Notes Credit Trans

Credit Transactions
Notes on discussions of Atty. Y. Tadeo
REVIEW: OBLICON, PROPERTY, SALES Conditional Deed of

Contract to Sell
Sale
Q: What is a public instrument? to convey title by
A: A public instrument is one that is notarized and entering into a contract
acknowledged. of absolute sale.
Q: Is a sale of a real property in a tissue paper

valid? Consumable v. Non-consumable
A: Yes. Under the law, for a sale of a real property to
be valid between parties, the sale must be written. Consumable Non-Consumable
However, in order to bind third persons, the contract A thing or object is Things that do not need
of sale must be written and in a public instrument, consumable if, by its to be used up in order to
duly notarized. nature, it is intended to comply to what they are
be used up. They may intended.
Promise to Contract v. Contract also refer to supplies
that are regularly
Promise to Contract Contract replaced.
An undertaking that a A contract gives the
person will enter into a rights and obligations Q: Is a consumable thing also fungible?
contract or transaction. that fall within the A: YES.
By itself, it is already a provisions of the laws.
contract treated as a Fungible Non-fungible
covenant between the A thing or object is Assets where each unit
parties. fungible if it is has unique qualities
interchangeable with that add or subtract
Contract to Sell v. Deed of Absolute Sale objects of the same kind value. They are not
for the same interchangeable, so they
Contract to Sell Deed of Absolute Sale purpose. Fungible cannot be referred to as
A preparatory contract There is no reservation things are usually dealt fungible goods.
or a promise to enter of ownership. Upon with by number, weight,
into a contract of sale. execution and delivery or measure. Money
Delivery of the object of the object, there is (paper bills or coins) is
subject of the sale will already a transfer of also considered
not transfer ownership. ownership. fungible.
Contract to Sell v. Conditional Deed of Sale Note: Whether a thing is consumable or not depends
upon its nature; whether a thing is fungible or not
Conditional Deed of depends on the intention of the parties.
Contract to Sell
Sale
In both, there is reservation of ownership. There Real Contracts
is yet no transfer of ownership. It is a contract perfected by the delivery of the object
of the contract such as contracts of deposit, of
For both, transfer of ownership will only happen if pledge, of loan and of commodatum
there is payment in full of the consideration. It is a contract perfected by the delivery of the object
of the contract such as contracts of deposit, of
The fulfillment of the Upon fulfillment of the pledge, of loan and of commodatum
condition does not condition, the sale  A contract perfected by the delivery of the object
automatically transfer becomes absolute. of the contract such as contracts of deposit,
ownership to the pledge, loan or Commodatum.
buyer. Seller still has
MJ LAZA 1
Credit Transactions
Consensual Contract TYPES OF CREDIT TRANSACTIONS

 A contract perfected upon the meeting of minds
or consent of the parties as to the object and 1. Secured Transaction
consideration of the contract.  secured with a collateral;
 the security ensures payment to lessen risk
DILIGENCE (usually with lower interest rates)
 care, caution, and attention required from a 2. Unsecured transaction
person in a given situation.  no backing or promise that in case of failure
to pay, they will pay
Degrees of Diligence:  risky by its nature
1. ordinary diligence - diligence reasonably expected
from, and ordinarily exercised by a person who
seeks to satisfy a legal obligation. SECURITY
2. extraordinary diligence - a person of unusual  form of asset obtained by a credit provider from
prudence exercises to secure rights or property. the debtor or a third party to ensure repayment
3. diligence stipulated in contracts of usually the full sum of the debt
 guaranties repayment
INTRODUCTION TO CREDIT TRANSACTIONS
TYPES OF SECURITY
CREDIT
 faith on the ability to pay 1. Real
 belief or trust in the ability of another person to  supported by a collateral or an encumbrance
pay of property
 ability to borrow money  Example: pledge, chattel mortgage, real
estate mortgage, antichresis
CREDIT TRANSACTIONS
 contracts based in trust and belief 2. Personal
 all transactions involving the loan or purchase of  promise by a surety to pay the obligation in
goods, services, or money in the present with a case of non-payment
promise to pay or deliver in the future (De Leon)  fulfillment by the principal debtor is secured
 credit transactions involve the trust and only by a promise to pay or the personal
confidence reposed in one person (the borrower) commitment of another
by another (the lender)  Examples: guaranty, surety
 it also involves the expectation that the thing
loaned will be returned Why use security?
 The use of security reduces risk. Secured
What is the difference between a credit and a transactions usually have lower interest rates.
loan?  Why? The security makes up for the opportunity
cost for lending money.
CREDIT LOAN
Ability to borrow money The delivery by one Interest is not bad. What is bad are the
by virtue of the party and the receipt by unconscionable interest rates. Interest motivates
confidence or trust the other party of a borrowers to pay the obligation because it is
reposed by a lender that given sum of money, imposable as long as the obligation is paid. The
he will pay what he may upon an agreement, longer the obligation remains unpaid, the higher
promise. express or implied, to interest rates or the interest premium to be paid.
repay the sum loaned,
with or without interest.
BAILMENT
The concession of a credit necessarily involves the
 delivery of property of one person to another in
granting of loans up to the limit of the amount fixed
trust for a specific purpose, with a contract,
in the “credit”
MJ LAZA 2
Credit Transactions
express or implied, that the trust shall be REQUIREMENTS (ELEMENTS) FOR BAILMENT
faithfully executed and the property returned or 1. Property transferred must be a personal
duly accounted for when the special purpose is property;
accomplished or kept until the bailor reclaims it
(De Leon) Q: Is machinery a personal property?
 contract to deliver A: It depends. If the machinery is attached to a
 there is only a change in possession and no real property, the machinery may be
change in title considered as real or immovable properties.
In sales: there is transfer of ownership from one person to 2. Transfer of possession but not ownership
another.
Q: Possession v. Ownership
In credit transactions: possession is merely transferred,
A: Possession is the holding of a thing or the
not ownership (ex. bailment)
enjoyment of a right. Literally, to possess means
to actually and physically occupy a thing with or
Broader Definition of Bailment without right.
 bailment is the rightful possession of goods by a
person who is not an owner. Ownership exists when a thing pertaining to one
person is completely subjected to his will in a
Parties in a Bailment: manner not prohibited by law and consistent with
1. Bailor the rights of others. Ownership confers certain
 the giver, or the party who delivers rights to the owner, one of which is the right to
possession or custody of the thing dispose of the thing by way of sale.
2. Bailee Q: Can a possessor become an owner by mere

 the recipient, or the party who receives possession?
possession or custody of the thing A: NO. In order to ripen into ownership,
possession must be in the concept of an owner,
public, peaceful and uninterrupted. There must
be an act of repudiation.
3. There must be eventual return of the

property
TYPES OF BAILMENT:
1. Actual Bailment
 actual/constructive delivery of the thing to
the bailee
Contract BAILOR BAILEE
Deposit Depositor Depositary
2. Bailment for Hire/Lucrative Bailment
Lending Lender Borrower  bailee is compensated
Lease Lessor Lessee  Ex. Safety deposit box
Obligation of Bailor: deliver the property which is 3. Bailment of Mutual Benefit

going to be held by the bailee  bailee is compensated while bailor enjoys
advantages
Obligation of Bailee: comply with the contract;  Ex. Pledge
return the thing when the purpose is accomplished
4. Gratuitous Bailment
 bailee receives no compensation;
MJ LAZA 3
Credit Transactions
 bailment for the sole benefit of bailor  Under the law, there are only few obligations of
(requirement: return upon demand) the depositor. On the contrary, there are
numerous obligations of a depositary. Why?
5. Bailment for Sale Because a contract of deposit is essentially for
 bailee agrees to sell goods for bailor the benefit of the depositor.
(consignment)
 bailee’s obligation to return what was not sold Characteristics of Deposit:
1. Real Contract perfected by Delivery
6. Constructive Bailment  only upon delivery that a contract of deposit
 arises when the law imposes an obligation on is deemed instituted
a possessor to return property to its rightful  only upon delivery will the rights and
owner obligations of the parties start
 “finders, keepers” 2. Agreement for Future Deposit
 if there is no delivery, it is merely a
7. Involuntary Bailment consensual contract or a promise to enter
 arises from an accident but without into a contract
negligence, a person leaves property in 3. Generally a gratuitous contract
another’s possession
 Ex. necessary deposit Art. 1965. A deposit is a gratuitous contract, except
when there is an agreement to the contrary, or unless
DEPOSIT the depositary is engaged in the business of storing
goods.
DEPOSIT
 gratuitous except when:
Art. 1962. A deposit is constituted from the moment a a. there is an agreement to the contrary
person receives a thing belonging to another, with the b. the depositary is engaged in the
obligation of safely keeping it and of returning the same. If business of storing goods (ex. those in
the safekeeping of the thing delivered is not the principal the business of warehousing, banks as to
purpose of the contract, there is no deposit but some other safety deposit boxes)
contract.
Subject of Deposit:
 contract wherein a person receives a thing  only movable things (A. 1966)
belonging to another, with the obligation of safely  exception: judicial deposits pertaining to
keeping it and of returning the same. preliminary attachments since their subjects are
 Principal purpose of a contract of Deposit: immovable things
SAFEKEEPING (holding or in possession of the
thing without using it) BANK DEPOSITS are NOT covered
 If not for safekeeping, it is not deposit
 the following are not considered as deposits:  fixed, savings, current deposits of money in
o leaving ID at the guard banks and similar institutions shall be governed
o leaving goods for shipment at the LBC by the provisions concerning simple loan
 the following are deposits:
o leaving baggage at the SM baggage counter Q: Why is it not a deposit?
o opening a safety deposit box A: Deposit must be gratuitous. Bank deposits are
subject to interests and money deposited in banks
PARTIES TO A CONTRACT OF DEPOSIT are used (ex. lending to third persons). Bank
deposits are forms of loan.
Q: Who is the creditor in a relationship with the

bank?
A: The depositor is the creditor.
MJ LAZA 4
Credit Transactions
Consequences of the Primary Purpose

What bank service is covered by Deposits? (Safekeeping):
 Safety Deposit Boxes
1. cannot make use of the thing without
KINDS OF DEPOSITS: clear permission;
2. liable for damages if used without
permission or not for permitted uses;
3. requirement of diligence;
4. liable for loss even arising from fortuitous
events.
Depositary may make use of the thing:

 only with the consent of the depositor
 if for the preservation of the thing
deposited
1. Judicial – required in compliance with court
orders  A contract of deposit is only for safekeeping and,
2. Extrajudicial – no court intervention therefore, it cannot be used. If it can be used, that
a. Voluntary is another contract.
 delivery is made by the will of the depositor  The thing may be used if specifically provided for
in the contract. It cannot be presumed.
Art. 1968. A voluntary deposit is that wherein  The thing may also be used for the preservation
the delivery is made by the will of the depositor. but it cannot be more than what is necessary for
A deposit may also be made by two or more preservation of the thing. If for this purpose, the
persons each of whom believes himself entitled to
contract need not state that the thing may be
the thing deposited with a third person, who shall
used for its preservation.
deliver it in a proper case to the one to whom it
belongs.
Art. 1978. When the depositary has permission to
use the thing deposited, the contract loses the concept
b. Necessary
of a deposit and becomes a loan or Commodatum,
 created by imposition of law, by calamity, by except where safekeeping is still the principal purpose
innkeepers or hotels, by common carriers of the contract.
VOLUNTARY DEPOSIT The permission shall not be presumed, and its

existence must be proved.
Voluntary Deposit
 The use of the thing must be with clear
Art. 1968. A voluntary deposit is that wherein the delivery permission and cannot be presumed.
is made by the will of the depositor. A deposit may also be  When drafting a contract, the use of the thing
made by two or more persons each of whom believes subject of the contract must be specified (e.g. “not
himself entitled to the thing deposited with a third person, use the thing”; “use the thing with limitations”).
who shall deliver it in a proper case to the one to whom it
 If the thing is used without permission, the
belongs.
contract is considered a loan.
 made by the will of the depositor

If depositary uses the thing without
permission?
FORM OF A CONTRACT OF DEPOSIT:
 enough that it is oral (if value is less than 500) or
 SC in US v. Igpuara, the contract shall be
written (if value is more than 500)
treated as a loan and the depositary will be
held liable for Estafa.
OBLIGATION OF A DEPOSITARY
 to hold the thing for safekeeping
MJ LAZA 5
Credit Transactions
IRREGULAR DEPOSIT 1. cannot make use of the thing without

 safekeeping is the primary purpose of the clear permission;
contract but with permission to use the property 2. liable for damages if used without
(Art. 1978) permission or not for permitted uses;
 Where money or other consumable thing is 3. requirement of diligence;
deposited for safekeeping, and is demandable at 4. liable for loss even arising from fortuitous
will by the depositor, the contract is an irregular events.
deposit.
Depositary may make use of the thing:
Irregular Deposit v. Loan  only with the consent of the depositor
 if for the preservation of the thing
IRREGULAR DEPOSIT LOAN deposited
for only the benefit of for the benefit of both
the depositor creditor and debtor 2. Obligation to be Liable for Damages for Use
can demand the return cannot seek restitution
of the article at any time until the time for Liable for Damages
payment  USED WITHOUT PERMISSION
preference over the paid after the mortgage  Makes use of the thing beyond preserving
other creditors in case creditors and before the it
of distribution creditors  if allowed to use, but permitted others to
use the deposit
Favorite Question in Quizzes/Exams:
 the thing need not be injured, damaged or
Identify what contract is created. What is the lost for liability to be incurred
difference between irregular deposit and other  just by making use of the thing, there is
contracts. already breach of contract of deposit
 if used without permission, depositary is
liable even in fortuitous events
3. Requirement of Diligence in the Care
DILIGENCE REQUIRED
1. stipulated between the parties
2. expected of a good father of a family
 Q: Can the diligence be less than ordinary

diligence?
A: NO. The minimum standard set by law is

ordinary diligence.
What is ordinary diligence?

RES PERIT DOMINO
 General Rule: The owner bears the risk of
OBLIGATIONS OF THE DEPOSITARY loss. The depositary is not liable for loss
1. Obligation to safely keep the thing without from fortuitous events.
using it
 Exceptions (Art. 1979): depositary is liable
Consequences of the Primary Purpose even in fortuitous events
(Safekeeping):
1. Uses the thing without the depositor’s
permission;
MJ LAZA 6
Credit Transactions
 A contract of deposit may include two things:

Example: loss during typhoon or fire after
using the thing without permission 1) Can delegate who may be the substitute;
2) Depositary may decide who is the substitute
2. Depositary delays the return of the thing; depositary.
 there must be demand  What is required is for the depositary is to choose

the substitute depositary carefully.
3. Allows others to use it, even though he
himself may have been authorized to use  If assignment to 3rd person is allowed, depositary
it. must choose someone who is not manifestly
careless or unfit.
 In ordinary diligence, the party only becomes
liable upon proof.  Q: Who are manifestly careless or unfit?
A: Those who fail to observe the diligence
4. Notify the depositor of judicial attachment, required.
opposition from a third person to the return
or removal of the thing. 8. Obligation of Confidentiality
 Judicial attachments are necessary in case  If the deposit is sealed and locked, it is the
the debtor attempts to abscond or to prevent obligation of the depositary to maintain absolute
total loss of the property confidentiality over the thing.
 Keep Secret the Contents:
5. Notify change as to the method to keep safe 1) If deposited object is sealed or locked;
the deposit. 2) Even if seal and lock is broken.
 “notify” – merely to inform; different from
getting consent 9. Obligation to Collect Interest
6. Cannot deposit thing with third persons  For interest bearing deposits, there is a duty of
 Generally, depositary cannot transfer or assign the depositary to collect interest in the
obligation to another person. observance of ordinary diligence
 Interest Bearing Deposits:
Why? Because a contract of deposit is made with o Certificates
trust and confidence. o Bonds
▪ examples Treasury Bills
 Unless, expressly stipulated o Securities
▪ stockholder’s certificate or shares of
Take note: stock which represents interests in the
1) situations that can be stipulated against; corporation representing ability to vote
and o Instruments which earn interest
2) default applications in case there is no
stipulation Ex.
I promise to pay the amount of P500,000.00
Example: Without any stipulation, the contract to Mr. V on or before January 30, 2022 with
of deposit is gratuitous; use of the thing is not an interest of 2% per month until the
permitted; transfer to third persons is not obligation is paid.
permitted.
(sgd.)
7. If depositary is permitted to deposit thing
with third persons, to choose substitute YLT
depositary carefully
MJ LAZA 7
Credit Transactions
The note is surrendered to the payee. And  If there are 2 or more joint depositors and the
the payee may give the note to a depositary. deposit admits of division:
The depositary shall collect the interests.
Each depositor is only entitled to his share.
 Note: Even a promissory note is a property  If solidary and does not admit of division:
because it is movable. The obligation of the
depositary is to collect interests. Art. 1214: can return the deposit to anyone of the
depositors who must not do anything prejudicial to
10. Obligation to Preserve their Value and the other depositors.
Rights Corresponding to them (Art. 1972 in
relation to Art. 1988) To whom: to the one who demanded the return of
the thing.
Art. 1972. The depositary is obliged to keep the thing
safely and to return it, when required, to the depositor, WHO SHOULD RETURN THE THING (BY
or to his heirs and successors, or to the person who WHOM):
may have been designated in the contract. His
responsibility, with regard to the safekeeping and the
1. Depositary
loss of the thing, shall be governed by the provisions
of Title I of this Book. If the deposit is gratuitous, this 2. Heirs (Art. 1991)
fact shall be taken into account in determining the
degree of care that the depositary must observe.  Problem: What if the heirs of the depositary sold
the property deposited in good faith. Then the
Art. 1988. The thing deposited must be returned to obligation to return the thing is passed on to the
the depositor upon demand, even though a specified heirs. The heirs must collect the thing sold from
period or time for such return may have been fixed.
the buyer and return it to the depositor.
This provision shall not apply when the thing is
judicially attached while in the depositary’s
possession, or should he have been notified of the What if the buyer is also in good faith? The
opposition of a third person to the return or the property cannot be recovered. Possession in good
removal of the thing deposited. In these cases, the faith over a movable property is equal to
depositary must immediately inform the depositor of ownership.
the attachment or opposition.
Heirs’ Obligation
 Obligation of the depositary to make sure that the
thing deposited does not lose its value or be taken  Obligation to assign his right of action
by someone else against the buyer in case the price has not
been paid by him (Art. 1991).
11. Obligation to RETURN the thing
 Important aspect of bailment is return.
When should the thing be returned?
TO WHOM SHOULD THE DEPOSIT BE
RETURNED: Example:
Contract
 To the depositor;
 To his heirs and successors; The depositary obligates himself to return the thing
 To the person who may have been two months after the delivery of the motor vehicle.
designated in the contract;
 Guardian or administrator of incapacitated
person; Demand was made one month after deposit. Should
 Incapacitated person when acquired the depositary return the motor vehicle?
capacity.
Answer: YES.
MJ LAZA 8
Credit Transactions
Art. 1988 How returned?

 Even though a period has been stipulated, the  Depositary must return the thing in the same
depositary must return the thing when condition when it was deposited
demand has been made.  also include the accessories and accessions
When the thing cannot be returned? 12. Obligation to return in the same condition
Cannot return if: 13. Obligation to return the principal, accessories,

 Under judicial attachment and in the and accessions
depositary’s possession;
 With notification from a third person of Principal
opposition to the return or removal of the thing.  the deposit itself
Accessions
What if the Depositary returns the thing at will?  those attached to the principal, either
 The depositary cannot return the thing at will naturally or artificially
because the contract of deposit is for the benefit Accessories
of the depositor.  anything which is joined to another thing
as an ornament, or to render it more
When depositary may return the thing prior to the perfect, or which accompanies it, or is
termination of the period: connected with it, as an incident, or as
 Depositary may return the thing prior to subordinate to it, or which belongs to or
termination of the period if depositary had with it.
justifiable reasons to return it earlier.
 What is justifiable may be argued (ex. absence of
depositary, inconvenience) 14. Obligation to deliver the money or substitute
When the depositor refuses to accept the thing  Obligation to deliver the money or substitute
returned: applies if:
 Should the depositor refuse: depositary may 1. Depositary loses object by force majeure or
consign it with the court (Art. 1989) government order;
2. Receives money or another thing in its place
When the depositary may not return the thing (Art. 1990)
prior to termination:
 Thing cannot be returned if there is valuable  Depositor cannot demand the return of the same
consideration. Thing may not be returned even is expropriated by the government. What should
if for justifiable reasons. be delivered is just compensation.
 Situations where there is valuable consideration:  if thing is lost, what is received are the proceeds
1) when stipulated; from the insurance (but not the same value as the
2) depositary is in the business of storing goods. car)
Where to return? 15. Obligations for CLOSED and SEALED Deposits

 general rule: when the place for return is a. Deliver a deposit which was closed and
designated, the depositary must take the thing sealed also closed and sealed
deposited to such place (Art. 1987) b. Pay damages for loss
 when no place has been designated:
o return must be made where the deposit may Liable for Damages
be  OPENED / BROKEN due to depositary’s
o this is even if the place is different from where fault
the thing was deposited
When opened
 Presumption: fault of the depositary
unless shown to the contrary
MJ LAZA 9
Credit Transactions
During the one-month period:

Proof there is authority to open:  the obligation of the depositary is to notify the
 Key is delivered to the depositary true owner that the stolen property is in his
 When the instructions of the depositor as possession and to keep it for one month.
regards the deposit cannot be executed  If the true owner claims the thing within one
without opening the box or receptacle month, the thing must be returned to him.
 If after one month expires and the true owner fails
16. Duty not to demand that the depositor prove to claim the property, the thing will be kept again
his ownership of the thing (Art. 1984) under a contract of deposit, and upon demand
return it to the depositor.
Art. 1984. The depositary cannot demand that the
depositor prove his ownership of the thing deposited. Depositary is relieved of responsibility to hold in
Nevertheless, should he discover that the thing has behalf of the true owner, if after one month from
been stolen and who its true owner is, he must advise
notice, the true owner does not claim it.
the latter of the deposit. If the owner, in spite of such
information, does not claim it within the period of one
month, the depositary shall be relieved of all  BUT IF the depositary believes that the thing has
responsibility by returning the thing deposited to the not been lawfully acquired by the depositor (ex.
depositor. If the depositary has reasonable grounds to Estafa), the obligation is ONLY to inform the true
believe that the thing has not been lawfully acquired owner of the deposit.
by the depositor, the former may return the same.
Art. 1984 : The depositary…
Claims of Ownership from Third Persons:
 Depositary is not obliged to ascertain if the Believes Stolen Believes that the
third person is the true owner of the thing (par. 2) thing has not been
deposited lawfully acquired
 Why? because what is transferred is merely (par. 4)
possession, not ownership.  Obligated to inform  Allowed to return to
 BUT IF depositary discovered that the thing the true owner the depositor
was stolen and who the true owner is, there  Knows the owner  does not know the
is an obligation to inform true owner of the owner
deposit
NECESSARY DEPOSIT
17. Obligation to inform true owner of the deposit
When is a deposit necessary?
Requisites of requirement to advise true
owner: 1. When it is made in compliance with a legal
obligation
 For par. 2 of Art. 1984 to apply, the following
must be present:
What governs it
a) The thing deposited must be stolen; and
b) The depositary must know who its true
 Law governing it
owner is.
 In the absence, the provision of voluntary
deposits (Art. 1997, par. 1)
 In case of these situations, the obligations of
the depositary are as follows:
1) NOTIFY the true owner;
Some examples:
2) Hold the thing for one month for the true
 Judicial deposit of a thing whose possession
owner to retrieve the property.
is being disputed in litigation;
 Deposit to guarantee contracts with the
government;
MJ LAZA 10
Credit Transactions
 Other deposits required in suits, as provided Art. 1754

by the Rules of Court
The provisions of Articles 1733 to 1753 shall apply to
the passenger’s baggage which is not in his
2. When it takes place on the occasion of any
personal custody or in that of his employee. As
calamity, such as fire, storm, flood, pillage,
to other baggage, the rules in Articles 1998 and
shipwreck, or other similar events 2000 to 2003 concerning the responsibility of
hotel-keepers shall be applicable.
What governs it
Note: The rules on inns and hotels also apply to
 Voluntary Deposit baggage in the possession of passenger inside a
 Article 2168 common carrier.
If the things were stored without the RULES ON INNS AND HOTELS
knowledge of the owner, owner is bound
to pay compensation,
 “deposito miserable”
 These deposits occur when movable things
pass from one person to another by accident/
fortuitous event.
 The purpose of the deposit is to save the
property, rather than to safely keep it.
 Art. 2168: establishes a quasi-contract: the
owner of the thing becomes liable to pay the
person who saved his property just
compensation. What are covered?
 Deposit of effects made by travelers
3. Deposit of effects made by travelers in hotels  Vehicles, animals and articles which have been
or inns introduced or placed in the annexes of the hotel
Hotel Requisites in order to be Applicable:

1. Notice was given to the hotels or inns, and the
A house which is held out to well-behaved employees
members of the traveling public, who are 2. Guests take precautions which the hotel
willing to pay reasonable rates for keepers advised relative to the care and vigilance
accommodations, as a place where they will be of their effects
received and entertained as guests for
compensation, and will be furnished with Why is Notice is necessary?
food, drink, and lodging, and everything  It is necessary because how can you expect the
which they have occasion for while on their way hotel to exercise extraordinary diligence when
they are not notified of any thing brought in by
the guests.
 Hotels are imbued with public interest
OBLIGATIONS OF HOTEL KEEPERS
What rules govern:
a) Deposits of effects made by travelers in hotel Required Obligation:
or inns 1. Take precautions relative to the care and vigilance
b) Baggage in the possession of passengers in a of their effects (Art. 1998)
common carrier shall be governed by Arts.
1998, 2000-2003.
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2. Take care of the vehicles, animals and articles

which have been introduced or placed in the
annexes of the hotel (Art. 1999)
3. Liable for loss of, or injury, to the personal
property of the guests.
account of lodging, and supplies usually furnished to hotel

When is the hotel NOT LIABLE? guests.
 Acts of the guests
 Guest’s family, servants or visitors
 Character of the things brought into the hotel Right of Retention by Depositary
 From Force Majeure  The right of retention may be enforced against
guests who have yet to fully pay the fees for the
Problem: If the hotel post notices which states lodging, and supplies usually furnished to hotel
“This hotel is not responsible for any stolen or lost guests.
items.” Is the notice valid?  the right may be exercised:
o over things brought by guests
Answer: POSTING OF NOTICES HAVE NO EFFECT! o as security
Under Art. 2003, a stipulation in a contract o lodging and supplies furnished by the hotel
limiting or diminishing liability is VOID.
When does a contract of necessary deposit begin?
However, to make a hotel liable, notice is
important. Kinds of Necessary Begins when…
Deposit
Art. 2004 Made in compliance Upon delivery of the
with a legal obligation thing compelled by
The hotel-keeper has a right to retain the things brought
into the hotel by the guest, as a security for credits on
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legal obligation to safely Q: Can damages be recovered? Unlikely

keep
Calamity and other Upon passing of the
DEPOSIT DISTINGUISHED FROM OTHER
similar events movable thing from one
CONTRACTS
person to another, other
than the owner
DEPOSIT COMMODAT MUTUUM LEASE
Made by travelers in Upon notice of the
UM
inns and hotels effects
Gratuitou Essentially Gratuitous Onerous
s always or
gratuitous Onerous
“The fact that travelers are constrained to rely on
Safekeepi Use of the Consumpti Use of
the vigilance of the keeper of the hotel or inn shall
ng thing on the thing
be considered in determining the degree of care
required by him.” Movable Movable or Movable Movable
immovable or
Meaning: The greater reliance on the hotel to take immovabl
care of the effects, then the greater the degree of e
diligence expected of the hotel.
Q: In a parking space, car keys are given and the
JUDICIAL DEPOSIT car is parked. What contract is created?
A: Contract of deposit. The depositary is obligated
Art. 2005 to safely keep the car.
A judicial deposit or sequestration takes place when an

attachment or seizure of property in litigation is ordered.
Characteristic:
 when an attachment or seizure of property in
litigation is ordered
Examples:
• dispute as to who is the owner
• sequestration of things used in the
commission of a crime
• consigned items
 includes movables and immovables through

titles and documents evidencing ownership
Obligation of the depositary in judicial deposits:

 the depositary of the sequestrated property is the
person appointed by the court
 he has the obligation to take care of the property
with the diligence of a good father of a family
Extinguishment of Judicial Deposit

 only upon the end of the controversy which gave
rise to the sequestration (Art. 2007)
Q: Can the judges be sued? Only upon permission.
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LEASE obligations created by the contract between the

property.
Lease of things
 the lessor binds himself to give another the Q: Can the buyer terminate the contract of lease
enjoyment or use of a thing for a price certain between the parties? YES.
and for a period which may be definite or
indefinite (Art. 1643) Effect when lease is NOT registered
 lease is not characterized if it is for a period or  Purchaser may terminate the lease
not; even if the agreement states that the rent is  Unless: (buyer cannot terminate the lease)
for as long as the thing is needed, it still lease 1) Stipulated in the contract of sale; or
 Q: How to distinguish if it is a lease? Lease is for 2) When the purchaser knows of the existence
compensation. of the lease.
 “knowledge on the part of the buyer” is
Who can be lessees? tantamount to registration
 Everyone except those that cannot be buyers  Is it better to cause the registration of the
(Art. 1646) property? YES. Because if the lease is not
 Q: Who cannot be buyers? Those who are registered, the right of the buyer is superior to the
incapacitated. lessee.
Presumption when lease begins: When buyer terminates the lease

 The lessee received the property in good condition  Lessee has right to gather the fruits of the harvest
unless there is proof to the contrary plus ask damages
REGISTRATION OF A LEASE FICTITIOUS SALE
How is lease registered? Proof If at the time of sale, the sale is not
 For real property: registration in the Torrens recorded in the Register of Deeds
system and annotation of the lease in the Torrens Consequence Vendee cannot make use of the
title right to terminate the lease
 For machineries: through tax declarations
 For other movables such as cars: through Lessee’s Right to Suspend the Payment of Rent
certificates of registration  the lessee may suspend the payment of rent
when:
Registration o lessor fails to make necessary repairs
 Generally, not a requirement o lessor fails to maintain the lease in peaceful
 Needed in order to bind third persons and adequate enjoyment of the property
leased
If it is recorded, it must be with authority
 Husband as to wife’s paraphernal property SPECIFIC DUTIES: WARRANTIES ON LEASE
 Father or guardian as to minor or ward
 Manager without special power Warranties of Lease
 same as that in Sale
What happens to a lease when a buyer purchases  “reduction in price”: reduction in proportion to
the property? the rent
Situation: Ms. P rents from Mr. S. Mr. S sold the Art. 1546
property to Ms. T. Can the new owner ask the lessee
to vacate the property? Affirmation of fact or any promise by the lessor relating to
the thing is an express warranty if the natural tendency of
such affirmation or promise is to induce the lessee to rent
YES. The parties are Mr. P and Mr. S. Only them
the same, and if the lessee leases the thing relying thereon.
are bound in the contract of lease. Ms. T, as a
stranger to the contract, is not a privy to the
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Warranty of Lessor: Q: When one enters a hotel, there’s usually a safe. The
1) That the lessor had the right to lease the thing guest elects a password to the safe. If jewelries are put
inside the safe, who possesses the jewelry? What
2) The thing is free from any hidden faults or contract is created?
defects (Art. 1547) A: Contract of Lease. The hotel cannot be made liable
because the hotel is not an insurer of the property.
Lessor shall be liable for:
 hidden defects which makes the property ON THE USE OF THE PROPERTY
unfit for the use for which it was intended, if
lessee would not have acquired (leased) it if Duty of Lessee
aware of it  Take care of the thing with ordinary diligence
 however, the lessor shall not be liable for  Return the property in the condition it was
patent defects received
3) Warranty in case of Eviction Lessee is liable for

 Warranty in case of eviction must be upon  Deterioration of the thing leased
final judgment  Deterioration caused by the members of his
 Obligation of the lessor: make sure that the household, visitors and guests (Art. 1668)
lessee enjoys the property  Q: Can the lessee be liable for the ordinary
wear and tear of the property? NO.
4) Warranty that the property is fit for such
purpose (Art. 1562) Permissible Deterioration
 Lessee, expressly or by implication, makes  By virtue of time
known to the lessor the particular purpose for  By ordinary wear and tear
which the goods are acquired, and it appears  From inevitable cause (Art. 1665)
that the lessee relies on the lessor’s skill or
judgment Lessor’s Obligation
 The lessor cannot alter the form of the thing
RIGHTS OF THE LESSOR leased in such a way as to impair the use to which
 Not to act as insurer of the property leased (Art. the thing is devoted. (Art. 1661)
1664)
 The lessor is not liable for a mere act of trespass Lessor’s right
by a third person  To continue the business or industrial
establishment in the same business or industry
Q: Can the lessor be liable for the loss of the to which the lessee devotes the thing leased (Art.
property? 1656)
A: No. Unless the lessor participated in the loss of
the thing. In case of loss, the insurance company PARTIAL LOSS OF THE PROPERTY
replaces or pays for the damages.
Art. 1655
Problem: If the Parking Space is for a fixed fee, what
contract is created? If the thing leased is totally destroyed by a fortuitous event,
the lease is extinguished. If the destruction is partial, the
lessee may choose between a proportional reduction of the
Answer: Contract of lease because there is rental fee.
rent and a rescission of the lease.
Lessor: owner of the parking space
Lessee: owner of the car
 in case of partial loss due to fortuitous event, the
lessee has the right to choose between:
If the car key is delivered, then it is a contract of
deposit. If what is delivered is the parking space, then
(1) proportional reduction of rent; or
it is a contract of lease.
(2) rescission of lease
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 Why? Because the property cannot be enjoyed at

its fullest. If a portion of the property cannot be
used by the lessee, then there is no true  the right to rescind exists even if it was known to
enjoyment of the lease. The lessee is either the lessee or waived the right to rescind the lease
permitted to rescind the contract or to reduce the on account of the condition
price of the rent.
RIGHT OF BOTH PARTIES IN THE TERMINATION
 “rescission” – means to end or terminate the OF THE CONTRACT
contract
Art. 1659
Q: what does it entail to terminate the lease? If the lessor or the lessee should not comply with the
A: the lessee just needs to NOTIFY the lessor. obligations set forth in Articles 1654 and 1657, the
aggrieved party may ask for the rescission of the contract
and the indemnification for damages, or only the latter,
Q: must the consent of the lessor be obtained in order
allowing the contract to remain in force.
to terminate the contract of lease?
A: The law says to NOTIFY only. The consent of the
 in case of noncompliance to obligations of one
lessor is not needed. The continuation of the fiduciary
party, the lessor or the lessee may ask for:
relationship is not required if one of the parties does
(1) rescission of the contract and
not want to continue the contract.
indemnification; or
(2) indemnification only.
Q: Does it matter that the reason for the loss is within
the knowledge of the lessee?
Q: When may indemnification be applicable? Why
A: NO. The lessee need not have prior knowledge of
is it applicable?
the reason for the loss. Even with or without knowing
A: The opportunity cost of renting the property may
the reason for the loss, the lessee still has the right to
be the basis of the pre-termination of the contract and
either reduce the rent or cause the rescission of the
the corresponding indemnification.
lease in case of partial loss of the property due to
fortuitous event. The Doctrine of Assumption of
Nota Bene:
Risk when entering into contracts is not applicable in Article 1654. The lessor is Article 1657. The lessee is
the case. obliged: obliged:
(1) To deliver the thing (1) To pay the price of the
Assumption of Risk Doctrine which is the object of lease according to the
the contract in such a terms stipulated;
Means that one who voluntarily exposes himself to condition as to render it (2) To use the thing leased
fit for the use intended; as a diligent father of a
an obvious, known and appreciated danger
(2) To make on the same family, devoting it to
assumes the risk of injury that may result
during the lease all the the use stipulated; and
therefrom. It is based on voluntary consent, necessary repairs in in the absence of
express or implied, to accept danger of a known order to keep it suitable stipulation, to that
and appreciated risk. for the use to which it which may be inferred
has been devoted, from the nature of the
unless there is a thing leased, according
Nota Bene: stipulation to the to the custom of the
contrary; place;
(3) To maintain the lessee (3) To pay expenses for the
Art. 1660
in the peaceful and deed of lease.
adequate enjoyment of
If a dwelling place or any other building intended for
the lease for the entire
human habitation is in such a condition that its use brings
duration of the
imminent and serious danger to life or health, the lessee
contract.
may terminate the lease at once by notifying the
lessor, even if at the time the contract was perfected
the former knew of the dangerous condition or
waived the right to rescind the lease on account of
this condition.
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REPAIRS  the lessee has the right to reduction of the rent

What are necessary repairs? provided the work for repairs has been
 repairs that are necessary for the continued undertaken for MORE THAN 40 days (Art. 1662)
enjoyment of the thing  Why? Because if the repairs is more than 40
 it is the duty of the lessor to make necessary days, it will entail the less enjoyment of the
repairs property
Article 1662. Other rights of the lessee (in case of necessary

repairs):
If during the lease it should become necessary to make
some urgent repairs upon the thing leased, which cannot
(a) Right to rescind the contract (Art. 1662)
be deferred until the termination of the lease, the lessee is
 the lessee may rescind the contract when the
obliged to tolerate the work, although it may be very
annoying to him, and although during the same, he may work is such nature that the portion needed
be deprived of a part of the premises. for dwelling becomes uninhabitable
 the nature of the repair makes the property
If the repairs last more than forty days the rent shall uninhabitable
be reduced in proportion to the time – including the
first forty days – and the part of the property of which the (b) Right to reimbursement for repair (Art. 1663)
lessee has been deprived.
 if the lessor fails to make urgent repairs
 repair is necessary to avoid imminent
When the work is of such a nature that the portion which
the lessee and his family need for their dwelling becomes danger
uninhabitable, he may rescind the contract if the main  repair is done by the lessee at the lessor’s cost
purpose of the lease is to provide a dwelling place for the  Why is the lessee entitled to reimbursement?
lessee. Because it is the duty of the lessor to make
the necessary repairs.
Article 1663.  Note: to be entitled to reimbursement, the
lessor must be priorly notified of the need for
xxx
the repairs but the lessor failed to do so.
He is also obliged to advise the owner, with the same
urgency, of the need of all repairs included in No. 2 of IMPROVEMENTS
article 1654.  improvement means to introduce something to
the property; repairs are done to correct
In both cases the lessee shall be liable for the damages something
which, through his negligence, may be suffered by the
proprietor. Article 1678.
If the lessor fails to make urgent repairs, the lessee, in If the lessee makes, in good faith, useful
order to avoid an imminent danger, may order the improvements which are suitable to the use for which the
repairs at the lessor’s cost. lease is intended, without altering the form or substance of
the property leased, the lessor upon the termination of the
lease shall pay the lessee one-half of the value of the
DUTIES OF THE LESSEE (in case of necessary improvements at that time. Should the lessor refuse to
repairs): reimburse said amount, the lessee may remove the
 duty to advice the lessor of the need for improvements, even though the principal thing may suffer
necessary repairs for the use of the thing (Art. damage thereby. He shall not, however, cause any more
impairment upon the property leased than is necessary.
1663)
 obliged to tolerate the work, although it may be
With regard to ornamental expenses, the lessee shall not
very annoying to him or deprived of premises (Art. be entitled to any reimbursement, but he may remove the
1662) ornamental objects, provided no damage is caused to the
principal thing, and the lessor does not choose to retain
What is the right of the lessee in case the work them by paying their value at the time the lease is
cannot be tolerated? extinguished.
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ASSIGNMENT OR SUBLEASE
Note: If the contract stipulated that no improvements
shall be made, then the stipulation not to make  assignment and sub lease are different
improvements must be complied.
Article 1649.
Lessor’s duty in case improvements are made by The lessee cannot assign the lease without the consent
the lessee: of the lessor, unless there is a stipulation to the contrary.
 to make reimbursements for the useful
Article 1650.
improvements
When in the contract of lease of things there is no
 how much? Half of the value of the express prohibition, the lessee may sublet the thing
improvements at the time of termination of the leased, in whole or in part, without prejudice to his
lease responsibility for the performance of the contract toward
the lessor.
To be reimbursed, useful improvements by the
lessee must be:
 in good faith Assignment
 suitable to the use for which the lease is intended  lessee cannot assign without consent
 made without altering the form or substance of
the property leased Sublease
 permissible unless there is express prohibition
If the lessor refuses to reimburse:  in sublease, the lessee is the one acting as the
 lessee has the right to remove the improvement lessor of the property
even if the property suffers damages
Provisions on Sublease:
There shall be NO RIGHT TO REIMBURSEMENT Article 1651
for:
Without prejudice to his obligation toward the sublessor,
 ornamental expenses introduced by the lessee
the sublessee is bound to the lessor for all acts which
refer to the use and preservation of the thing leased
If ornamental expenses are made, the LESSOR has in the manner stipulated between the lessor and the
the RIGHT to: lessee.
(a) remove the ornaments without damage; OR
(b) retain them by paying value at the time lease is Article 1652.
extinguished.
The sublessee is subsidiarily liable to the lessor for
any rent due from the lessee. However, the sublessee
NOTIFICATION
shall not be responsible beyond the amount of rent due
Article 1663.
from him, in accordance with the terms of the sublease, at
the time of the extra-judicial demand by the lessor.
The lessee is obliged to bring to the knowledge of the
proprietor, within the shortest possible time, every
Payments of rent in advance by the sublessee shall be
usurpation or untoward act which any third person
deemed not to have been made, so far as the lessor’s claim
may have committed or may be openly preparing to carry
is concerned, unless said payments were effected in virtue
out upon the thing leased.
of the custom of the place.
xxx
What is the relationship between the lessor and

