CHAPTER 2

CLASSIFICATION OF CREDITS
Art. 2241. With reference to specific movable property of the debtor, the following
claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any subdivision thereof;
(2) Claims arising from misappropriation, breach of trust, or malfeasance by
public officials committed in the performance of their duties, on the movables,
money or securities obtained by them;
(3) Claims for the unpaid price of movables sold, on said movables, so long as
they are in the possession of the debtor, up to the value of the same; and if the
movable has been resold by the debtor and the price is still unpaid, the lien may
be enforced on the price; this right is not lost by the immobilization of the thing
by destination, provided it has not lost its form, substance and identity; neither is
the right lost by the sale of the thing together with other property for a lump sum,
when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the
hands of the creditor, or those guaranteed by a chattel mortgage, upon the things
pledged or mortgaged, up to the value thereof;
(5) Credits for the making, repair, safekeeping or preservation of personal
property, on the movable thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods manufactured or the work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from the contract of
tenancy on shares, on the share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried, for the price of the contract
and incidental expenses, until their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to travellers by hotel
keepers, on the movables belonging to the guest as long as such movables are in
the hotel, but not for money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and harvest advanced to the
debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon the personal property of the lessee
existing on the immovable leased and on the fruits of the same, but not on money
or instruments of credit;
(13) Claims in favor of the depositor if the depositary has wrongfully sold the
thing deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or preference attaches
have been wrongfully taken, the creditor may demand them from any possessor,
within thirty days from the unlawful seizure. (1922a)

CREDITS OVER SPECIFIC PERSONAL PROPERTIES

a) The order in this article is not important
b) What is important is that:
1. Those credits which enjoy preference with respect to specific movables
exclude all others to the extent of the value of the personal property to
which the preference refers;
 2. If there are two or more credits with respect to the same specific movable
property, they shall be satisfied pro rata, after the payments of duties,
taxes and fees due the State or any obligation.
Nature of the Claims or Credits

The claims or credits enumerated in Art. 2241 considered:

(a) pledges of personal property
(b) or liens with the purview of legal provisions of governing insolvency (Art. 2243)

NOTE: As liens, they are considered charges generally, unless otherwise stated, they
are NOT possessory liens with the right of retention. (See grano v. Paredes, 50 Phil. 6)]

Par. 1 - Taxes, etc.

The duties, taxes, and fees referred to are those ON the specific movable
concerned.

Par. 3 - Unpaid Price of Movables SOLD

There are two liens referred to here:

(a) possessory lien (as long as the property is still in the possession of the debtor)
(b) ordinary lien on the PRICE (not a possessory lien) if the property has been resold
and still unpaid (See Banco Español-Filipino v. Peterson, 7 Phil. 409; Hunter, Kerr and
Co. v. Murray, 48 Phil. 499)

Par. 4 - Pledge or Chattel Mortgage

Under the old law, the Court held that a repairer has preferential rights over a chattel
mortgage of the same property; thus the chattel mortgagee cannot get the property from
the repairer without first paying for the services. (Bachrach Motor Co. v. Mendoza, 43
Phil. 410; PCC v.
Webb and Falcon, 51 Phil. 745; Phil. Trust Co. v. Smith Navigation Co., 64 Phil. 830)

It would seem however that the preference has now been abolished under Art. 2247.

Par. 6 - Laborers Wages

(a) This applies only to personal, not to real property (The latter is governed by Par. 3 of
Art. 2242)

(b) The laborer must have been employed by the owner of the goods, not by the
contractor who in turn was employed to do the work (See Bautista v. Auditor General,
97 Phil. 244)

Last Paragraph Wrongful Taking

This applies only when the debtor still OWNS the property wrongfully taken not when he
has lost ownership over the same (See Peña v. Mitchell, 9 Phil. 588)

