Final Exam Transcript

CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
REAL MORTGAGE &

FORECLOSURE OF REAL
ESTATE MORTGAGE
Just like in pledge, a real estate mortgage is an accessory
contract. A contract whereby the debtor securing to the
creditor the fulfillment of the principal obligation specially
subjecting to such security immovable property or real
rights over the immovable property, which the obligation
shall be satisfied with the proceeds of the sale of such
property or rights, in case such obligation is not complied
with at the time stipulated. It is very clear that a real estate
mortgage is an accessory contract, and just like a pledge
or even a contract of guaranty or suretyship, it can have
a separate consideration but if there is no separate
consideration, it can have the same consideration as that
of the principal obligation.
As a real estate mortgage is an accessory contract,
without a valid principal contract, there can be no valid
real estate mortgage.
The obligation may be secured by a third person (refer to
the last paragraph of Article 2085), and it will be valid as
long as the principal obligation is valid and all the
essential requisites are present.
And of course, you cannot question the validity of a real
estate mortgage for lack of consideration because again,
it will have the same consideration as that of the principal
obligation.
We have here the case of DBP vs CA:
DBP vs CA
Q: From whom did the spouses Mangubat bought the
subject land?
A: DBP
Q: And they also applied for a loan, was it approved by
DBP?
A: Yes
Q: What was the reason why DBP refused to release
part of the loan?
Q: How did the nature or classification of that land
affect the loan? Why was it relevant as to the release
of the remaining portion of the loan?
Q: What is the relationship of the land to the contract of
loan?
A: The land served as a security for the loan obtained
through the execution of the real estate mortgage,
wherein the subject of said REM is the land
Q: The refusal of DBP of the loan was premised on
what ground?
A: That the land was not disposable as private land.
Q: What did the spouses contend?
A: The spouses filed for annulment of the deed of sale.
Q: How did the court rule on the annulment of the deed
of sale?
A: The court declared the sale as not valid due to the
absence of a valid subject matter as the land involved
is inalienable.
Q: Did the nullity of the sale of the land affect the validity
of the loan?
A: No because the contract of loan is the principal
obligation and it being separate and distinct from the
accessory obligation (which is the real estate
mortgage), the invalidity of the accessory contract (the
REM) does not result to invalidity of the principal
contract.
Real Mortgage to Concurrence & Preference of Credits

2 Manresa Roman 2ND sem, AY 2014-2015
The declaration of nullity of a contract which is void ab
initio operates to restore things to the state and condition
in which they were found before the execution. The return
by DBP (to sps Mangubat) is called for. But that is
separate from the issue of the loan wherein it was
perfected upon the release (of the money) in favor of the
spouses, therefore DBP has the right to demand payment
of said loan.
The fact that the annulment of the sale will also result in
the invalidity of the mortgage does not have an effect on
the validity and efficacy of the principal obligation, for
even an obligation that is unsupported by any security of
the debtor may also be enforced by means of an ordinary
action. There is no valid mortgage, but then again, the
principal obligation remains valid and not rendered null
and void.
Under the foregoing circumstances, what is lost is only the
right to foreclose the mortgage as a special remedy for
satisfying or settling the indebtedness which is the
principal obligation. However, the mortgage remains as
evidence or proof of a personal obligation of the debtor,
and the amount due to the creditor may be enforced in an
ordinary personal action.
So, a real estate mortgage is an accessory contract. Even
if it be declared null and void, its (in)validity will not affect
the validity of the principal contract. (recall the principle:
Accessory follows the principal!)
Characteristics of Mortgage
It is a real, accessory, and subsidiary contract. It is also
unilateral because it creates only an obligation on the part
of the creditor who must free the property from the
encumbrance once the obligation is fulfilled.
Kinds of Mortgage
(1) Voluntary
- Agreed to between the parties or constituted
by the will of the owner of the property on
which it is created.
(2) Legal
- Required by law to be executed in favor of
certain persons
(3) Equitable
- Although lacks proper formalities or other
requisites of a mortgage required by law,
nevertheless reveals the intention of the
parties to burden real property as security for
a debt, and contains nothing impossible or
contrary to law.
- Governed by Art 1602 of the Civil Code:
Art. 1602. The contract shall be presumed to
be an equitable mortgage, in any of the
following cases:
(1) When the price of a sale with right to
repurchase is unusually inadequate;
(2) When the vendor remains in possession as
lessee or otherwise;
(3) When upon or after the expiration of the
right to repurchase another instrument
extending the period of redemption or granting
a new period is executed;
(4) When the purchaser retains for himself a
part of the purchase price;
(5) When the vendor binds himself to pay the
taxes on the thing sold;
(6) In any other case where it may be fairly
inferred that the real intention of the parties is
For the use of ALL students under Atty Sarona

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CREDIT TRANSACTIONS
that the transaction shall secure the payment
of a debt or the performance of any other
obligation.
In any of the foregoing cases, any money,
fruits, or other benefit to be received by the
vendee as rent or otherwise shall be
considered as interest which shall be subject
to the usury laws. (n)
What are the valid objects as to real estate mortgage?
Article 2124. Only the following property may be
the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the
laws, imposed upon immovables.
Nevertheless, movables may be the object of a
chattel mortgage.
What are immovables? (Article 415, Civil Code)
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds
adhered to the soil;
(2) Trees, plants, and growing fruits, while they are
attached to the land or form an integral part of an
immovable;
(3) Everything attached to an immovable in a fixed
manner, in such a way that it cannot be separated
therefrom without breaking the material or deterioration
of the object;
(4) Statues, reliefs, paintings or other objects for use or
ornamentation, placed in buildings or on lands by the
owner of the immovable in such a manner that it
reveals the intention to attach them permanently to the
tenements;
(5) Machinery, receptacles, instruments or implements
intended by the owner of the tenement for an industry
or works which may be carried on in a building or on a
piece of land, and which tend directly to meet the needs
of the said industry or works;
(6) Animal houses, pigeon-houses, beehives, fish
ponds or breeding places of similar nature, in case their
owner has placed them or preserves them with the
intention to have them permanently attached to the
land, and forming a permanent part of it; the animals in
these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter
thereof forms part of the bed, and waters either running
or stagnant;
(9) Docks and structures which, though floating, are
intended by their nature and object to remain at a fixed
place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and
other real rights over immovable property.
We have here the case of Soriano vs Galit:
Soriano vs Galit
Q: What kind of sale took place here?
A: Execution sale
Q: Was there a REM executed here? Was that the
basis of the sale?
A: No

Q: What was the defect of the issuance of certificate of
sale?
Q: Can a building, excluding the land, be a valid subject
of REM?
A: Yes
Q: How about if you have a land with building, can the
land be a valid subject of REM excluding the buildings
and improvements thereon?
A: Yes
Notice in this case, there was no foreclosure sale arising
from the foreclosure of the REM, what happened here is
an execution sale. Nevertheless, this is an important case
as it provides that a notice must have a correct description
of the property subject of the REM. Note that an incorrect
title number together with a correct technical description
of the property to be sold and vice versa is deemed a
substantial and fatal error which results in the invalidation
of the sale. Subsequently including properties which have
not been explicitly mentioned in the notice for registration
purposes under suspicious circumstances smacks of
fraud. What was included in the (notice of) execution sale
was just the storehouse or the bodega.
The SC emphasized that the building is separate and
distinct from the parcel of land (where it is erected). While
it is true that a mortgage of land necessarily includes
buildings, in the absence of stipulation of the
improvements thereon, a building by itself may be
mortgaged apart from the land on which it has been
built. Such mortgage would be still a real estate mortgage
for the building would still be considered immovable
property even if dealt with separately and apart from
the land. Considering that what was sold by virtue of the
writ of execution issued by the trial court was merely the
storehouse and bodega constructed on the parcel of land
covered by Transfer Certificate of Title No. T-40785,
which by themselves are real properties of respondents
spouses, the same should be regarded as separate and
distinct from the conveyance of the lot on which they
stand. Therefore, a building in itself can be a valid subject
of REM.
The second object as enumerated under Article 2124
includes alienable real rights or rights over the immovable
(such as usufruct), but not the property itself, only the right
to use it.
A real right over a real property is considered a real
property and a valid object in a REM.
Take note that the subject matters listed in Article 2124
are the only valid subject matters of a REM. Why?
Because of the word only. In other words, the list is
exclusive.
The third paragraph emphasizes that movables can be
valid subject of chattel mortgage, however, if it is
delivered it is a contract of pledge.
Under Article 2085, it was emphasized that the mortgagor
must be the owner of the subject parcel of land. With that:
GR: Future property cannot be a valid object of REM
because at the time the mortgagor entered in to the
contract of mortgage, he still do not own the future
property
EX:
Mendoza vs CA
Q: What do you mean by after-acquired chattel?
A: Properties which were not yet existent at the time of
the execution of the REM
Q: Is there a chattel mortgage here or REM?

CREDIT TRANSACTIONS

A: Both
Q: What was the ruling of the Court with respect to the
machineries and equipment, can it be valid SM in a
REM?
Q: Machineries in itself, are they movable or
immovable?
A: Movable
Q: In this case, was it considered to be movable or
immovable?
A: Immovable
Q: Why?
A: Immovable by destination, therefore valid subject
matter of REM
If there is a movable property and it is made as a subject
matter in a REM, the parties would nevertheless be bound
to such agreement.
In this case, the said promissory notes authorized
respondent bank, in case of default, to sell things of
value belonging to the mortgagor which may be on its
hands for deposit or otherwise belonging to me/us and for
this purpose. Besides the petitioner executed not only a
chattel mortgage but also a real estate mortgage to
secure his loan obligations to respondent bank.
A stipulation in the mortgage, extending its scope and
effect to after-acquired property is valid and binding where
the after-acquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of
such goods.
With regard to the subject matter PNB asserts that those
movables were in fact "immovables by destination" under
Art. 415 (5) of the Civil Code.i It is an established rule that
a mortgage constituted on an immovable includes not
only the land but also the buildings, machinery and
accessories installed at the time the mortgage was
constituted as well as the buildings, machinery and
accessories belonging to the mortgagor, installed after the
constitution thereof. So, immovable by destination with
regard to the machinery and accessories.
Do take note of the distinction between a REM and a
pledge. Although they have similar requisites under
Article 2085:
Article 2085. The following requisites are essential to
the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of
a principal obligation;
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or
mortgage have the free disposal of their property, and
in the absence thereof, that they be legally authorized
for the purpose.
Third persons who are not parties to the principal
obligation may secure the latter by pledging or
mortgaging their own property.
REM vs Pledge
Subject matter
Possession
REM
Real property:
immovable
Delivery of the
subject matter to
the mortgagee
is not necessary
for its validity.
GR is that the
mortgagor
retains
Pledge
Personal
property
It is a real
contract
perfected
by
delivery,
possession
is
required
Fruits
Foreclosure
Registration to
bind 3rd person
possession of
the
property
mortgaged. (EX:
stipulation
by
the parties)
Mortgagee does
not have the
rights over the
fruits of the SM
Extrajudicial and
judicial
Required:
the
fact that it is
notarized is not
sufficient to bind
3rd persons
Pledgee have
the right to apply
the fruits of the
property
delivered to him
to the principal
obligaiton
Extrajudicial in
nature
Not
required:
what is required
is description of
the
thing
pledged, date of
pledge, in a
public
instrument
Article 2125. In addition to the requisites stated in

Article 2085, it is indispensable, in order that a
mortgage may be validly constituted, that the
document in which it appears be recorded in the
Registry of Property. If the instrument is not
recorded, the mortgage is nevertheless binding
between the parties.
The persons in whose favor the law establishes a
mortgage have no other right than to demand the
execution and the recording of the document in
which the mortgage is formalized. (1875a)
Article 2125 emphasizes the requirement for registration
of the said mortgage before the registry of property, but
this is only to bind third persons. If the instrument is not
recorded, the instrument is nevertheless binding between
the parties. Absent the annotation, the mortgage cannot
be binding as against third persons as provided under the
Torrens System, third parties cannot be bound by lien not
found in the title.
Going back to the characteristics of REMreal,
accessory, unilateral, and subsidiary: is REM a real
contract wherein delivery is required? No. Thus, there is
no basis in saying that a REM is a real contract because
again delivery is not required for the validity of the REM.
The last paragraph of Article 2125 applies to legal or
equitable mortgage under Article 1602.
With regard to the validity of the REM whether it be in a
private or public document, recall the case of Hechanova
vs Adil the mortgagee can demand that the mortgage be
executed in a public instrument. The private instrument
can be used as evidence wherein the creditor can file an
action for the execution of the mortgage and subsequently
the registration of said mortgage. He has the right to
compel the debtor to execute a contract of mortgage in a
public instrument.
Again, to bind third persons, a mortgage must be
registered. However, you cannot go directly to the register
of deeds with a private instrument. Now if a mortgage is
not registered, the mortgage however is valid as between
the parties as registration operates only as notice to third
persons but does not add to its validity nor convert an
invalid one to a valid one (ie mortgage is duly notarized
and subsequently registered before the ROD, however it
was discovered that the mortgagor is not the owner of the
property, the mortgage is still not valid).

CREDIT TRANSACTIONS
Tan vs Valdehueza
Q: Who was in possession of the property?
A: Valdehuezas
Q: What was the basis of Tan for filling the case against
the Valdehuezas so that Tan would have possession
over the said property?
A: Pacto de retro sale
Q: Was there an auction sale? What was the basis of
that auction sale?
Q: What was the contract entered into between the
Valdehuezas and Tan?
A: Equitable mortgage because Valdehuezas
remained in possession of the property which is one of
the badges under Art 1602
Notice that in this case the contract that they executed is
a Deed of Pacto de Retro Sale, which in itself does not
show that it is a REM. But the SC held that this was an
equitable mortgage since the intention here is to secure
the principal obligation moreover badges provided under
Art 1602 are present: Valdehuezas remained in
possession of the land, and they even paid for the taxes
of said land.
The Valdehuezas having remained in possession of the
land and the realty taxes having been paid by them, the
contracts which purported to be pacto de retro
transactions are presumed to be equitable mortgages,
whether registered or not, there being no third parties
involved.
Another thing that you have to consider in a REM is the
fact that it must sufficiently describe the debt or the
obligation sought to be secured.

such fee must be specific and fixed by the contracting
parties, unlike in the present case which slaps a 3%
penalty fee per month of the outstanding amount of the
obligation.
So the penalty fee was just excluded in the computation.
Doctrine of mortgagee in good faith
A mortgagee has the right to rely in good faith on the
certificate of title of the mortgagor of the property given as
security and in the absence of any sign that might arouse
suspicion, the mortgagee has no obligation to undertake
further investigation. All persons dealing with the property
are not required to go beyond what appears on the face
of the title. However, this does not apply to a situation
where the title is still in the name of the rightful owner and
the mortgagor is a different person pretending to be the
owner.
The principle of mortgage in good faith is not applicable in
the following instances:
1) Purchaser or mortgagee has knowledge of the
defect of the title
2) The mortgagee does not directly deal with the
registered owner of the real property
3) Mortgagee was aware of sufficient facts to induce
a reasonably prudent man to inquire to the status
of the property in litigation
4) When the mortgagee is a bank of financing
institutionit is required to go further than what
appears on the face of the Torrens title; it is
expected to exercise greater care and prudence
and higher standard of diligence
- So remember in Cavite Development Bank
vs Lim where Cavite Development Bank was
not considered to be mortgagee in good faith.
State Investment vs CA
Sps Viola vs Equitable

