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1.

It is a sum credited on the books of


CREDIT a company or to a person who
appears entitled to it.
FINALS REVIEWER 2. Credit also presupposes a creditor-
Prof. Stephanie Gomez-Somera debtor relationship and may be
Second Semester, AY 2012-2013 said to imply ability, by reason of
property or estates, to make a
promised payment.
3. It is also correlative to debt or
indebtedness, that which is due to
any person, as distinguished from
INTRODUCTION: THE CONCEPT OF CREDIT that which he owes.
 Jurisprudence also provides for a definition
A. Credit, Debt and Security
of debt as follows:
Somera notes:
1. It is a demand for an amount
 The concepts of credit and debt date back actually ascertained and not a mere
from ancient times wherein it used to be unliquidated demand or liability.
that non-payment of a debtor of his 2. The amount demanded is such that
obligation to the creditor can lead to cruel may  be  recovered  “in  numero”  and  
punishments. Subsequently, debt gave birth not to be repaired in damages.
to the concept of security which mitigates
the risk of non-payment of debt. People v. Concepcion (1922)
 Consequently, trade and commerce
flourished in the 14th to 19th centuries. By FACTS: PNB Pres. Concepcion was charged and
the 20th century, modern-day merchants found guilty of violating Sec. 35 of Act No. 2747
were translating the concepts of credit, debt which prohibited the granting of loans to board
and security into increasingly complicated members or agents of the bank. Concepcion was
and sophisticated transactions required by found to have granted a loan to the Puno y
the global economy. Concepcion co-partnership of which he is a part of.
B. Credit and Credit Transactions Defined HELD: “Credit”   is the means of an individual to
borrow money by virtue of the trust and confidence
R.A. No. 3765, Sec. 3.(2) "Credit" means any loan, reposed by a lender that he will pay what he
mortgage, deed of trust, advance, or discount; any promised. A “loan”  is  the  delivery  by  one  party  and  
conditional sales contract; any contract to sell, or the receipt by the other party of a given sum of
sale or contract of sale of property or services, either money, upon an agreement, express or implied, to
for present or future delivery, under which part or repay the sum loan, with or without interest. The
all of the price is payable subsequent to the making concession   of   a   “credit”   necessarily   involves   the  
of such sale or contract; any rental-purchase granting   of   “loans”   up   to   the   limit   of   the   amount  
contract; any contract or arrangement for the hire, fixed   in   the   “credit. Thus,   Concepcion’s   act   was in
bailment, or leasing of property; any option, violation of said law.
demand, lien, pledge, or other claim against, or for
the delivery of, property or money; any purchase, or Somera notes:
other acquisition of, or any credit upon the security  Justice   Malcolm   defined   credit   as   a   person’s  
of, any obligation of claim arising out of any of the ability to borrow money by virtue of the
foregoing; and any transaction or series of confidence or trust reposed by a lender that
transactions having a similar purpose or effect. he will pay what he may promise.
 This definition can be related to the
Somera notes: dictionary definition of the word credit,
 It is not the Civil Code but the Truth in which is, belief or trust, originating as it
Lending Act as abovecited that provide a does from the Latin credere, to trust or to
legal definition of credit. But such definition believe.
is only an enumeration of the coverage of  In essence, credit is an evaluation, made in
the law and applicable contracts and does the present, by virtue of the trust and
not provide a conceptual framework by confidence reposed by a creditor, of a
which to understand credit. debtor’s  future  worth  or  ability.
 Jurisprudence has defined credit as follows:

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 Credit transactions, on the other hand, are transaction, recognized as a
all obligations (juridical necessity to give, to standard of value, and authorized
do, or not to do) that arise as a consequence or adopted by a State as part of its
of such evaluation. currency.
2. It also approximates absolute
C. Commercial Credit Transactions credit as it represents the trust and
confidence reposed by the holder in
Code of Commerce a State.
ARTICLE 1. For purposes of this Code, 3. The use of money involves an
merchants are: evaluation, made in the present, by
1.Those who, having legal capacity to engage in virtue of the trust and confidence
commerce, habitually devote themselves to it; reposed   by   the   holder,   of   a   State’s  
2. The commercial or industrial companies which future worth or ability.
may be created in accordance with [existing  Social and economic changes in the 20th
legislation]. century (particularly the US) altered the
ARTICLE 2.Acts of commerce, whether those who credit landscape (i.e. property that was to
execute them be merchants or not, and stand as security was no longer valued at
whether specified in this Code or not, should be present values but on a continuing trend of
governed by the provisions contained in it, in their appreciating values).
absence, by the usages of commerce generally  The evaluation being made in credit
observed in each place; and in the absence of both transactions (i.e. debtor’s   future   worth   or  
rules, by those of the civil law. Those acts contained ability) was based on the same appreciating
in this Code and all others of analogous character values of security, and not on the trust and
shall be deemed acts of commerce. confidence   reposed   on   the   debtor’s   ability  
ARTICLE 3.The legal presumption of habitually to pay.
engaging in commerce shall exist from the moment  These resulted to 2 things:
the person who intends to engage therein 1. More debtors became eligible for
announces through circulars, newspapers, handbills, more credit under terms that
posters exhibited to the public, or in any other mirrored this trend of rising
manner whatsoever, an establishment which has for property values; and
its object some commercial operation. 2. Payments and interest were
deferred, and promises of higher
Somera notes: credit were made.
 The Code of Commerce and certain special  Just as a credit transaction was the root of
laws also govern commercial credit the 21st century’s   first   financial   meltdown
transactions since such transactions are (i.e. 2007 global credit crisis), it is also now
commercial in nature and are habitually being used as a tool for poverty alleviation
entered into by merchants. (eg. microfinance and microcredit.).
 Since commercial credit transactions are
habitually entered into, these usually take LOAN
the form of ready-made contracts (contracts
of adhesion) wherein one party imposes a I. THE CONCEPT OF LOAN
ready-made form of contract on the other
who is free to reject it entirely, or if it A. General Concepts
adheres, to give its consent.
 While these contracts of adhesion in Art. 1933 By the contract of loan, one of the parties
commercial credit transactions are not delivers to another, either something not
invalid, any ambiguity in its interpretation consumable so that the latter may use the same for a
will be construed against the party who certain time and return it, in which case the contract
prepared it. is called a commodatum; or money or other
consumable thing, upon the condition that the same
D. The Relevance of Trust and Confidence amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or
Somera notes: mutuum.
 Money also involves a credit transaction. Commodatum is essentially gratuitous.
1. Money = anything generally Simple loan may be gratuitous or with a stipulation
accepted as payment in a to pay interest.

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In commodatum the bailor retains the ownership of a result, she filed a complaint for a sum of money
the thing loaned, while in simple loan, ownership against Thio. Thio counters that she should not be
passes to the borrower. made liable for said debt since it was Marilou
Santiago who actually contracted the loan and that
Art. 1305 A contract is a meeting of minds between she was merely asked by Garcia to the deliver the
two persons whereby one binds himself, with checks to Santiago. RTC found that Thio was liable
respect to the other, to give something or to render to   Garcia   for   the   money.   CA   reversed   the   RTC’s  
some service. ruling declaring that there was no contract of loan
between Thio and Garcia.
Somera notes:
 A loan is an obligation that always arises HELD: Thio should be made liable to Garcia for the
from contract, the meeting of the minds of loan. A loan is a real contract that is perfected only
the creditor, who delivers the thing or upon delivery of the object of the contract. Delivery,
property, and the debtor, the party who in turn, is the act by which the res or substance
receives the property and is consequently thereof is placed within the actual or constructive
bound to return the property or pay the possession or control of another. It was undisputed
same amount of the same kind and quality that the checks were delivered to Thio. Although
to the creditor. Thio did not physically receive the proceeds of the
 A loan, whether commodatum or mutuum, checks, these instruments were placed in her control
is a contract for permissive use. and possession under an arrangement whereby she
 It may also be likened to a lease in terms of actually re-lent the amounts to Santiago. Delivery
permissive use; however, a loan is not unto her of said checks her liable for the amounts
necessarily for remuneration unlike in the thereof.
former wherein remuneration plays a key
role in the consideration and object of the 2. Object of a Loan
contract.
Art. 1933 By the contract of loan, one of the parties
1. Obligation to Deliver delivers to another, either something not
consumable so that the latter may use the same for a
Art. 1934 An accepted promise to deliver something certain time and return it, in which case the contract
by way of commodatum or simple loan is binding is called a commodatum; or money or other
upon parties, but the commodatum or simple loan consumable thing, upon the condition that the same
itself shall not be perfected until the delivery of the amount of the same kind and quality shall be paid, in
object of the contract. which case the contract is simply called a loan or
mutuum.
Somera notes: Commodatum is essentially gratuitous.
 The primary obligation of the creditor in a Simple loan may be gratuitous or with a stipulation
loan is delivery. to pay interest.
 Delivery is the formal act of transferring, In commodatum the bailor retains the ownership of
giving pr yielding possession or control of the thing loaned, while in simple loan, ownership
property by the creditor for permissive use passes to the borrower.
by the debtor.
 In effect, a loan (whether commodatum or Art. 418 Movable property is either consumable or
mutuum) is considered a real contract, nonconsumable. To the first class belong those
wherein property passes from one party to movables which cannot be used in a manner
another, requiring something more than appropriate to their nature without their being
mere consent. consumed; to the second class belong all the others.
 In the real contracts of commodatum and
mutuum, delivery by the creditor of the Somera notes:
object of the contract is essential for  The object (subject) of a loan is either
perfection. property that is non-consumable, or money
or other consumable property.
Garcia v. Thio (2007)  Non-consumable property is the object of a
FACTS: Two crossed checks were made payable to commodatum and may be a movable or
the order of a certain Marilou Santiago that were immovable.
received by Thio from Garcia in 1995. According to 1. If this is the object of the loan, the
Garcia, Thio failed to pay when the loans fell due. As purpose of the delivery by the

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creditor is for the permissive use of term
the property by the debtor for a For use or temporary For consumption
certain time, with the creditor possession
retaining ownership. Any property Personal property
2. This also gives rise to the obligation Bailor bears risk of loss Debtor/bailee bears risk
on the part of the debtor to return of loss
the very same property to the Ownership retained by Ownership passes to the
creditor. bailor debtor
 Money or other consumable property may
be the object of a mutuum. 4. Obligation to Return or Pay
1. The purpose of the delivery by the Art. 1933 By the contract of loan, one of the parties
creditor is for the permissive use of delivers to another, either something not
the property by the debtor by consumable so that the latter may use the same for a
taking ownership. certain time and return it, in which case the contract
2. Since the use of consumable is called a commodatum; or money or other
property also results to its consumable thing, upon the condition that the same
extinguishment, the debtor is amount of the same kind and quality shall be paid, in
obliged to pay the same amount, or which case the contract is simply called a loan or
kind and quality to the creditor. mutuum.
Commodatum is essentially gratuitous.
3. Consideration of a Loan Simple loan may be gratuitous or with a stipulation
to pay interest.
Art. 1933 By the contract of loan, one of the parties In commodatum the bailor retains the ownership of
delivers to another, either something not the thing loaned, while in simple loan, ownership
consumable so that the latter may use the same for a passes to the borrower.
certain time and return it, in which case the contract
is called a commodatum; or money or other Art. 1232 Payment means not only the delivery of
consumable thing, upon the condition that the same money but also the performance, in any other
amount of the same kind and quality shall be paid, in manner, of an obligation.
which case the contract is simply called a loan or
mutuum. Art. 1233 A debt shall not be understood to have
Commodatum is essentially gratuitous. been paid unless the thing or service in which the
Simple loan may be gratuitous or with a stipulation obligation consists has been completely delivered or
to pay interest. rendered, as the case may be.
In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership B. Contract to Loan
passes to the borrower.
Art. 1934 An accepted promise to deliver something
Somera notes: by way of commodatum or simple loan is binding
Commodatum Mutuum upon parties, but the commodatum or simple loan
essentially gratuitous may be gratuitous or itself shall not be perfected until the delivery of the
wherein the only may have a stipulation object of the contract.
consideration for the to pay interest.
creditor is always Somera notes:
liberality.
primary obligation of the obligation of the debtor Contract of loan Contract to loan
debtor is to return the is to pay the same real contract that is consensual contract that
very same property amount, kind and quality perfected not by mere is perfected by mere
delivered by the to the creditor. consent but by the consent.
creditor. delivery of the object of
Non-consumable/non- Consumable/fungible the contract.
fungible
Returned in case of Returned upon Saura Import and Export Co. v. DBP (1972)
urgent need and expiration of the term
commission of any acts only FACTS: Petitioner Saura filed a loan application
of ingratitude, even before respondent RFC (DBP) to support the
before expiration of manufacture of jute sacks. RFC   approved   Saura’s  

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loan application for P500k but due to a HELD: What was involved here was a contract of
miscommunication, money was not released in loan which is a real contract perfected by delivery of
favour of Saura. Since the first transaction failed, the the object of the contract and not by mere consent. t
negotiations between the two went back and forth It was the second release of the loan (Sept 1982)
until RFC imposed new conditions upon Saura in which perfected the contract of loan. Thus, ALS
order for the loan to be released. But Saura monthly amortization obligation should only
requested RFC to cancel the mortgage instead, commence after such.
which RFC granted. Saura eventually applied for
another loan from Prudential Bank but Saura failed Pantaleon v. American Express International
to pay its obligations to Prudential. Prudential sued Inc. (2010)
Saura. Saura sued RFC for damages allegedly for
failing to comply with its obligation to release funds FACTS: Pantaleon went on a guided European tour
for the loan resulting to   Saura’s   failure   to   fulfil   its   with his wife. In Amsterdam, his wife bought a
own obligations to 3rd parties. diamond jewelry worth US$13,826 for which
Pantaleon used his AMEX credit card to pay. It took
HELD: There was a perfected contract to loan bet. AMEX 78 minutes to approve the transaction and as
Saura & RFC as there was a definitive offer and a result, Pantaleon’s   tour   group members became
acceptance at the beginning of this case: application irritated because they had to cancel several parts of
of Saura for a loan (offer) was approved by RFC for the tour. Upon returning to the Philippines,
P500,000 (acceptance). Since a contract to loan is Pantaleon filed a case for damages against AMEX for
perfected by mere consent,,   the  approval   of  Saura’s   the humiliation they suffered because of the credit
loan application perfected the contract. But due to card   company’s   actions. AMEX insists that there
mutual desistance of the 2 parties (a mode of was no negligence on their part and that there was a
extinguishing obligations) the obligations arising delay in approving the purchase because the size of
from said contract to loan can no longer be imposed the transaction was different from the previous
against RFC in favor of Saura. purchases of the cardholder and that they were just
exercising due diligence.
Somera notes:
 This case illustrates the importance of a HELD: In every credit card transaction, 3 contracts
definitive acceptance of an offer, as opposed are involved: (a) the sales contract between the
to a counter-offer, for the perfection of the credit card holder and the merchant or business
consensual contract to loan. establishment which accepted the credit card; (b)
the loan agreement between the credit card issuer
My notes: and the credit card holder; and (c) the promise to
 A perfected consensual contract can give pay between the credit card issuer and the merchant
rise to damages. or business establishment. When a cardholder uses
his credit card, he merely offers to enter into loan
BPI Investment Corp. v. CA and ALS agreements with the card company and there is no
Management & Development Corp. (2002) obligation on the part of the card company to
approve the transactions all the time. Since AMEX
FACTS: Roa obtained a P500k loan from BPIIC to did   not   have   an   obligation   to   approve   Pantaleon’s  
construct his house and mortgaged said property to purchase request, the company cannot be held liable
BPIIC. Roa sold the house and lot to ALS for which for delay since a demandable obligation is a
ALS paid P350k in cash to Roa and assumed Roa’s requisite of such finding.
P500k debt with BPIIC. But BPIIC refused to extend
Roa’s   old   interest   rate   to ALS so it offered to grant II. COMMODATUM
ALS a new loan with a different interest rate and
mortgaged the same property as security. BPIIC A. General Concepts
foreclosed the property since ALS failed to pay the
amortization from May 1981 to June 1984. ALS Art. 1933 By the contract of loan, one of the parties
contended that they were not in arrears and that delivers to another, either something not
even though the contract stipulates that monthly consumable so that the latter may use the same for a
amortizations are to begin in May 1981, they should certain time and return it, in which case the contract
not be made to pay before the actual release of the is called a commodatum; or money or other
loan in August and September 1982. 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

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mutuum.
● Commodatum
Commodatum is essentially gratuitous. - Essentially gratuitous
Simple loan may be gratuitous or with a stipulation - Consideration for the contract
to pay interest. > Liberality on the part of the bailor
> On the part of the bailee, it is the
In commodatum the bailor retains the ownership of permissive use of the property loaned
the thing loaned, while in simple loan, ownership - Purely personal in character
passes to the borrower. (1740a) - Death of either party results in its extinguishment

Art. 1935 The bailee in commodatum acquires the ● Compensation is to be paid by the bailee for the
used of the thing loaned but not its fruits; if any use of the property loaned
compensation is to be paid by him who acquires the - Contract is not a commodatum
use, the contract ceases to be a commodatum. - Some other contract
(1941a)
2. Object of Commodatum
Art. 1939 Commodatum is purely personal in
character. Consequently: Art. 1937 Movable or immovable property may be
the object of commodatum. (n)
(1) The death of either the bailor or the bailee
extinguishes the contract; Art. 1936 Consumable goods may be the subject of
commodatum if the purpose of the contract is not
(2) The bailee can neither lend nor lease the object the consumption of the object, as when it is merely
of the contract to a third person. However, the for exhibition. (n)
members of the bailee's household may make use of
the thing loaned, unless there is a stipulation to the Producers Bank of the Philippines v. Court of
contrary, or unless the nature of the thing forbids Appeals (2003)
such use. (n)
FACTS: Vives (creditor) issued a 200k check in
Somera Notes: favour of Doronilla (debtor) in incorporating
Doronilla’s   business.   This   was   deposited   in
● Commodatum Dorinilla’s   business’   bank   account   for   purposes   of  
- To lend, or the gratuitous lending of goods to be incorporation. Vives learned that the funds had
used by the borrower and then returned undamaged already been withdrawn leaving only a balance of
to  the  lender  (Black’s  Law  Dictionary) P90k. The Vives spouses tried to withdraw the
- Entered into regularly in ordinary life amount but failed since the balance had to answer
- Roman  law:  considered  as  one  of  the  “contracts  of   for certain postdated checks issued by Doronilla.
neighbourliness"
- A contract where the creditor (or bailor) HELD: Transaction between Vives and Doronilla
gratuitously delivers to the debtor (or bailee) non- was a commodatum and not a mutuum. Art. 1933 of
consumable property so that the latter may use the the CC seems to imply that if the subject of the
same for a certain time and return it contract is a consumable thing, such as money, the
contract would be a mutuum. But there are some
UP Law Reviewer Notes: instances where a commodatum may have for its
●  Two  Kinds  of  Commodatum object a consumable thing as provided by Art. 1936.
1. Ordinary commodatum - See Art.1933 Thus, if consumable goods are loaned only for
2. Precarium – one whereby the bailor may demand purposes of exhibition, or when the intention of the
the thing loaned at will; exists in cases where: parties is to lend consumable goods and to have the
a. neither the duration of the contract nor very same goods returned at the end of the period
the use to which the thing loaned should be agreed upon, the loan is a commodatum and not a
devoted has been stipulated mutuum.
b. if the use of the thing is merely tolerated
by the owner (Art 1947) Somera Notes:

● Object of commodatum
1. Consideration in Commodatum - Generally non-consumable property (movable or
Somera Notes: immovable)

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● Consumable property may be the object of which case the contract is simply called a loan or
commodatum mutuum.
- If the purpose of the contract is not the
consumption of the object. Commodatum is essentially gratuitous.
> e.g. delivery of first edition stamps or
newly minted coins or specially printed Simple loan may be gratuitous or with a stipulation
paper money for purposes of exhibition give to pay interest.
rise to the obligation to return the very
same property In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership
● Producers Bank case passes to the borrower. (1740a)
- Questions:
> If the object of the commodatum was Somera Notes:
money, then was it the intention of the
parties for the bailee to return the very ● Bailor in commodatum
same notes delivered? - Need not be the owner of the property loaned
> If the bailor in commodatum retained
ownership of the money delivered, then ● But as against the bailee
what was the relationship between Sterela - It is the bailor who retains ownership of the
and Producers Bank? property loaned.
> Is the use of money for purposes of
incorporation even if only for 2. Use by Bailee
“accommodation,”  the  same  as  “exhibition”?
> How is the case reconciled with Article Art. 1935 The bailee in commodatum acquires the
1980, which provides that fixed, savings, used of the thing loaned but not its fruits; if any
and current deposits of money in banks are compensation is to be paid by him who acquires the
governed by the provisions on mutuum? use, the contract ceases to be a commodatum.
(1941a)
B. Parties to a Commodatum
Art. 1940 A stipulation that the bailee may make
Somera Notes: use of the fruits of the thing loaned is valid. (n)

● Parties in a commodatum Art. 1939 Commodatum is purely personal in


- Bailor (or creditor) character. Consequently:
- Bailee (or debtor)
(1) The death of either the bailor or the bailee
● Use of the terms bailor and bailee extinguishes the contract;
- Links the Roman law concept of commodatum with
the common law bailment (2) The bailee can neither lend nor lease the object
> Bailment is the delivery of property by of the contract to a third person. However, the
one person (the bailor) to another (the members of the bailee's household may make use of
bailee) who holds the property for a certain the thing loaned, unless there is a stipulation to the
purpose usually under an express or contrary, or unless the nature of the thing forbids
implied contract such use. (n)

1. Ownership by Bailor Somera Notes:

Art. 1938 The bailor in commodatum need not be ● Permissive use of the property loaned
the owner of the thing loaned. (n) - Generally acquired by the bailee

Art. 1933 By the contract of loan, one of the parties ● Permissive use of the fruits of the property loaned
delivers to another, either something not - Not usually acquired by the bailee
consumable so that the latter may use the same for a - But this may be validly stipulated by the parties so
certain time and return it, in which case the contract that the bailee could acquire it
is called a commodatum; or money or other ● General rule (due to the purely personal character
consumable thing, upon the condition that the same of commodatum)
amount of the same kind and quality shall be paid, in

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- The bailee acquires the permissive use of the house, allowed Guevarra to live in the house for free
property only for itself and can neither lend nor provided Guevarra would maintain the cleanliness
lease the object of the commodatum to a third and orderliness of the house. 9 years later, Guevarra
person. refused to  vacate  the  house  upon  Pajuya’s  demand.
- However,   members  of  the  bailee’s  household,  such  
as his family and those living with him, may make HELD: The Kasunduan reveals that the
use of the property loaned unless: accommodation accorded by Pajuyo to Guevarra
> There is a stipulation to the contrary, and was not essentially gratuitous. While the Kasunduan
> The nature of the property forbids its use did not require Guevarra to pay rent, it obligated
by anyone other than the bailee. him to maintain the property in good condition. The
3. Solidary Liability of Bailees imposition of this obligation makes the Kasunduan a
contract different from a commodatum. The effects
Art. 1945 When there are two or more bailees to of the Kasunduan are also different from that of a
whom a thing is loaned in the same contract, they commodatum. Case law on ejectment has treated
are liable solidarily. (1748a) relationship based on tolerance as one that is akin to
a landlord-tenant relationship where the
C. Liability for Expenses and Damages withdrawal of permission would result in the
termination of the lease.
1. Ordinary Expenses
Somera Notes:
Art. 1933 By the contract of loan, one of the parties
delivers to another, either something not ● Permissive use of the property loaned acquired
consumable so that the latter may use the same for a and Obligation to return the very same property
certain time and return it, in which case the contract incurred
is called a commodatum; or money or other - It is the bailee who is liable for the ordinary
consumable thing, upon the condition that the same expenses for its use and preservation.
amount of the same kind and quality shall be paid, in > This does not mean that the bailee is liable
which case the contract is simply called a loan or for the deterioration of the property loaned
mutuum. due only to the use and without fault.
>> Expectation: Property loaned
Commodatum is essentially gratuitous. will suffer ordinary wear and tear that
arises from actual use by the bailee.
Simple loan may be gratuitous or with a stipulation
to pay interest. ● Pajuyo case
- The obligation to maintain cleanliness and
In commodatum the bailor retains the ownership of orderliness of the property loaned was equated with
the thing loaned, while in simple loan, ownership compensation.
passes to the borrower. (1740a) > Thus the contract was was considered a
commodatum, which is essentially
Art. 1935 The bailee in commodatum acquires the gratuitous.
used of the thing loaned but not its fruits; if any - Expenses for cleanliness and orderliness are
compensation is to be paid by him who acquires the ordinary expenses for use, which a bailee is liable
use, the contract ceases to be a commodatum. for.
(1941a) - Question: How is this case reconciled with Article
1941?
Art. 1941 The bailee is obliged to pay for the
ordinary expenses for the use and preservation of 2. Extraordinary Expenses
the thing loaned. (1743a)
Art. 1949 The bailor shall refund the extraordinary
Art. 1943 The bailee does not answer for the expenses during the contract for the preservation of
deterioration of the thing loaned due only to the use the thing loaned, provided the bailee brings the
thereof and without his fault. (1746) same to the knowledge of the bailor before incurring
them, except when they are so urgent that the reply
Pajuyo v. Court of Appeals (2004) to the notification cannot be awaited without
FACTS: Petitioner Pajuyo constructed a house. danger.
Pajuyo and private respondent Guevarra executed a
Kasunduan which states that Pajuyo, as owner of the If the extraordinary expenses arise on the occasion

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of the actual use of the thing by the bailee, even
though he acted without fault, they shall be borne Art. 1944 The bailee cannot retain the thing loaned
equally by both the bailor and the bailee, unless on the ground that the bailor owes him something,
there is a stipulation to the contrary. (1751a) even though it may be by reason of expenses.
However, the bailee has a right of retention for
Somera Notes: damages mentioned in Article 1951. (1747a)

● General rule (since the bailor retains the Art. 1951 The bailor who, knowing the flaws of the
ownership of the property loaned) thing loaned, does not advise the bailee of the same,
- The bailor is liable for the extraordinary expenses shall be liable to the latter for the damages which he
for the preservation of the property loaned. may suffer by reason thereof. (1752)
> Exception: If the bailee incurs these Somera Notes:
expenses without informing the bailor
before incurring them, in which case, it is ● Primary obligation on the part of bailee
the bailee who shall be liable. - Return the property loaned
>> However, if the extraordinary
expenses for preservation are so urgent ● Right of Retention
(reply of the bailor to the notification - Generally, bailee does not have this right over the
cannot be awaited without danger to the property loaned if the bailor refuses to pay for
property loaned, the general rule applies expenses and damages that pertain to it.
(bailor shall remain liable). > Right of action of the bailee
>> Demand payment for the
● Extraordinary expenses from actual use by the expenses and damages incurred that
bailee properly pertain to the bailor.
- Bailor and bailee are equally liable (but parties >> Only exception: When the bailor,
may stipulate otherwise) because knowing the flaws of the property loaned,
> Bailor retains ownership of the property does not advise the bailee of the same, and
loaned, and the bailee suffers damages by reason
> Bailee acquires its use thereof, in which case, the bailee has a right
of retention over the property loaned until
3. Other Expenses the bailor answers for the damages.
- Object of right of retention
Art. 1950 If, for the purpose of making use of the > To guarantee payment of what may be
thing, the bailee incurs expenses other than those due
referred to in Articles 1941 and 1949, he is not - Principal characteristic of right of retention
entitled to reimbursement. (n) > Its accessory character (accessory to the
principal obligation)
Somera Notes: - Right of retention of the property by the creditor
> Not considered as a coercive measure to
● Bailee is liable for all other expenses incurred for oblige debtor to pay
purposes of making use of the property loaned, > Means of obtaining compensation for the
other than ordinary and extraordinary expenses for debt
use and preservation. > Means of extinguishing an obligation
- Question: What would these other expenses cover?
D. Liability for Loss
4. Abandonment by Bailor
Art. 1933 By the contract of loan, one of the parties
Art. 1952 The bailor cannot exempt himself from delivers to another, either something not
the payment of expenses or damages by abandoning consumable so that the latter may use the same for a
the thing to the bailee. (n) certain time and return it, in which case the contract
is called a commodatum; or money or other
Somera Notes: 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
● The bailee has a right to compel the bailor to pay
mutuum.
for the pertinent expenses.
Commodatum is essentially gratuitous.
5. Right of Retention by Bailee

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Simple loan may be gratuitous or with a stipulation ● General Rule: Bailee is not liable for loss or
to pay interest. damage due to a fortuitous event (Art.1174), since
the bailor retains ownership of the thing.
In commodatum the bailor retains the ownership of - Exception: Bailee is liable even for loss due to a
the thing loaned, while in simple loan, ownership fortuitous event when: (Art 1942)
passes to the borrower. (1740a) 1. He devotes the thing to any purpose
different from that for which it was loaned.
Art. 1942 The bailee is liable for the loss of the (breach of the conditions of the
thing, even if it should be through a fortuitous event: commodatum)
2. He keeps it longer than the period
(1) If he devotes the thing to any purpose different stipulated. (amounts to delay)
from that for which it has been loaned; 3. He keeps it after the accomplishment of
the use for which the commodatum has
(2) If he keeps it longer than the period stipulated, been constituted. (amounts to delay)
or after the accomplishment of the use for which the 4. The thing loaned has been delivered with
commodatum has been constituted; appraisal of its value, unless there is
stipulation exempting the bailee from
(3) If the thing loaned has been delivered with responsibility in case of a fortuitous event.
appraisal of its value, unless there is a stipulation (intention of the parties shifts the liability
exemption the bailee from responsibility in case of a for loss)
fortuitous event; 5. He lends or leases the thing to a third
person who is a not a member of his
(4) If he lends or leases the thing to a third person, household. (breach of the conditions of the
who is not a member of his household; commodatum)
6. Being able to save either the thing
(5) If, being able to save either the thing borrowed borrowed or his own thing, he chose to save
or his own thing, he chose to save the latter. (1744a the latter. (since the consideration of
and 1745) commodatum is liberality on the part of the
bailor, this amounts to an act of ingratitude)
Republic v. Bagtas (1962)
E. Obligation to Return
FACTS: The loan by the appellee to the late
defendant Bagtas of the 3 bulls for breeding Art. 1933 By the contract of loan, one of the parties
purposes for a period of 1 year, later on renewed for delivers to another, either something not
another year as regards one bull, was subject to the consumable so that the latter may use the same for a
payment by the borrower of breeding fee of 10% of certain time and return it, in which case the contract
the book value of the bulls. The appellant contends is called a commodatum; or money or other
that the contract was commodatum and that, for consumable thing, upon the condition that the same
that reason, as the appellee retained ownership or amount of the same kind and quality shall be paid, in
title to the bull it should suffer its loss due to force which case the contract is simply called a loan or
majeure. mutuum.

HELD: If the breeding fee would be considered Commodatum is essentially gratuitous.


compensation, then the contract would be a lease of
the bull. Under the Civil Code, the lessee would be Simple loan may be gratuitous or with a stipulation
subject to the responsibilities of a possessor in bad to pay interest.
faith, because she had continued possession of the
bull after the expiry of the contract. And even if the In commodatum the bailor retains the ownership of
contract be commodatum, still the appellant is the thing loaned, while in simple loan, ownership
liable, because (1) he kept it longer than the period passes to the borrower. (1740a)
stipulated and (2) the thing loaned has been
delivered with appraisal of its value (10%). There Art. 1946 The bailor cannot demand the return of
was no stipulation exempting the bailee from the thing loaned till after the expiration of the period
responsibility in case of a fortuitous event. stipulated, or after the accomplishment of the use
for which the commodatum has been constituted.
Somera and UP Law Reviewer Notes: However, if in the meantime, he should have urgent

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need of the thing, he may demand its return or - Exceptions: (implying that the bailor may demand
temporary use. the return of the property loaned)
1. Bailor has an urgent need for the thing (Art. 1946)
In case of temporary use by the bailor, the contract - the contract is suspended (Reason: the right of the
of commodatum is suspended while the thing is in bailor is based on the fact that commodatum is
the possession of the bailor. (1749a) essentially gratuitous)
Art. 1947 The bailor may demand the thing at will, a. Demand the return of the property
and the contractual relation is called a precarium, in b. Demand the temporary use of the
the following cases: property
2. May demand the thing at will when the contract is
(1) If neither the duration of the contract nor the use precarium (A kind of commodatum where the bailor
to which the thing loaned should be devoted, has may demand the thing at will. It has been defined as
been stipulated; or a contract by which the owner of a thing, at the
request of another person, gives the latter the thing
(2) If the use of the thing is merely tolerated by the for
owner. (1750a) use as long as the owner shall please.)
a. No stipulation as to duration or use of the
Art. 1948 The bailor may demand the immediate property loaned
return of the thing if the bailee commits any act of b. Use by the bailee is merely tolerated by
ingratitude specified in Article 765. (n) the bailor.
3. Bailee commits an act of ingratitude (Art. 1948)
Quintos v. Beck (1939) (Reason: the person who commits any of the acts of
ingratitude makes himself unworthy of the trust
FACTS: Beck was Quintos’   tenant   in   her   house.   reposed upon him by the bailor.)
Quintos gratuitously granted to Beck the use of a. If the bailee should commit an offense
furniture subject to the condition that Beck would against the person, the honor or the
return them upon her demand. Quintos sold the property of the bailor, or of the wife or
property to Sps. Lopez. They notified Beck and gave children under his parental authority
him 60 days to vacate the premises and to return all b. If the bailee imputes to the bailor any
the furniture transferred to him for use. Beck said criminal offense, or any act involving moral
that he cannot give up the 3 gas heaters and the 4 turpitude, even though he should prove it,
electric lamps because he would still use them until unless the crime or the act has been
the expiration of lease. Before vacating the house, committed against the bailee himself, his
Beck deposited with the Sheriff all the furniture of wife, or children under his authority; and
plaintiff which are deposited in a warehouse and in c. If the bailee unduly refuses the bailor
custody of the Sheriff. support when the bailee is legally or
morally bound to give support to the bailor
HELD: The contract entered into bet. the parties is
one of commodatum. The obligation voluntarily
assumed by Beck was to return the furniture upon III. SIMPLE LOAN
Quintos' demand, (i.e. Beck should return all of them
to Quintos' house. Beck did not comply with this A. General Concepts
obligation when he merely placed   them   at   Quintos’  
disposal, retaining for his benefit the 3 gas heaters Art. 1933 By the contract of loan, one of the parties
and the 4 eletric lamps. Beck breached the contract delivers to another, either something not
of commodatum, it is just and equitable that he pay consumable so that the latter may use the same for a
the legal expenses and other judicial costs which the certain time and return it, in which case the contract
plaintiff would not have otherwise defrayed. is called a commodatum; or money or other
consumable thing, upon the condition that the same
Somera and Ateneo Law Reviewer Notes: amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or
● Primary Obligation of the bailee in commodatum mutuum.
is to return the property loaned. But, generally, the
obligation arises only: Commodatum is essentially gratuitous.
1. After the expiration of the period stipulated
2. After the accomplishment of the use for which the Simple loan may be gratuitous or with a stipulation
commodatum was constituted. to pay interest.

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simple contract. An antecedent or pre-existing
In commodatum the bailor retains the ownership of obligation, whether for money or not, constitutes
the thing loaned, while in simple loan, ownership value where a receipt is taken either in satisfaction
passes to the borrower. (1740a) thereof or as security therefor.
Art. 1953 A person who receives a loan of money "Warehouseman" means a person lawfully engaged
or any other fungible thing acquires the ownership in the business of storing goods for profit.
thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality. (1753a) (b) A thing is done "in good faith" within the
meaning of this Act when it is in fact done honestly,
Art. 1954 A contract whereby one person transfers whether it be done negligently or not.
the ownership of non-fungible things to another
with the obligation on the part of the latter to give People v. Puig and Porras (2008)
things of the same kind, quantity, and quality shall
be considered a barter. (n) FACTS: Informations of qualified theft against Puig
and Porras stated that they “conspired,
Art. 1980 Fixed, savings, and current deposits of confederated, and helped one another, with grave
money in banks and similar institutions shall be abuse of confidence, being the cashier and
governed by the provisions concerning simple loan. bookkeeper of the Bank, without knowledge or
(n) consent of the Bank, and with intent to gain, steal
15k, to the damage and prejudice of the Bank”.
Act No. 2137 - The Warehouse Receipts Law
HELD: The bank becomes the owner of the monies
Act No. 2137, Sec. 58 "Fungible goods" deposited therein by its clients. The employees of
Definitions. — (a) In this Act, unless the content or the bank entrusted with the possession of monies
subject matter otherwise requires: due to the confidence reposed in them occupy
positions of confidence. The relationship between
"Action" includes counterclaim, set-off, and suits in banks and depositors has been held to be that of
equity as provided by law in these islands. creditor and debtor (Arts. 1953 & 1980 of CC). Thus,
the informations sufficiently allege all the essential
"Delivery" means voluntary transfer of possession elements of qualified theft.
from one person to another.
BPI Family Bank v. Franco (2007)
"Fungible goods" means goods of which any unit is,
from its nature by mercantile custom, treated as the FACTS: Tevesteco opened a savings and current
equivalent of any other unit. account with BPI-FB. FMIC also opened a time
deposit account with the same branch. Franco
"Goods" means chattels or merchandise in storage opened 3 accounts (current, savings & time deposit)
or which has been or is about to be stored. with BPI-FB. The P2M used to open these accounts is
traceable to a check issued by Tevesteco allegedly in
"Holder" of a receipt means a person who has both consideration of Franco’s   introduction   of   Eladio  
actual possession of such receipt and a right of Teves to Jaime Sebastian (then BPI-FB   SFDM’s  
property therein. Branch Mgr). The funding for the P2M check was
part of the P80M debited by BPI-FB   from   FMIC’s  
"Order" means an order by indorsement on the time   deposit   account   and   credited   to   Tevesteco’s  
receipt. current account pursuant to an Authority to Debit
"Owner" does not include mortgagee. purportedly   signed   by   FMIC’s   officers. But
signatures   of   FMIC’s   officers   on   the   Authority to
"Person" includes a corporation or partnership or Debit were forged. BPI-FB debited  Franco’s   savings  
two or more persons having a joint or common and current accounts for the amounts remaining.
interest. Two checks drawn by Franco against his BPI-FB
current account were dishonored and stamped with
To "purchase" includes to take as mortgagee or as “account   under   garnishment.”   The dishonored
pledgee. checks were issued by Franco and presented for
payment at BPI-FB  prior  to  Franco’s  receipt  of  notice  
"Receipt" means a warehouse receipt. that his accounts were under garnishment. BPI-FB
deducted advance interest paid to Franco from the
"Value" is any consideration sufficient to support a remaining balance of his time deposit account. BPI-

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FB’s   refused to   heed   Franco’s   demands   to   unfreeze   a. fungible or consumable-depending on the intent
his accounts and release his deposits with the bank. of the parties, that the return of the thing is
equivalent only and not the identical thing
HELD: BPI-FB does not have a unilateral right to b. money
freeze the accounts of Franco based on its mere c. if the transfer of ownership is on a non-fungible
suspicion that the funds therein were proceeds of thing, with the obligation of the other to give things
the multi-million peso scam Franco was allegedly of the same kind, quantity and quality, it is a barter
involved in. BPI-FB, as the trustee in the fiduciary
relationship, is duty bound to know the signatures of Basis of Commodatum Mutuum
its customers. Having failed to detect the forgery in Comparison (Simple Loan)
the Authority to Debit and in the process
inadvertently facilitate the FMIC-Tevesteco transfer, Object Ordinarily non- Money or other
BPI-FB cannot now shift liability thereon to Franco consumable consumable
and the other payees of checks issued by Tevesteco, thing
or prevent withdrawals from their respective
accounts without the appropriate court writ or a Ownership of Ownership is Ownership is
favorable final judgment. the thing retained by the transferred to
lender the borrower
Estores v. Spouses Supangan (2012)
Cause Essentially Gratuitous or
FACTS: Petitioner Estores and respondent spouses gratuitous onerous (w/
entered into a Conditional Deed of Sale where stipulation to
petitioner offered to sell a parcel of land to the pay interest)
spouses subject to several conditions one of which
states that if after the vendor completes the docs Thing to be Borrower must Borrower need
and vendee fails to complete the payment as per Returned return the same only pay the
agreement, a forfeiture fee of 25% or down payment thing loaned same amount
shall be applied. But if the vendor fails to complete of the same
the necessary documents w/in 30 days w/o kind and
sufficient reason or w/o informing the vendee of its quality
status, vendee has to right to the return of the full
down payment. Vendor failed to comply with her Subject May involve Only personal
obligation. Vendee demanded the return of the DP Matter real or personal property
with 12% int. compounded annually. Petitioner Property
promised to return the DP but failed to do so.
Purpose Loan for use or Loan for
HELD: It is proper to impose interest even without a temporary consumption
stipulation in the contract. Art. 2210 of the CC possession
provides that “interest   may,   in   the   discretion of the
court, be allowed upon damages awarded for breach When to Bailor may Lender may not
of   contract.” The parties did not stipulate as to the Return demand the demand its
applicable  rate  of  interest.  Petitioner’s  unwarranted   return of the return before
withholding of the money which rightfully pertains thing loaned the lapse of
to respondent-spouses amounts to forbearance of before the the term
money which can be considered as an involuntary expiration of agreed
loan. Thus, the applicable rate of interest is 12% per the term in case upon
annum. of urgent need
Ateneo Law Reviewer Notes: Who bears Loss of the Borrower
risk of loss subject matter suffers the loss
● Nature of Mutuum is suffered by (even if caused
a. bilateral - borrower’   promise   to   pay   is   the   the bailor since exclusively by a
consideration   for   the   lender’s obligation to furnish he is the owner fortuitous
the loan event and he is
b. no criminal liability upon failure to pay not therefore
discharged
● Subject Matter from his duty

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to pay)
Mutuum (Simple Loan) Sale
Nature Purely personal Not purely Real contract Consensual contract
personal Generally unilateral Bilateral and reciprocal
because only borrower
Mutuum (Simple Loan) Rent / Lease has obligations
Signifies the delivery of One party delivers to
money or some other another some non-
● If   the   property   is   “sold”,   but   the   real   intent   is   only  
consumable thing to consumable thing in
to give the object as security for a debt – as when the
another w/ a promise to order
“price”   is   comparatively   small   – there really is a
repay an equivalent that the latter may use it
contract  of  loan  with  an  “equitable  mortgage.”
amount of the same kind during a certain period
and quality and return it to the
UP Law Reviewer Notes:
former

There is a transfer of The owner of the lessee ● Consumable


ownership of the thing or the lessor of the - Those whose use according to their nature
delivered property does not lose his destroys the substance of the thing or causes their
ownership. He simply loss to the owner. (ex: food)
loses control over the - Consumable goods cannot be the subject matter of
property rented during a contract of commodatum unless the purpose of the
the period of the contract contract is not the consumption of the object, as
when it is merely for exhibition.
The relation between The relation is between
parties is that of obligor landlord and tenant ● Fungibles
and oblige - Things which because of their nature or the will of
the parties are capable of being substituted by
The creditor receives The owner of the roperty others of the same kind, not having a distinct
payment for his loan receives  “compensation”   individuality.
or   “price”   either   in  
money, provisions, ●   Consumable v. Fungible: It is the intention of the
chattels, or labor from the parties to a contract which determines whether the
occupant thereof in object is fungible or non-fungible and not the
return for its use consumable or non-consumable nature of the thing.

B. Obligation to Pay
Basis of Mutuum Commodatum Barter
Compariso (Simple Loan) Art. 1955 The obligation of a person who borrows
n money shall be governed by the provisions of
Subject Money or Personal or Non- Articles 1249 and 1250 of this Code.
matter any other real property fungible or
fungible (generally non- If what was loaned is a fungible thing other than
things/personal non- consumable money, the debtor owes another thing of the same
property consumable) things
kind, quantity and quality, even if it should change in
Obligation Pay or Return the The value. In case it is impossible to deliver the same
of bailee deliver the identical thing equivalent kind, its value at the time of the perfection of the
same kind borrowed thing is loan shall be paid. (1754a)
or quality when given in
loaned to the time has return for
the bailee expired or the what has Art. 1249 The payment of debts in money shall be
purpose has been made in the currency stipulated, and if it is not
been served received possible to deliver such currency, then in the
Nature of May be Always Onerous
currency which is legal tender in the Philippines.
contract gratuitous gratuitous
The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents
San Beda Law Reviewer Notes: shall produce the effect of payment only when they

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have been cashed, or when through the fault of the
creditor they have been impaired. C. Interest

In the meantime, the action derived from the San Beda Reviewer Notes:
original obligation shall be held in the abeyance.
(1170) ● The compensation allowed by law or fixed by the
parties for the loan or forbearance of money, goods
Art. 1250 In case an extraordinary inflation or or credits
deflation of the currency stipulated should
supervene, the value of the currency at the time of ● Requisites for Demandability:
the establishment of the obligation shall be the basis - must be expressly stipulated
of payment, unless there is an agreement to the > Exceptions:
contrary. (n) >> indemnity for damages
>> interest accruing from unpaid
Somera Notes: interest
- must be lawful
● Primary obligation of the borrower - must be in writing
- To pay
●  Compound Interest
● If object is money (the principal) - General Rule: Unpaid interest shall not earn
- General rules in payment in money apply interest.
- Value of payment in money or payment of the - Exceptions
principal is generally determined at the time of the > when judicially demanded
establishment of the obligation (time of the delivery > when there is an express stipulation
of the principal) (must be in writing in view of Art. 1956)

● If object is any other consumable property ●   Central Bank Circular No. 416 fixing the rate of
- borrower owes payment in kind (another property interest at 12% per annum deals with loans,
of the same kind, quantity and quality) forbearance of any money, goods or credits and
- Value of payment in kind determined at the time of judgments involving such loans, or forbearance in
perfection (time of the delivery of the object of the the absence of express agreement to such rate.
simple loan)
●   Central Bank Circular No. 905 (Dec. 10, 1982)
● Obligation to pay removed the Usury Law ceiling on interest rates for
- May be evidenced by a written promise to pay secured and unsecured loans, regardless of
- In commercial credit transactions, the most maturity.
common are:
>Note: a written promise by one party (the Agpalo Notes:
maker) to pay money to another party (the
payee) or to bearer or a written promise to Central Bank Circular No. 416 and Art. 2209 of the
pay a specified amount to a certain person Civil Code contemplate different situations and
on demand or on a specified date apply to different transactions. In transactions
> Bond: a written promise (by the issuer) to involving loan or forbearance of money, goods or
pay money to the holders or a written credits, as well as judgments relating to such loan or
promise issued by a government or forbearance of money, goods or credits, the Central
corporation to holders to pay the principal Bank circular applies. It is only in such transactions
amount of a loan at maturity and a specified or judgments where the Presidential Decree allowed
sum of money usually at specific intervals. the Monetary Board to dip its fingers into.
> Debenture (from the Latin word
debentur): an instrument acknowledging a In cases requiring the payment of indemnities as
debt   secured   only   by   the   issuer’s   earning   damages, in connection with any delay in the
power and not by a lien or legal right or performance of an obligation other than those
interest that a creditor has on any specific involving loan or forbearance of money, goods or
asset or an unsecured bond credits, Art. 2209 of the Civil Code applies. For the
- All of these promises to pay are evidence of Court, this is the most fair, reasonable, and logical
indebtedness and are commercial forms that interpretation of the two laws. There is no conflict
contracts of simple loan take. between CB Circular No. 416 and Art. 2209 of the

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Civil Code or any reason to hold that the former has Act No. 2655, An Act Fixing Rates Of Interest
repealed the latter by implication. (National Power Upon Loans And Declaring The Effect Of
Corp. v. Angas, 1982) Receiving Or Taking Usurious Rates And For
Other Purposes
1. Conventional Interest
Act No. 2655, Sec. 1 The rate of interest for the loan
Art. 1933 By the contract of loan, one of the parties or forbearance of any money, goods, or credits and
delivers to another, either something not the rate allowed in judgments, in the absence of
consumable so that the latter may use the same for a express contract as to such rate of interest, shall be
certain time and return it, in which case the contract fix per centum per annum or such rate as may be
is called a commodatum; or money or other prescribed by the Monetary Board of the Central
consumable thing, upon the condition that the same Bank of the Philippines for that purpose in
amount of the same kind and quality shall be paid, in accordance with the authority hereby granted.
which case the contract is simply called a loan or
mutuum. Central Bank Circular No. 416, series of 1974

Commodatum is essentially gratuitous. July 29, 1974


CBP CIRCULAR NO. 416-74
Simple loan may be gratuitous or with a stipulation
to pay interest. By virtue of the authority granted to it under Section
1 of Act No. 2655, as amended, otherwise known as
In commodatum the bailor retains the ownership of the"Usury Law", the Monetary Board, in its
the thing loaned, while in simple loan, ownership Resolution No. 1622 dated July 29, 1974, has
passes to the borrower. (1740a) prescribed that therate of interest for the loan or
forbearance of any money, goods or credits and the
Art. 1956 No interest shall be due unless it has been rate allowed in judgments,in the absence of express
expressly stipulated in writing. (1755a) contract as to such rate of interest, shall be twelve
per cent (12%) per annum.prcdThis Circular shall
Art. 1253 If the debt produces interest, payment of take effect immediately.
the principal shall not be deemed to have been made
until the interests have been covered. (1173) (SGD.) G. S. LICAROS
Governor
Art. 1958 In the determination of the interest, if it is
payable in kind, its value shall be appraised at the Act No. 2655, Sec. 7 All covenants and stipulations
current price of the products or goods at the time contained in conveyances, mortgages, bonds, bills,
and place of payment. (n) notes and other contracts or evidences of debts, and
all deposits of goods or other things, whereupon or
Art. 1960 If the borrower pays interest when there whereby there shall be stipulated, charged,
has been no stipulation therefor, the provisions of demanded, reserved, secured, taken, or received,
this Code concerning solutio indebiti, or natural directly or indirectly, a higher rate or greater sum or
obligations, shall be applied, as the case may be. (n) value for the loan or renewal or forbearance of
money, goods, or credits than is hereinabove
Art. 2154 If something is received when there is no allowed, shall be void: Provided, however, That no
right to demand it, and it was unduly delivered merely clerical error in the computation of interest,
through mistake, the obligation to return it arises. made without intent to evade any of the provisions
(1895) of this Act, shall render a contract void: Provided,
further, That parties to a loan agreement, the
Art. 1423 Obligations are civil or natural. Civil proceeds of which may be availed of partially or
obligations give a right of action to compel their fully at some future time, may stipulate that the rate
performance. Natural obligations, not being based of interest agreed upon at the time the loan
on positive law but on equity and natural law, do not agreement is entered into, which rate shall not
grant a right of action to enforce their performance, exceed the maximum allowed by law, shall prevail
but after voluntary fulfillment by the obligor, they notwithstanding subsequent changes in the
authorize the retention of what has been delivered maximum rates that may be made by the Monetary
or rendered by reason thereof. Some natural Board: And Provided, finally, That nothing herein
obligations are set forth in the following articles. contained shall be construed to prevent the
purchase by an innocent purchaser of a negotiable

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mercantile paper, usurious or otherwise, for constitute unjust enrichment of the debtor at the
valuable consideration before maturity, when there expense of the creditor.
has been no intention on the part of said purchaser
to evade the provisions of this Act and said purchase Concepcion v. Court of Appeals, et al. (1997)
was not a part of the original usurious transaction.
In any case, however, the maker of said note shall FACTS: Home Savings Bank & Trust Co. (now Insular
have the right to recover from said original holder Life) granted to the Concepcions a loan amounting
the whole interest paid by him thereon and, in case to P1.4M. Concepcions in turn executed PN & REM
of litigation, also the costs and such attorney's fees over their property. PN provided that the
as may be allowed by the court. Concepcions had authorized the Bank to increase
the interest rate w/o advance notice, in the event
Act No. 2655, Sec. 7-a Parties to an agreement the Central Bank raises its rediscount rate to
pertaining to a loan or forbearance of money, goods member banks, and/or the int. rate on savings and
or credits may stipulate that the rate of interest time deposit, and/or the int. rate on such loans
agreed upon may be increased in the event that the and/or advances. The bank unilaterally increased
applicable maximum rate of interest is increased by the int. rate 3 times. Concepcions failed to pay. The
law or by the Monetary Board: Provided, That such bank foreclosed the REM executed by the
stipulation shall be valid only if there is also a Concepcions. Bank emerged as the highest bidder. A
stipulation in the agreement that the rate of interest Certificate of Sale was issued in favor of the bank.
agreed upon shall be reduced in the event that the The Concepcions were unable to redeem. The bank
applicable maximum rate of interest is reduced by consolidated its title and sold the property to Asaje
law or by the Monetary Board: Provided, further, Realty Corp.
That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of HELD: Even considering that petitioners were
the increase or decrease in the maximum rate of bound by their agreement allowing an increase in
interest. the interest rate despite the lack of advance notice
to them, the escalation should still be subject, as so
Frias v. San Diego-Sison (2007) contractually stipulated, to a corresponding increase
by the Central Bank of its rediscount rate to member
FACTS: Frias (house & lot owner) and Sison entered banks, or of the interest rate on savings and time
into a Memorandum of Agreement (MOA) over the deposit, or of the interest rate on such loans and
house & lot for 6M. Their agreement speaks of 2 advances. The notices sent to petitioners merely
periods of 6months each. The 1st 6-month period stated that the increase was on account of the
was given to Sison to make up her mind WON to prevailing business and economic condition.
purchase petitioner's property. The 2nd 6-month Therefore, there is no sufficient valid justification
period was given to Frias to pay the P2M loan in the shown for the unilateral increases by private
event that Sison decided not to buy the subject respondent bank of the interest rates on the loan.
property in which case interest will be charged "for
the last 6 months only," referring to the 2nd 6-month 2. Interest on Interest
period.
Art. 1959 Without prejudice to the provisions of
HELD: The MOA executed between petitioner and Article 2212, interest due and unpaid shall not earn
respondent is the law between the parties. The interest. However, the contracting parties may by
agreement that the amount given shall bear stipulation capitalize the interest due and unpaid,
compounded bank interest for the last 6 months which as added principal, shall earn new interest.
only, i.e., referring to the 2nd 6-month period, does (n)
not mean that interest will no longer be charged
after the 2nd 6-month period since such stipulation Art. 2212 Interest due shall earn legal interest from
was made on the logical and reasonable expectation the time it is judicially demanded, although the
that such amount would be paid within the date obligation may be silent upon this point. (1109a)
stipulated. The monetary interest for the last 6
months continued to accrue until actual payment of 3. Compensatory, Penalty or Indemnity
the loaned amount. For a debtor to continue in Interest
possession of the principal of the loan and to
continue to use the same after maturity of the loan Art. 1169 Those obliged to deliver or to do
without payment of the monetary interest, would something incur in delay from the time the obligee
judicially or extrajudicially demands from them the

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fulfillment of their obligation. Eastern Shipping Lines, Inc. v. Court of Appeals
(1994)
However, the demand by the creditor shall not be
necessary in order that delay may exist: FACTS: 2 drums of riboflavin were shipped from
(1) When the obligation or the law expressly so Japan for SS Eastern Comet (owned by Eastern
declare; or Shipping Lines) and had a marine insurance policy
issued by the Mercantile Insurance Company. When
(2) When from the nature and the circumstances of it arrived in Manila, 1 drum were allegedly in bad
the obligation it appears that the designation of the order. Mercantile Insurance contended that due to
time when the thing is to be delivered or the service the losses/damage sustained by 1 drum, the
is to be rendered was a controlling motive for the consignee suffered losses due to Eastern   Shipping’s  
establishment of the contract; or fault and negligence. Because of the losses,
Mercantile Insurance was compelled to pay the
(3) When demand would be useless, as when the consignee, under the terms of the marine insurance
obligor has rendered it beyond his power to policy. Thus, it became subrogated to the
perform. consignee’s  right  of  action  against  Eastern  Shipping.

