FINALS CREDIT TRANSACTION

REVIEWER
CASES
LOAN

FACTS

ISSUE

DECISION/DOCTRINE

Naguiat vs. CA
- GR 118375

A loan contract is a real contract, not

consensual, and, as such, is perfected
only upon the delivery of the object of the
contract

Filipinas
Marble Corp
vs. IAC

PD No. 385 was issued primarily to

see to it that government financial
institutions are not denied substantial
cash inflows, which are necessary to
finance development projects all over
the country, by large borrowers who,
when they become delinquent, resort
to court actions in order to prevent or
delay the governments collection of
their debts and loans.

Sapit

Repaldo

A mortgage is a mere accessory

contract and, thus, its validity would
depend on the validity of the loan
secured by it. Article 2125 of the Civil
Code
provides
that
the
nonregistration of the mortgage does not
affect the immediate parties. It states:
Art. 2125. In addition to the requisites
1

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

DECISION/DOCTRINE
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.

Republic vs.
Bagtas
Magampon

Ligutan vs. CA
Montances

Investors
Finance Corp
vs. Autoworld
Sales Corp
Feliciano

Medel vs. CA

A Central Bank Circular cannot repeal

a law. Only a law can repeal another
law.
A stipulated rate of interest at 5.5%
per month on a loan is not usurious
pursuant to Central Bank Circular No.
905, the same must be equitably

Sapit

FINALS CREDIT TRANSACTION

CASES

DEPOSIT
CA-Agro
Industrial Dev.
Corp vs. CA
(Bayudan)

FACTS

ISSUE

DECISION/DOCTRINE
reduced
for
being
iniquitous,
unconscionable and exorbitant. It is
contrary to morals. It was reduced to
12% per annum in consonant with
justice and fair play.

Petitioner and spouses

Ramon and Paula
Pugao entered into an
agreement whereby
the former are to
purchase (2) parcels of
land for a price of
P350,625
Among the
agreements were that
the titles to the lots
shall be transferred to
petitioner upon full
payment and that
owners TCTs shall be
deposited in a safety
box.

WON the
contractual
relation
between a
commercial
bank and
another party
in a contract
of rent of a
safety
deposit box
with respect
to its
contents by
the latter;
bailor/bailee
or lessor,

The contract for the rent of the safety

deposit box is not an ordinary contract
of lease as defined in Article 1643 of
the Civil Code. the contract in the
case at bar is a special kind of
deposit. It cannot be characterized as
an ordinary contract of lease under
Article 1643 because the full and
absolute possession and control of the
safety deposit box was not given to
the joint renters the petitioner and
the Pugaos. The guard key of the box
remained with the respondent Bank;
without this key, neither of the renters
could open the box. On the other
hand, the respondent Bank could not
likewise open the box without the

FINALS CREDIT TRANSACTION

CASES

FACTS
Same could only be
withdrawn upon the
joint signature of the
petitioner and the
Pugaos upon full
payment of purchase
price.
After execution (2)
renters keys were
given to the parties.
A certain Mrs.
Margarita Ramos
offered to buy from
petitioner the (2) lots
at a price of
P225/square meter.
Consequently, she
demanded the
execution of a DEED
OF SALE.
When the parties
opened the safety
deposit box it yielded
no such certificates.
Mrs. Ramos withdrew

ISSUE
lessee?

DECISION/DOCTRINE
renter's key. In this case, the said key
had a duplicate which was made so
that both renters could have access to
the box.

FINALS CREDIT TRANSACTION

CASES
Lua Kian vs.
Manila
Railroad

(Bayudan)

FACTS
the offer.
Dec 31, 1959 Lua Kian
imported (2000) cases
of imported Carnation
Milk from the
Carnation Milk
Company of San
Francisco California
and shipped on board
SS Golden Bear per Bill
of Lading No. 17
However, only (1829)
cases were marked
Lua Kian 1458
Discharged from the
same vessel that day
were (3171) cases of
Carnation Milk marked
Cebu United 4860PH-Manila per Bill of
Lading No. 18
RTC ruled that (1829
cases less of the
2000; for Lua Kian)
and (3000 cases 171

ISSUE
WON the
defendants
are liable for
the goods?

