Credit A2015 Finals Reviewer

CREDIT TRANSACTIONS SOMERA
VINA.CLAIRE.LINDSEY.SHELAN.MAAN.KIMMIE.PHIMIE. Page 1 of 136

CREDIT
FINALS REVIEWER
Prof. Stephanie Gomez-Somera
Second Semester, AY 2012-2013

INTRODUCTION: THE CONCEPT OF CREDIT

A. Credit, Debt and Security
Someia notes:
The concepts of cieuit anu uebt uate back
fiom ancient times wheiein it useu to be
that non-payment of a uebtoi of his
obligation to the cieuitoi can leau to ciuel
punishments. Subsequently, uebt gave biith
to the concept of secuiity which mitigates
the iisk of non-payment of uebt.
Consequently, tiaue anu commeice
flouiisheu in the 14
th
to 19
th
centuiies. By
the 2u
th
centuiy, mouein-uay meichants
weie tianslating the concepts of cieuit, uebt
anu secuiity into incieasingly complicateu
anu sophisticateu tiansactions iequiieu by
the global economy.

B. Credit and Credit Transactions Defined

!"#" %&" '()*+ ,-." '"/01 "Cieuit" means any loan,
moitgage, ueeu of tiust, auvance, oi uiscount; any
conuitional sales contiact; any contiact to sell, oi
sale oi contiact of sale of piopeity oi seivices, eithei
foi piesent oi futuie ueliveiy, unuei which pait oi
all of the piice is payable subsequent to the making
of such sale oi contiact; any iental-puichase
contiact; any contiact oi aiiangement foi the hiie,
bailment, oi leasing of piopeity; any option,
uemanu, lien, pleuge, oi othei claim against, oi foi
the ueliveiy of, piopeity oi money; any puichase, oi
othei acquisition of, oi any cieuit upon the secuiity
of, any obligation of claim aiising out of any of the
foiegoing; anu any tiansaction oi seiies of
tiansactions having a similai puipose oi effect.

Someia notes:
It is not the Civil Coue but the Tiuth in
Lenuing Act as aboveciteu that pioviue a
legal uefinition of cieuit. But such uefinition
is only an enumeiation of the coveiage of
the law anu applicable contiacts anu uoes
not pioviue a conceptual fiamewoik by
which to unueistanu cieuit.
}uiispiuuence has uefineu cieuit as follows:
1. It is a sum cieuiteu on the books of
a company oi to a peison who
appeais entitleu to it.
2. Cieuit also piesupposes a cieuitoi-
uebtoi ielationship anu may be
saiu to imply ability, by ieason of
piopeity oi estates, to make a
piomiseu payment.
S. It is also coiielative to uebt oi
inuebteuness, that which is uue to
any peison, as uistinguisheu fiom
that which he owes.
}uiispiuuence also pioviues foi a uefinition
of uebt as follows:
1. It is a uemanu foi an amount
actually asceitaineu anu not a meie
unliquiuateu uemanu oi liability.
2. The amount uemanueu is such that
may be recovered in numero and
not to be iepaiieu in uamages.

2-&34- 5" 6&7.-3.8&7 /9:001

FACTS: PNB Pies. Concepcion was chaigeu anu
founu guilty of violating Sec. SS of Act No. 2747
which piohibiteu the gianting of loans to boaiu
membeis oi agents of the bank. Concepcion was
founu to have gianteu a loan to the Puno y
Concepcion co-paitneiship of which he is a pait of.

BELB: Credit is the means of an inuiviuual to
boiiow money by viitue of the tiust anu confiuence
ieposeu by a lenuei that he will pay what he
piomiseu. A loan is the delivery by one party and
the ieceipt by the othei paity of a given sum of
money, upon an agieement, expiess oi implieu, to
iepay the sum loan, with oi without inteiest. The
concession of a credit necessarily involves the
granting of loans up to the limit of the amount
fixed in the credit. Thus, Concepcions act was in
violation of saiu law.

Someia notes:
Justice Malcolm defined credit as a persons
ability to boiiow money by viitue of the
confiuence oi tiust ieposeu by a lenuei that
he will pay what he may piomise.
This uefinition can be ielateu to the
uictionaiy uefinition of the woiu cieuit,
which is, belief oi tiust, oiiginating as it
uoes fiom the Latin !"#$#"#, to tiust oi to
believe.
In essence, cieuit is an evaluation, maue in
the piesent, by viitue of the tiust anu
confiuence ieposeu by a cieuitoi, of a
debtors future worth or ability.

Cieuit tiansactions, on the othei hanu, aie
all obligations (juiiuical necessity to give, to
uo, oi not to uo) that aiise as a consequence
of such evaluation.

C. Commercial Credit Transactions

6&;- &< 6&==->.-
ARTICLE 1. Foi puiposes of this Coue,
meichants aie:
1.Those who, having legal capacity to engage in
commeice, habitually uevote themselves to it;
2. The commeicial oi inuustiial companies which
may be cieateu in accoiuance with |existing
legislationj.
ARTICLE 2.Acts of commeice, whethei those who
execute them be meichants oi not, anu
whethei specifieu in this Coue oi not, shoulu be
goveineu by the piovisions containeu in it, in theii
absence, by the usages of commeice geneially
obseiveu in each place; anu in the absence of both
iules, by those of the civil law. Those acts containeu
in this Coue anu all otheis of analogous chaiactei
shall be ueemeu acts of commeice.
ARTICLE S.The legal piesumption of habitually
engaging in commeice shall exist fiom the moment
the peison who intenus to engage theiein
announces thiough ciiculais, newspapeis, hanubills,
posteis exhibiteu to the public, oi in any othei
mannei whatsoevei, an establishment which has foi
its object some commeicial opeiation.

Someia notes:
The Coue of Commeice anu ceitain special
laws also govein commeicial cieuit
tiansactions since such tiansactions aie
commeicial in natuie anu aie habitually
enteieu into by meichants.
Since commeicial cieuit tiansactions aie
habitually enteieu into, these usually take
the foim of ieauy-maue contiacts (contiacts
of auhesion) wheiein one paity imposes a
ieauy-maue foim of contiact on the othei
who is fiee to ieject it entiiely, oi if it
auheies, to give its consent.
While these contiacts of auhesion in
commeicial cieuit tiansactions aie not
invaliu, any ambiguity in its inteipietation
will be constiueu against the paity who
piepaieu it.

D. The Relevance of Trust and Confidence

Someia notes:
Noney also involves a cieuit tiansaction.
1. Noney = anything geneially
accepteu as payment in a
tiansaction, iecognizeu as a
stanuaiu of value, anu authoiizeu
oi auopteu by a State as pait of its
cuiiency.
2. It also appioximates absolute
cieuit as it iepiesents the tiust anu
confiuence ieposeu by the holuei in
a State.
S. The use of money involves an
evaluation, maue in the piesent, by
viitue of the tiust anu confiuence
reposed by the holder, of a States
futuie woith oi ability.
Social anu economic changes in the 2u
th

centuiy (paiticulaily the 0S) alteieu the
cieuit lanuscape (i.e. piopeity that was to
stanu as secuiity was no longei valueu at
piesent values but on a continuing tienu of
appieciating values).
The evaluation being maue in cieuit
tiansactions (i.e. debtors future worth or
ability) was baseu on the same appieciating
values of secuiity, anu not on the tiust anu
confidence reposed on the debtors ability
to pay.
These iesulteu to 2 things:
1. Noie uebtois became eligible foi
moie cieuit unuei teims that
miiioieu this tienu of iising
piopeity values; anu
2. Payments anu inteiest weie
uefeiieu, anu piomises of highei
cieuit weie maue.
}ust as a cieuit tiansaction was the ioot of
the 21
st
centurys first financial meltdown
(i.e. 2uu7 global cieuit ciisis), it is also now
being useu as a tool foi poveity alleviation
(eg. miciofinance anu miciocieuit.).

LOAN

I. THE CONCEPT OF LOAN

A. General Concepts

#>?" 9:'' By the contiact of loan, one of the paities
ueliveis to anothei, eithei something not
consumable so that the lattei may use the same foi a
ceitain time anu ietuin it, in which case the contiact
is calleu a commouatum; oi money oi othei
consumable thing, upon the conuition that the same
amount of the same kinu anu quality shall be paiu, in
which case the contiact is simply calleu a loan oi
mutuum.
Commouatum is essentially giatuitous.
Simple loan may be giatuitous oi with a stipulation
to pay inteiest.

In commouatum the bailoi ietains the owneiship of
the thing loaneu, while in simple loan, owneiship
passes to the boiiowei.

#>?" 9'@* A contiact is a meeting of minus between
two peisons wheieby one binus himself, with
iespect to the othei, to give something oi to ienuei
some seivice.

Someia notes:
A loan is an obligation that always aiises
fiom contiact, the meeting of the minus of
the cieuitoi, who ueliveis the thing oi
piopeity, anu the uebtoi, the paity who
ieceives the piopeity anu is consequently
bounu to ietuin the piopeity oi pay the
same amount of the same kinu anu quality
to the cieuitoi.
A loan, whethei commouatum oi mutuum,
is a contiact foi peimissive use.
It may also be likeneu to a lease in teims of
peimissive use; howevei, a loan is not
necessaiily foi iemuneiation unlike in the
foimei wheiein iemuneiation plays a key
iole in the consiueiation anu object of the
contiact.

1. Obligation to Deliver

#>?" 9:'A An accepteu piomise to uelivei something
by way of commouatum oi simple loan is binuing
upon paities, but the commouatum oi simple loan
itself shall not be peifecteu until the ueliveiy of the
object of the contiact.

Someia notes:
The piimaiy obligation of the cieuitoi in a
loan is ueliveiy.
Beliveiy is the foimal act of tiansfeiiing,
giving pi yieluing possession oi contiol of
piopeity by the cieuitoi foi peimissive use
by the uebtoi.
In effect, a loan (whethei commouatum oi
mutuum) is consiueieu a ieal contiact,
wheiein piopeity passes fiom one paity to
anothei, iequiiing something moie than
meie consent.
In the ieal contiacts of commouatum anu
mutuum, ueliveiy by the cieuitoi of the
object of the contiact is essential foi
peifection.

BC>.8C 5" DE8& /0@@(1
FACTS: Two ciosseu checks weie maue payable to
the oiuei of a ceitain Naiilou Santiago that weie
ieceiveu by Thio fiom uaicia in 199S. Accoiuing to
uaicia, Thio faileu to pay when the loans fell uue. As
a iesult, she fileu a complaint foi a sum of money
against Thio. Thio counteis that she shoulu not be
maue liable foi saiu uebt since it was Naiilou
Santiago who actually contiacteu the loan anu that
she was meiely askeu by uaicia to the uelivei the
checks to Santiago. RTC founu that Thio was liable
to Garcia for the money. CA reversed the RTCs
iuling ueclaiing that theie was no contiact of loan
between Thio anu uaicia.

BELB: Thio shoulu be maue liable to uaicia foi the
loan. A loan is a ieal contiact that is peifecteu only
upon ueliveiy of the object of the contiact. Beliveiy,
in tuin, is the act by which the ies oi substance
theieof is placeu within the actual oi constiuctive
possession oi contiol of anothei. It was unuisputeu
that the checks weie ueliveieu to Thio. Although
Thio uiu not physically ieceive the pioceeus of the
checks, these instiuments weie placeu in hei contiol
anu possession unuei an aiiangement wheieby she
actually ie-lent the amounts to Santiago. Beliveiy
unto hei of saiu checks hei liable foi the amounts
theieof.

2. Object of a Loan

mutuum.
to pay inteiest.

#>?" A9F Novable piopeity is eithei consumable oi
nonconsumable. To the fiist class belong those
movables which cannot be useu in a mannei
appiopiiate to theii natuie without theii being
consumeu; to the seconu class belong all the otheis.

Someia notes:
The object (subject) of a loan is eithei
piopeity that is non-consumable, oi money
oi othei consumable piopeity.
Non-consumable piopeity is the object of a
commouatum anu may be a movable oi
immovable.
1. If this is the object of the loan, the
puipose of the ueliveiy by the

cieuitoi is foi the peimissive use of
the piopeity by the uebtoi foi a
ceitain time, with the cieuitoi
ietaining owneiship.
2. This also gives iise to the obligation
on the pait of the uebtoi to ietuin
the veiy same piopeity to the
cieuitoi.
Noney oi othei consumable piopeity may
be the object of a mutuum.
1. The puipose of the ueliveiy by the
cieuitoi is foi the peimissive use of
the piopeity by the uebtoi by
taking owneiship.
2. Since the use of consumable
piopeity also iesults to its
extinguishment, the uebtoi is
obligeu to pay the same amount, oi
kinu anu quality to the cieuitoi.

3. Consideration of a Loan

mutuum.
to pay inteiest.

Someia notes:
6&==&;C?G= HG?GG=
essentially giatuitous
wheiein the only
consiueiation foi the
cieuitoi is always
libeiality.
may be giatuitous oi
may have a stipulation
to pay inteiest.

piimaiy obligation of the
uebtoi is to ietuin the
veiy same piopeity
ueliveieu by the
cieuitoi.
obligation of the uebtoi
is to pay the same
amount, kinu anu quality
to the cieuitoi.
Non-consumablenon-
fungible
Consumablefungible
Retuineu in case of
uigent neeu anu
commission of any acts
of ingiatituue, even
befoie expiiation of
Retuineu upon
expiiation of the teim
only
teim
Foi use oi tempoiaiy
possession
Foi consumption
Any piopeity Peisonal piopeity
Bailoi beais iisk of loss Bebtoibailee beais iisk
of loss
0wneiship ietaineu by
bailoi
0wneiship passes to the
uebtoi

4. Obligation to Return or Pay
mutuum.
to pay inteiest.

#>?" 90'0 Payment means not only the ueliveiy of
money but also the peifoimance, in any othei
mannei, of an obligation.

#>?" 90'' A uebt shall not be unueistoou to have
been paiu unless the thing oi seivice in which the
obligation consists has been completely ueliveieu oi
ienueieu, as the case may be.

B. Contract to Loan

#>?" 9:'A An accepteu piomise to uelivei something
by way of commouatum oi simple loan is binuing
upon paities, but the commouatum oi simple loan
itself shall not be peifecteu until the ueliveiy of the
object of the contiact.

Someia notes:

6&7?>C.? &< 4&C7 6&7?>C.? ?& 4&C7
ieal contiact that is
peifecteu not by meie
consent but by the
ueliveiy of the object of
the contiact.
consensual contiact that
is peifecteu by meie
consent.

,CG>C I=3&>? C7; JK3&>? 6&" 5" LM2 /9:(01

FACTS: Petitionei Sauia fileu a loan application
befoie iesponuent RFC (BBP) to suppoit the
manufactuie of jute sacks. RFC approved Sauras

loan application foi PSuuk but uue to a
miscommunication, money was not ieleaseu in
favoui of Sauia. Since the fiist tiansaction faileu, the
negotiations between the two went back anu foith
until RFC imposeu new conuitions upon Sauia in
oiuei foi the loan to be ieleaseu. But Sauia
iequesteu RFC to cancel the moitgage insteau,
which RFC gianteu. Sauia eventually applieu foi
anothei loan fiom Piuuential Bank but Sauia faileu
to pay its obligations to Piuuential. Piuuential sueu
Sauia. Sauia sueu RFC foi uamages allegeuly foi
failing to comply with its obligation to ielease funus
foi the loan iesulting to Sauras failure to fulfil its
own obligations to Siu paities.

BELB: Theie was a peifecteu contiact to loan bet.
Sauia & RFC as theie was a uefinitive offei anu
acceptance at the beginning of this case: application
of Sauia foi a loan (offei) was appioveu by RFC foi
PSuu,uuu (acceptance). Since a contiact to loan is
peifecteu by meie consent,, the approval of Sauras
loan application peifecteu the contiact. But uue to
mutual uesistance of the 2 paities (a moue of
extinguishing obligations) the obligations aiising
fiom saiu contiact to loan can no longei be imposeu
against RFC in favoi of Sauia.

Someia notes:
This case illustiates the impoitance of a
uefinitive acceptance of an offei, as opposeu
to a countei-offei, foi the peifection of the
consensual contiact to loan.

Ny notes:
A peifecteu consensual contiact can give
iise to uamages.

M2I I75-N?=-7? 6&>3" 5" 6# C7; #O,
HC7CP-=-7? Q L-5-4&3=-7? 6&>3" /0@@01

FACTS: Roa obtaineu a PSuuk loan fiom BPIIC to
constiuct his house anu moitgageu saiu piopeity to
BPIIC. Roa solu the house anu lot to ALS foi which
ALS paiu PSSuk in cash to Roa anu assumeu Roas
PSuuk uebt with BPIIC. But BPIIC iefuseu to extenu
Roas old interest rate to ALS so it offeieu to giant
ALS a new loan with a uiffeient inteiest iate anu
moitgageu the same piopeity as secuiity. BPIIC
foiecloseu the piopeity since ALS faileu to pay the
amoitization fiom Nay 1981 to }une 1984. ALS
contenueu that they weie not in aiieais anu that
even though the contiact stipulates that monthly
amoitizations aie to begin in Nay 1981, they shoulu
not be maue to pay befoie the actual ielease of the
loan in August anu Septembei 1982.

BELB: What was involveu heie was a contiact of
loan which is a ieal contiact peifecteu by ueliveiy of
the object of the contiact anu not by meie consent. t
It was the seconu ielease of the loan (Sept 1982)
which peifecteu the contiact of loan. Thus, ALS
monthly amoitization obligation shoulu only
commence aftei such.

2C7?C4-&7 5" #=->8.C7 JK3>-NN I7?->7C?8&7C4
I7." /0@9@1

FACTS: Pantaleon went on a guiueu Euiopean toui
with his wife. In Amsteiuam, his wife bought a
uiamonu jeweliy woith 0S$1S,826 foi which
Pantaleon useu his ANEX cieuit caiu to pay. It took
ANEX 78 minutes to appiove the tiansaction anu as
a iesult, Pantaleons tour group membeis became
iiiitateu because they hau to cancel seveial paits of
the toui. 0pon ietuining to the Philippines,
Pantaleon fileu a case foi uamages against ANEX foi
the humiliation they suffeieu because of the cieuit
card companys actions. ANEX insists that theie
was no negligence on theii pait anu that theie was a
uelay in appioving the puichase because the size of
the tiansaction was uiffeient fiom the pievious
puichases of the caiuholuei anu that they weie just
exeicising uue uiligence.

BELB: In eveiy cieuit caiu tiansaction, S contiacts
aie involveu: (a) the sales contiact between the
cieuit caiu holuei anu the meichant oi business
establishment which accepteu the cieuit caiu; (b)
the loan agieement between the cieuit caiu issuei
anu the cieuit caiu holuei; anu (c) the piomise to
pay between the cieuit caiu issuei anu the meichant
oi business establishment. When a caiuholuei uses
his cieuit caiu, he meiely offeis to entei into loan
agieements with the caiu company anu theie is no
obligation on the pait of the caiu company to
appiove the tiansactions all the time. Since ANEX
did not have an obligation to approve Pantaleons
puichase iequest, the company cannot be helu liable
foi uelay since a uemanuable obligation is a
iequisite of such finuing.

II. COMMODATUM

A. General Concepts


mutuum.

to pay inteiest.

passes to the boiiowei. (174ua)

#>?" 9:'* The bailee in commouatum acquiies the
useu of the thing loaneu but not its fiuits; if any
compensation is to be paiu by him who acquiies the
use, the contiact ceases to be a commouatum.
(1941a)

#>?" 9:': Commouatum is puiely peisonal in
chaiactei. Consequently:

(1) The ueath of eithei the bailoi oi the bailee
extinguishes the contiact;

(2) The bailee can neithei lenu noi lease the object
of the contiact to a thiiu peison. Bowevei, the
membeis of the bailee's householu may make use of
the thing loaneu, unless theie is a stipulation to the
contiaiy, oi unless the natuie of the thing foibius
such use. (n)

Someia Notes:

Commouatum
- To lenu, oi the giatuitous lenuing of goous to be
useu by the boiiowei anu then ietuineu unuamageu
to the lender (Blacks Law Dictionary)
- Enteieu into iegulaily in oiuinaiy life
- Roman law: considered as one of the contracts of
neighbouiliness"
- A contiact wheie the cieuitoi (oi bailoi)
giatuitously ueliveis to the uebtoi (oi bailee) non-
consumable piopeity so that the lattei may use the
same foi a ceitain time anu ietuin it

0P Law Reviewei Notes:
Two Kinds of Commodatum
1. 0iuinaiy commouatum - See Ait.19SS
2. Piecaiium one wheieby the bailoi may uemanu
the thing loaneu at will; exists in cases wheie:
a. neithei the uuiation of the contiact noi
the use to which the thing loaneu shoulu be
uevoteu has been stipulateu
b. if the use of the thing is meiely toleiateu
by the ownei (Ait 1947)

1. Consideration in Commodatum
Someia Notes:

Commodatum
- Essentially giatuitous
- Consiueiation foi the contiact
> Libeiality on the pait of the bailoi
> 0n the pait of the bailee, it is the
peimissive use of the piopeity loaneu
- Puiely peisonal in chaiactei
- Beath of eithei paity iesults in its extinguishment

Compensation is to be paiu by the bailee foi the
use of the piopeity loaneu
- Contiact is not a commouatum
- Some othei contiact

2. Object of Commodatum

#>?" 9:'( Novable oi immovable piopeity may be
the object of commouatum. (n)

#>?" 9:') Consumable goous may be the subject of
commouatum if the puipose of the contiact is not
the consumption of the object, as when it is meiely
foi exhibition. (n)

2>&;G.->N MC7R &< ?E- 2E8483387-N 5! 6&G>? &<
#33-C4N /0@@'1

FACTS: vives (cieuitoi) issueu a 2uuk check in
favoui of Boionilla (uebtoi) in incoipoiating
Doronillas business. This was deposited in
Dorinillas business bank account for purposes of
incoipoiation. vives leaineu that the funus hau
alieauy been withuiawn leaving only a balance of
P9uk. The vives spouses tiieu to withuiaw the
amount but faileu since the balance hau to answei
foi ceitain postuateu checks issueu by Boionilla.

BELB: Tiansaction between vives anu Boionilla
was a commouatum anu not a mutuum. Ait. 19SS of
the CC seems to imply that if the subject of the
contiact is a consumable thing, such as money, the
contiact woulu be a mutuum. But theie aie some
instances wheie a commouatum may have foi its
object a consumable thing as pioviueu by Ait. 19S6.
Thus, if consumable goous aie loaneu only foi
puiposes of exhibition, oi when the intention of the
paities is to lenu consumable goous anu to have the
veiy same goous ietuineu at the enu of the peiiou
agieeu upon, the loan is a commouatum anu not a
mutuum.

Someia Notes:

0bject of commouatum
- ueneially non-consumable piopeity (movable oi
immovable)

Consumable piopeity may be the object of
commouatum
- If the puipose of the contiact is not the
consumption of the object.
> e.g. ueliveiy of fiist euition stamps oi
newly minteu coins oi specially piinteu
papei money foi puiposes of exhibition give
iise to the obligation to ietuin the veiy
same piopeity

Piouuceis Bank case
- Questions:
> If the object of the commouatum was
money, then was it the intention of the
paities foi the bailee to ietuin the veiy
same notes ueliveieu.
> If the bailoi in commouatum ietaineu
owneiship of the money ueliveieu, then
what was the ielationship between Steiela
anu Piouuceis Bank.
> Is the use of money foi puiposes of
incoipoiation even if only foi
accommodation, the same as exhibition?
> Bow is the case ieconcileu with Aiticle
198u, which pioviues that fixeu, savings,
anu cuiient ueposits of money in banks aie
goveineu by the piovisions on mutuum.

B. Parties to a Commodatum

Someia Notes:

Paities in a commouatum
- Bailoi (oi cieuitoi)
- Bailee (oi uebtoi)

0se of the teims bailoi anu bailee
- Links the Roman law concept of commouatum with
the common law bailment
> Bailment is the ueliveiy of piopeity by
one peison (the bailoi) to anothei (the
bailee) who holus the piopeity foi a ceitain
puipose usually unuei an expiess oi
implieu contiact

1. Ownership by Bailor

#>?" 9:'F The bailoi in commouatum neeu not be
the ownei of the thing loaneu. (n)

mutuum.


to pay inteiest.


Someia Notes:

Bailoi in commouatum
- Neeu not be the ownei of the piopeity loaneu

But as against the bailee
- It is the bailoi who ietains owneiship of the
piopeity loaneu.

2. Use by Bailee

(1941a)

#>?" 9:A@ A stipulation that the bailee may make
use of the fiuits of the thing loaneu is valiu. (n)

#>?" 9:': Commouatum is puiely peisonal in
chaiactei. Consequently:

(1) The ueath of eithei the bailoi oi the bailee
extinguishes the contiact;

(2) The bailee can neithei lenu noi lease the object
of the contiact to a thiiu peison. Bowevei, the
membeis of the bailee's householu may make use of
the thing loaneu, unless theie is a stipulation to the
contiaiy, oi unless the natuie of the thing foibius
such use. (n)

Someia Notes:

Peimissive use of the piopeity loaneu
- ueneially acquiieu by the bailee

Peimissive use of the fiuits of the piopeity loaneu
- Not usually acquiieu by the bailee
- But this may be valiuly stipulateu by the paities so
that the bailee coulu acquiie it
ueneial iule (uue to the puiely peisonal chaiactei
of commouatum)

- The bailee acquiies the peimissive use of the
piopeity only foi itself anu can neithei lenu noi
lease the object of the commouatum to a thiiu
peison.
- However, members of the bailees household, such
as his family anu those living with him, may make
use of the piopeity loaneu unless:
> Theie is a stipulation to the contiaiy, anu
> The natuie of the piopeity foibius its use
by anyone othei than the bailee.
3. Solidary Liability of Bailees

#>?" 9:A* When theie aie two oi moie bailees to
whom a thing is loaneu in the same contiact, they
aie liable soliuaiily. (1748a)

C. Liability for Expenses and Damages

1. Ordinary Expenses

mutuum.


to pay inteiest.


(1941a)

#>?" 9:A9 The bailee is obligeu to pay foi the
oiuinaiy expenses foi the use anu pieseivation of
the thing loaneu. (174Sa)

#>?" 9:A' The bailee uoes not answei foi the
ueteiioiation of the thing loaneu uue only to the use
theieof anu without his fault. (1746)

2CSGT& 5! 6&G>? &< #33-C4N /0@@A1
FACTS: Petitionei Pajuyo constiucteu a house.
Pajuyo anu piivate iesponuent uuevaiia executeu a
%&'()$(&) which states that Pajuyo, as ownei of the
house, alloweu uuevaiia to live in the house foi fiee
pioviueu uuevaiia woulu maintain the cleanliness
anu oiueiliness of the house. 9 yeais latei, uuevaiia
iefuseu to vacate the house upon Pajuyas demand.

BELB: The %&'()$(&) ieveals that the
accommouation accoiueu by Pajuyo to uuevaiia
was not essentially giatuitous. While the %&'()$(&)
uiu not iequiie uuevaiia to pay ient, it obligateu
him to maintain the piopeity in goou conuition. The
imposition of this obligation makes the %&'()$(&) a
contiact uiffeient fiom a commouatum. The effects
of the %&'()$(&) aie also uiffeient fiom that of a
commouatum. Case law on ejectment has tieateu
ielationship baseu on toleiance as one that is akin to
a lanuloiu-tenant ielationship wheie the
withuiawal of peimission woulu iesult in the
teimination of the lease.

Someia Notes:

Peimissive use of the piopeity loaneu acquiieu
anu 0bligation to ietuin the veiy same piopeity
incuiieu
- It is the bailee who is liable foi the oiuinaiy
expenses foi its use anu pieseivation.
> This uoes not mean that the bailee is liable
foi the ueteiioiation of the piopeity loaneu
uue only to the use anu without fault.
>> Expectation: Piopeity loaneu
will suffei oiuinaiy weai anu teai that
aiises fiom actual use by the bailee.

Pajuyo case
- The obligation to maintain cleanliness anu
oiueiliness of the piopeity loaneu was equateu with
compensation.
> Thus the contiact was was consiueieu a
commouatum, which is essentially
giatuitous.
- Expenses foi cleanliness anu oiueiliness aie
oiuinaiy expenses foi use, which a bailee is liable
foi.
- Question: Bow is this case ieconcileu with Aiticle
1941.

2. Extraordinary Expenses

#>?" 9:A: The bailoi shall iefunu the extiaoiuinaiy
expenses uuiing the contiact foi the pieseivation of
the thing loaneu, pioviueu the bailee biings the
same to the knowleuge of the bailoi befoie incuiiing
them, except when they aie so uigent that the ieply
to the notification cannot be awaiteu without
uangei.

If the extiaoiuinaiy expenses aiise on the occasion

of the actual use of the thing by the bailee, even
though he acteu without fault, they shall be boine
equally by both the bailoi anu the bailee, unless
theie is a stipulation to the contiaiy. (17S1a)

Someia Notes:

ueneial iule (since the bailoi ietains the
owneiship of the piopeity loaneu)
U The bailoi is liable foi the extiaoiuinaiy expenses
foi the pieseivation of the piopeity loaneu.
> Exception: If the bailee incuis these
expenses without infoiming the bailoi
befoie incuiiing them, in which case, it is
the bailee who shall be liable.
VV Bowevei, if the extiaoiuinaiy
expenses foi pieseivation aie so uigent
(ieply of the bailoi to the notification
cannot be awaiteu without uangei to the
piopeity loaneu, the geneial iule applies
(bailoi shall iemain liable).

Extiaoiuinaiy expenses fiom actual use by the
bailee
- Bailoi anu bailee aie equally liable (but paities
may stipulate otheiwise) because
> Bailoi ietains owneiship of the piopeity
loaneu, anu
> Bailee acquiies its use

3. Other Expenses

#>?" 9:*@ If, foi the puipose of making use of the
thing, the bailee incuis expenses othei than those
iefeiieu to in Aiticles 1941 anu 1949, he is not
entitleu to ieimbuisement. (n)

Someia Notes:

Bailee is liable foi all othei expenses incuiieu foi
puiposes of making use of the piopeity loaneu,
othei than oiuinaiy anu extiaoiuinaiy expenses foi
use anu pieseivation.
- Question: What woulu these othei expenses covei.

4. Abandonment by Bailor

#>?" 9:*0 The bailoi cannot exempt himself fiom
the payment of expenses oi uamages by abanuoning
the thing to the bailee. (n)

Someia Notes:

The bailee has a iight to compel the bailoi to pay
foi the peitinent expenses.

5. Right of Retention by Bailee

#>?" 9:AA The bailee cannot ietain the thing loaneu
on the giounu that the bailoi owes him something,
even though it may be by ieason of expenses.
Bowevei, the bailee has a iight of ietention foi
uamages mentioneu in Aiticle 19S1. (1747a)

#>?" 9:*9 The bailoi who, knowing the flaws of the
thing loaneu, uoes not auvise the bailee of the same,
shall be liable to the lattei foi the uamages which he
may suffei by ieason theieof. (17S2)
Someia Notes:

Piimaiy obligation on the pait of bailee
- Retuin the piopeity loaneu

Right of Retention
- ueneially, bailee uoes not have this iight ovei the
piopeity loaneu if the bailoi iefuses to pay foi
expenses anu uamages that peitain to it.
> Right of action of the bailee
>> Bemanu payment foi the
expenses anu uamages incuiieu that
piopeily peitain to the bailoi.
>> 0nly exception: When the bailoi,
knowing the flaws of the piopeity loaneu,
uoes not auvise the bailee of the same, anu
the bailee suffeis uamages by ieason
theieof, in which case, the bailee has a iight
of ietention ovei the piopeity loaneu until
the bailoi answeis foi the uamages.
- 0bject of iight of ietention
> To guaiantee payment of what may be
uue
- Piincipal chaiacteiistic of iight of ietention
V Its accessoiy chaiactei (accessoiy to the
piincipal obligation)
- Right of ietention of the piopeity by the cieuitoi
> Not consiueieu as a coeicive measuie to
oblige uebtoi to pay
V Neans of obtaining compensation foi the
uebt
> Neans of extinguishing an obligation

D. Liability for Loss

mutuum.



to pay inteiest.


#>?" 9:A0 The bailee is liable foi the loss of the
thing, even if it shoulu be thiough a foituitous event:

(1) If he uevotes the thing to any puipose uiffeient
fiom that foi which it has been loaneu;

(2) If he keeps it longei than the peiiou stipulateu,
oi aftei the accomplishment of the use foi which the
commouatum has been constituteu;

(S) If the thing loaneu has been ueliveieu with
appiaisal of its value, unless theie is a stipulation
exemption the bailee fiom iesponsibility in case of a
foituitous event;

(4) If he lenus oi leases the thing to a thiiu peison,
who is not a membei of his householu;

(S) If, being able to save eithei the thing boiioweu
oi his own thing, he chose to save the lattei. (1744a
anu 174S)

!-3GW48. 5" MCP?CN /9:)01

FACTS: The loan by the appellee to the late
uefenuant Bagtas of the S bulls foi bieeuing
puiposes foi a peiiou of 1 yeai, latei on ieneweu foi
anothei yeai as iegaius one bull, was subject to the
payment by the boiiowei of bieeuing fee of 1u% of
the book value of the bulls. The appellant contenus
that the contiact was commouatum anu that, foi
that ieason, as the appellee ietaineu owneiship oi
title to the bull it shoulu suffei its loss uue to *+"!#
-&.#("#.

BELB: If the bieeuing fee woulu be consiueieu
compensation, then the contiact woulu be a lease of
the bull. 0nuei the Civil Coue, the lessee woulu be
subject to the iesponsibilities of a possessoi in bau
faith, because she hau continueu possession of the
bull aftei the expiiy of the contiact. Anu even if the
contiact be commouatum, still the appellant is
liable, because (1) he kept it longei than the peiiou
stipulateu anu (2) the thing loaneu has been
ueliveieu with appiaisal of its value (1u%). Theie
was no stipulation exempting the bailee fiom
iesponsibility in case of a foituitous event.

Someia anu 0P Law Reviewei Notes:

ueneial Rule: Bailee is not liable foi loss oi
uamage uue to a foituitous event (Ait.1174), since
the bailoi ietains owneiship of the thing.
" Exception: Bailee is liable even foi loss uue to a
foituitous event when: (Ait 1942)
1. Be uevotes the thing to any puipose
uiffeient fiom that foi which it was loaneu.
(bieach of the conuitions of the
commouatum)
2. Be keeps it longei than the peiiou
stipulateu. (amounts to uelay)
S. Be keeps it aftei the accomplishment of
the use foi which the commouatum has
been constituteu. (amounts to uelay)
4. The thing loaneu has been ueliveieu with
appiaisal of its value, unless theie is
stipulation exempting the bailee fiom
iesponsibility in case of a foituitous event.
(intention of the paities shifts the liability
foi loss)
S. Be lenus oi leases the thing to a thiiu
peison who is a not a membei of his
householu. (bieach of the conuitions of the
commouatum)
6. Being able to save eithei the thing
boiioweu oi his own thing, he chose to save
the lattei. (since the consiueiation of
commouatum is libeiality on the pait of the
bailoi, this amounts to an act of ingiatituue)

E. Obligation to Return

mutuum.


to pay inteiest.


#>?" 9:A) The bailoi cannot uemanu the ietuin of
the thing loaneu till aftei the expiiation of the peiiou
stipulateu, oi aftei the accomplishment of the use
foi which the commouatum has been constituteu.
Bowevei, if in the meantime, he shoulu have uigent

neeu of the thing, he may uemanu its ietuin oi
tempoiaiy use.

In case of tempoiaiy use by the bailoi, the contiact
of commouatum is suspenueu while the thing is in
the possession of the bailoi. (1749a)
#>?" 9:A( The bailoi may uemanu the thing at will,
anu the contiactual ielation is calleu a piecaiium, in
the following cases:

(1) If neithei the uuiation of the contiact noi the use
to which the thing loaneu shoulu be uevoteu, has
been stipulateu; oi

(2) If the use of the thing is meiely toleiateu by the
ownei. (17Sua)

#>?" 9:AF The bailoi may uemanu the immeuiate
ietuin of the thing if the bailee commits any act of
ingiatituue specifieu in Aiticle 76S. (n)

XG87?&N 5" M-.R /9:':1

FACTS: Beck was Quintos tenant in her house.
Quintos giatuitously gianteu to Beck the use of
fuinituie subject to the conuition that Beck woulu
ietuin them upon hei uemanu. Quintos solu the
piopeity to Sps. Lopez. They notifieu Beck anu gave
him 6u uays to vacate the piemises anu to ietuin all
the fuinituie tiansfeiieu to him foi use. Beck saiu
that he cannot give up the S gas heateis anu the 4
electiic lamps because he woulu still use them until
the expiiation of lease. Befoie vacating the house,
Beck uepositeu with the Sheiiff all the fuinituie of
plaintiff which aie uepositeu in a waiehouse anu in
custouy of the Sheiiff.

BELB: The contiact enteieu into bet. the paities is
one of commouatum. The obligation voluntaiily
assumeu by Beck was to ietuin the fuinituie upon
Quintos' uemanu, (i.e. Beck shoulu ietuin all of them
to Quintos' house. Beck uiu not comply with this
obligation when he meiely placed them at Quintos
uisposal, ietaining foi his benefit the S gas heateis
anu the 4 eletiic lamps. Beck bieacheu the contiact
of commouatum, it is just anu equitable that he pay
the legal expenses anu othei juuicial costs which the
plaintiff woulu not have otheiwise uefiayeu.

Someia anu Ateneo Law Reviewei Notes:

Piimaiy 0bligation of the bailee in commouatum
is to ietuin the piopeity loaneu. But, geneially, the
obligation aiises only:
1. Aftei the expiiation of the peiiou stipulateu
2. Aftei the accomplishment of the use foi which the
commouatum was constituteu.
- Exceptions: (implying that the bailoi may uemanu
the ietuin of the piopeity loaneu)
1. Bailoi has an uigent neeu foi the thing (Ait. 1946)
- the contiact is suspenueu (Reason: the iight of the
bailoi is baseu on the fact that commouatum is
essentially giatuitous)
a. Bemanu the ietuin of the piopeity
b. Bemanu the tempoiaiy use of the
piopeity
2. Nay uemanu the thing at will when the contiact is
piecaiium (A kinu of commouatum wheie the bailoi
may uemanu the thing at will. It has been uefineu as
a contiact by which the ownei of a thing, at the
iequest of anothei peison, gives the lattei the thing
foi
use as long as the ownei shall please.)
a. No stipulation as to uuiation oi use of the
piopeity loaneu
b. 0se by the bailee is meiely toleiateu by
the bailoi.
S. Bailee commits an act of ingiatituue (Ait. 1948)
(Reason: the peison who commits any of the acts of
ingiatituue makes himself unwoithy of the tiust
ieposeu upon him by the bailoi.)
a. If the bailee shoulu commit an offense
against the peison, the honoi oi the
piopeity of the bailoi, oi of the wife oi
chiluien unuei his paiental authoiity
b. If the bailee imputes to the bailoi any
ciiminal offense, oi any act involving moial
tuipituue, even though he shoulu piove it,
unless the ciime oi the act has been
committeu against the bailee himself, his
wife, oi chiluien unuei his authoiity; anu
c. If the bailee unuuly iefuses the bailoi
suppoit when the bailee is legally oi
moially bounu to give suppoit to the bailoi

III. SIMPLE LOAN

A. General Concepts

mutuum.


to pay inteiest.


#>?" 9:*' A peison who ieceives a loan of money
oi any othei fungible thing acquiies the owneiship
theieof, anu is bounu to pay to the cieuitoi an equal
amount of the same kinu anu quality. (17SSa)

#>?" 9:*A A contiact wheieby one peison tiansfeis
the owneiship of non-fungible things to anothei
with the obligation on the pait of the lattei to give
things of the same kinu, quantity, anu quality shall
be consiueieu a baitei. (n)

#>?" 9:F@ Fixeu, savings, anu cuiient ueposits of
money in banks anu similai institutions shall be
goveineu by the piovisions conceining simple loan.
(n)

#.? %&" 09'( U DE- YC>-E&GN- !-.-83?N OCZ

#.? %&" 09'(+ ,-." *F [\G7P8W4- P&&;N[
Befinitions. (a) In this Act, unless the content oi
subject mattei otheiwise iequiies:

"Action" incluues counteiclaim, set-off, anu suits in
equity as pioviueu by law in these islanus.

"Beliveiy" means voluntaiy tiansfei of possession
fiom one peison to anothei.

"Fungible goous" means goous of which any unit is,
fiom its natuie by meicantile custom, tieateu as the
equivalent of any othei unit.

"uoous" means chattels oi meichanuise in stoiage
oi which has been oi is about to be stoieu.

"Boluei" of a ieceipt means a peison who has both
actual possession of such ieceipt anu a iight of
piopeity theiein.

"0iuei" means an oiuei by inuoisement on the
ieceipt.
"0wnei" uoes not incluue moitgagee.

"Peison" incluues a coipoiation oi paitneiship oi
two oi moie peisons having a joint oi common
inteiest.

To "puichase" incluues to take as moitgagee oi as
pleugee.

"Receipt" means a waiehouse ieceipt.

"value" is any consiueiation sufficient to suppoit a
simple contiact. An anteceuent oi pie-existing
obligation, whethei foi money oi not, constitutes
value wheie a ieceipt is taken eithei in satisfaction
theieof oi as secuiity theiefoi.
"Waiehouseman" means a peison lawfully engageu
in the business of stoiing goous foi piofit.

(b) A thing is uone "in goou faith" within the
meaning of this Act when it is in fact uone honestly,
whethei it be uone negligently oi not.

2-&34- 5" 2G8P C7; 2&>>CN /0@@F1

FACTS: Infoimations of qualifieu theft against Puig
anu Poiias stateu that they conspiieu,
confeueiateu, anu helpeu one anothei, with giave
abuse of confiuence, being the cashiei anu
bookkeepei of the Bank, without knowleuge oi
consent of the Bank, anu with intent to gain, steal
1Sk, to the uamage anu piejuuice of the Bank.

BELB: The bank becomes the ownei of the monies
uepositeu theiein by its clients. The employees of
the bank entiusteu with the possession of monies
uue to the confiuence ieposeu in them occupy
positions of confiuence. The ielationship between
banks anu uepositois has been helu to be that of
cieuitoi anu uebtoi (Aits. 19SS & 198u of CC). Thus,
the infoimations sufficiently allege all the essential
elements of qualifieu theft.

M2I \C=84T MC7R 5" \>C7.& /0@@(1

FACTS: Tevesteco openeu a savings anu cuiient
account with BPI-FB. FNIC also openeu a time
ueposit account with the same bianch. Fianco
openeu S accounts (cuiient, savings & time ueposit)
with BPI-FB. The P2N useu to open these accounts is
tiaceable to a check issueu by Tevesteco allegeuly in
consiueiation of Fiancos introduction of Eladio
Teves to }aime Sebastian (then BPI-FB SFDMs
Bianch Ngi). The funuing foi the P2N check was
pait of the P8uN uebiteu by BPI-FB from FMICs
time deposit account and credited to Tevestecos
cuiient account puisuant to an Authoiity to Bebit
purportedly signed by FMICs officers. But
signatures of FMICs officers on the Authority to
Bebit weie foigeu. BPI-FB debited Francos savings
anu cuiient accounts foi the amounts iemaining.
Two checks uiawn by Fianco against his BPI-FB
cuiient account weie uishonoieu anu stampeu with
account under garnishment. The uishonoieu
checks weie issueu by Fianco anu piesenteu foi
payment at BPI-FB prior to Francos receipt of notice
that his accounts weie unuei gainishment. BPI-FB
ueuucteu auvance inteiest paiu to Fianco fiom the
iemaining balance of his time ueposit account. BPI-

FBs refuseu to heed Francos demands to unfreeze
his accounts anu ielease his ueposits with the bank.

BELB: BPI-FB uoes not have a unilateial iight to
fieeze the accounts of Fianco baseu on its meie
suspicion that the funus theiein weie pioceeus of
the multi-million peso scam Fianco was allegeuly
involveu in. BPI-FB, as the tiustee in the fiuuciaiy
ielationship, is uuty bounu to know the signatuies of
its customeis. Baving faileu to uetect the foigeiy in
the Authoiity to Bebit anu in the piocess
inauveitently facilitate the FNIC-Tevesteco tiansfei,
BPI-FB cannot now shift liability theieon to Fianco
anu the othei payees of checks issueu by Tevesteco,
oi pievent withuiawals fiom theii iespective
accounts without the appiopiiate couit wiit oi a
favoiable final juugment.

JN?&>-N 5" ,3&GN-N ,G3C7PC7 /0@901

FACTS: Petitionei Estoies anu iesponuent spouses
enteieu into a Conuitional Beeu of Sale wheie
petitionei offeieu to sell a paicel of lanu to the
spouses subject to seveial conuitions one of which
states that if aftei the venuoi completes the uocs
anu venuee fails to complete the payment as pei
agieement, a foifeituie fee of 2S% oi uown payment
shall be applieu. But if the venuoi fails to complete
the necessaiy uocuments win Su uays wo
sufficient ieason oi wo infoiming the venuee of its
status, venuee has to iight to the ietuin of the full
uown payment. venuoi faileu to comply with hei
obligation. venuee uemanueu the ietuin of the BP
with 12% int. compounueu annually. Petitionei
piomiseu to ietuin the BP but faileu to uo so.

BELB: It is piopei to impose inteiest even without a
stipulation in the contiact. Ait. 221u of the CC
pioviues that interest may, in the d/'!"#0/+) +* 01#
!+("02 3# &44+5#$ (6+) $&-&7#' &5&"$#$ *+" 3"#&!1
of contract. The paities uiu not stipulate as to the
applicable rate of interest. Petitioners unwarranted
withholuing of the money which iightfully peitains
to iesponuent-spouses amounts to foibeaiance of
money which can be consiueieu as an involuntaiy
loan. Thus, the applicable iate of inteiest is 12% pei
annum.

Ateneo Law Reviewei Notes:

Natuie of Nutuum
a. bilateial - borrower promise to pay is the
consideration for the lenders obligation to fuinish
the loan
b. no ciiminal liability upon failuie to pay

Subject Nattei
a. fungible oi consumable-uepenuing on the intent
of the paities, that the ietuin of the thing is
equivalent only anu not the iuentical thing
b. money
c. if the tiansfei of owneiship is on a non-fungible
thing, with the obligation of the othei to give things
of the same kinu, quantity anu quality, it is a baitei

MCN8N &<
6&=3C>8N&7

6&==&;C?G=

HG?GG=
/,8=34- O&C71
]WS-.?

0iuinaiily non-
consumable

Noney oi othei
consumable
thing

]Z7->NE83 &<
?E- ?E87P

0wneiship is
ietaineu by the
lenuei

0wneiship is
tiansfeiieu to
the boiiowei

6CGN-

Essentially
giatuitous

uiatuitous oi
oneious (w
stipulation to
pay inteiest)

DE87P ?& W-
!-?G>7-;

Boiiowei must
ietuin the same
thing loaneu

Boiiowei neeu
only pay the
same amount
of the same
kinu anu
quality

,GWS-.?
HC??->

Nay involve
ieal oi peisonal
Piopeity

0nly peisonal
piopeity
2G>3&N-

Loan foi use oi
tempoiaiy
possession

Loan foi
consumption
YE-7 ?&
!-?G>7

Bailoi may
uemanu the
ietuin of the
thing loaneu
befoie the
expiiation of
the teim in case
of uigent neeu

Lenuei may not
uemanu its
ietuin befoie
the lapse of
the teim
agieeu
upon
YE& W-C>N
>8NR &< 4&NN

Loss of the
subject mattei
is suffeieu by
the bailoi since
he is the ownei
Boiiowei
suffeis the loss
(even if causeu
exclusively by a
foituitous
event anu he is
not theiefoie
uischaigeu
fiom his uuty

to pay)

%C?G>-

Puiely peisonal Not puiely
peisonal

HG?GG= /,8=34- O&C71 !-7? ^ O-CN-

Signifies the ueliveiy of
money oi some othei
consumable thing to
anothei w a piomise to
iepay an equivalent
amount of the same kinu
anu quality
0ne paity ueliveis to
anothei some non-
consumable thing in
oiuei
that the lattei may use it
uuiing a ceitain peiiou
anu ietuin it to the
foimei

Theie is a tiansfei of
owneiship of the thing
ueliveieu

The ownei of the lessee
oi the lessoi of the
piopeity uoes not lose his
owneiship. Be simply
loses contiol ovei the
piopeity ienteu uuiing
the peiiou of the contiact

The ielation between
paities is that of obligoi
anu oblige

The ielation is between
lanuloiu anu tenant
The cieuitoi ieceives
payment foi his loan

The ownei of the iopeity
receives compensation
or price either in
money, piovisions,
chattels, oi laboi fiom the
occupant theieof in
ietuin foi its use

MCN8N &<
6&=3C>8N&
7

HG?GG=
/,8=34- O&C71
6&==&;C?G= MC>?->
,GWS-.?
=C??->
Noney oi
any othei
fungible
thingspeisonal
piopeity
Peisonal oi
ieal piopeity
(geneially
non-
consumable)
Non-
fungible oi
non-
consumable
things

]W48PC?8&7
&< WC84--

Pay oi
uelivei the
same kinu
oi quality
loaneu to
the bailee

Retuin the
iuentical thing
boiioweu
when
the time has
expiieu oi the
puipose has
been seiveu

The
equivalent
thing is
given in
ietuin foi
what has
been
ieceiveu
%C?G>- &<
.&7?>C.?

Nay be
giatuitous
Always
giatuitous
0neious

San Beua Law Reviewei Notes:

HG?GG= /,8=34- O&C71 ,C4-
Real contiact Consensual contiact
ueneially unilateial
because only boiiowei
has obligations

Bilateial anu iecipiocal

If the property is sold, but the real intent is only
to give the object as '#!("/08 foi a uebt as when the
price is comparatively small theie ieally is a
contract of loan with an equitable mortgage.

0P Law Reviewei Notes:

Consumable
- Those whose use accoiuing to theii natuie
uestioys the substance of the thing oi causes theii
loss to the ownei. (ex: foou)
- Consumable goous cannot be the subject mattei of
a contiact of commouatum unless the puipose of the
contiact is not the consumption of the object, as
when it is meiely foi exhibition.

Fungibles
- Things which because of theii natuie oi the will of
the paities aie capable of being substituteu by
otheis of the same kinu, not having a uistinct
inuiviuuality.

Consumable v. Fungible: It is the intention of the
paities to a contiact which ueteimines whethei the
object is fungible oi non-fungible anu not the
consumable oi non-consumable natuie of the thing.

B. Obligation to Pay

#>?" 9:** The obligation of a peison who boiiows
money shall be goveineu by the piovisions of
Aiticles 1249 anu 12Su of this Coue.

If what was loaneu is a fungible thing othei than
money, the uebtoi owes anothei thing of the same
kinu, quantity anu quality, even if it shoulu change in
value. In case it is impossible to uelivei the same
kinu, its value at the time of the peifection of the
loan shall be paiu. (17S4a)

#>?" 90A: The payment of uebts in money shall be
maue in the cuiiency stipulateu, anu if it is not
possible to uelivei such cuiiency, then in the
cuiiency which is legal tenuei in the Philippines.

The ueliveiy of piomissoiy notes payable to oiuei,
oi bills of exchange oi othei meicantile uocuments
shall piouuce the effect of payment only when they

have been casheu, oi when thiough the fault of the
cieuitoi they have been impaiieu.

In the meantime, the action ueiiveu fiom the
oiiginal obligation shall be helu in the abeyance.
(117u)

#>?" 90*@ In case an extiaoiuinaiy inflation oi
ueflation of the cuiiency stipulateu shoulu
supeivene, the value of the cuiiency at the time of
the establishment of the obligation shall be the basis
of payment, unless theie is an agieement to the
contiaiy. (n)

Someia Notes:

Piimaiy obligation of the boiiowei
- To pay

If object is money (the piincipal)
- ueneial iules in payment in money apply
- value of payment in money oi payment of the
piincipal is geneially ueteimineu at the time of the
establishment of the obligation (time of the ueliveiy
of the piincipal)

If object is any othei consumable piopeity
- boiiowei owes payment in kinu (anothei piopeity
of the same kinu, quantity anu quality)
- value of payment in kinu ueteimineu at the time of
peifection (time of the ueliveiy of the object of the
simple loan)

0bligation to pay
- Nay be eviuenceu by a wiitten piomise to pay
- In commeicial cieuit tiansactions, the most
common aie:
>Note: a wiitten piomise by one paity (the
makei) to pay money to anothei paity (the
payee) oi to beaiei oi a wiitten piomise to
pay a specifieu amount to a ceitain peison
on uemanu oi on a specifieu uate
> Bonu: a wiitten piomise (by the issuei) to
pay money to the holueis oi a wiitten
piomise issueu by a goveinment oi
coipoiation to holueis to pay the piincipal
amount of a loan at matuiity anu a specifieu
sum of money usually at specific inteivals.
> Bebentuie (fiom the Latin woiu
$#3#)0("): an instiument acknowleuging a
debt secured only by the issuers earning
powei anu not by a lien oi legal iight oi
inteiest that a cieuitoi has on any specific
asset oi an unsecuieu bonu
- All of these piomises to pay aie eviuence of
inuebteuness anu aie commeicial foims that
contiacts of simple loan take.

C. Interest

San Beua Reviewei Notes:

The compensation alloweu by law oi fixeu by the
paities foi the loan oi foibeaiance of money, goous
oi cieuits

Requisites foi Bemanuability:
- must be -xpiessly stipulateu
> Exceptions:
>> inuemnity foi uamages
>> inteiest acciuing fiom unpaiu
inteiest
- must be lawful
- must be in wiiting

Compounu Inteiest
9 ueneial Rule: 0npaiu inteiest shall not eain
inteiest.
9 Exceptions
> when juuicially uemanueu
> when theie is an expiess stipulation
(must be in wiiting in view of Ait. 19S6)

Cential Bank Ciiculai No. 416 fixing the iate of
inteiest at 12% pei annum ueals with loans,
foibeaiance of any money, goous oi cieuits anu
juugments involving such loans, oi foibeaiance in
the absence of expiess agieement to such iate.

Cential Bank Ciiculai No. 9uS (Bec. 1u, 1982)
iemoveu the 0suiy Law ceiling on inteiest iates foi
secuieu anu unsecuieu loans, iegaiuless of
matuiity.

Agpalo Notes:

Cential Bank Ciiculai No. 416 anu Ait. 22u9 of the
Civil Coue contemplate uiffeient situations anu
apply to uiffeient tiansactions. In tiansactions
involving loan oi foibeaiance of money, goous oi
cieuits, as well as juugments ielating to such loan oi
foibeaiance of money, goous oi cieuits, the Cential
Bank ciiculai applies. It is only in such tiansactions
oi juugments wheie the Piesiuential Beciee alloweu
the Nonetaiy Boaiu to uip its fingeis into.

In cases iequiiing the payment of inuemnities as
uamages, in connection with any uelay in the
peifoimance of an obligation othei than those
involving loan oi foibeaiance of money, goous oi
cieuits, Ait. 22u9 of the Civil Coue applies. Foi the
Couit, this is the most faii, ieasonable, anu logical
inteipietation of the two laws. Theie is no conflict
between CB Ciiculai No. 416 anu Ait. 22u9 of the

Civil Coue oi any ieason to holu that the foimei has
iepealeu the lattei by implication. :;&0/+)&4 <+5#"
=+"6> ?> @)7&'2 ABCDE

1. Conventional Interest

mutuum.


to pay inteiest.


#>?" 9:*) No inteiest shall be uue unless it has been
expiessly stipulateu in wiiting. (17SSa)

#>?" 90*' If the uebt piouuces inteiest, payment of
the piincipal shall not be ueemeu to have been maue
until the inteiests have been coveieu. (117S)

#>?" 9:*F In the ueteimination of the inteiest, if it is
payable in kinu, its value shall be appiaiseu at the
cuiient piice of the piouucts oi goous at the time
anu place of payment. (n)

#>?" 9:)@ If the boiiowei pays inteiest when theie
has been no stipulation theiefoi, the piovisions of
this Coue conceining '+4(0/+ /)$#3/0/, oi natuial
obligations, shall be applieu, as the case may be. (n)

#>?" 09*A If something is ieceiveu when theie is no
iight to uemanu it, anu it was unuuly ueliveieu
thiough mistake, the obligation to ietuin it aiises.
(189S)

#>?" 9A0' 0bligations aie civil oi natuial. Civil
obligations give a iight of action to compel theii
peifoimance. Natuial obligations, not being baseu
on positive law but on equity anu natuial law, uo not
giant a iight of action to enfoice theii peifoimance,
but aftei voluntaiy fulfillment by the obligoi, they
authoiize the ietention of what has been ueliveieu
oi ienueieu by ieason theieof. Some natuial
obligations aie set foith in the following aiticles.

#.? %&" 0)**+ #7 #.? \8K87P !C?-N ]< I7?->-N?
_3&7 O&C7N #7; L-.4C>87P DE- J<<-.? ]<
!-.-8587P ]> DCR87P _NG>8&GN !C?-N #7; \&>
]?E-> 2G>3&N-N

#.? %&" 0)**+ ,-." 9 The iate of inteiest foi the loan
oi foibeaiance of any money, goous, oi cieuits anu
the iate alloweu in juugments, in the absence of
expiess contiact as to such iate of inteiest, shall be
fix pei centum pei annum oi such iate as may be
piesciibeu by the Nonetaiy Boaiu of the Cential
Bank of the Philippines foi that puipose in
accoiuance with the authoiity heieby gianteu.

6-7?>C4 MC7R 68>.G4C> %&" A9)+ N->8-N &< 9:(A

}uly 29, 1974
CBP CIRC0LAR N0. 416-74

By viitue of the authoiity gianteu to it unuei Section
1 of Act No. 26SS, as amenueu, otheiwise known as
the"0suiy Law", the Nonetaiy Boaiu, in its
Resolution No. 1622 uateu }uly 29, 1974, has
piesciibeu that theiate of inteiest foi the loan oi
foibeaiance of any money, goous oi cieuits anu the
iate alloweu in juugments,in the absence of expiess
contiact as to such iate of inteiest, shall be twelve
pei cent (12%) pei annum.picuThis Ciiculai shall
take effect immeuiately.

(SuB.) u. S. LICAR0S
uoveinoi

#.? %&" 0)**+ ,-." ( All covenants anu stipulations
containeu in conveyances, moitgages, bonus, bills,
notes anu othei contiacts oi eviuences of uebts, anu
all ueposits of goous oi othei things, wheieupon oi
wheieby theie shall be stipulateu, chaigeu,
uemanueu, ieseiveu, secuieu, taken, oi ieceiveu,
uiiectly oi inuiiectly, a highei iate oi gieatei sum oi
value foi the loan oi ienewal oi foibeaiance of
money, goous, oi cieuits than is heieinabove
alloweu, shall be voiu: Pioviueu, howevei, That no
meiely cleiical eiioi in the computation of inteiest,
maue without intent to evaue any of the piovisions
of this Act, shall ienuei a contiact voiu: Pioviueu,
fuithei, That paities to a loan agieement, the
pioceeus of which may be availeu of paitially oi
fully at some futuie time, may stipulate that the iate
of inteiest agieeu upon at the time the loan
agieement is enteieu into, which iate shall not
exceeu the maximum alloweu by law, shall pievail
notwithstanuing subsequent changes in the
maximum iates that may be maue by the Nonetaiy
Boaiu: Anu Pioviueu, finally, That nothing heiein
containeu shall be constiueu to pievent the
puichase by an innocent puichasei of a negotiable

meicantile papei, usuiious oi otheiwise, foi
valuable consiueiation befoie matuiity, when theie
has been no intention on the pait of saiu puichasei
to evaue the piovisions of this Act anu saiu puichase
was not a pait of the oiiginal usuiious tiansaction.
In any case, howevei, the makei of saiu note shall
have the iight to iecovei fiom saiu oiiginal holuei
the whole inteiest paiu by him theieon anu, in case
of litigation, also the costs anu such attoiney's fees
as may be alloweu by the couit.

#.? %&" 0)**+ ,-." (UC Paities to an agieement
peitaining to a loan oi foibeaiance of money, goous
oi cieuits may stipulate that the iate of inteiest
agieeu upon may be incieaseu in the event that the
applicable maximum iate of inteiest is incieaseu by
law oi by the Nonetaiy Boaiu: Pioviueu, That such
stipulation shall be valiu only if theie is also a
stipulation in the agieement that the iate of inteiest
agieeu upon shall be ieuuceu in the event that the
applicable maximum iate of inteiest is ieuuceu by
law oi by the Nonetaiy Boaiu: Pioviueu, fuithei,
That the aujustment in the iate of inteiest agieeu
upon shall take effect on oi aftei the effectivity of
the inciease oi ueciease in the maximum iate of
inteiest.

\>8CN 5" ,C7 L8-P&U,8N&7 /0@@(1

FACTS: Fiias (house & lot ownei) anu Sison enteieu
into a Nemoianuum of Agieement (N0A) ovei the
house & lot foi 6N. Theii agieement speaks of 2
peiious of 6months each. The 1
st
6-month peiiou
was given to Sison to make up hei minu W0N to
puichase petitionei's piopeity. The 2
nu
6-month
peiiou was given to Fiias to pay the P2N loan in the
event that Sison ueciueu not to buy the subject
piopeity in which case inteiest will be chaigeu F*+"
01# 4&'0 G -+)01' +)482F iefeiiing to the 2
nu
6-month
peiiou.

BELB: The N0A executeu between petitionei anu
iesponuent is the law between the paities. The
agieement that the amount given shall beai
compounueu bank inteiest foi the last 6 months
only, i.e., iefeiiing to the 2
nu
6-month peiiou, uoes
not mean that inteiest will no longei be chaigeu
aftei the 2
nu
6-month peiiou since such stipulation
was maue on the logical anu ieasonable expectation
that such amount woulu be paiu within the uate
stipulateu. The monetaiy inteiest foi the last 6
months continueu to acciue until actual payment of
the loaneu amount. Foi a uebtoi to continue in
possession of the piincipal of the loan anu to
continue to use the same aftei matuiity of the loan
without payment of the monetaiy inteiest, woulu
constitute unjust eniichment of the uebtoi at the
expense of the cieuitoi.

6&7.-3.8&7 5" 6&G>? &< #33-C4N+ -? C4" /9::(1

FACTS: Bome Savings Bank & Tiust Co. (now Insulai
Life) gianteu to the Concepcions a loan amounting
to P1.4N. Concepcions in tuin executeu PN & REN
ovei theii piopeity. PN pioviueu that the
Concepcions hau authoiizeu the Bank to inciease
the inteiest iate wo auvance notice, in the event
the Cential Bank iaises its ieuiscount iate to
membei banks, anuoi the int. iate on savings anu
time ueposit, anuoi the int. iate on such loans
anuoi auvances. The bank unilateially incieaseu
the int. iate S times. Concepcions faileu to pay. The
bank foiecloseu the REN executeu by the
Concepcions. Bank emeigeu as the highest biuuei. A
Ceitificate of Sale was issueu in favoi of the bank.
The Concepcions weie unable to ieueem. The bank
consoliuateu its title anu solu the piopeity to Asaje
Realty Coip.

BELB: Even consiueiing that petitioneis weie
bounu by theii agieement allowing an inciease in
the inteiest iate uespite the lack of auvance notice
to them, the escalation shoulu still be subject, as so
contiactually stipulateu, to a coiiesponuing inciease
by the Cential Bank of its ieuiscount iate to membei
banks, oi of the inteiest iate on savings anu time
ueposit, oi of the inteiest iate on such loans anu
auvances. The notices sent to petitioneis meiely
stateu that the inciease was on account of the
pievailing business anu economic conuition.
Theiefoie, theie is no sufficient valiu justification
shown foi the unilateial incieases by piivate
iesponuent bank of the inteiest iates on the loan.

2. Interest on Interest

#>?" 9:*: Without piejuuice to the piovisions of
Aiticle 2212, inteiest uue anu unpaiu shall not eain
inteiest. Bowevei, the contiacting paities may by
stipulation capitalize the inteiest uue anu unpaiu,
which as auueu piincipal, shall eain new inteiest.
(n)

#>?" 0090 Inteiest uue shall eain legal inteiest fiom
the time it is juuicially uemanueu, although the
obligation may be silent upon this point. (11u9a)

3. Compensatory, Penalty or Indemnity
Interest

#>?" 99): Those obligeu to uelivei oi to uo
something incui in uelay fiom the time the obligee
juuicially oi extiajuuicially uemanus fiom them the

fulfillment of theii obligation.

Bowevei, the uemanu by the cieuitoi shall not be
necessaiy in oiuei that uelay may exist:
(1) When the obligation oi the law expiessly so
ueclaie; oi

(2) When fiom the natuie anu the ciicumstances of
the obligation it appeais that the uesignation of the
time when the thing is to be ueliveieu oi the seivice
is to be ienueieu was a contiolling motive foi the
establishment of the contiact; oi

(S) When uemanu woulu be useless, as when the
obligoi has ienueieu it beyonu his powei to
peifoim.

In iecipiocal obligations, neithei paity incuis in
uelay if the othei uoes not comply oi is not ieauy to
comply in a piopei mannei with what is incumbent
upon him. Fiom the moment one of the paities
fulfills his obligation, uelay by the othei begins.
(11uua)

#>?" 900) In obligations with a penal clause, the
penalty shall substitute the inuemnity foi uamages
anu the payment of inteiests in case of
noncompliance, if theie is no stipulation to the
contiaiy. Neveitheless, uamages shall be paiu if the
obligoi iefuses to pay the penalty oi is guilty of
fiauu in the fulfillment of the obligation.

The penalty may be enfoiceu only when it is
uemanuable in accoiuance with the piovisions of
this Coue. (11S2a)

#>?" 00@: If the obligation consists in the payment
of a sum of money, anu the uebtoi incuis in uelay,
the inuemnity foi uamages, theie being no
stipulation to the contiaiy, shall be the payment of
the inteiest agieeu upon, anu in the absence of
stipulation, the legal inteiest, which is six pei cent
pei annum. (11u8)

#>?" 009' Inteiest cannot be iecoveieu upon
unliquiuateu claims oi uamages, except when the
uemanu can be establisheu with ieasonably
ceitainty

#>?" 000) Liquiuateu uamages aie those agieeu
upon by the paities to a contiact, to be paiu in case
of bieach theieof.

#>?" 000( Liquiuateu uamages, whethei intenueu as
an inuemnity oi a penalty, shall be equitably
ieuuceu if they aie iniquitous oi unconscionable.

JCN?->7 ,E83387P O87-N+ I7." 5" 6&G>? &< #33-C4N
/9::A1

FACTS: 2 uiums of iiboflavin weie shippeu fiom
}apan foi SS Eastein Comet (owneu by Eastein
Shipping Lines) anu hau a maiine insuiance policy
issueu by the Neicantile Insuiance Company. When
it aiiiveu in Nanila, 1 uium weie allegeuly in bau
oiuei. Neicantile Insuiance contenueu that uue to
the lossesuamage sustaineu by 1 uium, the
consignee suffeieu losses uue to Eastein Shippings
fault anu negligence. Because of the losses,
Neicantile Insuiance was compelleu to pay the
consignee, unuei the teims of the maiine insuiance
policy. Thus, it became subiogateu to the
consignees right of action against Eastern Shipping.

BELB: (1) When an obligation, iegaiuless of its
souice, /.#., law, contiacts, quasi-contiacts, uelicts oi
quasi-uelicts

is bieacheu, the contiavenoi can be
helu liable foi uamages.

The piovisions unuei Title
XvIII on "Bamages" of the Civil Coue govein in
ueteimining the measuie of iecoveiable uamages.

