estate mortgages. It is intended merely to
regulate the extrajudicial sale of the
property mortgaged if and when the
mortgagee is given a special power or
express authority to do so in the deed
itself or in a document annexed thereto.
(2) Authority not extinguished by death of
mortgagor or mortgagee. — A mortgage
may be foreclosed extrajudicially where
there is inserted in the contract a clause
giving the mortgagee the power, upon
default of the debtor, to foreclose the
mortgage by an extrajudicial sale of the
mortgaged property.
(3) Public sale after proper notice. —
Statutory provisions governing
publication of notice of mortgage
foreclosure sales must be strictly
complied with, and that even slight
deviations therefrom will invalidate the
notice and render the sale at least
voidable.
(4) Public sale at different places/on
different dates. — The indivisibility of a
real estate mortgage is not violated by
conducting two separate foreclosure
proceedings on mortgaged properties
located in different cities or
municipalities as long as each parcel of
land is answerable for the entire debt.
(5) Publication of notice of auction sale. —
Publication is required to give the
foreclosure sale a reasonably wide publicity
such that those interested might attend the
public sale.
(6) Payment of cash by highest bidder. —
Where the highest bidder is the mortgagee
and the amount of his bid represented the
total mortgage debt, it is not necessary for
him to pay cash although Section 5 of Act
No. 3135 requires that the creditor must bid
“under the same condition as any other
bidder.”
(7) Surplus proceeds from foreclosure sale.
— By their very nature, surplus money
arising from a sale of real property like land
under foreclosure stands in the same place
of the land itself with respect to liens
thereon or vested right therein.
(8) Redemption of property sold. — The
debtor (natural person) has the right to
redeem the property sold within the term of
one year from and after the date of the sale.
(9) Remedy of party aggrieved by
foreclosure. — Under Section 8, of Act No.
3135, the debtor may, in the proceedings in
which possession was requested, petition
that the sale be set aside and the writ of
possession cancelled, because the mortgage
was not violated or the sale was not made in
accordance with the provisions thereof.
(10) Republication. — Republication in the
manner prescribed by Act No. 3135 is
necessary for the validity of a postponed
extrajudicial foreclosure sale. Another
publication is required in case the auction
sale is rescheduled, and the absence of such
republication invalidates the foreclosure
sale.
Philippine Trust Co. vs. Tan Suisa, 52 Phil
852
FACTS: Philippine Trust Co. granted to the
Visayan General Supply Co., Inc., credit in
current account amounting to P40,000.00
which was utilized by the debtor party. It is
stipulated in the contract that firstly, Visayan
General Supply Co., Inc., should pay interest
on the average daily debit balances of its
said current account at the rate of 10% per
annum, secondly, it was agreed that the
debit balance shown in said current account
by the books of the bank should be taken
and held to be the true and correct amount
owing by the debtor; thirdly, the debtor party
agreed to furnish such security as the bank
might from time to time require for the
payment of any sum advanced by the bank
to the debtor. Pursuant to the agreement of
the debtor to furnish security for said
indebtedness, the defendant, Lucio Echaus
Tan Siua, mortgaged to the bank the five
parcels of land which are the subject of this
proceeding for the purpose of securing the
aforesaid indebtedness.
ISSUE: Whether or not the land of Tan
Suisa may be validly foreclosed. – YES.
RULING: The Supreme Court held that the
position taken by the appellee on this point
is correct and that the error is manifest and
apparent from the mortgage itself in relation
with the principal contract. First, the
mortgage was evidently given pursuant to
that clause of the original contract by which
the debtor had agreed to furnish security to
the bank for any sum for which the debtor
might become obligated to the bank under
the terms of the original agreement.
Secondly, the paragraph of the mortgage in
which the word "quarterly" is used explicitly
states that the obligation to pay interest is
"all in accordance with the terms and
conditions" of the original agreement.
Thirdly, the same paragraph of the mortgage
makes express reference to the original
agreement for the granting of credit in
current account by the bank to the debtor
and said contract is incorporated in the
mortgage by reference. Fourthly, in the
defeasance clause of the mortgage, which is
the second of the two paragraphs above
quoted from the mortgage, the debt secured
is not described as being one for the
payment of interest quarterly, but the
original contract is again referred to and
incorporated in said clause without
specifying how the interest should be paid.
Limpin v IAC G.R. No. 70987 September
29, 1988
FACTS: Spouses Jose and Marcelina
Aquino mortgaged four lots to Guillermo
Ponce and his wife Adela as security for a
loan of P2,200,000.00. Two of the lots, those
covered by TCTs Nos. 92836 and 92837
were afterwards sold by the Aquinos to the
Butuan Bay Wood Export Corporation,
which caused an adverse claim to be
annotated on the certificates of title.
Gregorio Y. Limpin, Jr. obtained a money
judgment against Butuan Bay Wood Export
Corporation in Court of First Instance of
Davao. To satisfy the judgment, the lots
covered by TCTs Nos. 92836 and 92837
were levied upon on and sold at public
auction to Limpin as the highest bidder for
the sum of P517,485.41. On order of the
trial court, the covering titles were cancelled
and issued to Limpin. He sold the two lots to
Rogelio M. Sarmiento. By virtue of said
sale, TCTs Nos. 285450 and 285451 were
cancelled and TCT’S were replaced in
Sarmiento's name.
Ponce filed suit against the Aquino spouses
for judicial foreclosure of the mortgage over
the Aquinos' four lots. Judgment was
rendered in favor of Ponce. After the
judgment became final, the Trial Court,
directed the sale at public auction of the 4
mortgaged lots to satisfy the judgment.
The 4 lots, including those formerly covered
by TCTs Nos. 92836 and 92837, were sold
to Ponce himself whose bid was the highest
and exactly correspond to the judgment
debt. On the same day, the sheriff's
certificate of sale was registered. Ponce then
moved for the confirmation of the sale and
the issuance of a writ of possession in his
favor covering the four lots. But the Trial
Court confirmed only the sale of the lots
covered by TCTs Nos. 02839 and 92840,
refusing to confirm the sale or issue a writ of
possession in regard to the lots covered by
TCTs Nos. 92836 and 92837 on the ground
that those titles had already been cancelled
and new ones issued to Gregorio F. Limpin.
IAC set aside the judgment of the Trial
Court and issue a writ of possession to
Ponce with respect thereto, subject to
Sarmiento's equity of redemption.
ISSUE: Whether or not the equity of
redemption recognized in favor of petitioner
Sarmiento still subsists and may be
exercised. - NO.
RULING: The equity of redemption lapsed
and ceased to exist without having been
properly exercised. After such order of
confirmation of the foreclosure sale, no
redemption can be effected any longer. The
right of redemption in relation to a
mortgage, exists only in the case of the
extrajudicial foreclosure of the mortgage.
No such right is recognized in a judicial
foreclosure except only where the
mortgagee is the Philippine National Bank
or a bank or banking institution. Where a
mortgage is foreclosed extra-judicially, Act
3135 grants to the mortgagor the right of
redemption within one (1) year from the
registration of the sheriffs certificate of
foreclosure sale.
Where the foreclosure is judicially effected,
however, no equivalent right of redemption
exists. The law declares that a judicial
foreclosure sale, "when confirmed by an
order of the court, shall operate to divest the
rights of all the parties to the action and to
vest their rights in the purchaser, subject to
such rights of redemption as may be allowed
by law. Such rights exceptionally "allowed
by law" are those granted by the charter of
the Philippine National Bank (Acts No.
2747 and 2938), and the General Banking
Act (R.A. 337). These laws confer on the
mortgagor, his successors in interest or any
judgment creditor of the mortgagor, the right
to redeem the property sold on
foreclosure-after confirmation by the court
of the foreclosure sale-which right may be
exercised within a period of one (1) year,
counted from the date of registration of the
certificate of sale in the Registry of Property.
Redemption/Deficiency
Judgment/Writ of Possession
Q: What is Redemption?
A: Redemption may be defined as a
transaction by which the mortgagor
reacquires or buys back the property which
may have passed under the mortgage or
divests the property of the lien which the
mortgage may have created.
In general, the concept of redemption is to
allow the owner to repurchase or buy back,
within a certain period and for a certain
amount, a property that has been sold due to
debt, tax, or encumbrance. (Iligan Bay
Manufacturing Corp. vs. Dy, 524 SCRA
55 [2007].)
It is allowed in cases of foreclosures in favor
of banking and credit institutions and in
extrajudicial foreclosures.
Kinds of redemption
Q: What are the 2 kinds of redemption?
A: Equity of redemption and Right of
redemption.
Equity of redemption
Q: What is Equity of Redemption?
A: Equity of redemption or the right of the
mortgagor in case of judicial foreclosure to
redeem the mortgaged property after his
default in the performance of the conditions
of the mortgage but before the confirmation
of the sale of the mortgaged property.
Right of redemption
Q: What is Right of Redemption?
A: Right of redemption or the right of the
mortgagor in case of extrajudicial
foreclosure to redeem the mortgaged
property within a certain period from and
after it was sold for the satisfaction of the
mortgage debt.
Q: What is the effect of the exercise of
Right of Redemption?
A: Where redemption is seasonably
exercised by the judgment or mortgage
debtor, what is actually effected is not the
recovery of the property because ownership
is never lost, but the elimination from his
title thereto of the lien created by the levy
or attachment or judgment or registration of
the mortgage thereon, as if no sale had been
made. Further, it does not give to the
mortgagor a new title, but merely restores
to him, the title freed of the encumbrance
of the lien foreclosed.
Q: What is the effect of failure to exercise
the Right Of Redemption?
A: If the debtor failed to redeem the
foreclosed property, within the prescribed
period, the debtor loses his right over the
property. The purchaser will now have the
absolute right to a writ of possession which
is the final process to carry out or
consummate the extrajudicial foreclosure. If
no redemption of a foreclosed property is
made within one year, the purchaser is
entitled as a matter of right to consolidate
title and to possess the property.
Confirmation by court of auction sale in
judicial foreclosure
Q: What happens after the confirmation of
the sale of mortgaged real property?
A: Confirmation of the sale of mortgaged
real property cuts off all the rights or
interests of the mortgagor and of the
mortgagee and persons holding under him,
and with them the equity of redemption in
the property and vests them in the purchaser.
Confirmation retroacts to the date of the
sale. It is final order, not interlocutory.
Q: What is the importance of confirmation
by court in judicial foreclosure?
A: A foreclosure sale is not complete until it
is confirmed and before such confirmation,
the court retains control of the proceedings
by exercising sound discretion in regard to it
either granting or withholding confirmation
as the rights and interests of the parties and
the ends of justice may require.
Q: What is the procedure in auction sale in
judicial foreclosure?
A: The mortgagor’s equity of redemption is
simply the right of the mortgagor to
extinguish the mortgage and retain
ownership of the property by paying the
secured debt within the 120-day period from
the entry of judgment in accordance with
Section 2, Rule 68 of the Rules of Court, or
even after the foreclosure sale but prior to its
confirmation. The procedure, however, can
be modified by a valid agreement of the
parties, such as in a compromise agreement,
wherein the parties specifically agree on the
amounts to be paid, when they should be
paid, and the effects of non-payment or
violation of the terms of their agreement.
Q: Can a mortgagor exercise his right to
redemption after the sale is confirmed by the
Court in auction sale?
A: In judicial foreclosure of real estate
mortgage, the mortgagor cannot exercise his
right of redemption after the sale is
confirmed.
Nature of mortgagor's right of
redemption
Q: What are the nature of mortgagor’s right
of redemption?
A: Right of redemption is (1) An absolute
privilege, the exercise of which is entirely
dependent upon the will and discretion of
the redemptioner.
(2) A mere statutory privilege, it must be
exercised in the mode and within the period
prescribed by the statute.
(3) A real action. Involves title to
foreclosed property. An action to redeem by
the mortgage debtor affects his title to the
foreclosed property.
If the action is seasonably made, it seeks to
erase from the title of the judgment or
mortgage debtor the lien created by
registration of the mortgage and sale. If not
made seasonably, it may seek to recover
ownership to the property since the
purchaser’s inchoate title to the property
becomes consolidated after expiration of the
redemption period. Either way, redemption
involves the title to the foreclosed property.
It is a real action.
Requisites for valid redemption.
Q: What are the requisites for a valid
redemption?
A:
1. The redemption must be made
within one (1) year from the date
of the registration of the certificate
of sale, not from the date of the
 foreclosure sale. The period of
redemption is not a prescriptive
period but a condition precedent
provided by law to restrict the right
of the person exercising redemption.
2. Payment of the purchase price of
the property plus 1% interest per
month together with the taxes
thereon, if any, paid by the purchaser
and the amount of his prior lien, if
any, with the same rate of interest
computed from the date of
registration of the sale, up to the time
of redemption; Exception:
Redemption of properties mortgaged
with the Philippine National Bank
(PNB) and the Development Bank of
the Philippines (DBP) and foreclosed
either judicially or extrajudially are
governed by special laws which
provide for the payment of all the
amounts owed by the debtor. This
special protection given to
government lending institutions; is
not accorded to judgment creditors in
ordinary civil actions; and
3. Written notice of the redemption
must be served on the officer who
made the sale and a duplicate filed
with the proper Register of Deeds.
In judicial foreclosure, the general rule is
that the mortgagor of real estate can no
longer exercise his right of redemption after
the sale is confirmed by the court.
The mortgagor or his assignee is required to
tender payment within the prescribed
period to make said redemption valid, or to
preserve the right of redemption for future
enforcement beyond such period of
redemption.
Payment of redemption money
Q: To whom may the payment of
redemption money be made?
A: The payment of the redemption money
may be made to the purchaser or
redemptioner, or for him to the officer who
made the sale.
Amount payable.
Q: What is the amount payable in
redemption of mortgaged property?
A: In the redemption of mortgaged property,
the rule is that the amount payable is no
longer the judgment debt but the purchase
price at the auction sale.
Similarly, attorney’s fees awarded by the
trial court shall not be added to the
redemption price because the amount
payable is no longer the judgment debt but
that which is stated in Section 30, Rule 39 of
the Rules of Court.
Rights of persons with subordinate
interest
Q: What are the rights of person with
subordinate interest in redemption?
A:
1. Mortgagor’s equity of redemption
before foreclosure. — A second or
junior mortgagee acquires only the
equity of redemption vested in the
mortgagor, and his rights are strictly
subordinate to the superior lien of the
first mortgagee. Thus, a second
mortgagee has to wait until after the
 debtor’s obligation to the first mortgagee
has been fully settled.
2. Mortgagor’s right of redemption after
foreclosure. — When the debt becomes
demandable, the first mortgagee is
entitled to have the mortgaged property
sold in order to apply the proceeds to the
payment of his credit.
In all cases in which an extrajudicial sale is
made, any person having a lien on the
property subsequent to the mortgage, may
redeem the same at any time within the term
of one year from and after the date of sale.
(Sec. 6, Act No. 3135.) After the foreclosure
sale, there remains in the second mortgagee
a mere right of redemption; and only this
right passes to him by virtue of the second
mortgage. His remedy is limited to the right
to redeem by paying off the debt secured by
the first mortgage.
Equity of redemption in judicial
foreclosure
Q: What is the period or time to exercise
Equity of Redemption?
A: Equity of redemption is simply the right
of the mortgagor to extinguish the mortgage
and retain ownership of the property by
paying the secured debt within the 90 days
period after the judgment became final.
Thus, the right to redeem the mortgaged
property shall be exercised within the (90)
ninety-day period from the order of
foreclosure.
Q: What is the 90 Day Period?
A: Ninety (90) Day Period is substantive
right. The period given in the rule is not
merely a procedural requirement.
It is a substantive right granted to the
mortgage debtor as the last opportunity to
pay the debt and save his mortgaged
property from final disposition at the
foreclosure sale. It is one of the two steps
necessary to destroy what in law is known as
the mortgagor's "equity of redemption," the
other, being the sale. It may not be omitted.
An order for the sale of mortgaged property
within the ninety-day period would be a
denial of a substantial right and void.
Persons entitled to exercise right of
redemption
Q: Who are entitled to exercise the right of
redemption?
A: The persons entitled to exercise the right
of redemption are the following:
1. Mortgagor or one in privity of title
with the mortgagor;
2. Successor-in-interest under Sec. 29,
Rule 39, Rules of Court
The term “successor-in-interest” includes:
(a) one to whom the debtor has transferred
his right of redemption; or
(b) one to whom the debtor has conveyed his
interest in the property for the purpose of
redemption; or
(c) one who succeeds to the interest of the
debtor by operation of law; or
(d) one or more joint debtors who were joint
owners of the property sold; or
(e) one with a joint interest in the property,
or his spouse, or heirs.

Registration of transfer of right of
redemption
Q: Does the transfer of the right of
redemption from the original
debtor-mortgagor need to be registered with
the Register of Deeds?
A: The transfer of the right of redemption
from the original debtor-mortgagor need not
be registered with the Register of Deeds to
enable the transferee or assignee to exercise
the same.
Rights and obligations of mortgagee in
possession
Q: What is a mortgagee in possession?
A: A mortgagee in possession, as this term
is used in American equity jurisprudence, is
“one who has lawfully acquired actual or
constructive possession of the premises
mortgaged to him, standing upon his rights
as mortgagee and not claiming under
another title, for the purpose of enforcing his
security upon such property or making its
income help to pay his debt.’’
Q: What are the rights and obligations of
mortgagee in possession?
A: The rights and obligations of mortgagee
in possession are:
1. Similar to those of an antichresis
creditor - He is entitled to retain such
possession until the indebtedness is
satisfied and the property redeemed.
Thus, a creditor with a lien on real
property who takes possession
thereof with the consent of the debtor
holds it as an “antichresis creditor
with the right to collect the credit
with interest from the fruits,
returning to the antichretic debtor,
the balance, if any, after deducting
the expense.”
The mortgagee has to account for the
fruits received.
2. Without right to reimbursement for
useful expenses. - a mortgagee in
possession of mortgaged property who
introduces improvements thereon is not
entitled to reimbursement for the value
thereof upon the redemption of the
mortgage
Vendee's right to possession of mortgaged
property sold
Q: What are the vendee's right to possession
of mortgaged property sold?
A: The vendee's right to possession of
mortgaged property sold are:
1. Contingent. — Before the
expiration date of the redemption
period, the vendee’s right to
possession (or continued pos-
session) of the property sold is
contingent upon the failure of the
mortgagor to redeem.
2. Final. — After the redemption
period is terminated, the right to
redeem is barred, the mortgagor is
divested of his rights to the
mortgaged property sold, and the
vendee’s right of possession of the
property becomes final.
Right of purchaser to writ of possession
Q What is a writ of possession?
A: A writ of possession is generally
understood to be an order by a court
whereby the sheriff is commanded to place
in possession of real or personal property the
person entitled thereto such as when a
property is extrajudicially foreclosed.
Q: Is the purchaser entitled to possession of
the property in an extra-judicial foreclosure?
A: Yes. The purchaser in an extra-judicial
foreclosure sale is entitled to the possession
of the property and can demand that he be
placed in possession of the same either
during (with bond) or after the expiration
(without bond) of the redemption period
therefor.
Right before lapse of redemption period
Q: What is required to avail possession
before the expiration of redemption period?
A: Before expiration of redemption period –
possession can be availed of as long as an ex
parte motion under oath is filed and a bond
in accordance with Sec. 7 of Act 3135 is
posted
Right after lapse of redemption period.
Q: Is the purchaser obliged to bring a
separate suit for possession after the lapse of
redemption period?
A: After lapse of redemption period –
purchaser is not obliged to bring a separate
suit for possession. He must invoke his right
to the aid of the courts and ask a writ of
possession.
Q: What is the nature of petition/motion for
the issuance of a writ of possession?
A: The petition and/or motion for the
issuance of a writ of possession is sum-
mary in nature and a non-litigious
proceeding authorized in an extrajudicial
foreclosure of mortgage pursuant to Act No.
3135, as amended. It is brought for the
benefit of one party only, and without notice
to, or consent by, any person adversely
interested. There is no necessity of giving
notice to the mortgagor who had lost all
interests in the mortgaged property when he
failed to re- deem the same.
Q: What is the rule is that after the
redemption period has expired?
A: The rule is that after the redemption
period has expired, the purchaser of the
property has the right to a conveyance and
to be placed in possession thereof. The
posting of a bond is no longer needed. To
obtain possession, the vendee or purchaser
may either ask for a writ of possession or
bring an appropriate independent action,
such as a suit for ejectment
The right to possession is based simply on
the purchaser’s ownership of the property.
Thus, the mere filing of an ex parte motion
for the issuance of a writ of possession
would suffice.
Upon the expiration of the redemption
period, without the mortgagor having made
use of his right of redemption, ownership of
the property becomes consolidated in the
purchaser.
Q: Does the sheriff has the authority to
suspend the implementation of the writ of
possession?
A: NO. Accordingly, where a writ of
possession has been issued by a court, it is
the inescapable duty of the sheriff to enforce
the writ. The sheriff has no authority to give
a grace period to suspend the
implementation of the writ of possession.
Q: Can a mortgagee be granted a writ of
possession over the property where
mortgaged property is under lease?
A: YES. A mortgagee who has foreclosed
upon the mortgaged real property and has
purchased the same at the foreclosure sale
can be granted a writ of possession over
the property despite the fact that the
premises are in the possession of a lessee
thereof and whose lease has not as yet been
terminated, unless the lease had been
previously registered in the Registry of
Property or unless despite non- registration,
the mortgagee had prior knowledge of the
existence and duration of the lease, actual
knowledge being equivalent to registration.
Q: What is remedy of the purchaser if the
mortgagor refuses to surrender property
sold?
A: The remedy is to file an ordinary action
for the recovery of possession in order that
the debtor may be given an opportunity to be
heard not only regarding possession but also
regarding the obligation covered by the
mortgage.
Q: In a case where a third party is in actual
possession of the mortgaged property, can
the purchaser be awarded of possession?
A: NO. Under Section 35, Rule 39 of the
Rules of Court, which is made suppletory to
the extrajudicial foreclosure of real estate
mortgages by Section 6 of Act 3135, as
amended, the possession of the mortgaged
property may be awarded to a purchaser in
the extrajudicial foreclosure unless a third
party is actually holding the property
adversely to the judgment debtor.
Under Article 433 of the Civil Code, one
who claims to be the owner of a property
possessed by another must bring the
appropriate judicial action for its physical
recovery. The term “judicial process” could
mean no less than an ejectment suit or
reivindicatory action in which ownership
claims of the contending parties may be
properly heard and adjudicated.
Issuance of writ before lapse of
redemption period
Q: If a bond was filed, is there a necessity
for the purchaser to file an ejectment case?
A: Where bond filed by purchaser. — As
already pointed out, the purchaser at the
auction sale is entitled to a writ of
possession pending the lapse of the
redemption period upon petition in the form
of an ex parte motion and upon the posting
of a bond. In such case, “no discretion is left
to the court.” There is, therefore, no
necessity for the purchaser to file an
ejectment case.
Q: What is the remedy of the mortgagor?
A: Remedy of mortgagor. — Any question
regarding the regularity and validity of the
sale as well as the consequent cancellation
of the writ of possession is to be determined
in a subsequent proceeding as outlined in
Section 8 of Act No. 3135. It cannot be
raised as a justification for opposing the
issuance of the writ of possession since,
under the Act, the proceeding for this is ex
parte.
Where rights of third persons involved.
Q: Will the possession of the property in
case of an extrajudicial foreclosure of a real
estate mortgage be given to the purchaser
immediately if there is a third person is
actually holding the property?
A: Claimants with interest adverse to
mortgagor. — Under Sections 27 to 29 and
Section 3335 of Rule 39 of the Rules of
Court which are made applicable by Section
6 of Act No. 3135, in case of an
extrajudicial foreclosure of a real estate
mortgage, the possession of the property
sold may be given to the purchaser by the
sheriff after the period of redemption had
expired, unless a third person is actually
holding the property adversely to the
mortgagor or judgment debtor in which
case an ordinary action is necessary to
recover possession from such third
person.
Q: Can someone who claims to be a
successor-in-interest of the mortgagor
exclude the purchaser from the property?.
A: Successor-in-interest of mortgagor. —
The purchaser, as absolute owner, is entitled
to the possession of the property bought and
cannot be excluded therefrom by one who
merely claims to be a successor-in-interest
of the mortgagor and whose possession is,
therefore, not adverse to the mortgagor
unless it is adjudged that the alleged
successor has a better right to the property
than the purchaser.
Q: Is the agricultural lessee’s pre-emptive
right to buy the land he cultivates superior to
the mortgagee of land?
A: Lessee of agricultural land. — The
agricultural lessee’s pre-emptive right to buy
the land he cultivates, as well as his right to
redeem the land, if sold to a third person
without his knowledge, under Sections 11
and 12, respectively, of the Code of
Agrarian Reforms, is statutory in character
and attaches to the particular landholding by
operation of law. It is superior to the
mortgagee of land. The remedy of the
mortgagee is not against the land nor the
agricultural lessee but against the
mortgagee-landowner.
Q: What is the duty of the seller upon full
payment by the buyer?
A: Buyer of condominium unit. — Under
the Subdivision and Condominium Buyers’
Protective Decree, upon full payment by the
buyer, the seller is duty- bound to deliver
the title of the unit to the buyer. Even with
a valid mortgage on the lot, the seller is still
bound to redeem said mortgage without any
cost to the buyer apart from the balance of
the purchase price if any, and registration
fees.
 Faculty of Civil Law
University of Santo Tomas
City of Manila, Philippines
___________________________________________________________________
CONSOLIDATED QUESTIONS AND ANSWERS ON
THE CHATTEL MORTGAGE LAW, SHIP MORTGAGE DECREE OF 1978, PERSONAL
PROPERTY SECURITY ACT AND THE RELATED CASES
___________________________________________________________________

In Partial Fulfillment of the Requirements for the course

CREDIT TRANSACTIONS
Group 3 - 2F Mon 6:00 PM - 9:00 PM
____________________________

Submitted by:
Custodio, Ryle Nicole Q.
Damiao, Harvey Jay D.
Daño, Maria Alexa Louise U.
De Leon, Charlene Lemuel S.
Dimatulac, Maricris P.
Glean, Daniella Khylyn D.
Magno, Ma. Traceza Nicole G.
Yambao, Grayson G.