DECISION/DOCTRINE
The legal relationship between an
arrastre operator and the consignee is
a kin to that of a depositor and
warehouseman. As custodian of the
goods discharged from the vessel, it
was defendant arrastre operator's
duty, like that of any ordinary
depositary, to take good care of the
goods and to turn them over to the
party entitled to their possession.

FINALS CREDIT TRANSACTION

CASES

Palmares vs.
CA
(Bayudan)

FACTS
ISSUE
DECISION/DOCTRINE
more for Cebu United)
The Bill of Lading No.
18 for Cebu United
only indicated (3000)
cases were due. The
excess of 171 cases
should be delivered to
Lua Kian where it was
indicated in Lua Kians
Bill of Lading No. 17
that it should receive
171 cases more.
GUARANTY AND SURETY
A PN dated March 13,
WON a party If a person binds himself solidarily
who signed a with
the
principal
debtor,
1990 by M.B. Lending
promissory
the provisions of Section 4, Chapter3,
Corporation extended
note as a co- Title I of this Book shall be observed.
a loan to spouses
maker and
In such case the contract is called a
Osmena and Merlyn
Azarraga together with binds herself suretyship. It is a cardinal rule in the
interpretation of contracts that if the
herein petitionerin the to be jointly
and severally terms of a contract are clear
amount of P30,000
and leave no doubt upon the intention
The Azarraga spouses liable with
the principal
of the contracting parties, the literal
were able to pay a
debtor
meaning of its stipulation shall
total of P16,300
deemed a
control.
leaving a balance of
6

FINALS CREDIT TRANSACTION

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FACTS
P13,700. After that no
other payments were
made.
Respondent
Corporation filed a
complaint (on the
basis of solidary
liability of petitioners)
against Palmares
allegedly by the
reason of the
insolvency of the
spouses.
Palmares agrees to be
liable on the note but
onnly upon the default
of the principal debtor,
respondent
corporation acted in
bad faith in suing her
alone without
including the spouses
Azarraga when they
were the only ones
who benefitted from

ISSUE
surety
(insurer of
debt) or
guarantor
(warrants
solvency of
debtor)?

DECISION/DOCTRINE

FINALS CREDIT TRANSACTION

CASES

FACTS
the proceeds of the
loan.

ISSUE

Zobel vs. CA

DECISION/DOCTRINE
Strictly speaking, guaranty and
surety are nearly related, and many
of the principles are common to both.
However,
under
our
civil
law, they may be distinguished thus:
A surety is usually bound with his
principal by the same instrument,
executed at the same time, and on
the same consideration. He is an
original promissor and debtor from the
beginning, and is held, ordinarily, to
know every default of his principal.
Usually, he will not be discharged,
either by the mere indulgence of the
creditor to the principal, or by want of
notice of the default of the principal,
no matter how much he may be
injured thereby. On the other hand,
the contract of guaranty is the
guarantor's
own
separate
undertaking, in which the principal
does not join. It is usually entered into
before or after that of the principal,

Moralde

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

Paramount
Insurance Co.
vs. Masakayan
Pigao

Security Bank
vs. Cuenca

DECISION/DOCTRINE
and is often supported on a separate
consideration from that supporting the
contract of the principal. The original
contract of his principal is not his
contract, and he is not bound to take
notice of its non-performance. He is
often discharged by the mere
indulgence of the creditor to the
principal, and is usually not liable
unless notified of the default of the
principal.
By the contract of suretyship, it is
not for the oblige to see to it that the
principal pays the debt, but the surety
to see to it that the principal pay
Being an onerous undertaking, a
surety agreement is strictly construed
against the creditor, and every doubt
is resolved in favor of the solidary
debtor. The fundamental rules of fair
play require the creditor to obtain the
consent of the surety to any material
alteration in the principal loan
agreement, or at least to notify it