(2) With iegaiu paiticulaily to an awaiu of inteiest
in the concept of actual anu compensatoiy uamages,
the iate of inteiest, as well as the acciual theieof, is
imposeu, as follows:

a) When the obligation is bieacheu, anu it consists in
the payment of a sum of money, i.e., a loan oi
foibeaiance of money, the inteiest uue shoulu be
that which may have been stipulateu in wiiting.
Fuitheimoie, the inteiest uue shall itself eain legal
inteiest fiom the time it is juuicially uemanueu. In
the absence of stipulation, the iate of inteiest shall
be 12% pei annum to be computeu fiom uefault, i.e.,
fiom juuicial oi extiajuuicial uemanu unuei anu
subject to the piovisions of Aiticle 1169 of the Civil
Coue.

b) When an obligation, not constituting a loan oi
foibeaiance of money, is bieacheu, an inteiest on
the amount of uamages awaiueu may be imposeu at
the uiscietion of the couit at the iate of 6% pei
annum. No inteiest, howevei, shall be aujuugeu on
unliquiuateu claims oi uamages except when oi
until the uemanu can be establisheu with ieasonable
ceitainty. Accoiuingly, wheie the uemanu is
establisheu with ieasonable ceitainty, the inteiest
shall begin to iun fiom the time the claim is maue
juuicially oi extiajuuicially (Ait. 1169, Civil Coue)
but when such ceitainty cannot be so ieasonably
establisheu at the time the uemanu is maue, the
inteiest shall begin to iun only fiom the uate the
juugment of the couit is maue (at which time the
quantification of uamages may be ueemeu to have

been ieasonably asceitaineu). The actual base foi
the computation of legal inteiest shall, in any case,
be on the amount finally aujuugeu.

c) When the juugment of the couit awaiuing a sum
of money becomes final anu executoiy, the iate of
legal inteiest, whethei the case falls unuei
paiagiaph 1 oi paiagiaph 2, above, shall be 12% pei
annum fiom such finality until its satisfaction, this
inteiim peiiou being ueemeu to be by then an
equivalent to a foibeaiance of cieuit.

,8PCUC7 5" `844C7G-5C /0@@:1

FACTS: Petitionei appioacheu iesponuent anu
offeieu a loan of S4uk. Responuent accepteu
because she neeueu capital foi hei business but the
loan agieement was not ieuuceu in wiiting anu
theie was no stipulation as to the payment of
inteiest foi the loan.

BELB: Inteiest is a compensation fixeu by the
paities foi the use oi foibeaiance of money. This is
iefeiieu to as monetaiy inteiest. Inteiest may also
be imposeu by law oi by couits as penalty oi
inuemnity foi uamages. This is calleu compensatoiy
inteiest. The iight to inteiest aiises only by viitue of
a contiact oi by viitue of uamages foi uelay oi
failuie to pay the piincipal loan on which inteiest is
uemanueu.

Ait. 19S6 of the CC manuates that payment of
monetaiy inteiest is alloweu only if: (1) theie was
an expiess stipulation foi the payment of inteiest;
anu (2) the agieement foi the payment of inteiest
was ieuuceu in wiiting. The concuiience of the two
conuitions is iequiieu foi the payment of monetaiy
inteiest. Thus, the SC has helu that collection of
inteiest without any stipulation theiefoi in wiiting
is piohibiteu by law.

Ait. 22u9 of the CC states that if the obligation
consists in the payment of a sum of money, anu the
uebtoi incuis uelay, a legal inteiest of 12% pei
annum may be imposeu as inuemnity foi uamages if
no stipulation on the payment of inteiest was agieeu
upon. Likewise, Aiticle 2212 of the Civil Coue
pioviues that inteiest uue shall eain legal inteiest
fiom the time it is juuicially uemanueu, although the
obligation may be silent on this point.

The inteiest unuei these two instances may be
imposeu only as a penalty oi uamages foi bieach of
contiactual obligations. It cannot be chaigeu as a
compensation foi the use oi foibeaiance of money.
In othei woius, the two instances apply only to
compensatoiy inteiest anu not to monetaiy inteiest.
The case at bar involves petitioners claim for
monetaiy inteiest.

Fuithei, compensatoiy inteiest is not chaigeable in
the instant case because it was not uuly pioven that
iesponuent uefaulteu in paying the loan. Also, no
inteiest was uue on the loan because theie was no
wiitten agieement as iegaius payment of inteiest.

As foi the piinciple of '+4(0/+ /)$#3/0/, it applies
wheie (1) a payment is maue when theie exists no
binuing ielation between the payoi, who has no
uuty to pay, anu the peison who ieceiveu the
payment; anu (2) the payment is maue thiough
mistake, anu not thiough libeiality oi some othei
cause. The SC has helu that the piinciple of '+4(0/+
/)$#3/0/ applies in case of eiioneous payment of
unuue inteiest.

O8PG?C7 5" 6&G>? &< #33-C4N /0@@01

FACTS: Petitioneis obtaineu P12uk loan fiom
Secuiity Bank. They executeu a PN binuing
themselves to pay the sum boiioweu with an int. of
1S.189% pei annum upon matuiity anu to pay a
penalty of S%month on the outstanuing piincipal
anu inteiest in case of uefault. They also agiee to pay
10% of the total amount due as attorneys fees if a
suit weie instituteu to enfoice payment. Petitioneis
faileu to pay.

BELB: A penalty clause is an accessoiy unueitaking
to assume gieatei liability on the pait of an obligoi
in case of bieach of an obligation. Its puipose is to
stiengthen the coeivcive foice of the obligation anu
to pioviue foi what coulu be the liquiuateu uamages
iesulting fiom such a bieach.

The inteiest iate of 1S.189% uoes not appeai to be
that excessive. The essence oi iationale foi the
payment of inteiest, often iefeiieu to as cost of
money, is not exactly the same as that of a suichaige
oi a penalty. The inteiest piesciibeu in loan
financing aiiangements is a funuamental pait of the
banking business and the core of a banks existence.

4. Finance Charges

!-3GW48. #.? %&" '()*
#7 #.? ?& !-aG8>- ?E- L8N.4&NG>- &< \87C7.-
6EC>P-N 87 6&77-.?8&7 Z8?E JK?-7N8&7N &< 6>-;8?
/D>G?E 87 O-7;87P #.?1

!" #" %&" '()*+ ,-." A Any cieuitoi shall fuinish to
each peison to whom cieuit is extenueu, piioi to the
consummation of the tiansaction, a cleai statement
in wiiting setting foith, to the extent applicable anu

in accoiuance with iules anu iegulations piesciibeu
by the Boaiu, the following infoimation:

(1) the cash piice oi ueliveieu piice of the piopeity
oi seivice to be acquiieu;

(2) the amounts, if any, to be cieuiteu as uown
payment anuoi tiaue-in;

(S) the uiffeience between the amounts set foith
unuei clauses (1) anu (2);

(4) the chaiges, inuiviuually itemizeu, which aie
paiu oi to be paiu by such peison in connection with
the tiansaction but which aie not inciuent to the
extension of cieuit;

(S) the total amount to be financeu;

(6) the finance chaige expiesseu in teims of pesos
anu centavos; anu

(7) the peicentage that the finance beais to the total
amount to be financeu expiesseu as a simple annual
iate on the outstanuing unpaiu balance of the
obligation.

!" #" %&" '()*+ ,-." ) (a) Any cieuitoi who in
connection with any cieuit tiansaction fails to
uisclose to any peison any infoimation in violation
of this Act oi any iegulation issueu theieunuei shall
be liable to such peison in the amount of P1uu oi in
an amount equal to twice the finance chaigeu
iequiieu by such cieuitoi in connection with such
tiansaction, whichevei is the gieatei, except that
such liability shall not exceeu P2,uuu on any cieuit
tiansaction. Action to iecovei such penalty may be
biought by such peison within one yeai fiom the
uate of the occuiience of the violation, in any couit
of competent juiisuiction. In any action unuei this
subsection in which any peison is entitleu to a
iecoveiy, the cieuitoi shall be liable foi ieasonable
attoiney's fees anu couit costs as ueteimineu by the
couit.

(b) Except as specifieu in subsection (a) of this
section, nothing containeu in this Act oi any
iegulation containeu in this Act oi any iegulation
theieunuei shall affect the valiuity oi enfoiceability
of any contiact oi tiansactions.

(c) Any peison who willfully violates any piovision
of this Act oi any iegulation issueu theieunuei shall
be fineu by not less than P1,uu oi moie than PS,uuu
oi impiisonment foi not less than 6 months, noi
moie than one yeai oi both.

(u) No punishment oi penalty pioviueu by this Act
shall apply to the Philippine uoveinment oi any
agency oi any political subuivision theieof.

(e) A final juugment heieaftei ienueieu in any
ciiminal pioceeuing unuei this Act to the effect that
a uefenuant has willfully violateu this Act shall be
piima facie eviuence against such uefenuant in an
action oi pioceeuing biought by any othei paity
against such uefenuant unuei this Act as to all
matteis iespecting which saiu juugment woulu be
an estoppel as between the paities theieto.

_78?-; 6&.&7G? 24C7?->N MC7R 5" ,C=G-4 C7;
M-4GN& /0@@(1

FACTS: 0CPB gianteu spouses Beluso a cieuit line
unuei a Cieuit Agieement wheieby the sps. coulu
avail fiom 0CPB a cieuit of up to a max. amt. of
P2.SSN. Spouses executeu PNs & REN in favoui of
0CPB. 0CPB applieu inteiest iates on the uiffeient
PNs ianging fiom 18% to S4%. Buiing the teim of
these PNs, the spouses weie able to pay P76uk but
they faileu to pay foi the inteiest anu penalty on
theii obligations. As a iesult, 0CPB uemanueu that
they pay theii total obligation of P2.9N but the
spouses faileu. 0CPB foiecloseu the piopeities
moitgageu by the spouses to secuie theii cieuit line,
which, by that time, alieauy ballooneu to neaily
PS.8N.

BELB: The penalty foi the violation of the Tiuth in
Lenuing Act is P1uu oi an amount equal to twice the
finance chaige iequiieu by such cieuitoi in
connection with such tiansaction, whichevei is
gieatei, except that such liability shall not exceeu
P2,uuu.uu on any cieuit tiansaction. As this penalty
uepenus on the finance chaige iequiieu of the
borrower, the borrowers cause of action would only
acciue when such finance chaige is iequiieu. In the
case at bai, the uate of the uemanu foi payment of
the finance chaige is Septembei 2, 1998, while the
foieclosuie was maue on Becembei 28, 1998. The
filing of the case on Febiuaiy 9, 1999 is theiefoie
within the one-yeai piesciiptive peiiou.

In this case, civil action to iecovei the penalty unuei
Section 6(a) of the Tiuth in Lenuing Act hau been
jointly instituteu with (1) the action to ueclaie the
inteiests in the piomissoiy notes voiu, anu (2) the
action to ueclaie the foieclosuie voiu. This joinuei
is alloweu unuei Rule 2, Section S of the Rules of
Couit.

In auuition, opening a cieuit line uoes not cieate a
cieuit tiansaction of loan oi mutuum, since the
foimei is meiely a piepaiatoiy contiact to the

contiact of loan oi mutuum. 0nuei such cieuit line,
the bank is meiely obligeu, foi the consiueiations
specifieu theiefoi, to lenu to the othei paity
amounts not exceeuing the limit pioviueu. The
cieuit tiansaction thus occuiieu not when the cieuit
line was openeu, but iathei when the cieuit line was
availeu of. In the case at bai, the violation of the
Tiuth in Lenuing Act allegeuly occuiieu not when
the paities executeu the Cieuit Agieement, wheie no
inteiest iate was mentioneu, but when the paities
executeu the piomissoiy notes, wheie the allegeuly
offenuing inteiest iate was stipulateu.

Lastly, Section 4 of the Tiuth in Lenuing Act
pioviues that the uisclosuie statement must be
fuinisheu piioi to the consummation of the
tiansaction. The iationale of this piovision is to
piotect useis of cieuit fiom a lack of awaieness of
the tiue cost theieof, pioceeuing fiom the
expeiience that banks aie able to conceal such tiue
cost by hiuuen chaiges, unceitainty of inteiest iates,
ueuuction of inteiests fiom the loaneu amount, anu
the like. The law theieby seeks to piotect uebtois
by peimitting them to fully appieciate the tiue cost
of theii loan, to enable them to give full consent to
the contiact, anu to piopeily evaluate theii options
in aiiiving at business uecisions.

5. Usury

DbJ D!_Db I% OJ%LI%B #6D /!"#" '()*1 Q DbJ
_,_!c O#Y /#6D %]" 0)**1
D>G?E 87 O-7;87P #.?
9" 2G>3&N-
,-.?8&7 0" Beclaiation of Policy. It is heieby
ueclaieu to be the policy of the State to piotect its
citizens fiom a lack of awaieness of the tiue cost of
cieuit to the usei by assuiing a full uisclosuie of
such cost with a view of pieventing the uninfoimeu
use of cieuit to the uetiiment of the national
economy.

0" L-<878?8&7 &< D->=N
,-.?8&7 '" As useu in this Act, the teim
(1) "M&C>;[ means the Nonetaiy Boaiu of the
Cential Bank of the Philippines.
(2) [6>-;8?" means any loan, moitgage, ueeu of
tiust, auvance, oi uiscount; any conuitional sales
contiact; any contiact to sell, oi sale oi contiact of
sale of piopeity oi seivices, eithei foi piesent oi
futuie ueliveiy, unuei which pait oi all of the piice
is payable subsequent to the making of such sale oi
contiact; any iental-puichase contiact; any contiact
oi aiiangement foi the hiie, bailment, oi leasing of
piopeity; any option, uemanu, lien, pleuge, oi othei
claim against, oi foi the ueliveiy of, piopeity oi
money; any puichase, oi othei acquisition of, oi any
cieuit upon the secuiity of, any obligation of claim
aiising out of any of the foiegoing; anu any
tiansaction oi seiies of tiansactions having a similai
puipose oi effect.
(S) "\87C7.- .EC>P-" incluues inteiest, fees, seivice
chaiges, uiscounts, anu such othei chaiges inciuent
to the extension of cieuit as the Boaiu may be
iegulation piesciibe.
(4) "6>-;8?&>" means any peison engageu in the
business of extenuing cieuit (incluuing any peison
who as a iegulai business piactice make loans oi
sells oi ients piopeity oi seivices on a time, cieuit,
oi installment basis, eithei as piincipal oi as agent)
who iequiies as an inciuent to the extension of
cieuit, the payment of a finance chaige.

\I%#%6J 6b#!BJ,d
Inteiest
Fees
Seivice Chaiges
Biscounts
0thei Chaiges inciuent to extension of
cieuit

6!JLID]!e !JX_I,IDJ,d
1) Engageu in business of extenuing cieuit
2) Requiies payment of finance chaige.

'" LG?T &< ?E- 6>-;8?&>
,-.?8&7 A" Any cieuitoi shall fuinish to each peison
to whom cieuit is extenueu, piioi to the
consummation of the tiansaction, a cleai statement
in wiiting setting foith, to the extent applicable anu
in accoiuance with iules anu iegulations piesciibeu
by the Boaiu, the following infoimation:

anu centavos; anu
obligation.

DE- 6!JLID]! ECN ?E- ;G?T ?&d
Yb]Hf The peison to whom cieuit is extenueu
Yb#Df Fuinish the following infoimation:
anu centavos; anu
obligation.
b]Y^\]!Hf Cleai statement in wiiting
YbJ%f Piioi to the consummation of the
tiansaction
6#,Jd M2I 5" c_
\C.?Nd In the contiact coveiing the loan agieement
(Bisclosuie Statement), BPI faileu to uisclose the
penalty chaiges in case of uefault. Bowevei, the
penalty chaiges weie inuicateu in the Piomissoiy
Note. Sps. Yu allege that BPI violateu Sec. 4 of the
Tiuth in Lenuing Act.
b-4;d BPIs stipulation of penalty charges in the
piomissoiy note constitutes compliance with the
iequiiement of the Act.
Penalty chaiges aie liquiuateu uamages
iesulting fiom bieach, it falls unuei finance chaiges
unuei Sec. 4 (6) of the Tiuth in Lenuing Act.
\87C7.- .EC>P- iepiesents the amount to
be paiu by the uebtoi inciuent to the extension of
cieuit. The lenuei may pioviue foi a penalty clause
so long as the amount oi iate of the chaige anu the
conuitions unuei which it is to be paiu aie uiscloseu
to the boiiowei befoie he enteis into the cieuit
agieement.
Sps. Yu cannot avoiu liability baseu on the
iigiu inteipietation of the Tiuth in Lenuing At that
contiavenes its goal.
A" O8CW848?8-N C>8N87P <>&= 58&4C?8&7 &< ?E- D>G?E
87 O-7;87P #.?"
8" J<<-.? &< \C84G>- ?& L8N.4&N- I7<&>=C?8&7
,-." )/C1" Any cieuitoi who in connection with any
cieuit tiansaction fails to uisclose to any peison any
infoimation in violation of this Act oi any iegulation
issueu theieunuei shall be liable to such peison in
the amount of P1uu oi in an amount equal to twice
the finance chaigeu iequiieu by such cieuitoi in
connection with such tiansaction, whichevei is the
gieatei, except that such liability shall not exceeu
P2,uuu on any cieuit tiansaction.
In any action under this subsection in which any
peison is entitleu to a iecoveiy, the cieuitoi shall be
liable foi ieasonable attoiney's fees anu couit costs
as determined by the court.

6>-;8?&> NEC44 3CTd
C1 YE8.E-5-> 8N bIBbJ! <>&= JIDbJ!d
1) PhP 1uu
2) Twice the finance chaige iequiieu by
cieuitoi in tiansaction
O8=8?C?8&7d
Liability shall not exceeu Php 2,uuu (2uuu
x)
b) Reasonable attorneys fees and court costs: as
ueteimineu by the couit

88" #.?8&7 ?& !-.&5-> 2-7C4?T
,-." )/C1 3C>" 0" Action to iecovei such penalty may
be biought by such peison within one yeai fiom the
uate of the occuiience of the violation, in any couit
of competent juiisuiction.

Yb]f Peison to whom cieuiteu is extenueu, who
has the iight to be infoimeu by the cieuitoi.
(Boiiowei)
YbJ%^ 2->8&; ?& <84-f WITBIN 1 yeai fiom the
uate of occuiience of the violation
YbJ!Jf Any Couit of competent juiisuiction
888" %&7U8=3C8>=-7? &< 6&7?>C.?
,-." )/W1" Except as specifieu in subsection (a) of
this section, nothing containeu in this Act oi any
iegulation containeu in this Act oi any iegulation
theieunuei shall affect the valiuity oi enfoiceability
of any contiact oi tiansactions.

85" J<<-.? &< Y844<G4 `8&4C?8&7 &< ?E- D>G?E 87
O-7;87P #.?
,-." )/.1. Any peison who willfully violates any
piovision of this Act oi any iegulation issueu
theieunuei shall be fineu by not less than P1,uu oi
moie than PS,uuu oi impiisonment foi not less than
6 months, noi moie than one yeai oi both.
!" \I%Jd Php 1uu AN00NT Php Suuu
#" IH2!I,]%HJ%Dd 6 months PERI0B 1
yeai
$" M]Db \I%J #%L IH2!I,]%HJ%D

5" JK-=3?8&7 <>&= O8CW848?T
,-." )/;1" No punishment oi penalty pioviueu by
this Act shall apply to the Philippine uoveinment oi
any agency oi any political subuivision theieof.
2->N&7N -K-=3? <>&= 48CW848?Td
91 2E8483387- B&5->7=-7?
01 #7T #BJ%6c &< ?E- 2E8483387-
B&5->7=-7?

58" J<<-.? &< <87C4 SG;P=-7? >-7;->-; 87 C7T
.>8=87C4 3>&.--;87P 87 58&4C?8&7 &<
,-." ) /.1
,-." )/-1. A final juugment heieaftei ienueieu in
any ciiminal pioceeuing unuei this Act to the effect
that a uefenuant has willfully violateu this Act shall
be piima facie eviuence against such uefenuant in an
action oi pioceeuing biought by any othei paity
against such uefenuant unuei this Act as to all
matteis iespecting which saiu juugment woulu be
an estoppel as between the paities theieto.

6#,Jd _62M 5" ,3N" M-4GN&
\C.?Nd 0CPB gianteu to Sps. Beluso a Piomissoiy
Notes Line unuei a Cieuit agieement wheieby the
Belusos coulu avail fiom 0CPB cieuit up to a ceitain
maximum amount. Sps. Beluso constituteu
piomissoiy notes anu ieal estate moitgage ovei
paicels of lanus. 0CPB applieu inteiest iates on
uiffeient piomissoiy notes ianging fiom 18% to
S4%. Fiom 1996 to Feb 1998, Belusos weie able to
pay the total of P76S,692.uS. Fiom 28 Feb 1998 to
1u }une 1998, 0CPB continueu to chaige inteiest
anu penalty on theii iemaining obligations. Sps.
Beluso faileu to make payment.
b-4;d 1) HG?GC48?T &< 6&7?>C.?Nd Inteiest shall be at
the iate inuicative of BBB ietail iate oi as
uetermined by the Branch Head is uepenuent solely
on the will of 0CPB. 0nuei this piovision, 0CPB can
choose which inteiest iate to apply. As 0CPB is
given this choice, the iate shoulu be categoiically
ueteiminable in B0TB choices. If eithei of these two
choices piesents an oppoitunity foi 0CPB to fix the
iate at will, the bank can easily choose such an
option, thus making the entiie inteiest iate
piovision violative of the piinciple of mutuality of
contiacts.
2) Validity of indicative of DBD rate: As iegaius
the rate indicative of the DBD retail rate the same
cannot be consiueieu as valiu foi being akin to a
prevailing rate or prime rate in Polotan v. CA.
0CPB can peg inteiest at any peicentage above oi
below BBB ietail iate. This gives 0CPB unfetteieu
uiscietion in ueteimining the inteiest iate. Also,
authoiity to ieview the inteiest iate was given to
0CPB alone as the lenuei.
S) ,-3C>CW848?T 64CGN-d Sepaiability Clause cannot
save eithei of the two options of 0CPB as both
options violate the piinciple of mutuality of
contiacts.
A1 J,D]22JO cannot be pieuicateu on an illegal act:
the violation of the Tiuth in Lenuing Act

*1 2!J,6!I2DI]%d Borrowers cause of action
woulu only acciue when such finance chaige is
iequiieu.
Bate of the uemanu foi payment of the finance
chaige is 2 Septembei 1998, while the foieclosuie
was maue on 28 Becembei 1998. The filing of the
case on 9 Febiuaiy 1999 is theiefoie within the one-
yeai piesciiptive peiiou.
)1 `8&4C?8&7 &< D>G?E 87 O-7;87P #.?d In light of
Sec. 6 (a) anu (c), it can be gleaneu that the violation
of the saiu Act gives iise to both ciiminal anu civil
liabilities. Sec. 6(c) consiueis a ciiminal offense the
willful violation of the Act, while Sec. 6(a) pioviues
foi a civil cause of action foi failuie to uisclose any
infoimation iequiieu.
In this case, the civil action to iecovei the
penalty unuei Sec. 6 (a) has been jointly instituteu
with the action to ueclaie the inteiests in the
piomissoiy notes voiu anu the action to ueclaie the
foieclosuie voiu.
The iationale of Sec. 4 of the Tiuth in
Lenuing Act is to piotect useis of cieuit fiom a lack
of awaieness of the tiue cost theieof, pioceeuing
fiom the expeiience that banks aie able to conceal
such tiue cost by hiuuen chaiges, unceitainty of
inteiest iates, ueuuction of inteiest fiom the loaneu
amount, and the like.
The law seeks to protect debtors by
peimitting them to give full consent to the contiact,
anu to piopeily evaluate theii options in aiiiving at
business uecisions.

_,_!c
BEFINITI0N
-0suiy is the lenuing of money at inteiest in
excess of the maximum iates alloweu by
law.
0S0RY AS STAT0T0RY CREATI0N
U_NG>T CN N?C?G?&>T .>-C?8&7d It is puiely a
statutoiy iegulation anu piohibition. In the
absence of a statute, any iate of inteiest
may be chaigeu. The iestiiction of the piice
to be paiu foi the use of money.

P0RP0SE: Foi the piotection of boiioweis fiom the
imposition of unsciupulous lenueis who take unuue
auvantage of the necessities of otheis.
BIST0RY: The taking of excessive inteiest foi the
loan of money has been iegaiueu with abhoiience
fiom the eailiest times.
-0suiy was piohibiteu by the ancient laws
of the Chinese, Binuus, Nosaic laws of }ews,
Koian, Athenians, Romans. It has also been
fiowneu upon by uistinguisheu publicists
thioughout histoiy.
-Roman law: Limitations weie imposeu on
the iate that cieuitois coulu uemanu; Rate
limitation = 12%.
-Chiistian law: 0S0RY as a SIN anu giounu
foi excommunication
-Judaic law: only allowed usury unto a
stranger and a violation resulted in social
exclusion
-0suiy in the Philippines: Act. No. 2S66 (as
amenueu) 0suiy Law which became
effective Nay 1, 1916 ueclaie usuiy as
illegal. Bowevei, Cential Bank Ciiculai 9uS
issueu by the Nonetaiy Boaiu of the CB,
puisuant to the poweis gianteu by the
0suiy law, which took effect on }anuaiy 1,
198S subsequently suspenueu.

ELENENTS:
1) A loan oi foibeaiance
2) An unueistanuing between paities that the loan
shall oi may be ietuineu;
S) An unlawful intent to take moie than the legal
iate foi the use of money oi its equivalent; anu
4) The taking oi agieeing to take foi the use of the
loan of something in excess of what is alloweu by
law.
BJ%J!#O 6]%6J2D,
#>?" 99(*" 0suiious tiansactions shall be goveineu
by special laws, i.e. Act no. 26SS

#>?" 9:*(" Contiacts anu stipulations, unuei any
cloak oi uevice whatevei, intenueu to ciicumvent
the laws against usuiy shall be voiu. The boiiowei

may iecovei in accoiuance with the laws on usuiy.

#>?"9:)9" 0suiious contiacts shall be goveineu by
the 0suiy Law anu othei special laws, in so fai as
they aie not inconsistent with this coue.

#.? %&" 0)**
,-." 9
#44&Z-; !C?-N &< I7?->-N?
uENERAL R0LE: Rate of Inteiest in Contiact
Exception: In absence of expiess contiact as to
inteiest iate.
1)Foi loan, foibeaiance of any money, goous, oi
cieuits = 12% p.a.(CB Ciiculai No. 416, S. 1974)
2)Rate in juugment = 6% p.a.
0R subject to iate piesciibeu by Nonetaiy Boaiu of
Cential Bank
,-." 9UCd 2&Z->N &< ?E- H&7-?C>T M&C>;
-Piesciibe the maximum iate oi iates of
inteiest foi the loan oi ienewal theieof oi
the foibeaiance of any money, goous oi
cieuits
-Change such iate oi iates whenevei
waiianteu by pievailing economic anu
social conuitions (uiauual)
-Piesciibe highei maximum iates foi loans
of low piioiity, such as consumei loans oi
ienewals theieof as well as such loans maue
by pawnshops finance companies anu othei
similai cieuit institutions (iates neeu not be
unifoim)
-Piesciibe uiffeient maximum iate oi iates
foi uiffeient types of boiiowings, incluuing
ueposits anu ueposit substitutes, oi loans of
financial inteimeuiaiies.
,-." AUC
-Eliminate, exempt fiom, oi suspenu the
effectivity of, inteiest iate ceilings on
ceitain types of loans oi ienewals theieof oi
foibeaiances of money, goous, oi cieuit
whenevei waiianteu by pievailing
economic anu social conuitions.
,-." :UC
-Piomulgate such iules anu iegulations as
may be necessaiy to implement effectively
the piovisions of this Act.
,-." AUb: Monetary Boards Guidelines in fixing
=CK87P >C?-^N &< 87?->-N?
1.The existing economic conuitions in the countiy
anu geneial iequiiements of the national economy
2. The supply of anu uemanu foi cieuit
S. The iate of inciease in the piice levels
4. Such othei ielevant ciiteiia as the Nonetaiy
Boaiu may auopt.
,-." *d #3348.CW848?T &< 6&=3&G7; I7?->-N?d
uENERAL R0LE: Compounu inteiest shall not be
ieckoneu in computing the inteiest on any
obligation, piomissoiy note oi othei instiument oi
contiact.
EXCEPTI0N: BY AuREENENT
R0LES:
-Effective iate of inteiest chaigeu by the
cieuitoi shall not exceeu the equivalent of
the maximum iate piesciibeu by the
Nonetaiy Boaiu; 0R

-If no iate of inteiest stipulateu ANB when
uebt is juuicially claimeu it shall uiaw 6%
p.a. inteiest oi such iate as may be
piesciibeu by the Nonetaiy Boaiu.

2CT=-7? &< #;5C7.- I7?->-N?d
uENERAL R0LE: No peison oi coipoiation shall
iequiie inteiest to be paiu in auvance foi a peiiou of
moie than one yeai.
EXCEPTI0N: Whenevei the inteiest is paiu in
auvance, the effective iate of inteiest chaigeu by the
cieuitoi shall not exceeu the equivalent of the
maximum iate piesciibeu by the Nonetaiy Boaiu.
6M 68>.G4C> :@*d
SECTI0N 1. The iate of inteiest, incluuing
commissions, piemiums, fees anu othei chaiges, on
a loan oi foibeaiance of any money, goous, oi

cieuits, iegaiuless of matuiity anu whethei secuieu
oi unsecuieu, that may be chaigeu oi collecteu by
any peison, whethei natuial oi juiiuical, shall not be
subject to any ceiling piesciibeu unuei oi puisuant
to the 0suiy Law, as amenueu.

_,_!I]_, #6D,
#.? %&" 0)**+ ,-." 0 ?& A
,-." 0
2>&E8W8?8&7 CPC87N? C7T 3->N&7 &> .&>3&>C?8&7 ?&
;8>-.?4T &> 87;8>-.?4T >-.-85- 87 =&7-T &> &?E->
3>&3->?T+ >-C4 &> 3->N&7C4+ &> .E&N-N 87 C.?8&7"
YEC?f a BIuBER iate of inteiest oi gieatei
sumvalue than 12% p.a.oi maximum iate
piesciibeu by Nonetaiy Boaiu anu in foice at the
time the loan oi ienewal theieof oi foibeaiance is
gianteu.
INCL0SI0NS: Commissions, piemiums, fines anu
penalties foi the loan oi ienewal theieof oi
foibeaiance of money, goous oi cieuits.
YE-7f Wheie such loan oi foibeaiance is secuieu
in whole oi in pait by a moitgage upon ieal estate
(w iegisteieu title uocument conveying ieal estate
oi inteiest theiein)
Rate of inteiest may apply to loans secuieu by othei
types of secuiity as may be specifieu by Nonetaiy
Boaiu.
,-." 'd 2>&E8W8?8&7 CPC87N? C7T 3->N&7 &>
.&>3&>C?8&7 ?& ;8>-.?4T &> 87;8>-.?4T ;-=C7;+
?CR-+ >-.-85- &> CP>-- ?& .EC>P- 87 =&7-T &>
&?E-> 3>&3->?T+ >-C4 &> 3->N&7C4
YEC?f a BIuBER iate of inteiest oi gieatei
sumvalue foi loan oi foibeaiance of money, goous,
oi cieuits than 14% p.a.oi maximum iate piesciibeu
by Nonetaiy Boaiu anu in foice at the time the loan
oi ienewal theieof oi foibeaiance is gianteu.
YE-7f Wheie such loan oi foibeaiance is N0T
SEC0REB as pioviueu in Sec. 2
,-." Ad 2>&E8W8?8&7 CPC87N? 3CZ7W>&R-> &>
pawnbrokers CP-7? ?& ;8>-.?4T &> 87;8>-.?4T
N?83G4C?-+ .EC>P-+ ;-=C7;+ ?CR- &> >-.-85-
YEC?f Any highei iate oi gieatei sumvalue foi any
loan oi foibeaiance than:
a) 2 12% pei month when the sum lent is less than
P1uu;
b) 2% pei month when the sum lent is moie than
P1uu but not exceeuing PSuu
c) anu 14% p.a. when it is moie than the amount last
mentioneu; 0R
u) the maximum iate oi iates piesciibeu by the
Nonetaiy Boaiu anu in foice at the time the loan oi
foibeaiance is gianteu
2CZ7W>&R-> &> 2CZ7W>&R->gN #P-7?d
1) Buly licenseu
2) Bas an establishment open to the public
_74CZ<G4 #.?Nd
1)To uiviue the pawn offeieu by a peison into two
oi moie fiactions in oiuei to collect gieatei inteiest
than the peimitteu by this section.
2)To iequiie the pawnei to pay an auuitional chaige
as insuiance piemium foi the safekeeping anu
conseivation of the aiticle pawneu"
!-=-;8-Nd
LJMD]!d
#>?" 9A9'" Bebtoi may iecovei the ff.:
1) Inteiest paiu in excess of the inteiest alloweu by
the usuiy laws
2) Inteiest of the excess inteiest (1) fiom the uate of
payment.
#.? %&" 0)**+ ,-." )
Bebtoi may iecovei the ff.:
1. Whole inteiest, commissions, piemiums penalties
anu suichaiges paiu oi ueliveieu.

2. Costs anu attoiney's fees
Note: Nust be biought within 2 yeais aftei payment
oi ueliveiy.
6#,Jd 6#!2] 5" 6b_# Q Lc
\C.?Nd Petitioneis contiacteu a loan fiom
iesponuents foi P17S, uuu payable withing 6 mos.
with a 6% inteiest iate pei month.
b-4;d Inteiest is invaliu foi being excessive. The
Couit uiscusseu a stiing of cases anu useu them as a
stanuaiu to concluue that the stipulateu inteiest in
the subject loan is excessive, iniquitous,
unconscionable anu exoibitant, anu theiefoie
invaliu. Puisuant to the fieeuom of contiact
piinciple embouieu in Aiticle 1Su6 of the Civil Coue,
contiacting paities may establish such stipulations,
clauses, teims anu conuitions as they may ueem
convenient, pioviueu they aie not contiaiy to law,
moials, goou customs, public oiuei, oi public policy.
This may be invokeu to annul the excessive
stipulateu inteiest.
,-." (" YE-7 N?83G4C?8&7N C>- 87 58&4C?8&7 &< ?E8N
#.?d
B-7->C4 !G4-d The following aie v0IB
Yb#Df Covenants anu stipulations containeu in
conveyances, moitgages, bonus, bills, notes, anu
othei contiacts oi eviuences of uebts, anu all
ueposits of goous oi othei things
YbJ!Jf Theie shall be stipulateu, chaigeu,
uemanueu, ieseiveu, secuieu, taken, oi ieceiveu,
uiiectly oi inuiiectly, a highei iate oi gieatei sum oi
value foi the loan oi ienewal oi foibeaiance of
money, goous, oi cieuits than is heieinbefoie
alloweu.
JK.-3?8&7Nd
a)Neiely cleiical eiioi in the computation of
inteiest anu
b)Naue without intent to evaue piovisions of this
act
,GWN-aG-7? .EC7P- 87 ?E- =CK8=G= >C?-N =C;-
WT ?E- H&7-?C>T M&C>;
Changes shall not affect the valiuity of inteiest iate
agieeu anu stipulateu at the time the loan
agieement is enteieu into, by paities to a loan
agieement, the pioceeus of which may be availeu of
paitially oi fully at some futuie time, which such
iate shall not exceeu the maximum alloweu by law

2G>.ECN- WT 877&.-7? 3G>.ECN-> &< C 7-P&?8CW4-
=->.C7?84- 3C3->+ GNG>8&GN &> &?E->Z8N-+ <&>
5C4GCW4- .&7N8;->C?8&7 W-<&>- =C?G>8?T
uENERAL R0LE: ALL0WEB
Conuitions:
1) No intention on the pait of saiu puichasei to
evaue the piovisions of this Act; anu
2) Puichase was not a pait of the oiiginal usuiious
tiansaction.
Right to Recovei: Nakei of note shall have iight to
iecovei fiom oiiginal holuei the ff:
1) the whole inteiest paiu by makei
2) In case of litigation, costs anu attoiney's fees.
,-." F
O&C7 3CT=-7?N Z8?E CP>8.G4?G>C4 3>&;G.?N CN
.&=3-7NC?8&7
B-7->C4 !G4-d All L0ANS unuei which payment is to
be maue in agiicultuial piouucts oi seeu oi in any
othei kinu of commouities shall be null anu voiu.
JK.-3?8&7d If they pioviue that such piouucts oi
seeu oi othei commouities shall be appiaiseu at the
time when the obligation falls uue at the cuiient
local maiket piice
#;5C7.87P CP>8.G4?G>C4 3>&;G.?N
B-7->C4 !G4-d Any contiact auvancing money to be
iepaiu latei in agiicultuial piouucts oi seeu oi any
othei kinu of commouities shall be unueistoou to be
a loan.
JK.-3?8&7: IF otheiwise stateu in a uocument
wiitten in a language oi uialect intelligible to the

uebtoi anu subsciibeu in the piesence of not less
than two witnesses
!-.&5->T
!J6]`J!cd any peison oi coipoiation having paiu
otheiwise shall be entitleu, in case action is biought
within ?Z& T-C>N aftei such payment oi ueliveiy, ?&
>-.&5-> C44 ?E- 3>&;G.?N &> N--; ;-485->-; CN
87?->-N?+ &> ?E- 5C4G- ?E->-&<+ ?&P-?E-> Z8?E ?E-
.&N?N C7; C??&>7-TgN <--N
A lenuei unuei the foiegoing contiacts may take
inteiest, pioviueu such inteiest be not in excess of
the iates heiein fixeu.
,-." :
2->N&7 &> .&>3&>C?8&7 NG-; NEC44 <84-d #7NZ->
Nust be in wiiting
Nust be unuei oath
Lack of oath = Aumission of facts in
complaint

,-." 9@
violation of this Act anu IRR piomulgateu by the the
Nonetaiy Boaiu will iesult in:
1) Civil Liability
2) Ciiminal Liablity
Fine: not less than PSu noi moie than PSuu
Impiisonment: not less than Su uays noi moie than
1 yeai
Both, at the courts discretion
Retuin the entiie sum ieceiveu as inteiest fiom the
paity aggiieveu.
%&?-Nd
Non-payment iesults in subsiuiaiy
impiisonment at the iate of one uay foi
eveiy 2 pesos.
In case of coipoiations, associations,
societies, oi companies the managei,
auministiatoi oi geient oi the peison who
has chaige of the management oi
auministiation of the business shall be
ciiminally iesponsible foi any violation of
this Act

II. DEPOSIT

A. The Concept of Deposit
#>?" 9:)0" A ueposit is constituteu fiom the
moment a peison ieceives a thing belonging to
anothei, with the obligation of safely keeping it anu
of ietuining the same. If the safekeeping of the
thing ueliveieu is not the piincipal puipose of the
contiact, theie is no ueposit but some othei
contiact.

#>?" 9:)A" A ueposit may be constituteu juuicially
oi extiajuuicially.

#>?" 9:)(" An extiajuuicial ueposit is eithei
voluntaiy oi necessaiy.

Beposit
Roman law concept uepositum - the
giatuitous ueposit of goous foi the benefit of the
uepositoi
! contract of neighborliness
It is an obligation constituteu fiom the
moment of ueliveiy of piopeity belonging to
anothei, foi the puipose of safekeeping anu
eventual ietuin.
piincipal obligation anu uistinguishing
chaiacteiistic is the safekeeping anu its eventual
ietuin

}uuicial - the obligation aiises as a
consequence of law, allowing the issuance of a
juuicial oiuei constituting a ueposit
Extiajuuicial
a. voluntaiy - obligation aiises as a
consequence of a contiact
"# Necessaiy - obligation aiises as a
consequence of law oi quasi-contiact

BEP0SIT N0T00N
Foi safekeeping oi
custouay
Foi consumption
LJ2],ID 6]HH]L#D_H
$%& '()*+**,-./ $%& 0&(.')*& %) 01* 2'*
3(4 "* /&(02-0%2' 5''*.0-(664 (.7 (68(4'
/&(02-0%2'
3%9("6*:;%&,%&*(6
01-./' %.64 -. ;('* %)
*<0&(=27-;-(6 7*,%'-0
>%01 ?%9("6* (.7
-??%9("6* ?(4 "* 01*
%"=*;0
@*,%'-0(&4 ;(. (68(4'
"* &*A2-&*7 0% &*02&.
01* 01-./ (0 (.4 0-?*
>%&&%8*& ;(. 2'* 01*
01-./ )%& 01* ,*&-%7
'0-,26(0*7 (.7 ;(. "*
&*A2-&*7 0% &*02&. %.64
-. ;('* %) 2&/*.0 .**7

Bepositoi can uemanu
ietuin at any time
Peiiou to ietuin must be
iespecteu by lenuei
Compensation is
geneially giatuitous
(except by mutual
agieement)
Compensation may be
giatuitous, oi with a
stipulation to pay
inteiest
Any piopeity Fungible things
Bepositoi anu
uepositaiy ielationship
Lenuei anu boiiowei
ielationship

B. VoIuntary Deposit

! GeneraI Concepts

voluntaiy Beposit
An extiajuuicial ueposit that aiises as a
consequence of a contiact
! 0bject must be movable piopeity.
! Beliveiy of the object is maue by the will of
the uepositoi.
! As a contiact, it iequiies meeting of minus
between the uepositoi anu the uepositaiy.
Real Contact
! Piopeity passes fiom one paity to anothei,
iequiiing ueliveiy iathei than meie consent.
Beliveiy is essential foi peifection.
No foimal iequisites. The contiact may be
oial oi wiitten.
Bistoiically giatuitous, but may be oneious.
Piincipal obligation - safekeeping of the
movable piopeity anu its eventual ietuin.
Contact to ueposit - valiu consensual
contiact

Bepositoi
explaineu that the sum was uisposeu of anu the
pioceeus ueposited in Zshornacks peso current
account. BPI aigues uaicia exceeueu his poweis in
enteiing into the tiansaction, since the contiact is a
uepositum, which banks uo not entei into.

D>834-U` 5" \848387& H->.EC7?N I7NG>C7.- /0@@*1

FACTS: Be Asis was at Kamayan Restauiant. She
availeu of the valet paiking seivice anu entiusteu
hei cai key to the valet countei. A paiking ticket was
issueu as ieceipt foi the cai with a piovision that
that the management anu staff will not be
iesponsible foi any loss oi uamage on the vehicle.
The cai was then paikeu by the valet attenuant at
the uesignateu paiking aiea. Latei, the attenuant
noticeu that the cai was not in its paiking slot anu
its key no longei in the box wheie the keys of cais
entiusteu to them weie usually kept. The cai was
nevei iecoveieu.

BELB: Tiiple-v is liable foi the loss of the cai.
Petitionei was constituteu as a uepositaiy of the
same cai. When Be Asis entiusteu the cai to the
valet attenuant while eating at petitionei's
iestauiant, she expecteu the cai's safe ietuin at the
enu of hei meal. It cannot evaue liability by aiguing
that neithei a contiact of ueposit noi that of
insuiance, guaianty oi suiety foi the loss of the cai
was constituteu, when Be Asis availeu of its fiee
valet paiking seivice, noi can it be alloweu to use its
exclusionaiy stipulation as shielu fiom
iesponsibility.

the peison who ueliveis oi foimally
tiansfeis, gives, oi yielus possession anu contiol
of a movable piopeity to the uepositaiy (who is
not the ownei), foi the puiposes of safekeeping.

M2I 5" I#6 C7; hN.E&>7C.R /9:FF1

FACTS: Zshoinack entiusteu to Comtiust, thiough
uaicia $Sk (gieenbacks) foi safekeeping. When he
iequesteu the ietuin of the money, Comtiust
#>?" 9:)'" An agieement to constitute a ueposit is
binuing, but the ueposit itself is not peifecteu until
the ueliveiy of the thing.

#>?" 9:)F" A voluntaiy ueposit is that wheiein the
ueliveiy is maue by the will of the uepositoi. A
ueposit may also be maue by two oi moie peisons
each of whom believes himself entitleu to the thing
uepositeu with a thiiu peison, who shall uelivei it
in a piopei case to the one to whom it belongs.

#>?" 9:):" A contiact of ueposit may be enteieu
into oially oi in wiiting.

#>?" 9:)*" A ueposit is a giatuitous contiact, except
when theie is an agieement to the contiaiy, oi
unless the uepositaiy is engageu in the business of
stoiing goous.

#>?" 9:))" 0nly movable things may be the object
of a ueposit.

#>?" 9::*" A ueposit its extinguisheu:
(1) 0pon the loss oi uestiuction of the thing
uepositeu;
(2) In case of a giatuitous ueposit, upon the ueath
of eithei the uepositoi oi the uepositaiy.

When the seal oi lock is bioken, with oi without the
uepositaiy's fault, he shall keep the seciet of the
ueposit.

Ait. 1982. When it becomes necessaiy to open a
lockeu box oi ieceptacle, the uepositaiy is
piesumeu authoiizeu to uo so, if the key has been
ueliveieu to him; oi when the instiuctions of the
uepositoi as iegaius the ueposit cannot be
executeu without opening the box oi ieceptacle#

BELB: The uocument which embouies the contiact
states that the $Sk was ieceiveu by the bank foi
safekeeping. The subsequent acts of the paities also
show that the intent of the paities was ieally foi the
bank to safely keep the uollais anu to ietuin it to
Zshoinack at a latei time. The paities uiu not intenu
to sell the 0S$ to the Cential Bank within 1 business
uay fiom ieceipt. 0theiwise, the contiact
of uepositum woulu nevei have been enteieu into at
all. Since the meie safekeeping of the gieenbacks,
without selling them to the Cential Bank within 1
business uay fiom ieceipt, is a tiansaction which is
not authoiizeu by CB Ciiculai No. 2u, it must be
consiueieu as one which falls unuei the geneial
class of piohibiteu tiansactions. Bence, it is voiu,
having been executeu against the piovisions of a
manuatoiypiohibitoiy law. Foi this ieason, it
affoius neithei of the paities a cause of action
against the othei.

! ObIigation to Safekeep
Way of the Deposit

#>?" 9:(A" The uepositaiy may change the way of
the ueposit if unuei the ciicumstances he may
ieasonably piesume that the uepositoi woulu
consent to the change if he knew of the facts of the
situation. Bowevei, befoie the uepositaiy may make
such change, he shall notify the uepositoi theieof
anu wait foi his uecision, unless uelay woulu cause
uangei.

#>?" 9:(*" The uepositaiy holuing ceitificates,
bonus, secuiities oi instiuments which eain inteiest
shall be bounu to collect the lattei when it becomes
uue, anu to take such steps as may be necessaiy in
oiuei that the secuiities may pieseive theii value
anu the iights coiiesponuing to them accoiuing to
law.
The above piovision shall not apply to contiacts foi
the ient of safety ueposit boxes.

#>?" 9:()" 0nless theie is a stipulation to the
contiaiy, the uepositaiy may commingle giain oi
othei aiticles of the same kinu anu quality, in which
case the vaiious uepositois shall own oi have a
piopoitionate inteiest in the mass.

#>?" 9:((" The uepositaiy cannot make use of the
thing uepositeu without the expiess peimission of
the uepositoi.
0theiwise, he shall be liable foi uamages.
Bowevei, when the pieseivation of the thing
uepositeu iequiies its use, it must be useu but only
foi that puipose.

#>?" 9:(F" When the uepositaiy has peimission to
use the thing uepositeu, the contiact loses the
concept of a ueposit anu becomes a loan oi
commouatum, except wheie safekeeping is still the
piincipal puipose of the contiact.
The peimission shall not be piesumeu, anu its
existence must be pioveu.

#>?" 9:F9" When the thing uepositeu is ueliveieu
closeu anu sealeu, the uepositaiy must ietuin it in
the same conuition, anu he shall be liable foi
uamages shoulu the seal oi lock be bioken thiough
his fault.
Fault on the pait of the uepositaiy is piesumeu,
unless theie is pioof to the contiaiy.
As iegaius the value of the thing uepositeu, the
statement of the uepositoi shall be accepteu, when
the foicible opening is imputable to the uepositaiy,
shoulu theie be no pioof to the contiaiy. Bowevei,
the couits may pass upon the cieuibility of the
uepositoi with iespect to the value claimeu by him.
ueposit.

#>?" 9:F0" When it becomes necessaiy to open a
lockeu box oi ieceptacle, the uepositaiy is piesumeu
authoiizeu to uo so, if the key has been ueliveieu to
him; oi when the instiuctions of the uepositoi as
iegaius the ueposit cannot be executeu without
opening the box oi ieceptacle.

Way of the Beposit
The specific mannei by which the ueliveiy
to the uepositaiy of the object may be uone.
Rules:
a. The uepositaiy may not change the way of
the way of the ueposit unless:
1. Theie is a piesumption of consent,
baseu on ciicumstances, anu
2. The uepositaiy notifies the
uepositoi anu waits foi the uecision.
0bligation to notify uoes not apply
if uelay woulu cause uangei to the
object.
b. The uepositaiy must
a. Collect inteiest of ceitificates,
bonus, secuiities, oi instiuments, when
they become uue, anu
b. Take necessaiy measuies to
pieseive theii value anu coiiesponuing
iights.
0bligation uoes not apply if the
ceitificates, bonus, secuiities, oi
instiuments aie kept puisuant to a
contiact foi the ient of safety ueposit
boxes.

c. The uepositaiy may commingle giain oi
othei aiticles of the same kinu anu quality
unless theie is a stipulation to the
contiaiy.
u. The uepositaiy cannot use the thing
uepositeu, unless
1. Iiiegulai ueposit - Theie is expiess
anu pioven peimission of the uepositoi.
B0T the piincipal puipose is still
safekeeping
2. The pieseivation of the object
iequiies its use.
B0T use is foi the limiteu puipose
of pieseivation
e. The uepositaiy must
1. Retuin a closeu anu sealeu object
in the same conuition, anu
2. Keep the seciet of the ueposit, if the
seal oi lock is bioken.
f. The uepositaiy may open a lockeu box oi
ieceptacle, only if:
1. Theie is expiess authoiity.
Theie is piesumeu authoiity. (ex. key to lock
ueliveieu, instiuctions cannot be executeu without
opening)

6# #>P&UI7;GN?>8C4 L-5? 6&>3 5" 6# C7; ,-.G>8?T
MC7R /9::'1

FACTS: Petitionei enteieu into a sale of 2 paicels of
lanu fiom spouses Pugao. Among the conuitions aie
that owners copies of the certificates of titles shall
be uepositeu in a safety ueposit box (SBB) of a bank,
to be withuiawn only upon joint signatuies of a
iepiesentative of the petitionei anu the Pugaos,
upon full payment of the puichase piice. Theieaftei,
they ienteu an SBB at Secuiity Bank. Ramos then
offeieu to buy both lots anu uemanueu the
execution of a ueeu of sale. Petitionei's piesiuent,
accompanieu by the Pugaos, pioceeueu to the bank
to open the SBB (with the banks key and the
renters key) and get the certificates of title. But the
box yielueu no such ceitificates. Bank allegeu that
petitionei has no cause of action because of the
stipulations in the contiact of lease that the bank is
not a uepositaiy of the contents of the safe anu
assumes no liability in connection with it.
BELB: The contiact is a special kinu of ueposit. It is
not an oiuinaiy lease because the full possession
anu contiol of the safety ueposit box was not given
to the joint ienteis. The piimaiy function is still the
ieceiving in custouy of funus, uocuments anu othei
valuable objects foi safekeeping. The ienting out is
not inuepenuent fiom, but ielateu to oi in
conjunction with, this piincipal function. The paities
may establish such stipulations, pioviueu they aie
not contiaiy to law, moials, goou customs, public
oiuei oi public policy. Any stipulation exempting
the uepositaiy fiom any liability aiising fiom the
loss of the thing uepositeu on account of fiauu,
negligence oi uelay woulu be voiu foi being contiaiy
to law anu public policy. Thus, the stipulations
exempting the bank fiom liability aie voiu.

DE- !&=C7 6C?E&48. M8NE&3 &< iC>& 5" L- OC 2-7C
/9:9'1

FACTS: Fathei Bela Pena was the plaintiffs uuly
authoiizeu iepiesentative to ieceive the legacy of a
chaiitable bequest maue foi the constiuction of a
lepei hospital. Fathei Bela Pena hau on hanu as
tiustee the sum of P6641. Be uepositeu P19k in his
peisonal account in BSBC-Iloilo. When he was
aiiesteu as a political piisonei, he maue an oiuei on
the bank foi the sum uepositeu in favoi of a 0S Aimy
officei (who believeu that he was an insuigent anu
that he collecteu the funus foi ievolutionaiy
puiposes). The tiust funus weie pait of the funus
uepositeu which weie iemoveu by 0S militaiy
authoiities.

BELB: Be is not liable to iepay the money. The fact
that he placeu the tiust funu in his peisonal account
uoes not auu to his iesponsibility oi make him a
uebtoi who must iesponu to all hazaius. The act of
mixing the tiust funus with his peisonal funus uiu
not make him assume an obligation uiffeient fiom
that unuei which he woulu have lain if such ueposit
hau not been maue. Neithei uiu he make himself
liable to iepay the money at all hazaius.

Bissent (Tient): When ue la Pena mixeu the tiust
funus with his own, he stampeu on the saiu funu his
own piivate maiks anu unclotheu it of all piotection
it hau. Tiustees aie not liable foi a loss by theft
without theii fault, but this exemption ceases when
they mix the tiust-money with theii own, wheieby it
loses its iuentity, anu they became meie uebtois. In
auuition, a consiueiable length of time inteiveneu
fiom the time of the ueposit until the funus weie
confiscateu. The iecoiu shows that he iepeateuly
withuiew funus fiom the account, inuicating that he
hau been using the money in violation of the tiust
imposeu in him.

1. Liability for Loss and Damages

#>?" 9:(0" The uepositaiy is obligeu to keep the
thing safely anu to ietuin it, when iequiieu, to the
uepositoi, oi to his heiis anu successois, oi to the
peison who may have been uesignateu in the
contiact. Bis iesponsibility, with iegaiu to the
safekeeping anu the loss of the thing, shall be

goveineu by the piovisions of Title I of this Book.
If the ueposit is giatuitous, this fact shall be taken
into account in ueteimining the uegiee of caie that
the uepositaiy must obseive. (1766a)

#>?" 9:('" 0nless theie is a stipulation to the
contiaiy, the uepositaiy cannot ueposit the thing
with a thiiu peison. If ueposit with a thiiu peison is
alloweu, the uepositaiy is liable foi the loss if he
uepositeu the thing with a peison who is manifestly
caieless oi unfit. The uepositaiy is iesponsible foi
the negligence of his employees.

#>?" 9:((" The uepositaiy cannot make use of the
thing uepositeu without the expiess peimission of
the uepositoi.

0theiwise, he shall be liable foi uamages.

Bowevei, when the pieseivation of the thing
uepositeu iequiies its use, it must be useu but only
foi that puipose. (1767a)

#>?" 9:(F" When the uepositaiy has peimission to
use the thing uepositeu, the contiact loses the
concept of a ueposit anu becomes a loan oi
commouatum, except wheie safekeeping is still the
piincipal puipose of the contiact.

#>?" 9:F9" When the thing uepositeu is ueliveieu
closeu anu sealeu, the uepositaiy must ietuin it in
the same conuition, anu he shall be liable foi
uamages shoulu the seal oi lock be bioken thiough
his fault.

Fault on the pait of the uepositaiy is piesumeu,

As iegaius the value of the thing uepositeu, the
statement of the uepositoi shall be accepteu, when
the foicible opening is imputable to the uepositaiy,
shoulu theie be no pioof to the contiaiy. Bowevei,
the couits may pass upon the cieuibility of the
uepositoi with iespect to the value claimeu by him.

ueposit.

#>?" 9:(:" The uepositaiy is liable foi the loss of the
thing thiough a foituitous event:

(1) If it is so stipulateu;
(2) If he uses the thing without the uepositoi's
peimission;

(S) If he uelays its ietuin;

(4) If he allows otheis to use it, even though he
himself may have been authoiizeu to use the
same.

#>?" 9::@" If the uepositaiy by foice majeuie oi
goveinment oiuei loses the thing anu ieceives
money oi anothei thing in its place, he shall uelivei
the sum oi othei thing to the uepositoi.

#>?" 9::'" The uepositoi shall ieimbuise the
uepositaiy foi any loss aiising fiom the chaiactei of
the thing uepositeu, unless at the time of the
constitution of the ueposit the foimei was not awaie
of, oi was not expecteu to know the uangeious
chaiactei of the thing, oi unless he notifieu the
uepositaiy of the same, oi the lattei was awaie of it
without auvice fiom the uepositoi.

Safekeeping
Bistinguishing chaiacteiistic of contiact of ueposit
Responsibility foi loss anu uamage aie subject to
specific iules

Liability of Depositary

Responsibility foi loss anu uamage will attach to the
uepositaiy if:

1. Bepositaiy ueposits the object with a thiiu peison,
unless theie is a stipulation allowing it
2. If ueposit to a thiiu peison is alloweu, the
uepositaiy ueposits the thing with a peison
manifestly caieless oi unfit
S. The employees of the uepositaiy aie negligent
4. Bepositaiy uses the object of the ueposit,
unless theie was expiess peimission of the
uepositoi
oi the use was necessaiy foi the limiteu
puipose of pieseivation
S. The seal oi lock of a thing ueliveieu closeu anu
sealeu is bioken thiough the fault of the
uepositaiy,
If the foicible opening is imputable to the
uepositaiy, the value of the thing uepositeu
shall be baseu on the statement of the
uepositoi, unless
a. Theie is contiaiy pioof, anu
b. The couits ueteimine otheiwise,
baseu on the cieuibility of the uepositoi.
6. Even in case of foituitous event, if:
a. It has been stipulateu
b. The uepositaiy uses the thing without the
depositors permission

c. The uepositaiy uelays the ietuin of the
object
u. The uepositaiy allows otheis to use it eve
though the uepositaiy may have been
authoiizeu to use it.
7. The uepositaiy shall uelivei the money oi
ieplacement to the uepositoi, even if he is not
liable foi having lost the thing by foice majeuie oi
goveinment oiuei.

Liability of Depositor

Responsibility foi loss anu uamage will
attach to the uepositoi only if:
! the uepositoi ueliveis a thing, the chaiactei
of which causes any loss to the uepositaiy,
unless:
a. At the time of the constitution of the
ueposit, the uepositoi was not awaie of,
oi was not expecteu to know the
uangeious chaiactei of the thing, oi
b. The uepositoi notifieu the
uepositaiy of the uangeious chaiactei, oi
the uepositaiy was in any case awaie of
the chaiactei

Liability for expenses

#>?" 9::0" If the ueposit is giatuitous, the uepositoi
is obligeu to ieimbuise the uepositaiy foi the
expenses he may have incuiieu foi the pieseivation
of the thing uepositeu.

If giatuitous
Bepositoi beais expenses foi pieseivation
If oneious
Bepositaiy beais expenses foi pieseivation

! Obligation to Return

By Whom and To Whom

#>?" 9:(0" The uepositaiy is obligeu to keep the
thing safely anu to ietuin it, when iequiieu, to the
uepositoi, oi to his heiis anu successois, oi to the
peison who may have been uesignateu in the
contiact. Bis iesponsibility, with iegaiu to the
safekeeping anu the loss of the thing, shall be
goveineu by the piovisions of Title I of this Book.
If the ueposit is giatuitous, this fact shall be taken
into account in ueteimining the uegiee of caie that
the uepositaiy must obseive.

#>?" 9:(@" If a peison having capacity to contiact
accepts a ueposit maue by one who is incapacitateu,
the foimei shall be subject to all the obligations of a
uepositaiy, anu may be compelleu to ietuin the
thing by the guaiuian, oi auministiatoi, of the
peison who maue the ueposit, oi by the lattei
himself if he shoulu acquiie capacity.

#>?" 9:(9" If the ueposit has been maue by a
capacitateu peison with anothei who is not, the
uepositoi shall only have an action to iecovei the
thing uepositeu while it is still in the possession of
the uepositaiy, oi to compel the lattei to pay him the
amount by which he may have eniicheu oi benefiteu
himself with the thing oi its piice. Bowevei, if a
thiiu peison who acquiieu the thing acteu in bau
faith, the uepositoi may biing an action against him
foi its iecoveiy.

#>?" 9:FA" The uepositaiy cannot uemanu that the
uepositoi piove his owneiship of the thing
uepositeu.

Neveitheless, shoulu he uiscovei that the thing has
been stolen anu who its tiue ownei is, he must
auvise the lattei of the ueposit.

If the ownei, in spite of such infoimation, uoes not
claim it within the peiiou of one month, the
uepositaiy shall be ielieveu of all iesponsibility by
ietuining the thing uepositeu to the uepositoi.

If the uepositaiy has ieasonable giounus to believe
that the thing has not been lawfully acquiieu by the
uepositoi, the foimei may ietuin the same.

#>?" 9:F*" When theie aie two oi moie uepositois,
if they aie not soliuaiy, anu the thing aumits of
uivision, each one cannot uemanu moie than his
shaie.

When theie is soliuaiity oi the thing uoes not aumit
of uivision, the piovisions of Aiticles 1212 anu 1214
shall govein. Bowevei, if theie is a stipulation that
the thing shoulu be ietuineu to one of the
uepositois, the uepositaiy shall ietuin it only to the
peison uesignateu.

#>?" 9090" Each one of the soliuaiy cieuitois may uo
whatevei may be useful to the otheis, but not
anything which may be piejuuicial to the lattei.

#>?" 909A" The uebtoi may pay any one of the
soliuaiy cieuitois; but if any uemanu, juuicial oi
extiajuuicial, has been maue by one of them,
payment shoulu be maue to him.

#>?" 9:F)" If the uepositoi shoulu lose his capacity
to contiact aftei having maue the ueposit, the thing
cannot be ietuineu except to the peisons who may
have the auministiation of his piopeity anu iights.


#>?" 9::9" The uepositoi's heii who in goou faith
may have solu the thing which he uiu not know was
uepositeu, shall only be bounu to ietuin the piice he
may have ieceiveu oi to assign his iight of action
against the buyei in case the piice has not been paiu
him.

What to Return

#>?" 9:F'" The thing uepositeu shall be ietuineu
with all its piouucts, accessoiies anu accessions.

Shoulu the ueposit consist of money, the
piovisions ielative to agents in aiticle 1896 shall
be applieu to the uepositaiy.

#>?" 9F:)" The agent owes inteiest on the sums he
has applieu to his own use fiom the uay on which
he uiu so, anu on those which he still owes aftei
the extinguishment of the agency.

Where to Return

#>?" 9:F(" If at the time the ueposit was maue a
place was uesignateu foi the ietuin of the thing,
the uepositaiy must take the thing uepositeu to
such place; but the expenses foi tianspoitation
shall be boine by the uepositoi.

If no place has been uesignateu foi the ietuin, it
shall be maue wheie the thing uepositeu may be,
even if it shoulu not be the same place wheie the
ueposit was maue, pioviueu that theie was no
malice on the pait of the uepositaiy.

When to Return

#>?" 9:FF" The thing uepositeu must be ietuineu
to the uepositoi upon uemanu, even though a
specifieu peiiou oi time foi such ietuin may have
been fixeu.

This piovision shall not apply when the thing is
juuicially attacheu while in the uepositaiy's
possession, oi shoulu he have been notifieu of the
opposition of a thiiu peison to the ietuin oi the
iemoval of the thing uepositeu. In these cases, the
uepositaiy must immeuiately infoim the uepositoi
of the attachment oi opposition.

#>?" 9:F:" 0nless the ueposit is foi a valuable
consiueiation, the uepositaiy who may have
justifiable ieasons foi not keeping the thing
uepositeu may, even befoie the time uesignateu,
ietuin it to the uepositoi; anu if the lattei shoulu
iefuse to ieceive it, the uepositaiy may secuie its
consignation fiom the couit.

To ietuin the object of the ueposit upon uemanu
is one of the piimaiy obligations of the uepositaiy.
Exceptions:
If the thing uepositeu is juuicially
attached while in the depositarys
possession
If the uepositaiy was notifieu of the
opposition of a thiiu peison to the ietuin
oi the iemoval of the thing uepositeu.
The uepositaiy must immeuiately
infoim the uepositoi of the
attachment oi opposition.
Not exceptions on the obligation to
ietuin, but exceptions to the
obligation to ietuin upon uemanu
! Stipulation of a peiiou is N0T an exception.

Right of Retention

#>?" 9::A" The uepositaiy may ietain the thing in
pleuge until the full payment of what may be uue
him by ieason of the ueposit.

The aiticle giants the uepositaiy a iight of
ietention ovei the piopeity as means oi uevice to
obtain payment of what may be uue because of the
ueposit.

C. Necessary Deposit

1. GeneraI Concepts

#>?" 9:)A" A ueposit may be constituteu juuicially
oi extiajuuicially.

#>?" 9:)(" An extiajuuicial ueposit is eithei
voluntaiy oi necessaiy.

#>?" 9:))" 0nly movable things may be the object
of a ueposit.

#>?" 9::)" A ueposit is necessaiy:
(1) When it is maue in compliance with a legal
obligation;
BCD When it takes place on the occasion of any
calamity, such as fiie, stoim, floou, pillage,
shipwieck, oi othei similai events.

Necessaiy ueposit - an extiajuuicial ueposit
constituteu ovei movable piopeity as a
consequence of law oi quasi-contiact, so that no
unjust eniichment will iesult fiom the juiiuical
ielation.
! Piincipal obligation: safekeeping oi
pieseivation.

2. ExampIes of Necessary Deposit

a. CompIiance with a LegaI
ObIigation

(1) When it is maue in compliance with a legal
obligation...

#>?" 9::(" The ueposit iefeiieu to in No. 1 of the
pieceuing aiticle shall be goveineu by the
piovisions of the law establishing it, anu in case of
its ueficiency, by the iules on voluntaiy ueposit...

b. On the Occasion of a CaIamity

(2) When it takes place on the occasion of any
calamity, such as fiie, stoim, floou, pillage,
shipwieck, oi othei similai events.

#>?" 9::(" ...The ueposit mentioneu in No. 2 of the
pieceuing aiticle shall be iegulateu by the
piovisions conceining voluntaiy ueposit anu by
Aiticle 2168.

#>?" 09)F" When uuiing a fiie, floou, stoim, oi
othei calamity, piopeity is saveu fiom uestiuction
by anothei peison without the knowleuge of the
ownei, the lattei is bounu to pay the foimei just
compensation.

c. Passenger Baggage with
Common Carriers

#>?" 9(*A" The piovisions of Aiticles 17SS to 17SS
shall apply to the passengei's baggage which is not
in his peisonal custouy oi in that of his employee.
As to othei baggage, the iules in Aiticles 1998 anu
2uuu to 2uuS conceining the iesponsibility of
hotel-keepeis shall be applicable.

Common caiiieis - peisons, coipoiations,
fiims, associations engageu in the business of
caiiying oi tianspoiting passengeis oi goous oi
both, by lanu, watei oi aii, foi compensation.
Law on common caiiieis goveins passengei
baggage being tianspoiteu by the common caiiiei
that is not in the custouy of the passengei oi of the
passengers employees.
! CC 17SS iequiies extiaoiuinaiy uiligence in
the vigilance ovei the goous.
Passengei baggage uepositeu with the
common caiiiei by the passengei shall be
consiueieu necessaiy ueposit.

4. HoteIs or Inns

#>?" 9::F" The ueposit of effects maue by the
tiaveleis in hotels oi inns shall also be iegaiueu as
necessaiy. The keepeis of hotels oi inns shall be
iesponsible foi them as uepositaiies, pioviueu that
notice was given to them, oi to theii employees, of
the effects biought by the guests anu that, on the
pait of the lattei, they take the piecautions which
saiu hotel-keepeis oi theii substitutes auviseu
ielative to the caie anu vigilance of theii effects.

