Credit Transactions Doctines

CREDIT TRANSACTIONSFACTS/ISSUE RULING

LOAN

1 EASTERN SHIPPING LINES, INC., vs.HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC.,

1. This is an action against defendants shipping company (EASTERN SHIPPING LINES), arrastre operator (METRO PORT SERVICE) and broker-forwarder (ALLIED BROKERAGE CORP) for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages.

2. The CA RULED- Ordering defendants to pay plaintiff, jointly and severally: The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid.

ISSUES:

whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker;

whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered;

whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%).

Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum, thus:The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator. Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee.

Reckoning point and rate of legal interest- THE RULES When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the

CODERIS, FRANCISCO, MANONGSONG, MATAS, OMAR, TAN, TIZON, VELENCIA Page 1

rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.

2 FLORENDO VS. CA

FACTS: Petitioner Gilda Florendo was an employee of Respondent Bank from May 17, 1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years from respondent bank's Provident Fund. Petitioners and respondent bank, through the latter's duly authorized representative, executed the Housing Loan Agreement. Together with the Housing Loan Agreement, petitioners and respondent bank, through the latter's authorized representative, also executed a Real Estate Mortgage and PromissoryNote. The loan was actually given to petitioner Gilda Florendo, in her capacity as employee of respondent bank. Thereafter, respondent bank increased the interest rate on petitioner's loan from 9% per annum to 17%, the said increase to take effect on March 19, 1985. That petitioners protested the increase.

Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors . . . ." 9 Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them.

In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in


ISSUE: Did the respondent bank have a valid and legal basis to impose an increased interest rate on the petitioners' housing loan?

essence ruled that in general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar, 11 the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.

What is actually central to the disposition of this case is not really the validity of the escalation clause but theretroactive enforcement of the ManCom Resolution as against petitioner-employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation.

The loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as employee resignations, which could have been used to trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise, they — especially respondent bank — should have included such factors in their loan agreement.

ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or


circular. Without such CB issuance, any proposed increased rate will never become effective.

On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contractsordained in Article 1308 of the Civil Code.

3PNB V. CA, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ

Private respondents obtained a loan from PNB. The interest rate provided in the promissory note and real estate mortgage executed by private respondents is 12%, with a clause authorizing the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."

PNB informed private respondents that the interest rate of the loan account with us is now 25% per annum plus a penalty of 6% per annum on past dues." The PNB further increased this interest rate to 30% on October 15, 1984; and to 42% on October 25, 1984.

INTEREST RATES CANNOT BE UNILATERALLY RAISED.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

DEPOSIT

1 PAULINO GULLAS vs. THE PHILIPPINE NATIONAL BANKPNB applied the account of Gullas to the debt created by the dishonor of the treasury warrant indorsed by GULLAS

ISSUE:Can Philippine National Bank apply a deposit to the debt of depositor to the bank?Was the set off properly done by the bank?

1. YES. As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. Civil Code contains provisions regarding compensation (set off) and deposit.The portions of Philippine law provide that compensation shall take place when two persons are reciprocally creditor and debtor of each other . In his connection, it has been held that the relation existing between a depositor and a bank is that of creditor and debtor.2. NO.The action of the bank was prejudicial to Gullas notice should actually


have been given him in order that he might protect his interests. While notice of the application of his deposit to a debt to the bank is not necessary in case of a maker, the same cannot be applied to an indorser, such as Gullas.


2 GUINGONA vs. CITY FISCAL

respondent David invested with the Nation Savings and Loan Association (NSLA). NSLA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments but he only recovered a lesser an amount than that he invested. Believing that petitioners misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions, David filed a case for estafa against petitioners.

Pets filed MTD to the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation which was itself novated (civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed them)

W/N the public respondents have no jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions)

YES. Petitioners’ liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa.

It must be pointed out that when private respondent David invested his money on nine and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:

Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan.