Repaldo

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

RCBC vs. ARRO

Uy

PLEDGE
PNB vs. Sayo

DECISION/DOCTRINE
thereof.
The peculiar nature of a guaranty or
a surety agreement is that it is
regarded as valid despite the absence
of any direct consideration received
by the guarantor or surety either from
the principal debtor or from the
creditor. While a contract of guaranty
or surety, like any other contract,
must generally be supported by a
sufficient
consideration,
such
consideration need not pass directly
to the guarantor or surety; a
consideration moving to the principal
alone will suffice. For a guarantor or
surety is bound by the same
consideration that makes the contract
effecive between the principal parties
thereto.

The foreclosure of the thing pledged

results in the full satisfaction of the
loan liabilities to the pledge of the

Gimelo

10

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

De Rama vs.
Palileo

DECISION/DOCTRINE
pledgor. The buyer in a foreclosure
sale does not assume the obligations
of the pledgor to his creditors.
A transaction is determined by the
nature thereof. The nature of the
agreement being inherent in the
agreement itself exists from the very
moment the transaction was entered
into.
In order to constitute the contract of
pledge, the thing pledged must be
placed in the possession of the
creditor, or of a third person by
common agreement. (Requisites of
pledge).
One of the essential requisite for the
validity of contract of pledge and
mortgage is that the pledge or
mortgage be the absolute owner of
the thing pledge or mortgage.

Ng

Gen. Insurance
Co. vs.
Masakayan
Chai Rodriguez

Cerna vs. CA
Northern

General Rule: Joint liability arises

Exception: when obligation expressly
11

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FACTS

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DECISION/DOCTRINE
states or when the law or nature of
the obligation requires solidarity.
A third person who constitutes chattel
mortgage on his own property as
security to anothers obligation not
solely by reason thereof becomes
solidarily bound with principal debtor

Motors vs.
Coquia

Only upon default of the principal

debtor, that a third party mortgagor
becomes liable to the extent of the
property mortgaged

Enzo Velilla

A
special
power
of
attorney
authorizing another to mortgage ones
property as
security of latters
obligation does not in itself makes the
person executing the same a comortgagor thereof.
Real Estate Mortgage
Adriano vs.
Pangilinan

The relevant legal provision, Article

2085 of the Civil Code, requires that
the mortgagor be the absolute owner
of the thing x x x mortgaged. Here,

Magampon

12

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

Cristobal vs.
CA

DECISION/DOCTRINE
the mortgagor was an impostor who
executed the contract without the
knowledge and consent of the
owner. Second, equity dictates that a
loss brought about by the concurrent
negligence of two persons shall be
borne by one who was in the
immediate, primary and overriding
position
to
prevent
it. Herein
respondent who, we repeat, is
engaged in the business of lending
money secured by real estate
mortgages could have easily
avoided the loss by simply exercising
due diligence in ascertaining the
identity of the impostor who claimed
to be the owner of the property being
mortgaged. Finally,
equity
merely
supplements, not supplants, the law.
The former cannot contravene or take
the place of the latter
Mortgages;
Foreclosure;
Noncompliance with the requirements of

13

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

Feliciano

DECISION/DOCTRINE
notice
and
publication
in
an
extrajudicial foreclosure sale is a
factual issue. The resolution thereof
by the lower courts is binding and
conclusive upon this Court. However,
this rule is subject to exceptions, as
when the findings of trial court and
the Court of Appeals are in conflict.
Also, it must be noted that noncompliance
with
the
statutory
requisites
could
constitute
a
jurisdictional
defect
that
would
invalidate the sale.
Failure
to
comply
with
statutory
requirements as to publication of notice
of auction of sale constitutes a
jurisdictional defect which invalidated the
sale.

