SUMMARY - Salescredit

SALES CREDIT AND TRANSACTIONBONSATO V. CA

95 PHIL 481FACTS:Respondents sought the annulment of the deeds of donation on the ground that it wasn’t in compliance with the formalities of a will. The petitioners on the other hand claim that they are valid donations and that they were not donations mortis causa.HELD:If there has been no badge that it is a donation mortis causa, it should be considered as a donation inter vivos.

PUIG V. PENAFLORIDA16 SCRA 136

FACTS: Penaflorida contends that the donation effected was a donation inter vivos even if the disposition of the property was reserved with Parcon.HELD:The donation notwithstanding, if there is reservation of the right of disposition, the donation is mortis causa and not inter vivos.

REPUBLIC V. CA 132 SCRA 514

FACTS: Respondents sought the registration of land adjacent to their fishpond. They are the registered owners of parcel of lot bordering on the Bocaue and Meycauyan rivers. The lower and appellate court allowed registration but this was opposed by the government. HELD: There is no accretion if by man-made causes.

VILLANUEVA V. CASTANEDA 154 SCRA 142

FACTS: Petitioners claim the right to remain in and conduct business in the area (talipapa) by virtue of a previous authorization granted to them by the municipal government. The respondents denied this and alleged that the demolitions of the stalls were not illegal. HELD: A public plaza is beyond the commerce of man and so cannot be the subject of lease or any other commercial undertaking.

SERG’S PRODUCTS AND GOQUIOLAY V. PCI LEASING AND FINANCE 338 SCRA 499

FACTS: PCI filed a case for collection of a sum of money as well as a writ of replevin for the seizure of machineries, subject of a chattel mortgage executed by petitioner in favor of PCI. Machineries of petitioner were seized and petitioner filed a motion for special protective order. It asserts that the machineries were real property and could not be subject of a chattel mortgage. HELD: The machineries in question have become immobilized by destination because they are essential and principal elements in the industry, and thus have become immovable in nature.

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Nonetheless, they are still proper subjects for a chattel mortgage. Contracting parties may validly stipulate that a real property be considered as personal. After agreement, they are consequently estopped from claiming otherwise.

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SEQUESTRATION OR JUDICIAL DEPOSIT

Art. 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. (1785)

Art. 2006. Movable as well as immovable property may be the object of sequestration. (1786) Art. 2007. The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders. (1787a) Art. 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family. (1788)

WHEN JUDICIAL DEPOSIT TAKES PLACE

A deposit may be constituted judicially or extrajudicially Takes place when an attachment or seizure of property in litigation is ordered by the court

NATURE AND PURPOSE OF JUDICIAL DEPOSIT

Judicial deposit is auxiliary to a case pending in court Purpose is to maintain the status quo during the pendency of the litigation or to insure the rights of the parties to the property in case of a favorable judgment

OBLIGATION OF DEPOSITARY OF SEQUESTRATED PROPERTY

The depositary of sequestered property is the person appointed by the court He has the obligation to take care of the property with diligence of a good father of a family and he may not be relieved of his responsibility until the litigation is ended or the court so orders Art. 2009. As to matters not provided for in this Code, judicial sequestration shall be governed by the Rules of Court. (1789)

APPLICABLE LAW

The law on judicial deposit is remedial and the Rules of Court is thus applicable Rule 57 on preliminary attachment, Rule 59 on receivership, and Rule 60 on replevin.

THE WAREHOUSE RECEIPTS LAW

WHO MAY ISSUE WAREHOUSE RECEIPT?

> A warehouseman is a person lawfully engaged in the business of storing goods for profit. > Only a warehouseman may issue warehouse receipts

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WHAT SHOULD BE DONE TO PUT THE RECEIPT WITHIN THE PURVIEW OF WAREHOUSE RECEIPTS LAW?

> The warehouse receipt should be issued by the warehouseman FORM OF RECEIPTS; ESSENTIAL TERMS 1. The location of the warehouse where the goods are stored 2. The date of issue of the receipt 3. Consecutive number of the receipt 4. A statement whether the goods received will be delivered to the bearer, to a specified person or to a specified person or his order 5. The rate of storage charges 6. A description of the goods or of the packages containing them 7. The signature of the warehouseman which may be made by his authorized agent 8. If the receipt is issued for goods of which the warehouseman is owner, either solely or jointly or in common with others, the fact of such ownership 9. A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims as lien. If the precise amount for such advances made or of such liabilities incurred is, at the same time of the issue of the receipt, unknown to the warehouseman or to his agent who issues it, a statement of the fact that advances have been made or liabilities incurred and the purpose thereof is sufficient

EFFECT OF OMISSION OF THE ESSENTIAL CONTENTS

> A warehouseman shall be liable to any person injured thereby all damages caused by the omission from a negotiable receipt of any of the terms herein required > Validity of the receipt not affected > Negotiability of the receipt not affected

TERMS THAT CANNOT BE INCLUDED IN THE WAREHOUSE RECEIPT

1. Those contrary to any provision of the law 2. In any wise impair the warehouseman’s obligation to exercise that degree of care in the safekeeping of the goods entrusted to him which a reasonably careful man would exercise with regard to similar goods of his own

NON-NEGOTIABLE WAREHOUSE RECEIPT

> Receipt in which it is stated that the goods received will be delivered to the depositor or to any specified person NEGOTIABLE WAREHOUSE RECEIPT > Receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt > No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision if inserted shall be void. DUPLICATE RECEIPTS MUST BE MARKED > When more than one is issued for the same goods, the word “duplicate” shall be plainly placed upon the face of every such receipt, except the first one issued > A warehouseman shall be held liable for damages for failure to do so to anyone who purchased the subsequent receipt for value supposing it to be original, even though the purchaser be after the delivery of the goods by the warehouseman to the holder of the original receipt

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OBLIGATIONS AND RIGHTS OF WAREHOUSEMAN UPON THEIR RECEIPTS

PRINCIPAL OBLIGATIONS OF THE WAREHOUSEMAN 1. To take care of the goods entrusted to his safekeeping 2. To deliver them to the holder of the receipt or the depositor provided the following conditions are fulfilled—there is demand by the depositor accompanied by either a. An offer to satisfy the warehouseman’s lien b. An offer to surrender the receipt, if negotiable with such indorsements as would be necessary for the negotiation of the receipts c. A readiness and willingness to sign, when the goods are delivered, an acknowledgement that they have been delivered, if such signature is requested by the warehouseman

WHAT SHOULD ACCOMPANY THE DEMAND FOR THE RETURN OF THE GOODS?

1. An offer to satisfy the warehouseman’s lien 2. An offer to surrender the receipt, if negotiable with such indorsements as would be necessary for the negotiation of the receipts 3. A readiness and willingness to sign, when the goods are delivered, an acknowledgement that they have been delivered, if such signature is requested by the warehouseman

A WAREHOUSEMAN IS JUSTIFIED IN DELIVERING THE GOODS TO ONE WHO IS—

1. Person lawfully entitled to the possession of the goods, or his agent 2. Person who either himself entitled to delivery by the terms of the non-negotiable receipt issued for the goods, or who has written authority from the person so entitled either endorsed upon the receipt or written on another paper 3. Person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or order, or to bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by the terms of the receipt or by his mediate or immediate indorser

WAREHOUSEMAN’S LIABILITY FOR MISDELIVERY

> Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman shall be liable for conversion/estafa to all having a right of property or possession in the goods if he delivered the goods otherwise than as authorized > And though he delivered the goods as authorized he shall be so liable if prior to such delivery he had either— o Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such delivery o Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods

WHAT IS CONVERSION?

> Unauthorized assumption and exercise of the right of ownership over goods belonging to another through the alteration of their condition or the exclusion of the owner’s right

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NEGOTIABLE RECEIPTS MUST BE CANCELLED OR MARKED WHEN GOODS DELIVERED OR WHEN PART OF IT IS DELIVERED. FAILURE TO DO SO WILL MAKE THE WAREHOUSEMAN LIABLE—

> The warehouseman is liable to any one who purchases for value in good faith such receipt, for failure to deliver the goods to him, whether such purchaser acquired title to the receipt before or after the delivery of the goods by the warehouseman

EFFECT OF ALTERATION ON LIABILITY OF WAREHOUSEMAN

1. Alteration immaterial—whether fraudulent or not, whether authorized or not, the warehouseman is liable on the altered receipt according to its original tenor 2. Alteration material—if the alteration is material, but authorized, the warehouseman is liable according to the terms of the receipt as altered 3. Material alteration innocently made—the warehouseman is liable on the altered receipt according to its original receipt 4. Material alteration fraudulently made—warehouseman is liable according to the original tenor of the receipt to a purchaser of the receipt for value without notice, and even to the alterer and subsequent purchasers with notice except that as regards to the last two, the warehouseman’s liability is limited only to delivery as he is excused from any liability NOTA BENE: it is clear that even a fraudulent alteration cannot divest the title of the owner of stored goods and the warehouseman is, therefore, liable to return them to the owner. But a bona fide holder acquires no right to the goods under a negotiable receipt which has been lost or stolen or to which the endorsement of the depositor has been forged.

LOST OR DESTROYED RECEIPTS

> The court may order the delivery of the goods upon satisfactory proof of such loss or destruction and upon the giving of a bond with sufficient sureties to be approved by the court to protect the warehouseman from any liability or expense, which he or any person injured by such delivery may incur by reason of the original receipt remaining outstanding > The court may also in its discretion order the payment of the warehouseman’s reasonable costs and counsel fees > The order of the court shall not relieve the warehouseman from liability to a person to whom the negotiable receipt as been or shall be negotiated for value without notice of the proceedings or of the delivery of the goods

LIABILITY OF WAREHOUSEMAN AS TO DUPLICATE—HE WARRANTS

1. That the duplicate is an accurate copy of the original receipt 2. Such original receipt is uncancelled at the date of the issue of the duplicate

WAREHOUSEMAN CANNOT SET UP TITLE IN HIMSELF

> The warehouseman cannot refuse to deliver the goods on the ground that he has acquired title or right to the possession of the same unless such title or right is derived— o Directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent thereto o From the warehouseman’s lien

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INTERPLEADER OF ADVERSE CLAIMANTS

> If more than one person claims the title or possession of the goods, the warehouseman may, either as a defense to an action brought against him for non-delivery of the goods, or as an original suit, whichever is appropriate, require all known claimants to interplead

WAREHOUSEMAN HAS REASONABLE TIME TO DETERMINE VALIDITY OF CLAIMS

> If someone other than the depositor or person claiming under him has a claim to the title or possession of goods, and the warehouseman has information of such claim, the warehouseman shall be excused from liability for refusing to deliver the goods, either to the depositor or person claiming under him or to the adverse claimant, until the warehouseman has had a reasonable time to ascertain the validity of the adverse claim or to bring legal proceedings to compel all claimants to interplead

LIABILITY OF WAREHOUSEMAN FOR NON-EXISTENCE OR MISDESCRIPTION OF GOODS

> As a general rule, the warehouseman is under obligation to deliver the identical property stored with him and if he fails to do so, he is liable directly to the owner > As against a bona fide holder of a warehouse receipt, the warehouseman is estopped whether the receipt is negotiable or not, to deny that he has received the goods described in it

LIABILITY OF WAREHOUSEMAN FOR LOSS DUE TO LACK OF CARE

> The warehouseman is required to exercise ordinary or reasonable care in the custody of the goods, that is, the care is reasonably careful owner would exercise over similar goods of his own. > The warehouseman isn’t liable for any loss or injury to the goods, which couldn’t have been avoided by the exercise of such care. Of course, what constitutes ordinary or reasonable care depends upon the circumstances such as the character and value of the property and the character and location of the warehouse.

COMMINGLING OF DEPOSITED GOODS

> As a general rule, a warehouseman may not mingle goods belonging to depositors > In case of fungible goods, the warehouseman may mingle them with the goods of the same kind and grade provided that he authorized by agreement or custom > Commingling is intended for the benefit of the warehouseman. It would, indeed be strange if the warehouseman could escape his liability to the owner of the goods by the simple process of commingling them without authorization

ATTACHMENT OR LEVY OF A NEGOTIABLE RECEIPT

> The warehouseman has the direct obligation to hold possession of the goods for the original owner or for the person known the negotiable receipt of title has been duly negotiated. > While in possession of such warehouseman, the goods cannot be attached or levied upon under an execution unless— o The document is first surrendered o Its negotiation is enjoined o The document is impounded by the court > This shall not apply if the person depositing is not the owner of the goods or one who has no right to convey title to the goods binding upon the owner. > Neither shall it apply to actions for recovery or manual delivery of goods by the real owner nor to cases where the attachment is made before the issuance of the negotiable receipt of title

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CREDITOR’S REMEDIES TO REACH NEGOTIABLE RECEIPTS

> A creditor whose debtor is the owner of negotiable receipt shall be entitled to such aid from courts of appropriate jurisdiction, by injunction and otherwise, in attaching such receipt or in satisfying the claim by means thereof as is allowed by law or in equity in regard to property which cannot be readily be attached or levied upon by ordinary legal process

WHAT CLAIMS ARE INCLUDED IN THE WAREHOUSEMAN’S LIEN

1. All lawful charges for storage and preservation of the goods 2. All lawful claims for money advanced—Interests, Insurance, Transportation, Labor, Weighing, Cooperating and other charges and expenses in relation to the goods 3. All reasonable charges and expenses for notice and advertisements of sale 4. Sale of goods where default has been made in satisfying warehouseman’s lien

AGAINST WHAT PROPERTY THE LIEN MAY BE ENFORCED

1. Against all goods, whenever deposited, belonging to the person who is liable to the debtor for the claims in regard to which the lien is asserted 2. Against all goods belonging to others which have been deposited at any time by the person who is liable as debtor for claims in regard to which the lien is asserted if such person had been entrusted with the possession of the goods that a pledge of the same by him at the time of the deposit to one who took the goods in good faith for value would have been valid

HOW WAREHOUSEMAN LOSES HIS LIEN

1. By surrendering possession thereof 2. By refusing to deliver the goods when a demand is made with which he is bound to comply under

the provisions of the law

LIEN WHERE RECEIPT NEGOTIABLE

> With the exception of the charges for the storage or preservation of goods for which a negotiable receipt has been issued, the lien exists only for the other charges expressly enumerated in the receipt so far as they are written although the amount of the said charge isn’t stated

OTHER THINGS IN CONNECTION TO WAREHOUSEMAN’S LIEN

1. Warehouseman need not deliver lien is satisfied 2. Warehouseman’s lien doesn’t preclude other remedies

SATISFACTION OF LIEN BY SALE

1. The warehouseman shall give a written notice to the person on whose account the goods are held, and to any other person known by the warehouseman to claim an interest in the goods. Such notice shall be given by delivery in person or by registered mail addressed to the last known place of business or abode of the person to be notified. 2. The notice shall contain— a. An itemized statement of the claim, showing the sum due at the time of the notice and the dates when it became due b. A brief description of the goods c. A demand that such amount of the claim as stated shall be paid on or before the day mentioned, not

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less than 10 days from the delivery of the notice if it is personally delivered, or from the time when the notice shall reach its destination, according to due course of post, if the notice is sent by mail d. A statement that unless the claim is paid within the time specified, the goods will be advertised for sale and sold by auction at a specified time and place

ENFORCEMENT OF WAREHOUSEMAN’S LIEN

1. By refusing to deliver the goods until the lien is satisfied 2. By causing the extrajudicial sale of the property and applying the proceeds to the value of the lien 3. By filing a civil action for collection of the unpaid charges or by way of counterclaim in an action to recover the property from him

EFFECT OF SALE OF GOODS

1. In case of sale of goods, the warehouseman is not liable for nondelivery even if the receipt given for the goods when they were deposited be negotiated. 2. When the sale was made without the publication requirement and before the time specified by law, such sale is void and the purchaser of the goods acquires no title in them.

ACTS FOR WHICH WAREHOUSEMAN IS LIABLE

1. Failure to stamp duplicate on copies of negotiable receipt 2. Failure to place non-negotiable or not negotiable on the not negotiable receipt 3. Misdelivery of the goods 4. Failure to effect cancellation of a negotiable receipt upon delivery of the goods 5. Issuing receipt for non-existing goods or misdescribed goods 6. Failure to take care of the goods 7. Failure to give notice in case of sale of goods to satisfy the lien or because the goods are perishable or hazardous

NEGOTIATION AND TRANSFER OF RECEIPTS

NEGOTIATION OF NEGOTIABLE RECEIPT BY DELIVERY

1. Where by the terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer 2. Where by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer a. Where by the terms of the receipt, the goods are deliverable to bearer or where a negotiable receipt has been indorsed in blank or bearer, any holder may indorse the same to himself or to any other specified person, and in such case the receipt shall thereafter be negotiated only by the indorsement by such indorsee NEGOTIATION OF NEGOTIABLE RECEIPT BY INDORSEMENT 1. If indorsed in blank or to bearer, the document becomes negotiable by delivery 2. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Delivery alone isn’t sufficient.

TRANSFER OF NON-NEGOTIABLE RECEIPT

> A non-negotiable receipt of title cannot be negotiated. > Nevertheless, it can be transferred or assigned by delivery > The assignee or transferee only acquires the rights of the transferor or assignor

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ADVANTAGES OF A NEGOTIABLE WAREHOUSE RECEIPT

1. It protects a purchaser for value and in good faith 2. The goods covered by the receipt cannot be garnished or levied upon under execution unless it is surrendered, or impounded, or its negotiation enjoined 3. In case of negotiation, the holder acquires the direct obligation of the warehouseman to hold possession of the goods for him without notice to such warehouseman 4. The goods it covers aren’t subject to seller’s lien or stoppage in transitu

WHO MAY NEGOTIATE A RECEIPT

1. By the owner thereof 2. By any person to whom the possession or custody of the receipt has been entrusted by the owner, if by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of the person to whom the possession or custody of the receipt has been entrusted, or if at the same time of such entrusting, the receipt is in such form that it may be negotiated by delivery

RIGHTS OF PERSON TO WHOM RECEIPT HAS BEEN NEGOTIATED

1. The title of the person negotiating the receipt over the goods covered by the receipt 2. The title of the person to whose order by the terms of the receipt the goods were to be delivered over such goods 3. The direct obligation of the warehouseman to hold possession of the goods for him, as if the warehouseman directly contracted with him

RIGHTS OF PERSON TO WHOM RECEIPT HAS BEEN TRANSFERRED

1. Title to the goods as against the transferor 2. The right to notify the warehouseman of the transfer thereof 3. The right thereafter to acquire the obligation of the warehouseman to hold the goods for him

RIGHTS OF TRANSFEREE OF NEGOTIABLE RECEIPT

1. The right to the goods as against the transferor 2. The right to compel the transferor to indorse the receipt

RULE WHERE RECEIPT IS SUBSEQUENTLY INDORSED

> For the purpose of determining whether the transferee is a purchaser for value in good faith without notice, the negotiation shall take effect as of the time when the indorsement is actually made not at the time the receipt is delivered > Reason for the rule: negotiation becomes complete only at the time of indorsement

WARRANTIES ON SALE OF RECEIPT

1. That the receipt is genuine 2. That he has a legal right to negotiate or transfer it 3. That he has knowledge of no fact which would impair the validity of the worth of the receipt 4. That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied, if the contract of the parties had been to transfer without a receipt of the goods represented thereby

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INDORSER, NOT A GUARANTOR

> The indorsement of a receipt doesn’t make the indorser liable for any failure on the part of the warehouseman or previous indorser of the receipt to fulfill their respective obligations

NO WARRANTY IMPLIED FROM ACCEPTING PAYMENT OF A DEBT

> A mortgagee, pledgee or holder for security of a receipt who, in good faith, demands or receives payment of the debt for which such receipt is security, whether from a party to a draft drawn for such debt or from any other person, shall not, by so doing, be deemed to represent or to warrant the genuineness of such receipt or the quantity or quality of the goods therein described > In other words, the holder of a security who in good faith accepts payment of a debt from a person doesn’t warrant thereby the genuineness of the receipt nor the quality or quantity of the goods therein described

WHEN NEGOTIATION NOT IMPAIRED BY FRAUD, DURESS, MISTAKE

> The validity of the negotiation of a receipt isn’t impaired by the fact that such negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the receipt was induced by fraud, mistake or duress to entrust the possession or custody of the receipt to such person, if the person to whom the receipt was negotiated, or to a person to whom the receipt is subsequently negotiated paid value therefor, without notice of the breach of duty, fraud, mistake or duress

EFFECT OF SUBSEQUENT NEGOTIATION BY SELLER, ETC.

> The purchaser, mortgagee, or pledgee of goods for which a negotiable receipt has been issued, or of the negotiable receipt itself, has the duty to require the negotiation of the receipt to him otherwise, his failure will have the same effect as an express authorization on his part to the seller, mortgagor, or pledgor in possession of such receipt to make subsequent negotiation > The subsequent purchaser must have taken the receipt in good faith and for value in order to acquire a better right

INDORSEE’S RIGHT SUPERIOR TO VENDOR’S LIEN

> An innocent holder of a negotiable receipt has a better right to the goods for which the receipt is given than the vendor who has a vendor’s lien upon such goods > Warehouseman isn’t obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation

HOW DO YOU ATTACH OR IMPOSE A LIEN OVER GOODS COVERED BY A WAREHOUSE RECEIPT?

If it is not negotiable, the court would issue a writ of attachment. If it is negotiable, the court should require the surrender of the receipt and restrict further negotiations.

EFFECTS OF DEATH OF INSOLVENT DEBTOR PENDING INSOLVENCY PROCEEDINGS IT DEPENDS— 1. If the debtor shall die after the order of adjudication, the proceedings shall be continued and concluded in like manner and with like validity, and effect as if he had lived 2. If the death occurs before the order of adjudication, the proceedings shall be discontinued. The claims must be filed in the proper testate or intestate proceedings as provided for in the R/C on the settlement of decedent’s estate DUTY OF COURT WHERE PROPERTY EXEMPT FROM EXECUTION

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It shall be the duty of the court having jurisdiction of the proceedings, upon petition and after hearing held upon due notice, to exempt and set apart, for the use and benefit of the insolvent, such real and personal property as is by law exempt from execution WHEN INSOLVENCY PROCEEDINGS DEEMED TO COMMENCE The filing off a petition by or against a debtor upon which, or upon amendment of which, an order of adjudication in insolvency may be made, shall be deemed to be the commencement of proceedings in insolvency under the Act WHEN RECEIVER MAY BE APPOINTED Upon the filing of either a voluntary or involuntary petition in insolvency, a receiver may be appointed by the court in which the proceeding is pending, or by a judge thereof, at any time before the election of an assignee, when it appears by the verified petition of a creditor: 1. That the assets of the insolvent, or a considerable portion thereof, have been pledged, mortgaged, transferred, assigned, conveyed, or seized, on legal process, in contravention or violation of the provisions of section seventy of this Act, and 2. That it is necessary to commence an action to recover the same. The appointment, oath, undertaking, and powers of such receiver shall in all respects be regulated by the general laws of the Philippine Islands applicable to receivers. When an assignee is chosen, and has qualified, the receiver shall forthwith return to court an account of the assets and property which have come into his possession, and of his disbursements, and a report of all actions or proceedings commenced by him for the recovery of any property belonging to the estate, and the court shall thereupon summarily hear and settle the receiver's account, and shall allow him a just compensation for his services and his expenses, including a reasonable attorney's fee, whereupon the receiver shall deliver all property, assets, or effects remaining in his hands, to the assignee who shall be substituted for the receiver in all pending actions or proceedings. WHEN PETITION MAY BE DISMISSED 1. Upon the application of the debtor, if it be voluntary petition, if no creditor files a written objection 2. If a creditor's petition, dismiss the petition and the discontinue the proceedings at any time before the appointment of an assignee 3. After the appointment of an assignee, no dismissal shall be made without the consent of all parties interested in or affected thereby.

EFFECTS OF DEATH OF INSOLVENT DEBTOR PENDING INSOLVENCY PROCEEDINGS

IT DEPENDS— 1. If the debtor shall die after the order of adjudication, the proceedings shall be continued and concluded in like manner and with like validity, and effect as if he had lived 2. If the death occurs before the order of adjudication, the proceedings shall be discontinued. The claims must be filed in the proper testate or intestate proceedings as provided for in the R/C on the settlement of decedent’s estate

DUTY OF COURT WHERE PROPERTY EXEMPT FROM EXECUTION

It shall be the duty of the court having jurisdiction of the proceedings, upon petition and after hearing held upon due notice, to exempt and set apart, for the use and benefit of the insolvent, such real and personal property as is by law exempt from execution

WHEN INSOLVENCY PROCEEDINGS DEEMED TO COMMENCE

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The filing off a petition by or against a debtor upon which, or upon amendment of which, an order of adjudication in insolvency may be made, shall be deemed to be the commencement of proceedings in insolvency under the Act

WHEN RECEIVER MAY BE APPOINTED

Upon the filing of either a voluntary or involuntary petition in insolvency, a receiver may be appointed by the court in which the proceeding is pending, or by a judge thereof, at any time before the election of an assignee, when it appears by the verified petition of a creditor: 1. That the assets of the insolvent, or a considerable portion thereof, have been pledged, mortgaged, transferred, assigned, conveyed, or seized, on legal process, in contravention or violation of the provisions of section seventy of this Act, and 2. That it is necessary to commence an action to recover the same. The appointment, oath, undertaking, and powers of such receiver shall in all respects be regulated by the general laws of the Philippine Islands applicable to receivers. When an assignee is chosen, and has qualified, the receiver shall forthwith return to court an account of the assets and property which have come into his possession, and of his disbursements, and a report of all actions or proceedings commenced by him for the recovery of any property belonging to the estate, and the court shall thereupon summarily hear and settle the receiver's account, and shall allow him a just compensation for his services and his expenses, including a reasonable attorney's fee, whereupon the receiver shall deliver all property, assets, or effects remaining in his hands, to the assignee who shall be substituted for the receiver in all pending actions or proceedings.

WHEN PETITION MAY BE DISMISSED

1. Upon the application of the debtor, if it be voluntary petition, if no creditor files a written objection 2. If a creditor's petition, dismiss the petition and the discontinue the proceedings at any time before the appointment of an assignee 3. After the appointment of an assignee, no dismissal shall be made without the consent of all parties interested in or affected thereby.

OLUNTARY DEPOSIT

GENERAL PROVISIONS

Art. 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A deposit may also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs. (1763)

VOLUNTARY DEPOSIT

One wherein the delivery is made by the will of the depositor Generally, the depositor must be the owner of the thing deposited But it may belong to another person The depositary cannot dispute the title of the depositor to the thing deposited

WHERE THERE ARE SEVERAL DEPOSITORS

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Two or more persons each claiming to be entitled to the thing deposited, may deposit the same with a third person Art. 1969. A contract of deposit may be entered into orally or in writing. (n) Art. 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated, the former shall be subject to all the obligations of a depositary, and may be compelled to return the thing by the guardian, or administrator, of the person who made the deposit, or by the latter himself if he should acquire capacity. (1764)

WHERE DEPOSITARY CAPACITATED AND THE DEPOSITOR INCAPACITATED

If the depositary is capacitated, he is subject to all the obligations of a depositary, whether or not the depositor is capacitated In the latter case, the depositary must return the property to the legal representative of the incapacitated or the depositor himself if he should acquire capacity WHAT IF THE CAPACITATED DEPOSITOR CANNOT RETURN IT TO THE LEGAL REPRESENTATIVE? He can be held liable for estafa.WHAT CAN HE OPT TO DO? Consignation is not advisable. It is too costly. Art. 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. (1765a)

WHERE DEPOSITARY INCAPACITATED AND THE DEPOSITOR CAPACITATED

The incapacitated depositary doesn’t incur the obligation of the depositary However, he is liable to return o To return the thing deposited while still in his possession o To the pay the depositor the amount by which he may have benefited himself with the thing or its price subject to the right of a third person who acquired the thing in good faith WHAT IS THE BENEFIT CONTEMPLATED BY LAW? Reasonable and judicious use

OBLIGATIONS OF THE DEPOSITARY Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. (1766a)

OBLIGATION TO KEEP THE THING DEPOSITED AND RETURN IT

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1. Degree of care—ordinarily, the depositor must exercise over the thing deposited the same diligence as he would exercise over his property a. Because it is an essential requisite of the judicial relation which involves the depositor’s confidence in good faith and trustworthiness b. Presumption that the depositor in choosing the depositary took into account the diligence which the depositary is accustomed with respect to his own property 2. Rules applicable a. Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. (1094a) b. Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) c. Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a) d. The required degree of care is greater if the deposit is made for compensation than when it is gratuitous. 3. Return before specified term—the thing deposited must be returned to the depositor whenever he claims it, even though a specified term or time for such may have been stipulated in the contract. CAN THERE BE A STIPULATION FOR A LESSER DEGREE OF CARE? Yes. CAN THERE BE STIPULATION THAT THERE WOULD ONLY BE LIABILITY WITH REGARD GROSS NEGLIGENCE AND NOT ORDINARY NEGLIGENCE? Yes. Art. 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a third person. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit. The depositary is responsible for the negligence of his employees. (n)

OBLIGATION NOT TO TRANSFER DEPOSIT

1. Liability for loss a. If he deposits it with a third person without authority even if there has been no negligence from his part and on the third person b. If deposit with a third person is allowed, he is liable still if he deposited the thing with a person who is manifestly careless or unfit 2. Exemption from liability a. The depositor is not responsible in case the thing is lost without negligence of the third person with whom he was allowed to deposit the thing if such person is not manifestly careless or unfit

Art. 1974. The depositary may change the way of the deposit if under the circumstances he may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation. However, before the depositary may make such change, he shall notify the depositor thereof and wait for his decision, unless delay would cause danger. (n) Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law. The above provision shall not apply to contracts for the rent of safety deposit boxes. (n)

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IF THE THING DEPOSITED SHOULD EARN INTEREST, THE DEPOSITARY IS UNDER THE OBLIGATION

1. To collect the interest as it becomes due 2. To take steps as may be necessary to preserve its value and the rights corresponding to it

SAFETY DEPOSIT BOXES

The contract for rent of safety deposit boxes is not an ordinary contract of lease of things because the full and absolute possession and control of the safety deposit box is not given to the party renting. It is actually a special kind of deposit. It is a contractual relation between the parties. The liability rules are governed by the Civil Code provisions on obligations and contracts, and not on donations.

