Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S.

Sagmit

CREDIT TRANSACTIONS REVIEW • BAILOR – the one who lends a thing;

– Need not be the owner but must have
Introduction and Framework possessory interest in the SM
• Lessee (1643, 1650)
• Usufructuary (562)

The bailor is not required to be the owner but he must have legal
possession.

• BAILEE – the one who borrows the thing

BAR 2007
The parties to a bailment are:
A. bailor
B. bailee
C. comodatario
D. all of the above
E. letters a and B

Answer: E

PART ONE: Contracts of Loan

LOAN

Concept – 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 kind and quality
shall be paid, in which case the contract is simply
called a loan or mutuum.

Role of delivery
 1934 – delivery of the subject matter is required for
perfection of the contract.

Producers vs. CA (2003 case) –

FACTS: Vives was asked by his friend Sanchez to help her friend
Doronilla, in incorporating his business, the Sterela Marketing and
Services (“Sterela”), by depositing in a bank a certain amount of
money in the bank account of Sterela.
Angeles assured Vives that he could withdraw his money from
said account within a month’s time. Vives issued a check in the
amount of P200,000.00 in favor of Sterela. Upon learning that
Sterela was no longer holding office in the address previously given to
him, Vives went to the Bank to verify if their money was still intact. He
learned that the money in the account had been withdrawn by
Doronilla, and that only P90,000.00 remained therein.
Vives instituted an action for recovery of sum of money.

ISSUE: Whether or not the transaction between Doronilla and Vives

was one of simple loan

RULING: The transaction between Vives and Doronilla was a

Topical Outline
CREDIT TRANSACTIONS, IN GENERAL
Concept
• Include all transactions involving the purchase or
loan of goods, services or money in the present
with a promise to pay or deliver in the future
commodatum and not a mutuum.
Article 1933 of the Civil Code seems to imply that if the subject of
the contract is a consumable thing, such as money, the contract would
be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing.
Article 1936 of the Civil Code provides: 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.
The rule is that the intention of the parties thereto shall be
accorded primordial consideration in determining the actual character
of a contract. In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.
In this case, the evidence shows that Vives agreed to deposit his
money in the savings account of Sterela specifically for the purpose of
making it appear “that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be returned
within thirty (30) days.” Vives merely “accommodated” Doronilla by
lending his money without consideration, as a favor to his good friend
Sanchez. It was however clear to the parties to the transaction that
the money would not be removed from Sterela’s savings account and
would be returned to private respondent after 30 days.

Parties

Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009) 1

 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit

 EXCEPTIONS:

◦ PURPOSE- uses for purpose different from the agreed

one
◦ DELAY - keeps it longer than the period stipulated or
after the accomplishment of the purpose
◦ WITH APPRAISAL - SM was delivered with appraisal
of its value unless there is a stipulation exempting
the bailee from loss in case of fortuitous event

 LENDING TO 3RD PERSON- lends or leases the SM to

COMMODATUM
Concept
 Contract where bailor delivers to bailee a non-
consumable thing so that bailee may use it for a
certain time and return the identical thing
a 3rd person not a member of his household
Q: In this case, is the house maid a member of the household?
A: No, it does not extend to the house maid. It refers to family
members based on the premise that a commodatum is based on
trust
 DOES NOT SAVE - being able to save the SM
borrowed or his own thing, he saves the latter

Lease v. Commodatum Right to Possession of SM

 If there is consideration in money for the use of  1951 – Bailee cannot retain the SM unless bailor
the SM - contract is NOT commodatum but is a failed to warn him of hidden defects and he suffers
contract of lease damages as a consequence

Bailee has no right to retain except there are hidden defects

known to the bailor and the bailor did not inform the bailee
Example of hidden defect: a car with no brake

 1952- Bailor cannot escape expenses by simply

abandoning the SM to the bailee

Simple abandonment will not exculpate bailor from damages

BAR 2005
 A left his adventure van to B before he left to work
abroad. The parties agreed that B can use the van for 1
year. A did not tell B that the van’s brakes are faulty. B
had the brakes repaired and the van tuned up, spending
P15,000. B discovered that the van consumed too much
ARTICLE 1933 – By the contract of loan, one of the parties fuel. Hence, he leased the van to C. Two months later, A
delivers to another, either something not consumable so that the returned and asked B to return the van. However, the van
latter may use the same for a certain time and return it, in which was damaged while B was using it, without his fault
case the contract is called a commodatum; or money or other
consumable thing, upon the condtion that the same amount of the (a) Who shall bear the P15,000 spent for van repair?
same kind and quality shall be paid, in which case the contract is (b) Who shall bear the cost of the van’s fuel?
simply called a loan or mutuum (c) Does A have the right to get the van before the lapse
of one year?
ARTICLE 1947 – The bailor may demant the thing at will, and the ANSWER
contractual relation is called a precarium, in the following cases: (a) Breaks (extraordinary) – A
(1) If neither the duration of the contract nor the use to which the Tuneup (ordinary) – B
thing loaned should be devoted, has been stipulated; or (b) Fuel (ordinary) – B
(2) If the use of the thing is merely tolerated by the owner. (c) A cannot demand return before the period unless he
has urgent need of the van
Parties’ Obligations
SIMPLE LOAN
Bailor Bailee
Concept
Ordinary YES
expenses for use  Lender delivers to borrower money or other
and preservation consumable upon the condition that the latter shall pay
Extraordinary YES 50% YES 50% the same amount of the same kind and quality
expenses not due
to his fault while The Debtor
using  Has ownership of money received or other fungible
Extraordinary YES If with notice OR thing
expenses for even if without if
preservation notice will cause delay  Must pay the creditor an equal amount of the same
kind and quality
Not ordinary, not NO YES
extraordinary
 Is liable for loss of money or thing
expenses
Loss due to GENERALLY: YES GENERALLY: NO, unless
The debtor must pay an equal amount, unless there is a contrary
fortuitous event exceptions
stipulation.
Respect the YES. Unless (a) urgent
period need; (b) act of In commodautm, ownership is retained by the bailor and the loss
ingratitude under 765; is borne by the bailor.
© precarium

Extraordinary expenses – expenses not expected, expenses not on

a regular basis

Loss due to fortuitous event Interest

Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009) 2
 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
 GENERAL RULE: 1956 – no interest shall be due
unless it has been expressly stipulated in writing and
is lawful
As to being lawful, such is not applicable for now because the
Usury Law has been legally suspended.
Exceptions
 Indemnity for damages – debtor in delay must pay
legal interest even if there is no stipulation
 Interest accruing from unpaid interest – interest
due shall earn interest from the time it is judicially
demanded although the obligation may be silent
on this point (2212)
Indemnity for Damages
 6% per annum – transactions other than
loans/forbearance of money
Examples: contract of sale, monetary award for piece of work
If there is no demand but only delay, apply the 6% per annum
interest. There is forbearance when there is demand and delay.
 e.g. Monetary award arising from a contract for a
piece of work, unpaid purchase price ( Cristina
Garments v. CA)
Example
 A purchased a car from B
 The price shall be paid in 30 days
 A paid the price one year after the 30-day period
 A will be liable for 6% interest per annum for the
delay in paying the price
Indemnity for Damages
 12% per annum – delay in paying loans,
forbearance of money, judgments involving loans
or forbearance in absence of stipulation computed
from date of default (CB Circular 416)
Example: If there is a judgment already and the obligation is
satisfied within 30 days, apply 6% per annum. If the obligation is
satisfied after 30 days, apply 12% per annum. Since there is a
deadline set judicially, there is already a forbearance of which 12%
per annum interest is applied.
Example
 A obtained a P1,000 loan from B payable in 30
days
 A paid the loan one year after the 30-day period
 A will be liable for 12% interest since she delayed
in paying the loan
Interest accruing from unpaid interest
 A borrowed P5,000 from B
 Loan has 12% annual interest
 A fails to pay P5,000 and the interest
 One year after due date, there is a judicial demand
for payment of P5,000 and 12% annual interest
within 30 days from judgment
 A pays 1 month after the 30-day period
 The 12% interest will earn 12% annual legal
interest (forbearance already) or 1% for each
month of delay
New principal = old principal + interest
You apply the interest on the new principal
ORIGINAL LOAN = P5,000 + 12% (per annum)
= P5,000 + P600
= P5,600
600 is from 12% of 5,000
FORBEARANCE = 12% per annum or 1% a month of
delay from judicial order
= P5,600 + 1% (P56.00)
= P6,160
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
For 1 month of delay: (May difference sa total, please verify )
Forbearance = 5,600 + 1% (5,600)
= 5,600 + 56
= 5,656
BAR 2002
 Carlo sues Dino for
◦ (a) collection on a promissory note for a
loan, with NO agreement on interest on which Dino
defaulted
◦ (b) damages caused by Dino on Carlos’
priceless painting on which Dino accidentally spilled
acid while transporting it.
 The court finds Dino liable for both obligations. What
rates of interests may the court impose?
ANSWER
 With respect to the amount covered by a promissory
note, an interest of 12% per annum may be imposed
since it is a forbearance of money
 With respect to damages, it is 6% from the time of
final demand until finality of judgment and 12% of the
amount from final judgment until the debt is fully paid
INTEREST
 Contracting parties may stipulate freely on any
adjustment in the interest rate on a loan or forbearance
of money.
 However, the law does not authorize increase of
interest rate by one party without the other party’s
consent.
 Any change of interest must be mutually agreed by
the parties
BAR 2001
 A obtained a P300,000 housing loan from X Bank at
18% per annum interest. The promissory note provides
that X reserves the right to increase the interest within
the limits allowed by law. X Bank increased the interest
to 48% per annum. When A questioned the increase in
court, X argued that the usury law is already legally
suspended. Will the action prosper? Why?
ANSWER
 The action will prosper. While it is true that interest
ceilings set by the Usury law are no longer in force, the
court may still reduce interests which are unconscionable.
 Contracting parties may stipulate freely on any
adjustment in the interest rate on a loan or forbearance
of money.
 However, the law does not authorize increase of
interest rate by one party without the other party’s
consent.
So, if the bank increased to interest rate to 30%, it must still be
mutually agreed upon.
 Any change of interest must be mutually agreed by
the parties
INTEREST
 1960 - If debtor pays interest when there is no
stipulation therefor, the provisions on solutio indebiti or
natural obligations will apply (debtor may recover)
KINDS OF INTEREST
 SIMPLE – paid for the principal at a certain rate fixed
or stipulated by the parties
 COMPOUND – that which is imposed upon interest
due and unpaid. The accrued interest is added to the
principal sum and the whole (principal and interest) is
treated as the new principal upon which the interest for
the new period is calculated
 LAWFUL – that which the law allows or does not
prohibit, the maximum rate of interest prescribed by law
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit

assets to pay his liability. In surety, there is no need to establish that

 UNLAWFUL OR USURIOUS – that which is paid or the principal debtor cannot pay his debt.
stipulated to be paid beyond the maximum fixed by
law There can be a guaranty of:
COMMODATUM vs. MUTUUM 1. A voidable contract
2. An unenforceable contract
BASIS COMMODATUM MUTUUM 3. A natural obligation
4. Future debts
SUBJECT MATTER Non-consumable Money or consumable 5. Conditional obligations

Qualifications of a guarantor
NATURE Essentially Gratuitous or onerous 1. Person who possesses INTEGRITY
gratuitous 2. Has the CAPACITY TO BIND himself
3. Has SUFFICIENT PROPERTY to answer for the
PURPOSE Use or temporaryFor consumption obligation he guarantees (2056)
possession
Grounds for disqualification
KIND OFReal or personal Personal property
1. Insolvency OR
PROPERTY
2. Conviction of a crime involving dishonesty
INVOLVED
RISK OF LOSS Lender or bailorTransfer of ownership toNOTE: If creditor did not choose the guarantor, he may
retains ownership borrower demand a replacement guarantor (2056)

TIME OFEnd of periodEnd of period If debtor chose the guarantor, the creditor can ask for a
PAYMENT unless urgent need, replacement. The creditor has a right to ask for a replacement which
acts of ingratitude he may or may not exercise.
or precarium If it was the creditor who chose the guarantor, he cannot ask for
CHARACTER OFPurely personal Not personal a replacement and must suffer the consequences thereof.
THE CONTRACT
ARTICLE 2056 One who is obliged to furnish a guarantor shall
BAR 2004 present a person who possesses integrity, capacity to bind himself,
 Distinguish briefly but clearly between mutuum and sufficient property to answer for the obligation which he
and commodatum guarantees. The guarantor shall be subject to the jurisdiction of the
court of the place where this obligation is to be complied with.

PART TWO: U N S E C U R E D LOANS If guaranty is without the knowledge or consent or against

2 Kinds of Unsecured Loans
1. guaranty
2. suretyship
Differentiate this from a secured loan – a secured loan is
assured of payment. If full payment is not certain, a particular
property is secured in case non-payment of such loan.
GUARANTY
 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 (2047)
SURETYSHIP
 Relationship where one person undertakes to
ensure the performance of an obligation of
another person
SIMILARITY between guaranty and suretyship
 Both promise or undertake to answer for a debt,
default or miscarriage of another person
the will of the debtor (2050)
Guarantor:
 can only recover in so far as payment was
beneficial to the debtor
 cannot compel subrogation to the creditor’s
rights
ARTICLE 2050 If a guaranty is entered into without the knowledge
or consent, or against the will of the principal debtor, the provisions of
Article 1236 and 1237 shall apply.
ARTICLE 1236 The creditor is not bound to accept payment or
performance by a third person who has no interest in the fulfilment of
the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he
has paid, except that if he paid without the knowledge or against the
will of the debtor, he can recover only insofar as the payment has
been beneficial to the debtor.
ARTICLE 1237 Whoever pays on behalf of the debtor without the
knowledge or against the will of the latter, cannot compel the creditor
to subrogate him in his rights, such as those arising from a mortgage,
guaranty or penalty.

Both are accessory contracts. If a there is a guarantor and pays in behalf of the debtor but
against the will of the debtor, only the principal amount can be
DIFFERENCE between guaranty and suretyship collected from the said debtor.

Dynamics of guaranty
GUARANTOR SURETY
Liability depends on He assumes liability as a
independent agreement to regular party to the
pay the principal’s contract
obligation should he fail to
do so
Obligation is secondary Obligation is primary
Undertaking is to pay if Undertaking is to pay if
principal debtor cannot pay principal debtor does not
pay
An insurer of the solvency Insurer of a debt
of the debtor
Effects of guaranty
Entitled to excussion No excussion
1. Between the creditor and guarantor
Main distinctions of guaranty & suretyship: 2. Between the debtor and guarantor
Extent of liability & presence or absence of excussion 3. Between the co-guarantors
Take note that in a guaranty, the principal debtor cannot pay.
This means that the principal debtor is unable to pay for he has no 1. Between Creditor and Guarantor: BENEFIT OF EXCUSSION

Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009) 4

 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
 The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor and has resorted to all legal
remedies against the debtor (2058)
 The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor and has resorted to all legal
remedies against the debtor (2058)
 Illustration (2064)
CREDITOR DEBTOR
Exussion
Guarantor
Exussion
Sub-Guarantor
ARTICLE 2064 The guarantor of a guarantor shall enjoy the
benefit of excussion, both with respect to the guarantor and to the
principal debtor
How excussion is used
 When the debtor is sued, the guarantor must be
notified of the action so that he may set up
excussion as a defense (2062)
Remember permissive joinder of parties in Civil Procedure. In
accordance with due process, the guarantor must be informed that
he is sued and that right to excussion must first be exercised.cfs
 Guarantor points out to the creditor available
property of the debtor within the Philippines
(2060)
 After guarantor points to debtor's property and
creditor neglects to exhaust the properties he
shall suffer the loss to the extent of the value of
the properties (2061)
Excussion shall not take place
◦ Guarantor has expressly renounced it
◦ Guarantor has bound himself solidarily with the
debtor
Case: The title of the contract was “Contract of Guaranty”.
But in the contract, it was stipulated that the guarantor bound
himself solidarily. Thus, this falls under exception # 2 wherein
excussion shall not take place.
◦ Insolvency by the debtor
◦ Debtor has absconded, or cannot be sued within the
Philippines unless he has left a manager or
representative
◦ If it may be presumed that an execution on the
property of the principal debtor would not result in
the satisfaction of the obligation
2. Between the debtor and guarantor: INDEMNITY
- collect, reimburse, indemnify
Debtor & Guarantor – not a loan or forbearance
Debtor & Creditor – loan or forbearance
Indemnity
◦ total amount of the debt
◦ legal interests from time payment was
demanded till payment
◦ expenses by guarantor after demanding
payment from debtor
◦ damages, if they are due
If debtor did not know that there was a guarantor and the
guarantor paid the debt, the guarantor can collect only in so far
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
that the debtor was benefited. As such, the guarantor can only collect
the total amount of the debt.
Rights of the Guarantor Who Paid
 Subrogated to all rights of the creditor
 In case of compromise cannot collect more than
what he paid
 If he pays before due date, cannot collect earlier than
due date unless payment was ratified by the debtor
Guarantor pays without notice to the debtor
 2068 - Debtor may set up all defenses debtor can set
up against the creditor
 Defenses – minority, extinguishment etc.
Repeat Payment Rule
 Guarantor pays without notifying debtor
 Debtor repeats payment
 RULE: guarantor has no remedy against the debtor
but only against the creditor
 EXCEPTION: debtor must reimburse if
◦ gratuitous guaranty;
◦ guarantor was prevented by fortuitous
event from notifying debtor; and
◦ creditor becomes insolvent
Conditions must be cumulative. All conditions must be present so
as to fall within the exception. Absence of one, the guarantor cannot
recover from the principal debtor but instead recover from the creditor.
Guarantor of an absent 3rd person (2072)
◦ A person requests another to guarantee a debt
◦ Debt belongs to an absent third person
◦ Guarantor pays the debt
◦ Guarantor may collect either from the person
requesting or the absent debtor
In this case, there is double relief.
Guarantor may ask for release or additional security
(alternative)
◦ when guarantor is sued for payment
◦ principal debtor is insolvent
◦ debtor bound himself to relieve him from the
guaranty and the period has expired
◦ debt has become demandable due to
expiration of period for payment
◦ principal obligation has no fixed period and
after the lapse of 10 years
◦ reasonable grounds to fear absconding of
debtor
◦ when the debtor is in imminent danger of
being insolvent
Among co-guarantors
2073
 There are 2 or more guarantors of the same debtor
 same debt
 one of the co-guarantors pays
 payment is made by judicial demand OR
 principal debtor is insolvent
General rule: If there are 2 or more guarantors, they divide equally,
unless there is contrary stipulation
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit

Example of novation: There was an increase in interest. This is a

novation which materially affects the obligation of the guarantor.
Hence, that may cause the extinguishment of the guarantee.
In other case, the interest rate was decreased. There was
novation because there was a change.
Concurring vs. Sub-guaranty When we talk about materially affects, it is to the disadvantage of
the guarantor. Just because there is novation, it does not mean that
the guaranty is extinguished. It must be established that the novation
is now to his disadvantage. If there is decrease in interest rate, then,
there is no problem. He remains to be a guarantor.

Extension of period to pay without guarantor’s consent – you

must not think of any other qualification. You do not have to consider
if advantageous or disadvantageous to the guarantor. The longer the
period to pay, the greater the probability of the debtor becoming
insolvent, which then makes the guarantor liable. If the period is
extended, it is advantageous to the debtor but disadvantageous to the
guarantor. When there is extension, the guaranty is extinguished
unless there is consent from the guarantor.

PART THREE: Secured Loans - PLEDGE

Insolvent co-guarantor CONCEPT

 It is a 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 shall be returned with all its fruits and accessions.

It is possible that the pledgor is not the debtor.

Security/Mortgage is a good evidence of existence of a principal

G1 pays obligation
G2 is insolvent
G1 and G3 pay P300,000 each ESSENTIAL REQUISITES, 2085
 constituted to secure the fulfillment of a
Insolvent guarantor has a sub-guarantor principal obligation

 pledgor is the absolute owner of the thing

(Cavite v. Lim)

The pledgor must be the absolute owner of the thing. If he is not

the owner of the thing at the time the thing was pledged but he
eventually became the owner thereof, still, it is not a valid pledge.

 pledgor has the free disposal of their

property or are legally authorized to do so

ARTICLE 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;
G1 pays
(2) That the pledgor or mortgagor be the absolute owner of the thing
G2 is insolvent
pledged or mortgaged;
G1, SG2 and G3 pay P200,000 each
(3) That the persons constituting the pledge or mortgage have the
free disposal of their property, and in the absence thereof, that
Co-guarantor is released by creditor
they be legally authorized for the purpose.
 If WITH consent of co-guarantors, they will bear
Third persons who are not parties to the principal obligation may
the share of released guarantor
secure the latter by pledging or mortgaging their own property.
 If WITHOUT the consent of co-guarantors, they
will NOT bear the share of the released co-
ESSENTIAL REQUISITES
guarantor
 the property must be placed in the
Insolvency is just one form of defense. Other forms of possession of the creditor (2093)
defense – minority, extinguished obligation.
If the obligation is extinguished, it is a defense which can be In pledge, the delivery of the movable is essential. In chattel
claimed by all co-guarantors. But minority is personal in character mortgage, what is essential is the registration in the Chattel Mortgage
and can only be claimed by the minor. Registry.

EXTINGUISHMENT OF GUARANTEE  the description of the thing and the date of

the pledge must be in a public instrument to bind 3rd
persons (2096)
Grounds
 Payment of principal obligation No Double Pledge
 Novation without guarantor’s consent which  A property already pledged cannot be pledged again
materially affects the obligation while the first pledge is still subsisting ( Mission de San
 Extension of period to pay without guarantor’s Vicente v. Reyes, 19 Phil 524)
consent (2079)
There can be no double pledge because you cannot deliver to 2
Take note that it is possible that the guaranty is extinguished separate individuals one object.
before the principal obligation is paid. It is possible that the
guaranty is extinguished and yet the principal obligation still stands. PARTIES