Art. 2242. With reference to specific immovable property and real rights of the
debtor, the following claims, mortgages and liens shall be preferred, and shall
constitute an encumbrance on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen, as well as of
architects, engineers and contractors, engaged in the construction,
reconstruction or repair of buildings, canals or other works, upon said buildings,
canals or other works;

(4) Claims of furnishers of materials used in the construction, reconstruction, or

repair of buildings, canals or other works, upon said buildings, canals or other
works;
(5) Mortgage credits recorded in the Registry of Property, upon the real estate
mortgaged;
(6) Expenses for the preservation or improvement of real property when the law
authorizes reimbursement, upon the immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by
attachments or executions, upon the property affected, and only as to later
credits;
(8) Claims of co-heirs for warranty in the partition of an immovable among them,
upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or other conditions
imposed upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance premium for
two years. (1923a)

Credits Over Specific Real Properties

Comments Nos. 1 and 2 in the preceding article are applicable to this article, except that
the reference to "movables should now apply to "real property or im movables." (See
Arts. 2248 and 2249)

Concurrence, not Preference

Again, it must be stressed that with the sole exception of the State, the creditors with
respect to the SAME specific immovable merely CONCUR; there is NO PREFERENCE
(See Arts. 2248 and 2249)

Refectionary Credit

This is a credit for the repair or reconstruction of something that had previously been
made (See Art. 2242, No. 3) Ordinarily an entirely new work is not included, although
Spanish jurisprudence appears to have sanctioned this broader conception in certain
cases (Directtor of Public Works v. Sing Joco, 53 Phil. 205).

Art. 2243. The claims or credits enumerated in the two preceding articles shall be
considered as mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency. Taxes mentioned in No. 1,
Article 2241, and No. 1, Article 2242, shall first be satisfied. (n)

Nature of the Claim ore Credits

They are considered as pledges or mortgages.

Comment of the Code Commission

The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled in this article. The preference named in Arts. 2241 and 2242 are
to be enforced in accordance with the Insolvency Law. Taxes on the specific property
will be paid first.

Art. 2244. With reference to other property, real and personal, of the debtor, the
following claims or credits shall be preferred in the order named:

(1) Proper funeral expenses for the debtor, or children under his or her parental
authority who have no property of their own, when approved by the court;
(2) Credits for services rendered the insolvent by employees, laborers, or
household helpers for one year preceding the commencement of the proceedings
in insolvency;

(3) Expenses during the last illness of the debtor or of his or her spouse and
children under his or her parental authority, if they have no property of their own;

(4) Compensation due the laborers or their dependents under laws providing for
indemnity for damages in cases of labor accident, or illness resulting from the
nature of the employment;

(5) Credits and advancements made to the debtor for support of himself or
herself, and family, during the last year preceding the insolvency;

(6) Support during the insolvency proceedings, and for three months thereafter;

(7) Fines and civil indemnification arising from a criminal offense;

(8) Legal expenses, and expenses incurred in the administration of the insolvent's
estate for the common interest of the creditors, when properly authorized and
approved by the court;
(9) Taxes and assessments due the national government, other than those
mentioned in Articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those referred to in
Articles 2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other than those
indicated in Articles 2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused by a quasi-delict;

(13) Gifts due to public and private institutions of charity or beneficence;

(14) Credits which, without special privilege, appear in (a) a public instrument; or
(b) in a final judgment, if they have been the subject of litigation. These credits
shall have preference among themselves in the order of priority of the dates of
the instruments and of the judgments, respectively. (1924a)

Order of Preference In Connection With OTHER Properties

(a) The order of preference here is VERY IMPORTANT (See Art. 2251)
(b) The order of preference here does not refer to specific real or personal property. It
refers to other properly

Taxes

Note that under Art. 2244, taxes (duties, assessments) are placed only as Nos. 9, 10,
11. This rule applies to property other than specific. If the property is specific, taxes,
duties, assessments) on said property (not other taxes) are given first preference.(See
Arts. 2243, 2247 2249)

Re Par. 14 ( Ordinary Credits and Final Judgments)

It would seem here that an ordinary credit evidenced by a public instrument and
a final judgment are placed on an EQUAL PLANE; hence, if both are of the same date,
there will be a pro rata sharing.