IS A STIPULATION WHICH EXEMPTS THE BANK FROM LIABILITY FOR THE THINGS CONTAINED IN THE SAFETY DEPOSIT BOX VALID?

The stipulation is void. Even if as a rule, the Bank may limit its liability to some extent by agreement or stipulation, the agreement or stipulation must not be contrary to law and public policy. The law on deposit provides that the depositary is liable for loss due to fraud, negligence, delay, or contravention of the tenor of the agreement. Any contrary stipulation would be void. Art. 1976. Unless there is a stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and quality, in which case the various depositors shall own or have a proportionate interest in the mass. (n) Art. 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor. Otherwise, he shall be liable for damages. However, when the preservation of the thing deposited requires its use, it must be used but only for that purpose. (1767a)

GENERALLY THE DEPOSITARY CANNOT MAKE USE OF THE THING DEPOSITED WITHOUT THE EXPRESS PERMISSION OF THE DEPOSITOR. WHAT ARE THE EXCEPTIONS?

1. When the depositor has given his express permission to the depositary to use the thing deposited 2. When the preservation of the thing deposited requires its use, it must be used but only for that purpose

WHAT IS THE REASON FOR THIS RULE?

The principal purpose of deposit is safekeeping, not use of the thing. If the purpose is use, it is not deposit anymore. If the depositary uses the thing deposited without permission of the depositor, he shall be liable for damages. In addition, if the thing is lost even through fortuitous event, the depositary shall bear the loss. Art. 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract.

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The permission shall not be presumed, and its existence must be proved. (1768a)

WHAT HAPPENS IF THE DEPOSITARY IS GIVEN PERMISSION TO USE?

1. If the purpose of the contract is still for safekeeping, then it retains its concept as a deposit 2. If the purpose has become for the use or consumption of the thing a. Commodatum—if the purpose is for a non-consumable thing b. Mutuum—if the purpose is for a consumable thing or money Art. 1979. The depositary is liable for the loss of the thing through a fortuitous event: (1) If it is so stipulated; (2) If he uses the thing without the depositor's permission; (3) If he delays its return; (4) If he allows others to use it, even though he himself may have been authorized to use the same.(n)

WHEN IS THE DEPOSITARY LIABLE FOR THE LOSS OF THE THING THROUGH A FORTUITOUS EVENT?

1. If it is so stipulated; 2. If he uses the thing without the depositor's permission; 3. If he delays its return; 4. If he allows others to use it, even though he himself may have been authorized to use the same. (n) Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (n) Art. 1981. When the thing deposited is delivered closed and sealed, the depositary must return it in the same condition, and he shall be liable for damages should the seal or lock be broken through his fault. Fault on the part of the depositary is presumed, unless there is proof to the contrary. As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the forcible opening is imputable to the depositary, 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. When the seal or lock is broken, with or without the depositary's fault, he shall keep the secret of the deposit. (1769a) Art. 1982. When it becomes necessary to open a locked box or receptacle, the depositary is presumed authorized to do so, if the key has been delivered to him; or when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. (n) Art. 1983. The thing deposited shall be returned with all its products, accessories and accessions. Should the deposit consist of money, the provisions relative to agents in article 1896 shall be applied to the depositary. (1770)

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OBLIGATION TO RETURN PRODUCTS, ACCESSORIES, AND ACCESSIONS

The depositor is the owner of or at least represents the owner of the things deposited The depositary must therefore return not only the thing itself but also all its products, accessions and accessories which are a consequence of ownership

OBLIGATION TO PAY INTEREST ON SUMS CONVERTED TO PERSONAL USE

If what has been deposited is money, the depositary has no right to make use thereof and therefore, he is not liable to pay interest If the depositary be in delay or has used the money without permission, he shall be liable for interest as indemnity The depositary owes interest on the sums he has applied to his own use from the day on which he did so, and those which he still owes after the extinguishment of the deposit Art. 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited. Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit. If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. (1771a)

DEPOSITOR NEED NOT PROVE OWNERSHIP

The depositary who receives the thing in deposit cannot require that the depositor prove his ownership over the thing

WHERE THIRD PERSON APPEARS TO BE THE OWNER

Should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same.

CAN THE DEPOSITARY REQUIRE THE PRESENTATION OF AN ID?

Yes. Proof of identification is different from proof of ownership.

CAN THE DEPOSITARY REQUIRE THE PRESENTATION OF THE RECEIPT?

Yes. It is only a proof of identification and not ownership.

IN DEPOSIT, WHAT SHOULD BE ASCERTAINED AT THE VERY LEAST?

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Authority to make deposit should be ascertained. Take note that before the deposit, proof of ownership may be required. The prohibition applies subsequent to the deposit. There is required due diligence review. Art. 1985. When there are two or more depositors, if they are not solidary, and the thing admits of division, each one cannot demand more than his share. When there is solidarity or the thing does not admit of division, the provisions of Articles 1212 and 1214 shall govern. However, if there is a stipulation that the thing should be returned to one of the depositors, the depositary shall return it only to the person designated. (1772a)

RIGHT OF TWO OR MORE DEPOSITORS

1. Thing deposited divisible and depositors not solidary—if the thing deposited is divisible and there are two or more depositors who are not solidary, each one can demand only his proportionate share thereto

2. Obligation solidary or thing deposited not divisible—if the obligation is solidary or the thing is not divisible, the rules on active solidarity shall apply, to the effect that each one of the solidary depositors may do whatever may be useful to the others but not anything which may be prejudicial to the latter, and the depositary may return the thing to any one of the solidary depositors unless a demand for its return has been made by one of them in which case delivery should be made to him 3. Return to one of depositors stipulated—if by stipulation the thing should be returned to one of the depositors, the depositary is bound to return it only to the person designated although he has not made any demand for its return. Art. 1986. If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his property and rights. (1773)

PERSON TO WHOM RETURN MUST BE MADE

1. The depositary is obliged to return the thing deposited when required, to the depositor, to his heirs and successors, or to the person who may have been designated in the contract 2. If the person was incapacitated at the time of making the deposit, the property must be returned to his guardian or administrator or the person who made the deposit or to the depositor himself should he acquire capacity 3. Even if the depositor had capacity at the time of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative Art. 1987. If at the time the deposit was made a place was designated for the return of the thing, the depositary must take the thing deposited to such place; but the expenses for transportation shall be borne by the depositor. If no place has been designated for the return, it shall be made where the thing deposited may be, even if it should not be the same place where the deposit was made, provided that there was no malice on the part of the depositary. (1774)

PLACE OF RETURN

The thing must be returned at the place agreed upon by the parties, and in the absence of stipulation, at the place where the thing deposited might even if it shouldn’t be the same place where the original deposit was made provided the transfer was accomplished without malice on the part of the depositary

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In the first place, the expenses for transportation shall be borne by the depositor. This is just because the deposit is constituted for the benefit of the depositor and not the depositary who assumes no more than the safekeeping and the return of the thing Art. 1988. The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed. This provision shall not apply when the thing is judicially attached while in the depositary's possession, or should he have been notified of the opposition of a third person to the return or the removal of the thing deposited. In these cases, the depositary must immediately inform the depositor of the attachment or opposition. (1775)

TIME OF RETURN

As a rule, the depositor can demand the return of the thing deposited at will and this is true whether the period has been stipulated or not If the deposit is for compensation, the depositary is entitled to the compensation for the whole period. In this case, the period is for both the depositor and depositary.

WHEN DEPOSITARY IS NOT OBLIGED TO RETURN THING DEPOSITED

1. When the thing has been judicially attached while in the depositary’s possession—he would be disobeying the judicial order of attachment 2. When he has been notified of the opposition of a third person to the return or removal of the thing deposited Art. 1989. Unless the deposit is for a valuable consideration, the depositary who may have justifiable reasons for not keeping the thing deposited may, even before the time designated, return it to the depositor; and if the latter should refuse to receive it, the depositary may secure its consignation from the court. (1776a)

RIGHT OF DEPOSITARY TO RETURN THING DEPOSITED

1. Deposit gratuitous—the depositary may likewise return the thing deposited notwithstanding that a period has been fixed for the thing if a. The deposit is gratuitous b. Justifiable reasons 2. Deposit for a valuable consideration—if the deposit is for a valuable consideration, the depositary has no right to return the thing deposited before the expiration of the time designated even if he should suffer inconvenience as a consequence Art. 1990. If the depositary by force majeure or government order loses the thing and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor. (1777a)

LIABILITY FOR LOSS BY FORCE MAJEURE OR GOVERNMENT ORDER

The depositary has the obligation to return the thing deposited But he isn’t liable for loss of the thing by force majeure or by government order However, if in place of the thing he receives money or another thing, he has the duty to deliver to the depositor what he has acquired otherwise, he would enrich himself at the expense of the depositor Art. 1991. The depositor's heir who in good faith may have sold the thing which he did not know was

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deposited, shall only be bound to return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him. (1778)

ALIENATION IN GOOD FAITH BY DEPOSITARY’S HEIR

This above article envisions a situation where the depositary dies and the object of the deposit is left with his heir who, in good faith, sells it The obligation of the heir is limited to the return of the price received or to assign the right to collect the same if it hasn’t been paid and not the real value of the thing The rule is based on considerations of equity If the purchaser who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery If the heir acts in bad faith, he is liable for damages. The sale or appropriation of the thing constitutes estafa.

OBLIGATIONS OF THE DEPOSITOR Art. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the expenses he may have incurred for the preservation of the thing deposited. (1779a) OBLIGATION TO PAY EXPENSES OF PRESERVATION

1. Deposit gratuitous—the above article applies only if the deposit is gratuitous. It rests on equity. The depositor would have incurred just the same had the thing remained with him. Without the duty of reimbursement imposed by the article, the depositor would be enriching himself at the expense of the depositary. The rule is different in commodatum. 2. Deposit for compensation—if the deposit is for valuable consideration, the expenses of preservation are borne by the depositary because they are deemed included in the compensation. There can however be a contrary stipulation. Art. 1993. The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited, unless at the time of the constitution of the deposit the former was not aware of, or was not expected to know the dangerous character of the thing, or unless he notified the depositary of the same, or the latter was aware of it without advice from the depositor. (n) 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. (1780)

DEPOSITARY’S RIGHT OF RETENTION Talks about legal pledge The thing retained serves as security for payment of what may be due to the depositary by reason of the deposit Depositary may foreclose through public auction Art. 1995. A deposit its extinguished: (1) Upon the loss or destruction of the thing deposited; (2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary. (n)

CAUSES OF EXTINGUISHMENT OF DEPOSIT

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The causes mentioned are not exclusive There could also be other causes such as return of the thing, Novation, merger, expiration of term, fulfillment of resolutory condition

EFFECT OF DEATH OF DEPOSITOR OR DEPOSITARY

1. Deposit gratuitous—if the deposit is gratuitous, the death of either the depositor or depositary extinguishes the deposit. 2. Deposit for compensation—a deposit for a compensation isn’t extinguished by the death of either party because unlike a gratuitous deposit, an onerous deposit isn’t personal in nature. Hence, the rights and obligations arising therefrom are transmissible to their respective heirs. But the heirs of either party have a right to terminate the deposit even before the expiration of the term.

NECESSARY DEPOSIT Art. 1996. A deposit is necessary: (1) When it is made in compliance with a legal obligation; (2) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events. (1781a) Art. 1997. The deposit referred to in No. 1 of the preceding article shall be governed by the provisions of the law establishing it, and in case of its deficiency, by the rules on voluntary deposit. The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning voluntary deposit and by Article 2168. (1782) WHEN DEPOSIT IS NECESSARY 1. When it is made in compliance with a legal obligation 2. When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events 3. Travelers in hotels or inns 4. Made by passengers with common carriers NECESSARY DEPOSIT IN COMPLIANCE WITH A LEGAL OBLIGATION 1. The judicial deposit of a thing the possession of which is being disputed in a litigation by two or more persons 2. The deposit with a bank or public institution of public bonds or instruments of credit payable to order or bearer given in usufruct when the usufructuary doesn’t give proper security for their conservation 3. The deposit of a thing pledged when the creditor uses the same without the authority of the owner or misuses it in any other way 4. Those required in suits as provided for in the Rules of Court 5. Those constituted to guarantee contracts with the government. In this last case, the deposit arises from an obligation of a public or administrative character. 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. (1783) Art. 1999. The hotel-keeper is liable for the vehicles, animals and articles which have been

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introduced or placed in the annexes of the hotel. (n) DEPOSIT BY TRAVELLERS IN HOTELS AND INNS 1. They have been previously informed about the effects brought by their guests 2. The latter have taken the precautions prescribed regarding their safekeeping EXTENT OF LIABILITY OF KEEPERS OF HOTELS AND INNS The liability isn’t limited to effects lost or damaged in the hotel rooms which come under the term “baggage” or articles such as clothing as are ordinarily used by travelers but include those lost or damaged in hotel annexes such as vehicles in the hotel’s garage The responsibility extends to all those who offer lodging for a compensation, whatever may be their character DEFINITION OF TERMS1. Travelers or guests—it refers to transients and not to boarders. Non-transients are governed by the rules on lease. 2. Hotel-keeper and inn-keeper— a. Hotel—a house or large building that supplies rooms and food for pay to travelers and others; inn. b. Inn—a place where travelers and others can get meals and a room to sleep in. Hotels have largely taken the place of the old inns. c. Motel—a roadside hotel or group of furnished cottages or cabins providing overnight lodging for motorists; motor court. Art. 2000. The responsibility referred to in the two preceding articles shall include the loss of, or injury to the personal property of the guests caused by the servants or employees of the keepers of hotels or inns as well as strangers; but not that which may proceed from any force majeure. The fact that travelers are constrained to rely on the vigilance of the keeper of the hotels or inns shall be considered in determining the degree of care required of him. (1784a) Art. 2001. The act of a thief or robber, who has entered the hotel is not deemed force majeure, unless it is done with the use of arms or through an irresistible force. (n) Art. 2002. The hotel-keeper is not liable for compensation if the loss is due to the acts of the guest, his family, servants or visitors, or if the loss arises from the character of the things brought into the hotel. (n) WHEN HOTEL-KEEPER LIABLE 1. The loss or injury is caused by his servants or employees as well as by strangers provided that notice has been given and proper precautions taken 2. The loss is caused by the act of the thief or robber done without the use of arms and irresistible force for in this case, the hotel-keeper is apparently negligent. WHEN HOTEL-KEEPER IS NOT LIABLE 1. The loss or injury is caused by force majeure, theft or robbery by a stranger with the use of arms or irresistible force, unless he is guilty of fault or negligence in failing to provide against the loss or injury from his cause 2. The loss is due to the acts of the guests, his family, servants, or visitors 3. The loss arises from the character of the things brought into the hotel Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in

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articles 1998 to 2001 is suppressed or diminished shall be void. (n) EXEMPTION OR DIMUNITION OF LIABILITY The rule in this article is similar to the rule on common carriers which doesn’t allow a common carrier to dispense with or limit his responsibility by stipulation or by posting of notices Such stipulations is deemed contrary to law, morals, and public policy 1. Hotel-keepers and inn-keepers in offering their accommodations to the public, practically volunteer as depositaries, and as such, they should be subject to an extraordinary degree of responsibility for the protection and safety of travelers who have no alternative but rely on good faith and care of those with whom they take lodging 2. Inn-keepers by the nature of their business, have supervision and control of their inns and the premises thereof. As a matter of fact, authorities are to the effect that it is not necessary in order to hold an inn-keeper liable that the effects of the guests be actually delivered to him or his employee, it is enough that they are within the inn. CAN THERE BE STIPULATION EXEMPTING LIABILITY FOR GROSS NEGLIGENCE? No since you cannot waive liability for gross negligence as this would be tantamount to waiving liability for fraud. Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests. (n) HOTEL-KEEPER’S RIGHT TO RETAIN Nature of a pledge created by operation of law Incidentally, the act of obtaining food or accommodation in a hotel or inn without paying thereof constitutes estafa.

CLASSIFICATION AND PREFERENCE OF CREDITORS

ORDER OF DISTRIBUTION

1. Equitable claims under Section 482. Preferred claims with respect to specific movable property and specific immovable property 3. Preferred claims as to the encumbered property of the debtor which shall be paid in the order named in Article 2244 CC4. Common or ordinary credits which shall be paid pro rata regardless of the dates under Article 2245 CC5. With respect to specific movable and immovable property, the taxes due the State shall first be established

EQUITABLE CLAIMS UNDER THE INSOLVENCY LAW

1. Paraphernal property belonging to the wife of the insolvent2. Property held by the insolvent on deposit, administration, lease or usufruct3. Merchandise held by the debtor on commodatum4. Negotiable instruments for collection or remittance5. Money held by the debtor for remittance6. Amounts due the insolvent for sales or merchandise on commission7. Merchandise bought by the insolvent on credit where no delivery is made or where the right of ownership or possession has been retained by the seller8. Goods or chattels wrongfully taken by the insolvent or the amount of the value thereof

CLASSIFICATION AND PREFERENCE OF CREDITORS

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SECTION 48. Property not belonging to insolvent; Dowry; Paraphernalia property. — Merchandise, effects, and any other kind of property found among the property of the insolvent, the ownership of which has not been conveyed to him by a legal and irrevocable title, shall be considered to be the property of other persons and shall be placed at the disposal of its lawful owners on order of the court made at the hearing mentioned in section forty-three or at any ordinary hearing, if the assignee or any creditor whose right in the estate of the insolvent has been established shall petition in writing for such hearing and the court in its discretion shall so order, the creditors, however, retaining such rights in said property as belong to the insolvent, and ubrogating him whenever they shall have complied with all obligations concerning said property.

The following shall be included in this section:

1. Dowry property inestimado and such property estimado which may remain in the possession of the husband where the receipt thereof is a matter of record in a public instrument registered under the provisions of sections twenty-one and twenty-seven of the Code of Commerce in force.

2. Paraphernal property which the wife may have acquired by inheritance, legacy, or donation whether remaining in the form in which it was received or subrogated or invested in other property, provided that such investment or subrogation has been registered in the registro mercantile in accordance with the provisions of the sections of the Code of Commerce mentioned in the next preceding paragraph.

3. Property and effects deposited with the bankrupt, or administered, leased, rented, or held in usufruct by him.

4. Merchandise in the possession of the bankrupt, on commission, for purchase, sale, forwarding, or delivery.

5. Bills of exchange or promissory notes without endorsement or other expression transferring ownership remitted to the insolvent for collection

6. Money remitted to the insolvent, otherwise than on current account, and which is in his possession for delivery to a definite person in the name and for the account of the remitter or for the settlement of claims which are to be met at the unsolvent's domicile.

7. Amounts due the insolvent for sales of merchandise on commission, and bills of exchange and promissory notes derived therefrom in his possession, even when the same are not made payable to the owner of the merchandise sold, provided it is proven that for the obligation to the insolvent is derived therefrom and that said bills of exchange and promissory notes were in the possession of the insolvent for account of the owner of the merchandise to be cashed and remitted, in due time, to the said owner; all of which shall be a legal presumption when the amount involved in any such sale shall not have been credited on the books of both the owner of the merchandise and of the insolvent.

8. Merchandise bought on credit by the insolvent so long as the actual delivery thereof has not been made to him at his store or at any other place stipulated for such delivery, and merchandise the bills of lading or shipping receipts of which have been sent him after the same has been loaded by order of the purchaser and for his account and risk.

In all cases arising under this paragraph assignees may retain the merchandise so purchased or claim it for the creditors by paying the price thereof to the vendor.

9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if still existing in his possession or the amount of the value thereof.

SECTION 49. Creditors sharing pro rata. — All creditors, except those whose claims are mentioned

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in the next following section, whose debts are duly proved and allowed shall be entitled to share in the property and estate pro rata, after the property belonging to other persons referred to in the last in preceding section has been deducted therefrom, without priority or preference whatever:

Provided, That any debt proved by any person liable as bail, surety, guarantor, or otherwise, for the debtor, shall not be paid to the person so proving the same until satisfactory evidence shall be produced of the payment of such debt by such person so liable, and the share to which such debt would be entitled may be paid into court, or otherwise held, for the benefit of the party entitled thereto, as the court may direct.

SECTION 50. The following are the preferred claims which shall be paid in the order named:

(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under their parental authority and have no property of their own, when approved by the court;

(b) Debts due for personal services rendered the insolvent by employees, laborers, or domestic servants immediately preceding the commencement of proceedings in insolvency;

(c) Compensation due the laborers or their dependents under the provisions of Act Numbered Thirty-four hundred and twenty-eight, known as the Workmen's Compensation Act, 22 as amended by Act Numbered Thirty-eight hundred and twelve, and under the provisions of Act Numbered Eighteen hundred and seventy-four, known as the Employees' Liability Act 23 and of other laws providing for payment of indemnity for damages in cases of labor accidents;

(d) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors, when properly authorized and approved by the court;

(e) Debts, taxes, and assessments due the Insular Government; 24

(f) Debts, taxes, and assessments due to any province or provinces of the Philippine Islands;

(g) Debts, taxes, and assessments due to any municipality or municipalities of the Philippine Islands;

All other creditors shall be paid pro rata.

INSOLVENCY OF PARTNERSHIPS & CORPORATIONS

WHEN PARTNERSHIP MAY BE DECLARED INSOLVENT

A partnership may be adjudged insolvent during the continuation of the partnership business or after its dissolution but before the final settlement thereof

WHO MAY PETITION FOR DECLARATION OF INSOLVENCY IN PARTNERSHIP

1. In case of voluntary insolvency—the petition may be filed by all the partners, or any one of them 2. In case of involuntary insolvency—the petition is filed by one or more of the partners or three or more of the creditors of the partnership. a. If the petition be filed by less than all the partners of the partnership, those partners who don’t join the petition shall be ordered to show cause why should not be adjudged to be insolvent in the same manner as other creditors are required to show cause upon a creditor’s petition

PROPERTIES INCLUDED IN THE INSOLVENCY PROCEEDINGS

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1. All the properties of the partnership 2. All the separate property of each of the partners, except a. Separate properties of limited partners b. Properties which are exempt by law

EFFECT OF FILING OF PETITION

1. When insolvency proceedings have been instituted against or by a partnership, the proceedings are deemed to commence against the partners at the same time even if a partner is not ordered included in the proceedings until sometime later 2. Upon order of the court, all the property of the partnership and also all the separate property of each partner, if they are liable, shall be taken 3. All creditors of the partnership and the separate creditors of each partner shall be allowed to prove their respective claims 4. The assignee shall be chosen by the creditors of the partnership 5. Pending insolvency proceedings by or against any partnership, no statute of limitations shall run upon a claim of or against the estate of the debtor

EFFECT OF INSOLVENCY OF PARTNERSHIP OR ANY PARTNER

1. A partnership may be declared insolvent notwithstanding the solvency of the partners constituting the same 2. A partnership isn’t necessarily insolvent because one of its members is insolvent 3. A partnership is automatically dissolved upon the insolvency of one of the partners or of the partnership

DISTRIBUTION OF PROCEEDS

1. The net proceeds of the partnership property shall be appropriated to the payment of partnership debts 2. The net proceeds of the individual estate of each partner shall be applied to the payment of his individual debts 3. Should any surplus remain, so much thereof as corresponds to him as his share in the subsidiary liability for partnership debts shall be added to the partnership assets and be applied to the payment of such debts 4. Should any surplus remain of the partnership property, such assets shall be added to the assets of the individual partners in the proportion of their respective interests in the partnership

WHO MAY PETITION FOR DECLARATION OF INSOLVENCY OF A CORPORATION

1. In case of voluntary insolvency—the petition may be filed by any officer duly authorized by the vote of the board of directors or trustees at a meeting especially called for that purpose, or by the assent in writing of a majority of directors, or trustees, as the case may be 2. In case of involuntary insolvency— a. First view—upon a creditor’s petition made and presented in the manner provided for in respect to debtors b. Second view—the petition must be filed by at least 3 creditors of the corporation under the circumstances mentioned by law

EFFECT WHEN CORPORATION DECLARED INSOLVENT

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1. Property and assets shall be distributed to the creditors 2. No discharge shall be granted PARTNERSHIPS & CORPORATIONS - Insolvency LawSECTION 51. Partnerships. — A partnership, during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged insolvent, either on the petition of the partners or any one of them, or on the petition of three or more creditors of the partnership, qualified as provided in section twenty of this Act, in either of which cases the court shall issue an order in the manner provided by this Act, upon which all the property of the partnership, and also all the separate property of each of the partners, if they are liable, shall be taken, excepting such parts thereof as may be exempt by law; and all creditors of the partnership, and the separate creditors of each partner, shall be allowed to prove their respective claims; and the assignee shall be chosen by the creditors of the partnership, and shall also keep separate accounts of the property of the partnership, and of the separate estate of each member thereof. The expenses of the proceedings shall be paid from the partnership property and the individual property of the partners in such proportions as the court shall determine. The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of their respective interests in the partnership. Certificate of discharge shall be granted or refused to each partner as the same would or ought to be if the proceedings had been by or against him alone under this Act; and in all other respects the proceedings as to the partners shall be conducted in like manner as if they had been commenced and prosecuted by or against one person alone. If such partners reside in different provinces, the court in which the petition is first filed shall retain exclusive jurisdiction over the case. If the petition to be filed by less than all the partners of a partnership those partners who do not join in the petition shall be ordered to show cause why they, as individuals, and said partnership, should not be adjudged to be insolvent, in the same manner as other debtors are required to show cause upon a creditor's petition, as in this Act provided; and no order of djudication shall be made in said proceedings until after the hearing of said order to show cause. SECTION 52. Corporations and sociedades anonimas; Banking. — The provisions of this Act shall apply to corporations and sociedades anonimas, and upon the petition of any officer of any corporation or sociedad anonima, duly authorized by the vote of the board of irectors or trustees, at a meeting specially called for that purpose, or by the assent in writing of a majority of the directors or trustees as the case may be, or upon a creditor's petition made and presented in the manner provided in respect to debtors, of the like proceedings shall be had and taken as are provided in the case of debtors: Provided, That in case the articles of association or by-laws of any corporation the or sociedad anonima provide a method for such proceedings, such method shall be followed. All the provisions of this Act which apply to the debtor, or set forth his duties, examination, and liabilities, or prescribe penalties, or relate to fraudulent conveyances, payments, and assignments, apply to each and every officer of any corporation or sociedad anonima in relation to the same matters concerning the corporation. Whenever any corporation is declared insolvent, its property and assets shall be distributed to the creditors; due at but no discharge shall be granted to any corporation. The provisions of this Act shall not apply to corporations engaged principally in the banking business, 26 or to any other corporation as to which there is any special provision of law for its liquidation in case of insolvency.

PROOF OF DEBTS - Insolvency Law

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DEBTS THAT MAY BE PROVED

1. All debts due and payable from the debtor at the time of the adjudication of the insolvency2. All debts existing at the time of the adjudication of insolvency but not payable until a future time, a discount being made if no interest is payable by the terms of the contract3. Any debt of the insolvent arising from his liability as indorser, surety, bail or guarantor, where such liability became absolute after the adjudication of insolvency but before the final dividend shall have been declared

4. Other contingent debts and contingent liabilities contracted by the insolvent if the contingency shall happen before the order of final dividend5. Any debt of the insolvent arising from his liability to any person liable as bail, surety, or guarantor or otherwise, for the insolvent, who shall have paid the debt in full, or in part

CONTINGENT CLAIM

> Claim in which liability depends on some future event that may or may not happen and which makes it uncertain whether there will be any liability> Such claim is not barred merely because it is not presented during the insolvency proceedings. After the insolvency proceedings and the happening of the contingency, the creditor may pursue any available remedy for the collection of his claim

DEBTS THAT MAY NOT BE PROVED

1. Claims barred by the statute of limitations2. Claims of secured creditors with a mortgage or pledge in their favor unless they surrender their security3. Claims of creditors who hold an attachment or execution on the property of the debtor duly recorded and not dissolved

4. Claims on account of which a fraudulent preference was made or given5. Support, as it doesn’t arise from any business transaction but from the relation of marriage6. A claim for unliquidated damages arising out of a pure tort which neither constitutes a breach of an express contract nor results in any unjust enrichment of the tortfeasor thay may form the basis of an implied contract

CAN A CREDITOR SET UP COMPENSATION/OFFSET HIS OWN DEBTS AGAINST THE INSOLVENT DEBTOR?

> This is the case of Uy-Tong v. Silva. > Compensation can be set up against the insolvent debtor but only for those debts which arose at least 30 days before the filing of the insolvency proceedings. If the claim arose within the 30-day period before the filing of the petition, there can be no compensation. The rule on preferences would be disregarded if the set-off were allowed. It would, in effect, give the one claiming compensation undue preference over other creditors.

PROOF OF DEBTS - Insolvency Law

SECTION 53. Class of debts. — All debts due and payable from the debtor at the time of the adjudication of insolvency, and all debts then existing but not payable until a future time, a discount being made if no interest is payable by the terms of the contract, may be proved against the estate of the debtor.

SECTION 54. Commercial paper. — If the debtor is bound as indorser, surety, bail, or guarantor, upon any

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bill, bond, note, or other specialty or contract, or for any debt any person, and his liability shall not have become absolute until after the adjudication of insolvency, the creditor may prove the same after such liability shall have become fixed, and before the final dividend shall have been declared.