Lessee’s DUTY TO NOTIFY THE LESSOR
the sublessee?
 lessee shall notify the lessor of any usurpation or
 sublessee is bound to the lessor for all acts which
untoward act of any third person which is
refer to the use and preservation of the thing
committed or may be openly preparing to carry
leased
out upon the thing leased
Rent of the Lessee

 the sublessee is subsidiarily liable to the lessor
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 how much? Only to the extent of the amount acquiescence of the lessor, and unless a notice to the
of his rent contrary by either party has previously been given, it is
understood that there is an implied new lease, not for the
period of the original contract, but for the time established
Sublessee’s subsidiary liability for rent
in articles 1682 and 1687. The other terms of the original
contract shall be revived.
 sublessee is not responsible beyond the
amount of rent due from him at the time of
extrajudicial demand by the lessor Implied Lease exists when:
 lessee should continue enjoying the property for
15 days with the acquiescence of the lessor
TERMINATION OF LEASE
How is acquiescence shown:
Instances when lease may be terminated: (1) by not giving notice to vacate; and
(2) continued acceptance of rentals.
Article 1655.
If the thing leased is totally destroyed by a fortuitous event,
the lease is extinguished. xxx
Spouses Velasco v. Laigo et. al., G.R. No.
199215, January 16, 2019
 under Art. 1655, lease may be terminated when
the thing leased is TOTALLY destroyed by
Facts: In 1976, Spouse Laigo leased a portion of
fortuitous event
their property in Bauang, La Union to Spouses
 when partially lost only (see previous
Velasco for a period of 20 years from September 1,
discussion), only reduction or rescission of the
1976 to August 31, 1996 renewable for another 10
lease
years. Spouses Velasco constructed a residential
house and a warehouse (improvements) on the
Article 1660.
If a dwelling place or any other building intended for property. The improvements were later on
human habitation is in such a condition that its use brings mortgaged to DBP to secure a loan. Thus, the
imminent and serious danger to life or health, the Laigos and the Velascos agreed that the lease will
lessee may terminate the lease at once by notifying remain in full force and effect until the payment of
the lessor, even if at the time the contract was perfected the loan. Spouses Velasco failed to pay the loan
the former knew of the dangerous condition or waived the leading to the extrajudicial foreclosure of the
right to rescind the lease on account of this condition. improvements. When Spouses Laigo died, the heirs
renewed the lease for another 10 years, extending
 the lessee’s right to terminate the lease under Art. the period to 2006. When the lease expired in 2006,
1660: dwelling place is in a condition that it the heirs through their attorney demanded that
brings imminent and serious danger to life or Spouses Velasco vacate the property but the
health Velascos refused and claimed that the lease was
 lessee may rescind the contract if the property extended until 2025. In 2007, an unlawful
becomes uninhabitable detainer case was filed on the ground of the
expiration of the lease but still the Velascos refused
Article 1669.
to vacate the property raising the same defense
If the lease was made for a determinate time, it ceases
that the lease is extended to 2025 and that rentals
upon the day fixed, without the need of a demand.
had already been paid in advance.
 the arrival of the period terminates the lease Issue: Was the lease contract extended or renewed
after the expiration of the lease period in 2006?
IMPLIED LEASE
Held: In this case, the lease was extended and
Article 1670. renewed annually after its expiration in 2006.
If at the end of the contract the lessee should continue There is an implied lease. Under Art. 1670 of the
enjoying the thing leased for fifteen days with the NCC, a new lease is implied if the lessee continues
MJ LAZA 19
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enjoying the lease for 15 days after the termination Article 1682.
of the original contract, unless notice to the The lease of a piece of rural land, when its duration
contrary has been previously given by either party. has not been fixed, is understood to have been for
If a notice is given, the fact that the lessee all the time necessary for the gathering of the fruits
continues to stay for 15 more days is not a ground which the whole estate leased may yield in one
for inferring a new lease. An implied new lease or year, or which it may yield once, although two or
tacita reconduccion will set in and the period of more years have to elapse for the purpose.
the lease are those established by Art. 1682 and
1687 of the NCC.  for Rural Lands: all the time necessary for the
gathering of the fruits which the whole estate
In this case, Spouses Velasco occupied the leased may yield in one year or may yield once.
property for more than 15 days following the
expiration of the period in Aug. 31, 2006. The Article 1687.
written notice to vacate was given only on Oct. 4, If the period for the lease has not been fixed, it is
2006 (more than a month after expiration), or after understood to be from year to year, if the rent agreed upon
is annual; from month to month, if it is monthly; from week
an implied lease already commenced. The implied
to week, if the rent is weekly; and from day to day, if the
lease was for a year to year period pursuant to Art.
rent is to be paid daily. However, even though a monthly
1687, because the term of the expired lease rent is paid, and no period for the lease has been set, the
agreement provided for the payment of annual courts may fix a longer term for the lease after the lessee
rents. has occupied the premises for over one year. If the rent is
weekly, the courts may likewise determine a longer period
Summary: While there was no extension of lease for after the lessee has been in possession for over six months.
a continuous period until 2025, an implied lease for a In case of daily rent, the courts may also fix a longer period
after the lessee has stayed in the place for over one month.
successive yearly period existed between the parties
when the respondents failed to timely give a written
notice to vacate. When the unlawful detainer was filed  for Urban Land:
in 2007, the heirs of Laigo had no right to eject the
Spouses Velasco because an implied lease has If rent agreed upon is
commenced. The implied lease gave the latter the Year to Year Annual
right to occupy the leased property for a year or until Month to Month Monthly
August 31, 2007. Week to Week Weekly
Day to Day Daily
SC ON TACITA RECONDUCCION
An implied lease will set in when the following Q: When does the implied lease begin?
requisites are present: A: From the expiration of the original lease. If the
lease expired on Jan. 15, the new implied lease
a) the term of the original contract of lease has will start on Jan. 16 and end on Feb. 15. Within
expired; this period, the lessor cannot ask the lessee to
b) the lessor has not given the lessee a notice to vacate the property.
vacate; and
c) the lessee continued enjoying the thing leased Q: If the payment of the rent is weekly, when will
for 15 days with the acquiescence of the lessor. the implied lease begin?
A: If the payment is weekly, wait for 15 days before
there be an implied lease.
Consequences on an Implied Lease:
Problem:
1. the period of the implied lease is not for the This contract of lease is valid for one year, with rent
period of the original contract but those being paid P25,000.00 per month.
established under 1682 and 1687
Q: Until when can the lease be renewed?
Basis of the period of the new implied lease: A: Until there is a notice to vacate.
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JUDICIAL EJECTMENT
Courts may fix a longer period:
Article 1673.
Even though the period Occupied the
is property The lessor may judicially eject the lessee for any of the
following causes:
Monthly For over one year
Weekly For over six months (1) When the period agreed upon, or that which is fixed
Daily For over one month for the duration of leases under articles 1682 and
1687, has expired;
2. under the same condition: “other terms of the (2) Lack of payment of the price stipulated;
contract are revived” (3) Violation of any of the conditions agreed upon in the
contract;
(4) When the lessee devotes the thing leased to any use
Article 1672.
or service not stipulated which causes the
In case of an implied new lease, the obligations contracted
deterioration thereof; or if he does not observe the
by a third person for the security of the principal contract
requirement in No. 2 of article 1657, as regards the
shall cease with respect to the new lease.
use thereof.
The ejectment of tenants of agricultural lands is governed

by special laws.
Lessor may judicially eject when:

(1) Period agreed upon has expired;
(2) Lack of payment of rent;
(3) Violation of any of the conditions;
(4) The thing leased is used for a purpose not
stipulated and causes deterioration.
Article 1671.
 example of conditions in leases: no bringing pets
If the lessee continues enjoying the thing after the in the property
expiration of the contract, over the lessor’s objection, the
 example of purpose not stipulated: the purpose of
former shall be subject to the responsibilities of a possessor
the property is for residential but the tenant
in bad faith.
converted it into a hotel
The Possessor in Bad Faith shall: What are the remedies available:
 reimburse the fruits received and those which the
Article 1674.
legitimate possessor could have received
 be reimbursed for necessary expenses and
In ejectment cases where an appeal is taken the remedy
expenses for the preservation of fruits granted in article 539, second paragraph, shall also apply,
 not be reimbursed for expenses for pure luxury or if the higher court is satisfied that the lessee’s appeal is
mere pleasure but may remove the objects for frivolous or dilatory, or that the lessor’s appeal is prima
which such expenses have been incurred, facie meritorious. The period of ten days referred to in said
provided that the thing suffers no injury thereby, article shall be counted from the time the appeal is
and that the lawful possessor does not prefer to perfected.
retain them by paying the value they may have at
the time he enters into possession (Art. 549)
Appeal in Ejectment Cases:
 request for remedy of writ of preliminary
injunction
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When is the remedy available? 7% P5,000.00 to P8,999.00

 the Writ of Preliminary Injunction shall be 11% P9,000.00 to
available when: P10,000.00
o lessee’s appeal is frivolous or dilatory; or
o lessor’s appeal is prima facie meritorious General Rule: No increase in rent for more than
once per year
 applicable to boarding houses, dormitories,
RENT CONTROL ACT (R.A. NO. 9653)
rooms and bedspaces offered for rent to students
Residential Unit:
Exception: When the residential unit becomes
 includes:
vacant, the lessor may set the initial rent for the next
o apartment;
lessee.
o dormitories;
o building house;
Excluded from Coverage: Rent-to-own schemes
o house and/or land on which another’s
dwelling is located and used for residential
GROUNDS FOR JUDICIAL EJECTMENT
purposes;
o rooms and bed spaces offered for rent by their
Grounds:
owners;
1. Assignment or Subleasing
o properties used for home industries, retail
2. Expiration of the period for lease
stores or other business purposes if the
3. Arrears in payment for a total of three months
owner thereof and his or her family actually
live therein and use it principally for dwelling
Deposit and Notice to the Lessor: (review
purposes.
recording)
 Not applicable to commercial properties
 Consign in Court
 Exclude: motels, motel rooms, hotels, and hotel
 City or Municipal Treasurer
rooms
 Barangay Chairman
 Bank in the name of the lessor
Coverage of the Act:
 all residential units in NCR and other Highly
When should the rent be deposited?
Urbanized Cities (HUC) where the total monthly
 Within one month from non-payment
rent for each of which ranges from one peso to P
because of the lessor’s refusal to accept
10,000.00
payment
 all residential units in all other areas, the total
 Lessee will then: deposit the rent within
monthly rent for each of which ranges from one
10 days of every current month
peso to P5,000.00
When should rent be paid (under the Act):

4. Arrears in payment for total of three months if
 in advance within the first 5 days of every current
already consigned in court;
month
5. Legitimate need of the owner/lessor to repossess
LIMIT ON RENT the property for own use.
Limit on Increase on Rent Who shall repossess (by whom):

 rent shall not be increased by more than 7%  Lessor
annually as long as the unit is occupied by the  Immediate member of family:
same lessee 1. Spouse
2. Direct descendants or ascendants, by
HUDCC Resolution No. 1 Series 2017 consanguinity or affinity
Permitted Increase Covered Rent

6. Necessity to make repairs
2% P 1.00 to P4,999.00
MJ LAZA 22
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 If subject of an existing order of written contract, the period still definite but
condemnation by appropriate authorities the period is based on when the rent is paid
 Giving the lessee preference to lease the same
properties How interpreted:
 “The owner/lessor cannot eject the tenant by
No First Preference (review recording) reason of the expiration of the period of a lease as
 condemned or completely demolished fixed or determined under Article 1687. It does
not mean that the provisions of Article 1687 itself
PECULIARITY OF RESIDENTIAL UNITS had been suspended. Thus, the determination of
the period of a lease agreement can still be made
Difference of treatment of residential units: in accordance with said Article 1687.” (Uy Hoo &
(1) subleasing is prohibited unless with written Sons Realty Development Corp v. CA and Kuan,
consent by owner G.R. No. L-83263, June 14, 1989)
(2) even if there is registration, a residential lessee  Lease agreements with no specific period, but in
may not be ejected by mortgage or sale which rentals are paid monthly, are considered to
(3) lessor cannot demand more than one month be on a month-to-month basis. They are for a
advance definite period and expire after the last day of any
(4) lessor cannot demand more than two months given thirty-day period, upon proper demand and
deposit notice by the lessor to vacate. (Acab v. CA)
Two (2) months deposit, one (1) month

advance.
(5) deposit should be kept in a bank under the

lessor’s name and interest should be given to
lessee
Purpose of Deposit
 to cover rent, electric, telephone, water or
such other utility bills
 to cover damages if tenant destroys any
house components and accessories
(6) arrears of rent as a ground for judicial ejectment

is a total of three months
Section 12. Application of the Civil Code and the

Rules of Court of the Philippines
Except when the lease is for a definite period, the

provision of paragraph 1 of Article 1673 of the Civil
Code of the Philippines, insofar as they refer to
residential units covered by this Act, shall be
suspended during the effectivity of this Act, but
other provisions of the Civil Code and the Rules of
Court on lease contracts, insofar as they are not in
conflict with the provisions of this Act shall apply.
 The Rent Control Act does not require that the

lease should be in writing. If there is no
MJ LAZA 23
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LOAN: COMMODATUM AND MUTUUM

LOAN V. DEPOSIT
Article 1933.
By the contract of loan, one of the parties delivers Two kinds of loan:
to another, either something not consumable so 1) Commodatum
that the latter may use the same for a certain time 2) Mutuum or simple loan
and return it, in which case the contract is called a
commodatum; or money or other consumable Commodatum v. Mutuum
thing, upon the condition that the same amount of
the same kind and quality shall be paid, in which Commodatum Mutuum
case the contract is simply called a loan or Thing Non- Consumable
mutuum. delivered consumable (in
general)
Commodatum is essentially gratuitous. Effect of Borrower may Borrower may
contract use the thing consume the
Simple loan may be gratuitous or with a stipulation (contract of use) thing (contract of
to pay interest. consumption
Borrower’s Return the Return a thing of
In commodatum the bailor retains the ownership of obligation identical thing same kind or
the thing loaned, while in simple loan, ownership at quality
passes to the borrower. termination
 Loan is a bailment
 There is delivery of a property
 This is a real contract
Q: Can there be consensual contract of

Commodatum or Mutuum?
A: YES. There can be. But the obligations cannot
yet be enforced because there is no delivery yet.
LOAN V. LEASE
MJ LAZA 24
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COMMODATUM CHARACTERISTICS
Objects of Commodatum: The object is non-consumable and may be used

1. immovable for a certain time. The same thing must be
2. movable returned.
Characteristics:  object of Commodatum is not consumable

 using the same for a certain time; and
Article 1933.  returning the same thing (non-fungible)
By the contract of loan, one of the parties delivers to
another, either something not consumable so that the However, the object of Commodatum may be
latter may use the same for a certain time and return
consumable if the purpose of the Commodatum is
it, in which case the contract is called a commodatum; or
for exhibition only.
money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or Article 1936.
mutuum. Consumable goods may be the subject of
commodatum if the purpose of the contract is not
Commodatum is essentially gratuitous. the consumption of the object, as when it is merely
for exhibition.
Simple loan may be gratuitous or with a stipulation to pay
interest.
Q: Can money be subject of Commodatum?
In commodatum the bailor retains the ownership of A: YES. A practical example is “show-money”
the thing loaned, while in simple loan, ownership passes needed when travelling abroad.
to the borrower.
Gratuitous
Article 1934.
An accepted promise to deliver something by way of
 Under Arts. 1933 and 1935
commodatum or simple loan is binding upon parties, but
 Commodatum is gratuitous
the commodatum or simple loan itself shall not be perfected
until the delivery of the object of the contract.  If any compensation is to be paid by him who
acquires the use, the contract ceases to be a
Article 1935. Commodatum
The bailee in commodatum acquires the use of the thing Problem:

loaned but not its fruits; if any compensation is to be paid The contract states:
by him who acquires the use, the contract ceases to be a
commodatum.
Ako si COLITO PAJUYO, may-ari ng bahay at lote
Article 1939. sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na
Commodatum is purely personal in character. pansamantalang manirahan sa nasabing bahay at
Consequently: lote ng “walang bayad.” Kaugnay nito, kailangang
(1) The death of either the bailor or the bailee extinguishes panatilihin nila ang kalinisan at kaayusan ng
the contract; bahay at lote.
(2) The bailee can neither lend nor lease the object of the
Sa sandaling kailangan na namin ang bahay at
contract to a third person. However, the members of
the bailee's household may make use of the thing lote, sila’y kusang aalis ng walang reklamo.
loaned, unless there is a stipulation to the contrary, or
unless the nature of the thing forbids such use.
Q: Is this a Commodatum?
A: NOT A COMMODATUM. There is actually an
obligation “kaugnay nito….” Note that consideration
can be anything other than money.
MJ LAZA 25
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Q: How can the contract be transformed into a Consequences of being personal in character
contract of Commodatum? 1. As to use
A: Remove the obligation.
General rule: Only the bailee may use the
PAJUYO v. CA (2004) thing.
Exception: The use may extend to the
The contract of commodatum is essentially members of the bailee’s household (not family).
gratuitous. As per the CC, payment of Exceptions to the exception:
compensation or the imposition of any a. Stipulation prohibits such use
condition will change the contract from one of b. The nature of the thing forbids such use
commodatum to another kind of contract—in
this case a contract of rent. 2. As to termination—The contract is
extinguished upon the death of either party.
Facts: Pajuyo allowed Guevarra to stay in his
house rent-free with the sole condition that he will
vacate upon demand. Upon demand, however, OWNERSHIP AND FRUITS
Guevarra failed to leave. The CA ruled that the
agreement was in the nature of a commodatum— Bailor RETAINS the ownership of the thing loaned
Guevarra hence had the better right because he  bailor need not be the owner of the thing
was in rightful possession thereof.
Article 1938.
Issue: WON the contract they entered into was a The bailor in commodatum need not be the owner of
loan or the thing loaned.
commodatum—LOAN
 bailee only acquires the right to use a thing
Ratio: Being that it was not essentially gratuitous  Why? Because what is being transferred is merely
because of the obligation, it was in the nature of a possession and not ownership. Only the right to
loan. use the thing lent is being transferred.
As to Fruits:
Personal (Art. 1939) Article 1935.
The bailee in commodatum acquires the use of the
thing loaned but not its fruits; if any compensation is
 exception to Art. 1176 that all rights acquired by
to be paid by him who acquires the use, the contract
virtue of an obligation are transmissible ceases to be a commodatum.
 a Commodatum is non-transmissible
Consequences of the Personal Character of  General Rule: Only pertains to the use of the
Commodatum: thing and not to its fruits.
(1) death of either the bailor or bailee extinguishes it
(2) bailee cannot lend nor lease the object of the Why? Ownership over the fruits belongs to the
contract to a 3rd person owner of the property (Art. 441)
Exception to lending to a third person:  Exception to the general rule on fruits:

 the members of bailee’s household may make use
of the thing loaned Article 1940.
 exception to the exception rule (EER): the A stipulation that the bailee may make use of the fruits
thing may be lent if otherwise stipulated of the thing loaned is valid.
 Can movable property have fruits? YES. Rents.
MJ LAZA 26
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OBLIGATIONS EXPENSES BAILOR BAILEE

without fault of bailee (Art.
Summary of bailee’s (borrower’s) obligations: 1949)
Other expenses other than
1. Take good care of the thing with the diligence from Arts. 1941 and 1949

of a good father of the family; incurred by the bailee (Art.
2. Use the thing loaned only for the purpose for 1950)
which it was loaned, and for no other purpose; Damages suffered by bailee
3. Pay ordinary expenses for the use and for non-disclosure of flaws 
preservation of the thing, and portion of (Art. 1951)
extraordinary expenses for the actual use of the Extraordinary expenses for
thing; the preservation of the thing 
4. Return and not retain the thing loaned, except loaned (Art. 1949)
under certain circumstances;
5. Be solidarily liable when there are two or more Extraordinary Expenses
bailees to whom a thing is loaned in the same
contract. Article 1949
The bailor shall refund the extraordinary expenses
TAKE CARE OF THE THING during the contract for the preservation of the thing loaned,
provided the bailee brings the same to the knowledge
What is the required degree of diligence? of the bailor before incurring them, except when they
are so urgent that the reply to the notification
 Diligence of a good father of a family
cannot be awaited without danger.
 Failure to take care of the thing loaned with the
diligence of a good father of a family makes the If the extraordinary expenses arise on the occasion of the
bailee liable for damages actual use of the thing by the bailee, even though he acted
without fault, they shall be borne equally by both the bailor
Q: Can the bailee be held liable for loss? and the bailee, unless there is a stipulation to the contrary.
A: As a general rule, the bailee cannot be held liable
for loss of the thing, except when there is evidence Bailor refunds the bailee
that the bailee is negligent. There can be no liability  for extraordinary expenses incurred by the bailee
during fortuitous event except when there is for the preservation of the thing loaned
culpability.  reimbursement is permitted provided bailee
notifies bailor prior to incurring them
EXPENSES  notifying the bailor is not necessary when it is so
urgent and reply cannot be awaited without
Kinds of Expenses: danger
1. Ordinary Expenses: not related to capital, use of
the thing Article 1952
2. Extraordinary Expenses: related to capital, The bailor cannot exempt himself from the payment of
expenses or damages by abandoning the thing to the
preservation of the thing
bailee
 the bailor cannot exempt himself from paying
Summary of rules on expenses (who has the duty to
expenses by abandoning the thing to the bailee
shoulder the expenses?):
SOLIDARILY LIABLE
EXPENSES BAILOR BAILEE
Ordinary expenses for the use
 Article 1945
and preservation (Art. 1941)
Deterioration due to the use When there are two or more bailees to whom a thing is
None
(Art. 1943) loaned in the same contract, they are liable solidarily.
Extraordinary expense
 
because of actual use,  solidarily liable if there are two or more bailees
MJ LAZA 27
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LOSS OF THE THING Exception: If the following circumstances are

present, the bailee will be liable for loss or damage
Article 1942 due to fortuitous event.
The bailee is liable for the loss of the thing, even if it should
Exception Basis for
be through a fortuitous event:
Liability
(1) If he devotes the thing to any purpose different from
that for which it has been loaned; 1. the bailee uses the thing for Bailee is
(2) If he keeps it longer than the period stipulated, or after a different purpose other deemed to
the accomplishment of the use for which the than that for which it was have acted in
commodatum has been constituted; loaned bad faith
(3) If the thing loaned has been delivered with appraisal 2. the bailee keeps it beyond Bailee incurs
of its value, unless there is a stipulation exempting the the stipulated period or delay
bailee from responsibility in case of a fortuitous event;
after the purpose has been
(4) If he lends or leases the thing to a third person, who
is not a member of his household;
completed
(5) If, being able to save either the thing borrowed or his 3. the bailee lends/ leases the Commodatum
own thing, he chose to save the latter. thing to a third person not is purely
a member of his household personal
Who shall bear the risk of loss of the thing: 4. the bailee was able to save Bailee shows
either the thing borrowed or his ingratitude
General Rule: The BAILOR bears the loss or damage his own thing, and he chose
of the thing due to fortuitous event (doctrine of res to save his own
perit domino). 5. the thing was delivered to Law presumes
the bailee with an appraisal that parties
Exception: Bailee shall be liable for the loss of the of its value – unless there is intend that
thing even if loss is from fortuitous event when: a stipulation exempting the bailee be liable
bailee from liability for
1. devotes the thing to any purpose different from fortuitous even
that which it was loaned;
REPUBLIC v. BAGTAS (1962)
2. as to period, bailee is liable if the thing is kept; While the general rule is that the bailee in a
a. longer than the period stipulated; or contract of commodatum will not be liable for
b. after the accomplishment of the use for which the loss of the thing when it was caused by a
it was constituted fortuitous event, he will be liable in such an
instance if:
3. if the thing loaned has been delivered with 1. The thing is devoted to a purpose not
appraisal value contemplated;
2. Keeps it longer than the period
*unless stipulated otherwise that bailee is not stipulated/after the accomplishment of
liable in case of fortuitous event the use for which it was lent;
3. The thing been delivered with an
4. if he lends or leases the thing to a third person appraisal of its value, unless there is a
who is not a member of his household; stipulation that exempts the bailee;
4. Lends or leases the thing to a third
5. if he saved his own thing rather than the thing person who is not a member of his
borrowed. household;
5. If the bailee chooses to save his
Summary of rules on liability for risk of loss: property instead of what was borrowed.
General rule: Bailor is liable for loss or damage due Facts: Bagtas had three bulls that he borrowed
to fortuitous event. from the Bureau of Animal Industry for one year.
Note that they had corresponding appraised
MJ LAZA 28
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values. Upon the expiry of the one-year period, he  no date; no purpose

tried to keep them despite demand being made for
their return. He was able to return two while one (2) Use of the thing is merely tolerated
was shot in a Huk raid.  example: Spare room. A cousin stays in the
room for the Bar exam but the cousin stayed
Issue: WON Bagtas’s estate is liable for the cost of over a year (tolerance)
the bull – YES
E. upon demand for acts of ingratitude under Art.
Ratio: The case falls under situations 2 and 3 of 765
Art. 1942. [see doctrine]
Article 1948
The bailor may demand the immediate return of the
thing if the bailee commits any act of ingratitude
When should object be returned when borrowed?
specified in Article 765.
(Arts. 1946, 1947, 1948, 765)
What are acts of ingratitude under Art. 765

Article 1946
The bailor cannot demand the return of the thing loaned till  commission of an offense against the person,
after the expiration of the period stipulated, or after honor or the property of the bailor or the wife
the accomplishment of the use for which the or children under his parental authority
commodatum has been constituted. However, if in the  bailee imputes to the bailor any criminal
meantime, he should have urgent need of the thing, he may offense, or act involving moral turpitude
demand the return or temporary use. except when committed against the bailee,
his wife or children
In case of temporary use by the bailor, the contract of
 unduly refuses him support when he is
commodatum is suspended while the thing is in the
possession of the bailor. legally or morally bound to give support to the
bailor
A. Expiration of the period stipulated Note: If there are acts of ingratitude, there must first
B. After the accomplishment of the use for which the be demand for the return of the thing.
Commodatum has been constituted
C. Bailor has urgent need of the thing for temporary QUINTOS v. BECK (1939)
use The obligation of the bailee to return the
property of the bailor in a contract of
When bailor has temporary use : contract of commodatum covers all of what was lent
Commodatum is suspended without exception. Further, actual physical
return is required—depositing the same to a
D. Upon demand of the bailor sheriff will constitute breach of the obligation
to return.
Article 1947
The bailor may demand the thing at will, and the Facts: Beck rented a house owned by Quintos. The
contractual relation is called a precarium, in the latter gratuitously lent the use of some furniture to
following cases: Beck. Quintos sold the property and subsequently
(1) If neither the duration of the contract nor the use demanded the return of the furniture. Beck refused
to which the thing loaned should be devoted, has
to return three gas heaters and subsequently
been stipulated; or
deposited the other pieces of property with the
(2) If the use of the thing is merely tolerated by the
owner. sheriff.
Precarium Issue: WON Beck was in breach of his obligation to

return the property of Quintos – YES
There is precarium when:
(1) Neither the duration or devoted use has been Ratio: Being that the contract entered into was one
stipulated of commodatum, the obligation of beck mean that
MJ LAZA 29
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he should return all of what was lent to Quintos at The bailee is required to give notice to the
the latter’s residence or house. bailor of extraordinary expenses incurred for
the preservation of the thing. The decision,
RIGHT TO RETAIN however, is to be made by the owner of the
thing, i.e. the bailor.
Article 1944
The bailee cannot retain the thing loaned on the ground There is no required form for the notice—it
that the bailor owes him something, even though it may be may be oral or written. The notice is however
by reason of expenses. However, the bailee has a right of
not required if the expense to be incurred is
retention for damages mentioned in Article 1951.
urgent, i.e. if waiting for the response of the
bailor may endanger the thing or cause its loss.
General Rule: The Bailee has no right to retain the
thing on the ground that the bailor owes him
b. refund portion of extraordinary expenses arising
something.
from the actual use of the thing
Exception: There is right of retention for damages

Extraordinary expenses for the use of the thing
arising from failing to notify the bailee of hidden
shall be borne by the bailor and the bailee on a
defects.
50-50 basis. This is because the bailor is the
owner, and the thing will be returned to him,
Summary of General Rules (default settings) in
while the bailee has derived benefit from the
Commodatum:
thing.
 borrower is not entitled to fruits

c. pay damages for known hidden flaws
 borrower cannot lend it to another person
Requisites for damages to be paid to bailee
 borrower’s family may be permitted to use the
1. Flaw must be hidden from bailee;
thing
2. Bailor is aware of the flaw/defect;
 if there is appraised value, borrower is liable for
3. Bailor neglects to advise bailee of
loss from fortuitous events
flaw/defect;
4. Bailee suffers damage due to hidden
flaw/defect.
Summary of bailor’s (lender’s) obligations:
Remedy of the bailee in case bailor fails to

Primary obligation: the bailor has the obligation
pay: retain the thing until he has been paid.
to respect the period or purpose for which the
Commodatum was constituted
Others:
1. refund extraordinary expenses for the
preservation of the thing loaned (Art. 1949);
2. refund portion of extraordinary expenses
arising from the actual use of the thing (Art.
1949);
3. pay damages for known hidden flaws (Art.
1951-1952).
For emphasis and review:
Bailor’s duties:
a. refund extraordinary expenses for the
preservation of the thing loaned
MJ LAZA 30
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MUTUUM pay to the creditor an equal amount of the same kind and
quality.
Definition of Mutuum (Art. 1933)
 loan of a consumable thing, upon the condition
that the same kind and quality shall be paid  ownership over the money and the fungible thing
passes to the bailee
Characteristics:  bailee pays creditor an amount equal to the same
 gratuitous or onerous kind and quality
 Note: the payment is not based on value, but on
Onerous when there is payment of interest. the quality or quantity.
Interest is payment for the use of the property
which may be in cash or in kind. Q: Does the loss of a fungible thing extinguish the
obligation?
A: No. Because it is substitutable.
 real contract
EXTINGUISHMENT OF A MUTUUM
Delivery of the money subject of the mutuum
Article 1953, supra
is essential to its perfection. However,
delivery either actual or constructive: it need Article 1955
not be actually put in the borrower’s hands, xxx
e.g. deposit in the debtor’s account.
If what was loaned is a fungible thing other than money,
A contract to loan, however, is consensual, the debtor owes another thing of the same kind, quantity
perfected by the parties’ mere consent. It is and quality, even if it should change in value. In case it is
thus demandable at once. impossible to deliver the same kind, its value at the time of
the perfection of the loan shall be paid.
 not a personal contract

(1) By payment in case of money
Not Personal: death will not extinguish the

 payment should be made in the:
obligation
o currency stipulated
o currency which is legal tender in the
Philippines
Identify what contract is created in the following:
 legal tender in the Philippines: Philippine
1. Loan of Seedlings for Planting: Contract of Peso
Mutuum
 why? because it needs to be planted (consumed).  in case of extraordinary inflation or
The property contemplated is therefore, deflation:
consumable. o payment shall be in the value of the
establishment of the obligation; or
2. Loan for phone: Commodatum o that stipulated in the contract
 A phone need not be consumed to be used (“di mo o there was an official declaration of
naman kinaikain ang cellphone”) extraordinary inflation or deflation from
the BSP
3. Exchange for another phone: Barter
 note on the word “exchange”  checks, bills of exchange and promissory
notes are not cash
Article 1953
 only when checks, bills of exchange,
A person who receives a loan of money or any other
promissory notes are encashed is there
fungible thing acquires ownership thereof, and is bound to
payment.
MJ LAZA 31
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Discount v. Loan
(2) In case of fungible thing
 What should be returned is an object of the Discount Loan
same kind, same quantity and quality, even Interest is deducted Interest is taken at
if it shall change in the value in advance the expiration of
credit
Q: What if bailee cannot deliver something of In a double name Single name paper
the same kind? paper
A: What can be returned is the value at the time Not covered by usury Covered by usury
of perfection (Art. 1955). In this case, money laws laws
equivalent to the value of the object may be given.
Q: Is there still a Usury Law?
Problem: Ms. T gave 3 kilos of banana worth A: none
P500.00. What are you obligated to give? The
three kilos of banana. Define the following:
How payment must be made: Credit Accommodation

Credit Line
1. Loan of money—Must be made in the currency Forbearance
stipulated, if it is possible; otherwise, it must Floating Interest Rate
be made in the currency that is legal tender
in the Philippines. In case of extraordinary INTEREST
inflation/deflation, the value of the currency
must be computed at the time the obligation Requisites for the collection of interest:
was created, i.e. at the time the money lent was  for interest to be due and demandable, there
delivered to the debtor. must be:
1. consent for the imposition of interest;
2. Loan of fungible thing—Something of the same 2. express stipulation for the payment of
kind, quantity, and quality should be interest;
delivered; even if the value changes, the change 3. the agreement to pay interest is reduced in
must be borne by the debtor/borrower writing (Art. 1956)
FORM OF A CONTRACT OF MUTUUM

(additional notes)
OTHER CONCEPTS  Mutuum is still valid regardless of form.
Discounting of a Paper Article 1956
 deducting interest on a loan before it is given No interest shall be due unless it has been expressly
stipulated in writing.
example:
Loan: P50,000.00
Period: 6 months Summary of rules on form of mutuum
Interest is for 1% per month (formula: Interest =
principal x rate x time) General rule: May be either oral or written
Exceptions:
1. Interest—Must be stipulated in writing (Art.
1956)
2. Agency—An agent borrowing in behalf of his
principal must have a special power of
MJ LAZA 32
Credit Transactions
attorney, unless the things in his control must Example:

be urgently preserved (Art. 1878) I promise to pay on May 19, 2022, P500,000.00
and interest shall be in the form of cooking
equipment.
Examples:
 Promissory note with stipulated interest: Q: How much interest should be collected on
maturity date?
I promise to pay the amount of P4,500,000 on A: Principal amounting to P500,000.00 plus
or before May 19, 2022 subject to 3% interest cooking equipment. However, cooking equipment
per month. must be clearly defines as the term is too broad.
Borrower Article 1958
In the determination of the interest, if it is payable in kind,

Here, the consent of the parties is manifested by
its value shall be appraised at the current price of the
the signature of the borrower.
products or goods at the time and place of payment.
 Promissory note where rate of interest is not

stipulated: Kinds of Interest:
I promise to pay the amount of P4,500,000 on  Simple Interest
or before May 19, 2022 subject to interest per  Compound Interest
month.  Monetary or Regular Interest
 Compensatory Interest
There is interest. Manifestation that the interest
is willing to pay: “…subject to interest per month” (1) Simple Interest (Art. 1959)
 interest only on the principal loan
Q: How much interest is to be collected?  P500,000.00 x 12% x 3 years = P21,600.00
A: Since parole evidence (evidence based from the (bakit iba nacocompute ko)
agreement of the parties) will not be entertained,
the interest rate to be imposed is the legal interest Note: OBLICON: When there is confusion as to what
rate. is being paid, pay first the interest before the
principal. Interest is collected until the principal
Rules on interests: obligation is fully paid.
(1) If rate is not stipulated, what is applied is:
 the legal interest rate (2) Compound interest (Articles 1959 and 2212)
 6% (MB Circular No. 799, July 1, 2019)  interest on unpaid interest and added on the
principal which shall earn interest
Q: what if the interest rate today is 6% and
tomorrow  sample provision on compound interest:
it is increased to 8%?
A: The rate to be applied is the rate during the The borrower shall pay compound interest on
perfection of the contract. the unpaid balance at the rate of 1% per
month.
(2) Interest if payable in kind
 valid as long as stipulated between parties  P x (1+r) t
 value of the interest payable in kind shall be
appraised at the current price pf the products
Principal
of goods at time of place and payment Interest
LOAN plus Principal
@ 12%
interest
Year 1 60,000 560,000 500,000
Year 2 67, 200 627, 200
Year 3 75,264 702, 464
MJ LAZA 33
Credit Transactions
ESCALATION CLAUSES AND DE-ESCALATION

 When can there be compound interest: CLAUSES
o stipulated in writing; or
o if there is a judicial demand (Art. 2212) ESCALATION CLAUSE
 stipulation in a contract of loan allowing
INTEREST ACCORDING TO PURPOSE increase of interest rate
 escalation clauses are valid and do not
(3) Monetary or Regular contravene public policy
 the cost of borrowing, using, lending money  as means of maintaining fiscal stability and
retaining the value of money on long-term
(4) Compensatory (Arts. 1169. 2209. 1226) contracts
 damages for delay in the delivery of a sum of
money (Art. 2209) ▪ for short term contracts, it is not necessary to
 in the form of penalty when there is a penal stipulate an escalation clause because the lender
clause for breach of contractual obligations is more or less assured that the value of money
(Art. 1226) now is still the value of money at maturity
 Q: Can monetary and compensatory co-exist? ▪ If the contract of loan is for a longer period, it is
YES. prudent to have an escalation clause. Why?
 Note: compensatory interest rates need not Because of the effects of inflation or deflation.
be stipulated to be enforceable. ▪ Purpose: equalize what was lent more or less to
 Compensatory interest cannot be what is to be returned (paid).
unconscionable. Monetary interest can be
conscionable. Example:
I promise to pay the amount of P500,000.00 on or
Payment of Interest when there is no stipulation before May 19, 2020 at the rate of 12% per annum
until paid which interest rate may be increased at
any time without notice.
The phrase “may be increased at any time without

notice” was treated by the parties as an escalation
clause.
What is violated? The principle of mutuality which

provides that parties should agree to the terms and
Article 1960 conditions of the contract. It is violated because there
is an impression that the rate of interest would be
If the borrower pays interest when there has been no increased by the creditor, without notice. Hence, at
stipulation therefor, the provisions of this Code concerning “any time”, the debtor may be compelled to pay the
solutio indebitii, or natural obligations, shall be applied, as interest without knowing what the interest rate is and
the case may be.
without prior agreement.
REQUISITES FOR AN ESCALATION CLAUSE TO

 If unstipulated interest is paid by mistake, it
BE VALID:
would be a case of solutio indebiti. However, if
unstipulated interest is paid voluntarily, there
1. Escalation clause should be accompanied by a
can be no recovery, as in the case of natural
de-escalation clause.
obligations.
▪ if there is an increase in rate, there should be
a corresponding decrease
▪ fair for both creditor and debtor; while an
escalation clause is beneficial to the creditor,
MJ LAZA 34
Credit Transactions
the de-escalation clause is beneficial to the Ms. Y and Mr. V entered into a contract of
debtor loan with the amount having an interest of
23%. The contract provided for an escalation
DE-ESCALATION CLAUSE and a de-escalation clause. On July 1, 2013,
the interest rate specified in the de-escalation
 stipulation that authorizes a reduction in clause will be triggered. The obligation to pay
the interest rates corresponding to will be lowered.
downward changes made by law or by the
Monetary Board Question: What should be the interest rate that must
be identified?
2. The interest rate must be agreed upon, Answer: The parties can fix or specify it. Another
otherwise it is void. option is to use the present interest rate as reference.
For example, Ms. Y’s obligation to pay Mr. V is at 18%
▪ encourages the principle of mutuality (which is thrice the legal interest rate of 6%). Ms. Y
▪ go back to the example: can say that an increase of interest rate would make
the stipulated interest rate increase by three. If the
There is no agreement of the increase in legal interest rate was increased to 12%, Ms. Y would
interest rate. There should be consent be obligated to pay at 36% (12x3) as stipulated in the
manifested through the signature of the escalation clause. If the legal interest rate was
parties. If one party signed, it does not decreased to 3%, Ms. Y would stipulate that the
automatically mean that it is without consent interest rate is at 9% (3x3).
of the other party. Other stipulations in the
contract may indicate the consent of both ▪ Note: parties must agree to any stipulation
parties. However, the interest rate should still regarding the interest rate. There must be an
be identified. informed consent.
▪ best proof of consent: signature of both Question: What is the proper stipulation on the
parties changes in interest rates?
▪ important: the interest rate can be or must be
identified Answer: “The interest rate could be increased or
decreased only when the law changes the legal
3. The adjustment in the rate of interest agreed interest rate or the Monetary Board of the BSP does.
upon shall take effect on or after the
effectivity of the increase or decrease in the Question: Can the increase or decrease be anchored
maximum rate of interest. on the desperate need of the borrower?
 change of interest rate should be by Answer: NO. The escalation clause, in order to be
declaration of law or the declaration of the valid, must only be dependent on the declaration
Monetary Board of the BSP (not on the whim made by law or by the Monetary Board of the BSP.
of one party or in any event) Anything else, or any other trigger, is considered void.
 July 1, 2013: lowering of interest rate from
12% to 6% ON UNCONSCIONABLE INTEREST RATES
 If there is an escalation clause in the
contract, then that should have triggered the Article 1957
de-escalation of the interest rate. Why? ▪ contracts and stipulations intended to
because there was a downward movement of circumvent the law is void
the legal interest rate.
▪ “unconscionable” – shocking to the senses
Effect: amount to be paid is lowered
 Example:
MJ LAZA 35
Credit Transactions
USURY LAW Answer: The imposition of an unconscionable rate of

(Act 2655, as amended) interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. Even if
 empowered the monetary board of the CB to fix a there is full knowledge and awareness of the legal
maximum interest rate for a loan or forbearance consequences of entering into a contract of loan with
 prohibits the imposition of an interest rate greater an unconscionable interest, the knowledge and
than the maximum interest rate imposed by the awareness is not a valid defense. The interest remains
MB to be unconscionable even if there was voluntariness.
 the stipulation of an interest rate is higher than The voluntariness will not make the interest rate
that of the maximum interest rate shall be void. lawful.
 Purpose: there was an intent to correct misdeeds Supreme Court:

during the time of the Commonwealth. During the
Spanish time, interest rates were set up by third Voluntariness does not make the stipulation on an
persons not privy to the contracts and borrowers unconscionable interest valid
would lose their properties in order to pay the
interest. useless defense: THE DEFENSE OF KNOWINGLY
 Under the Act, the Central Bank of the ENTERING INTO SUCH CONTRACT
Philippines can dictate the maximum legal
interest rate such that it would be unlawful to Consequence of an unconscionable Interest Rate
stipulate an interest rate higher than what is  the unconscionable rate only extends to the
provided under the law. interest rate stipulated by the parties
 However, the provision in the Usury Law became
inconsistent with the provision under the Civil  Note: Stipulations in a contract of loan are
Code that allows parties to set the terms and divisible.
limitations between them.
 By virtue of an administrative law, the Usury Law (a) Pay the loan (principal obligation)
was suspended. Thus, parties are now free to (b) Pay the interest
stipulate the interest rates of their contracts.
 Warning: do not use the term “usurious”; use  the court is empowered to reduce the interest rate
the term “unconscionable” if an interest rate was stipulated but is usurious
The Usury Law was suspended by virtue of Question: Would it be sufficient to declare the
CENTRAL BANK CIRCULAR NO. 905 (effective entire obligation as null and void?
January 1, 1983)
Answer: NO. It will only be sufficient to declare the
Consequence of Suspension interest rate null and void. The obligation to pay
 parties are allowed to freely stipulate on the interest is separate from the payment of the
interest BUT NOT WHEN the interest enslaves principal obligation.
their borrowers or lead to a hemorrhaging of their
assets To declare that even the principal obligation is
 the interest rate must not be so high as to enslave null and void was deemed by the Supreme Court
the borrower as unjust enrichment.
 an interest rate that is unconscionable, one that
enslaves or hemorrhages the assets of the Question: If the interest is declared void, does it
borrower, is not just void, it is also immoral mean that there is no more duty to pay the
(much like rape or stealing is immoral) and unjust interest?
Question: What if the parties willingly agreed to the Answer: There is still a duty because the parties
unconscionable interest rate? Can there be estoppel? agreed to be governed by the contract providing for
the payment of the interest. The interest will be
fixed by the courts but it can be any amount
MJ LAZA 36
Credit Transactions
equivalent to the legal interest rate. The courts are Medel et.al., v. Court of Appeals et. al.
permitted to set the interest at 6% or reduce the
interest lower than what is stipulated by the  “go-to-case” for setting the general rule on
parties. unconscionable interest rates
Question: If you are lawyering for the creditor and

the interest rate is higher than the legal interest
rate, would it be proper to deem the rate as
unconscionable?
Answer: No. The courts are empowered to declare

the rate as unconscionable or not. The courts can
also reduce the rate, even at a rate higher than the
legal interest rate. The parties can argue that the
stipulated interest rate is not unconscionable even Facts: Medel borrowed money in 1985 with an
if it is higher than the legal interest rate by proving interest rate of 6% per month (72% per annum). At
that the same was agreed upon and there is that time, the legal interest rate is 12%. The term
sufficient justification for the imposition of such of the loan was for 2 months. In this case, there
rate. was already discounting of the interest rates. The
proceeds of the loan already excluded the payment
However, if the interest rate is clearly for the interests. Medel was unable to pay all his
unconscionable, the parties must find a “middle obligations. On June 1986, another loan was
ground” because the creditor still needs to be paid entered into but was secured by a real estate
for the use of his money. The rate must be mortgage. Unable to pay the previous obligations,
justifiable and lawful. Medel renegotiated the loans and the parties agree
to consolidate the obligations. The consolidated
Possible reasons: obligation was for P500,000.00 payable within one
a) there is no collateral to secure the debt, which month subject to 5.5% per month (or 66% per
merits a higher interest rate; or annum).
b) the business of the borrower is risky and there
is no guaranty that the loan can be paid. Held: The SC held that the 66% per annum is
unconscionable. It enslaves the borrower and
Question: Should the parties waive the payment of cause the hemorrhaging of the assets.
interest?
Suggested Answer: No. The interest rate was

entered into by parties fully aware and
knowledgeable of the consequences. As an
alternative, if the court determines that the rate is
unconscionable, the rate should be lowered to this
amount (state the rate), because the parties still
agreed to be bound by an interest rate.
CASES ON UNCONSCIONABLE INTEREST

RATES
MJ LAZA 37
Credit Transactions
Survey of the decisions of the SC pertaining to interest rates:
▪ Used loan to advance payments for

SBTC v. RTC (1996) prospective clients of educational
▪ The legal interest rate was 12%. The agreed upon payments to be entitled to 50% rebate
interest was 23%. ▪ She used or borrowed the money to take
▪ SC ruled that the 23% interest rate was advantage of a loophole. Thus, even if the
conscionable because it was freely agreed upon interest rate was higher than in the Medel
by the parties and the respondent never case, the interest rate in this case is
questioned the interest rate. conscionable.
▪ Takeaway: If the party wants to question the
interest rate, the same must be done
immediately, not later. ▪ SC held the that the interest rate was lawful.
▪ SC: “the law will not relieve a party from the
Imperial v. Jaucian (2004) effects of an unwise, foolish or disastrous
▪ The interest rate was 16% per month or 192% per contract if such party had full awareness of what
annum. she was doing”
▪ SC held that the rate shouldn’t really be based on ▪ “when you come to court, you must do so with
comparing the legal interest rate with the clean hands”
stipulated interest rate. That is not how to ▪ The case is an exception to Medel. But do not use
determine whether the interest rate is the case if the facts are different.
unconscionable or not.
Prisma and Pantaleon
Question: What should then be the basis?
▪ The interest rate of 4% per month or 48% per
Answer: The individual facts from case to case. annum was declared conscionable.
The circumstances per case must be considered.
Principal: P100,000
Toledo v. Hyden (2010) Interest: P40,000 up to December
▪ The interest rate is 6% to 7% per month.
Facts: ▪ The interest is fixed from February to December.