Art. 2245. Credits of any other kind or class, or by any other right or title not
comprised in the four preceding articles, shall enjoy no preference. (1925)

All other kinds of credits

No preference- this is the rule indicated for these credits.

CHAPTER 3
ORDER OF PREFERENCE OF CREDITS
Art. 2246. Those credits which enjoy preference with respect to specific
movables, exclude all others to the extent of the value of the personal property to
which the preference refers.
Art. 2247. If there are two or more credits with respect to the same specific
movable property, they shall be satisfied pro rata, after the payment of duties,
taxes and fees due the State or any subdivision thereof. (1926a)

Art. 2248. Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of the
immovable or real right to which the preference refers.

Art. 2249. If there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable property or real right. (1927a)

Art. 2250. The excess, if any, after the payment of the credits which enjoy
preference with respect to specific property, real or personal, shall be added to
the free property which the debtor may have, for the payment of the other credits.
(1928a)

Art. 2251. Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount not paid,
shall be satisfied according to the following rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid pro rata regardless of
dates. (1929a)

Concurrence and Preference of Credit:

Concurrence of credit: Concurrence of credits occurs when the same specific property of
the debtor or all of his property is subjected to the claims of several creditors. The concurrence
of credits raises no questions of consequence where the value of the property or the value of all
assets of the debtor is sufficient to pay in full all the creditors. However, it becomes material
when said assets are insufficient for then some creditors of necessity will not be paid or some
creditors will not obtain the full satisfaction of their claims. In this situation, the question of
preference will then arise that is to say who of the creditors will be paid ahead of the others.

Preference of credit: A preference of credit bestows upon the preferred creditor an advantage of
having his credit satisfied first ahead of other claims which may be established against the
debtor. Logically, it becomes material only when the properties and assets of the debtor are
insufficient to pay his debts in full; for if the debtor is amply able to pay his various creditors in
full, there is no necessity to determine which of his creditors shall be paid first or whether they
shall be paid out of the proceeds of the sale of the debtor's specific property

Requirement of liquidation proceedings: A preference of credit points out solely the order in
which creditors inventoried and appraised during bankruptcy, insolvency or liquidation
proceedings. Moreover, a preference does not exist in any effective way prior to, and apart
from, the institution of these proceedings, for it is only then that the legal provisions on
concurrence and preference of credits begin to apply." In this jurisdiction, bankruptcy,
insolvency and general judicial liquidation proceedings provide the only proper venue for the
enforcement of a creditor's preferential right such as that established in Article 110 of the Labor
Code, for these are in rem proceedings binding against the whole world where all persons
having any interest in the assets of the debtor are given the opportunity to establish their
respective credits. A liquidation of similar import or "other equivalent general liquidation" must
also necessarily be a proceedings in rem so that all in interested persons whether known to the
parties or not may be bound by such proceeding

Classification of Credits: The Civil Code classifies credits against a particular insolvent into three
general categories, namely —

1) Special preferred credits listed in Articles 2241 and 2242;

2) Ordinary preferred credits listed in Article 2244;

and

3) Common credits under Article 2245

Special preferred credits:

Concept: These credits constitute liens or encumbrances on the specific movable or immovable
property to which they relate. Article 2243 makes clear that these credits "shall be considered as
mortgages or pledges of real or personal property, or liens within the purview of legal provisions
governing insolvency.

Order of preference among special preferred credits: Articles 2241 and 2242 jointly with Articles
2246 to 2249 establish a two-tier order of preference. The first tier includes only taxes, duties
and fees due on specific movable or immovable property (or tax liens). All other special
preferred credits (non-tax liens) stand " the same second tier to be satisfied. Pari passu and pro
rata, out of any residual value of the specific property to which such other credits relate. Thus

1) Duties, taxes and fees due on specific movable property of the insolvent to the State or any
subdivision thereof and taxes due upon the insolvent's land or building stand first in preference
in respect of the particular movable or immovable property to which the tax liens have attached.
Article 2243 is quite explicit: "[Taxes mentioned in number 1, Article 2241 and number 1, Article
2242 shall first be satisfied."