SECTION 55. Contingent debts. — In all cases of contingent debts and contingent liabilities, contracted by the debtor, and not herein otherwise provided for, thecreditor may make claim therefor and have his claim allowed, with the right to share in the dividends, if the contingency shall happen before the order of the final dividend; or he may, at any time, apply to the court to have the present value of the debt or liability ascertained and liquidated, which shall be done in such manner as the court shall order, and it shall be allowed for the amount so ascertained.

SECTION 56. Bail, surety, etc., for the debtor. — Any person liable as bail, surety, or guarantor, or otherwise, for the debtor, who shall have paid the debt, or any part thereof, in discharge of the whole, shall be entitled to prove such debt, or to stand in the place of the creditor, if he shall have proved the same, although such payments shall have been made after the proceedings in insolvency were commenced; and any person so liable for the debtor, and who has not paid the whole of said debt, but is still liable for the same, or any part thereof, may, if the creditor shall fail or omit to prove such debt, prove the same in the name of the creditor.

SECTION 57. Rents and periodical payments. — Where the debtor is liable to pay rent, or other debt falling due at fixed and stated periods, the creditor may prove, for a proportionate part thereof up to the time of the insolvency, as if the same became due from day to day, and not at such fixed and stated periods.

SECTION 58. Mutual debts and credits. — In all cases of mutual debts and mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed of a claim in its nature not provable against the estate: Provided, That no set-off or counterclaim shall be allowed in favor of any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty days immediately preceding the filing, or after the filing of the petition by or against the insolvent.

SECTION 59. Mortgages, pledges, liens, etc.; Release or sale by assignee. — When a creditor has a mortgage, or pledge of real or personal property of the debtor, or a lien thereon, for securing the payment of a debt owing to him from the debtor, or an attachment or execution on property of the debt or duly recorded and not dissolved under this Act, he shall be admitted as a creditor for the balance of the debt only, after deducting the value of such property, such value to be ascertained by agreement between him and the receiver, if any, and if no receiver, then upon such sum as the court or a judge thereof may decide to be fair and reasonable, before the election of an assignee, or by a sale thereof, to be made in such manner as the court or judge thereof shall direct; or the creditor may release or convey his claim to the receiver, if any, or if no receiver then to thesheriff, before the election of an assignee, or to the assignee if an assignee has been elected, upon such property, and be admitted to prove his whole debt. If the value of the property exceeds the sum for which it is so held as security, the assignee may release to the creditor the debtor's right of redemption thereon on receiving such excess; or he may sell the property, subject to the claim of the creditor thereon, and in either case the assignee and creditor, respectively, shall execute all deeds and writings necessary or proper to consummate the transaction. If the property is not sold or released, and delivered up, or its value fixed, the creditor shall not be allowed to prove any part of his debt, but the assignee shall deliver to the creditor all such property upon which the creditor holds a mortgage, pledge, or lien, or upon which he has an attachment or execution.

SECTION 60. Creditors proving claims cannot use; Stay of action. — No creditor, proving his debt or claim, shall be allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived all right of action and suit against him, and all proceedings already commenced, or any unsatisfied judgment already obtained thereon, shall be deemed to be discharged and surrendered thereby; and after the debtor's discharge, upon proper application and proof to the court having jurisdiction, all such proceedings shall be, dismissed, and such unsatisfied judgments satisfied of record: Provided, That

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no valid lien existing in good faith thereunder shall be thereby affected. A creditor proving his debt or claim shall not be held to have waived his right of action or suit against the debtor when a discharge has have been refused or the proceedings have been determined to the without a discharge. No creditor whose debt is provable under this Act shall be allowed, after the commencement of proceedings in insolvency, to prosecute to final judgment any action therefor against the debtor until the question of the debtor's discharge shall ave been determined, and any such suit proceeding shall, upon the application of the debtor or of any creditor, or the assignee, be stayed to await the determination of the court on the question of discharge: Provided, That if the amount due the creditor is in dispute, the suit, by leave of the court in insolvency, may proceed to judgment for purpose of ascertaining the amount due, which amount, when adjudged, may be allowed in the insolvency proceedings, but execution shall be stayed aforesaid.

SECTION 61. Preferences knowingly accepted contrary to this Act. — Any person who shall have accepted any preference, having reasonable cause to believe that the same was made or given by the debtor contrary to any provision of this Act, shall not be allowed to prove the debt or claim on account of which the preference was made or given, nor shall he receive any dividend thereon, until he shall have surrendered to the assignee all property, money, benefit, or advantage received by him under such preference.

SECTION 62. Examinations under oath by court. — The court may, upon the application of the assignee, or of any creditor, or without any application, before or after adjudication in insolvency, examine upon oath the debtor in relation to his property and his estate and may examine any other person tending or making proof of claims, and may subpoena witnesses to give evidence relating to such matters. All examinations of witnesses shall be had and depositions shall be taken in accordance with and in the same manner as is provided by the Code of Civil Procedure.

DISCHARGE in Insolvency

DISCHARGE

Formal and judicial release of an insolvent debtor from his debts with the exception of those expressly reserved by law

ACTS OF DEBTOR OR GROUNDS WHICH WILL PREVENT A DISCHARGE

1. False swearing 2. Concealment of any part of his estate or effects 3. Fraud or willful neglect in the care of his property or in the delivery thereof to the assignee 4. Procuring his properties to be attached or seized on execution within 1 month before the commencement of insolvency proceedings 5. Destruction, mutilation, alteration or falsification of his books, documents, and papers 6. Giving fraudulent preference to a creditor 7. Non-disclosure to the assignee of a proven false or fictitious debt within 1 month after acquiring knowledge 8. Being a merchant, failure to keep proper books of accounts 9. Influencing the action of any creditor, at any state of the proceedings, by any pecuniary consideration 10. Effecting any transfer, conveyance, or mortgage in contemplation of insolvency 11. Conviction of any misdemeanor under the Insolvency Law 12. In case of voluntary insolvency, he has received the benefits of insolvency within 6 years next preceding his application for discharge 13. If insolvency proceedings in which he could have applied for a discharge are pending by or against him in the RTC of any other province or city

DEBTS RELEASED BY DISCHARGE

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1. All claims, debts, and liabilities and demands set forth in the schedule 2. All claims, debts, and liabilities and demands which were or might have been proved against the estate of the insolvency

DEBTS NOT RELEASED BY DISCHARGE

1. Taxes 2. Debts arising from any act of swindling (because you don’t reward a person who violated a law or a trust)

3. Debts of a surety, guarantor, indorser, or any person liable for the same debt, for or with the insolvent debtor (This is because the discharge only benefits the principal debtor, not his co-debtors or guarantors). 4. Debts of a corporation 5. Claims for support 6. Debts which were not proved and could not have been proved during the insolvency proceedings 7. Debts arising from tort 8. Claims of secured creditors 9. Debts which were not yet existing at the time of the discharge 10. Contingent claims

WHEN DISCHARGE MAY BE REVOKED

1. Whose debt was proved or provable against the estate in insolvency, on the ground that the discharge was fraudulently obtained 2. Who has discovered facts constituting the fraud subsequent to the discharge and provided, 3. The petition is filed within 1 year after the date of the discharge DISCHARGE - Act 1956 SECTION 64. Discharge. — At any time after the expiration of three months from the adjudication of insolvency, but not later than one year from such adjudication, unless the property of the insolvent has not been converted unto money, the debtor may apply to the court for a discharge from his debts, and the court shall thereupon order notice to be given to all creditors who have proved their debts to appear on a day appointed for that purpose and show cause why a discharge should not be granted to the debtor; said notice shall be given by registered mail and by publication 28 at least once a week, for six weeks, in a newspaper published in the province or city, or, if there be none, in a newspaper which, in the opinion of the judge, will best give notice to the creditors of the said insolvent: Provided, That if no debts have been proven, such notice shall not be required. SECTION 65. Invalid discharge. — No discharge shall be granted, or if granted shall be valid, (1) if the debtor shall have sworn falsely in his affidavit annexed to his petition, schedule, or inventory, or upon any examination in the course of the proceedings in insolvency, in relation to any material fact concerning his estate or his debts or to any other material fact; or (2) if he has concealed any part of his estate or effects, or any books or writing relating thereto; or (3) if he has been guilty of fraud or willful neglect in the care or custody of his property or in the delivery to the assignee of the property belonging to him at the time of the presentation of his petition and inventory, excepting such property as he is permitted to retain under the provisions of this Act; or (4) if, within one month before the commencement of such proceedings, he has procured his real estate, goods, moneys, or chattels to be attached or seized on execution; or (5) if he has destroyed, mutilated, ltered, or falsified any of his books, documents, papers, writings, or securities, or has made, or been privy to the making of, any false or fraudulent entry in any book of account or other document with intent to defraud his creditors; or (6) if he has given any fraudulent preference, contrary to the provisions of this Act, or has made any fraudulent payment, gift, transfer, conveyance, or assignment of any part of his property, or has admitted a false or fictitious debt

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against his estate; or (7) if, having knowledge that any person has proven such false or fictitious debt, he has not disclosed the same to his assignee within one month after such knowledge; or (8) if, being a merchant or tradesman, he has not kept proper books of account in Arabic numerals and in accordance with the provisions of the Code of Commerce; or (9) if he, or any other person on his account, or in his behalf, has influenced the action of any creditor, at any stage of the proceedings, by any pecuniary consideration or obligation; or (10) if he has, in contemplation of becoming insolvent, made any pledge, payment, transfer, assignment, or conveyance of any part of his property, directly or indirectly, absolutely or conditionally, for the purpose of preferring any creditor or person having a claim against him, or who is, or may be, under liability for him, or for the purpose of preventing the property from coming into the hands of the assignee, or of being distributed under this Act in satisfaction of his debts; or (11) if he has been convicted of any misdemeanor under this Act, or has been guilty of fraud contrary to the true intent of this Act; or (12) in case of voluntary insolvency, has received the benefit of this or any other Act of insolvency or bankruptcy within six years next preceding his application for discharge; or (13) if insolvency proceedings in which he could have applied for a discharge are pending by or against him in the Court of First Instance of any other province or city in the Philippine Islands. Before any discharge is granted, the debtor shall take and subscribe an oath to the effect that he has not done, suffered, or been privy to any act, matter, or thing specified in this Act as grounds for withholding such discharge or as invalidating such discharge, if granted. SECTION 66. Any creditor opposing the discharge of a debtor shall file his objections thereto, specifying the grounds of his opposition, and after the debtor has filed and served his answer thereto which pleadings shall be verified, the court shall try the issue or issues raised, according to the practice provided by law in civil actions. SECTION 67. Discharge of debtor by court. — If it shall appear to the court that the debtor has in all things conformed to his duty under this Act, and that he is entitled under the provisions thereof to receive a discharge, the court shall grant him a discharge from all his debts, except as hereinafter provided, and shall give him a certificate thereof, under the seal of the court, in substance as follows: "In the Court of First Instance of the _____________, Philippine Islands. Whereas, ______________, has been duly adjudged an insolvent under the Insolvency Law of the Philippine Islands, and appears to have conformed to all the requirements of law in that behalf, it is therefore ordered by the court that said _______________ be forever discharged from all debts and claims, which by said Insolvency Law are made provable against his estate, and which existed on the _______ day of _________, on which the petition of adjudication was filed by (or against) him, excepting such debts, if any, as are by said Insolvency Law excepted from the operation of a discharge in insolvency. Given under my hand, and the seal of the court, this ____ day of ______________, anno Domini ______________ Attest: ____________, clerk. (Seal) _____________, judge." SECTION 68. Debts not released under this Act — No tax or assessment due the Insular Government 29 or any provincial or municipal government, whether proved or not as provided for in this Act, shall be discharged. Nor shall any debt created by the fraud or embezzlement of the debtor, or by his defalcation as a public officer or while acting in a fiduciary capacity, be discharged under this Act, but the debt may be proved, and the dividend thereon shall be a payment on account of said debt. No discharge solvent granted under this Act shall release, discharge, or affect any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise. 30 SECTION 69. Effect of discharge under this Act — A discharge, duly granted under this Act, shall, with the exceptions aforesaid, release the debtor from all claims, debts, liabilities, and demands set forth in his schedule, or which were or might have been proved against his estate in insolvency, and may be pleaded by a simple averment that on the day of its date such discharge was granted to him, setting forth the same in full, and the same shall be a complete bar to all suits brought on any such debts, claims, liabilities, or demands, and the certificate shall be prima facie evidence in favor of such fact and of the

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regularity of such discharge: Provided, however, That any creditor whose debt was proved or provable against the estate in insolvency who shall see fit to contest the validity of such discharge on the ground that it was fraudulently obtained and who has discovered the facts constituting the fraud subsequent to the discharge, may, at any time within one year after the date thereof, apply to the court which granted it to set it aside and annul the same.

COMPOSITION - Insolvency Law

What is Composition?

> Agreement made upon a sufficient consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter, for the sake of immediate or sooner payment, agree to accept a dividend less than the whole amount of their claims, to be distributed pro rata, indischarge and satisfaction of the whole debt

WHY WOULD A CREDITOR OPT FOR COMPOSITION?

1. To get the present value of money2. To reduce costs—costs of assignee and receiver

REQUIREMENTS FOR A VALID OFFER OF COMPOSITION

1. The offer of the terms of composition must be made after the filing in court of the schedule of property and submission of the list of creditors;

2. The offer must be accepted in writing by a DOUBLE MAJORITY OF THE CREDITORS—majority of the number of creditors representing a majority of the claims;

3. It must be made after depositing the consideration to be paid and the cost of the proceedings;

4. The court must approve or confirm the terms of the composition.a. It is for the best interest of the creditorsb. The debtor hasn’t been guilty of any of the acts, or of a failure to perform any of the duties which would create a bar to his dischargec. The offer and its acceptance are in good faith and have not been made or procured in a mannerforbidden by the Act

EFFECTS OF THE CONFIRMATION OF COMPOSITION

1. The consideration shall be distributed as the judge shall direct2. The insolvency proceeding shall be dismissed3. The title to the insolvent’s property shall revest in him4. The insolvent shall be released from his debts

WHEN CONFIRMATION MAY BE SET ASIDE

1. That fraud was practiced in the procuring of such composition2. That the knowledge thereof has come to the petitioner since the confirmation of such composition

COMPOSITIONS

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SECTION 63. When confirmation filed. — An insolvent may offer terms of composition to his creditors after, but not before, he has filed in court a schedule of his property and list of his creditors as provided in this Act. An application for the confirmation of a composition may be filed in the insolvency court after, but not before, it has been accepted in writing by a majority in number of all creditors whose claims have been allowed, which number must represent a majority in amount of such claims and after the consideration to be paid by the insolvent to his creditors and the money necessary to pay all debts which have priority and the costs of proceedings have been deposited in such place as shall be designated by and subject to the order of the court. A time shall be fixed by the court for the hearing upon an application for the confirmation of a composition, and for the hearing of such objections as may be made to its confirmation. The court shall confirm a composition if satisfied that (1) it is for the best interest of the creditors; (2) that the insolvent has not been guilty of any of the acts, or of a failure to perform any of the duties, which would create a bar to his discharge; and (3) that the offer and its acceptance are in good faith, and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden. Upon the confirmation of a composition the consideration shall be distributed as the judge shall direct, and the case dismissed, and the title to the insolvent's property shall revest in him. Whenever a composition is not confirmed, the estate in insolvency shall be administered as herein provided. The court may, upon application of a party in interest, filed at any time within six months after the composition has been confirmed, set the same aside, and reinstate the case if it shall be made to appear upon a trial that fraud was practiced in the procuring of such composition, and that the knowledge thereof has come to the petitioner since the confirmation of such composition.

FRAUDULENT PREFERENCES AND TRANSFERS Insolvency

TRANSFER

Includes the sale and every other and different modes of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security

WHEN PREFERENTIAL TRANSFER EXISTS

It is a parting with the property of the insolvent for the benefit of a creditor with the result that the estate of the insolvent is diminished and other creditors are prejudiced.

WHEN FRAUDULENT PREFERENCE EXISTS

It is a disposition of property by the debtor under the following conditions: 1. He is insolvent or is in contemplation of insolvency; 2. The transaction is made within 30 days before the filing of the petition for insolvency; 3. It is made with a view to giving preference to any creditor; 4. The person receiving a benefit has reason to believe that the debtor is insolvent and that the transfer is made in order to defeat or prejudice the rights of other creditors.

WHEN FRAUDULENT TRANSFER EXISTS

It is any disposition of property made by the insolvent within one month before the filing of the petition for insolvency, except for valuable consideration in good faith.

EFFECT OF FRAUDULENT TRANSFER

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1. If made within 30 days before the filing of insolvency proceedings, the transfer is void. 2. If made after the filing of insolvency proceedings, it is rescissible for being in fraud of creditors. 3. Another remedy of the creditors is to file a criminal complaint against the insolvent debtor.

IS THERE A PRESUMPTION OF FRAUD?

THERE IS A REBUTTABLE PRESUMPTION THAT A CONVEYANCE IS FRAUDULENT WHEN: 1. It is not made in the usual and ordinary cause of business of the debtor; or 2. It is made under a confession of judgment.

FRAUDULENT PREFERENCES AND TRANSFERS- Act 1956SECTION 70. If any debtor, being insolvent, or in contemplation of insolvency, within thirty days before the filing of a petition by or against him, with a view to giving a preference to any creditor or person having a claim against him or who is under any liability for him, procures any part of his property to be attached, sequestered, or seized on execution, or makes any payment, pledge, mortgage, assignment, transfer, sale, or conveyance of any part of his property, either directly or indirectly, absolutely or conditionally, to anyone, the person receiving such payment, pledge, mortgage, assignment, transfer, sale, or conveyance, or to be benefited thereby, or by such attachment or seizure, having reasonable cause to believe that such debtor is insolvent, and that such attachment, sequestration, seizure, payment, pledge, mortgage, conveyance, transfer, sale, or assignment is made with a view to prevent his property from coming to his assignee in insolvency, or to prevent the same from being distributed ratably among his creditors, or to defeat the object of, or in any way hinder, impede, or delay the operation of or to evade any of the provisions of this Act, such attachment, sequestration, seizure, payment, pledge, mortgage, transfer, sale, assignment, or conveyance is void, and the assignee, or the receiver, may recover the property, or the value thereof, as assets of such insolvent debtor. If such payment, pledge, mortgage, conveyance, sale, assignment, or transfer is not made in the usual and ordinary course of business of the debtor, or if such seizure is made under a judgment which the debtor has confessed or offered to allow, that fact shall be prima facie evidence of fraud. Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of whatever character made by the insolvent within one month before the filing of a petition in insolvency by or against him, except for a valuable pecuniary consideration made in good faith, shall be void. All assignments, transfers, conveyances, mortgages, or encumbrances of real estate shall be deemed, under this section, to have been made at the time the instrument conveying or affecting such realty was filed for record in the office of the register of deeds of the province or city where the same is situated.

THE INSOLVENCY LAW ACT NO. 1956

TITLE AND GENERAL SUBJECT OF THE ACT

SECTION 1. This Act shall be known and may be cited as The Insolvency Law, and in accordance with its provisionsevery insolvent debtor may be permitted to suspend payments or be discharged from his debts and liabilities. INSOLVENCY, DEFINED. Generally denotes the state of a person whose liabilities are more than his assets Relative condition of a man’s assets and liabilities that the former if all made immediately available, wouldn’t be sufficient to discharge the latter

INSOLVENCY PRIMARILY GOVERNED BY CIVIL CODE

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Insolvency shall be governed by special laws insofar as they are not inconsistent with the CC Special law referred to is the Insolvency Law

PURPOSES OF THE INSOLVENCY LAW

1. To effect an equitable distribution of the bankrupt’s property among his creditors 2. To benefit the debtor in discharging him from his liabilities and enabling him to start afresh with the property set apart to him as exempt

WHAT MAYBE PERMITTED OF A DEBTOR BY THE INSOLVENCY LAW

1. To petition the court to suspend payments of his debts 2. To be discharged from his debts and liabilities by voluntary or involuntary proceedings

SUSPENSION OF PAYMENTS

Insolvency Law Postponement by court order of the payment of debts of one who, while possessing sufficient property to cover his debts, foresees the impossibility of meeting them when they respectively fall due

PURPOSE AND BASIS OF SUSPENSION OF PAYMENTS

1. The purpose of a suspension of payments is to suspend or delay the payment of debts the amount of which isn’t affected although a postponement is declared 2. The basis is the probability of the debtor’s inability to meet his obligation when they respectively fall due, despite the fact that he has sufficient assets to cover all his liabilities

STEPS IN SUSPENSION OF PAYMENTS

1. Filing of petition by the debtor 2. Issuance by the court of an order calling a meeting of creditors 3. Publication of the order and service of summons 4. Meeting of creditors for the consideration of the debtor’s proposition 5. Approval of the creditor’s of the debtor’s proposition 6. Objections, if any, to the decision which must be made within 10 days following the meeting 7. Issuance of order by the court directing that the agreement be carried out in case the decision is declared valid, or when no objection to said decision has been presented

REQUISITES OF PETITION FOR SUSPENSION OF PAYMENTS THE PETITION TO BE FILED BY A DEBTOR—

1. Possessing sufficient property to cover all debts 2. Foreseeing the impossibility of meeting them when they respectively fall due 3. Petitioning that he be declared in the state of suspension of payments 4. The petition need not be verified (Verification is when the debtor would affirm all allegations and statement of facts)

DOCUMENTS TO ACCOMPANY PETITION

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1. A verified schedule containing a full and true statement of the debts and liabilities of the petitioner together with a list of creditors, including the residence, sum due each, nature of liability, consideration thereof, and any existing pledge, lien or security 2. A verified inventory containing a list of creditors, an accurate description of all the property, real and personal, of the petitioner including property exempt from execution and a statement as to the value of each item of property, its location, and encumbrances thereon, if any 3. A statement of his assets and liabilities 4. The proposed agreements he requests of his creditors

EFFECTS OF FILING OF PETITION

1. No disposition in any manner of his property may be made by the petitioner except insofar as concerns the ordinary operations of commerce or of industry in which he is engaged 2. No payments may be made by the petitioner except in the ordinary course of business or industry 3. Upon request to the court, all pending executions against the debtor shall be suspended except execution against property especially mortgaged

CREDITORS AFFECTED BY FILING OF PETITION

Only creditors included in the schedules filed by the debtor shall be cited to appear and to take part in the meeting Hence those who didn’t appear because they were not informed of the proceedings are unaffected by the same

CREDITORS NOT AFFECTED BY ORDER OF SUSPENSION OF PAYMENTS

1. Persons having claims for personal labor, maintenance, expenses of last illness and funeral of the wife or children of the debtor incurred in 60 days immediately preceding the filing of the petition 2. Persons having legal or contractual mortgages

RULE OF DOUBLE MAJORITY IN THE MEANING OF CREDITORS

The majority shall be 2/3 of the creditors voting upon the same proposition, which 2/3 represent at least 3/5 of the total liabilities of the debtor Any creditor, at any stage of the proceedings, may be represented by his attorney or duly authorized agent who shall be entitled to vote when properly authorized at any creditors’ meeting as and for his principal WHEN PETITION FOR SUSPENSION OF PAYMENTS DEEMED REJECTED 1. When the number of creditors representing at least 3/5 of the liabilities don’t attend 2. When the two majorities required are not in favor of the proposed agreement

EFFECT OF DISAPPROVAL OF PETITION

If the decision of the meeting be negative as regards the proposed agreement or if no decision is had in default of such number of such majorities, the proceedings shall be terminated without recourse In such case, the parties concerned shall be at liberty to enforce the rights which correspond to them

CAUSES FOR WHICH OBJECTION MAY BE MADE TO DECISION OF THE MEETING

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Defects in the call for the meeting, in the holding thereof, and in the deliberation had there at which prejudice the rights of the creditors Fraudulent connivance between one or more creditors and the debtor in favor of the proposed agreement Fraudulent conveyance of claims for the purpose of obtaining a majority

SECTION 2. Petition. — The debtor who, possessing sufficient property to cover all his debts, be it an individual person, be it a sociedad or corporation, foresees the impossibility of meeting them when they respectively fall due, may petition that he be declared in the state of suspension of payments by the court, or the judge thereof in vacation, of the province or of the city in which he has resided for six months next preceding the filing of his petition. He shall necessarily annex to his petition a schedule and inventory in the form provided in sections fifteen, sixteen, and seventeen of this Act, in addition to the statement of his assets and liabilities and the proposed agreement he requests of his creditors. SECTION 3. Meeting of Creditors; Injunction. — Upon receiving and filing the petition with the schedule and documents mentioned in the next preceding section, the court, or the judge thereof in vacation, shall make an order calling a meeting of creditors to take place in not less than two weeks nor more than eight weeks from the date of such order. Said order shall designate the day, hour, and place of meeting of said creditors as well as a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the judgment of the judge, will best give notice to the creditors of the said debtor, and in the newspaper so designated said order shall be published as often as may be prescribed by the court or the judge thereof. Said order shall further contain an absolute injunction forbidding the petitioning debtor from disposing in any manner of his property, except in so far as concerns the ordinary operations of commerce or of industry in which the petitioner is engaged, and, furthermore, from making any payments outside of the necessary or legitimate expenses of his business or industry, so long as the proceedings relative to the suspension of payments are pending, and said proceedings for the purposes of this Act shall be considered to have been instituted from the date of the filing of the petition. SECTION 4. Publication order; Deposit. — A copy of said order shall immediately be published 1 by the clerk of said court, in the newspaper designated therein, for the number of times and in the form prescribed by the court or the judge thereof, and the clerk of said court shall cause a copy of said order to be delivered personally or to be sent forthwith by registered mail, postage prepaid, to all creditors named in the schedule. There shall be deposited in addition to the sum of twenty-four Philippine pesos, which shall be paid to the clerk for the filing and registration of the petition, including all proceedings until the expediente is completed, an amount sufficient to defray all expense of publication ordered by the court, necessary postage, and ten centavos for each copy, to be delivered personally or mailed to the creditors, which last-named sum is hereby constituted the legal fee of the clerk for the personal delivery or mailing required by this section. SECTION 5. Creditors cited to appear. — Only creditors included in the schedule filed by the debtor shall be cited to appear and take part in the meeting mentioned in section three, and they shall be notified upon delivery or transmission to them of a copy of the order calling the meeting to appear at same with the written evidences of their respective claims, without which they shall not be admitted. SECTION 6. Pending Execution. — If any execution be pending against the debtor it shall not be consolidated with this proceeding, but the course thereof shall be suspended

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before sale of property is made thereunder, provided the debtor makes a request therefor to the court before which the proceeding for suspension of payments is pending, unless the execution be against property especially mortgaged which is hereby exempted from the least the provisions of this section. The suspension ordered by virtue of this section shall lapse when three months shall have passed without the proposed agreement being accepted by the creditors or as soon as it is denied. No creditor and the other than those mentioned in section nine shall sue or institute proceedings to collect his claim from the debtor from the moment that suspension of payments is applied for and while the proceedings are pending. SECTION 7. Creditors may be represented at the meeting by one or more lawyers or by any person authorized by power of attorney, which document shall be presented and be attached to the record. Persons appearing for more than one creditor shall have only one personal vote, but the claims presented by them shall be taken into consideration for the purpose of arriving at the majority of the amount represented. SECTION 8. Creditors necessary to hold a meeting; Meeting; Minutes of the meeting. — The presence of the creditors representing at least three-fifths the liabilities shall be necessary for holding a meeting. The meeting shall be held on the day and at the hour and place designated, the judge, or commissioner deputized by him when he is absent from the province where the meeting is held, acting as president and the clerk as secretary thereof, subject to the following rules: (a) The clerk shall prepare for insertion in the minutes of the meeting a statement of the persons present and their claims; the judge, or, in default thereof, the commissioner, shall examine the written evidences of the claims and the powers of attorney, if any. If the persons present who have complied with the foregoing rules represent at least three-fifths of the liabilities, the judge or commissioner shall declare the meeting open for business. (b) The petition of the debtor, the schedule of debts and of property, the statement of assets and liabilities, and the proposed agreement filed therewith shall be read forthwith by the clerk, and the discussion shall be opened. (c) The debtor may modify his proposition or propositions in view of the result of the debate, or insist upon the ones already made, and the judge or commissioner, without further discussion, shall clearly and succinctly place these several propositions before the meeting for a vote thereupon. (d) The vote shall be taken by a call of names and shall be inserted in and the minutes; a majority vote shall rule. (e) To form a majority it is necessary — 1. That two-thirds of the creditors voting unite upon the same position. 2. That the claims represented by said majority vote amount to at least three-fifths of the total liabilities of the debtor mentioned in the petition. (f) After the result of the voting has been announced, all protests made against the majority vote shall be drawn up, and there shall be inserted therein the proposition or propositions voted upon, which, after having been read and approved, shall be signed by the judge or commissioner together with all persons taking part in the voting; if any such persons shall be unable to write, any person present shall sign, at their request, and the clerk shall certify to all of the above.

