7. Special Laws (Final)

8/3/2019 7. Special Laws (Final)

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I. Chattel Mortgage LawSpecial Laws

Chattel Mortgage Law(Act No. 1508)

A. Definition

By chattel mortgage, personal property isrecorded in the Chattel Mortgage Registry as

security for the performance of an obligation.(Art. 2140, Civil Code.)

The old definition under Sec. 3 of Act No.

1508 which considered a chattel mortgage as a

conditional sale was considered inaccurate bythe Code Commission. (Serra v. Rodriguez,

1974).

Act 1508 primarily governs chattel

mortgage while the provisions of the Civil Codeon the contract of pledge apply in so far as

they are not in conflict with CML.

NOTE: The Ship Mortgage Decree of 1978(Pres. Decree No. 1521) governs the mortgageof vessels of domestic ownership.

B. Characteristics

1. Accessory contract: purpose: to secure the

performance of a principal obligation;2. Formal contract: registration in the CMRegister is indispensable;3. Unilateral contract: produces only

obligations on the part of the creditor to freethe thing from the encumbrance upon

fulfillment of the obligation (De Leon).

C. Comparison with Pledge

CHATTEL MORTGAGE PLEDGE

both refer to personal property

Property remains in

possession of debtor

Creditor takes

possession of prop

Delivery of the property to the

mortgagee is not necessary

Delivery of the

property to the

pledgee is necessary

Registration in the Chattel

Mortgage Register isnecessary for validity

Registration in the

Registry of Property isnot necessary for

validity

Procedure for the sale is found

in Sec. 14, Act No. 1508

Procedure for the sale

is found in Art. 2112

of the Civil Code

Can recover deficiency

judgment

No recovery of

deficiency.

Excess of proceeds from

foreclosure goes to persons

holding subsequent

mortgages, then to mortgagor

(S14)

Debtor not entitled to

excess, unless

stipulated

Debtor can redeem before the

sale, when the condition of the

No redemption

chattel mortgage is broken.(Sec. 13)

Mortgagor can sell propertymortgaged, subject to the

mortgage

Pledgor can sell thingwith consent of

pledgee

Cannot secure futureobligations

Can secure futureobligations

NOTE: Even if the property mortgaged is inthe possession of the debtor, creditors are

protected in that the chattel mortgage is madeeffective against third persons by the processof registration, to protect creditors against

possible disposal of the property by the debtor.Land Settlement & Dev. Corp. v. Carlos(68)

Should the creditor bring an action on the principal

obligation, like suing on the promissory note, thisamounts to a discharge of the chattel mortgage

so that the debtor may now dispose of the personal

property given in a chattel mortgage without thenecessity of a release of the mortgage. The debtordoes not thereby commit estafa.

Movido v. RFC (59)

A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit

waives thereby his right to enforce the mortgagesecuring it. (Also Serra v. Rodriguez, 1974).

Southern Motors v. Moscoso (61)

The complaint is an ordinary civil action forrecovery of the remaining unpaid balance due onthe promissory note. The plaintiff had not adopted

the procedure or methods outlined by Sec. 14 ofthe Chattel Mortgage Law but those prescribed forordinary civil actions. Since herein appellee has

chosen to exact the fulfillment of the appellant'sobligation, it may enforce execution of the

judgment that may be favorably rendered hereon,on all personal and real properties of the latter not

exempt from execution sufficient to satisfy suchjudgment.

CHATTEL

MORTGAGE

PACTO DE RECTO SALE

Accessory contract Principal contract

Title to the thingmortgaged is not

transferred

Title to the subject matter istransferred to the vendee but

subject to the redemption of thevendor

Affidavit of good

faith is required

Affidavit of good faith is not

required

CHATTEL MORTGAGE REAL ESTATE

MORTGAGE

Personal property Real property

Affidavit of good faithis required

Affidavit of good faith isnot required

Mortgagor cannotalienate the thing

Mortgagor can alienate thething mortgaged without

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mortgaged without the

written consent of themortgagee

the written consent of the

mortgagee and any suchprovision is void

No right of redemption There can be a right of

redemption in extrajudicialforeclosure and in judicial

foreclosure by banks

Cannot secure future

obligations

Can secure future

obligations

D. Proper Subject Matter

1. Sec. 2, read with Sec. 7: Only personal

property may be subject of chattel mortgage(personal property as defined by the Civil

Code).a. Shares of stock;b. Interest in business;

c. Machinery treated aspersonal property subsequently installed

on leased land (Davao Sawmill v. Castillo);d. Vessels recorded in

the office of the Philippine Coast Guard tobe effective as to third persons; not

necessary to be recorded in the Office ofthe Register of Deeds;

e. Motor vehiclesmortgage registered in the LTO (for

vehicles used for public services);f. House of mixed

material;g. House built on leased

land;G.R.: Immovable propertyExc.: Treated as movable by estoppel of parties

h. House intended to bedemolished;

i. House of strongmaterials, for purposes of executing a CM

as between the parties to the contract ifparties so agree and no innocent third

party will be prejudiced.

2. Exceptions:

a. By exercising the freedom tocontract that the law gives them, partiesmay stipulate that as between them, realproperty, such as building, may be

considered personal for purposes of thechattel mortgage law. But this cannot

affect third persons. (Navarro v. Pineda,63): Tumulad v. Vicencio, 71).

BUT: It shall still be executedas a real property and subject to the rules on

foreclosure of real estate mortgage.

b. Section 6: a chattel mortgagecan be executed on growing crops (whichunder the Civil Code are real property).

BUT: If the creditor wants to attachgrowing crops, the procedure is still the sameas in attachment of real property.

Piansay vs David (64)

Regardless of the validity of a contract constitutinga chattel mortgage on a house, as between the

parties to said contract, the same cannot and doesnot bind third persons, who are not parties to the

aforementioned contract or their privies

Tumalad vs Vicencio (71)The house on rented land is not only expressly

designated as Chattel Mortgage; it specificallyprovides that "the mortgagor ... voluntarily CEDES,

SELLS and TRANSFERS by way of Chattel Mortgagethe property together with its leasehold rights over

the lot on which it is constructed and participation."Moreover, the subject house stood on a rented lot

to which defendants-appellants merely had atemporary right as lessee, and although this cannot in itself alone determine the status of the

property, it does so when combined with otherfactors to sustain the interpretation that the

parties, particularly the mortgagors, intended totreat the house as personalty.

Makati Leasing v. Wearever Textile (83)

Although machineries permanently affixed to abuilding are classified as real property under the

Civil Code, the parties may validly subject suchmachineries to a chattel mortgage and shall be

found by the validity therefore by the doctrine ofestoppel. Such an arrangement however cannot

prejudice the rights of third parties to whom themachineries would still be treated as real property.

E. Extent

1. Existingobligations

2. After-

acquired (future) obligations

The chattel mortgage shall cover only theproperty described in the deed and not anyother like or substituted property. (Sec. 7)

Exception: Where the debtor gives as

security, the stock or merchandise in his storeand it is the intention of the parties that the

mortgage shall cover the stock that will takeits place in the course of the business. (Torresv. Limjap, '31)

Torres v. Limjap (31)

The provision of Sec. 7 is deemed not to apply tostores open to the public for retail business wherethe goods are constantly sold and substituted with

new stock, such as drug stores, grocery stores, drygoods stores, etc. A stipulation in the mortgage

extending its coverage to properties acquired afterits constitution is valid and binding where the

after-acquired property is in renewal of, or insubstitution for, goods on hand when the mortgage

was executed, or is purchased with the proceeds ofthe sale of such goods.

3. After-Incurred Obligations

Acme Shoe, Rubber & Plastic Corp. v. CA (96)While a pledge, real estate mortgage, orantichresis may exceptionally secure after-incurredobligations so long as these future debts are



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accurately described, a chattel mortgage can onlycover obligations existing at the time the mortgage

is constituted.Therefore, although a promise expressed in the

chattel mortgage to include debts that are yet tobe 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 coveringthe newly contracted debt is executed either by

concluding a fresh chattel mortgage or byamending the old contract conformably with form

prescribed by the CML.This ruling is due to the requirement in the

Affidavit of Good Faith which must contain an oaththat the mortgage is made for the purpose of

securing the obligation specified in the conditionsthereof, and for no other purpose, and that thesame is a just and valid obligation, and one not

entered into for the purpose of fraud whichmakes it obvious that the debt referred to in the

law is current, not an obligation that is yet merelycontemplated.