In reciprocal obligations, neither party incurs in HELD: (1) When an obligation, regardless of its
delay if the other does not comply or is not ready to source, i.e., law, contracts, quasi-contracts, delicts or
comply in a proper manner with what is incumbent quasi-delicts is breached, the contravenor can be
upon him. From the moment one of the parties held liable for damages. The provisions under Title
fulfills his obligation, delay by the other begins. XVIII on "Damages" of the Civil Code govern in
(1100a) determining the measure of recoverable damages.

Art. 1226 In obligations with a penal clause, the (2) With regard particularly to an award of interest
penalty shall substitute the indemnity for damages in the concept of actual and compensatory damages,
and the payment of interests in case of the rate of interest, as well as the accrual thereof, is
noncompliance, if there is no stipulation to the imposed, as follows:
contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of a) When the obligation is breached, and it consists in
fraud in the fulfillment of the obligation. the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
The penalty may be enforced only when it is that which may have been stipulated in writing.
demandable in accordance with the provisions of Furthermore, the interest due shall itself earn legal
this Code. (1152a) interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall
Art. 2209 If the obligation consists in the payment be 12% per annum to be computed from default, i.e.,
of a sum of money, and the debtor incurs in delay, from judicial or extrajudicial demand under and
the indemnity for damages, there being no subject to the provisions of Article 1169 of the Civil
stipulation to the contrary, shall be the payment of Code.
the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent b) When an obligation, not constituting a loan or
per annum. (1108) forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at
Art. 2213 Interest cannot be recovered upon the discretion of the court at the rate of 6% per
unliquidated claims or damages, except when the annum. No interest, however, shall be adjudged on
demand can be established with reasonably unliquidated claims or damages except when or
certainty until the demand can be established with reasonable
certainty. Accordingly, where the demand is
Art. 2226 Liquidated damages are those agreed established with reasonable certainty, the interest
upon by the parties to a contract, to be paid in case shall begin to run from the time the claim is made
of breach thereof. judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably
Art. 2227 Liquidated damages, whether intended as established at the time the demand is made, the
an indemnity or a penalty, shall be equitably interest shall begin to run only from the date the
reduced if they are iniquitous or unconscionable. judgment of the court is made (at which time the
quantification of damages may be deemed to have

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been reasonably ascertained). The actual base for The   case   at   bar   involves   petitioner’s   claim   for  
the computation of legal interest shall, in any case, monetary interest.
be on the amount finally adjudged.
Further, compensatory interest is not chargeable in
c) When the judgment of the court awarding a sum the instant case because it was not duly proven that
of money becomes final and executory, the rate of respondent defaulted in paying the loan. Also, no
legal interest, whether the case falls under interest was due on the loan because there was no
paragraph 1 or paragraph 2, above, shall be 12% per written agreement as regards payment of interest.
annum from such finality until its satisfaction, this
interim period being deemed to be by then an As for the principle of solutio indebiti, it applies
equivalent to a forbearance of credit. where (1) a payment is made when there exists no
binding relation between the payor, who has no
Siga-an v. Villanueva (2009) duty to pay, and the person who received the
payment; and (2) the payment is made through
FACTS: Petitioner approached respondent and mistake, and not through liberality or some other
offered a loan of 540k. Respondent accepted cause. The SC has held that the principle of solutio
because she needed capital for her business but the indebiti applies in case of erroneous payment of
loan agreement was not reduced in writing and undue interest.
there was no stipulation as to the payment of
interest for the loan. Ligutan v. Court of Appeals (2002)

HELD: Interest is a compensation fixed by the FACTS: Petitioners obtained P120k loan from
parties for the use or forbearance of money. This is Security Bank. They executed a PN binding
referred to as monetary interest. Interest may also themselves to pay the sum borrowed with an int. of
be imposed by law or by courts as penalty or 15.189% per annum upon maturity and to pay a
indemnity for damages. This is called compensatory penalty of 5%/month on the outstanding principal
interest. The right to interest arises only by virtue of and interest in case of default. They also agree to pay
a contract or by virtue of damages for delay or 10%   of   the   total   amount   due   as   attorney’s   fees   if   a  
failure to pay the principal loan on which interest is suit were instituted to enforce payment. Petitioners
demanded. failed to pay.

Art. 1956 of the CC mandates that payment of HELD: A penalty clause is an accessory undertaking
monetary interest is allowed only if: (1) there was to assume greater liability on the part of an obligor
an express stipulation for the payment of interest; in case of breach of an obligation. Its purpose is to
and (2) the agreement for the payment of interest strengthen the coervcive force of the obligation and
was reduced in writing. The concurrence of the two to provide for what could be the liquidated damages
conditions is required for the payment of monetary resulting from such a breach.
interest. Thus, the SC has held that collection of
interest without any stipulation therefor in writing The interest rate of 15.189% does not appear to be
is prohibited by law. that excessive. The essence or rationale for the
payment of interest, often referred to as cost of
Art. 2209 of the CC states that if the obligation money, is not exactly the same as that of a surcharge
consists in the payment of a sum of money, and the or a penalty. The interest prescribed in loan
debtor incurs delay, a legal interest of 12% per financing arrangements is a fundamental part of the
annum may be imposed as indemnity for damages if banking  business  and  the  core  of  a  bank’s  existence.
no stipulation on the payment of interest was agreed
upon. Likewise, Article 2212 of the Civil Code 4. Finance Charges
provides that interest due shall earn legal interest
from the time it is judicially demanded, although the Republic Act No. 3765
obligation may be silent on this point. An Act to Require the Disclosure of Finance
Charges in Connection with Extensions of Credit
The interest under these two instances may be (Truth in Lending Act)
imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a R. A. No. 3765, Sec. 4 Any creditor shall furnish to
compensation for the use or forbearance of money. each person to whom credit is extended, prior to the
In other words, the two instances apply only to consummation of the transaction, a clear statement
compensatory interest and not to monetary interest. in writing setting forth, to the extent applicable and

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in accordance with rules and regulations prescribed (d) No punishment or penalty provided by this Act
by the Board, the following information: shall apply to the Philippine Government or any
agency or any political subdivision thereof.
(1) the cash price or delivered price of the property
or service to be acquired; (e) A final judgment hereafter rendered in any
criminal proceeding under this Act to the effect that
(2) the amounts, if any, to be credited as down a defendant has willfully violated this Act shall be
payment and/or trade-in; prima facie evidence against such defendant in an
action or proceeding brought by any other party
(3) the difference between the amounts set forth against such defendant under this Act as to all
under clauses (1) and (2); matters respecting which said judgment would be
an estoppel as between the parties thereto.
(4) the charges, individually itemized, which are
paid or to be paid by such person in connection with United Coconut Planters Bank v. Samuel and
the transaction but which are not incident to the Beluso (2007)
extension of credit;
FACTS: UCPB granted spouses Beluso a credit line
(5) the total amount to be financed; under a Credit Agreement whereby the sps. could
avail from UCPB a credit of up to a max. amt. of
(6) the finance charge expressed in terms of pesos P2.35M. Spouses executed PNs & REM in favour of
and centavos; and UCPB. UCPB applied interest rates on the different
PNs ranging from 18% to 34%. During the term of
(7) the percentage that the finance bears to the total these PNs, the spouses were able to pay P760k but
amount to be financed expressed as a simple annual they failed to pay for the interest and penalty on
rate on the outstanding unpaid balance of the their obligations. As a result, UCPB demanded that
obligation. they pay their total obligation of P2.9M but the
spouses failed. UCPB foreclosed the properties
R. A. No. 3765, Sec. 6 (a) Any creditor who in mortgaged by the spouses to secure their credit line,
connection with any credit transaction fails to which, by that time, already ballooned to nearly
disclose to any person any information in violation P3.8M.
of this Act or any regulation issued thereunder shall
be liable to such person in the amount of P100 or in HELD: The penalty for the violation of the Truth in
an amount equal to twice the finance charged Lending Act is P100 or an amount equal to twice the
required by such creditor in connection with such finance charge required by such creditor in
transaction, whichever is the greater, except that connection with such transaction, whichever is
such liability shall not exceed P2,000 on any credit greater, except that such liability shall not exceed
transaction. Action to recover such penalty may be P2,000.00 on any credit transaction. As this penalty
brought by such person within one year from the depends on the finance charge required of the
date of the occurrence of the violation, in any court borrower,  the  borrower’s  cause  of  action  would  only  
of competent jurisdiction. In any action under this accrue when such finance charge is required. In the
subsection in which any person is entitled to a case at bar, the date of the demand for payment of
recovery, the creditor shall be liable for reasonable the finance charge is September 2, 1998, while the
attorney's fees and court costs as determined by the foreclosure was made on December 28, 1998. The
court. filing of the case on February 9, 1999 is therefore
within the one-year prescriptive period.
(b) Except as specified in subsection (a) of this
section, nothing contained in this Act or any In this case, civil action to recover the penalty under
regulation contained in this Act or any regulation Section 6(a) of the Truth in Lending Act had been
thereunder shall affect the validity or enforceability jointly instituted with (1) the action to declare the
of any contract or transactions. interests in the promissory notes void, and (2) the
action to declare the foreclosure void. This joinder
(c) Any person who willfully violates any provision is allowed under Rule 2, Section 5 of the Rules of
of this Act or any regulation issued thereunder shall Court.
be fined by not less than P1,00 or more than P5,000
or imprisonment for not less than 6 months, nor In addition, opening a credit line does not create a
more than one year or both. credit transaction of loan or mutuum, since the
former is merely a preparatory contract to the

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contract of loan or mutuum. Under such credit line, future delivery, under which part or all of the price
the bank is merely obliged, for the considerations is payable subsequent to the making of such sale or
specified therefor, to lend to the other party contract; any rental-purchase contract; any contract
amounts not exceeding the limit provided. The or arrangement for the hire, bailment, or leasing of
credit transaction thus occurred not when the credit property; any option, demand, lien, pledge, or other
line was opened, but rather when the credit line was claim against, or for the delivery of, property or
availed of. In the case at bar, the violation of the money; any purchase, or other acquisition of, or any
Truth in Lending Act allegedly occurred not when credit upon the security of, any obligation of claim
the parties executed the Credit Agreement, where no arising out of any of the foregoing; and any
interest rate was mentioned, but when the parties transaction or series of transactions having a similar
executed the promissory notes, where the allegedly purpose or effect.
offending interest rate was stipulated. (3) "Finance charge" includes interest, fees, service
charges, discounts, and such other charges incident
Lastly, Section 4 of the Truth in Lending Act to the extension of credit as the Board may be
provides that the disclosure statement must be regulation prescribe.
furnished prior to the consummation of the (4) "Creditor" means any person engaged in the
transaction. The rationale of this provision is to business of extending credit (including any person
protect users of credit from a lack of awareness of who as a regular business practice make loans or
the true cost thereof, proceeding from the sells or rents property or services on a time, credit,
experience that banks are able to conceal such true or installment basis, either as principal or as agent)
cost by hidden charges, uncertainty of interest rates, who requires as an incident to the extension of
deduction of interests from the loaned amount, and credit, the payment of a finance charge.
the like. The law thereby seeks to protect debtors
by permitting them to fully appreciate the true cost
of their loan, to enable them to give full consent to FINANCE CHARGES:
the contract, and to properly evaluate their options
in arriving at business decisions.  Interest
 Fees
5. Usury  Service Charges
 Discounts
THE TRUTH IN LENDING ACT (R.A. 3765) & THE  Other Charges incident to extension of
USURY LAW (ACT NO. 2655) credit

Truth in Lending Act CREDITOR; REQUISITES:

1. Purpose 1) Engaged in business of extending credit


2) Requires payment of finance charge.
Section 2. Declaration of Policy. It is hereby
declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of 3. Duty of the Creditor
credit to the user by assuring a full disclosure of
such cost with a view of preventing the uninformed Section 4. Any creditor shall furnish to each person
to whom credit is extended, prior to the
use of credit to the detriment of the national
consummation of the transaction, a clear statement
economy. in writing setting forth, to the extent applicable and
in accordance with rules and regulations prescribed
by the Board, the following information:
(1) the cash price or delivered price of the property
2. Definition of Terms or service to be acquired;
(2) the amounts, if any, to be credited as down
Section 3. As used in this Act, the term payment and/or trade-in;
(1) "Board" means the Monetary Board of the (3) the difference between the amounts set forth
Central Bank of the Philippines. under clauses (1) and (2);
(2) "Credit" means any loan, mortgage, deed of (4) the charges, individually itemized, which are
trust, advance, or discount; any conditional sales paid or to be paid by such person in connection with
contract; any contract to sell, or sale or contract of the transaction but which are not incident to the
sale of property or services, either for present or extension of credit;

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(5) the total amount to be financed; Finance charge represents the amount to
(6) the finance charge expressed in terms of pesos be paid by the debtor incident to the extension of
and centavos; and credit. The lender may provide for a penalty clause
(7) the percentage that the finance bears to the total so long as the amount or rate of the charge and the
amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the conditions under which it is to be paid are disclosed
obligation. to the borrower before he enters into the credit
agreement.
Sps. Yu cannot avoid liability based on the
The CREDITOR has the duty to: rigid interpretation of the Truth in Lending At that
contravenes its goal.
WHOM? The person to whom credit is extended
4. Liabilities arising from violation of the Truth
WHAT? Furnish the following information: in Lending Act.
(1) the cash price or delivered price of the property i. Effect of Failure to Disclose Information
or service to be acquired;
Sec. 6(a). Any creditor who in connection with any
(2) the amounts, if any, to be credited as down
payment and/or trade-in; credit transaction fails to disclose to any person any
(3) the difference between the amounts set forth information in violation of this Act or any regulation
under clauses (1) and (2); issued thereunder shall be liable to such person in
(4) the charges, individually itemized, which are the amount of P100 or in an amount equal to twice
paid or to be paid by such person in connection with the finance charged required by such creditor in
the transaction but which are not incident to the connection with such transaction, whichever is the
extension of credit;
greater, except that such liability shall not exceed
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos P2,000 on any credit transaction.
and centavos; and
(7) the percentage that the finance bears to the total “…In  any  action  under   this  subsection  in  which  any  
amount to be financed expressed as a simple annual person is entitled to a recovery, the creditor shall be
rate on the outstanding unpaid balance of the liable for reasonable attorney's fees and court costs
obligation. as  determined  by  the  court.”

HOW/FORM? Clear statement in writing

WHEN? Prior to the consummation of the Creditor shall pay:


transaction a) Whichever is HIGHER from EITHER:

CASE: BPI v. YU 1) PhP 100


2) Twice the finance charge required by
Facts: In the contract covering the loan agreement creditor in transaction
Limitation:
(Disclosure Statement), BPI failed to disclose the
penalty charges in case of default. However, the Liability shall not exceed Php 2,000 (2000
penalty charges were indicated in the Promissory ≤x)
Note. Sps. Yu allege that BPI violated Sec. 4 of the b)  Reasonable  attorney’s  fees  and  court  costs:   as
Truth in Lending Act. determined by the court

Held: BPI’s   stipulation   of   penalty   charges   in   the  


promissory note constitutes compliance with the
requirement of the Act. ii. Action to Recover Penalty
Sec. 6(a) par. 2. Action to recover such penalty may
Penalty charges are liquidated damages be brought by such person within one year from the
resulting from breach, it falls under finance charges date of the occurrence of the violation, in any court
under Sec. 4 (6) of the Truth in Lending Act. of competent jurisdiction.

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WHO? Person to whom credited is extended, who an estoppel as between the parties thereto.
has the right to be informed by the creditor.
(Borrower)

WHEN/ Period to file? WITHIN 1 year from the CASE: UCPB v. Sps. Beluso
date of occurrence of the violation
Facts: UCPB granted to Sps. Beluso a Promissory
WHERE? Any Court of competent jurisdiction Notes Line under a Credit agreement whereby the
Belusos could avail from UCPB credit up to a certain
iii. Non-impairment of Contract maximum amount. Sps. Beluso constituted
Sec. 6(b). Except as specified in subsection (a) of promissory notes and real estate mortgage over
this section, nothing contained in this Act or any parcels of lands. UCPB applied interest rates on
regulation contained in this Act or any regulation different promissory notes ranging from 18% to
thereunder shall affect the validity or enforceability 34%. From 1996 to Feb 1998, Belusos were able to
of any contract or transactions. pay the total of P763,692.03. From 28 Feb 1998 to
10 June 1998, UCPB continued to charge interest
and penalty on their remaining obligations. Sps.
iv. Effect of Willful Violation of the Truth in Beluso failed to make payment.
Lending Act
Held: 1) Mutuality of Contracts: Interest shall be at
Sec. 6(c). Any person who willfully violates any
the   “rate indicative of DBD retail rate or as
provision of this Act or any regulation issued
determined  by  the  Branch  Head” is dependent solely
thereunder shall be fined by not less than P1,00 or
on the will of UCPB. Under this provision, UCPB can
more than P5,000 or imprisonment for not less than
6 months, nor more than one year or both. choose which interest rate to apply. As UCPB is
given this choice, the rate should be categorically
1) FINE: Php 100 ≤   AMOUNT ≤  Php 5000 determinable in BOTH choices. If either of these two
2) IMPRISONMENT: 6 months ≤   PERIOD ≤   1 choices presents an opportunity for UCPB to fix the
year rate at will, the bank can easily choose such an
3) BOTH FINE AND IMPRISONMENT option, thus making the entire interest rate
provision violative of the principle of mutuality of
contracts.
v. Exemption from Liability
Sec. 6(d). No punishment or penalty provided by
2)   Validity   of   “indicative   of   DBD   rate”:  As regards
this Act shall apply to the Philippine Government or
the  rate  “indicative  of  the  DBD  retail  rate”  the  same  
any agency or any political subdivision thereof.
cannot be considered as valid for being akin to a
Persons exempt from liability: “prevailing   rate”   or   “prime   rate”   in   Polotan   v.   CA.  
UCPB can peg interest at any percentage above or
1) Philippine Government below DBD retail rate. This gives UCPB unfettered
2) Any AGENCY of the Philippine discretion in determining the interest rate. Also,
Government authority to review the interest rate was given to
UCPB alone as the lender.
vi. Effect of final judgment rendered in any 3) Separability Clause: Separability Clause cannot
criminal proceeding in violation of
save either of the two options of UCPB as both
Sec. 6 (c)
Sec. 6(e). A final judgment hereafter rendered in options violate the principle of mutuality of
any criminal proceeding under this Act to the effect contracts.
that a defendant has willfully violated this Act shall
4) ESTOPPEL cannot be predicated on an illegal act:
be prima facie evidence against such defendant in an
the violation of the Truth in Lending Act
action or proceeding brought by any other party
against such defendant under this Act as to all
matters respecting which said judgment would be

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5) PRESCRIPTION: Borrower’s   cause   of   action   PURPOSE: For the protection of borrowers from the
would only accrue when such finance charge is imposition of unscrupulous lenders who take undue
required. advantage of the necessities of others.

Date of the demand for payment of the finance HISTORY: The taking of excessive interest for the
charge is 2 September 1998, while the foreclosure loan of money has been regarded with abhorrence
was made on 28 December 1998. The filing of the from the earliest times.
case on 9 February 1999 is therefore within the one-
year prescriptive period. -Usury was prohibited by the ancient laws
of the Chinese, Hindus, Mosaic laws of Jews,
6) Violation of Truth in Lending Act: In light of Koran, Athenians, Romans. It has also been
frowned upon by distinguished publicists
Sec. 6 (a) and (c), it can be gleaned that the violation
throughout history.
of the said Act gives rise to both criminal and civil -Roman law: Limitations were imposed on
liabilities. Sec. 6(c) considers a criminal offense the the rate that creditors could demand; Rate
willful violation of the Act, while Sec. 6(a) provides limitation = 12%.
for a civil cause of action for failure to disclose any -Christian law: USURY as a SIN and ground
information required. for excommunication
-Judaic   law:   only   allowed   usury   “unto   a  
In this case, the civil action to recover the stranger”   and   a   violation   resulted   in   social  
penalty under Sec. 6 (a) has been jointly instituted exclusion
-Usury in the Philippines: Act. No. 2566 (as
with the action to declare the interests in the
amended)/ Usury Law which became
promissory notes void and the action to declare the effective May 1, 1916 declare usury as
foreclosure void. illegal. However, Central Bank Circular 905
issued by the Monetary Board of the CB,
“The   rationale of Sec. 4 of the Truth in pursuant to the powers granted by the
Lending Act is to protect users of credit from a lack Usury law, which took effect on January 1,
of awareness of the true cost thereof, proceeding 1983 subsequently suspended.
from the experience that banks are able to conceal
such true cost by hidden charges, uncertainty of ELEMENTS:
interest rates, deduction of interest from the loaned
1) A loan or forbearance
amount,  and  the  like.”
2) An understanding between parties that the loan
“The   law   seeks   to   protect   debtors   by  
shall or may be returned;
permitting them to give full consent to the contract,
and to properly evaluate their options in arriving at 3) An unlawful intent to take more than the legal
business decisions. rate for the use of money or its equivalent; and

4) The taking or agreeing to take for the use of the


loan of something in excess of what is allowed by
USURY
law.
DEFINITION
GENERAL CONCEPTS
-Usury is the lending of money at interest in
Art. 1175. Usurious transactions shall be governed
excess of the maximum rates allowed by
law. by special laws, i.e. Act no. 2655
USURY AS STATUTORY CREATION

-Usury as statutory creation: It is purely a


statutory regulation and prohibition. In the Art. 1957. Contracts and stipulations, under any
absence of a statute, any rate of interest cloak or device whatever, intended to circumvent
may be charged. The restriction of the price the laws against usury shall be void. The borrower
to be paid for the use of money.

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may recover in accordance with the laws on usury. Sec. 9-a

-Promulgate such rules and regulations as


may be necessary to implement effectively
Art.1961. Usurious contracts shall be governed by the provisions of this Act.
the Usury Law and other special laws, in so far as Sec. 4-b:   Monetary   Board’s   Guidelines   in   fixing  
they are not inconsistent with this code. maxing rate/s of interest

1.The existing economic conditions in the country


and general requirements of the national economy
Act No. 2655
2. The supply of and demand for credit
Sec. 1
3. The rate of increase in the price levels
Allowed Rates of Interest
4. Such other relevant criteria as the Monetary
GENERAL RULE: Rate of Interest in Contract Board may adopt.

Exception: In absence of express contract as to Sec. 5: Applicability of Compound Interest:


interest rate.
GENERAL RULE: Compound interest shall not be
1)For loan, forbearance of any money, goods, or reckoned in computing the interest on any
credits = 12% p.a.(CB Circular No. 416, S. 1974) obligation, promissory note or other instrument or
contract.
2)Rate in judgment = 6% p.a.
EXCEPTION: BY AGREEMENT
OR subject to rate prescribed by Monetary Board of
Central Bank RULES:

Sec. 1-a: Powers of the Monetary Board -Effective rate of interest charged by the
creditor shall not exceed the equivalent of
-Prescribe the maximum rate or rates of the maximum rate prescribed by the
interest for the loan or renewal thereof or Monetary Board; OR
the forbearance of any money, goods or
credits -If no rate of interest stipulated AND when
-Change such rate or rates whenever debt is judicially claimed it shall draw 6%
warranted by prevailing economic and p.a. interest or such rate as may be
social conditions (Gradual) prescribed by the Monetary Board.
-Prescribe higher maximum rates for loans
of low priority, such as consumer loans or Payment of Advance Interest:
renewals thereof as well as such loans made
by pawnshops finance companies and other GENERAL RULE: No person or corporation shall
similar credit institutions (rates need not be require interest to be paid in advance for a period of
uniform) more than one year.
-Prescribe different maximum rate or rates
for different types of borrowings, including EXCEPTION: Whenever the interest is paid in
deposits and deposit substitutes, or loans of
advance, the effective rate of interest charged by the
financial intermediaries.
Sec. 4-a creditor shall not exceed the equivalent of the
maximum rate prescribed by the Monetary Board.
-Eliminate, exempt from, or suspend the
effectivity of, interest rate ceilings on CB Circular 905:
certain types of loans or renewals thereof or
forbearances of money, goods, or credit SECTION 1. The rate of interest, including
whenever warranted by prevailing commissions, premiums, fees and other charges, on
economic and social conditions. a loan or forbearance of any money, goods, or

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 25 of 136
credits, regardless of maturity and whether secured Sec. 4: Prohibition against pawnbroker or
or unsecured, that may be charged or collected by pawnbroker’s agent to directly or indirectly
any person, whether natural or juridical, shall not be stipulate, charge, demand, take or receive
subject to any ceiling prescribed under or pursuant
to the Usury Law, as amended. What? Any higher rate or greater sum/value for any
loan or forbearance than:

a) 2 1/2% per month when the sum lent is less than


USURIOUS ACTS
P100;
Act No. 2655, Sec. 2 to 4
b) 2% per month when the sum lent is more than
Sec. 2 P100 but not exceeding P500

Prohibition against any person or corporation to c) and 14% p.a. when it is more than the amount last
directly or indirectly receive in money or other mentioned; OR
property, real or personal, or choses in action.
d) the maximum rate or rates prescribed by the
What? a HIGHER rate of interest or greater Monetary Board and in force at the time the loan or
sum/value than 12% p.a.or maximum rate forbearance is granted
prescribed by Monetary Board and in force at the
time the loan or renewal thereof or forbearance is Pawnbroker or Pawnbroker's Agent:
granted.
1) Duly licensed
INCLUSIONS: Commissions, premiums, fines and
2) Has an establishment open to the public
penalties for the loan or renewal thereof or
forbearance of money, goods or credits. Unlawful Acts:

When? Where such loan or forbearance is secured 1)To divide the pawn offered by a person into two
in whole or in part by a mortgage upon real estate or more fractions in order to collect greater interest
(w/ registered title/ document conveying real estate than the permitted by this section.
or interest therein)
2)To require the pawner to pay an additional charge
Rate of interest may apply to loans secured by other as insurance premium for the safekeeping and
types of security as may be specified by Monetary conservation of the article pawned.
Board.
Remedies:
Sec. 3: Prohibition against any person or
corporation to directly or indirectly demand, DEBTOR:
take, receive or agree to charge in money or
other property, real or personal Art. 1413. Debtor may recover the ff.:

What? a HIGHER rate of interest or greater 1) Interest paid in excess of the interest allowed by
sum/value for loan or forbearance of money, goods, the usury laws
or credits than 14% p.a.or maximum rate prescribed 2) Interest of the excess interest (1) from the date of
by Monetary Board and in force at the time the loan
payment.
or renewal thereof or forbearance is granted.
Act No. 2655, Sec. 6
When? Where such loan or forbearance is NOT
SECURED as provided in Sec. 2 Debtor may recover the ff.:

1. Whole interest, commissions, premiums penalties


and surcharges paid or delivered.

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 26 of 136
2. Costs and attorney's fees Changes shall not affect the validity of interest rate
agreed and stipulated at the time the loan
Note: Must be brought within 2 years after payment agreement is entered into, by parties to a loan
or delivery. agreement, the proceeds of which may be availed of
partially or fully at some future time, which such
CASE: CARPO v. CHUA & DY
rate shall not exceed the maximum allowed by law
Facts: Petitioners contracted a loan from
respondents for P175, 000 payable withing 6 mos.
with a 6% interest rate per month. Purchase by innocent purchaser of a negotiable
mercantile paper, usurious or otherwise, for
Held: Interest is invalid for being excessive. The
valuable consideration before maturity
Court discussed a string of cases and used them as a
standard to conclude that the stipulated interest in GENERAL RULE: ALLOWED
the subject loan is excessive, iniquitous,
unconscionable and exorbitant, and therefore Conditions:
invalid. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, 1) No intention on the part of said purchaser to
contracting parties may establish such stipulations, evade the provisions of this Act; and
clauses, terms and conditions as they may deem
2) Purchase was not a part of the original usurious
convenient, provided they are not contrary to law,
transaction.
morals, good customs, public order, or public policy.
This may be invoked to annul the excessive Right to Recover: Maker of note shall have right to
stipulated interest. recover from original holder the ff:

Sec. 7. When stipulations are in violation of this 1) the whole interest paid by maker
Act:
2) In case of litigation, costs and attorney's fees.
General Rule: The following are VOID
Sec. 8
WHAT? Covenants and stipulations contained in
conveyances, mortgages, bonds, bills, notes, and Loan payments with agricultural products as
other contracts or evidences of debts, and all compensation
deposits of goods or other things
General Rule: All LOANS under which payment is to
WHERE? There shall be stipulated, charged, be made in agricultural products or seed or in any
demanded, reserved, secured, taken, or received, other kind of commodities shall be null and void.
directly or indirectly, a higher rate or greater sum or
value for the loan or renewal or forbearance of Exception: If they provide that such products or
money, goods, or credits than is hereinbefore seed or other commodities shall be appraised at the
allowed. time when the obligation falls due at the current
local market price
Exceptions:
Advancing agricultural products
a)Merely clerical error in the computation of
interest and General Rule: Any contract advancing money to be
repaid later in agricultural products or seed or any
b)Made without intent to evade provisions of this other kind of commodities shall be understood to be
act a loan.

Subsequent change in the maximum rates made Exception: IF otherwise stated in a document
by the Monetary Board written in a language or dialect intelligible to the

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 27 of 136
debtor and subscribed in the presence of not less Notes:
than two witnesses
 Non-payment results in subsidiary
Recovery imprisonment at the rate of one day for
every 2 pesos.
RECOVERY: any person or corporation having paid  In case of corporations, associations,
otherwise shall be entitled, in case action is brought societies, or companies the manager,
administrator or gerent or the person who
DEPOSIT COMMODATUM
has charge of the management or
For safekeeping For transfer of the use
administration of the business shall be
May be gratuitous Essentially and always criminally responsible for any violation of
gratuitous
this Act
Movable/corporeal Both movable and
things only in case of immovable may be the
extrajudicial deposit object
II. DEPOSIT
Depositary can always Borrower can use the
be required to return thing for the period
A. The Concept of Deposit
the thing at any time stipulated and can be
required to return only Art. 1962. A deposit is constituted from the
in case of urgent need moment a person receives a thing belonging to
within two years after such payment or delivery, to another, with the obligation of safely keeping it and
recover all the products or seed delivered as of returning the same. If the safekeeping of the
thing delivered is not the principal purpose of the
interest, or the value thereof, together with the
contract, there is no deposit but some other
costs and attorney's fees contract.
A lender under the foregoing contracts may take Art. 1964. A deposit may be constituted judicially
interest, provided such interest be not in excess of or extrajudicially.
the rates herein fixed.
Art. 1967. An extrajudicial deposit is either
Sec. 9 voluntary or necessary.

Person or corporation sued shall file: Answer Deposit


 Roman law concept depositum - the
 Must be in writing gratuitous deposit of goods for the benefit of the
 Must be under oath depositor
 Lack of oath = Admission of facts in o “contract  of  neighborliness”
complaint It is an obligation constituted from the

moment of delivery of property belonging to
another, for the purpose of safekeeping and
Sec. 10 eventual return.
 principal obligation and distinguishing
Violation of this Act and IRR promulgated by the the characteristic is the safekeeping and its eventual
Monetary Board will result in: return

1) Civil Liability  Judicial - the obligation arises as a


consequence of law, allowing the issuance of a
2) Criminal Liablity judicial order constituting a deposit
 Extrajudicial
Fine: not less than P50 nor more than P500 a. Voluntary - obligation arises as a
consequence of a contract
Imprisonment: not less than 30 days nor more than b. Necessary - obligation arises as a
1 year consequence of law or quasi-contract

Both,  at  the  court’s  discretion DEPOSIT MUTUUM


For safekeeping or For consumption
Return the entire sum received as interest from the custoday
party aggrieved.

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 28 of 136
Art. 1963.the Anperson
agreement whoto constitute
delivers or formally
a deposit is  An extrajudicial deposit that arises as a
binding, but the deposit itself is not perfectedcontrol
transfers, gives, or yields possession and until consequence of a contract
theofdelivery
a movable property
of the thing. to the depositary (who is o Object must be movable property.
not the owner), for the purposes of safekeeping. o Delivery of the object is made by the will of
Art. 1968. A voluntary deposit is that wherein the the depositor.
BPI v. IACisand
delivery madeZschornack
by the will(1988)
of the depositor. A o As a contract, it requires meeting of minds
deposit may also be made by two or more persons between the depositor and the depositary.
FACTS: Zshornack
each of whom entrusted
believes himselftoentitled
Comtrust, through
to the thing  Real Contact
Garcia
deposited with a third person, who shall deliver he
$3k (greenbacks) for safekeeping. When it o Property passes from one party to another,
requested
in a properthe return
case to theofone
theto
money,
whomComtrust
it belongs. requiring delivery rather than mere consent.
Delivery is essential for perfection.
Art. 1969. A contract of deposit may be entered  No formal requisites. The contract may be
into orally or in writing. oral or written.
 Historically gratuitous, but may be onerous.
Art. 1965. A deposit is a gratuitous contract, except  Principal obligation - safekeeping of the
when there is an agreement to the contrary, or  movable property and its eventual return.
unless the depositary is engaged in the business of  Contact to deposit - valid consensual
storing goods. contract

Art. 1966. Only movable things may be the object Depositor


of a deposit. explained that the sum was disposed of and the
proceeds deposited   in   Zshornack’s   peso   current  
Art. 1995. A deposit its extinguished: account. BPI argues Garcia exceeded his powers in
(1) Upon the loss or destruction of the thing entering into the transaction, since the contract is a
deposited; depositum, which banks do not enter into.
(2) In case of a gratuitous deposit, upon the death
of either the depositor or the depositary.

When the seal or lock is broken, with or without the Triple-V v. Filipino Merchants Insurance (2005)
depositary's fault, he shall keep the secret of the
deposit. FACTS: De Asis was at Kamayan Restaurant. She
availed of the valet parking service and entrusted
Art. 1982. When it becomes necessary to open a her car key to the valet counter. A parking ticket was
locked box or receptacle, the depositary is issued as receipt for the car with a provision that
presumed authorized to do so, if the key has been that the management and staff will not be
delivered to him; or when the instructions of the responsible for any loss or damage on the vehicle.
depositor as regards the deposit cannot be The car was then parked by the valet attendant at
executed without opening the box or receptacle. the designated parking area. Later, the attendant
Depositor can demand Period to return must be noticed that the car was not in its parking slot and
return at any time respected by lender its key no longer in the box where the keys of cars
Compensation is Compensation may be entrusted to them were usually kept. The car was
generally gratuitous gratuitous, or with a never recovered.
(except by mutual stipulation to pay
agreement) interest HELD: Triple-V is liable for the loss of the car.
Petitioner was constituted as a depositary of the
Any property Fungible things
same car. When De Asis entrusted the car to the
Depositor and Lender and borrower
valet attendant while eating at petitioner's
depositary relationship relationship
restaurant, she expected the car's safe return at the
end of her meal. It cannot evade liability by arguing
that neither a contract of deposit nor that of
insurance, guaranty or surety for the loss of the car
B. Voluntary Deposit
was constituted, when De Asis availed of its free
valet parking service, nor can it be allowed to use its
o General Concepts
exclusionary stipulation as shield from
responsibility.
Voluntary Deposit

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 29 of 136
HELD: The document which embodies the contract Art. 1978. When the depositary has permission to
states that the $3k was received by the bank for use the thing deposited, the contract loses the
safekeeping. The subsequent acts of the parties also concept of a deposit and becomes a loan or
show that the intent of the parties was really for the commodatum, except where safekeeping is still the
bank to safely keep the dollars and to return it to principal purpose of the contract.
Zshornack at a later time. The parties did not intend The permission shall not be presumed, and its
to sell the US$ to the Central Bank within 1 business existence must be proved.
day from receipt. Otherwise, the contract
of depositum would never have been entered into at Art. 1981. When the thing deposited is delivered
all. Since the mere safekeeping of the greenbacks, closed and sealed, the depositary must return it in
without selling them to the Central Bank within 1 the same condition, and he shall be liable for
business day from receipt, is a transaction which is damages should the seal or lock be broken through
not authorized by CB Circular No. 20, it must be his fault.
considered as one which falls under the general Fault on the part of the depositary is presumed,
class of prohibited transactions. Hence, it is void, unless there is proof to the contrary.
having been executed against the provisions of a As regards the value of the thing deposited, the
mandatory/prohibitory law. For this reason, it statement of the depositor shall be accepted, when
affords neither of the parties a cause of action the forcible opening is imputable to the depositary,
against the other. should there be no proof to the contrary. However,
the courts may pass upon the credibility of the
depositor with respect to the value claimed by him.
o Obligation to Safekeep When the seal or lock is broken, with or without the
 Way of the Deposit depositary's fault, he shall keep the secret of the
deposit.
Art. 1974. The depositary may change the way of
the deposit if under the circumstances he may Art. 1982. When it becomes necessary to open a
reasonably presume that the depositor would locked box or receptacle, the depositary is presumed
consent to the change if he knew of the facts of the authorized to do so, if the key has been delivered to
situation. However, before the depositary may make him; or when the instructions of the depositor as
such change, he shall notify the depositor thereof regards the deposit cannot be executed without
and wait for his decision, unless delay would cause opening the box or receptacle.
danger.
Way of the Deposit
Art. 1975. The depositary holding certificates,  The specific manner by which the delivery
bonds, securities or instruments which earn interest to the depositary of the object may be done.
shall be bound to collect the latter when it becomes  Rules:
due, and to take such steps as may be necessary in a. The depositary may not change the way of
order that the securities may preserve their value the way of the deposit unless:
and the rights corresponding to them according to 1. There is a presumption of consent,
law. based on circumstances, and
The above provision shall not apply to contracts for 2. The depositary notifies the
the rent of safety deposit boxes. depositor and waits for the decision.
• Obligation to notify does not apply
Art. 1976. Unless there is a stipulation to the if delay would cause danger to the
contrary, the depositary may commingle grain or object.
other articles of the same kind and quality, in which b. The depositary must
case the various depositors shall own or have a a. Collect interest of certificates,
proportionate interest in the mass. bonds, securities, or instruments, when
they become due, and
Art. 1977. The depositary cannot make use of the b. Take necessary measures to
thing deposited without the express permission of preserve their value and corresponding
the depositor. rights.
Otherwise, he shall be liable for damages. • Obligation does not apply if the
However, when the preservation of the thing certificates, bonds, securities, or
deposited requires its use, it must be used but only instruments are kept pursuant to a
for that purpose. contract for the rent of safety deposit
boxes.

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 30 of 136
c.
The depositary may commingle grain or not contrary to law, morals, good customs, public
other articles of the same kind and quality order or public policy. Any stipulation exempting
• unless there is a stipulation to the the depositary from any liability arising from the
contrary. loss of the thing deposited on account of fraud,
d. The depositary cannot use the thing negligence or delay would be void for being contrary
deposited, unless to law and public policy. Thus, the stipulations
1. Irregular deposit - There is express exempting the bank from liability are void.
and proven permission of the depositor.
• BUT the principal purpose is still The Roman Catholic Bishop of Jaro v. De La Pena
safekeeping (1913)
2. The preservation of the object
requires its use. FACTS: Father Dela Pena was the plaintiff’s duly
• BUT use is for the limited purpose authorized representative to receive the legacy of a
of preservation charitable bequest made for the construction of a
e. The depositary must leper hospital. Father Dela Pena had on hand as
1. Return a closed and sealed object trustee the sum of P6641. He deposited P19k in his
in the same condition, and personal account in HSBC-Iloilo. When he was
2. Keep the secret of the deposit, if the arrested as a political prisoner, he made an order on
seal or lock is broken. the bank for the sum deposited in favor of a US Army
f. The depositary may open a locked box or officer (who believed that he was an insurgent and
receptacle, only if: that he collected the funds for revolutionary
1. There is express authority. purposes). The trust funds were part of the funds
There is presumed authority. (ex. key to lock deposited which were removed by US military
delivered, instructions cannot be executed without authorities.
opening)
HELD: He is not liable to repay the money. The fact
that he placed the trust fund in his personal account
CA Argo-Industrial Devt Corp v. CA and Security does not add to his responsibility or make him a
Bank (1993) debtor who must respond to all hazards. The act of
mixing the trust funds with his personal funds did
FACTS: Petitioner entered into a sale of 2 parcels of not make him assume an obligation different from
land from spouses Pugao. Among the conditions are that under which he would have lain if such deposit
that   owner’s   copies   of   the   certificates   of   titles   shall   had not been made. Neither did he make himself
be deposited in a safety deposit box (SDB) of a bank, liable to repay the money at all hazards.
to be withdrawn only upon joint signatures of a
representative of the petitioner and the Pugaos, Dissent (Trent): When de la Pena mixed the trust
upon full payment of the purchase price. Thereafter, funds with his own, he stamped on the said fund his
they rented an SDB at Security Bank. Ramos then own private marks and unclothed it of all protection
offered to buy both lots and demanded the it had. Trustees are not liable for a loss by theft
execution of a deed of sale. Petitioner's president, without their fault, but this exemption ceases when
accompanied by the Pugaos, proceeded to the bank they mix the trust-money with their own, whereby it
to open the SDB (with   the   bank’s   key   and   the   loses its identity, and they became mere debtors. In
renters’  key)  and  get  the  certificates  of  title. But the addition, a considerable length of time intervened
box yielded no such certificates. Bank alleged that from the time of the deposit until the funds were
petitioner has no cause of action because of the confiscated. The record shows that he repeatedly
stipulations in the contract of lease that the bank is withdrew funds from the account, indicating that he
not a depositary of the contents of the safe and had been using the money in violation of the trust
assumes no liability in connection with it. imposed in him.
HELD: The contract is a special kind of deposit. It is
not an ordinary lease because the full possession 1. Liability for Loss and Damages
and control of the safety deposit box was not given
to the joint renters. The primary function is still the Art. 1972. The depositary is obliged to keep the
receiving in custody of funds, documents and other thing safely and to return it, when required, to the
valuable objects for safekeeping. The renting out is depositor, or to his heirs and successors, or to the
not independent from, but related to or in person who may have been designated in the
conjunction with, this principal function. The parties contract. His responsibility, with regard to the
may establish such stipulations, provided they are safekeeping and the loss of the thing, shall be

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 31 of 136
governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken (4) If he allows others to use it, even though he
into account in determining the degree of care that himself may have been authorized to use the
the depositary must observe. (1766a) same.

Art. 1973. Unless there is a stipulation to the Art. 1990. If the depositary by force majeure or
contrary, the depositary cannot deposit the thing government order loses the thing and receives
with a third person. If deposit with a third person is money or another thing in its place, he shall deliver
allowed, the depositary is liable for the loss if he the sum or other thing to the depositor.
deposited the thing with a person who is manifestly
careless or unfit. The depositary is responsible for Art. 1993. The depositor shall reimburse the
the negligence of his employees. depositary for any loss arising from the character of
the thing deposited, unless at the time of the
Art. 1977. The depositary cannot make use of the
constitution of the deposit the former was not aware
thing deposited without the express permission of
the depositor. of, or was not expected to know the dangerous
character of the thing, or unless he notified the
Otherwise, he shall be liable for damages. depositary of the same, or the latter was aware of it
without advice from the depositor.
However, when the preservation of the thing
deposited requires its use, it must be used but only
for that purpose. (1767a) Safekeeping
• Distinguishing characteristic of contract of deposit
Art. 1978. When the depositary has permission to • Responsibility for loss and damage are subject to
use the thing deposited, the contract loses the specific rules
concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the  Liability of Depositary
principal purpose of the contract.
Responsibility for loss and damage will attach to the
Art. 1981. When the thing deposited is delivered depositary if:
closed and sealed, the depositary must return it in
the same condition, and he shall be liable for 1. Depositary deposits the object with a third person,
damages should the seal or lock be broken through • unless there is a stipulation allowing it
his fault. 2. If deposit to a third person is allowed, the
depositary deposits the thing with a person
Fault on the part of the depositary is presumed, manifestly careless or unfit
unless there is proof to the contrary. 3. The employees of the depositary are negligent
4. Depositary uses the object of the deposit,
As regards the value of the thing deposited, the • unless there was express permission of the
statement of the depositor shall be accepted, when depositor
the forcible opening is imputable to the depositary, • or the use was necessary for the limited
should there be no proof to the contrary. However, purpose of preservation
the courts may pass upon the credibility of the 5. The seal or lock of a thing delivered closed and
depositor with respect to the value claimed by him. sealed is broken through the fault of the
depositary,
When the seal or lock is broken, with or without the • unless there is proof to the contrary.
depositary's fault, he shall keep the secret of the • If the forcible opening is imputable to the
deposit. depositary, the value of the thing deposited
shall be based on the statement of the
Art. 1979. The depositary is liable for the loss of the depositor, unless
thing through a fortuitous event: a. There is contrary proof, and
b. The courts determine otherwise,
(1) If it is so stipulated; based on the credibility of the depositor.
(2) If he uses the thing without the depositor's 6. Even in case of fortuitous event, if:
permission; a. It has been stipulated
b. The depositary uses the thing without the
(3) If he delays its return; depositor’s  permission

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c. The depositary delays the return of the thing by the guardian, or administrator, of the
object person who made the deposit, or by the latter
d. The depositary allows others to use it eve himself if he should acquire capacity.
though the depositary may have been
authorized to use it. Art. 1971. If the deposit has been made by a
7. The depositary shall deliver the money or capacitated person with another who is not, the
replacement to the depositor, even if he is not depositor shall only have an action to recover the
liable for having lost the thing by force majeure or thing deposited while it is still in the possession of
government order. the depositary, or to compel the latter to pay him the
amount by which he may have enriched or benefited
 Liability of Depositor himself with the thing or its price. However, if a
third person who acquired the thing acted in bad
 Responsibility for loss and damage will faith, the depositor may bring an action against him
attach to the depositor only if: for its recovery.
o the depositor delivers a thing, the character
of which causes any loss to the depositary, Art. 1984. The depositary cannot demand that the
unless: depositor prove his ownership of the thing
a. At the time of the constitution of the deposited.
deposit, the depositor was not aware of,
or was not expected to know the Nevertheless, should he discover that the thing has
dangerous character of the thing, or been stolen and who its true owner is, he must
b. The depositor notified the advise the latter of the deposit.
depositary of the dangerous character, or
the depositary was in any case aware of If the owner, in spite of such information, does not
the character claim it within the period of one month, the
depositary shall be relieved of all responsibility by
 Liability for expenses returning the thing deposited to the depositor.

Art. 1992. If the deposit is gratuitous, the depositor If the depositary has reasonable grounds to believe
is obliged to reimburse the depositary for the that the thing has not been lawfully acquired by the
expenses he may have incurred for the preservation depositor, the former may return the same.
of the thing deposited.
Art. 1985. When there are two or more depositors,
• If gratuitous if they are not solidary, and the thing admits of
• Depositor bears expenses for preservation division, each one cannot demand more than his
• If onerous share.
• Depositary bears expenses for preservation
When there is solidarity or the thing does not admit
o Obligation to Return of division, the provisions of Articles 1212 and 1214
shall govern. However, if there is a stipulation that
 By Whom and To Whom the thing should be returned to one of the
depositors, the depositary shall return it only to the
Art. 1972. The depositary is obliged to keep the person designated.
thing safely and to return it, when required, to the
depositor, or to his heirs and successors, or to the Art. 1212. Each one of the solidary creditors may do
person who may have been designated in the whatever may be useful to the others, but not
contract. His responsibility, with regard to the anything which may be prejudicial to the latter.
safekeeping and the loss of the thing, shall be
governed by the provisions of Title I of this Book. Art. 1214. The debtor may pay any one of the
If the deposit is gratuitous, this fact shall be taken solidary creditors; but if any demand, judicial or
into account in determining the degree of care that extrajudicial, has been made by one of them,
the depositary must observe. payment should be made to him.

Art. 1970. If a person having capacity to contract Art. 1986. If the depositor should lose his capacity
accepts a deposit made by one who is incapacitated, to contract after having made the deposit, the thing
the former shall be subject to all the obligations of a cannot be returned except to the persons who may
depositary, and may be compelled to return the have the administration of his property and rights.

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 33 of 136
Art. 1988. The thing deposited must be returned
Art. 1991. The depositor's heir who in good faith
to the depositor upon demand, even though a
may have sold the thing which he did not know was specified period or time for such return may have
deposited, shall only be bound to return the price he been fixed.
may have received or to assign his right of action
against the buyer in case the price has not been paid This provision shall not apply when the thing is
him. judicially attached while in the depositary's
possession, or should he have been notified of the
opposition of a third person to the return or the
 What to Return removal of the thing deposited. In these cases, the
depositary must immediately inform the depositor
of the attachment or opposition.
Art. 1983. The thing deposited shall be returned
with all its products, accessories and accessions. Art. 1989. Unless the deposit is for a valuable
consideration, the depositary who may have
Should the deposit consist of money, the justifiable reasons for not keeping the thing
provisions relative to agents in article 1896 shall deposited may, even before the time designated,
be applied to the depositary. return it to the depositor; and if the latter should
refuse to receive it, the depositary may secure its
Art. 1896. The agent owes interest on the sums he consignation from the court.
has applied to his own use from the day on which
he did so, and on those which he still owes after
the extinguishment of the agency. • To return the object of the deposit upon demand
is one of the primary obligations of the depositary.
• Exceptions:
 Where to Return  If the thing deposited is judicially
attached   while   in   the   depositary’s  
Art. 1987. If at the time the deposit was made a possession
place was designated for the return of the thing,  If the depositary was notified of the
the depositary must take the thing deposited to opposition of a third person to the return
such place; but the expenses for transportation or the removal of the thing deposited.
shall be borne by the depositor.  The depositary must immediately
inform the depositor of the
If no place has been designated for the return, it attachment or opposition.
shall be made where the thing deposited may be,  Not exceptions on the obligation to
even if it should not be the same place where the return, but exceptions to the
deposit was made, provided that there was no obligation to return upon demand
malice on the part of the depositary. o Stipulation of a period is NOT an exception.