#>?" 9:::" The hotel-keepei is liable foi the
vehicles, animals anu aiticles which have been
intiouuceu oi placeu in the annexes of the hotel. (n)

#>?" 0@@@" The iesponsibility iefeiieu to in the two
pieceuing aiticles shall incluue the loss of, oi injuiy
to the peisonal piopeity of the guests causeu by the
seivants oi employees of the keepeis of hotels oi
inns as well as stiangeis; but not that which may
pioceeu fiom any foice majeuie. The fact that
tiaveleis aie constiaineu to iely on the vigilance of
the keepei of the hotels oi inns shall be consiueieu
in ueteimining the uegiee of caie iequiieu of him.
(1784a)

#>?" 0@@9" The act of a thief oi iobbei, who has
enteieu the hotel is not ueemeu foice majeuie,
unless it is uone with the use of aims oi thiough an
iiiesistible foice. (n)

#>?" 0@@0" The hotel-keepei is not liable foi
compensation if the loss is uue to the acts of the
guest, his family, seivants oi visitois, oi if the loss
aiises fiom the chaiactei of the things biought into
the hotel. (n)

#>?" 0@@'" The hotel-keepei cannot fiee himself
fiom iesponsibility by posting notices to the effect
that he is not liable foi the aiticles biought by the
guest. Any stipulation between the hotel-keepei anu
the guest wheieby the iesponsibility of the foimei
as set foith in aiticles 1998 to 2uu1 is suppiesseu oi
uiminisheu shall be voiu. (n)

#>?" 0@@A" The hotel-keepei has a iight to ietain the
things biought into the hotel by the guest, as a
secuiity foi cieuits on account of louging, anu
supplies usually fuinisheu to hotel guests. (n)

Right of ietention - the hotel keepei, as
uepositaiy, is given the iight of ietention ovei the
piopeity as means to obtain payment of what may
be uie because of the ueposit.

cbD !-C4?T 6&>3&>C?8&7 5 6&G>? &< #33-C4N

FACTS: NcLoughlin usually stayeu at Sheiaton
uuiing his business tiips to the Philippines. Be then
met Tan, who convinceu him to tiansfei to
Tiopicana. Theieaftei, he stayeu at Tiopicana
uuiing his tiips, anu uepositeu valuables (money,
documents, and jewelry) at the hotels safety ueposit
box. 0n vaiious occasions, some of his money anu
jeweliy hau gone missing fiom the box. Be
confionteu the hotel anu uiscoveieu that Tan
openeu the safety ueposit box using the key
assigneu to him. Tan aumitteu that she hau stolen
McLoughlins key. The hotel uisclaimeu liability,
ielying on the stipulation on the teims foi use of the
safety ueposit box ieleasing the hotel fiom liability
aiising fiom loss of contents anu use of the ueposit
box.

BELB: The hotel may be liable. The stipulation
iemoving liability fiom the hotel management foi
any loss of objects in the ueposit box is null anu voiu.
The hotel-keepei cannot fiee him fiom
iesponsibility by posting notices to the effect that he
is not liable foi the aiticles biought by the guest.
Any stipulation between the hotel-keepei anu the
guest wheie the iesponsibility of the foimei set
foith in the Coue is suppiesseu oi uiminisheu shall
be voiu. The hotel business is imbueu with public
inteiest. The hotel cannot be alloweu to evaue public
policy thiough stipulations oi contiacts between
itself anu its guests. The finuing of gioss negligence
on the pait of the uefenuants is suppoiteu by
eviuence. Since 2 keys weie iequiieu to open the
ueposit box, the management hau a hanu in the
taking, unless the ieason is foice majeuie.

D. JudiciaI Deposit

#>?" 9:)A" A ueposit may be constituteu juuicially oi
extiajuuicially.

#>?" 0@@*" A juuicial ueposit oi sequestiation takes
place when an attachment oi seizuie of piopeity in
litigation is oiueieu. (178S)

#>?" 0@@)" Novable as well as immovable piopeity
may be the object of sequestiation. (1786)

#>?" 0@@(" The uepositaiy of piopeity oi objects
sequestiateu cannot be ielieveu of his iesponsibility
until the contioveisy which gave iise theieto has
come to an enu, unless the couit so oiueis. (1787a)

#>?" 0@@F" The uepositaiy of piopeity sequestiateu
is bounu to comply, with iespect to the same, with
all the obligations of a goou fathei of a family.
(1788)

#>?" 0@@:" As to matteis not pioviueu foi in this
Coue, juuicial sequestiation shall be goveineu by the
Rules of Couit.

}uuicial Beposit (oi Sequestiation)
Beposit constituteu by juuicial oiuei as a
consequence of litigation
Suppletoiily goveineu by the Rules of Couit
on attachment anu seizuie of piopeity
It is the only type of ueposit that may have
immovable piopeity as object.

#.? %&" 09'( /\-W>GC>T *+ 9:901
DE- YC>-E&GN- !-.-83?N OCZ

BJ%J!#O 6]%6J2D,
Waiehouse ieceipts may be issueu by any
waiehouseman (Sec 1).
YC>-E&GN-=C7- peison lawfully engageu in
the business of stoiing goous foi piofit (Sec
S8|aj)
YC>-E&GN-- builuing oi place wheie goous aie
uepositeu anu stoieu foi piofit (Sec 2, ueneial
Bonueu Waiehouse Act)
Receipt has no paiticulai foim but must be
wiitten oi piinteu

6&7?-7?N &< ?E- !-.-83? /,-. 01
Location of the waiehouse
Bate of issue
Consecutive numbei of ieceipt
Statement whethei goous will be ueliveieu to
the beaiei, to a specifieu peison oi to a specifieu
peison oi his oiuei
Rate of stoiage chaiges
Besciiption of goous

6&7?-7?N &< ?E- !-.-83? /,-. 01
Signatuie of Waiehouseman (may be maue by
his agent)
If waiehouseman is ownei of goous, the fact of
such owneiship
Statement of amount of auvances maue anu
liabilities incuiieu foi which the waiehouseman
claims as lien.
*Waiehouseman shall be liable foi all uamages
causeu by the omission of any of these teims

\&>= &< !-.-83?N /,-. '1
Any othei teims anu conuitions may be inseiteu by
the waiehouseman pioviueu that they shall N0T:
Be contiaiy to the piovisions in the Act;
Impaii his obligation to exeicise that uegiee of
caie in the safekeeping of the goous
Be contiaiy to law, moials, goou customs, public
oiuei oi public policy (Ait 1Su6, CC)

%&7U7-P&?8CW4- >-.-83? /,-. A1
A ieceipt in which it is stateu that the goous
ieceiveu will be ueliveieu to the uepositoi oi to any
othei specifieu peison.

%-P&?8CW4- >-.-83? /,-. *1
A ieceipt in which it is stateu that the goous
ieceiveu will be ueliveieu to the beaiei oi to the
oiuei of any peison nameu in such ieceipt.

LG348.C?- !-.-83?N /,-." )1
When moie than one negotiable ieceipt is issueu foi
the same goods, the word duplicate shall be plainly
placeu upon the face of eveiy such ieceipt.
A waiehouseman shall be liable foi all uamages
causeu by his failuie to uo this.

J<<-.? &< LG348.C?- !-.-83?N /,-." 9*1
A uuplicate ieceipt is a iepiesentation anu waiianty
by the waiehouseman that it is an accuiate copy of
an oiiginal ieceipt piopeily issueu anu uncancelleu
at the uate of the issue of the uuplicate, but shall
impose upon him no othei liability.

\Cilure to mark not negotiable
In case the waiehouseman fails to maik a non-
negotiable receipt with non-negotiable or not
negotiable, the warehouseman shall be liable as if
the ieceipt was negotiable, pioviueu that the holuei
of such ieceipt acquiieu it foi value supposing it to
be negotiable. (Sec. 7)

]MOIB#DI]%, #%L !IBbD, ]\ Y#!Jb]_,JHJ%

]W48PC?8&7 ?& L-485-> /,-." F1
Waiehouseman is bounu to uelivei the goous upon
uemanu if such uemanu is accompanieu with:
An offer to satisfy the warehousemans lien;
An offei to suiienuei the ieceipt, if negotiable
with such inuoisements as woulu be necessaiy
foi the negotiation of the ieceipts; anu
A ieauiness anu willingness to sign an
acknowleugment that they have been ueliveieu,
if such signatuie is iequesteu by the
waiehouseman.
In case the waiehouseman iefuses oi fails to uelivei
the goous upon uemanu, he has the buiuen to
establish the existence of a lawful excuse foi such
iefusal.

iGN?8<8.C?8&7 87 L-485->87P /,-." :1
A waiehouseman is justifieu in ueliveiing the goous
to one who is:

The peison lawfully entitleu to the possession of
the goous, oi his agent;
A peison entitleu to the ueliveiy of the goous by
the teims of a non-negotiable ieceipt, oi
someone who has wiitten authoiity fiom the
peison so entitleu eithei inuoiseu upon the
ieceipt oi wiitten upon anothei papei; oi
A peison in possession of a negotiable ieceipt

O8CW848?T <&> H8N;-485->T /,-." 9@1
A waiehouseman shall be liable to all having a iight
of piopeity oi possession in the goous if he
ueliveieu the goous as authoiizeu by subuivisions
(b) anu (c) of Section 9, if piioi to such ueliveiy he:
Bau been iequesteu, by oi on behalf of the
peison lawfully entitleu, not to make such
ueliveiy; oi
Bau infoimation that the ueliveiy about to be
maue was to one not lawfully entitleu to the
possession of the goous.

6C7.-44C?8&7 &< %-P&?8CW4- !-.-83?N _3&7
L-485->T &< B&&;N /,-." 991
A waiehouseman who fails to take up anu cancel a
7-P&?8CW4- >-.-83?+ the negotiation of which woulu
tiansfei the iight to the possession of the goous,
shall be liable to any one who puichases foi value 87
P&&; <C8?E such ieceipt, whethei such puichasei
acquiieu title to the ieceipt befoie oi aftei the
ueliveiy of the goous by the waiehouseman.

6C7.-44C?8&7 &< %-P&?8CW4- !-.-83?N ZE-7 2C>? &<
B&&;N L-485->-; /,-." 901
A waiehouseman who fails eithei to take up anu
cancel a 7-P&?8CW4- >-.-83?, oi to place plainly upon
it a statement of what goous oi packages have been
ueliveieu, shall be liable to any one who puichases
foi value 87 P&&; <C8?E such ieceipt, whethei such
puichasei acquiieu title to the ieceipt befoie oi
aftei the ueliveiy of any poition of the goous.

#4?->-; !-.-83?N /,-." 9'1
The alteiation of ieceipts shall not excuse the
waiehouseman fiom any liability if such alteiation
was:
Immateiial;
Authoiizeu; oi
Naue without fiauuulent intent.

#4?->C?8&7 I==C?->8C4U liable on the alteieu ieceipt
accoiuing to its oiiginal tenoi
#4?->C?8&7 HC?->8C4 /CG?E&>8j-;1U liable accoiuing
to the teims of the ieceipt as alteieu
HC?->8C4 C4?->C?8&7 877&.-7?4T =C;-U liable on the
alteieu ieceipt accoiuing to its oiiginal tenoi
HC?->8C4 C4?->C?8&7 <>CG;G4-7?4T =C;-U
Liable accoiuing to the
oiiginal tenoi of the ieceipt to a puichasei
of the ieceipt foi value without notice
Liability is limiteu only to
ueliveiy as iegaius to the alteiei anu
subsequent puichaseis with notice

O&N? &> L-N?>&T-; !-.-83?N /,-." 9A1
A couit of competent juiisuiction =CT &>;-> ?E-
;-485->T &< ?E- P&&;Nd
upon satisfactoiy pioof of such loss
oi uestiuction; anu
upon giving of a bonu with sufficient
suieties to be appioveu by the couit.
The couit may also, in its uiscietion,
&>;-> ?E- 3CT=-7? &< ?E-
warehousemans reasonable costs and
.&G7N-4 <--N.

Beliveiy of the goous unuei an oiuei of the couit
NEC44 7&? ielieve the waiehouseman fiom liability to
a peison to whom the negotiable ieceipt has been oi
shall be negotiateu foi value without notice of the
pioceeuings oi of the ueliveiy of the goous.
The waiehouseman can secuie himself on the bonu
given.

6C77&? N-? G3 ?8?4- 87 E8=N-4< /,-." 9)1
Waiehouseman cannot iefuse ueliveiy of the goous
on the giounu that he has acquiieu title oi iight to
the possession of the goous unless such iight oi title
is ueiiveu:
Biiectly oi inuiiectly fiom a tiansfei maue
by the uepositoi at the time of ueposit foi
stoiage oi subsequent theieto; oi
From the warehousemans lien.
*Boctiine of Estoppel

I7?->34-C;-> &< C;5->N- .4C8=C7?N /,-." 9(1
If theie aie seveial claimants to the goous, the
waiehouseman may iequiie all known claimants to
inteipleau, eithei as a uefense to an action biought
against him foi non-ueliveiy of the goous oi as an
oiiginal suit.

!-CN&7CW4- ?8=- ?& ;-?->=87- 5C48;8?T &< .4C8=N
/,-." 9F1
If someone has a claim to the title oi possession of
the goous anu the waiehouseman has infoimation of
such claim, the waiehouseman shall be excuseu
fiom liability foi iefusing to uelivei the goous until a
ieasonable time to asceitain the valiuity of the
auveise claim oi to biing legal pioceeuings to
compel all claimants to inteipleau.

J<<-.? &< ,C4- /,-." ')1
The waiehouseman shall not be liable foi failuie to
uelivei the goous to the uepositoi oi ownei of the
goous oi to a holuei of the ieceipt given foi the
goous when they weie uepositeu, even if such
ieceipt be negotiable C<?-> ?E- P&&;N EC5- W--7
4CZ<G44T N&4; ?& NC?8N<T C ZC>-E&GN-=C7gN 48-7+ &>
EC5- W--7 4CZ<G44T N&4; &> ;8N3&N-; &< because of
theii peiishable oi hazaiuous natuie.

6#,Jd 6]%,]OIL#DJL DJ!HI%#O, ` #!DJk
/9:(*1
\C.?Nd CTI, as an ownei of a bonueu waiehouse,
ieceiveu 19S bales of high uensity compiesseu iaw
cotton. It was unueistoou that it woulu keep the
cotton in behalf of Luzon Biokeiage, until the
consignee Paiamount Textile hau openeu a lettei of
cieuit. Allegeuly by viitue of a foigeu peimit to
uelivei the cotton, Aitex was able to obtain ueliveiy
of the saiu goous. CTI subsequently fileu an action to
iecovei the goous against Aitex.
!C?8&d The lowei couit uismisseu the case, iuling
that CTI uoes not have a cause of action against
Aitex. At the time the goous weie ueliveieu to Aitex,
CTI was alieauy paiu the waiehousing chaiges. The
ieal paities-in-inteiest aie Luzon Biokeiage as the
uepositoi, Paiamount Textile as the consignee,
Auolph Banslik as shippei anu the uoveinment with
iespect to the uuties anu taxes uue. CTI, not being
the ownei of the cotton, cannot file this action to
iecovei the goous.

O8CW848?T <&> B&&;N

O8CW848?T <&> 7&7U-K8N?-7.- &> =8N;-N.>83?8&7 &<
P&&;N /,-." 0@1
A waiehouseman NEC44 W- 48CW4- to the holuei of
ieceipt foi uamages causeu by the non-existence of
the goous oi by the failuie of the goous to
coiiesponu with the uesciiption in the ieceipt.
Bowevei, if the uesciiption consists meiely of maiks
oi labels upon the goous oi packages containing
them, the waiehouseman is 7&? 48CW4- even if the
goous aie not of the kinu as inuicateu in the maiks
oi labels.

O8CW848?T <&> 6C>- &< B&&;N /,-." 091
A waiehouseman shall be liable foi any loss oi
injuiy to the goous causeu by his failuie to exeicise
such caie in iegaiu to them as a ieasonably caieful
ownei of similai goous woulu exeicise (uiligence of
a goou fathei of a family).
Be shall not be liable, in the absence of an
agieement to the contiaiy, foi any loss oi injuiy to
the goous which coulu not have been avoiueu by the
exeicise of such caie.

B&&;N =GN? W- R-3? N-3C>C?- /,-." 001
A waiehouseman shall keep the goous so fai
sepaiate fiom goous of othei uepositois anu fiom
othei goous of the same uepositoi foi which a
sepaiate ieceipt has been issueu.
To peimit at all times the iuentification anu
ieueliveiy of the goous uepositeu.

6&==87P487P &< \G7P8W4- B&&;N /,-." 0'1
If authoiizeu by agieement oi by custom, a
waiehouseman may mingle fungible goous with
othei goous of the same kinu anu giaue.
The vaiious uepositois of the mingleu goous shall
own the entiie mass in common anu each uepositoi
shall be entitleu to such poition theieof as the
amount uepositeu by him beais to the whole.

O8CW848?T ?& L-3&N8?&>N &< 6&==87P4-; B&&;N
/,-." 0A1
Waiehouseman shall be N-5->C44T 48CW4- to each
uepositoi foi the caie anu ieueliveiy of his shaie of
such mass to the same extent anu unuei the same
ciicumstances as if the goous hau been kept
sepaiate.

#??C.E=-7? &> O-5T G3&7 B&&;N /,-." 0*1
uoous, foi which a negotiable ieceipt was issueu,
cannot be attacheu by gainishment oi be levieu
upon unuei an execution while in the possession of
the waiehouseman, G74-NN ?E- >-.-83? W- <8>N?
NG>>-7;->-; ?& E8=+ &> 8?N 7-P&?8C?8&7 -7S&87-;.
The waiehouseman cannot be compelleu in any case
to uelivei up the actual possession of the goous

G7?84 ?E- >-.-83? 8N NG>>-7;->-; ?& E8= &>
8=3&G7;-; WT ?E- .&G>?.
0nly applies if the peison uepositing is the ownei oi
a peison whose act woulu binu the ownei.

Creditors remedies to reach negotiable receipts
/,-." 0)1
A cieuitoi, whose uebtoi is the ownei of a
negotiable ieceipt, shall be entitleu to such aiu fiom
couits, by injunction anu otheiwise, in C??C.E87P
NG.E >-.-83? oi in satisfying the claim by means
theieof as is alloweu at law oi in equity in iegaiu to
piopeity which cannot ieauily be attacheu oi levieu
upon by oiuinaiy legal piocess.

Warehousemans Lien

%& ;-485->T G7?84 48-7 8N NC?8N<8-; /,-." '91
A waiehouseman having a lien valiu against the
peison uemanuing the goous may iefuse to uelivei
the goous to him until the lien is satisfieu.

O8-7 ;&-N 7&? 3>-.4G;- &?E-> >-=-;8-N /,-." '01
Whethei a waiehouseman has oi has not a lien upon
the goous, he is entitleu to all iemeuies alloweu by
law to a cieuitoi against a uebtoi foi the collection
fiom the uepositoi of all the chaiges anu auvances
which the uepositoi has expiessly oi implieuly
contiacteu with the waiehouseman to pay.

,C?8N<C.?8&7 &< O8-7 WT ,C4- /,-." ''1
Waiehouseman shall give a Z>8??-7 7&?8.- to the
peison on whose account the goous aie helu, anu to
any othei peison claiming an inteiest in the goous.
Such notice shall be given by ueliveiy in
peison oi by iegisteieu lettei.

Contents of notice:
Itemized statement of warehousemans
claim anu uates when it became uue;
Biief uesciiption of the goous against which
the lien exist
A uemanu that such claim shall be paiu on
oi befoie a specifieu uate, not less than 1u
uays fiom the ueliveiy of the notice;
Statement that unless the claim is paiu
within the time specifieu, the goous will be
auveitiseu foi sale anu solu by auction
A sale may be hau to satisfy any valiu claim of the
waiehouseman foi which he has a lien on the goous.
The sale shall be in the place wheie the lien was
acquiieu oi if such place is manifestly unsuitable foi
such puipose, at the neaiest suitable place.

Aftei the specifieu uate of payment has elapseu, an
auveitisement of the sale shall be publisheu once a
week foi 2 consecutive weeks in a newspapei. If
theie is no newspapei in such place, it shall be
posteu at least 1u uays in not less than 6
conspicuous places theiein.
The auveitisement shall uesciibe the goous to be
solu anu shall state the name of the ownei oi peison
on whose account the goous aie helu.

The sale shall not be helu less than 1S uays fiom the
time of the fiist publication. Fiom the pioceeus of
the sale, the waiehouseman shall satisfy his lien,
incluuing the ieasonable chaiges of notice,
auveitisement anu sale.

The balance, if any, shall be helu by the
waiehouseman anu ueliveieu on uemanu to the
peison to whom he woulu have been bounu to
uelivei.

At any time befoie the goous aie solu, any peison
claiming a iight of piopeity oi possession theiein
may pay the waiehouseman the amount necessaiy
to satisfy his lien anu to pay the ieasonable expenses
anu liabilities incuiieu in seiving notices,
auveitising anu piepaiing foi the sale.

2->8NECW4- C7; bCjC>;&GN B&&;N /,-." 'A1
uoous which aie:
Peiishable in natuie; oi
Will ueteiioiate gieatly in value; oi
By theii ouoi, leakage, inflammability oi
explosive in natuie; anu
Will be liable to injuie othei piopeity

Waiehouseman may:
give 7&?8.- to the ownei oi to the peison in
whose name the goous aie stoieu, to satisfy
the lien upon such goous, anu to iemove
them fiom the waiehouse
If such peison fails to satisfy the lien oi iemove the
goous, the waiehouseman may sell the goous at
public oi piivate sale without auveitising

If waiehouseman is unable to sell, he may uispose of
them in any lawful mannei, anu shall incui no
liability.
The pioceeus of the sale shall be uisposeu of in the
same way as the pioceeus of sales unuei Sec SS.

]?E-> H-?E&;N &< J7<&>.87P O8-7 /,-. '*1
0thei iemeuies alloweu by law shall not be
piecluueu foi the enfoicement of a lien against
peisonal piopeity. The iight to iecovei so much of
the warehousemans claim which will iemain unpaiu
by the pioceeus of the sale of the piopeity shall not
be baiieu.

J<<-.? &< ,C4- /,-." ')1
Aftei the goous have been solu to satisfy the lien oi
been uisposeu of because of theii peiishable oi
hazaiuous natuie, the waiehouseman shall not
theieaftei be liable foi failuie to uelivei the goous
to:
Bepositoi; oi
0wnei of the goous; oi
To holuei of the ieceipt given foi the goous
when they weie uepositeu, even if such ieceipt
be negotiable.

%-P&?8C?8&7 C7; D>C7N<->

/,-." '(1 %-P&?8CW4- >-.-83? =CT W- 7-P&?8C?-;
WT ;-485->Td
Wheie, by the teims of the ieceipt, the
waiehouseman unueitakes to ;-485-> ?E-
P&&;N ?& ?E- W-C>->; oi
Wheie, by the teims of the ieceipt, the
waiehouseman unueitakes to uelivei the goous
to the &>;-> &< C N3-.8<8-; 3->N&7, anu such
peison oi a NGWN-aG-7? 87;&>N-- of the ieceipt
has inuoiseu it in blank oi to beaiei.
Wheie, by the teims of the ieceipt, the goous
aie ueliveiable to beaiei oi wheie a negotiable
ieceipt has been inuoiseu in blank oi to beaiei,
any holuei may inuoise the same to himself oi
to any othei specifieu peison, anu in such case
the ieceipt shall only be negotiateu by the
inuoisement by such inuoisee.
,3-.8C4 87;&>N-=-7?- specifies the peison to whom
oi to whose oiuei the goous aie to be ueliveieu.

%-P&?8C?8&7 &< 7-P&?8CW4- >-.-83? WT
87;&>N-=-7? /,-." 'F1
A negotiable ieceipt by the teims of which the goous
aie ueliveiable to a specifieu peison may be
7-P&?8C?-; &74T WT ?E- 87;&>N-=-7? &< NG.E
3->N&7"
If inuoiseu to a specifieu peison, it may be
negotiateu again by the inuoisement of such peison
in blank, to beaiei oi to anothei specifieu peison.
If inuoiseu in blank oi to beaiei, the uocument
becomes negotiable by ueliveiy.

D>C7N<-> &< !-.-83? /,-." ':1
A ieceipt which in its foim can be negotiateu by
ueliveiy may be tiansfeiieu by the holuei thiough
ueliveiy to a puichasei oi uonee.
A non-negotiable ieceipt cannot be negotiateu, anu
its inuoisement gives the tiansfeiee no auuitional
iight.

YE& =CT 7-P&?8C?- C >-.-83?f
The ownei
Peison to whom the possession oi custouy of
the ieceipt has been entiusteu by the ownei
If by the teims of the ieceipt, the
waiehouseman unueitakes to uelivei the
goous to the oiuei of the peison to whom
the possession oi custouy of the ieceipt has
been entiusteu, oi if at the time of such
entiusting, the ieceipt is in such foim that it
may be negotiateu by ueliveiy.

6#,Jd ,Ic 6]%B MIJ%B Q 6]" ` b,M6 /9:'01
\C.?Nd 0tto Ranft bought bales of hemp (abaca) fiom
plaintiff, anu the two paities agieeu on the piice
theiefoi (PS1,6SS). 0n the same uay, the plaintiff
sent the queuans anu the invoice to Ranft with the
unueistanuing that the payment woulu be maue
against the same queuans. As in pievious
tiansactions of the same kinu between the bank anu
the plaintiff, the queuans weie paiu one oi two uays
aftei theii ueliveiy. Subsequently, Ranft pleugeu
ceitain negotiable waiehouse ieceipts (queuans) to
BSBC in oiuei to secuie the payment of his pie-
existing uebts to the lattei. 0n the same night, Ranft
uieu. Plaintiff uemanus the ietuin of the queuans
fiom BSBC, alleging that the subject goous of the
ieceipt have not yet been paiu.
!C?8&d If the ownei of the goous peimits anothei to
have the possession oi custouy of negotiable

waiehouse ieceipts iunning to the oiuei of the
lattei, oi to the beaiei, it is a iepiesentation of title
upon which bona fiue puichaseis foi value aie
entitleu to iely. The negotiable queuans weie uuly
negotiateu to the bank anu nothing on the iecoiu
shows that BSBC is guilty of fiauu in the saiu
tiansaction.

!8PE?N &< 3->N&7N ?& ZE&= C >-.-83? ECN W--7
#$%&'()'$*
Title of the peison negotiating the ieceipt ovei
the goous coveieu by the ieceipt;
Title of the peison (uepositoi oi ownei) to
whose oiuei by the teims of the ieceipt the
goous weie to be ueliveieu, ovei such goous;
The uiiect obligation of the waiehouseman to
holu possession of the goous foi him, as if the
waiehouseman uiiectly contacteu with him.

!8PE?N &< 3->N&7N ?& ZE&= >-.-83? ECN W--7
'+)#,-$++$* /,-." A01
Title to the goous as against the tiansfeioi;
The iight to notify the waiehouseman of the
tiansfei theieof; anu
The iight, theieaftei, to acquiie the obligation of
the waiehouseman to holu the goous foi him.
Right of the tiansfeiee is not absolute as it is
subject to the teims of any agieement with the
tiansfeioi. Be meiely steps into the shoes of the
tiansfeioi.

D>C7N<-> &< >-.-83?

%&7U7-P&?8CW4- >-.-83?d tiansfei uoes not effect
the ueliveiy of the goous coveieu by it. Befoie
notification, the waiehouseman is not bounu to the
tiansfeiee.
%-P&?8CW4- >-.-83?d the goous cannot be attacheu
oi be levieu unuei an execution unless the ieceipt be
fiist suiienueieu to the waiehouseman oi its
negotiation enjoineu.

D>C7N<-> &< 7-P&?8CW4- >-.-83? Z8?E&G?
87;&>N-=-7?
The tiansfeiee acquiies a iight against the
tiansfeioi to compel him to inuoise the ieceipt,
unless a contiaiy intention appeais.
The negotiation shall take effect as of the time when
the inuoisement is actually maue
.
YC>>C7?8-N &7 NC4- &< >-.-83?
That the ieceipt is genuine;
That he has a legal iight to negotiate oi tiansfei
it;
That he has no knowleuge of any fact which
woulu impaii the valiuity oi woith of the
ieceipt; anu
That he has a iight to tiansfei the title to the
goous anu that the goous aie fii foi a paiticulai
puipose
I7;&>N-> 7&? C PGC>C7?&>
The inuoisement of the ieceipt shall not make the
inuoisei liable foi any failuie on the pait of the
waiehouseman oi pievious inuoiseis of the ieceipt
to fulfill theii iespective obligations.

%& 8=348-; ZC>>C7?T <>&= C..-3?87P 3CT=-7? &<
C ;-W?
A moitgagee, pleugee oi holuei foi secuiity of
ieceipt who, in goou faith, uemanus oi ieceives
payment of the uebt foi which such ieceipt is
secuiity, shall not be ueemeu to iepiesent oi to
waiiant the genuineness of such ieceipt oi the
quantity oi quality of the goous theiein uesciibeu.

YE-7 7-P&?8C?8&7 7&? 8=3C8>-; WT <>CG;+
=8N?CR- &> ;G>-NN
The 5C48;8?T &< ?E- 7-P&?8C?8&7 &< C >-.-83? 8N 7&?
8=3C8>-; by the fact that such negotiation was:
A bieach of uuty on the pait of the peison
making the negotiation; oi
By the fact that the ownei of the ieceipt was
inuuceu by fiauu, mistake, oi uuiess to entiust
the possession oi custouy of the ieceipt to such
peison
If the peison to whom the ieceipt was
negotiateu paiu value theiefoi without notice of
bieach of uuty, oi fiauu, mistake oi uuiess.

,GWN-aG-7? %-P&?8C?8&7
The peison who solu moitgageu oi pleugeu the
goous in a waiehouse foi which a negotiable ieceipt
has been issueu, oi the ieceipt iepiesenting such
goous, continues in possession of the negotiable
ieceipt, the subsequent negotiation theieof to any
peison ieceiving the same 87 P&&; <C8?E+ <&> 5C4G-
C7; Z8?E&G? 7&?8.- &< ?E- 3>-58&GN NC4-+
=&>?PCP- &> 34-;P-+ shall have the same effect as if
the fiist puichasei of the goous oi ieceipt hau
expiessly authoiizeu the subsequent negotiation.

Negotiation defeats vendors lien
Wheie a negotiable ieceipt has been issueu foi
goods, no sellers lien or right of stoppage in transitu
shall uefeat the iights of any puichasei foi value in
goou faith to whom such ieceipt has been
negotiateu.
The waiehouseman shall not be obligeu to uelivei oi
be justifieu in ueliveiing the goous to an unpaiu
sellei unless the ieceipt is fiist suiienueieu foi
cancellation.

6>8=87C4 O8CW848?T

INNG- &< >-.-83? <&> P&&;N 7&? >-.-85-;
Waiehouseman, oi his officei, agent oi seivant;
Issues oi aius in issuing a ieceipt;
Knowing that the goous subject of the ieceipt
have not been actually ieceiveu, oi aie not
unuei his actual contiol at the time of issuing
such ieceipt.
Penalty: Impiisonment not exceeuing S yeais oi a
fine not exceeuing P1u,uuu, oi both.

INNG- &< >-.-83? .&7?C8787P <C4N- N?C?-=-7?
Fiauuulently issues oi aius in fiauuulently
issuing a ieceipt foi goous knowing that it
contains any false statement.
Penalty: Impiisonment not exceeuing 1 yeai, oi a
fine not exceeuing P2,uuu, oi both.

INNG- &< ;G348.C?- >-.-83? 7&? N& =C>R-;
Issues oi aius in issuing a uuplicate oi
auuitional negotiable ieceipt foi the same
goous;
Knowing that a foimei negotiable ieceipt foi the
same goous oi any pait of them is outstanuing
anu uncancelleu;
Without plainly placing upon the face theieof
the word Duplicate.
Penalty: Impiisonment not exceeuing S yeais, oi a
fine not exceeuing P1u,uuu, oi both.

Issue for warehousemans goods of receipt
ZE8.E ;&-N 7&? N?C?- ?EC? <C.?
Waiehouseman, his officeis, agents oi seivants
Who is ownei eithei solely oi jointly oi in
common with otheis
Knowing this owneiship ;
Issues oi aius in issuing a negotiable ieceipt foi
such goous without stating such owneiship.
Penalty: Impiisonment not exceeuing one yeai, oi a

L-485->T &< P&&;N Z8?E&G? &W?C8787P 7-P&?8CW4-
>-.-83?
Beliveis goous out of the possession of such
waiehouseman;
Knowing that the negotiation of a negotiable
ieceipt, which woulu tiansfei the iight to the
possession of such goous, is outstanuing anu
uncancelleu;
Without obtaining the possession of such
ieceipt at oi befoie the time of such ueliveiy.
Penalty: Impiisonment not exceeuing one yeai, oi a

%-P&?8C?8&7 &< >-.-83? <&> =&>?PCP-; P&&;N
Any peison who:
Beposits goous to which he has no title, oi upon
which theie is a lien oi moitgage; anu
Takes a negotiable ieceipt foi such goous which
he afteiwaius negotiates foi value with intent to
ueceive;
Without uisclosing his want of title oi the
existence of the lien oi moitgage.
Penalty: Impiisonment not exceeuing 1 yeai, oi a

#6D 'F:' /iC7GC>T 9+ 9:'01
DbJ BJ%J!#O M]%LJL Y#!Jb]_,J O#Y
#7 #.? !-PG4C?87P ?E- MGN87-NN &< !-.-8587P !8.-
<&> ,?&>CP-

L-<878?8&7 &< D->=N
YC>-E&GN-- eveiy builuing, stiuctuie, oi othei
piotecteu inclosuie in which commouity is kept foi
stoiage.
!8.-- palay, in bunules oi in giains, oi cleaneu iice,
oi both.
YC>-E&GN-=C7- a peison engageu in the business
of ieceiving commouity foi stoiage
!-.-83?- any ieceipt issueu by a waiehouseman foi
commouity ueliveieu to him.

MGN87-NN &< !-.-8587P 6&==&;8?T <&> ,?&>CP-

Any contiact oi tiansaction wheiein the
waiehouseman is obligateu to ietuin the veiy
same commouity ueliveieu to him oi to pay its
value;
commouity ueliveieu is to the milleu foi anu on
account of the ownei theieof;
commouity ueliveieu is commingleu with
commouity ueliveieu by oi belonging to othei
peisons, anu the waiehouseman is obligateu to
ietuin commouity of the same kinu oi to pay its
value.
,-.G>87P C O8.-7N-
Necessaiy befoie engaging in the business of
ieceiving commouity foi stoiage. It shall be annual
anu shall expiie on the S1
st
of Becembei. This is
secuieu fiom the Biiectoi of the Buieau of
Commeice anu Inuustiy (Bepaitment of Tiaue anu
Inuustiy)
The peison who violates this piovision shall be
guilty of misuemeanoi.

Penalty: Impiisonment of not less than 1 month oi
fine of not moie than PS,uuu, oi both.

#3348.C?8&7 <&> O8.-7N-
Place oi places wheie the business anu the
waiehouse aie to be establisheu oi locateu
Naximum quantity of commouity to be ieceiveu
Accompanieu by a cash bonu oi bonu secuieu by
ieal estate oi signeu by a uuly authoiizeu bonuing
company.

Amount shall be fixeu by Biiectoi of the Buieau
(BTI) at not less than SS anu 1S% of the maiket
value of the maximum quantity of commouity to be
ieceiveu

Eveiy peison licenseu to engage in the business of
ieceiving commouity foi stoiage shall insuie the
commouity so ieceiveu anu stoieu against fiie.

Any peison injuieu by the bieach of any obligation
to secuie which a bonu is given shall be entitleu to
sue on the bonu in his own name in any couit of
competent juiisuiction to iecovei the uamages he
may have sustaineu by such bieach.

]W48PC?8&7N &< YC>-E&GN-=C7
Eveiy licenseu waiehouseman shall ieceive foi
stoiage, so fai as his license anu the capacity of his
waiehouse peimit, any commouity of the kinu
customaiily stoieu theiein by him.

Eveiy licenseu waiehouseman shall keep a complete
iecoiu of all the commouity ieceiveu by him, of the
ieceipts issueu theiefoi, of the withuiawals, of the
liquiuation, anu of all ieceipts ietuineu to anu
cancelleu by him. Be shall make iepoits to the
Biiectoi conceining his waiehouse anu the
conuition, contents opeiation anu business theieof.

`8&4C?8&7N &< ?E- #.?
Any licenseu waiehouseman
Receiving a quantity of commouity gieatei that
that specifieu in his application anu license
Penalty: fine of uouble the maiket value of the
commouity so ieceiveu in excess of the quantity of
commouity he is authoiizeu to ieceive

`8&4C?8&7N &< ?E- #.?
Any peison
Enteiing into connivance oi combination with
any waiehouseman that is not licenseu
With the puipose of evauing the piovisions of
Sec S (secuiing license)
Penalty: impiisonment of not moie than 1 month oi
fine of not moie than P2uu, oi both.

,GN3-7N8&7^!-5&.C?8&7 &< O8.-7N-
The Biiectoi of the Buieau of Commeice anu
Inuustiy may, aftei heaiing has been affoiueu to the
licensee, suspenu oi ievoke any license issueu to
any waiehouseman foi any violation of oi failuie to
comply with any piovision of this Act.

6#,Jd 2%M ` ,J
\C.?Nd A pievious uecision of the Couit helu that
PNB has iights ovei the sugai stocks coveieu by S
waiehouse ieceipts stoieu in the waiehouse of
piivate respondents, Noahs Ark. Thereafter, when
PNB fileu a Notion foi Execution of the juugment,
the tiial couit iuleu that PNB can claim the goous
aftei payment of stoiage fees. PNB contenus this
alleging that Noahs Ark has waived its lien over the
goous when it uiu not biing up the same uuiing the
pievious case.
!C?8&d 0nuei Act 21S7, stoiage fees aie chaigeable.
What was meiely iesolveu was the issue of
owneiship ovei the sugai stocks so theie was no

point in taking up the warehousemans lien. Sec. 31
of Act 21S7 pioviues that the waiehouseman may
iefuse ueliveiy of the goous until the lien is satisfieu.

SECURITY TRANSACTIONS

II. THE CONCEPT OF SECURITY

C. General Concepts
Someia notes:
In the context of cieuit tiansactions, a
contiact of secuiity (oi a secuiity
tiansaction) is uefineu as a means by which
the paities to a piincipal obligation ensuie
its enfoicement, piotect an inteiest in
piopeity, oi ensuie that the peison to be
maue secuie (secuieu cieuitoi) can be
compensateu foi loss.
It is an accessoiy obligation that mitigates
the iisk that the uebtoi will uefault on a
piincipal obligation
A secuieu obligation is a piincipal
obligation the enfoicement of which is
ensuieu by a contiact of secuiity, while one
that is not, is an unsecuieu obligation.

5. Distinguished from Securities

!"#" %&" F(:: /,-.G>8?8-N !-PG4C?8&7 6&;-1+ ,-."
'"9 "Secuiities" aie shaies, paiticipation oi inteiests
in a coipoiation oi in a commeicial enteipiise oi
piofit-making ventuie anu eviuenceu by a
ceitificate, contiact, instiuments, whethei wiitten
oi electionic in chaiactei. It incluues:
(a) Shaies of stocks, bonus, uebentuies,
notes eviuences of inuebteuness, asset-
backeu secuiities;
(b) Investment contiacts, ceitificates of
inteiest oi paiticipation in a piofit shaiing
agieement, ceitifies of ueposit foi a futuie
subsciiption;
(c) Fiactional unuiviueu inteiests in oil, gas
oi othei mineial iights;
(u) Beiivatives like option anu waiiants;
(e) Ceitificates of assignments, ceitificates
of paiticipation, tiust ceitificates, voting
tiust ceitificates oi similai instiuments
(f) Piopiietaiy oi nonpiopiietaiy
membeiship ceitificates in coipoiations;
anu
(g) 0thei instiuments as may in the futuie
be ueteimineu by the Commission.

Someia notes:
Since bonus, notes, anu uebentuies aie
eviuences of inuebteuness anu aie the
common commeicial foims that contiacts of
loan take, theiefoie, unuei the Secuiity
Regulation Coue, such contiacts aie
consiueieu as secuiities, whethei they aie
secuieu oi unsecuieu.

6. Distinguished from Securitization

Someia notes:

Secuiitization
piocess by which loans anu othei uebts
with an expecteu cash payment stieam
(such as inteiest in the case of simple loans)
aie solu on a without iecouise basis by a
sellei to a special puipose entity (the
issuei) which in tuin issues secuiities (such
as a bonu oi othei instiument) that uepenu,
foi theii payment, in the expecteu cash
payment stieam.
way to conveit assets (such as inteiest
ieceivable fiom a simple loan) into
secuiities foi iesale in the financial maiket,
allowing the sellei to iemove assets fiom its
books, anu theieby impiove its capital iatio
anu liquiuity, anu to make new loans with
the pioceeus fiom the sale of the new
secuiity, if it so chooses.
piocess of uistiibuting the iisk of uefault oi
non-payment of loans anu othei uebts by
aggiegating these uebts into tianches baseu
on iisk anu then issuing new secuiities
backeu by the aggiegateu uebt (asset-
backeu secuiities) wheiein secuiities with
highei iisks pioviue highei yielus.

Secuiitization Secuiity tiansaction
uistiibutes the iisk of
uefault oi non-payment
to those willing to
assume it.
mitigates iisk

D. Events of Default

Someia notes:
Beiiving fiom the accessoiy natuie of a
secuiity tiansaction, it is ueemeu that once
the piincipal obligation (the enfoicement of
which is the puipose of the secuiity) is
complieu with, the secuiity is automatically
extinguisheu.
0n the othei hanu, if the piincipal
obligation becomes uue anu uemanuable
anu the piincipal uebtoi uefaults, the
cieuitoi may elect to:

1. biing an oiuinaiy action foi specific
peifoimance of the piincipal
obligation; oi
2. elect to enfoice the secuiity, as a
secuieu cieuitoi.
Enfoicement of the secuiity is piopei not
only in case of mora solvendi (debtors
uefault) but also in case of uelay in the
fulfilment of the piincipal obligation by
ieason of a cause imputable to the uebtoi.
The iequisites of uefault aie as follows:
1. The piincipal obligation is
uemanuable anu liquiuateu;
2. The uebtoi uelays peifoimance;
anu
S. The cieuitoi juuicially oi
extiajuuicially iequires the debtors
peifoimance.
It shoulu be noteu that in cieuit
tiansactions, it is customaiy foi paities to
uefine othei events of uefault in the
contiact foi the piincipal obligation, such
as, but not limiteu to:
1. Failuie to submit iequiieu iepoits
2. Naintain anu file appiopiiate tax
ietuins
S. Pieseive the secuiity
If any event of uefault takes place, the
cieuitoi is given the iight to acceleiate all
outstanuing obligations, ueclaiing them as
immeuiately uue anu uemanuable, which
may leau to the enfoicement of the
obligation.

E. Kinds of Security Transactions

1. Personal Security Transactions

Someia notes:
This is a contiactual obligation foi the
iepayment of a uebt binuing a peison, as
uistinguisheu fiom piopeity.
It is an obligation of a peison, whethei
natuial oi juiiuical, othei than the piincipal
uebtoi to ensuie the fulfilment of a
piincipal obligation.
A guaianty is a contiact of peisonal
secuiity.
In peisonal secuiity tiansactions, the
faithful peifoimance of the obligation by the
piincipal uebtoi is secuieu by the peisonal
commitment of anothei.

2. Real Security Transactions

Someia notes:
This kinu of secuiity tiansaction is an
encumbiance of piopeity (the collateial)
given to guaiantee the fulfilment of an
obligation, especially the assuiance that a
cieuitoi will be iepaiu any money oi cieuit
extenueu to a uebtoi, usually with inteiest.
An example of a contiact of ieal secuiity is a
moitgage.
In a contiact of ieal secuiity, the cieuitoi
acquiies a secuiity inteiest in the collateial
foi puiposes of ensuiing the fulfilment of
the piincipal obligation.
A secuiity inteiest, in tuin, is a piopeity
inteiest cieateu by agieement oi by
opeiation of law to secuie the peifoimance
of an obligation.
A secuiity inteiest is specifically uefineu
unuei the law as:

2"L" %&" 99* &< 9:('+ ,-." ' /E1 "Secuiity Inteiest"
means a piopeity inteiest in goous, uocuments oi
instiuments to secuie peifoimance of some
obligations of the entiustee oi of some thiiu peisons
to the entiustei anu incluues title, whethei oi not
expiesseu to be absolute, whenevei such title is in
substance taken oi ietaineu foi secuiity only.

3. In the Context of Insolvency

!"#" %&" 9@9A0+ ,-." A /31 H)'+4?#)0 shall iefei to
the financial conuition of a uebtoi that is geneially
unable to pay its oi his liabilities as they fall uue in
the oiuinaiy couise of business oi has liabilities that
aie gieatei than its oi his assets.

!"#" %&" 9@9A0+ ,-." A
(ll) I#!("#$ 6&"08 shall iefei to a secuieu cieuitoi oi
the agent oi iepiesentative of such secuieu cieuitoi.
(kk) I#!("#$ !"#$/0+" shall iefei to a cieuitoi with a
secuieu claim.
(jj) I#!("#$ !4&/- shall iefei to a claim that is
secuieu by a lien.
(qq) J)'#!("#$ !"#$/0+" shall iefei to a cieuitoi with
an unsecuieu claim.
(pp) J)'#!("#$ !4&/- shall iefei to a claim that is not
secuieu by a lien.
(t) K/#) shall iefei to a statutoiy oi contiactual claim
oi juuicial chaige on ieal oi peisonal piopeity that
legality entities a cieuitoi to iesoit to saiu piopeity
foi payment of the claim oi uebt secuieu by such
lien.

Someia notes:
The Financial Rehabilitation anu Insolvency
Act (FRIA) of 2u1u uefines the conuition of
being insolvent in the abovementioneu
piovision.

The FRIA also pioviues foi a classification of
cieuitois.
A secuieu cieuitoi, in the context of
insolvency, is a cieuitoi that has in its
favoui a ieal secuiity tiansaction, that is, a
claim secuieu by statutoiy, contiactual, oi
juuicial chaige on ieal oi peisonal piopeity
(the collateial) that legally entitles a
cieuitoi to iesoit to the piopeity foi
payment of its claim.
An unsecuieu cieuitoi, on the othei hanu, is
a cieuitoi who only has in his favoi a
peisonal secuiity tiansaction.

O-??->N &< 6>-;8?

#" BJ%J!#O 6]%6J2D,

9" L-<878?8&7

A Lettei of Cieuit is an instiument unuei which the
issuer, at a customers application, agiees to honoi a
uiaft oi othei uemanu foi payment maue by a thiiu
paity, as long as the uemanu complies with specifieu
conuitions set out in the lettei of cieuit, iegaiuless
of whethei any unueilying obligation between the
customei anu the thiiu paity has been satisfieu
(Blacks Law Dictionary)

.)/
Coue of Commeice, Aiticle S67
Letteis of cieuit aie issueu by one meichant to
anothei foi the puipose of attenuing to a
commeicial tiansaction.

Coue of Commeice, Aiticle S68
The essential conuitions of letteis of cieuit shall be:
1. To be issueu in favoi of a ueteimineu
peison anu not to oiuei
2. To be limiteu to a fixeu anu specifieu
amount oi to one oi moie unueteimineu
amounts, but all within a maximum, the
limits of which must be stateu exactly.
Those which uo not have one of these conuitions
shall be consiueieu as meie letteis of
iecommenuation.

01+(,2+1*$#3$
A letter of credit is an engagement by a bank or
othei peison at the iequest of a customei that the
issuei will honoi uiafts oi othei uemanus foi
payment upon compliance with the conuitions
specified in the credit. (Bank of Commerce v.
Seiiano, uR 1S189S, Feb. 16, 2uuS)

4#'$+#)'(&#)5 .)/6 7#(-&+8 91,'&8, )#* :+)3'(3$
;79:<
Coue of Commeice, Aiticle 2
Acts of commeice, whethei those who execute them
be meichants oi not, anu whethei specifieu in this
Coue oi not, shoulu be goveineu by the piovisions
containeu in it, in theii absence, the by usages of
commeice geneially obseiveu in each place anu in
the absence of both iules, by those of the civil law.
Those acts containeu in this Coue anu all otheis of
analogous chaiactei shall be ueemeu acts of
commeice.

uoveining law:
a. Coue of Commeice
b. 0sages of commeice geneially obseiveu
(e.g. 0CP)
c. Civil Coue anu othei Special Laws on civil
law

=, *(,'(#%1(,>$* -+&8 &'>$+ 3&#'+)3', ;?+)#,-($5*
:>(5! 4#3! @! 9=<
not strictly contractual
not a third-party beneficiary contract
not a suretyship or guarantee
not in itself a negotiable instrument

0" 2C>?8-N
@664/!&)0 the one who piocuies the lettei of cieuit
anu obliges himself to ieimbuise the issuing bank
upon ieceipt of the uocuments of title
H''(/)7 <&"08 L M&)N the bank which issues the
lettei of cieuit anu unueitakes to pay the beneficiaiy
upon ieceipt of the uiaft anu piopei uocuments of
title anu to suiienuei the uocuments to the
applicant upon ieimbuisement

M#)#*/!/&"8 in compliance with the contiact,
ueliveis the uocuments of title anu the uiaft to the
issuing bank to iecovei payment

0thei paities:
;+0/*8/)7 M&)N a coiiesponuent of the issuing bank
which notifies the beneficiaiy of the existence of a
lettei of cieuit
=+)*/"-/)7 M&)N it not only notifies the beneficiaiy
but assumes the uiiect obligation to pay the
beneficiaiy
;#7+0/&0/)7 M&)N is a coiiesponuent bank which
buys oi uiscounts a uiaft unuei the lettei of cieuit

'" D>C7NC.?8&7N I75&45-;

Thiee uistinct agieements involveu in a Lettei of
Cieuit tiansaction:
a. Agieement between the applicant anu
the beneficiaiy may involve sale oi
non-sale tiansactions
b. Reimbuisement Agieement between
the applicant anu the issuing bank
c. Agieement between the issuing bank
anu the beneficiaiy

!-48C7.- 6&==&;8?8-N+ I7." 5" LC-Z&& I7;GN?>8C4
6&"+ O?;" /9::'1
Facts: Baewoo (sellei), a Koiean company, enteieu
into a contiact with Reliance (buyei), foi the sale of
founuiy pig iion. Puisuant to the contiact, Reliance
shoulu apply foi a Lettei of Cieuit. Reliance applieu
foi a lettei of cieuit (L0C) with Chinabank but the
same was uenieu. It tuineu out that Reliance faileu
to meet the iequiiements of the goveinment befoie
it can impoit pig iion, a iegulateu commouity.
Baewoo, in a suit against Reliance, claimeu that it is
entitled for damages due to the latters failure to
secuie a lettei of cieuit.

Issue: WN failuie of Reliance to open the L0C foi
Baewoo makes him liable foi uamages. YES

Belu: In this case, the contentious contiactual
ielation is the contiact of sale between Reliance anu
Baewoo. Although a contiact of sale was alieauy
peifecteu befoie the L0C application, the L0C is a
conuition to the ueliveiy by Baewoo of the
commouity. Because the failuie of Baewoo to uelivei
was a result of Reliances failure to secure a LOC,
Reliance shoulu be liable foi uamages. Reliance
shoulu also be liable foi the loss of piofits incuiieu
by Baewoo.

M" lI%L, ]\ OJDDJ!, ]\ 6!JLID

6&==->.8C4 O-??->N &<
6>-;8?
,?C7;WT O-??->N &<
6>-;8?
Involve contiacts of sale Involve non-sale
tiansactions obligations
Reuuce the iisk of non-
payment
Reuuce the iisk of non-
peifoimance
Sellei can iecovei
payment upon showing
that it has peifoimeu its
obligation to uelivei
Cieuitoi can iecovei
payment upon showing
that the othei paity has
faileu to peifoim its
obligation

6" !_OJ ]\ ,D!I6D 6]H2OI#%6J

\-C?8 MC7R Q D>GN? 6&=3C7T 5" 6&G>? &< #33-C4N
C7; `844C4Gj /9::91
Facts: villaluz solu logs to Axel Chiistiansen, which
then solu the logs to Banumi Tiaue Bevelopment, a
company baseu in the 0S. Banumi openeu a lettei of
cieuit in its bank in Califoinia, saiu bank instiucteu
Feati Bank to infoim villaluz of the existence of the
lettei of cieuit anu the uocumentaiy iequiiements
foi iecoveiy of payment. 0ne of the iequiiements is
a ceitification to be issueu by Chiistiansen. Bowevei
uespite uemanus, Chiistiansen iefuseu to issue the
ceitification, thus, villaluz cannot iecovei payment
fiom Feati Bank. Bence, this action fileu by villaluz
against Chiistiansen anu Feati.

Issue: WN the bank shoulu be helu liable. N0

Belu: The Rule of Stiict Compliance applies in this
case. The uocuments tenueieu by the beneficiaiy
must stiictly confoim with the teims of the lettei of
cieuit befoie the bank can honoi the claim. A bank
which uepaits fiom the stipulation of the L0C anu
accepts a faulty tenuei acts on its own iisk as it may
not be able to iecovei fiom the buyei. Because

villaluz faileu to submit the iequiieu
uocumentation, Feati Bank cannot be helu liable foi
iefusing to honoi his claim.

L" I%LJ2J%LJ%6J 2!I%6I2OJ
ueneial Rule: The issuei unueitakes to pay the
beneficiaiy inuepenuent of the unueilying
contiactual ielation between the Applicant anu the
Beneficiaiy as long as the iequiieu uocuments aie
tenueieu by the beneficiaiy to the bank

Exception: Fiauu
The beneficiaiy fiauuulently piesents to the bank,
uocuments that contain mateiial iepiesentations of
fact that to his knowleuge aie untiue
Elements:
a. A cleai pioof of fiauu
b. Fiauu constitutes an abuse of the
inuepenuent puipose of the lettei of cieuit
c. Iiiepaiable injuiy will follow if injunction is
not gianteu

D>C7N<8-4; 2E8483387-N I7." 5" OGj&7 bT;>&
6&>3&>C?8&7 #GN?>C48C /0@@A1
Facts: Tiansfielu Phil. Inc. (TPI) unueitook to
constiuct a hyuio-electiic powei station foi Luzon
Byiuio Coip. (LBC). The contiact stipulateu a taiget
completion uate but TPI may be entitleu to
extensions uue to foice majeuie oi othei uelays. As a
secuiity of TPIs obligation, TPI opened in favor of
LBC two stanuby letteis of cieuit fiom the
iesponuent banks.
TPI askeu foi extensions allegeuly uue to
foice majeuie but LBC uenieu these iequests. This
culminateu to a seiies of legal actions leauing to two
aibitiation pioceeuings. Buiing the penuency of the
pioceeuings, TPI infoimeu the banks that they
shoulu not ielease the money unuei the L0C,
otheiwise, they woulu be liable foi liquiuateu
uamages. When the banks saiu that they woulu
honor LHCs claim, TPI filed a Complaint foi
Injunction against the banks.

Issue: WN the banks shoulu be enjoineu fiom
ieleasing the money unuei the Letteis of Cieuit. N0

Belu: The banks aie unuei the obligation to pay LBC
when the lattei calleu on the secuiities in the Lettei
of Cieuit. The banks aie not iequiieu to look into the
main contiact oi wait foi the settlement of the case
between TPI anu LBC. As long as LBC has complieu
with the uocumentaiy iequiiements as iequiieu by
the L0C, LBC will be entitleu to payment.
Although the inuepenuence piinciple
aumits of the so-calleu fiauu exception, such is not
piesent in this case.

D!_,D !J6JI2D,

#" BJ%J!#O 6]%6J2D,
A tiust ieceipt is a uocument which expiesses a
secuiity tiansaction, wheieunuei the lenuei, having
no piioi title in the goous anu not having possession
of the same, lenus his money to the boiiowei on
secuiity of the goous, which the boiiowei is
piivilegeu to sell on agieement to pay all oi pait of
the proceeds of the sale to the lender (Blacks Law
Bictionaiy)

:+$,(*$#'()5 A$3+$$ BBC &+ '>$ ?+1,' D$3$(2', .)/
;?D.<
Elements of a Tiust Receipt tiansaction (Section S,
4):
1. Entiustei the peison holuing title ovei the
goous, uocuments oi instiuments subject to
the tiansaction
a. uoous incluue chattels anu peisonal
piopeity (othei than thing in action oi
those so affixeu to the lanu)
b. Bocument wiitten oi piinteu
eviuence of title to goous
c. Instiument any negotiable instiument
as uefineu by the Negotiable
Instiument Law (but not incluuing
uocuments as uefineu by the TRL)
2. Entiustee the peison having oi taking
possession of the goous, uocuments oi
instiuments unuei the tiansaction
S. Tiust ieceipt the wiitten oi piinteu
uocument signeu anu ueliveieu by the
entiustei to the entiustee (which contains
the teims anu conuitions complying with
the TRL)
J)$#" 01# 0"('0 "#!#/602 01# #)0"('0#" 3/)$'
1/-'#4*O

a. To holu anu sell uispose of the goous,
uocuments instiuments then tuin ovei
the pioceeus to the entiustei eithei
i. To the extent of the amount owing
to the entiustei 0R
ii. As what appeais in the tiust ieceipt
b. If unsolu oi not uisposeu of, ietuin the
goous, uocuments anu instiuments to
the entiustei

Tiansactions that the entiustee can entei into
(Section 4):
1. In case of goous anu uocuments of title:
a. To sell oi piocuie theii sale
b. To piocess oi manufactuie with the
puipose of ultimate sale
c. To loau, unloau, ship oi ueal with them
in a mannei pieliminaiy oi necessaiy
foi theii sale
2. In case of instiuments
a. To sell oi piocuie theii sale exchange
b. To uelivei them to the piincipal
c. To effect the consummation of some
tiansaction involving the ueliveiy to a
uepositaiy oi iegistei
u. To effect theii piesentation, collection
oi ienewal

N0TE: The sale of goous, uocuments oi instiuments
by a peison in the business of selling these foi piofit
anu one who has the geneial piopeity iights as
against the buyei uoes not constitute a tiust ieceipt
tiansaction.

M" \]!H ]\ D!_,D !J6JI2D,
! A tiust ieceipt is a F0RNAL C0NTRACT
because the law iequiies that it be in
wiitten oi piinteu foim anu must
contain specific teims incluuing the
following:
1. The uesciiption of the goous,
uocuments oi instiuments
2. The total invoice value anu the amount
of the uiaft paiu by the entiustee
S. The unueitaking of the entiustee:
a. To holu the goous, uocuments,
instiuments in tiust foi the
intiustei
b. To uispose of them in accoiuance
with the teims of the tiust ieceipt
c. To tuin ovei the pioceeus of the
sale 0R if unsolu, to ietuin them to
the entiustee

! A tiust ieceipt may be uenominateu in:
1. Philippine Cuiiency 0R
2. Any foieign cuiiency acceptable as pait
of inteinational ieseives of the
Philippines

6" !IBbD, ]\ J%D!_,DJ!

Security Interest - a piopeity inteiest of the
Entiustei to secuie peifoimance of some obligations
of the entiustee oi of some thiiu peisons to the
entiustei anu incluues title, whethei oi not
expiesseu to be absolute, whenevei such title is in
substance taken oi ietaineu foi secuiity only
(Section S)
! This inteiest shall be valiu against all
the cieuitois of the entiustee anu foi
the uuiation of the tiust ieceipt
agieement (Section 12)

Rights of the Entiustei (Section 7, 8):
1. If solu, to the pioceeus fiom the sale of the
goous, uocuments oi instiuments 0R
2. If unsolu, to the ietuin of the goous,
uocuments, oi instiument
S. To the enfoicement of all othei iights
confeiieu to in the tiust ieceipt
4. To cancel the tiust anu take possession of
the subject of the tiust oi of the pioceeus at
any time upon uefault oi failuie of the
entiustee to comply with the teims of the
tiust
! The entiustei shoulu notify the
entiustee of the intention to sell the
goous, which may be conuucteu at
least five uays aftei the notice to
the entiustee
! The pioceeus of the sale shall be
applieu:
a. To the expenses of the sale
b. To the payment of the expenses
of ie-taking anu stoiing

c. To the satisfaction of the
inuebteuness
! The entiustee shall be entitleu to
any suiplus but shall be liable to
the entiustei foi any ueficiency
S. To be fiee fiom any liability on sale oi othei
uisposition maue by the entiustee eithei as
the latters principal or as vendor

OC7;4 Q 6&=3C7T /2E84"1 5" H-?>&WC7R /0@@A1
\C.?Nd Lanul Company (buyei) enteieu into a
contiact of sale with 0S company Peima Alloys
(sellei) foi weluing ious anu electioues. To secuie
the sale, Lanul applieu foi a Commeicial Lettei of
Cieuit with Netiobank to covei the piice of the sale.
As secuiity foi the money auvanceu by the bank in
the L0C, Lanul executeu a Tiust Receipt in favoi of
Netiobank.
0pon aiiival of the goous, Lanul took
possession of the goous. Bowevei, it uefaulteu on its
obligation with the bank. The bank uemanueu the
tuin ovei of the goous which it latei solu at public
auction, with the bank as the highest biuuei.
Because the pioceeus of the sale was insufficient to
cover Landls indebtedness, the bank demanded for
the payment of the ueficiency. When Lanul faileu to
uo so, Netiobank instituteu this action.

Issue: WN L shoulu pay the ueficiency. YES

Belu: The Tiust Receipt Law gives the bank the iight
to iepossess the goous in case of uefault on the pait
of the entiustee. In this case, the initial iepossession
of the goous by the bank uiu not iesult in the full
satisfaction of the loan obligation. Bence, the bank is
still entitleu to ask Lanul foi the ueficiency.

L" ]MOIB#DI]%, ]\ DbJ J%D!_,DJJ
/,-.?8&7 :+ 9@1
1. To holu the goous, uocuments anu
instiuments in tiust foi the entiustei
anu uispose them in accoiuance with
the teims anu conuitions of the tiust
ieceipt
2. To ieceive the pioceeus in tiust foi the
entiustei anu tuin ovei the same to the
entiustei to the extent of the amount
owing to the entiustei oi as appeais on
the tiust ieceipt
S. To insuie the goous foi theii total value
against loss fiom fiie, theft, pilfeiage oi
othei casualties
4. To keep saiu goous oi pioceeus theieof
whethei in money oi whatevei foim,
sepaiate anu capable of iuentification
as piopeity of the entiustei
S. To ietuin the goous, uocuments oi
instiuments in the event of non-sale oi
upon uemanu of the entiustei
6. To obseive all othei teims anu
conuitions of the tiust ieceipt
7. To be liable foi the goous, uocuments oi
instiuments in case of L0SS

Ciiminal Liability of the Entiustee (Section 1S)
1. The entiustee enteieu into a tiust ieceipt
agieement with the entiustei
2. The entiustee eithei:
a. Fails to tuin ovei the pioceeus of the
sale (to the extent of the amount he
oweu to the entiustei oi as appeais in
the tiust ieceipt)
b. Fails to ietuin the subject of the
agieement if unsolu oi not uisposeu of
S. The entrustees acts shall constitute the
ciime of ESTAFA unuei Aiticle S1S (b) of
the RPC
! If committeu by a juiiuical peison,
the officials theieof shall be
iesponsible foi the offense

J" !IBbD, ]\ 2_!6b#,J! /,-.?8&7 991
! The puichasei of goous oi
tiansfeiee of uocuments anu
instiuments (in the customaiy
mannei of tiansfei) F0R vAL0E
anu in u00B FAITB shall be fiee
from the entrusters security
inteiest

6&487C>-N C7; `-4&N& 5" 6&G>? &< #33-C4N /0@@@1
Facts: Petitioneis weie contiacteu by the Caimelite
sisteis to ienovate theii convent. The petitioneis
bought constiuction mateiials fiom CN Builueis
Centie. The uay aftei the puichase, they went to PBC

bank to apply foi a commeicial lettei of cieuit in
favoi of CN Builueis. They also signeu a pio-foima
tiust ieceipt as secuiity foi the LoC. The petitioneis
uefaulteu anu PBC uemanueu payment. When the
balance hau not been paiu thiee yeais aftei the loan
was obtaineu, PBC sueu petitioneis foi violation of
PB 11S.

Issue: WN the petitioneis shoulu be helu liable
unuei the Tiust Receipt Law. N0

Belu: The contiact between the bank anu the
petitioneis is actually a contiact of simple loan anu
not a tiust ieceipt agieement.
Two situations in a tiust ieceipt tiansaction:
a. The money ieceiveu by the entiustee
shoulu be ueliveieu to the ownei
(entiustoi) of the meichanuise solu
b. The meichanuise ieceiveu shoulu be
ietuineu to the ownei, if unsolu

It is the failuie to ietuin eithei the pioceeus
of the sale oi the unsolu goous that is punishable as
estafa. The intention of the law in punishing the
entiustee in these cases is not to enfoice the loan
but to punish the uishonesty anu abuse of
confiuence by the entiustee in hanuling the money
oi goous, to the piejuuice of the entiustoi.
In this case, owneiship of the goous was
alieauy tiansfeiieu fiom CN Builueis to the
petitioneis. This is uiffeient fiom tiust ieceipt
tiansactions wheie the banks aie the owneis of
goous anu meiely ieleaseu the goous to the
impoitei in tiust subsequent to the loan auvanceu to
pay the sellei. The bank ietains the secuiity inteiest
of the goous until the impoitei tuin ovei the
pioceeus of the sale oi the goous hau been ietuineu
to him.
It is also appaient that theie is no intent to
uefiauu anu misappiopiiate on the pait of the
petitioneis as they continuously acknowleugeu theii
inuebteuness anu attempteu to pay the bank.
Similaily, the petitioneis aie not impoiteis of goous
foi iesale but contiactois in a constiuction pioject.

IV. GUARANTY

A. General Concepts

#>?" 0@A( By guaianty a peison, calleu the
guaiantoi, binus himself to the cieuitoi to fulfill the
obligation of the piincipal uebtoi in case the lattei
shoulu fail to uo so.
If a peison binus himself soliuaiily with the
piincipal uebtoi, the piovisions of Section 4, Chaptei
S, Title I of this Book shall be obseiveu. In such case
the contiact is calleu a suietyship.

#>?" 0@AF A guaianty is giatuitous, unless theie is a
stipulation to the contiaiy.

#>?" 0@*9 A guaianty may be conventional, legal oi
juuicial, giatuitous, oi by oneious title.
It may also be constituteu, not only in favoi of the
piincipal uebtoi, but also in favoi of the othei
guaiantoi, with the lattei's consent, oi without his
knowleuge, oi even ovei his objection.

Someia notes:
A guaianty is a piomise to answei foi the
payment of some uebt oi the peifoimance
of some uuty, in case of failuie of anothei
who is liable in the fiist instance.
A guaianty is also a peisonal secuiity
tiansaction that involves the conuitional
obligation of a guaiantoi to fulfil a piincipal
obligation in favoi of a cieuitoi, in case the
uebtoi fails to uo so.
The obligations of the guaiantoi always
aiise as a consequence of contiact, whethei
the guaianty is conventional, legal, oi
juuicial.

B. Form of Guaranty

#>?" 0@** A guaianty is not piesumeu; it must be
expiess anu cannot extenu to moie than what is
stipulateu theiein.
If it be simple oi inuefinite, it shall compiomise not
only the piincipal obligation, but also all its
accessoiies, incluuing the juuicial costs, pioviueu
with iespect to the lattei, that the guaiantoi shall
only be liable foi those costs incuiieu aftei he has
been juuicially iequiieu to pay.