F. Requirements

1. Registration Requirements to make ChattelMortgage Binding against 3rd Parties Under Sec. 4, a chattel mortgage leaves

the property in the possession of the debtor.Hence, this section lays down the requisiteswhich must be complied with in order to make

a chattel mortgage affect third parties for theprotection of the creditor.

a. G.R.: The chattel mortgage mustbe registered with the Register of Deedswhere the debtor resides in order to bind

third persons. (Sec. 4)

If mortgagor resides abroad, mustbe registered in the province where the

property is located

But note: Art 2125, CC says that a

chattel mortgage is binding between themortgagor and mortgagee even if not

registered (Filipinas Marble Corp vs. IAC, 86)

b. Share of Stock:i. Must be registered with the

Register of Deeds where the debtorresides; and

ii. Must also be registered withthe Register of Deeds where the

corporation has its principal office.

NOTE: Registration in

the stock and transfer book of the corporation

is not necessary. (Chua Guan v. SamahangMagsasaka, 35).

c. Motor Vehicles

i. Register with the Register of Deedswhere the debtor resides;

ii. Register with the Register of Deedswhere the motor vehicle is located;

and

iii. Register with the MotorVehicle Commission, now Land

Transportation Office. (Borlough v.

Fortune Enterprises, 57)

Otherwise, the failure of the mortgagee

to report the mortgage executed in his favorhas the effect of making said mortgage

ineffective against a purchaser in good faithwho registers his purchase in the motor vehicle

office.

d. Vesselsi. Register with the Philippine

Coastguardii. Must also be registered in

the Bureau of Customs in Manila (if inManila) or in the Office of the Collector

of Customs in the port of entry (ifoutside Manila)

e. Motor vehicle which is

public utility and loan is not repayablewithin 1 year

Register with the Land Transportation

Franchising and Regulatory Board

G. Formal Requirements

1. Affidavit of

Good Faith

It is an oath wherein the partiesseverally swear that the mortgage is made forthe purpose of securing the obligations

specified in the conditions thereof and for noother purposes and that the same is a just and

valid obligation and one not entered into forthe purpose of fraud. (Sec. 5)

Lilius v. Manila Railroad Co. (35)

Under Sec. 5, the absence of the affidavit vitiates amortgage as against third parties without notice,

like creditors and subsequent lienholders; but notas between the parties thereto, which remains

valid as to them. Where a corporation is a party,

the affidavit of good faith must be subscribed by anauthorized officer. (Sec. 6)

2. Other Formal Requirementsa. Must be signed in the presence of

at least 2 witnessesb. Certificate of oath / Notarial

acknowledgment

Sec. 198 of the RACSec. 198. Registration of chattel mortgages and

fees collectible in connection therewith. Everyregister of deeds shall keep a primary entry book

and a registration book for chattel mortgages.The recording of a mortgage shall be effected by

making an entry, setting forth the names of themortgages and the mortgagor, the sum or

obligation guaranteed, date of the instrument,



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name of the notary before whom it was sworn to oracknowledged, and a note that the property

mortgaged, as well as the terms and conditions ofthe mortgage, is mentioned in detail in the

instrument filed, giving the proper file numberthereof.

The register of deeds shall also certify the officer'sreturn of sale upon any mortgage, and a reference

of such return on the record of the mortgage itself,and give a certified copy thereof;

H. Liabilities

1. Where the debtor performs and the creditor

refuses to release the mortgage

Debtor may go to court for relief. (Sec.

8)

2. Sections 9 to 12 have been repealed by Art.319 of the Revised Penal Code on crimes on

Chattel Mortgage:a. Knowingly removing any personal property

mortgaged under the Chattel MortgageLaw to any province or city other than the

one in which it was located at the time ofthe execution of the mortgage, without the

written consent of the mortgagee;b. Selling or pledging personal property

already mortgaged, without the consent ofthe mortgagee written on the back of the

mortgage and duly recorded in the ChattelMortgage Register.

Note:

Mortgagor remains owner of the property. He

can therefore validly sell the chattel, althoughhe will be criminally liable if he did not get

consent of mortgagee.

Com

pare with: If the mortgagee sells the credit, heonly needs to notify the mortgagor, so

mortgagor knows whom to pay (ServicewideSpecialists vs. CA)

Cerna v. CA (93)

3rd party mortgage or accommodation chattelmortgage does not by itself make the mortgagee

personally liable for the loan that heaccommodated.

I. Remedies of Creditor (Sec. 13)

.1 Extra-judicialForeclosure

Mambulao Lumber v. PNB (68)

It presupposes voluntary surrender to sheriff ofpersonal property by debtor. Creditor then files

affidavit outlining right to possession and sale.Posting of notice of sale must be made on twoplaces in the Presidencia plus notice to debtor 10

days before the sale.

PNB v. Manila Investment (71)

Parties may agree on private sale rather than saleat public auction.

Place must be designated in the contract;

otherwise the creditor is liable for conversion.

Note:SC Circular 7-2002 : GUIDELINES FOR THE

ENFORCEMENT OF SC RESOLUTION OF DEC 14,1999 IN A.M. 99-10-05-0 (RE: PROCEDURE IN

EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE)

Sec. 1. All applications for extra-judicialforeclosure of mortgage shall be filed with the

Executive Judge, through the Clerk of Court.

Sec. 2. The Clerk of Court shall:xxx

c. Collect the appropriate filing fees and issues

the corresponding official receipt.d. In case the application is for real estates

and/or chattels in different locationscovering one indebtedness, issue acertificate of payment indicating the

amount of indebtedness, the filing feescollected, the mortgages sought to be

foreclosed, the real estates and/or chattelsmortgaged and their respective locations,

for purposes of having the applicationdocketed with the Clerks of Court in the

places where the other properties arelocated.

Sec. 4. The Sheriff shall:In case of foreclosure of a chattel mortgage, post

the notice for at least 10 days in 2 or more public

places in the municipality where the mortgagorresides or where the property is situated

Sec. 5. Conduct of the extra-judicial foreclosure

sale

a. The bidding shall be made throughsealed bids which must be submitted to

the Sheriff who shall conduct the salebetween 9 am and 4 pm. The property

shall be awarded to the party submittingthe highest bid; in case of a tie, an openbidding shall be conducted between thehighest bidders. Payments shall be made

in cash or managers check, in Philippine

currency, within 5 days from notice.b. The sale shall be made at a place inthe municipality where the mortgagor

resides or where the property is situated

Sec. 6. The Clerk of Courts shall collect the

appropriate fees, computed on the basis of theamount actually collected by him. This shall not be

subject to a refund even if the foreclosed propertyis subsequently redeemed.

Sec. 7 & 8. The Sheriff shall, within 30 days fromthe sale, prepare a return and file the same in the

Office of the Registry of Deeds where the mortgage

is recorded. He shall report the name/s of thebidder/s to the Clerk of Court.



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Sec. 9. The Clerk of Court shall issue and sign theCertificate of Sale, subject to the approval of the

Executive Judge. Prior to the issuance of such, theClerk of court shall, in extra-judicial foreclosure

conducted under the sheriff, collect P300.00; insales conducted under a notary public, the

appropriate fees pursuant to Rule 141, 20(e).

Sec. 10. The Clerk of Court shall keep the

complete records for a period of 1 year from thedate of registration of the certificate of sale withthe Register of Deeds, after which the records shall

be archived. Juridical persons whose property issold pursuant to an extra-judicial foreclosure shallhave the right to redeem the property until, but

not later than, the registration of the certificate offoreclosure sale which in no case shall be more

than 3 months after foreclosure, whichever isearlier.

In case the property is redeemed, the Clerk ofCourt shall assess the redemptioners fee as

provided in Section 7 (k), Rule 141. If the propertyis not redeemed, the Clerk of Court shall, as a

requisite for the issuance of the final Deed of Sale,assess the highest bidder the amount of P300.00.

2. Should debtor refuse to

surrender the property

Creditor may take the preliminary step of

replevin and once he has possession, proceedat public auction as in remedy No. 1.

Important: Creditor must seek court

remedy to obtain possession (Filinvest Credit

Corp vs. CA, 95). Otherwise, that would bepactum commissorium (Esguerra vs. CA, 89)

3. Judicial Foreclosure follow the sameprocedure as foreclosure of real estate

mortgage under Sec. 8, Rule 68, Rules ofCourt.

4. Sue on the Note waive the chattelmortgage; hence, one can levy on otherproperties. (Industrial Finance Corp. v.

Ramirez, 77).

J. Foreclosure of Chattel Mortgage

1. Public Sale

If the mortgagor defaults in the paymentof the secured debt or otherwise fails tocomply with the conditions of the mortgage,

the creditor is permitted only to recover hiscredit from the proceeds of the sale of the

property at public auction.