Q: What are the contracts executed here?
A: REM
Q: What obligation was secured by that REM?
A: Loan premised on the credit line agreement
Q: What was included in the credit line agreement?
A: Principal obligation with interest
Q: What was included in the REM? What was the
obligation secured?
A: Principal obligation, interests, bank charges
Q: Since the penalty is not included in the REM, what
is the effect with respect to the foreclosure of the real
estate mortgage?
A: Still valid, but does not include the penalty
Again, a mortgage must sufficiently describe the debt
sought to be secured, which description must not be such
as to mislead or deceive, and an obligation is not secured
by a mortgage unless it comes fairly within the terms of
the mortgage.
The mortgage contract here did not specifically mention
(aside from the principal loan obligation), the payment of
the penalty fee of 3% per month, which was provided for
in the credit line agreement.
Since an action to foreclose must be limited to the
amount mentioned in the mortgage and the penalty fee
of 3% per month of the outstanding obligation is not
mentioned in the mortgage, it must be excluded from the
computation of the amount secured by the mortgage.
Moreover, penalty fee is entirely different from bank
charges. The phrase bank charges is normally
understood to refer to compensation for services. A
penalty fee is likened to a compensation for damages in
case of breach of the obligation. Being penal in nature,
Q: Which is superior between a contract to sell and

mortgage?
A: Registered CTS
Q: Why?
A: Because State Investment was not considered as
mortgagee in good faith because it being a financing
institution, it cannot rely upon the face of the title
Q: What are the other reasons why State Investment
was not considered to be mortgagee in good faith?
A: It had knowledge of the defect
Q: Is there already transfer of ownership?
A: There was no transfer of ownership as there was no
delivery
In this case you have here a registered mortgage and
unregistered right under the CTS. STATEs registered
mortgage right over the property is inferior to that of
respondents-spouses unregistered right.
As a general rule, where there is nothing in the certificate
of title to indicate any cloud or vice in the ownership of the
property, or any encumbrance thereon, the purchaser is
not required to explore further than what the Torrens Title
upon its face indicates in quest for any hidden defect or
inchoate right that may subsequently defeat his right
thereto. This rule, however, admits of an exception as
where the purchaser or mortgagee, has knowledge of a
defect or lack of title in his vendor, or that he was aware
of sufficient facts to induce a reasonably prudent man to
inquire into the status of the title of the property in
litigation. In this case, petitioner (State) was well aware
that it was dealing with SOLID, a business entity engaged
in the business of selling subdivision lots. In fact, the
OAALA found that at the time the lot was mortgaged,
State Investment House, Inc., had been aware of the lots

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location and that said lot formed part of Capital

Park/Homes Subdivision.
As petitioner is a financing institution, it is to investigate,
examine and assess the real property offered as security
for any loan application. It is a settled rule that a purchaser
or mortgagee cannot close its eyes to facts which should
put a reasonable man upon his guard, and then claim that
he acted in good faith under the belief that there was no
defect in the title of the vendor or mortgagor. Petitioner
was not a purchaser or mortgagee in good faith; hence
petitioner cannot solely rely on what merely appears on
the face of the Torrens Title.
bank? How was it discovered that they were

impostors?
PNB vs Corpuz
Q: Who was the registered owner? Was there a title
issued to Bondoc?
A: Yes
Q: How about the subsequent sale issued to
Palaganas?
A: Yes
Q: Why would it be important to determine whether the
bank is a mortgagee in GF?
Q: Was the mortgage entered into by the Songcuans
here valid?
A: No
Q: Nevertheless, does this mean that PNB is a
mortgagee in GF?
A: No, aside from the period, the price for which it was
sold was too small as to be considered as realistic sale
Take note here that even if the mortgage was considered
as void for not having complied with the requirements
under the law, mortgagee in good faith is protected. As
emphasized, an exception to this mortgagee in good faith
are banks and financing institutions. Banks are expected
to be more cautious than ordinary individuals in dealing
with lands, even registered ones, since the business of
banks is imbued with public interest. It is of judicial notice
that the standard practice for banks before approving a
loan is to send a staff to the property offered as collateral
and verify the genuineness of the title to determine the
real owner or owners of the property.
Petitioner PNB was informed of the previous TCTs
covering the subject property. And the PNB has not
categorically contested this finding. It is evident from the
faces of those titles that the ownership of the land
changed from Corpuz to Bondoc, from Bondoc to the
Palaganases, and from the Palaganases to the
Songcuans in less than three months and mortgaged to
PNB within four months of the last transfer. This should
have driven the PNB to look at the deeds of sale involved.
It would have then discovered that the property was sold
for ridiculously low prices: Corpuz supposedly sold it to
Bondoc for just P50,000.00; Bondoc to the Palaganases
for just P15,000.00; and the Palaganases to the
Songcuans also for just P50,000.00. Yet the PNB gave
the property an appraised value of P781,760.00. Anyone
who deliberately ignores a significant fact that would
create suspicion in an otherwise reasonable person
cannot be considered as an innocent mortgagee for
value.
It is already settled that the banks and financial institutions

are required to exert more diligence as compared to other
mortgagees. Respondent bank did not observe the
requisite diligence in ascertaining or verifying the real
identity of the couple who introduced themselves as the
spouses Osmundo Canlas and Angelina Canlas. It is
worthy to note that not even a single identification card
was exhibited by the said impostors to show their true
identity; and yet, the bank acted on their representations
simply on the basis of the residence certificates bearing
signatures which tended to match the signatures affixed
on a previous deed of mortgage to a certain Atty. Magno,
covering the same parcels of land in question.
The efforts exerted by the bank to verify the identity of the
couple posing as Osmundo Canlas and Angelina Canlas
fell short of the responsibility of the bank to observe more
than the diligence of a good father of a family. The
negligence of respondent bank was magnified by the fact
that the previous deed of mortgage (which was used as
the basis for checking the genuineness of the signatures
of the suppose Canlas spouses) did not bear the tax
account number of the spouses, as well as the
Community Tax Certificate of Angelina Canlas. But such
fact notwithstanding, the bank did not require the
impostors to submit additional proof of their true identity.
The SC also applied here the doctrine of last clear chance
in Torts and Damages, the Court finds that it cannot be
denied that the bank had the last clear chance to prevent
the fraud, by the simple expedient of faithfully complying
with the requirements for banks to ascertain the identity
of the persons transacting with them.
Under the attendant facts and circumstances, Osmundo
Canlas was undoubtedly negligent, which negligence
made them (petitioners) undeserving of an award of
Attorneys fees. However, it cannot be denied that the
bank is not considered to be mortgagee in GF.
The mortgage here is considered void as it was
constituted by an impostor and for failing to exercise the
negligence required of banks, the bank cannot be
considered mortgagee in GF.
Agricultural vs Yusay
Q: Registration is a ministerial act, what do you mean
by that?
A: The ROD does not exercise discretion in registering
mortgages, as it is a ministerial act
Atty Sarona: As long as the requirements are duly
complied with, the ROD must register the mortgage
without exercise of its discretion.
Q: In case you have a void mortgage, does the
registration thereof cure the invalidity of the mortgge?
A: No
Registration is a mere ministerial act, the ROD has no
discretion and can refuse as long as the requirements are
complied with.
Canlas vs CA
Q: Wasnt it that a SPA was executed to authorize
Manosca to mortgage the property?
A: There was intervention of impostor, and it was not
through the SPA that the land was mortgaged
Q: Can the bank here be considered as mortgagee in
good faith? What was the negligence on the part of the
Registration is a mere ministerial act by which a deed,

contract or instrument is sought to be inscribed in the
records of the Office of the Register of Deeds and
annotated at the back of the certificate of title covering the
land subject of the deed, contract or instrument.
The registration of a lease or mortgage, or the entry of a
memorial of a lease or mortgage on the register, is not a
declaration by the state that such an instrument is a valid

CREDIT TRANSACTIONS

and subsisting interest in land; it is merely a declaration

that the record of the title appears to be burdened with the
lease or mortgage described, according to the priority set
forth in the certificate. The mere fact that a lease or
mortgage was registered does not stop any party to it from
setting up that it now has no force or effect.
A: Without the consent of the spouse, and since it is the

Civil Code which was the applicable law at the time the
mortgage was executed, since the spouses property
relations is governed by Art. 173 of the Civil Code
states that any disposition or encumbrance of a
conjugal real property by the husband without the
express or implied consent of the other spouse is
voidable. The wife can question the encumbrance on
the ground that she did not consent to the same. In
contrast, if the transaction is governed by the Family
Code, the absence of consent by the wife would be void
and not merely voidable.
In registration and annotation of the mortgage it does not

pass on its invalidity or effect. As the mortgage is
admittedly an act of the registered owner, all that the
judge below did and could do, as a registration court, is to
order its registration and annotation on the certificate of
title covering the land mortgaged. By said order the court
did not pass upon the effect or validity of the mortgage
these can only be determined in an ordinary case before
the courts, not before a court acting merely as a
registration court, which did not have the jurisdiction to
pass upon the alleged effect or validity.
Even if it is registered, one can still go to court to have it
declared as void through annulment of REM, and then
pray for the cancellation of the REM.
Do remember that with regard to real estate mortgage the

provisions that we have discussed before that were
common to pledge and mortgage are also applicable to
contracts of mortgage, so don't forget Art. 2085 and 2088
among others.
Last time we have already identified what a real mortgage
is, what are its objects or subject matter and also under
Art. 2125, even if it is not recorded the mortgage is
nevertheless binding between the parties. And also last
time, we discussed the doctrine of a mortgage lien.
Aside from Yusay, we also discussed the case of State
Investment wherein you remember in that case you have
there a registered mortgage and also, a registered right of
a buyer. If you remember it, the one who has a preferred
right over the subject matter was the buyer even if his
deed of sale was not registered. Atlhough, in that case, if
you remember, by the perfection of the sale, there is
transfer of ownership again distinguish it, it is NOT the
perfection of the contract that transfers ownership but the
delivery whether actual or constructive. So if there was
delivery then there is a subsequent mortgage executed at
the time this said mortgage was executed, the mortgagor
could not be the owner of the property and therefore,
failure to conform with the requirements of 2085, there is
no valid contract of mortgage.
Now, also relate contract of mortgage with Persons,
remember mortgage is an encumbrance so this means
that the property relations between the spouses is an
absolute community or conjugal partnership of gains, if
you remember you have to get the written consent of the
other spouse, this applies not only to contracts of sale but
even in a contract of mortgage. I think you have Art. 124
governing conjugal partnership of gains and the other one
is Art. 96, Absolute Community. Nevertheless, that
provision states that sole power to administration do not
include disposition referring to sale or encumbrance
meaning mortgage without authority of the court or the
written consent of the other spouse. In the absence of
such authority or consent the disposition or encumbrance
shall be void but shall be construed as a continuing offer.
So dont forget what you have learned in Persons and
Family Relations and relate it to the execution of a real
estate mortgage.
Ross v. PNB
Q: What would be the effect of such defense absence
of the consent of the spouse?
Q: Why can you say that in this case the law applicable
is the Civil Code? How can you determine that?
A: It depends on when the transaction took place, if it
is before Aug. 3, 1988 the old Civil Code will be
applicable. In this case the mortgage was executed in
1974 as such, the old Civil Code is applicable.
Now, take note with regard to this case what was applied
was the Civil Code provisions since the marriage took
place during the effectivity of the Civil Code and not during
the Family Code and if you remember in Persons and
Family Relations, the presumption there is that in the
absence of any agreement between the spouses or what
we call pre-nuptial agreement shall be considered as a
conjugal partnership of gainsaid that any property
acquired during the marriage belongs to the conjugal
property of the spouses. In this case, a real mortgage
executed the wife alleged that her signature therein was
forged. However, bare allegations are not sufficient
especially when you are alleging fraud or forgery. You
should show sufficient proof to support your allegation of
fraud or forgery. Moreover, there is a presumption here
that the mortgage was regularly executed since the
acknowledgment is a prima facie evidence of the
execution of the instrument of the document involved
since it was duly notarized and is considered as a public
document. Now, even if the property was to be considered
as an absolute community property wherein the property
was acquired, the marriage took place within the
effectivity of the Family Code. Again the consent would be
required to be in writing which is present in this case. No
contrary thereto was shown and therefore the mortgage
would still be considered as valid. That is the case of Ross
v. PNB.
Ross v. PNB: absence of consent of the other spouse in
a contract of mortgage executed under the Civil Code
(before Aug. 3, 1988), the contract of mortgage is
voidable.
Now, of course if the written consent was not acquired, it
is only the husband who executed the real estate
mortgage and the marriage took place under the family
code, so absolute community property, remember that
was a mortgage which is considered void, the principal
obligation will be considered as valid. Where a mortgage
is not valid, the principal obligation which is guaranteed
by it will not be null and void. What is lost is only the right
to foreclose the mortgage and the mortgage can even be
used while it cannot be used to foreclose the property it
can be used as an evidence of the personal obligation.
Article 2126. The mortgage directly and
immediately subjects the property upon which
it is imposed, whoever the possessor may be,
to the fulfillment of the obligation for whose
security it was constituted. (1876)
Remember that the registered mortgage is a real right, a
right in rem and therefore it is inseparable from the
property and therefore enforceable against the whole
world. The mortgage attaches not to the owner of the
property but to the property itself and therefore the

CREDIT TRANSACTIONS
mortgage follows the property wherever it goes and
subsists notwithstanding the change of ownership. It
disregards the personality of the owner. Whoever
subsequently acquires the property carries with it the
obligation to observe the mortgage but take note, it must
be registered in order to bond third persons. So it just
means even if there is already a mortgage the mortgagor
can still sell the property to third persons but again to bind
third persons with regard to the mortgage, the mortgage
must be registered. And all subsequent purchasers must
respect the registered mortgage or that the buyer must
know of its existence. So again, there could be a valid
contract of sale even if the property has already been
previously mortgaged. A mortgage is a real right attached
to the property.
EXAMPLE:
Let us say that you have a real estate mortgage with
Giovanni as the debtor-mortgagor and then Ron i the
creditor-mortgagee, there is already a mortgage executed
by Giovanni over his subject parcel of land. Now, even
with that mortgage, even if that obligation still remains
unpaid. Giovanni can sell the property to Jordan. That is
a valid contract of sale. A mortgage is a real right therefore
if the obligation becomes due and demandable Giovanni
fails to pay, notwithstanding that the mortgaged property
has already been bought by Jordan, Ron can still
foreclose the property and Jordan cannot raise as a
defense that the he does not owe Ron and that it was
Giovanni who owed him and therefore, he cannot
foreclose the property he already bought. This defense
will only be available to a third person if the mortgage is
not registered. But if the mortgage was registered, that
defense cannot apply. As we go along, you would notice
however that with regard to the obligation itself the third
person has no personal obligation which just sans that the
mortgagee can foreclose the property but if there is a
deficiency, the proceeds of the sale is not sufficient to
cover the amount of the principal obligation, Ron, the
creditor-mortgagee, can no longer collect from Jordan
because it is the personal obligation of Giovanni, the
debtor-mortgagor to pay for the deficiency. So that is the
nature of a contract of mortgage being a real right. The
right attaches to the property and not to the owner thereof.
The only instance however, that the buyer can be held
liable to pay, is when there is a novation. For instance in
our example, if Jordan becomes the debtor of the
obligation of Giovanni. So if you remember in novation
there are three instances one of which is the substitution
of the person of the debtor, if that would be the instance,
then that would be the only time that Ron as credtitormortgagee can collect from Jordan for the deficiency.
Article 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits,
and the rents or income not yet received when the
obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in
virtue of expropriation for public use, with
the declarations, amplifications and limitations
established by law, whether the estate remains
in the possession of the mortgagor, or it passes
into the hands of a third person. (1877)

the mortgage extends to the just compensation that will
received by the mortgagor.
Now, with regard to the fruits. If the fruits were already
harvested before the obligation becomes due and
demandable, of course that would not be part of the
mortgage. However, if the fruits are attached to the
property when the obligation becomes due, then they will
form part of the mortgage. To exclude these fruits,
improvements, an accessions there must be an express
stipulation in the real estate mortgage. Otherwise, the
following are deemed included in the absence of an
express stipulation excluding the following they will be
deemed included:
1. New paintings
2. Fruits except for those collected before the
obligation falls due or those removed and stored
when it falls due.
3. Accrued and unpaid rents, by accrued, we mean
those already earned but not yet received.
4. Buildings and machineries belonging to the
debtor-mortgagor installed on a mortgaged
issuance central. This should be familiar to you,
one of the cases in property law. All objects or
materials permanently attached to the mortgaged
building although they have been placed after the
execution of the mortgage.
5. Another instance, if a more costly building is
constructed in place of a torn down building.
Also, we have mentioned last time the concept of an after
acquired property. In an after acquired property, this is an
exception to the rule that with regard to a mortgage, the
mortgagor must be the owner of the property. Such
stipulation should include as after acquired property
subject to mortgage is valid. Usually this refers to
perishable, wear and tear or subject matters that can be
replaced with others. Such stipulation is valid.
EXAMPLE:
If mortgagor Giovanni would subject his properties for
instance his groceries, where he owns the grocery store,
the inventory or stock that he subjected to the mortgage,
but of course that would be chattel mortgage,
nevertheless a mortgage, there will be a replenishment
that will take place. So what happens is that at the time of
the execution of the mortgage, what the mortgagor owns
is the present inventory now later on when the obligation
becomes due and demandable those stocks that were
present in the inventory at the time of the execution of the
mortgage has already been sold but these stocks were
replenished with new ones. So just the same, those
stocks which were used to replenish are subject to the
mortgage, which is known as after acquired properties.
Also last time, we emphasized that the general rule that
with regard to foreclosing a mortgage it must be limited to
the amount mentioned in the mortgage however, as an
exception, the amount given as consideration of the
contract is not really the amount of which the mortgage
may stand as security for as long as there is an intention
on the part of the partied to secure future loans or
advancements and other indebtedness wherein we have
the concept of a blanket mortgage or a dragnet clause.
Producers Bank v. Excelsa
So this is another instance that would show that the

mortgage is indeed inseparable from the property. Article
2127 discusses the extent of the mortgage. Remember
that upon the time the obligation becomes due and
demandable the creditor can demand the payment from
the debtor. Now, the mortgage extends to all its natural
accessions, improvements, growing fruits, rents or
income, even proceeds of insurance if the property should
be destroyed, and in case the property is expropriated,
Q: What is the basis for the action to annul?

