Star Wars Mace Windu Vs Jabbawockeez

2017
CREDIT TRANSACTIONS
BEARS
STEPHEN DANIEL JAVIER & KATRINA ANNE TIAMBENG

B 2020
Credit Transactions | Atty. CJ Tan Javier | Tiambeng
Table of Contents
Credit Transactions ..............................................................................................................................................................................................................................................................................................................................................................1
Meaning & Scope ........................................................................................................................................................................................................................................................................................................................................................1
Security .......................................................................................................................................................................................................................................................................................................................................................................................1
Bailment .....................................................................................................................................................................................................................................................................................................................................................................................1
Loan ......................................................................................................................................................................................................................................................................................................................................................................................................3
General Provisions .........................................................................................................................................................................................................................................................................................................................................................3
Commodatum .....................................................................................................................................................................................................................................................................................................................................................................3
Simple Loan / Mutuum ...............................................................................................................................................................................................................................................................................................................................................6
Usury Law .........................................................................................................................................................................................................................................................................................................................................................................................8
Elements .....................................................................................................................................................................................................................................................................................................................................................................................8
Interest Rates .......................................................................................................................................................................................................................................................................................................................................................................8
Determination of Existence of Usury ...........................................................................................................................................................................................................................................................................................................8
Not applicable to.........................................................................................................................................................................................................................................................................................................................................................8
Computations .....................................................................................................................................................................................................................................................................................................................................................................8
Deposit ..........................................................................................................................................................................................................................................................................................................................................................................................11
Deposit in General & Its Different Kinds .............................................................................................................................................................................................................................................................................................11
Voluntary Deposit .......................................................................................................................................................................................................................................................................................................................................................13
Necessary Deposit ...................................................................................................................................................................................................................................................................................................................................................16
Sequestration / Judicial Deposit ................................................................................................................................................................................................................................................................................................................17
Warehouse Receipts Law .........................................................................................................................................................................................................................................................................................................................................18
Purpose ..................................................................................................................................................................................................................................................................................................................................................................................18
The Issue of Warehouse Receipts ............................................................................................................................................................................................................................................................................................................18
Obligations & Rights of Warehousemen upon their Receipts ..................................................................................................................................................................................................................................19
Negotiation & Transfer of Receipts .......................................................................................................................................................................................................................................................................................................23
Criminal Offenses .........................................................................................................................................................................................................................................................................................................................................................24
Guaranty & Suretyship ..................................................................................................................................................................................................................................................................................................................................................25
Nature & Extent of Guaranty .........................................................................................................................................................................................................................................................................................................................25
Effects of Guaranty ...................................................................................................................................................................................................................................................................................................................................................29
Extinguishment of Guaranty ..............................................................................................................................................................................................................................................................................................................................33
Legal & Judicial Bonds .........................................................................................................................................................................................................................................................................................................................................34
Provisions Common to Pledge and Mortgage ................................................................................................................................................................................................................................................................................35
Requisites [2085].........................................................................................................................................................................................................................................................................................................................................................35
Intention of Parties .....................................................................................................................................................................................................................................................................................................................................................35
Property Pledged / Mortgaged ................................................................................................................................................................................................................................................................................................................35
Thing Pledged / Mortgaged May be Alienated [2087] ..............................................................................................................................................................................................................................................36
Accommodation Pledge / Mortgage [2085] ............................................................................................................................................................................................................................................................................36
Pledge v Mortgage.................................................................................................................................................................................................................................................................................................................................................36
Assignments as Security Device ..................................................................................................................................................................................................................................................................................................................36
Right of Creditor where Debtor Fails to Comply w/ his Obli [2088] ..................................................................................................................................................................................................................36
Pledge / Mortgage Indivisible [2089, 2090] .............................................................................................................................................................................................................................................................................37
All Kinds of Obligation Secured [2091]............................................................................................................................................................................................................................................................................................38
Promise to Constitute Pledge / Mortgage Creates No Real Right [2092] ..............................................................................................................................................................................................38
Pledge ............................................................................................................................................................................................................................................................................................................................................................................................39
Kinds of Pledge ............................................................................................................................................................................................................................................................................................................................................................39
Characteristics ...............................................................................................................................................................................................................................................................................................................................................................39
Parties ......................................................................................................................................................................................................................................................................................................................................................................................39
Requisites .............................................................................................................................................................................................................................................................................................................................................................................39
Rights and Obligations of Creditor / Pledgee .........................................................................................................................................................................................................................................................................39
Rights and Obligations of the Pledgor ..............................................................................................................................................................................................................................................................................................41
Public Instrument to Bind 3rd Persons [2096] ................................................................................................................................................................................................................................................................................41
Alienation by the Pledgor of Thing Pledged [2097] ..........................................................................................................................................................................................................................................................41
Extinguishment of Pledge....................................................................................................................................................................................................................................................................................................................................41
Right of 3rd Person to Satisfy Obligation [2117] .....................................................................................................................................................................................................................................................................42
Right of 3rd Person Who Pledged His Own Property [2120] ......................................................................................................................................................................................................................................42
Pledges by Operation of Law [2121] ................................................................................................................................................................................................................................................................................................42
Rules as to Pawnshops & Other Establishments [2123] ...................................................................................................................................................................................................................................................42
Section 45, Securities Regulation Code : Pledging a Security or Interest Therein ...........................................................................................................................................................................42
Real Mortgage .....................................................................................................................................................................................................................................................................................................................................................................43
Definition of Mortgage .........................................................................................................................................................................................................................................................................................................................................43
Kinds of Mortgage ....................................................................................................................................................................................................................................................................................................................................................43
Parties to the Contract ........................................................................................................................................................................................................................................................................................................................................43
Requisites .............................................................................................................................................................................................................................................................................................................................................................................43
Possession of Property Mortgaged ........................................................................................................................................................................................................................................................................................................44
Payment of Interest on Mortgage Credit .........................................................................................................................................................................................................................................................................................44
Mortgage Executed by an Agent ..........................................................................................................................................................................................................................................................................................................44
Recorded in Registry of Property [2125] .........................................................................................................................................................................................................................................................................................45
Doctrine of Mortgagee in Good Faith ..............................................................................................................................................................................................................................................................................................46
Right in Case of Legal Mortgage [2125] .......................................................................................................................................................................................................................................................................................46
Effect of Invalidity of Mortgage on Principal Obligation ..............................................................................................................................................................................................................................................46
Effect of Mortgage [2126] ..............................................................................................................................................................................................................................................................................................................................46
Ownership Rights of Mortgagor..................................................................................................................................................................................................................................................................................................................47
Alienation / Assignment of Mortgage Credit [2128] ..........................................................................................................................................................................................................................................................47
Right of Creditor Against Transferee of Mortgaged Property [2129] .............................................................................................................................................................................................................47
Laws governing mortgage [2131] ...........................................................................................................................................................................................................................................................................................................47
Foreclosure ........................................................................................................................................................................................................................................................................................................................................................................47
Redemption (of foreclosed property) .................................................................................................................................................................................................................................................................................................52
Writ of possession .......................................................................................................................................................................................................................................................................................................................................................55
Antichresis ....................................................................................................................................................................................................................................................................................................................................................................................57
Definition ...............................................................................................................................................................................................................................................................................................................................................................................57
Delivery of the immovable .................................................................................................................................................................................................................................................................................................................................57
Obligation to pay interest ...............................................................................................................................................................................................................................................................................................................................57
Antichresis vs. Pledge..............................................................................................................................................................................................................................................................................................................................................57
Antichresis vs. REM ......................................................................................................................................................................................................................................................................................................................................................57
Obligations of the Creditor ............................................................................................................................................................................................................................................................................................................................57
Right of Debtor to Reacquire enjoyment .........................................................................................................................................................................................................................................................................................57
Remedies of Creditor in case of nonpayment ...........................................................................................................................................................................................................................................................................57
Acquisitive prescription not applicable ............................................................................................................................................................................................................................................................................................58
Interest in Antichresis subject to Usury Law .....................................................................................................................................................................................................................................................................................58
Provisions on Pledge and REM applicable .................................................................................................................................................................................................................................................................................58
Chattel Mortgage.............................................................................................................................................................................................................................................................................................................................................................59
Definition ...............................................................................................................................................................................................................................................................................................................................................................................59
Requisites .............................................................................................................................................................................................................................................................................................................................................................................59
Pledge v Chattel Mortgage v REM.......................................................................................................................................................................................................................................................................................................60
Laws governing chattel mortgage ..........................................................................................................................................................................................................................................................................................................61
Mortgage of improvements .............................................................................................................................................................................................................................................................................................................................61
Extent of the Chattel Mortgage ................................................................................................................................................................................................................................................................................................................61
Recording / Registration.....................................................................................................................................................................................................................................................................................................................................61
Affidavit of Good Faith ........................................................................................................................................................................................................................................................................................................................................62
Redemption.......................................................................................................................................................................................................................................................................................................................................................................62
Right of mortgagee to possession ..........................................................................................................................................................................................................................................................................................................63
Foreclosure ........................................................................................................................................................................................................................................................................................................................................................................63
Civil action to recover credit ........................................................................................................................................................................................................................................................................................................................64
Concurrence and Preference of Credits .................................................................................................................................................................................................................................................................................................65
Features .................................................................................................................................................................................................................................................................................................................................................................................65
Scope......................................................................................................................................................................................................................................................................................................................................................................................65
Concurrence of Credits .......................................................................................................................................................................................................................................................................................................................................65
Preference of Credit ................................................................................................................................................................................................................................................................................................................................................65
Liability of Debtor’s Property for Obligations ..............................................................................................................................................................................................................................................................................65
Civil Code > Insolvency Laws [2237] ..................................................................................................................................................................................................................................................................................................66
Classification of Credits .......................................................................................................................................................................................................................................................................................................................................66
Order of Preference of Credits ...................................................................................................................................................................................................................................................................................................................69
Financial Rehabilitation and Insolvency Act of 2010 (RA 10142) ...........................................................................................................................................................................................................................70
Constitutionality ............................................................................................................................................................................................................................................................................................................................................................70
Policy ........................................................................................................................................................................................................................................................................................................................................................................................70
Insolvency ............................................................................................................................................................................................................................................................................................................................................................................70
Debtors covered by FRIA ..................................................................................................................................................................................................................................................................................................................................70
Debtors not covered by FRIA .......................................................................................................................................................................................................................................................................................................................70
Claims.......................................................................................................................................................................................................................................................................................................................................................................................71
How does the court acquire jurisdiction? ........................................................................................................................................................................................................................................................................................71
Remedies (no advantages yet) .................................................................................................................................................................................................................................................................................................................71
Suspension of payment ........................................................................................................................................................................................................................................................................................................................................71
Rehabilitation ..................................................................................................................................................................................................................................................................................................................................................................73
Court-supervised Rehabilitation.................................................................................................................................................................................................................................................................................................................73
Pre-negotiated rehabilitation .......................................................................................................................................................................................................................................................................................................................80
Out-of-Court Restructuring Agreements (OCRA) ....................................................................................................................................................................................................................................................................81
Liquidation .........................................................................................................................................................................................................................................................................................................................................................................82
Cross-border insolvency .....................................................................................................................................................................................................................................................................................................................................84
Penal Provisions ............................................................................................................................................................................................................................................................................................................................................................84
Credit Transactions Bailment
o One person holds personal property, ownership is in
Meaning & Scope another
o Include all transactions involving the loan of money & o Person who has possession = obligation to return
goods, / purchase / delivery of goods & services in same goods, either in same / altered form to owner, /
the present w/ promise to pay / deliver in the future dispose of them for his benefit when the purpose of
o May consist of principal contract & contracts of bailment shall have been accomplished
security
Creation of Bailment
Types in terms of security ▪ May be said to be a contractual relation
▪ Agreement is not always necessary
Secured transactions o May be express / implied
• Supported by a collateral / an o May be created by operation of law
encumbrance of property / some other ▪ General rule: does not need to be in writing
security intended to secure the fulfillment ▪ Must contain all elements of a valid contract to
of the principal obligation be legally enforceable
o Consent, object, cause
Pledge
o Placing the movable property in the Elements
possession of the creditor ▪ Bailor retains title of personal property
Chattel Mortgage ▪ Possession / temporary control of property is
delivered / transferred to bailee (actual /
o Execution of corresponding deed
constructive)
substantially in the form prescribed by law
▪ Bailee accepts possession of property
Real Estate Mortgage ▪ Possession of bailee is for a specific purpose
o Execution of a public instrument ▪ Parties intend that identical property (or tangible
encumbering the real property covered goods of same quantity & quality) will be returned
to the bailor at the end of the bailment unless the
Antichresis bailor directs that it be given to another person
o Written instrument granting to the creditor or its disposal by the bailee
the right to receive the fruits of an immovable
property w/ the obligation to apply such
Distinguished from custody
fruits to the payment of interest & principal ▪ Intent to possess & control is absent in custody
obligation ▪ Possessor is mere custodian unless owner intends
to relinquish right to their control
Unsecured transactions ▪ Property lawfully taken by authority of legal
• Secured / supported only by a promise to process & in possession of public officer
pay / personal commitment of debtor ▪ Property / goods delivered to employee by
employer to be used in employer’s business
Security ▪ When difficult to determine: intent of parties &
o Something given, deposited, / serving as a means to contemporaneous & subsequent acts to
ensure the fulfillment / enforcement of an obligation / carry out that intent shall be considered
of protecting some interest in property
o Secured creditor: one who holds a security from his Parties
debtor for payment of latter’s debts
Bailor
Personal security • Party who delivers possession / custody of
▪ An individual becomes a surety / guarantor the thing bailed
Property / Real security Bailee

▪ Mortgage, pledge, antichresis, charge / lien / • Party who receives possession / custody of
other device used to have property held, out of thing delivered
w/c the person to be made secure can be Subject mater
compensated for loss
▪ By definition, personal / movable property
▪ Under our law, movable / immovable property
may be object of commodatum
▪ Recipient acquires substantial measure of
control over property
1
Kinds of Contractual Bailment Hire of service
o Goods are delivered for some work / labor
Ordinary Bailments upon it by bailee
Gratuitous Bailment o Contract for a piece of work
o No consideration
Hire for carriage of goods
o Considered more as a favor but law
imposes definite obligations o Goods are delivered either to a common
carrier / to a private person for the purpose
For the sole benefit of the bailor of being carried from place to place
❖ Belongs to gratuitous deposit & mandatum
o Mandatum: bailment of goods w/o Hire of custody
recompense o Goods are delivered for storage
❖ Slight care + liable only for gross negligence
For the sole benefit of the bailee
❖ Commodatum & gratuitous simple loan /
mutuum
❖ Great care + liable for simple negligence
Mutual benefit bailments
o Includes deposit for a compensation,
voluntary / necessary deposit, pledge,
bailments for hire
o Ordinary care + liable for ordinary
negligence
For the benefit of both parties
❖ Bailments of mere keeping
o Warehousemen agents
❖ Bailments of carriage
o Private carriers
❖ Bailments of goods delivered to another to
do work upon
o Watch left for repair
❖ Bailments of goods delivered to another to
work w/
o Baggage is checked
❖ Bailments for security
o Pledges
❖ Bailments of vendor in possession after sale
Fortuitous bailments
o Includes a miserable deposit
o Arising out of finding, salvage, theft, etc
Extraordinary bailments
• Cover businesses that peculiarly serve the
public
• Common carrier
• Innkeeper: duty to serve all who come
Kinds of bailment for hire
• Locatio et conductio
• Arises when goods are left w/ bailee for
some use / service by him & is always for
some compensation
Hire of things
o Goods are delivered for the temporary use
of the hirer
2
Loan Commodatum v Mutuum
Commodatum Mutuum
General Provisions Generally: non-
consumable Money / other
Kinds Object
exception: if for consumable thing
exhibition only
Commodatum
Transferred to
• Bailor delivers to the bailee a non- Ownership Retained by lender
borrower
consumable thing so that the latter may use May be gratuitous
it for a certain time & return the identical Consideration Gratuitous
/ onerous
thing Pay same amount
Return the same
Simple Loan / Mutuum Obligation of same kind &
thing loaned
quality
• Lender delivers to the borrower money /
other consumable thing upon the condition Property Real / personal Personal
that the latter shall pay the same amount of Use / temporary
Purpose Consumption
the same kind & quality possession
May demand return Lender may not
Loan v Credit of thing before demand return
Demand
▪ Credit is ability to borrow money / things by virtue expiration in case of before lapse of
of confidence / trust reposed by a lender that he urgent need [1946] term agreed upon
will pay what he may promise w/in a specified Suffered by
Risk of loss Suffered by bailor
period borrower
Personal Purely personal Not
People v Concepcion
Delivery is Necessary for Perfection [1934]
• Concession of a credit necessarily involves granting of
▪ Real contract
loans up to limit of amount fixed in credit
▪ To transfer either use / ownership
Loan v Discount Accepted Promise is Binding
Loan Discount • Promise to constitute a loan = consensual
Interest is taken at expiration of Interest is deducted in • Can give rise to an action for damages
credit advance
Generally on a single-name Always on a double-name Commodatum
paper paper
Borrow P100 at 10% interest, Borrow P100 at 10% interest, Nature of Commodatum
get P100, pay P110 get P90, pay P100 ▪ Real contract
▪ Discounting is slightly more expensive for the o Delivery is necessary
borrower because interest is calculated on ▪ Unilateral contract
amount loaned & not on that actually received o Once delivered, creates obligations on
only one of the parties (borrower)
▪ Nominate contract
o Given a specific name by the Civil Code
▪ Principal contract
o Existence is not dependent on another
contract
▪ Informal contract
o No particular form required
▪ Gratuitous contract
o Bailee does not pay bailor for the use of the
thing
o If rental is paid = lease
▪ Purely personal in character
3
Requisites Obligations of the Bailee
Consent ▪ Take good care of thing w/ diligence of a
o Delivery is necessary good father of the family [1163]
▪ Use the thing only for the intended purpose
Object [1935,1939, 1940]
o Movable / immovable [1937] ▪ Pay ordinary expenses for use & preservation
o Not consumable, unless for exhibition [1936] & portion of extraordinary expenses arising from
o Within the commerce of men actual use
o Determinate & not impossible ▪ Return & not retain
o Except for claim for damages suffered bec
Cause of flaws of thing loaned [1951]
Bailor need not be owner of thing [1938] ▪ REQUISITES
• Flaw / defect in the thing
• No transfer of ownership
• Flaw / defect is hidden
• Sufficient that bailor has right to allow
• Bailor is aware
the use of the thing by the bailee
• Bailor does not advise bailee
• Sufficient that he has such possessory
• Bailee suffers damages
interest in the subject matter / right to its use
▪ Bailor is not liable for damages if he is
w/c he may assert against the bailee & 3rd
not aware of defect
persons
▪ Bailee can only retain & not sell the
• Lessee / usufructuary may lend, but
thing to satisfy damages
borrower / bailee may not lend nor lease the
▪ * If bailee breaches any of these obligations,
thing to 3rd person
then liable for damages
Extent of Bailee’s Right of Use
Return of the Thing
• Limited to the thing loaned but not to its fruits
• Misappropriation = swindling (estafa)
o Unless otherwise stipulated
• Retention of the thing beyond the agreed
• Temporary use of the thing
period = breach
• Safekeeping is not commodatum
o Liable for damages & loss of the thing
Extinguishment of the Commodatum • Loss of the thing
• Expiration of the stipulated period / o w/o fault of bailee = not liable
accomplishment of the use for w/c the thing Manner of Return
was given [1933]
o What: the same thing borrowed
• Return after demand, in the event that the
o When: period stipulated / after
bailor has urgent need of the thing [1946]
accomplishment of use for which
• Return in case of precarium / in event that
commodatum has been constituted
bailee commits any acts of ingratitude
o Where
[1947, 1948]
▪ Agreed on place of return =
• Loss of the thing agreed place
• Death of either bailor / bailee ▪ No place stipulated = where the
• Rules of extinguishment of obligations thing might be at the moment the
[1231] obligation was constituted
o Compensation ▪ Generic: house of bailee
▪ Facultative Compensation
• Only 1 party may invoke Liable for Loss through Fortuitous Event [1942]
legal compensation • Devotes the thing to any purpose diff from
• Bailor can apply that for w/c it has been loaned
compensation, but bailee • Keeps it longer than the period stipulated
CANNOT apply • Delivered w/ appraisal of its value
compensation o Unless stipulation exempting bailee
• Applies to deposit & support from responsibility in case of fortuitous
Commodatum v Usufruct event
• Lends / leases to a 3rd person not a member
• Bailee does not have right to fruits (jus of his household
fruendi) unless expressly stipulated [1940] • Being able to save either thing borrowed /
o Fruits contemplated are non- own thing, he chooses to save the latter
consumable – carabao’s offspring
• Use of fruits must only be incidental
o If fruits are main cause = usufruct
4
Liability for Deterioration of Thing Obligations to Refund Extraordinary Expenses
• Due to ordinary wear & tear = bailor • Extraordinary expenses for the preservation
• Due to bailee’s fault / negligence = bailee of the thing loaned – bailor
o Bailee needs to give notice to the
Bailee cannot Setup Adverse Claim bailor before he incurs extraordinary
• Mere failure to return does not constitute expenses
adverse possession ▪ Bailor must be given discretion as
• Cannot ripen into title by way of ordinary to what must be done w/ his
acquisitive prescription property
▪ Bailor must refund bailee
Liability when 2 or more Bailees
▪ Exception: If expenses are so
• Solidary urgent that a reply to the
• To safeguard effectively rights of lender notification cannot be awaited
Obligations of Bailor w/o danger
• Extraordinary expenses arising from actual
Kinds of Commodatum use of the thing loaned = 50-50
Ordinary Precarium o Bailee pays ½ bec of the benefit
Commodatum derived from the use of the thing
Bailor delivers to the o Bailor pays ½ bec he is the owner &
Owner of a thing, at the thing will be returned to him
bailee a non-
the request of another
consumable thing so Summary of Rules on Expenses
person, gives the latter
Definition that the latter may use • Ordinary expenses for the use of the thing –
the thing for use as
it for a certain time &
long as the owner bailee
return the identical
shall please • Ordinary expenses for the preservation of
thing
the thing – bailee
Neither duration nor • Extraordinary expenses for the preservation
use to w/c the thing of the thing – bailor
Period / use for which loaned should be • Extraordinary expenses arising from the
commodatum has devoted is actual use of the thing – 50-50
Instances
been constituted is stipulated; or
• Other expenses for the use of the thing –
stipulated Use of the thing is
bailee
merely tolerated by
the owner No right of Abandonment for Expenses
Bailor may demand • Bailor cannot exempt himself from payment
Until the period expires
Duration the thing loaned at of expenses / damages by abandoning the
/ use is accomplished
will thing to the bailee [1952]
• Expenses / damages may exceed the value
Right of Bailor to Demand Return
of the thing loaned
• If the bailee commits any of the acts of
ingratitude, he makes himself unworthy of the
trust reposed upon him by the bailor
Acts of Ingratitude
o Bailee commits some offense against the
person, honor / property of bailor / his wife /
children under his parental authority
o Bailee imputes to bailor any criminal offense
/ any act involving moral turpitude
▪ UNLESS crime / act be committed
against the bailee himself, his wife
/ children under his authority
o Bailee unduly refuses the bailor support
when bailee is legally / morally bound to
give support to the bailor
5
Simple Loan / Mutuum Form of Payment
Can the creditor demand before maturity? Loan of Money

▪ Generally, no. Benefit of period is for both • Currency stipulated
▪ Except: when one loses right to the period [1198] • If no stipulation - currency in w/c money was
o Debtor becomes insolvent delivered
o Does not furnish the guaranties / securities • If not possible to deliver in the relevant
w/c he has promised currency - currency w/c is legal tender in PH
o By his own acts, he has impaired said • Check & manager’s check are not valid
guaranties / securities after establishment tenders of payment
▪ If lost through fortuitous event – loses o Creditor may refuse payment
benefit unless he furnishes new ones • If payment in coins, up to 1k only
o Violates any undertaking, in consideration of • If coins < P1, up to 100 only
w/c the creditor agreed to the period • Creditor cannot be compelled to accept
o Attempts to abscond partial payment
▪ If no period was intended, the obligation is
Extraordinary Inflation / Deflation
demandable at once / anytime
▪ If a period was intended, but there was no Requisites
stipulation, the courts may fix a period ❖ Official declaration from BSP
▪ If the debtor says that he will pay when his means ❖ Obligation was contractual
permit him to do so, courts may fix a period ❖ Parties expressly agreed to consider
▪ If the debtor says that he will pay when he effects of extraordinary inflation / deflation
decides to pay:
o Creditor generally bears the risk of change
o If the obligation arises from this = void
in value of currency
o If it is a pre-existing obligation = condition is 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 𝑡ℎ𝑒𝑛
void, demandable at once o 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 = (𝑎𝑚𝑡)
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 𝑛𝑜𝑤
Prescriptive Period Loan of Fungible Thing

▪ From non-payment after maturity (right of action • Deliver the same kind, quality & quantity
accrues) • If impossible, pay its value at the time of the
▪ 6 years if oral contract perfection of the loan
▪ 10 years if written contract • Creditor bears risk of change
• Legal compensation
Loan v Lease o Must be same thing
Loan Lease o Cannot be thing to money
Delivery of money / some Owner / lessor does not lose his
other consumable thing w/ ownership, simply loses control Interest
promise to repay equivalent over the property rented during
Requisites [1956]
amount of same kind & quality the period of the contract
Obligor & obligee Landlord & tenant • Must be expressly stipulated
Creditor receives payment Owner receives compensation / • In writing
price • Lawful
May be in form of work / services Monetary Interest
Mutuum v Commodatum v Barter • Compensation for the use of money
Mutuum Commodatum Barter Compensatory Interest
Money / any other Non - consumable Non – fungible • Imposed by law / by courts as penalty /
fungible thing things indemnity for damages
Give things of same Bailee is bound to Equivalent thing
kind, quality & quantity return identical thing is given in return ▪ Can a person be liable for both monetary &
May be gratuitous Always gratuitous Onerous compensatory interest? Yes
6
Can the creditor be compelled to accept Escalation Clause
payment before maturity? • Stipulation allowing an increase in the
• Generally, no interest rate originally agreed upon
• If the loan is gratuitous, the period is • Generally valid
constituted solely for the debtor • If valid, but borrower does not agree to
o Borrower may pay before maturity date interest rate, must have option to prepay
o Creditor may not be compelled to loan
accept payment • Requisites
• If the loan is onerous, the period is o Must not be solely potestative
constituted for the benefit of both ▪ Violates mutuality of contracts
creditor and debtor o Must be paired w/ de-escalation
o Principal earns interest clause
• Debtor offers to pay before maturity - o Must be pegged to prevailing
principal + interest, can creditor refuse? market rates & not merely to “any
o Yes increase / decrease in the interest rate”
o Creditor may want to keep his money in the event a law / CB regulation is
w/ the debtor passed
o Creditor is not in delay o Must be result of agreement bet
• Banks are not allowed to refuse payment, parties
but they may charge an pre-payment fee • Invalid escalation clause
o Does not affect validity of loan
Kinds of Interest o Reverts to original interest rate agreed
• Simple interest upon
o Paid for the principal at a certain rate o Borrower cannot be estopped
fixed • Estoppel cannot be predicated on an
• Compound interest illegal act
o Imposed upon interest due & unpaid
• Legal interest Interest Payable in Kind [1958]
o 6% per annum from 01 July 2013 • Value should be appraised at the current
▪ BSP Circular No. 799 price of the products / goods at the time
▪ Does not apply retrospectively & place of payment
▪ Prior to 01 July 2013 = 12%
Interest Orally Agreed To
▪ If period is from Jan 2013 –
December 2013: • Payment by mistake
• From Jan – june 30, pay 12% o May be reimbursed
• From July 1 – Dec, pay 6% • Voluntary payment
• Lawful interest o May not be reimbursed
o That w/c the law allows / does not o Arises from natural obligation
prohibit Legal Delay
• Unlawful / usurious interest
o Beyond maximum fixed by law ▪ Results to damages
▪ Happens when:
o * Failure to pay documentary stamp tax (DST) will make o Obligation is due & demandable
the instrument inadmissible in court o Creditor demands judicially / extrajudicially
▪ Has to be a demand, mere request /
reminder is not a demand
o May stipulate that the debtor be
automatically in delay even w/o demand
7
Usury Law Not applicable to
• Currently suspended (not repealed, only a law can o Does not apply to rental in contract of lease
repeal another law) ▪ Landlord - tenant relationship, not borrower -
o Even w/o a ceiling, courts may declare an interest lender
rate as excessive & against public policy o Bona fide sale
▪ Courts may reduce interest o Increase in price of thing sold as a result of a sale on
• If the law provides a ceiling, interest is > ceiling, it is as if credit, over its cash sales price
there is no interest agreed upon ▪ Known as time-price differential
o = pay 0 interest ▪ To encourage cash sales
o Debtor is still liable for the principal o Bona fide pacto de retro sale
• If interest is usurious, debtor may still be held liable for o Transactions in w/c lender incurs risk of losing in whole
compensatory interest / in part the principal sum lent
Elements Computations
o Loan / forbearance
Loan
o Understanding bet parties that the loan shall / may be
returned Monetary interest
o Unlawful intent to take more than the legal rate for the
• If there is a stipulated monetary interest =
use of money / its equivalent
follow stipulation
o Taking / agreeing to take for the use of the loan of
• If interest is stipulated, but no rate was
something in excess of what is allowed by law
specified = use legal interest
Interest Rates • If no stipulation in writing = 0 interest
• If there is judicial demand
o Legal rate: 6% per annum
o From perfection of contract – finality of
o Maximum rate
judgment
▪ 12% per annum if secured in whole / in part by a
• If there is no judicial demand
REM; secured by gov’t securities: treasury bills, CB
o From perfection of contract – date of
certs of indebtedness
payment
▪ 14% per annum if loan is not secured as above
stated Compensatory Interest
o Pawn shops • If there is a stipulated penalty rate = follow
▪ 2.5% per month – sum lent ≤ P2000 stipulation
▪ 18% per annum – sum lent > P2000 • If penalty is stipulated, but no rate was
▪ May impose a max service charge of P5, but in specified:
no case exceed 1% of principal loan o If monetary interest rate is specified, use
▪ Not allowed to divide pawn in several fractions monetary interest rate
Interest Payable in Kind o If no monetary interest rate specified,
use legal interest
▪ Usurious when the diff between the agreed price
• If there is judicial demand
& actual price exceeds lawful interest
o From judicial demand (unless no
o Except where debtor is given option of
demand is necessary) – final judgment
discharging his obligation by paying sum
• If there is no judicial demand
lawfully due from him w/in a specified time
o From demand (unless no demand is
▪ Loan P1000 to be paid with 1 sack of rice
necessary) – date of payment
o Upon maturity of loan, 1 sack of rice costs
P5000 Interest on interest
• = (monetary interest until judicial demand)
Determination of Existence of Usury (6%) (yrs)
o Corrupt agreement must be present • From judicial demand – final judgment
▪ If neither party intended it but acted bona fide
& innocently, the law will not infer a corrupt Extrajudicial Demand
agreement
o Where consideration of loan is property / services
Perfection Demand Payment
of uncertain value
▪ If excess is so palpable as to show a corrupt
intent to violate / evade the usury law Legend
o Form of contract is not conclusive Monetary interest
▪ Law will not permit a usurious loan to hide itself Compensatory interest
behind a legal form
8
Judicial Demand Problem: Judicial Demand
• 2017 – perfection of loan