2. Private Sale

There is nothing illegal, immoral or against

public order in an agreement for the privatesale of the personal properties covered by the

chattel mortgage. (De Leon)

3. Period to Foreclose Mortgage

Mortgagee may, after 30 days from thetime of the condition broken, cause themortgaged property to be sold at public

auction by a public officer. (Sec. 12, Act No.1508)

There must be at least 10 days notice to

the mortgagor and posting of public notice of

time, place and purpose of such sale and is aperiod of grace for the mortgagor, to discharge

the mortgage obligation. (Cabral v.Evangelista)

4. Application of Proceeds of Sale

a. Costs and expenses of keeping andsale;

b. Payment of the obligation securedby the mortgage;

c. Claims of persons holdingsubsequent mortgages in their order; and

d. The balance, if any, shall be paid tothe mortgagor, or person holding under

him. (Sec. 14, Act No. 1508)

K. Alternative Remedies of Mortgagee

1. Performance of the principal obligation by themortgagor

None; the CM becomes null and void

2. Default by the mortgagora. Extra-Judicial Foreclosure (Rule 68, RoC

not applicable)b. Original action for collection of money

effect: waiver of the chattel mortgage

L. Criminal Liability

Art. 319, RPC1. Knowingly

removing any personal property mortgagedunder the CML to any province or city other

than the one in which it was located at thetime of the execution of the mortgage without

the written consent of the mortgagee;2. Selling or

pledging personal property already mortgagedor any part thereof under the terms of the CML

without the consent of the mortgagee writtenon the back of the mortgage and duly recorded

in the chattel mortgage registry.

2. The mortgagor is not relieved of criminal

liability even if the mortgage indebtedness isthereafter paid in full (US v. Kilayko), or themortgagor-seller informed the purchaser that

the thing sold had been mortgaged (People v.Alvares).

M. Redemption

1. There is noright of redemption in chattel mortgage, onlyan equity of redemption.

2. Period: The

following may redeem if the condition of the

mortgage is broken;a. Mortgagor;



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b. A person holding asubsequent mortgage;

c. A subsequent attachingcreditor (Sec. 13, Act 1508).

N. Deficiency Judgment

1. General Rule: Creditor shall always be entitledto collect the deficiency judgement. (Ablaza v.Ignacio, 58).

State Investment House, Inc. v. CA (93)

When the proceeds of the sale are insufficient tocover the debts in an extra-judicial foreclosure of

chattel mortgage, the mortgagee is entitled toclaim the deficiency from the debtor.

2. Ratio: mortgages as accessory contractsserve only as securities and not for the

satisfaction of the principal obligation

3. PrescriptivePeriod: Ten (10) years under Art, 1142 of the

Civil Code. (DBP v. Tomeldan, 80).

Exception: If the property was sold in

installments, the mortgagee can no longer takeany action against the purchaser to recover

any unpaid balance of the price. Anyagreement to the contrary is void. (Art. 1484,

Civil Code, aka the Recto Law)

O. Recto Law

The Recto law, which is now reflected

in Articles 1484-1485 of the Civil Code, whichprovides that in a contract of sale of personalproperty, the price of which is payable in

installments, the vendor may exercise any ofthe following remedies:

(a) Exact fulfillment of the obligation, shouldthe vendee fail to pay (specific

performance);

(b) Cancel the sale, should the vendee'sfailure to pay cover two or moreinstallments (Note that this is not the

same as rescission because here, thevendor gets back the object of the saleand retains the installments paid.

However, this is not available in theabsence of stipulation in the contract.);

(c) Foreclose the chattel mortgage on the

thing sold, if one has been constituted,should the vendee's failure to pay cover 2

or more installments. In this case, heshall have no further action against the

purchaser to recover any unpaid balanceof the price. Any agreement to the

contract is void.

The principal object of this amendmentwas to remedy the abuses committed inconnection with the foreclosure of chattel

mortgages. This amendment prevents

mortgagees from seizing the mortgagedproperty, buying it at foreclosure sale for a lowprice, and then bringing the suit against the

mortgagor for a deficiency judgment. The

almost invariable result of this procedure wasthat the mortgagor found himself minus the

property and still owing practically the fullamount of his original indebtedness.

Pacific Commercial Co. v. Dela Rama

These remedies are alternative, not cumulative.Filipinas Investement v. Vitug (69)

When the creditor can no longer recover from themaker of the note with chattel mortgage because

the deficiency is covered by the Recto Law, afterthe foreclosure of the mortgage, said creditor can

still recover balance from the endorse whoendorsed with recourse.

Cruz v. Filipinas Investment (68)C sold to D a car payable on installments. The car

was given as security by way of chattel mortgageto secure payment. In addition, the debtor put up areal estate mortgage as further security for the

payment of the debt. D did not pay 2 or moreinstallments and so C foreclosed the chattel

mortgage. The proceeds therefrom wereinsufficient and so C wanted to get a deficiency

judgment and satisfy it by foreclosing on the real

estate mortgage.The established rule is to the effect that the

foreclosure and actual sale of a mortgaged chattelbars further recovery (whether by judicial or extra-

judicial foreclosure) by the vendor, of any balanceon the purchasers outstanding obligation not so

satisfied by the public sale. To allow furtherrecovery by the foreclosure of the real estate

mortgage is contrary to public policy.Northern Motors v. Sapinoso (70)

Northern Motors sold a car to Sapinoso on

installments. A chattel mortgage was executed onthe car sold. When S failed to pay 2 or moreinstallments, NM sought to foreclose the chattel

mortgage and asked the court for a writ ofreplevin. Meantime, S made several paymentswhile the replevin suit was pending. The lowercourt ruled that NM, by bringing the suit, was

barred from accepting any further payments fromS and ordered NM to reimburse the amount

collected.The court a quo erred in concluding that the legal

effect of the filing of the action for replevin was tobar NM from accepting further payments on the

promissory note. That the ultimate objective of theaction was for the foreclosure of the chattel

mortgage is of no moment, for it is the fact offoreclosure and actual sale at public auction of

the mortgaged chattel that bars further recoveryby the vendor of any balance on the buyers

outstanding obligation not satisfied by the sale.Pascual v. Universal Motors (74)

When the seller imposes a double security by achattel mortgage of the thing sold on installments

and another mortgage on another property of thebuyer, such is contrary to the public policy soughtto be protected by the Recto Law, and the

foreclosure of the chattel mortgage on the objectof the sale bars recovery on any deficiency.

Ridad v. Filipinas Investment (83)The precise purpose of the law is to prevent

mortgagees from seizing the mortgaged property,buying it at foreclosure sale for a low price and



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then bringing suit against the mortgagor for adeficiency judgment, otherwise, the mortgagor-

buyer would find himself without the property andstill owing practically the full amount of his original

indebtedness. The corporation elected to forecloseits mortgage upon default by the plaintiffs in the

payment of the agreed installments. Having chosento foreclose the chattel mortgage, and bought the

purchased vehicles at the public auction as thehighest bidder, it submitted itself to the

consequences of the law as specifically mentioned.Bicol Savings and Loan Asso. v. Guinhawa

(90)The prohibition under the Recto Law against

recovery does not apply to foreclosure of chattelmortgage constituted to secure a loan and not

originating from a sales transaction.



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Real Estate Mortgage(Act 3135, as amendedby RA 4118)

A. Definition

A Real Mortgage/ Real Estate Mortgage isa contract whereby the debtor secures to thecreditor the fulfillment of a principal obligation,

specially subjecting to such security immovableproperty or real rights over immovable

property which obligation shall be satisfied withthe proceeds of the sale of said property or

rights in case the said obligation is notcomplied with at the time stipulated.

B. Nature

It is a real right following the property,

such that in subsequent transfers by themortgagor, the transferee must respect themortgage. A registered mortgage lien is

considered inseparable from the propertyinasmuch as it is a right in rem.

C. Purpose

To regulate the sale of property underspecial powers inserted in or annexed to real

estate mortgages and redemption thereof.

D. Coverage

Governs sales made under a special powerinserted in or attached to any real-estate

mortgage, which is made as security for thepayment of money or the fulfillment of any

other obligation. Act 3135 will govern themanner in which the sale and redemption shallbe effected, whether or not provision for the

same is made in the power. (Sec 1)

Foreclosure from settlement of estate notincluded

PNB v. CA (01)

The case at bar involves a foreclosure of mortgagearising out of a settlement of estate, wherein the

administrator mortgaged a property belonging tothe estate of the decedent, pursuant to an

authority given by the probate court. The Rules ofCourt on Special Proceedings comes into playdecisively.

E. Applicability

If a special power to sell is inserted in acontract of real mortgage, there can be an

extra-judicial foreclosure sale under Act 3135.if the real mortgage contract is silent, Rule 68

on judicial foreclosure shall apply.

F. Effects of Invalidity of Mortgage

1. Principal obligation remains valid;2. Mortgage deed remains as evidence of personal

obligation

G. Alternative Remedies of a Real EstateMortgagee

1. Mortgagor is alive:

a. Foreclosure:i. judicial

ii. extra-judicial

b. Ordinary action for collection of money effect: waiver of the real estate mortgage

because the remedies are exclusive.