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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
 PLEDGOR – the debtor or a third person who
pledges the subject matter to secure the loan of the
debtor; he must be the owner and must have free
disposal of the property or at least must be authorized
to dispose
 PLEDGEE - creditor
 NOTE: The pledgor may or may not be the debtor
(2083, 2nd paragraph)
 A pledge executed before a person becomes the
owner is VOID (vda de bautista v. marcos, 3 SCRA
434)
SUBJECT MATTER
 2094 - all movables which are within the
commerce of man provided they are susceptible of
possession
 2095 - incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stocks, bonds,
warehouse receipts and similar documents. The
instrument must be delivered to the pledgee and
properly indorsed.
 Future property cannot be pledged (Gen.
Insurance v. Masakayan, 54 SCRA 120)
 A mortgagee has the right to rely upon the title
and does not have to inquire further, unless
mortgagee is a banking institution ( GSIS v. CA,
287 SCRA 204)
But in case of banking institutions, it is not enough that it
relies upon the title. It must conduct credit investigations.
 A co-owner may pledge his portion of the thing
(PNB v. CA, 98 SCRA 207)
NATURE (2089)
 GENERAL RULE: indivisible
 Debtor who pays part of the debt cannot ask for
proportionate extinguishment of the pledge
 EXCEPTION: where several things are given in
pledge and each thing guarantees only a determinate
portion of the credit
PLEDGEE
Obligations
 To appropriate fruits, income, dividends or interest
of thing with those which are owing him, and if none,
to apply it to the principal (2102)
 Take care of the thing with the diligence of a good
father of a family, subject to reimbursement (2099)
 Cannot deposit the thing with a 3rd person and is
bound by his agents’ acts (2100)
 Liable for loss and deterioration (2099)
Rights
 Cannot deposit the thing with a 3rd person and is
bound by his agents’ acts (2100)
 Liable for loss and deterioration (2099)
 To use the thing to preserve it (2099)
Example: warming up the car
 To retain possession of the thing until fulfillment
of the obligation (2098)
 Reimbursement for expenses to preserve the thing
(2099)
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
 May file actions to recover it from or defend it
against 3rd persons (2103)
 In case of fear of destruction or impairment without
the fault of the pledgee, may cause the sale in a public
auction (2108)
Remember this because there is a counter part in the right of
a pledgor.
 If he is deceived as to substance or quality of the
thing may ask for replacement OR demand immediate
payment (2109)
PLEDGOR
Rights and Obligations
 May dispose of the thing, with the consent of the
pledgee and with the thing still subject to the pledge and
in the possession of the pledgee (2097)
The pledgor can still sell the thing. The pledge does not lose
ownership over the thing. He must ask permission from the
mortgagee/pledge.
 Must advise the pledgee of hidden flaws of the thing
otherwise shall be liable for damages (2101)
This has a counterpart in commodatum – if there is damage,
the bailee can retain the thing and the bailor cannot abandon.
 In case of unauthorized use or misuse by pledgee,
may ask judicial or extrajudicial deposit of thing (2104)
Loss or Impairment
 If the pledgee is negligent - may ask for deposit with
3rd person (2106)
 If without fault of pledgee - may demand return of
thing and offer a replacement (inferior to right to sell by
pledgee) (2107)
The right to sell is superior to the right to retun.
Extinguishment of Pledge
 If the thing pledged is returned by pledgee to the
pledgor (2110)
If the thing is delivered to the pledgor and in which the pledgor
has possession thereof, the pledge is deemed extinguished.
 A statement in writing by the pledgee that he
renounces or abandons his pledge (2111)
Extinguishment of the pledge does not necessarily mean that the
principal obligation is fulfilled
When the debtor defaults
 Obligation is due and unpaid
 Sale of thing at a public auction
 Notice to the pledgor and owner stating the amount
for which the sale is to be held
 Sale must be conducted by a notary public
 After the sale, pledgee must advise the pledgor of the
results
Public Auction
 Pledgor - may bid and if he offers the same terms as
highest bidder, he is preferred (2113)
 Pledgee - may bid but not if he is the only bidder
(2113, 2nd par.)
General Rule: Pledgee can participate in the public auction but
not if he is the loan bidder
 all bids shall offer to pay the purchase price at once
(2114)
 Deficiency - pledgee cannot collect the balance
(2115)
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
 Excess - debtor is not entitled to the excess unless
the contrary is provided (2115)
It is different in Chattel Mortgage. The creditor can get the
balance and the debtor can get the excess.
Can the creditor appropriate the thing to himself in case of
non-payment?
 NO. Creditor cannot appropriate the thing pledged
to himself or dispose of them. Any stipulation to
the contrary is VOID (2088).
 Such stipulation is called pactum commissorium
Pactum commissorium is prohibited
Elements of Pactum
 There should be a pledge, mortgage, or antichresis
of property by way of security for the payment of
the principal obligation;
 There should be stipulation for an automatic
appropriation by the creditor of the property in the
event of non-payment of the obligation
There is pactum
 Stipulation that the thing shall be considered in
full payment of the debt without further action
(Northern Motors v. Herrera)
 Stipulation in a pacto de retro sale that ownership
over the thing will automatically pass to the
vendee in case there is no redemption ( Lanuza v.
De Leon)
Case: It is not pactum commissorium if ordered by the court
Exception to Pactum
 After 2 auction sales and there are no bidders,
pledgee may appropriate the thing to himself BUT
he must give an acquittance of the entire claim
(2112)
BAR 2004
 ABC loaned to MNO P40,000 for which the latter
pledged 400 shares of stocks in XYZ Corp. The parties
agreed that if pledgor failed to pay the loan with 10%
yearly interest within four years, the pledgee is
authorized to foreclose on the shares. MNO delivered
possession of shares to ABC with understanding that
the shares will be returned to MNO upon payment of
loan. However, the loan was not paid on time.
 A month after 4 years, may the shares be deemed
owned by ABC?
ANSWER
 NO. The shares of stocks cannot be deemed owned
by ABC. The pledge has to be foreclosed. Under the
law, the creditor cannot appropriate the things given
by way of pledge. Even if the parties agreed that ABC
will automatically own the shares upon MNO’s default,
that constitutes pactum commissorium, which is a void
agreement.
BAR 2001
 To secure a loan from a rural bank, A assigned her
leasehold rights over a public market stall in favor of
the bank. The deed of assignment provides that in
case of default in the loan payment, the bank shall
have the right to sell Purita’s rights over the stall as
her attorney in fact and to apply the proceeds to the
payment of the loan.
 Was the assignment of rights a mortgage or
cession? Assuming it is a mortgage, does the provision
giving the bank the power to sell the stall constitute
pactum commissorium?
ANSWER
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
 The assignment was a mortgage not a cession of the
leasehold rights. A cession would have transferred
ownership to the bank. However, the grant of authority
to the bank to sell the stall is proof that no such
ownership was transferred and that a mere encumbrance
was constituted. There would have been no need for the
authority if there was cession.
 No. The clause does not constitute pactum
commissorium. It is pactum when non-payment of loan
automatically vests to the bank ownership of the
encumbered property. In this case, the bank merely has
the right to sell the rights to the stall and to apply the
proceeds to the loan.
BAR 1999
 X borrowed money from Y and gave a piece of land as
security by way of mortgage. It was expressly agreed in
the mortgage contract that upon non-payment of the
loan, the land will already belong to Y. If X defaulted in
the payment of loan, will Y now own the land? Why?
ANSWER
 No. Y would not become the owner of the land. The
stipulation is in the nature of pactum commissorium,
which is prohibited by law. The property should be sold at
a public auction and the proceeds thereof paid to Y.
BAR 1999
 Suppose in the preceeding question, the agreement
is that if X failed to pay the loan, the debt shall be paid
with the land mortgaged by X to Y. Would your answer be
the same? Explain.
ANSWER
 No, my answer would not be the same. This is a valid
stipulation and does not constitute pactum
commissorium. In pactum, the acquisition is automatic
without need of further action. In the second situation,
another act is required to be performed, namely, the
conveyance of property as payment (dacion en pago).
Pactum commissorium – at the time of that the obligation was
secured, it was already stipulated
Dacion en pago – “after the fact”
Legal Pledges
 Provisions on possession, care and sale of the thing
pledged cover legal pledges (2121)
 Art. 546 – right of possessor in good faith to refund
of necessary expenses before he returns the thing
 Art. 1707 – lien on goods manufactured or work done
by laborer until his wages are paid
 Art. 1731 – right to retain by a worker who executed
work on a movable
 Art. 1914 – right of an agent to retain the thing until
he is reimbursed advances and damages
 Art. 1994 – right of retention of a depositary until he
is paid his fees
 Art. 2004 – right of a hotelkeeper to retain properties
of the guest until his bills are paid
Pawnshop Regulation Act
 Capitalization – P100,000
 Citizenship – 70% Filipino
 Amount of loan – not less than 30% of the property’s
value unless pawner manifests in writing desire to loan a
smaller amount
 Redemption – within 90 days from maturity of
obligation
 Notify owner of sale on or before end of 90-day
period
 Public auction in place of business or public place
within territorial limits where the pawnshop operates
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit

investigation and inquiry (Saldana v. Phil Guaranty, 106

 Under control of licensed auctioneer Phil 919)

 Notice once in at least two daily newspapers in the  Interest in business

city of operation
 Shares of stocks in a corporation

 Machinery installed in a leased land treated by the

parties as personal property

 House intended to be demolished

PART FOUR: Secured Loans – CHATTEL MORTGAGE

Concept Affidavit of Good Faith

 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, not a chattel mortgage.
 An oath in a contract of CM wherein the parties
severally swear that the mortgage is made for the
purpose of securing the obligation specified in the
conditions thereof and for no other purposes and that the
same is a just and valid obligation and not one entered
into for the purpose of fraud (Section 5, Chattel Mortgage
Law)

Essential Requisites Absence of Affidavit of Good Faith

 Art. 2085
 constituted to secure the fulfillment of a principal
obligation
 pledgor is the absolute owner of the thing
 persons constituting the pledge have the
free disposal of their property or are legally authorized
to do so
 personal property must be recorded in
the chattel mortgage registry (2140)
 Absence only vitiates the mortgage as to 3rd persons
without notice like creditors and subsequent
encumbrancers (PRC v. Jarque, 61 Phil 229)
The counterpart of affidavit of good faith in pledge is description
Period to foreclose the CM
 After 30 days from the time the condition is broken
 The 30-day period is the minimum period with at
least 10 days’ notice to the mortgagor and posting of
public notice of time, place and purpose of the sale
(Cabral v. Evangelista, 28 SCRA 1000)

Essential requisites in Chattel Mortgage: Extrajudicial Foreclosure

Article 2085 + registration/recording of the Chattel
Mortgage in the Chattel Mortgage Registry

BAR 2003
 X constructed a house on Y’s land. X executed a
CM over the house in favor of Y. X purchased the lot
from Y. X then executed a real mortgage over the
property in favor of A bank. When A was able to
foreclose the mortgage, Y demanded that A satisfy the
debt of X and to honor the CM between X and Y. Is this
demand against A valid and sustainable? Why?
ANSWER
 Y’s demand is not valid. The CM is void because it
was not registered with the CM Registry. Hence, A
Bank does not have any obligation to Y.

Effect of Registration
 Registration is binding notice to other creditors of
its existence and creates a real right or a lien
which follows the chattel whenever it goes

 The lien of a chattel mortgagee over the property

is superior to the levy made by an assignee of the
unsecured judgment creditor of the chattel Replevin
mortgagor (Northern v. Coquia, 68 SCRA 374)
 Action which must be initiated by the creditor if he
Mortgage of Motor Vehicle
cannot obtain possession of the property for purposes of
 Under the Revised Motor Vehicle Law, when the
sale on foreclosure (Filinvest v. CA)
subject matter of a chattel mortgage is a vehicle,
the CM must not only be registered with the CM Proceeds of the Sale
registry must also with the Land Transportation
Office or LTFRB in cases of public utility vehicles in  Costs and expenses of keeping and sale
order to BIND THIRD PERSONS (Borlough v.
Fortune)
 demand or obligation secured by the CM
Subject Matter
 subsequent mortgagees
 Always personal or movable property
 mortgagor
 Covers only property described in the CM and not
like or substituted property thereafter acquired by the
Right of Redemption
mortgagor and placed in the same depositary as the
 Available in extrajudicial foreclosure
property originally mortgaged (Sec. 7, par 4 Act 1508)