▪ P290,000 from August 1993 to May 22, ▪ Takeaway: If the interest rate set up by the parties
1997 is high, bordering on unconscionable, the interest
must not be pegged with a rate. It is better to fix
the interest with a fixed amount, not a rate.
MJ LAZA 38
Credit Transactions
Effect of Unconscionable Interest Rate

Question: What would be the interest after
December? (1) To the amount of obligation
Example: The principal obligation is P1 Million and
Answer: The interest computed with the legal the stipulate interest rate is 30% per annum. If the
interest rate. Thus, P40,000 up to December then interest rate is lowered to 18% because the stipulated
6% per annum afterwards. interest rate is unconscionable, the interest would
now be P180,000 and not P300,000.
▪ If the interest is fixed, it is not unconscionable but
it is a valid stipulation. What is the consequence? There is an overpayment of
P120,000.
Sps. Andal v. PNB
What is the effect of the overpayment? The filing of a
▪ Here, the legal interest rate was already lowered suit for non-compliance of payment of obligation is
to 6%. premature. The overpayment can be applied to the
▪ In this case, the parties agreed to a floating interest and any remaining amount, to the principal.
interest rate of 17.5% to 25%. The lower courts
found the rates to be unconscionable. However, (2) To the Real Estate Mortgage
Sps. Andal elevated the case to the SC because
they do not want to pay any interest. Example: A loan is secured with a real estate
▪ The obligation to pay interest still exists but the mortgage. If there is failure to pay, the property will
rate is declared null and void. There is still the be foreclosed. To avoid foreclosure, the parties will file
intent to pay interest. annulment of the foreclosure with TRO and reduction
▪ Just because the case is filed in court, it does not of interest because the same is unconscionable.
mean that the running period of the computation However, if the property is already foreclosed, the
of the interest payable does not stop. overpayment would make the proceedings unlawful
and premature. The foreclosure and subsequent sale
Sps. Abella v. Sps. Abella, 763 Phil. 372, 388 of the property will be annulled. The debtor will then
(2015) regain sole ownership over the property.
▪ The interest rate agreed upon was 2.5% per LARA GIFTS AND DECORS V. MIDTOWN
month or 30% per annum. The SC declared the INDUSTRIAL SALES
rate as unconscionable.
▪ The legal rate of interest is the presumptive Facts: There was purchase of property with a
reasonable compensation for borrowed money. forbearance. The forbearance was subject to a 60-
While parties are free to deviate from this, any day credit term, which means that the buyer can
deviation must be reasonable and fair. Any get whatever good but only obligated to pay for it at
deviation that is far-removed is suspect. Thus, in a later date. The right to pay the obligation at a
cases where stipulated interest is more than later date was subject to a 24% interest rate per
twice the prevailing legal rate of interest, it is annum, which is four times higher than the legal
for the creditor to prove that this rate is interest rate. The payment was made through
required by prevailing market conditions. checks but all bounced.
Question: What is an unconscionable interest Supreme Court En Banc:

rate using the case? ▪ 24% interest rate is conscionable and lawful,
although four times higher than the legal
Answer: An unconscionable interest rate is twice interest rate.
the legal interest rate that cannot be justified by ▪ The parties are presumed to have full
the creditor. As long as the rate is justified, it is knowledge of the terms and conditions of the
permissible. contract and did not object thereto. They
cannot have been misled into agreeing to the
MJ LAZA 39
Credit Transactions
24% interest rate. Thus, the 24% is valid and

binding. Judicial Demand Extrajudicial Demand
▪ Stipulated interest for the loan or forbearance Takes place if there is Made through demand
shall be applied until full payment of the an order by the court to letters. The creditor
obligation. pay an obligation. The demands the debtor to
▪ No compounding of interest unless by decision need not be pay.
agreement. final and executory.
▪ Forbearance:
 arrangements other than loan where a Question: When can a person be considered in
person acquiesces to the temporary use of default?
his money, goods, or credits pending the
happening of certain events or fulfillment Answer: TWO INSTANCES:
of certain conditions. (1) if there is already a judicial demand and no
 Being deprived of the ability to use their payment is made;
money for the period pending fulfillment of (2) when the contract expressly stipulates a period
the conditions and when the condition has when payment is to be made. Here, no demand
been breached. is needed to render the party in default.
▪ if no stipulated interest or the interest rates
is deemed unconscionable, apply legal NOTE: SEE THE FILE ON LARA v. NACAR.
interest rate to:
▪ loans;
▪ forbearance of any money, goods, or
credits;
▪ judgments in litigations involving loans,
forbearance of money, goods or credit.
Some terms used in the case:

▪ forbearance of goods: installment payment
requiring period payment of money to the creditor
▪ forbearance of credit: sale of anything on credit,
where the full amount is due
Judicial Demand v. Extrajudicial Demand
TABLE COMPARISON: COMMODATUM v. MUTUUM
COMMODATUM Distinctions MUTUUM

NO Consumable YES or money
NO Fungible YES
NO Personal Property Only YES
Use for a certain time How used Used for consumption
BOTH: onerous if with stipulation
Essentially gratuitous Gratuitous or Onerous
to pay interest
YES Retention of Ownership by Bailor NO
BAILOR Bears risk of loss BAILEE
May be demanded even before the
When is return made Generally, at the end of period
end of the period
YES Personal obligation NO
MJ LAZA 40
Credit Transactions
TRUTH IN LENDING ACT ▪ action is filed within one year from the date of the
RA 3765 occurrence of the violation
▪ in any court of competent jurisdiction
Purpose of the law
▪ protect its citizens from a lack of awareness of the WILLFUL VIOLATION
true cost of credit to the user by assuring a full ▪ fined by not less than Php. 100 or more than
disclosure of such cost Php. 5,000
▪ imprisonment for not less than 6 months, nor
creditor is obligated: more than one year
▪ to furnish each person a clear statement in ▪ both
writing
▪ prior to the consummation of the transaction of a note:
CREDIT ▪ violation of this law does not affect the validity of
enforceability of the contract
credit ▪ the penalty does not affect the Republic or against
▪ loan the political subdivision of the Philippines
▪ mortgage
▪ any conditional sales contract
▪ any contract to sell, or sale or contract of sale of
property or services, either for present or future
delivery, under which part or all of the price is
payable subsequent to the making of such sale or
contract
▪ any contract or arrangement for the hire,
bailment or leasing of property
Information to be disclosed:
(1) the cash price or delivered price of the property or
service to be acquired;
(2) the amounts, if any, to be credited as down
payment and/or trade-in;
(3) the difference between the amounts set forth
under clauses (1) and (2);
(4) the charges, individually itemized, which are paid
or to be paid by such person in connection with
the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos
and centavos; and
(7) the percentage that the finance bears to the total
amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of
the obligation.
Failure to disclose
▪ Php. 100 or in an amount equal to twice the
finance charged whichever is the greater, except
that such liability shall not exceed Php. 2,000
on any credit transaction
▪ AF and cost
Provided:
MJ LAZA 41
Credit Transactions
GUARANTY & SURETY presents do hereby assign, transfer and convey

unto the said PHILIPPINE NATIONAL BANK, its
Definition (2047) successors and assigns all payment to be received
from my contract with the Bureau of Public Works,
Article 2047. By guaranty a person, called the Republic of the Philippines date (sic) August 6,
guarantor, binds himself to the creditor to fulfill the 1955.
obligation of the principal debtor in case the latter
should fail to do so. If a person binds himself Secured Surety
solidarily with the principal debtor, xxx the contract
is called a suretyship. That we, E. E. DEPUSOY CONSTRUCTION CO... as
surety, are held and firmly bound unto the
PHILIPPINE NATIONAL BANK of Manila in the sum
▪ a person binds himself to the creditor to fulfill of SIXTY THOUSAND PESOS ONLY (P60,000.00),
the obligation of the principal debtor in case Philippine Currency, for the payment of which
the latter should fail to do so sum, well and truly to be made, we bind ourselves,
our heirs, executors, administrators, successors,
and assigns, jointly and severally, firmly by these
presents.
Question: Who is benefited by the guaranty or

surety?
Answer: The CREDITOR because there is always an

assurance that the debtor’s obligation is always paid.
▪ A guarantor is a person who binds himself to
the creditor to fulfill the obligation of the
principal debtor. GUARANTY V. SURETY
▪ The guarantor ensures the solvency of the
debtor through his promise to pay in case of ▪ The effect is the same. A debtor’s obligation is
default. promised to be paid by a third person.
▪ the difference lies on when the obligation is to
Guaranty and Surety be paid by the third person
▪ becomes liable for the duty of the debtor even if
he has no direct or personal interest SURETYSHIP
▪ examples of what can be secured by a guaranty:
o Guaranty the service contract Suretyship
o Guaranty the Mutuum ▪ agreement whereby a party, called the surety,
guarantees the performance by another party,
Example: Mr. C promised to paint the house of called the principal or obligor, of an obligation or
Ms. T. Mr. C failed to do so. As the guarantor of undertaking in favor of another party, called the
Mr. C, Ms. Y can either: (1) paint the house; or (2) obligee.
pay damages to Mr. T.
What is the suretyship's liability:
▪ Example of Surety: ▪ to the creditor or promisee of the principal is said
to be direct, primary and absolute;
PNB v. CA, G.R. No. 33174, July 4, 1991 ▪ in other words, he is directly and equally bound
with the principal.
That I, Estanislao Depusoy,.. for and in ▪ the same level as that of the debtor
consideration of certain loans, overdrafts or other
credit accommodations to be granted by the
PHILIPPINE NATIONAL BANK, Manila, have Surety (Palmares v. CA.)
assigned, transferred and conveyed and by these
MJ LAZA 42
Credit Transactions
▪ the obligation of the surety is the same as that of GUARANTY SURETY

the principal, then as soon as the principal is in
One contract with
default, the surety is likewise in default, and may
Two contracts signature in the same
be sued immediately and before any proceedings
contract
are had against the principal.
▪ The obligation of the surety is the same as the In other words, mere
debtor’s. want of diligence or
▪ Surety is the same party as the debtor in forbearance does not
relation to whatever is adjudged touching the Must sue debtor before affect the creditor’s
obligation of the latter, and their liabilities are guarantor can be held rights vis-à-vis the
interwoven as to be inseparable. liable surety, unless the
▪ The obligation of a surety is solidarily with surety requires him by
that of the debtor. appropriate notice to
▪ the creditor can go directly to the surety and sue on the obligation.
demand payment for the obligation
Example: HOW TO KNOW IF A CONTRACT IS A GUARANTY

OR A SURETY:
(1) look at the tenor of the contract:

▪ terms used to indicate that the contract is a
surety:
 the obligation direct, immediate and
absolute
 secondary
 jointly and severally
 co-maker
The obligation of the co-maker is the same as the
obligation of the debtor (maker). ▪ terms used to indicate that the contract is a
guaranty:
GUARANTY V. SURETY  subsidiary
 conditional (debtor has assets)
GUARANTY SURETY
The third person binds (2) existence of one or two contracts

Subsidiary liability himself solidarily with ▪ single contract: surety (the obligation of the
(creditor must go to the the debtor surety is jointly and severally with the debtor)
debtor first before the ▪ two contracts: guaranty (one for creditor and
guarantor) Principally liable for the principal debtor, and another for principal
debt debtor and guarantor)
Insures the fulfillment Question: When can a guarantor be held liable?

Insurer of the
of the obligation
obligation itself
(only insures that the Answer: Liability of guarantor is imposed:
(insures that the
debtor is solvent or that 1. Debtor is default;
obligation will be paid
the debtor can pay the 2. Debtor’s liability is determined; and
no matter what)
obligation) 3. Debtor’s assets is insufficient.
“subsidiary” “secondary”
Question: When can a surety be held liable?
Contracts to pay if, by A surety undertakes
the use of due directly for the payment Answer: A surety can only be made liable once the
diligence, the debt and is so responsible at obligation became due and demandable.
cannot be made out of once if the principle
the principle debtor debtor makes default Example:
MJ LAZA 43
Credit Transactions
Finman General Assurance Corp. V. Salik, G.R.

No. 84084, Aug. 20, 1990 Osmena and MB Lending are the principal parties.
▪ Abdulgani Salik et al., private respondents, Osmena owes a sum of money to MB Lending.
allegedly applied with Pan Pacific Overseas Palmares was asked to be a surety or guaranty.
Recruiting Services, Inc. and were assured Osmena was in default. Palmares was informed of this
employment abroad by a certain Mrs. Normita default. Thus, Palmares offered to pay the obligation.
Egil and paid fees. However, when MB Lending went after Palmares, the
▪ They were not employed abroad. So they filed a latter raised the defense that she is not a surety.
case against Pan Pacific, to which the POEA
ruled in their favor. Palmares v. Court of Appeals & MB Lending
▪ Finman is Pan Pacific's surety which is a Corporation, G.R. No. 126490, March 31, 1998
requirement to engage in the business of
recruitment for overseas employment. ATTENTION TO CO-MAKERS: PLEASE READ
▪ Salik sued Finman and Pan Pacific. WELL
▪ Pan Pacific Objected. FinMan also objected. I, Mrs. Estrella Palmares, as the Co-maker of the
above-quoted loan, have fully understood the
contents of this Promissory Note for Short-Term
Question: Is it proper for Finman to be held liable? Loan:
Answer: The Supreme Court held that the duty of That as Co-maker, I am fully aware that I shall be
Finman is based in the Labor Code. FinMan cannot jointly and severally or solidarily liable with the
say that it cannot be held liable because they are above principal maker of this note;
bound to the employees (the creditors in a surety). As
surety, FinMan is liable to them. That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the
IRR of Labor Code, Rule V, Sec. 4 above loan from me in case the principal maker,
Mrs. Merlyn Azarraga, defaults in the payment of
Upon approval of the application, the applicant the note subject to the same conditions above-
shall pay to the Ministry (now Department) a contained.
license fee of P6,000.00, post a cash bond of
P50,000.00 or negotiable bonds of equivalent
amount convertible to cash issued by banking or Held: Palmares is a surety. The first and second
financial institution duly endorsed to the Ministry paragraphs are affirmations that she is a co-maker
(now Department) as well as a surety bond of and is jointly and solidarily liable with the debtor. The
P150,000.00 from an accredited bonding company third paragraph only explains when she can be held
to answer for valid and legal claims arising from liable. However, it does not transform the contract
violations of the conditions of the license or the into a contract of guaranty.
contracts of employment and guarantee
compliance with the provisions of the Code, its The third paragraph of the controverted suretyship
implementing rules and regulations and contract merely elucidated on and made more specific
appropriate issuances of the Ministry (now the obligation of petitioner as generally defined in the
Department). second paragraph thereof. Palmares offered to
immediately pay when informed of principal’s failure
to pay.
The contract should be read in its entirety.
Notice to Surety of Debtor’s default is not

required
▪ demand on the sureties is not necessary before
bringing suit against them, since the
commencement of the suit is a sufficient demand
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▪ surety is not even entitled, as a matter of right, to Palmares v. CA

be given notice of the principal’s default
▪ if there is a stipulation to notify the surety, then It cannot be used as an aid in determining whether
it is a matter of right on the part of the surety to a party’s undertaking is that of a surety or a
be notified guarantor.
▪ unlike the guarantor who has the right to be
notified in case the debtor is in default, the surety
does not enjoy the same right PNB v. CA, G.R. No. 33174, July 4, 1991
FORM OF GUARANTY & SURETY That I, Estanislao Depusoy,.. for and in

consideration of certain loans, overdrafts or other
▪ always in writing credit accommodations to be granted by the
▪ the law says that when a person undertakes to PHILIPPINE NATIONAL BANK, Manila, have
perform the obligation of another, it should assigned, transferred and conveyed and by these
always be in writing presents do hereby assign, transfer and convey
unto the said PHILIPPINE NATIONAL BANK, its
successors and assigns all payment to be received
from my contract with the Bureau of Public Works,
Republic of the Philippines date (sic) August 6,
1955.
What obligation had been guaranteed by Luzon

under the terms of the surety bonds?
A. To pay its Depusoy’s loan to PNB

B. To assign payment from DPWH
INTERPRETATION OF SURETY AND Answer: B

GUARANTY
Supreme Court: Nowhere in the Deed of
STRICTISSIMI JURIS Assignment nor in the bonds did Luzon guarantee
▪ “we reiterated the unrippled rule that the liability that Depusoy would pay his indebtedness to the
of the surety is measured by the terms of the plaintiff and that upon Depusoy’s default, Luzon
contract, and, while he is liable to the full extent would be liable. When the terms of the agreement
thereof, such liability is strictly limited to that are clear, there can be no room for construction.
assumed by its terms.”
▪ the contract should be interpreted according to
the strictest interpretation of the law or contracts
CHARACTERISTICS OF A SURETY
▪ if the obligation of the debtor is only to pay for a
specific amount, the guaranty or surety cannot be
1) Gratuitous (2048)
made to pay for a greater amount (example)
▪ generally free
La Insular vs. Machuca Go Tanco, et. al. 2) Accessory Contract (2052)

▪ It is extinguished at the same time as that
“It is undoubtedly true that the law looks upon the of the principal debt, and for the same
contract of suretyship with a jealous eye, and the causes as all other obligations (2076)
rule is settled that the obligations of the surety ▪ grounds for extinguishment: payment,
cannot be extended by implication beyond its novation, prescription, laches, etc.
specified limits.”
3) It must be express and not presumed (2055)
4) Strictly construed against the creditor

(Strictissimi juris)
MJ LAZA 45
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Answer: It is a contract of surety.

CHARACTERISTICS OF GUARANTY
NOTE: “guarantee” for payment of money;
1) Gratuitous (2048) “guaranty” pertains to other than money.
2) Accessory Contract (2052)
3) It must be express and not presumed (2055)
4) Strictly construed against the creditor Obligations that can be guaranteed and subject of
(Strictissimi juris) surety:
5) Subsidiary and conditional (2058)
▪ guarantor can only be liable when debtor is a) Present Debt
in default, insolvent or his liability b) Future Debts
determined. c) Conditional Obligation (2053)
d) Natural Obligation (2052)
SUBJECTS OF A GUARANTY AND SURETY e) Voidable Contract (2052)
f) Unenforceable Contract (2052)
What may be secured by guaranty or surety:
a. Present debt Article 2052. A guaranty cannot exist without a valid
▪ enactment of the obligation is simultaneous obligation.
with the guaranty or surety
Nevertheless, a guaranty may be constituted to
b. Future debts (2053)
guarantee the performance of a voidable or an
▪ the guaranty or surety is executed before the
unenforceable contract. It may also guarantee a
obligation natural obligation.
▪ will only be demanded against the guarantor
after a liquidation of the future debt Article 2053. A guaranty may also be given as security
▪ it is only when the obligation becomes certain for future debts, the amount of which is not yet known;
that the debt can be identified there can be no claim against the guarantor until the debt
is liquidated. A conditional obligation may also be
secured.
Lint v. Security Bank Corporation, G.R. No.
188539, March 12, 2014
▪ Anything and everything may be guaranteed

"Guaranteed Obligations" - the obligations of the
except those which are unlawful by nature.
Debtor arising from all credit accommodations
Even conditional obligation, where certain events
extended by the Bank to the Debtor, including
happen that makes the obligation demandable
increases, renewals, roll-overs, extensions,
and enforceable, which are unsure can be
restructurings, amendments or novations thereof,
secured. Even natural obligations, which cannot
as well as:
be enforced, can be secured. Even voidable and
(i) all obligations of the Debtor presently or
unenforceable contracts can be secured.
hereafter owing to the Bank, as appears in
▪ As long as the obligations have not yet been
the accounts, books and records of the
determined as natural obligations and as long as
Bank, whether direct or indirect, and
the contracts have not been rendered null and
(ii) any and all expenses which the Bank may
void, they can be secured by a surety or guaranty.
incur in enforcing any of its rights, powers
Once declared null and void, the guarantor or
and remedies under the Credit Instruments
surety can no longer be held liable.
as defined hereinbelow.
▪ example of present and future obligations which
can be secured: continuing suretyship or
Question: Are the obligations present debt or future
guarantyship
debt?
When parties enter into a continuing suretyship,
Answer: BOTH. “All obligations of the Debtor
the surety or guarantor will be liable for the
presently or hereafter owing to the Bank.”
obligation of the debtor even without executing
another suretyship.
Question: Is the contract a guaranty or surety?
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Willex Plastic Industries Corp. V. CA, G.R. No. Held: The Supreme Court said that there is nothing
103066, April 25, 1996 inherently wrong with being liable for past obligations
if it was agreed upon by the parties. Sureties and
guaranties, as a general rule, must always be
forward-looking. However, when parties stipulate
otherwise, then the surety or guaranty can be held
liable for past obligations. Thus, in this case, Willex
can be held liable for past obligations because it
purposefully bound itself to be liable for all
obligations obtained and will be obtained.
TYPES OF GUARANTY
Article 2051. A guaranty may be conventional, legal or

judicial, gratuitous, or by onerous title.
Agreement with Willex:
It may also be constituted, not only in favor of the principal
For and in consideration of the sums obtained and/or to
debtor, but also in favor of the other guarantor, with the
be obtained by INTER-RESIN INDUSTRIAL
latter's consent, or without his knowledge, or even over his
CORPORATION, hereinafter referred to as the
objection.
DEBTOR/S, from you and/or your principal's as may be
evidenced by promissory notes, checks, bills receivable/s
and/or other evidence's of indebtedness (hereinafter Classifications:
referred to as the NOTE'S), I/We hereby jointly and A. How created
severally and unconditionally guarantee unto you and/or B. Consideration
your principal/s. successor's and assigns the prompt and C. With or without knowledge of the debtor
punctual payment at maturity of the NOTE'S issued by D. In favor of whom
the DEBTOR'S in your and/or your principal's,
successor's and assigns favor to the extent of the
A. As to manner of creation:
aggregate principal sum of FIVE MILLION PESOS
▪ Conventional
(P5,000,000.00), Philippine Currency, and such interests,
charges and penalties as may hereinafter be specified. ➢ by agreement of the parties
▪ Legal
➢ required by law (example: FinMan Case)
A principal obligation was entered into by Inter-Resin ▪ Judicial
with Manila Bank. IUCP is the guarantor of Inter- ➢ required by law but enforced by the
Resin. IUCP obliges itself to pay the obligation of courts
Inter-Resin to Manila Bank. Afterwards, IUCP entered ➢ best explained by a bond:
into another contract with Willex Plastic, such that o supersedeas bond in labor cases
the latter will be liable for the obligation of Inter- o replevin bond for damages in case the
Resin. Now, Manila Bank is requiring the payment of plaintiff was not entitled to the recovery
the obligation from Willex. Willex denies the liability of a movable property
stating that it cannot be held liable for obligations
already existing before it became a party to the B. Based on consideration:
contract. It is only liable for obligations after it became ▪ Generally gratuitous
a surety. o “I hereby undertake to pay the debt of the
debtor in case he fails to do so.”
The law says a party can be made liable for both
present and future debts. In this case, the debt ▪ Onerous
imposed by Manila Bank upon Willex is neither a o “I hereby guarantee the debt of the debtor and
present nor a future debt. It is not a present debt hereby submit my property as security for the
because the obligation was entered into before Willex guaranty.”
became a party. It is not a future debt because it o onerous because it is more burdensome
already existed at the time of the undertaking. o example of being burdensome: the obligation
of the guarantor will be paid by the
guarantor’s property
MJ LAZA 47
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value of the property is P2 Million, can this be

C. For whose benefit: done?
▪ generally for the benefit of the creditor
▪ guaranty may also be for the benefit of the The house may be sold at a public auction
guarantor if there is a sub-guarantor (see through foreclosure proceedings but the payment
illustration) for the loan is only up to P1 Million and not for
the whole P2 Million. The excess will be returned
to the guarantor.
EXCEPTION: Simple or indefinite guaranty
Simple Guaranty Indefinite Guaranty

There is no amount There is no specified
stipulated in the period to be liable.
contract of guaranty. It
is only a simple promise
to pay for the obligation
▪ the sub-guarantor can be directed to pay the
of the debtor.
debtor’s obligation if the guarantor cannot pay
the obligation
Example of simple and indefinite: “I promise to be
liable to the creditor in case the debtor fails to pay the
D. With knowledge of the debtor/ sub-guarantor
obligation.” Here, there is no fixed amount and
specified period.
▪ a guarantor pays the obligation with the right of
reimbursement
▪ A simple and indefinite contract of guaranty is a
bad contract. Under the law, it is not just the
principal obligation which the guarantor may be
held liable but also for accessory contracts and
obligations, such as payment of interests and
penalties, costs of the proceedings and attorney’s
fees.
Example of definite guaranty: If the principal

obligation is for P1 Million and there is a definite
guaranty such that the guarantor is only “bound to
pay the creditor only up to P500,000”, how much can
EXTENT OF COVERAGE OF GUARANTY be demanded from the guarantor? Only P500,000.00.
General Rule: The guaranty cannot be greater than “I promise to be bound to the creditor for the amount
the loan. of P1 Million in case the debtor fails to pay the
obligation.”
Example 1:
▪ if the loan is P1 Million, the guarantor or the “I promise to be bound to the creditor for the amount
surety can be held liable for 1 CENTAVO or up of P1 Million only for one year upon execution of the
to P1 MILLION. But, it can never be greater principal obligation.” The obligation of the guarantor
than the loan. Why? Because the contract is only will only be effective one year after the debtor fails to
subsidiary. The guaranty is only an accessory pay the obligation.
contract. Hence, it can never be more than the
liability of the debtor. Example of simple and indefinite: “I promise to be
bound to the creditor in case debtor fails to pay.” If
Example 2: debtor fails to pay, guarantor is liable for the principal
▪ if the principal obligation is for P1 Million and the obligation, including penalties, interest, and if the
guarantor is required to put up his own property
to secure the obligation and the corresponding
MJ LAZA 48
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court orders compounding of interest, guarantor is Exception

also liable for the same. (see table) ▪ Even when a person is convicted or is insolvent
may be permitted to remain as a guarantor if the
If loan is P1,000,000 debtor has named a specific person to be a
guarantor.
Not Simple/ Simple/ Indefinite
Indefinite Guaranty Guaranty Note: The disqualification of a guarantor does not
P 0.01 to P1,000,000.00 P1,000,000 render the guaranty invalid. It is the duty of the
6% interest debtor to look for another guarantor.
6% penalty
6% compounded Article 2049
interest for judicial cost ▪ a married woman may guarantee an obligation
without the husband’s consent, but shall not
QUALIFICATIONS OF THE GUARANTOR thereby bind the conjugal partnership, except in
cases provided by law.
Article 2056. One who is obliged to furnish a guarantor
shall present a person who possesses integrity, capacity Article 2049. A married woman may guarantee an
to bind himself, and sufficient property to answer for obligation without the husband's consent, but shall not
the obligation which he guarantees. The guarantor shall thereby bind the conjugal partnership, except in cases
be subject to the jurisdiction of the court of the place where provided by law.
this obligation is to be complied with.
▪ thus, spouses may only be guarantors if they
Guarnator must possess: have sufficient assets which do not belong to the
▪ Integrity; conjugal property (exclusive property).
o a contract of guaranty is a credit transaction
which is based on trust and confidence
▪ Capacity to bind himself; and
o must not be a minor
▪ Sufficient property to answer for the obligation.
o necessity of sufficient property to answer for
obligations of the debtor.
Rules:
➢ if it is shown that a person lacks the integrity,
capacity to bind himself, and sufficient property
to answer for the obligation, the creditor may
actually demand for another guarantor.
➢ If a person is convicted for a crime involving

dishonesty (Estafa, forgery, etc.), the conviction is
already a sufficient basis for the guarantor to be
disqualified.
Article 2057. If the guarantor should be convicted in first

instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all
the qualifications required in the preceding article. The
case is excepted where the creditor has required and
stipulated that a specified person should be the guarantor.
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EFFECTS OF GUARANTY How will the debtor pay?

▪ in every decision, there needs to be an
Procedure to make the guarantor liable: execution
▪ the debtor must have sufficient property
▪ when the decision becomes final and
executory, the property may be executed in
the following order:
o real property
o personal property
o garnish savings account
▪ in labor cases, order is reversed
Here, debtor has not paid.

▪ the sheriff orders debtor to pay but is unable
Note: This is only applicable to guaranty and not to do so.
to surety. ▪ only then can the guarantor can be held
liable.
Steps:
1. The creditor must file an action against the 7. Guarantor is held liable
debtor only. ▪ before the guarantor becomes liable,
▪ why the debtor only? the duty of the guarantor has the benefit of excussion
guarantor is only subsidiary.
▪ what action may be filed? collection for sum BENEFIT OF EXCUSSION
of money or specific performance
Article 2058. The guarantor cannot be compelled to pay
2. The creditor must sue the debtor only BUT the creditor unless the latter has exhausted all the property
included in the prayer is for the court to notify of the debtor, and has resorted to all the legal remedies
the guarantor of the action. against the debtor.
▪ in the case of guaranty, the guarantor, as a
matter of right, has the right to be notified of EXCUSSION
the indebtedness, default and the liability of ▪ guarantor pays the creditor only after the creditor
the debtor has exhausted all the property of the debtor
(2058)
3. Guarantor may appear. ▪ note: this is only applicable to guaranty and not
▪ because the guarantor is notified, the to surety
guarantor may appear ▪ why is there a need for exhaustion of the
▪ guarantor may file an intervention suit (he is properties of the debtor? Because primarily, the
not a party but wants to intervene) guarantor guaranties the solvency of the debtor.
▪ the debtor may not appear at all ▪ the creditor must exert all legal remedies against
the debtor BEFORE it could go after the
4. Guarantor may set up defenses. guarantor
▪ purpose of the intervention suit: guarantor ▪ however, the benefit of excussion remains
may put up defenses in order to prove that he unimpaired even if there is a judgment against
or the debtor cannot be held liable the debtor and guarantor, if debtor or guarantor
▪ guarantor can say that the period which he appears in the suit.
may be held liable has prescribed ▪ benefit: “to compel the creditor to exhaust all
properties of the debtor before going after the
5. Judgment from court holding debtor liable guarantor”
▪ the court must decide and determine that the
debtor is liable
▪ “must find the debtor liable” TWO REQUIREMENTS FOR PROPER EXCUSSION
6. Debtor has “not paid” Article 2060. In order that the guarantor may make use
of the benefit of exclusion, he must set it up against the
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creditor upon the latter's demand for payment from him, Example 1:
and point out to the creditor available property of the debtor
within Philippine territory, sufficient to cover the amount of The remaining property of the debtor is a motor
the debt.
vehicle. The creditor was aware because it was
pointed out by the guarantor. If the motor vehicle was
▪ Two-fold to enjoy the benefits of Excussion later in impounded, the car can no longer be used to
(2060) pay for the obligation. Because of the failure of the
creditor to be vigilant, the creditor suffers the loss.
1. G must raise the benefit of excussion upon the
creditor’s demand for payment from him; and Example 2:
2. G points out to the creditor available property
of the debtor within the Philippines. (2060) Debtor has the following properties: (a) residential
land in La Trinidad, Benguet (P300,000.00); and (b)
Question: If the duty of the guarantor is to point out residential house and lot in Baguio City (P4.7M).
all the available properties of the debtor, what should
the guarantor do to protect himself? The Loan Agreement is as follows:
Answer: There must be a complete listing of the

I, the debtor, promise to pay the debt of P5 Million.
properties of the debtor. To know the list of available
The guarantor guarantees the said obligation.
properties, the guarantor may secure a certificate of
property holding from the assessor’s office.
Debtor failed to pay the obligation. Creditor sued
Debtor. Guarantor pointed out the two properties.
▪ The identified property should be sufficient
Creditor only went after the land worth P4.7 Million.
property to cover obligation otherwise, for any
amount not covered by the assets of the debtor,
Question: Can the creditor compel the creditor to pay
the guarantor becomes liable. (review: the
the balance?
guarantor is liable only if there is default, liability
is ascertained, and if debtor’s property is
Answer: NO. According to Article 2061, the creditor
insufficient).
loses the right to recover the P300,000 against the
▪ The benefit of excussion is a great privilege and
guarantor. The creditor must bear the risk of being
protects the guarantor from any liability but there
negligent.
is a corresponding duty from the guarantor to
make sure that the debtor has sufficient
Question: Does it mean that the creditor can no
properties.
longer recover the P300,000?
NEGLIGENT CREDITOR
Answer: The creditor can still recover the balance.
However, the right to go after the guarantor is now
Article 2061. The guarantor having fulfilled all the
lost due to his negligence. The creditor’s remedy is to
conditions required in the preceding article, the creditor
who is negligent in exhausting the property pointed out directly compel the debtor to pay the obligation.
shall suffer the loss, to the extent of said property, for the
insolvency of the debtor resulting from such negligence. Excussion benefits guarantor and sub-
guarantor
SITUATION: Properties of the debtor had been
identified by the guarantor but creditor is negligent. Article 2064. The guarantor of a guarantor shall enjoy the
Creditor did not go after them. As a consequence, the benefit of excussion, both with respect to the guarantor and
to the principal debtor.
property of the debtor has been passed to an innocent
third person.
Article 2064
Effect: The Creditor suffers the loss, to the extent of ▪ excussion benefits the guarantor of a guarantor
said property
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Credit Transactions
▪ there are assets but debtor is finding it

difficult to pay obligations when they become
due
4) when debtor has absconded or cannot be sued

within the Philippines unless he has left a
manager or representative;
▪ appointment of a manager is an exception to
this case because it is presumed that the
appointment means there are still remaining
properties to be exhausted
▪ a person who has absconded cannot be sued
▪ the existence of the sub-guarantor means that because the courts do not have jurisdiction
the creditor can go directly to the sub-guarantor outside the Philippines
if the liability of the debtor is determined ▪ the creditor can directly go after the
▪ because there is a benefit of excussion available guarantor
also to the sub-guarantor, he can point out the
properties of the debtor to be exhausted to satisfy 5) may be presumed that an execution on the
the obligation property of the principal debtor would not result
in the satisfaction of the obligation.
Excussion shall not take place (Proceed against ▪ there is already lien over the propertieswhich
the Guarantor) means that these properties are already
reserved for a particular secured creditor.
Article 2059. The excussion shall not take place: Hence, they can no longer be used to satisfy
(1) If the guarantor has expressly renounced it; the obligations.
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor; Under these scenarios:
(4) When he has absconded, or cannot be sued within the
▪ the guarantor becomes directly liable
Philippines unless he has left a manager or
▪ creditor may go after the guarantor to secure
representative;
(5) If it may be presumed that an execution on the payment
property of the principal debtor would not result in the ▪ the suit may be: creditor v. debtor and guarantor
satisfaction of the obligation.
example:
There is no Excussion: Creditor and Debtor’s Agreement:

1) guarantor expressly renounces the privilege;
▪ it must be the guarantor who expressly Debtor must develop a vaccine under a research
renounces the benefit, not the creditor or the grant.
debtor
▪ there is express renouncement when the
guarantor pays for the obligation Question: What does the guarantor guaranty?
Answer: The development of a vaccine.
2) bound himself solidarily liable with the debtor;
▪ there is binding of the guarantor to the Question: When is the guarantor liable?
creditor Answer: The guarantor becomes liable if the debtor
▪ the guarantor is now converted to a surety fails to develop the vaccine.
▪ the obligation becomes solidary and not
merely subsidiary Question: What is the obligation of the guarantor?
Answer: To ensure that the debtor is capable of
3) debtor’s insolvency; developing the vaccine.
▪ insolvency means there are no longer
properties Question: If the debtor fails, what is the obligation of
the guarantor?
MJ LAZA 52
Credit Transactions
Answer: The guarantor may undertake to develop the ▪ selling properties is a sign that the debtor is
vaccine himself or pay damages or penalties resulting attempting to abscond
from the failure to develop the vaccine, depending on
the agreement of the parties. 7) if the principal debtor is in imminent danger of
becoming insolvent.
Fulfillment of the obligation is not just payment, it ▪ Example: oil-dependent businesses are
could also be specific performance of the task. affected on the Russian-Ukraine conflict
Guarantor’s Options Prior to Payment ▪ Two situations dependent on time: (1) after the
lapse of 10 years, when the principle obligation
Article 2071. The guarantor, even before having paid, has no fixed period for its maturity; and (2) when
may proceed against the principal debtor: the debtor has bound himself to relieve him
(1) When he is sued for the payment; from the guaranty within a specified period, and
(2) In case of insolvency of the principal debtor;
this period had arrived.
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period
has expired; Question: How does a security work?
(4) When the debt has become demandable, by reason of Answer: When there is a creditor going after the
the expiration of the period for payment; guarantor, it is possible that there is still a surety.
(5) After the lapse of ten years, when the principal Thus, the surety is sued first before the guarantor.
obligation has no fixed period for its maturity, unless The same also works when there is a security.
it be of such nature that it cannot be extinguished
except within a period longer than ten years;
If there is a mortgage over an obligation, the mortgage
(6) If there are reasonable grounds to fear that the
will be used to pay for the obligation. If the security is
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of not enough, then the guarantor can be held liable.
becoming insolvent.
EFFECT OF COMPROMISES
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that Article 2063. A compromise between the creditor and the
shall protect him from any proceedings by the creditor and principal debtor benefits the guarantor but does not
from the danger of insolvency of the debtor. prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not prejudice
the principal debtor.
▪ a contract of guaranty may be burdensome to the
guarantor. Thus, the law provides for a “way out” ▪ compromises are entered into by:
or remedy to avoid obligations. o creditor and guarantor
o debtor and guarantor
Remedy of the Guarantor against the Debtor: o creditor and guarantor
a) release from guaranty; or ▪ all of them can agree that the obligation will be
b) demand a security that shall protect him. modified or condoned
▪ if condoned, both the debtor’s and guarantor’s
Release or demand security is applicable when: obligations are extinguished
1) when he is sued for payment;
2) in case of insolvency of the principal debtor; Compromise Agreement Between Creditor and
3) when the debtor has bound himself to relieve Debtor
him from the guaranty within a specified period, ▪ the law says: any agreement of compromise
and this period had arrived; between the creditor and the debtor which shall
4) when the debt has become demandable, by benefit the guarantor will bind the guarantor; if
reason of the expiration of the period for payment; the guarantor is prejudiced by any compromise
5) after the lapse of 10 years, when the principle agreement, the guarantor will be released and
obligation has no fixed period for its maturity; shall not be bound by it
▪ 10 years is considered under the law as too
long to be bound by the obligation
6) if there are reasonable grounds to fear the
principal debtor intends to abscond;
MJ LAZA 53
Credit Transactions
Question: What if the guarantor participates in the

compromise agreement?
Answer: The agreement will bind the guarantor,

whether or not it will be beneficial to him.
Compromise Agreement Between Creditor and

Guarantor
▪ same rule applies: if the agreement is beneficial

▪ thus, another way by which guaranties can be to the debtor, the same shall bind him; if
extinguished is if there is a compromise prejudicial, it does not bind the debtor (not
agreement that is prejudicial to the guarantor released from the obligation)
Benefits: example: Creditor and guarantor agreed to

increase the interest rate. Thereafter, guarantor
Agree that the P1 Million shall be lowered to paid the obligation of the debtor. How much will
P500,000. the debtor reimburse to the guarantor?
This benefits the guarantor because his obligation is The debtor shall reimburse what was paid by the
lowered. guarantor but with the original stipulated
interest, not the one agreed by the creditor and
Prejudices: guarantor.
DIVISIBLE GUARANTY
Rework loan that instead of P1 Million it would now
be P1.5 Million
Article 2065. Should there be several guarantors of only
one debtor and for the same debt, the obligation to answer
The guarantor is prejudiced because the guarantor for the same is divided among all. The creditor cannot claim
will be made to pay an amount higher than what was from the guarantors except the shares which they are
originally guarantied. respectively bound to pay, unless solidarity has been
expressly stipulated.
Consequence: There is a novation by operation of
law. Guarantor is released and his obligation is The benefit of division against the co-guarantors ceases in
extinguished. the same cases and for the same reasons as the benefit of
excussion against the principal debtor.
▪ The same is also applicable to sureties. If there is
a compromise agreement, the guarantor shall be
bound if it is beneficial to him. If it is prejudicial
to him, then the guarantor will be released and
the obligation is extinguished.
Question: What if the obligation to pay the principal

obligation is lowered, but the obligation to pay
interest is increased. What is the consequence?
Answer: It depends. Compute.
FROM TO
P1 Million with 7% P500,000 with 10% ▪ When creditor makes a demand, no excussion
interest (P1,070,000) interest (P550,000) can be made because the guarantors are
more beneficial obligated to pay definite amounts.
The new agreement will bind the guarantor.
MJ LAZA 54
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▪ Benefit of Division: ceases in the same instance 2) If debtor pays creditor after the guarantor paid:
as the benefits of excussion the guarantor has no right of reimbursement
against the debtor;
▪ if there is no agreement as to the division, it is
presumed to be pro-rata. 3) Recover only the amount which was beneficial
to the debtor (1236).
RIGHT OF GUARANTOR AGAINST DEBTOR
Remedy of Guarantor: Go after the Creditor and
▪ indemnification recover only the amount beneficial to the debtor.
▪ subrogation
Exception, if GRATUITOUS (2070)
INDEMNIFICATION
Article 2070. If the guarantor has paid without
Article 2066. The guarantor who pays for a debtor must notifying the debtor, and the latter not being aware of
be indemnified by the latter. the payment, repeats the payment, the former has no
The indemnity comprises: remedy whatever against the debtor, but only against the
(1) The total amount of the debt; creditor. Nevertheless, in case of a gratuitous guaranty, if
(2) The legal interests thereon from the time the payment the guarantor was prevented by a fortuitous event from
was made known to the debtor, even though it did advising the debtor of the payment, and the creditor
not earn interest for the creditor; becomes insolvent, the debtor shall reimburse the
(3) The expenses incurred by the guarantor after having guarantor for the amount paid.
notified the debtor that payment had been demanded
of him; ▪ when the reason for absence of information:
(4) Damages, if they are due. fortuitous events and creditor becomes insolvent,
debtor must reimburse the amount paid
▪ debtor must indemnify the guarantor who paid in Requirements before the debtor can indemnify
his or her stead guarantor:
▪ indemnity includes payment of: (TIDE) 1) fortuitous event made it impossible to notify the
o total amount of debt; debtor;
o legal interest from the time payment was 2) guarantor pays obligation;
made known; 3) debtor pays without notice of payment;
o expenses incurred by the guarantor after 4) creditor becomes insolvent.
having notified the debtor that payment has
been demanded of him; Guarantor Upon Request
o damages, if they are due.
Article 2072. If one, at the request of another, becomes a
Obligation of Guarantor: NOTIFY the debtor that guarantor for the debt of a third person who is not present,
payment was made the guarantor who satisfies the debt may sue either the
person so requesting or the debtor for reimbursement.
Article 2068. If the guarantor should pay without
notifying the debtor, the latter may enforce against him all ▪ a person becomes a guarantor upon the request
the defenses which he could have set up against the of another
creditor at the time the payment was made.
▪ Article 2072 applies if:
1) person requests another person to be a guarantor
Why? The lack of notification may result to double for a debtor;
payment. The loss will be born by the guarantor. 2) debtor is not present;
3) guarantor pays.
Effects of payment by guarantor without
knowledge of debtor: ▪ consequence: Guarantor may sue the person
who requested that he be a guarantor; and the
1) debtor will have the same defense he could have debtor.
set up against the creditor;
MJ LAZA 55
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SUBROGATION Question: The obligation of the debtor is on March 31,

2022. However, the guarantor paid today, March 2,
Article 1237. Whoever pays on behalf of the debtor 2022. Should the guarantor be indemnified or be
without the knowledge or against the will of the latter, subrogated in the shoes of the creditor?
cannot compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty, or Answer:
penalty.
Question: How does the debtor ratify?
Article 2050. If a guaranty is entered into without the
knowledge or consent, or against the will of the principal
debtor, the provisions of articles 1236 and 1237 shall
Answer: Express or implied approval
apply.
EFFECTS OF GUARANTY AS BETWEEN CO-
Article 2067. The guarantor who pays is subrogated by GUARANTORS
virtue thereof to all the rights which the creditor had
against the debtor. Article 2073. When there are two or more guarantors of
the same debtor and for the same debt, the one among
If the guarantor has compromised with the creditor, he them who has paid may demand of each of the others the
cannot demand of the debtor more than what he has really share which is proportionally owing from him.
paid.
If any of the guarantors should be insolvent, his share shall
be borne by the others, including the payer, in the same
▪ subrogation takes place when the guarantor proportion.
steps into the shoes of the creditor
▪ all available rights of the creditor against the The provisions of this article shall not be applicable, unless
the payment has been made by virtue of a judicial demand
debtor will be available to the guarantor
or unless the principal debtor is insolvent.
▪ however, when payment is without knowledge
or consent of debtor: there is NO right to Article 2075. A sub-guarantor, in case of the insolvency
subrogation (1237) of the guarantor for whom he bound himself, is responsible
to the co-guarantors in the same terms as the guarantor.
Payment before due date (2069)
Article 2069. If the debt was for a period and the Applicable only if:
guarantor paid it before it became due, he cannot demand
reimbursement of the debtor until the expiration of the ▪ two or more guarantors;
period unless the payment has been ratified by the debtor. ▪ same debtor, same debt
▪ payment was made after judicial demand
▪ when should the guarantor become liable: (1)
debtor’s default; (2) debtor’s liability is EFFECTS:
determined; and (3) debtor’s assets are
insufficient (1) the one who has paid may demand
▪ when guarantor pays before due date, the proportionate reimbursement from other
following are the consequences: guarantors ;
o there is no more excussion; (2) guarantors shall bear the share of the insolvent
o guarantor could only demand reimbursement guarantor;
once the obligation becomes due and
demandable (upon the expiration of the
period); and
o NO right of subrogation (Art. 1237)
Exception: Unless, payment has been ratified by the

debtor
Example:
MJ LAZA 56
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EXTINGUISHMENT OF GUARANTY
HOW EXTINGUISHED:
(1) Extinguished at the same time as the principal

obligation;
(2) Extinguished when the creditor voluntarily

There are four guarantors jointly liable for P250,000 accepts immovable or other property in payment
each. of the debt;
(3) Extinguished by release of creditor.
Note: If not all are released and no consent

from other guarantors: benefits other
guarantors to the extent of the share of the
guarantor.
Example:
If there is no sub-guarantor and guarantor A becomes
insolvent, the other guarantors shall bear the amount
due from guarantor A. Hence, each of the remaining
guarantors shall be liable for P333,000 each.
Without consent= 333,000 each
However, if guarantor A has a sub-guarantor, the

guarantor shall be secondarily liable to the debt of
guarantor A. The liability of the other guarantors
remain the same.
(3) other guarantors may set up the same defense

which could have been set up against the
creditor.
(4) Sub-guarantor of an insolvent guarantor shall
pay other guarantor. (4) Creditor granted extension to the debtor without
consent of the guarantor
ON EXTENSION
▪ requirement of consent means that this

provision is for the benefit of the guarantor
▪ failure to collect payment upon due does not
immediately mean that there was an extension
MJ LAZA 57
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REQUISITES OF EXTENSION WHICH The law clearly requires the debtor to indemnify the
DISCHARGES A GUARANTOR guarantor what the latter has paid. What is
controlling is that default and demand on
Requisites for a valid discharge: PhilGuarantee had taken place while the guarantee
1. it should appear that the extension was for a was still in force.
definite period;
2. pursuant to an enforceable agreement between LEGAL AND JUDICIAL BONDS
the principal and the creditor;
3. it was made without the consent of the PECULIARITIES
guarantor or with a reservation of rights with ▪ excussion is not allowed
respect to him; ▪ if no bond can be given, pledge or mortgage shall
4. the contract must be one which precludes the be admitted.
creditor from, or at least hinders him in,
enforcing the principle contract within the
period during which he could otherwise have
enforced it, and which precludes the guarantor
from paying the debt; and
5. if by the acts of the creditor, the guarantors are
unable to subrogate him to the rights, mortgages
and preferences.
JN Development Co. and Spouses Sta. Ana v.