 Right of Retention
 When to Return

Art. 1994. The depositary may retain the thing in


pledge until the full payment of what may be due
him by reason of the deposit.

 The article grants the depositary a right of


retention over the property as means or device to
obtain payment of what may be due because of the
deposit.

C. Necessary Deposit

1. General Concepts

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Art. 1964. A deposit may be constituted judicially Art. 1996. A deposit is necessary:
or extrajudicially. (2) When it takes place on the occasion of any
calamity, such as fire, storm, flood, pillage,
Art. 1967. An extrajudicial deposit is either shipwreck, or other similar events.
voluntary or necessary.
Art. 1997. ...The deposit mentioned in No. 2 of the
Art. 1966. Only movable things may be the object preceding article shall be regulated by the
of a deposit. provisions concerning voluntary deposit and by
Article 2168.
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal Art. 2168. When during a fire, flood, storm, or
obligation; other calamity, property is saved from destruction
(2) When it takes place on the occasion of any by another person without the knowledge of the
calamity, such as fire, storm, flood, pillage, owner, the latter is bound to pay the former just
shipwreck, or other similar events. compensation.

 Necessary deposit - an extrajudicial deposit c. Passenger Baggage with


constituted over movable property as a Common Carriers
consequence of law or quasi-contract, so that no
unjust enrichment will result from the juridical Art. 1754. The provisions of Articles 1733 to 1753
relation. shall apply to the passenger's baggage which is not
o Principal obligation: safekeeping or in his personal custody or in that of his employee.
preservation. As to other baggage, the rules in Articles 1998 and
2000 to 2003 concerning the responsibility of
2. Examples of Necessary Deposit
hotel-keepers shall be applicable.
a. Compliance with a Legal
Obligation
 Common carriers - persons, corporations,
firms, associations engaged in the business of
Art. 1996. A deposit is necessary: carrying or transporting passengers or goods or
(1) When it is made in compliance with a legal both, by land, water or air, for compensation.
obligation...  Law on common carriers governs passenger
baggage being transported by the common carrier
Art. 1997. The deposit referred to in No. 1 of the that is not in the custody of the passenger or of the
preceding article shall be governed by the passenger’s  employees.
provisions of the law establishing it, and in case of o CC 1733 requires extraordinary diligence in
its deficiency, by the rules on voluntary deposit... the vigilance over the goods.
 Passenger baggage deposited with the
common carrier by the passenger shall be
b. On the Occasion of a Calamity considered necessary deposit.

4. Hotels or Inns

Art. 1998. The deposit of effects made by the


travelers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that
notice was given to them, or to their employees, of
the effects brought by the guests and that, on the
part of the latter, they take the precautions which
said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.

Art. 1999. The hotel-keeper is liable for the


vehicles, animals and articles which have been
introduced or placed in the annexes of the hotel. (n)

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 35 of 136
Art. 2000. The responsibility referred to in the two arising from loss of contents and use of the deposit
preceding articles shall include the loss of, or injury box.
to the personal property of the guests caused by the
servants or employees of the keepers of hotels or HELD: The hotel may be liable. The stipulation
inns as well as strangers; but not that which may removing liability from the hotel management for
proceed from any force majeure. The fact that any loss of objects in the deposit box is null and void.
travelers are constrained to rely on the vigilance of The hotel-keeper cannot free him from
the keeper of the hotels or inns shall be considered responsibility by posting notices to the effect that he
in determining the degree of care required of him. is not liable for the articles brought by the guest.
(1784a) Any stipulation between the hotel-keeper and the
guest where the responsibility of the former set
Art. 2001. The act of a thief or robber, who has forth in the Code is suppressed or diminished shall
entered the hotel is not deemed force majeure, be void. The hotel business is imbued with public
unless it is done with the use of arms or through an interest. The hotel cannot be allowed to evade public
irresistible force. (n) policy through stipulations or contracts between
itself and its guests. The finding of gross negligence
Art. 2002. The hotel-keeper is not liable for on the part of the defendants is supported by
compensation if the loss is due to the acts of the evidence. Since 2 keys were required to open the
guest, his family, servants or visitors, or if the loss deposit box, the management had a hand in the
arises from the character of the things brought into taking, unless the reason is force majeure.
the hotel. (n)
D. Judicial Deposit
Art. 2003. The hotel-keeper cannot free himself
from responsibility by posting notices to the effect Art. 1964. A deposit may be constituted judicially or
that he is not liable for the articles brought by the extrajudicially.
guest. Any stipulation between the hotel-keeper and
the guest whereby the responsibility of the former Art. 2005. A judicial deposit or sequestration takes
as set forth in articles 1998 to 2001 is suppressed or place when an attachment or seizure of property in
diminished shall be void. (n) litigation is ordered. (1785)

Art. 2004. The hotel-keeper has a right to retain the Art. 2006. Movable as well as immovable property
things brought into the hotel by the guest, as a may be the object of sequestration. (1786)
security for credits on account of lodging, and
supplies usually furnished to hotel guests. (n) Art. 2007. The depositary of property or objects
sequestrated cannot be relieved of his responsibility
 Right of retention - the hotel keeper, as until the controversy which gave rise thereto has
depositary, is given the right of retention over the come to an end, unless the court so orders. (1787a)
property as means to obtain payment of what may
be die because of the deposit. Art. 2008. The depositary of property sequestrated
is bound to comply, with respect to the same, with
YHT Realty Corporation v Court of Appeals all the obligations of a good father of a family.
(1788)
FACTS: McLoughlin usually stayed at Sheraton
during his business trips to the Philippines. He then Art. 2009. As to matters not provided for in this
met Tan, who convinced him to transfer to Code, judicial sequestration shall be governed by the
Tropicana. Thereafter, he stayed at Tropicana Rules of Court.
during his trips, and deposited valuables (money,
documents,  and  jewelry)  at  the  hotel’s  safety deposit Judicial Deposit (or Sequestration)
box. On various occasions, some of his money and  Deposit constituted by judicial order as a
jewelry had gone missing from the box. He consequence of litigation
confronted the hotel and discovered that Tan  Suppletorily governed by the Rules of Court
opened the safety deposit box using the key on attachment and seizure of property
assigned to him. Tan admitted that she had stolen  It is the only type of deposit that may have
McLoughlin’s   key. The hotel disclaimed liability, immovable property as object.
relying on the stipulation on the terms for use of the
safety deposit box releasing the hotel from liability

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 36 of 136
Act No. 2137 (February 5, 1912)
The Warehouse Receipts Law Negotiable receipt (Sec 5)
A receipt in which it is stated that the goods
GENERAL CONCEPTS received will be delivered to the bearer or to the
order of any person named in such receipt.
 Warehouse receipts may be issued by any
warehouseman (Sec 1). Duplicate Receipts (Sec. 6)
 Warehouseman- person lawfully engaged in
When more than one negotiable receipt is issued for
the business of storing goods for profit (Sec
58[a]) the  same  goods,  the  word  “duplicate”  shall  be  plainly  
 Warehouse- building or place where goods are placed upon the face of every such receipt.
deposited and stored for profit (Sec 2, General A warehouseman shall be liable for all damages
Bonded Warehouse Act) caused by his failure to do this.
 Receipt has no particular form but must be
written or printed Effect of Duplicate Receipts (Sec. 15)
A duplicate receipt is a representation and warranty
Contents of the Receipt (Sec 2)
by the warehouseman that it is an accurate copy of
 Location of the warehouse an original receipt properly issued and uncancelled
 Date of issue at the date of the issue of the duplicate, but shall
 Consecutive number of receipt impose upon him no other liability.
 Statement whether goods will be delivered to
the bearer, to a specified person or to a specified Failure  to  mark  “not  negotiable”
person or his order In case the warehouseman fails to mark a non-
 Rate of storage charges negotiable  receipt  with  “non-negotiable”  or  “not  
 Description of goods
negotiable,”  the  warehouseman  shall  be  liable  as  if  
Contents of the Receipt (Sec 2) the receipt was negotiable, provided that the holder
of such receipt acquired it for value supposing it to
 Signature of Warehouseman (may be made by be negotiable. (Sec. 7)
his agent)
 If warehouseman is owner of goods, the fact of OBLIGATIONS AND RIGHTS OF WAREHOUSEMEN
such ownership
 Statement of amount of advances made and Obligation to Deliver (Sec. 8)
liabilities incurred for which the warehouseman
claims as lien. Warehouseman is bound to deliver the goods upon
*Warehouseman shall be liable for all damages demand if such demand is accompanied with:
caused by the omission of any of these terms
 An  offer  to  satisfy  the  warehouseman’s  lien;
 An offer to surrender the receipt, if negotiable
with such indorsements as would be necessary
Form of Receipts (Sec 3) for the negotiation of the receipts; and
 A readiness and willingness to sign an
Any other terms and conditions may be inserted by
acknowledgment that they have been delivered,
the warehouseman provided that they shall NOT: if such signature is requested by the
warehouseman.
 Be contrary to the provisions in the Act; In case the warehouseman refuses or fails to deliver
 Impair his obligation to exercise that degree of
the goods upon demand, he has the burden to
care in the safekeeping of the goods
 Be contrary to law, morals, good customs, public establish the existence of a lawful excuse for such
order or public policy (Art 1306, CC) refusal.

Non-negotiable receipt (Sec 4) Justification in Delivering (Sec. 9)


A receipt in which it is stated that the goods A warehouseman is justified in delivering the goods
received will be delivered to the depositor or to any to one who is:
other specified person.

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 The person lawfully entitled to the possession of Alteration Material (authorized)- liable according
the goods, or his agent; to the terms of the receipt as altered
 A person entitled to the delivery of the goods by Material alteration innocently made- liable on the
the terms of a non-negotiable receipt, or altered receipt according to its original tenor
someone who has written authority from the
Material alteration fraudulently made-
person so entitled either indorsed upon the
receipt or written upon another paper; or  Liable according to the
 A person in possession of a negotiable receipt original tenor of the receipt to a purchaser
of the receipt for value without notice
Liability for Misdelivery (Sec. 10)  Liability is limited only to
delivery as regards to the alterer and
A warehouseman shall be liable to all having a right subsequent purchasers with notice
of property or possession in the goods if he
delivered the goods as authorized by subdivisions Lost or Destroyed Receipts (Sec. 14)
(b) and (c) of Section 9, if prior to such delivery he: A court of competent jurisdiction may order the
delivery of the goods:
 Had been requested, by or on behalf of the
person lawfully entitled, not to make such
 upon satisfactory proof of such loss
delivery; or
or destruction; and
 Had information that the delivery about to be
 upon giving of a bond with sufficient
made was to one not lawfully entitled to the
sureties to be approved by the court.
possession of the goods.
 The court may also, in its discretion,
order the payment of the
Cancellation of Negotiable Receipts Upon
warehouseman’s   reasonable   costs   and  
Delivery of Goods (Sec. 11) counsel fees.
A warehouseman who fails to take up and cancel a
negotiable receipt, the negotiation of which would Delivery of the goods under an order of the court
transfer the right to the possession of the goods, shall not relieve the warehouseman from liability to
shall be liable to any one who purchases for value in a person to whom the negotiable receipt has been or
good faith such receipt, whether such purchaser shall be negotiated for value without notice of the
acquired title to the receipt before or after the proceedings or of the delivery of the goods.
delivery of the goods by the warehouseman. The warehouseman can secure himself on the bond
given.
Cancellation of Negotiable Receipts when Part of
Goods Delivered (Sec. 12) Cannot set up title in himself (Sec. 16)
A warehouseman who fails either to take up and Warehouseman cannot refuse delivery of the goods
cancel a negotiable receipt, or to place plainly upon on the ground that he has acquired title or right to
it a statement of what goods or packages have been the possession of the goods unless such right or title
delivered, shall be liable to any one who purchases is derived:
for value in good faith such receipt, whether such
purchaser acquired title to the receipt before or  Directly or indirectly from a transfer made
after the delivery of any portion of the goods. by the depositor at the time of deposit for
storage or subsequent thereto; or
 From  the  warehouseman’s  lien.
Altered Receipts (Sec. 13)
*Doctrine of Estoppel
The alteration of receipts shall not excuse the
warehouseman from any liability if such alteration
Interpleader of adverse claimants (Sec. 17)
was:
If there are several claimants to the goods, the
 Immaterial; warehouseman may require all known claimants to
 Authorized; or interplead, either as a defense to an action brought
 Made without fraudulent intent. against him for non-delivery of the goods or as an
original suit.
Alteration Immaterial- liable on the altered receipt
according to its original tenor

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Reasonable time to determine validity of claims However, if the description consists merely of marks
(Sec. 18) or labels upon the goods or packages containing
If someone has a claim to the title or possession of them, the warehouseman is not liable even if the
the goods and the warehouseman has information of goods are not of the kind as indicated in the marks
such claim, the warehouseman shall be excused or labels.
from liability for refusing to deliver the goods until a
reasonable time to ascertain the validity of the Liability for Care of Goods (Sec. 21)
adverse claim or to bring legal proceedings to A warehouseman shall be liable for any loss or
compel all claimants to interplead. injury to the goods caused by his failure to exercise
such care in regard to them as a reasonably careful
Effect of Sale (Sec. 36) owner of similar goods would exercise (diligence of
The warehouseman shall not be liable for failure to a good father of a family).
deliver the goods to the depositor or owner of the He shall not be liable, in the absence of an
goods or to a holder of the receipt given for the agreement to the contrary, for any loss or injury to
goods when they were deposited, even if such the goods which could not have been avoided by the
receipt be negotiable after the goods have been exercise of such care.
lawfully sold to satisfy a warehouseman's lien, or
have been lawfully sold or disposed of because of Goods must be kept separate (Sec. 22)
their perishable or hazardous nature. A warehouseman shall keep the goods so far
separate from goods of other depositors and from
CASE: CONSOLIDATED TERMINALS V ARTEX other goods of the same depositor for which a
(1975) separate receipt has been issued.
Facts: CTI, as an owner of a bonded warehouse, To permit at all times the identification and
received 193 bales of high density compressed raw redelivery of the goods deposited.
cotton. It was understood that it would keep the
cotton in behalf of Luzon Brokerage, until the Commingling of Fungible Goods (Sec. 23)
consignee Paramount Textile had opened a letter of If authorized by agreement or by custom, a
credit. Allegedly by virtue of a forged permit to warehouseman may mingle fungible goods with
deliver the cotton, Artex was able to obtain delivery other goods of the same kind and grade.
of the said goods. CTI subsequently filed an action to The various depositors of the mingled goods shall
recover the goods against Artex. own the entire mass in common and each depositor
Ratio: The lower court dismissed the case, ruling shall be entitled to such portion thereof as the
that CTI does not have a cause of action against amount deposited by him bears to the whole.
Artex. At the time the goods were delivered to Artex,
CTI was already paid the warehousing charges. The Liability to Depositors of Commingled Goods
real parties-in-interest are Luzon Brokerage as the (Sec. 24)
depositor, Paramount Textile as the consignee, Warehouseman shall be severally liable to each
Adolph Hanslik as shipper and the Government with depositor for the care and redelivery of his share of
respect to the duties and taxes due. CTI, not being such mass to the same extent and under the same
the owner of the cotton, cannot file this action to circumstances as if the goods had been kept
recover the goods. separate.

Liability for Goods Attachment or Levy upon Goods (Sec. 25)


Goods, for which a negotiable receipt was issued,
Liability for non-existence or misdescription of cannot be attached by garnishment or be levied
goods (Sec. 20) upon under an execution while in the possession of
A warehouseman shall be liable to the holder of the warehouseman, unless the receipt be first
receipt for damages caused by the non-existence of surrendered to him, or its negotiation enjoined.
the goods or by the failure of the goods to The warehouseman cannot be compelled in any case
correspond with the description in the receipt. to deliver up the actual possession of the goods

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until the receipt is surrendered to him or The sale shall be in the place where the lien was
impounded by the court. acquired or if such place is manifestly unsuitable for
Only applies if the person depositing is the owner or such purpose, at the nearest suitable place.
a person whose act would bind the owner.
After the specified date of payment has elapsed, an
Creditor’s  remedies  to  reach  negotiable  receipts   advertisement of the sale shall be published once a
(Sec. 26) week for 2 consecutive weeks in a newspaper. If
A creditor, whose debtor is the owner of a there is no newspaper in such place, it shall be
negotiable receipt, shall be entitled to such aid from posted at least 10 days in not less than 6
courts, by injunction and otherwise, in attaching conspicuous places therein.
such receipt or in satisfying the claim by means The advertisement shall describe the goods to be
thereof as is allowed at law or in equity in regard to sold and shall state the name of the owner or person
property which cannot readily be attached or levied on whose account the goods are held.
upon by ordinary legal process.
The sale shall not be held less than 15 days from the
Warehouseman’s  Lien time of the first publication. From the proceeds of
the sale, the warehouseman shall satisfy his lien,
No delivery until lien is satisfied (Sec. 31) including the reasonable charges of notice,
A warehouseman having a lien valid against the advertisement and sale.
person demanding the goods may refuse to deliver
the goods to him until the lien is satisfied. The balance, if any, shall be held by the
warehouseman and delivered on demand to the
Lien does not preclude other remedies (Sec. 32) person to whom he would have been bound to
Whether a warehouseman has or has not a lien upon deliver.
the goods, he is entitled to all remedies allowed by
law to a creditor against a debtor for the collection At any time before the goods are sold, any person
from the depositor of all the charges and advances claiming a right of property or possession therein
which the depositor has expressly or impliedly may pay the warehouseman the amount necessary
contracted with the warehouseman to pay. to satisfy his lien and to pay the reasonable expenses
and liabilities incurred in serving notices,
Satisfaction of Lien by Sale (Sec. 33) advertising and preparing for the sale.
Warehouseman shall give a written notice to the
person on whose account the goods are held, and to Perishable and Hazardous Goods (Sec. 34)
any other person claiming an interest in the goods. Goods which are:
Such notice shall be given by delivery in
person or by registered letter.  Perishable in nature; or
 Will deteriorate greatly in value; or
 By their odor, leakage, inflammability or
Contents of notice:
explosive in nature; and
Will be liable to injure other property
 Itemized   statement   of   warehouseman’s  
claim and dates when it became due;
 Brief description of the goods against which Warehouseman may:
the lien exist
 A demand that such claim shall be paid on  give notice to the owner or to the person in
or before a specified date, not less than 10 whose name the goods are stored, to satisfy
days from the delivery of the notice; the lien upon such goods, and to remove
 Statement that unless the claim is paid them from the warehouse
within the time specified, the goods will be If such person fails to satisfy the lien or remove the
advertised for sale and sold by auction goods, the warehouseman may sell the goods at
A sale may be had to satisfy any valid claim of the public or private sale without advertising
warehouseman for which he has a lien on the goods.

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If warehouseman is unable to sell, he may dispose of A negotiable receipt by the terms of which the goods
them in any lawful manner, and shall incur no are deliverable to a specified person may be
liability. negotiated only by the indorsement of such
The proceeds of the sale shall be disposed of in the person.
same way as the proceeds of sales under Sec 33. If indorsed to a specified person, it may be
negotiated again by the indorsement of such person
Other Methods of Enforcing Lien (Sec 35) in blank, to bearer or to another specified person.
Other remedies allowed by law shall not be If indorsed in blank or to bearer, the document
precluded for the enforcement of a lien against becomes negotiable by delivery.
personal property. The right to recover so much of
the  warehouseman’s  claim  which  will remain unpaid Transfer of Receipt (Sec. 39)
by the proceeds of the sale of the property shall not A receipt which in its form can be negotiated by
be barred. delivery may be transferred by the holder through
delivery to a purchaser or donee.
Effect of Sale (Sec. 36) A non-negotiable receipt cannot be negotiated, and
After the goods have been sold to satisfy the lien or its indorsement gives the transferee no additional
been disposed of because of their perishable or right.
hazardous nature, the warehouseman shall not
thereafter be liable for failure to deliver the goods Who may negotiate a receipt?
to:
 The owner
 Depositor; or  Person to whom the possession or custody of
 Owner of the goods; or the receipt has been entrusted by the owner
 To holder of the receipt given for the goods  If by the terms of the receipt, the
when they were deposited, even if such receipt warehouseman undertakes to deliver the
be negotiable. goods to the order of the person to whom
the possession or custody of the receipt has
Negotiation and Transfer been entrusted, or if at the time of such
entrusting, the receipt is in such form that it
may be negotiated by delivery.
(Sec. 37) Negotiable receipt may be negotiated
by delivery:
CASE: SIY CONG BIENG & CO. V HSBC (1932)
 Where, by the terms of the receipt, the
warehouseman undertakes to deliver the Facts: Otto Ranft bought bales of hemp (abaca) from
goods to the bearer; or
plaintiff, and the two parties agreed on the price
 Where, by the terms of the receipt, the
therefor (P31,635). On the same day, the plaintiff
warehouseman undertakes to deliver the goods
to the order of a specified person, and such sent the quedans and the invoice to Ranft with the
person or a subsequent indorsee of the receipt understanding that the payment would be made
has indorsed it in blank or to bearer. against the same quedans. As in previous
 Where, by the terms of the receipt, the goods transactions of the same kind between the bank and
are deliverable to bearer or where a negotiable the plaintiff, the quedans were paid one or two days
receipt has been indorsed in blank or to bearer, after their delivery. Subsequently, Ranft pledged
any holder may indorse the same to himself or
to any other specified person, and in such case certain negotiable warehouse receipts (quedans) to
the receipt shall only be negotiated by the HSBC in order to secure the payment of his pre-
indorsement by such indorsee. existing debts to the latter. On the same night, Ranft
Special indorsement- specifies the person to whom died. Plaintiff demands the return of the quedans
or to whose order the goods are to be delivered. from HSBC, alleging that the subject goods of the
receipt have not yet been paid.
Negotiation of negotiable receipt by
indorsement (Sec. 38) Ratio: If the owner of the goods permits another to
have the possession or custody of negotiable

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 41 of 136
warehouse receipts running to the order of the Warranties on sale of receipt
latter, or to the bearer, it is a representation of title
upon which bona fide purchasers for value are  That the receipt is genuine;
entitled to rely. The negotiable quedans were duly  That he has a legal right to negotiate or transfer
it;
negotiated to the bank and nothing on the record
 That he has no knowledge of any fact which
shows that HSBC is guilty of fraud in the said would impair the validity or worth of the
transaction. receipt; and
 That he has a right to transfer the title to the
goods and that the goods are fir for a particular
Rights of persons to whom a receipt has been purpose
negotiated Indorser not a guarantor
The indorsement of the receipt shall not make the
 Title of the person negotiating the receipt over indorser liable for any failure on the part of the
the goods covered by the receipt;
warehouseman or previous indorsers of the receipt
 Title of the person (depositor or owner) to
whose order by the terms of the receipt the to fulfill their respective obligations.
goods were to be delivered, over such goods;
 The direct obligation of the warehouseman to No implied warranty from accepting payment of
hold possession of the goods for him, as if the a debt
warehouseman directly contacted with him. A mortgagee, pledgee or holder for security of
receipt who, in good faith, demands or receives
Rights of persons to whom receipt has been
payment of the debt for which such receipt is
transferred (Sec. 42)
security, shall not be deemed to represent or to
 Title to the goods as against the transferor; warrant the genuineness of such receipt or the
 The right to notify the warehouseman of the quantity or quality of the goods therein described.
transfer thereof; and
 The right, thereafter, to acquire the obligation of When negotiation not impaired by fraud,
the warehouseman to hold the goods for him. mistake or duress
 Right of the transferee is not absolute as it is The validity of the negotiation of a receipt is not
subject to the terms of any agreement with the impaired by the fact that such negotiation was:
transferor. He merely steps into the shoes of the
transferor.  A breach of duty on the part of the person
making the negotiation; or
Transfer of receipt
 By the fact that the owner of the receipt was
induced by fraud, mistake, or duress to entrust
Non-negotiable receipt: transfer does not effect the possession or custody of the receipt to such
the delivery of the goods covered by it. Before person
notification, the warehouseman is not bound to the  If the person to whom the receipt was
transferee. negotiated paid value therefor without notice of
Negotiable receipt: the goods cannot be attached breach of duty, or fraud, mistake or duress.
or be levied under an execution unless the receipt be
Subsequent Negotiation
first surrendered to the warehouseman or its
The person who sold mortgaged or pledged the
negotiation enjoined. goods in a warehouse for which a negotiable receipt
has been issued, or the receipt representing such
Transfer of negotiable receipt without
goods, continues in possession of the negotiable
indorsement
receipt, the subsequent negotiation thereof to any
The transferee acquires a right against the
person receiving the same in good faith, for value
transferor to compel him to indorse the receipt,
and without notice of the previous sale,
unless a contrary intention appears. mortgage or pledge, shall have the same effect as if
The negotiation shall take effect as of the time when
the first purchaser of the goods or receipt had
the indorsement is actually made
expressly authorized the subsequent negotiation.
.

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Negotiation  defeats  vendor’s  lien  Knowing this ownership ;
Where a negotiable receipt has been issued for  Issues or aids in issuing a negotiable receipt for
goods,  no  seller’s  lien  or  right  of  stoppage  in  transitu   such goods without stating such ownership.
shall defeat the rights of any purchaser for value in Penalty: Imprisonment not exceeding one year, or a
good faith to whom such receipt has been fine not exceeding P2,000, or both.
negotiated.
The warehouseman shall not be obliged to deliver or Delivery of goods without obtaining negotiable
be justified in delivering the goods to an unpaid receipt
seller unless the receipt is first surrendered for
 Warehouseman, or his officer, agent or servant;
cancellation.  Delivers goods out of the possession of such
warehouseman;
Criminal Liability  Knowing that the negotiation of a negotiable
receipt, which would transfer the right to the
Issue of receipt for goods not received possession of such goods, is outstanding and
uncancelled;
 Warehouseman, or his officer, agent or servant;  Without obtaining the possession of such
 Issues or aids in issuing a receipt; receipt at or before the time of such delivery.
 Knowing that the goods subject of the receipt Penalty: Imprisonment not exceeding one year, or a
have not been actually received, or are not fine not exceeding P2,000, or both.
under his actual control at the time of issuing
such receipt. Negotiation of receipt for mortgaged goods
Penalty: Imprisonment not exceeding 5 years or a Any person who:
fine not exceeding P10,000, or both.
 Deposits goods to which he has no title, or upon
Issue of receipt containing false statement which there is a lien or mortgage; and
 Takes a negotiable receipt for such goods which
 Warehouseman, or his officer, agent or servant; he afterwards negotiates for value with intent to
 Fraudulently issues or aids in fraudulently deceive;
issuing a receipt for goods knowing that it  Without disclosing his want of title or the
contains any false statement. existence of the lien or mortgage.
Penalty: Imprisonment not exceeding 1 year, or a Penalty: Imprisonment not exceeding 1 year, or a
fine not exceeding P2,000, or both. fine not exceeding P2,000, or both.

Issue of duplicate receipt not so marked ACT 3893 (January 1, 1932)


THE GENERAL BONDED WAREHOUSE LAW
 Warehouseman, or his officer, agent or servant; An Act Regulating the Business of Receiving Rice
 Issues or aids in issuing a duplicate or for Storage
additional negotiable receipt for the same
goods;
 Knowing that a former negotiable receipt for the Definition of Terms
same goods or any part of them is outstanding Warehouse- every building, structure, or other
and uncancelled; protected inclosure in which commodity is kept for
 Without plainly placing upon the face thereof storage.
the  word  “Duplicate”. Rice- palay, in bundles or in grains, or cleaned rice,
Penalty: Imprisonment not exceeding 5 years, or a or both.
fine not exceeding P10,000, or both. Warehouseman- a person engaged in the business
of receiving commodity for storage
Issue  for  warehouseman’s  goods  of  receipt   Receipt- any receipt issued by a warehouseman for
which does not state that fact commodity delivered to him.

 Warehouseman, his officers, agents or servants


Business of Receiving Commodity for Storage
 Who is owner either solely or jointly or in
common with others

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 Any contract or transaction wherein the warehouse permit, any commodity of the kind
warehouseman is obligated to return the very customarily stored therein by him.
same commodity delivered to him or to pay its
value; Every licensed warehouseman shall keep a complete
 Any contract or transaction wherein the
record of all the commodity received by him, of the
commodity delivered is to the milled for and on
account of the owner thereof; receipts issued therefor, of the withdrawals, of the
 Any contract or transaction wherein the liquidation, and of all receipts returned to and
commodity delivered is commingled with cancelled by him. He shall make reports to the
commodity delivered by or belonging to other Director concerning his warehouse and the
persons, and the warehouseman is obligated to condition, contents operation and business thereof.
return commodity of the same kind or to pay its
value.
Violations of the Act
Securing a License
Necessary before engaging in the business of  Any licensed warehouseman
receiving commodity for storage. It shall be annual  Receiving a quantity of commodity greater that
and shall expire on the 31st of December. This is that specified in his application and license
secured from the Director of the Bureau of Penalty: fine of double the market value of the
Commerce and Industry (Department of Trade and commodity so received in excess of the quantity of
Industry) commodity he is authorized to receive
The person who violates this provision shall be
guilty of misdemeanor. Violations of the Act

Penalty: Imprisonment of not less than 1 month or  Any person


fine of not more than P5,000, or both.  Entering into connivance or combination with
any warehouseman that is not licensed
 With the purpose of evading the provisions of
Application for License Sec 3 (securing license)
Place or places where the business and the Penalty: imprisonment of not more than 1 month or
warehouse are to be established or located fine of not more than P200, or both.
Maximum quantity of commodity to be received
Accompanied by a cash bond or bond secured by Suspension/Revocation of License
real estate or signed by a duly authorized bonding The Director of the Bureau of Commerce and
company. Industry may, after hearing has been afforded to the
licensee, suspend or revoke any license issued to
Amount shall be fixed by Director of the Bureau any warehouseman for any violation of or failure to
(DTI) at not less than 33 and 1/3% of the market comply with any provision of this Act.
value of the maximum quantity of commodity to be
received CASE: PNB V SE
Facts: A previous decision of the Court held that
Every person licensed to engage in the business of PNB has rights over the sugar stocks covered by 5
receiving commodity for storage shall insure the warehouse receipts stored in the warehouse of
commodity so received and stored against fire. private  respondents,  Noah’s  Ark.  Thereafter,  when  
PNB filed a Motion for Execution of the judgment,
Any person injured by the breach of any obligation the trial court ruled that PNB can claim the goods
to secure which a bond is given shall be entitled to after payment of storage fees. PNB contends this
sue on the bond in his own name in any court of alleging  that  Noah’s  Ark  has  waived  its  lien  over  the  
competent jurisdiction to recover the damages he goods when it did not bring up the same during the
may have sustained by such breach. previous case.
Ratio: Under Act 2137, storage fees are chargeable.
Obligations of Warehouseman What was merely resolved was the issue of
Every licensed warehouseman shall receive for ownership over the sugar stocks so there was no
storage, so far as his license and the capacity of his

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 44 of 136
point  in  taking  up  the  warehouseman’s  lien.  Sec.  31   common commercial forms that contracts of
of Act 2137 provides that the warehouseman may loan take, therefore, under the Security
refuse delivery of the goods until the lien is satisfied. Regulation Code, such contracts are
considered as securities, whether they are
SECURITY TRANSACTIONS secured or unsecured.

II. THE CONCEPT OF SECURITY 6. Distinguished from Securitization

C. General Concepts Somera notes:


Somera notes:
 In the context of credit transactions, a Securitization
contract of security (or a security  process by which loans and other debts
transaction) is defined as a means by which with an expected cash payment stream
the parties to a principal obligation ensure (such as interest in the case of simple loans)
its enforcement, protect an interest in are sold on a without recourse basis by a
property, or ensure that the person to be seller to a special purpose entity (the
made secure (secured creditor) can be issuer) which in turn issues securities (such
compensated for loss. as a bond or other instrument) that depend,
 It is an accessory obligation that mitigates for their payment, in the expected cash
the risk that the debtor will default on a payment stream.
principal obligation  way to convert assets (such as interest
 A secured obligation is a principal receivable from a simple loan) into
obligation the enforcement of which is securities for resale in the financial market,
ensured by a contract of security, while one allowing the seller to remove assets from its
that is not, is an unsecured obligation. books, and thereby improve its capital ratio
and liquidity, and to make new loans with
5. Distinguished from Securities the proceeds from the sale of the new
security, if it so chooses.
R.A. No. 8799 (Securities Regulation Code), Sec.  process of distributing the risk of default or
3.1 "Securities" are shares, participation or interests non-payment of loans and other debts by
in a corporation or in a commercial enterprise or aggregating these debts into tranches based
profit-making venture and evidenced by a on risk and then issuing new securities
certificate, contract, instruments, whether written backed by the aggregated debt (asset-
or electronic in character. It includes: backed securities) wherein securities with
(a) Shares of stocks, bonds, debentures, higher risks provide higher yields.
notes evidences of indebtedness, asset-
backed securities; Securitization Security transaction
(b) Investment contracts, certificates of distributes the risk of mitigates risk
interest or participation in a profit sharing default or non-payment
agreement, certifies of deposit for a future to those willing to
subscription; assume it.
(c) Fractional undivided interests in oil, gas
or other mineral rights;
(d) Derivatives like option and warrants; D. Events of Default
(e) Certificates of assignments, certificates
of participation, trust certificates, voting Somera notes:
trust certificates or similar instruments  Deriving from the accessory nature of a
(f) Proprietary or nonproprietary security transaction, it is deemed that once
membership certificates in corporations; the principal obligation (the enforcement of
and which is the purpose of the security) is
(g) Other instruments as may in the future complied with, the security is automatically
be determined by the Commission. extinguished.
 On the other hand, if the principal
obligation becomes due and demandable
Somera notes: and the principal debtor defaults, the
 Since bonds, notes, and debentures are creditor may elect to:
evidences of indebtedness and are the

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1. bring an ordinary action for specific  This kind of security transaction is an
performance of the principal encumbrance of property (the collateral)
obligation; or given to guarantee the fulfilment of an
2. elect to enforce the security, as a obligation, especially the assurance that a
secured creditor. creditor will be repaid any money or credit
 Enforcement of the security is proper not extended to a debtor, usually with interest.
only in   case   of   mora   solvendi   (debtor’s    An example of a contract of real security is a
default) but also in case of delay in the mortgage.
fulfilment of the principal obligation by  In a contract of real security, the creditor
reason of a cause imputable to the debtor. acquires a security interest in the collateral
 The requisites of default are as follows: for purposes of ensuring the fulfilment of
1. The principal obligation is the principal obligation.
demandable and liquidated;  A security interest, in turn, is a property
2. The debtor delays performance; interest created by agreement or by
and operation of law to secure the performance
3. The creditor judicially or of an obligation.
extrajudicially requires  the  debtor’s    A security interest is specifically defined
performance. under the law as:
 It should be noted that in credit
transactions, it is customary for parties to P.D. No. 115 of 1973, Sec. 3 (h) "Security Interest"
define other events of default in the means a property interest in goods, documents or
contract for the principal obligation, such instruments to secure performance of some
as, but not limited to: obligations of the entrustee or of some third persons
1. Failure to submit required reports to the entruster and includes title, whether or not
2. Maintain and file appropriate tax expressed to be absolute, whenever such title is in
returns substance taken or retained for security only.
3. Preserve the security
 If any event of default takes place, the 3. In the Context of Insolvency
creditor is given the right to accelerate all
outstanding obligations, declaring them as R.A. No. 10142, Sec. 4 (p) Insolvent shall refer to
immediately due and demandable, which the financial condition of a debtor that is generally
may lead to the enforcement of the unable to pay its or his liabilities as they fall due in
obligation. the ordinary course of business or has liabilities that
are greater than its or his assets.
E. Kinds of Security Transactions
R.A. No. 10142, Sec. 4
1. Personal Security Transactions (ll) Secured party shall refer to a secured creditor or
the agent or representative of such secured creditor.
Somera notes: (kk) Secured creditor shall refer to a creditor with a
 This is a contractual obligation for the secured claim.
repayment of a debt binding a person, as (jj) Secured claim shall refer to a claim that is
distinguished from property. secured by a lien.
 It is an obligation of a person, whether (qq) Unsecured creditor shall refer to a creditor with
natural or juridical, other than the principal an unsecured claim.
debtor to ensure the fulfilment of a (pp) Unsecured claim shall refer to a claim that is not
principal obligation. secured by a lien.
 A guaranty is a contract of personal (t) Lien shall refer to a statutory or contractual claim
security. or judicial charge on real or personal property that
 In personal security transactions, the legality entities a creditor to resort to said property
faithful performance of the obligation by the for payment of the claim or debt secured by such
principal debtor is secured by the personal lien.
commitment of another.
Somera notes:
2. Real Security Transactions  The Financial Rehabilitation and Insolvency
Act (FRIA) of 2010 defines the condition of
Somera notes: being insolvent in the abovementioned
provision.

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 The FRIA also provides for a classification of “A   letter   of   credit   is   an   engagement   by   a   bank   or  
creditors. other person at the request of a customer that the
 A secured creditor, in the context of issuer will honor drafts or other demands for
insolvency, is a creditor that has in its payment upon compliance with the conditions
favour a real security transaction, that is, a
specified   in   the   credit.”   (Bank   of   Commerce   v.  
claim secured by statutory, contractual, or
judicial charge on real or personal property Serrano, GR 151895, Feb. 16, 2005)
(the collateral) that legally entitles a
creditor to resort to the property for International Law: Uniform Customs and Practice
payment of its claim. (UCP)
 An unsecured creditor, on the other hand, is Code of Commerce, Article 2
a creditor who only has in his favor a
personal security transaction. Acts of commerce, whether those who execute them
be merchants or not, and whether specified in this
Letters of Credit
Code or not, should be governed by the provisions
contained in it, in their absence, the by usages of
A. GENERAL CONCEPTS
commerce generally observed in each place and in
the absence of both rules, by those of the civil law.
1. Definition
Those acts contained in this Code and all others of
A Letter of Credit is an instrument under which the analogous character shall be deemed acts of
issuer,  at  a  customer’s  application, agrees to honor a commerce.
draft or other demand for payment made by a third
party, as long as the demand complies with specified
conditions set out in the letter of credit, regardless
of whether any underlying obligation between the
customer and the third party has been satisfied Governing law:
(Black’s  Law  Dictionary) a. Code of Commerce
b. Usages of commerce generally observed
Law (e.g. UCP)
Code of Commerce, Article 567 c. Civil Code and other Special Laws on civil
law
Letters of credit are issued by one merchant to
another for the purpose of attending to a As distinguished from other contracts (Transfield
commercial transaction. Phil. Inc. v. CA)
“not  strictly  contractual”  
“not  a  third-party  beneficiary  contract”  
Code of Commerce, Article 568
“not  a  suretyship  or  guarantee”  
The essential conditions of letters of credit shall be: “not  in  itself  a  negotiable  instrument”  

1.To be issued in favor of a determined


person and not to order 2. Parties
2. To be limited to a fixed and specified Applicant –the one who procures the letter of credit
amount or to one or more undetermined and obliges himself to reimburse the issuing bank
amounts, but all within a maximum, the
upon receipt of the documents of title
limits of which must be stated exactly.
Those which do not have one of these conditions Issuing Party / Bank – the bank which issues the
shall be considered as mere letters of letter of credit and undertakes to pay the beneficiary
recommendation. upon receipt of the draft and proper documents of
title and to surrender the documents to the
applicant upon reimbursement
Jurisprudence

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Beneficiary –in compliance with the contract, was   a   result   of   Reliance’s   failure   to   secure   a   LOC,  
delivers the documents of title and the draft to the Reliance should be liable for damages. Reliance
issuing bank to recover payment should also be liable for the loss of profits incurred
by Daewoo.
Other parties:
Notifying Bank – a correspondent of the issuing bank
which notifies the beneficiary of the existence of a B. KINDS OF LETTERS OF CREDIT
letter of credit
Confirming Bank – it not only notifies the beneficiary Commercial Letters of Standby Letters of
but assumes the direct obligation to pay the Credit Credit
beneficiary
Negotiating Bank – is a correspondent bank which Involve contracts of sale Involve non-sale
buys or discounts a draft under the letter of credit transactions/ obligations

Reduce the risk of non- Reduce the risk of non-


3. Transactions Involved
payment performance
Three distinct agreements involved in a Letter of
Seller can recover Creditor can recover
Credit transaction: payment upon showing payment upon showing
a. Agreement between the applicant and
that it has performed its that the other party has
the beneficiary may involve sale or obligation to deliver failed to perform its
non-sale transactions obligation
b. Reimbursement Agreement between
the applicant and the issuing bank
c. Agreement between the issuing bank
and the beneficiary C. RULE OF STRICT COMPLIANCE

Reliance Commodities, Inc. v. Daewoo Industrial Feati Bank & Trust Company v. Court of Appeals
Co., Ltd. (1993) and Villaluz (1991)
Facts: Villaluz sold logs to Axel Christiansen, which
Facts: Daewoo (seller), a Korean company, entered then sold the logs to Handmi Trade Development, a
into a contract with Reliance (buyer), for the sale of company based in the US. Handmi opened a letter of
foundry pig iron. Pursuant to the contract, Reliance credit in its bank in California, said bank instructed
should apply for a Letter of Credit. Reliance applied Feati Bank to inform Villaluz of the existence of the
for a letter of credit (LOC) with Chinabank but the letter of credit and the documentary requirements
same was denied. It turned out that Reliance failed for recovery of payment. One of the requirements is
to meet the requirements of the government before a certification to be issued by Christiansen. However
it can import pig iron, a regulated commodity. despite demands, Christiansen refused to issue the
Daewoo, in a suit against Reliance, claimed that it is certification, thus, Villaluz cannot recover payment
entitled   for   damages   due   to   the   latter’s   failure   to   from Feati Bank. Hence, this action filed by Villaluz
secure a letter of credit. against Christiansen and Feati.

Issue: W/N failure of Reliance to open the LOC for Issue: W/N the bank should be held liable. NO
Daewoo makes him liable for damages. YES
Held: The Rule of Strict Compliance applies in this
Held: In this case, the contentious contractual case. The documents tendered by the beneficiary
relation is the contract of sale between Reliance and must strictly conform with the terms of the letter of
Daewoo. Although a contract of sale was already credit before the bank can honor the claim. A bank
perfected before the LOC application, the LOC is a which departs from the stipulation of the LOC and
condition to the delivery by Daewoo of the accepts a faulty tender acts on its own risk as it may
commodity. Because the failure of Daewoo to deliver not be able to recover from the buyer. Because

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 48 of 136
Villaluz failed to submit the required main contract or wait for the settlement of the case
documentation, Feati Bank cannot be held liable for between TPI and LHC. As long as LHC has complied
refusing to honor his claim. with the documentary requirements as required by
the LOC, LHC will be entitled to payment.
Although the independence principle
D. INDEPENDENCE PRINCIPLE admits of the so-called fraud exception, such is not
General Rule: The issuer undertakes to pay the present in this case.
beneficiary independent of the underlying
contractual relation between the Applicant and the
Beneficiary as long as the required documents are
tendered by the beneficiary to the bank
TRUST RECEIPTS
Exception: Fraud
The beneficiary fraudulently presents to the bank, A. GENERAL CONCEPTS
documents that contain material representations of A trust receipt is a document which expresses a
fact that to his knowledge are untrue security transaction, whereunder the lender, having
Elements: no prior title in the goods and not having possession
a. A clear proof of fraud of the same, lends his money to the borrower on
b. Fraud constitutes an abuse of the security of the goods, which the borrower is
independent purpose of the letter of credit privileged to sell on agreement to pay all or part of
c. Irreparable injury will follow if injunction is the   proceeds   of   the   sale   to   the   lender   (Black’s   Law  
not granted Dictionary)

Transfield Philippines Inc. v. Luzon Hydro Presidential Decree 115 or the Trust Receipts Law
Corporation Australia (2004) (TRL)
Facts: Transfield Phil. Inc. (TPI) undertook to Elements of a Trust Receipt transaction (Section 3,
construct a hydro-electric power station for Luzon 4):
Hyrdro Corp. (LHC). The contract stipulated a target 1. Entruster – the person holding title over the
completion date but TPI may be entitled to goods, documents or instruments subject to
extensions due to force majeure or other delays. As a the transaction
security of TPI’s   obligation,   TPI   opened   in   favor   of   a. Goods – include chattels and personal
LHC two standby letters of credit from the property (other than thing in action or
respondent banks. those so affixed to the land)
TPI asked for extensions allegedly due to b. Document – written or printed
force majeure but LHC denied these requests. This evidence of title to goods
culminated to a series of legal actions leading to two c. Instrument – any negotiable instrument
arbitration proceedings. During the pendency of the as defined by the Negotiable
proceedings, TPI informed the banks that they Instrument Law (but not including
should not release the money under the LOC, documents as defined by the TRL)
otherwise, they would be liable for liquidated 2. Entrustee – the person having or taking
damages. When the banks said that they would possession of the goods, documents or
honor   LHC’s   claim,   TPI   filed a Complaint for instruments under the transaction
Injunction against the banks. 3. Trust receipt – the written or printed
document signed and delivered by the
Issue: W/N the banks should be enjoined from entruster to the entrustee (which contains
releasing the money under the Letters of Credit. NO the terms and conditions complying with
the TRL)
Held: The banks are under the obligation to pay LHC Under the trust receipt, the entruster binds
when the latter called on the securities in the Letter himself:
of Credit. The banks are not required to look into the

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a. To hold and sell/ dispose of the goods, b. To dispose of them in accordance
documents instruments then turn over with the terms of the trust receipt
the proceeds to the entruster either c. To turn over the proceeds of the
i. To the extent of the amount owing sale OR if unsold, to return them to
to the entruster OR the entrustee
ii. As what appears in the trust receipt
b. If unsold or not disposed of, return the - A trust receipt may be denominated in:
goods, documents and instruments to 1. Philippine Currency OR
the entruster 2. Any foreign currency acceptable as part
of international reserves of the
Philippines
Transactions that the entrustee can enter into
(Section 4):
1. In case of goods and documents of title: C. RIGHTS OF ENTRUSTER
a. To sell or procure their sale
b. To process or manufacture with the “Security   Interest” - a property interest of the
purpose of ultimate sale Entruster to secure performance of some obligations
c. To load, unload, ship or deal with them of the entrustee or of some third persons to the
in a manner preliminary or necessary entruster and includes title, whether or not
for their sale expressed to be absolute, whenever such title is in
2. In case of instruments substance taken or retained for security only
a. To sell or procure their sale/ exchange (Section 3)
b. To deliver them to the principal - This interest shall be valid against all
c. To effect the consummation of some the creditors of the entrustee and for
transaction involving the delivery to a the duration of the trust receipt
depositary or register agreement (Section 12)
d. To effect their presentation, collection
or renewal Rights of the Entruster (Section 7, 8):
1. If sold, to the proceeds from the sale of the
NOTE: The sale of goods, documents or instruments goods, documents or instruments OR
by a person in the business of selling these for profit 2. If unsold, to the return of the goods,
and one who has the general property rights as documents, or instrument
against the buyer does not constitute a trust receipt 3. To the enforcement of all other rights
transaction. conferred to in the trust receipt
4. To cancel the trust and take possession of
the subject of the trust or of the proceeds at
B. FORM OF TRUST RECEIPTS any time upon default or failure of the
- A trust receipt is a FORMAL CONTRACT entrustee to comply with the terms of the
because the law requires that it be in trust
written or printed form and must - The entruster should notify the
contain specific terms including the entrustee of the intention to sell the
following: goods, which may be conducted at
1. The description of the goods, least five days after the notice to
documents or instruments the entrustee
2. The total invoice value and the amount - The proceeds of the sale shall be
of the draft paid by the entrustee applied:
3. The undertaking of the entrustee: a. To the expenses of the sale
a. To hold the goods, documents, b. To the payment of the expenses
instruments in trust for the of re-taking and storing
intruster

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c. To the satisfaction of the owing to the entruster or as appears on
indebtedness the trust receipt
- The entrustee shall be entitled to 3. To insure the goods for their total value
any surplus but shall be liable to against loss from fire, theft, pilferage or
the entruster for any deficiency other casualties
5. To be free from any liability on sale or other 4. To keep said goods or proceeds thereof
disposition made by the entrustee either as whether in money or whatever form,
the  latter’s  principal  or  as  vendor   separate and capable of identification
as property of the entruster
5. To return the goods, documents or
Landl & Company (Phil.) v. Metrobank (2004) instruments in the event of non-sale or
Facts: Landl Company (buyer) entered into a upon demand of the entruster
contract of sale with US company Perma Alloys 6. To observe all other terms and
(seller) for welding rods and electrodes. To secure conditions of the trust receipt
the sale, Landl applied for a Commercial Letter of 7. To be liable for the goods, documents or
Credit with Metrobank to cover the price of the sale. instruments in case of LOSS
As security for the money advanced by the bank in
the LOC, Landl executed a Trust Receipt in favor of Criminal Liability of the Entrustee (Section 13)
Metrobank. 1. The entrustee entered into a trust receipt
Upon arrival of the goods, Landl took agreement with the entruster
possession of the goods. However, it defaulted on its 2. The entrustee either:
obligation with the bank. The bank demanded the a. Fails to turn over the proceeds of the
turn over of the goods which it later sold at public sale (to the extent of the amount he
auction, with the bank as the highest bidder. owed to the entruster or as appears in
Because the proceeds of the sale was insufficient to the trust receipt)
cover  Landl’s  indebtedness,  the  bank  demanded  for   b. Fails to return the subject of the
the payment of the deficiency. When Landl failed to agreement if unsold or not disposed of
do so, Metrobank instituted this action. 3. The   entrustee’s   acts   shall   constitute   the  
crime of ESTAFA under Article 315 (b) of
Issue: W/N L should pay the deficiency. YES the RPC
- If committed by a juridical person,
Held: The Trust Receipt Law gives the bank the right the officials thereof shall be
to repossess the goods in case of default on the part responsible for the offense
of the entrustee. In this case, the initial repossession
of the goods by the bank did not result in the full
satisfaction of the loan obligation. Hence, the bank is E. RIGHTS OF PURCHASER (Section 11)
still entitled to ask Landl for the deficiency. - The purchaser of goods or
transferee of documents and
instruments (in the customary
D. OBLIGATIONS OF THE ENTRUSTEE manner of transfer) FOR VALUE
(Section 9, 10) and in GOOD FAITH shall be free
1. To hold the goods, documents and from   the   entruster’s   security  
instruments in trust for the entruster interest
and dispose them in accordance with
the terms and conditions of the trust
receipt Colinares and Veloso v. Court of Appeals (2000)
2. To receive the proceeds in trust for the Facts: Petitioners were contracted by the Carmelite
entruster and turn over the same to the sisters to renovate their convent. The petitioners
entruster to the extent of the amount bought construction materials from CM Builders
Centre. The day after the purchase, they went to PBC

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bank to apply for a commercial letter of credit in obligation of the principal debtor in case the latter
favor of CM Builders. They also signed a pro-forma should fail to do so.
trust receipt as security for the LoC. The petitioners If a person binds himself solidarily with the
defaulted and PBC demanded payment. When the principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such case
balance had not been paid three years after the loan the contract is called a suretyship.
was obtained, PBC sued petitioners for violation of
PD 115. Art. 2048 A guaranty is gratuitous, unless there is a
stipulation to the contrary.
Issue: W/N the petitioners should be held liable
under the Trust Receipt Law. NO Art. 2051 A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of the
Held: The contract between the bank and the
principal debtor, but also in favor of the other
petitioners is actually a contract of simple loan and guarantor, with the latter's consent, or without his
not a trust receipt agreement. knowledge, or even over his objection.
Two situations in a trust receipt transaction:
a. The money received by the entrustee Somera notes:
should be delivered to the owner  A guaranty is a promise to answer for the
(entrustor) of the merchandise sold payment of some debt or the performance
b. The merchandise received should be of some duty, in case of failure of another
who is liable in the first instance.
returned to the owner, if unsold
 A guaranty is also a personal security
transaction that involves the conditional
It is the failure to return either the proceeds obligation of a guarantor to fulfil a principal
of the sale or the unsold goods that is punishable as obligation in favor of a creditor, in case the
estafa. The intention of the law in punishing the debtor fails to do so.
entrustee in these cases is not to enforce the loan  The obligations of the guarantor always
but to punish the dishonesty and abuse of arise as a consequence of contract, whether
the guaranty is conventional, legal, or
confidence by the entrustee in handling the money
judicial.
or goods, to the prejudice of the entrustor.
In this case, ownership of the goods was B. Form of Guaranty
already transferred from CM Builders to the
petitioners. This is different from trust receipt Art. 2055 A guaranty is not presumed; it must be
transactions where the banks are the owners of express and cannot extend to more than what is
goods and merely released the goods to the stipulated therein.
If it be simple or indefinite, it shall compromise not
importer in trust subsequent to the loan advanced to
only the principal obligation, but also all its
pay the seller. The bank retains the security interest accessories, including the judicial costs, provided
of the goods until the importer turn over the with respect to the latter, that the guarantor shall
proceeds of the sale or the goods had been returned only be liable for those costs incurred after he has
to him. been judicially required to pay.
It is also apparent that there is no intent to
Somera notes:
defraud and misappropriate on the part of the
 The obligation of the guarantor must be
petitioners as they continuously acknowledged their
express and not presumed and it cannot
indebtedness and attempted to pay the bank. extend to more than what is stipulated.
Similarly, the petitioners are not importers of goods  A simple or indefinite guaranty is a
for resale but contractors in a construction project. guaranty that extends to the principal
obligation as well as accessories and judicial
IV. GUARANTY costs.
 A definite guaranty, on the other hand, is a
A. General Concepts guaranty that extends only to a specified
amount.
Art. 2047 By guaranty a person, called the  However, it should be noted that if a
guarantor, binds himself to the creditor to fulfill the guaranty specifies that the guarantor will be

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liable for a specific amount but nevertheless
also provides that the guarantor will also be Art. 2052 A guaranty cannot exist without a valid
liable for interest and expenses, such will be obligation.
deemed  included  in  the  guarantor’s  liability   Nevertheless, a guaranty may be constituted to
even if such exceeds the amount specified. guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a
Art. 1403 The following contracts are natural obligation.
unenforceable, unless they are ratified:
(1) Those entered into in the name of another Art. 2053 A guaranty may also be given as security
person by one who has been given no authority or for future debts, the amount of which is not yet
legal representation, or who has acted beyond his known; there can be no claim against the guarantor
powers; until the debt is liquidated. A conditional obligation
(2) Those that do not comply with the Statute of may also be secured.
Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some Art. 2054 A guarantor may bind himself for less, but
note or memorandum, thereof, be in writing, and not for more than the principal debtor, both as
subscribed by the party charged, or by his agent; regards the amount and the onerous nature of the
evidence, therefore, of the agreement cannot be conditions.
received without the writing, or a secondary Should he have bound himself for more, his
evidence of its contents: obligations shall be reduced to the limits of that of
(a) An agreement that by its terms is not to be the debtor.
performed within a year from the making
thereof; Somera notes:
(b) A special promise to answer for the debt,  As an accessory obligation, a guaranty
default, or miscarriage of another; cannot exist if the principal obligation is
(c) An agreement made in consideration of void.
marriage, other than a mutual promise to  However, the principal obligation in a
marry; guaranty may depend on a voidable,
(d) An agreement for the sale of goods, chattels unconditional, natural, or conditional
or things in action, at a price not less than five obligation.
hundred pesos, unless the buyer accept and  The obligations of a guarantor also cannot
receive part of such goods and chattels, or the be more onerous, in terms of amount and
evidences, or some of them, of such things in conditions, than that of the principal debtor
action or pay at the time some part of the since a guaranty is merely an accessory
purchase money; but when a sale is made by obligation.
auction and entry is made by the auctioneer in  A   guarantor’s   obligations   may   also   be   less  
his sales book, at the time of the sale, of the than that of the principal debtor.
amount and kind of property sold, terms of sale,
 It is also possible under the law for a
price, names of the purchasers and person on
guarantor to ask for a reduction of
whose account the sale is made, it is a sufficient
obligations if he will be liable to more than
memorandum;
the amount of the principal obligation of the
(e) An agreement for the leasing for a longer
debtor.
period than one year, or for the sale of real
property or of an interest therein;  A continuing guaranty may also be used to
( f ) A representation as to the credit of a third secure future debts, the object of which is to
person. grant to the principal debtor a standing
(3) Those where both parties are incapable of giving credit to be used from time to time either
consent to a contract. indefinitely or until a certain period.