Perfection EJ Demand J Demand Final Judgment Payment • 2022 – maturity date
• 2024 – judicial demand
• 2025 – final judgment
Legend • 1M – principal
Monetary interest • 5% per annum interest
Compensatory interest • Stipulated penalty, but no rate
Interest on Interest
Delay after Final Judgment 𝑚𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
− 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛)
Not Loan 𝑚𝑖 = (1 000 000)(5%)(2025 − 2017)
𝑚𝑖 = 400 000
Compensatory Interest
• If interest rate is stipulated = follow 𝑐𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑝𝑒𝑛𝑎𝑙𝑡𝑦 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
stipulation − 𝑑𝑎𝑡𝑒 𝑜𝑓𝑑𝑒𝑚𝑎𝑛𝑑)
• If no rate is stipulated = 6%
o Liquidated No stipulated penalty rate, but interest rate is specified, so use
▪ Backwages interest rate of 5%
▪ From judicial / ej demand
o Unliquidated 𝑐𝑖 = (1 000 000)(5%)(2025 − 2024)
▪ Vehicular accident 𝑐𝑖 = 50 000
▪ From decision of trial court
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Delay in Payment after Final Judgment = (𝑚𝑖 𝑓𝑟𝑜𝑚 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛 𝑡𝑜 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑)
▪ Applies to both loans & not loans (𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
▪ Legal interest from finality – satisfaction − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑)
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Problem: Extrajudicial Demand = [(𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
• 2017 – perfection of loan − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛)](𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
• 2022 – maturity date (𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑)
• 2023 – extrajudicial demand Legal interest from 01 July 2013 is 6% (before that, 12%)
• 2025 – payment
• 1M – principal 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
• 5% per annum interest = [(1 000 000)(5%)(2024
• Stipulated penalty, but no rate − 2017)](6%)(2025 − 2024)
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 21 000
𝑚𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
− 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛) 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑒 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑚𝑖 + 𝑐𝑖 + 𝑖 𝑜𝑛 𝑖
𝑚𝑖 = (1 000 000)(5%)(2025 − 2017) 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑒 = 1 000 000 + 400 000 + 50 000 + 21000
𝑚𝑖 = 400 000 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑒 = 1 471 000
𝑐𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑝𝑒𝑛𝑎𝑙𝑡𝑦 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

− 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑)
No stipulated penalty rate, but interest rate is specified, so use

interest rate of 5%
𝑐𝑖 = (1 000 000)(5%)(2025 − 2023)
𝑐𝑖 = 100 000
𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑒 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑚𝑖 + 𝑐𝑖

𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑒 = 1 000 000 + 400 000 + 100 000
𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑒 = 1 500 000
9
Problem: Judicial Demand w/ Delay Problem: Extrajudicial Demand + Judicial Demand + Delay
• 2017 – perfection of loan 2017 – perfection 2021 – 1st demand

• 2022 – maturity date 2019 – maturity 2022 – complaint
• 2024 – judicial demand 1M – principal 2024 – RTC judgment
• 2025 – final judgment 10% pa 2026 - payment
• 2027 - payment Penalty not mentioned
• 1M – principal Demand waived
• 5% per annum interest
• Stipulated penalty, but no rate
𝑚𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
𝑚𝑖 = (1 000 000)(10%)(2024 − 2017)
𝑚𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 𝑚𝑖 = 700 000
𝑚𝑖 = (1 000 000)(5%)(2025 − 2017) 𝑐𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑝𝑒𝑛𝑎𝑙𝑡𝑦 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
𝑚𝑖 = 400 000 − 𝑑𝑎𝑡𝑒 𝑜𝑓𝑑𝑒𝑚𝑎𝑛𝑑)
𝑐𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑝𝑒𝑛𝑎𝑙𝑡𝑦 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 No stipulated penalty rate, but interest rate is specified, so use
− 𝑑𝑎𝑡𝑒 𝑜𝑓𝑑𝑒𝑚𝑎𝑛𝑑) interest rate of 10%
No stipulated penalty rate, but interest rate is specified, so use Demand was waived, so the debtor was automatically in delay right
interest rate of 5% after the obligation matured
𝑐𝑖 = (1 000 000)(5%)(2025 − 2024) 𝑐𝑖 = (1 000 000)(10%)(2024 − 2019)

𝑐𝑖 = 50 000 𝑐𝑖 = 500 000
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 Only monetary interest due will accrue interest

= (𝑚𝑖 𝑓𝑟𝑜𝑚 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛 𝑡𝑜 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑) 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
(𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 = (𝑚𝑖 𝑓𝑟𝑜𝑚 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛 𝑡𝑜 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑)
− 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑) (𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑)
= [(𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
− 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛)](𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡) = [(𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑) − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑖𝑜𝑛)](𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑗𝑢𝑑𝑖𝑐𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑)
Legal interest from 01 July 2013 is 6% (before that, 12%)
Legal interest from 01 July 2013 is 6% (before that, 12%)
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
= [(1 000 000)(5%)(2024 = [(1 000 000)(10%)(2022
− 2017)](6%)(2025 − 2024) − 2017)](6%)(2024 − 2022)
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 21 000 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 60 000
𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
= 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑚𝑖 + 𝑐𝑖 + 𝑖 𝑜𝑛 𝑖 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑚𝑖 + 𝑐𝑖 + 𝑖 𝑜𝑛 𝑖
𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
= 1 000 000 + 400 000 + 50 000 = 1 000 000 + 700 000 + 500 000
+ 21000 + 60 000
𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 = 1 471 000 𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 = 2 260 000
𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑 𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑

= 𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡
+ (𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡)(𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡) + (𝑎𝑚𝑜𝑢𝑛𝑡 𝑑𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡)(𝑙𝑒𝑔𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡) (𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 − 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑗𝑢𝑑𝑔𝑚𝑒𝑛𝑡)
Legal interest from 01 July 2013 is 6% (before that, 12%) Legal interest from 01 July 2013 is 6% (before that, 12%)
𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑
𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑
= 2 260 000
= 1 471 000
+ (2 260 000)(6%)(2026 − 2024)
+ (1 471 000)(6%)(2027 − 2025)
𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑 = 2 531 200
𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑 = 1 647 520
10
Deposit Extinguishment of Deposit [1995]
▪ General modes (condonation, confusion,
Deposit in General & Its Different Kinds novation)
o Constituted from the moment a person receives a thing ▪ Loss / destruction
belonging to another, w/ the obligation of safely ▪ Return of the thing by depositary
keeping it & returning the same [1962] ▪ Conversion of a deposit into another
o If safekeeping is not principal purpose = no deposit contract if depositor allows depositary to use
the thing
Characteristics ▪ If gratuitous: upon death of either party
▪ Real contract ▪ If onerous: transmissible to respective heirs
o Contract - future deposit: consensual [1963] o Heirs may terminate before expiration
▪ Binding & enforceable upon parties ▪ Compensation is not applicable
▪ Generally unilateral o Compensation is not proper when one of
o Only when depositor has agreed to pay the debts arises from a deposit / from
remuneration to the depositary that the obligation of a depositary
contract will become bilateral & onerous o Facultative Compensation: only depositor
o Still unilateral despite reimbursement may invoke compensation
obligations [1992, 1993]
▪ Nominate
▪ Principal
▪ Informal [1969]
▪ Generally gratuitous [1965]
o Depositor does not pay compensation to
the depositary
▪ Exceptions
• Where there is contrary stipulation
• Depositary is engaged in business
of storing goods
• Property saved from destruction
w/o knowledge of owner (not
onerous by virtue of contract but
by extrinsic factors)
Requisites
▪ Consent
▪ Object
o Only movable things (under Art 1962)
o Movable as well as immovable property may
be the object of sequestration / judicial
deposit [2006]
▪ Cause
o Generally gratuitous
Parties to the Contract
▪ Depositor
o May be > 1
o Need not be the owner of thing deposited
▪ Does not transfer ownership
▪ Depositary
Safekeeping – Principal Purpose
▪ If safekeeping is only an accessory / secondary
obligation, deposit is not constituted [1978]
o May be lease, commodatum, / agency
▪ Balance of commission account in agent’s
possession at principal’s disposal
o If appropriated by agent = estafa
▪ Depositary cannot make use of the thing
deposited except if for preservation [1977]
11
Deposit v Mutuum v Commodatum If for Extraordinary
Deposit Mutuum Commodatum compensation: expenses arising
Purpose Safekeeping / – expenses of from its use – both
Consumption Transfer of use preservation are bailor & bailee
mere custody
borne by (50-50)
Demand Lender must Bailor may
wait until demand the depositary
Depositor can expiration of return before the (deemed
included in
demand return a period, expiration in case
compensation)
at will [1988] except 1198 of urgent need +
(loses right to in case of acts of Object to be Same amount Same thing w/ all
period) ingratitude [1948] Returned Same thing of same kind & accessories etc.
quality [1983]
Property Only money / Movable /
Movable / any immovable (GR
immovable consumable non-consumable
Kinds of Deposit [1964]
thing EX exhibit)
Judicial
Consideration May be
May be Essentially & • Takes place when an attachment / seizure
gratuitous /
gratuitous always gratuitous of property in litigation is ordered
onerous
Right of Depositary may Bailee cannot • Purpose: protect the rights of parties to a suit
Retention retain thing until retain thing even if
full payment of bailor owes him Extrajudicial [1967]
what may be money by reason • Only movable things [1966]
due him by of expenses (only
reason of hidden defect) Voluntary
deposit [1994] o Delivery is made by the will of the
Transfer of depositor / by 2 or more persons each of
 ✓ 
Ownership whom believes himself entitled to the thing
Loss through [1979, 1990] Borrower GR: Bailor deposited
Fortuitous Owner suffers incurs loss Except: Bailee if
Event w/o fault /
o Depositor has complete freedom in
negligence of (1) devotes the choosing depositary
depositary thing to diff
Necessary
- if he receives purpose
money / another o Made in compliance w/ a legal obligation
thing = deliver to (2) keeps it longer / on the occasion of a calamity / by
depositor than period travelers in hotels & inns / by travelers in
- if he does not stipulated common carriers
receive anything, o Lack of free choice in the depositor
no liability (3) delivered w/
appraisal (unless
Depositary is stipulation to
liable (SUDA) contrary)
(1) stipulation
(2) uses the (4) lends / leases
thing w/o to a 3rd person
depositor’s not a member of
permission his household
(2) delays its
return (5) being able to
(4) allows others save thing
to use it, even borrowed / own
though he himself thing, chose own
may have been thing
authorized to
use it
Expenses [1992] Borrower Ordinary
If gratuitous: incurs expenses – bailee
- depositor
covers all Extraordinary
expenses for expenses for
preservation preservation –
(ordinary & bailor
extraordinary)
12
Voluntary Deposit o Exemption from liability
▪ Lost w/o negligence of 3rd person
General Provisions + allowed to deposit + not
▪ Delivery is made by the will of the depositor manifestly careless / unfit
▪ When there are several depositors ▪ Depositor authorized deposit +
o 2 or more - claiming to be entitled to a thing designated 3rd person
o 3rd person assumes obligation to deliver to ▪ Urgent cases: may deposit with 3rd
the one to whom it belongs person if necessary for
o Action to compel depositors to settle their preservation + no time for consent
conflicting claims: interpleader • Not liable unless 3rd person is
manifestly careless / unfit
Depositary: Capacitated; Depositor: • After transfer, should inform
Incapacitated [1970] depositor
• Depositary is subject to all obligations of a (3) Not change the way of the deposit
depositary [1974]
• Depositary cannot be compelled by o EXCEPT if there are circumstances
incapacitated depositor to return the thing indicating that the depositor would
to depositor consent to the change
o Best for depositary to contact o 1st notify depositor + wait for decision
depositor’s guardian / administrator ▪ Unless delay would cause danger
in relation to return of thing (4) Collect interest on certificates when they
• If returned to incapacitated depositor, become due & preserve the value of
guardian / administrator can hold securities [1975]
depositary liable for damages o Negotiable PN dishonored by non-
o Valid only as to amount that payment by maker – depositary must
redounded to the benefit of the give notice of dishonor to indorsers
depositor o Does not apply to contracts for rent of
• Voidable safety deposit boxes
• If both are incapacitated: unenforceable Rent of Safety Deposit Boxes
Depositary: Incapacitated; Depositor: ❖ Special kind of deposit
Capacitated [1971] ❖ Box & contents are in manual possession of
• Incapacitated depositary does not incur lessor
obligation of depositary ❖ Neither lessor nor renter can be given
access to the contents of box w/o consent
• Liabilities
& cooperation of other
o Return the thing deposited while still in
❖ See CA Agro case
possession
o If the thing deposited is no longer in his (5) Not to commingle grain & other articles
possession, to pay the depositor the of the same kind & quality if stipulated
amount benefited / its price subject to [1976]
the right of any 3rd person in good faith o GR: commingling is allowed EXCEPT if
unauthorized
Obligations of Depositary
▪ Depositors shall own entire mass in
Keep the thing common; each entitled to portion
deposited
(1) Keep the thing safely
(2) Not deposit the thing w/ 3rd person Degree of Care
[1973] o That agreed upon by parties
o Except if expressly authorized o In the absence of stipulation
o Depositary is liable if: ▪ Lower if deposit is gratuitous
▪ Transfer w/ 3rd person w/o ▪ Higher if deposit is w/
authority (no negligence on both) compensation
▪ 3rd person is manifestly careless or o Default is same diligence as he would
unfit exercise over his property
• Although authorized o Depositary cannot excuse himself from
• Even if no negligence liability in the event of loss if amount of care
▪ Thing is lost through negligence of exercised is less than what is required
his employees (whether manifestly
careless or not)
13
Liability for Care & Delivery Return the thing
o Liable for loss / deterioration if through his (1) Return the same thing w/ all its products,
fault / negligence accessions & accessories [1983]
o Loss of thing while in his possession = o Exceptions
presumption of fault ▪ If not prohibited from commingling
o Diligence of a good father of a family, unless • An article of the same kind &
otherwise stipulated quality
o Degree of care is greater if it is for ▪ Loses the thing by force majeure &
compensation receives money / another thing
• Sum of money / other thing
Insurance received
o When deposit is gratuitous, not obligated to ▪ Depositary’s heir sells thing in
obtain insurance for the thing, unless good faith [1991]
stipulated • Price received
Not to use the thing [1977] • Bad faith = damages +
estafa
• Unauthorized use = damages
• 3rd party buyer in good faith
• May use if necessary for preservation
o Acquires title + owner
o Limited for that purpose only
cannot obtain its return
Permission to Use is Given [1978] w/o reimbursing price
o Permission to use is not presumed except if paid
necessary for preservation • 3rd party buyer in bad faith
▪ Burden of proof is on depositary o Depositor may bring
o Non – consumable = commodatum action against him for
▪ Unless safekeeping is still principal recovery
purpose o If depositary be in delay / has used
o Money / other consumable thing = mutuum money w/o permission = liable for
▪ If safekeeping is still principal interest as indemnity
purpose = irregular deposit ▪ Interest on sums he has applied to
his own use from the day on w/c he
Irregular Deposit did so + those w/c he still owes
❖ Fungible things will be deposited, w/ transfer after extinguishment of deposit
of ownership + depositary has obligation to (2) Return the thing closed & sealed if
return another thing of same kind, quality & delivered in such condition [1981]
quantity o Obligations under 1981
❖ No substantive distinction bet irregular ▪ Return the thing closed & sealed
deposit & mutuum ▪ Pay for damages should seal /
Irregular Deposit Mutuum lock be broken through his fault
Demand Lender is bound by • Presumption of depositary’s
Consumable thing
provisions & cannot fault
demandable at
seek restitution until ▪ Keep secret of deposit when seal
will by depositor
time for payment / lock is broken w/ or w/o his fault
Benefit Essential cause is o When depositary is justified to open
necessity of ▪ Presumed authority (key delivered)
borrower ▪ Necessity (instructions in box)
Benefit accrues
Loan w/ stipulation
to depositor only
for interest is for the
benefit of both
parties
Preference of Common creditors
Credit Depositor has enjoy no
preference over preference in the
other creditors distribution of the
debtor’s property
14
To Whom Where [1987]
o To depositor, / his heirs & successors, / to o Place designated (Transpo expenses =
the person who may have been depositor)
designated in the contract o If no designation: place where it might be
▪ Priority: Heir or Assignee? even if not same place of deposit
• If assignee did not intervene, ▪ Provided transfer was without
but just appointed to receive malice on part of depositary
– heirs ▪ If w/ malice: place of deposit +
• If made for benefit of depositary will shoulder expenses
assignee - assignee
▪ Can depositor terminate
Time [1988]
designation? o Upon demand, regardless of period
• YES if designation = for stipulated
benefit of depositor ▪ If for compensation, depositary is
• NO if designation = for entitled to compensation
benefit of party named corresponding to entire period
o Depositor incapacitated at the time of ▪ Cannot demand at an
making deposit inopportune time
▪ Guardian / administrator OR • Sufficient: in the most
depositor should he acquire immediate time possible
capacity o Exceptions
o Depositor loses capacity after having made ▪ Thing is judicially attached
deposit [1986] ▪ Notification of 3rd person’s
▪ Administrator of depositor’s opposition to return of thing
property / rights • BUT this may be prone to
o 2 / more depositors [1985] abuse; Justice JBL Reyes –
▪ If not solidary + thing is divisible – consign thing in court
joint (cannot demand >own share) (interpleader)
▪ Solidary / indivisible • In BOTH cases, depositary
• Each may do whatever may must immediately inform
be useful to others but not depositor of attachment /
anything w/c may be opposition
prejudicial Breach of Obligation to Return
• Either
o Damages
• If any demands = to him
o If appropriated = estafa
▪ Return to one of depositors
stipulated/designated even if no Mistake [1991]
demand from him ❖ Mistake on depositary’s heir
o 2 / more depositaries ❖ Sold the thing w/c he did not know was
▪ Solidary deposited
▪ Indivisible + 1 refuses to return = ❖ No damages
claim for damages ❖ Return price he may have received
• Depositor can claim from any
• Damages to be reimbursed Force Majeure [1990]
solely by person who refused ❖ Without fault/negligence and does not
to return receive money/thing = not bound to return
• If 1 is insolvent = his share is thing
divided among others ❖ If receives – deliver to depositor
o Discovers that the thing is stolen + knows Relation between Bank & Depositor [1980]
who true owner is [1984]
▪ Advise owner Contract of Loan
▪ If owner does not claim w/in 1 o Bank deposits are really loans to a bank
month, return to depositor because bank can use the same for
▪ If 1 month has not expired & ordinary transactions & for banking
depositor claims it = give to business in w/c it is engaged
depositor (law is unclear); risky o Earn interest
o Has reasonable grounds to believe that o Nature: irregular deposits
thing is not lawfully acquired [1984] o Governed by provisions on mutuum
▪ May return to depositor
15
Relation of Creditor & Debtor ▪ Arises from an obligation of public /
o Depositor (creditor) lends the bank (debtor) administrative character
money & bank agrees to pay the depositor ▪ Governed by provision of such law
on demand o In default, by rules on voluntary deposit
o Compensation is allowed (as opposed to a
true deposit – no compensation) Miserable Deposit [1996]
o Extraordinary diligence (public interest) ▪ Possession of movable property passes from one
▪ General Banking Law person to another by accident / fortuitously
through force of circumstances
Right to Return Thing [1989] ▪ Involuntary bailment / involuntary deposit
Deposit Gratuitous ▪ More immediate object is to save property rather
o May return for justifiable reasons despite than its safekeeping
period fixed (e.g. abroad) ▪ Governed by rules on voluntary deposit + just
o In case depositor refuses, may deposit at compensation
the disposal of judicial authority (consign) Travelers in Hotels / Inns [1998, 1999]
Deposit for a Valuable Consideration
Deposit by Travelers in Hotels
o No right to return before expiration even
if he should suffer inconvenience therefore • Keepers of hotels & inns are generally
liable for the loss of the effects of their
Obligations of Depositor guests BUT these elements must concur:
• Elements
If gratuitous, Reimburse for preservation [1992] (1) Previously informed about effects
brought by guests
Obligation to Pay Losses Incurred Due to a. Actual notification is not
Character of Thing Deposited [1993] necessary, allowed to board
• Exceptions w/ no protest is enough
o Depositor not aware of dangerous (2) Guests have taken precautions
character prescribed
o Depositor not expected to know • Include those introduced / placed in
o Depositor notified depositary annexes of hotel
o Depositary was aware of it w/o advice o Vehicles, animals, articles
from depositor • Do not refer to boarders in dormitories &
lodging houses who select their boarders
Depositary’s Right of Retention [1994]
usually for a contracted & extended period
o Depositary may retain the thing until full • Couch-surfing: for free, no liability
payment of what may be due to him by
reason of deposit When Hotel-Keeper LIABLE [2000, 2001, 2002]
o Thing retained serves as security • Loss / injury to personal property of guests
o Preservation expenses, transportation, caused by hotel’s servants / employees as
compensation, indemnification for loss well as strangers
• Loss caused by thief / robber without use
Necessary Deposit of arms / irresistible force
Legal Deposit [1996] When Hotel-Keeper is NOT LIABLE [2000,
▪ Examples 2001, 2002]
o Judicial deposit of a thing the possession of • Loss / injury through force majeure like flood,
w/c is being disputed in a litigation by 2 or fire, or theft / robbery by a stranger with use
more persons (interpleader) of arms / irresistible force
o Deposit w/ a bank / public institution of • Loss due to acts of guests, his family, servants,
public bonds / instruments of credit payable visitors
to order / bearer given in usufruct when the • Loss arises from character of things brought
usufructuary does not give proper security into the hotel
for their conservation
o Deposit of a thing pledged when the
creditor uses the same w/o authority of the
owner / misuses it in any other way
o Those required in suits as provided in Rules
of Court
o Constituted to guarantee contracts w/ gov’t
16
Exemption / Diminution of Liability [2003] Judicial v Extrajudicial Deposits
• Cannot free himself of responsibility by Judicial Extrajudicial
posting notices to the effect that he is not Cause By will of the court By will of the parties
liable for articles brought by the guest Purpose As security & to
• Any stipulation suppressing / diminishing secure the right of a Custody &
responsibility in articles 1998 – 2001 shall party to recover in safekeeping of the
be void case of a favorable thing
• Practically volunteer as depositaries judgment
o Extraordinary degree of responsibility Subject Matter Movable /
• Not necessary that effects be actually immovable, but Movable
delivered to innkeepers / employees generally immovable
o Enough that such effects are within Remuneration Always remunerated May be
hotel / inn (onerous) compensated / not;
Right to Retain [2004] generally gratuitous
In whose behalf Person who, by Depositor / 3rd
• Hotel-keeper has right to retain things
it is held judgment, has a right person designated
brought into hotel by guest, as security for
Termination When the
credits on account of lodging, & supplies Generally, when the
controversy w/c
usually furnished to hotel guests depositor claims
gave rise to deposit
back the thing w/c
Passengers w/ Common Carriers [1754, 1733] has come to an end
is then returned to
▪ Luggage stored in overhead + in custody of (unless court so
the depositor
passenger: liability is like that of a hotel w/ regard orders)
to deposit of travelers Principles Also governed by
▪ Luggage stored in compartment: liability is that of applicable Rules of Court [2009]
a common freight carrier
o Required to exercise extraordinary diligence
Sequestration / Judicial Deposit