Someia notes:
The obligation of the guaiantoi must be
expiess anu not piesumeu anu it cannot
extenu to moie than what is stipulateu.
A simple oi inuefinite guaianty is a
guaianty that extenus to the piincipal
obligation as well as accessoiies anu juuicial
costs.
A uefinite guaianty, on the othei hanu, is a
guaianty that extenus only to a specifieu
amount.
Bowevei, it shoulu be noteu that if a
guaianty specifies that the guaiantoi will be

liable foi a specific amount but neveitheless
also pioviues that the guaiantoi will also be
liable foi inteiest anu expenses, such will be
deemed included in the guarantors liability
even if such exceeus the amount specifieu.

#>?" 9A@' The following contiacts aie
unenfoiceable, unless they aie iatifieu:
(1) Those enteieu into in the name of anothei
peison by one who has been given no authoiity oi
legal iepiesentation, oi who has acteu beyonu his
poweis;
(2) Those that uo not comply with the Statute of
Fiauus as set foith in this numbei. In the following
cases an agieement heieaftei maue shall be
unenfoiceable by action, unless the same, oi some
note oi memoianuum, theieof, be in wiiting, anu
subsciibeu by the paity chaigeu, oi by his agent;
eviuence, theiefoie, of the agieement cannot be
ieceiveu without the wiiting, oi a seconuaiy
eviuence of its contents:
(a) An agieement that by its teims is not to be
peifoimeu within a yeai fiom the making
theieof;
(b) A special piomise to answei foi the uebt,
uefault, oi miscaiiiage of anothei;
(c) An agieement maue in consiueiation of
maiiiage, othei than a mutual piomise to
maiiy;
(u) An agieement foi the sale of goous, chattels
oi things in action, at a piice not less than five
hunuieu pesos, unless the buyei accept anu
ieceive pait of such goous anu chattels, oi the
eviuences, oi some of them, of such things in
action oi pay at the time some pait of the
puichase money; but when a sale is maue by
auction anu entiy is maue by the auctioneei in
his sales book, at the time of the sale, of the
amount anu kinu of piopeity solu, teims of sale,
piice, names of the puichaseis anu peison on
whose account the sale is maue, it is a sufficient
memoianuum;
(e) An agieement foi the leasing foi a longei
peiiou than one yeai, oi foi the sale of ieal
piopeity oi of an inteiest theiein;
( f ) A iepiesentation as to the cieuit of a thiiu
peison.
(S) Those wheie both paities aie incapable of giving
consent to a contiact.

Ny notes:
A guaianty uoes not necessaiily have to be
ieuuceu in wiiting to be valiu but a wiitten
note oi memoianuum theieof is necessaiy
foi it to be enfoiceable.

C. Obligations Secured

#>?" 0@*0 A guaianty cannot exist without a valiu
obligation.
Neveitheless, a guaianty may be constituteu to
guaiantee the peifoimance of a voiuable oi an
unenfoiceable contiact. It may also guaiantee a
natuial obligation.

#>?" 0@*' A guaianty may also be given as secuiity
foi futuie uebts, the amount of which is not yet
known; theie can be no claim against the guaiantoi
until the uebt is liquiuateu. A conuitional obligation
may also be secuieu.

#>?" 0@*A A guaiantoi may binu himself foi less, but
not foi moie than the piincipal uebtoi, both as
iegaius the amount anu the oneious natuie of the
conuitions.
Shoulu he have bounu himself foi moie, his
obligations shall be ieuuceu to the limits of that of
the uebtoi.

Someia notes:
As an accessoiy obligation, a guaianty
cannot exist if the piincipal obligation is
voiu.
Bowevei, the piincipal obligation in a
guaianty may uepenu on a voiuable,
unconuitional, natuial, oi conuitional
obligation.
The obligations of a guaiantoi also cannot
be moie oneious, in teims of amount anu
conuitions, than that of the piincipal uebtoi
since a guaianty is meiely an accessoiy
obligation.
A guarantors obligations may also be less
than that of the piincipal uebtoi.
It is also possible unuei the law foi a
guaiantoi to ask foi a ieuuction of
obligations if he will be liable to moie than
the amount of the piincipal obligation of the
uebtoi.
A continuing guaianty may also be useu to
secuie futuie uebts, the object of which is to
giant to the piincipal uebtoi a stanuing
cieuit to be useu fiom time to time eithei
inuefinitely oi until a ceitain peiiou.

Ny notes:
The piincipal obligation uoes not
necessaiily have to be valiu foi a guaianty
to exist, what is impoitant is it is not voiu.
An example of a futuie uebt is a contiact to
loan, which coulu be secuieu by a guaianty.

D. Parties to a Guaranty


#>?" 0@*) 0ne who is obligeu to fuinish a guaiantoi
shall piesent a peison who possesses integiity,
capacity to binu himself, anu sufficient piopeity to
answei foi the obligation which he guaiantees. The
guaiantoi shall be subject to the juiisuiction of the
couit of the place wheie this obligation is to be
complieu with.

#>?" 0@*( If the guaiantoi shoulu be convicteu in
fiist instance of a ciime involving uishonesty oi
shoulu become insolvent, the cieuitoi may uemanu
anothei who has all the qualifications iequiieu in
the pieceuing aiticle. The case is excepteu wheie the
cieuitoi has iequiieu anu stipulateu that a specifieu
peison shoulu be the guaiantoi.

#>?" 0@A: A maiiieu woman may guaiantee an
obligation without the husbanu's consent, but shall
not theieby binu the conjugal paitneiship, except in
cases pioviueu by law.

#>?" 0@)A The guaiantoi of a guaiantoi shall enjoy
the benefit of excussion, both with iespect to the
guaiantoi anu to the piincipal uebtoi.

#>?" 0@)* Shoulu theie be seveial guaiantois of
only one uebtoi anu foi the same uebt, the
obligation to answei foi the same is uiviueu among
all. The cieuitoi cannot claim fiom the guaiantois
except the shaies which they aie iespectively bounu
to pay, unless soliuaiity has been expiessly
stipulateu.
The benefit of uivision against the co-guaiantois
ceases in the same cases anu foi the same ieasons as
the benefit of excussion against the piincipal
uebtoi.

Someia notes:
Paities to a guaianty:
1. Cieuitoi
2. Bebtoi of the piincipal obligation
S. uuaiantoi
A sub-guaiantoi is a guaiantoi of a
guaiantoi.
A co-guaiantoi is one of seveial guaiantois
of only one uebtoi foi the same uebt.
Qualifications of a guaiantoi:
1. Nust possess integiity, capacity to
contiact anu sufficient piopeity foi
the guaianteeu obligation.
Loss of these qualifications
gives the cieuitoi the iight to
uemanu a new guaiantoi
unless the cieuitoi hau
stipulateu a specifieu peison to
act as guaiantoi.
2. A maiiieu woman must secuie the
consent of hei husbanu to binu
conjugal piopeity.

E. Benefit of Excussion

#>?" 0@)0 In eveiy action by the cieuitoi, which
must be against the piincipal uebtoi alone, except in
the cases mentioneu in aiticle 2uS9, the foimei shall
ask the couit to notify the guaiantoi of the action.
The guaiantoi may appeai so that he may, if he so
uesiie, set up such uefenses as aie gianteu him by
law. The benefit of excussion mentioneu in aiticle
2uS8 shall always be unimpaiieu, even if juugment
shoulu be ienueieu against the piincipal uebtoi anu
the guaiantoi in case of appeaiance by the lattei.

#>?" 0@*F The guaiantoi cannot be compelleu to
pay the cieuitoi unless the lattei has exhausteu all
the piopeity of the uebtoi, anu has iesoiteu to all
the legal iemeuies against the uebtoi.

#>?" 0@*: The excussion shall not take place:
(1) If the guaiantoi has expiessly
ienounceu it;
(2) If he has bounu himself soliuaiily with
the uebtoi;
(S) In case of insolvency of the uebtoi;
(4) When he has absconueu, oi cannot be
sueu within the Philippines unless he has
left a managei oi iepiesentative;
(S) If it may be piesumeu that an execution
on the piopeity of the piincipal uebtoi
woulu not iesult in the satisfaction of the
obligation.

#>?" 0@)@ In oiuei that the guaiantoi may make use
of the benefit of exclusion, he must set it up against
the cieuitoi upon the lattei's uemanu foi payment
fiom him, anu point out to the cieuitoi available
piopeity of the uebtoi within Philippine teiiitoiy,
sufficient to covei the amount of the uebt.

#>?" 0@)9 The guaiantoi having fulfilleu all the
conuitions iequiieu in the pieceuing aiticle, the
cieuitoi who is negligent in exhausting the piopeity
pointeu out shall suffei the loss, to the extent of saiu
piopeity, foi the insolvency of the uebtoi iesulting
fiom such negligence.

#>?" 0@)' A compiomise between the cieuitoi anu
the piincipal uebtoi benefits the guaiantoi but uoes
not piejuuice him. That which is enteieu into
between the guaiantoi anu the cieuitoi benefits but
uoes not piejuuice the piincipal uebtoi.


#>?" 0@)A The guaiantoi of a guaiantoi shall enjoy
the benefit of excussion, both with iespect to the
guaiantoi anu to the piincipal uebtoi.

#>?" 0@F9 The guaiantoi may set up against the
cieuitoi all the uefenses which peitain to the
piincipal uebtoi anu aie inheient in the uebt; but
not those that aie peisonal to the uebtoi.

Someia notes:
This is the uistinguishing element of a
guaianty.
The benefit of excussion (oi exhaustion oi
exclusion) is the iight of the guaiantoi to
uemanu that the cieuitoi, befoie making the
foimei liable to fulfil the obligation of the
piincipal uebtoi, uo the following things
fiist:
1. Exhaust all of the piopeities of the
piincipal uebtoi
2. Resoit to all legal iemeuies against
the piincipal uebtoi
0n the othei hanu, foi the cieuitoi to
enfoice a guaianty:
1. Be must biing an action against the
piincipal uebtoi alone (exceptions
aie the cases mentioneu in Ait.
2uS9).
2. Be shall also as the couit to notify
the guaiantoi of the action.
S. The guaiantoi may appeai in the
pioceeuings, so that it may set up
such uefenses as pioviueu by law.
a. The benefit of excussion shall
always be unimpaiieu, even if
juugment shoulu be ienueieu
against the piincipal uebtoi
anu the guaiantoi in case of
appeaiance by the lattei.
4. In oiuei that the guaiantoi may
make use of the benefit of
excussion, he must:
a. Set it up against the cieuitoi
upon uemanu foi payment, anu
b. Point out to the cieuitoi
available piopeity of the
uebtoi within Philippine
teiiitoiy, sufficient to covei the
amount of the uebt.

DG3Cj I` C7; DG3Cj 5" 6&G>? &< #33-C4N
/0@@*1

FACTS: }ose Tupaz Iv anu Petionila Tupaz
applieu foi 2 commeicial L0Cs in favoi of El 0io
Coip. with BPI in oiuei to finance the puichase
of iaw mateiials foi suivival bolos that weie
oiueieu maue by the Phil. Aimy. Petitioneis
simultaneously executeu tiust ieceipts in favoi
of BPI wheiein they executeu a guaiantee to pay
the bank which also pioviueu that theii liability
shall be uiiect anu immeuiate without any neeu
to exhaust any legal iemeuies befoie pioceeuing
against them. In one of the tiust ieceipts, the
petitioneis signeu as coipoiate officeis,
inuicating theii iespective positions in saiu
companies. In the othei tiust ieceipt, only }ose
Tupaz Iv signeu anu he uiu not inuicate in saiu
uocument he was signing as El Oros VP.

BELB: While petitioneis aie in this case aie only
liable as guaiantois, the woiuing of the
unueitaking ieveals that the tiansaction
involveu heie is a loan secuieu by a guaianty
with a waivei of the benefit of excussion. Since
}ose Tupaz Iv uiu not inuicate his capacity as
coipoiate officei in signing the othei tiust
ieceipt, then he shoulu be maue liable to the
bank in his peisonal capacity (they weie not
helu peisonally liable unuei the fiist tiust
ieceipt because they signeu as coipoiate
officeis). Since he has waiveu the benefit of
excussion in the unueitaking that he signeu, he
may be pioceeueu against by the bank without
the neeu to exhaust othei iemeuies.

Ny notes:
If the benefit of excussion is waiveu, then
theie is no longei a neeu to pioceeu against
the uebtoi befoie pioceeuing against the
guaiantoi.
The couit in this case also pioviueu ieasons
why Tupaz Iv was maue liable to the bank
even befoie excussion is iesoiteu to:
1. Excussion is not a pie-iequisite to
secuie juugment against a
guaiantoi.
2. The benefit of excussion may be
waiveu (which was piesent in this
case).
Accoiuing to the SC, howevei, theie is still a
iemeuy foi the guaiantoi, which is to
uemanu uefeiment of the execution of the
juugment against it until aftei the assets of
the piincipal uebtoi is exhausteu.
Bespite the pioceuuie pioviueu in Ait.
2u62, this case is basis foi saying that a
cieuitoi may secuie juugment against a
guaiantoi even befoie excussion is iesoiteu
to.

F. Right to Protection

#>?" 0@(9 The guaiantoi, even befoie having paiu,
may pioceeu against the piincipal uebtoi:
(1) When he is sueu foi the payment;
(2) In case of insolvency of the piincipal
uebtoi;
(S) When the uebtoi has bounu himself to
ielieve him fiom the guaianty within a
specifieu peiiou, anu this peiiou has
expiieu;
(4) When the uebt has become uemanuable,
by ieason of the expiiation of the peiiou foi
payment;
(S) Aftei the lapse of ten yeais, when the
piincipal obligation has no fixeu peiiou foi
its matuiity, unless it be of such natuie that
it cannot be extinguisheu except within a
peiiou longei than ten yeais;
(6) If theie aie ieasonable giounus to feai
that the piincipal uebtoi intenus to
absconu;
(7) If the piincipal uebtoi is in imminent
uangei of becoming insolvent.
In all these cases, the action of the guaiantoi is to
obtain ielease fiom the guaianty, oi to uemanu a
secuiity that shall piotect him fiom any pioceeuings
by the cieuitoi anu fiom the uangei of insolvency of
the uebtoi.

Someia notes:
The iight to piotection is the iight of the
guaiantoi as against the piincipal uebtoi to:
1. 0btain ielease fiom the guaianty,
oi
2. Bemanu secuiity.
The puipose of such iight is foi the
guaiantoi to piotect itself fiom:
1. Any pioceeuing by the cieuitoi, anu
2. The uangei of insolvency by the
uebtoi.
The iight to piotection is pieliminaiy in
natuie since it may be availeu of by the
guaiantoi befoie payment aftei he has been
liable to uo so.
This iight may also only be enfoiceu by
action, although the guaiantoi will not be
alloweu to iealize on the juugment on the
point of actual collection until it has
satisfieu oi causeu to satisfy the piincipal
obligation.
In effect, the guaiantoi is pioceeuing
against the piincipal uebtoi to compel the
lattei to extinguish the piincipal obligation,
in oiuei foi the guaiantoi to be ieleaseu
fiom the guaianty.

Ny notes:
Since by uefinition, a guaiantoi binus
himself to the cieuitoi, it is also only the
lattei that can ielease the guaiantoi fiom
the guaianty.

G. Right to Indemnification

#>?" 0@)) The guaiantoi who pays foi a uebtoi
must be inuemnifieu by the lattei.
The inuemnity compiises:
(1) The total amount of the uebt;
(2) The legal inteiests theieon fiom the
time the payment was maue known to the
uebtoi, even though it uiu not eain inteiest
foi the cieuitoi;
(S) The expenses incuiieu by the guaiantoi
aftei having notifieu the uebtoi that
payment hau been uemanueu of him;
(4) Bamages, if they aie uue.

#>?" 0@*@ If a guaianty is enteieu into without the
knowleuge oi consent, oi against the will of the
piincipal uebtoi, the piovisions of aiticles 12S6 anu
12S7 shall apply.

#>?" 90') The cieuitoi is not bounu to accept
payment oi peifoimance by a thiiu peison who has
no inteiest in the fulfillment of the obligation, unless
theie is a stipulation to the contiaiy.
Whoevei pays foi anothei may uemanu fiom the
uebtoi what he has paiu, except that if he paiu
without the knowleuge oi against the will of the
uebtoi, he can iecovei only insofai as the payment
has been beneficial to the uebtoi.

#>?" 0@): If the uebt was foi a peiiou anu the
guaiantoi paiu it befoie it became uue, he cannot
uemanu ieimbuisement of the uebtoi until the
expiiation of the peiiou unless the payment has
been iatifieu by the uebtoi.

#>?" 0@(@ If the guaiantoi has paiu without
notifying the uebtoi, anu the lattei not being awaie
of the payment, iepeats the payment, the foimei has
no iemeuy whatevei against the uebtoi, but only
against the cieuitoi. Neveitheless, in case of a
giatuitous guaianty, if the guaiantoi was pieventeu
by a foituitous event fiom auvising the uebtoi of the
payment, anu the cieuitoi becomes insolvent, the
uebtoi shall ieimbuise the guaiantoi foi the amount
paiu.

#>?" 0@(0 If one, at the iequest of anothei, becomes
a guaiantoi foi the uebt of a thiiu peison who is not
piesent, the guaiantoi who satisfies the uebt may
sue eithei the peison so iequesting oi the uebtoi foi
ieimbuisement.


Someia notes:
The iight to inuemnification is the legal tie
cieateu between the guaiantoi anu the
piincipal uebtoi to which the cieuitoi is not
piivy.
It is a substantive iight of action of the
guaiantoi as against the piincipal uebtoi,
aftei the foimei has paiu the piincipal uebt,
to iecovei:
1. The total amount of the uebt;
2. The legal inteiests theieon fiom
the time the payment was maue
known to the uebtoi, even though it
uiu not eain inteiest foi the
cieuitoi;
S. The expenses incuiieu by the
guaiantoi aftei having notifieu the
uebtoi that payment hau been
uemanueu of it; anu
4. Bamages, if they aie uue.
Right of inuemnification is moie than a
meie iight of ieimbuisement.

H. Right to Subrogation

#>?" 0@)( The guaiantoi who pays is subiogateu by
viitue theieof to all the iights which the cieuitoi hau
against the uebtoi.
If the guaiantoi has compiomiseu with the cieuitoi,
he cannot uemanu of the uebtoi moie than what he
has ieally paiu.

#>?" 0@*@ If a guaianty is enteieu into without the
knowleuge oi consent, oi against the will of the
piincipal uebtoi, the piovisions of aiticles 12S6 anu
12S7 shall apply.

#>?" 90'( Whoevei pays on behalf of the uebtoi
without the knowleuge oi against the will of the
lattei, cannot compel the cieuitoi to subiogate him
in his iights, such as those aiising fiom a moitgage,
guaianty, oi penalty.

#>?" 0@)F If the guaiantoi shoulu pay without
notifying the uebtoi, the lattei may enfoice against
him all the uefenses which he coulu have set up
against the cieuitoi at the time the payment was
maue.

#>?" 0@F@ The guaiantois, even though they be
soliuaiy, aie ieleaseu fiom theii obligation
whenevei by some act of the cieuitoi they cannot be
subiogateu to the iights, moitgages, anu piefeience
of the lattei.

Someia notes:
The iight of subiogation is the iight of a
guaiantoi who pays, as against the piincipal
uebtoi, to be substituteu in all the iights,
iemeuies oi secuiities that the cieuitoi hau
against the piincipal uebtoi.
In effect, this piocess tiansfeis to the
guaiantoi the cieuit with all the iights
appeitaining theieto, against the piincipal
uebtoi.

Ny notes:
The iight of inuemnification anu iight of
subiogation only aiises when the guaiantoi
has alieauy paiu the piincipal uebt anu the
contiact of guaianty was enteieu with the
knowleuge anu consent of the piincipal
uebtoi.

I. Rights of Co-Guarantors

4. Benefit of Division

#>?" 0@)* Shoulu theie be seveial guaiantois of
only one uebtoi anu foi the same uebt, the
obligation to answei foi the same is uiviueu among
all. The cieuitoi cannot claim fiom the guaiantois
except the shaies which they aie iespectively bounu
to pay, unless soliuaiity has been expiessly
stipulateu.
The benefit of uivision against the co-guaiantois
ceases in the same cases anu foi the same ieasons as
the benefit of excussion against the piincipal uebtoi.

#>?" 0@(F A ielease maue by the cieuitoi in favoi of
one of the guaiantois, without the consent of the
otheis, benefits all to the extent of the shaie of the
guaiantoi to whom it has been gianteu.

Someia notes:
A co-guaianty is when two oi moie peisons
(oi co-guaiantois) answei foi the same
uebt of the same uebtoi.
The benefit of uivision among co-guaiantois
is the iight of a co-guaiantoi, as against the
cieuitoi, to pay only the uiviueu shaie that
it is bounu to pay.
The benefit of uivision may be claimeu by a
co-guaiantoi fiom the moment the
obligation is contiacteu, except theie is
stipulation to the contiaiy.
The benefit of uivision will cease if:
1. The co-guaiantoi against whom the
cieuitoi is making the claim has
expiessly ienounceu the benefit of
uivision;
2. The guaiantoi has bounu itself
soliuaiily with the co-guaiantoi;

S. In case of insolvency of the co-
guaiantoi;
4. A co-guaiantoi has absconueu, oi
cannot be sueu within the
Philippines unless it has left a
managei oi iepiesentative;
S. It may be piesumeu that an
execution on the piopeity of a co-
guaiantoi woulu not iesult in the
satisfaction of the obligation.
The effect of the cessation of the benefit of
uivision is that the cieuitoi may claim the
entiie amount fiom a co-guaiantoi.

Ny notes:
Theie aie two ways of looking at Ait. 2u78:
1. The amount of the benefit of
ielease will be uiviueu among all
uebtois; oi
2. The othei co-guaiantois may seek
ieimbuisement fiom the co-
guaiantoi that was ieleaseu.

5. Right to Reimbursement

#>?" 0@(' When theie aie two oi moie guaiantois
of the same uebtoi anu foi the same uebt, the one
among them who has paiu may uemanu of each of
the otheis the shaie which is piopoitionally owing
fiom him.
If any of the guaiantois shoulu be insolvent, his
shaie shall be boine by the otheis, incluuing the
payei, in the same piopoition.
The piovisions of this aiticle shall not be applicable,
unless the payment has been maue by viitue of a
juuicial uemanu oi unless the piincipal uebtoi is
insolvent.

#>?" 0@(A In the case of the pieceuing aiticle, the co-
guaiantois may set up against the one who paiu, the
same uefenses which woulu have peitaineu to the
piincipal uebtoi against the cieuitoi, anu which aie
not puiely peisonal to the uebtoi. (184S) ARTICLE
2u7S. A sub-guaiantoi, in case of the insolvency of
the guaiantoi foi whom he bounu himself, is
iesponsible to the co-guaiantois in the same teims
as the guaiantoi.

#>?" 0@(* A sub-guaiantoi, in case of the insolvency
of the guaiantoi foi whom he bounu himself, is
iesponsible to the co-guaiantois in the same teims
as the guaiantoi.

Someia notes:
The iight of ieimbuisement is the iight of a
co-guaiantoi who pays, as against the othei
co-guaiantois, to iecovei the shaies uue
fiom the co-guaiantois.
Bowevei, this iight will only aiise if the
following conuitions concui:
1. Theie aie two oi moie guaiantois
of the same uebtoi anu foi the
same uebt.
2. 0ne of the co-guaiantois has paiu.
S. Payment is maue by viitue of a
juuicial uemanu oi the piincipal
uebtoi is insolvent.
In the event that any of the co-guaiantois
becomes insolvent, the shaie of the
insolvent co-guaiantoi shall be boine by the
othei co-guaiantois, incluuing the co-
guaiantoi who paiu the piincipal uebt, in
the same piopoition as that establisheu in
the co-guaianty.

J. Extinguishment and Right of Release

#>?" 0@() The obligation of the guaiantoi is
extinguisheu at the same time as that of the uebtoi,
anu foi the same causes as all othei obligations.

#>?" 0@(( If the cieuitoi voluntaiily accepts
immovable oi othei piopeity in payment of the
uebt, even if he shoulu afteiwaius lose the same
thiough eviction, the guaiantoi is ieleaseu.

#>?" 0@(: An extension gianteu to the uebtoi by the
cieuitoi without the consent of the guaiantoi
extinguishes the guaianty. The meie failuie on the
pait of the cieuitoi to uemanu payment aftei the
uebt has become uue uoes not of itself constitute
any extension of time iefeiieu to heiein.

#>?" 0@F@ The guaiantois, even though they be
soliuaiy, aie ieleaseu fiom theii obligation
whenevei by some act of the cieuitoi they cannot be
subiogateu to the iights, moitgages, anu piefeience
of the lattei.

,_!JDc

#" B-7->C4 6&7.-3?N

#>?" 0@A(" By guaianty a peison, calleu the
guaiantoi, binus himself to the cieuitoi to fulfill
the obligation of the piincipal uebtoi in case the
lattei shoulu fail to uo so.

piincipal uebtoi, the piovisions of Section 4,
Chaptei S, Title I of this Book shall be obseiveu. In
such case the contiact is calleu a suietyship.

#>?" 9099" Soliuaiity may exist although the
cieuitois anu the uebtois may not be bounu in the
same mannei anu by the same peiious anu
conuitions.

#>?" 909)" The cieuitoi may pioceeu against any
one of the soliuaiy uebtois oi some oi all of them
simultaneously. The uemanu maue against one of
them shall not be an obstacle to those which may
subsequently be uiiecteu against the otheis, so
long as the uebt has not been fully collecteu.

#>?" 0@F0" The bonusman who is to be offeieu in
viitue of a piovision of law oi of a juuicial oiuei
shall have the qualifications piesciibeu in Aiticle
2uS6 anu in special laws.

#>?" 0@F'" If the peison bounu to give a bonu in
the cases of the pieceuing aiticle, shoulu not be
able to uo so, a pleuge oi moitgage consiueieu
sufficient to covei his obligation shall be aumitteu
in lieu theieof.

#>?" 0@FA" A juuicial bonusman cannot uemanu
the exhaustion of the piopeity of the piincipal
uebtoi.

A sub-suiety in the same case, cannot uemanu the
exhaustion of the piopeity of the uebtoi of the
suiety.

Suretyship
Is the legal ielation that aiises when one
peison N&48;C>84T binus himself with the
piincipal uebtoi to be answeiable foi the
;-W?+ ;-<CG4? &> =8N.C>>8CP-"
Is a contiactual ielation.
Is an C..-NN&>T+ C7.844C>T &> .&44C?->C4
&W48PC?8&7 > obligation ceases when
piincipal obligation is extinguisheu.
A suretys liability to the cieuitoi is ;8>-.?+
3>8=C>T C7; CWN&4G?-.

M" \&>= &< ,G>-?T

#>?" 9A@'"
(b) A special piomise to answei foi the uebt,
uefault oi miscaiiiage of anothei.

0nenfoiceable by action, unless the same, oi some
note oi memoianuum, theieof, be in wiiting, anu
subsciibeu by the paity chaigeu, oi by his agent;
eviuence, theiefoie, of the agieement cannot be
ieceiveu without the wiiting, oi a seconuaiy
eviuence of its contents.

0nenfoiceable unless it is in wiiting.

6" ]W48PC?8&7N ,-.G>-;

1. Consiueiation consiueiation
necessary to support a suretys
obligation neeu not pass uiiectly to
the suiety; a consiueiation moving
to the piincipal uebtoi alone
suffices.
2. Extent obligation of the suiety
cannot be extenueu by implication
beyonu its specifieu limits. To the
extent, anu in the mannei, anu
unuei the ciicumstances pointeu
out in the obligation, the suiety is
bounu anu no fuithei.
S. Continuing Suiety not limiteu to a
single tiansaction but contemplates
a piospective oi futuie uealing;
seiies of tiansactions.

#>?" 0@*'" A guaianty may also be given as
secuiity foi futuie uebts, the amount of which is
not yet known; theie can be no claim against the
guarantor until the debt is liquidated

6CN-d

,-.G>8?T MC7R C7; D>GN? 6&=3C7T 5 6G-7.C
Facts: Sta. Ines is a coipoiation engageu in logging
opeiations. In 198u it was gianteu, by Secuiity Bank,
a cieuit line in the amount of P8N. To secuie
payment, it executeu a chattel moitgage ovei some
of its machineiies anu equipments. Anu as an
auuitional secuiity its Piesiuent anu Chaiiman of the
Boaiu of Biiectois, Rouolfo Cuenca, execute an
inuemnity agieement in favoi of Secuiity Bank
wheieby he bounu himself jointly anu seveially with
Sta. Ines. Foui uays befoie the expiiation of the
peiiou of effectivity of the P8N loan facility,
appellant uiew P6.1N. Cuenca iesigneu in 198S.
Soon aftei, Sta. Ines iequesteu Secuiity Bank to
iestiuctuie theii loan agieement without piioi
notice to Cuenca.

Belu: Cuenca not liable foi iestiuctuieu loan. An
essential alteiation in the teims of a Loan
Agieement without the consent of the suiety
extinguishes the latters obligation. The submission
that only the boiiowei, not the suiety, is entitleu to
be notifieu of any mouification in the oiiginal loan
accommouation is untenable-such theoiy is contiaiy
to the to the piinciple that a suiety cannot assume
an obligation moie oneious than that of the
piincipal. That the Inuemnity Agieement is a
continuing suiety uoes not authoiize the lenuei to
extenu the scope of the piincipal obligation

inoiuinately; A .&7?87G87P PGC>C7?T is one which
coveis all tiansaction, incluuing those aiising in the
futuie, which aie within the uesciiption oi
contemplation of the contiact of guaianty, until the
expiiation oi teimination theieof.

Case Notes:
An obligation may be extinguisheu by
7&5C?8&7" (Ait. 1292)
The following aie the iequiiements foi
novation:
! Theie is a pievious valiu obligation
! The paities conceineu agiee to a
new contiact
! The olu contiact is extinguisheu
! Theie is a new valiu contiact
}SS (joint anu soliuaiy signatuie) of a majoi
stock-holuei oi coipoiate officei is an
auuitional secuiity foi loans gianteu to
coipoiations.

L" L8N?87PG8NE-; <>&= ,?C7;WT O-??-> &<
6>-;8?

I0&)$38 K#00#" +* ="#$/0 Reveises financial buiuen
of paities thiough litigation. Cieuitoi expects to
piomptly ieceive cash in the vent of non-
peifoimance.

I("#08 Cieuitoi neeus to establish the fact of the
debtors non-peifoimance foi the uuty of
inuemnification to aiise.

J" L8N?87PG8NE-; <>&= BGC>C7?T

#>?" 0@A(" By guaianty a peison, calleu the
guaiantoi, binus himself to the cieuitoi to fulfill
the obligation of the piincipal uebtoi in case the
lattei shoulu fail to uo so.

piincipal uebtoi, the piovisions of Section 4,
Chaptei S, Title I of this Book shall be obseiveu. In
such case the contiact is calleu a suietyship

P(&"&)08 guaiantoi is the insuiei of the solvency,
assumes liability when piincipal uebtoi fails oi is
unable to pay.

I("#08'1/6 suiety is the insuiei of the uebt,
obligates itself to pay if the piincipal uebtoi uoes not
pay. The natuie of suietyships pievents suietys
fiom availing the benefit of excussion.

6CN-Nd

2C4=C>-N 5 6&G>? &< #33-C4N
Facts: Piivate iesponuent N.B. Lenuing Coipoiation
extenueu a loan to the spouses 0smea anu Neilyn
Azaiiaga, togethei with petitionei Estiella Palmaies,
in the amount of PSu,uuu.uu payable on oi befoie
Nay 12, 199u, with compounueu inteiest at the iate
of 6% pei annum to be computeu eveiy Su uays
fiom the uate theieof. 1 0n foui occasions aftei the
execution of the piomissoiy note anu even aftei the
loan matuieu, petitionei anu the Azaiiaga spouses
weie able to pay a total of P16,Suu.uu, theieby
leaving a balance of P1S,7uu.uu. No payments weie
maue aftei the last payment on Septembei 26, 1991.
2 Consequently, on the basis of petitionei's soliuaiy
liability unuei the piomissoiy note, iesponuent
coipoiation fileu a complaint S against petitionei
Palmaies as the lone paity-uefenuant, to the
exclusion of the piincipal uebtois, allegeuly by
ieason of the insolvency of the lattei.
Belu: Palmaies (suiety) is liable. It is a caiuinal iule
in the inteipietation of contiacts that if the teims of
a contiact aie cleai anu leave no uoubt upon the
intention of the contiacting paities, the liteial
meaning of its stipulation shall contiol. 1S In the
case at bai, petitionei expiessly bounu heiself to be
jointly anu seveially oi soliuaiily liable with the
piincipal makei of the note. The teims of the
contiact aie cleai, explicit anu unequivocal that
petitionei's liability is that of a suiety.

J"h&W-4+ I7." 5 6#
Facts: Sps Claveiia (Agio Biokeis) applieu foi a loan
with Consoliuateu Bank anu Tiust (Soliu Bank) foi
P2,87S,uuu to finance puichase of 2 maiitime baiges
anu 1 tugboat. Loan was appioveu on the conuition
that chattel moitgage is executeu on the S vessels
and a continuing guarantee is executed by E. Zobel
Inc. Spouses uefaulteu. Soliu Bank fileu a complaint
foi sum of money with a piayei foi a wiit of
pieliminaiy attachment against Spouses anu the
petitionei E. Zobel, Inc.Petitionei Zobel moveu foi
uismissal aiguing that puisuant to Ait. 2u8u of NCC,
it has lost its right to be subrogated to the first
chattel moitgage because Soliu Bank faileu to
iegistei the chattel moitgage with the piopei
goveinment agency. Responuent Bank aigues that
Ait. 2u8u (piovisions on uuaianty) uoes not apply
because Zobel was in tiuth a suiety anu not a
guaiantoi.
Belu: Zobel is liable as a suiety.
I("#08 ?'> 7(&"&)08: uuaianty anu suiety aie
neaily ielateu, anu many of the piinciples aie
common to both. Bowevei, unuei oui civil law,
they may be uistinguisheu thus: A suiety is usually
bounu with his piincipal by the same instiument,
executeu at the same time, anu on the same
consiueiation. 0n the othei hanu, the contiact of
guaianty is the guaiantoi's own sepaiate

unueitaking, in which the piincipal uoes not join.
Simply put, a suiety is uistinguisheu fiom a
guaianty in that a guaiantoi is the insuiei of the
solvency of the uebtoi anu thus binus himself to
pay if the piincipal is ()&34# 0+ 6&8 while a suiety
is the insuiei of the uebt, anu he obligates himself
to pay if the piincipal $+#' )+0 6&8>
Q1# !+)0"&!0 /' & '("#08 "#7&"$4#'' +* /0' 0/04#: The
use of the teim "guaiantee" uoes not /6'+
*&!0+ mean that the contiact is one of guaianty.
Authoiities iecognize that the woiu "guaiantee" is
fiequently employeu in business tiansactions to
uesciibe not the secuiity of the uebt but an
intention to be bounu by a piimaiy oi inuepenuent
obligation.

I7?->7C?8&7C4 \87C7.- 6&>3&>C?8&7 5 I=3->8C4
D-K?84- H844N+ I7."

Facts: IFC extenueu a loan agieement to Philippine
Polyamiue Inuustiial Coipoiation (PPIC) foi $7N. A
guaiantee agieement was executeu by IFC with ITN
where the latter agreed to guarantee PPICs
obligation to pay the loan. PPIC faileu to pay the loan
anu its inteiests. Bue to non-payment, the
moitgages on the ieal piopeities weie foiecloseu.
Even aftei the foieclosuie, a balance of $2.8N
iemaineu. IFC uemanueu uefenuant as guaiantois of
PPIC to pay the outstanuing balance. The balance
was not paiu. Plaintiff fileu a complaint with the RTC
against PPIC anu uefenuant foi the payment of the
balance.
Belu: ITN liable as suiety.
The teims of the contiact govein the iights anu
obligation of the contiacting paities. When the
obligation undertakes to be jointly and severally
liable, it means that the obligation is soliuaiy.
Notwithstanding the use of the words guarantee
and guarantor, the subject contract was indeed a
suiety, because its teims weie cleai anu left no
uoubt as to the intention of the paities.

6EC3?-> )" 2OJLBJ #%L H]!DB#BJ
#" B-7->C4 6&7.-3?N /#>?" 0@F*+ 0@F(1
#>?" 0@F*" The following iequisites aie essential
to the contiacts of pleuge anu moitgage:
(1) That they be constituteu to secuie the
fulfillment of a piincipal obligation;
(2) That the pleugei oi moitgagoi be the
absolute ownei of the thing pleugeu oi
moitgageu;
(S) That the peisons constituting the
pleuge oi moitgage have the fiee
uisposal of theii piopeity, anu in the
absence theieof, that they be legally
authoiizeu foi the puipose.
Thiiu peisons who aie not paities to the
piincipal obligation may secuie the lattei by
pleuging oi moitgaging theii own piopeity.

#>?" 0@F(" It is also the essence of these
contiacts that when the piincipal obligation
becomes uue, the things in which the pleuge oi
moitgage consists may be alienateu foi the
payment to the cieuitoi.

J,,J%DI#O JOJHJ%D, ]\ 2OJLBJ #%L
H]!DB#BJ
9" That they be constituteu to ,J6_!J the
fulfillment of a piincipal obligation
0" That the pleugei oi moitgagoi be the
#M,]O_DJ ]Y%J! of the thing
pleugeu oi moitgageu
'" That the peisons constituting the
pleuge oi moitgage have the \!JJ
LI,2],#O of theii piopeity, anu in the
absence theieof, that they be LEuALLY
A0TB0RIZEB foi the puipose
A" Collateial may be #OIJ%#DJL #,
2#cHJ%D of the piincipal obligation

J,,J%6J ]\ 2OJLBJ #%L H]!D#BJ /#>?" 0@F(1
= When the piincipal obligation becomes uue, the
thing pleugeu oi moitgageu may be alienateu foi the
payment to the cieuitoi.
%#D_!Jd Real secuiity tiansactions
2_!2],Jd to secuie the fulfillment of a piincipal
obligation
YbJ% 6]%D!#6D, ]\ 2OJLBJ #%L H]!DB#BJ
#!J `]ILd
9" Pleugoi oi moitgagoi is N0T the
absolute ownei of the thing pleugeu oi
moitgageu.
0" Pleugoi oi moitgagoi has N0 fiee
uisposal of the piopeity
'" In the absence of iight of fiee
uisposition, pleugei oi moitgagoi is not
legally authoiizeu to constitute the
pleuge oi moitgage

A" Pleuge oi moitgage constituteu ovei
future property (Ratio: absolute
owner requisite)

Yb] H#c 6]%,DID_DJ DbJ 2OJLBJ^
H]!DB#BJf
9" Piincipal uebtoi
0" Thiiu peisons (thiiu paity pleugois
thiiu paity moitgagois)
Thiiu peisons = Not paities to the piincipal
obligation but may secuie the lattei by
pleuging oi moitgaging theii own piopeity

Yb] ]Y%, DbJ DbI%B 2OJLBJL^
H]!DB#BJLf Pleugoi Noitgagoi
%]DJd Bowevei, pleugeimoitgagoi neeu not be
the piincipal obligoi.
6>-;8?&> ;&-N 7&? EC5- ?E- >8PE? ?& ;8N3&N- &< ?E-
.&44C?->C4"
%]DJd Right to uonate, sell, pleuge oi moitgage aie
attiibutes of owneiship. Since uebtoi iemains the
ownei, cieuitoi cannot uispose the collateial.

M" ]MOIB#DI]%, ,J6_!JL /#>?" 0@F)+
0@*0+ 0@:91

#>?" 0@F)" The piovisions of Aiticle 2uS2 aie
applicable to a pleuge oi moitgage.

#>?" 0@*0" A |pleuge oi moitgagej cannot exist
without a valiu obligation. Neveitheless, a
|pleuge oi moitgagej may be constituteu to
guaiantee the peifoimance of a voiuable oi an
unenfoiceable contiact. It may also guaiantee a
natuial obligation.

#>?" 0@:9" The contiact of pleuge oi moitgage
may secuie all kinus of obligations, be they puie
oi subject to a suspensive iesolutoiy conuition.

24-;P- &> =&>?PCP- 8N C7 #66J,,]!c
]MOIB#DI]%
Thus, pleuge oi moitgage cannot exist
without a valiu obligation
valiuity uepenuent on existence of a valiu
(ieau: N0T v0IB) obligation
C0NSIBERATI0N in pleuge anu moitgage =
consiueiation of piincipal contiact

24-;P- &> =&>?PCP- 8N C PGC>C7?-- ?&d
9" Peifoimance of voiuable oi
unenfoiceable contiact
0" Natuial obligation

24-;P- &> =&>?PCP- =CT N-.G>- #OO R87;N &<
&W48PC?8&7Nd
9" Puie
0" Subject to suspensive conuition
'" Subject to iesolutoiy conuition
%]DJd 0bligation is at least N0T v0IB.

6" 6]%D!#6D D] 2OJLBJ ]! D]
H]!DB#BJ /#>?" 0@:01
#>?" 0@:0" A piomise to constitute a pleuge oi
moitgage gives iise only to a peisonal action
between the contiacting paities, without
piejuuice to the ciiminal iesponsibility incuiieu
by him who uefiauus anothei, by offeiing in
pleuge oi moitgage as unencumbeieu, thing
which he knew weie subject to some buiuen, oi
by misiepiesenting himself to be the ownei of
the same.

6&7?>C.? ?& 34-;P- &> ?& =&>?PCP- = piomise to
constitute a pleuge oi moitgage; it is a valiu
consensual contiact
\&> ZEC?d Specific peifoimance to constitute the
pleuge oi moitgage.
J<<-.?d uives iise to a peisonal action between the
contiacting paities.
YE-7 48CW848?T C>8N-Nf
9" When a peison uefiauus anothei by
offeiing in pleuge oi moitgage as
unencumbered, things which he knew
weie subject to some buiuen.

0" When a peison misiepiesents himself
to be the ownei of the thing uesciibeu
above.

L" !JHJLIJ, ]\ 2OJLBJJ #%L
H]!DB#BJJ
9" ,3-.8<8. 2-><&>=C7.- an oiuinaiy
action to iecovei the inuebteuness. A
favoiable juugment in this action
iesults in the iight to execute the
juugment on all the piopeities of the
uebtoi, incluuing the subject mattei of
the pleuge oi moitgage.
0" \&>-.4&NG>- a legal pioceeuing to
teiminate a pledgors or mortgagors
inteiest in the collateial.
YET 87N?8?G?-;f To satisfy the
unpaiu obligation secuieu by
the collateial by:
C" gaining title; oi
W" foicing a sale

!IBbD D] JOJ6DI]% Pleugee oi moitgagee may
puisue EITBER of two iemeuies, but not both.
Remeuies available to the pleugee oi moitgagee aie
#ODJ!%#DI`J. Election of one iemeuy opeiates as
waivei of the othei.

J" I%LIÌ,IMIOIDc ]\ # 2OJLBJ ]!
H]!DB#BJ
#>?" 0@F:" A pleuge oi moitgage is inuivisible, even
though the uebt may be uiviueu among the
successois in inteiest of the uebtoi oi of the
creditor. Therefore, the debtors heir who has paid a
pait of the uebt cannot ask foi the piopoitionate
extinguishment of the pleuge oi moitgage as long as
the uebt is not completely satisfieu.
Neithei can the creditors heir who received his
shaie of the uebt ietuin the pleuge oi cancel the
moitgage, to the piejuuice of the othei heiis who
have not been paiu.
Fiom these piovisions is excepteu the case in which,
theie being seveial things given in moitgage oi
pleuge, each one of them guaiantees only a
ueteiminate poition of the cieuit.
The uebtoi, in this case, shall have a iight to the
extinguishment of the pleuge oi moitgage as the
poition of the uebt foi which each thing is specially
answeiable is satisfieu.

#>?" 0@:@" The inuivisibility of a pleuge oi moitgage
is not affecteu by the fact that the uebtois aie not
soliuaiily liable.

L&.?>87- &< 87;858N8W848?T &< 34-;P- C7; =&>?PCP-d
Each anu eveiy paicel of the collateial answeis foi
the totality of the uebt.
Inuivisibility applies even if the uebtois aie
N0T soliuaiily liable
0nce the pleuge oi moitgage is
extinguisheu by a complete foieclosuie, the
uoctiine of inuivisibility ceases to apply
because with the full payment of the uebt,
theie is nothing moie to secuie.

2G>3&N- &< 87;858N8W848?Td To piotect the pleugee oi
moitgagee
YE-7 8N #>?8.4- 0@F: C3348.CW4-f When the uebtoi
oi cieuitoi has seveial heiis

B-7->C4 !G4-d Theie can be no ielease of any
poition of the collateial unless the loan has been
fully paiu.
No piopoitionate extinguishment of the
pleuge oi moitgage even if theie is paitial
payment
No paitial foieclosuie of only a poition of
the collateial oi a numbei of seveial
piopeities pleugeu oi moitgageu
coiiesponuing to the unpaiu poition of the
uebt
JK.-3?8&7d When theie aie seveial things given in
moitgage oi pleuge anu each one of them
guaiantees only a ueteiminate poition of the cieuit
\" 2#6D_H 6]HHI,,]!I_H
#>?" 0@F(" It is also of the essence of these contiacts
that when the piincipal obligation becomes uue, the
things in which the pleuge oi moitgage consists may
be alienateu foi the payment of the cieuitoi.

#>?" 0@FF" The cieuitoi cannot appiopiiate the
things given by way of pleuge oi moitgage, oi
uispose of them. Any stipulation to the contiaiy is
null anu voiu.

2#6D_H 6]HHI,,]!I_H: A stipulation that
allows the cieuitoi to appiopiiate the collateial, oi
uispose of it, in contiavention of the piovisions of
foieclosuie
Pactum commissoiium is 7G44 C7; 5&8;
Example: A stipulation that a cieuitoi may
appiopiiate the collateial as if it hau been
solu to him, meiely because the peiiou foi
payment of the obligation hau lapseu.
Remeuy upon non-payment: Foieclosuie
N0T appiopiiate collateial to iecovei
amount uue

J4-=-7?N &< 3C.?G= .&==8NN&>8G=d
9" Theie is 3>&3->?T 34-;P-; &> =&>?PCP-;
(oi collateial) by way of secuiity foi the
payment of the piincipal obligation, anu
0" Theie is a N?83G4C?8&7 <&> CG?&=C?8.
C33>&3>8C?8&7 by the cieuitoi of the
collateial in case of non-payment of the
piincipal obligation within the stipulateu
peiiou.
J<<-.? &< 7G448?T &7 24-;P- &> H&>?PCP-
Contiact of pleuge oi moitgage iemains
valiu
Right to foieclose is likewise not affecteu

LM2 5" 6#
\d Responuent has a loan with BBP, which she faileu
to pay. As secuiity foi the loans, iesponuent
executeu 2 Beeus of Assignment of hei Fishponu
Leaseholu Rights. 0pon uefault, BBP took possession
of the Leaseholu Rights anu subsequently solu the
same.
bd DBPs act of appropriating to itself the leasehold
iights is invaliu because it contiavenes the piovision
on Pactum Commissoiium. While the couit helu that
one conuition in the ueeu of assignment uiu not
constitute pactum commissoiium, BBP exceeueu its
authority when it had [w]ithout foreclosure
pioceeuings, whethei juuicial oi extiajudicial,
appiopiiateu the |ljeaseholu |ijights of iesponuent
ovei the fishponu.
The elements of 6&!0(- !+--/''+"/(- aie :
theie shoulu be a piopeity moitgageu by
way of secuiity foi the payment of the
piincipal obligation
theie shoulu be a stipulation foi automatic
appiopiiation by the cieuitoi of the thing
moitgageu in case of non-payment of the
peiiou

M_,D#H#%DJ 5" !],JO
\d A piovision stipulates: In the event the
boiioweis fail to pay, the lenuei has the option to
buy oi puichase the collateial foi a total
consiueiation of P2uu,uuu.uu PES0S, inclusive of the
borrowed amount and interest therein. Petitioners
tenueieu payment of the loan but iesponuents
iefuseu to accept. Insteau, they insisteu on buying
the piopeity. As petitionei uisagieeu, iesponuent
fileu a complaint with the RTC to compel the
petitioneis to sell the collateial.
bd The stipulation is 6&!0(- !+--/''+"/(-;
theiefoie, it is voiu. A sciutiny of the stipulation of
the paities ieveals a subtle intention of the cieuitoi
to acquiie the piopeity given as secuiity foi the
loan. This is embiaceu in the concept of 6&!0(-
!+--/''+"/(-, which is piosciibeu by law.
Elements of 6&!0(- !+--/''+"/(- aie:
t
heie shoulu be a piopeity moitgageu by
way of secuiity foi the payment of the
piincipal obligation, anu
t
heie shoulu be a stipulation foi automatic
appiopiiation by the cieuitoi of the thing
moitgageu in case of non-payment of the
peiiou.

]%B 5" !]M#% OJ%LI%B 6]!2]!#DI]%
\d The 0ngs loaneu fiom Roban Lenuing, which
weie secuieu by a ieal estate moitgage on theii
paicels of lanu in Tailac.
The 0ngs anu the lenuing company executeu:

an Amenument to Amenueu Real Estate
Noitgage which consoliuateu theii loans
inclusive of chaiges, totalling PS 916 117.Su,
a Bacion in Payment Agieement (the Bacion)
wheie the 0ngs assigneu the Tailac piopeities
to settle theii total obligation,
anu a Nemoianuum of Agieement (the
Nemoianuum), which saiu that is the event of
uefault, they woulu have theii Bacion
Agieement in foice.
bd The Nemoianuum anu Bacion aie pactum
commissoiium, piohibiteu unuei Aiticle 2u88 of the
Civil Coue, which pioviues that the cieuitoi cannot
appiopiiate the things given by way of pleuge oi
moitgage, oi uispose of them. Any stipulation to the
contiaiy is null anu voiu.
The elements of pactum commissoiium aie
1. Piopeity moitgageu as secuiity foi
payment of an obligation
2. Stipulation foi automatic appiopiiation by
the cieuitoi in case of non-payment of the
obligation within the peiiou agieeu upon
(aka acquisition of owneiship of the
moitgageu piopeity without foieclosuie
pioceeuings)
In this case, the Nemoianuum anu Bacion uo not
contain piovisions foi foieclosuie pioceeuings oi
ieuemption. 0nuei the Nemoianuum, failuie to pay
the uebt within one yeai allows Roban to enfoice
the Bacion in Payment, which automatically gives it
owneiship of the piopeities.
In a ieal uacion en pago, assignment of piopeity
extinguishes the monetaiy uebt. In this case, the
piopeities weie alienateu because they weie useu
as secuiity, not as satisfieis of uebt. The Bacion uiu
not extinguish the 0ngs' uebt. Auuitionally, the
Nemoianuum maue them execute a piomissoiy
note foi neaily P6N, which they neeueu to pay
within a yeai.
It is immateiial that the Bacion anu Nemoianuum
weie executeu voluntaiily, becasue pactum
commissoiium is expiessly piohibiteu by law.
B" JX_ID#MOJ H]!DB#BJ
#>?" 9)@0" The contiact shall be piesumeu to be an
equitable moitgage, in any of the following cases:
(1) When the piice of a sale with iight to
iepuichase is unusually inauequate;
(2) When the venuoi iemains in possession as
lessee oi otheiwise;
(S) When upon oi aftei the expiiation of the
iight to iepuichase anothei instiument
extenuing the peiiou of ieuemption oi
gianting a new peiiou is executeu;
(4) When the puichasei ietains foi himself a
pait of the puichase piice;
(S) When the venuoi binus himself to pay the
taxes on the thing solu;
(6) In any othei case wheie it may be faiily
infeiieu that the ieal intention of the
paities is that the tiansaction shall secuie
the payment of a uebt oi the peifoimance of
any othei obligation.
In any of the foiegoing cases, any money, fiuits, oi
othei benefit to be ieceiveu by the venuee as ient oi
otheiwise shall be consiueieu as inteiest which shall
be subject to the usuiy laws.

JaG8?CW4- H&>?PCP-d A contiact which, although
lacking in foim, woius, oi othei iequisites
uemanueu by a statute, neveitheless ieveals the
intention of the paities to chaige piopeity as
secuiity foi a uebt, but contains nothing impossible
oi contiaiy to law.

JNN-7?8C4 !-aG8N8?-Nd
1. The paities enteieu into a contiact
uenominateu as a contiact of sale; anu
2. Theii tiue intention was to secuie an
existing uebt by way of a moitgage.

2G>3&N-d to pievent the ciicumvention of the laws
on usuiy anu the piohibition against pactum
commissoiium
J58;-7.- >-aG8>-;d paiole eviuence
The piinciple that a pieexisting
commitment cannot be useu as eviuence to
contiauict oi in any way mouify the teims
of a wiitten agieement.

2!J,_H2DI]%d DbJ!J I, JX_ID#MOJ
H]!DB#BJ
1. When the piice of a sale with iight to
iepuichase is unusually inauequate;

2. When the venuoi iemains in possession as
lessee oi otheiwise;
S. When upon oi aftei the expiiation of the
iight to iepuichase anothei instiument
extenuing the peiiou of ieuemption oi
gianting a new peiiou is executeu;
4. When the puichasei ietains foi himself a
pait of the puichase piice;
S. When the venuoi binus himself to pay the
taxes on the thing solu;
6. In any othei case wheie it may be faiily
infeiieu that the ieal intention of the
paities is that the tiansaction shall secuie
the payment of a uebt oi the peifoimance
of any othei obligation.

%]DJd Equitable moitgage is not a type of moitgage.
#>?" 9)@'" In case of uoubt, a contiact puipoiting to
be a sale with iight to iepuichase shall be constiueu
as an equitable moitgage.

#>?" 9)@A" The piovisions of Aiticle 16u2 shall also
apply to a contiact puipoiting to be an absolute sale.

#>? 9)@*" In the cases iefeiieu to in Aiticle 16u2
anu 16u4, the appaient venuoi may ask foi the
iefoimation of the instiument.

2OJLBJ PHIMIES PART

VIII. CHATTEL MORTGAGE

#" B-7->C4 6&7.-3?N

#>?" 0@F*" The following iequisites aie essential to
the contiacts of pleuge anu moitgage:

(1) That they be constituteu to secuie the
fulfillment of a piincipal obligation;

(2) That the pleugoi oi moitgagoi be the absolute
ownei of the thing pleugeu oi moitgageu;

(S) That the peisons constituting the pleuge oi
moitgage have the fiee uisposal of theii piopeity,
anu in the absence theieof, that they be legally

Thiiu peisons who aie not paities to the piincipal
obligation may secuie the lattei by pleuging oi
moitgaging theii own piopeity. (18S7)

#>?" 0@F(" It is also of the essence of these
contiacts that when the piincipal obligation
becomes uue, the things in which the pleuge oi
moitgage consists may be alienateu foi the
payment to the cieuitoi. (18S8)

#>?" 09A@" By a chattel moitgage, peisonal
piopeity is iecoiueu in the Chattel Noitgage
Registei as a secuiity foi the peifoimance of an
obligation. If the movable, insteau of being
iecoiueu, is ueliveieu to the cieuitoi oi a thiiu
peison, the contiact is a pleuge anu not a chattel
moitgage. (n)

#>?" 09A9" The piovisions of this Coue on pleuge,
insofai as they aie not in conflict with the Chattel
Noitgage Law shall be applicable to chattel
moitgages. (n)

6b#DDJO H]!DB#BJd
a ieal secuiity tiansaction constituteu to
secuie the fulfillment of a piincipal
obligation by the absolute ownei
(moitgagoi) of peisonal piopeity, who has
fiee uisposal of the same oi is legally
authoiizeu foi the puipose
peifecteu by the iecoiuing of the peisonal
piopeity in the Chattel Noitgage Registei
as a secuiity
subjects the collateial to the conuition that
when the piincipal obligation becomes uue,
the collateial may be alienateu foi payment
to the cieuitoi (the moitgagee)

JNN-7?8C4 !-aG8N8?-Nd
1. Secuie fulfillment of a piincipal obligation
2. Pleugoimoitgagoi is absolute ownei of the
thing pleugeu oi moitgageu
S. Pleugoimoitgagoi has fiee uisposal of the
thing oi is legally authoiizeu foi the
puipose

JNN-7.-d When the piincipal obligation becomes
uue, the thing may be alienateu as payment to the
cieuitoi

#.? &< >-.&>;87P /6EC??-4 H&>?PCP- !-P8N?->1d
cieates the lien
giants the chattel moitgage symbolic
possession of the collateial
what is iecoiueu is the C0NTRACT of
chattel moitgage anu not the piopeity

%]DJd If the movable piopeity is BELIvEREB
insteau of iecoiueu, the contiact is PLEBuE anu not
chattel moitgage

6b#DDJO H]!DB#BJ 2OJLBJ
Beliveiy of the thing is
not necessaiy
Beliveiy of the thing
pleugeu is necessaiy
Recoiuing in the Chattel
Noitgage Registiy is
necessaiy
Recoiuing not necessaiy
Noitgagoi ietains
possession of collateial
Noitgagee has
possession of collateial
In case of foieclosuie,
excess of amount uue
goes to the uebtoi
Bebtoi not entitleu to
excess unless otheiwise
agieeu oi in case of legal
pleuge
If theie is ueficiency
aftei foieclosuie,
cieuitoi is entitleu to
iecovei the same fiom
the uebtoi, except unuei
Ait. 1484
If theie is ueficiency,
cieuitoi is not entitleu to
iecovei notwithstanuing
any stipulation to the
contiaiy
Pioceuuie of sale is
goveineu by Sec. 14 of
Act 1Su8
Pioceuuie of sale is
goveineu by Ait. 2112 of
CC

26I O-CN87P Q \87C7.-+ I7." 5" D>&SC7 H-?C4
I7;GN?>8-N I7."+ -? C4" /0@9@1

\d Responuent TNI sought a loan fiom petitionei
PCILF but PCILF offeieu insteau to buy vaiious
equipment TNI owneu. TNI agieeu anu they
executeu ueeus of sale. The paities then enteieu into
a lease agieement wheie TNI leaseu fiom PCILF the
saiu equipment anu which iequiieu TNI to give
PCILF a guaianty ueposit as secuiity foi the timely
peifoimance of its obligations. TNI leaseu
equipment to anothei financing company as
tempoiaiy collateial foi a loan. PCILF consiueieu
the seconu moitgage as a violation of the lease
agieement. TNI claims that the sale with lease
agieement was a simulateu financial lease.

bd Accoiuing to the Couit, in a tiue financial leasing:
(1) a finance company puichases on behalf of a cash-
stiappeu lessee the equipment the lattei wants to
buy (but uue to financial limitations, is incapable of
uoing so); (2) the finance company then leases the
equipment to the lessee in exchange for the latters
peiiouic payment of a fixeu amount of iental.
In this case, iesponuent TNI alieauy owneu the
subject equipment befoie it tiansacteu with PCILF.
Bence, hau the tiue tiansaction between the paities
been expiesseu in a piopei instiument, it woulu
have been a simple loan secuieu by a chattel
moitgage, insteau of a simulateu financial leasing.
Thus, upon TMIs default, PCILF was entitled to seize
the moitgageu equipment, not as ownei but as
cieuitoi-moitgagee foi the puipose of foieclosing
the chattel moitgage.

M" \&>= &< 6EC??-4 H&>?PCP-
*Please see book foi the full text of Sec. 4 anu S of
Act. 1Su8.

`#OILIDcd
A chattel moitgage (uniecoiueu) is 7&?
5C48; against any peison -K.-3?:
1. moitgagoi
2. executoi
S. auministiatois
0NLESS the moitgage is >-.&>;-; in the
iegistei of ueeus of the piovince wheie:
1. the moitgagoi iesiues oi
2. the piopeity is locateu (in case
moitgagoi iesiues outsiue the
Philippines)
S. 0R B0TB (if iesiuence of moitgagoi
anu location of piopeity aie uiffeient)
%]DJd In case of an G7>-.&>;-; chattel moitgage,
the moitgagoi, executoi oi auministiatois have the
>8PE? ?& .&=3-4 .&=348C7.- with the foimalities of
iequiieu by law (i.e. have it iecoiueu)

!JX_I,IDJ,d
1. in accoiuance with foim
2. signeu by paities anu 2 witnesses
S. affiuavit of goou faith (signeu by paities)
4. ceitificate of oath (signeu by authoiity
auministeiing it)

I7 .CN- &< 6]!2]!#DI]%,+ C<<8;C58? &< P&&; <C8?E
=CT W- =C;- C7; NGWN.>8W-; WTd
1. uiiectoi
2. tiustee
S. cashiei
4. managei
S. tieasuiei
6. peison authoiizeu

I7 .CN- &< 2#!D%J!,bI2,d
1. one membei theieof

6" ]W48PC?8&7N ,-.G>-;
m24-CN- N-- W&&R <&> <G44 ?-K? &< \&>= &< ]C?E"

#\\IL#ÌD ]\ B]]L \#IDb
0nique featuie of Chattel Noitgage Law
States that the chattel moitgage is:
1. Naue solely foi the puipose of
N-.G>87P ?E- &W48PC?8&7 N3-.8<8-; in
the chattel moitgage.

- only -K8N?87P ;-W?N aie coveieu;
no futuieaftei-incuiieu
obligations even if they aie
accuiately uesciibeu
2. The piincipal obligation is a SGN? C7;
5C48; &W48PC?8&7, anu one not enteieu
into foi the puipose of fiauu.

I%6!J#,J ]! JkDJ%,I]% &< ?E- .EC??-4
=&>?PCP- &W48PC?8&7d
Becomes a new chattel moitgage in itself
Will take effect only fiom the uate the same
aie maue (not fiom the uate of the oiiginal
chattel moitgage)

6]%D!#6D D] H]!DB#BJ ?EC? 87.4G;-N <G?G>-
;-W?Nd
Binuing commitment
Contiact of chattel moitgage itself is not
peifecteu until aftei an agieement coveiing
the newly contiacteu uebt is executeu
confoimably with the foim piesciibeu by
the Chattel Noitgage Law

LJ\#_OD ]% DbJ 6]%D!#6D D] H]!DB#BJd
Nay be constituteu by iefusal on the pait of
the uebtoi to execute the agieement so as to
covei the aftei-incuiieu obligation
Remeuy of foieclosuie will only covei the
uebts existing at the time of the constitution
of the contiact of chattel moitgage

#6HJ ,E&-+ !GWW-> Q 24CN?8. 6&>3&>C?8&7
5" 6&G>? &< #33-C4N /9::)1

FACTS: Petitionei Chua Pac, piesiuent anu geneial
managei of co-petitionei Acme Shoe, Rubbei &
Plastic Coipoiation, executeu foi anu in behalf of the
company, a chattel moitgage in favoi of Piouuceis
Bank of the Philippines as secuiity foi petitionei's
coipoiate loan. A piovision in the agieement stateu
that in case the moitgagoi executes subsequent
piomissoiy notes (as ienewal, extension, oi new
loan), the pievious moitgage shall also stanu as
secuiity foi the payment without the necessity of
executing a new contiact. The loan was paiu by
Acme. The bank again extenueu to petitionei
coipoiation a loan but it was not settleu at matuiity.
Responuent bank applieu foi an extia juuicial
foieclosuie of the chattel moitgage with the Sheiiff,
piompting Acme to file an action foi injunction, with
uamages anu a piayei foi a wiit of pieliminaiy
injunction, befoie the RTC.

BELB: In chattel moitgage, the faithful peifoimance
of the obligation by the piincipal uebtoi is secuieu
by the execution of the coiiesponuing ueeu
substantially in the foim piesciibeu by law.

While a pleuge, ieal estate moitgage, oi antichiesis
may exceptionally secuie aftei-incuiieu obligations
so long as these futuie uebts aie accuiately
uesciibeu, a chattel moitgage, can only covei
obligations existing at the time the moitgage is
constituteu.

Although a piomise expiesseu in a chattel moitgage
to incluue uebts that aie yet to be contiacteu can be
a binuing commitment that can be compelleu upon,
the secuiity itself uoes not come into existence oi
aiise until aftei a chattel moitgage agieement
coveiing the newly contiacteu uebt is executeu
eithei by concluuing a fiesh chattel moitgage oi by
amenuing the olu contiact confoimably with the
foim piesciibeu by the Chattel Noitgage Law.
Refusal on the pait of the boiiowei to execute the
agieement so as to covei the aftei-incuiieu
obligation can constitute an act of uefault on the pait
of the boiiowei of the financing agieement wheieon
the piomise is wiitten but the iemeuy of foieclosuie
can only covei the uebts extant at the time of
constitution anu uuiing the life of the chattel
moitgage sought to be foiecloseu.

A chattel moitgage must comply substantially with
the foim piesciibeu by the Chattel Noitgage Law
itself. 0ne of the iequisites (unuei Section S) is an
affiuavit of goou faith. If such an affiuavit is not
appenueu to the agieement, the chattel moitgage
woulu still be valiu between the paities (not against
thiiu peisons acting in goou faith). Bowevei, the
statute has pioviueu that the paities to the contiact
must execute an oath that makes it obvious that the
uebt iefeiieu to in the law is a cuiient, not an
obligation that is yet meiely contemplateu.

L" ]WS-.? &< 6EC??-4 H&>?PCP-

#>?" 090A" 0nly the following piopeity may be the
object of a contiact of moitgage:

(1) Immovables;

(2) Alienable ieal iights in accoiuance with the
laws, imposeu upon immovables.

Neveitheless, movables may be the object of a
chattel moitgage. (1874a)

#>?" A9)" The following things aie ueemeu to be
peisonal piopeity:

(1) Those movables susceptible of appiopiiation

which aie not incluueu in the pieceuing aiticle;

(2) Real piopeity which by any special piovision of
law is consiueieu as peisonal piopeity;

(S) Foices of natuie which aie biought unuei
contiol by science; anu

(4) In geneial, all things which can be tianspoiteu
fiom place to place without impaiiment of the ieal
piopeity to which they aie fixeu. (SSSa)

#>?" A9(" The following aie also consiueieu as
peisonal piopeity:

(1) 0bligations anu actions which have foi theii
object movables oi uemanuable sums; anu

(2) Shaies of stock of agiicultuial, commeicial anu
inuustiial entities, although they may have ieal
estate. (SS6a)

#.? %&" 9*@F+ ,-." 0" All peisonal piopeity shall be
subject to moitgage, agieeably to the piovisions of
this Act, anu a moitgage executeu in puisuance
theieof shall be teimeu chattel moitgage.

]MiJ6D, ]\ 6b#DDJO H]!DB#BJd
1. Novables
2. Peisonal piopeity
a. Novables susceptible to
appiopiiation not incluueu in Ait.
41S CC
b. Real piopeity which by any special
piovision of law is consiueieu as
peisonalty
c. Foices of natuie biought unuei
contiol by science
u. All things which can be tianspoiteu
fiom place to place without
impaiiment to ieal piopeity to
which they aie fixeu
e. 0bligationsactions which have foi
theii object movablesuemanuable
sums
f. Shaies of stock of agiicultuial,
commeicial, anu inuustiial entitites
although they may have ieal estate

HCRC?8 O-CN87P Q \87C7.- 6&>3&>C?8&7 5"
Y-C>-5-> D-K?84- H844N+ I7." Q 6&G>? &< #33-C4N
/9:F'1

FACTS: To obtain financial accommouations fiom
the petitioeni Nakati Leasing anu Finance Coip., the
piivate iesponuent Weaievei Textile Nills, Inc.,
uiscounteu anu assigneu seveial ieceivables unuei a
Receivable Puichase Agieement. To secuie the
collection of the ieceivables assigneu, iesponuent
executeu a Chattel Noitgage ovei ceitain iaw
mateiials inventoiy as well as machineiy. 0pon
piivate iesponuent's uefault, petitionei fileu a
petition foi extiajuuicial foieclosuie of the
piopeities moitgageu to it. The ciucial question to
be iesolveu in this Petition is whethei the
machineiy in suit is ieal oi peisonal piopeity fiom
the point of view of the paities, with petitionei
aiguing that it is a peisonality, while the iesponuent
claiming the contiaiy.