Submitted to:
Atty. Irvin Joseph M. Fabella

8 MAY 2023
 TABLE OF CONTENTS

The Chattel Mortgage Law 2

Articles 2140 and 2141, Civil Code 5

Republic Act No. 11057 otherwise known 6

as the Personal Property Security Act of
2018

Presidential Decree No. 1521 otherwise 11

known as the Ship Mortgage Decree of
1978

Cases under Chattel Mortgage Law 15


THE CHATTEL MORTGAGE LAW or
ACT No. 1508
By: Maria Alexa Louise U. Daño
Q: What is chattel mortgage?
A: It is a contract by virtue of which a
personal property is recorded in the
Chattel Mortgage Register as a security
for the performance of an obligation.
The registration in the Chattel Mortgage
register makes the chattel mortgage valid
between the parties and effective against
third persons.
Q: What is the essence of a chattel
mortgage?
A: The essence of a chattel mortgage is
that the mortgaged chattels should answer
for the mortgaged credit and not for the
judgment credit of the mortgagor’s
unsecured credit.
The mortgagee is not obligated to file an
“independent action” for the enforcement
of his credit because to require him to do
so would be a nullification of his lien and
would defeat the purpose of a chattel
mortgage.
Q: What is the validity of a chattel
mortgage?
A: A chattel mortgage shall not be valid
against any person except the mortgagor,
his executors or administrators, unless the
possession of the property is delivered to
and retained by the mortgagee or unless
the mortgage is recorded in the office of
the register of deeds of the province in
which the mortgagor resides at the time of
making the same, or, if he resides without
the Philippine Islands, in the province in
which the property is situated; Provided,
however, That if the property is situated in
a different province from that in which the
mortgagor resides, the mortgage shall be
recorded in the office of the register of
deeds of both the province in which the
mortgagor resides and that in which the
property is situated. (Sec. 4, Act. No.
1508)
Q: May the chattels be sold in a private
sale?
A: Yes, if there is an agreement between
the parties. It is valid for the parties to
stipulate that if the debtor violated the
conditions of the mortgage, the creditor
may sell, at a private sale and without
prior notice, the mortgaged property for
the purpose of applying the proceeds of
the sale to the payment of the debt.
Q: What is the form of chattel
mortgage?
A: A chattel mortgage shall be deemed to
be sufficient when made substantially in
accordance with the following form, and
shall be signed by the person or persons
executing the same, in the presence of
two witnesses, who shall sign the
mortgage as witnesses to the execution
thereof, and each mortgagor and
mortgagee, or, in the absence of the
mortgagee, his agent or attorney, shall
make and subscribe an affidavit in
substance as hereinafter set forth, which
affidavit, signed by the parties to the
mortgage as above stated, and the
certificate of the oath signed by the
authority administering the same, shall be
appended to such mortgage and recorded
therewith. (Sec. 5, Act No. 1508)
Q: What if a corporation is a party to a
mortgage?
A: When a corporation is a party to such
mortgage the affidavit required may be
made and subscribed by a director,
trustee, cashier, treasurer, or manager
thereof, or by a person authorized on the
part of such corporation to make or to
receive such mortgage. (Sec. 6, Act. No.
1508)
Q: What if a partnership is a party to a
mortgage?
A: When a partnership is a party to the
mortgage the affidavit may be made and
subscribed by one member thereof. (Sec.
6, Act No. 1508)
Q: What is the extent of chattel
mortgage?
A: Chattel mortgage shall be deemed to
cover only the property described therein
and not like or substituted property
thereafter acquired by the mortgagor and
placed in the same depository as the
property originally mortgaged, anything in
the mortgage to the contrary
notwithstanding. (Sec. 7, Act No. 1508)
It can only cover obligations that are
existing at the time the mortgage is
constituted.
Q: What does “like or substituted
properties” mean?
A: It makes reference to those acquired
thereafter by the mortgagor and placed in
the same depositary as the property
originally mortgaged, and not to those
already existing and originally included at
the date of the constitution of the chattel
mortgage.
Q: What is the procedure of sale of
chattel mortgage?
A: The mortgagee, his executor,
administrator, or assign, may, after thirty
days from the time of condition broken,
cause the mortgaged property, or any part
thereof, to be sold at public auction by a
public officer at a public place in the
municipality where the mortgagor resides,
or where the property is situated, provided
at least ten days' notice of the time, place,
and purpose of such sale has been posted
at two or more public places in such
municipality, and the mortgagee, his
executor, administrator, or assign, shall
notify the mortgagor or person holding
under him and the persons holding
subsequent mortgages of the time and
place of sale, either by notice in writing
directed to him or left at his abode, if
within the municipality, or sent by mail if he
does not reside in such municipality, at
least ten days previous to the sale.
The officer making the sale shall, within
thirty days thereafter, make in writing a
return of his doings and file the same in
the office of the register of deeds where
the mortgage is recorded, and the register
of deeds shall record the same. The fees
of the officer for selling the property shall
be the same as in the case of sale on
execution as provided in Act Numbered
One hundred and ninety, 4 and the
amendments thereto, and the fees of the
register of deeds for registering the
officer's return shall be taxed as a part of
the costs of sale, which the officer shall
pay to the register of deeds. The return
shall particularly describe the articles sold,
and state the amount received for each
article, and shall operate as a discharge of
the lien thereon created by the mortgage.
The proceeds of such sale shall be
applied to the payment, first, of the costs
and expenses of keeping and sale, and
then to the payment of the demand or
obligation secured by such mortgage, and
the residue shall be paid to persons
holding subsequent mortgages in their
order, and the balance, after paying the
mortgages, shall be paid to the mortgagor
or person holding under him on demand.
(Sec. 14, Act No. 1508)
Q: What are the similarities of a chattel
mortgage and pledge?
A: Similarities:
1. Both are executed to secure the
performance of a principal
obligation;
2. Both are constituted only on
personal property;
3. Both are indivisible;
4. Both constitute a lien on the
property;
5. The creditor cannot appropriate the
property to himself in payment of
debt;
6. When the debtor defaults, the
property must be sold for the
payment of the creditor; and
7. Both are extinguished by the
payment of the principal obligation
or destruction of property.
Q: What are the differences between a
chattel mortgage and a pledge?
2
 As to Registration
A:
A chattel A real estate
CHATTEL PLEDGE mortgage must be mortgage must be
MORTGAGE registered and registered to take
accompanied by effect against third
As to Delivery an affidavit of persons.
good faith to take
Delivery of the Delivery of effect against third
property is not property is persons.
necessary. necessary.
As to Future Obligations
As to the Procedure of the Sale
Cannot secure May secure future
Sec. 14, Act No. Article 2112 of the future obligations. obligations.
1508 Civil Code
As to Where it is Constituted
As to Registration
Movables Immovables
Registration is Registration is not
required for it to required.
be valid. Q: What is an affidavit of good faith?

As to the Excess in Case of A: It is an oath in a chattel mortgage

Foreclosure contract where the parties severally swear
that the foregoing mortgage is made for
Excess over the Excess pertains to the purpose of securing the obligation
amount due the creditor of the specified in the conditions thereof, and for
pertains to the pledgee unless no other purpose, and that the same is a
debtor or the otherwise alleged. just and valid obligation, and one not
mortgagor. entered into for the purpose of fraud.

As to Recovery of Deficiency in Case Q: What if there is no affidavit of good

of Foreclosure faith?

Creditor is entitled Pledgee is not A: Such absence of an affidavit will not

to recover entitled to recover affect the validity of the chattel mortgage
deficiency unless deficiency in all except against third persons without
chattel mortgage event. notice.
was constituted as
a security for Q: What is the subject matter of a
purchase or chattel mortgage?
personal property
payable in A: The object of a chattel mortgage is
installments. personal property.

Q: What are some examples of

Q: What are the differences between a
personal property which can be an
chattel mortgage and a real estate
object of chattel mortgage?
mortgage?
A:
A:
1. An interest in business;
2. Shares of stock in a corporation;
CHATTEL REAL ESTATE
MORTGAGE MORTGAGE

3
 3. Machinery installed in a leased
land treated by the parties as
personal property;
4. A house intended to be
demolished;
5. A house of strong materials.
Q: Is there a right of redemption in
chattel mortgage?
A: Yes, the right of redemption may be
exercised after the mortgagor’s default but
before the foreclosure of the sale.
Q: How is a right of redemption
exercised?
A: When the condition of a chattel
mortgage is broken, a mortgagor or
person holding a subsequent mortgage, or
a subsequent attaching creditor may
redeem the same by paying or delivering
to the mortgagee the amount due on such
mortgage and the reasonable costs and
expenses incurred by such breach of
condition before the sale thereof. An
attaching creditor who so redeems shall
be subrogated to the rights of the
mortgagee and entitled to foreclose the
mortgage in the same manner that the
mortgagee could foreclose it by the terms
of this Act. (Sec. 13, Act no. 1508)
Q: Who may exercise the right of
redemption?
A: The following may exercise the right of
redemption:
1. The mortgagor;
2. A person holding a subsequent
mortgage; and
3. A subsequent attaching creditor.
ARTICLES 2140 and 2141 OF THE
NEW CIVIL CODE
By: Harvey Jay D. Damiao
Q: It is defined as an accessory
contract by which personal property is
recorded in the Chattel Mortgage
Register as security for the
performance of an obligation.
A: Chattel Mortgage
Q: What are the characteristics of
Chattel Mortgage?
A: A chattel mortgage is an accessory
contract, a formal contract, and a
unilateral contract.
Q: Who may be considered a
mortgagor?
A: The mortgagor may be the debtor
himself or a third person.
Q: Where must a property subject of
chattel mortgage be registered?
A: It must be registered in the Chattel
Mortgage Register of the Register of
Deeds where the mortgagor resides or if
he resides in the Philippines, in the place
where the property is situated.
Q: It is an oath in a contract of chattel
mortgage where the parties “severally
swear that the mortgage is made for
the purpose of securing the obligations
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.”
A: Affidavit of Good Faith
Q: What kind of property may be a
subject of chattel mortgage?
A: Chattel mortgage may cover personal
or movable properties contemplated under
Articles 416 and 417 of the Civil Code of
the Philippines including shares of stocks
and interest in a business.
Q: May a future property be a subject of
chattel mortgage?
A: No, future property cannot be a subject
of chattel mortgage since it is not yet in
the possession of the mortgagor.
Q: What are the essential requirements
for the validity of the plaintiff’s exercise
4
of the foreclosure of property under
chattel mortgage?
A: The conditions essential for such
foreclosure would be to show, firstly, the
existence of the chattel mortgage, and
secondly, the default of the mortgagor.
These requirements must be shown
because the validity of the plaintiff’s
exercise of the right of foreclosure is
inevitably dependent on it.
Q: Can the right of redemption be
exercised after foreclosure?
A: There is no right of redemption after the
foreclosure sale; there is only equity of
redemption before the foreclosure.
Q: What could a mortgagee do in case
the property has been foreclosed
judicially and there is a deficiency?
A: If the mortgagee has foreclosed the
mortgage judicially, he may ask for the
execution of the judgment against any
other property of the mortgagor for the
payment of the balance.
Q: Is recovery of deficiency allowed if
the chattel mortgage is a security for
the purchase of personal property in
installments?
A: No, if the chattel mortgage is
constituted as a security for the purchase
of personal property (not for loan) payable
in installments, no deficiency judgment
can be asked and any agreement to the
contrary shall be void.
PERSONAL PROPERTY SECURITY
ACT (PPSA) or RA No. 11057 dated
17 August 2018
By: Daniella Khylyn D. Glean
Q: What are the laws governing chattel
mortgage?
A: The laws constituting chattel mortgage
are the Chattel Mortgage Law, provisions
on the New Civil Code, Revised
Administrative Code, Revised Penal Law,
other special laws such as Ship Mortgage
Decree.
Q: What is the impact of the PPSA?
A: Currently, RA 11057 or the Personal
Property Security Act has amended,
modified, and repealed certain provisions
of the Chattel Mortgage and the provisions
of the New Civil Code regarding chattel
mortgage with the purpose of unifying and
simplifying the rules and to increase the
access of the MSMEs to more credit at the
least cost through the establishment of a
unified and modern legal framework for
securing obligations with personal
property.
Q: Which laws were repealed by the
PPSA?
A: The following laws were repealed:
1. Sections 1 to 16 of Act No. 1508,
otherwise known as "The Chattel Mortgage
Law";
2. Articles 2085-2092 of the "Civil Code of
the Philippines", insofar as movable property
is concerned;
3. Articles 2093-2123 and 2140-2141 of the
Civil Code of the Philippines;
4. Section 13 of Republic Act No. 5980, as
amended by Republic Act No. 8556,
otherwise known as the "Financing
Company Act of 1998";
5. Sections 114-116 of Presidential Decree
No. 1529, otherwise known as the "Property
Registration Decree";
6. Section 5(e) of Republic Act No. 4136,
otherwise known as the "Land
Transportation and Traffic Code."
Q: What are the subjects covered by the
PPSA?
A: All forms of tangible or intangible asset or
movable/personal property.
Q: Are all movable/tangible assets,
when made as security to an
obligation, call for the application of
the PPSA?
A: No. Section 4 of the PPSA provides
that interests in ships and aircrafts shall
continue to be governed by the Civil
Aviation Authority Act of 2008 and Ship
Mortgage Decree of 1978, respectively.
Q: Is there a required form for a
security agreement?
5
A: Yes. Under Section 6 of the PPSA, a
security agreement must be signed by the
parties in a written contract, which may
consist of one or more writings that, taken
together, establish the intent of the parties
to create a security interest.
Q: Is it necessary to describe the
subject property of a security
agreement?
A: According to Section 7, a description of
collateral shall be considered sufficient,
whether specific or general, if it
reasonably identifies the collateral,
including descriptions such as "all
personal property", "all equipment", "all
inventory", or "all personal property within
a generic category" of the grantor.
A specific description is not required. A
description, whether specific or general,
may be allowed.
Q: May the mortgagor use future
property as collateral?
A: Yes. Section 5(b) states that while a
security agreement may provide for the
creation of a security interest in a future
property, the security interest in that
property is created only when the grantor
acquires rights in it or the power to
encumber it.
Q: Is it valid to have a clause in a
security agreement that purports to
extend its coverage to obligations yet
to be contracted or incurred?
A: Yes. There is no categorical statement
in the PPSA to the effect that the security
may be for future obligations. However,
this is implicit from Section 39 of the
PPSA.
Under Section 39, a grantor may demand
in writing the amendment or termination of
the effectiveness of the notice to the
secured creditor if all the obligations under
the security agreement to which the
registration relates have been performed
and there is no commitment to make
future advances.
It follows that a commitment to make
future advances may be secured by a
security agreement with movables as
collateral.
Hence, it may cover present and future
obligations, but of course, it must be
specifically identified in the security
agreement.
Q: When is a security agreement
perfected?
A: According to Section 11 of the PPSA, a
security interest is considered perfected
once it has been created and the secured
creditor has taken one of the actions in
accordance with Section 12, which
includes registration of a notice with the
Registry, possession of the collateral by
the secured creditor, and control of
investment property and deposit account.
Q: When is a security agreement
binding to third parties?
A: According to Section 11(b) of the
PPSA, once a security interest is
perfected, it becomes effective against
third parties.
Q: Is registration of assignment of
mortgage required?
A: Under Section 16, if a secured creditor
assigns a perfected security interest, it is
possible to register an amendment notice
to reflect the assignment.
Q: How may the chattel mortgage be
enforced?
A: After default, a secured creditor may
enforce its security interest either through
recovery (Section 48), disposition (Section
49), or retention (Section 54).
NOTE: PPSA amended Sec. 14 of Act No.
1508. As such, the secured creditor may
now take possession of the mortgaged
property without need of judicial process
and dispose of the same in a public or
private sale upon notice to the debtor.
Q: Is Pactum Commissorium still
prohibited under the PPSA in the
enforcement of security?
A: No, a secured creditor is allowed to
retain the collateral.
6
Under Section 54, after default, a secured
property
creditor may propose to the debtor and
grantor to take all or part of the collateral As to Form
in total or partial satisfaction of the
secured obligation, and shall send a Sufficient when Written contract
proposal to them. made substantially signed by the
in accordance with parties. It may
Q: Is there a right of redemption under the following form: consist of one or
the PPSA? more writings that,
A: Yes, there is a right of redemption. 1. Signed by taken together,
the establish the intent
Under Section 45 of the PPSA, any person/s of the parties to
person entitled to receive a notification of executing create a security
disposition is entitled to redeem the the same, interest. (Section
collateral by paying or otherwise in the 6)
performing the secured obligation in full, presence
including the reasonable cost of of two
enforcement. The right of redemption may witnesses,
be exercised, except if the person entitled who shall
to redeem has waived the right in writing, sign the
if the collateral is already disposed of, mortgage
acquired or collected by the secured as
creditor, or if the secured creditor has witnesses
retained the collateral. to the
execution
Q: Does the mortgagor have a right to 2. Each
the excess? mortgagor
A: Under Section 52(b) of the PPSA, the and
secured creditor is required to account for mortgagee,
any surplus to the grantor. or, in the
absence of
Q: Does the mortgagee have the right the
to recover deficiency? mortgagee,
A: Section 52(b) of the PPSA specifies his agent
that the secured creditor is obligated to or attorney,
account for any surplus to the grantor and, shall make
unless otherwise agreed, the debtor is and
responsible for any deficiency. subscribe
an affidavit
Q: What is the comparison between the in
chattel mortgage laws and the Personal substance
Property Security Act (PPSA)? 3. Affidavit
shall be
signed by
CHATTEL PPSA (RA 11057) the parties
MORTGAGE to the
(NCC; ACT 1508) mortgage
4. The
As to Subject Matter certificate
of the oath
Personal All forms of signed by
Properties tangible or the
intangible asset or authority
movable/personal administeri

7
 ng the encumber it.
same, shall (Section 5[b])
be
appended As to After Incurred Obligations
to such
mortgage Not allowed. Allowed.
and
recorded A chattel Security
(Section 5, mortgage can Agreement may
Chattel cover obligations secure future
Mortgage existing at the time obligations.
Law) the mortgage is
constituted. (Acme
As to Description Shoe vs. CA)

The description of A description of As to Perfection

the mortgaged collateral shall be
property shall be considered By registration of A security interest
such as to enable sufficient, whether personal property. shall be perfected
the parties to the it is specific or when it has been
mortgage, or any general, if it If the movable, created and the
other person, after reasonably instead of being secured creditor
reasonable inquiry identifies the recorded, is has taken one of
and investigation, collateral. A delivered to the the actions in
to identify the description such creditor or a third accordance with
property. (Section as "all personal person, the Section 12.
7, Chattel property", "all contract is a (Section 11)
Mortgage Law) equipment", "all pledge, not a
inventory", or "all chattel mortgage. A security may be
personal property (Article 2140, perfected by:
within a generic NCC) a. Registratio
category" of the n of a
grantor shall be notice with
sufficient. (Section the
7) Registry;
b. Possession
As to use of After Acquired Property of the
as Collateral collateral
by the
Not allowed. Allowed. secured
creditor;
The mortgagor be A security and
the absolute agreement may c. Control of
owner of the thing provide for the investment
mortgaged. creation of a property
(Article 2085, security interest in and
NCC) a future property, deposit
but the security account
interest in that (Section
property is created 12)
only when the
grantor acquires
rights in it or the As to Binding Effect to Third Parties
power to

8
Registration is On perfection, a municipalit privately, in its
necessary to bind security interest y where present condition
third persons. becomes effective the or following any
against third mortgagor commercially
parties. (Section resides, or reasonable
11[b]) where the preparation or
property is processing. x x x
As to Registration of Assignment of situated.
Mortgage (Section 3. Retention
14, Chattel (Section
Not required. If a secured Mortgage 54)
creditor assigns a Law)
There is no law perfected security
expressly interest, an XPN: The sale
requiring the amendment notice may be a private
recording of the may be registered one if permitted by
assignment of to reflect the the agreement of
mortgage. assignment. the parties. (PNB
(Section 16) v. Manila
Thus, as held in Investment
Sison v. Yap Tico, Construction Inc.)
a debtor is
protected if he As to Pactum Commissorium
pays his creditor Prohibition
without actual
notice that the Prohibited. Allowed.
debt has been
assigned. Such The creditor Section 54.
notice must be cannot appropriate Retention of
actual. the things given by Collateral by
way of pledge or Secured
As to the Enforcement of the mortgage, or Creditor.—
Security dispose of them. (a) After default,
Any stipulation to the secured
By public sale. By public and the contrary is null creditor may
private sale, and and void. (Article propose to the
The mortgagee, through other 2088, NCC) debtor and grantor
his executor, means. to take all or part
administrator, or of the collateral in
assign, may, after Either through: total or partial
thirty days from satisfaction of the
the time of 1. Recovery secured
condition broken, (Section obligation, and
cause the 48) shall send a
mortgaged 2. Disposition proposal to:
property, or any (Section xxx
part thereof 49) (b) The secured
1. to be sold creditor may retain
at public (a) After default, a the collateral in
auction by secured creditor the case of: x x x
a public may sell or
officer otherwise dispose As to Right of Redemption
2. at a public of the collateral,
place in the publicly or None. Allowed.

