Spcl - Divina eBook

7/30/2019 Spcl - Divina eBook

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Transcribers:

Marc Roby de Chavez (MARX)Marc Roby de Chavez (MARX)Marc Roby de Chavez (MARX)Marc Roby de Chavez (MARX)

Mon Cristhoper Pasia (MON)

Professor: Dean Nilo T. Divina


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Special Commercial Laws Notes by MARX and MON

What is a letter of credit?Any arrangement however named of described,

whereby a bank acting upon the request of its client

or in its own behalf, agrees to pay another, against a

stipulated documents provided that the terms of the

credit are complied with.

The definition of letter of credit based on the

National Chamber of Commerce

Can there ever be a letter of credit were there is no sale

setting?

Yes, Let say a debtor wants to obtain a loan from

creditor, the creditor is willing to lend money to the

debtor under the condition that there is a security

arrangement issued by a bank. So the creditor is

comfortable with any collateral coming from the

debtor; the creditor is not comfortable with any

guaranty agreement that would be executed by an

ordinary person; he wants a security coming from a

bank. So in that case, there is a letter of credit issued

in favor of the creditor. It is a non-sale setting. It is a

contract of loan, then the bank issues a letter of

credit. So it is not correct to say then that the letter

of credit always presupposes for a sale setting.

Commercial letter of credit conforms to sale setting. The

transaction underlying the letter of credit is sale.

Standby letter of credit conforms to non-sale setting. The

transaction underlying the letter of credit is non-sale.

Example of Commercial Letter of credit

Buyer is a company based in the Philippines, it wants to

purchase equipment from a company based in Japan. Only

this company based in Japan has the capability or technicalknowhow to manufacture this equipment that the Buyer

needs for his business. The only problem is they reside in

different jurisdiction the Buyer is on the Philippines the seller

is in abroad. If the buyer advance payment there is a

possibility that he will not get the equipment, on the other

hand if the seller causes the shipment of the equipment there

deposit. Buyer-applicant pays 30% of the total obligation andpay fees and commission to the issuing bank. Of course, the

bank will not issue a letter of credit without an income, there

is a gain and the gain or income comes in the form of

payment of commission and interest charges on the

obligation to be paid in favor of the seller-beneficiary later

on. As the buyer applicant pays the marginal deposit and

agrees on the terms and conditions that the issuing bank may

impose, the issuing bank will now undertake to pay the seller-

beneficiary for issuing a letter of credit. The undertaking topay by the issuing bank is conditioned on submission of

certain stipulated documents, that why earlier in our

definition Any arrangement however named of described,

whereby a bank acting upon the request of its client or in its

own behalf, agrees to pay another, against a stipulated

documents which means the obligation of the issuing bank

to pay, the commitment of the issuing bank to pay the

beneficiary is on the condition or against the stipulated

document meaning on the condition that the seller-

beneficiary will submit certain stipulated documents. This

documents stipulated by the parties usually are the shipping

documents, the same documents to show that the seller-

beneficiary has complied with his obligation under the

contract of sale with the buyer and the same documents that

the buyer-applicant will need later on to obtain delivery of

the equipment. The shipping documents are the Bill of lading

(issued by a common carrier acknowledging receipt of the

goods with the obligation to deliver the same to the

consignee), sale invoices (contains the description of the

equipment, the purchase price) and a draft to be drawn by

the issuing bank etc. once the document have been defined

or verified, these documents are submitted to the issuing

bank, upon receipt of the issuing bank of those documents,

the issuing bank will pay the seller-beneficiary. The issuing

bank will release the documents of title to the buyer-

applicant, so the buyer-applicant will be able to obtaindelivery of equipment from the common carrier or the

customs as the case may be. But the issuing bank will not just

release the documents, it has to be reimburse by the buyer-

applicant of the total amount paid under the letter of credit.

So the issuing bank pays $10,000.00 and the buyer-applicant

paid only 30%. The issuing bank has to be reimburse the


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debtor on the condition that the debtor will have to procure asecurity arrangement to be issued by a bank. So the creditor

is not comfortable in granting a loan to the debtor with any

security, at the same time the creditor is not comfortable

granting loan to the debtor simply on the strength of its

mortgage on his properties or the creditor is not comfortable

granting loan to the debtor with a guaranty agreement to be

signed by a third party. So the creditor will only be comforted

in granting a loan to the debtor in a security arrangement

comes from a bank, the bank is presumably with resources orwith the ability to pay the debtors obligation. So the debtor

now procures a standby letter of credit in favor of the

creditor, he pays the marginal deposit and agrees with the

commission. The issuing bank will now open the letter of

credit in favor of the creditor. Undertaking to pay the creditor

upon submission of the stipulated documents. In standby

letter of credits the documents to be submitted are

documents showing that the obligor did not perform his

obligation under the contract supporting the letter of credit.

In a commercial letter of credit, the documents submitted by

the seller-beneficiary are documents showing that he has

taken the required steps to comply with his obligations under

the contract of sale. So by shipping that equipment he

obtained the bill of lading, so he has taken the positive steps

to comply with his obligation.

In a standby letter of credit the documents submitted by the

creditor that the debtor did not perform his obligation under

the contract that supports the letter of credit. So, i t is either a

certificate of non-payment or certificate of default or

certificate of non-performance. So once the documents has

been submitted and identified and documents have been

submitted by the creditor, such creditor can now draw on the

standby letter of credit. The payment is made by the issuing

bank to the creditor, then the bank must be reimburse fromthe debtor. So, whatever is the amount paid to the creditor

plus the charges and the commission.

A letter of credit by itself does not come into operation

without a contract supporting it. It is not a contract that can

stand on its own, it needs a supporting contract. In a

Without the issuing bank in the equation, what we have is apromise to pay by debtor to the creditor, in a standby letter

of credit, by introducing an issuing bank in the equation, the

promise to pay by the debtor is substituted by a better

promise to pay made by the issuing bank.

In both cases, whether commercial or standby letter of credit,

they conform or fits the definition of letter of credit.

Who are the parties to the letter of credit? Applicant Beneficiary Issuing bank

When we say in the definition against stipulated documents

what does it mean? What is the condition that these

stipulated are submitted?

Provided that the terms of the credit are complied

with

Who are the parties to the letter of credit? (Basic Parties)

Applicant/Account party he may be a buyer,importer or obligor. The person who procures the

opening of letter of credit and who agrees to

reimburse the issuing bank any and all amount

should be paid under the letter of credit once the

issuing bank is compelled to pay because the

beneficiary is able to submit the documentstipulated.

Issuing Bank the one that undertakes to pay thebeneficiary upon submission of the beneficiary of

these stipulated documents and compliance with the

terms of the credit

Beneficiary the one titled to payment from theissuing bank upon his submission of the document

stipulated and compliance with the terms of the

credit.

Other Party

Correspondent Bank of the issuing bank

Why do we need a Correspondent Bank? If the account party

is in the Philippines the beneficiary is in abroad How will the


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if genuine, the advising/notifying bank notifies thebeneficiary of the letter of credit; transmit the letter

of credit in favor of the beneficiary so that the

beneficiary can cause shipment of the equipment.

Paying Bank is an agent of the issuing bank for thepurpose of making payment to the beneficiary.

Usually an issuing bank has a bank account in Tokyo,

lets say BDO has an account in the Bank of Tokyo.

Bank of Tokyo may be a paying bank. BDO willinstruct Bank of Tokyo to pay the beneficiary, debit

the account of BDO then credit the account to the

beneficiary. The Paying Bank collects fees from the

issuing bank.

Is it possible for an advising bank and the paying

bank to be the same bank?

Yes

Confirming Bank Why is it called confirming bank?

Because it lends credence to a letter of

credit issued by a lesser known bank as if it

is the one who issued the letter of credit.

Lets say BDO in the Philippines is the largest bank in

Philippines but BDO in Japan is small. So BDO in

Japan is a lesser-known bank in Japan. So why will

the beneficiary agree on a letter of credit to be

issued by a lesser-known bank? A confirming bank

may come into the equation. That confirming bank

lends credence to the letter of credit issued by a

lesser-known bank as of it is the one that issued the

letter of credit. Which means the beneficiary,

instead of going directly to the issuing bank, may just

present the documents to the confirming bank, and

the confirming bank will be the one to pay thebeneficiary. Once the confirming bank pays the

beneficiary it will claim reimbursement from the

issuing bank and collect also its own fees. If there is a

confirming bank, the letter of credit becomes more

expensive because there are more fees to be paid.