In Serrano vs. Central Bank of the Philippines:Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of

The Court had already laid out the rule:

In order that a person can be convicted under Art. 315, par.I(b), it must be proven that he has the obligation to deliver or return the some money, goods or personal property that he received. Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly as stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

"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 he 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.

"In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership passes to the borrower.

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

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the

(b) By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property.


petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return the subject matter of the deposit

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction.

aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor.

3 REYES VS BPI

(March 24, 1995) Reyes spouses executed a real estate mortgage on their property in Iloilo City in favor of respondent BPI to secure a P15,000,000 loan of Transbuilders. Transbuilders failed to pay its P15M loan within the stipulated period of one year, the bank restructured the loan through a promissory note executed by Transbuilders in its favor.

Petitioners filed separate petitions for mandamus and prohibition with the RTC of Manila to compel the bank to return their certificate of title and cancel the mortgage. BPI-FSB instituted extrajudicial foreclosure proceedings against petitioners in Iloilo City after Transbuilders defaulted in its payments. Consequently, a sheriff’s notice of sale of petitioners’ property at public auction was issued.

ISSUE: Whether there was a novation of the mortgage loan contract between petitioners and BPI-FSB that would result in the extinguishment of petitioners’ liability to the bank.

NONE. Novation is defined as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor.

Article 1292 of the Civil Code on novation further provides:

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.

The cancellation of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. While there is really no hard and fast rule to determine what might constitute sufficient change resulting in novation, the touchstone, however, is irreconcilable incompatibility between the old and the new obligations.

In every novation there are four essential requisites:(1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. There must be consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid new one. The acceptance of the promissory note by the plaintiff is not novation of the


contract. The legal doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and adding other obligations not incompatible with the old one. It is not proper to consider an obligation novated as in the case at bar by the mere granting of extension of payment which did not even alter its essence. To sustain novation necessitates that the same be declared in unequivocal terms or that there is complete and substantial incompatibility between the two obligations. An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding other obligations not incompatible with the old one or wherein the old contract is merely supplementing the old one.

Thus, the well-settled rule is that, with respect to obligations to pay a sum of money, the obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones, or the new contract merely supplements the old one.

BPI-FSB and Transbuilders only extended the repayment term of the loan from one year to twenty quarterly installments at 18% interest per annum. There was absolutely no intention by the parties to supersede or abrogate the old loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB. In fact, the intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid. The novation of a contract cannot be presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.

Moreover, under the real estate mortgage executed by them in favor of BPI-FSB, petitioners undertook to secure the P15M loan of Transbuilders to BPI-FSB “and other credit accommodations of whatever nature obtained by the Borrower/Mortgagor.” While this stipulation proved to be onerous to petitioners, neither the law nor the courts will extricate a party from an unwise or undesirable contract entered into with all the required formalities and with full awareness of its consequences. Petitioners voluntarily executed the real estate mortgage on their property in favor of BPI-FSB to secure the P15M loan of Transbuilders. They cannot now be allowed to repudiate their obligation to the bank after Transbuilders’ default. While petitioners’ liability was written in fine


print and in a contract prepared by BPI-FSB, it has been the consistent holding of this Court that contracts of adhesion are not invalid per se. On numerous occasions, we have upheld the binding effects of such contracts.

GUARANTY

1 TRADERS INSURANCE and SURETY COMPANY vs. DY ENG GIOK, PEDRO LOPEZ DEE and PEDRO E. DY-LIACCO

DLT & Co AGENT DY Eng Giok who has a running account in favor of principal, executed surety bond as principal and Traders as guarantor. Giok’s remittances were applied first to his outstanding balance. DLT & CO demanded payment for remaining balance which was paid by surety. Surety demanded reimbursement from Giok.

Remittances of Giok should first be applied to obligation incurred during the period covered by the surety agreement.