2. Mortgagor dies (Rule 86, Sec. 7, RoC):a. Waive the mortgage and claim the entire

debt from the estate of the mortgagor asan ordinary claim against the estate;

b. Judicial foreclosure and claim the deficiencyfrom the estate;

c. Rely on the mortgage and foreclose thesame at anytime within the period of the

statute of limitations without right to claimfor the deficiency;

d. Extrajudicial foreclosure under Act 3135before it is barred by prescription without

right to file a claim for any deficiency.

Lucena v. CAFailure to comply with the statutory requirements

as to publication of notice of auction saleconstitutes a jurisdictional defect which invalidates

the sale.

H. Foreclosure Sale

Foreclosure is a remedy available to themortgagee by which he subjects the

mortgaged property to the satisfaction of theobligation, which was secured by the

mortgage.

Nature of Power of Foreclosure by

Extrajudicial Sale

1. It is an authority conferred upon themortgagee for the latters own protection.

2. It is an ancillary stipulation supported bythe same cause or consideration for the

mortgage and forms an essential andinseparable part of the bilateral agreement.

3. To declare to foreclose or not is theprerogative of the mortgagee.

4. It is generally held that no particularformality is required in the creation of the

power of sale.

Extrajudicial Foreclosure (Act 3135)1. Express authority to sell given to

mortgagee (authority not extinguished bydeath of mortgagor or mortgagee)

2. Public sale after proper noticea. Type of Sale: Public auction



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b. Venue of Sale: Province where theproperty is situated

c. Sale cannot be made legally outside of theprovince in which the property sold is

situatedd. If venue is subject to stipulation, such sale

shall be made in said place (i.e., the placeso stipulated) or in the municipal building

of the municipality in which the property orpart thereof is situated.

e. Notice: Notices of the sale are to be postedin at least 3 public places of the

municipality or city where the property issituated for not less than 20 days (Sheriffs

Office, Assessors Office, Register ofDeeds).

f. Such notice shall likewise be publishedonce a week for at least 3 consecutiveweeks in a newspaper of general

circulation in the municipality or city.g. Personal notice to mortgagor not generally

required. Posting of notice on mortgagedproperty is likewise not required.

h. Republication in the manner prescribed byAct No. 3135 is necessary for the validity

of a postponed extrajudicial foreclosuresale. The absence of such republication

invalidates the foreclosure sale.

DBP v. Emerald Resorts HotelFacts: DBP published the notice of auction sale

scheduled on 12 Aug 1986. However, the auctionsale was moved to 11 Sept 1986. DBP contendsthat the agreement to postpone dispensed with theneed to publish again the notice of auction sale.

Held: Republication in the manner prescribed byAct No. 3135 is necessary for the validity of a

postponed extrajudicial foreclosure sale. Anotherpublication is required in case the auction sale is

rescheduled, and the absence of such republicationinvalidates the foreclosure sale.

The last paragraph of the prescribed notice of sale(under SC Circular 7-2002) allows the holding of a

rescheduled auction sale without reposting orrepublication of the notice: In the event the public

auction should not take place on the said date, itshall be held on _____,____without further notice.

However, the rescheduled auction sale will only bevalid if the rescheduled date of auction is clearly

specified in the prior notice of sale. The absence ofthis information in the prior notice of sale will

render the rescheduled auction sale void for lack ofreposting or republication.

3. Content of notice: correct number of thecertificate of title and correct technicaldescription of the property.

Object of notice: to inform the

public of the nature and condition of theproperty sold and of the time, place and terms

of the sale.

4. When sale not held on date specified

DBP v. Aguirre (01)

Although the notice of foreclosure sale was dulypublished, the sale did not take place as scheduled

on Sept 25, 1985. Instead, it was held more thantwo months after the published date of the sale or

on Jan 7, 1986. This renders the sale void.

5. Waiver of notice of sale

PNB vs. Nepomuceno (02) &

Ouano vs CA (03)The focal issue in this case is whether the parties

to the mortgage can validly waive the posting andpublication requirements mandated by Act No.

3135. We answer in the negative. Failure to publishthe notice of sale constitutes a jurisdictional defect,which invalidates the sale.

While it is established that rights may be waived,Art 6 of the Civil Code provides that such waiver is

subject to the condition that it is not contrary tolaw, public order, public policy, morals, or goodcustoms, or prejudicial to a third person with a

right recognized by law. The statutoryrequirements of posting and publication are

mandated for the public or third persons. As such,it is imbued with public policy considerations and

any waiver thereon would be inconsistent with theintent and letter of Act No. 3135.

6. Newspaper of general circulation

Perez vs. Perez (05)

Petitioners argue that the Olongapo News where

the notice of public auction was published was nota newspaper of general circulation in Morong,Bataan.

To be a newspaper of general circulation, it isenough that it is published for the dissemination oflocal news and general information; that it has abona fide subscription list of paying subscribers;

and that it is published at regular intervals. Thenewspaper must not be devoted to the interests or

entertainment of a particular class, profession,trade, calling, race or religious denomination. The

newspaper need not have the largest circulation solong as it is of general circulation.

7. Time of Sale: Between 9 AM and 4 PM

8. Who may bid:

a. The creditor;b. The trustee;

c. Other persons authorized to act for thecreditor;

d. Other bidders not privy to the mortgage ortrust deed

9. Procedure

1) The mortgagee files an application forforeclosure with the Executive Judgethrough the Clerk of Court, who will

receive and docket the application and

collect the appropriate filing fees. (SC AMNo. 99-10-05-0)



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2) Notice of the sale is posted in at least 3public places of the municipality or citywhere the property is situated for not less

than 20 days and published once a weekfor at least 3 consecutive weeks in a

newspaper of general circulation in the

municipality or city. (Sec. 3, Act 3135)3) The auction sale is conducted under the

direction of the sheriff, the ExecutiveJudge, or a notary public of the

municipality. (Sec. 4, Act 3135)At the sale, the creditor, trustee, or other

persons authorized to act for the creditormay participate in the bidding and

purchase under the same conditions asany other bidder unless the contrary has

been expressly provided in the mortgageor trust deed under which the sale is

made. (Sec. 5, Act 3135)

4) There must be at least 2 participating

bidders for the auction sale to be valid. Ifon the new date set for the sale there shallnot be at least two bidders, the sale shall

then proceed. (SC AM No. 99-10-05-0)

5) Once the sale has been confirmed, theClerk of Court signs and issues a certificate

of sale to the winning bidder. (SC AM No.99-10-05-0)

6) Possession during the redemption period

G.R.: Purchaser must petition the court

where the property is situated for possession

during the redemption period. He must alsogive a bond equivalent to the use of the

property for a period of twelve months toindemnify the debtor in case the sale is shown

to violate the law (Sec 7, Act 3135).

Within 30 days after the purchaser is givenpossession of the property, the debtor may

petition that the sale be set aside on theground that the mortgage was not violated or

the sale was not made in accordance with theprovisions of Act 3135. (Sec. 8)

Sales made under RA 8791 (General

Banking Law): After the date of theconfirmation of the auction sale, the winning

bidder has the right to enter upon and takepossession of such property and administer the

same in accordance with law.

At the sale, the creditor, trustee or anyperson authorized to act for the creditor, may

participate in the bidding and purchase, as anyother bidder, unless the contrary is expressly

provided in the mortgage or trust deed underwhich the sale is made. (Sec. 5)

The creditor is allowed to recover the

deficiency from the sale of the property. Wherethe proceeds of the sale are insufficient to

cover the debt in an extrajudicial foreclosure ofmortgage, the mortgagee is entitled to claim

the deficiency from the debtor.

The mortgagee, in extrajudicial

foreclosure, has the right to recover deficiency judgment within 10 years from the time the

right of action accrues. Except: When themortgagor is not debtor. The action for the

recovery of such deficiency must be directedagainst the debtor.

A foreclosure sale retroacts to the date of

registration of the mortgage and that a personwho takes a mortgage in good faith and for

valuable consideration will be protected againstequitable claims on the title in favor of third

persons of which he had no actual orconstructive notice.

Valmonte v. CAThe inadequacy of price would not nullify the saleunless the price is so inadequate so as to shock the

conscience of the court. In fact, the property maybe sold for less than its fair market value precisely

because the lesser the price the easier for theowner to effect a redemption.

Samson v. Rivera (04)

The duty of the trial court to grant a writ ofpossession is ministerial. Such writ issues as a

matter of course upon the filing of the propermotion and the approval of the corresponding

bond. Any question regarding the regularity andvalidity of the sale is to be determined in a

subsequent proceeding (Sec 8). Such questioncannot be raised to oppose the issuance of the

writ, since the proceeding is ex parte.