Who will give the order to pay to the issuing bank orconfirming bank as the drawee of the draft?

The one liable to pay. So the drawer and

the payee can be both the seller-beneficiary

What will the payee do on the draft?

On maturity, the payee may present the

draft to the drawee. The drawee accepts

and pays.

What if the draft is payable 60 days after sight?

Upon acceptance by the drawee, it is not

yet due for payment. That the payee will

have to wait for 60 more days upon

acceptance by the drawee

If it is a users draft, the payee may not want to wait

for 60 days, what will the payee-beneficiary do?He may have the option to negotiate the

draft into somebody else. So if the payee-

beneficiary negotiates that draft to a bank

(XYZ bank). This bank is known as the

negotiating bank. The bank that buys the

drafts drawn against the issuing bank or

confirming bank is the negotiating bank

In negotiable instruments law, if you have a draft, the drawer

address the drawee to pay the payee. The payee has 2

options: present the instrument for acceptance or negotiate.

If he payee negotiate, the holder, the one who pays the

instrument, becomes the owner and the owner now has 2

options: present the instrument for acceptance or negotiate

Why will a bank by the draft?Because it will buy it with a discount. So if the draft

is valued of $10,000.00, the bank will only buy it for

$9500.00. So the payee gets the $9500.00 without

waiting for 60 days. The entire $10,000.00 will be

collected by XYZ bank on maturity from the issuing

or confirming bank.


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agreement for the issuance of the letter-credit bythe bank

Issuing Bank and beneficiary relationship isgoverned by the terms of the letter of credit issued

by the bank

Applicant and the beneficiary relationship isgoverned by the law on sales. They agree on the

terms and conditions of the sale

Is the contract between the applicant and beneficiaryindependent from the contract between the issuing bank and

the applicant?

Yes, they are inter-connected or related but they are

independent and separate from one another

Lets say that the buyer-applicant and the seller-beneficiary

agreed to enter into a contract of sale and the object of the

sale refers to a dye stuff. A letter of credit has been opened

procured by the buyer in favor of the seller. The seller

presented the document to the issuing bank and the issuing

bank pays the seller. Then the documents were returned to

the buyer-applicant, the buyer-applicant presented the

document to the common carrier and obtained the shipment.

When the buyer opened the goods, what was delivered were

not dye stuff. Can the buyer refuse to reimburse the issuing

bank?

No, in this case, the object did not conform on what

was agreed upon by the buyer and the seller, there

is a breach of contract. The buyer cannot refuse to

reimburse the issuing bank despite the breach of

contract by the seller. This is the DOCTRINE OF

INDEPENDENCE

Doctrine of Independence

Under this doctrine, the obligation of the issuing

bank to pay the beneficiary does not depend on thefulfillment or non-fulfillment of the contract

supporting the letter of credit. If it is a commercial

letter of credit, the obligation if the issuing bank to

pay the beneficiary is not affected by any breach of

contract by the seller to the buyer because the

contract between the issuing bank and beneficiary is

The right of the issuing bank to reimbursement the

buy from the buyer applicant does not depend on

the fulfillment or non-fulfillment of the contract. It

depends on whether or not the issuing bank was

compelled to pay beneficiary because the latter

submitted the documents stipulated.

It is not part and it will never be a part of the

contract between the issuing bank and the buyerthat the bank will investigate whether the goods

conformed to the goods ordered.

What are remedies of the buyer in case the goods did not

conformed to the goods ordered?

File an action for breach of contract against the

seller. The remedy of the buyer is based on the law

on contracts and not based on the principles of

letter of credit

Lets say the buyer and seller in a commercial letter of credit

entered into a contract of sale for a delivery of certain object.

They stipulated that the buyer will procure the opening of a

letter of credit in favor of the seller. The buyer, however, was

not able to obtain a letter of credit with a bank. In the

stipulation that the buyer will procure a letter of credit but

failed to do so prevent the consummation of the contract of

sale? Is the non-opening of the letter of credit is at least a

resolutory condition that extinguished the contract of sale?

In Reliance Commodities, Inc vs Daewoo Industrial,

the contract of sale between the seller and the

buyer is separate, distinct and independent from the

opening of the letter of credit because it is a matter

between the buyer and the issuing bank. A contract

of sale is perfected by mere consent and such nature

of a contract of sale is not affected by the non-opening of a letter of credit

Letter of Credit in a non-sale setting or a STAND-BY LETTER

OF CREDIT

Lets say the debtor obtained a loan from a creditor for 5

million pesos secured by a stand-by letter of credit issued by


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the letter of credit. The only amount that the issuingbank may recover from the debtor is 5M under their

own relationship. But to prevent unjust enrichment

at the expense of another, the SC said that the

excess payment may be recovered by the debtor

from the creditor.

What are the kinds of letter of credit?

Irrevocable letter of credit A letter of creditwherein the terms and the undertakings of theissuing bank cannot be amended or altered or

revoked without the consent of the beneficiary

Revocable letter of credit can be amended,altered or revoked even without the consent of the

beneficiary

Standby letter of credit non-sale setting Commercial letter of credit the principal

transaction is a sale or importation setting

Confirmed letter of credit - the liability of theconfirming bank is primary

Non-confirmed letter of credit -SPCL2

Can we say that the obligation of the issuing bank in a letter

of credit is similar to a guarantor particularly to stand-by

letter of credit?No, the obligation in a letter of credit is primary and

solidary while in a case of a guarantor, it is

subsidiary.

In a contract of guarantee, the guarantors obligation

is merely collateral and it arises only upon the default of the

person primarily liable; a letter of credit is an engagement by

a bank or other person made at the request

How about a surety?

The issuing bank has to pay even there is no default

payment

Lets say between the debtor and the creditor, there are issues

of overpayment capacity minority or defenses which are

Does the fraud refers to the performance of the contract?What kind of fraud that is contemplated with the fraud

exemption principle to prevent the beneficiary from collecting

on the letter of credit?

Fraud in relation with the independent purpose or

character of the letter of credit, not fraud in the

performance of the obligation or contract supporting

the letter of credit.

Because if it is fraud in the performance of thecontract, under the doctrine of independence, it is

not a bar for the beneficiary to collect from the

issuing bank.

Example: the Letter of credit requires submission of the Bill

of Lading but the submitted document was a spurious bill of

lading.

Doctrine of Strict ComplianceIt requires that the document to be submitted or

tendered by the beneficiary conforms strictly,

faithfully and absolutely with the document

stipulated such that if there is a discrepancy

between the document stipulated and the document

tendered, the beneficiary is not entitled to payment.

Supposing that the document required is submitted by the

beneficiary is a document that is within the power of the

applicant to issue, but the applicant refuses to issue despite

having received the shipment, will the document of strict

complaince still bars the beneficiary in collecting the letter of

credit?

It matters not that the submission of the documents

are unfair, unjust or inequitable, the point is, it

requires that the document stipulated must be the

document to be submitted, otherwise, the issuingbank is not liable or the beneficiary is not entitled to

payment

The SC said in various cases that in Sec 2 of the code of

Commerce that in the absence of any particular law in the

Code of Commerce, commercial transactions shall be


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Any arrangement, however named or described, whereby abank, acting upon the request of his client or on his own

behalf agrees to:

Pay a third party to the order of the beneficiary Accept draft drawn by the beneficiary Authorize another bank to pay the beneficiary Authorize another bank to accept a draft drawn by

the beneficiary

To negotiate against stipulated documents providedthat the terms of the letter of credit are compliedwith

TRUST RECEIPTS LAW (PD 115)

Trust Receipt Transaction any transaction between the

entruster and the entrustee, whereby the entruster who

owns or holds absolute title or security interest over specified

goods, documents or instruments releases the same to the

possession of the entrustee, who in turn, binds himself to the

designated goods, documents or instruments with the

obligation to turn over the proceeds to the entrustor to the

extent of the entrustees obligation to him, or if unsold, to

return the said goods, documents, or instruments to the

entrustor

Who are the parties in a trust receipt transaction?