A: According to Excelsa, the real estate mortgage only
covered the loan and not the drafts.
Q: So what if it covers only the loan?
A: This means that whatever the liabilities from the
drafts of the respondent, the real estate mortgage
should not answer for such or stand as a security to the
same.

CREDIT TRANSACTIONS
Q: Was the loan already paid?

A: No.
Q: However, what was the basis for the foreclosure of
the mortgage? The drafts?
A: Yes.
Q: What was the ruling of the curt? was the foreclosure
valid?
A: The SC held in this case that the foreclosure is valid
in saying that the real state mortgage here also secures
the drafts since the real state mortgage contains a
blanket mortgage clause or a dragnet mortgage clause.
Q: What do you mean by dragnet clause?
A: A dragnet clause is one which is specifically phrased
as to subsume all debts of past and future origins. It is
strictly construed and operates as a convenience and
accommodation to the borrower as it makes available
additional funds without their having to execute
additional security documents, thereby saving time,
travel, loan closing costs, costs of extra legal services,
recording fees, et cetera.
Q: How was the Supreme Court able to conclude that
the real estate mortgage here includes a dragnet
clause?
A: It was the clause which states For and in
consideration of those certain loans, overdraft and/or
other credit accommodations on this date obtained
from the MORTGAGEE, and to secure the payment of
the same, the principal of all of which is hereby fixed at
FIVE HUNDRED THOUSAND PESOS ONLY
(P500,000.00) Pesos, Philippine Currency, as well as
those that the MORTGAGEE may hereafter extend to
the MORTGAGOR, including interest and expenses or
any other obligation owing to the MORTGAGEE, the
MORTGAGOR does hereby transfer and convey by
way of mortgage unto the MORTGAGEE, its
successors or assigns, the parcel(s) of land which
is/are described in the list inserted on the back of this
document, and/or appended hereto, together with all
the buildings and improvements now existing or which
may hereafter be erected or constructed thereon, of
which the MORTGAGOR declares that he/it is the
absolute owner, free from all liens and encumbrances.
Q: With that, is the foreclosure valid or not?
A: The SC held that the Respondent executed a real
estate mortgage containing a "blanket mortgage
clause," also known as a "dragnet clause." It has been
settled in a long line of decisions that mortgages given
to secure future advancements are valid and legal
contracts, and the amounts named as consideration in
said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners
of the instrument the intent to secure future and other
indebtedness can be gathered.
Q: With regard to the 250,000 was it already paid?
A: No.
Q: Do you have here a dragnet clause?
A: Yes.
Q: Why can you say that we have a dragnet clause
here?
A: This case the agreement between the parties which
states that to secure the payment of the same and
those that may hereafter be obtained, the principal
or all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency,
as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the

Mortgagee, whether direct or indirect, principal or
secondary.
So we have here the concept of a blanket mortgage
clause also known as a dragnet clause. Mortgages
which includes this dragnet clause is given to secure
future advancements are valid and legal contracts, and
the amounts named as consideration in said contracts do
not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the
intent to secure future and other indebtedness can be
gathered. If you look at the provision in the real estate
mortgage while it says there the principal of all of which is
hereby fixed at 500,000, you would see that the intention
of the parties here that the mortgage is to secure other
obligations, the 500,000 pesos as well as those which the
mortgagee hereafter may extend to the mortgagor
including interests and expenses or any other obligation
owing to the mortgagee. So if you compare it to contracts
of guaranty or suretyship, its akin to that of a continuing
guaranty or suretyship. Again, the same purpose, it
enables the parties to provide continuous dealings when
the extent of which may not be known or unliquidated at
that time, and therefore, they avoid the expense or
inconvenience of executing a new security of each
transaction. It operates as a convenience and
accommodation to the borrower as it makes available
additional funds without their having to execute additional
security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees,
et cetera.
Also it is stated here that petitioner was not precluded
from seeking the foreclosure of the real estate mortgage
based on the unpaid drafts drawn by respondent. And
with regard to notice in their agreement, petitioner was
merely required to furnish respondent a notice but no
obligation to ensure that respondent actually receive the
same. in other words, the petitioner, producers bank here
complied with all the requirements both under the law as
well as their agreement.
Just take note of this case, the Court again, emphasizes
the concept of a dragnet mortgage clause is valid. Again,
it is specifically phrased to subsume all debts of past and
future origins. In this case, again, there was an amount
stated or fixed to 250,000 but it also includes all hose that
the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary.
However, take note that such clauses are carefully
scrutinized and strictly construed. Mortgages of this
character enable the parties to provide continuous
dealings, the nature or extent of which may not be known
or anticipated at the time, and they avoid the expense and
inconvenience of executing a new security on each new
transaction.
The real estate mortgage secures or covers not only the
250,000 but also future credit facilities. However, while
the dragnet clause is valid, we have here other loans
which were covered by another security other than this
real estate mortgage with a dragnet clause. In other
words, with regard to preference the specific property
mortgaged to cover the other two obligations would have
been first applied or foreclosed before availing of what is
present in the blanket mortgage clause. Again, take note
of how these clauses should be carefully interpreted and
construed strictly and carefully scrutinized.
More often than not, these real estate mortgage is a
contract of adhesion, banks or financial institutions
already have a pro forma mortgage contract and you
would just fill in the blanks as in the case of Prudential vs

CREDIT TRANSACTIONS

Alviar. While contracts of adhesion are also considered

as strictly construed and carefully scrutinized, again, just
because it is a contract of adhesion it does not mean that
there is vitiated consent on the part of the mortgagor.
Article 2128. The mortgage credit may be
alienated or assigned to a third person, in whole
or in part, with the formalities required by law.
(1878)
Q: So what is a foreclosure sale by virtue of a real

estate mortgage? Was the sale considered as an
extrajudicial foreclosure of property? Did Reyes
execute a real estate mortgage in favor of PDC?
A: No, Reyes did execute a real estate mortgage in
favor PDC. She acquired the property through the loan
she obtained from SSS and to secure said loan, it was
the property acquired from PDC which was mortgaged
in favor of SSS.
Mortgaged credit, this refers to the right of the mortgagee.

The right of the mortgagee over the property mortgaged
may be alienated or assigned to a third person in whole
or in part.
EXAMPLE:
Ron here assigned his rights creditor-mortgagee in favor
of Julian. So what do we have here? If Giovanni fails to
pay the obligation then Julian being the assignee of the
rights of Ron can foreclose the property even if he is not
the original creditor.
Q: So with that, there was a sale in favor of PDC in a

public auction by virtue of an execution sale not
extrajudicial foreclosure sale? And then on the other
hand, we have here Vega occupying the property in the
concept of an owner. Now, between PDC and Vega,
who has a better right to the property?
A: The spouses Vegas has a better right to the property
over PDC because they already became owners of the
property when the said property was sold to them by
the Reyes.
That right is provided under Article 2128 wherein the

assignee can foreclose the property subject to the
mortgage since the right of the mortgagee has already
been assigned to him. The alienation or assignment is
valid even if it is not registered. The assignment between
Ron and Julian. Registration again, is only necessary to
affect third persons.
Q: Is it possible for PDC to considered as a purchaser

in good faith?
A: No since at that time that PDC filed an action for a
sum of money against the Reyes they already had a
notice of the adverse claim of the Spouses Vega.
Now on the part of the mortgaged property again, on the

part of Giovanni as mortgagor, he can sell it to third
person. He can alienate the property because again in a
mortgage there is no transfer of ownership. A stipulation
saying that upon non-payment of the obligation that the
property shall automatically be appropriated or forfeited in
favor of the creditor- mortgagee is not valid, it is void being
contrary to public policy and law. And, we have discussed
that under Art. 2128 the concept of pactum commisorium.
If the debar cannot pay and there was a mortgage
executed, follow the procedures outlined by law with
respect to the foreclosure of the mortgage.
Vega v. SSS
Q: What is Article 1237?
A: Article 1237 provides: Whoever pays on behalf of
the debtor without the knowledge or against the will of
the latter, cannot compel the creditor to subrogate him
in his rights, such as those arising from a mortgage,
guaranty, or penalty.
Q: Can we apply that article to the facts of this case?
A: No. Article 1237 cannot apply in this case since
Reyes consented to the transfer of ownership of the
mortgaged property to the Vegas. Reyes also agreed
for the Vegas to assume the mortgage and pay the
balance of her obligation to SSS.
Even if paragraph 4 of the mortgage contract covering
the property required Reyes to secure SSS consent
before selling the property is a stipulation that is valid
and binding, in the sense that the SSS cannot be
compelled while the loan was unpaid to recognize the
sale, it cannot however, be interpreted as absolutely
forbidding her, as owner of the mortgaged property,
from selling the same while her loan remained unpaid.
Such stipulation contravenes public policy, being an
undue impediment or interference on the transmission
of property.
Q: What was the nature or basis of that public auction?
Why was the property sold by the sheriff?
A: RTC issued a writ of execution against Reyes and
its Sheriff levied on the property in Pilar Village.
So what do you have here? We have here Reyes who

borrowed money from SSS and mortgaged their property
subsequently sold to Spouses Vegas but apparently the
Reyes still has a debt to PDC or Pilar Development
Corporation. And thereafter, PDC filed an action for sum
of money. Since Reyes cannot pay, her properties were
sold at a public auction. Remember here that the
mortgage in favor of SSS, the mortgagor was Reyes. And
even if it was annotated remember that it was
subsequently released by SSS by virtue of the payment
made by Vegas. Now, in other words, when PDC looked
at the title, the right of spouses Vegas was not annotated
therein. Nevertheless, PDC cannot be considered as
purchaser in good faith or cannot take comfort in the fact
that the property remained in the spouses Reyes name
when PDC bought the same in the sheriff sale. PDC
cannot assert that it is a buyer in good faith since it had
notice of the Vegas claim on the property prior to such
sale. Therefore, even if the deed between Reyes and
Vega was not registered, Vega would nevertheless have
a better right over PDC.
This is one thing you have to consider in the execution of
a real estate mortgage, a deed of assignment with an
assumption of mortgage, deed of sale with assumption of
real estate mortgage. You purchase a real estate property
but you still have a debt to financial institutions, PAGIBIG,
SSS etc. Now, any transaction, or such deed of
assignment with assumption of real estate mortgage is
valid between the parties who executed the same. On
other words, the owner sells the property to the buyer and
if there is still a remaining balance the buyer will pay for
the same.
However, one thing you should take note of here is, ask
the mortgagee, in this case it was SSS. Remember what
was the rule here of SSS? They will not recognize
assignment of mortgage. What do you mean by that? The
assignment is valid between the parties but in the record
of SSS they will not recognize it, in the sense that when
the mortgaged property is already released they have
then have the obligation to release the property to the
buyer who bought it from the original debtor-mortgagor.
For their part they are concerned that the loan be paid by
the owner-mortgagor. There may be other financial
institutions or real estate developers which would
acknowledge such documents. For instance, in some
cases, if the buyer still has not paid for the property and
is till paying, and the one who pays for the property is the

CREDIT TRANSACTIONS
one who assumes the debt so that there would only be
one transfer, which is directly to the buyer. So you have
to ask, for practicality reasons, ask the mortgagee, what
are the terms or requirement with regard to such
arrangement. Now regardless of the procedure or
arrangement on the part of the mortgagee, it is better on
the part of the subsequent buyers to have that deed of
assignment or deed of sale with assumption of mortgage
registered in the title. In this case, Vegas was just lucky
that when PDC purchased the property it already had
knowledge prior to the sale. What if PDC had no
knowledge of the same? And let us say that Vega was not
in possession of the property, then you could have PDC
as an innocent purchaser for value. It would be Vega who
would be financially disadvantaged because they were
the ones who paid the debt of Reyes to SSS. So as the
third person being the innocent purchaser for value would
have a better right. The only remedy available here to the
subsequent buyer is to go after the original owner. The
problem here Reyes is no longer in the Philippines. How
can you recover from Reyes? The subsequent buyer
would have no recourse against Reyes unless Reyes has
other properties. So you should consider this, there are a
lot of assumption of mortgage that happens, so you have
to make sure to ask the if it will be acknowledged by the
mortgagee or the financial institution and then aside from
that, make sure that you register it. As in this case, the
assignment or the deed of sale with assumption of
mortgage was not registered then third persons can be
considered as innocent purchaser for value consequently,
they would be considered to have a better right.
Article 2129. The creditor may claim from a third
person in possession of the mortgaged property,
the payment of the part of the credit secured by the
property which said third person possesses, in
the terms and with the formalities which the law
establishes. (1879)
Remember for a valid contract of mortgage there is no
requirement for the delivery of the possession to the
creditor-mortgagee. However, there is nothing that would
prohibit the parties from turning over the possession.
General Rule: It is not required that the possession be
transferred to the creditor-mortgagee.
Exception: Stipulation by the parties that possession be
transferred to the creditor-mortgagee.
Now, with that this also means in our example:
Giovanni could sell the property to Jordan, deliver the
property to Jordan and Jordan will be in possession of the
subject property. Under Art. 2129, the creditor may claim
the payment of the credit to secure the property even if it
is already in possession of a third person it may be
proceeded against by the creditor as payment of the
obligation. So what does this mean?
The illustration there in your book, the obligation of the
debtor there is 600,000. The value of the property is
500,000 the creditor can try to collect from the third
person the value of the property which is 500,000.
However, prior demand is required of the debtor. The
creditor has to first demand debtor-mortgagor before
proceeding against the third person who purchased the
mortgaged property. Now, if you demanded payment from
the third person and the third person pays, this third
person can seek reimbursement from the principal debtor.
If there was a foreclosure proceeding, debtor did not pay,
Jordan tells the third person that he will also not pay, the
property is foreclosed and the deficiency will not be the
obligation of the third person but rather the creditor can
demand the deficiency to the principal debtor. The third
person cannot be held for the deficiency unless again,
there is a novation in the contract wherein there is a
substitution in the person of the debtor.