A pending action for annulment of mortgage orforeclosure does not stay the issuance of a writ of

possession.

DBP v. Spouses Gatal (05)

Once a mortgaged estate is extra-judicially sold,and is not redeemed within the reglementary

period, no separate and independent action isnecessary to obtain possession of the property.

The purchaser at the public auction has only to filea petition for issuance of a writ of possession

pursuant to Sec. 33 of Rule 39 of the RoC.Where the title is consolidated in the name of the

mortgagee, the writ of possession becomes a

matter of right on the part of the mortgagee, and itis a ministerial duty on the part of the trial court toissue the same. The pendency of a separate civil

suit questioning the validity of the sale of themortgaged property cannot bar the issuance of the

writ of possession. The rule equally applies toseparate civil suits questioning the validity of themortgage or its foreclosure and the validity of the

public auction sale.

7) Upon failure of the debtor to redeem the

property within 1 year after the date of theregistration of the certificate of sale,

winning bidder becomes the absoluteowner.

10. Remedies of mortgagee are not cumulative



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Caltex v. IAC (89)CALTEX made a mockery of our judicial system

when it initially filed a collection suit then, duringthe pendency thereof foreclosed extra-judicially the

mortgaged property which secured theindebtedness and still pursued the collection suit to

the end.A mortgage creditor may institute either a personal

action for debt or a real action to foreclose themortgage. He may pursue either of the two

remedies, for each of the two remedies is completein itself.

When the mortgagee chooses the foreclosure ofthe mortgage, he enforces his lien by the sale of

the mortgaged property. The proceeds will beapplied to the satisfaction of the debt. With this

remedy, he has a prior lien on the property.On the other hand, if the mortgagee resorts to anaction to collect the debt, he waives his mortgage

lien. He will have no more priority over themortgaged property.

I. Redemption

A transaction by which the mortgagorreacquires or buys back the property which

may have passed under the mortgage ordivests the property of the lien which the

mortgagee may have created.

Kinds of Redemption1. Equity of redemption or the right of the

mortgagor in case of a judicial foreclosure toredeem the mortgaged property after his

default in the performance of the conditions of

the mortgage but before the confirmation ofthe sale of the mortgaged property.

2. Right of redemption or the right, in case of an

extrajudicial foreclosure, to redeem themortgaged property within a certain period

after it was sold for the satisfaction of themortgage debt.

Right of redemption

1. Period within which to exerciseright: 1 year from the date of registration of

certificate of sale with the appropriate Registryof Deeds.

2. Effect of failure to exercise right:

the purchaser has the absolute to a writ ofpossession.3. Effect of exercise of right:

elimination from his title thereto of the liencreated by the levy or attachment or judgment

or registration of the mortgage thereon.4. Where mortgaged property sold to

third party: transfers only the right to redeemthe property and the right to possess, use andenjoy the same during the said period (in case

of sale to a third person by the mortgageeafter the foreclosure, the mortgagor mayredeem it at the amount of the principal

obligation plus interest until time of actualredemption.)

5. Where sale is not registered andmade without the consent of mortgagee: the

mortgagee need not recognize the redemptionmade by the third party.

6. Where extrajudicial foreclosure iseffected with fraud: it is null and void ab initio

Requisites of a valid

redemption1. Made within 1year from the date of the registration of the

certificate of sale;2. Payment of the

purchase price of the property plus 1% interestper month together with the taxes thereon, if

any, paid by the purchaser and the amount ifhis prior lien, if any with the same rate of

interest computed from the date of registrationof the sale up to the time of redemption.

3. Written notice of the redemption must be served on the officer

who made the sale and a duplicate filed withthe proper Registry of Deeds.

Who mayexercise the right of redemption

1. Mortgagor or one in privity of title with

mortgagor;2. S

uccessor-in-interest:a. One to whom the debtor has transferred

his right of redemption;b. One to whom the debtor has conveyed his

interest ion the property for the proposed

redemption;

c. One who succeeds to the interest of thedebtor by operation of law;

d. One or more of debtors who were jointowners of the property sold;

e. The wife as regards her husbandshomestead by reason of the fact that some

portion of her husbands title passes toher;

f. Compulsory heir.

3. Under the Rules of Court:a. The judgment debtor or his successor-in-

interest in the whole or any part of theproperty;

b. A creditor having a lien by attachment,judgment or mortgage on the property

sold or some part thereof. Subsequent tothe judgment under which the propertywas sold.



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II. Insolvency LawSpecial Laws

Insolvency Law (Act No.1956, as amended)

A. Concept

Under Phil. law, bankruptcy is the same asinsolvency.

Defn of Insolvency: relative condition of adebtors assets and liabilities that the assets, if

all made immediately available, would not besufficient to pay the liabilities.

Defn of Transfer: it includes the sale and

every other and different modes of disposing ofor parting with property, or the possession ofproperty, absolutely or conditionally, as a

payment, pledge, mortgage, gift or security. Adeposit of money is not a transfer.

B. Purpose

1. Equitable distribution of the properties ofthe debtor among the creditors2. To afford the individual debtor a fresh start

in life

BUT NOTE: the Insolvency Law does not

grant discharge to a corporate debtor

C. Divisions of the Law

1. Suspension of PaymentsDebtor possesses sufficient property to cover all his

debts, but foresees the impossibility of meeting

them when they respectively fall due (Sec 2).Debtor asks for more time to convert some of hisproperties to cash to be able to pay his debts.

2. Insolvency Proceedings debtor has nocash or property to pay all his debts.

a. Voluntary Insolvency: debtor filesfor insolvencyb. Involuntary Insolvency: creditorsfile for debtors insolvency

D. Comparisons

SUSPENSION OF

PAYMENTS

INSOLVENCY

PROCEEDINGS

Purpose: To suspend or

delay payments of

debts

Purpose: to compel

presentment of all debts,

whether due or not, and to

secure a complete discharge

from such debts

Amount of

indebtedness is not

affected, but only the

time for paying them is

postponed

Creditors receive less than

what they are entitled to, or

some creditors may not even

receive anything

Debtor has sufficient

property to cover his

liabilities

Debtors assets are not

sufficient to cover liabilities

VOLUNTARYINSOLVENCY

INVOLUNTARYINSOLVENCY

Debtor is the

petitioner

3 or more creditors are the

petitioner

Debtor may haveonly one creditor

Debtor must have at least 3creditors

No requirements

WRT creditors

Creditors must be Phil.

residents whose creditsaccrued in the Phils, and

none of them became acreditor by assignment

within 30 days prior to thefiling of the petition

No bond is requiredfor the petition

A bond is required forinsolvency proceedings

Order of adjudication

may be granted exparte

Order is granted only after a

hearing

Debtor must not

have committed anact of insolvency

Debtor must have

committed an act ofinsolvency before the

creditors can file the petition

Petition must be filed

with the RTC wherepetitioner-debtor

resided for 6 monthsprior to the filing

Length of residence of the

debtor is immaterial

SUSPENSION OF PAYMENTS

Individual Corporation, Partnership or

Association (CPA)

Governing Law

Act No. 1956 Act No. 1956 P.D. No. 902-A

Jurisdiction

RTC (Act No.1956)

RTC (Act No.1956)

RTC (R.A. No.8799)

Grounds

Debtor hassufficient

property but

foresees theimpossibility of

meeting themwhen they

respectively fall

due

C.P.A. debtorhas sufficient

property but

foresees theimpossibility of

meeting themwhen they fall

due

a. C.P.A. hassufficient property

to cover all its

debts but foreseesthe impossibility of

meeting themwhen they

respectively fall

due, OR;

b. C.P.A. has no

sufficient assets to

cover its liabilities

but is under

management of aRehabilitation

Receiver or Mngt.Committee (Sec.

5[d], P.D. 902-A



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E. Sources

1. Spanish Code of Commerce

Mitsui v. HSBC (17)

Act No. 1956 deals with 3 principal subjects:suspension of payments, voluntary insolvency, andinvoluntary insolvency. That part of the Actreferring to the first appears to have been taken

from the Spanish Code of Commerce, as amendedby the law of June 10, 1897. The Act, in so far as it

relates to voluntary and involuntary insolvency, isessentially a bankruptcy law because it discharges

the honest debtor.

2. Insolvency Act of California of 1895 (as tovoluntary and involuntary insolvency)

SunLife vs. Ingersoll (21)

Act No. 1956 is in great part a copy of theInsolvency Act of California, enacted in 1895,

though it contains a few provisions from theAmerican Bankruptcy Law of 1898. The California

Insolvency Law of 1895 is precisely the provisionwhich appears as section 32 of our Act, defining

the property which passes as assets to theassignee in insolvency.