Reasons:

IThe first is that, in the absence of express stipulation, a guaranty or suretyship operates prospectively and not retroactively; that is to say, it secures only the debts contracted after the guaranty takes effect. This rule is a consequence of the statutory directive that a guaranty is not presumed, but must be express, and can not extend to more than what is stipulated. (New Civil Code, Art. 2055).

To apply the payments made by the principal debtor to the obligations he contracted prior to the guaranty is, in effect, to make the surety answer for debts incurred outside of the guaranteed period, and this cannot be done without the express consent of the guarantor.

IIDebts covered by a guaranty are deemed more onerous to the debtor than the simple obligations because, in their case, the debtor may be subjected to action not only by the creditor, but also by the guarantor, and this even before the guaranteed debt is paid by the guarantor.

2SPOUSES TOH vs. SOLID BANK CORPORATION

Respondent SOLID BANK CORPORATION agreed to extend an "omnibus line" credit facility worth P10 million in favor of respondent First Business Paper Corporation (FBPC). A continuing guaranty was submitted and then petitioner Sps Toh and Sps Li signed the same. The terms of the instrument defined the contract arising therefrom as a surety agreement and provided for the solidary liability of the signatories thereto for and in consideration of "loans or advances" and "credit in any other manner to, or at the request or for the account" of

Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or from time to time, in [its] discretion x x x extend or change the time payment," this provision even if understood as a waiver is confined per se to the grant of an extension and does not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to defer collection contemplates only authorized extensions, that is, those that meet the terms of the "letter-advise."

Certainly, while the Bank may extend the due date at its discretion pursuant to


FBPC.

Petitioner claim that the surety agreement has been extinguished by the material alterations thereof and of the letter-advise which were allegedly brought by the extentions of the due dates of the letters of credit without the required partial payment for extension.

the Continuing Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment per extension.

The extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty." This act of the Bank is not mere failure or delay on its part to demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit which the Bank did not extend, defer or put off, but comprises conscious, separate and binding agreements to extend the due date, as was admitted by the Bank itself.

PLEDGE AND MORTGAGE

1 Dizon vs. Suntay 1. Respondent Suntay and Sison entered into a transaction wherein the

Suntay’s three-carat diamond ring was delivered to Sison for sale on commission.

1. Upon receiving the ring, Sison executed and delivered to the receipt to Suntay.

2. Suntay made demands on Sison for the return of said jewelry. 3. Sison, however, could not comply with Suntay’s demands because on

June 15, 1962, her niece pledged the ring with the petitioner Dizon's pawnshop without Suntay’s knowledge.

4. Suntay filed a case of estafa against Sison.5. Subsequently, Suntay wrote a letter to Dizon asking for the return of

her ring which was pledged with the latter’s pawnshop.6. Suntay filed an action for its recovery with the CFI of Manila, which

declared that she had the right to its possession.

ISSUE:

Who has the right title over the subject property?

Suntay has the right over the property.

Article 559 of the Civil Code which provides that “The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof may recover it from the person in possession of the same. If the possessor of a movable lost of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor.” The only exception the law allows is when there is acquisition in good faith of the possessor at a public sale, in which case the owner cannot obtain its return without, reimbursing the price. Hanging on to said exception as his basis, Dizon insisted that the principle of estoppel should apply in this case but the Supreme Court ruled otherwise.

In the present case not only has the ownership and the origin of the jewels misappropriated been unquestionably proven but also that Clarita R. Sison, acting fraudulently and in bad faith, disposed of them and pledged them contrary to agreement with no right of ownership, and to the prejudice of Suntay, who was illegally deprived of said jewels and who, as the owner, has


an absolute right to recover the jewels from the possession of whosoever holds them, which in this case is Dizon’s pawnshop. Dizon ought to have been on his guard before accepting the pledge in question, but evidently there was no such precaution availed of and he has no one to blame but himself.