Entruster

entrusteeDescribe the rights of the entruster over the goods,

documents or instrument

He has absolute title or security interest over the

goods

Think of a trust receipt similar to a chattel mortgage. In trust

receipts transaction, the goods are held in trust for thebenefit of the entruster. By express provision of law, the

entrustee has the obligation to hold the goods, documents,

or instruments in trust for the entruster and if he sells the

goods, he must account for and deliver the same proceeds in

favor of the entruster. Or, if he did not sell the goods, he

must return the same to the entruster otherwise he is liable

sell, he must return the goods, documents or instruments,otherwise there is a crime committed.

From an issuing bank, it becomes the entruster and the buyer

becomes the entrustee, he is able to receive the goods even

though he does not pay in full, in time the obligation is

converted from mere civil to criminal.

In Bank of Commerce vs Serrano, the SC distinguished

between trust receipt and letter of credit. The liability of thebuyer-importer to reimburse the issuing bank is civil in

nature, even he does not pay, there is no crime committed. In

a trust receipt transaction, it is true that the bank may release

the goods even though it is not pay in full, but there are

concomitant obligation to be performed by the entrustee

such that he did not performed such obligation, there is a

crime committed. The issuing bank finds comfort in issuing

the goods or documents to the buyer-importer even though

he did not pay in full yet of the amount advanced by the bankfor the importation on shipment of the goods.

The basic obligation of the buyer-importer, now the

entrustee, is to pay. The bank advanced the money, the bank

lent the funds to enable the buyer to acquire the goods.

Basically, it is the money of the bank because the bank paid

the beneficiary, even though it has not been paid in full by

the buyer.

What is the basic obligation of the buyer?

To pay the amount advanced by the bank. If the

entrustee does not pay and he sold the goods but he

did not deliver the proceeds, a crime is committed.

Or, he did not pay the obligation, not able to sell the

goods but he did not return the goods, then a crime

of estafa is committed.

If he is able to pay the obligation to the bank, then

both civil and criminal obligation are extinguished.

Are there any other obligation imposed upon the entrustee?

The obligation to insure the goods The obligation to keep the goods separate and


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interested in the shells, did not accept the return. So bank didnot receive the return of the goods. A and B consigned the

goods in court but the consequence is, a complaint for estafa

was filed against A and B, but it was dismissed because the

goods are consigned in court. Can the Bank file a separate

civil action to enforce the civil liability of A and B?

In the case of Vintola vs IBAA, the action will prosper

because a trust receipt transaction has 2 features:

Loan feature Security Feature

Loan feature is brought about by the fact that the

bank financed the cost of acquisition or importation.

The bank lent the money to enable the buyer to

obtain the goods that he wants to purchase.

Security feature lies on the goods itself, the goods

are held under a trust for the benefit of the

entruster. If they are sold, the proceeds must be

accounted for and delivered to the entruster. If they

are not sold, the goods must be returned to the

entruster, otherwise the crime of estafa is

committed.

Basically, for as long as the loan is not paid, the civil

liability remains. The return of the goods will only

have a bearing on the criminal liability of the

entrustee not on the civil liability. For as long as the

load advanced by the bank is not paid, the civil

obligation remains.

The return of the goods will only extinguished the

criminal liability but not the civil liability, the loan is

yet to be paid.

When is the civil liability be extinguished?Only when the goods are sold and the

proceeds will be applied for the payment of

the obligation

Who is the owner under the trust receipt transaction?

Entrustee, the entrustor is merely a holder of a

Does the entrustee have absolute ownership on the property?No, because the property is held in trust for the

benefit of the entruster. He does not have freedom

of disposal, therefore, he cannot mortgage the

goods.

The inclusion of goods under trust receipt transaction in a

mortgage is void and the ensuing foreclosure sale is likewise

null and void

The entrustee cannot mortgage but he can sell. If the

entrustee is the owner and the object is lost, suppose to be

there is no more liability. But under the trust receipt law, the

loss of the goods will not extinguish the civil liability of the

entrustee. (Section 10)

In one case, the SC said that the owner of the goods is the

entruster (in vintola case, it is the entrustee). The SC clarified

that it is an artificial concept or notion meant to protect itsinterest over the goods.

A entered into a contract with ABC to renovate the cemetery

in Cebu. After entering into the contract, A purchased supplies

from a construction supplier. The following day, he went to a

bank, got a loan to pay off his construction supplier. The bank

asked him to sign a trust receipt agreement. A was not able

to pay his obligation to the bank. The bank filed a criminal

case for estafa against A. is he liable? Is that a trust receipt

transaction just because the parties signed a trust receipt

agreement? Can we say that the bank financed the goods?

It is not a trust receipt agreement but an ordinary

loan because when A signed the trust receipt

agreement, he is already the owner of the goods.

The bank did not financed the goods. It is the nature

of the transaction that determined whether the

transaction is a trust receipt transaction, not thenomenclature or name of the agreement.

If the supposed entrustee was already the owner of

the goods before he signs the trust receipt

agreement even though he is not in possession of

the goods, it is not a trust receipt transaction as


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employees or other officials or persons therein responsible for the offense,

without prejudice to the civil liabilities arising from the criminal offense.

What about an agent of the corporation, it was violated by

the corporation thru an agent. Who is liable civilly? The agent

who signed in behalf of the corporation or the corporation?

Corporation is liable civilly

Who is criminally liable?

In the case of Ong vs CA, it was the agent who is

criminally liable because he is a person responsible

for the offense

Can we file a criminal case against the corporation?

It depends, if the penalty is imprisonment, we

cannot file a criminal case, but if the penalty is a fine

or forfeiture or revocation of the corporations

franchise, then we can

What are the defenses that can be invoked to negate criminal

liability?

The entrustee has fulfilled his obligation, that is, hehad surrendered the proceeds or returned the goods

to the entruster (delivery of the proceeds up to the

extent owing to the entruster will extinguish the civil

liability; partial delivery will not extinguish civil

liability), (return of the goods do not extinguish civil

liability, it has to be sold and apply the proceeds) The transaction is only a loan and not a trust receipt

transaction as contemplated by law (it does not

extinguish civil liability)

The goods or documents subject of the trust receiptwas not delivered or received by the entrustee (it

does not extinguished civil liability)

When the entruster cancels the agreement andtakes possession of the goods and eventually sells

the said goods. Mere repossession of goods willextinguish criminal liability (it does not extinguish

the civil liability)

Loss of goods due to fortuitous event or forcemajeure; (it does not extinguish civil liability)

If there is compromise agreement before the filing ofh l h h

the entrustee, but subject to the execution by the entrusteeof an agreement whereby he undertakes to hold the goods,

documents or instruments in trust for the entruster.

In case he sells the goods, documents or instruments to

deliver the proceeds to the entruster up to the extent of the

amount owing to the entruster, or return the goods if not

sold. Otherwise, he commits the crime of estafa.

Think of trust receipt transaction as basically a loan securedby chattel mortgage. Same concept except that the goods are

held in trust for the benefit of the entruster and if the goods

are sold there is a corresponding obligation to deliver the sale

proceeds or if unsold to return the goods otherwise there is a

crime of estafa under Sec 13 of PD 115 in relation to Art 315

of the RPC.

The basic obligation of the entrustee is to pay the obligation.

So the bank financed, lend money, advanced to funds to

finance the acquisition or purchase of goods under trust

receipts. So there is money out insofar as the bank is

concerned. The security of the bank lies with the goods

themselves, such that if the goods are sold the sale proceeds

must be delivered to the entruster, or if not the same must

be returned to the entruster.

If the obligation is paid, if the loan advanced by the bank is

paid then the obligation is extinguished or there is no

obligation to talk about.

If it is only when the entrustee does not pay the obligation

that what he does with goods becomes critical insofar as his

liability is concerned.

If he does not pay and sells the goods, he must deliver the

proceeds up to the full amount owing to the entruster.

If he does not pay and did not sell the goods, he must return

the goods to the entruster. This is clear in the case of Allied

Bank vs DOLE.


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intend to sell it. You intend to use it. So the criminalsanction under PD 115 applies even if that object is

not for sale or resale.

So how can the entrustee comply with the obligation to

deliver the sale proceeds or return the goods if not sold if it is

not for sale anyway?