F. Suspension of Payments

1. Nature

The debtor who, possessing sufficient property tocover all his debts, foresees the impossibility of

meeting them when they fall due, may petition thathe be declared in the state of suspension ofpayments by the court of the province / city in

which he has resided for the preceding 6 months.(Sec 2)

2. Purpose: To seek postponement of thepayment of debts in order to provide the

debtor a given period to convert some of hisproperties to cash.

3. Basis: The probability of the debtors

inability to meet his obligations when theyrespectively fall due, despite the fact that he

has sufficient assets to cover all his liabilities.

4. Effect commences: upon the filing of thepetition.

5. Who May File:

a. An individual debtor;b. Corporation, partnership orassociation (C.P.A.) (Sec. 2).

Chung Ka Bio v. IAC (88)If petition for suspension of payments is filed with

SEC by a corporate entity and an individualstockholder (who is a surety for the corporation),

SEC has no jurisdiction over the individual

petitioner.

Traders Royal Bank v. CA (89)

SEC can only take custody and control of theassets of the corporation. Individual petitioner is

merely a nominal party. His properties are notincluded in the rehabilitation receivership

appointed by the SEC for the corporation. Hence,his creditors can file suits against him even during

the rehabilitation receivership.

PAL vs. Spouses Kurangking (02)A claim is said to be a right to payment, whether

or not It is reduced to judgment, liquidated orunliquidated, fixed or contingent, matured or

unmatured, disputed or undisputed, legal orequitable, and secured or unsecured. In Finasia

Investments, this Court has defined the wordclaim, contemplated in Sec. 6(c) of P.D. 902-A,

as referring to debts or demands of a pecuniarynature and the assertion of a right to have moneypaid as well.

The claim of private respondents against PAL is amoney claim for the missing luggage, a financial

demand that the law requires to be suspendedpending the rehabilitation proceedings.The justification is to enable the management

committee or rehabilitation receiver to effectivelyexercise its/his powers free from any judicial or

extra-judicial interference that might unduly hinderor prevent the rescue of the debtor company

Chas Realty v. Talavera (03)

Rule 4, Sec. 2(k) of the Interim Rules on CorporateRehabilitation provides that (a), the filing of the

petition has been duly authorized and (b), thedirectors and stockholders have irrevocably

consented to, in accordance with existing laws, all

actions or matters necessary and desirable torehabilitate the debtorIf any extraordinary corporate actions are to be

done, the petitioner would be bound get theapproval of a majority of the directors and theaffirmative votes of stockholders representing atleast 2/3 of the outstanding capital stock. Where

no such extraordinary corporate acts arecontemplated, the approval of stockholders would

only be by a majority.The rehabilitation plan submitted by petitioner

merely consists of a repayment or re-structuringscheme. This would not require a vote of approval

by the stockholders representing at least 2/3 of theoutstanding capital stock

MWSS v. Daway (04)

Sec. 6 (b) of Rule 4 of the Interim Rules does notenjoin the enforcement of all claims against

guarantors and sureties, but only those claimsagainst guarantors and sureties who are not

solidarily liable with the debtor.The participating banks obligation are solidary with

respondent Maynilad in that it is a primary, direct,definite and an absolute undertaking to pay and isnot conditioned on the prior exhaustion of the

debtors assets. These are the same characteristicsof a surety or solidary obligor. Being solidary, theclaims against them can be pursued separately

from and independently of the rehabilitation case.

6. Where to filea. Individuals:



16/34


RTC of the province where he has residence within6 months previous to the filing of the case, if

debtor is a natural person.Governing law: Insolvency Law

b. Partnerships and corporations:Transferred from SEC to RTC by the Securities

Regulation CodeGoverning Law: PD 902-A

7. Procedure for Individual Debtors

1. Debtor files petition in court

The petition for suspension of payments

must include as annex a statement of assetsand liabilities, proposed agreement with

creditors, inventory of assets and a detailedschedule of obligations, amounts and due

dates.

Effects of filing the petition:

a. No disposition in any manner of his property may be made by thepetitioner except insofar as concerns the

ordinary operations of commerce or ofindustry in which he is engaged (Sec.3,par. 2);

b. No payment may be made bypetitioner except in the ordinary course of

his business or industry;c. Upon request to the court, all

pending executions against the debtorshall be suspended except execution

against property especially mortgaged.d. As to the unsecured creditors:

i. Any pending executions of thedebtor shall be suspended except

execution against property mortgaged

(Sec. 6).ii. They cannot sue to collect their claimsduring the suspension of payments

proceedings.

2. Court orders meeting of creditors andpublication (Ratio: Suspension of payments isa proceeding in rem, so publication is needed

to acquire jurisdiction)

Creditors not affected by the Order ofSuspension of Payments:

a. Those having claims for personal

labor, maintenance, expenses of the lastillness and funeral of wife or child of

debtor, incurred during the 60 daysimmediately preceding the filing of the

petition;b. Those having legal or contractual

mortgages.

3. Meeting of creditors included in theschedule of creditors filed by the debtor.

Creditors representing at least 3/5 of theliabilities must be present. (Sec 8)

The ff creditors may also join the meeting:

Persons having claims for personal

labor, maintenance, expenses of the lastillness and funeral of wife or child of

debtor, incurred during the 60 dayspreceding the filing of the petition

On the other hand they may alsorefrain from attending or voting at such

meeting, in which case they shall not bebound by the agreements determined at

such. (Sec 9)

4. Action by the creditors upon the debtorsproposition. Approval must be by the majority,

meaning :

2/3 of the creditors voting uponthe position.

Claims represented by the

majority must amount to at least 3/5 of thetotal liabilities of the debtor.

If decision is negative / nodecision:

Proceeding shall beterminated

Parties may enforcetheir rights (Sec 11)

If decision is favorable:

Any creditor who attended the meeting and

protested against the vote may object (Sec.11) on the following grounds:

Defects in the call for the meeting or in the

deliberations, which prejudiced creditorsrights

Fraudulent connivance between one ormore creditors and debtor to vote in favor

of the proposed agreement

Fraudulent connivance of claims to obtain

a majority (Sec. 12)

The court shall

conduct a hearing. If the objection ismeritorious, the proceedings will be

terminated. Causes for which objection may bemade to decision of the meeting:

a. Defects in the call for the meeting,in the holding thereof, and in the

deliberation had there at whichprejudice the rights of the creditors;

b. Fraudulent connivance betweenone or more creditors and the debtorto vote in favor of the proposedagreement; and

c. Fraudulent conveyance of claimsfor the purpose of obtaining a

majority.

If decision hasbeen declared valid/no opposition or objection:

Courtshall order that agreement be carried out

(Sec. 11)

If thedebtor fails wholly/in part to perform theagreement, all the rights which the

creditors had shall revest in them. Thedebtor may be made subject to bankruptcy

and insolvency proceedings. (Sec. 13).

8. Effect of Filing PetitionO

n execution pending against debtor If any execution be pending againstthe debtor, it shall be suspended before



17/34


the sale of the property is madethereunder

PROVIDED the debtor makes arequest to the court before which the

proceeding for suspension of paymentsis pending (Sec 6)

b. On execution against property specially

mortgagedThe execution against property especiallymortgaged is exempted from the provisions of this

section (see above) (Sec 6)

c. On action to collect sum of money still to be

filed against debtorNo creditor other than those mentioned in Sec 91

shall institute proceedings to collect his claim fromthe moment that suspension of payments is

applied for and while the proceedings are pending.

(Sec 6)

d. D

ebtor may not dispose of his property,except in the ordinary course of the

business in which he is engaged

e. Debtor cannot make any payments outsideof the necessary or legitimate expenses ofthis business (Sec 3)

Suspension of Payments under:

INSOLVENCY LAW P.D. NO. 902-A

1. Applies to either

individual or C.P.A.debtors

1. Applies to C.P.A. debtors

only

2. Suspensive effectcovers unsecured

creditors only

2. Suspensive effect coverssecured and unsecured

creditors

3. Absent any

agreement amongcreditors, automatic stay

expires after 3 months

3. No time limit as long as

C.P.A. debtor is undermanagement committee/

rehabilitation receiver

4. Agreement is subject

to qualifying majority

votes

4. No need to obtain

creditors approval

G. Voluntary Insolvency Proceedings

Procedure for Individual debtors,

Partnerships, and Corporations1. Filing of petition by insolvent

debtor

Debtor must owe at least

P1,000.