9

No right of
redemption after
the sales is held to
discharge the
obligation.
As to the Right to Recover Excess
Allowed. Allowed.
As to the Right to Recover
Deficiency
Allowed. Allowed.
THE SHIP MORTGAGE DECREE OF
1978 or PD No. 1521
By: Ryle Nicole Q. Custodio,
Charlene Lemuel S. De Leon, and Ma.
Traceza Nicole G. Magno
Q: What is a ship mortgage?
A: It is the pledging and charge upon the
title of a ship and its machinery as security
for a loan. A mortgage of a ship is a
common way of financing its construction
or purchase. In essence, a mortgage
provides a creditor with security for the
repayment of a loan or the performance of
some other obligation by the acquisition of
a property interest in the ship. It may in
fact be used to secure any financial
obligation involving the operation of a
ship.
Q: What law governs ship mortgages in
the Philippines?
A: The Ship Mortgage Decree of 1978
governs the mortgage of vessels of
domestic ownership.
Q: For what purpose may a ship
mortgage be constituted?
A: A mortgage or any other lien or
encumbrance on vessels and its
equipment may be freely constituted with
any bank or other financial institutions,
either domestic or foreign, for financing
the construction, acquisition, purchase, or
initial operation of vessels.
Q: Who may constitute a ship
mortgage?
A: Any citizen of the Philippines or any
association or corporation organized
under the laws of the Philippines, at least
sixty per cent (60%) of the capital of which
is owned by citizens of the Philippines
(Section 2, P.D. 1521).
Q: Does the mortgage have to be
recorded in order to be valid?
A: Yes. According to Section 3 of P.D.
1521, no mortgage shall be valid, in
respect to such vessel, against any person
other than the mortgagor, his heir or
assign, and a person having actual notice
thereof, until such mortgage is recorded in
the office of the Philippine Coast Guard of
the port of documentation of such vessel.
In addition, a copy of the instrument or
mortgage shall be furnished to the Central
Bank of the Philippines.
Q: What is a preferred mortgage?
A: According to Section 4 of P.D. 1521, a
preferred mortgage is a valid mortgage
which at the time it is made includes the
whole of any vessel of domestic
ownership shall have, in respect to such
vessel and as of the date of recordation,
the preferred status given by the
provisions of Section 17 hereof, if:
1. The mortgage is recorded as provided
in Section 3;
2. An affidavit is filed with the record of
such mortgage to the effect that the
mortgage is made in good faith and
without any design to hinder, delay, or
defraud any existing or future creditor of
the mortgagor or any lien or of the
mortgaged vessel;
3. The mortgage does not stipulate that
the mortgagee waives the preferred status
thereof.
In addition, a preferred mortgage includes
more than one vessel and provides for the
separate discharge of each vessel by the
payment of a portion of mortgage
indebtedness, the amount of such portion
of such payment shall be endorsed upon
10
the documents of the vessel. In case such
mortgage does not provide for the
separate discharge of a vessel and the
vessel is to be sold upon the order of a
district court of the Philippines in a suit in
rem in admiralty, the court shall determine
the portion of the mortgage indebtedness
increased by 20 per centum (1) which, in
the opinion of the court, the approximate
value of all the vessels covered by the
mortgage, and (2) upon the payment of
which the vessel shall be discharged from
the mortgage.
NOTE: A vessel holding a Provisional
Certificate of Philippine Registry is
considered a vessel of domestic
ownership such that it can be subject of
preferred mortgage.
Q: What is the effect of including
another property other than the vessel
itself?
A: According to Section 4 of P.D. 1521, a
mortgage which includes property other
than a vessel shall not be held a preferred
mortgage unless the mortgage provides
for the separate discharge of such
property by the payment of a specified
portion of the mortgage indebtedness. If a
preferred mortgage so provides for the
separate discharge, the amount of the
portion of such payment shall be endorsed
upon the documents of the vessel.
Q: What is the requirement on certified
copies of mortgage?
A:
1. The Coast Guard District or Station
Commander upon the recording of
a preferred mortgage shall deliver
two certified copies thereof to the
mortgagor.
2. The mortgagor shall place, and
use due diligence to retain, one
copy on board the mortgaged
vessel notice of which shall be
posted in a conspicuous place
thereat and cause such copy and
the documents of the vessel to be
exhibited by the master to any
person having business with the
vessel, which give rise to a
maritime lien upon the vessel or to
the sale, conveyance, or mortgage
thereof.
3. The master of the vessel shall
upon the request of any such
person, exhibit to him the
documents of the vessel placed on
board thereof.
4. The requirement that a copy of a
preferred mortgage be placed and
retained on board the mortgaged
vessel shall not apply in the case
of a mortgaged vessel which is not
self-propelled (including but not
limited to, barges, scors, lighters,
and car floats).
5. If the master of the vessel willfully
fails to exhibit the documents of
the vessel or the copy of any
preferred mortgage thereof, the
Philippine Coast Guard may
suspend or cancel the master's
license.
Q: Does the mortgagor have to
disclose to the mortgagee the
existence of any maritime lien?
A: Yes. According to Section 6 of P.D.
1521, the mortgagor (1) shall, upon
request of the mortgagee, disclose in
writing to him prior to the execution of any
preferred mortgage, the existence of any
maritime lien, prior mortgage, or other
obligation or liability upon the vessel to be
mortgaged, that is known to the
mortgagor, and (2) without the consent of
the mortgagee, shall not incur, after the
execution of such mortgage and before
the mortgagee has had a reasonable time
in which to record the mortgage and have
indorsements in respect thereto made
upon the documents of the vessel, any
contractual obligation creating a lien upon
the vessel other than a lien for wages of
stevedores when employed directly by the
owner, operator, master, ship's husband,
or agent of the vessel, for wages of the
crew of the vessel, for general average, or
for salvage, including contract salvage, in
respect to the vessel, tonnage dues and
all other charges (not to exceed P20,000)
of the Philippine Government in respect to
the vessel.
Q: What is the effect of violating such
provision?
11
A: A mortgagor, who, with intent to defraud,
violates the above provision and if the
mortgagor is a corporation or association,
the president or other principal executive
officer of the corporation or association,
shall be punished by a fine of not, more than
P5,000 or imprisonment of not more than
two years, or both. The mortgage
indebtedness shall thereupon become
immediately due and payable at the election
of the mortgagee.
Q: How is the notice of claim of lien
recorded?
A: The Coast Guard District or Station
Commander of the port of documentation
shall, upon the request of any person,
record notice of his claim of a lien upon a
vessel covered by a preferred mortgage,
together with the nature, date of creation,
and amount of the lien, and the name and
address of the person.
Q: How is the lien discharged?
A: The mortgagor upon a discharge in
whole or in part of the mortgage
indebtedness, shall forthwith file with the
Coast Guard District or Station Commander
for the port of documentation of the vessel,
a certificate of such discharge duly executed
by the mortgagee. Such Coast Guard
District or Station Commander shall there
upon record the certificate. In case of a
vessel covered by a preferred mortgage, the
Coast Guard District or Station Commander
at the port of documentation shall endorse
upon the documents of the vessel, or direct
the Coast Guard District or Station
Commander at any port in which the vessel
is found, to so endorse, the fact of such
discharge. A certificate of such
endorsement, giving the time, place and
description of the endorsement, shall be
recorded with the Philippine Coast Guard.
Where the endorsement is made by a
person other than the Coast Guard District
or Station Commander such certificate shall
be promptly forwarded to the Philippine
Coast Guard.
Q: What are the conditions precedent to
record?
A: According to Section 8 of P.D. 1521, (a)
no mortgage shall be recorded unless it
states the interest of the mortgagor in the
vessel, and the interest so mortgaged; (b)
no mortgage, notice of claim of lien, or
certificate of discharge thereof, shall be
recorded unless previously acknowledged
before the Coast Guard District or Station
Commander of the port of documentation or
a notary public or other officer authorized by
a law of the Philippines to take
acknowledgment of deeds or before a
Philippine consul or consular agent; (c) in
case of a change in the port of
documentation of a vessel of the
Philippines, no mortgage shall be recorded
at the new port of documentation unless
there is furnished to the Coast Guard District
or Station Commander of such port,
together with the copy of the mortgage to be
recorded, a certified copy of the record of
the vessel at the former port of
documentation furnished by the Coast
Guard District or Station Commander of
such port. The Coast Guard District or
Station Commander at the new port of
documentation is authorized and directed to
record such certified copy.
Q: What are the mortgagee’s remedies in
case of default?
A: Upon the default of any term or condition
of the mortgage such lien may be enforced
by the mortgagee by suit in remaining
admiralty, wherein the vessel itself may be
made a partly defendant and be arrested in
the manner as provided in Section 11
hereof. Original jurisdiction of all such suits
is granted to the Court of First Instance of
the Philippines exclusively. In addition to any
notice by publication, actual notice of
commencement of any such suit shall direct,
to (1) the master, other ranking officer, or
caretaker of the vessel, and (2) any person
who has recorded a notice of claim of an
undischarged lien upon the vessel, as
provided in Section 7 hereof, unless after
search by the mortgage satisfactory to the
court, such mortgagor, master, other ranking
officer, caretaker, or claimant is not found
within the Philippines. Failure to give notice
to any such person, as required by this
Section, shall be liable to such person for
damages in the amount of his interest in the
vessel terminated by the suit.
In case of judicial foreclosure as
provided herein, the provisions of Rule 68 of
the New Rules of Court, if not inconsistent
herewith, shall apply.
The lien of a preferred ship
mortgage may also be enforced by a suit in
12
rem in admiralty or otherwise in any foreign
country in which the vessel may be found
pursuant to the procedure of said country for
the enforcement of ship mortgages
constituting maritime liens on vessels
documented under the laws of said country.
Q: How does one apply for the arrest of
a mortgaged vessel?
A: Under Sec. 11 of PD 1521, an applicant
may apply ex parte for an order for the
arrest of a mortgaged vessel/s. The judge
shall immediately issue the same if the
applicant’s affidavit shows that 1) a default
in the mortgage has occurred; and 2) the
applicant had filed a bond executed to the
adverse party, conditioned that the
applicant will pay all the costs which may
be adjudged to the adverse party and all
damages which he may sustain by reason
of such arrest, if the court shall finally
adjudge that the applicant was not entitled
thereto.
Q: How may an Order of Arrest be
discharged?
A: Under Secs. 12 and 13 of PD 1521,
either through a) application of the owner
of the vessel and his accompanying
deposit/counterbond; or b) application of
the owner of the vessel on the ground that
the arrest was improperly or irregularly
issued.
Q: Can there be a preferred mortgage
on a foreign ship?
A: YES. Under Sec. 15 of PD 1521,
provided that such mortgage was
executed in accordance of the laws of the
foreign nation where the vessel is
registered.
Q: What happens after a mortgaged
vessel is sold?
A: Under Sec. 17 of PD 1521, the effect is
that all pre-existing claims to that vessel
shall be terminated. Moreover, if the
proceeds of the sale should not be
sufficient to pay all creditors, the residue
shall be divided among them pro rata.
Q: What is Section 19 of PD521 all
about?
A: It talks about the Surrender of
Documents; termination of mortgagee's
interest; sale of mortgaged vessel which
states that:
(a) The documents of a vessel of the
Philippines covered by a preferred
mortgaged may not be surrendered (except
in the case of the forfeiture of the vessel or
its sale by the order of any court of the
Philippines or any foreign country) without
the approval of the Maritime Industry
Authority. The Administrator shall not grant
such approval without the mortgagee's
consent.
(b) The interest of the mortgage in a vessel
of the Philippines covered by a mortgage,
shall not be terminated by the forfeiture of
the vessel for a violation of any law of the
Philippines, unless the mortgage authorized,
consented, or conspired to effect the illegal
act, failure, or omission which constituted
such violation. Neither shall the chance by
the shipowner in the use or character of the
vessel or in the business of the mortgagor,
without the consent of the mortgagee, nor
the failure by the mortgagor to comply with
the provisions of Section 5 hereof affect the
validity or preference of the preferred ship
mortgage as against third persons.
(c) Upon the sale of any vessel of the
Philippines covered by a preferred mortgage
in any extrajudicial sale or by order of a
district court of the Philippines in any suit in
rem in admiralty for the enforcement of a
maritime lien other than a preferred maritime
lien, the vessel shall be sold free from all
pre-existing claims thereon; but the court
shall, upon the request of the mortgagee,
the plaintiff, or any intervenor, require the
purchase at such sale to give and the
mortgagee to accept a new mortgage of the
vessel for the balance of the term of the
original mortgage. The conditions of such
new mortgage shall be the same, so far as
practicable, as those of the original
mortgage and shall be subject to the
approval of the court. If such new mortgage
is given, the mortgagee shall not be paid
from the proceeds of the sale and the
amount payable as the purchase price shall
13
be held diminished in the amount of the new
mortgage indebtedness.
(d) No vessel of domestic ownership shall
be mortgaged, nor, any rights under said
mortgage shall be assigned, to any person
not a citizen of the Philippines without the
approval of the Maritime Industry Authority.
The penalties and sanctions provided for
under Commonwealth Act No. 606 shall
apply in case of any violation hereof.
(e) The foreclosure sale of vessels
mortgaged under the provisions of this
Decree, whether judicially or extra- judicially,
shall not require the approval of the
Maritime Industry Authority.
Q: Who May Bid in the Foreclosure Sale?
A: The following persons are qualified to bid
in the foreclosure sale of the mortgaged
vessel:
(a) Citizens of the Philippines or
corporations 60% of the capital of which is
owned by Filipino citizens.
(b) A foreign mortgagee or foreign national
whose country has diplomatic relations with
the Philippines or whose country grants
reciprocal rights to Filipino citizens.
In case the purchaser is a foreign individual
or entity, the Philippine Coast Guard shall,
upon presentation of the certificate of sale,
cancel the registration of the vessel and
issue a certificate to that effect upon
request.
Q: What is Section 21 of PD521 all
about?
A: Any person furnishing repairs, supplies,
towage, use of dry dock or marine railway,
or other necessaries to any vessel, whether
foreign or domestic, upon the order of the
owner of such vessel, or of a person
authorized by the owner, shall have a
maritime lien on the vessel, which may be
enforced by suit in rem, and it shall be
necessary to allege or prove that credit was
given to the vessel.
Q: Who are presumed to have authority
from the owner to procure repairs,
supplies, towage, use of dry dock or
marine railway, and other necessaries for
the vessel?
A: The managing owner, ship's husband,
master or any person to whom the
management of the vessel at the port of
supply is entrusted. No person tortuously or
unlawfully in possession or charge of a
vessel shall have authority to bind the
vessel.
Q: What is Section 23 of PD521 all
about?
A: It talks about the notice to Person
Furnishing Repairs, Supplies, and
Necessarie which states that the officers
and agents of a vessel specified in Section
22 of this Decree shall be taken to include
such officers and agents when appointed by
a character, by an owner pro hac vice, or by
an agreed purchaser in possession of the
vessel; but nothing in this Decree shall be
construed to confer a lien when the furnisher
know, or by exercise of reasonable diligence
could have ascertained, that because of the
terms of a charter party, agreement for sale
of the vessel, or for any other reason, the
person ordering the repairs, supplies, or
other necessaries was without authority to
bind the vessel therefor.
Q: What is Section 24 of PD1521 all
about?
Section 24 talks about the Waiver of Right to
Lien which states that Nothing in this Decree
shall be construed to prevent the furnisher
of repairs, supplies, towage, use of dry dock
or marine railway, or other necessaries, or
the mortgagee, from waiving his right to a
lien, or in the case of a preferred mortgage
lien, to the preferred status of such lien, at
any time by agreement or otherwise.
CASES ASSIGNED UNDER
CHATTEL MORTGAGE LAW
By: Grayson G. Yambao, Maricris P.
Dimatulac, and Ryle Nicole Q.
Custodio
FILIPINAS MARBLE vs IAC
G.R. No. L-68010, dated 30 May 1986
Q: Provide the Doctrine, Facts, Issue
and Ruling.
14
A:
DOCTRINE: A mortgage is a mere
accessory contract and, thus, its validity
would depend on the validity of the loan
secured by it.Art. 2125. In addition to the
requisites stated in article 2085, it is
indispensable, in order that a mortgage
may be validly constituted that the
document in which it appears be recorded
in the Registry of Property. If the
instrument is not recorded, the mortgage
is nevertheless binding between the
parties.
FACTS: Filipinas Marble Corporation
(FMC) applied for a loan in the amount of
$5M with the respondent Development
Bank of the Philippines in its desire to
develop the full potentials of its mining
claims and deposits. DBP granted the
loan subject, however, to sixty onerous
conditions, among which is: (1) FMC shall
enter into a management contract with
Bancom to manage the FMC for a period
of three (3) years and that the affairs of
the petitioner were placed under the
complete control of DBP and Bancom
including the disposition and disbursement
of the said loan; and (2) the $5M loan
shall be secured by a final mortgage on
FMC’s assets with a total approved value
of P48,630,756.
FMC alleges that Bancom and their
directors/officers mismanaged and
misspent the loan, after which Bancom
resigned with the approval of DBP even
before the expiration date of the
management contract, leaving petitioner
desolate and devastated. Thus, FMC
failed to comply with its obligations and
instead of helping petitioner get back on
its feet, DBP completely abandoned the
petitioner’s project and proceeded to
foreclose the properties mortgaged to it by
petitioner without previous demand or
notice.
In essence, FMC seeks the annulment of
the deeds of mortgage and deed of
assignment because there was no loan at
all to secure since what DBP “lent” to FMC
with its right hand, it also got back with its
left hand; and that, there was failure of
consideration with regard to the execution
of said deeds as the loan was never
delivered to FMC. FMC further prayed that
pending the trial on the merits of the case,
the trial court immediately issue a
restraining order and then a writ of
preliminary injunction against the sheriffs
to enjoin the latter from proceeding with
the foreclosure and sale of the FMC’s
properties in Metro Manila and in
Romblon.
DBP opposed the issuance of a writ of
preliminary injunction stating that under
Presidential Decree No. 385, DBP’s right
to foreclose is mandatory as the
arrearages of FMC had already amounted
to P123,801,265.82 as against its total
obligation of P151,957,641.72; that under
the same decree, no court can issue any
restraining order or injunction against it to
stop the foreclosure since Filipinas
Marble’s arrearages had already reached
at least twenty percent of its total
obligations; that the alleged non-receipt of
the loan proceeds by the petitioner could,
at best, be accepted only in a technical
sense because the money was received
by the officers of the petitioner acting in
such capacity and, therefore, irrespective
of whoever is responsible for placing them
in their positions.
RTC: RTC held that it cannot enjoin DBP
from complying with the mandatory
provisions of the said PD It having been
shown that plaintiff's outstanding
obligation amounted to P151,957,641.72
and with arrearages reaching up to 81%
against said total obligation, the Court
finds the provisions of P.D. No. 385
applicable to the instant case.
15