Lucena vs. CA
Montances

Foreclosure and public auction sale of a

parcel of land foreclosed by a rural bank
are null and void when there is a failure to
post notices of auction sale in the barrio
where the subject property is located.
Where the land sold is in the possession
of a person other than the vendor, the
14

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

DECISION/DOCTRINE
purchaser is required to go beyond the
certificate of title and make inquiries
concerning the rights of the actual
possessor.
Where the purchaser of a foreclosed
property
is
within
the
one-year
redemption period, the purchaser is
deemed to have had a notice of defect in
the title of the vendee.

PNB vs. Rabat

Mortgages;
Foreclosure;
In
extrajudicial
foreclosure
sales,
personal notice to the mortgagor is
not necessary. Section 3 of Act No.
3135 states that notice shall be given
by posting 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.

Chai Rodriguez

15

FINALS CREDIT TRANSACTION

CASES
Bohonan vs.
CA

FACTS

ISSUE

Gimelo

RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY

DBP vs.
Mirang
Ng

16

DECISION/DOCTRINE
Mortgages; Foreclosure; The nonpresentation of a certificate of posting
does not affect the intrinsic validity of
the questioned foreclosure sale. As
already stated, all that is required by
Sec. 3 of Act No. 3135 is that public
notice of the place and time of the
sale be posted in three (3) public
places and, where the property is
worth more than P400.00, published
in a newspaper of general circulation.
Non-compliance
constitutes
a
jurisdictional defect sufficient to
invalidate the sale.
However, a certificate of posting is not
a statutory requirement. Rather, it is
significant only in the matter of
proving compliance with the required
posting of notice.
Extrajudicial Foreclosure; Recovery; In
the absence of a similar provision in
Act 3135, as amended, it cannot be
concluded that the creditor loses his
right given him under the Mortgage

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

Sulit vs. CA
Moralde

17

DECISION/DOCTRINE
Law and recognized in the Rules of
Court, to take action for the recovery
of any unpaid balance on the principal
obligation, simply because he has
chosen to foreclose his mortgage
extra-judicially, pursuant to a special
power of attorney given him by the
mortgagor in the mortgage contract.
The
general
rule
that
mere
inadequacy of price is not sufficient to
set aside a foreclosure sale is based
on the theory that the lesser the price
the easier it will be for the owner to
effect the redemption. The same thing
cannot be said where the amount of
the bid is in excess of the total
mortgage debt. The reason is that in
case the mortgagor decides to
exercise his right of redemption,
Section 30 of Rule 39 provides that
the redemption price should be
equivalent to the amount of the
purchase price, plus one per cent
monthly interest up to the time of the
redemption,] together
with
the

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

DECISION/DOCTRINE
amount of any assessments or taxes
which the purchaser may have paid
thereon after purchase, and interest
on such last-named amount at the
same rate.
*inadequacy of pace*
1. It is true that respondent treasurer

Vda. De
Gordon vs. CA

now claims that the prices for which

the
lands
were
sold
are
unconscionable considering the wide
divergence between their assessed
values and the amounts for which
they had been actually sold. However,
while in ordinary sales for reasons of
equity
a
transaction
may
be
invalidated
on
the
ground
of
inadequacy of price, or when such
inadequacy shocks one's conscience
as to justify- the courts to interfere,
such does not follow when the law
gives to the owner the right to
redeem, as when a sale is made at
public auction upon the theory that
the lesser the price the easier it is for

Pigao

18

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

DECISION/DOCTRINE
the owner to effect the redemption.
And so it was aptly said: When there
is the right to redeem, inadequacy of
pace should not be material because
the judgment debtor may reacquire
the property or also sell his right to
redeeem and thus recover the loss he
claims to have suffered by reason of
the price obtained at the auction
sale. (Velasquez vs. Coronet, 5 SCRA
985, 988)

*Equitable Mortgage

Tolentino vs.
CA

Nothing in Article 1602 of the Civil Code

indicates that the provision applies only
in the absence of an express agreement
between the parties.