 Description of the property must be such to enable  Done by paying the mortgagee the amount due on
parties to identify the same after a reasonable such mortgage and the costs and expenses incurred
by such breach of condition before the sale thereof
OR
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009) 9
 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
 If after the sale, done by paying the winning
bidder the purchase price and all costs within one
year from date of registration of certificate of sale
Who Can Redeem
 Mortgagor
 Person holding subsequent mortgage
 Subsequent attaching creditor
Subsequent attaching creditor – after the mortgage
Rights of Parties
CM in
favor of
A dated
June 1,
2000
CM in
favor of
B dated
July 1,
2000
Attachment by
judgment creditor C on
July 15, 2000
 1st Mortgagee - Creditor A – he can foreclose the
chattel mortgage in case of default
 2nd Mortgagee – Creditor B – he can redeem the
property by paying A the mortgage debt. He can now
appropriate the property to himself
This is not pactum commissorium because this is not an
automatic appropriation.
 Attaching Creditor – Creditor C he can redeem the
property by paying A the mortgage debt. He acquires
the right to foreclose and not the right to own the
property
 Debtor can also redeem the property by paying the
mortgage debt and get the property back
Right to Deficiency
 Mortgagee can recover deficiency
 Exception: when the chattel mortgage was
instituted to secure the purchase of a property on
installment (Recto Law)
In Chattel Mortgage, the debtor has a right to get the balance
except if the Recto law (purchase of personal property on
installment) is applicable. The counterpart of the Recto law in real
property is the Maceda law.
Right to Excess
 Since there is no express prohibition under the
law, the chattel mortgagor is presumed to have
the right to the excess of the purchase price over
the debt
Criminal Cases in Chattel Mortgage
 Article 319 of the RPC
 knowingly removing any personal
property mortgage under the Chattel
Mortgage Law to any province or city other
than the one where it was located at the time
of execution of mortgage without the
WRITTEN consent of the mortgagee
 selling or pledging personal property
already mortgaged without the consent of the
mortgagee written at the back of the
mortgage and duly recorded with the Chattel
Mortgage Registry
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
CM Pledge
Registration is requiredRegistration is not required for
for validity validity
Delivery is not essentialDelivery is essential for validity
for validity
Act No. 1508 rules the sale Article 2112 governs the sale
Creditor can sue forCreditor cannot sue for balance
balance, except if sale on
installment (Recto Law)
Debtor gets excess Debtor does not get excess
unless there is a stipulation to
the contrary
BAR 1999
 Distinguish a chattel mortgage from a contract of
pledge
PART FIVE: Secured Loans – REAL MORTGAGE
CONCEPT
 A contract whereby the debtor secures to the creditor
the fulfillment of a principal obligation, specially
subjecting to such security immovable property or real
rights over immovable property which obligation shall be
satisfied with the proceeds of the sale of said property or
rights in case said obligation is not complied with at the
time stipulated.
SUBJECT MATTER
 Immovables
 Alienable real rights in accordance with the
laws imposed upon immovables
 Includes natural accessions, improvements, growing
fruits, rents or income not yet received when the
obligation becomes due
 Includes insurance proceeds or proceeds of
expropriation for public use WHETHER THE SM IS IN THE
HANDS OF THE OWNER OR A 3RD PERSON
 May include AFTER-ACQUIRED PROPERTIES – this is
allowed when the real property are perishable or subject
to inevitable wear and tear. The purpose here is to
maintain the original value of the securities given
(Mendoza v. CA, June 25, 2001)
Coverage: Dragnet Clause
 A clause which subsumes all debts of past or future
origin.
 The mortgage may secure future loans or
advancements. e.g. for the payment of loan of
P20,000 and such other loans or advances already
obtained or still to be obtained ( Quintanilla v. CA,
279 SCRA 397 [1997])
Essential Requisites, 2085
 Constituted to secure the fulfillment of a principal
obligation
 The mortgagor is the absolute owner of the thing
mortgaged
 That the persons constituting the mortgage have the
free disposal of the property or are legally authorized to
do so
 Mortgage must be in a public document. No valid
mortgage is constituted where the deed of mortgage is in
a mere private document (Hechanova v. Adil, 144 SCRA
450)
Requisites for Real Estate Mortgage:
Article 2085 + must be in a public document
Minimum Requirement for Validity: Public Document
 If mortgage is in a public document but is not
recorded - mortgage is nonetheless binding on the
parties (2125)
 If the mortgage is in a private document, the
mortgage is void and the mortgagee may demand
reduction of mortgage in a public instrument
(notarized)
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
Effect of Non-Registration
 Registration only operates as a notice of the
mortgage to others but does NOT add to the
validity of the mortgage or convert an invalid
mortgage into a valid one (Samanilla v. Cajucom,
107 Phil 432) In this case, the mortgagor was not the
owner but he nevertheless had the mortgage recorded.
The duty of the Register of Deeds as to the recording of
the mortgage is merely ministerial. So, in this case, the
registration did not make the mortgage valid.
Even if the Real Estate Mortgage is not registered, it is still a
valid Real Estate Mortgage
Effect of Registration
 Registration is merely ministerial and does not
validate an invalid RM (Agriculture v. Yusay, 107
Phil 791)
Unregistered Sale vs. Recorded Mortgage
 If prior to the mortgage, the SM was sold to
another person, the sale prevails (even if it is
unregistered) over the registered mortgage. The
original owner has parted with ownership and at
the time of mortgage he no longer had ownership
and free disposal of the thing ( State Investment v.
CA, 254 SCRA 368 [1996])
Example: A sold the property to B. The sale was not recorded.
After the sale, A mortgaged the property to C. The Real Estate
Mortgage was recorded. The mortgage is not valid because the
mortgagor must be the absolute owner. In this case, there was a
valid sale and ownership has already transferred to B.
Kinds of Real Mortgage
 Voluntary – one which is agreed to between the
parties or constituted by will of the owner of the
property
 Equitable – one which, although it lacks the
formalities of a mortgage shows the intention of the
parties to make the property as security for the debt
 Legal – one required by law to be executed in
favor of certain persons
 E.g. a person bound to give a bond but can’t
execute a bond may execute a real mortgage over
his property covering his obligation
Effects of Mortgage
 Creates a real right- until discharged, it follows the
property wherever it goes and subsists
notwithstanding change of ownership. If the
mortgagor sells the property , the SM remains
subject to the fulfillment of the obligation secured
by it (Bonnevie v. CA, 125 SCRA 122)
The Real Estate Mortgage creates a real right. Until the main
obligation is paid, it will still exist despite change in ownership.
Illustration
Real mortgage in
favor of A on May
1, 2000
Sale in favor of B
June 1, 2000,
with A’s consent
Auction sale
foreclosing the RM of
A, with C as the
highest bidder
 Who has a preferential right? The buyer who buys
the property from debtor/owner after the mortgage
OR the winning bidder during foreclosure?
 The winning bidder has a preferential right but
subject to the new owner’s equitable right of
redemption (Santiago v. Dionisio, 92 Phil 485)
Effects of Mortgage
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
 Creates merely an encumbrance – it does involve the
transfer, cession or conveyance of property but only
constitutes a lien. What is lost is the free disposal
and sale of the SM (Medida v. CA, 208 SCRA 887)
It merely creates an encumbrance. The owner still has the right
to freely dispose the property for such right is not curtailed.
 2128 – the mortgage credit may be alienated or
assigned to a 3rd person in whole or in part (right is
transferable)
 2130 – a stipulation forbidding the owner from
alienating the SM shall be VOID
Effects of an Invalid Mortgage
 The principal obligation subsists
 What is lost is merely the right to foreclose
 The mortgage deed remains as evidence of personal
obligation of the debtor (DBP v. CA, 249 SCRA 331)
When the principal obligation is not fulfilled
 Mortgagee chooses between filing a collection case
or foreclosing the mortgage
 Foreclosure may either be extrajudicial OR judicial
Redemption
 Equity of Redemption
 Right of Redemption
EQUITY OF REDEMPTION
 Right of the mortgagor to redeem the property after
his default in the performance of the conditions of the
mortgage BUT before the confirmation of the auction sale
of the mortgaged property
Equity of Redemption = Judicial Foreclosure
(“E” – Equity = do not combine with another “E” – Extrajudicial)
Equity of Redemption; When available
 General Rule: Only in judicial foreclosure – 90-120
days from receipt of judgment in favor of the creditor OR
before the confirmation of the sale at the discretion of the
court
When we talk about judicial foreclosure, there is a full blown
action filed before a court. That is why, there has to be a finding of
liability by the court. It is not from the release of the order of
payment but from the receipt of the order.
It is possible that the 90-120 days have lapsed and there was
sale and yet you can still redeem using equity of redemption before
the court confirms the sale, but this is purely discretionary on the part
of the court.
 Exception: in extrajudicial foreclosure where the
mortgagor is a juridical entity - until but not after the
registration of certificate of foreclosure sale which shall
not be more than 3 months after foreclosure,
WHICHEVER IS EARLIER (RA 8791)
It is possible to have equity of redemption in extrajudicial. But
that is only the term. This happens when the mortgagor is a juridical
entity.
In extrajudicial foreclosure, the advantage of the mortgagor is
that he has one year to redeem from registration of sale. However, if
the mortgagor is a juridical entity (do we include partnership? No
definite answer , it will nto have 1 year to redeem. According to RA
8791, the equity of redemption is until but not after the registration of
certification of foreclosure sale and this should not be more than 3
months after the foreclosure. So, there are 2 periods of time –
whichever is earlier.
RIGHT OF REDEMPTION
 The right of the mortgagor to redeem the mortgaged
property within a certain period after it was sold for the
satisfaction of the debt
Right of Redemption = Extrajudicial Foreclosure
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
 GENERAL RULE: extrajudicial foreclosure within
one year (365 days) from registration of certificate of
sale
 EXCEPTION: in judicial foreclosure where the
mortgagee is PNB or a banking institution – within one
year from registration of the foreclosure sale
BAR 1999
 Are the right of redemption and the equity of
redemption given by law to mortgagor the same?
Explain.
EXTRAJUDICIAL FORECLOSURE
File application with executive judge who has
jurisdiction over the property, through Clerk of Court
Post notice of sale or publish notice of sale once a week for
at least 3 consec weeks in a newspaper of gen circ
Clerk of Court issues receipt and certificate of payment
Application is raffled among sheriffs
Sale must have at least 2 bidders, if not, sale is postponed.
If still no 2 bidders, proceed.
Certificate of sale is approved by Exec Judge or Vice Exec
Judge in former’s absence. Cert is issued to winning bidder
3 months 1-Yr Right of Redemption
If redemption period expires, Clerk archives records
Redemption in Extrajudicial Foreclosure
 If mortgagor is NOT a juridical entity - Right of
Redemption – Within 1 year from date of
registration of certificate of sale
 If mortgagor is a juridical entity - Equity of
Redemption – until but not after the registration
of certificate of foreclosure sale which shall not be
more than 3 months after foreclosure,
WHICHEVER IS EARLIER (RA 8791)
Technically, we call the 3-month period not right of
redemption but equity of redemption.
Extrajudicial foreclosure -> right of redemption -> 1 year
But if the mortgagor is a juridical entity -> 3 months or
whichever is earlier. Officially, it is not a right of redemption
but an equity of redemption.
How to Validly Redeem
 Must be made within the period
 Payment of purchase price plus 1% interest per
month with taxes thereon from date of registration of
sale until date of redemption. Payment is to
redemptioner or sale officer
 Written notice of redemption must be served on
officer who made the sale and a duplicate with
Register of Deeds (Rosales v. Yboa, 120 SCRA 869)
Judicial Foreclosure
File an action with RTC which has jurisdiction over
location of SM
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
Court shall order payment of debt within 90-120 days from
entry of judgment (debtor’s receipt of judgment, Herrera v.
Arellano, 97 Phil 776)
Equity of Redemption Equity of Redemption
If no payment, the court orders sale of SM to the Highest
bidder in a public auction
The court calls parties for confirmation of sale
Equity of Redemption Equity of Redemption
Execution of judgment
Application of proceeds
Execution of sheriffs’ certificate
Registration of certified true copy of the final order of
the court confirming the sale
If mortgagee is PNB or For ordinary mortgagees,
a banking institution, 1-yr title shall now be
right of redemption starts consolidated in winning
bidder’s name
Q: What is hearing for confirmation of sale?
A: This is a hearing where the parties will appear and the mortgagor
will try his best to assail the validity of the auction the sale. He will
question the legality of the sale.
Case: Equity of redemption in judicial foreclosure will not stop on the
120th day. It is possible that even after the sale, there can be
redemption as long as there is no confirmation of the sale yet.
If you exercised the equity of redemption before the confirmation
of the sale, the amount of the debt (not the purchase price) is to be
paid. So, it is still an equity of redemption.
Redemption in Judicial Foreclosure
 Equity of redemption – 90-120 days from entry of
judgment or at any time before the sale is confirmed
upon the discretion of the court ( Salazar v. De
Torres, 108 Phil 209)
 Right of Redemption – 1 year from registration of
order confirming the sale if the mortgagee is PNB or
a banking institution
Who Can Redeem?
 Mortgagor or one who is in privity of title with
mortgagor
 Successor-in-interest
 One to whom debtor has transferred his
right
 One to whom debtor has conveyed his
interest in the SM
 One who succeeds to the interest of the
debtor
 One or more joint debtors who were joint
owners of the SM
 Wife as regards her husband’s homestead
 Compulsory heir
In Case of Deficiency
 Can recover within 10 years from time the right of
action accrues
 May recover even during period of redemption
 Incorporated in deficiency judgment in a judicial
foreclosure
PART SIX: Secured Loans – ANTICHRESIS
Concept
 2132- by the contract of antichresis the creditor
acquires the right to receive fruits if an immovable of
his debtor, with the obligation to apply them to the
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit

payment of interest, if owing and thereafter to the SM is delivered to the creditor Debtor usually retains
principal of his credit possession over SM

Case: Medel vs. CA – You can still bring the creditor to the Creditor has right to receiveCreditor has real right over
court even if the usury law is suspended. fruits but does not have real the SM but does not have the
right right over the fruits
Role of Delivery
 Delivery is only required in order that the creditor
may receive the fruits and not for validity of the Creditor has obligation to payNo obligation to pay taxes
antichresis. taxes
Creditor has obligation to get No obligation to apply fruits
Obligations of the Antichretic Creditor fruits and apply them to the
 Must pay taxes and charges upon the estate interest then to the principal

 Bound to pay expenses necessary for preservation Real property Real property
and repair

 Sums spent for these purposes are deducted from

the fruits

How to avoid obligation to pay taxes, charges, and

necessary expenses

 Compel the debtor to enter again upon enjoyment

of the property except when there is a stipulation
to the contrary

Requirement for Validity (in addition to Article 2085)

 The amount of the principal and interest shall be
specified in writing; otherwise the contract of
antichresis shall be VOID (2134).

Effect of Antichresis
 No transfer of ownership upon debtor’s default

 In case of non-payment, creditor may petition the

court for payment of debt and foreclosure (under
the Rules of Court)

Petition the court = judicial foreclosure

BAR 2007
 A contract of antichresis is always:
(a) a written contract
(b) a contract with a stipulation that debt will be
paid through receipt of the fruits of an immovable
(c) involves the payment of interest, if owing
(d) all of the above;
(e) letters a and b

ANSWER: D

If there is no “if owing” in (c), the answer could be (e)

Pledge, Mortgage and Antichresis

 Innocent mortgagees for value, like innocent
purchasers for value are protected by law

 Mortgage by using a forged special power of atty

is VOID

 Mortgage by an impostor is VOID

Q: Can a Real Estate Mortgage and Antichresis cover 1 subject

matter?
It is hard but not impossible.

Antichresis Pledge

Real property Movable property

Perfected by mere consent Perfected by delivery

Consensual contract Real contract

Antichresis RM
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009) 13
 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit

Pledge Chattel Mortgage Real Mortgage Antichresis

Subject Matter Movables Incorporeal Movables Incorporeal Immovables Fruits of real property
rights rights Alienable real rights

Added Requisite forDelivery of SM to Registration in CM Public Instrument Principal and interest

Validity pledgee Registry must be in writing
Pactum applicable YES YES YES YES

Essence Pledgee retains CM follows the property RM creates a real right and Cr editor enjoys fruits
possession until encumbrance until payment of debt
payment and interest

Default options Art. 2112 Act 1508 Act 1508 or Rules of Court Rules of Court

PART SEVEN: DEPOSIT

Concept
• 1962 – A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and returning the same.
• If the safekeeping of the thing is not the principal
purpose of the contract, there is NO deposit but some
other contract. The contract may either be lease,
commodatum or agency.
Bank deposit – is not a contract of deposit but a contract of loan
Judicial Deposit/Sequestration
• 2005 – takes place when an attachment or seizure of
property in litigation is ordered by the court
• 2006 – movable or immovable may be the SM of
sequestration
Judicial Deposit
• Primary purpose: to maintain status quo during
the pendency of litigation or to insure the rights of
parties to property.

Role of Delivery
• 1963 – An agreement to constitute a deposit is
binding but the deposit is NOT perfected until the
delivery of the thing
Subject Matter
• General Rule - Only movable things may be the
object of a deposit (1966)
• Judicial deposit – may cover immovable or movable
(2005-2996)
Nature of Deposit
• Essentially gratuitous – except when there is an
agreement to the contrary OR unless the depositary is
engaged in the business of storing goods (1965)
This is not necessarilyl physical possession but taking within
the the control of the court.
Examples of Judicial Deposit
• Rule 57 (Preliminary attachment) – attachment
by sheriff upon filing of complaint
• Rule 59 (Receivership) - a receiver may be
appointed by the court to administer and
preserve the property in litigation
• Rule 60 (Replevin) - personal property may be
seized by sheriffs in suits of replevin or manual
delivery of personal property
• Rule 127 – attachment in criminal cases

Form Judicial Deposit

• 1969 – A contract of deposit may be entered into • 2008 – depositary must comply with the
orally or in writing obligations of a good father of family

• 2007- obligation of depositary subsists until the

Basis Deposit Commodatum Mutuum end of controversy which gave rise to the
sequestration, unless the court orders.

PURPOSE Safekeeping Use of thing Consumption EXTRAJUDICIAL DEPOSIT

NATURE Gratuitous or Gratuitous Gratuitous or VOLUNTARY DEPOSIT

onerous onerous
Concept
OBJECT Extra-judicial: Movables and Money or • 1968 - One wherein the delivery is made by the
movables immovables fungible thing will of the depositor or by two or more persons each
of whom believes himself entitled to the thing
DEMANDABILITY Depositor can Return only after Pay within period deposited
demand thing at period
will In this case, you can choose who will be the depositary

• MAIN DISTINCTION WITH NECESSARY DEPOSIT:

Depositor has complete freedom in choosing the
depositary.