The SC the criminal sanction under PD 115

encompasses the basic obligation to pay. So if that

obligation is not fulfilled then criminal liability is alsopresent.

That is why we clarify that it is only when the entrustee is

able to pay that the obligation is extinguished. And it is only

when the entrustee failed to pay that what he does to the

goods as a security becomes important to determine the

nature and extent of his liablity.

What are the other obligations imposed by law upon theentrustee?

1. to insure the goods against theft, pilferage, fire andother natural calamities

2. keep the goods separate and distinct from his otherproperties

3. to Observe the other terms and conditions of theagreement, like if the agreement prohibits that the

goods be transferred to other location then such

must be respected.

But, only the obligation to deliver the sale proceeds or return

the goods if not sold will give rise to criminal liability in case

the loan is not paid. The rest of the obligations will not give

rise of to criminal liability.

The gravamen of the offense or the core of the offense is the

failure to pay matched with the failure to deliver the sale

proceeds or return the goods if not sold.

In cases of Vintola vs IBAA and Rosario Textile Mills vs ___

the SC explained the nature of TR Transaction. It has a loan

feature and a security feature.

The Vintolas tendered the return the of the goods incourt but obviously rejected by the IBBA. The

Vintolas were forced to consign to goods in court.

The consignation will result in acquittal, but not in

the extinguishment of the civil liability, because for

as long as the loan is not paid the civil obligation

remains.

So the return of the goods will only address the

criminal liability, but unless the goods are sold andproceeds are applied to the obligation, the civil

liability remains.

So in the case of Vintola vs IBAA that the acquittal of the

entrustee in the criminal case which impliedly includes the

civil case does not preclude or is not a bar to the filing of a

separate civil action in court of the civil liability of the

entrustee.

In Vintola vs IBBA acquittal first then separate civil action. In

Sarmiento vs CA, it is simultaneous filing.

May a criminal action proceed indecently of a civil action?

Can they go hand in hand - criminal action for estafa, civil

action to recover the obligation or enforce civil liability?

The SC said yes, because the criminal action is based

on ex delicto, violation of PD 115 as a law and the

civil action is based on ex contractu, violation of the

terms and conditions of the agreement itself.

Rosario Textile Mills vs Homebankers Trust

In this case the goods were not accepted by the

entrustee because they did not conform with the

specifications. The goods were stored in a bodega.

While in the bodega they were destroyed by fire. So

without the receipt of the goods by the entrustee.

Does that extinguish the civil obligation of the

entrustee? The goods were lost without actual

receipt by the entrustee

The SC said, citing the two features loan

and security features, the loss of the goods


11/67


The SC said,''No, because one of the elements of a

valid mortgage under Art 2085 of the Civil Code is

that the mortgagor must be the absolute owner of

the property mortgaged, or must have freedom of

disposal which is not present in this case of a TR

transaction, where the goods are simply held in

trust.''

But anytime he can sell, this is one case where not being theowner he could sell but with the corresponding obligation to

deliver the sale proceeds to the the entruster.

If the entruster is the owner, however, how come the

principle of res perit domino will not apply against him?

If he is the owner the loss of the goods would have

its effect against the entruster. If he is the owner

then he will bear the risk of loss. But that is not so.

The loss does not in any way impair the obligation ofthe entrustee to pay the entruster.

In Rosario Textile Mills, the owner is the entruster but only in

an artificial concept or notion meant to preserve, protect,

and enhance the security interest over the goods.

If the facts are similar to DBP, apply DBP. If the issue is

whether or not you can mortgage, apply DBP.

If the issue is whether or not the loss of the goods

extinguishes the civil liability apply the case of Rosario Textile

Mills.

If the issue is whether or not the acquittal of the entrustee

will be a bar to the filing of a separate civil action in enforcing

the civil liability, apply the case of Vintola vs IBAA or

Sarmiento vs CA.

Defenses which the entrustee may invoke or raise against

the entruster if ever he is charged with violation PD 115

1. It is not a real transaction as contemplated by law.2. Fulfilment of the terms and conditions of the

of the transaction that determines the rights andobligations of the parties to the transaction. That is

what exactly happened in the case of Colinares vs

CA.

Colinares vs CA

A entered into a contract for _ the purchase of two

sacks of rice and the following day he obtained loan

from a bank to pay-off the two sacks of rice_. The

bank made him sign a TR agreement. He did not paythe obligation to the bank. He was charged with the

crime estafa.

Is there a crime committed?

The sequence is: He got a contract today. The

following day purchased the supplies and became

the owner thereof although on loan. After buying

the supplies, went to the bank got a loan to pay-off

the supplier.

The question is: when he signed the agreement was he in

possession and the owner of the goods?

Yes. Then if he is in possession of the goods and the

owner then that is not a TR transaction, because in a

TR transaction the bank should have financed the

acquisition of the goods.

In this case it is the reverse. It cannot be said that

the bank finances because he was an owner at the

time that the funds came in. So the funds have been

delivered before or simultaneously with the delivery.

So it cannot be said that the bank financed the

acquisition of the goods which is in keeping with the

nature and concept of a TR transaction.

Fulfilment of the terms and conditions of the agreement

Fulfilment may come in the form of payment or

delivery of the sale proceeds or return of the goods.

If the obligation is paid on its entirety then criminal

and civil liability are extinguished.

If it is delivery of the sale proceeds, it depends on


12/67


People vs OngThe compromise agreement, unfortunately, was

entered into after the filing of the Information in

court. When the prosecution continued the

entrustee questioned the continuance of the case

because he already entered into a compromise

agreement with the entruster.

The SC said the compromise agreement after the

filing is not a ground to extinguish criminal liability.Conversely, if the compromise agreement was

entered into after the filing of the Information there

is novation, it prevents the rising of criminal liability.

It is not a ground to extinguish criminal liability but it

prevents the rising of criminal liability.

It stops the giving birth of the criminal liability

because the basis of criminal liability was convertedinto a creditor-debtor relationship.

A trust if breached will give rise to a criminal liability,

but if a trust is converted to a creditor-debtor

relationship then the trust element is gone. What

you have is simply an obligation to pay under the

compromise agreement, if breached would only give

rise to a civil liability.

Pilipinas Bank vs Ong

The entrustee here is the __ corporation. The

entrustor is the bank. The entrustee file a petition

for suspension of payment with the SEC (At that time

the SEC has jurisdiction over petition for suspension

of payment. Now it is the RTC acting as a special

commercial court). The SEC appointed a

management committee that oversaw the operation

of the entrustee corporation and forbade the

entrustee corporation from making any

payment_crisis and difficulties including the

obligation under TR.

The question is, if you have and order coming from a

In criminal law, if it is a violation of special law intent

is not necessary. It is the violation of the law that

makes it an offense. But in this case the SC said that

there is no intent to commit the act. So it is not a

question of whether there is intent to violate the

law, but there is not intent to commit the act

because the reason for the non-payment was

brought about by the order coming from the

management committee appointed by the SEC.

Actually, that hair-splitting distinction would not

have been necessary because all the SC would have

to say is that there was a novation before the filing

of the information.

In this case the parties converted the TR agreement

into a 7 year term loan. They changed the term of

the contract. They increased the interest rate. Thebank requires a collateral. It is no longer a trust

relationship agreement. It is now a creditor-debtor

relationship under the loan agreement.

Non-delivery of goods

___ vs CA. The execution of a TR agreement with

matching invoice attached to it, does not prove

delivery. Just because the prosecution was able to

present the TR agreement, the invoices does not

prove delivery. The invoices merely contain the

description of the goods, quantity and quality does

not prove delivery.

The prosecution should have presented a document

independently of the TR agreement to prove

delivery.

If there is denial on the part of the entrustee of the

receipt of the goods, it behooves upon the

prosecution to substantiate delivery by producing or

presenting additional documents on top of the TR

agreement.


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Does the repossession per se bar the PNB fromforeclosing the mortgage?

If the repossession is enough to extinguish

the obligation, then PNB would have no

basis to foreclose the mortgage.

But repossession per se does not extinguish

the civil obligation. For as long as the loan is

not paid, the civil obligation remains.

So it is only when the goods are

repossessed, sold, and the proceeds applied

to the obligation that the civil liability is

extinguished and by that time there is no

need to foreclose the mortgage.