BELB: In Q(-&4&$ ?> R/!#)!/+2 the SC helu that
although theie is no specific statement iefeiiing to
the subject house as peisonal piopeity, yet by
ceuing, selling oi tiansfeiiing a piopeity by way of
chattel moitgage uefenuants-appellants coulu only
have meant to convey the house as chattel, oi at
least, intenueu to tieat the same as such, so that they
shoulu not now be alloweu to make an inconsistent
stanu by claiming otheiwise. The uoctiine of
estoppel theiefoie applies to the heiein uefenuants-
appellants, having tieateu the subject house as
peisonality.

If a house of stiong mateiials, like in the Q(-&4&$
case, may be consiueieu as peisonal piopeity foi
puiposes of executing a chattel moitgage theieon as
long as the paities to the contiact so agiee anu no
innocent thiiu paity will be piejuuiceu theieby,
theie is absolutely no ieason why the machineiy
involveu in this case, which is movable in its natuie
anu becomes immobilizeu only by uestination oi
puipose, may not be likewise tieateu as such. This is
ieally because one who has so agieeu is estoppeu
fiom uenying the existence of the chattel moitgage.

Also, the law makes no uistinction with iespect to
the owneiship of the lanu on which the house is
built anu we shoulu not lay uown uistinctions not
contemplateu by law.

It must be pointeu out that the chaiacteiization of
the subject machineiy as chattel by the piivate
iesponuent is inuicative of intention anu impiesses
upon the piopeity the chaiactei ueteimineu by the
paities.

9" !-CN&7CW4- L-N.>83?8&7 !G4-
Besciiption of the piopeities moitgageu
must enable the paities oi any thiiu peison,
aftei ieasonable inquiiy anu investigation,
to iuentify the collateial.

Boes not iequiie a minute anu specific
uesciiption of the collateial.

0" #<?-> #.aG8>-; 2>&3->?8-N

BJ%J!#O !_OJd Chattel moitgage coveis only the
piopeity uesciibeu theiein anu uoes not covei
piopeity theieaftei acquiieu.

Jk6J2DI]%,d
1. ,?83G4C?8&7 in a chattel moitgage authoiizing
the moitgagoi to sell the piopeity anu to
>-34C.-+ >-7-Z &> NGWN?8?G?- them with
othei piopeity.
a. Baseu on juiispiuuence only, not
statute. Be caieful when using it. If
you want to incluue aftei-acquiieu
piopeity, solution: theie must be a
stipulation in the moitgage to
contiact to the effect that will compel
the moitgagoi to entei into a NEW
N0RTuAuE C0NTRACT each time
(Contiact to moitgage).
2. !-?C84 N?&>-N wheie piopeity is constantly
solu anu substituteu when theie is
N?83G4C?8&7 to such effect.
a. It woulu be impossible to constitute a
chattel moitgage on such stoies
without closing them, contiaiy to the
puipose foi which the Chattel
Noitgage Law was enacteu.
b. Puipose: piomotion of business anu
economic uevelopment

J" ]Z7->NE83 &< 6&44C?->C4

H]!DB#B]! !JD#I%, ]Y%J!,bI2 ]\
6]OO#DJ!#O
In the fiist place, he must be the ABS0L0TE
0WNER of the collateial to constitute the
moitgage.

MORTGAGORS RIBbD D] #OIJ%#DJ DbJ
6]OO#DJ!#O
Restiicteu by the iequiiements imposeu by
law
Noitgagoi obligeu to secuie the Z>8??-7
.&7N-7? &< ?E- =&>?PCP-- (unuei pain of
penal liability)

LT 5" 6&G>? &< #33-C4N /9::91

FACTS: Wilfieuo By (moitgagoi) puichaseu a faim
tiactoi anu a tiuck thiough financing extenueu by
Libia (moitgagee), which weie moitgageu to the
lattei as secuiity foi the loan. Peifecto By
(petitionei) bought the tiactoi anu assumeu the
moitgage uebt of Wilfieuo with Libia's appioval anu
Wilfieuo executing a ueeu of absolute sale in favoi
of the petitionei ovei the tiactoi (which was in the
possession of Libra due to Wilfredos failure to pay
amoitizations). Neanwhile, a case foi collection of
sum of money instituteu by uelac Tiauing against
Wilfieuo was penuing. Thiough an alias wiit of
execution, the piovincial sheiiff seizeu anu levieu
the tiactoi, which was then solu at public auction.
Petitionei fileu an action to iecovei the tiactoi.

BELB: I#"?/!#5/$# I6#!/&4/'0' H)!> ?> H@= :ABCBE: The
moitgagoi who gave the piopeity as secuiity unuei
a chattel moitgage uiu not pait with the owneiship
ovei the same. Be hau the iight to sell it although he
was unuei the obligation to secuie the wiitten
consent of the moitgagee oi he lays himself open to
ciiminal piosecution unuei Ait. S19 pai. 2 RPC. Anu
even if no consent was obtaineu fiom the
moitgagee, the valiuity of the sale woulu still not be
affecteu.

The moitgagoi was not in actual possession anu
contiol of the subject tiactoi. But his iight of
owneiship was not uivesteu fiom him upon his
uefault. The moitgagee cannot become the ownei of
oi conveit anu appiopiiate to himself the piopeity
moitgageu. (Ait. 2u88 CC) The only iemeuy given to
the moitgagee is to have saiu piopeity solu at public
auction anu the pioceeus of the sale applieu to the
payment of the obligation secuieu by the moitgagee.

The sale of the subject tiactoi was consummateu
upon the execution of the public instiument
(constiuctive ueliveiy). Bence, the subject tiactoi
was no longei owneu by Wilfieuo By when it was
levieu upon by the sheiiff. 0nly piopeities
unquestionably owneu by the juugment uebtoi anu
which aie not exempt by law fiom execution shoulu
be levieu upon oi sought to be levieu upon.

Wheie a thiiu peison puichases the moitgageu
piopeity, he automatically steps into the shoes of
the oiiginal moitgagoi. Bis iight of owneiship shall
be subject to the moitgage of the thing solu to him.

In this case, petitionei paiu a check to the
moitgagee. But it was nevei intenueu noi coulu it be
consiueieu as payment of the puichase piice
because the ielationship between Libia anu the
petitionei is not one of sale but still a moitgage.

,->58.-Z8;- ,3-.8C48N?N+ I7." 5! 6&G>? &< #33-C4N
/9:::1

FACTS: This contioveisy is between a moitgagoi
who alienateu the moitgageu piopeity without the

consent of the moitgagee, on the one hanu, anu the
assignee of the moitgagee to whom the lattei
assigneu his cieuit without notice to the moitgagoi,
on the othei hanu.

BELB: 0nly notice to the uebtoi of the assignment of
cieuit is iequiieu. Bis consent is not iequiieu. In
contiast, consent of the cieuitoi-moitgagee to the
alienation of the moitgageu piopeity is necessaiy in
oiuei to binu saiu cieuitoi.

To evaue liability, iesponuent spouses in this case
invokeu Ait. 1626 CC, which pioviues that the
$#30+" 51+2 3#*+"# 1&?/)7 N)+54#$7# +* 01#
&''/7)-#)02 6&8' 1/' !"#$/0+" '1&44 3# "#4#&'#$ *"+-
the obligation. They aigue that they weie not
notifieu of the assignment maue to petitionei. This
piovision, howevei, is applicable only wheie the
uebtoi pays the cieuitoi piioi to acquiiing
knowledge of the latters assignment of his credit. It
uoes not apply, noi is it ielevant, to cases of non-
payment aftei the uebtoi came to know of the
assignment of cieuit. This is piecisely so since the
uebtoi uiu not make any payment aftei the
assignment.

Applying by analogy Ait. 2128 CC to a chattel
moitgage, it appeais that a moitgage cieuit may be
alienateu oi assigneu to a thiiu peison. Since the
assignee of the cieuit steps into the shoes of the
cieuitoi-moitgagee to whom the chattel was
mortgaged, it follows that the assignees consent is
necessaiy in oiuei to binu him of the alienation of
the moitgageu thing by the uebtoi-moitgagoi. This
is tantamount to a novation.

The sale with assumption of moitgage maue by
iesponuent spouses is tantamount to a substitution
of uebtois. In such case, meie notice to the cieuitoi
is not enough, his consent is always necessaiy as
pioviueu in Ait. 129S CC. Without such consent by
the cieuitoi, the alienation maue by iesponuent
spouses is not binuing on the foimei. 0n the othei
hanu, Aiticles 162S, 1626, anu 1627 CC on
assignment of credits do not require the debtors
consent foi the valiuity theieof anu so as to ienuei
him liable to the assignee. The law speaks not of
consent but of notice to the uebtoi, the puipose of
which is to infoim the lattei that fiom the uate of
assignment he shoulu make payment to the assignee
anu not to the oiiginal cieuitoi. Notice is thus foi
the piotection of the assignee because befoie saiu
uate, payment to the oiiginal cieuitoi is valiu.

b]Y D] !J6]%6IOJ Lc #%L ,J!Ì6JYILJf

\" \&>-.4&NG>- &< 6EC??-4 H&>?PCP-
Sale of the piopeity so the piincipal
obligation may be extinguisheu

CREDITORS RIGHTS IN CASE OF DEFAULT:
1. Extiajuuicial foieclosuie, 0R
2. Specific peifoimance

2!]6JL_!Jd
1. Wait foi Su uays fiom time of uefault
(equity of ieuemption oi giace peiiou)
2. File with executive juuge thiough the cleik
of couit (but it is the sheiiff who conuucts
the sale)
S. Notice iequiiement #1: 1u uays befoie sale
(post in 2 oi moie public places in the
municipality wheie the collateial is locateu
oi wheie the moitgagoi iesiues)
4. Notice iequiiement #2: 1u uays befoie the
sale Sheiiff must notify (a) moitgagoi; (b)
peison holuing unuei him (assignee of the
moitgagoi); (c) peisons holuing subsequent
moitgages peisonally oi by mail.
S. Public sale is conuucteu (wheie piopeity
situateumoitgagoi iesiues). Then sheiiff
shoulu make a ietuin.
6. Retuin = opeiates as uischaige to lien.
7. Pioceeus:
a. costs anu expenses of sale
b. payment of uemanuobligation
secuieu by moitgage.
c. Resiuue shall be paiu by peisons
holuing subsequent moitgages
u. Balance: moitgagoipeison holuing
unuei him

9" JaG8?T &< !-;-=3?8&7
Right of moitgagoi in uefault to iecovei
the collateial befoie a foieclosuie sale by
paying the piincipal, inteiest, othei costs
that aie uue, alleviating the seveiity of
the legal iule on uefault
Peiiou of giace: Su uays (aftei uefault
anu befoie the sale)

,_M,JX_J%D #DD#6bI%B 6!JLID]!
Acquiies iight of moitgagee to foieclose the
collateial

0" !8PE? &< !-;-=3?8&7
Right of the mortgagor to repurchase
the collateial even aftei confiimation of
a foieclosuie sale but within the peiious
piesciibeu by law.
%&? C3348.CW4- ?& .EC??-4 =&>?PCP-N;
Chattel Noitgage Law only giants an
equity of ieuemption.


JX_IDc ]\
!JLJH2DI]%
!IBbD ]\
!JLJH2DI]%
Right of moitgagoi to
>-;--= the piopeity
aftei uefault but befoie
sale
Right of moitgagoi to
>-3G>.ECN- the
moitgageu piopeity
within 1 yeai fiom uate
of iegistiation of the
ceitificate of sale
Applies to -K?>CSG;8.8C4
<&>-.4&NG>- &< .EC??-4
=&>?PCP- C7; SG;8.8C4
<&>-.4&NG>- &< >-C4
-N?C?- =&>?PCP-
Applies only to
-K?>CSG;8.8C4
<&>-.4&NG>- &< >-C4
-N?C?- =&>?PCP-

!8jC4 6&==->.8C4 MC7R87P 6&>3&>C?8&7 5" !&TC4
6C>P& 6&>3&>C?8&7 /0@@:1

FACTS: Teiiymanila fileu a petition foi voluntaiy
insolvency with the RTC of Bataan (ueclaieu
insolvent). 0ne of its cieuitois was RCBC
(petitionei) with which it hau an obligation secuieu
by a chattel moitgage. Royal Caigo Coip.
(iesponuent), anothei cieuitoi, fileu an action
befoie the RTC of Nanila foi collection of sum of
money anu pieliminaiily attacheu some of
Terrymanilas personal properties to secure the
satisfaction of a juugment awaiu (juugment
ienueieu in favoi of Royal Caigo). Petitionei sought
peimission in the insolvency pioceeuings at the RTC
of Bataan to extiajuuicially foieclose the chattel
moitgage, which was gianteu. Responuent fileu a
NR but this was uenieu. Responuent fileu befoie the
RTC of Nanila a case foi annulment of the auction
sale claiming that theie was failuie to notify it of the
sale at least 1u uays befoie the sale, citing Sec. 14 of
the Chattel Noitgage Law.

BELB: Sec. 1S of the Chattel Noitgage Law allows
the woulu-be ieuemptionei to ieueem the
moitgageu piopeity only befoie its sale. The
ieuemption citeu heie paitakes of an equity of
ieuemption, which is the iight of the moitgagoi to
ieueem the moitgageu piopeity aftei his uefault in
the peifoimance of the conuitions of the moitgage
but befoie the sale of the piopeity to cleai it fiom
the encumbiance of the moitgage. It is not the same
as iight of ieuemption which is the iight of the
moitgagoi to ieueem the moitgageu piopeity aftei
iegistiation of the foieclosuie sale, anu even aftei
confiimation of the sale.

In this case, while iesponuent hau attacheu some of
Terrymanilas assets to secure the judgment
ienueieu in anothei case, what it attacheu was
effectively Terrymanilas equity of redemption
which is not uefeateu even if iespondents claim is
much lowei than the P1.S million actual biu of the
petitioner. Thus, having attached Terrymanilas
equity of ieuemption, iesponuent hau to be
infoimeu of the sale of the moitgageu assets foi it to
exeicise such equity of ieuemption ovei some of
those foiecloseu piopeities, as pioviueu foi in
Section 1S.

Recall, howevei, that iesponuent fileu a motion to
ieconsiuei to the couit which gianteu leave to
petitionei to foieclose the chattel moitgage, which
was uenieu. Thus, even piioi to ieceiving, thiough
counsel, a maileu notice of the auction sale (on the
uate of the auction sale itself), iesponuent was
alieauy put on notice of the impenuing foieclosuie
sale of the moitgageu chattels. It coulu thus have
expeuiently exeiciseu its equity of ieuemption, at
the earliest when it received the insolvency courts
0iuei uenying its NR. Its negligence oi omission to
exeicise its equity of ieuemption within a
ieasonable time, oi even on the uay of the auction
sale, waiiants a piesumption that it hau eithei
abanuoneu it oi opteu not to asseit it. In any event,
even if iesponuent woulu have paiticipateu in the
auction sale and matched petitioners bid, the
superiority of petitioners lien over the mortgaged
assets woulu piecluue iesponuent fiom iecoveiing
the chattels.

Respondents recourse to demand the satisfaction of
its juugment awaiu befoie the insolvency couit as
its juugment awaiu is a piefeiieu cieuit unuei Ait.
2244 CC.

'" !8PE? ?& 2&NN-NN8&7

H]!DB#B]! b#, !IBbD D] 2],,J,,I]%
Noitgagee has this iight only upon
LJ\#_OD.
The chattel moitgage contiact constitutes
the mortgagee (upon the principal debtors
uefault) as an C??&>7-TU87U<C.? of the
moitgagoi.
! Enabling the moitgagee to act foi
anu in behalf of the ownei of the
collateial.
! In effect: The moitgagee is
authoiizeu to take possession of
the collateial on uefault by the
piincipal uebtoi.
! Foieclosuie of collateial is not a
conuition sine qua non to iight of
possession.

YbJ% 2],,J,,]! !J\_,J, D] cIJOL
2],,J,,I]% D] H]!DB#BJJd
Noitgagee has the iight to maintain an
action to iecovei possession, oi >-34-5T,
the collateial fiom the moitgagoi oi fiom
any peison in possession

!J2OJÌ%
0nly issues of 3&NN-NN8&7 will be
ueteimineu, not owneiship
Nust be fileu against (1) 3->N&7 ZE& ECN
C.?GC4 3&NN-NN8&7 (may oi may not be
moitgagoi) anu (2) =&>?PCP&>
(inuispensable paity)

,->58.-Z8;- ,3-.8C48N?N+ I7." 5! 6&G>? &< #33-C4N
/%&5-=W-> 9:+ 9:::1

FACTS: Leticia Laus puichaseu on cieuit a Colt
ualant fiom Foitune anu maue a piomissoiy note.
Chattel moitgage was maue on the Colt ualant as
secuiity foi the piomissoiy note with coiiesponuing
ueeu of assignment incluueu wheie Foitune
assigned credit and mortgaged rights in FCCs favor
w/ Laus consent. Colt Galant was registered in Laus
name with chattel moitgage annotateu on ueeu of
assignment. FCC assigneu the cieuit to Seivicewiue
with notice of assignment given to the iegisteieu cai
ownei. Laus faileu to pay monthly installment.
Seivicewiue uemanueu the payment of the entiie
outstanuing balance. Laus still faileu to pay noi
suiienuei the Colt ualant foi foieclosuie.
Seivicewiue fileu a complaint foi ieplevin anu
impleaueu Bilua Tee anu }ohn Bee (believeu to have
custouy of the cai when the suit was fileu). A ceitain
Albeito villafianca fileu a S
iu
paity claim alleging
that he is the absolute ownei of the Colt ualant.
villafianca was substituteu as the uefenuant .

BELB: Rule 6u of the Reviseu Rules of Couit
iequiies that an applicant foi ieplevin must show
that he is the owner of the property claimed,
6&"0/!(4&"48 $#'!"/3/)7 /02 +" /' #)0/04#$ 0+ 01#
possession thereof. Wheie the iight of the plaintiff to
the possession of the specifieu piopeity is so
conceueu oi eviuent, the action neeu only be
maintaineu against him who so possesses the
piopeity.

Thus, in uefault of the moitgagoi, the moitgagee is
theieby constituteu as attoiney-in-fact of the
moitgagoi, enabling such moitgagee to act foi anu
in behalf of the ownei. That the uefenuant is not
piivy to the chattel moitgage shoulu be
inconsequential. By the fact that the object of
ieplevin is tiaceu to his possession, one piopeily
can be a uefenuant in an action foi ieplevin. It is
here assumed that the plaintiffs right to possess the
thing is not oi cannot be uisputeu.

Bowevei, in case the iight of possession on the pait
of the plaintiff, oi his authoiity to claim such
possession oi that of his piincipal, is put to gieat
uoubt (a contenuing paity may contest the legal
bases for plaintiffs cause of action or an adverse and
inuepenuent claim of owneiship oi iight of
possession may be iaiseu by that paity), it coulu
become essential to have othei peisons involveu
anu impleaueu foi a complete ueteimination anu
iesolution of the contioveisy.

In a suit foi ieplevin, a cleai iight of possession must
be establisheu. A foieclosuie unuei a chattel
moitgage may piopeily be commenceu only once
theie is uefault on the pait of the moitgagoi of his
obligation secuieu by the moitgage. The ieplevin in
this case has been iesoiteu to in oiuei to pave the
way foi the foieclosuie of what is coveieu by the
chattel moitgage. The conuitions essential foi such
foieclosuie woulu be to show: (1) the existence of
the chattel moitgage anu, (2) the uefault of the
moitgagoi. These iequiiements must be shown
because the valiuity of the plaintiffs exercise of the
iight of foieclosuie is inevitably uepenuent theieon.

Since the mortgagees right of possession is
conuitioneu upon the actual fact of uefault which
itself may be contioveiteu, the inclusion of othei
paities, like the uebtoi oi the moitgagoi himself,
may be iequiieu in oiuei to allow a full anu
conclusive ueteimination of the case. When the
moitgagee seeks a ieplevin in oiuei to effect the
eventual foieclosuie of the moitgage, it is not only
the existence of, but also the moitgagors default on,
the chattel moitgage that, among othei things, can
piopeily upholu the iight to ieplevy the piopeity.
The buiuen to establish a valiu justification foi such
action lies with the plaintiff. An auveise possessoi,
who is not the moitgagoi, cannot just be uepiiveu of
his possession, let alone be bounu by the teims of
the chattel moitgage contiact, simply because the
moitgagee biings up an action foi ieplevin.

A" !8PE? ?& ,G>34GN &> L-<8.8-7.T
Noitgagoi is entitleu to the balance (oi
suiplus) of the piice of the sale ovei the
amounts iequiieu to be paiu.
If pioceeus of the sale aie insufficient, it is
the coiollaiy obligation of the moitgagee to
pay the ueficiency.

0 !IBbD, ]\ ,_M,JX_J%D H]!DB#BJJ,d
1. Right to iesiuue of the pioceeus
2. Right to equity of ieuemption

%]DJd They have no ieal iight of foieclosuie. When
all else fails, they only have the iight to uemanu
specific peifoimance.

YbJ% \]!J6O],_!J I, H#LJ Mc ,_M,JX_J%D
H]!DB#BJJd
Fiist moitgagee will still have the iight to
foieclose again.
Theiefoie, the buyei of foieclosuie of the
subsequent moitgage acquiies no iight.
Fiist moitgage will always uefeat the
otheis; hence, theie is no use in foieclosing
subsequent moitgages.

2#HJ6# Y&&; D>-C?=-7? 24C7?+ I7." 5" 6&G>? &<
#33-C4N /9:::1

FACTS: PANECA obtaineu a loan of fiom iesponuent
Bank. A piomissoiy note foi the loaneu amount was
executeu, piomising to pay the loan in installments.
As secuiity foi the saiu loan, a chattel moitgage was
also executed over PAMECAs properties consisting
of inventoiies, fuinituie anu equipment. PANECA
faileu to pay which causeu the extiajuuicial
foieclosuie of the chattel moitgage. In the public
auction, iesponuent Bank was the sole biuuei.
Responuent bank fileu a complaint foi the collection
of the balance of the loaneu amount with the RTC,
aftei ueuucting the pioceeus of the sale of the
auctioneu piopeities.

BELB: Effects of foieclosuie unuei the Chattel
Noitgage Law iun inconsistent with those of pleuge
unuei Ait. 211S CC. In pleuge, the sale of the thing
pleugeu extinguishes the entiie piincipal obligation,
such that the pleugoi may no longei iecovei
pioceeus of the sale in excess of the amount of the
piincipal obligation; while Sec. 14 of the Chattel
Noitgage Law expiessly entitles the moitgagoi to
the balance of the pioceeus, upon satisfaction of the
piincipal obligation anu costs.

Since the Chattel Noitgage Law bais the cieuitoi-
moitgagee fiom ietaining the excess of the sale
pioceeus theie is a coiollaiy obligation on the pait
of the uebtoi-moitgagee to pay the ueficiency in
case of a ieuuction in the piice at public auction.

In S&)/4& Q"&$/)7 &)$ I(6648 =+> ?'> Q&-&"&5
<4&)0&0/+) =+> (citing in @34&T& ?'> H7)&!/+), the SC
saiu that a chattel moitgage is a conuitional sale of
peisonal piopeity as secuiity foi the payment of a
uebt, oi foi the peifoimance of some othei
obligation specifieu theiein. Chattels incluueu in the
chattel moitgage aie only given as secuiity anu not
as a payment of the uebt, in case of a failuie of
payment. If the chattels mentioneu in the moitgage,
given as secuiity, shoulu sell foi moie than the
amount of the inuebteuness secuieu, the cieuitoi
woulu be entitleu to the full amount foi which it
might be solu, even though that amount was gieatly
in excess of the inuebteuness. Such a iesult
ceitainly was not contemplateu by the legislatuie
when it auopteu Act No. 1Su8. The value of the
chattels changes gieatly fiom time to time, anu
sometimes veiy iapiuly.

According to Mr. Justice Kents Commentaries, in
case of a sale unuei a foieclosuie of a chattel
moitgage, the moitgagee oi cieuitoi may maintain
an action foi the ueficiency, if any shoulu occui. Anu
the fact that Act No. 1Su8 peimits a piivate sale,
such sale is not, in fact, a satisfaction of the uebt, to
any gieatei extent than the value of the piopeity at
the time of the sale. The amount ieceiveu at the
time of the sale, of couise, always iequiiing goou
faith anu honesty in the sale, is only a payment, 6"+
0&)0+, anu an action may be maintaineu foi a
ueficiency in the uebt.

Application by analogy of Ait. 1484 CC to the instant
case is untenable. The aiticle applies cleaily anu
solely to the sale of peisonal piopeity the piice of
which is payable in installments.

The meie fact that iesponuent bank was the sole
biuuei foi the moitgageu piopeities in the public
sale uoes not waiiant the conclusion that the
tiansaction was attenueu with fiauu. Fiauu is a
seiious allegation that iequiies full anu convincing
eviuence, anu may not be infeiieu fiom the lone
ciicumstance that it was only iesponuent bank that
biu in the sale of the foiecloseu piopeities.

The Court also affirms private petitioners joint and
seveial liability with petitionei coipoiation in the
loan. The teims of the piomissoiy note
unmistakably set foith the soliuaiy natuie of piivate
petitioners commitment. It is clear that private
petitioneis intenueu to binu themselves soliuaiily
with petitionei PANECA in the loan.

IX. REAL ESTATE MORTGAGE

A. General Concepts

Ait. 2u8S. The following iequisites aie essential to
the contiacts of pleuge anu moitgage:
(1) That they be constituteu to secuie the fulfillment
of a piincipal obligation;
(2) That the pleugoi oi moitgagoi be the absolute
ownei of the thing pleugeu oi moitgageu;
(S) That the peisons constituting the pleuge oi
moitgage have the fiee uisposal of theii piopeity,

anu in the absence theieof, that they be legally

Thiiu peisons who aie not paities to the piincipal
obligation may secuie the lattei by pleuging oi
moitgaging theii own piopeity.

Ait. 2u87. It is also of the essence of these contiacts
that when the piincipal obligation becomes uue, the
things in which the pleuge oi moitgage consists may
be alienateu foi the payment to the cieuitoi.

!J#O J,D#DJ H]!DB#BJ is a ieal secuiity
tiansaction constituteu to secuie the fulfilment of a
piincipal obligation by the absolute ownei
(moitgagoi) of immovable oi alienable iights, which
has fiee uisposal of the piopeity, anu in the absence
theieof, is legally authoiizeu foi the puipose;
subjecting the moitgageu piopeity (collateial) to
the conuition that when the piincipal obligation
becomes uue, the collateial may be alienateu foi
payment to the cieuitoi (moitgagee).

!-C4 N-.G>8?T ?>C7NC.?8&7 = encumbiance of
piopeity given to guaiantee the fulfillment of an
obligation

!JX_I,IDJ,d
1. Secuie fulfillment of piincipal obligation
2. Noitgagoi is absolute ownei of the thing
moitgageu
S. Noitgagoi has fiee uisposal of the same oi
is legally authoiizeu foi the puipose

6b#DDJO H]!DB#BJ !JH
Thing moitgageu must
be peisonal oi movable
piopeity
Thing moitgageu must
be ieal oi immovable
piopeity
Affiuavit of uoou Faith
iequiieu
Not iequiieu

Noitgagoi cannot
alienate the thing
moitgageu without
wiitten consent of
moitgagee
Noitgagoi can alienate
the thing moitgageu wo
consent of moitgagee
anu any such piohibition
is voiu
Can secuie futuie
obligations
Cannot secuie futuie
obligations
No iight of ieuemption Theie is iight of
ieuemption in
extiajuuicial foieclosuie
anu in juuicial
foieclosuie by banks

B. Form of Real Estate Mortgage

Ait. 212S. In auuition to the iequisites stateu in
Aiticle 2u8S, it is inuispensable, in oiuei that a
moitgage may be valiuly constituteu, that the
uocument in which it appeais be iecoiueu in the
Registiy of Piopeity. If the instiument is not
iecoiueu, the moitgage is neveitheless binuing
between the paities.

The peisons in whose favoi the law establishes a
moitgage have no othei iight than to uemanu the
execution anu the iecoiuing of the uocument in
which the moitgage is foimalizeu.

Ait. 21S1. The foim, extent anu consequences of a
moitgage, both as to its constitution, mouification
anu extinguishment, anu as to othei matteis not
incluueu in this Chaptei, shall be goveineu by the
piovisions of the Noitgage Law anu of the Lanu
Registiation Law.

To binu S
iu
paities, a ieal estate moitgage
must be iecoiueu in the Registiy of
Piopeity.
REN must be a public instiument to be
iecoiueu in the iegistiy.
0niecoiueu REN: iight to uemanu
executioniecoiuing
0niegisteieu REN: still valiu, but only
between the paities

YEC? >8PE? &< =&>?PCP-- Z844 W- 8=3C8>-; 8< 7&?
>-.&>;-;f Right to foieclose

C. Obligations Secured
0bligations that aie 7&? 5&8;.
Nay secuie aftei-incuiieu
obligationsfutuie uebts
B-7->C4 >G4-d REN is limiteu to the
piincipal obligations mentioneu in the
contiact of ieal estate moitgage.
L>CP7-? &> M4C7R-? H&>?PCP- 64CGN-
! Specifically phiaseu to subsume C44
;-W?N, whethei past oi futuie
! Continuing secuiity anu not
uischaigeu by iepayment of the
amount nameu in REN, until the
full amount of piincipal obligation
is paiu

2>G;-7?8C4 MC7R 5N #458C> C7; #458C>
FACTS: Responuents moitgageu theii lanu foi
2Suk loan. The PN that was executeu hau a
uiagnet clause. Anothei PN was executeu foi
anothei loan containing anothei secuiity. A S
iu

PN was executeu by iesponuents foi a loan in
behalf of theii company. Petitionei moveu foi
extiajuuicial foieclosuie foi failuie to pay the
obligation.


W0N the uiagnet clause applies to the
subsequent loans.

BELB: Reliance on the secuiity test when the
moitgagoi takes anothei laon foi which anothei
secuiity was given it coulu not be infeiieu that
such loan was maue in ieliance solely on the
original security with the dragnet clause but
iathei on the new secuiity given.

In the absence of cleai, suppoitive eviuence of a
contiaiy intention, a moitgage containing a
dragnet clause will not be extended to cover
futuie auvances unless the uocument eviuence
the subsequent auvance iefeis to the moitgage
as pioviuing secuiity theiefoi. It was impiopei
foi petitionei to foieclose the moitgage foi non-
payment of subsequent loans.

D. Object of Real Estate Mortgage

Ait. 2124. 0nly the following piopeity may be the
object of a contiact of moitgage:
(1) Immovables;
(2) Alienable ieal iights in accoiuance with the
laws, imposeu upon immovables.

Ait. 41S. The following aie immovable piopeity:
(1) Lanu, builuings, ioaus anu constiuctions of all
kinus auheieu to the soil;
(2) Tiees, plants, anu giowing fiuits, while they aie
attacheu to the lanu oi foim an integial pait of an
immovable;
(S) Eveiything attacheu to an immovable in a fixeu
mannei, in such a way that it cannot be sepaiateu
theiefiom without bieaking the mateiial oi
ueteiioiation of the object;
(4) Statues, ieliefs, paintings oi othei objects foi use
oi oinamentation, placeu in builuings oi on lanus by
the ownei of the immovable in such a mannei that it
ieveals the intention to attach them peimanently to
the tenements;
(S) Nachineiy, ieceptacles, instiuments oi
implements intenueu by the ownei of the tenement
foi an inuustiy oi woiks which may be caiiieu on in
a builuing oi on a piece of lanu, anu which tenu
uiiectly to meet the neeus of the saiu inuustiy oi
woiks;
(6) Animal houses, pigeon-houses, beehives, fish
ponus oi bieeuing places of similai natuie, in case
theii ownei has placeu them oi pieseives them with
the intention to have them peimanently attacheu to
the lanu, anu foiming a peimanent pait of it; the
animals in these places aie incluueu;
(7) Feitilizei actually useu on a piece of lanu;
(8) Nines, quaiiies, anu slag uumps, while the
mattei theieof foims pait of the beu, anu wateis
eithei iunning oi stagnant;
(9) Bocks anu stiuctuies which, though floating, aie
intenueu by theii natuie anu object to iemain at a
fixeu place on a iivei, lake, oi coast;
(1u) Contiacts foi public woiks, anu seivituues anu
othei ieal iights ovei immovable piopeity.

The iight, title anu inteiest in a contiact of
lease of an immovable, such as builuing, as
well as the iights, title anu inteiest acquiieu
in the lanu on which the builuing was
constiucteu, aie alienable ieal iights.
Assignment by way of guaianty of such
iights is a ieal estate moitgage, inasmuch as
it is executeu to guaiantee a piincipal
obligation.

1. After Acquired Properties
A stipulation in a iegisteieu REN that all
piopeity taken in exchange oi ieplacement
by the moitgagoi (aftei acquiieu
piopeities) shall become subject to the
moitgage.
! Binuing
! REN neeu not be iegisteieu a 2
nu

time in oiuei to binu the aftei
acquiieu paities anu S
iu
paities

Peoples Bank & Trust Company and Atlantic
B&4< C7; 2C.8<8. 6&" &< HC784C 5N LCE8.C7
OG=W-> 6&=3C7T

FACTS: ATLANTIC solu anu assigneu its iights in
the BALC0 foi $SuuK, only $SuK was paiu. To
uevelop the concession, BALC0 obtaineu loans
Peoples Bank and Trust Co. After the execution
of the moitgages, BALC0 puichaseu vaiious
machines, paits anu accessoiies. Pei the last
part of the provision on After Acquired
Properties, the BANK asked DALCO to submit a
list of the piopeities acquiieu aftei the
execution of the moitgage, but the lattei faileu
to uo so. BALC0 faileu to pay. The BANK anu
ATLANTIC commenceu foieclosuie pioceeuings.

WoN DALCOs after acquired properties are
subject to the ueeus of moitgage now being
foiecloseu.

BELB: YES. Stipulations regarding After
Acquired Properties are valid, logical and
lawful featuies of ueeus of moitgage. As
piopeities which aie given as collateial aie
subject to inevitable weai anu teai, they aie
given with the unueistanuing that they shall be

ieplaceu with otheis latei acquiieu by the
moitgagoi. Its puipose is to maintain the
oiiginal value of the piopeities given as
secuiity.

2. Effect and Extent
Ait. 2126. The moitgage uiiectly anu immeuiately
subjects the piopeity upon which it is imposeu,
whoevei the possessoi may be, to the fulfillment of
the obligation foi whose secuiity it was constituteu.

Ait. 2127. The moitgage extenus to the natuial
accessions, to the impiovements, giowing fiuits, anu
the ients oi income not yet ieceiveu when the
obligation becomes uue, anu to the amount of the
inuemnity gianteu oi owing to the piopiietoi fiom the
insuieis of the piopeity moitgageu, oi in viitue of
expiopiiation foi public use, with the ueclaiations,
amplifications anu limitations establisheu by law,
whethei the estate iemains in the possession of the
moitgagoi, oi it passes into the hanus of a thiiu peison.

Ait. 2129. The cieuitoi may claim fiom a thiiu
peison in possession of the moitgageu piopeity, the
payment of the pait of the cieuit secuieu by the
piopeity which saiu thiiu peison possesses, in the
teims anu with the foimalities which the law
establishes.

Registeieu REN is a >8PE? 87 >-=
! A lien oi legal iight oi inteiest that
a creditor has in anothers
piopeity.
! Insepaiable fiom the collateial anu
follows the piopeity until
uischaigeu.
Puchasei of collateial is bounu to
acknowleuge anu iespect the encumbiance
to which the piopeity is subjecteu

E. Right to Alienate Mortage Credit
Ait. 2128. The moitgage cieuit may be alienateu oi
assigneu to a thiiu peison, in whole oi in pait, with
the foimalities iequiieu by law.

Ait. 162S. An assignment of a cieuit, iight oi action
shall piouuce no effect as against thiiu peison,
unless it appeais in a public instiument, oi the
instiument is iecoiueu in the Registiy of Piopeity in
case the assignment involves ieal piopeity.

Ait. 1627. The assignment of a cieuit incluues all the
accessoiy iights, such as a guaianty, moitgage,
pleuge oi piefeience.

!8PE? ?& C48-7C?- =&>?PCP- .>-;8?
Right of the moitgagee to assign its iights
unuei the piincipal obligation secuieu by
the ieal estate moitgage
Not piesent in Chattel Noitgage

F. Right to Alienate Collateral
Ait. 21Su. A stipulation foibiuuing the ownei fiom
alienating the immovable moitgageu shall be voiu.

The moitgagoi iemains to be the &Z7-> of
the collateial anu ietains the >8PE? ?&
;8N3&N- (jus uisponenui).
When theie is thieat of foieclosuie,
moitgagoi may opt to sell his piopeity
(moie beneficial since he may uictate the
piice, as opposeu to a foieclosuie sale
wheie biuuing may not go as well)
The following stipulations aie 5&8;:
! Foibiuuing the moitgagoi fiom
selling the collateial
! Foibiuuing the moitgagoi fiom
selling the collateial without the
consent of the moitgagee
A stipulation piohibiting the moitgagoi
fiom enteiing into 2
nu
oi subsequent
moitgages is valiu
The giant of iight of fiist iefusal in favoui of
1
st
moitgagee is valiu

G. Foreclosure of Real Estate Mortgage
1. Judicial Foreclosure
a. Complaint for Foreclosure
Rules of Couit, Rule 68, Section 1. Complaint in
action foi foieclosuie. In an action foi the
foieclosuie of a moitgage oi othei encumbiance
upon ieal estate, the complaint shall set foith the
uate anu uue execution of the moitgage; its
assignments, if any; the names anu iesiuences of the
moitgagoi anu the moitgagee; a uesciiption of the
moitgageu piopeity; a statement of the uate of the
note oi othei uocumentaiy eviuence of the
obligation secuieu by the moitgage, the amount
claimeu to be unpaiu theieon; anu the names anu
iesiuences of all peisons having oi claiming an
inteiest in the piopeity suboiuinate in iight to that
of the holuei of the moitgage, all of whom shall be
maue uefenuants in the action.

iG;8.8C4 <&>-.4&NG>- 8N 878?8C?-; WT C
.&=34C87?
The complaint must contain:
! Bate anu uue execution of
moitgage
! Assignments, if any
! Names anu iesiuences of the
moitgagois anu moitgage
! Besciiption of moitgageu piopeity

! Bate of note oi othei uocumentaiy
eviuence iegaiuing the moitgage
! 0npaiu amount
! Names anu iesiuences of all
peisons having oi claiming an
inteiest in the piopeity with
suboiuinate iight to the moitgagoi

b. Judgment on Foreclosure
Rules of Couit, Rule 68, Section 2. }uugment on
foieclosuie foi payment oi sale.If upon the tiial in
such action the couit shall finu the facts set foith in
the complaint to be tiue, it shall asceitain the
amount uue to the plaintiff upon the moitgage uebt
oi obligation, incluuing inteiest anu othei chaiges as
appioveu by the couit, anu costs, anu shall ienuei
juugment foi the sum so founu uue anu oiuei that
the same be paiu to the couit oi to the juugment
obligee within a peiiou of not less than ninety (9u)
uays noi moie than one hunuieu twenty (12u) uays
fiom the entiy of juugment, anu that in uefault of
such payment the piopeity shall be solu at public
auction to satisfy the juugment.

Aftei filing of complaint, theie will be a ?>8C4
wheie the couit will asceitain if the
complaint is tiue.
If founu to be tiue, the couit will:
! Asceitain amount uue to moitgagee
! Compute the inteiest anu othei
chaiges, if any
}uugment will be ienueieu foi the sum to be
paiu not less than 9u uays noi moie than
12u uays fiom entiy of juugment
If moitgagoi faileu to pay, piopeity will be
solu at public auction

l&>-C JK.EC7P- MC7R 5N \84R&> MGN87-NN
I7?-P>C?-;+ I7.
FACTS: Filkoi loaneu fiom Koiea Exhange Bank
anu executeu 9 tiust ieceipts. Filkoi executeu
REN as secuiity. Filkoi faileu to pay so the Bank
fileu a complaint foi it to be paiu anu the
moitgage be foiecloseu.

W0N the action is foi a collection of a sum of
money oi foieclosuie of moitgage.

BELB: The Banks allegations in the complaint,
anu its piayei that the moitgageu piopeity be
foiecloseu anu solu at public auction inuicate
that it was one foi foieclosuie of REN.

c. Equity of Redemption
Right of the moitgagoi to extinguish the
moitgage anu ietain owneiship of the
collateial
aftei uefault in the peifoimance of the
conuition of the moitgage but befoie the
foieclosuie sale of the collateial
by paying the moitgage obligation
0nuei Rule 68, Section 2, the peiiou is not
less than 9u uays but no moie than 12u
uays fiom the entiy of juugment
Equity of redemption on mortgagors
successois-in-inteiest
! All junioi lien-holueis acquiie the
iight to suboiuinate to the supeiioi
lien of the 1
st
moitgagee
0nfoiecloseu Equity of ieuemption
! A ueciee of foieclosuie wheie the
junioi lien-holueis aie not paities,
the equity of ieuemption in theii
favoui iemains unfoiecloseu anu
unaffecteu.
! A sepaiate foieclosuie pioceeuing
shoulu be biought to iequiie them
to ieueem fiom the fiist moitgagee,
unuei penalty of losing the
pieiogative to ieueem.

YE&N- >8PE?N C>- ;-<-C?-;f Mortgagees right to
foreclose (or assignees)

d. Foreclosure Sale

2!]6JL_!Jd
1. Failuie to pay within the peiiou
2. File a complaint foi foieclosuie of moitgage
inuicating:
a. Bate & uue execution of the
moitgage
b. Its assignments, if any
c. Names anu iesiuences of
moitgagoi anu moitgagee
u. Besciiption of the moitgageu
piopeity
e. Statement of the uate of the note oi
othei uocumentaiy eviuence of the
obligation secuieu by the moitgage
f. Amount claimeu to be paiu theieon
g. Names anu iesiuences of all
peisons having oi claiming an
inteiest in the piopeity
suboiuinate to the moitgagee (they
shall be maue uefenuants)
S. If the couit finus the facts in the complaint
to be tiue, it shall:
a. Asceitain amount uue to plaintiff
(juugment obligee)
b. 0iuei that the same be paiu to the
couit oi juugment obligee within a
peiiou of not less than 9u uays anu

not moie than 12u uays (equity of
ieuemption)
c. It shall also oiuei that in uefault of
such payment, the piopeity shall be
solu at public auction
4. Equity of ieuemption expiies (assuming
juugment obligoi uiu not pay)
S. Sale will be conuucteu (puichase = highest
biuuei)
6. Couit will issue confiimation oiuei (upon
motion)
a. Operates to divest the mortgagors
iights in the piopeity anu vest it in
the puichasei
7. Finality of confiimation oiuei 0R expiiation
of ieuemption peiiou (if theie is a iight of
ieuemption)
a. Consequence: puichasei is entitleu
to possession unless a thiiu paity is
actually holuing the same auveisely
to the juugment obligoi
(moitgagoi). In such a case, the
possession will also have to be
litigateu.
8. Pioceeus of sale:
a. Costs of the sale
b. Noitgage uect specifieu in the
contiact
c. }unioi encumbianceis in oiuei of
piioiity
u. Noitgagoi
9. Registiation
a. Registei of ueeus: piesent final
oiuei of couit confiiming the sale
W" %& >8PE? &< >-;-=3?8&7d
i. Ceitificate of title
cancelleu; new one issueu
in the name of puichasei
." !8PE? &< >-;-=3?8&7 -K8N?Nd
i. Ceitificate is not cancelleu;
(1) ceitificate of sale anu
(2) confiimation oiuei is
iegisteieu anu a biief
memo maue by iegistiai of
ueeus
ii. Reueemeu: ueeu of
ieuemption iegisteieu
iii. Not ieueemeu: final ueeu
of sale iegisteieu anu new
ceitificate of title issueu
1u. Nove foi the couit to ienuei juugment on
ueficiency

%]DJ,d
The acceptance of a biu at the foieclosuie
sale confeis no title on the puichasei
0ntil the couit has valiuly confiimeu the
foieclosuie sale, the puichasei is nothing
moie than a piefeiieu biuuei
Befoie the couit confiims the foieclosuie
sale, theie will be a heaiing. It will be foi
inteiesteu paities to show cause why the
sale shoulu not be confiimeu.

e. Right of Redemption
To claim a iight of ieuemption theie must
be a N3-.8<8. 4CZ that exceptionally allows
it (statutoiy iight)
!8PE? ;-<-C?-;d inchoate iight of puichasei
ovei the piopeity
!# F(:9^B-7->C4 MC7R87P OCZ &< 0@@@:
in a juuicial foieclosuie by a bankquasi-
bank oi tiust entity, the moitgagoi shall
have the iight Z8?E87 9 T-C> C<?-> ?E- NC4-
&< ?E- .&44C?->C4 to ieueem the piopeity by
paying the amount uue unuei the moitgage
ueeu with inteiest anu all costs anu
expenses incuiieu by the bank fiom sale
less anu custouy of the piopeity less income
(ex. ient) ueiiveu theiefiom. (N0RTuAuEE
IS BANKCREBIT INSTIT0TI0N)

bG->?C #4WC !-N&>? I7. 5N 6#
FACTS: Inteicon fileu a motion to foieclose the
piopeities of Bueita Alba. Bueita Alba, only on
appeal, uemanu that they have the iight to
ieuemption.

W0N Bueita Alba has one yeai iight to
ieuemption.

BELB: No. No such iight is iecognizeu in a
juuicial foieclosuie except only wheie the
moitgagee is the Philippine National Bank oi a
bank oi banking institution. Wheie a moitgage
is foiecloseu extiajuuicially, Act S1SS giants to
moitgagoi the iight of ieuemption within 1 yeai
from the registration of the sheriffs certificate
of foieclosuie sale.

f. Right to Surplus or Deficiency

Noitgagoi is entitleu to the suiplus
Noitgagee is entitleu to ueficiency
juugment
The iight to iecovei ueficiency by
moitgagee extenus to the juuicial
foieclosuie of moitgage aiising out of a
settlement of estate (Rule 86), it gives
moitgagee S uistinct, inuepenuent anu
mutually exclusive iemeuies

! Waive moitgage anu claim the
piincipal obligation fiom the estate
as an oiuinaiy claim
! }uuicial foieclosuie anu piove
ueficiency as an oiuinaiy claim
! Rely on the moitgage exclusively,
without iight to ueficiency

2. Extrajudicial Foreclosure
a. Special Powers
Section 1. When a sale is maue unuei a special powei
inseiteu in oi attacheu to any ieal-estate moitgage
heieaftei maue as secuiity foi the payment of money oi
the fulfillment of any othei obligation, the piovisions of
the following election shall govein as to the mannei in
which the sale anu ieuemption shall be effecteu, whethei
oi not piovision foi the same is maue in the powei.

A moitgage may only be extiajuuicially
foiecloseu if theie is a special powei
inseiteu oi attacheu to the uocument in
which the REN appeais anu only in
accoiuance with Act No. S1SS

b. Foreclosure Sale

YbJ!Jd Piovince in which the piopeity is situateu
As stipulateu oi
In the municipal builuing of the
municipality

%]DI6Jd
Foi all: S public places of the municipality
oi city (foi at least 2u uays)
If piopeity > P4uu: newspapei of geneial
ciiculation (once a week foi S consecutive
weeks)

2!]6JL_!Jd
1. Application foi extiajuuicial foieclosuie
sale fileu with executive juuge thiough cleik
of couit
2. Buties of cleik of couit:
a. Ensuie SPA is inseiteuattacheu to
ueeu of REN
b. Bocket the application
c. Collect filing fee anu issue a ieceipt
(exception: coopeiatives, thiift
banks, iuial banks)
u. Issue ceitificate of payment if
collateial is locateu sepaiately anu
coveis only 1 inuebteuness
S. Raffle among the sheiiffs with the
supeivision of the executive juuge
4. Buties of sheiiff assigneu:
a. Piepaie notice of extiajuuicial sale
b. Cause publication
c. Executive juuge will uistiibute
copies to newspapei companies foi
publication
u. Bebtoi-moitgagoi: neeu not be
seiveu a copy of notice unless the
moitgage contiact iequiies it (case
of P"&)$ U&"-')
e. Foi loans < P1uu,uuu by
iuialthiift banks: no moie neeu
foi publication; only notice posteu
foi 6u uays in conspicuous aieas of
municipality wheie piopeity is
locateu (municipal builuing,
municipal public maiket, iuial
bank, baiangay hall)

1. Requirement of Notice
The object is to infoim the public of the
natuie anu conuition of the collateial to be
solu, anu of the time, place anu teims of the
sale
ueneial Rule statutoiy piovisions
goveining posting of notice of REN
foieclosuie sales must be stiictly complieu
with
Exception objectives of a notice of sale aie
attaineu, immateiial eiiois anu mistakes
may not affect the sufficiency of the notice

B>C7; \C>=N+ I7." 5N 2E8483387- ,EC>-N 6&>3
5N 6#

Petitioneis fileu a Civil Case foi annulment
anuoi ueclaiation of nullity of the extiajuuicial
foieclosuie pioceeuings ovei theii moitgageu
piopeities. Petitioneis also fileu a iequest foi
aumission by piivate iesponuent of the
allegation that no foimal notice of intention to
foieclose the ieal estate moitgage was sent by
piivate iesponuent to petitioneis. The
petitioneis fileu a motion foi summaiy
juugment contenuing that the foieclosuie was
violative of the piovisions of the moitgage
contiact.

W0N notice by publication of the foieclosuie
constitutes sufficient notice to petitioneis unuei
the moitgage contiact

Piivate iesponuent tacitly aumitteu in its
answei to petitioneis' iequest foi aumission
that it uiu not senu any foimal notice of
foieclosuie to petitioneis. This omission, by
itself, ienueieu the foieclosuie uefective anu
iiiegulai foi being contiaiy to the expiess
piovisions of the moitgage contiact.

2. Conduct of Sale
Public auction (9am-4pm) with the
supeivision of the sheiiff, justiceauxilliaiy
justice of municipality, oi notaiy public.
Cieuitoi oi his tiusteeagent is in the same
conuition as any othei biuuei EXCEPT when
theie is a contiaiy stipulation in the REN oi
Tiust Beeu.

b]Y 6]%L_6DJLd
1. sealeu bius submitteu to the sheiiff
2. in case of tie, open biuuing
S. payment: cash/managers check
4. pay within S uays fiom notice
S. cleik of couit will collect appiopiiate fees
6. sheiiff will iepoit names of biuueis to cleik
of couit
7. cleik will sign ceitificate of sale subject to
appioval by the executive juuge

%]DJd Inauequacy of biu piice will not invaliuate
the sale (case of I6'> V&3&0)

c. Right of Redemption
The iight acquiieu by a puichasei of
collateial is meiely inchoate.
0wneiship iemains with the moitgagoi
until expiiation of the giace peiiou foi the
iight of ieuemption
Foi the paity to claim iight of ieuemption,
theie must be a specific law that
exceptionally allows it
Peiiou to ieueem:
! #.? '9'*d 1 yeai fiom iegistiation
of ceitificate of sale
! !# F(:9 /B-7->C4 MC7R87P #.?1d
S months aftei foieclosuie oi
befoie iegistiation of ceitificate of
foieclosuie, whichevei is eailiei
(bank must be the moitgagee)

1. Who May Redeem
uebtoi
his successois-in-inteiest
juuicial cieuitoi oi juugment cieuitoi of the
uebtoi (uiffeient fiom the one who
foiecloseu)
any peison having a subsequent lien ovei
the piopeity (subsequent to the
moitgagetiust unuei which the piopeity
was solu)

%]DJ,d
,G..-NN&>U87U87?->-N? incluues, but not
limiteu to, the one to whom the moitgagoi
has tiansfeiieu the statutoiy iight of
ieuemption
!-;-=3?8&7-> a cieuitoi of the
moitgagoi with a lien on the collateial
subsequent to the lien that was the basis of
the foieclosuie sale

H-;8;C 5N 6#
Spouses Bolino was scaieu that they woulu lose
theii iight of ieuemption ovei theii moitgageu
piopeity so they applieu foi a loan of PSu,uuu
offeiing as secuiity the same subject lot. The
Spouses faileu to pay this loan anu a foieclosuie
sale was instituteu. No ieuemption was effecteu
uuiing the peiiou of ieuemption so a TCT was
finally issueu.

W0N a Noitgagoi, whose piopeity has been
extiajuuicially foiecloseu anu solu at the
coiiesponuing foieclosuie sale, may valiuly
execute a moitgage contiact ovei the same
piopeity in favoi of a thiiu paity uuiing the
peiiou of ieuemption.

Yes. 0nuei Rule S9, Sec. SS, the juugment uebtoi
iemains in possession of the piopeity
foiecloseu anu solu uuiing the peiiou of
ieuemption. The moitgagoi iemains the
absolute ownei of the piopeity uuiing the
ieuemption peiiou. The iight of the auction
puichasei is only inchoate.

2. How to Redeem

2!]6JL_!Jd
1. The ieuemption must be maue within 12
months fiom the uate of the iegistiation of
the sale in the 0ffice of the Registei of
Beeus
2. Payment of the puichase piice of the
collateial involveu, plus 1% inteiest pei
month theieon, togethei with the amount of
any assessments oi taxes if any, paiu by the
puichasei aftei the sale with same iate of
inteiest
S. Wiitten notice of the ieuemption must be
seiveu on the officei who maue the sale anu
a uuplicate fileu with the Registei of Beeus
of the piovince
4. An actual anu simultaneous tenuei of
payment must accompany the statement of
intention
S. Ceitificate of ieuemption issueu by peison
to whom the ieuemption payment is maue
(puichaseiieuemptionei)
6. Ceitificate of ieuemption iecoiueu in
iegistiy of ueeus
7. Pioof of iight to ieueem:
a. Copy of final juugment oi oiuei

b. If unuei moitgage oi othei lien
i. Nemoiecoiu theieof 0R
ii. 0iiginal ceitifiieu copy of
assignment ANB
iii. Affiuavit showing amount
uue on the lien

M&7C <8;- >-;-=3?8&7d actual anu simultaneous
tenuei of payment accompanieu by statement of
intention 0R filing of complaint to enfoice
ieuemption (not meie intentionvauge attempt to
enfoice)
Piecemeal ieuemptions aie alloweu.

d. Right to Deficiency
Theie is not law piohibiting the iecoveiy of
any ueficiency, thus the moitgagee may
pioceeu in a piopei action against the
uebtoi
0nueilying piinciple: a REN is a secuiity
tiansaction anu not a satisfaction of
inuebteuness of the uebtoi
The mortgagees right to recover the
ueficiency uoes not extenu to the
extiajuuicial foieclosuie of moitgage
aiising out of settlement of estate

e. Right to Surplus
The application of the pioceeus fiom the
sale of the collateral to the debtors
obligation is an act of payment, not payment
by dacion; hence, it is the mortgagees duty
to ietuin any suiplus in the selling piice.
When theie aie seveial liens upons the
collateial, such as a 2
nu
oi S
iu
moitgage, the
suiplus must be applieu to theii uischaige
in the oiuei of theii piioiity

,G8.& 5N 2%M
Plaintiff spouses faileu to pay theii obligation,
piompting PNB to extia-juuicially foieclose the
moitgageu piopeity. The loan obligation of the
spouses accoiuing to the notice of sale was
1,991,77u.S8, while the biu piice of PNB was
8,S11,uuu. The spouses fileu a petition foi
ueclaiation of nullity of ieal estate moitgage on
the giounu that PNB uiu not pay its biu oi
uelivei the excess to the sheiiff oi to the
spouses aftei ueuucting the uiffeience between
the amount of its biu anu the amount of the
spouses obligation in the notice of sale.

W0N the foieclosuie sale was null anu voiu foi
failuie to uelivei the suiplus to the sheiiff oi the
plaintiff spouses.

No. If the moitgagee (PNB) is ietaining moie of
the pioceeus of the sale than he is entitleu to,
this fact alone will not affect the valiuity of the
sale but will simply give the moitgagoi
(spouses) a cause of action to iecovei the
suiplus. The application of the pioceeus fiom
the sale of the moitgageu piopeity to the
mortgagors (spouses) obligation is an act of
payment, not payment by uacion; hence, it is the
mortgagees (PNB) duty to return any surplus in
the selling piice to the moitgagoi. A moitgagee
who exeicises the powei of sale containeu in a
moitgage is consiueieu a custouian of the funu.
Be is liable if he fails to apply the pioceeus of
the sale to the peisons entitleu to it.

f. Right to Possession
1. During Redemption Period
Section 7 expiessly uiiects the issuance of
wiit of possession in favoui of the
puichasei that seeks the possession of the
foiecloseu collateial uuiing ieuemption
peiiou. No uiscietion is left to the couit. ->
NINISTERIAL
The wiit of possession is issueu in an ex-
paite pioceeuing, a juuicial pioceeuing
biought foi the benefit of one paity only,
anu without notice oi consent by any
peison auveisely inteiesteu
Bowevei, a paity may file a petition to set
asiue the foieclosuie sale anu to .C7.-4
/7&? &33&N-1 the wiit of possession.

2. After Consolidation of Ownership
Aftei consoliuation of owneiship anu the
issuance of a new title in the name of the
puichasei, a wiit of possession will issue as
a mattei of couise, without filing anu
appioval of a bonu.

3. When Held by a Third Party
The purchasers right of possession is
iecognizeu only as against the moitgagoi
anu its successoi-in-inteiest, but not against
peisons whose iight of possession is
auveise to the lattei.
The iemeuies of a S
iu
paity holuing the
collateial auveisely to the moitgagoi aie:
! Teiceiia fileu against the sheiiff oi
officei effecting the wiit by seiving
on him an affiuavit of title with a
copy to the puichasei
! An inuepenuent anu sepaiate
action to vinuicate its claim of
owneiship oi possession ovei the
collateial

M2I \C=84T ,C587PN MC7R 5N B&4;-7 2&Z->
L8-N-4 ,C4-N 6-7?->
CEBEC Tianspoit, obtaineu P6.S7 N. loan fiom
petitionei BPI Family but CEBEC uefaulteu. BPI
Family fileu with the RTC ex-officio sheiiff a
veiifieu petition foi extiajuuicial foieclosuie of
REN. Aftei uue notice anu publication, the
sheiiff solu the piopeities at public auction. 1
yi-ieuemption peiiou expiieu without CEBEC
ieueeming the piopeities. Titles to the
piopeities weie consoliuateu in the name of
petitionei anu the Registiy of Beeus issueu new
titles in the name of petitionei. Bespite seveial
uemanu letteis, CEBEC iefuseu to vacate the
piopeities anu to suiienuei possession to
petitionei. Petitionei fileu an Ex-Paite Petition
foi Wiit of Possession ovei the piopeities with
RTC Pasay City.

W0N piivate iesponuents who meiely steppeu
into the shoes of moitgagoi CEBEC, being the
venuee of the piopeities in question aie Siu
peisons in possession theieof who aie claiming
a iight auveise to that of the uebtoimoitgagoi
CEBEC.

N0. uen. Rule: Puichasei in a public auction sale
of a foiecloseu piopeity is entitleu to a wiit of
possession anu, upon an ex paite petition of the
puichasei, it is ministeiial upon the tiial couit
to issue the wiit of possession in favoi of the
puichasei. Exception: The possession of the
piopeity shall be given to the puichasei oi last
ieuemptionei by the same officei unless a thiiu
paity is actually holuing the piopeity auveisely
to the juugment obligoi. Thus, when the
foiecloseu piopeity is in the possession of a Siu
paity holuing the same auveisely to the
juugment obligoi the issuance by the tiial couit
of a wiit of possession in favoi of the puichasei
of saiu ieal piopeity ceases to be ministeiial
anu may no longei be uone ex paite.

k" #%DI6b!J,I,
#" B-7->C4 6&7.-3?N
#>?" 09'0" By the contiact of antichiesis the cieuitoi
acquiies the iight to ieceive the fiuits of an
immovable of his uebtoi, with the obligation to apply
them to the payment of the inteiest, if owing, anu
theieaftei to the piincipal of his cieuit.

Etymology: Latin - in place of interest
Real secuiity tiansaction that aiises by
contiact, with the antichietic cieuitoi
acquiiing the iight to ieceive the fiuits
of an immovable of the antichietic
uebtoi anu the obligation to apply them
to the payment of the inteiest, if owing,
anu theieaftei to the piincipal.
Theie must be a contiact of loan, which
has foi its object immovable piopeity,
not the fiuits.
This is a ieal secuiity tiansaction
because the piopeity may be
F0RECL0SEB if aftei the peiiou agieeu
upon, piincipal obligation hasnt been
paiu yet. Immovable may be alienateu to
satisfy the piincipal obligation.

#>?" 09''" The actual maiket value of the fiuits at
the time of the application theieof to the inteiest
anu piincipal shall be the measuie of such
application.
H-CNG>- &< C3348.C?8&7 &< 3CT=-7?
Actual maiket value of fiuits at time of
application

#>?" 09'*" The cieuitoi, unless theie is a stipulation
to the contiaiy, is obligeu to pay the taxes anu
chaiges upon the estate. Be is also bounu to beai the
expenses necessaiy foi its pieseivation anu iepaii.
The sums spent foi the puiposes stateu in this
aiticle shall be ueuucteu fiom the fiuits.
]W48PC?8&7N &< ?E- 6>-;8?&>
B-7->C4 !G4-d Cieuitoi is obligeu to pay the
following:
i. Taxes anu chaiges upon estate
ii. Necessaiy expenses foi pieseivation anu
iepaii of piopeity
JK.-3?8&7d Stipulation to the contiaiy
%&?-d Sums spent aie ueuucteu fiom the fiuits

#>?" 09'F" The contiacting paities may stipulate
that the inteiest upon the uebt be compensateu with
the fiuits of the piopeity which is the object of the
antichiesis, pioviueu that if the value of the fiuits
shoulu exceeu the amount of inteiest alloweu by
laws against usuiy, the -K.-NN shall be applieu to
the 3>87.83C4.

#3348.C?8&7 &< \>G8?N
WITB00T INTEREST Fiuits aie applieu to the
principal of the debtors credit
WITB INTEREST
8" value of fiuits < amount of inteiest
(alloweu by usuiy law) fiuits aie
applieu to the INTEREST
88" value of fiuits = amount of inteiest
(alloweu by usuiy law) fiuits aie
applieu to the INTEREST
888" value of fiuits > amount of inteiest
alloweu by usuiy law Fiuits aie
fiist applieu to the inteiest; then,
the EXCESS is applieu to the
piincipal

#>?" 09':" The last paiagiaph of Aiticle 2u8S, anu
Aiticles 2u89 to 2u91 aie applicable to this contiact.

#>?" 0@F*" Thiiu peisons who aie not paities to the
piincipal obligation may secuie the lattei by
|antichiesis ofj theii own piopeity.
2C>?8-N ?& C7 #7?8.E>-N8N
8" Cieuitoi
88" 0wnei of the piopeity subject of an
antichiesis
91 Bebtoi in the piincipal
obligation
01 Thiiu peison secuiing
the piincipal obligation
using theii own piopeity

#>?" 0@F:" An antichiesis is inuivisible, even though
the uebt may be uiviueu among the successois in
inteiest of the uebtoi oi of the cieuitoi. Theiefoie,
the debtors heir who has paiu a pait of the uebt
cannot ask foi the piopoitionate extinguishment of
the |antichiesisj as long as the uebt is not
completely satisfied. Neither can the creditors heir
who received the share of the debt cancel the
|antichiesisj, to the piejuuice of the othei heiis who
have not been paiu.
Fiom these piovisions is expecteu the case in which,
theie being seveial things given in |antichiesisj,
each one of them guaiantees only a ueteiminate
poition of the cieuit.
The uebtoi, in this case, shall have a iight to
extinguishment of the |antichiesisj as the poition of
the uebt foi which each thing is specially answeiable
is satisfieu.

#>?" 0@:@" The inuivisibility of an antichiesis is not
affecteu by the fact that the uebtois aie not
soliuaiily liable.
I7;858N8W848?T &< C7 C7?8.E>-N8N
B-7->C4 !G4-d An antichiesis is inuivisible.
Theie can be no piopoitionate extinguishment
oi cancellation of antechiesis uue to paitial
payment of the uebt.
JK.-3?8&7d Theie being seveial things given in
antichiesis, each one of them guaiantees only a
ueteiminate poition of the cieuit.
In this case, the uebtoi has a iight
to extinguishment of the
antichiesis as the poition of the
uebt coiiesponuing to a thing is
satisfieu
%&?-d Inuivisibility of antichiesis applies even if the
uebtois aie not soliuaiily liable.
#>?" 0@:9" The contiact of |antichiesisj may secuie
all kinus of obligations, be they puie oi subject to a
suspensive oi iesolutoiy conuition.

W" 6&7?>C.? &< C7?8.E>-N8N N-.G>-N #OO
lI%L, &< &W48PC?8&7N
8" Puie
88" Subject to a suspensive conuition
888" Subject to a iesolutoiy conuition

M" \&>= &< #7?8.E>-N8N
#>?" 09'A" The amount of the piincipal anu of the
inteiest shall be specifieu in wiiting; otheiwise, the
contiact of antichiesis shall be voiu.
I7 Z>8?87P (amount of piincipal
anu inteiest) otheiwise it is voiu

6" !8PE? &< !-?-7?8&7
#>?" 09')" The uebtoi cannot ieacquiie the
enjoyment of the immovable without fiist having
totally paiu what he owes the cieuitoi. But the lattei,
in oiuei to exempt himself fiom the obligations

imposeu upon him by the pieceuing aiticle (Aiticle
21SS), may always compel the uebtoi to entei again
upon the enjoyment of the piopeity, except when
theie is a stipulation to the contiaiy.