CA: CA upheld the trial court's decision.
ISSUE: WON there was no valid loan
contract for failure of consideration since
the mortgage cannot exist or stand by
itself being a mere accessory contract.and
the non-registration of the chattel
mortgage renders the same as null and
void pursuant to Article 2125 of the New
Civil Code.
RULING: YES, a mortgage is a mere
accessory contract and, thus, its validity
would depend on the validity of the loan
secured by it. However, the Supreme
Court rejected the petitioner's argument
that since the chattel mortgage involved
was not registered, the same is null and
void. Article 2125 of the Civil Code clearly
provides that the non-registration of the
mortgage does not affect the immediate
parties. Thus, the petitioner cannot invoke
such provision to nullify the chattel
mortgage it executed in favor of
respondent DBP.
BICOL SAVINGS AND LOAN
ASSOCIATION vs Guinhawa
G.R. No. L-62415, dated 20 August 1990
Q: Provide the Doctrine, Facts, Issue
and Ruling.
A:
DOCTRINE: Where the obligation is one
of a loan by a chattel mortgage and not a
sale where the price is payable on
installments, an independent civil action
may be instituted for the recovery of said
deficiency if after extra judicial foreclosure
of such chattel mortgage a deficiency
exist. If the mortgagee has foreclosed the
mortgage judicially, he may ask for the
execution of the judgment against any
other property of the mortgagor for the
payment of the balance.
FACTS: Victor Depositario together with
private respondent Jaime Guinhawa,
acting as solidary co-maker, took a loan
from petitioner Bicol Savings and Loan
Association (BISLA) in the sum of
P10,622.00, payable at P535.45 every
19th day of each month. To secure the
payment of the foregoing loan obligation,
Victorio Depositario put up as security a
chattel mortgage which was a Yamaha
Motorcycle. Said motorcycle was
eventually foreclosed by reason of the
failure of Depositario and Guinhawa to
pay the loan. As a result of the
foreclosure, there was a deficiency, where
BISLA made a demand to pay the same.
BISLA filed a complaint for the recovery of
a sum of money constituting the deficiency
after foreclosure of the chattel mortgage
put up by the Depositario against the latter
and his solidary co-maker Guinhawa.
Depositario was dropped as his
whereabouts were unknown and he could
not be served with summons.
ISSUE: WON a co-maker in a loan, who
jointly and severally bound himself to pay
loan on the promissory note but is not a
party to the chattel mortgage executed to
secure the same loan by the principal
debtor can be held liable for the deficiency
in case of foreclosure.
RULING: YES. Under Article 1216 of the
Civil Code, the creditor may proceed
against any one of the solidary debtors or
some or all of them simultaneously. The
demand made against one of them shall
not be an obstacle to those which may
subsequently be directed against the
others, so long as the debt has not been
fully collected. Therefore, where the
private respondent binds himself
solidarily with the principal debtor to
pay the latter’s debt, he may be
proceeded against by the principal
debtor. Private respondent as a solidary
co- maker is also a surety (Art. 2047) and
16
that under the law, the bringing of an
action against the principal debtor to
enforce the payment of the obligation is
not inconsistent with, and does not
preclude, the bringing of another action to
compel the surety to fulfill his obligation
under the agreement.
Where the obligation is one of a loan by a
chattel mortgage and not a sale where
the price is payable on installments, an
independent civil action may be
instituted for the recovery of said
deficiency if after extra judicial
foreclosure of such chattel mortgage a
deficiency exist. If the mortgagee has
foreclosed the mortgage judicially, he may
ask for the execution of the judgment
against any other property of the
mortgagor for the payment of the balance.
To deny to the mortgagee the right to
maintain an action to recover the
deficiency after foreclosure of the chattel
mortgage would be to overlook the fact
that the chattel mortgage is only given as
a security and not as payment for the debt
in case of failure of payment.
TUMALAD vs VICENCIO
41 SCRA 143
Q: Provide the Doctrine, Facts, Issue
and Ruling.
A:
DOCTRINE: Although a building is an
immovable, the parties to a contract may
by agreement treat as personal property
that which by nature is a real property
however they are estopped from
subsequently claiming otherwise.
FACTS: Alberta Vicencio and Emiliano
Simeon received a loan of P4,800 from
Gavino and Generosa Tumalad. To
guaranty said loan, Vicencio executed a
chattel mortgage in favor of Tumalad over
their house of strong materials which
stood on a land which was rented from the
Madrigal & Company, Inc. When Vicencio
defaulted in paying, the house was
extrajudicially foreclosed, pursuant to their
contract. It was sold to Tumalad and they
instituted a Civil case in the Municipal
Court of Manila to have Vicencio vacate
the house and pay rent.
The MTC decided in favor of Tumalad
ordering Vicencio to vacate the house and
pay rent until they have completely
vacated the house. Vicencio is questioning
the legality of the chattel mortgage on the
ground that 1) the signature on it was
obtained thru fraud and 2) the mortgage is
a house of strong materials which is an
immovable therefore can only be the
subject of a Real Estate Mortgage. On
appeal, the CFI found in favor of Tumalad,
and since Vicencio failed to deposit the
rent ordered, it issued a writ of execution,
however the house was already
demolished pursuant to an order of the
court in an ejectment suit against Vicencio
for non-payment of rentals. Thus, the case
at bar.
ISSUE: WON the chattel mortgage is void
since its subject is an immovable
RULING: NO. Although a building is by
itself an immovable property, parties to a
contract may treat as personal property
that which by nature would be real
property and it would be valid and good
only insofar as the contracting parties are
concerned. By principle of estoppel, the
owner declaring his house to be a chattel
may no longer subsequently claim
otherwise.
In this case, the house on rented land is
not only expressly designated as Chattel
Mortgage; it specifically provides that "the
mortgagor ... voluntarily CEDES, SELLS
and TRANSFERS by way of Chattel
Mortgage the property together with its
leasehold rights over the lot on which it is
17
constructed and participation ..." Although
there is no specific statement referring to
the subject house as personal property,
yet by ceding, selling or transferring a
property by way of chattel mortgage
defendants-appellants could only have
meant to convey the house as chattel, or
at least, intended to treat the same as
such, so that they should not now be
allowed to make an inconsistent stand by
claiming otherwise. Moreover, the subject
house stood on a rented lot to which
defendants-appellants merely had a
temporary right as lessee, and although
this can not in itself alone determine the
status of the property, it does so when
combined with other factors to sustain the
interpretation that the parties, particularly
the mortgagors, intended to treat the
house as personalty. It is the
defendants-appellants themselves, as
debtors-mortgagors, who are attacking the
validity of the chattel mortgage in this
case. The doctrine of estoppel therefore
applies to the herein
defendants-appellants, having treated
the subject house as personalty.
PHILIPPINE REFINING CO. vs JARQUE
61 PHIL 229
Q: Provide the Doctrine, Facts, Issue
and Ruling.
A:
DOCTRINE: It is essential that a record of
documents affecting the title to a vessel
be entered in the record of the Collector of
Customs at the port of entry. Otherwise a
mortgage on a vessel is generally like
other chattel mortgages as to its requisites
and validity
FACTS: Philippine Refining Co., Inc., and
Francisco Jarque executed three (3)
mortgages on the motor vessels Pandan
and Zaragoza. These documents were
recorded in the record of transfers and
incumbrances of vessels for the port of
Cebu and each was therein
denominated a "chattel mortgage".
Neither of the first two mortgages had
appended an affidavit of good faith. The
third mortgage contained such an affidavit,
but this mortgage was not registered in the
customs house until the period of thirty
(30) days prior to the commencement of
insolvency proceedings against Francisco
Jarque.
A fourth mortgage was executed by
Francisco Jarque and Ramon Aboitiz on
the motorship Zaragoza and was entered
in the Chattel Mortgage Registry within the
period of 30 days prior to the
foreclosure/institution of the insolvency
proceedings.
Jose Corominas (as the assignee of the
estate of the insolvent Francisco Jarque)
filed with the CFI of Cebu a petition
praying that Francisco Jarque be declared
an insolvent debtor. This was granted and
Jarque’s properties were then assigned to
Corominas.
A problem arose when Judge Jose
Hontiveros declined to order the
foreclosure of the mortgages, and instead,
ruled that they were defective because
they did not have affidavits of good faith.
ISSUE: WON the mortgages were
defective.
RULING: YES. Vessels are considered
personal property under the civil law.
Similarly under the common law, vessels
are personal property although
occasionally referred to as a peculiar kind
of personal property. They are subject to
mortgage agreeably to the provisions of
the Chattel Mortgage Law.
The only difference between a chattel
mortgage of a vessel and a chattel
18
mortgage of other personalty is that it is
not now necessary for a chattel mortgage
of a vessel to be noted in the registry of
the register of deeds, but it is essential
that a record of documents affecting
the title to a vessel be entered in the
record of the Collector of Customs at
the port of entry. Otherwise, a
mortgage on a vessel is generally like
other chattel mortgages as to its
requisites and validity.
In this case, the absence of the affidavit
vitiates a mortgage as against creditors
and subsequent encumbrancers. As a
consequence a chattel mortgage of a
vessel wherein the affidavit of good faith
required by the Chattel Mortgage Law
is lacking, it is unenforceable against
third persons.
CEBU INTERNATIONAL FINANCE
CORPORATION vs COURT OF
APPEALS
G.R. No. 107554
Q: Provide the Doctrine, Facts, Issue
and Ruling.
A:
DOCTRINE: The prevailing jurisprudence
is that a mortgagee has a right to rely in
good faith on the certificate of title of the
mortgagor to the property given as
security and in the absence of any sign
that might arouse suspicion, has no
obligation to undertake further
investigation.
FACTS: Jacinto Dy executed a Special
Power of Attorney in favor of private
respondent Ang Tay, authorizing the latter
to sell the cargo vessel owned by Dy
called LCT “Asiatic.”
Through a Deed of Absolute Sale, Ang
Tay sold the subject vessel to Robert Ong
(Ong). Ong paid the purchase price by
issuing three (3) checks. However, since
the payment was not made in cash, it was
specifically stipulated in the deed of sale
that the “LCT Asiatic shall not be
registered or transferred to Robert Ong
until complete payment.” Thereafter, Ong
obtained possession of the subject vessel
so he could begin deriving economic
benefits therefrom. Ong, likewise,
obtained copies of the unnotarized deed
of sale allegedly to be shown to the banks
to enable him to acquire a loan to
replenish his capital. The aforequoted
condition, however, which was handwritten
on the original deed of sale does not
appear on Ong’s copies. Contrary to the
aforementioned agreements and without
the knowledge of Ang Tay, Ong had his
copies of the deed of sale (on which the
aforementioned prohibition does not
appear) notarized. Ong presented the
notarized deed to the Philippine Coast
Guard which subsequently issued him a
Certificate of Ownership and a Certificate
of Philippine Register over the subject
vessel. Ong also succeeded in having the
name of the vessel changed to LCT
“Orient Hope”.
Using the acquired vessel, Ong
acquired a loan from Cebu International
Finance Corporation to be paid in
installments as evidenced by a
promissory note of even date. As
security for the loan, Ong executed a
chattel mortgage over the subject vessel,
which mortgage was registered with the
Philippine Coast Guard and annotated on
the Certificate of Ownership.
Ong defaulted in the payment of the
monthly installments. Consequently, Cebu
International Finance Corporation sent him
a letter demanding delivery of the
mortgaged vessel for foreclosure or in the
alternative to pay the balance pursuant to
paragraph 11 of the deed of chattel
mortgage. Meanwhile, the two checks paid
by Ong to Ang Tay for the Purchase of the
19
subject vessel bounced. Ang Tay’s search
for the elusive Ong and all attempts to
confer with him proved to be futile. A
subsequent investigation and inquiry with
the Office of the Coast Guard revealed
that the subject vessel was already in the
name of Ong, in violation of the express
undertaking contained in the original deed
of sale. As a result thereof, Ang Tay and
Jacinto Dy filed a civil case for rescission
and replevin with damages against Ong
and his wife.
ISSUE: WON Cebu International Finance
Corporation can validly foreclose the
chattel mortgage
RULING: YES. The prevailing
jurisprudence is that a mortgagee has a
right to rely in good faith on the certificate
of title of the mortgagor to the property
given as security and in the absence of
any sign that might arouse suspicion, has
no obligation to undertake further
investigation.
Hence, even if the mortgagor is not the
rightful owner of or does not have a
valid title to the mortgaged property,
the mortgagee or transferee in good
faith is nonetheless entitled to
protection. Although this rule generally
pertains to real property, particularly
registered land, it may also be applied by
analogy to personal property, in this case
specifically, since shipowners are,
likewise, required by law to register their
vessels with the Philippine Coast Guard.
The chattel mortgage constituted on a
vessel by the buyer who was able to
register the vessel in his name despite the
agreement with the seller that the vessel
would not be so registered until after full
payment of the price which do not appear
in the buyer’s copy of the deed of sale is
VALID, for the mortgagee has the right to
rely in good faith on the certificate of
registration.
ACME SHOE, RUBBER & PLASTIC
CORP. vs COURT OF APPEALS
G.R. No. 103576, 22 August 1996
Q: What is the issue in the case?
A: Would it be valid and effective to have a
clause in a chattel mortgage that purports
to likewise extend its coverage to
obligations yet to be contracted or
incurred?
Q: What obligations does a chattel
mortgage cover?
A: While a pledge, real estate mortgage,
or antichresis may exceptionally secure
after-incurred obligations so long as these
future debts are accurately described, a
chattel mortgage, however, can only cover
obligations existing at the time the
mortgage is constituted.
Q: When does a security arise?
A: the security itself, however, does not
come into existence or arise until after a
chattel mortgage agreement covering the
newly contracted debt is executed either
by concluding a fresh chattel mortgage or
by amending the old contract conformably
with the form prescribed by the Chattel
Mortgage Law.
Q: what does refusal on the part of the
borrower to execute the agreement so
as to cover the after-incurred obligation
constitute?
A: an act of default on the part of the
borrower of the financing agreement
whereon the promise is written but, of
course, the remedy of foreclosure can only
cover the debts extant at the time of
constitution and during the life of the
chattel mortgage sought to be foreclosed.
Q: how much is the obligation specified
in the chattel mortgage in this case?
A: the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of
Section 3 of the Chattel Mortgage Law,
the payment of the obligation
20
automatically rendered the chattel
mortgage void or terminated. (Belgian
Catholic Missionaries, Inc., v. Magallanes
Press, Inc., Et. Al.) The significance of the
ruling to the instant problem would be that
since the 1978 chattel mortgage had
ceased to exist coincidentally with the full
payment of the P3,000,000.00 loan, there
no longer was any chattel mortgage that
could cover the new loans that were
concluded thereafter.
A chattel mortgage, as hereinbefore so
intimated, must comply substantially with
the form prescribed by the Chattel
Mortgage Law itself.
Q: What does Section 5 of the Chattel
Mortgage Law require?
A: One of the requisites, under Section 5
thereof, is an affidavit of good faith.
The statute has provided that the parties
to the contract must execute an oath
makes it obvious that the debt referred to
in the law is a current, not an obligation
that is yet merely contemplated.
CALTEX vs IAC
176 SCRA 741
Q: What are the issues in this case?
A:
a.) Whether or not the mere filing
of a collection suit for the
recovery of the debt secured
by real estate mortgage
constitutes waiver of the other
remedy of foreclosure;
b.) Whether or not the filing of the
complaint for recovery of the
amount of indebtedness and
the subsequent extrajudicial
foreclosure of the deed of first
mortgage constitutes splitting
of a single cause of action.
Q: How much is Manzana’s
indebtedness?
A: On the basis of the first condition
enumerated in the Deed of First Mortgage,
CALTEX submits that Manzana’s
indebtedness of P361,218.66 was
secured up to the extent of P120,000.00
only
Q: Did Manzana secure a continuing
credit line with Caltex with each
transaction resulting in a separate
obligation?
A: Yes. The SC affirms the RTC’s ruling
with respect to the liability of Manzana to
CALTEX in the amount of P233,218.66
(P353,218.66 less P120,000.00) with
interest thereon at 12% per annum from
August 17, 1970, plus 20% thereof as
attorney’s fees. The evidence on record,
both testimonial and documentary, clearly
support such amount of indebtedness.
Q: Can a remedy of foreclosure be
secured consequently with a filing a
collection suit for recovery of money?
A; No. The mere act of filing a collection
suit for the recovery of a debt secured by
a mortgage constitutes waiver of the other
remedy of foreclosure.
a rule that would authorize the plaintiff to
bring a personal action against the debtor
and simultaneously or successively
another action against the mortgaged
property, would result not only in
multiplicity of suits so offensive to justice
(Soriano v. Enriques, 24 Phil. 584) and
obnoxious to law and equity (Osorio v.
San Agustin, 25 Phil. 404)
Q: Can the collection suit before the
trial court be considered as deficiency
of judgment?
A: No. The collection suit filed before the
trial court cannot be considered as a
deficiency judgment because a deficiency
judgment has been defined as one for the
balance of the indebtedness after applying
the proceeds of the sale of the mortgaged
property to such indebtedness and is
necessarily filed after the foreclosure
proceedings.
It is significant to note that the judgment
rendered by the trial court was for the full
amount of the indebtedness and the case
was filed prior to the foreclosure
proceedings.
In general, a deficiency judgment is in the
nature of an ordinary money judgment,
may constitute a cause of action and is
barred by the statute of limitations
applicable to ordinary judgment (59 C.J.S.
1497).
21
MANILA TRADING AND SUPPLY CO. vs
CO KIM AND SO TEK
71 Phil 448
Q: What is the issue in this case?
A: Is attachment by the plaintiff of the truck
in question, equivalent to a proceeding in
foreclosure of the mortgage thereon, and,
therefore, Act No. 4122 should be applied
in their favor?
Q: Are attachments incident to ordinary
actions the same as foreclosure of a
chattel mortgage?
A: No. Attachments incident to an ordinary
action and foreclosure of a chattel
mortgage are different, alternative
remedies.
The rule is now settled that a mortgage
creditor may elect to waive his security
and bring, instead, an ordinary action to
recover the indebtedness with the right to
execute a judgment thereon on all the
properties of the debtor, including the
subject-matter of the mortgage (Manila
Trading & Supply Co. v. Alba, G.R. No.
44965; Manila Trading & Supply Co. v.
Reyes, 62 Phil., 461; Bachrach Motor Co.
v. Millan, 61 Phil., 409), subject to the
qualification that if he fails in the remedy
by him elected, he cannot pursue further
the remedy he has waived
PNB vs MANILA INVESTMENT
CONSTRUCTION, INC.
G.R. No. L-27132, 29 April 1971
Q: Is the sale at public auction of the
personal properties covered by the
chattel mortgage executed in favor of
the Bank illegal?
A: that said personal properties were sold
at a private sale by agreement between
the parties.
We see nothing illegal, immoral or against
public order in such agreement entered
into freely and voluntarily. In line with the
provisions of the substantive law giving
the contracting parties full freedom to
contract provided their agreement is not
contrary to law, morals, good customs,
public order or public policy (Article 1306,
Civil Code of the Philippines)
Q: Is the bank entitled to collect the
balance?
A: Yes. the Court ruled that proceeds of
the sale of the mortgaged personal
properties of the herein appellants
constitute only a pro tanto satisfaction of
the monetary award made by the court
and the appellee Bank is entitled to collect
the balance.
The Court invoked Article 2141 which
states that the New Civil Code on pledge
shall apply to a chattel Mortgage only in
so far as they are not counter to any
provision of the Chattel Mortgage Law,
otherwise the provisions of the latter shall
apply. Here we find that the provisions of
the Chattel Mortgage with regard to the
effects of the foreclosure of a chattel
mortgage are precisely contrary to the
provisions of Article 2115 which were
applied by the trial Court.
BACHRACH MOTOR CO. vs SUMMERS
42 Phil 3
Q: Who is in possession of the subject
of the chattel mortgage if the
mortgagor defaults in the payment of
the secured debt?
A: In commercial usage the property which
is the subject of a chattel mortgage is, as
is well known, almost invariably left in the
possession of the mortgagor, and this
possession' is not disturbed until the
mortgagor defaults in the payment of the
secured debt or otherwise fails to comply
with the conditions of the mortgage.
When default occurs and the creditor
desires to foreclose, he must necessarily
take the mortgaged property into his
hands; and his right to do this is clearly
implied in the provision which gives the
right to sell.
Q: Can a mortgagee cause the sale of a
mortgaged property through a public
auction by a public officer?
A: Yes. Says the statute: "The mortgagee
may, after thirty days from the time of
condition broken, cause the mortgaged
property, or any part thereof, to be sold at
public auction by a public officer at a
public place in the municipality where the
22
mortgagor resides," etc. (Sec. 14, Act No.
1508.) As will be seen, this provision
supposes that the creditor has possession
of the mortgaged property, for the power
to sell imports a power to make delivery of
the thing sold to the purchaser; and
without actual possession delivery would
be impossible. The right of the mortgagee
to have possession after condition broken
must therefore be taken to be
unquestionable; and to this effect is the
great weight of American authority.
Where, however, the debtor refuses to
yield up the property, the creditor must
institute an action, either to effect a judicial
foreclosure directly, or to secure
possession as a preliminary to the sale
contemplated in the provision above
quoted.
It will be observed that the law places the
responsibility of conducting the sale upon
"a public officer;" and it might be supposed
that an officer, such as the sheriff, can
seize the property where the creditor could
not.
This suggestion is, we think, without force,
as it is manifest that the sheriff or other
officer proceeding under the authority of
the language already quoted from section
14 of the Chattel Mortgage Law, becomes
pro hac vice the mere agent of the
creditor.
obligation according to the terms of the
contract.
A visit to any recorder's office in a
common-law State will supply abundant
proof that chattel mortgages are
commonly drawn in the form of a straight
sale, to which a clause of defeasance is
added, declaring that in case the debt is
paid or other obligation performed the
contract will be void.
The contract in fact merely imposes on the
mortgaged property a subsidiary
obligation by which it is bound for the debt
or other principal obligation of the
mortgagor.
But whatever conclusion may be drawn in
the premises with respect to the true
nature of a chattel mortgage, the result
must in this case be the same; for whether
the mortgagee becomes the real owner of
the mortgaged property as some suppose
or acquires only certain rights therein, it is
nonetheless clear that he has after default
the right of possession; though it cannot
be admitted that he may take the law into
his own hands and wrest the property
violently from the possession of the
mortgagor.

Q: how can a creditor recover property

from a debtor in default?
A: where the right is disputed, the creditor
must proceed along the usual channels by
action in court. Whether the sheriff, upon
being indemnified by the creditor, could
safely proceed to take the property from
the debtor, is a point upon which we
express no opinion.

Q: What kind of contract is a chattel

mortgage?
A: Chattel mortgage is a contract which
purports to be, and in form is, a sale of
personal property, intended as security for
the payment of a debt, or the performance
of some other obligation specified therein,
upon the condition subsequent that such
sale shall be void upon payment of the
debt or performance of the specified

23
 University of Santo Tomas
Faculty of Civil Law

___________________________________________________________________

Consolidated Questions and Answers on

ANTHICHRESIS
__________________________________________________________________

In Partial Fulfillment of the Requirements for the course

Credit Transactions

Submitted by:

2F- Group 2
Dadia, Hanna
Galasinao, Paul Matthew
Garcia, Alexandra Maureen
Penaflor, Paula Andrea
Santiago, Ranie Rafael
Santos, Keano Lewis
Superio, Edgar Jr.

Submitted to:
Atty. Irvin Joseph M. Fabella
 CREDIT TRANSACTIONS
Art. 2132. By the contract of antichresis the
creditor acquires the right to receive the
fruits of an immovable of his debtor, with the
obligation to apply them to the payment of
the interest, if owing, and thereafter to the
principal of his credit. (1881)
Q: What is a contract of antichresis?
A: A contract of antichresis is defined as a contract
whereby a debtor transfers to his creditor the
possession of his immovable from which he is to
receive the fruits, provided that these fruits are
imputed to the debt until such is paid in full.
It involves an express agreement in between two
parties wherein a creditor will have possession of the
debtor’s real property given as security, that such
creditor will apply the fruits of the property to the
interest owed by the debtor, if any then to the
principal amount, that creditor retains enjoyment of
such property until the debtor has totally paid what
he owes, and should the obligation be duly, then the
contract is automatically extinguished proceeding
from the accessory character of the agreement.
Q: What are the characteristics of a contract
of antichresis?
A: An antichresis contract is characterized as:
1
1. Accessory - because it secures the
performance of the principal obligation;
2. Formal - because it must be in a specified
form to be valid;
3. Nominate - because it is given by the Civil
Code a specific name;
4. Consensual - because the Civil Code does
not require the immovable to be delivered to
the creditor;
5. Unilateral - because all obligations are
imposed on the creditor;
6. Onerous - because it is the consideration of
the loan or principal being secured that the
debtor granted the antichresis.
Q: Who are the parties to the contract of
antichresis?
A: The parties to the contract are the debtor and the
creditor. However, third persons who are not
parties to the principal obligation may secure such
by pledging or mortgaging their own property.
Q: What are the essential requisites of the
contract of antichresis?
A: The contract of antichresis must contain all the
essential requisites of a contract such that:
 ANTICHRESIS

1. Consent of the contracting parties; the freedom to stipulate otherwise. The reduction of
the amount of fruits available to the creditor does
• meeting of the offer and acceptance
not vary the nature of the contract
upon the thing and the cause which
are to constitute the contract (Art.
1319 of the NCC)
Q: What are the obligations of the creditor?
• must be given by parties with
A: What are the obligations of the creditor?
capacity to give consent

1. The obligation to apply the fruits of the

2. Object certain which is the subject
immovable to interest, if owing, and
matter of the contract; and
thereafter, to the principal (Art. 2132.)
3. Cause of the obligation which is
2. The obligation to pay taxes and charges upon
established. (Art. 1318.)
the estate (unless there is a stipulation to the
Note: Unlike a pledge, an antichresis is not contrary) (Art. 2135.);
a real contract. Hence, delivery of the
3. The obligation to bear the expenses
property to the creditor is not required for
necessary for the preservation and repair of
the perfection of the contract.
the estate (Art 2135.);

4. The obligation to return the immovable after

Q: Is the delivery of property essential? debt is totally paid. (Art. 2136.)