Obligations of the Depositary

• To keep the thing safely and to return it, when
required, to the depositor or to his heirs or successors
or to the person who may have been designated in the
contract (1972) (safekeeping)
• Degree of care required – degree of care one
would exercise over his own property
• Must return the SM together with all accessions,
accessories and products. (1983)
JUDICIAL DEPOSIT 2005-2008 • Cannot deposit the SM with a 3rd person .

Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009) 14

 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
• If deposit with 3rd person is allowed, depositary is
liable for loss if deposited with 3rd person who is
manifestly careless or unfit. (1973)
• 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 the facts of the situation.
– Before change he must notify the depositor and wait
for his decision, unless delay would cause danger.
(1974)
• Depositary holding certificates, bonds, securities or
instruments which earn interest:
– must collect interest when they become due
– take steps so that value of securities is preserved
(1975)
 If SM delivered closed and sealed:
– must return it in the same condition
– liable for damages should the seal be broken through
his fault.
– fault on the part of the depositary is presumed
unless there is proof to the contrary (1981)
Obligations of the Depositary: Loss by Fortuitous Event
(1979)
• GENERAL RULE: Not liable
• EXCEPTIONS:
– Stipulated
– Uses without owner’s permission
– Delays in return
– Allows others to use it even though he himself is
authorized
Obligations of the Depositary: Loss by Force Majeure (1990)
• Loss by force majeure or government order and
receives a thing or money in lieu of the thing, he
must deliver to the depositary the thing or money he
received (1990)
Rights of the Depositary
• 1984 – cannot demand that depositor proves his
ownership BUT
• If he discovers that the SM was stolen and who the
true owner is, he must inform the true owner of the
deposit
• If owner does not claim within 1 month from notice,
depositor may return SM to depositary without
incurring liability
• May retain the SM in pledge until full payment of
what may be due him by reason of deposit (1994)
Use of the Subject Matter
• GENERAL RULE- cannot use without express
permission of depositor. He shall be liable for
damages
• EXCEPTION – to preserve the thing. (1977)
• If allowed to use – the contract is no longer a
deposit but becomes a commodatum, except where
safekeeping is still the principal purpose. The
permission shall not be presumed.
Depositor’s Incapacity
• Depositary shall be subject to all obligations of a
depositary and may be compelled to return the thing BY
the guardian or administrator of the incapacitated person
(1970)
Incapacity of Depositary
• Depositor shall only have an action to recover the SM
while in possession of the depositary or to compel
payment of amount that depositary was enriched.(1971)
– If property is in the hands of a 3rd person who
acquired SM in good faith, depositor may sue the 3rd
person
Obligations of the Depositor
• Must reimburse depositary for expenses he may
have incurred for the preservation of the thing if
gratuitous deposit (1992)
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
• Must reimburse depositary for any loss arising
from the character of the SM, unless the depositor
was not aware of or was not expected to know the
dangerous character of the SM or unless he notified
the depositary of the same or depositary was aware of
it (1993)
Extinguishment of Voluntary Deposit
 Death of depositary extinguishes the deposit in
gratuitous deposit but not in deposit for
compensation
 1995
 Upon loss or destruction of the thing deposited
 In case of gratuitous deposit, upon the death of
either the depositor or the depositary
 Other causes (novation, merger, expiration of the
term, fulfillment of resolutory condition)
NECESSARY DEPOSIT
Concept
• A deposit is necessary when:
– It is made in compliance with a legal obligation
(1996)
– It takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck or
other similar events (1996)
– Travellers in hotels or inns deposit effects (1998)
– Made by passengers of common carriers (1745)
Necessary Deposit – To comply with a legal obligation
• Judicial deposit of SM the possession of which is
disputed by two or more persons under Art. 538
– If the two possessors are identical as to dates of
possession and both can present title
– Thing must be placed in judicial deposit
• Deposit of SM of pledge when there is
unauthorized use by the pledge
• When constituted to guarantee contracts with the
government arising from an obligation which is
administrative in character.
Example: When entering into a contract with a DPWH, it is
required that a guarantee contract is constituted. Property is
necessarily deposited which may be proceeded against in case
construction does not follow specifications.
BAR 2007
• A deposit made in compliance with a legal
obligation is:
(a) an extrajudicial deposit
(b) a voluntary deposit
(c) a necessary deposit
(d) a deposit with a warehouseman
(e) letters a and b
ANSWER: C
Necessary Deposit – On the occasion of calamity
• When during a fire, flood, storm, or other
calamity a property is saved from destruction by
another person without the knowledge of the
owner, the latter is bound to pay the former just
compensation (2168)
• Possession passes by accident from one person to
another and the law imposes on the recipient the
obligations of a bailee
• Primary purpose: to save the property
Necessary Deposit – Travellers
• The keepers of hotels on inns shall be responsible
as depositaries for effects deposited by guests
provided:
– Notice was given to them about the effects
– Guests have taken precautions prescribed
regarding their safekeeping (1998)
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
• Liable for vehicles, animals and articles placed in the
annexes of the hotel (1999)
• Liable for loss or injury through:
• Acts of servants or employees of the keeper
• Acts of strangers
• Acts of robbers UNATTENDED by use of arms or
irresistible force
• NOT liable for loss or injury through:
• Force majeure
• Acts of robbers with arms or using irresistible force
• Acts of guests, his family, servants or visitors
• Character of the SM
• 2003 – hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is
not liable for articles brought in by guests
• Void stipulations – stipulations which diminish or
suppress liability of keepers
• 2004 – may validly retain articles as security for
credits of guests
Judicial Deposit vs. Extrajudicial Deposit
ORIGIN: will of the court ORIGIN: will of the parties
PURPOSE: to secure the PURPOSE: safekeeping
right of a party to recover
Movable or immovable Movable
Always remunerated May be gratuitous
onerous
Held in behalf of the Held in behalf of depositor
prevailing party
PART EIGHT: CONCURRENCE AND PREFERENCE OF CREDITS
PRINCIPLES
• Assets of a debtor can be used to satisfy obligations
with creditors.
• However, there are certain properties which are
exempted from satisfying liabilities.
• Note, however, that even if these properties are
deemed exempted, these assets shall NOT be
exempt from execution issued upon a judgment
recovered for its price or upon a judgment of
foreclosure of a mortgage thereon
Exempted Properties
• Art. 153 - Family Home – generally exempted unless
for:
– Non-payment of taxes
– Debts incurred prior to the constitution of family
home
– Debts secured by mortgages on the premise before
or after such constitution; and
– Debts due to laborers, mechanics, architects,
builders, material men and others who have
rendered service or furnished material for the
construction of the building (155)
 Art. 205 – Right to receive support
as well as any money or property obtained as such
support shall not be levied upon on attachment or
execution
Section 13 – Exempted Properties
– Judgment obligor’s family home or the homestead in
which he resides
– Ordinary tools and implements personally used by
him in his trade, employment or livelihood;
– 3 horses or 3 cows or 3 carabaos or other beasts of
burden necessarily used by him in his ordinary
occupation;
– His necessary clothing and articles for ordinary
personal use, EXCLUDING jewelry;
– Household furnitures and utensils necessary for
housekeeping with a value not exceeding P100,000;
– Provisions for individual or family use sufficient for 4
months
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
– Professional libraries of judges, lawyers,
physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers and other
professionals not exceeding P300,000 in value;
– 1 fishing boat and accessories not exceeding the
total value of P100,000 owned by a fisherman
and by the lawful use of which he earns his
livelihood;
– Salaries, wages, earnings of the debtor for his
personal services within the 4 months preceeding
the levy necessary to support his family;
– Lettered gravestones;
– Moneys, benefits, privileges, or annuities accruing
or growing out of life insurance; (except
endowment)
– Right to receive legal support or money or
property obtained as such support or any pension
or gratuity from the government;
– Properties especially exempted by law;
– Properties belonging to the absolute community
or conjugal partnership except insofar as the debt
has redounded to the benefit of the family
(2238);
– Property held by debtor as trustee of an express
or implied trust (2239)
Concurrence vs. Preference
• Concurrence – implies the possession of two or
more creditors of equal rights or privileges over
the SAME property or all of the property of the
debtor
or • Preference – right held by creditor to be preferred
in the payment of his claim above others out of
the debtor’s assets
• The provisions on concurrence and preference
will only apply if the liabilities of the debtor are
more than his assets
Do not apply the provisions on concurrence and preference if
assets are sufficient to pay liabilities.
General Categories of Credit
• Special Preferred – 2241 & 2242
• Ordinary Preferred – 2244
• Common Credits - 2245
SPECIAL PREFERRED
• Envisions a situation where a particular property
which is either movable or immovable is subject
to certain obligations
• These special preferred credits or obligations
have to be satisfied using the proceeds from the
sale of said property
Illustration
• A owns a vehicle. The price of the vehicle is not
yet paid. The vehicle is also the subject of a chattel
mortgage in favor of the financial institution where A
obtained a loan for the price. A also has unpaid repair
expenses.
• IDENTIFY THE OBLIGATIONS WITH RESPECT TO
THE CAR: unpaid purchase price, chattel mortgage,
unpaid repair expenses
Special Preferred Credits on Movables 2241
• Duties, taxes and fees due on the movable
• 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
• Claims for the unpaid price of movables sold
• Credits guaranteed with a pledge of the movables
• Credits for repairs, safekeeping, preservation of
the property
• Claims for laborer’s wages on the goods
manufactured or work done
• Expenses of salvage
• Credits between the landlord and tenant
• Credits for transportation upon goods carried
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 Credit Transactions Review – Based on PowerPoint Presentations and Lectures of Atty. Maria Christina S. Sagmit
• Credits for lodging and supplies usually furnished to
travellers by hotelkeepers on movables belonging to
the guests
• Credits for seeds and expenses for cultivation and
harvest
• Credits for rent for 1 year upon personal property of
the lessee
• Claims in favor of the depositor if depositary has
wrongfully sold the thing deposited
Special Preferred Credits on Immovables, 2242
• Taxes due upon the land or building
• Unpaid price of immovable
• Claims of laborers, masons and other workmen
engaged in construction
• Claims of furnishers of materials used in
construction
• Mortgage credits recorded in Registry of Property
• Expenses for preservation, improvement
• Credits annotated in the Registry of Property
• Claims of co-heirs for warranty in the partition
• Claims of donors
• Credits of insurers upon property insured
ORDINARY PREFERRED
• Envisions a situation where a particular credit is not
secured by any particular movable or immovable.
• HOWEVER, this credit happens to be one of those
enumerated as ordinary preferred. Hence, the credit
will enjoy preference over properties which are not
encumbered, including the free portion of the
debtor's property.
Ordinary Preferred, 2244: Hierarchical Application
• Credits for services rendered the insolvent by
employees, laborers, household helpers
• Proper funeral expenses for the debtor, children
under his parental authority
• Expenses during last illness of debtor, spouse and
children under his parental authority
• Compensation due to laborers or dependents under
laws providing for indemnity for damages in cases of
labor accident or illness arising from nature of
employment
Ordinary Preferred, 2244
• Credits and advancements made to debtor for
support of himself and family
• Support during insolvency proceedings and for 3
months thereafter
• Fines and civil indemnification arising from criminal
offense
• Legal expenses for administration of insolvent’s
estate
• Taxes due the national government
• Taxes due any province
• Taxes due any city or municipality
• Damages for death or personal injuries caused by
quasi-delict
• Gifts due to private and public institutions of charity
• Credits without privilege which appear in a public
instrument or by final judgment if they have been
the subject if litigation
SUMMARY
• STEP 1: Special Preferred Credits must be paid from
the value of the movable or immovable. Taxes enjoy
priority while the rest of the credits are paid
proportionally.
Case: DBP vs. CA – By virtue of this case, claim of laborer is # 1
based on Article 101 of the Labor Code. This mus be read in
connection with Article 2244 of the Civil Code which puts the claim on
the #2. (Read the case to verify but I do not have the citation )
• STEP 2: Ordinary Preferred Credits are then paid in
the order of priority as they are enumerated. The assets
used to pay ordinary preferred credits are those which
are free from encumbrances under 2241 and 2242 and
the free portion under 2241 and 2242.
• STEP 3: The non-preferred credits are now paid with
whatever free portion remains.
Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009)
Example: P 2M value of property. Pay first taxes valued at P
200,000. Then, P 1.8M must be used to pay proportionately those
in #2 to 13 in Article 2241.
INSOLVENCY LAW
Concept
• Insolvency generally denotes the state of a
person whose liabilities are more than his assets.
• Used interchangeably with bankruptcy.
• Insolvency law deals with voluntary and
involuntary insolvency and suspension of
payments.
Suspension of Payments
• Sec. 2 – The debtor who, possessing sufficient
property to cover all his debts, be it an individual
person, 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 city in
which he has resided for 6 months next preceeding
the filing of his petition.
Voluntary Insolvency
• Debtor files petition for voluntary insolvency with
the RTC (debt must be >P1,000)
• Court issues an order declaring debtor insolvent
• Order is published
• Creditors meet to elect the assignee in insolvency
• Debtor’s properties are conveyed by the clerk of
court to the assignee
• Debtor’s assets are liquidated and debts are paid
• Composition, or an agreement where creditors
agree to receive less than the amount due them
• Discharge of the debtor on his application
• Objection, if any to the discharge
• Appeal to the Supreme Court in extreme cases
Effects of Order Declaring Insolvency
• All the assets of the debtor not exempt from
execution are taken possession by the sheriff or
until the appointment of a receiver or assignee
• Forbids the payment of 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 by him
• All civil proceedings pending against the insolvent
debtor shall be stayed
• Mortgages or pledges, attachments or executions
on property of the debtor duly recorded and not
dissolved are NOT affected by the order
Involuntary Insolvency
• Initiated by a petition filed by at least 3 creditors
whose credits accrue in the Philippines with an
aggregate amount of not less than P1,000.
• The petition must set forth one or more acts of
insolvency.
Acts of Insolvency
• Such person is about to depart or has departed
from the country with intent to defraud his
creditors;
• That being absent from the country, he remains
absent;
• That he conceals himself to avoid the service of
legal process to delay or defraud creditors;
• He conceals or is removing any of his property to
avoid its being attached or taken on legal
process;
• He has suffered his property to remain under
attachment or legal process for 3 days for the
purpose of hindering or delaying or defrauding
his creditors;
• He has confessed or offered to allow judgment in
favor of any creditor or claimant for the purpose
of hindering or delaying or defrauding any
creditor or claimant;
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• He has willfully suffered judgment to be taken (d) 1/3 of the total debts must be
against him for default for the purpose of hindering representative of the approving creditors
or delaying or defrauding his creditors; (e) letters a and b
• He has suffered or procured his property to be taken ANSWER: B
or legal process with intent to give a preference to
one or more of his creditors and thereby hinder, Note: The 2/3 creditors who agree to the proposal must represent
delay or defraud any of his creditors; at least 3/5 of the liabilities of the debtor.
• He has made any assignment, gift, sale, conveyance
or transfer of his estate, property, rights or credits
with intent to delay, defraud or hinder his creditors;
• He has, in contemplation of insolvency, made any
payment, grant, sale, conveyance or transfer of his
estate, property, rights or credits with intent to
delay, defraud or hinder his creditors;
• That being a merchant or tradesman he has
generally defaulted in the payment of his current
obligations for a period of 30 days;
• That for a period of 30 days he has failed after
demand, to pay any moneys deposited with him or
received by him in a fiduciary capacity; and
• An execution having been issued against him on final
judgment for money, he was found to be without
sufficient property subject to execution to satisfy
judgment.