B-7->C4 !G4-d The uebtoi cannot ieacquiie the
enjoyment of the immovable without full payment of
the uebt.
JK.-3?8&7d If the cieuitoi compels the uebtoi to
entei again upon the enjoyment of the piopeity, to
exempt himself (cieuitoi) fiom the obligations
imposeu upon him unuei Ait. 21SS (payment of
taxes, chaiges, anu necessaiy expenses)
JK.-3?8&7 ?& ?E- -K.-3?8&7d Stipulation to the
contiaiy
2G>3&N- &< !8PE? ?& >-?-7?8&7d Neans of
extinguishing the obligation.
L" \&>-.4&NG>- &< #7?8.E>-N8N
#>?" 09'(" The cieuitoi uoes not acquiie the
owneiship of the ieal estate foi non-payment of the
uebt within the peiiou agieeu upon. Eveiy
stipulation to the contiaiy shall be voiu. But the
cieuitoi may petition the couit foi the payment of
the uebt oi the sale of the ieal piopeity. In this case,
the Rules of Couit on the foieclosuie of moitgages
shall apply.
a. YE& &Z7N ?E- 3>&3->?T NGWS-.? ?&
#7?8.E>-N8Nf Antichietic uebtoi thiiu
peison
b. J<<-.? &< 7&7U3CT=-7? &< ;-W?f Tiiggeis
the availability of eithei of the two
iemeuies:
i. Specific peifoimance
ii. Foieclosuie
c. `&8; N?83G4C?8&7d The cieuitoi uoes not
acquiie owneiship of ieal estate foi non-
payment of uebt. Eveiy stipulation to the
contiaiy shall be voiu.
u. O8R-7-; ?& !JH: Noitgagee ietains
possession of the collateial anu takes the
fiuits in lieu of inteiest on the uebt
LIJB] 5" \J!%#%L]
To be antichiesis, it must be expiessly agieeu
between cieuitoi anu uebtoi that the foimei, having
been given possession of the piopeities given as
secuiity, is to apply theii fiuits to the payment of the
inteiest, if owing, anu theieaftei to the piincipal of
his cieuit; so that if a contiact of loan with secuiity
uoes not stipulate the payment of inteiest but
pioviues foi the ueliveiy to the cieuitoi by the
uebtoi of the piopeity given as secuiity, in oiuei
that the lattei may gathei its fiuits, without stating
that saiu fiuits aie to be applieu to the payment of
inteiest, if any, anu afteiwaius that of the piincipal,
the contiact is a moitgage anu not antichiesis.
In this case, the tiue position of cieuitoi unuei his
contiact with appellant is a "moitgage in
possession" that is "one who has lawfully acquiieu
actual oi constiuctive possession of the piemises
moitgageu to him, stanuing upon his iights as
moitgagee anu not claiming unuei anothei title, foi
the puipose of enfoicing his secuiity upon such
piopeity oi making its income help to pay his uebt".
As such moitgagee in possession, his iights anu
obligations aie similai to those of an antichietic
cieuitoi:
(1) the non-payment of the uebt within the
teim agieeu uoes not vest the owneiship of
the piopeity in the cieuitoi;
(2) the moitgagee must account foi the ients
anu piofits of the lanu, oi its value foi
puiposes of use anu occupation, any
amount thus iealizeu going towaius the
uischaige on the moitgage uebt;
(S) if the moitgage iemains in possession aftei
the moitgage uebt has been satisfieu, he
becomes a tiustee foi the moitgagoi as to
the excess of the ients anu piofits ovei
such uebt; anu lastly,
(4) the moitgagoi can only enfoice his iights to
the lanu by an equitable action foi an
account anu to ieueem.
Bence, the paities having agieeu that the loan was
to be without inteiest, anu the appellant not having
expiessly waiveu his iight to the fiuits of the
piopeities moitgageu uuiing the time they weie in
appellee's possession, the lattei, like an antichietic
cieuitoi, must account foi the value of the fiuits
ieceiveu by him, anu ueuuct it fiom the loan
obtaineu by appellant.
2C>? I`" I7N&45-7.T
6EC3?-> 9" DE- 6&7.-3? &< I7N&45-7.T

#>?" 00')" The uebtoi is liable with C44 E8N
3>&3->?T+ 3>-N-7? C7; <G?G>-, foi the fulfillment of
his obligations, subject to the exemptions pioviueu
by law.

B-7->C4 !G4-d Bebtoi is liable with all his piopeity
JK.-3?8&7Nd !G4- ':+ ,-." 9'
9" Family home oi homesteau
0" 0iuinaiy tools anu implements peisonally
useu in tiaue, employment oi livelihoou
'" S hoises, S cows, S caiabaos, oi othei beast
of buiuen
A" Necessaiy clothing anu aiticles foi peisonal
use (}eweliy not incluueu)
*" Bousehoulu fuinituie anu utensils
necessary for housekeeping (Value 100k)
)" Piovisions foi inuiviuual oi family use
sufficient foi 4 months
(" Piofessional libiaiies anu equipment of
juuges, lawyeis, physicians, phaimacists,
uentists, engineeis, suiveyois, cleigymen,
teachers, and other professionals (Value
Suuk)
F" 1 fishing boat and accessories (Value
1uuk)
:" Some salaiies, wages, oi eainings foi
peisonal seivices within 4 months befoie
levy foi suppoit of family
9@" Letteieu giavestones
99" Nonies, benefits, piivileges, oi annuities
acciuing
90" Right to ieceive legal suppoit, oi money oi
piopeity obtaineu as such suppoit, oi any
pension oi giatuity fiom the uoveinment
9'" Piopeities exempteu by law

#>?" 00'(" Insolvency shall be goveineu by special
laws insofai as they aie not inconsistent with this
Coue.

!# 9@9A0 ,-." 0" L-.4C>C?8&7 &< 2&48.T" It is the
policy of the State to encouiage uebtois, both
juiiuical anu natuial peisons, anu theii cieuitois to
collectively anu iealistically iesolve anu aujust
competing claims anu piopeity iights. In
fuitheiance theieof, the State shall ensuie a timely,
faii, tianspaient, effective anu efficient
iehabilitation oi liquiuation of uebtois. The
iehabilitation oi liquiuation shall be maue with a
view to ensuie oi maintain ceitainly anu
pieuictability in commeicial affaiis, pieseive anu
maximize the value of the assets of these uebtois,
iecognize cieuitoi iights anu iespect piioiity of
claims, anu ensuie equitable tieatment of cieuitois
who aie similaily situateu. When iehabilitation is
not feasible, it is in the inteiest of the State to
facilities a speeuy anu oiueily liquiuation of these
uebtoi's assets anu the settlement of theii
obligations.
C" 2&48.Td To encouiage uebtois anu cieuitois
to collectively anu iealistically iesolve anu
aujust competing claims anu piopeity
iights.
W" #N ?& >-ECW848?C?8&7 C7; 48aG8;C?8&7d
Ensuie a timely, faii, tianspaient, effective
anu efficient iehabilitation oi liquiuation of
uebtois.
." !-ECW848?C?8&7 &> 48aG8;C?8&7 NEC44 W-
=C;- ?&d
8" Ensuie oi maintain ceitainty anu
pieuictability in commeicial affaiis
88" Pieseive anu maximize the value of
assets of uebtois
888" Recognize cieuitoi iights anu
iespect piioiity of claims
85" Ensuie equitable tieatment of
cieuitois who aie similaily situateu
;" !-=-;T ZE-7 >-ECW848?C?8&7 8N 7&?
<-CN8W4-f OIX_IL#DI]%

,-." A
(k) W#30+" shall iefei to, unless specifically excluueu
by a piovision of this Act, a sole piopiietoiship uuly
iegisteieu with the Bepaitment of Tiaue anu
Inuustiy (BTI), a paitneiship uuly iegisteieu with
the Secuiities anu Exchange Commission (SEC), a
coipoiation uuly oiganizeu anu existing unuei
Philippine laws, oi an inuiviuual uebtoi who has
become insolvent as uefineu heiein.
(n) P"+(6 +* $#30+"' shall iefei to anu can covei
only: (1) coipoiations that aie financially ielateu to
one anothei as paient coipoiations, subsiuiaiies oi
affiliates; (2) paitneiships that aie owneu moie
than fifty peicent (Su%) by the same peison; anu
(S) single piopiietoiships that aie owneu by the
same peison. When the petition coveis a gioup of
uebtois, all iefeience unuei these iules to uebtoi
shall incluue anu apply to the gioup of uebtois.

(o) H)$/?/$(&4 $#30+" shall iefei to a natuial peison
who is a iesiuent anu citizen of the Philippines that
has become insolvent as uefineu heiein.
(h) ="#$/0+" shall iefei to a natuial oi juiiuical
peison which has a claim against the uebtoi that
aiose on oi befoie the commencement uate.
C" L-W?&>
i. Sole piopiietoiship iegisteieu with
BTI
ii. Paitneiship iegisteieu with
iii. Coipoiation
iv. Inuiviuual uebtoi who has become
insolvent

,-.?8&7 *" JK.4GN8&7N. - The teim uebtoi uoes not
incluue banks, insuiance companies, pie-neeu
companies, anu national anu local goveinment
agencies oi units.
Foi puiposes of this section:
(a) Bank shall iefei to any uuly licenseu bank oi
quasi-bank that is potentially oi actually subject to
conseivatoiship, ieceiveiship oi liquiuation
pioceeuings unuei the New Cential Bank Act
(Republic Act No. 76SS) oi successoi legislation;
(b) Insuiance company shall iefei to those
companies that aie potentially oi actually subject to
insolvency pioceeuings unuei the Insuiance Coue
(Piesiuential Beciee No. 146u) oi successoi
legislation; anu
(c) Pie-neeu company shall iefei to any coipoiation
authoiizeulicenseu to sell oi offei to sell pie-neeu
plans.
JK.4GN8&7Nd ,J6" *
9" Banks
0" Insuiance companies
'" Pie-neeu companies
A" National anu local goveinment agencies oi
units
W" B>&G3 &< ;-W?&>N
8" Coipoiations that aie financially
ielateu to one anothei as paient
coipoiations, subsiuiaiies, oi
affiliates
88" Paitneiships wheie moie than
Su% is owneu by same peison
888" Single piopiietoiships owneu by
same peison
." I7;858;GC4 ;-W?&> natuial peison,
iesiuent anu citizen of the Philippines that
has become insolvent
;" 6>-;8?&> natuial oi juiiuical peison which
has a claim against the uebtoi (must have
aiisen on oi befoie commencement uate)

,-." 9A)" =225(3)'(&# '& :$#*(#% 4#,&5@$#3EF
G1,2$#,(&# &- :)E8$#', )#* D$>)H(5(')'(&#
9),$,! U This Act shall govein all petitions fileu aftei
it has taken effect. All fuithei pioceeuings in
insolvency, suspension of payments anu
iehabilitation cases then penuing, except to the
extent that in opinion of the couit theii application
woulu not be feasible oi woulu woik injustice, in
which event the pioceuuies set foith in piioi laws
anu iegulations shall apply.

,-." 9A(" #3348.C?8&7 ?& 2-7;87P 6&7?>C.?N" U This
Act shall apply to all contiacts of the uebtoi
iegaiuless of the uate of peifection.
B-7->C4 !G4-d This act govein the following:
a. All petitions fileu AFTER FRIA took effect
b. All fuithei pioceeuings in insolvency,
suspension of payments anu iehabilitations
penuing
c. All contiacts of uebtoi iegaiuless of uate of
peifection
JK.-3?8&7Nmd
a. In opinion of the couit, the application of
FRIA is not feasible
b. Application woulu woik injustice
*Pioceuuie in piioi laws apply
,-." 9AF" !-3-C487P 64CGN-" The Insolvency Law
(Act No. 19S6). As amenueu is heieby iepealeu. All
othei laws, oiueis, iules anu iegulations oi paits
theieof inconsistent with any piovision of this Act
aie heieby iepealeu oi mouifieu accoiuingly.

,-." A (p) H)'+4?#)0 shall iefei to the financial
conuition of a uebtoi that is geneially unable to pay
its oi his liabilities as they fall uue in the oiuinaiy
couise of business oi has liabilities that aie gieatei

than its oi his assets.
(s) Liabilities shall iefei to monetaiy claims against
the uebtoi, incluuing stockholuei's auvances that
have been iecoiueu in the uebtoi's auuiteu financial
statements as auvances foi futuie subsciiptions.
C" !8PE?N &< ?E- ;-W?&>
9" uuaianteeu non-impiisonment foi non-
payment of uebt
0" Right to ietain possession of piopeity
exempt fiom execution

W" !8PE?N &< ?E- 6>-;8?&>
9" Right to attach, gainish, foieclose, execute
upon, anu otheiwise seize the piopeity of a
uebtoi foi the fulfillment of the obligation
0" Bebtoi can only ieseive the piopeity that is
exempteu by law

." !C?8&7C4- <&> 87N&45-7.T 3>&.--;87PNd
Even if debtors properties answer for the
obligations, theie is still a iisk that uebtoi
woulu be unable to pay when the uebt falls
uue in the usual couise of business oi as the
uebts matuie

;" I7N&45-7.T 3>&.--;87PNd The statutoiy
pioceuuies by which a uebtoi obtains
financial ielief anu unueigoes juuicially
supeiviseu ieoiganization oi liquiuation of
its assets foi the benefit of its cieuitois.

-" YEC? 4CZ P&5->7N 87N&45-7.Tf \!I#
/Financial Rehabilitation anu Insolvency
Act)

<" I7N&45-7?d the financial conuition of a
uebtoid
8" MC4C7.- NE--? 87N&45-7.T liabilities
> assets
88" JaG8?T &> 8448aG8;8?T 87N&45-7.T
unable to pay liabilities as they fall uue
in the oiuinaiy couise of business
888" Db_,+ 87N&45-7? n 8448aG8;

P" O8CW848?8-N
8" 0seu to calculate state of being
insolvent
88" Nonetaiy claims against uebtoi

#" %C?G>- &< I7N&45-7.T 2>&.--;87PN
,-." '" %C?G>- &< 2>&.--;87PN" U The pioceeuings
unuei this Act shall be in iem. }uiisuiction ovei all
peisons affecteu by the pioceeuings shall be
consiueieu as acquiieu upon publication of the
notice of the commencement of the pioceeuings in
any newspapei of geneial ciiculation in the
Philippines in the mannei piesciibeu by the iules of
pioceuuie to be piomulgateu by the Supieme Couit.
The pioceeuings shall be conuucteu in a summaiy
anu non-auveisaiial mannei consistent with the
ueclaieu policies of this Act anu in accoiuance with
the iules of pioceuuie that the Supieme Couit may
piomulgate.
%C?G>-d in iem
b&Z SG>8N;8.?8&7 8N C.aG8>-;f 0pon publication of
the notice of commencement of pioceeuings in any
newspapei of geneial ciiculation in the Philippines
b&Z .&7;G.?-;f Summaiy anu non-auveisaiial
mannei
,-." A" (uu) Pioceeuings shall iefei to juuicial
pioceeuings commenceu by the couit's acceptance
of a petition fileu unuei this Act.
(bb) Paity to the pioceeuings shall iefei to the
uebtoi, a cieuitoi, the unsecuieu cieuitois'
committee, a stakeholuei, a paity with an owneiship
inteiest in piopeity helu by the uebtoi, a secuieu
cieuitoi, the iehabilitation ieceivei, liquiuatoi oi
any othei juiiuical oi natuial peison who stanus to
be benefiteu oi injuieu by the outcome of the
pioceeuings anu whose notice of appeaiance is
accepteu by the couit.
DT3- &< 3>&.--;87PNf }uuicial pioceeuings
2C>?8-N ?& ?E- 3>&.--;87PNd
1. uebtoi
2. cieuitoi
S. unsecured creditors committee
4. stakeholuei
S. paity with an owneiship inteiest in
piopeity helu by uebtoi
6. secuieu cieuitoi
7. iehabilitation ieceivei
8. liquiuatoi
9. othei juiiuical oi natuial peison who stanus
to be benefiteu oi injuieu by outcome of
pioceeuings

,-." (" ,GWN?C7?85- C7; 2>&.-;G>C4
6&7N&48;C?8&7" U Each juiiuical entity shall be
consiueieu as a sepaiate entity unuei the
pioceeuings in this Act. 0nuei these pioceeuings,
the assets anu liabilities of a uebtoi may not be
commingleu oi aggiegateu with those of anothei,
unless the lattei is a ielateu enteipiise that is owneu
oi contiolleu uiiectly oi inuiiectly by the same
inteiests: Pioviueu, howevei, That the commingling
oi aggiegation of assets anu liabilities of the uebtoi
with those of a ielateu enteipiise may only be
alloweu wheie:
(a) theie was commingling in fact of assets anu
liabilities of the uebtoi anu the ielateu enteipiise
piioi to the commencement of the pioceeuings;
(b) the uebtoi anu the ielateu enteipiise have
common cieuitois anu it will be moie convenient to
tieat them togethei iathei than sepaiately;
(c) the ielateu enteipiise voluntaiily acceues to join
the uebtoi as paity petitionei anu to commingle its
assets anu liabilities with the uebtoi's; anu
(u) The consoliuation of assets anu liabilities of the
uebtoi anu the ielateu enteipiise is beneficial to all
conceineu anu piomotes the objectives of
iehabilitation.
Pioviueu, finally, That nothing in this section shall
pievent the couit fiom joining othei entities
affiliateu with the uebtoi as paities puisuant to the
iules of pioceuuie as may be piomulgateu by the
Supieme Couit.
B-7->C4 !G4-d Each juiiuical entity is a sepaiate
entity. Thus, the assets anu liabilities of a uebtoi
may not be commingleu oi aggiegateu with those of
anothei
JK.-3?8&7d 0nless the othei is a ielateu enteipiise
that is owneu oi contiolleu uiiectly oi inuiiectly by
the same inteiest. The commingling oi aggiegation
of assets anu liabilities of the uebtoi with ielateu
enteipiise aie alloweu wheie:
(a) theie was commingling in fact of assets anu
liabilities piioi to the commencement of the
pioceeuings;
(b) they have common cieuitois anu it will be moie
convenient to tieat them togethei iathei than
sepaiately;
(c) the ielateu enteipiise voluntaiily acceues to join
the uebtoi as paity petitionei anu to commingle its
assets anu liabilities with the uebtoi's; anu
(u) Consoliuation is beneficial to all conceineu anu
piomotes the objectives of iehabilitation.

,-." )" W#'/7)&0/+) +* =+("0' &)$ <"+-(47&0/+) +*
<"+!#$("&4 V(4#'> - The Supieme Couit shall
uesignate the couit oi couits that will heai anu
iesolve cases biought unuei this Act anu shall
piomulgate the iules of pleauing, piactice anu
pioceuuie to govein the pioceeuings biought unuei
this Act.

M" 68584 C7; 6>8=87C4 O8CW848?T 87 I7N&45-7.T
2>&.--;87PN
,-." 9@" O8CW848?T &< I7;858;GC4 L-W?&>+ ]Z7-> &< C
,&4- 2>&3>8-?&>NE83+ 2C>?7->N 87 C 2C>?7->NE83+
&> L8>-.?&>N C7; ]<<8.->N" U Inuiviuual uebtoi,
ownei of a sole piopiietoiship, paitneis in a
paitneiship, oi uiiectois anu officeis of a uebtoi
shall be liable foi uouble the value of the piopeity
solu, embezzleu oi uisposeu of oi uouble the amount
of the tiansaction involveu, whichevei is highei to
be iecoveieu foi benefit of the uebtoi anu the
cieuitois, if they, having notice of the
commencement of the pioceeuings, oi having
ieason to believe that pioceeuings aie about to be
commenceu, oi in contemplation of the pioceeuings,
willfully commit the following acts:
(a) Bispose oi cause to be uisposeu of any piopeity
of the uebtoi othei than in the oiuinaiy couise of
business oi authoiize oi appiove any tiansaction in
fiauu of cieuitois oi in a mannei giossly
uisauvantageous to the uebtoi anuoi cieuitois; oi
(b) Conceal oi authoiize oi appiove the
concealment, fiom the cieuitois, oi embezzles oi
misappiopiiates, any piopeity of the uebtoi.
The couit shall ueteimine the extent of the liability
of an ownei, paitnei, uiiectoi oi officei unuei this

section. In this connection, in case of paitneiships
anu coipoiations, the couit shall consiuei the
amount of the shaieholuing oi paitneiship oi equity
inteiest of such paitnei, uiiectoi oi officei, the
uegiee of contiol of such paitnei, uiiectoi oi officei
ovei the uebtoi, anu the extent of the involvement of
such paitnei, uiiectoi oi uebtoi in the actual
management of the opeiations of the uebtoi.
YE& C>- 48CW4-f
a. Inuiviuual uebtoi
b. 0wnei of sole piopiietoiship
c. Paitneis in paitneiship
u. Biiectois anu officeis of a uebtoi
#.?N 3G78NECW4-f
(a) Bispose oi cause to be uisposeu of any piopeity
of the uebtoi othei than in the oiuinaiy couise of
business oi authoiize oi appiove any tiansaction in
fiauu of cieuitois oi in a mannei giossly
uisauvantageous to the uebtoi anuoi cieuitois; oi
(b) Conceal oi authoiize oi appiove the
concealment, fiom the cieuitois, oi embezzles oi
misappiopiiates, any piopeity of the uebtoi.
YE-7 48CW4-f If they commit the acts punishable
uuiing the following peiious:
a. if they have notice of the
commencement of the pioceeuings,
oi
b. having ieason to believe that the
pioceeuings aie about to be
commences,
c. in contemplation of pioceeuings
the
JK?-7? &< 48CW848?Tf Beteimineu by the couit
Note: In paitneiships anu coipoiations, the couit
shall consiuei the following in ueteimining extent of
liability:
1. Amount of shaieequity inteiest
2. Begiee of contiol
S. Extent of involvement in actual
management of opeiations

,-." 9A*" 2-7C4?8-N" An ownei, paitnei, uiiectoi,
officei oi othei employee of the uebtoi who
commits any one of the following acts shall, upon
conviction theieof, be punisheu by a fine of not moie
than 0ne million pesos (Php 1, uuu,uuu.uu) anu
impiisonment foi not less than thiee(S) months noi
moie than five (S) yeais foi each offense;
(a) if he shall, having notice of the commencement of
the pioceeuings, oi having ieason to believe that
pioceeuings aie about to be commenteu, oi in
contemplation of the pioceeuings hiue oi conceal, oi
uestioy oi cause to be uestioyeu oi hiuuen any
piopeity belonging to the uebtoi oi if he shall hiue,
uestioy, aftei mutilate oi falsify, oi cause to be
hiuuen, uestioyeu, alteieu, mutilateu oi falsifieu, any
book, ueeu, uocument oi wiiting ielating theieto; if
he shall, with intent to uefiauu the cieuitois of the
uebtoi, make any payment sale, assignment, tiansfei
oi conveyance of any piopeity belongings to the
uebtoi
(b) if he shall, having knowleuge belief of any peison
having pioveu a false oi fictitious claim against the
uebtoi, fail to uisclose the same to the iehabilitation
ieceivei of liquiuatoi within one (1) month aftei
coming to saiu knowleuge oi belief; oi if he shall
attempt to account foi any of the uebtois piopeity
by fictitious losses oi expense; oi
(c) if he shall knowingly violate a piohibition oi
knowingly fail to unueitake an obligation
establisheu by this Act.
YE& C>- 48CW4-f
a. 0wnei
b. Paitnei
c. Biiectoi
u. 0fficei
e. 0thei employee of uebtoi

#.?N 3G78NECW4-f
(a)
1. if he shall, having notice of the
commencement of the pioceeuings, oi having
ieason to believe that pioceeuings aie about to be
commenteu, oi
2. in contemplation of the pioceeuings hiue
oi conceal, oi uestioy oi cause to be uestioyeu oi
hiuuen any piopeity belonging to the uebtoi oi
S. if he shall hiue, uestioy, aftei mutilate oi
falsify, oi cause to be hiuuen, uestioyeu, alteieu,
mutilateu oi falsifieu, any book, ueeu, uocument oi
wiiting ielating theieto;

4. if he shall, with intent to uefiauu the
cieuitois of the uebtoi, make any payment sale,
assignment, tiansfei oi conveyance of any piopeity
belongings to the uebtoi
(b) if he shall, having knowleuge belief of any peison
having pioveu a false oi fictitious claim against the
uebtoi, fail to uisclose the same to the iehabilitation
ieceivei of liquiuatoi within one (1) month aftei
coming to saiu knowleuge oi belief; oi if he shall
attempt to account foi any of the uebtois piopeity
by fictitious losses oi expense; oi
(c) if he shall knowingly violate a piohibition oi
knowingly fail to unueitake an obligation
2-7C4?Tf M]Db
a. Fine = x1M
b. Imprisonment = 3 mos x 5 years

6EC3?-> 0" 6&7.G>>-7.- Q 2>-<->-7.- &< 6>-;8?N
9" B-7->C4 6&7.-3?N
,-." )0" =+)0#)0' +* & V#1&3/4/0&0/+) <4&)> The
Rehabilitation Plan shall, as a minimum:
(i) ensuie that the payments maue unuei the plan
follow the piioiity establisheu unuei the piovisions
of the Civil Coue on concuiience anu piefeience of
cieuits anu othei applicable laws.

,-." 9''" 9&#31++$#3$ )#* :+$-$+$#3$ &- 9+$*(',! U
The Liquiuation Plan anu its Implementation shall
ensuie that the concuiience anu piefeience of
cieuits as enumeiateu in the Civil Coue of the
Philippines anu othei ielevant laws shall be
obseiveu, unless a piefeiieu cieuitoi voluntaiily
waives his piefeiieu iight.
The iehabilitation plan anu the liquiuation
plan must ensuie that the concuiience anu
piefeience of cieuits aie complieu with

2G>3&N- &< .&7.G>>-7.- C7; 3>-<->-7.- &< .>-;8?d
A system is followeu to piopeily iecognize creditors
iights, iespect piioiity of claims, anu ensuie the
equitable tieatment of similaily situateu cieuitois
6&7.G>>-7.- &< .>-;8?d The cieuitois aie paiu
concuiiently anu pio-iata (in piopoition) to the
amount of the iespective cieuits
2>-<->-7.- &< .>-;8?d A methou auopteu to
ueteimine anu specify the oiuei in which cieuits
shoulu be paiu.
Beteimine the piioiity of payments oi
which cieuitois will be paiu aheau of otheis.
YE-7 C3348-;f
When theie aie two oi moie cieuitois
having sepaiate anu uistinct claims against
the same uebtoi who has insufficient
piopeity
When uebtoi cannot pay his uebts in full
Asceitaineu in the context of some
pioceeuings (i.e. insolvency pioceeuings)

0" 64CNN8<8.C?8&7 &< 6>-;8?N
9" ,3-.8C4 2>-<->>-; 6>-;8?N
#>?8.4- 00A9" With iefeience to specific movable
piopeity of the uebtoi, the following claims oi liens
shall be piefeiieu:
(1) Buties, taxes anu fees uue theieon to the State oi
any subuivision theieof;
(2) Claims aiising fiom misappiopiiation, bieach of
tiust, oi malfeasance by public officials committeu
in the peifoimance of theii uuties, on the movables,
money oi secuiities obtaineu by them;
(S) Claims foi the unpaiu piice of movables solu, on
saiu movables, so long as they aie in the possession
of the uebtoi, up to the value of the same; anu if the
movable has been iesolu by the uebtoi anu the piice
is still unpaiu, the lien may be enfoiceu on the piice;
this iight is not lost by the immobilization of the
thing by uestination, pioviueu it has not lost its
foim, substance anu iuentity; neithei is the iight lost
by the sale of the thing togethei with othei piopeity
foi a lump sum, when the piice theieof can be
ueteimineu piopoitionally;
(4) Cieuits guaianteeu with a pleuge so long as the
things pleugeu aie in the hanus of the cieuitoi, oi
those guaianteeu by a chattel moitgage, upon the
things pleugeu oi moitgageu, up to the value
theieof;

(S) Cieuits foi the making, iepaii, safekeeping oi
pieseivation of peisonal piopeity, on the movable
thus maue, iepaiieu, kept oi possesseu;
(6) Claims foi laboieis' wages, on the goous
manufactuieu oi the woik uone;
(7) Foi expenses of salvage, upon the goous
salvageu;
(8) Cieuits between the lanuloiu anu the tenant,
aiising fiom the contiact of tenancy on shaies, on
the shaie of each in the fiuits oi haivest;
(9) Cieuits foi tianspoitation, upon the goous
caiiieu, foi the piice of the contiact anu inciuental
expenses, until theii ueliveiy anu foi thiity uays
theieaftei;
(1u) Cieuits foi louging anu supplies usually
fuinisheu to tiavelleis by hotel keepeis, on the
movables belonging to the guest as long as such
movables aie in the hotel, but not foi money loaneu
to the guests;
(11) Cieuits foi seeus anu expenses foi cultivation
anu haivest auvanceu to the uebtoi, upon the fiuits
haivesteu;
(12) Cieuits foi ient foi one yeai, upon the peisonal
piopeity of the lessee existing on the immovable
leaseu anu on the fiuits of the same, but not on
money oi instiuments of cieuit;
(1S) Claims in favoi of the uepositoi if the
uepositaiy has wiongfully solu the thing uepositeu,
upon the piice of the sale.
In the foiegoing cases, if the movables to which the
lien oi piefeience attaches have been wiongfully
taken, the cieuitoi may uemanu them fiom any
possessoi, within thiity uays fiom the unlawful
seizuie. (1922a)

]7 ,3-.8<8. H&5CW4- 2>&3->?T
6>-;8? 2>-<->-7.- ]5->^_3&7
Buties, taxes anu fees
uue to the State oi its

subuivisions
Claims aiising fiom
misappiopiiation,
bieach of tiust, oi
malfeasance by public
officials committeu in
the peifoimance of theii
uuties
The movables, money, oi
secuiities obtaineu by
the subject public
officials
a. Claims foi unpaiu
piice of movables
solu
b. Claim when
movable has been
iesolu by the
uebtoi anu the
piice is unpaiu
a. Novables
So long as in
possession of
uebtoi (only up
to the value of
the movable)
b. Piice of Sale (uue to
lien)
Right not lost by
immobilization
of thing by
uestination
Nust not have
lost its foim,
substance anu
iuentity
Right not lost by
sale with othei
piopeity foi
lump sum
amount (Piice of
subject movable
can be
ueteimineu
piopoitionally)
Cieuits guaianteeu with
a pleuge oi moitgage
The thing pleugeu oi
moitgageu
Thing pleugeu
must be in the
hanus of the
cieuitoi
0p to the value
of thing pleugeu
oi moitgageu
Cieuits foi making,
iepaii, safekeeping oi
pieseivation of peisonal
piopeity
0n the movable maue,
iepaiieu, kept oi
possesseu
Claims foi laboieis'
wages
0n the goous
manufactuieu oi the

woik uone
Expenses of salvage 0n goous salvageu
Cieuits between the
lanuloiu anu the tenant,
aiising fiom the
contiact of tenancy on
shaies
The shaie of each in the
fiuits oi haivest
Cieuits foi
tianspoitation, foi the
piice of the contiact anu
inciuental expenses,
until theii ueliveiy anu
foi thiity uays
theieaftei
0pon the goous caiiieu
Cieuits foi louging anu
supplies usually
fuinisheu to tiavelleis
by hotel keepeis,
0n the movables
belonging to the guest
Such movables
aie in the hotel
Not foi money
loaneu to the
guests
Cieuits foi seeus anu
expenses foi cultivation
anu haivest auvanceu to
the uebtoi
0pon the fiuits
haivesteu
Cieuits foi ient foi one
yeai
0pon the peisonal
piopeity of the lessee
existing on the
immovable leaseu anu on
the fiuits of the same
Not on money oi
instiuments of
cieuit
Claims in favoi of the
uepositoi if the
uepositaiy has
wiongfully solu the
thing uepositeu
0pon the piice of the sale

#>?8.4- 00A0" With iefeience to specific immovable
piopeity anu ieal iights of the uebtoi, the following
claims, moitgages anu liens shall be piefeiieu, anu
shall constitute an encumbiance on the immovable
oi ieal iight:
(1) Taxes uue upon the lanu oi builuing;
(2) Foi the unpaiu piice of ieal piopeity solu, upon
the immovable solu;
(S) Claims of laboieis, masons, mechanics anu othei
woikmen, as well as of aichitects, engineeis anu
contiactois, engageu in the constiuction,
ieconstiuction oi iepaii of builuings, canals oi othei
woiks, upon saiu builuings, canals oi othei woiks;
(4) Claims of fuinisheis of mateiials useu in the
constiuction, ieconstiuction, oi iepaii of builuings,
canals oi othei woiks, upon saiu builuings, canals oi
othei woiks;
(S) Noitgage cieuits iecoiueu in the Registiy of
Piopeity, upon the ieal estate moitgageu;
(6) Expenses foi the pieseivation oi impiovement
of ieal piopeity when the law authoiizes
ieimbuisement, upon the immovable pieseiveu oi
impioveu;
(7) Cieuits annotateu in the Registiy of Piopeity, in
viitue of a juuicial oiuei, by attachments oi
executions, upon the piopeity affecteu, anu only as
to latei cieuits;
(8) Claims of co-heiis foi waiianty in the paitition
of an immovable among them, upon the ieal
piopeity thus uiviueu;
(9) Claims of uonois oi ieal piopeity foi pecuniaiy
chaiges oi othei conuitions imposeu upon the
uonee, upon the immovable uonateu;
(1u) Cieuits of insuieis, upon the piopeity insuieu,
foi the insuiance piemium foi two yeais. (192Sa)

]7 N3-.8<8. 8==&5CW4- 3>&3->?T C7; >-C4 >8PE?N
&< ;-W?&>
6>-;8? 2>-<->-7.- ]5->^_3&7
Taxes uue upon the lanu
oi builuing

0npaiu piice of ieal 0pon the immovable

piopeity solu solu
Claims of laboieis,
masons, mechanics anu
othei woikmen,
aichitects, engineeis anu
contiactois, engageu in
the constiuction,
ieconstiuction oi iepaii
of builuings, canals oi
othei woiks
0pon saiu builuings,
canals oi othei woiks
Claims of fuinisheis of
mateiials useu in the
constiuction,
ieconstiuction, oi iepaii
of builuings, canals oi
othei woiks
0pon saiu builuings,
canals oi othei woiks;
Noitgage cieuits
iecoiueu in the Registiy
of Piopeity
0pon the ieal estate
moitgageu
Expenses foi the
pieseivation oi
impiovement of ieal
piopeity when the law
authoiizes
ieimbuisement
0pon the immovable
pieseiveu oi impioveu
Cieuits annotateu in the
Registiy of Piopeity, in
viitue of a juuicial oiuei,
by attachments oi
executions
0pon the piopeity
affecteu, anu only as to
latei cieuits
Claims of co-heiis foi
waiianty in the paitition
of an immovable among
them
0pon the ieal piopeity
thus uiviueu
Claims of uonois oi ieal
piopeity foi pecuniaiy
chaiges oi othei
conuitions imposeu upon
the uonee
0pon the immovable
uonateu
Cieuits of insuieis foi
the insuiance piemium
foi two yeais
0pon the piopeity
insuieu

!"#" %&" 9@9A0+ ,-.?8&7 9')" O8aG8;C?8&7 &< C
,-.G>8?8-N HC>R-? 2C>?8.83C7?" U The foiegoing
piovisions of this chaptei shall be without piejuuice
to the powei of a iegulatoiy agency oi self-
iegulatoiy oiganization to liquiuate tiaue-ielateu
claims of clients oi customeis of a secuiities maiket
paiticipant which, foi puiposes of investoi
piotection, aie heieby ueemeu to have absolute
piioiity ovei othei claims of whatevei natuie oi
kinu insofai as tiaue-ielateu assets aie conceineu.
Foi puiposes of this section, tiaue -ielateu assets
incluue cash, secuiities, tiauing iight anu othei
assets owneu anu useu by the secuiities maiket
paiticipant in the oiuinaiy couise of this business.
6>-;8?d Tiaue-ielateu claims of clients oi customeis
of a secuiities maiket paiticipant
2>-<->-7.- &5-> tiaue-ielateu assets
D>C;-U>-4C?-; CNN-?Nd
1. Cash
2. Secuiities
S. Tiauing iight
4. 0thei assets owneu anu useu by the
secuiities maiket paiticipant in the
oiuinaiy couise of this business
This special piefeiieu cieuit enjoys
absolute piioiity ovei othei claims anu
amenus the oiuei of piefeience Ait. 2241
anu 2242.

#>?8.4- 00A'" The claims oi cieuits enumeiateu in
the two pieceuing aiticles shall be consiueieu as
moitgages oi pleuges of ieal oi peisonal piopeity,
oi liens within the puiview of legal piovisions
goveining insolvency. Taxes mentioneu in No. 1,
aiticle 2241, anu No. 1, aiticle 2242, shall fiist be
satisfieu. (n)
Claims oi cieuits enumeiateu in 2241
(special piefeiieu cieuits on specific
movable piopeity) anu in 2242 (Special
piefeiieu cieuits on specific immovable
piopeity) aie ueemeu N0RTuAuES oi
PLEBuES oi LIENS.
In all cases, taxes in 2241 anu 2242 shall be
fiist satisfieu

#>?8.4- 00A)" Those cieuits, which enjoy piefeience

with iespect to specific movables, excluue all otheis
to the extent of the value of the peisonal piopeity to
which the piefeience iefeis.
Ait. 2241-2242 enumeiates special
piefeiieu cieuits that enjoy piefeience with
iespect to movable oi immovable piopeity
of the uebtoi.
It excluues all othei claims to the extent of
the value of the affecteu piopeity

#>?8.4- 00A(" If theie aie two oi moie cieuits with
iespect to the same specific movable piopeity, they
shall be satisfieu pio iata, aftei the payment of
uuties, taxes anu fees uue the State oi any
subuivision theieof. (1926a)

#>?8.4- 00AF" Those cieuits which enjoy piefeience
in ielation to specific ieal piopeity oi ieal iights,
excluue all otheis to the extent of the value of the
immovable oi ieal iight to which the piefeience
iefeis.

#>?8.4- 00A:" If theie aie two oi moie cieuits with
iespect to the same specific ieal piopeity oi ieal
iights, they shall be satisfieu pio iata, aftei the
payment of the taxes anu assessments upon the
immovable piopeity oi ieal iight. (1927a)
Among the special piefeiieu cieuits
enumeiateu in Ait. 2241-2242, only taxes
enjoy piefeience.
Those enumeiateu in 2241 (2) to (1S) &
2242 (2) to (1u) aie liens, they aie not
piefeiieu ovei any anothei intei se. TBERE
IS 0NLY C0NC0RRENCE 0F CREBIT.

DZ&U?8-> &>;-> &< 3>-<->-7.-
DIJ! 9d Taxes, uuties, anu fees uue on specific
movable oi immovable piopeity
DIJ! 0d All othei special piefeiieu cieuits
Satisfieu paii passu anu pio iata out of any iesiuual
value of specific piopeity to which othei cieuits
ielate

#>?8.4- 00*@" The excess, if any, aftei the payment
of the cieuits which enjoy piefeience with iespect to
specific piopeity, ieal oi peisonal, shall be auueu to
the fiee piopeity which the uebtoi may have, foi the
payment of the othei cieuits. (1928a)
Excess aftei payment of cieuits = auueu to
fiee piopeity

LJ M#!!JD] 5" ÌOO#%_J`#
\C.?Nd Theie aie two liens in the piopeity of
iesponuent. 0n the title, theie was an annotation
stating that in case of sale under the foreclosuie
decree, the vendors lien and the mortgage credit
shoulu be paiu 6"+ "&0& from the proceeds. The
issue in this case is whethei the cieuit shoulu be
paiu pio iata.
b-4;d No. 0nly taxes enjoy a similai absolute
piefeience among cieuitois. All the iemaining
thiiteen classes of piefeiieu cieuitois unuei Aiticle
2242 enjoy no piioiity among themselves but must
be paiu pio iata oi in piopoition to the amount of
the iespective cieuit. 0nuei Ait. 2249, if theie aie
two oi moie cieuits with iespect to specific ieal
piopeity oi ieal iights, they shall be satisfieu pio
iata, aftei the payment of the taxes anu assessments
upon the immovable piopeity oi ieal iight. The
piefeiieu cieuitois enumeiateu in Ait. 2241 (2-14)
must necessaiily be conveneu anu theii claims
asceitaineu. To ueteimine the piopoition, a
proceeding is necessary to adjudicate the creditors
claims.

LM2 5" 6#
\C.?Nd Naiinuuque Nining obtaineu loans fiom PNB
anu BBP. 0pon uefault, the banks foiecloseu the
piopeities moitgageu. Neanwhile, Naiinuuque
Nining bought constiuction mateiials fiom
Remington which the foimei faileu to pay,
INNG-d Boes Remington have a piefeiieu cieuit ovei
BBP consiueiing that it has a piioi lien ovei the
mateiials. N0
b-4;d 0nly taxes enjoy an absolute piefeience in the
application of piefeiieu cieuit. Theie is no hieiaichy
among the othei piefeiieu cieuitois in Ait. 2242.
Insteau, they must be paiu theii uue in piopoition to
the amount of credit. According to ARTICLE 2249 If
theie aie two oi moie cieuits with iespect to the

same specific ieal piopeity oi ieal iights, they shall
be satisfieu pio iata, aftei the payment of the taxes
anu assessments upon the immovable piopeity oi
real rights.

i"O" MJ!%#!L] 6]%,D!_6DI]% 5" 6#
\C.?Nd Nunicipal goveinment of San Antonio Nueva
Ecija appioveu the constiuction of the San Antonio
Public Market, funding by a grant-loan-equity
financing piogiam. Nunicipality agieeu to assume
ceitain expenses; howevei, when the cash equity
became uue, the municipality faileu to pay the
winning biuueis. Biuueis seek the enfoicement of
contractors lien
b-4;d 0nuei Ait, 2242, the claims of contiactois
engageu in the constiuction, ieconstiuction oi
iepaii of builuings oi othei woiks shall be piefeiieu
with iespect to the specific builuing oi othei
immovable piopeity constiucteu. Bowevei, it only
finus application when theie is a concuiience of
cieuits, i.e. when the same specific piopeity of the
uebtoi is subjecteu to the claims of seveial cieuitois
anu the value of such piopeity of the uebtoi is
insufficient to pay in full all the cieuitois. In such a
situation, the question of piefeience will aiise, that
is, theie will be a neeu to ueteimine which of the
cieuitois will be paiu aheau of the otheis. This
statutoiy lien shoulu then only be enfoiceu in the
context of some kinu of a pioceeuing wheie the
claims of all the piefeiieu cieuitois may be
binuingly aujuuicateu, such as insolvency
pioceeuings. Since the action fileu by the petitioneis
is not an insolvency pioceeuings, such lien cannot be
enfoiceu in the piesent action foi theie is no way of
ueteimining whethei oi not theie exist othei
piefeiieu cieuitois with claims ovei the San
Antonio Public Naiket

0" ]>;87C>T 2>-<->>-; 6>-;8?N
#>?8.4- 00AA" With iefeience to othei piopeity, ieal
anu peisonal, of the uebtoi, the following claims oi
cieuits shall be piefeiieu in the oiuei nameu:
(1) Piopei funeial expenses foi the uebtoi, oi
chiluien unuei his oi hei paiental authoiity who
have no piopeity of theii own, when appioveu by
the couit;
(2) Cieuits foi seivices ienueieu the insolvent by
employees, laboieis, oi householu helpeis foi one
yeai pieceuing the commencement of the
pioceeuings in insolvency;
(S) Expenses uuiing the last illness of the uebtoi oi
of his oi hei spouse anu chiluien unuei his oi hei
paiental authoiity, if they have no piopeity of theii
own;
(4) Compensation uue the laboieis oi theii
uepenuents unuei laws pioviuing foi inuemnity foi
uamages in cases of laboi acciuent, oi illness
iesulting fiom the natuie of the employment;
(S) Cieuits anu auvancements maue to the uebtoi
foi suppoit of himself oi heiself, anu family, uuiing
the last yeai pieceuing the insolvency;
(6) Suppoit uuiing the insolvency pioceeuings, anu
foi thiee months theieaftei;
(7) Fines anu civil inuemnification aiising fiom a
ciiminal offense;
(8) Legal expenses, anu expenses incuiieu in the
auministiation of the insolvent's estate foi the
common inteiest of the cieuitois, when piopeily
authoiizeu anu appioveu by the couit;
(9) Taxes anu assessments uue the national
goveinment, othei than those mentioneu in aiticles
2241, No. 1, anu 2242, No. 1;
(1u) Taxes anu assessments uue any piovince, othei
than those iefeiieu to in aiticles 2241, No. 1, anu
2242, No. 1;
(11) Taxes anu assessments uue any city oi
municipality, othei than those inuicateu in aiticles
2241, No. 1, anu 2242, No. 1;
(12) Bamages foi ueath oi peisonal injuiies causeu
by a quasi-uelict;
(1S) uifts uue to public anu piivate institutions of
chaiity oi beneficence;
(14) Cieuits which, without special piivilege, appeai
in (a) a public instiument; oi (b) in a final juugment,
if they have been the subject of litigation. These
cieuits shall have piefeience among themselves in
the oiuei of piioiity of the uates of the instiuments
anu of the juugments, iespectively. (1924a)

#>?" 00AA enumeiates the oiuinaiy
piefeiieu cieuits that enjoy a piefeience,
excluuing the cieuits that aie latei in oiuei,
but only as against the value of piopeity not
subject of any special piefeiieu cieuit.
Cieates iights in favoi of ceitain cieuitois
to have the fiee piopeity of the uebtoi, oi
piopeity not subjecteu to any special
piefeiieu cieuit, applieu in accoiuance with
an oiuei of piefeience.
value of piopeity & tieatment
! value of specific piopeity > total of
special cieuits iesiuual foims
pait of fiee piopeity of insolvent
uebtoi
! value of specific piopeity < total of
special piefeiieu cieuits
unsatisfieu balance of cieuits
tieateu as pioviueu in Ait. 22S1
Taxes anu assessments in Ait. 2242 (9) to
(11) uo not have the piefeience cieateu in
Ait. 2241 (1) anu 2242(2)
Ait. 2242 (14) establishes a piefeience
among cieuits in the oiuei of piioiity of the
uates of the instiuments oi of the
juugments.

2"L" %&" AA0+ #>?8.4- 99@" Woikei piefeience in
case of bankiuptcy. In the event of bankiuptcy oi
liquidation of an employers business, his woikeis
shall enjoy fiist piefeience as iegaius theii wages
anu othei monetaiy claims, any piovisions of law to
the contiaiy notwithstanuing. Such unpaiu wages
anu monetaiy claims shall be paiu in full befoie
claims of the goveinment anu othei cieuitois may
be paiu. (As amenueu by Section 1, Republic Act No.
671S, Naich 21, 1989)

!"#" %&" 9@9A0+ ,-.?8&7 9''" Concuiience anu
Piefeience of Cieuits. - The Liquiuation Plan anu its
Implementation shall ensuie that the concuiience
anu piefeience of cieuits as enumeiateu in the Civil
Coue of the Philippines anu othei ielevant laws shall
be obseiveu, unless a piefeiieu cieuitoi voluntaiily
waives his piefeiieu iight. Foi puiposes of this
chaptei, cieuits foi seivices ienueieu by employees
oi laboieis to the uebtoi shall enjoy fiist piefeience
unuei Aiticle 2244 of the Civil Coue, unless the
claims constitute legal liens unuei Aiticle 2241 anu
2242 theieof.
9" Reiteiates that Ait. 11u of Laboi Coue uoes
not cieate a lien in favoi of woikeis oi
employees foi unpaiu wages. They aie not
special piefeiieu cieuits unless they aie
coveieu by Ait. 2241 (6) oi Ait. 2242 (S).
0" The fiist piefeience in Ait. 11u mouies the
oiuei of piefeience in Ait. 2244 by
iemoving the one-yeai limitation in Ait.
2242 (2) anu by moving claims foi unpaiu
wages fiom seconu piioiity to fiist piioiity
in the oiuei of piefeience establisheu by
Ait. 2242

#>?8.4- 00*9" Those cieuits which uo not enjoy any
piefeience with iespect to specific piopeity, anu
those which enjoy piefeience, as to the amount not
paiu, shall be satisfieu accoiuing to the following
iules:
(1) In the oiuei establisheu in aiticle 2244;
(2) Common cieuits iefeiieu to in aiticle 224S shall
be paiu pio iata iegaiuless of uates. (1929a)

'" 6&==&7 6>-;8?N
#>?8.4- 00A*" Cieuits of any othei kinu oi class, oi
by any othei iight oi title not compiiseu in the foui
pieceuing aiticles, shall enjoy no piefeience. (192S)

#>?8.4- 00*9" Those cieuits which uo not enjoy any
piefeience with iespect to specific piopeity, anu
those which enjoy piefeience, as to the amount not
paiu, shall be satisfieu accoiuing to the following
iules:
(1) In the oiuei establisheu in aiticle 2244;
(2) Common cieuits iefeiieu to in aiticle 224S shall
be paiu pio iata iegaiuless of uates. (1929a)
#>?" 00A* enumeiates common cieuits that
enjoy no piefeience anu must only be paiu
aftei payment of the oiuinaiy piefeiieu
cieuits.
Theie is concuiience of cieuits among
them. These aie paiu pio-iata oi in
piopoition to the amount of the iespective
cieuits, iegaiuless of uates.
0iuinaiy cieuits aie not liens they uo not
attach to any piopeity of the uebtoi


6]!L]`# 5" !JcJ,
\C.?Nd Coiuova bought ceitificates of stock of
Celebiity Spoits Plaza Incoipoiateu (CSPI), which
weie ueliveieu by Philfinance to Filmanbank to holu
the shaies in behalf of Coiuova. Philfinance was
placeu unuei ieceiveiship, assigning iesponuent
lawyeis as liquiuatois. Without the knowleuge anu
consent of Coiuova anu without authoiity fiom SEC,
the iesponuents withuiew the CSPI shaies fiom the
custouian banks anu subsequently solu them.
Coiuova fileu a complaint. But since the shaies hau
been solu anu the pioceeus commingleu with the
othei assets of Philfinance, petitionei is now an
oiuinaiy cieuitoi foi the value of the shaies
b-4;d Cordovas CSPI shares were specific or
ueteiminate movable piopeities. But when they
weie solu, the pioceeus became geneiic anu weie
commingleu with the cash anu othei assets of
Philfinance. Thus, Cordovas claim was for a generic
piopeity (sum of money) anu not specific oi
ueteiminate; hence, #>? 00A*+ 66 is applicable. It
pioviues: Cieuits of any othei kinu oi class, oi by
any othei iight oi title not compiiseu in the foui
pieceuing aiticles, shall enjoy no piefeience.
#>? 00*9 /01+ 66 is also applicable: Common
cieuits iefeiieu to in Ait 224S shall be paiu pio iata
regardless of dates.

6b#2DJ! '" ,_,2J%,I]% ]\ 2#cHJ%D,
#" B-7->C4 6&7.-3?N /!# 9@9A0+ ,-." 0+ ,-."
:A+ ,-." :*+ ,-." :)1
C" ,_,2J%,I]% ]\ 2#cHJ%D,d
i. A juuicial insolvency pioceeuing by
which an inuiviuual uebtoi
submits, foi appioval by his
cieuitois, a pioposeu agieement
containing piopositions uelaying oi
extenuing the time of payment of
his uebts.
ii. A statutoiy uevice allowing a
uistiesseu uebtoi to uefei payment
of his uebts by piesenting a plan to
iepay cieuitois ovei time
W" 6b#!#6DJ!I,DI6,
8" Always v0L0NTARY it may only
be availeu of anu instituteu by an
inuiviuual uebtoi (natuial peison
that has become insolvent)
1

88" Inuiviuual uebtoi must be insolvent
unuei the ILLIQ0IBITY oi EQ0ITY
concept (IB possesses sufficient
piopeity to covei all his uebts but
foieseeing impossibility of meeting
them when they fall uue)
888" No value iequiiement with iespect
to amount of uebts of insolvent
uebtoi

,-." 0" L-.4C>C?8&7 &< 2&48.T. It is the policy of the
State to encouiage uebtois, both juiiuical anu
natuial peisons, anu theii cieuitois to collectively
anu iealistically iesolve anu aujust competing claims
and property rights
W" 2_!2],Jd to encouiage uebtois anu
cieuitois to collectively anu iealistically
iesolve anu aujust competing claims anu
piopeity iights

,-." A"
/31 Insolvent shall iefei to the financial conuition of
a uebtoi that is geneially unable to pay its oi his
liabilities as they fall uue in oiuinaiy couise of
business oi has liabilities that aie gieatei than its oi
his assets.
/N1 Liabilities shall iefei to monetaiy claims against
the debtor
." LJ\I%IDI]%
8" I%,]O`J%D: the financial
conuition of a uebtoid
91 Balance sheet insolvency
liabilities > assets
(Remeuy: Liquiuation)
01 Equity oi illiquiuity
insolvency unable to
pay liabilities as they fall
uue in the oiuinaiy
couise of business
(Remeuy: Suspension of
Payments)
ii. OI#MIOIDIJ,d Nonetaiy claims

1
Paitneiships anu coipoiations may only
avail of iehabilitation

,-." :A" 2-?8?8&7" An inuiviuual uebtoi who,
possessing sufficient piopeity to covei all his uebts
but foieseeing the impossibility of meeting them
when they iespectively fall uue, may file a veiifieu
petition that he be ueclaieu in the state of
suspension of payments by the couit of the piovince
oi city in which he has iesiues foi six (6) months
piioi to the filing of his petition. Be shall attach to
his petition, as a minimum: (a) a scheuule of uebts
anu liabilities; (b) an inventoiy of assess; anu (c) a
pioposeu agieement with his cieuitois.
C1 YEC? ?& <84-f veiifieu petition to be
ueclaieu in the state of suspension of
payments
W1 YE& =CT <84-f Inuiviuual uebtoi
.1 YE-7 ?& <84-f When theie uebtoi possesses
sufficient piopeity to covei his uebts but
foieseeing the impossibility of meeting
them when they fall uue
;1 YE->- ?& <84-f Piovince oi city wheie
inuiviuual uebtoi iesiues foi 6 months piioi
to the filling of the petition
-1 !-aG8>-; #??C.E=-7?Nd
iii. Scheuule of uebts anu liabilities
iv. Inventoiy of Assets
v. Pioposeu agieement with cieuitois

,-." :*" #.?8&7 &< ?E- 2-?8?8&7" U If the couit finus
the petition sufficient in foim anu substance, it shall,
within five (S) woiking uays fiom the filing of the
petition, issue an 0iuei:
(a) calling a meeting of all the cieuitois nameu in the
scheuule of uebts anu liabilities at such time not less
than fifteen (1S) uays noi moie than foity (4u) uays
fiom the uate of such 0iuei anu uesignating the
uate, time anu place of the meeting;
(b) uiiecting such cieuitois to piepaie anu piesent
wiitten eviuence of theii claims befoie the
scheuuleu cieuitois' meeting;
(c) uiiecting the publication of the saiu oiuei in a
newspapei of geneial ciiculation publisheu in the
piovince oi city in which the petition is fileu once a
week foi two (2) consecutive weeks, with the fiist
publication to be maue within seven (7) uays fiom
the time of the issuance of the 0iuei;
(u) uiiecting the cleik of couit to cause the senuing
of a copy of the 0iuei by iegisteieu mail, postage
piepaiu, to all cieuitois nameu in the scheuule of
uebts anu liabilities;
(e) foibiuuing the inuiviuual uebtoi fiom selling,
tiansfeiiing, encumbeiing oi uisposing in any
mannei of his piopeity, except those useu in the
oiuinaiy opeiations of commeice oi of inuustiy in
which the petitioning inuiviuual uebtoi is engageu
so long as the pioceeuings ielative to the suspension
of payments aie penuing;
(f) piohibiting the inuiviuual uebtoi fiom making
any payment outsiue of the necessaiy oi legitimate
expenses of his business oi inuustiy, so long as the
pioceeuings ielative to the suspension of payments
aie penuing; an
(g) appointing a commissionei to piesiue ovei the
cieuitois' meeting.
<1 6&7?-7?N &< ]!LJ!
8" Call a meeting of all cieuitois in the
scheuule of uebts anu liabilities
91 Period: 15x40 from
uate of 0iuei
01 Besignate uate, time anu
place of meeting
ii. Biiect cieuitois to piepaie anu
piesent wiitten eviuence of theii
claims
iii. Biiect publication of oiuei in a
newspapei of geneial ciiculation
1) Wheie publisheu.
Piovince oi city in which
petition is fileu
2) Peiiou. 0nce a week foi
2 consecutive weeks
S) When publisheu. Fiist
publication maue within
7 uays fiom issuance of
oiuei
iv. Biiect cleik of couit to senu a copy
of oiuei to cieuitois nameu in the
scheuule of uebts anu liabilities
v. Foibiuuing the inuiviuual uebtoi,
while suspension of payments
pioceeuings is penuing, fiom:
1) Selling
2) Tiansfeiiing
S) Encumbeiing
4) Bisposing
Except those useu in the oiuinaiy
opeiations of commeice oi of inuustiy in
which the petitioning inuiviuual uebtoi is
engageu.

vi. Piohibiting the inuiviuual uebtoi
fiom making any payment outsiue
of the necessaiy oi legitimate
expenses of his business oi
inuustiy
vii. Appointing a Commissionei to
preside over creditors meeting
I" #G?&=C?8. ,?CT
,-.?8&7 :)" @!0/+)' I('6#)$#$> -
No cieuitoi shall sue oi institute pioceeuings to
collect his claim fiom the uebtoi fiom the time of the
filing of the petition foi suspension of payments anu
foi as long as pioceeuings iemain penuing except:
(a) those cieuitois having claims foi
peisonal laboi, maintenance, expense of last
illness anu funeial of the wife oi chiluien of
the uebtoi incuiieu in the sixty (6u) uays
immeuiately piioi to the filing of the
petition; anu
(b) secuieu cieuitois
B-7->C4 !G4-d No cieuitoi shall sue oi institute
pioceeuings to collect his claims fiom the uebtoi
Peiiou: Fiom time of filing of petition foi
suspension of payments anu as long as
pioceeuings iemain penuing
JK.-3?8&7Nd
9" Cieuitois having claims foi:
a. Peisonal laboi
b. Naintenance
c. Expense of last illness
u. Funeial of the wife oi chiluien of
the uebtoi incuiieu in the 6u uays
immeuiately piioi to the filing of
petition
0" Secuieu cieuitois

II" ,GN3-7N8&7 ]>;->
,-." :)" @!0/+)' I('6#)$#$> 0pon motion fileu by
the inuiviuual uebtoi, the couit may issue an oiuei
suspenuing any penuing execution against the
inuiviuual uebtoi. Pioviueu, That piopeities helu as
secuiity by secuieu cieuitois shall not be the subject
of such suspension oiuei. The suspension oiuei
shall lapse when thiee (S) months shall have passeu
without the pioposeu agieement being accepteu by
the cieuitois oi as soon as such agieement is uenieu.
B-7->C4 !G4-d The couit issues an oiuei suspenuing
any penuing execution against the inuiviuual uebtoi
YE-7f 0pon =&?8&7 fileu by the inuiviuual
uebtoi
JK.-3?8&7d Piopeities helu as secuiity by secuieu
cieuitois shall not be subject of suspension oiuei

YE-7 8N C NGN3-7N8&7 &>;-> 87-<<-.?85-f
1. Aftei lapse of S months without appioval of
pioposeu agieement
2. Pioposeu agieement is uenieu

III" I7SG7.?8&7 #PC87N? L-W?&>
,-." :*" @!0/+) +) 01# <#0/0/+)> If the couit finus the
petition sufficient in foim anu substance, it shall,
(e) foibiuuing the inuiviuual uebtoi fiom selling,
tiansfeiiing, encumbeiing oi uisposing in any
mannei of his piopeity, except those useu in the
oiuinaiy opeiations of commeice oi of inuustiy in
which the petitioning inuiviuual uebtoi is engageu
so long as the pioceeuings ielative to the suspension
of payments aie penuing;
(f) piohibiting the inuiviuual uebtoi fiom making
any payment outsiue of the necessaiy oi legitimate
expenses of his business oi inuustiy, so long as the
pioceeuings ielative to the suspension of payments
aie penuing

I7SG7.?8&7 CPC87N? ;-W?&> CPC87N?d
1. B-7->C4 !G4-d Selling, tiansfeiiing,
encumbeiing, oi uisposing, in any mannei,
of his piopeity
JK.-3?8&7d Those useu in the oiuinaiy
opeiation of commeice oi of inuustiy in
which the inuiviuual uebtoi is engageu
2. Naking any payment outsiue of the
necessaiy oi legitimate expenses of his
business oi inuustiy.

M" 6&==8NN8&7->
,-." :*" #.?8&7 &< ?E- 2-?8?8&7" U If the couit finus
the petition sufficient in foim anu substance, it shall,

(g) appointing a commissionei to piesiue ovei the
cieuitois' meeting.
Appointment of commissionei

Sec. 97. Creditors Meeting. The commissionei
appointeu by the couit shall piesiue ovei the
meeting anu the cleik of couit shall act as the
secretary thereof
(b) The commissionei shall examine the wiitten
eviuence of the claims. If the cieuitois piesent holu
at least thiee-fifths (SS) of the liabilities of the
inuiviuual uebtoi, the commissionei shall ueclaie
the meeting open foi business;
(e) Aftei the iesult of the voting has been
announceu, all piotests maue against the majoiity
vote shall be uiawn up, anu the commissionei anu
the inuiviuual uebtoi togethei with all cieuitois
taking pait in the voting shall sign the affiimeu
piopositions.

2C>?8.83C?8&7 &< 6&==8NN8&7->d
1. Examine wiitten eviuence of claims
2. Commissionei signs affiimeu piopositions

6" CREDITORS MEETING
Sec. 97. Creditors M--?87P" The piesence of
cieuitois holuing claims amounting to at least thiee-
fifths (SS) of the liabilities shall be necessaiy foi
holuing a meeting. The commissionei appointeu by
the couit shall piesiue ovei the meeting anu the
cleik of couit shall act as the secietaiy theieof,
subject to the following iules:
(a) The cleik shall iecoiu the cieuitois piesent anu
amount of theii iespective claims;
(b) The commissionei shall examine the wiitten
eviuence of the claims. If the cieuitois piesent holu
at least thiee-fifths (SS) of the liabilities of the
inuiviuual uebtoi, the commissionei shall ueclaie
the meeting open foi business;
(c) The cieuitois anu inuiviuual uebtoi shall uiscuss
the piopositions in the pioposeu agieement anu put
them to a vote;
(u) To foim a majoiity, it is necessaiy:
(1) that two-thiius (2S) of the cieuitois voting
unite upon the same pioposition; anu
(2) that the claims iepiesenteu by saiu majoiity vote
amount to at least thiee-fifths (SS) of the total
liabilities of the uebtoi mentioneu in the petition;
anu
(e) Aftei the iesult of the voting has been
announceu, all piotests maue against the majoiity
vote shall be uiawn up, anu the commissionei anu
the inuiviuual uebtoi togethei with all cieuitois
taking pait in the voting shall sign the affiimeu
piopositions.
No cieuitoi who incuiieu his cieuit within ninety
(9u) uays piioi to the filing of the petition shall be
entitleu to vote.
L]_MOJ H#i]!IDcd 6&7.G>>-7.- &< ?E- <<"d
1. #N ?& 7G=W-> &< .>-;8?&>N two-thiius (2S)
of the cieuitois voting appiove the pioposeu
agieement; anu
2. #N ?& 5C4G- &< ?E- .4C8=N the claims
iepiesenteu by the majoiity vote amount to at
least thiee-fifths (SS) of the total liabilities of
the uebtoi.

,-." ::" !-S-.?8&7 &< ?E- 2>&3&N-; #P>--=-7?"
The pioposeu agieement shall be ueemeu iejecteu if
the numbei of cieuitois iequiieu foi holuing a
meeting uo not attenu theieat, oi if the two (2)
majoiities mentioneu in Section 97 heieof aie not in
favoi theieof. In such instances, the pioceeuing shall
be teiminateu without iecouise anu the paities
conceineu shall be at libeity to enfoice the iights
which may coiiesponu to them.

YbJ% 2!]2],JL #B!JJHJ%D I, LJJHJL
!JiJ6DJLd
1. No quoium
2. Bouble-majoiity in Sec. 97 not in favoi of
the pioposeu agieement
J<<-.? &< !-S-.?8&7 &< 2>&3&N-; #P>--=-7? n
Pioceeuings teiminateu Paities shall be at libeity
to enfoice the iights which may coiiesponu to them

,-." 9@@" ]WS-.?8&7N" U If the pioposal of the
inuiviuual uebtoi, oi any amenument theieof maue
uuiing the cieuitois' meeting, is appioveu by the
majoiity of cieuitois in accoiuance with Section 97
heieof, any cieuitoi who attenueu the meeting anu
who uissenteu fiom anu piotesteu against the vote
of the majoiity may file an objection with the couit
within ten (1u) uays fiom the uate of the last
cieuitois' meeting. The causes foi which objection

may be maue to the uecision maue by the majoiity
uuiing the meeting shall be: (a) uefects in the call foi
the meeting, in the holuing theieof anu in the
uelibeiations hau theieat which piejuuice the iights
of the cieuitois; (b) fiauuulent connivance between
one oi moie cieuitois anu the inuiviuual uebtoi to
vote in favoi of the pioposeu agieement; oi
(c) fiauuulent conveyance of claims foi the puipose
of obtaining a majoiity. The couit shall heai anu
pass upon such objection as soon as possible anu in
a summaiy mannei.
In case the uecision of the majoiity of cieuitois to
appiove the inuiviuual uebtoi's pioposal oi any
amenument theieof maue uuiing the cieuitois'
meeting is annulleu by the couit, the couit shall
ueclaie the pioceeuings teiminateu anu the
cieuitois shall be at libeity to exeicise the iights
which may coiiesponu to them.

]MiJ6DI]%,d 6#_,J,
1. L-<-.?N 87 ?E- .C44 <&> ?E- =--?87P, in the
E&4;87P theieof anu in the ;-48W->C?8&7N
hau theieat which piejuuice the iights of
the cieuitois;
2. \>CG;G4-7? .&7785C7.- between one oi
moie cieuitois anu the inuiviuual uebtoi to
vote in favoi of the pioposeu agieement; oi
S. \>CG;G4-7? .&75-TC7.- &< .4C8=N foi the
puipose of obtaining a majoiity.

L" 2>&3&N-; #P>--=-7?
,-." :A" 2-?8?8&7" An inuiviuual uebtoi who,
possessing sufficient piopeity to covei all his uebts
but foieseeing the impossibility of meeting them
when they iespectively fall uue, may file a veiifieu
petition that he be ueclaieu in the state of
suspension of payments by the couit of the piovince
oi city in which he has iesiues foi six (6) months
piioi to the filing of his petition. Be shall attach to
his petition, as a minimum: (a) a scheuule of uebts
anu liabilities; (b) an inventoiy of assess; anu (c) a
pioposeu agieement with his cieuitois.

,-." 9@9" J<<-.?N &< #33>&5C4 &< 2>&3&N-;
#P>--=-7?" If the uecision of the majoiity of the
cieuitois to appiove the pioposeu agieement oi any
meeting is upholu by the couit, oi when no
opposition oi objection to saiu uecision has been
piesenteu, the couit shall oiuei that the agieement
be caiiieu out anu all paities bounu theieby to
comply with its teims.
The couit may also issue all oiueis which may be
necessaiy oi piopei to enfoice the agieement on
motion of any affecteu paity. The 0iuei confiiming
the appioval of the pioposeu agieement oi any
meeting shall be binuing upon all cieuitois whose
claims aie incluueu in the scheuule of uebts anu
liabilities submitteu by the inuiviuual uebtoi anu
who weie piopeily summoneu, but not upon: (a)
those cieuitois having claims foi peisonal laboi,
maintenance, expenses of last illness anu funeial of
the wife oi chiluien of the uebtoi incuiieu in the
sixty (6u) uays immeuiately piioi to the filing of the
petition; anu (b) secuieu cieuitois who faileu to
attenu the meeting oi iefiaineu fiom voting theiein.
6&G>? ]>;->d
9" Couit oiueis that agieement be caiiieu out
anu all paities aie bounu to comply with the
pioposeu agieement
0" Couit may issue all oiueis which may be
necessaiy oi piopei to enfoice the
agieement on motion of any affecteu paity

B-7->C4 !G4-d The appioveu pioposeu agieement
oi any amenument theieof shall be binuing upon all
cieuitois whose claims aie incluueu in the scheuule
of uebts anu liabilities submitteu by the uebtoi anu
who weie piopeily summoneu.