A: It is required that immovable property be
delivered by the debtor to the creditor. However,
such delivery is required only in order that the
creditor may receive the fruits and not that the
contract shall be binding.
5. The obligation to account to the debtor for
the fruits thereof less the expenses incurred
(Enriquez v. PNB, 55 Phil 414)

Q: Is the obligation to pay interest essential?

A: No. The obligation to pay interest is not of the

Q: What are the rights of the creditor to the
essence of the contract of antichresis, any more than
fruits?
it is indispensable in a contract of loan.
A: Antichresis normally covers all the fruits of the
encumbered property, but the law gives the parties

2
 CREDIT TRANSACTIONS

Q: What are the distinctions between Perfected by mere Object must be

consent. However, delivered
antichresis and real mortgage?
delivery erect to pledgee Note:
or third is required only Section 12 of the
A: The distinctions are the following: to allow creditor to PPSA provides
receive the fruits and the means by which a
income. security interest may
ANTICHRESIS REAL MORTGAGE be
debtor usually retains perfected.
immovable property is
possession of the
delivered to the creditor Principal and interest Principal and interest
property
creditor acquires only must be specified in need not be specified
creditor does not have writing. Otherwise, the in writing. Oral
the right to receive the
any right to receive contract is void (Art. evidence may be
fruits of the property →
the fruits, but creates 2134) allowed to prove the
does not produce a real
real right over the same
right (unless registered
property enforceable
in the Registry
against the world Note:
Property)
creditor, unless there is
Under the PPSA, a
a stipulation to the the creditor has no
security agreement
contrary, is obliged to obligation to pay the
pay the taxes and taxes and charges
charges upon the estate upon the estate
Q: May the creditor acquire ownership of
(Art. 2135.)
the creditor given the property by prescription?
the creditor has no
possession of the
obligation to receive
property shall apply the A: No. Prescription as a mode of acquiring
the fruits and to apply
fruits thereof to the
the value thereof to ownership is not available to the creditor because his
payment of interest, if
the payment of the
owing, and thereafter to
obligation possession of the property is not in the concept of an
the principal of the
credit owner but that of a mere holder during the existence
of the contract.
both involves real property

Q: What are the distinctions between

antichresis and pledge? Illustrative Case: Diego vs. Fernando, G.R.
No. L-15128, 25 August 1960
A: The distinctions are the following:

ANTICHRESIS PLEDGE Facts:

Object is immovable Object is personal

On May 26, 1950, the defendant Segundo Fernando
property property
executed a deed of mortgage in favor of plaintiff
Cecilio Diego over two parcels of land registered in
his name, to secure a loan of P2,000, without

3
 ANTICHRESIS
interest, payable within four years from the date of
the mortgage. After the execution, possession of the
mortgaged properties was turned over.
When debtor-mortgagor Fernando failed to pay the
loan after four years, the creditor-mortgagee Diego
made several demands upon him for payment,
which were unheeded, thus the filing of action for
foreclosure of mortgage.
Defendant Fernando’s defense was that the true
transaction between him and plaintiff was one of
antichresis and not of mortgage; and that as
plaintiff had allegedly received a total of 120 cavans
of palay from the properties given as security,
which, at the rate of P10 a cavan, represented a
value of P5,200, his debt had already been paid,
with plaintiff still owing him a refund of some
P2,720.00.
The Court below, however, found that there was
nothing in the deed of mortgage to show that it was
not a true contract of mortgage, and that the fact
that possession of the mortgaged properties were
turned over to the mortgagee did not alter the
transaction; that the parties must have intended
that the mortgagee would collect the fruits of the
mortgaged properties as interest on his loan, which
agreement is not uncommon; and that the evidence
showed that plaintiff had already received 55
cavans of palay from the properties during the
period of his possession. Whereupon, judgment was
rendered for plaintiff Diego in the amount of
P2,000, the loan he gave the defendant, with legal
interest from the filing of the action until full
payment, plus P500 as attorney’s fees and the costs;
and in case of default in payment, for the
4
foreclosure of the mortgage. Hence, this appeal.
Issue:
Whether or not the contract between the parties is
one of mortgage or of antichresis.
Ruling:
It is one of mortgage.
Appellant, while admitting that the contract shows a
deed of mortgage, contends that the admitted fact
that the loan was without interest, coupled with the
transfer of the possession of the properties
mortgaged to the mortgagee, reveals that the true
transaction between him and appellee was one of
antichresis. However, it is not an essential requisite
of a mortgage that possession of the mortgaged
premises be retained by the mortgagor. To be
antichresis, it must be expressly agreed between
creditor and debtor that the former, having been
given possession of the properties given as security,
is to apply their fruits to the payment of the interest,
if owing, and thereafter to the principal of his credit;
so that if a contract of loan with security does not
stipulate the payment of interest but provides for the
delivery to the creditor by the debtor of the property
given as security, in order that the latter may gather
its fruits, without stating that said fruits are to be
applied to the payment of interest, if any, and
afterwards that of the principal, the contract is a
mortgage and not antichresis. The court below,
therefore, did not err in holding that the contract is
 CREDIT TRANSACTIONS
a true mortgage and not an antichresis.
The above conclusion does not mean,
however, that appellee, having received the
fruits of the properties mortgaged, will be
allowed to appropriate them for himself and
not be required to account for them to the
appellant. The contract of mortgage clearly
provides that the loan of P2,000 was
"without interest within four (4) years from
date of this instrument"; and there being no
evidence to show that the parties had
intended to supersede such stipulation when
the mortgaged properties were turned over
to the Diego by another allowing the latter to
collect, the fruits thereof as interest on the
loan, the trial court is not authorized to infer
from this that the parties had verbally
modified their written agreement into giving
appellee the right to receive the fruits of the
mortgaged properties as interests.
The true position of appellee herein under
his contract with appellant is a "mortgage in
possession"; that is, "one who has lawfully
acquired actual or constructive possession of
the premises mortgaged to him, standing
upon his rights as mortgagee and not
claiming under another title, for the purpose
of enforcing his security upon such property
or making its income help to pay his debt". As
such mortgagee in possession, his rights and
obligations are similar to those of an
antichretic creditor.
In the present case, the parties having
agreed that the loan was to be without
5
interest, and Fernando not having expressly
waived his right to the fruits of the properties
mortgaged during the time they were in
Diego’s possession, the latter, like an
antichretic creditor, must account for the
value of the fruits received by him, and
deduct it from the loan obtained by
appellant. According to the findings of the
trial court, appellee had received a net share
of 55 cavans of palay out of the mortgaged
properties up to the time he filed the present
action; at the rate of P9.00 per cavan (a rate
admitted by the parties), the total value of the
fruits received by appellee is P495.00.
Deducting this amount from the loan of
P2,000 received by appellant from appellee,
the former has only P1,505.00 left to pay the
latter.
Wherefore, the judgment of the court below
is modified in the sense that the amount of
appellee’s principal recovery is reduced to
P1,505, with an obligation on the part of
appellee to render an accounting of all the
fruits received by him from the properties in
question from the time of the filing of this
action until full payment, or in case of
appellant’s failure to pay, until foreclosure of
the mortgage thereon, the value of which
fruits shall be deducted from the total
amount of his recovery.
 ANTICHRESIS
Art. 2133. The actual market value of the
fruits at the time of the application thereof to
the interest and principal shall be the
measure of such application. (n)
Q: What is the measure to be used in the
application of payment to the interest and
principal?
A: The fruits of the immovable that is the object of
the antichresis must be appraised at their actual
market value at the time of the application.
Art. 2134. The amount of the principal and of
the interest shall be specified in writing;
otherwise, the contract of antichresis shall
be void. (n)
Q: What is the form of the contract of
antichresis?
A: The law requires that a contract of antichresis be
in the form of writing in order that it may be valid
and not only to affect third persons. Even if the
antichresis is void, the principal obligation,
however, is still valid
6
Art. 2135. The creditor, unless there is a
stipulation to the contrary, is obliged to pay
the taxes and charges upon the estate.
He is also bound to bear the expenses
necessary for its preservation and repair.
The sums spent for the purposes stated in
this article shall be deducted from the fruits.
(1882)
Q: What are the obligations of an antichretic
creditor?
A: An antichretic creditor carry two obligations:
1. Payment of taxes and charges upon the
estate - the creditor is obliged, unless there
is a stipulation to the contrary, to pay the
taxes and charges upon the estate. If he does
not pay the taxes, he is by law required to pay
indemnity for damages to the debtor. Where
the debtor has paid for the taxes on the
property which the creditor should have
paid, the amount is to be applied to the
payment of the debt, and the debtor is
entitled to the return of the property free
from all encumbrances if he, in effect, by
advancing the taxes, had already discharged
the debt; and
2. Application of the fruits of the estate -
After receiving the fruits, the creditor is to
apply to the interest, if owing, and thereafter
 CREDIT TRANSACTIONS
to the principal in accordance with the
provisions of Article 2133 or 2138. Hence, it
is the duty of the creditor to render an
account of the fruits to the debtor, and the
corresponding right of the latter to apply the
said fruits to the debt.
The sums spent by the creditor in fulfillment of the
obligations under the article shall be charged against
the fruits of the property.
Art. 2136. The debtor cannot reacquire the
enjoyment of the immovable without first
having totally paid what he owes the creditor.
But the latter, in order to exempt himself
from the obligations imposed upon him by
the preceding article, may always compel the
debtor to enter again upon the enjoyment of
the property, except when there is a
stipulation to the contrary. (1883)
Q: What is the right of the Antichrectic
Debtor to Reacquire enjoyment of property?
A: The property delivered stands as a security for the
payment of the obligation of the debtor in
antichresis. Hence, the debtor cannot demand its
return until the debt is totally paid. However, if the
creditor does not want to pay the taxes and incur the
expenses necessary for the preservation and repair
of the property, he may compel the debtor to
7
reacquire the enjoyment of the same except when
there is a contrary stipulation.
Illustrative Case: Nadal vs. Court of Appeals,
G.R. No L-46623, 04 March 1994
Facts:
Concepcion Nadal and her sister Benigna mortgaged
their land to spouses Cosme Nadua and Simona
Nabayra in 1930, which was later assigned to
Salvador Ureta. In 1940, Ureta brought the sisters to
a notary and had them execute separate documents,
duly notarized, entitled "Escritura De Compra-
Venta con Pacto de Retro" in favor of him. The
documents were registered with the Register of
Deeds of Roxas City sixteen years later in 1956.
The Nadal sisters informed Ureta of their intention
to redeem the property, but UretaUreta informed
the group that he would agree to have the land
redeemed but he should also be paid for the
improvements that he had theretofore introduced on
the property. He likewise refused to accept their
payment, claiming that it might be bogus and . On 18
September 1956, Benigna's heirs and her sister,
Concepcion Nadal, filed a complaint for recovery of
possession and ownership of the land.
After the trial on the merits, the court declared the
contracts of pacto de retro as null and void on the
ground of fraud, misrepresentation, and deceit. The
defendant, Salvador Ureta, was ordered to pay the
 ANTICHRESIS
plaintiffs the sum of P7,125.00 to which they were
entitled as owners with right to possession of the
land, as the possession of the defendant was in bad
faith from the year 1943 when he refused repeatedly
the redemption after repeated demands. Ureta
appealed to the Court of Appeals, which upheld, with
modification, the decision of the lower court,
declaring the true contract between the parties to be
one of mortgage, and ordered Ureta to pay the
plaintiffs the sum of Seven Thousand and Seventy-
Six pesos and Sixty-Three centavos (P7,076.63) as
the unpaid balance of the mortgage loan with legal
interest from November 7, 1941.
Ureta filed a motion for reconsideration. On 08 July
1977, the appellate court, on a 3-2 vote, reversed and
set aside its decision and declared Ureta to be the
true and lawful owner of the land in question.
ISSUE:
Whether or not the agreements made by the parties
was one of "mortgage in possession"
Ruling:
NO. It never was disputed that prior to the transfer
of the mortgage to herein private respondent, the
property was merely mortgaged to spouses
Cosme Nadua and Simona Nabayra who, by the
terms of the agreement, enjoyed the possession of
the property. The mortgage right was thereafter
assigned to private respondent. There was no effort
8
to document that transaction until much later when
the Nadal sisters were prevailed upon by private
respondent.
The fact that private respondent has been in
possession of the property is not all that
consequential on the true import of the parties'
agreement. A "mortgage in possession," otherwise
termed an "antichresis," was a practice prevailing
even at that time. It entailed the lawful acquisition
by the mortgagee of the possession, actually or
constructively, of the premises mortgaged, with the
creditor standing upon his rights merely as
mortgagee, not as owner, for the purpose of
enforcing his security upon such property and
allowing its income to pay for the debt. In such
agreement, the mortgagee would be obligated to
account for the fruits received from the mortgaged
property deductible from the total amount due the
mortgagee from the mortgagor, including, in this
particular case, the value of the improvements
introduced by the mortgagee in possession over
which the herein petitioners expressed willingness
to likewise reimburse.
WHEREFORE, the Court of Appeals' Resolution,
dated 08 July 1977, is hereby REVERSED and SET
ASIDE and its Decision of 29 November 1976 is
REINSTATED and AFFIRMED, with the
MODIFICATION that private respondent shall
render an accounting of the fruits of the property
from the time of the filing of the complaint below,
from which fruits shall be deducted the value of the
improvements introduced by private respondent.
Private respondent shall thereupon deliver the value
 CREDIT TRANSACTIONS
of the fruits of the property to petitioners less the
amount of their indebtedness.
Art. 2137. The creditor does not acquire the
ownership of the real estate for non-payment
of the debt within the period agreed upon.
Every stipulation to the contrary shall be
void. But the creditor may petition the court
for the payment of the debt or the sale of the
real property. In this case, the Rules of Court
on the foreclosure of mortgages shall apply.
(1884a)
Q: What are the remedies of the creditor in
case of nonpayment of debt?
A: The creditor have the following remedies:
If the debt is not paid, it is clear enough that
the creditor does not acquire ownership of
the real estate since what was transferred is
not the ownership but merely the right to
receive its fruits.
A stipulation authorizing the antichretic
creditor to appropriate the property upon the
nonpayment of the debt within the period
agreed upon is void
Remedy of the creditor:
9
1. To bring an action for specific
performance
2. To petition for the sale of the real
property as in a foreclosure of
mortgages under Rule 68 of the Rules
of Court. The parties, however may
agree on extrajudicial foreclosure in
the same manner as they are allowed
in contracts of mortgage.
Q: What is Pactum Commisorium?
A: Pactum commissorium is a stipulation whereby
the thing pledged or mortgaged or subject of
antichresis shall automatically become the property
of the creditor in the event of nonpayment of the
debt within the term fixed. Such stipulation is null
and void. (NCC, Art. 2085). This is what is
contemplated under Paragraph 1 of Article 2137.
Q: Is Pactum Commisorium prohibited?
A: Yes. The only right accorded by the law to the
creditor is the enjoyment of the fruits of the
property, the value of which will be applied for the
payment of the obligations of the debtor in the
following order-interest, first and thereafter the
principal, which arrangement is more for the benefit
of the creditor. If the parties have agreed that the
immovable shall become the property of the creditor
in case of nonpayment of the debtor's obligation at
 ANTICHRESIS
the stipulated time,said agreement is pactum
commissorium and is void (Art. 2088).
Q: Is there an exception to the prohibition on
Pactum Commisorium?
A: Yes, but this is only applicable to pledge. Under
Article 2112, If at the first auction, the thing is not
sold, there will be another setting for the second
auction following the same formalities. If there is
still no sale effected, the pledgee is now allowed to
appropriate the thing pledge. The act
appropriation ipso jure transfers ownership of the
thing to the pledgee.
Art. 2138. The contracting parties may
stipulate that the interest upon the debt be
compensated with the fruits of the property
which is the object of the antichresis,
provided that if the value of the fruits should
exceed the amount of interest allowed by the
laws against usury, the excess shall be
applied to the principal. (1885a)
Q: Is the interest rate on the loan to which
the antichresis was executed subject to
Usury Law?
A: No, the interest rate on loan or forbearance of
money is no longer subject to any ceiling prescribed
under the Usury Law.
Art. 2139. The last paragraph of Article 2085,
and Articles 2089 to 2091 are applicable to
this contract. (1886a)
Q: What is the significance of the last
paragraph of Article 2085, and how do
Articles 2089 to 2091 relate to the contract
in question?
A: Since an antichresis is constituted so that the
creditor can receive the fruits and apply them to the
of payment of interest and principal, an antichresis
secures an obligation to pay a sum of money.
Illustrative Case: Macapinlac vs. Repide,
G.R. No. 18574, 20 September 1992
Facts:
On and prior to August 22, 1916, plaintiff Jose
Macapinlac was the owner of the Hacienda Dolores,
a property located in the municipality of Porac,
Pampanga, and assessed upon the tax books at
P288,000, but having an actual value of no less than
P800,00, encumbered, however, with certain debts
and charges. This property had been registered
under Act No. 496, as amended, and upon May 13,
1916, a Torrens certificate of title was issued.
On August 22, 1916, the plaintiff bought an
automobile and its accessories from the Bachrach
Garage & Taxicab Company of Manila, later
10
 CREDIT TRANSACTIONS

organized under the name of Bacharch Motor and that the balance due was less than one-half of
Company, evinced by fourteen promissory notes the sum of P12,960.
executed by the plaintiff payable to Bachrach,
Afterwards, Repide tried procuring the certificate of
amounting in all to the sum of P12,960. Each of
title to be transferred to his own name. The Court of
these notes was drawn in the amount of P1,000,
First Instance of Pampanga was of the opinion that
except the last two which together amounted to
the conveyance to Bachrach was a straight contract
P960. On September 1, 1916, eleven of these notes
of sale with pacto de retro; and inasmuch as it
were discounted by Bachrach, through its manager
appeared that the ownership had then consolidated
E. M. Bachrach, at the Philippine National Bank. The
in the purchaser, he directed the register of deeds of
other three notes, amounting to P2,277.70,
Pampanga to register the property in the name of
remained in Bachrach’s hands and were
Francisco Gutierrez Repide and to issue to him a new
subsequently paid in full by the plaintiff.
certificate of transfer, which was accordingly done.
Along with the delivery of said notes, as a security or Thus, the complaint was instituted. It appears from
guaranty for the payment of said notes, plaintiff the complaint that, at the time of the filing of this
executed what on its face purports to be a deed of complaint, the defendant Repide was in actual
sale, with privilege of repurchase. This transfer possession of the property in question, and that he
comprises all the property covered by Torrens had in effect been enjoying possession since august
certificate No. 427 (which includes the Hacienda 24, 1917, to the alleged prejudice of the plaintiff in
Dolores), subjects to the encumbrances noted the sum of no less than P200,000 per annum.
thereon; and the conveyance to which reference is
now made was itself extended on the back of said
certificate. In this conveyance E. M. Bachrach is Issues:
named as transferee, instead of the alleged real
creditor, the Bachrach Garage & Taxicab Company. 1. Whether the agreement was a contract of
sale with pacto de retro or a mortgage agreement
On November 8, 1917, Francisco Gutierrez Repide
acquired, for the sum of P5,000, all the rights of E. 2. Whether Repide’s title is already
M. Bachrach in the property which had been thus indefeasible due to prescription
conveyed to the later; and at this time Francisco
3. Whether Repide’s rights on the property is
Gutierrez Repide was well aware that the transfer to
the same as under a contract of antichresis
Bachrach had been made by the plaintiff for the
purpose of securing a debt owing to the Bachrach
Company, and that part of said debt has been paid
Ruling:

11
 ANTICHRESIS

1. It is a mortgage agreement. The first and its face was only intended to be a security for the
most obvious proposition to be laid down is that payment of a debt, and thus to be a mortgage,
inasmuch as said conveyance is alleged to have although the parties deliberately and knowingly
been executed as security for a debt owing by the executed the instrument in its existing form, and
plaintiff to the Bachrach Company, it follows without any allegations of fraud, mistake, or
that in equity said conveyance must be treated as accident in its mode of execution.”
a mere security or substantially as a mortgage.
In the present case the rights of the immediate
This conclusion is fully supported by the decision
grantee (E. M. Bachrach) passed by transfer for
in Cuyugan vs. Santos (34 Phil., 100), where this
a valuable consideration to Francisco Gutierrez
court held that a conveyance in the form of a
Repide and this transfer had been effected before
contract of sale with pacto de retro will be treated
the action in this case was instituted. But is
as a ere mortgage, if really executed as security
obvious that this circumstance cannot be any
for a debt, and that this fact can be shown by oral
obstacle to the enforcement of any rights that the
evidence apart from the instrument of
plaintiff may have had as against Bachrach (or
conveyance, a doctrine which has been followed
the Bachrach Company) since it is alleged that at
in the later cases of Villa vs. Santiago (38 Phil.,
the time Repide acquired the interest of
157), and Cuyugan vs. Santos (39 Phil., 970).
Bachrach, he was fully aware of the nature of the
According to the case of Cuyugan vs. Santos, transaction between Bachrach and the plaintiff
“Any conveyance of land absolute on its face, and knew that part of the debt secured by the
without anything in its terms to indicate that it is conveyance of August 22, 1916, had been paid.
otherwise than an absolute conveyance, and
In other words, having acquired the interest of
without any accompanying written defeasance,
Bachrach in the Hacienda Dolores, with
contract of repurchase, or other agreement, may,
knowledge that the contract of August 22, 1916,
in equity, by means of extrinsic and parol
has been executed as security for a debt,
evidence, be shown to be in a reality a mortgage
Francisco Gutierrez Repide — or his estate, now
as between the original parties, and as against all
that Repide is a dead — must be understood to
those deriving title from or under the grantee,
stand towards the present plaintiff in exactly the
who are not bona fide purchasers for value and
same position that would have been occupied by
without notice… The general doctrine is fully
Bachrach, if the transfer to Repide had never
established, and certainly prevails in a great
been effected.
majority of the states, that the granter and his
representatives are always allowed in equity to
show, by parol evidence, that a deed absolute on

12
 CREDIT TRANSACTIONS
2. NO, prescription has yet to set in. It
must be borne in mind that the equitable
doctrine which has been so fully stated above, to
the effect that any conveyance intended as
security for a debt will be held in effect to be a
mortgage, whether so actually expressed in the
instrument or not, operates regardless of the
form of the agreement chosen by the contracting
parties as the repository of their will. Further,
the circumstance that the land has been
judicially registered under the Torrens system
does not change or affect civil rights and
liabilities with respect thereto except as
expressly provided in the Land Registration Act;
and as between the immediate parties to any
contract affecting such lands their rights will
generally be determined by the same rules of law
that are applicable to unregistered land. A
judicial decree of registration admittedly has the
effect of binding the land and quieting the title
thereto, to the extent and with the exceptions
stated in section 38 of the Land Registration Act.
But an ordinary transfer of land, effected in any
of the ways allowed by law, even when followed
by registration and that issuance of a new
certificate, as contemplated in sections 50 to 55,
inclusive, of the Land Registration Act, has a
different character.
Under section 38 of Act No. 496, any person
deprived of land by a decree of registration
procured by fraud is limited to the period of one
year after the entry of the decree within which to
13
file a petition for review, and even this remedy is
unavailable if any innocent purchaser for value
has acquired the property; while under section
55, if a subsequent transfer is infected with fraud
or the title is procured by any fraudulent means
to be registered in the name of the transferee, the
injured party may pursue all his legal and
equitable remedies against the party, or parties,
to such fraud, saving the rights of any innocent
holder of the title for value. This means of course
that the person thus defrauded may bring any
appropriate action to be relieved within the
ordinary period of limitation applicable in other
cases of fraud, or within the four-year period
prescribed in subsection 4, of section 43 of the
Code of Civil Procedure.
Applying said provision to the present case, it
must follow that the cause of action to annul the
registration of this property in the name of
Francisco Gutierrez Repide did not prescribe at
one year, as the trial judge erroneously
supposed, and the plaintiff's cause of action
upon this branch of the case had not in fact been
barred at all when the present action was begun.
3. YES. By reference to the appropriate
provisions of the Civil Code (arts. 1881-1884), in
the chapter dealing with antichresis, it will be at
once seen that while non-payment of the debt
does not vest the ownership of the property in
the creditor, nevertheless the debtor cannot
recover the enjoyment of the property without
 ANTICHRESIS

first paying in full what he owes to his creditor.