When Judicial Deposit Takes Place
▪ When attachment / seizure of property in
litigation is ordered by a court [2005]
▪ Auxiliary to a case pending
▪ To maintain status quo / to insure right of parties
to property in case of a favorable judgment
In Custodia Legis
• Lawfully seized
• Taken by virtue of legal process & authority
• Placed in possession of a public officer
o Sheriff
o Officer of the court empowered to hold
such as a receiver
Escrow
• Written instrument which by its terms imports a
legal obligation and which is deposited by
the grantor/promisor with a 3rd party, to be
kept by depositary until performance of
condition or happening of event
Obligation of Depositary of Sequestered
Property
▪ Care w/ diligence of a good father of a family
[2008]
▪ May not be relieved of his responsibility until
litigation is ended / courts so orders [2007]
17
Warehouse Receipts Law ▪ Warehouseman may be held liable for issuance
of receipts over non-existent goods
• Act applies to warehouse receipts issued by warehouse
▪ Warehouseman may validly issue receipts for
man
his own property stored in the warehouse
• Civil Code applies when receipts are not issued by a
o Such fact of ownership must be indicated
warehouse man
in the receipt
Purpose Form & Contents
o To regulate the status, rights, & liabilities of the parties ▪ Act does not require / specify any particular form
in a warehousing contract ▪ Act provided for certain essential terms
o To protect those who, in good faith & for value,
acquire negotiable warehouse receipts by Essential Terms [2]
negotiation Location of Warehouse
o To render the title to, & right of possession of, property o To enable holders of warehouse receipts to
stored in warehouses more easily convertible determine where goods are deposited
o To facilitate the use of warehouse receipts as docs of
title Date of Issue of Receipt
o In order to accomplish these, to place a much greater o Indicates prima facie the date when
responsibility of the warehouseman contract of deposit is perfected & when
storage charges shall begin to run
The Issue of Warehouse Receipts
Consecutive Number of Receipt
Document of Title o To identify each receipt w/ goods for w/c it
▪ Doc issued by carrier / warehouseman was issued
▪ Reciting receipt of goods for carriage / keeping
& terms & conditions Person to Whom Goods are Deliverable
▪ Symbol of goods themselves o Determines person/s who shall prima facie
be entitled lawfully to the possession of the
Who May Issue [1] goods deposited
▪ Warehouseman o Can be to order / to bearer = negotiable
o Person lawfully engaged in business of ▪ Failure to use words – may still be
storing goods for profit considered negotiable
o Natural / juridical person
▪ Duly authorized officer / agent of warehouseman Rate of Storage Charges
o In absence of express agreement = pay
Warehouse customary / reasonable compensation for
▪ Building / place where goods are deposited & services of warehouseman
stored for profit
Description of Goods / Packages
Warehouse Receipt o To make identification possible
▪ Written acknowledgement by a Signature of Warehouseman
warehouseman that he has received & holds
o Best evidence that he has received the
certain goods therein described in store for
goods described & has bound himself to
person to whom it is issued
assume all obligations in connection
▪ Simple written contract bet owner of goods &
therewith
warehouseman to pay compensation for service
Warehouseman’s Ownership of / Interest in
Nature
Goods
• Bilateral contract
• Not a negotiable instrument w/in meaning of o To prevent abuses w/c arise from
Negotiable Instruments Law warehousemen issuing receipts on their
o Negotiability is provided for by goods
Warehouse Receipts Act o Omission to state his ownership of the goods
• Not a security in the receipt may render him criminally liable
o Not a contract for payment of money Statement of Advances Made & Liabilities
nor evidence of obligation to pay Incurred
Issuance of Receipt o To preserve lien of warehouseman over
▪ Person who deposits goods w/ warehouseman goods stored / proceeds thereof
for storage is entitled to a receipt
18
Effect of Omission of Any of Essential Terms Obligations & Rights of Warehousemen upon
• Validity of receipt not affected; only their Receipts
Warehouseman liable for damages
• Negotiability of receipt not affected Obligations of Warehouseman
• Contract not converted to ordinary deposit
Principal Obligations [8]
Terms that cannot be Included [3]
(1) To take care of the goods entrusted to his
(1) Exemption from liability from misdelivery safekeeping [21]
o Against Sec 10 of Act o Liable for loss due to lack of care
o For not giving statutory notice in case ▪ Diligence of a good father of a
of sale of goods [Sec 33 & 34] family
(2) Exemption from liability from negligence o Not liable if force majeure
o Required by law to exercise degree of (2) To deliver them to the holder of the receipt
care in safekeeping goods w/c a depositor PROVIDED:
reasonable careful man would exercise
in regard to similar goods of his own Demand
o May limit his liability for loss to an ❖ Not necessary if demand is evidently useless
agreed valuation (beyond his power to deliver)
(3) Contrary to law, morals, good customs, ❖ Where a conversion is otherwise shown
public order / public policy
An offer to satisfy warehouseman’s lien
Negotiability [4, 5] ❖ May refuse to deliver goods until lien is
▪ Not the same as the one in NIL satisfied
o Unconditional promise / order to pay a sum ❖ But loses lien upon surrender of goods
certain in money ❖ When an offer is vain / useless, a formal
▪ In the passage of warehouse receipts through tender is not required (offer to satisfy
the channels of commerce, the law regards the lien may be dispensed with)
property which they describe as following them & An offer to surrender receipt
gives to their regular transfer by indorsement ❖ If negotiable, w/ indorsements
the effect of manual delivery of the things o For protection of warehouseman
specified in them o Warehouseman will be criminally liable
▪ Inserting provision in negotiable that it is non- if he delivers goods w/o obtaining
negotiable = void [5] negotiable receipt
Duplicate Receipts Must be so Marked [6] o Subject to waiver
▪ Refuses to deliver on grounds
• Applies only to negotiable receipts
other than its non-production
• Warehouseman shall be liable for all
❖ If not negotiable
damages caused by his failure to do so
o Not required; need not surrender
o To anyone who purchased the
subsequent receipt for value A readiness & willingness to sign, when the goods are
supposing it to be an original delivered, an acknowledgement that they have been
o Even though purchase be after delivery delivered, if such signature is requested by
of goods by warehouseman to holder warehouseman
of original receipt
Failure to Mark “Non-negotiable” [7]
• Shall be considered negotiable provided
the holder of such unmarked receipt
purchased it for value supposing it to be
negotiable
• Liberal construction = applies only to
warehouseman
19
Other Obligations o If authorized by agreement / custom,
(1) To stamp “duplicate” on copies of may mingle fungible goods w/ other
negotiable receipt goods of same kind & grade [23]
o Warehouseman warrants that: [15] ▪ Different owners become co-
▪ Duplicate is an accurate copy of owners of the whole mass
original receipt ▪ Liability as if goods had been
▪ Original receipt is uncancelled at kept separate [24]
date of issuance of duplicate (8) Obligation w/ respect to goods in case
o Warehouseman may not be compelled of attachment / levy upon goods for w/c
to deliver goods by virtue of duplicate a negotiable receipt has been issued [25]
only o Creditor goes to the warehouseman w/
(2) To place “non-negotiable” on a non- a writ of attachment
negotiable receipt ▪ If the receipt is non-negotiable,
(3) To cancel negotiable receipts upon the warehouseman has no right to
delivery / part delivery [11, 12] refuse the creditor
o Not applicable to non-negotiable • Or else contempt of Court
receipts ▪ If negotiable, any of the ff must be
o If uncancelled, liable to a person who present:
acquires it in good faith & for value • Doc was surrendered or
o Lost / Destroyed Receipts [14] • Negotiation is enjoined or
▪ Court may order delivery of goods: • Doc is impounded by court
• Upon proof of loss / o Does not apply if person depositing is
destruction of receipt not owner (thief)
• Upon giving of a bond w/ o Remedies of Creditor [26]
sufficient sureties to be ▪ Court may aid by injunction &
approved by court otherwise to attach receipt
▪ Warehouseman is still liable to a
holder of receipt for value w/o Delivery
notice since he can secure himself Time
on bond given
(4) To honor altered receipts in appropriate • At the time specified in the contract
cases [13] • When no particular time for redelivery is
o Immaterial Alteration specified, on seasonable demand
o Material Alteration Innocently To Whom Goods Must be Delivered [9]
Made • Not liable for misdelivery to:
▪ Liable on the altered receipt
accdg to original tenor (same for (a) Person lawfully entitled to possession of
both) goods / his agent
o Authorized Material Alteration o To whom competent court has ordered
▪ Liable accdg to terms of receipt delivery of goods
as altered o To an attaching creditor
o Material Alteration Fraudulently o To purchaser in case of sale to enforce lien
Made / where goods are perishable / hazardous
▪ Liable accdg to original tenor
(5) To not issue receipt if goods non-existent (b) Person entitled to delivery under a non-
o Liable for damages [20] negotiable receipt / w/ written authority
(6) To properly describe the goods covered o Authority is sufficient (de leon v. codal)
by the receipt [20] o Does not provide that warehouseman is
o Liable for damages caused by failure justified in making delivery only on written
of goods to correspond w/ description authority
in receipt
o If description consists merely of marks / (c) Person in possession of a negotiable receipt
labels upon goods / upon packages o Liable for misdelivery if delivered to one not
containing them, warehouseman is not an indorsee
liable even if goods are not of kind as
indicated in marks / labels
(7) To keep the goods separate & to not
comingle the goods [22]
20
Liability for Misdelivery [10] Valid Reasons for Refusing to Deliver Goods
• Similar to a bank paying a forged check (1) Holder does not satisfy conditions prescribed
• Liability for conversion in Sec 8
o Conversion (2) Warehouseman has legal title in himself on
▪ Unauthorized assumption & goods
exercise of right of ownership over o Derived directly / indirectly from a
goods belonging to another transfer made by depositor at time /
through the alteration of their subsequent to deposit for storage /
condition / exclusion of owner’s from warehouseman’s lien
right (3) Warehouseman has legally set up title / right
o Delivery is otherwise than authorized by of 3rd persons as lawful defense
subsections b & c o Requested by / on behalf of person
o Even if delivered to b / c, may still lawfully entitled to right of property /
be liable for conversion if: of possession in goods, not to make
▪ Requested not to make such such delivery
delivery o Had info that delivery about to be
▪ Had received notice of adverse made was to one not lawfully
claim / title of 3rd person entitled to possession of goods
o Goods have already been lawfully
Ownership is Not a Defense for Refusal to sold to 3rd persons to satisfy
Deliver [16] warehouseman’s lien / bec of
• UNLESS title / right is derived perishable / hazardous nature
o Directly / indirectly from transfer made (4) Refuses to deliver until lien is satisfied
by depositor at time of deposit for (5) Failure not due to fault / negligence
storage / subsequent thereto o Force majeure
o From warehouseman’s lien
• Based on estoppel Warehouseman’s Lien
▪ Lien over goods deposited w/ him is his security
Several Claimants [17, 18]
• Warehouseman must determine w/in What Claims are Included [27]
reasonable time, the validity of conflicting • For all lawful charges for storage &
claims preservation
o Deliver to whom he finds entitled • For all lawful claims for money advanced,
o Not excused from liability in case he interest, insurance, transportation, labor,
makes a mistake weighing, cooperating & other charges &
• Warehouseman must bring a complaint expenses in relation to such goods
in interpleader • For all reasonable charges & expenses
o Require different claimants to litigate for notice & ads of sale
among themselves • For sale of goods where default had been
• Adverse title of 3rd person is not a made in satisfying the warehouseman’s lien
defense for refusal to deliver [19] • Not for other obligations
Liability to Rightful Claimant Goods Subject to Lien [28]
o Does not compel interpleader in a case • Goods of depositor who is liable to
requiring it warehouseman as debtor
▪ Liable for refusal to deliver to • Goods of other persons stored by depositor
rightful claimant who is liable to warehouseman as debtor w/
o Neither impleads nor investigates authority to make a valid pledge
▪ After a lapse of a reasonable time, • Goods stored in fraud of true owner’s rights –
liable for conversion as of date of NOT INCLUDED
original demand o Otherwise, warehouseman could
become a legalized receiver of stolen
goods
21
Loss & Waiver of Lien upon Goods [29] ❖ Sale in place where lien was acquired, if
• Surrendering possession of goods unavailable, nearest place
o Presumed that lien has been waived / ❖ Ad published once a week for 2
abandoned consecutive weeks in newspaper where sale
o May not claim a lien on other goods of is to be held
same depositor if covered by separate o No newspaper: ad posted in at least 6
receipts conspicuous places – at least 10 days
• By wrongfully refusing to deliver goods before sale
o Does not necessarily mean o Describing goods to be sold
extinguishment of depositor’s o Name of owner / person on whose
obligation to pay warehousing fees & acct goods are held
charges o Time & place of sale
❖ Sale ≥ 15 days from time of 1st publication
Lien where Receipt Negotiable [30]
• Lien exists only for other charges Perishable & Hazardous Goods [34]
expressly enumerated in receipt • Perishable in nature / by keeping will
o EXCEPT for charges for storage & deteriorate greatly in value / by odor,
preservation leakage, inflammability / explosive nature,
• Claims not specified in receipt will be liable to injure other property
o Warehouseman shares pro rata w/ • Warehouseman may give notice to satisfy
other creditors of depositor on lien & to remove from warehouse
balance of proceeds of sale for o To owner / person in whose name
satisfaction of claims – after deducting goods are stored
charges for storage • Warehouseman may sell at public / private
sale w/o advertising
Remedies Available to Warehouseman [31, 32, o If unable to sell, may dispose in a lawful
33, 34, 35] manner
• Refusing to deliver goods until lien is
satisfied Effect of Sale of Goods [33, 36]
• Causing extrajudicial sale of property & • Not liable for non-delivery even if receipt
applying proceeds to value of lien given when deposited be negotiated
o If sale is insufficient, may recover value • Sale w/o publication required & before time
o If sale is in excess = return to one who specified by law
can present warehouse receipt o Sale is void
o Any time before goods are sold, any o Purchaser of goods acquires no title
person claiming a right may pay Acts for w/c Warehouseman is Liable
warehouseman
▪ Deliver if person is entitled • Failure to stamp “duplicate” on copies of a
• Filing a civil action for collection of negotiable receipt
unpaid charges / by way of counterclaim • Failure to place “non-negotiable”
in an action to recover the property from him • Misdelivery of goods
o Such other remedies allowed by law for • Failure to effect cancellation of a
enforcement of a lien against personal negotiable receipt upon delivery
property / to a creditor against his • Issuing receipt for non-existing goods /
debtor misdescribed goods
• Failure to take care of goods
Procedure for Sale • Failure to give notice in case of sale of
❖ Written notice: person on whose acct goods to satisfy his lien / bec goods are
goods are held & any other person known perishable / hazardous
by warehouseman to claim an interest
o Given by delivery
o Itemized statement of warehouseman’s
claim
o Brief description of goods
o Demand: paid on or before a day
mentioned, not < 10 days from receipt
of notice
o Statement that unless claim is paid,
goods will be advertised for sale & sold
by auction
22
Negotiation & Transfer of Receipts (2) Title of person (depositor / owner) to whose
order by terms of receipt the goods were to
Negotiation of Negotiable Receipt [37] be delivered, over such goods
▪ Manner of transferring is the same as in (3) Direct obligation of warehouseman to hold
negotiation of promissory notes & bills of possession of goods for him, as if
exchange warehouseman directly contracted w/ him
(1) Negotiable by delivery
o Goods are deliverable to bearer * one who purchases a negotiable receipt
o Indorsed in blank issued to a thief acquires no right over
▪ When holder merely signs his name at goods
the back w/o specifying to whom
Transfer of Non-Negotiable Receipt [39]
goods are to be delivered
o Indorsed to bearer by person to whose ▪ Cannot be negotiated
order the goods are deliverable / by a ▪ Can be transferred / assigned by delivery
subsequent indorsee Rights of Person to Whom Receipt has been
(2) Specially indorsed
o Becomes an order receipt
Transferred [42, 43]
o Can only be effected by indorsement of ▪ Rights are not absolute
indorsee o Subject to terms of agreement w/ transferor
By Indorsement [38] Negotiable, Transferred, not Negotiated

• Deliverable to a person specified, may be (1) Right to goods as against transferor
negotiated (2) Right to compel transferor to indorse
o If indorsed in blank / to bearer, receipt
negotiable by delivery o If intention is to merely transfer, no
o If indorsed to a specified person, may right to require indorsement
be again negotiated by indorsement o Negotiation shall take effect as of the
of such person in blank, to bearer or to time of indorsement, not time when
another specified person receipt is delivered
▪ Delivery alone is not sufficient Non-Negotiable, Transferred
Advantages of a Negotiable Warehouse Receipt (1) Right to notify warehouseman of transfer
• Protects a purchaser for value & in good (2) Right to acquire obligation of
faith warehouseman to hold goods for him
• Goods covered cannot be garnished /
Attachment of Goods Covered by Receipt [42]
levied upon under execution unless
surrendered, / impounded / negotiation is Receipt Non-Negotiable
enjoined [25]
• Does not effect delivery of goods
• In case of negotiation, holder acquires
• Before notification
direct obligation of warehouseman to
o Warehouseman is not bound to
hold possession of goods for him w/o
transferee
notice to warehouseman
o Right of transferee may be defeated by
• Goods are not subject to seller’s lien /
a levy of an attachment / execution
stoppage in transitu
upon goods by creditor of transferor /
Persons who Negotiate a Receipt [40] notification to such warehouseman of
• Owner subsequent sale of goods
• Any person to whom possession / custody Receipt Negotiable
has been entrusted by owner
• Goods cannot be attached / be levied
• As between 2 innocent persons, the loss under execution unless receipt be 1st
must fall upon him whose misplaced surrendered to warehouseman / its
confidence made the loss possible negotiation enjoined
Rights of Person to Whom Receipt has been
Ownership of Goods Covered by Receipt
Negotiated [41]
Negotiated / Transferred
(1) Title of person negotiating receipt over
goods covered by receipt Indorsee / Transferee
• Considered as the owner of goods
23
• Therefore, indorser / transferor may not take Effect of Subsequent Negotiation by Seller [48]
possession & dispose of the goods w/o ▪ Purchaser, mortgagee, / pledgee should
consent of indorsee require negotiation of receipt to him,
• For 3rd persons, holder is the owner otherwise, his failure will have the same effect as
Indorser / Transferor an express authorization for seller / mortgagor
/ pledgor to make any subsequent
• If the indorsement / transfer is only for negotiation
security of a debt, indorsee / transferee
does not automatically become owner Indorsee’s Right Superior to Vendor’s Lien [49]
o Merely retains right to keep ▪ Warehouseman is not obliged to deliver / justified
o Sell w/ consent of owner to satisfy an in delivering goods to an unpaid seller unless
obligation receipt is 1st surrendered for cancellation
When innocent 3rd persons are involved
Criminal Offenses
• Indorsee-pledgee of a WHR is considered
o Issue of receipt for goods not received
the owner (similar w/ 1st heading)
o Issue of receipt containing false statement
Warranties on Sale of Receipt [44] o Issue of duplicate receipt not so marked
▪ 4 WARRANTIES on sale/negotiation of receipt: o Issue for warehouseman’s goods of receipt w/c does
(1) Receipt is genuine not state the fact
(2) He has legal right to negotiate / transfer it o Delivery of goods w/o obtaining negotiable receipt
(3) No knowledge of fact w/c would impair ▪ Delivery of goods out of possession of
validity / worth of receipt warehouseman, by warehouseman / officer /
(4) He has a right to transfer title to goods & agent / servant
goods are merchantable / fit for a particular ▪ Person who causes delivery has knowledge that
purpose, whenever such warranties would have a negotiable receipt for goods is outstanding &
been implied, if contract of parties had been to uncancelled
transfer w/o a receipt of goods represented ▪ Person causing delivery does so w/o obtaining
thereby possession of receipt at / before time of delivery
▪ Transferor does not guarantee that o Negotiation of receipt for mortgaged goods
warehouseman / previous indorsers will
perform their obligations [45]
o Merely conveyance, not a contract of
guaranty
Liability of Mortgagee, Pledgee / Holder for
Security [46]
▪ A holder for security of a receipt who in good
faith accepts payment of debt from a person
does not thereby warrant genuineness of receipt
nor quality / quantity of goods
Validity of Negotiation as Against Real Owner
[47]
Receipt Acquired from Owner’s Agent
• Bona fide purchaser acquires title to goods
o w/in actual / apparent scope of
agent’s authority
o Not where transfer is made by one
other than owner w/o any ostensible
authority to issue / negotiate receipt
Lost / Stolen Receipt
• Bona fide transferee acquires no title
o UNLESS owner indorses in blank &
leaves w/ agent – puts it in power of
agent to steal & negotiate
24
Guaranty & Suretyship Characteristics
▪ Consensual
Nature & Extent of Guaranty ▪ Unilateral
o Guarantor binds himself to the creditor to fulfill the o Duty on part of guarantor in relation to
obligation of the principal debtor in case the latter creditor
should fail to do so ▪ Principal debtor becomes liable to
indemnify guarantor – merely incidental
Classification o May be entered into even w/o intervention
▪ In the broad sense of principal debtor
o Personal o Bilateral if compensation is paid
▪ Credit given by guarantor ▪ Nominate
o Real ▪ Accessory [2052]
▪ Property o If principal is void, guarantee is also void
• Immovable: real mortgage, o May secure voidable unless annulled by
antichresis proper action in court [1390]
• Movable: pledge, chattel o May secure an unenforceable contract
mortgage [1403]
▪ Origin [2051] o May secure a natural obli [1423]
o Conventional ▪ When debtor himself offers a guaranty,
▪ By agreement of parties he impliedly recognizes his liability,
o Legal thereby transforming the obli to a civil
▪ Imposed law to secure compliance of one
certain obligations ▪ Subsidiary & conditional [2054]
▪ Law interpreted strictly o Takes effect only when principal debtor fails
o Judicial in his obli, subject to certain limitations
▪ Constituted by decree of court o Cannot bind himself for more than the
▪ Consideration principal debtor
o Gratuitous ▪ Even if he does, his liability shall be
▪ Guarantor does not receive any price reduced to the limits of the debtor
/ remuneration for acting as such o Interest, judicial costs, & atty’s fees as part of
o Onerous damages may be recovered
▪ Guarantor receives valuable o Penalty may be provided
consideration ▪ Informal [2055]
▪ As to person guaranteed [2051] o Must be in writing for enforceability
o Single ▪ Strictly construed – in favor of guarantor
▪ To secure performance by debtor / surety
o Double / sub-guaranty o Governed by Statute of Frauds
▪ To secure fulfillment by guarantor ▪ Need not appear in a pub doc to be
▪ Scope & extent valid & enforceable
o Definite / Limited ▪ Generally gratuitous, may be onerous
▪ Limited to principal obligation only / to
a specific portion Parties
o Indefinite / Unlimited ▪ Creditor & guarantor
▪ Not only principal obligation but aslo ▪ Debtor may also be a party
all its accessories including judicial
Requisites
costs
▪ Guaranty may also be continuing / not ▪ Consent
o Meeting of the minds
▪ Object
o Obligation guaranteed
▪ Cause [2048]
o Gratuitous, unless stipulation to the contrary
o Cause is the same cause w/c supports the
obli as to the principal debtor
o Liable although he possesses no direct /
personal interest over obli nor does he
receive any benefit therefrom
25
Scope Nature of Surety’s Undertaking
▪ Principal obligations of the debtor • Liability is contractual & accessory but
▪ Accessory obligations pertaining to principal direct
obligation o Directly, primarily, equally bound w/
▪ Obligations that arise as a matter of law from the principal
guaranteed obligations o Creditor is given right to directly
o Interest in case of delay proceed against either principal
▪ Obligation to pay judicial costs incurred after debtor / surety
guarantor has been judicially required to pay o Surety does not insure insolvency of
debtor but rather debt itself
Manner of Payment • Liability is limited by terms of contract
▪ Manner provided in the principal contract, unless o Surety is not presumed
otherwise provided o Cannot extend to more than what is
▪ Place stipulated
o Stipulation o Surety is not released by change in
o Domicile of debtor contract w/c does not have the effect
▪ Time of making its obli more onerous
o As soon as creditor was unsuccessful in • Liability arises only if principal debtor is held
exhausting properties of debtor liable
o In the absence of collusion, the surety is
Suretyship bound by a judgment against the
▪ Contractual relation principal even though he was not a
▪ Not in writing = still enforceable party to the proceedings
o Not part of SoF o A surety not given notice when the
▪ Surety engages to be answerable to creditor for claim for damages against the
debt, default, / miscarriage of debtor principal in the replevin bond was
▪ Law applicable: Joint & Solidary obligations heard is entitled to be heard when the
o Title I, Chap 3, Section 4, Book IV judgment for damages against the
o Provisions on guaranty also apply principal is sought to be enforced
▪ 2066: right to indemnification against the surety’s replevin bond
▪ 2067: right to subrogation o A surety bond is void where there is no
▪ 2079: extn of time granted by creditor principal debtor
to debtor w/o consent of surety will • Surety is not entitled to exhaustion
release surety • Undertaking is to creditor, not to debtor
▪ The ff don’t apply: o Unless otherwise expressly provided,
• 2058: benefit of excussion surety makes no covenant / agreement
• 2063: compromise bet creditor & w/ principal debtor that it will fulfill the
principal debtor benefits obli guaranteed for his benefit
guarantor but does not prejudice • Surety is not entitled to notice of principal’s
him default
• 2071 • Prior demand by the creditor upon principal
• 2080: cannot claim release from not required
obligation under this article • Surety is not exonerated by neglect of
• 2081 creditor to sue principal
▪ Suretyship for future debts o Even if such delay continues until the
o Parties can agree that surety will be liable principal becomes insolvent
for debts incurred after execution of
suretyship agreement
Guarantor w/ Solidary Liability
• Possible w/o affecting nature of contract
• Depends upon terms & intention
• Action may be brought against him outright
by reason of said solidarity but he retains his
character as a guarantor & all rights inherent
in a guarantor by reason of payment by him
26
Guaranty v Suretyship Guaranty v Indorsement
Guaranty Suretyship Guaranty Indorsement
Insurer of the solvency of the Insurer of debt – obligates Security Transfer
debtor – binds himself to pay if himself to pay if principal does Unless the note is promptly
Failure in prompt presentation
principal is unable to pay not pay presented for payment at
& due notice of dishonor does
Undertaking that debtor shall Undertaking that debt shall be maturity & due notice of
not (as a GR) work an
pay paid dishonor given w/in a
absolute discharge of liability
Liability depends upon an reasonable time, he will be
– discharged only to extent of
independent agreement to Assumes liability as a regular discharged absolutely from all
loss w/c he may have suffered
pay obli if primary debtor fails party to the undertaking liability thereon, W/N he has
in consequence thereof
to do so suffered any actual damage
Charged as an original Answerable on a strict
Collateral undertaking promisor & debtor from the Warrants solvency of promisor compliance w/ the law, whether
beginning promisor is solvent / not
Liability to the creditor is direct, Cannot be sued as promisor May be sued
Secondarily / subsidiarily liable
primary & absolute Falls under Statute of Frauds Does not fall under SoF
Not bound to take notice of
Ordinarily held to know every Guaranty v Warranty
non-performance of his
default of his principal
principal Guaranty Warranty
Often discharged by mere Undertaking that the title,
Will not be discharged either
indulgence of the creditor of quality, / quantity of the subject
by mere indulgence of creditor Contract by w/c a person is
the principal & is usually not matter of a contract is what it
of principal / by want of bound to another for the
liable unless notified of the has been represented to be &
notice of default of principal fulfillment of a promise /
default of the principal relates to some agreement
engagement of a 3rd party
Can claim release from obli made ordinarily by the party
whenever by some act of the who makes the warranty
creditor, they cannot be Cannot claim release from his
subrogated to the rights, obli under Art 2080 Married Woman as Guarantor [2049]
mortgages, & preferences of ▪ Ordinarily binds only her separate property
the creditor [2080] ▪ May also bind community / conjugal partnership
▪ Presumption of guaranty w/ husband’s consent
▪ No demand necessary for surety + need not o Even w/o consent in cases provided by law
implead all sureties – redounded to the benefit of the family
▪ Relativity of Contracts
o Insurance is liable even if no premium was
Rights of 3rd Person Who Pays [2050]
paid ▪ w/o knowledge / against will of debtor
o Under Insurance Code, cannot invoke “no o Can only recover insofar as debtor is
premium paid” benefitted
o Cannot compel creditor to subrogate him in
Terminology Used by Parties Not Controlling his rights such as those arising from mortgage,
• In case of conflict, written prevails over guaranty / penalty
printed ▪ w/ knowledge / consent
• Goods sold upon sole credit & responsibility o Subrogated by virtue of payment to all rights
of party who makes promise = surety w/c creditor had against debtor
• Jointly & severally = surety
• Bind myself as guarantor = guaranty Guaranty of Future Debts [2053]
• We hereby guarantee compliance w/ the ▪ Continuing guaranty / suretyship
terms & conditions of the contract = ▪ No claim can be made until amt is ascertained /
guaranty fixed & demandable
▪ Examples
o To secure the payment of a loan at maturity
o To secure payment of any debt to be
subsequently incurred
o To secure existing unliquidated debts
Guaranty of Conditional Obligations [2053]
▪ Valid & binding just like a pure one
27
Guaranty Strictly Construed [2055] Strict Construction not Applicable to
▪ Liable only to obligation stipulated Compensated Sureties
o Not to obli assumed previous to execution • Ambiguity – interpreted against the surety
of guaranty unless clearly indicated company that prepared it
▪ Guaranty to render accounting • Business associations
o Cannot be extended to include a guaranty o Organized for purpose of assuming
that the money due the creditor will be classified risks in large numbers, for profit
delivered & on impersonal basis
▪ Guaranty w/ a term subsequently cancelled o Through medium of standardized
o Not liable for non-compliance by principal written contractual forms drawn by its
debtor w/ a subsequent contract w/c the own representatives
principal debtor & creditor might have o Primary aim of protecting its own
entered into on / after term w/o guarantor’s interests
intervention • Secured from all possible loss by adequate
▪ Liability of surety limited to a fixed period counterbonds / indemnity agreements
o Cannot be bound, for a longer time, unless • Although calling themselves as sureties – are
contract has been renewed in fact insurers
▪ Liability of surety in case of renewal / extn
o Agreement: surety bound themselves liable Extent of Guarantor’s Liability
in case of an extn / renewal w/o necessity of ▪ Guaranty definite
executing another indemnity agreement / o Limited in whole / in part to principal debt
w/o necessity of being notified – valid o To the exclusion of accessories
▪ Liability of surety to expire on maturity of principal ▪ Guaranty indefinite / simple
obli o Extends not only to principal obli but also to
o Unfair & unreasonable all its accessories
▪ Liability of surety to pay in case of forfeiture of
Liability for Judicial Costs
imported goods
o Bound itself to pay sum of money in the • Only as have been occurred after he has
event that merch is forfeited to the gov’t – been judicially required to pay
guaranteed payment of appraised value of • From the time he had been judicially
goods, not legality of importation required to pay, all of the costs that arise
▪ Bond requires creditor to report to surety any depend on his exclusive will & are therefore
violation by debtor attributed to his fault if he does not do so
o Does not cover defaults incurred prior to
Acceptance of Guaranty by Creditor & Notice to
acceptance by lessor of bond & condition
▪ Bond issued to secure defendant from possible Guarantor
damages as a result of injunction
When Necessary
o If declared as wrongfully issued, cannot be
executed to satisfy defendant’s mortgage • There is merely an offer / merely a
claim against the plaintiff conditional guaranty
▪ Bond issued in favor of plaintiff who filed a case • Requires action by creditor before obli
for collection becomes fixed
▪ Contract requires that notice of principal’s • Binding only when accepted & guarantor
default be given surety gains knowledge of acceptance
o If stipulated, failure to comply will prevent o Acceptance need not be express / in
recovery from surety writing
• Guarantor is entitled to notice
Strictissimi Juris Applicable only to o To know nature & extent of liability
Accommodation Surety o To have opportunity of taking indemnity
• Acts w/o motive of pecuniary gain w/ principal
o Should be protected against unjust o To have reasonable time to arrange
pecuniary impoverishment necessary funds
o To avail of appropriate means in law &
equity to compel other parties to
discharge him from future responsibility
• Example
o In such form & amt as shall be
satisfactory to the company
28
When not Necessary Effects of Guaranty
• Not merely an offer of guaranty
o Amounts to direct / unconditional Effects bet Guarantor & Creditor
promise of guaranty
▪ Unless notice of acceptance is Right of Guarantor to Benefit of Excussion /
made a condition Exhaustion [2058]
• Creditor should act upon it • Guarantor only secondarily liable
• All property + legal remedies against debtor
Qualifications of Guarantor [2057] to be 1st exhausted
▪ Integrity o Not sufficient that debtor appears
▪ Capacity to bind himself insolvent
▪ Sufficient property to answer for obli w/c he • Payment prior to exhaustion
guarantees o May recover
▪ *Creditor may waive requirements
Duty of Creditor to Secure Judgment Against
Effect of Subsequent Loss of Required Debtor Prior to Exhaustion
Qualifications [2057] o Need for judgment
• Qualifications need only be present at the ▪ All properties of principal must 1st
time of perfection be exhausted before his own is
o Contract of guaranty continues levied upon
• If guarantor is convicted of a crime involving o Deferment of execution
dishonesty / insolvent (need not be final ▪ Creditor may secure judgment
judgment) against guarantor
o Judicial determination of insolvency not ▪ Guarantor is entitled to deferment
necessary of execution until after properties
o Insolvent of principal debtor shall have
▪ Liabilities > assets been exhausted
▪ Unable to meet obligations in a
normal manner
o Creditor may demand another
guarantor
▪ May waive it
▪ Exception: creditor has required
& stipulated that a specified
person should be the guarantor
Selection of Guarantor
• Specified person stipulated as guarantor
o Substitution may not be demanded
• Guarantor selected by principal debtor
o Principal answers for integrity, capacity
& solvency of guarantor
• Guarantor personally designated by
creditor
o Responsibility for selection is creditor’s
29
Exceptions to Benefit of Excussion [2059] o Pledge / mortgage has been given by him
o No benefit of excussion means that the as a special security [fall under Extra-
creditor may demand from the guarantor Contractual Obli - Title XVII]
even if properties / other legal remedies are ▪ No benefit as mortgagor;
present separate
o Guarantor expressly renounced it o Fails to interpose it as a defense before
▪ Personal right judgment is rendered against him
▪ Waiver is valid
Joinder of Guarantor & Principal as Parties
▪ No specific form required –
sufficient that renunciation is Defendant [2062]
express • GR: Guarantor cannot be sued w/ his
o G bound himself solidarily w/ debtor [2047] principal
▪ Benefit of excussion is • Exception: if it would serve merely to delay
incompatible w/ solidarity the ultimate accounting of the guarantor
o Insolvency of debtor o Proven that principal is not able to
▪ Must be actual perform contract
▪ May be proven by return of writ of Procedure
execution unsatisfied / other
means o Sent against principal
▪ Not sufficiently established by ▪ Creditor may hold guarantor only
mere declaration of insolvency in after judgment has been
insolvency proceedings obtained against principal
• Extent of inability to pay is not debtor – unable to pay
determined until final o Notice to guarantor of the action
liquidation of estate ▪ Must be notified, so he may
o Debtor absconded / cannot be sued w/in appear
PH ▪ Voluntary appearance does not
▪ Unless he has left a manager / constitute a renunciation of right
representative to excussion
o May be presumed that execution on debtor ▪ Does not appear = cannot set up
would not result in satisfaction defenses
▪ Resort to all legal remedies would • May no longer be possible
be a useless formality for him to question validity of
▪ Not necessary that debtor be judgment against debtor
judicially declared insolvent / o Hearing before execution can be issued
bankrupt against guarantor
o G does not comply w/ 2060 ▪ Entitled to be heard before
▪ Must set up benefit of excussion execution can be issued against
against creditor upon demand him where he is not a party in the
• When demand to be made case involving his principal
o Only after judgment on Effects of Compromise [2063]
debt • Compromise: contract whereby parties, by
• Actual demand to be made making reciprocal concessions, avoid
o Joining guarantor in suit v litigation / put an end to one already
debtor is not the commenced [2028]
demand intended • Compromise cannot prejudice guarantor /
• Judicial / extrajudicial debtor when he is not a party to such
demand compromise
▪ Point out available property of o Contract binds only parties & not 3rd
debtor w/in PH territory – sufficient persons
to cover debt • Even if not a party, contract may benefit him
• Not in litigation / o May accept unless it has been revoked
encumbered before his acceptance
• Not exempt (family home)
▪ If G complies, creditor who is Sub-Guarantor’s Right to Excussion [2064]
negligent suffers loss to extent of • Enjoys benefit of excussion not only w/
property [2061] respect to principal debtor, but also w/
o G is a judicial bondsman & sub-surety [2084] respect to guarantor
30
Benefit of Division Among Several Guarantors o Payment by a 3rd person who does not
[2065] intend to be reimbursed [1238]
• No benefit of division when: ▪ Donation – requires debtor’s
o Solidarity is expressly stipulated consent
o Any of the circumstances in 2059 (also ▪ Valid as to creditor
benefit of exhaustion ceases) o Right to demand reimbursement is subject to
• Need not point out property of co- a waiver
guarantors to be entitled to division Guarantor’s Right to Subrogation [2067]
Requisites Subrogation
o Several guarantors, 1 debtor, same debt o Transfer of credit w/ all rights thereto
▪ Cannot be availed if 2 / more appertaining either against debtor /
debtors of 1 debt – even of against 3rd persons [1303]
solidary ▪ Change in person of creditor by
▪ Cannot be availed if 2 / more guarantor
guarantors of same debtor, but • Obli subsists in all respects as
not only for same debt before payment
o Claimed in a timely manner ▪ If debtor’s obli is secured w/
o Solidarity has not been expressly stipulated pledge, mortgage / other security
• Guarantor is also subrogated
Benefit of Excussion Among Several
to all rights w/c creditor had
Guarantors [2065] under these securities
• If 1 of them turn out to be insolvent, his share ▪ Rights to indemnification &
has to be borne by others [2073 (2)] subrogation in 2066 & 2067
• When creditor claims share of guarantor extend to sureties
from others on ground of insolvency
o Others can set up existence of Accrual, Basis & Nature of Right
property of supposed insolvent o Arises by operation of law upon payment by
o Same conditions in 2060 guarantor
o Stands upon principles of natural justice
Effects bet Debtor & Guarantor o Not a contractual right
o If G paid a smaller amt by virtue of
Guarantor Must be Indemnified [2066]
compromise, cannot demand > actually
• Total amt of debt paid
o Includes interest paid by guarantor
• Legal interest When Right not Available
o From the time notice of payment of o When guarantor has no right to be
debt was made known to debtor reimbursed
▪ Notice = demand
• Expenses incurred by guarantor Payment Against Will of Debtor
o Only those he has to satisfy in o G cannot compel creditor to subrogate him
accordance w/ law as a consequence in his rights
of the guaranty ▪ Such as those arising from a
o Not those w/c depend upon his will / mortgage, guaranty / penalty
own acts / fault Partial Payment
o Incurred after notifying debtor that
demand for payment has been made o Creditor is preferred over G who has been
• Damages, if they are due subrogated in his place in virtue of partial
o Damage suffered by G w/ respect to payment
payment of money to creditor is Effect of Payment by Guarantor w/o Notice to
compensated by payment of legal Debtor [2068]
interest
• Debtor may interpose against guarantor
Exceptions to Right to Indemnify / those defenses w/c he could have set up
Reimbursement against the creditor at the time payment was
o Guaranty is constituted w/o knowledge / made
against will of principal debtor [2050] o Ex. Already paid creditor
▪ Recover only insofar as payment
had been beneficial to debtor
31
Effect of Payment by Guarantor Before / After Recovery by Surety Against Indemnitor Even
Maturity [2069] Before Payment
• Payment before maturity o Indemnity agreement for benefit of surety
o Not entitled to reimbursement o Indemnity agreement may be against actual
o Debtor is liable if w/ his consent / loss as well as liability
ratified ▪ Indemnitor’s liability arises as soon
▪ G may recover upon expiration of as liability of person to be
period indemnified has arisen w/o regard
• Demand during term of guarantee, doesn’t to whether or not he has suffered
matter if payment was made after term actual loss
o Default & demand had taken place
while guarantee was still in force Guarantor of 3rd Person at Request of Another
[2072]
Effect of Repeat Payment by Debtor [2070] • G guarantees debt of absentee at request
• GR: guarantor’s only remedy is to collect from of another
creditor • G has a right to claim reimbursement after
• Requisites for Exception: payment from:
1. Creditor becomes insolvent o Person who requested him to be a
2. Guarantor was prevented by fortuitous guarantor
event to advise debtor of payment o Debtor
3. Guaranty is gratuitous
Effects bet Co-guarantors
Right of Guarantor to Proceed Against Debtor
Before Payment [2071] Right to Contribution of Guarantor who Pays
• When he is sued for payment [2073]
o & guarantor cannot claim benefit of • Same debtor, same debt
excussion • Applies to sureties
• Insolvency of principal debtor • Condition
• Debtor has bound himself to relieve him from o In virtue of a judicial demand or
guaranty w/in specified period, period has o Principal debtor is insolvent
expired • If guarantor proceeds 1st against debtor,
• Debt has become demandable by reason debtor pays
of expiration of period for payment o Debtor & co-guarantors discharged at
• After 10 yrs, when principal obli has no fixed once from their obligations
period for its maturity
o Unless it be of such nature that it Effect of Insolvency of Any Guarantor
cannot be extinguished except w/in a o His share is borne by others
period longer than 10 yrs Accrual & Basis of Right
• If there are reasonable grounds to fear that
o Right to contribution is acquired ipso jure by
principal debtor intends to abscond
virtue of payment w/o need of obtaining
• If principal debtor is in imminent danger of
from creditor any prior cession of rights to
becoming insolvent
such guarantor
Remedy to Guarantor
Defenses Available to Co-Guarantors [2074]
o Obtain release from guaranty /
o May avail of all defenses w/c debtor would
▪ Creditor cannot be compelled,
have interposed against creditor
against his will, to release
▪ Fraud, prescription, illegality,
guarantor
remission
▪ Debtor may offer creditor another
▪ Except those purely personal to
guarantor / another security
debtor
o Demand a security that shall protect him from
any proceedings by creditor & from danger Liability of Sub-Guarantor in case of
of insolvency of debtor Insolvency of Guarantor [2075]
o Cannot demand reimbursement – has not • SG is liable to co-guarantors in the same
paid manner as guarantor whom he guaranteed
32
Extinguishment of Guaranty o Extension must be based on a new
agreement
Causes of Extinguishment [2076] o Diligence of creditor to enforce his claim
generally not required
Obligations of Guarantor ▪ Recognized doctrine in suretyship
• Causes of extinguishment under general ▪ No cause of action against
contract law [1231] creditor for delay
• Extinguishment of principal obligation • Law does not grant surety
o Since guaranty is accessory & right to sue creditor for delay
subsidiary contract o *If instead of extending the period, the
• Certain causes peculiar to extinguishment of period was made shorter = cannot be
guaranty made to pay earlier
Guaranty Obli payable in installments
Payment / performance ❖ Extension as to 1 / more will not affect liability
for others
o Payment / performance by debtor
❖ w/o acceleration clause = release from
Dacion en pago specific installment
o If creditor voluntarily accepts immovable / ❖ w/ acceleration clause = release from entire
other property in payment of debt [2077] obligation
o Even if creditor is subsequently evicted Consent to extension waived in advance
▪ Eviction revives principal but not Payment by G after creditor’s demand
guaranty
❖ Benefit of excussion + consent in extension
Loss of the thing due may be invoked as defenses
o Obli to deliver determinate thing [1262] ❖ Principal debtor cannot raise against
guarantor defenses w/c only guarantor may
Service becomes impossible invoke against creditor
o Legally / physically [1266] Extension not granted by creditor
Consignation ❖ 2079 not applicable
o Consigned – creditor authorizes debtor to Extension granted to 1st-tier obigors
withdraw ❖ Indemnitors bound themselves solidarily to
Condonation [1273] the surety
❖ Creditor cannot directly demand payment
Merger / Confusion of principal from indemnitors
o Debtor & creditor merge
Failure of Subrogation [2080]
Compensation o By some act of creditor, G cannot be
Novation subrogated to the rights, mortgages, &
o When principal obli is extinguished as a preferences of creditor
consequence of novation, guaranty may ▪ Ex. Creditor releases / fails to
subsist only insofar as it benefits 3rd persons register a mortgage
who did not give their consent [1296] o Act must be personal, direct & of a positive
o Material alteration of principal w/o consent character
of surety ▪ Excludes mere passivity / lack of
▪ Change w/c imposes new obli / diligence
added burden on party promising o Duty of creditor to acct for his lien on
/ w/c takes away some obli principal’s property
already imposed – changing legal ▪ Any release / impairment of this
effect of orig contract & not security as primary source for
merely form payment of debt will discharge the
surety to the extent of the value of
Extn of Term by Creditor to Debtor [2079] the property / lien released
o w/o consent of guarantor
o Applies to surety Release
o Mere failure of creditor to demand payment o Release made by creditor in favor of 1 of
after debt becomes due ≠ extension guarantors, w/o consent of others, benefits
o Prejudice to guarantor & period of extn all to the extent of the share of the guarantor
immaterial to whom it has been granted [2078]
33
Defenses Available to Guarantor Against Legal & Judicial Bonds
Creditor [2081] o Bond: an undertaking that is sufficiently secured – not
cash / currency
Defenses Derived from Principal Obligation o Bondsman: surety offered in virtue of a provision of law
• May be set up against creditor / judicial order [2082]
• Rules ▪ Must have qualifications required of guarantor –
o If guarantor, knowing the defenses, 2056 & in special laws – RoC secs 12, 13, Rule
does not set up – debtor may set up all 114
defenses w/c debtor could have set
up against creditor at time payment Nature of Bonds
was made ▪ Contractual
o Guarantor may set up these defenses ▪ Exist only in consequence of a meeting of minds
even against will of debtor under conditions essential to a contract
o Guarantor can intervene in action bet ▪ Judicial Bonds: special class of contracts of
debtor & creditor guaranty – given in virtue of judicial order
▪ Concerning existence & validity of
principal obli Pledge / Mortgage in Lieu of Bond [2083]
▪ Does not intervene= not deprived ▪ If person required to give legal / judicial bond
of right to set up defenses should not be able to do so, a pledge /
o Voluntary waiver of debtor of mortgage sufficient to cover obli shall be
prescription of debt does not prevent admitted
guarantor from asserting defenses
Bondsman not Entitled to Excussion [2084]
Defenses Derived from Contract of Guarantee ▪ Not mere guarantors, but sureties
• Defenses relating to creation of guarantee o Liability is primary & solidary
o Lack of consent ▪ Mere negligence on part of creditor in collecting
o Mistake from debtor will not relieve surety from liability
o Nullity of contract of guarantee
Defenses Derived from Conduct of Creditor
• Negligence
o Negligence in exhausting property
pointed out by guarantor
o Negligence in general
• Extension
• Subrogation
Purely Personal Defenses
• Incapacity / limited capacity to act
o Minority, insanity
o Cannot setup, risk is w/ guarantor
• Does not include vitiation of consent
o Mistake, violence, intimidation, undue
influence, fraud
o Can be raised as defense – voidable
o Not purely personal
34
Provisions Common to Pledge and Mortgage Intention of Parties
o Absolute conveyance on its face, but debt continues
Requisites [2085] in existence & is not discharged by the transfer =
(1) Constituted to secure fulfillment of principal obligation treated as pledge / mortgage
(2) Pledgor/mortgagor is absolute owner of thing o Assignment of Stocks Executed by Debtor
(3) Free disposal of the thing OR legally authorized together w/ Indemnity Agreement
▪ Deed of assignment of stocks to surety = outright
Constituted to Secure Fulfillment of a sale, BUT the fact that the debtor also executed
Principal Obligation an indemnity agreement is inconsistent w/ theory
▪ Purely accessory, cannot exist w/o a valid obli of absolute sale
[2086] • Therefore, parties intended stock
▪ May guarantee assignment as pledge
o Valid, voidable, unenforceable [2086, o Assignment of Rights Executed to Guarantee an
2052] Obligation
o Civil / natural obligations [2086, 2052] ▪ Assignment of rights, receivables, title / interest =
o Pure / conditional obligations pledge / mortgage not an absolute
o Present & future debts conveyance
▪ Chattel mortgage – present debts o In case of doubt whether pledge / mortgage or
only dation in payment, presumption in favor of pledge
o Payment / performance obligations ▪ Lesser transmission of rights; Dation is less onerous
Pledgor / mortgagor is absolute owner of thing Legal Pledge