While the activity he is engaged in is no doubt legal, it is not to be lost sight of that it thrives on taking advantage of the necessities precisely of that element of our population whose lives are blighted by extreme poverty. From whatever angle the question is viewed then, estoppel certainly cannot be justly invoked

2 UY TONG VS. CA

FACTS: Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners of Apartment No. 307 of the Ligaya Building, together with the leasehold right for ninety- nine (99) years over the land on which the building stands. The land is registered in the name of Ligaya Investments, Inc. It appears that Ligaya Investments, Inc. owned the building which houses the apartment units but sold Apartment No. 307 and leased a portion of the land in which the building stands to the SPOUSES.

In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three (3) installments. The transaction was evidenced by a written "Agreement" wherein the terms of payment had been specified as follows: That if for any reason the VENDEE should fail to pay her aforementioned obligation to the VENDOR,the latter shall become automatically the owner of the former's apartment which is located at No. 307, Ligaya Building, Alvarado St., Binondo, Manila, with the only obligation on its part to pay unto the VENDEE the amount of Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos, Philippine Currency; and in such event the VENDEE shall execute the corresponding Deed of absolute Sale in favor of the VENDOR and or the Assignment of Leasehold Rights.

After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00. Due to these unpaid balances, BAYANIHAN filed an action for specific performance against the SPOUSES.

ISSUE: Whether deed of assignment is null and void because it is in the nature of a pactum commissoriumand/or was borne out of the same.

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period.

A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium provision. First, there is no indication of 'any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.

Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the SPOUSES defaulted in their payments of the second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in this case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment.

Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to the concept of pacto commissorio" And even


granting that the original agreement between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was executed pursuant to a valid judgment in Civil Case .

3 ACME SHOE, RUBBER & PLASTIC CORPORATION vs. CA

Acme (MortgagoR)----Producers Bank of the Philippines (MortgageE) For a loan of (P3,000,000.00). The mortgage contract provides that:

This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage.

In due time, the loan of P3,000,000.00 was paid by petitioner corporation-2nd LOAN- one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity.

Producers BANK sought to foreclose on the CHATTEL MORTGAGE.

ISSUE:If the chattel mortgage can stand as security for obligations not yet existing at the time it was executed?

NO. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted form prescribed by the Chattel Mortgage Law itself.

One of the requisites, under Section 5 thereof, is an affidavit of good faith which should provide that:

. . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud.

makes it obvious that the debt referred to in the law is a CURRENT, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated.

4 ROXAS VS CA

Petitioner Blanca Consuelo Roxas is the owner of a parcel of land. She executed a special power of attorney appointing her brother, the late Manuel Roxas, as her attorney-in-fact for the purpose of applying for an agricultural loan with private respondent Rural Bank of Dumalag, Inc. using said land as collateral. The mortgage was later on foreclosed.

Petitioner filed a complaint for cancellation of foreclosure of mortgage and annulment of auction sale against the bank. She claimed that The notices of

It is settled doctrine that failure to publish notice of auction sale as required by the statute constitutes a jurisdiction defects with invalidates the sale. Even slight deviations therefrom are not allowed.

Section 5 of Republic Act No. 720, as amended by Republic Act No. 5939 the pertinent portion of which, provides:

The foreclosure of mortgages covering loans granted by rural banks shall be exempt from the publication in newspapers now required by law where the total amount of the loan, including interests due and unpaid, does not exceed three thousand pesos. It shall be sufficient publication in such cases if the notices of foreclosure are posted in at least three of the most conspicuous public places in


foreclosure were posted in the municipality where the subject land was located and in Roxas City, but not in the barrio. Moreover, there was no affidavit of the sheriff who conducted the sale, attached to the records of the case.

the municipality and barrio where the land mortgaged is situated during the period of sixty days immediately preceding the public auction. Proof of publication as required herein shall be accomplished by affidavit of the sheriff or officer conducting the foreclosure sale and shall be attached with the records of the case

5 CERNA vs. CA and CONRAD C. LEVISTE

Celerino Delgado loaned from Conrad Leviste. Delgado executed a chattel mortgage over a Willy's jeep owned by him. And acting as the attorney-in-fact of herein petitioner, Manolo P. Cerna, he also mortgaged a "Taunus' car owned by the latter.