At the same time, however, the creditor is under
obligation to apply the fruits derived from the
estate in satisfaction, first, of the interest on the
debt, if any, and, secondly, to the payment of the
principal. From this is necessarily deduced the
obligation of the creditor to account to the debtor
for said fruits and the corresponding right of the
debtor to have the same applied in satisfaction of
the mortgage debt.

From the complaint it appears that, even before

acquiring the interest of Bachrach in the
Hacienda Dolores, Repide had taken over from
the Archbishop of Manila a mortgage on the
property in favor of said Archbishop, paying
therefor the sum of P35,000; and we infer from
the complaint that Repide had probably
discharged other liens on the property either
before or after he acquired the interest of
Bachrach. If so, his executrix will be entitled to
charge the plaintiff with the amount paid to free
the property from such liens, and to retain
possession until all valid claims against the
estate are satisfied, in obedience to the maxim
that he who seeks equity must do equity.

14
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
Concurrence and Preference
of Credit
Submitted by: Danish Samantha C. Santos
& Sofia Marichel B. Corilla
Q: What is Concurrence of Credit?
A: Implies the possession by two or more
creditors of equal rights or privileges over
the same property or all the property of a
debtor.
Q: What is the Preference of Credit?
A: It is a right held by a creditor to be
preferred in the payment of his claim above
others out of the debtor’s assets.
- It is a method adopted to determine
and specify the order in which
credits should be paid in the final
distribution of the proceeds of the
insolvent assets.
- It is a right to a first preference in the
discharge of the funds of the
judgment debtor.
Q: What are the 4 features of
Concurrence and Preference of Credits?
A: The features of concurrence and
preference of credits are:
1. The liens and mortgages with
respect to specific movable and
immovable property have been
increased.
2. The proposed Civil Code and the
Insolvency Law have been brought
into harmony.
3. Preferred claims as to the free
property of the insolvent have also
been augmented.
1
4. The order of preference, laid down in
Articles 1926 and 1927 of the
present Civil Code, among claims
with respect to specific personal and
real property has been abolished,
except that taxes must first be
satisfied.
Q: What are the Nature and Effect of
Preference of Credit?
A: The nature and effects of preference of
credit are:
1. A preference is an exception to
the general rule. For this reason,
the law as to preferences is strictly
construed.
2. Preference doesn’t create an
interest in property. It simply
creates a right of one creditor to
be paid first the proceeds of the
sale of property as against another
creditor.
3. The law doesn’t give the creditor
who has a preference a right to take
the property or sell it as against
another creditor. It is not a question
who takes or sells, it is one of the
application of the proceeds after the
sale—of payment of the debt
4. The right of preference is one
which can be made only by being
asserted and maintained. If the
right claim is not asserted or
maintained, it is lost.
5. Where a creditor released his
levy, leaving the property in
possession of the debtor, thereby
indicating that he didn’t intend to
press his claim further as to that
specific property, after that act, his
claim to preference, if one had been
asserted by him, could not exist
because he had ceased to contest.
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
Q: When is the rule of preference
Applicable?
A: It applies only where two or more
creditors have separate and distinct claims
against the same debtor who has an
insufficient property.
- It is also applicable when the
debtor is insolvent—having more
liabilities than his assets.
Q: When does the preferential right of
credit attain significance?
A: The preferential right of credit attains
significance only after the properties of the
debtor have been inventoried and
liquidated, and the claims held by his
various creditors have been established.
There is a need for:
1. Inventory,
1. Liquidation, and
2. Establishment of claims of other
creditors.
Q: What does the phrase “credits must
be due” mean?
A: The Title on “Concurrence and
Preference of Credits” refers to credits
which are already due. That is why it opens
with the mention of the “fulfillment of his
obligations” in Article 2236 which does not
take place except when the obligations are
already demandable.
- The law on the concurrence of
credits cannot be applied in a mere
action to collect from the obligor.
There must be an insolvency or
other type of in rem proceeding of
the obligor's estate.
ARTICLE 2236
2
Art. 2236. The debtor is liable with all his
property, present and future, for the
fulfillment of his obligations, subject to
the exemptions provided by law.
Q: What is the general rule for Art 2236?
A: The debtor is liable with all his property,
present and future, for the fulfillment of his
obligations.
The creditors have the right to pursue the
property, in possession of the debtor to
satisfy their claim.
They are given the right to exercise all the
rights and bring all the actions of the latter
for the same purpose,save those which are
inherent in his person; and impugn the acts
which the debtor may have done to defraud
them.
Q: What are the exceptions to the
General Rule?
A: The properties that are exempt from
attachments are:
1. Present property - With respect to
present property of the debtor,
exemptions are established in the
following:
A. Family Home
Art. 152. The family home, constituted
jointly by the husband and the wife or by
an unmarried head of a family, is the
dwelling house where they and their
family reside, and the land on which it is
situated.
Art. 153. The family home is deemed
constituted on a house and lot from the
time it is occupied as a family residence.
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
From the time of its constitution and so by law, the following property, and no
long as any of its beneficiaries actually other, shall be exempt from execution:
reside therein, the family home A. The judgment obligor's family home
continues to be such and is exempt from as provided by law, or the
execution, forced sale or attachment except homestead in which he resides, and
as hereinafter provided and to the extent of land necessarily used in connection
the value allowed by law. therewith;
B. Ordinary tools and implements
Art. 154. The beneficiaries of a family home personally used by him in his
are: The husband and wife, or an unmarried trade, employment, or livelihood;
person who is the head of a family; Their C. Three horses, or three cows, or
parents, ascendants, descendants, three carabaos, or other beasts of
brothers and sisters, whether the burden such as the judgment
relationship be legitimate or illegitimate, obligor may select necessarily used
who are living in the family home and by him in his ordinary occupation;
who depend upon the head of the family D. His necessary clothing and
for legal support. articles for ordinary personal use,
excluding jewelry;
Art. 155. The family home shall be E. Household furniture and
exempt from execution, forced sale or utensils necessary for
attachment except: housekeeping, and used for that
1. For nonpayment of taxes; purpose by the judgment obligor
2. For debts incurred prior to the and his family, such as the
constitution of the family home; judgment obligor may select, of a
3. For debts secured by mortgages on value not exceeding one hundred
the premises before or after such thousand pesos;
constitution; and F. Provisions for individual or family
4. For debts due to laborers, use sufficient for four months;
mechanics, architects, builders, G. The professional libraries and
materialmen and others who equipment of judges, lawyers,
have rendered service or physicians, pharmacists,
furnished material for the dentists, engineers, surveyors,
construction of the building. clergymen, teachers, and other
professionals, not exceeding three
B. Support hundred thousand pesos in value;
Art. 205. The right to receive support under H. One fishing boat and accessories
this Title as well as any money or property not exceeding the total value of
obtained as such support shall not be one hundred thousand pesos
levied upon on attachment or execution. owned by a fisherman and by the
lawful use of which he earns his
C. Exception under Rules of Court livelihood;
Sec. 13. Property exempt from execution - I. So much of the salaries, wages,
Except as otherwise expressly provided or earnings of the judgment
obligor of his personal services

3
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
within the four months preceding
the levy as are necessary for the
support of his family;
J. Lettered gravestones;
K. Monies benefits, privileges, or
annuities accruing or in any manner
growing out of any life insurance.
L. The right to receive legal support,
or money or property obtained as
such support,
M. Properties specially exempt by law.
But no article or species of property
mentioned in this section shall be exempt
from execution issued upon a judgment
recovered for its price or upon a judgment of
foreclosure of a mortgage thereon.
2. Future property — those related to
the insolvency of a debtor.
- With respect to his future property, a
debtor who obtains a discharge from
his debts on account of his
insolvency, is not liable for the
unsatisfied claims of his creditors
with said property subject to certain
exceptions expressly provided by
law.
3. Property in custodia legis and of
public dominion - Property under
legal custody and those owned by
municipal corporations necessary for
governmental purposes have been
held exempt from attachment or
execution.
ARTICLE 2237
Art. 2237. Insolvency shall be governed
by special laws insofar as they are not
inconsistent with this Code.
4
Q: What law would prevail in case of
conflict on concurrence and preference
of credit?
A: The Civil Code prevails in case of conflict
with special laws on insolvency, unless
otherwise provided in the latter.
- Insolvency law will come into play
after the rules of preference and
concurrence of credits.
Q: What is the aim of liquidation of
proceeding?
A: Insolvency proceedings, as well as
liquidation proceedings have only one aim –
to conserve all the remaining assets of the
insolvent/ liquidate person/ corporation for
distribution to the creditors, after payment of
taxes.
ARTICLE 2238
Art. 2238. So long as the conjugal
partnership or absolute community
subsists, its property shall not be
among the assets to be taken
possession of by the assignee for the
payment of the insolvent debtor's
obligations, except insofar as the latter
have redounded to the benefit of the
family. If it is the husband who is
insolvent, the administration of the
conjugal partnership of absolute
community may, by order of the court, be
transferred to the wife or to a third person
other than the assignee.
Q: What is the exemption to the general
rule which states that the assets pass to
the assignee in case of insolvency?
A: The assets of the conjugal partnership or
the absolute community do not pass to the
assignee in insolvency elected by the
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
creditors or appointed by the court as they
do not belong to the individual spouses, but
a distinct entity: the partnership or the
community.
Q: What are the requisites for the
exemption to apply?
A: The requisites for the exemption to apply
are:
1. the partnership or community subsists;
2. the obligations of the insolvent spouse
have not redounded to the benefit of the
family.
NOTE: The insolvency of the husband does
not have the effect of dissolving the
conjugal partnership or the absolute
community.
ARTICLE 2239
ARTICLE 2240
Art. 2240. Property held by the
insolvent debtor as a trustee of an
express or implied trust, shall be
excluded from the insolvency
proceedings.
Q: What is the rule involving property
held in trust?
A: The trustee is not strictly speaking the
owner of the trust property although he has
legal title thereto. Hence, property held in
trust by the insolvent debtor should be
excluded from the insolvency proceedings.
Q: What are the general categories of
debt?

Art. 2239. If there is property, other than
that mentioned in the preceding article,
owned by two or more persons, one of
whom is the insolvent debtor, his
undivided share or interest therein shall
be among the assets to be taken
possession of by the assignee for the
payment of the insolvent debtor's
obligations.
A: The general categories of debt are:
1. Special preferred credits listed in Articles
2241 and 2242
2. Ordinary preferred credits listed in Article
2244
3. Common credits under Article 2245
ARTICLE 2241

Q: What are the rules involving Art. 2241. With reference to specific
undivided share or interest of a movable property of the debtor, the
co-owner? following claims or liens shall be
preferred:
1. Duties, taxes and fees due
A: If there is a co-ownership and of the
thereon to the State or any
co-owners is the insolvent debtor, his subdivision thereof;
undivided share or interest in the 2. Claims arising from
property shall be possessed by the misappropriation, breach of trust,
assignee in insolvency proceedings or malfeasance by public
because it is part of his assets officials committed in the
- The shares of the other performance of their duties, on
the movables, money or
co-owners of course cannot be
securities obtained by them;
taken possession of by the assignee 3. Claims for the unpaid price of
movables sold, on said movables,

5
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
so long as they are in the
possession of the debtor, up to
the value of the same; and if the
movable has been resold by the
debtor and the price is still unpaid,
the lien may be enforced on the
price; this right is not lost by the
immobilization of the thing by
destination, provided it has not
lost its form, substance and
identity; neither is the right lost by
the sale of the thing together
with other property for a lump
sum, when the price thereof
can be determined proportionally;
4. Credits guaranteed with
pledge so long as the things
pledged are in the hands of
the creditor, or those guaranteed
by a chattel mortgage, upon the
things pledged or mortgaged, up
to the value thereof;
5. Credits for the making, repair,
safekeeping or preservation of
personal property, on
movable thus made, repaired,
kept or possessed;
6. Claims for laborers' wages,
on the goods manufactured or
the work done;
7. For expenses of salvage, upon the
goods salvaged;
8. Credits between the landlord and
the tenant, arising from
contract of tenancy on shares,
on the share of each in the fruits
or harvest;
9. Credits for transportation, upon
the goods carried, for the price
of the contract and incidental
expenses, until their delivery and
for thirty days thereafter;
10. Credits for lodging and supplies
usually furnished to travelers by
hotelkeepers, on the movables
belonging to the guest as long as
such movables are in the hotel,
but not for money loaned to the
guests;
11. Credits for seeds and expenses
for cultivation and harvest
advanced to the debtor, upon the
fruits harvested;
12. Credits for rent for one year,
upon the personal property of the
lessee existing on the immovable
leased and on the fruits of the
same, but not on money or
instruments of credit;
13. Claims in favor of the depositor
if the depositary has wrongfully
sold the thing deposited, upon
the price of the sale.
In the foregoing cases, if the
a movables to which the lien or preference
attaches have been wrongfully taken,
the creditor may demand them from
any possessor, within thirty days from
the unlawful seizure.
Q: What is the rule provided in Article
221?
the
A: Articles 2241 don’t give the order of
preference or priority of payment. They
merely enumerate the credits which enjoy
preference with respect to specific
movables or immovables. With respect to
the same specific movable or immovable,
creditors with the exception of the State,
the merely concur. There is no preference
among them, there is only concurrence.
Q: What is the rule regarding the
wrongful taking of movables to which
lien attaches?
A: The lessor of property under a contract
which stipulates that the permanent
improvements made by the lessee on the
leased premises shall belong to the lessor,
has a better right to such improvements
than the manufacturer thereof who sold the
same on credit to the lessee and has not
been paid, where said improvements were
6
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
delivered and installed in the leased
premises, because ownership thereof was
transferred to the lessee upon delivery and
to the lessor, upon installation. Payment of
the purchase price is not essential to the
transfer of ownership as long as the thing
sold has been delivered.
ARTICLE 2242
Article 2242. With reference to specific
immovable property and real rights of the
debtor, the following claims, mortgages
and liens shall be preferred, and shall
constitute an encumbrance on the
immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property
sold, upon the immovable sold;
(3) Claims of laborers, masons,
mechanics and other workmen, as well as
of architects, engineers and contractors,
engaged in the construction,
reconstruction or repair of buildings,
canals or other works, upon said
buildings, canals or other works;
(4) Claims of furnishers of materials used
in the construction, reconstruction, or
repair of buildings, canals or other works,
upon said buildings, canals or other
works;
(5) Mortgage credits recorded in the
Registry of Property, upon the real estate
mortgaged;
(6) Expenses for the preservation or
improvement of real property when the
law authorizes reimbursement, upon the
immovable preserved or improved;
(7) Credits annotated in the Registry of
Property, in virtue of a judicial order, by
attachments or executions, upon the
7
property affected, and only as to later
credits;
(8) Claims of co-heirs for warranty in the
partition of an immovable among them,
upon the real property thus divided;
(9) Claims of donors or real property for
pecuniary charges or other conditions
imposed upon the donee, upon the
immovable donated;
(10) Credits of insurers, upon the property
insured, for the insurance premium for
two years.
Q: What is the general rule for this
article?
A: This article merely enumerates the
preferred claims on specific
immovables. Therefore, the enumeration is
not an order of preference.
Q: What are the preferred liens as
enumerated in Article 2242?
A: The following liens are:
1. Taxes due upon the land or
building
- Only taxes enjoy absolute
preference. In case the value of the
property is not sufficient to cover the
taxes, the price thereof shall all
pertain to the State.
2. For the unpaid price of real
property sold, upon the
immovable sold;
- This article makes no distinction
between registered and unregistered
vendor’s lien. The unpaid price of
real property sold, mortgage credits
(5), in order to be given preference,
should be recorded in the Registry of
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
Property.Unpaid sellers of machinery
immobilized by destination (thus,
becoming realty) have a lien
superior to the mortgagee of said
machinery.
3. Claims of laborers, masons,
mechanics and other workmen, as
well as of architects, engineers
and contractors, engaged in the
construction, reconstruction or
repair of buildings, canals or
other works, upon said buildings,
canals or other works;
- The claim of a builder of a building
is not a mere preferred credit but is a
lien provided in Article 2242,
paragraph 3, which is superior to the
claim of the owners of the land.
Illustrative case:
Republic vs. Peralta
(G.R. No. L-56568)
FACTS: The various creditors submitted
claims for separation pay by USTC
workers, inspection fees, customs duties,
and taxes payable by the BIR in the
voluntary insolvency proceedings started
in May 1977 by private respondent
Quality Tobacco Corporation. In his
request for the reversal of the questioned
Orders, the Solicitor General contends
that Article 110 of the Labor Code is
inapplicable since it refers to "wages," a
term that, in his view, does not contain
the separation pay that the Unions claim.
Issue: Whether or not the claims of the
employees be given preference over
those of the BIR and BOC?
Ruling: Article 110 of the Labor Code
does not intend to give employees a claim
to a lien for unpaid pay against any
specific property or all properties owned
8
by their employer.
Therefore, except to the extent that such
claims for unpaid wages are already
covered by Article 2241, number 6, it
does not at all belong into the category of
specially preferred claims established
under Articles 2241 and 2242 of the Civil
Code. "claims for laborers' wages, on the
goods manufactured or the work done;"
or, according to Article 2242, number 3:
"claims of laborers and other workers
engaged in the construction,
reconstruction, or repair of buildings,
canals, and other works, upon said
buildings, canals, or other works."
Unpaid wages claims would fall under the
definition of ordinary preferred credits
under Article 2244 to the extent that they
are not covered by Articles 2241, number
6, and 2242, number 3.
4. Claims of furnishers of materials
used in the construction,
reconstruction, or repair of
buildings, canals or other works,
upon said buildings, canals or
other works;
- Refractory Credit is primarily an
indebtedness incurred in the repair
or reconstruction of something
previously made, such repair or
construction being necessary by the
deterioration or destruction of the
thing as it formerly existed.
5. Mortgage credits recorded in the
Registry of Property, upon the real
estate mortgaged;
- A mortgage over a real property
which is duly re- corded, has
preferential right over the proceeds
of the foreclosure sale as against an
unrecorded vendor's lien over the
same property. The vendor has no
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
pro rate share. expenses from preservation or
-A mortgage directly and improvement of a real property enjoy
immediately subjects the property preference on the property
upon which it is imposed, whoever concerned. However, there must be
the possessor may be, to the a law authorizing the
fulfillment of the obligation for whose reimbursement.
security it was constituted.
-A recorded mortgage credit is a 7. Expenses for the preservation or
special preferred credit. improvement of real property
-The preference given to workers by when the law authorizes
Article 110 of the Labor code, when reimbursement, upon the
not falling within Article 2241 (6) and immovable preserved or
Article 2242 (3) and not attached to improved;
any specific property - Creditors with credits inscribed on
-Between an unrecorded sale of a the title of a property like
house of a prior date and a recorded attachments, levy on execution,
enjoy preferential rights. The
mortgage of the same property of a preference is only with respect to
later date,the former is preferred to subsequent credits and not with prior
the latter for the reason that, if the credits.
original owner had parted with his - The priority rule applies to credits
ownership of the thing sold, then he annotated in the Registry of Property
no longer had the ownership and -As to the credits mentioned in No
free disposal of the thing so as to be 7of Article 2242, there is preference
able to mortgage it. among the attachments or
- While a pacto de retro sale of a executions according to the order of
house which is in reality an equitable the time they were levied upon the
mortgage is valid as between the property.
parties, it cannot prevail over a -The pro rata rule in Article 2249
subsequent recorded mortgage over does not apply, otherwise, the result
the same priority. Preference of would be absurd. The preference of
mortgage credits is determined by a credit annotated by an attachment
the priority of registration of the or execution could be defeated by
mortgages, following the maxim simply obtaining a writ of attachment
“prior tempore potior jure.” which or execution, no matter how much
means he who is earlier in time is later.
stronger in law.
8. Claims of co-heirs for warranty in
6. Expenses for the preservation or the partition of an immovable
improvement of real property among them, upon the real
when the law authorizes property thus divided;
reimbursement, upon the - For better understanding: The law
immovable preserved or on succession provides:
improved;
- Creditors whose credits arose from