JK.-3?8&7Nd
1. Cieuitois having claims foi:
a. Peisonal laboi
b. Naintenance
c. Expense of last illness
u. Funeial of the wife oi chiluien of
the uebtoi incuiieu in the 6u uays
immeuiately piioi to the filing of
petition
2. Secuieu cieuitois who faileu to attenu the
meeting oi iefiaineu fiom voting theiein

,-." 9@0" \C84G>- &< I7;858;GC4 L-W?&> ?& 2-><&>=
#P>--=-7?" If the inuiviuual uebtoi fails, wholly
oi in pait, to peifoim the agieement ueciueu upon

at the meeting of the cieuitois, all the iights which
the cieuitois hau against the inuiviuual uebtoi
befoie the agieement shall ievest in them. In such
case the inuiviuual uebtoi may be maue subject to
the insolvency pioceeuings in the mannei
J<<-.? &< <C84G>- &< IL ?& 3-><&>= CP>--=-7? n All
the iights which the cieuitois hau against the
inuiviuual uebtoi befoie the pioposeu agieement
shall be ievesteu in the cieuitois
J" D>-C?=-7? &< 64C8=N
,-." :)" #.?8&7N ,GN3-7;-;" 0pon motion fileu by
the inuiviuual uebtoi, the couit may issue an oiuei
suspenuing any penuing execution against the
inuiviuual uebtoi. Pioviue, That piopeities helu as
secuiity by secuieu cieuitois shall not be the subject
of such suspension oiuei. The suspension oiuei
shall lapse when thiee (S) months shall have passeu
without the pioposeu agieement being accepteu by
the cieuitois oi as soon as such agieement is uenieu.
No cieuitoi shall sue oi institute pioceeuings to
collect his claim fiom the uebtoi fiom the time of the
filing of the petition foi suspension of payments anu
foi as long as pioceeuings iemain penuing except:
(a) those cieuitois having claims foi peisonal laboi,
maintenance, expense of last illness anu funeial of
petition; anu
(b) secuieu cieuitois.

,-." :F" 2->N&7N YE& HCT !-<>C87 \>&= `&?87P"
Cieuitois who aie unaffecteu by the Suspension
0iuei may iefiain fiom attenuing the meeting anu
fiom voting theiein. Such peisons shall not be
bounu by any agieement ueteimineu upon at such
meeting, but if they shoulu join in the voting they
shall be bounu in the same mannei as aie the othei
cieuitois.

2->N&7N ZE& =CT >-<>C87 <>&= 5&?87Pd Cieuitois
who aie unaffecteu by the Suspension 0iuei
J<<-.?d Such peisons shall not be bounu by any
agreement during the creditors meeting

,-." 9@9" J<<-.?N &< #33>&5C4 &< 2>&3&N-;
#P>--=-7?" The 0iuei confiiming the appioval of
the pioposeu agieement oi any amenument theieof
maue uuiing the cieuitois' meeting shall be binuing
upon all cieuitois whose claims aie incluueu in the
scheuule of uebts anu liabilities submitteu by the
inuiviuual uebtoi anu who weie piopeily
summoneu, but not upon: (a) those cieuitois having
claims foi peisonal laboi, maintenance, expenses of
last illness anu funeial of the wife oi chiluien of the
uebtoi incuiieu in the sixty (6u) uays immeuiately
piioi to the filing of the petition; anu (b) secuieu
cieuitois who faileu to attenu the meeting oi
iefiaineu fiom voting theiein.
I" ,-.G>-; 6>-;8?&> 64C8=N

,-." A /kk) I#!("#$ !"#$/0+" shall iefei to a cieuitoi
with a secuieu claim.
(jj) I#!("#$ !4&/- shall iefei to a claim that is
secuieu by a lien.
(t) K/#) shall iefei to a statutoiy oi contiactual claim
oi juuicial chaige on ieal oi peisonal piopeity that
legality entities a cieuitoi to iesoit to saiu piopeity
foi payment of the claim oi uebt secuieu by such
lien.
C" The claims of secuieu cieuitois aie not
coveieu by the automatic stay of all suits
anu pioceeuings foi he collection of claims
against the uebtoi.
W" The piopeity helu as secuiity is not coveieu
by any suspension oiuei that may be issueu
against penuing executions against the
uebtoi.
." Secuieu cieuitois neeu not attenu oi vote
during the creditors meeting and are not
bounu by the pioposeu agieement
appioveu uuiing the meeting, unless they
waive this iight by voting uuiing the
meeting.
;" Secuieu cieuitois aie not bounu by the
pioposeu agieement confiimeu by the
couit, unless they waive this iight by voting
uuiing the meeting.

II" JK-=3? 64C8=N
The cieuitois having claims foi peisonal laboi,
maintenance, expenses of last illness anu funeial of
petition
C" The exempt claims aie not coveieu by the
automatic stay of all suits anu pioceeuings
foi the collection of claims against the
uebtoi.
W" Exempt cieuitois neeu not attenu oi vote
during the creditors meeting and are not
appioveu uuiing the meeting, unless they
waive this iight by voting uuiing the
meeting.
." Exempt cieuitois aie not bounu by the
pioposeu agieement confiimeu by the
couit, unless they waive this iight by voting
uuiing the meeting.
III" JK.4G;-; 64C8=N
Cieuitois whose claims aie not incluueu in the
scheuule of uebts anu liabilities submitteu by the
inuiviuual uebtoi anu cieuitois who weie not
piopeily summoneu.
C" Cieuitois whose claims aie excluueu aie not
confiimeu by the couit.
W" Subject to automatic stay
." Subject to the suspension oiuei

IV. REHABILITATION

#" B-7->C4 6&7.-3?N

!"#" %&" 9@9A0
An Act Pioviuing foi the Rehabilitation oi
Liquiuation of Financially Bistiesseu Enteipiises
anu Inuiviuuals

,-." 9" D8?4-" - This Act shall be known as the
Financial Rehabilitation and Insolvency Act
(FRIA) of 2010.

!"#" %&" 9@9A0+ ,-." 0" L-.4C>C?8&7 &< 2&48.T" - It
is the policy of the State to encouiage uebtois,
both juiiuical anu natuial peisons, anu theii
cieuitois to collectively anu iealistically iesolve
anu aujust competing claims anu piopeity iights.
In fuitheiance theieof, the State shall ensuie a
timely, faii, tianspaient, effective anu efficient
iehabilitation oi liquiuation of uebtois. The
iehabilitation oi liquiuation shall be maue with a
view to ensuie oi maintain ceitainly anu
pieuictability in commeicial affaiis, pieseive anu
maximize the value of the assets of these uebtois,
iecognize cieuitoi iights anu iespect piioiity of
claims, anu ensuie equitable tieatment of
cieuitois who aie similaily situateu. When
iehabilitation is not feasible, it is in the inteiest of
the State to facilities a speeuy anu oiueily
liquiuation of these uebtoi's assets anu the
settlement of theii obligations.

!Jb#MIOID#DI]%d the iestoiation of the uebtoi to
a conuition of successful opeiation anu solvency, if it
is shown that:
1. Its continuance of opeiation is
-.&7&=8.C44T <-CN8W4-; anu
2. Its .>-;8?&>N .C7 >-.&5-> WT ZCT &< ?E-
3>-N-7? 5C4G- &< 3CT=-7?N 3>&S-.?-; 87
?E- 34C7 =&>- if the uebtoi continues as a
giowing concein than if it is immeuiately
liquiuateu.
a. value of iecoveiy plan as a giowing
concein vS. value of iecoveiy if
company is liquiuateu

2G>3&N-

- To enable an insolvent uebtoi to
gain a new lease on life while
allowing cieuitois to be paiu fiom
the debtors earnings

YE& C>-
W-7-<8??-;f

- Employees
- Cieuitois
- 0wneis
- ueneial public

Rehabilitation pioceeuings
- Both equitable anu iehabilitative puiposes

JaG8?CW4-

- Pioviue foi the efficient
anu equitable
uistiibution of an
insolvent debtors
iemaining assets to its
cieuitois

!-ECW848?C?85-

- Pioviue the insolvent
uebtoi with a fiesh stait
> Bow: By ielieving it
of the weight of its
outstanuing uebts
anu peimitting it to
ieoiganize its
affaiis

Doctrine of equality is equity

- Buiing iehabilitation, the assets of the uebtoi aie
helu in tiust
> Puipose: foi the equal benefit of all
cieuitois to piecluue one fiom obtaining
an auvantage oi piefeience ovei anothei
by the expeuiency of an attachment,
execution, oi otheiwise
- Key phrase as between creditors: equality is
equity
> All the cieuitois shoulu stanu on equal
footing
> Not one of them shoulu be given
piefeience
>> Bow: By paying one oi some of
them aheau of the otheis

FRIA
- Expanueu the uefinition of iehabilitation
pioviueu by juiispiuuence
> Bow: By incluuing 2 conuitions:
>> 1. Economic feasibility
>> 2. Piesent value iecoveiy
- Rehabilitation not piopei
> If the iestoiation of the insolvent uebtoi
to a conuition of successful opeiation anu
solvency is not economically feasible anu
uoes not iesult in bettei piesent value
iecoveiy foi the cieuitois
> Recouise: Liquiuation

S Noues of iehabilitation pioviueu by FRIA
- 1. Couit-supeiviseu iehabilitation
- 2. Pie-negotiateu iehabilitation
- S. 0ut-of-couit iehabilitation

M" 6&G>?U,G3->58N-; !-ECW848?C?8&7

Someia Notes:

Couit-supeiviseu iehabilitation
- }uuicial insolvency pioceeuing
- Nay eithei be voluntaiy oi involuntaiy

9" `&4G7?C>T 2>&.--;87PN

voluntaiy iehabilitation pioceeuings
- }uuicial insolvency pioceeuings instituteu by a
uebtoi (juiiuical uebtoi) that may be:
> 1. Sole piopiietoiship
> 2. Paitneiship
> S. Coipoiation
- value iequiiement with iespect to the amount of
uebts of the insolvent uebtoi
> Not imposeu by FRIA

Insolvency of uebtoi must be eithei unuei the
- Illiquiuity concept
> Bebtoi is illiquiu: possessing sufficient
piopeity to covei all its liabilities but
foieseeing the impossibility of meeting
them when they iespectively fall uue
oi
- Balance sheet concept
> Assets of the uebtoi aie insufficient to
covei its liabilities

Conuitions in the iehabilitation of the insolvent
uebtoi that must be piesent in eveiy case
1. Rehabilitation of insolvent uebtoi is
economically feasible
2. Rehabilitation iesults in bettei piesent value
iecoveiy foi the cieuitois

Inuiviuual uebtoi that is not a sole piopiietoiship
- Nay not institute voluntaiy iehabilitation
pioceeuings
> Reason: Puipose of iehabilitation is to
iestoie anu ieinstate a uebtoi to its
foimei position of successful opeiation
- Available couises of action:
> Petition foi suspension of payments
oi
> Petition foi liquiuation

2-?8?8&7 ?& I78?8C?- `&4G7?C>T 2>&.--;87PN WT
L-W?&>

2!]6JL_!Jd
U When may voluntaiy pioceeuings be initiateu by
the uebtoi.
L-W?&> YE-7 I78?8C?-;

,&4-
3>&3>8-?&>NE83

- When appioveu by the ownei
2C>?7->NE83

- When appioveu by a majoiity
of the paitneis

6&>3&>C?8&7

- 1. When appioveu by a
majoiity vote of the boaiu of
uiiectois oi tiustees anu
- 2. authoiizeu by the vote of:
> stockholueis iepiesenting at
least 2S of the outstanuing
capital stock in a stockholders
meeting uuly calleu foi the
puipose
oi
> at least 2S of the membeis
(nonstock coipoiation) in a
members meeting duly called
foi the puipose

- Bow may an insolvent uebtoi initiate voluntaiy
pioceeuings.
> By filing a veiifieu petition foi
iehabilitation with the couit anu on the
giounus specifically pioviueu in the Act.
- Puipose of veiifieu petition
> To establish the insolvency of the uebtoi
anu the viability of its iehabilitation
- The following must be incluueu (as a minimum) as
an attachment oi as pait of the bouy of the petition:
> 1. Iuentification of the:
>> uebtoi
>> debtors principal activities
>> debtors addresses
> 2. Statement of the fact of anu cause of the
>> debtors insolvency or
>> inability to pay its obligations as
they become uue
> S. Specific ielief sought
> 4. uiounus of the petition
> S. 0thei infoimation that may be iequiieu
unuei the Act uepenuing on the foim of
ielief iequesteu
> 6. a. Schedule of the debtors debts and
liabilities; anu
b. list of cieuitois with theii
>> auuiesses
>> amounts of claims
>> collateials, oi secuiities (if any)
> 7. Inventoiy of all its assets
> 8. Rehabilitation Plan
> 9. Names of at least S nominees to the
position of iehabilitation ieceivei
> 1u. 0thei uocuments iequiieu to be fileu
with the petition
U When may a gioup of uebtois jointly file a petition
foi iehabilitation.
> 1. When one oi moie of its membeis
foiesee the impossibility of meeting uebts
when they iespectively fall uue, anu
> 2. When the financial uistiess woulu likely
auveisely affect the financial conuition anuoi
opeiations of the othei membeis of the gioup
anuoi the paiticipation of the othei membeis of the
gioup is essential unuei the teims anu conuitions of
the pioposeu Rehabilitation Plan.

0" I75&4G7?C>T 2>&.--;87PN

Involuntaiy iehabilitation pioceeuings
- }uuicial insolvency pioceeuings
- Instituteu by a cieuitoi oi gioup of cieuitois
against an insolvent uebtoi, pioviueu:
> Requiiements of the law on numbei of
cieuitois oi value of claims, oi both is met;
anu
> Ciicumstance iequiiing iehabilitation is
allegeu anu theieaftei establisheu
- FRIA imposes a value iequiiement on the
amount of claims without iegaiu to the numbei
of cieuitois who file
> at least P1million
oi
> at least 2S% of the subsciibeu capital
stock or partners contributions
(whichevei is highei)

Basis of calculation
,?C?GN &< W-87P
87N&45-7?

`C4G- >-aG8>-=-7? <&>
>-ECW848?C?8&7
3>&.--;87PN

Calculateu baseu on
liabilities (monetaiy
claims)

Calculateu baseu on
creditors claims

Ciicumstances iequiiing iehabilitation
1. No genuine issue of fact anu law on the claims of
the cieuitois anu that the uue anu uemanuable
payments have not been maue foi at least 6u
uays
oi
2. Bebtoi has faileu geneially to meet its liabilities
as they fall uue (illiquiuity concept)
oi
S. A cieuitoi, othei than the petitioneis, has
initiateu foieclosuie pioceeuings against the
uebtoi that will pievent the uebtoi fiom paying
its uebts as they become uue (illiquiuity
concept) oi will ienuei it insolvent (balance
sheet concept)

2-?8?8&7 ?& I78?8C?- I75&4G7?C>T 2>&.--;87PN

2!]6JL_!Jd
- 1. Cieuitois' petition foi iehabilitation veiifieu
> Puipose: To establish the substantial
likelihoou that the uebtoi may be
iehabilitateu
- 2. The following shall be incluueu in the petition:
> a. Iuentification of the:
>> uebtoi
>> debtors principal activities
>> debtors address
> b. Ciicumstances sufficient to suppoit a
petition to initiate involuntaiy
iehabilitation pioceeuings unuei Sec. 1S of
the FRIA
> c. Specific ielief sought
> u. Rehabilitation Plan
> e. Names of at least S nominees to the
position of iehabilitation ieceivei

> f. 0thei infoimation that may be iequiieu
unuei this Act uepenuing on the foim of
ielief iequesteu
> g. 0thei uocuments iequiieu to be fileu with the
petition

'" 2>&58N8&7N 6&==&7 ?& `&4G7?C>T C7;
I75&4G7?C>T !-ECW848?C?8&7 2>&.--;87PN

C" 6&==-7.-=-7? ]>;->

#.?8&7 &7 ?E- 3-?8?8&7

2!]6JL_!Jd
1. File a petition foi iehabilitation
2. If couit finus petition:
a) sufficient in foim anu substance = issue
a Commencement 0iuei (C0) win S
woiking uays fiom filing uate
b) ueficient in foim oi substance =
(uiscietionaiy) give the petitioneis a
ieasonable piu. of time within which:
i. to amenu oi supplement the
petition, oi
ii. to submit such uocuments as
may be necessaiy oi piopei to
put the petition in piopei oiuei
iii. S woiking uays foi the issuance
of C0 shall be ieckoneu fiom
the filing uate of (i) oi (ii).

Commencement 0iuei
- 0peiates as a pieseivative measuie
> To ensuie that theie is, anu theie will
continue to be, a substantial likelihoou foi
successful iehabilitation.
- 0pon issuance:
> Poweis anu functions of the
Rehabilitation Receivei aie vesteu
>> with specific emphasis on its
iight to ieview anu obtain all
iecoius of the uebtoi
- Aftei commencement uate:
1. All extiajuuicial attempts to collect oi
enfoice a claim, all setoffs of claims, anu
the peifection of all liens, aie voiueu.
2. All legal pioceeuings by anu against the
uebtoi, except those excepteu by the FRIA
oi by oiuei of the iehabilitation couit, aie
consoliuateu in the iehabilitation couit.
>> Inuiiect contempt of couit: Any attempt to
ciicumvent its manuate constitutes this.

W" ,?CT &> ,GN3-7N8&7 ]>;->

!"#" %&" 9@9A0+ ,-." 9)" 6&==-7.-=-7? &<
2>&.--;87PN C7; INNGC7.- &< C 6&==-7.-=-7?
]>;->" - The iehabilitation pioceeuings shall
commence upon the issuance of the
Commencement 0iuei, which shall:

(a) iuentify the uebtoi, its piincipal business oi
activityies anu its piincipal place of business;

(b) summaiize the giounus foi initiating the
pioceeuings;

(c) state the ielief sought unuei this Act anu any
iequiiement oi pioceuuie paiticulai to the ielief
sought;

(u) state the legal effects of the Commencement
0iuei, incluuing those mentioneu in Section 17
heieof;

(e) ueclaie that the uebtoi is unuei iehabilitation;

(f) uiiect the publication of the Commencement
0iuei in a newspapei of geneial ciiculation in the
Philippines once a week foi at least two (2)
consecutive weeks, with the fiist publication to be
maue within seven (7) uays fiom the time of its
issuance;

(g) If the petitionei is the uebtoi uiiect the seivice
by peisonal ueliveiy of a copy of the petition on
each cieuitoi holuing at least ten peicent (1u%) of
the total liabilities of the uebtoi as ueteimineu
fiom the scheuule attacheu to the petition within
five (S) uays; if the petitioneis isaie cieuitois,
uiiect the seivice by peisonal ueliveiy of a copy of
the petition on the uebtoi within five (S) uays;

(h) appoint a iehabilitation ieceivei who may oi
not be fiom among the nominees of the
petitioneis anu who shall exeicise such poweis
anu uuties uefineu in this Act as well as the
pioceuuial iules that the Supieme Couit will
piomulgate;

(i) summaiize the iequiiements anu ueaulines foi
cieuitois to establish theii claims against the
uebtoi anu uiiect all cieuitois to theii claims with
the couit at least five (S) uays befoie the initial
heaiing;

(j) uiiect Buieau of inteinal Revenue (BIR) to file
anu seive on the uebtoi its comment on oi
opposition to the petition oi its claims against the
uebtoi unuei such pioceuuies as the Supieme
Couit pioviue;

(k) piohibit the uebtoi's supplieis of goous oi
seivices fiom withholuing the supply of goous anu

seivices in the oiuinaiy couise of business foi as
long as the uebtoi makes payments foi the
seivices oi goous supplieu aftei the issuance of the
Commencement 0iuei;

(l) authoiize the payment of auministiative
expenses as they become uue;

(m) set the case foi initial heaiing, which shall not
be moie than foity (4u) uays fiom the uate of
filing of the petition foi the puipose of
ueteimining whethei theie is substantial
likelihoou foi the uebtoi to be iehabilitateu;

(n) make available copies of the petition anu
iehabilitation plan foi examination anu copying by
any inteiesteu paity;

(o) inuicate the location oi locations at which
uocuments iegaiuing the uebtoi anu the
pioceeuings unuei Act may be ievieweu anu
copieu;

(p) state that any cieuitoi oi uebtoi who is not the
petitionei, may submit the name oi nominate any
othei qualifieu peison to the position of
iehabilitation ieceivei at least five (S) uays befoie
the initial heaiing;

(q) incluues Stay oi Suspension 0iuei which shall:

(1) suspenu all actions oi pioceeuings, in couit oi
otheiwise, foi the enfoicement of claims against
the uebtoi;

(2) suspenu all actions to enfoice any juugment,
attachment oi othei piovisional iemeuies against
the uebtoi;

(S) piohibit the uebtoi fiom selling, encumbeiing,
tiansfeiiing oi uisposing in any mannei any of its
piopeities except in the oiuinaiy couise of
business; anu

(4) piohibit the uebtoi fiom making any payment
of its liabilities outstanuing as of the
commencement uate except as may be pioviueu
heiein.

!"#" %&" 9@9A0+ ,-." 0@" #3348.C?8&7 &< ,?CT &>
,GN3-7N8&7 ]>;-> ?& B&5->7=-7? \87C7.8C4
I7N?8?G?8&7N" - The piovisions of this Act
conceining the effects of the Commencement
0iuei anu the Stay oi Suspension 0iuei on the
suspension of iights to foieclose oi otheiwise
puisue legal iemeuies shall apply to goveinment
financial institutions, notwithstanuing piovisions
in theii chaiteis oi othei laws to the contiaiy.

91 B-7->C4 6&7.-3?N

,?CT^,GN3-7N8&7 ]>;-> .&5->Nd
1. all actions anu pioceeuings in couit foi
enfoicement of claims against the uebtoi oi
piopeity
2. piovisional iemeuies
S. injunction against the uebtoi fiom
tiansfeiiing, encumbeiing, selling
(exception: oiuinaiy couise of
businessuay-to-uay opeiations uebtoi has
been engageu in)

0 L8N?87.? &>;->N .&7?C87-; 87 ?E- ,?CT &>
,GN3-7N8&7 ]>;->d
1. Stay oiuei
2. Injunction

]>;->

,?CT &>;-> I7SG7.?8&7
#PC87N?
ZE&=

Against the
cieuitoi
Against the uebtoi
J<<-.?

1. Suspenuing all
actions oi
pioceeuings, in
couit oi
otheiwise, foi the
enfoicement of
claims against the
uebtoi; anu

2. Suspenuing all
actions to enfoice
any juugment,
attachment oi
othei piovisional
iemeuies against
the uebtoi.

1. Piohibiting the
sale,
encumbiance,
tiansfei oi
uisposal in any
mannei of any of
its piopeities
except in the
oiuinaiy couise of
business; anu

2. Piohibiting any
payment of its
liabilities
outstanuing as of
the
commencement
uate except as
pioviueu in the
FRIA

2G>3&N- - To enable the
ieceivei to
effectively
exeicise its
poweis fiee fiom
any juuicial oi
extiajuuicial
inteifeience that
might unuuly
hinuei oi pievent
- To ensuie that
the uebtoi will not
commit any act
that uefiauus its
cieuitois oi
iesults in an
unuue piefeience
of cieuitois.

the iescue of the
uebtoi

- To give enough
bieathing space
foi the ieceivei to
make the
business of the
uebtoi viable
again, without
having to uiveit
attention anu
iesouices to
litigations in
vaiious foia.

If an action oi pioceeuing weie to pioceeu, anu if
the creditors claim were to be granted
- The cieuitoi woulu be in a position to asseit a
piefeience ovei othei cieuitois
- The uebtoi woulu be compelleu to uispose of its
piopeities in oiuei to satisfy the claim
- It woulu in effect be a uefiance of the injunction
on selling, encumbeiing, tiansfeiiing, oi
disposing in any manner any of the debtors
business.
> Example of selling, encumbeiing,
tiansfeiiing, oi uisposing in the oiuinaiy
couise of business: selling inventoiy

!8jC4 6&==->.8C4 MC7R87P 6&>3&>C?8&7 5"
I7?->=-;8C?- #33-44C?- 6&G>? /9:::1

FACTS: BF Bomes fileu a petition foi iehabilitation
anu foi ueclaiation of suspension of payments with
the SEC. Among its cieuitois was RCBC. The lattei
iequesteu the Sheiiff to extia-juuicially foieclose the
ieal estate moitgage on some piopeities of BF
Bomes. An auction sale was helu anu RCBC tuineu
out to be the highest biuuei. BF Bomes fileu a
motion to annul the sale. Neanwhile, SEC appointeu
a Nanagement Committee foi BF Bomes. The couit
set asiue the acquisition of title by the RCBC iuling
that whenevei a uistiesseu coipoiation asks the SEC
foi iehabilitation anu suspension of payments,
piefeiieu cieuitois may no longei asseit such
piefeience.

BELB: The couit thus claiifieu in this case the iule of
thumb to be applieu.

1. All claims against coipoiations, paitneiships, oi
associations that aie penuing befoie any couit,
tiibunal, oi boaiu, without uistinction as to whethei
oi not a cieuitoi is secuieu oi unsecuieu, shall be
suspenueu effective upon the appointment of a
management committee, iehabilitation ieceivei,
boaiu, oi bouy in accoiuance which the piovisions
of Piesiuential Beciee No. 9u2-A.

2. Secuieu cieuitois ietain theii piefeience ovei
unsecuieu cieuitois, but enfoicement of such
piefeience is equally suspenueu upon the
appointment of a management committee,
iehabilitation ieceivei, boaiu, oi bouy. In the event
that the assets of the coipoiation, paitneiship, oi
association aie finally liquiuateu, howevei, secuieu
anu piefeiieu cieuits unuei the applicable
piovisions of the Civil Coue will uefinitely have
piefeience ovei unsecuieu ones.

In othei woius, once a management committee,
iehabilitation ieceivei, boaiu oi bouy is appointeu
puisuant to P.B. 9u2-A, all actions foi claims against
a uistiesseu coipoiation penuing befoie any couit,
tiibunal, boaiu oi bouy shall be suspenueu
accoiuingly. But this suspension shall not piejuuice
oi ienuei ineffective the status of a secuieu cieuitoi
as compaieu totally unsecuieu cieuitoi. It meiely
pioviues that all actions foi claims against the
coipoiation, paitneiship oi association shall be
suspenueu.

Lectuie Notes:

RCBC v. IAC (1999)
- Beciueu unuei P.B. 9u2-A
- Still a valiu case law unuei the FRIA
- Its enumeiation of the guiuelines in the
tieatment of claims has been enshiineu in the
FRIA.

,&W>-SGC78?- 5" #,M L-5-4&3=-7? 6&>3&>C?8&7
/0@@*1

FACTS: Spouses Sobiejuanite fileu a Complaint foi
iescission of contiact to sell, iefunu of payments anu
uamages, against ASBBC befoie the BL0RB. They
enteieu into a Contiact to Sell with the lattei ovei a
conuominium unit anu a paiking space. Bespite full
payment anu uemanus, ASBBC faileu to uelivei the
piopeity on oi befoie the agieeu uate. ASBBC fileu a
motion to uismiss oi suspenu pioceeuings in view of
appioval by the SEC of the iehabilitation plan of ASB
uioup of Companies, which incluues ASBBC.

BELB: The puipose foi the suspension of the
pioceeuings is to pievent a cieuitoi fiom obtaining
an auvantage oi piefeience ovei anothei anu to
piotect anu pieseive the iights of paity litigants as
well as the inteiest of the investing public oi
cieuitois. Such suspension is intenueu to give

enough bieathing space foi the management
committee oi iehabilitation ieceivei to make the
business viable again, without having to uiveit
attention anu iesouices to litigations in vaiious foia.
The suspension woulu enable the management
committee oi iehabilitation ieceivei to effectively
exeicise itshis poweis fiee fiom any juuicial oi
extia-juuicial inteifeience that might unuuly hinuei
or prevent the rescue of the debtor company. To
allow such othei action to continue woulu only auu
to the buiuen of the management committee oi
iehabilitation ieceivei, whose time, effoit anu
iesouices woulu be wasteu in uefenuing claims
against the coipoiation insteau of being uiiecteu
towaiu its iestiuctuiing anu iehabilitation.

In U/)&'/& H)?#'0-#)0' &)$ U/)&)!# =+"6> ?> =@ anu
@""&)T& ?> M>U> X+-#'2 H)!>, the SC construed claim
to iefei only to uebts oi uemanus pecuniaiy in
natuie oi to actions involving monetaiy
consiueiations.

0n the othei hanu, the Inteiim Rules of Pioceuuie
on Coipoiate Rehabilitation (2000) define claim as
iefeiiing to all claims oi uemanus, of whatevei
natuie oi chaiactei against a uebtoi oi its piopeity,
whethei foi money oi otheiwise. The uefinition is
all-encompassing as it iefeis to all actions whethei
foi money oi otheiwise. Theie aie no uistinctions
oi exemptions.

The complaint fileu by Sobiejuanite is a claim as
uefineu unuei the Inteiim Rules of Pioceuuie on
Coipoiate Rehabilitation. Even unuei the iulings in
the two afoiementioneu cases, the complaint foi
iescission of contiact to sell, iefunu of payments anu
uamages woulu fall unuei the categoiy of claim
consiueiing that it is foi pecuniaiy consiueiations.

Lectuie Notes:

Sobiejuanite v. ASBBC (2uuS)
- Beciueu unuei P.B. 9u2-A anu the Inteiim Rules
of Pioceuuie on Coipoiate Rehabilitation
(2uuu)
- If the case weie ueciueu unuei the FRIA, the
outcome woulu have been the same since the
FRIAs definition of claims is broadei.
- FRIAs definition of claims is similar to but
bioauei than that of the inteiim iules
> Reason: The FRIA fuithei elaboiates on the
types of claims:
>> liquidated or unliquidated, fixed
+" !+)0/)7#)02 -&0("#$ +"
()-&0("#$2 $/'6(0#$ +"
undisputed

01 JK.-3?8&7N ?& ,?CT &> ,GN3-7N8&7 ]>;->

!"#" %&" 9@9A0+ ,-." 9F" JK.-3?8&7N ?& ?E- ,?CT
&> ,GN3-7N8&7 ]>;->" - The Stay oi Suspension
0iuei shall not apply:

(a) to cases alieauy penuing appeal in the
Supieme Couit as of commencement uate
Pioviueu, That any final anu executoiy juugment
aiising fiom such appeal shall be iefeiieu to the
couit foi appiopiiate action;

(b) subject to the uiscietion of the couit, to cases
penuing oi fileu at a specializeu couit oi quasi-
juuicial agency which, upon ueteimination by the
couit is capable of iesolving the claim moie
quickly, faiily anu efficiently than the couit:
Pioviueu, That any final anu executoiy juugment
of such couit oi agency shall be iefeiieu to the
couit anu shall be tieateu as a non-uisputeu claim;

(c) to the enfoicement of claims against suieties
anu othei peisons soliuaiily liable with the uebtoi,
anu thiiu paity oi accommouation moitgagois as
well as issueis of letteis of cieuit, unless the
piopeity subject of the thiiu paity oi
accommouation moitgage is necessaiy foi the
iehabilitation of the uebtoi as ueteimineu by the
couit upon iecommenuation by the iehabilitation
ieceivei;

(u) to any foim of action of customeis oi clients of
a secuiities maiket paiticipant to iecovei oi
otheiwise claim moneys anu secuiities entiusteu
to the lattei in the oiuinaiy couise of the lattei's
business as well as any action of such secuiities
maiket paiticipant oi the appiopiiate iegulatoiy
agency oi self-iegulatoiy oiganization to pay oi
settle such claims oi liabilities;

(e) to the actions of a licenseu biokei oi uealei to
sell pleugeu secuiities of a uebtoi puisuant to a
secuiities pleuge oi maigin agieement foi the
settlement of secuiities tiansactions in accoiuance
with the piovisions of the Secuiities Regulation
Coue anu its implementing iules anu iegulations;

(f) the cleaiing anu settlement of financial
tiansactions thiough the facilities of a cleaiing
agency oi similai entities uuly authoiizeu,
iegisteieu anuoi iecognizeu by the appiopiiate
iegulatoiy agency like the Bangko Sential ng
Pilipinas (BSP) anu the SEC as well as any foim of
actions of such agencies oi entities to ieimbuise
themselves foi any tiansactions settleu foi the
uebtoi; anu

(g) any ciiminal action against inuiviuual uebtoi
oi ownei, paitnei, uiiectoi oi officei of a uebtoi
shall not be affecteu by any pioceeuing commenu
unuei this Act.

6]HHJ%6JHJ%D 2!]6JJLI%B, #%L I,,_#%6J
]\ 6]HHJ%6JHJ%D ]!LJ!

2!]6JL_!Jd
Rehab pioceeuings commence upon issuance of C0.
The C0 shall:
1. iuentify the uebtoi, its piincipal business oi
activityies anu its piincipal place of
business;
2. summaiize the giounus foi initiating the
pioceeuings;
S. state the ielief sought anu any iequiiement
oi pioceuuie paiticulai to the ielief sought;
4. state the legal effects of the C0
S. ueclaie that the uebtoi is unuei iehab;
6. uiiect the following:
a. publication of the C0 in a
newspapei of geneial ciiculation in
the Phils:
i. 1xweek foi at least 2
consecutive weeks,
ii. with the fiist publication to
be maue within 7 uays
fiom the time of its
issuance;
b. seivice by peisonal ueliveiy of a
copy of the petition:
i. on each cieuitoi holuing at
least 10% of the debtors
total liabilities
(ueteimineu fiom the
scheu attacheu to the
petition) within S uays (if
petitionei is the uebtoi)
ii. on the uebtoi within S
uays (if petitioneis isaie
cieuitois)
c. appointment of iehab ieceivei who
may oi not be fiom among the
petitioners nominees
u. summaiy of iequiiements &
ueaulines foi cieuitois to establish
theii claims against the uebtoi anu
uiiect all cieuitois to theii claims
with the couit at least S uays befoie
e. BIR to file & seive on the uebtoi its
comment on oi opposition to the
petition oi its claims against the
uebtoi
7. piohibit the uebtoi's supplieis of goous oi
seivices fiom withholuing the supply of
goous anu seivices in the oiuinaiy couise of
business foi as long as the uebtoi makes
payments foi the seivices oi goous supplieu
aftei the issuance of C0
8. authoiize the payment of aumin expenses
as they become uue;
9. initial heaiing set not moie than 4u uays
fiom the petitions filing date foi the
puipose of ueteimining whethei theie is
substantial likelihoou foi the uebtoi to be
iehabilitateu;
1u. make available copies of the petition anu
iehab plan foi examination anu copying by
11. inuicate the locations at which uocuments
iegaiuing the uebtoi anu the pioceeuings
may be ievieweu anu copieu;
12. state that any cieuitoiuebtoi who is not
the petitionei, may nominate any othei
qualifieu peison to the position of iehab
ieceivei at least S uays befoie the initial
heaiing;
1S. incluues Stay oi Suspension 0iuei

Recall that: Suretys liability to the creditor is
- Piimaiy;
- Biiect; anu
- Absolute

Accoiuing to Piof. Someia, we neeu not focus on
paiagiaphs (u), (e), anu (f) of Section 18 of the
FRIA.

Stay oi Suspension 0iuei
- Acts as a(n):
> Stay oiuei against the cieuitois
> Injunction against the uebtoi
>> Concept of auministiative
expenses becomes ciitical
- ueneial Rule: All claims foi auministiative
expenses aie excepteu fiom the application of
the Stay oi Suspension 0iuei
- Since the puipose of iehabilitation is to iestoie
anu ieinstate a uebtoi to its foimei position of
successful opeiation anu solvency
> payment of auministiative expenses
allows the uebtoi to effectively continue
its financial life anu activities

H-?>&3&48?C7 YC?->Z&>RN Q ,-Z->CP- ,TN?-= 5"
LCZCT C7; HCT784C; YC?-> ,->58.-N+ I7." /0@@A1

FACTS: Naynilau obtaineu a 2u-yeai concession to
manage, iepaii, iefuibish, anu upgiaue existing
NWSS watei ueliveiy anu seweiage seivices. 0nuei
the concession agieement, Naynilau unueitook to

pay concession fees anu its foieign loans anu
secuieu its obligations by aiianging foi a thiee-yeai
facility with a numbei of foieign banks (leu by
Citicoip) foi the issuance of an iiievocable stanuby
lettei of cieuit in favoi of NWSS foi the full anu
piompt payment of Maynilads obligations to MWSS.
The agieement was amenueu to incoipoiate a
mechanism that woulu piotect Naynilau fiom
foieign exchange losses. Bowevei, the uepieciation
of the peso still took its toll on Naynilau causing its
filing of a notice of eaily teimination of the
concession contract citing MWSS failure to protect
the company fiom foieign exchange losses unuei the
amenueu agieement. As a iesult of this, NWSS fileu
notice with Citicoip that it woulu uiaw on the SLC of
Naynilau (which was unueigoing coipoiate
iehabilitation). This was opposeu by Naynilau on
the basis that the Inteiim Rules foi Coipoiate
Rehabilitation piohibit claims against the conceineu
coipoiation, its guaiantois, anu suieties not
soliuaiily liable with the petitionei.

BELB: The piohibition unuei Sec 6 (b) of Rule 4 of
the Inteiim Rules uoes not apply as the piohibition
is on the enfoicement of claims against guaiantois
oi suieties of the uebtois whose obligations aie not
solidary with the debtor. The participating banks
obligation aie soliuaiy with iesponuent Naynilau in
that it is a piimaiy, uiiect, uefinite anu an absolute
unueitaking to pay anu is not conuitioneu on the
prior exhaustion of the debtors assets. These are
the same chaiacteiistics of a suiety oi soliuaiy
obligoi. Being soliuaiy, the claims against them can
be puisueu sepaiately fiom anu inuepenuently of
the iehabilitation case.

The teims of the Iiievocable Stanuby Lettei of
Cieuit show that the obligations of the banks aie
soliuaiy with those of iesponuent Naynilau. It was
issueu at the iequest of anu foi the account of
Naynilau in favoi of the NWSS, as a bonu foi the full
anu piompt peifoimance of the obligations by the
concessionaiie unuei the Concession Agieement
anu that NWSS is authoiizeu by the banks to uiaw
on it by the simple act of ueliveiing to the agent a
wiitten ceitification substantially in the foim
inuicateu by the Lettei of Cieuit. It pioviues fuithei
in Sec. 6, that foi as long as the Stanuby Lettei of
Cieuit is valiu anu subsisting, the Banks shall honoi
any wiitten Ceitification maue by NWSS.

Except when a lettei of cieuit specifically stipulates
otheiwise, the obligation of the banks issuing letteis
of cieuit aie soliuaiy with that of the peison oi
entity iequesting foi its issuance, the same being a
uiiect, piimaiy, absolute anu uefinite unueitaking to
pay the beneficiaiy upon the piesentation of the set
of uocuments iequiieu theiein.

The public iesponuent, theiefoie, exceeueu his
juiisuiction, in holuing that he was competent to act
on the obligation of the banks unuei the Lettei of
Cieuit unuei the aigument that this was not a
soliuaiy obligation with that of the uebtoi. Being a
soliuaiy obligation, the lettei of cieuit is excluueu
fiom the juiisuiction of the iehabilitation couit anu
theiefoie in enjoining petitionei fiom pioceeuing
against the Stanuby Letteis of Cieuit to which it hau
a cleai iight unuei the law anu the teims of saiu
Stanuby Lettei of Cieuit, public iesponuent acteu in
excess of his juiisuiction.

Lectuie Notes:

The iuling in NWSS vs. Baway (2uu4), which helu
that a lettei of cieuit is excluueu fiom the
juiisuiction of the iehabilitation couit, has been
enshiineu in Sec. 18 pai. (c) of the FRIA. It
pioviues that the suspension oiuei uoes not covei
the enfoicement of claims against peisons
soliuaiily liable with the uebtoi incluuing issueis
of letteis of cieuit.

2C74848&+ -? C4" 5" !-P8&7C4 D>8C4 6&G>?+ M>C7.E *9+
68?T &< HC784C /0@991

FACTS: Petitioneis anu coipoiate officeis of Silahis
Inteinational Botel Inc. (SIBI), Panlilio, et al., fileu
with RTC of Nanila, a petition foi Suspension of
Payments anu Rehabilitation. The saiu petition was
gianteu anu an 0iuei was issueu staying all claims
against SIBI. Bowevei, uuiing the time the petition
was fileu, theie weie also a numbei of ciiminal
chaiges (estafa) penuing against petitionei
coipoiate officeis befoie anothei bianch of RTC of
Nanila. Consequently, petitioneis piayeu foi the
suspension of pioceeuings in the lattei bianch until
the petition foi iehabilitation was finally iesolveu.

BELB: Suspension of all claims as an incident to a
coipoiate iehabilitation uoes not contemplate the
suspension of ciiminal chaiges fileu against the
coipoiate officeis of a uistiesseu coipoiation, citing
the case of V+'&"/+ ?> =+ (question in this case was
W0N ciiminal case involving a violation of BP 22
shoulu be suspenueu uuiing iehabilitation
pioceeuings).

The couit saiu in the V+'&"/+ case that while the
puiposes of a ciiminal action is the punishment of
the offenuei anu inuemnity to the offenueu paity, its
uominant anu piimoiuial objective is the foimei anu

the civil action is meiely inciuental to anu
consequent to the conviction of the accuseu.

Rehabilitation anu the settlement of claims against
the coipoiation is not a legal giounu foi the
extinction of petitioners criminal liabilities. It would
be absuiu if one who has engageu in ciiminal
conuuct coulu escape punishment by the meie filing
of a petition foi iehabilitation by the coipoiation of
which he is an officei.

The piosecution of the officeis of the coipoiation
has no beaiing on the penuing iehabilitation of the
coipoiation, especially since they aie chaigeu in
theii inuiviuual capacities anu that in this case, the
puipose of the law foi the issuance of the stay oiuei
is not compiomiseu, since the appointeu
iehabilitation ieceivei can still fully uischaige his
functions as manuateu by law.

Accoiuing to the couit, the only scenaiio the oiuei
of suspension issueu in this case woulu affect the
pioceeuings against the coipoiate officeis is if in
case they woulu also be founu civilly liable upon
theii conviction. Bowevei, such is not a ieason to
suspenu the ciiminal pioceeuings because the
awaiu foi civil inuemnity of coipoiate officeis will
merely be classified under claims which will then
be subject to the stay oiuei issueu by the
iehabilitation couit.

The couit also noteu that Congiess has now enacteu
R.A. No. 1u142 (Financial Rehabilitation anu
Insolvency Act of 2u1u), Section 18 of which
explicitly pioviues that ciiminal actions against the
inuiviuual officei of a coipoiation aie not subject to
the Stay oi Suspension 0iuei in iehabilitation
pioceeuings.

." ,GWN-aG-7? #.?8&7N

!"#" %&" 9@9A0+ ,-." 00" #.?8&7 C? ?E- I78?8C4
b-C>87P" - At the initial heaiing, the couit shall:

(a) ueteimine the cieuitois who have maue timely
anu piopei filing of theii notice of claims;

(b) heai anu ueteimine any objection to the
qualifications of the appointment of the
iehabilitation ieceivei anu, if necessaiy appoint a
new one in accoiuance with this Act;

(c) uiiect the cieuitois to comment on the petition
anu the Rehabilitation Plan, anu to submit the
same to the couit anu to the iehabilitation
ieceivei within a peiiou of not moie than twenty
(2u) uays; anu

(u) uiiect the iehabilitation ieceivei to evaluate
the financial conuition of the uebtoi anu to
piepaie anu submit to the couit within foity (4u)
uays fiom initial heaiing the iepoit pioviueu in
Section 24 heieof.

!"#" %&" 9@9A0+ ,-." 0A" !-3&>? &< ?E-
!-ECW848?C?8&7 !-.-85->" - Within foity (4u) uays
fiom the initial heaiing anu with oi without the
comments of the cieuitois oi any of them, the
iehabilitation ieceivei shall submit a iepoit to the
couit stating his pieliminaiy finuings anu
iecommenuations on whethei:

(a) the uebtoi is insolvent anu if so, the causes
theieof anu any unlawful oi iiiegulai act oi acts
committeu by the owneis of a sole piopiietoiship
paitneis of a paitneiship oi uiiectois oi officeis of
a coipoiation in contemplation of the insolvency
of the uebtoi oi which may have contiibuteu to
the insolvency of the uebtoi;

(b) the unueilying assumptions, the financial goals
anu the pioceuuies to accomplish such goals as
stateu in the petitionei's Rehabilitation Plan aie
iealistic, feasible anu ieasonable;

(c) theie is a substantial likelihoou foi the uebtoi
to be successfully iehabilitateu;

(u) the petition shoulu be uismisseu; anu

(e) the uebtoi shoulu be uissolveu anuoi
liquiuateu.

!"#" %&" 9@9A0+ ,-." 0*" B8587P LG- 6&G>N- ?& &>
L8N=8NNC4 &< 2-?8?8&7+ &> 6&75->N8&7 &<
2>&.--;87PN" - Within ten (1u) uays fiom ieceipt
of the iepoit of the iehabilitation ieceivei
mentioneu in Section 24 heieof the couit may:

(a) give uue couise to the petition upon a finuing
that:

(1) the uebtoi is insolvent; anu

(2) theie is a substantial likelihoou foi the uebtoi

(b) uismiss the petition upon a finuing that:

(1)uebtoi is not insolvent;

(2) the petition i8 a sham filing intenueu only to
uelay the enfoicement of the iights of the
cieuitois oi of any gioup of cieuitois;


(S)the petition, the Rehabilitation Plan anu the
attachments theieto contain any mateiially false
oi misleauing statements; oi

(4)the uebtoi has committeu acts of
misiepiesentation oi in fiauu of its cieuitois oi a
gioup of cieuitois;

(c)conveit the pioceeuings into one foi the
liquiuation of the uebtoi upon a finuing that:

(1)the uebtoi is insolvent; anu

(2)theie is no substantial likelihoou foi the uebtoi
to be successfully iehabilitateu as ueteimineu in
accoiuance with the iules to be piomulgateu by
the Supieme Couit.

!"#" %&" 9@9A0+ ,-." 0)" 2-?8?8&7 B85-7 LG-
6&G>N-" - If the petition is given uue couise, the
couit shall uiiect the iehabilitation ieceivei to
ieview, ievise anuoi iecommenu action on the
Rehabilitation Plan anu submit the same oi a new
one to the couit within a peiiou of not moie than
ninety (9u) uays.

The couit may iefei any uispute ielating to the
Rehabilitation Plan oi the iehabilitation
pioceeuings penuing befoie it to aibitiation oi
othei moues of uispute iesolution, as pioviueu foi
unuei Republic Act No. 928S, 0i the Alteinative
Bispute Resolution Act of 2uu4, shoulu it
ueteimine that such moue will iesolve the uispute
moie quickly, faiily anu efficiently than the couit.

!"#" %&" 9@9A0+ ,-." 0(" L8N=8NNC4 &< 2-?8?8&7" -
If the petition is uismisseu puisuant to paiagiaph
(b) of Section 2S heieof, then the couit may, in its
uiscietion, oiuei the petitionei to pay uamages to
any cieuitoi oi to the uebtoi, as the case may be,
who may have been injuieu by the filing of the
petition, to the extent of any such injuiy.

;" !-ECW848?C?8&7 !-.-85->

91 B-7->C4 6&7.-3?N

!"#" %&" 9@9A0+ ,-." A"
(hh) Rehabilitation ieceivei shall iefei to the
peison oi peisons, natuial oi juiiuical, appointeu
as such by the couit puisuant to this Act anu
which shall be entiusteu with such poweis anu
uuties as set foith heiein.

!"#" %&" 9@9A0+ ,-." 0F" YE& HCT ,->5- CN C
!-ECW848?C?8&7 !-.-85->" - Any qualifieu natuial
oi juiiuical peison may seive as a iehabilitation
ieceivei: <"+?/$#$2 That if the iehabilitation
ieceivei is a juiiuical entity, it must uesignate a
natuial peisons who possesses all the
qualifications and none of the disqualifications as
its iepiesentative, it being unueistoou that the
juiiuical entity anu the iepiesentatives aie
soliuaiily liable foi all obligations anu
iesponsibilities of the iehabilitation ieceivei.

!"#" %&" 9@9A0+ ,-." 0:" XGC48<8.C?8&7N &< C
!-ECW848?C?8&7 !-.-85->" - The iehabilitation
ieceivei shall have the following minimum
qualifications:

(a)A citizen of the Philippines oi a iesiuent of the
Philippines in the six (6) months immeuiately
pieceuing his nomination;

(b)0f goou moial chaiactei anu with
acknowleugeu integiity, impaitiality anu
inuepenuence;

(c)Bas the iequisite knowleuge of insolvency anu
othei ielevant commeicial laws, iules anu
pioceuuies, as well as the ielevant tiaining anuoi
expeiience that may be necessaiy to enable him to
piopeily uischaige the uuties anu obligations of a
iehabilitation ieceivei; anu

(u)Bas no conflict of inteiest: Pioviueu, That such
conflict of inteiest may be waiveu, expiessly oi
implieuly, by a paity who may be piejuuiceu
theieby.

Other qualifications and disqualifications of the
iehabilitation ieceivei shall be set foith in
pioceuuial iules, taking into consiueiation the
natuie of the business of the uebtoi anu the neeu
to piotect the inteiest of all stakeholueis
conceineu.

!"#" %&" 9@9A0+ ,-." '@" I78?8C4 #33&87?=-7? &<
?E- !-ECW848?C?8&7 !-.-85->" U The couit shall
initially appoint the iehabilitation ieceivei, who
may oi may not be fiom among the nominees of
the petitionei, Bowevei, at the initial heaiing of
the petition, the cieuitois anu the uebtoi who aie
not petitioneis may nominate othei peisons to the
position. The couit may ietain the iehabilitation
ieceivei initially appointeu oi appoint anothei
who may oi may not be fiom among those
nominateu.

In case the uebtoi is a secuiities maiket
paiticipant, the couit shall give piioiity to the

nominee of the appiopiiate secuiities oi investoi
piotection funu.

If a qualifieu natuial peison oi entity is nominateu
by moie than fifty peicent (Su%) of the secuieu
cieuitois anu the geneial unsecuieu cieuitois, anu
satisfactoiy eviuence is submitteu, the couit shall
appoint the cieuitois' nominee as iehabilitation
ieceivei.

!"#" %&" 9@9A0+ ,-." '0" !-=&5C4 &< ?E-
!-ECW848?C?8&7 !-.-85->" The iehabilitation
ieceivei may be iemoveu at any time by the couit
eithei -+0( 6"+6"/+ oi upon motion by any
cieuitois holuing moie than fifty peicent (Su%)
of the total obligations of the uebtoi, on such
giounus as the iules of pioceuuie may pioviue
which shall incluue, but aie not limiteu to, the
following:

(a) Incompetence, gioss negligence, failuie to
peifoim oi failuie to exeicise the piopei uegiee of
caie in the peifoimance of his uuties anu poweis;

(b) Lack of a paiticulai oi specializeu competency
iequiieu by the specific case;

(c) Illegal acts oi conuuct in the peifoimance of his
uuties anu poweis;

(u) Lack of qualification oi piesence of any
uisqualification;

(e) Conflict of inteiest that aiises aftei his
appointment; anu

(f) Nanifest lack of inuepenuence that is
uetiimental to the geneial bouy of the
stakeholueis.

!"#" %&" 9@9A0+ ,-." ''" 6&=3-7NC?8&7 C7;
D->=N &< ,->58.-" U The iehabilitation ieceivei
anu his uiiect employees oi inuepenuent
contiactois shall be entitleu to compensation foi
ieasonable fees anu expenses fiom the uebtoi
accoiuing to the teims appioveu by the couit aftei
notice anu heaiing. Piioi to such heaiing, the
iehabilitation ieceivei anu his uiiect employees
shall be entitleu to ieasonable compensation
baseu on Y(&)0(- -#"(/0> Such costs shall be
consiueieu auministiative expenses.

!"#" %&" 9@9A0+ ,-." 'A" ]C?E C7; M&7; &< ?E-
!-ECW848?C?8&7 !-.-85->" U Piioi to enteiing upon
his poweis, uuties anu iesponsibilities, the
iehabilitation ieceivei shall take an oath anu file a
bonu, in such amount to be fixeu by the couit,
conuitioneu upon the faithful anu piopei
uischaige of his poweis, uuties anu
iesponsibilities.

!"#" %&" 9@9A0+ ,-." '*" `C.C7.T" - In case the
position of iehabilitation ieceivei is vacateu foi
any ieason whatsoevei. the couit shall uiiect the
uebtoi anu the cieuitois to submit the names of
theii nominees to the position. The couit may
appoint any of the qualifieu nominees. oi any
othei peison qualifieu foi the position.

!"#" %&" 9@9A0+ ,-." A@" 6&7<48.? &< I7?->-N?" U No
peison may be appointeu as a iehabilitation
ieceivei, membei of a_ management committee, oi
be employeu by the iehabilitation ieceivei oi the
management committee if he has a conflict of
inteiest.

An inuiviuual shall be ueemeu to have a conflict of
inteiest if he is so situateu as to be mateiially
influenceu in the exeicise of his juugment foi oi
against any paity to the pioceeuings. Without
limiting the geneiality of the foiegoing, an
inuiviuual shall be ueemeu to have a conflict of
inteiest if:

(a) he is a cieuitoi, ownei, paitnei oi stockholuei
of the uebtoi;

(b) he is engageu in a line of business which
competes with that of the uebtoi;

(c) he is, oi was, within five (S) yeais fiom the
filing of the petition, a uiiectoi, officei, ownei,
paitnei oi employee of the uebtoi oi any of the
cieuitois, oi the auuitoi oi accountant of the
uebtoi;

(u) he is, oi was, within two (2) yeais fiom the
filing of the petition, an unueiwiitei of the
outstanuing secuiities of the uebtoi;

(e) he is ielateu by consanguinity oi affinity within
the fouith civil uegiee to any inuiviuual cieuitoi,
owneis of a sale piopiietoiship-uebtoi, paitneis
of a paitneiship- uebtoi oi to any stockholuei,
uiiectoi, officei, employee oi unueiwiitei of a
coipoiation-uebtoi; oi

(f) he has any othei uiiect oi inuiiect mateiial
inteiest in the uebtoi oi any of the cieuitois.

Any iehabilitation ieceivei, membei of the
management committee oi peisons employeu oi
contiacteu by them possessing any conflict of
inteiest shall make the appiopiiate uisclosuie

eithei to the couit oi to the cieuitois in case of
out-of-couit iehabilitation pioceeuings. Any paity
to the pioceeuing auveisely affecteu by the
appointment of any peison with a conflict of
inteiest to any of the positions enumeiateu above
may howevei waive his iight to object to such
appointment anu, if the waivei is unieasonably
withhelu, the couit may uisiegaiu the conflict of
inteiest, taking into account the geneial inteiest of
the stakeholueis.

01 2&Z->N+ LG?8-N C7; !-N3&7N8W848?8-N

!"#" %&" 9@9A0+ ,-." A(" HC7CP-=-7?" - 0nless
otheiwise pioviueu heiein, the management of the
juiiuical uebtoi shall iemain with the existing
management subject to the applicable laws anu
agieements, if any, on the election oi
appointment of uiiectois, manageis 0i managing
paitnei. Bowevei, all uisbuisements, payments oi
sale, uisposal, assignment, tiansfei oi
encumbiance of piopeity , oi any othei act
affecting title oi inteiest in piopeity, shall be
subject to the appioval of the iehabilitation
ieceivei anuoi the couit, as pioviueu in the
following subchaptei.

!"#" %&" 9@9A0+ ,-." 0A" !-3&>? &< ?E-
!-ECW848?C?8&7 !-.-85->" - Within foity (4u) uays
fiom the initial heaiing anu with oi without the
comments of the cieuitois oi any of them, the
iehabilitation ieceivei shall submit a iepoit to the
couit stating his pieliminaiy finuings anu
iecommenuations on whethei:

(a) the uebtoi is insolvent anu if so, the causes
theieof anu any unlawful oi iiiegulai act oi acts
committeu by the owneis of a sole piopiietoiship
paitneis of a paitneiship oi uiiectois oi officeis of
a coipoiation in contemplation of the insolvency
of the uebtoi oi which may have contiibuteu to
the insolvency of the uebtoi;

(b) the unueilying assumptions, the financial goals
anu the pioceuuies to accomplish such goals as
stateu in the petitionei's Rehabilitation Plan aie
iealistic, feasible anu ieasonable;

(c) theie is a substantial likelihoou foi the uebtoi

(u) the petition shoulu be uismisseu; anu

(e) the uebtoi shoulu be uissolveu anuoi
liquiuateu.

!"#" %&" 9@9A0+ ,-." '9" 2&Z->N+ LG?8-N C7;
!-N3&7N8W848?8-N &< ?E- !-ECW848?C?8&7 !-.-85->"
- The iehabilitation ieceivei shall be ueemeu an
officei of the couit with the piincipal uuty of
pieseiving anu maximizing the value of the assets
of the uebtoi uuiing the iehabilitation
pioceeuings, ueteimining the viability of the
iehabilitation of the uebtoi, piepaiing anu
iecommenuing a Rehabilitation Plan to the couit,
anu implementing the appioveu Rehabilitation
Plan, To this enu, anu without limiting the
geneiality of the foiegoing, the iehabilitation
ieceivei shall have the following poweis, uuties
anu iesponsibilities:

(a)To veiify the accuiacy of the factual allegations
in the petition anu its annexes;

(b)To veiify anu coiiect, if necessaiy, the
inventoiy of all of the assets of the uebtoi, anu
theii valuation;

(c)To veiify anu coiiect, if necessaiy, the scheuule
of uebts anu liabilities of the uebtoi;

(u)To evaluate the valiuity, genuineness anu tiue
amount of all the claims against the uebtoi;

(e)To take possession, custouy anu contiol, anu to
pieseive the value of all the piopeity of the
uebtoi;

(f)To sue anu iecovei, with the appioval of the
couit, all amounts oweu to, anu all piopeities
peitaining to the uebtoi;

(g) To have access to all infoimation necessaiy,
piopei oi ielevant to the opeiations anu business
of the uebtoi anu foi its iehabilitation;

(h) To sue anu iecovei, with the. appioval of the
couit, all piopeity +" money of the uebtoi paiu,
tiansfeiieu oi uisbuiseu in fiauu of the uebtoi oi
its cieuitois, oi which constitute unuue piefeience
of cieuitois;

(i) To monitoi the opeiations anu the business of
the uebtoi to ensuie that no payments oi tiansfeis
of piopeity aie maue othei than in the oiuinaiy
couise of business;

(j) With the couit's appioval, to engage the
seivices of oi to employ peisons oi entities to
assist him in the uischaige of his functions;

(k) To ueteimine the mannei by which the uebtoi
may be best iehabilitateu, to ieview) ievise

anuoi iecommenu action on the Rehabilitation
Plan anu submit the same oi a new one to the
couit foi appioval;

(1) To implement the Rehabilitation Plan as
appioveu by the couit, if 8u pioviueu unuei the
Rehabilitation Plan;

(m) To assume anu exeicise the poweis of
management of the uebtoi, if uiiecteu by the couit
puisuant to Section S6 heieof;

(n) To exeicise such othei poweis as may, fiom
time to time, be confeiieu upon him by the couit;
anu

To submit a status iepoit on the iehabilitation
pioceeuings eveiy quaitei oi as may be iequiieu
by the couit -+0( 6"+6"/+> oi upon motion of any
cieuitoi. oi as may be pioviueu, in the
Rehabilitation Plan.

0nless appointeu by the couit, puisuant to Section
S6 heieof, the iehabilitation ieceivei shall not take
ovei the management anu contiol of the uebtoi
but may iecommenu the appointment of a
management committee ovei the uebtoi in the
cases pioviueu by this Act.

!"#" %&" 9@9A0+ ,-." ':" J=34&T=-7? &<
2>&<-NN8&7C4N" - 0pon appioval of the couit, anu
aftei notice anu heaiing, the iehabilitation
ieceivei oi the management committee may
employ specializeu piofessionals anu othei
expeits to assist each in the peifoimance of theii
uuties. Such piofessionals anu othei expeits shall
be consiueieu eithei employees oi inuepenuent
contiactois of the iehabilitation ieceivei oi the
management committee, as the case may be. The
qualifications anu disqualifications of the
piofessionals anu expeits may be set foith in
pioceuuial iules, taking into consiueiation the
natuie of the business of the uebtoi anu the neeu
to piotect the inteiest of all stakeholueis
conceineu.

!"#" %&" 9@9A0+ ,-." A9" I==G78?T" U The
iehabilitation ieceivei anu all peisons employeu
by him, anu the membeis of the management
committee anu all peisons employeu by it, shall
not be subject to any action. claim oi uemanu in
connection with any act uone oi omitteu to be
uone by them in goou faith in connection with the
exeicise of theii poweis anu functions unuei this
Act oi othei actions uuly appioveu by the couit.

Piinciple of uebtoi-in-possession oi uebtoi-in-
place
- Puipose of iehabilitation: To pieseive a
flounueiing business as a going concein
> Piemise: Assets of the business aie moie
valuable if maintaineu than if liquiuateu
> Result: Bebtoi maintaining contiol of its
business anu piopeity (uebtoi-in-
possession uebtoi-in-place)
>> Subject only to the iequiiement
of appioval of the Rehabilitation
Receivei oi the couit foi:
a. Bisbuisements affecting title oi
inteiest in piopeity
b. Payments affecting title oi
c. Sale, uisposal, assignment,
tiansfei oi encumbiance of
piopeity, oi
u. Any othei act affecting title oi

Rehabilitation Receivei
- ueneially uoes not take ovei the contiol anu
management of the uebtoi
- Piincipally taskeu with:
a. Pieseiving anu maximizing the value of the
assets of the uebtoi uuiing the
iehabilitation pioceeuings
b. Beteimining the viability of the
iehabilitation of the uebtoi
c. Piepaiing anu iecommenuing a
Rehabilitation Plan to the couit; anu
u. Implementing the Rehabilitation Plan

-" Creditors Committees

!"#" %&" 9@9A0+ ,-." A0" 6>-;8?&>Ng 6&==8??--" U
Aftei the cieuitois' meeting calleu puisuant to
Section 6S heieof, the cieuitois belonging to a
class may foimally oiganize a committee among
themselves. In auuition, the cieuitois may, as a
bouy, agiee to foim a cieuitois' committee
composeu of a iepiesentative fiom each class of
cieuitois, such as the following:

(a) Secuieu cieuitois;

(b) 0nsecuieu cieuitois;

(c) Tiaue cieuitois anu supplieis; anu

(u) Employees of the uebtoi.

In the election of the cieuitois' iepiesentatives,
the iehabilitation ieceivei oi his iepiesentative
shall attenu such meeting anu extenu the

appiopiiate assistance as may be uefineu in the
pioceuuial iules.

!"#" %&" 9@9A0+ ,-." A'" !&4- &< 6>-;8?&>Ng
6&==8??--" U The cieuitois' committee when
constituteu puisuant to Section 42 of this Act shall
assist the iehabilitation ieceivei in
communicating with the cieuitois anu shall be the
piimaiy liaison between the iehabilitation
ieceivei anu the cieuitois. The cieuitois'
committee cannot exeicise oi waive any iight oi
give any consent on behalf of any cieuitoi unless
specifically authoiizeu in wiiting by such cieuitoi.
The cieuitois' committee may be authoiizeu by
the couit oi by the iehabilitation ieceivei to
peifoim such othei tasks anu functions as may be
uefineu by the pioceuuial iules in oiuei to
facilitate the iehabilitation piocess.
!"#" %&" 9@9A0+ ,-." F" L-.8N8&7N &< 6>-;8?&>N" -
Becisions of cieuitois shall be maue accoiuing to
the ielevant piovisions of the Coipoiation Coue in
the case of stock oi nonstock coipoiations oi the
Civil Coue in the case of paitneiships that aie not
inconsistent with this Act.

!"#" %&" 9@9A0+ ,-." :" 6>-;8?&>N
!-3>-N-7?C?85-N. - Cieuitois may uesignate
iepiesentatives to vote oi otheiwise act on theii
behalf by filing notice of such iepiesentation with
the couit anu seiving a copy on the iehabilitation
ieceivei oi liquiuatoi.

!"#" %&" 9@9A0+ ,-." A"
(ll) Secuieu paity shall iefei to a secuieu cieuitoi
oi the agent oi iepiesentative of such secuieu
cieuitoi.

(kk) Secuieu cieuitoi shall iefei to a cieuitoi with
a secuieu claim.

(jj) Secuieu claim shall iefei to a claim that is
secuieu by a lien.

(qq) 0nsecuieu cieuitoi shall iefei to a cieuitoi
with an unsecuieu claim.

(pp) 0nsecuieu claim shall iefei to a claim that is
not secuieu by a lien.

(t) Lien shall iefei to a statutoiy oi contiactual
claim oi juuicial chaige on ieal oi peisonal
piopeity that legality entities a cieuitoi to iesoit
to saiu piopeity foi payment of the claim oi uebt
secuieu by such lien.

In the context of insolvency:
,-.G>-; .>-;8?&>N

_7N-.G>-; .>-;8?&>N
All cieuitois holuing
special piefeiieu
cieuits unuei Aits.
2241 anu 2242 CC.

All cieuitois holuing
only peisonal secuiity
tiansactions, such as
contiacts of guaianty oi
suiety.

<" HC7CP-=-7? 6&==8??--

!"#" %&" 9@9A0+ ,-." A(" HC7CP-=-7?" - 0nless
appointment of uiiectois, manageis oi managing

!"#" %&" 9@9A0+ ,-." ')" L8N34C.-=-7? &<
JK8N?87P HC7CP-=-7? WT ?E- !-ECW848?C?8&7
!-.-85-> &> HC7CP-=-7? 6&==8??--" 0pon
motion of any inteiesteu paity, the couit may
appoint anu uiiect the iehabilitation ieceivei to
assume the poweis of management of the uebtoi,
oi appoint a management committee that will
unueitake the management of the uebtoi. upon
cleai anu convincing eviuence of any of the
following ciicumstances:

(a) Actual oi imminent uangei of uissipation, loss,
wastage or destruction of the debtors assets or
othei piopeities;

(b) Paialyzation of the business opeiations of the
uebtoi; oi

(c) uioss mismanagement of the uebtoi. oi fiauu
oi othei wiongful conuuct on the pait of, oi gioss
oi willful violation of this Act by existing
management of the uebtoi 0i the ownei, paitnei,
uiiectoi, officei oi iepiesentatives in
management of the uebtoi.

In case the couit appoints the iehabilitation
ieceivei to assume the poweis of management of
the uebtoi. the couit may:

(1) iequiie the iehabilitation ieceivei to post an
auuitional bonu;

(2) authoiize him to engage the seivices oi to
employ peisona oi entities to assist him in the
uischaige of his manageiial functions; anu

(S) authoiize a commensuiate inciease in his
compensation.

!"#" %&" 9@9A0+ ,-." '(" !&4- &< ?E-
HC7CP-=-7? 6&==8??--" When appointeu
puisuant to the foiegoing section, the
management committee shall take the place of the
management anu the goveining bouy of the uebtoi
anu assume theii iights anu iesponsibilities.

The specific poweis anu uuties of the management
committee, whose membeis shall be consiueieu as
officeis of the couit, shall be piesciibeu by the
pioceuuial iules.

!"#" %&" 9@9A0+ ,-." 'F" XGC48<8.C?8&7N &<
H-=W->N &< ?E- HC7CP-=-7? 6&==8??--" - The
qualifications and disqualifications of the
membeis of the management committee shall be
set foith in the pioceuuial iules, taking into
consiueiation the natuie of the business of the
uebtoi anu the neeu to piotect the inteiest of all
stakeholueis conceineu.

Poweis of management of the uebtoi
- ueneial Rule: Rehabilitation Receivei uoes not
take ovei contiol anu management of the uebtoi
> Bowevei: FRIA pioviues instances when
the Rehabilitation Receivei oi a
Nanagement Committee may, when so
oiueieu by the couit, assume the poweis
of management of the uebtoi. But theie
must be cleai anu convincing eviuence of:
>> 1. Actual oi imminent uangei of
uissipation, loss, wastage oi
destruction of the debtors assets
oi othei piopeities; oi
>> 2. Paialyzation of the business
opeiations of the uebtoi; oi
>> S. uioss mismanagement of the
uebtoi, oi fiauu oi othei
wiongful conuuct on the pait of,
oi gioss oi wilful violation of the
FRIA by existing management of
the uebtoi oi the ownei, paitnei,
uiiectoi, officei oi
iepiesentatives in management
of the uebtoi.