Article 2130. A stipulation forbidding the owner

from alienating the immovable mortgaged shall be
void. (n)
Remember the ownership remains with the debtormortgagor and 2130 is clear that any stipulation
prohibiting the mortgagor from alienating the immovable
mortgaged is void. Do recall the case of Vega v. SSS.
There was a stipulation there in the mortgage, requiring
Reyes to secure SSS consent before selling the property.
What was the ruling of the court? Although such
stipulation is valid and binding, in the sense that SSS
cannot be compelled while the loan is unpaid to recognize
the sale, it cannot be interpreted as absolutey forbidding
her otherwise, it would be in contravention to Article 2130.
As owner of mortgaged property requiring the consent of
SSS to the sale while her loan was remain unpaid, such
stipulation contradicts public policy and is deemed as an
undue impediment or interference on the transmission of
the property.
In other words, if such consent would be required before
the mortgagor could sell it to third persons while it may be
valid, it must not be used in contravention of Art. 2130
wherein what would happen the mortgagee can always
withhold its consent and in effect, it would be forbidding
the owner from alienating the immovable mortgages.
Therefore, that would be considered as void. In addition,
if the mortgagor wishes to sell the property and it is
required the he secures the consent of the mortgagee,
otherwise he can be liable for estafa which is why the
mortgagor cannot be prevented from having the right to
sell the property mortgaged.
How about executing a second or subsequent mortgage?
It is also valid to secure a second mortgage over a
property already mortgaged. For example, Giovanni
already mortgaged his property in favor of Ron, what if
Giovanni also mortgaged the same property after this
mortgage to Ron, in favor of Nikki? Is it valid? Yes. But
what we have here, we have the first mortgagee Ron and
the second mortgagee, Nikki and therefore the rights of
the second mortgagee will be subordinate to the rights of
the first mortgagee. If the debtor cannot pay his debts and
in the order of payment the first mortgagee is preferred.
The proceeds of the property would be used to pay
whatever is due to the first mortgagee any excess can be
paid to the second mortgagee and so on and so forth.
Usually what would happen here? It is possible that the
second mortgagee here, Nikki, the property will be
foreclosed by Ron as the first mortgagee. It is possible
that Nikki will redeem the property or pay the obligation of
Giovanni because he has an interest in the obligation.
And that would be included in the obligation of Giovanni
which can be part of the security of the second mortgage.
Under the law on obligations and contracts that the
creditor is not bound to accept payment from a third
person but if Nikki offers to pay the obligation of Giovanni
just so that the property will not be foreclosed in favor of
Ron, then that would be one of the instances wherein Ron
would be compelled to accept payment from Nikki
because Nikki here has an interest in the obligation. The
first mortgagee cannot refuse payment by a second
mortgagee because the second mortgagee is interested
in the extinguishment of the obligation. Is it really possible
to have two mortgages over one property? Yes, but on
your part, as the second mortgagee, you already have
notice of the first mortgage. And what happens? If the
principal obligation of the first mortgage becomes due and
demandable and there would be foreclosure proceedings,
if the proceeds of the foreclosure sale is merely enough
or insufficient to cover the obligation, the second
mortgagee no longer has a security. That is the
disadvantage on the part of the second mortgagee.
Probably what would happen here, the property subject to

CREDIT TRANSACTIONS

the first mortgage secures a principal obligation lesser

than that of the value of the property. So if the second
mortgagee looks at the 1st mortgage, it would be okay on
his part because again if the property would be foreclosed
only a portion thereof can cover the payment of the
principal obligation.
modification and extinguishment, and as to other

matters not included in this Chapter, shall be
governed by the provisions of the Mortgage Law
and of the Land Registration Law. (1880a)
What about the right of first refusal? Before Giovanni can

sell it to Jordan, Ron will have a right of first refusal in
which Giovanni must first offer the sale to Ron under the
same terms and conditions. Such stipulation is valid and
will not affect the contract of mortgage. It is also not in
contravention of Article 2130. Mortgagor has every right
to sell the mortgaged property even without securing the
consent of the mortgagee and therefore, if there is a right
of first refusal, that right of first refusal will also be valid. A
sale made in violation of the mortgagees right of first
refusal is considered as a rescissible contract.
Do take note that for mortgage to be valid as against third
persons as provided in the Civil Code the said mortgage
must be registered and such registration serves as a
constructive notice to the whole world that the has a lien
or has been encumbered and a person dealing with a
property has the obligation to look at the title and see for
himself whether or not the property is encumbered. Some
people would no longer opt to have it annotated on the
title because there are subsequent expenses to have it
annotated. Nevertheless, although it is not required for
validity, it should be done because it is also for your
protection as your right can bind third persons. However,
do take note that even if the mortgage lien was not
annotated on the title but the buyer has knowledge of the
existence of such lien, that actual knowledge is deemed
a constructive notice and binds the third person, the buyer
can no longer be considered as a buyer in good faith.
Another situation, Giovanni sold the property to Jordan
and the sale was duly notarized but not yet registered. So
in the title, the property still belongs to Giovanni.
Thereafter, Giovanni mortgages the property to Ron,
since in the title Giovanni appears to be the owner of the
property, Ron accepted the offer of the said mortgage. But
in this instance a sale duly notarized over the mortgaged
property already took place. If Giovanni fails to pay his
obligation to Ron and Ron proceeds to foreclose the
property. What is the effect here? Can Jordan oppose the
foreclosure of the property? Remember, as what I have
emphasized earlier, sale itself does not transfer
ownership, since ownership is not required for the
perfection thereof we have to take not here that there was
already a deed of sale duly notarized, execution of a
public document which constitutes constructive delivery
so therefore at the time Giovanni mortgaged the property
in favor of Ron, Giovanni was no longer the owner of the
subject property as a result, there is no valid mortgage in
favor of Ron to speak of. But, the principal obligation
subsists. Take note that in this case, the deed of sale in
favor Jordan was not even registered. Even if the
mortgage in favor of Ron was registered, there is still no
valid contract of mortgage because at the time the
mortgage was executed, the mortgagor is no longer the
owner of the property.
Take note again, the concept of after acquired properties.
As a general rule, after acquired properties cannot be the
subject of a contract of mortgage because at the time of
the mortgage you have to be the owner of the property, in
this case the mortgagor acquires the property after the
mortgage was executed. But, as mentioned earlier, if you
are talking of inventories which are to be replenished as
in the ordinary course of business then that would be
allowed as a valid object in a contract of chattel mortgage.
Article 2131. The form, extent and consequences
of a mortgage, both as to its constitution,
In fact we have the Chattel Mortgage Law and the Land

Registration Law.
Governing laws:
a. Act 3135 for Real Estate Mortgage
b. Act 1508 for Chattel Mortgage
c. PD 1529 for Land Registration
d. General Banking Law of 2000
- where some provisions therein involves the
foreclosure of mortgages
e. Rule 68 of the Rules of Court- Extrajudicial
foreclosure of property
Take note of those rules in relation to the foreclosure of
properties.
What are the remedies available to a creditor if the debtor
cannot pay him?
1. File an action for collection of a sum of money.
- In this case he abandons the mortgage.
Remember the debtor who executed a real
estate mortgage, he cannot compel the
creditor to foreclose the property as the
creditor can opt for a collection of sum of
money therefore he abandons the mortgage.
Here however, while the creditor files an
action for collection of sum of money, the
creditor can pray for the issuance for a writ of
attachment mortgaged.
2. He can institute foreclosure proceedings on the
mortgaged property.
NOTA BENE: But the remedies available to the creditor
are alternative and not cumulative nature therefore, he
can only opt to exercise either of the remedies but at no
instance can he exercise both.
FORECLOSURE PROCEEDINGS
Foreclosure is the remedy available to the mortgagee by
which he subjects the mortgaged property to the
satisfaction of the obligation to secure which the
mortgagee was given where the mortgagor is in default in
the payment of said obligation.
Foreclosure proceedings has in their favor the
presumption of regularity and therefore, the burden of
evidence to rebut the same is on the party that seeks to
challenge the proceedings.
Two kinds of foreclosure proceedings:
(1) Extrajudicial- foreclosure done without the aid of the
court; governed by Act 3135
(2) Judicial- is a foreclosure filed before the court and
governed by Rule 68 of the Rules of Court.
Judicial vs Extrajudicial foreclosure:
Extrajudicial
As to right of
redemption of
debtormortgagor
has a right of
redemption no
right of
redemption but
only equity of
redemption
ion
Judicial
no
right
of
redemption but
only equity of
redemption

CREDIT TRANSACTIONS
As to the law
applicable
As to period of
redemption
Act 3135
1 yr. period from
date of
registration
Debtor
mortgagor is a
juridical entity: 3
months from the

Rule 68 of the
Rules of Court
90-120
days
from date of
entry
of
judgment ; even
after the 90-120
period
but
before
the
confirmation of
sale
Mortgagee is is
a
banking
institution 1 yr.
from the date of
entry judgment
Spouses Rosales v. Spouses Suba

Q: Why was the property here considered to be subject
to a judicial foreclosure? Was there a mortgage?
A: There was an equitable mortgage.
Q: Why was it considered as an equitable mortgage?
What was the contract executed between the parties?
A: The parties executed a deed of sale but the court
considered said deed to be an equitable mortgage. The
Court defined an equitable mortgage as one which
although lacking in some formality, or form or words, or
other requisites demanded by a statute, nevertheless
reveals the intention of the parties to charge real
property as security for a debt, and contains nothing
impossible or contrary to law.
one year period from the date of the registration of sale to

redeem the property. Here, since it was a judicial
foreclosure, you only have equity of redemption. Right to
redemption is not recognized in a judicial foreclosure
except when the mortgagee is a banking institution.
Where the foreclosure is judicially effected no equivalent
right of redemption exists, what we have here is only an
equity of redemption wherein it gives the mortgagor 90
from the date of entry of judgment or even after the
foreclosure sale but prior to its confirmation, to extinguish
the obligation and retain the property.
Section 2, Rule 68. Judgment on foreclosure for
payment or sale. If upon the trial in such action the
court shall find the facts set forth in the complaint to be
true, it shall ascertain the amount due to the plaintiff
upon the mortgage debt or obligation, including interest
and other charges as approved by the court, and costs,
and shall render judgment for the sum so found due
and order that the same be paid to the court or to the
judgment obligee within a period of not less than ninety
(90) days nor more than one hundred twenty (120)
days from the entry of judgment, and that in default of
such payment the property shall be sold at public
auction to satisfy the judgment. (2a)
General Rule: No right of redemption in judicial
foreclosure after the confirmation of the sale mortgagor
can no longer redeem the property.
Exception: Mortgagee is a banking institution as
provided under the banking laws, even if it is a judicial
foreclosure as long as the mortgagee is a bank the
mortgagor has the right to redeem the property within one
year reckoned from the date of registration of the
foreclosure sale.
Judicial Foreclosure under Rule 68
An equitable mortgage is not different from a real estate

mortgage, and the lien created thereby ought not to be
defeated by requiring compliance with the formalities
necessary to the validity of a voluntary real estate
mortgage.[6] Since the parties transaction is an
equitable mortgage and that the trial court ordered its
foreclosure, execution of judgment is governed by
Sections 2 and 3, Rule 68 of the 1997 Rules of Civil
Procedure, as amended and not under Act 3135 on
extrajudicial foreclosure.
Q: Why do we have to determine whether what we
have here is a judicial foreclosure or an extrajudicial
foreclosure?
A: It is important to determine because the right of the
redemption of the debtor-mortgagor would depend on
whether or not what exists is a judicial foreclosure or
extrajudicial foreclosure over the property.
Q: What do you mean by equity of redemption under
judicial foreclosure?
A: As provided under Rule 68 of the Rules of Court, the
mortgagor is provided not less than 90 days and no
more than 120 days from the entry of judgment to retain
ownership over the property and extinguish the
obligation and as long as there is no confirmation of
sale by the court. However, in this case, there was
already confirmation of the judicial foreclosure sale in
favor of Spouses Suba therefore, the Spouses Rosales
can no longer redeem the property.
Here we have an equitable mortgage under Article 1602,
provisions regarding sale. And an equitable mortgage is
not any different from a real estate mortgage because the
intention of the parties is to secure a principal obligation.
Since the transaction between the parties is an equitable
mortgage the trial court ordered its foreclosure and
execution of judgment as provided under Rule 68. Right
of redemption is not recognized under a judicial
foreclosure. In a right of redemption, the mortgagor has a
1.) The mortgagee would file a a petition for judicial

foreclosure in the court which has jurisdiction
over the area where the property is situated.
2.) The court will conduct a trial. If, after trial, the
court finds merit in the petition, it will render
judgment ordering the mortgagor/debtor to pay
the obligation within a period not less than 90
nor more than 120 days from the finality of
judgment.
3.) Within this 90 to 120 day period, the
mortgagor has the chance to pay the obligation
to prevent his property from being sold. This is
called the EQUITY OF REDEMPTION
PERIOD.
4.) If mortgagor fails to pay within the 90-120 days
given to him by the court, the property shall be
sold to the highest bidder at public auction to
satisfy the judgment.
5.) There will be a judicial confirmation of the sale.
After the confirmation of the sale, the purchaser
shall be entitled to the possession of the
property, and all the rights of the mortgagor
with respect to the property are severed or
terminated. The equity of redemption period
actually extends until the sale is confirmed. Even
after the lapse of the 90 to 120 day period, the
mortgagor can still redeem the property, so long
as there has been no confirmation of the sale yet.
Therefore, the equity of redemption can be
considered as the right of the mortgagor to
redeem the property BEFORE the confirmation
of the sale.
6.) The confirmation of the sale is a hearing where
the parities will appear and the mortgagor can