PhilGuarantee, 151060, August 31, 2005
Facts:
▪ Debtor: JN to be paid 30 June 1980
▪ Creditor: Traders Royal Bank
▪ Security: REM and Guaranty by PhilGuarantee
from Dec. 17, 1979 until Dec. 17, 1980
▪ Sta. Ana and Cruz executed undertaking that
it will be liable for reimbursement to JN
▪ TRB: Foreclosed the real estate mortgage and
did not demand payment of deficiency from JN
or PhilGuarantee
▪ October 8,1980: TRB requested PhilGuarantee
to pay
▪ March 10, 1981: PhilGuarantee paid the
obligation but JN refused to indemnify.
▪ PhilGuarantee filed a suit to recover payment
Issue:
Is PhilGuarantee entitled to payment even if it
waived excussion, and paid outside the term of its
obligation?
Held:
While a guarantor enjoys the benefit of excussion,
nothing prevents him from paying the obligation
once demand is made on him. Excussion, after all,
is a right granted to him by law and as such he may
opt to make use of it or waive it. PhilGuarantee's
waiver of the right of excussion cannot prevent it
from demanding reimbursement from petitioners.
MJ LAZA 58
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PROVISIONS COMMON TO PLEDGE AND Article 2090. The indivisibility of a pledge or

MORTGAGE mortgage is not affected by the fact that the debtors
are not solidarily liable.
Article 2085. The following requisites are essential
Article 2091. The contract of pledge or mortgage
to the contracts of pledge and mortgage:
may secure all kinds of obligations, be they pure or
(1) That they be constituted to secure the
subject to a suspensive or resolutory condition.
fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute Article 2092. A promise to constitute a pledge or
owner of the thing pledged or mortgaged; mortgage gives rise only to a personal action
(3) That the persons constituting the pledge or between the contracting parties, without prejudice
mortgage have the free disposal of their to the criminal responsibility incurred by him who
property, and in the absence thereof, that they defrauds another, by offering in pledge or mortgage
be legally authorized for the purpose. as unencumbered, things which he knew were
Third persons who are not parties to the principal subject to some burden, or by misrepresenting
obligation may secure the latter by pledging or himself to be the owner of the same.
mortgaging their own property.
Article 2086. The provisions of article 2052 are

applicable to a pledge or mortgage. REAL ESTATE MORTGAGE
Article 2087. It is also of the essence of these
contracts that when the principal obligation Guaranty and Surety vs. Real Mortgage
becomes due, the things in which the pledge or
mortgage consists may be alienated for the Guaranty and Surety Real Mortgage
payment to the creditor.
Article 2088. The creditor cannot appropriate the Mortgage v. Pledge

things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is MORTGAGE PLEDGE
null and void. A type of security A type of security
binding the entire thing wherein the thing is
Article 2089. A pledge or mortgage is indivisible,
or a portion thereof to placed in the possession
even though the debt may be divided among the
secure an obligation of the creditor
successors in interest of the debtor or of the
without divesting
creditor.
himself of the
Therefore, the debtor's heir who has paid a part of possession
the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long “mort” and “gage”: a
as the debt is not completely satisfied. dead or unproductive
pledge
Neither can the creditor's heir who received his
share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who Distinctions Chattel Real Pledge
have not been paid. Mortgage Mortgage
As to object movable Immovable movable
From these provisions is excepted the case in How Registration
which, there being several things given in mortgage perfected
or pledge, each one of them guarantees only a
determinate portion of the credit. PPSA: all movable properties are subject to security
agreements
The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the
Mortgage: a restriction on ownership; the owner is not
portion of the debt for which each thing is specially
able to enjoy the property
answerable is satisfied.
MJ LAZA 59
Credit Transactions
Example: Ms. Y is selling her property. The buyer ▪ for REM: it creates a real right in favor of the
discovers a lien on the property. Will the buyer offer mortgagee
the same amount for the property? NO. There is now
the danger that the buyer will be dispossessed if the Example:
buyer buys the property subject of a mortgage.
A house, subject of a REM, is sold to a buyer. Just
PARTIES TO A MORTGAGE because there is transfer of ownership, the REM is not
removed.
If the buyer donates the property, the property

although transferred to another is still subject of a
REM. If the debtor fails to pay the obligation, the
donee can still be deprived of the possession over the
property.
Q: At the point of donation, who is the owner?

A: The donee. However, the ownership and possession
is restricted by the REM. The non-payment of the
debtor can be a ground for the dispossession of the
property.
Parties to the Principal Contract: Creditor and Debtor
Parties to the Accessory Contract: Mortgagee and INDIVISIBLE
Mortgagor
Effects of Indivisibility:
Q: Can the Mortgagee be different from the Creditor?
A: No. The Creditor is always the mortgagee. ▪ debtor’s heir who has paid cannot ask for the
extinguishment of the mortgage if the debt has
Accommodation Mortgage: the property is put up to not yet been completely satisfied
accommodate the debt of another. ▪ creditor’s heir who received the share of the
debt cannot return the pledge or cancel the
CHARACTERISTICS OF MORTGAGE AND mortgage, to the prejudice of the other heirs
PLEDGE who have not been paid
1. It is inseparable from the property.

2. It is indivisible. Example 1:
3. Limitation on the right of ownership.
INSEPARABLE
▪ The lien, created by the real estate mortgage,

cannot be separated from the property
▪ As long as the principal obligation has not been
complied with, there exists an inseparable lien
over the property
▪ the inseparability creates a real right over the
property in favor of the mortgagee
EFFECTS OF INSEPARABILITY:
▪ directly and immediately subject the property Example:
upon which it is imposed, whoever the If the debtor passed away and left three heirs, the
possessor may be to the fulfillment of the heirs are not released of the obligation.
obligation for whose security it was constituted
MJ LAZA 60
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Note: It does not matter that the debtors are not

solidarily liable.
ESSENTIAL REQUISITES COMMON TO PLEDGE

AND MORTGAGE (Art. 2085)
Common Requisites:
1. constituted to secure the fulfillment of a
principal obligation
2. pledgor and mortgagor must be the owner of the
thing
▪ only the pledgor and mortgagor, not the
debtor (take note on the wording of the law)
3. that the person constituting it should have free
disposal of the property or be authorized for the
purpose
1. Acts as a security to a principal obligation
Applicability of Art. 2052:
Art. 2052. A guaranty cannot exist without a valid

obligation.
Nevertheless, a guaranty may be constituted to

guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a
natural obligation.
1. A pledge and mortgage cannot exist without a

valid obligation
2. The mortgage is valid even if the principal debt is
voidable, unenforceable or merely natural
3. May secure all kinds of obligations, be they pure
or resolutory conditions (Art. 2091).
General Rule: The obligation is INDIVISIBLE. DBP v. Guarina Agriculture and Realty Dev’t
Corp., G.R. No. 160758, Jan. 15, 2014
Exceptions:
1. if there are several properties, proportionate Facts: Approved loan is P3, 387, 000 from DBP.
payment Released loan was P3,003, 617.49. Foreclosed the
▪ presence of several properties and not the mortgages.
presence of several mortgagors/pledgors that Issue: Is the foreclosure valid? NO.
make it divisible
▪ what makes it unlawful or invalid? According
2. payment made by the condo unit buyer of the to SC, it was still premature. There is no
purchase price of a condominium project or default. Hence, there can be no foreclosure. It
subdivision project is premature because what was delivered is
▪ condominium project and subdivision project incomplete. Only P3 Million is delivered. If it is
in relation to PD 957 or the Subdivision and not complete, there is yet no obligation to
Condominium Buyer’s Protective Decree return something when the entire amount
(Prudential Bank (now BPI) v. Rapanot and borrowed is not yet delivered to you.
HLURB, G.R. No. 191636, January 16, 2017)
MJ LAZA 61
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Question: Are the following considered as absolute

▪ A real mortgage being an accessory contract, owners?
there is no obligation to give up the property…. Titled owner in a YES.
TCT/OCT
Q: What kind of contract is a mutuum? Tax declarant but NO. A beneficial owner
A: It is a real contract and, thus, enforceable only property owned by cannot use the property as
upon delivery. Republic of the collateral.
Philippines
DRAGNET CLAUSE Tax declarant of the YES. His right is not over the
building but the land but over the building.
▪ Other terms: all embracing clause, blanket land is owned by The building and the land
mortgage clause the Republic are separate properties.
▪ subsume all debts of past or future origin Naked owner in a YES. The owner of the land
▪ valid means to secure debts of both future and usufruct is still the naked owner.
past origins Only the enjoyment and use
▪ the loans thereby secured must be sufficiently of the land is transferred.
described in the mortgage contract
How can the following become mortgagors/pledgors?
Example:
WHO HOW
That for and in consideration of certain loans, Third Persons Use their property to secure
overdraft and other credit accommodations the obligation of another
obtained from the Mortgagee by the Mortgagor (Accommodation Mortgagor)
and/or ________ hereinafter referred to, irrespective Corporations Includes in their powers the
of number, as DEBTOR, and to secure the ability to mortgage the
payment of the same and those that may property of the corporation
hereafter be obtained, the principal or all of which Conjugal Property Both spouses have the right to
is hereby fixed at Two Hundred Fifty Thousand enjoy and administer
(P250,000.00) Pesos, Philippine Currency, as well property. Husband’s decision
as those that the Mortgagee may extend to the will prevail with right of
Mortgagor and/or DEBTOR. Including interests recourse granted to the wife
and expenses or any other obligation owing to (Art. 96 of the Family Code).
the Mortgagee, whether direct or indirect,
principal or secondary as appears in the accounts,
As to third persons:
books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of
Third persons who are not parties to the principal
mortgage unto the Mortgagee, its successors and
obligation may secure the latter by pledging or
assigns, the parcels of land which are described
mortgaging their own property.
in the list inserted on the back of this
document, and/or appended hereto, together
with all the buildings and improvements now
Q: Can a co-owner use the land co-owned as a
existing or which may hereafter be erected or
collateral to a loan?
constructed thereon of which the Mortgagor
declares that he/it is the absolute owner free from
A: YES, but only over his ideal share and not the
all liens and encumbrances.
entire property.
▪ applies only to Real Estate Mortgages and not to

Accommodation Mortgagor: another person secures
chattel or pledges
the obligation of someone else.
2. Mortgagor or pledgor must be the absolute

Example:
owner of the property mortgaged or pledged.
MJ LAZA 62
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Article 2088. The creditor cannot appropriate the things

given by way of pledge or mortgage, or dispose of them.
Any stipulation to the contrary is null and void.
▪ Under the law, pactum Commissorium is null and

void.
▪ The creditor cannot appropriate things given by
way of mortgage and pledge or dispose of them.
Any stipulation to the contrary is null and void.
▪ Why, when the purpose of mortgage is to… ?
Third person is the accommodation mortgagor. ▪ To be lawful, the property must be sold at a public
auction.
3. Mortgagor or pledgor must have free ▪ Supreme Court: The creditor in a contract of real
disposal of the property. security, like pledge cannot appropriate without
foreclosure of the things given by way of pledge.
FREE DISPOSAL
Elements of Pactum Commissorium:
▪ Situations where the owner cannot freely dispose 1. There is creditor-debtor relationship;
the property: easement (e.g. right of way); free 2. Property used as security for the loan;
patents 3. There was automatic appropriation by creditor
Free Disposal upon default of the debtor.
▪ this means the right of jus dispodendi, to dispose
alienate and encumber Examples of Pactum Commissorium in Mortgage:
▪ why? the thing subject of pledge and mortgage ▪ “in case of default, the property shall be delivered
shall be alienated for the payment to the creditor to the creditor without further action”
(Art. 2087) ▪ registering the mortgage property in creditor’s
name upon failure to redeem
▪ the declaration to the effect that absolute
▪ Purpose: there is a likelihood that the property ownership over the subject premises has become
can be alienated or disposed? Anuuu consolidated in the creditor upon failure of the
petitioners to pay their obligation within the
Authority to Dispose specified period
▪ in the absence of the right of free disposal that ▪ mortgagee allowing, during the existence of the
there should be authority to dispose (i.e. SPA) debt, to sell the property mortgaged to him
Problem: The mortgaged property is passed on to

Who may dispose HOW Mortgagee 1 then to Mortgagee 2.
Conjugal Property Both spouses have right to
enjoy and administer
property. Husband’s decision
will prevail with right of
recourse granted to wife. (Art.
96 of the Family Code)
Incapacitated Must be with approval of the Q: Can this be done?
spouse court, otherwise it is void. A: NO. The action of the mortgagee in this case is an
Co-owner Only with respect to ideal act of an owner. Ownership and possession still
share. remains with the owner of the property. A
mortgagee…
Caution!! This does not mean that the mortgagee
becomes the owner immediately. Claim of lien of pledgee or mortgagee is NOT
transfer of ownership over the pledged or
PACTUM COMMISSORIUM (Art. 2088) mortgage thing.
MJ LAZA 63
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APPLICATION OF BULK SALES LAW ESSENTIAL REQUISITIES OF REAL ESTATE

MORTGAGE
Application of Bulk Sales:
▪ pledge or mortgage of all or substantially all of Essential Requisites:
stock of goods, wares and merchandise 1. constituted to secure the fulfillment of a principal
▪ other than in the ordinary course of business obligation;
2. mortgager must be the owner of the thing;
Requirement in Bulk Sales: 3. that the person constituting it should have free
▪ deliver to mortgagee a written statement of the disposal of the property or be authorized for the
other creditors and how much is the amount of purpose;
indebtedness 4. document in which it appears should be
registered with the Registry of Deeds (Art. 2125)
Void Mortgage (because of Bulk Sales Law)
▪ no sworn statement; and PERSONAL ACTION: To demand the execution and
▪ not applying mortgage money of the said property the recording of the document in which the mortgage
to the pro rata payment of the bona fide claim or is formalized (Art. 2125).
claims of the creditors of the mortgagor
Question: If the mortgage is not recorded, does it
TYPES OF REAL ESTATE MORTGAGE mean that it is not binding between the parties?
Answer: It is binding between the parties.
Question: If the mortgage is not recorded, does it bind

innocent third persons?
Question: Can the third persons be dispossessed of

the property?
Answer: NO:
Therefore, to bind third persons, REGISTER.
Presumption that there is equitable mortgage: RIGHTS OF MORTGAGOR

1. when the price of the sale with right to repurchase
is unusually inadequate; Right to sell or dispose property mortgaged
2. when the vendor remains in possession as a ▪ mortgagor still has the right to dispose of the
lessee or otherwise; property
3. when upon or after the expiration of the right to ▪ stipulation forbidding the owner from alienating
repurchase another instrument extending the the immovable mortgaged property is void (Art.
period of redemption is executed; 2130)
4. when the purchaser retains for himself a part of
the purchase price; Question: The contract has the following stipulation:
5. when the vendor binds himself to pay the taxes “ the mortgagor must first secure the consent of the
on the thing sold; mortgagee prior to dispossession.”
6. inferred that the transaction shall secure the Is the stipulation valid?
payment of a debt or the performance of any other
obligation. Answer: No. The prerogative to sell the property still
belongs to the owner. The requirement of the
Example: a right to sell with a pacto de retro provision mortgagor’s consent is a circumvention of the law.
What a person cannot do directly, he cannot do so
Presumption: Sale with right of repurchase shall be indirectly.
construed as equitable mortgage
MJ LAZA 64
Credit Transactions
➢ If the land is expropriated by government, the just

Effect of Sale compensation will be the subject of the lien.
▪ sale does not release the mortgaged property from ➢ The substitute of the property will be the subject
mortgage of the mortgage.
▪ the purchaser or transferee is necessarily bound ➢ Will be applicable even if:
to acknowledge and respect the encumbrance  Estate is in the possession of the mortgagor;
▪ inseparability or
▪ The best way for a purchaser to protect himself is  If it passes into the hands of a third person
to annotate the title of the property.  Inseparability
➢ Those found on the land at the time of the
Question: Is it necessary to keep the title of the mortgage was constituted
property? What is the advantage? ➢ Those installed after the execution of the
mortgage
Answer: No. The best way to protect the rights of the ➢ Anything found in the property prior to the
mortgagee is to annotate the title. Thus, it is not foreclosure will be the subject of the Real Estate
necessary to keep the title of the property. Mortgage.
RIGHTS OF MORTGAGEE
1. Right to Alienate
2. Right to collect from 3rd persons
3. Right to recover credit
▪ The mortgagee is always the creditor. The

mortgagee has the right to dispose of the credit.
Right to Alienate
▪ Mortgage credit may be alienated to a 3rd person,
in whole or in part (Art. 2128)
▪ Art. 2128 does not permit the sale of the… Effect: tendency of improving the property will be
lowered.
Right to collect from 3rd Persons
▪ Creditor may claim payment from the 3rd person Right to recover credit
in possession of the mortgaged property (Art.
2129) ▪ in case of default, the CREDITOR has only ONE
▪ Inseparability cause of action: recovery of debt
▪ Only applicable if the mortgaged property is ▪ Cause of Action (from the perspective of
annotated in the title mortgagee): the right of the mortgagee to recover
the debt.
EXTENT OF THE MORTGAGE
(Art. 2127) Question: How can the mortgagee recover the
debt?
▪ real property Answer:
▪ natural accession Two Remedies:
▪ improvements 1. Personal action for collection of debt
▪ growing fruits, rents or incomes not yet received 2. Real action to foreclose the mortgage
when the obligation becomes due
▪ proceeds from insurance PERSONAL ACTION
▪ just compensation in expropriation
▪ can either be:
➢ If the mortgage is extinguish by loss, the proceeds o specific performance; or
from the insurance company shall be the subject o collection of sum of money (more applicable)
of the lien of the creditor. ▪ collection of sum of money is applicable for any
sum of money for a simple loan or rent
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▪ specific performance is applicable when:

o there is refusal to annotate the real estate ▪ While the procedure for personal action contains
mortgage property; only four steps, the case may take a decade to be
o there is refusal of the mortgagee to execute a resolved because of the remedy of appeal.
real estate mortgage ▪ The vital part in a collection suit is the point of
execution. Lawyers must make sure that there
REAL ACTION are properties to be executed.
▪ real action is not just to go after the debtor but to
go after the mortgaged property Question: What can be the methods of execution?
▪ this remedy of foreclosure does not matter if Answer:
debtor is insolvent or not Rules of Court
▪ just as long as there is default, the mortgagee can Rule 39, Section 9
go after the property
 immediate payment of the amount
Remember!!  levy real or personal property and sell
 CHOOSE ONLY ONE  garnish debts and credits
 by choosing one, it is complete in itself
 by choosing one, waiving the other
 Example: if the mortgagee chooses a personal When the judgment is already final and executory, the
action (e.g. collection of sum of money), the court will issue a writ of execution. The sheriff will be
real action cannot be used. The mortgagee ordered to go to the debtor and collect on the
can no longer file a foreclosure suit. obligation. The immediate payment of the amount is
 the remedies are alternative unlikely. Thus, the levy of the debtor’s properties is
the proper remedy. The creditor will help the sheriff
OPTION OF PERSONAL ACTION in identifying which properties are to be levied or to
be sold at a public action. The proceeds will be used
Procedure: to pay for the obligation.
Another remedy is the garnishment of the debts and

credits. This means that savings account may be
garnished. Other credits of the debtor may also be
garnished. In any situation where the debtor is a
creditor of someone else, the petitioner in a collection
suit can step in and will be authorized to collect from
the debtor’s debtor.
Disadvantages of a Personal Action:

1. It takes time.
2. The remedy is costly and will take resources.
Steps:
1. File a Collection of Sum of Money Advantage of a Personal Action:
 Amendment on the Rules of Small Claims: if
the amount of money claim is P1 Million or If it is a personal case for collection of sum of money,
less, a small claims case can be filed. Lawyers the personal action is not limited to the property
only assist the petitioner in the preparation of offered as collateral or the property subject of the Real
the pro forma form. Estate Mortgage. All other properties of the debtor are
 If not, a complaint in court is filed for the also made available to the mortgagee.
collection of sum of money and the usual
court procedure is followed. Also, it is easier to liquidate movable properties than
2. Usual Court Procedure immovable properties.
▪ trial, complaint, position paper,
counterclaims, objections, etc.
3. Wait for Decision to become Final
4. Execution
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Answer: The right to judicial foreclosure is created by

Example: law. The right to extrajudicially foreclose the property
If the loan is for P2 Million and the debtor fails to pay, is the authority given in a Real Estate Mortgage to sell
the mortgagee can go after all the properties of the the property at a public auction.
debtor. Both the movable and immovable properties
may be the subject of a personal action for collection However, if the Real Estate Mortgage is an equitable
of sum of money. mortgage, the remedy available is only judicial
foreclosure.
Why? Because the parties simulated the contract to

make it look like a contract of sale. In a simulated
contract, the authority to sell the property through an
extrajudicial foreclosure is not included. Thus, the
property can only be foreclosed through a judicial
foreclosure.
Kinds of Foreclosure:
OPTION OF FORECLOSURE
▪ Judicial: Rules of Court, Rule 68
▪ Extrajudicial: Act No. 3135, A.M. No. 99-10-05-
NOTE: Action to foreclose must be limited to the
0 (August 7, 2001), and General Banking Act,
amount mentioned in the mortgage
Sec. 47
▪ the mortgagee must go after the property
JUDICIAL FORECLOSURE
▪ the suit will not only be for the collection of money
but the recovery of the debt is done by going
Jurisdiction:
after the property
▪ the jurisdiction for a judicial foreclosure is based
▪ however, the subject of the foreclosure is limited
on assessed value
to the amount of the mortgage
▪ it can be filed with the RTC or the MTC
▪ the amount can be identified or computed later
▪ it is based on assessed value because it is based
on by the parties
on title and not the interest over the property
Requisites for Foreclosure:
Roldan v. Barrios, G.R. No. 214803, April 23,
1. there must have been failure to pay the loan
2018
obtained from the mortgagee-creditor;
▪ there must be default and non-compliance of
An action “involving title to real property” means
the obligation of the debtor
that the plaintiff’s cause of action is based on a
▪ it is important that there must be default
claim that he owns such property or that he has
because one of the grounds that can be raised
the legal right to have exclusive control,
to nullify the foreclosure proceedings is
possession, enjoyment, or disposition of the
pointing out that there is no default such as
same.
when:
o there is partial delivery of the amount
The allegations and reliefs sought in petitioner’s
o the interest is unconscionable which
action for foreclosure of mortgage showed that the
means that there is overpayment
loan obtained by respondent spouses Barrios from
petitioner fell due and they failed to pay such loan
2. the loan obligation must be secured by a real
which was secured by a mortgage on the property
estate mortgage;
of the respondent spouses; and prayed that in case
of default of payment of such mortgage
3. the mortgagee-creditor has the right to
indebtedness to the court, the property be ordered
foreclose the real estate mortgage either
sold to answer for the obligation under the
judicially or extrajudicially.
mortgage contract and the accumulated interest. It
is worthy to mention that the essence of a
Question: What creates the right to foreclose?
contract of mortgage indebtedness is that a
MJ LAZA 67
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property has been identified or set apart from 4. Entry of Judgment

the mass of the property of the debtor- ▪ entry of judgment is also the date that the
mortgagor as security for the payment of money decision became final and executory
or the fulfillment of an obligation to answer the ▪ a decision becomes final and executory when
amount of indebtedness, in case of default of no appeal was taken within 15 days from
payment. Foreclosure is but a necessary notice of the decision
consequence of non-payment of the mortgage ▪ also included in the judgment is an order
indebtedness. In a real estate mortgage when wherein the debtor is obligated to pay the
the principal obligation is not paid when due, obligation within 90 to 120 days from the
the mortgagee has the right to foreclose the entry of judgment otherwise the property
mortgage and to have the property seized and will be sold at public auction
sold with the view of applying the proceeds to ▪ the period is referred to as equity of
the payment of the obligation. Therefore, the redemption
foreclosure suit is a real action so far as it is against
the property, and seeks the judicial recognition of Equity of Redemption
a property debt, and an order for the sale of the res.
▪ Period where the creditor must be paid
Stages for Judicial Foreclosure within 90 to 120 days from the entry
of judgment
▪ it is the final opportunity (last chance)
given to the debtor to pay the obligation
▪ if the obligation is paid during trial or
within this period, there will be no
foreclosure
▪ “grace period”
▪ Payment prior to foreclosure
▪ Note:
Equity of redemption = payment prior to

foreclosure
▪ judicial foreclosure requires that a suit be filed Right of redemption = right after
in court foreclosure
▪ hence, all the disadvantages of a collection suit
will also be apparent in a judicial foreclosure Question: Are they different?
▪ it will also take time because it can be subject to Answer: YES. They are different. The debtor
appeal is benefited by an equity redemption because
there is another period of time by which the
Steps: debt can be paid.
1. Complaint
▪ in a complaint there must be the inclusion of ▪ Reckoning period: 90 to 120 days “from the
the date and due execution of the mortgage entry of judgment” (not 3 to 4 months)
▪ there must also be a description of the
mortgaged property Problem: The date of the decision is March 1, 2018.
The losing party received the decision on March 3,
2. Trial 2018. The winning party received the decision on
March 2, 2018.
3. Judgment
▪ judgment must already include how much is Question: When is the date of finality?
the total obligation Answer: March 18, 2018. The entry of judgment is
▪ it must already identify and compute how after 15 days from receipt of notice. Which notice is
much is the interest and other charges as well
as the cost
MJ LAZA 68
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take account of? The last notice to any party (March Order of Confirmation
3, 2018), regardless if it is the winning or losing party.
▪ operate to divest the rights in the property of
Question: When is the date of entry if no appeal was all the parties to the action and to vest their
taken? rights in the purchaser, subject to such rights
Answer: March 18, 2018 reckoned from the last of redemption as may be allowed by law.
person receiving the decision which is March 3, 2018. ▪ the deed of conveyance and gives the highest
bidder the right to possess and own the
Visual Representation: property
▪ the act that divests ownership from the
mortgagor
▪ the order of confirmation is brought to the
Registry of Deeds to cancel the title
▪ the execution of another deed of sale is not
necessary as the order of confirmation is
already sufficient
▪ by the execution of the order of confirmation,
▪ from the entry of judgment, there must be a
the highest bidder becomes the owner of the
period of 90 to 120 days before the conduct of a
property and the mortgagor loses the property
public auction
PUBLIC AUCTION
Question: What happens to the payment made by the
▪ public auction must be made by motion
highest bidder?
▪ the mortgagee must file a motion in court for the
Answer: The payment is immediately made. The
conduct of a public auction
money goes to the mortgagee since the property is
▪ there must be posting of notice of the date of the
made to answer for the obligation of the debtor. It
public auction and notice given to the judgment
cannot go to the mortgagor because the mortgagor is
debtor
assuring the obligation with the property of the
▪ the notice to the debtor is only a requirement for
debtor.
judicial foreclosure, not for extrajudicial
foreclosure
If the mortgagor and the debtor are two different
individuals, the mortgagor will have a right of
PROCEDURE FOR A PUBLIC AUCTION:
recourse against the debtor.
▪ the party with the highest bid wins at a public
auction (highest bidder)
▪ By the order of confirmation, the obligation of
▪ how does one make a bid? the bid is written or
the debtor is extinguished except if there is
manifested and the property will be awarded to
any deficiency.
the party who made the highest bid
▪ Since there is already ownership, there is already
▪ when the sale is of real property, consisting of
the right to possess the property. However, most
several known lots, they must be sold at public
of the time, the mortgagor is unwilling to leave the
auction separately
property. The remedy is to file a motion for the
issuance of a writ of possession. There should
CONSEQUENCES OF PUBLIC AUCTION:
be a motion because of the pending case.
Writ of Possession
▪ remedy to acquire possession over property

▪ After the public auction, there is a confirmation
upon order of confirmation or expiration of
of sale made by the sheriff. This includes a
redemption period, if there is
manifestation that a property is sold at a public
▪ the right or authority to the highest bidder
auction for a certain price to the highest bidder,
to acquire possession over the property
who will be identified.
▪ With the confirmation of sale, there will be a right
to possess the property.
MJ LAZA 69
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Question: What is the effect of the inadequacy of the REDEMPTION IN JUDICIAL FORECLOSURE:
bid?
Answer: It will not nullify the sale. General Rule: NONE. There is only equity
redemption which must be exercised within 90 to 120
▪ The inadequacy of the bid price at a forced sale days upon the entry of judgment.
will not nullify the sale. Inadequacy does not
matter. Illustration:
▪ Why? Because the value of the property may be
higher than the amount of the obligation. When a
bid is made at a public auction, the value of the
property is not taken into consideration. The only
consideration is the sufficiency of the payment of
the obligation.
▪ Example:
The value of the property is P50 Million and the
value of the obligation is only P1 Million. The
highest bidder made a bid for P2 Million.
Will the property go to the highest bidder even if

the bid is less than the value of the property?
Exception: If the Mortgagee is a bank.
Answer: YES.
Exception to the Rule: Sec. 47, RA 8791
Sycamore Ventures Corp. v. Metropolitan Bank
and Trust, G.R. No. 173183, Nov. 18, 2013 ▪ Bank is a mortgagee, then there is right of
redemption of one (1) year from the registration
Facts: of the Certificate of Sale.
▪ Sycamore and Sps. Paz borrowed the amount of ▪ This means that the bank is the creditor and
P65 Million and used 12 parcels of land as the collateral is used to secure the obligation to
collateral. the bank.
▪ The properties were to be sold for that amount
but it is less than the assessed value of the ▪ If the mortgagee is not a bank, only equity
property and will cause deficiency. redemption, which is only available in judicial
foreclosure.
Issue: Does the appraisal value of the property ▪ If the mortgagee is a bank, on top of the equity
matter? redemption, the bank has the right of redemption
which follows the public auction.
Held: "We have held in a long line of cases that ▪ Even if the property is sold to another person,
mere inadequacy of price per se will not invalidate there is now a right to redeem the property is
a judicial sale of real property. It is only when the given to the mortgagor. The mortgagor pays the
inadequacy of the price is grossly shocking to highest bidder in order to retrieve or redeem the
the conscience or revolting to the mind, such property.
that a reasonable man would neither directly ▪ the right of redemption contemplated in this case
nor indirectly be likely to consent to it, that the is for the purpose of redeeming the property sold
sale shall be declared null and void. This rule, at public auction
however, does not strictly apply in the case of ▪ redemption is reckoned one year from the
extrajudicial foreclosure sales where the right of registration of the Certificate of Sale
redemption is available." ▪ if there is no right of redemption, the mortgagor
is divested of the ownership over the property
▪ note: to be applicable, the mortgagee must be a
bank
MJ LAZA 70
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What is a bank?
Consequence:
Bank ▪ If there is right of redemption, the highest bidder
▪ banks shall refer to entities engaged in the lending of does not immediately become the owner of the
funds obtained in the form of deposits property because of the one year redemption
▪ banks shall be classified into:
period. After the lapse of one year and there is no
(a) Universal banks;
redemption, there is consolidation of ownership.
(b) Commercial banks;
(c) Thrift banks, composed of: ▪ If there is no right of redemption, then the highest
(i) Savings and mortgage banks, bidder becomes the owner of the property
(ii) Stock savings and loan associations, and immediately.
(iii) Private development banks, as defined in Republic
Act No. 7906 (hereafter the "Thrift Banks Act"); Illustration:
(d) Rural banks, as defined in Republic Act No. 7353 The mortgagee is DBP. Thus, it has 1-year right of
(hereafter the "Rural Banks Act");
redemption from the registration of the certificate of
(e) Cooperative banks, as defined in Republic Act No.
sale with the Registry of Deeds.
6938 (hereafter the "Cooperative Code");
(f) Islamic banks as defined in Republic Act No. 6848,
otherwise known as the "Charter of Al Amanah Islamic If Joey is the lender, he only has equity of redemption
Investment Bank of the Philippines"; and from the issuance of the order of confirmation of sale.
(g) Other classifications of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas. Question: Why did the General Banking Law provide
for the right of redemption of banks?
Answer: Banks are not in the business of holding
FORECLOSURE properties. The assets of banks are liquid and easily
convertible to cash. If banks hold onto assets for a
longer period, the banks’ liquidity ratio is affected.
Under the General Banking Law, banks are only
allowed to hold onto properties for 5 years.
MJ LAZA 71
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EXTRAJUDICIAL FORECLOSURE located. A stipulation outside the

province where the property is
▪ governed by Act 3135 located is void. (Act 3135, Section 2)
▪ to be an available remedy there must be an Posting of Not less than 20 days prior to sale in
authority to foreclose the notice of three public places in the
auction sale municipality or city where the
Authority to Foreclose property is situated
▪ authority to cause the foreclosure sale must be Who
included in the Real Estate Mortgage conducts the Notary Public or Sheriff
▪ “the mortgagee is given the authority to sell the auction
property, in case of default, at a public auction” Time for
▪ there is no need to execute another instrument Public 9:00 AM to 4:00 PM
for extrajudicial foreclosure Auction
Who may Bid Strangers, creditors, trustee or
authorized person, and debtor
Procedure for Extrajudicial Foreclosure:
▪ the procedure for extrajudicial foreclosure could
be conducted within a month because once it is
applied, it will be immediately conducted
▪ what will take time will be the waiting of the 1-
year redemption period
Ramirez v. The Manila Banking Corp. G.R. No.

198800, Dec. 11, 2013
Facts: In the Real Estate Mortgage Deed, there

was a stipulation that states:
Steps:
1. File an application for extrajudicial
“All correspondence relative to this MORTGAGE,
foreclosure with the Executive Judge through
including demand letters, summons, subpoenas or
the Clerk of Court
notifications of any judicial or extrajudicial actions
2. Publication of the Notice of Auction Sale
shall be sent to the MORTGAGOR at the address
▪ posting
given above or at the address that may hereafter be
▪ no requirement to give notice to the debtor
given in writing by the MORTGAGOR to the
3. Holding of Auction Sale
MORTGAGEE, and the mere act of sending any
4. Reporting of the highest bidder
correspondence by mail or by personal delivery to
5. Issuance of the Certificate of Sale
the said address shall be valid and effective notice
6. Wait for Redemption Period of 1 year
to the MORTGAGOR for all legal purposes and the
fact that any communication is not actually
▪ Unlike in judicial foreclosure, extrajudicial
received by the MORTGAGOR, or that it has been
foreclosures have no equity of redemption.
returned unclaimed to the MORTGAGEE, or that
▪ Under Act 3135, there is always be a right of
no person was found at the address given, or that
redemption of 1 year. In extrajudicial foreclosure,
the address is fictitious or cannot be located, shall
the right of redemption of 1 year is given, unlike
not excuse or relieve the MORTGAGOR from the
in judicial foreclosure where the right is only
effects of such notice.”
given if the mortgagee is a bank.
No requirement of notice is present under the law.
Where is the Within the province where the
auction property is located. May stipulate Issue: Is the foreclosure invalid because of the
conducted where within the province. absence of notice to the mortgagor?
But should be in the municipal Held: Yes. Even though there is no requirement
building in which the property is under the law, the fact that the same was
MJ LAZA 72
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stipulated by the parties means that they have

to comply with the provisions of the contract.
The absence of notice will only invalidate the

auction and the foreclosure if it was stipulated
in the contract between the parties. If there is
no stipulation, the absence will not affect the
sale, public auction, and all subject rights or
consequences will remain valid.
RIGHT OF REDEMPTION IN EXTRAJUDICIAL

FORECLOSURE
General Rule: There is a one-year right of redemption

reckoned from and after the date of registration of the
certificate of sale (Act 3135, Section 6). Note: the law states 3 months, not 90 days.
Exception: If the mortgagor is a Juridical Person (RA Right of Redemption of Basis

8791, Art. 47), then the right of redemption must be One Year in:
exercised: Extrajudicial Foreclosure Act 3135
▪ prior to the registration of the foreclosure sale, or Judicial Foreclosure General Banking Act
▪ within 3 months after foreclosure
▪ whichever is earlier. COMMON EFFECTS OF FORECLOSURE
Rationale of the shorter period given to Juridical Excess and Deficiency

Persons: A juridical person has more resources and
more people to cause the redemption of the property. ▪ the value of the property is irrelevant; only the
value of the obligation is to be considered
Summary of the modifications of RA 8791: ▪ if the value of the obligation is less than the
1. right of redemption for banks in judicial highest bid, there is an excess
foreclosure ▪ if the value of the obligation is greater than the
2. shorter or earlier period of redemption for highest bid, there is a deficiency
juridical persons in extrajudicial foreclosure
Questions: If the property is sold at a price higher
Question: What is a juridical entity? than the amount of the obligation, what happens to
Answer: A juridical entity is a partnership or the excess? If the property is sold at a price lesser
corporation. A sole proprietorship is not considered as than the amount of the obligation, what is the
a juridical entity for the purpose of redemption in obligation of the debtor?
extrajudicial foreclosure.
In case of Excess from the Proceeds:
Question: Is there right of redemption in extrajudicial ▪ common for both judicial and extrajudicial
foreclosure? foreclosure
Answer: YES, because the right is created by Act ▪ how the obligation is to be paid out (steps):
3135. 1. deduct the costs of the sale
 costs: sheriff’s fee, court fees
Question: How long is the right of redemption? 2. given to the mortgagee-creditor in fulfillment
Answer: see illustration of the debtor’s obligation
3. balance shall be paid to junior
encumbrances, if any
4. excess to be given to the mortgagor
MJ LAZA 73
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▪ why is the excess given to the mortgagor? Licudan’s lien over the property matured firs. Because
Because the property sold is the property of the of failure to pay, Mr. Licudan has the right over the
mortgagor. property. What happens to the credit of the other
▪ Is the mortgagor entitled to the excess? YES, after mortgagees over the property after the sale of the
payment of the costs of the sale is made and after property at a public auction?
payment to the junior encumbrances is made.
Answer: Their claim over the property is also
Problem: extinguished. The highest bidder will acquire the
Loan: P1 Million property free from any liens and encumbrances.
Costs: P35,000.00
1 junior encumbrance: P500,000.00 Question 2: Since all obligations are secured, what
will happen to the obligation due to the other
Junior Encumbrance mortgagees?
 same property used as collateral for another Answer: The obligations become unsecured. The
obligation to another person mortgagee who foreclosed the property has the
obligation to hold on to the proceeds and distribute
How is the obligation paid out? the same to the junior mortgagees.
AMOUNT REMAINING In case of deficiency:

Highest Bid P2,000,000.00 P2,000,000.00 ▪ there is a recognized right of mortgagee to recover
Cost (35,000.00) 1,965,000.00 and file a suit for a deficiency judgment
To Mortgagee (1,000,000.00) 965,000.00 ▪ there is no violation of the rule that once a
Junior (500,000.00) 465,000.00 foreclosure proceeding (real action) is applied, a
Encumbrance personal action can no longer be availed.
To Mortgagor (465,000.00) 0.00 ▪ The deficiency suit is a continuation of the
foreclosure proceedings. Because the mortgagee
Question: Why are the junior mortgagees paid before has not recovered the full amount of the
obligation, the foreclosure will be followed by a
the mortgagor?
deficiency suit.
Answer: Sulit Case
▪ How?
o Judicial: by motion (no filing fees)
Sulit Case
o Extrajudicial: must be by petition
 pay off junior encumbrances
▪ In case of deficiency, the debtor always has the
 then excess to mortgagor
obligation to pay the creditor in full.
Supreme Court:
Redemption
 by their very nature, surplus money arising
from a sale of land under a decree of foreclosure
▪ opportunity given to a mortgagor to acquire rights
stands in the place of the land itself with
over the property
respect to liens thereon or vested rights
therein.
Amount of redemption price
 The senior mortgagee is the trustee for the
▪ mortgagee is NOT a bank:
junior mortgagees. He holds the payment and
o price at auction price
gives only the excess to the mortgagor because
o plus interest: 1% per month up to the time of
the rest should be paid to the junior
redemption from sale
encumbrances.
o assessments or taxes which were paid
o lien on the property if held by the purchaser
who is the holder of said lien
Illustration: There are four mortgagees over the
▪ mortgagee bank:
property: Mr. Licudan, Ms. Espinosa, Mr. Batondo,
o amount due under the mortgage deed
and Ms. Tangalin. The P2 Million obligation is due to
o interest rate specified in mortgage
Mr. Licudan, P4 Million to Ms. Espinosa, P500,000 to
o cost and expenses incurred by the bank
Mr. Batondo, and P50,000 to Ms. Tangalin. The same
collateral is used for all the loans. Unfortunately, Mr.
MJ LAZA 74
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o (Section 47 of the General Banking Law of the property can be the writ of possession is
2000, which amended Section 6 of Act No. possessed even if there made through Ex parte
3135) is no consolidation of motion.
property. But it must be
Summary of the modifications of RA 8791: through Ex parte
1. right of redemption for banks in judicial motion.
foreclosure Payment of bond No need to pay bond
2. shorter or earlier period of redemption for Discretionary upon the Ministerial upon the
juridical persons in extrajudicial foreclosure court court
3. specification of the amount of redemption price Matter of right
if the mortgagee is a bank
Bond
Problem: ▪ purpose: to answer for any damages inflicted on
Certificate of Sale was registered on March 4, 2021. the property and if the possession was unlawful
Manifested an intent to redeem on March 1, 2022. Is ▪ amount of bond: amount equivalent to the use of
this redemption? the property for 12 months
Answer: NO. There is no right of redemption because Right of the Debtor

it is just a manifestation. ▪ to object to the possession and pray that the writ
be cancelled or denied on the following grounds:
China Banking Corporation v. Martir, G.R. No. 1. mortgage was violated
193453, June 05, 2013 2. sale was not made in accordance with law
The general rule in redemption is that it is not Question: When may the mortgagor object? When
sufficient that a person offering to redeem may the opposition to the writ of possession be filed?
manifests his desire to do so. The statement of Answer:
intention must be accompanied by an actual ▪ during the proceedings for the writ of possession;
and simultaneous tender of payment. This or
constitutes the exercise of the right to ▪ within 30 days when the purchaser was given
repurchase. possession
Purchaser’s Right of Possession Right of Purchaser After Redemption

(Highest Bidder)
▪ if the purchaser was given possession over the
Writ of Possession property, the purchaser has right of set off
▪ it is a manifestation in court that a party intends ▪ right of set off: price of redemption less rentals
to assert his right of possession over the property earned (if the property was rented)
▪ must be made through a petition to the RTC who ▪ however: deduct 1% per month if property is used
has jurisdiction over the property as dwelling or used gainfully
▪ must be with payment of bond
Phil. Bank of Communications v. Yeung, G.R.