9
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
Art. 1092. After the partition has
been made, the co-heirs shall be
reciprocally bound to warrant the title
to, and the quality of, each property
adjudicated.
Art. 1093. The reciprocal obligation
of war- ranty referred to in the
preceding article shall be pro-
portionate to the respective
hereditary shares of the co-heirs; but
if any one of them should be
insolvent, the other co-heirs shall be
liable for his part in the same
proportion, deducting the part
corresponding to the one who
should be indemnified. Those who
pay for the insolvent heir shall have
a right of action against him for
reimbursement, should his financial
condition improve.
The action to enforce warranty must
be brought within ten (10) years from
the date the action accrues (Art.
1094).
9. Claims of donors or real property
for pecuniary charges or other
conditions imposed upon the
donee, upon the immovable
donated;
- The donation must be a donation of
real property where for its validity the
formalities required by Article 749
must be complied with. The donor
must have imposed some burdens
on the donee which the latter must
comply with. If the pecuniary
charges are not satisfied per stipula-
tion, the charges shall enjoy
preference on the immovable
donated.
10
10. Credits of insurers, upon the
property insured, for the
insurance premium for two years.
- If the insured has failed to pay the
premium for an insurance, the
insurer has preference on the
premium due but only the equivalent
of the premiums for two (2) years.
ARTICLE 2243
The claims or credits enumerated in the
two preceding articles shall be considered
as mortgages or pledges of real or
personal property, or liens within the
purview of legal provisions governing
insolvency. Taxes mentioned in No. 1,
article 2241, and No. 1, article 2242, shall
first be satisfied.
Q: What is the rule provided in Article
2243?
A: The Article harmonized the CiVil Code
and the Insolvency Law on the matter of
concurrence and preference of credits .
Thus, the different claims and liens in
Articles 2241 and 2242 are considered
mortgages or pledges of real and personal
property respectively within the purview of
the Insolvency Law.
Q: What is the nature of the claim in
Article 2241 and 2242 as provided in
Article 2243?
A: The Article harmonized the CiVil Code
and the Insolvency Law on the matter of
concurrence and preference of credits .
Thus, the different claims and liens in
Articles 2241 and 2242 are considered
mortgages or pledges of real and personal
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
property respectively within the purview of
the Insolvency Law.
Hence, the provisions on pledge and
mortgage are also applicable:
● In case of the insolvency of the
debtor, such claims or credits shall
be considered as liens within the
purview of legal provisions
governing insolvency.
● Hence, they are not included in the
insolvent debtor’s assets.
● Articles 2241 and 2242 only find
application when there is a
concurrence of credits, i.e. when the
same specific property of the debtor
is subjected to the claims of several
creditors and the value of such
property is insufficient to pay in full
all the creditors.
In such a situation, the question of
preference will arise, there will be a need to
determine which of the creditors will be paid
ahead of the others.
● Due process will dictate that this
statutory lien should then only be
enforced in the context of some kind
of a proceeding where the claims of
all the preferred creditors may be
bindingly adjudicated, such as
insolvency or estate proceedings.
● A preferred creditor’s third-party
claim to the proceeds of a
foreclosure sale by the mortgagee is
not he proceeding contemplated by
law for the enforcement of
preferences under Articles 2241 and
2242 unless the claimant is
11
enforcing a credit for taxes that
enjoy absolute priority.
ARTICLE 2244
​With reference to other property, real and
personal, of the debtor, the following
claims or credits shall be preferred in the
order named:
(1) Proper funeral expenses for the
debtor, or children under his or her
parental authority who have no property
of their own, when approved by the court;
(2) Credits for services rendered the
insolvent by employees, laborers, or
household helpers for one year preceding
the commencement of the proceedings in
insolvency;
(3) Expenses during the last illness of the
debtor or of his or her spouse and
children under his or her parental
authority, if they have no property of their
own;
(4) Compensation due the laborers or
their dependents under laws providing for
indemnity for damages in cases of labor
accident, or illness resulting from the
nature of the employment;
(5) Credits and advancements made to
the debtor for support of himself or
herself, and family, during the last year
preceding the insolvency;
(6) Support during the insolvency
proceedings, and for three months
thereafter;
(7) Fines and civil indemnification arising
from a criminal offense;
(8) Legal expenses, and expenses
incurred in the administration of the
insolvent's estate for the common interest
of the creditors, when properly authorized
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
and approved by the court;
(9) Taxes and assessments due the
national government, other than those
mentioned in articles 2241, No. 1, and
2242, No. 1;
(10) Taxes and assessments due any
province, other than those referred to in
articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city
or municipality, other than those indicated
in articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal
injuries caused by a quasi-delict;
(13) Gifts due to public and private
institutions of charity or beneficence;
(14) Credits which, without special
privilege, appear in (a) a public
instrument; or (b) in a final judgment, if
they have been the subject of litigation.
These credits shall have preference
among themselves in the order of priority
of the dates of the instruments and of the
judgments, respectively.
Q: What does Article 2244 speak of?
A: The present Article 2244 speaks of the
properties of the debtor (whether real or
personal) which are considered "free
assets," that is, free from mortgages,
pledges and liens. In other words, they are
unencumbered properties and not
determinate but which may be the subject of
future claims or cases. More, there is an
order of priority (in the order named) in the
present Article which is not present in the
two previous Articles.
In contrast with Articles 2241 and 2242,
Article 2244 creates no liens on determinate
property which follow such property. What
12
Article 2244 creates are simpJy rights in
favor of certain creditors to have the cash
and other assets of the insolvent applied in
a certain sequence or order of priority.
Illustrative case:
Barayoga vs. Asset Privatization Trust
(473 SCRA 690)
FACTS: When the management made
their rehiring contingent on their
resignation from the union but yet
employed outside help under the pakyaw
system, the union launched a labor
complaint against BISUDECO-Phisucor
for unfair labor practice and illegal
dismissal. The plantation was now sold to
Peafrancia Sugar Mill (Pensumil) by the
APT Board of Trustees. But the board
also authorized the payment of separation
benefits to BISUDECO employees in the
event that the organization was privatized.
ISSUE: Whether or not ordinary preferred
credits is the first choice over special
preferred credit?
RULING: APT's lien on BISUDECO's
mortgaged assets is a special preferred
lien that must be satisfied before the
claims of the employees because it is a
mortgage credit. A mortgage credit is a
special preferred credit that has priority
with respect to a particular/determinate
property of a debtor under Art. 2241 and
2242 of the Civil Code. The employees
preference, however, is a regular
preferred credit under Labor Code Article
110. Despite being given first priority
under this clause in the order of
preference outlined in Art. 2244 of the
Civil Code, the worker's money claim has
no advantage over special preferred
credits.
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
Q: What is the order of of priority with
respect to insolvent’s “free property”?
A: The following are the order of priority
with respect to insolvent’s “free property”:
1. Specially preferred credits -
Credits which are specially preferred
because they constitute liens take
precedence over ordinary preferred
credits so far as concerns of the
property to which the liens have
attached:
a. If the value of the specific
property involved is greater
than the sum total of tax liens
and other specially preferred
credits, the residual value will
form part of the “free
property” of the insolvent, or
property not impressed with
liens by operation of Articles
2241 and 2242.
b. If the value of the specific
property is less than the
aggregate of the tax liens
and other specially preferred
credits, the unsatisfied
balance of the tax liens and
other such credits are to be
treated as ordinary preferred
credits under Article 2244.
2. Ordinary preferred credits - Only
in respect of the insolvent’s “free
property” is an order of priority
established by Article 2244.
Q: What are the rules for the preference
of claims for unpaid wages and other
monetary claims?
A: The rules are as follows:
13
1. Article 110 of the Labor Code does
not purport to create a lien in favor of
workers or employees for unpaid
wages and other monetary claims
either upon all of the properties or
upon any particular property owned
by their employer.
2. Claims for unpaid wages do not,
therefore, fall at all within the
category of specially preferred
claims established under Articles
2241 and 2242 except to the extent
that such claims for unpaid wages
are already covered by 2241 (6) and
2242 (3).
3. It did not upgrade the workers’ claim
as absolutely preferred credit. It did
not alter Articles 2241 and 2242 so
much that creditors with liens over a
certain property are still given
special preferences over the
proceeds of that property.
4. To the extent that claims for unpaid
wages fall outside the scope of said
provisions, they would come within
the ambit of the category of ordinary
preferred credits under Article 2244.
Q: What does Article 2244 intend to
modify?
A: What it intends to modify is the order of
preference in Article 2244, which relates to
the free property of the insolvent debtor.
Article 110 of the Labor Code has modified
Article 2244 of the Civil Code in two
respects:
1. By removing the one-year limitation
found in Article 2244 (2), and
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
2. By moving up claims for unpaid
wages (and other monetary claims)
of laborers or workers of the
insolvent from second priority to first
priority in the order of preference
established by Article 2244.
Q: Does statutory preference apply to
the government?
A: Article 2244 (No 4a) confers a
preference on credits constituted in the form
of a duly notarized instrument over credits
not so constituted, such preference being
determined in the order of priority of the
respective dates of notarization. It is a
recognized doctrine that the State is always
solvent. The provisions of Article 2244
(14.1) were not intended to apply and do not
apply to obligations of the Republic.
ARTICLE 2245
Credits of any other kind or class, or by
any other right or title not comprised in the
four preceding articles, shall enjoy no
preference.
Q: Do credits not mentioned in the
previous articles enjoy preference?
A: If a credit of any kind is not included in
any of the enumeration in said Articles, it
shall enjoy no preference. Such credits shall
be paid pro rata regardless of their dates of
execution (Art. 2251) . They are referred to
as non-preferred or ordinary credits.
Q: What are the rules in insolvency
proceedings involving banks?
A: The rules are as follows:
1. After a bank is declared insolvent by
the Monetary Board of the CB, a
14
depositor cannot bring a separate
action against it, his remedy being to
intervene in the judicial proceedings
for liquidation instituted by the Board
thru the Solicitor General.
2. The reason is that the execution of
the final judgment rendered in a
separate suit will cause the bank’s
assets to be unduly depleted to the
obvious prejudice of other depositors
and creditors.
3. All claims against the insolvent bank
should be filed in the liquidation
proceedings to obviate the
proliferation of litigations and to
avoid injustice and arbitrariness.
4. However, taking into account
different circumstances and in the
interest of justice, a deviation from
the procedure may be allowed.
Q: Is a final judgment a preferred claim
against the insolvent bank?
A: Bank deposits are considered simple
loans, and as such, are not preferred
credits. Article 2244 (14, b) does not apply
to judgments for the payment of deposits in
an insolvent bank which were obtained after
the declaration of insolvency. A contrary rule
would be productive of injustice – it would
allow depositors to rush to the courts to
secure judgments, where less alert
depositors would be prejudiced.
The effect of the final judgment is only to fix
the amount of the debt, and not give priority
over other depositors and creditors. After its
insolvency, one cannot obtain an advantage
or preference over another by an
attachment, execution or otherwise.
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
ARTICLE 2246
Those credits which enjoy preference with
respect to specific movables, exclude all
others to the extent of the value of the
personal property to which the preference
refers.
ARTICLE 2247
If there are two or more credits with
respect to the same specific movable
property, they shall be satisfied pro rata,
after the payment of duties, taxes and
fees due the State or any subdivision
thereof.
Q: What did Article 2247 abolish?
A: Article 2247 has abolished the ranking of
liens under the old law. If there are two or
more claims or liens over the same specific
personal property, the value of said property
will be divided pro mta by and among the
preferred concurring creditors except that
taxes on the property are paid first.
ARTICLE 2248
Those credits which enjoy preference in
relation to specific real property or real
rights, exclude all others to the extent of
the value of the immovable or real right to
which the preference refers.
Q: What rule does article 2248 stress
about?
A: With the sole exception of the State, the
creditors with respect to the same specific
immovable merely concur; there is no
preference.
15
ARTICLE 2249
If there are two or more credits with
respect to the same specific real property
or real rights, they shall be satisfied pro
rata, after the payment of the taxes and
assessments upon the immovable
property or real right.
Q: Under the old law, what did Article
2249 eliminate?
A: Under the old law, there was an order of
preference among liens over specific
immovable property of the debtor. Article
2249 eliminated the ranking among such
liens or credits.
Q: How are concurring credits satisfied?
A: Concurring credits shall be satisfied by
dividing the property or its value pro rata
among the creditors. How- ever, taxes are
always given first priority just like under
Article 2247.
Q: Why was the order of priority rule
eliminated?
A: Such liens and encumbrances must be
paid pro rata. As to these claims attached to
specific property, it is extremely difficult to
determine a just order of preference among
themselves. Doubtless, the holder of each
lien or encumbrance could give plausible
reasons why his claim should be placed
ahead of the others. But it would seem to be
a fairer course to divide the value of the
property pro rata among the lien-holders"
Q: What is the exception to the pro rata
division?
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
A: The pro rata division rule does not apply
to "credits annotated in the Registry of
Property, in virtue of a judicial order, by
attachments and executions" which are
preferred as to "later credits". In satisfying
several credits_annotated by attachments
or executions, the rule is still preference
according to the priority of the credits in
order of time.
ARTICLE 2250
The excess, if any, after the payment of
the credits which enjoy preference with
respect to specific property, real or
personal, shall be added to the free
property which the debtor may have, for
the payment of the other credits.
Q: What will happen to excess properties
after payment of credits?
A: If after payment of the preferred credits
whether with regard to real or personal
property, there is any resulting excess, the
same shall be added to the "free property"
of the debtor for the payment of other
credits.
As a rule, the debtor in insolvency has more
debts than assets so no excess is given to
him.
ARTICLE 2251
Those credits which do not enjoy any
preference with respect to specific
property, and those which enjoy
preference, as to the amount not paid,
shall be satisfied according to the
following rules:
(1) In the order established in article
2244;
16
(2) Common credits referred to in article
2245 shall be paid pro rata regardless of
dates.
Q: What are the kinds of credits Article
2251 cover?
A: The Article covers two kinds of credits:
1. Those which do not enjoy
preference with respect to
specific property;
- The first are those credits not
mentioned in Articles 2241 and 2242
which enjoy no preference.
2. Those which enjoy preference as
to the amount not paid.
- The second are those credits
though included in the said two (2)
Articles are not fully paid because
the value of the debtor's property to
which the preference refers is less
than the preferred credits.
Both credits shall be satisfied in accordance
with the order of preference as they are
named in Article 2244, meaning those
named first are preferred to those men-
tioned later. Article 2244 refers to the other
properties of the debtor.
Q: What are tiers of order of preference?
A: The tiers are as follows:
1. First-tier - includes only taxes,
duties and feeds due on a specific
movable or immovable property.
2. Second-tier -includes all other
special preferred (non-tax) credits to
be satisfied pari passu and pro rata,
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
out of any residual value of the
specific property to which such other
credits relate.
NOTE: The pro rata rule does not apply to
credits annotated in the Registry of Property
(judicial order, attachments, executions)
which are preferred to “as later credits”. In
satisfying several credits annotated by
attachments or executions, the rule is still
preferred according to the priority of the
credits in the order of time.
Q: How are credits satisfied?
A: Credits are satisfied by:
1. With order of preference - Credits
which do not enjoy any preference
with respect to specific property
because they are not among those
mentioned in 2241 and 2242 and
those while included in said articles
are unpaid because the value of he
property to which the preference
refers is less than the preferred
credit or credits, shall be satisfied in
the order established in 2244 with
reference to the other real and/or
personal property of the debtor.
2. Without any order of preference -
Common credits are those which do
not fall under 2241, 2242 and 2244.
They do not enjoy any preference
(2245) and shall be paid pro rata
regardless of dates.
Cases under Preference and Concurrence
of Credit:
PSB vs Lantin
[G.R. No. L-33929. September 2, 1983]
17
FACTS: a duplex-apartment house
constructed by Candido Ramos for the
spouses Filomeno and Socorro Tabligan.
The construction cost amounted to P32,927.
However, the Tabligan spouses only paid
Ramos P7,139, leaving a balance of
P25,788.50, which Ramos used his own
money to cover and complete the
construction.
On December 16, 1966, February 1, 1967,
and February 28, 1967, the Tabligan
spouses obtained three loans from
petitioner PS (the bank) amounting to
P35,000 for the purpose of constructing the
duplex-apartment. To secure the loans, they
executed three promissory notes and three
deeds of real estate mortgage over the
property involved in this dispute. The bank
registered the deeds of real estate
mortgage with the Register of Deeds of
Manila on December 19, 1966, February 2,
1967, and March 1, 1967, respectively. At
the time of mortgage registration, the
property had no other liens or
encumbrances, as reflected in Transfer
Certificate of Title (TCT) No. 86195.
The bank foreclosed the mortgages, and at
the public auction held on July 23, 1969, the
bank emerged as the highest bidder. On
August 5, 1969, the bank registered the
certificate of sale in its name. Subsequently,
the bank consolidated its ownership, and
TCT No. 101864 was issued by the Register
of Deeds of Manila in the bank's name.
Private respondent Candido Ramos filed an
action against the Tabligan spouses to
collect the unpaid cost of the house,
resulting in Civil Case No. 69228. Ramos
obtained a writ of preliminary attachment,
and a notice of adverse claim was
annotated on the back of TCT No. 86195.
CONCURRENCE AND PREFERENCE OF CREDIT
Written report by: Danish Samantha C. Santos & Sofia Marichel B. Corilla
The court rendered a decision in favor of
Ramos.
A writ of execution was issued but returned
unsatisfied as the Tabligan spouses had no
property to satisfy the judgment. Ramos
then wrote to the bank, requesting the
delivery of his pro-rata share in the value of
the duplex-apartment in accordance with
Civil Code Article 2242. However, the bank
refused, prompting Ramos to file the
present case.
ISSUE: Is Ramos entitled to claim pro-rata
share in the value of the property in
question?
RULING: The Bank, relying on De Barretto
vs Villanueva, argues that it is not the
proceeding contemplated, there must be an
insolvency proceeding other than liquidation
proceedings. The architect's lien did not
acquire the character of a statutory lien
equal to PSB's registered mortgage.
Ramos on the one hand contends that the
proceedings in the trial court can qualify as
a general liquidation of the estate of the
spouses Tabligan because the only existing
property of the spouses is the duplex
apartment.
The fact that the lower court found that
there were no known creditors other than
Ramos and PSB is not conclusive, it will not
bar other creditors in the event they show
up and present their claims against PSB
claiming that they also have preferred liens
against the property involved. The TCT
which was issued in favor of the bank is
supposed to be indefeasible and would
remain constantly unstable and
questionable.
The bank could not have known of any
contractor's lien because, as far as it was
concerned, it financed the entire
construction even if the stated purpose of
the loans was only to complete the
construction. Since the action filed by the
private respondent is not one which can be
considered as equivalent general liquidation
having the same import as an insolvency or
settlement of the decedent's estate
proceeding, the well established principle
must be applied that a purchaser in good
faith and for value takes registered land free
from liens and encumbrances other than
statutory liens and those recorded in the
Certificate of Title.

The proceedings in the court below do not

partake in the nature of insolvency
proceedings or settlement of a decedent's
estate. The action filed by Ramos was only
to collect the unpaid cost of the construction
of the duplex apartment. Insolvency
proceedings and settlement of a decedent's
estate are both proceedings in rem which
are binding against the whole world
regardless of whether or not persons having
interest were notified or not, they are
equally bound.

18
 University of Santo Tomas
Faculty of Civil Law

___________________________________________________________________

The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)

Republic Act No. 10142

__________________________________________________________________

In Partial Fulfillment of the Requirements for the course

Credit Transactions

Submitted by:

2F- Group 6
Ancheta, Pamela Margareth G.
Argana, Carlo Reynaldo II F.
Peña, Therese Diana R.

Submitted to:
Atty. Irvin Joseph M. Fabella
 The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)
Republic Act No. 10142, or the Financial
Rehabilitation and Insolvency Act (FRIA)
FRIA was enacted on July 29, 2009, with the main
purpose of conserving the assets of the insolvent or
liquidated debtor for distribution to creditors and to
ensure that both the debtors and creditors are protected
in the collection of claims.
The law provides that Financial Rehabilitation is the
restoration of the debtor to a condition of successful
operation and solvency if continuance of operation is
economically feasible, and that its creditors can recover
by way of the present value of payments in the
Rehabilitation Plan, more if the debtor continues as a
going concern that if it is immediately liquidated.
Moreover, Insolvency is the financial condition of a
debtor when they are generally unable to pay its or his
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his
assets.
The State Policy of the law provides for the following
purposes of the law:
a. To encourage debtors, both juridical and natural
persons, and their creditors to collectively and
realistically resolve and adjust competing claims
and property rights.
b. To ensure a timely, fair, transparent, effective and
efficient rehabilitation or liquidation of debtors.
c. To ensure or maintain certainly and predictability
in commercial affairs, preserve and maximize the
value of the assets of these debtors, recognize
creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are
similarly situated.
d. When rehabilitation is not feasible, to facilitate a
speedy and orderly liquidation of these debtor's
assets and the settlement of their obligations.
Nature of Proceedings
Per Section 3 of the law, rehabilitation and insolvency
proceedings are done in rem or through summary
proceeding.
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It is an in rem proceeding, because upon publication of
the notice of the commencement of the proceedings in any
newspaper of general circulation in the Philippines,
jurisdiction over all persons affected by the proceedings is
set in place. Here, all parties are bound to the
proceedings.
On the other hand, it is also summary and non-
adversarial consistent with the declared policies of the law
and in accordance with the rules of procedure of the
Supreme Court.
Coverage and Definitions
The law covers all insolvent debtors and creditors.
Debtors
Section 4 defines debtors using an enumeration of
persons or groups that are considered debtors in the
law.
• Sole proprietorship duly registered with the
Department of Trade and Industry (DTI).
• Partnership duly registered with the Securities
and Exchange Commission (SEC).
• Corporation duly organized and existing under
Philippine laws.
• Individual debtor who has become insolvent -- a
natural person who is a resident and citizen of the
Philippines.
Meanwhile, groups of debtors refer to the following
groups:
• Corporations that are financially related to one
another as parent corporations, subsidiaries or
affiliates.
• Partnerships that are owned more than fifty
percent (50%) by the same person.
• Single proprietorships that are owned by the
same person.
Section 5 provides for groups/companies that are
not included in the definition of debtor.
• Bank shall refer to any duly licensed bank or
quasi-bank that is potentially or actually subject
to conservatorship, receivership or liquidation
proceedings under the New Central Bank Act
(Republic Act No. 7653) or successor legislation.
 CREDIT TRANSACTIONS

• Insurance company shall refer to those debtor, and the extent of the involvement
companies that are potentially or actually subject of such partner, director or debtor in the
to insolvency proceedings under the Insurance actual management of the operations of
Code (Presidential Decree No. 1460) or successor the debtor.
legislation; and
Creditors
• Pre-need company shall refer to any corporation
authorized/licensed to sell or offer to sell pre- • Natural or juridical person which has a
need plans. claim against the debtor on or before the
• National and local government agencies or units, commencement date.
except for government financial institutions that o Claim
are not banks or GOCCs. § Demands of whatever nature or
character against the debtor or
In relation to debtors, Section 10 provides for the
its property, whether for money
consequences of fraudulent acts of debtors to
or otherwise, liquidated or
evade liability from their claims.
unliquidated, fixed or
• Debtors mentioned here are individual debtor, contingent, matured or
owner of a sole proprietorship, partners in a unmatured, disputed or
partnership, or directors and officers of a debtor. undisputed
• They shall be liable for double the value of the § (1) All claims of the government,
property sold, embezzled or disposed of or double whether national or local,
the amount of the transaction involved, including taxes, tariffs and
whichever is higher to be recovered for benefit of customs duties; and
the debtor and the creditors, if they, having notice § (2) Claims against directors and
of the commencement of the proceedings, or officers of the debtor arising
having reason to believe that proceedings are from acts done in the discharge
about to be commenced, or in contemplation of of their functions falling within
the proceedings, willfully commit the following the scope of their authority.
acts: § Claims are not limited to (1) and
o Dispose or cause to be disposed of any (2).
property of the debtor other than in the o Commencement Date
ordinary course of business or authorize § Date the court issues the
or approve any transaction in fraud of commencement order for the
creditors or in a manner grossly rehabilitation or liquidation of
disadvantageous to the debtor and/or the debtor's assets
creditors; or § Retroactive to the date of filing of
o Conceal or authorize or approve the the petition
concealment, from the creditors, or
embezzles or misappropriates, any • Kinds of Creditors
property of the debtor. o General unsecured creditor
• The court shall determine the extent of the § Creditor whose claim is neither
liability of these debtors. secured, preferred nor
o In case of partnerships and corporations, subordinated
the court shall consider the amount of the o Secured creditor
shareholding or partnership or equity § Creditor with a secured claim or
interest of such partner, director or claim secured by a lien
officer, the degree of control of such § A lien is a claim on a real or
partner, director or officer over the personal property which entitles
the creditor to resort to the

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 The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)

property for the payment of a

claim/debt

• Creditors Representatives REMEDIES UNDER FRIA

o Persons designated by creditors to vote
or otherwise act on their behalf by filing
notice of such representation with the Q: What are the remedies available for insolvent
court and serving a copy on the debtors and creditors under the FRIA?
rehabilitation receiver or liquidator.