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SECTION 9. Persons who may refrain from voting. — Persons having claims for personal labor, maintenance, expenses of last illness and funeral of the wife or children of the debtor, incurred in the sixty days immediately preceding the filing of the petition, and persons having legal or contractual mortgages, may refrain from attending the meeting and from voting therein. Such persons shall not be bound by any agreement determined upon at such meeting, but if they should join in the voting they shall be bound in the same manner as are the other creditors. SECTION 10. Rejection of agreement. — 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 majorities mentioned in rule (e) of section eight are not in favor thereof, even if the negative vote itself does not receive such majorities. SECTION 11. Termination of proceedings without recourse; Court hearing. — If the decision of the meeting be negative as regards the proposed agreement or if no decision is had in default of such number or of such majorities, the proceeding shall be terminated without recourse and the parties concerned shall be at liberty to enforce the rights which may correspond to them. If the decision is favorable to the debtor it may be objected to within ten days following the date of the meeting by any creditor who attended the meeting and who dissented from and protested against the vote of the majority. The opposition or objection to the decision of the majority favorable to the debtor shall be proceeded with as in any other incidental motion, the debtor and the creditors who shall appear declaring their purpose to sustain the decision of the meeting being the defendants. The court shall hear and pass upon such objection as soon as possible in a summary manner, and in its order, which shall be final, it shall declare whether or not the decision of the meeting is valid. In case that the decision of the meeting is held to be null, the court shall declare the proceeding terminated and the parties concerned at liberty to exercise the rights which may correspond to them; and in case the decision of the meeting is declared valid, or when no opposition or objection to said decision has been presented, the court shall order that the agreement be carried out and the persons concerned shall be bound by the decision of the meeting. The court may also issue all orders which may be proper to enforce the agreement on motion of any of the parties litigant. The order directing the agreement to be made effective shall be binding upon all creditors included in the schedule of the debtor who may have been properly summoned, but not upon creditors mentioned in section nine who failed to attend the meeting or refrained from voting therein, and their rights shall not be affected by the agreement unless they may have expressly or impliedly consented thereto. SECTION 12. The causes for which objection may be made to the decision of the meeting shall be — (a) Defects in the call for the meeting, in the holding thereof, and in and the deliberations had thereat which prejudice the rights of the creditors; (b) Fraudulent connivance between one or more creditors and in debtor to vote in favor of the proposed agreement; (c) Fraudulent conveyance of claims for the purpose of obtaining a majority. SECTION 13. Failure of debtor to perform agreement. — If the debtor fails wholly or in part to perform the agreement decided upon at the meeting of the creditors, all the rights which the creditors had against the debtor before the agreement shall revest in them. In such case the debtor may be made subject to the bankruptcy and insolvency proceedings in the manner established by the following chapters of this Act.

VOLUNTARY INSOLVENCY, Insolvency Law- ACT NO. 1956

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KINDS OF INSOLVENCY

1. Voluntary insolvency—an insolvent debtor owing debts exceeding in amount in the sum of P1000, may apply to be discharged from his debts and liabilities by petition to the RTC of the province or city in which he has resided for 6 months next preceding the filing of the petition 2. Involuntary insolvency—an adjudication of insolvency may be made by the petition of 3 or more creditors, residents of the Philippines, whose credits or demands accrued in the Philippines, for the amount of which credits or demands are in the aggregate of not less than P1000

STEPS IN VOLUNTARY INSOLVENCY

1. Filing of the petition by the debtor praying for the declaration of insolvency 2. Issuance of order of adjudication declaring the petitioner insolvent 3. Publication and service of the order 4. Meeting of the creditors to elect the assignee in insolvency 5. Conveyance of the debtor’s property by the clerk of court to the assignee 6. Liquidation of the debtor’s assets and payment of his debts 7. Composition, if agreed upon 8. Discharge of the debtor on his application, except a corporation 9. Objection, if any, to the discharge 10. Appeal to the SC in certain cases

REQUISITES OF PETITION FOR VOLUNTARY INSOLVENCY THE PETITION WHICH MUST BE VERIFIED, IS TO BE FILED—

1. By an insolvent debtor 2. Owing debts exceeding in amount of the sum of P1000 3. In the RTC of the province or city in which he has resided for 6 months next preceding the filing of such petition 4. Setting forth in his petition the following a. His place of residence b. The period of residence therein immediately prior to filing said petition c. His inability to pay all his debts in full d. His willingness to surrender all his property, estate, and effects not exempt from execution for the benefit of creditors e. An application to be adjudged an insolvent

EFFECT OF FILING OF PETITION - Once the petition is filed, it ipso facto takes away and deprives the debtor petitioner of the right to do or commit any act of preference as to creditors, pending the final adjudication DOCUMENTS TO ACCOMPANY THE PETITION

1. A verified schedule must contain— a. A full and true statement of all debts and liabilities of the insolvent debtor b. An outline of the facts giving rise or which might give rise to a cause of action against such insolvent debtor 2. A verified inventory which must contain— a. An accurate description of all the personal and real property of the insolvent exempt or not from execution including a statement as of its value, location and encumbrances thereon b. An outline of the facts giving rise or which might give rise to a right of action in favor of the insolvent debtor

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FILING OF SCHEDULE AND INVENTORY, JURISDICTIONAL

On filing a petition for a discharge from his debts, an insolvent is required to present a verified schedule of liabilities and a verified inventory of his properties The presentation of such documents stating the amount of each creditor’s claim is a jurisdictional requirement, without the proper performance of which his subsequent discharge will be of no avail

EFFECT OF ERRORS IN DESCRIPTION OR OMISSION OF PROPERTY IN INVENTORY

That the property is erroneously or ambiguously described in the insolvent’s inventory will not affect the title of purchasers in the insolvency proceedings. All the property of the insolvent passes to his assignee and is administered in the insolvency proceedings regardless of errors in the insolvency. If the insolvent omits property from his inventory, through either mistake or fraud, it is the duty of the assignee to have the inventory amended so as to include it and take possession and administer it Even property exempt from execution must be included in order to preclude possible fraudulent omissions under the pretext that such property is exempt. But where the petitioner didn’t attach an inventory to its petition for insolvency, alleging under oath that it had no property to inventory, the lack of inventory was held not fatal to the petition because it was assumed, until proven otherwise, that the petitioner was stating the truth.

EFFECT OF COURT ORDER DECLARING DEBTOR INSOLVENT

1. All the assets of the debtor not exempt from execution are taken possession of by the sheriff until the appointment of a receiver or assignee 2. The payment to the debtor of any debts due to him and the delivery to the debtor or to any person for him of any property belonging to him, and the transfer of any property to him are forbidden 3. All civil proceedings pending against the insolvent debtor shall be stayed 4. Mortgages or pledges, attachments or executions on property of the debtor duly recorded and not dissolved are not, however, affected by the order

IF YOU ARE THE DEBTOR, WHY WOULD YOU FILE FOR INSOLVENCY?

The debtor will get a discharge A corporation doesn’t get a discharge The partners in a partnership will get a discharge

Insolvency Law ACT NO. 1956

SECTION 14. Application. — An insolvent debtor, owing debts exceeding in amount the sum of one thousand pesos, may apply to be discharged from his debts and liabilities by petition to the Court of First Instance of province or city in which he has resided for six months next preceding the filing of such petition. In his petition he shall set forth his of residence, the period of his residence therein immediately prior to filing said petition, his inability to pay all his debts in full, his willingness to surrender all his property, estate, and effects not exempt from execution for the benefit of his creditors, and an application to be adjudged an insolvent. He shall annex to his petition a schedule and inventory in the form herein-after provided. The filing of such petition shall be an act of insolvency. SECTION 15. Statement of debts and liabilities. — Said schedule must contain a full and true statement of all his debts and liabilities, together with a list of all those to whom, to the best of his knowledge and belief, said debts or liabilities are due, the place of residence of his creditors and the sum due each the nature of the indebtedness or liability and whether

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founded on written security, obligation, contract or otherwise, the true cause and consideration thereof, the time and place when and where such indebtedness or liability accrued, a declaration of any existing pledge, lien, mortgage, judgment, or other security for the payment of the debt or liability, and an outline of the facts giving rise or which might give rise to a cause of action against such insolvent debtor. SECTION 16. Description of real and personal property. — Said inventory must contain, besides the creditors, an accurate description of all the real and personal property, estate, and effects of the petitioner, including his homestead, if any, together with a statement of the value of each item of said property, estate, and effects and its location, and a statement of the encumbrances thereon. All property exempt by law from execution 2 shall be set out in said inventory with a statement of its valuation, location, and the encumbrances thereon, if any. The inventory shall contain an outline of the facts giving rise, or which might give rise, to a right of action in favor of the insolvent debtor. SECTION 17. Verification, form of . — The petition, schedule, and inventory must be verified by the affidavit of the petitioner, annexed thereto, and shall be in form substantially as follows: "I, _______________., do solemnly swear that the schedule and inventory now delivered by me contain a full, correct, and true discovery of all my debts and liabilities and of all goods, effects, estate, and property of whatever kind or class to me in any way belonging. The inventory also contains a full, true and correct statement of all debts owing or due to me, or to any person or persons in trust for me and of all securities and contracts whereby any money may hereafter become due or payable to me or by or through which any benefit or advantage whatever may accrue to me or to my use, or to any other person or persons in trust for me. The schedule contains a clear outline of the facts giving rise, or which might give rise, to a cause of action against me, and the inventory contains an outline of the facts giving rise, or which might give rise, to any cause of action in my favor. I had no lands, money, stock, or estate, reversion, or expectancy, or property of any kind, except that set forth in said inventory. I have no instance created or acknowledged a debt for a greater sum than I honestly and truly owe. I have not, directly or indirectly, concealed, fraudulently sold, or otherwise fraudulently disposed of, any part of my real or personal property, estate, effects, or rights of action, and I have not in any way compounded with any of my creditors in order to secure such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to whom I am indebted. So help me God." SECTION 18. Order of court declaring petitioner insolvent; Publication notice. — Upon receiving and filing said petition, schedule, and inventory, the court, or the judge thereof in vacation, shall make an order declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition is filed to take possession of, and safely keep, until the appointment of a receiver or assignee, all the deeds, vouchers, books of account, papers, notes, bonds, bills, and securities of the debtor, and all his real and personal property, estate, and effects, except such as may be by law exempt from execution. 3 Said order shall further forbid the payment to the debtor of any debts due to him and the delivery to the debtor, or to any person for him, and the transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order shall designate a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion of the judge, will best give notice to the creditors of the said insolvent, and in the newspaper so designated said order shall be published 4 as often as may be prescribed by the court or the judge The time appointed for the election of an assignee shall not be less than two, nor more than eight, weeks from the date of the order of adjudication. Upon the granting of said order all civil proceedings pending against said insolvent shall be stayed. When a receiver is appointed, or an assignee chosen, as provided in this Act, the sheriff shall

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thereupon deliver to such receiver or assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to such receiver or assignee, as the case may be, all the property, assets, and belongings of the insolvent which have come into his possession, and he shall be allowed and paid as compensation for his services the same expenses and fees as would by law be collectible if the property had been levied upon and safely kept under attachment. SECTION 19. Publication of order. — A copy of said order shall immediately be published 5 by the clerk of said court, in the newspaper designated therein, for the number of times and as prescribed by the court or the judge thereof, and a copy of said order shall be delivered personally or sent by the clerk forthwith by registered mail, postage prepaid, to all creditors named in the schedule. There shall be deposited, in addition to twenty-four pesos, which shall be received by the clerk on commencing such proceedings, a sum of money sufficient to defray the expense of the ublication ordered by the court, necessary postage, and ten centavos for each copy, to be delivered personally or mailed to the creditors, which last-named sum is hereby constituted the legal fee of the clerk for the personal delivery or mailing required by this section.

INVOLUNTARY INSOLVENCYAct No. 1956

NATURE OF INVOLUNTARY INSOLVENCY PROCEEDINGS

> An involuntary insolvency isn’t a mere personal action against the insolvent for the collection of debts; but its purpose is to impound all of his non-exempt property, to distribute it equitably among his creditors and to release him from further liability> It is an action in rem and action in personam

WHO MAY PETITION FOR INVOLUNTARY INSOLVENCY

1. They have the qualifications required by the Insolvency Law2. Their credits must be those contemplated by the Insolvency Law

STEPS IN INVOLUNTARY INSOLVENCY

1. Filing of the petition by three or more creditors2. Issuance of order requiring the debtor to show cause why he shouldn’t be adjudged insolvent3. Service of order to show cause4. Filing of answer or motion to dismiss5. Hearing of the case6. Issuance of order or decision adjudging debtor insolvent 7. Publication and service of order8. Meeting of creditors for election of an assignee in insolvency9. Conveyance of debtor’s property by clerk of court10. Liquidation of assets and payments of debts11. Composition, if agreed upon12. Discharge of the debtor on his application, except a corporation13. Objection if any to the discharge14. Appeal to the SC in certain cases

WHY IS THERE NO NEED TO ATTACH SCHEDULE AND WHY IS THERE A NEED FOR VERIFICATION?

> Answer behind this isn’t legal> It is not required because the creditors are not in the position in the first place to know

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WHO WILL ULTIMATELY SUBMIT THE SCHEDULE OF ASSETS AND LIABILITIES?

The debtor. In case of his absence, the assignee may be required to submit as far as practicable.

IS THERE ANYTHING CREDITOR CAN DO IN THE MEANTIME? DEBTOR CAN HAVE POSSESSION OF PROPERTY BETWEEN STEPS 1 AND 2.

> The creditor may ask for the appointment of a receiver during steps 1 and 2 as provisional remedy to prevent the leak of assets

WHAT IS THE RECOURSE OF THE DEBTOR WHEN THE CREDITOR FILED FOR INSOLVENCY FOR THE SOLE PURPOSE OF HARASSMENT?

> File for damages and if you are thinking criminal, file for perjury.> Recover from the bond posted by the creditors

REQUISITES OF PETITION FOR INVOLUNTARY INSOLVENCY THE PETITION IS TO BE FILED BY

1. Three or more creditors2. None of whom has become such a creditor by assignment, within 30 days prior to the filing of petition3. Whose credits accrued in the Philippines4. The total amount of which credits is not less than P1000

5. In the RTC of the province or city in which the debtor resides or has his principal place of business

THE PETITION--

6. Must be verified by at least three of the petitioning creditors 7. Must set forth one or more acts of insolvency mentioned in the law8. Must be accompanied by a bond, approved by the court with at least two sureties, in such penal sum as the court shall direct

ACTS OF INSOLVENCY

1. Intention to depart or departure from the Philippines to defraud creditors2. Absence from the Philippines to defraud creditors3. Concealment of debtor to avoid legal process4. Concealment or removal of his property to avoid legal process5. Confession of judgment in favor of any creditor to defraud other creditors6. Allowing default judgment in favor of a creditor to defraud other creditors7. Allowing his property to be taken under legal process in preference of a particular creditor to defraud other creditors8. Making conveyance, assignment or transfer of his property to defraud creditors9. Making conveyance, assignment or transfer of his property in contemplation of insolvency10. Default of a merchant or tradesman to pay his current obligations for a period of 30 days11. Failure to pay money on deposit or received in a fiduciary capacity for a period of 30 days after demand12. Insufficiency of property to satisfy an execution issued against him

ADJUDICATION OF INSOLVENCY

> If the respondent debtor shall make a default, or if, after trial, the issues are found in favor of the petitioning creditors, the court shall make an order adjudging the said respondent is and was, at the time of

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filing of the petition, an insolvent debtor and that the debtor was guilty of the act and things charged in the petition or such of them as the court may find to be true> The date of adjudication of insolvency retroacts to the date of the filing of the petition for insolvenc

ASSIGNEE IN INSOLVENCY

Insolvency Law - Act 1956

> An assignee is the person elected by the creditors or appointed by the court to whom an insolvent debtor makes an assignment of all his property for the benefit of his creditors

CREDITORS NOT ENTITLED TO VOTE IN THE ELECTION OF ASSIGNEE

1. Those who didn’t file their claims at least 2 days prior to the time appointed for such election2. Those claims are barred by the statute of limitations3. Secured creditors unless they surrender their security or lien to the sheriff or receiver or unless they shall first have the value of such security fixed as provided for in Section 594. Holders of claims for unliquidated damages arising out of pure tort

IMPORTANT! The vote requirement is DOUBLE MAJORITY.

ASSIGNEE’S TITLE VESTS ON FILING OF PETITION

> An assignee in insolvency acquires title to the property of the insolvent by virtue of the transfer of the insolvent’s property by the clerk of court> But this instrument relates back to the commencement of the proceedings in insolvency with the result that the title of the assignee is determined as of the date when the petition in insolvency is filed> With respect to property registered under the Land Registration Law, it is necessary that such proceedings be recorded in the registry of deeds from their commencement and the assignment is likewise recorded

EFFECTS OF ASSIGNMENT

1. The assignee takes the property in the plight and conditions that the insolvent held it

2. Upon assignment, the legal title to all the property of the insolvent is vested in the assignee, and the control of the property is vested in the court3. All actions to recover the estate, debts and effects of the insolvent shall be brought by the assignee and not by the creditors 4. The assignment shall— a. Dissolve any attachment levied within 1 month next preceding the commencement of the insolvency proceedings b. Vacate and set aside judgment entered in any action commenced within 30 days immediately prior to the commencement of insolvency proceedingsNOTE: 5. There is a cut-off period—one month in attachment cases and 30 days in judgments entered in actions commenced rior to the insolvency proceedings. A levy of attachment not made within the period specified isn’t dissolved by the insolvency proceedings and the refusal of the court to enforce the lien arising from such levy is grave abuse of discretion.6. The plaintiff has the right if the attachment is not dissolved before the commencement of the proceedings in insolvency, or is dissolved by an undertaking given by the defendant, if the claim upon which the attachment suit was commenced is proved against the estate of the debtor.

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BOND OF ASSIGNEE

> After his election, he is required to give a bond for the faithful performance of his duties> To establish his official character and his right to sue in that capacity, it is incumbent on the assignee to show that the bond required has been given

PROPERTIES OF INSOLVENT THAT PASS TO THE ASSIGNEE

1. All real and personal property, estate and effects of the debtor including all deeds, books, and papers in relation thereto2. Properties fraudulently conveyed 3. Right of action for damages to real property4. The undivided share for interest of the insolvent debtor in property held under co-ownership

PROPERTIES OF INSOLVENT THAT DOESN’T PASS TO THE ASSIGNEE

1. Property exempt from execution2. Property held in trust3. Property of the conjugal partnership or absolute community so long as said partnership or community exists except insofar as the insolvent debtor’s obligations have redounded to the benefit of the former4. Property over which a mortgage or pledge exists unless the creditor surrenders his security or lien5. After-acquired property except fruits and income of property owned by the debtor and which had passed to the assignee in insolvency law6. Non-leviable assets like a life insurance policy which doesn’t have cash surrender value7. Right of action for tort which is purely personal in nature

POWERS OF ASSIGNEE

1. To sue and recover all the estate, assets, debts, and claims, belonging to or due to such debtor; 2. To take in to his possession all the estate of such debtor except property exempt by law from execution,3. In case of a nonresident or absconding or concealed debtor, to demand and receive of every sheriff who shall have attached any of the property of such debtor, or who shall have in his possession any moneys arising from the sale of such property, all such property and moneys, on paying him his lawful costs and charges for attaching and keeping the same.4. To sell, upon order of the court, any of the estate, real and personal, which has come into his possession, and which is vested in him as such assignee, and on such sales to execute the necessary conveyances and bills of sale.

5. To redeem all valid mortgages and conditional contracts, and all valid pledges of personal property, and to satisfy any judgments which may be an encumbrance on any property sold by him; or to sell such property, subject to such mortgage, contracts, pledges, judgments, or liens.

6. To settle all matters and accounts between such debtor and his creditors subject to the approval of the court.7. Under the order of the court or judge appointing him, to compound with any person indebted to such debtor, and thereupon discharge all demands against such person.8. To recover from any person receiving a conveyance, gift transfer, payment, or assignment, made contrary to any provision of this Act, the property thereby transferred or assigned; or in case a redelivery of the property can not be had, to recover the value thereof with damages for thedetention.

DUTIES OF AN ASSIGNEE

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1. To register the assignment to him of the real estate of the debtor2. To file a schedule and inventory of the property of the debtor3. To convert, as speedily as possible, the estate, real and person, into money a. Any disposition requires court approval b. Private sale needs authorization of the court

4. To keep a regular account of all moneys received by him as assignee a. Why is a private sale an exception? Because there is always room for irregularity. b. Assignee is allowed to recover the expenses he advanced for. c. There is a distinction between claims and expenses. As creditor, WATCH OUT!5. To petition the court to allow the private sale of debtor’s property if it appears that it is for the best interest of the estate6. To file a just and true account of receipts and payments7. To file accounts upon order of the court on motion of two or more creditors8. To distribute such dividends as he may be required9. To file a final account within one year from the date of order of adjudication

SALE OF ASSETS

1. Generally—the law provides for the reduction of the insolvent’s assets into cash by means of public sales. Proceedings are in rem. The only question of jurisdiction is the power of the court over the subject matter without regard to the parties who may have an interest in it. 2. Persons competent to purchase—the insolvent will not be generally allowed to purchase the assets, either in his own name or through a dummy. If he does so, the property purchased becomes subject to the claims of his creditors.

APPLICABILITY OF SECTION 37

> The provisions of Section 37 which make the person coming within the purview liable for double the value of the property sought to be disposed of, are not applicable where what has been disposed of is the creditor’s own credit and not the insolvent’s property

DIVIDENDS IN INSOLVENCY DEFINED

> Parcel of the fund arising from the assets of the estate, rightfully allotted to share in the fund, whether in the same proportion with other creditor or in a different proportion

> It is paid by the assignee only upon order of the court

EFFECT OF DEBTS SUBSEQUENTLY PROVED ON RIGHT TO DIVIDENDS

> Whenever any dividend has been duly declared, the distribution of it shall not be stayed or affected by reason of debts being subsequently proved> However, any creditor proving such a debt shall be entitled to a dividend equal to those already received by other creditors before any further dividend is made to the latter, if the failure to prove such claim shall not have resulted from his own neglect

WHAT WOULD BE COVERED BY THE ASSETS?

Assets whose title is vested in the debtor—both equitable and legal title. At least there is beneficial ownership.

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CAN INSOLVENCY PROCEEDINGS BE FILED AGAINST THE HUSBAND ALONE?

No.

CAN CORPORATIONS AND PARTNERSHIPS BE SUBJECT TO INSOLVENCY PROCEEDINGS?

Yes. However, it is not good to have voluntary proceedings.

Insolvency Law Act 1956 on Assignees

SECTION 29. Election; Creditors holding security. — No creditor shall be entitled to vote for the election of an assignee unless he shall have filed his claim in the office of the clerk of the court in which the proceedings are pending at least two days prior to the time appointed for such election. All claims shall contain a statement showing the amount and nature of the claim and security, if any. The claim shall be verified by the claimant, or his duly authorized agent or attorney. No claim barred by the statute of limitations 16 shall be proved or allowed against the estate of an insolvent debtor for any purpose. Any person interested in the estate of the insolvent may file exceptions to the legality of good faith of any claim, by setting forth specifically in writing his interest in the estate, and the grounds of his objection to such claim. Such exceptions shall be verified by the affidavit of the party objecting, or his duly authorized agent or attorney, and the affidavit shall set out that such exceptions are not made for the purpose of delay and are made in good faith in the best interests of said estate. Exceptions to any claim must be filed with the clerk of the court at least one day before the time appointed for the election of an assignee, and such exceptions shall be heard and disposed of by the court, on affidavit or other evidence, in a summary manner, before the election of an assignee. No creditor or claimant who holds any mortgage, pledge, or lien of any kind whatever as security for the payment of his claim or attachment or execution on property of the debtor duly recorded and not dissolved under this Act shall be permitted to vote at the election of the assignee any part of his secured claim unless he shall first have the value of such security fixed as provided section fifty-nine of this Act, or shall surrender to the sheriff or receiver of the estate of the insolvent, if there be a receiver, all such property, or assign such lien to such sheriff or receiver. The surrender or assignment of such security or lien shall be for the benefit of all creditors of the estate of the insolvent. The value of such security, if fixed by the court, shall be so fixed at least one day before the day appointed for the election of an assignee, in which event the claimant may prove his demand as provided in this section for any unsecured balance, subject to the filing of exceptions as in all other claims.

SECTION 30. Election of assignee in open court. — At a meeting of the creditors in open court or, if the court is not in session, in the presence of the judge or the clerk of the court, those being entitled to vote, as provided by section twenty-nine, shall proceed to the election of an assignee. The majority of the creditors who have proven their claims, such majority being both in number and amount, must concur for the election of an assignee. The clerk of the court shall keep a minute of the deliberations of said creditors, and of the election and appointment of the assignee, and enter the same upon the records of the court, and, in the absence of the judge, shall send a copy of such record to him at the place where he may be found. The assignee shall file, within five days, unless the time be extended by the court, with the clerk, a bond, in an amount to be fixed by the court, to the Government of the Philippine Islands, with two or more sufficient sureties, approved by the court, and conditioned upon the faithful performance of the duties devolving upon him. The bond shall not be void upon the first recovery, but may be sued upon from time to time by any person aggrieved, in his own name, until the whole penalty be exhausted. The sureties on such bond may be required to justify as to their sufficiency upon the application of any party interested.

SECTION 31. Appointment of assignee by court. — If, on the day appointed for the meeting, creditors do not attend, or fail or refuse to elect an assignee, or if, after election, the assignee shall fail to qualify within the proper time, or if a vacancy occurs by death or otherwise, the court shall appoint an assignee and fix the amount of his bond.

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SECTION 32. Transfer of property to assignee. — As soon as an assignee is elected or appointed and qualified, the clerk of the court shall, by an instrument under his hand and seal of the court, assign and convey to the assignee all the real and personal property, estate, and effects of the debtor with all his deeds, books, and papers relating thereto, and such assignment shall relate back to the commencement of the proceedings in insolvency, and shall relate back to the acts upon which the adjudication was founded, and by operation of law shall vest the title to all such property, estate, and effects in the assignee, although the same is then attached on mesne process, as the property of the debtor. Such assignment shall operate to vest in the assignee all of the estate of the insolvent debtor not exempt by law from execution. 17 It shall also dissolve any attachment levied within one month next preceding the commencement of the insolvency proceedings and vacate and set aside any judgment entered in any action commenced within thirty days immediately prior to the commencement of insolvency proceedings and shall vacate and set aside any execution issued thereon and shall vacate and set aside any judgment entered by default or consent of the debtor within thirty days immediately prior to the commencement of the insolvency proceedings.

SECTION 33. Recovery and action of assignee. — The assignee shall have the right to recover all the state debts, and effects of said insolvent. If, at the time of the commencement of proceeings in insolvency, an action is pending in the name of the debtor, for the recovery of a debtor other thing which might or ought to pass to the assignee by the assignment, the assignee shall be allowed and admitted to prosecute the action, in like manner and with like effect as if it had been originally commenced by him. If there are any rights of action in favor of the insolvent for damages, on any account, for which an action is not pending, the assignee shall have the right toprosecute the same with the same effect as the insolvent might have done himself if no proceedings in insolvency had been instituted. If any action or proceeding in which the insolvent is defendant is pending at the time of the adjudication, the assignee may defend the same in the same manner and with like effect as it might have been defended by the insolvent. In a suit prosecuted or defended by the assignee, a certified copy of the assignment made to him shall be conclusive evidence of his authority to sue or defend.

SECTION 34. Registration of assignment to assignee. — The assignee shall, within one month after the making of the assignment to him, cause the same to be recorded in every province or city within the Philippine Islands where any real estate owned by the debtor is situated, and the record of such assignment, or a duly certified copy thereof, shall be conclusive evidence thereof in all courts. If the schedule and inventory required by this Act have not been filed by the debtor the assignee shall, within one month after his election, prepare and file such schedule and inventory from the best information he can obtain, and shall thereupon personally deliver notice or send same by registered mail, postage prepaid, to all creditors named in such schedule, whose claims have not been filed, to forthwith prove their demands.

SECTION 35. Resignation of assignee. — Any assignee may at any time, by writing filed in court, resign his appointment, having first settled his accounts and delivered up all the deeds, vouchers, books of account, notes, bills, bonds, and securities of the debtor and all his real and personal property, estate, and effects to such successor as the court shall appoint: Provided, That if, in the discretion of the court, the circumstances of the case require it, upon good cause being shown, the court may, at any time before such settlement of account and delivery of the estate shall have been completed, revoke the appointment of such assignee and appoint another in his stead. The liability of the outgoing assignee, or of the sureties on his bond, shall not be in any manner discharged, released, or affected by such appointment of another in his stead.

SECTION 36. The said assignee shall have power:

1. To sue and recover all the estate, assets, debts, and claims, belonging to or due to such debtor; and no set-off or counterclaim shall be allowed in any such for debts contracted by the insolvent within thirty days immediately preceding the filing of the petition of insolvency except in case of creditors

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specified in section fifty of this Act.

2. To take in to his possession all the estate of such debtor except property exempt by law from execution, 2. whether attached or delivered to him, or afterwards discovered, and all books, vouchers, evidence of indebtedness, and securities belonging to the same. 3. In case of a nonresident or absconding or concealed debtor, to demand and receive of every sheriff who shall have attached any of the property of such debtor, or who shall have in his possession any moneys arising from the sale of such property, all such property and moneys, on paying him his lawful costs and charges for attaching and keeping the same.

4. From time to time to sell at public auction after advertisement in the manner provided by subsections (1), (2), and (3) of section four hundred and fifty-four of the Code of Civil Procedure, 19 upon order of the court, any of the estate, real and personal, which has come into his possession, and which is vested in him as such assignee, and on such sales to execute the necessary conveyances and bills of sale.

5. To redeem all valid mortgages and conditional contracts, and all valid pledges of personal property, and to satisfy any judgments which may be an encumbrance on any property sold by him; or to sell such property, subject to such mortgage, contracts, pledges, judgments, or liens.

6. To settle all matters and accounts between such debtor and his creditors subject to the approval of the court.

7. Under the order of the court or judge appointing him, to compound with any person indebted to such debtor, and thereupon discharge all demands against such person.

8. To recover from any person receiving a conveyance, gift transfer, payment, or assignment, made contrary to any provision of this Act, the property thereby transferred or assigned; or in case a redelivery of the property can not be had, to recover the value thereof with damages for the detention.