▪ Ownership is retained ▪ Arises by operation of law
▪ Mortgage executed before mortgagor became ▪ Example: In a voluntary / necessary deposit –
owner = void & ineffective when the depositary retains the thing when the
o Mortgagor desiring to attack as invalid – depositor does not pay the charges due
unreasonable delay may amt to ratification
o Invalidity does not affect principal contract Property Pledged / Mortgaged
o Void = may be considered an instrument
evidencing indebtedness
Future Property
▪ If not owner – VOID; pledgee/mortgagee ▪ Cannot be pledged / mortgaged
acquires no right in the property ▪ BUT parties can agree that future properties will
▪ Exception: Mortgagee in Good Faith [2125] form part of pledge / mortgage
o w/ respect to property covered by a Torrens o Can be added to security
certificate of title, allowed to rely on the title ▪ Promise to constitute pledge over future
absent any suspicion property = valid
▪ Innocent purchaser for value o Failure to furnish promised security = lose
o Applies to banks BUT w/ a different degree right to period
of diligence
Property Acquired Subsequently
▪ Banks are required to exercise
extraordinary diligence ▪ w/o legal existence
▪ REASON: in anticipation of the default which will ▪ Registration cannot validate it
lead to a foreclosure sale (to transfer ownership Transfer of Motor Vehicles Registered
to highest bidder, seller must be the owner)
Subsequently
Free disposal of the thing / in the absence, is ▪ Chattel mortgage executed earlier than transfer
legally authorized of registration certificate, but after perfection of
▪ Act of pledging/mortgaging is a strict act of contract of sale = VALID
ownership (alienation) ▪ Registration has no bearing on perfection
▪ Free disposal of property Share in a Co-ownership
o Claim by 3rd person does not mean it can’t
▪ Valid as to his share
be mortgaged / pledged
▪ Capacity to dispose of property + owner Property Covered by Torrens Title
▪ Agent may constitute pledge, but if he exceeds
▪ 3rd requisite of 2085 DOES NOT apply when
his authority = unenforceable
property is registered under Torrens System
o If a person claims to be the owner, but is not
o Because title is enough
= void
o Does not apply to banks
35
Thing Pledged / Mortgaged May be Alienated Assignments as Security Device
[2087] o Civil Code does not contain any provision on the
o When obligation becomes due, the thing pledged / assignment of property as security device
mortgaged must be capable of being alienated or ▪ SC views them as either pledge / mortgage
else security will be illusory o Must comply w/ formal & substantive requirements of a
o Creditor does not automatically become owner pledge / mortgage
o Only remedy is to have security sold at public o Presumption of equitable mortgage
auction & proceeds are applied to payment ▪ Where it may be fairly inferred that the real
o Creditor is not required to file an independent action intention of the parties is that the transaction shall
for enforcement of his credit secure payment of a debt / performance of any
other obli
Accommodation Pledge / Mortgage [2085] o Creation of trust
o Pledgor / Mortgagor may be a 3 person rd ▪ Absolute conveyance of property to secure
o Not himself a recipient of the loan performance of obli = trust by virtue of law
o So long as valid consent was given, fact that loan was ▪ Fulfillment = may demand reconveyance
solely for benefit of debtor would not invalidate Forms of Assignment
pledge / mortgage
o Corporation may execute pledge, but may be ultra ▪ Security assignment
vires because the corporation is not in the business of ▪ Absolute assignment
securing other people’s loans o Borrower divests itself of all right, title &
interest in the property & vests the same in
Duty of Mortgagee to Make Proper Inquiry the creditor, subject to the resolutory
▪ Creditor is required to exercise due care & condition that the fulfillment of the principal
prudence by making proper inquiry obli = assignment null & void
▪ Guilty of negligence if he relied solely on o Title instrument
representations made by debtor Object of Assignment
Where Mortgage Gratuitous ▪ Receivables / other contract rights
▪ Strictly construed ▪ Difficulties
▪ Lease transmission of rights / interests as possible o Pledge requires delivery; therefore, pledge
will not be perfected until collected cash is
Liability for Deficiency delivered (pledge is cash, not receivables)
▪ Pledgor / Mortgagor is not liable for o Since chattel mortgage cannot be created
payment of any deficiency over future property, chattel mortgage does
o without expressly assuming personal liability not extend to sums that may be due from A/R
▪ Is not solidarily bound with the debtor o Under Chattel Mortgage Law, CM must be
▪ Liability extends only up to loan value of his registered w/ RD
mortgaged property ▪ Not clear where receivables, contract
o Even in SPA authorizing to mortgage rights & similar rights are located
Pledge v Mortgage Right of Creditor where Debtor Fails to Comply

Pledge REM w/ his Obli [2088]
Movables1 Immovables (REM)
Property is delivered to Sale w/ Formalities Required by Law
pledgee / by common Delivery is not necessary ▪ Jus distrahendi: right to sell the thing received in
consent, to a 3rd person pledge / mortgage in the event the principal obli
Not valid against 3rd persons is not fulfilled
unless description of thing Not valid against 3rd persons if ▪ Action for consolidation of ownership is an
pledged & date of pledge not registered inappropriate remedy
appear in a public instrument
Pledgor can sell w/ consent of Mortgagor can sell even w/o
pledgee consent of mortgagee
1
Stock is always personal property
36
Prohibition Against Appropriation of Property Pledge / Mortgage Indivisible [2089, 2090]
(Pactum Commisorium) o One & indivisible as to contracting parties
▪ Also applies to immovable w/c is object of o Rule applies even if obligation is joint
contract of antichresis o As a consequence of indivisibility:
▪ Only exception to pactum commisorium is ▪ Single thing
provided in 2112 • Every portion is answerable for the whole
o 1st auction – not sold; 2nd auction – not sold; obligation
creditor may now appropriate ▪ Several things
▪ Stipulation is null & void • Even when only a part of the debt remains
o Contrary to good morals & public policy unpaid, all things are liable for such balance
o Amt of loan is ordinarily < value of thing • Debtor cannot ask for release of one / some
pledged / mortgaged / proportionate extinguishment of pledge /
o Pledgor / mortgagor must have the benefit mortgage
of foreclosure ▪ Debtor’s heir / creditor’s heir
▪ Requisites • Debtor’s heir who has paid a part of the
o Pledge, mortgage, / antichresis by way of debt cannot ask for the proportionate
security for payment of principal obli extinction of pledge / mortgage
o Stipulation for an automatic
appropriation in the event of non- Exceptions to Rule of Indivisibility
payment w/in stipulated period ▪ Where each one of several things guarantees
▪ Does not affect substantially the principal determinate portions of credit
contract of pledge, mortgage / antichresis o Actually not an exception because there
o Only prohibited stipulation is void would be as many pledges/mortgages as
▪ Versus dacion en pago there are things given
o Timing is relevant o Agreed that ring was to secure 15k, earrings
o In dacion, there was no previous agreement to secure 5k. paid 15k = can demand return
to automatically appropriate of ring
▪ Where only portion of loan was released
Permissible Stipulations o Security is only for portion released
• Subsequent modification of original ▪ Where there was failure of consideration
contract ▪ Where there is no debtor-creditor relationship
• Subsequent voluntary cession of property o Accommodation mortgagor
o Amounts to a novation of orig contract ▪ Where the benefit of indivisibility is waived
to a voluntary sale for amt of debt
• Promise to assign / sell (because title remains Foreclosure of Mortgage Constituted on
with debtor) Several Properties
• Authority to take possession (by ▪ The rule that RP (several lots), should be sold
mortgagee) of property upon foreclosure separately - applies to sales in execution &
not to foreclosure of mortgages
Applicability of Pactum Commissorium to
▪ A mortgage is one and indivisible
Money Held as Security ▪ Sale of mortgagor’s properties cannot be set
• Time deposit is assigned: SC held that it was aside in the absence of evidence to show that a
not illegal for creditor to encash time better price could have been obtained if they
deposit certs to pay debtor’s overdue were sold separately, / the sale of 1 / some alone
obligations w/ debtor’s consent would bring sufficient proceeds to satisfy the
mortgage credit
Risk of Loss
▪ Indivisibility does not apply once mortgage is
▪ Ownership is not transferred extinguished by a complete foreclosure
▪ Debtor-owner bears loss of property
REM + Chattel Mortgage in 1 Instrument
▪ Does not have effect of fusing both securities into
an indivisible whole
▪ Distinct contracts; different governing provisions
▪ Mortgagee may legally foreclose the REM
extrajudicially & waive the chattel mortgage
foreclosure, & maintain instead a personal action
for recovery of unpaid balance of credit
37
All Kinds of Obligation Secured [2091]
o Any kind of obligation, whether pure / conditional,
may be secured by pledge / mortgage
o May stipulate that the pledge will also stand as
security for any future advancements / renewals
that the pledgor may procure from pledgee
Promise to Constitute Pledge / Mortgage

Creates No Real Right [2092]
o If accepted, gives rise only to a personal right
binding upon parties
o Creates no real right in the property
o Creditor can enforce an agreement to constitute a
mortgage together w/ right to recover indebtedness
Criminal Responsibility of Pledgor / Mortgagor
▪ Estafa
o Pretending to be the owner – sell / encumber
/ mortgage
o Knowing that the real property is
encumbered, dispose as unencumbered
o Deceit is essential at time of sale
38
Pledge Cause [1318]
• Principal obligation
• Pledge: contract by virtue of w/c the debtor delivers to
the creditor (or a 3rd person by common agreement) a • Not the debtor: compensation stipulated /
movable property susceptible of appropriation or a mere liberality of the pledgor
document evidencing incorporeal rights for the purpose of Requisites of Pledge [2085]
securing the fulfillment of a principal obligation [2093]
▪ Constituted to secure the fulfillment of a principal
o When the obligation is fulfilled, the thing
obligation
delivered shall be returned w/ all its fruits &
▪ Pledgor must be the absolute owner of the thing
accessions in appropriate cases
pledged
Kinds of Pledge ▪ Pledgor must have free disposal of the property
pledged; in the absence thereof, must be legally
▪ Voluntary / conventional: created by
authorized for the purpose
agreement of the parties
▪ Legal: created by operation of law Delivery [1316, 2093]
• To constitute a contract: Creditor acquires
Characteristics no right to the property unless delivered bec
o Real [1316, 2093] pledge is merely a lien & possession is
o Unilateral: creditor to return the thing subject thereof indispensable to the right of a lien
upon fulfillment of the principal obligation • To affect 3rd persons: public instrument +
▪ If a 3rd party pledgor receives fees fr creditor for possession must be delivered
entering into the pledge agreement = bilateral
o Nominate [1307] Type of Delivery
o Accessory [2085(1)] Actual Delivery
o Formal [2096] Constructive Delivery
o Onerous / gratuitous ❖ Civil Code does not say that delivery must
▪ Onerous if given by debtor necessarily be actual delivery
▪ Gratuitous if 3rd party pledgor receives no ❖ Indispensable that the thing must be placed
compensation under the effective control & possession
▪ Between pledge & dacion en pago – of the pledgee (or 3rd person by common
presumption of pledge agreement)
▪ Between sale & loan w/ pledge / mortgage – ❖ Pledgor must cease to have effective
presumption of loan control & possession of the thing
o No right to redemption
Rights and Obligations of Creditor / Pledgee
Parties
o Pledgor: debtor / 3rd person Rights of the Creditor / Pledgee
o Pledgee
Fundamental Rights
Requisites • Jus retentionis: right to retain the thing
pledged [2098]
Requisites of a Contract o Debtor cannot demand for its return
▪ Consent until the debt secured by it is paid
o Limited only to the fulfillment of the
Object principal obligation for w/c the pledge
• Movable things w/in the commerce of men was created
[2094] • Jus distrahendi: right to proceed before a
• Certain incorporeal rights may also be notary public for the sale of the thing [2112]
pledged [2095] o Requisites
o Evidenced by documents w/n ▪ Debt is due & unpaid
negotiable ▪ Sale must be at a public auction
▪ Negotiable instruments, bills of ▪ Due notice to the pledgor &
ladings, shares of stock, bonds, owner, stating the amount due +
warehouse receipts, similar docs details of sale
▪ Doc must be delivered to the ▪ Sale must be made w/ intervention
creditor of a notary public
▪ If negotiable, must be indorsed ▪ No posting / publication
o Ordinary contract rights cannot be requirements
pledged by delivery of signed o Right, not an obligation to cause sale
contract to pledgee
39
▪ Creditor may pursue other legal Obligations of the Creditor / Pledgee
remedies w/o abandoning his ▪ To take care of the thing pledged w/ the
rights under the pledge diligence of a good father of a family [2009]
o Pledgee may appropriate the thing if o Loss / deterioration due to fortuitous event
after 1st & 2nd auctions, the thing is not = not liable
sold o Loss / deterioration due to fraud,
▪ Considered full payment for his negligence, delay, / violation of the terms of
entire claim the contract = liable [1174, 1170]
▪ Debtor is not entitled to excess o Duty to collect if delay would endanger
Other Rights recovery of the credit [2118]
▪ Credit w/c has been pledged
• Right to bring actions w/c pertain to the becomes due before it is redeemed
owner of the thing pledged [2103] ▪ To not deposit the thing pledged w/ a 3rd person
o In order to recover it / defend it, [2100]
against claims of 3rd persons o Not authorized to transfer possession to a
• Right to compensate fruits & interest 3rd person
received w/ those w/c are owing to him o Prohibition is necessary for the protection of
[2102] the pledgor / owner
o Apply fruits, income, dividends, / o EXCEPTION: stipulation to the contrary
interests earned / produced by the o Responsible for the acts of his agents /
thing pledged to the payment of employees w/ respect to the thing pledged
interest & thereafter to the principal of ▪ Their acts are, in legal effect, deemed
his credit his
o Unless there is a stipulation to the ▪ To not use the thing pledged [2104]
contrary, the interest & earnings of the o w/o authority of the owner
right pledged & in case of animals, their o Pledgor transmits only possession, not
offsprings, are included in the pledge ownership
• Right to reimbursement of expenses incurred o If it is of such character that use is necessary
for the preservation of the thing [2099] in properly caring for, then it becomes his
• Right to cause the public sale of the thing duty to use it so that it will not suffer from its
pledged if there is danger of destruction, disuse
impairment or diminution of value [2108] o If from the use profits are derived, pledgee
o Pledgee shall keep the proceeds of must acct therefor to the pledgor, & apply
the sale as security for the fulfillment of the net proceeds of such use to the
the principal obligation payment of his claim
• Right to demand substitution of the thing ▪ To return the thing pledged upon payment of the
pledged / immediate payment [2109] debt [2098, 2105]
o If the creditor is deceived on o Pledgor cannot ask for its return until
substance / quality of thing pledged obligation + interests + expenses incurred
o Privileged to choose only 1 & not both for preservation are fully paid (Except 2107:
• Right to choose w/c of several things reasonable grounds to fear destruction /
pledged shall be sold [2119] impairment w/o fault of pledgee + replaced)
o Limited only by stipulation o Prescription on action to demand return of
o After sufficient property has been sold the thing pledged while obli subsists will not
to satisfy the obligation + interests + run
expenses, no more shall be sold o If both the debtor & pledgor / owner claim
the right to the return of the thing after
payment, the creditor may consign the thing
[1256(4)]
▪ To advise the pledgor of any danger to the thing
pledged
▪ To advise the pledgor / owner of the result of the
public auction [2116]
o To enable pledgor / owner to take steps for
the protection of his rights where he has
reasonable grounds to believe that the sale
was not an honest one
40
Rights and Obligations of the Pledgor Extinguishment of Pledge
Rights of the Pledgor By Return of Thing Pledged [2110]
▪ Require the deposit (judicially / extrajudicially) of ▪ True even w/ stipulation that pledge continues
the thing pledged w/ a 3rd person [2104] although pledgee is no longer in possession
o If the creditor uses the thing w/o authority
o If he misuses the thing in any other way Presumption of Extinguishment
o If the thing is in danger of being lost / • Possession by debtor/owner of thing
impaired because of the negligence / willful pledged after perfection of pledge
act of the pledgee [2106] • Pledgee can temporarily trust the physical
▪ Subject to the right of the pledgee, the right to possession of the chattel pledged to the
demand the substitution of the thing if there are pledgor w/o invalidating the pledge
reasonable grounds to fear the destruction / o Pledgee is regarded as holding the
impairment of the thing pledged [2107] pledged property merely as trustee for
o Requisites the pledge
▪ Pledgor has reasonable grounds to • Only the accessory obligation of pledge is
fear the destruction / impairment of the presumed remitted, not the principal
thing pledged obligation itself
▪ No fault on the part of the pledgee
Renunciation / Abandonment [2111]
▪ Pledgor is offering in place of the thing,
another thing in pledge w/c is of the ▪ Must be in writing
same kind & quality as the former ▪ Not conditioned upon acceptance by pledgor
▪ Pledgee does not choose to exercise / owner nor upon the return of the thing pledged
his right to cause the thing pledged to ▪ Transforms pledge into a depositary
be sold at public auction ▪ Principal debt is not affected
Obligation of the Pledgor Sale at a Public Auction [2115]