2) The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Article 2242, all
come after taxes in order of precedence; such claims enjoy their privileged character as liens
and may be paid only to the extent that taxes have been paid from the proceeds of the specific
property involved (or from any other sources) and only in respect of the remaining balance of
such proceeds. What is more, these other (non-tax) credits, although constituting liens attaching
to particular property, are not preferred one over another inter se. Provided tax liens shall have
been satisfied, non-tax liens or special preferred credits which subsist in respect of specific
movable or immovable property are to be treated on an equal basis and to be satisfied
concurrently and proportionately.
Special preferred takes precedence over ordinary preferred credits: Credits which are specially
preferred because they constitute liens tax or non-tax) in turn, take precede over ordinary
preferred credits so far concerns the property to which the liens attached. The specially
preferred credits must be discharged first out of the proceeds of the property to which they
relate, before ordinary preferred creditors may lay claim to any part of such proceeds.

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

Ordinary preferred credits:

Concept: In contrast with Art. 2241 and 2242, Article 2244 creates no liens on determinate
property which follow such property. What Article 2244 creates are simply rights in favor of
certain creditors to have the cash and other assets of the insolvent applied in a certain
sequence or order of priority. Only in respect of the insolvent's "free property" is an order of
priority established by Article 2244.

Effect of worker's preference under Article 110 of Labor Code: Republic Act No. 6715 expanded
the concept of "worker preference" to cover not only unpaid wages but also other monetary
claims to which even claims of the Government must be deemed subordinate. But the right of
first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on
the property of the insolvent debtor in favor of workers. It is but a preference of credit in their
favor, a preference in application. It is a method adopted to determine and specify the order in
which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It
is a right to a first preference in the discharge of the funds of the judgment debtor.480 The
preference given by Article 110 of the Labor Code, when not falling within Article 22416) and
Article 2242(3), of the Civil Code and not attached to any specific property, is all ordinary
preferred credit although its impact is to move it from second priority to first priority in the order
of preference established by Article 2244 of the Civil Code. Stated otherwise, the worker's
preference under Article 110 of the Labor Code is an ordinary preferred credit. While this
provision raises the worker's money claim to first priority in the order of preference established
under Article 2244 of the Civil Code, the claim has no preference over special preferred credits.

A mortgage credit is a special preferred credit that enjoys preference with respect to a specific
determinate property of the debtor. On the other hand, the worker's preference under Article
110 of the Labor Code is an ordinary preferred credit. While this provision raises the worker
money claim to first priority in the order of preference established under Article 2244 of the Civil
Code, the claim has no preference over special preferred credit.

Claims for unpaid wages classified as special preferred credit: Claims for unpaid wages falling
within the category of specially preferred credits are the following

1) Claims for laborers' wages, on the goods manufactured or the work done; or

2) Claims of laborers and other workers engaged in the construction, reconstruction or repair of
buildings, canals and other works, upon said buildings canals or other works.
NOTE: To the extent that claims for un paid wages fall outside the scope of article 2241,
number 6 and 2242, number 3, they would come within the ambit of the category of ordinary
preferred credits under Article 2244.

Order of preference among the ordinary preferred credits: Insofar as ordinary preferred credits
are concerned, they are to be paid in the order mentioned in Article 2244, except that the
worker's claim for unpaid wages has been moved from second priority to first priority in the order
of preference.

In addition, the one year limitation in Article 2244, No. 2 has already been remove

Common credits:
Concept: Those which are not included in Articles 2241, 2242 and 2244

Rule with respect to common credits: There shall be no preference among them6e and they are
to be paid pro rata regardless of dates.