SECTION 37. Embezzlement, etc. — If any person, before the assignment is made, having notice of the commencement of the proceedings in insolvency, or having reason to believe that insolvency proceedings are about to be commenced, embezzles or disposes of any of the moneys, goods, chattels, or effects of the insolvent, he is chargeable therewith, and liable to an action by the assignee for double the value of the property so embezzled or disposed of, to be recovered for the benefit of the insolvent's estate.

SECTION 38. Penalties and forfeitures. — The same penalties, forfeitures, and proceedings by citation, examination, and commitment shall apply on behalf of an assignee against persons suspected of having concealed, embezzled, conveyed away, or disposed of any property of the debtor, or of having possession or knowledge of any deeds, conveyances, bonds, contracts, or other writings which relate to any interest of the debtor in any real or personal estate as provided in the case of estates of deceased persons in sections seven hundred and nine to seven hundred and thirteen, inclusive, of the Code of Civil Procedure.

SECTION 39. Conversion of property into money. — The assignee shall as speedily as possible convert the estate, real and personal, into money. He shall keep a regular account of all moneys received by him as assignee, to which every creditor or other person interested therein may, at all reasonable times, have access. No private sale of any property of the estate of an insolvent debtor shall be valid unless made under the order of the court, upon a petition in writing, which shall set forth the facts showing the sale to be necessary. Upon filing the petition, notice of the hearing thereof of at least ten days shall be given by publication and mailing, in the same manner as is provided in section nineteen of this Act. If it appears that a private sale is for the best interests of the estate, the court shall order it to be made.

SECTION 40. Perishable property. — In all cases when it appears to the satisfaction of the court

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that the estate of the debtor, or any part thereof, is of a perishable nature, or is liable to deteriorate in value, or is disproportionately expensive to keep, and that the insolvent's estate will suffer if sufficient time elapses for the giving of notice, the court may order the same to be sold in such manner and at such time as may be deemed most expedient, under the direction of the sheriff, receiver, or assignee, as the case may be, who shall hold the funds received in place of the property sold until further order of the court.

SECTION 41. Outstanding debts, etc. due estate. — Outstanding debts, or other property due or belonging to the estate, which can not be collected and received by the assignee without unreasonable or inconvenient delay or expense, may be sold and assigned in like manner as the remainder of the estate. If there are any rights of action for damages in favor of the insolvent prior to the commencement of the insolvency proceedings, the same may, with the approval of the court, be compromised.

SECTION 42. Expenses and commissions; Division of compensation. — Assignees shall be allowed all necessary expenses in the care, management, and settlement of the estate, and shall be entitled to charge and receive for their services commissions upon all sums of money coming to their hands and accounted for by them, as follows: For the first thousand pesos, at the rate of seven per centum; for all above that sum and not exceeding ten thousand pesos, at the rate of five per centum; and for all above that sum, at the rate of four per centum: Provided, however, That if the person acting as assignee was receiver of the property of the estate pending the election of an assignee, any compensation allowed him as such receiver shall be deducted from the compensation to which he otherwise would be entitled as such assignee: And provided further, further That if there should be two or more assignees the court shall order an equitable division of the compensation herein provided, and if for any reason an assignee's term is completed before the final settlement of the estate and a successor is appointed the court shall not allow to any such assignee prior to the settlement of the estate an amount exceeding four per centum of the sums of money coming into his hands. Upon the final settlement of the estate an equitable distribution of the compensation of the assignees shall be made.

SECTION 43. Filing of accounts with vouchers, statements, etc.; Decisions of court upon claims; Additional accounts. — At the expiration of three months from the appointment of the assignee in any case, or as much earlier as the court may direct, a time and place shall be fixed by the court at which the assignee shall file just and true accounts of all his receipts and payments with proper vouchers, verified by his oath and a statement of the property outstanding, specifying the causes of its outstanding, also what debts or claims are yet undetermined, and stating what sum remains in his possession, and shall accompany the same with an affidavit that notice by registered mail has been given to all creditors named in the schedule filed by the debtor or the assignee that said accounts will be heard at a time specified in such notice, which time shall not be less than two nor more than eight weeks from the filing of such accounts. At the hearing the court shall audit the accounts of the assignee, and any person interested may appear and file exceptions thereto and contest the same. The court shall thereupon confirm said accounts if they shall be found to be correct, or order the same corrected if errors shall be found therein. The court shall also, in such hearing, determine the property which must be deducted from the estate as another's, under the provisions of section forty-eight of this Act, and the right of the claimants to participate in the dividend, and may order a dividend paid to those creditors whose claims have been proven and allowed. The decision of the courttheretofore rendered as to whether any claimant was entitled to vote for an assignee shall not be conclusive upon the right of the claimant to share in such dividend; but all claimants who were so allowed to vote shall participate in such dividend unless objections were filed to the same prior to such hearing. If any such objections have been filed against any claim, or if any claimant was refused the right to vote, the court shall determine said objections and the rights of all such claimants in such hearing and refuse or allow the same before the declaration of a dividend. Thereafter, further accounts, statements, and dividends shall be made in like manner as often as occasion requires: Provided, however, That it shall be the duty of the assignee to file his final account within one year from the date of the order of adjudication, unless the court, after notice to creditors, shall grant further time, upon a satisfactory showing that great loss and waste would result to the estate by reason of the conversion of the property into money within said time, or that it has been impossible to do so by reason of litigation.

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SECTION 44. Motion to require accounts, filing of . — The court may at any time, upon the motion of any two or more creditors, require the assignee to file his account in the manner and upon giving the notice specified in the preceding section, and if he has funds subject to distribution he may be required to distribute them without delay.

SECTION 45. Rights of creditors late in proving claims. — Whenever any dividend has been duly declared, the distribution of it shall not be stayed or affected by reason of debts being subsequently proved, but any creditor proving such a debt shall be entitled to a dividend equal to those already received by the other creditors before any further dividend is made to the latter, if the failure to prove such claim shall not have resulted from his own neglect.

SECTION 46. Failure, neglect or refusal by assignee. — Should the assignee refuse or neglect to render his accounts as required by sections forty-three and forty-four of this Act, or refuse or neglect to pay over a dividend when he shall have, in the opinion of the court, sufficient funds for that purpose, or shall neglect or mismanage the estate in any manner whatever or violate any of the provisions of this Act, the court shall immediately discharge such assignee from his trust, and shall appoint another in his place. The assignee so discharged shall forthwith deliver over to the assignee appointed by the court all the funds, property, books, vouchers, or securities belonging to the insolvent, and he shall not be entitled for his services to the compensation provided in section forty-two.

SECTION 47. Final account. — Preparatory to the settlement of the estate, the assignee shall file his final account in the court, accompanying the same with an affidavit that a notice by registered mail has been given to all creditors who have proved their claims, that he will apply for a settlement of his account and for a discharge from all liability as assignee at a time specified in such notice, which time shall not be less than two nor more than eight weeks from such filing. At the hearing the court shall audit the account, and any person interested may appear and file exceptions in writing and contest the same. The court thereupon shall settle the account, and order a dividend of any portion of the estate, if any, remaining undistributed, and shall discharge the assignee, subject to compliance with the order of the court, from all liability as assignee to any creditor of the insolvent.

CONCURRENCE AND PREFERENCE OF CREDITS (ARTICLES 2236-2251)

CONCURRENCE OF CREDITS Implies the possession by two or more creditors of equal rights or privileges over the same property or all the property of a debtor

PREFERENCE OF CREDIT - Right held by a creditor to be preferred in the payment of his claim above others out of the debtor’s assets NATURE AND EFFECT OF PREFERENCE

1. A preference is an exception to the general rule. For this reason, the law as to preferences is strictly construed. 2. Preference doesn’t create an interest in property. it creates simply a right of one creditor to be paid first the proceeds of the sale of property as against another creditor. 3. The law doesn’t give the creditor who has a preference a right to take the property or sell it as against another creditor. It is not a question who takes or sells, it is one of the application of the proceeds after the sale—of payment of the debt 4. The right of preference is one which can be made only by being asserted and maintained. If the right claimed is not asserted or maintained, it is lost. 5. Where a creditor released his levy, leaving the property in possession of the debtor, thereby

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indicating that he didn’t intend to press his claim further as to that specific property, after that act, his claim to preference, if one had been asserted y him, could not exist because he had ceased to contest.

WHEN RULE OF PREFERENCE APPLICABLE

Apply only where two or more creditors have separate and distinct claims against the same debtor who has an insufficient property Is applicable when the debtor is insolvent—having more liabilities than his assets It is a matter of necessity and log that the question of preference should arise only when the debtor’s assets are insufficient to pay his debts in full

GENERAL PROVISIONS Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (1911a) AS A RULE, A DEBTOR IS LIABLE WITH ALL HIS PROPERTY, PRESENT AND FUTURE, FOR THE FULFILLMENT OF HIS OBLIGATIONS EXEMPT PROPERTY 1. Present property-Articles 152, 153, 154, 155, 205(Family Code); Section 13 Rule 39 of the Rules of Court; Section 118 of CA 141 Art. 152. The family home, constituted jointly by the husband and the wife or by an unmarried head of a family, is the dwelling house where they and their family reside, and the land on which it is situated. (223a)

Art. 153. The family home is deemed constituted on a house and lot from the time it is occupied as a family residence. From the time of its constitution and so long as any of its beneficiaries actually resides therein, the family home continues to be such and is exempt from execution, forced sale or attachment except as hereinafter provided and to the extent of the value allowed by law. (223a) Art. 154. The beneficiaries of a family home are: (1) The husband and wife, or an unmarried person who is the head of a family; (2) Their parents, ascendants, descendants, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support. (226a) Art. 155. The family home shall be exempt from execution, forced sale or attachment except: (1) For nonpayment of taxes; (2) For debts incurred prior to the constitution of the family home; (3) For debts secured by mortgages on the premises before or after such constitution; and (4) For debts due to laborers, mechanics, architects, builders, materialmen and others who have rendered service or furnished material for the construction of the building. (243a) Art. 205. The right to receive support under this Title as well as any money or property obtained as such support shall not be levied upon on attachment or execution. (302a) Sec. 13. Property exempt from execution. Except as otherwise expressly provided by law, the following property, and no other, shall be exempt from execution: (a) The judgment obligor's family home as provided by law, or the homestead in which he resides, and land necessarily used in connection therewith; (b) Ordinary tools and implements personally used by him in his trade, employment, or livelihood; (c) Three horses, or three cows, or three carabaos, or other beasts of burden such as the judgment obligor may select necessarily used by him in his ordinary occupation; (d) His necessary clothing and articles for ordinary personal use, excluding jewelry;

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(e) Household furniture and utensils necessary for housekeeping, and used for that purpose by the judgment obligor and his family, such as the judgment obligor may select, of a value not exceeding one hundred thousand pesos; (f) Provisions for individual or family use sufficient for four months; (g) The professional libraries and equipment of judges, lawyers, physicians, pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other professionals, not exceeding three hundred thousand pesos in value; (h) One fishing boat and accessories not exceeding the total value of one hundred thousand pesos owned by a fisherman and by the lawful use of which he earns his livelihood; (i) So much of the salaries, wages, or earnings of the judgment obligor of his personal services within the four months preceding the levy as are necessary for the support of his family; (j) Lettered gravestones; (k) Monies benefits, privileges, or annuities accruing or in any manner growing out of any life insurance; (l) The right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the Government; (m) Properties specially exempt by law. But no article or species of property mentioned in his section shall be exempt from execution issued upon a judgment recovered for its price or upon a judgment of foreclosure of a mortgage thereon. 2. Future property—those related to the insolvency of a debtor 3. Property in custodia legis and of public dominion Art. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n)

>>INSOLVENCY LAW WILL COME INTO PLAY AFTER THE RULES OF PREFERENCE AND CONCURRENCE OF CREDITS. DEBTOR MUST BE THE ABSOLUTE OWNER Art. 2238. So long as the conjugal partnership or absolute community subsists, its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations, except insofar as the latter have redounded to the benefit of the family. If it is the husband who is insolvent, the administration of the conjugal partnership of absolute community may, by order of the court, be transferred to the wife or to a third person other than the assignee. (n) Art. 2239. If there is property, other than that mentioned in the preceding article, owned by two or more persons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations. (n) RULES INVOLVING UNDIVIDED SHARE OR INTEREST OF A CO-OWNER

If there is a co-ownership and of the co-owners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets The shares of the other co-owners of course cannot be taken possession of by the assignee Art. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings. (n)

RULE INVOLVING PROPERTY HELD IN TRUST

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The trustee is not strictly speaking the owner of the trust property although he has legal title thereto Hence, property held in trust by the insolvent debtor should be excluded from the insolvency proceedings

CLASSIFICATION OF CREDITS Art. 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred: (1) Duties, taxes and fees due thereon to the State or any subdivision thereof; (2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed 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 said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; (5) Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed; (6) Claims for laborers' wages, on the goods manufactured or the work done; (7) For expenses of salvage, upon the goods salvaged; (8) Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share of each in the fruits or harvest; (9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter; (10) Credits for lodging and supplies usually furnished to travelers by hotelkeepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests; (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested; (12) Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit; (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale. In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure. (1922a) GENERAL CATEGORIES OF CREDIT

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1. Special preferred credits listed in Articles 2241 and 2242 2. Ordinary preferred credits listed in Article 2244 3. Common credits under Article 2245

PREFERRED CREDITS WITH RESPECT TO SPECIFIC MOVABLE PROPERTY

1. Duties, taxes and fees due thereon to the State or any subdivision thereof 2. Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed 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 said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally 4. Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereofa. Should be registered b. Binding against third parties 5. Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed 6. Claims for laborers' wages, on the goods manufactured or the work done 7. For expenses of salvage, upon the goods salvaged 8. Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share of each in the fruits or harvest 9. Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter 10. Credits for lodging and supplies usually furnished to travelers by hotel keepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests 11. Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested 12. Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit 13. Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale.

PREFERRED CREDITS WITH RESPECT TO SPECIFIC MOVABLE PROPERTY

Articles 2241 and 2242 don’t give the order of preference or priority of payment They merely enumerate the credits which enjoy preference with respect to specific movables or immovables With respect to the same specific movable or immovable, creditors with the exception of the State, merely concur REMEMBER that preference is only given to #1 and the rest shall be treated equally

WRONGFUL TAKING OF MOVABLES TO WHICH LIEN ATTACHES

Last paragraph applies only when the right of ownership in such property continues in the debtor, and therefore, is not applicable to cases where the debtor has parted his ownership therein, as where he has sold the property Art. 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real right:

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(1) Taxes due upon the land or building; (2) For the unpaid price of real property sold, upon the immovable sold; (3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works; (5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged; (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved; (7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits; (8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided; (9) Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated; (10) Credits of insurers, upon the property insured, for the insurance premium for two years. (1923a)

PREFERRED LIEN ON SPECIFIC IMMOVABLE PROPERTY

1. Taxes due upon the land or building 2. For the unpaid price of real property sold, upon the immovable sold 3. Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and ontractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works 4. Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works 5. Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged 6. Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved 7. Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits 8. Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided 9. Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated 10. Credits of insurers, upon the property insured, for the insurance premium for two years.

Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first be satisfied. (n)

NATURE OF CLAIMS OR CREDITS IN ARTICLES 2241 AND 2242

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Articles 2241 and 2242 apply only when there is a concurrence of credits when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property is insufficient to pay in full all the creditors In such situation, the question of preference will arise, there will be a need to determine which of the creditors will be paid ahead of the others Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: (1) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; (2) Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency; (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own; (4) Compensation due the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the nature of the employment; (5) Credits and advancements made to the debtor for support of himself or herself, and family, during the last year preceding the insolvency; (6) Support during the insolvency proceedings, and for three months thereafter; (7) Fines and civil indemnification arising from a criminal offense; (8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors, when properly authorized and approved by the court; (9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1; (10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1; (11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1; (12) Damages for death or personal injuries caused by a quasi-delict; (13) Gifts due to public and private institutions of charity or beneficence; (14) Credits which, without special privilege, appear in(a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a)

SPECIAL PREFERRED CREDITS

1. Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court 2. Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency 3. Expenses during the last illness of the debtor or of his or her spouse and children under his or

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

ORDER OF PRIORITY ONLY WITH RESPECT TO INSOLVENT’S FREE PROPERTY

1. Specially preferred credits—credits which are specially preferred because they constitute liens take precedence over ordinary preferred credits so far as concerns the property to which the liens are attached a. Specific property involved of greater value b. Specific property involved of lesser value—will be treated as ordinary preferred credits and to be paid in the order of preference therein provided 2. Ordinary preferred credits—only in respect of the insolvent’s free property, is an order of priority established. In this sequence, certain taxes and assessments also figure but, as already pointed out, these don’t have the same kind of overriding preference Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference. (1925)

NON-PREFERRED OR COMMON CREDITS - Credits other than those mentioned in 2241, 2242, and 2244 shall enjoy no preference and such common credits shall be paid pro rata regardless of dates ORDER OF PREFERENCE OF CREDITS Art. 2246. Those credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers. Art. 2247. If there are two or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof. (1926a) Art. 2248. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers. Art. 2249. If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right. (1927a)

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Art. 2250. The excess, if any, after the payment of the credits which enjoy preference with respect to specific property, real or personal, shall be added to the free property which the debtor may have, for the payment of the other credits. (1928a) TWO-TIER ORDER OF PREFERENCE

First tier includes only taxes, duties and fees due on a specific movable or immovable property All other special preferred credits stand on the second tier to be satisfied pari passu and pro rata, out of the residual value of the specific property to which such other credits relate The pro-rata rule however doesn’t apply to credits annotated in the RD in virtue of a judicial order, by attachments and executions, which are preferred to later credits. In satisfying several credits annotated by attachments and executions, the rule is still preference according to the priority of credits in the order of time.

PROCEEDING FOR PAYMENT PRO RATA OF PREFERRED CREDITORS

Proceeding required for adjudication of claims of preferred creditors Pro rata rule contemplates more than one creditor

Art. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules: (1) In the order established in Article 2244; (2) Common credits referred to in Article 2245 shall be paid pro rata regardless of dates. (1929a)

SUMMARY AS TO ORDER OF PREFERENCE

1. Preferred lien on specific immovables 2. Preferred lien on specific movables 3. Special preferred credits 4. Distribute pro-rata to creditors without preference

RIGHT OF THIRD PERSON TO SATISFY OBLIGATION

Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n) Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable.(n) > A third person who has a right in or to the thing pledged may pay the debt as soon as it becomes due and demandable and the creditor cannot refuse to accept the payment

RIGHT OF PLEDGEE TO COLLECT AND RECEIVE AMOUNT DUE ON CREDIT PLEDGED

Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n) > Pledgee is given the right to collect and receive the amount due on the credit pledged > But in reference to the previous article, having the duty to take good care with the diligence of a good father to a family the thing pledged, he has the duty to collect if danger would endanger the recovery of the credit

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Art. 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. (n)

RIGHT OF PLEDGEE TO CHOOSE WHICH OF SEVERAL THINGS PLEDGED SHALL BE SOLD

> After sufficient property has been sold to satisfy the obligation plus interests and expenses, no more shall be sold Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of Article 2085 he shall have the same rights as a guarantor under Articles 2066 to 2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n)

RIGHT OF THIRD PERSON WHO PLEDGED HIS OWN PROPERTY

> A third person who is not a party to the principal obligation may secure the latter by pledging his own property > The law grants him the same rights as a guarantor and he cannot be prejudiced by any waiver or defense by the principal debtor Art. 2121. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n) Art. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n) Art. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of his Title. (1873a)

MORTGAGE REAL ESTATE MORTGAGE (ARTICLES 2124-2131)

Art. 2124. Only the following property may be the object of a contract of mortgage: (1) Immovables; (2) Alienable real rights in accordance with the laws, imposed upon immovables. Nevertheless, movables may be the object of a chattel mortgage. (1874a)

MORTGAGE

> Contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially substituting to such security immovable property or real rights over immovable property which obligation shall be satisfied with the proceeds of sale of said property or rights in case the said obligation is not complied with at the time stipulated > Real, accessory, unilateral and subsidiary contract

POSSESSION OF PROPERTY MORTGAGED

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> As a general rule, it is retained by the mortgagor > The mortgaged property is only subjected to a lien by the mortgagee but ownership is retained by the mortgagor

PAYMENT OF INTEREST ON MORTGAGE CREDIT

> With regard to fruits or interest, the mortgagee shall be subject to the obligation of an antichresis creditor

SUBJECT MATTER OF MORTGAGE

> Immovables and alienable real rights over immovables

FUTURE PROPERTY CANNOT BE OBJECT OF MORTGAGE

> Future property cannot be the object of a contract of mortgage > A stipulation however subjecting the mortgage lien, properties which the mortgagor may subsequently acquire, install, or use in connection with real property already mortgaged belonging to the mortgagor is valid Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. (1875a)

ESSENTIAL REQUISITES OF A MORTGAGE

1. To secure the fulfillment of a principal obligation 2. The mortgagor should be the absolute owner of thing mortgaged 3. The mortgagor should have free disposal of the thing 4. When the principal obligation becomes due, the thing mortgaged may be alienated to secure payment 5. For a mortgage to be validly constituted and to prejudice third persons, the mortgage should be recorded with the Registry of Property NO VALIDLY CONSTITUTED MORTGAGE IF THE DEED OF MORTGAGE IS A MERE PRIVATE DOCUMENT

MORTGAGE IS NEVERTHELESS BINDING BETWEEN THE PARTIES EVEN IF UNREGISTERED

> Actual knowledge on the part of the buyer > Actual knowledge=registration

PROCEDURE: WHAT HAPPENS WHEN YOU ENTER INTO A CONTRACT OF MORTGAGE?

1. Execute the document of mortgage 2. Go to a notary public, who will notarize the document. 3. Pay the documentary stamp tax within the first five days of the succeeding month. The doc stamp tax is a percentage of the value of the property mortgaged.

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4. Go to the Office of the Register of Deeds and pay the registration fees. Before you pay the registration fees, the government will require you to update payment of realty taxes on the property. After payment of the registration fees, the mortgage will be annotated on the title.

EFFECT OF INVALIDITY OF MORTGAGE ON PRINCIPAL OBLIGATION

1. The principal obligation remains valid 2. Mortgage deed remains as evidence of principal obligation Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. (1876)

EFFECTS OF MORTGAGE

1. Creates a real right a. If the mortgagor sells the encumbered property, the property remains subject to the fulfillment of the principal obligation secured by it b. The mortgagee has a right to rely in good faith on what appears on the certificate of title of the mortgagor of the property given as security and in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate c. Until the action for expropriation has been completed, ownership over the property remains with the registered owner d. Banking institution must exercise due diligence before entering contract of mortgage e. If a person is the first mortgagee over a property which was sold in an auction by the second mortgagee, the only right left to him is to collect his mortgage credit from the purchaser thereof during the sale conducted f. In a suit to nullify a certificate of title, the mortgagee is an indispensable party 2. Creates merely an encumbrance Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (1877)

EXTENT OF MORTGAGE

> A REM constituted on an immovable property is not limited to the property itself but also extends to all its accessions, improvements, growing fruits, and rents > To exclude them, it is necessary that there be an express stipulation to that effect Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (1878) Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes. (1879)

RIGHT OF CREDITOR AGAINST TRANSFEREE OF MORTGAGED PROPERTY

> The fact that the mortgagor has transferred the mortgaged property to a third person doesn't relieve him from his obligation to pay the debt to the mortgage creditor in the absence of Novation > A recorded REM is merely an accessory contract

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> The creditor may only demand from any possessor the payment only of the part of the credit secured by said property > Necessary that there be prior demand for payment be made on the debtor and the latter failed to pay > Does not really apply to all third persons in possession of the property > It only applies to those in possession of the mortgaged property in the concept of owner. If the possession by a third person is only as lessee, the creditor may not collect the credit from that third person. Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (n)

STIPULATION FORBIDDING ALIENATION OF MORTGAGED PROPERTY

> Such stipulation would be contrary to public good inasmuch as the transmission of property should not be unduly impeded

CAN MORTGAGEE PROHIBIT ENCUMBERANCES WITHOUT PRIOR CONSENT? > Yes, regulation is not the same as prohibition > The mortgagee may even add a standard. This is for good measure on the part of the mortgagee which is allowed by law. IN THE FIRST PLACE, WHY WOULD YOU BE CONCERNED WITH THE DISPOSITION OF THE PROPERTY IF YOU ARE THE MORTGAGEE?

> You don't want the property to be in the hands of someone who is litigious > As a means of monitoring the financial condition of the mortgagor Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. (1880a)

FORECLOSURE of Mortgage - Redemption

FORECLOSURE

> Remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given> Denotes a procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself

VALIDITY AND EFFECT OF FORECLOSURE

> The right to foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the payment of the principal obligation> A mortgage contract may contain an acceleration clause—on occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes due and payable> Essence of mortgage contract—property has been identified and separated from a mass of the property of the mortgagor to secure the payment of a principal obligation> Once the proceeds have been applied to the payment of the principal obligation, the debtor cannot anymore be asked to pay unless there is deficiency

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KINDS OF FORECLOSURE1. Judicial 2. Extrajudicial

AN ACT TO AUTHORIZE THE MORTGAGE OF PRIVATE REAL PROPERTY IN FAVOR OF ANY INDIVIDUAL, CORPORATION, OR ASSOCIATION SUBJECT TO CERTAIN CONDITIONS

Section 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged in favor of any individual, corporation, or association, but the mortgagee or his successor in interest, if disqualified to acquire or hold lands of the public domain in the Philippines, shall not take possession of the mortgaged property during the existence of the mortgage and shall nottake possession of the mortgaged property except after default and for the sole purpose of foreclosure, receivership, enforcement or other proceedings and in no case for a period of more than 5 years from actual possession and shall not bid or take part in any sale of such real property in case of foreclosure: Provided, that said mortgagee or successor in interest may take possession of said property after default in accordance with the prescribed judicial procedures for foreclosure and receivership and in no case exceeding 5 years from actualpossession.

Section 2. All laws, orders, or regulations, or parts thereof inconsistent with the provisions of this Act, are repealed or modified accordingly.

Section 3. This Act shall take effect upon its approval.NOTES ON RA 133:

1. You can mortgage to a foreigner. RA 133 sanctions this. Ownership is not equivalent to mortgage. Nonetheless, he can only institute judicial proceedings and not extrajudicially foreclose the mortgage. Furthermore, he cannot bid or take part in the sale of the real property.2. The foreigner may not take possession of the property during the mortgage. He could only possess the same as a lessee.3. The foreigner may only take possession of the mortgaged property after default, and for the sole purpose of foreclosure, enforcement or other proceedings. This should not exceed the period of 5 years from actual possession.

JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT

1. The mortgagee should file a petition for judicial foreclosure in the court which has jurisdiction over the area where the property is situated 2. The court will conduct a trial. If, after trial, the court finds merit in the petition, it will render judgment ordering the mortgagor/debtor to pay the obligation within a period not less than 90 nor more than 120 days from the finality of judgment. 3. Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation to prevent his property from being sold. This is called the EQUITY OF REDEMPTION PERIOD. 4. If mortgagor fails to pay within the 90-120 days given to him by the court, the property shall be sold to the highest bidder at public auction to satisfy the judgment. 5. There will be a judicial confirmation of the sale. After the confirmation of the sale, the purchaser shall be entitled to the possession of the property, and all the rights of the mortgagor with respect to the property are severed or terminated. The equity of redemption period actually extends until the sale is confirmed. Even after the lapse of the 90 to 120 day period, the mortgagor can still redeem the property, so long as there has been no confirmation of the sale yet. Therefore, the equity of redemption can beconsidered as the right of the mortgagor to redeem the property BEFORE the confirmation of the sale.

a. After the confirmation of the sale, the mortgagor does not have a right to redeem the property anymore. This is the general rule in judicial foreclosures – there is no right of redemption after the sale is

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confirmed.

The proceeds of the sale of the property will be disposed as follows: a. First, the costs of the sale will be deducted from the price at which the property was sold b. The amount of the principal obligation and interest will be deducted c. The junior encumbrances will be satisfied d. If there is still an excess, the excess will go back to the mortgagor. In mortgage, the mortgagee DOESNOT get the excess (unlike in pledge).i. If there is a deficiency, the mortgagee can ask for a DEFICIENCY JUDGMENT which can be imposed on other property of the mortgagor. The rule on extrajudicial foreclosure is different. The mortgagee must go to court and file another action for the collection of the deficiency. ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE:

1. Judicial foreclosure is costly, since the parties would need to hire lawyers. But then again, the present rules provide that court fees are needed to be paid in extrajudicial proceedings also. 2. The parties have very little control over the sale because there is court intervention.

3. More susceptible to stalling/dilatory tactics by the mortgagor, since he can file all sorts of motions in court to prevent the sale.4. It is more efficient to have extrajudicial proceedings since for judicial proceedings, there is a minimum lapse of time of 6 years. EXTRAJUDICIAL FORECLOSURE

(UNDER ACT 3135/4118 AND SC ADMINISTRATIVE CIRCULAR)

WHERE SHOULD AN EXTRAJUDICIAL FORECLOSURE SALE BE DONE?> Sale cannot be made legally outside the city or province wherein the property sold is situated. In case the place has been stipulated, it shall be made in the municipal building of the said place

NOTICE OF THE SALE

1. POSTING of the notices of the sale FOR NOT LESS THAN 20 DAYS in at least 3 public places of the municipality or city where the property is situated

2. IF THE PROPERTY IS WORTH MORE THAN P400, such notice shall also be published once a week at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city. (You don't

need to count 6 days between publications.)NOTE: there is jurisprudence, which held that there is sufficient notice when there is publication.