Delgado defaulted. Leviste filed collection suit against collection against Delgado and petitioner as solidary debtors.

W/N the mere execution by the principal debtor of a chattel mortgage over the property of another creates a JOINT and SOLIDARY obligation between him and the owner of such property.

NO. Only Delgado signed the promissory note and accordingly, he was the only one bound by the contract of loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear that "(c)ontracts take effect only between the parties. But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly because he was a co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that "(t)here is solidarily liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity."

We have already stated that the contract of loan, as evidenced by the promissory note, was signed by Delgado only. Petitioner had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner was solidarily bound with Delgado for the payment of the loan.

There is also no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the principal obligor. A chattel mortgage may be "an accessory contract" to a contract of loan, but that fact alone does not make a third-party mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the principal contract — loan — remains to be primarily bound. It is only upon the default of the latter that the creditor may have been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan. And the liability of the third-party mortgagors extends only to the property mortgaged. Should there be

The mortgage contract was signed only by Delgado as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor. All it did was to authorize Delgado to mortgage certain properties belonging to petitioner. And this is in compliance with the requirement in Article 2085 of the Civil Code which states that:

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

xxx xxx xxx

(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."

In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to secure his debt. Thus, from the contract itself, it was clear that only Delgado was the mortgagor regardless of the fact the he used properties belonging to a third person to secure his debt.

Granting, however, that petitioner was obligated under the mortgage contract to answer for Delgado's indebtedness, under the circumstances, petitioner could not be held liable because the complaint was for recovery of a sum of money, and not for the foreclosure of the security. We agree with petitioner that the filing of collection suit barred the foreclosure of the mortgage.


any deficiency, the creditors has recourse on the principal debtor.

6 NORTHERN MOTORS, INC. vs. HON. JORGE R. COQUIA

Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of this Court's resolution of August 29, 1975.

1975 RESOLUTION: It was held that the lien of Northern Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made on the said cabs by Honesto Ong, the assignee of the unsecured judgment creditor of the chattel mortgagor, Manila Yellow Taxicab Co., Inc.

ISSUE:WON Ong has the right to levy upon the mortgaged taxicabs.

The essence of the chattel mortgage is that the mortgaged chattels should answer for the mortgage credit and not for the judgment credit of the mortgagor's unsecured creditor. The mortgagee is not obligated to file an "independent action" for the enforcement of his credit. To require him to do so would be a nullification of his lien and would defeat the purpose of the chattel mortgage which is to give him preference over the mortgaged chattels for the satisfaction of his credit.

Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not affect him because he is not privy of such contract is untenable. The registration of the chattel mortgage is an effective and binding notice to him of its existence. The mortgage creates a real right or a lien which, being recorded, follows the chattel wherever it goes.

7 NORTHERN MOTORS, INC. vs. HON. JORGE R. COQUIA

Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of this Court's resolution of August 29, 1975. In that resolution, it was held that the lien of Northern Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made on the said cabs by Honesto Ong, the assignee of the unsecured judgment creditor of the chattel mortgagor, Manila Yellow Taxicab Co., Inc. Northern Motors, Inc. in its motion for the partial reconsideration, prayed for the reversal of the TC's orders cancelling the bond filed by Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further prayed that the sheriff should be required to deliver to it the proceeds of the execution sale of the mortgaged taxicabs without deducting the expenses of execution.

ISSUE: Whether the levy made by mortgagor's judgment creditor against the chattel mortgagor should prevail over the chattel mortgage credit.

