Credit

Transactions

Concept of credit

People v. Concepcion

The credit of an individual means his ability to borrow money by
virtue of the trust or confidence reposed by a lender that he will
pay what he may promise.

A loan means the delivery by one party and the receipt by the
other of a given sum of money, upon an agreement, express or
implied, to repay the sum loaned, with or without interest.

The concession of a credit necessarily involves the granting of
loans up to the limit of the amount fixed in the credit.

To discount a paper is only a mode of loaning money, with the
following distinctions:

a. In a discount, interest is deducted in advance, while in
a loan, interest is taken at the expiration of a credit;
b. A discount is always on a double-name paper; a loan is
generally on a single-name paper

Commodatum

Republic v. Bagtas

A contract of commodatum is essentially gratuitous. Ownership
of the thing does not transfer to the bailee, thus, the bailor bears
the risk of loss due to force majeure. However, the bailee is liable
for loss of the thing due to fortuitous event if he keeps the thing

longer than the period stipulated or when the thing loaned has
been delivered with appraisal of its value, unless there is a
stipulation exempting him from responsibility in case of a
fortuitous event.

Pajuyo v. CA

In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use the
same for a certain time and return it. An essential feature of
commodatum is that it is gratuitous. The use of the thing
belonging to another is for a certain period such that the bailor
cannot demand the return of the thing loaned until after the
expiration of the period stipulated or after accomplishment of
the use for which the commodatum is constituted. If the bailor
should have urgent need of the thing, he may demand its return
for temporary use. If the use of the thing is merely tolerated by
the bailor, he can demand the return of the thing at will, in which
case, the contractual relation is a precarium.

Quintos v. Beck

The bailee is bound to return all the things subject of the
commodatum upon demand of the bailor. He is not deemed to
have complied with his obligation if he retains for himself some
of the things loaned or when he merely placed them at the
disposal of the bailor, when the agreement between them is for
him to return them at the bailors residence. The bailee is not
entitled to place the thing on deposit, and the bailor cannot be
compelled to accept the offer to return only some of things
loaned.

A bailee who breached the contract of commodatum and without

any reason refused to return and deliver all the things loaned
upon the bailors demand is bound to pay the legal expenses and
judicial costs which the bailor would not have otherwise
defrayed.

Producers Bank of the Philippines v. CA

A commodatum may have for its object a consumable thing if the
consumable goods are loaned only for the purpose of exhibition,
or when the intention of the parties is to lend consumable goods
and to have the very same goods returned at the end of the
period agreed upon.

Simple loan or mutuum

Garcia v. Thio

A loan is a real contract, not consensual, and as such is perfected
only upon the delivery of the object of the contract. Upon
delivery of the object of the contract of loan, the debtor acquires
ownership of such money or loan proceeds and is bound to pay
the creditor an equal amount.

Delivery is the act by which the res or substance thereof is placed
within the actual or constructive possession or control of
another.

Saura Inc. v. DBP

Where an application for a loan of money was approved by
resolution of the corporation (lender) and the corresponding

mortgage was executed and registered, there arises a perfected

consensual contract of loan.

Since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.

BPI Investment Corp. v. CA

A loan contract is not a consensual, but a real, contract. It is
perfected only upon the delivery of the object of the contract.

A loan contract involves a reciprocal obligation wherein the
obligation or promise of each party is the consideration for that
of the other. Neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what
is incumbent upon him.

People v. Puig and Porras

The bank acquires ownership of the money deposited by its
clients. The relationship between banks and depositors is that of
a creditor and debtor.

The employees of the bank who are entrusted with the
possession of the deposits in the bank occupy positions of
confidence by virtue of the confidence reposed in them. It is not
the depositor-client who is the real-party-in-interest in a case for
qualified theft filed by the bank against its employees who
misappropriated the money deposited in the bank, but the bank
itself, as it is now the owner of such money.

BPI Family Bank v. Franco

The quality of being fungible depends upon the possibility of the

property, because of its nature or the will of the parties, being
substituted by others of the same kind, not having a distinct
individuality. Money is generic and fungible and bears no
earmarks of peculiar ownership.

The deposit of money in banks is governed by the provisions on
simple loan. As there is a debtor-creditor relationship between a
bank and its depositor, a bank acquires ownership of the
deposits, but such ownership is coupled with an obligation to pay
him an equal amount on demand.

Interest

Frias v. San Diego-Sison

For a debtor to continue in possession of the principal of the loan
and to continue to use the same after maturity of the loan
without payment of the monetary interest would constitute
unjust enrichment on the part of the debtor at the expense of the
creditor.

Ligutan v. CA

A penalty clause is an accessory undertaking to assume greater
liability on the part of the obligor in case of breach of an
obligation. It functions to strengthen the coercive force of the
obligation and to provide in effect, for what would be the
liquidated damages resulting from such a breach. The obligor
would then be bound to pay the stipulated indemnity without the
necessity of proof on the existence and on the measure of
damages caused by the breach. Such stipulated penalty may still
be equitably reduced by the courts if iniquitous or

unconscionable or if the principal obligation has been partly or

irregularly complied with.

A penalty stipulation is not necessarily preclusive of interest, if
there is an agreement to that effect, the two being distinct
concepts which may be separately demanded. What may justify
the court in reducing penalty or surcharges may not equally
justify non-payment or reduction of interest.

GSIS v. CA (1986)

Stipulation in the Contract:
The rate of interest shall be 9% per annum compounded
monthly, and that any due and unpaid monthly amortization
shall bear interest at the rate of 9%/12% per month.

Ratio:
The Usury Law applies only to interest by way of compensation
for the use or forbearance of money. Interest by way of damages
is governed by Art. 2209.
Art. 2209. If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon.

The Civil Code permits the agreement upon a penalty apart from
interest. Should there be such agreement, the penalty does not
include the interest, and as such the two are different and
distinct things which may be demanded separately.
The stipulation about payment of additional rate partakes of
the nature of a penalty clause, which is sanctioned by
law.

Eastern Shipping Lines v. CA (1994)

CB Circular 416: the rate of interest for loan or forbearance of
money, goods or credit, and the rate allowed in judgments, in the
absence of expressly contract as to such rate of interest, shall be
12% per annum.

If the claim does not constitute a loan or forbearance, then CB
Circular 416 will not apply. In this case, the claim is one
for damages which is still unliquidated, hence, the legal
interest to be paid is 6% on the amount due computed
from the decision of the court a quo.

Rules of thumb in computing interest as damages:
When an obligation, regardless of its source, is breached, the
contravenor can be held liable for damages.
With regard particularly to an award of interest in the concept
of actual and compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed as follows:

Loan or Forbearance of Money

With stipulation. When an obligation is
breached and it consists in the payment of a
sum of money, i.e., a loan or forbearance of
money, the interest due should be that
stipulated, commencing from the time it is
judicially demanded.
Without stipulation. In the absence of
stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e.,
from judicial or extrajudicial demand and
subject to the provisions of Art. 1169[1].

Other Obligations
When an obligation, not constituting a loan or
forbearance of money, is breached, an interest in the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% p.a. No interest,
however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be
established with reasonable certainty.
o Where the demand is established with
reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or
extrajudicially.
o When such certainty cannot be reasonably
established at the time the demand is made, the
interest shall begin to run only from the date the
judgment of the court is made.

When Judgment Final and Executory
When the judgment of the court awarding a sum
of money becomes final and executor, the rate of legal
interest, whether the case falls under par. 1 or par. 2,
shall be 12% p.a. from such finality until its
satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.

Discussion:
Other Obligations Not Constituting Loan or Forbearance of
Money:
Recovery of damages for injury to person and
loss of property
Recovery of damages arising from the collapse of
the building

 Moral and exemplary damages

Damages for breach of employment contract
Complaint for a sum of money as just
compensation for lands expropriated

Siga-an v. Villanueva (2009)

Monetary Interest
No monetary interest shall be due unless it has been expressly
stipulated in writing (Art. 1956). Monetar interest is
compensation fixed by the parties for the use or forbearance of
money.

Requisites for payment of monetary interest:
1. An express stipulation for the payment of
interest
2. Such agreement for the payment of interest must
be reduced in writing

Compensatory Interest
Compensatory interest is interest as penalty or indemnity for
damages[2]. Interest can be payable even in the absence of an
express stipulation in writing. Compensatory interest CANNOT
be charged as compensation for the use of forbearance of money.
The right to interest arises only:
By virtue of a contract
By virtue of damages for delay or failure to pay
the principal loan on which interest is demanded

Solutio indebiti

Under Art. 1960[3], if the borrower of loan pays interest when
there has been no stipulation therefor, the principle of solution

indebiti applies. It applies to erroneous payment of undue

interest.

Requisites:
1. A payment is made when there exists no binding
relation between the payor, who has no duty to pay,
and the person who received the payment
2. The payment is made through mistake, and not
through liberality of some other cause

DEPOSIT

Voluntary Deposit

BPI v. IAC (1988)

Zschornack entrusted to COMTRUST $3,000 cash (greenbacks)
for safekeeping, and that the agreement was embodied in a
document.

Ratio:

The document and the subsequent acts of the parties show that
they intended the bank to safekeep the foreign exchange, and
return it later to Zschornack. The parties did not intend to sell
the US dollars to the Central Bank within one business day from
receipt. Otherwise, the contract of depositum would never have
been entered into at all.

However, since safekeeping of greenback is prohibited, both
parties are in pari delicto and Zschornack cannot recover the
amount.

Roman Catholic Bishop of Jaro v. De la Pena

No one shall be liable for events which could not be foreseen, or
which having been foreseen were inevitable, with the exception
of the cases expressly mentioned in the law or those in which the
obligation so declares.
By placing the money in the bank and mixing it
with his personal funds, De la Pena did not thereby
assume an obligation different from that under which
he would have lain if such deposit had not been made,
nor did he thereby make himself liable to repay the
money at all hazards. The fact that he placed the trust
fund in the bank in his personal account does not add
to his responsibility. The question here is not
negligence.

There was no law prohibiting him from depositing it as he did
and there was no law which changed his responsibility by reason
of the deposit.

Discussion:

Maam disagrees. The change of way of the deposit was
unwarranted within the purview of Art. 1973. Change of way of
deposit the contract was converted from a deposit to a loan
Art. 1973. Unless there is a stipulation to the
contrary, the depositary cannot deposit the thing with
a third person. If deposit with a third person is
allowed, the depositary is liable for the loss if he
deposited the thing with a person who is manifestly
careless or unfit. The depositary is responsible for the
negligence of his employees.

Triple V v. Filipino Merchants

De Asis availed of the valet p arking service of Triple V and
entrusted her car key to the vale counter. The car and the key
were stolen.

Ratio:

In a contract of deposit, a person receives an object belonging to
another with the obligation of safely keeping it and returning the
same. A deposit may be constituted even without any
consideration. It is not necessary that the depositary receives a
fee before it becomes obligated to keep the item entrusted for
safekeeping and to return it later to the depositor.

Discussion:

Why liable:
Art. 2000. The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
the keepers of hotels or inns as well as strangers; but not that
which may proceed from any force majeure. The fact that
travellers are constrained to rely on the vigilance of the keeper of
the hotels or inns shall be considered in determining the degree
of care required of him.

Situation: If the car key was with the owner, would it be a
contract of deposit?
No. It would be a contract of lease as there was no delivery as to
constitute deposit and the owner had the control of the thing.

CA Agro-Industrial Devt Corp. v. CA


The contract for the rent of the safety deposit box is not an
ordinary contract of lease of things but a special kind of
deposit.
It cannot be characterized as an ordinary
contract of lease of things because the full and absolute
possession and control of the safety deposit box was
not given to the joint renters.
o The guard key remained with the Bank.
Without this key, neither of the renters
could open the box.
o On the other hand, the Bank cannot
likewise open the box without the renters
key.

Art. 1975[4] cannot be invoked as an argument against the
deposit theory.
Obviously, the first paragraph cannot apply to a
depositary of certificates, bonds, securities or
instruments which earn interest if such documents are
kept in a rented safety deposit box. It is clear that the
depositary cannot open the box without the renter
being present.

The contractual relation between a commercial bank and
another party in a contract of rent of a safety deposit box with
respect to its contents is one of bailor and bailee.
The prevailing rule in American jurisprudence is
that the relation between a bank renting out safe-
deposit boxes and its customers with respect to the
contents of the box is that of a bailor and bailee, the
bailment being for hire and mutual benefit.
We adopted the prevailing rule in the US.

o General Banking Act: The banks may

receive in custody funds, documents, and
valuable objects, and rent safety deposit
boxes for its safeguarding. The banks shall
perform these services as depositaries or as
agents.
o The rending out of the safety
deposit boxes is not independent
from, but related to or in conjunction
with, this principal function.

Discussion:

Maam disagrees. Bailment contract is a common law concept in
the US. The 2nd par. of Art. 1975 means that the depositary has
no duty to preserve the value as long they are certificates, bonds,
securities or instruments. The contract is one of deposit, not a
bailment contract.

Necessary Deposit

YHT Realty Corporation v. CA (2005)

Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages (Art. 1170).
The owners and managers of an establishment or enterprise are
likewise responsible for damages caused by their employees in
the service of the branches in which the latter are employed or
on the occasion of their functions Art. 2180 (4).

o Tropicana is guilty of gross negligence. The guest
alone cannot open the safety deposit box without the

assistance of the management or its employees. With

more reason that access of the safety box should be
denied if the one requesting for the opening of the
safety deposit box is a stranger.

The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles
brought by the guest. Any stipulation between the hotel-keeper
and the guest whereby the responsibility of the former as set
forth in articles 1998 to 2001 is suppressed or diminished shall
be void (Art. 2003).

Responsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of the guests even if causes by
servants or employees of the keepers of hotels or inns as well as
by strangers, except as it may proceed from any force majeure.
o In the case at bar, there is no showing that the act of
the thief or robber was done with the use of arms or
through an irresistible force to qualify the same as
force majeure.

LETTERS OF CREDIT

Transfield Phil. v. Luzon Hydro Corporation (2004)

A letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver
goods to a third person and assumes responsibility for payment
of debt therefor to the addressee.

The independent nature of a letter of credit may be:
Independence in toto where the credit is
independent from the justification aspect and is a

separate obligation from the underlying agreement

like for instance a typical standby
Independence may only be as to the justification
aspect like in a commercial letter of credit or
repayment standby, which is identical with the same
obligations under the underlying agreement.
In both cases, the payment may be enjoined if in light of the
purpose of the credit, the payment of the credit would constitute
fraudulent abuse of credit.

Surety Contract

The surety has no duty to pay beneficiary until the latter proves
the fact of obligors performance in a litigation. During the
litigation, the surety holds the money and the beneficiary bears
most of the cost of delay in performance.

Letter of Credit

In a standby credit case, the beneficiary avoids that litigation
burden and receives his money promptly upon presentation of
the required document. It may be that the applicant has in fact
performed his obligation and that the beneficiarys presentation
of documents is wrongful. In that case, applicant may sue the
beneficiary in tort, contract or in breach of warranty; but during
the litigation, the beneficiary, not the applicant, holds the money.

Ratio:

Letters of credit, by their nature, are separate transactions from
the sales or other contracts on which they may be based. The
engagement of the issuing bank is to pay the seller or beneficiary
of the credit once the draft and the required documents are

presented to it.
The independence principle assures the seller or
the beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing
bank from determining whether the main contract is
actually accomplished or not. The beneficiary can
invoke the independence principle to justify its
drawing of the securities because the letter of credit
was precisely entered into for the benefit of both
issuing bank and beneficiary.
o Banks are in no way concerned with or
bound by such contracts, even if any reference
whatsoever to such contract is included in the
credit.
o Banks assume no responsibility for the
form, sufficiency or genuineness of any
document presented to it, nor does it assume
responsibility for the good/bad faith of the
consignor.

Injunction does not lie to prevent LHC to draw on the letter of
credit. To require that any dispute must first be resolved by the
parties would convert the letter of credit into a mere guaranty. In
a letter of credit, the settlement of a dispute between the parties
is not a prerequisite for the release of funds.
Furthermore, nothing in the contract suggested
that all disputes regarding delay must first be settled
before LHC can draw on the securities.

TRUST RECEIPTS LAW

Colinares v. CA (2000)

Trust receipt transactions are intended to aid in financing

importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or
purchased.

The Trust Receipts Law does not seek to enforce payment of the
loan, rather it punishes the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner.

The practice of banks of making borrowers sign
trust receipts to facilitate collection of loans and place
them under the threats of criminal prosecution should
they be unable to pay it may be unjust and inequitable,
if not reprehensible. Such agreements are contracts of
adhesion which borrowers have no option but to sign
lest their loan be disapproved.

Ratio:

The transaction was a contract of loan. Petitioners received the
merchandise from CM Builders on Oct. 30. On the same day,
ownership over the merchandise was already transferred to
them who were to use the materials for their construction
project. It was only on Oct. 31 when they went to the bank to
apply for a loan to pay for the merchandise. The situation belies
what normally obtains in a pure trust receipt transaction.
Petitioners are not importers acquiring the goods for re-sale,
contrary to the express provision embodied in the trust receipt.

Trust Receipt Transaction:

 The bank acquires a security interest in the

goods as holder of a security title for the advances it
had made to the entrustee.
o The ownership of the merchandise
continues to be vested in the person who
had advanced payment until he has been
paid in full, or if the merchandise has
already been sold, the proceeds of the sale
should be turned over to him by the
importer or by his representative or
successor in interest.

To secure that the bank shall be paid, it takes full
title to the goods at the very beginning and continues
to hold that title as his indispensable security until the
goods are sold and the vendee is called upon to pay for
them; hence, the importer has never owned the goods
and is not able to deliver possession.
o In a certain manner, trust receipts
partake of the nature of a conditional sale
where the importer becomes absolute
owner of the imported merchandise as soon
as he has paid its price.

Truth in Lending Act

UCPB v. Samuel and Beluso (2007)

Sec. 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the
consummation of the transaction. The promissory notes, the
copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB.

The rationale of this provision is to protect

debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to
the contract, and to properly evaluate their options in
arriving at business decisions.
Opening a credit line does not create a credit
transaction of loan or mutuum, since the former is
merely a preparatory contract to the contract of loan
or mutuum. The credit transaction thus occurred not
when the credit line was opened, but rather when the
credit line was availed of. The violation occurred not
when the parties executed the Credit Agreement,
where not interest rate was mention, but when the
parties executed the promissory notes, where the
allegedly offending interest rate was stipulated.

The penalty for the violation of the act is P100 or an amount
equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is greater, except
that such liability shall not exceed P2,000 on any credit
transaction. As this penalty depends on the finance charge
required of the borrower, the borrowers cause of action would
only accrue when such finance charge is required.
The date of the demand for payment of the
finance charge is Sept. 2, 1998 while the foreclosure
was made on Dec. 28, 1998. The filing of the case on
Feb. 9, 1999 is therefore within the 1-year prescriptive
period.

Note: Penalty is P26,000, not P2,000 computation is per credit
transaction

Usury Law


Carpo v. Chua (2005)

Pursuant to the freedom of contract principle embodied in
Article 1306 of the Civil Code, contracting parties may establish
such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
(lowest interest rate reduced by the SC)
In Ruiz v. Court of Appeals, we equitably reduced the
agreed 3% per month or 36% per annum interest to
1% per month or 12% per annum interest.

Article 1420 provides: "In case of a divisible contract, if the
illegal terms can be separated from the legal ones, the latter may
be enforced." In simple loan with stipulation of usurious interest,
the prestation of the debtor to pay the principal debt, which is
the cause of the contract (Article 1350), is not illegal. By the
same token, since the mortgage contract derives its vitality from
the validity of the principal obligation, the invalid stipulation on
interest rate is similarly insufficient to render void the ancillary
mortgage contract.
The illegality lies only as to the prestation to pay
the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the only
one that is illegal.
The invalidation of the interest rates is congruent
with the rule that a usurious loan transaction is not a
complete nullity but defective only with respect to the
agreed interest.
The principal debt remaining without stipulation
for payment of interest can thus be recovered by
judicial action. And in case of such demand, and the

debtor incurs in delay, the debt earns interest from the

date of the demand (in this case from the filing of the
complaint). Such interest is not due to stipulation, for
there was none, the same being void. Rather, it is due to
the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay
interest by way of damages (Art. 2209, Civil Code).

Since an excessive stipulated interest rate may be void for being
contrary to public policy, an action to annul said interest rate
does not prescribe. Such indeed is the remedy; it is not the action
for annulment of the ancillary real estate mortgage.

Warehouse Receipts Law

PNB v. Se (1996)

A warehouseman shall have a lien on goods deposited in his
hands, for all lawful charges for storage and preservation of the
goods (Sec. 27). A warehouseman having a lien valid against the
person demanding the goods may refuse to deliver the goods to
him until the lien is satisfied (Sec. 31). Therefore, while PNB is
entitled to the sugar stocks as the endorsee of the quedans,
delivery to it shall be effected only upon payment of the storage
fees.
After being declared not the owner, but the
warehouseman, Noahs Ark cannot be deprived of its
right to enforce its claim for warehousemans lien, for
reasonable storage fees and preservation expenses.

The unconditional presentment of the receipts by PNB for
payment against Noahs Ark on the strength of the provisions of
the Warehouse Receipts Law carried with it the admission of the

existence and validity of the stipulations written on the face of

the warehouse receipts, including the unqualified recognition of
the payment of the warehousemans lien for storage fees and
preservation expenses.

Imperative is the right of a warehouseman to demand payment
of his lien at this juncture, because under Sec.29, the lien may be
lost where the warehouseman surrenders the possession of the
goods without requiring payment of his lien, because a
warehousemans lien is possessory in nature.


PNB .V SE (double)

After being declared not the owner of the goods subject of the
warehouse receipts, but the warehouseman, Noahs Ark is claiming
the right to a warehousemans lien (for payment of storage fees
and preservation expenses).
The subject warehouse receipts themselves contained a
stipulation which provides for Noahs Ark right to impose
and collect warehousemans lien.
Even in the absence of such a stipulation, law and equity
dictate the payment of the warehousemans lien pursuant to
Secs. 27 and 31 of the Warehouse Receipts Law.
o Sec. 27: A warehouseman shall have a lien on
goods deposited in his hands, for all lawful
charges for storage and preservation of the
goods.
o Sec. 31: A warehouseman having a lien valid
against the person demanding the goods may
refuse to deliver the goods to him until the
lien is satisfied.

A lien may be lost where the

warehouseman
surrenders
the
possession of the goods without requiring
payment of his lien, because a
warehousemans lien is possessory in
nature.

GUARANTY AND SURETY

E. ZOBEL INC. V. CA

In the document referred to as Continuing Guaranty, E. Zobel Inc.
obligated itself to Solidbank as a surety.
A surety is distinguished from a guaranty in that a guarantor
is the insurer of the solvency of the debtor and thus binds
himself to pay if the principal is unable to pay, while a
surety is the insurer of the debt, and he obligates himself to
pay if the principal does not pay.
Surety
o He is usually bound with his principal by the
same instrument, executed at the same time, and
on the same consideration.
o He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every
default of his principal.
o Usually, he will not be discharged, either by the
mere indulgence of the creditor to the principal,
or by want of notice of the default of the principal,
no matter how much he may be injured thereby.
Guarantor
o The contract of guaranty is the guarantors own
separate undertaking, in which the principal does
not join. It is usually entered into before or after

that of the principal, and is often supported on a

separate consideration from that supporting the
contract of the principal.
o The original contract of his principal is not his
contract, and he is not bound to take notice of its
non-performance.
o He is often discharged by the mere indulgence of
the creditor to the principal, and is usually not
liable unless notified of the default of the
principal.
The use of the term guarantee does not ipso facto mean
that the contract is one of guarantee. Guarantee is
frequently employed in business transactions to describe not
the security of the debt but an intention to be bound by a
primary or independent obligation.
o The contract, albeit denominated as a Continuing
Guaranty, is a contract of surety. The terms of
the contract categorically obligates E. Zobel Inc.
as surety.

INTL FINANCE CORP. V. IMPERIAL TEXTILE MILLS (ITM)

The Guarantee Agreement provided for the solidary liability of
ITM with PPIC, the principal debtor.
If a person binds himself solidarily with the principal
debtor, the contract is a suretyship.
o When the Guarantee Agreement provided for
the solidary liability of ITM, it brought ITM to the
level of PPIC and thus, not merely secondarily
liable but primarily liable as a surety. ITM became
a surety when it bound itself solidarily with the
principal debtor.

The use of the word guarantee does not ipso facto make the
contract one of guaranty. The word is frequently used in
business transactions to describe the intention to be bound
by a primary or an independent obligation.

PHIL. BLOOMING MILLS V. CA

Under a Deed of Suretyship, Ching obligated himself as surety of
PBM. Later, PBM (with Ching) filed a petition for suspension of
payments with the SEC.
Creditors may sue individual sureties of debtor-
corporations in a separate proceeding before regular
courts despite the pendency of a case before the SEC
involving a debtor-corporation.
o Being a nominal party in the SEC case, Chings
properties were not included in the rehabilitation
receivership that the SEC constituted to take
custody of PBMs assets. Therefore, the Bank was
not barred from filing a suit against Ching, as
surety for PBM.
An anomalous situation would arise if
individual
sureties
for
debtor-
corporations may escape liability by
simply co-filing with the corporation a
petition for suspension of payments in the
SEC whose jurisdiction is limited only to
corporations and their assets.
As the insurer of debt, a surety is bound to pay the debt
in the original amount, not the reduced/rehabilitated
amount.
o In granting the loan to PBM, the Bank required
Chings surety precisely to insure full recovery of

the loan in case PMB becomes insolvent or fails to

pay in full. Thus, Ching cannot use PBMs failure
to pay in full as justification for his own reduced
liability. As surety, Ching agreed to pay in full
PBMs loan in case it fails to pay in full for any
reason, including insolvency.


ESCANO & SOLIS V. ORTIGAS

Joint and several debtors (active solidarity) v. Surety
o Similarity: Solidarity signifies that the creditor
can compel any one of the joint and solidary
debtors or the surety alone to answer for the
entirety of the principal debt.
o Difference: The difference lies in the respective
faculties of the joint and several debtor and the
surety to seek reimbursement/indemnification.
In the case of joint and several debtors,
the solidary debtor who pays may claim
from his co-debtors only the share
which corresponds to each (with
interest).
In contrast, even as the surety is solidarily
bound with the principal debtor to the
creditor, the surety who pays has the
right to recover the full amount paid,
and not just the proportional share,
from the principal debtor/s.
The rights to indemnification and subrogation as
granted to the guarantor extend as well to sureties.
o The application of the provisions on joint and
solidary obligations on suretyship, however, does

not mean that suretyship is withdrawn from the

applicable provisions governing guaranty.
Otherwise, there would be no difference between
the surety and the joint and several debtors.


TUPAZ IV & TUPAZ V. CA

A corporate representative signing as a solidary guarantee in
his capacity as corporate representative does not undertake
to guarantee personally the payment of the corporations
debt.
o Debts incurred by corporate representatives,
acting as such, are not theirs but the direct
liability of the corporation. As an exception, they
are personally liable only if they so stipulate.
Solidary guarantee v. surety
o The clause we jointly and severally agree and
undertake refers to the understanding between
the 2 parties who are to sign it or to the liability
existing between themselves. It does not refer to
the undertaking between either one or both of
them on the one hand, and the bank on the other
with respect to the liability described in the trust
receipt.
o Had there been more than one signatory to
the trust receipts, the solidarity liability
would exist between the guarantors.
Excussion is not a prerequisite to secure judgment
against a guarantor.
o The guarantor can still demand deferment of the
execution of the judgment against him until after

the assets of the principal debtor shall have been

exhausted.
The benefit of excussion may be waived.
o Tupaz waived excussion when he agreed that his
liability in the guaranty shall be direct and
immediate, without any need on the part of the
bank to take any steps or exhaust any legal
remedies.

PLEDGE AND MORTGAGE (Common Provisions)


DBP V. CA

Simultaneous with the execution of the loans was the execution of
Assignment of Leasehold Rights by Cuba in favor of DBP as
security. Condition 12 of the Assignment provides for the
appointment of DBP as attorney-in-fact with authority to sell the
leasehold rights in case of default by Cuba, the proceeds to be
applied to the payment of the loans. Upon default, DBP, without
foreclosure proceedings, appropriated the leasehold rights.
An assignment to guarantee an obligation is in effect a
mortgage.
o The Assignment of Leasehold Rights is a
mortgage contract. It is by way of security for the
payment of the loans.
Condition 12 did not constitute a pactum commissorium.
o Elements:
There would be a property mortgaged
by way of security for the payment of
the principal obligation.

There should be a stipulation for

automatic appropriation by the
creditor of the thing mortgaged in case
of non-payment of the principal
obligation within the stipulated
period.
o Condition 12 did not provide that the ownership
over the leasehold rights would automatically
pass to DBP upon Cubas failure to pay the loans
on time. It merely provided for the appointment
of DBP as attorney-in-fact for the sale.
DBP however, exceeded the authority vested by Condition
12.
o It had, without foreclosure proceedings, whether
judicial or extrajudicial, appropriated Cubas
leasehold rights.

BUSTAMANTE V. ROSEL

To guarantee payment of the loan, the debtors put as collateral a
parcel of land. It was stipulated that in the event they fail to pay,
the creditor has the option to buy the collateral for a pre-arranged
price inclusive of the amount of the loan and interest.
A scrutiny of the stipulation of the parties reveals a
subtle intention of the creditor to acquire the property
given as security for the loan. This is embraced in the
concept of pactum commissorium.
o The debtors are obliged to dispose of the
collateral at the pre-arranged consideration
amounting to practically the same amount as the
loan. In effect, the creditor acquires the collateral
in the event of non-payment of the loan.

Maam comments: It is pactum commissorium since the

option has no separate consideration independent of the
price.

ONG V. ROBAN LENDING CORP.

Ong spouses executed a promissory note for their debt to Roban on
the same day they signed a dacion in payment agreement. In the
agreement, Ong would assign the mortgaged properties to Roban
in settlement of their obligation. A MOA was also signed on the
same day, which provides that failure of Ong to pay their debt on
time would give Roban the right to enforce the dacion in payment
agreement and transfer to it the ownership of the mortgaged
properties.
While the agreement is named dacion in payment, it in
fact constitutes pactum commissorium, as failure of by
Ong to pay their debts grants Roban the right to
automatically acquire ownership of the mortgaged
properties.
o In a true dacion en pago, the assignment of
property extinguishes the monetary debt.
Here, Ong still had to execute a promissory
note for their debt on the same day as they
signed the dacion en pago agreement.

PLEDGE

PARAY & ESPELETA V. RODRIGUEZ

Rodriguez et al. pledged their shares of stocks to Paray to secure
certain obligations. Upon their default, attempted to foreclosure
the pledges. Prior to the foreclosure, Rodriguez et al. caused the

consignation with the Clerk of Court of certain amounts which

allegedly were tendered to Paray beforehand. However, the
auction took place.
In order for consignation to have the effect of
extinguishing the pledge, the amounts should cover not
only the principal loan but also the stipulated interest.
The right of the creditor to retain possession of the thing
pledged exists only until the debt is paid.
The debtor cannot ask for the return of the thing pledged
against the will of the creditor unless and until he had
paid the debt and its interest.
o At the same time, the right of the pledgee to
foreclose pledge is also established under the
Code. When the credit has not been satisfied
in due time, the creditor may proceed with the
sale by public auction.

REAL ESTATE MORTGAGE

MEDIDA V. CA

Another mortgage was constituted on the mortgaged properties
during the redemption period.
Since the mortgagor remains as the absolute owner of
the property during the redemption period and has free
disposal of his property, there would be compliance with
the requisites of Art. 2085 for the constitution of another
mortgage on the property.
o During the redemption period, it cannot be
said that the mortgagor is no longer the
owner of the foreclosed property since the
rule is that the right of the purchaser at a
foreclosure sale is merely inchoate until after

the period of redemption has expired without

the right being exercised.
The redemption of property sold under a
foreclosure sale defeats the inchoate right of
the purchaser and restores the property to
the same condition as if no sale had been
made. It does not give to the mortgagor a new
title, which was never lost, but merely
restores to him the title freed of the
encumbrance of the lien foreclosed.

HUERTA ALBA RESORT V. CA

Right of redemption v. Equity of redemption
o The right of redemption understood in the
sense of a prerogative to re-acquire mortgaged
property 1 year after registration of the
certificate of sale exists only in the case of
extrajudicial foreclosure of the mortgage.
No such right is recognized in a judicial
foreclosure except only when the
mortgagee is the PNB or a bank or a
banking institution.
o Equity of redemption is the right of the
mortgagor in a judicial foreclosure of the
mortgage to extinguish the mortgage by paying
the debt 90-120 days from entry of judgment,
or even after but before the confirmation of
sale.
Where a party failed to assert a right to redeem in
several crucial stages of the proceedings, it is too late in
the day for it to subsequently invoke such right in

opposition to a motion for issuance of a writ of possession

after confirmation of sale by the court of the foreclosure sale
and the registration of the certificate of sale.


Suico v. Philippine National Bank

It is true that statutory provisions governing publication of
notice of mortgage foreclosure sales must be strictly
complied with, and that even slight deviations therefrom will
invalidate the notice and render the sale at least voidable.
Nonetheless, we must not also lose sight of the fact that the
purpose of the publication of the Notice of Sheriffs Sale is to
inform all interested parties of the date, time, and place of
the foreclosure sale.
o Logically, this not only requires that the correct date,
time and place of the foreclosure sale appear in the
notice, but also that any and all interested parties be
able to determine that what is about to be sold at the
foreclosure sale is the real property in which they
have an interest.
Notices are given for the purpose of securing bidders and
to prevent sacrifice of the property.
o If these objectives are attained, immaterial errors and
mistakes will not affect the sufficiency of the notice.
o But if mistakes or omissions occur in the notices of
sale, which are calculated to deter or mislead bidders,
to depreciate the value of the property, or to prevent
it from bringing a fair price, such mistakes or
omissions will be fatal to the validity of the notice,
and also to the sale made pursuant thereto.
Non-delivery of the bid price or the surplus in a
foreclosure sale does not invalidate the sale.

If the mortgagee retains more of the proceeds of the sale

than he is entitled to, this fact alone will not affect the
validity of the sale but simply give the mortgagor a cause
of action to recover such surplus.
If the amount of the loan is equal to the amount of the
bid, there is no need to pay the amount in cash.
o The raison detre is that it would obviously be
senseless for the sheriff or the notary public
conducting the foreclosure sale to go through the idle
ceremony of receiving the money and paying it back
to the creditor.
The proceeds of the foreclosure sale shall be applied to ff
in order:
o costs of the sale
o mortgaged debt
o payment to the junior encumbrancers, if any in the
order of priority
o balance to the mortgagor
The applications of the proceeds of the sale of the
mortgaged property to the mortgagors obligation is an
act of payment, not payment by dacion; hence, it is the
mortgagees duty to return any surplus in the selling price
to the mortgagor.
o A mortgagee who exercises the power of sale
contained in a mortgage is considered a custodian of
the fund and, being bound to apply it properly, is
liable to the persons entitled thereto if he fails to do
so.

Chattel Mortgage

Acme Shoe Rubber and Plastic Corp. v. CA (after-incurred
obligations)

ISSUE: WON a chattel mortgage can extend to cover after-

incurred obligations

HELD: NO. A chattel mortgage can only cover obligations
existing at the time the mortgage is constituted.

Contracts of security are either personal1 or real2.

Contracts of real security are subject to the essential
condition that if the obligation becomes due and the debtor
defaults, then the property encumbered can be alienated for
the payment of the obligation, but that should the obligation
be duly paid, then the contract is automatically extinguished
proceeding from the accessory character of the agreement.
As the law so puts it, once the obligation is
complied with, the contract of security becomes,
ipso facto, NULL AND VOID.

While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as
these future debts are accurately described, a chattel
mortgage, however, can only cover obligations existing at the
time the mortgage is constituted.
Although a promise expressed in a chattel mortgage to
include debts that are yet to be 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
covering the newly contracted debt is executed
either by concluding a fresh chattel mortgage or by
amending the old contract conformably with the
form prescribed by the Chattel Mortgage Law.

Refusal on the part of the borrower to execute the

agreement so as to cover the after-incurred obligation
can constitute an act of default on the part of the
borrower of the financing agreement whereon the
promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage
sought to be foreclosed.

A chattel mortgage must comply substantially with the form

prescribed by the Chattel Mortgage Law itself.
One of the requisites, under Section 5 thereof, is
an affidavit of good faith. While it is not doubted
that if such an affidavit is not appended to the
agreement, the chattel mortgage would still be
valid between the parties (not against third
persons acting in good faith), the fact, however,
that the statute has provided that the parties to
the contract must execute an oath makes it
obvious that the debt referred to in the law is a
current, not an obligation that is yet merely
contemplated.
FORM OF OATH
o "We severally swear that the foregoing
mortgage is made for the purpose of
securing the obligation specified in the
conditions thereof, and for no other
purpose, and that the same is a just and
valid obligation, and one not entered
into for the purpose of fraud."

In contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the

principal debtor is secured by the personal commitment of

another (the guarantor or surety).

In a contract of real security, that fulfillment is secured by an
encumbrance of property.
in pledge, the placing of movable property in the
possession of the creditor;
in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed
by law;
in real estate mortgage, by the execution of a public
instrument encumbering the real property covered
thereby;
in antichresis, by a written instrument granting to the
creditor the right to receive the fruits of an immovable
property with the obligation to apply such fruits to the
payment of interest, if owing, and thereafter to the
principal of his credit

Notes from Maam:
To protect debtor-mortgagor in cases where the agreement
provides that the mortgage will extend to after-incurred
obligations (to make sure that the mortgagee will undertake to
amend the old contract or create a new one to include the after-
incurred obligations), it is best to include an agency
agreement/contract. A third party may be hired to act as the
collateral agent of the parties who will execute the
aforementioned on the parties behalf.

Peoples Bank and Trust Company v. Dahican Lumber
Company (after-acquired properties)

Issue: WON after-acquired properties may be subject of a

mortgage (in the case, it was a real mortgage)
Ratio: YES. A stipulation that after-acquired properties shall
immediately become subject to the lien of a mortgage is not
unlawful, as its purpose is to maintain the original value of the
properties given as security. These stipulations are often present
in cases where properties given as collateral are perishable or
subject to wear and tear (i.e. machineries and tools bought as
replacements, *stocks-in-trade)


Makati Leasing and Finance Corporation v. Wearever Textile
Mills

ISSUE: WON machinery that has been immobilized by
destination may be the subject of a chattel mortgage?
HELD: YES. There is no reason why a machinery, which is
movable in its nature and becomes immobilized only by
destination or purpose, may not be treated as such. This is
because one who has agreed is estopped from denying the
existence of the chattel mortgage.
The characterization of the machinery as chattel by the private
respondent is indicative of intention. It impresses upon the
property the character determined by the parties.


Dy v. CA

A mortgagor who gives his property as security under a
chattel mortgage does not part with the ownership of the
same, even upon his default. He has the right to sell such
mortgaged property, although under the obligation to secure
the written consent of the mortgagee lest he lay himself open

to criminal prosecution under Article 319 par. 2 of the

Revised Penal Code. However, even if no consent is obtained
from the mortgagee, the validity of the sale will not be
affected.
The only remedy given to the mortgagee is to have said
property sold at public auction and the proceeds of the sale
applied to the payment of the obligation secured by the
mortgagee.
Where a third person purchases the mortgaged property, he
automatically steps into the shoes of the original mortgagor.
His right of ownership shall be subject to the mortgage of the
thing sold to him.

Servicewide Specialist Inc. v. CA

When a creditor-mortgagee assigns his credit, he need not
get the consent of the debtor in order to bind the latter. He
only needs to give NOTICE of such assignment.
Legal Basis: Art 2128 (on pledge): The mortgage
credit may be alienated or assigned to a third person,
in whole or in part, with the formalities required by
law.
The provision applies because: Art 2141. The
provisions on pledge shall apply to chattel
mortgages insofar as they are not in conflict
with the chattel mortgage law
The purpose of notice is to inform the debtor that
from the date of the assignment of credit, he should
make payments to the assignee and not to the
original creditor.

Notice is for the protection of the assignee

since before notice but after assignment,
payment to the original creditor is valid
The consent of creditor-mortgagee to alienation of
mortgaged property by debtor-mortgagor is necessary in
order to bind the former.

Servicewide Specialist Inc. v. CA

(Where right of possession is not disputed)
Where the right of the plaintiff (applicant for replevin) to
the possession of the specified property is so conceded
or evident, the action for replevin need only be
maintained against him who possesses the property.
o In default of the mortgagor, the mortgagee is thereby
constituted as attorney-in-fact of the mortgagor,
enabling such mortgagee to act for and in behalf of
the owner.
o That the defendant is not privy to the chattel mortgage
should be inconsequential. By the fact that the object
of replevin is traced to his possession, one properly
can be a defendant in an action for replevin.

(Where right of possession is disputed)
However, in case the right of possession on the part of the
plaintiff, or his authority to claim such possession or that
of his principal, is put to great doubt (a contending party
may contest the legal bases for plaintiffs cause of action or an
adverse and independent claim of ownership or right of
possession may be raised by that party, i.e. an adverse and
independent claim of ownership by a third party), it could
become essential to have other persons involved and

impleaded for the complete determination and resolution

of the controversy.
In a suit for replevin, a clear right of possession must be
first established.
o The replevin in this case has been resorted to in
order to pave the way for the foreclosure of what is
covered by the chattel mortgage.
o The conditions essential for such foreclosure would be
to show, firstly, the existence of the chattel mortgage
and, secondly, the default of the mortgagor.
Since the mortgagees right of possession is conditioned
upon the actual fact of default which itself may be
controverted, the inclusion of other parties, like the
debtor or the mortgagor himself, may be required in
order to allow a full and conclusive determination of the
case.
o An adverse possessor, who is not the mortgagor,
cannot just be deprived of his possession, let alone be
bound by the terms of the chattel mortgage contract,
simply because the mortgagor brings up an action for
replevin.

PAMECA Wood Treatment Plant v. CA

Under Section 14 of Act No. 1508, as amended, or the Chattel
Mortgage Law, the balance from the proceeds of the sale, after
paying the mortgage, shall be paid to the mortgagor or
persons holding under him on demand.

It is clear that the effects of foreclosure under the Chattel
Mortgage Law run inconsistent with those of pledge under
Article 2115.

Whereas, in pledge, the sale of the thing pledged extinguishes

the entire principal obligation, such that the pledgor may no
longer recover proceeds of the sale in excess of the amount of
the principal obligation, Section 14 of the Chattel Mortgage
Law expressly entitles the mortgagor to the balance of
the proceeds, upon satisfaction of the principal
obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds, there is a
corollary obligation on the part of the debtor-mortgagor
to pay the deficiency in case of a reduction in the price at
public auction.
As explained in Manila Trading and Supply Co. vs. Tamaraw
Plantation Co.:

While it is true that section 3 of Act No. 1508 provides
that a chattel mortgage is a conditional sale, it
further provides that it is a conditional sale of
personal property as security for the payment of a
debt, or for the performance of some other obligation
specified therein.

IMPLICATION: the chattels included in the chattel mortgage

are only given as security and not as a payment of the debt, in
case of a failure of payment. If the creditor is not permitted to
retain the excess, then the same token would require the
debtor to pay the deficiency in case of a reduction in the price
of the chattels.

Antichresis
Concurrence and Preference of Credits

De Barreto v. Villanueva

A preferred creditors 3rd party claim to the proceeds of a
judicial foreclosure sale is not the proceeding contemplated
by law for the enforcement of preferences under Art. 2242,
unless the claimant were enforcing a credit for taxes which
enjoy absolute priority. If none of the claims is for taxes, a
dispute between 2 creditors will not enable the court to
ascertain the pro rate dividend corresponding to each,
because the rights of other creditors likewise enjoying
preference under Art. 2242 cannot be ascertained.
What the law contemplates, thus, is a proceeding where the
claims of all preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of the
decedents estate under Rule 87 of the ROC, and other
liquidation proceedings of similar import.
Art 2243 explains: the claims or credits enumerated in
the 2 preceding articles shall be considered as mortgages
or pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency.
These proceedings make pro-rating fully effective, as the
preferred creditors are convened and the import of their
claims ascertained.
In the absence of insolvency proceedings, the conflict
between claiming parties must be decided according to the
principle that a purchaser in good faith and for value takes
registered property free from liens and encumbrances other
than statutory liens and those recorded in the certificate of
title.
Privileged creditors must cause their claims to be
recorded in the books of the registry of Deeds to
protect their rights even outside liquidation or
insolvency proceedings.

In the new CC, no more order of preference among preferred

credits, except for taxes, which enjoy absolute preference. All
preferred creditors must be paid prorata in proportion to
amount of their respective credits. Thus, for prorating to be
effective, all the creditors must be convened and the import
of their claims ascertained. This can be done through
liquidation and insolvency proceedings.

J.L. Bernardo Construction v. CA

A statutory lien cannot be enforced in an action for
specific performance and damages.
Art 2242 only finds application when there is a
concurrence of credits, i.e. when the same specific
property of the debtor is subjected to the claims of
several debtors and the value of such property of the
debtor is insufficient to pay in full all the creditors. In
such a situation, the question of preference will arise.
There will be a need to determine which of the creditors
will be paid ahead of the others
Due process dictates that a statutory lien should only be
enforced in the context of some kind of proceeding where
the claims of all preferred creditors may be bindingly
adjudicated, such as insolvency proceedings
o Art 2243: the claims and liens enumerated in
2241 and 2242 shall be considered mortgages or
pledges of real or personal property, or liens
within the purview of legal provisions governing
insolvency

DBP v. CA

full application of 2241, 2242, 2249 demands that there

must be some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated such
as:
o insolvency proceedings
o settlement of decedents estate
o other liquidation proceedings of the same import
Only taxes enjoy an absolute preference. All other
creditors enjoy no priority among themselves, but must
be paid pro rata, in proportion to the amount of their
respective credits. (Art. 2249)

Insolvency Law

Gateway Electronics Corp. v. AsianBank Corporation

Under sec. 18 of Act 1956, the issuance of an order
adjudicating insolvency, after the insolvency court finds the
petition for insolvency meritorious, shall stay ALL pending
civil actions against insolvents property. The claimants must
seek relief in the insolvency proceedings.
Sec. 18, however, must be read with Sec. 60 of the same act,
which applies to the period after the commencement of the
proceedings in insolvency. Thus, the 2 provisions should be
harmonized as follows:
o Upon the filing of the petition for insolvency, pending
civil actions against the property of the debtor are
not ipso facto stayed, but the insolvent may apply
with the court in which the actions are pending for a
stay of the actions against the insolvents property. If
the court grants it, pending civil actions against the
property shall be stayed; otherwise, they shall
continue. Once an order of insolvency nevertheless

issues, all civil proceedings against the debtors

property are by statutory command, automatically
stayed.
The issuance of an insolvency order has the effect of
automatically staying all pending civil actions. Under sec.
60 of Act 1956, such actions may only be justified to continue
for purposes of ascertaining the amount due from debtor.
Insolvency court is bereft of jurisdiction over sureties of
the principal debtor. A suit against the surety, insofar as the
suretys liability is concerned, is not affected by insolvency
proceedings. The same principle holds true for sureties of
distressed
corporations
undergoing
rehabilitation
proceedings. Sureties of distressed corporations can be sued
separately to enforce his liability as such, notwithstanding an
order declaring the debtor under a state of suspension of
payment.

Corporate Rehabilitation


Ruby Industrial v CA

Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to
its former position of successful operation and solvency. When a
distressed company is placed under rehabilitation, the
appointment of a management committee follows to avoid
collusion between the previous management and creditors it
might favor, to the prejudice of the other creditors. All assets of a
corporation under rehabilitation receivership are held in trust
for the equal benefit of all creditors to preclude one from
obtaining an advantage or preference over another by the

expediency of attachment, execution or otherwise. As between

the creditors, the key phrase is equality in equity. Once the
corporation threatened by bankruptcy is taken over by a
receiver, all the creditors ought to stand on equal footing. Not
any one of them should be paid ahead of the others. This is
precisely the reason for suspending all pending claims against
the corporation under receivership.

NOTES:
Between Benhar and Ruby contract TO loan
o There is no true loan if there was a contract OF
loan, the creditor would have been Chinabank, as
Benhar only offered Ruby to use its credit facility
Remember that it was Benhar that paid some of the
creditors and not Ruby. But the creditors assigned their
rights to Benhar, effectively making Benhar one of Rubys
creditors. And under the revised rehab plan, payments
made by Benhar under the voided deeds of assignment
were recognized as payable to Benhar under the revised
plan.


RCBC v IAC

Rules of thumb:
1. All claims against corporations, partnerships, or
associations that are pending before any court, tribunal
or board, without distinction as to whether or not a
creditor is secured or unsecured shall be suspended
effective upon the appointment of a management
committee, rehabilitation receiver, board or body in
accordance with the provisions of PD 902-A.

2. Secured creditors retain their preferences over

unsecured creditors but enforcement of such preference
is equally suspended upon the appointment of a
management committee, rehabilitation receiver, board or
body. In the event that assets of the corporation,
partnership or association are finally liquidated,
however, secured and preferred credits under the
applicable provisions of the Civil Code will definitely
have preference over unsecured ones.

NOTES: All claims are treated equally concept of pari passu


Rules of Procedure on Corporate Rehabilitation

LECA Realty Corp v Manuela Corp

The amount of rental is an essential condition of any lease
contract. The change of its rate (gross discrepancy between the
amounts of rent agreed upon by the parties and those provided
in the Rehabilitation plan) is not justified as it impairs the
stipulation between the parties.

The Stay Order issued by the court directed Manuela to pay in
full all administrative expenses incurred after its issuance.
Administrative expenses are costs associated with the general
administration of an organization and include such items as
utilities, rents, salaries, postages, furniture and housekeeping
charges. Inasmuch as rents are considered as administrative
expenses and considering that the Stay Order directed
respondent Manuela to pay the rents in full, then it must comply
at the rates agreed upon.

Rubberworld v NLRC

The law is clear: upon the creation of a management
committee or the appointment of a rehabilitation receiver, all
claims for actions shall be suspended accordingly. No
exception in favor of labor claims is mentioned in the law.
The law makes no distinction or exemptions. Ubi lex non
distinguit nec nos distinguere debemos. Allowing labor cases
to proceed clearly defeats the purpose of the automatic stay
and severely encumbers the management committees time
and resources.

The preferential right of workers and employees under Art.
110 of the Labor Code may be invoked only upon the
institution of insolvency or judicial liquidation proceedings.
The purpose of rehabilitation proceedings is to enable the
company to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings. In
insolvency proceedings on the other hand, the company
stops operating and the claims of creditors are satisfied from
the assets of the insolvent corporation. The present case
involves the rehabilitation and not the liquidation. Hence the
preference of credit granted to workers or employees under
Art. 110 is not applicable.


PAL v CA

Claims for damages based on a breach of contract of carriage are
also stayed upon the appointment by the SEC of management
committee or a rehabilitation receiver.

NOTES: If claims are stayed, the recourse of the family is either

to: 1) file claim for damages with the rehabilitation receiver; or
2) file a Relief of Stay Order (Sec. 10, Rules of Corp. Rehab)
arguing that damages need not be restructured. DO NOT IGNORE
CORP. REHAB. PROCEEDINGS.


Clarion v NLRC

The LA, NLRC or CA should not have proceeded to resolve the
complaint for illegal dismissal in view of the rehabilitation
proceedings. Instead, it should have directed the complainant to
lodge her claim before the receiver of Clarion. However, to refile
the claim after 8 years lapsed, the Court deems it most expedient
and advantageous for both parties that Clarions liability be
determined with finality instead of filing before liquidators of
Clarion.


Sobrejuanite v ASB Devt. Corp

The interim rules define a claim as referring to all claims or
demands, of whatever nature or character against a debtor or its
property, whether for money or otherwise. The definition is all
encompassing as it refers to all actions whether for money or
otherwise. There are no distinctions or exemptions.

As such the HLURB arbiter should have suspended the
proceedings for rescission of contract and damages upon the
approval by the SEC of the ASB Group of Companies
rehabilitation plan and the appointment of its rehabilitation
receiver. By the suspension of the proceedings, the receiver is
allowed to fully devote his time and efforts to the rehabilitation

and restructuring of the distressed corporation. By allowing the

proceedings, the HLURB arbiter gave undue preference to
Sobrejuanite over the other creditors and claimants of ASBDC.


Metrobank v SLGT Holdings

SLGTs and Dylancos complaints did not seek monetary recovery
or to touch the corporate coffers of ASB ahead of others. They did
not even consider themselves as money claimants. All they ask
was for the enforcement of ASBs statutory and contractual
obligations as a condominium developer. Hence their claims are
not stayed for they do not involve pecuniary consideration unlike
in the case of Sobrejuanite.

Also, Sec. 24 of the interim rules limits the coverage of the Rules
on rehabilitation and consequently the rule of suspension of
action to those who stand in the category or debtors and
creditors. The relationship between the petitioner banks, as
mortgagor and respondents, as unit buyers, cannot be that of a
debtor-creditor so as to bring the case within the purview of the
rules on corporate recovery.

NOTES:
Creditor-debtor should have been construed in a more
general concept (as in obligations)
Claim what about money or otherwise do you not
understand?
Ruling might have been correct but ratiocination was
dubious
o Should have focused on the fact that condo sellers
cannot claim the units as their assets but only

hold them in trust; hence claims against the units

are not stayed or suspended


MWSS v Daway

A letter of credit is an engagement by a bank or other person
made at the request of a customer that the issuer shall honor
drafts or other demands of payment upon compliance with the
conditions specified in the credit. It is an absolute undertaking to
pay the money advanced or the amount for which credit is given
on the faith of the instrument. It is a primary obligation and not
an accessory contract. While it is a security arrangement, it is not
converted into a contract of guaranty.

The prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose obligations are not
solidary with the debtor. The participating banks obligation are
solidary with Maynilad in that it is a primary, direct, definite and
an absolute undertaking to pay and is not conditioned on the
prior exhaustion of the debtors assets. Being solidary, the claims
against the bank can be pursued separately from and
independently of the rehabilitation case.

NOTES: Why is Maynilad so interested? LOC is in effect a contract
TO loan; that when MWSS calls for the letter of credit and the
bank pays, it becomes a contract OF loan. The bank becomes
Maynilads creditor. If this is the case, Maynilad cannot use the
same defenses against the bank.


Ong v PCIB

The bank as creditor may proceed against petitioner-spouses as

sureties despite the execution of the MOA which provided for the
suspension of payment and filing of collection suits against BMC.
The banks right to collect payment from the surety exists
independently of its right to proceed directly against the
principal debtor.


Metrobank v ASB Holdings

There is no compulsion on the part of the bank to accept a dacion
en pago arrangement of the mortgaged properties based on ASB
Group of Companies transfer values and to condone interests
and penalties.

The dacion en pago program and the intent of ASB to ask
creditors to waive the interests, penalties and related charges
are not compulsory in nature. They are merely proposals for the
creditors to accept. If the dacion en pago does not materialize in
case secured creditors refuse to agree thereto, the Rehabilitation
Plan contemplates to settle the obligations to secured creditors
with mortgaged properties at selling prices.

The approval of the Rehabilitation Plan by the SEC Hearing Panel
is in furtherance of the rationale behind PD 902-A, as amended,
which is to effect a feasible and viable rehabilitation of ailing
corporations which affect the public welfare.

NOTES: But isnt the rehab plan compulsory? (that the court may
even approve it over the objections of the creditor)


Chas Realty and Development Corp. v Talavera


Where no extraordinary corporate acts (or one that under the
law would call for a 2/3 vote) are contemplated to be done in
carrying out the proposed rehabilitation plan, then the approval
of stockholders would only be by a majority, not necessarily 2/3
vote, as long as, there is a quorum.