7. special laws (final)
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I. Chattel Mortgage LawSpecial Laws
Chattel Mortgage Law(Act No. 1508)
A. Definition
By chattel mortgage, personal property isrecorded in the Chattel Mortgage Registry as
security for the performance of an obligation.(Art. 2140, Civil Code.)
The old definition under Sec. 3 of Act No.
1508 which considered a chattel mortgage as a
conditional sale was considered inaccurate bythe Code Commission. (Serra v. Rodriguez,
1974).
Act 1508 primarily governs chattel
mortgage while the provisions of the Civil Codeon the contract of pledge apply in so far as
they are not in conflict with CML.
NOTE: The Ship Mortgage Decree of 1978(Pres. Decree No. 1521) governs the mortgageof vessels of domestic ownership.
B. Characteristics
1. Accessory contract: purpose: to secure the
performance of a principal obligation;2. Formal contract: registration in the CMRegister is indispensable;3. Unilateral contract: produces only
obligations on the part of the creditor to freethe thing from the encumbrance upon
fulfillment of the obligation (De Leon).
C. Comparison with Pledge
CHATTEL MORTGAGE PLEDGE
both refer to personal property
Property remains in
possession of debtor
Creditor takes
possession of prop
Delivery of the property to the
mortgagee is not necessary
Delivery of the
property to the
pledgee is necessary
Registration in the Chattel
Mortgage Register isnecessary for validity
Registration in the
Registry of Property isnot necessary for
validity
Procedure for the sale is found
in Sec. 14, Act No. 1508
Procedure for the sale
is found in Art. 2112
of the Civil Code
Can recover deficiency
judgment
No recovery of
deficiency.
Excess of proceeds from
foreclosure goes to persons
holding subsequent
mortgages, then to mortgagor
(S14)
Debtor not entitled to
excess, unless
stipulated
Debtor can redeem before the
sale, when the condition of the
No redemption
chattel mortgage is broken.(Sec. 13)
Mortgagor can sell propertymortgaged, subject to the
mortgage
Pledgor can sell thingwith consent of
pledgee
Cannot secure futureobligations
Can secure futureobligations
NOTE: Even if the property mortgaged is inthe possession of the debtor, creditors are
protected in that the chattel mortgage is madeeffective against third persons by the processof registration, to protect creditors against
possible disposal of the property by the debtor.Land Settlement & Dev. Corp. v. Carlos(68)
Should the creditor bring an action on the principal
obligation, like suing on the promissory note, thisamounts to a discharge of the chattel mortgage
so that the debtor may now dispose of the personal
property given in a chattel mortgage without thenecessity of a release of the mortgage. The debtordoes not thereby commit estafa.
Movido v. RFC (59)
A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit
waives thereby his right to enforce the mortgagesecuring it. (Also Serra v. Rodriguez, 1974).
Southern Motors v. Moscoso (61)
The complaint is an ordinary civil action forrecovery of the remaining unpaid balance due onthe promissory note. The plaintiff had not adopted
the procedure or methods outlined by Sec. 14 ofthe Chattel Mortgage Law but those prescribed forordinary civil actions. Since herein appellee has
chosen to exact the fulfillment of the appellant'sobligation, it may enforce execution of the
judgment that may be favorably rendered hereon,on all personal and real properties of the latter not
exempt from execution sufficient to satisfy suchjudgment.
CHATTEL
MORTGAGE
PACTO DE RECTO SALE
Accessory contract Principal contract
Title to the thingmortgaged is not
transferred
Title to the subject matter istransferred to the vendee but
subject to the redemption of thevendor
Affidavit of good
faith is required
Affidavit of good faith is not
required
CHATTEL MORTGAGE REAL ESTATE
MORTGAGE
Personal property Real property
Affidavit of good faithis required
Affidavit of good faith isnot required
Mortgagor cannotalienate the thing
Mortgagor can alienate thething mortgaged without
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mortgaged without the
written consent of themortgagee
the written consent of the
mortgagee and any suchprovision is void
No right of redemption There can be a right of
redemption in extrajudicialforeclosure and in judicial
foreclosure by banks
Cannot secure future
obligations
Can secure future
obligations
D. Proper Subject Matter
1. Sec. 2, read with Sec. 7: Only personal
property may be subject of chattel mortgage(personal property as defined by the Civil
Code).a. Shares of stock;b. Interest in business;
c. Machinery treated aspersonal property subsequently installed
on leased land (Davao Sawmill v. Castillo);d. Vessels recorded in
the office of the Philippine Coast Guard tobe effective as to third persons; not
necessary to be recorded in the Office ofthe Register of Deeds;
e. Motor vehiclesmortgage registered in the LTO (for
vehicles used for public services);f. House of mixed
material;g. House built on leased
land;G.R.: Immovable propertyExc.: Treated as movable by estoppel of parties
h. House intended to bedemolished;
i. House of strongmaterials, for purposes of executing a CM
as between the parties to the contract ifparties so agree and no innocent third
party will be prejudiced.
2. Exceptions:
a. By exercising the freedom tocontract that the law gives them, partiesmay stipulate that as between them, realproperty, such as building, may be
considered personal for purposes of thechattel mortgage law. But this cannot
affect third persons. (Navarro v. Pineda,63): Tumulad v. Vicencio, 71).
BUT: It shall still be executedas a real property and subject to the rules on
foreclosure of real estate mortgage.
b. Section 6: a chattel mortgagecan be executed on growing crops (whichunder the Civil Code are real property).
BUT: If the creditor wants to attachgrowing crops, the procedure is still the sameas in attachment of real property.
Piansay vs David (64)
Regardless of the validity of a contract constitutinga chattel mortgage on a house, as between the
parties to said contract, the same cannot and doesnot bind third persons, who are not parties to the
aforementioned contract or their privies
Tumalad vs Vicencio (71)The house on rented land is not only expressly
designated as Chattel Mortgage; it specificallyprovides that "the mortgagor ... voluntarily CEDES,
SELLS and TRANSFERS by way of Chattel Mortgagethe property together with its leasehold rights over
the lot on which it is constructed and participation."Moreover, the subject house stood on a rented lot
to which defendants-appellants merely had atemporary right as lessee, and although this cannot in itself alone determine the status of the
property, it does so when combined with otherfactors to sustain the interpretation that the
parties, particularly the mortgagors, intended totreat the house as personalty.
Makati Leasing v. Wearever Textile (83)
Although machineries permanently affixed to abuilding are classified as real property under the
Civil Code, the parties may validly subject suchmachineries to a chattel mortgage and shall be
found by the validity therefore by the doctrine ofestoppel. Such an arrangement however cannot
prejudice the rights of third parties to whom themachineries would still be treated as real property.
E. Extent
1. Existingobligations
2. After-
acquired (future) obligations
The chattel mortgage shall cover only theproperty described in the deed and not anyother like or substituted property. (Sec. 7)
Exception: Where the debtor gives as
security, the stock or merchandise in his storeand it is the intention of the parties that the
mortgage shall cover the stock that will takeits place in the course of the business. (Torresv. Limjap, '31)
Torres v. Limjap (31)
The provision of Sec. 7 is deemed not to apply tostores open to the public for retail business wherethe goods are constantly sold and substituted with
new stock, such as drug stores, grocery stores, drygoods stores, etc. A stipulation in the mortgage
extending its coverage to properties acquired afterits constitution is valid and binding where the
after-acquired property is in renewal of, or insubstitution for, goods on hand when the mortgage
was executed, or is purchased with the proceeds ofthe sale of such goods.
3. After-Incurred Obligations
Acme Shoe, Rubber & Plastic Corp. v. CA (96)While a pledge, real estate mortgage, orantichresis may exceptionally secure after-incurredobligations so long as these future debts are
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accurately described, a chattel mortgage can onlycover obligations existing at the time the mortgage
is constituted.Therefore, although a promise expressed in the
chattel mortgage to include debts that are yet tobe contracted can be a binding commitment that
can be compelled upon, the security itself,however, does not come into existence or arise
until after a chattel mortgage agreement coveringthe newly contracted debt is executed either by
concluding a fresh chattel mortgage or byamending the old contract conformably with form
prescribed by the CML.This ruling is due to the requirement in the
Affidavit of Good Faith which must contain an oaththat the mortgage is made for the purpose of
securing the obligation specified in the conditionsthereof, and for no other purpose, and that thesame is a just and valid obligation, and one not
entered into for the purpose of fraud whichmakes it obvious that the debt referred to in the
law is current, not an obligation that is yet merelycontemplated.
F. Requirements
1. Registration Requirements to make ChattelMortgage Binding against 3rd Parties Under Sec. 4, a chattel mortgage leaves
the property in the possession of the debtor.Hence, this section lays down the requisiteswhich must be complied with in order to make
a chattel mortgage affect third parties for theprotection of the creditor.
a. G.R.: The chattel mortgage mustbe registered with the Register of Deedswhere the debtor resides in order to bind
third persons. (Sec. 4)
If mortgagor resides abroad, mustbe registered in the province where the
property is located
But note: Art 2125, CC says that a
chattel mortgage is binding between themortgagor and mortgagee even if not
registered (Filipinas Marble Corp vs. IAC, 86)
b. Share of Stock:i. Must be registered with the
Register of Deeds where the debtorresides; and
ii. Must also be registered withthe Register of Deeds where the
corporation has its principal office.
NOTE: Registration in
the stock and transfer book of the corporation
is not necessary. (Chua Guan v. SamahangMagsasaka, 35).
c. Motor Vehicles
i. Register with the Register of Deedswhere the debtor resides;
ii. Register with the Register of Deedswhere the motor vehicle is located;
and
iii. Register with the MotorVehicle Commission, now Land
Transportation Office. (Borlough v.
Fortune Enterprises, 57)
Otherwise, the failure of the mortgagee
to report the mortgage executed in his favorhas the effect of making said mortgage
ineffective against a purchaser in good faithwho registers his purchase in the motor vehicle
office.
d. Vesselsi. Register with the Philippine
Coastguardii. Must also be registered in
the Bureau of Customs in Manila (if inManila) or in the Office of the Collector
of Customs in the port of entry (ifoutside Manila)
e. Motor vehicle which is
public utility and loan is not repayablewithin 1 year
Register with the Land Transportation
Franchising and Regulatory Board
G. Formal Requirements
1. Affidavit of
Good Faith
It is an oath wherein the partiesseverally swear that the mortgage is made forthe purpose of securing the obligations
specified in the conditions thereof and for noother purposes and that the same is a just and
valid obligation and one not entered into forthe purpose of fraud. (Sec. 5)
Lilius v. Manila Railroad Co. (35)
Under Sec. 5, the absence of the affidavit vitiates amortgage as against third parties without notice,
like creditors and subsequent lienholders; but notas between the parties thereto, which remains
valid as to them. Where a corporation is a party,
the affidavit of good faith must be subscribed by anauthorized officer. (Sec. 6)
2. Other Formal Requirementsa. Must be signed in the presence of
at least 2 witnessesb. Certificate of oath / Notarial
acknowledgment
Sec. 198 of the RACSec. 198. Registration of chattel mortgages and
fees collectible in connection therewith. Everyregister of deeds shall keep a primary entry book
and a registration book for chattel mortgages.The recording of a mortgage shall be effected by
making an entry, setting forth the names of themortgages and the mortgagor, the sum or
obligation guaranteed, date of the instrument,
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name of the notary before whom it was sworn to oracknowledged, and a note that the property
mortgaged, as well as the terms and conditions ofthe mortgage, is mentioned in detail in the
instrument filed, giving the proper file numberthereof.
The register of deeds shall also certify the officer'sreturn of sale upon any mortgage, and a reference
of such return on the record of the mortgage itself,and give a certified copy thereof;
H. Liabilities
1. Where the debtor performs and the creditor
refuses to release the mortgage
Debtor may go to court for relief. (Sec.
8)
2. Sections 9 to 12 have been repealed by Art.319 of the Revised Penal Code on crimes on
Chattel Mortgage:a. Knowingly removing any personal property
mortgaged under the Chattel MortgageLaw to any province or city other than the
one in which it was located at the time ofthe execution of the mortgage, without the
written consent of the mortgagee;b. Selling or pledging personal property
already mortgaged, without the consent ofthe mortgagee written on the back of the
mortgage and duly recorded in the ChattelMortgage Register.
Note:
Mortgagor remains owner of the property. He
can therefore validly sell the chattel, althoughhe will be criminally liable if he did not get
consent of mortgagee.
Com
pare with: If the mortgagee sells the credit, heonly needs to notify the mortgagor, so
mortgagor knows whom to pay (ServicewideSpecialists vs. CA)
Cerna v. CA (93)
3rd party mortgage or accommodation chattelmortgage does not by itself make the mortgagee
personally liable for the loan that heaccommodated.
I. Remedies of Creditor (Sec. 13)
.1 Extra-judicialForeclosure
Mambulao Lumber v. PNB (68)
It presupposes voluntary surrender to sheriff ofpersonal property by debtor. Creditor then files
affidavit outlining right to possession and sale.Posting of notice of sale must be made on twoplaces in the Presidencia plus notice to debtor 10
days before the sale.
PNB v. Manila Investment (71)
Parties may agree on private sale rather than saleat public auction.
Place must be designated in the contract;
otherwise the creditor is liable for conversion.
Note:SC Circular 7-2002 : GUIDELINES FOR THE
ENFORCEMENT OF SC RESOLUTION OF DEC 14,1999 IN A.M. 99-10-05-0 (RE: PROCEDURE IN
EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE)
Sec. 1. All applications for extra-judicialforeclosure of mortgage shall be filed with the
Executive Judge, through the Clerk of Court.
Sec. 2. The Clerk of Court shall:xxx
c. Collect the appropriate filing fees and issues
the corresponding official receipt.d. In case the application is for real estates
and/or chattels in different locationscovering one indebtedness, issue acertificate of payment indicating the
amount of indebtedness, the filing feescollected, the mortgages sought to be
foreclosed, the real estates and/or chattelsmortgaged and their respective locations,
for purposes of having the applicationdocketed with the Clerks of Court in the
places where the other properties arelocated.
Sec. 4. The Sheriff shall:In case of foreclosure of a chattel mortgage, post
the notice for at least 10 days in 2 or more public
places in the municipality where the mortgagorresides or where the property is situated
Sec. 5. Conduct of the extra-judicial foreclosure
sale
a. The bidding shall be made throughsealed bids which must be submitted to
the Sheriff who shall conduct the salebetween 9 am and 4 pm. The property
shall be awarded to the party submittingthe highest bid; in case of a tie, an openbidding shall be conducted between thehighest bidders. Payments shall be made
in cash or managers check, in Philippine
currency, within 5 days from notice.b. The sale shall be made at a place inthe municipality where the mortgagor
resides or where the property is situated
Sec. 6. The Clerk of Courts shall collect the
appropriate fees, computed on the basis of theamount actually collected by him. This shall not be
subject to a refund even if the foreclosed propertyis subsequently redeemed.
Sec. 7 & 8. The Sheriff shall, within 30 days fromthe sale, prepare a return and file the same in the
Office of the Registry of Deeds where the mortgage
is recorded. He shall report the name/s of thebidder/s to the Clerk of Court.
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Sec. 9. The Clerk of Court shall issue and sign theCertificate of Sale, subject to the approval of the
Executive Judge. Prior to the issuance of such, theClerk of court shall, in extra-judicial foreclosure
conducted under the sheriff, collect P300.00; insales conducted under a notary public, the
appropriate fees pursuant to Rule 141, 20(e).
Sec. 10. The Clerk of Court shall keep the
complete records for a period of 1 year from thedate of registration of the certificate of sale withthe Register of Deeds, after which the records shall
be archived. Juridical persons whose property issold pursuant to an extra-judicial foreclosure shallhave the right to redeem the property until, but
not later than, the registration of the certificate offoreclosure sale which in no case shall be more
than 3 months after foreclosure, whichever isearlier.
In case the property is redeemed, the Clerk ofCourt shall assess the redemptioners fee as
provided in Section 7 (k), Rule 141. If the propertyis not redeemed, the Clerk of Court shall, as a
requisite for the issuance of the final Deed of Sale,assess the highest bidder the amount of P300.00.
2. Should debtor refuse to
surrender the property
Creditor may take the preliminary step of
replevin and once he has possession, proceedat public auction as in remedy No. 1.
Important: Creditor must seek court
remedy to obtain possession (Filinvest Credit
Corp vs. CA, 95). Otherwise, that would bepactum commissorium (Esguerra vs. CA, 89)
3. Judicial Foreclosure follow the sameprocedure as foreclosure of real estate
mortgage under Sec. 8, Rule 68, Rules ofCourt.
4. Sue on the Note waive the chattelmortgage; hence, one can levy on otherproperties. (Industrial Finance Corp. v.
Ramirez, 77).
J. Foreclosure of Chattel Mortgage
1. Public Sale
If the mortgagor defaults in the paymentof the secured debt or otherwise fails tocomply with the conditions of the mortgage,
the creditor is permitted only to recover hiscredit from the proceeds of the sale of the
property at public auction.
2. Private Sale
There is nothing illegal, immoral or against
public order in an agreement for the privatesale of the personal properties covered by the
chattel mortgage. (De Leon)
3. Period to Foreclose Mortgage
Mortgagee may, after 30 days from thetime of the condition broken, cause themortgaged property to be sold at public
auction by a public officer. (Sec. 12, Act No.1508)
There must be at least 10 days notice to
the mortgagor and posting of public notice of
time, place and purpose of such sale and is aperiod of grace for the mortgagor, to discharge
the mortgage obligation. (Cabral v.Evangelista)
4. Application of Proceeds of Sale
a. Costs and expenses of keeping andsale;
b. Payment of the obligation securedby the mortgage;
c. Claims of persons holdingsubsequent mortgages in their order; and
d. The balance, if any, shall be paid tothe mortgagor, or person holding under
him. (Sec. 14, Act No. 1508)
K. Alternative Remedies of Mortgagee
1. Performance of the principal obligation by themortgagor
None; the CM becomes null and void
2. Default by the mortgagora. Extra-Judicial Foreclosure (Rule 68, RoC
not applicable)b. Original action for collection of money
effect: waiver of the chattel mortgage
L. Criminal Liability
Art. 319, RPC1. Knowingly
removing any personal property mortgagedunder the CML to any province or city other
than the one in which it was located at thetime of the execution of the mortgage without
the written consent of the mortgagee;2. Selling or
pledging personal property already mortgagedor any part thereof under the terms of the CML
without the consent of the mortgagee writtenon the back of the mortgage and duly recorded
in the chattel mortgage registry.
2. The mortgagor is not relieved of criminal
liability even if the mortgage indebtedness isthereafter paid in full (US v. Kilayko), or themortgagor-seller informed the purchaser that
the thing sold had been mortgaged (People v.Alvares).
M. Redemption
1. There is noright of redemption in chattel mortgage, onlyan equity of redemption.
2. Period: The
following may redeem if the condition of the
mortgage is broken;a. Mortgagor;
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b. A person holding asubsequent mortgage;
c. A subsequent attachingcreditor (Sec. 13, Act 1508).
N. Deficiency Judgment
1. General Rule: Creditor shall always be entitledto collect the deficiency judgement. (Ablaza v.Ignacio, 58).
State Investment House, Inc. v. CA (93)
When the proceeds of the sale are insufficient tocover the debts in an extra-judicial foreclosure of
chattel mortgage, the mortgagee is entitled toclaim the deficiency from the debtor.
2. Ratio: mortgages as accessory contractsserve only as securities and not for the
satisfaction of the principal obligation
3. PrescriptivePeriod: Ten (10) years under Art, 1142 of the
Civil Code. (DBP v. Tomeldan, 80).
Exception: If the property was sold in
installments, the mortgagee can no longer takeany action against the purchaser to recover
any unpaid balance of the price. Anyagreement to the contrary is void. (Art. 1484,
Civil Code, aka the Recto Law)
O. Recto Law
The Recto law, which is now reflected
in Articles 1484-1485 of the Civil Code, whichprovides that in a contract of sale of personalproperty, the price of which is payable in
installments, the vendor may exercise any ofthe following remedies:
(a) Exact fulfillment of the obligation, shouldthe vendee fail to pay (specific
performance);
(b) Cancel the sale, should the vendee'sfailure to pay cover two or moreinstallments (Note that this is not the
same as rescission because here, thevendor gets back the object of the saleand retains the installments paid.
However, this is not available in theabsence of stipulation in the contract.);
(c) Foreclose the chattel mortgage on the
thing sold, if one has been constituted,should the vendee's failure to pay cover 2
or more installments. In this case, heshall have no further action against the
purchaser to recover any unpaid balanceof the price. Any agreement to the
contract is void.
The principal object of this amendmentwas to remedy the abuses committed inconnection with the foreclosure of chattel
mortgages. This amendment prevents
mortgagees from seizing the mortgagedproperty, buying it at foreclosure sale for a lowprice, and then bringing the suit against the
mortgagor for a deficiency judgment. The
almost invariable result of this procedure wasthat the mortgagor found himself minus the
property and still owing practically the fullamount of his original indebtedness.
Pacific Commercial Co. v. Dela Rama
These remedies are alternative, not cumulative.Filipinas Investement v. Vitug (69)
When the creditor can no longer recover from themaker of the note with chattel mortgage because
the deficiency is covered by the Recto Law, afterthe foreclosure of the mortgage, said creditor can
still recover balance from the endorse whoendorsed with recourse.
Cruz v. Filipinas Investment (68)C sold to D a car payable on installments. The car
was given as security by way of chattel mortgageto secure payment. In addition, the debtor put up areal estate mortgage as further security for the
payment of the debt. D did not pay 2 or moreinstallments and so C foreclosed the chattel
mortgage. The proceeds therefrom wereinsufficient and so C wanted to get a deficiency
judgment and satisfy it by foreclosing on the real
estate mortgage.The established rule is to the effect that the
foreclosure and actual sale of a mortgaged chattelbars further recovery (whether by judicial or extra-
judicial foreclosure) by the vendor, of any balanceon the purchasers outstanding obligation not so
satisfied by the public sale. To allow furtherrecovery by the foreclosure of the real estate
mortgage is contrary to public policy.Northern Motors v. Sapinoso (70)
Northern Motors sold a car to Sapinoso on
installments. A chattel mortgage was executed onthe car sold. When S failed to pay 2 or moreinstallments, NM sought to foreclose the chattel
mortgage and asked the court for a writ ofreplevin. Meantime, S made several paymentswhile the replevin suit was pending. The lowercourt ruled that NM, by bringing the suit, was
barred from accepting any further payments fromS and ordered NM to reimburse the amount
collected.The court a quo erred in concluding that the legal
effect of the filing of the action for replevin was tobar NM from accepting further payments on the
promissory note. That the ultimate objective of theaction was for the foreclosure of the chattel
mortgage is of no moment, for it is the fact offoreclosure and actual sale at public auction of
the mortgaged chattel that bars further recoveryby the vendor of any balance on the buyers
outstanding obligation not satisfied by the sale.Pascual v. Universal Motors (74)
When the seller imposes a double security by achattel mortgage of the thing sold on installments
and another mortgage on another property of thebuyer, such is contrary to the public policy soughtto be protected by the Recto Law, and the
foreclosure of the chattel mortgage on the objectof the sale bars recovery on any deficiency.
Ridad v. Filipinas Investment (83)The precise purpose of the law is to prevent
mortgagees from seizing the mortgaged property,buying it at foreclosure sale for a low price and
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then bringing suit against the mortgagor for adeficiency judgment, otherwise, the mortgagor-
buyer would find himself without the property andstill owing practically the full amount of his original
indebtedness. The corporation elected to forecloseits mortgage upon default by the plaintiffs in the
payment of the agreed installments. Having chosento foreclose the chattel mortgage, and bought the
purchased vehicles at the public auction as thehighest bidder, it submitted itself to the
consequences of the law as specifically mentioned.Bicol Savings and Loan Asso. v. Guinhawa
(90)The prohibition under the Recto Law against
recovery does not apply to foreclosure of chattelmortgage constituted to secure a loan and not
originating from a sales transaction.
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Real Estate Mortgage(Act 3135, as amendedby RA 4118)
A. Definition
A Real Mortgage/ Real Estate Mortgage isa contract whereby the debtor secures to thecreditor the fulfillment of a principal obligation,
specially subjecting to such security immovableproperty or real rights over immovable
property which obligation shall be satisfied withthe proceeds of the sale of said property or
rights in case the said obligation is notcomplied with at the time stipulated.
B. Nature
It is a real right following the property,
such that in subsequent transfers by themortgagor, the transferee must respect themortgage. A registered mortgage lien is
considered inseparable from the propertyinasmuch as it is a right in rem.
C. Purpose
To regulate the sale of property underspecial powers inserted in or annexed to real
estate mortgages and redemption thereof.
D. Coverage
Governs sales made under a special powerinserted in or attached to any real-estate
mortgage, which is made as security for thepayment of money or the fulfillment of any
other obligation. Act 3135 will govern themanner in which the sale and redemption shallbe effected, whether or not provision for the
same is made in the power. (Sec 1)
Foreclosure from settlement of estate notincluded
PNB v. CA (01)
The case at bar involves a foreclosure of mortgagearising out of a settlement of estate, wherein the
administrator mortgaged a property belonging tothe estate of the decedent, pursuant to an
authority given by the probate court. The Rules ofCourt on Special Proceedings comes into playdecisively.
E. Applicability
If a special power to sell is inserted in acontract of real mortgage, there can be an
extra-judicial foreclosure sale under Act 3135.if the real mortgage contract is silent, Rule 68
on judicial foreclosure shall apply.
F. Effects of Invalidity of Mortgage
1. Principal obligation remains valid;2. Mortgage deed remains as evidence of personal
obligation
G. Alternative Remedies of a Real EstateMortgagee
1. Mortgagor is alive:
a. Foreclosure:i. judicial
ii. extra-judicial
b. Ordinary action for collection of money effect: waiver of the real estate mortgage
because the remedies are exclusive.
2. Mortgagor dies (Rule 86, Sec. 7, RoC):a. Waive the mortgage and claim the entire
debt from the estate of the mortgagor asan ordinary claim against the estate;
b. Judicial foreclosure and claim the deficiencyfrom the estate;
c. Rely on the mortgage and foreclose thesame at anytime within the period of the
statute of limitations without right to claimfor the deficiency;
d. Extrajudicial foreclosure under Act 3135before it is barred by prescription without
right to file a claim for any deficiency.
Lucena v. CAFailure to comply with the statutory requirements
as to publication of notice of auction saleconstitutes a jurisdictional defect which invalidates
the sale.
H. Foreclosure Sale
Foreclosure is a remedy available to themortgagee by which he subjects the
mortgaged property to the satisfaction of theobligation, which was secured by the
mortgage.
Nature of Power of Foreclosure by
Extrajudicial Sale
1. It is an authority conferred upon themortgagee for the latters own protection.
2. It is an ancillary stipulation supported bythe same cause or consideration for the
mortgage and forms an essential andinseparable part of the bilateral agreement.
3. To declare to foreclose or not is theprerogative of the mortgagee.
4. It is generally held that no particularformality is required in the creation of the
power of sale.
Extrajudicial Foreclosure (Act 3135)1. Express authority to sell given to
mortgagee (authority not extinguished bydeath of mortgagor or mortgagee)
2. Public sale after proper noticea. Type of Sale: Public auction
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b. Venue of Sale: Province where theproperty is situated
c. Sale cannot be made legally outside of theprovince in which the property sold is
situatedd. If venue is subject to stipulation, such sale
shall be made in said place (i.e., the placeso stipulated) or in the municipal building
of the municipality in which the property orpart thereof is situated.
e. Notice: Notices of the sale are to be postedin at least 3 public places of the
municipality or city where the property issituated for not less than 20 days (Sheriffs
Office, Assessors Office, Register ofDeeds).
f. Such notice shall likewise be publishedonce a week for at least 3 consecutiveweeks in a newspaper of general
circulation in the municipality or city.g. Personal notice to mortgagor not generally
required. Posting of notice on mortgagedproperty is likewise not required.
h. Republication in the manner prescribed byAct No. 3135 is necessary for the validity
of a postponed extrajudicial foreclosuresale. The absence of such republication
invalidates the foreclosure sale.
DBP v. Emerald Resorts HotelFacts: DBP published the notice of auction sale
scheduled on 12 Aug 1986. However, the auctionsale was moved to 11 Sept 1986. DBP contendsthat the agreement to postpone dispensed with theneed to publish again the notice of auction sale.
Held: Republication in the manner prescribed byAct No. 3135 is necessary for the validity of a
postponed extrajudicial foreclosure sale. Anotherpublication is required in case the auction sale is
rescheduled, and the absence of such republicationinvalidates the foreclosure sale.
The last paragraph of the prescribed notice of sale(under SC Circular 7-2002) allows the holding of a
rescheduled auction sale without reposting orrepublication of the notice: In the event the public
auction should not take place on the said date, itshall be held on _____,____without further notice.
However, the rescheduled auction sale will only bevalid if the rescheduled date of auction is clearly
specified in the prior notice of sale. The absence ofthis information in the prior notice of sale will
render the rescheduled auction sale void for lack ofreposting or republication.
3. Content of notice: correct number of thecertificate of title and correct technicaldescription of the property.
Object of notice: to inform the
public of the nature and condition of theproperty sold and of the time, place and terms
of the sale.
4. When sale not held on date specified
DBP v. Aguirre (01)
Although the notice of foreclosure sale was dulypublished, the sale did not take place as scheduled
on Sept 25, 1985. Instead, it was held more thantwo months after the published date of the sale or
on Jan 7, 1986. This renders the sale void.
5. Waiver of notice of sale
PNB vs. Nepomuceno (02) &
Ouano vs CA (03)The focal issue in this case is whether the parties
to the mortgage can validly waive the posting andpublication requirements mandated by Act No.
3135. We answer in the negative. Failure to publishthe notice of sale constitutes a jurisdictional defect,which invalidates the sale.
While it is established that rights may be waived,Art 6 of the Civil Code provides that such waiver is
subject to the condition that it is not contrary tolaw, public order, public policy, morals, or goodcustoms, or prejudicial to a third person with a
right recognized by law. The statutoryrequirements of posting and publication are
mandated for the public or third persons. As such,it is imbued with public policy considerations and
any waiver thereon would be inconsistent with theintent and letter of Act No. 3135.
6. Newspaper of general circulation
Perez vs. Perez (05)
Petitioners argue that the Olongapo News where
the notice of public auction was published was nota newspaper of general circulation in Morong,Bataan.
To be a newspaper of general circulation, it isenough that it is published for the dissemination oflocal news and general information; that it has abona fide subscription list of paying subscribers;
and that it is published at regular intervals. Thenewspaper must not be devoted to the interests or
entertainment of a particular class, profession,trade, calling, race or religious denomination. The
newspaper need not have the largest circulation solong as it is of general circulation.
7. Time of Sale: Between 9 AM and 4 PM
8. Who may bid:
a. The creditor;b. The trustee;
c. Other persons authorized to act for thecreditor;
d. Other bidders not privy to the mortgage ortrust deed
9. Procedure
1) The mortgagee files an application forforeclosure with the Executive Judgethrough the Clerk of Court, who will
receive and docket the application and
collect the appropriate filing fees. (SC AMNo. 99-10-05-0)
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2) Notice of the sale is posted in at least 3public places of the municipality or citywhere the property is situated for not less
than 20 days and published once a weekfor at least 3 consecutive weeks in a
newspaper of general circulation in the
municipality or city. (Sec. 3, Act 3135)3) The auction sale is conducted under the
direction of the sheriff, the ExecutiveJudge, or a notary public of the
municipality. (Sec. 4, Act 3135)At the sale, the creditor, trustee, or other
persons authorized to act for the creditormay participate in the bidding and
purchase under the same conditions asany other bidder unless the contrary has
been expressly provided in the mortgageor trust deed under which the sale is
made. (Sec. 5, Act 3135)
4) There must be at least 2 participating
bidders for the auction sale to be valid. Ifon the new date set for the sale there shallnot be at least two bidders, the sale shall
then proceed. (SC AM No. 99-10-05-0)
5) Once the sale has been confirmed, theClerk of Court signs and issues a certificate
of sale to the winning bidder. (SC AM No.99-10-05-0)
6) Possession during the redemption period
G.R.: Purchaser must petition the court
where the property is situated for possession
during the redemption period. He must alsogive a bond equivalent to the use of the
property for a period of twelve months toindemnify the debtor in case the sale is shown
to violate the law (Sec 7, Act 3135).
Within 30 days after the purchaser is givenpossession of the property, the debtor may
petition that the sale be set aside on theground that the mortgage was not violated or
the sale was not made in accordance with theprovisions of Act 3135. (Sec. 8)
Sales made under RA 8791 (General
Banking Law): After the date of theconfirmation of the auction sale, the winning
bidder has the right to enter upon and takepossession of such property and administer the
same in accordance with law.
At the sale, the creditor, trustee or anyperson authorized to act for the creditor, may
participate in the bidding and purchase, as anyother bidder, unless the contrary is expressly
provided in the mortgage or trust deed underwhich the sale is made. (Sec. 5)
The creditor is allowed to recover the
deficiency from the sale of the property. Wherethe proceeds of the sale are insufficient to
cover the debt in an extrajudicial foreclosure ofmortgage, the mortgagee is entitled to claim
the deficiency from the debtor.
The mortgagee, in extrajudicial
foreclosure, has the right to recover deficiency judgment within 10 years from the time the
right of action accrues. Except: When themortgagor is not debtor. The action for the
recovery of such deficiency must be directedagainst the debtor.
A foreclosure sale retroacts to the date of
registration of the mortgage and that a personwho takes a mortgage in good faith and for
valuable consideration will be protected againstequitable claims on the title in favor of third
persons of which he had no actual orconstructive notice.
Valmonte v. CAThe inadequacy of price would not nullify the saleunless the price is so inadequate so as to shock the
conscience of the court. In fact, the property maybe sold for less than its fair market value precisely
because the lesser the price the easier for theowner to effect a redemption.
Samson v. Rivera (04)
The duty of the trial court to grant a writ ofpossession is ministerial. Such writ issues as a
matter of course upon the filing of the propermotion and the approval of the corresponding
bond. Any question regarding the regularity andvalidity of the sale is to be determined in a
subsequent proceeding (Sec 8). Such questioncannot be raised to oppose the issuance of the
writ, since the proceeding is ex parte.
A pending action for annulment of mortgage orforeclosure does not stay the issuance of a writ of
possession.
DBP v. Spouses Gatal (05)
Once a mortgaged estate is extra-judicially sold,and is not redeemed within the reglementary
period, no separate and independent action isnecessary to obtain possession of the property.
The purchaser at the public auction has only to filea petition for issuance of a writ of possession
pursuant to Sec. 33 of Rule 39 of the RoC.Where the title is consolidated in the name of the
mortgagee, the writ of possession becomes a
matter of right on the part of the mortgagee, and itis a ministerial duty on the part of the trial court toissue the same. The pendency of a separate civil
suit questioning the validity of the sale of themortgaged property cannot bar the issuance of the
writ of possession. The rule equally applies toseparate civil suits questioning the validity of themortgage or its foreclosure and the validity of the
public auction sale.
7) Upon failure of the debtor to redeem the
property within 1 year after the date of theregistration of the certificate of sale,
winning bidder becomes the absoluteowner.
10. Remedies of mortgagee are not cumulative
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Caltex v. IAC (89)CALTEX made a mockery of our judicial system
when it initially filed a collection suit then, duringthe pendency thereof foreclosed extra-judicially the
mortgaged property which secured theindebtedness and still pursued the collection suit to
the end.A mortgage creditor may institute either a personal
action for debt or a real action to foreclose themortgage. He may pursue either of the two
remedies, for each of the two remedies is completein itself.
When the mortgagee chooses the foreclosure ofthe mortgage, he enforces his lien by the sale of
the mortgaged property. The proceeds will beapplied to the satisfaction of the debt. With this
remedy, he has a prior lien on the property.On the other hand, if the mortgagee resorts to anaction to collect the debt, he waives his mortgage
lien. He will have no more priority over themortgaged property.
I. Redemption
A transaction by which the mortgagorreacquires or buys back the property which
may have passed under the mortgage ordivests the property of the lien which the
mortgagee may have created.
Kinds of Redemption1. Equity of redemption or the right of the
mortgagor in case of a judicial foreclosure toredeem the mortgaged property after his
default in the performance of the conditions of
the mortgage but before the confirmation ofthe sale of the mortgaged property.
2. Right of redemption or the right, in case of an
extrajudicial foreclosure, to redeem themortgaged property within a certain period
after it was sold for the satisfaction of themortgage debt.
Right of redemption
1. Period within which to exerciseright: 1 year from the date of registration of
certificate of sale with the appropriate Registryof Deeds.
2. Effect of failure to exercise right:
the purchaser has the absolute to a writ ofpossession.3. Effect of exercise of right:
elimination from his title thereto of the liencreated by the levy or attachment or judgment
or registration of the mortgage thereon.4. Where mortgaged property sold to
third party: transfers only the right to redeemthe property and the right to possess, use andenjoy the same during the said period (in case
of sale to a third person by the mortgageeafter the foreclosure, the mortgagor mayredeem it at the amount of the principal
obligation plus interest until time of actualredemption.)
5. Where sale is not registered andmade without the consent of mortgagee: the
mortgagee need not recognize the redemptionmade by the third party.
6. Where extrajudicial foreclosure iseffected with fraud: it is null and void ab initio
Requisites of a valid
redemption1. Made within 1year from the date of the registration of the
certificate of sale;2. Payment of the
purchase price of the property plus 1% interestper month together with the taxes thereon, if
any, paid by the purchaser and the amount ifhis prior lien, if any with the same rate of
interest computed from the date of registrationof the sale up to the time of redemption.
3. Written notice of the redemption must be served on the officer
who made the sale and a duplicate filed withthe proper Registry of Deeds.
Who mayexercise the right of redemption
1. Mortgagor or one in privity of title with
mortgagor;2. S
uccessor-in-interest:a. One to whom the debtor has transferred
his right of redemption;b. One to whom the debtor has conveyed his
interest ion the property for the proposed
redemption;
c. One who succeeds to the interest of thedebtor by operation of law;
d. One or more of debtors who were jointowners of the property sold;
e. The wife as regards her husbandshomestead by reason of the fact that some
portion of her husbands title passes toher;
f. Compulsory heir.
3. Under the Rules of Court:a. The judgment debtor or his successor-in-
interest in the whole or any part of theproperty;
b. A creditor having a lien by attachment,judgment or mortgage on the property
sold or some part thereof. Subsequent tothe judgment under which the propertywas sold.
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Insolvency Law (Act No.1956, as amended)
A. Concept
Under Phil. law, bankruptcy is the same asinsolvency.
Defn of Insolvency: relative condition of adebtors assets and liabilities that the assets, if
all made immediately available, would not besufficient to pay the liabilities.
Defn of Transfer: it includes the sale and
every other and different modes of disposing ofor parting with property, or the possession ofproperty, absolutely or conditionally, as a
payment, pledge, mortgage, gift or security. Adeposit of money is not a transfer.
B. Purpose
1. Equitable distribution of the properties ofthe debtor among the creditors2. To afford the individual debtor a fresh start
in life
BUT NOTE: the Insolvency Law does not
grant discharge to a corporate debtor
C. Divisions of the Law
1. Suspension of PaymentsDebtor possesses sufficient property to cover all his
debts, but foresees the impossibility of meeting
them when they respectively fall due (Sec 2).Debtor asks for more time to convert some of hisproperties to cash to be able to pay his debts.
2. Insolvency Proceedings debtor has nocash or property to pay all his debts.
a. Voluntary Insolvency: debtor filesfor insolvencyb. Involuntary Insolvency: creditorsfile for debtors insolvency
D. Comparisons
SUSPENSION OF
PAYMENTS
INSOLVENCY
PROCEEDINGS
Purpose: To suspend or
delay payments of
debts
Purpose: to compel
presentment of all debts,
whether due or not, and to
secure a complete discharge
from such debts
Amount of
indebtedness is not
affected, but only the
time for paying them is
postponed
Creditors receive less than
what they are entitled to, or
some creditors may not even
receive anything
Debtor has sufficient
property to cover his
liabilities
Debtors assets are not
sufficient to cover liabilities
VOLUNTARYINSOLVENCY
INVOLUNTARYINSOLVENCY
Debtor is the
petitioner
3 or more creditors are the
petitioner
Debtor may haveonly one creditor
Debtor must have at least 3creditors
No requirements
WRT creditors
Creditors must be Phil.
residents whose creditsaccrued in the Phils, and
none of them became acreditor by assignment
within 30 days prior to thefiling of the petition
No bond is requiredfor the petition
A bond is required forinsolvency proceedings
Order of adjudication
may be granted exparte
Order is granted only after a
hearing
Debtor must not
have committed anact of insolvency
Debtor must have
committed an act ofinsolvency before the
creditors can file the petition
Petition must be filed
with the RTC wherepetitioner-debtor
resided for 6 monthsprior to the filing
Length of residence of the
debtor is immaterial
SUSPENSION OF PAYMENTS
Individual Corporation, Partnership or
Association (CPA)
Governing Law
Act No. 1956 Act No. 1956 P.D. No. 902-A
Jurisdiction
RTC (Act No.1956)
RTC (Act No.1956)
RTC (R.A. No.8799)
Grounds
Debtor hassufficient
property but
foresees theimpossibility of
meeting themwhen they
respectively fall
due
C.P.A. debtorhas sufficient
property but
foresees theimpossibility of
meeting themwhen they fall
due
a. C.P.A. hassufficient property
to cover all its
debts but foreseesthe impossibility of
meeting themwhen they
respectively fall
due, OR;
b. C.P.A. has no
sufficient assets to
cover its liabilities
but is under
management of aRehabilitation
Receiver or Mngt.Committee (Sec.
5[d], P.D. 902-A
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E. Sources
1. Spanish Code of Commerce
Mitsui v. HSBC (17)
Act No. 1956 deals with 3 principal subjects:suspension of payments, voluntary insolvency, andinvoluntary insolvency. That part of the Actreferring to the first appears to have been taken
from the Spanish Code of Commerce, as amendedby the law of June 10, 1897. The Act, in so far as it
relates to voluntary and involuntary insolvency, isessentially a bankruptcy law because it discharges
the honest debtor.
2. Insolvency Act of California of 1895 (as tovoluntary and involuntary insolvency)
SunLife vs. Ingersoll (21)
Act No. 1956 is in great part a copy of theInsolvency Act of California, enacted in 1895,
though it contains a few provisions from theAmerican Bankruptcy Law of 1898. The California
Insolvency Law of 1895 is precisely the provisionwhich appears as section 32 of our Act, defining
the property which passes as assets to theassignee in insolvency.
F. Suspension of Payments
1. Nature
The debtor who, possessing sufficient property tocover all his debts, foresees the impossibility of
meeting them when they fall due, may petition thathe be declared in the state of suspension ofpayments by the court of the province / city in
which he has resided for the preceding 6 months.(Sec 2)
2. Purpose: To seek postponement of thepayment of debts in order to provide the
debtor a given period to convert some of hisproperties to cash.
3. Basis: The probability of the debtors
inability to meet his obligations when theyrespectively fall due, despite the fact that he
has sufficient assets to cover all his liabilities.
4. Effect commences: upon the filing of thepetition.
5. Who May File:
a. An individual debtor;b. Corporation, partnership orassociation (C.P.A.) (Sec. 2).
Chung Ka Bio v. IAC (88)If petition for suspension of payments is filed with
SEC by a corporate entity and an individualstockholder (who is a surety for the corporation),
SEC has no jurisdiction over the individual
petitioner.
Traders Royal Bank v. CA (89)
SEC can only take custody and control of theassets of the corporation. Individual petitioner is
merely a nominal party. His properties are notincluded in the rehabilitation receivership
appointed by the SEC for the corporation. Hence,his creditors can file suits against him even during
the rehabilitation receivership.
PAL vs. Spouses Kurangking (02)A claim is said to be a right to payment, whether
or not It is reduced to judgment, liquidated orunliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, legal orequitable, and secured or unsecured. In Finasia
Investments, this Court has defined the wordclaim, contemplated in Sec. 6(c) of P.D. 902-A,
as referring to debts or demands of a pecuniarynature and the assertion of a right to have moneypaid as well.
The claim of private respondents against PAL is amoney claim for the missing luggage, a financial
demand that the law requires to be suspendedpending the rehabilitation proceedings.The justification is to enable the management
committee or rehabilitation receiver to effectivelyexercise its/his powers free from any judicial or
extra-judicial interference that might unduly hinderor prevent the rescue of the debtor company
Chas Realty v. Talavera (03)
Rule 4, Sec. 2(k) of the Interim Rules on CorporateRehabilitation provides that (a), the filing of the
petition has been duly authorized and (b), thedirectors and stockholders have irrevocably
consented to, in accordance with existing laws, all
actions or matters necessary and desirable torehabilitate the debtorIf any extraordinary corporate actions are to be
done, the petitioner would be bound get theapproval of a majority of the directors and theaffirmative votes of stockholders representing atleast 2/3 of the outstanding capital stock. Where
no such extraordinary corporate acts arecontemplated, the approval of stockholders would
only be by a majority.The rehabilitation plan submitted by petitioner
merely consists of a repayment or re-structuringscheme. This would not require a vote of approval
by the stockholders representing at least 2/3 of theoutstanding capital stock
MWSS v. Daway (04)
Sec. 6 (b) of Rule 4 of the Interim Rules does notenjoin the enforcement of all claims against
guarantors and sureties, but only those claimsagainst guarantors and sureties who are not
solidarily liable with the debtor.The participating banks obligation are solidary with
respondent Maynilad in that it is a primary, direct,definite and an absolute undertaking to pay and isnot conditioned on the prior exhaustion of the
debtors assets. These are the same characteristicsof a surety or solidary obligor. Being solidary, theclaims against them can be pursued separately
from and independently of the rehabilitation case.
6. Where to filea. Individuals:
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RTC of the province where he has residence within6 months previous to the filing of the case, if
debtor is a natural person.Governing law: Insolvency Law
b. Partnerships and corporations:Transferred from SEC to RTC by the Securities
Regulation CodeGoverning Law: PD 902-A
7. Procedure for Individual Debtors
1. Debtor files petition in court
The petition for suspension of payments
must include as annex a statement of assetsand liabilities, proposed agreement with
creditors, inventory of assets and a detailedschedule of obligations, amounts and due
dates.
Effects of filing the petition:
a. No disposition in any manner of his property may be made by thepetitioner except insofar as concerns the
ordinary operations of commerce or ofindustry in which he is engaged (Sec.3,par. 2);
b. No payment may be made bypetitioner except in the ordinary course of
his business or industry;c. Upon request to the court, all
pending executions against the debtorshall be suspended except execution
against property especially mortgaged.d. As to the unsecured creditors:
i. Any pending executions of thedebtor shall be suspended except
execution against property mortgaged
(Sec. 6).ii. They cannot sue to collect their claimsduring the suspension of payments
proceedings.
2. Court orders meeting of creditors andpublication (Ratio: Suspension of payments isa proceeding in rem, so publication is needed
to acquire jurisdiction)
Creditors not affected by the Order ofSuspension of Payments:
a. Those having claims for personal
labor, maintenance, expenses of the lastillness and funeral of wife or child of
debtor, incurred during the 60 daysimmediately preceding the filing of the
petition;b. Those having legal or contractual
mortgages.
3. Meeting of creditors included in theschedule of creditors filed by the debtor.
Creditors representing at least 3/5 of theliabilities must be present. (Sec 8)
The ff creditors may also join the meeting:
Persons having claims for personal
labor, maintenance, expenses of the lastillness and funeral of wife or child of
debtor, incurred during the 60 dayspreceding the filing of the petition
On the other hand they may alsorefrain from attending or voting at such
meeting, in which case they shall not bebound by the agreements determined at
such. (Sec 9)
4. Action by the creditors upon the debtorsproposition. Approval must be by the majority,
meaning :
2/3 of the creditors voting uponthe position.
Claims represented by the
majority must amount to at least 3/5 of thetotal liabilities of the debtor.
If decision is negative / nodecision:
Proceeding shall beterminated
Parties may enforcetheir rights (Sec 11)
If decision is favorable:
Any creditor who attended the meeting and
protested against the vote may object (Sec.11) on the following grounds:
Defects in the call for the meeting or in the
deliberations, which prejudiced creditorsrights
Fraudulent connivance between one ormore creditors and debtor to vote in favor
of the proposed agreement
Fraudulent connivance of claims to obtain
a majority (Sec. 12)
The court shall
conduct a hearing. If the objection ismeritorious, the proceedings will be
terminated. Causes for which objection may bemade to decision of the meeting:
a. Defects in the call for the meeting,in the holding thereof, and in the
deliberation had there at whichprejudice the rights of the creditors;
b. Fraudulent connivance betweenone or more creditors and the debtorto vote in favor of the proposedagreement; and
c. Fraudulent conveyance of claimsfor the purpose of obtaining a
majority.
If decision hasbeen declared valid/no opposition or objection:
Courtshall order that agreement be carried out
(Sec. 11)
If thedebtor fails wholly/in part to perform theagreement, all the rights which the
creditors had shall revest in them. Thedebtor may be made subject to bankruptcy
and insolvency proceedings. (Sec. 13).
8. Effect of Filing PetitionO
n execution pending against debtor If any execution be pending againstthe debtor, it shall be suspended before
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the sale of the property is madethereunder
PROVIDED the debtor makes arequest to the court before which the
proceeding for suspension of paymentsis pending (Sec 6)
b. On execution against property specially
mortgagedThe execution against property especiallymortgaged is exempted from the provisions of this
section (see above) (Sec 6)
c. On action to collect sum of money still to be
filed against debtorNo creditor other than those mentioned in Sec 91
shall institute proceedings to collect his claim fromthe moment that suspension of payments is
applied for and while the proceedings are pending.
(Sec 6)
d. D
ebtor may not dispose of his property,except in the ordinary course of the
business in which he is engaged
e. Debtor cannot make any payments outsideof the necessary or legitimate expenses ofthis business (Sec 3)
Suspension of Payments under:
INSOLVENCY LAW P.D. NO. 902-A
1. Applies to either
individual or C.P.A.debtors
1. Applies to C.P.A. debtors
only
2. Suspensive effectcovers unsecured
creditors only
2. Suspensive effect coverssecured and unsecured
creditors
3. Absent any
agreement amongcreditors, automatic stay
expires after 3 months
3. No time limit as long as
C.P.A. debtor is undermanagement committee/
rehabilitation receiver
4. Agreement is subject
to qualifying majority
votes
4. No need to obtain
creditors approval
G. Voluntary Insolvency Proceedings
Procedure for Individual debtors,
Partnerships, and Corporations1. Filing of petition by insolvent
debtor
Debtor must owe at least
P1,000.
Petition must be filed in
the RTC where he resided 6 months priorto the filing
1 Persons having claims for personal labor, maintenance,
expenses of last illness and funeral of wife/children of the
debtor incurred 60 days prior to the petition and personshaving legal or contractual mortgages
I
mportant: RTC has jurisdiction over
proceedings for voluntary andinvoluntary insolvency of corporations
(Ching v. Land Bank, 91)
Petition must state forth:
Place of residence;
Period of residence therein
immediately prior to filing said petition;
Inability to pay all his debts in full;
Willingness to surrender all hisproperty, testate and effects, not exempt from
execution to the benefit of his creditors; and
Application to be adjudged an
insolvent (Sec. 14)
Attach
the ff: schedule of debts and creditors,
inventory of all his properties not exemptfrom attachment or execution
If acorporation, must have written assent of
majority of the board
The
filing of such petition shall be an act ofinsolvency (Sec 14)
Phil. Trust Co. v. National BankEffect of filing of Petition: It ipso facto takes away
and deprives the petitioner of the right to do orcommit any act of preference as to creditor,
pending the final adjudication.
2. If the petition is in order, Courtshall issue an Order of Adjudication (i.e. that
the debtor is declared insolvent)
The order must be published. (Ratio: This
is a proceeding in rem). All creditors mustalso be notified.
Effects of order
a. All assets of debtor placed in sheriffscustody until a receiver or assignee is
assigned.b. Payment to debtor of any debt or
delivery of any property due to him isforbidden. He also cannot transfer or
convey any of his property.c. All civil proceedings vs. the insolvent
are stayed, except those pertaining toforeclosure of secured liens.
3. Meeting of creditors for election of anAssignee in Insolvency
4. Conveyance of debtors property toassignee in insolvency5. Liquidation of assets and payment of debts
6. Composition, if agreed upon7. Discharge of the debtor, except in case of
composition
Not applicable to corporations
8. Objection to discharge of debtor, if any
9. Appeal in certain cases
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H. Involuntary Insolvency
Who may petition for involuntary
insolvency:1. Debtors who have the qualifications
required by the Insolvency Law; and2. Their credits must be those
contemplated by the Insolvency Law.
Procedure for Individual Debtors,Partnerships, and Corporations:
1. Filing of petition by 3 or moreresident creditors (can be natural or juridical
persons):
Their credits must be worth at least
P1,000;
Credits must have accrued in the RP;
None of whom has become such a
creditor by assignment, within 30 days
prior to the filing of the petition; Petition must be filed in the RTC of the
place where debtor has residence or hashis principal business;
Must be verified by at least 1 petitioner
Petition must be accompanied by a
bond, approved by the court, with at least2 sureties
Date of Cleavage: Date when thepetition is filed, from which we count
forward or backward, in determiningeffects under the Insolvency Law.
Count 30 days backward from date ofcleavage. A creditor by assignment
made within 30 days prior to the filingof the petition cannot file the petition.
2. Petition must allege at least 1 act
of insolvency:a. Personal
Debtor is about to depart in fraud ofcreditors
He remains absent in fraud ofcreditors
Conceals himself to avoid legalprocesses
b. Judicial
Debtor concealing property to avoid
attachment He has suffered judgment to beattached for 3 days
He has confessed judgment
He has suffered judgment to beattached to give preference to certaincreditors
c. Preference
Debtor transferred property tocreditors to defraud others
He has made transfers to hinder ordelay creditors
He has made transfers in
contemplation of insolvency
d. Merchant
As merchant defaulted payments for30 days
He has failed to deliver moneyreceived as fiduciary within 30 days
Execution issued against him isreturned unsatisfied
Assets of the insolvent which are ot
exempt from execution will then be distributedamong his creditors in accordance with the
rules of concurrence in preference of credits inthe Civil Code. Note the provision in the Labor
Code which says that the claim of a laborertake priority over all others including taxes of
the government.
3. After the petition is filed, the courtshall issue an order of adjudication, which shall
retroact to date of filing of petition.a. Effects of order
i. All assets of debtor placed in
sheriffs custody until a receiver orassignee is assigned
ii. Payment to debtor of any
debt or delivery of any property due tohim is forbidden. He also cannot
transfer or convey any of his propertyiii. All civil proceedings vs. the
insolvent are stayed, except thosepertaining to foreclosure of secured
liens.
b. The order must be published.c. Court shall also order debtor to
show cause why he should not be declared
insolvent
4. Summons to the debtor
5. Answer or motion todismiss filed by debtor
6. Hearing of petition
7. Order of adjudicationdeclaring debtor insolvent
8. Publication and service of
order of court9. Meeting of creditors to
elect an assignee in insolvency10. Conveyance of debtors
property to assignee in insolvency11. Liquidation of assets and
payment of debts12. Composition, if agreed
upon by debtors and creditors
Composition:
debtor offers to pay his creditors a certainpercentage of their claims in consideration
of his release from liability
Requisites
a. Offer must be made after filing ofSchedule of Debtors property and the
list of his creditorsb. Offer must be accepted in writing by
a majority of the creditors
representing a majority of the claims
which have been allowed
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c. Offer must be made only after theinsolvent deposits the consideration to
be paid to the creditorsd. Offer must be accepted by majority
of creditors holding majority of theclaims, and must be confirmed by the
court
Effects of Composition:
a. Insolvency Proceedings aredismissed
b. All debts are discharged
13. Discharge of the debtor, except
in case of composition
Discharge not
applicable to corporations
14. Objection to discharge of debtor, if any
15. Appeal to Supreme Court
I. Specific Provisions
Assignee
Elected by majority of creditors
who hold majority of the claims. Thecreditor must have filed his verified claim 2days before the election.
Creditors not entitled to vote in
the election of assignee:
Those who did not file their claims
at least 2 days prior to the timeappointed for such election (Sec. 29);
Those whose claims are barred by
the statute of limitations; Secured creditors unless they
surrender their security or lien to the
sheriff or receiver or unless they shallfirst have the value of such security
fixed as provided in Sec. 59;
Holders of claims for unliquidated
damages arising out of pure tort(Schall v. Comors)
Assignee converts the debtors
property to cash and declares dividends toequitably distribute the property to thecreditors
Assignee may be substituted as
the plaintiff in cases previously brought bydebtor. Ratio: Causes of action also pass
to the assignee.
EXCEPT: Purely personal
action
The ff propertiesshall not pass to the assignee:a. After-
acquired property (acquired subsequent tothe filing of the petition), except its fruitsand income
Examples of after-acquired property:
donations, inheritance, provided he is adebtor in good faith who will later petitionfor a discharge
b. Non-leviable assets such as insurance policy
without any cash surrender valuec. Expectancy
to inheritd. Right of
action in personal injury cases whichpertain exclusively to the debtor
e. Propertyheld in trust by debtor or merely leased by
debtorf. Property
exempt from execution
Board of Liquidators v. Floro (60)Only the assignee can set aside fraudulent
preferences
Assignee can ask for examination ofpersons suspected of having concealed,
embezzled, or disposed of any property of
the debtor. Liability shall be double thevalue of the property.
Assignee is allowed necessary expenses
and commissions (for the first P1k 7%;for above P1k but not exceeding P10k
4%). If there are 2/more assignees, thecourt shall order an equitable division.
Powers of assignee Duties of assignee
To sue and possess all assetsand uncollected credits of the
debtor
To inventory theproperty
To sell at auction said assets To collect all assets
To redeem all mortgages To convert all assets
to cash
To compromise with his
insolvents debtors
To account for money
received and paid out
To recover propertiesfraudulently conveyed by the
debtor
To distribute theassets to creditors
Order of Distribution:1. Equitable claims under Sec. 48
(see Properties Excluded from Estate below);2. Preferred claims WRT specific
movable property and specific immovableproperty under Art. 2241 and 2242, CC;
3. Preferred claims as tounencumbered property of the debtor which
shall be paid in the order named in Art. 2244;
4. Common or ordinary credits whichshall be paidpro rata regardless of dates underArt. 2245.
Remedies of Secured Creditors
The ff are secured claims:
real estate mortgage, chattel mortgageand pledge
1. Secured creditors have 3
remedies:
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a. Rely on the security. If he does, he cannot take part in the
insolvency proceedings;b. Evaluate the security. If
there is a part of the loan not secured, hecan ask for this balance from the court;
c. File a contingent claimin the insolvency proceedings in case the
proceeds from the security is not enoughto cover the loan
This 3rd remedy is not available tochattel mortgages of movables sold under
installments under Art 1484 of the Civil Code, andto pledges.
Consequences of Attachments,Judgments, etc.
Attachme
nt levied upon within 30 days prior to thefiling of the petition may be set aside
Judgments on cases filed and decided within 30 days
prior to the filing may be set aside
Judgment
s on cases filed outside the 30 day periodbut decided within the 30 day period prior
to the filing because the debtor confessedjudgment or was declared in default will beset aside.
Properties Excluded from Estate1. Paraphernal property of the wife of the
debtor2. Property held on lease, administration or
deposit
3. Merchandise held on commission, forforwarding or on consignment and pricefrom sales on consignment
4. Bills of exchange sent to the debtor for
remittance to others5. Money in possession of debtor for
remittance to others
6. Merchandise bought on credit if no deliveryhas been made
7. Goods wrongfully taken by debtor
Insolvency Proceedings on Partnerships
A partnership may be adjudged
insolvent during the continuation of the
partnership business or after its dissolutionbut before its final settlement thereof (Sec.51).
Individual creditors must provetheir claims against such general partners,
or else the general partners may bedeclared discharged
Partnership property will bepreferred to pay partnership debts, and
property of individual partners will bepreferred to pay individual debts
Excess property of individualpartners will be used to pay partnership
debts.
Who may petition for declarationof insolvency of a partnership:
Voluntary Insolvency: by
all the partners or any of them.
Involuntary Insolvency:by 1 or more of the partners or 3 or
more creditors of the partnership.
Propertiesincluded in the Insolvency Proceedings:
All the property of thepartnership; and
All the separate property of eachof the partners, except:
o Separate properties of limited
partners; ando Properties which are exempt by
law.
Effect of Insolvency of
Partnership or any Partner
Right of
partnership creditors a partnershipmay be declared insolvent
notwithstanding the solvency of the
partners constituting the same. A partnership isnot necessarily insolvent because one
of its members is insolvent. Thesolvent members are bound to wind
up the partnership affairs.
Under the law, apartnership is automatically dissolved
by the insolvency of any partner or ofthe partnership (Art. 1830, CC).
Insolvency of Corporations
Who may petition for declaration of
insolvency of a corporation:1. Voluntary Insolvency: by any
officer duly authorized by the vote of
the board of directors or trustees at ameeting especially called for that
purpose, or by assent in writing of amajority of the directors or trustees as
the case may be (Sec. 52).2. Involuntary Insolvency:
a. First view: upon acreditors petition made and
presented in the manner providedin respect to debtors.
b. Second view: petition
must be filed by at least 3creditors of the corporation under
the circumstances mentioned bylaw (De Leon).
Effect of Declaration of Insolvency: itsproperty and assets shall be distributed
among the creditors but no discharge shallbe granted to any corporation (Sec. 52).
When the Act is not applicable: The Actdoes not apply to corporations engaged
primarily in the banking business or anyother corporation to which there is any
special provision of law for its liquidation incase of insolvency.
Contingent claim
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Claim in which liability depends onsome future event that may or may not
happen and which makes it uncertainwhether there will be any liability.
After the close of the insolvencyproceedings and the happening of the
contingency, the creditor may pursue anyavailable remedy for the collection of his
claim.
Composition
A proceeding in insolvency
proceedings, which is voluntary on the partof the debtor and his creditors, in which a
debtor offers to pay his creditors a certainpercentage of their claims in consideration
of his release from liability.
Requisites:
1. Offer must be made afterthe filling of the Schedule of the
debtors property and the list of his
creditors.2. Offer must be accepted in
writing by a majority of the creditors
representing a majority of the claimswhich have been allowed;
3. Offer must be made onlyafter the insolvent deposits the
consideration to be paid to thecreditors ;
4. Accepted offer must be
confirmed by the court.
Effects of Confirmation:
1. The consideration shall be
distributed as the judge shalldirect;
2. The insolvency proceedings shall be
terminated.3. The title to the insolvents estate
shall revest in him.4. The insolvent shall be released
from his debts.
When court may confirm a composition1. It is for the best interest of the
creditors;2. The debtor has not been guilty of nay
of the acts, or of a failure to performany of the duties which would create a
bar to his discharge; and3. The offer and its acceptance are in
good faith and have not been made or
procured in a manner forbidden by theAct (De Leon).
When confirmation may be setaside:
Upon application ofa party in interest within 6 months
after the composition has beenconfirmed, the court may set aside the
confirmation and reinstate the case ifit shall be showed upon a trial that:
1. That fraudwas practiced in the procuring of
such composition; and
2. That theknowledge thereof has come to
the petitioner since theconfirmation of such composition
(Sec. 63).
Insolvency Proceedings are quasi in rem
Ratio: Claims are completely
extinguished by discharge of the debtor.
Discharge
Definition: Judicial
clearance of an insolvent debtor from allclaims except those expressly reserved by
law.
Debts which are not
discharged:1. Taxes and assessments due to
the Government, whether national orlocal;
2. Any debts created by fraud,embezzlement of the debtor;
3. Any debt created by thedefalcation as a public officer or while
acting in a fiduciary capacity;4. Debt of any person liable for the
same debt, for or with the insolventdebtor, either as partner, jointcontractor, indorser, surety orotherwise;
5. Debts of a corporation;6. Claim for support;
7. Discharged debt but revived by asubsequent new promise to pay;
8. Debts which have not been duly
scheduled in time for proof andallowance, unless the creditors hadnotice or actual knowledge of the
insolvency proceedings, are notdischarged as to such creditors;
9. Claims for unliquidated damagesarising out of pure tort;
10. Claims of secured creditors;11. Claims not in existence or not
mature at the time of discharge;12. Claims that are contingent at the
time of discharge.
Rules:
Debtor who has been declaredinsolvent must still obtain a dischargeafter 3 months, but not more than 1
year.
Debtor must not commit any of the
ACTS OF INSOLVENCY:1. Debtor submitted a false affidavit;
2. He concealed part of his estate oreffects;
3. Debtor was guilty of fraud or neglect in
care of his property;4. Debtor procured an attachment or
execution on his property during the one
month period prior to the insolvencyproceedings;
5. Debtor destroyed or falsified importantpapers and documents;
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6. Debtor fraudulently gave certaincreditors preferences;
7. Debtor failed to disclose that certainclaims which had been proven were false
or fraudulent;8. Being a merchant, debtor failed to keep
proper books of account;9. Debtor influenced the action of any
creditor by pecuniary means;10. In contemplation of insolvency, debtor
made fraudulent conveyances of orencumbrances upon his properties;
11. Debtor had been convicted of any of thepenal provisions of the Insolvency Law;
12. In case of involuntary insolvency, debtorhad already availed of the benefits of the
Insolvency Law within the 6-year periodpreceding his application for discharge.
When discharge may be revoked:
Upon petition of any creditor:
1. Whose debt was proved orprovable against the estate ininsolvency, on the ground that the
discharge was fraudulentlyobtained.
2. Who has discovered factsconstituting the fraud subsequent
to the discharge.3. The petition is filed within
1 year after the date of thedischarge (Sec. 69).
Fraudulent Preference
If debtor transferred property to any
person to give him preference, and such transfertook place within 30 days period from the date ofcleavage, such transfer may be set aside by proper
court action by the assignee.
A fraudulent preference is committed when
the debtor procures any part of his property to beattached, sequestered or seized on execution or
makes any payment, pledge, mortgage,assignment, transfer, sale or conveyance of any
part of his property, whether directly or indirectly,absolutely or conditionally, to any one under the
following circumstances:1. The debtor is insolvent or in contemplation
of insolvency;2. The transaction in question is made within
30 days before the filing of a petition by oragainst the debtor;
3. It is made with a view to giving preferenceto any creditor or person having a claim
against him;4. and the person receiving a benefit thereby
has reasonable cause to believe;5. That the transfer is made with a view to
prevent his property from coming to hisassignee in insolvency or to prevent the
same from being distributed ratably amonghis creditors or to defeat the object of or
any way hinder the operation of or evadethe provisions of the Insolvency Law.
Presumed Fraudulent Transfer
not in ordinary course of business
under confession of judgment
not for valuable consideration nor in
good faith
Effect of Fraudulent Transfer:
As against the creditors of the
insolvent debtor, any conveyance orassignment fraudulently made is void.
If debtordies before Order of Adjudication is issued,
insolvency proceedings must be dismissed.
Remedy: File a claim in the testate orintestate proceedings.
If debtor dies after the Order ofAdjudication is issued, proceedings will
continue.
Date of Cleavage: Importance
Creditor by assignment of credit made
within 30 days from date of cleavage shall
be disqualified as petitioning creditor; Attachment levied upon within 30 days
before the date of cleavage may be setaside by the assignee;
Judgments on cases filed and decided
within 30 days prior to the date ofcleavage may be set aside by the
assignee;
Judgments on cases filed before 30 days
from the date of cleavage but decidedwithin 30 days because of confession of
judgment or declaration of default may beset aside by action of assignee;
Properties acquired after date of cleavage,
after discharge of debtor in good faith shallnot be liable for debts incurred prior todate of cleavage;
Fraudulent preferences made within 30days prior to date of cleavage may be set
aside in an action brought by assignee.
For Banks / Quasi-Banks (Secs 29-33, RA 7653)1. Conservatorship
Should the Monetary Board find that a
bank or a quasi-bank is in a stat