Uy

The Court applied Article 1602 in several

cases despite the presence of an express or
written contract between the parties. In Lapat vs
Rosasio, petitioner asked for a consolidation of
19

FINALS CREDIT TRANSACTION

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FACTS

ISSUE

DECISION/DOCTRINE
ownership over two parcels of land by virtue of
two Deeds of Sale of Realty with Right to
Repurchase allegedly executed by private
respondents in petitioners favor. Petitioner
therein alleged that as respondents failed to
repurchase the property on the agreed period,
she then became its owner and was therefore
entitled to consolidate ownership over it.
However, private respondents denied selling the
two parcels of land to petitioner. They alleged
that petitioner sold to them an Isuzu Elf truck
which needed some repairs. As they didnt have
the money for repairs at that time, petitioner
loaned to them P60,000 with 4 percent interest.
To secure its payment, petitioner required
respondents to sign the two Deeds of Sale with
Right to Repurchase. In that case, we ruled that
the two deeds of sale constituted an equitable
mortgage. We applied paragraph 6, Article 1602
of the Civil Code, to wit: In any other case
where it may be fairly inferred that the real
intention of the parties is that the transaction
shall secure the payment of a debt or the
performance of any other obligation. The
contract of sale with right to repurchase was in

20

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

DECISION/DOCTRINE
reality intended to secure the payment of the
P60,000 loan.
In Misena vs Rongavilla, petitioner sold to
respondent an undivided one-half portion of lot
315 of the Naic Estate Subdivision in Cavite,
evidenced by a Deed of Sale. Later on,
respondent obtained a loan from and mortgaged
the same property to petitioner. Despite
respondents failure to settle the loan, petitioner
did not foreclose the mortgage. In 1988, upon
petitioners misrepresentation that the document
was intended to foreclose the mortgage and that
respondent had one year to redeem the property,
petitioner asked respondent to sign a Deed of
Absolute Sale conveying the property to
petitioner. As respondent refused to vacate the
property despite repeated demands, petitioner
brought the case to court. We ruled in favor of
respondent and held that, applying Article 1602
of the Civil Code, the transaction was an
equitable mortgage. The real intention of
respondent in signing the document was to
provide security for the loan and not to transfer
ownership over the property.

21

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FACTS

ISSUE

DECISION/DOCTRINE
Accommodation mortgagors are not
liable for the payment of the loan of
the debtor. The liability of the
accommodation mortgagors extends
only up to the loan value of their
mortgaged property and not to the
entire loan itself. Hence, it is only just
that they be allowed to redeem their
mortgaged property by paying only
the winning bid price thereof (plus
interest thereon) at the public auction
sale

Spouses Belo
vs. PNB
Repaldo

CHATTEL MORTGAGE
Filipinas
Marble vs. CA

A mortgage is a mere accessory

contract and, thus, its validity would
depend on the validity of the loan
secured by it. Article 2125 of the Civil
Code
provides
that
the
nonregistration of the mortgage does not
affect the immediate parties. It states:
Art. 2125. In addition to the requisites
stated
in
article
2085,
it
is
indispensable,
in
order
that
a

Sapit

22

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

PAMECA Wood
Treatment vs.
CA
Renovalles

DECISION/DOCTRINE
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 effects of foreclosure under the
Chattel Mortgage Law run inconsistent
with those of pledge under Article
2115 whwereby the sale of the thing
pledged
extinguishes
the
entire
principal obligation, such that the
pledgor may no longer recover
proceeds of the sale in excess of the
amount of the principal obligation,
Section 14 of the Chattel Mortgage
Law expressly entitles the mortgagor
to the balance of the proceeds, upon
satisfaction of the principal obligation
and costs.
There is a corollary obligation on the
part of the debtor-mortgagee to pay
the deficiency in case of a reduction in