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assail the validity of the option or question the

legality thereof.
executive judge or the vice executive judge in his absence

and is issued to the winning bidder.
7.) There will be execution of the judgment,

application of the proceeds and the issuance or
execution of the sheriff certificate.
6.) Registration of the sale and from this date will the 1
year redemption period will run; or if a mortgagor is a
juridical entity three months.
8.) Thereafter, a registration of the certified true copy

of the final order of the court confirming the sale.
7.) If the redemption period expires, the clerk will archive

the records.
* Remember the equity of redemption in a judicial

foreclosure will not stop on the 120th day, even if it is not
within the 90-120 day period for as long as there is no
confirmation of the sale, the mortgagor can redeem the
property by paying the amount of the debt and not the
purchase price of the sale.
*this is why I mentioned before, in an extrajudicial

foreclosure, it does not technically mean that there is no
court intervention since you still you have to file a petition
with the judge. It is only that there is no longer a hearing
but mainly summary procedures to be followed.
Who can redeem the property?
Judicial foreclosure is under special civil action. Extra

judicial foreclosure is under Act 3135.
1.)
2.)
3.)
4.)
The mortgagor
One who is in privity of the mortgagor
The successors in interest of the mortgagor.
A person whom the debtor has transferred his
right
5.) A person whom the debtor has contained his
interest in the subject matter
6.) One who succeeds to the interest of the debtor
7.) One who is a joint debtor or joint owner of the
subject matter.
In case of deficiency in a judicial foreclosure, the creditormortgagee can recover within ten years from the time the
right of action accrues. In fact you can also recover within
the 90-120 period. The deficiency must be incorporated in
the deficiency judgment in a judicial foreclosure. In other
words, you have to look at the judgment of the court with
respect to the deficiency judgment, the proceeds there is
still a balance which shall be paid by the debtormortgagor.
In summary:
Judicial foreclosure
General Rule: equity of redemption; 90-120 from date of
entry of judgment AND as long as the there is no
confirmation sale.
Exception: right of redemption if the mortgagee is a bank
(1 year from registration of sale)
Extrajudicial foreclosure
General Rule: Right of redemption (1 year period from
registration of sale)
Exception: equity of redemption applicable if the
mortgagor is a juridical entity; 1 year period of redemption
will not apply, the juridical entity can pay the obligation
within but not after registration until registration but not
more than 3 months after foreclosure.
Act 3135 Extrajudicial Foreclosure Procedure:
1.) File an application with the executive judge who has
the jurisdiction over the property.
2.) Requisite posting of notice of the sale; if the property
is valued at 400 pesos; if more than 400 pesos publication
of the notice of sale once a week for at least three
consecutive weeks in a newspaper of general circulation.
3.) Clerk of court issues a certificate of payment and the
application is raffled among the sheriff.
4.) 1st sale, there must be at least two bidders. If there is
only one bidder or no one bids, the sale will be postponed.
5.) In the 2nd sale, one who emerges as the highest
bidder the certificate of sale will be approved by the
Act 3135 is an act to regulate the sale of property under

special powers inserted in or annexed to real estate
mortgages. We have here an extrajudicial foreclosure.
SECTION 1. When a sale is made under a special
power inserted in or attached to any real-estate
mortgage hereafter made as security for the
payment of money or the fulfillment of any other
obligation, the provisions of the following election
shall govern as to the manner in which the sale and
redemption shall be effected, whether or not
provision for the same is made in the power.
For you to be able to promptly advance an execution
foreclosure of real estate mortgage, make sure that in the
same contract of real estate mortgage or attached thereto
there is a special power or authority given by the
mortgagor to the mortgagee to foreclose or sell the
subject property in case the debtor fails to pay. In the
absence of that authority you cannot apply for
extrajudicial foreclosure. The only remedy would be by
judicial foreclose or an action for sum of money.
SECTION 2. Said sale cannot be made legally
outside of the province in which the property sold
is situated; and in case the place within said
province in which the sale is to be made is subject
to stipulation, such sale shall be made in said place
or in the municipal building of the municipality in
which the property or part thereof is situated.
Section 3 provides for the notice and publication
requirement. This must be strictly complied otherwise,
failure to comply with this provision would result to the
nullity of the foreclosure proceeding.
SECTION 3. Notice shall be given by posting
notices of the sale for not less than twenty days in
at least three public places of the municipality or
city where the property is situated, and if such
property is worth more than four hundred pesos,
such notice shall also be published once a week for
at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.
Evidence there will be Affidavit of publication as well
issues with regard to this notice.
Section 4 with regard to the time of the public auction
under the direction of the sheriff, justice or auxiliary justice
but usually sheriff.
SECTION 4. The sale shall be made at public
auction, between the hours or nine in the morning
and four in the afternoon; and shall be under the
direction of the sheriff of the province, the justice

CREDIT TRANSACTIONS
or auxiliary justice of the peace of the municipality
in which such sale has to be made, or a notary
public of said municipality, who shall be entitled to
collect a fee of five pesos each day of actual work
performed, in addition to his expenses.
SECTION 5. At any sale, the creditor, trustee, or
other persons authorized to act for the creditor,
may participate in the bidding and purchase under
the same conditions as any other bidder, unless
the contrary has been expressly provided in the
mortgage or trust deed under which the sale is
made.
General rule: The creditor, trustee or other person,
authorized to act for the creditor, may participate in the
bidding and purchase under the same conditions as any
other bidder
Exception: it has been expressly provided in the mortgage
that they cannot participate.
Section 6 provides for the right of redemption.
SECTION 6. In all cases in which an extrajudicial
sale is made under the special power hereinbefore
referred to, the debtor, his successors in interest
or any judicial creditor or judgment creditor of said
debtor, or any person having a lien on the property
subsequent to the mortgage or deed of trust under
which the property is sold, may redeem the same
at any time within the term of one year from and
after the date of the sale; and such redemption
shall be governed by the provisions of sections
four hundred and sixty-four to four hundred and
sixty-six, inclusive, of the Code of Civil Procedure,
in so far as these are not inconsistent with the
provisions of this Act.
It says the debtor may redeem the same at any time
within the term of one year from and after the date of the
sale . Notice that the law states date f the sale but the
Supreme Court has held that that refers to the registration
of certificate of sale. So one year from registration of the
sale.
SECTION 7. In any sale made under the provisions
of this Act, the purchaser may petition the Court of
First Instance of the province or place where the
property or any part thereof is situated, to give him
possession thereof during the redemption period,
furnishing bond in an amount equivalent to the use
of the property for a period of twelve months, to
indemnify the debtor in case it be shown that the
sale was made without violating the mortgage or
without complying with the requirements of this
Act. Such petition shall be made under oath and
filed in form of an ex parte motion in the
registration or cadastral proceedings if the
property is registered, or in special proceedings in
the case of property registered under the Mortgage
Law or under section one hundred and ninety-four
of the Administrative Code, or of any other real
property encumbered with a mortgage duly
registered in the office of any register of deeds in
accordance with any existing law, and in each case
the clerk of the court shall, upon the filing of such
petition, collect the fees specified in paragraph
eleven of section one hundred and fourteen of Act
Numbered Four hundred and ninety-six, as
amended by Act Numbered Twenty-eight hundred
and sixty-six, and the court shall, upon approval of
the bond, order that a writ of possession issue,
addressed to the sheriff of the province in which
the property is situated, who shall execute said
order immediately.

Section 7 we have here possession by the purchaser
during the redemption period. Purchaser during the public
auction can possess the property by furnishing a bond
equivalent to the use of the property for a period of 12
months to indemnify the debtor in case it be shown that
the sale was made without violating the mortgage or
without complying with the requirements.
If you are the highest bidder you file a petition. If you want
to acquire possession during the redemption period you
have to furnish a bond. But if the redemption period has
already lapsed, then no bond is requires as the sale is
considered as absolute. The petition for possession shall
be considered in the form of an ex parte motion in
registration or cadastral proceeding if the property is
registered.
SECTION 8. The debtor may, in the proceedings in
which possession was requested, but not later
than thirty days after the purchaser was given
possession, petition that the sale be set aside and
the writ of possession cancelled, specifying the
damages suffered by him, because the mortgage
was not violated or the sale was not made in
accordance with the provisions hereof, and the
court shall take cognizance of this petition in
accordance with the summary procedure provided
for in section one hundred and twelve of Act
Numbered Four hundred and ninety-six; and if it
finds the complaint of the debtor justified, it shall
dispose in his favor of all or part of the bond
furnished by the person who obtained possession.
Either of the parties may appeal from the order of
the judge in accordance with section fourteen of
Act Numbered Four hundred and ninety-six; but the
order of possession shall continue in effect during
the pendency of the appeal.
So here he can file an action to question the public
auction.
SECTION 9. When the property is redeemed after
the purchaser has been given possession, the
redeemer shall be entitled to deduct from the price
of redemption any rentals that said purchaser may
have collected in case the property or any part
thereof was rented; if the purchaser occupied the
property as his own dwelling, it being town
property, or used it gainfully, it being rural
property, the redeemer may deduct from the price
the interest of one per centum per month provided
for in section four hundred and sixty-five of the
Code of Civil Procedure.
Essentially thats act 3135. This is an old law but we have
an update here. A new circular was issued by the
Supreme Court A.M. NO. 99-10-05-0 as amended by
resolution of June 30, 2001 and August 7, 2002.
Application for extrajudicial foreclosure shall be filed with
the executive judge through the clerk of court who is also
the ex officio sheriff.
When we say extrajudicial it is technically without the aid
of court. But you still need to apply to the court.
Requirements for filing of the fees and the procedure for
the issuance of the certificate. Notice that it is provided
therein the general banking law under Section 47 of RA
8791.
We mentioned that while in extrajudicial foreclosure the
general rule is that the redemption period is one year
period.
The exception is the mortgagor is a juridical person he
has the right to redeem the property until but not after the

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registration of the sale in which no case shall be more
than 3 months after foreclosure whichever comes earlier.
If the sale is registered one month after the foreclosure,
the property can no longer be redeemed if the mortgagor
is a juridical person.
Also emphasized therein the importance of notices;
noncompliance therewith shall constitute as a violation of
the law.
Another circular was issued, Circular No. 7-2002,
reiterating what we mentioned in the earlier administrative
matter but this time we also included the fees to be paid.
We have there an example of a notice of extrajudicial
sale.
Thats a quick overview of Act 3135. Again take note that
there must be an authority given in favor of the mortgagee
so that the mortgagee can sell the property to a
foreclosure sale in case the debtor fails to pay when the
obligation becomes due. In the absence of special power
or authority, extrajudicial foreclosure is not available. The
remedies available are to judicially foreclose the property
or to file a collection for sum of money.
Remember if judicially foreclose a property most probably
it would have to incur more expenses since you have to
get a lawyer and pay legal fees and it would take much
longer. So you still have to schedule a hearing.
In extrajudicial you just have to comply with the
requirement of notice and publication and the payment of
fees which are obviously lesser than judicial foreclosure.
Notice that what is used here is a special power authority.
In other words there is somewhat a contract of agency.
Wherein the mortgagor is the principal and the mortgagee
is the agent. A contract of agency is a personal contract
based on trust and confidence. Being personal in nature,
as a general rule, when one of the parties dies the
contract of agency will be extinguished.
How about in the execution of a real estate mortgage
when there is a special power or authority to sell, what
happens when the mortgagor dies? Does it mean that the
authority given to the mortgagee will be extinguished? No
such extinguishment occurred because the power given
to the mortgagee is for the interest of the mortgagee. It is
not for the interest of the mortgagor. So notwithstanding
the death of the mortgagor, the mortgagee can still
extrajudicially foreclose the property as the agency is not
extinguished. This is an agency coupled with interest
which is not necessarily extinguished by the death of the
mortgagor or the principal.
Take note as to the necessity of publication. Remember,
the date of sale indicated in the publication the same must
be held on that scheduled day. If the sale was held on a
day different from that indicated in the notice then the
notice is void and the subsequent foreclosure proceeding
would also be considered as void.
Also under the law, there is no requirement of personal
notice to the mortgagor of the foreclosure sale. Personal
notice to mortgagor is not generally required unless it is
provided in the mortgage contract. So it is stipulated by
the parties that the mortgagee will notify the mortgagor if
the property is sold. In the absence of that stipulation, the
mortgagor is not entitled to notice. Publication of
newspaper is more than sufficient compliance.
General rule in extrajudicial foreclosure is the right of
redemption. The exception there is the 3 month period
with regard to a mortgagor who is considered as a juridical
entity. The one year right of redemption period starts from
the registration of the sale and not from the date of the
actual foreclosure sale.

Spouses Landrito vs CA
Q: What was the requirement that the mortgagor
spouses pointed out to nullify the foreclosure
proceeding?
A: petitioner failed to follow the notice and publication
requirement and as to the amount.
Q: what step should have been taken if they want to
question the foreclosure proceeding?
A: they should have redeemed the property within one
year from the date of registration.
Q: how about to the issue regarding the extension
given to them?
A: the petitioners were not able to make a valid offer of
the redemption price. In order for the legal redemption
to be converted into a conventional the parties must
agree.
Q: was the complaint for annulment filed within the one
year redemption period?
A: No. it was made a year after the registration.
Q: If the action was filed within the one year redemption
period, will it interrupt the running of the period?
A: No.
The best remedy is to redeem the property and to
question the sale. Just in case you have no ground in
questioning, at least you have redeemed the property.
So when the principal obligation is not paid, the
mortgagee has already the right to foreclose the
mortgage, have the property sold with the view of applying
the proceeds thereof to the obligation. Petitioners failed
to exercise their right of redemption within the 1 year
period founded from registration of the sheriffs certificate
of sale. The one year redemption period shall be counted
from the time the certificate of sale is registered. Even the
complaint filed by the petitioners here was instituted
beyond the one year redemption period. As to the
redemption price, they were held in estoppels as they did
not question it in the proceedings. They did not even
appear during the proceeding despite notice. No time at
all is petitioner made a valid offer to redeem coupled with
the tender of redemption price. It is only where by
voluntary agreement of the parties consisting of extension
of period to redeem followed by commitment to pay with
the concept of legal redemption be converted into one of
conventional redemption. No showing that petitioners
agreed to pay the redemption price on or before
November 11 1994.
The filing of the complaint was due to their refusal to pay
the redemption price. At the very least if they believe that
their loan was only for 1M they should have made an offer
to redeem during the one year period but they never did.
The period of redemption is not a prescriptive period but
a condition precedent provided by law to restrict the right
of the person exercising the redemption. If a person
exercising the right has offered to redeem the property
within the one year period he is considered to have
complied with the condition precedent prescribed by law
and may thereafter file an action to enforce redemption to
compel the acceptance of his payment.
If the period has already lapsed before a right of
redemption be exercised the action to enforce redemption
will not prosper even if the action was brought within the
ordinary prescriptive period like 10 years if in writing.
Moreover the period within which to redeem the property
sold at the sheriffs sale is not suspended by the institution
of the action for the xxx foreclosure sale. Petitioners have
lost any right to the subject property primarily because of

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their failure to redeem the same in the manner and within
the period prescribed by law.
Take note as to the 3 month redemption period provided
for mortgagors who are juridical persons under Section 47
of the General Banking Law RA 8791
Section 47. Foreclosure of Real Estate Mortgage. - In
the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is
security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property
has been sold for the full or partial payment of his
obligation shall have the right within one year after the
sale of the real estate, to redeem the property by
paying the amount due under the mortgage deed, with
interest thereon at rate specified in the mortgage, and
all the costs and expenses incurred by the bank or
institution from the sale and custody of said property
less the income derived therefrom.
So that is the basis of the exception in judicial foreclosure.
If the mortgagee is a bank, it is not an equity of redemption
but the bank here can xxx redeem the property.
However, the purchaser at the auction sale concerned
whether in a judicial or extra-judicial foreclosure shall
have the right to enter upon and take possession of
such property immediately after the date of the
confirmation of the auction sale and administer the
same in accordance with law. Any petition in court to
enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall
be given due course only upon the filing by the
petitioner of a bond in an amount fixed by the court
conditioned that he will pay all the damages which the
bank may suffer by the enjoining or the restraint of the
foreclosure proceeding.
Second paragraph of the law states
Notwithstanding Act 3135, juridical persons whose
property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property
in accordance with this provision until, but not after, the
registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be
more than three (3) months after foreclosure,
whichever is earlier. Owners of property that has been
sold in a foreclosure sale prior to the effectivity of this
Act shall retain their redemption rights until their
expiration. (78a)
So that is an exception to judicial foreclosure as well as
exception to extra judicial foreclosure.
With regard to deed of sale in an extra judicial foreclosure,
in act 3135 and the circulars issued by the Supreme Court
we would see that it is an application for extra judicial
foreclosure filed with the executive judge who has
jurisdiction over the property through the clerk of court or
also the sheriff.
Requirement is also the publication of the notice of sale
once a week for at least three consecutive weeks in a
newspaper of general circulation and the clerk of court
sign and issues a certificate of payment and the
application is xxx of the sheriffs and one of the sheriffs
conducts the auction sale. So the sale will not proceed in
the absence of bidders and once it is postponed the sale
here can proceed usually the highest bidder at the very
least the bidder is the mortgagee.
Thereafter the certificate of sale is approved by the
executive judge and then the certificate of sale is issued
in the remaining year. Registration for one year right to
redeem the property will run otherwise the mortgagor
juridical person in three months from foreclosure or until
registration whichever comes earlier. If the redemption

period expires and no redemption is made the clerk will
archive the record and there will be a confirmation of the
sale.
In redemption in extrajudicial foreclosure if the mortgagor
is not a juridical entity, again, the right of redemption is
once year from the registration of the certificate of sale. if
the mortgagor is a juridical entity, we have an equity of
redemption but different from judicial foreclosure equity
of redemption. Until but not after the registration of the
certificate of the foreclosure sale which shall not be more
than three months after the foreclosure.
How to validly redeem:
(1) It must be made within the period provided by law
(2) Payment of purchase price plus 1% interest with
taxes from the date of registration until the date
of redemption.
(3) Payment is to be made to the redemptioner or to
the sale officer, the sheriff
(4) Written notice of redemption must be served on
officer who made the sale and a duplicate in the
register of deed
What happens if the proceeds are insufficient to pay the
obligation? If the foreclosed property is sold and the
proceeds are not sufficient to extinguish the obligation
may the party still proceed against the debtor for the
deficiency? With regard to judicial foreclosure, yes but as
longs as it is part of the order of the court with regard to
deficiency judgment; if there is a deficiency judgment the
mortgagee may proceed against the mortgagor for the
deficiency or the mortgagee can go after the principal
debtor because it can happen that the mortgagor is a third
person and that person cannot be held personally liable
for the deficiency. With regard to extrajudicial foreclosure,
there is no mention with regard to deficiency. However in
jurisprudence it is implied that the mortgagee can recover
the deficiency because again if we look at the law nothing
prevents the mortgagee from recovering the deficiency.
How about if the property is sold more than the obligation?
The excess shall be returned to the mortgagor in both
cases whether it is a judicial or extrajudicial foreclosure.
Do remember that under obligations and contracts mere
inadequacy of price of a contract of sale will not result to
the nullity of the said contract. However if the price is
grossly inadequate, the contract can be considered as
rescissible.
However if what we have is a foreclosure proceeding and
there is a right of redemption or equity of redemption
gross inadequacy of price will not justify the rescission of
the foreclosure sale because if the price is inadequate,
that will favorable to the mortgagor in redeeming the
property. Gross inadequacy is not a ground of rescission
of there is a right if redemption although for those who had
sales there is a price which is shocking to the conscience
of men which can nullify the sale,
EQUITABLE MORTGAGE
What was executed here is a contract of sale with right of
repurchase or an absolute sale but there is no intention to
transfer the property. The intention was to have the
property act as a security or collateral of the principal
obligation. It lacks the formalities of a mortgage but the
intention is there. For it to be considered to be an
equitable mortgage there must have to be that intention
that the property will secure a principal obligation and any
of the instances provided under article 1602. Unusually
inadequate price, vendor remains in possession, upon the
expiration of the right to repurchase they extend the
period and the purchaser retains a part of the purchase
price, the vendor binds himself to pay the taxes and In any
other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure

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the payment of a debt or the performance of any other
obligation.
Article 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is
unusually inadequate;
(2) When the vendor remains in possession as lessee
or otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on
the thing sold;
(6) In any other case where it may be fairly inferred that
the real intention of the parties is that the transaction
shall secure the payment of a debt or the performance
of any other obligation.
In any of the foregoing cases, any money, fruits, or
other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall
be subject to the usury laws. (n)
Again, any of the instances coupled with the intention of
the parties. There must be proof that there is a principal
obligation because mortgage is an accessory contract. So
if the intention was to secure a principal obligation
although what was executed was a deed of absolute sale
with right to repurchase, the remedy available to the
seller is to file an action for reformation because there
was a contract perfected and a meeting of the minds as
to a mortgage. You just have to reform so that the contract
will express the true intention of the parties. The
possibility here is that the buyer will file an action for the
possession of the property. On the part of the seller, he
can raise the defense of equitable mortgage.
Union Bank vs CA
Q: What was the basis of the private respondents in
executing the foreclosure sale?
Q: What was the issue with regard to the title itself?
A: They had title reconstituted in their name without the
knowledge of private respondents.
The private respondents were not mortgagor but they
were alleging that there could be no valid mortgage
because allegedly there was no transfer of title in favor of
spouses Dario. They acquired the title allegedly through
fraud. So when union bank filed for the consolidation of
the title in its name, they questioned such consolidation
but the Supreme Court held that it was proper. But
nevertheless on the part of the private respondents here,
can they still question the extrajudicial foreclosure that
took place even without the consolidation of the title in
favor of union bank?
In this case there is a notice of lis pendens. So when you
file an action to question the consolidation or to stop it,
nevertheless, the action can still proceed because of that
notice of lis pendens.
The buyer in a foreclosure sale becomes the absolute
owner of the property purchased if it is not redeemed after
one year after the registration of the sale. Consolidation
is the transfer of the title in the name of the highest bidder.
It is made as a matter of right as there was no redemption
made and the TRO issued here had expired. During the
one year period there can be no consolidation, there can
be no transfer the title in the name of highest bidder
because the mortgagor may still redeem the property.
He can have possession of the property but he has to file
a petition and attach or furnish a bond but he cannot

transfer the title until the expiration of the one year period.
Union bank did not inform the respondents that it was
consolidating the title over the property. Union bank need
not inform private respondents that it was consolidating
title over the property, notice to mortgagors more reasons
to private respondents who are not parties to the
mortgage contract or to the extrajudicial sale notice to
them is not necessary again the mortgagee has the right
to foreclose the mortgage and have the property ceased
and sold with the view to apply the proceed to the
payment of the principal obligation.
Again, what we have here is an extrajudicial foreclosure,
one year period to redeem from and after the registration
of the sale. Upon failure to redeem consolidation of title
becomes a matter of right on the part of the auction buyer
and the issuance of the certificate of title in favor of the
purchaser becomes ministerial on the register of deeds.
The consolidation of ownership over the mortgaged
property in favor of UNIONBANK and the issuance of a
new title in its name during the pendency of an action for
annulment and reconveyance will not cause irreparable
injury to private respondents who are plaintiffs in the said
action that will merit the protection of the court through the
writ of preliminary injunction. As purchaser at a public
auction, UNIONBANK is only substituted to and acquires
the right, title, interest and claim of the judgment debtors.
The judgment in the main action for reconveyance will not
be rendered ineffectual by the consolidation of ownership
and the issuance of title in the name of union bank. The
notice of lis pendens, which despite consolidation remains
annotated on union banks transfer certificate of title
subject to the outcome of the litigation sufficiently protects
private respondents interest over the property.
Once a notice of lis pendens is registered any cancellation
or issuance of the title involved will have to be subject to
the outcome of the litigation. In other words, the private
respondents interest will still have to be protected.
Pineda vs. CA
In this case there was an action for the issuance of the
new title. But they lost the case because there was an
innocent purchaser for value. So be vigilant in the
exercise of your right in the exercise of your ownership
over the subject property. What was emphasized here
that what is void here was the transfer certificate of title
and not the title of the property. The title refers to the
ownership of the property covered by the TCT or the TCT
is merely an evidence of ownership. A certificate of title is
not equivalent to title itself. Prior mortgage by the spouses
benitez to pineda did not prevent the spouses from selling
to mojica; valid sale, valid transfer of ownership. As the
mortgage was merely an encumbrance on the property
and does not extinguish the title of the debtor who does
not lose his principal attribute as owner to dispose of the
property. The law even considers void a stipulation
forbidding the owner of the property from alienating the
mortgaged immovable.
Ownership of the property passed from the Spouses
Benitez to Mojica. The nullity of the second owners
duplicate of TCT did not affect the validity of the sale as
between the Spouses Benitez and Mojica. A mortgage
annotated on a void title is valid if the mortgagee
registered the mortgage in good faith. In this case,
Gonzales is a mortgagee in good faith and the foreclosure
sale was considered valid. To bind third parties to an
unregistered encumbrance, the law requires actual
notice. In his case Gonzales had no actual notice of the
mortgage in favor or Pineda.
When Gonzales purchased the Property at the auction
sale, Pineda and Sayoc had already annotated the lis
pendens on the original of TCT which remained
valid. However, the mortgage of Gonzales was validly

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registered prior to the notation of the lis pendens. The
subsequent annotation of the lis pendens could not defeat
the rights of the mortgagee or the purchaser at the auction
sale who derived their rights under a prior mortgage
validly registered.
Pineda and sayoc were considered negligent in not
registering their mortgage. Pineda and Sayoc registered
their mortgage, their rights as prior mortgagees would
have prevailed over that of Gonzales. Pineda and Sayoc
were also negligent in not foreclosing their mortgage
ahead of Gonzales, when they could have done so. On
the other hand Gonzales vigilantly exercised her right to
foreclose the mortgaged Property ahead of Pineda and
Sayoc. Between two unregistered mortgagees, both
being in good faith, the first to foreclose his mortgage
prevails over the other.
Extrajudicial foreclosure in relation to our discussion,

again going back to the rules, in case there is a deficiency
in the extrajudicial foreclosure the mortgagee may still
claim from the mortgagor.
If it is an extrajudicial foreclosure, the law does not
expressly provide that the mortgagee can recover the
deficiency. However, there is no prohibition regarding the
recovery of the deficiency from the mortgagor. And
jurisprudence would tell us that any deficiency may be
collected. If there is an excess, the excess shall be
returned to the mortgagor regardless of whether it is a
judicial or extrajudicial foreclosure.
Also last time we have discussed that with respect to the
inadequacy of the price, we already know that under
Obligations and Contracts that mere inadequacy would
not invalidate the sale. However, gross inadequacy may
result to a rescissible contract. Also if the price of the sale
is unusually inadequate it is considered as an equitable
mortgage under 1602 if the intention is to make the
property to secure an existing obligation.
With regard to extrajudicial foreclosure, the inadequacy of
the price will not invalidate the sale but rather it would be
in favor the mortgagor since it would be easier for him to
redeem the mortgaged property. However, if the price is
shocking to the conscience of men, then jurisprudence
would tell us that it may be nullified.
Spouses Rabat vs. PNB
Q. How much is the bid price?
A. 3.8M
Q. How much is the fair market value of the property?
A. 14M
Q. What was the ruling of the Court?
A. Unlike in an ordinary sale, in a forced sale, the
inadequacy of the price does not nullify the sale since
it is more favorable to the mortgagor.
Q. How much was the total obligation?
A. 4 M
Q. So with the foreclosure sale, was the obligation
deemed extinguished?
A. Yes, but PNB can recover the deficiency
What do you have here is an inadequacy of the bid price
in a forced sale as distinguished to a foreclosure sale.
Unlike in an ordinary sale, the inadequacy of the bid price
is immaterial; it will not nullify the sale. But in a forced sale,
a low bid price is considered as more beneficial to the
mortgage debtor since it would be easier for him to
redeem such property.

Here the CA noted that the bid price is almost equal to the
4M applied for by the spouses as loan. It is settled that if
the proceeds of the sale are insufficient to cover the debt
in an extrajudicial sale, the mortgagee is nevertheless
entitled to recover the deficiency from the debtor. While
Act 3135 which governs the extrajudicial foreclosure on
mortgages is silent as to the mortgagees right to recover,
it does not prohibit the recovery of the said deficiency.
Again, take note, the inadequacy of the price will not
invalidate the sale.
Also last time, with regard to foreclosure sale the
requirements under the law must be strictly complied with
otherwise it will not be considered valid. We have the case
of DBP vs. CA.
DBP vs. CA
Q. With regard to the posting and publication, what is
the requirement under the law?
A. As to the personal property, only posting is required.
Q. How about to real property?
A. Posting with publication. The publication of the
notice of the sale must be not less than 20 days and
must be posted in 3 conspicuous places (public places
in the city or municipality where the property is
situation. With regard to the publication, it should be
published for 3 consecutive weeks in a newspaper of
general circulation.
Q. Is the certificate of posting required?
A. No. what is required is the actual publication.
Q. Was the publication complied with?
A. When the auction sale was not yet rescheduled,
there was compliance with the publication But as to the
rescheduled sale (because it was postponed), the
auction sale was not republished hence, the failure to
republish rendered the auction sale void.
So remember that the law is strict with respect to the
requirements of posting and publication. While posting
and publication is required under the law, the certificate of
posting however is not required much less considered
indispensable as to the validity of the foreclosure sale
under Act 3135. The fact alone that there was no
certificate of posting in the sheriffs record is not sufficient
[to the] lack of posting, what is required by law is the
actual posting which is present in the case.
However, with regard to the publication of date of the
foreclosure sale, republication in the manner as provided
under Act 3135 is necessary for the validity of the
extrajudicial foreclosure sale. The parties have no right to
[do away] with the publication requirement. Publication is
required in a reasonably wide publicity such as those
interested may attend the foreclosure sale. Without
compliance to such requirement would convert it to a
private sale. The last paragraph of the prescribed notice
under the Circular issued by the SC in 2002, allows the
putting of the rescheduled auction sale without the
reposting or the republication of the notice. The
rescheduled foreclosure sale will only be valid if the
rescheduled date of sale is clearly specified in the prior
notice of sale. The absence of this information in the prior
notice of sale will render the rescheduled sale void for lack
of reposting or republication. If the notice contains this
particular information, whether or not the parties agreed
thereto, there is no more need for the reposting or
republication of the rescheduled auction sale.
The purpose here is to minimize the expenses to which
the mortgagee incurs in posting the notices for the auction
sale. The interested parties are also informed of the next
date of the auction sale if the first auction sale is not

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fulfilled. Therefore the purpose of the posting of the

auction sale is to notify the mortgagor and the public. This
is also to deter the process [that some mortgagors make]
in postponing the foreclosure sale and thereafter
attacking the validity of the foreclosure for lack of
republication.
while in Act 3135, the date of sale refers to the date of

registration of the sale with the ROD.
In this case, there was no republication of the notice of

the rescheduled auction sale here the extrajudicial
foreclosure of the real estate mortgage was void.
It was mentioned here also that with respect to Chattel
mortgages what is required only is the posting of the
notice of the auction sale.
Take note, the date provided should be followed. Even if
we say that there is a rescheduled date provided [and
published], still, if the actual auction sale did not take
place on such date as published, then the auction sale
would still be considered as void.
Also last time we have discussed regarding the
redemption period. Again distinguish the redemption
under judicial foreclosure as a general rule we have a
right of redemption if we have a bank as the mortgagee.
Under the extrajudicial foreclosure sale, right of
redemption from registration and the exception we have
there the mortgagor as a juridical person then we have
the 3 months (until) registration whichever comes earlier.
Q. What is the relevance of the ordinance issued by

QC?
A. SC said that the QC pursuant to its taxing powers,
this ordinance specifically provides that the one year
redemption period shall be counted from the date of
registration of the sale at the ROD.
Q. Between RA 7160 and the Ordinance, which
prevails?
A. Ordinance. Hence, the period of redemption must be
from the date of the annotation of the date of sale in the
ROD.
Q. Assuming that the QC did not have the Ordinance,
would the respondents still be able to redeem the
property?
A. No, what will be applied is RA 7160 which is one
year from the date of sale.
So here take note that RA 7160 repealed PD 464. Section
61 of RA 7160, the owner of the delinquent property has
the right to redeem the property within one year from the
date of the actual sale.
Q. What is the redemption period provided under

CARP?
A. 2 years from the registration of the sale
However what is involved here is a property that is

situated in QC, and in QC there is an ordinance where it
provides that the redemption period shall be within 1 year
from date of annotation of the sale at the property.
Between a general law and a special law, the special law
will prevail. Also with regard to redemption if there is doubt
in the interpretation of the law, it should rule in favor of the
mortgagor or the original owner.
Q. The tenants here, can they still continue possession

even if they failed to redeem it within the period
provided under the law?
A. Yes, they can continue possession
Therefore here they have until 2005 which is one year

from the date of the sale was registered. The tender of
payment of subject property (tax) in 2004 was well within
the redemption period.
So you have here a special law [CARP] the right of

redemption provided under such law should be exercised
within 2 years after the registration of the sale. However
in this case, the sale was registered in 1985 and the right
of redemption therefore expired in 1987. The right of
redemption was exercised only in 1992 or 5 years after
the expiration of the redemption period or 7 years counted
from the time of registration.
If there is failure to redeem, the next step for the

mortgagee is to consolidate the title into his name and
thereafter a title will be issued in his name. If the title is
already in the name of the mortgagee, then the next step
is to file a motion for writ of possession.
Philbancor Finance vs. CA
So in this scenario we have the tenancy under the CARP,

you have here a 2 year period and not the one year period
provided under the law. But take note the tenants here
can still continue with the possession of the property and
enjoyment of the land in question. Because the right of
tenancy [as provided under the law], the leasehold
relation is not extinguished by reason of the alienation or
the transfer of the legal possession of the land.
QUEZON CITY vs. RCBC
Q. What was the basis of the auction sale?
A. Failure for the payment of real estate taxes
Q. What is PD 464?
A. Real Property Tax Code
Cu Lai Chu vs. Laqui