A: The remedies available under the FRIA are:

Consolidation of Assets and Liabilities 1. Suspension of Payments;
Section 7 provides that the assets and liabilities of a 2. Rehabilitation; or
3. Liquidation
debtor may not be commingled or aggregated with the
assets and liabilities of another. However, the exception
to this rule is when the latter is a related enterprise that is
owned and controlled directly or indirectly by the same SUSPENSION OF PAYMENTS
interests.

The following are circumstances wherein consolidation is

allowed:
• Commingling with a related enterprise prior to
the commencement.
• Debtor and related enterprise have common
creditors.
• Related enterprise voluntarily accedes to join the
debtor as party petitioner with the debtor.
• Consolidation is beneficial to all concerned.
Q: What is suspension of payments?
A: It is a remedy where an individual debtor who,
possessing sufficient property to cover all his debts but
foreseeing the impossibility of meeting them when they
respectively fall due, may file a verified petition that he be
declared in the state of suspension of payments by the
court of the province or city in which he has resided for
six (6) months prior to the filing of his petition.

Nothing in Section 7 shall prevent the court from joining An individual debtor submits, for approval by his
other entities affiliated with the debtor as parties. creditors, a proposed agreement, containing propositions
delaying or extending the time of payment of his debts.

Authorization to Exchange Debt for Equity

Section 11 provides that notwithstanding applicable
banking legislation, any bank may acquire and hold an
equity interest or investment in a debtor or its
subsidiaries when conveyed to such bank in satisfaction
of debts pursuant to a Rehabilitation or Liquidation Plan
approved by the court.
The following are conditions to this authorization:
• Ownership of equity interest or investment shall
be subject to the ownership limits applicable to
universal banks for equity investments
• Any equity investment or interest acquired or
held pursuant to this section shall be disposed by
the bank within a period of five (5) years or as
may be prescribed by the Monetary Board.
Q: What are the requisites of a valid petition for
suspension of payments under the FRIA?
A: The requisites for a valid petition fro suspension of
payment under FRIA are:
1. The petitioner is an individual debtor.
2. The debtor has sufficient properties to cover
all his debts (solvent).
3. The debtor foresees the impossibility of
meeting his debts when they respectfully fall
due.
4. The purpose of the petition is to suspend or
delay the payment of debts.

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 CREDIT TRANSACTIONS
Q: What are the effects of Suspension Order?
A: It suspends any pending execution against the
individual debtor, provided properties held as security
by secured creditors shall not be the subject of such
suspension order.
The Order shall lapse when three months shall have
passed without the proposed agreement being accepted
by the creditors or as soon as such agreement is denied.
Q: Who are the creditors exempted from the
Suspension Order?
A: Creditors who are exempt from the effects of a
suspension order:
1. Those creditors having claims for personal labor,
maintenance, expense of last illness and
funeral of the wife or children of the debtor
incurred in the sixty (60) days immediately
prior to the filing of the petition; and
2. Secured creditors.
These creditors who fall under the exception, may
choose not to attend the creditors meeting. However, if
they are aware of this right, but still chooses to attend,
they will be waiving their right.
Q: When is a creditor’s meeting considered as
validly held?
The presence of creditors holding claims amounting to at
least three-fifths (3/5) of the liabilities shall be necessary
for holding a meeting. The commissioner appointed by
the court shall preside over the meeting and the clerk of
court shall act as the secretary thereof, subject to the
following rules:
(a) The clerk shall record the creditors present and
amount of their respective claims;
(b) The commissioner shall examine the written
evidence of the claims. If the creditors present hold at
least three-fifths (3/5) of the liabilities of the individual
debtor, the commissioner shall declare the meeting open
for business;
(c) The creditors and individual debtor shall discuss the
propositions in the proposed agreement and put them to
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a vote;
(d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors voting
unite upon the same proposition; and
(2) that the claims represented by said majority
vote amount to at least three fifths (3/5) of the
total liabilities of the debtor mentioned in the
petition; and
(e) After the result of the voting has been announced, all
protests made against the majority vote shall be drawn
up, and the commissioner and the individual debtor
together with all creditors taking part in the voting shall
sign the affirmed propositions.
No creditor who incurred his credit within ninety (90)
days prior to the filing of the petition shall be entitled to
vote
Q: What is the effect in case of failure of
individual debtor to perform agreement?
A: If the individual debtor fails, wholly or in part, to
perform the agreement decided upon at the meeting of
the creditors, all the rights which the creditors had
against the individual debtor before the agreement shall
revest in them. In such case the individual debtor may be
made subject to the insolvency proceedings in the
manner established by this Act.
REHABILITATION
Q: What is rehabilitation under the FRIA?
A: It refers to the restoration of the debtor to a condition
of successful operation and solvency, if it is shown that:
1. its continuance of operation is economically
feasible and
2. its creditors can recover by way of the present
value of payments projected in the plan more if
the debtor continues as a going concern than if it
is immediately liquidated.
 The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)
Q: Are all corporations in a state of insolvency is
entitled to rehabilitation corporations?
A: This remedy should be denied to corporations whose
insolvency appears to be irreversible and whose sole
purpose is to delay the enforcement of any of the rights
of the creditors, which is rendered obvious by the
following:
a) the absence of a sound and workable
business plan;
b) baseless and unexplained assumptions,
targets and goals;
c) speculative capital infusion or complete
lack thereof for the execution of the
business plan;
d) cash flow cannot sustain daily
operations; and
e) negative net worth and the assets are
near full depreciation or fully
depreciated.
Q: What are the types of rehabilitation
proceeding?
A: There are three types of rehabilitation proceeding:
1. Court-Supervised Rehabilitation
2. Pre-Negotiated Rehabilitation; and
3. Out-of-Court or Informal Restructuring
Agreements or Rehabilitation Plan
Court Supervised Rehabilitation
Q: What are the two kinds of proceedings under
the Court- Supervised Rehabilitation?
A: They are:
1. Voluntary Proceedings; and
2. Involuntary Proceedings.
Q: Who may initiate a voluntary proceeding?
A: Initiated by the debtor when approved by:
1. Sole proprietorship – owner;
2. Partnership – majority of the partners;
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3. Corporation – a majority vote of the board of
directors or trustees and authorized by the vote
of the stockholders representing at least 2/3 of
the outstanding capital stock;
4. Non stock corporation – by the vote of at least
2/3 of the members, in a member’s meeting duly
called for the purpose.
Q: How is a voluntary rehabilitation proceeding
initiated?
A: An insolvent debtor may initiate voluntary
proceedings under this Act by filing a petition for
rehabilitation with the court and on the grounds
hereinafter specifically provided. The petition shall be
verified to establish the insolvency of the debtor and the
viability of its rehabilitation.
Ground: A group of debtors may jointly file a petition for
rehabilitation under this Act when one or more of its
members foresee the impossibility of meeting debts
when they respectively fall due, and the financial distress
would likely adversely affect the financial condition
and/or operations of the other members of the group
and/or the participation of the other members of the
group is essential under the terms and conditions of the
proposed Rehabilitation Plan.
Q: Who may initiate an involuntary
rehabilitation proceeding?
A: Any creditor or group of creditors with a claim of, or
the aggregate of whose claims is, at least P1million or at
least 25% of the subscribed capital stock or partners’
contributions, whichever is higher. (Section 12)
Q: How is an involuntary rehabilitation
proceeding initiated?
A: By filing a petition for rehabilitation with the court if:
(a) there is no genuine issue of fact on law on the
claim/s of the petitioner/s, and that the due and
demandable payments thereon have not been
made for at least sixty (60) days or that the
debtor has failed generally to meet its liabilities
as they fall due; or
(b) a creditor, other than the petitioner/s, has
initiated foreclosure proceedings against the
 CREDIT TRANSACTIONS
debtor that will prevent the debtor from paying
its debts as they become due or will render it
insolvent.
The creditor/s' petition for rehabilitation shall be
verified to establish the substantial likelihood that the
debtor may be rehabilitated.
Q: What is a Commencement Order
A: If the court finds the petition for rehabilitation to be
sufficient in form and substance, it shall, within five (5)
working days from the filing of the petition, issue a
Commencement Order. If, within the same period, the
court finds the petition deficient in form or substance,
the court may, in its discretion, give the petitioner/s a
reasonable period of time within which to amend or
supplement the petition, or to submit such documents as
may be necessary or proper to put the petition in proper
order. In such case, the five (5) working days provided
above for the issuance of the Commencement Order
shall be reckoned from the date of the filing of the
amended or supplemental petition or the submission of
such documents.
Q: What is the effect of a Stay Order?
A: The Stay Order shall:
1. Suspend all actions or proceedings, in court or
otherwise, for the enforcement of claims against
the debtor;
2. Suspend all actions to enforce any judgment,
attachment or other provisional remedies
against the debtor;
3. Prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of
its properties except in the ordinary course of
business; and
4. prohibit the debtor from making any payment of
its liabilities outstanding as of the
commencement date except as may be provided
herein. (Sec. 16)
Pre-Negotiated Rehabilitation
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Q: Who may initiate a pre-negotiated
rehabilitation proceeding?
A: An insolvent debtor, by itself or jointly with any of its
creditors, may file a verified petition. (Section 76)
Q: How is a pre-negotiated rehabilitation
proceeding initiated?
A: File a verified petition with the court for the approval
of a pre-negotiated Rehabilitation Plan which has been
endorsed or approved by creditors holding at least two-
thirds (2/3) of the total liabilities of the debtor,
including:
1. secured creditors holding more than fifty
percent (50%) of the total secured claims of
the debtor; and
2. unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of
the debtor.
Out-of-Court or Informal Restructuring
Agreements or Rehabilitation Plan
Q: How is an Out-of-Court or Informal
Restructuring Agreements and
Rehabilitation Plans recognized under the
FRIA?
A: An out-of-court or informal restructuring
agreement or Rehabilitation Plan that meets the
minimum requirements prescribed in this chapter is
hereby recognized as consistent with the objectives
of this Act.
Q: What are the Minimum Requirements of
Out-of-Court or Informal Restructuring
Agreements and Rehabilitation Plans?
A: The debtor must agree to the out-of- court or
informal restructuring/workout agreement or
Rehabilitation Plan;
(b) It must be approved by creditors representing at
least sixty-seven (67%) of the secured obligations of
the debtor;
 The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)
(c) It must be approved by creditors representing at
least seventy-five percent (75%) of the unsecured
obligations of the debtor; and
(d) It must be approved by creditors holding at least
eighty-five percent (85%) of the total liabilities,
secured and unsecured, of the debtor.
Q: What is a standstill period?
A: A standstill period that may be agreed upon by the
parties pending negotiation and finalization of the out-
of-court or informal restructuring/workout agreement or
Rehabilitation Plan contemplated herein shall be
effective and enforceable not only against the contracting
parties but also against the other creditors.
Q: What are the requisites of a standstill period?
A: The requisites are:
a. such agreement is approved by creditors
representing more than fifty percent (50%) of
the total liabilities of the debtor;
b. notice thereof is publishing in a newspaper of
general circulation in the Philippines once a
week for two (2) consecutive weeks; and
c. the standstill period does not exceed one
hundred twenty (120) days from the date of
effectivity.
The notice must invite creditors to participate in the
negotiation for out-of- court rehabilitation or
restructuring agreement and notify them that said
agreement will be binding on all creditors if the required
majority votes prescribed in Section 84 of this Act are
met. (Section 85)
Q: Upon whom is the Rehabilitation Plan
binding?
A: The Rehabilitation Plan and its provisions shall be
binding upon the debtor and all persons who may be
affected by it, including the creditors, whether or not
such persons have participated in the proceedings or
opposed the Rehabilitation Plan or whether or not their
claims have been scheduled. [Section 69, (a)]
Q: What is the cram-down effect?
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A: A restructuring/workout agreement or Rehabilitation
Plan that is approved pursuant to an informal workout
framework referred to in this chapter shall have the
same legal effect as confirmation of a Plan under Section
69 hereof. (Section 86)
The cram-down refers to the power of the rehabilitation
court to approve and implement a rehabilitation plan
notwithstanding the objection of the majority of
creditors. (BPI v Sarabia)
Conversion
A rehabilitation proceeding can be converted to an
involuntary liquidation proceeding.
This can be done at any time during the pendency of or
after court-supervised or pre-negotiated rehabilitation
proceedings.
Three or more creditors the aggregate of whose claims is
at least either One million pesos (Php1,000,000,00) or
at least twenty-five percent (25% of the subscribed
capital stock or partner’s contributions of the debtor,
whichever is higher, may apply for and seek the
liquidation of an insolvent debtor by filing a petition for
liquidation of the debtor with the court.
By filing a motion to convert the rehabilitation
proceedings into liquidation proceedings. The motion
shall be verified, shall contain or set forth the same
matters required in the preceding paragraph and state
that the movants are seeking the immediate liquidation
of the debtor.
If the petition or motion is sufficient in form and
substance, the court shall issue an Order:
(1) directing the publication of the petition or
motion in a newspaper of general
circulation once a week for two (2)
consecutive weeks; and
(2) directing the debtor and all creditors who
are not the petitioners to file their comment
on the petition or motion within fifteen (15)
days from the date of last publication.
If, after considering the comments filed, the court
determines that the petition or motion is meritorious, it
shall issue the Liquidation Order.
 CREDIT TRANSACTIONS
LIQUIDATION
Q: What is liquidation under the FRIA?
A: Under the FRIA, liquidation is a judicial insolvency
proceeding by which a debtor’s assets are reduced and
converted to cash in order to discharge the claims
against the debtor.
Q: Who is qualified to be liquidator under the
FRIA?
A: A natural person or juridical entity appointed as such
by the court and entrusted with such powers and duties
as set forth in this Act. [Section 2, (w)]
Q: What are the types of liquidation proceedings
under the FRIA?
A:
• Voluntary Liquidation and Involuntary
Liquidation
• Voluntary Liquidation
Voluntary Liquidation
In Voluntary Liquidation, an insolvent debtor may apply
for liquidation by filing a petition for liquidation with the
court. The petition shall be verified, shall establish the
insolvency of the debtor.
• An individual debtor whose properties are not
sufficient to cover his liabilities may file for
voluntary liquidation.
• The debt must exceed P500,000
• It is initiated by filing a verified petition with the
court of the province or city in which he has
resided for 6 months prior to the filing of such
petition.
• The filing of such petition shall be an act of
insolvency.
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• In such petition, the individual debtor must
attach a schedule of debts and liabilities and an
inventory of assets.
Involuntary Liquidation
In Involuntary Liquidation, a group of creditors the
aggregate of whose claims is at least either One million
pesos (Php1,000,000,00) or at least twenty-five percent
(25%) of the subscribed capital stock or partner’s
contributions of the debtor, whichever is higher, may
apply for and seek the liquidation of an insolvent debtor
by filing a petition for liquidation of the debtor with the
court.
• The debt must be at least P500,000.
• It is initiated by filing a verified petition for
liquidation with the court of the province or city in
which the individual debtor resides.
• The petition must allege acts of insolvency by the
debtor. It must allege one of the following:
a. That such person is about to depart or has
departed from the Republic of the Philippines,
with intent to defraud his creditors;
b. That being absent from the Republic of the
Philippines, with intent to defraud his creditors,
he remains absent;
c. That he conceals himself to avoid the service of
legal process for the purpose of hindering or
delaying the liquidation or of defrauding his
creditors;
d. That he conceals, or is removing, any of his
property to avoid its being attached or taken on
legal process;
e. That he has suffered his property to remain
under attachment or legal process for three (3)
days for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
f. That he has confessed or offered to allow
judgment in favor of any creditor or claimant for
 The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)
the purpose of hindering or delaying the
liquidation or of defrauding any creditor or
claimant;
g. That he has willfully suffered judgment to be
taken against him by default for the purpose of
hindering or delaying the liquidation or of
defrauding his creditors;
h. That he has suffered or procured his property to
be taken on legal process with intent to give a
preference to one or more of his creditors and
thereby hinder or delay the liquidation or
defraud any one of his creditors;
i. That he has made any assignment, gift, sale,
conveyance or transfer of his estate, property,
rights or credits with intent to hinder or delay
the liquidation or defraud his creditors;
j. That he has, in contemplation of insolvency,
made any payment, gift, grant, sale, conveyance
or transfer of his estate, property, rights or
credits;
k. That being a merchant or tradesman, he has
generally defaulted in the payment of his current
obligations for a period of thirty (30) days;
l. that for a period of thirty (30) days, he has
failed, after demand, to pay any moneys
deposited with him or received by him in a
fiduciary capacity; and
m. That an execution having been issued against
him on final judgment for money, he shall have
been found to be without sufficient property
subject to execution to satisfy the judgment.
(Sec. 105, FRIA)
Liquidation Order
It is the order that the court issues if it finds the
petition for liquidation meritorious.
For voluntary liquidation, the order is issued without
trial.
On the other hand, in involuntary liquidation, the order
is issued after trial. Upon filing of such creditors’
petition, the court shall issue a show-cause order against
the individual debtor, to explain why he should not be
adjudged an insolvent.
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Upon good cause shown, the court may issue an order
forbidding the individual debtor from making payments
of any of his debts, and transferring any property
belonging to him. If the individual debtor shall default or
if, after trial, the issues are found in favor of petitioning
creditors, the court shall issue the liquidation order.
Contents
The liquidation order shall:
a. Declare the debtor insolvent;
b. Order the liquidation of the debtor and, in the
case of a juridical debtor, declare it as dissolved;
c. Order the sheriff to take possession and control
of all the property of the debtor, except those
that may be exempt from execution;
d. Order the publication of the petition or motion
in a newspaper of general circulation once a
week for two (2) consecutive weeks;
e. Direct payments of any claims and conveyance
of any property due the debtor to the liquidator;
f. Prohibit payments by the debtor and the transfer
of any property by the debtor;
g. Direct all creditors to file their claims with the
liquidator within the period set by the rules of
procedure;
h. Authorize the payment of administrative
expenses as they become due;
i. State that the debtor and creditors who are not
petitioner/s may submit the names of other
nominees to the position of liquidator; and
j. Set the case for hearing for the election and
appointment of the liquidator, which date shall
not be less than thirty (30) days nor more than
forty-five (45) days from the date of the last
publication.
Effects
Upon issuance of the Liquidation Order:
 CREDIT TRANSACTIONS
a. The juridical debtor shall be deemed dissolved
and its corporate or juridical existence
terminated;
b. Legal title to and control of all the assets of the
debtor, except those that may be exempt from
execution, shall be deemed vested in the
liquidator or, pending his election or
appointment, with the court;
c. All contracts of the debtor shall be deemed
terminated and/or breached, unless the
liquidator, within ninety (90) days from the date
of his assumption of office, declares otherwise
and the contracting party agrees;
d. No separate action for the collection of an
unsecured claim shall be allowed. Such actions
already pending will be transferred to the
Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes the
claim, the court shall allow, hear, and resolve
such contest except when the case is already on
appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment
therein for a claim against the debtor shall be
filed and allowed in court; and
e. No foreclosure proceeding shall be allowed for a
period of one hundred eighty (180) days.
Liquidator
A liquidator is an officer of the court with the principal
duty of preserving and maximizing the value and
recovering the assets of the debtor, with the end of
liquidating them and discharging to the extent possible
all the claims against the debtor.
Powers, Duties, and Responsibilities
1. To sue and recover all the assets, debts and
claims, belonging or due to the debtor;
2. To take possession of all the property of the
debtor except property exempt by law from
execution;
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3. To sell, with the approval of the court, any
property of the debtor which has come into his
possession or control;
4. To redeem all mortgages and pledges, and to
satisfy any judgment which may be an
encumbrance on any property sold by him;
5. To settle all accounts between the debtor and his
creditors, subject to the approval of the court;
6. To recover any property or its value,
fraudulently conveyed by the debtor;
7. To recommend to the court the creation of a
creditors' committee which will assist him in the
discharge of his functions, and which shall have
powers as the court deems just, reasonable and
necessary; and
8. Upon approval of the court, to engage such
professionals as may be necessary and
reasonable to assist him in the discharge of his
duties.
Determination of Claims
Within twenty days from his assumption into office, the
liquidator shall prepare a preliminary registry of claims.
The liquidator shall make the registry available for
public inspection and provide publication notice to
creditors, individual debtors, owner/s of the sole
proprietorship-debtor, the partners of the partnership-
debtor and shareholders or members of the corporation-
debtor, on where and when they may inspect it.
Right of Set-off
If the debtor and a creditor are mutually debtor and
creditor of each other, one debt shall be set off against
the other, and only the balance, if any, shall be allowed
in the liquidation proceedings.
Opposition or Challenge to Claims
Within thirty days from the expiration of the period for
filing of applications for recognition of claims, creditors,
 The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)

individual debtors, owner/s of the sole proprietorship- With court’s approval, unencumbered property of
debtor, partners of the partnership-debtor and Debtor may also be conveyed to a creditor in satisfaction
shareholders or members of the corporation-debtor and of his claim or part thereof.
other interested parties may submit a challenge to a
claim or claims to the court, serving a certified copy on
the liquidator and the creditor holding the challenged
claim.

Finality of the Claims

Upon the expiration of the thirty-day period, the

rehabilitation receiver shall submit to the court the
registry of claims containing the undisputed claims that
have not been subject to challenge. Such claims shall
become final upon the filing of the register and may be
subsequently set aside only on grounds of fraud,
accident, mistake or inexcusable neglect.

Liquidation Plan

Within three months from his assumption into office, the

Liquidator shall submit a Liquidation Plan to the court.
The Liquidation Plan shall, as a minimum, enumerate all
the assets of the debtor, all the claims against the debtor
and a schedule of liquidation of the assets and payment
of the claims. (Sec. 129, FRIA)

Sales of Assets in Liquidation

The liquidator may sell the unencumbered assets of the

debtor and convert the same into money. The sale shall
be made at public auction.

However, a private sale may be allowed with the

approval of the court if:

1. The goods to be sold are of a perishable

nature, or are liable to quickly deteriorate in
value, or are disproportionately expensive to
keep or maintain; or

2. The private sale is for the best interest of the

debtor and his creditors. With the approval
of the court, unencumbered property of the
debtor may also be conveyed to a creditor in
satisfaction of his claim or part thereof.

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