23

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FACTS

ISSUE

DECISION/DOCTRINE
the price at public auction since
Chattel Mortgage Law bars the
creditor-mortgagee from retaining the
excess of the sale proceeds
Article 1484 applies clearly and solely
to the sale of personal property the
price of which is payable in
installments. Although Article 1484,
paragraph (3) expressly bars any
further action against the purchaser to
recover an unpaid balance of the
price, where the vendor opts to
foreclose the chattel mortgage on the
thing sold, should the vendee's failure
to pay cover two or more installments,
this provision is specifically applicable
to a sale on installments.

Piansay vs.
David
Enzo Vellila

A mortgage creditor who purchases

real properties at an extra-judicial
foreclosure sale thereof by virtue of a
chattel mortgage constituted in his
favor, which mortgage has been
24

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FACTS

ISSUE

Lilus vs.
Manila
Railroad Co

Magampon

25

DECISION/DOCTRINE
declared null and void with respect to
said real properties acquires no right
thereto by virtue of said sale. (De la
Riva vs. Ah Kee, 60 Phil. 899).
Regardless of the validity of a contract
constituting a chattel mortgage on a
house, as between the parties to said
contract (Standard Oil Co. of N. Y. vs.
Jaramillo, 44 Phil. 632-633), the same
cannot and does not bind third
persons, who are not parties to the
aforementioned contract or their
privies.
In order that a victim of an accident
may recover indemnity for damages
from the person liable therefor, it is
not enough that the latter has been
guilty of negligence, but it is also
necessary that the said victim has
not, through his own negligence,
contributed to the accident, inasmuch
as nobody is a guarantor of his
neighbor's
personal
safety
and
property, but everybody should look
after them, employing the care and

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

CONCURRENCE AND PREFERENCE OF CREDIT

De Barreto vs.
Villanueva
Krissy

26

DECISION/DOCTRINE
diligence that a good father of a
family should apply to his own person,
to the members of his family and to
his property, in order to avoid any
damage.
In
the
absence
of
insolvency
proceedings (or other equivalent
general liquidation of the debtor's
estate), the conflict between the
parties now before us must be
decided
pursuant
to
the
well
established
principle
concerning
registered lands; that a purchaser in
good faith and for value (as the
appellant
concededly
is)
takes
registered property free from liens and
encumbrances other than statutory
liens and those recorded in the
certificate of title. There being no
insolvency or liquidation, the claim of
the appellee, as unpaid vendor, did
not require the character and rank of
a statutory lien co-equal to the
mortgagee's recorded encumbrance,

FINALS CREDIT TRANSACTION

CASES

FACTS

ISSUE

Republic vs.
Peralta
Krissy

DECISION/DOCTRINE
and must remain subordinate to the
latter.

Credits which are specially preferred

because they constitute liens (tax or
non-tax) in turn, take precedence over
ordinary preferred credits so far as
concerns the property to which the
liens have attached. The specially
preferred credits must be discharged
first out of the proceeds of the
property to which they relate, before
ordinary preferred creditors may lay
claim to any part of such proceeds.
If the value of the specific property
involved is greater than the sum total
of the tax liens and other specially
preferred credits, the residual value
will form part of the "free property" of
the insolvent i.e., property not
impressed with liens by operation of
Articles 2241 and 2242.
If, on the other hand, the value of the
27

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FACTS

ISSUE

DECISION/DOCTRINE
specific movable or immovable 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 the
treated as ordinary credits under
Article 2244 and to be paid in the
order of preference there set up.
In contrast with Articles 2241 and
2242, Article 2244 creates no liens on
determinate property which follow
such property. What Article 2244
creates are simply 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.
Only in respect of the insolvent's "free
property" is an order of priority
established by Article 2244. In this
sequence,
certain
taxes
and
assessments also figure but these do
not have the same kind of overriding