▪ Indemnify the pledgee for damages in case of ▪ Pledgor & pledgee has a right to bid [2113]
known hidden flaws in the thing pledged [1951, o Pledgor shall be preferred if he offers the
2101] same terms as the highest bidder
o Pledgee is not allowed to acquire the thing
Public Instrument to Bind 3rd Persons [2096] pledged if he is the only bidder
o Description of thing + date ▪ Bid must be for cash [2114]
o w/o w/c contract of pledge cannot adversely affect o If the pledgee accepts a bid other than for
3rd persons cash, the pledgor / owner has the right to
o To forestall fraud consider that the pledgee has received the
▪ Debtor may attempt to conceal his property from purchase price in cash
creditors by simulating a pledge w/ an ▪ Extinguishes the principal w/n the price is more /
accomplice less than the amount due
o Still valid & binding upon parties even if not in a public o If price of sale > amount due, debtor is not
instrument entitled to the excess unless stipulated
▪ Under Chattel Mortgage Law, the
Alienation by the Pledgor of Thing Pledged mortgagor is entitled to recover the
[2097] excess of the proceeds of the sale in
foreclosure proceedings
o Pledgor may sell, provided the pledgee consents to o If price of sale < amount due, creditor is not
the sale entitled to recover deficiency
o Ownership transfers to the vendee subject to the rights ▪ A contrary stipulation is void
of the pledgee – that the thing sold may be alienated ▪ To compel the creditor to hold an
to satisfy the obligation [2112] honest public sale
o Pledgee must continue in possession during the ▪ Creditor should see to it that he loans
existence of the pledge [2093, 2098] only as much as he is likely to realize at
o Pledge would not bind 3rd persons unless 2096 is a public sale
followed ▪ Creditor may sue on the principal
obligation instead of electing to sell
the thing pledged
• In such case, he may recover the
deficiency from the debtor
▪ No right of redemption for personal property
41
Prescription, Loss, Merger, Compensation, Pledges by Operation of Law [2121]
Novation, etc o 546: Necessary expenses to a possessor
o 1707: Laborer’s wages shall be a lien on the goods
Right of 3rd Person to Satisfy Obligation [2117] o 1731: Executed work upon a movable
o 3rd person who has any right in / to thing pledged may o 1914: Agent
pay debt as soon as it becomes due & demandable o 1994: Depositary
▪ Creditor cannot refuse to accept payment o 2004: Hotel Keeper
o After payment of the debt & expenses, remainder of
Right of 3rd Person Who Pledged His Own the price of sale shall be delivered to the obligor
Property [2120] o Thing may be sold only after demand of amount for
o Same rights as guarantor w/c the thing is retained [2122]
o Not prejudiced by any waiver of defense by the ▪ Public auction shall take place w/in 1 month after
principal obligor such demand
o Art.2066 The guarantor who pays for a debtor must ▪ If creditor does not cause public sale to be held
be indemnified by the latter. w/in that period, w/o just grounds, debtor may
▪ Total amount of the debt; require return of the thing
▪ Legal interests from the time the payment was
made known to the debtor
Rules as to Pawnshops & Other
▪ Expenses incurred by the guarantor after notifying Establishments [2123]
debtor that he has been demanded to pay o PD 114 regulates establishment & oper. of pawnshops
▪ Damages, if due
o Art. 2067 The guarantor who pays is subrogated to Section 45, Securities Regulation Code :
all the rights w/c the creditor had against the debtor. Pledging a Security or Interest Therein
▪ If guarantor compromised w/ creditor, guarantor
cannot demand more than what he has paid
o Art. 2068 If guarantor pays w/o notifying the debtor, In addition to other methods recognized by law, a pledge
debtor may enforce against him all the defenses which of, or release of a pledge of, a security, including an
he could have set up against the creditor at the time uncertificated security, is properly constituted and the
the payment was made instrument proving the right pledged shall be considered
o Art. 2069 If the debt was for a period and guarantor delivered to the creditor under Articles 2093 and 2095 of the
paid before it became due, he cannot demand Civil Code if a securities intermediary indicates by book-entry
reimbursement until the expiration of the period unless that such security has been credited to a specially designated
the payment has been ratified by the debtor pledge account in favor of the pledgee. A pledge under this
o Art. 2070 Guarantor pays w/o notifying debtor, subsection has the effect of the delivery of a security in bearer
debtor repeats payment = guarantor has no remedy form or duly indorsed in blank representing the quantity or
against the debtor, but only against the creditor amount of such security or right pledged. In the case of a
▪ In case of a gratuitous guaranty, if the guarantor registered clearing agency, the procedures by which, and the
was prevented by a fortuitous event from exact time at which, such book-entries are created shall be
advising the debtor of the payment, and the governed by the registered clearing agency’s rules. However,
creditor becomes insolvent, the debtor shall the corporation shall not be bound by the foregoing
reimburse the guarantor for the amount paid. transactions unless the corporate secretary is duly notified in
o Art. 2077 If the creditor voluntarily accepts such manner as the Commission may provide.
immovable or other property in payment of the debt,
even if he should afterwards lose the same through
eviction, the guarantor is released.
o Art. 2078 Creditor releases one guarantor w/o
consent of others = other guarantors benefit to the
extent of the share of the released guarantor
o Art. 2079 Creditor grants extension to debtor w/o
consent of guarantor = guaranty is extinguished
▪ Failure of creditor to demand payment does not
constitute an extension
o Art. 2080 Guarantors, even if solidary, are released
from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights,
mortgages, and preference of the latter.
o Art. 2081 Guarantor may set up all defenses except
those that are personal to the debtor
42
Real Mortgage • Alienable real rights imposed upon
immovables [2124]
Definition of Mortgage Extent of Mortgage [2127]
o Debtor secures the fulfillment of a principal obligation,
o Extends to all its accessions, improvements,
subjecting to such security immovable property / real
growing fruits & rents / income as well as
rights over immovable property proceeds of insurance should the property
Kinds of Mortgage be destroyed, / expropriation value of the
property should it be expropriated
o Voluntary: agreed to between the parties / o To exclude: express stipulation
constituted by the will of the owner of the property o Generally deemed included
o Legal: required by law – in favor of certain persons ▪ New plantings
o Equitable: lacks the proper formalities, words, or other ▪ Fruits, except those collected before
requisites of a mortgage required by law obligation falls due & those removed &
▪ Still, reveals intention of parties to burden real stored when it falls due
property as a security for an existing debt, & ▪ Accrued & unpaid rents
contains nothing impossible / contrary to law • As well as those w/c should have
Characteristics to be paid while credit remains
wholly unsatisfied
o Accessory ▪ Bldgs., machinery & accessories
o Subsidiary belonging to mortgage debtor
o Unilateral: creates only an obligation on the part of installed on mortgaged land
the creditor who must free the property from the ▪ Improvement constructed
encumbrance once the obligation is fulfilled ▪ All objects permanently attached to a
o Nominate mortgaged land / bldg.
Parties to the Contract • Although placed after execution
of mortgage
o Mortgagee ▪ A costlier bldg. erected in place of
▪ Foreigner may be mortgagee (can’t bid) mortgaged bldg. w/c was torn down by
• 5 years max possession (for purposes of debtor
enforcing foreclosure) • If estate passes into hands of 3rd
▪ Foreign banks may bid, but no transfer of person, mortgage does not
ownership extend to any machinery, object,
o Mortgagor: need not be the debtor [2085] chattel / construction he brought /
▪ Corporation may be a mortgagor; however, it placed there & w/c such 3rd
may be considered ultra vires because a person may remove whenever it is
corporation has no business guaranteeing other convenient for him to do so
people’s obligations
▪ Foreigner may own a condominium unit Future Property cannot be Object of Mortgage
• Provided: common areas are owned by o Parties may agree that mortgage will extend
condo corp and not by condo unit owners to future properties = agreement to
• Condo corp – 60:40 mortgage future properties
▪ Mortgagor must execute a mortgage
Requisites supplement after mortgagor acquires
ownership of the properties / after
Requisites of a Contract
those properties come into existence
Consent ▪ Mortgage supplement must be
registered w/ RD
• Corporation may mortgage all its properties
o Stipulation including after-acquired
w/ consent of stockholders representing 2/3
properties = VALID [2127]
of outstanding capital stock
▪ Purpose: to maintain, to the extent
• Corporation undergoing rehabilitation &
allowed by the circumstances, the
insolvency proceedings has right to
original value of the properties given as
mortgage w/ consent of receiver
security
Object ▪ Attachment of lien is retroactive
• Immovables [415] o Future inheritance cannot be subject of
o Building contract
o Trees before uprooted [415] Cause
• Same as the principal contract
43
Dragnet Clause to Secure Future o Partition of the thing owned in common will
Advancements not prejudice 3rd persons, who shall retain
o Stipulation is necessary rights of mortgage, servitude, / any other real
▪ GR: mortgage is limited to amt rights belonging to them before the division
mentioned was made
o Generally prospective, but may stipulate its o Title is not w/ owner, mortgage is valid
application to past debts ▪ Mortgagor must have free disposal of the
o Usefulness of a blanket mortgage clause / property; in the absence thereof, must be legally
mortgage w/ a dragnet clause authorized for the purpose
▪ Convenience & accommodation ▪ No need for delivery
to borrowers as it makes available o Not converted to pledge even if delivered
add’l funds w/o having to execute o Convert only if that was the intention of the
add’l security docs parties
▪ Saves time, travel, loan closing
costs, costs of extra legal services, Possession of Property Mortgaged
recording fees, etc. o Mortgagor retains possession
▪ Makes business of lending more o As creditor & mortgagee, one cannot appropriate
profitable things given by way of pledge / mortgage
o Construction of mortgage w/ a dragnet ▪ Any stipulation to the contrary is null & void
clause o Mortgagor may deliver said property to mortgagee,
▪ Carefully scrutinized & strictly w/o altering the nature of the contract of mortgage
construed
Rights & Obligations of Mortgagee in
• Particularly if it is a contract of
adhesion – prepared by the Possession
mortgagee & mortgagor’s ▪ Similar to those of an antichresis creditor [2132]
only participation is to sign it o Entitled to retain such possession until the
▪ Where obli is not a series of indebtedness is satisfied & the property
indeterminate sums incurred over a redeemed
period of time, but 2 specific sums o Right to collect the credit w/ interest from the
procured in a single instance – an fruits, returning to the antichretic debtor, the
action to foreclose a mortgage balance, if any, after deducting expense
must be limited to the amt ▪ No right to reimbursement for useful expenses
mentioned in the mortgage o No other right than to demand execution &
o A continuing security recording of the document in w/c the
▪ Not discharged by the repayment mortgae is formalized [2125(2)]
of the amt named in the mortgage
• Until full amt of loans / Payment of Interest on Mortgage Credit
advancements obtained are o It is not an essential requisite that the principal bears
paid interest
▪ Annotation: mortgage secured o Interest may be in the form of fruits of the mortgaged
payment of a certain sum + interest property w/o the contract losing thereby its character
+ other obli arising thereunder = as a mortgage contract
no necessity for any notation of ▪ But if it is expressly agreed that the creditor shall
later loans apply the fruits of the property, to the payment of
interest, if owing & thereafter to the principal of
Reliance on Security Test
his credit – true antichresis [2132]
❖ When a mortgagor takes on another loan &
offers another security, it cannot be inferred Mortgage Executed by an Agent
that the loan was made relying on the old o Signed in his own name w/o indicating that he acted
security for & on behalf of his principal binds only the agent
o Old security contains a dragnet clause ▪ Mere fact that agent was authorized to
Requisites of Mortgage [2085] mortgage the property is not sufficient to bind the
principal, unless the deed was executed &
▪ Constituted to secure the fulfillment of a principal signed by the agent for & on behalf of his
obligation principal
▪ Mortgagor must be the absolute owner of the
thing mortgaged
o Co-owner may mortgage his part except
when personal rights are involved
44
Recorded in Registry of Property [2125] ▪ Title is retained by the vendor until full
o Document must be recorded in the Registry of Property payment of the price
▪ If it is not recorded, binding bet parties ▪ Registrability of encumbrance acquired
o Duly executed mortgage is presumed to be valid until subsequent to the mortgage
the contrary is shown o In a proceeding for the annotation of an
o Party attacking mortgage rests burden of proving encumbrance (e.g. leasehold rights)
invalidity due to fraud, duress, / illegality subsequently acquired, mortgagee need
▪ Right to attack may be lost by a waiver of defects not introduce the mortgage deed in
& obligations, / by unreasonable delay to act evidence to prove its existence
amounting to ratification o Where the mortgage deed contains a
o Public document: merely for convenience prohibition against encumbrance of the
o Private document: SC said no valid mortgage is mortgaged land, w/o the mortgagee’s
constituted consent, rights w/c came into existence after
▪ Creditor may recover loan the execution of the deed cannot be
▪ Right to compel debtor to execute a contract of annotated as an adverse claim on title
mortgage in a public instrument ▪ Registrability of mortgage by surviving
o Not registered: binding between parties spouse of his/her undivided share of
▪ Order for foreclosure cannot be refused on the conjugal property
ground that the mortgage had not been o Legal & valid
registered, provided no innocent 3rd parties are o Registration will, in no way, affect the rights
involved of the deceased husband’s creditors, if any,
o Registered under Act No 3344: registration is w/o / of his heirs
prejudice to the better right of 3rd parties o Would not affect debts, if any, of the
▪ Unregistered pacto de retro sale over a house is conjugal partnership, their payment being
superior to a recorded mortgage over the same provided for by law before the one-half
house of a later date share of the wife-mortgagor is finally
determined
Registration of Mortgage ▪ Subsequent registration of an adverse claim
▪ Registration: ministerial act by w/c a deed, o Subsequent annotation of an adverse claim
contract, / instrument is inscribed in the records of cannot defeat the rights of the mortgagee /
the RD & annotated on the back of the TCT purchaser at the auction sale whose rights
covering the registered land subject of the deed, were derived from a prior mortgage validly
contract, / instrument registered
o Creates a constructive notice to the whole
world & binds 3rd persons
o Registered where property is regardless of
execution of REM & residence of parties
▪ Mortgagee entitled to registration of
mortgage as a matter of right
o By executing the mortgage, the mortgagor
is understood to have given his consent to
its registration, & he cannot be permitted to
revoke it unilaterally
▪ Proceedings for registration do not
determine validity of mortgage / its effect
o Mere fact that a mortgage was registered
does not stop any party to it from setting up
that it has no force & effect & ask for the
avoidance of the deed & the cancellation
of its registration
o Registration must first be allowed & its validity
/ effect litigated afterwards
▪ Registration w/o prejudice to better right of
3rd parties
o A registered mortgage right over property
previously sold is inferior to the buyer’s
unregistered right
o A registered mortgage is superior to a
contract to sell
45
Doctrine of Mortgagee in Good Faith Effect of Mortgage [2126]
o GR: Reliance in good faith on certificate of title of
mortgagor Creates Real Right
▪ In the absence of anything to excite suspicion ▪ Registered mortgage creates right in rem
▪ Under no obligation to look beyond the o Enforceable against the whole world
certificate & investigate ▪ A real right
o Presupposes that mortgagor, who is not rightful owner ▪ A lien inseparable from the property mortgaged
of property, has already succeeded in obtaining a o Until discharged upon payment of
Torrens title over the property in his name obligation, it follows the property wherever it
o EXCEPTIONS goes & subsists notwithstanding changes of
▪ Purchaser / mortgagee has knowledge of a ownerships
defect / lack of title in the vendor ▪ If sold, still remains subject to fulfillment of
▪ Mortgagee does not directly deal w/ registered obligation
owner of real property o Mortgage must be registered / buyer must
• Law requires that a higher degree of know
prudence be exercised ▪ Right of 1st mortgagee when 2nd mortgagee
▪ He was aware of sufficient facts to induce a sold property in auction
reasonably prudent man to inquire into the status o Collect mortgage credit from the purchaser
of a property in question during the sale
o Mortgagee in good faith may not be a purchaser ▪ Need not be done if 1st mortgagee is
in good faith also 2nd mortgagee
▪ Where the mortgagee purchased the property at ▪ Mortgagee is indispensable party in a suit to
the time where the relevant certificate of title nullify an existing TCT
already bore a notice of lis pendens o Non-joinder of the mortgagee deprived the
o Greater care & diligence required of mortgagee- court of jurisdiction
bank ▪ BP Blg 877
▪ Its business being impressed w/ public interest o No lessor / his successor-in-interest shall be
▪ Not relieved of this responsibility simply because entitled to eject the lessee upon the ground
the title offered as a security is, on its face, free of that the leased premises has been sold /
any encumbrance / lien mortgaged to a 3rd person regardless of
▪ 1st undertakes careful examination of title of whether the lease / mortgage is registered /
applicant to verify its genuineness not
▪ Physical & on-the-spot investigation of the land
itself offered as security
Creates Merely an Encumbrance
▪ A bank that failed to observe due diligence ▪ Does not affect, much less extinguish the title /
cannot be accorded the status of a bona fide ownership of the mortgagor who does not lose
mortgagee his principal attribute as owner – the right to
▪ Due diligence required of banks extends even to dispose
persons regularly engaged in the business of ▪ Does not involve a transfer, cession /
lending money secured by REM conveyance of property
o Only constitutes a lien
Right in Case of Legal Mortgage [2125] ▪ Only right of mortgagee in case of non-
o Right to compel each other to observe the form payment: foreclose & have the encumbered
required by law property sold to satisfy the outstanding
indebtedness
Effect of Invalidity of Mortgage on Principal ▪ Upon payment of the mortgage debt, there is no
Obligation more mortgage – no basis for mortgagee to
refuse to return certificate of title to mortgagor
o Principal obligation remains valid
▪ In a sale w/ assumption of mortgage, assumption
▪ What is lost only is the right to foreclose the
of mortgage is a condition to the seller’s consent
mortgage as a special remedy for satisfying /
– w/o the approval of the mortgagee, no sale is
settling the indebtedness w/c is the principal obli
perfected
o Mortgage deed remains as evidence of a
▪ Action to compel mortgagee to accept
personal obligation
payment & cancel REM is a personal action if
mortgagee has not foreclosed mortgage &
mortgagor is in possession of premises
46
Ownership Rights of Mortgagor Laws governing mortgage [2131]
o PD 1529 & Admin Code
Right to Sell ▪ Govern the form, extent, and consequences of
▪ Stipulation forbidding the owner from alienating mortgage, and also its constitution, modification,
the immovable mortgaged = VOID [2130] and extinguishment
o Prohibition would be contrary to public o As to aliens becoming mortgagees – RA 4882
good – transmission of property should not o See also: RA 8179, RA 10641
be unduly impeded o Doctrine of Processual Presumption
o Transferee is bound to respect ▪ If foreign law is not properly proved, courts will
encumbrance presume that foreign law is the same as our local
▪ Stipulation requiring mortgagee’s consent before & domestic / international law
alienation = VOID [2130] ▪ Foreign law must be properly pleaded & proved
o Stipulation practically gives the mortgagee as a fact
the sole prerogative to prevent any sale of
the mortgaged property to a 3rd party Foreclosure
▪ Stipulation granting mortgagee right of 1st refusal o The remedy available to the mortgagee by which he
= VALID subjects the mortgaged property to the satisfaction of
o Sale made in violation of mortgagee’s the obligation to secure which the mortgage was
contractual right of 1st refusal is rescissible given where the mortgagor is in default in the payment
o Buyer is presumed to have been notified by of said obligation
registration of mortgage deed containing o Presupposes something more than a mere demand to
such stipulation surrender possession of the object of mortgage
▪ Mortgagor does not have the unconditional o Procedure adopted by the mortgagee to
power to absolutely sell the property since it is terminate rights of mortgagor on the property;
encumbered by a lien of a 3rd person includes the sale itself
Right of Possession Validity and Effect
▪ Mere mortgagee has no right to eject an ▪ Valid ONLY WHEN debtor is in default in the
occupant payment of his obligation
▪ Right of foreclosure cannot be exercised by any
Right to Mortgage person other than creditor-mortgagee or his
▪ Mortgagor is allowed to take a 2nd / subsequent assigns
mortgage subject to the prior rights of the
previous mortgagee Foreclosure limited to amount in mortgage doc.
▪ Sec 4, Rule 68 of Rules of Civ Pro: disposition of • Mortgagee has no right to include in
proceeds of sale after foreclosure requires foreclosure any unpaid loan separately
payment of proceeds to junior encumbrancers in secured by CM
order of priority
▪ In insolvency proceedings, the right to mortgage GR: Demand before Foreclosure is essential
is w/ receivers because the property is under • Exceptions: 1169
receivership o Stipulation / Law
o Time is of the essence
Alienation / Assignment of Mortgage Credit o Demand would be useless
[2128] Mortgage contract may contain an acceleration
o Such real right may be alienated / assigned to a 3rd clause
person, in whole / in part, by mortgagee who is the • On default, whole sum becomes due
owner of said right • Failure to pay any instalment = triggers right
o Assignee may foreclose the mortgage in case of of mortgagee to foreclose
nonpayment of mortgage indebtedness
o Valid even if it is not registered Mortgagee may recover deficiency
▪ Registration is only necessary to affect 3rd • REM → Pledge = allowed
persons • Pledge → REM = not allowed
Right of Creditor Against Transferee of
Mortgaged Property [2129]
o Transferring property does not relieve mortgagor from
obligation to pay debt in the absence of novation
o Property may still be foreclosed despite the transfer
47
Presumption of Regularity o Before confirmation, court retains control of
• And burden of evidence to rebut is on the proceedings
mortgagor-party litigant that seeks to ▪ May either grant or withhold
challenge proceedings confirmation as the rights of
• An allegation that mortgagee committed parties may require
fraud in constitution of REM is actually an
Execution of judgment
attack on the mortgage contract and
not just a foreclosure on the mortgage o Proper remedy to seek reversal of judgment
• Invalid mortgage = invalid foreclosure in an action for foreclosure of REM is NOT
a petition for annulment of judgment
Kinds of Foreclosure ▪ Appeal from judgment itself or from
▪ Judicial [Rule 68, Rules of Court] order confirming the sale
▪ Extrajudicial [Act No. 3135] Application of proceeds
▪ These 2 are to be distinguished from an ordinary
o Proceeds shall be applied to payment of:
execution sale [Rule 39, Rules of Court]
▪ Costs of the sale
o Applies to EJF only as to manner of
▪ Amount due the mortgagee
redemption + computation of interest
▪ Claims of junior encumbrancers or
▪ Each of the 3 has its own requirements
persons holding subsequent
o Parties are not precluded from imposing
mortgages in the order of their
additional requirements
priority
Extrajudicial Judicial Foreclosure ▪ The balance, if any, paid to
Foreclosure mortgagor or his agent
Posting 20 days in 3 public places o Surplus of proceeds does not invalidate
Publication Once a week If >50k once a week for foreclosure; it merely gives mortgagor a
for 3 2 consecutive weeks cause of action to recover such
consecutive Execution of sheriff’s certificate
weeks If ≤50k no publication
o In judicial foreclosures, the ‘foreclosure’ is not
Notice GR: Not Notice to debtor 3
complete until sheriff’s certificate is
required days before sale
executed, acknowledged and
Ex: Stipulation
recorded
o In the absence of this, no title shall pass
Judicial Foreclosure Nature
Procedure An action quasi in rem
Judicial Action o Based on a personal claim against
specific property of the defendant
o How initiated: by bringing action in proper
o Purpose is to have property seized + sold
court which has jurisdiction over area
for proceeds to apply to payment of claim
wherein the real property involved or a
portion thereof, is situated Result or incident of failure to pay
Order to mortgagor indebtedness
o If court finds complaint well-founded, it shall o Indebtedness is the principal thing, not the
order mortgagor to pay amount due on foreclosure (this is only result / incident of ^)
debt with interest + other charges o The fact that property mortgaged is
▪ WITHIN 90-120 days from entry of destroyed; not a ground to reduce
judgment indebtedness secured
Sale at public auction Survives death of mortgagor

o If mortgagor fails to pay, property sold to o Because the claim is not pure money claim
highest bidder in public auction but an action to enforce mortgage lien
▪ So, the judgment may be
Confirmation of sale enforced by a writ of execution
o The sale, when confirmed by order of the
court, also upon motion, shall operate to
Extrajudicial Foreclosure
divest the rights of all parties to the ▪ Act 3135 outlines the notice and publication
action and vest to the purchaser (but requirements and formalities on extrajudicial
subject to right of redemption as allowed by foreclosure proceedings which are conditions
law) sine qua non for its validity
48
Express authority to sell given to mortgagee Object of notice
• The law is merely to regulate sale of property o Publication in a newspaper of general
if the mortgagee is given a special circulation is required
power or express authority to do so in ▪ To secure bidders and to prevent
the deed itself / document annexed sacrifice of property
• EJ Foreclosure is proper only when provided o Newspaper of GC:
in REM contract ▪ Published for dissemination of
• Situation: 2 loans; it is immaterial w/n REM is local news and general
also a security for the earlier loan; information
foreclosure still valid as to 2nd loan where ▪ Has a bona fide subscription list of
mortgagors admit that it is already due paying subscribers
▪ Published at regular intervals
Proceedings, how commenced ▪ Available to the public in general
o Not by filing complaint but by submitting ▪ Need not have largest circulation
application before an executive judge as long as it is of GC in the place
who receives neither in judicial capacity nor where property is situated
on behalf of the court [2013 case; p. 515 ▪ Needs to be accredited by SC
of book]
▪ Judge merely performs an Immaterial errors / simple mistakes
administrative function o As long as objects of the notice are
▪ To ensure all requirements & attained, sufficiency/validity is not affected
conditions are satisfied by immaterial errors / simple mistakes not
o Filing petition with office of the sheriff calculated to mislead bidders
[2011 case; p. 532 of book] o Mere discrepancy between amount of
obligation (in notice) vs. amount actually
Authority not extinguished by death of due does not constitute substantial error
mortgagor/mortgagee that should invalidate notice and sale
• Because authority to sell is an essential ▪ Based on case; factual
and inseparable part of the agreement circumstances must be considered
Publication of notice of auction sale Personal notice to mortgagor not required
• Required to give foreclosure a reasonably o Unless parties stipulate
wide publicity such that those interested o If stipulated and no notice given; failure to
might attend the public sale comply is a breach of contract – sufficient to
• Question of compliance is a factual issue invalidate
Mandatory Notice to executing mortgagee-creditor not
o The requirements of posting + publication provided by law
are mandatory and imbued with public o Because it is he who causes the sale and
policy considerations controls its details
o Not for the mortgagor’s benefit, but for
public / 3rd persons Posting of notice on mortgaged property not
o Waiver of these is not allowed; it will be required
inconsistent with intent of Act 3135 o Notice must be posted in at least 3 public
o Failure to comply = invalidates sale or at places in city / municipality where
least voidable property is situated (e.g. Sheriff’s Office,
o Sale after scheduled date is void/voidable Assessor’s Office, Register of Deeds)
▪ Failure to do this is not a ground
Contents for invalidation
o Notice of sale, to be valid, must contain: ▪ Jurisprudence: newspaper of
▪ Correct # of Certificate of Title general circulation is sufficient
▪ Correct technical description of
real property to be sold Certificates of posting not required
o Not required for validity of sale
o Significant only when it is necessary to prove
compliance with requirement
49
Burden of proving non-compliance with Surplus proceeds from sale
requirements – mortgagor • Mortgagee must account for the proceeds
o Foreclosure proceedings have a as if price were paid in cash
presumption of regularity • In an action against mortgagee to recover
surplus, he cannot raise defense that no
Formalities of levy not required actual cash was received
o Formalities of levy: • Significant when there are junior
▪ File w/ RD a copy of the order of encumbrancers on the property
attachment / execution, together o Discharged in order of priority
w/ description of the attached • Senior mortgagee who realizes more than
property & notice of attachment amount of his debt is regarded as a trustee
or execution for benefit of mortgagor and junior
▪ Leave w/ occupant of the encumbrancers
property copy of the same order, • Mortgagee who exercises power of sale is
description & notice considered a custodian of the fund; liable
Notice to bidder of all bids offered not required to the persons entitled thereto
Time of Sale Remedy of party aggrieved by foreclosure
o Sec. 4 provides: between 9AM and 4PM • Any question regarding regularity and
any sale within the period is valid regardless validity of sale and issuance of writ of
of time it took for the proceeding itself possession is to be determined in a
subsequent proceeding [Sec. 8, Act
Public sale after public notice 3135]
• Sale must be made within province where • Debtor may petition that sale be set aside
property is situated [Sec. 2, Act 3135] and writ cancelled because mortgage was
not violated, or sale was not made in
Public sale on different dates/places
accordance with provisions
• Indivisibility is not violated by conducting 2 • He may ask for annulment of foreclosure sale
separate foreclosure proceedings on on these grounds:
mortgaged properties located in different o Fraud, collusion, accident, mutual
cities or municipalities as long as each mistake, breach of trust, or misconduct
property is answerable for same debt by purchaser
• Act 3135 is silent as to different dates o Sale was not fairly and regularly
Number of bidders conducted
o Price was inadequate and
• Not mandatory to have more than 1 bidder
inadequacy was so great as to shock
for auction to be valid
conscience of the court
Payment of cash by highest bidder
Republication
• Where highest bidder is also mortgagee
• Necessary for validity of postponed EJF
and amount of bid = total debt, no need
• Another publication is required in case
to pay cash (exception to GR)
auction sale is rescheduled
• Inadequacy of price does not nullify sale
Nature of power to foreclose
Determination of mortgaged property’s
appraised value – not required • For mortgagee’s protection; a matter of right
when provided in contract; that is why writ of
• What the law only provides are the p. injunction is improper
requirements, procedure, venue, and
• An ancillary stipulation supported by same
mortgagor’s right to redeem the property
cause for mortgage and forms essential
and inseparable part of the bilateral
agreement
• Prerogative of mortgagee
o After deciding to foreclose, act of
auctioning sheriff is governed by Act
3135 not by instructions of
mortgagee
50
Remedy in case mortgagor refuses to surrender Stipulation of upset price – void
mortgaged property ▪ Upset price – minimum price at which the property
▪ Bring civil action, either: shall be sold
o To recover such possession as a preliminary ▪ When buyer is creditor/mortgagee himself, it is
step to the sale; OR unclear w/n rule still applies; see CC Art. 1431
o Obtain a judicial foreclosure
Effect of inadequacy of price
▪ In case of refusal to surrender property already
sold by sheriff, purchaser cannot merely file ▪ Where there is a right to redeem,
petition for writ of possession (except in JF, if inadequacy is immaterial because the
mortgagor is in possession and no 3rd person judgment debtor may reacquire the property
intervened) easier at a low price or sell right to redeem
o Remedy is to file an ordinary action for ▪ Property may be sold for less than FMV
recovery of possession (to give debtor ▪ Value of property has no bearing on bid price
opportunity to be heard regarding provided the auction was regularly and
possession and obligation) honestly conducted
Injunction to prevent foreclosure Waiver of security by mortgagee