Doctrine: The execution was not justified and that Northern Motors, Inc., as mortgagee, was entitled to the possession of the eight taxicabs. Those cabs should not have been levied upon and sold at public auction to satisfy the judgment credit which was inferior to the chattel mortgage. Since the cabs could no longer be recovered because apparently they had been transferred to persons whose addresses are unknown, the proceeds of the execution sale may be regarded as a partial substitute for the unrecovarable cabs (arts. 1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632). Northern Motors, Inc. is entitled to the entire proceeds without deduction of the expenses of execution.


8 MAKATI LEASING and FINANCE CORPORATION, vs. WEAREVER TEXTILE MILLS

In order to obtain financial accommodations from herein petitioner Makati Leasing and Finance Corporation, Wearever Textile Mills, Inc., discounted and assigned several receivables with the former under a Receivable Purchase Agreement. To secure the collection of the receivables assigned, private respondent executed a Chattel Mortgage over certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering Range.

In an action for judicial foreclosure respondent claim the machine is a real property thus cannot be subject of the chattel mortgage.

Issue:

WON the machinery in suit is real or personal property

If a house of strong materials, like what was involved in Tumalad case, may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the existence of the chattel mortgage.

As held in the case of Tumalad vs vicencio:

Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendants-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personality.

9. ASSOCIATED INSURANCE and SURETY COMPANY, INC vs. ISABEL IYA, ADRIANO VALINO and LUCIA VALINO,

1. Spouses Valino (owners a house and Lot) purchased on installment from the Philippine Realty Corporation

2. November 6, 1951- FIRST MORTGAGE- CHATTEL MORTGAGE of HOUSE in favor of the Associated Insurance duly registered with the Chattel Mortgage Register of Rizal on December 6, 1951. At the time said undertaking t, the parcel of land on which the house is erected was still registered in the name of the Philippine Realty Corporation.

3. October 24, 1952 , SECOND MORTGAGE- REAL ESTATE

IYA’S ENCUMBRANCE IS PREFERRED. The decisive factor is the determination of the NATURE OF THE STRUCTURE LITIGATED UPON, for where it be considered a personality, the foreclosure of the chattel mortgage and the subsequent sale thereof at public auction, made in accordance with the Chattel Mortgage Law would be valid and the right acquired by the surety company therefrom would certainly deserve prior recognition; otherwise, appellant's claim for preference must be granted.

BUILDING IS A REAL PROPERTY- it is obvious that the inclusion of the building, separate and distinct from the land, in the enumeration of what may constitute real properties (Art. 415, new Civil Code) could only mean one thing


MORTGAGE over the LOT AND THE HOUSE in favor of Isabel Iya, duly registered.

4. October 18, 1958- Valino completed payment of the lot house and lot to PRC a certificate of title in their name was issued.

5. ASSOCIATED INSURANCE foreclosed the chattel mortgage over the HOUSE. The surety company learned of the existence of the real estate mortgage over the LOT thus:

6. FIRST CIVIL CASE IN MANILA: ASSOCIATED INSURANCE VS VALINO AND IYA

a. The complaint prayed for the exclusion of the residential house from the real estate mortgage in favor of defendant Iya.

7. SECOND CIVIL CASE: ISABEL IYA FILED VS VALINOS AND ASSOCIATED INSURANCE

a. ANSWER OF ASSOCIATED INSURANCE : as the lot on which the house was constructed did not belong to the spouses Valinos at the time the chattel mortgage was executed, the house might be considered only as a personal property and that the encumbrance thereof and the subsequent foreclosure proceedings made pursuant to the provisions of the Chattel Mortgage Law were proper and legal. Defendant therefore prayed that said BUILDING BE EXCLUDED FROM THE REAL ESTATE MORTGAGE and its right over the same be declared superior to that of plaintiff, for damages, attorney's fees and costs

ISSUE:

There is no question as to IYA’s right over the land covered by the real estate mortgage; however, as the building constructed thereon has been the subject of 2 mortgages; controversy arise as to which of these encumbrances should receive preference over the other?