PUBLIC AUCTION/SALE

1. Time shall be between 9AM and 4PM. It shall be made in the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality, or of the notary public of the

municipality, who shall be compensated with P5 for each day of actual work or performance in addition to his expenses.

2. Anyone may bid at the sale, unless there are stipulations in the agreement.

POSSESSION> Upon foreclosure, if the mortgagor is in possession of the property, he will retain possession during the redemption period—1 year from the date of sale> If the winning bidder wants possession during the redemption period, he may execute a bond in the amount equivalent to the use of the property for 12 months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of the Act. Upon approval, a writ of possession will be issued in his favor.> If the winning bidder is able to secure possession, the mortgagor may petition that the sale is set aside

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and the writ of possession be cancelled on the ground that he wasn't in default or that the sale wasn't made in accordance with Act 3135. This must be filed within 30 days from issuance of the writ of possession.

RIGHT OF REDEMPTION

> The debtor, his successors-in-interest, or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time WITHIN THE TERM OF 1 YEAR FROM AND AFTER THE DATE OF THE SALE and such will be governed by the Rules of Court> When the property is redeemed after the purchaser has been given possession, the redeemer is entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part thereof was rented. If the property was used as his own dwelling, it being town property, or used it gainfully, it being rural property, the redeemer may deduct from theprice the interest of 1% per month provided in the Rules of Court. RULES OF COURT, RULE 39, SECTIONS 29 TO 31, AND 35

Sec. 29. Effect of redemption by judgment obligor, and a certificate to be delivered and recorded thereupon; to whom payments on redemption made. If the judgment obligor redeems, he must make the same payments as are required to effect a redemption by a redemptioner, whereupon, no further redemption shall be allowed and he is restored to his estate. The person to whom theredemption payment is made must execute and deliver to him a certificate of redemption acknowledged before a notary public or other officer authorized to take acknowledgments of conveyances of real property. Such certificate must be filed and recorded in the registry of deeds of the place in which the property is situated, and the registrar of deeds must note the record thereof on the margin of the record of the certificate of sale. The payments mentioned in this and the last preceding sections may be made to the purchaser r redemptioner, or for him to the officer who made the sale.

Sec. 30. Proof required of redemptioner.A redemptioner must produce to the officer, or person from whom he seeks to redeem, and serve with his notice to the officer a copy of the judgment or final order under which he claims the right to redeem, certified by the clerk of the court wherein the judgment or final order is entered; or, if he redeems upon a mortgage or other lien, a memorandum of the record thereof, certified by the registrar of deeds; or an original or certified copy of any assignment necessary to establish his claim; and an affidavitexecuted by him or his agent, showing the amount then actually due on the lien.

Sec. 31. Manner of using premises pending redemption; waste restrained.Until the expiration of the time allowed for redemption, the court may, as in other proper cases, restrain the commission of waste on the property by injunction, on the application of the purchaser or the judgment obligee, with or without notice; but it is not waste for a person in possession of the property at the time of the sale, or entitled to possession afterwards, during the period allowed for redemption, to continue to use it in the same manner in which it was previously used; or to use it in the ordinary course of husbandry; or to make the necessary repairs to buildings thereon while he occupies the property.

Sec. 35. Right to contribution or reimbursement.When property liable to an execution against several persons is sold thereon, and more than a due proportion of the judgment is satisfied out of the proceeds of the sale of the property of one of them, or one of them pays, without a sale, more than his proportion, he may compel a contribution from the others; and when a judgment is upon an obligation of one of them, as security for another, and the surety pays the amount, or any part thereof, either by sale of his property or before sale, he may compel repayment from the principal.

GENERAL BANKING LAW OF 2000, SECTION 47

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Sec. 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given duecourse only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or therestraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provisionuntil, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.

NOTES:1. For judicial foreclosure, the redemption period is within one year. For extrajudicial, its 90 days from sale or registration.2. The purpose is to give concession to the banks. Banks cannot get properties mortgaged by those in financial distress.3. The redemption price would be the mortgaged obligation plus the interest as stipulated in the original obligation. Compare this with judicial foreclosure wherein the redemption price is the original price. In this case, you have to pay more when redeeming from a bank.4. There is immediate possession5. A motion to enjoin would not be entertained unless secured by a bond.6. Court will fix the amount of the bond. Normally, this would be the liability of the bank plus costs. This remedied the loopholes in Act 3135—protect the bank during foreclosures. This makes it hard to secure injunctions and it shortens the redemption period.

ANTICHRESIS

(ARTICLES 2132-2139)

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 them to the payment of the interest, if owing, and thereafter to the principal of his credit. (1881)

Art. 2133. The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application. (n)

Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis shall be void. (n)

Art. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and charges upon the estate.

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He is also bound to bear the expenses necessary for its preservation and repair.

The sums spent for the purposes stated in this article shall be deducted from the fruits. (1882)

Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the creditor.

But the latter, in order to exempt himself from the obligations imposed upon him by the preceding article, may always compel the debtor to enter again upon the enjoyment of the property, except when there is a stipulation to the contrary. (1883)

Art. 2137. The creditor does not acquire the ownership of the real estate for non-payment of the debt within the period agreed upon.

Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of the debt or the sale of the real property. In this case, the Rules of Court on the foreclosure of mortgages shall apply. (1884a)

Art. 2138. The contracting parties may stipulate that the interest upon the debt be compensated with the fruits of the property which is the object of the antichresis, provided that if the value of the fruits should exceed the amount of interest allowed by the laws against usury, the excess shall be applied to the principal. (1885a)

Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are applicable to this contract. (1886a)

ANTICHRESIS

> The creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them o the payment of the interest, if owing, and thereafter to the principal of his credit

> Arrangement that the fruits will be used to liquify the principal obligation> Doesn't create a lien but only the grant of the use of the fruits

CHARACTERISTICS OF AN ANTICHRESIS

1. Accessory contract2. Formal contract—it must be in writing; the principal obligation and the interest secured must be in writing

THERE IS NO NEED TO TRANSFER POSSESSION. WHAT IS ESSENTIAL IS THE GRANT OF THE USE OF THE FRUITS.

ADDITIONAL BENEFIT IN HAVING A CONTRACT OF ANTICHRESIS

> In the absence of a contract of antichresis, the debtor could just issue a special power of attorney in favor of the creditor for the collection of the fruits of the immovable.> The additional benefit is that at the failure of the debtor to pay the principal obligation, the creditor may have the property subject of antichresis foreclosed

MEASURE OF APPLICATION OF FRUITS TO INTEREST AND PRINCIPAL

> Must be appraised at their actual market value at the time of application

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FORM OF CONTRACT

> The amount of the principal and interest shall be specified in writing> Otherwise, the contract is void

DEFAULT RULES TO BE FOLLOWED (TAKE NOTE SO THAT YOU WILL KNOW WHEN TO OPT OUT OF THE RULES)

1. The creditor advances for the taxes, charges, as well as the necessary expenses for the preservation of the property2. The law uses the term “advances” as the fruits of the immovable may be applied to the expenses and charges. If the creditor doesn't want to advance, he may just surrender the immovable to the debtor3. The debtor may not reacquire the enjoyment of the thing until full payment of the obligation.4. The creditor doesn't acquire ownership of the immovable for nonpayment of the debt within the period agreed upon. Every stipulation to the contrary is void. The creditor may petition the court to foreclose the property.

>>THERE IS POSSIBILITY TO HAVE ALTERNATIVE ARRANGEMENTS FOR FORECLOSURE.

CHATTEL MORTGAGE

(ARTICLES 2140-2141, CHATTEL MORTGAGE LAW)

Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. (n)

CHATTEL MORTGAGE

> Contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation

CHARACTERISTICS

1. Accessory contract2. Formal contract

WHAT MAKES IT DIFFERENT FROM A PLEDGE?

1. Delivery of the personal property to the mortgagee is not necessary2. The registration in the Register is required by law3. Procedure for the sale of the thing is different4. If the property is foreclosed and there is excess, the amount goes to the debtor5. If there is deficiency, the creditor may recover the deficiency

WHEN DO YOU DO A Chattel Mortgage OR PLEDGE?

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> When property needs to be retained by the debtor, then opt for a chattel mortgage

Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages. (n)

LAWS GOVERNING CHATTEL MORTGAGE

1. Chattel mortgage law, Act 15082. Civil Code provisions3. Revised Administrative Code4. Revised Penal Code

OFFENSES INVOLVING CHATTEL MORTGAGE

1. Knowingly removing personal property mortgaged to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent2. Selling or pledging personal property already mortgaged or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgage written on the back of the mortgage and duly recorded in the CM Register

REGISTRATION

> Registration shall be done in the Register of Deeds where the mortgagor resides> And when the property is situated somewhere else, it needs to be registered also in the Register of Deeds of the area where the property is situated> Chattel mortgage would not be valid and binding as against third persons absent any registration> If what is mortgaged is a car, registration with the LTO is also needed. Absent this, again, it would not be binding and invalid as against third persons

FORM OF CONTRACT AS STATED IN THE LAW.

> Theoretically, the mortgagor may sign the contract alone but practically, the mortgagee must sign also given that they both need to sign the affidavit of good faith

AFFIDAVIT OF GOOD FAITH

> Part of the chattel mortgage contract wherein it is stated that the chattel mortgage has been constituted to secure a principal obligation and not meant for fraud or any ill purpose> It is possible to defraud using mortgage. You can take away property through mortgage from an unsecured creditor.

FORMAL REQUIREMENT OF DESCRIPTION OF PROPERTY

> Attach a description or schedule of the properties mortgaged> There is also the requirement of payment of registration fees and documentary stamp taxes

FORECLOSURE (SIMILAR BUT NOT IDENTICAL WITH REM) SECTION 14, CHATTEL MORTGAGE LAW

1. There is a 30-day cooling off period before the public auction, from the time the condition is broken2. Notice—at least 10 days notice of the time, day, place, and purpose of such sale has been posted at 2 or more public places in such municipality. Personal notice or mail shall also be given to the mortgagor

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or person holding under him and the persons holding subsequent mortgages of the time and place of sale.3. Sheriff should possess the property as he needs to deliver the same to the winning bidder. If the mortgagor refuses to do so, the mortgagee can seek the help of the court. There could also be a stipulation in the contract as well. But if the debtor is not willing and able, the loss is with the creditor.4. There is a 30-day equity of redemption period (payment of obligation)5. After foreclosure, there could be recovery of deficiency, but there is Recto Law (1484) pertaining to sale of personal property in installments and there is a Chattel Mortgage to secure payment of price.

>>AN ACTION FOR SPECIFIC PERFORMANCE IS TANTAMOUNT TO THE ABANDONMENT OF RIGHTS OF MORTGAGEE

APPLICATION OF PROCEEDS OF FORECLOSURE

1. Costs2. Obligation itself. Pay first the interest and then the principal. If there is penalty, then pay it first.3. Junior encumbrances4. Owner

OBLIGATION OF PLEDGEE NOT TO USE THING PLEDGED

Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. (1870a)

> The pledgee who is in possession of the thing pledged has no right to make use of it without permission from the owner> If however, the thing pledged is of such a character that use is necessary in properly caring for it, then it becomes his duty to use it so that it will not suffer from its disuse—if from the use thereof profits are derived, the pledgee must account such profits to the pledgor and apply the net proceeds of such use to the payment of his claim

RIGHT OF THE PLEDGOR TO ASK THE THING PLEDGED TO BE DEPOSITED

1. If the creditor uses the thing without authority2. If he misuses the thing in any other way3. If the thing is in danger of being lost or impaired because of the negligence or willful act of the pledgee

Danger To The Thing Pledged

Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. (n)

REQUISITES FOR THE APPLICATION OF ARTICLE 2107

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1. The pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged 2. There is no fault on the part of the pledgor 3. The pledgor is offering in place of the thing, another thing in pledge which is of the same kind and quality as the former 4. The pledgee doesn't choose to exercise his right to cause the thing pledged to be sold at public auction

RIGHT OF PLEDGEE TO CAUSE THE SALE OF THE THING PLEDGED

Art. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n) > This right is superior to that of the pledgor to substitute the thing pledged > The right given to the pledgor is without prejudice to the right of the pledgee

RIGHT OF PLEDGEE TO DEMAND SUBSTITUTE OR IMMEDIATE PAYMENT

Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n) 1. To claim another thing in pledge, and 2. To demand immediate payment of the principal obligation > The abovementioned are alternative remedies—to choose only one but not both

EXTINGUISHMENT OF PLEDGE BY RETURN OF THE THING PLEDGED

Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n) > One of the essential requisites of pledge is that the thing pledged be placed in the possession of the pledgee or a third person designated by the parties > Hence, the pledge is extinguished once the thing pledged is return in the possession of the pledgor. This notwithstanding any stipulation that the pledge would continue although the pledgee is no longer in possession of the thing pledged > The pledge is also extinguished by payment of the debt, by renunciation or abandonment of the pledge and by sale of the thing pledged at public auction

PRESUMPTION OF EXTINGUISHMENT OF PLEDGE > Possession by the debtor or owner of the thing pledged subsequent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and therefore, the pledge has been extinguished > This presumption may be disputed or rebutted by evidence to the contrary > Only the accessory obligation is presumed remitted and not the principal obligation

EXTINGUISHMENT OF PLEDGE BY RENUNCIATION OR ABANDONMENT

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Art. 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n)

> The renunciation or abandonment must be in writing to constitute an extinguishment of pledge

> The renunciation is not conditioned upon the acceptance by the pledgor or owner nor upon the return of the thing pledged

> Under this article, the thing pledged remains in the possession of the pledgee. Hence the renunciation must be in writing.

RIGHT OF PLEDGEE TO CAUSE SALE OF THE THING PLEDGED

Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) > The thing pledged may be alienated for the payment to the creditor when the principal obligation becomes due

THE FORMALITIES REQUIRED FOR SUCH SALE

1. The debt is due and unpaid 2. The sale must be at a public auction 3. There must be notice to the pledgor and owner, stating the amount due 4. The sale must be made with the intervention of a notary public

RIGHT OF PLEDGEE TO APPROPRIATE THING PLEDGED > Serves as an exception to the prohibition on pactum commissorium > The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is not sold > If the creditor appropriates the thing, it shall be considered as full payment of his entire claim—he is thus obliged to an acquittance for the same. The debtor is not entitled for the excess in case the value of the thing pledged is more than the principal obligation.

RIGHT OF PLEDGOR AND PLEDGEE TO BID AT PUBLIC SALE

Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n) RIGHT OF PLEDGOR AND PLEDGEE TO BID AT PUBLIC SALE To avoid fraud, the pledgee is not allowed to acquire the thing pledged if he is the only bidder

IN PLEDGE, BID MUST BE FOR CASH

Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n)

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EFFECT OF SALE OF THING PLEDGED

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. (n) 1. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess unless the contrary is provided 2. If the price of sale is less, neither is the creditor entitled to recover the deficiency a. The reason is to compel the creditor to hold an honest public sale b. Creditor should realize the loans only as much as he is likely to realize at a public sale

RIGHT OF DEBTOR TO EXCESS

> GENERAL RULE—the debtor is not entitled to the excess unless there is an agreement to the contrary > To compensate the creditor for his risk of not being able to recover the deficiency in case the thing pledged is sold below the amount of the principal obligation

PLEDGE

(ARTICLES 2085-2123)

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857)

Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n)

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858)

PLEDGE> Contract by virtue of which the debtor delivers to the creditor or to a third person a movable, or document evidencing incorporeal rights, for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions

KINDS OF PLEDGE1. Voluntary or conventional2. Legal

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REQUISITES TO A CONTRACT OF PLEDGE

1. It be constituted to secure the fulfillment of a principal obligation2. The pledgor be the absolute owner of the thing pledged3. That the persons constituting the pledge have the free disposal of the property and in the absence thereof, that they be legally authorized for the purpose4. The pledge is perfected by the delivery of the thing pledged5. When the principal obligation becomes due, the things, which the pledge consists, may be alienated for the payment of the creditor.

CHARACTERISTICS OF A CONTRACT OF PLEDGE

1. Real contract—perfected by the delivery of the things pledged by the debtor who is called the pledgor to the creditor who is called by the pledgee, or to a third person by common agreement2. Accessory contract3. Unilateral contract4. Subsidiary contract

WHAT IS THE CAUSE OR CONSIDERATION IN PLEDGE?

> Pledge is an accessory contract > Its cause is the principal obligation

CONSTITUTED TO SECURE THE FULFILLMENT OF THE PRINCIPAL OBLIGATION

CONSTITUTED BY THE ABSOLUTE OWNER

1. Future property cannot be the subject of a pledge or mortgage2. A pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it3. Share in a co-ownership—shall be limited to the portion which may be alienated by him in the division upon the termination of the co-ownership

What is the absolute owner? It means unencumbered property. The absolute owner has legal and beneficial ownership. In the earlier example, P is the legal owner and S is the beneficial owner. This being the case, neither of them can pledge the property.

WHAT IS THE DIFFERENCE BETWEEN FREE DISPOSAL AND CAPACITY TO DISPOSE?

> FREE DISPOSAL OF THE PROPERTY—property must not be subject to any claim of a third person> CAPACITY TO DISPOSE—pledgor or mortgagor has the capacity or authority to make a disposition of the property

THING PLEDGED OR MORTGAGED MAY BE ALIENATED

> Necessarily implied as an inherent element of the transaction of the mortgage or pledge> The only remedy for the pledgee is to have the security given sold at public auction and the proceeds of the sale be applied to the payment of the obligation secured by the mortgage or pledge

PLEDGOR OR MORTGAGOR MAY BE A THIRD PERSON

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1. Accommodation pledge or mortgage2. Duty of mortgagee to make proper inquiry3. Where mortgage is gratuitous—same should be strictly construed4. Liability for deficiency—pledgor not liable for any deficiency should the property be not sufficient to cover the debt

RIGHT OF CREDITOR WHERE DEBTOR FAILS TO COMPLY WITH HIS OBLIGATION IN PLEDGE

1. If the debtor fails to comply with the obligation at the time it falls due, the creditor is merely entitled to move for the sale of thing pledged 2. The creditor cannot appropriate himself without foreclosure the thing pledged as pledge or under mortgage nor can he dispose of the same as owner

RISK OF LOSS OF PROPERTY PLEDGED OR MORTGAGED

> Debtor-owner bears the loss of the property > The principal obligation is not extinguished upon the loss of the thing pledged or mortgaged

PLEDGE OR MORTGAGE INDIVISIBLE, EXCEPTIONS

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860) Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n)

PLEDGE OR MORTGAGE INDIVISIBLE

> Rule applies even if the obligation is joint and not solidary > The divisibility of the principal obligation doesn't affect the indivisibility of the mortgage or pledge

EXCEPTIONS TO THE RULE OF INDIVISIBILITY

1. Where each one of several things guarantees determinate portions of credit 2. Where only a portion of the loan was released 3. Where there was failure of consideration 4. Where there is no debtor-creditor relationship

FORECLOSURE OF MORTGAGE CONSTITUTED ON SEVERAL PROPERTIES

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> A mortgage even constituted on several properties is one and indivisible, that is, it cannot be divided among the several properties and the mortgagee has the right to have the properties either or both, jointly or singly, sold to satisfy his claim > Further, the sale of the mortgaged properties cannot be set aside in the absence of evidence to show that a better price could have been obtained if they were sold separately, or the sale of one or some alone would bring sufficient proceeds to satisfy the mortgage credit

ALL KINDS OF OBLIGATIONS, WHETHER PURE OR CONDITIONAL, CAN BE SECURED BY PLEDGE OR MORTGAGE

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

PROMISE TO CONSTITUTE PLEDGE OR MORTGAGE CREATES NO REAL RIGHT

Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862)

> A promise to constitute a pledge or mortgage only gives rise to a personal right> What exists only is the right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet

TRANSFER OF POSSESSION ESSENTIAL IN PLEDGE

Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (1863) > An agreement to constitute a pledge only gives rise to a personal action between the contracting parties > Unless the movable given as security is delivered and placed in the possession of the creditor or third person designated by the parties, the creditor acquires no real right to the property because pledge is merely a lien or encumbrance indispensable to the right of lien > Without delivery there can be no pledge

TYPE OF DELIVERY DEPENDS UPON NATURE OF THING PLEDGED

> Actual delivery—there should be actual possession of the property pledged > But it was held in an earlier case that the symbolic transfer of the goods is acceptable when the owner of the property could no longer dispose of the goods, the pledgee being the only one authorized to do so

Art. 2094. All movables, which are within commerce, may be pledged, provided they are susceptible of possession. (1864) Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (n) SUBJECT MATTER OF PLEDGE Confined and limited to personal property and it cannot be extended to real property Incorporeal rights evidenced by documents whether negotiable or not may also be pledged

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IN PLEDGE, PUBLIC INSTRUMENT NECESSARY TO BIND THIRD PERSONS

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (1865a)

PUBLIC INSTRUMENT NECESSARY TO BIND THIRD PERSONS

1. CONTENTS OF PUBLIC INSTRUMENT a. The pledge is not binding against third persons unless in addition to delivery of the thing pledged, it is embodied in a public instrument b. Description of the thing pledged; and the date of pledge 2. OBJECT OF THE REQUIREMENT—to forestall fraud, because a debtor may attempt to conceal his property from his creditors when he sees it in danger of execution by simulating a pledge thereof with an accomplice

THE DATE OF THE PLEDGE IS RELEVANT TO KNOW IF THERE IS VALID CONSIDERATION IN THE FIRST PLACE.

WHAT IS A PUBLIC INSTRUMENT? The pledge contract should be the one in the public instrument, acknowledged by the notary public What if there is litigation ensued and the pledge is not in a public instrument? Is this binding upon the court? No, it is not. There should be payment of documentary stamp tax.

ALIENATION BY THE PLEDGOR OF THE THING PLEDGED

Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. (n) > Remember that the pledgor retains ownership over the thing pledged > As soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to the vendee subject to the rights of the pledgee, namely—that the thing sold may be alienated to satisfy the obligation; and that the pledgee must continue in possession during the existence of the pledge

THE PLEDGEE IS CONCERNED WITH THE TRANSFER OF ONWERSHIP BECAUSE AS PLEDGEE, HE WOULD WANT TO LIMIT THE ENTANGLEMENTS.

RIGHT OF PLEDGEE TO RETAIN THE THING PLEDGED

Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid. (1866a)

> This right is limited only to the fulfillment of the principal obligation for which the pledge was created

RIGHT OF PLEDGEE TO COMPENSATE EARNINGS OF PLEDGE WITH DEBT

> The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner > The pledgee can apply the fruits, income, dividends, or interests earned or produced by the thing pledged to the payment of interest, if owing, and thereafter to the principal of his credit > Unless there is stipulation to the contrary, the interest and earnings of the right pledged and in case of animals, their offsprings, are included in the pledge

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OBLIGATION OF PLEDGEE TO TAKE DUE CARE OF THE THING PLEDGED

Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this Code. (1867) > Upon fulfillment of the principal obligation, the pledgee must return the thing pledged > Having possession of the property, he has the obligation to take care of the same with the diligence of a good father of the family > In case of loss or deterioration of the thing pledged due to a fortuitous event, the pledgee cannot be held responsible but he is liable for loss or deterioration by reason of fraud, negligence, or violation of the terms of the contract

EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR

Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter. The indemnity comprises: (1) The total amount of the debt; (2) The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor; (3) The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; (4) Damages, if they are due. (1838a)

EXCEPTIONS TO THE RIGHT TO INDEMNITY AND/OR REIMBURSEMENT

1. Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor 2. Payment by a third person who doesn’t intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the consent of the debtor. But the payment is in any case valid as to the creditor who has accepted it. 3. The right to demand reimbursement is subject to waiver.

BENEFIT OF DIVISION AMONG SEVERAL GUARANTORS

1. In whose favor applicable—several guarantors of only one debtor and for the same debt2. Extent of liability of several guarantors—joint liability to answer for the debt that is divided among them 3. Exception: when solidarity has been stipulated among themArt. 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares, which they are respectively bound to pay, unless solidarity has been expressly stipulated. The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. (1837)

THE GUARANTOR MAY BE ENTITLED TO THE BENEFIT OF DIVISION WITHOUT THE REQUIREMENT THAT HE POINT OUT THE PROPERTY OF HIS CO-GUARANTORS

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> Obligation with the co-guarantors is not subsidiary but direct and doesn’t depend as to its origin on the solvency or insolvency of the latter, although afterwards, if one of them should turn out to be insolvent, his share shall be born by the others

GUARANTOR’S RIGHT TO SUBROGATION

1. Accrual, basis and nature of right a. It arises by operation of law upon payment of the guarantor b. It is not a contractual right c. The guarantor is subrogated by virtue of the payment to the rights of the creditor2. When right not available—it cannot be invoked in those cases where the guarantor has no right to be reimbursedArt. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights, which the creditor had against the debtor. If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. (1839)

SUBROGATION

> Transfers to the person subrogated, the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in conventional subrogation

EFFECT OF PAYMENT BY GUARANTOR WITHOUT NOTICE TO DEBTOR

Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. (1840) > If the debtor has already paid the creditor and the guarantor pays, the debtor can set up against the guarantor the defenses of previous extinguishment of the obligation by payment > The guarantor cannot be allowed through his own fault or negligence to prejudice or impair the rights or interests of the debtor

EFFECT OF REPEAT PAYMENT BY DEBTOR

Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. (1842a)

> GENERAL RULE—before the guarantor pays the creditor, he must first notify the debtor. If he fails to notify and the debtor repeats the payment, the guarantor’s only remedy is to collect from the creditor but he has no cause of action from the debtor. > EXCEPTION: o Creditor becomes insolvent o The guarantor was prevented by fortuitous event to advise the debtor of the payment o The guaranty is gratuitous

EFFECT OF PAYMENT BY GUARANTOR BEFORE OR AFTER MATURITY

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Art. 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor. (1841a)

1. If principal obligation is with a period, it becomes demandable only when the day fixed comes. The guarantor cannot demand reimbursement if he pays before maturity since there is no necessity to accelerate payment.

2. It would be different though if the debtor consented to the payment or subsequently ratifies it. The guarantor may not demand reimbursement from the debtor.

3. What is controlling is that the default or demand on guarantor had taken place while the guarantee is still in force—when the payment was made during the term of the guarantee.

Guarantor May Proceed Against Principal Debtor

Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:

(1) When he is sued for the payment;(2) In case of insolvency of the principal debtor;(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;(4) When the debt has become demandable, by reason of the expiration of the period for payment;(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years;(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. (1834a)>>AS A GENERAL RULE, THE GUARANTOR HAS NO CAUSE OF ACTION AGAINST THE DEBTOR UNTIL AFTER THE FORMER HAS PAID THE OBLIGATION. NONETHELESS, THE 7 AFOREMENTIONED ARE INSTANCES WHEN THE GUARANTOR CAN PROCEED AGAINST THE DEBTOR REMEDY TO WHICH GUARANTOR ENTITLED

*Alternative remedies1. Release from the guaranty2. Demand a security that shall protect him from any proceeding

EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS

Art. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share, which is proportionally owing from him. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion. The provisions of this article shall not be applicable, unless the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent. (1844a)

REQUISITES BEFORE THIS ARTICLE APPLIES

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1. Payment has been made by virtue of a judicial demand 2. Or because the principal debtor is insolvent

EXTINGUISHMENT OF GUARANTY

Art. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. (1847) CAUSES OF EXTINGUISHMENT OF GUARANTY 1. Being subsidiary and accessory, it is also terminated when the principal obligation is extinguished 2. It may itself be extinguished directly although the principal obligation subsists such as in the case of the release of the guarantor by the creditor

MATERIAL ALTERATION OF PRINCIPAL CONTRACT

1. Effect of material alteration—any agreement between the creditor and principal debtor which essentially varies the terms of the principal contract without the consent of the surety will release the surety from liability 2. When alteration is material—the guarantor may not be released if the change doesn’t have the effect of making its obligation more onerous. There must be change which imposes new obligation or added burden to the party promising or which takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof.Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. (1849)

RELEASE BY CONVEYANCE OF PROPERTY

Any substitute paid in lieu of money which is accepted by the creditor extinguishes the obligation and in consequence, the guaranty Art. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. (1850) Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. (1851a)

RELEASE BY EXTENSION OF TERM GRANTED BY CREDITOR TO DEBTOR

1. Where the release without consent of guarantor—guarantor is released from his undertaking 2. Where obligation payable in installments—where a guarantor is liable for several payments, such as installments, an extension of time as to one or more will not affect the liability of the surety for the others. But in case of an acceleration clause, the act of the creditor of extending payment of said installment without guarantor’s consent, discharges the guarantor because this constitutes an extension of the principal obligation. 3. Prejudice to guarantor and period of extension is immaterial 4. Extension must be based on new agreement 5. Diligence on the part of the creditor to enforce his claim Art. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter.

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(1852) Art. 2081. The guarantor may set up against the creditor all the defenses, which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor. (1853)

LEGAL AND JUDICIAL BONDS

Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in Article 2056 and in special laws. (1854a) BOND > An undertaking that is sufficiently secure, and not cash or currency Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof. (1855)

Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor. A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety. NOTA BENE: the only important thing in legal and judicial bonds is that it is a surety, it is not entitled to the benefit of excussion.