• Issuance of writ of preliminary injunction upon ▪ Mortgagee may do so and maintain instead a
application of mortgagor is IMPROPER personal action for recovery of indebtedness
• Foreclosure is a necessary consequence of ▪ Mortgagee has 2 options:
non-payment of obligation secured by M. o Personal action for debt
o Real action to foreclose mortgage
Right to recover deficiency ▪ In either case ^, he is entitled to obtain a
deficiency judgment for whatever sum might
Judicial Foreclosure be due after liquidation of property covered
• Right to claim deficiency is explicit under by the mortgage
Rule 68 (Sec. 6) ▪ REMEDY IS ALTERNATIVE (otherwise, there
would be multiplicity of suits)
Extrajudicial Foreclosure
▪ May foreclose REM even before going after
• Act 3135 is silent surety
• To recover deficiency, the EJF must be valid
In case of death of debtor
Common to both • Mortgagee has 3 options now:
• Mortgage is merely a security and not a o Claim entire debt from estate (personal)
satisfaction of the indebtedness o Foreclose judicially (real) and prove
• W/N highest bidder is the creditor himself is any deficiency as an ordinary claim
irrelevant o Rely on mortgage exclusively,
• Where 3rd person is mortgagor: he is not foreclosing it at any time before
liable for any deficiency (unless stipulated) barred by prescription without right
o Action for recovery must be against to file a claim for any deficiency
debtor ▪ Includes EJF which bars any
Action for recovery subsequent deficiency claim
against estate
• An independent civil action for the recovery
may be filed even during period of Foreclosure retroacts to date of registration of
redemption mortgage
• Once auction sale is effected and resulting
▪ Person who takes a mortgage in GF and for
deficiency is ascertained, mortgagee-
valuable consideration will be protected against
creditor is then and there entitled to secure
claims on the title of which he had no notice
a deficiency judgment which may
▪ Notice of adverse claim by 3rd party annotated
immediately be executed, w/n mortgaged
after registration of mortgage but before
is still entitled to redeem
foreclosure and sale at public auction cannot
Prescriptive period affect rights of mortgagee
o Action to recover = 10 yrs from time the right
of action accrues
51
Redemption (of foreclosed property) Period of exercise
o Transaction by which the mortgagor reacquires or • Sale does not take effect until it is registered
buys back property which he may have passed in the RD
under the mortgage or divests the property of the lien • Filing of action by redemptioner to enforce
which the mortgage may have created right to redeem does not suspend running
o Allowed in both judicial and extrajudicial foreclosures of period to redeem w/o prejudice to final
o Period of redemption is not tolled by filing of action to outcome of action to enforce right of
annul foreclosure redemption
o Cannot pay in installments because will have the • Art. 13 of CC: 1 year is 365 days
effect of extending the period • Admin Code of 1987: 1 year is 12 months;
▪ Except judicial action for redemption a month is 30 days unless specific month
• BIR: reckoning point is the date of
Judicial Foreclosure confirmation of auction sale (date when
EJF
Non-bank Bank certificate of title is issued)
Natural Right of Equity of Right of • Period is only directory, CAN BE
Person Redemption: 1 Redemption: Redemption: EXTENDED BY PARTIES on 2 conditions:
yr from 90-120 days 1 yr from o Voluntary agreement
registration of from entry of registration of o Debtor’s commitment to pay
sheriff’s judgment sheriff’s redemption price on fixed date
certificate of certificate of
sale Anytime sale Failure to exercise right
Juridical Until but not before • Within the period, purchaser becomes
Person after registration confirmation absolute owner of the property
of sheriff’s of sale • Title of purchaser after sale but before
certificate of expiration of period, is merely inchoate
sale OR
Effect of exercise
3 mos from
foreclosure sale • Eliminates from his title the lien created by
Whichever is levy, attachment, judgment, or registration of
earlier the mortgage
• Defeats the inchoate right of purchaser
• No new title; old title merely restored free
Equity of Redemption (JF) from encumbrances
▪ Right of mortgagor in a judicial foreclosure to • Implied admission of regularity of foreclosure
redeem mortgaged property sale
▪ Right of mortgagor to extinguish the mortgage o Estops mortgagor from later impugning
and retain ownership by paying secured its validity
debt within the period Unregistered Sale Made w/o Consent of
▪ Procedure can be modified by valid agreement Mortgagee
of parties (compromise agreement)
• 2 days after execution of mortgage to a
Period given is a substantive right bank, executed in favor of 3rd party a DoS
• Last opportunity to pay the debt and save with assumption of mortgage (w/o consent
his mortgaged property from final disposition of mortgagee); buyer was not validly
• Sale within 90 days would be a denial of this substituted as debtor; no right to redeem
substantial right and thus, void • Bank is obliged to recognize only right of
redemption of mortgagor
Levy of equity for redemption • [Bonnevie v. CA]
• Done by means of a write of execution with
the result that this interest will pass to the EJ Foreclosure w/ Fraud
purchaser at the execution sale • VOID
• Consequently, consolidation of ownership
Right of Redemption (GR: EJF) of property to mortgagee as highest bidder
▪ GR: available only for EJF also without legal force and effect
o EX: JF of a REM over land in favor of banks • Mortgagor is entitled to equitable remedy
[Sec. 47 of G. Banking Law] of redemption
▪ Waiver of right = void
52
Nature of Mortgagor’s Right of Redemption Persons Entitled to Right of Redemption
• An absolute privilege Mortgagor / one in privity of title with
o Exercise of which is entirely dependent mortgagor
upon the will and discretion of the o GR: if one is in privity, and he has such an
redemptioner interest that he would be a loser by the
• Formal offer, accompanied by a bona fide foreclosure, he may redeem
tender of redemption price within the period
is only essential to preserve right of Successor-in-interest
redemption for future enforcement (even o Transferee of right of redemption is in equal
beyond period) footing with a successor-in-interest under
• Where right to redeem is exercised through Sec. 29, Rule 39
filing of judicial action, within period, such o Includes:
filing is equivalent to formal offer; and = ▪ One to whom debtor has
preserving right → freezing exp of 1yr transferred his right of redemption
period ▪ One to whom debtor has
o Thus, formal offer is not a distinct step to conveyed his interest in the
the filing of action in court for valid property
exercise of right ▪ Succeeds to the interest of the
• Choose: either formal offer to redeem OR file debtor by operation of law
action in court together with consignation of ▪ One or more joint debtors who
redemption price were joint owners of the property
• GR: not sufficient that person offering to sold
redeem makes a manifestation of desire to ▪ One with a joint interest in the
repurchase; intention must be property, or his spouse, heirs
accompanied by actual & simultaneous
tender of payment of full amount Under the Rules of Court
o EX: Where right to redeem is exercised o When RP is sold on an execution judgment,
through filing of judicial action may be redeemed by:
• Involves title to foreclosed property; it is a ▪ Judgment debtor, or his successor-
real action in-interest in whole or any part of
o If made on time: seeks to erase from title the property
the lien created ▪ Creditor having lien by
o If not made on time: seeks to recover attachment, judgment, or
ownership because title was passed mortgage on the property sold
o [Sec. 29, Rule 39]
Requisites for valid redemption (EJF)
• Sec. 28, Rule 39 of Rules of Court Registration of Transfer of Right of
Redemption
1. Redemption made within 1 year from date o Need not be registered with RD to enable
of registration of certificate of sale not from transferee to exercise it
date of sale itself o Where redemption is proper, purchaser
o If made after, allowed when buyer does cannot refuse to allow it (his right is purely
not object but even consents inchoate)
o Policy of the law is to aid rather than
defeat right of redemption Payment of redemption money
2. Payment of purchase price + 1% interest ▪ May be made to purchaser / officer who made
per month + taxes (if any) the sale / sheriff
o Computed from date of registration up ▪ Art. 1249 of CC is N/A (checks, etc. produce
to time of redemption effect of payment only when encashed)
3. Written notice of redemption served on o Redemption is not rendered invalid by the
officer who made the sale; duplicate filed fact that sheriff accepted a check
with proper RD o But in accepting such, he may be held liable
4. Mortgagee / his assignee required to if any damage has been suffered as a result
tender payment within prescribed of the medium of payment
period to make the redemption valid or to o SC allows redemption by check [Co v. PNB]
preserve right for future enforcement
o Tender must be for full amount
53
Amount payable • After the foreclosure sale, there remains in
▪ Total amount due under the mortgage deed, 2nd mortgagee a mere right of redemption
with interest at rate specified in mortgage and all o His remedy is limited to right to redeem
foreclosure expenses by paying off debt secured by 1st
mortgagee
In general (for valid redemption)
• Full amount paid Entitled to excess of proceeds
• + 1% per month interest on purchase price, • For payment of his credit, after covering
up to time of redemption mortgagor’s obligations to first mortgagee
o Because when foreclosure • If 1st mortgagee absorbed all proceeds, 2nd
proceedings are completed, all mortgage is extinguished because it
interests of mortgagor are cut off cannot be enforced beyond total value
• + any assessments or taxes which of mortgaged property
purchasers may have paid after the When not made defendants
purchase
o Purchaser also entitled to expenses for • The requirement of being made defendants
preservation during the period in action for foreclosure is not mandatory
• + interest on taxes paid by purchaser at o Failure to comply will not invalidate
rate of 1% per month, up to time of (judicial) sale
redemption • Failure to implead = foreclosure is ineffective
• + amount of other lien, with interest (if as against them; they still have equity of
purchaser is also creditor having prior lien) redemption (JF)
• Separate foreclosure proceeding should
Purchase price be brought to require mortgagor’s
• In redemption, the amount payable is no successor-in-interest to redeem from 1st
longer the judgment debt but the PP at the mortgagee within 90 days under penalty
auction sale of losing prerogative to redeem
o Rule does not apply where balance Where irregularities attended foreclosure
due to mortgagor is not received by
mortgagor w/o his fault • Unless otherwise presented at time of
o PP less balance cancellation of certificate of title by reason
of foreclosure of superior mortgage lien, that
Amount fixed by the court irregularities attended the foreclosure (lack
• G. Banking Act (old law) of notice, non-inclusion of inferior lien
o Redeem by paying amount fixed by holders), RD is authorized, even without
court or amount due under mortgage court order, to issue new title without
deed carrying over annotations of
• G. Banking Law (new) [RA 8791] subordinate liens
o Amount due under mortgage deed o Without prejudice to right of inferior lien
(deleting that fixed by the court) holders to question legality of
foreclosure proceedings
In case of surplus in purchase price
• It will be unjust to require redemption if the Rights of buyer to sell during period of
PP is higher than real amount of mortgage redemption
obligation ▪ This sale does not prevent court from granting
o Prejudicial to rights of mortgagor; could mortgagor period to redeem property
effectively prevent exercise of right ▪ If period expires, and sold to a third person,
court should give him a chance to be heard
Rights of persons with subordinate interest before allowing mortgagor to redeem
Mortgagor’s equity of redemption before F. ▪ Situation: property sold by mortgagee after
foreclosure. Should mortgagor redeem from
• Junior mortgagee acquires only equity of mortgagee bank or from purchaser?
redemption, his rights are strictly subordinate o From mortgagee bank
to superior lien of first mortgagee o Amount: principal debt + accumulated
Mortgagor’s right of redemption after F. interest up to time of purchase
• In all EJF, any person having a lien on the ▪ Right of redemption, as long as within period
property subsequent to the mortgage may prescribed, may be exercised irrespective of
redeem the same at any time within 1 w/n the mortgagee has subsequently
year conveyed the property to some other party
54
Rights of mortgagor during period of o If lease had been previously registered
redemption in RoP
o Or if unregistered, but mortgagee had
Property sold to 3rd party prior knowledge of existence and
• The only rights that a mortgagor can legally duration of lease
transfer after foreclosure are right to • Mortgagor refuses to surrender property
redeem, possession, use, enjoyment sold (writ is not available at all)
o Proper remedy is to file ordinary action
Right to possession for recovery of possession to give
• Judgment debtor remains in possession debtor opportunity to be heard
during period
• Mortgagor is still the owner, entitled to Injunction to prohibit issuance is improper
physical possession subject to right of ▪ Any question regarding the validity of the
purchaser to petition court to give him mortgage or foreclosure is not a legal ground for
possession refusing the issuance of writ or a justification for
opposing the petition for issuance
Right to rentals o Validity is to be determined in a separate
• Purchaser shall not be entitled to receive case
rents, earnings, and income of property sold o Cannot be raised to oppose issuance
on execution if in the possession of tenant because the proceeding is ex parte
o Shall belong to judgment debtor ▪ Such issue may be raised and determined only
until expiration of period after issuance of the writ
o Only remedy of mortgagor is to question
Purchaser’s right to possession of mortgaged validity of sale by a petition to set aside
property sold sale and to cancel writ of possession not
▪ Becomes final only after period is terminated later than 30 days after purchaser was given
▪ File with RD final deed of sale or sworn statement possession
attesting to fact of non-redemption o Grounds for petition: (1) mortgage was
▪ RD shall issue new certificate not violated; and (2) sale was not made in
accordance with provisions [Sec. 8, Act
Writ of possession 3135]
o Writ of possession – order by a court whereby sheriff is
commanded to place in possession of real / personal Right before lapse of redemption period
property the person entitled thereto such as when a ▪ In cases of EJF, Act 3135 allows purchaser to
property is extrajudicially foreclosed (either within take possession during period of redemption
or after the period) upon filing of ex parte application AND
o Right to request for issuance does not prescribe approval of a bond in an amount equivalent
o Where a writ has been issued, duty of sheriff to enforce; to use of property for period of 12 months
he has no authority to give a grace period o Bond is required to protect rights of the
▪ It would be erroneous to suspend implementation mortgagor so that he may be indemnified in
when it should issue as a matter of course case it be shown that the foreclosure sale
was not justified
Issuance of writ is ministerial ▪ Purchaser may apply ex parte with the RTC of
▪ Purchaser is entitled as a matter of right, place where property is situated
regardless of w/n there is a pending suit for
annulment of the mortgage / foreclosure itself Right after lapse of redemption period
▪ Given that the writ may be issued within the
Exceptions period, with greater reason that the writ must be
• Gross inadequacy of purchase price issued after expiration of period
• Third party with an adverse claim to ▪ Purchaser has only to file a petition for
mortgagor issuance without need of a bond
o Trial court should conduct a hearing to
determine nature of the adverse Right to conveyance + possession
possession • Either ask for writ or bring appropriate
• Failure to pay surplus proceeds of sale to independent action (e.g. ejectment suit)
mortgagor • Right to possession is based on ownership
• Mortgaged property under lease (writ is o Mere filing of ex parte motion for
not available at all) issuance would suffice
55
• Upon expiration, issuance of final certificate Successor-in-interest of mortgagor
of sale is a mere formality; only confirms title • Purchaser, being entitled to possession,
cannot be excluded therefrom by one
Petition for issuance of writ who merely claims to be a successor-in-
▪ Ex parte and summary in nature, non-litigious interest (possession is not adverse)
proceeding authorized in EJF pursuant to Act o UNLESS it is adjudged that he has a
3135 better right to the property
▪ No necessity of giving notice to mortgagor who
lost all interests in mortgaged property when he Lessee of agricultural land
failed to redeem the same • Agricultural lessee’s pre-emptive right to buy
the land he cultivates, and right to redeem
Order for issuance of writ is under Code of Agrarian Reforms
▪ Simply incidental to transfer of title in the name of o Purely statutory
purchaser o Superior to mortgagee of land
▪ Effect is to make right of purchaser to ▪ Remedy of mortgagee is against
possession absolute the landowner
▪ The writ is not a judgment on the merits that can
amount to res judicata Buyer of condo unit
• Under PD 957, upon full payment by buyer,
Right of purchaser to aid of court the seller is duty bound to deliver title of unit
▪ Purchaser is not obliged to bring separate and to the buyer
independent suit for possession • Even with a valid mortgage on the lot, seller
▪ But to give effect to this right of possession, he is still bound to redeem said mortgage
must invoke aid of courts and ask for a writ without any cost to the buyer
• Proper remedy is to annul mortgage
Petition for annulment of foreclosure foreclosure sale and condo certificate of
proceedings title issued in favor of highest bidder
▪ Contests presumed right of ownership of buyer in • HLURB consent is needed for validity of
a foreclosure sale and puts in issue such mortgage of condo by condo corp
presumed right of ownership
o Not allowed
▪ Must be in another separate proceeding, not to
be consolidated with writ of possession
proceedings
Where rights of 3rd persons involved
Claimants with adverse interest
• In case of EJF, possession may be given to
purchaser after period of redemption unless
a 3rd person is actually holding the
property in a capacity adverse to
mortgagor
• Ordinary action is necessary to recover
possession
• One of the exceptions on ministerial
issuance of writ
Remedies available to adverse 3rd parties
o Terceria to determine whether sheriff has
rightly or wrongly taken hold of the property
not belonging to the judgment debtor
o Independent “separate action” to
vindicate their claim of ownership and/or
possession over the property
▪ Must be separate from action in
which judgment is being enforced
o Both remedies cumulative, may be availaed
of independently or separately
o [Sec. 16, Rule 39]
56
Antichresis Antichresis vs. REM
Antichresis REM
Definition Possession Creditor acquires Debtor usually
o A contract whereby the creditor acquires the right to possession retains possession
receive the fruits of an immovable of his debtor, with Rights acquired No such right; But it
the obligation to apply them to the payment of the Only right to
creates a real right
interest, if owing, and then to the principal of his credit receive fruits of the
enforceable
property; No real
against the whole
Application of Fruits right created
world
▪ Parties must expressly agree that the creditor is to Obligation to pay
apply the fruits to the payment of interest / taxes and
principal  
charges upon the
▪ If there is an agreement that the creditor may property
administer and avail himself of the fruits, WITHOUT Obligation to
stating that said fruits are to be applied as apply fruits to  
payment, the contract shall be one of payment of debt
mortgage and not antichresis SIMILARITY Subject matter is real property
Measure of application Obligations of the Creditor
• The fruits of the immovable must be o The sums spent by the creditor in fulfilling these 2
appraised at their actual market value at obligations shall be charged against fruits of property
the time of the application [2133] o In addition to these 2, creditor is also bound to bear
Characteristics the expenses necessary for preservation and repair
o Accessory Payment of taxes and charges upon the estate
o Formal ▪ Unless there is a contrary stipulation
▪ Amount of the principal AND interest shall be ▪ If he does not pay taxes, he is, by law required to
specified in writing; otherwise, the antichresis is pay indemnity for damages to the debtor
void [2134] ▪ If debtor pays for taxes which should have been
o Nominate paid by creditor, the amount is to be applied
o Consensual (delivery is not required to perfect) to the payment of the debt
▪ If consensual vs. real = CONSENSUAL o Debtor is entitled to the return of the
▪ If consensual vs. formal = FORMAL property IF such payment discharged the
whole debt
Delivery of the immovable
o Required only in order that the creditor may receive Application of the fruits of the estate
fruits and not for the validity of the contract ▪ Duty of the creditor is to render an account of
o AC does not cover the immovable but only its fruits said fruits to the debtor
▪ Then apply said fruits
Obligation to pay interest
o Not essential; loan may or may not bear interest Right of Debtor to Reacquire enjoyment
o Only upon payment of the principal obligation
Antichresis vs. Pledge o If creditor does not want to pay the taxes and
Antichresis Pledge expenses for preservation and repair, he may compel
Object Fruits of real property Personal property the debtor to reacquire the enjoyment, except
Perfection By mere consent By delivery when there is a contrary stipulation
(provided that it is in
writing) [2135] Remedies of Creditor in case of nonpayment
SIMILARITY Debtor loses control of the subject matter o Creditor does not acquire ownership for nonpayment
of debt
▪ A stipulation to the contrary is void
▪ It is valid if only possession is transferred
Action for specific performance
Petition for Judicial Foreclosure [Rule 68]
▪ However, parties may agree on an extrajudicial
foreclosure in the same manner as they are
allowed in contracts of mortgage and pledge
57
Acquisitive prescription not applicable
o Possession is not in the concept of an owner
o Cannot acquire ownership unless he repudiates his
status as antichretic creditor
Interest in Antichresis subject to Usury Law

o If the appraised value of fruits should exceed amount
allowed by the Usury Law, the excess shall be applied
to the principal
o Now, there is no longer any ceiling prescribed
Provisions on Pledge and REM applicable