No. 179691, Dec. 4, 2013
Differences of the writ of possession depending on

whether or not there is right of redemption and
whether it has already lapsed:
During Redemption Consolidation of

Period Ownership
A writ of possession can If possession is now in
already be issued and the concept of an owner,
MJ LAZA 75
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SUMMARY
REDEMPTION THROUGH EXTRAJUDICIAL AND JUDICIAL FORECLOSURE
Not redeemed: cancel old,

Banks if mortgagee issue new
▪ right of redemption is one year unless juridical
person *when the period has
▪ redemption price: amount of obligation, not the elapsed, the old title can be
highest bid cancelled and a new title
can be issued in favor of
Start at 1:19:00 the highest bidder
Effect to Title
Question: How should an equitable mortgage be
CONFIRMATION OF SALE foreclosed?
Certified copy of Answer: Judicial Foreclosure. Only judicial
confirmation of sale is foreclosure is available since no authority was given
registered to the parties.
* the mere fact that there MORTGAGEE IN GOOD FAITH AND DUE
was a sale is sufficient to DILIGENCE
NONE
cause the cancellation of
the title and the issuance of Scenario:
a new one in favor of the Boy borrows money from girl and uses his real
Right of highest bidder property to secure the obligation.
Redemption
Cancel old, issue new Boy shows title. Girl inspects the title. Boy’s name
Certificate of sale and appears thereon. Girl inspects the property.
confirmation of sale shall
be registered Boy defaults. Girl forecloses on the property. Turns
THERE out the property is not owned by Boy. What now?
IS * wait for the lapse of the
redemption period before a ▪ There is a need to determine whether Girl is a
new title can be issued to mortgagee in good faith. If Girl is a mortgagee in
the highest bidder good faith, foreclosure could continue. If Girl is
not a mortgagee in good faith, foreclosure cannot
continue because the mortgage is invalid. It is
MJ LAZA 76
Credit Transactions
invalid because Boy is not the absolute owner of ▪ Extraordinary diligence as imposed by
the property. jurisprudence
▪ Banks are required to be more cautious
Documents usually brought for preparation of o cannot merely rely on the certificate of title
Mortgage Deed: offered by the mortgagor in ascertaining the
▪ Title (certified true copy is better than owner’s status of mortgaged properties
duplicate copy but both is preferred) o before approving a loan application, it is a
▪ Tax Declaration (especially for buildings) standard operating practice for banks to
o if property is unregistered, the best proof of conduct an ocular inspection of the
ownership is the tax declaration property offered for mortgage including the
presence of occupants/tenants and to verify
Indefeasibility of Torrens Title the genuineness of the title to determine its
▪ Mirror Doctrine: the party need not go beyond the real owners
face of the title in order to determine ownership
over the property Necessity of ocular inspection
▪ best proof of ownership ▪ an ocular inspection is conducted to verify if there
▪ best proof of the encumbrance or the absence of is another person in possession of the land being
encumbrance mortgaged
▪ best proof of the right of disposal ▪ it is incumbent upon the purchaser to verify the
extent of the occupant’s possessory rights
Question: What if the mortgagor is not the owner of
the property? Bautista et. al. v. Spouses Balolong, G.R. No.
Answer: There is a need to determine whether the 243296, July 29, 2020
mortgagee is in good faith or not.
Facts: An impostor pretended to be the owner of the
Mortgagee in Good Faith property.
▪ one who is unaware of the defects in the title or
ownership of the mortgagor What Metrobank did:
▪ good faith entails an honest intention to refrain ▪ conducted a background check to find out if
from taking unconscientious advantage of borrowers had the means to pay their loan, and
another found that they did
▪ matter of evidence to be satisfied by the one ▪ conduct of neighborhood check to confirm the
claiming such status same
▪ a mortgagee cannot simply ignore facts that ▪ determined that only mortgagors are on the
should have put reasonable person on guard, and property
thereafter claim that he or she acted in good truth ▪ went to the Register of Deeds of Lingayen,
under the belief that the mortgagor’s title is not Pangasinan and verified that the title is
defective authentic
Consequence is mortgagee is in good faith Supreme Court: the foregoing steps need to be
▪ foreclosure and all consequences proceeds as conducted by a bank in order for it to be considered
usual a mortgagee in good faith.
Consequence if NOT mortgagee in good faith

▪ Foreclosure is null and void Impostor
▪ Obligation is pure or unsecured by any property ▪ What if a person pretended to be the titled owner
▪ Possession by highest bidder is not valid and used that property to secure the fulfillment
▪ No right to deficiency of an obligation? Would that make the mortgagee
transacting with the impostor a mortgagee in
BANK IS A MORTGAGEE good faith?
Banks: Rule created by the Supreme Court:

▪ Imbued with public interest
MJ LAZA 77
Credit Transactions
▪ to be a mortgagee in good faith, the impostor of the impostor who thereafter transacts with a
must have succeeded in obtaining a Torrens mortgagee who acted in good faith.
Title in his name and thereafter in mortgaging
the property The title of the property must have been validly
▪ It is not enough that there is an impostor to be transferred to the name of the impostor to support
considered as a mortgagee in good faith. There the indefeasibility doctrine of title.
must be a title issued in the name of the
impostor In this case, title is still in the name of the rightful
▪ where the mortgagor is an impostor who only owner. Therefore, Evelyn is not a mortgagee in
pretended to be the registered owner, and good faith.
acting on such pretense, mortgaged the
property to another, the mortgagor evidently
did not succeed in having the property titled in ▪ Taking into consideration of the other pieces of
his or her name, and the mortgagee cannot rely evidence, there was really absence of good faith
on such pretense as what appears on the title on the part of Evelyn. She remained intentionally
is not the impostor’s name but that of the ignorant.
registered owner; this will not make the
mortgagee a mortgagee in good faith Failure to establish by evidence of a Mortgagee in
Good Faith
▪ Deed of REM was a forged instrument
Ruiz v. Dimailig, G.R. No. 204280, November ▪ Evelyn did not take the necessary steps to
09, 2016 (Special En Banc) determine any defect in the title of the alleged
owner of the mortgaged property. She deliberately
Facts: Bernardo is the registered owner of a land. ignored pertinent facts that should have aroused
He left for abroad on October 19, 1997. The title of suspicion on the veracity of the title of the
the land was entrusted to his little brother, mortgagor “Bernardo” who:
Jovannie, who in turn gave it to a broker, Editha. o did not present any proof of identification
Editha was to sell the property for and in behalf of o did not participate in the negotiations/
Bernardo. However, the property was mortgaged to transactions leading to the execution of the
Evelyn Ruiz on January 26, 1998. Evelyn inspected Deed of REM
the title and the property. She was accompanied by ▪ Evelyn:
a person who was pretending to be “Bernardo.” o failed to ascertain the supposed title of
Evelyn did not verify the neighborhood as she “Bernardo” over the property
stayed in the car. “Bernardo” presented a CTC and o hastily granted the loan and entered into the
his picture. Editha told Jovannie that the title was mortgage contract
lost but she eventually admitted that it was ▪ SC: “Where the mortgagee acted with haste in
mortgaged to Evelyn. Jovannie told Evelyn that it granting the loan without first determining the
was not Bernardo, his brother, who signed the ownership of the property mortgaged, the
mortgage and that the mortgage is null and void. mortgagee cannot be considered as an innocent
Bernardo filed an annulment suit of the REM. mortgagee in good faith.”
The RTC held that Evelyn was a mortgagee in good

faith because she was unaware that Bernardo was
an impostor. The CA reversed the decision and said
that Evelyn is not a mortgagee in good faith
because the title is still in the name of the rightful
owner and she even failed to verify the identity of
the mortgagor, the fake “Bernardo.”
Held: The SC held that a mortgagee in good faith

assumes that the title to the subject property had
already been transferred or registered in the name
MJ LAZA 78
Credit Transactions
▪ If the title of the property is in the name of the  If the mortgagee is not a bank, the amount of
fake mortgagor (impostor), the mortgagee can be redemption is only the highest bid.
considered a mortgagee in good faith because he ◆ That is why there are situations where
can rely on the title and the face of the title. there can be collusion, where you pretend
▪ If the title is still in the name of the real owner, to be the highest bidder.
the mortgagee is not a mortgagee in good faith.
 If the mortgagee is a bank, the amount of
Due Diligence redemption should be the redemption price
▪ on the part of the lawyer in assisting the client (how much is owed the bank)
▪ it is done by: ◆ How much is the obligation of the debtor
o investigation, audit, or review performed to to the bank will be the amount that will be
confirm facts or details of a matter under paid for the property. It will not matter if
consideration the bidders colluded with one another.
o determination of compliance with legal
requirements 3. Period of Exercising right of Redemption
 Judicial foreclosure: who is the mortgagee
Checklist for the Mortgagee ◆ If the mortgagee is the bank, one year is the
▪ the following are the things or facts to be right of redemption.
determined and checked: ◆ If not a bank, equity redemption.
o updated certified true copy of the title
o check on memorandum of encumbrance  Extrajudicial foreclosure: who is the
o if there are encumbrances, the status of the mortgagor
other obligations, is it nearing default, is it ◆ If a natural person, the right of redemption is
subject of foreclosure one year.
o tax declaration ◆ If not a natural person, earlier than
o determine market value of the property registration or three months from foreclosure,
o ocular inspection whichever is earlier.
o determine claims of those staying on the
property, if any
o location of owner’s duplicate copy of the title
o ID of the mortgagor
o If thru SPA, require an updated SPA
o If co-owned, is the property partitioned?
o If married, is the property part of the conjugal
estate?
o Credit of the mortgagor
▪ if the foregoing are complied with, the lawyer can
advice client to proceed with the mortgage
Review:
How the General Banking Law affected the
Rules of Foreclosure
1. Right of Redemption
 With a judicial foreclosure and a bank being
a mortgagee, there is a right of redemption
which is something that is a right supposedly
under extra judicial foreclosure.
2. Amount of redemption
 Redemption price for the property (either
judicial or extrajudicial foreclosure)
MJ LAZA 79
Credit Transactions
CASES
Philnico Industrial Corp. v. Privatization and
Management Office, G.R. No. 199420, August 27,
2014 [pactum commissorium] 😊
Spouses Flancia v. CA and Genato, G.R. No. 146997,

April 26, 2005 [power to encumber] 😊
Vitug v. Abuda, G.R. No. 201264, January 16, 2016

[free disposal] 😊
Catapang and Gabin v. Lipa Bank, G.R. No. 240645

January 27, 2020 [consent in real estate mortgage]
😊
Arguelles v. Malarayat Rural Bank, G.R. No. 200468,

March 19, 2014 [absolute owners] 😊
DBP v. Guarina Agricultural and Realty Dev’t Corp.,

G.R. No. 160758, Jan. 15, 2014 [premature
foreclosure] 😊
Phil. Bank of Communications v. Yeung, G.R. No.

179691, Dec. 4, 2013 [excess of proceeds from sale]
😊
Heirs of the Late Spouses Maglasang v. Manila

Banking Corporation, G.R. No. 171206, Sept. 23,
2013 [claims against estate; extrajudicial foreclosure
and deficiency] 😊
Ramirez v. The Manila Banking Corp., G.R. No.

198800, Dec. 11, 2013 [notice in extrajudicial
foreclosure]
https://www.projectjurisprudence.com/2017/05/ra
mirez-v-manila-banking-gr-198800.html
PNB v. Marano, G.R. No. 189316, July 1, 2013 [Art.

2127; mortgagee in good faith] 😊
Sycamore Ventures Corp. V. Metropolitan Bank and

Trust, G. R. No. 173183, Nov. 18, 2013 [options
available to mortgagee; appraised value] 😊
Ereña v. Querrer-Kauffman, G.R. No. 165853, June

22, 2006 [mortgagee in good faith] 😊
Ruiz v. Dimailig, G.R. No. 204280, November 9, 2016

[mortgagee in good faith; absolute owner; imposter]
😊
Supreme Transliner Inc. et. al., v. BPI Family Savings

Bank, G.R. No. 165617, February 25, 2011 (included
in the redemption price) 😊
MJ LAZA 80
Credit Transactions
PERSONAL PROPERTY SECURITY ACT

Pledge Chattel Security
Republic Act No. 11057
Mortgage Transactions
under PPSA
▪ effective February 9, 2019
▪ applies to secured transactions much like Real contract There is no There is
guaranty or real estate mortgage which will take requirement for perfection
▪ however: guaranty pertains to a promise made by effect upon the property to through delivery
a third person to be liable for the obligation of delivery be transferred (possession),
someone else; and REM is a promise by a property to the registration,
and an assurance of a property to answer for the Accessory possession of and control
obligation of the debtor contract where the creditor. It
▪ this law pertains to the use of personal property the pledgor gives is sufficient
as security his property to that the
▪ prior to the law, there are pledge and chattel the possession of mortgage is
mortgage the pledgee- registered.
creditor
Scope of the Law
The transfer of
▪ apply to all transactions of any form that secure possession back
an obligation with movable collateral to the pledgor
▪ regardless of the nomenclature (i.e. pledge or extinguishes the
chattel mortgage), as long as the contract was agreement.
perfected or executed after enduring the
effectivity of the law, the contract is considered as Requires the execution of Affidavit Does not require
a security agreement under the PPSA of Good Faith the execution of
▪ when the law talks about something in writing, it an Affidavit of
also covers those pertaining to electronic records Good Faith
-Pledge and
Effectivity of the Law chattel mortgage
▪ February 9, 2019 are combined
into one =
Repealed or Amended security
agreements
▪ Sections 1 to 16 of the Chattel Mortgage Law
▪ Articles 2085-2123, 2127, 2140-2141, 2243 and Competitive There should These rules were
2246-2247 of Republic Act No. 386 otherwise Auction, hence, be a highest repealed by the
known as Civil Code of the Philippines there is no bidder PPSA
highest bidder
Question: Is pledge and chattel mortgage effective -if there is no
now? highest bidder or
Answer: NO. It is already repealed or amended. At only one bidder,
present, pledges and chattel mortgages are now the auction will
referred as security agreements. However, those be redone
executed prior to the effectivity of the law continue to
be covered by the law covering pledge and chattel In case of excess, In case of These rules were
mortgage. this will go to the excess, it will repealed by the
creditor go to the PPSA
mortgagor
No listing as to what can be subject There is a
under PPSA
of the pledge or chattel mortgage so specific listing
long as considered as tangible and under the PPSA
Similarity: All pertains to personal or movable property
personal property on what can be
MJ LAZA 81
Credit Transactions
2007) by identifying more properties that can

be used as collateral
o Increasing cost of credit, particularly to
under PPSA
MSMEs
considered as
Personal Property
personal
property
▪ the following are the personal properties covered:
o Personal property under the Civil Code
o Commodity contract
Purpose of the Law o Instrument or negotiable document
o Equipment and inventory
▪ The Model Provisions deal with the registration o Intellectual property
of notices of security interests in a publicly o Livestock
accessible Registry to make a security interest o Fixtures, accessions and commingled foods
effective against third parties and to provide an o Operating lease (agreement by which the
objective basis for determining the priority of a owner temporarily grants the use of his
security interest over the rights of competing property to another who undertakes to pay
claimants. By providing a transparent, rent, therefore, no transfer of ownership)
comprehensive and rational legislative framework o Tangible asset
of secured financing, the Model Law is expected o Intangible asset
to have a beneficial impact on the availability o Intermediated securities (ex. shares of
and the cost of credit, in particular to small and stocks managed by a broker)
medium-sized enterprises in developing o Non-intermediated securities (those held by
countries. This will not only assist in their the owners or not subject to management by
market inclusion and alleviating poverty, but a broker)
also contribute to achieving Goal 1 of the 17 o Investment property
Sustainable Development Goals on ending o Deposit accounts
poverty. (UNCITRAL MODEL LAW ON o Future property or after-acquired assets
SECURED TRANSACTIONS)
COMMODITY CONTRACT
▪ UNCITRAL – United Nations Commission on ▪ an agreement to buy and sell a particular
International Trade Law commodity at a future date
▪ Since PPSA is patterned on the UNCITRAL Model ▪ advantage: hedging or minimizing the risk of
Law, there is a tendency that the law is similar selling products at a future date
with other countries. The difference is that our ▪ regardless of the value of the product today, the
traditions, culture and biases are not considered. same is purchased by a party at a fixed and
▪ Purpose: agreed price
o Creation of an accessible registration of
notices so that everyone will have access as INVESTMENT PROPERTY
to whether a security interest is created over ▪ investment property is any property arising from
the property. With the registration, a person an investment
need only look at the register of property to ▪ investment is any asset purchased only for the
determine if there is a collateral or lien over purpose of attaining an increase in value, making
the property. sure that its use will only be dedicated to the
o It provides vital information. generation of income
o It has beneficial impact on the availability ▪ an investment’s primary purpose is not to
and cost of credit (e.g. use of intangible consume or use the property but to hold onto it
properties as collateral). for the purpose of increasing its value over time
o To end poverty ▪ included are commodities contract and other
o To promote low-cost credit by enhancing the securities (e.g. shares of stocks)
availability of secured credit (UNCITRAL
Legislative Guide on Secured Transactions,
MJ LAZA 82
Credit Transactions
FUTURE PROPERTY OR AFTER-ACQUIRED to the seller’s perspectives, the future payments are
ASSETS regarded as accounts receivable.
▪ difference between REM and security agreements
under the PPSA ▪ accounts receivable are security interests on the
▪ Under Real Estate Mortgage, the requirement is part of the seller. Since the seller has the right to
that there must be free disposal of the property. collect payments, it is regarded as an asset which
Only properties which can be freely disposed by can be used as collateral to secure an obligation
the mortgagor can be the subject of a REM. from another person.
▪ Under a security agreement which covers
personal properties, even future property or one PURCHASE MONEY
that currently does not exist or capable of existing ▪ purchase money as security interest: a security
in the future can be the subject of a personal interest in goods taken by the seller to secure the
property security agreement. price or by a person who gives value to enable the
▪ After-acquired assets are those properties that grantor to acquire the goods to the extent that the
the grantor currently has no right to encumber at credit is used for that purpose (IRR)
the time the security agreement is concluded. ▪ best explained in finance leasing
Properties yet to be acquired can be the subject of ▪ finance leasing: where a person goes to a finance
a security agreement but it will only be made leasing company where the leasing company
effective after the acquisition of the property. purchases assets for the use of the lessor in
▪ Example: The right of children over the properties exchange of the payment of rent (ex. a taxi
of their parents is merely an inchoate right. Under operator pays rent for the use of the taxi to the
the PPSA, future inheritance can be the subject of leasing company)
a personal property security agreement. ▪ the collateral used in this case is the purchase
money or the money used to purchase the goods
ACCOUNTS RECEIVABLE ▪ the subject of the security interest is either the
▪ the best proof that intangible assets can be the goods or other obligations that would enable the
subject of accounts receivable grantor to purchase the goods
▪ the right associated with accounts receivable is
the right to be paid or a right to collect payment Distinct Features of PPSA
from someone else
▪ Accounts Receivable under Sec. 3.08 1. Land Registration Authority (LRA) or the Registry
1. from the supply or lease of goods or services of Deeds maintains an Electronic Registry
2. construction contract or contract for the sale ▪ the LRA also has jurisdiction over personal
or lease of a real property property
3. contract for the sale, lease or license of 2. The modes for Perfection of Secured Interest (ex.
intellectual property possession, registration, control agreement for
intangible assets)
Example: Contract of Sale 3. Express identification of what are personal
property
4. Security interest is any right over collateral
5. At least two modes of perfection depending on
property involved
6. Perfection of security interest is binding to third
persons (even if it is not by registration)
7. Right of redemption exists and may not be
exercised
8. No need for specificity in the description of the
assets
▪ they are distinct because these features are a

The buyer pays in installments. Since there is a clear departure from pledge and chattel mortgage
promise to pay in installments at some future date, as
MJ LAZA 83
Credit Transactions
Security Interest and Security Agreement ▪ the grantor and the debtor can be the same
person but the grantor can also be another
▪ security interest: A property right in collateral person
that secures a payment or other performance ▪ the PPSA focuses more on the grantor’s rights and
of an obligation, regardless of whether the obligations
parties have denominated it as security interest,
and regardless of the type of assets, the status of GRANTOR
the grantor or secured creditor, or the nature of ▪ under Sec.3(c) of the PPSA, the grantor is:
the secured obligation; including the right of a 1. the person who grants a security interest
buyer of accounts receivable and lessor under an in collateral to secure its own obligation or
operation lease for not less than one year. that of another person
▪ security interest:  accommodation grantor
1. may be in existing or future properties 2. a buyer or other transferee of a collateral
2. may be over tangible or intangible assets that acquires its right subject to a security
3. provided, the grantor has a legal right over interest
these properties  rationale why the person not a party to
4. created by a security agreement the security agreement becomes a
▪ legal right: grantor: continuity
o in REM, it is required that the mortgagor is  similar to the inseparability of REM
the owner of the property; under PPSA, the  under the PPSA, whoever acquires the
grantor only needs a legal right, not a claim property becomes the grantor
of ownership, over these properties 3. a transferor in an outright transfer of an
o example is the right to possess a property accounts receivable
under a contract of lease, Commodatum or  a person given the right to receive
mutuum; payment from another person is
o the right to possess also contemplates the considered a grantor
right to subject the property to a security 4. lessee of goods
agreement or a security interest  someone in current possession of a
property that is subject of a collateral is
Parties to a Security Agreement under the considered as a grantor
PPSA  the lessee must surrender claims over the
property if there is an enforcement of the
security agreement
Requirements for a VALID Security Interest
1. the grantor must have legal right of the personal

property
2. if a future property, the grantor must acquire
legal right in it or has the power to encumber it
later on
Security Agreement
▪ parties: secured creditor, debtor, grantor ▪ defined under the law as a contract that:
▪ secured creditor: the same as the creditor in o creates the security interest
REM o must be in writing and signed by the parties
▪ debtor: the same person in a REM, guaranty or (regardless of the amount)
surety o may be several documents
▪ grantor: the one that is the subject of a security o regardless of the nomenclature, the intent
agreement between a secured creditor and the would be to establish the intent of the
grantor parties to create a security interest (to
MJ LAZA 84
Credit Transactions
create a collateral in the movable property to

secure the obligation of the debtor) Exception to the Rule: acquisition by a third person
o may be executed in English or Filipino who is in good faith (not binding)
o should have a description of the property
▪ implication:
Valid Description o the collateral is extinguished and the
▪ Specific: chassis number, engine number continuity of the security interest over the
▪ General: “all inventory”, “all equipment”, “all property ceases
personal property” o the property can no longer be used to secure
or pay the debtor’s obligation
Continuity of Security Interest o reason: possession of a person in good faith
over a movable property is tantamount to a
▪ continuity is important to establish whether title.
something is acquired in good faith or not; and
also to establish which properties are covered by Exception to the Exception: if the property’s
the security interest security agreement is registered
▪ continuity is also important for the execution of
pledge or mortgage before the effectivity of the law ▪ perfection by registration is taking the security
▪ even if there is sale, lease, license, exchange agreement and going to the LRA and causing the
or other disposition (Sec. 9) the security registration
interest continues, remains, and retains its ▪ here, if the security agreement is registered, a
perfection, and the priority it had even before the defense of good faith will not be meritorious
commencement of insolvency proceedings ▪ reason: registration serves as informing all
o same as the concept of inseparability in REM persons, even those in good faith, that there is a
o this means that if there is failure to pay lien over the property
obligation to the secured creditor, the ▪ this emphasizes that every time there is purchase
secured creditor can take the property from of movable property, there should be checking of
the possessor of the property because of the the personal property security registration to
continuity of the secured interest determine if there is a claim or lien on that
▪ remains perfected and retain the priority it property
had before the commencement of insolvency ▪ if the security agreement is registered, even if the
proceedings (IRR, Sec. 6.04(b)) grantor sold the property to a third person in good
faith, the secured creditor can still take the
General Rule: Security interest binding to third property away from the third person (buyer)
persons. because there is registration and continuity of the
security interest
▪ even if the transfer contemplates a mere transfer
of possession and the contract is executed Coverage of the Security Agreement
between the secured creditor and the grantor, the 1. Personal Property itself
same will be binding to third persons 2. Identifiable and traceable proceeds (Section 8.a)
▪ example: Mr. A acquired a property from the
grantor through sale. It turns out that debtor Example: If the security interest is over a motor
cannot pay for his obligation. What happens to vehicle, the subject of the security agreement is the
the property? The property should still be motor vehicle and the identifiable and traceable
enforced by the secured creditor. Mr. A cannot proceeds. If the motor vehicle is damaged, the
raise the defense that he is not bound by the proceeds from the insurance will be given to the
contract and that he has the right of ownership creditor. The security agreement follows the traceable
over the property. proceeds, which is the pay-out from the insurance
company.
What can be a valid defense of Mr. A? He should
assert that the transfer was made in good faith If the insurance company paid out in cash and the
and that he acquired the property without cash is used to purchase another motor vehicle, the
knowing that it was subject of a lien.
MJ LAZA 85
Credit Transactions
new motor vehicle will be the identifiable proceed. The Answer:

new car will still be subject to the security interest.
If the motor vehicle is sold to a third person in good

faith, the object of the agreement will be transformed.
It is no longer over the motor vehicle. Since the
transfer was done in good faith, the subject of the
security interest is now over the proceeds from the
sale (the identifiable and traceable proceed). The If the proceeds are in the form of money, accounts
motor vehicle is now absolutely owned by the third receivable, negotiable instruments or deposit
person since the same was done in good faith. accounts, there is no need for another perfection.
These proceeds are identifiable and traceable
If the sale of the motor vehicle was not done in good proceeds.
faith and the same was perfected by registration, the
subject of the security interest will still be the car. The If the proceeds is another movable property, it must
security agreement will still cover the motor vehicle be perfected by the specified modes within 15 days to
because of the principle of continuity. be effective against 3rd persons. The change in the
object does not mean that there is a change in the
▪ Note: The coverage of the security agreement will security interest. The security interest is just
be the identifiable and traceable proceeds if the transferred to the new object.
transfer was done in good faith.
Means of Perfection
Perfection of Security Interest
(1) registration of a notice with the registry through
▪ how the security interest will be enforced the Personal Property Security Registration
▪ perfection of the security interest is the method (PPSR) with the LRA or the Registry of Deeds
by which it becomes binding and valid against (2) possession of the collateral by the secured
third persons creditor
▪ how perfected: (3) control of investment property and deposit
o upon its creation and taking one of the account
actions under Sec. 12
o upon creation it becomes effective against HINT:
third persons Tangible Assets Intangible Assets
o remains perfected despite a change in the Registration and Registration and
means for achieving perfection (Sec. 15) possession, either conclusion of
o manner of perfection determines priority in Perfection
actual or control agreement
the same collateral constructive
▪ perfection of the security interest determines the
priority over the enforcement over the collateral PERFECTION BY POSSESSION
▪ can be:
Perfection and Disposition of Proceeds a. actual or constructive
(Section 14) ▪ actual: actual transfer of possession
▪ constructive: transfer is made in writing
▪ the collateral is sold leased or otherwise disposed
▪ there remains to be a security interest in the b. by secured creditor or a depositary acting for
proceeds (Sec. 8.a) the secured creditor
▪ possession can be made by the person
Question: Is there a need for perfection of security appointed by the secured creditor
interest to the proceeds to bind third persons?
c. cannot be possessed by the grantor on behalf
of the secured creditor
▪ the grantor cannot act as depositary on
behalf of the secured creditor
MJ LAZA 86
Credit Transactions
▪ even if the agreement is not yet notarized, it can

PERFECTION BY REGISTRATION already be registered
▪ Why does this matter? The first to register is
▪ binding between the parties even if there is no considered as the higher secured creditor.
registration
o to bind third persons there must be Note: REGISTRY’S ROLE
registration ▪ Registry exercises only administrative functions:
▪ grantor must authorize the registration if initial o it cannot decide whether or not to cause the
notice by signing a security agreement registration
o the notice will be given to the PPSR for its o it cannot determine the sufficiency,
registration correctness, authenticity, or validity of the
▪ notice of lien may be registered by a lien holder application of registration
without consent of the person against whom the o it is ministerial on their part to cause the
lien is sought to be enforced registration once there is showing that the
o involuntary registration requirements of identification, identification
number, and description is satisfied
Perfection by Registration: EFFECTIVITY ▪ refusal to register does not determine the
▪ start: at the time it is discoverable on the records sufficiency, correctness or authenticity, or
of the Registry validity of any information contained in the notice
o as long as it can be searched, then it is
already effected Registration established and administered by LRA
▪ duration: term indicated in the notice unless ▪ public record and may be searched by anyone
continuation notice is registered before the lapse ▪ an SPA is no longer needed to search on the lien
of the term
o it cannot be forever or litis pendentia Review!
o parties could agree on the duration of the
term What if the collateral was sold to a person who has
information that the property is subject of a
▪ amendments: must be authorized security agreement. What is the subject of the
o such as when there is re-negotiation of the collateral?
agreements or extension of the loan
A. The proceeds from the sale
Sufficiency of the Notice B. The same collateral
▪ a notice is sufficient when:
(1) identifies the grantor by identification Answer: B. The same collateral (Sec. 21 in
number relation to Section 3(g)).
(2) identifies the secured creditor to an agent of
the secured creditor “information that the property is subject of a
(3) provides their address security agreement” means that the buyer is in
(4) describes the collateral bad faith.
(5) paid fee
Ineffective Registration PERFECTION BY CONTROL AND CONTROL

▪ notice cannot be searched in the PPSR AGREEMENT
▪ seriously misleading notice by not providing
identification number of grantor ▪ primarily used in perfecting security agreements
which covers intangible assets because these
IRR Sec. 5.05(d): PRE-REGISTRATION assets cannot be physically possessed
▪ pre-registration is permissible ▪ perfection by control is:
▪ notice may be registered before a security (1) creation of security interest in favor of the
agreement is concluded deposit-taking institution or the
▪ the date of registration of the notice shall be from intermediary
the date of registration ▪ deposit-taking institution is a bank
MJ LAZA 87
Credit Transactions
▪ intermediary is a broker who manages ▪ A stock and transfer book is maintained

the securities of someone else by a corporation. It means that a notation
should be made by virtue of a control
(2) the conclusion of a control agreement agreement in the books of corporation for
▪ example: if the subject of the security it to state that there is a security interest
agreement are shares of stocks, being held there by the creditor over the
perfection through the conclusion of a shares of stocks belonging to the grantor.
control agreement is done through ▪ Purpose: If there is failure to pay by the
notation of the security interest in the grantor, the creditor can go after the
books maintained by or on behalf of the securities.
issuer ▪ This cannot be done by possession of
shares of stocks. If there is refusal to
(3) notation of the security interest in the books surrender, then there is notation.
maintained by or on behalf of the issuer for
the purpose of recording the name of the
holder of the securities (for investment
property that is an electronic security)
Comparison of Control Agreement
SECURITIES DEPOSIT ACCOUNT

Agreement in writing Agreement in writing
Issuer and intermediary, the grantor and secured Deposit-taking institution, the grantor and the
creditor secured creditor
to follow instructions from the secured creditor with respect to the payment of funds credited to the
deposit account without further consent from the grantor
Intermediary: person, including but not limited to a Deposit-taking institution: bank, non-stock savings
bank, trust entity, depositary, broker, or central and loan association, cooperative
securities depositary, that in the ordinary course of
business or regulatory activity maintains an account
for such securities or assets, for another person, and is
acting in that capacity
Control Agreement On Control Agreement (Section 13(b))

1. under oath and in writing 1. the control agreement must be upon request of
2. date and time specifying the hour and minute of the other parties to the deposit-taking institution
its execution should be indicated and intermediary and not the grantor
• these information serves as a measure of who • This is an obligation on the part of the
is the higher rank secured creditor secured creditor, it is not the obligation of the
• if all of the claims are registered, the first grantor to request for a control agreement.
registrant is the highest secured creditor.
2. deposit-taking institution or an intermediary is
Why does that matter? not required to confirm the existence of the
a. In a single property, there can be many agreement to another person unless requested to
security agreements over the same do so by the grantor (confidentiality)
property. That is the reason why there are • Remember that the parties to a control
Junior mortgagee in real estate mortgage agreement are the secured creditor, grantor,
b. For Personal property as well, it is possible and the deposit-taking institution, as the
that in a single property, there are several case may be. Since banks are considered as
secured creditors and secreted interest. deposit taking institutions and possible
If it will be enforced, it matters who is the priority, parties to a control agreement, there is a
it matters who is the superior secured creditor. requirement of confidentiality. The bank
cannot also disclose that if the deposit
MJ LAZA 88
Credit Transactions
account is subject to a security agreement, Example of investment properties:

such agreement shall not be disclosed as this
is covered by the confidentiality of bank 1. Deposit taking institutions, those agreements
deposits and their securities.
2. Commodity contracts
Property Registration Possession Control Others
Tangible Assets (Sec. 12) X X
Intangible Asset X X
Creation of a security
interest in favor of the
Deposit Account X X
deposit-taking institution
(IRR S. 4.04)
Control by notation in the
Electronic Securities X X books on behalf of the
issuer (IRR S. 4.06)
Fixture, accessions,
X X
commingled goods
Intermediated Electronic
X X
Securities
Personal Rule of Ma’am:
● If it is a tangible asset, it can be perfected by registration or possession

● If it is an intangible asset, the rule would be perfected by registration and control agreement
Enforcement of Security Interest Requirements:

(1) upon default
Methods of enforcement
(2) may be made without judicial process, if the
1. Expedited repossession of collateral
security agreement so stipulates
2. Right of a secured creditor to dispose
➢ Danger: after the effectivity of the PPSA, every
3. Retention of Collateral by Secured Creditor
contract, regardless if it is called Chattel
4. Recovery in Special Cases
Mortgage or pledge, shall be treated as a
security agreement under the PPSA, if there
Requirements for Enforcement:
is no stipulation or if they stipulated that the
1. There should be default
property can be taken without judicial action
2. Failure to pay the obligation when it became
or order. The danger is that with this law, it
due and demandable.
specifies that if the property is found in a
public area, that property can be taken by the
(1) Expedited Repossession of Collateral (Sec. 47) secured creditor as long as stipulated under
the agreement that this can be taken.
• There must be no pactum commissorium
• A remedy for a secured creditor to be paid. (3) there is no breach of peace (IRR S. 7.02)
• Process a. entering private residence of the
Q: How is this done? grantor without permission (Any
property found in a public area can be
A: The property that is subject of security taken and repossessed by the creditor
interest is repossessed, taken and applied to and it will already extinguish the
the payment of debt. There is no requirement obligation of the debtor. There is no need
that it should be sold in public auction. You for a court order.)
just take the property and apply it to the
obligation of the debtor and the obligation of b. resorting to physical violence or
the debtor is extinguished. intimidation
MJ LAZA 89
Credit Transactions
c. being accompanied by law (2) Right of Secured Creditor to Dispose

enforcement when taking possession
or confronting the grantor ▪ Another proof that there is no pactum
commissorium anymore. The prohibition on
▪ The requirements are anti-pactum pactum commissorium is because here, it is
commissorium. The Pactum commissorium the creditor who either sells or buys the
says that this cannot be done as it requires property.
“must secure” “must be foreclosed”.. Now, a ▪ In pledge and chattel mortgage, property can
judicial order is not required anymore unless be purchased by the secured creditor but
there is breach of peace. there needs to be a foreclosure first. Why is it
that this is in contravention against pactum
If there is possibility of breach of peace: commissorium is that there is already a right
(1) expedited hearing upon application of an of the creditor to act as the owner. When you
order sell something, you must have rights over it -
(2) notify the debtor, grantor, and real estate the same one that you are transferring to
mortgagee if the collateral is a fixture another person (ownership). But under the
(3) must prove that there is default and there PPSA, this is something that can already be
is a right of possession done by the creditor, sell the property.
▪ The secured creditor has the right to dispose
Q: What is the duty here? of the property already without judicial order.
▪ This is the right to sell
A: simple duty that there is a right to possess the
property, which will be justified by the security WHEN RIGHT IS EXERCISED: After default, a
agreement and there is a default. secured creditor
❖ This is not a remedy that a secured creditor

(a) may sell or otherwise dispose of the
who perfected the security agreement by
collateral, publicly or privately, in its present
possession. This means that the secured
condition or following any commercially
creditor already has possession over the
reasonable preparation or processing.
property. Instead, this is a remedy where the
(b) buy the collateral at any public disposition,
security agreement is perfected by
or at a private disposition but only if the
registration.
collateral is of a king that is customarily sold
on a recognized market or the subject of
Rules on Fixtures
widely distributed standard price.
▪ extrajudicial enforcement may include
removing the fixture from the real property
 When a property is sold by the secured
without judicial process
creditor, it is okay, there is no necessity. If he
buys it, it should be at a public disposition
Danger as to Expedited Repossession: It was the
(there should be other buyers) or it can be at
IRR which identified the situations where there is
a private disposition as long as it is not
breach of peace. It was not even the law.
subject to negotiation or there is a fixed price
- To recap, if a property or a motor vehicle is
for it.
parked along session road which is a
o In pledge, secured creditor cannot be
public area, and so long as there is no
the highest bidder. If the secured
breach of peace, the secured creditor can
creditor will be the highest bidder,
repossess the vehicle without going
there will be a repeated bidding, but
through the courts anymore. This is a clear
now, it is permissible. The secured
removal from the pledge and chattel
creditor can now sell the property.
mortgage law. In the latter, there is a
Generally, only the owner has a right
mandatory conduct of a public auction
to sell the property. BUT this law
before you can repossess.
permits the selling of the property to
someone else as if the secured
creditor is the owner.
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Credit Transactions
o He can also buy the property as long Purpose: to avoid that situation of asserting
as there are other buyers in a public ascendancy. [But to sell it can be at a public
disposition. disposition.]
o It can only be done with private
disposition, if there is a recognizable
market. b. Private disposition: one that is limited to buyers
selected by the secured party, including other
Kinds of disposition customers, and in which the price is negotiated
(Manner of Selling by SC): rather than being driven by competitive bidding
a. Public disposition ▪ The only time that it is in a private disposition

b. Private disposition is if the property is sold in a recognizable
market.
a. Public disposition: open to participation by ▪ Similar to a stock exchange because the price
general public and price is driven by bidding is dictated by the supply and demand of the
market and not by the whims and mood of
▪ The market dictates the price the bidders.
▪ Why should it be in a public disposition?
A: On the part of the seller, to make the price ❖ The law creates this mechanism to at least make
competitive in order to sell the property at a it possible for the owner of the property to
higher price. On the part of the buyer, to maximize profit. It is just not losing the property
ensure that the property is purchased near but sufficiently enough to pay the obligations of
the cost of the property so he/she won’t be at the debtor.
a loss.
Considerations:
Example: Tads will sell her motor vehicle. All of us
must be present and must make a bid on it so that ➢ Concept of a recognizable market
there can be competitive bidding. If the bidding is only
➢ Fixed by Supply and Demand- meeting or
between the creditor and the grantor, then the former
interplay of supply and demand is a
will purchase the property at a low price. But if there
recognizable market, where the price is
are other competitors, then the disposition can at
determined by external factors and not the
least generate a higher price. The one that can pay a
whims of the parties
higher price will be the new owner.
➢ Commercial improvements over the
Q: Is the sale of fish a recognizable market? Is it one property
that is dictated by the markert or it depends on the ○ This matters because expenses for the sale of
parties? property are deducted from the proceeds of the
sale.
A: There can be negotiation in this case. This is ○ Improvements that can be done to generate
something you need to avoid. Because if you haggle, more income for the secured creditor:
that means you can purchase the property at a cost ● Only which is reasonable or something that is
higher than the obligation which is unfair. expected from the usual sale of the property or
commercially acceptable associated with that
property.
Q: A is the secured creditor who purchased the
property from the debtor, can A say that “can I buy it
-staging for real property [sell of a real property,
at a lower price?”
that even though vacant, it appears fully
A: As much as possible, when the secured creditor furnished to make it more appealing-show the
purchases the property, it must be in a public possibility]
disposition, unless it is a product sold in a recognized
-as to motor vehicle, it should have gas, it must
public
be clean and polished to make it enticing
MJ LAZA 91
Credit Transactions
(1) the guarantor

● Only which that is reasonable or something
• It is his/her property that will be subject of
that is expected from the usual sale of the
disposition
property
-changing the tires is unusual and is no longer
(2) secured creditor or lien holder
reasonable
a) five days prior held a security interest or lien
in the collateral
b) collateral was perfected by registration
Commercially Reasonable Preparation or
Processing
• There is a time limit for who can be entitled
1. Disposes of the collateral in conformity with
to notification among the secured creditors
commercial practices among dealers in that
• This pertains to the junior mortgagees or
type of property
other creditors involving the same property
2. a cost-benefit analysis in determining
whether to prepare or process collateral
(3) person from whom secured creditor received
before disposition
notification of a claim of an interest
• In case the secured creditor received notice
Must make notification of disposition
from another secured creditor, the latter is
Person entitled to receive notification of
also entitled to notification
disposition from secured creditor (§21)
1. The grantor
Particulars of Notification
2. Secured creditor or lien holder
1. must be made 10 days before disposition
a) Five days prior held a security interest or lien
2. grantor may waive right to be notified
in the collateral
3. identifies the grantor and secured creditor, the
b) Collateral was perfected by registration
description of the collateral, the method of
3. Person from whom secured creditor received
intended disposition or the time after which the
notification of a claim of an interest
disposition is made
• The notification should be done 10 days prior
Summary| Identification of parties who
to disposition. But this may be waived. Since
should be notified:
the law says that the grantor may way it, it
These are:
must be the grantor. It can't be that it is the
1. Grantor
secured creditor who determines that a
2. Secured creditor
grantor is no longer entitled to notification.
a. Those identified or registered
• The grantor must specify either in the
b. Those who gave notice to the
security agreement or in other method that
secured notice who are now giving
he or she will be waiving the right to be
notice in the disposition of the
notified. It must indicate the name of the
property.
parties and the method of disposition.
Generally, grantor and other secured creditors
are entitled to notice before disposition. • US: Cases under the secured transaction in
the US would involve whether there would be
Why? Because of Application of Proceeds under sufficient notification made to the grantor or
Section 52 of PPSA to other secured creditors.
No duty to notify (Sec. 51.d)

NOTIFICATION
• If there is urgency
Person entitled to receive notification of 1) Perishable
disposition from secured creditor (Sec. 21) 2) Threatens to decline speedily in value
3) Is a type customarily sold on a recognizable
market
• These are the very same persons entitled to
REDEMPTION in case of disposition • This is a market not subject to negotiation.
• Memory Aid: Two (2) persons are entitled to • The sale between parties is already fixed by
notification: the grantor and the secured creditor the market and the interplay of supply and
demand.
MJ LAZA 92
Credit Transactions
• There is no need for notification anymore continuity of interest over all other creditors
because the price or value of the thing to be is only now over the proceeds.
disposed of is already fixed
(4) Grantor is paid surplus
Q: If you sell your car right now, is it subject “Deficiency is the liability of the debtor”
to negotiation between the parties? Or if you 1. secured creditor has a right to go after the debtor
sell your law books now, is it subject to in case the proceed is insufficient
negotiation? 2. unless there is stipulation to the contrary
A: Yes. There is no fixed market for it.
▪ Under REM, it is automatic that the debtor is

APPLICATION OF PROCEEDS FROM
DISPOSITION (Sec. 52) liable for the deficiency of an obligation. But the
difference between PPSA and REM is that this can
Order of Application be specified. The parties can specify and subject
of stipulation, where the parties can say that the
Meaning: when the property is disposed of, the debtor is no longer liable for the insufficiency of
proceeds will be divided. This is also how the proceeds the obligation in the disposition.
in REM are to be distributed.
Q: In the order of application of proceeds, can parties
(1) Reasonable expenses of taking, holding, say that the parties are entitled to surplus?
preparing for disposition, and disposing of the
collateral A: There is no provision under the law that permits it.
▪ This is the reason why the improvements (it is a very difficult argument to make that they are
should be commercially reasonable, it cannot entitled)
be more than that because this will be the
basis of deductions. RIGHT OF REDEMPTION (Sec. 45)
▪ There must be cost- benefit analysis, where a
decision must be made whether the property ● Different from chattel mortgage and pledge,
owner is willing to spend on expenses that because there was no right of redemption as to
will eventually be not recoverable. these contracts.
(2) Satisfaction of the obligation secured by the Right of Redemption

security interest 1. this is the general rule
▪ It means that the amount from the proceeds 2. right to redeem the collateral upon disposition
will be applied to the obligation by a person who is entitled to receive
notification
(3) Satisfaction of the obligation secured by any 3. pay the obligation in full including reasonable
subordinate security interest or lien in the cost of enforcement
collateral
Comparison:
▪ This is similar to the discussion on junior (1) Under REM, only the mortgagor is entitled to
mortgagees, where when there are other exercise the right of redemption. But under the
secured creditors than own a lien or security PPSA, it is not only the mortgagor but also the
interest over the property, they are also grantor, the secured creditors and even the
entitled to the proceeds of the property. junior mortgagees, as long as they are notified.
▪ REASON: Once the property passes to the Even if not notified but they are entitled to be
buyer under disposition, they can no longer notified, they have the right of redemption
have a claim over the property. The continuity (2) Amount of redemption = redemption price. It
of interest no longer exists over the property will not matter if the property is sold at a lower
because it was sold in good faith. So it is only price.
now over the proceeds of the property. The
MJ LAZA 93
Credit Transactions
EXCEPTIONS: NO RIGHT OF REDEMPTION RIGHT OF BUYERS AND OTHER THIRD

PARTIES (Sec. 53)
(1) waived in writing by the grantor after default
(2) collateral is sold or otherwise disposed of, Actions of the
Consequence
acquired or collected by the secured creditor or Secured Creditors
until the conclusion of the agreement by the Sells the collateral Buyer shall acquire the
secured creditor for that purpose grantor’s right in the
(3) secured creditor has retained the collateral asset, free of the rights
of any secured creditor
WAIVER or lien holder
1. Waived in writing by the grantor after Leases or licenses the Lessee or licensee shall
default collateral be entitled to the benefit
- It cannot be stipulated after agreement, it of the lease or license
should only be after default because the during its term
grantor is already aware that the obligation Sells, leases or licenses ▪ acquire the grantor’s
has not been paid and the property is in in contravention of the rights in the assets;
auction Chapter without and
Purpose of the reckoning period: to avoid knowledge by the buyer ▪ entitled to benefit of
any pressures to induce the grantor to and other 3rd parties the lease or license
waive that right of redemption.
PROPERTY ALREADY IN POSSESSION OF SC NOTES:

2. Collateral is sold or otherwise disposed of,
acquired or collected by the secured ● All the rights of a buyer in good faith are also
creditor or until the conclusion of the the rights of a buyer when the property is
agreement by the secured creditor for that disposed of by the enforcement of the security
purpose agreement.
3. Secured creditor has retained the ● When a property is purchased from a secured
collateral creditor by virtue of disposition, it is already
clean. Since there is no lien, there will be no
If the property was purchased by the secured claim over the property already. This is the
creditor or the right of retention was exercised by reason why other secured creditors will also
the creditor, there is no right of redemption have an interest over the proceeds of the
because the perfection is by possession and property because they can no longer enforce
enforcement is by retention of the collateral. it over the collateral.
● Take note of the wording “Any”, not just the
creditor who imposed it but any of the
Question: How long is the right of redemption? creditors who have security interest over the
Answer: There is no period for the right of property.
redemption under the law. Ma’am wrote to the DoF a
year ago but there was no response or clarification on (3) Retention of Collateral by Secured Creditor
this query. Even if you look into the IRR, there is no (Sec. 54)
period for the exercise of the right of redemption.
▪ This is applicable when the security
Q: How do we know what is the period of redemption, agreement is perfected by possession
can we safely argue that it is one year based on the o The secured creditor already has
GBL? possession over the movable property
and in case of default of the debtor, all
A: That is an argument that can be made under Sec.
the secured creditor has to do is continue
47 of the GBL but only if the secured creditor is the
the possession over the collateral.
bank but if it is not, who knows, because there is no
right of redemption in chattel mortgages.
MJ LAZA 94
Credit Transactions
Right of Retention of Collateral (§54)* ▪ partial satisfaction: with affirmative consent

of each addressee of the proposal in writing within
▪ by secured creditor 20 days
▪ retention over all or part of the collateral as
full satisfaction of the secured obligation
N.B. Take note that this right of retention, the full
▪ in total or partial satisfaction of the secured
satisfaction does not depend on the value of the
obligation
property.
▪ proposal shall be sent to:
o debtor and the grantor
It is possible that the property is valued as 500k
o other secured creditor or lien holder who
but the obligation is only 1M- that can be used as
5 days before the proposal is sent to the
payment already. Or the value of the property is 2M
debtor & the grantor, perfected its
but the obligation is only 1M, she has now
security interest or lien by registration
possession of the property more than the amount
o any other interest in the collateral who
of the obligation, this is applicable.
has given a written notification to the
secured creditor before the proposal is
REASON: We are only talking about retention. The
sent to the debtor and the grantor
value of the collateral is not material. By mere
possession of the collateral, it may extinguish the
NOTES: entire obligation.
➔ The retention over the property can either
be total or partial satisfaction of the Q: Is there any situation wherein you are the
obligation. This means that the continued grantor and you will agree with a partial
possession is equivalent to the satisfaction only?
extinguishment of the debtor’s obligation. A: Yes. If the value of the property is less than the
In case of partial satisfaction, it means that obligation (Comment of Glady)
notwithstanding the continued possession
of the property, the creditor can still go Q: Is it possible that the value of the property is not
after the debtor for that property that is not its value to you, that it has sentimental value to
paid by the possessed property. you?
A: Yes.
Example: Nams is the grantor with secured creditor
Kids. When they entered into a security agreement, Comment of Ma’am: It is an uphill battle to get
Tads transferred the possession of her motor affirmative consent for partial satisfaction. Take
vehicle to Kids. Kids is now in possession of the note, it should be an affirmative consent of each of
motor vehicle. The debtor Nams failed to pay the the addressee. All of them must say they yes, there
obligation, so Kids will now have a right to possess is disposal of the property but there still should be
the property as the owner and not as collateral, payment of the obligation.
automatically without any judicial proceedings. It
is possible that even if the property is already in the
possession of Kids, she can still go after Nams to (4) Recovery in Special Cases (Sec. 48)
satisfy the obligation.
● This recovery in special cases are those
Who are entitled? | This is merely a proposal pertaining to specific assets.
parties must agree to but not the court. Parties
must agree to it, the parties who are the same Right of the Secured Creditor without judicial
persons entitled to notification, the debtor, grantor, process
and secured creditors.
1) Accounts Receivable: instruct the account
debtor to make payment to the secured creditor
Secured Creditor may retain the collateral as satisfaction of the obligation
▪ full satisfaction: unless there is objection in 2) Negotiable Document by Possession: proceeds
writing from any person entitled to receive such as to the negotiable document or goods covered
proposal within 20 days after the proposal is by the negotiable document
sent to that person
MJ LAZA 95
Credit Transactions
3) Deposit Account: apply the balance of the security agreement last month. J already initiated
deposit account the sale of the property and improved the property.
4) Deposit Account by Control: pay the balance of Can K come over and take over?
the deposit account to the secured creditor’s A: Yes.
account
Q: What if the property was sold for 1M already.
RIGHT OF HIGHER RANKING SECURED The obligation to J is 800k. Can K, as the higher
CREDITOR TO TAKE OVER THE ranking creditor take over?
ENFORCEMENT (Sec. 46) A: Yes even if the obligation to her is 900k. It
means that K will be paid first. If there is any
● There is a hierarchy of the creditors. remaining amount, that is what J will take.
● There are two effects of a higher secured creditor
a. Take over and use of enforcement Q: J already has possession over the property. Can
b. Insolvency of a debtor and how it affects secured K come and take over?
creditors A: Yes.
Higher-Ranked Secured Creditor who has priority:

B. Perfection by Control
(1) has the right to take over the enforcement even
if commenced by another secured creditor Priority Rights Deposit Account
(2) maybe invoked at anytime before the collateral
is sold or otherwise disposed of, or retained by the right of set-off by deposit-taking
secured creditor or until the conclusion of an MIP institution is prioritized over a security
agreement by the secured creditor for that interest in the deposit account
purpose The secured creditor is the deposit-
(3) includes the right to enforce the rights by any WIP
taking institution
method available to a secured creditor Those perfected by control agreement
VIP If they are the same, controlled on the
Priority of Security Interest basis of the time of conclusion
Sections 18, 19, 20, 22, 23, 24, 25 Ordinary Those perfected by other means
Priority Rules NOTE:

▪ applies if there is a common collateral with
several secured interests over it ● Disclaimer: terms used in the slide are terms
for better retention and not official terms.
A. Perfected by Registration Don’t also get confused. Remember that
1. determined according to date of registration registration is always the lowest. Then
2. no regard to the order of creation of the followed by possession and then followed by
security interests and liens control agreement.
● MIP: When it comes to property rights over a
● The first registrant will have higher priority, deposit account, the right to set off by the
even if the security agreement was created at a deposit-taking institution, this means that
latter date. the loan is made with the bank. So the bank
○ Remember the discussion on pre- will be considered as the higher rank or most
registration where even if there is yet no important person because it can set-off the
agreement, it can be registered already. obligation. As long as this is over a deposit
That is the advantage. This is because the account.
creditor whose security agreement was ● What if it is perfected by registration? Then,
registered first will have priority. the rule that first to be filed will apply
Example: Priority Rights Intermediary

J caused the registration of the security interest
over the property yesterday. K registered the
MJ LAZA 96
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The secured creditor is the NOTE:

VVIP
intermediary
● Securities that are only annotated in the
Those perfected by control agreement
stock and transfer book will be the higher
VIP If they are the same, controlled on the
property, followed by control agreements,
basis of the time of conclusion
then followed by those perfected by other
Ordinary Those perfected by other means
means.
NOTE:
C. Perfected by Possession of Tangible Assets
● Q: What if it is just a control agreement, who
is the higher rank?
A: Remember that a requirement in a control
agreement is that date, hour and time should
be included in the control agreement so that
is binding.
● VVIP: The control agreement will be

considered as higher secured creditor if all of
them is perfected in the same way.
NOTE:
Priority for Security Certification
● Q: What is the right of retention?
Example: If Tads is a mechanic and fixed your
motor vehicle and purchased certain parts to
make it functioning again. But you refused to
pay her. Tads right is to exercise retention.
She can possess the motor vehicle while you
have not paid her yet. She can exercise
control over the motor vehicle. That
mechanics lien. This lien is the highest
priority even if you are supposed to be the
secured creditor by possession. Social
NOTE: justice.
● In this order: Those that have possession over ● So it is perfected by possession of tangible
the security certificate and those who only assets. Essentially, this is the order of
registered there claim everything. You just have to be careful how
● Security certificate: the one issued by a stock you nuance it.
corporation; whoever who has possession will
be considered the highest secured creditor Creation of Prior Interest (Sec. 56)
Priority Rights for Electronic Securities Non- ● Pertains to the interest of the other secured
Intermediated Security creditors arising from pledge or mortgage.
Perfected by a notation of the security Effectivity of the Law

VVIP interests in the books maintained for a. Statute: February 9, 2019 (according to
that purpose explanatory notes)
Perfected by Control Agreement b. IRR: December 3, 2019
VIP Same manner of perfection: time of
conclusion of the control agreements Q: Because it was already repealed, what do we do
Those perfected by other means i.e. now with the rights of pledge and chattel
Ordinary
Registration mortgagees?
A: The law says that this too is considered as a
priority. There is a prior interest.
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Until when is the prior interest prioritized

Q: What does this mean? (whichever is the earliest)
A: The effectivity of the law is in Feb. 9, 2010 (accdg (1) cease to be perfected under the prior law
to the Explanatory notes). While the IRR was (2) expiration of the transitional period
published on December 3, 2019. Any chattel
mortgage or pledge before this date is considered ▪ This is only supposed to expire while we are
as prior interest. in the transitional period under the PPSA,
whichever is the earliest. The transitional
Q: What about those still called pledge or chattel period of the PPSA is while the registry is not
mortgages? fully operational, it is still in the transitional
A: Regardless of the nomenclature, they should be period. (In 2021, there was a soft opening of
treated as security agreements under this law. the PPSR. They is yet no declaration that it is
fully operational. So, three years after, we are
Q: How does that work? still in the transitional period.)
A: Under the PPSA, security agreements should be ▪ This matters because of Section 58 of the
either perfected by perfection or by registration. PPSA.
That is still going to happen. If it is a chattel
mortgage, it must be registered, if it is a pledge, Priority of Prior Interest (Sec. 58)
there must be possession.
Security interest before the effectivity of
Example: Tads is a chattel mortgagee under the the PPSA.
chattel mortgage in 2018. Tads have a prior MIP
interest. K is a secured creditor under the PPSA Should not have changed since the
because the security agreement was enacted and effectivity of this act.
enforced in December 2021. This means that on
her own, she is considered to be a secured creditor Enforcement of Prior Interest
under the PPSA. But because there is Tads, she has a. enforcement by prior law: may continue under
a prior interest. the prior law
b. will apply to a matter that is the subject of
proceedings before a court
Prior Interest
a. Security interest and/or provided for by an Enforcement of Pledge: Foreclosure and Public
agreement that was made before the effectivity of Auction.
the PPSA ➔ So those with prior interest can still
b. Excludes: security interest that is renewed or enforce the same security agreements even
extended by a security agreement after the though it is chattel mortgage under the old
effectivity of the PPSA law.
c. Perfected before PPSA, continues to be perfects ➔ However, they cannot take immediate
possession of for example, a collateral
▪ This prior interest is one created for motor vehicle parked in Session Road
agreements prior to the effectivity of the because this will constitute as pactum
PPSA. commissorium, which is prohibited under
▪ In the given example, if however, the chattel the chattel mortgage law
mortgage in 2018 was used again as
collateral or entered into as a security Q: What if Kids now, the higher rank secured
agreement for a new loan in 2020, there is roll creditor exercises expedited repossession, can the
over. it means that it should only be covered higher prior interest take over?
by the PPSA. The perfection or continuity only
exists prior to the effectivity of the PPSA. if it A: There is a right to take over if you are the higher
is still effective after the obligation was rolled creditor. But ma’am thinks that there is none. The
over, the PPSA provisions will then apply. take over should be done after. If the advantage of
the higher secured creditor is to take over and the
prior interest creditor is the highest, this should be
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an available remedy. It cannot be initiated by the generated is higher, if there is commingling of

prior interest creditor because that is prohibited money.
under the old law.
Rule:
ASSET SPECIFIC RULES (1) security interest shall extend to the commingled
money or funds even if they have ceased to be
Future Property (IRR, Sec. 3.05) identifiable to the extent that they remain to be
traceable
a. maybe stipulated in a security agreement but (2) shall be limited to the amount of proceeds
security interest is only created when the grantor immediately before they were commingled.
acquires rights in it or the power to encumber (3) Shall be the lowest before commingling,
it proceeds after commingling, or when the
proceeds are claimed
Q: Can your inheritance be the subject of a
security agreement? Amount Before P2,000,000.00
A: Yes. But it is not yet enforceable while the Commingling
heir does not yet acquire any right over it. Amount of Proceeds P1,500,000.00
After Commingling
b. if over a tangible asset that is transformed into Amount when the P1,000,000.00
a product, value of the encumbered asset before proceeds is claimed
it becomes a product Security Interest P1,000,000.00
Example: Gold or ore transformed into a gold For example, the amount before commingling is 2M.
ring The amount after commingling is 1.5 M. Then Tads
➔ The security interest can over be a gold lost this money. If the value of money at the start was
ring, just as long as there is something that 2M but because of external factors, the security
can be transformed into it. interest is no 1.5 M. Then when you withdrew it, it is
only now at 1M.
Q: How much is the security interest - 1M or 1.5M or

c. over a replacement, value before it was replaced
2M?
A: The lowest before commingling, proceeds after

Commingled Funds and Money (Sec. 8) commingling, or when the proceeds are claimed.
Continuity
a. security interest in personal property shall extend
Example: In reference to the 1k invested in the
to its identifiable or traceable proceeds
previous example, after pooling it into a fund and
b. this extends even to those that are commingled
investing the same, it grew to 200k. How much is the
security interest - 200k or 1k
Example: There are 32 individuals. Their broker
suggested they put 1k each in a fund for ● A: It remains as P1000 because it is the
investment. All of them placed 1k each. Can that lowest before commingling, proceeds after
share of 1k be used as security interest? commingling, or when the proceeds are
A: Yes. Because you have legal interest over it. claimed.
➔ Even if it is commingled with the funds of ● It is possible that the security interest can be
another person, you can use it as a a fund that is invested by commingling it with
security interest. funds of other people. This does not mean
that the security interest will increase just
Example: Tads takes your money and invests in because your money increased. There is no
bitcoin. Tads can increase the value of the 1k to danger in that because what is being avoided
200k the next day. them for a day. There are here is the immediate act of investing because
mutual funds because the income that will be
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you fear that the security interest will is no such provision. A defense of good faith
possibly increase as well.. will be available.
Tangible Asset Commingled in a Mass (2) Priority

 The kind of perfection will determine whether
▪ extends to the mass in the same proportion of the a secured creditor is a higher rank.
mass as the quantity of the encumbered asset  A secured creditor whose agreement was
bore to the quantity of the entire mass perfected by registration will always be the
immediately after commingling last secured creditor.
▪ As long as it is traceable as you can identify the
mass as part of the encumbered asset, that is the (3) Kind of enforcement
amount of commingling.  Tangible assets: If perfection was done by
▪ Example: If you placed in a deposit six bushels of possession, the remedy is not by expedited
apples and it is commingled with other bushels of possession because the property is already in
apples, you can still identify. The 6 apples will still the possession. The proper remedy is
be the security interest. retention or disposition.
 If the agreement is merely registered, the
Accounts Receivable under Sec. 3.08 remedy to enforce will be by expedited
▪ Accounts receivable is the expectation to be paid. repossession or disposition. Retention cannot
▪ This is something then that can be used as be done because there is no longer a property
collateral to secure the obligation to another to be retained.
person
DUTY TO DISCLOSE INFORMATION

(Sec. 37)
Secured Creditor discloses to grantor, upon

request
a. secured creditor must provide the information
▪ This is a right of a grantor if the property is
no longer in his possession
▪ There is a question on how much is the value
of the property
b. grantor is entitled to a reply, without charge,
once every six months (anything more than this,
the grantor should already be paying fees to the
creditor for a reply to a question that he is
entitled)
c. over what:
i. current amount of the unpaid secured
obligation
ii. list of assets currently subject to a security
interest
Summary on:
Kind of perfections matters:
(1) Effect to third persons
 If perfection is done by registration, the
security interest binds third persons even
those in good faith.
 No such right is available if perfection is done
by possession or by control agreement. There
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PLEDGE AND CHATTEL MORTGAGE Chattel

Basis Pledge
Mortgage
Definition deficiency deficiency
notwithstanding from the
PLEDGE any stipulation debtor except
a. a type of security wherein the thing is placed in to the contrary. if the chattel
the possession of the creditor mortgage is a
b. object is only movable property security for
c. there is transfer of possession over the thing the purchase
pledged to the creditor of property in
installments
CHATTEL MORTGAGE Possession Possession is
a. a type of security binding the entire thing or a Possession remains with vested in the
portion thereof to secure an obligation the creditor debtor
without divesting himself of the possession Formal
Contract Real contract
b. there should be a registration of the mortgage contract
deed Must be in a
c. no requirement of transfer of possession public
d. what exists it the registration of the mortgage instrument Must be
containing recorded in a
deed
Registration description of public
the thing instrument to
Commonalities pledged and the bind third
date thereof to persons.
(1) secures a principal obligation therefore it is an bind third
accessory contract; persons.
(2) there should be absolute ownership over the Not valid
Not valid unless against third
thing subject of the pledge or chattel mortgage;
a description of persons
(3) there is right to free disposal; Validity the thing and unless
(4) the object is only movable property. against third the date of registered
persons pledge appear in (although
Pledge v. Chattel Mortgage a public binding
instrument. between the
parties).
Chattel
Basis Pledge
Mortgage
PLEDGE
Delivery is Delivery is not
Delivery
necessary necessary
Procedure for Characteristics of Pledge
the sale of the
thing given as Characteristics of Pledge
Governing law Art. 2112, NCC security is A. Voluntary/conventional – agreement between
governed by parties.
Act No. 1508. B. Legal Pledge – constituted by law.
Sec. 14 C. Real contract – the pledge must be placed in the
If the property is possession of the creditor or of a third person by
sold, the debtor If the property a common agreement. This gives right to the
is not entitled to is foreclosed, creditor to retain in his possession until the debt
Excess the excess the excess is paid.
unless goes to the D. Over movable susceptible of possession including
otherwise debtor. incorporeal rights
agreed. E. Use is not allowed without authority of owner or
for its preservation (2104)
The creditor is The creditor is
Recovery of F. Indivisible and inseparable
not entitled to entitled to
the deficiency
recover the recover the
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Coverage of Pledge (Art. 2102) ▪ Diligence of a good father of a family and

liable for its loss or deterioration even those
A. Includes interests and earnings of things pledged committed by the acts of agents or employees
B. Includes offspring unless stipulated otherwise
(2) Not liable for loss of the thing if fortuitous
PLEDGOR (because the obligation is only ordinary
diligence), except when:
Who is a Pledgor? ▪ Stipulated
▪ The one who owns the property who transfers the ▪ Nature of the obligation requires the
possession over it to the pledgee. assumption of risk
Rights of Pledgor (3) Entitled to reimbursement for the

preservation
(1) Owns the thing pledged and may be alienated (4) Option of the pledgee in case of danger of
▪ possession remains with pledgee destruction or loss without pledgee’s fault
▪ Pledgee must give consent to the alienation ▪ Return of the thing with substitution
▪ What is only transferred is the possession ▪ Pledge causes the sale at public sale
▪ Pledgee must give consent to the alienation
because he is the one exercising possession. (5) Compensation for damages
▪ Hidden flaws and there was failure to inform
(2) For the fruits to set off the payment of interest the pledgee.
▪ If the principal obligation has not yet been
paid, then the fruits will be applied first to the (6) Demand the replacement or immediate
interest and only when the interest has been payment if there is deceit to substance or
fully paid, that’s the time the fruits will be quality of the thing pledged
used to pay for the principal obligation.
(7) If there are two or more things pledged,
(3) Demand the return of the thing pledgee must choose which is necessary for
the payment of the debt, unless stipulation to
▪ upon payment of debt, interest and expense the contrary.
if any (2105)
▪ Fear the destruction or impairment of the RIGHTS OF THIRD PERSONS
thing pledged
o without fault of pledgee Rights of Third Person:
o but pledgor must offer another thing in
pledge of the same kind and not of (1) A third person may secure the obligation of
inferior quality another person by using his own movable
property which he owns and has free disposal
(4) Demand Judicial or Extrajudicial Deposit (Art. 2120)
(2) Pledgor is different from the debtor
PLEDGEE (3) The third person is entitled to reimbursement and
subrogation like a guarantor.
Rights of Pledgee (4) If the third person is the one who pays → he who
secures an obligation by pledging his own
(1) Possess the pledged thing until principal movable property which he owns and has free
obligation has been paid (2098) disposal (Art. 2120) has the right to pay the
▪ may be by third person to whom it was obligation of the debtor and then have the
delivered by authority of pledgee (2100) property be returned to him.
▪ Pledgee may bring the action which pertains
to the pledgor to recover or defend property ENFORCEMENT OF OBLIGATION
from third persons. (2103)
Two Ways by Which the Pledgee Could Seek
Enforcement of the Obligation:
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(1) Personal action suing the debtor to pay the BIDDING

obligation; and
(2) Foreclosure of the thing pledged which results to
the satisfaction of the loan liabilities to the
pledgee of the pledgor.
FORECLOSURE
Foreclosure of the Thing Pledged

▪ May be done before the notary public or the clerk
of court or the sheriff
▪ Sold at public auction (bidding in written form)
▪ There must be notification made to the debtor and
the owner of the thing pledged (if they are not the ▪ As between the Pledgor and Stranger 1, Pledgor
same) will be preferred.
▪ Pledgor and owner ay bid and will have a better ▪ If Stranger 1 bids Php. 1.2M and Stranger 2 bids
right if he offers the same terms as the highest Php. 800K, and Pledgor only bids Php. 1M,
bidder. Stranger 1 will be preferred.
▪ Pledgee may bid but offer shall not be valid if he
is the only bidder.
▪ Bidders must offer to pay purchase price at once
▪ Pledgee is obligated to promptly inform the
pledgor of the results of the foreclosure
To Be Valid:
▪ In order for a public auction to be valid if there is VOID STIPULATION

only a single bidder, it must undergo two (2)
public auctions. Void Stipulation:
▪ In case of deficiency, the pledgor shall be liable
Amount Sold at Auction for the uncollected amount.
In excess of Debtor is not entitled to ▪ Return of the thing pledged will not mean that the
principal excess, unless stipulated principal obligation has been fulfilled (Art. 2110)
obligation o part of the characteristics and requisites of a
Less than Debtor shall not be valid pledge is that the thing pledged should
principal obligated to pay be in the possession of the pledgee while the
obligation deficiency even if there is a obligation has not yet been fulfilled;
stipulation to the contrary. o this stipulation cannot be done because once
the thing has been returned, it means that
the obligation has been extinguished.
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EXTINGUISHMENT
Extinguishment
▪ Payment in full of the debt, including the interest
and expenses, if any.
▪ Thing pledged is returned to the owner by the
pledgee.
▪ Prima facie presumption of extinguishment, if
subsequent to perfection, the thing pledged is in
the possession of the pledgor or with a third
person who received it from the pledgor.
▪ Statement in writing by pledgee that he
renounces or abandons the pledge. It is the pledge
that is extinguished and not the principal
obligation.
o Unnecessary when there is renunciation or
abandonment
▪ Return of the thing pledged is necessary
▪ Acceptance by pledgor or owner (Art.
2111)
▪ Foreclosure sale of the thing pledged even if it is
less than the amount of the obligation.
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CHATTEL MORTGAGE COVERAGE

Civil Code, Art. 2140 and 2141 & Act 1508
Extent of Coverage of Chattel Mortgage
ELEMENTS ▪ Sec. 7. xxx xxx
▪ A chattel mortgage shall be deemed to cover only
Elements: the property described therein and not like or
(1) Constituted to secure fulfillment of a principal substitute property thereafter acquired by the
obligation mortgagor and placed in the same depositary as
(2) Absolute owner the property originally acquired, anything in the
(3) Free disposal mortgage to the contrary.
(4) Over a movable property
(5) Registered with the chattel mortgage register Torres et. al., vs. Limjap, G.R. No. 34385,
September 21, 1931
REGISTRATION
Issue: WON the substitute inventory of goods sold
Where Registration is made in drug store be included in the chattel mortgage.
Property is in
province of Ruling: YES, if:
Mortgagor’s residence (1) Stipulated to be included in the mortgage;
residence of
mortgagor (2) Where the after-acquired property is in renewal
Non-resident of, or in substitution for, goods on hand when
Where property is situated the mortgage was executed, or is purchases
mortgagor
with the proceeds of the sale of such goods, etc.
Property is in
province (1) Where mortgagor resides
different from (2) Where property is ▪ BUT, it is NOT applicable to drug stores,
bazaars and all other stores in the nature
residence of situated
of a revolving and floating business.
mortgagor
▪ Chattel mortgage include only those
Machineries and Assessor’s Office (Tax
described in the mortgage deed
equipment Declaration)
▪ Unlike under the PPSA, future properties
Motor Vehicles LTO
may not be the subject of chattel
Motor Vehicles
LTFRB mortgage.
with franchises
Ship Coast Guard
THERE CAN BE NO CHATTEL MORTGAGE OVER
Stocks of
Registry of Deeds FUTURE PROPERTY AND DRAGNET CLAUSE
Certificate
CANNOT BE APPLIED IN CHATTEL MORTGAGE
Characteristics:
It is because of the affidavit of good faith, which
▪ Public instrument and signed by the persons
states that:
executing the same before two witnesses
We severally swear that the foregoing mortgage is
▪ Attaching an Affidavit of Good Faith
made for the purpose of securing the obligation
specified in the conditions thereof, and for no other
Affidavit of Good Faith
purpose, and that the same is a just and fraud.
We severally swear that the foregoing mortgage

If it is not identified in the mortgage deed because
is made for the purpose of securing the obligation
it is not yet existing, then it cannot be over those
specified in the conditions thereof, and for no
things. It must be existing at the time of the
other purpose, and that the same is a just and
obligation.
valid obligation, and one not entered into for the
purpose of fraud.
▪ There can be no dragnet clause because a
dragnet clause says that the same set of
property will be used to secure the fulfillment
of an obligation that is not yet existing.
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▪ But the affidavit of good faith requires that this

is for the purpose of securing an obligation Question: Does it have something in common
which is already specified. with pledge?
▪ If it is still something to be done, an obligation
to be done in future, then it cannot be specified Answer: NONE. For pledge, there is no equity
yet. Therefore, there can be no dragnet clause. redemption or right of redemption.
▪ If the parties intended to use the same property
as collateral in another obligation some time in ▪ Equity Redemption: 30 days prior to the sale in
the future, they must enter into another chattel public auction
mortgage and must execute another affidavit in ▪ Right of Redemption: None (Paray v. Rodriguez,
good faith. G.R. No. 132287, January 24, 2006)
Marquez vs. Elisan Credit Corp, G.R. No. RIGHT TO EXCESS IN THE PROCEEDS
194642, April 6, 2015
▪ in case of excess, Section 14 of the Chattel
It is obvious therefore that the debt referred in the Mortgage Act provides that the proceeds from the
law is a current, not an obligation that is yet merely sale shall be deducted as follows:
contemplated.
Proceeds from Sale (Sec. 14)
(1) Cost of Keeping and Sale
Sison vs. Tico and Avaceña, G.R. No. L-11585, (2) Obligation secured by mortgage
February 8, 1918 (3) Junior encumbrances
(4) Mortgagor
▪ Assignment is allowed. No need for consent
▪ But there must be actual notification of the Question: Does the chattel mortgagor have a
assignment right to the proceeds of the sale?
▪ Registration of the assignment is not enough.
Answer: YES.
FORECLOSURE Question: Does it need to have a stipulation in

order to acknowledge the right of the mortgagor?
FORECLOSURE AND SALE (Chattel Mortgage
Law) Answer: There is no need for a stipulation. Unlike
in pledge where there is a need for such
stipulation, in the case of chattel mortgage, the
right of the mortgagor need not be stipulated. It is
already a right under the law.
MORTGAGEE’S RIGHT TO RECOVER

DEFICIENCY
Question: If the property was sold at public auction

for P1.5 Million but the obligation is P2 Million, is
▪ Within 30 days from the broken condition, from there a right of the mortgagee-creditor to recover
when the obligation has become due and deficiency?
demandable, notice should be given to the
mortgagor that a sale would be made at least 10 Right to Recover Deficiency (Rules)
days from the date of notice.
General Rule There exists a right to recover
REDEMPTION deficiency because there is no
intention from legislative to deny
▪ one thing in common with judicial foreclosure of such right
real estate mortgage Exception Art. 1484 or the Recto Law
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auction less than the amount of the obligation, there

▪ unlike in pledge, there is no right to recover any is no right to recover any deficiency from the debtor.
deficiency
On the part of the debtor, this provision of the law is
RECTO LAW an advantage. Thus, to recover the full obligation, the
bank’s most appropriate remedy is to demand the
▪ when does Recto Law apply in Chattel Mortgage: exact fulfillment of the obligation rather than to
o purchase of movable property in installments rescind the sale or foreclose the chattel mortgage.
and subject of a mortgage
o best example is the purchase of new cars NOTE!!!
where the buyer opts to pay in installments.
Buyer obtains a chattel mortgage loan from There is a right to recover any deficiency unless the
the bank. The bank shall pay the car seller chattel mortgage is created by the purchase of
outright. The buyer then pays the personal property in installments.
installments to the bank. The security for the
chattel mortgage loan will be the same car Question: Is this the same rule under Pledge and
purchased by the buyer (borrower). security agreements under the PPSA?
Example: Answer: NO. Under pledge, there is no right to recover

Buy a BMW and use that as security for a deficiency. Under PPSA, there is always a right to
car loan with BPI recover any deficiency under security agreements.
▪ in case of default, there are three remedies

available to the mortgagee (bank):
(1) exact fulfillment

➢ collection of sum of money suit in court
to compel the buyer of the motor vehicle,
who purchased a personal property in
installments, to pay the obligation
(2) cancel the sale

➢ rescind the sale
➢ when there is rescission of any contract,
there is mutual restitution
➢ ex. the motor vehicle will be returned;
then there will be payment
(3) foreclose the chattel mortgage

➢ ex. the motor vehicle in the possession of
the debtor, which is the subject of the
loan from the bank, will be foreclosed and
sold at public auction
Question: How is the Recto Law an exception to the

right of the mortgagee to recover deficiency?
Answer: Under the law, in case there is deficiency in

the payment of the obligation, there is no further act
against the purchaser. If the property is sold at public
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COMPARISON
Distinctions PLEDGE CHATTEL MORTGAGE SECURITY AGREEMENT

Subject Movable Property Movable Property Movable Property
How perfected Possession with the Possession with debtor Perfection by possession,
creditor or a third person registration and control
agreement
Description of property Property should be Property should be Property should be
described specifically described specifically described specifically or
generally
Inclusion of future May include future Cannot be over future Can be over future
property property property property
How is the obligation Satisfaction by By extrajudicial By disposition,
satisfied extrajudicial foreclosure foreclosure repossession, retention
Debtor’s right to excess of Generally debtor is not Debtor is entitled to Debtor is entitled to
the proceeds and entitled to excess and excess, obligated to pay excess, obligated to pay
obligation for any cannot be compelled to the deficiency unless deficiency unless
deficiency pay deficiency stipulated to the contrary stipulated to the contrary
and under the Recto Law
Redemption none Equity Redemption Right of Redemption
Question: Which is better: pledge, chattel mortgage

or security agreements from a creditor’s perspective?
Answer: Pledge. Because of the right of possession

and the creditor is more protected since the property
cannot be sold to another person.
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LEGAL PLEDGE ▪ purpose of the demand:

➢ to notify the owner of the property that the
▪ legal pledge is a pledge created by provisions of property will be sold at public auction
law and demanded by law ➢ to determine the reckoning date from which
▪ instances where there is right of retention as a the auction will be conducted
security to compel payment by another person
(a) Art. 546: necessary and useful expense ▪ under the law, a public auction will be conducted
(b) Art. 1731: work done on a movable property 30 days or one month reckoned from the date of
➢ ex. a mechanic works on a car. The demand of the amount
mechanic has a lien on the property and
is permitted to hold on to the car until the
obligation is paid
(c) Art. 1951 in relation to Art. 1944:
Commodatum hidden defects
➢ right to hold on to the property because
damages for hidden defects have not
been paid
(d) Art. 1994: depositary Legal Pledge v. Conventional Pledge
(e) Art. 1914: an agent’s right to retain
(f) Art. 2004: hotel keeper ▪ distinction from conventional pledge: in legal
pledge, the pledgor has the right to the excess
of the proceeds from the sale (Art. 2121)
➢ these are situations where there is prior
possession of the property and gives the Public Auction
possessor the right to continue holding
the property until the obligation has been ▪ if there is no public auction within one month:
paid which may be in the form of salaries debtor may require the return of the thing
or from damages. ▪ in order to satisfy the obligation and to dispossess
the debtor of ownership over the property, a
▪ since there is a duty to pay for an obligation, the public auction must be conducted otherwise the
creditor has a right to hold on to the object until debtor can recover the property
there is payment
ex. when hotels do not sell the properties of
Legal Pledge v. Pledge guests at public auction, the guests can collect
the property
▪ the same rules apply for legal pledge and pledge
➢ possession: continued possession of the first
person who takes hold of the property
➢ care: ordinary diligence
➢ sale of the thing: property can be sold at
public auction to satisfy the obligation
➢ termination of pledge: transfer of the property
or renunciation in writing
▪ however, a pre-requisite prior to the sale of the

thing is that there should be a demand of the
amount for which the thing is retained
ex. a hotel cannot arbitrarily sell the properties at

public auction without a demand for the debtor
to pay the obligation.
MJ LAZA 109
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PAWNSHOP REGULATION ACT HOW IS THE PROPERTY REDEEMED

PD 114
▪ Redeem in 90 days:
Definition o A pawner who fails to pay or renew his loan
with a pawnshop on the date it falls due shall
▪ Pawnshop refers to a person or entity engaged in have ninety (90) days from the date of
the business of lending money on personal maturity of the loan within which to redeem
property delivered as security for loans the pawn by paying the principal amount of
o from the definition, it is essentially a pledge. the loan plus the amount of interest that shall
However, as compared to pledge, pawnshops have accrued thereon.
are businesses of lending. It is not an isolated o Within 90 days from maturity, the pawner
transaction covered by pledge because in must pay the principal amount of the loan to
essence, a pawnshop is a special kind of redeem the property.
pledge. o There is a maturity date agreed upon but
there is also a redemption date after.
▪ Pawner: borrower from a pawnshop
▪ Reduced to 30 days to redeem:
▪ Pawnee: pawnshop or pawnbroker o In case of a pawned article that is subject to
quick obsolescence, i.e., electronic gadgets,
▪ Pawn: personal property delivered the pawner and the pawnee may agree on a
o what may be pawned: shorter redemption period but the same shall
▪ movable property not be less than thirty (30) days.
▪ except: guns, knives and similar weapons o The agreement to reduce the redemption
period must be mutually agreed upon. The
▪ Loan Amount: any but not less than 30% of the pawnshop cannot arbitrarily reduce the
value of the amount pawned period.
o when the pawn is delivered, the pawner o At present, obsolescence of electronic gadgets
should receive a value higher than 30% of the are triggered by the marketing of new units or
value of the property models.
o the pawner should at least know the value of
the property REQUIREMENT FOR FORECLOSURE
o value can be appraised through receipts
▪ the following are the essential requirements:
PAWN TICKET o only at public auction (take note of Pactum
Commissorium)
▪ pawnbroker’s receipt for a pawn and proves that o conducted in the place of business
a property is pawned to a particular pawnbroker o conducted by auctioneer who is duly licensed
▪ it is neither security nor evidence of indebtedness (not the sheriff or notary public)
o the pawn receipt cannot be used as collateral o with notice once in two (2) daily newspapers
for another obligation in the city or municipality during the week
o it is also not a negotiable instrument which preceding the date of sale
can be passed on to another person o public posting within territorial limits of the
o it only serves as a proof that a property is place of business
deposited with a pawnshop which can be o Notice of Sale must be in English and Filipino
recovered upon payment of the obligation and/or dialect of the locality
o name, owner, address, and date of auction
▪ obligations of pawnshops: should be identified
Pawnshops shall, at the time of the loan, deliver

to each pawner a pawn ticket which shall contain
the following: names, address, value of the
property, amount of the obligation, due date or
maturity of the obligation.
MJ LAZA 110
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ANTICHRESIS Natural Fruits

ART. 2132 TO ART. 2139, NCC January 10,000.00
February 10,000.00
Definition March 5,000.00
April 3,000.00
▪ Creditor acquires the right to receive the fruits of May 2,000.00
an immovable of the debtor, with the obligation of June 1,000.00
the creditor to apply them to payment of interest July 10,000.00
and then the principal of the credit
▪ an antichresis does not pertain to movable If interest due is less than the value of the
property. It is a right over the fruits of the fruits:
immovable property. The creditor should be
consistently aware of the value of the fruits. ➢ Parties may stipulate that the excess shall be
applied to the principal.
Characteristics
Question: Can a party stipulate that the value of
▪ characteristics: the fruits is fixed for a certain period in time?
(1) accessory contract
➢ much like other secured transactions Answer: NO. The law specifically states that the
(2) indivisible actual market value of the fruits shall be applied. If
(3) may secure all kinds of obligations, pure the value of the fruits is fixed, a disadvantage will
or subject to condition or subject to be the non-payment of the creditor of the actual
suspensive or resolutory condition market value of the fruits.
▪ an antichresis will use the fruits, permit the REQUIREMENT FOR VALIDITY
creditor to take the fruits and apply it to the
obligation (interest first, then to the principal) The following are the requirements for a valid
antichresis:
ex. The obligation is P30,000 and the value of the ▪ amount of principal and interest should be in
fruits is P60,000. Hence, the value of the fruits writing
shall be applied first to the interest next month o since it pertains to an immovable property, it
and, after which, to the P30,000 obligation. is best that the agreement be made in a
public instrument
VALUE OF THE FRUITS
▪ must be expressly agreed between creditor and
How much is deducted? debtor that the former, having been given
possession of the properties given as security, is
Actual market value of the fruits at the time of the to apply their fruits to the payment of the
application. interest, if owing, and thereafter to the principal
of his credit
➢ The market value of the fruits will be the basis o if Atty. asked to draft an antichresis, this
for the amount of interest. The market value at requirement should be shown: “what is given
the time of application and not at the time of is the application of the fruits to the payment
the execution of the contract or the time when of interest”
the obligation is to be paid in full.
➢ If there is an interest, there will be an ▪ possession over the immovable is not requirement
assessment and appraisal of the actual value of under the law (Legaspi and Salcedo v. Celestial,
the fruits. 66 Phil., 372)
o if the parties agreed that the subject of
possession and transfer are only the fruits,
Example: If the natural fruits of the property there is no necessity that the immovable be
fluctuates from month to month, then the payment of transferred as well
interest will also fluctuate from month to month.
MJ LAZA 111
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Question: But can the parties stipulate that the

immovable property will be transferred? Right of Debtor
Answer: YES. This stipulation is not prohibited ▪ remains to be the owner of the property (since it
under the law BUT it is not necessary nor a is only a transfer of possession)
requirement for the validity of the antichresis. ▪ stipulation to the contrary is void
Obligations of Creditor Extinguishment of Antichresis
(1) liable for payment of taxes and charges for (1) must pay off the debt in full
preservation and repair unless stipulated to the ➢ when the obligation has been paid in full, the
contrary debtor acquires the rights to the fruits
➢ what taxes?: taxes pertaining to the fruits not ➢ restore jus fruendi
taxes over the immovable property
(2) judicial foreclosure of the property
(2) deduct from the fruits the following: ➢ there is no extrajudicial foreclosure in
➢ payment of taxes and charges upon the estate antichresis; there is only judicial foreclosure
➢ necessary expenses for preservation and ➢ apply: foreclosure under the Rules of Court
repair ➢ what is foreclosed? The entire property.
▪ HOW TO EXEMPT FROM DUTY Antichresis v. Pledge

➢ compel the debtor to possess the property
unless there is an exception to the Question: Compare antichresis to pledge.
contrary
➢ return the immovable property to the Article 2085
possession of the debtor
Third persons who are not party to principal
Takeaway: obligations may use own property as
antichresis.
It is the creditor’s duty to pay for the taxes and
charges, and the necessary expenses for ▪ Parties to the antichresis are referred to as:
preservation and repair IF the creditor has antichretic creditor and antichretic debtor.
possession over the immovable property.
If the creditor has no possession over the

immovable property, the creditor’s obligation is
only to pay for the taxes and charges over the
fruits.
Taxes for the immovable property, i.e., real

property taxes, and expenses for the
preservation and repair of the immovable
property should only be the obligation of the
creditor if the latter has possession over it.
Right of Creditor
▪ compel the debtor to exercise jus fruendi, unless

there is stipulation to the contrary
▪ why? for the debtor to pay taxes
MJ LAZA 112
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FINANCIAL REHABILITATION AND INSOLVENCY ACT (FRIA)

R.A. No. 10142
▪ the law creates certainty, stability and

▪ provides an opportunity to hustle and to be able predictability in commercial affairs by
to rehabilitate in order to comply with certain emphasizing that “all is not lost just because the
obligations creditor is losing at the moment” and as long as
▪ the provisions of the FRIA permits suspensions of the obligation is capable of rehabilitation, the
payments creditor will always have the opportunity to
▪ “suspension of payments” – creditors cannot recover
collect from the debtors, and the debtors are also ▪ having the FRIA, a law that protects parties,
not permitted to pay its creditors investors, and creditors, is also a good enticement
▪ advantage of suspension of payments: business for foreign investors (foreign investors detest
continues as usual without paying creditors erratic and unstable conditions that affect
investment)
Question: Wouldn’t the creditors be worse off under ▪ stakeholders benefit under rehabilitation
the provisions of the FRIA? ▪ gain new lease on life (another opportunity)
o creditors can recover their investment
Answer: NO. One of the things considered under o more employees keep their jobs
rehabilitation is would the creditors be better off (di o network of suppliers and customers is
ko din gets). It is better for the creditors to wait rather preserved
than to just sue the debtors. (sabi nya: “suffer now, ▪ the Constitution mandates that the private sector
than suffer later”) is necessary in nation-building (by providing
rehabilitation plans to a financially distressed
From the perspective of the creditor who agrees to the company)
rehabilitation plan of the debtor, the creditor opts to
suffer not being paid today (for example) but at least EXCLUDED FROM THE LAW
payment is guaranteed in the future.
▪ excluded from the law are the following:
▪ according to Atty., the goal of the FRIA is a little o banks
bit idealistic and that it wants that everybody o insurance companies
wins by losing a little o pre-need companies
▪ these entities have their own laws that governs
PURPOSE any rehabilitation (e.g. for banks, they have
conservatorship)
SEC. 2. Declaration of Policy. — It is the policy of the
State to encourage debtors, both juridical and DEFINITIONS
natural persons, and their creditors to collectively
and realistically resolve and adjust competing
INSOLVENCY
claims and property rights. In furtherance thereof,
▪ financial condition of a debtor who is unable to
the State shall ensure a timely, fair, transparent,
effective and efficient rehabilitation or liquidation of pay its or his liabilities as they fall due in the
debtors. The rehabilitation or liquidation shall be ordinary course of business
made with a view to ensure or maintain certainty ▪ this does not necessarily mean that there are less
and predictability in commercial affairs, preserve assets compared to liabilities
and maximize the value of the assets of these ▪ if the assets are lesser than the liabilities, there
debtors, recognize creditor rights and respect may not be an opportunity for rehabilitation
priority of claims, and ensure equitable treatment of
creditors who are similarly situated. When
REHABILITATION
rehabilitation is not feasible, it is in the interest of
the State to facilitate a speedy and orderly ▪ restoration of the debtor to a condition of
liquidation of these debtors’ assets and the successful operation and solvency
settlement of their obligations. ▪ IF:
o if it is shown that the continuance of
operation is economically feasible; and
MJ LAZA 113
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o its creditors can recover by way of present (3) corporation duly organized under Philippine
value of payment projected in the plan Laws.
▪ in order for rehabilitation to apply, ▪ “Piercing the veil of corporate fiction” means that
(1) rehabilitation must be FEASIBLE or there is there is corporate fiction created.
likelihood of being rehabilitated o The stockholder is separate from the
➢ if rehabilitation is not possible, then the corporation. The corporation will be liable for
remedy will be liquidation its own liabilities and its properties will be
(2) the creditor must be better off and agree with used to pay for its obligations.
the rehabilitation rather than liquidation o In partnership, the partners are not liable for
the liabilities of the partnership. The
LIQUIDATION partnership’s liability will be used to pay for
▪ proceeding when rehabilitation is not feasible its obligations.
▪ dissolution of entity and distribution of the assets
of the entity ▪ Sole proprietorship is a business person
▪ what happens: registered with the DTI (ex. sari-sari store). There
o if the debtor can no longer pay for its is just one person. If the business is sole
obligations, its assets will be sold and the proprietorship, the property of the sole proprietor
proceeds will be used to pay the creditors will be used to pay for the obligation of the
first; if there are remaining assets or business. The creditors can go after the business
proceeds, the debtor can have them or the sole proprietor.
o for corporations, all properties will be sold
and proceeds will be paid to creditors; any ▪ “juridical debtor” includes sole proprietorship
remaining proceeds or properties will be used registered with the debtor and the primary
to pay the shares of the stockholders remedy is rehabilitation.
▪ when an entity is liquidated, it dies and loses its
personality to continue doing business; its INDIVIDUAL DEBTOR
juridical capacity of doing business is ▪ natural person who is a resident and citizen of the
extinguished Philippines that has become insolvent
SUSPENSION OF PAYMENTS ▪ difference with a sole proprietor:

▪ stopping of payments to creditors o under sole proprietorship, there is a business
▪ this means that the debtor cannot be compelled registered with the DTI (juridical debtor); an
to pay the creditors and creditors cannot go after individual debtor is a natural person with a
the debtors liability or obligation
o the remedy available to a sole proprietorship
Question: Why does it need to be two-fold? Why can’t is rehabilitation; for an individual debtor, the
the prohibition just be on the part of the creditor? remedy is just suspension of payments.
Why does the law also prohibit the debtor from
paying? CREDITOR
Answer: EQUITY. If a creditor is not paid, then all CREDITOR

creditors should not be paid. There is a tendency that ▪ refers to a natural or juridical person which has
some creditors will be preferred. a claim against the debtor that arose on or before
the commencement date
COMMENCEMENT DATE ▪ note: the claim must be existing on the
▪ date of filing of the Petition commencement date
DEBTOR CLAIM
▪ claims or demands of whatever nature or
DEBTOR character against the debtor or its property
▪ a debtor can be any of the following: ▪ claims or demands cover: whether liquidated or
(1) sole proprietorship registered with the DTI; unliquidated, fixed or contingent, matured or
(2) partnership registered with the SEC; or unmatured
MJ LAZA 114
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▪ “liquidated”: price certain or that the amount of SEC. 21. Effectivity and Duration of
obligation is identified Commencement Order.
▪ “unliquidated”: if the amount must still be xxx
(d) The rehabilitation receiver submits a
computed report, based on preliminary evaluation,
▪ “fixed or contingent”: whether dependent on stating that the underlying assumptions
certain conditions and the financial goals stated in the
petitioner’s Rehabilitation Plan are
▪ “matured or unmatured”: whether enforceable, realistic, feasible and reasonable; or, if
due and demandable, and exists at the not, there is, in any case, a substantial
commencement date likelihood for the debtor to be successfully
▪ CLAIMS INCLUDE: rehabilitated because, among others:
o claims of the government, whether national (1) there are sufficient assets with
or local, including taxes, tariffs and customs which to rehabilitate the debtor;
duties
(2) there is sufficient cash flow to
o claims against directors and officers arising maintain the operations of the
from acts done in the discharge of their debtor;
functions
(3) the debtor’s owner/s, partners,
stockholders, directors and
KINDS OF CREDITORS: officers have been acting in good
(1) general unsecured creditor faith and with due diligence;
o a creditor whose claim is neither secured nor
(4) the petition is not a sham filing
preferred intended only to delay the
(2) secured creditor enforcement of the rights of the
o all creditors discussed creditor/s or of any group of
creditors; and
o those subject of a guaranty, surety, real
estate mortgage, secured agreement under (5) the debtor would likely be able to
the PPSA, pledge, chattel mortgage, pursue a viable Rehabilitation
antichresis Plan.
xxx
(3) unsecured creditor
o nothing secures their claims
(4) voting creditor o there are sufficient assets with which to
rehabilitate
▪ why the need for classification of creditors: o there is sufficient cash flow
because they vote differently o the debtor’s partners, stockholders, directors
▪ example: A secured creditor has greater tendency and officers have acted in good faith and with
not to participate in the rehabilitation because due diligence
either way he will be paid. If there is no security, o the petition is not sham filing
the creditor will rather participate in the ➢ there is a tendency for the debtor’s
rehabilitation plan. partners, directors and officers to abuse
▪ They vote separately in order for the secured the filing of the Petition just to avoid
creditor not to bamboozle the unsecured payment of obligations
creditors. o debtor would likely be able to pursue a viable
rehabilitation plan
REHABILITATION
▪ “rehabilitation plan”: the agreement
▪ The status where there is ability to pay or between the creditor and the debtor to
returning the debtor to that ability to pay the schedule the payments of the obligation
obligation.
▪ restoring the debtor to that ability CASE OF VIVA SHIPPING
THREE REQUISITES FOR REHABILITATION: “If the results of the financial examination
and analysis clearly indicate that there
(1) FEASIBILITY of Rehabilitation (Sec. 21(D)) lies no reasonable probability that the
distressed corporation could be revived and
MJ LAZA 115
Credit Transactions
that liquidation would, in fact, better

subserve the interests of its stakeholders, ▪ dacion en pago
then it may be said that a rehabilitation
would not be feasible.” ▪ debt-equity conversion
o here, there is no payment of obligation
o the debts are treated as shares in the
▪ If rehabilitation is not possible, better business
liquidate. o gain: extinguishment of debts and
obligations
(2) MATERIAL COMMITMENT give-up: control over the business
▪ manifestation of resolve, determination,
earnestness and good faith of distressed ▪ sale of business or parts of it
corporation
➢ it is not enough that it is just a ▪ setting up of a new business
hypothetical promise
➢ in rehabilitation there must be “material (3) LIQUIDATION ANALYSIS
commitment” ▪ setting out for each creditor that the present
value of payments it would receive under the
▪ May include the voluntary undertakings of plan is more than that which it would receive
the stockholder or the would-be investors of if the assets of the debtor were sold by a
the debtor corporation indicating readiness, liquidator within 6 months from filing
willingness and ability to contribute funds ▪ it is just a requirement that is needed to be
or property to guarantee the continued shown when filing a Petition for
successful operation of the debtor Rehabilitation to show that a creditor is
corporation during the period of better off with a rehabilitation plan instead of
rehabilitation liquidation
➢ material commitment is backed up by an
actual plan and surrender of the property VIVA Shipping Lines Inc. v. Keppel Philippines
et. al., G.R. No. 177382, February 17, 2016
▪ legally binding investment from third parties
is required to qualify as a material financial Facts:
commitment • The assets of Viva only consists of 2 vessels.
Free assets has valuation of P143 Million and
Examples of Material Commitment: indebtedness of P233 Million.
▪ debt forgiveness • It filed a petition for rehabilitation because of
o included in the rehabilitation plan is an difficulty in paying its obligations.
agreement on how to forgive the debt (e.g. • Included in the rehabilitation plan:
condonation) 1. Sell 2 ships
2. Purchase new vessels that are serviceable
▪ debt rescheduling 3. Sell vessels of sister company but has no
o renegotiation of the debt consent (material commitment)
o postponement of the due date
o increasing interests Issue: Is rehabilitation feasible?
o requiring more properties to secure the
debt Ruling: NO. Rehabilitation is not feasible for the
following reasons:
▪ reorganization • If Viva sells its 2 ships, then there will be no
o the parties take a look at the business to more means of making money or income.
determine whether there is redundancy • It has no cash flow to purchase new vessels.
of certain works or aspects in the • It cannot sell a vessel of its sister company
business (i.e. there is surplus in labor) because the latter is a different entity. It cannot
o if the services are redundant, there can make assurances on behalf of another
be merger of departments company. It does not count as a material
MJ LAZA 116
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commitment. The material commitment must ▪ Summary:

solely belong to the debtor.
Court Pre-
Out of Court
Hence, rehabilitation is not feasible. The Petition Supervised Negotiated
should be dismissed. Rehabilitation
Petition is filed Outside of
plan is
in court and court; no
prepared prior
the court approval of
to submission
approves a rehabilitation
MODE OF REHABILITATION of a petition for
rehabilitation plan by the
rehabilitation
plan after court
Modes of rehabilitation under the law: (CPO) in court
▪ Court Supervised Rehabilitation
➢ a petition will be filed in Court and the Court Court Supervised Rehabilitation
will approve the rehabilitation plan
➢ everything will be under the auspices of the Nature of Proceedings
RTC sitting as a special commercial court or ▪ In rem upon publication
a special commercial court ➢ binds everyone even if they do not appear in
court, participate in the proceedings or
Question: Are they different? submit any claim
Answer: If the petition is filed with the RTC, then ➢ implication:
it means that the RTC is merely designated as a o it can be enforced against any person
special commercial court. o the suspension binds all creditors even if
they are not identified or included in the
▪ Pre-negotiated proceedings
➢ parties will be agreeing as to the
rehabilitation and how each creditor will be ▪ Summary and non-adversarial
paid; thereafter, the agreement will be ▪ summary: dependent on the documents
submitted in court submitted in court, and there is an urgency
➢ all negotiations happen outside of the court in making judgments
but the rehabilitation plan will still be
submitted to the court KINDS OF COURT SUPERVISED
REHABILITATION:
▪ Out of Court or Informal Restructuring
Agreements or Rehabilitation Plans (1) VOLUNTARY PROCEEDING
➢ there is no submission of the rehabilitation ▪ initiated by the debtor
plan with the court ▪ initiated when it foresees the impossibility of
➢ everything is done outside of the court meeting the debts by the (debtors who can
including the approval of the rehabilitation initiate):
plan (a) owner in sole proprietorship;
➢ there is no need for its confirmation by the (b) majority of partners;
RTC or the special commercial court ▪ if there are three partners, then a vote of
the two partners can cause the initiation
▪ Comparison: of the proceeding
(c) majority vote of BOD/Trustees and
Court Pre- Out of stockholders representing 2/3 Outstanding
Distinction
Supervised Negotiated Court Capital Stock or members
With the ▪ Board of Directors: for stock corporations
Negotiation Outside the court
court
▪ Board of Trustees: for non-stock
Confirmation/
corporations
Approval of
Outside ▪ what vote is needed:
the With the court
the court o stock corporation: majority vote of
Rehabilitation
Plan the BOD plus 2/3 of the stockholders
representing the outstanding capital
MJ LAZA 117
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stock (a stockholder can own 2/3 of there is material commitment, and the
the OCS) liquidation analysis
o non-stock corporation: majority vote  rehabilitation plan
of the board of trustees and members ➢ a plan where the well-being of the debtor
▪ “outstanding capital stock”: the stocks can be restored using various means
that are issued to stockholders ➢ submitted by a rehabilitation receiver,
(d) group of debtors who must be identified in the petition
(2) INVOLUNTARY PROCEEDING (2) Issuance of the Commencement Order by the

▪ initiated by whom: Court
(a) creditor  Court may issue the commencement order
(b) group of creditors who should have an once there is compliance of the verified
aggregate claim of P1 Million or 25% of petition and rehabilitation plan
subscribed stocks or partner’s contribution,  If there is an order to amend, it will be issued
whichever is higher within 5 days from the receipt of the order to
▪ must show documents that would prove amend
that the debtor may be rehabilitated
➢ to comply with the requirement that (3) Order to Ament
rehabilitation must be feasible  If the court finds that there are things to be
▪ “subscribed stock” : stocks that are paid in amended, the court can order an amendment
full; in order for a creditor to vote, the stocks within 5 days from the receipt of the verified
held must be subscribed or paid in full petition and rehabilitation plan
NOTE: Involuntary proceedings are rare. CREDITORS NOTIFIED

(Sec. 23 in relation to Sec. 16(H))
▪ creditors should be notified especially for
PROCEDURES FOR BOTH, regardless of who voluntary petitions but even if petition is
initiates involuntary, all other creditors should be notified
▪ remedy is same regardless of who initiates and must be included in the commencement
order
▪ Commencement Order: order to notify copy of
petition to each creditor
▪ Creditors who failed to file notice of claim:
not entitled to participate but will be entitled to
receive distribution (to be paid the obligation)
▪ “not entitled to participate”: not entitled to vote on
the rehabilitation plan
COMMENCEMENT ORDER
COMMENCEMENT ORDER
▪ commencement order is the heart of the
rehabilitation law (FRIA)
▪ in a commencement order:
o declared, in rem, that the debtor is under
(1) a verified petition will be filed in court rehabilitation
 verified petition o includes an appointment of receiver which is
➢ there is a promise included in the petition based on the identified rehabilitation receiver
that the petition is based on authentic in the verified petition
documents and based on the knowledge o direct creditors to file verified claim
of the one filing the petition ➢ verified claim:
➢ there should be showing that there is
likelihood or probability of rehabilitation,
MJ LAZA 118
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 an inclusion of how much is the Answer: YES. The creditor can still file a complaint
obligation and when is it due and against the debtor. There is nothing under the law
demandable; which prohibits a party from filing a complaint for a
 it shall be kept in the registry of collection of money as long as the same is done to
claims maintained by the preserve any claim against the debtor. The purpose of
rehabilitation receiver the filing of the complaint is to toll the running of the
 it shall be the basis of who are the prescriptive period.
creditors to be paid under the
rehabilitation plan The prescriptive period is not going to be suspended
o include a stay or suspension order just because there is a suspension order. For
o authorize payment of administrative example, in the enforcement of a written document
expenses must be filed within 10 years, the suspension order
does not affect the prescriptive period. If the deadline
STAY OR SUSPENSION ORDER of the filing of a suit falls within the rehabilitation
period, it is still best that a complaint is filed. In this
Effects: case, prescription will not be a valid defense against
(1) suspend all actions or proceedings in court for the creditor.
the enforcement of all claims
(2) suspend action to enforce any judgment FILING A COMPLAINT IS ALLOWED
attachment or provisional remedies
(3) prohibit the debtor from selling, encumbering, The issuance of a stay order does not affect the
transferring or disposing in any manner any of right to commence actions or proceedings in order
its properties except in the ordinary course of to preserve ad cautelam a claim against the debtor.
business
(4) prohibit the debtor from making any payment of
its liabilities outstanding as of the ▪ The filer of the complaint pays 1/10th of the filing
commencement date fee in order for the case to proceed.
▪ Also applicable as to the debtor. The debtor is also
Discussion: permitted to file a complaint as against any of his
own creditors. The requirement under the law is
Suspend all actions or proceedings in court for the debtor to pay P100,000 or 1/10 th of the
▪ if there is a pending action for the collection of filing fee.
monetary claims, the action shall be suspended ▪ Rule: The debtor can file; the debtor can still be
▪ why? the monetary claims must be consolidated sued even if there is a suspension order.
in the rehabilitation court
EFFECTS OF A STAY ORDER
Suspend action to enforce any judgment
attachment or provisional remedies Effectivity of Commencement Order
▪ for the purpose of executing the decision, the
execution of any decision or preliminary ▪ In essence the effectivity of the suspension of
attachment must be suspended payments, the declaration that there is a
rehabilitation, the appointment of the
prohibit the debtor from selling, encumbering, rehabilitation receiver, the order to pay
transferring or disposing administrative expenses will be for the entire
▪ the debtor is prohibited because the properties duration of rehabilitation proceedings.
may be necessary for the rehabilitation ➢ Hence, the obligation not to pay the creditors
proceeding and for the creditors not to collect from the
▪ the debtor may encumber the property if the court debtors will be effective for the entire
approved the encumbrance of the property rehabilitation plan.
➢ The only payment permitted will only be those
Question: Can a complaint still be allowed to be filed in the rehabilitation plan. Other than that,
notwithstanding the suspension or stay order? any payments will not be permitted.
MJ LAZA 119
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Example: There is a commencement order for the of the property null and void. The creditor
execution of a decision against the debtor for a will be ordered to return the property back
collection of sum of money. The rehabilitation to the debtor for the purpose of
plan is effective for 10 years. If the collection of determining whether the property can be
sum of money is not indicated in the used for rehabilitation proceedings.
rehabilitation plan, the creditor will not be paid
and the execution over the property will not take o sale encumbered property after
place. commencement order
➢ recall: The ownership of the property
▪ Effects of commencement order retroacts to the remains with the mortgagor or grantor.
day of the filing of the petition. Ownership is not affected by the lien of
➢ For purposes of determining when is the the property. However, under
effectivity of a commencement order, the day rehabilitation proceedings, if the property
of the filing of the petition shall also serve as is sold, the sale is declared null and void.
the commencement or start of the effectivity ➢ Rule: In any other time, the sale of any
of the commencement order. encumbered property is valid. However,
➢ Thus, when asked when does the suspension when the sale is done within the
begin, the answer would be on the day of the rehabilitation period, the same is null
filing of the petition. and void even if the property is passed to
the hands of a buyer in good faith. As an
When does the rehabilitation proceedings end? in rem proceeding, it binds third persons,
even if parties that are not privy to the
Answer: If it is terminated. It is terminated when: case.
(1) the proceedings is converted from a
rehabilitation proceeding to a liquidation
proceeding; o attempt to collect or enforce after
(2) the entity or the debtor has been rehabilitated; commencement order
or
(3) it has been determined that the rehabilitation Example: There is a real estate mortgage
cannot take place. between the debtor and the creditor. If the
creditor causes the extrajudicial
This can take years or immediately thereafter such
as when the proceedings have been dismissed by foreclosure of the property, the public
the court. If dismissed, the rehabilitation auction shall be declared null and void.
proceedings and the effects of the suspension order
will be lifted. It is as if there was no suspension that If the pledgee sells the property in a public
took place. auction, the same is also null and void.
Serves as Legal Basis

If a creditor in a security agreement
▪ the commencement order and the suspension presents a demand letter to the debtor to
order also has the effect of serving as legal basis collect the obligation, the demand is
of declaring certain actions, activities, and already null and void.
contracts as null and void.
▪ The orders render null and void the results of: Effect: The computation of interest
o any extrajudicial activity or process to reckoned from the date of extrajudicial
seize the property after commencement demand will have no effect because the
order demand is null and void.
Example: The security agreement is under

PPSA and there is a security interest is for Consolidation of all Legal Proceedings
a movable property. One of the remedies of ▪ another effect of the commencement order
the creditor is expedited repossession of
the property. This (remedy) cannot be done ▪ all cases for the collection of sum of money and
if the creditor chooses to exercises the any case for the enforcement of a suit shall be
remedy. The court will declare the seizure consolidated with the rehabilitation court
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➢ “consolidation”: means that all cases shall be • the government cannot sue the debtor nor
heard and decided by the rehabilitation court cannot issue a PAN or assessment notice to
➢ Consolidation is the reason why the compel the debtor to pay taxes
rehabilitation proceedings should be made
before the RTC, a court of general jurisdiction ▪ exempt the debtor from liability for taxes and fees
and not one with limited jurisdiction such as to the national government and LGU (Sec. 19)
the MTC. Regardless of the amount of the • fees: business permits, toll fees
obligation, the rehabilitation proceedings
should still be with the rehabilitation court Question: Can the government still sue the debtor in
because it has the authority and power to order to collect?
make decisions over all aspects. Answer: YES. The suit can proceed. The courts will
➢ cases that can be consolidated: continue to hear it if done with the permission of the
o damages rehabilitation receiver. However, from the moment
o declaration of nullity of a contract for the there is already execution, then the suit will be
purpose of rescission suspended. The case will be consolidated with the
o return of certain properties rehabilitation court.
o even if for support demanded from a sole
proprietor If there is permission for a court to continue trying a
case despite the rehabilitation of the debtor, it can
▪ continuation of cases on other courts may be continue to make decisions up until there is already
allowed where the debtor had initiated the suit an execution of the decision. Once there is an
• if there are other cases that are pending, the execution of a decision, it should not be permitted to
same may be allowed to continue with the continue because the case is already affected by the
permission of the rehabilitation court stay order. From this point, there is a claim which
must be filed with the rehabilitation court or
Proceedings also applies to Government rehabilitation receiver.
SEC. 19. Waiver of Taxes and Fees Due to the ACTIVITIES WHICH CANNOT BE DONE AFTER
National Government and to Local Government COMMENCEMENT DATE
Units (LGUs). — Upon issuance of the
Commencement Order by the court, and until the Activities Basis
approval of the Rehabilitation Plan or dismissal of Extrajudicial activity or process to 17 (b)
the petition, whichever is earlier, the imposition of all seize property
taxes and fees, including penalties, interests and Sell, encumbering or transferring, 17(b),
charges thereof, due to the national government or disposing encumbered property 16(q)(3)
to LGUs shall be considered waived, in furtherance Attempt to collect or enforce a claim 17(b)
of the objectives of rehabilitation. Set-off 17(c )
Perfection of any lien against debtor’s 17 (d)
SEC. 20. Application of Stay or Suspension property
Order to Government Financial Institutions. — Attempt to seek legal or other 17 (last
The provisions of this Act concerning the effects of recourse paragraph)
the Commencement Order and the Stay or Suppliers withholding the supply of 16 (k)
Suspension Order on the suspension of rights to goods
foreclose or otherwise pursue legal remedies shall Continue with court proceedings for 16 (q) (1)
apply to government financial institutions,
enforcement of claims
notwithstanding provisions in their charters or other
Continue with enforcement of any 16 (q) (2)
laws to the contrary.
judgment, attachment or provisional
remedies
Debtor’s payment of liabilities 16 (q) (2)
▪ effects of suspension on rights to foreclose or
outstanding as of date of
pursue legal remedies (Sec. 20)
commencement order
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▪ “set-off”: parties are debtors and creditors of each ▪ sureties ensuring the liability and not
other necessarily the obligation will still be required
▪ Summary of the Rules: to pay by express provision of the law
1) The assets of the debtor must remain with the ▪ any person jointly or severally liable shall still
debtor. be liable
2) The debtor cannot pay any obligation. ▪ third parties or accommodation mortgagors
3) Neither can the creditor enforce any decision who are using their properties to secure the
as against the debtor. obligation of a debtor will also be liable and
4) Debtor should be permitted to continue with will not be affected by the stay order
the business. ▪ reason: because these are not liabilities of the
debtor and it is not the debtor’s properties
EXCEPTION TO STAY ORDER which will be foreclosed
▪ effect: in case the debtor is undergoing
The following are exempted: rehabilitation, the creditor can still foreclose
(1) Cases pending before the SC the property of a third person who used its
▪ these should be permitted to continue property to secure the obligation of the debtor
because the rehabilitation court does not
have authority over cases pending before the exception to the exception:
SC ▪ if the properties being used by the third party
or the accommodation mortgagor are
(2) Cases filed before quasi-judicial courts necessary for the rehabilitation of the debtor
▪ these should also be allowed to continue to ▪ however, this should be done with the
proceed because quasi-judicial courts are permission of the rehabilitation receiver and
essentially administrative agencies that are approved by the court
given the authority to exercise judicial ▪ ex. if it is later determined that the property
powers and are considered under the law as of the mortgagor is necessary to rehabilitate
having the necessary expertise to hear and the debtor and there is approval from the
decide cases with more promptness and court, the creditor cannot go after such
efficiency as compared with the property
rehabilitation courts that do not necessarily
have the same expertise or efficiency. Question: Can the guarantor still be required to
▪ example: disputes as to salaries shall be pay the obligation if the debtor is already under
allowed to continue with the NLRC rehabilitation?
Answer: (think about it daw)
(3) Criminal action against individual debtor or
owner, partner, director or officer of a debtor (5) Licensed brokers or dealers to sell pledged
▪ essentially, these are obligations of the debtor securities of a debtor
in its personal capacity ▪ the properties are in the possession of
▪ criminal actions should not be subject of the intermediaries
claims
▪ the pursuit of justice should not be defeated (6) Clearing and financial securities thru facilities of
by an insolvency law a clearing agency
▪ both the civil and criminal aspects of these
cases shall continue because they are ▪ common to (5) and (6): they are selling of
receiving the same pieces of evidence properties via an intermediary
▪ however, the enforcement of the decision as
to the civil aspect of the criminal action shall (7) payment of administrative expenses
be affected by the stay order ▪ administrative expenses are expenses that
are incurred generally after the
(4) enforcement of claims against sureties, commencement date
solidarily liable, third party or accommodation ▪ they can be paid after and can be paid by the
mortgagors debtor because it is not affected by a stay
▪ not under Section 50 order
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Question: Can you enforce a decision from the SC Question: Should you file a suit for collection
or quasi-judicial court which became final after the against the debtor when there is already a
commencement date? commencement order and stay order?
Answer: NO. These should be referred to the Answer: YES (based on the case of Philippine
rehabilitation court pursuant to Administrative Wireless Inc and Republic Telecommunication)
Matter No. 12-12-11-SC for appropriate action.
The Supreme Court or the quasi-judicial court will SUMMARY:

still be permitted to continue with the hearing and ▪ commencement order should be reckoned on the
with receiving evidence. However, once the decision date of filing
becomes final after the commencement date, then ▪ all obligations that are due and demandable upon
the enforcement must be referred to the the filing of the petition or commencement date
rehabilitation court. shall be affected by the commencement order
Question: Can you enforce the civil liability arising example: If the date of filing is February 1, 2022
from a criminal offense? but the obligation became due and demandable
January 30, 2022, those are affected by the
Answer: NO. The civil liability from a criminal suspension order.
offense cannot be enforced pursuant to
Administrative Matter No. 12-12-11-SC. ▪ The creditor cannot collect on debts that became
due and demandable prior to the effectivity of the
The criminal offense can be enforced and the commencement date.
penalties meted will be enforced (ex.
imprisonment). However, as to the civil liability, Question: What is the difference between
this cannot be enforced (ex. the court cannot involuntary and voluntary rehabilitation?
execute on the house or any of the properties of the
accused) as this will be subject to the suspension Answer: Look into the requirements for initiation
order. and who initiates it. For voluntary, the debtor
initiates; for involuntary, the creditor.
As the lawyer of the complainant, what will you do
when there is an award for civil liability?
Cases on rehabilitation and the effects of
Use the decision or case to file a claim with the commencement order
rehabilitation receiver for the claim to be included
in the rehabilitation plan. The claim arising from Philippine Wireless Inc and Republic
the criminal action should be part of the claims Telecommunication v. Optimum Development
that will be paid by the debtor. Bank (Capitol), G.R. No. 208251, November 10,
2020
Question: Can the debtor continue with the
business? Facts:
• PWI & RETELCO owes an obligation to Capitol
Answer: YES. The reason for the rehabilitation is in the total obligation of P25 Million.
to permit the debtor to rehabilitate. The debtor • Capitol sued PWI & RETELCO.
cannot rehabilitate if it is not permitted to continue • RTC held PWI and RETELCO liable.
its business. • PWI and RETELCO appealed the case to the
CA.
This is also the reason why it is prohibited for the
• On August 20, 2009, PWI and RETELCO filed a
suppliers of the debtor to stop delivering raw
Petition for Rehabilitation.
materials or supplying any goods or services to the
• On August 24, 2009, a stay order was issued
debtor. Suppliers include utilities.
by the rehabilitation court.
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• The CA suspended the proceedings but • The heirs of Ofelia purchased from Kaizen a
continued it upon manifestation that the house and lot.
Rehabilitation Plan was approved. • Eventually, there was a swapping of property.
• The CA suspended it during the effectivity of Thus, another property was given to Ofelia.
the rehabilitation proceedings but continued • Because there was a mismatch of the value of
once it was approved. the property, what Ofelia paid was higher than
the value of the property. It resulted to the
Issue: Was the decision of the CA to continue buying and acquiring properties with a value
hearing the case proper? Was it proper to disregard less than the amount paid for. Kaizen and
the suspension order because there is already a Cecilia now owes Ofelia the amount of
rehabilitation plan? P320,000.00 or the difference of the value of
the property and the amount paid.
Held: • In 2011, Ofelia filed a complaint for sum of
money against Kaizen and Apostol.
• The right to commence actions/proceedings in • The RTC held, in 2013, that Kaizen and Apostol
order to preserve ad cautelam their respective were solidarily liable. Hence, they appealed to
claims against a distressed corporation despite the CA.
the issuance of a stay order. • In the meantime, after two years or on August
• Atty. T: This is your basis for arguing that 12, 2015, the RTC-60 of Baguio City issued a
there is a right to commence any action in Commencement Order after receiving a petition
order for there to be a protection of the for rehabilitation filed by Kaizen Builders and
prescription of any action. To avoid that Apostol.
being applicable against the plaintiff, might • Pursuant to the provisions of the FRIA, Kaizen
as well and you should already file a case, moved for the consolidation of the proceedings.
despite there being a pendency of the • On Dec. 8, 2015, the CA initially said that it
rehabilitation proceedings. (verbatim kasi di was not affected by the Commencement Order,
ko din gets) Suspension Order, and the petition for
consolidation.
• The CA may proceed despite a stay order • However, after three years, on Feb. 14, 2018,
issued by the rehabilitation court. CA was the CA eventually held in abeyance not yet
correct in resuming appellate proceedings. ruling on the decision in reversal of its initial
statement.
• Regardless of the date of the petition for • On October 1, 2018, the CA rendered a decision
rehabilitation was initiated the issuance of a against Kaizen ordering it to pay its obligation
stay order no longer bars the court from to Ofelia. In essence, it violated the
making a determination of rights and liabilities commencement order because it continued
in a collection case involving a distressed hearing the case.
corporation.
• Atty. T: It will continue despite there being Issue: Did the CA commit grave abuse of discretion
a suspension order and despite a mandate in rendering a decision against Kaizen and
that there should be consolidation. In effect, effectively continuing with the decision despite the
the SC division is saying that you can commencement order?
continue hearing the case, but to make it
enforceable, that’s when the court no longer Held: YES, there was grave abuse of discretion.
has jurisdiction.
• Because the proceedings were not suspended,
and the case was not consolidated before the
Kaizen Builders Inc. & Cecilia Apostol v. CA & Rehabilitation Court.
Heirs of Ofelia, G.R. No. 22894, Sept. 3, 2020 • The SC, just two months before the
promulgation of the PWI Case, said in this case
Facts: that this is a money claim case and is affected
• Kaizen Builders and Cecilia Apostol are real by suspension.
estate brokers in the City of Baguio.
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• In other words, the creditors must ventilate also provides that there should be a consolidation of
their claims before the rehabilitation court. Any all the resolutions of all legal proceedings by and
attempt to seek legal or other resource against against the debtor to the court. The only exceptions
the distressed corporation shall be sufficient to to the stay order pertain to cases that are already
support a finding of indirect contempt of court. pending appeal in the Supreme Court as of the
commencement date. Any final and executory
judgment arising from any appeal shall eventually be
Comments: referred to the court for appropriate action.
▪ In the PWI case, the SC held that the proceedings
should not be consolidated and it may continue There are three actions not affected by the Stay Order:
before the CA despite the order of consolidation of (1) Those that are already pending in the Supreme
cases in the Commencement Order and the Court as of the time of the Commencement Date;
suspension of enforcement. • this is not applicable in both the PWI case
▪ In the case of Kaizen, which was decided prior to and the Kaizen case; since both are pending
the PWI case, the SC held that the CA should not with the CA.
have continued with the decision of the case and (2) exception to the suspension of the proceedings if
should not have rendered any decision because the case is pending before the quasi-judicial
this is a money claims case. Therefore, it should agencies, to enforce any claims against sureties,
have been returned to the rehabilitation court so actions of clients of securities or license brokers;
that the latter will be the one to hear it to and
determine if there is any liability. (3) criminal cases.
Question: Which decision should be followed? Thus, what should be applicable will be the Kaizen
Case, where the CA should have returned the case
Answer: “Whichever is beneficial to my case.” Both back to the rehabilitation court and for the latter to
cases are considered legal authorities and both cases decide.
are part of the law of the land. In order for one case to
be supreme over the other, this should be modified by Question: Should cases filed before the Court of
a decision of the SC sitting En Banc. In both cases, Appeals continue and be decided by them (when it
the SC sat in divisions and the cases were decided pertains to money claims that are currently
differently, they both form part of the law of the land. involved in a petition for rehabilitation)?
Are they in conflict with one another? YES. Answer: NO. Based on the provisions of law, these
Is there a way to harmonize them? The Supreme cases should all be consolidated and the
Court En Banc should harmonize them and decide on resolutions of all these cases should also be
the issue. consolidated with the rehabilitation court except
when there is prior consent of the rehabilitation
Question: Then if the same problem is posted, how court.
should we answer?
So the actions of the CA in the case of Kaizen would
Answer: Go back to the provisions of the law. Since have been proper if there was prior consent from
there is conflict between the two decisions of the SC the rehabilitation court.
and their interpretations of the law, we need to go
back to the provision of the law. What does the law Question: Can the Rehabilitation Court modify a
say on the effects of the commencement order? What decision which has become final and executory?
does the law say pertaining to decisions which are
currently pending before the CA? Answer: Note that once a decision becomes final
and executory, the decision is immutable. It can no
Under Sec. 16(q), it says that there should be a longer be modified except for some typographical
suspension of all actions or proceedings in court or errors.
otherwise, and that there should be a suspension of
all actions to enforce any judgement, attachment, or To answer: see the following cases.
provisional remedies. Also under Sec. 17(e), the law
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Question: Can the Rehabilitation Court modify a

La Sovoie Development Corporation v. decision which has become final and executory?
Buenavista Properties, Inc., G.R. No. 200934-35,
June 19, 2019 Answer: YES, if the decision was made in
contravention of the decision or the rules, or the
Facts: law pertaining to the effects of the suspension
order in a commencement order.
A Complaint to terminate contract
1998 Feb. 28
was filed in court.
La Savoie filed a Petition for Question: Is the highest bidder/ mortgagee
2003 April 25 Rehabilitation (over 7 years after affected by stay order?
the termination of the contract)
Rehabilitation Court issued a Stay Answer: Based on the case of LBP v. Polillio.
2003 June 4
Order
QC RTC terminated contract and LBP v. Polillio, G.R. No. 211537,
ordered La Savoie to pay interest December 10, 2019
2003 June 12 and return property. There is now
a money claim to be collected from Facts:
the debtor. • Polillio obtained a P5 Million loan from LBP and
Rehabilitation Court ordered the used two securities to be used for hotel
2007 Dec. 28 sheriff to stop collection from writ of business.
execution issued by the QC RTC. • The loan was restructured but Polillio was
The Rehabilitation Court reduced unable to pay the obligation. The securities
2008 June 30 the penalty in the decision of QC were then sold at public auction with LBP being
RTC. the highest bidder.
• Since the LBP is the highest bidder, Polillio can
Issue: A a writ of execution means that the decision exercise its right of redemption within one year.
is already final and executory and should not be • A petition for rehabilitation was filed by Polillio.
modified anymore. Was the Rehab Court’s actions The court then issued a commencement order
proper? which mandated the consolidation of
ownership and that ownership should be
Held: stayed since LBP is a creditor.
• The decision of the QC RTC did not attain finality
because it ran counter to the Commencement
Order of the Rehab Court. Additional Facts:
• Once a commencement order is issued, it The following are the relevant dates:
affects all courts. Thus, the QC RTC should not Petition for Extrajudicial
2011 June 24
have continued with its decision nor the Foreclosure
enforcement of its decision. Certificate of Sale was issued and
2011 Aug. 22
registered
• Thus, penalties can be lowered. Expiration of the Right of
2012 Aug. 22
• Because there is yet no finality. The effects of Redemption
immutability of judgment does not apply it Corporate Rehabilitation was
2012 Aug. 17
because the decision was made in filed in Court
contravention of the rules pertaining to Dismissed corporate
2012 Aug. 25
rehabilitation. rehabilitation
Amended Petition for
2012 Oct.
• But, the Rehab Court cannot enjoin a co-equal rehabilitation
court from enforcing the Decision, only the CA Commencement Order was
2013 Jan. 18
can. issued
• A rehab court is still essentially a Regional
Trial Court. • The RTC ruled that the consolidation of
ownership with the properties used as
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securities with the LBP was null and void

because the commencement order was Question: In cases of appeal of a labor case, is it
reckoned from the date of the filing of the required to put up the appeal bond?
petition.
• Since the case was dismissed, there was no Answer: Recall that in labor cases, an appeal bond
petition to be amended. Hence, by October is required to be posted by the employer which
2012, the owner of the property is already LBP, includes the filing fees and the monetary award to
thus, LBP is no longer a creditor. be given by the employer had the decision been
• Since the right of redemption expired on Aug. rendered in favor of the employee.
22, 2012, this means that ownership has
already been consolidated with the LBP in any Answer based on the case of Karj Global v. Mara.
of the dates thereafter. There is no longer debt
to be paid since there is already foreclosure. Karj Global Networking Inc. v. Mara,
• If there is already consolidation, then it is G.R. No. 190654, July 18, 2020
already moot and academic for the
rehabilitation court to order stopping of the Facts:
consolidation and make LBP a creditor. • On July 6, 2006, Mara sued Karj Global before
the Labor Arbiter for nonpayment of 14th month
Issue: When should the commencement order be pay.
reckoned from and whether there should be • Two months later or on October 2, 2006, the
consolidation of ownership over the property? creditors of Karj Global filed a Petition for
Involuntary Insolvency. An insolvency case
Held: means that the corporation has to be liquidated
and assets should be distributed to pay the
The SC held that the reckoning date for the creditors first, then the owners.
commencement order should be from October • On October 16, 2006, the Labor Arbiter
2012, when there was an amendment in the rendered a decision against Karj Global saying
Petition for Rehabilitation. that it was liable for the payment of the 14 th
month pay.
It cannot be reckoned on the date the petition was • Karj Global then filed an appeal with the NLRC
dated, or on August 17, 2012, because it was but no appeal bond was paid. Karj Global
actually filed on August 22, 2012 or a year after the argued that it is not obligated to pay the appeal
registration of the certificate of sale and the bond because of the suspension order.
consolidation of ownership has already taken place • On November 28, 2008, the NLRC dismissed
with the LBP as the highest bidder. the petition because no bond was filed.
The SC agreed that the petition should have been Held:

reckoned on October 2012 because there was • The SC held, however, that when an employer
already dismissal of the petition. If the petition was is undergoing insolvency proceedings, Article
dismissed, in effect, there is nothing to amend. 217 of the Labor Code (appeal bond) must be
read with Sec. 60 of the Insolvency Law.
If used liberally, the subsequent filing of the • NLRC was permitted to proceed with the suit to
petition for rehabilitation would be on the date the ascertain the amount due to it but the
petition was amended. Hence, the actual date of execution of which will be stayed.
filing is in October 2012. By this time, LBP no • Rehabilitation proceedings is a ground to
longer has a claim over the debtor because the permit the non-payment of appeal bond as a
property was already consolidated. measure of relaxing the requirement of paying
the appeal bond. The government, as
However, according to Atty.T, there is no longer a represented by the NLRC, is also affected by the
claim over the property upon the conduct of the suspension order. Hence, it cannot collect from
extrajudicial foreclosure; foreclosure being one of the the employer.
modes when an obligation can be extinguished.
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• NLRC should have allowed the appeal and ➢ ex. if the commencement date falls on Jan.
ruled on the merits considering the 1, 2022, post commencement loans are
circumstances of the case. those loans entered after the said date
• The SC ultimately determined that Mara was and are entered into for the purpose of
not entitled to any of the remedies or reliefs rehabilitating. One of the conditions in
prayed for. rehabilitation might be the requirement
that the debtor borrow sums of money
from a bank in order to pay other
ADMINISTRATIVE EXPENSE creditors.
➢ What may justify post-commencement
▪ administrative expenses serve as exception to the loans? If the money is used to purchase
stay order and the commencement order additional machinery, for example, to
▪ there is no suspension of payment to creditors increase efficiency in creating products for
who are covered by the administrative expenses the manufacturing company.
▪ creditors will be paid as the obligation falls due ➢ The loan must be done with the approval
▪ General Rule: The commencement order covers of the rehabilitation court upon
all obligations already existing at the time of the recommendation by the rehabilitation
commencement order. Even those not yet due receiver.
and demandable are affected by the ➢ post-commencement loans will be paid as
commencement order. Hence, all existing they fall due.
obligations at the time of the commencement ➢ Rule: Payment of all expenses incurred
order must be paid. (with some exceptions) before the commencement date are
▪ One exception are administrative expenses suspended. All expenses incurred after
the commencement date shall be paid
Administrative Expenses as they fall due because they are
▪ not covered by stay order considered as administrative
▪ incurred arising from the filing of the petition expenses.
o only existed after the filing of the petition
o ex. salaries incurred after the filing date will o compensation of employees required to carry
be paid on the business (Sec. 56)
▪ arising from the conduct of the proceedings
▪ administrative expenses include the following: o separation pay for work done after
o incurred in the ordinary course of business commencement date (Sec. 56)
➢ if the debtor continues to do business,
then it is obligated to pay expenses in the o contractual obligations arising or performed
ordinary course of business (ex. purchase during the 90 days period of notification and
of materials, acquisition of inventory) confirmed contract (Sec. 57)
➢ ex. if the petition was filed Jan. 1, 2022,
the supplies purchased before the petition
will be affected by the stay order (prior to
Jan.1) but those purchased after filing of
the petition or on Jan. 1 will still need to
be paid.
o for the payment of new obligations obtained

after the commencement date to finance
rehabilitation
o incurred for the fees of the RR, liquidator and Problem: There is a pending case for separation pay
professionals engaged by them that was decided by the NLRC. The NLRC’s decision
became enforceable prior to the commencement date.
o post-commencement loans and obligations to Hence, the claim for separation pay is a claim already
rehabilitate (Sec. 55) existing at the time of the filing of the petition for
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rehabilitation. The claim for separation pay will be ➢ as long as the acts are done for the purpose of
affected by the suspension order. No payment will rehabilitating the debtor, there is business
be made. judgment that is afforded to the receiver
➢ it is assumed that all his actions are done in
However, if the obligation became due and good faith, and for that, there is no liability
demandable after or even if there was a filing of a ▪ deemed an officer of the court
petition for rehabilitation that was initiated, ▪ has the duty of preserving and maximizing the
continued, and became effective only after the value of the assets
commencement date, then these should be paid as ▪ preparing and recommending Rehabilitation Plan
administrative expenses. ▪ implement Rehabilitation Plan
▪ prepared registry of claims based on notice of
Separation pay that became due and demandable claims
after should be paid if it falls after the ➢ registry of claims: where certain creditors
commencement date or when the claim is will be filing their claims immediately upon
liquidated after the commencement date. notice of the petition for rehabilitation; basis of
the rehabilitation receiver to determine who
Same rule applies to salaries of employees prior to should be paid and how much to pay
the petition for rehabilitation. These employees ▪ to sue and recover, with the approval of court, all
are considered creditors who have existing claims amounts owed to, and all properties pertaining to
against the debtor. Payment for their claims the debtor
should be suspended. ➢ in essence the debtor is “hands off” the
rehabilitation proceedings
Problem 2: If there are contracts entered into by the
debtor prior to the filing of a petition for rehabilitation, ▪ to sue and recover properties distributed by the
these contracts are temporarily suspended. They debtor in fraud of creditors
cannot be enforced yet. They are suspended until they
are confirmed by the rehabilitation court as Rehabilitation Plan
something that is essential to the rehabilitation. ▪ includes the following:
o process on how the insolvent debtor will be
If the contractual obligation is not essential to the rehabilitated
rehabilitation, then it will not be confirmed/affirmed o information as to how creditor’s financial
as an obligation of the debtor and may be rescinded interest will be protected
by the rehabilitation court upon the recommendation o treatment of the different kinds of creditors
of the rehabilitation receiver. Question: Why are creditors treated differently?
Answer: To avoid any situation where one of them will
However, once confirmed within the 90 days period of take advantage of another.
notification, the contractual obligation is now
considered an administrative expense. ▪ Another duty of the rehabilitation receiver is to
present the rehabilitation plan to the creditors,
Hence, the petition for rehabilitation and the for the latter’s approval.
commencement order can serve as basis for the
nullification of certain contracts unless it is
confirmed by the rehabilitation court within 90
days of notification.
REHABILITATION RECEIVER AND

REHABILITATION PLAN
Duties of the Rehabilitation Receiver

▪ has immunity for acts done in good faith
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PROCEDURE FOR REHABILITATION
(2) there is a substantial likelihood for the

Steps: debtor to be successfully rehabilitated;
(1) Upon filing of a verified petition and rehabilitation (b) dismiss the petition upon a finding that:
plan within five days, a commencement order will (1) debtor is not insolvent;
be issued by the rehabilitation court. The (2) the petition is a sham filing intended
commencement order shall include the date of the only to delay the enforcement of the
initial hearing. rights of the creditor/s or of any group of
creditors;
(2) Within forty (40) days after the issuance of the (3) the petition, the Rehabilitation Plan and
order, there could be a submission to the registry the attachments thereto contain any
claims being kept by the rehabilitation receiver. materially false or misleading
statements; or
(3) Within forty (40) days from the initial hearing, (4) the debtor has committed acts of
and with or without the comments of the creditors misrepresentation or in fraud of its
or any of them, the rehabilitation receiver shall creditor/s or a group of creditors;
submit a report to the court stating his (c) convert the proceedings into one for the
preliminary findings and recommendations on liquidation of the debtor upon a finding that:
whether: (1) the debtor is insolvent; and
(a) the debtor is insolvent; (2) there is no substantial likelihood for the
(b) the Rehabilitation Plan is realistic, feasible debtor to be successfully rehabilitated
and reasonable; as determined in accordance with the
(c) there is a substantial likelihood for the rules to be promulgated by the Supreme
debtor to be successfully rehabilitated; Court.
(d) the petition should be dismissed; and
(e) the debtor should be dissolved and/or (5) If the petition is given due course, the court shall
liquidated. direct the rehabilitation receiver to review, revise
and/or recommend action on the Rehabilitation
(4) Within ten (10) days from receipt of the report of Plan and submit the same or a new one to the
the rehabilitation receiver, the court may: court within a period of not more than ninety (90)
(a) give due course to the petition upon a finding days.
that:
(1) the debtor is insolvent; and
MJ LAZA 130
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Within the 90 day period, the rehabilitation receiver follows the following rules:
STEPS: (5) The court can confirm the Rehabilitation Plan or