In the case of South City Homes, we learned that the

remedies are there, but it is up to the entruster to determine

which remedy to pursue. He may file a criminal case forestafa. He may cancel the trust and take repossession. The

option does not belong to anyone but to the entruster.

In that case the South City Homes, the surety contended that

entruster should have cancelled the trust and take

possession.

The SC said the law says may cancel the trust. It is

permissive, not mandatory and the option belongs to the

entruster.

What happens if the entruster retake possession, sells the

goods, apply to proceeds but then there is a deficiency, in the

sense that the proceeds of the sale are not enough to cover

the obligation secured by the TR?

Metrobank vs _ that the deficiency shall be for the

account of the entrustee.

Keep in mind that the goods are only security, they

are not mode of payment. So if the goods are sold,

the proceeds generated applied to the loan

obligation but that is not enough, then the entrustee

should pay for the deficiency.

If the goods are lost without the fault of theentrustee, it is not fair to impute criminal liability

against the entrustee. The goods must have been

lost due to fraud, deliberately, so that there is a basis

to file criminal action.

Who has the better right over the goods under TR is it the

entruster or the creditors of the entrustee? Prudential Bank

vs NLRC

A group of laborers filed a labor complaint againsttheir employer and the employer corporation was

also an entrustee to a TR agreement with prudential

bank. The laborers obtained judgment against their

employer. It became final...levied on the properties

of the employer including the goods held under TR.

Prudential Bank asserted its right and ownership

over the goods.

Who has the better right over the goods held under

TR it is the unpaid laborer or is it the entruster

itself?

The SC, citing the law, said that the security

interest of the entruster is valid and

enforceable against the creditors of the

entrustee for the duration of the trust

receipt agreement. The security interest

attaching to the goods, valid and

enforceable against the creditors of the

entrustee all throughout the duration of the

TR agreement. In simple words, the right of

the creditor is inferior to the right of the

entruster with respect to the goods held

under TR

The SC pointed out that there is only one person

who can defeat right of the entruster- an innocent

purchaser for value.

The issue of the constitutionality of PD 115 was likewise

tackled in the case of People vs ___. The SC said that it is a

valid exercise of police power. It is not just a crime against


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here _ entered into a TR agreement with Metrobank.He failed to pay his obligation to Metrobank.

Metrobank commenced criminal proceedings. The

defense was that the parties explore a transaction

agreement to convert the TR into a loan agreement

and in good faith _ deposited about 2.8 M with

Metrobank. But, unfortunately, not enough. The

agreement was not implemented, did not

materialize. Metrobank continued with the

prosecution of the case. _ said that no, there wascompensation because he deposited 2.8 M _.

The SC said that there can be no compensation if the

debt consisting of a civil liability arises from a crime.

Could there conventional or contractual set-off or set-off by

agreement?

Yes, but it must be stipulated.

Metrobank and _ should have agreed expressly that

this 2.8 M should be applied to the loan obligation

under TR. But it is not.

Who is liable in case the offense is committed by a

corporation?

PD 115 Sec 13 expressly provides now that if the

offense is committed by a corporation the criminal

liability may be imposed against the director, officer,any person responsible for the violation.

Not all the directors or officers of the corporation

are to be held liable because the corporation has a

personality separate and distinct from the officers.

Only those who are responsible for the violation are

liable. In market terms, it simply means who signed

the agreement. The director or officer who signed

the agreement will be the one liable criminally, even

though he did not benefit from the transaction, even

though the goods were not received by him, even

though ____ and all the benefits accrued to the

corporation. This is what the SC said in the case of

Ching vs Secretary of Justice.

person responsible for the violation. You need notbe a director. You need not be an officer. You can be

any person for as long as you acted in behalf of the

corporation, _ responsible _ for the violation stand

to be held criminally liable.

This is one instance where the one liable criminally is

not the one liable civilly. The one liable civilly is the

corporation, unless the officer or agent assumes

personal liability but criminal liability devolves uponthe responsible director, officer or person.

The same cases Ching vs Sec of Justice and Ong vs CA, it was

pointed out that you cannot file a criminal case against the

corporation if the penalty is imprisonment. Someone has to

pay the price. You cannot put behind prison bars the

corporation, it being an artificial person and that person is

the one responsible for the violation.

But if the penalty is fine, revocation of franchise, then the

corporation may be held criminally.

SPCL5

Chattel Mortgage

What is a Chattel Mortgage?

An accessory contract whereby a personal propertyis recorded in the Chattel Mortgage Register to

secure the performance of a principal obligation.

The concept of a chattel mortgage as a conditional sale under

the old chattel mortgage law has been supplanted by the

definition of chattel mortgage under Art 2140 of the Civil

Code. It is now an accessory contract, no longer a conditional

sale.

Debtor obtained a loan from a creditor secured by a chattel

mortgage on personal property, let's say a car. The car was

gutted by fire, completely perished and destroyed. Is the

chattel mortgage extinguished?

Yes, because there is no more chattel.


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Will the lack of registration of the chattel mortgage affect itsvalidity? Will the lack of registration destroy the very

definition of a chattel mortgage?

All that the SC said in the case ofPilipinas Marble vs

IAC (142 SCRA) that lack of registration does not

invalidate the chattel mortgage because registration

is only necessary to bind 3rd

persons.

Unrecorded chattel mortgage is still valid between

the contracting parties because registration is onlyfor the purpose of binding 3

rdpersons.

When you read the case of Pilipinas Marble vs IAC you will

realize that the provision cited by the SC in laying that

conclusion is a provision applicable to Real Estate Mortgage.

In credit transaction, there is an express provision on Real

Estate Mortgage that lack of registration does not invalidate

the contract. It is still valid between the contracting partiesbecause registration is only for the purpose of binding 3

rd

parties. It is in real estate mortgage. But, there is no

counterpart provision in chattel mortgage. In Act 1508, Art

2140 Chapter on Chattel mortgage, none.

But, just the same the SC court applied the provision on real

estate mortgage and held, and there being no different

decision, Pilipinas Marble vs IAC will stand that,

jurisprudentially, unrecorded chattel mortgage binds thecontracting parties, because registration is only for the

purpose of binding 3rd

persons.

What may be the object of chattel mortgage?

Personal property

shares of stocks, cars, public or private vehicles,

tugboats, vessels, aircrafts, growing crops, stocks in

trade, stocks in inventory in a sari-sari store or

department stores, large or small cattle (animals

may be subject of chattel mortgage).

How about satellites?

They are personal property. They cannot be personal

party by agreement of the parties. Real estate was ruled outmortgage was ruled out because it is not a real property but a

personal property. So the board suggested chattel mortgage.

It is a personal property because theoretically you can have a

valid chattel mortgage on a satellite. A question pops out on

how do you foreclose if it is a chattel mortgage?

In chattel mortgage you cannot foreclose

extrajudicially unless you are in possession of the

chattel.

You can file an action for replevin to seize possession

preparatory to the foreclosure. But, even if you have

a replevin how do you bring it up to foreclose it. So

chattel mortgage is out of the question.

We thought of a deed of trust. A deed of trust in

your law on agency, partnership and trust, in trust a

dichotomy is created between the legal title and

beneficial (equitable) title. Legal title is held by thetrustee but for the benefit of the beneficiary. And

when the legal title and beneficial title are merged in

favor of one person, you have full ownership.

So thats what happened, PLDT conveyed legal title

over the satellite in favor of the banks. The banks

hold the satellite for the benefit of PLDT itself. So the

trustor-beneficiary is PLDT and the legal title is with

the bank. So the collection, income of the satelliteredound to PLDT, but we have legal title. There was

a stipulation that in case of default the legal title and

beneficial title shall be merged in favor of the bank.

So we do not have to foreclose because

automatically we become the owner.

Will that violate the principle of pactum

commissorium?

In credit transaction in the case ofUytong vs CA

there are 2 requisites for factum commissorium

to a apply:

there must be a pledge, antichresis,mortgage, and

A stipulation that in case of default the


16/67


extrajudicially, you could foreclose judicially. But still validobject of chattel mortgage.