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preference that Articles 2241 No. 1
and 2242 No. 1 create for taxes which
constituted liens on the taxpayer's
property.
Article 110 of the Labor Code did not
sweep away the overriding preference
accorded under the scheme of the
Civil Code to tax claims of the
government or any subdivision thereof
which
constitute
a
lien
upon
properties of the Insolvent. It is
frequently said that taxes are the very
lifeblood of government.
Bearing in mind the overriding
precedence given to taxes, duties and
fees by the Civil Code and the fact
that the Labor Code does not impress
any lien on the property of an
employer, the use of the phrase "first
preference" in Article 110 indicates
that what Article 110 intended to
modify is the order of preference
found in Article 2244, which order

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relates, as we have seen, to property
of the Insolvent that is not burdened
with the liens or encumbrances
created or recognized by Articles 2241
and 2242. Article 2244, number 2,
establishes second priority for claims
for wages for services rendered by
employees or laborers of the Insolvent
"for
one
year
preceding
the
commencement of the proceedings in
insolvency."
Article 110 of the Labor Code
establishes "first preference" for
services rendered "during the period
prior to the bankruptcy or liquidation,"
a period not limited to the year
immediately prior to the bankruptcy
or liquidation. Thus, very substantial
effect may be given to the provisions
of Article 110 without grievously
distorting the framework established
in the Civil Code by holding, as we so
hold, that Article 110 of the Labor
Code has modified Article 2244 of the

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DBP vs. NLRC

Krissy

31

DECISION/DOCTRINE
Civil Code in two respects: (a) firstly,
by removing the one year limitation
found in Article 2244, number 2; and
(b) secondly, by moving up claims for
unpaid wages of laborers or workers
of the Insolvent from second priority
to first priority in the order of
preference established I by Article
2244.
A distinction should be made between
a preference of credit and a lien. A
preference applies only to claims
which do not attach to specific
properties. A lien creates a charge on
a particular property. The right of first
preference as regards unpaid wages
recognized by Article 110 does not
constitute a lien on the property of the
insolvent debtor in favor of workers. It
is but a preference of credit in their
favor, a preference in application. It is
a method adopted to determine and
specificy the order in which credits
should be paid in the final distribution
of the proceeds of the insolvent's

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assets. It is a right to a first
preference in the discharge of the
funds of the judgment debtor.
Even
if
Article
110
and
its
Implementing Rule, as amended,
should be interpreted to mean
'absolute
preference,'
the
same
should be given only prospective
effect in line with the cardinal rule
that laws shall have no retroactive
effect, unless the contrary is provided
(Article 4, Civil Code). Thereby, any
infringement on the constitutional
guarantee on non-impairment of the
obligation of contracts (Section 10,
Article III, 1987 Constitution) is also
avoided.
In fine, the right to preference given
to workers under Article 110 of the
Labor Code cannot exist in any
effective way prior to the time of its
presentation
in
distribution
proceedings. It will find application

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DECISION/DOCTRINE
when, in proceedings such as
insolvency, such unpaid wages shall
be paid in full before the 'claims of the
Government and other creditors' may
be paid. But, for an orderly settlement
of a debtor's assets, all creditors must
be convened, their claims ascertained
and inventoried, and thereafter the
preferences determined in the course
of judicial proceedings which have for
their object the subjection of the
property of the debtor to the payment
of
his
debts
or
other
lawful
obligations. Thereby, an orderly
determination
of
preference
of
creditors' claims is assured (Philippine
Savings Bank vs. Lantin, No. L-33929,
September 2, 1983, 124 SCRA 476);
the adjudication made will be binding
on all parties-in-interest, since those
proceedings are proceedings in rem;
and the legal scheme of classification,
concurrence and preference of credits
in the Civil Code, the Insolvency Law,
and the Labor Code is preserved in

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34

DECISION/DOCTRINE
harmony.