IDOL L. BONDOC SR NO. 11-64318 Finals Examination in Credit Transactions 2nd Semester SY 2012-2013 Atty. Edwin P. Sulit epsulit@gmail.

com PROFESSOR (100 points) QUESTION: XYZ Company, a pre-need corporation engaged in the sale of educational plans defaulted in the payment of its obligations to holders of maturing educational plans in January 2011. A week later, said company closed its main office and all of its branch offices. Upon investigation conducted by the Senate, the following were brought to light: The policies and marketing plans of the company were conceived and implemented by the board of Directors consisting of a chairman and 7 members of the board and by its officers consisting of the president, 4 vice-presidents, treasurer, board secretary and branch managers in 12 branch offices. Of the 130,000 educational plans (Plan A and B combined) sold by the company, 45,000 have already matured but remain unpaid. 20,000 of the educational plans sold are Type B and the sale of the same was done by the company without the company having secured authority from the Insurance Commission and the SEC to sell the same. The known assets of the company and its officials are as follows: A. Land and Building in Makati worth 250 Million; B. Beach resort in Bataan worth 50 Million in the name of the companys chairman of the board but the funds used in the acquisition thereof all came from the company. C. Trust fund in ABC Bank in the amount of P600,000.00; D. Bank deposits in ABC Bank in the amount of P10 Million; E. Office equipment worth 20 Million; F. Company motor vehicles worth 30 Million; G. Unpaid subscriptions in shares of stock of XYZ Corporation worth P100 Million.
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The company owes the following; a. 130,000 plan holders, the aggregate value of the plans being P2 Billion Pesos; b. The City of Makati, 15 Million in unpaid realty and business taxes; c. PLDT, 300,000 in unpaid telephone bills; d. ABC Bank, 100 Million loan secured by mortgage on land and building in Makati; e. 100 employees, 10 million in unpaid salary, 13th month pay, holiday pay and separation benefits; f. SSS, 5 Million in unremitted contributions for the employees; g. BIR, 300 Million for unpaid VAT, documentary and income taxes; h. Maynilad, 150,000 for unpaid water bills; i. CCC Construction Corporation, 50 Million unpaid balance for the building in Makati constructed by the said corporation; j. Mr. Mercado, 30 Million balance of the purchase price of the beach resort. Mr. Mercado is the unpaid vendor; k. JMA Properties, Inc., 35 million rentals in arrears for the branch offices of XYZ Corporation. JMA Properties, Inc. is the owner of the land leased by XYZ Corporation for its branch offices; l. LG Bank, 25 Million motor vehicle loan for all the motor vehicles of XYZ Corporation. All the motor vehicles have chattel mortgages in favor of LG Bank; and m. Barako Law Office, 25 Million for unpaid attorneys fees. All the officials of XYZ Corporation went into hiding. 5 plan holders with Type B educational plans sued the officials of the Corporation for Syndicated Estafa and Violation of the Pre-Need Law and Violation of the Revised Securities Act. After preliminary investigation, information for said offenses were filed with the Regional Trial Court of Makati against all the officials of the corporation and warrants of arrest were issued for their apprehension. Only the President of the Corporation was arrested and arraigned. The Anti-Money Laundering Council (AMLC) filed suit to freeze all the assets of the corporation and its officials with the Regional Trial Court of Makati.
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The Court issued a freeze order. None of the officials of XYZ Corporation filed any answer or opposition to the AMLC suit. Discuss the rights of the respective claimants to the assets of XYZ Corporation and the respective feasible legal remedies that may be undertaken by them. ANSWER: A. The rights of the respective claimants to the assets of XYZ Corporation: Based on factual data, the total Assets of XYZ Corporation is valued at Php 460,600,000.00 and the total liabilities is approximately Php 2,595,450,000.00 which is only 18% based on assets. As such, the rights of the respective claimants to the assets of XYZ Corporation will fall under the order of preference of credits under the Civil Code of the Philippines. It is stated under the law that it classifies credits into three general categories which is (1) Special preferred credits listed in Article 2241 and 2242;
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) 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; 4

(10) Credits of insurers, upon the property insured, for the insurance premium for two years. (1923a)

(2) Ordinary preferred credits listed in Article 2244; and

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

(3) Common credits under Article 2245.

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) 5

(4) 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)

Likewise in Article 2241 and 2242 do not give the order of preference or priority of payment. They merely enumerate the credits which enjoy preference with respect to specific movables or immovable. With respect to the same specific movable or immovable, creditors, with the exception of the State, merely concur. There is no preference among them, there is only concurrence. However, in Article 2244 not only enumerates the ordinary preferred credits with respect to other property, real and personal, of the debtor, but also gives their order of preference in the order named. B. Reference to the respective feasible legal remedies: a) The other educational plan holders composed of Plan A and B Combine (129,995) should also file an amended Syndicated Estafa and Violation of the Pre-Need Law and Violation of the Revised Securities Act against XYZ Corporation so that they can really assert their right to claim; b) The City of Makati which has a claimed of 15 Million pesos of unpaid realty and business taxes can foreclosed the property and proceed with proper auction;

c) For PLDT and Maynilad who has 300,000 pesos and 150,000 pesos claim respectively they should stop and cut their services to XYZ Corporation and file Civil Case for Collection of Sum of Money; d) Officials of ABC Bank with a 100 Million loan secured by mortgage on land and building in Makati that they should review and ensure that said mortgage is registered and fully annotated in the land title in the Registry of Deeds to protect their claim and to file a separate Civil Case for Specific Performance of Contract plus Damages; e) To ascertained the rights of the 100 employees unpaid salary, 13th Month pay, holiday pay and separation benefits worth 10 Million pesos should file a case to DOLE NCR against the employer, XYZ Corporation and in accordance with Article 110 of Department of Labor and Employment Standards; f) The Social Security System should also file a Civil Case for Collection of Sum of Money worth 5 Million pesos unremitted SSS contributions for the employees; g) CCC Construction Corporation with a 50 Million unpaid balance for the building in Makati and JMA properties Inc, with a 35 Million unpaid rentals in arrears, they should also file a Civil Case for Specific Performance of Contract plus Damages; h) Mr. Mercado, 30 Million balance of the purchase price of the beach resort could ask for rescission for breach of contract and could file an Action for Reconveyance to Mr. Mercado as the rightful owner of the beach resort; i) LG Bank with 25 Million motor vehicle loan for all the motor vehicles of XYZ Corporation should also rescind the contract of sale and recover by actual possession or ask for forclosure of chattel mortgage or ask for specific performance with damages of all the vehicles for the bank disposition; j) Barako Law Office should cancel its representation to all the court which they represent XYZ Corporation as counsel because they will have difficulty defending the Corporation because of shortage of fund or no funds at all to be provided by Company. Also, they should settle with their client amicably the 25 million unpaid attorneys fees otherwise if no settlement arrived, they can file a Civil Case for specific performance of contract with damages; k) BIR can file tax evasion case worth 300 Million pesos against XYZ Corporation in violation of unpaid VAT, documentary and income taxes; All of these legal remedies by different claimant must also file a notice in notifying the RTC and the Anti-Money Laundering of their individual claim against XYZ Corporation for possible consolidation of cases;

Discuss likewise the effect, if any, of the suit of the AMLC relative to the rights of the claimants. The suit filed by the Anti-Money Laundering Council (AMLC) to freeze all the assets of XYZ Corporation is valid under Republic Act No. 10167, Section 01 and Section 02.
Thus in Section 2, Section 11 of the same act was amended to wit that AMLC may inquire into or examine any particular deposit or investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent court based on an ex parte application in cases of violations of this Act, when it has been established that there is probable cause that the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense under Section 4 hereof.

Now therefore, the possible effect of AMLC filing suit relative to the rights of the claimants is that the Anti-Money Laundering Council may have the better rights against the other claimants which specifically states under Republic Act No 9160, Section 12 Forfeiture Provisions classifies (a) civil forfeiture, (b) claim of forfeited assets and (c) payment in lieu of forfeiture procedure.
Sec. 12 Forfeiture Provisions. (a) Civil Forfeiture. When there is a covered transaction report made, and the court has, in a petition filed for the purpose ordered seizure of any monetary instrument or property, in whole or in part, directly or indirectly, related to said report, the Revised Rules of Court on civil forfeiture shall apply. (b) Claim on Forfeited Assets. Where the court has issued an order of forfeiture of the monetary instrument or property in a criminal prosecution for any money laundering offense defined under Section 4 of this Act, the offender or any other person claiming an interest therein may apply, by verified petition, for a declaration that the same legitimately belongs to him and segregation or exclusion of the monetary instrument belongs to him and for segregation or exclusion of the monetary instrument corresponding thereto. The verified petition shall be filed with the court which rendered the judgment of conviction and order of forfeiture, within fifteen (15) days from the date of the order of forfeiture,, in default of which the said order shall become final and executor. This provision shall apply in both civil and criminal forfeiture. (c) Payment in Lieu of Forfeiture. Where the court has issued an order of forfeiture of the monetary instrument or property subject of a money laundering offense defined under Section 4, and said order cannot be enforced because any particular monetary instrument or property cannot, with due diligence, be located, or it has been substantially altered, destroyed, diminished in value or otherwise rendered worthless by any act or omission,, directly or indirectly, attributable to the offender, or it has been concealed, removed, converted or otherwise transferred to prevent the same from being found or to avoid forfeiture thereof, or it is located outside the Philippines or has been placed or brought outside the jurisdiction of the court, or it has been commingled with other monetary instruments or property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be segregated for purposes of forfeiture, the court may, instead of enforcing the order of forfeiture of the monetary instrument or property or part thereof or interest therein, accordingly order the convicted offender to pay an amount 8

equal to the value of said monetary instrument or property. This provision shall apply in both civil and criminal forfeiture.

Therefore, the other claimants after AMLC will fall under Section 17, RA 9160 provides Restitution which states that restitution for any aggrieved party shall be governed by the provisions of the New Civil Code of the Philippines. Thus, the Civil Code states the order of preference under special preferred credits, ordinary preferred credits and common credits Article 2241, 2242, 2244 and 2245 respectively. And order of preference of credits under articles 2246 to 2251.