Petition must be filed in

the RTC where he resided 6 months priorto the filing

1 Persons having claims for personal labor, maintenance,

expenses of last illness and funeral of wife/children of the

debtor incurred 60 days prior to the petition and personshaving legal or contractual mortgages

I

mportant: RTC has jurisdiction over

proceedings for voluntary andinvoluntary insolvency of corporations

(Ching v. Land Bank, 91)

Petition must state forth:

Place of residence;

Period of residence therein

immediately prior to filing said petition;

Inability to pay all his debts in full;

Willingness to surrender all hisproperty, testate and effects, not exempt from

execution to the benefit of his creditors; and

Application to be adjudged an

insolvent (Sec. 14)

Attach

the ff: schedule of debts and creditors,

inventory of all his properties not exemptfrom attachment or execution

If acorporation, must have written assent of

majority of the board

The

filing of such petition shall be an act ofinsolvency (Sec 14)

Phil. Trust Co. v. National BankEffect of filing of Petition: It ipso facto takes away

and deprives the petitioner of the right to do orcommit any act of preference as to creditor,

pending the final adjudication.

2. If the petition is in order, Courtshall issue an Order of Adjudication (i.e. that

the debtor is declared insolvent)

The order must be published. (Ratio: This

is a proceeding in rem). All creditors mustalso be notified.

Effects of order

a. All assets of debtor placed in sheriffscustody until a receiver or assignee is

assigned.b. Payment to debtor of any debt or

delivery of any property due to him isforbidden. He also cannot transfer or

convey any of his property.c. All civil proceedings vs. the insolvent

are stayed, except those pertaining toforeclosure of secured liens.

3. Meeting of creditors for election of anAssignee in Insolvency

4. Conveyance of debtors property toassignee in insolvency5. Liquidation of assets and payment of debts

6. Composition, if agreed upon7. Discharge of the debtor, except in case of

composition

Not applicable to corporations

8. Objection to discharge of debtor, if any

9. Appeal in certain cases



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H. Involuntary Insolvency

Who may petition for involuntary

insolvency:1. Debtors who have the qualifications

required by the Insolvency Law; and2. Their credits must be those

contemplated by the Insolvency Law.

Procedure for Individual Debtors,Partnerships, and Corporations:

1. Filing of petition by 3 or moreresident creditors (can be natural or juridical

persons):

Their credits must be worth at least

P1,000;

Credits must have accrued in the RP;

None of whom has become such a

creditor by assignment, within 30 days

prior to the filing of the petition; Petition must be filed in the RTC of the

place where debtor has residence or hashis principal business;

Must be verified by at least 1 petitioner

Petition must be accompanied by a

bond, approved by the court, with at least2 sureties

Date of Cleavage: Date when thepetition is filed, from which we count

forward or backward, in determiningeffects under the Insolvency Law.

Count 30 days backward from date ofcleavage. A creditor by assignment

made within 30 days prior to the filingof the petition cannot file the petition.

2. Petition must allege at least 1 act

of insolvency:a. Personal

Debtor is about to depart in fraud ofcreditors

He remains absent in fraud ofcreditors

Conceals himself to avoid legalprocesses

b. Judicial

Debtor concealing property to avoid

attachment He has suffered judgment to beattached for 3 days

He has confessed judgment

He has suffered judgment to beattached to give preference to certaincreditors

c. Preference

Debtor transferred property tocreditors to defraud others

He has made transfers to hinder ordelay creditors

He has made transfers in

contemplation of insolvency

d. Merchant

As merchant defaulted payments for30 days

He has failed to deliver moneyreceived as fiduciary within 30 days

Execution issued against him isreturned unsatisfied

Assets of the insolvent which are ot

exempt from execution will then be distributedamong his creditors in accordance with the

rules of concurrence in preference of credits inthe Civil Code. Note the provision in the Labor

Code which says that the claim of a laborertake priority over all others including taxes of

the government.

3. After the petition is filed, the courtshall issue an order of adjudication, which shall

retroact to date of filing of petition.a. Effects of order

i. All assets of debtor placed in

sheriffs custody until a receiver orassignee is assigned

ii. Payment to debtor of any

debt or delivery of any property due tohim is forbidden. He also cannot

transfer or convey any of his propertyiii. All civil proceedings vs. the

insolvent are stayed, except thosepertaining to foreclosure of secured

liens.

b. The order must be published.c. Court shall also order debtor to

show cause why he should not be declared

insolvent

4. Summons to the debtor

5. Answer or motion todismiss filed by debtor

6. Hearing of petition

7. Order of adjudicationdeclaring debtor insolvent

8. Publication and service of

order of court9. Meeting of creditors to

elect an assignee in insolvency10. Conveyance of debtors

property to assignee in insolvency11. Liquidation of assets and

payment of debts12. Composition, if agreed

upon by debtors and creditors

Composition:

debtor offers to pay his creditors a certainpercentage of their claims in consideration

of his release from liability

Requisites

a. Offer must be made after filing ofSchedule of Debtors property and the

list of his creditorsb. Offer must be accepted in writing by

a majority of the creditors

representing a majority of the claims

which have been allowed



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c. Offer must be made only after theinsolvent deposits the consideration to

be paid to the creditorsd. Offer must be accepted by majority

of creditors holding majority of theclaims, and must be confirmed by the

court

Effects of Composition:

a. Insolvency Proceedings aredismissed

b. All debts are discharged

13. Discharge of the debtor, except

in case of composition

Discharge not

applicable to corporations

14. Objection to discharge of debtor, if any

15. Appeal to Supreme Court

I. Specific Provisions

Assignee

Elected by majority of creditors

who hold majority of the claims. Thecreditor must have filed his verified claim 2days before the election.

Creditors not entitled to vote in

the election of assignee:

Those who did not file their claims

at least 2 days prior to the timeappointed for such election (Sec. 29);

Those whose claims are barred by

the statute of limitations; Secured creditors unless they

surrender their security or lien to the

sheriff or receiver or unless they shallfirst have the value of such security

fixed as provided in Sec. 59;

Holders of claims for unliquidated

damages arising out of pure tort(Schall v. Comors)

Assignee converts the debtors

property to cash and declares dividends toequitably distribute the property to thecreditors

Assignee may be substituted as

the plaintiff in cases previously brought bydebtor. Ratio: Causes of action also pass

to the assignee.

EXCEPT: Purely personal

action

The ff propertiesshall not pass to the assignee:a. After-

acquired property (acquired subsequent tothe filing of the petition), except its fruitsand income

Examples of after-acquired property:

donations, inheritance, provided he is adebtor in good faith who will later petitionfor a discharge

b. Non-leviable assets such as insurance policy

without any cash surrender valuec. Expectancy

to inheritd. Right of

action in personal injury cases whichpertain exclusively to the debtor

e. Propertyheld in trust by debtor or merely leased by

debtorf. Property

exempt from execution

Board of Liquidators v. Floro (60)Only the assignee can set aside fraudulent

preferences

Assignee can ask for examination ofpersons suspected of having concealed,

embezzled, or disposed of any property of

the debtor. Liability shall be double thevalue of the property.

Assignee is allowed necessary expenses

and commissions (for the first P1k 7%;for above P1k but not exceeding P10k

4%). If there are 2/more assignees, thecourt shall order an equitable division.

Powers of assignee Duties of assignee

To sue and possess all assetsand uncollected credits of the

debtor

To inventory theproperty

To sell at auction said assets To collect all assets

To redeem all mortgages To convert all assets

to cash

To compromise with his

insolvents debtors

To account for money

received and paid out

To recover propertiesfraudulently conveyed by the

debtor

To distribute theassets to creditors

Order of Distribution:1. Equitable claims under Sec. 48

(see Properties Excluded from Estate below);2. Preferred claims WRT specific

movable property and specific immovableproperty under Art. 2241 and 2242, CC;

3. Preferred claims as tounencumbered property of the debtor which

shall be paid in the order named in Art. 2244;

4. Common or ordinary credits whichshall be paidpro rata regardless of dates underArt. 2245.

Remedies of Secured Creditors

The ff are secured claims:

real estate mortgage, chattel mortgageand pledge

1. Secured creditors have 3

remedies:



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a. Rely on the security. If he does, he cannot take part in the

insolvency proceedings;b. Evaluate the security. If

there is a part of the loan not secured, hecan ask for this balance from the court;

c. File a contingent claimin the insolvency proceedings in case the

proceeds from the security is not enoughto cover the loan

This 3rd remedy is not available tochattel mortgages of movables sold under

installments under Art 1484 of the Civil Code, andto pledges.

Consequences of Attachments,Judgments, etc.

Attachme

nt levied upon within 30 days prior to thefiling of the petition may be set aside

Judgments on cases filed and decided within 30 days

prior to the filing may be set aside

Judgment

s on cases filed outside the 30 day periodbut decided within the 30 day period prior

to the filing because the debtor confessedjudgment or was declared in default will beset aside.