o Art. 2085 (4)
▪ Third persons may secure the obligation by
pledging/mortgaging their own property
o Art. 2089
▪ Indivisibility of pledge/mortgage
o Art. 2090
▪ Indivisibility is not affected by the fact that the
debtors are not solidarily liable
o Art 2091
▪ May secure all kinds of obligations
• Pure or Conditional
58
Chattel Mortgage Motor Vehicles
• But the mortgage must also be registered in
Definition LTO and with respect to vehicles used for
o Contract by virtue of which personal property is public services, the mortgage must carry the
recorded in the CM Register as a security for the approval of the LTFRB to be effective
performance of an obligation against the public
• Must also be registered in the CM Registry
Characteristics • CAAP for airplanes
o Accessory House of mixed materials
o Unilateral
• Which by its nature is considered personal
▪ Only obligations on the part of the creditor to
free the thing from encumbrance upon payment property and because it was so expressly
o Nominate designated by the parties
House intended to be demolished
Requisites
• Because what are really mortgaged in this
Consent case are the materials
▪ Corporation may mortgage House built on rented land
o Majority vote of board + stockholders • Because the deed considered it as such
representing 2/3 outstanding capital stock • Also, because it did not form part of the land
o Dividends + vote still done by mortgagor o An object placed on land by one who
since ownership is not transferred had only a temporary right to the same,
Object / Subject Matter such as the lessee, does not become
immobilized by attachment
▪ Must always be personal / movable property o The view that parties may agree to
▪ Must be described and identified consider a house as personal property
o Sec. 7 of the CML does not demand a is good only as far as parties are
specific description of every chattel, it only concerned
requires that the description be such as o Nevertheless, this does not make the
to enable the parties or any person to house personal property for purposes
identify the same after a reasonable of notice to be given for its sale at
investigation and inquiry public auction
▪ Jurisprudence provides that the following are
mortgageable under the CM Law: Not buildings
Share of Stock in a Corporation • Immovable property and cannot be
divested of its character by the fact that it
• But if the owner is not domiciled in the same belongs to another
province where the corporation is domiciled, • Execution of CM on a building is void
registration must be made in both
provinces Cause
Interest in Business o Requisites under Art. 2085 are applicable
▪ Must be constituted to secure fulfillment of
• It is personal property capable of
principal obligation
appropriation
▪ Absolute owner
Machinery treated by the parties as personal ▪ Free disposal
property subsequently installed on leased land
• Machinery and equipment, appearing to
be immobile, may be treated by the parties
as chattels to secure an obligation under
the principle of estoppel
Vessels
• But it is essential that the mortgage is
recorded Record of Ship Mortgages and
Encumbrances maintained by MARINA of
the port of documentation of such vessels to
be effective as to 3rd persons
59
Pledge v Chattel Mortgage v REM where EJF
Pledge CM REM property is Publication
Subject Movables Movables Immovables located Once a week
(may include (may include for 3
Incorporeal machinery movables No consecutive
rights treated as that have publication weeks
personal been requirement
property, immobilized) Notice
house built Notice GR: Notice to
on rented Alienable real To mortgagor
land, etc) rights mortgagor & not required
Real junior Ex.: Stipulation
Yes No No mortgagees
Contract
Notice in JF
Registration Public Registration in Registration in
writing left at Publication
to bind 3rd instrument w/ CM Register – Registry of
his abode, / If >50k,
Persons description of RD where Property –
by mail once a week
thing & date mortgagor RD where
At least 10 for 2
of pledge resides & property is
days before consecutive
where
sale weeks
property is
If ≤ 50k no
Form No Affidavit of
publication
prescribed Good Faith –
EJF: SPA to
form to make it
sell Notice
preferred
To debtor 3
credit
days before
Can secure
sale
after-
Yes No Yes Who
incurred
conducts Notary Public Sheriff Sheriff
obligations
sale
Right to No, GR: Yes Yes
When to Conventional After 30 JF (non-bank
recover stipulation is
foreclose / Pledge – from calendar mortgages) –
deficiency void Ex: Recto Law
cause sale default of days from time after 90-120
Right to GR: No
pledgor condition is days from
recover Yes Yes
broken entry of
excess Ex: Stipulation
Legal Pledge judgment
Governing Civil Code Civil Code Civil Code – w/in 1 month
Laws CM Law Rule 39 from demand
Ship (Execution to debtor
Mortgagee sale)
May GR: No
Decree Rule 68 (JF)
creditor be
Act 3135 Yes Yes
sole bidder Ex: After 2
(EJF)
failed sales
General
Redemption - Equity of Equity /
Banking Law
Redemption Right of
RA 4882
Redemption
(Alien
mortgagees) Similarities between Pledge & CM
RA 10491
▪ Both are executed to secure principal obligation
(Foreign
▪ Both are constituted only on personal property
banks)
▪ Both are indivisible
Posting / No posting & Posting Posting ▪ Both constitute a lien on the property
Publication / publication 10 days 20 days ▪ Creditor cannot appropriate property in himself
Notice requirement 2 / more At least 3 in lieu of payment
public places public places ▪ Upon default, property must be sold for the
Notice to Municipality Municipality payment of the creditor
pledgor & where where ▪ Extinguished by the fulfillment of the principal
owner of thing mortgagor property is obligation OR by destruction of the property
pledged resides OR located
60
Laws governing chattel mortgage same depositary as the property originally
mortgaged
Chattel Mortgage Law ▪ Does not apply to stores open to the public for
retail business where goods are constantly sold
Civil Code and substituted with new stock
o For practical reasons
Provisions on Pledge
• Applicable to CM insofar as they are not in Stipulation including after-acquired property
conflict with the CM Law [Art. 2141] ▪ Valid and binding
• Provisions of CM on effects of foreclosure o The after-acquired property must be in
are contrary to provisions of pledge renewal of, or in substitution for goods on
o No recovery of deficiency for pledge hand when the mortgage was executed
o CM Law is silent but creditor may still ▪ After-acquired properties may be added to the
recover mortgage through a mortgage supplement
Administrative Code Limited to Existing Obligations
▪ Only to obligations existing at the time the
Revised Penal Code mortgage is constituted
o If the CM provides that the security is for the
Offenses involving chattel mortgage
payment of future obligations, CM IS VOID
• Knowingly removing any personal property ▪ Unlike pledge, REM, and antichresis which may
mortgaged under the CML to any province secure after-incurred obligations
or city other than the one in which it was ▪ A PROMISE to include future obligations can be
located at the time of the execution of the binding
mortgage without written consent of the o But the security itself does not come into
mortgagee [Art. 319, RPC] existence until after a CM agreement
• Selling or pledging personal property covering the new debt is executed by
already mortgaged, or any part thereof, ▪ Constituting a fresh CM; or
under the terms of the CML, without the ▪ Amending the old contract
consent of the mortgagee written on the • Refusal of the debtor to execute
back of the mortgage and duly such agreement to cover the
recorded in the CM Register [Id.] future obligation can constitute
o Under both acts, the property an act of default on his part
removed/repledged must be the
identical property that was mortgaged Recording / Registration
o Sale is valid although no written
consent is obtained; but can still be Is it necessary for validity?
prosecuted ▪ 2 conflicting views
Mortgage of improvements Yes. Recording is required.
o Under Act No. 1508, Both growing crops and large • This view is based on the Civil Code
cattle are personal property and may be definition of a chattel mortgage
mortgaged under a CM (only insofar as parties are o “…personal property is recorded in
concerned) the CM Register as a security for the
▪ May be considered immovable under conditions performance of an obligation”
in Art. 415 (2) & (6) of the CC • Civil Code definition supersedes contrary
▪ No conflict with CC because CC classifies provision in CM Law which is an earlier law
personal property “Real property which by any
special provisions of law is considered as No. Recording is not required.
personalty” • This view is based on the CM Law that
▪ So far as the public is concerned, such provides that “a CM shall not be valid
improvements if falling under provisions of Art. against any person except the mortgagor,
415 are immovable property his executors or administrators unless the
• May only be subject to REM and not CM possession is delivered to and retained by
the mortgagee or unless the mortgage is
Extent of the Chattel Mortgage recorded in the office of the RD of the
province in which the mortgagor
Only to property described therein resides…”
▪ Not like or substituted property thereafter • Recording is only to affect 3rd persons
acquired by the mortgagor and placed in the
61
SC has adopted the 2nd view Duty of Register of Deeds – MINISTERIAL
• SC cited Art. 2125 of CC that provides “if ▪ No provision of law confers upon the RD any
the instrument is not recorded, the mortgage judicial or quasi-judicial power to determine the
is nevertheless binding between the parties.” nature of any document of which registration is
o BUT take note that Art. 2125 relates to sought as a chattel mortgage
REM, not to CM ▪ It is his duty to accept the proper fee and
place the instrument on record, leaving the
Place of registration effects of registration to be determined by the
▪ In the office of the RD of the province where the court if such question should arise
mortgagor resides at the time of making ▪ Cannot refuse registration on the ground only
▪ Place where the property is situated IF he that the property mortgaged do not appear to
resides outside the PH be personal property
▪ If property is situated in a different province from
where the mortgagor resides, must be recorded Affidavit of Good Faith
in both o An oath in a contract of CM wherein the parties “swear
o Principal place of business (where SEC that the mortgage is made for the purpose of securing
registered) the obligation specified in the conditions thereof and
for no other purposes and that the same is a just and
Period within which to register
valid obligation and not one entered into for the
▪ The CM Law does not provide any specific time purpose of fraud” [Sec. 5]
within which a CM should be recorded in the CM ▪ This strengthens the requirement that the CM must
Register only secure the obligations specified and NOT
▪ Jurisprudence: the law is complied with if the future ones
registration is made by the mortgagee before o Required only for the purpose of transforming an
the mortgagor has complied with his already valid mortgage into a “preferred mortgage”
principal obligation and no right of innocent
3rd persons is prejudiced Effect of absence
▪ Vitiates a mortgage only as against 3rd persons
Effect of registration
without notice like creditors and subsequent
Creates real right encumbrancers
o CM still valid
• The registration gives the mortgagee
symbolical possession Redemption
o Which is why the RPC punishes the
o When the condition of a CM is broken, the following
wrongful removal without the written
may redeem:
consent of mortgagee
▪ Mortgagor
• Effective and binding notice to other
▪ Person holding a subsequent mortgage
creditors of its existence
▪ Subsequent attaching creditor
• Lien of a CM over the property is superior to
o An attaching creditor who redeems shall be
the levy made on the same by the assignee
subrogated to the rights of the mortgagee and
of the unsecured judgment creditor of the
entitled to foreclose the mortgage
chattel mortgagor
• Right of an attaching creditor or a How do you redeem?
purchaser of the chattel at the auction sale ▪ By paying or delivering to the mortgagee the
is subordinate to the lien of the mortgagee amount due on such mortgage and the costs
• Doctrine of Mortgagee in GF applies and expenses incurred by such breach of the
o Rely on certificate of registration (LTO, condition before the sale thereof [Sec. 13]
LTFRB, Marina, CAAP) o Upon foreclosure sale, all rights of ownership
Adds nothing to the mortgage leave the mortgagor and become vested in
the purchaser
• The registration only operates as a
▪ Partakes the nature of an equity of redemption
constructive notice of its existence
o Right of the mortgagor to redeem after
• Affects nobody’s rights except as a species
default but before the sale to clear it from
of notice
the encumbrance of the mortgage
62
Right acquired by 2nd mortgagee and Action for replevin
subsequent purchaser • Both a form of principal remedy and of a
provisional relief
Before payment of debt • May either refer to the action itself (to regain
• After a CM is executed, there remains in the possession) or to the provisional remedy that
mortgagor a mere right of redemption and would allow plaintiff to retain thing during
only this right passes to the 2nd pendency of action
mortgagee in case of a 2nd mortgage • The action is primarily possessory in nature
• 2nd mortgagee can only recover the • Partly in rem + in personam
property from mortgagee by paying him o In rem: recovery of property
the mortgage debt o In personam: for damages
• By the fact that the object of replevin is
After payment of debt traced to his possession, one can properly
• The judgment or attaching creditor who be a defendant in an action for replevin
purchased the property at the execution • When the mortgagee seeks a replevin in
sale could not acquire anything except the order to effect foreclosure, the existence of
right of redemption default + existence of CM can properly
o He is not entitled to actual possession uphold the right to replevin [Servicewide v.
and delivery without first paying the CA]
mortgage debt
Where right to possession is disputed
Right of mortgagee to possession ▪ It could become essential to have other persons
involved and accordingly impleaded for a
After default complete determination and resolution of the
▪ Only if the creditor desires to foreclose; it is controversy
only natural to take possession before sale is
conducted Third party claimant
▪ If creditor chooses to foreclose, and mortgagor ▪ Rule 57 provides that a 3rd party claimant to a
refuses to surrender possession, creditor’s property levied upon by a writ of attachment must
remedies: make an affidavit showing that he has a title
o Effect a Judicial Foreclosure directly thereto or right to the possession
o Secure possession as a preliminary step to o Not applicable to CM; a CM is merely a
the sale security and does not transfer title
▪ If mortgagor refuses to deliver the chattel upon
failure to pay 2 or more installments, or if he Claimant is an unpaid seller
conceals the chattel ▪ PNB v. CA, p. 631 of book
o The necessary expenses incurred by ▪ Buyer, Seller, Mortgagee of Buyer
mortgagee should be borne by the ▪ Failure of buyer to pay PP does not revert
mortgagor ownership of the goods to the seller unless sale
▪ Sheriff does not have authority to seize was first invalidated
mortgaged property ▪ Mortgagee’s act of including in its foreclosure the
o Also, filing an action for replevin does not unpaid goods and merchandise sold to Buyer
require assent of sheriff did not make mortgagee an obligor to pay
for such unpaid goods
Before default ▪ Obligation to pay remains with buyer
▪ No such right
o Otherwise, the contract will become one of Foreclosure
pledge and not a CM o If the mortgagor defaults in the payment or fails to
comply with the conditions of the mortgage, creditor
Where right to possession is evident has no right to appropriate to himself the
▪ The action need only be maintained against him personal property
who possesses the property o Sec. 14 allows mortgagee to have the property sold
▪ Persons having a special right in the goods, the almost the same manner as that allowed by Act
recovery of which is sought, such as a CM, may No. 3135
maintain an action for replevin o Private sale is allowed for foreclosure of CM
Period to foreclose
▪ After 30 days from the time the condition is
broken
63
How? [Sec. 14, Act 1508] Application of proceeds of sale
▪ Sale at public auction through a public ▪ Costs and expenses of keeping the sale
officer at a public place in the municipality ▪ Payment of the obligation secured by the CM
where the mortgagor resides OR where the ▪ Claims of junior encumbrancers (in order)
property is situated [Sec. 14] ▪ Balance, if any, is paid to the mortgagor or
▪ With at least a 10-day notice to the person holding under him
mortgagor o Sec. 14 of the CM Law expressly entitles
• Notice must contain the time, place, and mortgagor to the balance
purpose of the sale o Since the CM Law bars the mortgagee from
• Posted at 2 or more public places in such retaining the excess, there is an obligation
municipality on the part of the mortgagor to pay the
▪ Mortgagee shall notify the mortgagor / junior deficiency in case of a reduction in the
mortgagors of the time and place of sale (at price at public auction
least 10 days prior to sale) either by:
• Notice in writing directed to him or left at his Civil action to recover credit
abode; or o Independent action for enforcement of credit not
• Sent by mail if he does not reside in such required
municipality ▪ To require this is to nullify the lien and defeat the
purpose of the CM which is to give him
Refusal of mortgagor to surrender possession preference over the chattels for the
after sale satisfaction of the credit
▪ Remedy of purchaser is to bring an ordinary o Mortgage lien deemed abandoned by obtaining a
action for recovery of possession, instead of personal judgment (real action waived)
merely asking for a writ of possession, in order to ▪ Manifests lack of desire and interest to go after
give the mortgagor the opportunity to be the mortgaged property as security for the
heard regarding possession + obligation principal obligation
Recovery of deficiency
▪ CM Law is silent but Jurisprudence has allowed
such recovery
▪ Action may be brought within 10 years from the
time the cause of action accrues even if it is not
upon a written contract (based on law)
Where CM secures purchase of chattel payable
in installments [Art. 1484, CC]
• No deficiency judgment can be asked
o Any contrary agreement is VOID
• 3rd remedy in Recto Law
o Barring effects of foreclosure: all
amounts due from the sale, including
damages & atty.’s fees are barred from
recovery [Macondray & Co. v
Eustaquio]
o Remedies are alternative
▪ Specific performance, rescission,
or foreclosure
• Chattel mortgagee is entitled to deficiency
if the action is for specific performance
where the mortgaged property is
subsequently attached and sold
o This is an execution sale (Rule 39); not
a foreclosure sale as contemplated in
Art. 1484
64
Concurrence and Preference of Credits Preference of Credit v Lien
Preference of Credit Lien
Features Applies only to claims which do
Creates a charge on a
o Liens and mortgages w/ respect to specific movable not attach to specific
particular property
& immovable property – increased properties
o Civil Code & Insolvency Law harmonized Preference in application:
o Preferred claims as to free property of insolvent – method adopted to determine
augmented & specify the order in w/c
o Order of preference in old Civil Code have been credits should be paid in the
abolished except that taxes must 1st be satisfied final distribution of proceeds of
the insolvent’s assets
Scope May not be invoked to nullify a
o Apply only where 2 or more creditors have separate foreclosure sale
& distinct claims against the same debtor who has
insufficient property Liability of Debtor’s Property for Obligations
o Attains significance only after properties of debtor o Creditors have the right to pursue property in
have been inventoried & liquidated & claims held by possession of debtor to satisfy their claims
various creditors have been established o Creditor has right to exercise all rights & bring all
o Credits must be due actions & impugn acts w/c debtor may have done to
defraud him
Concurrence of Credits ▪ Except: those w/c are inherent in his person
o Possession by 2 or more creditors of equal rights / o Debtor is liable w/ all his property, present & future,
privileges over the same specific property / all of the for fulfillment of his obligations
property of a debtor
Exempt Property
Preference of Credit
Present Property
o Right held by a creditor to be preferred in the
payment of his claim above others out of the debtor’s Family Home [152]
assents Beneficiaries [154]
❖ Husband & wife, or unmarried head of the
Nature & Effect of Preference family
▪ Preference is an exception to the general rule = ❖ Parents, ascendants, descendants, brothers
strictly construed & sisters living in the family home & who
▪ Does not create an interest in property depend upon the head of the family for
o Creates simply a right of one creditor to be legal support
paid 1st the proceeds of the sale of
property as against another creditor – o GR: exempt from execution, forced sale,
preference in application of proceeds of attachment
sale Exception to Exemption [155]
o Creates no lien on property ❖ For non-payment of taxes
▪ Law does not give creditor who has preference ❖ Debts incurred prior to constitution
a right to take property / sell it as against another ❖ Debts secured by mortgages
creditor o Before / after constitution
▪ Can be made effective only by being asserted ❖ Debts due to those who rendered service /
& maintained furnished material for construction of bldg.
o If not ascertained & maintained = lost
▪ Where a creditor released his levy, his claim to Support [205]
preference could not exist because he had o Right to receive support, as well as any
ceased to contest money / property obtained as such support
o Abandoned, at least at that moment, any ▪ Not allowed to be levied upon on
claim of preference attachment / execution
65
Exempt from Execution [Rule 39, Sec 13] Future Property
o Family home as provided by law / • Debtor who obtains a discharge from his
homestead w/c he resides & land debts on account of his insolvency, is not
necessarily used in connection therewith liable for the unsatisfied claims of his
o Ordinary tools & implements personally creditors
used by him in his trade, employment, / • Subject to certain exceptions expressly
livelihood provided by law
o 3 horses / 3 cows / 3 carabaos / 3 other • [Insolvency Law]
beasts of burden
▪ Judgment obligor may select Property in Custodia Legis & of Public
▪ Necessarily used by him in his Dominion
ordinary occupation • Under legal custody & those owned by
o Necessary clothing & articles for ordinary municipal corporations necessary for
personal use governmental purposes – exempt from
▪ Excluding jewelry attachment / execution
o Household furniture & utensils necessary
CPG / ACP [2238]
for housekeeping
▪ Used for that purpose • Assets of CPG / ACP do not pass to the
▪ Judgment debtor may select assignee in insolvency provided:
▪ Value ≤ 100k o Partnership / community subsists, &
o Provisions for individual / family use sufficient o Obligations of the insolvent spouse
for 4 mos have not redounded to the benefit of
o Professional libraries of judges, lawyers, the family
physicians, pharmacists, dentists, engineers, Co-Ownership [2239]
surveyors, clergymen, teachers, & other
• If 1 of the co-owners is the insolvent debtor,
professionals
his undivided share / interest in the property
▪ Value ≤ 300k
shall be possessed by the assignee in
o 1 fishing boat & accessories
insolvency proceedings
▪ Value ≤ 100k
▪ Owned by fishing man Property Held in Trust [2240]
▪ Earns livelihood by lawful use of it • Excluded from insolvency proceedings
o Salaries, wages, / earnings for personal
services Civil Code > Insolvency Laws [2237]
▪ w/in 4 mos preceding levy as o Unless otherwise provided in the special law
necessary for support of his family
o Lettered gravestones Classification of Credits
o Moneys, benefits, privileges, / annuities
accruing / in any manner growing out of any Special Preferred Credits
life insurance ▪ Do not give order of preference
o Right to receive legal support, or money / ▪ Merely enumerate credits
property obtained as such support, or any ▪ w/ respect to same specific movable /
pension / gratuity from the government immovable creditors (except State), merely
o Properties especially exempted by law concur
No Exemption if: ▪ Considered as mortgages / pledges of real /
❖ Issued upon a judgment recovered for its personal property [2243]
price or ▪ In case of insolvency of debtor, claims / credits
❖ Upon a judgment of foreclosure of a shall be considered as liens w/in purview of legal
mortgage thereon provisions governing insolvency
▪ Statutory lien should only be enforced in context
Land Acquired under Free Patent / Homestead of some kind of proceeding where claims of all
o Not liable to satisfaction of any debt preferred creditors may be bindingly
contracted prior to the expiration of 5 yrs adjudicated
from issuance of patent / grant o Such as insolvency proceedings
o Exception: in favor of gov’t or any of its o EJF is not liquidation proceedings
branches, units, / institutions contemplated
o [Public Land Act]
66
Specific Movable Property [2241] o Upon the price of sale
• TMUGCRLSTTLC1D
1. Duties, taxes, fees due to State / any o If movables to w/c the lien / preference
subdivision thereof attaches have been wrongfully taken,
o Pay in full!! creditor may demand them from any
• Claims arising from misappropriation, possessor, w/in 30 days from unlawful seizure
breach of trust, / malfeasance by public Specific Immovable Property [2242]
officials • TULFMoPACDI
o Committed in performance of duties 1. Taxes due upon land / bldg.
o On the movables, money / securities o Pay in full!!
obtained by them • Unpaid price of real property sold
• Claims for unpaid price of movables sold o Upon immovable sold
o As long as in possession of debtor o No distinction between registered &
o Up to value of same unregistered vendor’s lien
o If resold & price is still unpaid, lien may • Claims of laborers, masons, mechanics &
be enforced on price other workmen, as well as architects,
o Not lost by immobilization of thing by engineers & contractors, engaged in
destination, provided it has not lost its construction, reconstruction / repair of bldgs.,
form, substance & identity canals, / other works
o Not lost by sale of thing together w/ o Upon said bldgs., canals / other works
other property for a lump sum, when • Claims of furnishers of materials used in
price can be determined construction, reconstruction, / repair of
proportionally bldgs., canals, & other works
• Credits guaranteed w/ a pledge o Upon said bldgs., canals / other works
o So long as possessed by creditor • Mortgage credits recorded in Registry of
o Up to the value Property
• Guaranteed by chattel mortgage o Upon real estate mortgaged
o Up to the value o Superior to an unrecorded unpaid
• Credits for making, repairs, safekeeping / vendor’s lien
preservation o Registration under Act No 3344 is w/o
o On the movable made, repaired, kept prejudice to better right of 3rd parties
/ possessed o Preference among mortgages
• Claims for laborers’ wages according to order in time
o On goods manufactured / work done • Expenses for preservation / improvement
• Expenses of salvage of real property when law authorizes
o Upon goods salvaged reimbursement
• Credits between landlord & tenant, arising o Upon immovable preserved / improved
from contract of tenancy on shares • Credits annotated in the Register of
o On share of each in fruits / harvest Property, in virtue of a judicial order, by
• Credits for transportation, upon goods attachments / executions
carried, for price of contract & incidental o Upon property affected
expenses o Only as to later credits
o Until delivery / for 30 days thereafter o Preference among attachments /
• Credits for lodging & supplies executions according to order of time
o Usually furnished to travelers by hotel- they were levied upon the property
keepers • Claims of co-heirs for warranty in partition
o On movables belonging to guest as of immovable among them
long as movables are in hotel o Upon real property divided
o But not for money loaned to guests • Claims of donors of real property for
• Credits for seeds & expenses for pecuniary charges / other conditions
cultivation & harvest advanced to debtor imposed upon donee
o Upon fruits harvested o Upon immovable donated
• Credits for rent for 1 year • Credits of insurers for insurance premium
o Upon personal property of lessee for 2 yrs
existing on the immovable leased & on o Upon property insured
fruits of the same
o Not on money / instruments of credit
• Claims in favor of depositor if depositary
wrongfully sold the thing deposited
67
Refectionary Credit o When approved by the Court
o Indebtedness incurred in repair / 3. Expenses during last illness of debtor / of
construction of something previously made spouse & children under his / her parental
o Made necessary by deterioration / authority, if they have no property of their own
destruction of thing as it formerly existed 4. Compensation due to laborers / their
o See 3,4, 6 dependents under laws providing for indemnity
o SC: Include new construction for damages in cases of labor accident, /
illness resulting from nature of employment
Ordinary Preferred Credits [2244] 5. Credits & advancements made to debtor for
▪ ElFILAS2CAT3QGP support of himself / herself, & family
▪ Creates no liens on determinate property w/c o During last year preceding insolvency
follow such property 6. Support
▪ Creates simply rights in favor of certain creditors o During insolvency proceedings & 3 months
to have the cash & other assets of insolvent thereafter
applied in a certain sequence / order of priority 7. Fines & civil indemnification arising from criminal
▪ Only in respect of insolvent’s free property offense
▪ Specially preferred credits > ordinary preferred 8. Legal expenses & expenses incurred in
credits administration of insolvent’s estate for
o Specific property involved of greater value common interest of creditors
▪ Residual value will form part of free o When properly authorized & approved by
property of insolvent court
o Specific property of lesser value 9. Taxes & assessments due the national gov’t
▪ Unsatisfied balance of tax liens & other o Other than those mentioned in 2241 (1)
such credits are to be treated as and 2242 (1)
ordinary preferred credits 10. Taxes & assessments due any province
▪ Does not apply to State o Other than those mentioned in 2241 (1)
o Inconceivable for a sovereign State and 2242 (1)
voluntarily to initiate insolvency / general 11. Taxes & assessments due any city /
liquidation proceedings / to be subjected municipality
to such proceedings under its own laws o Other than those mentioned in 2241 (1)
o State is regarded as always solvent and 2242 (1)
12. Damages for death / personal injuries caused by
1. Credits for services rendered by employees, quasi-delict
laborers, / household helpers [Labor Code] 13. Gifts due to public & private institutions of charity
o Wages refers to all remunerations, earnings / beneficence
& other benefits in terms of money 14. Credits w/c w/o special privilege, appear in a
o Separation pay is part of remuneration for public instrument / final judgment, if they have
services rendered / to be rendered been the subject of litigation
o Judicial proceedings in rem required o Preference among themselves in the order of
• In adjudication of creditors’ claims priority of dates
against debtor’s assets
• To become operative 2
𝐿𝑜𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = (80 − 𝑎𝑔𝑒)(𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 − 50%)
• To bind 3rd parties 3
o Declaration of bankruptcy / judicial
liquidation must be present before worker’s
preference may be enforced
• Not rehabilitation proceedings
• Rehabilitation proceedings are to
enable company to gain a new lease
in life & thereby allow creditors to be
paid claims from its earnings
o Liability for improper application of debtor’s
assets
• Moral & exemplary damages + liable
to return company’s assets w/c he
appropriated / their value
2. Proper funeral expenses for debtor / children
under his / her parental authority who have no
property of their own
68
Common Credits [2245] Order of Preference of Credits
▪ Credits other than those mentioned in 2241, o Only taxes & assessments upon specific movable &
2242, 2244 shall enjoy no preference immovable property enjoy absolute preference
▪ Paid pro rata regardless of dates o Two-tier order of preference
▪ 1st -Tier
Insolvency Proceedings Involving Banks
• Taxes, duties & fees due on a specific
• Actions of Monetary Board of Central Bank movable / immovable property
in proceedings in receivership & liquidation ▪ 2nd-Tier
are explicitly declared final & executory • All other special preferred credits
o May not be set aside / restrained /
enjoined by courts Pro Rata Rule
o Except: upon convincing proof that ▪ In proportion or ratably, or a division according
action is plainly arbitrary & made in to share, interest or liability of each
bad faith ▪ Does not apply to credits annotated in the
• After a bank is declared insolvent by MB of Registry of Property in virtue of a judicial order, by
CB, a depositor cannot bring a separate attachments and executions
action against it o Priority of credits in order of time
o Remedy: intervene in the judicial ▪ Not to be enforced where there is 1 creditor
proceedings for liquidation through
SolGen Proceeding for Payment
o Execution of final judgment rendered in • Preferred creditors in 2242 must necessarily
a separate suit will cause bank’s assets be convened, & import of their claims
to be unduly depleted to the obvious ascertained
prejudice of other depositors & • Some proceeding where claims of all
creditors preferred creditors may be bindingly
• Deviation from procedure may be allowed adjudicated
in the interest of justice, upon taking into o Insolvency, settlement of decedent’s
consideration the circumstances of the case estate under Rule 87, other liquidation
• Liquidation Proceeding proceedings of similar import
o Single proceeding w/c consists of a
number of cases properly classified as 1. Preference w/ respect to specific movables [2246]
claims • Exclude all others to the extent of the value of the
o 1st phase: approval & disapproval of personal property
claims • 2 / more credits w/ respect to same specific
▪ Classified whether it is ordinary / movable [2247]
preferred o Satisfied pro rata
▪ Included in the distribution plan 2. Preference in relation to specific real property or real
▪ Order allowing / disallowing a rights [2248]
particular claim is final order & may • Exclude all others to the extent of the value of the
be appealed by aggrieved party immovable / real rights
o 2nd phase: approval by court of • 2 / more credits w/ respect to same specific real
distribution plan property / real rights [2249]
▪ Distribution plan specifies in detail o Satisfied pro rata
the total amt available for 3. Excess shall be added to the free property [2250]
distribution to creditors whose
Satisfaction of Other Credits [2251]
claims were earlier allowed
▪ Credits w/c do not enjoy any preference &
unpaid credit under 2241 + 2242 because the
value of the property is less than the preferred
credit / credit - follow 2244
▪ Common credits
o Those w/c do not fall under 2241, 2242,
2244
o Paid pro rata regardless of dates
69
Financial Rehabilitation and Insolvency Act of Under the FRIA
▪ Liabilities > Assets OR unable to pay debts as
2010 (RA 10142) they come due
• Took effect on Aug. 31, 2010 ▪ Thus, under FRIA, “insolvent” covers both
• It repealed the Insolvency Law bankruptcy and illiquidity
• Governs all petitions filed after it has taken effect
• Governs all further proceedings in insolvency, suspension of How do you determine?
payments and rehabilitation cases pending at the time it ▪ Reference must be made to the fair valuation of
became effective assets
o EXCEPT to the extent that in the opinion of the o Debtors assets (at fair value) must not be
court, the application of FRIA would not be sufficient to pay his debts
feasible or would work injustice, in which case ▪ Fair valuation – what a willing owner, not
prior laws will apply compelled to sell, would take and a willing
• Under the Civil Code, insolvency will be governed by purchaser, not compelled to buy, would pay
special laws insofar as they are not inconsistent with the
Civil Code (This special law is FRIA) Corporation
o Thus, insolvency is primarily governed by CC; ▪ When assets at fair value are less than the
and subsidiarily by FRIA liabilities (disregarding liability to stockholders,
• Proceedings under FRIA are in rem preferred or common)
Constitutionality Partnership
o SC ruled that the restructuring of the debt of the ▪ Not insolvent as long as the property of the
debtor pursuant to a rehabilitation plan does not partnership, together with the individual
violate the non-impairment clause property of the partners who are liable for
▪ The matter does not involve a law declaring the partnership debts, is sufficient to pay its
modification of the contract among the debtor & indebtedness
creditor/s; thus, the non-impairment clause Vs. Bankruptcy (Am. Jur.)
may not be invoked
▪ Even assuming that it may be invoked, it must yield Before
to the police power of the State
• Insolvency operated on the petition of an
Policy insolvent debtor to discharge him from his
debts
o To encourage debtors and their creditors to
• Bankruptcy operated on the petition of his
collectively and realistically resolve and adjust
creditors for the purpose of applying his
competing claims and property rights
property to the payment of his debts
▪ State will ensure a timely, fair, transparent,
effective, and efficient rehabilitation or Now
liquidation of debtors • Both insolvency and bankruptcy may be
o When rehabilitation is not feasible, it is in the interest initiated by either debtor or creditor
of the State to facilitate a speedy and orderly
liquidation of these debtors’ assets and the Debtors covered by FRIA
settlement of their obligations o Individual debtor who has become insolvent as
defined in the law
Insolvency o Sole proprietorship duly registered with DTI
Balance sheet test o Partnership duly registered with SEC
▪ May either be business partnership or general
▪ Liabilities > Assets professional partnership
▪ Under this test, insolvency = bankruptcy o Corporation duly organized and existing under PH
Illiquidity / Equity test laws
o Government financial institutions (GFIs)
▪ Inability to pay debts as they become due in the
ordinary course of his business Debtors not covered by FRIA
▪ Person may be insolvent but may be able to pay
o Banks, insurance companies, pre-need companies,
his debts at some future time on a settlement and
and national and local government agencies or units
winding up of his affairs
o Unincorporated company, JV not registered as
▪ Not bankrupt but illiquid
partnership with SEC
o Estates, trusts
70
Claims Remedies (no advantages yet)
o A “claim” includes all claims or demands of whatever
nature or character against the debtor or its property, Judicial (Under FRIA)
whether monetary or not, liquidated or not, fixed ▪ Suspension of payment
or contingent, matured or not, disputed or not ▪ Rehabilitation
▪ Includes all claims of the government, whether o Voluntary (debtor-initiated)
national or local (taxes) o Involuntary (creditor-initiated)
▪ Includes claims against directors of officers of the ▪ Out of court restructuring agreement (OCRA)
debtor arising from the acts done in the ▪ Liquidation
discharge of their functions falling within the
scope of their authority Extra-judicial
▪ Infusing additional equity
Must be against the debtor ▪ Selling core assets or portions of its business to
▪ Thus, the rehabilitation court has no jurisdiction raise funds
over claims by the debtor against his own ▪ Implementing a debt-to-equity conversion
debtors or against 3rd parties ▪ Transferring assets as payment of debt (dacion)
How does the court acquire jurisdiction? Suspension of payment

o Upon publication of notice of the commencement o Remedy available to an individual debtor who
of the proceedings in any Newspaper of GC in seeks to suspend the payments outside of the
the PH (in the manner prescribed by rules of necessary or legitimate expenses of his business while
procedure promulgated by SC) the proceedings are pending
o Proceedings in FRIA are in rem, summary, and non- o Always voluntary; creditors cannot file petition for this
adversarial in nature o Only individual debtors can file
▪ Because it is summary in nature, filing a motion ▪ Natural person who is a resident citizen who
to dismiss is not allowed has become insolvent
▪ Except as provided by law, a married individual
Rehabilitation proceedings debtor must sue or be sued jointly with his or her
▪ Publication of notice of the commencement of spouse
the proceedings and the commencement order o Filed in the court having jurisdiction over the
in 1 newspaper of GC for 2 consecutive province/city where the debtor has resided for 6 mos.
weeks prior to the filing of the petition
Voluntary Liquidation proceedings Basic Procedure
▪ Upon publication of the Liquidation Order
Filing of petition
Involuntary Liquidation proceedings • Must attach:
▪ For juridical debtors o Schedule of debts and liabilities
o Upon publication of the petition or motion o Inventory of assets
as provided in FLSP Rules o Proposed agreement with creditors
▪ For individual debtors • Must indicate names of at least 3 nominees
o Upon service of summons in accordance to the position of Commissioner
with FLSP Rules (jurisdiction over debtor) • From this time and for as long as
o Upon publication of Liquidation Order proceedings remain pending, no creditor
(jurisdiction over other persons) can sue or institute proceedings to
collect his claim, except: (MILF)
Suspension of Payments o Creditors having claims for personal
▪ Upon publication of the Suspension Order labor, maintenance, expense of last
illness and funeral of wife or children of
debtor incurred in 60 days
immediately prior to filing
o Secured creditors
71
Court action • Creditor who incurred his credit within 90
• If court finds petition sufficient in form + days prior to the filing of petition is not
substance, it will, within 5 working days entitled to vote
from filing, issue an Order: • Unaffected creditors may not attend and
o Calling a meeting of all creditors vote (labor, secured)
named in the schedule 15 to 40 days • Commissioner will now prepare a report of
from date of the Order the proceedings to be submitted to the
o Directing such creditors to prepare court not later than 3 days after the last
and present written evidence of claims creditors’ meeting
o Directing the publication of the Order
Objections to proposal
in a newspaper of GC
o Directing the clerk of court to cause the • Any creditor who attended may file an
sending of a copy of the Order to all objection with the court within 10 days from
creditors named in the schedule the date of the last meeting
o Forbidding the individual debtor from Grounds for objecting
selling, transferring, encumbering, or
o Defects in the call for the meeting and
disposing of his property
holding thereof which prejudiced their rights
o Prohibiting the individual debtor from
o Fraudulent connivance between 1 or more
making any payment outside of the
creditors and the debtor to vote in favor of
necessary or legitimate expenses of his
the proposed agreement
business or industry
o Fraudulent conveyance of claims for the
o Prohibiting creditors from suing or
purpose of obtaining a majority
instituting proceedings for collection
against the debtor EXCEPT the 2 ^ Hearing and issuance of court order
o Appointing a commissioner to preside • Court must hear and pass upon such
over the creditors’ meeting objection as soon as possible and in a
▪ The commissioner may or may not summary manner
be among the nominees of debtor
• Upon motion filed by the individual debtor, If proposal is annulled / rejected
the court may issue an order suspending o Court will declare proceedings terminated
any pending execution against the o Creditors will be free to exercise their rights
debtor (Suspension Order)
o However, the Suspension Order cannot If proposal is accepted
cover properties held as security by o Court will order that the agreement be
secured creditors carried out
o The SO will lapse after 3 months without
proposed agreement being accepted • If the debtor fails to perform obligations
by the creditors OR as soon as the under the agreement, creditors’ rights will
agreement is denied revest in them; debtor may now be subject
to insolvency proceedings (involuntary)
Notification
The Commissioner
• The Order is then published in a newspaper
of GC in the province or city where petition Qualifications
is filed once a week for 2 consecutive
o Natural person
weeks; to be made within 7 days from
o Citizen OR Resident for at least 6 mos.
issuance of the Order
immediately preceding his appointment
Holding of meeting o GMC and with acknowledged integrity,
• On the date, time, and place designated in impartiality and independence
the Order o Requisite knowledge of insolvency laws
• Presence of creditors holding claims o No conflict of interest
amounting to at least 3/5 of the ▪ But this may be waived by a
liabilities is required to hold a meeting party who may be prejudiced
• Propositions in the proposed agreement will ▪ There is conflict of interest when
be discussed and creditors will vote one may be materially influenced
o To form a majority, 2/3 of creditors is in the exercise of his judgment
needed; AND claims represented
by this 2/3 amounts to at least 3/5
of the total liabilities of the debtor
72
Objections Court-supervised Rehabilitation
o Debtor or any creditor may file written
objection to the commissioner on ground Who may file?
that he does not meet minimum requirements
Voluntary Rehabilitation
Prohibited transactions • In general: debtor or group of debtors
▪ Sale, transfer, encumbrance or disposition by • For single proprietorship: owner
individual debtor of his property • For partnership: majority of partners
o EXCEPT: those used in the ordinary course • For corporation: majority vote of the
of business board AND vote of stockholders
▪ Payment by debtor outside of the necessary / representing at least 2/3 of capital
legitimate expenses of his business stock
▪ These prohibitions apply upon the issuance o If the articles of incorporation impose a
of the Order until pendency of proceedings higher vote requirement, that will prevail
Rehabilitation Involuntary Rehabilitation
o Restoration of the debtor to a condition of • By creditor or group of creditors with
successful operation and solvency, if it is shown aggregate claims of at least P1M OR at
that its continuance of operation is economically least 25% of subscribed capital / partners’
feasible AND its creditors can recover by way of the contribution whichever is higher
present value of payments projected in the plan, more
Grounds
if the debtor continues as a going concern than if it is
immediately liquidated o No genuine issue of fact or law on the claim
and that the due payments have not been
Types made for at least 60 days; (180 days for
▪ Court supervised (voluntary/involuntary) [Sec. 12] liquidation)
▪ Pre-negotiated [Sec. 76] o Debtor has failed generally to meet its
▪ Out of Court (OCRA) [Sec.83] liabilities as they fall due; OR
o A creditor (other than petitioners) has
Purpose initiated foreclosure proceedings against
▪ To efficiently and equitably distribute the assets the debtor that will prevent the debtor from
of the insolvent debtor to its creditors paying its debts as they become due
▪ To provide the debtor with a fresh start
Venue for petition
Likelihood ▪ RTC which has jurisdiction over the principal
▪ Rehabilitation must be viable or likely office of the debtor alleged to be insolvent
▪ If not feasible, the appropriate proceeding
would be a liquidation proceeding
Contents of petition
Requirements to establish substantial Voluntary

likelihood 1. Name, business, and principal address and
• Proposed Rehab Plan submitted complies other addresses of the debtor
with minimum contents prescribed by FRIA 2. Nature of business and principal activities of
• Sufficient monitoring by the Rehab Receiver the debtor
(RR) of the debtor’s business 3. History of the debtor
• Debtor has met w/ its creditors attempting to 4. Fact and the cause of the insolvency
reach consensus on proposed Rehab Plan 5. Specific relief sought
• RR submits a report, based on prelim 6. Grounds upon which the petition is based
evaluation stating that the financial goals in 7. All pending actions or proceedings by or
the Rehab Plan are realistic, feasible, and against the debtor and the courts where
reasonable they are pending
• The petition, the Rehab Plan, and the 8. Threats or demands to enforce claims
attachments, do not contain any against him
9. Manner by which the debtor may be
materially false or misleading statement
rehabilitated and how it will benefit the
• If petitioner is debtor, it has met with the
creditors, employees and stockholders
creditors representing at least ¾ of its total
10. Exact address at w/c documents regarding
obligations
the debtor may be reviewed and copied
• Debtor has not committed acts of
misrepresentation or in fraud of its creditor/s
73
Involuntary 9. Submission of report of the Rehabilitation
1. 1, 2, 5, 10 of voluntary petition Receiver
2. Circumstances sufficient to support a 10. Grant / Dismissal of Petition, or Conversion of
petition to initiate involuntary rehabilitation Proceedings
proceedings a. Give due course upon finding that:
3. Rehabilitation Plan i. Debtor is insolvent; and
4. Names of at least 3 nominees to the ii. There is substantial likelihood for
position of Rehabilitation Receiver with their the debtor to be rehabilitated
qualifications, office, and email ad b. Dismiss the petition upon finding that:
5. Documents showing that there is substantial i. Debtor is NOT insolvent
likelihood that the debtor may be ii. Petition is a sham filing, intended
rehabilitated only to delay the enforcement of
creditors rights
Basic Procedure iii. Petition, Rehab Plan, and
1. Filing of petition attachments contain any
a. Must conform with requirements ^ materially false or misleading
b. If involuntary, must be on grounds statements; OR
provided ^ iv. Debtor has committed acts of
2. Action on petition misrepresentation
a. If sufficient in form + substance: c. Convert it to Liquidation proceedings
i. Court must issue Commencement i. If debtor is insolvent and no
Order (CO) within 5 days substantial likelihood to be
b. If not satisfied rehabilitated; AND / OR
i. Give petitioner reasonable ii. There is failure of rehabilitation
period of time (not > 5 days) within 11. Consultation with Debtor and Creditors
which to amend or supplement the 12. Formation of Creditors’ Committee
petition a. Creditors belonging to a class may
ii. 5 days for the issuance of CO from formally organize a committee among
date of filing amendment themselves
iii. If deficiency is still not complied b. Creditors may, as a body, agree to
with, petition dismissed form a creditors’ committee composed
3. Publication of CO and delivery of notices of a representative from each class of
a. Same with suspension of payment; 1x a creditors:
week for at least 2 consecutive weeks i. Secured
4. Establishment of registry of claims ii. Unsecured
a. By Rehabilitation Receiver within 20 iii. Trade creditors and suppliers
days from assumption of office iv. Employees of the debtor
b. RR must make it available for inspection 13. Review, revision and preparation of
i. Period of inspection is max 15 rehabilitation plan by receiver
days from last publication 14. Creditors’ meeting to approve rehabilitation
5. Filing of creditor’s claim plan
a. Creditors must file their claims at least 5 a. The RR will notify the creditors that the
days before the initial hearing Plan is ready for their examination
b. Creditor whose claim it not listed in the b. Within 20 days from notice, creditors will
schedule and who failed to file notice vote on the approval
of claim will NOT be entitled to i. Plan is deemed rejected unless
participate in the Rehab proceedings approved by all classes of
6. Challenge of claims creditors whose right is affected by
a. Within 30 days from expiration of the Plan
period to inspect the registry, the 15. Submission of rehabilitation plan to the court
debtor, creditors and other interested a. If RP is approved, RR must submit to the
parties may submit a challenge of court for confirmation
claims to the court
b. Upon expiration of this 30-day period,
the registry must be submitted to court
7. Initial hearing and subsequent hearings
8. Creditors’ comment on the petition and
Rehabilitation Plan
a. Not > 20 days from initial hearing
74
16. Filing of objections • Prohibit the debtor’s suppliers from
a. Within 20 days from receipt of notice withholding supply for as long as the debtor
from court that the RP has been makes payments for these
submitted for confirmation • Authorize payment of administrative
b. Grounds: expenses as they become due
i. Creditors’ support was induced by • Set the case for initial hearing
fraud
ii. Docs or data relied upon in the RP Effect
are materially false / misleading • Vest with RR all the powers and functions
iii. RP is in fact not supported by the provided in the FRIA
voting creditors • Prohibit, or serve as legal basis for nullifying
17. Hearing on objections the results of any extrajudicial process to
a. If court finds merit in objections, it will seize property, sell encumbered property, or
order the curing of the defect, when attempt to collect on or enforce a claim
feasible against the debtor after the commencement
i. If court finds that debtor acted in date unless otherwise allowed in FRIA
bad faith OR that it is not feasible, • Serve as legal basis for nullifying any set-off
proceedings will be converted to after the commencement date of any debt
liquidation owed to the debtor by any of the debtor’s
18. Court action creditors
a. If no objections, court will issue order • Serve as legal basis for nullifying the
confirming the RP perfection of any lien against the debtor’s
b. Court has 1 year max from the filing of property after the commencement date
petition to confirm a RP • Consolidate the resolution of all legal
i. If no RP is confirmed within 1yr, proceedings by and against the debtor to
proceedings may be converted the court
to Liquidation
Effectivity and Duration
19. Amendments to the Approved Rehabilitation
Plan • Effective for the duration of the rehabilitation
20. Termination of Proceedings proceedings, except:
a. By order of the court either declaring a: o if earlier lifted by the court
i. Successful implementation of the o the rehab plan is seasonably confirmed
RP; or o The rehab proceedings are ordered
ii. There is failure of rehabilitation terminated by the court
• The effects of the CO retroacts to the
When is there failure of rehabilitation? date of filing of the petition
• Court dismisses the petition
• Debtor fails to submit a RP Suspension Order
• Under the RP submitted by the debtor, there ▪ May be included in a Commencement Order
is no substantial likelihood that it can be Contents
rehabilitated within a reasonable period
• The RP is approved but in the • Suspend all actions or proceedings for
implementation, the debtor fails to perform enforcement of claims against the debtor
its obligations • Suspend all actions to enforce any
• Commission of fraud in securing the judgment, attachment or other provisional
approval of the RP remedies against the debtor
• Court does not confirm the RP • Prohibit debtor from selling or disposing in
• Determination that the RP may no longer be any manner any of its properties except in
implemented the ordinary course of business
• Defect is not cured • Prohibit the debtor from making any
payment of its liabilities outstanding as of
• Failure of debtor to comply with the FLSP
the commencement date except as may be
Rules, RoC, or any order of the court
provided herein
Commencement Order
Contents
• Declare that debtor is under rehabilitation
• Appoint a RR who may or may not be from
among the nominees of the petitioner
75
Does not apply to: What should the court do?
• Cases already pending appeal in the SC o Court will order the debtor or the RR to:
as of commencement date ▪ Make arrangements to provide for
• (Subject to court’s discretion) To cases the insurance or maintenance of
pending or filed at a specialized court or the property; OR
quasi-judicial agency which is capable of ▪ Make payments or otherwise
resolving the claim more quickly, fairly and provide additional or
efficiently replacement security so the
• To the enforcement of claims against obligation is fully secured
sureties and other persons solidarily liable o If these arrangements are not feasible, court
with the debtor, and 3rd party or may modify the Suspension Order to allow
accommodation mortgagors, issuers of the secured creditor lacking protection to
letters of credit, unless the property held enforce its security claim
as mortgage is necessary for the rehab
Applicability to GFIs
of the debtor
• To any form of action of customers / clients • Effects of Commencement Order and
of a securities market participant to recover Suspension Order applies to GFIs even if
claim moneys and securities entrusted to the their charters provide otherwise
latter in the ordinary course of the latter’s Rehabilitation Receiver
business
• To the actions of a licensed broker or ▪ Natural or juridical person
dealer to sell pledged securities of a debtor o If juridical, it includes the entity’s designated
pursuant to a securities pledge or margin representative (solidarily liable)
agreement ▪ Appointed by the court, entrusted w/ duties &
• To the clearing and settlement of financial responsibilities in rel. to rehabilitation of debtor
transactions through the facilities of a Qualifications
clearing agency or similar entities duly
If natural person
authorized
• Any criminal action against the individual 1. Citizen OR resident of PH for at least 6 mos.
debtor will not be affected by any Immediately preceding his nomination
proceeding commenced under FRIA 2. Of GMC, with acknowledge integrity,
impartiality, and independence
Continuance 3. (As far as practicable) Has expertise to
• Court may terminate, modify, or set manage and operate a business similar in
conditions for the continuance of size and complexity with that of the debtor
suspension of payment, or relieve a claim 4. Has an operating knowledge in
from the coverage thereof, upon showing management, finance, and rehabilitation of
that: distressed companies
o Creditor does not have adequate 5. Has a general familiarity with the rights of
protection over property securing its creditors subject to suspension of payments
claim; or 6. Has not been earlier dismissed as a
o Value of a claim secured by a lien on rehabilitation receiver
property not necessary for 7. Has no conflict of interest
rehabilitation exceeds the FMV of said 8. Willing and able to file a bond in an amount
property fixed by the court
When is there a lack of adequate protection? If juridical person

o Debtor fails or refuses to honor a pre-existing 1. 6, 7, 8 of natural
agreement with the creditor to keep the 2. Duly authorized to do business in PH for at
property insured; least 6 years prior to its appointment
o Debtor fails or refuses to take commercially 3. Of good standing as certified by the
reasonable steps to maintain property; OR appropriate regulatory agencies
o Property has depreciated to an extent that 4. Must submit name of person designated to
the creditor is under-secured carry out duties of RR, and the names of
employees authorized to assist the RR
5. Submit a sworn undertaking binding itself to
be solidarily liable with the persons
designated
6. Not disqualified to be a RR under Consti
76
Initial Appointment o Debt forgiveness
• Appointee may or may not be among those o Debt rescheduling
nominated o Reorganization or quasi-reorganization
• In case the debtor is a securities market o Dacion en pago
participant, court must give priority to the o Debt-to-equity conversion
nominee of the appropriate securities or o Sale of a business (or part of it) as a going
investor protection fund concern
• If a qualified person is nominated by more o Setting-up of new business entity as
than 50% of the secured creditors AND the prescribed in Sec. 62
general unsecured creditors, court MUST o Other similar arrangements as may be
appoint this nominee approved by the court or creditors
Powers, Duties, and Responsibilities (p.736) Contents (minimum requirements)

• Specify the underlying assumptions, financial
Oath goals and the procedures proposed to
accomplish such goals
Compensation
• Compare amounts expected to be
Removal received by the creditors under the Rehab
Plan vs. what they will receive if liquidation
• The RR may be removed at any time by the
ensues within the next 120 days
court, either motu proprio OR by any
• Information sufficient to give credits
creditor/s holding more than 50% of the
reasonable basis for determining whether
total obligations of the debtor on the ff:
supporting the RP is in their financial interest
Grounds vs. an immediate liquidation
o Incompetence, gross negligence, failure to • Establish classes of voting creditors
perform or failure to exercise proper degree • Establish subclasses of voting creditors (if
of care in the performance of duties prior approval is granted by the court)
o Lack of a particular or specialized • Indicate how the insolvent debtor will be
competency required by the specific case rehabilitated
o Illegal acts or conduct in the performance • Specify the treatment of each class of
of his duties creditors
o Lack of qualification or presence of DQ • Provide for equal treatment of all claims
o Conflict of interest that arises after his within the same class (unless a creditor
appointment agrees to less favorable treatment)
o Manifest lack of independence that is • Ensure that payments made under the
detrimental to the general body of plan follow the priority established
stakeholders under the provisions of the CC on
concurrence and preference of credits
Vacancy and other laws
• Maintain security interest of secured
Discharge creditors; preserve liquidation value of the
• Upon the confirmation of the RP, the RR security (unless waived)
will submit a report and accounting to the • Disclose all payments to creditors for pre-
court within 30 days from such confirmation commencement debts made during the
for the approval of the court proceedings
• Upon approval of report and • Describe the disputed claims and
accounting, court will order the RR’s provisioning of funds to accounts for
discharge unless the RP requires the RR to appropriate payments
assume certain duties and responsibilities • Identify debtor’s role in the implementation
even after the confirmation of the RP of the RP
o In such case, he will be discharged only • State any rehabilitation covenants of the
after termination of the rehab debtor
proceedings AND approval of his final o Breach of this will be considered a
report and accounting material breach of the RP
Rehabilitation Plan • Identify those responsible for the future
management of the debtor and the
▪ The plan by which the financial well-being and supervision and implementation of the RP
viability of an insolvent debtor can be restored • Address of the treatment of claims arising
using various means including: after the confirmation of the RP
77
• Require the debtor and its counter-parties Management of the company under rehab
to adhere to the terms of all contracts that ▪ GR: it remains w/ the existing management subject
the debtor has chosen to confirm only to the monitoring of the appointed RR
• Arrange for the payment of all outstanding o EX: if court appoints the RR to assume
admin expenses as a condition to the Plan’s powers of management or appoint a
approval (unless waived in writing by cr) management committee
• Arrange for payment of all outstanding taxes ▪ This concept of preserving the corporation’s
and assessments business as a going concern while it is
• Include certified copy of a certificate of tax undergoing rehab is called “debtor-in-place”
clearance ▪ While management will remain with the debtor, all
• Include valid and binding reso. Of a disbursements, payments, or any other act
meeting of the debtor’s stockholders affecting title or interest in property are subject
• State the compensation and status of the to approval of the RR and/or the court
RR after the approval of the Plan ▪ Court may appoint RR or management
• Contain provisions for conciliation and/or committee to take over under any of the ff
mediation as a prerequisite to court circumstances:
assistance or intervention in the event of any o Actual or imminent danger of dissipation or
disagreement in the interpretation or loss of debtor’s assets
implementation of the RP o Paralyzation of business oper. of debtor
o Gross mismanagement of the debtor
Cram-down Power (IMPORTANT)
▪ Power of the court to approve or implement the Management Committee
Rehabilitation Plan despite the lack of • Same qualifications as RR
approval, or objection from owners, partners, • 3 qualified members
stockholders or creditors of insolvent debtor o 1st member nominated by debtor
o PROVIDED: that the terms thereof are o 2nd member nominated by creditor/s
necessary to restore the financial well-being holding more than 50% of total obli
and viability of the insolvent debtor o 3rd nominated by 1st and 2nd members,
▪ Court may only do this if ALL the ff are present: will act as chairman
o The RP complies with the requirements
specified in the FRIA; Employment of professionals
o The RR recommends the confirmation of RP • Upon approval of the court + after notice
o The shareholders, owners or partners of the and hearing, the RR or the management
juridical debtor lose at least their controlling committee may employ specialized
interest as a result of the RP professionals / experts to assist in
o The RP would likely provide the objecting performance of their duties
class of creditors with compensation which o They will be considered either as
has a net present value greater than that employees or independent contractors
which they would have received if the
Conflict of interest
debtor were under liquidation
• Not only for members of management
Confirmation of the Rehab Plan; effect: committee but for RR as well; cannot be
▪ Binding upon the debtor and all persons who appointed if there is conflict of interest
may be affected by it (including creditors w/n • Any conflict of interest must be disclosed
they participated in the proceedings) at all times throughout the proceedings
▪ Payments will be made to the creditors in to the court and to the creditors
accordance with the provisions of it
Immunity of RR and management committee
▪ Contracts & other arrangements between debtor
& its creditors will continue to apply to the extent ▪ RR and all persons employed by him, and
that they do not conflict w/ provisions of the RP members of the MC and all employed by it are
▪ Any compromises will be binding on creditors not subject to any action, claim or demand
▪ Claims arising after approval of the RP that are in connection with any act done or omitted
not treated by the RP are not subject to any to be done by them in good faith in
Suspension Order connection with the exercise of their powers
▪ Will not affect rights of creditors to pursue action ▪ For the immunity to apply, the RR or the MC
against general partners of a partnership member must have acted in GF
▪ Amounts of any indebtedness or obligations o Mere mistake or simple negligence will not
reduced in connection with the RP approval remove the immunity if there is GF
will NOT be taxable
78
Sale or disposition of assets after mortgages of its unencumbered
commencement date property OR secondary
▪ GR: No funds or property by the debtor can be mortgages of encumbered
used or disposed of property with the approval of
senior secured parties
Exceptions ▪ Incur other obligations as may be
• It is in the ordinary course of business essential to the rehabilitation
• Necessary to finance the admin expenses of o ^ Payment of the foregoing will be
the rehab proceedings CONSIDERED AS ADMIN EXPENSES
• Made with the approval of the court and Encumbrances
upon application of the RR, of
• GR: Cannot encumber property
unencumbered property of the debtor
outside the ordinary course of business if the Exceptions
property is shown to be perishable, o When done in the ordinary course of
costly to maintain, or susceptible to business
devaluation o Authorized by the court under Sec 52 (same
• Made with authority of the court and after as exceptions under rescission (previous
notice and hearing if: [Sec. 52] green heading)
• Upon application by secured creditor
holding a lien against or holder of an • The Commencement Order renders null and
ownership interest in property held by the void perfection of lien after commencement
debtor that is subject to potentially rapid date
obsolescence or depreciation
Administrative Expenses
Rescission of sale / disposition ▪ Those reasonable and necessary expenses:
• Court may rescind or annul any sale of o Incurred or arising from filing of a petition
debtor’s unencumbered property or any under FRIA
encumbering by the debtor, after the o In connection with conduct of the
commencement which are NOT in the proceedings under FRIA
ordinary course of business o Incurred in the ordinary course of business of
the debtor after the commencement date
Exceptions
o Payment of new obligations obtained after
o If made to administer the debtor and commencement date to finance the
facilitate preparation and implementation rehabilitation of the debtor
of a RP o Incurred for the fees of RR or liquidator, and
o If made to provide a substitute lien, of the professionals engaged
mortgage or pledge o Those authorized or mandated under the
o If made to pay or meet admin expenses FRIA or such other expenses as may be
o To pay victims of quasi-delicts allowed by SC
o To repurchase property of the debtor that is o Compensation of employees required to
auctioned off in a judicial/ej sale carry on the business
o To reclaim or redeem property of the debtor o Claims for salary and separation pay for
held pursuant to a possessory lien work performed after the commencement
Credit arrangements and encumbrance of date will be an admin expense
o Contractual obligations arising during 90-
property after commencement date day period for confirmation
Credit arrangements Payment
▪ GR: Debtor cannot enter into credit • The Commencement Order authorizes
arrangements after the commencement date payment of admin expenses as they fall due
Exceptions • The Rehab Plan will also arrange for
payment of all outstanding admin expenses
o With the approval of the court upon the
as a condition to the Plan’s approval
recommendation of the RR, in order to
(unless such condition had been waived)
enhance its rehabilitation
▪ Enter into credit arrangements
(excluding restructured
obligations)
▪ Enter into credit arrangements
(excluding r. obli) secured by
79
Pre-commencement contracts ▪ If granted, the RR will assign and
▪ GR: all valid and subsisting contracts of the transfer to the creditor all rights
debtor with creditors and other parties as of and interest in the chose in action
commencement date will continue in force or subject matter of the
o However, court may cancel the contract at proceeding including any
any time after the issuance of the CO document in support thereof
o Contracts not confirmed by the debtor will
Treatment of secured creditors in
be considered terminated
▪ Within 90 days following the commencement of rehabilitation proceedings
proceedings, debtor must notify each ▪ FRIA gives preferential treatment to them
contractual counter-party of whether it is
No diminution of rights
confirming the particular contract
o Contractual obligations of the debtor • Issuance of CO and SO will not be deemed
arising or performed during this period, and in any way to diminish or impair the security
afterwards for confirmed contracts, are or lien of a secured creditor, or the value of
considered admin expenses the property
o EXCEPT that his right to enforce said
Avoidance Proceedings (IMPORTANT) security or lien may be suspended
▪ Any transaction occurring prior to during the term of the SO
commencement date entered into by the debtor • The court may allow a secured creditor to
or involving its funds/assets may be rescinded enforce his security / lien, or foreclose, if said
or declared null and void on these grounds: property is not necessary for the
o That the same was executed with intent to rehabilitation of the debtor
defraud a creditor; or o The said creditor will be admitted to
o Which constitute undue preference of the rehab proceedings only for the
creditors balance of the claim
• (In suspension of payments), they may
When presumption of these grounds arises institute proceedings even after the filing of
• If the transaction provides unreasonably the petition
inadequate consideration to the debtor
and is executed within 90 days prior to the Sale of encumbered property
commencement date • The court may authorize the sale or disposal
• Involves accelerated payment of a claim of encumbered property of the debtor with
to a creditor within 90 days prior to the the consent of the secured creditors
commencement date Maintenance of security interest
• Provides security or additional security
executed within 90 days prior to the • The rehab plan must maintain the security
commencement date interest of secured creditors and preserve
• Involves creditors, where a creditor the liquidation value of the security unless
obtained MORE THAN ITS PRO RATA such has been waived
SHARE in the assets of the debtor, Pre-negotiated rehabilitation
execute at a time when the debtor was
insolvent o Debtor and the required number of creditors agree
• Intended to defeat, delay, or hinder the in the rehabilitation plan before filing of a
ability of the creditors to collect claims petition with the rehab court
where the effect of the transaction is to put Who may file?
assets of the debtor beyond the reach of
▪ Insolvent debtor, by itself, or jointly with any of
creditors
its creditors
o FRIA does not prohibit court from rescinding With respect to debtor
transactions on other grounds
▪ Provisions on CC on rescission will • Same with court-supervised rehab; must be
apply to these transactions authorized by:
o Sole proprietorship – owner
Who may file for such rescission? o Partnership – majority of partners
• Rehabilitation Receiver o Corporation – maj BOD + 2/3
• Any creditor (with conformity of RR) stockholders
o If RR does not consent, any creditor
may seek leave of court to commence
said action
80
With respect to creditors • Date of hearing will be 20-30 days from
• The pre-negotiated Rehab Plan must have date of 2nd publication
been endorsed / approved by creditors • If court finds merit, direct debtor to cure
holding at least 2/3 of total liabilities defect
(including secured creditors holding > 50% • If court determines that the parties
of total secured and unsecured holding > supporting the RP acted in bad faith, or that
50% of total unsecured) the objection is non curable, court may
order the conversion of proceedings to
Venue (same with court-supervised) liquidation
Basic procedures Approval of a Plan
• Same legal effect as confirmation of a Plan
Filing of petition
• For approval of a pre-negotiated RP Out-of-Court Restructuring Agreements
Must include: (OCRA)
o Schedule of debtor’s debts and liabilities o Rehabilitation plan agreed upon by the debtor and
o Inventory of debtor’s assets the required number of creditors
o Pre-negotiated RP, including names of at ▪ Not submitted to court for approval
least 3 qualified nominees for R
Minimum requirements
o Summary of disputed claims against the
debtor and a report on the provisioning of ▪ Debtor must agree to the OCRA
funds to account for the appropriate ▪ Must be approved by creditors representing at
payments should any such claims be ruled least 67% of secured obligations;
valid or their amounts adjusted ▪ Must be approved by creditors representing at
least 75% of unsecured obligations
Issuance of court order ▪ Must be approved by creditors holding at least
• Within 5 working days + after determination 85% of total liabilities (secured / unsecured)
that the petition is sufficient in form and
Publication (TAKE NOTE; DIFF. FROM PREV)
substance
• Same effects as a Commencement Order • Published 1x a week for at least 3
o It will retroact to the date of filing; consecutive weeks in a newspaper of GC
effective for 120 days Cram-down Effect
Order will: • OCRA will have same legal effect as
o Identify debtor, principal business and confirmation of a Plan under Sec. 69
principal place of business Amendment modification
o Declare that debtor is under rehab
• Any amendment of the OCRA must be made
o Summarize the ground/s for filing of the
in accordance with the OCRA terms itself
petition
o Direct the publication of the Order in a Standstill
newspaper of GC
o Direct the service by personal delivery of a Standstill period
copy of the petition on certain creditors • Period agreed upon by the debtor and its
o Appoint a RR (if provided for in the Plan) creditors to enable them to negotiate and
o Include a Suspension Order as described enter into an OCRA
under FRIA
Requirements
Publication • While negotiating the OCRA, the parties
• Order will be published in a newspaper of may agree on a standstill period
GC 1x a week for at least 2 consecutive
weeks Effectivity
• A standstill period will expire upon:
Verified objection to the petition or RP o Lapse of 120 days from effectivity of
Comments standstill agreement
o Effectivity of the OCRA
o Termination of the negotiations for the
Hearing on objections OCRA as declared by creditors rep.
• After receipt of objections and comments, more than 50% of the the total liabilities
court will set same for hearing of the debtor (w/c ever comes first
81
Court assistance with aggregate value of claims of at least P1M
▪ While the OCRA or standstill agreement is not or at least 25% of subscribed capital, debtor
filed w/ or approved by the court may file motion to convert
▪ The insolvent debtor or a creditor may file an ▪ After notice and hearing, the court where rehab
application for court assistance to execute or is pending may also order the conversion in
implement a standstill agreement for an OCRA cases authorized by law
Forms of assistance Basic procedure

• Issuing a writ of execution to enforce its terms
Filing of petition - contents
• Court may provide any other form of
additional assistance as may be necessary Voluntary
to execute / implement o Schedule of the debtor’s debts and
liabilities including list of creditors and
Liquidation amount of claims
o May also either be voluntary or involuntary o Inventory of all assets
o Names of at least 3 nominees to the
Who may file petition? position of liquidator
Voluntary Involuntary (juridical debtor)
• A debtor (natural or juridical) whose o No genuine issue of fact or law on the claims
liabilities exceed his assets AND whose of the petitioners
debts exceed P500K o The due and demandable payments
thereon have not been made for at least
Involuntary 180 days
If debtor is individual o No substantial likelihood that the debtor
o Any creditor/s with a claim or aggregate may be rehabilitated
claim of P500K
Involuntary (individual debtor)
If debtor is juridical person o P. 782
o 3 or more creditors, with aggregate claim of o The petitioning creditor must post a bond in
at least P1M or at least 25% of the such sum as the court will direct
subscribed capital stock of partners’ ▪ PROVIDED: if the petition is dismissed, or
contributions (whichever is higher) withdrawn by the petitioner, or if debtor
is not declared as insolvent,
Rehab proceedings converted to Liquidation petitioners will pay to the debtor all
▪ Instead of giving due course to the petition for expenses and damages
rehab, the court may convert upon a finding that: occasioned by the proceedings +
o Debtor is insolvent atty fees
o No substantial likelihood for the debtor to
be successfully rehabilitated Issuance of court order
▪ When there is an objection to the RP and court If voluntary
determines that debtor acted in bad faith or that o If sufficient in form + substance, court will
defect is infeasible to correct issue a Liquidation Order; otherwise, court
▪ If the court does not confirm the RP within 1 year will dismiss
from the date of filing
▪ Upon a breach or upon a failure of the Rehab If involuntary
Plan; court may order directing breach to be o Court will issue a Show Cause Order why he
cured, should not be deemed insolvent
▪ Termination of rehab proceedings is due to
Publication of the petition and notification of
failure of rehab or dismissal of the petition for
reasons other than technical grounds parties
▪ If the court determines that the debtor or Filing of comments
creditors supporting the RP acted in BF; or that
objection is non-curable Hearing on the petition or motion
▪ At any time during the pendency of the court
supervised OR pre-negotiated rehab
proceedings, debtor may also initiate
liquidation proceedings (motion to convert)
▪ When there is a pending court-supervised or pre-
nego rehab proceedings, 3 or more creditors
82
Issuance of Liquidation Order Submission of Liquidation Plan
Liquidation Order • Within 3 mos. from assumption of office, the
o Declare the debtor insolvent liquidator will submit a Liquidation Plan
o Order the liquidation of the debtor (if to the court
juridical debtor = dissolved) • The LP will enumerate all assets of the debtor,
o Order sheriff to take possession and control all claims against debtor and a schedule of
of all the property of the debtor (except liquidation of the assets and payment of
those exempt from execution claims
o Order publication in np of gc, 1x for 2 • The LP must also contain a proposed mode
consecutive weeks and schedule of liquidation of the assets
o Direct payments of any claims due the and payment of the claims
debtor to the liquidator Implementation of the LP
o Prohibit payments by the debtor and the
transfer of any property by the debtor Complete implementation of the plan
o Direct all creditors to file their claims with the • Upon determining that the liquidation has
liquidator within the period set in rules been completed, the court will issue an
o Authorize the payment of admin expenses as Order approving the report and ordering
they become due SEC to remove the debtor from the
o State that the debtors and creditors who registry of legal entities
are not petitioners may submit names of
other nominees to position of liquidator Termination of proceedings
o Set the case for hearing for election and
appointment of liquidator Discharge of liquidator
Effects Liquidation of securities market participant

❖ Juridical debtor will be deemed dissolved ▪ A SMP is a broker, dealer, underwriter, transfer
and its corporate or juridical existence agent or other juridical persons transacting
terminated securities in the capital market
❖ Legal title to and control of all assets of the ▪ The Suspension Order does not apply to any
debtor (except those exempt from form of action of customers of clients of a
execution) will be deemed vested in the SMP
liquidator or, pending his election or ▪ In case debtor is a SMP, court must give priority,
appointment, with the court in the appointment of the receiver, to the
❖ All contracts of the debtor will be deemed nominee of the appropriate securities or investor
terminated (unless the liquidator within 90D protection fund
from date of assumption, declares otherwise) ▪ The provisions on FRIA on liquidation is without
❖ No separate action for the collection of an prejudice to power of a regulatory agency
unsecured claim will be allowed or self-regulatory organization to liquidate
o Such actions already pending will be trade-related claims of clients or customers
transferred to the Liquidator for him to of a SMP which, for purposes of investor
accept and settle or contest protection, are hereby deemed to have
❖ No foreclosure proceeding will be allowed absolute priority over all other claims
for a period of 180 Days
Publication of Liquidation Order
Hearing
Appointment of liquidator
Registry of claims
Opposition to claims
Submission of disputed claims to court
83
Cross-border insolvency
o Subject to the rules on liquidation of a SMP, and the
FR Rules, the FRIA adopted the Model Law on
Cross-Border Insolvency of the UN Center for Intl
Trade and Devt (UNCITRAL) as part of FRIA
o Overall purpose of the Model Law is to provide
effective mechanisms for dealing with cases of cross-
border insolvency so as to promote the objectives of
▪ Cooperation between courts and other
authorities involved in cross-border insolvency
▪ Greater legal certainty for trade and investment
▪ Fair and efficient administration of cross-border
insolvency
▪ Protection and maximization of the value of the
debtor’s assets
▪ Facilitation of the rescue of financially troubled
businesses
How initiated
▪ Upon submission of a petition by the
representative of the foreign entity that is the
subject of the foreign proceeding
o Afterwards, the court will set a hearing in
connection with an insolvency or rehab
proceeding taking place in a foreign
jurisdiction
Penal Provisions
o An owner, partner, director, officer, or other employee
of the debtor who commits any one of the ff. acts will
be punished by a fine + imprisonment
▪ Having notice of the commencement of
proceedings, or having reason to believe that
proceedings are about to commence, or in
contemplation of the proceedings
• shall hide, conceal, or destroy any property
belonging to the debtor
• hide, destroy, alter, mutilate, falsify any book
/ document relating thereto
• With intent to defraud creditors of the
debtor, make any payment or transfer any
property belonging to the debtor
▪ Having knowledge or belief of any person having
proved a false or fictitious claim against the
debtor,
• Shall fail to disclose the same to the RR or
liquidator within 1 month after knowledge
▪ If he will knowingly violate a prohibition or
knowingly fail to undertake an obligation
established by the FRIA
84

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Star Wars Mace Windu Vs Jabbawockeez

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2017

STEPHEN DANIEL JAVIER & KATRINA ANNE TIAMBENG

Property / Real security Bailee

Can the creditor demand before maturity? Loan of Money

Prescriptive Period Loan of Fungible Thing

• 2017 – perfection of loan

𝑐𝑖 = (𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑝𝑒𝑛𝑎𝑙𝑡𝑦 𝑟𝑎𝑡𝑒)(𝑑𝑎𝑡𝑒 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

No stipulated penalty rate, but interest rate is specified, so use

𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑒 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑚𝑖 + 𝑐𝑖

• 2017 – perfection of loan 2017 – perfection 2021 – 1st demand

𝑐𝑖 = (1 000 000)(5%)(2025 − 2024) 𝑐𝑖 = (1 000 000)(10%)(2024 − 2019)

𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 Only monetary interest due will accrue interest

𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑 𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑

Sequestration / Judicial Deposit

By Indorsement [38] Negotiable, Transferred, not Negotiated

Pledgor / mortgagor is absolute owner of thing Legal Pledge

Pledge v Mortgage Right of Creditor where Debtor Fails to Comply

Promise to Constitute Pledge / Mortgage

Obligation of the Pledgor Sale at a Public Auction [2115]

Sale at public auction Survives death of mortgagor

Injunction to prevent foreclosure Waiver of security by mortgagee

Interest in Antichresis subject to Usury Law

Provisions on Pledge and REM applicable

How does the court acquire jurisdiction? Suspension of payment

Requirements to establish substantial Voluntary

When is there a lack of adequate protection? If juridical person

Powers, Duties, and Responsibilities (p.736) Contents (minimum requirements)

Forms of assistance Basic procedure

Effects Liquidation of securities market participant

Submission of disputed claims to court

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