Chattel mortgage on stocks in trade of a sari-sari store. Lets

say at any given time all the contents Juan de la Cruz sari-sari

store. Juan de la Cruz the proprietor of a sari-sari store,

obtains a loan secured by a chattel mortgage on the stocks in

trade found in the sari-sari store. These stocks in trade are

consumed, replenished. Consumed, being bought and

replenished by new products or merchandise. Will the newmerchandise or new stock forthcoming form part of the

chattel mortgage even though at the time of the execution of

the chattel mortgage they were not there?

Yes, that is what you call stocks in trade. If so

stipulated even though at the time of the execution

they were not there.

This is to be distinguished from machineries.

Machineries cannot be treated the same way as stocks in

trade.

Lets say you have a chattel mortgage on machinery and then

new machineries are acquired. Will the new machineries form

part of the chattel mortgage?

No, unless otherwise stipulated. That means when

these new properties come and acquired by the

mortgagor, you have to sign a new chattel mortgageagreement to cover them, unlike in stocks in trade

you don't have to sign any document. You just have

to stipulate that replenishment will form part of the

chattel mortgage.

What about chattel mortgage on machineries, is that valid?

Qualify. Machineries which can be transported from

one place to another and therefore movable

property, in its true sense of the word, by very

nature may be a subject of a chattel mortgage.

Machineries which are bolted, attached, embedded,

fixed to the ground is a real property by

immobilization or destination.

easy to bind 3

rd

persons even if the object isreal property.

The point is if it is a real property, it cannot be the

object of a chattel mortgage.

However, the SC said in the case of Makati Leasing

vs Wearever Textile Mills, there can be a valid

chattel mortgage on machinery bolted or attached

to the ground, even if it is a real property bydestination or immobilization. You can have a valid

chattel mortgage on a house, even if it is real

property by nature. But, that arrangement is only

between the parties. It does not bind or prejudice

innocent 3rd

persons.

In not so kind words, the SC said that if you two

want to make a fool of yourselves but don't involve

third persons. Don't let that arrangement bind oraffect 3

rdpersons.

Lets say a judgment creditor of a debtor. The debtor obtained

a loan from creditor C secured by a chattel mortgage on a

machinery attached to the ground. That chattel mortgage is

valid as between the parties. Can the creditor foreclose?

Yes, in case of non-payment, he can foreclose and

become the owner of the machinery even though by

its very nature it is a real property.

But lets say judgment creditor of D comes with a writ of

execution served on D, who has the better right now, the

judgment creditor of D or the mortgagee of D?

The judgment creditor. That arrangement of a

chattel mortgage on a real property does not bind

innocent 3rd

persons.

No amount of registration can change the fact that a real

property cannot be the object of chattel mortgage and

therefore cannot bind 3rd

persons.

Debtor obtained a loan secured by a chattel mortgage over a

house standing on a parcel of land. If the debtor cannot pay,


17/67


Can he levy on the house?

Yes. A chattel mortgage over the house does not

bind 3rd

persons.

C after foreclosure sold the house to Y in good faith for value

(innocent purchaser for value). Between Y and X who has the

better right over the house?

The SC said in the case of __ vs David that X has the

better right for the simple reason that Y, even

though he may be an innocent purchaser for value,simply steps into the shoes of C and therefore

acquires the same title, rights and interests that C

has over the house subject to the same limitations

that C had over the house.

The right of C is enforceable only against D, then the

right of Y who simply steps into the shoes of C is only

valid and enforceable against D.

Registration of a Chattel mortgage

Where do you register chattel mortgage?

You have to register twice.

Chattel mortgage registered:

in the place where the property is situatedand

in the place where the mortgagee situatedUnless the place where the property is located is the same

place where the mortgagee resides under Sec 14 of PD 1529

13, 113 and 114 if the amount of the loan exceeds 500K then

one registration is sufficient in the place where the property

is situated.

What about a chattel mortgage over a private motor vehicle?

Land Transportation Office (LTO)

What about public motor vehicle?

Land Transportation Franchise Regulatory Board

(LTFRB)

May a chattel mortgage secure future obligations?

No.

Can it include future debts or obligations?

No,

What makes it so different from other security arrangements

like pledge, antichresis, real estate mortgage, can these

secure future debts if so stipulated?

Yes

Is there any requirement peculiar to chattel mortgage that is

not applicable to other types of security arrangements?

There should be Affidavit of good faith executed

jointly by the mortgagor and the mortgagee under

oath. They state that the chattel mortgage secures a

valid, just and existing debt and not for the purpose

of fraud. That phrase valid, just and existing debt

refers to debt existing at the time of its execution.Not to debts that may be incurred or obtained in the

future.

Lets say Debtor obtained a loan from the creditor in 2004

secured by a chattel mortgage over a personal property for

P5M. In 2005, he paid the obligation. In 2006, he obtained

another P5M from the creditor. He paid in 2007. In 2008, he

another P5M, but this time the loan was not paid. In 2004,

the debtor executed a chattel mortgage over personalproperty that provides that covers past, present and future

obligation, any and all of obligations owing by the mortgagor

to the mortgagee whether incurred before during or after the

execution of chattel mortgage agreement. That is the only

document signed by the parties. Can the chattel mortgage be

foreclosed for the 5M debt incurred in 2008 on the strength of

the stipulation in the chattel mortgage agreement that it

covers past, present and future obligations, any and all

obligations owing by the mortgagor to the mortgagee

whether incurred before during or after the execution of

chattel mortgage agreement.Is the dragnet clause stipulation

(covers everything) void? How do you subject the 2008 loan to

the chattel mortgage?


18/67


That is why the SC said it is not void.

It is valid. It amounts to a promise on the part of the

mortgagor to execute a fresh chattel mortgage

contract or to amend the existing contract at the

time the loan is obtained. In either case there must

conformably to the provision of the Chattel

Mortgage Law. There must be an affidavit of good

faith.

But the chattel mortgage does not become effective,

the only amounts to a promise to sign a new one or

the existing one but the security, the chattel

mortgage by itself, does not come into play unless

you have a formal amendment or a fresh mortgage

contract.

So there have to be an amendment in 2008 or a

fresh mortgage contract, in both cases with affidavitof good faith so that the chattel mortgage can be

foreclosed.

Lets change the situation.

A loan was incurred in 2004 by B from C for P1M. in 2005

another P1 M. in 2008 P3 M and all that the mortgagor

signed is a chattel mortgage in 2004 containing a dragnet

clause.

How much loan is secured by the chattel mortgage? Is it P1 M

only the loan exist under the agreement?

P1 M only, unless you have an amendment in 2005

and 2008 or a fresh mortgage contract in 2005 or

2008, in both cases with affidavit of good faith,

because a chattel mortgage cannot secure future

debts. It can only secure debts existing at the time of

its execution, unless there is an amendment or a

fresh mortgage contract when the loans are actually

obtained. This the SC ruling in the case of ACME

Shoe rubber vs_ (260 SCRA).

If you compare this with a pledge agreement, assuming that

The SC said in China Bank vs CA that pledge,

antichresis and real estate mortgage can secure

future debts if so stipulated.

Take note of that qualification, if so stipulated

because unless otherwise stipulated then the pledge

can only secure debts existing at the time it of its

execution.

But, there is nothing wrong with including future debts in thepledge if so stipulated and there is no need to amend or sign

a new one.

In a recent case, 2007 decision, in credit transaction the

extinguishment of the principal obligation extinguishes the

accessory obligation. Lets say you have a loan secured by a

real estate mortgage and you paid the loan the mortgage is

likewise extinguished. The exception is dragnet clause.

So the extinguishment of the principle obligation does not

extinguish the accessory obligation if you have a dragnet

clause. Which means future debts can be secured, will be

secured, are secured by the real estate mortgage.

In real estate mortgage, you have various decisions Artadi vs

PNB (12 SCRA), Mojica vs CA (201 SCRA), Chinabank vs CA

(249 SCRA) , PDCOM vs CA (1995).

In real estate mortgage, there are many decisions. What the

SC did not realize is that these decisions affect the revenue

raising capability of the government.

Lets say that the debtor want to obtain a loan for P1B

secured by a real estate mortgage. All that the debtor has to

do is to borrow P 10 M only after two months borrow the rest

of the remaining amount. What is the significance?

Every time you obtain a loan ___ you pay

documentary stamp tax. It is about 1.5% of the

amount of the loan. And then when you register a

real estate mortgage you pay 1.5% of registration

fee. So all in all the government collects more or less

3%.