My notes:
My notes:
 The principal obligation does not
 A guaranty does not necessarily have to be necessarily have to be valid for a guaranty
reduced in writing to be valid but a written to exist, what is important is it is not void.
note or memorandum thereof is necessary
 An example of a future debt is a contract to
for it to be enforceable.
loan, which could be secured by a guaranty.
C. Obligations Secured
D. Parties to a Guaranty

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stipulated a specified person to
Art. 2056 One who is obliged to furnish a guarantor act as guarantor.
shall present a person who possesses integrity, 2. A married woman must secure the
capacity to bind himself, and sufficient property to consent of her husband to bind
answer for the obligation which he guarantees. The conjugal property.
guarantor shall be subject to the jurisdiction of the
court of the place where this obligation is to be E. Benefit of Excussion
complied with.
Art. 2062 In every action by the creditor, which
Art. 2057 If the guarantor should be convicted in must be against the principal debtor alone, except in
first instance of a crime involving dishonesty or the cases mentioned in article 2059, the former shall
should become insolvent, the creditor may demand ask the court to notify the guarantor of the action.
another who has all the qualifications required in The guarantor may appear so that he may, if he so
the preceding article. The case is excepted where the desire, set up such defenses as are granted him by
creditor has required and stipulated that a specified law. The benefit of excussion mentioned in article
person should be the guarantor. 2058 shall always be unimpaired, even if judgment
should be rendered against the principal debtor and
the guarantor in case of appearance by the latter.
Art. 2049 A married woman may guarantee an
obligation without the husband's consent, but shall Art. 2058 The guarantor cannot be compelled to
not thereby bind the conjugal partnership, except in
pay the creditor unless the latter has exhausted all
cases provided by law. the property of the debtor, and has resorted to all
the legal remedies against the debtor.
Art. 2064 The guarantor of a guarantor shall enjoy
the benefit of excussion, both with respect to the
Art. 2059 The excussion shall not take place:
guarantor and to the principal debtor.
(1) If the guarantor has expressly
renounced it;
Art. 2065 Should there be several guarantors of (2) If he has bound himself solidarily with
only one debtor and for the same debt, the the debtor;
obligation to answer for the same is divided among (3) In case of insolvency of the debtor;
all. The creditor cannot claim from the guarantors (4) When he has absconded, or cannot be
except the shares which they are respectively bound sued within the Philippines unless he has
to pay, unless solidarity has been expressly left a manager or representative;
stipulated. (5) If it may be presumed that an execution
The benefit of division against the co-guarantors on the property of the principal debtor
ceases in the same cases and for the same reasons as would not result in the satisfaction of the
the benefit of excussion against the principal obligation.
debtor.
Art. 2060 In order that the guarantor may make use
Somera notes: of the benefit of exclusion, he must set it up against
 Parties to a guaranty: the creditor upon the latter's demand for payment
1. Creditor from him, and point out to the creditor available
2. Debtor of the principal obligation property of the debtor within Philippine territory,
3. Guarantor sufficient to cover the amount of the debt.
 A sub-guarantor is a guarantor of a
guarantor. Art. 2061 The guarantor having fulfilled all the
 A co-guarantor is one of several guarantors conditions required in the preceding article, the
of only one debtor for the same debt. creditor who is negligent in exhausting the property
 Qualifications of a guarantor: pointed out shall suffer the loss, to the extent of said
1. Must possess integrity, capacity to property, for the insolvency of the debtor resulting
contract and sufficient property for from such negligence.
the guaranteed obligation.
 Loss of these qualifications Art. 2063 A compromise between the creditor and
gives the creditor the right to the principal debtor benefits the guarantor but does
demand a new guarantor not prejudice him. That which is entered into
unless the creditor had between the guarantor and the creditor benefits but
does not prejudice the principal debtor.

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of raw materials for survival bolos that were
Art. 2064 The guarantor of a guarantor shall enjoy ordered made by the Phil. Army. Petitioners
the benefit of excussion, both with respect to the simultaneously executed trust receipts in favor
guarantor and to the principal debtor. of BPI wherein they executed a guarantee to pay
the bank which also provided that their liability
Art. 2081 The guarantor may set up against the shall be direct and immediate without any need
creditor all the defenses which pertain to the to exhaust any legal remedies before proceeding
principal debtor and are inherent in the debt; but against them. In one of the trust receipts, the
not those that are personal to the debtor. petitioners signed as corporate officers,
indicating their respective positions in said
Somera notes: companies. In the other trust receipt, only Jose
 This is the distinguishing element of a Tupaz IV signed and he did not indicate in said
guaranty. document  he  was  signing  as  El  Oro’s  VP.
 The benefit of excussion (or exhaustion or
exclusion) is the right of the guarantor to HELD: While petitioners are in this case are only
demand that the creditor, before making the liable as guarantors, the wording of the
former liable to fulfil the obligation of the undertaking reveals that the transaction
principal debtor, do the following things involved here is a loan secured by a guaranty
first: with a waiver of the benefit of excussion. Since
1. Exhaust all of the properties of the Jose Tupaz IV did not indicate his capacity as
principal debtor corporate officer in signing the other trust
2. Resort to all legal remedies against receipt, then he should be made liable to the
the principal debtor bank in his personal capacity (they were not
 On the other hand, for the creditor to held personally liable under the first trust
enforce a guaranty: receipt because they signed as corporate
1. He must bring an action against the officers). Since he has waived the benefit of
principal debtor alone (exceptions excussion in the undertaking that he signed, he
are the cases mentioned in Art. may be proceeded against by the bank without
2059). the need to exhaust other remedies.
2. He shall also as the court to notify
the guarantor of the action. My notes:
3. The guarantor may appear in the  If the benefit of excussion is waived, then
proceedings, so that it may set up there is no longer a need to proceed against
such defenses as provided by law. the debtor before proceeding against the
a. The benefit of excussion shall guarantor.
always be unimpaired, even if  The court in this case also provided reasons
judgment should be rendered why Tupaz IV was made liable to the bank
against the principal debtor even before excussion is resorted to:
and the guarantor in case of 1. Excussion is not a pre-requisite to
appearance by the latter. secure judgment against a
4. In order that the guarantor may guarantor.
make use of the benefit of 2. The benefit of excussion may be
excussion, he must: waived (which was present in this
a. Set it up against the creditor case).
upon demand for payment, and  According to the SC, however, there is still a
b. Point out to the creditor remedy for the guarantor, which is to
available property of the demand deferment of the execution of the
debtor within Philippine judgment against it until after the assets of
territory, sufficient to cover the the principal debtor is exhausted.
amount of the debt.  Despite the procedure provided in Art.
2062, this case is basis for saying that a
Tupaz IV and Tupaz v. Court of Appeals creditor may secure judgment against a
(2005) guarantor even before excussion is resorted
to.
FACTS: Jose Tupaz IV and Petronila Tupaz
applied for 2 commercial LOCs in favor of El Oro F. Right to Protection
Corp. with BPI in order to finance the purchase

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Art. 2071 The guarantor, even before having paid,  Since by definition, a guarantor binds
may proceed against the principal debtor: himself to the creditor, it is also only the
(1) When he is sued for the payment; latter that can release the guarantor from
(2) In case of insolvency of the principal the guaranty.
debtor;
(3) When the debtor has bound himself to G. Right to Indemnification
relieve him from the guaranty within a
specified period, and this period has Art. 2066 The guarantor who pays for a debtor
expired; must be indemnified by the latter.
(4) When the debt has become demandable, The indemnity comprises:
by reason of the expiration of the period for (1) The total amount of the debt;
payment; (2) The legal interests thereon from the
(5) After the lapse of ten years, when the time the payment was made known to the
principal obligation has no fixed period for debtor, even though it did not earn interest
its maturity, unless it be of such nature that for the creditor;
it cannot be extinguished except within a (3) The expenses incurred by the guarantor
period longer than ten years; after having notified the debtor that
(6) If there are reasonable grounds to fear payment had been demanded of him;
that the principal debtor intends to (4) Damages, if they are due.
abscond;
(7) If the principal debtor is in imminent Art. 2050 If a guaranty is entered into without the
danger of becoming insolvent. knowledge or consent, or against the will of the
In all these cases, the action of the guarantor is to principal debtor, the provisions of articles 1236 and
obtain release from the guaranty, or to demand a 1237 shall apply.
security that shall protect him from any proceedings
by the creditor and from the danger of insolvency of Art. 1236 The creditor is not bound to accept
the debtor. payment or performance by a third person who has
no interest in the fulfillment of the obligation, unless
Somera notes: there is a stipulation to the contrary.
 The right to protection is the right of the Whoever pays for another may demand from the
guarantor as against the principal debtor to: debtor what he has paid, except that if he paid
1. Obtain release from the guaranty, without the knowledge or against the will of the
or debtor, he can recover only insofar as the payment
2. Demand security. has been beneficial to the debtor.
 The purpose of such right is for the
guarantor to protect itself from: Art. 2069 If the debt was for a period and the
1. Any proceeding by the creditor, and guarantor paid it before it became due, he cannot
2. The danger of insolvency by the demand reimbursement of the debtor until the
debtor. expiration of the period unless the payment has
 The right to protection is preliminary in been ratified by the debtor.
nature since it may be availed of by the
guarantor before payment after he has been Art. 2070 If the guarantor has paid without
liable to do so. notifying the debtor, and the latter not being aware
 This right may also only be enforced by of the payment, repeats the payment, the former has
action, although the guarantor will not be no remedy whatever against the debtor, but only
allowed to realize on the judgment on the against the creditor. Nevertheless, in case of a
point of actual collection until it has gratuitous guaranty, if the guarantor was prevented
satisfied or caused to satisfy the principal by a fortuitous event from advising the debtor of the
obligation. payment, and the creditor becomes insolvent, the
 In effect, the guarantor is proceeding debtor shall reimburse the guarantor for the amount
against the principal debtor to compel the paid.
latter to extinguish the principal obligation,
in order for the guarantor to be released Art. 2072 If one, at the request of another, becomes
from the guaranty. a guarantor for the debt of a third person who is not
present, the guarantor who satisfies the debt may
My notes: sue either the person so requesting or the debtor for
reimbursement.

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 The right of subrogation is the right of a
Somera notes: guarantor who pays, as against the principal
 The right to indemnification is the legal tie debtor, to be substituted in all the rights,
created between the guarantor and the remedies or securities that the creditor had
principal debtor to which the creditor is not against the principal debtor.
privy.  In effect, this process transfers to the
 It is a substantive right of action of the guarantor the credit with all the rights
guarantor as against the principal debtor, appertaining thereto, against the principal
after the former has paid the principal debt, debtor.
to recover:
1. The total amount of the debt; My notes:
2. The legal interests thereon from  The right of indemnification and right of
the time the payment was made subrogation only arises when the guarantor
known to the debtor, even though it has already paid the principal debt and the
did not earn interest for the contract of guaranty was entered with the
creditor; knowledge and consent of the principal
3. The expenses incurred by the debtor.
guarantor after having notified the
debtor that payment had been I. Rights of Co-Guarantors
demanded of it; and
4. Damages, if they are due. 4. Benefit of Division
 Right of indemnification is more than a
mere right of reimbursement. Art. 2065 Should there be several guarantors of
only one debtor and for the same debt, the
H. Right to Subrogation obligation to answer for the same is divided among
all. The creditor cannot claim from the guarantors
Art. 2067 The guarantor who pays is subrogated by except the shares which they are respectively bound
virtue thereof to all the rights which the creditor had to pay, unless solidarity has been expressly
against the debtor. stipulated.
If the guarantor has compromised with the creditor, The benefit of division against the co-guarantors
he cannot demand of the debtor more than what he ceases in the same cases and for the same reasons as
has really paid. the benefit of excussion against the principal debtor.

Art. 2050 If a guaranty is entered into without the Art. 2078 A release made by the creditor in favor of
knowledge or consent, or against the will of the one of the guarantors, without the consent of the
principal debtor, the provisions of articles 1236 and others, benefits all to the extent of the share of the
1237 shall apply. guarantor to whom it has been granted.

Art. 1237 Whoever pays on behalf of the debtor Somera notes:


without the knowledge or against the will of the  A co-guaranty is when two or more persons
latter, cannot compel the creditor to subrogate him (or co-guarantors) answer for the same
in his rights, such as those arising from a mortgage, debt of the same debtor.
guaranty, or penalty.  The benefit of division among co-guarantors
is the right of a co-guarantor, as against the
Art. 2068 If the guarantor should pay without creditor, to pay only the divided share that
notifying the debtor, the latter may enforce against it is bound to pay.
him all the defenses which he could have set up  The benefit of division may be claimed by a
against the creditor at the time the payment was co-guarantor from the moment the
made. obligation is contracted, except there is
stipulation to the contrary.
Art. 2080 The guarantors, even though they be  The benefit of division will cease if:
solidary, are released from their obligation 1. The co-guarantor against whom the
whenever by some act of the creditor they cannot be creditor is making the claim has
subrogated to the rights, mortgages, and preference expressly renounced the benefit of
of the latter. division;
2. The guarantor has bound itself
Somera notes: solidarily with the co-guarantor;

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3. In case of insolvency of the co- co-guarantors, to recover the shares due
guarantor; from the co-guarantors.
4. A co-guarantor has absconded, or  However, this right will only arise if the
cannot be sued within the following conditions concur:
Philippines unless it has left a 1. There are two or more guarantors
manager or representative; of the same debtor and for the
5. It may be presumed that an same debt.
execution on the property of a co- 2. One of the co-guarantors has paid.
guarantor would not result in the 3. Payment is made by virtue of a
satisfaction of the obligation. judicial demand or the principal
 The effect of the cessation of the benefit of debtor is insolvent.
division is that the creditor may claim the  In the event that any of the co-guarantors
entire amount from a co-guarantor. becomes insolvent, the share of the
insolvent co-guarantor shall be borne by the
My notes: other co-guarantors, including the co-
 There are two ways of looking at Art. 2078: guarantor who paid the principal debt, in
1. The amount of the benefit of the same proportion as that established in
release will be divided among all the co-guaranty.
debtors; or
2. The other co-guarantors may seek J. Extinguishment and Right of Release
reimbursement from the co-
guarantor that was released. Art. 2076 The obligation of the guarantor is
extinguished at the same time as that of the debtor,
5. Right to Reimbursement and for the same causes as all other obligations.

Art. 2073 When there are two or more guarantors Art. 2077 If the creditor voluntarily accepts
of the same debtor and for the same debt, the one immovable or other property in payment of the
among them who has paid may demand of each of debt, even if he should afterwards lose the same
the others the share which is proportionally owing through eviction, the guarantor is released.
from him.
If any of the guarantors should be insolvent, his Art. 2079 An extension granted to the debtor by the
share shall be borne by the others, including the creditor without the consent of the guarantor
payer, in the same proportion. extinguishes the guaranty. The mere failure on the
The provisions of this article shall not be applicable, part of the creditor to demand payment after the
unless the payment has been made by virtue of a debt has become due does not of itself constitute
judicial demand or unless the principal debtor is any extension of time referred to herein.
insolvent.
Art. 2080 The guarantors, even though they be
Art. 2074 In the case of the preceding article, the co- solidary, are released from their obligation
guarantors may set up against the one who paid, the whenever by some act of the creditor they cannot be
same defenses which would have pertained to the subrogated to the rights, mortgages, and preference
principal debtor against the creditor, and which are of the latter.
not purely personal to the debtor. (1845) ARTICLE
2075. A sub-guarantor, in case of the insolvency of SURETY
the guarantor for whom he bound himself, is
responsible to the co-guarantors in the same terms A. General Concepts
as the guarantor.
Art. 2047. By guaranty a person, called the
Art. 2075 A sub-guarantor, in case of the insolvency guarantor, binds himself to the creditor to fulfill
of the guarantor for whom he bound himself, is the obligation of the principal debtor in case the
responsible to the co-guarantors in the same terms latter should fail to do so.
as the guarantor.
If a person binds himself solidarily with the
Somera notes: principal debtor, the provisions of Section 4,
 The right of reimbursement is the right of a Chapter 3, Title I of this Book shall be observed. In
co-guarantor who pays, as against the other such case the contract is called a suretyship.

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Art. 1211. Solidarity may exist although the
creditors and the debtors may not be bound in the C. Obligations Secured
same manner and by the same periods and
conditions. 1. Consideration – consideration
necessary   to   support   a   surety’s  
Art. 1216. The creditor may proceed against any obligation need not pass directly to
one of the solidary debtors or some or all of them the surety; a consideration moving
simultaneously. The demand made against one of to the principal debtor alone
them shall not be an obstacle to those which may suffices.
subsequently be directed against the others, so 2. Extent – obligation of the surety
long as the debt has not been fully collected. cannot be extended by implication
beyond its specified limits. To the
Art. 2082. The bondsman who is to be offered in extent, and in the manner, and
virtue of a provision of law or of a judicial order under the circumstances pointed
shall have the qualifications prescribed in Article out in the obligation, the surety is
2056 and in special laws. bound and no further.
3. Continuing Surety – not limited to a
Art. 2083. If the person bound to give a bond in single transaction but contemplates
the cases of the preceding article, should not be a prospective or future dealing;
able to do so, a pledge or mortgage considered series of transactions.
sufficient to cover his obligation shall be admitted
in lieu thereof. Art. 2053. A guaranty may also be given as
security for future debts, the amount of which is
Art. 2084. A judicial bondsman cannot demand not yet known; there can be no claim against the
the exhaustion of the property of the principal guarantor  until  the  debt  is  liquidated…
debtor.
Case:
A sub-surety in the same case, cannot demand the
exhaustion of the property of the debtor of the Security Bank and Trust Company v Cuenca
surety. Facts: Sta. Ines is a corporation engaged in logging
operations. In 1980 it was granted, by Security Bank,
Suretyship… a credit line in the amount of P8M. To secure
 Is the legal relation that arises when one payment, it executed a chattel mortgage over some
person solidarily binds himself with the of its machineries and equipments. And as an
principal debtor to be answerable for the additional security its President and Chairman of the
debt, default or miscarriage. Board of Directors, Rodolfo Cuenca, execute an
indemnity agreement in favor of Security Bank
 Is a contractual relation.
whereby he bound himself jointly and severally with
 Is an accessory, ancillary or collateral
Sta. Ines. Four days before the expiration of the
obligation > obligation ceases when
period of effectivity of the P8M loan facility,
principal obligation is extinguished.
appellant drew P6.1M. Cuenca resigned in 1985.
 A  surety’s  liability  to  the creditor is direct,
Soon after, Sta. Ines requested Security Bank to
primary and absolute.
restructure their loan agreement without prior
notice to Cuenca.
B. Form of Surety
Held: Cuenca not liable for restructured loan. An
Art. 1403. … essential alteration in the terms of a Loan
(b) A special promise to answer for the debt, Agreement without the consent of the surety
default or miscarriage of another.
extinguishes   the   latter’s   obligation.   The   submission  
… that only the borrower, not the surety, is entitled to
Unenforceable by action, unless the same, or some
be notified of any modification in the original loan
note or memorandum, thereof, be in writing, and accommodation is untenable-such theory is contrary
subscribed by the party charged, or by his agent;
to the to the principle that a surety cannot assume
evidence, therefore, of the agreement cannot be an obligation more onerous than that of the
received without the writing, or a secondary principal. That the Indemnity Agreement is a
evidence of its contents.
continuing surety does not authorize the lender to
extend the scope of the principal obligation
 Unenforceable unless it is in writing.

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inordinately; A continuing guaranty is one which Facts: Private respondent M.B. Lending Corporation
covers all transaction, including those arising in the extended a loan to the spouses Osmeña and Merlyn
future, which are within the description or Azarraga, together with petitioner Estrella Palmares,
contemplation of the contract of guaranty, until the in the amount of P30,000.00 payable on or before
expiration or termination thereof. May 12, 1990, with compounded interest at the rate
of 6% per annum to be computed every 30 days
Case Notes: from the date thereof. 1 On four occasions after the
 An obligation may be extinguished by execution of the promissory note and even after the
novation. (Art. 1292) loan matured, petitioner and the Azarraga spouses
 The following are the requirements for were able to pay a total of P16,300.00, thereby
novation: leaving a balance of P13,700.00. No payments were
o There is a previous valid obligation made after the last payment on September 26, 1991.
o The parties concerned agree to a 2 Consequently, on the basis of petitioner's solidary
new contract liability under the promissory note, respondent
o The old contract is extinguished corporation filed a complaint 3 against petitioner
o There is a new valid contract Palmares as the lone party-defendant, to the
 JSS (joint and solidary signature) of a major exclusion of the principal debtors, allegedly by
stock-holder or corporate officer is an reason of the insolvency of the latter.
additional security for loans granted to Held: Palmares (surety) is liable. It is a cardinal rule
corporations. in the interpretation of contracts that if the terms of
a contract are clear and leave no doubt upon the
D. Distinguished from Standby Letter of intention of the contracting parties, the literal
Credit meaning of its stipulation shall control. 13 In the
case at bar, petitioner expressly bound herself to be
Standby Letter of Credit – Reverses financial burden jointly and severally or solidarily liable with the
of parties through litigation. Creditor expects to principal maker of the note. The terms of the
promptly receive cash in the vent of non- contract are clear, explicit and unequivocal that
performance. petitioner's liability is that of a surety.

Surety – Creditor needs to establish the fact of the E.Zobel, Inc. v CA


debtor’s   non-performance for the duty of Facts: Sps Claveria (Agro Brokers) applied for a loan
indemnification to arise. with Consolidated Bank and Trust (Solid Bank) for
P2,875,000 to finance purchase of 2 maritime barges
E. Distinguished from Guaranty and 1 tugboat. Loan was approved on the condition
that chattel mortgage is executed on the 3 vessels
Art. 2047. By guaranty a person, called the and   a   “continuing   guarantee”  is   executed   by   E.   Zobel  
guarantor, binds himself to the creditor to fulfill Inc. Spouses defaulted. Solid Bank filed a complaint
the obligation of the principal debtor in case the for sum of money with a prayer for a writ of
latter should fail to do so. preliminary attachment against Spouses and the
petitioner E. Zobel, Inc.Petitioner Zobel moved for
If a person binds himself solidarily with the dismissal arguing that pursuant to Art. 2080 of NCC,
principal debtor, the provisions of Section 4, “it   has   lost   its   right   to   be   subrogated   to   the   first  
Chapter 3, Title I of this Book shall be observed. In chattel mortgage because Solid Bank failed to
such case the contract is called a suretyship register the chattel mortgage with the proper
government agency. Respondent Bank argues that
Guaranty – guarantor is the insurer of the solvency, Art. 2080 (provisions on Guaranty) does not apply
assumes liability when principal debtor fails or is because Zobel was in truth a surety and not a
unable to pay. guarantor.
Held: Zobel is liable as a surety.
Suretyship – surety is the insurer of the debt, Surety vs. guaranty: Guaranty and surety are
obligates itself to pay if the principal debtor does not nearly related, and many of the principles are
pay. The nature of suretyships prevents suretys common to both. However, under our civil law,
from availing the benefit of excussion. they may be distinguished thus: A surety is usually
bound with his principal by the same instrument,
Cases: executed at the same time, and on the same
consideration. On the other hand, the contract of
Palmares v Court of Appeals guaranty is the guarantor's own separate

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undertaking, in which the principal does not join. authorized for the purpose.
Simply put, a surety is distinguished from a Third persons who are not parties to the
guaranty in that a guarantor is the insurer of the principal obligation may secure the latter by
solvency of the debtor and thus binds himself to pledging or mortgaging their own property.
pay if the principal is unable to pay while a surety
is the insurer of the debt, and he obligates himself
to pay if the principal does not pay.
The contract is a surety regardless of its title: The
Art. 2087. It is also the essence of these
use of the term "guarantee" does not ipso
facto mean that the contract is one of guaranty. contracts that when the principal obligation
Authorities recognize that the word "guarantee" is becomes due, the things in which the pledge or
frequently employed in business transactions to mortgage consists may be alienated for the
describe not the security of the debt but an payment to the creditor.
intention to be bound by a primary or independent
obligation.

International Finance Corporation v Imperial ESSENTIAL ELEMENTS OF PLEDGE AND


Textile Mills, Inc. MORTGAGE

Facts: IFC extended a loan agreement to Philippine 1. That they be constituted to SECURE the
Polyamide Industrial Corporation (PPIC) for $7M. A fulfillment of a principal obligation
guarantee agreement was executed by IFC with ITM 2. That the pledger or mortgagor be the
where   the   latter   agreed   to   guarantee   PPIC’s   ABSOLUTE OWNER of the thing
obligation to pay the loan. PPIC failed to pay the loan pledged or mortgaged
and its interests. Due to non-payment, the 3. That the persons constituting the
mortgages on the real properties were foreclosed. pledge or mortgage have the FREE
Even after the foreclosure, a balance of $2.8M DISPOSAL of their property, and in the
remained. IFC demanded defendant as guarantors of absence thereof, that they be LEGALLY
PPIC to pay the outstanding balance. The balance AUTHORIZED for the purpose
was not paid. Plaintiff filed a complaint with the RTC 4. Collateral may be ALIENATED AS
against PPIC and defendant for the payment of the PAYMENT of the principal obligation
balance.
Held: ITM liable as surety. ESSENCE OF PLEDGE AND MORTAGE (Art. 2087)
The terms of the contract govern the rights and = When the principal obligation becomes due, the
obligation of the contracting parties. When the
thing pledged or mortgaged may be alienated for the
obligation   undertakes   to   be   “jointly   and   severally”  
liable, it means that the obligation is solidary. payment to the creditor.
Notwithstanding   the   use   of   the   words   “guarantee”  
and   “guarantor”,   the   subject   contract   was   indeed   a   NATURE: Real security transactions
surety, because its terms were clear and left no
doubt as to the intention of the parties. PURPOSE: to secure the fulfillment of a principal
obligation
Chapter 6. PLEDGE AND MORTGAGE
WHEN CONTRACTS OF PLEDGE AND MORTGAGE
A. General Concepts (Art. 2085, 2087) ARE VOID:
Art. 2085. The following requisites are essential
to the contracts of pledge and mortgage: 1. Pledgor or mortgagor is NOT the
absolute owner of the thing pledged or
(1) That they be constituted to secure the mortgaged.
fulfillment of a principal obligation; 2. Pledgor or mortgagor has NO free
(2) That the pledger or mortgagor be the disposal of the property
absolute owner of the thing pledged or 3. In the absence of right of free
mortgaged; disposition, pledger or mortgagor is not
(3) That the persons constituting the legally authorized to constitute the
pledge or mortgage have the free pledge or mortgage
disposal of their property, and in the
absence thereof, that they be legally

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4. Pledge or mortgage constituted over  Thus, pledge or mortgage cannot exist
future   property   (Ratio:   “absolute   without a valid obligation
owner”  requisite)  Validity dependent on existence of a valid
(read: NOT VOID) obligation
WHO MAY CONSTITUTE THE PLEDGE/  CONSIDERATION in pledge and mortgage =
MORTGAGE? consideration of principal contract

1. Principal debtor
2. Third persons (third party pledgors/ Pledge or mortgage is a guarantee to:
third party mortgagors)
 Third persons = Not parties to the principal 1. Performance of voidable or
obligation but may secure the latter by unenforceable contract
pledging or mortgaging their own property 2. Natural obligation

WHO OWNS THE THING PLEDGED/


MORTGAGED? Pledgor/ Mortgagor Pledge or mortgage may secure ALL kinds of
obligations:
NOTE: However, pledger/mortgagor need not be
the principal obligor. 1. Pure
2. Subject to suspensive condition
Creditor does not have the right to dispose of the 3. Subject to resolutory condition
collateral. NOTE: Obligation is at least NOT VOID.

NOTE: Right to donate, sell, pledge or mortgage are


attributes of ownership. Since debtor remains the C. CONTRACT TO PLEDGE OR TO
owner, creditor cannot dispose the collateral. MORTGAGE (Art. 2092)
Art. 2092. A promise to constitute a pledge or
mortgage gives rise only to a personal action
B. OBLIGATIONS SECURED (Art. 2086, between the contracting parties, without
2052, 2091) prejudice to the criminal responsibility incurred
by him who defrauds another, by offering in
pledge or mortgage as unencumbered, thing
Art. 2086. The provisions of Article 2052 are
which he knew were subject to some burden, or
applicable to a pledge or mortgage.
by misrepresenting himself to be the owner of
the same.

Art. 2052. A [pledge or mortgage] cannot exist


without a valid obligation. Nevertheless, a
Contract to pledge or to mortgage = promise to
[pledge or mortgage] may be constituted to
constitute a pledge or mortgage; it is a valid
guarantee the performance of a voidable or an
consensual contract
unenforceable contract. It may also guarantee a
natural obligation. For what: Specific performance to constitute the
pledge or mortgage.

Effect: Gives rise to a personal action between the


Art. 2091. The contract of pledge or mortgage contracting parties.
may secure all kinds of obligations, be they pure
or subject to a suspensive resolutory condition. When liability arises?

1. When a person defrauds another by


offering in pledge or mortgage as
Pledge or mortgage is an ACCESSORY “unencumbered,”   things  which   he   knew  
OBLIGATION were subject to some burden.

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2. When a person misrepresents himself answerable is satisfied.
to be the owner of the thing described
above.

D. REMEDIES OF PLEDGEE AND Art. 2090. The indivisibility of a pledge or mortgage


MORTGAGEE is not affected by the fact that the debtors are not
1. Specific Performance – an ordinary solidarily liable.
action to recover the indebtedness. A
favorable judgment in this action
results in the right to execute the
judgment on all the properties of the Doctrine of indivisibility of pledge and mortgage:
debtor, including the subject matter of
Each and every parcel of the collateral answers for
the pledge or mortgage.
2. Foreclosure – a legal proceeding to the totality of the debt.
terminate   a   pledgor’s   or   mortgagor’s  
interest in the collateral.  Indivisibility applies even if the debtors are
 Why instituted? To satisfy the NOT solidarily liable
unpaid obligation secured by  Once the pledge or mortgage is
the collateral by: extinguished by a complete foreclosure, the
a. gaining title; or doctrine of indivisibility ceases to apply
b. forcing a sale because with the full payment of the debt,
there is nothing more to secure.
RIGHT TO ELECTION – Pledgee or mortgagee may
pursue EITHER of two remedies, but not both.
Purpose of indivisibility: To protect the pledgee or
Remedies available to the pledgee or mortgagee are
mortgagee
ALTERNATIVE. Election of one remedy operates as
waiver of the other. When is Article 2089 applicable? When the debtor
or creditor has several heirs

E. INDIVISIBILITY OF A PLEDGE OR
MORTGAGE General Rule: There can be no release of any
Art. 2089. A pledge or mortgage is indivisible, even
portion of the collateral unless the loan has been
though the debt may be divided among the
fully paid.
successors in interest of the debtor or of the
creditor.   Therefore,   the   debtor’s   heir   who   has   paid  a    No proportionate extinguishment of the
part of the debt cannot ask for the proportionate pledge or mortgage even if there is partial
extinguishment of the pledge or mortgage as long as payment
the debt is not completely satisfied.  No partial foreclosure of only a portion of
the collateral or a number of several
Neither can   the   creditor’s   heir   who   received   his   properties pledged or mortgaged
share of the debt return the pledge or cancel the corresponding to the unpaid portion of the
debt
mortgage, to the prejudice of the other heirs who
Exception: When there are several things given in
have not been paid.
mortgage or pledge and each one of them
From these provisions is excepted the case in which, guarantees only a determinate portion of the credit
there being several things given in mortgage or
F. PACTUM COMMISSORIUM
pledge, each one of them guarantees only a Art. 2087. It is also of the essence of these contracts
determinate portion of the credit.
that when the principal obligation becomes due, the
The debtor, in this case, shall have a right to the things in which the pledge or mortgage consists may
extinguishment of the pledge or mortgage as the be alienated for the payment of the creditor.
portion of the debt for which each thing is specially

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Art. 2088. The creditor cannot appropriate the appropriated the [l]easehold [r]ights of respondent
things given by way of pledge or mortgage, or over the fishpond.
dispose of them. Any stipulation to the contrary is
null and void. The elements of pactum commissorium are :

 there should be a property mortgaged by


way of security for the payment of the
PACTUM COMMISSORIUM: A stipulation that principal obligation
 there should be a stipulation for automatic
allows the creditor to appropriate the collateral, or
appropriation by the creditor of the thing
dispose of it, in contravention of the provisions of mortgaged in case of non-payment of the
foreclosure principal obligation within the stipulated
period
 Pactum commissorium is null and void
 Example: A stipulation that a creditor may
appropriate the collateral as if it had been BUSTAMANTE v. ROSEL
sold to him, merely because the period for
payment of the obligation had lapsed. F: A provision stipulates: “   In the event the
 Remedy upon non-payment: Foreclosure borrowers fail to pay, the lender has the option to
NOT appropriate collateral to recover buy or purchase the collateral for a total
amount due consideration of P200,000.00 PESOS, inclusive of the
borrowed  amount  and  interest  therein”.  Petitioners  
Elements of pactum commissorium: tendered payment of the loan but respondents
refused to accept. Instead, they insisted on buying
1. There is property pledged or mortgaged the property. As petitioner disagreed, respondent
(or collateral) by way of security for the filed a complaint with the RTC to compel the
payment of the principal obligation, and petitioners to sell the collateral.
2. There is a stipulation for automatic H: The stipulation is pactum commissorium;
appropriation by the creditor of the therefore, it is void. A scrutiny of the stipulation of
collateral in case of non-payment of the
the parties reveals a subtle intention of the creditor
principal obligation within the stipulated
to acquire the property given as security for the
period.
loan. This is embraced in the concept of pactum
Effect of nullity on Pledge or Mortgage
commissorium, which is proscribed by law.
Elements of pactum commissorium are:
 Contract of pledge or mortgage remains
 t
valid
here should be a property mortgaged by
 Right to foreclose is likewise not affected
way of security for the payment of the
principal obligation, and
DBP v. CA  t
here should be a stipulation for automatic
F: Respondent has a loan with DBP, which she failed appropriation by the creditor of the thing
mortgaged in case of non-payment of the
to pay. As security for the loans, respondent
principal obligation within the stipulated
executed 2 Deeds of Assignment of her Fishpond period.
Leasehold Rights. Upon default, DBP took possession
of the Leasehold Rights and subsequently sold the
same. ONG v. ROBAN LENDING CORPORATION

H: DBP’s  act  of  appropriating  to  itself  the  leasehold   F: The Ongs loaned from Roban Lending, which
rights is invalid because it contravenes the provision were secured by a real estate mortgage on their
on Pactum Commissorium. While the court held that parcels of land in Tarlac.
one condition in the deed of assignment did not
constitute pactum commissorium, DBP exceeded its The Ongs and the lending company executed:
authority   when   it   had   “[w]ithout   foreclosure  
proceedings, whether judicial or extrajudicial,   …  

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 an Amendment to Amended Real Estate (1) When the price of a sale with right to
Mortgage which consolidated their loans repurchase is unusually inadequate;
inclusive of charges, totalling P5 916 117.50, (2) When the vendor remains in possession as
lessee or otherwise;
 a Dacion in Payment Agreement (the Dacion)
(3) When upon or after the expiration of the
where the Ongs assigned the Tarlac properties right to repurchase another instrument
to settle their total obligation, extending the period of redemption or
 and a Memorandum of Agreement (the granting a new period is executed;
Memorandum), which said that is the event of (4) When the purchaser retains for himself a
default, they would have their Dacion part of the purchase price;
Agreement in force. (5) When the vendor binds himself to pay the
taxes on the thing sold;
(6) In any other case where it may be fairly
H: The Memorandum and Dacion are pactum
inferred that the real intention of the
commissorium, prohibited under Article 2088 of the parties is that the transaction shall secure
Civil Code, which provides that the creditor cannot the payment of a debt or the performance of
appropriate the things given by way of pledge or any other obligation.
mortgage, or dispose of them. Any stipulation to the In any of the foregoing cases, any money, fruits, or
contrary is null and void. other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall
The elements of pactum commissorium are be subject to the usury laws.

1. Property mortgaged as security for


payment of an obligation
2. Stipulation for automatic appropriation by Equitable Mortgage: A contract which, although
the creditor in case of non-payment of the
lacking in form, words, or other requisites
obligation within the period agreed upon
(aka acquisition of ownership of the demanded by a statute, nevertheless reveals the
mortgaged property without foreclosure intention of the parties to charge property as
proceedings) security for a debt, but contains nothing impossible
In this case, the Memorandum and Dacion do not or contrary to law.
contain provisions for foreclosure proceedings or
redemption. Under the Memorandum, failure to pay
the debt within one year allows Roban to enforce
Essential Requisites:
the Dacion in Payment, which automatically gives it
ownership of the properties. 1. The parties entered into a contract
denominated as a contract of sale; and
In a real dacion en pago, assignment of property 2. Their true intention was to secure an
extinguishes the monetary debt. In this case, the existing debt by way of a mortgage.
properties were alienated because they were used
as security, not as satisfiers of debt. The Dacion did Purpose: to prevent the circumvention of the laws
not extinguish the Ongs' debt. Additionally, the on usury and the prohibition against pactum
Memorandum made them execute a promissory commissorium
note for nearly P6M, which they needed to pay
Evidence required: parole evidence
within a year.

It is immaterial that the Dacion and Memorandum  The principle that a preexisting
commitment cannot be used as evidence to
were executed voluntarily, becasue pactum contradict or in any way modify the terms
commissorium is expressly prohibited by law. of a written agreement.

G. EQUITABLE MORTGAGE PRESUMPTION: THERE IS EQUITABLE


MORTGAGE
Art. 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases: 1. When the price of a sale with right to
repurchase is unusually inadequate;

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2. When the vendor remains in possession as Third persons who are not parties to the principal
lessee or otherwise; obligation may secure the latter by pledging or
3. When upon or after the expiration of the mortgaging their own property. (1857)
right to repurchase another instrument
extending the period of redemption or Art. 2087. It is also of the essence of these
granting a new period is executed; contracts that when the principal obligation
4. When the purchaser retains for himself a becomes due, the things in which the pledge or
part of the purchase price; mortgage consists may be alienated for the
5. When the vendor binds himself to pay the payment to the creditor. (1858)
taxes on the thing sold;
6. In any other case where it may be fairly Art. 2140. By a chattel mortgage, personal
inferred that the real intention of the property is recorded in the Chattel Mortgage
parties is that the transaction shall secure Register as a security for the performance of an
the payment of a debt or the performance obligation. If the movable, instead of being
of any other obligation. recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel
NOTE: Equitable mortgage is not a type of mortgage. mortgage. (n)

Art. 1603. In case of doubt, a contract purporting to Art. 2141. The provisions of this Code on pledge,
be a sale with right to repurchase shall be construed insofar as they are not in conflict with the Chattel
as an equitable mortgage. Mortgage Law shall be applicable to chattel
mortgages. (n)

Art. 1604. The provisions of Article 1602 shall also CHATTEL MORTGAGE:
 a real security transaction constituted to
apply to a contract purporting to be an absolute sale.
secure the fulfillment of a principal
obligation by the absolute owner
(mortgagor) of personal property, who has
free disposal of the same or is legally
Art 1605. In the cases referred to in Article 1602 authorized for the purpose
and 1604, the apparent vendor may ask for the  perfected by the recording of the personal
reformation of the instrument. property in the Chattel Mortgage Register
as a security
 subjects the collateral to the condition that
when the principal obligation becomes due,
PLEDGE – PHIMIE’S  PART the collateral may be alienated for payment
to the creditor (the mortgagee)

VIII. CHATTEL MORTGAGE Essential Requisites:


1. Secure fulfillment of a principal obligation
A. General Concepts 2. Pledgor/mortgagor is absolute owner of the
thing pledged or mortgaged
Art. 2085. The following requisites are essential to 3. Pledgor/mortgagor has free disposal of the
the contracts of pledge and mortgage: thing or is legally authorized for the
purpose
(1) That they be constituted to secure the
fulfillment of a principal obligation; Essence: When the principal obligation becomes
due, the thing may be alienated as payment to the
(2) That the pledgor or mortgagor be the absolute creditor
owner of the thing pledged or mortgaged;
Act of recording (Chattel Mortgage Register):
(3) That the persons constituting the pledge or  creates the lien
mortgage have the free disposal of their property,  grants the chattel mortgage symbolic
and in the absence thereof, that they be legally possession of the collateral
authorized for the purpose.  what is recorded is the CONTRACT of
chattel mortgage and not the property

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NOTE: If the movable property is DELIVERED Thus,  upon  TMI’s  default,  PCILF  was  entitled  to  seize  
instead of recorded, the contract is PLEDGE and not the mortgaged equipment, not as owner but as
chattel mortgage creditor-mortgagee for the purpose of foreclosing
the chattel mortgage.
CHATTEL MORTGAGE PLEDGE
Delivery of the thing is Delivery of the thing B. Form of Chattel Mortgage
not necessary pledged is necessary *Please see book for the full text of Sec. 4 and 5 of
Recording in the Chattel Recording not necessary Act. 1508.
Mortgage Registry is
necessary VALIDITY:
Mortgagor retains Mortgagee has  A chattel mortgage (unrecorded) is not
possession of collateral possession of collateral valid against any person except:
In case of foreclosure, Debtor not entitled to 1. mortgagor
excess of amount due excess unless otherwise 2. executor
goes to the debtor agreed or in case of legal 3. administrators
pledge  UNLESS the mortgage is recorded in the
If there is deficiency If there is deficiency, register of deeds of the province where:
after foreclosure, creditor is not entitled to 1. the mortgagor resides or
creditor is entitled to recover notwithstanding 2. the property is located (in case
recover the same from any stipulation to the mortgagor resides outside the
the debtor, except under contrary Philippines)
Art. 1484 3. OR BOTH (if residence of mortgagor
Procedure of sale is Procedure of sale is and location of property are different)
governed by Sec. 14 of governed by Art. 2112 of NOTE: In case of an unrecorded chattel mortgage,
Act 1508 CC the mortgagor, executor or administrators have the
right to compel compliance with the formalities of
PCI Leasing & Finance, Inc. v. Trojan Metal required by law (i.e. have it recorded)
Industries Inc., et al. (2010)
REQUISITES:
F: Respondent TMI sought a loan from petitioner 1. in accordance with form
PCILF but PCILF offered instead to buy various 2. signed by parties and 2 witnesses
equipment TMI owned. TMI agreed and they 3. affidavit of good faith (signed by parties)
executed deeds of sale. The parties then entered into 4. certificate of oath (signed by authority
a lease agreement where TMI leased from PCILF the administering it)
said equipment and which required TMI to give
PCILF a guaranty deposit as security for the timely In case of CORPORATIONS, affidavit of good faith
performance of its obligations. TMI leased may be made and subscribed by:
equipment to another financing company as 1. director
temporary collateral for a loan. PCILF considered 2. trustee
the second mortgage as a violation of the lease 3. cashier
agreement. TMI claims that the sale with lease 4. manager
agreement was a simulated financial lease. 5. treasurer
6. person authorized
H: According to the Court, in a true financial leasing:
(1) a finance company purchases on behalf of a cash- In case of PARTNERSHIPS:
strapped lessee the equipment the latter wants to 1. one member thereof
buy (but due to financial limitations, is incapable of
doing so); (2) the finance company then leases the C. Obligations Secured
equipment  to  the  lessee  in  exchange  for  the  latter’s   *Please see book for full text of Form of Oath.
periodic payment of a fixed amount of rental.
In this case, respondent TMI already owned the AFFIDAVIT OF GOOD FAITH
subject equipment before it transacted with PCILF.  Unique feature of Chattel Mortgage Law
Hence, had the true transaction between the parties  States that the chattel mortgage is:
been expressed in a proper instrument, it would 1. Made solely for the purpose of
have been a simple loan secured by a chattel securing the obligation specified in
mortgage, instead of a simulated financial leasing. the chattel mortgage.

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- only existing debts are covered; by the execution of the corresponding deed
no future/after-incurred substantially in the form prescribed by law.
obligations even if they are
accurately described While a pledge, real estate mortgage, or antichresis
2. The principal obligation is a just and may exceptionally secure after-incurred obligations
valid obligation, and one not entered so long as these future debts are accurately
into for the purpose of fraud. described, a chattel mortgage, can only cover
obligations existing at the time the mortgage is
INCREASE OR EXTENSION of the chattel constituted.
mortgage obligation:
 Becomes a new chattel mortgage in itself Although a promise expressed in a chattel mortgage
 Will take effect only from the date the same to include debts that are yet to be contracted can be
are made (not from the date of the original a binding commitment that can be compelled upon,
chattel mortgage) the security itself does not come into existence or
arise until after a chattel mortgage agreement
CONTRACT TO MORTGAGE that includes future covering the newly contracted debt is executed
debts: either by concluding a fresh chattel mortgage or by
 Binding commitment amending the old contract conformably with the
 Contract of chattel mortgage itself is not form prescribed by the Chattel Mortgage Law.
perfected until after an agreement covering Refusal on the part of the borrower to execute the
the newly contracted debt is executed agreement so as to cover the after-incurred
conformably with the form prescribed by obligation can constitute an act of default on the part
the Chattel Mortgage Law of the borrower of the financing agreement whereon
the promise is written but the remedy of foreclosure
DEFAULT ON THE CONTRACT TO MORTGAGE: can only cover the debts extant at the time of
 May be constituted by refusal on the part of constitution and during the life of the chattel
the debtor to execute the agreement so as to mortgage sought to be foreclosed.
cover the after-incurred obligation
 Remedy of foreclosure will only cover the A chattel mortgage must comply substantially with
debts existing at the time of the constitution the form prescribed by the Chattel Mortgage Law
of the contract of chattel mortgage itself. One of the requisites (under Section 5) is an
affidavit of good faith. If such an affidavit is not
ACME Shoe, Rubber & Plastic Corporation appended to the agreement, the chattel mortgage
v. Court of Appeals (1996) would still be valid between the parties (not against
third persons acting in good faith). However, the
FACTS: Petitioner Chua Pac, president and general statute has provided that the parties to the contract
manager of co-petitioner Acme Shoe, Rubber & must execute an oath that makes it obvious that the
Plastic Corporation, executed for and in behalf of the debt referred to in the law is a current, not an
company, a chattel mortgage in favor of Producers obligation that is yet merely contemplated.
Bank of the Philippines as security for petitioner's
corporate loan. A provision in the agreement stated D. Object of Chattel Mortgage
that in case the mortgagor executes subsequent
promissory note/s (as renewal, extension, or new Art. 2124. Only the following property may be the
loan), the previous mortgage shall also stand as object of a contract of mortgage:
security for the payment without the necessity of
executing a new contract. The loan was paid by (1) Immovables;
Acme. The bank again extended to petitioner
corporation a loan but it was not settled at maturity. (2) Alienable real rights in accordance with the
Respondent bank applied for an extra judicial laws, imposed upon immovables.
foreclosure of the chattel mortgage with the Sheriff,
prompting Acme to file an action for injunction, with Nevertheless, movables may be the object of a
damages and a prayer for a writ of preliminary chattel mortgage. (1874a)
injunction, before the RTC.
Art. 416. The following things are deemed to be
HELD: In chattel mortgage, the faithful performance personal property:
of the obligation by the principal debtor is secured
(1) Those movables susceptible of appropriation

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which are not included in the preceding article; private respondent Wearever Textile Mills, Inc.,
discounted and assigned several receivables under a
(2) Real property which by any special provision of Receivable Purchase Agreement. To secure the
law is considered as personal property; collection of the receivables assigned, respondent
executed a Chattel Mortgage over certain raw
(3) Forces of nature which are brought under materials inventory as well as machinery. Upon
control by science; and private respondent's default, petitioner filed a
petition for extrajudicial foreclosure of the
(4) In general, all things which can be transported properties mortgaged to it. The crucial question to
from place to place without impairment of the real be resolved in this Petition is whether the
property to which they are fixed. (335a) machinery in suit is real or personal property from
the point of view of the parties, with petitioner
Art. 417. The following are also considered as arguing that it is a personality, while the respondent
personal property: claiming the contrary.