OBLIGATIONS OF THE BAILEE

Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a) Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745) Art. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. (1746) Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. (1747a) Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (1748a)

OBLIGATIONS OF THE BAILEE

1. The bailee is liable for ordinary expenses—the borrower should defray the expenses for the use and preservation of the thing loaned for after all, he acquires the use of the same and he is supposed to

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return the identical thing 2. The borrower must take good care of the thing with the diligence of a good father of a family (due diligence) 3. Generally, the borrower would not be liable for the loss of a thing due to a fortuitous event but he would be liable in case of the following circumstances: a. If he devotes the thing to any purpose different from that for which it has been loaned; b. If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; c. If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; d. If he lends or leases the thing to a third person, who is not a member of his household; e. If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (JPSP: should be considered as an exemption. This is actually based on ingratitude. Nonetheless, this provision tends to control one’s instinct for self-preservation) 4. The bailee is not liable for the deterioration of the thing loaned due only to the use thereof and without his fault 5. He cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be for the reason of expenses. He can have the right to retain though for damages as mentioned in Article 1951—“The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof”. 6. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily to the bailor a. To safeguard effectively the rights of the lender b. Law presumes that the bailor takes into account the personal integrity and responsibility of all the bailees and that, therefore, he would not have constituted the commodatum is there were only one liable

OBLIGATIONS OF THE BAILOR

1. The primary obligation of the bailor is to allow the bailee the use of the thing loaned for the duration of the period stipulated or until the accomplishment of the purpose for which the commodatum was constituted a. However, the lender may demand its return or temporary use if he has the urgent need of the thing or if the borrower commits an act of ingratitude 2. PRECARIUM: a kind of commodatum where the bailor may demand the thing at will. In this kind of commodatum, the lender may demand at will the return of thing under the following circumstances: a. If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or b. If the use of the thing is merely tolerated by the owner. c. the law recognizes the urgency as well as it is gratuitous. d. Take note that in precarium, there is no stipulated period or the use is merely tolerated 3. He may demand the immediate return of the thing if the bailee commits any act of ingratitude a. If the bailee should commit some offenses against the person, honor or the property of the bailor, or of his wife, and children under his parental authority b. If the bailee imputes to the bailor any criminal offense or any act involving moral turpitude, even though he should prove it, unless the crime or act has been committed against himself, his wife and children under his authority c. If the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support 4. He has the obligation to refund extraordinary expenses for the preservation of the thing loaned—it is him who profits from the said expenses anyway. a. As a rule, notice is required because it is possible that the bailor may not want to incur the extraordinary expenses at all b. An exception of course is where there is urgency that the reply to the notification cannot be awaited

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without danger c. you have to determine if its ordinary or extraordinary d. why would you advance for the extraordinary expenses when you can return the thing and make the lender pay for the expenses? 5. Regarding, extraordinary expenses arising from the actual use of the thing, the division of liability between the bailor and bailee is 50-50. This is the default rule but the parties may stipulate for a different apportionment. 6. For expenses other than ordinary expenses and expenses for the preservation and use of the thing, the bailor is not liable for the same. 7. He is liable to the bailee for damages in case he has knowledge of flaws of the thing loaned, and he didn't advise the bailee of the same a. There is flaw or defect in the thing loaned b. The flaw or defect is hidden c. The bailor is aware thereof d. He doesn't advise the bailee of the same e. The bailee suffers damages by reason of the said flaw or defect 8. He cannot excuse himself from liability for any expense or damages by abandoning the thing to the bailee

SIMPLE LOAN OR MUTUUM

Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay the creditor an equal amount of the same kind and quality

SIMPLE LOAN OR MUTUUM

> Contract whereby one of the parties delivers to another money or another consumable thing with the understanding that the same amount of the same kind and quality shall be paid > It involves the return of the equivalent only and not the identical thing because the borrower acquires ownership thereof OBLIGATION OF DEBTOR IS TO PAY > The law uses the word to pay and the word return > The consumption of the thing loaned is the distinguishing character of the contract of mutuum from that of commodatum > The promise of the borrower to pay is the consideration for the obligation of the lender to furnish the loan > A loan is a bilateral contract

NO ESTAFA IS COMMITTED BY A PERSON WHO REFUSES TO PAY HIS DEBT OR DENIES ITS EXISTENCE

> The borrower acquires ownership > Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered as appropriation thereof

FUNGIBLE THINGS

> Are those which are usually dealt with by number, weight, or measure

DISTINCTION BETWEEN FUNGIBLE AND CONSUMABLE THINGS

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> Whether a thing is consumable or not depends upon its nature > Whether a thing is fungible or not depends upon the intention of the parties

BARTER OR CONTRACT OF EXCHANGE

Article 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter.

> One of the parties binds himself to give one thing in consideration of the other’s promise to give another thing

FORM OF PAYMENT

1. LOAN OF MONEY—if the thing loaned is money, payment must be made in the currency stipulated, if it is possible to deliver such currency; otherwise it is payable in the currency which is legal tender in the Philippines and in case of extraordinary inflation or deflation, the basis of payment shall be the value of the currency at the time of creation of the obligation a. Coins 25 cents and below: up to P100 is legal tender b. Coins above 25 centavos: up to P1000 is legal tender (according to BSP Circular of 2007 Series 6) 2. LOAN OF FUNGIBLE THINGS—if what was loaned is a fungible thing other than money, the borrower is under the obligation to pay the lender another thing of the same kind, quality, and quantity.

EQUISITES FOR RECOVERY OF INTEREST 1. The payment of interest must be expressly stipulated 2. The agreement must be in writing 3. The interest must be lawful EXISTENCE OF STIPULATION TO PAY INTEREST 1. If a particular rate of interest has been expressly stipulated by the parties, that interest, and not the legal rate of interest, shall be applied 2. If the exact rate of interest is not mentioned, the legal rate of 12% shall be payable 3. No increase in interest shall be due unless such increase has also been expressly stipulated 4. It is only in contracts of loan, with or without security, that interest may be stipulated and demanded. 5. The receipt of the creditor of interest payment up to a certain date of a loan that has already matured does not ipso facto result in the renewal or extension of maturity period of the loan up to said date. 6. Stipulation of interest must be mutually agreed upon by the parties and may not be unilaterally increased by only one of the parties. This would violate consensuality and mutuality of contract (PNB v. CA). But the parties can agree upon a formula for determining the interest rate, over which neither party has control (ex: interest will be adjusted quarterly at a rate of 3% plus the prevailing 91-day T-bill rate, etc.). But if the formula says “interest will be based on T-bill rates and other interest-setting policies as the bank may determine,” this is not valid. ESCALATION CLAUSE Clause which authorizes the automatic increase in the interest An escalation clause is valid when it is accompanied by a De-Escalation Clause. A de-escalation clause is a clause, which provides that the rate of interest agreed upon will also be automatically reduced. There must be a specified formula for arriving at the adjusted interest rate, over which neither party has any discretion. LIABILITY FOR INTEREST EVEN IN THE ABSENCE OF STIPULATION 1. Indemnity for damages—the debtor in delay is liable to pay legal interest as indemnity for damages even in the absence of stipulation for the payment of interest

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a. Rate of penalty interest agreed upon b. Interest cannot be recovered upon unliquidated claims or damages except when the demand can be established with reasonable certainty c. In the absence of express agreement as to the rate of interest, CB Circular #416 fixes the interest at 12% per annum for loans, forbearance, goods and credits; and judgments involving such loans and forbearance d. Interest as indemnity for damages is payable only in case of default or non-performance of the contract 2. Interest accruing from unpaid interest—interest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point

WHEN UNPAID INTEREST EARNS INTEREST

1. When JUDICIALLY DEMANDED 2. When there is EXPRESS STIPULATION made by the parties to wit: a. That the interest due an unpaid shall be added to the principal obligation and the resulting total amount shall earn interest b. Practice called COMPOUNDING INTERES

WHAT IS A TREASURY BILL?

It is an instrument issued by the government when it borrows money. This is used to establish the market rate. The Treasury bill rate is used because generally, the government is thought to be risk-free.

Article 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. RECOVERY OF UNSTIPULATED INTEREST PAID This article means that if unstipulated interest is paid by mistake, the debtor may recover as this would be the case of solutio indebiti or undue payment But where the unstipulated interest, or stipulated interest, there being a stipulation but not in writing, is paid voluntarily, the debtor feels morally obliged to do so, there can be no recovery as in the case of natural obligations

Article 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code.

WHY SHOULD THERE BE A PROVISION ON THE PURPOSE WHEN IT IS ONLY THE CONCERN OF THE BORROWER?

It is the risk-management tool of the lender. The lender wants control. They want it to go the business or stated purpose. This is one way of ensuring payment.

WHAT IS A COMMITMENT FEE?

The bank being part of the syndicate, you have to pay the fee. This is similar with the participation fee.

WHAT IS THE CLAUSE WHEREIN THE BORROWER WOULD SHOULDER ALL FEES? AN EXAMPLE OF THIS IS FUNDING AND YIELD PROTECTION.

This is to ensure that the banks would profit from the loan agreement.

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DRAWDOWN DATE

Date of giving of the money.

WHY IS THE TREASURY BILL RATE DENOMINATED AS 91-DAY, 182-DAY…?

It is because it is divisible by 7 and in a public auction, it would fall on a business day. Another trivia, if it is for more than one year, it is called Treasury Bonds. If it is longer than that, it is called Cash Management Bonds.

GUARANTY AND SURETYSHIP

(ARTICLES 2047 TO 2084) NATURE AND EXTENT OF GUARANTY

Article 2047. By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case, the contract is called a suretyship.

GUARANTY

> Contract between the guarantor and creditor > In a broad sense, it includes pledge and mortgage because the purpose of guaranty may be accomplished not only by securing the fulfillment of an obligation contracted by the principal debtor through the personal guaranty of a third person but also by furnishing to the creditor for his security, property with authority to collect the debt from the proceeds of the same in case of default.

CHARACTERISTICS OF A GUARANTY

1. Accessory—because it is dependent for its existence upon the principal obligation guaranteed by it 2. Subsidiary and conditional—it takes effect only when the principal debtor fails in his obligation subject to limitation 3. Unilateral— a. Gives rise only to the duty on the part of the guarantor in relation to the creditor and not vice versa b. It may be entered into even without the intervention of the principal debtor 4. Contract, which requires that the guarantor be a distinct person from the principal debtor because a person cannot be the personal guarantor of himself

CLASSIFICATION OF GUARANTY

1. Guaranty in the broad sense— a. Personal—guaranty properly so-called or guaranty in the strict sense. The guarantee given is the credit given by the person who guarantees the fulfillment of the principal obligation. b. Real—the guaranty is property, movable or immovable 2. As to its origin a. Conventional b. Legal c. Judicial

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3. As to consideration a. Gratuitous b. Onerous 4. As to persons guaranteed a. Single b. Double or sub-guaranty—one constituted to secure the fulfillment of a guarantee in another guaranty 5. As to its scope and extent a. Definite—one where the guaranty is limited to the principal obligation only, or to a specific portion thereof b. Indefinite or simple—one where the guaranty includes not only the principal obligation but also all its accessories

SURETYSHIP

> A relation which exists where one person has undertaken an obligation and another person is also under a direct and primary obligation or other duty to a third person, who is entitled to but one performance, and as between the two who are bound, the one rather than the other should perform > Contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for a debt, default, miscarriage of another known as the principal

LAW APPLICABLE TO SURETYSHIP

> Second paragraph > It covers OBLIGATIONS, DIFFERENT KINDS OF OBLIGATIONS, JOINT AND SOLIDARY OBLIGATIONS, OBLIGATIONS AND CONTRACTS > If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is called the SURETY

DIFFERENCE BETWEEN PASSIVE SOLIDARITY (SOLIDARITY AMONG DEBTORS) AND SURETYSHIP

The two are SIMILAR in the following ways:

1. A solidary debtor, like a surety, STANDS FOR SOME OTHER PERSON. 2. Both debtor and surety, after payment, may require that they be REIMBURSED. The difference is that the lender cannot go after the surety right away. There has to be default on the part of the principal debtor before the surety becomes liable. If it were mere solidarity among debtors, the creditor can go after any of the solidary debtors on due date.

NATURE OF A SURETY’S UNDERTAKING

1. CONTRACTUAL AND ACCESSORY BUT DIRECT—The contractual obligation of the surety is merely an accessory or collateral to the obligation contracted by the principal. BUT, his liability to the creditor is direct, primary, and absolute. 2. LIABILITY IS LIMITED BY THE TERMS OF THE CONTRACT—The extent of a surety’s liability is determined only by the terms of the contract and cannot be extended by implication. 3. LIABILITY ARISES ONLY IF PRINCIPAL DEBTOR IS HELD LIABLE—If the principal debtor and the surety are held liable, their liability to pay the creditor would be solidary. But, the surety does not incur liability unless and until the principal debtor is held liable. a. A surety is bound by a judgment against the principal even though the party was not a party to the proceedings. b. The creditor may sue, separately or together, the principal debtor and the surety (since they are

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solidarily bound). c. Generally, a demand or notice of default is not required to fix the surety’s liability. d. An accommodation party (one who signs an instrument as maker, drawer, acceptor, or indorser without consideration and only for the purpose of lending his name) is, in effect, a surety. He is thus liable to pay the holder of the instrument, subject to reimbursement from the accommodated party.e. A surety bond is void where there is no principal debtor. 4. SURETY IS NOT ENTITLED TO EXHAUSTION—A surety is not entitled to the exhaustion of the properties of the principal debtor since the surety assumes a solidary liability for the fulfillment of the principal obligation. 5. THE UNDERTAKING IS TO THE CREDITOR, NOT TO THE PRINCIPAL DEBTOR—The debtor cannot claim that the surety breached its obligation to pay for the principal obligation because there is no obligation as between the surety and the debtor. If the surety does not pay, the principal debtor is still not relieved of his obligation. 6. SURETY NOT ENTITLED TO NOTICE OF PRINCIPAL’S DEFAULT—the surety is bound to take notice of the principal’s default to perform the obligation 7. PRIOR DEMAND BY THE CREDITOR UPON PRINCIPAL NOT REQUIRED—the right of the creditor to proceed against the surety alone exists independently of his right to proceed against the principal where both surety and principal are equally bound 8. SURETY IS NOT EXONERATED BY NEGLECT OF ANOTHER TO SUE PRINCIPAL—mere want of diligence or forbearance doesn’t affect the creditor’s rights vis-à-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. The raison d’etre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time

GUARANTY GENERALLY GRATUITOUS

Article 2048. A guaranty is gratuitous unless there is a stipulation to the contrary. > General rule: a guaranty is gratuitous > Except when there is a stipulation to the contrary

WHAT IS THE CAUSE OF A CONTRACT OF GUARANTY?

1. Presence of cause which supports principal obligation 2. Absence of direct consideration or benefit to the guarantor

GUARANTY UNDERTAKEN WITHOUT KNOWLEDGE OF DEBTOR / WIFE

Art. 2049. A married woman may guarantee an obligation without the husband’s consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. (n) Art. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of Articles 1236 and 1237 shall apply. (n) GUARANTY UNDERTAKEN WITHOUT KNOWLEDGE OF DEBTOR Always remember that a guaranty is unilateral. It exists for the benefit of the creditor and not for the benefit of the debtor. The creditor obviously has every right to take all possible means to secure the payment of his credit WHAT THEN IS THE RIGHT OF A THIRD PERSON WHO PAYS? Remember the rules on payment. A person who pays without the knowledge or against the will of the debtor can recover only insofar as the payment has been beneficial to the debtor AND he cannot demand the creditor to subrogate him into his rights

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http://www.batasnatin.com/law-library/civil-law/obligations-and-contracts/764-guaranty-undertaken-without-knowledge-of-debtor--wife.html

If he becomes the guarantor with the knowledge and consent of the debtor, he is subrogated by virtue thereof to all the rights which the creditor has against the debtor

A Guaranty May Be Conventional, Legal or Judicial, Gratuitous, or by Onerous Title

Conventional Guaranty, Legal Guaranty or Judicial Guaranty, Gratuitous Guaranty, or Guaranty by Onerous Title

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 principal debtor, but also in favor of the other guarantor, with the latter’s consent, or without his knowledge, or even over his objection. (1823) Art. 2052. A guaranty cannot exist without an valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824a) GUARANTY IS AN ACCESSORY CONTRACT > It is indispensable for its existence that there must be a principal obligation > So if the principal obligation is void, it follows that it is also void

A GUARANTY MAY SECURE THE PERFORMANCE OF

1. A voidable contract inasmuch as such contract is binding unless it is annulled by a proper action in court 2. An unenforceable contract because contract is not void 3. A natural obligation so that the contract may proceed against the guarantor although he has no right of action against the principal debtor for the reason that the latter’s obligation is not civilly enforceable

CONTINUING GUARANTY OR SURETYSHIP

Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a)> One which isn’t limited to a single transaction but which contemplates a future course of dealings, covering a series of transactions generally for an indefinite time or until revoked > Prospective in its operations and is generally intended to provide security with respect to future transactions > Future debts, even if the amount is not yet known, may be guaranteed but there can be no claim against the guarantor until the amount of the debt is ascertained or fixed and demandable > Take note however that the abovementioned provision may be misleading in sanctioning guarantees for future debts. What should be bore in mind is that there is already an existing obligation that is being guaranteed. The guaranty would be void if there is no existing obligation.

HOW ABOUT GUARANTY OF CONDITIONAL OBLIGATIONS

> If the principal obligation is subject to a suspensive condition, the guarantor is liable only after the fulfillment of the condition > If it is subject to a resolutory condition, the happening of the condition extinguishes both the principal obligation and the guaranty

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THE GUARANTOR’S LIABILITY CANNOT EXCEED PRINCIPAL OBLIGATION

Art. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. (1826) 1. Guaranty is a subsidiary and accessory contract—the guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor 2. Interest, judicial costs, attorney’s fees as part of the damages may be recovered a. The surety is made to pay not by reason of the contract but by reason of his failure to pay when demanded and for having compelled the creditor to resort to the courts to obtain payment b. Interest doesn’t run from the time the obligation becomes due but from the filing of the complaint 3. Penalty may be provided

GUARANTY IS NOT PRESUMED

Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. (1827a) > Requires the expression of consent on the part of the guarantor to be bound > It cannot be presumed because of the existence of a contract or principal obligation > Why this rule? The law wants not only that there be assurance that the guarantor has the true intention to bind himself but also to make certain that on making it, he proceeded with consciousness of what he was doing

GUARANTY IS COVERED BY THE STATUTE OF FRAUDS

> A guaranty must not only be expressed but must also be reduced to writing > Falls under the Statute since it is a special promise to answer for the debt, default or miscarriage of another

A GUARANTY IS STRICTLY CONSTRUED

> It has to be strictly interpreted against the creditor and in favor of the guarantor and isn’t to be extended beyond its terms or specified limits > The rule of strictissimi juris commonly refers to an accommodation party. Why? An accommodation surety acts without motive of pecuniary gain and hence, should be protected against unjust pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. Take note further that this rule only applies once it is established that the contract is one of suretyship or guaranty.

IS A STIPULATION THAT SAYS THAT THE GUARANTY WILL SUBSIST ONLY UNTIL MATURITY OF THE OBLIGATION VALID?

> Generally, no. Such a stipulation would defeat the purpose of a guaranty, which is to answer for the default of the principal debtor. If the guaranty is only up to the date of maturity, there is no way that the guarantor can be liable since default comes only at maturity date.

EXTENT OF GUARANTOR’S LIABILITY

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1. DEFINITE GUARANTY—limited in whole or in part to the principal debt, to the exclusion of the accessories. If the amount to be paid or the service to be performed by the person guaranteed is specified in a contract of guaranty, then the obligation of the guarantor extends no further than the sum or services so specified, and extrinsic facts cannot be resorted to for the purpose of enlarging the limit if the guarantor was ignorant of such facts. 2. INDEFINITE GUARANTY OR SIMPLE GUARANTY—it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

Reason: the guarantor in entering into the contract could have fixed the limits of his responsibility solely to the strict terms of the principal obligation and if he didn’t do so, it must be presumed that he wanted to be bound to the extent so established

ACCEPTANCE OF GUARANTY BY CREDITOR AND NOTICE THEREOF TO GUARANTOR

GENERAL RULE: It is not necessary for the CREDITOR to expressly accept the contract of guaranty since the contract is unilateral; only the guarantor binds himself to do something. EXCEPTION: If the guarantor merely offers to become a guaranty, it does not become a binding obligation unless the creditor accepts and notice of acceptance is given to the guarantor. On the other hand, if the guarantor makes a direct or unconditional promise of guaranty (and not merely an offer), there is no need for acceptance and notice of such acceptance from the creditor.

WHAT ARE THE QUALIFICATIONS OF A GUARANTOR?

1. He possesses integrity

2. He has the capacity to bind himself

3. He has sufficient property to answer for the obligation which he guarantees

EFFECT OF SUBSEQUENT LOSS OF REQUIRED QUALIFICATIONS

> Qualifications need only be present at the time of the perfection of the contract

> The creditor may however demand another guarantor with the proper qualifications but he may waive it if he chooses and hold the guarantor to his bargain

> Note in Article 2057 that it requires conviction for a crime involving dishonesty, but a judicial declaration of insolvency is not necessary in order for the creditor to have the right to demand another guarantor

SELECTION OF GUARANTOR

1. Specified person stipulated as guarantor—where the creditor has required and stipulated that a specific person should be a guarantor, the substitution of a guarantor may not be demanded because obviously, in such a case, the selection of the guarantor is a term of the agreement and the creditor is bound thereby as a party

2. Guarantor selected by the principal debtor—the debtor answers for the integrity, capacity and solvency of the former

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3. Guarantor personally designated by the creditor—the responsibility should fall upon the creditor and not on the debtor

RIGHT OF GUARANTOR TO BENEFIT OF EXCUSSION OR EXHAUSTION

1. Guarantor is only secondarily liable 2. All legal remedies against debtor to be first exhausted

RIGHT OF CREDITOR TO SECURE JUDGMENT AGAINST GUARANTOR PRIOR TO EXHAUSTION

> As a rule, an ordinary personal guarantor may demand exclusion of all the property of debtor before he can be compelled to pay > The creditor however may secure prior thereto a judgment against the guarantor, who shall be entitled to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been first exhausted to satisfy the latter’s obligation

EXCEPTIONS TO THE BENEFITS OF EXCUSSION

1. If the guarantor has expressly renounced it;

2. If he has bound himself solidarily with the debtor;

3. In case of insolvency of the debtor;

4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;

5. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation.

6. If he doesn’t comply with Article 2060

7. If he has a judicial bondsman and sub-surety

8. Where a pledge or mortgage has been given by him as special security

9. If he fails to interpose it as a defense before judgment is rendered against him

DUTY OF CREDITOR TO MAKE PRIOR DEMAND FOR PAYMENT FROM GUARANTOR

Art. 2060. In order that the guarantor may make use of the benefit of exclusion, he must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. (1832)

Art. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. (1833a)

1. When demand to be made—only after judgment on the debt for obviously the exhaustion of the principal’s property cannot even being to take place before judgment has been obtained

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2. Actual demand has to be made—the fact that the guarantor was joined in a suit against the principal debtor necessarily means that a demand has already been made upon him

DUTY OF THE GUARANTOR TO SET UP BENEFIT OF EXCUSSION

> It isn’t enough that the guarantor claims the benefit of excussion

> As soon as he is required to pay, he must also point out to the creditor available property of the debtor within the Philippines

DUTY OF CREDITOR TO RESORT TO ALL LEGAL REMEDIES

> Failure to comply with duty of creditor would mean that he would suffer the loss but only to the extent of the value of said property, for the insolvency of the debtor

JOINDER OF GUARANTOR AND PRINCIPAL AS PARTIES DEFENDANT

> The GENERAL RULE is that the guarantor, not being a joint contractor with the principal, cannot be sued with his principal

> EXCEPTION: not required when it would serve merely to delay the ultimate accounting of the guarantor

PROCEDURE WHEN CREDITOR SUES IN A GUARANTY

Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in Article 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. (1834a)

PROCEDURE WHEN CREDITOR SUES

1. SENT AGAINST PRINCIPAL—the creditor must sue the principal alone. The guarantor cannot be sued together with his principal except when the guarantor is not entitled to the benefit of excussion.

2. NOTICE TO GUARANTOR OF THE ACTION—the guarantor must be notified so that he may appear, if he so desires, and set up the defenses he may want to offer a. If the guarantor appears, he is still given the benefit of excussion even if judgment is rendered against him and the principal debtorb. If he doesn’t appear, he cannot set up the defenses which, by appearing, are allowed him bylaw, and it may no longer be possible for him to question the validity of the judgment renderedagainst the debtor

3. HEARING BEFORE EXECUTION CAN BE ISSUED AGAINST GUARANTOR

Compromise In A Contract With Guaranty

Art. 2063. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor. (1835a)

COMPROMISE

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> Contract whereby the parties, by asking reciprocal concessions, avoid a litigation or put an end to one already commenced

EFFECTS OF COMPROMISE

1. Where prejudicial—a contract binds only the parties thereto and not third persons. Hence, a compromise cannot prejudice the guarantor or the debtor, as the case may be, when he is not a party to such compromise.

2. Where in the nature of the stipulation in favor of third person—however, even if the guarantor or debtor is not a party to such compromise, the same can still benefit him as it is in the nature of a stipulation in favor of a third person which the guarantor or debtor may accept unless it has been revoked before his acceptance

SUB-GUARANTOR’S RIGHT TO EXCUSSION

> Enjoys the right with respect to the debtor but also to the principal guarantorArt. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. (1836)

CREDIT TRANSACTIONS

> Includes all transactions involving the purchase or loan of goods, services, money in the present with a promise to pay or deliver in the future

> Bailment contracts, contracts of guaranty and suretyship, mortgage, antichresis, and concurrence and preference of credits

CREDIT TRANSACTIONS ARE REALLY CONTRACTS OF SECURITY. THEY ARE TWO TYPES:

1. SECURED TRANSACTIONS OR CONTRACTS OF REAL SECURITY—Those supported by a collateral or an encumbrance of property 2. UNSECURED TRANSACTIONS OR CONTRACTS OF PERSONAL SECURITY—those the fulfillment of which by the principal debtor is secured or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety

WHAT IS A SECURITY?

It is something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property May be PERSONAL SECURITY, as when the individual becomes a surety or a guarantor; or a PROPERTY OR REAL SECURITY, as when a mortgage, pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss

BAILMENT

> Delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it

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CREATION OF BAILMENT

> Generally, a bailment may be said to be a contractual relation> To be legally enforceable, it must contain the essential elements of a valid contract> It may also be created by operation of law

PARTIES TO A BAILMENT

1. Bailor—the giver; the party who delivers the possession or custody of the thing bailed2. Bailee—the recipient; the party who receives the possession and custody of the thing thus delivered

KINDS OF CONTRACTUAL BAILMENT

1. For the sole benefit of the bailora. Under this first kind belongs the gratuitous deposit and the mandatumb. Mandatum—bailment of the goods without recompense where the mandatory or person towhom the property is delivered undertakes to do some act with respect to the same; as simply to carry it, or keep it, or otherwise to do something with respect to it gratuitously

2. For the sole benefit of the baileea. Commodatum and the simple loan or mutuum

3. For the benefit of both partiesa. Deposit for a compensation, involuntary deposit, pledge, bailments for hire

> The first two kinds are GRATUITOUS BAILMENTS—there is really no consideration for they are considered more as a favor by one party to the party benefited> The third kind usually results from bailments involving business transactions—MUTUAL-BENEFIT BAILMENTS

KINDS OF BAILMENT FOR HIRE

> Bailment for hire arises when goods are left with the bailee for some use or service by him and is always for some compensation.

1. Hire of things (locatio rei)—where goods are delivered for the temporary use of the hirer2. Hire of service (locatio operis faciendi)—where goods are delivered for some work or labor upon it by the bailee3. Hire for carriage of goods (locatio operis mercium vehemdarum)—where goods are delivered either to a common carrier or to a private person for the person of being carried from place to place4. Hire of custody (locatio custodae)—where goods are delivered for storage

GENERAL PROVISIONS ON LOAN Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest.

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In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a) CONTRACT OF LOAN

> The abovementioned defines the two kinds of loan and gives their characteristics

CHARACTERISTICS OF THE CONTRACT

1. Real contract—because the delivery of the thing loaned is necessary for the perfection of the contract 2. Unilateral contract—once the subject matter has been delivered, it creates obligations on the part of only one of the parties

CAUSE OR CONSIDERATION IN A CONTRACT OF LOAN

> For the borrower—the acquisition of the thing > For the lender—the right to demand its return or its equivalent

KINDS OF LOAN

1. COMMODATUM—where the bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the identical thing 2. SIMPLE LOAN OR MUTUUM—where the lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay he same amount of the same kind and quality

WHEN IS A THING CONSUMABLE?

It is consumable when used in a manner appropriate for its purpose or nature, like gasoline, rice, money, fruit, firewood, etc. 1. In commodatum, if you do not return the thing when it is due, you will be liable for estafa because ownership of the property is not transferred to the borrower. 2. In loan, the borrower who does not pay is not criminally liable for estafa. His liability is only a civil liability for the breach of the obligation to pay. This is because in loan, ownership of the thing is transferred to the borrower, so there is no unlawful taking of property belonging to another. Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)

DELIVERY ESSENTIAL TO PERFECTION OF LOAN > The abovementioned is a necessary consequence of the fact that commodatum and mutuum are real contracts which require the delivery of the subject matter thereof for their perfection ACCEPTED PROMISE TO MAKE A FUTURE LOAN

> Is there a contract of loan at this point? No, because loan is a real contract and is perfected only upon delivery of the thing.

FORMALITY IN LOAN

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> There are no formal requisites for the validity of a contract of loan except if there is a stipulation for the payment of interest. A stipulation for the payment of interest must be in writing.

COMMODATUM

NATURE OF COMMODATUM

Art. 1935. The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1941a)

KINDS OF COMMODATUM

1. ORDINARY COMMODATUM2. PRECARIUM—one whereby the bailor may demand the thing loaned at will

Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. (n)

Art. 1937. Movable or immovable property may be the object of commodatum. (n)

Art. 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)

Art. 1939. Commodatum is purely personal in character .

Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. (n)

Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n)NATURE OF COMMODATUM SUMMARIZED

1. COMMODATUM IS ESSENTIALLY GRATUITOUS a. A commodatum is essentially gratuitous b. The contract ceases to be a commodatum if any compensation is to be paid by the borrower who acquires the usec. A commodatum is similar to a donation in that it confers a benefit to the recipient

2. EXTENT OF BAILEE’S RIGHT TO USE is limited to the thing loaned but not to the fruits unless there is stipulation to the contrarya. As the bailor is the owner of the thing loaned, the bailor is naturally entitled to its fruits

3. CAN THERE BE A STIPULATION GRANTING THE BAILEE USE OF THE FRUITS? Of course. The law sanctions such stipulation BUT such use should only be incidental and not the main cause of the contract. Because if it is the main cause, then the contract may that one of a usufruct.

4. The PURPOSE of a commodatum is the temporary use of thing loaneda. If the bailee is not entitled to the use of the thing loaned, the contract may be that of deposit

5. The SUBJECT MATTER is generally a non-consumable things, whether real or personala. It may be the case that the purpose is for exhibition only of the thing loaned. If this is the case,

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then the subject matter may be that of a consumable thing

6. The bailor NEED NOT BE THE OWNER of thing loaned

7. Commodatum is PURELY PERSONAL in character.

Consequently:a. The death of either the bailor or the bailee extinguishes the contract;b. The bailee can neither lend nor lease the object of the contract to a third person. However, themembers of the bailee's household may make use of the thing loaned, unless there is a stipulation tothe contrary, or unless the nature of the thing forbids such use.

AYSON-SIMON VS. ADAMOS 131 SCRA 439

FACTS: On December 13, 1943, Nicolas Adamos and Vicente Feria defendants-appellants herein purchased two lots from Juan Porciuncula. Porciuncula’s successor in interest sought for the annulment and cancellation of the sale which the court a quo favorably ruled.

In the meantime during the pendency of the above mentioned case, defendants-appellants sold to Generosa Ayson Simon the lots in question. Due to the failure of defendants appellants to comply with their commitment to have the subdivision plan of the lots approved and to deliver to deliver the titles and possession to Generosa, the latter filed suit for specific performance. As a result of the sale of the lot to said defendants sppellants being null and void, there is impossibity that they can comply with their commitment to Generosa, the latter then seek the rescission of the contract plus damages.

The defendants-appellants contend that Generosa’s action had prescribed, considering that she had only four years from May 29, 1946 to rescind the transaction.ISSUE:

Whether or not the action to rescind the obligation has prescribed.

HELD: Article 1191 of the Civil Code provides that an injured party may also seek rescission if the fulfillment should have become impossible. The cause of action to claim rescission arises when the fulfillment of the obligation became imppossible when the court declared that the sale was null and void. The Generosa cannot be assailed on the ground that she slept on her rights.

Nature Of The Benefit Of Excussion

The benefit of excussion is a right granted to the guarantor and, therefore, only he may invoke it at his discretion.The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee. However, Philguarantee did not avail of these defenses when it paid its obligation according to the tenor of the guarantee once demand was made on it.

When to invoke benefit of excussion.

The benefit of excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor must be first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, “for obviously the ‘exhaustion of the principal’s property’ cannot even begin to take place before judgment has been obtained”. The law imposes conditions precedent for the invocation of the defense. Thus, in order that the guarantor may make use of the benefit of excussion,

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he must set it up against the creditor upon the latter’s demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt. (Article 2060, NCC; JN Dev. Corp. vs. Phil. Export & Foreign Guarantee Corp., G.R. No. 151060, August 31, 2005).

Pactum Commissorium

In Luisa Briones – Velasquez vs. CA, et al., G.R. No. 144882, February 4, 2005, the Supreme Court once again said that if there is an equitable mortgage, the creditor cannot consolidate his ownership in case the debtor does not pay. The proper remedy is to foreclose it. The reason is founded on Article 2088, NCC which provides that the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.Applying the principle of pactum commissorium specifically to equitable mortgages, in Montevergin vs. CA, 112 SCRA 641 (1982) it has been said that the consolidation of ownership in the person of the mortgagee in equity, merely upon failure of the mortgagor in equity to pay the obligation, would amount to a pactum commissorium. It was further articulated that an action for consolidation of ownership is an inappropriate remedy on the part of the mortgagee in equity. The only proper remedy is to cause the foreclosure of the mortgagee in equity. And if the mortgagee in equity desires to obtain title to the mortgaged property, the mortgagee in equity may buy it at the foreclosure sale.

DRAGNET CLAUSE, MORTGAGEDragnet clause in a mortgage contract; nature; reason.

A “blanket mortgage clause”, also known as a “dragnet clause” is one which is specifically phrased to subsume all debts of past or future origins. Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts (Mojica vs. CA, G.R. No. 94247, September 11, 1991, 201 SCRA 517),and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. (China Banking Corp. vs. CA, 333 Phil. 158 (1996); Prudential Bank vs. Don A. Alviar, et al., G.R. No. 150197, July 28, 2005; Cuyco vs. Cuyco, 487 SCRA 693 (2006)).

The foreclosure should be limited for the amount of P250, 000.00 because the other obligations were secured by other securities. The mortgage with such a clause will not secure a note that expresses that it is secured by another security. When the mortgagor takes a loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause but rather on the new security given. It is therefore improper for the bank to foreclose the mortgaged properties because of non – payment of all the three promissory notes for there is a need to respect the existence of the other securities given for other loans. (Prudential Bank vs. Alviar, et al., G.R. No. 150197, July 28, 2005).

A mortgage with a “dragnet clause” is an “offer” by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. It can be said that the “offer” was not accepted by the bank when a subsequent advance was made because of a new security. (Prudential Bank vs. Alviar, et al., G.R. No. 150197, July 28, 2005).

Indivisibility of mortgage.

The law provides that a pledge or mortgage is indivisible. Explaining the meaning of the law, the Supreme Court said that it simply means that there can be no partial foreclosure of the mortgage.

No right to lease while there is an existing lease contract

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The rule is that, when there is a lease contract, the lessor is obliged to maintain the lessee in the peaceful and adequate enjoyment of the lease for the entire duration of the contract. (Art. 1654, NCC). This is true only if the contract is valid, unlike in this case, where the contract is void, for having an existing contract of lease, hence, the lessor has no right to lease the same property. When the lessor entered into the contract, he was still obliged to maintain peaceful and adequate possession and enjoyment of its lease with the other lessee. (Bercero v. Capitol Dev’t. Corp., G.R. No. 154765, March 29, 2007).

Basic Duty Of The Lessor In Relation To The Lessee

The lessor must see that the enjoyment is not interrupted or disturbed, either by others’ acts x x x or by his own. By his own acts, because, being the person principally obligated by the contract, he would openly violate it if, in going back on his agreement, he should attempt to render ineffective in practice the right in the thing he had granted to the lessee; and by others’ acts, because he must guarantee the right he created, for he is obligated to give warranty in the manner set forth in Article 1553, and, in this sense, it is incumbent upon him to protect the lessee in the latter’s peaceful enjoyment. (Manresa; CMS Investment & Mgt. Corp. v. IAC, 139 SCRA 75 (1985; Goldstein v. Roces, 34 Phil. 562 (1916); Barcero v. Capitol Dev’t. Corp., G.R. No. 154765, March 29, 2007).

When the obligation to ensure enjoyment of the use of the premises arise?

The obligation of the lessor arises only when acts, termed as legal trespass (perturbacion de derecho), disturb, dispute, object to, or place difficulties in the way of the lessee’s peaceful enjoyment of the premises that in some manner or other cast doubt upon the right of the lessor by virtue of which the lessor himself executed the lease, in which case the lessor is obligated to answer for said act of trespass. The lessee has the right to be respected in his possession and should he be disturbed therein, he shall be restored to said possession by the means established by the law or by the Rules of Court. Possession is not protection against a right but against the exercise of a right by one’s own authority. (Bercero v. Capitol Dev’t. Corp., G.R. No. 154765, March 29, 2007).

Assignment of Lease Distinguished from Subleasing

Once again, the SC in BPI-Family Savings Bank v. Sps. Domingo, et al., G.R. No. 158676, November 27, 2006, the distinctions between subleasing and assignment of lease were made.

In a sublease situation, the lessee continues to be liable to the lessor for the payment of rent. The sublessee pay rent not to the lessor but to the lessee/sub-lessor. On the other hand, in an assignment of rights, the assignee steps into the shoes of the lessee who is thereupon freed from his obligations under the lease because from then on it is the assignee who is liable to the lessor for rental payment. In other words, in an assignment of rights, there is a change of lessor, which is not so in a sublease situation. It is thus understandable why it is not necessary for the lessor to give his consent to a sublease, while in an assignment of rights, it is a necessity for the lessor to require his prior consent. This is for the lessor’s own protection.

Surrender Of Leased Premises

In Remington Industrial Sales Corp. v. Chinese Young Men’s Christian Assn. of the Phil. Islands, etc., G.R. No. 171858, January 22, 2007, there was a lease contract over the ground floor and the second floor of a building. Due to disagreement on the rental, the lessee filed a petition for consignation but later on made a “Formal Surrender of the Leased Premises” over the ground floor. It however retained the key of the door or passage way to the second floor as it was using the same. Is there surrender of the premises? Why?

Held: Yes, effectively it was surrendered and vacated.

In a contract of lease, one of the parties binds himself to give to another the enjoyment or use of a thing for a

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price certain, and for a period which may be definite or indefinite. Upon its termination, the lessee shall return the thing leased and the lessor shall resume possession thereto. (Art. 1665, NCC).

Under the law, possession is acquired by the material occupation of a things or the exercise of a right, or by the fact that it is subject to the action of our will, or by the proper acts and legal formalities established for acquiring such right. (Art. 531, NCC). In short, possession can be either actual or merely constructive. (Rep. v. David, G.R. No. 155634, August 16, 2004; 436 SCRA 571).

Actual possession consists in the manifestation of acts of dominion over property of such a nature as a party would naturally exercise over his own – as when respondent himself is physically in occupation of the property, or even when another person who recognizes the former’s right as owner is in occupancy. Constructive possession, on the other hand, may be had through succession, donation, execution of public instruments, or the possession by a sheriff by virtue of a court order.

When there was “Formal Surrender of Leased Premises” the defendant actually emptied and vacated the leased premises.

The padlocking of the main door of the ground floor units and the continued use thereof as defendant’s passageway to and from the second floor unit did not virtually denied it of its right to possess the unit. There was intention to relinquish in favor of plaintiff its possession over the premises. The filing of the Formal Surrender at the MeTC-Manila, constituted its constructive delivery of the said premises. Thereafter, it actually emptied and vacated the premises. Therefore, the plaintiff could have taken legal and actual possession of premises. It could have easily removed the padlock and occupied the premises in view of its unconditional surrender of the premises.

Immovables Contributed Into Partnership

Effect if immovables are contributed into the partnership.

In Litonjua, Jr. vs. Litonjua, Sr., et al., G.R. No. 166299-300, December 13, 2005, it was once again said that the contract – validating inventory requirement under Article 1773 of the Civil Code applies as long as real property or real rights are initially brought into the partnership. In short, it is really of no moment which of the partners contributed immovables. In context, the more important consideration is that real property was contributed, in which case an inventory of the contributed property duly signed by the parties should be attached to the public instrument, else there is legally no partnership to speak of.

Agency Coupled With Interest- Not Revocable At Will

As developer of the permanent improvement on the Property, BDAI has an interest in the Property that is the subject matter of the agency, assuming such agency exists. An agency coupled with interest is not revocable at the will of principal. In Sevilla vs. CA, 160 SCRA 171, it was said:

“The reason is that it is one coupled with an interest, the agency having been created for the mutual interest of the agent and the principal. It appears that Lina Sevilla is a bona fide travel agent herself, and as such, she had acquired an interest in the business entrusted to her. Moreover, she had assumed a personal obligation for the operation thereof, holding herself solidarily liable for the payment of rentals. She continued the business, using her own name, after Tourist World had stopped further operations. Her interest, obviously, is not limited to the commissions she earned as a result of her business transactions, but one that extends to the very subject matter of the power of management delegated to her. It is an agency that cannot be revoked at the pleasure of the principal. (Bacaling vs. Muya, 430 Phil. 531 (2002); Wheelers Club International, Inc. vs. Bonifacio, Jr., G.R. No. 139540, June 29, 2005; Lim vs. Saban, G.R. No. 163720, December 11, 2004).

Commission Of Agents

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It is dictum that in order for an agent to be entitled to a commission, he must be the procuring cause of the sale, which simply means that the measures employed by him and the efforts he exerted must result in a sale. (Damon vs. Antonio Brimo & Co., 42 Phil. 134; Ramos vs. CA, 63 SCRA 331). In other words, an agent receives his commission only upon the successful conclusion of a sale. (Hahn vs. CA, G.R. No. 113074, January 22, 1997, 266 SCRA 537). Conversely, it follows that where his efforts are unsuccessful, or there was no effort on his part, he is not entitled to a commission.In this case, the contract was negotiated directly by the parties after the agency was revoked due to his refusal to reduce his commission. Revocation is allowed by law which states that the agency is revoked if the principal directly manages the business entrusted to the agent, dealing directly with third persons. (Art. 1924, NCC).

The agent was not the procuring cause of the contract between the parties, hence, he is not entitled to commission. (Sanchez vs. Medicard Phils. Inc., et al., G.R. No. 141525, September 2, 2005).

Duty Of A Person Dealing With An Agent

It is a settled rule that persons dealing with an agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it. (YU Eng Cho vs. Pan American World Airways, 385 Phil. 453 (2000). The basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. (Safric Alcan & Cie vs. Imperial Vegetable Oil Co., Inc., 355 SCRA 559). If he does not make such an inquiry, he is chargeable with knowledge of the agent’s authority and his ignorance of that authority will not be any excuse. (Bacaltos Coal Mines vs. CA, 245 SCRA 460; Manila Memorial Park Cemetery, Inc. vs. Pedro Linsangan, G.R. No. 151319, November 22, 2004).

Broker Is Entitled To Compensation If He Is The Procuring Cause

The brokers are entitled to their commission because they were instrumental in the sale of the property. Without their intervention, no sale could have been consummated. They were the ones who set the sale in motion, or the procuring cause. A broker is generally defined as one who engaged, for others, on a commission, negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other parties, never acting in his own name but in the name of those who employed him; he is strictly a middleman and for some purposes the agent of both parties. A broker is one whose occupation is to bring parties together, in matters of trade, commerce or navigation. (Tan vs. Gullas, 393 SCRA 330 (2002); (Medrano, et al. vs. CA, et al., G.R. No. 150678, February 18, 2005 (Callejo, J)).

DEPOSIT

Under the law, the hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void. (Art. 2003, NCC).

Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely. The hotel business like the common carrier’s business is imbued with public interest. Catering to the public, hotel-keepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called “undertakings” that ordinarily appear in prepared forms imposed by hotel-keepers on guests for their signature. (YHT Realty Corp. v. CA, et al., G.R. No. 126780, February 17, 2005).

GUARANTY and SURETY- G.R. No. 151060

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The claim that Philguarantee had no more obligation to pay TRB because of the expiration of the contract of guarantee is untenable. The mere fact that payment was made after the expiration of the guarantee is not controlling. What is controlling is that demand on Philguarantee had taken place while the guarantee was still in force.

There is no basis for JN’s claim that Philguarantee was a mere volunteer payor and had no legal obligation to pay TRB. The law does not prohibit the payment by a guarantor on his own violation, heedless of the benefit of excussion. In fact, it recognizes the right of a guarantor to recover what it has paid, even if payment was made before the debt becomes due, or if made without notice to the debtor, subject of course to some conditions. (JN Dev. Corp., et al. vs. Phil. Export & Foreign Loan Guarantee Corp., G.R. No. 151060, August 31, 2005).

When there is solidarity in an obligation

The Undertaking or contract to secure a loan agreement uses the word “sureties” althroughout the document in describing the parties. It is further contended that the principal objective of the parties in executing the Undertaking cannot be attained unless they are solidarily liable “because the total loan obligation can not be paid or settled to free or release the Obligors if one or any of the Sureties default from their obligation in the Undertaking.”

The contention is not correct. In case there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation, Article 1207 of the Civil Code states that among them, there is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Article 1210 supplies further caution against the broad interpretation of solidarity by providing: “The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.”

These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or more debtors in one and the same obligation, and in the absence of express and indubitable terms characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove such fact with a preponderance of evidence.

The Undertaking does not contain any express stipulation that the parties agreed “to bind themselves jointly and severally” in their obligations, or any such terms to that effect. hence, such obligation established in the Undertaking is presumed only to be joint. (Escaño, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007, Tinga, J).

The use of “SURETIES” 13 times does not sufficiently establish that the obligation is solidary in nature.

The term “surety” has a specific meaning under the Civil Code. Article 2047 provides the statutory definition of a surety agreement, that by guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

As provided in Article 2047, in a surety agreement the surety undertakes to be bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. The argument rests solely on the solidary nature of the obligation of the surety under Article 2047. In tandem with the nomenclature “SURETIES”, this argument can only be viable if the obligations established in the Undertaking do partake of the nature of suretyship as defined by Article 2047, NCC, otherwise, the liability is joint. (Escaño, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007, Tinga, J).

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Nature Of Suretyship Agreement

As indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation. At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact “become subrogated to all the rights and remedies of the creditor.” (Escaño, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007, Tinga, J, citing Palmares v. CA).

Note:

“Since, generally, it is not necessary for a creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same as that of the principal, then as soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal.” (Palmares v. CA, 351 Phil. 664, 685 (1998) citing Standard Accident Insurance Co. v. Standard Oil Co., 133 So. 2d 539; School District No. 65 of Lincoln County v. Universal Surety Co., 135 N. W. 2d 232; Depot Realty Syndicate v. Enterprise Brewing Co., 171 P. 223).

Distinction Between A Joint And Several Debtor And A Surety

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment to the creditor “may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made.” Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety. (Escaño, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007, Tinga, J).

Article 2047 itself specifically calls for the application of the provisions on solidary obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety). However, a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor.

A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumed to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary so-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between the co-debtors liable in solidum is similar to the common law suretyship. (Tolentino, Civil Code of the Phils. (1992 ed.).

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Right To Full Reimbursement By The Surety

The right under Article 2066, NCC which assures the guarantor who pays for a debtor must be indemnified, such indemnity comprising of among others, the total amount of the debt. Furthermore, Article 2067 of the Civil Code likewise establishes that the guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. (Escaño, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007, Tinga, J).

NCC Refer Not Only To Guarantors But To Surety As Well

Article 2066 and 2067, NCC explicitly pertain to guarantors. The argument that the provisions should not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should apply to sureties is not correct. The reference in the second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship is withdrawn from the applicable provisions governing guaranty. (Manila Surety & Fidelity Co. v. Barter Construction & Co., et al., 53 Off. Gaz. 8836 & Arranz v. Manila Fidelity & Surety, Co., 53 Off. Gaz. 7247). For if that were not the implication, there would be no material difference between the surety as defined under Article 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the same rules and limitations.

Accordingly, the right to indemnification and subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who pays, since the indemnification that pertains to the latter the share which corresponds to each debtor. (Escaño, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007).

When solidary debtor who pays is entitled to reimbursement.

If a solidary debtor pays the obligation in part, he can recover reimbursement from the co-debtors only in so far as his payment exceeded his share in the obligation. This is precisely because if a solidary debtor pays an amount equal to his proportionate share in the obligation, then he in effect pays only what is due from him. If the debtor pays less than his share in the obligation, he cannot demand reimbursement because his payment is less than his actual debt. (Republic Glass Corp. v. Qua, G.R. No. 144413, July 30, 2004).

Death Not An Escape To Liability

Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary obligation under its performance bond. (Stronghold Insurance Company, Inc. vs. Republic – Asahi Glass Corp., G.R. No. 147561, June 22, 2006).

Surety’s obligation is not original; but direct and primary to creditor

The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promise of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. (Garcia vs. CA, 191 SCRA 439 (1990); IFC vs. Imperial Textile Mills, Inc., G.R. No. 160324, November 15, 2005).

Under the law and jurisprudence, the creditor may sue, separately or together, the principal debtor and the surety, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the

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principal debtor, the creditor may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond. (Stronghold Insurance Co., Inc. vs. Republic – Asahi Glass Corp., supra.).

Cabales, et al. v. CA, et al., G.R. No. 162421

A property was the subject of co-ownership. Some of the co-owners sold the whole property without the consent of the two others, Nelson, a minor and his mother. Explaining the nature of the sale, the SC ruled:

The sale insofar as their shares are concerned is unenforceable because it was entered into in the name of another person by one who had not given authority. (Art. 1403(1), NCC). Nelson and his mother, therefore, retained ownership over their undivided share of subject property. (Cabales, et al. v. CA, et al., G.R. No. 162421, August 31, 2007).

Non-Involvement Clause In a Contract

Non-involvement clause in a contract; valid, provided there is limitation as to time, place and trade.

In Daisy Tiu v. Platinum Plans, Inc., G.R. No. 163512, February 28, 2007, the petitioner was employed as Division Marketing Director of the respondent, a pre-need company. In 1995, she stopped working and became the Vice President for Sales of Professional Pension Plans, Inc., another pre-need company. She was sued for damages for violating her contract with respondent which prohibited her in a business of the same nature within two (2) years separation, whether voluntary or involuntary. The RTC and the CA held her liable. Before the SC, the petitioner contended that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to afford respondent a fair and reasonable protection. She added that since the products sold in the pre-need industry are more or less the same, the transfer to a rival company is acceptable. She likewise argued that a strict application of the non-involvement clause would deprive her of the right to engage in the only work she knows.

Respondent countered that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contended that the inclusion of the two-year non-involvement clause in the contract of employment was reasonable and needed since her job gave her access to the company’s confidential marketing strategies. It added that the non-involvement clause merely enjoined her from engaging in pre-need business akin to respondents within two years from her separation from respondent. She had not been prohibited from marketing other service plans. In brushing aside respondent’s contention, the SC

Held: As early as 1916, the validity of a non-involvement clause has already been discussed. In Ferazzini v. Gsell, 34 Phil. 697 (1916), it was held that such clause was unreasonable restraint of trade and therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for a period of five years after the termination of his employment contract and must first get the written permission of his employer if her were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forced an employee to leave the Philippines to work should his employer refuse to give a written permission.

In G. Martini, Ltd. v. Glaiserman, 39 Phil. 120 (1918), a similar stipulation was declared as void for being unreasonable restraint of trade. There, the employee was prohibited from engaging in any business similar to that of his employer for a period of one year. Since the employee was employed only in connection with the purchase and export of abaca, among the many business of the employer, the restraint was considered too broad since it effectively prevented the employee from working in any other business similar to his employer even if his employment was limited only to one of its multifarious business activities.

However, in Del Castillo v. Richmond, 45 Phil. 679 (1974), a similar stipulation was upheld as legal, reasonable, and not contrary to public policy. In the said case, the employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employer’s

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place of business during the time the employer was operating his drugstore. A contract in restraint of trade is valid provided there is a limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires.

Finally, in Consulta v. Court of Appeals, G.R. No. 145443, March 18, 2005, 453 SCRA 732, a non-involvement clause was held in accordance with Article 1306 of the Civil Code. While the complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in activities of other companies that compete with the business of her principal. The restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principal’s business. Further, the prohibition applied only for one year after the termination of the agent’s contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer.

Conformably with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place.

In this case, the non-involvement clause has a time limit: two years from the time petitioner’s employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner from engaging in any pre-need business akin to respondents.

In this case what makes the non-involvement clause valid is that, she had been privy to confidential and highly sensitive marketing strategies of respondent’s business. To allow her to engage in a rival business soon after she leaves would make respondent’s trade secrets vulnerable especially in a highly competitive marketing environment. In sum, the non-involvement clause is not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to respondent. (Ollendorff v. Abrahamsom, 38 Phil. 585 (1918)).

In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Article 1159 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto. (Phil. Communications Satellite Corp. v. Telecom, Inc., G.R. Nos. 147324 and 147334, May 25, 2004, 429 SCRA 153).

TRUSTS- Implied Trusts, Constructive Trusts

When one’s property is registered in another’s name without the former’s consent, an implied trust is created by law in favor of the true owner. Implied trusts are those which, without being expressed, are deducible from the nature of the transaction by operation of law as matters of equity, independently of the particular intention of the parties. Meanwhile, constructive trusts are created in order to satisfy the demands of justice and prevent unjust enrichment. They arise against one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. An action for reconveyance based upon an implied or constructive trust prescribes in ten (10) years from the registration of the deed or from the issuance of the title.

IMPLIED TRUST- Action to Recover Based on Implied Trust

Action to recover based on implied trust; prescribes after 10 years; except if plaintiff is in possession.

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Once again, the Supreme Court ruled in Consuelo Vda. de Gualberto, et al. vs. Francisco Go, et al., G.R. No. 139843, July 21, 2005 that an action for reconveyance of real property based on implied or constructive trust is not barred by the 10-year period of prescription only if the plaintiff is in actual, continuous and peaceful possession of the property involved. In DBP vs. CA, 331 SCRA 267 (2000) it was said that generally an action for reconveyance based on an implied or constructive trust prescribes in 10-years from the date of issuance of the decree of registration. However, this rule does not apply when the plaintiff is in actual possession of the land.

If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. (Art. 1456, NCC). Thus, the law thereby creates the obligation of the trustee to reconvey the property and the title thereto in favor of the true owner. The prescriptive period for the reconveyance for fraudulently registered real property is ten (10) years reckoned from the date of the issuance of the certificate of title. (Consuelo Vda. de Alberto, et al. vs. Francis Go, et al., G.R. No. 139843, July 21, 2005).

Implied Trust If Property Is Acquired By Fraudulent Act

The act of petitioners in misrepresenting that they were in actual possession and occupation of the property, obtaining patents and original certificates of title in their names, created an implied trust in favor of the actual possessors of the property. Under the law, if the property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. (Art. 1456, NCC).

In other words, if the registration of the land is fraudulent, the person in whose name the land is registered holds it as a mere trustee, and the real owner is entitled to file an action for reconveyance of the property. (Mendizabel, et al. vs. Apao, et al., G.R. No. 143185, February 20, 2006).

Torrens Systems Not Designed To Shield Against Fraud

Reconveyance is just and proper in order to terminate the intolerable anomaly that the patentees should have a Torrens title for the land which they and their predecessors never possessed and which has been possessed by another person in the concept of owner. After all, the Torrens system was not designed to shield and protect one who had committed fraud or misrepresentation and thus holds title in bad faith. (Mendizabel, et al. vs. Apao, et al., G.R. No. 143185, February 20, 2006).

Action For Reconveyance Based On Implied Trust

An action for reconveyance of registered land based on implied trust prescribes in 10 years, the point of reference being the date of registration of the deed or the date of the issuance of the certificate of title over the property. This is especially if the plaintiff is in possession of the property at the time of the filing of the complaint that the 10 – year prescriptive period applies only when the person enforcing the trust is not in possession of the property. If a person claiming to be its owner is in actual possession of the property, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not prescribe. The reason is that the one who is in actual possession of the land claiming to be its owner may wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right. His undisturbed possession gives him a continuing right to seek the aid of a court of equity to ascertain and determine the nature of the adverse claim of a third party and its effect on his own title, which right can be claimed only by one who is in possession. (Mendizabel, et al. vs. Apao, et al., G.R. No. 143185, February 20, 2006).

OBLIGATIONS AND CONTRACTS- FORTUITOUS EVENT, Robbery

Robbery per se is not a fortuitous event.

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In Sicam, et al. v. Jorge, et al., G.R. No. 159617, August 8, 2007, Lulu Jorge pawned several pieces of jewelry with Agencia de R.C. Sicam to secure a loan in the amount of P59,500.00. It was alleged that two armed men entered the pawnshop and took away whatever cash and jewelry found inside the pawnshop vault. It was reported to the police. She sued for damages but Sicam interposed the defense of fortuitous event, alleging that there was robbery. The SC brushed aside the contention and said:

Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of negligence on his part.

In a case similarly situated, it was ruled that:

“It is not a defense for a repaid shop of motor vehicles to escape liability simply because the damage or loss of a thing lawfully placed in its possession was due to carnapping. Carnapping per se cannot be considered as a fortuitous event. The fact that a thing was unlawfully and forcefully taken from another’s rightful possession, as in cases of carnapping, does not automatically give rise to a fortuitous event. To be considered as such, carnapping entails more than the mere forceful taking of another’s property. It must be proved and established that the event was an act of God or was done solely by third parties and that neither the claimant nor the person alleged to be negligent has any participation. In accordance with the Rules of Evidence, the burden of proving that the loss was due to a fortuitous event rests on him who invokes it – which in this case is the private respondent. However, other than the police report of the alleged carnapping incident, no other evidence was presented by private respondent to the effect that the incident was not due to its fault. A police report of an alleged crime, to which only private respondent is privy, does not suffice to establish the carnapping. Neither does it prove that there was no fault on the party of private respondent notwithstanding the parties’ agreement at the pre-trial that the car was carnapped. Carnapping does not foreclose the possibility of fault or negligence on the part of private respondent. (Co. v. CA, 353 Phil. 305 (1998); Sicam, et al. v. Jorge, et al., G.R. No. 159617, August 8, 2007).

In another case, it was held that to be relieved from civil liability of returning the pendant under Article 1174 of the Civil Code, it would only be sufficient that the unforeseen event, the robbery, took place without any concurrent fault on the debtor’s part, and this can be done by preponderance of evidence; that o be free from liability for reason of fortuitous event, the debtor must, in addition to the case itself, be free from any concurrent or contributory fault or negligence. (Sicam, et al. v. Jorge, et al., supra.).

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SUMMARY - Salescredit

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