Voluntary Insolvency vs. Involuntary Insolvency

One creditor is sufficient
Insolvent debtor files the
petition
Debtor must not be guilty
of any act of insolvency
Debt must be > P 1,000
Bond is not required
An adjudication of
insolvency may be granted
ex parte
Petition is filed with RTC of Length of residence is
province or city where
debtor had resided for 6
months
Declaration of insolvency is Declaration of insolvency is
made upon filing of
voluntary insolvency
At least 3 creditors must file
the petition
Three or more creditors
who meet the requirements
file the petition
Debtor must be guilty of
any act of insolvency
Debt must be P 1,000 or
above
Bond is required
Adjudication of insolvency
granted only after hearing
immaterial
made after hearing

Suspension of Payment vs. Insolvency

Purpose is to suspend or Purpose is to discharge
delay payment in debts debtor from payment of
debts
Debtor has sufficient Debtor does not have
property to pay his debts sufficient property to pay
his debts
Amount of indebtedness is Creditors receive less than
not affected their credits OR may not
receive anything at all in
case of preferred credits
Number of creditors is In voluntary: 1 creditor
immaterial In involuntary: 3 or more
creditors

BAR 2007
• An assignee in a proceeding under the Insolvency
Law does not have the duty to:
(a) suing to recover the properties of
the estate of the insolvent debtor
(b) selling the property of the
insolvent debtor
(c) ensuring that a debtor corporation
operates the business effectively and efficiently
while proceedings are pending
(d) collecting and discharging debts owed to the
insolvent debtor
ANSWER: C

BAR 2007
• In order to obtain approval of the proposed
settlement of the debtor in an insolvency proceeding:
(a) the court must initiate the proposal
(b) 2/3 of the number of creditors must agree A long life may not be enough,
to the proposal but a good life is good enough 
(c) 3/5 of the number of creditors must agree
to the settlement

Prepared by: Mariblithe A. Cartujano & Jazzie M. Sarona (4-Manresa 2008-2009) 18