P" 64C8=N

!"#" %&" 9@9A0+ ,-." A/.1" L-<878?8&7 &< D->=N" -
As useu in this Act, the teim:

(c) =4&/- shall iefei to all claims oi uemanus of
whatevei natuie oi chaiactei against the uebtoi
oi its piopeity, whethei foi money oi otheiwise,
liquiuateu oi unliquiuateu, fixeu oi contingent,
matuieu oi unmatuieu, uisputeu oi unuisputeu,
incluuing, but not limiteu to; (1) all claims of the
goveinment, whethei national oi local, incluuing
taxes, taiiffs anu customs uuties; anu (2) claims
against uiiectois anu officeis of the uebtoi aiising
fiom acts uone in the uischaige of theii functions
falling within the scope of theii authoiity:
<"+?/$#$2 That, this inclusion uoes not piohibit the
cieuitois oi thiiu paities fiom filing cases against
the uiiectois anu officeis acting in theii peisonal
capacities.

91 L-?->=87C?8&7 &< 64C8=N

!"#" %&" 9@9A0+ ,-." 9)" 6&==-7.-=-7? &<
2>&.--;87PN C7; INNGC7.- &< C 6&==-7.-=-7?
]>;->" - The iehabilitation pioceeuings shall


pioceeuings;

sought;

heieof;


issuance;



piomulgate;

heaiing;

Couit pioviue;

Commencement 0iuei;




copieu;



the uebtoi;

the uebtoi;

business; anu

heiein.

!"#" %&" 9@9A0+ ,-." AA" !-P8N?>T &< 64C8=N" -
Within twenty (2u) uays fiom his assumption into
office, the iehabilitation ieceivei shall establish a
pieliminaiy iegistiy of claims. The iehabilitation
ieceivei shall make the iegistiy available foi
public inspection anu pioviue publication notice
to the uebtoi, cieuitois anu stakeholueis on wheie
anu when they may inspect it. All claims incluueu
in the iegistiy of claims must be uuly suppoiteu by
sufficient eviuence.

!"#" %&" 9@9A0+ ,-." A*" ]33&N8?8&7 &>
6EC44-7P- &< 64C8=N" Within thiity (Su) uays
fiom the expiiation of the peiiou stateu in the
immeuiately pieceuing section, the uebtoi,
cieuitois, stakeholueis anu othei inteiesteu
paities may submit a challenge to claims to the
couit, seiving a ceitifieu copy on the iehabilitation
ieceivei anu the cieuitoi holuing the challengeu
claimso 0pon the expiiation of the thiity (Su)-
uay peiiou, the iehabilitation ieceivei shall submit
to the couit the iegistiy of claims which shall
incluue unuisputeu claims that have not been
subject to challenge.

!"#" %&" 9@9A0+ ,-." A)" #33-C4" U Any uecision of
the iehabilitation ieceivei iegaiuing a claim may
be appealeu to the couit.

Beteimination of claims
- The Rehabilitation Receiver will clean up all
the claims (one siue of the equation).
> The othei siue of the equation is the
assets, which will be useu to pay foi the
claims.
- The Rehabilitation Receivei will fix all the claims
anu assets (complete anu stable conuition) foi

puiposes of aiiiving at a Rehabilitation Plan
that is viable.

Stait with a petition (impoitant)
> because it contains the scheuule of
debtors debts and liabilities

01 D>-C?=-7? &< 64C8=N

C1 ,-.G>-; 6>-;8?&> 64C8=N

!"#" %&" 9@9A0+ ,-." A"
(ll) Secuieu paity shall iefei to a secuieu cieuitoi
oi the agent oi iepiesentative of such secuieu
cieuitoi.

(kk) Secuieu cieuitoi shall iefei to a cieuitoi with
a secuieu claim.

(jj) Secuieu claim shall iefei to a claim that is
secuieu by a lien.

(qq) 0nsecuieu cieuitoi shall iefei to a cieuitoi
with an unsecuieu claim.

(pp) 0nsecuieu claim shall iefei to a claim that is
not secuieu by a lien.

(t) Lien shall iefei to a statutoiy oi contiactual
claim oi juuicial chaige on ieal oi peisonal
piopeity that legality entities a cieuitoi to iesoit
to saiu piopeity foi payment of the claim oi uebt
secuieu by such lien.

!"#" %&" 9@9A0+ ,-." )@" %& L8=87G?8&7 &<
,-.G>-; 6>-;8?&> !8PE?N" 9 The issuance of the
Commencement 0iuei anu the Suspension oi Stay
0iuei, anu any othei piovision of this Act, shall
not be ueemeu in any way to uiminish oi impaii
the secuiity oi lien of a secuieu cieuitoi, oi the
value of his lien oi secuiity, except that his iight to
enfoice saiu secuiity oi lien may be suspenueu
uuiing the teim of the Stay 0iuei.

The couit, upon motion oi iecommenuation of the
iehabilitation ieceivei, may allow a secuieu
cieuitoi to enfoice his secuiity oi lien, oi foieclose
upon piopeity of the uebtoi secuiing hisits claim,
if the saiu piopeity is not necessaiy foi the
iehabilitation of the uebtoi. The secuieu cieuitoi
anuoi the othei lien holueis shall be aumitteu to
the iehabilitation pioceeuings only foi the balance
of his claim, if any.

!"#" %&" 9@9A0+ ,-." )9" OC.R &< #;-aGC?-
2>&?-.?8&7" - The couit, on motion oi -+0(
6"+6"/+2 may teiminate, mouify oi set conuitions
foi the continuance of suspension of payment, oi
ielieve a claim fiom the coveiage theieof, upon
showing that: (a) a cieuitoi uoes not have
auequate piotection ovei piopeity secuiing its
claim; oi
(b) the value of a claim secuieu by a lien on
piopeity which is not necessaiy foi iehabilitation
of the uebtoi exceeus the faii maiket value of the
saiu piopeity.

Foi puiposes of this section, a cieuitoi shall be
ueemeu to lack auequate piotection if it can be
shown that:

(a) the uebtoi fails oi iefuses to honoi a pie-
existing agieement with the cieuitoi to keep the
piopeity insuieu;

(b) the uebtoi fails oi iefuses to take commeicially
ieasonable steps to maintain the piopeity; oi

(c) the piopeity has uepieciateu to an extent that
the cieuitoi is unuei secuieu.

0pon showing of a lack of piotection, the couit
shall oiuei the uebtoi oi the iehabilitation
ieceivei to make aiiangements to pioviue foi the
insuiance oi maintenance of the piopeity; oi to
make payments oi otheiwise pioviue auuitional
oi ieplacement secuiity such that the obligation is
fully secuieu. If such aiiangements aie not
feasible, the couit may mouify the Stay 0iuei to
allow the secuieu cieuitoi lacking auequate
piotection to enfoice its secuiity claim against the
uebtoi: <"+?/$#$2 1+5#?#"2 That the couit may
ueny the cieuitoi the iemeuies in this paiagiaph if
the piopeity subject of the enfoicement is
iequiieu foi the iehabilitation of the uebtoi.

Sec. 6u. No Biminution of Secuieu Cieuitoi Rights
- First paragraph follows the principle of equality
is equity

The tieatment of secuieu cieuitois uuiing the
iehabilitation pioceeuing is as follows:
9 ;+0#O X#&$/)7' :01+'# /) Y(+0&0/+) -&"N'E +* 01#
*+44+5/)7 #)(-#"&0/+) 5#"# )+0 6"+?/$#$ /) 01# 3++N>
Theyre only used to emphasize the important terms
&)$ 61"&'#' +* #&!1 /0#->
- 1. Equality is equity by issuance of the
Commencement Order
> 0pon the issuance of the Commencement
0iuei, all cieuitois, incluuing secuieu
cieuitois, aie piecluueu, by viitue of the
Stay oi Suspension 0iuei, fiom obtaining
an auvantage oi piefeience ovei anothei.

As between the cieuitois, the key phiase
is equality is equity, anu all cieuitois,
secuieu oi unsecuieu, stanu on equal
footing.
- 2. Security or lien not diminished or impaired
> The issuance of the Commencement 0iuei
anu the Stay oi Suspension 0iuei,
howevei, uoes not uiminish oi impaii the
secuiity oi lien of a secuieu cieuitoi, oi
its value, except that the iight to enfoice
the secuiity oi lien is suspenueu uuiing
its teim.
- S. Security of lien enforced upon motion or
recommendation (of the Rehabilitation Receiver)
> Buiing the pioceeuings, the couit, upon
motion oi iecommenuation of the
Rehabilitation Receivei, may allow a
secuieu cieuitoi to enfoice the secuiity
oi lien, oi foieclose upon the secuiity, if
the piopeity is not necessaiy foi the
iehabilitation of the uebtoi.
- 4. Continuance of the Stay or Suspension Ord#" +)
motion or motu propio (by the court)
> Buiing the pioceeuings, the couit, on
motion oi -+0( 6"+6/+, may teiminate,
mouify oi set conuitions foi the
continuance of the Stay oi Suspension
0iuei, oi ielieve a claim fiom its
coveiage, if a secuieu cieuitoi uoes not
have auequate piotection ovei its
secuiity, oi the value of a claim secuieu
by a lien on piopeity, which is not
necessaiy foi iehabilitation, exceeus the
faii maiket value of the piopeity.
- S. Equal treatment of all claims within the same
!4ass or subclass through the Rehabilitation Plan
> The Rehabilitation Plan shall specify the
tieatment of each class oi subclass of
cieuitois anu shall pioviue equal
tieatment of all claims within the same
class oi subclass, unless a paiticulai
cieuitoi voluntaiily agiees to less
favouiable tieatment.
> Concurrence and Preference of Credits
-('0 3# *+44+5#$ &)$ I#!("/08 +* H)0#"#'0
must be maintained
>> The Rehabilitation Plan must
ensuie that the payments maue
unuei the plan follow the piioiity
establisheu unuei the piovisions
of the Civil Coue on concuiience
anu piefeience of cieuits anu
must maintain the secuiity
inteiest of secuieu cieuitois anu
pieseive the liquiuation value of
the secuiity unless waiveu oi
mouifieu voluntaiily.

W1 J=34&T-- 64C8=N

!"#" %&" 9@9A0+ ,-." *)" D>-C?=-7? &<
J=34&T--N+ 64C8=N" 9 Compensation of
employees iequiieu to caiiy on the business shall
be consiueieu an auministiative expense. Claims
of sepaiation pay foi months woikeu piioi to the
commencement uate shall be consiueieu a pie-
commencement claim. Claims foi salaiy anu
sepaiation pay foi woik peifoimeu aftei the
commencement uate shall be an auministiative
expense.

!"#" %&" 9@9A0+ ,-." 9)" 6&==-7.-=-7? &<
2>&.--;87PN C7; INNGC7.- &< C 6&==-7.-=-7?
]>;->" U The iehabilitation pioceeuings shall


pioceeuings;

sought;

heieof;


issuance;



piomulgate;

heaiing;

Couit pioviue;

Commencement 0iuei;




copieu;



the uebtoi;

the uebtoi;

business; anu

heiein.

Sec. 56. Treatment of Employees Claims
- Compensation of employees required to carry on
01# 3('/)#'' '1&44 3# !+)'/$#"#$ &)
administrative expense.
> This means that they will not be stayeu by
the Suspension 0iuei.
> The iest of the piovision following the
saiu quoteu poition states the
qualifications.

.1 JK.4G;-; 64C8=N

!"#" %&" 9@9A0+ ,-." 0'" J<<-.? &< \C84G>- ?& \84-
%&?8.- &< 64C8=" - A cieuitoi whose claim is not
listeu in the scheuule of uebts anu liabilities anu
who fails to file a notice of claim in accoiuance
with the Commencement 0iuei but subsequently
files a belateu claim shall not be entitleu to
paiticipate in the iehabilitation pioceeuings but
shall be entitleu to ieceive uistiibutions aiising
theiefiom.

E" D>-C?=-7? &< #NN-?N

!"#" %&" 9@9A0+ ,-." A(" HC7CP-=-7?" - 0nless
appointment of uiiectois, manageis 0i managing

Sec. 47. Nanagement
- However, all disbursements, payments or sale,
$/'6+'&42 &''/7)-#)02 0"&)'*#" +" #)!(-3"&)!# +*
6"+6#"08 2 +" &)8 +01#" &!0 &**#!0/)7 0/04# +"
/)0#"#'0 /) 6"+6#"082 '1&44 3# '(3.#!0 0+ 01#
&66"+?&4 +* 01# "#1&3/4/0&0/+) "#!#/?#" &)$L+" 01#
court, as provided in the following subchapter.
> Impoitant pait of this piovision

> Subchaptei being iefeiieu to: =1&60#" HH
:UE J'#2 <"#'#"?&0/+) &)$ W/'6+'&4 +* @''#0'
&)$ Q"#&0-#)0 +* @''#0' &)$ =4&/-' &*0#"
=+--#)!#-#)0 W&0#
> Appioval of the Rehabilitation Receivei
anu appioval of the couit aie two
uiffeient steps, the lattei being a highei
step.

91 _7-7.G=W->-; #NN-?N

!"#" %&" 9@9A0+ ,-." AF" _N- &> L8N3&N8?8&7 &<
#NN-?N" - Except as otheiwise pioviueu heiein, no
funus oi piopeity of the uebtoi shall he useu oi
uisposeu of except in the oiuinaiy couise of
business of the uebtoi, oi unless necessaiy to
finance the auministiative expenses of the
iehabilitation pioceeuings.

!"#" %&" 9@9A0+ ,-." A:" ,C4- &< #NN-?N" - The
couit, upon application of the iehabilitation
ieceivei, may authoiize the sale of unencumbeieu
piopeity of the uebtoi outsiue the oiuinaiy couise
of business upon a showing that the piopeity, by
its natuie oi because of othei ciicumstance, is
peiishable, costly to maintain, susceptible to
uevaluation oi otheiwise in jeopaiuy.

!"#" %&" 9@9A0+ ,-." *0" !-N.8NN8&7 &> %G448?T &<
,C4-+ 2CT=-7?+ D>C7N<-> &> 6&75-TC7.- &<
#NN-?N" - The couit may iescinu oi ueclaie as null
anu voiu any sale, payment, tiansfei oi
conveyance of the uebtoi's unencumbeieu
piopeity oi any encumbeiing theieof by the
uebtoi oi its agents oi iepiesentatives aftei the
commencement uate which aie not in the oiuinaiy
couise of the business of the uebtoi: Pioviueu,
howevei, That the unencumbeieu piopeity may
be solu, encumbeieu oi otheiwise uisposeu of
upon oiuei of the couit aftei notice anu heaiing:

(a) if such aie in the inteiest of auministeiing the
uebtoi anu facilitating the piepaiation anu
implementation of a Rehabilitation Plan;

(b) in oiuei to pioviue a substitute lien, moitgage
oi pleuge of piopeity unuei this Act;

(c) foi payments maue to meet auministiative
expenses as they aiise;

(u) foi payments to victims of quasi uelicts upon a
showing that the claim is valiu anu the uebtoi has
insuiance to ieimbuise the uebtoi foi the
payments maue;

(e) foi payments maue to iepuichase piopeity of
the uebtoi that is auctioneu off in a juuicial oi
extiajuuicial sale unuei. This Act; oi

(f) foi payments maue to ieclaim piopeity of the
uebtoi helu puisuant to a possessoiy lien.

Sec. 49. Sale of Assets
- Piinciple of uebtoi-in-place oi uebtoi-in-
possession
> Reason why oiuinaiy acts still iequiie
appioval of the uebtoi

01 J7.G=W->-; #NN-?N

!"#" %&" 9@9A0+ ,-." A"
(l) Encumbeieu piopeity shall iefei to ieal oi
peisonal piopeity of the uebtoi upon which a lien
attaches.

!"#" %&" 9@9A0+ ,-." 9(" J<<-.?N &< ?E-
6&==-7.-=-7? ]>;->" - 0nless otheiwise
pioviueu foi in this Act, the couit's issuance of a
Commencement 0iuei shall, in auuition to the
effects of a Stay oi Suspension 0iuei uesciibeu in
Section 16 heieof:

(a) vest the iehabilitation with all the poweis anu
functions pioviueu foi this Act, such as the iight to
ieview anu obtain iecoius to which the uebtoi's
management anu uiiectois have access, incluuing
bank accounts oi whatevei natuie of the uebtoi
subject to the appioval by the couit of the
peifoimance bonu fileu by the iehabilitation
ieceivei;

(b) piohibit oi otheiwise seive as the legal basis
ienueiing null anu voiu the iesults of any
extiajuuicial activity oi piocess to seize piopeity,
sell encumbeieu piopeity, oi otheiwise attempt to
collection oi enfoice a claim against the uebtoi
aftei commencement uate unless otheiwise
alloweu in this Act, subject to the piovisions of
Section Su heieof;

(c) seive as the legal basis foi ienueiing null anu
voiu any setoff aftei the commencement uate of
any uebt oweu to the uebtoi by any of the uebtoi's
cieuitois;

(u) seive as the legal basis foi ienueiing null anu
voiu the peifection of any lien against the uebtoi's
piopeity aftei the commencement uate; anu

(e) consoliuate the iesolution of all legal
pioceeuings by anu against the uebtoi to the couit
Pioviueu. Bowevei, That the couit may allow the

continuation of cases on othei couits wheie the
uebtoi hau initiateu the suit.

Attempts to seek legal of othei iesouice against
the uebtoi outsiue these pioceeuings shall be
sufficient to suppoit a finuing of inuiiect contempt
of couit.

!"#" %&" 9@9A0+ ,-." *@" ,C4- &> L8N3&NC4 &<
J7.G=W->-; 2>&3->?T &< ?E- L-W?&> C7; #NN-?N
&< DE8>; 2C>?8-N b-4; WT L-W?&>" I The couit may
authoiize the sale, tiansfei, conveyance oi
uisposal of encumbeieu piopeity of the uebtoi, oi
piopeity of otheis helu by the uebtoi wheie theie
is a secuiity inteiest peitaining to thiiu paities
unuei a financial, cieuit oi othei similai
tiansactions if, upon application of the
iehabilitation ieceivei anu with the consent of the
affecteu owneis of the piopeity, oi secuieu
cieuitois in the case of encumbeieu piopeity of
the uebtoi anu, aftei notice anu heaiing, the couit
ueteimines that:

(a) such sale, tiansfei, conveyance oi uisposal is
necessaiy foi the continueu opeiation of the
uebtoi's business; anu

(b) the uebtoi has maue aiiangements to pioviue
a substitute lien oi owneiship iight that pioviues
an equal level of secuiity foi the countei-paity's
claim oi iight.

Pioviueu, That piopeities helu by the uebtoi
wheie the uebtoi has authoiity to sell such as
tiust ieceipt oi consignment aiiangements may
be solu oi uisposeu of by the .uebtoi, if such sale
oi uisposal is necessaiy foi the opeiation of the
uebtoi's business, anu the uebtoi has maue
aiiangements to pioviue a substitute lien oi
owneiship iight that pioviues an equal level of
secuiity foi the countei-paity's claim oi iight.

Sale oi uisposal of piopeity unuei this section
shall not give iise to any ciiminal liability unuei
applicable laws.

!"#" %&" 9@9A0+ ,-." *9" #NN-?N &< L-W?&> b-4;
WT DE8>; 2C>?8-N" In the case of possessoiy
pleuges, mechanic's liens oi similai claims, thiiu
paities who have in theii possession oi contiol
piopeity of the uebtoi shall not tiansfei, conveyoi
otheiwise uispose of the same to peisons othei
than the uebtoi, unless upon piioi appioval of the
iehabilitation ieceivei. The iehabilitation ieceivei
may also:

(a) uemanu the suiienuei oi the tiansfei of the
possession oi contiol of such piopeity to the
iehabilitation ieceivei oi any othei peison,
subject to payment of the claims secuieu by any
possessoiy Iiens theieon;

(b) allow saiu thiiu paities to ietain possession oi
contiol, if such an aiiangement woulu moie likely
pieseive oi inciease the value of the piopeity in
question oi the total value of the assets of the
uebtoi; oi

(c) unueitake any othei uisposition of the saiu
piopeity as may be beneficial foi the
iehabilitation of the uebtoi, aftei notice anu
heaiing, anu appioval of the couit.

!"#" %&" 9@9A0+ ,-." *'" #NN-?N ,GWS-.? ?& !C38;
]WN&4-N.-7.-+ L-3>-.8C?8&7 C7; L8=87G?8&7 &<
`C4G-" - 0pon the application of a secuieu cieuitoi
holuing a lien against oi holuei of an owneiship
inteiest in piopeity helu by the uebtoi that is
subject to potentially iapiu obsolescence,
uepieciation oi uiminution in value, the couit
shall, aftei notice anu heaiing, oiuei the uebtoi oi
iehabilitation ieceivei to take ieasonable steps
necessaiy to pievent the uepieciation. If
uepieciation cannot be avoiueu anu such
uepieciation is jeopaiuizing the secuiity oi
piopeity inteiest of the secuieu cieuitoi oi ownei,
the couit shall:

(a) allow the encumbeieu piopeity to be
foiecloseu upon by the secuieu cieuitoi accoiuing
to the ielevant agieement between the uebtoi anu
the secuieu cieuitoi, applicable iules of pioceuuie
anu ielevant legislation: Pioviueu. That the
pioceeus of the sale will be uistiibuteu in
accoiuance with the oiuei piesciibeu unuei the
iules of concuiience anu piefeience of cieuits; oi

(b) upon motion of, oi with the consent of the
affecteu secuieu cieuitoi oi inteiest ownei. oiuei
the conveyance of a lien against oi owneiship
inteiest in substitute piopeity of the uebtoi to the
secuieu cieuitoi: Pioviueu. That othei cieuitois
holuing liens on such piopeity, if any, uo not
object theieto, oi, if such piopeity is not available;

(c) oiuei the conveyance to the secuieu cieuitoi
oi holuei . of an owneiship inteiest of a lien on the
iesiuual funus fiom the sale of encumbeieu
piopeity uuiing the pioceeuings; oi

(u) allow the sale oi uisposition of the piopeity:
Pioviueu. That the sale oi uisposition will
maximize the value of the piopeity foi the benefit
of the secuieu cieuitoi anu the uebtoi, anu the

pioceeus of the sale will be uistiibuteu in
accoiuance with the oiuei piesciibeu unuei the
iules of concuiience anu piefeience of cieuits.

Nain Biffeience between Sec. Su anu Sec. SS of the
FRIA
\!I# 2>&58N8&7 ,-." *@

,-." *'
YE& Z844
W-7-<8?f

Bebtoi
(anyway, a
substitute
lien has been
pioviueu)

Cieuitoi

8" D>-C?=-7? &< 6&7?>C.?N

91 6&7<8>=C?8&7 &> D->=87C?8&7 &<
6&7?>C.?N

,-.?8&7 *("Q"#&0-#)0 +* =+)0"&!0'> - 0nless
cancelleu by viitue of a final juugment of a couit of
competent juiisuiction issueu piioi to the
issuance of the Commencement 0iuei, oi at
anytime theieaftei by the couit befoie which the
iehabilitation pioceeuings aie penuing, all valiu
anu subbsisting contiacts of the uebtoi with
cieuitois anu othei thiiu paities as at the
commencement uate shall continue in
foice: <"+?/$#$2 That 5/01/) ninety :BZE uays
following the commencement of pioceeuings, the
uebtoi, with the consent of the iehabilitation
ieceivei, shall notify each contiactual countei-
paity of whethei it is confiiming the paiticulai
contiact. Contiactual obligations of the uebtoi
aiising oi peifoimeu uuiing this peiiou, anu
afteiwaius foi confiimeu contiacts, shall be
consiueieu auministiative expenses. Contiacts not
confiimeu within the iequiieu ueauline shall be
consiueieu teiminateu. Claims foi actual uamages,
if any, aiising as a iesult of the election to
teiminate a contiact shall be consiueieu a pie-
commencement claim against the uebtoi. Nothing
containeu heiein shall pievent the cancellation oi
teimination of any contiact of the uebtoi foi any
giounu pioviueu by law.

,-.?8&7 9)" =+--#)!#-#)0 +* <"+!##$/)7' &)$
H''(&)!# +* & =+--#)!#-#)0 ["$#"> - The
iehabilitation pioceeuings shall commence upon
the issuance of the Commencement 0iuei, which
shall:
(q) incluue s Stay oi Suspension 0iuei which
shall:
heiein.

Someia Book:
Confiimation effecteu by notice to the
contiactual countei-paity, within 9u uays
fiom the commencement of the pioceeuings
Teimination effecteu by the lapse of the
9u-uay ueauline without a notice of
confiimation, subject to a claim foi actual
uamages aiising as a iesult of the
teimination.

Notes:
Befault valiu anu subsisting contiacts
shall continue to be in foice, PR0vIBEB that
within 9u uays following the
commencement of pioceeuings, a
notification of confiimation woulu be sent
to notify the countei-paity with the consent
of the iehabilitation ieceivei

Confiimeu contiacts consiueieu
auministiative expenses
Teiminateu contiacts (Contiacts not
confiimeu) claims aiising fiom these
contiacts shall be consiueieu a pie-
commencement claim against the uebtoi

01 #5&8;C7.- 2>&.--;87PN

,-.?8&7 *F"V#'!/''/+) +" ;(44/08 +* =#"0&/) Pie-
commencement Q"&)'&!0/+)'> Any tiansaction
occuiiing piioi to commencement uate enteieu
into by the uebtoi oi involving its funus oi assets
may be iescinueu oi ueclaieu null anu voiu on the
giounu that the same was executeu with intent to
uefiauu a cieuitoi oi cieuitois oi which constitute
unuue piefeience of cieuitois. Without limiting
the geneiality of the foiegoing, a uisputable
piesumption of such uesign shall aiise if the
tiansaction:
(a) pioviues unieasonably inauequate

consiueiation to the uebtoi anu is
executeu within ninety (9u) uays piioi to
the commencement uate;
(b) involves an acceleiateu payment of a
claim to a cieuitoi within ninety (9u)
uays piioi to the commencement uate;
(c) pioviues secuiity oi auuitional
secuiity executeu within ninety (9u) uays
piioi to the commencement uate;
(u) involves cieuitois, wheie a cieuitoi
obtaineu, oi ieceiveu the benefit of, moie
than its 6"+ "&0& shaie in the assets of the
uebtoi, executeu at a time when the
uebtoi was insolvent; oi
(e) is intenueu to uefeat, uelay oi hinuei
the ability of the cieuitois to collect
claims wheie the effect of the tiansaction
is to put assets of the uebtoi beyonu the
ieach of cieuitois oi to otheiwise
piejuuice the inteiests of cieuitois.
<"+?/$#$2 1+5#?#"2 That nothing in this section
shall pievent the couit fiom iescinuing oi
ueclaiing as null anu voiu a tiansaction on othei
giounus pioviueu by ielevant legislation anu
juiispiuuence: <"+?/$#$2 *("01#"2 That the
piovisions of the Civil Coue on iescission shall in
any case apply to these tiansactions.

,-.?8&7 *:"@!0/+)' *+" V#'!/''/+) +" ;(44/08> - (a)
The iehabilitation ieceivei oi, with his confoimity,
any cieuitoi may initiate anu piosecute any action
to iescinu, oi ueclaie null anu voiu any
tiansaction uesciibeu in Section S8 heieof. If the
iehabilitation ieceivei uoes not consent to the
filing oi piosecution of such action,
(b) If leave of couit is gianteu unuei subsection
(a), the iehabilitation ieceivei shall assign anu
tiansfei to the cieuitoi all iights, title anu inteiest
in the chose in action oi subject mattei of the
pioceeuing, incluuing any uocument in suppoit
theieof.
(c) Any benefit ueiiveu fiom a pioceeuing taken
puisuant to subsection (a), to the extent of his
claim anu the costs, belongs exclusively to the
cieuitoi instituting the pioceeuing, anu the
suiplus, if any, belongs to the estate.
(u) Wheie, befoie an oiuei is maue unuei
subsection (a), the iehabilitation ieceivei (oi
liquiuatoi) signifies to the couit his ieauiness to
institute the pioceeuing foi the benefit of the
cieuitois, the oiuei shall fix the time within which
he shall uo so anu, m that case, the benefit ueiiveu
fiom the pioceeuing, if instituteu within the time
limits so fixeu, belongs to the estate.

Someia Book:
Avoiuance Pioceeuing peimits ceitain
tiansaction enteieu into piioi the
commencement uate to be iescinueu oi
nullifieu, anu an asset tiansfeiieu to the
tiansaction, oi its value, to be iecoveieu foi
the benefit of the cieuitois

Tiansactions that may be nullifieu oi
iescinueu:

! Enteieu into by the uebtoi oi
involves the uebtois assets
! Piioi the commencement uate
! Executeu to uefiauu oi in unuue
piefeience of cieuitois (Section S8
gives a list of situations that give
iise to a uisputable piesumption
that such tiansaction was in fiauu
of cieuitois)
Notes:
Who may initiate anu piosecute a
tiansaction null anu voiu.
! Rehabilitation ieceivei oi cieuitoi
with the rehabilitation receivers
confoimity
If without iehabilitation ieceivei consent,
cieuitoi may seek leave of couit to
commence the action

S" !-ECW848?C?8&7 24C7
91 B-7->C4 6&7.-3?N

Section 4 (ii) V#1&3/4/0&0/+) <4&) shall iefei to a
plan by which the financial well-being anu
viability of an insolvent uebtoi can be iestoieu
using vaiious means incluuing, but not limiteu to,
uebt foigiveness, uebt iescheuuling,
ieoiganization oi quasi-ieoiganization, uacion en
pago, uebt-equity conveision anu sale of the
business (oi paits of it) as a going concein, oi
setting-up of new business entity as piesciibeu in
Section 62 heieof, oi othei similai aiiangements
as may be appioveu by the couit oi cieuitois.

,-.?8&7 )0"=+)0#)0' +* & V#1&3/4/0&0/+) <4&)> The
Rehabilitation Plan shall, as a minimum:
(a) specify the unueilying assumptions,
the financial goals anu the pioceuuies
pioposeu to accomplish such goals;
(b) compaie the amounts expecteu to be
ieceiveu by the cieuitois unuei the
Rehabilitation Plan with those that they
will ieceive if liquiuation ensues within
the next one hunuieu twenty (12u) uays;
contain infoimation sufficient to give

the vaiious classes of cieuitois a
ieasonable basis foi ueteimining whethei
suppoiting the Plan is in theii financial
inteiest when compaieu to the immeuiate
liquiuation of the uebtoi, incluuing any
ieuuction of piincipal inteiest anu
penalties payable to the cieuitois;
(u) establish classes of voting cieuitois;
(e) establish subclasses of voting
cieuitois if piioi appioval has been
gianteu by the couit;
(f) inuicate how the insolvent uebtoi will
be iehabilitateu incluuing, but not limiteu
to, uebt foigiveness, uebt iescheuuling,
ieoiganization oi quasi-
ieoiganization. W&!/+) #) 6&7+2 uebt-
equity conveision anu sale of the business
(oi paits of it) as a going concein, oi
setting-up of a new business entity oi
othei similai aiiangements as may be
necessaiy to iestoie the financial well-
being anu visibility of the insolvent
uebtoi;
(g) specify the tieatment of each class oi
subclass uesciibeu in subsections (u) anu
(e);
(h) pioviue foi equal tieatment of all
claims within the same class oi subclass,
unless a paiticulai cieuitoi voluntaiily
agiees to less favoiable tieatment;
(i) ensuie that the payments maue unuei
the plan follow the piioiity establisheu
unuei the piovisions of the Civil Coue on
concuiience anu piefeience of cieuits
anu othei applicable laws;
(j) maintain the secuiity inteiest of
secuieu cieuitois anu pieseive the
liquiuation value of the secuiity unless
such has been waiveu oi mouifieu
voluntaiily;
(k) uisclose all payments to cieuitois foi
pie-commencement uebts maue uuiing
the pioceeuings anu the justifications
theieof;
(1) uesciibe the uisputeu claims anu the
piovisioning of funus to account foi
appiopiiate payments shoulu the claim
be iuleu valiu oi its amount aujusteu;
(m) iuentify the uebtoi's iole in the
implementation of the Plan;
(n) state any iehabilitation covenants of
the uebtoi, the bieach of which shall be
consiueieu a mateiial bieach of the Plan;
(o) iuentify those iesponsible foi the
futuie management of the uebtoi anu the
supeivision anu implementation of the
Plan, theii affiliation with the uebtoi anu
theii iemuneiation;
(p) auuiess the tieatment of claims
aiising aftei the confiimation of the
(q) iequiie the uebtoi anu its countei-
paities to auheie to the teims of all
contiacts that the uebtoi has chosen to
confiim;
(i) aiiange foi the payment of all
outstanuing auministiative expenses as a
conuition to the Plan's appioval unless
such conuition has been waiveu in wiiting
by the cieuitois conceineu;
(s) aiiange foi the payment" of all
outstanuing taxes anu assessments, oi an
aujusteu amount puisuant to a
compiomise settlement with the BlR 0i
othei applicable tax authoiities;
(t) incluue a ceitifieu copy of a ceitificate
of tax cleaiance oi eviuence of a
compiomise settlement with the BIR;
(u) incluue a valiu anu binuing i(,solution
of a meeting of the uebtoi's stockholueis
to inciease the shaies by the iequiieu
amount in cases wheie the Plan
contemplates an auuitional issuance of
shaies by the uebtoi;
(v) state the compensation anu status, if
any, of the iehabilitation ieceivei aftei
the appioval of the Plan; anu
(w) contain piovisions foi conciliation
anuoi meuiation as a pieiequisite to
couit assistance oi inteivention in the
event of any uisagieement in the
inteipietation oi implementation of the

Section 4 (ss) R+0/)7 !"#$/0+" shall iefei to a
cieuitoi that is a membei of a class of cieuitois,
the consent of which is necessaiy foi the appioval
of a Rehabilitation Plan unuei this Act.

,-.?8&7 *A"<+'09!+--#)!#-#)0 H)0#"#'0> - The
iate anu teim of inteiest, if any, on secuieu anu
unsecuieu claims shall be ueteimineu anu
pioviueu foi in the appioveu Rehabilitation Plan.

,-.?8&7 **"<+'09!+--#)!#-#)0 K+&)' &)$
[34/7&0/+)'> - With the appioval of the couit upon
the iecommenuation of the iehabilitation ieceivei,
the uebtoi, in oiuei to enhance its iehabilitation.
may:
(a) entei into cieuit aiiangements; oi
(b) entei into cieuit aiiangements,

secuieu by moitgages of its
unencumbeieu piopeity oi seconuaiy
moitgages of encumbeieu piopeity with
the appioval of senioi secuieu paities
with iegaiu to the encumbeieu piopeity;
oi
(c) incui othei obligations as may be
essential foi its iehabilitation.
The payment of the foiegoing obligations shall be
consiueieu auministiative expenses unuei this
Act.

Someia Book:
Rehabilitation Plan may incluue:
! Bebt Foigiveness conuonation oi
waivei of ceitain claims
! Bebt Rescheuuling extension of
time foi the payment of claim
! Reoiganization oi Quasi-
ieoiganization change in the
equity, coipoiate oi opeiating
stiuctuie of the uebtoi
! Bacion en Pago the assignment of
assets as payment foi ceitain
claims
! Bebt to equity conveision the
issuance of owneiship inteiests as
payment foi ceitain claims
! Sale of business as a going concein
useu to geneiate income to pay
off claims
! Setting-up of new business entities

01 6>C= L&Z7 J<<-.?

,-.?8&7 )'"=+)'(40&0/+) 5/01 W#30+" &)$
="#$/0+"'> if the couit gives uue couise to the
petition, the iehabilitation ieceivei shall confei
with the uebtoi anu all the classes of cieuitois,
anu may consiuei theii views anu pioposals ill the
ieview, ievision oi piepaiation of a new

,-.?8&7 )A"="#$/0+" @66"+?&4 +* V#1&3/4/0&0/+)
<4&)> The iehabilitation ieceivei shall notify the
cieuitois anu stakeholueis that the Plan is ieauy
foi theii examination. Within twenty (2Q) uays
fiom the saiu notification, the iehabilitation
ieceivei shall convene the cieuitois, eithei as a
whole oi pei class, foi puiposes of voting on the
appioval of the Plan. The Plan shall be ueemeu
iejecteu unless appioveu by all classes of
cieuitois w hose iights aie auveisely mouifieu oi
affecteu by the Plan. Foi puiposes of this section,
the Plan is ueemeu to have been appioveu by a
class of cieuitois if membeis of the saiu class
holuing moie than fifty peicent (Su%) of the total
claims of the saiu class vote in favoi of the Plan.
The votes of the cieuitois shall be baseu solely on
the amount of theii iespective claims baseu on the
iegistiy of claims submitteu by the iehabilitation
ieceivei puisuant to Section 44 heieof.
Notwithstanuing the iejection of the
Rehabilitation Plan, the couit may confiim the
Rehabilitation Plan if all of the following
ciicumstances aie piesent:
(a)The Rehabilitation Plan complies with
the iequiiements specifieu in this Act.
(b) The iehabilitation ieceivei
iecommenus the confiimation of the
(c) The shaieholueis, owneis oi paitneis
of the juiiuical uebtoi lose at least theii
contiolling inteiest as a iesult of the
Rehabilitation Plan; anu
(u) The Rehabilitation Plan woulu likely
pioviue the objecting class of cieuitois
with compensation which has a net
piesent value gieatei than that which
they woulu have ieceiveu if the uebtoi
weie unuei liquiuation.

,-.?8&7 )*"I(3-/''/+) +* V#1&3/4/0&0/+) <4&) 0+
01# =+("0> - 1fthe Rehabilitation Plan is appioveu,
the iehabilitation ieceivei shall submit the same
to the couit foi confiimation. Within five (S) uays
fiom ieceipt of the Rehabilitation Plan, the couit
shall notify the cieuitois that the Rehabilitation
Plan has been submitteu foi confiimation, that
any cieuitoi may obtain copies of the
Rehabilitation Plan anu that any cieuitoi may file
an objection theieto.

,-.?8&7 ))"U/4/)7 +* [3.#!0/+)' 0+ V#1&3/4/0&0/+)
<4&)> A cieuitoi may file an objection to the
Rehabilitation Plan within twenty (2u) uays fiom
ieceipt of notice fiom the couit that the
Rehabilitation Plan has been submitteu foi
confiimation. 0bjections to a Rehabilitation Plan
shall be limiteu to the following:
(a) The cieuitois' suppoit was inuuceu by
fiauu;
(b)The uocuments oi uata ielieu upon in
the Rehabilitation Plan aie mateiially
false oi misleauing; oi
(c)The Rehabilitation Plan is in fact not
suppoiteu by the voting cieuitois.

,-.?8&7 )("X#&"/)7 +) 01# [3.#!0/+)'> - If
objections have been submitteu uuiing the

ielevant peiiou, the couit shall issue an oiuei
setting the time anu uate foi the heaiing oi
heaiings on the objections.
If the couit finus meiit in the objection, it shall
oiuei the iehabilitation ieceivei oi othei paity to
cuie the uefect, whenevei feasible. If the couit
ueteimines that the uebtoi acteu in bau faith, oi
that it is not feasible to cuie the uefect, the couit
shall conveit the pioceeuings into one foi the
liquiuation of the uebtoi unuei Chaptei v of this
Act.

,-.?8&7 )F"=+)*/"-&0/+) +* 01# V#1&3/4/0&0/+)
<4&)> If no objections aie fileu within the
ielevant peiiou oi, if objections aie fileu, the couit
finus them lacking in meiit, oi ueteimines that the
basis foi the objection has been cuieu, oi
ueteimines that the uebtoi has complieu with an
oiuei to cuie the objection, the couit shall issue an
oiuei confiiming the Rehabilitation Plan.
The couit may confiim the Rehabilitation Plan
notwithstanuing uniesolveu uisputes ovei claims
if the Rehabilitation Plan has maue auequate
piovisions foi paying such claims.
Foi the avoiuance of uoubt, the piovisions of othei
laws to the contiaiy notwithstanuing, the couit
shall have the powei to appiove oi implement the
Rehabilitation Plan uespite the lack of appioval, oi
objection fiom the owneis, paitneis oi
stockholueis of the insolvent
uebtoi: <"+?/$#$2 That the teims theieof aie
necessaiy to iestoie the financial well-being anu
viability of the insolvent uebtoi.

,-.?8&7 ):"\**#!0 +* =+)*/"-&0/+) +* 01#
V#1&3/4/0&0/+) <4&)2 - The confiimation of the
Rehabilitation Plan by the couit shall iesult in the
following:
(a) The Rehabilitation Plan anu its
piovisions shall be binuing upon the
uebtoi anu all peisons who may be
affecteu by . it, incluuing the cieuitois,
whethei oi not such peisons have
paiticipateu in the pioceeuings oi
opposeu the Rehabilitation Plan oi
whethei oi not theii claims have been
scheuuleu;
(b) The uebtoi shall comply with the
piovisions of the Rehabilitation Plan anu
shall take all actions necessaiy to caiiy
out the Plan;
(c) Payments shall be maue to the
cieuitois in accoiuance with the
piovisions of the Rehabilitation Plan;
(u) Contiacts anu othei aiiangements
between the uebtoi anu its cieuitois shall
be inteipieteu as continuing to apply to
the extent that they uo not conflict with
the piovisions of the Rehabilitation Plan;
(e) Any compiomises on amounts oi
iescheuuling of timing of payments by the
uebtoi shall be binuing on cieuitois
iegaiuless of whethei oi not the Plan is
successfully implement; anu
(f) Claims aiising aftei appioval of the
Plan that aie otheiwise not tieateu by the
Plan aie not subject to any Suspension
0iuei.
The 0iuei confiiming the Plan shall comply with
Rules S6 of the Rules of Couit: <"+?/$#$2
1+5#?#"2 That the couit may maintain juiisuiction
ovei the case in oiuei to iesolve claims against the
uebtoi that iemain contesteu anu allegations that
the uebtoi has bieacheu the Plan.

,-.?8&7 (@" K/&3/4/08 +* P#)#"&4 <&"0)#"' +* &
<&"0)#"'1/6 *+" J)6&/$ M&4&)!#' J)$#" &)
@66"+?#$ <4&)> - The appioval of the Plan shall not
affect the iights of cieuitois to puisue actions
against the geneial paitneis of a paitneiship to
the extent they aie liable unuei ielevant
legislation foi the uebts theieof.

,-.?8&7 (9" Q"#&0-#)0 +* @-+()0' +* H)$#30#$)#''
+" [34/7&0/+)' U+"7/?#) +" V#$(!#$> - Amounts of
any inuebteuness oi obligations ieuuceu oi
foigiven in connection with a Plan's appioval shall
not be subject to any tax in fuitheiance of the
puiposes of this Act.

,-.?8&7 (0" <#"/+$ *+" =+)*/"-&0/+) +* 01#
V#1&3/4/0&0/+) <4&)> - The couit shall have a
maximum peiiou of one (1) yeai fiom the uate of
the filing of the petition to confiim a
If no Rehabilitation Plan is confiimeu within the
saiu peiiou, the pioceeuings may upon motion
oi -+0( 6"+6/+, be conveiteu into one foi the
liquiuation of the uebtoi .

,-.?8&7 ('" @!!+()0/)7 W/'!1&"7# +* V#1&3/4/0&0/+)
V#!#/?#"> - 0pon the confiimation of the
Rehabilitation Plan, the iehabilitation ieceivei
shall pioviue a final iepoit anu accounting to the
couit. 0nless the Rehabilitation Plan specifically
iequiies anu uesciibes the iole of the
iehabilitation ieceivei aftei the appioval of the
Rehabilitation Plan, the couit shall uischaige the

iehabilitation ieceivei of his uuties.

Someia Book:
Rehabilitation Plan is appioveu when
! Nembeis of a class of cieuitois
holuing moie than Su% of total
claims vote in favoi of the plan
! Bue to the expansive uefinition of
claims, it may be haiu to calculate
the actual vote foi all classes of
cieuitois

Ciam Bown situation wheie the couit
confiims the Rehabilitation Plan ovei the
objection of the cieuitois
! Binus the insolvent uebtoi anu
cieuitois, whethei oi not they
paiticipateu pioceeuings oi
opposeu the Rehabilitation Plan

Ciam Bown is peimitteu only when:
! Rehabilitation Plan complies with
the iequiiements specifieu in the
FRIA
! Rehabilitation ieceivei
iecommenus the confiimation
! Shaieholueis, owneis oi paitneis
of the juiiuical uebtoi lose at least
theii contiolling inteiest as a iesult
of the Rehabilitation Plan
! Rehabilitation Plan woulu likely
pioviue the objecting class of
cieuitois with compensation
gieatei than what they woulu
ieceive thiough liquiuation

Couit may also confiim a Rehabilitation
Plan ovei the objection of the owneis,
paitneis oi stockholueis of the insolvent
uebtoi, if the iehabilitation plan is
necessaiy to iestoie the financial well being
of the insolvent uebtoi.

M2I 5 ,J6 /0@@(1
Facts: The Bank of the Philippine Islanus (BPI)
extenueu cieuit accommouations to the ASB
uioup, secuieu by a ieal estate moitgage ovei two
(2) piopeities locateu in uieenhills, San }uan. ASB
uioup then fileu a petition foi iehabilitation anu
suspension of payments. The Rehabilitation Plan
pioviues a $&!/+) #) 6&7+ by the ASB uioup to BPI
of one of the piopeities moitgageu to the lattei. In
tuin, ASB uioup woulu iequiie the ielease of the
othei piopeity moitgageu to BPI, to be theieaftei
placeu in the asset pool. The uacion woulu
constitute full payment of the entiie obligation uue
to BPI because the balance was then to be
consiueieu waiveu, as pei the Rehabilitation Plan.
BPI opposeu the Rehabilitation Plan anu moveu foi
the dismissal of the ASB Groups petition for
rehabilitation. SEC approved ASB Groups proposed
iehabilitation plan. BPI fileu a petition foi ieview of
the oiuei befoie the SEC en banc, aiguing that the
Order constituted an arbitrary violation of BPIs
fieeuom anu iight to contiact since the
Rehabilitation Plan compelleu BPI to entei into a
uacion en pago agieement with the ASB uioup. The
SEC en banc uenieu the petition. The CA also uenieu
BPIs petition. BPI elevated the case to the SC. It
aigues that the uacion en pago is a foim of coeicion
oi compulsion, anu violative of the iights of secuieu
cieuitois.
Issue: W0N the iehabilitation plan is violative of
BPIs rights as cieuitoi. (N0)
Belu: The meie fact that the Rehabilitation Plan
pioposes a uacion en pago appioach uoes not
ienuei it uefective on the giounu of impaiiment of
the iight to contiact. Bacion en pago is a special
moue of payment wheie the uebtoi offeis anothei
thing to the cieuitoi who accepts it as equivalent of
payment of an outstanuing uebt. The unueitaking
ieally paitakes in a sense of the natuie of sale, that
is, the cieuitoi is ieally buying the thing oi piopeity
of the uebtoi, the payment foi which is to be
charged against the debtors debt. As such, the
essential elements of a contiact of sale, namely;
consent, object ceitain, anu cause oi consiueiation
must be piesent.Being a foim of contiact, the uacion
en pago agieement cannot be peifecteu without the
consent of the paities involveu.

0thei Remeuies foi BPI.
If BPI uoes not finu the uacion en pago
mouality acceptable, the ASB uioup can
piopose to settle its uebts at such amount
as is equivalent to the selling piice of the
moitgageu piopeities.
If BPI still iefuses this option, it can asseit
its iights in the liquiuation anu uistiibution
of the ASB Groups assets. It will not lose its
status as a secuieu cieuitoi, ietaining its
piefeience ovei unsecuieu cieuitois when
the assets of the coipoiation aie finally
liquiuateu.

R" D->=87C?8&7 2>&.--;87PN

,-.?8&7 (A" Q#"-/)&0/+) +* <"+!##$/)7'> - The
iehabilitation pioceeuings unuei Chaptei II shall,
upon motion by any stakeholuei oi the
iehabilitation ieceivei be teiminateu by oiuei of
the couit eithei ueclaiing a successful
implementation of the Rehabilitation Plan oi a

failuie of iehabilitation.
Theie is failuie of iehabilitation in the following
cases:
(a) Bismissal of the petition by the couit;
(b) The uebtoi fails to submit a
(c) 0nuei the Rehabilitation Plan
submitteu by the uebtoi, theie is no
substantial likelihoou that the uebtoi can
be iehabilitateu within a ieasonable
peiiou;
(u) The Rehabilitation Plan oi its
amenument is appioveu by the couit but
in the implementation theieof, the uebtoi
fails to peifoim its obligations theie
unuei oi theie is a failuie to iealize the
objectives, taigets oi goals set foith
theiein, incluuing the timelines anu
conuitions foi the settlement of the
obligations uue to the cieuitois anu othei
claimants;
(e) The commission of fiauu in secuiing
the appioval of the Rehabilitation Plan oi
its amenument; anu
(f) 0thei analogous ciicumstances as may
be uefineu by the iules of pioceuuie.
0pon a bieach of, oi upon a failuie of the
Rehabilitation Plan the couit, upon motion by an
affecteu paity may:
(1) Issue an oiuei uiiecting that the
bieach be cuieu within a specifieu peiiou
of time, falling which the pioceeuings may
be conveiteu to a liquiuation;
(2) Issue an oiuei conveiting the
pioceeuings to a liquiuation;
(S) Allow the uebtoi oi iehabilitation
ieceivei to submit amenuments to the
Rehabilitation Plan, the appioval of which
shall be goveineu by the same
iequiiements foi the appioval of a
Rehabilitation Plan unuei this
subchaptei;
(4) Issue any othei oiuei to iemeuy the
bieach consistent with the piesent
iegulation, othei applicable law anu the
best inteiests of the cieuitois; oi
(S) Enfoice the applicable piovisions of
the Rehabilitation Plan thiough a wiit of
execution.

,-.?8&7 (*" \**#!0' +* Q#"-/)&0/+)> - Teimination
of the pioceeuings shall iesult in the following:
(a) The uischaige of the iehabilitation
ieceivei subject to his submission of a
final accounting; anu
(b) The lifting of the Stay 0iuei anu any
othei couit oiuei holuing in abeyance any
action foi the enfoicement of a claim
against the uebtoi.
<"+?/$#$2 1+5#?#"2 That if the teimination of
pioceeuings is uue to failuie of iehabilitation oi
uismissal of the petition foi ieasons othei than
technical giounus, the pioceeuings shall be
immeuiately conveiteu to liquiuation as pioviueu
in Section 92 of this Act.
Notes:
Initializeu thiough a motion by any
stakeholuei oi by the iehabilitation
ieceivei to teiminate the pioceeuings upon
an oiuei of the couit ueclaiing
! Successful implementation of the
Rehabilitation Plan
! Failuie of iehabilitation in the ff:
Bismissal of the couit
Failuie of uebtoi to submit
iehabilitation plan
No substantial likelihoou
that iehabilitation woulu
occui within a ieasonable
peiiou
Failuie of uebtoi to
implement the
iehabilitation plan
Commission of fiauu in
secuiing appioval foi the
iehabilitation plan
0thei analogous
ciicumstances

Effects of Teimination
! Bischaige of iehabilitation
ieceivei, subject to the submission
of a final accounting
! Lifting of Stay oiuei anu othei
couit holuing in abeyance of action
against claims

If teimination is uue to a failuie othei than
technical giounus pioceeuing will be
conveiteu to liquiuation

4" 6&75->N8&7 ?& O8aG8;C?8&7 2>&.--;87PN

,-.?8&7 :0" =+)?#"'/+) 38 01# =+("0 /)0+
K/Y(/$&0/+) <"+!##$/)7'> - Buiing the penuency of
couit-supeiviseu oi pie-negotiateu iehabilitation
pioceeuings, the couit may oiuei the conveision
of iehabilitation pioceeuings to liquiuation
pioceeuings puisuant to (a) Section 2S(c) of this
Act |(c)conveit the pioceeuings into one foi the
liquiuation of the uebtoi upon a finuing that:,
(1)the uebtoi is insolvent; anu (2)theie is no
substantial likelihoou foi the uebtoi to be
successfully iehabilitateu as ueteimineu in

accoiuance with the iules to be piomulgateu by
the Supieme Couit.j; oi
(b) Section 72 of this Act |<#"/+$ *+" =+)*/"-&0/+)
+* 01# V#1&3/4/0&0/+) <4&)> - The couit shall have a
maximum peiiou of one (1) yeai fiom the uate of
the filing of the petition to confiim a
Rehabilitation Plan. If no Rehabilitation Plan is
confiimeu within the saiu peiiou, the pioceeuings
may upon motion oi -+0( 6"+6/+, be conveiteu
into one foi the liquiuation of the uebtoij; oi
(c) Section 7S of this Act |\**#!0' +* Q#"-/)&0/+)> -
Teimination of the pioceeuings shall iesult in the
following:(a) The uischaige of the iehabilitation
ieceivei subject to his submission of a final
accounting; anu (b) The lifting of the Stay 0iuei
anu any othei couit oiuei holuing in abeyance any
action foi the enfoicement of a claim against the
uebtoij; oi
(u) Section 9u of this Act |At any time uuiing the
penuency of couit-supeiviseu oi pie-negotiateu
iehabilitation pioceeuings, the uebtoi may also
initiate liquiuation pioceeuings by filing a motion
in the same couit wheie the iehabilitation
pioceeuings aie penuing to conveit the
iehabilitation pioceeuings into liquiuation
pioceeuings. The motion shall be veiifieu, shall
contain oi set foith the same matteis iequiieu in
the pieceuing paiagiaph, anu state that the uebtoi
is seeking immeuiate uissolution anu teimination
of its coipoiate existence.j; oi
at any othei time upon the iecommenuation of the
iehabilitation ieceivei that the iehabilitation of
the uebtoi is not feasible. Theieupon, the couit
shall issue the Liquiuation 0iuei mentioneu in
Section 112 heieof.

Someia Book:
0nly available if iehabilitation is no longei
economically feasible oi it will no longei
pioviue bettei piesent value iecoveiy foi
cieuitois
! Rehabilitation anu liquiuation
cannot be unueitaken at the same
time

Notes:
Rehabilitation = Rescue
Liquiuation = Suiienuei

6" 2>-U7-P&?8C?-; !-ECW848?C?8&7

,-.?8&7 ()" <#0/0/+) 38 W#30+"> - An insolvent
uebtoi, by itself oi jointly with any of its cieuitois,
may file a veiifieu petition with the couit foi the
appioval of a pie-negotiateu Rehabilitation Plan
which has been enuoiseu oi appioveu by
cieuitois holuing at least two-thiius (2S) of the
total liabilities of the uebtoi, incluuing secuieu
cieuitois holuing moie than fifty peicent (Su%) of
the total secuieu claims of the uebtoi anu
unsecuieu cieuitois holuing moie than fifty
peicent (Su%) of the total unsecuieu claims of the
uebtoi. The petition shall incluue as a minimum:
(a) a scheuule of the uebtoi's uebts anu
liabilities;
(b) an inventoiy of the uebtoi's assets;
(c) the pie-negotiateu Rehabilitation Plan,
incluuing the names of at least thiee (S)
qualifieu nominees foi iehabilitation
ieceivei; anu
(u) a summaiy of uisputeu claims against
the uebtoi anu a iepoit on the
piovisioning of funus to account foi
appiopiiate payments shoulu any such
claims be iuleu valiu oi theii amounts
aujusteu.

,-.?8&7 ((" H''(&)!# +* ["$#"> - Within five (S)
woiking uays, anu aftei ueteimination that the
petition is sufficient in foim anu substance, the
couit shall issue an 0iuei which shall;
(a) iuentify the uebtoi, its piincipal
business of activityies anu its piincipal
place of business;
(b) ueclaie that the uebtoi is unuei
iehabilitation;
(c) summaiize the giounu.s foi the filling
of the petition;
(u) uiiect the publication of the 0iuei in a
newspapei of geneial ciiculation in the
Philippines once a week foi at least two
(2) consecutive weeks, with the fiist
publication to be maue within seven (7)
uays fiom the time of its issuance;
(e) uiiect the seivice by peisonal ueliveiy
of a copy of the petition on each cieuitoi
who is not a petitionei holuing at least ten
peicent (1u%) of the total liabilities of the
uebtoi, as ueteimineu in the scheuule
attacheu to the petition, within thiee (S)
uays;
(f) state that copies of the petition anu the
Rehabilitation Plan aie available foi
examination anu copying by any
inteiesteu paity;
(g) state that cieuitois anu othei
inteiesteu paities opposing the petition
oi Rehabilitation Plan may file theii
objections oi comments theieto within a
peiiou of not latei than twenty (2u) uays
fiom the seconu publication of the 0iuei;
(h) appoint a iehabilitation ieceivei, if
pioviueu foi in the Plan; anu
(i) incluue a Suspension oi Stay 0iuei as

uesciibeu in this Act.

,-.?8&7 (F" @66"+?&4 +* 01# <4&)> - Within ten (1u)
uays fiom the uate of the seconu publication of the
0iuei, the couit shall appiove the Rehabilitation
Plan unless a cieuitoi oi othei inteiesteu paity
submits an objection to it in accoiuance with the
next succeeuing section.

,-.?8&7 (:" [3.#!0/+) 0+ 01# <#0/0/+) +"
V#1&3/4/0&0/+) <4&)> - Any cieuitoi oi othei
inteiesteu paity may submit to the couit a veiifieu
objection to the petition oi the Rehabilitation Plan
not latei than eight (8) uays fiom the uate of the
seconu publication of the 0iuei mentioneu in
Section 77 heieof. The objections shall be limiteu
to the following:
(a) The allegations in the petition oi the
Rehabilitation Plan oi the attachments
theieto aie mateiially false oi misleauing;
(b) The majoiity of any class of cieuitois
uo not in fact suppoit the Rehabilitation
Plan;
(c) The Rehabilitation Plan fails to
accuiately account foi a claim against the
uebtoi anu the claim in not categoiically
ueclaieu as a contesteu claim; oi
(u) The suppoit of the cieuitois, oi any of
them was inuuceu by fiauu.
Copies of any objection to the petition of the
Rehabilitation Plan shall be seiveu on the uebtoi,
the iehabilitation ieceivei (if applicable), the
secuieu cieuitoi with the laigest claim anu who
suppoits the Rehabilitation Plan, anu the
unsecuieu cieuitoi with the laigest claim anu who
suppoits the Rehabilitation Plan.

,-.?8&7 F@" X#&"/)7 +) 01# [3.#!0/+)'> - Aftei
ieceipt of an objection, the couit shall set the same
foi heaiing. The uate of the heaiing shall be no
eailiei than twenty (2u) uays anu no latei than
thiity (Su) uays fiom the uate of the seconu
publication of the 0iuei mentioneu in Section 77
heieof. If the couit finus meiit in the objection, it
shall uiiect the uebtoi, when feasible to cuie the
uetect within a ieasonable peiiou. If the couit
ueteimines that the uebtoi oi cieuitois
suppoiting the Rehabilitation Plan acteu in bau
faith, oi that the objection is non-cuiable, the
couit may oiuei the conveision of the pioceeuings
into liquiuation. A finuing by the couit that the
objection has no substantial meiit, oi that the
same has been cuieu shall be ueemeu an appioval
of the Rehabilitation Plan.

,-.?8&7 F9" <#"/+$ *+" @66"+?&4 +* V#1&3/4/0&0/+)
<4&)> - The couit shall have a maximum peiiou of
one hunuieu twenty (12u) uays fiom the uate of
the filing of the petition to appiove the
Rehabilitation Plan. If the couit fails to act within
the saiu peiiou, the Rehabilitation Plan shall be
ueemeu appioveu.

,-.?8&7 F0" \**#!0 +* @66"+?&4> - Appioval of a Plan
unuei this chaptei shall have the same legal effect
as confiimation of a Plan unuei Chaptei II of this
Act.

,-.?8&7 :0" =+)?#"'/+) 38 01# =+("0 /)0+
K/Y(/$&0/+) <"+!##$/)7'> - Buiing the penuency of
couit-supeiviseu oi pie-negotiateu iehabilitation
pioceeuings, the couit may oiuei the conveision
of iehabilitation pioceeuings to liquiuation
pioceeuings puisuant to (a) Section 2S(c) of this
Act; oi (b) Section 72 of this Act; oi (c) Section 7S
of this Act; oi (u) Section 9u of this Act; oi at any
othei time upon the iecommenuation of the
iehabilitation ieceivei that the iehabilitation of
the uebtoi is not feasible. Theieupon, the couit
shall issue the Liquiuation 0iuei mentioneu in
Section 112 heieof.

Someia Notes:
Pie-negotiateu Rehabilitation is an
insolvency pioceeuing that commences as
an extia-juuicial pioceeuing but teiminates
as a juuicial one
It is a consensual contiact between
cieuitois anu uebtoi
Negotiateu befoie a petition is fileu in couit
Aftei a plan has been agieeu upon, a
veiifieu petition foi couit appioval of the
Pie-negotiateu iehabilitation plan will be
fileu but only if minimum vote
iequiiements aie met
! Appioval of cieuitois holuing at
least 2/3 of debtors total liabilities
! Secuieu cieuitois holuing moie
than Su% of total secuieu claims of
the uebtoi
! 0nsecuieu cieuitois holuing moie
than Su% of total unsecuieu claims
of the uebtoi

0ltimately iesults to a Ciam uown, affecting
all cieuitois whethei they paiticipateu in
the pioceeuings oi opposeu the plan.

L" ]G?U&<U6&G>? !-ECW848?C?8&7

,-.?8&7 F'" [(09+*9=+("0 +" H)*+"-&4 V#'0"(!0("/)7
@7"##-#)0' &)$ V#1&3/4/0&0/+) <4&)'> - An out-of-
cuit oi infoimal iestiuctuiing agieement oi
Rehabilitation Plan that meets the minimum
iequiiements piesciibeu in this chaptei is heieby
iecognizeu as consistent with the objectives of
this Act.

,-.?8&7 FA" S/)/-(- V#Y(/"#-#)0' +* [(09+*9
=+("0 +" H)*+"-&4 V#'0"(!0("/)7 @7"##-#)0' &)$
V#1&3/4/0&0/+) <4&)'> - Foi an out-of-couit oi
infoimal iestiuctuiingwoikout agieement oi
Rehabilitation Plan to qualify unuei this chaptei, it
must meet the following minimum iequiiements:
(a) The uebtoi must agiee to the out-of-
couit oi infoimal iestiuctuiingwoikout
agieement oi Rehabilitation Plan;
(b) It must be appioveu by cieuitois
iepiesenting at least sixty-seven (67%) of
the secuieu obligations of the uebtoi;
(c) It must be appioveu by cieuitois
iepiesenting at least seventy-five peicent
(7S%) of the unsecuieu obligations of the
uebtoi; anu
(u) It must be appioveu by cieuitois
holuing at least eighty-five peicent (8S%)
of the total liabilities, secuieu anu
unsecuieu, of the uebtoi.

91 B-7->C4 6&7.-3?N

Someia Book:
0ut-of Couit Rehabilitation - a consensual
contiact between an insolvent uebtoi which
implies that the two paities have negotiateu
anu agieeu on a iestiuctuiing of the
debtors claims without filing a petition in
couit
No petitions aie fileu with the couit

Ninimum vote Requiiement:

! Appioveu by uebtoi
! Secuieu cieuitois iepiesenting at
least 67% of secuieu obligations
! 0nsecuieu cieuitois iepiesenting
at least 7S% of unsecuieu
obligations
! Cieuitois holuing at least 8S% of
total liabilities, secuieu oi
unsecuieu

Nay be pieceueu by a Stanustill Agieement

01 M-7-<8?N &< ]G?U&<U6&G>? !-ECW848?C?8&7

,-.?8&7 F*" I0&)$'0/44 <#"/+$> - A stanustill peiiou
that may be agieeu upon by the paities penuing
negotiation anu finalization of the out-of-couit oi
infoimal iestiuctuiingwoikout agieement oi
Rehabilitation Plan contemplateu heiein shall be
effective anu enfoiceable not only against the
contiacting paities but also against the othei
cieuitois: <"+?/$#$2That (a) such agieement is
appioveu by cieuitois iepiesenting moie than
fifty peicent (Su%) of the total liabilities of the
uebtoi; (b) notice theieof is publishing in a
newspapei of geneial ciiculation in the
Philippines once a week foi two (2) consecutive
weeks; anu (c) the stanustill peiiou uoes not
exceeu one hunuieu twenty (12u) uays fiom the
uate of effectivity. The notice must invite cieuitois
to paiticipate in the negotiation foi out-of-couit
iehabilitation oi iestiuctuiing agieement anu
notify them that saiu agieement will be binuing on
all cieuitois if the iequiieu majoiity votes
piesciibeu in Section 84 of this Act aie met.

,-.?8&7 F)" ="&- W+5) \**#!0> - A
iestiuctuiingwoikout agieement oi
Rehabilitation Plan that is appioveu puisuant to
an infoimal woikout fiamewoik iefeiieu to in this
chaptei shall have the same legal effect as
confiimation of a Plan unuei Section 69 heieof.
The notice of the Rehabilitation Plan oi
iestiuctuiing agieement oi Plan shall be
publisheu once a week foi at least thiee (S)
consecutive weeks in a newspapei of geneial
ciiculation in the Philippines. The Rehabilitation
Plan oi iestiuctuiing agieement shall take effect
upon the lapse of fifteen (1S) uays fiom the uate
of the last publication of the notice theieof.

,-.?8&7 F(" @-#)$-#)0 +" S+$/*/!&0/+)> - Any
amenument of an out-of-couit
iestiuctuiingwoikout agieement oi
Rehabilitation Plan must be maue in accoiuance

with the teims of the agieement anu with uue
notice on all cieuitois.

,-.?8&7 FF" \**#!0 +* =+("0 @!0/+) +" [01#"
<"+!##$/)7'> - Any couit action oi othei
pioceeuings aiising fiom, oi ielating to, the out-
of-couit oi infoimal iestiuctuiingwoikout
agieement oi Rehabilitation Plan shall not stay its
implementation, unless the ielevant paity is able
to secuie a tempoiaiy iestiaining oiuei oi
injunctive ielief fiom the Couit of Appeals.

,-.?8&7 F:" =+("0 @''/'0&)!#> - The insolvent
uebtoi anuoi cieuitoi may seek couit assistance
foi the execution oi implementation of a
Rehabilitation Plan unuei this Chaptei, unuei such
iules of pioceuuie as may be piomulgateu by the
Supieme Couit.

Someia Book:
Stanustill Agieement consensual contiact
between the insolvent uebtoi anu its
cieuitois that allows the uebtoi not to pay
its liabilities as they fall uue anu pievent
cieuitois fiom taking fuithei actions
! Appioveu by cieuitois
iepiesenting moie than Su% of the
total liabilities of the uebtoi
! Notice of the agieement is
publisheu in a newspapei of
geneial ciiculation once a week foi
two weeks, inviting cieuitois to
paiticipate in the negotiation foi
the 0ut-of Couit Restiuctuiing
Agieement anu infoiming them
that if the minimum iequiieu vote,
the agieement woulu binu all
cieuitois
! Boes not extenu 12u uays fiom
uate of effectivity

If minimum vote iequiiement is met it will
iesult to a Ciam uown pioviueu that:
! 0RA shall be publisheu once a week
foi at least thiee weeks in a
newspapei of geneial ciiculation
! 0RA shall take effect upon the lapse
of 1S uays fiom uate of last
publication
! Any couit action oi pioceeuing
aiising fiom 0RA that meets
minimum vote ieq. shall not stay its
implementation, unless ielevant
paity is able to secuie a tempoiaiy
iestiaining oiuei oi injunctive
ielief fiom CA
! Insolvent uebtoi may seek
assistance foi the execution oi
implementation of 0RA that meets
minimum vote ieq.

LIQUIDATION: PHIMIES PART TO FOLLOW
/L-- 5&4G7?-->-; ?& ;& ?E8N 3C>?1

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