19/67


Do you have to sign a new one? Do you have the amend the

existing one?

No more, because the SC said a dragnet clause in

real estate mortgage is valid. So theoretically. You

need not sign a new one. You need not amend the

existing one. The subsequent ones are deemed

secured by the real estate mortgage.

So you don't have to pay documentary stamp tax and

registration fees on the 999,999,990 M.

It is not tax evasion it is tax avoidance. You are just taking

advantage of what the SC has laid down in various cases.

In the case ofMojica vs CA.

The debtor obtained a loan secured by a real estate

mortgage. He paid it. Because it has been paid the

accessory obligation should be extinguished,

because the extinguishment of the principalextinguishes the accessory obligation. After 8 years

the debtor obtained another loan from the

mortgagee

Is that loan secured by the real estate mortgage

without any new mortgage agreement signed after 8

years, just because mortgage agreement signed 8

years agree contained a dragnet clause?

The SC said, yes. Thats 8 years down theroad. So any obligation down the road, any

future debt now derived are secured by the

real estate mortgage if the mortgage

agreement contains the so called dragnet or

all encompassing clause.

In that case the SC said that any party who

deals with these properties must inquire

from the mortgagee how much is exactly is

the amount of loan secured by the

mortgage.

So if what is annotated at the back of the

title is P 1M under real estate mortgage

If it is a pledge there is no right to recover

deficiencies.

In chattel mortgage there is a right to recover

deficiencies, except in certain cases.

In pledge, while there is no right to recover

deficiencies in the sense that proceeds of the

foreclosure should be enough to extinguish the debtor anything beyond that cannot be collected from

the pledgor.

The other side of the coin tells you that a pledge can

secure future debts, while a chattel mortgage

cannot secure future obligations.

So where are you better off now? Is it with pledge which could

secure future obligations, but has no right to recoverdeficiency or is it chattel mortgage where there is a right to

recover deficiency but cannot secure future debts?

The best thing to do is to say that these agreements

may be interpreted or construed as pledge or chattel

mortgage at the option of the creditor.

Lets say both elements are present, all the elements of

pledge are present, delivered and at the same time all the

elements of chattel mortgage are present, you registered withthe chattel mortgage register. What do you have now, is it

pledge or chattel mortgage?

That is why when I was with the bank what I did is to

stipulate that this agreement may be construed as a

pledge or chattel mortgage at the option of the

creditor, at the option of the bank.

So at the time of the foreclosure I'm better off

considering it as pledge, where I can secure future

debts then I will be under pledge.

But lets say the future debts have not been covered

by an amendment or fresh mortgage contract, I

don't want chattel mortgage.


20/67


In a chattel mortgage, if the proceeds of the foreclosure are

not enough to satisfy the mortgage debt, the mortgagor is

liable to pay the deficiency. And by deficiency we mean

anything not covered by the proceeds of the sale. Are there

exceptions?

What are the cases where the mortgagee has no right to

recover the deficiency?

1. In case of chattel mortgage on personal propertysold on instalment, if the mortgagor defaults in thepayment of the instalment. That is Art 1484 or

otherwise known as the Recto Law.

2. Stipulation3. Accommodation mortgage or 3rd party mortgage as

held in __ vs CA

4. In case of extrajudicial foreclosure of chattelmortgage due to the debt of the mortgagor as held

in __ vs Roxas and PNB vs CA.

What do you mean by accommodation mortgage?

A 3rd

party mortgaging his property to secure the

debt of another.

The basis is Art 2085 of the Civil Code.

What is the limitation on the liability of the 3rd

party

mortgagor?

Up to the extent of the value of the mortgagedproperty. Not beyond that.

In Special proceedings, when the mortgagor dies the

mortgagee has two remedies.

Money claim against the estate Foreclosure of mortgage which can be judicial or

extrajudicial

When the mortgage files a money claim against the

estate, he is deemed to have given up his right over the

mortgaged property. He stands in equal footing with the

other creditors of the mortgagor. And his rights depend

on how preferred he is compared to other creditors

based on rules on concurrency and preference of credit.

foreclosure there is a deficiency. Is the mortgagor liable to

pay the deficiency?

Yes. The transaction is not covered by the Recto Law.

What is lacking in that example to make it within the

coverage of Recto Law?

There is no sale of personal property on instalment.

What you have is a simple loan secured by a chattel

mortgage where the mortgagor is liable to pay

deficiency, except in those cases enumerated.

Do not be misled by the instalment payment angle of

the transaction. There ought to be a chattel

mortgage on the same personal property sold on

instalment.

What are the requisites of Recto Law so that the mortgagee

cannot recover the deficiency?

there is a sale of personal property on instalment A chattel mortgage was constituted over the same

property sold in instalment

default in the payment of at least two instalments among the remedies available to the unpaid vendor.

he opted to foreclose the chattel mortgage

A and B signed a promissory note as solidary co-makers in

favor of ABC Bank. The loan is secured by a chattel mortgage

belonging to A. The loan was not paid. The bank foreclosed

the mortgage extrajudicially. After foreclosure there was a

deficiency.Can the bank enforce the deficiency against A?

Yes

Against B?

Yes. That is ruling of the SC in _ vs Ginhawa. A

chattel is only a security and not a mode of payment.

If the security is not enough, the mortgagor should

be liable such deficiency. And the deficiency can be

enforced not only against the mortgagor himself but

also against his solidary co-debtors if any.

If the mortgagor does not pay his obligation (simple loan

secured by a chattel mortgage) what are the remedies


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for failure to prosecute, he forgot his SPA during the pre-trial

conference. SPA from his client, the mortgagee, authorizing

him to appear in the pre-trial conference, to stipulate on

issues, admit certain facts and so on. So case dismissed with

prejudice. Can he foreclose it the case was dismissed on

technicality?

The mere filing of the collection case bars the

remedy of foreclosure.

So if you choose to file an action choose an actionfor collection and unfortunately you did not make it

or you lose failed to obtain a favorable judgment

then you cannot foreclose the chattel mortgage.

Or lets say you changed your mind and instead you

want to drop or abandon the collection case, you

cannot anymore foreclose the mortgage, because

one remedy bars or necessarily precludes the

exercise of the others.

Lets say the property is situated in the Philippines but the

action for collection was filed abroad. Does that have the

same effect that the mortgagee having filed an action for

collection is precluded from foreclosing a property situated in

the Philippines?

Yes. That is what the SC in one case. The filing of an

action for collection regardless of venue, wherever

filed in other words, bars the remedy of foreclosure.

Lets say you have loan secured by a real estate mortgage and

a chattel mortgage agreement. So you have 2 mortgages

real and chattel. The loan was not paid. So the mortgagee

foreclosed the real estate mortgage. After foreclosure of the

real estate mortgage there is a deficiency. Can he file an

action to recover the deficiency without first foreclosing the

chattel mortgage?

No. the remedies are alternative not cumulative. So

once you chose the remedy of foreclosure, you have

to exhaust the remedy of foreclosure. So foreclose

both the REM and chattel. And only after foreclosure

that you can file an action to recover the deficiency,

if any. So you cannot foreclose and sue for the

These are:

in case extrajudicial foreclosure of a real estatemortgage of a real property under Act 3135

in case of execution sale of a real propertyunder Rule 39 Rules of Court

in case of judicial foreclosure of real estatemortgage if the mortgagee is a bank or a credit

institution

There is no right of redemption in chattel mortgage. So thereis no right of redemption whatsoever when it comes to

personal property.

What right does the law afford the mortgagor in a chattel

mortgage before there can be a foreclosure sale? Is there are

right available to the mortgagor by which he can stop the

foreclosure sale despite the fact that he is already in default?

Lets say he did not pay his obligation. Can the mortgagee

foreclose the mortgage the following day or week?Equity of redemption. It is the right of the

mortgagor to prevent the sale by paying the debt

within 30 days from default. So it is a grace period

that the law affords in favor of the mortgagor.

Just because the mortgagor defaults either because

of non-payment or violation of the agreement does

not justify foreclosure right away. It cannot be done

in 1 week or couple of weeks. The law says 30 daysgrace period.

Within the 30 days grace period there must be a

notice of sale given to the mortgagor.

Twin periods you may say

30 grace period and 10 days notice before the sale.