Q. When did the mortgagee applied for the possession
of the property? Can it not possess the property during
the redemption period?
A. Yes it can possess the property during the
redemption period, but there must be a bond.
Q. After the expiration of the redemption period, is the
bond still required?
A. No
Q. There was a petition for writ of possession, was it
properly issued? Is notice required under the law?
A. Yes it was properly issued.
Q. What is the role of the court here?
A. It becomes a ministerial duty of the court to issue a
writ of execution once the requirements have been
complied with.
Q. Which should prevail here, RA 7160 or (Local

Government Code) PD 464?
A. RA 7160 because the sale here took place under
7160 for the failure of the payment of the real estate
taxes.
Q. If there is denial of due process if the mortgagor

owner is not impleaded in the motion for writ of
possession?
A. No, because what have here is an ex parte motion.
Q. How is the date of sale under Act 3135 and RA

7160 distinguished?
A. Under Local Government Code, 1 year from the date
of sale. The date of sale means date of actual sale;
If the period of redemption has already expired, the

highest bidder can already consolidate the title under his
name and thereafter he can already move for the
issuance of a writ of possession. In fact even if during the

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period of redemption he can already possess the property
provided that he put up a bond. But if he does not want to
possess the property [during the redemption period] then
he does not need to put up a bond, all he has to do is to
wait for the lapse of the period.
If the property is not redeemed within the period provided
under the law, the highest, as in this case the private
respondent, had acquired an absolute right for a writ of
possession. After which it becomes a ministerial duty of
the court to issue such writ of possession upon mere
motion pursuant to Section 7 of Act 3135.
Once ownership has been consolidated, the issuance of
the writ of possession becomes a ministerial duty of the
court upon proper application thereto of title. When private
respondent applied for the issuance of writ of possession,
it presented a new title in its name. The right of private
respondent was therefore incumbent upon its right of
ownership. The purchaser at a foreclosure sale using the
title newly issued, the right of private respondent over the
property therefore had become absolute.
Petitioners were wrong in saying that they were denied
due process when they were declared in default despite
the fact that they filed an opposition. Remember the
motion for the issuance of the writ of possession is in the
nature of an ex parte motion, therefore [the court] issues
it as a matter of force once the requirements have been
complied with. No discretion is left to the courts.
The remedy of the petitioners here is to have the writ set
aside and writ of possession cancelled. But in the
meantime the highest bidder is entitled to the possession
thereof. The right of possession of the purchaser at a
foreclosure sale is not affected by a pending case
questioning the validity of the foreclosure proceeding. The
latter is not a bar to the former even pending proceedings.
Again a writ of possession is issued ex parte as a matter
of force upon compliance with the requirements under the
law.
Recap
In the case of DBP, we have emphasized the importance
of the compliance with the rules regarding posting and
publication.

Now with regard to the equal protection clause, the
difference in the treatment of juridical persons and natural
persons is based on the nature of the foreclosed property
as to how it is used.
Now also last meeting we emphasized with the other
special laws that provided for different redemptions period
as provided for in the LGC and then you also have there
the properties that are covered by the other laws.
Also last time we discussed the issuance of consolidation,
it becomes absolute if the property is not redeemed within
the period as provided by law and now a writ of
possession will be issued in favor of the highest bidder
because his ownership becomes absolute.
Remember the petition for the issuance of the Writ of
possession is ex-parte in nature.
In the case of Mallari vs GSIS, you have here the issue
whether the writ of execution for the writ of possession is
invalid. Now remember here that the debtor his financial
interest or any person who has interest subsequent to the
mortgage has the right to redeem the property at anytime
between one year from the date of the sale or expiration
of 1 year and that means that you all know the date of the
registration of the sale.
The holder of the property becomes the absolute owner if
no redemption is made.
The issuance of the writ of possession to him becomes a
matter of right upon the consolidation of the title in his
name. The court can no longer exercise discretion upon
whether or not it is proper to execute the writ as it
becomes a ministerial duty of the court. Ex-parte and
summary in nature, the application and execution of the
issuance of the writ of possession.
ANTICHRESIS
Art. 2132. By the contract of antichresis the creditor
acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to
apply them to the payment of the interest, if owing,
and thereafter to the principal of his credit. (1881)
Now regarding redemption period, we have emphasized

that the general rule is equity of redemption. The
exemption is right of redemption if the bank is a
mortgagee bank as provided of section 47 of the general
banking law
This is the definition of a contract of antichresis, it is also

an accessory contract.
Now if you have an extra judicial foreclosure the general

rule is one year period of redemption from the date of
registration. The exception is that if the mortgagor is a
juridical person, then the equity of redemption is from 3
months from the foreclosure of the sale or the registration
of the sale whichever comes earlier.
It is a consensual contract that must also be in writing.

Delivery here is not required for validity. Nevertheless the
property must be delivered by the debtor to the creditor
so that the creditor may receive the goods. But such
delivery is not required for the validity of the contract of
antichresis.
In the case of Goldenway, so here you have a juridical

person as the mortgagor, the said corporation ascertains
that 1-year period is to apply to them; they alleged that
such law (sec 47) violates the constitutional prescription
against impairment of obligations.
Now the contract of antichresis covers all the fruits in the

porerty but the law gives the parties to stipulate otherwise.
It is susceptible of pure or conditional obligation.
Now remember the purpose of this non-impairment

clause is to safeguard the integrity of contracts. Sec 47
did not divest juridical persons of the right to redeem, but
only modified such right to redeem by reducing the one
year period.
The new redemption period commences from the date of
foreclosure sale and expires upon registration of sale or 3
months after foreclosure whichever is earlier.
Pledge vs Antichresis
Pledge
movable or personal
Pledge is perfected by
delivery
a real contract
Mortgage vs Antichresis
Mortgage
Antichresis
real property involved
an informal contract
Antichresis

CREDIT TRANSACTIONS
Delivery of the possession
in favor of the mortgagee
is not required.
Creditor acquires real
right over the property.
No such obligation
No such obligation

SM is delivered to creditor
for the creditor to apply
the fruits not for validity.
Creditor acquires only the
right to acquire the fruits of
the property
Creditor is obliged to pay
the taxes unless there is a
stipulation to the contrary
Creditor apply fruits to the
principal obligation
With respect to the nature of antichresis, in the case of

Alojado vs Siongco, you have to show that there is a
principal obligation wherein the fruits of the property is to
be applied wherein in this case they failed to do so which
clearly states their intention that it was indeed a sale with
right to repurchase as compared to an antichresis.
In the case of La Vega vs Ballilos, always go to the
intention of the parties. The creditor in this case might
manage and enjoy the same in consideration for the sum,
which the land was mortgaged.
It is important to determine the intention of the parties as
evidenced by the word and terms employed by them and
written in the said documents. So again you have here a
contract of antichresis.
Possession is given to the creditor to use and apply the
fruits that are of the property to be applied to the principal
obligation for which the land was subjected to the control
of the creditor.
Article 2133. The actual market value of the fruits at
the time of the application thereof to the interest
and principal shall be the measure of such
application.
Here it is the actual market value at the time the fruits are
to be applied in the obligation.
Article 2134. The amount of the principal and of the
interest shall be specified in writing; otherwise, the
contract of antichresis shall be void.
This provision is clear. It must be in writing for its validity
and not just for the purpose of affecting third persons. The
amount of the principal and the interest must be specified
in writing. Otherwise, antichresis is void. But take note
that antichresis is an accessory contract so even if such
acntichresis is void, the principal can still be considered
as valid.
Q: What was the basis of the transfer of possession to

the creditor Antonio Baretto? What was their
agreement? The acts of the parties show that they
intend to limit themselves to give the creditor the right
over the fruits.
Q: What was the basis of saying there was antichresis?
Was there a document presented? There was none.
Q: Even assuming that this is in the Old Civil Code, but
isnt that antichresis must be in writing? There is no rule
in the Old Civil Code that says antichresis must be in
writing.
Q: What happens if the debtor becomes insolvent,
aside from applying the fruits, what is the remedy? The
creditor may ask the sale of the real property.
Antonio Vicente Barretto took possession of said
hacienda by virtue of voluntary assignment with the
express consent of heirs of the deceased Juan Antonio
Barretto, Sr., owner of one-half of the hacienda and of
Juan Antonio Barretto Grandpre, Jr., owner of the other
half.
Even when it cannot possibly be doubted that the
assignment of the hacienda to Antonio Vicente Barretto
was not made in payment of his credit in spite of the fact
that the agreement between the creditor and the debtors
was not set down in any document, due to the relationship
which exists between them, it may safely be asserted,
assuming the facts that took place, that the debtors have
limited themselves to give to the creditor the right to
collect his credit from the fruits of the hacienda, upon him
the possession of the property, but not transferring to him
the dominion of the same, since such transfer does not in
any way appear to be proved in the present action.
The agreement or verbal stipulation which leads to the
facts proved deserves in law the name of antichresis.
So there is a valid consensual contract of antichresis even
if there was no document. However, do take note that this
case was decided in under the Old Civil Code. If you look
at Article 2134, there is this letter at the end which says
(n) which means that this a new provision under the New
Civil Code.
So antichresis is consensual under the Old Civil Code, but
under the New Civil Code, you have to consider Article
2134, which means antichresis is a formal contract.
The debtor cannot recover possession over the property
without fully paying the creditor. Plaintiff here has no title
over the property and cannot recover possession of the
said property.
Article 2135. The creditor, unless there is a

stipulation to the contrary, is obliged to pay the
taxes and charges upon the estate.
Article 2136. The debtor cannot reacquire the

enjoyment of the immovable without first having
totally paid what he owes the creditor.
He is also bound to bear the expenses necessary

for its preservation and repair.
But the latter, in order to exempt himself from the

obligations imposed upon him by the preceding
article, may always compel the debtor to enter
again upon the enjoyment of the property, except
when there is a stipulation to the contrary.
The sums spent for the purposes stated in this

article shall be deducted from the fruits.
This provision describes the obligations of the antichretic
creditor. He must pay the taxes and the charges upon the
estate, subject to the stipulation of the parties. If he does
not pay the taxes he is by law required to pay indemnity
for damages to the debtor. The antichretic debtor is also
bounf to pay the expenses for the preservation and repair
and the sum spent for the purposes in this article.
BARETTO versus BARRETTO
Q: Was there transfer of ownership? No.
The debtor cannot demand possession until the debt is

fully paid. Just like pledge.
MACAPINLAC versus GUTIERREZ REPIDE
Q: Repide here was not a party to the original contract,
he just acquired the right from Bachrach, so what is the
nature of the contract? Is it a pacto de retro sale, a
mortgage or an antichresis?
It is an antichresis between Repide and Macapinlac.
Repide occupied the position of a mortgagee in
possession.

CREDIT TRANSACTIONS
Q: Wasnt there already a tender of payment made by
Macapinlac? There was no valid tender of payment.
There was only a written offer to pay. Under Civil
Procedure, if the written offer is refused the tender of
payment is likewise refused.
Q: Under Obligation and Contracts, was the offer valid
to extinguish the obligation? If refused, there must be
tender of payment plus consignation.
Q; But nevertheless, there was no valid tender of
payment because? It did not mention a particular sum
where the debt is to be applied.
We have here a contract of antichresis. Even though the
facts of the case seem to refer to mortgage, we have here
an antichresis. At the same time, however, the creditor is
under obligation to apply the fruits derived from the estate
in satisfaction, first, of the interest on the debt, if any, and,
secondly, to the payment of the principal. From this is
necessarily deduced the obligation of the creditor to
account to the debtor for said fruits and the corresponding
right of the debtor to have the same applied in satisfaction
of the mortgage debt, as recognized in Barretto vs.
Barretto.

RAMIREZ versus COURT OF APPEALS
Q: How long was the possession of the petitioners over
the subject land? Since 1938
Q; By virtue of the period, could they be considered
owners thereof? No since they are only mere holders
of the property as authorized by the owners.
In Land Titles, what is the requirement of possession to
acquire ownership? 10 years in good faith, 30 years in
bad faith. Then the possession must be open, continuous,
exclusive, adverse and notorious. The petitioners were
only in possession not as owners but only as antichretic
creditors. They are mere holders and they cannot acquire
the property.
But take note that the owner (debtors) cannot reacquire
the property unless the debt secured is paid.
Article 2138. The contracting parties may stipulate
that the interest upon the debt be compensated
with the fruits of the property which is the object of
the antichresis, provided that if the value of the
fruits should exceed the amount of interest allowed
by the laws against usury, the excess shall be
applied to the principal.
Repide was in actual possession of the property in

question, and that he had in effect been enjoying
possession but only as an antichretic creditor. he is
entitled to retain such possession until the indebtedness
is satisfied and the property redeemed; that the nonpayment of the debt within the term agreed does not vest
the ownership of the property in the creditor; that the
general duty of the mortgagee in possession towards the
premises is that of the ordinary prudent owner' that the
mortgagee must account for the rents and profits of the
land, or its value for purposes of use and occupation, any
amount thus realized going towards the discharge of the
mortgage debt; that if the mortgagee remains in
possession after the mortgage debt has been satisfied, he
becomes a trustee for the mortgagor as to the excess of
the rents and profits over such debt; and, lastly, that the
mortgagor can only enforce his rights to the land by an
equitable action for an account and to redeem.
So apply the fruits of the property are applied to the

interest then to the principal.
There was no valid tender of payment: the reason that it

does not appear that the written offer mentioned a
particular sum as the amount to be paid. There was
therefore no valid tender.
Therefore, the debtor's heir who has paid a part of the

debt cannot ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not
completely satisfied.
But the case is not one where a tender is necessary,

because the amount actually due cannot be known until
an accounting is had and the extent of the plaintiff's
indebtedness reduced to certainty.
Neither can the creditor's heir who received his share

of the debt return the pledge or cancel the mortgage, to
the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which,
there being several things given in mortgage or pledge,
each one of them guarantees only a determinate
portion of the credit.
So the next step that should have been taken by the

debtor here is to demand for the accounting.
Article 2137. The creditor does not acquire the
ownership of the real estate for non-payment of the
debt within the period agreed upon.
Every stipulation to the contrary shall be void. But
the creditor may petition the court for the payment
of the debt or the sale of the real property. In this
case, the Rules of Court on the foreclosure of
mortgages shall apply.
Ownership is not transferred to the creditor. Even if there
is a stipulation, such stipulation is void. Go back to our
discussion on pactum commisorium which applies not
only to pledge and mortgage but also to antichresis. The
remedy of the creditor is to demand payment or
foreclosure of the property.
Article 2139. The last paragraph of article 2085, and

articles 2089 to 2091 are applicable to this contract.
Last paragraph of Article 2085: That the persons
constituting the pledge or mortgage have the free disposal
of their property, and in the absence thereof, that they be
legally authorized for the purpose.
So it is possible that the property of a third person may be
the subject of the antichresis. The fruits form the property
of the third person may be applied to the principal debt.
Article 2089. A pledge or mortgage is indivisible, even
though the debt may be divided among the successors
in interest of the debtor or of the creditor.
The debtor, in this case, shall have a right to the

extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially
answerable is satisfied.
Article 2090. The indivisibility of a pledge or mortgage
is not affected by the fact that the debtors are not
solidarily liable.
Article 2091. The contract of pledge or mortgage may
secure all kinds of obligations, be they pure or subject
to a suspensive or resolutory condition.
Take note of the rules of indivisibility in the provisions.
Notice that the cases here are old, since only a few people
enter into contracts of antichresis today.