(1) Obligations and actions which have for their HELD: In Tumalad v. Vicencio, the SC held that
object movables or demandable sums; and although there is no specific statement referring to
the subject house as personal property, yet by
(2) Shares of stock of agricultural, commercial and ceding, selling or transferring a property by way of
industrial entities, although they may have real chattel mortgage defendants-appellants could only
estate. (336a) have meant to convey the house as chattel, or at
least, intended to treat the same as such, so that they
Act No. 1508, Sec. 2. All personal property shall be should not now be allowed to make an inconsistent
subject to mortgage, agreeably to the provisions of stand by claiming otherwise. The doctrine of
this Act, and a mortgage executed in pursuance estoppel therefore applies to the herein defendants-
thereof shall be termed chattel mortgage. appellants, having treated the subject house as
personality.

OBJECTS OF CHATTEL MORTGAGE: If a house of strong materials, like in the Tumalad


1. Movables case, may be considered as personal property for
2. Personal property purposes of executing a chattel mortgage thereon as
a. Movables susceptible to long as the parties to the contract so agree and no
appropriation not included in Art. innocent third party will be prejudiced thereby,
415 CC there is absolutely no reason why the machinery
b. Real property which by any special involved in this case, which is movable in its nature
provision of law is considered as and becomes immobilized only by destination or
personalty purpose, may not be likewise treated as such. This is
c. Forces of nature brought under really because one who has so agreed is estopped
control by science from denying the existence of the chattel mortgage.
d. All things which can be transported
from place to place without Also, the law makes no distinction with respect to
impairment to real property to the ownership of the land on which the house is
which they are fixed built and we should not lay down distinctions not
e. Obligations/actions which have for contemplated by law.
their object movables/demandable
sums It must be pointed out that the characterization of
f. Shares of stock of agricultural, the subject machinery as chattel by the private
commercial, and industrial entitites respondent is indicative of intention and impresses
although they may have real estate upon the property the character determined by the
parties.

Makati Leasing & Finance Corporation v. 1. Reasonable Description Rule


Wearever Textile Mills, Inc. & Court of Appeals  Description of the properties mortgaged
(1983) must enable the parties or any third person,
after reasonable inquiry and investigation,
FACTS: To obtain financial accommodations from to identify the collateral.
the petitioenr Makati Leasing and Finance Corp., the

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 Does not require a minute and specific mortgage debt of Wilfredo with Libra's approval and
description of the collateral. Wilfredo executing a deed of absolute sale in favor
of the petitioner over the tractor (which was in the
2. After Acquired Properties possession   of   Libra   due   to  Wilfredo’s   failure   to   pay  
amortizations). Meanwhile, a case for collection of
GENERAL RULE: Chattel mortgage covers only the sum of money instituted by Gelac Trading against
property described therein and does not cover Wilfredo was pending. Through an alias writ of
property thereafter acquired. execution, the provincial sheriff seized and levied
the tractor, which was then sold at public auction.
EXCEPTIONS: Petitioner filed an action to recover the tractor.
1. Stipulation in a chattel mortgage authorizing
the mortgagor to sell the property and to HELD: Servicewide Specialists Inc. v. IAC (1989): The
replace, renew or substitute them with mortgagor who gave the property as security under
other property. a chattel mortgage did not part with the ownership
a. Based on jurisprudence only, not over the same. He had the right to sell it although he
statute. Be careful when using it. If was under the obligation to secure the written
you want to include after-acquired consent of the mortgagee or he lays himself open to
property, solution: there must be a criminal prosecution under Art. 319 par. 2 RPC. And
stipulation in the mortgage to even if no consent was obtained from the
contract to the effect that will compel mortgagee, the validity of the sale would still not be
the mortgagor to enter into a NEW affected.
MORTGAGE CONTRACT each time
(Contract to mortgage). The mortgagor was not in actual possession and
2. Retail stores where property is constantly control of the subject tractor. But his right of
sold and substituted when there is ownership was not divested from him upon his
stipulation to such effect. default. The mortgagee cannot become the owner of
a. It would be impossible to constitute a or convert and appropriate to himself the property
chattel mortgage on such stores mortgaged. (Art. 2088 CC) The only remedy given to
without closing them, contrary to the the mortgagee is to have said property sold at public
purpose for which the Chattel auction and the proceeds of the sale applied to the
Mortgage Law was enacted. payment of the obligation secured by the mortgagee.
b. Purpose: promotion of business and
economic development The sale of the subject tractor was consummated
upon the execution of the public instrument
E. Ownership of Collateral (constructive delivery). Hence, the subject tractor
was no longer owned by Wilfredo Dy when it was
MORTGAGOR RETAINS OWNERSHIP OF levied upon by the sheriff. Only properties
COLLATERAL unquestionably owned by the judgment debtor and
 In the first place, he must be the ABSOLUTE which are not exempt by law from execution should
OWNER of the collateral to constitute the be levied upon or sought to be levied upon.
mortgage.
Where a third person purchases the mortgaged
MORTGAGOR’S   RIGHT TO ALIENATE THE property, he automatically steps into the shoes of
COLLATERAL the original mortgagor. His right of ownership shall
 Restricted by the requirements imposed by be subject to the mortgage of the thing sold to him.
law
 Mortgagor obliged to secure the written In this case, petitioner paid a check to the
consent of the mortgagee (under pain of mortgagee. But it was never intended nor could it be
penal liability) considered as payment of the purchase price
because the relationship between Libra and the
Dy v. Court of Appeals (1991) petitioner is not one of sale but still a mortgage.

FACTS: Wilfredo Dy (mortgagor) purchased a farm Servicewide Specialists, Inc. v. Court of Appeals
tractor and a truck through financing extended by (1999)
Libra (mortgagee), which were mortgaged to the
latter as security for the loan. Perfecto Dy FACTS: This controversy is between a mortgagor
(petitioner) bought the tractor and assumed the who alienated the mortgaged property without the

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consent of the mortgagee, on the one hand, and the F. Foreclosure of Chattel Mortgage
assignee of the mortgagee to whom the latter  Sale of the property so the principal
assigned his credit without notice to the mortgagor, obligation may be extinguished
on the other hand.
CREDITOR’S  RIGHTS  IN  CASE  OF  DEFAULT:
HELD: Only notice to the debtor of the assignment of 1. Extrajudicial foreclosure, OR
credit is required. His consent is not required. In 2. Specific performance
contrast, consent of the creditor-mortgagee to the
alienation of the mortgaged property is necessary in PROCEDURE:
order to bind said creditor. 1. Wait for 30 days from time of default
(equity of redemption or grace period)
To evade liability, respondent spouses in this case 2. File with executive judge through the clerk
invoked Art. 1626 CC, which provides that “the   of court (but it is the sheriff who conducts
debtor who, before having knowledge of the the sale)
assignment, pays his creditor shall be released from 3. Notice requirement #1: 10 days before sale
the   obligation.” They argue that they were not (post in 2 or more public places in the
notified of the assignment made to petitioner. This municipality where the collateral is located
provision, however, is applicable only where the or where the mortgagor resides)
debtor pays the creditor prior to acquiring 4. Notice requirement #2: 10 days before the
knowledge  of  the   latter’s  assignment  of  his  credit.    It   sale Sheriff must notify (a) mortgagor; (b)
does not apply, nor is it relevant, to cases of non- person holding under him (assignee of the
payment after the debtor came to know of the mortgagor); (c) persons holding subsequent
assignment of credit. This is precisely so since the mortgages personally or by mail.
debtor did not make any payment after the 5. Public sale is conducted (where property
assignment. situated/mortgagor resides). Then sheriff
should make a return.
Applying by analogy Art. 2128 CC to a chattel 6. Return = operates as discharge to lien.
mortgage, it appears that a mortgage credit may be 7. Proceeds:
alienated or assigned to a third person. Since the a. costs and expenses of sale
assignee of the credit steps into the shoes of the b. payment of demand/obligation
creditor-mortgagee to whom the chattel was secured by mortgage.
mortgaged,   it   follows   that   the   assignee’s   consent   is   c. Residue shall be paid by persons
necessary in order to bind him of the alienation of holding subsequent mortgages
the mortgaged thing by the debtor-mortgagor. This d. Balance: mortgagor/person holding
is tantamount to a novation. under him

The sale with assumption of mortgage made by 1. Equity of Redemption


respondent spouses is tantamount to a substitution  Right of mortgagor in default to recover
of debtors. In such case, mere notice to the creditor the collateral before a foreclosure sale by
is not enough, his consent is always necessary as paying the principal, interest, other costs
provided in Art. 1293 CC. Without such consent by that are due, alleviating the severity of
the creditor, the alienation made by respondent the legal rule on default
spouses is not binding on the former. On the other  Period of grace: 30 days (after default
hand, Articles 1625, 1626, and 1627 CC on and before the sale)
assignment   of   credits   do   not   require   the   debtor’s  
consent for the validity thereof and so as to render SUBSEQUENT ATTACHING CREDITOR
him liable to the assignee. The law speaks not of  Acquires right of mortgagee to foreclose the
consent but of notice to the debtor, the purpose of collateral
which is to inform the latter that from the date of
assignment he should make payment to the assignee 2. Right of Redemption
and not to the original creditor. Notice is thus for  Right   of   the   mortgagor   to   “repurchase”  
the protection of the assignee because before said the collateral even after confirmation of
date, payment to the original creditor is valid. a foreclosure sale but within the periods
prescribed by law.
HOW TO RECONCILE DY AND SERVICEWIDE?  Not applicable to chattel mortgages;
Chattel Mortgage Law only grants an
equity of redemption.

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which is not defeated even if respondent’s   claim   is  
EQUITY OF RIGHT OF much lower than the P1.5 million actual bid of the
REDEMPTION REDEMPTION petitioner.   Thus,   having   attached   Terrymanila’s  
Right of mortgagor to Right of mortgagor to equity of redemption, respondent had to be
redeem the property repurchase the informed of the sale of the mortgaged assets for it to
after default but before mortgaged property exercise such equity of redemption over some of
sale within 1 year from date those foreclosed properties, as provided for in
of registration of the Section 13.
certificate of sale
Applies to extrajudicial Applies only to Recall, however, that respondent filed a motion to
foreclosure of chattel extrajudicial reconsider to the court which granted leave to
mortgage and judicial foreclosure of real petitioner to foreclose the chattel mortgage, which
foreclosure of real estate mortgage was denied. Thus, even prior to receiving, through
estate mortgage counsel, a mailed notice of the auction sale (on the
date of the auction sale itself), respondent was
already put on notice of the impending foreclosure
Rizal Commercial Banking Corporation v. Royal sale of the mortgaged chattels. It could thus have
Cargo Corporation (2009) expediently exercised its equity of redemption, at
the   earliest   when   it   received   the   insolvency   court’s  
FACTS: Terrymanila filed a petition for voluntary Order denying its MR. Its negligence or omission to
insolvency with the RTC of Bataan (declared exercise its equity of redemption within a
insolvent). One of its creditors was RCBC reasonable time, or even on the day of the auction
(petitioner) with which it had an obligation secured sale, warrants a presumption that it had either
by a chattel mortgage. Royal Cargo Corp. abandoned it or opted not to assert it. In any event,
(respondent), another creditor, filed an action even if respondent would have participated in the
before the RTC of Manila for collection of sum of auction   sale   and   matched   petitioner’s   bid,   the  
money and preliminarily attached some of superiority   of   petitioner’s   lien   over   the   mortgaged  
Terrymanila’s   personal   properties   to   secure   the   assets would preclude respondent from recovering
satisfaction of a judgment award (judgment the chattels.
rendered in favor of Royal Cargo). Petitioner sought
permission in the insolvency proceedings at the RTC Respondent’s   recourse   to   demand   the   satisfaction   of  
of Bataan to extrajudicially foreclose the chattel its judgment award before the insolvency court as
mortgage, which was granted. Respondent filed a its judgment award is a preferred credit under Art.
MR but this was denied. Respondent filed before the 2244 CC.
RTC of Manila a case for annulment of the auction
sale claiming that there was failure to notify it of the 3. Right to Possession
sale at least 10 days before the sale, citing Sec. 14 of
the Chattel Mortgage Law. MORTGAGOR HAS RIGHT TO POSSESSION
 Mortgagee has this right only upon
HELD: Sec. 13 of the Chattel Mortgage Law allows DEFAULT.
the would-be redemptioner to redeem the  The chattel mortgage contract constitutes
mortgaged property only before its sale. The the   mortgagee   (upon   the   principal   debtor’s  
redemption cited here partakes of an equity of default) as an attorney-in-fact of the
redemption, which is the right of the mortgagor to mortgagor.
redeem the mortgaged property after his default in o Enabling the mortgagee to act for
the performance of the conditions of the mortgage and in behalf of the owner of the
but before the sale of the property to clear it from collateral.
the encumbrance of the mortgage. It is not the same o In effect: The mortgagee is
as right of redemption which is the right of the authorized to take possession of
mortgagor to redeem the mortgaged property after the collateral on default by the
registration of the foreclosure sale, and even after principal debtor.
confirmation of the sale. o Foreclosure of collateral is not a
condition sine qua non to right of
In this case, while respondent had attached some of possession.
Terrymanila’s   assets   to   secure   the   judgment  
rendered in another case, what it attached was
effectively   Terrymanila’s   equity   of   redemption  

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WHEN POSSESSOR REFUSES TO YIELD here   assumed   that   the   plaintiff’s   right   to   possess   the  
POSSESSION TO MORTGAGEE: thing is not or cannot be disputed.
 Mortgagee has the right to maintain an
action to recover possession, or replevy, However, in case the right of possession on the part
the collateral from the mortgagor or from of the plaintiff, or his authority to claim such
any person in possession possession or that of his principal, is put to great
doubt (a contending party may contest the legal
REPLEVIN bases  for  plaintiff’s  cause  of  action  or  an  adverse  and  
 Only issues of possession will be independent claim of ownership or right of
determined, not ownership possession may be raised by that party), it could
 Must be filed against (1) person who has become essential to have other persons involved
actual possession (may or may not be and impleaded for a complete determination and
mortgagor) and (2) mortgagor resolution of the controversy.
(indispensable party)
In a suit for replevin, a clear right of possession must
Servicewide Specialists, Inc. v. Court of Appeals be established. A foreclosure under a chattel
(November 19, 1999) mortgage may properly be commenced only once
there is default on the part of the mortgagor of his
FACTS: Leticia Laus purchased on credit a Colt obligation secured by the mortgage. The replevin in
Galant from Fortune and made a promissory note. this case has been resorted to in order to pave the
Chattel mortgage was made on the Colt Galant as way for the foreclosure of what is covered by the
security for the promissory note with corresponding chattel mortgage. The conditions essential for such
deed of assignment included where Fortune foreclosure would be to show: (1) the existence of
assigned  credit  and  mortgaged  rights  in  FCC’s  favor   the chattel mortgage and, (2) the default of the
w/  Laus’  consent.  Colt  Galant  was  registered  in  Laus’   mortgagor. These requirements must be shown
name with chattel mortgage annotated on deed of because the validity of the  plaintiff’s  exercise  of  the  
assignment. FCC assigned the credit to Servicewide right of foreclosure is inevitably dependent thereon.
with notice of assignment given to the registered car
owner. Laus failed to pay monthly installment. Since   the   mortgagee’s   right   of   possession   is  
Servicewide demanded the payment of the entire conditioned upon the actual fact of default which
outstanding balance. Laus still failed to pay nor itself may be controverted, the inclusion of other
surrender the Colt Galant for foreclosure. parties, like the debtor or the mortgagor himself,
Servicewide filed a complaint for replevin and may be required in order to allow a full and
impleaded Hilda Tee and John Dee (believed to have conclusive determination of the case. When the
custody of the car when the suit was filed). A certain mortgagee seeks a replevin in order to effect the
eventual foreclosure of the mortgage, it is not only
Alberto Villafranca filed a 3rd party claim alleging
the existence of, but also the mortgagor’s   default   on,  
that he is the absolute owner of the Colt Galant.
the chattel mortgage that, among other things, can
Villafranca was substituted as the defendant .
properly uphold the right to replevy the property.
The burden to establish a valid justification for such
HELD: Rule 60 of the Revised Rules of Court
action lies with the plaintiff. An adverse possessor,
requires that an applicant for replevin must show
who is not the mortgagor, cannot just be deprived of
that he “is   the   owner   of   the   property   claimed,  
his possession, let alone be bound by the terms of
particularly describing it, or is entitled to the
the chattel mortgage contract, simply because the
possession  thereof.” Where the right of the plaintiff to
mortgagee brings up an action for replevin.
the possession of the specified property is so
conceded or evident, the action need only be
4. Right to Surplus or Deficiency
maintained against him who so possesses the
property.  Mortgagor is entitled to the balance (or
surplus) of the price of the sale over the
Thus, in default of the mortgagor, the mortgagee is amounts required to be paid.
thereby constituted as attorney-in-fact of the  If proceeds of the sale are insufficient, it is
mortgagor, enabling such mortgagee to act for and the corollary obligation of the mortgagee to
in behalf of the owner. That the defendant is not pay the deficiency.
privy to the chattel mortgage should be
inconsequential. By the fact that the object of 2 RIGHTS OF SUBSEQUENT MORTGAGEES:
replevin is traced to his possession, one properly 1. Right to residue of the proceeds
can be a defendant in an action for replevin. It is 2. Right to equity of redemption

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NOTE: They have no real right of foreclosure. When given as security, should sell for more than the
all else fails, they only have the right to demand amount of the indebtedness secured, the creditor
specific performance. would be entitled to the full amount for which it
might be sold, even though that amount was greatly
WHEN FORECLOSURE IS MADE BY SUBSEQUENT in excess of the indebtedness. Such a result
MORTGAGEE: certainly was not contemplated by the legislature
 First mortgagee will still have the right to when it adopted Act No. 1508. The value of the
foreclose again. chattels changes greatly from time to time, and
 Therefore, the buyer of foreclosure of the sometimes very rapidly.
subsequent mortgage acquires no right.
 First mortgage will always defeat the According   to   Mr.   Justice   Kent’s   Commentaries,   in  
others; hence, there is no use in foreclosing case of a sale under a foreclosure of a chattel
subsequent mortgages. mortgage, the mortgagee or creditor may maintain
an action for the deficiency, if any should occur. And
PAMECA Wood Treatment Plant, Inc. v. Court of the fact that Act No. 1508 permits a private sale,
Appeals (1999) such sale is not, in fact, a satisfaction of the debt, to
any greater extent than the value of the property at
FACTS: PAMECA obtained a loan of from respondent the time of the sale. The amount received at the
Bank. A promissory note for the loaned amount was time of the sale, of course, always requiring good
executed, promising to pay the loan in installments. faith and honesty in the sale, is only a payment, pro
As security for the said loan, a chattel mortgage was tanto, and an action may be maintained for a
also   executed   over   PAMECA’s   properties   consisting   deficiency in the debt.
of inventories, furniture and equipment. PAMECA
failed to pay which caused the extrajudicial Application by analogy of Art. 1484 CC to the instant
foreclosure of the chattel mortgage. In the public case is untenable. The article applies clearly and
auction, respondent Bank was the sole bidder. solely to the sale of personal property the price of
Respondent bank filed a complaint for the collection which is payable in installments.
of the balance of the loaned amount with the RTC,
after deducting the proceeds of the sale of the The mere fact that respondent bank was the sole
auctioned properties. bidder for the mortgaged properties in the public
sale does not warrant the conclusion that the
HELD: Effects of foreclosure under the Chattel transaction was attended with fraud. Fraud is a
Mortgage Law run inconsistent with those of pledge serious allegation that requires full and convincing
under Art. 2115 CC. In pledge, the sale of the thing evidence, and may not be inferred from the lone
pledged extinguishes the entire principal obligation, circumstance that it was only respondent bank that
such that the pledgor may no longer recover bid in the sale of the foreclosed properties.
proceeds of the sale in excess of the amount of the
principal obligation; while Sec. 14 of the Chattel The  Court  also  affirms  private  petitioners’  joint  and  
Mortgage Law expressly entitles the mortgagor to several liability with petitioner corporation in the
the balance of the proceeds, upon satisfaction of the loan. The terms of the promissory note
principal obligation and costs. unmistakably set forth the solidary nature of private
petitioners’   commitment.   It   is   clear   that   private  
Since the Chattel Mortgage Law bars the creditor- petitioners intended to bind themselves solidarily
mortgagee from retaining the excess of the sale with petitioner PAMECA in the loan.
proceeds there is a corollary obligation on the part
of the debtor-mortgagee to pay the deficiency in IX. REAL ESTATE MORTGAGE
case of a reduction in the price at public auction.
A. General Concepts
In Manila Trading and Supply Co. vs. Tamaraw
Plantation Co. (citing in Ablaza vs. Ignacio), the SC Art. 2085. The following requisites are essential to
said that a chattel mortgage is a conditional sale of the contracts of pledge and mortgage:
personal property as security for the payment of a (1) That they be constituted to secure the fulfillment
debt, or for the performance of some other of a principal obligation;
obligation specified therein. Chattels included in the (2) That the pledgor or mortgagor be the absolute
chattel mortgage are only given as security and not owner of the thing pledged or mortgaged;
as a payment of the debt, in case of a failure of (3) That the persons constituting the pledge or
payment. If the chattels mentioned in the mortgage, mortgage have the free disposal of their property,

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and in the absence thereof, that they be legally Article 2085, it is indispensable, in order that a
authorized for the purpose. mortgage may be validly constituted, that the
document in which it appears be recorded in the
Third persons who are not parties to the principal Registry of Property. If the instrument is not
obligation may secure the latter by pledging or recorded, the mortgage is nevertheless binding
mortgaging their own property. between the parties.

Art. 2087. It is also of the essence of these contracts The persons in whose favor the law establishes a
that when the principal obligation becomes due, the mortgage have no other right than to demand the
things in which the pledge or mortgage consists may execution and the recording of the document in
be alienated for the payment to the creditor. which the mortgage is formalized.

REAL ESTATE MORTGAGE is a real security Art. 2131. The form, extent and consequences of a
transaction constituted to secure the fulfilment of a mortgage, both as to its constitution, modification
principal obligation by the absolute owner and extinguishment, and as to other matters not
(mortgagor) of immovable or alienable rights, which included in this Chapter, shall be governed by the
has free disposal of the property, and in the absence provisions of the Mortgage Law and of the Land
thereof, is legally authorized for the purpose; Registration Law.
subjecting the mortgaged property (collateral) to
the condition that when the principal obligation  To bind 3rd parties, a real estate mortgage
becomes due, the collateral may be alienated for must be recorded in the Registry of
payment to the creditor (mortgagee). Property.
 REM must be a public instrument to be
Real security transaction = encumbrance of recorded in the registry.
property given to guarantee the fulfillment of an  Unrecorded REM: right to demand
obligation execution/recording
 Unregistered REM: still valid, but only
REQUISITES: between the parties
1. Secure fulfillment of principal obligation
2. Mortgagor is absolute owner of the thing What right of mortgagee will be impaired if not
mortgaged recorded? Right to foreclose
3. Mortgagor has free disposal of the same or
is legally authorized for the purpose C. Obligations Secured
 Obligations that are not void.
CHATTEL MORTGAGE REM  May secure after-incurred
Thing mortgaged must Thing mortgaged must obligations/future debts
be personal or movable be real or immovable  General rule: REM is limited to the
property property principal obligations mentioned in the
Affidavit of Good Faith Not required contract of real estate mortgage.
required  Dragnet or Blanket Mortgage Clause
Mortgagor cannot Mortgagor can alienate o Specifically phrased to subsume all
alienate the thing the thing mortgaged w/o debts, whether past or future
mortgaged without consent of mortgagee o Continuing security and not
written consent of and any such prohibition discharged by repayment of the
mortgagee is void amount named in REM, until the
Can secure future Cannot secure future full amount of principal obligation
obligations obligations is paid
No right of redemption There is right of
redemption in Prudential Bank vs Alviar and Alviar
extrajudicial foreclosure FACTS: Respondents mortgaged their land for
and in judicial 250k loan. The PN that was executed had a
foreclosure by banks dragnet clause. Another PN was executed for
another loan containing another security. A 3rd
PN was executed by respondents for a loan in
B. Form of Real Estate Mortgage behalf of their company. Petitioner moved for
extrajudicial foreclosure for failure to pay the
Art. 2125. In addition to the requisites stated in obligation.

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(8) Mines, quarries, and slag dumps, while the
WON the dragnet clause applies to the matter thereof forms part of the bed, and waters
subsequent loans. either running or stagnant;
(9) Docks and structures which, though floating, are
HELD: Reliance on the security test – when the intended by their nature and object to remain at a
mortgagor takes another laon for which another fixed place on a river, lake, or coast;
security was given it could not be inferred that (10) Contracts for public works, and servitudes and
such loan was made in reliance solely on the other real rights over immovable property.
original   security   with   the   “dragnet   clause”   but  
rather on the new security given.  The right, title and interest in a contract of
lease of an immovable, such as building, as
In the absence of clear, supportive evidence of a well as the rights, title and interest acquired
contrary intention, a mortgage containing a in the land on which the building was
“dragnet   clause”   will   not   be   extended   to   cover   constructed, are alienable real rights.
future advances unless the document evidence  Assignment by way of guaranty of such
the subsequent advance refers to the mortgage rights is a real estate mortgage, inasmuch as
as providing security therefor. It was improper it is executed to guarantee a principal
for petitioner to foreclose the mortgage for non- obligation.
payment of subsequent loans.
1. After Acquired Properties
D. Object of Real Estate Mortgage  A stipulation in a registered REM that all
property taken in exchange or replacement
Art. 2124. Only the following property may be the by the mortgagor (after acquired
object of a contract of mortgage: properties) shall become subject to the
(1) Immovables; mortgage.
(2) Alienable real rights in accordance with the o Binding
laws, imposed upon immovables. o REM need not be registered a 2nd
time in order to bind the after
acquired parties and 3rd parties
Art. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all People’s   Bank   &  Trust   Company   and   Atlantic  
kinds adhered to the soil; Golf and Pacific Co. of Manila vs Dahican
(2) Trees, plants, and growing fruits, while they are Lumber Company
attached to the land or form an integral part of an
immovable; FACTS: ATLANTIC sold and assigned its rights in
(3) Everything attached to an immovable in a fixed the DALCO for $500K, only $50K was paid. To
manner, in such a way that it cannot be separated develop the concession, DALCO obtained loans
therefrom without breaking the material or People’s  Bank  and  Trust  Co.  After  the  execution  
deterioration of the object; of the mortgages, DALCO purchased various
(4) Statues, reliefs, paintings or other objects for use machines, parts and accessories. Per the last
or ornamentation, placed in buildings or on lands by part   of   the   provision   on   “After   Acquired  
the owner of the immovable in such a manner that it Properties”,   the   BANK  asked   DALCO   to   submit  a  
reveals the intention to attach them permanently to list of the properties acquired after the
the tenements; execution of the mortgage, but the latter failed
(5) Machinery, receptacles, instruments or to do so. DALCO failed to pay. The BANK and
implements intended by the owner of the tenement ATLANTIC commenced foreclosure proceedings.
for an industry or works which may be carried on in
a building or on a piece of land, and which tend WoN   DALCO’s   after   acquired   properties   are  
directly to meet the needs of the said industry or subject to the deeds of mortgage now being
works; foreclosed.
(6) Animal houses, pigeon-houses, beehives, fish
ponds or breeding places of similar nature, in case HELD: YES. Stipulations   regarding   “After  
their owner has placed them or preserves them with Acquired   Properties”   are   valid,   logical   and  
the intention to have them permanently attached to lawful features of deeds of mortgage. As
the land, and forming a permanent part of it; the properties which are given as collateral are
animals in these places are included; subject to inevitable wear and tear, they are
(7) Fertilizer actually used on a piece of land; given with the understanding that they shall be

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replaced with others later acquired by the  Right of the mortgagee to assign its rights
mortgagor. Its purpose is to maintain the under the principal obligation secured by
original value of the properties given as the real estate mortgage
security.  Not present in Chattel Mortgage

2. Effect and Extent F. Right to Alienate Collateral


Art. 2126. The mortgage directly and immediately Art. 2130. A stipulation forbidding the owner from
subjects the property upon which it is imposed, alienating the immovable mortgaged shall be void.
whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted.  The mortgagor remains to be the owner of
the collateral and retains the right to
Art. 2127. The mortgage extends to the natural dispose (jus disponendi).
accessions, to the improvements, growing fruits, and  When there is threat of foreclosure,
the rents or income not yet received when the mortgagor may opt to sell his property
obligation becomes due, and to the amount of the (more beneficial since he may dictate the
indemnity granted or owing to the proprietor from the price, as opposed to a foreclosure sale
insurers of the property mortgaged, or in virtue of where bidding may not go as well)
expropriation for public use, with the declarations,  The following stipulations are void:
amplifications and limitations established by law, o Forbidding the mortgagor from
whether the estate remains in the possession of the selling the collateral
mortgagor, or it passes into the hands of a third person. o Forbidding the mortgagor from
selling the collateral without the
Art. 2129. The creditor may claim from a third consent of the mortgagee
person in possession of the mortgaged property, the  A stipulation prohibiting the mortgagor
payment of the part of the credit secured by the from entering into 2nd or subsequent
property which said third person possesses, in the mortgages is valid
terms and with the formalities which the law  The grant of right of first refusal in favour of
establishes. 1st mortgagee is valid

 Registered REM is a right in rem G. Foreclosure of Real Estate Mortgage


o A lien or legal right or interest that 1. Judicial Foreclosure
a   creditor   has   in   another’s   a. Complaint for Foreclosure
property. Rules of Court, Rule 68, Section 1. Complaint in
o Inseparable from the collateral and action for foreclosure.— In an action for the
follows the property until foreclosure of a mortgage or other encumbrance
discharged. upon real estate, the complaint shall set forth the
 Puchaser of collateral is bound to date and due execution of the mortgage; its
acknowledge and respect the encumbrance assignments, if any; the names and residences of the
to which the property is subjected mortgagor and the mortgagee; a description of the
mortgaged property; a statement of the date of the
E. Right to Alienate Mortage Credit note or other documentary evidence of the
Art. 2128. The mortgage credit may be alienated or obligation secured by the mortgage, the amount
assigned to a third person, in whole or in part, with claimed to be unpaid thereon; and the names and
the formalities required by law. residences of all persons having or claiming an
interest in the property subordinate in right to that
Art. 1625. An assignment of a credit, right or action of the holder of the mortgage, all of whom shall be
shall produce no effect as against third person, made defendants in the action.
unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in  Judicial foreclosure is initiated by a
case the assignment involves real property. complaint
 The complaint must contain:
Art. 1627. The assignment of a credit includes all the o Date and due execution of
accessory rights, such as a guaranty, mortgage, mortgage
pledge or preference. o Assignments, if any
o Names and residences of the
Right to alienate mortgage credit mortgagors and mortgage
o Description of mortgaged property

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o Date of note or other documentary  after default in the performance of the
evidence regarding the mortgage condition of the mortgage but before the
o Unpaid amount foreclosure sale of the collateral
o Names and residences of all  by paying the mortgage obligation
persons having or claiming an  Under Rule 68, Section 2, the period is not
interest in the property with less than 90 days but no more than 120
subordinate right to the mortgagor days from the entry of judgment
 Equity   of   redemption   on   mortgagor’s  
b. Judgment on Foreclosure successors-in-interest
Rules of Court, Rule 68, Section 2. Judgment on o All junior lien-holders acquire the
foreclosure for payment or sale.—If upon the trial in right to subordinate to the superior
such action the court shall find the facts set forth in lien of the 1st mortgagee
the complaint to be true, it shall ascertain the  Unforeclosed Equity of redemption
amount due to the plaintiff upon the mortgage debt o A decree of foreclosure where the
or obligation, including interest and other charges as junior lien-holders are not parties,
approved by the court, and costs, and shall render the equity of redemption in their
judgment for the sum so found due and order that favour remains unforeclosed and
the same be paid to the court or to the judgment unaffected.
obligee within a period of not less than ninety (90) o A separate foreclosure proceeding
days nor more than one hundred twenty (120) days should be brought to require them
from the entry of judgment, and that in default of to redeem from the first mortgagee,
such payment the property shall be sold at public under penalty of losing the
auction to satisfy the judgment. prerogative to redeem.

 After filing of complaint, there will be a trial Whose rights are defeated? Mortgagee’s   right   to  
where the court will ascertain if the foreclose  (or  assignee’s)
complaint is true.
 If found to be true, the court will: d. Foreclosure Sale
o Ascertain amount due to mortgagee
o Compute the interest and other PROCEDURE:
charges, if any 1. Failure to pay within the period
 Judgment will be rendered for the sum to be 2. File a complaint for foreclosure of mortgage
paid not less than 90 days nor more than indicating:
120 days from entry of judgment a. Date & due execution of the
 If mortgagor failed to pay, property will be mortgage
sold at public auction b. Its assignments, if any
c. Names and residences of
Korea Exchange Bank vs Filkor Business mortgagor and mortgagee
Integrated, Inc d. Description of the mortgaged
FACTS: Filkor loaned from Korea Exhange Bank property
and executed 9 trust receipts. Filkor executed e. Statement of the date of the note or
REM as security. Filkor failed to pay so the Bank other documentary evidence of the
filed a complaint for it to be paid and the obligation secured by the mortgage
mortgage be foreclosed. f. Amount claimed to be paid thereon
g. Names and residences of all
WON the action is for a collection of a sum of persons having or claiming an
money or foreclosure of mortgage. interest in the property
subordinate to the mortgagee (they
HELD: The   Bank’s   allegations   in   the   complaint,   shall be made defendants)
and its prayer that the mortgaged property be 3. If the court finds the facts in the complaint
foreclosed and sold at public auction indicate to be true, it shall:
that it was one for foreclosure of REM. a. Ascertain amount due to plaintiff
(judgment obligee)
c. Equity of Redemption b. Order that the same be paid to the
 Right of the mortgagor to extinguish the court or judgment obligee within a
mortgage and retain ownership of the period of not less than 90 days and
collateral

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not more than 120 days (equity of  Until the court has validly confirmed the
redemption) foreclosure sale, the purchaser is nothing
c. It shall also order that in default of more than a preferred bidder
such payment, the property shall be  Before the court confirms the foreclosure
sold at public auction sale, there will be a hearing. It will be for
4. Equity of redemption expires (assuming interested parties to show cause why the
judgment obligor did not pay) sale should not be confirmed.
5. Sale will be conducted (purchase = highest
bidder) e. Right of Redemption
6. Court will issue confirmation order (upon  To claim a right of redemption there must
motion) be a specific law that exceptionally allows
a. Operates   to   divest   the   mortgagor’s   it (statutory right)
rights in the property and vest it in  Right defeated: inchoate right of purchaser
the purchaser over the property
7. Finality of confirmation order OR expiration  RA 8791/General Banking Law of 2000:
of redemption period (if there is a right of in a judicial foreclosure by a bank/quasi-
redemption) bank or trust entity, the mortgagor shall
a. Consequence: purchaser is entitled have the right within 1 year after the sale
to possession unless a third party is of the collateral to redeem the property by
actually holding the same adversely paying the amount due under the mortgage
to the judgment obligor deed with interest and all costs and
(mortgagor). In such a case, the expenses incurred by the bank from sale
possession will also have to be less and custody of the property less income
litigated. (ex. rent) derived therefrom. (MORTGAGEE
8. Proceeds of sale: IS BANK/CREDIT INSTITUTION)
a. Costs of the sale
b. Mortgage dect specified in the Huerta Alba Resort Inc vs CA
contract FACTS: Intercon filed a motion to foreclose the
c. Junior encumbrancers in order of properties of Huerta Alba. Huerta Alba, only on
priority appeal, demand that they have the right to
d. Mortgagor redemption.
9. Registration
a. Register of deeds: present final WON Huerta Alba has one year right to
order of court confirming the sale redemption.
b. No right of redemption:
i. Certificate of title HELD: No. No such right is recognized in a
cancelled; new one issued judicial foreclosure except only where the
in the name of purchaser mortgagee is the Philippine National Bank or a
c. Right of redemption exists: bank or banking institution. Where a mortgage
i. Certificate is not cancelled; is foreclosed extrajudicially, Act 3135 grants to
(1) certificate of sale and mortgagor the right of redemption within 1 year
(2) confirmation order is from   the   registration   of   the   sheriff’s   certificate  
registered and a brief of foreclosure sale.
memo made by registrar of
deeds f. Right to Surplus or Deficiency
ii. Redeemed: deed of
redemption registered  Mortgagor is entitled to the surplus
iii. Not redeemed: final deed  Mortgagee is entitled to deficiency
of sale registered and new judgment
certificate of title issued  The right to recover deficiency by
10. Move for the court to render judgment on mortgagee extends to the judicial
deficiency foreclosure of mortgage arising out of a
settlement of estate (Rule 86), it gives
NOTES: mortgagee 3 distinct, independent and
 The acceptance of a bid at the foreclosure mutually exclusive remedies
sale confers no title on the purchaser

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o Waive mortgage and claim the c. Executive judge will distribute
principal obligation from the estate copies to newspaper companies for
as an ordinary claim publication
o Judicial foreclosure and prove d. Debtor-mortgagor: need not be
deficiency as an ordinary claim served a copy of notice unless the
o Rely on the mortgage exclusively, mortgage contract requires it (case
without right to deficiency of Grand Farms)
e. For loans < P100,000 by
2. Extrajudicial Foreclosure rural/thrift banks: no more need
a. Special Powers for publication; only notice posted
Section 1. When a sale is made under a special power for 60 days in conspicuous areas of
inserted in or attached to any real-estate mortgage municipality where property is
hereafter made as security for the payment of money or located (municipal building,
the fulfillment of any other obligation, the provisions of municipal public market, rural
the following election shall govern as to the manner in bank, barangay hall)
which the sale and redemption shall be effected, whether
or not provision for the same is made in the power. 1. Requirement of Notice
 The object is to inform the public of the
 A mortgage may only be extrajudicially nature and condition of the collateral to be
foreclosed if there is a special power sold, and of the time, place and terms of the
inserted or attached to the document in sale
which the REM appears and only in  General Rule – statutory provisions
accordance with Act No. 3135 governing posting of notice of REM
foreclosure sales must be strictly complied
b. Foreclosure Sale with
 Exception – objectives of a notice of sale are
WHERE: Province in which the property is situated attained, immaterial errors and mistakes
 As stipulated or may not affect the sufficiency of the notice
 In the municipal building of the
municipality Grand Farms, Inc. vs Philippine Shares Corp
vs CA
NOTICE:
 For all: 3 public places of the municipality Petitioners filed a Civil Case for annulment
or city (for at least 20 days) and/or declaration of nullity of the extrajudicial
 If property > P400: newspaper of general foreclosure proceedings over their mortgaged
circulation (once a week for 3 consecutive properties. Petitioners also filed a request for
weeks) admission by private respondent of the
allegation that no formal notice of intention to
PROCEDURE: foreclose the real estate mortgage was sent by
1. Application for extrajudicial foreclosure private respondent to petitioners. The
sale filed with executive judge through clerk petitioners filed a motion for summary
of court judgment contending that the foreclosure was
2. Duties of clerk of court: violative of the provisions of the mortgage
a. Ensure SPA is inserted/attached to contract.
deed of REM
b. Docket the application WON notice by publication of the foreclosure
c. Collect filing fee and issue a receipt constitutes sufficient notice to petitioners under
(exception: cooperatives, thrift the mortgage contract
banks, rural banks)
d. Issue certificate of payment if Private respondent tacitly admitted in its
collateral is located separately and answer to petitioners' request for admission
covers only 1 indebtedness that it did not send any formal notice of
3. Raffle among the sheriffs with the foreclosure to petitioners. This omission, by
supervision of the executive judge itself, rendered the foreclosure defective and
4. Duties of sheriff assigned: irregular for being contrary to the express
a. Prepare notice of extrajudicial sale provisions of the mortgage contract.
b. Cause publication

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2. Conduct of Sale  Redemptioner – a creditor of the
 Public auction (9am-4pm) with the mortgagor with a lien on the collateral
supervision of the sheriff, justice/auxilliary subsequent to the lien that was the basis of
justice of municipality, or notary public. the foreclosure sale
 Creditor or his trustee/agent is in the same
condition as any other bidder EXCEPT when Medida vs CA
there is a contrary stipulation in the REM or Spouses Dolino was scared that they would lose
Trust Deed. their right of redemption over their mortgaged
property so they applied for a loan of P30,000
HOW CONDUCTED: offering as security the same subject lot. The
1. sealed bids submitted to the sheriff Spouses failed to pay this loan and a foreclosure
2. in case of tie, open bidding sale was instituted. No redemption was effected
3. payment:  cash/manager’s  check during the period of redemption so a TCT was
4. pay within 5 days from notice finally issued.
5. clerk of court will collect appropriate fees
6. sheriff will report names of bidders to clerk WON a Mortgagor, whose property has been
of court extrajudicially foreclosed and sold at the
7. clerk will sign certificate of sale subject to corresponding foreclosure sale, may validly
approval by the executive judge execute a mortgage contract over the same
property in favor of a third party during the
NOTE: Inadequacy of bid price will not invalidate period of redemption.
the sale (case of Sps. Rabat)
Yes. Under Rule 39, Sec. 33, the judgment debtor
c. Right of Redemption remains in possession of the property
 The right acquired by a purchaser of foreclosed and sold during the period of
collateral is merely inchoate. redemption. The mortgagor remains the
 Ownership remains with the mortgagor absolute owner of the property during the
until expiration of the grace period for the redemption period. The right of the auction
right of redemption purchaser is only inchoate.
 For the party to claim right of redemption,
there must be a specific law that 2. How to Redeem
exceptionally allows it
 Period to redeem: PROCEDURE:
o Act 3135: 1 year from registration 1. The redemption must be made within 12
of certificate of sale months from the date of the registration of
o RA 8791 (General Banking Act): the sale in the Office of the Register of
3 months after foreclosure or Deeds
before registration of certificate of 2. Payment of the purchase price of the
foreclosure, whichever is earlier collateral involved, plus 1% interest per
(bank must be the mortgagee) month thereon, together with the amount of
any assessments or taxes if any, paid by the
1. Who May Redeem purchaser after the sale with same rate of
 debtor interest
 his successors-in-interest 3. Written notice of the redemption must be
 judicial creditor or judgment creditor of the served on the officer who made the sale and
debtor (different from the one who a duplicate filed with the Register of Deeds
foreclosed) of the province
4. An actual and simultaneous tender of
 any person having a subsequent lien over
the property (subsequent to the payment must accompany the statement of
mortgage/trust under which the property intention
was sold) 5. Certificate of redemption issued by person
to whom the redemption payment is made
NOTES: (purchaser/redemptioner)
6. Certificate of redemption recorded in
 Successor-in-interest – includes, but not
registry of deeds
limited to, the one to whom the mortgagor
7. Proof of right to redeem:
has transferred the statutory right of
a. Copy of final judgment or order
redemption

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b. If under mortgage or other lien No. If the mortgagee (PNB) is retaining more of
i. Memo/record thereof OR the proceeds of the sale than he is entitled to,
ii. Original certifiied copy of this fact alone will not affect the validity of the
assignment AND sale but will simply give the mortgagor
iii. Affidavit showing amount (spouses) a cause of action to recover the
due on the lien surplus. The application of the proceeds from
the sale of the mortgaged property to the
Bona fide redemption: actual and simultaneous mortgagor’s   (spouses)   obligation   is   an   act   of  
tender of payment accompanied by statement of payment, not payment by dacion; hence, it is the
intention OR filing of complaint to enforce mortgagee’s  (PNB)  duty  to  return  any  surplus  in  
redemption (not mere intention/vauge attempt to the selling price to the mortgagor. A mortgagee
enforce) who exercises the power of sale contained in a
 Piecemeal redemptions are allowed. mortgage is considered a custodian of the fund.
He is liable if he fails to apply the proceeds of
d. Right to Deficiency the sale to the persons entitled to it.
 There is not law prohibiting the recovery of
any deficiency, thus the mortgagee may f. Right to Possession
proceed in a proper action against the 1. During Redemption Period
debtor  Section 7 expressly directs the issuance of
 Underlying principle: a REM is a security writ of possession in favour of the
transaction and not a satisfaction of purchaser that seeks the possession of the
indebtedness of the debtor foreclosed collateral during redemption
 The   mortgagee’s   right   to   recover   the   period. No discretion is left to the court. ->
deficiency does not extend to the MINISTERIAL
extrajudicial foreclosure of mortgage  The writ of possession is issued in an ex-
arising out of settlement of estate parte proceeding, a judicial proceeding
brought for the benefit of one party only,
e. Right to Surplus and without notice or consent by any
 The application of the proceeds from the person adversely interested
sale   of   the   collateral   to   the   debtor’s    However, a party may file a petition to set
obligation is an act of payment, not payment aside the foreclosure sale and to cancel
by  dacion;  hence,  it  is  the  mortgagee’s  duty   (not oppose) the writ of possession.
to return any surplus in the selling price.
 When there are several liens upons the 2. After Consolidation of Ownership
collateral, such as a 2nd or 3rd mortgage, the  After consolidation of ownership and the
surplus must be applied to their discharge issuance of a new title in the name of the
in the order of their priority purchaser, a writ of possession will issue as
a matter of course, without filing and
Suico vs PNB approval of a bond.
Plaintiff spouses failed to pay their obligation,
prompting PNB to extra-judicially foreclose the 3. When Held by a Third Party
mortgaged property. The loan obligation of the  The   purchaser’s   right   of   possession   is  
spouses according to the notice of sale was recognized only as against the mortgagor
1,991,770.38, while the bid price of PNB was and its successor-in-interest, but not against
8,511,000. The spouses filed a petition for persons whose right of possession is
declaration of nullity of real estate mortgage on adverse to the latter.
the ground that PNB did not pay its bid or  The remedies of a 3rd party holding the
deliver the excess to the sheriff or to the collateral adversely to the mortgagor are:
spouses after deducting the difference between o Terceria filed against the sheriff or
the amount of its bid and the amount of the officer effecting the writ by serving
spouses’  obligation  in  the  notice  of  sale. on him an affidavit of title with a
copy to the purchaser
WON the foreclosure sale was null and void for o An independent and separate
failure to deliver the surplus to the sheriff or the action to vindicate its claim of
plaintiff spouses. ownership or possession over the
collateral

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BPI Family Savings Bank vs Golden Power acquiring the right to receive the fruits
Diesel Sales Center of an immovable of the antichretic
CEDEC Transport, obtained P6.57 M. loan from debtor and the obligation to apply them
petitioner BPI Family but CEDEC defaulted. BPI to the payment of the interest, if owing,
Family filed with the RTC ex-officio sheriff a and thereafter to the principal.
verified petition for extrajudicial foreclosure of  There must be a contract of loan, which
REM. After due notice and publication, the has for its object immovable property,
sheriff sold the properties at public auction. 1 not the fruits.
yr-redemption period expired without CEDEC  This is a real security transaction
redeeming the properties. Titles to the because the property may be
properties were consolidated in the name of FORECLOSED if after the period agreed
petitioner and the Registry of Deeds issued new upon, principal   obligation   hasn’t   been  
titles in the name of petitioner. Despite several paid yet. Immovable may be alienated to
demand letters, CEDEC refused to vacate the satisfy the principal obligation.
properties and to surrender possession to
petitioner. Petitioner filed an Ex-Parte Petition
for Writ of Possession over the properties with Art. 2133. The actual market value of the fruits at
RTC Pasay City. the time of the application thereof to the interest
and principal shall be the measure of such
WON private respondents who merely stepped
into the shoes of mortgagor CEDEC, being the application.
vendee of the properties in question are 3rd
persons in possession thereof who are claiming Measure of application of payment
a right adverse to that of the debtor/mortgagor  Actual market value of fruits at time of
CEDEC. application

NO. Gen. Rule: Purchaser in a public auction sale


of a foreclosed property is entitled to a writ of Art. 2135. The creditor, unless there is a stipulation
possession and, upon an ex parte petition of the to the contrary, is obliged to pay the taxes and
purchaser, it is ministerial upon the trial court charges upon the estate. He is also bound to bear the
to issue the writ of possession in favor of the expenses necessary for its preservation and repair.
purchaser. Exception: The possession of the
The sums spent for the purposes stated in this
property shall be given to the purchaser or last
redemptioner by the same officer unless a third article shall be deducted from the fruits.
party is actually holding the property adversely
to the judgment obligor. Thus, when the Obligations of the Creditor
foreclosed property is in the possession of a 3rd
party holding the same adversely to the General Rule: Creditor is obliged to pay the
judgment obligor the issuance by the trial court following:
of a writ of possession in favor of the purchaser
of said real property ceases to be ministerial i. Taxes and charges upon estate
and may no longer be done ex parte. ii. Necessary expenses for preservation and
repair of property
X. ANTICHRESIS Exception: Stipulation to the contrary

A. General Concepts Note: Sums spent are deducted from the fruits
Art. 2132. By the contract of antichresis the creditor
acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply
Art. 2138. The contracting parties may stipulate
them to the payment of the interest, if owing, and
that the interest upon the debt be compensated with
thereafter to the principal of his credit.
the fruits of the property which is the object of the
antichresis, provided that if the value of the fruits
 Etymology: Latin - “in  place  of  interest” should exceed the amount of interest allowed by
 Real security transaction that arises by laws against usury, the excess shall be applied to
contract, with the antichretic creditor the principal.

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Application of Fruits extinguishment of the [antichresis] as the portion of
 WITHOUT INTEREST – Fruits are applied to the the debt for which each thing is specially answerable
principal  of  the  debtor’s  credit is satisfied.
 WITH INTEREST
i. Value of fruits < amount of interest
(allowed by usury law)  fruits are
applied to the INTEREST Art. 2090. The indivisibility of an antichresis is not
ii. Value of fruits = amount of interest affected by the fact that the debtors are not
(allowed by usury law)  fruits are
solidarily liable.
applied to the INTEREST
iii. Value of fruits > amount of interest
Indivisibility of an antichresis
allowed by usury law  Fruits are
first applied to the interest; then,
General Rule: An antichresis is indivisible.
the EXCESS is applied to the
principal There can be no proportionate extinguishment
or cancellation of antechresis due to partial
payment of the debt.
Art. 2139. The last paragraph of Article 2085, and
Articles 2089 to 2091 are applicable to this contract. Exception: There being several things given in
antichresis, each one of them guarantees only a
determinate portion of the credit.