(1) If the court gives due course to the petition, the it may continue with the hearing if there are
rehabilitation receiver shall confer with the debtor objections.
and all the classes of creditors, and may consider
their views and proposals in the review, revision Question: May the Court overrule a vote of the
or preparation of a new Rehabilitation Plan. Creditors to reject the Rehabilitation Plan?
(2) The rehabilitation receiver shall notify the BDO v. International Copra Export Interco,
creditors and stakeholders that the Plan is ready ICEC and Kimee Realty, G.R. No. 218485-86,
for their examination. Within twenty (20) days April 28, 2021
from the said notification, the rehabilitation
receiver shall convene the creditors, either as a Facts:
whole or per class, for purposes of voting on the • DBP and BDO objected to the Rehabilitation
approval of the Plan. The Plan shall be deemed Plan because to them the Rehabilitation Plan is
rejected unless approved by all classes of only filed to delay holding Interco liable.
creditors whose right are adversely modified or • The terms of the modified rehabilitation plan is
affected by the Plan. burdensome and prejudicial to them.
• It impairs their right to non-impairment clause
(3) The Plan is deemed to have been approved by a of the Constitution because instead of exacting
class of creditors if members of the said class payment from Interco, BDO is forced to wait
holding more than fifty percent (50%) of the total and be paid later.
claims of the said class vote in favor of the Plan. • But Receiver said that the rehabilitation is very
The votes of the creditors shall be based solely on viable.
the amount of their respective claims based on
the registry of claims submitted by the Issue: Despite the objections of DBP and BDO to
rehabilitation receiver. the Rehabilitation Plan, may the Rehabilitation
Plan still be compelled upon the parties?
(4) If the Rehabilitation Plan is approved, the
rehabilitation receiver shall submit the same to Held:
the court for confirmation within twenty (20) Supreme Court:
days. • Proper exercise of police power as rehabilitation
benefits debtors, creditors, employees and the
economy in general.
MJ LAZA 131
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• The Rehabilitation Court may overrule the benefited from the rehabilitation plan such that
rejection of the vote of the creditors (Cram payment will still be made to them.
Down Power under Sec. 64).
In Cram Down Effect, the rehabilitation plan binds
the creditors who are objecting to it. It only affects
SEC. 64. Creditor Approval of Rehabilitation Plan. those creditors who submitted their claims in the
xxx registry of claims and participated in the voting of
the rehabilitation plan but objected to it.
Notwithstanding the rejection of the Rehabilitation
Plan, the court may confirm the Rehabilitation Plan
if all of the following circumstances are present:
USE, PRESERVATION AND DISPOSAL OF
(a) The Rehabilitation Plan complies with the ASSETS AND TREATMENT OF ASSETS AND
requirements specified in this Act; CLAIMS AFTER COMMENCEMENT DATE
(Sec. 48)
(b) The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
Management of the Business
(c) The shareholders, owners or partners of the ▪ Debtor shall still continue with the business
juridical debtor lose at least their controlling ▪ If the debtor is not fit to continue or manage the
interest as a result of the Rehabilitation Plan;
business, a management committee may be
and
appointed
(d) The Rehabilitation Plan would likely provide the ▪ Rehabilitation receiver who has management
objecting class of creditors with compensation power may also manage the business
which has a net present value greater than that
which they would have received if the debtor SEC. 36. Displacement of Existing Management by
were under liquidation. the Rehabilitation Receiver or Management
Committee. — Upon motion of any interested party, the
court may appoint and direct the rehabilitation receiver to
PURPOSE OF THE CRAM DOWN EFFECT assume the powers of management of the debtor, or
▪ Necessary to curb the majority creditors’ natural appoint a management committee that will undertake the
tendency to dictate their own terms and management of the debtor, upon clear and convincing
conditions to the rehabilitation, absent due evidence of any of the following circumstances:
regard to the greater long-term benefit of all
(a) Actual or imminent danger of dissipation, loss,
stakeholders. Otherwise stated, it forces the
wastage or destruction of the debtor’s assets or
creditors to accept the terms and conditions of
other properties;
the rehabilitation plan, preferring long-term (b) Paralyzation of the business operations of the
viability over immediate but incomplete recovery. debtor; or
▪ Forces the creditors to accept the terms and (c) Gross mismanagement of the debtor, or fraud or
conditions of the Rehabilitation Plan, preferring other wrongful conduct on the part of, or gross
long term viability over immediate but incomplete or willful violation of this Act by, existing
recovery management of the debtor or the owner, partner,
director, officer or representative/s in
management of the debtor.
Clarification:
xxx
The effect of in rem proceedings is different from
the Cram Down Effect.
Sale or Disposal of Asset
In rem proceedings implies that all the ▪ General Rule: sale or disposal of assets is
distributions will still be involving all persons, generally not permitted.
including creditors who did not participate in the
rehabilitation proceedings. The claims of these
creditors are considered but they shall not have a
right to vote. In rem proceedings shall include even
those who did not participate but shall still be
MJ LAZA 132
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Sale of encumbered or unencumbered will be parties + with consent of

declare void, unless: the affected owners +
▪ the unencumbered property may be sold, court hearing and
encumbered or otherwise disposed of upon order notice
of the court after notice and hearing:
o if such are in the interest of administering the Loan after Post Commencement
debtor and facilitating the preparation of the ▪ the debtor may secure debt post-commencement
rehabilitation plan (or filed after the filing of the petition for
o To provide a substitute lien, mortgage or insolvency)
property ▪ payment of these loans are considered
o For payment of administrative expenses administrative expenses
▪ should be done with approval of court
Sale of Asset Upon Showing
▪ the court may authorize the sale, transfer, The following should be done With approval of
conveyance or disposal of assets upon showing the Court
that: ▪ enter into a credit arrangement (borrowing of
o such is necessary for the continued operation money in any capacity)
of debtor’s business; and ▪ enter into a credit arrangement secured by
o debtor will make substitute lien that provides unencumbered property
an equal level of security ▪ enter into a credit arrangement with second
mortgage on encumbered property (two
Question: Is the sale of a property of the debtor mortgages for the same set of property)
proper if the debtor is undergoing rehabilitation
proceedings? TAXES
Answer: Generally, it is not permitted because these SEC. 19. Waiver of Taxes and Fees Due to the
properties may be later sold off to pay the debtor’s National Government and to Local Government Units
liabilities. It may be permitted upon showing that it is (LGUs). — Upon issuance of the Commencement Order by
for the interest the debtor and the preparation of the the court, and until the approval of the Rehabilitation Plan
or dismissal of the petition, whichever is earlier, the
rehabilitation plan, when the debtor will make a
imposition of all taxes and fees, including penalties,
substitute lien, and if it necessary for the payment of
interests and charges thereof, due to the national
administrative expenses. government or to LGUs shall be considered waived, in
furtherance of the objectives of rehabilitation.
SUMMARY
Not allowed except ▪ during rehabilitation proceedings
under the ordinary ▪ Waived (Sec. 19)
Use or disposal of
course of business or to ▪ Amount of indebtedness or obligations reduced or
funds or property
finance administrative condoned is not subject to tax
expenses
Sale of unencumbered TREATMENT OF CONTRACTS (Sec. 57)
and perishable assets *already explained
With court approval
outside of ordinary ▪ Contracts remain to be valid and continue in force
course ▪ Subject to confirmation within 90 days
Third parties shall not ▪ If not confirmed within 90 days, considered
Assets of debtor held transfer, convey or terminated
by third parties- otherwise dispose of the ▪ Considered to be an administrative expenses
possessory pledges, same to persons other
mechanics liens or than the debtor or with Question: Does this only cover contracts with money
similar claims approval of claims?
rehabilitation receiver
With court approval Answer: NO. Any contract of the debtor should be
Sale or disposal of
when there is security subject of confirmation because these contracts may
encumbered property
interest pertaining to 3rd
MJ LAZA 133
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have a direct or indirect effect to the business of the (a) Dismissal of the petition (no plan was
debtor. approved within one year)
(b) Debtor fails to submit a rehabilitation plan
PRE-COMMENCEMENT TRANSACTIONS (c) Under the rehabilitation plan, no substantial
▪ Transaction involving funds or assets may be likelihood of rehabilitation
rescinded or declared null and void (d) Failure to comply with the obligation
▪ If intended to defraud a creditor/s
▪ REMEDY: convert the proceedings into a
SECURED CREDITORS liquidation proceeding
▪ Effects: the rehabilitation receiver will be
Treatment of Secured Creditors discharged and the stay order will be lifted
▪ Only suspends the right to enforce a lien
➢ there is still a lien but it cannot be enforced
▪ Not deemed in any way to diminish or impair the
security or lien of a secured creditor
Remedy of Secured Creditor: ENFORCE

SECURITY, FORECLOSE LIEN
▪ the enforcement of the security or the foreclosure
of the lien will be permitted:
o If property subject of a lien is unnecessary in
the rehabilitation
o Upon recommendation of the rehabilitation
receiver and approval of the court
o Deficiency from claim will be covered by a
notice of claim
➢ the filing of the notice of claim implies that the
deficiency will no longer be covered by the
security; the secured creditor becomes an
unsecured creditor
EFFECT OF CONFIRMED REHABILITATION

PLAN
Effect of Confirmed Rehabilitation Plan

▪ Binds debtor and all persons affected by it even
those who did not participate (in rem)
▪ Order to which the debtor must comply
▪ Payment shall be made to creditors in the order
stipulated by the Rehabilitation Plan
▪ Any compromise or contract shall be binding even
if the Rehabilitation Plan was not successfully
implemented
➢ ex. if the rehabilitation plan provides that there
should be payment to X and the rehabilitation
plan was not confirmed, the obligation to pay
X remains
▪ Claims arising after confirmation is not covered
by suspension order
FAILURE OF REHABILITATION
▪ There is failure of rehabilitation when:
MJ LAZA 134
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▪ the rehabilitation proceeding should take place SUMMARY OF THE PROCEDURE FOR PRE-
within one year (from the filing of the petition to NEGOTIATED REHABILITATION:
approval)
▪ if more than one year, there is already a failure of
rehabilitation
PRE-NEGOTIATED REHABILITATION
Pre-Negotiated Rehabilitation
▪ parties come to an agreement as to how they are

going to be paid
▪ a rehabilitation plan has already been pre-
negotiated by a debtor and creditors and must be
submitted to the court for approval
▪ total period: 120 days from filing
▪ example: if an agreement was entered into on Out of Court Informal Restructuring
January 1, then within 120 days or four months, Agreements and Rehabilitation Plans
the same must have been submitted to the court
for approval Minimum Requirements:
▪ debtor must agree
Approved ▪ approved by those representing 67% of secured
▪ creditors holding 2/3 of total liabilities including creditors
secured creditors holding more than 50% of total ▪ approved by those representing 75% of
secured claims and unsecured creditors holding unsecured creditor
50% of total unsecured claims ▪ it must be approved by 85% creditors, secured
▪ segregate first the unsecured creditors from the and unsecured
secured creditors
▪ the 2/3 vote is not dependent on the number but STANDSTILL PERIOD
on the amount of the obligation or claim ▪ for the purpose of negotiating and finalizing
▪ once the required vote is met, the agreement is rehabilitation plan
deemed approved and is now due for the court’s ▪ rehabilitation plan has been agreed upon by
approval creditors representing 50% of total liabilities
MJ LAZA 135
Credit Transactions
▪ published for 2 consecutive weeks (publication is ▪ Voluntary Rehabilitation: Sole Proprietorship

notice to the whole world that if a party has whose business is registered with the DTI
interest or claim, then the party must participate ▪ in order that there be suspension of payments for
with the out of court proceedings) individual debtors, there should be a verified
▪ should not exceed 120 days petition that has the following contents:
▪ main purpose of the standstill period is for the o schedule of debts
parties to negotiate o inventory of assets
o proposed agreement
CRAM DOWN EFFECT ▪ in court supervised proceedings, the
▪ the rehabilitation plan affects those who did not rehabilitation receiver prepares the verified
participate in the informal restructuring petition but, in this case, the individual debtor
agreement prepares the petition
REMEDY OF INJUNCTION
▪ only if from Court of Appeals
▪ out of court informal restructuring agreements
may only be enjoined via an approval or order
from the Court of Appeals
PROCEEDINGS FOR INDIVIDUAL DEBTORS
Individual Debtor
▪ natural person who is a resident and citizen of the
Philippines that has become insolvent
▪ insolvency = inability to pay obligations as they
fall due
Suspension of payments (Sec. 94)
SEC. 94. Petition. — An individual debtor who,

possessing sufficient property to cover all his debts
but foreseeing the impossibility of meeting them
when they respectively fall due, may file a verified
petition that he be declared in the state of
suspension of payments by the court of the province
or city in which he has resided for six (6) months
prior to the filing of his petition. He shall attach to
his petition, as a minimum: (a) a schedule of debts
and liabilities; (b) an inventory of assets; and (c) a
proposed agreement with his creditors.
▪ debtor has sufficient assets to cover his debt but

foresees the impossibility of meeting his
obligations when they fall due
Suspension vs. Voluntary Rehabilitation

▪ Suspension: individual debtors
MJ LAZA 136
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PROCEDURE FOR SUSPENSION OF PAYMENTS FOR INDIVIDUAL DEBTORS:
court within ten (10) days from the date of the

STEPS: last creditors’ meeting. (Sec. 100)
➢ If the decision of the majority of the creditors
(1) If the court finds the petition sufficient in form to approve the proposed agreement is upheld
and substance, it shall, within five (5) working by the court, or when no opposition or
days from the filing of the petition, issue an objection has been presented, the court shall
Order, among others, calling a meeting of all the order that the agreement be carried out and
creditors and directing the creditors to prepare all parties bound thereby to comply with its
and present written evidence of their claims (Sec. terms. (Sec. 101)
95).
(5) When rejected:
(2) A meeting of all the creditors named in the ▪ The proposed agreement shall be deemed
schedule of debts and liabilities shall be rejected if the number of creditors required
conducted within forty (40) days from the date of for holding a meeting do not attend or if the
the Order. majorities mentioned are not in favor thereof.
In such instances, the proceeding shall be
➢ The presence of creditors holding claims terminated without recourse and the parties
amounting to at least three-fifths (3/5) of the concerned shall be at liberty to enforce the
liabilities shall be necessary for holding a rights which may correspond to them.(Sec.
meeting. 99)
➢ To form a majority, it is necessary: (1) that
two-thirds (2/3) of the creditors voting unite CONSEQUENCE OF SUSPENSION OF
upon the same proposition; and (2) that the PAYMENTS
claims represented by said majority vote
amount to at least three-fifths (3/5) of the Consequences
total liabilities. ▪ A debtor is prohibited from selling, transferring,
encumbering or disposing in any manner of his
(3) The creditors may approve or reject the Petition. property except in the ordinary course of
business.
(4) When approved: ▪ The individual debtor is prohibited from making
➢ If the proposal of the individual debtor is payment outside of the necessary or legitimate
approved by the majority of creditors, any expenses of his business or industry during
creditor who attended the meeting and who pendency.
dissented from and protested against the vote ▪ No creditor shall sue or institute proceedings
of the majority may file an objection with the to collect his claim.
MJ LAZA 137
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ONLY ALLOWABLE SUIT DURING PENDENCY OF

PROCEEDING PRIVILEGE OF SECURED CREDITOR
▪ Claims of labor, maintenance, expenses of last
illness and funeral of the wife or children of the (1) Property held by secured creditor shall not be the
debtor incurred within 60 days prior to the subject of suspension of execution
filing of the petition (2) Allowed to sue to enforce claim despite
▪ Those made by secured creditors can also be suspension order
permitted or allowed despite the suspension of (3) Are not governed by the proposed agreement if
payments they did not attend the meeting or failed to vote
SUSPENSION PENDING EXECUTION

▪ Upon motion by the debtor
▪ Valid for 3 months if there is no agreement
APPROVED AGREEMENT GOVERNS

▪ Creditors whose claims were included in the
schedule of debts and were properly summoned
even if it did not participate
IF DEBTOR FAILS TO COMPLY

▪ All the rights which the creditor had against the
individual debtor before the agreement shall
revest in them
▪ It is as if there is no agreement between the
creditor and debtor
LIQUIDATION PROCEEDINGS
How Initiated, For Both

▪ Liquidation may be initiated voluntarily by the
debtor or involuntarily by the creditor as long as
the situation presents that rehabilitation is no
longer feasible
▪ Liquidation is done via a Petition with a verified
motion in court supervised and pre-negotiated
JURIDICAL INDIVIDUAL
Insolvent debtor via verified petition Insufficient properties to cover obligations
VOLUNTARY whose debts is greater than or equal to
P500,000
3 or more creditors, at least P1 Million or at Any creditor or group of creditors of
least 25% of subscribed capital stock or aggregate claim of greater than or equal to
partner’s contribution P500,000
There is no genuine issue of fact or law on
INVOLUNTARY
the claims
Commission of acts of insolvency
No payment have been made for 180 days.
(Sec. 105)
There is no substantial likelihood that the
debtor may be rehabilitated.
SEC. 105. Petition; Acts of Insolvency. — xxx (a) That such person is about to depart or has
departed from the Republic of the Philippines,
The following shall be considered acts of insolvency, and with intent to defraud his creditors;
the petition for liquidation shall set forth or allege at least (b) That being absent from the Republic of the Philippines,
one of such acts: with intent to defraud his creditors, he remains
absent;
MJ LAZA 138
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(c) That he conceals himself to avoid the service of ▪ all contracts are deemed terminated or breached
legal process for the purpose of hindering or delaying unless confirmed by liquidator within 90 days
the liquidation or of defrauding his creditors; from date of assumption of office
(d) That he conceals, or is removing, any of his
▪ no separate action for unsecured claim shall be
property to avoid its being attached or taken on legal
allowed (all should be filed with the liquidation
process;
(e) That he has suffered his property to remain under court).
attachment or legal process for three (3) days for the ▪ PENDING: any obligation that is pending shall be
purpose of hindering or delaying the liquidation or of transferred to liquidator. If liquidator contests,
defrauding his creditors; the objection shall be heard by court.
(f) That he has confessed or offered to allow judgment in ▪ No foreclosure shall be allowed for a period of 180
favor of any creditor or claimant for the purpose of days from the filing of the petition for liquidation
hindering or delaying the liquidation or of defrauding
(necessary for assessment)
any creditor or claimant;
(g) That he has willfully suffered judgment to be taken
against him by default for the purpose of hindering or RESCISSION OF CONTRACTS
delaying the liquidation or of defrauding his creditors; ▪ If conditions exist under Sec. 58 or those entered
(h) That he has suffered or procured his property to be to defraud creditors
taken on legal process with intent to give a preference
to one or more of his creditors and thereby hinder or SALE OF UNENCUMBERED ASSETS
delay the liquidation or defraud any one of his ▪ Unencumbered assets may be sold and convert
creditors;
the same into money at public auction
(i) That he has made any assignment, gift, sale,
conveyance or transfer of his estate, property, rights
or credits with intent to hinder or delay the liquidation
or defraud his creditors;
(j) That he has, in contemplation of insolvency, made any
payment, gift, grant, sale, conveyance or transfer of
his estate, property, rights or credits;
(k) That being a merchant or tradesman, he has generally
defaulted in the payment of his current obligations for
a period of thirty (30) days;
(l) That for a period of thirty (30) days, he has failed, after
demand, to pay any moneys deposited with him or
received by him in a fiduciary capacity; and
(m) That an execution having been issued against him on
final judgment for money, he shall have been found to
be without sufficient property subject to execution to
satisfy the judgment.
Effects of Liquidation Order

▪ once there is a liquidation order, the debtor is
declared insolvent and the liquidation of the
debtor shall be made
▪ its corporate existence or juridical existence shall
be terminated
▪ when the corporate or juridical existence is
terminated, the debtor can no longer enter into
contracts or rely on its goodwill
▪ upon motion and hearing, payments and
transfer of property by the debtor is prohibited
except administrative expenses
▪ any claims and conveyance due to the debtor is
paid to the liquidator
▪ legal title of the assets of the debtor shall be
vested in the liquidator except those exempt from
execution
MJ LAZA 139
Credit Transactions
COMPARISON
RIGHT OF THE DEBTOR the secured creditors, those that waived the
(during the liquidation proceedings) secured credit and those considered as
▪ To maintain property that is exempt from unsecured creditors
execution
▪ To exempt from execution the homestead A. ELECTED LIQUIDATOR
▪ only by the unsecured creditors who have
Some examples that are exempted from filed their claims within the period may elect
Execution: a liquidator
▪ Ordinary tools and implements personally used
by him in his trade, employment or livelihood B. COURT APPOINTED LIQUIDATOR
▪ 3 horse, 3 cows, 3 carabaos ▪ may be the rehabilitation receiver if there was
▪ Necessary clothing and articles for ordinary a conversion of proceedings from
personality use, excluding jewelry rehabilitation to liquidation
▪ the court may appoint a liquidator when:
RIGHTS OF A SECURED CREDITOR o creditors do not attend the hearing for
(liquidation proceedings) the election of liquidator
o creditors fail or refuse to elect a liquidator
Right of a Secured Creditor o liquidator fails to qualify
▪ Liquidation order does not affect the right of a o vacancy occurs for any reason (example:
secured creditor to his lien death of a liquidator)
BUT Secure Creditor MAY LIQUIDATION PLAN

▪ Waive right under the security or lien, proving ▪ submitted within 3 months from assumption into
claim in the liquidation proceedings and share in office of the liquidator
the distribution of the assets of the debtor; or
▪ Maintain his right under the security PROCEDURE
LIQUIDATOR COMPARISON
▪ has the obligation of submitting a liquidation plan

and to maintain a registry of claims identifying
MJ LAZA 140
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Voluntary Insolvency Involuntary ▪ After which, a hearing is conducted.

Liquidation
▪ Prayer: To be ▪ Creditors must SUMMARY OF THE PROCEDURE:
discharged from his allege acts of
obligation insolvency or any of
▪ Venue: where those under Sec.
debtor resides 105:
(1) Debtor has departed
or is about to depart
the Philippines
(2) Conceals himself to
avoid legal process
PROCEDURE FOR VOLUNTARY:
ACTUAL PROCEDURE:
▪ Petition may be filed either by the creditor or the

debtor
▪ The court issues a liquidation order
PROCEDURE FOR INVOLUNTARY:

▪ Selling of the property is under the authority of
the sheriff and not the liquidator.
Section 133
▪ The liquidation plan shall make sure that the
concurrence and preference of credits as
enumerated in the Civil Code shall be
observed…unless waived.
▪ A petition is filed by the creditor,

▪ The debtor is ordered to show cause within 15
days on why there should not be a liquidation
proceeding.
▪ If there is an answer, an order is issued by the
liquidation court ordering the debtor to refrain
from paying or transferring properties.
MJ LAZA 141
Credit Transactions
CLASSIFICATION OF CREDITS AND ORDER OF PREFERENCE OF CREDITS
PREFERENCE v. CONCURRENCE CLAIMS

1 land* 1,000,000
Preference 1 building* 5,000,000
▪ a preference applies only to claims which do not Employees 500,000
attach to specific properties Real Property Tax 1,000,000
➢ preference is a claim on all properties Tuition Fee 500,000
➢ there is no specific property to which a Cars* 1,000,000
preference is going to be made Income Tax 500,000
➢ preference of credit means that it is an Donor’s Tax 1,000,000
obligation of the debtor to someone but there is Total 10,500,000
no specific property covered by it *subject to a mortgage agreement
➢ example: a claim of specific damages for the
injuries sustained by a person is not attached In this problem, the assets are greater than the claims
on any particular property, hence it is only a (P14 Million > P10.5 Million). Hence, the debtor can
preference readily pay all the claims.
Concurrence However, note that the state of being insolvent does

▪ a lien creates a charge on a particular property not mean that there are more assets than liabilities.
➢ example: a cause for damages because of loss Insolvency means that there is failure to pay all
of property which is not excused by a fortuitous obligations as they become due.
event (such as when the property is only
borrowed from someone else or a In this problem, there could still be an insolvency or
Commodatum) is a charge on a particular liquidation proceeding but all of the creditors can be
property (concurrence of credit applies) paid.
➢ other claims on a specific property: real estate
mortgage (land and building), chattel mortgage Problem 2: The following are the real and personal
(movable property), security agreements under properties of the debtor:
the PPSA, pledge (movable property),
antichresis (fruits of the property) REAL PROPERTY PERSONAL PROPERTY
1 land* 2,500,000 Car* 2,000,000
CLASSIFICATION OF CREDITS 1 building* 4,000,000 Cash 500,000
Total 6,500,000 2,500,000
▪ the provisions of Articles 2241-2245 of the NCC Grand Total 9,000,000
are only relevant when it comes to insolvency
proceedings and only when there is liquidation of The debtor has the following claims:
the properties of the debtor CLAIMS
▪ payment according to credit (preference) will not 1 land* 1,000,000
be applicable if the debtor is not insolvent 1 building* 5,000,000
▪ there must be insolvency or liquidation of assets Employees 500,000
Real Property Tax 1,000,000
Problem 1: The following are the real and personal Tuition Fee 500,000
properties of the debtor: Cars* 1,000,000
Income Tax 500,000
REAL PROPERTY PERSONAL PROPERTY Donor’s Tax 1,000,000
1 land* 3,000,000 Cars* 3,000,000 Total 10,500,000
1 building* 8,000,000 *subject to a mortgage agreement
Total 11,000,000 3,000,000
Grand Total 14,000,000
In this case, the total assets of the debtor is lesser
than the claims (P9 Million < P10.5 Million).
The debtor has the following claims:
MJ LAZA 142
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Questions: Which creditor should be paid first? If all

Article 2242. With reference to specific immovable property
property will be sold, how would the proceeds be
and real rights of the debtor, the following claims, mortgages and
divided? liens shall be preferred, and shall constitute an encumbrance on
the immovable or real right:
PROCEDURE FOR PAYMENT (1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovable
sold;
Taxes 2241 & 2244 2245 (3) Claims of laborers, masons, mechanics and other workmen,
2242
as well as of architects, engineers and contractors, engaged
in the construction, reconstruction or repair of buildings,
▪ the NCC and decisions of the Supreme Court
canals or other works, upon said buildings, canals or other
specifies the procedure for payment works;
▪ taxes must be paid first because of the lifeblood (4) Claims of furnishers of materials used in the construction,
doctrine followed by the payments of those reconstruction, or repair of buildings, canals or other works,
upon said buildings, canals or other works;
enumerated under 2241 and 2242, then 2244, (5) Mortgage credits recorded in the Registry of Property, upon the
and last 2245 real estate mortgaged;
(6) Expenses for the preservation or improvement of real property
Article 2241. With reference to specific movable property of the when the law authorizes reimbursement, upon the immovable
debtor, the following claims or liens shall be preferred: preserved or improved;
(1) Duties, taxes and fees due thereon to the State or any (7) Credits annotated in the Registry of Property, in virtue of a
subdivision thereof; judicial order, by attachments or executions, upon the property
(2) Claims arising from misappropriation, breach of trust, or affected, and only as to later credits;
malfeasance by public officials committed in the performance (8) Claims of co-heirs for warranty in the partition of an
of their duties, on the movables, money or securities obtained immovable among them, upon the real property thus divided;
by them; (9) Claims of donors or real property for pecuniary charges or
(3) Claims for the unpaid price of movables sold, on said other conditions imposed upon the donee, upon the immovable
movables, so long as they are in the possession of the debtor, donated;
up to the value of the same; and if the movable has been resold (10) Credits of insurers, upon the property insured, for the
by the debtor and the price is still unpaid, the lien may be insurance premium for two years.
enforced on the price; this right is not lost by the
immobilization of the thing by destination, provided it has not Article 2243. The claims or credits enumerated in the two
lost its form, substance and identity; neither is the right lost preceding articles shall be considered as mortgages or pledges
by the sale of the thing together with other property for a lump of real or personal property, or liens within the purview of
sum, when the price thereof can be determined proportionally; legal provisions governing insolvency. Taxes mentioned in No.
(4) Credits guaranteed with a pledge so long as the things 1, article 2241, and No. 1, article 2242, shall first be satisfied.
pledged are in the hands of the creditor, or those guaranteed
by a chattel mortgage, upon the things pledged or mortgaged, Article 2244. With reference to other property, real and
up to the value thereof; personal, of the debtor, the following claims or credits shall be
(5) Credits for the making, repair, safekeeping or preservation of preferred in the order named:
personal property, on the movable thus made, repaired, kept (1) Proper funeral expenses for the debtor, or children under his
or possessed; or her parental authority who have no property of their own,
(6) Claims for laborers' wages, on the goods manufactured or the when approved by the court;
work done; (2) Credits for services rendered the insolvent by employees,
(7) For expenses of salvage, upon the goods salvaged; laborers, or household helpers for one year preceding the
(8) Credits between the landlord and the tenant, arising from the commencement of the proceedings in insolvency;
contract of tenancy on shares, on the share of each in the fruits (3) Expenses during the last illness of the debtor or of his or her
or harvest; spouse and children under his or her parental authority, if
(9) Credits for transportation, upon the goods carried, for the price they have no property of their own;
of the contract and incidental expenses, until their delivery (4) Compensation due the laborers or their dependents under
and for thirty days thereafter; laws providing for indemnity for damages in cases of labor
(10) Credits for lodging and supplies usually furnished to travellers accident, or illness resulting from the nature of the
by hotel keepers, on the movables belonging to the guest as employment;
long as such movables are in the hotel, but not for money (5) Credits and advancements made to the debtor for support of
loaned to the guests; himself or herself, and family, during the last year preceding
(11) Credits for seeds and expenses for cultivation and harvest the insolvency;
advanced to the debtor, upon the fruits harvested; (6) Support during the insolvency proceedings, and for three
(12) Credits for rent for one year, upon the personal property of the months thereafter;
lessee existing on the immovable leased and on the fruits of (7) Fines and civil indemnification arising from a criminal offense;
the same, but not on money or instruments of credit; (8) Legal expenses, and expenses incurred in the administration
(13) Claims in favor of the depositor if the depositary has of the insolvent's estate for the common interest of the
wrongfully sold the thing deposited, upon the price of the sale. creditors, when properly authorized and approved by the
court;
In the foregoing cases, if the movables to which the lien or (9) Taxes and assessments due the national government, other
preference attaches have been wrongfully taken, the creditor may than those mentioned in articles 2241, No. 1, and 2242, No. 1;
demand them from any possessor, within thirty days from the (10) Taxes and assessments due any province, other than those
unlawful seizure. referred to in articles 2241, No. 1, and 2242, No. 1;
MJ LAZA 143
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(11) Taxes and assessments due any city or municipality, other ➢ Under Article 2244, there is no specific real or
than those indicated in articles 2241, No. 1, and 2242, No. 1;
personal property, hence considered as
(12) Damages for death or personal injuries caused by a quasi-
delict; preference of credit
(13) Gifts due to public and private institutions of charity or
beneficence; Question: Which taxes are to be paid first?
(14) Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the
subject of litigation. These credits shall have preference STEPS:
among themselves in the order of priority of the dates of the (1) Divide the claims under Arts. 2241 and 2242
instruments and of the judgments, respectively.
into taxes and non-taxes.
Article 2245. Credits of any other kind or class, or by any
other right or title not comprised in the four preceding articles, shall (2) Pay first the taxes referred to 2241(1) and
enjoy no preference. 2242(2)
➢ taxes shall only refer to those under 2241(1)
and 2242(2)
Article 2243
➢ these are taxes that are specific to a property
▪ claims or credits enumerated in 2241 and 2242
are treated as mortgages or pledges of specific real
2241(1): Duties, taxes and fees due thereon to
or personal property
the State or any subdivision thereof;
➢ these are specific credits over a specific
property
2242(1): Taxes due upon land or building
➢ Note:
examples: importation taxes on cars, real

Article 2241(5): claims for making,
property taxes on land or building, donor’s taxes
safekeeping, preservation of personal
property
➢ income taxes are not included if based solely
 not a pledge but since considered as a
on income; however, if income taxes are
claim over a specific personal property,
based on a specific property such as sale of
then it is going to be considered as a
immovable or movable property, it is covered
pledge
under Arts. 2241 or 2242
 ex. claims of a depositary for keeping the
thing: since it is not paid, the claim of the
(3) Pay the non-taxes referred to under 2241(2) to
depositary as against the debtor will be
13 and 2242(2) to (10)
considered as pledge even if the deposit
➢ these are assets that are considered non-
(thing) is already returned to the
taxes
depositary. Just think that there is now a
➢ there is no preference, hence, no order
creation of lien over the property.
Non-taxes under 2241 and 2242

➢ Articles 2241 and 2241 is subject to
▪ these are paid after taxes
concurrence
▪ no preference is made, no order
▪ to be treated on an equal basis and to be
➢ Note again:
satisfied concurrently and
proportionately (RP v. Hon. Peralta, G.R.
Article 2242(6): expenses for the preservation
No. L-56568, May 20, 1987)
or improvement of real property when law
▪ the listing is for the purpose of
authorizes reimbursement
identification and not based on preference
 still considered a lien
▪ those with bigger claim has bigger share
 applicable to real mortgage and other
secured transactions, other claims of
payment for purposes of equity, and Preferred claim in specific movables
others in connection to specific contracts (immovables)
such as repairs in case of lease or ▪ exclude all others to the extent of the value
payment of damages in Commodatum of the personal property (or real property)
to which the lien refers
MJ LAZA 144
Credit Transactions
▪ if there are two or more credits, satisfied the Civil Code, unless the claims constitute legal liens
pro-rate, after payment of duties, taxes under Article 2241* and 2242** thereof.
and fees due to the state
*paragraph 6
**paragraph 3
Comment of Atty. T: it seems like creditors are
giving up a portion of their claims… but then
➢ Implication: (What this means)
again…
a) Proper funeral expenses for the debtor, or
▪ a secured creditor is not deprived of his
children under his or her parental authority
right to maintain security under his right
who have no property of their own, when
(insolvency proceeding)
approved by the court.
▪ secured creditors has the option of either
maintaining his credit and getting the
b) Credits for services rendered the insolvent
property as payment for the obligation, or
employees, laborers or household helpers for
he can give up and participate in the
one year preceding the commencement of the
liquidation proceeding as an unsecured
proceedings in insolvency;
creditor and file a notice of claim
▪ Article 2244(4)
▪ The Supreme Court held, in the case of
Formula for FREE PROPERY:
RP v. Hon. Peralta, G.R. No. L-56568, May
Value of Property
20, 1987, that it is not necessary that the
- Value of Credits which enjoy preference
claims be only for one year preceding the
= Result added to Free Property which will commencement of the proceedings in
be used for other credits insolvency.
▪ Read as follows: “Credits for services
Free property shall be used to pay ordinary claims rendered the insolvent employees,
under Art. 2244. laborers or household helpers”
(4) Pay ordinary claims under Art. 2244, in the (5) Pay other claims under Art. 2245.
order of preference (as enumerated). ➢ those not mentioned in Arts. 2241, 2242,
2244.
For Art. 2244 ➢ these enjoy no preference and are paid pro-
rata.
ORDINARY CLAIMS ➢ this provision is reserved for those claims for
▪ preferred and in the ORDER named the payment of money
▪ considered as preferred credits ➢ money is a generic property and not
specific or determinate
Basis for Payment: FREE PROPERTY
examples: in the problem provided, tuition
FREE PROPERTY fees belong to this class; loans made through
▪ excess from payment of credits from Arts. oral agreements
2241 and 2242
▪ pays for ordinary credits under Art. 2244 APPLICATION:
unless there is a lien which creates first REAL PROPERTY PERSONAL PROPERTY
preference among ordinary claims 1 land* 2,500,000 Car* 2,000,000
▪ 1 building* 4,000,000 Cash 500,000
Total 6,500,000 2,500,000
Grand Total 9,000,000
➢ “first preference” is also mentioned under Art.
110 of the Labor Code
CLAIMS
1 land* 1,000,000
Art. 110 of the Labor Code in relation to Art.
1 building* 5,000,000
2244 of the Civil Code and Sec. 133 of the FRIA
Employees 500,000
Real Property Tax (on immovable 1,000,000
Credits for services rendered by employees or laborers
property)
shall enjoy first preference under Article 2244 of
Tuition Fee 500,000
MJ LAZA 145
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Cars* 1,000,000 Article 2241(6): Claims for laborers' wages, on the

Income Tax 500,000 goods manufactured or the work done.
Donor’s Tax (on personal property) 1,000,000
Total 10,500,000 Article 2242(3): Claims of laborers, masons,
mechanics and other workmen, as well as of
architects, engineers and contractors, engaged in
Question: How to go about it?
the construction, reconstruction or repair of
buildings, canals or other works, upon said
(1) Tally all assets and divide them as to real or buildings, canals or other works.
personal property. Then deduct from those
properties the taxes specific to each. ➢ Tuition fees are not attached to a specific
property; hence, it does not fall under Articles
Real Personal
2241 or 2242.
Property Property
Proceeds from the sale 6,500,000 2,500,00
(3) Pay the ordinary claims, in the order stated under
Pay the taxes first:
- RPT (1,000,000) Art. 2244.
- Donor’s Tax (1,000,000)
Balance: 5,500,000 1,500,000 Real Property Personal
Property
Proceeds from the 6,500,000 2,500,00
➢ no payment of income tax (since it is not
sale
specific to a property)
- RPT (1,000,000)
(2) Satisfy the non-tax claims under Articles 2241 - Donor’s Tax (1,000,000)
and 2242. Balance: 5,500,000 1,500,000
Pay the non-tax
Real Property Personal claims under Arts.
Property 2241 and 2242:
Proceeds from the 6,500,000 2,500,00 - REM on land
(1/6)* 5,500,000
sale - REM on building (5/6)* 5,500,000
- RPT (1,000,000) Note: the pro-rata
- Donor’s Tax (1,000,000) division is based on
the value of the claims
Balance: 5,500,000 1,500,000
(see table).
Pay the non-tax
claims under Arts.
- Chattel Mortgage
2241 and 2242: (1,000,000)
On cars
- REM on land
(1/6)* 5,500,000 Free Property 0 500,000
- REM on building (5/6)* 5,500,000 Pay ordinary claims
(1) Employees (500,000)
Note: the pro-rata
division is based on (2) Income taxes (0)
the value of the claims Free Property 0 0
(see table).
➢ claims of employees are under Art. 2244(1)
- Chattel Mortgage
(1,000,000) while Income Taxes are under 2244(9)
On cars
➢ in this case, no amount can be used to pay
Free Property 0 500,000
for the income taxes due to the government;
employees enjoy preference.
➢ salaries of employees, who are working other
➢ since after payment of claims of employees,
than those enumerated under Articles 2241
there is no free property left, the income taxes
and 2242, are not yet considered at this
have to be paid through other means
point.
(government shall look for other means to
collect)
Claims of employees under Articles 2241 and
2242 are specific to properties:
(4) Pay money claims (generic character) under Art.
2245.
MJ LAZA 146
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▪ pledge: P 500,000
Real Property Personal ▪ security agreement by possession: P2,000,000
Property ▪ security agreement by registration: P 500,000
Proceeds from the 6,500,000 2,500,00 ▪ income tax: P3,000,000
sale
Total: P6,000,000
- RPT (1,000,000)
- Donor’s Tax (1,000,000)
Question: Who is going to be paid first?
Balance: 5,500,000 1,500,000 Answer: The creditors shall be paid in the following
Pay the non-tax order:
claims under Arts. (1) the following shall be paid proportionately:
2241 and 2242: ▪ pledge
- REM on land ▪ security agreement by possession
(1/6)* 5,500,000
- REM on building (5/6)* 5,500,000 ▪ security agreement by registration
(2) income tax
Note: the pro-rata
division is based on
the value of the claims Personal Property 2,000,000
(see table). Pay claims under Art.
2241, proportionately:
- Chattel Mortgage ▪ pledge (0.5/3)* 2,000,000
(1,000,000)
On cars ▪ security agreement by
Free Property 0 500,000 possession (2/3) * 2,000,000
Pay ordinary claims ▪ security agreement by (0.5/3)* 2,000,000
(3) Employees (500,000) registration
(4) Income taxes (0)
Free Property 0 0 Free Property 0
Last preference
(under Art. 2245) The government can no longer be paid for the income
- tuition fee (0) tax due.
➢ since after payment of claims of employees, Effect of PPSA (Explanatory Notes)

there is no free property left, the payment of
tuition fees can no longer be collected, as Section 6.04(b) (By Operation of Law):
well.
The first paragraph of Section 6.04(b) is a
SUMMARY restatement of Section 22 of the PPSA. The
reference to “the applicable insolvency law”
Procedure for Payment of Creditors: indicates legislative intent that Congress did not
(1) divide the claim made for specific real property or intend to abandon the preference of credit. The
personal property second paragraph of Section 6.04(b) clarifies the
(2) pay off taxes owing to real and personal property, necessary effect of a security interest in a collateral
respectively upon insolvency proceedings. It is analogous to a
(3) pay specific credits under 2241 and 2242 pro- specific preferred credit of pledge in the old law.
rata
(4) determine free property
▪ Hence, as applied in the problem, whenever there
(5) arrange credits either 2244 or 2245
is only a single property and some of the claims
(6) pay 2244 according to order
are covered by security agreements under the
(7) pay 2245 pro-rata
PPSA, there should be no hierarchy on the
payment of these secured claims.
Consequence of In Rem Proceeding

Problem 3:
The debtor only has a single property:
In rem, which are binding against the whole world,
▪ motor vehicle worth P2,000,000
bind every person whether they be notified or not.
But there are a number of claims or creditors:
MJ LAZA 147
Credit Transactions
▪ In order for there to be concurrence, all creditors QUIZ 6 FINALS SUGGESTED ANSWERS:
who has a claim must be present in the
proceeding.
▪ For good division of the properties of the debtor,
all creditors must be present.
Additional Notes: Answer to Formative

Assessment:
Order of Payment:
1) Real Property Tax for Apartment
2) Chattel Mortgage for Car
3) Separation pay of employee illegally dismissed
4) Attorney’s fees for Damages Suit
5) SSS dues of employees
6) Business Permit Dues
7) Rent for apartment as obligated in a notarized
document
8) City utilities i.e. water, electricity
MJ LAZA 148

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Notes on discussions of Atty. Y. Tadeo

REVIEW: OBLICON, PROPERTY, SALES Conditional Deed of

Q: Is a sale of a real property in a tissue paper

Consensual Contract TYPES OF CREDIT TRANSACTIONS

2. Bailee Q: Can a possessor become an owner by mere

3. There must be eventual return of the

Obligation of Bailor: deliver the property which is 3. Bailment of Mutual Benefit

Q: Who is the creditor in a relationship with the

Consequences of the Primary Purpose

Depositary may make use of the thing:

VOLUNTARY DEPOSIT The permission shall not be presumed, and its

 made by the will of the depositor

IRREGULAR DEPOSIT 1. cannot make use of the thing without

3. Requirement of Diligence in the Care

 Q: Can the diligence be less than ordinary

A: NO. The minimum standard set by law is

What is ordinary diligence?

 A contract of deposit may include two things:

 there must be demand  What is required is for the depositary is to choose

Art. 1988 How returned?

Cannot return if: 13. Obligation to return the principal, accessories,

Where to return? 15. Obligations for CLOSED and SEALED Deposits

During the one-month period:

 Other deposits required in suits, as provided Art. 1754

Hotel Requisites in order to be Applicable:

2. Take care of the vehicles, animals and articles

account of lodging, and supplies usually furnished to hotel

legal obligation to safely Q: Can damages be recovered? Unlikely

A judicial deposit or sequestration takes place when an

 includes movables and immovables through

Obligation of the depositary in judicial deposits:

Extinguishment of Judicial Deposit

Q: Can the judges be sued? Only upon permission.

LEASE obligations created by the contract between the

Presumption when lease begins: When buyer terminates the lease

REGISTRATION OF A LEASE FICTITIOUS SALE

3) Warranty in case of Eviction Lessee is liable for

 Why? Because the property cannot be enjoyed at

REPAIRS  the lessee has the right to reduction of the rent

Article 1662. Other rights of the lessee (in case of necessary

What is the relationship between the lessor and

Rent of the Lessee

The ejectment of tenants of agricultural lands is governed

Lessor may judicially eject when:

When is the remedy available? 7% P5,000.00 to P8,999.00

When should rent be paid (under the Act):

Limit on Increase on Rent Who shall repossess (by whom):

Permitted Increase Covered Rent

Two (2) months deposit, one (1) month

(5) deposit should be kept in a bank under the

(6) arrears of rent as a ground for judicial ejectment

Section 12. Application of the Civil Code and the

Except when the lease is for a definite period, the

 The Rent Control Act does not require that the

LOAN: COMMODATUM AND MUTUUM

Q: Can there be consensual contract of

Objects of Commodatum: The object is non-consumable and may be used

Characteristics:  object of Commodatum is not consumable

The bailee in commodatum acquires the use of the thing Problem: