CREDIT TRANSACTIONS Rodriguez Outline

Submitted to: Atty. Jose Riodil Montebon

I. LOAN 3 Ingrid Tagal-Tinagan Dann Peter Douglas Tinagan

II. DEPOSIT 11 Joselle Amahit

III. GUARANTY AND SURETYSHIP 14 Gail Rocamora-Petilos Frances Sanchez April Seville Jose Marie Benin Carlisle Pyponco

IV. PROVISIONS COMMON TO PLEDGE AND MORTGAGE 21

Dino Abiera Jason Domingo

V. PLEDGE 31

Jan Mark Baguio

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VI. REAL MORTGAGE 38 Katrina Canonce Ihra Faith Magno Rochelle Rea Lu Kenny Melody Hotingoy Floyd Barry Amahit Albert Jerome Babaylan

VII. CHATTEL MORTGAGE 69

April Mae Gaston Zara Marie Dy

VIII. SPECIAL LAWS AFFECTING MORTGAGES 83

IX. ANTICHRESIS 84

X. CONCURRENCE AND PREFERENCE OF CREDITS 86

Nathan Joseph Ramacho Joselle Amahit

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I. LOAN LOAN is a contact whereby 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 (this is called a commodatum); OR money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid (this is called simply loan or mutuum) (Art. 1933, NCC) Characteristics of Loan

1. Real because the delivery of the thing is necessary for the perfection of the contract.

-An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.

2. Unilateral because once the subject matter has been delivered, it creates

obligations on the part of the borrower only.

Cause or consideration in a contract of loan.

1. As to the borrower, the acquisition of the thing; 2. As to the lender, the right to demand its return or its equivalent.

Kinds of loan.

1. Commodatum – where the bailor (lender) delivers to the bailee (borrower) a] non-consumable thing so that the latter may use it for a certain time or for a particular purpose, and return the identical thing.

2. Simple loan or mutuum – where the lender delivers to the borrower money

or other consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality.

Commodatum and Mutuum (simple loan) distinguished.

1. Commodatum ordinarily involves something not consumable; in mutuum, the subject matter is money or other consumable thing;

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2. In commodatum, ownership of the thing loaned is retained by the lender; in mutuum, the ownership is transferred to the borrower.

3. Commodatum is essentially gratuitous;

mutuum may be gratuitous or it may be onerous (with interest). 4. In commodatum, the borrower must return the very same thing loaned;

in mutuum, the borrower need only pay the same amount of money, or if other consumable, of the same kind and quality.

5. Commodatum may involve real or personal property; mutuum only involves personal property.

6. Commodatum is a loan for use;

mutuum is a loan for consumption.

7. In commodatum, the bailor may demand for the return of the thing loaned before the expiration of the term in case of urgent need; in mutuum, the lender may not demand its return before the lapse of the term agreed upon.

8. In commodatum, the loss suffered by the bailor since he is the owner;

in mutuum, the borrower suffers the loss. Table 1.1 Distinctions Between Mutuum and Commodatum MUTUUM COMMODATUM Equivalent amount to be returned (subject matter is fungible)

Same thing to be returned (subject matter is non-fungible)

May be gratuitous or onerous (with interest) Essentially gratuitous (If there is compensation it cease to be commodatum.)

Ownership goes to borrower or bailee Ownership retained by lender or bailor Refers to personal property only May involve real and personal property Referred to as loan for consumption Referred to as loan for use or temporary

possession Borrower, because of his ownership, bears risks of loss

Lender, because of his ownership, bears risk of loss

Can be generally obliged to pay only at end of period

While generally obliged to return object at end of period, still in some cases the return can be demanded even before the end of the period.

Not personal in character Personal in character

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Table 1.2 Loan Distinguished from Rent or Lease (Tolentino vs. Gonzales, 50 Phil. 558) LOAN (Simple) RENT OR LEASE Lender loses his property for the borrower becomes the owner thereof.

Owner of property does not lose his ownership; he merely loses control thereof in limited way for the duration of the rent or lease.

The relationship is one of lender and borrower (creditor and debtor).

The relationship is one of lessor and lessee.

Table 1.3 Loan Distinguished from Deposit LOAN DEPOSIT Purpose—to grant its USE to borrower Purpose—SAFEKEEPING by depositary (who

generally cannot use) Generally, the borrower pays only at end of period

The returning can be demanded by the depositor at any time

Relationship is that of lender (creditor) and borrower (debtor)

Relationship is that of depositor and depositary

There can be compensation of credits NO compensation of things deposited with each other (except by mutual agreement).

Table 1.4 Loan Distinguished from Irregular Deposit LOAN IRREGULAR DEPOSIT Borrower can use and will return only at end of period generally

Depositary can also use (as distinguished from a case of a regular deposit where depositary cannot generally use)

Lender has no preference over other creditors Irregular depositor has preference Essential cause is NECESSITY of borrower Essential use is the special benefit for depositor

(as his money is being safeguarded) Table 1.5 Loan Distinguished from Sale

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LOAN SALE Real contract Consensual contract Generally unilateral because only borrower has obligation

Bilateral and reciprocal

COMMODATUM Parties to a contract of Commodatum:

1. BAILEE – the borrower; the party to who the thing loaned is delivered in order for him to use the thing. 2. BAILOR – the lender; the party who delivers the thing to the other party in order for the latter to use the thing.

-Commodatum is essentially gratuitous.

-thus, if compensation is to be paid by the borrower, the contract ceases to be commodatum

-Purpose of commodatum is for the use of the thing loaned. -Object or subject matter of commodatum is generally a non-consumable thing, which may be movable or immovable property. -however, consumable goods may be the subject of commodatum when

the purpose of the loan is not for consumption, like when the purpose is merely for exhibition. -The bailee in commodatum acquires the use of the thing loaned but not its fruits. -the parties may, however, validly stipulate that the bailee may

make use of the fruits of the thing loaned.

-The bailor in commodatum need not be the owner of the thing loaned. -Commodatum is purely personal in character. Consequently:

1. Death of either party extinguishes the contract; 2. The bailee can neither lend nor lease the object of the contract to third persons.

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-However, the members of the bailee’s household may make use of the thing loaned, except – a. when there is a stipulation to the contrary; or b. where the nature of the thing forbids such use.

OBLIGATIONS OF THE BAILEE The obligations of the bailee are as follows:

1. To pay for the ordinary expenses for the use and preservation of the thing loaned. 2. The bailee shall be liable for loss of the thing, even if it should be through a fortuitous event, in the following cases:

a. If he devotes the thing to any purpose different from that for which it has been loaned; b. If he keeps it longer that the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; c. If the thing loaned has been delivered with appraisal of its value, where there is no stipulation exempting the bailee from responsibility in case of a fortuitous

event; d. If he lends or leases the thing to a third person, who is not a member of his household; e. If, being able to save either the thing borrowed or his own thing, he chose to save the latter.

3. To answer for the deterioration of the thing loaned through his fault; Other pertinent rules. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even if it may be by reason of expenses. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily.

OBLIGATIONS OF THE BAILOR 1. To allow the bailee the use of the thing loaned for the duration of the period

stipulated or until the accomplishment of the purpose for which the commodatum was constituted. -The bailor, however, may demand for the return of the thing loaned even

before the end of the period or accomplishment of the purpose for which the loan was constituted –

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a. if he should have an urgent need of the thing; or -return here is for temporary use b. if the borrower commits an act of gratitude. -Precarium is a kind of commodatum where the bailor may demand the thing at will. -It is a contract by which the one of a thing, at the request of

another person, gives the latter the thing for use as long as the owner shall please.

2. To refund extraordinary expenses for the preservation of the thing loaned paid for by the bailee.. -Extraordinary expenses for the preservation of the thing loaned shall be borne by the bailor, so that, if extraordinary expenses for the preservation

of the thing loaned is paid for by the bailee, the bailor shall be liable to reimburse the same, provided – -the bailee brings the same to the knowledge of the bailor before

incurring such expenses, except – -when they are so urgent that the reply to the notification

cannot be awaited without danger. 3. To bear, equally with the bailee, extraordinary expense, caused by a fortuitous event, arising on the occasion of the actual use of the thing by the bailee, even though he acted without fault, unless there is a stipulation to the contrary. 4. To answer for damages sustained by the bailee due to the flaws of the thing loaned, if, knowing such flaws, does not advise the bailee of such flaws. -Requisites for the liability to arise: a. There is a flaw or defect in the thing loaned; b. The flaw or defect is hidden; c. The bailor is aware thereof; d. He does not advise the bailee of the same; and -The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee.

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SIMPLE LOAN or MUTUUM The obligation of borrower to pay 1. Loan of money -If the thing loaned is money, payment must be made in the currency

which is the legal tender in the Philippines. -In case of extraordinary inflation or deflation, the basis of payment shall

be the value of the currency at the time of the creation of the obligation. 2. Loan of fungible/consumable thing -If the thing loaned is a fungible thing, the borrower shall pay the lender another thing of the same kind, quality, and quantity. -If it is impossible to do so, the borrower shall pay its value at the

time of the perfection of the loan. -Fungible things are those which are usually dealt with by number,

weight or measure such as grain, oil, sugar, etc., so that any given unit or portion is treated as the equivalent of any other unit or portion.

Interest -Interest is the compensation allowed by law or fixed by the parties for the loa

or forbearance of money, goods or credits. Kinds of interest: 1. Legal interest – that which the law directs to be charged in the absence of any

agreement as to the rate between the parties. -the rate of the legal interest is set by the Monetary Board -presently, the rate is 12% per annum

2. Lawful interest – rate of interest which is within the maximum prescribed by

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Law. -there must be a ceiling set or maximum allowable rate of interest set by

the Monetary Board, otherwise there is no way of determining which interest rates are in not within the rate/s allowed by law

3. Unlawful or usurious interest – interest rates beyond the maximum rates

fixed by law. -In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment.

Interest is not due just because what is borrowed is a sum of money. In order for interest to be due, the following requisites must be present: 1. The payment of interest must be expressly stipulated; 2. The agreement to pay interest must be in writing; and 3. The interest must be lawful. -If the obligation is an interest-bearing obligation, but the rate of interest is

not agreed upon, the legal rate of interest (now 12% per annum) shall be imposed.

Instances when debtor is liable to pay legal interest even in the absence of any agreement to pay interest: 1. When the debtor incurs legal delay or is in default; 2. Interest due shall, in turn, earn legal interest from the time it is judicially

demanded although the obligation may be silent on this point.

` Payment of interest without stipulation. -Where unstipulated interest is paid by mistake, it is a case of solutio indebiti or undue payment, and he debtor may recover the interest paid. -Where unstipulated interest is paid voluntarily because the debtor feels morally obliged to do so, there can be no recovery of the interest paid as in the case of natural obligations.

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II. DEPOSIT

Subject Elements/ Features Rules/Comments Illustrative Jurisprudence

Deposit in General Kinds (Art. 1967)

a. Extrajudicial

1. Voluntary

Constituted the moment a person receives a thing belonging to another Real because it is perfected only by the delivery of the subject matter (exception to Art. 1969) Creation can arise out of the will of the court or will of the contracting parties Unilateral if gratuitous Bilateral if with compensation Purpose is for safekeeping Held for the benefit of the person who has the right or the depositor or third person designated

Made by the will of the depositor (Art. 1968)

May be oral or written (Art. 1969)

Depositary is not the owner of the thing deposited (At. 1962) Only movable things may be the object of a deposit

(Art. 1966)

If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay

Bank of the Philippine Island vs. Intermediate appellate Court 164 SCRA 630 (Nature of transaction) In Simex International (Manila), Inc. vs. Court of Appeals (183 SCRA 360, 367), this Court stressed the fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of it in handling the accounts entrusted to its care.

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions… The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. . . .

Companioa Agricola de Ultramar v. Nepomuceno 55 Phil 83 Nov 14, 1930 (when deposit is a loan)

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him the amount by which he may be enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery (1971) Depository has the obligation of safely keeping it and returning of the same(Art. 1972) The depositary cannot deposit the thing with a third person unless stipulated(Art. 1973) The depository can not make use of the thing deposited without the express permission of the depositor. (Art. 1977) When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract. (Art. 1978) Fault on the part of the depositary is presumed ( Art.

1981) The thing deposited shall be returned with all its

products, accessories, and accessions.(Art. 1983)

When there are two or more depositors, if they are not solidary, and the thing admits of division, each one cannot demand more than his share (Art. 1985)

The thing deposited must be returned to the depositor

upon demand (Art. 1988)

Although in the document in question a deposit is spoken of, nevertheless from an examination of the entire document it clearly appears that the contract was a loan and that such was the intention of the parties.xxx The obligation of the depository to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depository should have the right to make use of the amount deposited, since it was stipulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. (Art. 1768, Civil Code.) Aboitiz vs. Oquenena 39 Phil 926 The document is in fact clearly a deposit, according to its terms, without a fixed time. But exactly for being such, the sum deposited may be withdrawn at any time. Singer Manufacturing Co. v. Millar 52 Min 156 Right to retain is given to compensate the innkeeper for the extraordinary liabilities imposed upon him by law.

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2. Necessary b. Judicial – as a

consequence of litigation

Made in compliance of a legal

obligation Takes place in the occasion of any

calamity such as a fire, storm, pillage, shipwreck, or other similar event (Art. 1996)

Purpose is to maintain the status quo

during the pendency of the litigation to insure the right of the parties to the property in case of a favorable judgment (Art.2005)

Onerous

The deposit of effects made by travelers in hotels or

inns shall also be regarded as necessary (Art. 1998) The hotel-keeper has a right to retain the things

brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests (Art. 2004)

Movable as well as immovable property may be

object of Sequestration (Art. 2006) The depositary of property or objects sequestrated

cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders (Art. 2007)

The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family (Art. 2008)

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III. GUARANTY AND SURETYSHIP

SUBJECT ELEMENTS / FEATURES RULES / COMMENTS ILLUSTRATIVE JURISPRUDENCE

Definition Guaranty and surety defined.

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, xxx the contract is called suretyship.

difference a. Cases on distinction between surety and guaranty

Pacific Banking vs IAC – the undertaking signed by defendant although denominated “guarantor’s undertaking” was in a substance a contract of surety. As distinguished from a contract of guarantee where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor. E. Zobel Inc. vs CA – A contract of surety is an accessory promise by which a person binds himself for another already bound and agrees with the creditor to satisfy the obligation if the debtor does not. A contract of guarantee, on the other hand, is a collateral undertaking to pay the debt in case the latter cannot pay the debt.

b. Cases on guaranty Castellvi vs Sellner – when defendant is not bound with the principals by the same instrument at the same time and on the same consideration, but his responsibility is a secondary one found in an independent collateral agreement, his obligation is simply that of guarantor.

Guaranty Surety Guarantor’s engagement is a collateral undertaking.

Charged as an original promissory.

Obligation is secondary Obligation is primary Liability depends upon an independent agreement to pay the obligation if the primary payor fails to do so.

Assumes liability as a regular party to the undertaking.

Insurer of the solvency of the debtor

Insurer of the debt

Guarantor binds himself to pay if the principal CANNOT PAY

Surety undertakes to pay if the principal DOES NOT PAY

Gratuitous?

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SUBJECT ELEMENTS / FEATURES RULES / COMMENTS ILLUSTRATIVE JURISPRUDENCE

Piczon vs Piczon – When defendant in his capacity as president of the borrowing company signed the loan agreement as guarantor, he is liable only as guarantor.

c. Cases on surety PNB vs Luzon Surety Co. – Where the surety bond clearly states that the surety binds itself jointly and severally with the principal obligor, the liability is one of suretyship. PNB vs Pineda – A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter and their liabilities are interwoven as to be inseparable.

Effects of Guaranty Effects of guaranty between the guarantor and the creditor

Art. 2058. Guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and has resorted to all the legal remedies against the debtor. 1.

The guarantor has the right or benefit of excussion. The right of excussion is the right of the guarantor to have all properties of the debtor and all legal remedies against him first exhausted before he can be compelled to pay the creditor.

Southern Motors, inc. vs Barbosa – the right of guarantors to demand the exhaustion of the principal debtor’s property exists only when a pledge or mortgage has not been given as special security for the payment of the principal obligation.

Exception: Art. 2059. This excussion shall not take place if: 2. If the guarantor has expressly

renounced it; 3. If he has bound himself solidarily

with the debtor; 4. In case of insolvency of the

debtor; 5. When he has absconded, or

1. Requisites before the guarantor can make use of the benefit of excussion: a. He must set it up against the creditor upon

the latter’s demand for payment from him and

b. He must point out to the creditor available property of the debtor

2. The available property of the debtor must be:

Arroyo vs Jungsay – When properties are insufficient to pay the indebtedness, not sailable or so encumbered with third persons, the guarantor cannot make use of excussion. Luzon Steel Corp vs Sia – When the guarantor has failed to point out sufficient leviable property of the debtor within Philippine territory, she may not demand excussion.

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SUBJECT ELEMENTS / FEATURES RULES / COMMENTS ILLUSTRATIVE JURISPRUDENCE cannot be sued within the Philippines unless he has left a manager or representative;

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

a. Within the Philippines and b. Sufficient to cover the amount of debt

Art. 2062. Procedure in enforcing obligation

The procedure in every action filed by the creditor to enforce the obligation against the principal debtor and guarantor is as follows: a. The suit must be brought against the principal

debtor alone b. The creditor shall ask the court to notify the

guarantor of the action c. The guarantor may appear so that he may, if

he so desires, set up such defenses as are granted him by law.

d. Even if judgment should be rendered against the principal debtor and the guarantor in case of the latter’s appearance, the benefit of excussion remains unimpaired.

→Garcia vs Lianco – the notification of the guarantor is mandatory. Towers Assurance Corp vs Ororama – A surety may be proceeded against separately or together with the principal obligor because of its direct and solidary liability. However, the surety is nevertheless entitled to be heard before an execution can be issued against him if he was not made a party in the case involving the principal.

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SUBJECT ELEMENTS / FEATURES RULES / COMMENTS ILLUSTRATIVE JURISPRUDENCE Effects of Guaranty between the debtor and the guarantor

Art. 2066. The guarantor who pays for the debtor must be indemnified by the latter…

The indemnity comprises: 1. The total amount of the debt 2. The legal interest thereon from the time the

payment was made known to the debtor, even though it did not earn interest for the creditor

3. The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him.

4. Damages if they are due.

General Indemnity Company vs Alvarez – an action by the guarantor against the principal debtor for payment, before the former has paid the creditor is premature.

Effects of Guaranty as Between Co-Guarantors

Art. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has pain may demand of each of the others the share which is proportionally owing from him. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion.

When there has been payment in virtue of a judicial demand or when the principal debtor is insolvent, the guarantor who paid may demand from the other guarantors the share which is proportionally owing from him. The defense available to co-guarantors against the guarantors who paid are the same defenses of the principal debtor against the creditor which are not purely personal to the debtor.

Extinguishment of Guaranty Causes That Will Extinguish the Guaranty

Art. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations

1. When the debtor's obligation to the creditor is extinguished, the guaranty is likewise extinguished. 2. A debtor's obligation is extinguished under the following causes as found under Article 1231 of the New Civil Code: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation 3. Other causes such as annulment, rescission, fulfillment of a resolutely condition. and prescription, are governed elsewhere in the Code 4. Material alteration will extinguish the guaranty (1) a material alteration of the principal contract

Cases on Material Alteration Asiatic Petroleum Co. vs. Hizon - where the contract was changed extending the agency to other places without the consent of the surety, there is material alteration and the surety is absolved from liability PNB vs. CA - where the indebtednesss was increased without the consent of the surety, there is material alteration and the surety is absolved from liability PNB vs. Macapanga Producers Inc. - an assignment of credit without the consent of the surety is not a material alteration sufficient to discharge the surety

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SUBJECT ELEMENTS / FEATURES RULES / COMMENTS ILLUSTRATIVE JURISPRUDENCE effected by the creditor and principal debtor without the knowledge and consent of the surety discharges the guarantor or surety. 5. The creditor's failure to send notice of default by the principal obligor to the surety as required in the surety bond extinguishes the surety's liability

Garcia, Jr. vs. CA - the compounding of the interest on the principal obligation with our the consent of the surety is not a material alteration sufficient to discharge the surety Cases on Creditor's Failure to Send Notice of Default by the Principal Obligor to the Surety Umali vs. CA - where the contract of suretyship stipulates that notice of the principal's default be given to the surety, generally the failure to comply with the conditions will prevent recovery from surety

Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due not of itself constitute any extension of time referred to herein.

1. An extension of time given by the creditor to the debtor to make payment without the consent of the guarantor extinguishes the guaranty.

Radio Corporation of the Phils. vs. Roa - an extension of time given by the creditor to the debtor to make payment without the consent of the guarantor extinguishes the guaranty Prudencio vs. CA - where the creditor bank is the payee of a note and assignee of a deed of assignment, its extension of the period of payment would release the accommodation party J.W. Shannon vs. Phil. Lumber & Trans. Co. - the mere failure on the part of the creditor to demand payment after the debt has become due does not itself discharge the guaranty Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc. - the creditors undertaking to "hold in abeyance any action to enforce its claims" against the principal obligor did not constitute extension of time that will discharge the guaranty

Legal and Judicial Bonds

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SUBJECT ELEMENTS / FEATURES RULES / COMMENTS ILLUSTRATIVE JURISPRUDENCE Legal and Judicial Bonds Defined

Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in article 2056 and in special laws. Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject tot he jurisdiction of the court of the place where this obligation is to be complied with.

1. Legal and judicial bonds are special contracts of guaranty characterized by the fact that they are given "in virtue of a court order." 2. Applying Art. 2056, the bondsman must possess integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees.

Stronghold Insurance Co., Inc. vs. CA - to recover damages against a surety, the court must order the surety to show cause why the bond should not respond for the judgement of damages. If the surety should contest the reality or reasonableness of the damages claimed by the prevailing party, the hearing will be summary

Pledge or Mortgage as a Bond

Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof.

The person required to give a bond may submit a pledge or mortgage in lieu thereof.

Art. 2084. A judicial bondsman cannot demand the exhaustion of the property for the principal debtor. A sub-surety in the same case, cannot demand exhaustion of the property of the debtor of the surety.

There is no right of excision for the judicial bondsman

Case on Administrator's Bond Luzon Surety Co. v.s Quebrar - the surety is liable under the administrator's bond for as long as the administrator has duties to do as such administrator and as long as the probate court retains jurisdiction of the estate. The administrator's bond contemplates a continuing liability notwithstanding the non-renewal of the bond. Case on Counter-bond to Dissolve Writ of Attachment Central Surety & Insurance Company vs. Ubay - when the surety made the jeep available for execution of the judgment, the obligation of the bond had been discharged

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SUBJECT ELEMENTS / FEATURES RULES / COMMENTS ILLUSTRATIVE JURISPRUDENCE Cases on Bail Bonds People vs. Hanasan - when one of the sureties in a single bail bond avails himself of the privilege of surrendering the prisoner, it must be presumed to be done in the interest of his co-sureties

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IV. PROVISIONS COMMON TO PLEDGE AND MORTGAGE

SUBJECT

ELEMENTS/FEATURES

RULES/COMMENTS

ILLUSTRATIVE JURISPRUDENCE

Article 2085 - Essential requisites to the contracts of Pledge and Mortgage

1. Pledge

2. Mortgage (Real)

Constituted to secure the

fulfillment of a principal obligation

That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged

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

Article 2093

An accessory obligation Personal property of the debtor

or third person is delivered to the creditor or to a third person by common agreement

To secure the performance of a principal obligation

(12 Manresa 460)

Contract in which the debtor or a third person.

Guarantees to the creditor the fulfilment of a principal obligation.

Subjecting for the faithful

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3. Mortgage (Chattel)

compliance therewith a real property in case of non-fulfillment of said obligation at the time stipulated.

Article 2140

Contract which personal property is recorded in the Chattel Mortgage Register

As a security for the performance of an obligation

(Pledge, Real Mortgage and Chattel Mortgage) Constituted to secure the fulfillment of a

Principal Obligation.

1. A mortgage or pledge is an accessory contract whose consideration is the same as the principal contract without which it cannot exist, as an independent contract. (Ganzon v Inserto, 123 SCRA 713)

2. The deed of assignment of receivables was intended as collateral security for the bank loans of the debtor. In case of doubt whether it is pledge or a dation in payment, the presumption is in favor of

China Banking Corporation v Lichauco, 46 Phil. 460

As a mortgage is an accessory contract, its consideration is the very consideration of the principal contract, from which it receives its life, and without which it cannot exist as an independent contract, although it may secure an obligation incurred by another.

Manila Banking Corporation v Teodoro, Jr., 169 SCRA 95

The deed of assignment was intended as

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pledge.

3. 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.

4. Mortgages given to secure future advancements are valid and legal contracts.

Absolute ownership of the thing pledged

or mortgaged.

1. A mortgage is void if the mortgagor has no title to the land mortgaged.

collateral security for the bank loans of appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests.

Cerna v Court of Appeals, 220 SCRA 517

The signatory to the principal contract of loan remains to be primarily bound. It is only upon the default of the latter that the creditor may have recouse 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 any deficiency, the creditor has recourse on the principal debtor.

Mojica v Court of Appeals, 201 SCRA 517

A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid.

Contreras v China Banking Corporation, 76 Phil.

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2. As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged, and it appearing that the mortgage was constituted before the issuance of the patent to the mortgagor, the mortgage in question is void and ineffective.

3. The surviving widow cannot by herself

mortgage the entire lot formerly belonging to the conjugal partnership. However, the mortgage is valid with respect to her conjugal share.

4. The questioned mortgaged constituted on the property under administration, by authority of the petitioner, is valid, notwithstanding the lack of judicial approval, with respect to her conjugal share and to her hereditary rights. The fact that what had been mortgaged was

709 Vda. de Bautista v Marcos, 3 SCRA 434 PNB v CA, 98 SCRA 207

One of the essential requisites to the contract of pledge and mortgage is that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. And under the New Civil Code (Art. 493), each co-owner shall have the full ownership of his part of the fruits and benefits pertaining thereto, and he may therefore, alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership.

Go Ong v CA, 154 SCRA 270

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in custodia legis is immaterial, insofar as her conjugal share and hereditary share in the property is concerned, for after all, she was the absolute owner thereof.

5. A co-owner may validly mortgage his one-tenth share of the property and may require another co-owner who holds the certificate of title to surrender said title to the Register so that the mortgage may be registered.

6. The mortgagee had the right to rely upon what appears in the certificate of title and does not have to inquire further.

7. The foreclosure by the GSIS of the mortgage building was valid even if a portion of the building stands on another lot which is not yet titled in the name of mortgagee. However the GSIS must pay the fair market value of the parcels of land on which the portion of

Co Chin Leng v Co Chin Tong, 120 SCRA 821 Duran v Intermediate Appellate Court, 138 SCRA 489

An innocent purchaser for value relying on a torrens title issued is protected. A mortgagee has the right to rely on what appears in the certificate of title and in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the back of said certificate.

Nartates v Government Service Insurance System, 156 SCRA 205

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Article 2086 – The provisions of Article 2052 are applicable to a pledge or mortgage.

Article 2052 of the NCC provides: “A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to

the foreclosed building stands. 8. Since the disputed property was not

owned by the mortgagors when they mortgaged it to mortgagee, the contract of mortgage and all the subsequent consequences as regards the lots are null and void.

Property of Third Persons Mortgaged

1. Property of third persons mortgaged is directly and jointly liable for the fulfillment of the obligation; rules on distribution of surplus after payment of obligation.

Article 2052 is applicable to a pledge or

mortgage

DBP v CA, 253 SCRA 414

With regard to the validity of the mortgage contracts entered into by the parties, Art. 2085, par. 2 of the NCC specifically requires that the pledgor or mortgagor be the absolute owner of the thing being pledged or mortgaged. For, the law explicitly requires as imperative for the validity of a mortgage that the mortgagor be the absolute owner of what is mortgaged.

Lack v Alonso, 14 Phil. 301

The property of third persons which has been expressly mortgaged to guarantee an obligation to which the said persons are foreign, is directly and jointly liable for the fulfillment thereof, in the same manner as the mortgaged property of the debtor; it is therefore subject to execution and sale for the purpose of paying the amount of the debt for which it is liable.

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

commissorium (Art.2088)

guarantee the performance of a voidable or unenforceable contract. It may also guarantee a natural obligation.”

Requisites : a.) Pledge, mortgage, or antichresis.

b.) A stipulation for an automatic

appropriation by the creditor of the property in the event of nonpayment.

The creditor does not automatically

become the owner of the thing pledged or mortgaged if the obligation becomes due and unpaid. The creditor has the remedy of selling or alienating the security at public auction with the proceeds applied to the obligation secured.

Rights of a creditor where debtor fails to

comply with the obligation:

a.) Creditor is merely entitled to move for

the sale of the thing pledged or mortgaged with the formalities required by law in order to collect.

b.) Creditor cannot appropriate to himself the thing nor can he dispose of the same

There is no pactum commissorium when the

parties agreed to a contract of loan and a promise of sale on house and lot. (Alcantara vs. Alinea, 8 Phil 111)

A promise to assign the mortgaged property in

case of failure to pay is not pactum commissorium because it requires a positive act of conveyance by the promisor for which he could not be compelled but said promissory can’t still be liable for damage. (Tan vs. West Coast Life Insurance Co., 54 Phil 361)

Failure of mortgagor or redeem the property

does not automatically vest ownership of the

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as owner.

Effects on Nullity of Contract - Nullity of

the stipulation does not affect validity and efficacy of the principal contract.

Stipulation is Null and Void - Stipulation where thing or mortgaged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed.

property to the mortgagee which could grant the latter the right to appropriate the thing mortgaged or dispose it. (Reyes vs. Sierra, 93 SCRA 473)

A decision of the lower court finding the

transaction as an equitable mortgage and not a pacto de retro sale cannot likewise declare that upon failure of the mortgagor to within the period fixed in the judgment, absolute ownership has become consolidated in the mortgagees as this will produce the same effect as a pactum commissorium. (Montevirgen vs C.A., 112 SCRA 641)

No valid mortgage has been constituted in

plaintiff’s favor, the alleged deed of mortgage being a mere private document and not registered; moreover, it contains a stipulation (pactum comisorio) which is null and void under Art. 2088. (Hechanova vs. Adil, 144 SCRA 450)

A perusal of the terms of the questioned agreement evinces no basis for the application of pactum commissorium provision. First, there is no identification of any contract of mortgage entered into by the parties. Second, there is no case of automatic appropriation of property. (Uy Tong vs. CA, 161 SCRA 383)

The stipulation is the promissory notes providing that, upon failure of respondent spouses to pay interest, ownership of the property would be automatically transferred to petitioner and the deed of sale in its favor would be registered, are in substance a pactum commissorium. (Francisco Development Corp. vs. C.A., 298 SCRA 349)

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Indivisibility of pledge or mortgage and Exception. (Art. 2089, Art. 2090)

Debtor-owner bears the risk of loss

of the property. Pledge or mortgage is indivisible. Exceptions: a)Where each of several things

guarantees a determinate portion of the credit.

b)Where only a portion of loan was released.

c)Where there was failure of consideration.

Rule that real property, consisting

of several lots should be sold separately, applies to sales in execution, and not to foreclosure of mortgages.

.The mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole.

The debtor's heir who has paid a part of

the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who

received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is especially answerable is satisfied.

Indivisibility of pledge or mortgage.

A mortgage is indivisible even though the debt may be divided and such indivisibility is likewise no affected by the fact that the debtors are not solidarily liable. (Dayrit vs. Court of Appeals, 36 SCRA 548)

A pledge or mortgage is indivisible. It cannot be divided among different lots and each and every parcel under mortgage answers for the totality of the debt. (Gonzales vs. GSIS, 107 SCRA 492; PNB vs. IAC 143 SCRA 299

The mortgagor cannot opt, much less compel the mortgagee, to apply any payment made by him on specific portion of the mortgaged property to effect release. Neither may the mortgagee apply payments made to it on, and consequently release, a portion of the mortgaged property and effect foreclosure on the rest. (PNB vs. Amores, 155 SCRA 445)

The mortgage instrument contemplated not only obligations existing on the date thereof, but also future obligations or accommodations appearing in the respective book of accounts of NIDC and PNB, thus rendering it impractical for the parties to have a division of the Mortgage. (Komatsu Industries Inc. vs. C.A., 289 SCRA 604)

Exception to indivisibility

An exception to indivisibility is a case in

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Article 2092

Article 2092

Pledge or mortgage may secure all kinds of obligation, be they pure or subject to suspensive or resolutory conditions.

A promise to constitute pledge or

mortgage creates no real right, only a personal right binding upon the parties, only right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet.

Under the RPC, estafa is committed by a

person who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same knowing that the real property is encumbered and shall dispose of the same as unencumbered. It is essential that fraud or deceit be practiced upon the vendee at the time of the sale.

which, there being several things given in mortgage or pledge, each on of them guarantees only a determinate portion of the credit.

Where only a portion of loan was released. (Central Bank vs. C.A., 139 SCRA 46)

Where there was failure of consideration. (Rose Packing Co., Inc. vs. C.A. 167 SCRA 309)

Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility of mortgage ceases to apply since there is nothing more to secure. (PNB vs. De los Reyes, 179 SCRA 619)

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V. PLEDGE

SUBJECT ELEMENTS/FEATURES RULES/COMMENTS ILLUSTRATIVE

JURISPRUDENCE SUBSEQUENT

COMPARISONS/NOTES PLEDGE (Articles 2093- 2123) Definition: Pledge 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 delivered shall be returned with all its fruits and accessions. (Art.2085 in relation to 2093)

Kinds: 1. Voluntary or conventional – Created by agreement of parties. 2. Legal – Created by operation of law. (Ex. Art. 546, 1731 and 1914 NCC) Requisites:

1) Constituted to secure the fulfillment of a principal obligation (Art. 2085, NCC);

2) The pledgor be the absolute owner of the thing pledged;

3) The person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose; and

4) The thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (Art. 2093, NCC)

Rights and Duties of Creditor in a Pledge: 1. Shall take care of the thing pledged with the diligence of a good father of a family (Art. 2099). 2. Has right to reimbursement of the expenses made for preserving the thing. Shall be liable for loss or deterioration of the thing by reason of fraud, negligence, delay or violation of the terms of the contract, but not for fortuitous events (Art. 2099). 3. May bring actions pertaining to the owner of the thing in order to recover it from, or defend it against, a 3rd person (Art. 2103). 4. Cannot use the thing without the authority of the owner. If he uses the thing without authority, or if he misuses the thing when he was authorized to use it, the owner may ask that it be judicially or extrajudicially deposited (Art. 2104). 5. May use the thing if necessary for its preservation

Pledge *Constituted on movables. * Property is delivered to the pledgee, or by common consent to a 3rd person. * Not valid against 3rd persons unless a description of the thing pledged and the date of the pledge appear in a public instrument. Mortgage *Constituted on immovables. * Delivery not necessary. * Not valid against 3rd persons if not registered.

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(Art. 2104). 6. May either claim another thing in pledge or demand immediate payment of the principal obligation if he is deceived on the substance or quality of the thing (Art. 2109).

Characteristics: 1. Real – Perfected by delivery. 2. Accessory – Has no independent existence of its own. 3. Unilateral – Creates obligation solely on the part of the creditor to return the thing subject upon the fulfillment of the principal obligation. 4. Subsidiary – Obligation incurred does not arise until the fulfillment of the principal obligation.

Rights and Duties of the Pledgee: 1. Cannot deposit the thing pledged with a 3rd person, unless there is a contrary stipulation (Art. 2100). 2. Is responsible for the acts of his agents or employees with respect to the thing pledged (Art. 2100). 3. Has no right to use the thing or to appropriate its fruits without authority from the owner (Art. 2104) 4. May cause the public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment or dimunition in value of the thing. The proceeds of the auction shall be a security for the principal obligation (Art. 2108).

YULIONGSIU vs. PNB: There is authority supporting the proposition that the pledgee can temporarily entrust me physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. The type of delivery will depend upon the nature and the peculiar circumstances of each case. PNB vs. ATENDIDO: according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge. If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor.

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Rights and Duties of the Pledgor: 1. Takes responsibility for the flaws of the thing pledged (Art. 2101 in relation to Art. 1951). 2. Cannot ask for the return of the thing against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in proper cases (Art. 2105). 3. Subject to the right of the pledge under article 2108, pledgor is allowed to substitute the thing which is in danger of destruction or impairment without any fault on the part of the pledgee with another thing of the same kind and quality (Art. 2107). 4. May require that the thing be deposited with a 3rd person, if through the negligence or willful act of the pledgee the thing is in danger of being lost or impaired (Art. 2106).

Cause or Consideration 1. Principal obligation – In so far as the pledgor is concerned. 2. Compensation stipulated for the pledge or mere liberality of the pledgor – If pledgor is not

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the debtor.

Provisions applicable only to Pledge: 1. Transfer of possession to the creditor or to third person by common agreement is essential in pledge (Art. 2093). a. Actual delivery is important. b. Constructive or symbolic delivery of the key to the warehouse is sufficient to show that the depositary appointed by common consent of the parties was legally placed in possession. (El Banco Español-Filipino vs. Peterson) 2. All movables within the commerce of man may be pledged as long as they are susceptible of possession (Art. 2094). 3. Incorporeal rights may be pledged. The instruments representing the pledged rights shall be delivered to the creditor; if they be negotiable instruments, they must be indorsed (Art. 2095). 4. Pledge shall take effect against 3rd persons only if the following appear in a public instrument: a. Description of the thing pledged. b. Date of the pledge (Art. 2096). 5. The thing pledged may be

Extinguishment of a Pledge: 1. Ways to extinguish a pledge: a. Payment of the debt. b. Sale of the thing pledged at public auction. c. Thing pledged is returned by the pledgee to the pledgor or owner (Art. 2110). d. Written statement by the pledgee that he renounces or abandons the pledge.For this purpose, neither the acceptance by the pledgor or owner nor the return of the thing pledged is necessary, and the pledgee becomes a depositary (Art. 2111). 2. Presumptions: a. If, subsequent to the perfection of the pledge, the thing is found in the possession of the pledgor or owner, there is prima facie presumption that the thing has been returned by the pledge (Art. 2110). b. If the thing is in the possession of a 3rd person who received it from the pledgor or owner after the constitution of the pledge, there is prima facie presumption that the thing has been returned by the pledge (Art. 2110).

MANILA BANKING vs. TEODORO: In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and Interests.

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alienated by the pledgor or owner only with the consent of the pledgee. Ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue to have possession (Art. 2097). 6. Pledge gives the creditor the right to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid (Art. 2098). 7. Special Laws apply to pawnshops and establishments engaged in making loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily to them.

Requirements in sale of the thing pledged by a creditor, if credit is not paid on time (Art. 2112) 1. Debt is due and unpaid. 2. Sale must be at a public auction. 3. Notice to the pledgor and owner, stating the amount due. 4. Sale must be made with the intervention of a notary public. 5. If at the first auction the thing is not sold, a second one with the same formalities shall be held. 6. If at the second auction, there is no sale either, the creditor may appropriate the thing pledged but he shall give an acquittance (release) for his entire claim. Effect of the sale of the thing pledged (Art 2115) 1. Extinguishes the principal obligation, whether the price of the sale is more or less than the amount due. 2. if the price is more than amount due, the debtor is not entitled to the excess unless the contrary is provided. 3. If the price of the sale is less, neither is the creditor entitled to recover the deficiency. A contrary

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stipulation is void.

Legal Pledges (Art. 2121) 1. Necessary expenses shall be refunded to every possessor, but only a possessor in good faith may retain the thing until he has been reimbursed.

Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired and by reason thereof (Art. 546) 2. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. This is called the mechanic’s lien. (Art. 1731) 3. The agent may retain the things which are the objects of agency until the principal effects the reimbursement and pays the indemnity. This is called the agent’s lien. (Art. 1914) 4. The laborer’s wages shall be a lien on the goods manufactured or the work done. (Art. 1707) Note: 1. In legal pledges, the remainder of the price of the

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sale shall be delivered to the obligor. 2. Public auction of legal pledges may only be executed after demand of the amount for which the thing is retained. It shall take place within one month after the demand, otherwise the pledgor may demand the return of the thing pledged, provided s/he is able to show that the creditor did not cause the public sale without justifiable grounds. (Art. 2122)

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VI. REAL MORTGAGE

SUBJECT ELEMENTS/ FEATURES

RULES/ COMMENTS ILLUSTRATIVE JURISPRUDENCE

REAL

MORTGAGE

A. Requisite of Registration

Object of a contract of mortgage (Article 2124)

1. Immovables 2. Alienable rights in accordance

with laws, imposed upon immovables.

Movables may be the object of a chattel mortgage.

The mortgage to be validly constituted must be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding the parties (Article 2125).

Mobil Oil Inc vs. Diocares 29 SCRA 656: Art 2125 of the NCC is clear. The lower court regarded the categorical nature of “it is indispensable” but ignored the succeeding sentence “the mortgage is nevertheless binding upon the parties”. Thus, the mortgage subsists. As between the parties, the mere fact that there is as yet no compliance with the requirement that it be recorded cannot be a bar to foreclosure. In order that a mortgage may be validly constituted, the document must be recorded in the registry of the property. If not so, the mortgage is nevertheless binding between the parties.

Barrido vs. Barreto 72 Phil 187: Lumampao has the better title. When the buyer purchased the land from the mortgagor, the same was not burdened by the mortgage in favor of the mortgagee because of its non-registration.

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B. Requirement of Ownership in properties mortgaged

Scope of Mortgage (Article 2127) The mortgage extends to: 1. natural accessions; 2. to the improvements; 3. growing fruits; and 4. rents or income that are not yet

received when the obligation becomes due

5. and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged

6. in virtue of expropriation for public use

C. Mortgage follows the property

whoever the possessor may be

Rules: *The mortgage credit may be alienated or assigned to a third person, in whole or in part, with formalities required by law (Article 2128). The stipulation forbidding the owner from alienating the immovable mortgaged shall be void (Article 2130).

Dilag vs. Heirs of Resurrection 76 Phil 650: In order that a mortgage may be validly constituted, the instrument by which it is created must be recorded in the Registry of Deeds; and so far as the additional parcels of land are concerned, the registration of the mortgage did not affect and could not have affected them because they were not specifically described therein.

People’s Bank and Trust Co. vs Dahican Lumber Co. 20 SCRA 84: Where the original properties mortgaged are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used, thus becoming the subject to the inevitable wear and tear, but with the understanding that they be replaced with others to be thereafter acquired by the mortgagor, these “after-acquired properties” can validly be covered and subject to the mortgage. The Chattel Mortgage Law does not apply. Where the machinery and fixtures installed by a lumber company in its concession had become immobilized and were included in the registered real mortgage as “acquired after properties”, it was not necessary to register them a second time as chattel mortgages in order to affect third persons.

Ganzon vs. Inserto 123 SCRA 713: A mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. Sale or transfer cannot effect or release the mortgage. A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subject the purchased thing and which is at the time of the disposal of the creditor in order that he, under the terms of the contract, may recover the amount of his credit therefrom. It is a

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*Rules not covered by the New Civil Code

*The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes (Article 2129). Other forms, extent and consequences of a mortgage, both as to the other matters not

settled rule that the mortgage subsists nothwithstanding changes of ownership. A mortgage lien is inseparable from the property mortgaged. Therefore, a real mortgage on a property cannot be ordered by the court to be substituted by a surety bond. Syjuco, Inc. vs. Tecson 116 SCRA 685: No. The filing of bonds by the mortgagors in a case to declare the mortgage void does not release the mortgage previously conducted. Bonnnevie vs. Court Appeals 125 SCRA 122: A mortgage follows the property whoever the possessor may be and subjects it to the fulfillment of the obligation for whose security it was constituted. McCullough & Co. vs Veloso 46 Phil 1: The obligation of the debtor to pay the debt to the mortgagee stands although the property mortgaged to secure the debt may have been transferred to a third person. The fact that the plaintiff did not oppose the subsequent sale by the defendant to Serna of the mortgaged property does not mean anything. The mortgage is merely an encumbrance upon the property and does not extinguish the debtor’s title, which does not, therefore, lose this principal attribute as owner, which is the right to dispose. The effects of a transfer of mortgaged property to a third person are well determined by the NCC. Art 1879 provides that the creditor may demand from the third person in possession of the property mortgaged in payment of such part of the debt, as is secured by the property in his possession, in the manner and form established by law.

Rizal Commercial Banking Corporation vs. Court of Appeals 289 SCRA 292: Being exclusively payable to RCBC by reason of the endorsement,

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D. Mortgage extends to the natural accessions, improvements and fruits

included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. 1. Even though no mention was made of the machineries and tramway in question, the mortgage is understood by law to extend to them as well as to other improvements. 2. The residential building, although not expressly mentioned in the mortgage is deemed included in the deed of mortgage as improvements found on the mortgage parcels

the eight policies cannot attached by GOYU’s other creditors up to the extent of GOYU’s standing obligation in RCBC’s favor.

Bischoff vs. Pomar 12 Phil 690: In the instruments of mortgage, executed prior to the sale to the plaintiff with pacto de retro, the improvements already mounted appear as expressly mortgaged at the time of the transfer of credit to Cia Generel de Tobaco in 1904. Article 110 of the Mortgage Law states that “a mortgage extends to the natural increase, improvements, growing crops, and rents not collected when the obligation falls due, and the value of indemnities allowed or due the owner for insurance on the property mortgaged or by virtue of condemnation by right of eminent domain.” So that even though no mention had been made of said machineries and tramway in the mortgaged instruments, the mortgage of the property whereon they are located is understood by law to extend to them and they must be considered as included therein, as well as all other improvements, unless there was an express stipulation between the parties that they should be excluded. Article 111 of the same law states that the following shall be considered as mortgaged with the estate, although they be not mentioned in the contract: “1. Chattels permanently located in a building, either useful or ornamental, or for the service of some industry, even though they were placed after the creation of the mortgage.” Manahan vs. Cruz 61 Phil 137: The said residential building is deemed included in the deed of mortgage originally executed, which mortgaged was assumed by the Rapid Construction. This is in accordance with Art. 2127 of NCC which is but a reiteration of Art. 1877 of the old CC. It was made

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of land. 3. The mortgage extends to the rents or income not yet received by the mortgagor/owner when the debt becomes due. The mortgagee can therefore secure said rents from the third parties. 4. While it is true that a mortgage of land necessarily include, in the absence of stipulation of the improvements thereon, buildings, still a building by itself may be mortgaged apart from the land on which it has been built. Such a mortgage would still be a real estate mortgage for the building would still be considered immovable property even if dealt with separately and apart from the land. In the same manner, this Court has also established that possessory rights over said properties before title is vested on the grantee, may be validly transferred or conveyed as in a deed of mortgaged.

clear by Justice Torres in Bischoff vs. Pomar, supra, that both under the Civil Code and the Mortgage Law, improvements found on the mortgaged property form part of and are deemed therein included. This is following the principle of law that the accessory follows the principal. Republic vs. De los Angeles 98 SCRA 105: Held: Insofar as it recognized the right of MSC to collect and receive rentals from the lessees of the Dońa Petra Building, the order of Dec. 23, 1967 was within the competence of the respondent Judge, since the lessor-mortgagor, Petra Farin, had empowered MSC to collect and receive any dividend, rents, profits, or other income or benefit produced by or derived from the mortgaged property under the terms of the real estate mortgage contract executed by them.

Leung Yee vs. Strong Machinery Co. 37 Phil 644 Vda. de Bautista vs. Marcos 3 SCRA 438 Prudential Bank vs. Panis 153 SCRA 390

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E. Mortgagor’s interest in mortgaged property is merely an equity of redemption

F. Rights and Obligations of subsequent mortgagees

1. The subsequent mortagee is bound to pay the first and superior lien of the first mortgagee. 2. If a mortgaged property is sold at public auction, the obligation to the first mortgagee shall be paid first. Any excess shall be paid to the subsequent mortgagee. Further excess shall be given to the mortgagor.

Potenciano vs. Mariano 96 SCRA 463: Quirino’s interest in the mortgaged lot is merely an equity of redemption, an intangible or incorporeal right. (Northern Mortors, Inc. v. Coquia, 66 SCRA 415). That interest could be levied upon by means of a writ of execution issued by the Manila court as had been in the case of property encumbered by a chattel mortgage. “A writ of execution in this jurisdiction reaches both legal and equitable interest, with the result that the equity of redemption of the mortgagor will pass to the purchaser at an execution sale.”

Pingol vs. Tigno 108 Phil 623: It must be remembered that the second mortgage in favor of the plaintiff was made subject to the first and superior lien of RFC. It is for this reason that aside from their bid, plaintiff offered to assume, and in fact started paying the defendant’s obligation to RFC. When plaintiff proposed to buy said property recognizing the senior and first lien of RFC, they actually bound themselves to pay an additional sum plus whatever interest or charges that may still accrue in the meantime. The bid received plus the lien in favor of RFC is certainly not so grossly inadequate to actual market value as to shock impartial men’s minds, especially taking not of the fact that defendant’s obligation to RFC earns a daily interest, the price therefore is adequate. Alpha Insurance vs. Reyes 106 SCRA 274: The court is of the considered opinion and so holds that to avoid further delay in writing finish to the instant case which started way back in 1962, without anymore ado, all that has to be done here is to have the property herein involved ordered by trial court sold at public auction immediately, the proceeds thereof to be used to pay the outstanding obligation, if still there be any, of the defendants-

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3. The execution by the Escuetas of a second mortgage over their property had the effect of subjecting the same property to the payment of two obligations. Both mortgage debts had to be paid by the mortgagors. If they failed to pay either or both, the unpaid mortgagee had the right to look to the property for satisfaction. Each mortgagee had the right to foreclose the mortgage; but obviously, the second mortgagee’s right was inferior and subordinate to the first. 4 .Any subsequent lien or encumbrances annotated at the back of the certificates of title cannot in any way prejudice the mortgage previously registered, and the lots subject thereto pass to the purchaser at the public auction sale free from any lien or encumbrance. Otherwise, the value of the mortgage could be easily destroyed by a subsequent record of an adverse claim, for no one would purchase at a

appellees ; if the same be used to pay their obligation to the plaintiff-appellant, and should there still be any further excess, the same should be given to the said defendants-appellees.

Tambunting vs. Rehabilitation Finance Corp. 176 SCRA 493: Prior to the foreclosure by the second mortgagee could not affect the first mortgagee’s rights at all; and if the first mortgagee foreclosed first, the second mortgagee had the right to redeem; i.e. pay the first mortgagee’s credit, together with all due interests and charges and thus acquire the property mortgaged, subject to the right of redemption by the mortgagor. The acquisition by the Hernandez Spouses of the Escuetas’ rights over the property carried with it the assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC and the Tambuntings. The Hernandez, by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured; they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the mortgaged deed; and as regards the second mortgage, sought to be foreclosed judicially but yet unforeclosed, they had the so called equity of redemption.

Philippine National Bank vs. International Corporate Bank G.R. No. 86679: Private respondent is a subsequent lien holder whose right over the mortgaged property are inferior to that of petitioner as mortgagee. Being a subsequent lien holder, private respondent acquires only the right of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien of the anterior mortgagee. After a foreclosure of a prior mortgage, all liens subordinate to the mortgage are likewise foreclosed and the purchaser at public auction held pursuant thereto acquires title free from the subordinate liens. Ordinarily, new titles without carrying over the annotation of subordinate. The failure of the subsequent attaching creditor to redeem, within the time allowed by Sec. 6 of Act 3135, the land which was sold extrajudicially to satisfy the first mortgage, gives the

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G. Remedies of a mortgage creditor

foreclosure sale if bound by the posterior claim (Bank of Philippine Islands vs. Noblejas). 1. A mortgage creditor may institute against the mortgage debtor either a personal action for debt or a real action to foreclose the real estate mortgage. In other words, he may pursue either of the two remedies, but not both. 2. In case of default in payment on the part of the mortgagor, the mortgagee has a choice of one of two remedies, i.e., foreclosure of the mortgage or an ordinary suit for collection, but he cannot have both. Mere filing of a collection suit for recovery of a debt constitutes a waiver of the other remedy of foreclosure (Caltex Phili., Inc. vs. IAC, 176 SCRA 741). 3. An action to foreclose a mortgage must be limited to the amount mentioned in the mortgage.

purchaser a perfect right to secure the cancellation of the annotation of said creditor’s attachment lien on the certificates of title of said bank.

Danao vs. CA 154 SCRA 446: As explain by the Court, the rule is as follows: “For non-payment of a note secured by mortgage, the creditor has a single cause of action against the debtor. This single cause of action consists in the recovery of the credit with execution of the security. By allowing the creditor to file two separate complaints simultaneously or successively, one to recover his credit and another to foreclose his mortgage, we will, in effect, be authorizing him plural redress for a single breach of contract at much cost to the courts and with so much vexation and oppression to the debtor.” Philippine Bank of Communications vs. Court of Appeals 253 SCRA 241: The doctrine laid down in Lim Julian vs. Lutero, 49 Phil 703, pertains only to mortgages securing future advancements. The petitioner would not have been misled into thinking otherwise had it properly

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H. Jurisdiction over foreclosure of mortgage

1. In the action for nullification of the mortgage documents petitioners questioned the validity of the mortgage in favor of the insolvent bank over which respondent Central Bank claimed title seeking the collection and eventually the foreclosure of the mortgaged property. Thus, it is a real action as the action affects the title to a property.

quoted Mojica vs. CA, 201 SCRA 517 in its petition. The obligation in this case was not a series of indeterminate sums incurred over a period of time, but two specific amounts procured in a single instance. Thus the inapplicability of Lim Juan. Instead, what applies here is the general rule that “an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage.” The mortgage relied upon by the petitioner is known in American jurisprudence as a “dragnet” clause, which is specifically phrased to subsume all debts of past or future origin. Such clauses are “carefully scrutinized and strictly construed.” A reading not only of the earlier quoted provision but of the entire mortgage contract yields no mention of penalty charges. Construing this silence strictly against the petitioner, it can fairly be concluded that the petitioner did not intend to include the penalties on the promissory notes in the secured amount. This explains the finding by the TC as affirmed by the CA, that “penalties and charges are not due for want of stipulation in the mortgage contract.”

Carandang vs. Court of Appeals 160 SCRA 1988: In the case of Hernandez vs. Rural Bank of Lucena Inc., this court ruled that an action for cancellation of real estate mortgage is a personal action. The said case was primarily an action to compel the mortgagee bank to accept payment of the mortgaged debt and to release the mortgage. It appears that no foreclosure of mortgage took place and that the plaintiffs remained in the possession of the mortgaged lot. Hence it was ruled that the action for cancellation of real estate mortgage is a personal action as it is not expressly included in the enumeration found in sec. 2(a) Rule 4, and does not involve title to the mortgaged lot. However the court is not convinced that the case mentioned is applicable to the case at bar. Moreover, it should be borne in mind that in the action for nullification of the mortgage documents petitioners questioned the validity of the mortgage in favor of the insolvent bank over which respondent Central Bank claimed title seeking the collection and eventually the foreclosure of the mortgaged property. Thus, it is a real action as the action affects

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I. Rights of Innocent Mortgagees

1. A forged deed of mortgage

even if registered does not give any right to the mortgagee. It is a different case where a deed of sale was forged first and a new title was issued which was mortgaged.

2. a. As of the time the

mortgages were accepted by the Bank, there was as yet no decision declaring the titles of the mortgages null and void. There can be no denying the fact that the Bank was made to rely and had the right to rely upon regular certificates of title presented to it by the mortgagors.

b. A fraudulent or forged document of sale may become the root of a valid title if the certificate of title has already been transferred from the name of the true owner to the name of the forger or the name indicated

the title to a property. Applying the rules on venue of the matter, the action should be brought before the court having jurisdiction over the territory in which the subject property or part thereof lies which in this case should properly be in the then Court of First Instance of Laguna. Parqui vs. Philippine National Bank 96 Phil. 157: One of the essential requisites of a valid mortgage is that the thing pledged or mortgaged be owned by the persons who pledge or mortgage it. There is no question that Roman Oliver who mortgaged the property to the PNB did not own it. The mortgage was consequently void. If the mortgage is void, foreclosure is also void and the buyer at public auction does not acquire a better right than the legal owner.

Penullar vs. Philippine National Bank 120 SCRA 171: The Torrens titles were the result of regular land registration proceedings duly registered with the Register of Deeds. There was nothing in the Torrens titles which would excite suspicion that the same were fraudulently processed by the mortgagors. The respondent Bank was not duty bound to further investigate the validity and/or invalidity of the Torrens title.

Duran vs. Intermediate Appellate Court 138 SCRA 489: An innocent purchaser for value relying on a Torrens title issued is protected. A mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate.

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by the forger.

c. Where the Torrens title of the land was in the name of the mortgagor and later given as security for a bank loan, the subsequent declaration of said title as null and void is not a ground for nullifying the mortgage rights of the Bank, which had acted in good faith.

d. [PNB] had every right to rely on TCT No. 38985 as it was a sufficient evidence of ownership of the mortgagor. [PNB] at that time had no way of knowing of the existence of another genuine title covering the land in question. [PNB], being an innocent mortgagee for value, it must be paid the mortgage credit by an innocent purchaser for value.

3. A person who takes a

mortgage in good faith and for a valuable consideration, the record showing a clear title in the mortgage, will be protected against any equitable titles to the premises or equitable claims on the title, in favor of third persons, of which

Philippine National Cooperative Bank vs. Carandang 139 SCRA 570: The claim cannot be justified that the Bank, before accepting the mortgage, should have made an investigation of the title so it could have found that the donation of the property was invalid.

Serfino vs. Court of Appeals 154 SCRA 19: Petitioner PNB relied on TCT No. 38985, the genuineness of which is not in issue as it was really issued by the Register of Deeds. PNB had every right to rely on TCT No. 38985 as it was a sufficient evidence of ownership of the mortgagor.

St. Dominic Corp. vs. Intermediate Appellate Court 151 SCRA 577: A mortgagee has the right to rely on what appears on the face of the certificate of title. In the absence of anything to excite suspicion, it is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate. There is no showing in the records that the mortgagee bank was aware of any shadow affecting the title of the mortgaged property when it was mortgaged.

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he had no notice, actual or constructive. The protection extends to a purchaser at a Sheriff’s sale under proceedings on the mortgage although such purchaser had notice of the alleged equity. Any subsequent lien or encumbrance annotated at the back of the certificate of title cannot in any way prejudice the mortgage previously registered and the lots subject thereto pass to the purchaser at public auction free from any lien or encumbrance.

4. When the property is

registered in the name of a spouse only and there is no showing as to when the property was acquired by said spouse, this is an indication that the property belongs exclusively to said spouse. And the presumption of conjugality under Article 160 of the Civil Code cannot prevail when the title is in the name of only one spouse and the rights of innocent third parties are involved.

5. The notice of lis pendens

which antedated the

The fact that the foreclosure of the mortgage and the subsequent auction sale were effected after the annotation of the adverse claim is of no moment. The foreclosure sale retroacts to the date of registration of the mortgage. Any subsequent lien or encumbrance annotated at the back of the certificate of title cannot in any way prejudice the mortgage previously registered and the lots subject thereto pass to the purchaser at public auction free from any lien or encumbrance.

Philippine National Bank vs. Court of Appeals 153 SCRA 435: The PNB had a reason to rely on what appears on the certificates of title of the properties mortgaged. For all legal purposes, the PNB is a mortgagee in good faith for at the time the mortgage covering said properties were constituted the PNB was not aware to any flaw of the title of the mortgagor.

Gonzales vs. Intermediate Appellate Court

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foreclosure and sale at public auction of subject property could not affect the rights of the respondent bank because the foreclosure sale retroacts to the date of registration of the mortgage. Its character of being an innocent mortgagee continues up to the date of factual foreclosure and sale at public auction.

6. As between two innocent

persons, the mortgagee and the owner of the mortgaged property, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss.

7. a. Failure to duly

investigate who are the true owners of the land offered as collateral, was considered as constitutive of negligence on the part of the bank.

157 SCRA 587: It is true that the notice of lis pendens is an announcement to the whole world that a particular real property is in litigation, and serves as a warning that one who acquires an interest over said property does so at his own risk, so that he gambles on the results of the litigation over said property. In the case at bar, the notice of lis pendens which antedated the foreclosure and sale at public auction of subject property could not affect the rights of the respondent bank because the foreclosure sale retroacts to the date of registration of the mortgage. Its character of being an innocent mortgagee continues up to the date of actual foreclosure and sale at public auction.

Tomas vs. Tomas 98 SCRA 280: We, indeed, find more weight and vigor in a doctrine which recognizes a better right for the innocent original registered owner who obtained his certificate of title through perfectly legal and regular proceedings, than one who obtains his certificate from a totally void one, as to prevail over judicial pronouncements to the effect that one dealing with a registered land, such as a purchaser, is under no obligation to look beyond the certificate of title of the vendor, for in the latter case, good faith has yet to be established by the vendee or transferee, being the most essential condition, coupled with valuable consideration, to entitle him to respect for his newly acquired title even as against the holder of an earlier and perfectly valid title.

Rural Bank of Sariaya, Inc. vs. Yacon 175 SCRA 65: Where the certificate of title is in the name of the mortgagor when the land is mortgaged, the innocent mortgagee for value has the right to rely on what appears on the certificate of title. In the absence of anything to excite or arouse suspicion, said mortgagee is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate.

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b. A purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor.

c. Deviation to the rule that a mortgagee has the right to rely on what appears in the certificate of title, and in the absence of anything to excite suspicion, is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of the certificate.

8.The right of the purchaser

cannot prevail over the rights of the mortgagee which have been annotated on the property.

9.Sugar quota allocations do

The Court took judicial notice of the common practice of banks, before approving a loan, to send a representative to the premises of the land offered as collateral and duly investigate who are the true owners thereof. Failure to do so was considered as constitutive of negligence on the part of the banks.

Crisostomo vs. Court of Appeals 197 SCRA 833: [His] mere refusal to believe that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the vendor’s or mortgagor’s title, will not make him an innocent purchaser or mortgagee for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of the defects as would have led to its discovery had he acted with the measure of precaution which may be required of a prudent man in a like situation.

Sunshine Finance and Investment Corp. vs. Intermediate Appellate Court 203 SCRA 210: [We] have to deviate from the general rule because of the failure of the petitioner in this case to take the necessary precautions to ascertain if there was any flaw in the title of the Nolascos and to examine the condition of the property they sought to mortgage. The petitioner is an investment and financing corporation. We presume it is experienced in its business. Ascertainment of the status and condition of properties offered to it as security for the loans it extends must be a standard and indispensable part of its operations.

Centeno vs. Court of Appeals 139 SCRA 545: Even if the petitioners had registered the deed in their favor, which they did not, their right under said deed of sale, cannot prevail over the rights of the mortgage which have been annotated on said property from the beginning.

Compania General de Tabacos De Filipinas vs. Court of Appeals

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J. The Rules on Equitable Mortgage

not have existence independently of any particular tract of land. They are essentially ancillary not principal assets, necessarily annexed to a specific sugar plantation or land, improvements “attaching to the land entitled thereto.” The purchases here are not in good faith.

a. There is an agreement b. Such agreement shows the intention of the parties to charge a real property as security c. Contains nothing impossible or contrary to law

1. When the vendee

immediately takes possession of the land, pays its taxes, and enjoys its fruits, the contract is pacto de retro.

2. When funds are loaned by vendees to the vendor and the vendor retains possession and use of the property and its fruits, the contract is an equitable mortgage. 3. When circumstances exist

185 SCRA 284: Even if the sugar quota is assumed to be personal, not real property, and hence not embraced in the mortgage of the immovable created by the corresponding deeds, it would nevertheless still be covered by the chattel mortgage created in and by the same deeds. Since, like the recording of a real estate mortgage, registration of a chattel mortgage also puts all persons on notice of its existence, the legal situation would be exactly the same; the registration of the above described deeds of chattel (and real estate) mortgage over the sugar quota, among other things, would also have charged all persons with notice thereof from the time of such registration.

Magtira vs. Court of Appeals 96 SCRA 680: The actuations of the parties after the agreement where the vendee immediately entered into the possession of the land, paid taxes and enjoyed its fruits prove that the contract was that of pacto de retro and not equitable mortgage.

Bundalian vs. Court of Appeals 29 SCRA 645: The statements in the agreement that the funds were loaned by the vendees to the vendor and the vendor shall have the right to possess, use and build on the property during the period of redemption confirms the real intention of the parties that the contract is a mortgage and the property served as security.

Capulong vs. Court of Appeals 129 SCRA 245: Where the deed of sale and the document of repurchase were signed and notarized on the same day, and the vendor remained in actual possession and enjoyed the fruits of the land, it is an equitable mortgage.

Balatero vs. Intermediate Appellate

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which would prove that the pacto de retro is in fact an equitable mortgage, the contract is deemed to be the latter.

4. Where the contract contains a stipulation that upon repurchase, the document shall become null and void and have no legal effect, the contract is a mortgage. 5. Where an unregistered pacto de retro sale is construed to be a mortgage, the court may order the sale of the land in case of non-payment of the debt after a prescribed period has elapsed.

6. A mortgagee/ creditor who is in possession of the property and introduces improvements therein is not entitled to the reimbursement for the value of the said improvements upon the redemption. 7. Inadequacy of the purchase price is not sufficient to set aside a sale unless it is purely shocking to the conscience.

Court 154 SCRA 530: Circumstances would tend to prove that the contract of sale should be treated as an equitable mortgage (Article 1602). Claravall vs. Court of Appeals 190 SCRA 439: The presence of even one circumstance in Art. 1602 is sufficient for a contract of sale with right to repurchase to be presumed an equitable. The fact that the pacto de retro sale was made due to the urgent necessity for money of the vendor only bolsters the claim that it was indeed an equitable mortgage. Olea vs. Court of Appeals 247 SCRA 274: Where the contract contains a stipulation that upon payment by the vendor a retro of the purchase price the contract shall become null and void, the purported sale should be considered a mortgage contract as a valid pacto de retro would not only nullify the contract but also obligate the vendee to sell back the property to the vendor a retro upon redemption.

Zubiri vs. Quijano 74 Phil 47: Where an unregistered pacto de retro sale was construed as an equitable mortgage, the plaintiff has the right to foreclose his mortgage in a proper proceeding and sell all or any art of the land to satisfy his debt. Gardner vs. Court of Appeals 80 SCRA 399: As a general rule the mortgagee is not entitled to reimbursement for the value of the improvements introduced by him. Respondents have no right to reimbursement for the possession if the mortgagee is subject to the right of redemption by the mortgagor who at any time may repurchase within the period stipulated.

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K. Act. No. 3135 An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real-Estate Mortgages SECTION 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the

Cachola Sr. vs. Court of Appeals 208 SCRA 496: The court held that the purchase price was not unusually inadequate. To set aside the sale, inadequacy is not enough unless it is so shocking to the conscience.

Supena vs. Dela Rosa G.R. No. RTJ-93-1031, January 28, 1997 We have three different types of sales, namely: an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale. And ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court on Execution, Satisfaction and Effect of Judgments. Rule 68 of the Rules, captioned Foreclosure of Mortgage, governs judicial foreclosure sales. On the other hand, Act No. 3135, as amended by Act No. 4118, otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages," applies in cases of extrajudicial foreclosure sales of real estate mortgages. Respondent judge, however, refers to the venue stipulation in the Loan Agreement signed by the parties to the effect that, "Any action or suit brought under this Agreement or any other documents related hereto shall be instituted in the proper courts of Makati . . . " Again, in this regard, we reiterate that the law in point here is Act No. 3135, as amended, which is a special law, dealing particularly on extrajudicial foreclosure sales of real estate mortgages, and not the general provisions of the Rules of Court on Venue of Actions.

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payment of money or the fulfillment of any other obligation, the provisions of the following election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power. SECTION 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated. Location of sale: in the province where the property is locstion. SECTION 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city. K. A. Rules of notice on foreclosure

Rural Bank of Caloocan vs. CA

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of sale

G.R. No. L-32116: The pretermission of a holiday applies only "where the day, or the last day for doing any act required or permitted by law falls on a holiday," or when the last day of a given period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer of the government for an act to be done, as distinguished from a period of time within which an act should be done, which may be on any day within that specified period. For example, if a party is required by law to file his answer to a complaint within fifteen (15) days from receipt of the summons and the last day falls on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court fixes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof is not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business day without the notices of the sale on that day being posted as prescribed in Section 9, Act No. 3135. Cruz vs. Court of Appeals: Since there is no privity of contract between the petitioners and the GSIS, the latter had no legal duty to notify the petitioners of the said foreclosure proceeding. Moreover, the prior publication of the subject extrajudicial foreclosure sale in a newspaper of general circulation operates as a constructive notice to the whole world, including petitioners, of the sale. Community Savings Bank and Loan Association Inc. vs. Court of Appeals G.R. No. 75786: Thus, while publication of the foreclosure proceedings in the newspaper of general circulation was complied with, personal notice is still required, as in the case at bar, when the same was mutually agreed upon by the parties as additional condition of the mortgage contract. Failure to comply with this additional stipulation would render illusory Article 306 of the New Civil Code of the Philippines"

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Danao vs. Court of Appeals and People of the Philippines G.R. No. 122353, June 6, 2001 The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor, including the subject matter of the mortgage . . . , subject to the qualification that if he fails in the remedy by him elected, he cannot pursue further the remedy he has waived. (Emphasis Ours) Tambuting vs. Court of Appeals G.R. No. L-48278: The rule is that statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly complied with, and that even slight deviations therefrom will invalidate the notice and render the sale at least voidable. Interpreting Sec. 457 of the Code of Civil Procedure (reproduced in Sec. 18 (c) of Rule 39, Rules of Court and in Sec. 3 of Act No. 3135) in Campomanes v. Bartolome and German & Co., this Court held that if a sheriff sells without the notice prescribed by the Code of Civil Procedure induced thereto by the judgment creditor, and the purchaser at the sale is the judgment creditor, the sale is absolutely void and no title passes. This is regarded as the settled doctrine in this jurisdiction whatever the rule may be elsewhere Bohanan vs. Court of Appeals G.R. No. 111654: Personal notice on the mortgagor is not required under Act No. 3135 as amended. All that is required is that notice be given by posting notices of the sale for not less than twenty (20) days in at least three (3) public places of the municipality or city where the property is situated, and publication once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the municipality or city, if the property is worth more than four hundred pesos. Therefore, any discussion into the factual issue of whether petitioner received a notice of foreclosure sale would be an exercise in futility since it would not have any bearing at all on the alleged validity or invalidity of the foreclosure sale in question. Second, a certificate of posting is not required, much less considered indispensable, for the validity of a

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K. A. A. Right of redemption

foreclosure sale either under Act 3135 or under the ruling in Tambunting v. Court of Appeals cited by petitioner. Fiestan vs. Court of Appeals G.R. No. 81552: The formalities of a levy, as an essential requisite of a valid execution sale under Section 15 of Rule 39 and a valid attachment lien under Rule 57 of the Rules of Court, are not basic requirements before an extrajudicially foreclosed property can be sold at public auction.

Rosario vs. Tayug Rural Bank G.R. No. L-26538: So the redemption period, for purposes of determining the time when a final deed of sale may be executed or issued and the ownership of the registered land consolidated in the purchaser at an extrajudicial foreclosure sale under Act 3135, should be reckoned from the date of registration of the certificate of sale in the office of the register of deeds concerned and not from the date of the public auction sale. People’s Financing Corporation vs. Court of Appeals G.R. No. 80791: On registered lands, the one-year period of redemption starts not from the date of the sale but from the date when the certificate of sale issued by the sheriff is registered in the office of the register of deeds (Salazar vs. Maneses, 8 SCRA 495; Reyes vs. Fajardo, CA-G.R. No. 39588-R, Jan. 15, 1973, 69 OG No. 48, Nov. 26, 1973, 18 C.A.R. 2s p. 79) Belisario vs. Intermediate Appellate Court: The general rule in redemption is that in making a repurchase, it is not sufficient that a person offering to redeem makes manifestation of his desire to repurchase; this statement of intention must be accompanied by an actual and simultaneous tender of payment, which constitutes the legal use or exercise of the right to repurchase (Angao vs. Clavano, 17 Phil. 152). Likewise, in several cases decided by this Court (Fructo vs. Fuentes, 15 Phil. 362; Retes vs. Suelto, 20 Phil. 394;

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Rosales vs. Reyes, et al., 25 Phil. 495, Canuto vs. Mariano, 37 Phil. 840; Dela Cruz, et al. vs Resurreccion, et al., 98 Phil. 975) where the right to repurchase was held to have been properly exercised, there was a definite finding of tender of payment having been made by the vendor. The tender of payment must be for the full amount of the repurchase price, otherwise the offer to redeem will be held ineffectual. (Rumbaoa vs. Arzaga, 84 Phil. 812) Bona fide redemptio necessarily imports a reasonable and valid tender of the entire repurchase price. There is no cogent reason for requiring the vendee to accept payment by installments from the redemptioner, as it would ultimately result in an indefinite extension of the redemption period (Conejero, et al. vs. Court of Appeals, et al., L-21812, April 29, 1966, 16 SCRA 775, 780). Gorospe vs. Santos: The requirement that the certificate of redemption be acknowledged or ratified before a Notary Public is only for the purpose of registration, but failure to comply with the same could not be a 'valid ground to invalidate the redemption. The validity of a redemption lies on the existence of the right to redeem, the amount to be paid, and the date of payment which must be made within the period provided for by law. Rosales vs. Yboa: Pursuant to the above-cited provision, the requisites for a valid redemption are: 1) the redemption must be made within twelve (12) months from the time of the registration of the sale in the Office of the Register of Deeds (Gorospe vs. Santos, 69 SCRA 191; Agbulos vs. Alberto, 5 SCRA 790; Santos vs. Rehabilitation Finance Corporation, et al., 101 Phil. 980; 2) payment of the purchase price of the property involved, plus 1% interest per month thereon, if any, paid by the purchaser after the sale with the same rate of interests (Rosario vs. Tayug Rural Bank, 22 SCRA 1220 cited in Tolentino vs. Court of Appeals, 106 SCRA 513); and 3) written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the Register of Deeds of the province. (Section 6 of Act 3135, as amended by Act No. 4148 and Section 30, Rule 39 of the Rules of Court)

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Lee Chuy Realty Corporation vs. Court of Appeals: What is condition precedent to a valid exercise of the right of legal redemption is either the formal tender with consignation or the filing of a complaint in court. What is paramount is the availment of the fixed and definite period within which to exercise the right of legal redemption. In sum, the formal offer to redeem is not a distinct step or condition sine qua non to the filing of the action in Court for the valid exercise of the right of legal redemption. What constitutes a condition precedent is either a formal offer to redeem or the filing of an action in court together with the consignation of the redemption price within the reglementary period. Dulay vs. Carriaga: Redemption of properties mortgaged with the Philippine National Bank and the Development Bank of the Philippines and foreclosed either judicially or extrajudicially are governed by special laws which provide for the payment of all the amounts owed by the debtor. This special protection given to government lending institutions is not accorded to judgment creditors in ordinary civil actions, Philippine National Bank vs. Court of Appeals: When the foreclosure proceedings are completed and the mortgaged property is sold to the purchaser then all interest of the mortgagor are cut off from the property Prior to the completion of the foreclosure, the mortgagor is liable for the interests on the mortgage. However, after the foreclosure proceedings and the execution of the corresponding certificate of sale of the property sold at public auction in favor of the successful bidder, the redemptioner mortgagor would be bound to pay only for the amount of the purchase price with interests thereon at the rate of one per centum per month in addition up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after the purchase and interest on such last named amount at the same rate. (see DBP vs. Zaragosa) Sy vs. Court of Appeals:

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By virtue of the deed of assignment of Carlos Coquinco's right of redemption must be deemed subrogated to the rights and obligations of his assignor, and bound by exactly the same conditions, relative to the redemption of the subject property that bound the latter as debtor and mortgagor (see Gorospe v. Santos) Delos Reyes vs. Intermediate Appellate Court: Where the judgment debtor or a redemptioner validly tenders the necessary payment for the redemption and the tender is refused, it is not necessary that it be followed by the deposit of the money in court or elsewhere, and no interest after such tender is demandable on the redemption money. Rural Bank of Paranaque vs. Remolado: There was no binding agreement for its repurchase. Even on the assumption that the bank should be bound by its commitment to allow repurchase on or before October 31, 1973, still Remolado had no cause of action because she did not repurchase the property on that date. Ramirez vs. Court of Appeals Acceptance of redemption price after the expirat ion of the statutory period for redemption is deemed a waiver of theone-year period to redeem foreclosed property. Medida vs. Court of Appeals Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on the property sold, or on some part thereof, subsequent to the judgment under which the property was sold. Of course, while in extrajudicial foreclosure the sale contemplated is not under a judgment but the proceeding pursuant to which the mortgaged property was sold, a subsequent mortgage could nevertheless be legally constituted thereafter with the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside from his right against the mortgagor. In either case, what bears attention is that since the mortgagor remains as the absolute owner of the property during the redemption period and has the free disposal of his property, there would be compliance

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K. B. Right of Deficiency K. B. A. Purchaser at Public Auction Entitled to Possession SECTION 7: Under section 7, the court has power to issue a writ of possession during the period of redemption period upon ex parte application of the purchaser.

with the requisites of Article 2085 of the Civil Code for the constitution of another mortgage on the property. To hold otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage thereon.

DBP vs. Vda. De Moll 43 SCRA 82: Motgagee-creditor is entitled to secure a deficiency judgement. DBP vs. Zaragoza 84 SCRA 668: In extrajudicial foreclosure of mortgage, where the proceeds of the sale is insufficient to cover the debt, the mortgegee is entitled to claim the deficiency from the debtor. DBP vs. Tomeldan 101 SCRA 171: Period to recover deficiency after extrajudicial foreclosure sale is ten years. GSIS vs. Court of Appeals 145 SCRA 343: The law expressly authorizes the purchaser to petition for a writ of possession during the redemption period. Mirasol vs. Intermediate Appellate Court 162 SCRA 306: The pendency of the civil case for annulment of the mortgage does not does not constitute a bar or a legal impediment to the writ of possession. Ibasco vs. Caguloa: A mortgagee can secure possession of the foreclosed property despite the fact that the premises are in the possession of a lessee.

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L. Foreclosure of Real Estate Mortgage The Debtor may Petition the Sale be Set Aside and the Writ of Possession be Cancelled SECTION 8-

This can be done, provided that; it is done in the proceedings in which possession was requested and that it is done not later than 30 days after the purchaser was given possession. a. the damages must be specified b. if complaint is found to be justified, the court shall dispose in the favor of the debtor all or part of the bond furnished by the party who obtained possession c. but such order of possession shall continue in effect during the pendency of the appeal

The Redeemer shall be Entitled to Deduct from the Price of Redemption any Rentals SECTION 9-

a. given that: the property is redeemed after it has been given possession to the purchaser

Malonzo vs. Mariano: The petitioners cannot be deemed third parties “actually holding the property adversely” to the mortgagor.

Santiago vs. Dionisio 92 Phil. 495:

a. failure to implead a subordinate leinholder b. or subsequent purchaser c. or both is to render the foreclosure ineffective as against them, d. with result that there remains in their favor the unforeclosed equity of redemption

Government Services System (GSIS) vs. Court of First Instance of Iloilo, Branch III 175 SCRA 19: There is no right of redemption from a judicial foreclosure sale after the confirmation of the sale; Except those granted by banks or banking institutions.

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b. the property is occupied as dwelling

c. it being a town property d. it being rural property e. it being used gainfully f. the redeemer may deduct the

price of the interest of 1% per month

FORCLOSURE OF REAL ESTATE MORTGAGE (RULE 68, Rules of Court)

I. Complaint in Action for Foreclosure SECTION 1- the complaint shall be set forth; a. the date and due execution of the mortgage b. it’s assignments if any c. Names of the residences of the mortgagee and mortgagor d. a description of the property e. a statement of the date of the note or other documentary evidence f. the amount claimed to be unpaid g. and the names and residences of all persons having or claiming an interest in the property II. Judgment on Foreclosure for Payment or Sale SECTION 2- if the court finds that the facts set forth by the complaint is true, it determines the amount due to the plaintiff upon the mortgage debt or obligation.

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a. the sum should be paid not less than 90 days b. nor more than 120 days from entry of judgment c. default shall result in the public auction of the property to satisfy the judgment III. Sale of Mortgaged Property; It’s Effect SECTION 3- upon default of payment; the property will be sold in accordance to Rule 39 and other regulation for real estate sales. a. the sale does not affect the rights of persons holding prior encumbrances b. upon confirmation by order of court and/ or by motion the rights in the property will be divested to all parties to the action c. and their rights will be vested in the purchaser A. the purchaser at the auction sale or last redemptioner, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgement obligor. 1. Provided that the entitlement of possession is upon finality of the order of confirmation or upon the expiration of the redemption when allowed by law 2. purchaser or last redemtioner may secure a writ of possession

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upon motion, from the court which ordered the foreclosure IV. Disposition of proceeds of sale SECTION 4- the amount realized from the foreclosure sale of the mortgagee property shall be ascertained by the court and if there is residue after the payment such shall be given to the junior encumbrances or if there be no such encumbrancers or there is a balance such shall be with the mortgagor or his duly authorized agent. V. How Sale to Proceed in case the Debt is not all due SECTION 5- if the debt for which the mortgage or encumbrance was held is not at all due as provided in the judgment, as soon as a sufficient portion of the property has been sold to pay the total amount and cost due, the sale shall terminate. Afterwards as more becomes due for principal or interest and other valid changes the court may order more to be sold. VI. Deficiency Judgment SECTION 6- upon the sale of any real property as provided in the next preceding section there is a balance due to the plaintiff after applying the proceeds of the sale, the court

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upon motion, shall render judgment against the defendant for such balance for which, by the record of the case, he may be personally be liable to the plaintiff, upon which by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment. VII. Registration SECTION 7- A certified copy of the final order shall be registered in the registry of deeds. a. if right of redemption exists, the certificate of title shall not be cancelled b. if the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclosure sale shall be registered with the registry of deeds c. whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser VIII. Equity of Redemption in

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Judicial Foreclosure- all persons having or claiming interest in the mortgage premises subordinate in right to that of the holder of the mortgage should be made defendants in the action. IX. There is only Equity redemption in favor of the mortgagor consisting in the right to redeem the Mortgaged Property a. within 90 day period from the order b. or even thereafter but c. before the confirmation

X. Notice and Hearing Required for Judicial Confirmation of Foreclosure Sale- a hearing should be held for the confirmation of the sale. The mortgagor should be notified of that hearing.

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VII.CHATTEL MORTGAGE

SUBJECT PROVISIONS/ELEMENTS/FEATURES RULES/COMMENTS ILLUSTRATIVE JURISPRUDENCE CHATTEL MORTGAGE

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

Who can constitute a Chattel Mortgage?

1. The mortgagor must be legally-capacitated to enter into a contract.

2. He must be the absolute owner of the property.

3. He must have free disposal of the property subject of the Chattel Mortgage.

What can be the objects of Chattel Mortgage?

MOVABLES IMMOVABLES: by agreement of the

parties such as one constituted on a building. Even if the mortgage is registered, it will not bind 3rd persons. It will bind only the parties.The debtor cannot later on object that the property is

Only personal property can be subject to chattel mortgage. However a house can be subject matter of a chattel mortgage: 1. If the parties to a contract agrees and no third persons are prejudiced Evangelista v. Abad, CA 36 O.G. 291 2. If what is mortgaged is a house intended to be demolished or removed – for here, what are really mortgaged are the materials thereof, hence mere personal property.

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real property and cannot be the proper subject of Chattel Mortgage, by the principle of ESTOPPEL.

What kind of obligations may be secured by a Chattel Mortgage?

PRESENT OBLIGATIONS can be

secured FUTURE OBLIGATIONS cannot be

secured.

Navarro v. Pineda L-18456 The house in question was treated as personal property by the parties to the contract themselves. Hence, as to them, the chattel mortgage is Valid. Besides the court, speaking of the size of the house, said “the house was small and made of light material, sawali, and wooden posts; and built on the land of another. Acme Shoe, Rubber and Plastic Corp. v. C.A., 260 SCRA 714 While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a (1) fresh chattel mortgage or by (2) amending the old contract to conform with the form prescribed by the Chattel Mortgage Law.

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THE RECTO LAW (ART 1484, NCC) in relation to chattel mortgage

Requisites For A Valid Form Of Chattel Mortgage

A. Validity between the parties ( ART. 2140)

B. Validity as against Third persons

Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages. ART. 1484: In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

1. Exact fulfillment of the obligation, should the vendee fail to pay

2. Cancel the sale , should the vendee’s failure to pay cover two or more installments

3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance

Registration shall be done in the Register of Deeds where the mortgagor resides, andwhen the property is situated somewhere else, it needs to be registered also in the Register of Deeds of the area where the property is situated. Chattel mortgage would not be valid and binding as against third persons absent any registration. If what is mortgaged is a car, registration with the LTO/ MVO is also needed. Absent this again, it would not be binding and invalid as against third persons. In case of conflict between the chattel Mortgage Law and the Civil Code provisions on Pledge, the former must prevail. The latter will have a suppletory effect. Article 1484 of the Civil Code provides for the remedies of a seller in contracts of sale of personal property by installments. The object of Recto Law was to remedy the abuses committed in connection with the foreclosure of chattel mortgages and was meant to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment.

Malonzo v. Luneta Motor Co. , et al., C.A. , 52 O.G. 5566 If under the Chattel Mortgage law, the mortgage must be registered in two registries (as when the mortgagor resides in one province, but the property is in another), the registration must be in both otherwise the chattel mortgage is void. Industrial Finance Corp vs. Ramirez. 77 SCRA 152 According to Art. 1484, it is only when there has been foreclosure that the mortgagor is not liable for any deficiency. In this case there was no foreclosure. The mortgagee evidently chose the remedy of Specific performance. It levied upon the car by virtue of an execution and not as an incident of a foreclosure proceeding. It is entitled to an alias writ of execution for the portion of the judgment that has not been satisfied. The rule is that in installment sales, if the action instituted is for a specific performance and the mortgaged property is subsequently attached and

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of the price. Any agreement to the contrary shall be void.

sold, the sale thereof does not amount to a foreclosure of the mortgage. Hence the seller creditor is entitled to a deficiency judgment (Southern Motors , Inc v. Moscoro, 112 Phil. 94) Industrial Finance Corp. Vs. Tobias 78 SCRA 28 The remedies provided for in Art.1484 are considered alternative, not cumulative such that the exercise of one would bar the exercise by the others. Here petitioner has not cancelled the sale, nor has it exercised the remedy of foreclosure. Foreclosure, judicially or extra- judicially, presupposes something more than a mere demand to surrender possession of the object of the mortgage. Since the petitioner has not availed itself of the remedy of cancelling the sale of the truck in question or of foreclosing the chattel mortgage on the said truck, petitioner is still free to avail to the remedy of exacting fulfillment of the obligation of respondent Tobias. Filinvest credit corp. vs. Phil Acetylene, Co., Inc. 111 SCRA 421 The delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only operate to extinguished appellants liability if the appellee had actually caused the foreclosure sale of the mortgaged property when it recovered possession thereof. It is worth noting that it is the fact of foreclosure and actual sale of mortgaged chattel that bar the recovery by the vendor of any balance of the purchaser’s outstanding debt not satisfied by the sale. If the vendor desisted, on his own initiative, from consummating the auction sale, such desistance was a timely disavowal of the remedy of foreclosure, and the vendor can still sue for

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specific performance. Ridad vs. Filipinas Investment and Finance Corp. 120 SCRA 246 If the vendor avails himself of the right to foreclose his mortgage the law prohibits him from further bringing an action against the vendee for the purpose of recovering whatever balance of the debt secured not satisfied by the foreclosure sale. The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price then bringing a suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full amount of his original indebtedness. Bicol Savings and Loan Association vs. Guinhawa 188 SCRA 642 In an extra –judicial foreclosure of a chattel mortgage a deficiency exists, an independent civil action may be instituted for the recovery of the said deficiency. If the mortgagee has foreclosed the mortgage judicially, he may ask for the execution of the judgment against any other property of the mortgagor for the payment of the balance. To deny to the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel mortgage would be to overlook the fact that chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment.

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The Revised Penal Code in Relation to Chattel Mortgage

ART.319. Revised Penal Code. Removal , sale or pledge of mortgaged property- The penalty of arresto mayor or a fine amounting to twice the value of the property shall be imposed upon:

1. Any person who shall knowingly remove any personal property mortgaged under the Chattel Mortgage law to any province or city other than the one which it was located at the time of the execution of the mortgage, without the written consent of the mortgagee or his executors, administrators or assigns.

2. Any mortgagor who shall sell or pledge personal property already pledged, or any part thereof under the terms of the Chattel mortgage law, without the consent of the mortgagee written on the back of the mortgage and noted on the record thereof in the office of the Register of Deeds of the province where such property is located.

In offenses consisting of selling or disposing of mortgaged property it is essential that there be a valid and subsisting mortgage.

People vs. Agoncillo 50 O.G. No. 10,4884 In offenses consisting of selling or disposing of mortgaged property it is essential that there be a valid and subsisting mortgage. The chattel mortgage in question is obviously not valid because; 1. It does not appear in a notarial document; 2. It is not accompanied by the indispensable affidavit of good faith. 3. It is not recorded in the CM Register The rule continues that chattel mortgagor continues to be the owner of the property, and therefore has the power to alienate the same; however, he is obliged under pain of penal liability, to secure the written consent of the mortgagee. (ServicewideSpecialists , Inc. Vs intermediate Appellate Court, 174 SCRA 80) Dy, Jr. vs C.A. 198 SCRA 826 The absence of a written consent of the mortgagee to the sale of a mortgaged property in favor of a third person, therefore , affects not the validity of the sale but only the penal liability of the mortgagor under the RPC and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor. His right of ownership shall subject to the mortgage of the thing sold to him.

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ACT 1508 THE CHATTEL MORTGAGE LAW

SUBJECT ELEMENTS/FEATURES RULES/COMMENTS ILLUSTRATIVE JURISPRUDENCE COMPARISONS/NOTES

Subject of Mortgage

1. Personal/Movable Property a. can be carried from

place to place b. change of location can

be effected without injury to an immovable to which an object may be attached

c. objects not included in any of the ten paragraphs of Article 415, NCC

(Art.416, NCC; Tolentino)

2. Real/Immovable Property

a. immovables by nature or those which cannot be moved from place to place such as land, etc.

b. immovables by incorporation or those which are essentially movables but are attached to an immovable in such a manner as to be an integral part of the immovable

All personal property shall be subject to mortgage and shall be called chattel mortgage (Act 1508, Sec. 2) A building of mixed materials may be the subject of a chattel mortgage where it is considered between the parties as personal property. However, it does not make said property personal in relation to sales at public auctions By agreement, the parties to a contract may treat as personal property that which by nature would be real property as long as there is no prejudice to third parties

Manarang v. Ofilada 99 Phil. 108 There can be no question that a building of mixed materials may be the subject of a chattel mortgage but this does not make the said house personal property. Sales on execution affect the public and third persons. The form of proceedings prescribed for each kind of property is suited to its character, not to the character which the parties have given to it or desire to give it

CONFLICT BETWEEN ACT 1508 & CIVIL CODE

Act 1508 Sec. 3 Civil Code

Art. 2140 Sec. 3. Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation. Sec. 4. Validity. — A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is

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

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c. immovables by destination or those which are essentially movables but by the purpose for which they have been placed in an immovable partake of the nature of the latter because of the added utility derived

d. immovables by law

(Art.415, NCC; Tolentino)

When a movable is immobilized merely by destination or purpose, characterization of parties as chattel impresses upon it the character determined by parties (which is chattel) A real estate mortgage has a better right over a chattel mortgage of the same building

Makati Leasing and Finance Corp. v. Wearever Textile Mills, Inc. 122 SCRA 296 When a movable is immobilized only by destination or purpose, it must be pointed out that the characterization of the subject machinery as chattel by the parties is indicative of the intention of the parties and impresses upon the property the character determined by the parties. As long as no third party is prejudiced, there is no reason why it should not be treated as such. One who has agreed is estopped from denying the existence of the chattel mortgage Associated Insurance & Surety Co. v. Iya 103 Phil. 972 A building is by itself an immovable property. Moreover, in the absence of any specific provision to the contrary, a building is immovable property irrespective of whether or not the land it is adhered to belong to the same owner. The execution of a chattel mortgage covering said building is clearly invalid and a nullity once a third party is prejudiced.

delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated. Provided, however, That if the property is situated in a different province from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in

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which the mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.

Validity and

Recording of

Chattel Mortgage

1. Valid against: a. mortgagor b. mortgagor’s executors

or administrators

Exceptions:

a. possession of property is delivered to and retained by the mortgagee

b. mortgage is recorded in the office of the register of deeds

2. Recording: Mortgage must be recorded in the office of the register of deeds of the province in which the mortgagor resides at the time or if he resides overseas, in the province where the property is situated; Provided,

Where the property is situated in a province different and distinct from that in which the mortgagor resides, it must be registered in the respective register of deeds where the property is located and in the register of deeds where the mortgagor resides. Failure to register in one or both would nullify the effects of the chattel mortgage

Malonzo v. Luneta Motor Co. 52 O.G. No. 12 5566 Registration is an essential requisite in the validity of a chattel mortgage. If property and residence of mortgagor are in two different localities, the mortgage must be registered in both. If deed not properly registered but possession of chattel was delivered and retained by the person in whose favor the chattel mortgage was executed, there would still be no chattel mortgage because Art.2140 of the NCC has modified Sec.4 of Act 1508 saying that, “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.”

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however, That if the property is situated in a different province from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province. (Act 1508, Sec.4)

Mortgagee has a right to rely in good faith on the certificate of title of the mortgagor specially that ship-owners are likewise required by law to register their vessel with the Philippine Coast Guard Chattel mortgagee’s rights superior to judgment creditor

Cebu International Finance Corporation v. CA 268 SCRA 178 Northern Motors, Inc. v. Coquia 66 SCRA 415 The chattel mortgagee’s lien over the mortgaged properties in question is superior to the levy on attachment made on the same by the creditor of the chattel mortgagor. What may be attached by the creditor of said chattel mortgagor is only the equity or right to redemption of the mortgagor Allied Banking Corporation v. Salas 168 SCRA 414 A chattel mortgage lien attaches to the property wherever it may be; Private respondent as attaching creditor acquired the properties subject to petitioner’s mortgage lien as it existed thereon at the time of the attachment

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BA Finance Corporation v. CA 201 SCRA 157 As assignee, BA Finance is bound by the terms and conditions of the chattel mortgage executed between the mortgagor and mortgagee

Form 1. Title (FORM OF CHATTEL MORTGAGE AND AFFIDAVIT)

2. Date 3. Parties and Designations

(Mortgagor/Mortgagee) 4. Residences/Addresses 5. Subject of Mortgage 6. Location of Subject of

Mortgage 7. Description of Subject of

Mortgage 8. Consideration (plus interest,

if any) and Dates 9. Obligation 10. Conditions 11. Where executed 12. Signature of Mortgagor 13. Witnesses’ Signature (2) 14. Attached Form of Oath 15. Attached Form of

Certificate of Oath

(Act 1508, Sec.5)

A chattel mortgage shall be deemed to be sufficient when made substantially in accordance with the form specified in Act 1508, Sec.5, and shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the mortgage as above stated, and the certificate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith (Act 1508, Sec.5) The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and

Giberson v. Jureidini Bros. 44 Phil. 216 Chattel mortgage deemed invalid because the oath (affidavit of good faith) required by law did not appear and because the subject matter was not described with sufficient particularity Jaca v. Davao Lumber Company 113 SCRA 107 Where the statute provides that the parties to a chattel mortgage must take oath that a debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted Saldana v. Phil. Guaranty Co. 106 Phil. 919 Statute does not demand a minute and specific description of every chattel mortgaged but only requires that the description of the properties be such “as to enable the parties in the mortgage

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investigation, to identify the same. Description of “large cattle” shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos, or cowlicks, and other marks of ownership as described and set forth in the certificate of ownership together with the number and place of issue of certificate. If growing crops be mortgaged there may be an agreement stipulating that the mortgagor binds himself properly to tend, care for and protect the crop while growing, and faithfully and without delay to harvest the same, and that in default of the performance of such duties the mortgage may enter upon the premises, take all the necessary measures for the protection of said crop, and retain possession and sell the same, and from the proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor or those entitled. A chattel mortgage shall be deemed to cover only the

or any other person, after reasonable inquiry and investigation, to identify the same.”

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property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. (Act 1508, Sec.7)

Foreclosure 1. mortgagee, his executor, administrator, or assign

2. after thirty days from the time of condition broken (default)

3. mortgaged property, or any part thereof

4. public auction by a public officer at a public place

5. in the municipality where the mortgagor resides, or where the property is situated

6. at least ten days' notice of the (1) time, (2) place, and (3) purpose of such sale has been posted at two or more public places in such municipality

7. mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under

The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the register of deeds where the mortgage is recorded, and the register of deeds shall record the same. The fees of the register of deeds for registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the register of deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation

Luna v. Encarnacion 91 Phil. 531 The creditor cannot merely file a petition for a writ of possession. The remedy is to file an ordinary action for recovery of possession in order that the debtor may be given an opportunity to be heard not only regarding possession but also regarding the obligation covered by the mortgage BPI Credit Corp. v. CA 204 SCRA 601 The law does not allow the creditor himself to process the mortgaged property through violence and against the will of the debtor because the creditor’s right of possession is conditioned upon the fact of default Filinvest Credit Corp. v. CA 248 SCRA 549 Replevin is the appropriate action

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him and the persons holding subsequent mortgages of the time and place of sale at least ten days before said sale a. notice in writing

directed to him or left at his abode, if within the municipality

b. by mail if he does not reside in such municipality

(Act 1508, Sec.14)

secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand. If the sale includes any "large cattle," a certificate of transfer shall be issued by the treasurer of the municipality where the sale was held to the purchaser thereof. (Act 1508, Sec.14)

to recover possession preliminary to the extrajudicial foreclosure of a chattel mortgage. However, for employing subterfuge in seizing the truck by misrepresenting its employees as deputy sheriffs and then hiding and cannibalizing it, there was bad faith in violation of Art.19, NCC.

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VIII. SPECIAL LAWS AFFECTING MORTGAGES

PD 385: Requiring Government Financial Institutions to Foreclose Mandatorily All Loans with Arrearages, Including Interest and

Charges, Amounting to at Least Twenty Percent (20%) of the Total Outstanding Obligation

Subject Elements/Features Illustrative Jurisprudence PD 385: Sec 1 PD 385 makes it mandatory for the court to place a government

financial institution in possession of the property. It shall be mandatory for government financial institutions…to foreclose the collaterals and/or securities for any loan/credit/accommodation/ and or guarantees granted by them whenever arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligation (Section 2).

PNB vs Adil

PD 385: Sec 2 No enjoining a government financial institution from taking possession of the property.

PNB vs Adil

Purpose of PD 385: it was issued primarily to see it that government financial institutions are not denied substantial case inflows, which are necessary to finance development projects over the country, by large barrowers who, when they become delinquent, resort to the court actions in order to prevent or delay the government’s collection of their debts and loans.

Filipinas Marble Corp. vs IAC

PD 385 PD 385 which prohibits the issuance of an injunction, did not intend to make the debtor’s mortgaged property answer for an unsecured obligation. Therefore, in this case, the foreclosure sale of a government financial institution may be enjoined

C & C Commercial Corporation vs Philippine National Bank

PD 385: Sec 2 PD 385 requires a prior hearing to determine whether or not 20% of the outstanding arrearages has been paid as a prerequisite for the issuance of a temporary restraining order or a writ or preliminary investigation.

Polysterene Manufacturing Co., Inc vs CA

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IX. ANTICHRESIS

Subject Elements/Features Comments Supporting Jurisprudence Art. 2132 Type: contract

Parties: creditor/debtor Subject Property: Immovable Purpose: for paying off a debt Right: Creditor to receive fruits of an immovable of his debtor, with obligation to apply them to the payment of the interest and thereafter to the principal of his credit.

Creditor is obliged to pay the taxes and charges on the land and apply the remains or excess of the fruits to the payment of interest and then the capital. Also he can not acquire ownership over the immovable because of non-payment of the debt or loan within the stipulated periods, making all stipulations to the contrary null and void. As a mortgagee in possession, his right and obligation s are similar to those of an antichretic creditor. Obligation to pay interest is not essential.

Jagunap vs Mirasol Diego vs Fernando

Art. 2133 Measure of the Fruits: the actual market value at the time of the application.

Art. 2134 Void Antichresis: if the amount of the principal and of the interest are not specified in writing.

This article like 2133 and 2138 is intended to forestall the use of antichresis for purposes of usury.

Art. 2135 Creditor’s Obligation: to pay the taxes and charges upon the estate. Also, bound to pay necessary expenses for its preservation and repair. The cost for the preceding repairs shall be deducted from the fruits.

Antichretic creditor is obliged to pay taxes and charges upon the estate unless there is a stipulation to the contrary. Two obligations for creditor: 1) payment of taxes and charges upon the estate and; 2) Application of the fruits of the estate.

Pando vs Gimenez

Art. 2136 Reacquisition of the immovable: debtor cannot reacquire enjoyment of the immovable without having totally paid what he owes the creditor. Creditor’s option: may exempt

It is the essence of antichresis that the debtor cannot recover the enjoyment of the land involved without first paying the creditor in full. The property delivered stands as a security for the payment of the obligation of the debtor in antichresis.

Villanueva vs Ipondo (CA)

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himself from the obligation that arises from the preceding article by compelling the debtor to again enter upon the enjoyment of the property.

Therefore, the debtor cannot demand its return until the debt is totally paid.

Art. 2137 Acquisition by creditor: Creditor does not acquire ownership of property for non-payment. Creditor may petition the court for payment of a debt or sale of the real property.

Once the antichretic creditor does not get fruits from property and the debt is not paid he may go to court for payment thereof and have the property sold to realize payment. Remedy of creditor in case of non-payment of debt. It is clear if this occurs that the creditor does not acquire ownership of the property since what was transferred was not ownership but right the right to receive its fruits. The creditor in antichresis cannot acquire property via prescription. Possession for that purpose must be in the concept of owner (Art. 1118). In antichresis the concept is not that of an owner.

Peralta vs Quimpo

Art. 2138 Interest of the loan may be paid from the fruits If value of fruits exceed the amount of interest allowed by usury laws, the excess will be applied to the principal

Interest in antichresis is subject to the usury laws.

Art. 2139 The last paragraph of Art 2085, and Arts 2089 to 2091 are applicable to this contract.

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X. CONCURRENCE AND PREFERENCE OF CREDITS

Chapter 1: General Provisions

Subject Elements/Features Art. 2236 General liability of debtor: liable with all property (present and future) for the fulfilment of his obligation.

When rules on preference of credits is applicable: only when there are two or more creditors have separate and distinct claims against the same debtor who has insufficient property. Concurrence of credit vs preference of credit: Concurrence of credit implies the possession by two or more creditors of equal rights or privileges over the same property or all of the property of a debtor. A preference of credit is the right held by a creditor to be preferred in the payment of his claim above others (i.e. to be paid first) out of the debtor’s assets.

Art. 2237 Insolvency: governed by special laws such as the Insolvency Act No. 1956, as amended. Also refer to the Labor Code (PD 442), Article 110. In cases of bankruptcy or liquidation of the employer’s business, his workers shall enjoy first preference as regards to unpaid wages and other monetary claims.

Art. 2238 Effect of property belonging to conjugal partnership or absolute community upon insolvency: it shall not be among the property to be taken possession, unless the assignee of the properties has redounded to the benefit of the family. Effects of insolvency of the husband: the administration of the conjugal partnership or absolute community may be transferred to the wife/third person/assignee.

Art. 2239 What if property is that other than that mentioned in the previous article (owned by two or more persons, one of which is the insolvent debtor): his undivided share or interest shall be among the assets to be taken possession of by the assignee for the payment of the insolvent’s debt.

Art. 2240 Effects of property held by an insolvent under an expressed or implied trust: it shall be excluded from insolvency proceedings. The trustee is not, strictly speaking, the owner of the trust property although he has the legal title thereto. Therefore, property held in trust by the insolvent debtor should be excluded from the insolvency proceedings.

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Chapter 2: Classification of Credits Subject Elements/Features Comments Supporting Jurisprudence Art. 2241 Preference of claims or liens to specific

movables of the debtor: a) duties/taxes/fees due to the state. b) claims arising from misappropriations/breach of trust/malfeasance by public officials. c) claims for unpaid price of movables sold, on said movables, so long as they are in debtor’s possession. d) credits guaranteed with a pledge (in the hands of the creditor)/things guaranteed by a chattel mortgage up to its value. e)credits for making repair/safekeeping/preservation of personal property. f) claims for laborers’ wages on goods manufactured or the works done. g) expenses of salvage, upon the goods salvaged. h) credit between the landlord and the tenant. i) credit for transportation upon the goods carried. j) credits for lodging and supplies furnished to travellers by hotel keepers. k) credits for seeds and expenses for cultivation and harvest advanced to debtor. l) credits for rent for one year m) claims in favor of the depositor if the depositary wrongfully sold the thing deposited. For all cases, if the movable (with lien or preference attached) is wrongfully taken, the creditor may demand its possession within 30 days from the unlawful seizure.

A vendor of chattel, who is a creditor for the purchase price, has no preference over a creditor holding a mortgage on that chattel where the vendor is not in possession of the thing mortgaged. The claims arising from unpaid rentals and the disputed sum comes from the sale of movable properties belonging to the lessee located on the rented premises is covered by Art 2241 (12). If the vendor’s lien for the price of the personal property continues even when they are converted into real properties by destination does not deprive the vendor of such lien because its proportional value in the sale may be determined. Relate this to Art 2246

Strochecker vs Ramierez Sheriff of Manila s A. Jose Realty Corp. Unson vs Urquijo

Art. 2242 Preference for claims/mortgages/liens (which shall constitute an encumbrance thereof) with respect to immovables and real rights of the debtor: a) taxes due on land/building.

The lien of PNB was registered almost two years prior to that of Javellana, which shows that the lien is entitled to preferential consideration.

PNB vs Javellana

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b) unpaid price of real property sold. c) claims on laborers/masons/work men/etc engaged in construction. d) claims on furnishers of material used in construction. e) recorded mortgage credits. f) expenses for preservation or improvements of real property. g) credits annotated in the Registry of Property. h) claims for co-heirs for warranty in the partition of an immovable. i) claims for donors of real property for pecuniary charges. j) credits of insurers for the insurance premium for two years.

It is a mistake to assume that the 10 enumerations under Art 2242 (and Art 2241) are an order of preference. It is not correct to say that number 4 is more superior to number 5. Relate this to Art. 2249 Art. 2242 makes no difference to registered or unregistered vendor’s lien.

Carried Lumber Co. vs ACCFA

Art. 2243 The claims/credits mentioned in the previous 2 articles shall be considered as mortgages/pledges/real or personal property/liens within the purview of the laws governing insolvency.

Art. 2244 List of preferences for other property, real and personal, of the debtor

Payments of time deposits in a savings bank does not apply to Art. 2244 when made after the declaration of insolvency. Art. 2244 not only enumerates the preferred credits with respect to other property, real or personal, of the debtor, but also gives their order of preference. Order of priority only is in respect to the insolvent’s “free property.”

CB vs Morfe

Art. 2245 Effects of credits of any kind not covered in previous 4 articles: shall not enjoy preference.

Those credits not mentioned by Arts. 2241, 2242, 2244 shall enjoy no preference and such common

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Chapter 3: Order of Preference of Credits Subject Elements Comments Art. 2246 Credits enjoying preference with respect to movables, exclude all

others to the extent of the value of the personal property to which the preference refers.

Arts. 2246 and 2249, in relationship to Arts. 2241 and 2242 establish a two tier order of preference. First tier includes only taxes and the second tier shall be satisfied pro rata

Art. 2247 Effects of two or more credits with the same movable property: it shall be satisfied pro-rata, after payment of duties/taxes/fees to the state.

Art. 2248 Effect of credit enjoying preference in relationship to real property: shall exclude all others to the extent of the value of the of the immovable or real right to which the preference refers.

Art. 2249 Effect of two or more credits with the same immovable property: shall be satisfied pro rata, after payment of taxes and assessments upon the real property.

Not all credits referring to the same real property fall under Art 2249. (Manabat vs Laguna Fed. of Facomas. Arts. 2246 and 2249, in relationship to Arts. 2241 and 2242 establish a two tier order of preference. First tier includes only taxes and the second tier shall be satisfied pro rata. This does not apply to credits annotated in the Registry of Property.

Art. 2250 Effect of excess after payment of credits which enjoy preference with respect to specific/real/personal property: shall be added to the free property which the debtor may have for the payment of other credits.

Art. 2251 Credits which do not enjoy preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules: a) In the order established by Art. 2244; b) common credits referred to in Art 2245 shall be paid pro rata regardless of dates.