Art. 2085. Third persons who are not parties to the  In this case, the debtor has a right
principal obligation may secure the latter by to extinguishment of the
[antichresis of] their own property. antichresis as the portion of the
debt corresponding to a thing is
Parties to an Antichresis satisfied
i. Creditor Note: Indivisibility of antichresis applies even if the
ii. Owner of the property subject of an debtors are not solidarily liable.
antichresis
1) Debtor in the principal Art. 2091. The contract of [antichresis] may secure
obligation all kinds of obligations, be they pure or subject to a
2) Third person securing suspensive or resolutory condition.
the principal obligation
using their own property

b. Contract of antichresis secures ALL


Art. 2089. An antichresis is indivisible, even though KINDS of obligations
the debt may be divided among the successors in i. Pure
interest of the debtor or of the creditor. Therefore, ii. Subject to a suspensive condition
the   debtor’s   heir   who has paid a part of the debt iii. Subject to a resolutory condition
cannot ask for the proportionate extinguishment of
B. Form of Antichresis
the [antichresis] as long as the debt is not
Art. 2134. The amount of the principal and of the
completely   satisfied.  Neither   can   the   creditor’s   heir  
interest shall be specified in writing; otherwise, the
who   received   the   share   of   the   debt…   cancel   the  
contract of antichresis shall be void.
[antichresis], to the prejudice of the other heirs who
have not been paid.  In writing (amount of principal
and interest) otherwise it is void
From these provisions is expected the case in which,
there being several things given in [antichresis], C. Right of Retention
each one of them guarantees only a determinate Art. 2136. The debtor cannot reacquire the
portion of the credit. enjoyment of the immovable without first having
totally paid what he owes the creditor. But the latter,
The debtor, in this case, shall have a right to
in order to exempt himself from the obligations

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imposed upon him by the preceding article (Article interest, if owing, and thereafter to the principal of
2135), may always compel the debtor to enter again his credit; so that if a contract of loan with security
upon the enjoyment of the property, except when does not stipulate the payment of interest but
there is a stipulation to the contrary. provides for the delivery to the creditor by the
debtor of the property given as security, in order
that the latter may gather its fruits, without stating
that said fruits are to be applied to the payment of
General Rule: The debtor cannot reacquire the
interest, if any, and afterwards that of the principal,
enjoyment of the immovable without full payment of
the contract is a mortgage and not antichresis.
the debt.
In this case, the true position of creditor under his
Exception: If the creditor compels the debtor to
contract with appellant is a "mortgage in
enter again upon the enjoyment of the property, to
possession" that is "one who has lawfully acquired
exempt himself (creditor) from the obligations
actual or constructive possession of the premises
imposed upon him under Art. 2135 (payment of
mortgaged to him, standing upon his rights as
taxes, charges, and necessary expenses)
mortgagee and not claiming under another title, for
Exception to the exception: Stipulation to the the purpose of enforcing his security upon such
contrary property or making its income help to pay his debt".
As such mortgagee in possession, his rights and
Purpose of Right to retention: Means of obligations are similar to those of an antichretic
extinguishing the obligation. creditor:

D. Foreclosure of Antichresis (1) the non-payment of the debt within the


Art. 2137. The creditor does not acquire the term agreed does not vest the ownership of
ownership of the real estate for non-payment of the the property in the creditor;
debt within the period agreed upon. Every (2) the mortgagee must account for the rents
stipulation to the contrary shall be void. But the and profits of the land, or its value for
creditor may petition the court for the payment of purposes of use and occupation, any
the debt or the sale of the real property. In this case, amount thus realized going towards the
the Rules of Court on the foreclosure of mortgages discharge on the mortgage debt;
shall apply. (3) if the mortgage remains in possession after
the mortgage debt has been satisfied, he
a. Who owns the property subject to becomes a trustee for the mortgagor as to
Antichresis? Antichretic debtor/ third
the excess of the rents and profits over
person
b. Effect of non-payment of debt? Triggers such debt; and lastly,
the availability of either of the two (4) the mortgagor can only enforce his rights to
remedies: the land by an equitable action for an
i. Specific performance account and to redeem.
ii. Foreclosure Hence, the parties having agreed that the loan was
c. Void stipulation: The creditor does not to be without interest, and the appellant not having
acquire ownership of real estate for non-
expressly waived his right to the fruits of the
payment of debt. Every stipulation to the
contrary shall be void. properties mortgaged during the time they were in
d. Likened to REM: Mortgagee retains appellee's possession, the latter, like an antichretic
possession of the collateral and takes the creditor, must account for the value of the fruits
fruits in lieu of interest on the debt received by him, and deduct it from the loan
DIEGO v. FERNANDO obtained by appellant.

To be antichresis, it must be expressly agreed Part IV. Insolvency


between creditor and debtor that the former, having
been given possession of the properties given as Chapter 1. The Concept of Insolvency
security, is to apply their fruits to the payment of the

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Art. 2236. The debtor is liable with all his view to ensure or maintain certainly and
property, present and future, for the fulfillment of predictability in commercial affairs, preserve and
his obligations, subject to the exemptions provided maximize the value of the assets of these debtors,
by law. recognize creditor rights and respect priority of
claims, and ensure equitable treatment of creditors
who are similarly situated. When rehabilitation is
not feasible, it is in the interest of the State to
General Rule: Debtor is liable with all his property
facilities a speedy and orderly liquidation of these
Exceptions: Rule 39, Sec. 13 debtor's assets and the settlement of their
obligations.
1. Family home or homestead
2. Ordinary tools and implements personally a. Policy: To encourage debtors and creditors
used in trade, employment or livelihood to collectively and realistically resolve and
3. 3 horses, 3 cows, 3 carabaos, or other beast adjust competing claims and property
of burden rights.
4. Necessary clothing and articles for personal b. As to rehabilitation and liquidation:
use (Jewelry not included) Ensure a timely, fair, transparent, effective
5. Househould furniture and utensils and efficient rehabilitation or liquidation of
necessary  for  housekeeping  (Value  ≤  100k) debtors.
6. Provisions for individual or family use c. Rehabilitation or liquidation shall be
sufficient for 4 months made to:
7. Professional libraries and equipment of i. Ensure or maintain certainty and
judges, lawyers, physicians, pharmacists, predictability in commercial affairs
dentists, engineers, surveyors, clergymen, ii. Preserve and maximize the value of
teachers,   and   other   professionals   (Value   ≤   assets of debtors
300k) iii. Recognize creditor rights and
8. 1   fishing   boat   and   accessories   (Value   ≤   respect priority of claims
100k) iv. Ensure equitable treatment of
9. Some salaries, wages, or earnings for creditors who are similarly situated
personal services within 4 months before d. Remedy when rehabilitation is not
levy for support of family feasible? LIQUIDATION
10. Lettered gravestones
11. Monies, benefits, privileges, or annuities
accruing Sec. 4
12. Right to receive legal support, or money or
property obtained as such support, or any (k) Debtor shall refer to, unless specifically excluded
pension or gratuity from the Government by a provision of this Act, a sole proprietorship duly
13. Properties exempted by law registered with the Department of Trade and
Industry (DTI), a partnership duly registered with
Art. 2237. Insolvency shall be governed by special
the Securities and Exchange Commission (SEC), a
laws insofar as they are not inconsistent with this
corporation duly organized and existing under
Code.
Philippine laws, or an individual debtor who has
become insolvent as defined herein.

(n) Group of debtors shall refer to and can cover


RA 10142 Sec. 2. Declaration of Policy. – It is the
only: (1) corporations that are financially related to
policy of the State to encourage debtors, both
juridical and natural persons, and their creditors to one another as parent corporations, subsidiaries or
collectively and realistically resolve and adjust affiliates; (2) partnerships that are owned more
than fifty percent (50%) by the same person; and
competing claims and property rights. In
(3) single proprietorships that are owned by the
furtherance thereof, the State shall ensure a timely,
same person. When the petition covers a group of
fair, transparent, effective and efficient
debtors, all reference under these rules to debtor
rehabilitation or liquidation of debtors. The
shall include and apply to the group of debtors.
rehabilitation or liquidation shall be made with a

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(o) Individual debtor shall refer to a natural person iii. Single proprietorships owned by
who is a resident and citizen of the Philippines that same person
has become insolvent as defined herein. c. Individual debtor – natural person,
resident and citizen of the Philippines that
(h) Creditor shall refer to a natural or juridical has become insolvent
d. Creditor – natural or juridical person which
person which has a claim against the debtor that
has a claim against the debtor (must have
arose on or before the commencement date. arisen on or before commencement date)
a. Debtor
i. Sole proprietorship registered with Sec. 146. Application to Pending Insolvency,
DTI
Suspension of Payments and Rehabilitation
ii. Partnership registered with
iii. Corporation Cases. - This Act shall govern all petitions filed after
iv. Individual debtor who has become it has taken effect. All further proceedings in
insolvent insolvency, suspension of payments and
rehabilitation cases then pending, except to the
extent that in opinion of the court their application
Section 5. Exclusions. - The term debtor does not would not be feasible or would work injustice, in
include banks, insurance companies, pre-need which event the procedures set forth in prior laws
companies, and national and local government and regulations shall apply.
agencies or units.

For purposes of this section:


Sec. 147. Application to Pending Contracts. - This
(a) Bank shall refer to any duly licensed bank or
Act shall apply to all contracts of the debtor
quasi-bank that is potentially or actually subject to regardless of the date of perfection.
conservatorship, receivership or liquidation
proceedings under the New Central Bank Act General Rule: This act govern the following:
(Republic Act No. 7653) or successor legislation;
a. All petitions filed AFTER FRIA took effect
(b) Insurance company shall refer to those b. All further proceedings in insolvency,
companies that are potentially or actually subject to suspension of payments and rehabilitations
insolvency proceedings under the Insurance Code pending
c. All contracts of debtor regardless of date of
(Presidential Decree No. 1460) or successor
perfection
legislation; and Exceptions*:
(c) Pre-need company shall refer to any corporation a. In opinion of the court, the application of
authorized/licensed to sell or offer to sell pre-need FRIA is not feasible
plans. b. Application would work injustice
*Procedure in prior laws apply
Exclusions: SEC. 5
Sec. 148. Repealing Clause. – The Insolvency Law
1. Banks (Act No. 1956). As amended is hereby repealed. All
2. Insurance companies
other laws, orders, rules and regulations or parts
3. Pre-need companies
4. National and local government agencies or thereof inconsistent with any provision of this Act
units are hereby repealed or modified accordingly.
b. Group of debtors
i. Corporations that are financially
related to one another as parent
corporations, subsidiaries, or Sec. 4 (p) Insolvent shall refer to the financial
affiliates condition of a debtor that is generally unable to pay
ii. Partnerships where more than its or his liabilities as they fall due in the ordinary
50% is owned by same person course of business or has liabilities that are greater

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than its or his assets. persons affected by the proceedings shall be
considered as acquired upon publication of the
(s) Liabilities shall refer to monetary claims against notice of the commencement of the proceedings in
the debtor, including stockholder's advances that any newspaper of general circulation in the
have been recorded in the debtor's audited financial Philippines in the manner prescribed by the rules of
statements as advances for future subscriptions. procedure to be promulgated by the Supreme Court.

a. Rights of the debtor The proceedings shall be conducted in a summary


1. Guaranteed non-imprisonment for non- and non-adversarial manner consistent with the
payment of debt
2. Right to retain possession of property declared policies of this Act and in accordance with
exempt from execution the rules of procedure that the Supreme Court may
promulgate.
b. Rights of the Creditor
1. Right to attach, garnish, foreclose, execute Nature: in rem
upon, and otherwise seize the property of a
debtor for the fulfillment of the obligation How jurisdiction is acquired? Upon publication of
2. Debtor can only reserve the property that is the notice of commencement of proceedings in any
exempted by law newspaper of general circulation in the Philippines

c. Rationale for insolvency proceedings: How conducted? Summary and non-adversarial


Even   if   debtor’s   properties   answer   for   the   manner
obligations, there is still a risk that debtor
would be unable to pay when the debt falls Sec. 4. (dd) Proceedings shall refer to judicial
due in the usual course of business or as the proceedings commenced by the court's acceptance
debts mature of a petition filed under this Act.

d. Insolvency proceedings: The statutory (bb) Party to the proceedings shall refer to the
procedures by which a debtor obtains debtor, a creditor, the unsecured creditors'
financial relief and undergoes judicially
supervised reorganization or liquidation of committee, a stakeholder, a party with an ownership
its assets for the benefit of its creditors. interest in property held by the debtor, a secured
creditor, the rehabilitation receiver, liquidator or
any other juridical or natural person who stands to
e. What law governs insolvency? FRIA be benefited or injured by the outcome of the
(Financial Rehabilitation and Insolvency proceedings and whose notice of appearance is
Act)
accepted by the court.

Type of proceedings? Judicial proceedings


f. Insolvent: the financial condition of a
debtor:
Parties to the proceedings:
i. Balance sheet insolvency – liabilities
> assets
1. debtor
ii. Equity or illiquidity insolvency –
2. creditor
unable to pay liabilities as they fall due
3. unsecured  creditors’  committee
in the ordinary course of business
4. stakeholder
iii. THUS, insolvent = illiquid
5. party with an ownership interest in
property held by debtor
g. Liabilities 6. secured creditor
i. Used to calculate state of being 7. rehabilitation receiver
insolvent 8. liquidator
ii. Monetary claims against debtor 9. other juridical or natural person who stands
to be benefited or injured by outcome of
A. Nature of Insolvency Proceedings proceedings
Sec. 3. Nature of Proceedings. - The proceedings
under this Act shall be in rem. Jurisdiction over all

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VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 88 of 136
Sec. 7. Substantive and Procedural (b) they have common creditors and it will be more
Consolidation. - Each juridical entity shall be convenient to treat them together rather than
considered as a separate entity under the separately;
proceedings in this Act. Under these proceedings,
the assets and liabilities of a debtor may not be (c) the related enterprise voluntarily accedes to join
commingled or aggregated with those of another, the debtor as party petitioner and to commingle its
unless the latter is a related enterprise that is owned assets and liabilities with the debtor's; and
or controlled directly or indirectly by the same
(d) Consolidation is beneficial to all concerned and
interests: Provided, however, That the commingling
promotes the objectives of rehabilitation.
or aggregation of assets and liabilities of the debtor
with those of a related enterprise may only be
allowed where:
Sec. 6. Designation of Courts and Promulgation of
(a) there was commingling in fact of assets and Procedural Rules. - The Supreme Court shall
liabilities of the debtor and the related enterprise designate the court or courts that will hear and
prior to the commencement of the proceedings; resolve cases brought under this Act and shall
promulgate the rules of pleading, practice and
(b) the debtor and the related enterprise have
procedure to govern the proceedings brought under
common creditors and it will be more convenient to
this Act.
treat them together rather than separately;

(c) the related enterprise voluntarily accedes to join


the debtor as party petitioner and to commingle its B. Civil and Criminal Liability in Insolvency
assets and liabilities with the debtor's; and Proceedings
Sec. 10. Liability of Individual Debtor, Owner of a
(d) The consolidation of assets and liabilities of the Sole Proprietorship, Partners in a Partnership,
debtor and the related enterprise is beneficial to all or Directors and Officers. - Individual debtor,
concerned and promotes the objectives of owner of a sole proprietorship, partners in a
rehabilitation. partnership, or directors and officers of a debtor
shall be liable for double the value of the property
Provided, finally, That nothing in this section shall
sold, embezzled or disposed of or double the amount
prevent the court from joining other entities
of the transaction involved, whichever is higher to
affiliated with the debtor as parties pursuant to the
be recovered for benefit of the debtor and the
rules of procedure as may be promulgated by the
creditors, if they, having notice of the
Supreme Court.
commencement of the proceedings, or having
General Rule: Each juridical entity is a separate reason to believe that proceedings are about to be
entity. Thus, the assets and liabilities of a debtor commenced, or in contemplation of the proceedings,
may not be commingled or aggregated with those of willfully commit the following acts:
another
(a) Dispose or cause to be disposed of any property
Exception: Unless the other is a related enterprise of the debtor other than in the ordinary course of
that is owned or controlled directly or indirectly by business or authorize or approve any transaction in
the same interest. The commingling or aggregation fraud of creditors or in a manner grossly
of assets and liabilities of the debtor with related disadvantageous to the debtor and/or creditors; or
enterprise are allowed where:
(b) Conceal or authorize or approve the
(a) there was commingling in fact of assets and concealment, from the creditors, or embezzles or
liabilities prior to the commencement of the misappropriates, any property of the debtor.
proceedings;
The court shall determine the extent of the liability
of an owner, partner, director or officer under this

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section. In this connection, in case of partnerships than One million pesos (Php 1, 000,000.00) and
and corporations, the court shall consider the imprisonment for not less than three(3) months nor
amount of the shareholding or partnership or equity more than five (5) years for each offense;
interest of such partner, director or officer, the
degree of control of such partner, director or officer (a) if he shall, having notice of the commencement of
over the debtor, and the extent of the involvement of the proceedings, or having reason to believe that
such partner, director or debtor in the actual proceedings are about to be commented, or in
management of the operations of the debtor. contemplation of the proceedings hide or conceal, or
destroy or cause to be destroyed or hidden any
Who are liable? property belonging to the debtor or if he shall hide,
destroy, after mutilate or falsify, or cause to be
a. Individual debtor hidden, destroyed, altered, mutilated or falsified, any
b. Owner of sole proprietorship
book, deed, document or writing relating thereto; if
c. Partners in partnership
d. Directors and officers of a debtor he shall, with intent to defraud the creditors of the
Acts punishable? debtor, make any payment sale, assignment, transfer
or conveyance of any property belongings to the
(a) Dispose or cause to be disposed of any property debtor
of the debtor other than in the ordinary course of
business or authorize or approve any transaction in (b) if he shall, having knowledge belief of any person
fraud of creditors or in a manner grossly having proved a false or fictitious claim against the
disadvantageous to the debtor and/or creditors; or debtor, fail to disclose the same to the rehabilitation
receiver of liquidator within one (1) month after
(b) Conceal or authorize or approve the coming to said knowledge or belief; or if he shall
concealment, from the creditors, or embezzles or attempt to account for any of the debtors property
misappropriates, any property of the debtor. by fictitious losses or expense; or

When liable? If they commit the acts punishable (c) if he shall knowingly violate a prohibition or
during the following periods: knowingly fail to undertake an obligation
established by this Act.
a. if they have notice of the
commencement of the proceedings, Who are liable?
or a. Owner
b. having reason to believe that the b. Partner
proceedings are about to be c. Director
commences, d. Officer
c. in contemplation of proceedings e. Other employee of debtor
the
Extent of liability? Determined by the court Acts punishable?
Note: In partnerships and corporations, the court (a)
shall consider the following in determining extent of 1. if he shall, having notice of the
liability: commencement of the proceedings, or having
reason to believe that proceedings are about to be
1. Amount of share/equity interest commented, or
2. Degree of control 2. in contemplation of the proceedings hide
3. Extent of involvement in actual or conceal, or destroy or cause to be destroyed or
management of operations hidden any property belonging to the debtor or

3. if he shall hide, destroy, after mutilate or


Sec. 145. Penalties. – An owner, partner, director,
falsify, or cause to be hidden, destroyed, altered,
officer or other employee of the debtor who
mutilated or falsified, any book, deed, document or
commits any one of the following acts shall, upon writing relating thereto;
conviction thereof, be punished by a fine of not more

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4. if he shall, with intent to defraud the Concurrence of credit: The creditors are paid
creditors of the debtor, make any payment sale, concurrently and pro-rata (in proportion) to the
assignment, transfer or conveyance of any property amount of the respective credits
belongings to the debtor
Preference of credit: A method adopted to
(b) if he shall, having knowledge belief of any person determine and specify the order in which credits
having proved a false or fictitious claim against the should be paid.
debtor, fail to disclose the same to the rehabilitation
receiver of liquidator within one (1) month after  Determine the priority of payments or
coming to said knowledge or belief; or if he shall which creditors will be paid ahead of others.
When applied?
attempt to account for any of the debtors property
by fictitious losses or expense; or  When there are two or more creditors
having separate and distinct claims against
(c) if he shall knowingly violate a prohibition or the same debtor who has insufficient
knowingly fail to undertake an obligation property
established by this Act.  When debtor cannot pay his debts in full
 Ascertained in the context of some
Penalty? BOTH proceedings (i.e. insolvency proceedings)

a. Fine  =  x≤1M
b. Imprisonment  =    3  mos  ≥  x  ≥  5  years 2. Classification of Credits
1. Special Preferred Credits
Chapter 2. Concurrence & Preference of Credits Article 2241. With reference to specific movable
property of the debtor, the following claims or liens
1. General Concepts
shall be preferred:
Sec. 62. Contents of a Rehabilitation Plan. – The
Rehabilitation Plan shall, as a minimum: (1) Duties, taxes and fees due thereon to the State or
any subdivision thereof;
(i) ensure that the payments made under the plan
follow the priority established under the provisions (2) Claims arising from misappropriation, breach of
of the Civil Code on concurrence and preference of trust, or malfeasance by public officials committed
credits and other applicable laws. in the performance of their duties, on the movables,
money or securities obtained by them;

(3) Claims for the unpaid price of movables sold, on


Sec. 133. Concurrence and Preference of Credits. -
said movables, so long as they are in the possession
The Liquidation Plan and its Implementation shall
of the debtor, up to the value of the same; and if the
ensure that the concurrence and preference of
movable has been resold by the debtor and the price
credits as enumerated in the Civil Code of the
is still unpaid, the lien may be enforced on the price;
Philippines and other relevant laws shall be
this right is not lost by the immobilization of the
observed, unless a preferred creditor voluntarily
thing by destination, provided it has not lost its
waives his preferred right.
form, substance and identity; neither is the right lost
by the sale of the thing together with other property
 The rehabilitation plan and the liquidation
plan must ensure that the concurrence and for a lump sum, when the price thereof can be
preference of credits are complied with determined proportionally;

(4) Credits guaranteed with a pledge so long as the


Purpose of concurrence and preference of credit: things pledged are in the hands of the creditor, or
A system is followed to properly recognize  creditors’   those guaranteed by a chattel mortgage, upon the
rights, respect priority of claims, and ensure the things pledged or mortgaged, up to the value
equitable treatment of similarly situated creditors thereof;

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(5) Credits for the making, repair, safekeeping or subdivisions
preservation of personal property, on the movable
thus made, repaired, kept or possessed; Claims arising from
misappropriation,
The movables, money, or
(6) Claims for laborers' wages, on the goods breach of trust, or
securities obtained by
manufactured or the work done; malfeasance by public
the subject public
officials committed in
(7) For expenses of salvage, upon the goods officials
the performance of their
salvaged; duties
(8) Credits between the landlord and the tenant, a. Movables
arising from the contract of tenancy on shares, on
the share of each in the fruits or harvest;  So long as in
possession of
(9) Credits for transportation, upon the goods debtor (only up
carried, for the price of the contract and incidental to the value of
expenses, until their delivery and for thirty days the movable)
thereafter; b. Price of Sale (due to
lien)
(10) Credits for lodging and supplies usually a. Claims for unpaid
furnished to travellers by hotel keepers, on the price of movables  Right not lost by
movables belonging to the guest as long as such sold immobilization
of thing by
movables are in the hotel, but not for money loaned b. Claim when
movable has been destination
to the guests;  Must not have
resold by the
debtor and the lost its form,
(11) Credits for seeds and expenses for cultivation substance and
price is unpaid
and harvest advanced to the debtor, upon the fruits identity
harvested;  Right not lost by
sale with other
(12) Credits for rent for one year, upon the personal property for
property of the lessee existing on the immovable lump sum
leased and on the fruits of the same, but not on amount (Price of
money or instruments of credit; subject movable
can be
(13) Claims in favor of the depositor if the determined
proportionally)
depositary has wrongfully sold the thing deposited,
The thing pledged or
upon the price of the sale.
mortgaged
In the foregoing cases, if the movables to which the
Credits guaranteed with  Thing pledged
lien or preference attaches have been wrongfully must be in the
taken, the creditor may demand them from any a pledge or mortgage
hands of the
possessor, within thirty days from the unlawful creditor
seizure. (1922a)  Up to the value
of thing pledged
or mortgaged
Credits for making,
On Specific Movable Property On the movable made,
repair, safekeeping or
repaired, kept or
preservation of personal
Credit Preference Over/Upon possessed
property
Duties, taxes and fees Claims for laborers'
due to the State or its On the goods
wages
manufactured or the

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work done shall constitute an encumbrance on the immovable
or real right:
Expenses of salvage On goods salvaged
(1) Taxes due upon the land or building;
Credits between the
landlord and the tenant, (2) For the unpaid price of real property sold, upon
The share of each in the
arising from the the immovable sold;
fruits or harvest
contract of tenancy on
shares (3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and
Credits for contractors, engaged in the construction,
transportation, for the reconstruction or repair of buildings, canals or other
price of the contract and works, upon said buildings, canals or other works;
incidental expenses, Upon the goods carried
until their delivery and (4) Claims of furnishers of materials used in the
for thirty days construction, reconstruction, or repair of buildings,
thereafter canals or other works, upon said buildings, canals or
other works;
On the movables
(5) Mortgage credits recorded in the Registry of
Credits for lodging and belonging to the guest
Property, upon the real estate mortgaged;
supplies usually
 Such movables
furnished to travellers (6) Expenses for the preservation or improvement
are in the hotel
by hotel keepers, of real property when the law authorizes
 Not for money
loaned to the reimbursement, upon the immovable preserved or
guests improved;
Credits for seeds and
expenses for cultivation Upon the fruits (7) Credits annotated in the Registry of Property, in
and harvest advanced to harvested virtue of a judicial order, by attachments or
the debtor executions, upon the property affected, and only as
to later credits;
Upon the personal
property of the lessee (8) Claims of co-heirs for warranty in the partition
existing on the of an immovable among them, upon the real
Credits for rent for one immovable leased and on property thus divided;
year the fruits of the same
(9) Claims of donors or real property for pecuniary
 Not on money or charges or other conditions imposed upon the
instruments of donee, upon the immovable donated;
credit
Claims in favor of the (10) Credits of insurers, upon the property insured,
depositor if the for the insurance premium for two years. (1923a)
depositary has Upon the price of the sale
wrongfully sold the
thing deposited
On specific immovable property and real rights
of debtor

Credit Preference Over/Upon

Article 2242. With reference to specific immovable Taxes due upon the land
property and real rights of the debtor, the following or building
claims, mortgages and liens shall be preferred, and
Unpaid price of real Upon the immovable

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property sold sold R.A. No. 10142, Section 136. Liquidation of a
Securities Market Participant. - The foregoing
Claims of laborers, Upon said buildings, provisions of this chapter shall be without prejudice
masons, mechanics and canals or other works to the power of a regulatory agency or self-
other workmen, regulatory organization to liquidate trade-related
architects, engineers and claims of clients or customers of a securities market
contractors, engaged in participant which, for purposes of investor
the construction, protection, are hereby deemed to have absolute
reconstruction or repair priority over other claims of whatever nature or
of buildings, canals or kind insofar as trade-related assets are concerned.
other works
For purposes of this section, trade -related assets
Claims of furnishers of Upon said buildings, include cash, securities, trading right and other
materials used in the canals or other works; assets owned and used by the securities market
construction, participant in the ordinary course of this business.
reconstruction, or repair
of buildings, canals or Credit: Trade-related claims of clients or customers
other works of a securities market participant

Mortgage credits Upon the real estate Preference over trade-related assets
recorded in the Registry mortgaged
of Property Trade-related assets:

Expenses for the Upon the immovable 1. Cash


2. Securities
preservation or preserved or improved 3. Trading right
improvement of real 4. Other assets owned and used by the
property when the law securities market participant in the
authorizes ordinary course of this business
reimbursement  This special preferred credit enjoys
absolute priority over other claims and
Credits annotated in the Upon the property amends the order of preference Art. 2241
Registry of Property, in affected, and only as to and 2242.
virtue of a judicial order, later credits
by attachments or Article 2243. The claims or credits enumerated in
executions
the two preceding articles shall be considered as
mortgages or pledges of real or personal property,
Claims of co-heirs for Upon the real property
or liens within the purview of legal provisions
warranty in the partition thus divided
governing insolvency. Taxes mentioned in No. 1,
of an immovable among
article 2241, and No. 1, article 2242, shall first be
them
satisfied. (n)
Claims of donors or real Upon the immovable
property for pecuniary donated  Claims or credits enumerated in 2241
(special preferred credits on specific
charges or other movable property) and in 2242 (Special
conditions imposed upon preferred credits on specific immovable
the donee property) are deemed MORTGAGES or
PLEDGES or LIENS.
Credits of insurers for Upon the property  In all cases, taxes in 2241 and 2242 shall be
the insurance premium insured first satisfied
for two years

Article 2246. Those credits, which enjoy preference

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with respect to specific movables, exclude all others
to the extent of the value of the personal property to
which the preference refers. Article 2250. The excess, if any, after the payment
of the credits which enjoy preference with respect to
 Art. 2241-2242 enumerates special specific property, real or personal, shall be added to
preferred credits that enjoy preference with the free property which the debtor may have, for the
respect to movable or immovable property payment of the other credits. (1928a)
of the debtor.
 It excludes all other claims to the extent of  Excess after payment of credits = added to
the value of the affected property free property

Article 2247. If there are two or more credits with DE BARRETO v. VILLANUEVA
respect to the same specific movable property, they Facts: There are two liens in the property of
shall be satisfied pro rata, after the payment of respondent. On the title, there was an annotation
duties, taxes and fees due the State or any stating   that   “in   case   of   sale   under   the   foreclosure
subdivision thereof. (1926a) decree,   the   vendor’s   lien   and   the   mortgage   credit  
should be paid pro rata from   the   proceeds”.   The  
issue in this case is whether the credit should be
paid pro rata.
Article 2248. Those credits which enjoy preference
Held: No. Only taxes enjoy a similar absolute
in relation to specific real property or real rights,
preference among creditors. All the remaining
exclude all others to the extent of the value of the
thirteen classes of preferred creditors under Article
immovable or real right to which the preference
2242 enjoy no priority among themselves but must
refers.
be paid pro rata or in proportion to the amount of
the respective credit. Under Art. 2249, if there are
two or more credits with respect to specific real
Article 2249. If there are two or more credits with property or real rights, they shall be satisfied pro
respect to the same specific real property or real rata, after the payment of the taxes and assessments
rights, they shall be satisfied pro rata, after the upon the immovable property or real right. The
payment of the taxes and assessments upon the preferred creditors enumerated in Art. 2241 (2-14)
immovable property or real right. (1927a) must necessarily be convened and their claims
ascertained. To determine the proportion, a
 Among the special preferred credits proceeding   is   necessary   to   adjudicate   the   creditors’  
enumerated in Art. 2241-2242, only taxes claims.
enjoy preference.
 Those enumerated in 2241 (2) to (13) &
DBP v. CA
2242 (2) to (10) are liens, they are not
preferred over any another inter se. THERE Facts: Marinduque Mining obtained loans from PNB
IS ONLY CONCURRENCE OF CREDIT. and DBP. Upon default, the banks foreclosed the
properties mortgaged. Meanwhile, Marinduque
Mining bought construction materials from
Two-tier order of preference Remington which the former failed to pay,
Issue: Does Remington have a preferred credit over
TIER 1: Taxes, duties, and fees due on specific
DBP considering that it has a prior lien over the
movable or immovable property
materials? NO
TIER 2: All other special preferred credits Held: Only taxes enjoy an absolute preference in the
application of preferred credit. There is no hierarchy
Satisfied pari passu and pro rata out of any residual among the other preferred creditors in Art. 2242.
value of specific property to which other credits Instead, they must be paid their due in proportion to
relate the  amount  of  credit.  According  to  ARTICLE  2249  “If  
there are two or more credits with respect to the

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same specific real property or real rights, they shall year preceding the commencement of the
be satisfied pro rata, after the payment of the taxes proceedings in insolvency;
and assessments upon the immovable property or
real  rights.” (3) Expenses during the last illness of the debtor or
of his or her spouse and children under his or her
J.L. BERNARDO CONSTRUCTION v. CA parental authority, if they have no property of their
Facts: Municipal government of San Antonio Nueva own;
Ecija approved the construction of the San Antonio
(4) Compensation due the laborers or their
Public   Market,   funding   by   a   “grant-loan-equity”  
dependents under laws providing for indemnity for
financing program. Municipality agreed to assume
damages in cases of labor accident, or illness
certain expenses; however, when the cash equity
resulting from the nature of the employment;
became due, the municipality failed to pay the
winning bidders. Bidders seek the enforcement of (5) Credits and advancements made to the debtor
contractor’s  lien for support of himself or herself, and family, during
Held: Under Art, 2242, the claims of contractors the last year preceding the insolvency;
engaged in the construction, reconstruction or
repair of buildings or other works shall be preferred (6) Support during the insolvency proceedings, and
with respect to the specific building or other for three months thereafter;
immovable property constructed. However, it only
finds application when there is a concurrence of (7) Fines and civil indemnification arising from a
credits, i.e. when the same specific property of the criminal offense;
debtor is subjected to the claims of several creditors
(8) Legal expenses, and expenses incurred in the
and the value of such property of the debtor is
administration of the insolvent's estate for the
insufficient to pay in full all the creditors. In such a
common interest of the creditors, when properly
situation, the question of preference will arise, that
authorized and approved by the court;
is, there will be a need to determine which of the
creditors will be paid ahead of the others. This (9) Taxes and assessments due the national
statutory lien should then only be enforced in the government, other than those mentioned in articles
context of some kind of a proceeding where the 2241, No. 1, and 2242, No. 1;
claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency (10) Taxes and assessments due any province, other
proceedings. Since the action filed by the petitioners than those referred to in articles 2241, No. 1, and
is not an insolvency proceedings, such lien cannot be 2242, No. 1;
enforced in the present action for there is no way of
determining whether or not there exist other (11) Taxes and assessments due any city or
preferred creditors with claims over the San municipality, other than those indicated in articles
Antonio Public Market 2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused


2. Ordinary Preferred Credits
by a quasi-delict;
Article 2244. With reference to other property, real
and personal, of the debtor, the following claims or (13) Gifts due to public and private institutions of
credits shall be preferred in the order named: charity or beneficence;
(1) Proper funeral expenses for the debtor, or (14) Credits which, without special privilege, appear
children under his or her parental authority who in (a) a public instrument; or (b) in a final judgment,
have no property of their own, when approved by if they have been the subject of litigation. These
the court; credits shall have preference among themselves in
the order of priority of the dates of the instruments
(2) Credits for services rendered the insolvent by
and of the judgments, respectively. (1924a)
employees, laborers, or household helpers for one

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 Art. 2244 enumerates the ordinary 1. Reiterates that Art. 110 of Labor Code does
preferred credits that enjoy a preference, not create a lien in favor of workers or
excluding the credits that are later in order, employees for unpaid wages. They are not
but only as against the value of property not special preferred credits unless they are
subject of any special preferred credit. covered by Art. 2241 (6) or Art. 2242 (3).
 Creates rights in favor of certain creditors 2. The first preference in Art. 110 modies the
to have the free property of the debtor, or order of preference in Art. 2244 by
property not subjected to any special removing the one-year limitation in Art.
preferred credit, applied in accordance with 2242 (2) and by moving claims for unpaid
an order of preference. wages from second priority to first priority
 Value of property & treatment in the order of preference established by
o Value of specific property > total of Art. 2242
special credits  residual forms
part of free property of insolvent
debtor Article 2251. Those credits which do not enjoy any
o Value of specific property < total of preference with respect to specific property, and
special preferred credits  those which enjoy preference, as to the amount not
unsatisfied balance of credits paid, shall be satisfied according to the following
treated as provided in Art. 2251
rules:
 Taxes and assessments in Art. 2242 (9) to
(11) do not have the preference created in
(1) In the order established in article 2244;
Art. 2241 (1) and 2242(2)
 Art. 2242 (14) establishes a preference (2) Common credits referred to in article 2245 shall
among credits in the order of priority of the
dates of the instruments or of the be paid pro rata regardless of dates. (1929a)
judgments.

3. Common Credits
P.D. No. 442, Article 110. Worker preference in
Article 2245. Credits of any other kind or class, or
case of bankruptcy. In the event of bankruptcy or
by any other right or title not comprised in the four
liquidation   of   an   employer’s   business,   his   workers
preceding articles, shall enjoy no preference. (1925)
shall enjoy first preference as regards their wages
and other monetary claims, any provisions of law to
the contrary notwithstanding. Such unpaid wages
and monetary claims shall be paid in full before Article 2251. Those credits which do not enjoy any
claims of the government and other creditors may preference with respect to specific property, and
be paid. (As amended by Section 1, Republic Act No. those which enjoy preference, as to the amount not
6715, March 21, 1989) paid, shall be satisfied according to the following
rules:

(1) In the order established in article 2244;


R.A. No. 10142, Section 133. Concurrence and
Preference of Credits. - The Liquidation Plan and its (2) Common credits referred to in article 2245 shall
Implementation shall ensure that the concurrence be paid pro rata regardless of dates. (1929a)
and preference of credits as enumerated in the Civil
Code of the Philippines and other relevant laws shall  Art. 2245 enumerates common credits that
be observed, unless a preferred creditor voluntarily enjoy no preference and must only be paid
after payment of the ordinary preferred
waives his preferred right. For purposes of this
credits.
chapter, credits for services rendered by employees  There is concurrence of credits among
or laborers to the debtor shall enjoy first preference them. These are paid pro-rata or in
under Article 2244 of the Civil Code, unless the proportion to the amount of the respective
claims constitute legal liens under Article 2241 and credits, regardless of dates.
2242 thereof.  Ordinary credits are not liens – they do not
attach to any property of the debtor

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individual debtor (natural person
CORDOVA v. REYES that has become insolvent) 1
ii. Individual debtor must be insolvent
Facts: Cordova bought certificates of stock of under the ILLIQUIDITY or EQUITY
Celebrity Sports Plaza Incorporated (CSPI), which concept (ID possesses sufficient
were delivered by Philfinance to Filmanbank to hold property to cover all his debts but
foreseeing impossibility of meeting
the shares in behalf of Cordova. Philfinance was
them when they fall due)
placed under receivership, assigning respondent iii. No value requirement with respect
lawyers as liquidators. Without the knowledge and to amount of debts of insolvent
consent of Cordova and without authority from SEC, debtor
the respondents withdrew the CSPI shares from the
custodian banks and subsequently sold them.
Cordova filed a complaint. But since the shares had Sec. 2. Declaration of Policy. – It is the policy of the
been sold and the proceeds commingled with the State to encourage debtors, both juridical and
other assets of Philfinance, petitioner is now an natural persons, and their creditors to collectively
ordinary creditor for the value of the shares and realistically resolve and adjust competing claims
and  property  rights…
Held: Cordova’s   CSPI   shares   were   specific   or  
determinate movable properties. But when they b. PURPOSE: to encourage debtors and
were sold, the proceeds became generic and were creditors to collectively and realistically
resolve and adjust competing claims and
commingled with the cash and other assets of property rights
Philfinance.     Thus,  Cordova’s  claim  was   for  a  generic  
property (sum of money) and not specific or
determinate; hence, Art 2245, CC is applicable. It Sec. 4.
provides: Credits of any other kind or class, or by
any other right or title not comprised in the four (p) Insolvent shall refer to the financial condition of
preceding articles, shall enjoy no preference. a debtor that is generally unable to pay its or his
liabilities as they fall due in ordinary course of
Art 2251 (2), CC is also applicable:   “Common business or has liabilities that are greater than its or
credits referred to in Art 2245 shall be paid pro rata his assets.
regardless  of  dates.”
(s) Liabilities shall refer to monetary claims against
the  debtor…

CHAPTER 3. SUSPENSION OF PAYMENTS c. DEFINITION


i. INSOLVENT: the financial
A. General Concepts (RA 10142, Sec. 2, Sec. condition of a debtor:
94, Sec. 95, Sec. 96) 1) Balance sheet insolvency
a. SUSPENSION OF PAYMENTS: – liabilities > assets
i. A judicial insolvency proceeding by (Remedy: Liquidation)
which an individual debtor 2) Equity or illiquidity
submits, for approval by his insolvency – unable to
creditors, a proposed agreement pay liabilities as they fall
containing propositions delaying or due in the ordinary
extending the time of payment of course of business
his debts. (Remedy: Suspension of
ii. A statutory device allowing a Payments)
distressed debtor to defer payment ii. LIABILITIES: Monetary claims
of his debts by presenting a plan to
repay creditors over time
b. CHARACTERISTICS
i. Always VOLUNTARY – it may only
be availed of and instituted by an 1Partnerships and corporations may only
avail of rehabilitation

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Sec. 94. Petition. – An individual debtor who, prepaid, to all creditors named in the schedule of
possessing sufficient property to cover all his debts debts and liabilities;
but foreseeing the impossibility of meeting them
when they respectively fall due, may file a verified (e) forbidding the individual debtor from selling,
petition that he be declared in the state of transferring, encumbering or disposing in any
suspension of payments by the court of the province manner of his property, except those used in the
or city in which he has resides for six (6) months ordinary operations of commerce or of industry in
prior to the filing of his petition. He shall attach to which the petitioning individual debtor is engaged
his petition, as a minimum: (a) a schedule of debts so long as the proceedings relative to the suspension
and liabilities; (b) an inventory of assess; and (c) a of payments are pending;
proposed agreement with his creditors.
(f) prohibiting the individual debtor from making
a) What to file? Verified petition to be any payment outside of the necessary or legitimate
declared in the state of suspension of expenses of his business or industry, so long as the
payments proceedings relative to the suspension of payments
b) Who may file? Individual debtor are pending; an
c) When to file? When there debtor possesses
sufficient property to cover his debts but (g) appointing a commissioner to preside over the
foreseeing the impossibility of meeting creditors' meeting.
them when they fall due
d) Where to file? Province or city where f) Contents of ORDER
individual debtor resides for 6 months prior i. Call a meeting of all creditors in the
to the filling of the petition schedule of debts and liabilities
e) Required Attachments: 1) Period:   15≥x≥40   from  
iii. Schedule of debts and liabilities date of Order
iv. Inventory of Assets 2) Designate date, time and
v. Proposed agreement with creditors place of meeting
ii. Direct creditors to prepare and
present written evidence of their
Sec. 95. Action of the Petition. - If the court finds claims
the petition sufficient in form and substance, it shall, iii. Direct publication of order in a
within five (5) working days from the filing of the newspaper of general circulation
petition, issue an Order: 1) Where published?
Province or city in which
(a) calling a meeting of all the creditors named in the petition is filed
schedule of debts and liabilities at such time not less 2) Period? Once a week for
2 consecutive weeks
than fifteen (15) days nor more than forty (40) days
3) When published? First
from the date of such Order and designating the publication made within
date, time and place of the meeting; 7 days from issuance of
order
(b) directing such creditors to prepare and present iv. Direct clerk of court to send a copy
written evidence of their claims before the of order to creditors named in the
scheduled creditors' meeting; schedule of debts and liabilities
v. Forbidding the individual debtor,
(c) directing the publication of the said order in a while suspension of payments
newspaper of general circulation published in the proceedings is pending, from:
province or city in which the petition is filed once a 1) Selling
2) Transferring
week for two (2) consecutive weeks, with the first
3) Encumbering
publication to be made within seven (7) days from 4) Disposing
the time of the issuance of the Order; Except those used in the ordinary
operations of commerce or of industry in
(d) directing the clerk of court to cause the sending
which the petitioning individual debtor is
of a copy of the Order by registered mail, postage
engaged.

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vi. Prohibiting the individual debtor Exception: Properties held as security by secured
from making any payment outside creditors shall not be subject of suspension order
of the necessary or legitimate
expenses of his business or
industry
vii. Appointing a Commissioner to When is a suspension order ineffective?
preside  over  creditor’s  meeting
I. Automatic Stay 1. After lapse of 3 months without approval of
Section 96. Actions Suspended. - proposed agreement
No creditor shall sue or institute proceedings to 2. Proposed agreement is denied
collect his claim from the debtor from the time of the
filing of the petition for suspension of payments and
for as long as proceedings remain pending except: III. Injunction Against Debtor
(a) those creditors having claims for
personal labor, maintenance, expense of last Sec. 95. Action on the Petition. – If the court finds the
illness and funeral of the wife or children of petition sufficient in form and substance, it shall,
the debtor incurred in the sixty (60) days
within five (5) working days from the filing of the
immediately prior to the filing of the
petition; and petition, issue an Order:
(b) secured creditors
General Rule: No creditor shall sue or institute (e) forbidding the individual debtor from selling,
proceedings to collect his claims from the debtor transferring, encumbering or disposing in any
manner of his property, except those used in the
 Period: From time of filing of petition for ordinary operations of commerce or of industry in
suspension of payments and as long as which the petitioning individual debtor is engaged
proceedings remain pending so long as the proceedings relative to the suspension
Exceptions: of payments are pending;

1. Creditors having claims for: (f) prohibiting the individual debtor from making
a. Personal labor any payment outside of the necessary or legitimate
b. Maintenance
c. Expense of last illness expenses of his business or industry, so long as the
d. Funeral of the wife or children of proceedings relative to the suspension of payments
the debtor incurred in the 60 days are pending
immediately prior to the filing of
petition
2. Secured creditors
Injunction against debtor against:

II. Suspension Order 1. General Rule: Selling, transferring,


encumbering, or disposing, in any manner,
Sec. 96. Actions Suspended. – Upon motion filed by of his property
the individual debtor, the court may issue an order Exception: Those used in the ordinary
suspending any pending execution against the operation of commerce or of industry in
individual debtor. Provided, That properties held as which the individual debtor is engaged
security by secured creditors shall not be the subject
2. Making any payment outside of the
of such suspension order. The suspension order necessary or legitimate expenses of his
shall lapse when three (3) months shall have passed business or industry.
without the proposed agreement being accepted by
the creditors or as soon as such agreement is denied. B. Commissioner
Sec. 95. Action of the Petition. - If the court finds
General Rule: The court issues an order suspending the petition sufficient in form and substance, it shall,
any pending execution against the individual debtor within five (5) working days from the filing of the
petition, issue an Order:
 When? Upon motion filed by the individual
debtor

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(g) appointing a commissioner to preside over the liabilities of the debtor mentioned in the petition;
creditors' meeting. and
(e) After the result of the voting has been
 Appointment of commissioner announced, all protests made against the majority
vote shall be drawn up, and the commissioner and
the individual debtor together with all creditors
Sec.   97.   Creditors’   Meeting.   The commissioner taking part in the voting shall sign the affirmed
propositions.
appointed by the court shall preside over the
No creditor who incurred his credit within ninety
meeting and the clerk of court shall act as the (90) days prior to the filing of the petition shall be
secretary  thereof… entitled to vote.
DOUBLE MAJORITY: Concurrence of the ff.:
(b) The commissioner shall examine the written
evidence of the claims. If the creditors present hold 1. As to number of creditors – two-thirds (2/3)
at least three-fifths (3/5) of the liabilities of the of the creditors voting approve the proposed
individual debtor, the commissioner shall declare agreement; and
the meeting open for business; 2. As to value of the claims – the claims
represented by the majority vote amount to at
(e) After the result of the voting has been least three-fifths (3/5) of the total liabilities of
the debtor.
announced, all protests made against the majority
vote shall be drawn up, and the commissioner and
the individual debtor together with all creditors Sec. 99. Rejection of the Proposed Agreement. –
taking part in the voting shall sign the affirmed
propositions. The proposed agreement shall be deemed rejected if
the number of creditors required for holding a
meeting do not attend thereat, or if the two (2)
majorities mentioned in Section 97 hereof are not in
Participation of Commissioner:
favor thereof. In such instances, the proceeding shall
1. Examine written evidence of claims be terminated without recourse and the parties
2. Commissioner signs affirmed propositions concerned shall be at liberty to enforce the rights
which may correspond to them.

C. CREDITORS’  MEETING
Sec.   97.   Creditors’   Meeting. – The presence of
creditors holding claims amounting to at least three- WHEN PROPOSED AGREEMENT IS DEEMED
fifths (3/5) of the liabilities shall be necessary for REJECTED:
holding a meeting. The commissioner appointed by
the court shall preside over the meeting and the 1. No quorum
clerk of court shall act as the secretary thereof, 2. Double-majority in Sec. 97 not in favor of
subject to the following rules: the proposed agreement
(a) The clerk shall record the creditors present and Effect of Rejection of Proposed Agreement =
amount of their respective claims; Proceedings terminated  Parties shall be at liberty
(b) The commissioner shall examine the written
to enforce the rights which may correspond to them
evidence of the claims. If the creditors present hold
at least three-fifths (3/5) of the liabilities of the
individual debtor, the commissioner shall declare
the meeting open for business;
Sec. 100. Objections. - If the proposal of the
(c) The creditors and individual debtor shall discuss
individual debtor, or any amendment thereof made
the propositions in the proposed agreement and put
during the creditors' meeting, is approved by the
them to a vote;
majority of creditors in accordance with Section 97
(d) To form a majority, it is necessary:
hereof, any creditor who attended the meeting and
(1) that two-thirds (2/3) of the creditors voting
who dissented from and protested against the vote
unite upon the same proposition; and
of the majority may file an objection with the court
(2) that the claims represented by said majority vote
within ten (10) days from the date of the last
amount to at least three-fifths (3/5) of the total
creditors' meeting. The causes for which objection

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may be made to the decision made by the majority be carried out and all parties bound thereby to
during the meeting shall be: (a) defects in the call for comply with its terms.
the meeting, in the holding thereof and in the
deliberations had thereat which prejudice the rights The court may also issue all orders which may be
of the creditors; (b) fraudulent connivance between necessary or proper to enforce the agreement on
one or more creditors and the individual debtor to
motion of any affected party. The Order confirming
vote in favor of the proposed agreement; or
(c) fraudulent conveyance of claims for the purpose the approval of the proposed agreement or any
of obtaining a majority. The court shall hear and amendment thereof made during the creditors'
pass upon such objection as soon as possible and in meeting shall be binding upon all creditors whose
a summary manner. claims are included in the schedule of debts and
In case the decision of the majority of creditors to liabilities submitted by the individual debtor and
approve the individual debtor's proposal or any who were properly summoned, but not upon: (a)
amendment thereof made during the creditors'
those creditors having claims for personal labor,
meeting is annulled by the court, the court shall
declare the proceedings terminated and the maintenance, expenses of last illness and funeral of
creditors shall be at liberty to exercise the rights the wife or children of the debtor incurred in the
which may correspond to them. sixty (60) days immediately prior to the filing of the
petition; and (b) secured creditors who failed to
attend the meeting or refrained from voting therein.
OBJECTIONS: CAUSES
Court Order:
1. Defects in the call for the meeting, in the
holding thereof and in the deliberations 1. Court orders that agreement be carried out
had thereat which prejudice the rights of and all parties are bound to comply with the
the creditors; proposed agreement
2. Fraudulent connivance between one or 2. Court may issue all orders which may be
more creditors and the individual debtor to necessary or proper to enforce the
vote in favor of the proposed agreement; or agreement on motion of any affected party
3. Fraudulent conveyance of claims for the
purpose of obtaining a majority.
General Rule: The approved proposed agreement
D. Proposed Agreement or any amendment thereof shall be binding upon all
Sec. 94. Petition. – An individual debtor who, creditors whose claims are included in the schedule
possessing sufficient property to cover all his debts of debts and liabilities submitted by the debtor and
but foreseeing the impossibility of meeting them who were properly summoned.
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 resides for six (6) months Exceptions:
prior to the filing of his petition. He shall attach to
1. Creditors having claims for:
his petition, as a minimum: (a) a schedule of debts
a. Personal labor
and liabilities; (b) an inventory of assess; and (c) a b. Maintenance
proposed agreement with his creditors. c. Expense of last illness
d. Funeral of the wife or children of
the debtor incurred in the 60 days
immediately prior to the filing of
Sec. 101. Effects of Approval of Proposed petition
Agreement. – If the decision of the majority of the 2. Secured creditors who failed to attend the
creditors to approve the proposed agreement or any meeting or refrained from voting therein
amendment thereof made during the creditors'
meeting is uphold by the court, or when no
Sec. 102. Failure of Individual Debtor to Perform
opposition or objection to said decision has been
Agreement. – If the individual debtor fails, wholly
presented, the court shall order that the agreement
or in part, to perform the agreement decided upon

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at the meeting of the creditors, all the rights which Effect: Such persons shall not be bound by any
the creditors had against the individual debtor agreement  during  the  creditors’  meeting
before the agreement shall revest in them. In such
case the individual debtor may be made subject to
the insolvency proceedings in the manner
Sec. 101. Effects of Approval of Proposed
established by this Act.
Agreement. – The Order confirming the approval of
Effect of failure of ID to perform agreement = All the proposed agreement or any amendment thereof
the rights which the creditors had against the made during the creditors' meeting shall be binding
individual debtor before the proposed agreement upon all creditors whose claims are included in the
shall be revested in the creditors schedule of debts and liabilities submitted by the
individual debtor and who were properly
E. Treatment of Claims summoned, but not upon: (a) those creditors having
Sec. 96. Actions Suspended. – Upon motion filed by claims for personal labor, maintenance, expenses of
the individual debtor, the court may issue an order last illness and funeral of the wife or children of the
suspending any pending execution against the debtor incurred in the sixty (60) days immediately
individual debtor. Provide, That properties held as prior to the filing of the petition; and (b) secured
security by secured creditors shall not be the subject creditors who failed to attend the meeting or
of such suspension order. The suspension order refrained from voting therein.
shall lapse when three (3) months shall have passed
without the proposed agreement being accepted by I. Secured Creditor Claims
the creditors or as soon as such agreement is denied.