If both requirements are complied with and it remains as

unpaid obligation, then the mortgagee can now foreclose the

mortgage.

Lets compare the remedies available to the mortgagee in a


22/67


What is the remedy available to a mortgagee in case of a

simple loan secured by a chattel mortgage?

Action for specific performance or collection Foreclosure of mortgage

What are the modes of foreclosure?

Judicial extrajudicial

Can the mortgagee foreclose the mortgage extrajudicially if

he is not in possession of the chattel?

No

What are the remedies available to the mortgagee in case the

mortgagor does not give up possession of the chattel?

Apply for a writ of replevin to seize possession of thechattel preparatory to the foreclosure.

Judicial foreclosureHow do you compare it then with the remedies available to

the unpaid vendor in case of chattel mortgage on a property

sold on installment where the mortgagor defaulted in the

payment of at least 2 installments? What are the remedies

available in that case?

Action for specific performance or collection Cancellation (rescission) foreclosure

Illustration:

Lets say that D wants to buy a Toyota Lexus. D was to shell

out P4M. He wants to pay 1M first and the balance over a

period of 16 months payable in 16 equal monthly

installments. He purchased the car from Toyota Cars. He paid

1M down payment and the balance of 3M covered by a

promissory note payable in 16 monthly installments. Tosecure the payment of the balance of the purchase price, D

constituted a chattel mortgage on the same Toyota Lexus. D

was paying the monthly amortization for 5 months or 6

months or so. Then he started losing his clients. The law office

floundered. He defaulted in the payment of at least 3

installments And at the time that he is in default lets say

If he files an action for collection and he loses the case

because of the incompetent handling of the case by his lawyer

can he foreclose the mortgage?

No. He is precluded because the remedies are

alternative and not cumulative.

So just like in a simple loan secured by a chattel

mortgage, the mere filing of the collection case

precludes the remedy of foreclosure.

So when there is a loans secured by a chattel

mortgage on a transaction falling under the Recto

Law, the mere filing of a collection case precludes

the remedy of foreclosure. Amounting to

abandonment or waiver of the right to foreclose the

mortgage. Equivalent to giving up the lien over the

mortgaged property.

2nd

remedy is cancellation. Cancellation means?Rescission of the contract. This means the return of

the vehicle and the return of the payment.

Can the mortgagee or unpaid vendor forfeit the previous

payment?

Yes.

So when you talk about cancellation, basically it

refers to the right of the unpaid vendor to seizeback, get back, obtain possession, recover, reposses

the personal property sold on installment and return

the purchase price, unless forfeiture is authorized.

And 99.9% forfeiture is the norm. I haven't seen a

case where the unpaid vendor returns the money.

He always forfeits the partial payments and the of

course is a valid stipulation because the mortgagor-

client is using of the vehicle anyways. That is why

forfeiture may be authorized, if so stipulated. So get

back the vehicle, return the payment unless

forfeiture is allowed.

3rd

remedy is Foreclosure

If the mortgagee opts to foreclose or the unpaid


23/67


paid. That is if the unpaid vendor opts to foreclose

the chattel mortgage.

If among the remedies available to him he opted to foreclose

then that is the consequence. He is limited to the particular

property sold on installment. He cannot recover beyond such

property. He cannot enforce any other security put up by the

mortgagor.

So insofar that law is concerned, the foreclosure of thechattel mortgage on the very thing sold on installment wipes

out or extinguishes the obligation of the mortgagor

notwithstanding any stipulation to the contrary. Any

stipulation to the contrary in fact is null and void.

That is the concept or the essence of the Recto Law. That is

why before you apply the principle that the unpaid vendor or

mortgagee cannot recover any unpaid claim you have to

make sure that all the elements are present: there must be a sale of personal property on

installment

chattel mortgage was constituted on the sameproperty sold on installment

default in the payment of at least 2 installment Among the remedies available to the unpaid vendor

he opted to foreclose

If all these elements are present there is no right to recoverthe deficiency.

Illustration:

Lets say on top of the Toyota Lexus, the debtor D also

furnished the creditor car company additional collateral in the

form a chattel mortgage over a Ford Expedition owned by D.

Now, there are two collateral the Lexus sold on installment

and the ford expedition. The Lexus sold on installment and the

Ford Expedition not sold on installment but subject of a

chattel mortgage. D defaulted in 2 installment. Toyota Lexus

opted to foreclose the chattel mortgage on the Lexus and

there is a deficiency or unpaid claim because what was

recovered during the sale was less than 2.150 M. Can he

foreclose the Expedition?

particular property. So he cannot enforce any

additional security for that by the buyer.

If there is additional mortgage, like in this case the

Ford Expedition, that Ford Expedition is free,

released from the mortgage brought about by the

foreclosure of the chattel mortgage on the thing sold

on installment.

Lets reverse the process, lets say the company creditor isaware, his counsel is a pride of UST and the lawyer advised

that if you foreclosed mortgage on the Lexus, you cannot

foreclose any other security. So lets try to outsmart the

system. You foreclose first mortgage on the expedition, the

one not on installment. After foreclosure there was a

deficiency. Can the unpaid vendor mortgagee foreclose the

Lexus?

No. The foreclosure of the 2nd

vehicle amounts to an

action for specific performance. Therefore, hecannot foreclose the mortgage because the filing of

an action for specific performance is tantamount to

a waiver of the right to foreclose.

Lets say the foreclosure of the 2nd

vehicle is an action that is

akin to a specific performance and lets say that there is

deficiency. And he filed an action to recover the deficiency.

Can he file an action to recover the deficiency?

Yes.

Lets say that he obtained a favorable judgment. After

obtaining a favorable judgment, it became final and

executory. Can he levy of the Lexus?

Yes

Can he levy on the other properties of the buyer until the debt

is paid and satisfied?

Yes

This is what the SC said in case of Burdujan vs _ that

the foreclosure of the 2nd

mortgage is tantamount to

an action for specific performance, and being

tantamount to an action for specific performance


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So only when he forecloses the chattel mortgage

that he cannot recover any unpaid claim. That he

cannot recover the deficiency.

But if files an action for specific performance and

obtains a favorable judgment, he can levy any and all

properties not just the car sold on installment but

also any of the properties of the buyer until the debt

is paid and satisfied.

So that is what we have to consider.

Simple Loan

In a simple loan secured by a chattel mortgage don't

even think about it. Foreclose, because after

foreclosure you can support deficiency. And if it a big

loan as long as it not unconscionable or shocking to

the conscience, so that you can recover whatever is

not covered by the security.

Let say that you have chattel mortgage over a

vehicle. Sell it for 100 k or 150 k. Really low as long

as not ridiculously low as to be shocking to the

conscience. Because if it is grossly inadequate, as

you know in your law on sale, the sale will be

invalidated, Art 1474.

So when you foreclose it should be low and then yousue for deficiency. As we have seen the mortgagee is

entitled to recover deficiency.

Transaction falling under the Recto Law

If it is a transaction falling under the Recto Law, a

chattel mortgage on a property sold on installment.

You have to weigh your options. You cannot just

foreclose, because you foreclose you cannot

recovery any unpaid claim. You are limited to the caror property sold on installment.

Now if you file an action for collection or specific

performance, you are deemed to have abandoned

the mortgage. But, there is no limit on what you can

If there is no creditor you are better filing an action for

specific performance. And when you obtain judgment you

can levy on the car on installment and any and all properties

until the debt is paid and satisfied.

Illustration:

Lets say the mortgagor in a transaction falling under the

Recto Law surrenders the vehicle to the mortgagee. On his

own volition, he surrendered the vehicle. Is the mortgageebound to proceed with the foreclosure?

No. The voluntary surrender of the object of the

mortgage does not amount to foreclosure.

What about a mere demand to surrender the property sold on

installment? Does that preclude the mortgagee from choosing

which remedy he wants to pursue, whether specific collection

or foreclosure? Lets say he made a demand. D surrendered

the vehicle. Does that estop him from choosing the remedy ofcollection?

No.

So what will stop him from choosing the collection?

If possession was acquired by writ, by force of law, can you

still file an action for collection? Even if it is not actual

foreclosure but just an action for replevin is he already

precluded from filing an action for collection or should it beactual foreclosure that should preclude from f

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