SECURITY TRANSACTIONS NOTES (SAN PEDRO)

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INTRODUCTION: CREDIT TRANSACTIONS CREATION OF BAILMENT

Generally, a bailment may be said to be a contractual
CREDIT TRANSACTIONS relation
Includes all transactions involving the purchase or loan of To be legally enforceable, it must contain the essential
goods, services, money in the present with a promise to elements of a valid contract
pay or deliver in the future It may also be created by operation of law
Bailment contracts, contracts of guaranty and suretyship,
mortgage, antichresis, and concurrence and preference of PARTIES TO A BAILMENT
credits 1. Bailorthe giver; the party who delivers the possession or
custody of the thing bailed
CREDIT TRANSACTIONS ARE REALLY CONTRACTS OF 2. Baileethe recipient; the party who receives the
SECURITY. THEY ARE TWO TYPES: possession and custody of the thing thus delivered
1. SECURED TRANSACTIONS OR CONTRACTS OF REAL
SECURITYThose supported by a collateral or an KINDS OF CONTRACTUAL BAILMENT
encumbrance of property 1. For the sole benefit of the bailor
2. UNSECURED TRANSACTIONS OR CONTRACTS OF a. Under this first kind belongs the gratuitous deposit
PERSONAL SECURITYthose the fulfillment of which by and the mandatum
the principal debtor is secured or supported only by a b. Mandatumbailment of the goods without
promise to pay or the personal commitment of another recompense where the mandatory or person to
such as a guarantor or surety whom the property is delivered undertakes to do
some act with respect to the same; as simply to
WHAT IS A SECURITY? carry it, or keep it, or otherwise to do something
It is something given, deposited, or serving as a means to with respect to it gratuitously
ensure the fulfillment or enforcement of an obligation or of 2. For the sole benefit of the bailee
protecting some interest in property a. Commodatum and the simple loan or mutuum
May be PERSONAL SECURITY, as when the individual 3. For the benefit of both parties
becomes a surety or a guarantor; or a PROPERTY OR REAL a. Deposit for a compensation, involuntary deposit,
SECURITY, as when a mortgage, pledge, antichresis, pledge, bailments for hire
charge or lien or other device used to have property held,
out of which the person to be made secure can be The first two kinds are GRATUITOUS BAILMENTSthere is
compensated for loss really no consideration for they are considered more as a
favor by one party to the party benefited
BAILMENT The third kind usually results from bailments involving
Delivery of property of one person to another in trust for a business transactionsMUTUAL-BENEFIT BAILMENTS
specific purpose, with a contract, express or implied, that
the trust shall be faithfully executed and the property KINDS OF BAILMENT FOR HIRE
returned or duly accounted for when the special purpose is Bailment for hire arises when goods are left with the bailee
accomplished or kept until the bailor reclaims it for some use or service by him and is always for some
compensation.

BY: MA. ANGELA LEONOR C. AGUINALDO

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1. Hire of things (locatio rei)where goods are delivered for Consent between the parties Parties: lender and borrower`
the temporary use of the hirer Object Property
2. Hire of service (locatio operis faciendi)where goods are Cause or consideration For the borrower: the thing
delivered for some work or labor upon it by the bailee loaned; extension to pay
3. Hire for carriage of goods (locatio operis mercium
vehemdarum)where goods are delivered either to a For the lender: capacity to pay
common carrier or to a private person for the person of
being carried from place to place CHARACTERISTICS OF THE CONTRACT
4. Hire of custody (locatio custodae)where goods are 1. Real contractbecause the delivery of the thing loaned is
delivered for storage necessary for the perfection of the contract
2. Unilateral contractonce the subject matter has been
LOAN (ARTICLES 1933-1961) delivered, it creates obligations on the part of only one of
the parties
GENERAL PROVISIONS
CAUSE OR CONSIDERATION IN A CONTRACT OF LOAN
Art. 1933. By the contract of loan, one of the parties For the borrowerthe acquisition of the thing
delivers to another, either something not consumable so For the lenderthe right to demand its return or its
that the latter may use the same for a certain time and equivalent
return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon KINDS OF LOAN
the condition that the same amount of the same kind and 1. COMMODATUMwhere the bailor delivers to the bailee a
quality shall be paid, in which case the contract is simply non-consumable thing so that the latter may use it for a
called a loan or mutuum. certain time and return the identical thing
2. SIMPLE LOAN OR MUTUUMwhere the lender delivers to
Commodatum is essentially gratuitous. the borrower money or other consumable thing upon the
condition that the latter shall pay he same amount of the
Simple loan may be gratuitous or with a stipulation to pay same kind and quality
interest.
WHEN IS A THING CONSUMABLE? It is consumable when used
In commodatum the bailor retains the ownership of the in a manner appropriate for its purpose or nature, like gasoline,
thing loaned, while in simple loan, ownership passes to the rice, money, fruit, firewood, etc.
borrower. (1740a)
LOAN DISTINGUISHED FROM CREDIT
CONTRACT OF LOAN LOAN CREDIT
The abovementioned defines the two kinds of loan and Delivery by one party and the His ability to borrow money or
gives their characteristics receipt by the other party who things by virtue of the
becomes the owner of a given confidence or trust reposed by
ESSENTIAL ELEMENTS OF A IN THE CONTEXT OF A sum of money or other the lender that he will pay what
CONTRACT LOAN? consumable thing upon an he may promise within a

BY: MA. ANGELA LEONOR C. AGUINALDO

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agreement, express or implied, specified period 1. In commodatum, if you do not return the thing when it is
to repay the same amount of due, you will be liable for estafa because ownership of the
the same kind and quality, with property is not transferred to the borrower.
or without interest 2. In loan, the borrower who does not pay is not criminally
liable for estafa. His liability is only a civil liability for the
DISTINCTIONS BETWEEN COMMODATUM AND MUTUUM breach of the obligation to pay. This is because in loan,
COMMODATUM MUTUUM ownership of the thing is transferred to the borrower, so
SUBJECT MATTER Not consumable Money or other there is no unlawful taking of property belonging to
consumable thing another.
OWNERSHIP Retained by the Transferred to the
lender borrower Art. 1934. An accepted promise to deliver something by way
GRATUITOUS? Essentially May be gratuitous or of commodatum or simple loan is binding upon parties, but
gratuitous be onerous the commodatum or simple loan itself shall not be perfected
RETURN OF THE The borrower must The borrower need until the delivery of the object of the contract. (n)
THING return the borrowed only pay the same
thing amount of the same DELIVERY ESSENTIAL TO PERFECTION OF LOAN
kind and quality The abovementioned is a necessary consequence of the
KIND OF May involve real or Personal property fact that commodatum and mutuum are real contracts
PROPERTY personal property which require the delivery of the subject matter thereof for
their perfection
USE OR PURPOSE Use or temporary Loan for
possession consumption
ACCEPTED PROMISE TO MAKE A FUTURE LOAN
WHEN THE May demand the May not demand its
LENDER MAY return upon the return before the
DEMAND expiration of the lapse of the term Borrower goes to Lender and asks if he could borrow P10K at 6%
term in case of agreed upon interest per annum. Lender says okay, I will lend you the money.
urgent need This is an accepted promise to make a future loan. It is a
LOSS OF THE Suffered by the Suffered by the consensual contract and is binding upon the parties.
SUBJECT MATTER bailor since he is the borrower even if
owner caused exclusively But is there a contract of loan at this point? No, because
by a fortuitous event loan is a real contract and is perfected only upon delivery
and he is not of the thing.
therefore,
discharged from his FORM OF LOAN
duty to pay There are no formal requisites for the validity of a contract
of loan except if there is a stipulation for the payment of
NOTA BENE: interest. A stipulation for the payment of interest must be
in writing.

BY: MA. ANGELA LEONOR C. AGUINALDO

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COMMODATUM NATURE OF COMMODATUM: SUMMARY

1. COMMODATUM IS ESSENTIALLY GRATUITOUS
NATURE OF COMMODATUM a. A commodatum is essentially gratuitous
b. The contract ceases to be a commodatum if any
Art. 1935. The bailee in commodatum acquires the used of compensation is to be paid by the borrower who
the thing loaned but not its fruits; if any compensation is to acquires the use
be paid by him who acquires the use, the contract ceases to c. A commodatum is similar to a donation in that it
be a commodatum. (1941a) confers a benefit to the recipient
2. EXTENT OF BAILEES RIGHT TO USE is limited to the thing
KINDS OF COMMODATUM loaned but not to the fruits unless there is stipulation to
1. ORDINARY COMMODATUM the contrary
2. PRECARIUMone whereby the bailor may demand the a. As the bailor is the owner of the thing loaned, the
thing loaned at will bailor is naturally entitled to its fruits
3. CAN THERE BE A STIPULATION GRANTING THE BAILEE
Art. 1936. Consumable goods may be the subject of USE OF THE FRUITS? Of course. The law sanctions such
commodatum if the purpose of the contract is not the stipulation BUT such use should only be incidental and not
consumption of the object, as when it is merely for the main cause of the contract. Because if it is the main
exhibition. (n) cause, then the contract may that one of a usufruct.
4. The PURPOSE of a commodatum is the temporary use of
Art. 1937. Movable or immovable property may be the thing loaned
object of commodatum. (n) a. If the bailee is not entitled to the use of the thing
loaned, the contract may be that of deposit
Art. 1938. The bailor in commodatum need not be the 5. The SUBJECT MATTER is generally a non-consumable
owner of the thing loaned. (n) things, whether real or personal
a. It may be the case that the purpose is for
Art. 1939. Commodatum is purely personal in character. exhibition only of the thing loaned. If this is the
Consequently: case, then the subject matter may be that of a
consumable thing
(1) The death of either the bailor or the bailee 6. The bailor NEED NOT BE THE OWNER of thing loaned
extinguishes the contract; 7. Commodatum is PURELY PERSONAL in character.
Consequently:
(2) The bailee can neither lend nor lease the object of a. The death of either the bailor or the bailee
the contract to a third person. However, the members of the extinguishes the contract;
bailee's household may make use of the thing loaned, b. The bailee can neither lend nor lease the object of
unless there is a stipulation to the contrary, or unless the the contract to a third person. However, the
nature of the thing forbids such use. (n) members of the bailee's household may make use
of the thing loaned, unless there is a stipulation to
Art. 1940. A stipulation that the bailee may make use of the the contrary, or unless the nature of the thing
fruits of the thing loaned is valid. (n) forbids such use.

BY: MA. ANGELA LEONOR C. AGUINALDO

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JPSP: WHY IS COMMODATUM GRATUITOUS?

You don't have to pay anything anymore REAL ESTATE MORTGAGE
You don't have to pay anything extra
*Even if there is no release, there is a valid mortgage.
JPSP: IS LOAN BY DEFAULT GRATUITOUS?
Yes, because for interest to be due and demandable, it
should be in writing OBLIGATIONS OF THE BAILEE

Art. 1941. The bailee is obliged to pay for the ordinary

L CAR, XYZ 123 B expenses for the use and preservation of the thing loaned.
PAYMENT X (1743a)

JPSP QUESTIONS: Art. 1942. The bailee is liable for the loss of the thing, even
1. SUPPOSE THAT B DEFAULTS? if it should be through a fortuitous event:
2. ASIDE FROM SPECIFIC PERFORMANCE AND (1) If he devotes the thing to any purpose different from
DAMAGES, WHAT ELSE IS THE LIABILITY OF B? that for which it has been loaned;
3. COMMENT: WHEN YOU SAY MU-TU-UM, IT REMINDS (2) If he keeps it longer than the period stipulated, or after
YOU OF THE SMELL AFTER THE RAIN. the accomplishment of the use for which the commodatum
has been constituted;
SECURITY BORROWING AND LENDING: (3) If the thing loaned has been delivered with appraisal of
its value, unless there is a stipulation exemption the bailee
L SMC SHARES B from responsibility in case of a fortuitous event;
EQUIVALENT # OF SMC SHARES (4) If he lends or leases the thing to a third person, who is
not a member of his household;
*Sale: conveying property (5) If, being able to save either the thing borrowed or his
*What is the consequence? The payment of capital gains tax as own thing, he chose to save the latter. (1744a and 1745)
well as other taxes.
*Return of the equivalent Art. 1943. The bailee does not answer for the deterioration
NOTA BENE: ownership is key in assessing the liabilities in of the thing loaned due only to the use thereof and without
commodatum or loan his fault. (1746)

Art. 1944. The bailee cannot retain the thing loaned on the
CREDIT AGREEMENT: ground that the bailor owes him something, even though it
may be by reason of expenses. However, the bailee has a
L CREDIT LINE UP TO P1M B right of retention for damages mentioned in Article 1951.
PAYMENT (1747a)

*Is there a valid contract already?

*Loan will be perfected upon the delivery but there is
already a preparatory contract to loan

BY: MA. ANGELA LEONOR C. AGUINALDO

ATENEO LAW 2010
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Art. 1945. When there are two or more bailees to whom a advise the bailee of the same, shall be liable to the latter
thing is loaned in the same contract, they are liable for the damages which he may suffer by reason thereof.
solidarily. (1748a) 6. When there are two or more bailees to whom a thing is
loaned in the same contract, they are liable solidarily to
OBLIGATIONS OF THE BAILEE: SUMMARY the bailor
1. The bailee is liable for ordinary expensesthe borrower a. To safeguard effectively the rights of the lender
should defray the expenses for the use and preservation of b. Law presumes that the bailor takes into account
the thing loaned for after all, he acquires the use of the the personal integrity and responsibility of all the
same and he is supposed to return the identical thing bailees and that, therefore, he would not have
2. The borrower must take good care of the thing with the constituted the commodatum is there were only
diligence of a good father of a family (due diligence) one liable
3. Generally, the borrower would not be liable for the loss of
a thing due to a fortuitous event but he would be liable in OBLIGATIONS OF THE BAILOR
case of the following circumstances:
a. If he devotes the thing to any purpose different Art. 1946. The bailor cannot demand the return of the thing
from that for which it has been loaned; loaned till after the expiration of the period stipulated, or
b. If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the
after the accomplishment of the use for which the commodatum has been constituted. However, if in the
commodatum has been constituted; meantime, he should have urgent need of the thing, he may
c. If the thing loaned has been delivered with demand its return or temporary use.
appraisal of its value, unless there is a stipulation
exemption the bailee from responsibility in case of In case of temporary use by the bailor, the contract of
a fortuitous event; commodatum is suspended while the thing is in the
d. If he lends or leases the thing to a third person, possession of the bailor. (1749a)
who is not a member of his household;
e. If, being able to save either the thing borrowed or Art. 1947. The bailor may demand the thing at will, and the
his own thing, he chose to save the latter. (JPSP: contractual relation is called a precarium, in the following
should be considered as an exemption. This is cases:
actually based on ingratitude. Nonetheless, this
provision tends to control ones instinct for self- (1) If neither the duration of the contract nor the use to
preservation) which the thing loaned should be devoted, has been
4. The bailee is not liable for the deterioration of the thing stipulated; or
loaned due only to the use thereof and without his fault
5. He cannot retain the thing loaned on the ground that the (2) If the use of the thing is merely tolerated by the
bailor owes him something, even though it may be for the owner. (1750a)
reason of expenses. He can have the right to retain
though for damages as mentioned in Article 1951The Art. 1948. The bailor may demand the immediate return of
bailor who, knowing the flaws of the thing loaned, does not the thing if the bailee commits any act of ingratitude
specified in Article 765. (n)

BY: MA. ANGELA LEONOR C. AGUINALDO

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lender may demand at will the return of thing under the

Art. 1949. The bailor shall refund the extraordinary following circumstances:
expenses during the contract for the preservation of the a. If neither the duration of the contract nor the use
thing loaned, provided the bailee brings the same to the to which the thing loaned should be devoted, has
knowledge of the bailor before incurring them, except when been stipulated; or
they are so urgent that the reply to the notification cannot b. If the use of the thing is merely tolerated by the
be awaited without danger. owner.
c. JPSP: the law recognizes the urgency as well as it
If the extraordinary expenses arise on the occasion of the is gratuitous.
actual use of the thing by the bailee, even though he acted d. Take note that in precarium, there is no stipulated
without fault, they shall be borne equally by both the bailor period or the use is merely tolerated
and the bailee, unless there is a stipulation to the contrary.
(1751a) IN PRECARIUM, THE LENDER MAY DEMAND AT
WILL THE RETURN OF THE THING BUT THERE
Art. 1950. If, for the purpose of making use of the thing, COULD STILL BE LIABILITY. TAKE THE
the bailee incurs expenses other than those referred to in FOLLOWING SCENARIO:
Articles 1941 and 1949, he is not entitled to
reimbursement. (n) Gan borrowed from Tan a pan to cook adobo.
Gan cooked then Tan smelled the garlic and he wanted
Art. 1951. The bailor who, knowing the flaws of the thing to eat the adobo.
loaned, does not advise the bailee of the same, shall be Tan asked for the pan.
liable to the latter for the damages which he may suffer by Tan liable for abuse of right.
reason thereof. (1752)
3. He may demand the immediate return of the thing if the
Art. 1952. The bailor cannot exempt himself from the
payment of expenses or damages by abandoning the thing bailee commits any act of ingratitude
a. If the bailee should commit some offenses against
to the bailee. (n)
the person, honor or the property of the bailor, or
OBLIGATIONS OF THE BAILOR: SUMMARY of his wife, and children under his parental
authority
1. The primary obligation of the bailor is to allow the bailee
the use of the thing loaned for the duration of the period b. If the bailee imputes to the bailor any criminal
offense or any act involving moral turpitude, even
stipulated or until the accomplishment of the purpose for
which the commodatum was constituted though he should prove it, unless the crime or act
has been committed against himself, his wife and
a. However, the lender may demand its return or
children under his authority
temporary use if he has the urgent need of the
thing or if the borrower commits an act of c. If the bailee unduly refuses the bailor support
when the bailee is legally or morally bound to give
ingratitude
2. PRECARIUM: a kind of commodatum where the bailor may support
demand the thing at will. In this kind of commodatum, the

BY: MA. ANGELA LEONOR C. AGUINALDO

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4. He has the obligation to refund extraordinary expenses for 7. He is liable to the bailee for damages in case he has
the preservation of the thing loanedit is him who profits knowledge of flaws of the thing loaned, and he didn't
from the said expenses anyway. advise the bailee of the same
a. As a rule, notice is required because it is possible a. There is flaw or defect in the thing loaned
that the bailor may not want to incur the b. The flaw or defect is hidden
extraordinary expenses at all c. The bailor is aware thereof
b. An exception of course is where there is urgency d. He doesn't advise the bailee of the same
that the reply to the notification cannot be awaited e. The bailee suffers damages by reason of the said
without danger flaw or defect
c. JPSP: you have to determine if its ordinary or 8. He cannot excuse himself from liability for any expense or
extraordinary damages by abandoning the thing to the bailee
d. JPSP: why would you advance for the
extraordinary expenses when you can return the SIMPLE LOAN OR MUTUUM
thing and make the lender pay for the expenses?
5. Regarding, extraordinary expenses arising from the actual Article 1953. A person who receives a loan of money or any
use of the thing, the division of liability between the bailor other fungible thing acquires the ownership thereof, and is
and bailee is 50-50. This is the default rule but the parties bound to pay the creditor an equal amount of the same kind
may stipulate for a different apportionment. and quality

JPSP GAVE THE FOLLOWING EXAMPLE FOR SIMPLE LOAN OR MUTUUM

EXTRAORDINARY EXPENSES Contract whereby one of the parties delivers to another
You went out in a honeymoon. money or another consumable thing with the
You borrowed a log cabin in Tagaytay Highlands. understanding that the same amount of the same kind and
Lightning struck and cabin burnt to the ground. quality shall be paid
Good chance to paythe lender can run after borrower. It involves the return of the equivalent only and not the
(My 2-cents worth though. Isnt the above more of an identical thing because the borrower acquires ownership
example of a fortuitous event?) thereof

Silver Surfer came and log cabin eaten by the ground. OBLIGATION OF DEBTOR IS TO PAY
You will pay. The law uses the word to pay and the word return
A thing of value will be borrowed. The consumption of the thing loaned is the distinguishing
(Again, wouldn't the extraordinary expense just arise if character of the contract of mutuum from that of
ever I just approach Silver Surfer offer a bride and then commodatum
charge this bribe later as an extraordinary expense?) The promise of the borrower to pay is the consideration for
the obligation of the lender to furnish the loan
A loan is a bilateral contract
6. For expenses other than ordinary expenses and expenses
for the preservation and use of the thing, the bailor is not NO ESTAFA IS COMMITTED BY A PERSON WHO REFUSES TO
liable for the same.
PAY HIS DEBT OR DENIES ITS EXISTENCE

BY: MA. ANGELA LEONOR C. AGUINALDO

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The borrower acquires ownership OR gratuitous or gratuitous

Being the owner, the borrower can dispose of the thing ONEROUS? onerous
borrowed and his act will not be considered as
appropriation thereof Article 1955. The obligation of a person who borrows
money shall be governed by the provisions of Article 1249
FUNGIBLE THINGS
and 1250 of this Code.
Are those which are usually dealt with by number, weight,
or measure
If what was loaned is a fungible thing other than money,
the debtor owes another thing of the same kind, quantity,
DISTINCTION BETWEEN FUNGIBLE AND CONSUMABLE
and quality, even if it should change its value. In case it is
THINGS impossible to deliver the same kind, its value at the time of
Whether a thing is consumable or not depends upon its
the perfection of the loan shall be paid.
nature
Whether a thing is fungible or not depends upon the
FORM OF PAYMENT
intention of the parties
1. LOAN OF MONEYif the thing loaned is money, payment
must be made in the currency stipulated, if it is possible to
Article 1954. A contract whereby one person transfers the
deliver such currency; otherwise it is payable in the
ownership of non-fungible things to another with the
currency which is legal tender in the Philippines and in
obligation on the part of the latter to give things of the
case of extraordinary inflation or deflation, the basis of
same kind, quantity, and quality shall be considered a
payment shall be the value of the currency at the time of
barter.
creation of the obligation
a. Coins 25 cents and below: up to P100 is legal
BARTER OR CONTRACT OF EXCHANGE tender
One of the parties binds himself to give one thing in
b. Coins above 25 centavos: up to P1000 is legal
consideration of the others promise to give another thing
tender (according to BSP Circular of 2007 Series 6)
2. LOAN OF FUNGIBLE THINGSif what was loaned is a
MUTUUM AND COMMODATUM DISTINGUISHED FROM
fungible thing other than money, the borrower is under the
BARTER obligation to pay the lender another thing of the same
MUTUUM COMMODATUM BARTER kind, quality, and quantity.
SUBJECT Money or any other fungible Non-fungible
MATTER thing things JPSP ILLUSTRATES:
OBLIGATION Return the Return the Equivalent
OF THE equivalent identical things things is Borrower P 1 MLender
BAILEE only borrowed given in payment on X date
return of **Day 1: P1=P1
what has **Day 2: P1=P1.50
been received 12%--applicable interest for forbearance of money, as
GRATUITOUS May be Always Onerous held by CB rule

BY: MA. ANGELA LEONOR C. AGUINALDO

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AND ASKS JPSP ILLUSTRATES:

IS A CHECK A VALID PAYMENT? Borrower P 1 MLender

payment on X date
IS A CHECK CONSIDERED AS LEGAL TENDER? P + I = 12% per month

CAN YOU PAY A PERSONAL CHECK? MANAGERS CHECK? 1 P10k

CASHIERS CHECK? The payment of managers check or cashiers 2 P10k x
check may be considered as legal tender or valid form of payment, 3 P10k x
depending on the jurisprudence you use. 1
1.5 extrajudicial demand
HOW ABOUT PAYMENT OF ONE-PESO COINS? Based on the 2
new CB circular, you can pay one-peso coins up to the total 3 judgment
amount of P1000.

CAN BORROWER COMPEL LENDER TO ACCEPT P1.2 M AS AND ASKS

PAYMENT? No, following the principle on identity of payment.
WILL THE UNPAID INTEREST EARN INTEREST? No, as there
EVEN IN THE ADDITIONAL SITUATION OF CHANGE IN THE is no stipulation to that effect. It should be stipulated by the
VALUE OF THE PESO, ONE CANNOT RELY ON THE parties. The practice of the unpaid interest earning interest is
PROVISION ON EXTRAORDINARY INFLATION/DEFLATION. called COMPOUNDING INTEREST.
You need to show hard proof to prove extraordinary inflation,
which the sc ruled only happened in Germany during the World CAN THERE STILL BE COMPOUNDING IN THE ABSENCE OF
War 1 aftermath. (article 1250 is dead law.) AGREEMENT? Yes, if it has been judicially demanded.

CAN THERE BE PAYMENT OF INTEREST? No as there is no WHEN WILL THE COMPOUNDING HAPPEN GIVEN THE
stipulation for interest payments. MODIFICATION OF THE FACTS? Compounding would happen
starting day 3.
FOR EXAMPLE, THERE IS DEFAULT IN PAYMENT. CAN
THERE BE A VALID PAYMENT OF INTEREST? Yes, as WHAT IF THE INTEREST AGREED UPON WAS 15%/MONTH,
indemnity for damages. The interest rate would be 12%. COMPOUNDED MONTHLY? IS THIS USURIOUS? The Usury
Law is a dead law. There is no ceiling on the interest that could be
Sellerproperty Buyer agreed upon by the parties. The 15%/month is going to be held
price as unconscionable depending on the circumstances.
downpayment
installments (failed to pay) Like a Denzel Washington movie

6%--interest applicable if it is not a loan; indemnity for PLDT P 1 B LOAN SYNDICATE OF BANKS
damages suffered (jurisprudence, CC provision) PAYMENT OF P + I @ 7%/MONTH

BY: MA. ANGELA LEONOR C. AGUINALDO

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ESCALATION CLAUSE
**You can show the process of the deliberation and Clause which authorizes the automatic increase in the
negotiation interest
**If the WHEELS OF JUSTICE WOULD GRIND IN YOUR An escalation clause is valid when it is accompanied by a
FAVOR, the interest rate may be validated. De-Escalation Clause. A de-escalation clause is a clause,
which provides that the rate of interest agreed upon will
Article 1256. No interest shall be due unless it has been also be automatically reduced. There must be a specified
expressly stipulated in writing. formula for arriving at the adjusted interest rate, over
which neither party has any discretion.
REQUISITES FOR RECOVERY OF INTEREST
1. The payment of interest must be expressly stipulated LIABILITY FOR INTEREST EVEN IN THE ABSENCE OF
2. The agreement must be in writing STIPULATION
3. The interest must be lawful 1. Indemnity for damagesthe debtor in delay is liable to pay
legal interest as indemnity for damages even in the
EXISTENCE OF STIPULATION TO PAY INTEREST absence of stipulation for the payment of interest
1. If a particular rate of interest has been expressly stipulated a. Rate of penalty interest agreed upon
by the parties, that interest, and not the legal rate of b. Interest cannot be recovered upon unliquidated
interest, shall be applied claims or damages except when the demand can
2. If the exact rate of interest is not mentioned, the legal rate be established with reasonable certainty
of 12% shall be payable c. In the absence of express agreement as to the rate
3. No increase in interest shall be due unless such increase of interest, CB Circular #416 fixes the interest at
has also been expressly stipulated 12% per annum for loans, forbearance, goods and
4. It is only in contracts of loan, with or without security, that credits; and judgments involving such loans and
interest may be stipulated and demanded. forbearance
5. The receipt of the creditor of interest payment up to a d. Interest as indemnity for damages is payable only
certain date of a loan that has already matured does not in case of default or non-performance of the
ipso facto result in the renewal or extension of maturity contract
period of the loan up to said date. 2. Interest accruing from unpaid interestinterest due shall
6. Stipulation of interest must be mutually agreed upon by earn interest from the time it is judicially demanded
the parties and may not be unilaterally increased by only although the obligation may be silent upon this point
one of the parties. This would violate consensuality and
mutuality of contract (PNB v. CA). But the parties can Article 1957. Contracts and stipulations, under any cloak or
agree upon a formula for determining the interest rate, device whatever, intended to circumvent the laws against
over which neither party has control (ex: interest will be usury shall be void. The borrower may recover in
adjusted quarterly at a rate of 3% plus the prevailing 91- accordance with the laws on usury.
day T-bill rate, etc.). But if the formula says interest will
be based on T-bill rates and other interest-setting policies Article 1958. In the determination of the interest, if it is
as the bank may determine, this is not valid. payable in kind, its value shall be appraised at the current

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price of the products and goods at the time and place of IF YOU ARE THE LENDER, HOW CAN YOU HAVE A PERIODIC
payment. ADJUSTMENT? THE SC YOU CANNOT DO SO. HOW CAN THE
LENDER CIRCUMVENT THIS? The parties can agree upon a
Article 1959. Without prejudice to the provisions of Article formula for determining the interest rate, over which neither party
2212, interest due and unpaid shall not earn interest. has control (ex: interest will be adjusted quarterly at a rate of 3%
However, if the contracting parties may by stipulation plus the prevailing 91-day T-bill rate, etc.). But if the formula
capitalize the interest due and unpaid, which as added says interest will be based on T-bill rates and other interest-
principal, shall earn new interest. setting policies as the bank may determine, this is not valid.

WHEN UNPAID INTEREST EARNS INTEREST WHAT IS A TREASURY BILL? It is an instrument issued by the
1. When JUDICIALLY DEMANDED government when it borrows money. This is used to establish the
2. When there is EXPRESS STIPULATION made by the parties market rate. The T-bill rate is used because generally, the
to wit: government is thought to be risk-free. (JPSP: not really, but
a. That the interest due an unpaid shall be added to under the premise, it is)
the principal obligation and the resulting total
amount shall earn interest PRESENT PRACTICE: The practice of banks today is the inclusion
b. Practice called COMPOUNDING INTEREST of a sort-of acceleration clause in case there is no agreement on
the change of the interest rate by the bank. There is no test
JPSP ILLUSTRATES: case for this situation.
LOAN AGREEMENT
(1) LP10 M B IF WHAT WAS BORROWED IS A CONSUMABLE THING AND
PAYMENT IT IS IMPOSSIBLE TO GIVE THE SAME, HOW COULD ONE
(2) P + I 1%/month PAY? The value of the thing should be paidthe value at the time
of perfection. IF IT IS INTEREST, AND IS PAYABLE IN KIND,
*Clause: that every quarter, the lender has the authority to HOW COULD IT BE PAID? It should be paid at the time of
adjust the interest rate based on prevailing financial and payment.
economic conditions*
WHY DO WE HAVE TO TAKE NOTE OF THE DATED
PROVISIONS? IS IT BECAUSE OF THE SAYING ANG HINDI
AND ASKS
MARUNONG LUMINGON SA PINANGGALINGAN AY DI
MAKAKARATING SA PATUTUNGUHAN. It is because it is still
IS THE AFOREMENTIONED CLAUSE VALID? The answer is NO.
the default rules. If the lender wants to earn more, then he has to
Stipulation of interest must be mutually agreed upon by the opt out of the default rules. The laws we study are most of the
parties and may not be unilaterally increased by only one of the time background rules. Sometimes, you cannot stipulate
parties. This would violate CONSENSUALITY AND MUTUALITY OF
otherwise. We would know when we can stipulate otherwise.
CONTRACT. The lender is given by the clause power to change an WHAT PRINCIPLE IS INVOLVED IN THIS CASE? CLUE IS
essential term of the contract. Even if there is agreement, there
YOU CAN FIND IT DOWN-SOUTH. (JPSP). Autonomy of
was no standard set by the clause. The discretion of the debtor contract.
was not limited. The authority is unbridled. (PNB v. CA)

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L100 liters of gasolineB (1) WHY SHOULD THERE BE A PROVISION ON THE PURPOSE
payment (2) WHEN IT IS ONLY THE CONCERN OF THE BORROWER?
It is the risk-management tool of the lender. The lender
*payment of the 100L of gas, as of Day 1 wants control. They want it to go the business or stated
*payment of interest, as of Day 2 purpose. This is one way of ensuring payment.

Day 1=P100,000 for 100 liters of gas WHAT IS A COMMITMENT FEE?

Day 2=P200,000 for the same liters of gas The bank being part of the syndicate, you have to pay the
fee. This is similar with the participation fee.
*The lender doesnt benefit from the appreciation of the
value of the gas. WHAT IS THE CLAUSE WHEREIN THE BORROWER WOULD
*In the case of interest, the provision was drafted when SHOULDER ALL FEES? AN EXAMPLE OF THIS IS FUNDING
there was still the existence of a ceiling on interest. (Article AND YIELD PROTECTION.
1958). If you allow recovery payment based on Day 2, then This is to ensure that the banks would profit from the loan
there is going to be circumvention of the Usury Law. agreement.

RECITALS PROVIDE THE FACTUAL PROVISIONS OR

Article 1960. If the borrower pays interest when there has
PREMISES OF THE CONTRACT.
been no stipulation therefor, the provisions of this Code
concerning solutio indebiti, or natural obligations, shall be DRAWDOWN DATE
applied, as the case may be. Date of giving of the money. (JPSP: If you are a History
major, youll be engaged in a dating service.)
RECOVERY OF UNSTIPULATED INTEREST PAID
This article means that if unstipulated interest is paid by WHY IS THE T-BILL RATE DENOMINATED AS 91-DAY, 182-
mistake, the debtor may recover as this would be the case
DAY?
of solutio indebiti or undue payment It is because it is divisible by 7 and in a public auction, it
But where the unstipulated interest, or stipulated interest, would fall on a business day. Another trivia, if it is for
there being a stipulation but not in writing, is paid
more than one year, it is called Treasury Bonds. If it is
voluntarily, the debtor feels morally obliged to do so, there longer than that, it is called Cash Management Bonds.
can be no recovery as in the case of natural obligations
(JPSPyou can use to impress someone.)
Article 1961. Usurious contracts shall be governed by the
IN THE LOAN AGREEMENT INVOLVING PHILREALTY, THERE
Usury Law and other special laws, so far as they are not IS NO AGREEMENT FOR COMPOUNDING INTEREST. IN THE
inconsistent with this Code. AGREEMENT INVOLVING AYALA, THERE IS.
The earlier loan agreement was done during a borrowers
ON THE SAMPLE SYNDICATED LOAN AGREEMENT (Why is it marketthere was so much money in the market. The
called a Syndicated Loan Agreement? Is it because banks
later one was during a lenders market.
are a group of gangsters?JPSP)

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WHY SHOULD THERE BE A STIPULATION ON PAYMENT, THE PHILREALTY LOAN IS NOTARIZED WHILE THE AYALA
PROVIDING THAT IT SHOULD BE MADE DIRECTLY TO THE LOAN IS NOT. IS THERE ANY SIGNIFICANCE?
LENDER AT THE SAMES OFFICE? It not only constitutes a public document and be used as
Default rule is that the payment is to be made at the place evidence in a proceeding. It will also have preference over
of the creditor. a private document when the debtor is insolvent.

WHY SHOULD YOU PAY A FEE IN CASE OF PREPAYMENT? AS A LAWYER, YOU WILL ATTACH A FORM OF OPINION OF
It is because the lender has already programmed the use COUNSEL TO THE BORROWER
for the money. It is easy for the lender but with regard borrower, there is
greater risk and diligence.
WHY IS THERE IS NO SECURITY NEEDED IN THE AYALA What if the opinion is wrong because of the gross
LOAN AGREEMENT WHEN IT SHOULD HAVE BEEN MADE negligence? Aside from the liability of the lawyer (Of
DURING A LENDERS MARKET? course, no one would run after the lawyer. A lawyer
Because it is Ayala. is one of those in the top 3 in the black list.JPSP).
If one would rely on the opinion of an expertthere would
NEGATIVE COVENANTS be fraud.
Deal with any reorganization
Party undertakes not to do any act as agreed upon GUARANTY AND SURETYSHIP
(ARTICLES 2047 TO 2084)
REPRESENTATIONS AND WARRANTS
NATURE AND EXTENT OF GUARANTY
UNDERTAKINGS: AFFIRMATIVE AND NEGATIVE
UNDERTAKINGS LENDERLOANBORROWER
Basically an undertaking of good housekeeping as a PAYMENT
corporation in its situation should do. GUARANTY (SURETY)GUARANTOR/SURETY

EVENTS OF DEFAULT *JPSP: Why not suretor?

Instances wherein the borrower would be placed on *You would not really want a surety or guaranty for it is
default; with the corresponding penalties only a say-so
*Red flag when a guarantor readily signs a guaranty
CROSS DEFAULT PROVISIONSHOULD THE BORROWER agreement: he has judgment proof assets
DEFAULT IN ANY OTHER AGREEMENT, IT WOULD BE DEALT
IN A DEFAULT IN THIS AGREEMENT.
The cross-default provision would be manageable to the Article 2047. By guaranty, a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
borrower by providing a threshold for the cross-default or
qualify the same. The cross-default would affect materially principal debtor in case the latter should fail to do so.
and adversely the ability to pay the loan.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of this

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Book shall be observed. In such case, the contract is called c. Judicial

a suretyship. 3. As to consideration
a. Gratuitous
GUARANTY b. Onerous
Contract between the guarantor and creditor 4. As to persons guaranteed
In a broad sense, it includes pledge and mortgage because a. Single
the purpose of guaranty may be accomplished not only by b. Double or sub-guarantyone constituted to secure
securing the fulfillment of an obligation contracted by the the fulfillment of a guarantee in another guaranty
principal debtor through the personal guaranty of a third 5. As to its scope and extent
person but also by furnishing to the creditor for his a. Definiteone where the guaranty is limited to the
security, property with authority to collect the debt from principal obligation only, or to a specific portion
the proceeds of the same in case of default. thereof
b. Indefinite or simpleone where the guaranty
CHARACTERISTICS OF A GUARANTY includes not only the principal obligation but also
1. Accessorybecause it is dependent for its existence upon all its accessories
the principal obligation guaranteed by it
2. Subsidiary and conditionalit takes effect only when the SURETYSHIP
principal debtor fails in his obligation subject to limitation A relation which exists where one person has undertaken
3. Unilateral an obligation and another person is also under a direct and
a. Gives rise only to the duty on the part of the primary obligation or other duty to a third person, who is
guarantor in relation to the creditor and not vice entitled to but one performance, and as between the two
versa who are bound, the one rather than the other should
b. It may be entered into even without the perform
intervention of the principal debtor Contractual relation resulting from an agreement whereby
4. Contract, which requires that the guarantor be a distinct one person, the surety, engages to be answerable for a
person from the principal debtor because a person cannot debt, default, miscarriage of another known as the
be the personal guarantor of himself principal

CLASSIFICATION OF GUARANTY LAW APPLICABLE TO SURETYSHIP

1. Guaranty in the broad sense Second paragraph
a. Personalguaranty properly so-called or guaranty It covers OBLIGATIONS, DIFFERENT KINDS OF
in the strict sense. The guarantee given is the OBLIGATIONS, JOINT AND SOLIDARY OBLIGATIONS,
credit given by the person who guarantees the OBLIGATIONS AND CONTRACTS
fulfillment of the principal obligation. If a person binds himself solidarily with the principal
b. Realthe guaranty is property, movable or debtor, the contract is called suretyship and the guarantor
immovable is called the SURETY
2. As to its origin
a. Conventional
b. Legal

BY: MA. ANGELA LEONOR C. AGUINALDO

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JPSP: WHAT IS THE DIFFERENCE BETWEEN PASSIVE contract. With regard to corporations, this could be through the
SOLIDARITY (SOLIDARITY AMONG DEBTORS) AND presentation of board resolutions, board approval, etc.
SURETYSHIP?
According to Tolentino, the two are SIMILAR in the following ways: SUPPOSE B IS THE CORPORATION TO WHICH G IS THE
1. A solidary debtor, like a surety, STANDS FOR SOME OTHER PRINCIPAL STOCKHOLDER. G HAS A SPOUSE BUT IN THE
PERSON. GUARANTY AGREEMENT, G WAS THE ONE ONLY WHO
2. Both debtor and surety, after payment, may require that they SIGNED. Assuming that G has separate assets, then the lender
be REIMBURSED. could go after the assets of G.

The difference is that the lender cannot go after the surety right WHAT IF THE PROPERTY REGIME PROVIDES THAT THERE IS
away. There has to be default on the part of the principal debtor NO SEPARATE PROPERTY, WHAT IS THE CONTRACTS
before the surety becomes liable. If it were mere solidarity among STATUS? Following the FC, then thee is a void contract. This
debtors, the creditor can go after any of the solidary debtors on follows the prohibition of disposition of property without the
due date. consent of both spouses. This is a special kind of void contract.
(JPSP: Should you get married in the future, when you sign a
JPSP ILLUSTRATES: contract, sign alone. This is protection of your assets and your
LENDER LOAN BORROWER childrens future.) An exception to this is when the family is
PAYMENT benefitedto the extent of the benefit.

GIVEN THAT THE GUARANTOR IS THE PRESIDENT,

( Fees, indemnity, security, 3 RD
party CHAIRMAN, PRINCIPAL STOCKHOLDER OF THE
undertaking) CORPORATION. ALL INCOME COMES FROM THE
BORROWER. CAN THE LENDER GO AFTER THE CONJUGAL
ASSETS? No. At present jurisprudence, what the law
GUARANTOR contemplates is benefit when the guarantor is the one personally
involved in the business. (JPSP: reminds him of a client who is
separated and estranged from his wife. They made them reunite
just to sign the contract.)
AND THEN ASKS THE FOLLOWING:

A GUARANTY IS ESSENTIALLY GRATUITOUS. SHOULD THE

GUARANTOR PAY THE OBLIGATION, WHAT IS HIS LENDER LOAN BORROWER
RECOURSE? The gratuitous concept only applies to the extending PAYMENT
of the guarantor of the guaranty without any exchange.
GUARANTOR
WHO ARE THE PARTIES TO A GUARANTY AGREEMENT?
LETTER OF CREDIT BANK
WHAT WOULD A GUARANTOR NEED TO ENTER INTO A
CONTRACT? The guarantor has the capacity to enter into a

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JPSP ASKS THE FOLLOWING: terms of the contract and cannot be extended by
implication.
WHO ARE THE APPROPRIATE PARTIES TO A SURETY 3. LIABILITY ARISES ONLY IF PRINCIPAL DEBTOR IS HELD
AGREEMENT? Insurance companies, banking institutions, LIABLEIf the principal debtor and the surety are held
government (the sovereign will not default). liable, their liability to pay the creditor would be solidary.
But, the surety does not incur liability unless and until the
WHAT IF THE GUARANTOR PROMISES TO PAY IN CASE OF principal debtor is held liable.
DEFAULT OF BORROWER (ORAL AGREEMENT)? This is a. A surety is bound by a judgment against the
unenforceable as it needs to be in writing, given the Statute of principal even though the party was not a party to
Frauds mandating a written agreement when one undertakes the the proceedings.
obligation of another. b. The creditor may sue, separately or together, the
principal debtor and the surety (since they are
ON DAY 1, THERE WAS A GUARANTY. ON DAY 2, THERE solidarily bound).
WAS A LOAN AGREEMENT, SUBJECT OF THE GUARANTY c. Generally, a demand or notice of default is not
DURING DAY 1. VALID? No. There is absence of consideration. required to fix the suretys liability.
d. An accommodation party (one who signs an
ON DAY 1, LENDER AND BORROWER PARTAKE OF A CREDIT instrument as maker, drawer, acceptor, or indorser
AGREEMENT. ON DAY 2, THERE IS A GUARANTY. ON DAY 3, without consideration and only for the purpose of
THERE IS A DRAWDOWN FOR THE LOAN. WHAT IS THE lending his name) is, in effect, a surety. He is thus
STATUS OF THE GUARANTY? Valid. liable to pay the holder of the instrument, subject
to reimbursement from the accommodated party.
WHAT IS A CONTINUING GUARANTY? At least at the day of
the guaranty, there is an existing obligation. At the inception, Example: A accommodates B so that he can obtain a
there must be something of the kind mentioned in #3 or loan from the bank. At the bottom of the loan
agreement for future release of loans. agreement, the following signatures appear:
(sgd) A (sgd) B
WHAT IF YOU GUARANTEE AN UNENFORCEABLE CONTRACT, San Pedro Luis Martin Tan
IS THE GUARANTEE UNENFORCEABLE? No, it is still valid and
enforceable. Is A a surety or a solidary debtor? According to
JPSP, based on this document above, A is a solidary
NATURE OF A SURETYS UNDERTAKING debtor. Remember the rule?
1. CONTRACTUAL AND ACCESSORY BUT DIRECTThe
contractual obligation of the surety is merely an accessory I promise to pay signed by two parties = solidary.
or collateral to the obligation contracted by the principal. To make sure that hes merely a guarantor or surety,
BUT, his liability to the creditor is direct, primary, and A should sign a separate guaranty agreement.
absolute. Besides, a guaranty must be express. It is not
2. LIABILITY IS LIMITED BY THE TERMS OF THE CONTRACT presumed.
The extent of a suretys liability is determined only by the

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Ordinarily is held to know every Not bound to take notice of the

e. A surety bond is void where there is no principal default of the principal performance of his principal
debtor.
4. SURETY IS NOT ENTITLED TO EXHAUSTIONA surety is Will not be discharged either by Often discharged by the mere
not entitled to the exhaustion of the properties of the the mere indulgence of the indulgence of the creditor and is
principal debtor since the surety assumes a solidary creditor of the principal or by usually not liable unless notified
liability for the fulfillment of the principal obligation. want of notice of the default of of the default of the principal
5. THE UNDERTAKING IS TO THE CREDITOR, NOT TO THE his principal
PRINCIPAL DEBTORThe debtor cannot claim that the
surety breached its obligation to pay for the principal
Article 2048. A guaranty is gratuitous unless there is a
obligation because there is no obligation as between the stipulation to the contrary.
surety and the debtor. If the surety does not pay, the
principal debtor is still not relieved of his obligation.
GUARANTY GENERALLY GRATUITOUS
6. SURETY NOT ENTITLED TO NOTICE OF PRINCIPALS
General rule: a guaranty is gratuitous
DEFAULTthe surety is bound to take notice of the
Except when there is a stipulation to the contrary
principals default to perform the obligation
7. PRIOR DEMAND BY THE CREDITOR UPON PRINCIPAL NOT
WHAT IS THE CAUSE OF A CONTRACT OF GUARANTY?
REQUIREDthe right of the creditor to proceed against the
1. Presence of cause which supports principal obligation
surety alone exists independently of his right to proceed
2. Absence of direct consideration or benefit to the guarantor
against the principal where both surety and principal are
equally bound
Art. 2049. A married woman may guarantee an obligation
8. SURETY IS NOT EXONERATED BY NEGLECT OF ANOTHER
without the husbands consent, but shall not thereby bind
TO SUE PRINCIPALmere want of diligence or forbearance the conjugal partnership, except in cases provided by law.
doesnt affect the creditors rights vis--vis the surety,
(n)
unless the surety requires him by appropriate notice to sue
on the obligation. The raison detre for the rule is that
Art. 2050. If a guaranty is entered into without the
there is nothing to prevent the creditor from proceeding
knowledge or consent, or against the will of the principal
against the principal at any time debtor, the provisions of Articles 1236 and 1237 shall apply.
(n)
GUARANTY DISTINGUISHED FROM SURETYSHIP
SURETY GUARANTY GUARANTY UNDERTAKEN WITHOUT KNOWLEDGE OF
Assumes liability as a regular Depends upon an independent DEBTOR
party to the undertaking agreement to pay the obligation Always remember that a guaranty is unilateral. It exists
for the benefit of the creditor and not for the benefit of the
Charged as an original promisor Collateral undertaking debtor.
The creditor obviously has every right to take all possible
Primarily liable Secondarily liable means to secure the payment of his credit

WHAT THEN IS THE RIGHT OF A THIRD PERSON WHO PAYS?

BY: MA. ANGELA LEONOR C. AGUINALDO

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Remember the rules on payment. Flashback to OBLICON! 1. A voidable contract inasmuch as such contract is binding
A person who pays without the knowledge or against the unless it is annulled by a proper action in court
will of the debtor can recover only insofar as the payment 2. An unenforceable contract because contract is not void
has been beneficial to the debtor AND he cannot demand 3. A natural obligation so that the contract may proceed
the creditor to subrogate him into his rights against the guarantor although he has no right of action
If he becomes the guarantor with the knowledge and against the principal debtor for the reason that the latters
consent of the debtor, he is subrogated by virtue thereof obligation is not civilly enforceable
to all the rights which the creditor has against the debtor
Art. 2053. A guaranty may also be given as security for
CREDITOR PRINCIPAL OBLIGATIONDEBTOR future debts, the amount of which is not yet known; there
PAYMENT can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured.
GUARANTOR (1825a)
*You have to check the authority. If it is a corporation, the
existence of any authorization. If an individual, the legal capacity. CONTINUING GUARANTY OR SURETYSHIP
One which isnt limited to a single transaction but which
contemplates a future course of dealings, covering a series
Art. 2051. A guaranty may be conventional, legal or judicial,
of transactions generally for an indefinite time or until
gratuitous, or by onerous title. revoked
Prospective in its operations and is generally intended to
It may also be constituted, not only in favor of the principal provide security with respect to future transactions
debtor, but also in favor of the other guarantor, with the Future debts, even if the amount is not yet known, may be
latters consent, or without his knowledge, or even over his
guaranteed but there can be no claim against the
objection. (1823) guarantor until the amount of the debt is ascertained or
fixed and demandable
Art. 2052. A guaranty cannot exist without a valid Take note however that the abovementioned provision
obligation. may be misleading in sanctioning guarantees for future
debts. What should be bore in mind is that there is
Nevertheless, a guaranty may be constituted to guarantee already an existing obligation that is being guaranteed.
the performance of a voidable or an unenforceable contract.
The guaranty would be void if there is no existing
It may also guarantee a natural obligation. (1824a) obligation.
GUARANTY IS AN ACCESSORY CONTRACT HOW ABOUT GUARANTY OF CONDITIONAL OBLIGATIONS
It is indispensable for its existence that there must be a If the principal obligation is subject to a suspensive
principal obligation
condition, the guarantor is liable only after the fulfillment
So if the principal obligation is void, it follows that it is also of the condition
void
If it is subject to a resolutory condition, the happening of
the condition extinguishes both the principal obligation and
A GUARANTY MAY SECURE THE PERFORMANCE OF
the guaranty

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WHAT IF THERE IS AMBIGUITY? It depends if G is on the

Art. 2054. A guarantor may bind himself for less, but not for business of extending guarantees. The contract of guaranty shall
more than the principal debtor, both as regards the amount be strictly construed against him. If G doesnt engage himself
and the onerous nature of the conditions. habitually in the business, then its otherwise.

Should he have bound himself for more, his obligations G SHOULD BE LIABLE ONLY AFTER THE FILING OF JUDICIAL
shall be reduced to the limits of that of the debtor. (1826) ACTION FOR JUDICIAL COSTS

TAKE NOTE THAT THE GUARANTORS LIABILITY CANNOT

EXCEED PRINCIPAL OBLIGATION G (P + I) X 2
1. Guaranty is a subsidiary and accessory contractthe
guarantor cannot bind himself for more than the principal
IS THE AFOREMENTIONED VALID? No, the guarantor may not
debtor and even if he does, his liability shall be reduced to
the limits of that of the debtor bind himself more than the principal obligation.
2. Interest, judicial costs, attorneys fees as part of the
damages may be recovered
a. The surety is made to pay not by reason of the G (P + I) + damages
contract but by reason of his failure to pay when But G only wanted to pay the P and I
demanded and for having compelled the creditor to
resort to the courts to obtain payment *the prohibition on the guarantor binding himself more
b. Interest doesnt run from the time the obligation pertains to the principal obligation.
becomes due but from the filing of the complaint *that is why to guaranty over P + I x 5% is not valid
3. Penalty may be provided
C LOAN CONTRACT D
JPSP GIVES AN ILLUSTRATION:
P100 M
CREDITOR P 100M PLUS INTEREST DEBTOR
PAYMENT G (P + 20%)
THE ABOVEMENTIONED GUARANTY IS VOID. HOW CAN WE
VALIDATE THE 20%? Have a new and separate agreement
GUARANTOR
outside the guaranty. (JPSP: there is always a way out of the law.
Like in CSI, think outside the box). This separate agreement may
AND THEN ASKS THE FOLLOWING be in the form of an option contract, which includes an option
income of 20%. It may be a new agreement in which L would
THE DEBTOR DEFAULTED. WHAT IS THE EXTENT OF (kunwari) perform some service for G in consideration of the
LIABILITY OF THE GUARANTOR? Guaranty insofar as the additional 20K.
principal liability only. In case of general statement of guaranty,
then the guarantor should pay both the principal and interest. Art. 2055. A guaranty is not presumed; it must be express
and cannot extend to more than what is stipulated therein.

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Generally, no. Such a stipulation would defeat the purpose

If it be simple or indefinite, it shall compromise not only the of a guaranty, which is to answer for the default of the
principal obligation, but also all its accessories, including principal debtor. If the guaranty is only up to the date of
the judicial costs, provided with respect to the latter, that maturity, there is no way that the guarantor can be liable
the guarantor shall only be liable for those costs incurred since default comes only at maturity date.
after he has been judicially required to pay. (1827a) According to Sheryl notes this is possible and JPSP
agreedif the lender asked for a guaranty precisely
GUARANTY NOT PRESUMED because there was a danger of the borrower absconding or
Requires the expression of consent on the part of the becoming insolvent prior to maturity date, then the
guarantor to be bound guaranty is valid.
It cannot be presumed because of the existence of a
contract or principal obligation EXTENT OF GUARANTORS LIABILITY
Why this rule? The law wants not only that there be 1. DEFINITE GUARANTYlimited in whole or in part to the
assurance that the guarantor has the true intention to bind principal debt, to the exclusion of the accessories.
himself but also to make certain that on making it, he
proceeded with consciousness of what he was doing If the amount to be paid or the service to be performed by
the person guaranteed is specified in a contract of
GUARANTY COVERED BY THE STATUTE OF FRAUDS guaranty, then the obligation of the guarantor extends no
A guaranty must not only be expressed but must also be further than the sum or services so specified, and extrinsic
reduced to writing facts cannot be resorted to for the purpose of enlarging
Falls under the Statute since it is a special promise to the limit if the guarantor was ignorant of such facts.
answer for the debt, default or miscarriage of another 2. INDEFINITE GUARANTY OR SIMPLE GUARANTYit shall
compromise not only the principal obligation, but also all
A GUARANTY IS STRICTLY CONSTRUED its accessories, including the judicial costs, provided with
It has to be strictly interpreted against the creditor and in respect to the latter, that the guarantor shall only be liable
favor of the guarantor and isnt to be extended beyond its for those costs incurred after he has been judicially
terms or specified limits required to pay.
The rule of strictissimi juris commonly refers to an
accommodation party. Why? An accommodation surety Reason: the guarantor in entering into the contract could
acts without motive of pecuniary gain and hence, should have fixed the limits of his responsibility solely to the strict
be protected against unjust pecuniary impoverishment by terms of the principal obligation and if he didnt do so, it
imposing on the principal duties akin to those of a must be presumed that he wanted to be bound to the
fiduciary. Take note further that this rule only applies extent so established
once it is established that the contract is one of suretyship
or guaranty. ACCEPTANCE OF GUARANTY BY CREDITOR AND NOTICE
THEREOF TO GUARANTOR
IS A STIPULATION THAT SAYS THAT THE GUARANTY WILL
SUBSIST ONLY UNTIL MATURITY OF THE OBLIGATION
VALID?

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GENERAL RULE: It is not necessary for the CREDITOR to expressly 3. He has sufficient property to answer for the obligation
accept the contract of guaranty since the contract is unilateral; which he guarantees
only the guarantor binds himself to do something.
EFFECT OF SUBSEQUENT LOSS OF REQUIRED
EXCEPTION: If the guarantor merely offers to become a guaranty, QUALIFICATIONS
it does not become a binding obligation unless the creditor accepts Qualifications need only be present at the time of the
and notice of acceptance is given to the guarantor. On the other perfection of the contract
hand, if the guarantor makes a direct or unconditional promise of The creditor may however demand another guarantor with
guaranty (and not merely an offer), there is no need for the proper qualifications but he may waive it if he chooses
acceptance and notice of such acceptance from the creditor. and hold the guarantor to his bargain
Note in Article 2057 that it requires conviction for a crime
involving dishonesty, but a judicial declaration of
Art. 2056. One who is obliged to furnish a guarantor shall
insolvency is not necessary in order for the creditor to
present a person who possesses integrity, capacity to bind have the right to demand another guarantor
himself, and sufficient property to answer for the
obligation, which he guarantees. The guarantor shall be
SELECTION OF GUARANTOR
subject to the jurisdiction of the court of the place where 1. Specified person stipulated as guarantorwhere the
this obligation is to be complied with. (1828a)
creditor has required and stipulated that a specific person
should be a guarantor, the substitution of a guarantor may
Art. 2057. If the guarantor should be convicted in first
not be demanded because obviously, in such a case, the
instance of a crime involving dishonesty or should become selection of the guarantor is a term of the agreement and
insolvent, the creditor may demand another who has all the the creditor is bound thereby as a party
qualifications required in the preceding article. The case is
2. Guarantor selected by the principal debtorthe debtor
excepted where the creditor has required and stipulated answers for the integrity, capacity and solvency of the
that a specified person should be the guarantor. (1829a)
former
3. Guarantor personally designated by the creditorthe
CLOAN CONTRACT OF P100 M D responsibility should fall upon the creditor and not on the
PAYMENT debtor

G EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND

THE CREDITOR
D designated G who is GMA.
C now asks replacement of GMA. Art. 2058. The guarantor cannot be compelled to pay the
Can he ask for the replacement? creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies
WHAT ARE THE QUALIFICATIONS OF A GUARANTOR? against the debtor. (1830a)
1. He possesses integrity
2. He has the capacity to bind himself RIGHT OF GUARANTOR TO BENEFIT OF EXCUSSION OR
EXHAUSTION

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1. Guarantor is only secondarily liable 9. If he fails to interpose it as a defense before judgment is

2. All legal remedies against debtor to be first exhausted rendered against him

RIGHT OF CREDITOR TO SECURE JUDGMENT AGAINST Art. 2060. In order that the guarantor may make use of the
GUARANTOR PRIOR TO EXHAUSTION benefit of exclusion, he must set it up against the creditor
As a rule, an ordinary personal guarantor may demand upon the latters demand for payment from him, and point
exclusion of all the property of debtor before he can be out to the creditor available property of the debtor within
compelled to pay Philippine territory, sufficient to cover the amount of the
The creditor however may secure prior thereto a judgment debt. (1832)
against the guarantor, who shall be entitled to a deferment
of the execution of said judgment against him until after Art. 2061. The guarantor having fulfilled all the conditions
the properties of the principal debtor shall have been first required in the preceding article, the creditor who is
exhausted to satisfy the latters obligation negligent in exhausting the property pointed out shall
suffer the loss, to the extent of said property, for the
Art. 2059. The excussion shall not take place: insolvency of the debtor resulting from such negligence.
(1) If the guarantor has expressly renounced it; (1833a)
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor; DUTY OF CREDITOR TO MAKE PRIOR DEMAND FOR
(4) When he has absconded, or cannot be sued within PAYMENT FROM GUARANTOR
the Philippines unless he has left a manager or 1. When demand to be madeonly after judgment on the
representative; debt for obviously the exhaustion of the principals
(5) If it may be presumed that an execution on the property cannot even being to take place before judgment
property of the principal debtor would not result in the has been obtained
satisfaction of the obligation. (1831a) 2. Actual demand has to be madethe fact that the
guarantor was joined in a suit against the principal debtor
EXCEPTIONS TO THE BENEFITS OF EXCUSSION necessarily means that a demand has already been made
1. If the guarantor has expressly renounced it; upon him
2. If he has bound himself solidarily with the debtor;
3. In case of insolvency of the debtor; DUTY OF THE GUARANTOR TO SET UP BENEFIT OF
4. When he has absconded, or cannot be sued within the EXCUSSION
Philippines unless he has left a manager or representative; It isnt enough that the guarantor claims the benefit of
5. If it may be presumed that an execution on the property of excussion
the principal debtor would not result in the satisfaction of As soon as he is required to pay, he must also point out to
the obligation. the creditor available property of the debtor within the
6. If he doesnt comply with Article 2060 Philippines
7. If he has a judicial bondsman and sub-surety
8. Where a pledge or mortgage has been given by him as DUTY OF CREDITOR TO RESORT TO ALL LEGAL REMEDIES
special security

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Failure to comply with duty of creditor would mean that he 3. HEARING BEFORE EXECUTION CAN BE ISSUED AGAINST
would suffer the loss but only to the extent of the value of GUARANTOR
said property, for the insolvency of the debtor
CREDITOR LOAN K P 1M DEBTOR CORPORATION
JOINDER OF GUARANTOR AND PRINCIPAL AS PARTIES
DEFENDANT G (PRESIDENT OF CORPORATION D)
The GENERAL RULE is that the guarantor, not being a joint
contractor with the principal, cannot be sued with his
principal
EXCEPTION: not required when it would serve merely to X SHARES IN D CORPORATION
delay the ultimate accounting of the guarantor HOUSE AND LOT WORTH P200,000
X SHARES IN F CORPORATION
Art. 2062. In every action by the creditor, which must be
against the principal debtor alone, except in the cases WHAT CAN G DO PENDING THE LITIGATION AGAINST D
mentioned in Article 2059, the former shall ask the court to CORPORATION?
notify the guarantor of the action. The guarantor may As the action against D is proceeding, G could hide his assets.
appear so that he may, if he so desire, set up such defenses
as are granted him by law. The benefit of excussion WHAT CAN CREDITOR DO TO PREVENT SUCH ACTION BY G?
mentioned in Article 2058 shall always be unimpaired, even He could proceed directly against G by proving that there are
if judgment should be rendered against the principal debtor circumstances, which would not make G entitled to the benefit of
and the guarantor in case of appearance by the latter. excussion.
(1834a)

PROCEDURE WHEN CREDITOR SUES Art. 2063. A compromise between the creditor and the
principal debtor benefits the guarantor but does not
1. SENT AGAINST PRINCIPALthe creditor must sue the
principal alone. The guarantor cannot be sued together prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not prejudice
with his principal except when the guarantor is not entitled
the principal debtor. (1835a)
to the benefit of excussion.
2. NOTICE TO GUARANTOR OF THE ACTIONthe guarantor
COMPROMISE
must be notified so that he may appear, if he so desires,
and set up the defenses he may want to offer Contract whereby the parties, by asking reciprocal
concessions, avoid a litigation or put an end to one already
a. If the guarantor appears, he is still given the
benefit of excussion even if judgment is rendered commenced
against him and the principal debtor
EFFECTS OF COMPROMISE
b. If he doesnt appear, he cannot set up the
defenses which, by appearing, are allowed him by 1. Where prejudiciala contract binds only the parties
thereto and not third persons. Hence, a compromise
law, and it may no longer be possible for him to
question the validity of the judgment rendered cannot prejudice the guarantor or the debtor, as the case
may be, when he is not a party to such compromise.
against the debtor

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2. Where in the nature of the stipulation in favor of third THE SAME AMOUNT THAT HE PAYS? HOW DO YOU GET OUT
personhowever, even if the guarantor or debtor is not a OF THIS SITUATION? B should hire G as his agent to broker
party to such compromise, the same can still benefit him the deal with C. As compensation for the service rendered by G, D
as it is in the nature of a stipulation in favor of a third will pay him P100K. So the agreement is taken out of the context
person which the guarantor or debtor may accept unless it of the guaranty and everyone is happy.
has been revoked before his acceptance
CREDITOR P 50M DEBTOR
JPSP ILLUSTRATES PAYMENT
P 5M
C P 50M PAYMENT D
GUARANTOR
P 5M

GUARANTOR G COMPROMISE OF P 40M

P 10M

AND ASKS THE FOLLOWING Art. 2064. The guarantor of a guarantor shall enjoy the
benefit of excussion, both with respect to the guarantor and
SUPPOSE G IS A FRIEND OF CREDITOR. THEY ENTERED to the principal debtor. (1836)
INTO AN AGREEMENT THAT IN CASE G WOULD BE LIABLE,
HE WOULD ONLY PAY P25M. HOW MUCH COULD G COLLECT SUB-GUARANTORS RIGHT TO EXCUSSION
FROM D? G could only collect the amount of P 25M. Enjoys the right with respect to the debtor but also to the
principal guarantor
GENERALLY, A COMPROMISE WOULD BENEFIT THE DEBTOR.
IS THERE A SITUATION WHERE A COMPROMISE WOULD Art. 2065. Should there be several guarantors of only one
NOT BE FOR THE BENEFIT OF D? Yes. Lets say there was no debtor and for the same debt, the obligation to answer for
such rule. B owes L P1M. G, who was a compadre of L, brokered the same is divided among all. The creditor cannot claim
a deal with L, in which they agreed that should G become liable, from the guarantors except the shares, which they are
he would only pay P500K. Since theres no rule, G tells B about respectively bound to pay, unless solidarity has been
the deal with L. G tells B that if G pays the P500K, B should expressly stipulated.
reimburse him P600K. This would give B a savings of P400 K,
while G earns P100K. Everyone will be happy. The benefit of division against the co-guarantors ceases in
the same cases and for the same reasons as the benefit of
BUT SINCE THERE IS A RULE THAT SAYS THAT G CANNOT excussion against the principal debtor. (1837)
ASK FOR MORE THAN WHAT HE HAS ACTUALLY PAID, G HAS
NO INDUCEMENT, NO INCENTIVE TO BROKER THAT DEAL BENEFIT OF DIVISION AMONG SEVERAL GUARANTORS
WITH HIS COMPADRE C. WHY WOULD HE GO THROUGH 1. In whose favor applicableseveral guarantors of only one
THE TROUBLE WHEN IN ANY CASE, HE WOULD BE GETTING debtor and for the same debt

BY: MA. ANGELA LEONOR C. AGUINALDO

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2. Extent of liability of several guarantorsjoint liability to can recover only insofar as the payment had been
answer for the debt that is divided among them beneficial to the debtor
3. Exception: when solidarity has been stipulated among 2. Payment by a third person who doesnt intend to be
them reimbursed by the debtor is deemed to be a donation,
which, however, requires the consent of the debtor. But
THE GUARANTOR MAY BE ENTITLED TO THE BENEFIT OF the payment is in any case valid as to the creditor who has
DIVISION WITHOUT THE REQUIREMENT THAT HE POINT accepted it.
OUT THE PROPERTY OF HIS CO-GUARANTORS 3. The right to demand reimbursement is subject to waiver.
Obligation with the co-guarantors is not subsidiary but
direct and doesnt depend as to its origin on the solvency Art. 2067. The guarantor who pays is subrogated by virtue
or insolvency of the latter, although afterwards, if one of thereof to all the rights, which the creditor had against the
them should turn out to be insolvent, his share shall be debtor.
born by the others
If the guarantor has compromised with the creditor, he
EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE cannot demand of the debtor more than what he has really
GUARANTOR paid. (1839)

Art. 2066. The guarantor who pays for a debtor must be SUBROGATION
indemnified by the latter. Transfers to the person subrogated, the credit with all the
rights thereto appertaining either against the debtor or
The indemnity comprises: against third persons, be they guarantors or possessors of
mortgages, subject to stipulation in conventional
(1) The total amount of the debt; subrogation

(2) The legal interests thereon from the time the GUARANTORS RIGHT TO SUBROGATION
payment was made known to the debtor, even though it did 1. Accrual, basis and nature of right
not earn interest for the creditor; a. It arises by operation of law upon payment of the
guarantor
(3) The expenses incurred by the guarantor after having b. It is not a contractual right
notified the debtor that payment had been demanded of c. The guarantor is subrogated by virtue of the
him; payment to the rights of the creditor
2. When right not availableit cannot be invoked in those
(4) Damages, if they are due. (1838a) cases where the guarantor has no right to be reimbursed

EXCEPTIONS TO THE RIGHT TO INDEMNITY AND/OR Art. 2068. If the guarantor should pay without notifying the
REIMBURSEMENT debtor, the latter may enforce against him all the defenses
1. Where the guaranty is constituted without the knowledge which he could have set up against the creditor at the time
or against the will of the principal debtor, the guarantor the payment was made. (1840)

BY: MA. ANGELA LEONOR C. AGUINALDO

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EFFECT OF PAYMENT BY GUARANTOR WITHOUT NOTICE TO

DEBTOR EFFECT OF REPEAT PAYMENT BY DEBTOR
If the debtor has already paid the creditor and the GENERAL RULEbefore the guarantor pays the creditor, he
guarantor pays, the debtor can set up against the must first notify the debtor. If he fails to notify and the
guarantor the defenses of previous extinguishment of the debtor repeats the payment, the guarantors only remedy
obligation by payment is to collect from the creditor but he has no cause of action
The guarantor cannot be allowed through his own fault or from the debtor.
negligence to prejudice or impair the rights or interests of EXCEPTION:
the debtor o Creditor becomes insolvent
o The guarantor was prevented by fortuitous event
Art. 2069. If the debt was for a period and the guarantor to advise the debtor of the payment
paid it before it became due, he cannot demand o The guaranty is gratuitous
reimbursement of the debtor until the expiration of the
period unless the payment has been ratified by the debtor. Art. 2071. The guarantor, even before having paid, may
(1841a) proceed against the principal debtor:

EFFECT OF PAYMENT BY GUARANTOR BEFORE OR AFTER (1) When he is sued for the payment;
MATURITY
1. If principal obligation is with a period, it becomes (2) In case of insolvency of the principal debtor;
demandable only when the day fixed comes. The
guarantor cannot demand reimbursement if he pays before (3) When the debtor has bound himself to relieve him
maturity since there is no necessity to accelerate payment. from the guaranty within a specified period, and this period
2. It would be different though if the debtor consented to the has expired;
payment or subsequently ratifies it. The guarantor may
not demand reimbursement from the debtor. (4) When the debt has become demandable, by reason
3. What is controlling is that the default or demand on of the expiration of the period for payment;
guarantor had taken place while the guarantee is still in
forcewhen the payment was made during the term of the (5) After the lapse of ten years, when the principal
guarantee. obligation has no fixed period for its maturity, unless it be
of such nature that it cannot be extinguished except within
Art. 2070. If the guarantor has paid without notifying the a period longer than ten years;
debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatever (6) If there are reasonable grounds to fear that the
against the debtor, but only against the creditor. principal debtor intends to abscond;
Nevertheless, in case of a gratuitous guaranty, if the
guarantor was prevented by a fortuitous event from (7) If the principal debtor is in imminent danger of
advising the debtor of the payment, and the creditor becoming insolvent.
becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid. (1842a)

BY: MA. ANGELA LEONOR C. AGUINALDO

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In all these cases, the action of the guarantor is to obtain ANOTHER NOTA BENE: THE GUARANTOR SHOULD BE
release from the guaranty, or to demand a security that INDEMNIFIED UPON PAYMENT AND SUBROGATED TO THE
shall protect him from any proceedings by the creditor and RIGHTS OF THE CREDITOR
from the danger of insolvency of the debtor. (1834a) Payment by a person who has no interest in the obligation
Review provision on OBLICON
AS A GENERAL RULE, THE GUARANTOR HAS NO CAUSE OF
ACTION AGAINST THE DEBTOR UNTIL AFTER THE FORMER Art. 2072. If one, at the request of another, becomes a
HAS PAID THE OBLIGATION. NONETHELESS, THE 7 guarantor for the debt of a third person who is not present,
AFOREMENTIONED ARE INSTANCES WHEN THE GUARANTOR the guarantor who satisfies the debt may sue either the
CAN PROCEED AGAINST THE DEBTOR person so requesting or the debtor for reimbursement. (n)

REMEDY TO WHICH GUARANTOR ENTITLED EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS

*Alternative remedies
1. Release from the guaranty Art. 2073. When there are two or more guarantors of the
2. Demand a security that shall protect him from any same debtor and for the same debt, the one among them
proceeding who has paid may demand of each of the others the share,
which is proportionally owing from him.
ARTICLE 2066 AND ARTICLE 2071 DISTINGUISHED
ARTICLE 2066: ARTICLE 2071: RIGHT TO If any of the guarantors should be insolvent, his share shall
REIMBURSEMENT FROM PROCEED AGAINST DEBTOR be borne by the others, including the payer, in the same
DEBTOR BEFORE PAYMENT proportion.
Enforcement of the rights of the For his protection before he has
guarantor against the debtor paid but after he has become The provisions of this article shall not be applicable, unless
after he has paid the debt liable the payment has been made by virtue of a judicial demand
Substantive right Nature of a preliminary remedy or unless the principal debtor is insolvent. (1844a)
Right of action 1. Release from the
guaranty REQUISITES BEFORE THIS ARTICLE APPLIES
2. Demand a security that 1. Payment has been made by virtue of a judicial demand
shall protect him from 2. Or because the principal debtor is insolvent
any proceeding
CLOAN K, P90,000D
NOTA BENE: THE RELEASE OF THE GUARANTOR FROM THE
GUARANTY MUST BE WITH THE CONSENT OF THE A
CREDITOR. B
The guaranty is a contract between the creditor and the C
guarantor first and foremost *guarantees P90, 000

*Suppose A pays the guaranty. He can collect P30,000 each

from B and C.

BY: MA. ANGELA LEONOR C. AGUINALDO

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*Suppose A pays the guaranty and thereafter, B is

insolvent. The share of B shall be borne by A and C. CLOAN K OF P 1M, DUE AFTER 1 YEARD
EXTENSION OF 3 YEARS
Art. 2074. In the case of the preceding article, the co-
guarantors may set up against the one who paid, the same GUARANTOR
defenses which would have pertained to the principal
debtor against the creditor, and which are not purely Art. 2077. If the creditor voluntarily accepts immovable or
personal to the debtor. (1845) other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor is
Art. 2075. A sub-guarantor, in case of the insolvency of the released. (1849)
guarantor for whom he bound himself, is responsible to the
co-guarantors in the same terms as the guarantor. (1846) RELEASE BY CONVEYANCE OF PROPERTY
Any substitute paid in lieu of money which is accepted by
EXTINGUISHMENT OF GUARANTY the creditor extinguishes the obligation and in
consequence, the guaranty
Art. 2076. The obligation of the guarantor is extinguished at
the same time as that of the debtor, and for the same Art. 2078. A release made by the creditor in favor of one of
causes as all other obligations. (1847) the guarantors, without the consent of the others, benefits
all to the extent of the share of the guarantor to whom it
CAUSES OF EXTINGUISHMENT OF GUARANTY has been granted. (1850)
1. Being subsidiary and accessory, it is also terminated when
the principal obligation is extinguished C PAYMENT P 50M D
2. It may itself be extinguished directly although the principal
obligation subsists such as in the case of the release of the
guarantor by the creditor G1
G2
MATERIAL ALTERATION OF PRINCIPAL CONTRACT G3
1. Effect of material alterationany agreement between the NO JURISPRUDENCE YET
creditor and principal debtor which essentially varies the REMISSION OF G1S SHARE
terms of the principal contract without the consent of the JPSP: SHOULD BE REDUCED TO P 2M
surety will release the surety from liability
2. When alteration is materialthe guarantor may not be WHAT IF THERE IS REMISSION WITHOUT AN AMOUNT?
released if the change doesnt have the effect of making its Benefit of divisionP 1M each.
obligation more onerous. There must be change which
imposes new obligation or added burden to the party WHO WILL BENEFIT OF THE REDUCTION?
promising or which takes away some obligation already All should benefit. Benefit by dividing 1/3 each.
imposed, changing the legal effect of the original contract
and not merely the form thereof.

BY: MA. ANGELA LEONOR C. AGUINALDO

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JPSPS ADVICE RE: DE LEONS COMMENTARYwhen you do

actual lawyering, and you are a sloppy lawyer and reading LEGAL AND JUDICIAL BONDS
annotations, when you cite, always read the primary
source. Art. 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the
qualifications prescribed in Article 2056 and in special laws.
Art. 2079. An extension granted to the debtor by the (1854a)
creditor without the consent of the guarantor extinguishes
the guaranty. The mere failure on the part of the creditor to
BOND
demand payment after the debt has become due does not of An undertaking that is sufficiently secure, and not cash or
itself constitute any extension of time referred to herein.
currency
(1851a)
Art. 2083. If the person bound to give a bond in the cases of
RELEASE BY EXTENSION OF TERM GRANTED BY CREDITOR the preceding article, should not be able to do so, a pledge
TO DEBTOR or mortgage considered sufficient to cover his obligation
1. Where the release without consent of guarantor
shall be admitted in lieu thereof. (1855)
guarantor is released from his undertaking
2. Where obligation payable in installmentswhere a
Art. 2084. A judicial bondsman cannot demand the
guarantor is liable for several payments, such as exhaustion of the property of the principal debtor.
installments, an extension of time as to one or more will
not affect the liability of the surety for the others. But in A sub-surety in the same case, cannot demand the
case of an acceleration clause, the act of the creditor of exhaustion of the property of the debtor of the surety.
extending payment of said installment without guarantors
consent, discharges the guarantor because this constitutes NOTA BENE: the only important thing in legal and judicial bonds
an extension of the principal obligation.
is that it is a surety, it is not entitled to the benefit of excussion.
3. Prejudice to guarantor and period of extension is
immaterial
PLEDGE
4. Extension must be based on new agreement
(ARTICLES 2085-2123)
5. Diligence on the part of the creditor to enforce his claim
PROVISIONS COMMON TO PLEDGE AND MORTGAGE
Art. 2080. The guarantors, even though they be solidary,
are released from their obligation whenever by some act of
Art. 2085. The following requisites are essential to the
the creditor they cannot be subrogated to the rights, contracts of pledge and mortgage:
mortgages, and preference of the latter. (1852)
(1) That they be constituted to secure the fulfillment of
Art. 2081. The guarantor may set up against the creditor all a principal obligation;
the defenses, which pertain to the principal debtor and are
inherent in the debt; but not those that are personal to the (2) That the pledgor or mortgagor be the absolute
debtor. (1853)
owner of the thing pledged or mortgaged;

BY: MA. ANGELA LEONOR C. AGUINALDO

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(3) That the persons constituting the pledge or REQUISITES TO A CONTRACT OF PLEDGE
mortgage have the free disposal of their property, and in 1. It be constituted to secure the fulfillment of a principal
the absence thereof, that they be legally authorized for the obligation
purpose. 2. The pledgor be the absolute owner of the thing pledged
3. That the persons constituting the pledge have the free
Third persons who are not parties to the principal obligation disposal of the property and in the absence thereof, that
may secure the latter by pledging or mortgaging their own they be legally authorized for the purpose
property. (1857) 4. The pledge is perfected by the delivery of the thing
pledged
Art. 2086. The provisions of Article 2052 are applicable to a 5. When the principal obligation becomes due, the things,
pledge or mortgage. (n) which the pledge consists, may be alienated for the
payment of the creditor.
Art. 2087. It is also of the essence of these contracts that
when the principal obligation becomes due, the things in C LOAN, P 1M X (1)
which the pledge or mortgage consists may be alienated for ON X DATE
the payment to the creditor. (1858)
PLEDGE
PLEDGE
Contract by virtue of which the debtor delivers to the P CONTRACT TO SELLS
creditor or to a third person a movable, or document (1) BUMBLEBEE
evidencing incorporeal rights, for the purpose of securing
the fulfillment of a principal obligation with the
understanding that when the obligation is fulfilled, the JPSP QUESTIONS:
thing delivered shall be returned with all its fruits and
accessions IS THIS A VALID PLEDGE? No. P still doesn't have absolute
ownership of Bumblebee when he pledged the same.
KINDS OF PLEDGE
1. Voluntary or conventional WHAT IF AT DAY 2 THE OWNERSHIP WAS CONVEYED TO P?
It is still invalid.
2. Legal

C LOAN, P 1M X
CREDITOR LOAN (2)
PAYMENT
PLEDGE
PLEDGE
PLEDGOR (1)
P (TRUST) SMC SHARES S
(DAY 1)
*void for absence of any cause or consideration
*not a valid pledge. P is not the absolute owner.

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THING PLEDGED OR MORTGAGED MAY BE ALIENATED

CHARACTERISTICS OF A CONTRACT OF PLEDGE Necessarily implied as an inherent element of the
1. Real contractperfected by the delivery of the things transaction of the mortgage or pledge
pledged by the debtor who is called the pledgor to the The only remedy for the pledgee is to have the security
creditor who is called by the pledgee, or to a third person given sold at public auction and the proceeds of the sale be
by common agreement applied to the payment of the obligation secured by the
2. Accessory contract mortgage or pledge
3. Unilateral contract
4. Subsidiary contract PLEDGOR OR MORTGAGOR MAY BE A THIRD PERSON
1. Accommodation pledge or mortgage
WHAT IS THE CAUSE OR CONSIDERATION IN PLEDGE? 2. Duty of mortgagee to make proper inquiry
Pledge is an accessory contract 3. Where mortgage is gratuitoussame should be strictly
Its cause is the principal obligation construed
4. Liability for deficiencypledgor not liable for any deficiency
CONSTITUTED TO SECURE THE FULFILLMENT OF THE should the property be not sufficient to cover the debt
PRINCIPAL OBLIGATION
C X
CONSTITUTED BY THE ABSOLUTE OWNER
1. Future property cannot be the subject of a pledge or
mortgage
2. A pledge or mortgage executed by one who is not the P (1)
owner of the property pledged or mortgaged is without
legal existence and registration cannot validate it DEED OF CONDITIONAL SALE (1)
3. Share in a co-ownershipshall be limited to the portion CONDITION HAPPENED (2)
which may be alienated by him in the division upon the *DAY 1: OWNER; HAPPENING OF THE CONDITION WOULD
termination of the co-ownership RETROACT TO DAY 1
JPSP: What is the absolute owner? It means
unencumbered property. The absolute owner has legal
and beneficial ownership. In the earlier example, P is the
legal owner and S is the beneficial owner. This being the CREDITOR X
case, neither of them can pledge the property.
PLEDGE
WHAT IS THE DIFFERENCE BETWEEN FREE DISPOSAL AND
CAPACITY TO DISPOSE? SPOUSE
FREE DISPOSAL OF THE PROPERTYproperty must not be
subject to any claim of a third person *VOID, FOLLOWING FC. SPOUSE DOESN'T HAVE
CAPACITY TO DISPOSEpledgor or mortgagor has the AUTHORITY.
capacity or authority to make a disposition of the property

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C X 1. If the debtor fails to comply with the obligation at the time

it falls due, the creditor is merely entitled to move for the
sale of thing pledged
CORPORATION 2. The creditor cannot appropriate himself without foreclosure
W/BOD AND SH APPROVAL the thing pledged as pledge or under mortgage nor can he
*VOID, IT NEEDS COURT APPROVAL (RECEIVERSHIP) dispose of the same as owner

PACTUM COMMISSORIUM
DISTINGUISH PLEDGE AND MORTGAGE
Automatic appropriation by the creditor of the thing
pledged or mortgaged upon the failure of the debtor to pay
PLEDGE MORTGAGE
the principal obligation
SUBJECT Movables Immovables TEST IF THERE IS EXISTS PACTUM COMMISSORIUM is
MATTER whether or not there is no need for extra step to be taken
DELIVERY Property is delivered Delivery not by creditor
to the pledgee or by necessary for
common consent, to perfection PROHIBITION AGAINST PACTUM COMMISSORIUM
a third person 1. Stipulation is null and voidit is said to be contrary to
REQUISITES TO Description of the Not valid against good morals and public policy
BIND THIRD thing pledged and third persons if not 2. Requisites
PERSONS the date of pledge registered a. There should be a pledge, mortgage, antichresis of
appear in a public property by way of security for the payment of the
instrument principal obligation
b. Stipulation for the automatic appropriation of the
MORTGAGOR SOLD PROPERTY (1) MORTGAGEE property in favor of the creditor upon default of the
PRICE debtor/pledgor
DOWNPAYMENT PLUS INSTALLMENTS 3. Effect on the security contractdoesnt affect substantially
REAL ESTATE MORTGAGE (2) the principal contract of pledge, mortgage or antichresis
JPSP QUESTION: CAN MORTGAGEE RESOLVE THE CONTRACT with regard to its validity and efficacy
OF SALE BECAUSE OF BREACH OR FAILURE TO PAY? No, the
only resolve is to go after the REM. Resolution is not a remedy. AGREEMENTS THAT WOULD NOT CONSTITUTE PACTUM
COMMISSORIUM (ACCORDING TO JPSP)
Art. 2088. The creditor cannot appropriate the things given 1. Attorney in fact
by way of pledge or mortgage, or dispose of them. Any 2. Option contract. There would be another contract. There
stipulation to the contrary is null and void. (1859a) is a risk of the courts to look at it as a PC.
3. Dacion en pago
RIGHT OF CREDITOR WHERE DEBTOR FAILS TO COMPLY 4. Assigned shares. Creditor would only have legal title and
WITH HIS OBLIGATION pledgor would still have beneficial ownership.

JPSP ILLUSTRATES

BY: MA. ANGELA LEONOR C. AGUINALDO

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C LOAN OF P 1M D The debtor, in this case, shall have a right to the

extinguishment of the pledge or mortgage as the portion of
REM P 500K the debt for which each thing is specially answerable is
satisfied. (1860)
X
Art. 2090. The indivisibility of a pledge or mortgage is not
affected by the fact that the debtors are not solidarily
AND ASKS liable. (n)
IF X SUES FOR COLLECTION OF MONEY, CAN HE STILL PLEDGE OR MORTGAGE INDIVISIBLE
FORECLOSE THE MORTGAGE? No, if X sues for collection of
Rule applies even if the obligation is joint and not solidary
money, he waives his right for foreclosure. The divisibility of the principal obligation doesn't affect the
indivisibility of the mortgage or pledge
IF REM FORECLOSED, CAN C RUN AFTER X FOR THE
BALANCE? X will be liable only up to the value of the thing EXCEPTIONS TO THE RULE OF INDIVISIBILITY
pledged or mortgaged.
1. Where each one of several things guarantees determinate
portions of credit
RISK OF LOSS OF PROPERTY PLEDGED OR MORTGAGED
2. Where only a portion of the loan was released
Debtor-owner bears the loss of the property 3. Where there was failure of consideration
The principal obligation is not extinguished upon the loss of
4. Where there is no debtor-creditor relationship
the thing pledged or mortgaged
FORECLOSURE OF MORTGAGE CONSITUTED ON SEVERAL
Art. 2089. A pledge or mortgage is indivisible, even though
PROPERTIES
the debt may be divided among the successors in interest of A mortgage even constituted on several properties is one
the debtor or of the creditor.
and indivisible, that is, it cannot be divided among the
several properties and the mortgagee has the right to have
Therefore, the debtors heir who has paid a part of the debt
the properties either or both, jointly or singly, sold to
cannot ask for the proportionate extinguishment of the
satisfy his claim
pledge or mortgage as long as the debt is not completely Further, the sale of the mortgaged properties cannot be
satisfied.
set aside in the absence of evidence to show that a better
price could have been obtained if they were sold
Neither can the creditors heir who received his share of the
separately, or the sale of one or some alone would bring
debt return the pledge or cancel the mortgage, to the sufficient proceeds to satisfy the mortgage credit
prejudice of the other heirs who have not been paid.

From these provisions is expected the case in which, there C PAID P500K D
being several things given in mortgage or pledge, each one LOAN, P 1M
of them guarantees only a determinate portion of the credit. REM OF 4 CONDO UNITS, P500K/EACH

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NOTA BENE: Art. 2092. A promise to constitute a pledge or mortgage

1. D cannot ask for the release of two of the four condo units gives rise only to a personal action between the contracting
2. While the obligation isnt released, D cannot ask for the parties, without prejudice to the criminal responsibility
release incurred by him who defrauds another, by offering in pledge
3. But the parties may stipulate otherwise or mortgage as unencumbered, things which he knew were
subject to some burden, or by misrepresenting himself to
C LOAN OF P 1M D be the owner of the same. (1862)
P 500K
REM, P 2M PROMISE TO CONSTITUTE PLEDGE OR MORTGAGE CREATES
NO REAL RIGHT
(REM VALID ONLY UP TO P 1M) A promise to constitute a pledge or mortgage only gives
(LACK OF CONSIDERATION) rise to a personal right
What exists only is the right of action to compel the
JPSP ILLUSTRATES THE ABOVE AND THEN THE FOLLOWING fulfillment of the promise but there is no pledge or
QUESTIONS mortgage yet
IN CASE NOT ABSOLUTE OWNER, WHAT IS THE RECOURSE PROVISIONS ONLY APPLICABLE TO PLEDGE
OF THE CREDITOR? File an action for estafa.
Art. 2093. In addition to the requisites prescribed in Article
CAN THERE BE A VALID PLEDGE IF THE PROPERTY REMAINS 2085, it is necessary, in order to constitute the contract of
AT THE HANDS OF THE PLEDGOR? Possible. It could be shown pledge, that the thing pledged be placed in the possession
that the pledgor is holding the property in trust or as an agent of of the creditor, or of a third person by common agreement.
the pledgee, and not in his capacity as the pledgor.
(1863)
CAN A NEGOTIABLE INSTRUMENT BE A SUBJECT OF
TRANSFER OF POSSESSION ESSENTIAL IN PLEDGE
PLEDGE? Yes. An agreement to constitute a pledge only gives rise to a
personal action between the contracting parties
HOW ABOUT A STOCK CERTIFICATE? A stock certificate is not
Unless the movable given as security is delivered and
a negotiable instrument. It is quasi-negotiable. To avoid outright placed in the possession of the creditor or third person
usurpation, how should it be endorsed? You can sign it and make
designated by the parties, the creditor acquires no real
reference pursuant to pledge agreement. right to the property because pledge is merely a lien or
encumbrance indispensable to the right of lien
Art. 2091. The contract of pledge or mortgage may secure Without delivery there can be no pledge
all kinds of obligations, be they pure or subject to a
suspensive or resolutory condition. (1861)
TYPE OF DELIVERY DEPENDS UPON NATURE OF THING
PLEDGED
ALL KINDS OF OBLIGATIONS, WHETHER PURE OR
Actual deliverythere should be actual possession of the
CONDITIONAL, CAN BE SECURED BY PLEDGE OR MORTGAGE property pledged

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But it was held in an earlier case that the symbolic transfer 2. OBJECT OF THE REQUIREMENTto forestall fraud, because
of the goods is acceptable when the owner of the property a debtor may attempt to conceal his property from his
could no longer dispose of the goods, the pledgee being creditors when he sees it in danger of execution by
the only one authorized to do so simulating a pledge thereof with an accomplice

Art. 2094. All movables, which are within commerce, may THE DATE OF THE PLEDGE IS RELEVANT TO KNOW IF THERE
be pledged, provided they are susceptible of possession. IS VALID CONSIDERATION IN THE FIRST PLACE.
(1864)
WHAT IS A PUBLIC INSTRUMENT?
Art. 2095. Incorporeal rights, evidenced by negotiable The pledge contract should be the one in the public
instruments, bills of lading, shares of stock, bonds, instrument, acknowledged by the notary public
warehouse receipts and similar documents may also be What if there is litigation ensued and the pledge is not in a
pledged. The instrument proving the right pledged shall be public instrument? Is this binding upon the court? No, it
delivered to the creditor, and if negotiable, must be is not. There should be payment of documentary stamp
indorsed. (n) tax.

SUBJECT MATTER OF PLEDGE PLEDGOR LOAN PLEDGEE

Confined and limited to personal property and it cannot be ABSOLUTE CONVEYANCE BY WAY OF SECURITY
extended to real property
Incorporeal rights evidenced by documents whether *SC: held as pledge; there is conveyance of property by way of
negotiable or not may also be pledged security. It cannot be taken as an implied trust.

JPSP: IS THERE A WAY TO OPT OUT OF THE NEEDED

PLEDGOR PERSONAL PROPERTY PLEDGEE REQUISITES OF A VALID PLEDGE WITH THE ABOVE
(PLEDGE) EXAMPLE? Yes. The above may escape the needed requisites of
LOAN a pledge by making it look like an implied trust.

Art. 2096. A pledge shall not take effect against third PLEDGOR LOAN PLEDGEE (1)
persons if a description of the thing pledged and the date of PLEDGE
the pledge do not appear in a public instrument. (1865a)
SALE BUYER (2)
PUBLIC INSTRUMENT NECESSARY TO BIND THIRD PERSONS (NOTARIZED) (3)
1. CONTENTS OF PUBLIC INSTRUMENT
a. The pledge is not binding against third persons
unless in addition to delivery of the thing pledged, WHO HAS A BETTER RIGHT?
1. The sale depends on the good faith or bad faith
it is embodied in a public instrument
b. Description of the thing pledged; and the date of 2. With regard the notarized sale with the buyer, it is possible
for the buyer to have a better right.
pledge

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3. If both have been notarized, two-prongpledgor cannot

dispose the thing pledged until the consent given by the OBLIGATION OF PLEDGEE TO TAKE DUE CARE OF THE
pledgee; valid sale but it is suspended. THING PLEDGED
Upon fulfillment of the principal obligation, the pledgee
Art. 2097. With the consent of the pledgee, the thing must return the thing pledged
pledged may be alienated by the pledgor or owner, subject Having possession of the property, he has the obligation to
to the pledge. The ownership of the thing pledged is take care of the same with the diligence of a good father of
transmitted to the vendee or transferee as soon as the the family
pledgee consents to the alienation, but the latter shall In case of loss or deterioration of the thing pledged due to
continue in possession. (n) a fortuitous event, the pledgee cannot be held responsible
but he is liable for loss or deterioration by reason of fraud,
ALIENATION BY THE PLEDGOR OF THE THING PLEDGED negligence, or violation of the terms of the contract
Remember that the pledgor retains ownership over the
thing pledged Art. 2100. The pledgee cannot deposit the thing pledged
As soon as the pledgee gives his consent, the ownership of with a third person, unless there is a stipulation authorizing
the thing pledged is transferred to the vendee subject to him to do so.
the rights of the pledgee, namelythat the thing sold may
be alienated to satisfy the obligation; and that the pledgee The pledgee is responsible for the acts of his agents or
must continue in possession during the existence of the employees with respect to the thing pledged. (n)
pledge
PLEDGOR PLEDGE CREDITOR
THE PLEDGEE IS CONCERNED WITH THE TRANSFER OF (CORPORATION)
ONWERSHIP BECAUSE AS PLEDGEE, HE WOULD WANT TO
LIMIT THE ENTANGLEMENTS.
LUZON VISAYAS MINDANAO
Art. 2098. The contract of pledge gives a right to the (P)
creditor to retain the thing in his possession or in that of a
third person to whom it has been delivered, until the debt is
paid. (1866a) JPSP ASKS

RIGHT OF PLEDGEE TO RETAIN THE THING PLEDGED CAN THE CREDITOR TRANSFER PLEDGED THING TO
MINDANAO? General rule is that it should be in the possession of
This right is limited only to the fulfillment of the principal
obligation for which the pledge was created the creditor. In this case, yes.

CAN CREDITOR GIVE THE PLEDGED THING TO X? No,

Art. 2099. The creditor shall take care of the thing pledged
with the diligence of a good father of a family; he has a following Article 2100.
right to the reimbursement of the expenses made for its
preservation, and is liable for its loss or deterioration, in WHAT CAN CREDITOR DO TO BE ABLE TO GIVE THE THING
PLEDGED TO X? Creditor can make X his agent. Another option
conformity with the provisions of this Code. (1867)

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is to state that the transfer to X of the thing pledged is in PLEDGOR P 100K DUE ON X DATE CREDITOR
furtherance of the obligation of exercising due diligence. PLEDGE OF SHARES,
CASH DIVIDENDS
BEING THE PLEDGOR, WHAT CAN YOU DO TO CLOSE THE
ALTERNATIVES OPEN TO THE CREDITOR? You have to
AND THEN ASKS
stipulate in the pledge agreement the exact or specific address
where the thing would be placed.
WHO WILL HAVE POSSESSION? The creditor. The pledge
extends to the fruits unless there is agreement to the contrary.
Art. 2101. The pledgor has the same responsibility as a
bailor in commodatum in the case under Article 1951. (n)
SUPPOSED THERE IS P1000 C/D? C entitled to compensation.
Art. 2102. If the pledge earns or produces fruits, income, Article 2102. CAN C OPPOSE? Yes. There can be no application
of the dividends to the principal obligation using the doctrine of
dividends, or interests, the creditor shall compensate what
he receives with those, which are owing him; but if none integrity of payment. Second, there is term for the benefit of both
are owing him, or insofar as the amount may exceed that parties. Now, it is possible to have an issue if creditor refuses.
which is due, he shall apply it to the principal. Unless there
is a stipulation to the contrary, the pledge shall extend to IF YOURE C, WHY IS IT RELEVANT TO HOLD TO THE
SHARES AS SECURITY? On due date and the pledgor fails to
the interest and earnings of the right pledged.
pay, the P10k will be paid to get an outstanding balance of P90k.
In case of a pledge of animals, their offspring shall pertain The shares will be foreclosed.
to the pledgor or owner of animals pledged, but shall be
subject to the pledge, if there is no stipulation to the WHAT IF THERE IS EXPROPRIATION? The proceeds shall
substitute for the property. Thing pledged would be the money.
contrary. (1868a)
Art. 2103. Unless the thing pledged is expropriated, the
RIGHT OF PLEDGEE TO COMPENSATE EARNINGS OF PLEDGE
WITH DEBT debtor continues to be the owner thereof.
The pledgee has no right to use the thing pledged or to
Nevertheless, the creditor may bring the actions which
appropriate the fruits thereof without the authority of the
owner pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person. (1869)
The pledgee can apply the fruits, income, dividends, or
interests earned or produced by the thing pledged to the
Art. 2104. The creditor cannot use the thing pledged,
payment of interest, if owing, and thereafter to the
principal of his credit without the authority of the owner, and if he should do so,
Unless there is stipulation to the contrary, the interest and or should misuse the thing in any other way, the owner may
ask that it be judicially or extrajudicially deposited. When
earnings of the right pledged and in case of animals, their
offsprings, are included in the pledge the preservation of the thing pledged requires its use, it
must be used by the creditor but only for that purpose.
JPSP GIVES ANOTHER ILLUSTRATION: (1870a)

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OBLIGATION OF PLEDGEE NOT TO USE THING PLEDGED property. Take note that there is still no jurisprudence on
The pledgee who is in possession of the thing pledged has rescission.
no right to make use of it without permission from the
owner DOES C HAVE A REMEDY AGAINST THE RIGHT OF
If however, the thing pledged is of such a character that SUBSTITUTION OF THE PLEDGOR? C can ask for the public
use is necessary in properly caring for it, then it becomes auction or sale. The option of C will prevail.
his duty to use it so that it will not suffer from its disuseif
from the use thereof profits are derived, the pledgee must Art. 2105. The debtor cannot ask for the return of the thing
account such profits to the pledgor and apply the net pledged against the will of the creditor, unless and until he
proceeds of such use to the payment of his claim has paid the debt and its interest, with expenses in a proper
case. (1871)
RIGHT OF THE PLEDGOR TO ASK THE THING PLEDGED TO
BE DEPOSITED RIGHT OF PLEDGOR TO DEMAND THE RETURN OF THE
1. If the creditor uses the thing without authority THING PLEDGED
2. If he misuses the thing in any other way Pledgor could demand the return if the obligation is fully
3. If the thing is in danger of being lost or impaired because paid including interest due thereon and expenses incurred
of the negligence or willful act of the pledgee for its preservation
Prescription will not begin to run on the action to demand
PLEDGOR PLEDGE OF DOG CREDITOR the return of the thing pledged while the obligation
subsists, neither will the possession of the pledgee as such
ripen into ownership by prescription because such
possession is not in the concept of an owner
Exception to the rulewhen the thing pledged is in danger
of destruction or impairment with another thing of the
same kind or quality

JPSP QUESTIONS: Art. 2106. If through the negligence or willful act of the
pledgee, the thing pledged is in danger of being lost or
CAN C WALK THE DOG? Yes, for maintenance. impaired, the pledgor may require that it be deposited with
a third person. (n)
HOW ABOUT FOR PULLING PEDICABS? No.
RIGHT OF PLEDGOR TO ASK FOR DEPOSIT OF THING
WHAT IF C ABUSES THE DOG? Pledgor can ask the deposit of PLEDGED
the dog with a third person. There is possibility of recovering The pledge has the duty to preserve the thing pledged with
possession by proving that theres substantial breach. the diligence of a good father to his family

IF YOU ASK FOR JUDICIAL DEPOSIT, WHAT WOULD BE THE Art. 2107. If there are reasonable grounds to fear the
CONSEQUENCES? The concern would be costsgetting a lawyer, destruction or impairment of the thing pledged, without the
etc. It is much better to take a shot at rescission to recover fault of the pledgee, the pledgor may demand the return of

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the thing, upon offering another thing in pledge, provided 1. To claim another thing in pledge, and
the latter is of the same kind as the former and not of 2. To demand immediate payment of the principal obligation
inferior quality, and without prejudice to the right of the The abovementioned are alternative remediesto choose
pledgee under the provisions of the following article. only one but not both

The pledgee is bound to advise the pledgor, without delay, Art. 2110. If the thing pledged is returned by the pledgee to
of any danger to the thing pledged. (n) the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary shall be void.
REQUISITES FOR THE APPLICATION OF ARTICLE 2107
1. The pledgor has reasonable grounds to fear the destruction If subsequent to the perfection of the pledge, the thing is in
or impairment of the thing pledged the possession of the pledgor or owner, there is a prima
2. There is no fault on the part of the pledgor facie presumption that the same has been returned by the
3. The pledgor is offering in place of the thing, another thing pledgee. This same presumption exists if the thing pledged
in pledge which is of the same kind and quality as the is in the possession of a third person who has received it
former from the pledgor or owner after the constitution of the
4. The pledgee doesn't choose to exercise his right to cause pledge. (n)
the thing pledged to be sold at public auction
EXTINGUISHMENT OF PLEDGE BY RETURN OF THE THING
Art. 2108. If, without the fault of the pledgee, there is PLEDGED
danger of destruction, impairment, or diminution in value of One of the essential requisites of pledge is that the thing
the thing pledged, he may cause the same to be sold at a pledged be placed in the possession of the pledgee or a
public sale. The proceeds of the auction shall be a security third person designated by the parties
for the principal obligation in the same manner as the thing Hence, the pledge is extinguished once the thing pledged
originally pledged. (n) is return in the possession of the pledgor. This
notwithstanding any stipulation that the pledge would
RIGHT OF PLEDGEE TO CAUSE THE SALE OF THE THING continue although the pledgee is no longer in possession of
PLEDGED the thing pledged
This right is superior to that of the pledgor to substitute The pledge is also extinguished by payment of the debt, by
the thing pledged renunciation or abandonment of the pledge and by sale of
The right given to the pledgor is without prejudice to the the thing pledged at public auction
right of the pledgee
PRESUMPTION OF EXTINGUISHMENT OF PLEDGE
Art. 2109. If the creditor is deceived on the substance or Possession by the debtor or owner of the thing pledged
quality of the thing pledged, he may either claim another subsequent to the perfection of the pledge gives rise to a
thing in its stead, or demand immediate payment of the prima facie presumption that the thing has been returned
principal obligation. (n) and therefore, the pledge has been extinguished
This presumption may be disputed or rebutted by evidence
RIGHT OF PLEDGEE TO DEMAND SUBSTITUTE OR to the contrary
IMMEDIATE PAYMENT

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Only the accessory obligation is presumed remitted and owner of the thing pledged in a proper case, stating the
not the principal obligation amount for which the public sale is to be held. If at the first
auction the thing is not sold, a second one with the same
PLEDGOR PLEDGE CREDITOR (1) formalities shall be held; and if at the second auction there
is no sale either, the creditor may appropriate the thing
POSSESSION = X pledged. In this case he shall be obliged to give an
acquittance for his entire claim. (1872a)
IS THERE STILL A PLEDGE? There is a prima facie presumption
RIGHT OF PLEDGEE TO CAUSE SALE OF THE THING PLEDGED
that object has been returned to the pledgor. If the thing pledged The thing pledged may be alienated for the payment to the
is returned, the pledge is extinguished. If the pledged thing is
creditor when the principal obligation becomes due
with X, the same presumption applies.
THE FORMALITIES REQUIRED FOR SUCH SALE
AT WHAT POINT CAN PLEDGOR GET BACK THE POSSESSION 1. The debt is due and unpaid
OF THE OBJECT? At the extinguishment of the principal 2. The sale must be at a public auction
obligation.
3. There must be notice to the pledgor and owner, stating the
amount due
Art. 2111. A statement in writing by the pledgee that he
4. The sale must be made with the intervention of a notary
renounces or abandons the pledge is sufficient to public
extinguish the pledge. For this purpose, neither the
acceptance by the pledgor or owner, nor the return of the RIGHT OF PLEDGEE TO APPROPRIATE THING PLEDGED
thing pledged is necessary, the pledgee becoming a Serves as an exception to the prohibition on pactum
depositary. (n)
commissorium
The pledgee may appropriate the thing pledged if after the
EXTINGUISHMENT OF PLEDGE BY RENUNCIATION OR
first and second auctions, the thing is not sold
ABANDONMENT If the creditor appropriates the thing, it shall be considered
The renunciation or abandonment must be in writing to
as full payment of his entire claimhe is thus obliged to an
constitute an extinguishment of pledge
acquittance for the same. The debtor is not entitled for
The renunciation is not conditioned upon the acceptance the excess in case the value of the thing pledged is more
by the pledgor or owner nor upon the return of the thing
than the principal obligation.
pledged
Under this article, the thing pledged remains in the
Art. 2113. At the public auction, the pledgor or owner may
possession of the pledgee. Hence the renunciation must bid. He shall, moreover, have a better right if he should
be in writing. offer the same terms as the highest bidder.
Art. 2112. The creditor to whom the credit has not been The pledgee may also bid, but his offer shall not be valid if
satisfied in due time, may proceed before a Notary Public to
he is the only bidder. (n)
the sale of the thing pledged. This sale shall be made at a
public auction, and with notification to the debtor and the
RIGHT OF PLEDGOR AND PLEDGEE TO BID AT PUBLIC SALE

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To avoid fraud, the pledgee is not allowed to acquire the PLEDGOR SHARES CREDITOR
thing pledged if he is the only bidder SHARES = P90,000
PAY FIRST THE INTEREST THEN THE PRINCIPAL.
Art. 2114. All bids at the public auction shall offer to pay
the purchase price at once. If any other bid is accepted, the
CAN THERE BE CLAIM ON THE OUTSTANDING? No, the
pledgee is deemed to have been received the purchase
price, as far as the pledgor or owner is concerned. (n) creditor will shoulder the deficiency and be entitled to the excess.
This default rule on deficiency is absolute. With regard the excess,
the parties may opt out of the default rule.
BID MUST BE FOR CASH
Art. 2116. After the public auction, the pledgee shall
Art. 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale promptly advise the pledgor or owner of the result thereof.
(n)
are equal to the amount of the principal obligation, interest
and expenses in a proper case. If the price of the sale is
more than said amount, the debtor shall not be entitled to Art. 2117. Any third person who has any right in or to the
thing pledged may satisfy the principal obligation as soon
the excess, unless it is otherwise agreed. If the price of the
sale is less, neither shall the creditor be entitled to recover as the latter becomes due and demandable.(n)
the deficiency, notwithstanding any stipulation to the
contrary. (n) RIGHT OF THIRD PERSON TO SATISFY OBLIGATION
A third person who has a right in or to the thing pledged
EFFECT OF SALE OF THING PLEDGED may pay the debt as soon as it becomes due and
1. If the price of the sale is more than the amount due the demandable and the creditor cannot refuse to accept the
payment
creditor, the debtor is not entitled to the excess unless the
contrary is provided
2. If the price of sale is less, neither is the creditor entitled to P 1M DUE ON X DATE
recover the deficiency PLEDGOR SHARES CREDITOR
a. The reason is to compel the creditor to hold an (1) P 1.5M
honest public sale
b. Creditor should realize the loans only as much as
he is likely to realize at a public sale (X) MATURITY

RIGHT OF DEBTOR TO EXCESS JPSP QUESTIONS:

GENERAL RULEthe debtor is not entitled to the excess
unless there is an agreement to the contrary WHAT IF THE VALUE OF THE SHARES ON X DATE IS P500K,
To compensate the creditor for his risk of not being able to WHAT CAN THE CREDITOR DO? C can collect P 1M or foreclose
recover the deficiency in case the thing pledged is sold the shares for P500k.
below the amount of the principal obligation
WHATS THE CONSEQUENCE OF SUING FOR COLLECTION? C
(x) P 1M DUE ON X DATE loses his right on the security obligation.

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THAT REASONABLE? Yes. There is sufficient information that a

ON DAY 1, WHAT CAN C DO? Stipulate that at all times, the foreclosure is forthcoming.
shares would be valued at P 1M. It could also be stipulated that
the pledgor should maintain collateral value of the shares at P HOW MANY BIDDERS ARE REQUIRED? If the creditor bids,
1.5M based on the trading value in the PSE. Should the value there should be at least 2. This rule doesn't apply to the pledgor
decrease, the pledgor should provide additional securities or or owner. The law seeks to preserve possession and ownership of
collateral. the pledgor.

WHAT IF VALUE DECREASES EVERYDAY, WHAT CAN C DO AT THE FIRST AND SECOND BIDS, IT WAS ONLY C WHO
ABSENT ANY PRIOR AGREEMENT? Use then the rule on WAS THE BIDDER. C may now appropriate.
diminution of value without fault of C. Have the shares of stock be
sold in a public sale and the proceeds would be applied and used CAN THERE BE A PRIVATE SALE? Yes, if there is a stipulation
as object of the pledge. Though according to JPSP, this is a to that effect. They can stipulate on a private sale based on
peculiar situation. autonomy of contract, as long as it doesn't contravene.

ON X DATE, WHAT IF THE VALUE IS MORE THAN THE WHAT AGREEMENT CAN UPHOLD A PRIVATE SALE? A private
OBLIGATION? Pledgor will recover excess and use rules on sale is the best measure of value. Lesser costs also would be
compensation. incurred. The SC once held with regard chattel mortgage that a
private sale can be done.
C IS GREEDY, WHAT CAN HE DO? C can rely on last clause of
2108. There is no foreclosure. According to JPSP, it is nebulous WHAT IF C EMPLOYS A DUMMY? Rules may state a show-
but very possible. JPSP says that the rules may change but the money policy.
analytical process is still the same. Is it ethical? Yes, remember
that we are being trained as advocates. Art. 2118. If a credit which has been pledged becomes due
before it is redeemed, the pledgee may collect and receive
COME X DATE, C CAN FORECLOSE. WHAT IS THE MODE? the amount due. He shall apply the same to the payment of
Public auction. Why is it possible? There is notary public his claim, and deliver the surplus, should there be any, to
administering auction. the pledgor. (n)

STEPS? RIGHT OF PLEDGEE TO COLLECT AND RECEIVE AMOUNT DUE

1. C should go to the notary public ON CREDIT PLEDGED
2. Notary public should send notice to debtor, owner and Pledgee is given the right to collect and receive the
pledgor. amount due on the credit pledged
But in reference to the previous article, having the duty to
WHAT SHOULD BE THE DATE OF THE AUCTION? There is no take good care with the diligence of a good father to a
period required. family the thing pledged, he has the duty to collect if
CAN THE NOTICE BE GIVEN AT ANY TIME? There is no danger would endanger the recovery of the credit
required period as long as it is before the auction. The auction may
be on the 30th day and the notice may be sent on the 29th. IS

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Art. 2119. If two or more things are pledged, the pledgee creditor does not cause the public sale to be held within
may choose which he will cause to be sold, unless there is a such period, the debtor may require the return of the thing.
stipulation to the contrary. He may demand the sale of only (n)
as many of the things as are necessary for the payment of
the debt. (n) Art. 2123. With regard to pawnshops and other
establishments, which are engaged in making loans secured
RIGHT OF PLEDGEE TO CHOOSE WHICH OF SEVERAL by pledges, the special laws and regulations concerning
THINGS PLEDGED SHALL BE SOLD them shall be observed, and subsidiarily, the provisions of
After sufficient property has been sold to satisfy the this Title. (1873a)
obligation plus interests and expenses, no more shall be
sold P 1M DUE ON X DATE
PLEDGOR SECURITY CREDITOR
Art. 2120. If a third party secures an obligation by pledging
his own movable property under the provisions of Article PLEDGE OF 100 XYZ SHARES = P750K
2085 he shall have the same rights as a guarantor under PLEDGE OF 100 ABC SHARES = P 1.2M
Articles 2066 to 2070, and Articles 2077 to 2081. He is not
prejudiced by any waiver of defense by the principal C WANTS TO MAXIMIZE VALUE. WHAT CAN HE DO?
Following the rules on indivisibility, C can foreclose both blocks.
obligor. (n)

RIGHT OF THIRD PERSON WHO PLEDGED HIS OWN PLEDGORCREDITOR

PROPERTY PLEDGE: SHARES OF P1.5M
A third person who is not a party to the principal obligation REM: LOT OF P900K P750K
may secure the latter by pledging his own property GUARANTY X P1.5M
The law grants him the same rights as a guarantor and he YOU WANT TO MAXIMIZE VALUE. Foreclose the REM first.
cannot be prejudiced by any waiver or defense by the Then foreclose the pledge. The guaranty would be cumbersome.
principal debtor
CARDINAL RULE!!! PLEDGE SHOULD ALWAYS BE THE
Art. 2121. Pledges created by operation of law, such as LAST TO BE FORECLOSED.
those referred to in Articles 546, 1731, and 1994, are
governed by the foregoing articles on the possession, care
and sale of the thing as well as on the termination of the
pledge. However, after payment of the debt and expenses, (x) P 1M
the remainder of the price of the sale shall be delivered to PLEDGOR/DEBTOR P 2M SHARES PLEDGEE
the obligor. (n)

Art. 2122. A thing under a pledge by operation of law may X=P 1.9M FORECLOSURE PROCEEDINGS
be sold only after demand of the amount for which the thing =P 1.9M
is retained. The public auction shall take place within one DAY BEFORE THE PUBLIC AUCTION, WHAT CAN PLEDGOR
month after such demand. If, without just grounds, the DO TO PROFIT? One option open is that there could be a sale

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between X and pledgor. The transfer of ownership would be such security immovable property or real rights over
suspended prior to the consent of pledgee. X would then pay the immovable property which obligation shall be satisfied with
P1.9M and there would be profit of P100,000. Another option is to the proceeds of sale of said property or rights in case the
have X pay the obligation as third person interested in the said obligation is not complied with at the time stipulated
fulfillment of the obligation. Pledgor would then pay X and profit Real, accessory, unilateral and subsidiary contract
from the excess.
POSSESSION OF PROPERTY MORTGAGED
ON THE SAMPLE PLEDGE AGREEMENT As a general rule, it is retained by the mortgagor
1. No provision regarding collateral value. Normally, The mortgaged property is only subjected to a lien by the
whenever there is diminution of value, the pledgee may mortgagee but ownership is retained by the mortgagor
foreclose automatically.
2. There is mention on how the sale was to be conducted PAYMENT OF INTEREST ON MORTGAGE CREDIT
3. Provision on defaultnot pacto commissorium. It allows With regard to fruits or interest, the mortgagee shall be
the pledgee to have legal title only and not ownership. subject to the obligation of an antichresis creditor
There can be option for pledgee to purchase at X price.
There could also be a separate contract for safeguarding. SUBJECT MATTER OF MORTGAGE
4. No address where it would be kept. This is a friendly Immovables and alienable real rights over immovables
pledge.
5. Should be notarized and pay documentary stamp taxes. FUTURE PROPERTY CANNOT BE OBJECT OF MORTGAGE
Future property cannot be the object of a contract of
REAL ESTATE MORTGAGE mortgage
(ARTICLES 2124-2131) A stipulation however subjecting the mortgage lien,
properties which the mortgagor may subsequently acquire,
MORTGAGE install, or use in connection with real property already
mortgaged belonging to the mortgagor is valid
Art. 2124. Only the following property may be the object of
a contract of mortgage: Art. 2125. In addition to the requisites stated in Article
2085, it is indispensable, in order that a mortgage may be
(1) Immovables; validly constituted, that the document in which it appears
be recorded in the Registry of Property. If the instrument is
(2) Alienable real rights in accordance with the laws, not recorded, the mortgage is nevertheless binding
imposed upon immovables. between the parties.

Nevertheless, movables may be the object of a chattel The persons in whose favor the law establishes a mortgage
mortgage. (1874a) have no other right than to demand the execution and the
recording of the document in which the mortgage is
MORTGAGE formalized. (1875a)
Contract whereby the debtor secures to the creditor the
fulfillment of a principal obligation, specially substituting to ESSENTIAL REQUISITES OF A MORTGAGE

BY: MA. ANGELA LEONOR C. AGUINALDO

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1. To secure the fulfillment of a principal obligation (2) REGISTERED MORTGAGE

2. The mortgagor should be the absolute owner of thing
mortgaged
JPSP QUESTIONS:
3. The mortgagor should have free disposal of the thing
4. When the principal obligation becomes due, the thing
WHO WILL HAVE A BETTER RIGHT? The real estate mortgage.
mortgaged may be alienated to secure payment
5. For a mortgage to be validly constituted and to prejudice If there was delivery, the sale.
third persons, the mortgage should be recorded with the
IF YOURE A LAWYER, IT WOULD DO YOU GOOD TO DO A
Registry of Property
TITLE CHECK.
Go to the RC and look if there are any annotations.
NO VALIDLY CONSTITUTED MORTGAGE IF THE DEED OF
MORTGAGE IS A MERE PRIVATE DOCUMENT
IF YOU SEE NO ANNOTATION, IS THAT SUFFICIENT? Yes.
MORTGAGE IS NEVERTHELESS BINDING BETWEEN THE IF BANK? No, bank is required to exercise greater care and
PARTIES EVEN IF UNREGISTERED diligence.
Actual knowledge on the part of the buyer
Actual knowledge=registration Art. 2126. The mortgage directly and immediately subjects
the property upon which it is imposed, whoever the
PROCEDURE: WHAT HAPPENS WHEN YOU ENTER INTO A possessor may be, to the fulfillment of the obligation for
whose security it was constituted. (1876)
CONTRACT OF MORTGAGE?
1. Execute the document of mortgage
2. Go to a notary public, who will notarize the document. EFFECTS OF MORTGAGE
1. Creates a real right
3. Pay the documentary stamp tax within the first five days of
the succeeding month. The doc stamp tax is a percentage a. If the mortgagor sells the encumbered property,
the property remains subject to the fulfillment of
of the value of the property mortgaged.
4. Go to the Office of the Register of Deeds and pay the the principal obligation secured by it
b. The mortgagee has a right to rely in good faith on
registration fees. Before you pay the registration fees, the
what appears on the certificate of title of the
government will require you to update payment of realty
taxes on the property. After payment of the registration mortgagor of the property given as security and in
the absence of anything to excite suspicion, he is
fees, the mortgage will be annotated on the title.
under no obligation to look beyond the certificate
c. Until the action for expropriation has been
EFFECT OF INVALIDITY OF MORTGAGE ON PRINCIPAL
OBLIGATION completed, ownership over the property remains
with the registered owner
1. The principal obligation remains valid
d. Banking institution must exercise due diligence
2. Mortgage deed remains as evidence of principal obligation
before entering contract of mortgage
e. If a person is the first mortgagee over a property
JPSP: BEWARE OF A MORTGAGE IN A PRIVATE DOCUMENT
which was sold in an auction by the second
mortgagee, the only right left to him is to collect
(1) PRIVATE SALE

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his mortgage credit from the purchaser thereof There was an agreement that mortgage shall secure any
during the sale conducted future advances to the debtor
f. In a suit to nullify a certificate of title, the
mortgagee is an indispensable party (1) D P 1M C
2. Creates merely an encumbrance (2) P500,000

Art. 2127. The mortgage extends to the natural accessions,

to the improvements, growing fruits, and the rents or M P 1.5 M
income not yet received when the obligation becomes due,
and to the amount of the indemnity granted or owing to the TO WHAT EXTENT IS THE AMOUNT SECURED BY THE
MORTGAGE? P 1M.
proprietor from the insurers of the property mortgaged, or
in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by Lets change the scenario
law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.
(1877) (1) D P1M C X P 1M (UNSECURED)
(2) P500K
EXTENT OF MORTGAGE REM OF P 1M REGISTERED
A REM constituted on an immovable property is not limited WHY IS THERE A CHANGE FOR UNSECURED CREDIT? If you
to the property itself but also extends to all its accessions, allow the mortgage to cover the whole P 1.5M, there would be
improvements, growing fruits, and rents undue advantage. The P 1M should be paid by D and then the
To exclude them, it is necessary that there be an express P500k excess should be split between X and the additional P500k
stipulation to that effect debt incurred. Remember that the mortgage was only registered
for P 1M. Take also in consideration the taxes paid.
DEBTOR P 1M CREDITOR
A WAY TO PLAY WITH THE RULES IS TO:
1. Stipulate the maximum amount covered by the mortgage
MORTGAGOR P 1.5M 2. Supplementary contract of mortgageto secure additional
P500k
JPSP QUESTIONS:
CAN C FILE AN ACTION FOR SPECIFIC PERFORMANCE Art. 2128. The mortgage credit may be alienated or
assigned to a third person, in whole or in part, with the
AGAINST D? Yes.
formalities required by law. (1878)
CAN C RUN AFTER M FOR SPECIFIC PERFORMANCE? No.
Art. 2129. The creditor may claim from a third person in
THE PROCEEDS REALIZED WAS ONLY P500,000. CAN C possession of the mortgaged property, the payment of the
part of the credit secured by the property which said third
COLLECT FROM D? Yes. FROM M? No.
person possesses, in the terms and with the formalities
which the law establishes. (1879)

BY: MA. ANGELA LEONOR C. AGUINALDO

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You don't want the property to be in the hands of someone

RIGHT OF CREDITOR AGAINST TRANSFEREE OF who is litigious
MORTGAGED PROPERTY As a means of monitoring the financial condition of the
The fact that the mortgagor has transferred the mortgaged mortgagor
property to a third person doesn't relieve him from his
obligation to pay the debt to the mortgage creditor in the Art. 2131. The form, extent and consequences of a
absence of Novation mortgage, both as to its constitution, modification and
A recorded REM is merely an accessory contract extinguishment, and as to other matters not included in this
The creditor may only demand from any possessor the Chapter, shall be governed by the provisions of the
payment only of the part of the credit secured by said Mortgage Law and of the Land Registration Law. (1880a)
property
Necessary that there be prior demand for payment be FORECLOSURE
made on the debtor and the latter failed to pay Remedy available to the mortgagee by which he subjects
Does not really apply to all third persons in possession of the mortgaged property to the satisfaction of the obligation
the property to secure which the mortgage was given
It only applies to those in possession of the mortgaged Denotes a procedure adopted by the mortgagee to
property in the concept of owner. If the possession by a terminate the rights of the mortgagor on the property and
third person is only as lessee, the creditor may not collect includes the sale itself
the credit from that third person.
VALIDITY AND EFFECT OF FORECLOSURE
Art. 2130. A stipulation forbidding the owner from The right to foreclose the mortgage and to have the
alienating the immovable mortgaged shall be void. (n) property seized and sold with a view to applying the
proceeds to the payment of the principal obligation
STIPULATION FORBIDDING ALIENATION OF MORTGAGED A mortgage contract may contain an acceleration clause
PROPERTY on occasion of the mortgagors default, the whole sum
Such stipulation would be contrary to public good remaining unpaid automatically becomes due and payable
inasmuch as the transmission of property should not be Essence of mortgage contractproperty has been
unduly impeded identified and separated from a mass of the property of
the mortgagor to secure the payment of a principal
CAN MORTGAGEE PROHIBIT ENCUMBERANCES WITHOUT obligation
PRIOR CONSENT? Once the proceeds have been applied to the payment of
Yes, regulation is not the same as prohibition the principal obligation, the debtor cannot anymore be
The mortgagee may even add a standard. This is for good asked to pay unless there is deficiency
measure on the part of the mortgagee which is allowed by
law. KINDS OF FORECLOSURE
1. Judicial
IN THE FIRST PLACE, WHY WOULD YOU BE CONCERNED 2. Extrajudicial
WITH THE DISPOSITION OF THE PROPERTY IF YOU ARE
THE MORTGAGEE? Republic Act No. 133 June 14, 1947

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AN ACT TO AUTHORIZE THE MORTGAGE OF PRIVATE REAL 3. The foreigner may only take possession of the mortgaged
PROPERTY IN FAVOR OF ANY INDIVIDUAL, CORPORATION, property after default, and for the sole purpose of
OR ASSOCIATION SUBJECT TO CERTAIN CONDITIONS foreclosure, enforcement or other proceedings. This
should not exceed the period of 5 years from actual
Section 1. Any provision of law to the contrary possession.
notwithstanding, private real property may be mortgaged in
favor of any individual, corporation, or association, but the JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT
mortgagee or his successor in interest, if disqualified to 1. The mortgagee should file a petition for judicial foreclosure
acquire or hold lands of the public domain in the in the court which has jurisdiction over the area where the
Philippines, shall not take possession of the mortgaged property is situated
property during the existence of the mortgage and shall not 2. The court will conduct a trial. If, after trial, the court finds
take possession of the mortgaged property except after merit in the petition, it will render judgment ordering the
default and for the sole purpose of foreclosure, mortgagor/debtor to pay the obligation within a period not
receivership, enforcement or other proceedings and in no less than 90 nor more than 120 days from the finality of
case for a period of more than 5 years from actual judgment.
possession and shall not bid or take part in any sale of such 3. Within this 90 to 120 day period, the mortgagor has the
real property in case of foreclosure: Provided, that said chance to pay the obligation to prevent his property from
mortgagee or successor in interest may take possession of being sold. This is called the EQUITY OF REDEMPTION
said property after default in accordance with the PERIOD.
prescribed judicial procedures for foreclosure and 4. If mortgagor fails to pay within the 90-120 days given to
receivership and in no case exceeding 5 years from actual him by the court, the property shall be sold to the highest
possession. bidder at public auction to satisfy the judgment.
5. There will be a judicial confirmation of the sale. After the
Section 2. All laws, orders, or regulations, or parts thereof confirmation of the sale, the purchaser shall be entitled to
inconsistent with the provisions of this Act, are repealed or the possession of the property, and all the rights of the
modified accordingly. mortgagor with respect to the property are severed or
terminated. The equity of redemption period actually
Section 3. This Act shall take effect upon its approval. extends until the sale is confirmed. Even after the lapse of
the 90 to 120 day period, the mortgagor can still redeem
NOTES ON RA 133:
the property, so long as there has been no confirmation of
1. You can mortgage to a foreigner. RA 133 sanctions this. the sale yet. Therefore, the equity of redemption can be
Ownership is not equivalent to mortgage. Nonetheless, he
considered as the right of the mortgagor to redeem the
can only institute judicial proceedings and not property BEFORE the confirmation of the sale.
extrajudicially foreclose the mortgage. Furthermore, he
a. After the confirmation of the sale, the mortgagor
cannot bid or take part in the sale of the real property.
does not have a right to redeem the property
2. The foreigner may not take possession of the property anymore. This is the general rule in judicial
during the mortgage. He could only possess the same as a
foreclosures there is no right of redemption after
lessee. the sale is confirmed.

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6. The proceeds of the sale of the property will be disposed the foreclosure or fail bid if he wants continued possession of the
as follows: property.
a. First, the costs of the sale will be deducted from
the price at which the property was sold ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE:
b. The amount of the principal obligation and interest 1. Judicial foreclosure is costly, since the parties would need
will be deducted to hire lawyers. But then again, the present rules provide
c. The junior encumbrances will be satisfied that court fees are needed to be paid in extrajudicial
d. If there is still an excess, the excess will go back to proceedings also.
the mortgagor. In mortgage, the mortgagee DOES 2. The parties have very little control over the sale because
NOT get the excess (unlike in pledge). there is court intervention.
i. If there is a deficiency, the mortgagee can 3. More susceptible to stalling/dilatory tactics by the
ask for a DEFICIENCY JUDGMENT which mortgagor, since he can file all sorts of motions in court to
can be imposed on other property of the prevent the sale.
mortgagor. The rule on extrajudicial 4. It is more efficient to have extrajudicial proceedings since
foreclosure is different. The mortgagee for judicial proceedings, there is a minimum lapse of time
must go to court and file another action for of 6 years.
the collection of the deficiency.
JPSP ILLUSTRATION #2:
COMPLAINT JUDGMENT ENTRY (90, 120) AUCTION MORTGAGOR REM 1 M1
REM 2 M2
SALE CONFIRMATION OF THE SALE (EQUITY OF REM 3 M3

REDEMPTION, THE MORTGAGOR CANNOT REDEEM) M1 IS THE SENIOR MORTGAGE, GIVEN IT IS REGISTERED.

JPSP ILLUSTRATION: WHAT IF REM 2 IS FORECLOSED, WHAT IS THE EFFECT TO

D P 1M C REM 3? M3 would not have any right over the property at the end
of the foreclosure proceedings.
REM P1.5M
WHAT WOULD BE THE RIGHT OF M1 OVER THE PROPERTY?
It can still foreclose. The foreclosure would only foreclose the
HOW CAN C FORECLOSE? Default rule is judicial foreclosure. junior encumbrances.
IF YOURE THE C, WHAT WILL YOU INSERT IN THE
THE PROCEEDS WOULD BE APPLIED AS FOLLOWS:
CONTRACT? Extrajudicial foreclosure. 1. Costs of the sale
2. Interest
SAY, C IS A FOREIGNER? Foreigner may only do judicial 3. Principal
foreclosure. This is up to the extent of 5 years. WHY? Because
4. If there is excess:
if you allow extrajudicial foreclosure, all he needs to do is to delay a. To the junior mortgages

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b. The owner 1. POSTING of the notices of the sale FOR NOT LESS THAN
20 DAYS in at least 3 public places of the municipality or
IF THERE IS DEFICIENCY, WHAT COULD BE DONE? If it is a city where the property is situated
judicial foreclosure, then there could just be a mere filing of 2. IF THE PROPERTY IS WORTH MORE THAN P400, such
motion for deficiency judgment. This is the upside of judicial notice shall also be published once a week at least 3
foreclosure, unlike in an extrajudicial one wherein one would file a consecutive weeks in a newspaper of general circulation in
separate action for the deficiency. the municipality or city. (You don't need to count 6 days
between publications.)
DOES AN EXTRAJUDICIAL FORECLOSURE HAVE ANY NOTE: there is jurisprudence, which held that there is sufficient
DOWNSIDE? notice when there is publication.
Yes, it does. For one, if there is any deficiency in the
proceeds, you will still need to file a separate action to
recover it. This is unlike in judicial proceedings wherein a 1 5 7
simple motion for deficiency judgment would suffice.
Second, it is not anymore true that it is less expensive 8 14
with extrajudicial foreclosure. Court fees have to paid in
this type of proceedings unlike before. 15 21

EXTRAJUDICIAL FORECLOSURE
(UNDER ACT 3135/4118 AND SC ADMINISTRATIVE 22 28
CIRCULAR)
PUBLIC AUCTION/SALE
WHERE SHOULD AN EXTRAJUDICIAL FORECLOSURE SALE BE
DONE? 1. Time shall be between 9AM and 4PM. It shall be made in
the direction of the sheriff of the province, the justice or
Sale cannot be made legally outside the city or province
wherein the property sold is situated. In case the place auxiliary justice of the peace of the municipality, or of the
notary public of the municipality, who shall be
has been stipulated, it shall be made in the municipal
compensated with P5 for each day of actual work or
building of the said place.
performance in addition to his expenses.
2. Anyone may bid at the sale, unless there are stipulations
in the agreement.
DEFAULT FILING OF COMPLAINT FOR EXTRA-JUDICIAL
FORECLOSURE WITH THE EXECUTIVE JUDGE NOTICE POSSESSION
SALE CERTIFICATION OF SALE REGISTRATION (1 YEAR Upon foreclosure, if the mortgagor is in possession of the
REDEMPTION PERIOD WILL RUN) property, he will retain possession during the redemption
period1 year from the date of sale
If the winning bidder wants possession during the
NOTICE OF THE SALE redemption period, he may execute a bond in the amount
equivalent to the use of the property for 12 months, to

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indemnify the debtor in case it be shown that the sale was IF M2 WANTS TO REDEEM, HOW MUCH SHOULD HE PAY?
made without violating the mortgage or without complying Purchase price plus interest of 1%. Where did the 1%
with the requirements of the Act. Upon approval, a writ of come from? See Section 6 of Act 3135, as well as Rule 39,
possession will be issued in his favor. Sections 29-31 and 35 of the Rules of Court
If the winning bidder is able to secure possession, the
mortgagor may petition that the sale is set aside and the IF M3 WANTS TO REDEEM FROM M2, HOW MUCH SHOULD
writ of possession be cancelled on the ground that he HE PAY?
wasn't in default or that the sale wasn't made in The purchase price plus 2%, taxes and assessments, as
accordance with Act 3135. This must be filed within 30 well as the liability to M2
days from issuance of the writ of possession. This is again based on Sections 29-31

RIGHT OF REDEMPTION WHAT WOULD BE THE BENEFIT TO M2?

The debtor, his successors-in-interest, or any judicial There would be payment to him by the redemptor of the
creditor or judgment creditor of said debtor, or any person liability of the debtor
having a lien on the property subsequent to the mortgage
or deed of trust under which the property is sold, may JPSP ILLUSTRATION #2:
redeem the same at any time WITHIN THE TERM OF 1 PROPERTY WORTH P 36M
YEAR FROM AND AFTER THE DATE OF THE SALE and such MORTGAGOR M1, P 10 M
will be governed by the Rules of Court M2, P 30 M
When the property is redeemed after the purchaser has M3, P 5 M
been given possession, the redeemer is entitled to deduct
from the price of redemption any rentals that said
NOTES:
purchaser may have collected in case the property or any
part thereof was rented. If the property was used as his 1. M1 forecloses. Excess will go to the debtor. But
normally, the bid would be P10M plus costs. M2 would
own dwelling, it being town property, or used it gainfully, it
being rural property, the redeemer may deduct from the have the benefit to redeem.
price the interest of 1% per month provided in the Rules of 2. M1 forecloses. And then, there is sale to M1. Debtor
redeems. He will expose the P 36M to M1 and M2.
Court.
What can debtor do to protect his interests? If debtor
redeems, the M1 will wipe out but the 2 junior
JPSP ILLUSTRATION:
encumbrances would remain making it an unsettling
M1 situation for the debtor. A better way really is that he can
finish foreclosure. He will get X as nominate. X will
M2 purchase from M1 and property will be free from the
encumbrances. M1 will automatically register the sale. M1
M3 would have an upside of P 5M. X on the other hand will be
getting P 36M free from the encumbrances.
D

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3. Remember the default rule that in the procedure for Until the expiration of the time allowed for redemption, the court
foreclosure, mortgagor retains possession but may, as in other proper cases, restrain the commission of waste
winning bidder can file action. on the property by injunction, on the application of the purchaser
4. After the sale, there will be an annotation. or the judgment obligee, with or without notice; but it is not waste
for a person in possession of the property at the time of the sale,
RULES OF COURT, RULE 39, SECTIONS 29 TO 31, AND 35 or entitled to possession afterwards, during the period allowed for
redemption, to continue to use it in the same manner in which it
Sec. 29. Effect of redemption by judgment obligor, and a was previously used; or to use it in the ordinary course of
certificate to be delivered and recorded thereupon; to husbandry; or to make the necessary repairs to buildings thereon
whom payments on redemption made. while he occupies the property.
If the judgment obligor redeems, he must make the same
payments as are required to effect a redemption by a Sec. 35. Right to contribution or reimbursement.
redemptioner, whereupon, no further redemption shall be allowed When property liable to an execution against several persons is
and he is restored to his estate. The person to whom the sold thereon, and more than a due proportion of the judgment is
redemption payment is made must execute and deliver to him a satisfied out of the proceeds of the sale of the property of one of
certificate of redemption acknowledged before a notary public or them, or one of them pays, without a sale, more than his
other officer authorized to take acknowledgments of conveyances proportion, he may compel a contribution from the others; and
of real property. Such certificate must be filed and recorded in the when a judgment is upon an obligation of one of them, as security
registry of deeds of the place in which the property is situated, and for another, and the surety pays the amount, or any part thereof,
the registrar of deeds must note the record thereof on the margin either by sale of his property or before sale, he may compel
of the record of the certificate of sale. The payments mentioned in repayment from the principal.
this and the last preceding sections may be made to the purchaser
or redemptioner, or for him to the officer who made the sale.
GENERAL BANKING LAW OF 2000, SECTION 47
Sec. 30. Proof required of redemptioner.
Sec. 47. Foreclosure of Real Estate Mortgage. - In the event
A redemptioner must produce to the officer, or person from whom
he seeks to redeem, and serve with his notice to the officer a copy of foreclosure, whether judicially or extra-judicially, of any
of the judgment or final order under which he claims the right to mortgage on real estate which is security for any loan or other
credit accommodation granted, the mortgagor or debtor whose
redeem, certified by the clerk of the court wherein the judgment or
final order is entered; or, if he redeems upon a mortgage or other real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the
lien, a memorandum of the record thereof, certified by the
registrar of deeds; or an original or certified copy of any real estate, to redeem the property by paying the amount due
under the mortgage deed, with interest thereon at rate specified in
assignment necessary to establish his claim; and an affidavit
the mortgage, and all the costs and expenses incurred by the bank
executed by him or his agent, showing the amount then actually
due on the lien. or institution from the sale and custody of said property less the
income derived therefrom. However, the purchaser at the auction
Sec. 31. Manner of using premises pending redemption; sale concerned whether in a judicial or extra-judicial foreclosure
shall have the right to enter upon and take possession of such
waste restrained.
property immediately after the date of the confirmation of the

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auction sale and administer the same in accordance with law. Any 7. In the earlier example, suppose M1 is the bank, D can go
petition in court to enjoin or restrain the conduct of foreclosure with the foreclosure and X will be the nominate.
proceedings instituted pursuant to this provision shall be given due
course only upon the filing by the petitioner of a bond in an MORTGAGE TRUST INDENTURE SAMPLE AGREEMENT
amount fixed by the court conditioned that he will pay all the
damages which the bank may suffer by the enjoining or the MORTGAGOR REAL ESTATE MORTGAGEMORTGAGEE
restraint of the foreclosure proceeding. OBLIGATION

Notwithstanding Act 3135, juridical persons whose property is

being sold pursuant to an extrajudicial foreclosure, shall have the MTI (IN FAVOR OF CREDITORS)
right to redeem the property in accordance with this provision
until, but not after, the registration of the certificate of foreclosure MR PAYMENT TRUSTEE
sale with the applicable Register of Deeds which in no case shall be MTI
more than three (3) months after foreclosure, whichever is earlier.
Owners of property that has been sold in a foreclosure sale prior to MORTGAGE PARTICIPATION CERTIFICATES
the effectivity of this Act shall retain their redemption rights until
their expiration. [POOL OF ASSETS]
P 400M (50% C1, 50% C2, C3)
NOTES: C1 P100 M
1. For judicial foreclosure, the redemption period is within C2 P50 M
one year. For extrajudicial, its 90 days from sale or C3 P50 M
registration.
2. The purpose is to give concession to the banks. Banks N.B: You can discharge an obligation and the MTI will remain.
cannot get properties mortgaged by those in financial There is no need to issue a mortgage every time. What is the
distress. consequence? There would be lesser costs to incur.
3. The redemption price would be the mortgaged obligation
plus the interest as stipulated in the original obligation.
Compare this with judicial foreclosure wherein the C1 P100 M MPC=200100 C1, 50 C2, 50 C3
redemption price is the original price. In this case, you
have to pay more when redeeming from a bank. C2 P50 M
4. There is immediate possession
5. A motion to enjoin would not be entertained unless C3 P50 M
secured by a bond.
6. Court will fix the amount of the bond. Normally, this IF C2 AND C3 PAIDFREE 100 MPC
would be the liability of the bank plus costs. This
remedied the loopholes in Act 3135protect the bank C4 P50 M
during foreclosures. This makes it hard to secure
injunctions and it shortens the redemption period. C5 P25 M

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Art. 2136. The debtor cannot reacquire the enjoyment of

C6 P25 M the immovable without first having totally paid what he
owes the creditor.
ANOTHER N.B: there could be an agreed limit or margin with But the latter, in order to exempt himself from the
regard the number of MPC.
obligations imposed upon him by the preceding article, may
always compel the debtor to enter again upon the
Further, take note of the clause on foreclosure. Just copy Act enjoyment of the property, except when there is a
3135.
stipulation to the contrary. (1883)
ANTICHRESIS
Art. 2137. The creditor does not acquire the ownership of
(ARTICLES 2132-2139) the real estate for non-payment of the debt within the
period agreed upon.
Art. 2132. By the contract of antichresis the creditor
acquires the right to receive the fruits of an immovable of Every stipulation to the contrary shall be void. But the
his debtor, with the obligation to apply them to the
creditor may petition the court for the payment of the debt
payment of the interest, if owing, and thereafter to the or the sale of the real property. In this case, the Rules of
principal of his credit. (1881)
Court on the foreclosure of mortgages shall apply. (1884a)
Art. 2133. The actual market value of the fruits at the time
Art. 2138. The contracting parties may stipulate that the
of the application thereof to the interest and principal shall interest upon the debt be compensated with the fruits of
be the measure of such application. (n) the property which is the object of the antichresis, provided
that if the value of the fruits should exceed the amount of
Art. 2134. The amount of the principal and of the interest interest allowed by the laws against usury, the excess shall
shall be specified in writing; otherwise, the contract of
be applied to the principal. (1885a)
antichresis shall be void. (n)
Art. 2139. The last paragraph of Article 2085, and Articles
Art. 2135. The creditor, unless there is a stipulation to the
2089 to 2091 are applicable to this contract. (1886a)
contrary, is obliged to pay the taxes and charges upon the
estate.
DEBTOR OBLIGATIONCREDITOR
He is also bound to bear the expenses necessary for its
preservation and repair. FRUITS OF AN IMMOVABLE

The sums spent for the purposes stated in this article shall ANTICHRESIS
be deducted from the fruits. (1882) The creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them
to the payment of the interest, if owing, and thereafter to
the principal of his credit

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Arrangement that the fruits will be used to liquify the If the creditor doesn't want to advance, he may just
principal obligation surrender the immovable to the debtor
Doesn't create a lien but only the grant of the use of the 3. The debtor may not reacquire the enjoyment of the thing
fruits until full payment of the obligation.
4. The creditor doesn't acquire ownership of the immovable
CHARACTERISTICS OF AN ANTICHRESIS for nonpayment of the debt within the period agreed upon.
1. Accessory contract Every stipulation to the contrary is void. The creditor may
2. Formal contractit must be in writing; the principal petition the court to foreclose the property. THERE IS
obligation and the interest secured must be in writing POSSIBILITY TO HAVE ALTERNATIVE ARRANGEMENTS FOR
FORECLOSURE.
THERE IS NO NEED TO TRANSFER POSSESSION. WHAT IS
ESSENTIAL IS THE GRANT OF THE USE OF THE FRUITS. C OBLIGATION, P 10M D
PLEDGE, P 5M (3)
ADDITIONAL BENEFIT IN HAVING A CONTRACT OF REM, P 3M (2) (1)
ANTICHRESIS ANTICHRESIS, P 4M (1) (2)
In the absence of a contract of antichresis, the debtor
could just issue a special power of attorney in favor of the
DIFFERENCE BETWEEN ANTICHRESIS AND MORTGAGE
creditor for the collection of the fruits of the immovable.
The additional benefit is that at the failure of the debtor to
pay the principal obligation, the creditor may have the ANTICHRESIS PLEDGE
property subject of antichresis foreclosed SUBJECT Refers to real property Refers to personal
MATTER property
MEASURE OF APPLICATION OF FRUITS TO INTEREST AND
PRINCIPAL PERFECTION Perfected by mere Perfected by the
Must be appraised at their actual market value at the time OF CONTRACT consent delivery of the thing
of application pledged

FORM OF CONTRACT KIND OF Consensual contract Real contract

The amount of the principal and interest shall be specified CONTRACT
in writing
Otherwise, the contract is void
CHATTEL MORTGAGE
DEFAULT RULES TO BE FOLLOWED (TAKE NOTE SO THAT (ARTICLES 2140-2141, CHATTEL MORTGAGE LAW)
YOU WILL KNOW WHEN TO OPT OUT OF THE RULES)
1. The creditor advances for the taxes, charges, as well as Art. 2140. By a chattel mortgage, personal property is
the necessary expenses for the preservation of the recorded in the Chattel Mortgage Register as a security for
property the performance of an obligation. If the movable, instead of
2. The law uses the term advances as the fruits of the being recorded, is delivered to the creditor or a third
immovable may be applied to the expenses and charges.

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person, the contract is a pledge and not a chattel mortgage.

(n) OFFENSES INVOLVING CHATTEL MORTGAGE
1. Knowingly removing personal property mortgaged to any
CHATTEL MORTGAGE province or city other than the one in which it was located
Contract by virtue of which personal property is recorded at the time of the execution of the mortgage without the
in the Chattel Mortgage Register as security for the written consent
performance of an obligation 2. Selling or pledging personal property already mortgaged or
any part thereof, under the terms of the CM Law without
CHARACTERISTICS the consent of the mortgage written on the back of the
1. Accessory contract mortgage and duly recorded in the CM Register
2. Formal contract
REGISTRATION
WHAT MAKES IT DIFFERENT FROM A PLEDGE? Registration shall be done in the Register of Deeds where
1. Delivery of the personal property to the mortgagee is not the mortgagor resides
necessary And when the property is situated somewhere else, it
2. The registration in the Register is required by law needs to be registered also in the Register of Deeds of the
3. Procedure for the sale of the thing is different area where the property is situated
4. If the property is foreclosed and there is excess, the Chattel mortgage would not be valid and binding as
amount goes to the debtor against third persons absent any registration
5. If there is deficiency, the creditor may recover the If what is mortgaged is a car, registration with the LTO is
deficiency also needed. Absent this, again, it would not be binding
and valid as against third persons
WHEN DO YOU DO A CM OR PLEDGE?
When property needs to be retained by the debtor, then FORM OF CONTRACT AS STATED IN THE LAW. TO PLAY IT
opt for a chattel mortgage SAFE, COPY THE FORM PROVIDED.
Remember the Syvel case wherein what was the subject of Theoretically, the mortgagor may sign the contract alone
the chattel mortgage was the inventory of goods used in but practically, the mortgagee must sign also given that
the business. If it was pledge, then the business would they both need to sign the affidavit of good faith
cease from operations. (Oblicon case)
AFFIDAVIT OF GOOD FAITH
Art. 2141. The provisions of this Code on pledge, insofar as Part of the chattel mortgage contract wherein it is stated
they are not in conflict with the Chattel Mortgage Law shall that the chattel mortgage has been constituted to secure a
be applicable to chattel mortgages. (n) principal obligation and not meant for fraud or any ill
purpose
LAWS GOVERNING CHATTEL MORTGAGE It is possible to defraud using mortgage. You can take
1. Chattel mortgage law, Act 1508 away property through mortgage from an unsecured
2. Civil Code provisions creditor.
3. Revised Administrative Code What is good faith/bad faith? JPSP: when there is a
4. Revised Penal Code married man walking in a mall and a woman approaches

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him and asks if he is the father of her child. It would be

bad faith if he asks if she was the woman during the stag THERE IS NO MENTION IN THE LAW PROHIBITING A
party. It would be good faith if he asks if he is the teacher SITUATION THAT WHEN AN OBLIGATION IS SECURED BY
of his child. (Honestly, I cannot get this.) BOTH A REM AND CM, A CM CAN BE SUBSEQUENTLY
FORECLOSED AFTER THE REM.
FORMAL REQUIREMENT OF DESCRIPTION OF PROPERTY What is prohibited is the foreclosure of a chattel mortgage
Attach a description or schedule of the properties then followed by the foreclosure of others
mortgaged
There is also the requirement of payment of registration AN ACTION FOR SPECIFIC PERFORMANCE IS TANTAMOUNT
fees and documentary stamp taxes TO THE ABANDONMENT OF RIGHTS OF MORTGAGEE

FORECLOSURE (SIMILAR BUT NOT IDENTICAL WITH REM) AS A RULE, REMEMBER TO GO AFTER THE SECURITY FIRST!
SECTION 14, CHATTEL MORTGAGE LAW
1. There is a 30-day cooling off period before the public THERE IS NOTHING IN THE LAW WHICH PROHIBITS
auction, from the time the condition is broken ALTERNATIVE MODES OF FORECLOSURE
2. Noticeat least 10 days notice of the time, day, place, and
purpose of such sale has been posted at 2 or more public APPLICATION OF PROCEEDS OF FORECLOSURE
places in such municipality. Personal notice or mail shall 1. Costsattorneys are part of this. Very important.
also be given to the mortgagor or person holding under According to JPSP, you are number 1!
him and the persons holding subsequent mortgages of the 2. Obligation itself. Pay first the interest and then the
time and place of sale. principal. If there is penalty, then pay it first.
3. Sheriff should possess the property as he needs to deliver 3. Junior encumbrances
the same to the winning bidder. If the mortgagor refuses 4. Owner
to do so, the mortgagee can seek the help of the court.
There could also be a stipulation in the contract as well. IT IS POSSIBLE TO WAIVE THE EXCESS. IT IS ALSO
But if the debtor is not willing and able, the loss is with the POSSIBLE TO WAIVE THE RIGHT TO REDEEM. TO PLAY IT
creditor. SAFE, THERE SHOULD BE PROOF OF FAIR EXCHANGE.
4. There is a 30-day equity of redemption period (payment of THERE IS NO CASE LAW YET.
obligation)
5. After foreclosure, there could be recovery of deficiency, CONCURRENCE AND PREFERENCE OF CREDITS
but there is Recto Law (1484) pertaining to sale of (ARTICLES 2236-2251)
personal property in installments and there is a CM to
secure payment of price. CONCURRENCE OF CREDITS
Implies the possession by two or more creditors of equal
ANGEL BOUGHT A CAR PAYABLE IN INSTALLMENTS FROM rights or privileges over the same property or all the
LOUIE AND THERE IS A CHATTEL MORTGAGE OVER THE property of a debtor
CAR. THERE WAS FAILURE TO PAY LOUIE.
Louie can either foreclose or resolve. PREFERENCE OF CREDIT
If there is foreclosure, no recovery of the deficiency.

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Right held by a creditor to be preferred in the payment of C3 P200K

his claim above others out of the debtors assets
CAN C2 AND C3 INTERVENE? No. It is a collection suit
instituted by C1 against D.
NATURE AND EFFECT OF PREFERENCE
1. A preference is an exception to the general rule. For this SUPPOSE THAT D DIED AND THERE WAS A SETTLEMENT OF
ESTATE PROCEEDING. Rules will now apply.
reason, the law as to preferences is strictly construed.
2. Preference doesnt create an interest in property. it creates
simply a right of one creditor to be paid first the proceeds of INSOLVENCY PROCEEDINGS
the sale of property as against another creditor.
3. The law doesnt give the creditor who has a preference a right D, P 100K C1
to take the property or sell it as against another creditor. It is C2 (LABORER)
not a question who takes or sells, it is one of the application of C3
the proceeds after the saleof payment of the debt
4. The right of preference is one which can be made only by GENERAL PROVISIONS
being asserted and maintained. If the right claimed is not
asserted or maintained, it is lost. Art. 2236. The debtor is liable with all his property, present
5. Where a creditor released his levy, leaving the property in and future, for the fulfillment of his obligations, subject to
possession of the debtor, thereby indicating that he didnt the exemptions provided by law. (1911a)
intend to press his claim further as to that specific property,
after that act, his claim to preference, if one had been asserted AS A RULE, A DEBTOR IS LIABLE WITH ALL HIS PROPERTY,
by him, could not exist because he had ceased to contest. PRESENT AND FUTURE, FOR THE FULFILLMENT OF HIS
OBLIGATIONS
WHEN RULE OF PREFERENCE APPLICABLE
Apply only where two or more creditors have separate and EXEMPT PROPERTY
distinct claims against the same debtor who has an 1. Present property-Articles 152, 153, 154, 155, 205(Family
insufficient property Code); Section 13 Rule 39 of the Rules of Court; Section
Is applicable when the debtor is insolventhaving more 118 of CA 141
liabilities than his assets
It is a matter of necessity and log that the question of
Art. 152. The family home, constituted jointly by the husband
preference should arise only when the debtors assets are
and the wife or by an unmarried head of a family, is the
insufficient to pay his debts in full
dwelling house where they and their family reside, and the
land on which it is situated. (223a)
PROCEEDINGS SIMILAR TO INSOLVENCY PROCEEDINGS OR
REGARDING LIQUIDATION OF ASSETS
Art. 153. The family home is deemed constituted on a house
COLLECTION SUIT and lot from the time it is occupied as a family residence. From
the time of its constitution and so long as any of its
beneficiaries actually resides therein, the family home
DEBTOR C1 P200K continues to be such and is exempt from execution, forced sale
P100K C2 P200K (LABORER)

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or attachment except as hereinafter provided and to the extent the homestead in which he resides, and land necessarily used
of the value allowed by law. (223a) in connection therewith;

Art. 154. The beneficiaries of a family home are: (b) Ordinary tools and implements personally used by him in
his trade, employment, or livelihood;
(1) The husband and wife, or an unmarried person who is the
head of a family; (c) Three horses, or three cows, or three carabaos, or other
beasts of burden such as the judgment obligor may select
(2) Their parents, ascendants, descendants, brothers and necessarily used by him in his ordinary occupation;
sisters, whether the relationship be legitimate or illegitimate,
who are living in the family home and who depend upon the (d) His necessary clothing and articles for ordinary personal
head of the family for legal support. (226a) use, excluding jewelry;

Art. 155. The family home shall be exempt from execution, (e) Household furniture and utensils necessary for
forced sale or attachment except: housekeeping, and used for that purpose by the judgment
obligor and his family, such as the judgment obligor may
(1) For nonpayment of taxes; select, of a value not exceeding one hundred thousand pesos;

(2) For debts incurred prior to the constitution of the family (f) Provisions for individual or family use sufficient for four
home; months;

(3) For debts secured by mortgages on the premises before or (g) The professional libraries and equipment of judges,
after such constitution; and lawyers, physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers, and other professionals, not
(4) For debts due to laborers, mechanics, architects, builders, exceeding three hundred thousand pesos in value;
materialmen and others who have rendered service or
furnished material for the construction of the building. (243a) (h) One fishing boat and accessories not exceeding the total
value of one hundred thousand pesos owned by a fisherman
Art. 205. The right to receive support under this Title as well and by the lawful use of which he earns his livelihood;
as any money or property obtained as such support shall not
be levied upon on attachment or execution. (302a) (i) So much of the salaries, wages, or earnings of the
judgment obligor of his personal services within the four
Sec. 13. Property exempt from execution. months preceding the levy as are necessary for the support of
his family;
Except as otherwise expressly provided by law, the following
property, and no other, shall be exempt from execution: (j) Lettered gravestones;

(a) The judgment obligor's family home as provided by law, or (k) Monies benefits, privileges, or annuities accruing or in any

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manner growing out of any life insurance; DEBTOR MUST BE THE ABSOLUTE OWNER

(l) The right to receive legal support, or money or property Art. 2238. So long as the conjugal partnership or absolute
obtained as such support, or any pension or gratuity from the community subsists, its property shall not be among the
Government; assets to be taken possession of by the assignee for the
payment of the insolvent debtor's obligations, except
(m) Properties specially exempt by law. insofar as the latter have redounded to the benefit of the
family. If it is the husband who is insolvent, the
But no article or species of property mentioned in his section administration of the conjugal partnership of absolute
shall be exempt from execution issued upon a judgment community may, by order of the court, be transferred to the
recovered for its price or upon a judgment of foreclosure of a wife or to a third person other than the assignee. (n)
mortgage thereon.
EXEMPTION OF CONJUGAL PARTNERSHIP OR ABSOLUTE
COMMUNITY OF PROPERTY
2. Future propertythose related to the insolvency of a The assets of the CPG or ACP dont pass to the assignee in
debtor insolvency elected by the creditors or appointed by the
3. Property in custodia legis and of public dominion court as they dont belong to the individual spouses, but a
distinct entity: the partnership or the community. The
DEBTOR P10 MILLION CREDITORS exemption applies provided that:
o The partnership or community persists
ASSETS OF P5 M o The obligations of the insolvent spouse havent
CONJUGAL HOME WORTH P1M redounded to the benefit of the family
SUPPORT P500,000/MONTH The insolvency of the husband doesnt have the effect of
dissolving the ACP or CPG
If you are the debtor, find the exemptions.
Art. 2239. If there is property, other than that mentioned in
JPSPs favorite among the listed exemptions is the lettered the preceding article, owned by two or more persons, one
gravestones. He finds it funny. What is the creditor supposed to of whom is the insolvent debtor, his undivided share or
do with the lettered gravestones. Is it something similar to interest therein shall be among the assets to be taken
wanting to be Benchs Be Famous or Anonymous? He also finds it possession of by the assignee for the payment of the
funny how agricultural the law and ROC thinks of the country, insolvent debtor's obligations. (n)
giving emphasis to cattle and livestock as exemptions.
RULES INVOLVING UNDIVIDED SHARE OR INTEREST OF A
Art. 2237. Insolvency shall be governed by special laws CO-OWNER
insofar as they are not inconsistent with this Code. (n) If there is a co-ownership and of the co-owners is the
insolvent debtor, his undivided share or interest in the
INSOLVENCY LAW WILL COME INTO PLAY AFTER THE RULES property shall be possessed by the assignee in insolvency
OF PREFERENCE AND CONCURRENCE OF CREDITS. proceedings because it is part of his assets

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The shares of the other co-owners of course cannot be guaranteed by a chattel mortgage, upon the things pledged
taken possession of by the assignee or mortgaged, up to the value thereof;

Art. 2240. Property held by the insolvent debtor as a (5) Credits for the making, repair, safekeeping or
trustee of an express or implied trust, shall be excluded preservation of personal property, on the movable thus
from the insolvency proceedings. (n) made, repaired, kept or possessed;

RULE INVOLVING PROPERTY HELD IN TRUST (6) Claims for laborers' wages, on the goods
The trustee is not strictly speaking the owner of the trust manufactured or the work done;
property although he has legal title thereto
Hence, property held in trust by the insolvent debtor (7) For expenses of salvage, upon the goods salvaged;
should be excluded from the insolvency proceedings
(8) Credits between the landlord and the tenant, arising
CLASSIFICATION OF CREDITS from the contract of tenancy on shares, on the share of
each in the fruits or harvest;
Art. 2241. With reference to specific movable property of
the debtor, the following claims or liens shall be preferred: (9) Credits for transportation, upon the goods carried,
for the price of the contract and incidental expenses, until
(1) Duties, taxes and fees due thereon to the State or their delivery and for thirty days thereafter;
any subdivision thereof;
(10) Credits for lodging and supplies usually furnished
(2) Claims arising from misappropriation, breach of to travelers by hotelkeepers, on the movables belonging to
trust, or malfeasance by public officials committed in the the guest as long as such movables are in the hotel, but not
performance of their duties, on the movables, money or for money loaned to the guests;
securities obtained by them;
(11) Credits for seeds and expenses for cultivation and
(3) Claims for the unpaid price of movables sold, on said harvest advanced to the debtor, upon the fruits harvested;
movables, so long as they are in the possession of the
debtor, up to the value of the same; and if the movable has (12) Credits for rent for one year, upon the personal
been resold by the debtor and the price is still unpaid, the property of the lessee existing on the immovable leased and
lien may be enforced on the price; this right is not lost by on the fruits of the same, but not on money or instruments
the immobilization of the thing by destination, provided it of credit;
has not lost its form, substance and identity; neither is the
right lost by the sale of the thing together with other (13) Claims in favor of the depositor if the depositary
property for a lump sum, when the price thereof can be has wrongfully sold the thing deposited, upon the price of
determined proportionally; the sale.

(4) Credits guaranteed with a pledge so long as the In the foregoing cases, if the movables to which the lien
things pledged are in the hands of the creditor, or those or preference attaches have been wrongfully taken, the

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creditor may demand them from any possessor, within 8. Credits between the landlord and the tenant, arising from
thirty days from the unlawful seizure. (1922a) the contract of tenancy on shares, on the share of each in
the fruits or harvest
GENERAL CATEGORIES OF CREDIT 9. Credits for transportation, upon the goods carried, for the
1. Special preferred credits listed in Articles 2241 and 2242 price of the contract and incidental expenses, until their
2. Ordinary preferred credits listed in Article 2244 delivery and for thirty days thereafter
3. Common credits under Article 2245 10. Credits for lodging and supplies usually furnished to
travelers by hotel keepers, on the movables belonging to
PREFERRED CREDITS WITH RESPECT TO SPECIFIC the guest as long as such movables are in the hotel, but
MOVABLE PROPERTY not for money loaned to the guests
1. Duties, taxes and fees due thereon to the State or any 11. Credits for seeds and expenses for cultivation and harvest
subdivision thereof advanced to the debtor, upon the fruits harvested
2. Claims arising from misappropriation, breach of trust, or 12. Credits for rent for one year, upon the personal property of
malfeasance by public officials committed in the the lessee existing on the immovable leased and on the
performance of their duties, on the movables, money or fruits of the same, but not on money or instruments of
securities obtained by them credit
3. Claims for the unpaid price of movables sold, on said 13. Claims in favor of the depositor if the depositary has
movables, so long as they are in the possession of the wrongfully sold the thing deposited, upon the price of the
debtor, up to the value of the same; and if the movable sale.
has been resold by the debtor and the price is still unpaid,
the lien may be enforced on the price; this right is not lost PREFERRED CREDITS WITH RESPECT TO SPECIFIC
by the immobilization of the thing by destination, provided MOVABLE PROPERTY
it has not lost its form, substance and identity; neither is Articles 2241 and 2242 dont give the order of preference
the right lost by the sale of the thing together with other or priority of payment
property for a lump sum, when the price thereof can be They merely enumerate the credits which enjoy preference
determined proportionally with respect to specific movables or immovables
4. Credits guaranteed with a pledge so long as the things With respect to the same specific movable or immovable,
pledged are in the hands of the creditor, or those creditors with the exception of the State, merely concur
guaranteed by a chattel mortgage, upon the things REMEMBER that preference is only given to #1 and the
pledged or mortgaged, up to the value thereof rest shall be treated equally
a. Should be registered
b. Binding against third parties WRONGFUL TAKING OF MOVABLES TO WHICH LIEN
5. Credits for the making, repair, safekeeping or preservation ATTACHES
of personal property, on the movable thus made, repaired, Last paragraph applies only when the right of ownership in
kept or possessed such property continues in the debtor, and therefore, is
6. Claims for laborers' wages, on the goods manufactured or not applicable to cases where the debtor has parted his
the work done ownership therein, as where he has sold the property
7. For expenses of salvage, upon the goods salvaged
X

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ASSET: LAMBORGHINI (8) Claims of co-heirs for warranty in the partition of an

LIABILITIES: immovable among them, upon the real property thus
P1M, INCOME TAX, GOVERNMENT divided;
P1M, TAXES AND DUTIES, GOVERNMENT
P1M, GRAFT AND CORRUPTION, GOVERNMENT (9) Claims of donors or real property for pecuniary
charges or other conditions imposed upon the donee, upon
the immovable donated;
Art. 2242. With reference to specific immovable property
and real rights of the debtor, the following claims,
(10) Credits of insurers, upon the property insured, for
mortgages and liens shall be preferred, and shall constitute the insurance premium for two years. (1923a)
an encumbrance on the immovable or real right:

(1) Taxes due upon the land or building; X

LAND WORTH P 5M
(2) For the unpaid price of real property sold, upon the LIABILITIES:
immovable sold; P1M, TAXES
500K, CGT AND VAT
(3) Claims of laborers, masons, mechanics and other 200K, REAL PROPERTY TAX
workmen, as well as of architects, engineers and 3M, REM
contractors, engaged in the construction, reconstruction or
repair of buildings, canals or other works, upon said PREFERRED LIEN ON SPECIFIC IMMOVABLE PROPERTY
buildings, canals or other works; 1. Taxes due upon the land or building
2. For the unpaid price of real property sold, upon the
(4) Claims of furnishers of materials used in the immovable sold
construction, reconstruction, or repair of buildings, canals 3. Claims of laborers, masons, mechanics and other
or other works, upon said buildings, canals or other works; workmen, as well as of architects, engineers and
contractors, engaged in the construction, reconstruction or
(5) Mortgage credits recorded in the Registry of repair of buildings, canals or other works, upon said
Property, upon the real estate mortgaged; buildings, canals or other works
4. Claims of furnishers of materials used in the construction,
(6) Expenses for the preservation or improvement of reconstruction, or repair of buildings, canals or other
real property when the law authorizes reimbursement, works, upon said buildings, canals or other works
upon the immovable preserved or improved; 5. Mortgage credits recorded in the Registry of Property,
upon the real estate mortgaged
(7) Credits annotated in the Registry of Property, in 6. Expenses for the preservation or improvement of real
virtue of a judicial order, by attachments or executions, property when the law authorizes reimbursement, upon
upon the property affected, and only as to later credits; the immovable preserved or improved

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7. Credits annotated in the Registry of Property, in virtue of a In such situation, the question of preference will arise,
judicial order, by attachments or executions, upon the there will be a need to determine which of the creditors
property affected, and only as to later credits will be paid ahead of the others
8. Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus Art. 2244. With reference to other property, real and
divided personal, of the debtor, the following claims or credits shall
9. Claims of donors or real property for pecuniary charges or be preferred in the order named:
other conditions imposed upon the donee, upon the
immovable donated (1) Proper funeral expenses for the debtor, or children
10. Credits of insurers, upon the property insured, for the under his or her parental authority who have no property of
insurance premium for two years. their own, when approved by the court;

X (2) Credits for services rendered the insolvent by

LAND, P 5M employees, laborers, or household helpers for one year
LIABILITIES: preceding the commencement of the proceedings in
P 1M, TAXES insolvency;
500 K, CGT/VAT
250 K, REAL PROPERTY TAX (3) Expenses during the last illness of the debtor or of
3 M, REM his or her spouse and children under his or her parental
100 K, PN NOTARIZED authority, if they have no property of their own;
400 K, PN
10 K, LOCAL TAX (4) Compensation due the laborers or their dependents
under laws providing for indemnity for damages in cases of
labor accident, or illness resulting from the nature of the
Art. 2243. The claims or credits enumerated in the two
employment;
preceding articles shall be considered as mortgages or
pledges of real or personal property, or liens within the
(5) Credits and advancements made to the debtor for
purview of legal provisions governing insolvency. Taxes
support of himself or herself, and family, during the last
mentioned in No. 1, Article 2241, and No. 1, Article 2242, year preceding the insolvency;
shall first be satisfied. (n)
(6) Support during the insolvency proceedings, and for
NATURE OF CLAIMS OR CREDITS IN ARTICLES 2241 AND
three months thereafter;
2242
Articles 2241 and 2242 apply only when there is a
(7) Fines and civil indemnification arising from a
concurrence of credits when the same specific property of
criminal offense;
the debtor is subjected to the claims of several creditors
and the value of such property is insufficient to pay in full
(8) Legal expenses, and expenses incurred in the
all the creditors administration of the insolvent's estate for the common

BY: MA. ANGELA LEONOR C. AGUINALDO

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interest of the creditors, when properly authorized and 4. Compensation due the laborers or their dependents under
approved by the court; laws providing for indemnity for damages in cases of labor
accident, or illness resulting from the nature of the
(9) Taxes and assessments due the national employment
government, other than those mentioned in Articles 2241, 5. Credits and advancements made to the debtor for support
No. 1, and 2242, No. 1; of himself or herself, and family, during the last year
preceding the insolvency
(10) Taxes and assessments due any province, other 6. Support during the insolvency proceedings, and for three
than those referred to in Articles 2241, No. 1, and 2242, No. months thereafter
1; 7. Fines and civil indemnification arising from a criminal
offense
(11) Taxes and assessments due any city or 8. Legal expenses, and expenses incurred in the
municipality, other than those indicated in Articles 2241, administration of the insolvent's estate for the common
No. 1, and 2242, No. 1; interest of the creditors, when properly authorized and
approved by the court
(12) Damages for death or personal injuries caused by a 9. Taxes and assessments due the national government,
quasi-delict; other than those mentioned in Articles 2241, No. 1, and
2242, No. 1 (10) Taxes and assessments due any
(13) Gifts due to public and private institutions of province, other than those referred to in Articles 2241, No.
charity or beneficence; 1, and 2242, No. 1
10. Taxes and assessments due any city or municipality, other
(14) Credits which, without special privilege, appear in than those indicated in Articles 2241, No. 1, and 2242, No.
(a) a public instrument; or (b) in a final judgment, if they 1
have been the subject of litigation. These credits shall have 11. Damages for death or personal injuries caused by a quasi-
preference among themselves in the order of priority of the delict
dates of the instruments and of the judgments, 12. Gifts due to public and private institutions of charity or
respectively. (1924a) beneficence
13. Credits which, without special privilege, appear in
SPECIAL PREFERRED CREDITS a. a public instrument; or
1. Proper funeral expenses for the debtor, or children under b. in a final judgment, if they have been the subject
his or her parental authority who have no property of their of litigation.
own, when approved by the court These credits shall have preference among themselves
2. Credits for services rendered the insolvent by employees, in the order of priority of the dates of the instruments
laborers, or household helpers for one year preceding the and of the judgments, respectively.
commencement of the proceedings in insolvency
3. Expenses during the last illness of the debtor or of his or X
her spouse and children under his or her parental CAR, P1M
authority, if they have no property of their own LOT, P2M
REM, P1M

BY: MA. ANGELA LEONOR C. AGUINALDO

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P140K, PN1 NOTARIZED pro rata, after the payment of duties, taxes and fees due
P140K, PN the State or any subdivision thereof. (1926a)

Art. 2248. Those credits which enjoy preference in relation

ORDER OF PRIORITY ONLY WITH RESPECT TO INSOLVENTS to specific real property or real rights, exclude all others to
FREE PROPERTY
the extent of the value of the immovable or real right to
1. Specially preferred creditscredits which are specially which the preference refers.
preferred because they constitute liens take precedence
over ordinary preferred credits so far as concerns the
Art. 2249. If there are two or more credits with respect to
property to which the liens are attached the same specific real property or real rights, they shall be
a. Specific property involved of greater value
satisfied pro rata, after the payment of the taxes and
b. Specific property involved of lesser valuewill be assessments upon the immovable property or real right.
treated as ordinary preferred credits and to be paid
(1927a)
in the order of preference therein provided
2. Ordinary preferred creditsonly in respect of the Art. 2250. The excess, if any, after the payment of the
insolvents free property, is an order of priority
credits which enjoy preference with respect to specific
established. In this sequence, certain taxes and property, real or personal, shall be added to the free
assessments also figure but, as already pointed out, these
property which the debtor may have, for the payment of the
dont have the same kind of overriding preference other credits. (1928a)
Art. 2245. Credits of any other kind or class, or by any other TWO-TIER ORDER OF PREFERENCE
right or title not comprised in the four preceding articles, First tier includes only taxes, duties and fees due on a
shall enjoy no preference. (1925)
specific movable or immovable property
All other special preferred credits stand on the second tier
NON-PREFERRED OR COMMON CREDITS
to be satisfied pari passu and pro rata, out of the residual
Credits other than those mentioned in 2241, 2242, and value of the specific property to which such other credits
2244 shall enjoy no preference and such common credits
relate
shall be paid pro rata regardless of dates
The pro-rata rule however doesnt apply to credits
annotated in the RD in virtue of a judicial order, by
ORDER OF PREFERENCE OF CREDITS
attachments and executions, which are preferred to later
credits. In satisfying several credits annotated by
Art. 2246. Those credits which enjoy preference with
attachments and executions, the rule is still preference
respect to specific movables, exclude all others to the according to the priority of credits in the order of time.
extent of the value of the personal property to which the
preference refers.
PROCEEDING FOR PAYMENT PRO RATA OF PREFERRED
CREDITORS
Art. 2247. If there are two or more credits with respect to
Proceeding required for adjudication of claims of preferred
the same specific movable property, they shall be satisfied creditors
Pro rata rule contemplates more than one creditor

BY: MA. ANGELA LEONOR C. AGUINALDO

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CM (1M)
Art. 2251. Those credits which do not enjoy any preference TOTAL P500K
with respect to specific property, and those which enjoy
preference, as to the amount not paid, shall be satisfied CASH PLUS EXCESS P3M
according to the following rules: INCOME TAX (500K)
SUBTOTAL P2.5M
(1) In the order established in Article 2244; PN1 (1M)
JUDGMENT (1M)
(2) Common credits referred to in Article 2245 shall be paid TOTAL P500K
pro rata regardless of dates. (1929a)

SUMMARY AS TO ORDER OF PREFERENCE PRESIDENTIAL DECREE NO. 902-A - REORGANIZATION OF

1. Preferred lien on specific immovables THE SECURITIES AND EXCHANGE COMMISSION WITH
2. Preferred lien on specific movables ADDITIONAL POWERS AND PLACING THE SAID AGENCY
3. Special preferred credits UNDER THE ADMINISTRATIVE SUPERVISION OF THE
4. Distribute pro-rata to creditors without preference OFFICE OF THE PRESIDENT

Section 5. In addition to the regulatory and adjudicative

DEBTOR
functions of the Securities and Exchange Commission over
ASSETS:
1. CAR, P1.5M corporations, partnerships and other forms of associations
2. HOUSE AND LOT, P5M registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and
3. CASH, P1.5M
decide cases involving.
LIABILITIES:
1. CHATTEL MORTGAGE, P 1M a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partnership,
2. REM, P3M
3. INCOME TAX, P500 K amounting to fraud and misrepresentation which may be
4. PN1, NOTARIZED, D1, P1M detrimental to the interest of the public and/or of the stockholder,
partners, members of associations or organizations registered with
5. PN2, D3, P1M
6. JUDGMENT, D2, P1M the Commission;
7. PN3, D0, P1M
8. SELLER, UNPAID, HOUSE AND LOT, P1M b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
HOUSE AND LOT P 5M
SELLER (1M) partnership or association of which they are stockholders,
members or associates, respectively; and between such
REM (3M)
TOTAL P1M corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such entity;
CAR P1.5M

BY: MA. ANGELA LEONOR C. AGUINALDO

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c) Controversies in the election or appointments of directors, d) To create and appoint a management committee, board,
trustees, officers or managers of such corporations, partnerships or body upon petition or motu propio to undertake the
or associations. management of corporations, partnerships or other
associations in appropriate cases when there is imminent
d) Petitions of corporations, partnerships or associations to danger of dissipation, loss, wastage or destruction of assets
be declared in the state of suspension of payments in cases or other properties or paralyzation of business operations
where the corporation, partnership or association of such corporations or entities which may be prejudicial to
possesses sufficient property to cover all its debts but the interest of minority stockholders, parties-litigants or
foresees the impossibility of meeting them when they the general public.
respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover The management committee or rehabilitation receiver,
its liabilities, but is under the management of a board or body shall have the power to take custody of and
Rehabilitation Receiver or Management Committee created control over, all the existing assets and property of such
pursuant to this Decree. entities under management; to evaluate the existing assets
and liabilities, earnings and operations of such
Section 6. In order to effectively exercise such jurisdiction, the corporations, partnerships or other associations; to
Commission shall possess the following powers: determine the best way to salvage and protect the interest
of the investors and creditors; to study, review and
xxx evaluate the feasibility of continuing operations and
restructure and rehabilitate such entities if determined to
c) To appoint one or more receivers of the property, real or be feasible by the Commission. It shall report and be
personal, which is the subject of the action pending before responsible to the Commission until dissolved by order of
the Commission in accordance with the pertinent provisions the Commission. Provided, however, That the Commission,
of the Rules of Court in such other cases whenever may, on the basis of the findings and recommendation of
necessary in order to preserve the rights of the parties- the management committee, or rehabilitation receiver,
litigants and/or protect the interest of the investing public board or body, or on its own findings, determine that the
and creditors. Provided, however, That the Commission continuance in business of such corporation or entity would
may, in appropriate cases, appoint a Rehabilitation Receiver not be feasible or profitable nor work to the best interest of
who shall have, in addition to the powers of a regular the stockholders, parties-litigants, creditors, or the general
receiver under the provisions of the Rules of Court, such public, order the dissolution of such corporation entity and
functions and powers as are provided for in the succeeding its remaining assets liquidated accordingly. The
paragraph d) hereof. Provided, further, that upon management committee or rehabilitation receiver, board or
appointment of a management committee, rehabilitation body may overrule or revoke the actions of the previous
receiver, board or body, pursuant to this Decree, all actions management and board of directors of the entity or entities
for claims against corporations, partnerships or under management notwithstanding any provision of law,
associations under management or receivership pending articles of incorporation or by-laws to the contrary.
before any court, tribunal, board or body shall be
suspended accordingly.

BY: MA. ANGELA LEONOR C. AGUINALDO

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The management committee, or rehabilitation receiver,

board or body shall not be subject to any action, claim or WHAT CAN BE DONE?
demand for, or in connection with, any act done or omitted 1. Sit nominate in the management committee and then
to be done by it in good faith in the exercise of its functions, execute a contract with the corporation.
or in connection with the exercise of its power herein 2. As a creditor, you dont want the scenario that with the
conferred. stockholders, receiver/management committee, you will be
the least to get something. The most advisable thing to do
is to get the P100M now and leave the P50M. Its better to
DEBTOR CORPORATION get the 50% now than the 100% latertime value of
ASSETS P150M money.
LIABILITIES P300M 3. JPSP: As a lawyer in the future, be a part of the
C1 management committee, or be a receiver, or be a lawyer
for the debtor corporation.
C50
(C1: MORTGAGE, C2: PLEDGEE, C3: MORTGAGE) DISTINCTION BETWEEN SUSPENSION OF PAYMENTS
UNDER CC AND SUSPENSION OF PAYMENTS UNDER PD 902-
JPSP NOTES: A
1. Under the Insolvency Law, provided if its qualified, the SUSPENSION OF PAYMENTS SUSPENSION OF PAYMENTS
foreclosure of C1 will not be stopped. CC PD 902-A
2. Under PD902-A, the debtor will still be qualified for At the time of application, Liabilities may be more than
suspension of payments. If the judge grants, all creditors assets must be sufficient to assets at the time of application
will be affected. Even if one creditor obtains judgment in cover liabilities but there is the provided that there would be an
its favor, execution shall be suspended. possibility of not meeting them appointment of a receiver or
when they fall due. management committee
JPSP ILLUSTRATES
P 400M THE GOOD JPSP NOTES:
1. For the creditor, if you see that the debtor is in financial
P 200M distress, foreclose outright. Always remember the play
when it comes to foreclosure of pledges, mortgages, etc.
0 PLEDGE IS ALWAYS TO BE THE LAST TO FORECLOSE.
2. Watch the actions of the receiver or management
AND SAYS...AT THE END OF THE DAY committee
3. Sue for insolvency
IF YOU ARE THE CREDITOR, WOULD YOU WANT TO
GAMBLE? As the creditor, you may want to get the P150 M now. WHAT HAPPENS WHEN THE COURT RULES FOR
In the above scenario, there is no risk for the debtor. It is all for SUSPENSION OF PAYMENTS UNDER PD902-A?
his benefit. The suspension will grant the debtor access to the 1. Must rule if rehabilitation is possible
remaining assets. 2. Order for partial payments to the creditors using the
receivership

BY: MA. ANGELA LEONOR C. AGUINALDO

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3. In suspension of payments, there could be other things Board may appoint a conservator connected with the Bangko
instituted like compromise agreements Sentral, in which case he shall not be entitled to receive any
remuneration or emolument from the Bangko Sentral during the
WHAT ARE THE SEVERAL WAYS TO LIQUIDATE? conservatorship. The expenses attendant to the conservatorship
1. Shorten the corporate term through the SEC shall be borne by the bank or quasi-bank concerned.
2. With regard banks, the provisions of the Central Bank Act
will apply, particularly Sections 29-33 The Monetary Board shall terminate the conservatorship when it is
satisfied that the institution can continue to operate on its own and
NEW CENTRAL BANK ACT the conservatorship is no longer necessary. The conservatorship
RE: RECEIVERSHIP AND LIQUIDATION shall likewise be terminated should the Monetary Board, on the
basis of the report of the conservator or of its own findings,
Section 29. Appointment of Conservator. - Whenever, on the basis determine that the continuance in business of the institution would
of a report submitted by the appropriate supervising or examining involve probable loss to its depositors or creditors, in which case
department, the Monetary Board finds that a bank or a quasi-bank the provisions of Section 30 shall apply.
is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of Section 30. Proceedings in Receivership and Liquidation. -
depositors and creditors, the Monetary Board may appoint a Whenever, upon report of the head of the supervising or
conservator with such powers as the Monetary Board shall deem examining department, the Monetary Board finds that a bank or
necessary to take charge of the assets, liabilities, and the quasi-bank:
management thereof, reorganize the management, collect all
monies and debts due said institution, and exercise all powers (a) is unable to pay its liabilities as they become due in the
necessary to restore its viability. The conservator shall report and ordinary course of business: Provided, That this shall not include
be responsible to the Monetary Board and shall have the power to inability to pay caused by extraordinary demands induced by
overrule or revoke the actions of the previous management and financial panic in the banking community;
board of directors of the bank or quasi-bank.
The conservator should be competent and knowledgeable in bank (b) has insufficient realizable assets, as determined by the Bangko
operations and management. The conservatorship shall not exceed Sentral, to meet its liabilities; or
one (1) year.
(c) cannot continue in business without involving probable losses
The conservator shall receive remuneration to be fixed by the to its depositors or creditors; or
Monetary Board in an amount not to exceed two-thirds (2/3) of the
salary of the president of the institution in one (1) year, payable in (d) has willfully violated a cease and desist order under Section 37
twelve (12) equal monthly payments: Provided, That, if at any that has become final, involving acts or transactions which amount
time within one-year period, the conservatorship is terminated on to fraud or a dissipation of the assets of the institution; in which
the ground that the institution can operate on its own, the cases, the Monetary Board may summarily and without need for
conservator shall receive the balance of the remuneration which he prior hearing forbid the institution from doing business in the
would have received up to the end of the year; but if the Philippines and designate the Philippine Deposit Insurance
conservatorship is terminated on other grounds, the conservator Corporation as receiver of the banking institution.
shall not be entitled to such remaining balance. The Monetary

BY: MA. ANGELA LEONOR C. AGUINALDO

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For a quasi-bank, any person of recognized competence in banking

or finance may be designed as receiver. (2) convert the assets of the institutions to money, dispose of the
same to creditors and other parties, for the purpose of paying the
The receiver shall immediately gather and take charge of all the debts of such institution in accordance with the rules on
assets and liabilities of the institution, administer the same for the concurrence and preference of credit under the Civil Code of the
benefit of its creditors, and exercise the general powers of a Philippines and he may, in the name of the institution, and with
receiver under the Revised Rules of Court but shall not, with the the assistance of counsel as he may retain, institute such actions
exception of administrative expenditures, pay or commit any act as may be necessary to collect and recover accounts and assets of,
that will involve the transfer or disposition of any asset of the or defend any action against, the institution. The assets of an
institution: Provided, That the receiver may deposit or place the institution under receivership or liquidation shall be deemed in
funds of the institution in non-speculative investments. The custodia legis in the hands of the receiver and shall, from the
receiver shall determine as soon as possible, but not later than moment the institution was placed under such receivership or
ninety (90) days from take over, whether the institution may be liquidation, be exempt from any order of garnishment, levy,
rehabilitated or otherwise placed in such a condition so that it may attachment, or execution.
be permitted to resume business with safety to its depositors and
creditors and the general public: Provided, That any determination The actions of the Monetary Board taken under this section or
for the resumption of business of the institution shall be subject to under Section 29 of this Act shall be final and executory, and may
prior approval of the Monetary Board. not be restrained or set aside by the court except on petition for
certiorari on the ground that the action taken was in excess of
If the receiver determines that the institution cannot be jurisdiction or with such grave abuse of discretion as to amount to
rehabilitated or permitted to resume business in accordance with lack or excess of jurisdiction. The petition for certiorari may only
the next preceding paragraph, the Monetary Board shall notify in be filed by the stockholders of record representing the majority of
writing the board of directors of its findings and direct the receiver the capital stock within ten (10) days from receipt by the board of
to proceed with the liquidation of the institution. The receiver directors of the institution of the order directing receivership,
shall: liquidation or conservatorship.

(1) file ex parte with the proper Regional Trial Court, and without The designation of a conservator under Section 29 of this Act or
requirement of prior notice or any other action, a petition for the appointment of a receiver under this section shall be vested
assistance in the liquidation of the institution pursuant to a exclusively with the Monetary Board. Furthermore, the designation
liquidation plan adopted by the Philippine Deposit Insurance of a conservator is not a precondition to the designation of a
Corporation for general application to all closed banks. In case of receiver.
quasi-banks, the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall, upon motion by Section 31. Distribution of Assets. - In case of liquidation of a bank
the receiver after due notice, adjudicate disputed claims against or quasi-bank, after payment of the cost of proceedings, including
the institution, assist the enforcement of individual liabilities of the reasonable expenses and fees of the receiver to be allowed by the
stockholders, directors and officers, and decide on other issues as court, the receiver shall pay the debts of such institution, under
may be material to implement the liquidation plan adopted. The order of the court, in accordance with the rules on concurrence
receiver shall pay the cost of the proceedings from the assets of and preference of credit as provided in the Civil Code.
the institution.

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Section 32. Disposition of Revenues and Earnings. - All revenues Section 68. Voluntary Liquidation. - In case of voluntary liquidation
and earnings realized by the receiver in winding up the affairs and of any bank organized under the laws of the Philippines, or of any
administering the assets of any bank or quasi-bank within the branch or office in the Philippines of a foreign bank, written notice
purview of this Act shall be used to pay the costs, fees and of such liquidation shall be sent to the Monetary Board before such
expenses mentioned in the preceding section, salaries of such liquidation shall be sent to the Monetary Board before such
personnel whose employment is rendered necessary in the liquidation is undertaken, and the Monetary Board shall have the
discharge of the liquidation together with other additional right to intervene and take such steps as may be necessary to
expenses caused thereby. The balance of revenues and earnings, protect the interests of creditors. (86)
after the payment of all said expenses, shall form part of the
assets available for payment to creditors. Section 69. Receivership and Involuntary Liquidation. - The
grounds and procedures for placing a bank under receivership or
Section 33. Disposition of Banking Franchise. - The Bangko Sentral liquidation, as well as the powers and duties of the receiver or
may, if public interest so requires, award to an institution, upon liquidator appointed for the bank shall be governed by the
such terms and conditions as the Monetary Board may approve, provisions of Sections 30, 31, 32, and 33 of the New Central Bank
the banking franchise of a bank under liquidation to operate in the Act: Provided, That the petitioner or plaintiff files with the clerk or
area where said bank or its branches were previously operating: judge of the court in which the action is pending a bond, executed
Provided, That whatever proceeds may be realized from such in favor of the Bangko Sentral, in an amount to be fixed by the
award shall be subject to the appropriate exclusive disposition of court. This Section shall also apply to the extent possible to the
the Monetary Board. receivership and liquidation proceedings of quasi-banks. (n)

Section 70. Penalty for Transactions After a Bank Becomes

REPUBLIC ACT No.8791 March 7, 2000 Insolvent. - Any director or officer of any bank declared insolvent
PROVIDING FOR THE REGULATION OF THE ORGANIZATION or placed under receivership by the Monetary Board who refuses to
AND OPERATIONS OF BANKS, QUASI-BANKS
turn over the bank's records and assets to the designated
receivers, or who tampers with banks records, or who appropriates
CHAPTER V
for himself for another party or destroys or causes the
PLACEMENT UNDER CONSERVATORSHIP misappropriation and destruction of the bank's assets, or who
receives or permits or causes to be received in said bank any
Section 67. Conservatorship. - The grounds and procedures for
deposit, collection of loans and/or receivables, or who pays out or
placing a bank under conservatorship, as well as, the powers and permits or causes to be transferred any securities or property of
duties of the conservator appointed for the bank shall be governed
said bank shall be subject to the penal provisions of the New
by the provisions of Section 29 and the last two paragraphs of
Central Bank Act. (85a)
Section 30 of the New Central Bank Act: Provided, That this
Section shall also apply to conservatorship proceedings of quasi-
banks. (n) THREE LEVELS OF REHABILITATION
1. Conservatorship
CHAPTER VI 2. Receivership
CESSATION OF BANKING BUSINESS 3. Liquidation

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CONSERVATORSHIP: CONSERVATOR
With such powers as the Monetary Board shall deem WHEN CAN THE MONETARY BOARD TERMINATE THE
necessary to take charge of the assets, liabilities, and the CONSERVATORSHIP?
management thereof, reorganize the management, collect 1. The Monetary Board shall terminate the conservatorship
all monies and debts due said institution, and exercise all when it is satisfied that the institution can continue to
powers necessary to restore its viability. operate on its own and the conservatorship is no longer
The conservator shall report and be responsible to the necessary.
Monetary Board and shall have the power to overrule or 2. The conservatorship shall likewise be terminated should
revoke the actions of the previous management and board the Monetary Board, on the basis of the report of the
of directors of the bank or quasi-bank. conservator or of its own findings, determine that the
continuance in business of the institution would involve
WHO CAN BE A CONSERVATOR? (FOLLOW UP QUESTION: probable loss to its depositors or creditors, in which case
WHO OF YOUR PROFESSORS CAN BE A CONSERVATOR?) the provisions of Section 30 shall apply.
The conservator should be competent and knowledgeable
in bank operations and management. RECEIVERSHIP: RECEIVER
1. Unable to pay its liabilities as they become due in the
HOW LONG SHOULD THE CONSERVATORSHIP LAST? ordinary course of business: Provided, That this shall not
The conservatorship shall not exceed one (1) year. include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;
WOULD YOU WANT TO BE A CONSERVATOR? HOW IS A 2. Has insufficient realizable assets, as determined by the
CONSERVATOR COMPENSATED? Bangko Sentral, to meet its liabilities; or
The conservator shall receive remuneration to be fixed by 3. Cannot continue in business without involving probable
the Monetary Board in an amount not to exceed two-thirds losses to its depositors or creditors; or
(2/3) of the salary of the president of the institution in one 4. Has willfully violated a cease and desist order that has
(1) year, payable in twelve (12) equal monthly payments become final, involving acts or transactions which amount
Provided, That, if at any time within one-year period, the to fraud or a dissipation of the assets of the institution.
conservatorship is terminated on the ground that the *PDIC IS THE ONLY RECEIVER.
institution can operate on its own, the conservator shall
receive the balance of the remuneration which he would WHY IS THE INTEREST OF PDIC IN LINE WITH THE BANK?
have received up to the end of the year; but if the Failure on the part of the bank to pay means that they will
conservatorship is terminated on other grounds, the pay
conservator shall not be entitled to such remaining Upon payment, they will be subrogated to the rights of the
balance. debtor
The Monetary Board may appoint a conservator connected
with the Bangko Sentral, in which case he shall not be DUTIES OF RECEIVER
entitled to receive any remuneration or emolument from 1. Gather and take charge of all the assets and liabilities of
the Bangko Sentral during the conservatorship. The the institution
expenses attendant to the conservatorship shall be borne 2. Administer the same for the benefit of its creditors
by the bank or quasi-bank concerned.

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3. Exercise the general powers of a receiver under the and with the assistance of counsel as he may retain,
Revised Rules of Court but shall not, with the exception of institute such actions as may be necessary to collect
administrative expenditures, pay or commit any act that and recover accounts and assets of, or defend any
will involve the transfer or disposition of any asset of the action against, the institution.
institution: Provided, That the receiver may deposit or
place the funds of the institution in non-speculative c. The assets of an institution under receivership or
investments. liquidation shall be deemed in custodia legis in the
4. The receiver shall determine as soon as possible, but not hands of the receiver and shall, from the moment the
later than ninety (90) days from take over, whether the institution was placed under such receivership or
institution may be rehabilitated or otherwise placed in such liquidation, be exempt from any order of garnishment,
a condition so that it may be permitted to resume business levy, attachment, or execution.
with safety to its depositors and creditors and the general
public. The actions of the Monetary Board taken under this section
N.B: Most efficient government institution. JPSP certain that this or under Section 29 of this Act shall be final and
has been drafted not be Congress but someone in the know. executory, and may not be restrained or set aside by the
court except on petition for certiorari on the ground that
LIQUIDATION: LIQUIDATOR (PDIC) the action taken was in excess of jurisdiction or with such
If the receiver determines that the institution cannot be grave abuse of discretion as to amount to lack or excess of
rehabilitated or permitted to resume business in jurisdiction.
accordance with the next preceding paragraph, the The petition for certiorari may only be filed by the
Monetary Board shall notify in writing the board of stockholders of record representing the majority of the
directors of its findings and direct the receiver to proceed capital stock within ten (10) days from receipt by the
with the liquidation of the institution. The receiver shall: board of directors of the institution of the order directing
receivership, liquidation or conservatorship.
a. File ex parte with the proper Regional Trial Court, and
without requirement of prior notice or any other action, JPSP: MORTGAGE IN FAVOR OF THE BANK IS AN EXAMPLE
a petition for assistance in the liquidation of the OF DISTRUST OF JUDICIAL PROCEEDINGS
institution pursuant to a liquidation plan adopted by Petition to be given due course, there must be posting of
the Philippine Deposit Insurance Corporation for bond outright
general application to all closed banks. In case of Purchaser will have outright possession
quasi-banks, the liquidation plan shall be adopted by
the Monetary Board. THE INSOLVENCY LAW
ACT NO. 1956
b. Convert the assets of the institutions to money,
dispose of the same to creditors and other parties, for TITLE AND GENERAL SUBJECT OF THE ACT
the purpose of paying the debts of such institution in
accordance with the rules on concurrence and SECTION 1. This Act shall be known and may be cited as
preference of credit under the Civil Code of the The Insolvency Law, and in accordance with its provisions
Philippines and he may, in the name of the institution,

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every insolvent debtor may be permitted to suspend

payments or be discharged from his debts and liabilities. He shall necessarily annex to his petition a schedule and
inventory in the form provided in sections fifteen, sixteen,
INSOLVENCY, DEFINED. and seventeen of this Act, in addition to the statement of
Generally denotes the state of a person whose liabilities his assets and liabilities and the proposed agreement he
are more than his assets requests of his creditors.
Relative condition of a mans assets and liabilities that the
former if all made immediately available, wouldnt be SECTION 3. Meeting of Creditors; Injunction. Upon
sufficient to discharge the latter receiving and filing the petition with the schedule and
documents mentioned in the next preceding section, the
INSOLVENCY PRIMARILY GOVERNED BY CIVIL CODE court, or the judge thereof in vacation, shall make an order
Insolvency shall be governed by special laws insofar as calling a meeting of creditors to take place in not less than
they are not inconsistent with the CC two weeks nor more than eight weeks from the date of such
Special law referred to is the Insolvency Law order. Said order shall designate the day, hour, and place of
meeting of said creditors as well as a newspaper of general
PURPOSES OF THE INSOLVENCY LAW circulation published in the province or city in which the
1. To effect an equitable distribution of the bankrupts petition is filed, if there be one, and if there be none, in a
property among his creditors newspaper which, in the judgment of the judge, will best
2. To benefit the debtor in discharging him from his liabilities give notice to the creditors of the said debtor, and in the
and enabling him to start afresh with the property set newspaper so designated said order shall be published as
apart to him as exempt often as may be prescribed by the court or the judge
thereof.
WHAT MAYBE PERMITTED OF A DEBTOR BY THE
INSOLVENCY LAW Said order shall further contain an absolute injunction
1. To petition the court to suspend payments of his debts forbidding the petitioning debtor from disposing in any
2. To be discharged from his debts and liabilities by voluntary manner of his property, except in so far as concerns the
or involuntary proceedings ordinary operations of commerce or of industry in which the
petitioner is engaged, and, furthermore, from making any
SUSPENSION OF PAYMENTS payments outside of the necessary or legitimate expenses
of his business or industry, so long as the proceedings
SECTION 2. Petition. The debtor who, possessing relative to the suspension of payments are pending, and
sufficient property to cover all his debts, be it an individual said proceedings for the purposes of this Act shall be
person, be it a sociedad or corporation, foresees the considered to have been instituted from the date of the
impossibility of meeting them when they respectively fall filing of the petition.
due, may petition that he be declared in the state of
suspension of payments by the court, or the judge thereof SECTION 4. Publication order; Deposit. A copy of said
in vacation, of the province or of the city in which he has order shall immediately be published 1 by the clerk of said
resided for six months next preceding the filing of his court, in the newspaper designated therein, for the number
petition. of times and in the form prescribed by the court or the

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judge thereof, and the clerk of said court shall cause a copy
of said order to be delivered personally or to be sent SECTION 7. Creditors may be represented at the meeting
forthwith by registered mail, postage prepaid, to all by one or more lawyers or by any person authorized by
creditors named in the schedule. There shall be deposited in power of attorney, which document shall be presented and
addition to the sum of twenty-four Philippine pesos, which be attached to the record.
shall be paid to the clerk for the filing and registration of
the petition, including all proceedings until the expediente Persons appearing for more than one creditor shall have
is completed, an amount sufficient to defray all expense of only one personal vote, but the claims presented by them
publication ordered by the court, necessary postage, and shall be taken into consideration for the purpose of arriving
ten centavos for each copy, to be delivered personally or at the majority of the amount represented.
mailed to the creditors, which last-named sum is hereby
constituted the legal fee of the clerk for the personal SECTION 8. Creditors necessary to hold a meeting;
delivery or mailing required by this section. Meeting; Minutes of the meeting. The presence of the
creditors representing at least three-fifths the liabilities
SECTION 5. Creditors cited to appear. Only creditors shall be necessary for holding a meeting. The meeting shall
included in the schedule filed by the debtor shall be cited to be held on the day and at the hour and place designated,
appear and take part in the meeting mentioned in section the judge, or commissioner deputized by him when he is
three, and they shall be notified upon delivery or absent from the province where the meeting is held, acting
transmission to them of a copy of the order calling the as president and the clerk as secretary thereof, subject to
meeting to appear at same with the written evidences of the following rules:
their respective claims, without which they shall not be
admitted. (a) The clerk shall prepare for insertion in the minutes of
the meeting a statement of the persons present and their
SECTION 6. Pending Execution. If any execution be claims; the judge, or, in default thereof, the commissioner,
pending against the debtor it shall not be consolidated with shall examine the written evidences of the claims and the
this proceeding, but the course thereof shall be suspended powers of attorney, if any. If the persons present who have
before sale of property is made thereunder, provided the complied with the foregoing rules represent at least three-
debtor makes a request therefor to the court before which fifths of the liabilities, the judge or commissioner shall
the proceeding for suspension of payments is pending, declare the meeting open for business.
unless the execution be against property especially
mortgaged which is hereby exempted from the least the (b) The petition of the debtor, the schedule of debts and
provisions of this section. The suspension ordered by virtue of property, the statement of assets and liabilities, and the
of this section shall lapse when three months shall have proposed agreement filed there- with shall be read
passed without the proposed agreement being accepted by forthwith by the clerk, and the discussion shall be opened.
the creditors or as soon as it is denied. No creditor and the
other than those mentioned in section nine shall sue or (c) The debtor may modify his proposition or propositions
institute proceedings to collect his claim from the debtor in view of the result of the debate, or insist upon the ones
from the moment that suspension of payments is applied already made, and the judge or commissioner, without
for and while the proceedings are pending. further discussion, shall clearly and succinctly place these

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several propositions before the meeting for a vote thereat, or if the two majorities mentioned in rule (e) of
thereupon. section eight are not in favor thereof, even if the negative
vote itself does not receive such majorities.
(d) The vote shall be taken by a call of names and shall be
inserted in and the minutes; a majority vote shall rule. SECTION 11. Termination of proceedings without
recourse; Court hearing. If the decision of the meeting be
(e) To form a majority it is necessary negative as regards the proposed agreement or if no
decision is had in default of such number or of such
1. That two-thirds of the creditors voting unite upon the majorities, the proceeding shall be terminated without
same position. recourse and the parties concerned shall be at liberty to
enforce the rights which may correspond to them. If the
2. That the claims represented by said majority vote decision is favorable to the debtor it may be objected to
amount to at least three-fifths of the total liabilities of the within ten days following the date of the meeting by any
debtor mentioned in the petition. creditor who attended the meeting and who dissented from
and protested against the vote of the majority. The
(f) After the result of the voting has been announced, all opposition or objection to the decision of the majority
protests made against the majority vote shall be drawn up, favorable to the debtor shall be proceeded with as in any
and there shall be inserted therein the proposition or other incidental motion, the debtor and the creditors who
propositions voted upon, which, after having been read and shall appear declaring their purpose to sustain the decision
approved, shall be signed by the judge or commissioner of the meeting being the defendants. The court shall hear
together with all persons taking part in the voting; if any and pass upon such objection as soon as possible in a
such persons shall be unable to write, any person present summary manner, and in its order, which shall be final, it
shall sign, at their request, and the clerk shall certify to all shall declare whether or not the decision of the meeting is
of the above. valid. In case that the decision of the meeting is held to be
null, the court shall declare the proceeding terminated and
SECTION 9. Persons who may refrain from voting. the parties concerned at liberty to exercise the rights which
Persons having claims for personal labor, maintenance, may correspond to them; and in case the decision of the
expenses of last illness and funeral of the wife or children meeting is declared valid, or when no opposition or
of the debtor, incurred in the sixty days immediately objection to said decision has been presented, the court
preceding the filing of the petition, and persons having shall order that the agreement be carried out and the
legal or contractual mortgages, may refrain from attending persons concerned shall be bound by the decision of the
the meeting and from voting therein. Such persons shall not meeting. The court may also issue all orders which may be
be bound by any agreement determined upon at such proper to enforce the agreement on motion of any of the
meeting, but if they should join in the voting they shall be parties litigant. The order directing the agreement to be
bound in the same manner as are the other creditors. made effective shall be binding upon all creditors included
in the schedule of the debtor who may have been properly
SECTION 10. Rejection of agreement. The proposed summoned, but not upon creditors mentioned in section
agreement shall be deemed rejected if the number of nine who failed to attend the meeting or refrained from
creditors required for holding a meeting do not attend voting therein, and their rights shall not be affected by the

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agreement unless they may have expressly or impliedly STEPS IN SUSPENSION OF PAYMENTS
consented thereto. 1. Filing of petition by the debtor
2. Issuance by the court of an order calling a meeting of
SECTION 12. The causes for which objection may be made creditors
to the decision of the meeting shall be 3. Publication of the order and service of summons
4. Meeting of creditors for the consideration of the debtors
(a) Defects in the call for the meeting, in the holding proposition
thereof, and in and the deliberations had thereat which 5. Approval of the creditors of the debtors proposition
prejudice the rights of the creditors; 6. Objections, if any, to the decision which must be made
within 10 days following the meeting
(b) Fraudulent connivance between one or more creditors 7. Issuance of order by the court directing that the
and in debtor to vote in favor of the proposed agreement; agreement be carried out in case the decision is declared
valid, or when no objection to said decision has been
(c) Fraudulent conveyance of claims for the purpose of presented
obtaining a majority.
REQUISITES OF PETITION FOR SUSPENSION OF PAYMENTS
SECTION 13. Failure of debtor to perform agreement. If THE PETITION TO BE FILED BY A DEBTOR
the debtor fails wholly or in part to perform the agreement 1. Possessing sufficient property to cover all debts
decided upon at the meeting of the creditors, all the rights 2. Foreseeing the impossibility of meeting them when they
which the creditors had against the debtor before the respectively fall due
agreement shall revest in them. In such case the debtor 3. Petitioning that he be declared in the state of suspension
may be made subject to the bankruptcy and insolvency of payments
proceedings in the manner established by the following 4. The petition need not be verified (Verification is when the
chapters of this Act. debtor would affirm all allegations and statement of facts)

SUSPENSION OF PAYMENTS DOCUMENTS TO ACCOMPANY PETITION

Postponement by court order of the payment of debts of 1. A verified schedule containing a full and true statement of
one who, while possessing sufficient property to cover his the debts and liabilities of the petitioner together with a list
debts, foresees the impossibility of meeting them when of creditors, including the residence, sum due each, nature
they respectively fall due of liability, consideration thereof, and any existing pledge,
lien or security
PURPOSE AND BASIS OF SUSPENSION OF PAYMENTS 2. A verified inventory containing a list of creditors, an
1. The purpose of a suspension of payments is to suspend or accurate description of all the property, real and personal,
delay the payment of debts the amount of which isnt of the petitioner including property exempt from execution
affected although a postponement is declared and a statement as to the value of each item of property,
2. The basis is the probability of the debtors inability to meet its location, and encumbrances thereon, if any
his obligation when they respectively fall due, despite the 3. A statement of his assets and liabilities
fact that he has sufficient assets to cover all his liabilities 4. The proposed agreements he requests of his creditors

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EFFECTS OF FILING OF PETITION 2. When the two majorities required are not in favor of the
1. No disposition in any manner of his property may be made proposed agreement
by the petitioner except insofar as concerns the ordinary
operations of commerce or of industry in which he is EFFECT OF DISAPPROVAL OF PETITION
engaged If the decision of the meeting be negative as regards the
2. No payments may be made by the petitioner except in the proposed agreement or if no decision is had in default of
ordinary course of business or industry such number of such majorities, the proceedings shall be
3. Upon request to the court, all pending executions against terminated without recourse
the debtor shall be suspended except execution against In such case, the parties concerned shall be at liberty to
property especially mortgaged enforce the rights which correspond to them

CREDITORS AFFECTED BY FILING OF PETITION CAUSES FOR WHICH OBJECTION MAY BE MADE TO
Only creditors included in the schedules filed by the debtor DECISION OF THE MEETING
shall be cited to appear and to take part in the meeting Defects in the call for the meeting, in the holding thereof,
Hence those who didnt appear because they were not and in the deliberation had there at which prejudice the
informed of the proceedings are unaffected by the same rights of the creditors
Fraudulent connivance between one or more creditors and
CREDITORS NOT AFFECTED BY ORDER OF SUSPENSION OF the debtor in favor of the proposed agreement
PAYMENTS Fraudulent conveyance of claims for the purpose of
1. Persons having claims for personal labor, maintenance, obtaining a majority
expenses of last illness and funeral of the wife or children
of the debtor incurred in 60 days immediately preceding VOLUNTARY INSOLVENCY
the filing of the petition
2. Persons having legal or contractual mortgages SECTION 14. Application. An insolvent debtor, owing
debts exceeding in amount the sum of one thousand pesos,
RULE OF DOUBLE MAJORITY IN THE MEANING OF may apply to be discharged from his debts and liabilities by
CREDITORS petition to the Court of First Instance of province or city in
The majority shall be 2/3 of the creditors voting upon the which he has resided for six months next preceding the
same proposition, which 2/3 represent at least 3/5 of the filing of such petition. In his petition he shall set forth his of
total liabilities of the debtor residence, the period of his residence therein immediately
Any creditor, at any stage of the proceedings, may be prior to filing said petition, his inability to pay all his debts
represented by his attorney or duly authorized agent who in full, his willingness to surrender all his property, estate,
shall be entitled to vote when properly authorized at any and effects not exempt from execution for the benefit of his
creditors meeting as and for his principal creditors, and an application to be adjudged an insolvent.
He shall annex to his petition a schedule and inventory in
WHEN PETITION FOR SUSPENSION OF PAYMENTS DEEMED the form herein-after provided. The filing of such petition
REJECTED shall be an act of insolvency.
1. When the number of creditors representing at least 3/5 of
the liabilities dont attend SECTION 15. Statement of debts and liabilities. Said

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schedule must contain a full and true statement of all his contracts whereby any money may hereafter become due or
debts and liabilities, together with a list of all those to payable to me or by or through which any benefit or
whom, to the best of his knowledge and belief, said debts or advantage whatever may accrue to me or to my use, or to
liabilities are due, the place of residence of his creditors any other person or persons in trust for me. The schedule
and the sum due each the nature of the indebtedness or contains a clear outline of the facts giving rise, or which
liability and whether founded on written security, might give rise, to a cause of action against me, and the
obligation, contract or otherwise, the true cause and inventory contains an outline of the facts giving rise, or
consideration thereof, the time and place when and where which might give rise, to any cause of action in my favor. I
such indebtedness or liability accrued, a declaration of any had no lands, money, stock, or estate, reversion, or
existing pledge, lien, mortgage, judgment, or other security expectancy, or property of any kind, except that set forth in
for the payment of the debt or liability, and an outline of the said inventory. I have no instance created or acknowledged
facts giving rise or which might give rise to a cause of a debt for a greater sum than I honestly and truly owe. I
action against such insolvent debtor. have not, directly or indirectly, concealed, fraudulently sold,
or otherwise fraudulently disposed of, any part of my real
SECTION 16. Description of real and personal property. or personal property, estate, effects, or rights of action, and
Said inventory must contain, besides the creditors, an I have not in any way compounded with any of my creditors
accurate description of all the real and personal property, in order to secure such creditors, or to receive or to accept
estate, and effects of the petitioner, including his any profit or advantage therefrom, or to defraud or deceive
homestead, if any, together with a statement of the value of in any manner any creditor to whom I am indebted. So help
each item of said property, estate, and effects and its me God."
location, and a statement of the encumbrances thereon. All
property exempt by law from execution 2 shall be set out in SECTION 18. Order of court declaring petitioner insolvent;
said inventory with a statement of its valuation, location, Publication notice. Upon receiving and filing said petition,
and the encumbrances thereon, if any. The inventory shall schedule, and inventory, the court, or the judge thereof in
contain an outline of the facts giving rise, or which might vacation, shall make an order declaring the petitioner
give rise, to a right of action in favor of the insolvent insolvent, and directing the sheriff of the province or city in
debtor. which the petition is filed to take possession of, and safely
keep, until the appointment of a receiver or assignee, all
SECTION 17. Verification, form of . The petition, the deeds, vouchers, books of account, papers, notes,
schedule, and inventory must be verified by the affidavit of bonds, bills, and securities of the debtor, and all his real
the petitioner, annexed thereto, and shall be in form and personal property, estate, and effects, except such as
substantially as follows: "I, _______________., do may be by law exempt from execution. 3 Said order shall
solemnly swear that the schedule and inventory now further forbid the payment to the debtor of any debts due to
delivered by me contain a full, correct, and true discovery of him and the delivery to the debtor, or to any person for him,
all my debts and liabilities and of all goods, effects, estate, and the transfer of any property by him, and shall further
and property of whatever kind or class to me in any way appoint a time and place for a meeting of the creditors to
belonging. The inventory also contains a full, true and choose an assignee of the estate. Said order shall designate
correct statement of all debts owing or due to me, or to any a newspaper of general circulation published in the
person or persons in trust for me and of all securities and province or city in which the petition is filed, if there be

BY: MA. ANGELA LEONOR C. AGUINALDO

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one, and if there be none, in a newspaper which, in the discharged from his debts and liabilities by petition to the
opinion of the judge, will best give notice to the creditors of RTC of the province or city in which he has resided for 6
the said insolvent, and in the newspaper so designated said months next preceding the filing of the petition
order shall be published 4 as often as may be prescribed by 2. Involuntary insolvencyan adjudication of insolvency may
the court or the judge The time appointed for the election of be made by the petition of 3 or more creditors, residents
an assignee shall not be less than two, nor more than eight, of the Philippines, whose credits or demands accrued in
weeks from the date of the order of adjudication. Upon the the Philippines, for the amount of which credits or
granting of said order all civil proceedings pending against demands are in the aggregate of not less than P1000
said insolvent shall be stayed. When a receiver is
appointed, or an assignee chosen, as provided in this Act, DISTINCTION BETWEEN SUSPENSION OF PAYMENTS AND
the sheriff shall thereupon deliver to such receiver or INSOLVENCY
assignee chosen, as provided in this Act, the sheriff shall SUSPENSION OF INSOLVENCY
thereupon deliver to such receiver or assignee, as the case PAYMENTS
may be, all the property, assets, and belongings of the PURPOSE Purpose is to suspend Purpose to discharge
insolvent which have come into his possession, and he shall or delay the payment the debtor from the
be allowed and paid as compensation for his services the of debts payment of debts
same expenses and fees as would by law be collectible if SUFFICIENCY The debtor has The debtor doesnt
the property had been levied upon and safely kept under OF PROPERTY sufficient property to have sufficient
attachment. pay his debts property to pay all his
debts
SECTION 19. Publication of order. A copy of said order AMOUNT OF The amount of The creditors receive
shall immediately be published 5 by the clerk of said court, INDEBTEDNESS indebtedness is not less than their credits,
in the newspaper designated therein, for the number of affected and in case there are
times and as prescribed by the court or the judge thereof, preferences, some
and a copy of said order shall be delivered personally or creditors may not
sent by the clerk forthwith by registered mail, postage receive any amount at
prepaid, to all creditors named in the schedule. There shall all
be deposited, in addition to twenty-four pesos, which shall REQUIRED Number of creditors is Three or more
be received by the clerk on commencing such proceedings, NUMBER OF immaterial creditors is required
a sum of money sufficient to defray the expense of the CREDITORS
publication ordered by the court, necessary postage, and
ten centavos for each copy, to be delivered personally or STEPS IN VOLUNTARY INSOLVENCY
mailed to the creditors, which last-named sum is hereby 1. Filing of the petition by the debtor praying for the
constituted the legal fee of the clerk for the personal declaration of insolvency
delivery or mailing required by this section. 2. Issuance of order of adjudication declaring the petitioner
insolvent
KINDS OF INSOLVENCY 3. Publication and service of the order
1. Voluntary insolvencyan insolvent debtor owing debts 4. Meeting of the creditors to elect the assignee in insolvency
exceeding in amount in the sum of P1000, may apply to be

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5. Conveyance of the debtors property by the clerk of court a. An accurate description of all the personal and real
to the assignee property of the insolvent exempt or not from
6. Liquidation of the debtors assets and payment of his debts execution including a statement as of its value,
7. Composition, if agreed upon location and encumbrances thereon
8. Discharge of the debtor on his application, except a b. An outline of the facts giving rise or which might
corporation give rise to a right of action in favor of the
9. Objection, if any, to the discharge insolvent debtor
10. Appeal to the SC in certain cases
FILING OF SCHEDULE AND INVENTORY, JURISDICTIONAL
REQUISITES OF PETITION FOR VOLUNTARY INSOLVENCY On filing a petition for a discharge from his debts, an
THE PETITION WHICH MUST BE VERIFIED, IS TO BE FILED insolvent is required to present a verified schedule of
1. By an insolvent debtor liabilities and a verified inventory of his properties
2. Owing debts exceeding in amount of the sum of P1000 The presentation of such documents stating the amount of
3. In the RTC of the province or city in which he has resided each creditors claim is a jurisdictional requirement,
for 6 months next preceding the filing of such petition without the proper performance of which his subsequent
4. Setting forth in his petition the following discharge will be of no avail
a. His place of residence
b. The period of residence therein immediately prior EFFECT OF ERRORS IN DESCRIPTION OR OMISSION OF
to filing said petition PROPERTY IN INVENTORY
c. His inability to pay all his debts in full That the property is erroneously or ambiguously described
d. His willingness to surrender all his property, in the insolvents inventory will not affect the title of
estate, and effects not exempt from execution for purchasers in the insolvency proceedings. All the property
the benefit of creditors of the insolvent passes to his assignee and is administered
e. An application to be adjudged an insolvent in the insolvency proceedings regardless of errors in the
insolvency.
EFFECT OF FILING OF PETITION If the insolvent omits property from his inventory, through
Once the petition is filed, it ipso facto takes away and either mistake or fraud, it is the duty of the assignee to
deprives the debtor petitioner of the right to do or commit have the inventory amended so as to include it and take
any act of preference as to creditors, pending the final possession and administer it
adjudication Even property exempt from execution must be included in
order to preclude possible fraudulent omissions under the
DOCUMENTS TO ACCOMPANY THE PETITION pretext that such property is exempt. But where the
1. A verified schedule must contain petitioner didnt attach an inventory to its petition for
a. A full and true statement of all debts and liabilities insolvency, alleging under oath that it had no property to
of the insolvent debtor inventory, the lack of inventory was held not fatal to the
b. An outline of the facts giving rise or which might petition because it was assumed, until proven otherwise,
give rise to a cause of action against such that the petitioner was stating the truth.
insolvent debtor
2. A verified inventory which must contain EFFECT OF COURT ORDER DECLARING DEBTOR INSOLVENT

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1. All the assets of the debtor not exempt from execution are SCENARIO IF YOU WILL FILEyou have nothing to lose. For
taken possession of by the sheriff until the appointment of example, you only have P10,000 in your pocket. You will get
a receiver or assignee discharge though you will incur a bad credit standing, etc.
2. The payment to the debtor of any debts due to him and
the delivery to the debtor or to any person for him of any INVOLUNTARY INSOLVENCY
property belonging to him, and the transfer of any
property to him are forbidden SECTION 20. Petition; Acts of insolvency. An
3. All civil proceedings pending against the insolvent debtor adjudication of insolvency may be made on the petition of
shall be stayed three or more creditors, residents of the Philippine Islands
4. Mortgages or pledges, attachments or executions on whose credits or demands accrued in the Philippine Islands,
property of the debtor duly recorded and not dissolved are and the amount of which credits or demands are in the
not, however, affected by the order aggregate not less than one thousand pesos: Provided, That
none of said creditors has become a creditor by
IF YOU ARE THE DEBTOR, WHY WOULD YOU FILE FOR assignments, however made, within thirty days prior to the
INSOLVENCY? filing of said petition. Such petition must be filed in the
The debtor will get a discharge Court of First Instance of the province or city in which the
A corporation doesnt get a discharge debtor resides or has his principal place of business, and
The partners in a partnership will get a discharge must be verified by at least three of the petitioners. The
following shall be considered acts of insolvency, and the
DEBTOR: petition for insolvency shall set forth one or more of
ASSETS P150M insolvency such acts: (1) That such person is about to
LIABILITIES P300M depart or has departed from the Philippine Islands, with
intent to defraud his creditors; (2) that being absent from
the Philippine Islands, with intent to defraud his creditors,
PETITION FOR INSOLVENCY? No, you wont. Your P150M can
he remains absent; (3) that he conceals himself to avoid the
buy you time. The creditors will more likely sue. Allot the P50M service of legal process for purpose of hindering or delaying
for expenses and then spend or hold on to the P100M.
or defrauding his creditors; (4) that he conceals, or is
removing, any of his property to avoid its being attached or
HOW ABOUT IF YOURE THE CREDITOR? If you are the taken on legal process; (5) that he has suffered his
creditor, think criminal.
property to remain under attachment or legal process for
three days for the purpose of hindering or delaying or
HOW IS FILING FOR INSOLVENCY BETTER THAN CESSION
defrauding his creditors; (6) that he has confessed or
OF PAYMENT? offered to allow judgment in favor of any creditor or
Cession is a lame mode of payment
claimant for the purpose of hindering or delaying or
After liquidation, you still owe something
defrauding any creditor or claimant; (7) that he has willfully
suffered judgment to be taken against him by default for
ALWAYS PLAN AHEAD!
the purpose of hindering or delaying or defrauding his
creditors; (8) that he has suffered or procured his property
to be taken on legal process with intent to give a preference

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to one or more of his creditors and thereby hinder, delay, or property belonging to such debtor to him or to any other
defraud any one of his creditors; (9) that he has made any person for his benefit or the transfer of any property by
assignment, gift, sale, conveyance, or transfer of his estate, him.
property, rights, or credits with intent to delay, defraud, or
hinder his creditors; (10) that he has, in contemplation of SECTION 22. Copies served on debtor. A copy of said
insolvency, made any payment, gift, grant, sale conveyance, petition, with a copy of the order to show shall be served on
or transfer of his estate, property, rights, or credits; (11) the debtor, in the same manner as is provided by law for
that being a merchant or tradesman he has generally the service of summons in civil actions, 7 but such shall be
defaulted in the payment of his current obligations for a made at least five days before the time fixed for the
period of thirty days; (12) that for a period of thirty days he hearing: Provided, That if, for any reason, the service is not
has failed, after demand, to pay any moneys deposited with made, the order may be renewed, and the time and place of
him or received by him in a fiduciary capacity; and (13) that hearing changed by supplemental order of the court.
an execution having been issued against him on final Whenever the debtor on whom service is to be made
judgment for money, he shall have been found to be resides out of the Philippine Islands; or has departed from
without sufficient property subject to execution to satisfy the Philippine Islands; or can not, after due diligence, be
the judgment. The petitioners may, from time to time, by found within the Philippine Islands; or conceals himself to
leave of the court, amend and or amendments to relate avoid the service of the order to show cause, or any other
back to and be received as embraced in the original process or orders in the matter; or is a foreign corporation
petition. The said petition shall be accompanied by a bond, having no managing or business agent, cashier, or
6 approved by the court, with at least two sureties, in such secretary within the Philippine Islands upon whom service
penal sum as the court shall direct, conditioned that if the can be made, and such facts are shown to the court or a
petition in insolvency be dismissed by the court, or judge thereof, shall make an order that the service of such
withdrawn by the petitioner, or if the debtor shall not be order, or other process, be made by publication, in the same
declared an insolvent, the petitioners will pay to the debtor manner, and with the same effect, as service of summons
alleged in the petition to be insolvent all costs, expenses, by publication in ordinary civil actions.
and damages occasioned by the proceedings dent, the in
insolvency, together with a reasonable counsel fee to be SECTION 23. Answer to petition. At the time fixed for
fixed by the court. The court may, upon motion, direct the the hearing of said order to show cause, or at another time
filing of an additional bond, with different sureties, when to which such hearing may be adjourned, the debtor must
deemed necessary. answer the petition, or may demur for the same causes as
are provided for demurrer in other cases by the Code of
SECTION 21. Order to debtor to show cause. Upon the Civil Procedure. 9 If he demur and the demurrer be
filing of such creditors' petition, the court or a judge shall overruled, the debtor shall immediately answer the petition.
issue an order requiring such debtor to show cause, at a Such answer shall contain a specific denial of the material
time and place to be fixed by said court or judge, why he allegations of the petition controverter by him, and shall be
should not be adjudged an insolvent debtor; and at the sworn to; and the issues raised thereon shall be promptly
same time, or thereafter, upon good cause shown therefor, tried and disposed of. If, upon such trial, the issues are
said court or judge may make an order forbidding the found in favor of the respondent, the proceedings shall be
payment of any debts, and the delivery of any the court dismissed, and the respondent shall be allowed all costs,

BY: MA. ANGELA LEONOR C. AGUINALDO

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counsel fees, expenses, and damages sustained by reason published 12 as often as may be prescribed by the court or
of the proceedings therein. Counsel fees, costs, expenses, the judge thereof. The time appointed for the election of an
and damages shall be fixed and allowed by the court. assignee shall not be less than two nor more than eight
weeks from the date of the order of adjudication. Upon the
SECTION 24. Default; Payments to debtor. If the granting of said order, all civil proceedings pending against
respondent shall make default, or if, after trial, the issues the said insolvent shall be stayed. When an assignee is
are found in favor of the petitioners, the court shall make chosen as provided in this Act, the sheriff or receiver, if
an order adjudging that said respondent is and was, at the there be one, shall thereupon deliver to such assignee all
time of filing the petition, an insolvent debtor and that the the property, estate, and belongings of the insolvent, which
debtor was guilty of the acts and things charged in the have come into his possession, and he shall be allowed and
petition, or such of them as the court may find to be true; paid as compensation for his services the same expenses
and shall require said debtor, within such time as the court and fees as would by law be collectible if the property had
may designate, not to exceed three days, to file in court the been levied upon and safely kept under attachment.
schedule and inventory provided for in sections fifteen and
sixteen of this Act, duly verified as required of a petitioning SECTION 25. Publication and service of order. A copy of
debtor: 10 Provided, That in the affidavit of the insolvent, the order provided for in the last preceding section of this
touching his property and its disposition, he shall not be Act shall immediately be published by the clerk of said court
required to swear that he has not made any fraudulent in the newspaper designated therein for the number of
preference or committed any other act in conflict with the times and as prescribed by the court or the judge thereof,
provisions of this Act; but he may do so if he desires. Said and upon the filing, at any time before the date set for such
order shall further direct the sheriff of the province or city meeting, of the schedule required by said last preceding
where the insolvency petition is filed, or the receiver, if one section, a copy of said order shall be delivered personally or
has been theretofore appointed, to take possession of and sent by the clerk forthwith by registered mail, postage
safely keep, until the appointment of an assignee, all the prepaid, to all creditors named in said schedule. If said
deeds, vouchers, books of account, papers, notes, bills, schedule is not filed prior to the day fixed for the election of
bonds and securities of the debtor, and all his real and an assignee, publication of said order as herein required
personal property, estate and effects, except such as may shall be of itself sufficient notice to the creditors of the time
be by law exempt from execution. 11 Said order shall and place appointed for the election of an assignee. No
further forbid the payment to the debtor of any debts due to order of adjudication upon creditor's petition shall be
him, and the delivery to the debtor, or to any person for entered unless there be first deposited, in addition to the
him, of any property belonging to him, and the transfer of cost of commencing said proceedings, a sum of money
any property by him, and shall further appoint a time and sufficient to defray the expense of the publication ordered
place for a meeting of the creditors to choose an assignee by the court, necessary postage, and ten centavos for each
of the estate. Said order shall designate a newspaper of copy to be delivered personally or mailed to the creditors,
general circulation published in the province or city in which last-named sum is hereby constituted the legal fee of
which the petition is filed, if there be one, and if there be the clerk for the personal delivery or mailing required by
none, in a newspaper which, in the opinion of the judge, this section.
will best give notice to the creditors of the said insolvent,
and in the newspaper so designated said order shall be SECTION 26. Absentee debtors; Sheriff to take

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possession. In all cases where the debtor resides out of as provided in the preceding section, if it does not embrace
the Philippine Islands; or has departed from the Philippine all the property and effects of the debtor not exempt from
Islands; or can not, after due diligence, be found within the execution, 14 any other creditor or creditors of the debtor,
Philippine Islands; or conceals himself to avoid service of upon giving bond to be approved by the court in double the
the order to show cause, or any other preliminary process amount of their claims, singly or jointly, shall be entitled to
or orders in the matter; or is a foreign corporation having similar orders, and to like action, by the sheriff, until all
no managing or business agent, cashier, or secretary within claims be provided for, if there be sufficient property or
the Philippine Islands upon whom service or orders and effects. All property taken into custody by the sheriff by
process can be made, and it therefore becomes necessary virtue of the giving of any such bonds shall be held by him
to obtain service of process and order to show cause, as for the benefit of all creditors of the debtor whose claims
provided in section twenty-two of this Act, then the shall be duly proved, and as provided, in this Act. The bonds
petitioning creditors, upon submitting the affidavits provided for in this and the preceding section to procure the
requisite to procure an order of publication, and presenting order for custody of the property and effects of the debtor,
a bond in double the amount of the aggregate sum of their shall be conditioned that if, upon final hearing of the
claims against the debtor, shall be entitled to an order of petition in insolvency, the court shall find in favor of the
the court directing the sheriff of the province or city in petitioners, such bonds and all of them shall be void; if the
which the matter is pending to take into his custody a decision be in favor of the debtor, the proceedings shall be
sufficient amount of property of the debtor to satisfy the dismissed, and the debtor, his heirs, administrators,
demands of the petitioning creditors and the costs of the executors, or assigns, shall be entitled to recover such sum
proceedings. Upon receiving such order of the court to take of money as shall be sufficient to cover the damages
into custody property of the debtor, it shall be the duty of sustained by him, not to exceed the amount of the
the sheriff to take possession of the property and effects of respective bonds. Such damages shall be fixed and allowed
the debtor, not exempt from execution, 13 to an extent by the court. If either the petitioners or the debtor shall
sufficient to cover the amount provided for, and to prepare, appeal from the decision of the court, upon final hearing of
within three days from the time of taking such possession, the petition the appellant shall be required to give bond to
a complete inventory of all the property so taken, and to the successful party in a sum double the amount of the
return it to the court as soon as completed. The time for value of the property in controversy, and for the costs of
taking the inventory and making return thereof may be the proceedings. Such bond shall be approved by the court.
extended for good cause shown to the court or a judge
thereof. The sheriff shall also prepare a schedule of the Any person interested in the estate may except to the
names and residences of the creditors, and the amount due sufficiency of the sureties on such bond or bonds. When
each, from the books of the debtor, or from such other excepted to, the petitioner's sureties, upon notice to the
papers or data of the debtor available as may come to his person excepting of not less than two nor more than five
possession, and shall file such schedule list of creditors and days, must justify as to their sufficiency; and upon failure to
inventory with the clerk of the court. justify, or if others in their place fail to justify at the time
and place appointed, the judge shall issue an order vacating
SECTION 27. All property taken to be held for all the order to take the property of the debtor into the custody
creditors; Appeal bonds; Exceptions to sureties. In all of the sheriff, or denying the appeal, as the case may be.
cases where property is taken into custody by the sheriff,

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SECTION 28. Sale under execution. If, in any case, 10. Liquidation of assets and payments of debts
proper affidavits and bonds are presented to the court or a 11. Composition, if agreed upon
judge thereof, asking for and obtaining an order of 12. Discharge of the debtor on his application, except a
publication and an order for the custody of the property of corporation
the debtor, as provided in sections twenty-six and twenty- 13. Objection if any to the discharge
seven of this Act, and thereafter the petitioners shall make 14. Appeal to the SC in certain cases
it appear satisfactorily to the court or a judge thereof that
the interest of the parties to the proceedings will be WHY IS THERE NO NEED TO ATTACH SCHEDULE AND WHY
subserved by a sale thereof, the court may order such IS THERE A NEED FOR VERIFICATION?
property to be sold in the same manner as property is sold Answer behind this isnt legal
under execution, 15 the proceeds to be deposited in the It is not required because the creditors are not in the
court to abide the result of the proceedings. position in the first place to know

NATURE OF INVOLUNTARY INSOLVENCY PROCEEDINGS WHO WILL ULTIMATELY SUBMIT THE SCHEDULE OF ASSETS
An involuntary insolvency isnt a mere personal action AND LIABILITIES? The debtor. In case of his absence, the
against the insolvent for the collection of debts; but its assignee may be required to submit as far as practicable.
purpose is to impound all of his non-exempt property, to
distribute it equitably among his creditors and to release IS THERE ANYTHING CREDITOR CAN DO IN THE MEANTIME?
him from further liability DEBTOR CAN HAVE POSSESSION OF PROPERTY BETWEEN
It is an action in rem and action in personam STEPS 1 AND 2.
The creditor may ask for the appointment of a receiver
WHO MAY PETITION FOR INVOLUNTARY INSOLVENCY during steps 1 and 2 as provisional remedy to prevent the
1. They have the qualifications required by the Insolvency leak of assets
Law
2. Their credits must be those contemplated by the WHAT IS THE RECOURSE OF THE DEBTOR WHEN THE
Insolvency Law CREDITOR FILED FOR INSOLVENCY FOR THE SOLE PURPOSE
OF HARASSMENT?
STEPS IN INVOLUNTARY INSOLVENCY File for damages and if you are thinking criminal, file for
1. Filing of the petition by three or more creditors perjury.
2. Issuance of order requiring the debtor to show cause why Recover from the bond posted by the creditors
he shouldnt be adjudged insolvent
3. Service of order to show cause REQUISITES OF PETITION FOR INVOLUNTARY INSOLVENCY
4. Filing of answer or motion to dismiss THE PETITION IS TO BE FILED BY
5. Hearing of the case 1. Three or more creditors
6. Issuance of order or decision adjudging debtor insolvent 2. None of whom has become such a creditor by assignment,
7. Publication and service of order within 30 days prior to the filing of petition
8. Meeting of creditors for election of an assignee in 3. Whose credits accrued in the Philippines
insolvency 4. The total amount of which credits is not less than P1000
9. Conveyance of debtors property by clerk of court

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5. In the RTC of the province or city in which the debtor creditors, the court shall make an order adjudging the said
resides or has his principal place of business respondent is and was, at the time of filing of the petition,
THE PETITION-- an insolvent debtor and that the debtor was guilty of the
6. Must be verified by at least three of the petitioning act and things charged in the petition or such of them as
creditors the court may find to be true
7. Must set forth one or more acts of insolvency mentioned in The date of adjudication of insolvency retroacts to the date
the law of the filing of the petition for insolvency
8. Must be accompanied by a bond, approved by the court
with at least two sureties, in such penal sum as the court DISTINCTIONS BETWEEN VOLUNTARY INSOLVENCY AND
shall direct INVOLUNTARY INSOLVENCY
VOLUNTARY INVOLUNTARY
ACTS OF INSOLVENCY INSOLVENCY INSOLVENCY
1. Intention to depart or departure from the Philippines to # OF One creditor is Three or more
defraud creditors CREDITORS sufficient creditors
2. Absence from the Philippines to defraud creditors WHO FILES Filed by the insolvent Filed by three or more
3. Concealment of debtor to avoid legal process debtor creditors who possess
4. Concealment or removal of his property to avoid legal the qualifications given
process by law
5. Confession of judgment in favor of any creditor to defraud ACTS OF The debtor must not The debtor must have
other creditors INSOLVENCY be guilty of any acts committed one or
6. Allowing default judgment in favor of a creditor to defraud of insolvency more of such acts of
other creditors insolvency
7. Allowing his property to be taken under legal process in AMOUNT OF Exceed P1000 Must not be less than
preference of a particular creditor to defraud other CREDITS P1000
creditors
BOND A bond is not Petition must be
8. Making conveyance, assignment or transfer of his property
REQUIREMENT required accompanied by a
to defraud creditors
bond
9. Making conveyance, assignment or transfer of his property
GRANT OF May be granted ex Granted only after
in contemplation of insolvency
ORDER OF parte hearing
10. Default of a merchant or tradesman to pay his current
ADJUDICATION
obligations for a period of 30 days
RESIDENCY RTC of the province The length of
11. Failure to pay money on deposit or received in a fiduciary
REQUIREMENT or city in which the residence is immaterial
capacity for a period of 30 days after demand
debtor has resided for
12. Insufficiency of property to satisfy an execution issued
6 months
against him
NECESSITY OF Court issues the Adjudicated after
HEARING order of adjudication hearing of the case
ADJUDICATION OF INSOLVENCY
declaring the
If the respondent debtor shall make a default, or if, after
petitioner insolvent
trial, the issues are found in favor of the petitioning

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upon filing of the creditor shall be entitled to vote for the election of an
voluntary insolvency assignee unless he shall have filed his claim in the office of
the clerk of the court in which the proceedings are pending
at least two days prior to the time appointed for such
ASSETS P1M election. All claims shall contain a statement showing the
amount and nature of the claim and security, if any. The
DEBTORP5M C1 PN1 claim shall be verified by the claimant, or his duly
PN2 authorized agent or attorney. No claim barred by the
PN3 statute of limitations 16 shall be proved or allowed against
PN4 the estate of an insolvent debtor for any purpose. Any
person interested in the estate of the insolvent may file
exceptions to the legality of good faith of any claim, by
CAN CREDITOR FILE FOR INSOLVENCY? No, there should be setting forth specifically in writing his interest in the estate,
three or more creditors. What he can do is assign two of the notes and the grounds of his objection to such claim. Such
to two other persons. exceptions shall be verified by the affidavit of the party
objecting, or his duly authorized agent or attorney, and the
CAN THEY FILE IMMEDIATELY? No, there is a cooling off affidavit shall set out that such exceptions are not made for
period of 30 days. the purpose of delay and are made in good faith in the best
interests of said estate. Exceptions to any claim must be
IF YOU ARE THE CREDITOR, WHY NOT JUST FILE A filed with the clerk of the court at least one day before the
COLLECTION SUIT? You want to affect the credit standing of the time appointed for the election of an assignee, and such
debtor. You want to send a stronger signal to humiliate the exceptions shall be heard and disposed of by the court, on
person. affidavit or other evidence, in a summary manner, before
the election of an assignee. No creditor or claimant who
WHY IS THERE NO NEED FOR VERIFICATION THAT THERE holds any mortgage, pledge, or lien of any kind whatever as
WAS NO FRAUDULENT PREFERENCE? It will be violative of the security for the payment of his claim or attachment or
constitutional right against self-incrimination. execution on property of the debtor duly recorded and not
dissolved under this Act shall be permitted to vote at the
IF THE DEBTOR REFUSES OR FAILS TO SHOW UP SINCE HE election of the assignee any part of his secured claim unless
IS CURRENTLY ABROAD, WHAT CAN BE DONE BY THE he shall first have the value of such security fixed as
CREDITORS? The remedy is to attach the property of the debtor provided section fifty-nine of this Act, or shall surrender to
so that the court may acquire jurisdiction over the property. Also, the sheriff or receiver of the estate of the insolvent, if there
if you want to just embarrass the debtor, then file a petition and be a receiver, all such property, or assign such lien to such
then do some press release, which according to the great JPSP is sheriff or receiver. The surrender or assignment of such
very important in litigation. security or lien shall be for the benefit of all creditors of the
estate of the insolvent. The value of such security, if fixed
ASSIGNEES by the court, shall be so fixed at least one day before the
day appointed for the election of an assignee, in which
SECTION 29. Election; Creditors holding security. No event the claimant may prove his demand as provided in

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this section for any unsecured balance, subject to the filing the real and personal property, estate, and effects of the
of exceptions as in all other claims. debtor with all his deeds, books, and papers relating
thereto, and such assignment shall relate back to the
SECTION 30. Election of assignee in open court. At a commencement of the proceedings in insolvency, and shall
meeting of the creditors in open court or, if the court is not relate back to the acts upon which the adjudication was
in session, in the presence of the judge or the clerk of the founded, and by operation of law shall vest the title to all
court, those being entitled to vote, as provided by section such property, estate, and effects in the assignee, although
twenty-nine, shall proceed to the election of an assignee. the same is then attached on mesne process, as the
The majority of the creditors who have proven their claims, property of the debtor. Such assignment shall operate to
such majority being both in number and amount, must vest in the assignee all of the estate of the insolvent debtor
concur for the election of an assignee. The clerk of the court not exempt by law from execution. 17 It shall also dissolve
shall keep a minute of the deliberations of said creditors, any attachment levied within one month next preceding the
and of the election and appointment of the assignee, and commencement of the insolvency proceedings and vacate
enter the same upon the records of the court, and, in the and set aside any judgment entered in any action
absence of the judge, shall send a copy of such record to commenced within thirty days immediately prior to the
him at the place where he may be found. The assignee shall commencement of insolvency proceedings and shall vacate
file, within five days, unless the time be extended by the and set aside any execution issued thereon and shall vacate
court, with the clerk, a bond, in an amount to be fixed by and set aside any judgment entered by default or consent of
the court, to the Government of the Philippine Islands, with the debtor within thirty days immediately prior to the
two or more sufficient sureties, approved by the court, and commencement of the insolvency proceedings.
conditioned upon the faithful performance of the duties
devolving upon him. The bond shall not be void upon the SECTION 33. Recovery and action of assignee. The
first recovery, but may be sued upon from time to time by assignee shall have the right to recover all the state debts,
any person aggrieved, in his own name, until the whole and effects of said insolvent. If, at the time of the
penalty be exhausted. The sureties on such bond may be commencement of proceedings in insolvency, an action is
required to justify as to their sufficiency upon the pending in the name of the debtor, for the recovery of a
application of any party interested. debtor other thing which might or ought to pass to the
assignee by the assignment, the assignee shall be allowed
SECTION 31. Appointment of assignee by court. If, on and admitted to prosecute the action, in like manner and
the day appointed for the meeting, creditors do not attend, with like effect as if it had been originally commenced by
or fail or refuse to elect an assignee, or if, after election, the him. If there are any rights of action in favor of the
assignee shall fail to qualify within the proper time, or if a insolvent for damages, on any account, for which an action
vacancy occurs by death or otherwise, the court shall is not pending, the assignee shall have the right to
appoint an assignee and fix the amount of his bond. prosecute the same with the same effect as the insolvent
might have done himself if no proceedings in insolvency
SECTION 32. Transfer of property to assignee. As soon had been instituted. If any action or proceeding in which
as an assignee is elected or appointed and qualified, the the insolvent is defendant is pending at the time of the
clerk of the court shall, by an instrument under his hand adjudication, the assignee may defend the same in the
and seal of the court, assign and convey to the assignee all same manner and with like effect as it might have been

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defended by the insolvent. In a suit prosecuted or defended 1. To sue and recover all the estate, assets, debts, and
by the assignee, a certified copy of the assignment made to claims, belonging to or due to such debtor; and no set-off or
him shall be conclusive evidence of his authority to sue or counterclaim shall be allowed in any such for debts
defend. contracted by the insolvent within thirty days immediately
preceding the filing of the petition of insolvency except in
SECTION 34. Registration of assignment to assignee. case of creditors specified in section fifty of this Act.
The assignee shall, within one month after the making of
the assignment to him, cause the same to be recorded in 2. To take in to his possession all the estate of such
every province or city within the Philippine Islands where debtor except property exempt by law from execution, 18
any real estate owned by the debtor is situated, and the whether attached or delivered to him, or afterwards
record of such assignment, or a duly certified copy thereof, discovered, and all books, vouchers, evidence of
shall be conclusive evidence thereof in all courts. If the indebtedness, and securities belonging to the same.
schedule and inventory required by this Act have not been
filed by the debtor the assignee shall, within one month 3. In case of a nonresident or absconding or concealed
after his election, prepare and file such schedule and debtor, to demand and receive of every sheriff who shall
inventory from the best information he can obtain, and shall have attached any of the property of such debtor, or who
thereupon personally deliver notice or send same by shall have in his possession any moneys arising from the
registered mail, postage prepaid, to all creditors named in sale of such property, all such property and moneys, on
such schedule, whose claims have not been filed, to paying him his lawful costs and charges for attaching and
forthwith prove their demands. keeping the same.

SECTION 35. Resignation of assignee. Any assignee 4. From time to time to sell at public auction after
may at any time, by writing filed in court, resign his advertisement in the manner provided by subsections (1),
appointment, having first settled his accounts and delivered (2), and (3) of section four hundred and fifty-four of the
up all the deeds, vouchers, books of account, notes, bills, Code of Civil Procedure, 19 upon order of the court, any of
bonds, and securities of the debtor and all his real and the estate, real and personal, which has come into his
personal property, estate, and effects to such successor as possession, and which is vested in him as such assignee,
the court shall appoint: Provided, That if, in the discretion and on such sales to execute the necessary conveyances
of the court, the circumstances of the case require it, upon and bills of sale.
good cause being shown, the court may, at any time before
such settlement of account and delivery of the estate shall 5. To redeem all valid mortgages and conditional
have been completed, revoke the appointment of such contracts, and all valid pledges of personal property, and to
assignee and appoint another in his stead. The liability of satisfy any judgments which may be an encumbrance on
the outgoing assignee, or of the sureties on his bond, shall any property sold by him; or to sell such property, subject
not be in any manner discharged, released, or affected by to such mortgage, contracts, pledges, judgments, or liens.
such appointment of another in his stead.
6. To settle all matters and accounts between such debtor
SECTION 36. The said assignee shall have power: and his creditors subject to the approval of the court.

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7. Under the order of the court or judge appointing him, to every creditor or other person interested therein may, at all
compound with any person indebted to such debtor, and reasonable times, have access. No private sale of any
thereupon discharge all demands against such person. property of the estate of an insolvent debtor shall be valid
unless made under the order of the court, upon a petition in
8. To recover from any person receiving a conveyance, writing, which shall set forth the facts showing the sale to
gift transfer, payment, or assignment, made contrary to any be necessary. Upon filing the petition, notice of the hearing
provision of this Act, the property thereby transferred or thereof of at least ten days shall be given by publication
assigned; or in case a redelivery of the property can not be and mailing, in the same manner as is provided in section
had, to recover the value thereof with damages for the nineteen of this Act. If it appears that a private sale is for
detention. the best interests of the estate, the court shall order it to be
made.
SECTION 37. Embezzlement, etc. If any person, before
the assignment is made, having notice of the SECTION 40. Perishable property. In all cases when it
commencement of the proceedings in insolvency, or having appears to the satisfaction of the court that the estate of
reason to believe that insolvency proceedings are about to the debtor, or any part thereof, is of a perishable nature, or
be commenced, embezzles or disposes of any of the is liable to deteriorate in value, or is disproportionately
moneys, goods, chattels, or effects of the insolvent, he is expensive to keep, and that the insolvent's estate will
chargeable therewith, and liable to an action by the suffer if sufficient time elapses for the giving of notice, the
assignee for double the value of the property so embezzled court may order the same to be sold in such manner and at
or disposed of, to be recovered for the benefit of the such time as may be deemed most expedient, under the
insolvent's estate. direction of the sheriff, receiver, or assignee, as the case
may be, who shall hold the funds received in place of the
SECTION 38. Penalties and forfeitures. The same property sold until further order of the court.
penalties, forfeitures, and proceedings by citation,
examination, and commitment shall apply on behalf of an SECTION 41. Outstanding debts, etc. due estate.
assignee against persons suspected of having concealed, Outstanding debts, or other property due or belonging to
embezzled, conveyed away, or disposed of any property of the estate, which can not be collected and received by the
the debtor, or of having possession or knowledge of any assignee without unreasonable or inconvenient delay or
deeds, conveyances, bonds, contracts, or other writings expense, may be sold and assigned in like manner as the
which relate to any interest of the debtor in any real or remainder of the estate. If there are any rights of action for
personal estate as provided in the case of estates of damages in favor of the insolvent prior to the
deceased persons in sections seven hundred and nine to commencement of the insolvency proceedings, the same
seven hundred and thirteen, inclusive, of the Code of Civil may, with the approval of the court, be compromised.
Procedure. 20
SECTION 42. Expenses and commissions; Division of
SECTION 39. Conversion of property into money. The compensation. Assignees shall be allowed all necessary
assignee shall as speedily as possible convert the estate, expenses in the care, management, and settlement of the
real and personal, into money. He shall keep a regular estate, and shall be entitled to charge and receive for their
account of all moneys received by him as assignee, to which services commissions upon all sums of money coming to

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their hands and accounted for by them, as follows: For the person interested may appear and file exceptions thereto
first thousand pesos, at the rate of seven per centum; for all and contest the same. The court shall thereupon confirm
above that sum and not exceeding ten thousand pesos, at said accounts if they shall be found to be correct, or order
the rate of five per centum; and for all above that sum, at the same corrected if errors shall be found therein. The
the rate of four per centum: Provided, however, That if the court shall also, in such hearing, determine the property
person acting as assignee was receiver of the property of which must be deducted from the estate as another's,
the estate pending the election of an assignee, any under the provisions of section forty-eight of this Act, and
compensation allowed him as such receiver shall be the right of the claimants to participate in the dividend, and
deducted from the compensation to which he otherwise may order a dividend paid to those creditors whose claims
would be entitled as such assignee: And provided further, have been proven and allowed. The decision of the court
further That if there should be two or more assignees the theretofore rendered as to whether any claimant was
court shall order an equitable division of the compensation entitled to vote for an assignee shall not be conclusive upon
herein provided, and if for any reason an assignee's term is the right of the claimant to share in such dividend; but all
completed before the final settlement of the estate and a claimants who were so allowed to vote shall participate in
successor is appointed the court shall not allow to any such such dividend unless objections were filed to the same prior
assignee prior to the settlement of the estate an amount to such hearing. If any such objections have been filed
exceeding four per centum of the sums of money coming against any claim, or if any claimant was refused the right
into his hands. Upon the final settlement of the estate an to vote, the court shall determine said objections and the
equitable distribution of the compensation of the assignees rights of all such claimants in such hearing and refuse or
shall be made. allow the same before the declaration of a dividend.
Thereafter, further accounts, statements, and dividends
SECTION 43. Filing of accounts with vouchers, shall be made in like manner as often as occasion requires:
statements, etc.; Decisions of court upon claims; Additional Provided, however, That it shall be the duty of the assignee
accounts. At the expiration of three months from the to file his final account within one year from the date of the
appointment of the assignee in any case, or as much earlier order of adjudication, unless the court, after notice to
as the court may direct, a time and place shall be fixed by creditors, shall grant further time, upon a satisfactory
the court at which the assignee shall file just and true showing that great loss and waste would result to the
accounts of all his receipts and payments with proper estate by reason of the conversion of the property into
vouchers, verified by his oath and a statement of the money within said time, or that it has been impossible to do
property outstanding, specifying the causes of its so by reason of litigation.
outstanding, also what debts or claims are yet
undetermined, and stating what sum remains in his SECTION 44. Motion to require accounts, filing of . The
possession, and shall accompany the same with an affidavit court may at any time, upon the motion of any two or more
that notice by registered mail has been given to all creditors creditors, require the assignee to file his account in the
named in the schedule filed by the debtor or the assignee manner and upon giving the notice specified in the
that said accounts will be heard at a time specified in such preceding section, and if he has funds subject to
notice, which time shall not be less than two nor more than distribution he may be required to distribute them without
eight weeks from the filing of such accounts. At the hearing delay.
the court shall audit the accounts of the assignee, and any

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SECTION 45. Rights of creditors late in proving claims. compliance with the order of the court, from all liability as
Whenever any dividend has been duly declared, the assignee to any creditor of the insolvent.
distribution of it shall not be stayed or affected by reason of
debts being subsequently proved, but any creditor proving ASSIGNEE IN INSOLVENCY
such a debt shall be entitled to a dividend equal to those An assignee is the person elected by the creditors or
already received by the other creditors before any further appointed by the court to whom an insolvent debtor makes
dividend is made to the latter, if the failure to prove such an assignment of all his property for the benefit of his
claim shall not have resulted from his own neglect. creditors

SECTION 46. Failure, neglect or refusal by assignee. CREDITORS NOT ENTITLED TO VOTE IN THE ELECTION OF
Should the assignee refuse or neglect to render his ASSIGNEE
accounts as required by sections forty-three and forty-four 1. Those who didnt file their claims at least 2 days prior to
of this Act, or refuse or neglect to pay over a dividend when the time appointed for such election
he shall have, in the opinion of the court, sufficient funds 2. Those claims are barred by the statute of limitations
for that purpose, or shall neglect or mismanage the estate 3. Secured creditors unless they surrender their security or
in any manner whatever or violate any of the provisions of lien to the sheriff or receiver or unless they shall first have
this Act, the court shall immediately discharge such the value of such security fixed as provided for in Section
assignee from his trust, and shall appoint another in his 59
place. The assignee so discharged shall forthwith deliver 4. Holders of claims for unliquidated damages arising out of
over to the assignee appointed by the court all the funds, pure tort
property, books, vouchers, or securities belonging to the
insolvent, and he shall not be entitled for his services to the IMPORTANT! The vote requirement is DOUBLE MAJORITY.
compensation provided in section forty-two.
ASSIGNEES TITLE VESTS ON FILING OF PETITION
SECTION 47. Final account. Preparatory to the An assignee in insolvency acquires title to the property of
settlement of the estate, the assignee shall file his final the insolvent by virtue of the transfer of the insolvents
account in the court, accompanying the same with an property by the clerk of court
affidavit that a notice by registered mail has been given to But this instrument relates back to the commencement of
all creditors who have proved their claims, that he will the proceedings in insolvency with the result that the title
apply for a settlement of his account and for a discharge of the assignee is determined as of the date when the
from all liability as assignee at a time specified in such petition in insolvency is filed
notice, which time shall not be less than two nor more than With respect to property registered under the Land
eight weeks from such filing. At the hearing the court shall Registration Law, it is necessary that such proceedings be
audit the account, and any person interested may appear recorded in the registry of deeds from their
and file exceptions in writing and contest the same. The commencement and the assignment is likewise recorded
court thereupon shall settle the account, and order a
dividend of any portion of the estate, if any, remaining EFFECTS OF ASSIGNMENT
undistributed, and shall discharge the assignee, subject to 1. The assignee takes the property in the plight and
conditions that the insolvent held it

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2. Upon assignment, the legal title to all the property of the 2. Properties fraudulently conveyed
insolvent is vested in the assignee, and the control of the 3. Right of action for damages to real property
property is vested in the court 4. The undivided share for interest of the insolvent debtor in
3. All actions to recover the estate, debts and effects of the property held under co-ownership
insolvent shall be brought by the assignee and not by the
creditors PROPERTIES OF INSOLVENT THAT DOESNT PASS TO THE
4. The assignment shall ASSIGNEE
a. Dissolve any attachment levied within 1 month 1. Property exempt from execution
next preceding the commencement of the 2. Property held in trust
insolvency proceedings 3. Property of the conjugal partnership or absolute
b. Vacate and set aside judgment entered in any community so long as said partnership or community
action commenced within 30 days immediately exists except insofar as the insolvent debtors obligations
prior to the commencement of insolvency have redounded to the benefit of the former
proceedings 4. Property over which a mortgage or pledge exists unless
NOTE: the creditor surrenders his security or lien
5. There is a cut-off periodone month in attachment cases 5. After-acquired property except fruits and income of
and 30 days in judgments entered in actions commenced property owned by the debtor and which had passed to the
prior to the insolvency proceedings. A levy of attachment assignee in insolvency law
not made within the period specified isnt dissolved by the 6. Non-leviable assets like a life insurance policy which
insolvency proceedings and the refusal of the court to doesnt have cash surrender value
enforce the lien arising from such levy is grave abuse of 7. Right of action for tort which is purely personal in nature
discretion.
6. The plaintiff has the right if the attachment is not dissolved POWERS OF ASSIGNEE
before the commencement of the proceedings in 1. To sue and recover all the estate, assets, debts, and
insolvency, or is dissolved by an undertaking given by the claims, belonging to or due to such debtor;
defendant, if the claim upon which the attachment suit was 2. To take in to his possession all the estate of such debtor
commenced is proved against the estate of the debtor. except property exempt by law from execution,
3. In case of a nonresident or absconding or concealed
BOND OF ASSIGNEE debtor, to demand and receive of every sheriff who shall
After his election, he is required to give a bond for the have attached any of the property of such debtor, or who
faithful performance of his duties shall have in his possession any moneys arising from the
To establish his official character and his right to sue in sale of such property, all such property and moneys, on
that capacity, it is incumbent on the assignee to show that paying him his lawful costs and charges for attaching and
the bond required has been given keeping the same.
4. To sell, upon order of the court, any of the estate, real and
PROPERTIES OF INSOLVENT THAT PASS TO THE ASSIGNEE personal, which has come into his possession, and which is
1. All real and personal property, estate and effects of the vested in him as such assignee, and on such sales to
debtor including all deeds, books, and papers in relation execute the necessary conveyances and bills of sale.
thereto

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5. To redeem all valid mortgages and conditional contracts, b. Assignee is allowed to recover the expenses he
and all valid pledges of personal property, and to satisfy advanced for.
any judgments which may be an encumbrance on any c. There is a distinction between claims and
property sold by him; or to sell such property, subject to expenses. As creditor, WATCH OUT!
such mortgage, contracts, pledges, judgments, or liens. 5. To petition the court to allow the private sale of debtors
6. To settle all matters and accounts between such debtor property if it appears that it is for the best interest of the
and his creditors subject to the approval of the court. estate
7. Under the order of the court or judge appointing him, to 6. To file a just and true account of receipts and payments
compound with any person indebted to such debtor, and 7. To file accounts upon order of the court on motion of two
thereupon discharge all demands against such person. or more creditors
8. To recover from any person receiving a conveyance, gift 8. To distribute such dividends as he may be required
transfer, payment, or assignment, made contrary to any 9. To file a final account within one year from the date of
provision of this Act, the property thereby transferred or order of adjudication
assigned; or in case a redelivery of the property can not be
had, to recover the value thereof with damages for the SALE OF ASSETS
detention. 1. Generallythe law provides for the reduction of the
insolvents assets into cash by means of public sales.
DUTIES OF AN ASSIGNEE Proceedings are in rem. The only question of jurisdiction is
1. To register the assignment to him of the real estate of the the power of the court over the subject matter without
debtor regard to the parties who may have an interest in it.
2. To file a schedule and inventory of the property of the 2. Persons competent to purchasethe insolvent will not be
debtor generally allowed to purchase the assets, either in his own
3. To convert, as speedily as possible, the estate, real and name or through a dummy. If he does so, the property
person, into money purchased becomes subject to the claims of his creditors.
a. Any disposition requires court approval
b. Private sale needs authorization of the court APPLICABILITY OF SECTION 37
The provisions of Section 37 which make the person
LOUIE WAS HOLDING CASH OF DEBTOR. LEARNING coming within the purview liable for double the value of
ABOUT THE PETITION, HE WANTED TO TAKE AS HIS the property sought to be disposed of, are not applicable
OWN THE MONEYWITH KNOWLEDGE OF THE where what has been disposed of is the creditors own
DEBTOR. Louie will then be held liable and in case of credit and not the insolvents property
P5M, he will be required to pay double the amount.
DIVIDENDS IN INSOLVENCY DEFINED
Parcel of the fund arising from the assets of the estate,
4. To keep a regular account of all moneys received by him
rightfully allotted to share in the fund, whether in the same
as assignee proportion with other creditor or in a different proportion
a. Why is a private sale an exception? Because there
It is paid by the assignee only upon order of the court
is always room for irregularity.

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EFFECT OF DEBTS SUBSEQUENTLY PROVED ON RIGHT TO

DIVIDENDS The following shall be included in this section:
Whenever any dividend has been duly declared, the
distribution of it shall not be stayed or affected by reason 1. Dowry property inestimado and such property estimado
of debts being subsequently proved which may remain in the possession of the husband where
However, any creditor proving such a debt shall be entitled the receipt thereof is a matter of record in a public
to a dividend equal to those already received by other instrument registered under the provisions of sections
creditors before any further dividend is made to the latter, twenty-one and twenty-seven of the Code of Commerce in
if the failure to prove such claim shall not have resulted force.
from his own neglect
2. Paraphernalia property which the wife may have
WHAT WOULD BE COVERED BY THE ASSETS? Assets whose acquired by inheritance, legacy, or donation whether
title is vested in the debtorboth equitable and legal title. At least remaining in the form in which it was received or
there is beneficial ownership. subrogated or invested in other property, provided that
such investment or subrogation has been registered in the
CAN INSOLVENCY PROCEEDINGS BE FILED AGAINST THE registro mercantile in accordance with the provisions of the
HUSBAND ALONE? No. sections of the Code of Commerce mentioned in the next
preceding paragraph.
CAN CORPORATIONS AND PARTNERSHIPS BE SUBJECT TO
INSOLVENCY PROCEEDINGS? Yes. However, it is not good to 3. Property and effects deposited with the bankrupt, or
have voluntary proceedings. administered, leased, rented, or held in usufruct by him.

CLASSIFICATION AND PREFERENCE OF CREDITORS 4. Merchandise in the possession of the bankrupt, on

commission, for purchase, sale, forwarding, or delivery.
SECTION 48. Property not belonging to insolvent; Dowry;
Paraphernalia property. Merchandise, effects, and any 5. Bills of exchange or promissory notes without
other kind of property found among the property of the endorsement or other expression transferring ownership
insolvent, the ownership of which has not been conveyed to remitted to the insolvent for collection
him by a legal and irrevocable title, shall be considered to
be the property of other persons and shall be placed at the 6. Money remitted to the insolvent, otherwise than on
disposal of its lawful owners on order of the court made at current account, and which is in his possession for delivery
the hearing mentioned in section forty-three or at any to a definite person in the name and for the account of the
ordinary hearing, if the assignee or any creditor whose remitter or for the settlement of claims which are to be met
right in the estate of the insolvent has been established at the unsolvent's domicile.
shall petition in writing for such hearing and the court in its
discretion shall so order, the creditors, however, retaining 7. Amounts due the insolvent for sales of merchandise on
such rights in said property as belong to the insolvent, and commission, and bills of exchange and promissory notes
subrogating him whenever they shall have complied with all derived therefrom in his possession, even when the same
obligations concerning said property. are not made payable to the owner of the merchandise sold,

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provided it is proven that for the obligation to the insolvent

is derived therefrom and that said bills of exchange and SECTION 50. The following are the preferred claims which
promissory notes were in the possession of the insolvent shall be paid in the order named:
for account of the owner of the merchandise to be cashed
and remitted, in due time, to the said owner; all of which (a) Necessary funeral expenses of the debtor, or of his
shall be a legal presumption when the amount involved in wife, or children who are under their parental authority and
any such sale shall not have been credited on the books of have no property of their own, when approved by the court;
both the owner of the merchandise and of the insolvent.
(b) Debts due for personal services rendered the
8. Merchandise bought on credit by the insolvent so long insolvent by employees, laborers, or domestic servants
as the actual delivery thereof has not been made to him at immediately preceding the commencement of proceedings
his store or at any other place stipulated for such delivery, in insolvency;
and merchandise the bills of lading or shipping receipts of
which have been sent him after the same has been loaded (c) Compensation due the laborers or their dependents
by order of the purchaser and for his account and risk. under the provisions of Act Numbered Thirty-four hundred
and twenty-eight, known as the Workmen's Compensation
In all cases arising under this paragraph assignees may Act, 22 as amended by Act Numbered Thirty-eight hundred
retain the merchandise so purchased or claim it for the and twelve, and under the provisions of Act Numbered
creditors by paying the price thereof to the vendor. Eighteen hundred and seventy-four, known as the
Employees' Liability Act 23 and of other laws providing for
9. Goods or chattels wrongfully taken, converted, or payment of indemnity for damages in cases of labor
withheld by the insolvent if still existing in his possession accidents;
or the amount of the value thereof.
(d) Legal expenses, and expenses incurred in the
SECTION 49. Creditors sharing pro rata. All creditors, administration of the insolvent's estate for the common
except those whose claims are mentioned in the next interest of the creditors, when properly authorized and
following section, whose debts are duly proved and allowed approved by the court;
shall be entitled to share in the property and estate pro
rata, after the property belonging to other persons referred (e) Debts, taxes, and assessments due the Insular
to in the last in preceding section has been deducted Government; 24
therefrom, without priority or preference whatever:
Provided, That any debt proved by any person liable as bail, (f) Debts, taxes, and assessments due to any province or
surety, guarantor, or otherwise, for the debtor, shall not be provinces of the Philippine Islands;
paid to the person so proving the same until satisfactory
evidence shall be produced of the payment of such debt by (g) Debts, taxes, and assessments due to any municipality
such person so liable, and the share to which such debt or municipalities of the Philippine Islands;
would be entitled may be paid into court, or otherwise held,
for the benefit of the party entitled thereto, as the court All other creditors shall be paid pro rata.
may direct.

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LAW AS TO PREFERENCES STRICTLY CONSTRUED which all the property of the partnership, and also all the
separate property of each of the partners, if they are liable,
ORDER OF DISTRIBUTION shall be taken, excepting such parts thereof as may be
1. Equitable claims under Section 48 exempt by law; and all creditors of the partnership, and the
2. Preferred claims with respect to specific movable property separate creditors of each partner, shall be allowed to
and specific immovable property prove their respective claims; and the assignee shall be
3. Preferred claims as to the encumbered property of the chosen by the creditors of the partnership, and shall also
debtor which shall be paid in the order named in Article keep separate accounts of the property of the partnership,
2244 CC and of the separate estate of each member thereof. The
4. Common or ordinary credits which shall be paid pro rata expenses of the proceedings shall be paid from the
regardless of the dates under Article 2245 CC partnership property and the individual property of the
5. With respect to specific movable and immovable property, partners in such proportions as the court shall determine.
the taxes due the State shall first be established The net proceeds of the partnership property shall be
appropriated to the payment of the partnership debts and
EQUITABLE CLAIMS UNDER THE INSOLVENCY LAW the net proceeds of the individual estate of each partner to
1. Paraphernal property belonging to the wife of the insolvent the payment of his individual debts. Should any surplus
2. Property held by the insolvent on deposit, administration, remain of the property of any partner after paying his
lease or usufruct individual debts, such surplus shall be added to the
3. Merchandise held by the debtor on commodatum partnership assets and be applied to the payment of the
4. Negotiable instruments for collection or remittance partnership debts. Should any surplus of the partnership
5. Money held by the debtor for remittance property remain after paying the partnership debts, such
6. Amounts due the insolvent for sales or merchandise on surplus shall be added to the assets of the individual
commission partners in the proportion of their respective interests in
7. Merchandise bought by the insolvent on credit where no the partnership. Certificate of discharge shall be granted or
delivery is made or where the right of ownership or refused to each partner as the same would or ought to be if
possession has been retained by the seller the proceedings had been by or against him alone under
8. Goods or chattels wrongfully taken by the insolvent or the this Act; and in all other respects the proceedings as to the
amount of the value thereof partners shall be conducted in like manner as if they had
been commenced and prosecuted by or against one person
PARTNERSHIPS & CORPORATIONS alone. If such partners reside in different provinces, the
court in which the petition is first filed shall retain exclusive
SECTION 51. Partnerships. A partnership, during the jurisdiction over the case. If the petition to be filed by less
continuation of the partnership business, or after its than all the partners of a partnership those partners who do
dissolution and before the final settlement thereof, may be not join in the petition shall be ordered to show cause why
adjudged insolvent, either on the petition of the partners or they, as individuals, and said partnership, should not be
any one of them, or on the petition of three or more adjudged to be insolvent, in the same manner as other
creditors of the partnership, qualified as provided in section debtors are required to show cause upon a creditor's
twenty of this Act, in either of which cases the court shall petition, as in this Act provided; and no order of
issue an order in the manner provided by this Act, upon adjudication shall be made in said proceedings until after

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the hearing of said order to show cause. 2. In case of involuntary insolvencythe petition is filed by
one or more of the partners or three or more of the
SECTION 52. Corporations and sociedades anonimas; creditors of the partnership.
Banking. The provisions of this Act shall apply to a. If the petition be filed by less than all the partners
corporations and sociedades anonimas, and upon the of the partnership, those partners who dont join
petition of any officer of any corporation or sociedad the petition shall be ordered to show cause why
anonima, duly authorized by the vote of the board of should not be adjudged to be insolvent in the same
directors or trustees, at a meeting specially called for that manner as other creditors are required to show
purpose, or by the assent in writing of a majority of the cause upon a creditors petition
directors or trustees as the case may be, or upon a
creditor's petition made and presented in the manner PROPERTIES INCLUDED IN THE INSOLVENCY PROCEEDINGS
provided in respect to debtors, of the like proceedings shall 1. All the properties of the partnership
be had and taken as are provided in the case of debtors: 2. All the separate property of each of the partners, except
Provided, That in case the articles of association or by-laws a. Separate properties of limited partners
of any corporation the or sociedad anonima provide a b. Properties which are exempt by law
method for such proceedings, such method shall be
followed. All the provisions of this Act which apply to the EFFECT OF FILING OF PETITION
debtor, or set forth his duties, examination, and liabilities, 1. When insolvency proceedings have been instituted against
or prescribe penalties, or relate to fraudulent conveyances, or by a partnership, the proceedings are deemed to
payments, and assignments, apply to each and every officer commence against the partners at the same time even if a
of any corporation or sociedad anonima in relation to the partner is not ordered included in the proceedings until
same matters concerning the corporation. Whenever any sometime later
corporation is declared insolvent, its property and assets 2. Upon order of the court, all the property of the partnership
shall be distributed to the creditors; due at but no discharge and also all the separate property of each partner, if they
shall be granted to any corporation. The provisions of this are liable, shall be taken
Act shall not apply to corporations engaged principally in 3. All creditors of the partnership and the separate creditors
the banking business, 26 or to any other corporation as to of each partner shall be allowed to prove their respective
which there is any special provision of law for its liquidation claims
in case of insolvency. 4. The assignee shall be chosen by the creditors of the
partnership
WHEN PARTNERSHIP MAY BE DECLARED INSOLVENT 5. Pending insolvency proceedings by or against any
A partnership may be adjudged insolvent during the partnership, no statute of limitations shall run upon a claim
continuation of the partnership business or after its of or against the estate of the debtor
dissolution but before the final settlement thereof
EFFECT OF INSOLVENCY OF PARTNERSHIP OR ANY
WHO MAY PETITION FOR DECLARATION OF INSOLVENCY IN PARTNER
PARTNERSHIP 1. A partnership may be declared insolvent notwithstanding
1. In case of voluntary insolvencythe petition may be filed the solvency of the partners constituting the same
by all the partners, or any one of them

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2. A partnership isnt necessarily insolvent because one of its

members is insolvent SECTION 53. Class of debts. All debts due and payable
3. A partnership is automatically dissolved upon the from the debtor at the time of the adjudication of
insolvency of one of the partners or of the partnership insolvency, and all debts then existing but not payable until
a future time, a discount being made if no interest is
DISTRIBUTION OF PROCEEDS payable by the terms of the contract, may be proved against
1. The net proceeds of the partnership property shall be the estate of the debtor.
appropriated to the payment of partnership debts
2. The net proceeds of the individual estate of each partner SECTION 54. Commercial paper. If the debtor is bound
shall be applied to the payment of his individual debts as indorser, surety, bail, or guarantor, upon any bill, bond,
3. Should any surplus remain, so much thereof as note, or other specialty or contract, or for any debt any
corresponds to him as his share in the subsidiary liability person, and his liability shall not have become absolute
for partnership debts shall be added to the partnership until after the adjudication of insolvency, the creditor may
assets and be applied to the payment of such debts prove the same after such liability shall have become fixed,
4. Should any surplus remain of the partnership property, and before the final dividend shall have been declared.
such assets shall be added to the assets of the individual
partners in the proportion of their respective interests in SECTION 55. Contingent debts. In all cases of
the partnership contingent debts and contingent liabilities, contracted by
the debtor, and not herein otherwise provided for, the
WHO MAY PETITION FOR DECLARATION OF INSOLVENCY OF creditor may make claim therefor and have his claim
A CORPORATION allowed, with the right to share in the dividends, if the
1. In case of voluntary insolvencythe petition may be filed contingency shall happen before the order of the final
by any officer duly authorized by the vote of the board of dividend; or he may, at any time, apply to the court to have
directors or trustees at a meeting especially called for that the present value of the debt or liability ascertained and
purpose, or by the assent in writing of a majority of liquidated, which shall be done in such manner as the court
directors, or trustees, as the case may be shall order, and it shall be allowed for the amount so
2. In case of involuntary insolvency ascertained.
a. First viewupon a creditors petition made and
presented in the manner provided for in respect to SECTION 56. Bail, surety, etc., for the debtor. Any
debtors person liable as bail, surety, or guarantor, or otherwise, for
b. Second viewthe petition must be filed by at least the debtor, who shall have paid the debt, or any part
3 creditors of the corporation under the thereof, in discharge of the whole, shall be entitled to prove
circumstances mentioned by law such debt, or to stand in the place of the creditor, if he shall
have proved the same, although such payments shall have
EFFECT WHEN CORPORATION DECLARED INSOLVENT been made after the proceedings in insolvency were
1. Property and assets shall be distributed to the creditors commenced; and any person so liable for the debtor, and
2. No discharge shall be granted who has not paid the whole of said debt, but is still liable
for the same, or any part thereof, may, if the creditor shall
PROOF OF DEBTS fail or omit to prove such debt, prove the same in the name

BY: MA. ANGELA LEONOR C. AGUINALDO

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of the creditor. held as security, the assignee may release to the creditor
the debtor's right of redemption thereon on receiving such
SECTION 57. Rents and periodical payments. Where the excess; or he may sell the property, subject to the claim of
debtor is liable to pay rent, or other debt falling due at fixed the creditor thereon, and in either case the assignee and
and stated periods, the creditor may prove, for a creditor, respectively, shall execute all deeds and writings
proportionate part thereof up to the time of the insolvency, necessary or proper to consummate the transaction. If the
as if the same became due from day to day, and not at such property is not sold or released, and delivered up, or its
fixed and stated periods. value fixed, the creditor shall not be allowed to prove any
part of his debt, but the assignee shall deliver to the
SECTION 58. Mutual debts and credits. In all cases of creditor all such property upon which the creditor holds a
mutual debts and mutual credits between the parties, the mortgage, pledge, or lien, or upon which he has an
account between them shall be stated, and one debt set off attachment or execution.
against the other, and the balance only shall be allowed of a
claim in its nature not provable against the estate: SECTION 60. Creditors proving claims cannot use; Stay of
Provided, That no set-off or counterclaim shall be allowed action. No creditor, proving his debt or claim, shall be
in favor of any debtor to the insolvent of a claim purchased allowed to maintain any suit therefor against the debtor,
by or transferred to such debtor within thirty days but shall be deemed to have waived all right of action and
immediately preceding the filing, or after the filing of the suit against him, and all proceedings already commenced,
petition by or against the insolvent. or any unsatisfied judgment already obtained thereon, shall
be deemed to be discharged and surrendered thereby; and
SECTION 59. Mortgages, pledges, liens, etc.; Release or after the debtor's discharge, upon proper application and
sale by assignee. When a creditor has a mortgage, or proof to the court having jurisdiction, all such proceedings
pledge of real or personal property of the debtor, or a lien shall be, dismissed, and such unsatisfied judgments
thereon, for securing the payment of a debt owing to him satisfied of record: Provided, That no valid lien existing in
from the debtor, or an attachment or execution on property good faith thereunder shall be thereby affected. A creditor
of the debt or duly recorded and not dissolved under this proving his debt or claim shall not be held to have waived
Act, he shall be admitted as a creditor for the balance of the his right of action or suit against the debtor when a
debt only, after deducting the value of such property, such discharge has have been refused or the proceedings have
value to be ascertained by agreement between him and the been determined to the without a discharge. No creditor
receiver, if any, and if no receiver, then upon such sum as whose debt is provable under this Act shall be allowed,
the court or a judge thereof may decide to be fair and after the commencement of proceedings in insolvency, to
reasonable, before the election of an assignee, or by a sale prosecute to final judgment any action therefor against the
thereof, to be made in such manner as the court or judge debtor until the question of the debtor's discharge shall
thereof shall direct; or the creditor may release or convey have been determined, and any such suit proceeding shall,
his claim to the receiver, if any, or if no receiver then to the upon the application of the debtor or of any creditor, or the
sheriff, before the election of an assignee, or to the assignee, be stayed to await the determination of the court
assignee if an assignee has been elected, upon such on the question of discharge: Provided, That if the amount
property, and be admitted to prove his whole debt. If the due the creditor is in dispute, the suit, by leave of the court
value of the property exceeds the sum for which it is so in insolvency, may proceed to judgment for purpose of

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ascertaining the amount due, which amount, when 4. Other contingent debts and contingent liabilities contracted
adjudged, may be allowed in the insolvency proceedings, by the insolvent if the contingency shall happen before the
but execution shall be stayed aforesaid. order of final dividend
5. Any debt of the insolvent arising from his liability to any
SECTION 61. Preferences knowingly accepted contrary to person liable as bail, surety, or guarantor or otherwise, for
this Act. Any person who shall have accepted any the insolvent, who shall have paid the debt in full, or in
preference, having reasonable cause to believe that the part
same was made or given by the debtor contrary to any
provision of this Act, shall not be allowed to prove the debt DATE OF CLEAVAGE (JPSP CAN ACTUALLY FOOTNOTE AND
or claim on account of which the preference was made or CITE VILLANUEVA)
given, nor shall he receive any dividend thereon, until he 30 days from filing of petition
shall have surrendered to the assignee all property, money,
benefit, or advantage received by him under such || 30 daysfilingadjudicationfinal dividend
preference. ok
NO.
SECTION 62. Examinations under oath by court. The
court may, upon the application of the assignee, or of any
WHEN WILL ADJUDICATION RECKON? Filing of petition.
creditor, or without any application, before or after
adjudication in insolvency, examine upon oath the debtor in
WHY IS THE CUT-OFF PERIOD THE FINAL DIVIDEND?
relation to his property and his estate and may examine any
other person tending or making proof of claims, and may Debtor will have no assets given there is a discharge.
subpoena witnesses to give evidence relating to such
CONTINGENT CLAIM
matters. All examinations of witnesses shall be had and
depositions shall be taken in accordance with and in the Claim in which liability depends on some future event that
may or may not happen and which makes it uncertain
same manner as is provided by the Code of Civil Procedure.
whether there will be any liability
Such claim is not barred merely because it is not
DEBTS THAT MAY BE PROVED
presented during the insolvency proceedings. After the
1. All debts due and payable from the debtor at the time of
the adjudication of the insolvency insolvency proceedings and the happening of the
contingency, the creditor may pursue any available
2. All debts existing at the time of the adjudication of
insolvency but not payable until a future time, a discount remedy for the collection of his claim
being made if no interest is payable by the terms of the
contract DEBTS THAT MAY NOT BE PROVED
3. Any debt of the insolvent arising from his liability as 1. Claims barred by the statute of limitations
2. Claims of secured creditors with a mortgage or pledge in
indorser, surety, bail or guarantor, where such liability
became absolute after the adjudication of insolvency but their favor unless they surrender their security
3. Claims of creditors who hold an attachment or execution
before the final dividend shall have been declared
on the property of the debtor duly recorded and not
dissolved

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4. Claims on account of which a fraudulent preference was be made to its confirmation. The court shall confirm a
made or given composition if satisfied that (1) it is for the best interest of
5. Support, as it doesnt arise from any business transaction the creditors; (2) that the insolvent has not been guilty of
but from the relation of marriage any of the acts, or of a failure to perform any of the duties,
6. A claim for unliquidated damages arising out of a pure tort which would create a bar to his discharge; and (3) that the
which neither constitutes a breach of an express contract offer and its acceptance are in good faith, and have not
nor results in any unjust enrichment of the tortfeasor thay been made or procured except as herein provided, or by any
may form the basis of an implied contract means, promises, or acts herein forbidden. Upon the
confirmation of a composition the consideration shall be
CAN A CREDITOR SET UP COMPENSATION/OFFSET HIS distributed as the judge shall direct, and the case
OWN DEBTS AGAINST THE INSOLVENT DEBTOR? dismissed, and the title to the insolvent's property shall
This is the case of Uy-Tong v. Silva. revest in him. Whenever a composition is not confirmed, the
Compensation can be set up against the insolvent debtor estate in insolvency shall be administered as herein
but only for those debts which arose at least 30 days provided. The court may, upon application of a party in
before the filing of the insolvency proceedings. If the interest, filed at any time within six months after the
claim arose within the 30-day period before the filing of composition has been confirmed, set the same aside, and
the petition, there can be no compensation. The rule on reinstate the case if it shall be made to appear upon a trial
preferences would be disregarded if the set-off were that fraud was practiced in the procuring of such
allowed. It would, in effect, give the one claiming composition, and that the knowledge thereof has come to
compensation undue preference over other creditors. the petitioner since the confirmation of such composition.

COMPOSITIONS COMPOSITION
Agreement made upon a sufficient consideration, between
SECTION 63. When confirmation filed. An insolvent may an insolvent or embarrassed debtor and his creditors,
offer terms of composition to his creditors after, but not whereby the latter, for the sake of immediate or sooner
before, he has filed in court a schedule of his property and payment, agree to accept a dividend less than the whole
list of his creditors as provided in this Act. An application amount of their claims, to be distributed pro rata, in
for the confirmation of a composition may be filed in the discharge and satisfaction of the whole debt
insolvency court after, but not before, it has been accepted
in writing by a majority in number of all creditors whose WHY WOULD A CREDITOR OPT FOR COMPOSITION?
claims have been allowed, which number must represent a 1. To get the present value of money
majority in amount of such claims and after the 2. To reduce costscosts of assignee and receiver
consideration to be paid by the insolvent to his creditors
and the money necessary to pay all debts which have REQUIREMENTS FOR A VALID OFFER OF COMPOSITION
priority and the costs of proceedings have been deposited 1. The offer of the terms of composition must be made after
in such place as shall be designated by and subject to the the filing in court of the schedule of property and
order of the court. A time shall be fixed by the court for the submission of the list of creditors;
hearing upon an application for the confirmation of a
composition, and for the hearing of such objections as may

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2. The offer must be accepted in writing by a DOUBLE notice shall be given by registered mail and by publication
MAJORITY OF THE CREDITORSmajority of the number of 28 at least once a week, for six weeks, in a newspaper
creditors representing a majority of the claims; published in the province or city, or, if there be none, in a
3. It must be made after depositing the consideration to be newspaper which, in the opinion of the judge, will best give
paid and the cost of the proceedings; notice to the creditors of the said insolvent: Provided, That
4. The court must approve or confirm the terms of the if no debts have been proven, such notice shall not be
composition. required.
a. It is for the best interest of the creditors
b. The debtor hasnt been guilty of any of the acts, or SECTION 65. Invalid discharge. No discharge shall be
of a failure to perform any of the duties which granted, or if granted shall be valid, (1) if the debtor shall
would create a bar to his discharge have sworn falsely in his affidavit annexed to his petition,
c. The offer and its acceptance are in good faith and schedule, or inventory, or upon any examination in the
have not been made or procured in a manner course of the proceedings in insolvency, in relation to any
forbidden by the Act material fact concerning his estate or his debts or to any
other material fact; or (2) if he has concealed any part of
EFFECTS OF THE CONFIRMATION OF COMPOSITION his estate or effects, or any books or writing relating
1. The consideration shall be distributed as the judge shall thereto; or (3) if he has been guilty of fraud or willful
direct neglect in the care or custody of his property or in the
2. The insolvency proceeding shall be dismissed delivery to the assignee of the property belonging to him at
3. The title to the insolvents property shall revest in him the time of the presentation of his petition and inventory,
4. The insolvent shall be released from his debts excepting such property as he is permitted to retain under
the provisions of this Act; or (4) if, within one month before
WHEN CONFIRMATION MAY BE SET ASIDE the commencement of such proceedings, he has procured
1. That fraud was practiced in the procuring of such his real estate, goods, moneys, or chattels to be attached or
composition seized on execution; or (5) if he has destroyed, mutilated,
2. That the knowledge thereof has come to the petitioner altered, or falsified any of his books, documents, papers,
since the confirmation of such composition writings, or securities, or has made, or been privy to the
making of, any false or fraudulent entry in any book of
DISCHARGE account or other document with intent to defraud his
creditors; or (6) if he has given any fraudulent preference,
SECTION 64. Discharge. At any time after the expiration contrary to the provisions of this Act, or has made any
of three months from the adjudication of insolvency, but fraudulent payment, gift, transfer, conveyance, or
not later than one year from such adjudication, unless the assignment of any part of his property, or has admitted a
property of the insolvent has not been converted unto false or fictitious debt against his estate; or (7) if, having
money, the debtor may apply to the court for a discharge knowledge that any person has proven such false or
from his debts, and the court shall thereupon order notice fictitious debt, he has not disclosed the same to his
to be given to all creditors who have proved their debts to assignee within one month after such knowledge; or (8) if,
appear on a day appointed for that purpose and show cause being a merchant or tradesman, he has not kept proper
why a discharge should not be granted to the debtor; said books of account in Arabic numerals and in accordance with

BY: MA. ANGELA LEONOR C. AGUINALDO

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the provisions of the Code of Commerce; or (9) if he, or any as hereinafter provided, and shall give him a certificate
other person on his account, or in his behalf, has influenced thereof, under the seal of the court, in substance as follows:
the action of any creditor, at any stage of the proceedings, "In the Court of First Instance of the _____________,
by any pecuniary consideration or obligation; or (10) if he Philippine Islands. Whereas, ______________, has been
has, in contemplation of becoming insolvent, made any duly adjudged an insolvent under the Insolvency Law of the
pledge, payment, transfer, assignment, or conveyance of Philippine Islands, and appears to have conformed to all the
any part of his property, directly or indirectly, absolutely or requirements of law in that behalf, it is therefore ordered
conditionally, for the purpose of preferring any creditor or by the court that said _______________ be forever
person having a claim against him, or who is, or may be, discharged from all debts and claims, which by said
under liability for him, or for the purpose of preventing the Insolvency Law are made provable against his estate, and
property from coming into the hands of the assignee, or of which existed on the _______ day of _________, on which
being distributed under this Act in satisfaction of his debts; the petition of adjudication was filed by (or against) him,
or (11) if he has been convicted of any misdemeanor under excepting such debts, if any, as are by said Insolvency Law
this Act, or has been guilty of fraud contrary to the true excepted from the operation of a discharge in insolvency.
intent of this Act; or (12) in case of voluntary insolvency, Given under my hand, and the seal of the court, this ____
has received the benefit of this or any other Act of day of ______________, anno Domini ______________
insolvency or bankruptcy within six years next preceding Attest: ____________, clerk. (Seal) _____________,
his application for discharge; or (13) if insolvency judge."
proceedings in which he could have applied for a discharge
are pending by or against him in the Court of First Instance SECTION 68. Debts not released under this Act No tax
of any other province or city in the Philippine Islands. or assessment due the Insular Government 29 or any
Before any discharge is granted, the debtor shall take and provincial or municipal government, whether proved or not
subscribe an oath to the effect that he has not done, as provided for in this Act, shall be discharged. Nor shall
suffered, or been privy to any act, matter, or thing specified any debt created by the fraud or embezzlement of the
in this Act as grounds for withholding such discharge or as debtor, or by his defalcation as a public officer or while
invalidating such discharge, if granted. acting in a fiduciary capacity, be discharged under this Act,
but the debt may be proved, and the dividend thereon shall
SECTION 66. Any creditor opposing the discharge of a be a payment on account of said debt. No discharge solvent
debtor shall file his objections thereto, specifying the granted under this Act shall release, discharge, or affect
grounds of his opposition, and after the debtor has filed and any person liable for the same debt, for or with the debtor,
served his answer thereto which pleadings shall be verified, either as partner, joint contractor, indorser, surety, or
the court shall try the issue or issues raised, according to otherwise. 30
the practice provided by law in civil actions.
SECTION 69. Effect of discharge under this Act A
SECTION 67. Discharge of debtor by court. If it shall discharge, duly granted under this Act, shall, with the
appear to the court that the debtor has in all things exceptions aforesaid, release the debtor from all claims,
conformed to his duty under this Act, and that he is entitled debts, liabilities, and demands set forth in his schedule, or
under the provisions thereof to receive a discharge, the which were or might have been proved against his estate in
court shall grant him a discharge from all his debts, except insolvency, and may be pleaded by a simple averment that

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on the day of its date such discharge was granted to him, 12. In case of voluntary insolvency, he has received the
setting forth the same in full, and the same shall be a benefits of insolvency within 6 years next preceding his
complete bar to all suits brought on any such debts, claims, application for discharge
liabilities, or demands, and the certificate shall be prima 13. If insolvency proceedings in which he could have applied
facie evidence in favor of such fact and of the regularity of for a discharge are pending by or against him in the RTC of
such discharge: Provided, however, That any creditor any other province or city
whose debt was proved or provable against the estate in
insolvency who shall see fit to contest the validity of such DEBTS RELEASED BY DISCHARGE
discharge on the ground that it was fraudulently obtained 1. All claims, debts, and liabilities and demands set forth in
and who has discovered the facts constituting the fraud the schedule
subsequent to the discharge, may, at any time within one 2. All claims, debts, and liabilities and demands which were
year after the date thereof, apply to the court which or might have been proved against the estate of the
granted it to set it aside and annul the same. insolvency

DISCHARGE DEBTS NOT RELEASED BY DISCHARGE

Formal and judicial release of an insolvent debtor from his 1. Taxes
debts with the exception of those expressly reserved by 2. Debts arising from any act of swindling (because you dont
law reward a person who violated a law or a trust)
3. Debts of a surety, guarantor, indorser, or any person liable
ACTS OF DEBTOR OR GROUNDS WHICH WILL PREVENT A for the same debt, for or with the insolvent debtor (This is
DISCHARGE because the discharge only benefits the principal debtor,
1. False swearing not his co-debtors or guarantors).
2. Concealment of any part of his estate or effects 4. Debts of a corporation
3. Fraud or willful neglect in the care of his property or in the 5. Claims for support
delivery thereof to the assignee 6. Debts which were not proved and could not have been
4. Procuring his properties to be attached or seized on proved during the insolvency proceedings
execution within 1 month before the commencement of 7. Debts arising from tort
insolvency proceedings 8. Claims of secured creditors
5. Destruction, mutilation, alteration or falsification of his 9. Debts which were not yet existing at the time of the
books, documents, and papers discharge
6. Giving fraudulent preference to a creditor 10. Contingent claims
7. Non-disclosure to the assignee of a proven false or
fictitious debt within 1 month after acquiring knowledge CAN DEBT FROM BORACAY MANSION BE DISCHARGED?
8. Being a merchant, failure to keep proper books of accounts No since proceeds from embezzlement or fraud.
9. Influencing the action of any creditor, at any state of the
proceedings, by any pecuniary consideration HOW ABOUT TO THE EXTENT OF A SOLIDARY DEBTOR? No.
10. Effecting any transfer, conveyance, or mortgage in
contemplation of insolvency WHEN DISCHARGE MAY BE REVOKED
11. Conviction of any misdemeanor under the Insolvency Law

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1. Whose debt was proved or provable against the estate in allow, that fact shall be prima facie evidence of fraud. Any
insolvency, on the ground that the discharge was payment, pledge, mortgage, conveyance, sale, assignment,
fraudulently obtained or transfer of property of whatever character made by the
2. Who has discovered facts constituting the fraud insolvent within one month before the filing of a petition in
subsequent to the discharge and provided, insolvency by or against him, except for a valuable
3. The petition is filed within 1 year after the date of the pecuniary consideration made in good faith, shall be void.
discharge All assignments, transfers, conveyances, mortgages, or
encumbrances of real estate shall be deemed, under this
FRAUDULENT PREFERENCES AND TRANSFERS section, to have been made at the time the instrument
conveying or affecting such realty was filed for record in the
SECTION 70. If any debtor, being insolvent, or in office of the register of deeds of the province or city where
contemplation of insolvency, within thirty days before the the same is situated.
filing of a petition by or against him, with a view to giving a
preference to any creditor or person having a claim against TRANSFER
him or who is under any liability for him, procures any part Includes the sale and every other and different modes of
of his property to be attached, sequestered, or seized on disposing of or parting with property, or the possession of
execution, or makes any payment, pledge, mortgage, property, absolutely or conditionally, as a payment,
assignment, transfer, sale, or conveyance of any part of his pledge, mortgage, gift, or security
property, either directly or indirectly, absolutely or
conditionally, to anyone, the person receiving such WHEN PREFERENTIAL TRANSFER EXISTS
payment, pledge, mortgage, assignment, transfer, sale, or It is a parting with the property of the insolvent for the
conveyance, or to be benefited thereby, or by such benefit of a creditor with the result that the estate of the
attachment or seizure, having reasonable cause to believe insolvent is diminished and other creditors are prejudiced.
that such debtor is insolvent, and that such attachment,
sequestration, seizure, payment, pledge, mortgage, WHEN FRAUDULENT PREFERENCE EXISTS
conveyance, transfer, sale, or assignment is made with a It is a disposition of property by the debtor under the following
view to prevent his property from coming to his assignee in conditions:
insolvency, or to prevent the same from being distributed 1. He is insolvent or is in contemplation of insolvency;
ratably among his creditors, or to defeat the object of, or in 2. The transaction is made within 30 days before the filing of
any way hinder, impede, or delay the operation of or to the petition for insolvency;
evade any of the provisions of this Act, such attachment, 3. It is made with a view to giving preference to any creditor;
sequestration, seizure, payment, pledge, mortgage, 4. The person receiving a benefit has reason to believe that
transfer, sale, assignment, or conveyance is void, and the the debtor is insolvent and that the transfer is made in
assignee, or the receiver, may recover the property, or the order to defeat or prejudice the rights of other creditors.
value thereof, as assets of such insolvent debtor. If such
payment, pledge, mortgage, conveyance, sale, assignment, WHEN FRAUDULENT TRANSFER EXISTS
or transfer is not made in the usual and ordinary course of It is any disposition of property made by the insolvent
business of the debtor, or if such seizure is made under a within one month before the filing of the petition for
judgment which the debtor has confessed or offered to insolvency, except for valuable consideration in good faith.

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EFFECT OF FRAUDULENT TRANSFER WHAT CAN THE CREDITOR DO? He has two options. First, he
1. If made within 30 days before the filing of insolvency can go and find two other creditors and file a petition for
proceedings, the transfer is void. involuntary insolvency. Another option is to assign credit to others
2. If made after the filing of insolvency proceedings, it is and wait for 30 days. If there is immediate filing, there would be
rescissible for being in fraud of creditors. no validity of contract between the debtor and X. It must be
3. Another remedy of the creditors is to file a criminal fraudulent.
complaint against the insolvent debtor.
WHAT IS XS LIABILITY IF IT IS PROVEN TO BE A
IS THERE A PRESUMPTION OF FRAUD? FRAUDULENT TRANSFER? Double the amount when X says
THERE IS A REBUTTABLE PRESUMPTION THAT A CONVEYANCE IS property is as his own. Creditor must make sure that this will fit.
FRAUDULENT WHEN: The burden of proof by the way is with X and not the creditors.
1. It is not made in the usual and ordinary cause of business
of the debtor; or PENAL PROVISIONS
2. It is made under a confession of judgment.
SECTION 71. Acts of debtors punishable under this Act.
DEBTOR From and after the taking effect of this Act, a debtor who
commits any one of the following acts shall, upon
PAYABLE (1) PROPERTY (2) conviction thereof, be punished by imprisonment for not
NOMINAL SUM less than three months nor more than five years for each
CREDITOR X offense:

MATURITY (3) RESCISSIBLE, VOID IF ABSOLUTE 1. If he shall, after the commencement of proceedings in
SIMULATION insolvency, secrete or conceal any property belonging to his
estate or part with, conceal, destroy, alter, mutilate, or
falsify or cause to be concealed, destroyed, altered,
DEBTOR mutilated, or falsified, any book, deed, document, or writing
relating thereto, or remove, or cause to be removed, the
PAYABLE (1) PROPERTY (2) same or any part thereof, with the intent to prevent it from
PAYMENT (2.5) coming into the possession of the assignee in insolvency, or
CREDITOR X to hinder, impede, or delay his assignee in recovering or
receiving the same, or if he shall make any payment, gift,
MATURITY (3) RESCISSIBLE, VOID IF ABSOLUTE sale, assignment, transfer, or conveyance of any property
SIMULATION belonging to his estate, with like intent, or shall spend any
*X must show that there is fair exchange between him and the part thereof in gaming; or if he shall, with intent to defraud
debtor. willfully and fraudulently conceal from his assignee, or
fraudulently or designedly omit from his schedule any
property or effects whatsoever; or if, in any case of any
CREDITOR PAYABLEDEBTOR PROPERTYX
person having, to his knowledge or belief, proved a false or

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fictitious debt against his estate he shall fail to disclose the 1. After commencement of insolvency proceedings
same to his assignee within one month after coming to the a. Secrete or conceal any property belonging to his
knowledge or belief thereof; or if he shall attempt to estate or
account for any of his property by fictitious losses or b. Part with, conceal, destroy, alter, mutilate, or
expenses; falsify or cause to be concealed, destroyed,
altered, mutilated, or falsified, any book, deed,
2. If he shall, within three months before commencement document, or writing relating thereto, or
of proceedings in insolvency under the false pretense of c. Remove, or cause to be removed, the same or any
carrying on business and dealing in the ordinary course of part thereof, with the intent to prevent it from
trade, obtain on credit from any person any goods or coming into the possession of the assignee in
chattels or shall pawn, pledge, or dispose of, otherwise insolvency, or to hinder, impede, or delay his
than by bona fide transactions in the ordinary course of his assignee in recovering or receiving the same, or
trade, any of his goods and chattels which have been d. If he shall make any payment, gift, sale,
obtained on credit and remain unpaid for, or shall have assignment, transfer, or conveyance of any
suffered loss in any kind of gaming when such loss is one of property belonging to his estate, with like intent,
the causes determining the commencement of proceedings, or shall spend any part thereof in gaming; or
in insolvency, or shall have sold at a loss or for less than e. If he shall, with intent to defraud willfully and
the current price any goods bought on credit and still fraudulently conceal from his assignee, or
unpaid for, or shall have advanced payments to the fraudulently or designedly omit from his schedule
prejudice of his creditors. any property or effects whatsoever; or
f. If, in any case of any person having, to his
3. If he shall, from and after the taking effect of this Act, knowledge or belief, proved a false or fictitious
during the proceedings for the suspension of payments, debt against his estate he shall fail to disclose the
secrete or conceal, or destroy or cause to be destroyed or same to his assignee within one month after
secreted any property belonging to his estate; or if he shall coming to the knowledge or belief thereof; or
secrete, destroy, alter, mutilate, or falsify, or cause to be g. If he shall attempt to account for any of his
secreted, destroyed, altered, mutilated, or falsified, any property by fictitious losses or expenses;
book, deed, document, or writing relating thereto, or if he 2. Within 3 months before commencement of insolvency
shall, with intent to defraud his creditors, make any proceedings
payment, sale, assignment, transfer, or conveyance of any a. Under the false pretense of carrying on business
property belonging to his estate; or if he shall spend any and dealing in the ordinary course of trade, obtain
part thereof in gaming; or if he shall falsely swear to the on credit from any person any goods or chattels or
schedule and inventory exacted by paragraph two of section b. Shall pawn, pledge, or dispose of, otherwise than
two as required by sections fifteen, sixteen and seventeen by bona fide transactions in the ordinary course of
of this Act, with intent to defraud his creditors; or if he shall his trade, any of his goods and chattels which have
violate or break in any manner whatsoever the injunction been obtained on credit and remain unpaid for, or
issued by the court under section three of this Act. c. Shall have suffered loss in any kind of gaming
when such loss is one of the causes determining
ACTS PUNISHABLE CRIMINALLY UNDER THIS ACT

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the commencement of proceedings, in insolvency, or against the estate of the debtor.

or
d. Shall have sold at a loss or for less than the SECTION 74. Any creditor, at any stage of the
current price any goods bought on credit and still proceedings, may be represented by his attorney or duly
unpaid for, or authorized agent, and the attorney or agent, properly
e. Shall have advanced payments to the prejudice of authorized, shall be entitled to vote at any creditors'
his creditors. meeting as and for his principal.
3. During proceedings for suspension of payments
a. Secrete or conceal, or destroy or cause to be SECTION 75. Exempt property to be set apart. It shall
destroyed or secreted any property belonging to be the duty of the court having jurisdiction of the
his estate; or proceedings, upon petition and after hearing, to exempt and
b. If he shall secrete, destroy, alter, mutilate, or set apart, for the use and benefit of said insolvent, such real
falsify, or cause to be secreted, destroyed, altered, and personal property as is by law exempt from execution,
mutilated, or falsified, any book, deed, document, and also a homestead, as provided in section four hundred
or writing relating thereto, or and fifty-two of the Code of Civil Procedure; 32 but no such
c. If he shall, with intent to defraud his creditors, petition shall be heard as aforesaid until it is first proved
make any payment, sale, assignment, transfer, or that notice of the hearing of the application therefor has
conveyance of any property belonging to his been duly given by the clerk, by causing such notice to be
estate; or posted in at least three public places in the province or city
d. If he shall spend any part thereof in gaming; or at least ten days prior to the time of such hearing, which
e. If he shall falsely swear to the schedule and notice shall set forth the name of said insolvent debtor, and
inventory exacted by paragraph two of section two the time and place appointed for the hearing of such
as required by sections fifteen, sixteen and application, and shall briefly indicate the homestead sought
seventeen of this Act, with intent to defraud his to be exempted or the property sought to be set aside; and
creditors; or the decree must show that such proof was made to the
f. If he shall violate or break in any manner satisfaction of the court, and shall be conclusive evidence of
whatsoever the injunction issued by the court that fact.
under section three of this Act.
SECTION 76. Proceedings, how commenced. The filing
MISCELLANEOUS PROVISIONS of a petition by or against a debtor upon which, or upon an
amendment of which, an order of adjudication in insolvency
SECTION 72. If any debtor shall die after the order of may be made, shall be deemed to be the commencement of
adjudication, the proceedings shall be continued and the proceedings in insolvency under this Act.
concluded in like manner and with like validity and effect as
if he had lived. SECTION 77. Words used in this Act in the singular
include the plural, and in the plural, the singular, and the
SECTION 73. Pending insolvency proceedings by or word "debtor" includes partnerships, corporations and
against any person, partnership, corporation, or sociedad sociedades anonimas.
anonima, no statute of limitations shall run upon a claim of

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SECTION 78. Appointment of receiver; Election and either party to be paid by the other, or to either or both
qualification of assignee. Upon the filing of either a parties to be paid out of the estate, as justice and equity
voluntary or involuntary petition in insolvency, a receiver may require. In awarding costs, the court may issue
may be appointed by the court in which the proceeding is execution therefor. In all involuntary cases under this Act,
pending, or by a judge thereof, at any time before the the court shall allow the petitioning creditors out of the
election of an assignee, when it appears by the verified estate of the debtor, if any adjudication of insolvency be
petition of a creditor that the assets of the insolvent, or a made, as a preferred claim, all legal costs and
considerable portion thereof, have been pledged, disbursements incurred by them in that behalf.
mortgaged, transferred, assigned, conveyed, or seized, on
legal process, in contravention or violation of the provisions SECTION 81. Dismissal or discontinuance. If no creditor
of section seventy of this Act, and that it is necessary to files written objections, the court may, upon the application
commence an action to recover the same. The appointment, of the debtor, if it be voluntary petition, or of the
oath, undertaking, and powers of such receiver shall in all petitioning creditors, if a creditor's petition, dismiss the
respects be regulated by the general laws of the Philippine petition and the discontinue the proceedings at any time
Islands applicable to receivers. When an assignee is before the appointment of an assignee, upon giving not less
chosen, and has qualified, the receiver shall forthwith than two nor more than eight weeks' notice to the
return to court an account of the assets and property which creditors, in the same manner that notice of the time and
have come into his possession, and of his disbursements, place of election of an assignee is given: Provided, however,
and a report of all actions or proceedings commenced by That by written consent of all creditors filed in the court the
him for the recovery of any property belonging to the proceedings may be dismissed at any time. After the
estate, and the court shall thereupon summarily hear and appointment of an assignee, no dismissal shall be made
settle the receiver's account, and shall allow him a just without the consent of all parties interested in or affected
compensation for his services and his expenses, including a thereby.
reasonable attorney's fee, whereupon the receiver shall
deliver all property, assets, or effects remaining in his SECTION 82. Law governing appeal. An appeal may be
hands, to the assignee who shall be substituted for the taken to the Supreme Court in the following cases: 33
receiver in all pending actions or proceedings.
1. From an order granting or refusing an adjudication of
SECTION 79. Attachments. When an attachment has insolvency and, in the latter case, from the order fixing the
been made and is not dissolved before the commencement amount of costs, expenses, damages, and attorney's fees
of proceedings in insolvency, or is dissolved by an allowed the debtor.
undertaking given by the defendant, if the claim upon which
the attachment suit was commenced is proved against the 2. From an order made at the hearing of any account of an
estate of the debtor, the plaintiff may prove the legal costs assignee, allowing or rejecting a creditor's claim, in whole
and disbursements of the suit, and of the keeping of the or in part, when the amount in dispute exceeds three
property, and the amount thereof shall be a preferred debt. hundred pesos.

SECTION 80. Costs. In all contested matters in 3. From an order allowing or denying a claim for property
insolvency the court may, in its discretion, award costs to not belonging to the insolvent, presented under section

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forty-eight of this Act. DUTY OF COURT WHERE PROPERTY EXEMPT FROM

EXECUTION
4. From an order settling an account of an assignee. It shall be the duty of the court having jurisdiction of the
proceedings, upon petition and after hearing held upon due
5. From an order against or in favor of setting apart notice, to exempt and set apart, for the use and benefit of
homestead or other property claimed as exempt from the insolvent, such real and personal property as is by law
execution. exempt from execution

6. From an order granting or refusing a discharge to the WHEN INSOLVENCY PROCEEDINGS DEEMED TO COMMENCE
debtor. The filing off a petition by or against a debtor upon which,
or upon amendment of which, an order of adjudication in
Chapter forty-two of the Code of Civil Procedure, 34 so far insolvency may be made, shall be deemed to be the
as applicable, shall govern appeals under this Act, except commencement of proceedings in insolvency under the Act
that when an assignee has given an official undertaking and
appeals from a judgment or order of insolvency, his official WHEN RECEIVED MAY BE APPOINTED
undertaking stands in the place of an undertaking on Upon the filing of either a voluntary or involuntary petition in
appeal, and the sureties thereon are liable on such insolvency, a receiver may be appointed by the court in which the
undertaking: Provided, however, That an interlocutory proceeding is pending, or by a judge thereof, at any time before
appeal shall not stay proceedings unless written be entered the election of an assignee, when it appears by the verified
into on the part of the appellant, with at least two sureties, petition of a creditor:
in such an amount as the court, or a judge thereof, may 1. That the assets of the insolvent, or a considerable portion
direct, but not less than double the value of the property thereof, have been pledged, mortgaged, transferred,
involved, to the effect that if the order appealed from be assigned, conveyed, or seized, on legal process, in
affirmed, or the appeal dismissed, appellant will pay all contravention or violation of the provisions of section
costs and damages which the adverse party may sustain by seventy of this Act, and
reason of the appeal and the stay of proceedings. 2. That it is necessary to commence an action to recover the
same. The appointment, oath, undertaking, and powers of
EFFECTS OF DEATH OF INSOLVENT DEBTOR PENDING such receiver shall in all respects be regulated by the
INSOLVENCY PROCEEDINGS general laws of the Philippine Islands applicable to
IT DEPENDS receivers.
1. If the debtor shall die after the order of adjudication, the When an assignee is chosen, and has qualified, the
proceedings shall be continued and concluded in like receiver shall forthwith return to court an account of the
manner and with like validity, and effect as if he had lived assets and property which have come into his possession,
2. If the death occurs before the order of adjudication, the and of his disbursements, and a report of all actions or
proceedings shall be discontinued. The claims must be proceedings commenced by him for the recovery of any
filed in the proper testate or intestate proceedings as property belonging to the estate, and the court shall
provided for in the R/C on the settlement of decedents thereupon summarily hear and settle the receiver's
estate account, and shall allow him a just compensation for his
services and his expenses, including a reasonable

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attorney's fee, whereupon the receiver shall deliver all (2) PROPERTY C2
property, assets, or effects remaining in his hands, to the UNPAID P120M
assignee who shall be substituted for the receiver in all
pending actions or proceedings. (3) P50M C3
INVESTMENT PROPERTY
WHEN PETITION MAY BE DISMISSED
1. Upon the application of the debtor, if it be voluntary (4) LOCAL TAX, RPT C4
petition, if no creditor files a written objection
2. If a creditor's petition, dismiss the petition and the DEBTOR: A<L
discontinue the proceedings at any time before the P200 M < P1B
appointment of an assignee
3. After the appointment of an assignee, no dismissal shall be
made without the consent of all parties interested in or IF YOU ARE C1, WHAT SHOULD YOU DO? D will lose the
affected thereby. benefit of the period. C1 would now do foreclosure.

SCENARIO #1: P100 M++ COSTS

THE GOOD REVIEW C/O JPSP
SCENARIO #2: INSOLVENCY PROCEEDINGS; P2M RPT, X/270 x
P198M
CREDITOR LOAN OF P100M DEBTOR (QC)
DEBTOR CORPORATION P200M FOREIGN PERSON
GROUP 1: CAVITE, GROUP 2: MALOLOS, GROUP 3: MAKATI
REAL ESTATE MORTGAGE, P100M
PLEDGE, P150M
1. Check the chattel mortgage. Check the date of execution SURETY
of the loan contract. Check the timing to see if the
mortgage is valid or not. *ASSUME THAT DEBTOR IN FINANCIAL DISTRESS.
2. The form should be the same as what is found in the *D FAILED THE LOAN.
Chattel Mortgage Law. An example of this is the affidavit *ASSETS < LIABILITIES
of good faith.
3. Pay the necessary documentary stamp taxes, notarization,
and follow this up with the registration. CONCERNS OF THE CREDITOR?
4. Problem with the above scenario is that you will have to 1. Is there a benefit for filing for insolvency proceedings?
pay four times. The solution is to bring to QC but get insolvency proceedings doesnt stop the creditor from
consent from the creditor. Otherwise, there will be a case security enforcement. No point of participating since he
can just foreclose the mortgage and the pledge.
of estafa.
2. What if there is no pledge? What is the benefit of the
insolvency proceeding? Join to recover the deficiency.
DEBTOR P100M Have the property appraised and claim the deficiency.
Nonetheless, there is no incentive to join since there is
(1) REM P200M C1 already overcollaterization.

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3. Debtor could still file a petition for suspension of payments (ARTICLES 1962-2009)
under PD 902-A. All creditors will be prevented from
collecting and the corporation will be placed under a DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
management committee or rehabilitation receiver.
4. Does surety benefit from the suspension of payments? Art. 1962. A deposit is constituted from the moment a
Most likely yes since but with no immediate value. person receives a thing belonging to another, with the
5. If you want results, then surety is not one of the choices. obligation of safely keeping it and of returning the same. If
the safekeeping of the thing delivered is not the principal
CREDITOR 100 MILLION DEBTOR purpose of the contract, there is no deposit but some other
PLEDGE contract. (1758a)
(SHARES =P75M P65M)
WHAT IS DEPOSIT?
ANTICHRESIS A deposit is constituted from the moment a person
(RENTALS = P1M/MONTH) receives a thing belonging to another, with the obligation
(PROPERTY = P75M) of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
1. First, do the judicial foreclosure of the antichresis then
contract.
foreclose the pledge.
2. What if its the P65M? Default? No, unless there is a CHARACTERISTICS OF THE CONTRACT
stipulation. What can creditor do? The shares will then be 1. It is a real contract since it is perfected by the delivery of
sold. Now, the P65M pledge and the P75M property. the thing deposited
3. Will you file for specific performance? No, since there will
2. When the contract is gratuitous, it is a unilateral contract
be abandonment of the securities. because only the depositary has an obligation. But when
4. What does the creditor have to do with the P65M proceeds
the deposit is for compensation, the juridical relation
of the share? Compensation. The issuewhether you can created becomes bilateral because it gives rise to
apply rule on no recovery of deficiency? Yes. There is no obligations on both parties
foreclosure to speak of.
SAFEKEEPING IS THE PRINCIPAL PURPOSE OF THE
BANK LOAN DEBTOR CORPORATION CONTRACT
REAL ESTATE MORTGAGE
PLEDGE DEPOSIT MUTUUM
PURPOSE Safekeeping or mere Consumption of the
1. In case of default, the bank should opt for the extrajudicial custody subject matter
foreclosure. There is a shorter redemption period. DEMAND FOR The depositor can The lender must wait
2. If the debtor files petition for suspension of payments, will RETURN demand the return of until the expiration of
it affect the bank? Yes since all payments are affected. the subject matter at the period granted to
will the debtor
DEPOSIT

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OBJECT OF THE Both immovable and Only money and any 2. Where depositary engaged in the business of storing
CONTRACT movable property other fungible thing goodsfor compensation and not pure liberality
3. Where property saved from destruction without knowledge
DEPOSIT DISTINGUISHED FROM COMMODATUM of the ownerthe owner is bound to pay just
compensation
DEPOSIT COMMODATUM
PRINCIPAL Safekeeping Transfer or use Art. 1966. Only movable things may be the object of a
PURPOSE deposit. (1761)
GRATUITOUS Gratuitous Essentially and
always gratuitous SUBJECT MATTER OF DEPOSIT
OBJECT OF THE In extrajudicial Both movable and 1. Only personal property may be the subject of extrajudicial
CONTRACT deposit, only immovable property deposit
movable property may be the object 2. Both personal and real property may be the subject of
judicial deposit
Art. 1963. An agreement to constitute a deposit is binding,
but the deposit itself is not perfected until the delivery of Art. 1967. An extrajudicial deposit is either voluntary or
the thing. (n) necessary. (1762)

BINDING EFFECT OF AGREEMENT TO DEPOSIT VOLUNTARY DEPOSIT

A deposit is a real contract and is perfected only by the
delivery of the thing deposited GENERAL PROVISIONS

Art. 1964. A deposit may be constituted judicially or Art. 1968. A voluntary deposit is that wherein the delivery
extrajudicially. (1759) is made by the will of the depositor. A deposit may also be
made by two or more persons each of whom believes
CREATION OF DEPOSIT himself entitled to the thing deposited with a third person,
Deposit may be created by virtue of a court order or by who shall deliver it in a proper case to the one to whom it
law and not by the will of the parties belongs. (1763)

Art. 1965. A deposit is a gratuitous contract, except when VOLUNTARY DEPOSIT

there is an agreement to the contrary, or unless the One wherein the delivery is made by the will of the
depositary is engaged in the business of storing goods. depositor
(1760a)
VOLUNTARY DEPOSIT NECESSARY DEPOSIT
CONTRACT OF DEPOSIT GENERALLY GRATUITOUS The depositor has complete The lack of choice in the
1. Where there is contrary stipulationthe parties may freedom in choosing the depositor
establish any stipulation that may deem convenient depositary
provided it is not contrary to law, morals, good customs,
public order and public policy
DEPOSITOR NEED NOT BE THE OWNER

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Generally, the depositor must be the owner of the thing to pay him the amount by which he may have enriched or
deposited benefited himself with the thing or its price. However, if a
But it may belong to another person third person who acquired the thing acted in bad faith, the
The depositary cannot dispute the title of the depositor to depositor may bring an action against him for its recovery.
the thing deposited (1765a)

WHERE THERE ARE SEVERAL DEPOSITORS WHERE DEPOSITARY INCAPACITATED AND THE DEPOSITOR
Two or more persons each claiming to be entitled to the CAPACITATED
thing deposited, may deposit the same with a third person The incapacitated depositary doesnt incur the obligation of
the depositary
Art. 1969. A contract of deposit may be entered into orally However, he is liable to return
or in writing. (n) o To return the thing deposited while still in his
possession
Art. 1970. If a person having capacity to contract accepts a o To the pay the depositor the amount by which he
deposit made by one who is incapacitated, the former shall may have benefited himself with the thing or its
be subject to all the obligations of a depositary, and may be price subject to the right of a third person who
compelled to return the thing by the guardian, or acquired the thing in good faith
administrator, of the person who made the deposit, or by
the latter himself if he should acquire capacity. (1764) WHAT IS THE BENEFIT CONTEMPLATED BY LAW? Reasonable
and judicious use
WHERE DEPOSITARY CAPACITATED AND THE DEPOSITOR
INCAPACITATED
OBLIGATIONS OF THE DEPOSITARY
If the depositary is capacitated, he is subject to all the
obligations of a depositary, whether or not the depositor is
Art. 1972. The depositary is obliged to keep the thing safely
capacitated
In the latter case, the depositary must return the property and to return it, when required, to the depositor, or to his
heirs and successors, or to the person who may have been
to the legal representative of the incapacitated or the
designated in the contract. His responsibility, with regard to
depositor himself if he should acquire capacity
the safekeeping and the loss of the thing, shall be governed
by the provisions of Title I of this Book.
WHAT IF THE CAPACITATED DEPOSITOR CANNOT RETURN
IT TO THE LEGAL REPRESENTATIVE? He can be held liable for If the deposit is gratuitous, this fact shall be taken into
estafa. WHAT CAN HE OPT TO DO? Consignation is not account in determining the degree of care that the
advisable. It is too costly. depositary must observe. (1766a)

Art. 1971. If the deposit has been made by a capacitated OBLIGATION TO KEEP THE THING DEPOSITED AND RETURN
person with another who is not, the depositor shall only IT
have an action to recover the thing deposited while it is still
in the possession of the depositary, or to compel the latter

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1. Degree of careordinarily, the depositor must exercise CAN THERE BE STIPULATION THAT THERE WOULD ONLY BE
over the thing deposited the same diligence as he would LIABILITY WITH REGARD GROSS NEGLIGENCE AND NOT
exercise over his property ORDINARY NEGLIGENCE? Yes.
a. Because it is an essential requisite of the judicial
relation which involves the depositors confidence
Art. 1973. Unless there is a stipulation to the contrary, the
in good faith and trustworthiness
b. Presumption that the depositor in choosing the depositary cannot deposit the thing with a third person. If
depositary took into account the diligence which deposit with a third person is allowed, the depositary is
liable for the loss if he deposited the thing with a person
the depositary is accustomed with respect to his
own property who is manifestly careless or unfit. The depositary is
responsible for the negligence of his employees. (n)
2. Rules applicable
a. Art. 1163. Every person obliged to give something
OBLIGATION NOT TO TRANSFER DEPOSIT
is also obliged to take care of it with the proper
diligence of a good father of a family, unless the 1. Liability for loss
law or the stipulation of the parties requires a. If he deposits it with a third person without
authority even if there has been no negligence
another standard of care. (1094a)
b. Art. 1170. Those who in the performance of their from his part and on the third person
b. If deposit with a third person is allowed, he is
obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene liable still if he deposited the thing with a person
who is manifestly careless or unfit
the tenor thereof, are liable for damages. (1101)
c. Art. 1265. Whenever the thing is lost in the 2. Exemption from liability
possession of the debtor, it shall be presumed that a. The depositor is not responsible in case the thing is
lost without negligence of the third person with
the loss was due to his fault, unless there is proof
to the contrary, and without prejudice to the whom he was allowed to deposit the thing if such
person is not manifestly careless or unfit
provisions of article 1165. This presumption does
not apply in case of earthquake, flood, storm, or
other natural calamity. (1183a) GENERALLY, MR. TAN CANNOT ENTRUST TO MS.
d. The required degree of care is greater if the AGUINALDO THE THING DEPOSITED WITH HIM. HOW CAN
deposit is made for compensation than when it is ENTRUSTING TO A THIRD PERSON BE JUSTIFIED? It can be
gratuitous. justified by saying that the entrustment to a third person is for
3. Return before specified termthe thing deposited must be safekeeping. It can be shown that entrusting it to a third person
returned to the depositor whenever he claims it, even would make the thing deposited safer. It can also be justified by
though a specified term or time for such may have been saying that the third person is only an agent of the depositary.
stipulated in the contract.
Article 1973 prohibits transfer but the 1974 may be used as a
CAN THERE BE A STIPULATION FOR A LESSER DEGREE OF justification
CARE? Yes.
Art. 1974. The depositary may change the way of the
deposit if under the circumstances he may reasonably

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presume that the depositor would consent to the change if TAN. IS TAN LIABLE TO RETURN? He can refuse to return if
he knew of the facts of the situation. However, before the Ms. Aquino cannot pay.
depositary may make such change, he shall notify the
depositor thereof and wait for his decision, unless delay SAFETY DEPOSIT BOXES
would cause danger. (n) The contract for rent of safety deposit boxes is not an
ordinary contract of lease of things because the full and
Art. 1975. The depositary holding certificates, bonds, absolute possession and control of the safety deposit box
securities or instruments which earn interest shall be bound is not given to the party renting.
to collect the latter when it becomes due, and to take such It is actually a special kind of deposit. It is a contractual
steps as may be necessary in order that the securities may relation between the parties. The liability rules are
preserve their value and the rights corresponding to them governed by the Civil Code provisions on obligations and
according to law. contracts, and not on donations.

The above provision shall not apply to contracts for the rent IS A STIPULATION WHICH EXEMPTS THE BANK FROM
of safety deposit boxes. (n) LIABILITY FOR THE THINGS CONTAINED IN THE SAFETY
DEPOSIT BOX VALID?
IF THE THING DEPOSITED SHOULD EARN INTEREST, THE The stipulation is void. Even if as a rule, the Bank may
DEPOSITARY IS UNDER THE OBLIGATION limit its liability to some extent by agreement or
1. To collect the interest as it becomes due stipulation, the agreement or stipulation must not be
2. To take steps as may be necessary to preserve its value contrary to law and public policy.
and the rights corresponding to it The law on deposit provides that the depositary is liable for
loss due to fraud, negligence, delay, or contravention of
A DEPOSIT OF ORDER NOTES WAS MADE WITH MR. TAN. the tenor of the agreement. Any contrary stipulation
HE DIDNT COLLECT. CAN TAN BE HELD LIABLE? Yes. He would be void.
failed to send notice at the least.
Art. 1976. Unless there is a stipulation to the contrary, the
HOW CAN HE COLLECT? He can collect only bearer instruments depositary may commingle grain or other articles of the
and also through the execution of a special power of attorney in same kind and quality, in which case the various depositors
his favor. (Art. 1975 really applies only to BEARER instruments. If shall own or have a proportionate interest in the mass. (n)
it is an order instrument, there is a need for an indorsement or at
least, a special power of attorney, to enable the depositary to Art. 1977. The depositary cannot make use of the thing
collect the interest and capital when due.) deposited without the express permission of the depositor.

THE N/A STOCKS SHOULD BE IN THE NAME OF THE Otherwise, he shall be liable for damages.
DEPOSITOR.
However, when the preservation of the thing deposited
PANDORAS BOX FOR 60 DAYS. LESS THAN THE 60-DAY requires its use, it must be used but only for that purpose.
PERIOD, MS. AQUINO DEMANDS ITS RETURN FROM MR. (1767a)

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GENERALLY THE DEPOSITARY CANNOT MAKE USE OF THE Art. 1979. The depositary is liable for the loss of the thing
THING DEPOSITED WITHOUT THE EXPRESS PERMISSION OF through a fortuitous event:
THE DEPOSITOR. WHAT ARE THE EXCEPTIONS?
1. When the depositor has given his express permission to (1) If it is so stipulated;
the depositary to use the thing deposited
2. When the preservation of the thing deposited requires its (2) If he uses the thing without the depositor's
use, it must be used but only for that purpose permission;

WHO WILL DO THE VALUATION? (3) If he delays its return;

WHAT IS THE REASON FOR THIS RULE? (4) If he allows others to use it, even though he himself
The principal purpose of deposit is safekeeping, not use of may have been authorized to use the same. (n)
the thing. If the purpose is use, it is not deposit anymore.
If the depositary uses the thing deposited without WHEN IS THE DEPOSITARY LIABLE FOR THE LOSS OF THE
permission of the depositor, he shall be liable for damages. THING THROUGH A FORTUITOUS EVENT?
In addition, if the thing is lost even through fortuitous 1. If it is so stipulated;
event, the depositary shall bear the loss. 2. If he uses the thing without the depositor's permission;
3. If he delays its return;
Art. 1978. When the depositary has permission to use the 4. If he allows others to use it, even though he himself may
thing deposited, the contract loses the concept of a deposit have been authorized to use the same. (n)
and becomes a loan or commodatum, except where
safekeeping is still the principal purpose of the contract. Art. 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
The permission shall not be presumed, and its existence provisions concerning simple loan. (n)
must be proved. (1768a)
Art. 1981. When the thing deposited is delivered closed and
WHAT HAPPENS IF THE DEPOSITARY IS GIVEN sealed, the depositary must return it in the same condition,
PERMISSION TO USE? and he shall be liable for damages should the seal or lock be
It depends. broken through his fault.
1. If the purpose of the contract is still for safekeeping, then
it retains its concept as a deposit Fault on the part of the depositary is presumed, unless
2. If the purpose has become for the use or consumption of there is proof to the contrary.
the thing
a. Commodatumif the purpose is for a non- As regards the value of the thing deposited, the statement
consumable thing of the depositor shall be accepted, when the forcible
b. Mutuumif the purpose is for a consumable thing opening is imputable to the depositary, should there be no
or money proof to the contrary. However, the courts may pass upon
the credibility of the depositor with respect to the value
claimed by him.

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2. When there is necessity for opening the box in order to

When the seal or lock is broken, with or without the execute the instructions of the depositor as regards the
depositary's fault, he shall keep the secret of the deposit. deposit
(1769a)
Art. 1983. The thing deposited shall be returned with all its
Art. 1982. When it becomes necessary to open a locked box
or receptacle, the depositary is presumed authorized to do products, accessories and accessions.
so, if the key has been delivered to him; or when the
Should the deposit consist of money, the provisions relative
instructions of the depositor as regards the deposit cannot
be executed without opening the box or receptacle. (n) to agents in article 1896 shall be applied to the depositary.
(1770)

MS. AQUINO DELIVERS A PANDORAS BOX TO MR. TAN FOR OBLIGATION TO RETURN PRODUCTS, ACCESSORIES, AND
SAFEKEEPING. WHAT ARE MR. TANS OBLIGATIONS? ACCESSIONS
1. Tan must return the Pandoras box in the same condition it The depositor is the owner of or at least represents the
must be locked when returned. owner of the things deposited
The depositary must therefore return not only the thing
2. If the lock of the Pandoras box is broken through Mr. Tans itself but also all its products, accessions and accessories
fault, he shall be liable to Ms. Aquino for damages. Mr. Tan is which are a consequence of ownership
presumed negligent until proved otherwise.
OBLIGATION TO PAY INTEREST ON SUMS CONVERTED TO
HOW IS THE VALUE OF THE THING DETERMINED IN CASE PERSONAL USE
THE PANDORAS BOX IS OPENED? Ultimately, the court will If what has been deposited is money, the depositary has
decide the value of damages that Tan should pay, since the parties no right to make use thereof and therefore, he is not liable
will always get into a dispute over the value of the thing (i.e. to pay interest
Aquino would inflate the price, Tan would undervalue it, etc.) If the depositary be in delay or has used the money
without permission, he shall be liable for interest as
If the lock of the Pandoras box is broken, with or without Tans indemnity
fault, Tan must keep the secret of the deposit. If the contents of The depositary owes interest on the sums he has applied
the box turn out to be illegal or dangerousthe depositary should to his own use from the day on which he did so, and those
immediately call the cops. He may still be held liable for the which he still owes after the extinguishment of the deposit
breach of his obligation as depositary but at least he knows that he
has done a greater good to society by reporting the dastardly deed Art. 1984. The depositary cannot demand that the depositor
to the authorities. The court just might exonerate him of liability prove his ownership of the thing deposited.
for the breach because of his fulfillment of a civic duty.
Nevertheless, should he discover that the thing has been
WHEN MAY TAN OPEN THE PANDORAS BOX? stolen and who its true owner is, he must advise the latter
1. When there is presumed authority authority is presumed of the deposit.
if the key has been delivered to him; or

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If the owner, in spite of such information, does not claim it

within the period of one month, the depositary shall be Art. 1985. When there are two or more depositors, if they
relieved of all responsibility by returning the thing are not solidary, and the thing admits of division, each one
deposited to the depositor. cannot demand more than his share.

If the depositary has reasonable grounds to believe that the When there is solidarity or the thing does not admit of
thing has not been lawfully acquired by the depositor, the division, the provisions of Articles 1212 and 1214 shall
former may return the same. (1771a) govern. However, if there is a stipulation that the thing
should be returned to one of the depositors, the depositary
DEPOSITOR NEED NOT PROVE OWNERSHIP shall return it only to the person designated. (1772a)
The depositary who receives the thing in deposit cannot
require that the depositor prove his ownership over the RIGHT OF TWO OR MORE DEPOSITORS
thing 1. Thing deposited divisible and depositors not solidaryif the
thing deposited is divisible and there are two or more
WHERE THIRD PERSON APPEARS TO BE THE OWNER depositors who are not solidary, each one can demand
Should he discover that the thing has been stolen and who only his proportionate share thereto
its true owner is, he must advise the latter of the deposit 2. Obligation solidary or thing deposited not divisibleif the
If the owner, in spite of such information, does not claim it obligation is solidary or the thing is not divisible, the rules
within the period of one month, the depositary shall be on active solidarity shall apply, to the effect that each one
relieved of all responsibility by returning the thing of the solidary depositors may do whatever may be useful
deposited to the depositor to the others but not anything which may be prejudicial to
If the depositary has reasonable grounds to believe that the latter, and the depositary may return the thing to any
the thing has not been lawfully acquired by the depositor, one of the solidary depositors unless a demand for its
the former may return the same. return has been made by one of them in which case
delivery should be made to him
CAN THE DEPOSITARY REQUIRE THE PRESENTATION OF AN 3. Return to one of depositors stipulatedif by stipulation the
ID? Yes. Proof of identification is different from proof of thing should be returned to one of the depositors, the
ownership. depositary is bound to return it only to the person
designated although he has not made any demand for its
CAN THE DEPOSITARY REQUIRE THE PRESENTATION OF return.
THE RECEIPT? Yes. It is only a proof of identification and not
ownership. Art. 1986. If the depositor should lose his capacity to
contract after having made the deposit, the thing cannot be
IN DEPOSIT, WHAT SHOULD BE ASCERTAINED AT THE VERY returned except to the persons who may have the
LEAST? Authority to make deposit should be ascertained. Take administration of his property and rights. (1773)
note that before the deposit, proof of ownership may be required.
The prohibition applies subsequent to the deposit. There is PERSON TO WHOM RETURN MUST BE MADE
required due diligence review. 1. The depositary is obliged to return the thing deposited
when required, to the depositor, to his heirs and

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successors, or to the person who may have been This provision shall not apply when the thing is judicially
designated in the contract attached while in the depositary's possession, or should he
2. If the person was incapacitated at the time of making the have been notified of the opposition of a third person to the
deposit, the property must be returned to his guardian or return or the removal of the thing deposited. In these
administrator or the person who made the deposit or to cases, the depositary must immediately inform the
the depositor himself should he acquire capacity depositor of the attachment or opposition. (1775)
3. Even if the depositor had capacity at the time of making
the deposit but he subsequently loses his capacity during TIME OF RETURN
the deposit, the thing must be returned to his legal As a rule, the depositor can demand the return of the thing
representative deposited at will and this is true whether the period has
been stipulated or not
Art. 1987. If at the time the deposit was made a place was If the deposit is for compensation, the depositary is
designated for the return of the thing, the depositary must entitled to the compensation for the whole period. In this
take the thing deposited to such place; but the expenses for case, the period is for both the depositor and depositary.
transportation shall be borne by the depositor.
WHEN DEPOSITARY IS NOT OBLIGED TO RETURN THING
If no place has been designated for the return, it shall be DEPOSITED
made where the thing deposited may be, even if it should 1. When the thing has been judicially attached while in the
not be the same place where the deposit was made, depositarys possessionhe would be disobeying the
provided that there was no malice on the part of the judicial order of attachment
depositary. (1774) 2. When he has been notified of the opposition of a third
person to the return or removal of the thing deposited
PLACE OF RETURN
The thing must be returned at the place agreed upon by Art. 1989. Unless the deposit is for a valuable
the parties, and in the absence of stipulation, at the place consideration, the depositary who may have justifiable
where the thing deposited might even if it shouldnt be the reasons for not keeping the thing deposited may, even
same place where the original deposit was made provided before the time designated, return it to the depositor; and if
the transfer was accomplished without malice on the part the latter should refuse to receive it, the depositary may
of the depositary secure its consignation from the court. (1776a)
In the first place, the expenses for transportation shall be
borne by the depositor. This is just because the deposit is RIGHT OF DEPOSITARY TO RETURN THING DEPOSITED
constituted for the benefit of the depositor and not the 1. Deposit gratuitousthe depositary may likewise return the
depositary who assumes no more than the safekeeping thing deposited notwithstanding that a period has been
and the return of the thing fixed for the thing if
a. The deposit is gratuitous
Art. 1988. The thing deposited must be returned to the b. Justifiable reasons
depositor upon demand, even though a specified period or 2. Deposit for a valuable considerationif the deposit is for a
time for such return may have been fixed. valuable consideration, the depositary has no right to
return the thing deposited before the expiration of the time

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designated even if he should suffer inconvenience as a OBLIGATIONS OF THE DEPOSITOR

consequence
Art. 1992. If the deposit is gratuitous, the depositor is
Art. 1990. If the depositary by force majeure or government obliged to reimburse the depositary for the expenses he
order loses the thing and receives money or another thing may have incurred for the preservation of the thing
in its place, he shall deliver the sum or other thing to the deposited. (1779a)
depositor. (1777a)
OBLIGATION TO PAY EXPENSES OF PRESERVATION
LIABILITY FOR LOSS BY FORCE MAJEURE OR GOVERNMENT 1. Deposit gratuitousthe above article applies only if the
ORDER deposit is gratuitous. It rests on equity. The depositor
The depositary has the obligation to return the thing would have incurred just the same had the thing remained
deposited with him. Without the duty of reimbursement imposed by
But he isnt liable for loss of the thing by force majeure or the article, the depositor would be enriching himself at the
by government order expense of the depositary. The rule is different in
However, if in place of the thing he receives money or commodatum.
another thing, he has the duty to deliver to the depositor 2. Deposit for compensationif the deposit is for valuable
what he has acquired otherwise, he would enrich himself consideration, the expenses of preservation are borne by
at the expense of the depositor the depositary because they are deemed included in the
compensation. There can however be a contrary
Art. 1991. The depositor's heir who in good faith may have stipulation.
sold the thing which he did not know was deposited, shall
only be bound to return the price he may have received or Art. 1993. The depositor shall reimburse the depositary for
to assign his right of action against the buyer in case the any loss arising from the character of the thing deposited,
price has not been paid him. (1778) unless at the time of the constitution of the deposit the
former was not aware of, or was not expected to know the
ALIENATION IN GOOD FAITH BY DEPOSITARYS HEIR dangerous character of the thing, or unless he notified the
This above article envisions a situation where the depositary of the same, or the latter was aware of it
depositary dies and the object of the deposit is left with his without advice from the depositor. (n)
heir who, in good faith, sells it
The obligation of the heir is limited to the return of the IF YOU COULD DRAFT THE RULE, WHAT WOULD IT BE? JPSP
price received or to assign the right to collect the same if it says that the one who will be liable is the one who could have
hasnt been paid and not the real value of the thing avoided the loss.
The rule is based on considerations of equity
If the purchaser who acquired the thing acted in bad faith,
Art. 1994. The depositary may retain the thing in pledge
the depositor may bring an action against him for its
recovery until the full payment of what may be due him by reason of
the deposit. (1780)
If the heir acts in bad faith, he is liable for damages. The
sale or appropriation of the thing constitutes estafa.
DEPOSITARYS RIGHT OF RETENTION

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Talks about legal pledge (2) When it takes place on the occasion of any calamity,
The thing retained serves as security for payment of what such as fire, storm, flood, pillage, shipwreck, or other
may be due to the depositary by reason of the deposit similar events. (1781a)
Depositary may foreclose through public auction
Art. 1997. The deposit referred to in No. 1 of the preceding
Art. 1995. A deposit its extinguished: article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
(1) Upon the loss or destruction of the thing deposited; voluntary deposit.

(2) In case of a gratuitous deposit, upon the death of The deposit mentioned in No. 2 of the preceding article shall
either the depositor or the depositary. (n) be regulated by the provisions concerning voluntary deposit
and by Article 2168. (1782)
CAUSES OF EXTINGUISHMENT OF DEPOSIT
The causes mentioned are not exclusive WHEN DEPOSIT IS NECESSARY
There could also be other causes such as return of the 1. When it is made in compliance with a legal obligation
thing, Novation, merger, expiration of term, fulfillment of 2. When it takes place on the occasion of any calamity, such
resolutory condition as fire, storm, flood, pillage, shipwreck, or other similar
events
EFFECT OF DEATH OF DEPOSITOR OR DEPOSITARY 3. Travelers in hotels or inns
1. Deposit gratuitousif the deposit is gratuitous, the death 4. Made by passengers with common carriers
of either the depositor or depositary extinguishes the
deposit. NECESSARY DEPOSIT IN COMPLIANCE WITH A LEGAL
2. Deposit for compensationa deposit for a compensation OBLIGATION
isnt extinguished by the death of either party because 1. The judicial deposit of a thing the possession of which is
unlike a gratuitous deposit, an onerous deposit isnt being disputed in a litigation by two or more persons
personal in nature. Hence, the rights and obligations 2. The deposit with a bank or public institution of public
arising therefrom are transmissible to their respective bonds or instruments of credit payable to order or bearer
heirs. But the heirs of either party have a right to given in usufruct when the usufructuary doesnt give
terminate the deposit even before the expiration of the proper security for their conservation
term. 3. The deposit of a thing pledged when the creditor uses the
same without the authority of the owner or misuses it in
NECESSARY DEPOSIT any other way
4. Those required in suits as provided for in the Rules of
Art. 1996. A deposit is necessary: Court
5. Those constituted to guarantee contracts with the
(1) When it is made in compliance with a legal government. In this last case, the deposit arises from an
obligation; obligation of a public or administrative character.

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Art. 1998. The deposit of effects made by the travelers in c. Motela roadside hotel or group of furnished
hotels or inns shall also be regarded as necessary. The cottages or cabins providing overnight lodging for
keepers of hotels or inns shall be responsible for them as motorists; motor court.
depositaries, provided that notice was given to them, or to
their employees, of the effects brought by the guests and Art. 2000. The responsibility referred to in the two
that, on the part of the latter, they take the precautions preceding articles shall include the loss of, or injury to the
which said hotel-keepers or their substitutes advised personal property of the guests caused by the servants or
relative to the care and vigilance of their effects. (1783) employees of the keepers of hotels or inns as well as
strangers; but not that which may proceed from any force
Art. 1999. The hotel-keeper is liable for the vehicles, majeure. The fact that travelers are constrained to rely on
animals and articles which have been introduced or placed the vigilance of the keeper of the hotels or inns shall be
in the annexes of the hotel. (n) considered in determining the degree of care required of
him. (1784a)
DEPOSIT BY TRAVELLERS IN HOTELS AND INNS
1. They have been previously informed about the effects Art. 2001. The act of a thief or robber, who has entered the
brought by their guests hotel is not deemed force majeure, unless it is done with
2. The latter have taken the precautions prescribed regarding the use of arms or through an irresistible force. (n)
their safekeeping
Art. 2002. The hotel-keeper is not liable for compensation if
EXTENT OF LIABILITY OF KEEPERS OF HOTELS AND INNS the loss is due to the acts of the guest, his family, servants
The liability isnt limited to effects lost or damaged in the or visitors, or if the loss arises from the character of the
hotel rooms which come under the term baggage or things brought into the hotel. (n)
articles such as clothing as are ordinarily used by travelers
but include those lost or damaged in hotel annexes such as WHEN HOTEL-KEEPER LIABLE
vehicles in the hotels garage 1. The loss or injury is caused by his servants or employees
The responsibility extends to all those who offer lodging for as well as by strangers provided that notice has been
a compensation, whatever may be their character given and proper precautions taken
2. The loss is caused by the act of the thief or robber done
TERMS EXPLAINED without the use of arms and irresistible force for in this
1. Travelers or guestsit refers to transients and not to case, the hotel-keeper is apparently negligent.
boarders. Non-transients are governed by the rules on
lease. WHEN HOTEL-KEEPER IS NOT LIABLE
2. Hotel-keeper and inn-keeper 1. The loss or injury is caused by force majeure, theft or
a. Hotela house or large building that supplies robbery by a stranger with the use of arms or irresistible
rooms and food for pay to travelers and others; force, unless he is guilty of fault or negligence in failing to
inn. provide against the loss or injury from his cause
b. Inna place where travelers and others can get 2. The loss is due to the acts of the guests, his family,
meals and a room to sleep in. Hotels have largely servants, or visitors
taken the place of the old inns.

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3. The loss arises from the character of the things brought on account of lodging, and supplies usually furnished to
into the hotel hotel guests. (n)

Art. 2003. The hotel-keeper cannot free himself from HOTEL-KEEPERS RIGHT TO RETAIN
responsibility by posting notices to the effect that he is not Nature of a pledge created by operation of law
liable for the articles brought by the guest. Any stipulation Incidentally, the act of obtaining food or accommodation in
between the hotel-keeper and the guest whereby the a hotel or inn without paying thereof constitutes estafa.
responsibility of the former as set forth in articles 1998 to
2001 is suppressed or diminished shall be void. (n) EXAMPLES OF NECESSARY DEPOSIT

EXEMPTION OR DIMUNITION OF LIABILITY BOARDING A PLANE AND DEPOSITING THE LUGGAGE?

The rule in this article is similar to the rule on common Common carriers and not covered by provisions.
carriers which doesnt allow a common carrier to dispense
with or limit his responsibility by stipulation or by posting STORES AND CHECKING IN OF BAGS? No, there is no legal
of notices obligation. It is for the protection of the store.
Such stipulations is deemed contrary to law, morals, and
public policy CONDOTELYOU HAVE RENTED FOR 2 DAYS A UNIT. ARE
1. Hotel-keepers and inn-keepers in offering their YOU COVERED BY RULES ON INNS AND HOTELS? Yes. The
accommodations to the public, practically volunteer as definition of travelers centers on being transients. There is an
depositaries, and as such, they should be subject to an expectation of same obligation from a hotel owner.
extraordinary degree of responsibility for the protection
and safety of travelers who have no alternative but rely on WHEN YOU PARK IN A PARKING LOT? IS THIS A
good faith and care of those with whom they take lodging NECESSARY DEPOSIT? You dont leave the keys and instead,
2. Inn-keepers by the nature of their business, have you get a ticket. Safekeeping is not the primary purpose. If this
supervision and control of their inns and the premises is indeed a deposit, then there would be a higher cost.
thereof. As a matter of fact, authorities are to the effect
that it is not necessary in order to hold an inn-keeper PARK AND FLY? IT IS LIKE RO-RO BUT IT IS FOR AN
liable that the effects of the guests be actually delivered to AIRPLANE. Yes.
him or his employee, it is enough that they are within the
inn. VALET PARKING? No.

CAN THERE BE STIPULATION EXEMPTING LIABILITY FOR VALET PARKING IN A HOTEL? Yes.
GROSS NEGLIGENCE? No since you cannot waive liability for
gross negligence as this would be tantamount to waiving liability PARKING BUILDING? No, unless otherwise stipulated.
for fraud.
VALET PARKING IN A HOTEL AND GETTING A ROOM? Yes.
Art. 2004. The hotel-keeper has a right to retain the things HOW ABOUT DINING IN THE HOTEL? Yes. HOW ABOUT
brought into the hotel by the guest, as a security for credits TOGETHER WITH USING THE TOILET INSIDE THE HOTEL?
Disputable since there shouldnt be any reward for freeloaders.

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A deposit may be constituted judicially or extrajudicially

DOES THE PROVISIONS OF NECESSARY DEPOSIT EXTEND Takes place when an attachment or seizure of property in
TO THE COMPANION OF THE DECLARED GUEST? You can litigation is ordered by the court
infer from Article 2002. It depends on who was negligent.
NATURE AND PURPOSE OF JUDICIAL DEPOSIT
THERE WAS DIRECTIVE FROM THE HOTEL NOT TO PUT Judicial deposit is auxiliary to a case pending in court
VALUABLE DOCUMENTS IN THE SAFETY DEPOSIT BOX BUT Purpose is to maintain the status quo during the pendency
THE GUEST STILL DID OTHERWISE. LIABLE? Yes. No one of the litigation or to insure the rights of the parties to the
could have entered the room and opened the box but only through property in case of a favorable judgment
negligence of the hotel. The hotel is in the best position to control.
OBLIGATION OF DEPOSITARY OF SEQUESTRATED
BALIKBAYAN CHECKED IN. SOMEONE CALLED AND ASKED PROPERTY
TO MEET UP. THE BALIKBAYAN WAS HELD UP FOR The depositary of sequestered property is the person
RANSOM. IS THE HOTEL LIABLE? Maybe not. appointed by the court
He has the obligation to take care of the property with
YOU DONT PAY FOR ACCOMODATIONS. WHAT CAN THE diligence of a good father of a family and he may not be
HOTEL DO? The guest can be held liable for estafa. It can retain relieved of his responsibility until the litigation is ended or
the goods by way of pledge. the court so orders

SEQUESTRATION OR JUDICIAL DEPOSIT JUDICIAL EXTRAJUDICIAL

CAUSE OR ORIGIN By will of the court By will of the parties
Art. 2005. A judicial deposit or sequestration takes place PURPOSE Security and to Custody and
when an attachment or seizure of property in litigation is secure the right of a safekeeping of the
ordered. (1785) party to recover in thing
case of a favorable
Art. 2006. Movable as well as immovable property may be judgment
the object of sequestration. (1786) SUBJECT MATTER Either movable or Only movable
immovable property
Art. 2007. The depositary of property or objects RENUMERATION Always remunerated May be
sequestrated cannot be relieved of his responsibility until compensated or not
the controversy which gave rise thereto has come to an IN WHOSE In behalf of the In behalf of the
end, unless the court so orders. (1787a) BEHALF IT IS person who by depositor or third
HELD judgment has a person designated
Art. 2008. The depositary of property sequestrated is bound right
to comply, with respect to the same, with all the obligations
of a good father of a family. (1788)

WHEN JUDICIAL DEPOSIT TAKES PLACE

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Art. 2009. As to matters not provided for in this Code, 9. A statement of the amount of advances made and of
judicial sequestration shall be governed by the Rules of liabilities incurred for which the warehouseman claims as
Court. (1789) lien. If the precise amount for such advances made or of
such liabilities incurred is, at the same time of the issue of
APPLICABLE LAW the receipt, unknown to the warehouseman or to his agent
The law on judicial deposit is remedial and the Rules of who issues it, a statement of the fact that advances have
Court is thus applicable been made or liabilities incurred and the purpose thereof is
Rule 57 on preliminary attachment, Rule 59 on sufficient
receivership, and Rule 60 on replevin
EFFECT OF OMISSION OF THE ESSENTIAL CONTENTS
THE WAREHOUSE RECEIPTS LAW A warehouseman shall be liable to any person injured
thereby all damages caused by the omission from a
ISSUE OF WAREHOUSE RECEIPTS negotiable receipt of any of the terms herein required
Validity of the receipt not affected
WHO MAY ISSUE WAREHOUSE RECEIPT? Negotiability of the receipt not affected
A warehouseman is a person lawfully engaged in the
business of storing goods for profit. TERMS THAT CANNOT BE INCLUDED IN THE WAREHOUSE
Only a warehouseman may issue warehouse receipts RECEIPT
1. Those contrary to any provision of the law
WHAT SHOULD BE DONE TO PUT THE RECEIPT WITHIN THE 2. In any wise impair the warehousemans obligation to
PURVIEW OF WAREHOUSE RECEIPTS LAW? exercise that degree of care in the safekeeping of the
The warehouse receipt should be issued by the goods entrusted to him which a reasonably careful man
warehouseman would exercise with regard to similar goods of his own

FORM OF RECEIPTS; ESSENTIAL TERMS NON-NEGOTIABLE WAREHOUSE RECEIPT

1. The location of the warehouse where the goods are stored Receipt in which it is stated that the goods received will be
2. The date of issue of the receipt delivered to the depositor or to any specified person
3. Consecutive number of the receipt
4. A statement whether the goods received will be delivered NEGOTIABLE WAREHOUSE RECEIPT
to the bearer, to a specified person or to a specified person Receipt in which it is stated that the goods received will be
or his order delivered to the bearer or to the order of any person
5. The rate of storage charges named in such receipt
6. A description of the goods or of the packages containing No provision shall be inserted in a negotiable receipt that it
them is non-negotiable. Such provision if inserted shall be void.
7. The signature of the warehouseman which may be made
by his authorized agent DUPLICATE RECEIPTS MUST BE MARKED
8. If the receipt is issued for goods of which the When more than one is issued for the same goods, the
warehouseman is owner, either solely or jointly or in word duplicate shall be plainly placed upon the face of
common with others, the fact of such ownership every such receipt, except the first one issued

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A warehouseman shall be held liable for damages for 2. Person who either himself entitled to delivery by the terms
failure to do so to anyone who purchased the subsequent of the non-negotiable receipt issued for the goods, or who
receipt for value supposing it to be original, even though has written authority from the person so entitled either
the purchaser be after the delivery of the goods by the endorsed upon the receipt or written on another paper
warehouseman to the holder of the original receipt 3. Person in possession of a negotiable receipt by the terms
of which the goods are deliverable to him or order, or to
OBLIGATIONS AND RIGHTS OF WAREHOUSEMAN UPON bearer, or which has been indorsed to him or in blank by
THEIR RECEIPTS the person to whom delivery was promised by the terms of
the receipt or by his mediate or immediate indorser
PRINCIPAL OBLIGATIONS OF THE WAREHOUSEMAN
1. To take care of the goods entrusted to his safekeeping WAREHOUSEMANS LIABILITY FOR MISDELIVERY
2. To deliver them to the holder of the receipt or the Where a warehouseman delivers the goods to one who is
depositor provided the following conditions are fulfilled not in fact lawfully entitled to the possession of them, the
there is demand by the depositor accompanied by either warehouseman shall be liable for conversion/estafa to all
a. An offer to satisfy the warehousemans lien having a right of property or possession in the goods if he
b. An offer to surrender the receipt, if negotiable with delivered the goods otherwise than as authorized
such indorsements as would be necessary for the And though he delivered the goods as authorized he shall
negotiation of the receipts be so liable if prior to such delivery he had either
c. A readiness and willingness to sign, when the o Been requested, by or on behalf of the person
goods are delivered, an acknowledgement that lawfully entitled to a right of property or
they have been delivered, if such signature is possession in the goods, not to make such delivery
requested by the warehouseman o Had information that the delivery about to be
made was to one not lawfully entitled to the
WHAT SHOULD ACCOMPANY THE DEMAND FOR THE RETURN possession of the goods
OF THE GOODS?
1. An offer to satisfy the warehousemans lien WHAT IS CONVERSION?
2. An offer to surrender the receipt, if negotiable with such Unauthorized assumption and exercise of the right of
indorsements as would be necessary for the negotiation of ownership over goods belonging to another through the
the receipts alteration of their condition or the exclusion of the owners
3. A readiness and willingness to sign, when the goods are right
delivered, an acknowledgement that they have been
delivered, if such signature is requested by the NEGOTIABLE RECEIPTS MUST BE CANCELLED OR MARKED
warehouseman WHEN GOODS DELIVERED OR WHEN PART OF IT IS
DELIVERED. FAILURE TO DO SO WILL MAKE THE
A WAREHOUSEMAN IS JUSTIFIED IN DELIVERING THE WAREHOUSEMAN LIABLE
GOODS TO ONE WHO IS The warehouseman is liable to any one who purchases for
1. Person lawfully entitled to the possession of the goods, or value in good faith such receipt, for failure to deliver the
his agent goods to him, whether such purchaser acquired title to the

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receipt before or after the delivery of the goods by the has been or shall be negotiated for value without notice of
warehouseman the proceedings or of the delivery of the goods

EFFECRT OF ALTERATION ON LIABILITY OF LIABILITY OF WAREHOUSEMAN AS TO DUPLICATEHE

WAREHOUSEMAN WARRANTS
1. Alteration immaterialwhether fraudulent or not, whether 1. That the duplicate is an accurate copy of the original
authorized or not, the warehouseman is liable on the receipt
altered receipt according to its original tenor 2. Such original receipt is uncancelled at the date of the issue
2. Alteration materialif the alteration is material, but of the duplicate
authorized, the warehouseman is liable according to the
terms of the receipt as altered WAREHOUSEMAN CANNOT SET UP TITLE IN HIMSELF
3. Material alteration innocently madethe warehouseman is The warehouseman cannot refuse to deliver the goods on
liable on the altered receipt according to its original receipt the ground that he has acquired title or right to the
4. Material alteration fraudulently madewarehouseman is possession of the same unless such title or right is
liable according to the original tenor of the receipt to a derived
purchaser of the receipt for value without notice, and even o Directly or indirectly from a transfer made by the
to the alterer and subsequent purchasers with notice depositor at the time of the deposit for storage or
except that as regards to the last two, the subsequent thereto
warehousemans liability is limited only to delivery as he is o From the warehousemans lien
excused from any liability
NOTA BENE: it is clear that even a fraudulent alteration cannot INTERPLEADER OF ADVERSE CLAIMANTS
divest the title of the owner of stored goods and the If more than one person claims the title or possession of
warehouseman is, therefore, liable to return them to the owner. the goods, the warehouseman may, either as a defense to
But a bona fide holder acquires no right to the goods under a an action brought against him for non-delivery of the
negotiable receipt which has been lost or stolen or to which the goods, or as an original suit, whichever is appropriate,
indorsement of the depositor has been forged. require all known claimants to interplead

LOST OR DESTROYED RECEIPTS WAREHOUSEMAN HAS REASONABLE TIME TO DETERMINE

The court may order the delivery of the goods upon VALIDITY OF CLAIMS
satisfactory proof of such loss or destruction and upon the If someone other than the depositor or person claiming
giving of a bond with sufficient sureties to be approved by under him has a claim to the title or possession of goods,
the court to protect the warehouseman from any liability or and the warehouseman has information of such claim, the
expense, which he or any person injured by such delivery warehouseman shall be excused from liability for refusing
may incur by reason of the original receipt remaining to deliver the goods, either to the depositor or person
outstanding claiming under him or to the adverse claimant, until the
The court may also in its discretion order the payment of warehouseman has had a reasonable time to ascertain the
the warehousemans reasonable costs and counsel fees validity of the adverse claim or to bring legal proceedings
The order of the court shall not relieve the warehouseman to compel all claimants to interplead
from liability to a person to whom the negotiable receipt

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ADVERSE TITLE OF THIRD PERSON NOT A DEFENSE FOR The warehouseman has the direct obligation to hold
REFUSAL TO DELIVER possession of the goods for the original owner or for the
person known the negotiable receipt of title has been duly
LIABILITY OF WAREHOUSEMAN FOR NON-EXISTENCE OR negotiated.
MISDESCRIPTION OF GOODS While in possession of such warehouseman, the goods
As a general rule, the warehouseman is under obligation to cannot be attached or levied upon under an execution
deliver the identical property stored with him and if he fails unless
to do so, he is liable directly to the owner o The document is first surrendered
As against a bona fide holder of a warehouse receipt, the o Its negotiation is enjoined
warehouseman is estopped whether the receipt is o The document is impounded by the court
negotiable or not, to deny that he has received the goods This shall not apply if the person depositing is not the
described in it owner of the goods or one who has no right to convey title
to the goods binding upon the owner.
LIABILITY OF WAREHOUSEMAN FOR LOSS DUE TO LACK OF Neither shall it apply to actions for recovery or manual
CARE delivery of goods by the real owner nor to cases where the
The warehouseman is required to exercise ordinary or attachment is made before the issuance of the negotiable
reasonable care in the custody of the goods, that is, the receipt of title
care is reasonably careful owner would exercise over
similar goods of his own. CREDITORS REMEDIES TO REACH NEGOTIABLE RECEIPTS
The warehouseman isnt liable for any loss or injury to the A creditor whose debtor is the owner of negotiable receipt
goods, which couldnt have been avoided by the exercise shall be entitled to such aid from courts of appropriate
of such care. Of course, what constitutes ordinary or jurisdiction, by injunction and otherwise, in attaching such
reasonable care depends upon the circumstances such as receipt or in satisfying the claim by means thereof as is
the character and value of the property and the character allowed by law or in equity in regard to property which
and location of the warehouse. cannot be readily be attached or levied upon by ordinary
legal process
COMMINGLING OF DEPOSITED GOODS
As a general rule, a warehouseman may not mingle goods WHAT CLAIMS ARE INCLUDED IN THE WAREHOUSEMANS
belonging to depositors LIEN
In case of fungible goods, the warehouseman may mingle 1. All lawful charges for storage and preservation of the
them with the goods of the same kind and grade provided goods
that he authorized by agreement or custom 2. All lawful claims for money advancedInterests,
Commingling is intended for the benefit of the Insurance, Transportation, Labor, Weighing, Cooperating
warehouseman. It would, indeed be strange if the and other charges and expenses in relation to the goods
warehouseman could escape his liability to the owner of 3. All reasonable charges and expenses for notice and
the goods by the simple process of commingling them advertisements of sale
without authorization 4. Sale of goods where default has been made in satisfying
warehousemans lien
ATTACHMENT OR LEVY OF A NEGOTIABLE RECEIPT

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AGAINST WHAT PROPERTY THE LIEN MAY BE ENFORCED a. An itemized statement of the claim, showing the
1. Against all goods, whenever deposited, belonging to the sum due at the time of the notice and the dates
person who is liable to the debtor for the claims in regard when it became due
to which the lien is asserted b. A brief description of the goods
2. Against all goods belonging to others which have been c. A demand that such amount of the claim as stated
deposited at any time by the person who is liable as debtor shall be paid on or before the day mentioned, not
for claims in regard to which the lien is asserted if such less than 10 days from the delivery of the notice if
person had been entrusted with the possession of the it is personally delivered, or from the time when
goods that a pledge of the same by him at the time of the the notice shall reach its destination, according to
deposit to one who took the goods in good faith for value due course of post, if the notice is sent by mail
would have been valid d. A statement that unless the claim is paid within the
time specified, the goods will be advertised for sale
HOW WAREHOUSEMAN LOSES HIS LIEN and sold by auction at a specified time and place
1. By surrendering possession thereof
2. By refusing to deliver the goods when a demand is made ENFORCEMENT OF WAREHOUSEMANS LIEN
with which he is bound to comply under the provisions of 1. By refusing to deliver the goods until the lien is satisfied
the law 2. By causing the extrajudicial sale of the property and
applying the proceeds to the value of the lien
LIEN WHERE RECEIPT NEGOTIABLE 3. By filing a civil action for collection of the unpaid charges
With the exception of the charges for the storage or or by way of counterclaim in an action to recover the
preservation of goods for which a negotiable receipt has property from him
been issued, the lien exists only for the other charges
expressly enumerated in the receipt so far as they are EFFECT OF SALE OF GOODS
written although the amount of the said charge isnt stated 1. In case of sale of goods, the warehouseman is not liable
for nondelivery even if the receipt given for the goods
OTHER THINGS IN CONNECTION TO WAREHOUSEMANS when they were deposited be negotiated.
LIEN 2. When the sale was made without the publication
1. Warehouseman need not deliver lien is satisfied requirement and before the time specified by law, such
2. Warehousemans lien doesnt preclude other remedies sale is void and the purchaser of the goods acquires no
title in them.
SATISFACTION OF LIEN BY SALE
1. The warehouseman shall give a written notice to the ACTS FOR WHICH WAREHOUSEMAN IS LIABLE
person on whose account the goods are held, and to any 1. Failure to stamp duplicate on copies of negotiable receipt
other person known by the warehouseman to claim an 2. Failure to place non-negotiable or not negotiable on the
interest in the goods. Such notice shall be given by not negotiable receipt
delivery in person or by registered mail addressed to the 3. Misdelivery of the goods
last known place of business or abode of the person to be 4. Failure to effect cancellation of a negotiable receipt upon
notified. delivery of the goods
2. The notice shall contain

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5. Issuing receipt for non-existing goods or misdescribed 2. The goods covered by the receipt cannot be garnished or
goods levied upon under execution unless it is surrendered, or
6. Failure to take care of the goods impounded, or its negotiation enjoined
7. Failure to give notice in case of sale of goods to satisfy the 3. In case of negotiation, the holder acquires the direct
lien or because the goods are perishable or hazardous obligation of the warehouseman to hold possession of the
goods for him without notice to such warehouseman
NEGOTIATION AND TRANSFER OF RECEIPTS 4. The goods it covers arent subject to sellers lien or
stoppage in transitu
NEGOTIATION OF NEGOTIABLE RECEIPT BY DELIVERY
1. Where by the terms of the receipt, the warehouseman WHO MAY NEGOTIATE A RECEIPT
undertakes to deliver the goods to the bearer 1. By the owner thereof
2. Where by the terms of the receipt, the warehouseman 2. By any person to whom the possession or custody of the
undertakes to deliver the goods to the order of a specified receipt has been entrusted by the owner, if by the terms of
person, and such person or a subsequent indorsee of the the receipt, the warehouseman undertakes to deliver the
receipt has indorsed it in blank or to bearer goods to the order of the person to whom the possession
a. Where by the terms of the receipt, the goods are or custody of the receipt has been entrusted, or if at the
deliverable to bearer or where a negotiable receipt same time of such entrusting, the receipt is in such form
has been indorsed in blank or bearer, any holder that it may be negotiated by delivery
may indorse the same to himself or to any other
specified person, and in such case the receipt shall RIGHTS OF PERSON TO WHOM RECEIPT HAS BEEN
thereafter be negotiated only by the indorsement NEGOTIATED
by such indorsee 1. The title of the person negotiating the receipt over the
goods covered by the receipt
NEGOTIATION OF NEGOTIABLE RECEIPT BY INDORSEMENT 2. The title of the person to whose order by the terms of the
1. If indorsed in blank or to bearer, the document becomes receipt the goods were to be delivered over such goods
negotiable by delivery 3. The direct obligation of the warehouseman to hold
2. If indorsed to a specified person, it may be again possession of the goods for him, as if the warehouseman
negotiated by the indorsement of such person in blank, to directly contracted with him
bearer or to another specified person. Delivery alone isnt
sufficient. RIGHTS OF PERSON TO WHOM RECEIPT HAS BEEN
TRANSFERRED
TRANSFER OF NON-NEGOTIABLE RECEIPT 1. Title to the goods as against the transferor
A non-negotiable receipt of title cannot be negotiated. 2. The right to notify the warehouseman of the transfer
Nevertheless, it can be transferred or assigned by delivery thereof
The assignee or transferee only acquires the rights of the 3. The right thereafter to acquire the obligation of the
transferor or assignor warehouseman to hold the goods for him

ADVANTAGES OF A NEGOTIABLE WAREHOUSE RECEIPT RIGHTS OF TRANSFEREE OF NEGOTIABLE RECEIPT

1. It protects a purchaser for value and in good faith 1. The right to the goods as against the transferor

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2. The right to compel the transferor to indorse the receipt thereby the genuineness of the receipt nor the quality or
quantity of the goods therein described
RULE WHERE RECEIPT IS SUBSEQUENTLY INDORSED
For the purpose of determining whether the transferee is a WHEN NEGOTIATION NOT IMPAIRED BY FRAUD, DURESS,
purchaser for value in good faith without notice, the MISTAKE
negotiation shall take effect as of the time when the The validity of the negotiation of a receipt isnt impaired by
indorsement is actually made not at the time the receipt is the fact that such negotiation was a breach of duty on the
delivered part of the person making the negotiation, or by the fact
Reason for the rule: negotiation becomes complete only at that the owner of the receipt was induced by fraud,
the time of indorsement mistake or duress to entrust the possession or custody of
the receipt to such person, if the person to whom the
WARRANTIES ON SALE OF RECEIPT receipt was negotiated, or to a person to whom the receipt
1. That the receipt is genuine is subsequently negotiated paid value therefor, without
2. That he has a legal right to negotiate or transfer it notice of the breach of duty, fraud, mistake or duress
3. That he has knowledge of no fact which would impair the
validity of the worth of the receipt EFFECT OF SUBSEQUENT NEGOTIATION BY SELLER, ETC.
4. That he has a right to transfer the title to the goods and The purchaser, mortgagee, or pledgee of goods for which a
that the goods are merchantable or fit for a particular negotiable receipt has been issued, or of the negotiable
purpose, whenever such warranties would have been receipt itself, has the duty to require the negotiation of the
implied, if the contract of the parties had been to transfer receipt to him otherwise, his failure will have the same
without a receipt of the goods represented thereby effect as an express authorization on his part to the seller,
mortgagor, or pledgor in possession of such receipt to
INDORSER, NOT A GUARANTOR make subsequent negotiation
The indorsement of a receipt doesnt make the indorser The subsequent purchaser must have taken the receipt in
liable for any failure on the part of the warehouseman or good faith and for value in order to acquire a better right
previous indorser of the receipt to fulfill their respective
obligations INDORSEES RIGHT SUPERIOR TO VENDORS LIEN
An innocent holder of a negotiable receipt has a better
NO WARRANTY IMPLIED FROM ACCEPTING PAYMENT OF A right to the goods for which the receipt is given than the
DEBT vendor who has a vendors lien upon such goods
A mortgagee, pledgee or holder for security of a receipt Warehouseman isnt obliged to deliver or justified in
who, in good faith, demands or receives payment of the delivering the goods to an unpaid seller unless the receipt
debt for which such receipt is security, whether from a is first surrendered for cancellation
party to a draft drawn for such debt or from any other
person, shall not, by so doing, be deemed to represent or HOW DO YOU ATTACH OR IMPOSE A LIEN OVER GOODS
to warrant the genuineness of such receipt or the quantity COVERED BY A WAREHOUSE RECEIPT? If it is not negotiable,
or quality of the goods therein described the court would issue a writ of attachment. If it is negotiable, the
In other words, the holder of a security who in good faith court should require the surrender of the receipt and restrict
accepts payment of a debt from a person doesnt warrant further negotiations.

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MR. TAN IS A WAREHOUSEMAN HOLDING GOODS. HERE

COMES MR. SAN DIEGO AND CLAIMS THE GOODS AS HIS
OWN. WHAT CAN MR. TAN DO? He can opt not to deliver and
instead, file an interpleader.

MR. SAN DIEGO IS THE WAREHOUSEMAN WHO ISSUES A

RECEIPT TO MR. TAN. MR. PADLAN SUCCESSFULLY STOLE
THE RECEIPT FROM MR. TAN. CAN MR. PADLAN CLAIM THE
GOODS? Mr. San Diego can object. One acquires only the rights
of the predecessor-in-interest. In this case, Padlan acquired
nothing as he stole the receipt.

CAN MR. PADLAN RUN AFTER THE INDORSERS? No, warranty

of warehouseman runs only after indorsers for violation of
warranties.

The end.

BY: MA. ANGELA LEONOR C. AGUINALDO

ATENEO LAW 2010