No creditor shall sue or institute proceedings to Sec. 4 (kk) Secured creditor shall refer to a creditor
collect his claim from the debtor from the time of the with a secured claim.
filing of the petition for suspension of payments and
(jj) Secured claim shall refer to a claim that is
for as long as proceedings remain pending except:
secured by a lien.
(a) those creditors having claims for personal labor,
(t) Lien shall refer to a statutory or contractual claim
maintenance, expense of last illness and funeral of
or judicial charge on real or personal property that
the wife or children of the debtor incurred in the
legality entities a creditor to resort to said property
sixty (60) days immediately prior to the filing of the
for payment of the claim or debt secured by such
petition; and
lien.
(b) secured creditors.
a. The claims of secured creditors are not
covered by the automatic stay of all suits
and proceedings for he collection of claims
against the debtor.
Sec. 98. Persons Who May Refrain From Voting. –
b. The property held as security is not covered
Creditors who are unaffected by the Suspension by any suspension order that may be issued
Order may refrain from attending the meeting and against pending executions against the
from voting therein. Such persons shall not be debtor.
bound by any agreement determined upon at such c. Secured creditors need not attend or vote
meeting, but if they should join in the voting they during   the   creditors’   meeting   and   are   not  
shall be bound in the same manner as are the other bound by the proposed agreement
approved during the meeting, unless they
creditors.
waive this right by voting during the
meeting.
d. Secured creditors are not bound by the
proposed agreement confirmed by the
Persons who may refrain from voting: Creditors court, unless they waive this right by voting
who are unaffected by the Suspension Order during the meeting.

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II. Exempt Claims view to ensure or maintain certainly and
The creditors having claims for personal labor, predictability in commercial affairs, preserve and
maintenance, expenses of last illness and funeral of maximize the value of the assets of these debtors,
the wife or children of the debtor incurred in the recognize creditor rights and respect priority of
claims, and ensure equitable treatment of
sixty (60) days immediately prior to the filing of the
creditors who are similarly situated. When
petition rehabilitation is not feasible, it is in the interest of
the State to facilities a speedy and orderly
a. The exempt claims are not covered by the liquidation of these debtor's assets and the
automatic stay of all suits and proceedings settlement of their obligations.
for the collection of claims against the
debtor.
b. Exempt creditors need not attend or vote REHABILITATION: the restoration of the debtor to
during   the   creditors’   meeting   and   are   not   a condition of successful operation and solvency, if it
bound by the proposed agreement is shown that:
approved during the meeting, unless they 1. Its continuance of operation is
waive this right by voting during the economically feasible; and
meeting. 2. Its creditors can recover by way of the
c. Exempt creditors are not bound by the present value of payments projected in
proposed agreement confirmed by the the plan more if the debtor continues as a
court, unless they waive this right by voting growing concern than if it is immediately
during the meeting. liquidated.
III. Excluded Claims a. Value of recovery plan as a growing
Creditors whose claims are not included in the concern VS. value of recovery if
schedule of debts and liabilities submitted by the company is liquidated
individual debtor and creditors who were not
properly summoned. Purpose - To enable an insolvent debtor to
gain a new lease on life while
a. Creditors whose claims are excluded are not allowing creditors to be paid from
bound by the proposed agreement the  debtor’s  earnings
confirmed by the court.
b. Subject to automatic stay Who are - Employees
c. Subject to the suspension order benefitted? - Creditors
- Owners
- General public
IV. REHABILITATION
● Rehabilitation proceedings
A. General Concepts - Both equitable and rehabilitative purposes

R.A. No. 10142 Equitable - Provide for the efficient


An Act Providing for the Rehabilitation or and equitable
Liquidation of Financially Distressed Enterprises distribution of an
and Individuals insolvent   debtor’s  
remaining assets to its
Sec. 1. Title. - This Act shall be known as the creditors
“Financial   Rehabilitation   and   Insolvency   Act  
(FRIA)  of  2010.” Rehabilitative - Provide the insolvent
debtor with a fresh start
R.A. No. 10142, Sec. 2. Declaration of Policy. - It > How: By relieving it
is the policy of the State to encourage debtors, of the weight of its
both juridical and natural persons, and their outstanding debts
creditors to collectively and realistically resolve and permitting it to
and adjust competing claims and property rights. reorganize its
In furtherance thereof, the State shall ensure a affairs
timely, fair, transparent, effective and efficient
rehabilitation or liquidation of debtors. The
rehabilitation or liquidation shall be made with a ● Doctrine  of  “equality  is  equity”

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- During rehabilitation, the assets of the debtor are > Debtor is illiquid: possessing sufficient
held in trust property to cover all its liabilities but
> Purpose: for the equal benefit of all foreseeing the impossibility of meeting
creditors to preclude one from obtaining them when they respectively fall due
an advantage or preference over another or
by the expediency of an attachment, - Balance sheet concept
execution, or otherwise > Assets of the debtor are insufficient to
- Key   phrase   as   between   creditors:   “equality   is   cover its liabilities
equity”
> All the creditors should stand on equal ● Conditions in the rehabilitation of the insolvent
footing debtor that must be present in every case
> Not one of them should be given 1. Rehabilitation of insolvent debtor is
preference economically feasible
>> How: By paying one or some of 2. Rehabilitation results in better present value
them ahead of the others recovery for the creditors

● FRIA ● Individual debtor that is not a sole proprietorship


- Expanded the definition of rehabilitation - May not institute voluntary rehabilitation
provided by jurisprudence proceedings
> How: By including 2 conditions: > Reason: Purpose of rehabilitation is to
>> 1. Economic feasibility restore and reinstate a debtor to its
>> 2. Present value recovery former position of successful operation
- Rehabilitation not proper - Available courses of action:
> If the restoration of the insolvent debtor > Petition for suspension of payments
to a condition of successful operation and or
solvency is not economically feasible and > Petition for liquidation
does not result in better present value
recovery for the creditors ●   Petition to Initiate Voluntary Proceedings by
> Recourse: Liquidation Debtor

● 3 Modes of rehabilitation provided by FRIA PROCEDURE:


- 1. Court-supervised rehabilitation - When may voluntary proceedings be initiated by
- 2. Pre-negotiated rehabilitation the debtor?
- 3. Out-of-court rehabilitation Debtor When Initiated

B. Court-Supervised Rehabilitation Sole - When approved by the owner


proprietorship
Somera Notes:
Partnership - When approved by a majority
● Court-supervised rehabilitation of the partners
- Judicial insolvency proceeding
- May either be voluntary or involuntary Corporation - 1. When approved by a
majority vote of the board of
1. Voluntary Proceedings directors or trustees and
- 2. authorized by the vote of:
● Voluntary rehabilitation proceedings > stockholders representing at
- Judicial insolvency proceedings instituted by a least 2/3 of the outstanding
debtor (juridical debtor) that may be: capital   stock   in   a   stockholder’s    
> 1. Sole proprietorship meeting duly called for the
> 2. Partnership purpose
> 3. Corporation or
- Value requirement with respect to the amount of > at least 2/3 of the members
debts of the insolvent debtor (nonstock corporation) in a
> Not imposed by FRIA member’s   meeting   duly   called  
for the purpose
● Insolvency of debtor must be either under the
- Illiquidity concept

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- How may an insolvent debtor initiate voluntary > Circumstance requiring rehabilitation is
proceedings? alleged and thereafter established
> By filing a verified petition for - FRIA imposes a value requirement on the
rehabilitation with the court and on the amount of claims without regard to the number
grounds specifically provided in the Act. of creditors who file
- Purpose of verified petition > at least P1million
> To establish the insolvency of the debtor or
and the viability of its rehabilitation > at least 25% of the subscribed capital
- The following must be included (as a minimum) as stock   or   partners’   contributions
an attachment or as part of the body of the petition: (whichever is higher)
> 1. Identification of the:
>> debtor ● Basis of calculation
>>  debtor’s  principal  activities   Status of being Value requirement for
>>  debtor’s  addresses insolvent rehabilitation
> 2. Statement of the fact of and cause of the proceedings
>>  debtor’s  insolvency  or  
>> inability to pay its obligations as Calculated based on Calculated based on
they become due liabilities (monetary creditor’s  claims
> 3. Specific relief sought claims)
> 4. Grounds of the petition
> 5. Other information that may be required
under the Act depending on the form of ● Circumstances requiring rehabilitation
relief requested 1. No genuine issue of fact and law on the claims of
>   6.   a.   Schedule   of   the   debtor’s   debts   and   the creditors and that the due and demandable
liabilities; and payments have not been made for at least 60
b. list of creditors with their days
>> addresses or
>> amounts of claims 2. Debtor has failed generally to meet its liabilities
>> collaterals, or securities (if any) as they fall due (illiquidity concept)
> 7. Inventory of all its assets or
> 8. Rehabilitation Plan 3. A creditor, other than the petitioners, has
> 9. Names of at least 3 nominees to the initiated foreclosure proceedings against the
position of rehabilitation receiver debtor that will prevent the debtor from paying
> 10. Other documents required to be filed its debts as they become due (illiquidity
with the petition concept) or will render it insolvent (balance
- When may a group of debtors jointly file a petition sheet concept)
for rehabilitation?
> 1. When one or more of its members ●  Petition to Initiate Involuntary Proceedings
foresee the impossibility of meeting debts
when they respectively fall due, and PROCEDURE:
> 2. When the financial distress would likely - 1. Creditor/s' petition for rehabilitation verified
adversely affect the financial condition and/or > Purpose: To establish the substantial
operations of the other members of the group likelihood that the debtor may be
and/or the participation of the other members of the rehabilitated
group is essential under the terms and conditions of - 2. The following shall be included in the petition:
the proposed Rehabilitation Plan. > a. Identification of the:
>> debtor
2. Involuntary Proceedings >>  debtor’s  principal  activities
>>  debtor’s  address
● Involuntary rehabilitation proceedings > b. Circumstances sufficient to support a
- Judicial insolvency proceedings petition to initiate involuntary
- Instituted by a creditor or group of creditors rehabilitation proceedings under Sec. 13 of
against an insolvent debtor, provided: the FRIA
> Requirements of the law on number of > c. Specific relief sought
creditors or value of claims, or both is met; > d. Rehabilitation Plan
and > e. Names of at least 3 nominees to the
position of rehabilitation receiver

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> f. Other information that may be required Order. - The rehabilitation proceedings shall
under this Act depending on the form of commence upon the issuance of the
relief requested Commencement Order, which shall:
> g. Other documents required to be filed with the
petition (a) identify the debtor, its principal business or
activity/ies and its principal place of business;
3. Provisions Common to Voluntary and
Involuntary Rehabilitation Proceedings (b) summarize the ground/s for initiating the
proceedings;
a. Commencement Order
(c) state the relief sought under this Act and any
● Action on the petition requirement or procedure particular to the relief
sought;
PROCEDURE:
1. File a petition for rehabilitation (d) state the legal effects of the Commencement
2. If court finds petition: Order, including those mentioned in Section 17
a) sufficient in form and substance = issue hereof;
a Commencement Order (CO) w/in 5
working days from filing date (e) declare that the debtor is under rehabilitation;
b) deficient in form or substance =
(discretionary) give the petitioner/s a (f) direct the publication of the Commencement
reasonable prd. of time within which: Order in a newspaper of general circulation in the
i. to amend or supplement the Philippines once a week for at least two (2)
petition, or consecutive weeks, with the first publication to be
ii. to submit such documents as made within seven (7) days from the time of its
may be necessary or proper to issuance;
put the petition in proper order
iii. 5 working days for the issuance (g) If the petitioner is the debtor direct the service
of CO shall be reckoned from by personal delivery of a copy of the petition on
the filing date of (i) or (ii). each creditor holding at least ten percent (10%) of
the total liabilities of the debtor as determined
● Commencement Order from the schedule attached to the petition within
- Operates as a preservative measure five (5) days; if the petitioner/s is/are creditor/s,
> To ensure that there is, and there will direct the service by personal delivery of a copy of
continue to be, a substantial likelihood for the petition on the debtor within five (5) days;
successful rehabilitation.
- Upon issuance: (h) appoint a rehabilitation receiver who may or
> Powers and functions of the not be from among the nominees of the
Rehabilitation Receiver are vested petitioner/s and who shall exercise such powers
>> with specific emphasis on its and duties defined in this Act as well as the
right to review and obtain all procedural rules that the Supreme Court will
records of the debtor promulgate;
- After commencement date:
1. All extrajudicial attempts to collect or (i) summarize the requirements and deadlines for
enforce a claim, all setoffs of claims, and creditors to establish their claims against the
the perfection of all liens, are voided. debtor and direct all creditors to their claims with
2. All legal proceedings by and against the the court at least five (5) days before the initial
debtor, except those excepted by the FRIA hearing;
or by order of the rehabilitation court, are
consolidated in the rehabilitation court. (j) direct Bureau of internal Revenue (BIR) to file
>> Indirect contempt of court: Any attempt to and serve on the debtor its comment on or
circumvent its mandate constitutes this. opposition to the petition or its claim/s against the
debtor under such procedures as the Supreme
b. Stay or Suspension Order Court provide;

R.A. No. 10142, Sec. 16. Commencement of (k) prohibit the debtor's suppliers of goods or
Proceedings and Issuance of a Commencement services from withholding the supply of goods and

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services in the ordinary course of business for as in their charters or other laws to the contrary.
long as the debtor makes payments for the
services or goods supplied after the issuance of the
Commencement Order; 1) General Concepts

(l) authorize the payment of administrative Stay/Suspension Order covers:


expenses as they become due; 1. all actions and proceedings in court for
enforcement of claims against the debtor or
(m) set the case for initial hearing, which shall not property
be more than forty (40) days from the date of 2. provisional remedies
filing of the petition for the purpose of 3. injunction against the debtor from
determining whether there is substantial transferring, encumbering, selling
likelihood for the debtor to be rehabilitated; (exception: ordinary course of
business/day-to-day operations debtor has
(n) make available copies of the petition and been engaged in)
rehabilitation plan for examination and copying by
any interested party; 2 Distinct orders contained in the Stay or
Suspension Order:
(o) indicate the location or locations at which 1. Stay order
documents regarding the debtor and the 2. Injunction
proceedings under Act may be reviewed and
copied; Order Stay order Injunction

(p) state that any creditor or debtor who is not the Against Against the Against the debtor
petitioner, may submit the name or nominate any whom creditor
other qualified person to the position of
rehabilitation receiver at least five (5) days before Effect 1. Suspending all 1. Prohibiting the
the initial hearing; actions or sale,
proceedings, in encumbrance,
(q) includes Stay or Suspension Order which shall: court or transfer or
otherwise, for the disposal in any
(1) suspend all actions or proceedings, in court or enforcement of manner of any of
otherwise, for the enforcement of claims against claims against the its properties
the debtor; debtor; and except in the
ordinary course of
(2) suspend all actions to enforce any judgment, 2. Suspending all business; and
attachment or other provisional remedies against actions to enforce
the debtor; any judgment, 2. Prohibiting any
attachment or payment of its
(3) prohibit the debtor from selling, encumbering, other provisional liabilities
transferring or disposing in any manner any of its remedies against outstanding as of
properties except in the ordinary course of the debtor. the
business; and commencement
date except as
(4) prohibit the debtor from making any payment provided in the
of its liabilities outstanding as of the FRIA
commencement date except as may be provided
herein. Purpose - To enable the - To ensure that
receiver to the debtor will not
R.A. No. 10142, Sec. 20. Application of Stay or effectively commit any act
Suspension Order to Government Financial exercise its that defrauds its
Institutions. - The provisions of this Act powers free from creditors or
concerning the effects of the Commencement any judicial or results in an
Order and the Stay or Suspension Order on the extrajudicial undue preference
suspension of rights to foreclose or otherwise interference that of creditors.
pursue legal remedies shall apply to government might unduly
financial institutions, notwithstanding provisions hinder or prevent

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the rescue of the suspended effective upon the appointment of a
debtor management committee, rehabilitation receiver,
board, or body in accordance which the provisions
- To give enough of Presidential Decree No. 902-A.
breathing space
for the receiver to 2. Secured creditors retain their preference over
make the unsecured creditors, but enforcement of such
business of the preference is equally suspended upon the
debtor viable appointment of a management committee,
again, without rehabilitation receiver, board, or body. In the event
having to divert that the assets of the corporation, partnership, or
attention and association are finally liquidated, however, secured
resources to and preferred credits under the applicable
litigations in provisions of the Civil Code will definitely have
various fora. preference over unsecured ones.

In other words, once a management committee,


● If an action or proceeding were to proceed, and if rehabilitation receiver, board or body is appointed
the  creditor’s  claim  were  to  be  granted pursuant to P.D. 902-A, all actions for claims against
- The creditor would be in a position to assert a a distressed corporation pending before any court,
preference over other creditors tribunal, board or body shall be suspended
- The debtor would be compelled to dispose of its accordingly. But this suspension shall not prejudice
properties in order to satisfy the claim or render ineffective the status of a secured creditor
- It would in effect be a defiance of the injunction as compared totally unsecured creditor. It merely
on selling, encumbering, transferring, or provides that all actions for claims against the
disposing   in   any   manner   any   of   the   debtor’s   corporation, partnership or association shall be
properties except in the ordinary course of suspended.
business.
> Example of selling, encumbering, Lecture Notes:
transferring, or disposing in the ordinary
course of business: selling inventory ● RCBC v. IAC (1999)
- Decided under P.D. 902-A
Rizal Commercial Banking Corporation v. - Still a valid case law under the FRIA
Intermediate Appellate Court (1999) - Its enumeration of the guidelines in the
treatment of claims has been enshrined in the
FACTS: BF Homes filed a petition for rehabilitation FRIA.
and for declaration of suspension of payments with
the SEC. Among its creditors was RCBC. The latter Sobrejuanite v. ASB Development Corporation
requested the Sheriff to extra-judicially foreclose the (2005)
real estate mortgage on some properties of BF
Homes. An auction sale was held and RCBC turned FACTS: Spouses Sobrejuanite filed a Complaint for
out to be the highest bidder. BF Homes filed a rescission of contract to sell, refund of payments and
motion to annul the sale. Meanwhile, SEC appointed damages, against ASBDC before the HLURB. They
a Management Committee for BF Homes. The court entered into a Contract to Sell with the latter over a
set aside the acquisition of title by the RCBC ruling condominium unit and a parking space. Despite full
that whenever a distressed corporation asks the SEC payment and demands, ASBDC failed to deliver the
for rehabilitation and suspension of payments, property on or before the agreed date. ASBDC filed a
preferred creditors may no longer assert such motion to dismiss or suspend proceedings in view of
preference. approval by the SEC of the rehabilitation plan of ASB
Group of Companies, which includes ASBDC.
HELD: The court thus clarified in this case the rule of
thumb to be applied. HELD: The purpose for the suspension of the
proceedings is to prevent a creditor from obtaining
1. All claims against corporations, partnerships, or an advantage or preference over another and to
associations that are pending before any court, protect and preserve the rights of party litigants as
tribunal, or board, without distinction as to whether well as the interest of the investing public or
or not a creditor is secured or unsecured, shall be creditors. Such suspension is intended to give

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enough breathing space for the management 2) Exceptions to Stay or Suspension Order
committee or rehabilitation receiver to make the
business viable again, without having to divert R.A. No. 10142, Sec. 18. Exceptions to the Stay
attention and resources to litigations in various fora. or Suspension Order. - The Stay or Suspension
The suspension would enable the management Order shall not apply:
committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or (a) to cases already pending appeal in the
extra-judicial interference that might unduly hinder Supreme Court as of commencement date
or   prevent   the   “rescue”   of   the   debtor   company.    To   Provided, That any final and executory judgment
allow such other action to continue would only add arising from such appeal shall be referred to the
to the burden of the management committee or court for appropriate action;
rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims (b) subject to the discretion of the court, to cases
against the corporation instead of being directed pending or filed at a specialized court or quasi-
toward its restructuring and rehabilitation. judicial agency which, upon determination by the
court is capable of resolving the claim more
In Finasia Investments and Finance Corp. v. CA and quickly, fairly and efficiently than the court:
Arranza v. B.F. Homes, Inc.,  the  SC  construed  “claim”   Provided, That any final and executory judgment
to refer only to debts or demands pecuniary in of such court or agency shall be referred to the
nature or to actions involving monetary court and shall be treated as a non-disputed claim;
considerations.
(c) to the enforcement of claims against sureties
On the other hand, the Interim Rules of Procedure and other persons solidarily liable with the debtor,
on Corporate Rehabilitation  (2000)  define  “claim”  as   and third party or accommodation mortgagors as
referring to all claims or demands, of whatever well as issuers of letters of credit, unless the
nature or character against a debtor or its property, property subject of the third party or
whether for money or otherwise. The definition is accommodation mortgage is necessary for the
all-encompassing as it refers to all actions whether rehabilitation of the debtor as determined by the
for money or otherwise. There are no distinctions court upon recommendation by the rehabilitation
or exemptions. receiver;

The complaint filed by Sobrejuanite is a claim as (d) to any form of action of customers or clients of
defined under the Interim Rules of Procedure on a securities market participant to recover or
Corporate Rehabilitation. Even under the rulings in otherwise claim moneys and securities entrusted
the two aforementioned cases, the complaint for to the latter in the ordinary course of the latter's
rescission of contract to sell, refund of payments and business as well as any action of such securities
damages would fall under the category of claim market participant or the appropriate regulatory
considering that it is for pecuniary considerations. agency or self-regulatory organization to pay or
settle such claims or liabilities;
Lecture Notes:
(e) to the actions of a licensed broker or dealer to
● Sobrejuanite v. ASBDC (2005) sell pledged securities of a debtor pursuant to a
- Decided under P.D. 902-A and the Interim Rules securities pledge or margin agreement for the
of Procedure on Corporate Rehabilitation settlement of securities transactions in accordance
(2000) with the provisions of the Securities Regulation
- If the case were decided under the FRIA, the Code and its implementing rules and regulations;
outcome would have been the same since the
FRIA’s  definition  of  “claims”  is  broader. (f) the clearing and settlement of financial
- FRIA’s   definition   of   “claims”   is   similar   to   but   transactions through the facilities of a clearing
broader than that of the interim rules agency or similar entities duly authorized,
> Reason: The FRIA further elaborates on the registered and/or recognized by the appropriate
types of claims: regulatory agency like the Bangko Sentral ng
>>  “liquidated  or  unliquidated,  fixed   Pilipinas (BSP) and the SEC as well as any form of
or contingent, matured or actions of such agencies or entities to reimburse
unmatured, disputed or themselves for any transactions settled for the
undisputed” debtor; and

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(g) any criminal action against individual debtor goods and services in the ordinary course of
or owner, partner, director or officer of a debtor business for as long as the debtor makes
shall not be affected by any proceeding commend payments for the services or goods supplied
under this Act. after the issuance of CO
8. authorize the payment of admin expenses
COMMENCEMENT PROCEEDINGS AND ISSUANCE as they become due;
OF COMMENCEMENT ORDER 9. initial hearing set not more than 40 days
from the petition’s     filing   date for the
PROCEDURE: purpose of determining whether there is
Rehab proceedings commence upon issuance of CO. substantial likelihood for the debtor to be
The CO shall: rehabilitated;
1. identify the debtor, its principal business or 10. make available copies of the petition and
activity/ies and its principal place of rehab plan for examination and copying by
business; any interested party;
2. summarize the ground/s for initiating the 11. indicate the location/s at which documents
proceedings; regarding the debtor and the proceedings
3. state the relief sought and any requirement may be reviewed and copied;
or procedure particular to the relief sought; 12. state that any creditor/debtor who is not
4. state the legal effects of the CO the petitioner, may nominate any other
5. declare that the debtor is under rehab; qualified person to the position of rehab
6. direct the following: receiver at least 5 days before the initial
a. publication of the CO in a hearing;
newspaper of general circulation in 13. includes Stay or Suspension Order
the Phils:
i. 1x/week for at least 2
consecutive weeks, ● Recall  that:  Surety’s  liability  to  the  creditor  is
ii. with the first publication to - Primary;
be made within 7 days - Direct; and
from the time of its - Absolute
issuance;
b. service by personal delivery of a ● According to Prof. Somera, we need not focus on
copy of the petition: paragraphs (d), (e), and (f) of Section 18 of the
i. on each creditor holding at FRIA.
least   10%   of   the   debtor’s  
total liabilities ● Stay or Suspension Order
(determined from the - Acts as a(n):
sched attached to the > Stay order against the creditors
petition) within 5 days (if > Injunction against the debtor
petitioner is the debtor) >> Concept of administrative
ii. on the debtor within 5 expenses becomes critical
days (if petitioner/s is/are - General Rule: All claims for administrative
creditor/s) expenses are excepted from the application of
c. appointment of rehab receiver who the Stay or Suspension Order
may or not be from among the - Since the purpose of rehabilitation is to restore
petitioner’s  nominees and reinstate a debtor to its former position of
d. summary of requirements & successful operation and solvency
deadlines for creditors to establish > payment of administrative expenses
their claims against the debtor and allows the debtor to effectively continue
direct all creditors to their claims its financial life and activities
with the court at least 5 days before
the initial hearing; Metropolitan Waterworks & Sewerage System v.
e. BIR to file & serve on the debtor its Daway and Maynilad Water Services, Inc. (2004)
comment on or opposition to the
petition or its claim/s against the FACTS: Maynilad obtained a 20-year concession to
debtor manage, repair, refurbish, and upgrade existing
7. prohibit the debtor's suppliers of goods or MWSS water delivery and sewerage services. Under
services from withholding the supply of the concession agreement, Maynilad undertook to

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pay concession fees and its foreign loans and pay the beneficiary upon the presentation of the set
secured its obligations by arranging for a three-year of documents required therein.
facility with a number of foreign banks (led by
Citicorp) for the issuance of an irrevocable standby The public respondent, therefore, exceeded his
letter of credit in favor of MWSS for the full and jurisdiction, in holding that he was competent to act
prompt payment  of  Maynilad’s  obligations  to  MWSS. on the obligation of the banks under the Letter of
The agreement was amended to incorporate a Credit under the argument that this was not a
mechanism that would protect Maynilad from solidary obligation with that of the debtor. Being a
foreign exchange losses. However, the depreciation solidary obligation, the letter of credit is excluded
of the peso still took its toll on Maynilad causing its from the jurisdiction of the rehabilitation court and
filing of a notice of early termination of the therefore in enjoining petitioner from proceeding
concession   contract   citing   MWSS’   failure   to   protect   against the Standby Letters of Credit to which it had
the company from foreign exchange losses under the a clear right under the law and the terms of said
amended agreement. As a result of this, MWSS filed Standby Letter of Credit, public respondent acted in
notice with Citicorp that it would draw on the SLC of excess of his jurisdiction.
Maynilad (which was undergoing corporate
rehabilitation). This was opposed by Maynilad on Lecture Notes:
the basis that the Interim Rules for Corporate
Rehabilitation prohibit claims against the concerned ● The ruling in MWSS vs. Daway (2004), which held
corporation, its guarantors, and sureties not that a letter of credit is excluded from the
solidarily liable with the petitioner. jurisdiction of the rehabilitation court, has been
enshrined in Sec. 18 par. (c) of the FRIA. It
HELD: The prohibition under Sec 6 (b) of Rule 4 of provides that the suspension order does not cover
the Interim Rules does not apply as the prohibition the enforcement of claims against persons
is on the enforcement of claims against guarantors solidarily liable with the debtor including issuers
or sureties of the debtors whose obligations are not of letters of credit.
solidary   with   the   debtor.   The   participating   banks’  
obligation are solidary with respondent Maynilad in Panlilio, et al. v. Regional Trial Court, Branch 51,
that it is a primary, direct, definite and an absolute City of Manila (2011)
undertaking to pay and is not conditioned on the
prior   exhaustion   of   the   debtor’s   assets.   These   are   FACTS: Petitioners and corporate officers of Silahis
the same characteristics of a surety or solidary International Hotel Inc. (SIHI), Panlilio, et al., filed
obligor. Being solidary, the claims against them can with RTC of Manila, a petition for Suspension of
be pursued separately from and independently of Payments and Rehabilitation. The said petition was
the rehabilitation case. granted and an Order was issued staying all claims
against SIHI. However, during the time the petition
The terms of the Irrevocable Standby Letter of was filed, there were also a number of criminal
Credit show that the obligations of the banks are charges (estafa) pending against petitioner
solidary with those of respondent Maynilad. It was corporate officers before another branch of RTC of
issued at the request of and for the account of Manila. Consequently, petitioners prayed for the
Maynilad in favor of the MWSS, as a bond for the full suspension of proceedings in the latter branch until
and prompt performance of the obligations by the the petition for rehabilitation was finally resolved.
concessionaire under the Concession Agreement
and that MWSS is authorized by the banks to draw HELD: Suspension  of  “all  claims”  as  an  incident  to  a  
on it by the simple act of delivering to the agent a corporate rehabilitation does not contemplate the
written certification substantially in the form suspension of criminal charges filed against the
indicated by the Letter of Credit. It provides further corporate officers of a distressed corporation, citing
in Sec. 6, that for as long as the Standby Letter of the case of Rosario v. Co (question in this case was
Credit is valid and subsisting, the Banks shall honor WON criminal case involving a violation of BP 22
any written Certification made by MWSS. should be suspended during rehabilitation
proceedings).
Except when a letter of credit specifically stipulates
otherwise, the obligation of the banks issuing letters The court said in the Rosario case that while the
of credit are solidary with that of the person or purposes of a criminal action is the punishment of
entity requesting for its issuance, the same being a the offender and indemnity to the offended party, its
direct, primary, absolute and definite undertaking to dominant and primordial objective is the former and

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the civil action is merely incidental to and
consequent to the conviction of the accused. (d) direct the rehabilitation receiver to evaluate
the financial condition of the debtor and to
Rehabilitation and the settlement of claims against prepare and submit to the court within forty (40)
the corporation is not a legal ground for the days from initial hearing the report provided in
extinction  of  petitioners’  criminal  liabilities.  It  would   Section 24 hereof.
be absurd if one who has engaged in criminal
conduct could escape punishment by the mere filing R.A. No. 10142, Sec. 24. Report of the
of a petition for rehabilitation by the corporation of Rehabilitation Receiver. - Within forty (40) days
which he is an officer. from the initial hearing and with or without the
comments of the creditors or any of them, the
The prosecution of the officers of the corporation rehabilitation receiver shall submit a report to the
has no bearing on the pending rehabilitation of the court stating his preliminary findings and
corporation, especially since they are charged in recommendations on whether:
their individual capacities and that in this case, the
purpose of the law for the issuance of the stay order (a) the debtor is insolvent and if so, the causes
is not compromised, since the appointed thereof and any unlawful or irregular act or acts
rehabilitation receiver can still fully discharge his committed by the owner/s of a sole proprietorship
functions as mandated by law. partners of a partnership or directors or officers of
a corporation in contemplation of the insolvency
According to the court, the only scenario the order of the debtor or which may have contributed to
of suspension issued in this case would affect the the insolvency of the debtor;
proceedings against the corporate officers is if in
case they would also be found civilly liable upon (b) the underlying assumptions, the financial goals
their conviction. However, such is not a reason to and the procedures to accomplish such goals as
suspend the criminal proceedings because the stated in the petitioner's Rehabilitation Plan are
award for civil indemnity of corporate officers will realistic, feasible and reasonable;
merely   be   classified   under   “claims”   which   will   then  
be subject to the stay order issued by the (c) there is a substantial likelihood for the debtor
rehabilitation court. to be successfully rehabilitated;

The court also noted that Congress has now enacted (d) the petition should be dismissed; and
R.A. No. 10142 (Financial Rehabilitation and
Insolvency Act of 2010), Section 18 of which (e) the debtor should be dissolved and/or
explicitly provides that criminal actions against the liquidated.
individual officer of a corporation are not subject to
the Stay or Suspension Order in rehabilitation R.A. No. 10142, Sec. 25. Giving Due Course to or
proceedings. Dismissal of Petition, or Conversion of
Proceedings. - Within ten (10) days from receipt
c. Subsequent Actions of the report of the rehabilitation receiver
mentioned in Section 24 hereof the court may:
R.A. No. 10142, Sec. 22. Action at the Initial
Hearing. - At the initial hearing, the court shall: (a) give due course to the petition upon a finding
that:
(a) determine the creditors who have made timely
and proper filing of their notice of claims; (1) the debtor is insolvent; and

(b) hear and determine any objection to the (2) there is a substantial likelihood for the debtor
qualifications of the appointment of the to be successfully rehabilitated;
rehabilitation receiver and, if necessary appoint a
new one in accordance with this Act; (b) dismiss the petition upon a finding that:

(c) direct the creditors to comment on the petition (1)debtor is not insolvent;
and the Rehabilitation Plan, and to submit the
same to the court and to the rehabilitation (2) the petition i8 a sham filing intended only to
receiver within a period of not more than twenty delay the enforcement of the rights of the
(20) days; and creditor/s or of any group of creditors;

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Rehabilitation Receiver. - Any qualified natural
(3)the petition, the Rehabilitation Plan and the or juridical person may serve as a rehabilitation
attachments thereto contain any materially false receiver: Provided, That if the rehabilitation
or misleading statements; or receiver is a juridical entity, it must designate a
natural person/s who possess/es all the
(4)the debtor has committed acts of qualifications  and  none  of  the  disqualification’s  as  
misrepresentation or in fraud of its creditor/s or a its representative, it being understood that the
group of creditors; juridical entity and the representative/s are
solidarily liable for all obligations and
(c)convert the proceedings into one for the responsibilities of the rehabilitation receiver.
liquidation of the debtor upon a finding that:
R.A. No. 10142, Sec. 29. Qualifications of a
(1)the debtor is insolvent; and Rehabilitation Receiver. - The rehabilitation
receiver shall have the following minimum
(2)there is no substantial likelihood for the debtor qualifications:
to be successfully rehabilitated as determined in
accordance with the rules to be promulgated by (a)A citizen of the Philippines or a resident of the
the Supreme Court. Philippines in the six (6) months immediately
preceding his nomination;
R.A. No. 10142, Sec. 26. Petition Given Due
Course. - If the petition is given due course, the (b)Of good moral character and with
court shall direct the rehabilitation receiver to acknowledged integrity, impartiality and
review, revise and/or recommend action on the independence;
Rehabilitation Plan and submit the same or a new
one to the court within a period of not more than (c)Has the requisite knowledge of insolvency and
ninety (90) days. other relevant commercial laws, rules and
procedures, as well as the relevant training and/or
The court may refer any dispute relating to the experience that may be necessary to enable him to
Rehabilitation Plan or the rehabilitation properly discharge the duties and obligations of a
proceedings pending before it to arbitration or rehabilitation receiver; and
other modes of dispute resolution, as provided for
under Republic Act No. 9285, Or the Alternative (d)Has no conflict of interest: Provided, That such
Dispute Resolution Act of 2004, should it conflict of interest may be waived, expressly or
determine that such mode will resolve the dispute impliedly, by a party who may be prejudiced
more quickly, fairly and efficiently than the court. thereby.

R.A. No. 10142, Sec. 27. Dismissal of Petition. - Other   qualifications   and   disqualification’s   of   the  
If the petition is dismissed pursuant to paragraph rehabilitation receiver shall be set forth in
(b) of Section 25 hereof, then the court may, in its procedural rules, taking into consideration the
discretion, order the petitioner to pay damages to nature of the business of the debtor and the need
any creditor or to the debtor, as the case may be, to protect the interest of all stakeholders
who may have been injured by the filing of the concerned.
petition, to the extent of any such injury.
R.A. No. 10142, Sec. 30. Initial Appointment of
the Rehabilitation Receiver. - The court shall
d. Rehabilitation Receiver initially appoint the rehabilitation receiver, who
may or may not be from among the nominees of
1) General Concepts the petitioner, However, at the initial hearing of
the petition, the creditors and the debtor who are
R.A. No. 10142, Sec. 4. not petitioners may nominate other persons to the
(hh) Rehabilitation receiver shall refer to the position. The court may retain the rehabilitation
person or persons, natural or juridical, appointed receiver initially appointed or appoint another
as such by the court pursuant to this Act and who may or may not be from among those
which shall be entrusted with such powers and nominated.
duties as set forth herein.
In case the debtor is a securities market
R.A. No. 10142, Sec. 28. Who May Serve as a participant, the court shall give priority to the

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nominee of the appropriate securities or investor conditioned upon the faithful and proper
protection fund. discharge of his powers, duties and
responsibilities.
If a qualified natural person or entity is nominated
by more than fifty percent (50%) of the secured R.A. No. 10142, Sec. 35. Vacancy. - In case the
creditors and the general unsecured creditors, and position of rehabilitation receiver is vacated for
satisfactory evidence is submitted, the court shall any reason whatsoever. the court shall direct the
appoint the creditors' nominee as rehabilitation debtor and the creditors to submit the name/s of
receiver. their nominee/s to the position. The court may
appoint any of the qualified nominees. or any
R.A. No. 10142, Sec. 32. Removal of the other person qualified for the position.
Rehabilitation Receiver. – The rehabilitation
receiver may be removed at any time by the court R.A. No. 10142, Sec. 40. Conflict of Interest. - No
either motu proprio or upon motion by any person may be appointed as a rehabilitation
creditor/s holding more than fifty percent (50%) receiver, member of a_ management committee, or
of the total obligations of the debtor, on such be employed by the rehabilitation receiver or the
grounds as the rules of procedure may provide management committee if he has a conflict of
which shall include, but are not limited to, the interest.
following:
An individual shall be deemed to have a conflict of
(a) Incompetence, gross negligence, failure to interest if he is so situated as to be materially
perform or failure to exercise the proper degree of influenced in the exercise of his judgment for or
care in the performance of his duties and powers; against any party to the proceedings. Without
limiting the generality of the foregoing, an
(b) Lack of a particular or specialized competency individual shall be deemed to have a conflict of
required by the specific case; interest if:

(c) Illegal acts or conduct in the performance of his (a) he is a creditor, owner, partner or stockholder
duties and powers; of the debtor;

(d) Lack of qualification or presence of any (b) he is engaged in a line of business which
disqualification; competes with that of the debtor;

(e) Conflict of interest that arises after his (c) he is, or was, within five (5) years from the
appointment; and filing of the petition, a director, officer, owner,
partner or employee of the debtor or any of the
(f) Manifest lack of independence that is creditors, or the auditor or accountant of the
detrimental to the general body of the debtor;
stakeholders.
(d) he is, or was, within two (2) years from the
R.A. No. 10142, Sec. 33. Compensation and filing of the petition, an underwriter of the
Terms of Service. - The rehabilitation receiver outstanding securities of the debtor;
and his direct employees or independent
contractors shall be entitled to compensation for (e) he is related by consanguinity or affinity within
reasonable fees and expenses from the debtor the fourth civil degree to any individual creditor,
according to the terms approved by the court after owners of a sale proprietorship-debtor, partners
notice and hearing. Prior to such hearing, the of a partnership- debtor or to any stockholder,
rehabilitation receiver and his direct employees director, officer, employee or underwriter of a
shall be entitled to reasonable compensation corporation-debtor; or
based on quantum meruit. Such costs shall be
considered administrative expenses. (f) he has any other direct or indirect material
interest in the debtor or any of the creditors.
R.A. No. 10142, Sec. 34. Oath and Bond of the
Rehabilitation Receiver. - Prior to entering upon Any rehabilitation receiver, member of the
his powers, duties and responsibilities, the management committee or persons employed or
rehabilitation receiver shall take an oath and file a contracted by them possessing any conflict of
bond, in such amount to be fixed by the court, interest shall make the appropriate disclosure

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either to the court or to the creditors in case of R.A. No. 10142, Sec. 31. Powers, Duties and
out-of-court rehabilitation proceedings. Any party Responsibilities of the Rehabilitation Receiver.
to the proceeding adversely affected by the - The rehabilitation receiver shall be deemed an
appointment of any person with a conflict of officer of the court with the principal duty of
interest to any of the positions enumerated above preserving and maximizing the value of the assets
may however waive his right to object to such of the debtor during the rehabilitation
appointment and, if the waiver is unreasonably proceedings, determining the viability of the
withheld, the court may disregard the conflict of rehabilitation of the debtor, preparing and
interest, taking into account the general interest of recommending a Rehabilitation Plan to the court,
the stakeholders. and implementing the approved Rehabilitation
Plan, To this end, and without limiting the
generality of the foregoing, the rehabilitation
2) Powers, Duties and Responsibilities receiver shall have the following powers, duties
and responsibilities:
R.A. No. 10142, Sec. 47. Management. - Unless
otherwise provided herein, the management of the (a)To verify the accuracy of the factual allegations
juridical debtor shall remain with the existing in the petition and its annexes;
management subject to the applicable law/s and
agreement/s, if any, on the election or (b)To verify and correct, if necessary, the
appointment of directors, managers Or managing inventory of all of the assets of the debtor, and
partner. However, all disbursements, payments or their valuation;
sale, disposal, assignment, transfer or
encumbrance of property , or any other act (c)To verify and correct, if necessary, the schedule
affecting title or interest in property, shall be of debts and liabilities of the debtor;
subject to the approval of the rehabilitation
receiver and/or the court, as provided in the (d)To evaluate the validity, genuineness and true
following subchapter. amount of all the claims against the debtor;

R.A. No. 10142, Sec. 24. Report of the (e)To take possession, custody and control, and to
Rehabilitation Receiver. - Within forty (40) days preserve the value of all the property of the
from the initial hearing and with or without the debtor;
comments of the creditors or any of them, the
rehabilitation receiver shall submit a report to the (f)To sue and recover, with the approval of the
court stating his preliminary findings and court, all amounts owed to, and all properties
recommendations on whether: pertaining to the debtor;

(a) the debtor is insolvent and if so, the causes (g) To have access to all information necessary,
thereof and any unlawful or irregular act or acts proper or relevant to the operations and business
committed by the owner/s of a sole proprietorship of the debtor and for its rehabilitation;
partners of a partnership or directors or officers of
a corporation in contemplation of the insolvency (h) To sue and recover, with the. approval of the
of the debtor or which may have contributed to court, all property or money of the debtor paid,
the insolvency of the debtor; transferred or disbursed in fraud of the debtor or
its creditors, or which constitute undue preference
(b) the underlying assumptions, the financial goals of creditor/s;
and the procedures to accomplish such goals as
stated in the petitioner's Rehabilitation Plan are (i) To monitor the operations and the business of
realistic, feasible and reasonable; the debtor to ensure that no payments or transfers
of property are made other than in the ordinary
(c) there is a substantial likelihood for the debtor course of business;
to be successfully rehabilitated;
(j) With the court's approval, to engage the
(d) the petition should be dismissed; and services of or to employ persons or entities to
assist him in the discharge of his functions;
(e) the debtor should be dissolved and/or
liquidated. (k) To determine the manner by which the debtor
may be best rehabilitated, to review) revise

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and/or recommend action on the Rehabilitation ● Principle of debtor-in-possession or debtor-in-
Plan and submit the same or a new one to the place
court for approval; - Purpose of rehabilitation: To preserve a
floundering business as a going concern
(1) To implement the Rehabilitation Plan as > Premise: Assets of the business are more
approved by the court, if 80 provided under the valuable if maintained than if liquidated
Rehabilitation Plan; > Result: Debtor maintaining control of its
business and property (debtor-in-
(m) To assume and exercise the powers of possession / debtor-in-place)
management of the debtor, if directed by the court >> Subject only to the requirement
pursuant to Section 36 hereof; of approval of the Rehabilitation
Receiver or the court for:
(n) To exercise such other powers as may, from a. Disbursements affecting title or
time to time, be conferred upon him by the court; interest in property
and b. Payments affecting title or
interest in property
To submit a status report on the rehabilitation c. Sale, disposal, assignment,
proceedings every quarter or as may be required transfer or encumbrance of
by the court motu proprio. or upon motion of any property, or
creditor. or as may be provided, in the d. Any other act affecting title or
Rehabilitation Plan. interest in property

Unless appointed by the court, pursuant to Section ● Rehabilitation Receiver


36 hereof, the rehabilitation receiver shall not take - Generally does not take over the control and
over the management and control of the debtor management of the debtor
but may recommend the appointment of a - Principally tasked with:
management committee over the debtor in the a. Preserving and maximizing the value of the
cases provided by this Act. assets of the debtor during the
rehabilitation proceedings
R.A. No. 10142, Sec. 39. Employment of b. Determining the viability of the
Professionals. - Upon approval of the court, and rehabilitation of the debtor
after notice and hearing, the rehabilitation c. Preparing and recommending a
receiver or the management committee may Rehabilitation Plan to the court; and
employ specialized professionals and other d. Implementing the Rehabilitation Plan
experts to assist each in the performance of their
duties. Such professionals and other experts shall e. Creditors’  Committees
be considered either employees or independent
contractors of the rehabilitation receiver or the R.A. No. 10142, Sec. 42. Creditors' Committee. -
management committee, as the case may be. The After the creditors' meeting called pursuant to
qualifications and disqualification’s   of   the   Section 63 hereof, the creditors belonging to a
professionals and experts may be set forth in class may formally organize a committee among
procedural rules, taking into consideration the themselves. In addition, the creditors may, as a
nature of the business of the debtor and the need body, agree to form a creditors' committee
to protect the interest of all stakeholders composed of a representative from each class of
concerned. creditors, such as the following:

R.A. No. 10142, Sec. 41. Immunity. - The (a) Secured creditors;
rehabilitation receiver and all persons employed
by him, and the members of the management (b) Unsecured creditors;
committee and all persons employed by it, shall
not be subject to any action. claim or demand in (c) Trade creditors and suppliers; and
connection with any act done or omitted to be
done by them in good faith in connection with the (d) Employees of the debtor.
exercise of their powers and functions under this
Act or other actions duly approved by the court. In the election of the creditors' representatives,
the rehabilitation receiver or his representative
shall attend such meeting and extend the

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appropriate assistance as may be defined in the
procedural rules.
● In the context of insolvency:
R.A. No. 10142, Sec. 43. Role of Creditors' Secured creditors Unsecured creditors
Committee. - The creditors' committee when
constituted pursuant to Section 42 of this Act shall All creditors holding All creditors holding
assist the rehabilitation receiver in special preferred only personal security
credits under Arts. transactions, such as
communicating with the creditors and shall be the
2241 and 2242 CC. contracts of guaranty or
primary liaison between the rehabilitation surety.
receiver and the creditors. The creditors'
committee cannot exercise or waive any right or
give any consent on behalf of any creditor unless f. Management Committee
specifically authorized in writing by such creditor.
The creditors' committee may be authorized by R.A. No. 10142, Sec. 47. Management. - Unless
otherwise provided herein, the management of the
the court or by the rehabilitation receiver to
juridical debtor shall remain with the existing
perform such other tasks and functions as may be management subject to the applicable law/s and
defined by the procedural rules in order to agreement/s, if any, on the election or
facilitate the rehabilitation process. appointment of directors, managers or managing
partner. However, all disbursements, payments or
R.A. No. 10142, Sec. 8. Decisions of Creditors. - sale, disposal, assignment, transfer or
Decisions of creditors shall be made according to encumbrance of property , or any other act
the relevant provisions of the Corporation Code in affecting title or interest in property, shall be
the case of stock or nonstock corporations or the subject to the approval of the rehabilitation
Civil Code in the case of partnerships that are not receiver and/or the court, as provided in the
inconsistent with this Act. following subchapter.

R.A. No. 10142, Sec. 9. Creditors R.A. No. 10142, Sec. 36. Displacement of
Representatives. - Creditors may designate Existing Management by the Rehabilitation
representatives to vote or otherwise act on their Receiver or Management Committee. – Upon
behalf by filing notice of such representation with motion of any interested party, the court may
the court and serving a copy on the rehabilitation appoint and direct the rehabilitation receiver to
receiver or liquidator. assume the powers of management of the debtor,
or appoint a management committee that will
R.A. No. 10142, Sec. 4. undertake the management of the debtor. upon
(ll) Secured party shall refer to a secured creditor clear and convincing evidence of any of the
or the agent or representative of such secured following circumstances:
creditor.
(a) Actual or imminent danger of dissipation, loss,
(kk) Secured creditor shall refer to a creditor with wastage   or   destruction   of   the   debtor’s   assets   or  
a secured claim. other properties;

(jj) Secured claim shall refer to a claim that is (b) Paralyzation of the business operations of the
secured by a lien. debtor; or

(qq) Unsecured creditor shall refer to a creditor (c) Gross mismanagement of the debtor. or fraud
with an unsecured claim. or other wrongful conduct on the part of, or gross
or willful violation of this Act by existing
(pp) Unsecured claim shall refer to a claim that is management of the debtor Or the owner, partner,
not secured by a lien. director, officer or representative/s in
management of the debtor.
(t) Lien shall refer to a statutory or contractual
claim or judicial charge on real or personal In case the court appoints the rehabilitation
property that legality entities a creditor to resort receiver to assume the powers of management of
to said property for payment of the claim or debt the debtor. the court may:
secured by such lien.

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(1) require the rehabilitation receiver to post an g. Claims
additional bond;
R.A. No. 10142, Sec. 4(c). Definition of Terms. -
(2) authorize him to engage the services or to As used in this Act, the term:
employ persona or entities to assist him in the
discharge of his managerial functions; and (c) Claim shall refer to all claims or demands of
whatever nature or character against the debtor
(3) authorize a commensurate increase in his or its property, whether for money or otherwise,
compensation. liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed,
R.A. No. 10142, Sec. 37. Role of the including, but not limited to; (1) all claims of the
Management Committee. – When appointed government, whether national or local, including
pursuant to the foregoing section, the taxes, tariffs and customs duties; and (2) claims
management committee shall take the place of the against directors and officers of the debtor arising
management and the governing body of the debtor from acts done in the discharge of their functions
and assume their rights and responsibilities. falling within the scope of their authority:
Provided, That, this inclusion does not prohibit the
The specific powers and duties of the management creditors or third parties from filing cases against
committee, whose members shall be considered as the directors and officers acting in their personal
officers of the court, shall be prescribed by the capacities.
procedural rules.

R.A. No. 10142, Sec. 38. Qualifications of


Members of the Management Committee. - The 1) Determination of Claims
qualifications   and   disqualification’s   of   the  
members of the management committee shall be R.A. No. 10142, Sec. 16. Commencement of
set forth in the procedural rules, taking into Proceedings and Issuance of a Commencement
consideration the nature of the business of the Order. - The rehabilitation proceedings shall
debtor and the need to protect the interest of all commence upon the issuance of the
stakeholders concerned. Commencement Order, which shall:

(a) identify the debtor, its principal business or


● Powers of management of the debtor activity/ies and its principal place of business;
- General Rule: Rehabilitation Receiver does not
take over control and management of the debtor (b) summarize the ground/s for initiating the
> However: FRIA provides instances when proceedings;
the Rehabilitation Receiver or a
Management Committee may, when so (c) state the relief sought under this Act and any
ordered by the court, assume the powers requirement or procedure particular to the relief
of management of the debtor. But there sought;
must be clear and convincing evidence of:
>> 1. Actual or imminent danger of (d) state the legal effects of the Commencement
dissipation, loss, wastage or Order, including those mentioned in Section 17
destruction  of  the  debtor’s  assets   hereof;
or other properties; or
>> 2. Paralyzation of the business (e) declare that the debtor is under rehabilitation;
operations of the debtor; or
>> 3. Gross mismanagement of the (f) direct the publication of the Commencement
debtor, or fraud or other Order in a newspaper of general circulation in the
wrongful conduct on the part of, Philippines once a week for at least two (2)
or gross or wilful violation of the consecutive weeks, with the first publication to be
FRIA by existing management of made within seven (7) days from the time of its
the debtor or the owner, partner, issuance;
director, officer or
representatives in management (g) If the petitioner is the debtor direct the service
of the debtor. by personal delivery of a copy of the petition on
each creditor holding at least ten percent (10%) of

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the total liabilities of the debtor as determined
from the schedule attached to the petition within (1) suspend all actions or proceedings, in court or
five (5) days; if the petitioner/s is/are creditor/s, otherwise, for the enforcement of claims against
direct the service by personal delivery of a copy of the debtor;
the petition on the debtor within five (5) days;
(2) suspend all actions to enforce any judgment,
(h) appoint a rehabilitation receiver who may or attachment or other provisional remedies against
not be from among the nominees of the the debtor;
petitioner/s and who shall exercise such powers
and duties defined in this Act as well as the (3) prohibit the debtor from selling, encumbering,
procedural rules that the Supreme Court will transferring or disposing in any manner any of its
promulgate; properties except in the ordinary course of
business; and
(i) summarize the requirements and deadlines for
creditors to establish their claims against the (4) prohibit the debtor from making any payment
debtor and direct all creditors to their claims with of its liabilities outstanding as of the
the court at least five (5) days before the initial commencement date except as may be provided
hearing; herein.