Properties Excluded from Estate1. Paraphernal property of the wife of the

debtor2. Property held on lease, administration or

deposit

3. Merchandise held on commission, forforwarding or on consignment and pricefrom sales on consignment

4. Bills of exchange sent to the debtor for

remittance to others5. Money in possession of debtor for

remittance to others

6. Merchandise bought on credit if no deliveryhas been made

7. Goods wrongfully taken by debtor

Insolvency Proceedings on Partnerships

A partnership may be adjudged

insolvent during the continuation of the

partnership business or after its dissolutionbut before its final settlement thereof (Sec.51).

Individual creditors must provetheir claims against such general partners,

or else the general partners may bedeclared discharged

Partnership property will bepreferred to pay partnership debts, and

property of individual partners will bepreferred to pay individual debts

Excess property of individualpartners will be used to pay partnership

debts.

Who may petition for declarationof insolvency of a partnership:

Voluntary Insolvency: by

all the partners or any of them.

Involuntary Insolvency:by 1 or more of the partners or 3 or

more creditors of the partnership.

Propertiesincluded in the Insolvency Proceedings:

All the property of thepartnership; and

All the separate property of eachof the partners, except:

o Separate properties of limited

partners; ando Properties which are exempt by

law.

Effect of Insolvency of

Partnership or any Partner

Right of

partnership creditors a partnershipmay be declared insolvent

notwithstanding the solvency of the

partners constituting the same. A partnership isnot necessarily insolvent because one

of its members is insolvent. Thesolvent members are bound to wind

up the partnership affairs.

Under the law, apartnership is automatically dissolved

by the insolvency of any partner or ofthe partnership (Art. 1830, CC).

Insolvency of Corporations

Who may petition for declaration of

insolvency of a corporation:1. Voluntary Insolvency: by any

officer duly authorized by the vote of

the board of directors or trustees at ameeting especially called for that

purpose, or by assent in writing of amajority of the directors or trustees as

the case may be (Sec. 52).2. Involuntary Insolvency:

a. First view: upon acreditors petition made and

presented in the manner providedin respect to debtors.

b. Second view: petition

must be filed by at least 3creditors of the corporation under

the circumstances mentioned bylaw (De Leon).

Effect of Declaration of Insolvency: itsproperty and assets shall be distributed

among the creditors but no discharge shallbe granted to any corporation (Sec. 52).

When the Act is not applicable: The Actdoes not apply to corporations engaged

primarily in the banking business or anyother corporation to which there is any

special provision of law for its liquidation incase of insolvency.

Contingent claim



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Claim in which liability depends onsome future event that may or may not

happen and which makes it uncertainwhether there will be any liability.

After the close of the insolvencyproceedings and the happening of the

contingency, the creditor may pursue anyavailable remedy for the collection of his

claim.

Composition

A proceeding in insolvency

proceedings, which is voluntary on the partof the debtor and his creditors, in which a

debtor offers to pay his creditors a certainpercentage of their claims in consideration

of his release from liability.

Requisites:

1. Offer must be made afterthe filling of the Schedule of the

debtors property and the list of his

creditors.2. Offer must be accepted in

writing by a majority of the creditors

representing a majority of the claimswhich have been allowed;

3. Offer must be made onlyafter the insolvent deposits the

consideration to be paid to thecreditors ;

4. Accepted offer must be

confirmed by the court.

Effects of Confirmation:

1. The consideration shall be

distributed as the judge shalldirect;

2. The insolvency proceedings shall be

terminated.3. The title to the insolvents estate

shall revest in him.4. The insolvent shall be released

from his debts.

When court may confirm a composition1. It is for the best interest of the

creditors;2. The debtor has not been guilty of nay

of the acts, or of a failure to performany of the duties which would create a

bar to his discharge; and3. The offer and its acceptance are in

good faith and have not been made or

procured in a manner forbidden by theAct (De Leon).

When confirmation may be setaside:

Upon application ofa party in interest within 6 months

after the composition has beenconfirmed, the court may set aside the

confirmation and reinstate the case ifit shall be showed upon a trial that:

1. That fraudwas practiced in the procuring of

such composition; and

2. That theknowledge thereof has come to

the petitioner since theconfirmation of such composition

(Sec. 63).

Insolvency Proceedings are quasi in rem

Ratio: Claims are completely

extinguished by discharge of the debtor.

Discharge

Definition: Judicial

clearance of an insolvent debtor from allclaims except those expressly reserved by

law.

Debts which are not

discharged:1. Taxes and assessments due to

the Government, whether national orlocal;

2. Any debts created by fraud,embezzlement of the debtor;

3. Any debt created by thedefalcation as a public officer or while

acting in a fiduciary capacity;4. Debt of any person liable for the

same debt, for or with the insolventdebtor, either as partner, jointcontractor, indorser, surety orotherwise;

5. Debts of a corporation;6. Claim for support;

7. Discharged debt but revived by asubsequent new promise to pay;

8. Debts which have not been duly

scheduled in time for proof andallowance, unless the creditors hadnotice or actual knowledge of the

insolvency proceedings, are notdischarged as to such creditors;

9. Claims for unliquidated damagesarising out of pure tort;

10. Claims of secured creditors;11. Claims not in existence or not

mature at the time of discharge;12. Claims that are contingent at the

time of discharge.

Rules:

Debtor who has been declaredinsolvent must still obtain a dischargeafter 3 months, but not more than 1

year.

Debtor must not commit any of the

ACTS OF INSOLVENCY:1. Debtor submitted a false affidavit;

2. He concealed part of his estate oreffects;

3. Debtor was guilty of fraud or neglect in

care of his property;4. Debtor procured an attachment or

execution on his property during the one

month period prior to the insolvencyproceedings;

5. Debtor destroyed or falsified importantpapers and documents;



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6. Debtor fraudulently gave certaincreditors preferences;

7. Debtor failed to disclose that certainclaims which had been proven were false

or fraudulent;8. Being a merchant, debtor failed to keep

proper books of account;9. Debtor influenced the action of any

creditor by pecuniary means;10. In contemplation of insolvency, debtor

made fraudulent conveyances of orencumbrances upon his properties;

11. Debtor had been convicted of any of thepenal provisions of the Insolvency Law;

12. In case of involuntary insolvency, debtorhad already availed of the benefits of the

Insolvency Law within the 6-year periodpreceding his application for discharge.

When discharge may be revoked:

Upon petition of any creditor:

1. Whose debt was proved orprovable against the estate ininsolvency, on the ground that the

discharge was fraudulentlyobtained.

2. Who has discovered factsconstituting the fraud subsequent

to the discharge.3. The petition is filed within

1 year after the date of thedischarge (Sec. 69).

Fraudulent Preference

If debtor transferred property to any

person to give him preference, and such transfertook place within 30 days period from the date ofcleavage, such transfer may be set aside by proper

court action by the assignee.

A fraudulent preference is committed when

the debtor procures any part of his property to beattached, sequestered or seized on execution or

makes any payment, pledge, mortgage,assignment, transfer, sale or conveyance of any

part of his property, whether directly or indirectly,absolutely or conditionally, to any one under the

following circumstances:1. The debtor is insolvent or in contemplation

of insolvency;2. The transaction in question is made within

30 days before the filing of a petition by oragainst the debtor;

3. It is made with a view to giving preferenceto any creditor or person having a claim

against him;4. and the person receiving a benefit thereby

has reasonable cause to believe;5. That the transfer is made with a view to

prevent his property from coming to hisassignee in insolvency or to prevent the

same from being distributed ratably amonghis creditors or to defeat the object of or

any way hinder the operation of or evadethe provisions of the Insolvency Law.

Presumed Fraudulent Transfer

not in ordinary course of business

under confession of judgment

not for valuable consideration nor in

good faith

Effect of Fraudulent Transfer:

As against the creditors of the

insolvent debtor, any conveyance orassignment fraudulently made is void.

If debtordies before Order of Adjudication is issued,

insolvency proceedings must be dismissed.

Remedy: File a claim in the testate orintestate proceedings.

If debtor dies after the Order ofAdjudication is issued, proceedings will

continue.

Date of Cleavage: Importance

Creditor by assignment of credit made

within 30 days from date of cleavage shall

be disqualified as petitioning creditor; Attachment levied upon within 30 days

before the date of cleavage may be setaside by the assignee;

Judgments on cases filed and decided

within 30 days prior to the date ofcleavage may be set aside by the

assignee;

Judgments on cases filed before 30 days

from the date of cleavage but decidedwithin 30 days because of confession of

judgment or declaration of default may beset aside by action of assignee;

Properties acquired after date of cleavage,

after discharge of debtor in good faith shallnot be liable for debts incurred prior todate of cleavage;

Fraudulent preferences made within 30days prior to date of cleavage may be set

aside in an action brought by assignee.

For Banks / Quasi-Banks (Secs 29-33, RA 7653)1. Conservatorship

Should the Monetary Board find that a

bank or a quasi-bank is in a stat

Documents

7. Special Laws (Final)