— that a building is by itself an immovable property.

A building certainly cannot be divested of its character of a realty by the fact that the land on which it is constructed belongs to another. To hold it the other way, the possibility is not remote that it would result in confusion, for to cloak the building with an uncertain status made dependent on the ownership of the land, would create a situation where a permanent fixture changes its nature or character as the ownership of the land changes hands. In the case at bar, as personal properties could only be the subject of a chattel mortgage (Section 1, Act 3952) and as obviously the structure in question is not one, the execution of the chattel mortgage covering said building is clearly invalid and a nullity.

While it is true that said document was correspondingly registered in the Chattel Mortgage Register of Rizal, this act produced no effect whatsoever for where the interest conveyed is in the nature of a real property, the registration of the document in the registry of chattels is merely a futile act.

Nor can we give any consideration to the contention of the surety that it has acquired ownership over the property in question by reason of the sale conducted by the Provincial Sheriff of Rizal, for as this Court has aptly pronounced: A mortgage creditor who purchases real properties at an extrajudicial foreclosure sale thereof by virtue of a chattel mortgage constituted in his favor, which mortgage has been declared null and void with respect to said real properties, acquires no right thereto by virtue of said sale.

CONCURRENCE AND PREFERENCE OF CREDIT


1 REPUBLIC VS. PERALTA

FACTS: In the voluntary insolvency proceedings commenced by private respondent Quality Tobacco Corporation, the following claims of creditors were filed:

(i) USTC Association of Employees and workers Union-PTGWO USTC as separation pay for their members.

(ii) Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF), as separation pay for their members.

(iii) Bureau of Internal Revenue for tobacco inspection fees

(iv) Bureau of Customs for customs duties and taxes payable on various importations by the Insolvent.

The trial court held that the above-enumerated claims of USTC and FOITAF for separation pay of their respective members embodied in final awards of the National Labor Relations Commission were to be preferred over the claims of the Bureau of Customs and the Bureau of Internal Revenue. The trial court, in so ruling, relied primarily upon Article 110 of the Labor Code which reads thus:

Article 110. Worker preference in case of bankruptcy — In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Union paid wages shall be paid in full before other creditors may establish any claim to a share in the assets of the employer.

ISSUE: whether the term “wages” under art. 110 of the labor code includes separation pay

Yes. In Philippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers Union, 4 the Solicitor General took a different view and there urged that the term "wages" under Article 110 of the Labor Code may be regarded as embracing within its scope severance pay or termination or separation pay. In PCIB, this Court agreed with the position advanced by the Solicitor General. We see no reason for overturning this particular position. We continue to believe that, for the specific purposes of Article 110 and in the context of insolvency termination or separation pay is reasonably regarded as forming part of the remuneration or other money benefits accruing to employees or workers by reason of their having previously rendered services to their employer; as such, they fall within the scope of "remuneration or earnings — for services rendered or to be rendered — ." Liability for separation pay might indeed have the effect of a penalty, so far as the employer is concerned. So far as concerns the employees, however, separation pay is additional remuneration to which they become entitled because, having previously rendered services, they are separated from the employer's service. The relationship between separation pay and services rendered is underscored by the fact that separation pay is measured by the amount (i.e., length) of the services rendered.

Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once that these credits constitute liens or encumbrances on the specific movable or immovable property to which they relate. Article 2243 makes clear that these credits "shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency." It should be emphasized in this connection that "duties, taxes and fees due [on specific movable property of the insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the [insolvent's] land or building (2242 [1])"stand first in preference in respect of the particular movable or immovable property to which the tax liens have attached. Article 2243 is quite explicit: "[T]axes mentioned in number 1, Article 2241 and number 1, Article 2242 shall first be satisfied. " The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Articles 2242, all come after taxes in order of precedence; such claims enjoy their privileged character as liens and may be paid only to the extent that taxes have been paid from the proceeds of the specific property involved (or from any other sources) and only in respect of the remaining balance of such proceeds. What is more, these other (non-tax) credits, although constituting liens attaching to particular property, are not preferred one over another inter se. Provided tax liens shall have been satisfied, non-tax liens or special preferred credits which subsist in respect of specific movable or immovable property are to be treated on an equal basis and to be satisfied concurrently and proportionately. Put succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-tier


order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. All other special preferred credits stand on the same second tier to be satisfied, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take precedence over ordinary preferred credits so far as concerns the property to which the liens have attached. The specially preferred credits must be discharged first out of the proceeds of the property to which they relate, before ordinary preferred creditors may lay claim to any part of such proceeds.

If the value of the specific property involved is greater than the sum total of the tax liens and other specially preferred credits, the residual value will form part of the "free property" of the insolvent — i.e., property not impressed with liens by operation of Articles 2241 and 2242. If, on the other hand, the value of the specific movable or immovable is less than the aggregate of the tax liens and other specially preferred credits, the unsatisfied balance of the tax liens and other such credits are to the treated as ordinary credits under Article 2244 and to be paid in the order of preference there set up.

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority.

Only in respect of the insolvent's "free property" is an order of priority established by Article 2244. In this sequence, certain taxes and assessments also figure but these do not have the same kind of overriding preference that Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens on the taxpayer's property.

We come to the question of what impact Article 110 of the Labor Code has had upon the complete scheme of classification, concurrence and preference of credits in insolvency set out in the Civil Code. We believe and so hold that Article 110 of the Labor Code did not sweep away the overriding preference accorded under the scheme of the Civil Code to tax claims of the government or any subdivision thereof which constitute a lien upon properties of the Insolvent. It is frequently said that taxes are the very lifeblood of government. The effective collection of taxes is a task of highest importance for the sovereign. It is critical indeed for its own survival. It follows that language of a much higher degree of specificity than that exhibited in Article 110 of the Labor Code is necessary to set aside the intent and purpose of the legislator that shines


through the precisely crafted provisions of the Civil Code. It cannot be assumed simpliciter that the legislative authority, by using in Article 110 the words "first preference" and "any provision of law to the contrary notwithstanding" intended to disrupt the elaborate and symmetrical structure set up in the Civil Code. Neither can it be assumed casually that Article 110 intended to subsume the sovereign itself within the term "other creditors" in stating that "unpaid wages shall be paid in full before other creditors may establish any claim to a share in the assets of employer." Insistent considerations of public policy prevent us from giving to "other creditors" a linguistically unlimited scope that would embrace the universe of creditors save only unpaid employees.

We, however, do not believe that Article 110 has had no impact at all upon the provisions of the Civil Code. Bearing in mind the overriding precedence given to taxes, duties and fees by the Civil Code and the fact that the Labor Code does not impress any lien on the property of an employer, the use of the phrase "first preference" in Article 110 indicates that what Article 110 intended to modify is the order of preference found in Article 2244, which order relates, as we have seen, to property of the Insolvent that is not burdened with the liens or encumbrances created or recognized by Articles 2241 and 2242. We have noted that Article 2244, number 2, establishes second priority for claims for wages for services rendered by employees or laborers of the Insolvent "for one year preceding the commencement of the proceedings in insolvency." Article 110 of the Labor Code establishes "first preference" for services rendered "during the period prior to the bankruptcy or liquidation, " a period not limited to the year immediately prior to the bankruptcy or liquidation. Thus, very substantial effect may be given to the provisions of Article 110 without grievously distorting the framework established in the Civil Code by holding, as we so hold, that Article 110 of the Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly, by removing the one year limitation found in Article 2244, number 2; and (b) secondly, by moving up claims for unpaid wages of laborers or workers of the Insolvent from second priority to first priority in the order of preference established I by Article 2244.

2 DBP VS NLRC- (JOYCE)


Documents

Credit Transactions Doctines