(j) direct Bureau of internal Revenue (BIR) to file R.A. No. 10142, Sec. 44. Registry of Claims. -
and serve on the debtor its comment on or Within twenty (20) days from his assumption into
opposition to the petition or its claim/s against the office, the rehabilitation receiver shall establish a
debtor under such procedures as the Supreme preliminary registry of claims. The rehabilitation
Court provide; receiver shall make the registry available for
public inspection and provide publication notice
(k) prohibit the debtor's suppliers of goods or to the debtor, creditors and stakeholders on where
services from withholding the supply of goods and and when they may inspect it. All claims included
services in the ordinary course of business for as in the registry of claims must be duly supported by
long as the debtor makes payments for the sufficient evidence.
services or goods supplied after the issuance of the
Commencement Order; R.A. No. 10142, Sec. 45. Opposition or
Challenge of Claims. – Within thirty (30) days
(l) authorize the payment of administrative from the expiration of the period stated in the
expenses as they become due; immediately preceding section, the debtor,
creditors, stakeholders and other interested
(m) set the case for initial hearing, which shall not parties may submit a challenge to claim/s to the
be more than forty (40) days from the date of court, serving a certified copy on the rehabilitation
filing of the petition for the purpose of receiver and the creditor holding the challenged
determining whether there is substantial claim/so Upon the expiration of the thirty (30)-
likelihood for the debtor to be rehabilitated; day period, the rehabilitation receiver shall submit
to the court the registry of claims which shall
(n) make available copies of the petition and include undisputed claims that have not been
rehabilitation plan for examination and copying by subject to challenge.
any interested party;
R.A. No. 10142, Sec. 46. Appeal. - Any decision of
(o) indicate the location or locations at which the rehabilitation receiver regarding a claim may
documents regarding the debtor and the be appealed to the court.
proceedings under Act may be reviewed and
copied;
● Determination of claims
(p) state that any creditor or debtor who is not the - The   Rehabilitation   Receiver   will   “clean   up”   all  
petitioner, may submit the name or nominate any the claims (one side of the equation).
other qualified person to the position of > The other side of the equation is the
rehabilitation receiver at least five (5) days before assets, which will be used to pay for the
the initial hearing; claims.
- The Rehabilitation Receiver will fix all the claims
(q) includes Stay or Suspension Order which shall: and assets (complete and stable condition) for

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purposes of arriving at a Rehabilitation Plan for the continuance of suspension of payment, or
that is viable. relieve a claim from the coverage thereof, upon
showing that: (a) a creditor does not have
● Start with a petition (important) adequate protection over property securing its
> because it contains the schedule of claim; or
debtor’s  debts  and  liabilities (b) the value of a claim secured by a lien on
property which is not necessary for rehabilitation
2) Treatment of Claims of the debtor exceeds the fair market value of the
said property.
a) Secured Creditor Claims
For purposes of this section, a creditor shall be
R.A. No. 10142, Sec. 4. deemed to lack adequate protection if it can be
(ll) Secured party shall refer to a secured creditor shown that:
or the agent or representative of such secured
creditor. (a) the debtor fails or refuses to honor a pre-
existing agreement with the creditor to keep the
(kk) Secured creditor shall refer to a creditor with property insured;
a secured claim.
(b) the debtor fails or refuses to take commercially
(jj) Secured claim shall refer to a claim that is reasonable steps to maintain the property; or
secured by a lien.
(c) the property has depreciated to an extent that
(qq) Unsecured creditor shall refer to a creditor the creditor is under secured.
with an unsecured claim.
Upon showing of a lack of protection, the court
(pp) Unsecured claim shall refer to a claim that is shall order the debtor or the rehabilitation
not secured by a lien. receiver to make arrangements to provide for the
insurance or maintenance of the property; or to
(t) Lien shall refer to a statutory or contractual make payments or otherwise provide additional
claim or judicial charge on real or personal or replacement security such that the obligation is
property that legality entities a creditor to resort fully secured. If such arrangements are not
to said property for payment of the claim or debt feasible, the court may modify the Stay Order to
secured by such lien. allow the secured creditor lacking adequate
protection to enforce its security claim against the
R.A. No. 10142, Sec. 60. No Diminution of debtor: Provided, however, That the court may
Secured Creditor Rights. - The issuance of the deny the creditor the remedies in this paragraph if
Commencement Order and the Suspension or Stay the property subject of the enforcement is
Order, and any other provision of this Act, shall required for the rehabilitation of the debtor.
not be deemed in any way to diminish or impair
the security or lien of a secured creditor, or the
value of his lien or security, except that his right to ● Sec. 60. No Diminution of Secured Creditor Rights
enforce said security or lien may be suspended - First   paragraph  follows   the   principle   of  “equality  
during the term of the Stay Order. is  equity”

The court, upon motion or recommendation of the ● The treatment of secured creditors during the
rehabilitation receiver, may allow a secured rehabilitation proceeding is as follows:
creditor to enforce his security or lien, or foreclose - Note: Headings (those in quotation marks) of the
upon property of the debtor securing his/its claim, following enumeration were not provided in the book.
if the said property is not necessary for the They’re   only   used   to   emphasize   the   important   terms  
rehabilitation of the debtor. The secured creditor and phrases of each item.
and/or the other lien holders shall be admitted to - 1. “Equality   is   equity   by   issuance   of   the  
the rehabilitation proceedings only for the balance Commencement  Order”
of his claim, if any. > Upon the issuance of the Commencement
Order, all creditors, including secured
R.A. No. 10142, Sec. 61. Lack of Adequate creditors, are precluded, by virtue of the
Protection. - The court, on motion or motu Stay or Suspension Order, from obtaining
proprio, may terminate, modify or set conditions an advantage or preference over another.

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As between the creditors, the key phrase
is equality is equity, and all creditors, b) Employee Claims
secured or unsecured, stand on equal
footing. R.A. No. 10142, Sec. 56. Treatment of
- 2. “Security  or  lien  not  diminished  or  impaired” Employees, Claims. - Compensation of
> The issuance of the Commencement Order employees required to carry on the business shall
and the Stay or Suspension Order, be considered an administrative expense. Claims
however, does not diminish or impair the of separation pay for months worked prior to the
security or lien of a secured creditor, or commencement date shall be considered a pre-
its value, except that the right to enforce commencement claim. Claims for salary and
the security or lien is suspended during separation pay for work performed after the
its term. commencement date shall be an administrative
- 3. “Security   of   lien   enforced   upon   motion   or   expense.
recommendation  (of  the  Rehabilitation  Receiver)”
> During the proceedings, the court, upon R.A. No. 10142, Sec. 16. Commencement of
motion or recommendation of the Proceedings and Issuance of a Commencement
Rehabilitation Receiver, may allow a Order. - The rehabilitation proceedings shall
secured creditor to enforce the security commence upon the issuance of the
or lien, or foreclose upon the security, if Commencement Order, which shall:
the property is not necessary for the
rehabilitation of the debtor. (a) identify the debtor, its principal business or
- 4. “Continuance  of  the  Stay  or  Suspension  Order on activity/ies and its principal place of business;
motion  or  motu  propio  (by  the  court)”
> During the proceedings, the court, on (b) summarize the ground/s for initiating the
motion or motu propio, may terminate, proceedings;
modify or set conditions for the
continuance of the Stay or Suspension (c) state the relief sought under this Act and any
Order, or relieve a claim from its requirement or procedure particular to the relief
coverage, if a secured creditor does not sought;
have adequate protection over its
security, or the value of a claim secured (d) state the legal effects of the Commencement
by a lien on property, which is not Order, including those mentioned in Section 17
necessary for rehabilitation, exceeds the hereof;
fair market value of the property.
- 5. “Equal   treatment   of   all   claims   within   the   same   (e) declare that the debtor is under rehabilitation;
class  or  subclass  through  the  Rehabilitation  Plan”
> The Rehabilitation Plan shall specify the (f) direct the publication of the Commencement
treatment of each class or subclass of Order in a newspaper of general circulation in the
creditors and shall provide equal Philippines once a week for at least two (2)
treatment of all claims within the same consecutive weeks, with the first publication to be
class or subclass, unless a particular made within seven (7) days from the time of its
creditor voluntarily agrees to less issuance;
favourable treatment.
> “Concurrence   and   Preference   of   Credits   (g) If the petitioner is the debtor direct the service
must be followed and Security of Interest by personal delivery of a copy of the petition on
must  be  maintained” each creditor holding at least ten percent (10%) of
>> The Rehabilitation Plan must the total liabilities of the debtor as determined
ensure that the payments made from the schedule attached to the petition within
under the plan follow the priority five (5) days; if the petitioner/s is/are creditor/s,
established under the provisions direct the service by personal delivery of a copy of
of the Civil Code on concurrence the petition on the debtor within five (5) days;
and preference of credits and
must maintain the security (h) appoint a rehabilitation receiver who may or
interest of secured creditors and not be from among the nominees of the
preserve the liquidation value of petitioner/s and who shall exercise such powers
the security unless waived or and duties defined in this Act as well as the
modified voluntarily. procedural rules that the Supreme Court will

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promulgate; properties except in the ordinary course of
business; and
(i) summarize the requirements and deadlines for
creditors to establish their claims against the (4) prohibit the debtor from making any payment
debtor and direct all creditors to their claims with of its liabilities outstanding as of the
the court at least five (5) days before the initial commencement date except as may be provided
hearing; herein.

(j) direct Bureau of internal Revenue (BIR) to file


and serve on the debtor its comment on or ● Sec.  56.  Treatment  of  Employees’  Claims
opposition to the petition or its claim/s against the - “Compensation  of  employees  required  to  carry  on  
debtor under such procedures as the Supreme the business shall be considered an
Court provide; administrative  expense.”
> This means that they will not be stayed by
(k) prohibit the debtor's suppliers of goods or the Suspension Order.
services from withholding the supply of goods and > The rest of the provision following the
services in the ordinary course of business for as said quoted portion states the
long as the debtor makes payments for the qualifications.
services or goods supplied after the issuance of the
Commencement Order; c) Excluded Claims

(l) authorize the payment of administrative R.A. No. 10142, Sec. 23. Effect of Failure to File
expenses as they become due; Notice of Claim. - A creditor whose claim is not
listed in the schedule of debts and liabilities and
(m) set the case for initial hearing, which shall not who fails to file a notice of claim in accordance
be more than forty (40) days from the date of with the Commencement Order but subsequently
filing of the petition for the purpose of files a belated claim shall not be entitled to
determining whether there is substantial participate in the rehabilitation proceedings but
likelihood for the debtor to be rehabilitated; shall be entitled to receive distributions arising
therefrom.
(n) make available copies of the petition and
rehabilitation plan for examination and copying by
any interested party; h. Treatment of Assets

(o) indicate the location or locations at which R.A. No. 10142, Sec. 47. Management. - Unless
documents regarding the debtor and the otherwise provided herein, the management of the
proceedings under Act may be reviewed and juridical debtor shall remain with the existing
copied; management subject to the applicable law/s and
agreement/s, if any, on the election or
(p) state that any creditor or debtor who is not the appointment of directors, managers Or managing
petitioner, may submit the name or nominate any partner. However, all disbursements, payments or
other qualified person to the position of sale, disposal, assignment, transfer or
rehabilitation receiver at least five (5) days before encumbrance of property , or any other act
the initial hearing; affecting title or interest in property, shall be
subject to the approval of the rehabilitation
(q) includes Stay or Suspension Order which shall: receiver and/or the court, as provided in the
following subchapter.
(1) suspend all actions or proceedings, in court or
otherwise, for the enforcement of claims against
the debtor; ● Sec. 47. Management
- “However,   all   disbursements,   payments   or   sale,  
(2) suspend all actions to enforce any judgment, disposal, assignment, transfer or encumbrance of
attachment or other provisional remedies against property , or any other act affecting title or
the debtor; interest in property, shall be subject to the
approval of the rehabilitation receiver and/or the
(3) prohibit the debtor from selling, encumbering, court,  as  provided  in  the  following  subchapter.”
transferring or disposing in any manner any of its > Important part of this provision

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> Subchapter being referred to: Chapter II the debtor that is auctioned off in a judicial or
(F) Use, Preservation and Disposal of Assets extrajudicial sale under. This Act; or
and Treatment of Assets and Claims after
Commencement Date (f) for payments made to reclaim property of the
> Approval of the Rehabilitation Receiver debtor held pursuant to a possessory lien.
and approval of the court are two
different steps, the latter being a higher
step. ● Sec. 49. Sale of Assets
- Principle of debtor-in-place or debtor-in-
1) Unencumbered Assets possession
> Reason why ordinary acts still require
R.A. No. 10142, Sec. 48. Use or Disposition of approval of the debtor
Assets. - Except as otherwise provided herein, no
funds or property of the debtor shall he used or 2) Encumbered Assets
disposed of except in the ordinary course of
business of the debtor, or unless necessary to R.A. No. 10142, Sec. 4.
finance the administrative expenses of the (l) Encumbered property shall refer to real or
rehabilitation proceedings. personal property of the debtor upon which a lien
attaches.
R.A. No. 10142, Sec. 49. Sale of Assets. - The
court, upon application of the rehabilitation R.A. No. 10142, Sec. 17. Effects of the
receiver, may authorize the sale of unencumbered Commencement Order. - Unless otherwise
property of the debtor outside the ordinary course provided for in this Act, the court's issuance of a
of business upon a showing that the property, by Commencement Order shall, in addition to the
its nature or because of other circumstance, is effects of a Stay or Suspension Order described in
perishable, costly to maintain, susceptible to Section 16 hereof:
devaluation or otherwise in jeopardy.
(a) vest the rehabilitation with all the powers and
R.A. No. 10142, Sec. 52. Rescission or Nullity of functions provided for this Act, such as the right to
Sale, Payment, Transfer or Conveyance of review and obtain records to which the debtor's
Assets. - The court may rescind or declare as null management and directors have access, including
and void any sale, payment, transfer or bank accounts or whatever nature of the debtor
conveyance of the debtor's unencumbered subject to the approval by the court of the
property or any encumbering thereof by the performance bond filed by the rehabilitation
debtor or its agents or representatives after the receiver;
commencement date which are not in the ordinary
course of the business of the debtor: Provided, (b) prohibit or otherwise serve as the legal basis
however, That the unencumbered property may rendering null and void the results of any
be sold, encumbered or otherwise disposed of extrajudicial activity or process to seize property,
upon order of the court after notice and hearing: sell encumbered property, or otherwise attempt to
collection or enforce a claim against the debtor
(a) if such are in the interest of administering the after commencement date unless otherwise
debtor and facilitating the preparation and allowed in this Act, subject to the provisions of
implementation of a Rehabilitation Plan; Section 50 hereof;

(b) in order to provide a substitute lien, mortgage (c) serve as the legal basis for rendering null and
or pledge of property under this Act; void any setoff after the commencement date of
any debt owed to the debtor by any of the debtor's
(c) for payments made to meet administrative creditors;
expenses as they arise;
(d) serve as the legal basis for rendering null and
(d) for payments to victims of quasi delicts upon a void the perfection of any lien against the debtor's
showing that the claim is valid and the debtor has property after the commencement date; and
insurance to reimburse the debtor for the
payments made; (e) consolidate the resolution of all legal
proceedings by and against the debtor to the court
(e) for payments made to repurchase property of Provided. However, That the court may allow the

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continuation of cases on other courts where the possession or control of such property to the
debtor had initiated the suit. rehabilitation receiver or any other person,
subject to payment of the claims secured by any
Attempts to seek legal of other resource against possessory Iien/s thereon;
the debtor outside these proceedings shall be
sufficient to support a finding of indirect contempt (b) allow said third parties to retain possession or
of court. control, if such an arrangement would more likely
preserve or increase the value of the property in
R.A. No. 10142, Sec. 50. Sale or Disposal of question or the total value of the assets of the
Encumbered Property of the Debtor and Assets debtor; or
of Third Parties Held by Debtor. - The court may
authorize the sale, transfer, conveyance or (c) undertake any other disposition of the said
disposal of encumbered property of the debtor, or property as may be beneficial for the
property of others held by the debtor where there rehabilitation of the debtor, after notice and
is a security interest pertaining to third parties hearing, and approval of the court.
under a financial, credit or other similar
transactions if, upon application of the R.A. No. 10142, Sec. 53. Assets Subject to Rapid
rehabilitation receiver and with the consent of the Obsolescence, Depreciation and Diminution of
affected owners of the property, or secured Value. - Upon the application of a secured creditor
creditor/s in the case of encumbered property of holding a lien against or holder of an ownership
the debtor and, after notice and hearing, the court interest in property held by the debtor that is
determines that: subject to potentially rapid obsolescence,
depreciation or diminution in value, the court
(a) such sale, transfer, conveyance or disposal is shall, after notice and hearing, order the debtor or
necessary for the continued operation of the rehabilitation receiver to take reasonable steps
debtor's business; and necessary to prevent the depreciation. If
depreciation cannot be avoided and such
(b) the debtor has made arrangements to provide depreciation is jeopardizing the security or
a substitute lien or ownership right that provides property interest of the secured creditor or owner,
an equal level of security for the counter-party's the court shall:
claim or right.
(a) allow the encumbered property to be
Provided, That properties held by the debtor foreclosed upon by the secured creditor according
where the debtor has authority to sell such as to the relevant agreement between the debtor and
trust receipt or consignment arrangements may the secured creditor, applicable rules of procedure
be sold or disposed of by the .debtor, if such sale and relevant legislation: Provided. That the
or disposal is necessary for the operation of the proceeds of the sale will be distributed in
debtor's business, and the debtor has made accordance with the order prescribed under the
arrangements to provide a substitute lien or rules of concurrence and preference of credits; or
ownership right that provides an equal level of
security for the counter-party's claim or right. (b) upon motion of, or with the consent of the
affected secured creditor or interest owner. order
Sale or disposal of property under this section the conveyance of a lien against or ownership
shall not give rise to any criminal liability under interest in substitute property of the debtor to the
applicable laws. secured creditor: Provided. That other creditors
holding liens on such property, if any, do not
R.A. No. 10142, Sec. 51. Assets of Debtor Held object thereto, or, if such property is not available;
by Third Parties. – In the case of possessory
pledges, mechanic's liens or similar claims, third (c) order the conveyance to the secured creditor
parties who have in their possession or control or holder . of an ownership interest of a lien on the
property of the debtor shall not transfer, conveyor residual funds from the sale of encumbered
otherwise dispose of the same to persons other property during the proceedings; or
than the debtor, unless upon prior approval of the
rehabilitation receiver. The rehabilitation receiver (d) allow the sale or disposition of the property:
may also: Provided. That the sale or disposition will
maximize the value of the property for the benefit
(a) demand the surrender or the transfer of the of the secured creditor and the debtor, and the

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proceeds of the sale will be distributed in the issuance of the Commencement Order, which
accordance with the order prescribed under the shall:
rules of concurrence and preference of credits.
(l) authorize the payment of administrative
expenses as they become due;
● Main Difference between Sec. 50 and Sec. 53 of the (q) include s Stay or Suspension Order which
FRIA shall:
FRIA Provision Sec. 50 Sec. 53
(4) prohibit the debtor from making any payment
Who will Debtor Creditor
of its liabilities outstanding as of the
benefit? (anyway, a
substitute commencement date except as may be provided
lien has been herein.
provided)

Somera Book:
i. Treatment of Contracts  Confirmation – effected by notice to the
contractual counter-party, within 90 days
1) Confirmation or Termination of from the commencement of the proceedings
Contracts  Termination – effected by the lapse of the
90-day deadline without a notice of
Section 57.Treatment of Contracts. - Unless confirmation, subject to a claim for actual
cancelled by virtue of a final judgment of a court of damages arising as a result of the
termination.
competent jurisdiction issued prior to the
issuance of the Commencement Order, or at Notes:
anytime thereafter by the court before which the  Default – valid and subsisting contracts
rehabilitation proceedings are pending, all valid shall continue to be in force, PROVIDED that
and subbsisting contracts of the debtor with within 90 days following the
creditors and other third parties as at the commencement of proceedings, a
commencement date shall continue in notification of confirmation would be sent
to notify the counter-party with the consent
force: Provided, That within ninety (90) days
of the rehabilitation receiver
following the commencement of proceedings, the
debtor, with the consent of the rehabilitation  Confirmed contracts – considered
receiver, shall notify each contractual counter- administrative expenses
party of whether it is confirming the particular  Terminated contracts (Contracts not
contract. Contractual obligations of the debtor confirmed) – claims arising from these
arising or performed during this period, and contracts shall be considered a pre-
commencement claim against the debtor
afterwards for confirmed contracts, shall be
considered administrative expenses. Contracts not
confirmed within the required deadline shall be 2) Avoidance Proceedings
considered terminated. Claims for actual damages,
if any, arising as a result of the election to Section 58.Rescission or Nullity of Certain Pre-
terminate a contract shall be considered a pre- commencement Transactions. Any transaction
commencement claim against the debtor. Nothing occurring prior to commencement date entered
into by the debtor or involving its funds or assets
contained herein shall prevent the cancellation or
may be rescinded or declared null and void on the
termination of any contract of the debtor for any ground that the same was executed with intent to
ground provided by law. defraud a creditor or creditors or which constitute
undue preference of creditors. Without limiting
the generality of the foregoing, a disputable
Section 16. Commencement of Proceedings and presumption of such design shall arise if the
Issuance of a Commencement Order. - The transaction:
rehabilitation proceedings shall commence upon (a) provides unreasonably inadequate

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consideration to the debtor and is  Avoidance Proceeding – permits certain
executed within ninety (90) days prior to transaction entered into prior the
the commencement date; commencement date to be rescinded or
(b) involves an accelerated payment of a nullified, and an asset transferred to the
claim to a creditor within ninety (90) transaction, or its value, to be recovered for
days prior to the commencement date; the benefit of the creditors
(c) provides security or additional
security executed within ninety (90) days  Transactions that may be nullified or
prior to the commencement date; rescinded:
(d) involves creditors, where a creditor
obtained, or received the benefit of, more o Entered into by the debtor or
than its pro rata share in the assets of the involves the debtors assets
debtor, executed at a time when the o Prior the commencement date
debtor was insolvent; or o Executed to defraud or in undue
(e) is intended to defeat, delay or hinder preference of creditors (Section 58
the ability of the creditors to collect gives a list of situations that give
claims where the effect of the transaction rise to a disputable presumption
is to put assets of the debtor beyond the that such transaction was in fraud
reach of creditors or to otherwise of creditors)
prejudice the interests of creditors. Notes:
Provided, however, That nothing in this section  Who may initiate and prosecute a
shall prevent the court from rescinding or transaction null and void?
declaring as null and void a transaction on other o Rehabilitation receiver or creditor
grounds provided by relevant legislation and with  the  rehabilitation  receiver’s  
jurisprudence: Provided, further, That the conformity
provisions of the Civil Code on rescission shall in  If without rehabilitation receiver consent,
any case apply to these transactions. creditor may seek leave of court to
commence the action
Section 59.Actions for Rescission or Nullity. - (a)
The rehabilitation receiver or, with his conformity, j. Rehabilitation Plan
any creditor may initiate and prosecute any action 1) General Concepts
to rescind, or declare null and void any
transaction described in Section 58 hereof. If the Section  4…  (ii) Rehabilitation Plan shall refer to a
rehabilitation receiver does not consent to the plan by which the financial well-being and
filing or prosecution of such action, viability of an insolvent debtor can be restored
(b) If leave of court is granted under subsection
using various means including, but not limited to,
(a), the rehabilitation receiver shall assign and
transfer to the creditor all rights, title and interest debt forgiveness, debt rescheduling,
in the chose in action or subject matter of the reorganization or quasi-reorganization, dacion en
proceeding, including any document in support pago, debt-equity conversion and sale of the
thereof. business (or parts of it) as a going concern, or
(c) Any benefit derived from a proceeding taken setting-up of new business entity as prescribed in
pursuant to subsection (a), to the extent of his
Section 62 hereof, or other similar arrangements
claim and the costs, belongs exclusively to the
creditor instituting the proceeding, and the as may be approved by the court or creditors.
surplus, if any, belongs to the estate.
(d) Where, before an order is made under
subsection (a), the rehabilitation receiver (or Section 62.Contents of a Rehabilitation Plan. – The
liquidator) signifies to the court his readiness to Rehabilitation Plan shall, as a minimum:
institute the proceeding for the benefit of the (a) specify the underlying assumptions,
creditors, the order shall fix the time within which the financial goals and the procedures
he shall do so and, m that case, the benefit derived proposed to accomplish such goals;
from the proceeding, if instituted within the time (b) compare the amounts expected to be
limits so fixed, belongs to the estate. received by the creditors under the
Rehabilitation Plan with those that they
Somera Book: will receive if liquidation ensues within
the next one hundred twenty (120) days;
© contain information sufficient to give

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the various classes of creditors a their remuneration;
reasonable basis for determining whether (p) address the treatment of claims
supporting the Plan is in their financial arising after the confirmation of the
interest when compared to the immediate Rehabilitation Plan;
liquidation of the debtor, including any (q) require the debtor and its counter-
reduction of principal interest and parties to adhere to the terms of all
penalties payable to the creditors; contracts that the debtor has chosen to
(d) establish classes of voting creditors; confirm;
(e) establish subclasses of voting (r) arrange for the payment of all
creditors if prior approval has been outstanding administrative expenses as a
granted by the court; condition to the Plan's approval unless
(f) indicate how the insolvent debtor will such condition has been waived in writing
be rehabilitated including, but not limited by the creditors concerned;
to, debt forgiveness, debt rescheduling, (s) arrange for the payment" of all
reorganization or quasi- outstanding taxes and assessments, or an
reorganization. Dacion en pago, debt- adjusted amount pursuant to a
equity conversion and sale of the business compromise settlement with the BlR Or
(or parts of it) as a going concern, or other applicable tax authorities;
setting-up of a new business entity or (t) include a certified copy of a certificate
other similar arrangements as may be of tax clearance or evidence of a
necessary to restore the financial well- compromise settlement with the BIR;
being and visibility of the insolvent (u) include a valid and binding r(,solution
debtor; of a meeting of the debtor's stockholders
(g) specify the treatment of each class or to increase the shares by the required
subclass described in subsections (d) and amount in cases where the Plan
(e); contemplates an additional issuance of
(h) provide for equal treatment of all shares by the debtor;
claims within the same class or subclass, (v) state the compensation and status, if
unless a particular creditor voluntarily any, of the rehabilitation receiver after
agrees to less favorable treatment; the approval of the Plan; and
(i) ensure that the payments made under (w) contain provisions for conciliation
the plan follow the priority established and/or mediation as a prerequisite to
under the provisions of the Civil Code on court assistance or intervention in the
concurrence and preference of credits event of any disagreement in the
and other applicable laws; interpretation or implementation of the
(j) maintain the security interest of Rehabilitation Plan.
secured creditors and preserve the
liquidation value of the security unless Section  4…  (ss) Voting creditor shall refer to a
such has been waived or modified creditor that is a member of a class of creditors,
voluntarily; the consent of which is necessary for the approval
(k) disclose all payments to creditors for
of a Rehabilitation Plan under this Act.
pre-commencement debts made during
the proceedings and the justifications
thereof;
(1) describe the disputed claims and the Section 54.Post-commencement Interest. - The
provisioning of funds to account for rate and term of interest, if any, on secured and
appropriate payments should the claim unsecured claims shall be determined and
be ruled valid or its amount adjusted; provided for in the approved Rehabilitation Plan.
(m) identify the debtor's role in the
implementation of the Plan;
(n) state any rehabilitation covenants of Section 55.Post-commencement Loans and
the debtor, the breach of which shall be Obligations. - With the approval of the court upon
considered a material breach of the Plan; the recommendation of the rehabilitation receiver,
(o) identify those responsible for the the debtor, in order to enhance its rehabilitation.
future management of the debtor and the may:
supervision and implementation of the (a) enter into credit arrangements; or
Plan, their affiliation with the debtor and (b) enter into credit arrangements,

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secured by mortgages of its class of creditors if members of the said class
unencumbered property or secondary holding more than fifty percent (50%) of the total
mortgages of encumbered property with claims of the said class vote in favor of the Plan.
the approval of senior secured parties The votes of the creditors shall be based solely on
with regard to the encumbered property; the amount of their respective claims based on the
or registry of claims submitted by the rehabilitation
(c) incur other obligations as may be receiver pursuant to Section 44 hereof.
essential for its rehabilitation. Notwithstanding the rejection of the
The payment of the foregoing obligations shall be Rehabilitation Plan, the court may confirm the
considered administrative expenses under this Rehabilitation Plan if all of the following
Act. circumstances are present:
(a)The Rehabilitation Plan complies with
Somera Book: the requirements specified in this Act.
 Rehabilitation Plan may include: (b) The rehabilitation receiver
o Debt Forgiveness – condonation or recommends the confirmation of the
waiver of certain claims Rehabilitation Plan;
o Debt Rescheduling – extension of (c) The shareholders, owners or partners
time for the payment of claim of the juridical debtor lose at least their
o Reorganization or Quasi- controlling interest as a result of the
reorganization – change in the Rehabilitation Plan; and
equity, corporate or operating (d) The Rehabilitation Plan would likely
structure of the debtor provide the objecting class of creditors
o Dacion en Pago – the assignment of with compensation which has a net
assets as payment for certain present value greater than that which
claims they would have received if the debtor
o Debt to equity conversion – the were under liquidation.
issuance of ownership interests as
payment for certain claims Section 65.Submission of Rehabilitation Plan to
o Sale of business as a going concern the Court. - 1fthe Rehabilitation Plan is approved,
– used to generate income to pay the rehabilitation receiver shall submit the same
off claims
to the court for confirmation. Within five (5) days
o Setting-up of new business entities
from receipt of the Rehabilitation Plan, the court
2) Cram Down Effect shall notify the creditors that the Rehabilitation
Plan has been submitted for confirmation, that
Section 63.Consultation with Debtor and any creditor may obtain copies of the
Creditors. – if the court gives due course to the Rehabilitation Plan and that any creditor may file
petition, the rehabilitation receiver shall confer an objection thereto.
with the debtor and all the classes of creditors,
and may consider their views and proposals ill the
review, revision or preparation of a new Section 66.Filing of Objections to Rehabilitation
Plan. – A creditor may file an objection to the
Rehabilitation Plan.
Rehabilitation Plan within twenty (20) days from
receipt of notice from the court that the
Rehabilitation Plan has been submitted for
Section 64.Creditor Approval of Rehabilitation confirmation. Objections to a Rehabilitation Plan
Plan. – The rehabilitation receiver shall notify the shall be limited to the following:
creditors and stakeholders that the Plan is ready (a) The creditors' support was induced by
for their examination. Within twenty (2Q) days fraud;
from the said notification, the rehabilitation (b)The documents or data relied upon in
receiver shall convene the creditors, either as a the Rehabilitation Plan are materially
whole or per class, for purposes of voting on the false or misleading; or
approval of the Plan. The Plan shall be deemed (c)The Rehabilitation Plan is in fact not
rejected unless approved by all classes of supported by the voting creditors.
creditors w hose rights are adversely modified or
affected by the Plan. For purposes of this section,
Section 67.Hearing on the Objections. - If
the Plan is deemed to have been approved by a
objections have been submitted during the

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relevant period, the court shall issue an order the extent that they do not conflict with
setting the time and date for the hearing or the provisions of the Rehabilitation Plan;
hearings on the objections. (e) Any compromises on amounts or
If the court finds merit in the objection, it shall rescheduling of timing of payments by the
order the rehabilitation receiver or other party to debtor shall be binding on creditors
cure the defect, whenever feasible. If the court regardless of whether or not the Plan is
determines that the debtor acted in bad faith, or successfully implement; and
that it is not feasible to cure the defect, the court (f) Claims arising after approval of the
shall convert the proceedings into one for the Plan that are otherwise not treated by the
liquidation of the debtor under Chapter V of this Plan are not subject to any Suspension
Act. Order.
The Order confirming the Plan shall comply with
Section 68.Confirmation of the Rehabilitation Rules 36 of the Rules of Court: Provided,
Plan. – If no objections are filed within the however, That the court may maintain jurisdiction
relevant period or, if objections are filed, the court over the case in order to resolve claims against the
finds them lacking in merit, or determines that the debtor that remain contested and allegations that
basis for the objection has been cured, or the debtor has breached the Plan.
determines that the debtor has complied with an
order to cure the objection, the court shall issue an Section 70. Liability of General Partners of a
order confirming the Rehabilitation Plan. Partnership for Unpaid Balances Under an
The court may confirm the Rehabilitation Plan Approved Plan. - The approval of the Plan shall not
notwithstanding unresolved disputes over claims
affect the rights of creditors to pursue actions
if the Rehabilitation Plan has made adequate
provisions for paying such claims. against the general partners of a partnership to
For the avoidance of doubt, the provisions of other the extent they are liable under relevant
laws to the contrary notwithstanding, the court legislation for the debts thereof.
shall have the power to approve or implement the
Rehabilitation Plan despite the lack of approval, or
objection from the owners, partners or Section 71. Treatment of Amounts of Indebtedness
stockholders of the insolvent or Obligations Forgiven or Reduced. - Amounts of
debtor: Provided, That the terms thereof are any indebtedness or obligations reduced or
necessary to restore the financial well-being and
forgiven in connection with a Plan's approval shall
viability of the insolvent debtor.
not be subject to any tax in furtherance of the
Section 69.Effect of Confirmation of the purposes of this Act.
Rehabilitation Plan, - The confirmation of the
Rehabilitation Plan by the court shall result in the
following: Section 72. Period for Confirmation of the
(a) The Rehabilitation Plan and its Rehabilitation Plan. - The court shall have a
provisions shall be binding upon the maximum period of one (1) year from the date of
debtor and all persons who may be the filing of the petition to confirm a
affected by . it, including the creditors, Rehabilitation Plan.
whether or not such persons have If no Rehabilitation Plan is confirmed within the
participated in the proceedings or said period, the proceedings may upon motion
opposed the Rehabilitation Plan or or motu propio, be converted into one for the
whether or not their claims have been liquidation of the debtor .
scheduled;
(b) The debtor shall comply with the Section 73. Accounting Discharge of Rehabilitation
provisions of the Rehabilitation Plan and Receiver. - Upon the confirmation of the
shall take all actions necessary to carry Rehabilitation Plan, the rehabilitation receiver
out the Plan; shall provide a final report and accounting to the
(c) Payments shall be made to the
court. Unless the Rehabilitation Plan specifically
creditors in accordance with the
provisions of the Rehabilitation Plan; requires and describes the role of the
(d) Contracts and other arrangements rehabilitation receiver after the approval of the
between the debtor and its creditors shall Rehabilitation Plan, the court shall discharge the
be interpreted as continuing to apply to

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rehabilitation receiver of his duties. to BPI because the balance was then to be
considered waived, as per the Rehabilitation Plan.
BPI opposed the Rehabilitation Plan and moved for
Somera Book: the   dismissal   of   the   ASB   Group’s   petition   for  
 Rehabilitation Plan is approved when – rehabilitation.  SEC  approved  ASB  Group’s  proposed  
o Members of a class of creditors rehabilitation plan. BPI filed a petition for review of
holding more than 50% of total the order before the SEC en banc, arguing that the
claims vote in favor of the plan Order   constituted   an   arbitrary   violation   of   BPI’s  
o Due to the expansive definition of freedom and right to contract since the
claims, it may be hard to calculate Rehabilitation Plan compelled BPI to enter into a
the actual vote for all classes of dacion en pago agreement with the ASB Group. The
creditors SEC en banc denied the petition. The CA also denied
BPI’s   petition.   BPI   elevated   the   case   to   the   SC.   It  
 Cram Down – situation where the court argues that the dacion en pago is a form of coercion
confirms the Rehabilitation Plan over the or compulsion, and violative of the rights of secured
objection of the creditors creditors.
o Binds the insolvent debtor and Issue: WON the rehabilitation plan is violative of
creditors, whether or not they BPI’s  rights  as  creditor. (NO)
participated proceedings or Held: The mere fact that the Rehabilitation Plan
opposed the Rehabilitation Plan proposes a dacion en pago approach does not
render it defective on the ground of impairment of
 Cram Down is permitted only when: the right to contract. Dacion en pago is a special
o Rehabilitation Plan complies with mode of payment where the debtor offers another
the requirements specified in the thing to the creditor who accepts it as equivalent of
FRIA payment of an outstanding debt. The undertaking
o Rehabilitation receiver really partakes in a sense of the nature of sale, that
recommends the confirmation is, the creditor is really buying the thing or property
o Shareholders, owners or partners of the debtor, the payment for which is to be
of the juridical debtor lose at least charged   against   the   debtor’s   debt.     As   such,   the  
their controlling interest as a result essential elements of a contract of sale, namely;
of the Rehabilitation Plan consent, object certain, and cause or consideration
o Rehabilitation Plan would likely must be present.Being a form of contract, the dacion
provide the objecting class of en pago agreement cannot be perfected without the
creditors with compensation consent of the parties involved.
greater than what they would
receive through liquidation Other Remedies for BPI.
 If BPI does not find the dacion en pago
 Court may also confirm a Rehabilitation modality acceptable, the ASB Group can
Plan over the objection of the owners, propose to settle its debts at such amount
partners or stockholders of the insolvent as is equivalent to the selling price of the
debtor, if the rehabilitation plan is mortgaged properties.
necessary to restore the financial well being  If BPI still refuses this option, it can assert
of the insolvent debtor. its rights in the liquidation and distribution
of   the   ASB   Group’s   assets.   It  will   not   lose   its  
BPI v SEC (2007) status as a secured creditor, retaining its
Facts: The Bank of the Philippine Islands (BPI) preference over unsecured creditors when
extended credit accommodations to the ASB the assets of the corporation are finally
Group, secured by a real estate mortgage over two liquidated.
(2) properties located in Greenhills, San Juan. ASB
Group then filed a petition for rehabilitation and k. Termination Proceedings
suspension of payments. The Rehabilitation Plan
provides a dacion en pago by the ASB Group to BPI Section 74. Termination of Proceedings. - The
of one of the properties mortgaged to the latter. In rehabilitation proceedings under Chapter II shall,
turn, ASB Group would require the release of the upon motion by any stakeholder or the
other property mortgaged to BPI, to be thereafter rehabilitation receiver be terminated by order of
placed in the asset pool. The dacion would the court either declaring a successful
constitute full payment of the entire obligation due implementation of the Rehabilitation Plan or a

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failure of rehabilitation. action for the enforcement of a claim
There is failure of rehabilitation in the following against the debtor.
cases: Provided, however, That if the termination of
(a) Dismissal of the petition by the court; proceedings is due to failure of rehabilitation or
(b) The debtor fails to submit a dismissal of the petition for reasons other than
Rehabilitation Plan; technical grounds, the proceedings shall be
(c) Under the Rehabilitation Plan immediately converted to liquidation as provided
submitted by the debtor, there is no in Section 92 of this Act.
substantial likelihood that the debtor can Notes:
be rehabilitated within a reasonable  Initialized through a motion by any
period; stakeholder or by the rehabilitation
(d) The Rehabilitation Plan or its receiver to terminate the proceedings upon
amendment is approved by the court but an order of the court declaring
in the implementation thereof, the debtor o Successful implementation of the
fails to perform its obligations there Rehabilitation Plan
under or there is a failure to realize the o Failure of rehabilitation in the ff:
objectives, targets or goals set forth  Dismissal of the court
therein, including the timelines and  Failure of debtor to submit
conditions for the settlement of the rehabilitation plan
obligations due to the creditors and other  No substantial likelihood
claimants; that rehabilitation would
(e) The commission of fraud in securing occur within a reasonable
the approval of the Rehabilitation Plan or period
its amendment; and  Failure of debtor to
(f) Other analogous circumstances as may implement the
be defined by the rules of procedure. rehabilitation plan
Upon a breach of, or upon a failure of the  Commission of fraud in
Rehabilitation Plan the court, upon motion by an securing approval for the
affected party may: rehabilitation plan
(1) Issue an order directing that the  Other analogous
breach be cured within a specified period circumstances
of time, falling which the proceedings may
be converted to a liquidation;  Effects of Termination
(2) Issue an order converting the o Discharge of rehabilitation
proceedings to a liquidation; receiver, subject to the submission
(3) Allow the debtor or rehabilitation of a final accounting
receiver to submit amendments to the o Lifting of Stay order and other
Rehabilitation Plan, the approval of which court holding in abeyance of action
shall be governed by the same against claims
requirements for the approval of a
Rehabilitation Plan under this  If termination is due to a failure other than
subchapter; technical grounds  proceeding will be
(4) Issue any other order to remedy the converted to liquidation
breach consistent with the present
regulation, other applicable law and the l. Conversion to Liquidation Proceedings
best interests of the creditors; or
(5) Enforce the applicable provisions of Section 92. Conversion by the Court into
the Rehabilitation Plan through a writ of Liquidation Proceedings. - During the pendency of
execution. court-supervised or pre-negotiated rehabilitation
proceedings, the court may order the conversion
Section 75. Effects of Termination. - Termination of rehabilitation proceedings to liquidation
of the proceedings shall result in the following: proceedings pursuant to (a) Section 25(c) of this
(a) The discharge of the rehabilitation Act [(c)convert the proceedings into one for the
receiver subject to his submission of a liquidation of the debtor upon a finding that:,
final accounting; and (1)the debtor is insolvent; and (2)there is no
(b) The lifting of the Stay Order and any substantial likelihood for the debtor to be
other court order holding in abeyance any successfully rehabilitated as determined in

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accordance with the rules to be promulgated by total liabilities of the debtor, including secured
the Supreme Court.]; or creditors holding more than fifty percent (50%) of
(b) Section 72 of this Act [Period for Confirmation the total secured claims of the debtor and
of the Rehabilitation Plan. - The court shall have a unsecured creditors holding more than fifty
maximum period of one (1) year from the date of percent (50%) of the total unsecured claims of the
the filing of the petition to confirm a debtor. The petition shall include as a minimum:
Rehabilitation Plan. If no Rehabilitation Plan is (a) a schedule of the debtor's debts and
confirmed within the said period, the proceedings liabilities;
may upon motion or motu propio, be converted (b) an inventory of the debtor's assets;
into one for the liquidation of the debtor]; or (c) the pre-negotiated Rehabilitation Plan,
(c) Section 75 of this Act [Effects of Termination. - including the names of at least three (3)
Termination of the proceedings shall result in the qualified nominees for rehabilitation
following:(a) The discharge of the rehabilitation receiver; and
receiver subject to his submission of a final (d) a summary of disputed claims against
accounting; and (b) The lifting of the Stay Order the debtor and a report on the
and any other court order holding in abeyance any provisioning of funds to account for
action for the enforcement of a claim against the appropriate payments should any such
debtor]; or claims be ruled valid or their amounts
(d) Section 90 of this Act [At any time during the adjusted.
pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the debtor may also Section 77. Issuance of Order. - Within five (5)
initiate liquidation proceedings by filing a motion working days, and after determination that the
in the same court where the rehabilitation petition is sufficient in form and substance, the
proceedings are pending to convert the court shall issue an Order which shall;
rehabilitation proceedings into liquidation (a) identify the debtor, its principal
proceedings. The motion shall be verified, shall business of activity/ies and its principal
contain or set forth the same matters required in place of business;
the preceding paragraph, and state that the debtor (b) declare that the debtor is under
is seeking immediate dissolution and termination rehabilitation;
of its corporate existence.]; or (c) summarize the ground./s for the filling
at any other time upon the recommendation of the of the petition;
rehabilitation receiver that the rehabilitation of (d) direct the publication of the Order in a
the debtor is not feasible. Thereupon, the court newspaper of general circulation in the
shall issue the Liquidation Order mentioned in Philippines once a week for at least two
Section 112 hereof. (2) consecutive weeks, with the first
publication to be made within seven (7)
Somera Book: days from the time of its issuance;
 Only available if rehabilitation is no longer (e) direct the service by personal delivery
economically feasible or it will no longer of a copy of the petition on each creditor
provide better present value recovery for who is not a petitioner holding at least ten
creditors percent (10%) of the total liabilities of the
o Rehabilitation and liquidation debtor, as determined in the schedule
cannot be undertaken at the same attached to the petition, within three (3)
time days;
(f) state that copies of the petition and the
Notes: Rehabilitation Plan are available for
 Rehabilitation = Rescue examination and copying by any
 Liquidation = Surrender interested party;
(g) state that creditors and other
C. Pre-negotiated Rehabilitation interested parties opposing the petition
or Rehabilitation Plan may file their
Section 76. Petition by Debtor. - An insolvent objections or comments thereto within a
debtor, by itself or jointly with any of its creditors, period of not later than twenty (20) days
may file a verified petition with the court for the from the second publication of the Order;
approval of a pre-negotiated Rehabilitation Plan (h) appoint a rehabilitation receiver, if
which has been endorsed or approved by provided for in the Plan; and
creditors holding at least two-thirds (2/3) of the (i) include a Suspension or Stay Order as

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described in this Act. of the Rehabilitation Plan.

Section 78. Approval of the Plan. - Within ten (10)


days from the date of the second publication of the Section 81. Period for Approval of Rehabilitation
Order, the court shall approve the Rehabilitation Plan. - The court shall have a maximum period of
Plan unless a creditor or other interested party one hundred twenty (120) days from the date of
submits an objection to it in accordance with the the filing of the petition to approve the
next succeeding section. Rehabilitation Plan. If the court fails to act within
the said period, the Rehabilitation Plan shall be
deemed approved.
Section 79. Objection to the Petition or
Rehabilitation Plan. - Any creditor or other
interested party may submit to the court a verified Section 82. Effect of Approval. - Approval of a Plan
objection to the petition or the Rehabilitation Plan under this chapter shall have the same legal effect
not later than eight (8) days from the date of the
as confirmation of a Plan under Chapter II of this
second publication of the Order mentioned in
Section 77 hereof. The objections shall be limited Act.
to the following:
(a) The allegations in the petition or the
Rehabilitation Plan or the attachments Section 92. Conversion by the Court into
thereto are materially false or misleading; Liquidation Proceedings. - During the pendency of
(b) The majority of any class of creditors court-supervised or pre-negotiated rehabilitation
do not in fact support the Rehabilitation proceedings, the court may order the conversion
Plan; of rehabilitation proceedings to liquidation
(c) The Rehabilitation Plan fails to
proceedings pursuant to (a) Section 25(c) of this
accurately account for a claim against the
debtor and the claim in not categorically Act; or (b) Section 72 of this Act; or (c) Section 75
declared as a contested claim; or of this Act; or (d) Section 90 of this Act; or at any
(d) The support of the creditors, or any of other time upon the recommendation of the
them was induced by fraud. rehabilitation receiver that the rehabilitation of
Copies of any objection to the petition of the the debtor is not feasible. Thereupon, the court
Rehabilitation Plan shall be served on the debtor, shall issue the Liquidation Order mentioned in
the rehabilitation receiver (if applicable), the
Section 112 hereof.
secured creditor with the largest claim and who
supports the Rehabilitation Plan, and the
unsecured creditor with the largest claim and who
Somera Notes:
supports the Rehabilitation Plan.
 Pre-negotiated Rehabilitation – is an
insolvency proceeding that commences as
Section 80. Hearing on the Objections. - After
an extra-judicial proceeding but terminates
receipt of an objection, the court shall set the same as a judicial one
for hearing. The date of the hearing shall be no  It is a consensual contract between
earlier than twenty (20) days and no later than creditors and debtor
thirty (30) days from the date of the second  Negotiated before a petition is filed in court
publication of the Order mentioned in Section 77  After a plan has been agreed upon, a
hereof. If the court finds merit in the objection, it verified petition for court approval of the
shall direct the debtor, when feasible to cure the Pre-negotiated rehabilitation plan will be
filed but only if minimum vote
detect within a reasonable period. If the court requirements are met
determines that the debtor or creditors o Approval of creditors holding at
supporting the Rehabilitation Plan acted in bad least  2/3  of  debtor’s  total  liabilities
faith, or that the objection is non-curable, the o Secured creditors holding more
court may order the conversion of the proceedings than 50% of total secured claims of
into liquidation. A finding by the court that the the debtor
o Unsecured creditors holding more
objection has no substantial merit, or that the
than 50% of total unsecured claims
same has been cured shall be deemed an approval of the debtor

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 Ultimately results to a Cram down, affecting o Creditors holding at least 85% of
all creditors whether they participated in total liabilities, secured or
the proceedings or opposed the plan. unsecured

D. Out-of-Court Rehabilitation  May be preceded by a Standstill Agreement

Section 83. Out-of-Court or Informal Restructuring 2) Benefits of Out-of-Court Rehabilitation


Agreements and Rehabilitation Plans. - An out-of-
curt or informal restructuring agreement or Section 85. Standstill Period. - A standstill period
Rehabilitation Plan that meets the minimum that may be agreed upon by the parties pending
requirements prescribed in this chapter is hereby negotiation and finalization of the out-of-court or
recognized as consistent with the objectives of informal restructuring/workout agreement or
this Act. Rehabilitation Plan contemplated herein shall be
effective and enforceable not only against the
contracting parties but also against the other
Section 84. Minimum Requirements of Out-of- creditors: Provided,That (a) such agreement is
Court or Informal Restructuring Agreements and approved by creditors representing more than
Rehabilitation Plans. - For an out-of-court or fifty percent (50%) of the total liabilities of the
informal restructuring/workout agreement or
debtor; (b) notice thereof is publishing in a
Rehabilitation Plan to qualify under this chapter, it
must meet the following minimum requirements: newspaper of general circulation in the
(a) The debtor must agree to the out-of- Philippines once a week for two (2) consecutive
court or informal restructuring/workout weeks; and (c) the standstill period does not
agreement or Rehabilitation Plan; exceed one hundred twenty (120) days from the
(b) It must be approved by creditors date of effectivity. The notice must invite creditors
representing at least sixty-seven (67%) of to participate in the negotiation for out-of-court
the secured obligations of the debtor;
(c) It must be approved by creditors rehabilitation or restructuring agreement and
representing at least seventy-five percent notify them that said agreement will be binding on
(75%) of the unsecured obligations of the all creditors if the required majority votes
debtor; and prescribed in Section 84 of this Act are met.
(d) It must be approved by creditors
holding at least eighty-five percent (85%)
of the total liabilities, secured and Section 86. Cram Down Effect. - A
unsecured, of the debtor. restructuring/workout agreement or
Rehabilitation Plan that is approved pursuant to
1) General Concepts
an informal workout framework referred to in this
Somera Book: chapter shall have the same legal effect as
 Out-of Court Rehabilitation - a consensual confirmation of a Plan under Section 69 hereof.
contract between an insolvent debtor which The notice of the Rehabilitation Plan or
implies that the two parties have negotiated restructuring agreement or Plan shall be
and agreed on a restructuring of the published once a week for at least three (3)
debtor’s  claims  without  filing  a  petition in consecutive weeks in a newspaper of general
court
circulation in the Philippines. The Rehabilitation
 No petitions are filed with the court
Plan or restructuring agreement shall take effect
 Minimum Vote Requirement: upon the lapse of fifteen (15) days from the date
of the last publication of the notice thereof.
o Approved by debtor
o Secured creditors representing at
least 67% of secured obligations Section 87. Amendment or Modification. - Any
o Unsecured creditors representing amendment of an out-of-court
at least 75% of unsecured restructuring/workout agreement or
obligations Rehabilitation Plan must be made in accordance

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with the terms of the agreement and with due implementation, unless relevant
notice on all creditors. party is able to secure a temporary
restraining order or injunctive
relief from CA
Section 88. Effect of Court Action or Other o Insolvent debtor may seek
assistance for the execution or
Proceedings. - Any court action or other
implementation of ORA that meets
proceedings arising from, or relating to, the out- minimum vote req.
of-court or informal restructuring/workout
agreement or Rehabilitation Plan shall not stay its
implementation, unless the relevant party is able LIQUIDATION:  PHIMIE’S  PART  TO  FOLLOW
to secure a temporary restraining order or
injunctive relief from the Court of Appeals. (Dee volunteered to do this part) 

Section 89. Court Assistance. - The insolvent


debtor and/or creditor may seek court assistance
for the execution or implementation of a
Rehabilitation Plan under this Chapter, under such
rules of procedure as may be promulgated by the
Supreme Court.

Somera Book:
 Standstill Agreement – consensual contract
between the insolvent debtor and its
creditors that allows the debtor not to pay
its liabilities as they fall due and prevent
creditors from taking further actions
o Approved by creditors
representing more than 50% of the
total liabilities of the debtor
o Notice of the agreement is
published in a newspaper of
general circulation once a week for
two weeks, inviting creditors to
participate in the negotiation for
the Out-of Court Restructuring
Agreement and informing them
that if the minimum required vote,
the agreement would bind all
creditors
o Does not extend 120 days from
date of effectivity

 If minimum vote requirement is met it will


result to a Cram down provided that:
o ORA shall be published once a week
for at least three weeks in a
newspaper of general circulation
o ORA shall take effect upon the lapse
of 15 days from date of last
publication
o Any court action or proceeding
arising from ORA that meets
minimum vote req. shall not stay its

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