CREDIT TRANSACTIONS
CHATTEL MORTGAGE &

THE CHATTEL MORTGAGE LAW
Article 2140. By a chattel mortgage, personal
property is recorded in the Chattel Mortgage
Register as a security for the performance of an
obligation. If the movable, instead of being
recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel
mortgage. (n)
So definition of a Chattel Mortgage, as provided for in
2140, that a contract by Chattel mortgage, personal
property is recorded in the Chattel Mortgage register as a
security for the performance of an obligation. Just like real
estate mortgage, pledge, and antichresis, this is an
accessory contract. Now, if you take a look at 2140, you
could see that it is a recorded contract. Because for its
validity, it seems that the registration in a chattel mortgage
register is indispensable. It is also unilateral as it produces
only obligations on the part of the creditor to free the thing
from encumbrance on the fulfillment of the obligation.
Obviously, the subject matter in a pledge and in a chattel
mortgage are the samepersonal property. However, in
a chattel mortgage, delivery is not essential for its validity.
Wherein, you remember under pledge, a pledge is a real
contract and therefore delivery is essential for its validity.
On the other hand, registration in Chattel Mortgage is
required for its validity, while it is not required in the
contract of pledge.
With regard to the foreclosure of the personal property in
case of default, we all know that we will apply 2112 if we
have pledge. With regard to the chattel mortgage, we
have Act No. 1508.
Also take note and recall that in pledge, with regard to the
deficiency after the sale, the creditor cannot sue for the
balance and cannot xxx the judgment even if there is a
stipulation. But in a chattel mortgage, you will see that in
a real estate mortgage the creditor can sue for the
balance. However, please remember that if a personal
property is sold based on Article 1484 of the civil code
which is the Recto Law so sale of personal property on
installment, do remember that if that is the basis for the
foreclosure sale (?), then the creditor cannot sue for the
balance.
As we expect, under the chattel mortgage, the debtor gets
the excess up to the value of the mortgage. But in pledge,
we already know that a creditor cannot get the excess
unless there is a stipulation to the contrary.
With respect to their similarity:
1. in subject matter personal property
2. They are both accessory contracts to secure the
principal obligation.
3. Both are indivisible and constitutes a lien on the
property.
4. The creditor cannot appropriate the property to
himself in payment of the debt in both cases.
5. No pactum commisorium on pledge, real estate
mortagage, antichresis, and chattel mortgage.
6. With pledge and chattel mortgage, both are
extinguished with the fulfillment of the principal
obligation or by the destruction of the property
pledged or mortgaged.
Article 2141. The provisions of this Code on pledge,
insofar as they are not in conflict with the Chattel
Mortgage Law shall be applicable to chattel
mortgages. (n)

So what do we have here? The civil code provisions on
plegde are likewise applicable to a chattel mortgage as
long as they are not inconsistent with the provisions on
the chattel mortgage law as well as on the few provisions
that we have under the civil code.
Reference is also made to other special laws, such as the
revised administrative code, the revised penal code, and
Cheap mortgage decree. Because for example, say the
object mortgaged is a motor vehicle. If the subject motor
vehicle is mortgaged, the mortgage will be recorded by
the LTO to effect as against third persons. If the subject
matter is a ship or a vessel, it must likewise be recorded
in the Philippine Coast Guard. Otherwise, the mortgage
will not be binding as against third persons. In relation to
the revised penal code, there are criminal liabilities in the
chattel mortgage where you knowingly remove any
personal property on a mortgage under the chattel
mortgage law in the property other than which it was
located at the time of the execution of the mortgage
without the written consent of the mortgagee. Or selling of
personal property already mortgaged or any part thereof
under the terms of the Chattel Mortgage law without the
consent of the mortgagee written at the back of the
mortgage and duly recorded in the chattel mortgage
register. That is Article 319 of the revised penal code.
Please remember that even if the mortgagor has already
paid his indebtedness or thereafter paid his debt to the
mortgagee, he will still be not relieved from the criminal
liability as provided in article 319 of the revised penal
code. Remember, the civil liability is different from the
criminal liability.
Now if the property is subject to chattel mortgage and
subsequently the mortgagor sold it to a third person,
despite the provision in the revised penal code wherein
the mortgagor can be held liable for selling it without the
consent of the mortgagee or removing any personal
property from the place where it was located at the time
of mortgage, the sale will still be considered as valid since
still it is considered as a consensual contract. But again,
the mortgagor-owner may still be held liable for criminal
liability.
Applicability of the Provision on Pledge
Again, the provision in the civil code on pledge shall apply
to a chattel mortgage in so far as they are not in conflict
with the provisions on the chattel mortgage law.
General rule as to the subject matter of the Mortgage:
again you have a personal or a movable property. Again,
your knowledge on what is personal or movable or
immovable property should be taken into consideration.
What are the deviations allowed wherein it is not
necessarily personal or movable property, but
nevertheless the SC has held that they can be valid
subject matters of a chattel mortgage?
1. We have shares of stock. However with regard
to shares of stock subject to a mortgage, it must
be mortgaged in both provinces of the owner and
the corporation which issued the said shares.
2. Interest of business can likewise be subject to a
chattel mortgage. I think the case of DavaoCastillo vs Sawmill was also discussed in your
Property wherein the machinery were treated by
them as personal properties. You recall there that
the machineries were cemented, bolted, etc on
the property and were made subject of the chattel
mortgage. Although if you look at article 315 of
the civil code, you can consider that as an
immovable property. Nevertheless, the fact that it
was made a subject matter of a chattel mortgage
does not make it an immovable property.

CREDIT TRANSACTIONS
However, it is treated as a valid subject matter of
a chattel mortgage because here the parties are
already estopped to say that the chattel mortgage
is void just because the subject matter is actually
an immovable property. So under the principle of
estoppel, the property (while under the civil code
it is an immovable) can be treated as a valid
subject matter in a chattel mortgage as between
the parties who effected such chattel mortgage.
3. As mentioned earlier, you could also have ships
or vessels. However, it is essential that the
mortgage be recorded with the Philipppine Coast
Guard as provided in the ship mortgage treaty.
Not for validity but to be effective upon third
persons. It is not necessary that it will still be
recorded in the registry of deeds.
4. Motor vehicles should aslo be recorded in the
LTO. But with respect to vehicles used for public
services, they should be made before the LTFRB.
You make it effected against the public in any
condition.
You have the case of Borlough vs Fortune. What
happened in this case?
Borlough vs Fortune
Q: First, what do we have here? Why is it necessary to
compare the Motor Vehicle law and the Chattel
Mortgage law? What is the subject of the mortgage
here?
A: Car.
Q: So we have a chattel mortgage law. Who was the
mortgagor?
A: Fortune.
Q: Was the mortgage registered? So if you compare
the two laws, who has the better right over the car? So
you have here the motor vehicles law and the chattel
mortgage law. Which should prevail?
A: The SC actually said that the two laws are not
inconsistent with each other. The first paragraph of
section 5 indicates that the provisions of the Revised
Motor Vehicles Law regarding registration and
recording of mortgage are not incompatible with a
mortgage under the Chattel Mortgage Law. The section
merely requires report to the Motor Vehicles Office of a
mortgage; it does not state that the registration of the
mortgage under the Chattel Mortgage Law is to be
dispensed with. We have, therefore, an additional
requirements in the Revised Motor Vehicles Law, aside
from the registration of a chattel mortgage, which is to
report a mortgage to the Motor Vehicles Office, if the
subject of the mortgage is a motor vehicle; the report
merely supplements or complements the registration.
The recording provisions of the Revised Motor Vehicles
Law, therefore, are merely complementary to those of
the Chattel Mortgage Law.

A: When the subject matter is a motor vehicle as just in
this case.
Q: So in other words, if you have a motor vehicle
subject of a chattel mortgage? What is the requirement
to bind third persons?
So you have here a motor vehicle subject of a mortgage.
The SC emphasized the difference between the chattel
mortgage law and the revised motor vehicles law. The SC
emphasized that the revised motor vehicles law is a
special legislation enacted to "amend and compile the
laws relative to motor vehicles," whereas the Chattel
Mortgage Law is a general law covering mortgages of all
kinds of personal property. The former is the latest
attempt to assemble and compile the motor vehicle laws
of the Philippines, all the earlier laws on the subject
having been found to be very deficient in form as well as
in substance; it had been designed primarily to control the
registration and operation of motor vehicles.
So the chattel mortgage law was not repealed by the
revised motor vehicles law. The revised motor vehicles
law merely requires to record it in the Motor Vehicles
office. It does not state that the registration of the
mortgage under the Chattel Mortgage Law is to be
dispensed with. The recording provisions of the Revised
Motor
Vehicles
Law,
therefore,
are
merely
complementary to those of the Chattel Mortgage Law. A
mortgage in order to affect third persons should not only
be registered in the Chattel Mortgage Registry, but the
same should also be recorded in the motor Vehicles
Officethat is what is lacking here in the case of Fortune.
Failure of the respondent mortgagee to report the
mortgage executed in its favor had the effect of making
said mortgage ineffective against Borlough, who had his
purchase registered in the said Motor Vehicles Office. On
failure to comply with the statute, the transferee's title is
rendered invalid as against a subsequent purchaser from
the transferor, who is enabled by such failure of
compliance to retain the indicia of ownership, such as a
subsequent purchaser in good faith, or a purchaser from
a conditional buyer in possession; and the lien of a chattel
mortgage given by the buyer to secure a purchase money
loan never becomes effective in such case as against an
innocent purchaser. Remember that they were not able to
prove that Borlough was in connivance with Aguinaldo. So
Borlough's right to the vehicle as against the previous and
prior mortgage Fortune Enterprises, Inc., which failed to
record its lien in accordance with the Revised Motor
Vehicles Law, should be upheld.
So the registration is only to bind third persons. And if you
have a motor vehicle, you register it as well in the LTO.
Now other valid subject matters of a chattel mortgage:
(continuation from the above-mentioned list):
5. A house off mixed materials;
6. A house intended to be demolished; and
7. a house built on rented land.
Q: What is the effect of the registration of the Mortgage

here? Where will it be registered in order to bind third
persons?
A: A mortgage in order to affect third persons should
not only be registered in the Chattel Mortgage Registry,
but the same should also be recorded in the motor
Vehicles Office as required by section 5 (e) of the
Revised Motor Vehicles Law. And the failure of the
respondent mortgage to report the mortgage executed
in its favor had the effect of making said mortgage
ineffective against Borlough, who had his purchase
registered in the said Motor Vehicles Office.
Can you have a building as a subject matter of a chattel

mortgage? What happened in the case of Standard Oil vs
Jaramillo?
Q: When would that additional requirement be

applicable?
Q: Can a building be a valid subject matter in a chattel

mortgage?
Standard Oil vs Jaramillo

Q: First, do you have a chattel mortgage?
A: Yes.
Q: And the subject matter is a?
A: The right, title, and interest of the mortgagor in and
to the contract of lease in the premises the subject of
the said lease

CREDIT TRANSACTIONS

So mortgage of improvements of a landcan it also be
valid subject matter of mortgage? Yes.
A: Yes.
Q: In this case, does the register of deeds have the
right to refuse the registration?
A: No.
Q: What is the nature of the duty here of the register of
deeds?
A: Purely ministerial in character.
Q: So can the registry of deeds be compelled to have
the chattel mortgage registered?
A: Yes.
So the duty of a register of deeds with respect to the
registration of the chattel mortgages is purely ministerial
in character. Remember here, you have a building. And
you have a chattel mortgage with the building as a subject
matter. Nevertheless the SC said that even if you are the
registry of deeds, you have no discretion as to the
registration of these kind of document. Whether it has a
valid subject matter or not, you have to register it because
the duty is ministerial only. It is undeniable that the parties
to a contract may by agreement treat as personal property
that which by nature would be real property. It is
unnecessary here to determine whether or not the
property described in the document in question is real or
personal; the discussion may be confined to the point as
to whether a register of deeds has authority to deny the
registration of a document purporting to be a chattel
mortgage and executed in the manner and form
prescribed by the Chattel Mortgage Law. The register of
deeds has no authority to pass upon the capacity of the
parties to a chattel mortgage which is presented to him for
record. If the mortgaged property is real instead of
personal the chattel mortgage would no doubt be held
ineffective as against third parties, but this is a question
to be determined by the courts of justice and not by the
register of deeds. So another ministerial act on the part of
the registry of deeds.
We all know that a building is a real property. But as long
as it is in the agreement of the parties and no third
persons are prejudiced, the chattel mortgage can still be
considered as valid applying the principle of estoppel. The
parties themselves deemed it as personal property,
although it is a real property. Therefore, they cannot
interpose the validity of the contract as void for having
failed to comply with the requirements of the law to
constitute a chattel mortgage if they have already agreed
that the building or any movable property will be made
subject matter of the mortgage. The parties cannot claim
that the contract is void because it does not comply with
the requirements of a chattel mortgage, but instead
complies with the requirements of a real estate mortgage.
Again, they are considered in estoppel. Remember that
the question here would be: Whether or not third parties
are prejudiced? because if they are prejudiced, then the
chattel mortgage cannot be used as against third persons.
But again, as between the contracting parties, the chattel
mortgage can be considered as valid although it cannot
defeat the rights of third parties.
Now, incorporeal property. Again, this is a valid subject
matter of the chattel mortgage. These referes to
incorporeal rights. They can be owned by a natural or
juridical person. So if the owner of the incorporeal right of
a property registers it in a chattel mortgage, he shall
register it in his own place of residence. But, if the owner
of the incorporeal property is a corporation, then it must
also be registered in the principal place of business of the
corporation. Remember, a corporation can be a
stockholder of another corporation. So the registration of
the mortgage will be the place of business as well as the
registration of the place ng owner. So two registrations.
Also, take note that growing crops and large cattle are
personal properties. They are capable of being
mortgaged, although they can be subjected as immovable
under Article 415. The real estate mortgage, in so far as
the public is concerned, such improvements are
immovable property.
If you recall in our discussion under real estate mortgage,
we emphasized that the property subject of the mortgage
must be clearly described. Also, in the chattel mortgage,
what is required under the law? What happened in the
case of Saldana vs Philippine Guaranty?
Saldana vs Philippine Guaranty
Q: Who is Saldana here?
A: He is the mortgagee.
Q: He is the mortgagee and wherein de Aleazar here
was the mortgagor who mortgaged some of the
properties which are now included in the chattel
mortgage. Was there a valid execution on the chattel
mortgage?
A: No.
Q: When we say execution, we refer to the execution,
perfection of the chattel mortgage.
A: The court here used the "reasonable description
rule" wherein the "furnitures, fixture and equipment"
referred to are properties of like nature, similarly
situated or similarly used in the restaurant of the
mortgagor which articles can be definitely pointed out
or ascertain by simple inquiry at or about the premises.
Q: When you say reasonable description, what is
usually the test here so that it could be a valid subject
of the chattel mortgage? As long as it is what? When
you say reasonable description as to the chattel
mortgage, what is sufficient description required under
the law? You try to compare it with real estate
mortgage. If we apply reasonable description in a real
estate mortgage, can we say that we have a valid
subject matter?
A: No.
Q: So what is the difference here? When we say
reasonable description, it is reasonable description in
what sense?
A: Section 7 of Act No. 1508, commonly and better
known as the Chattel Mortgage Law, does not demand
a minute and specific description of every chattel
mortgaged in the deal of mortgage but only requires
that the description of the properties be such "as to
enable the parties in the mortgage, or any other person,
after reasonable inquiry and investigation to identify the
same". In real estate mortgage, there must be a
specific description so as to isolate it from the rest.
Q: So when we use the term furnitures, equipments
what is in that phrase which made a reasonable
description to make the subject matters be valid subject
matters?
A: The "furnitures, fixture and equipment" referred to
are properties of like nature, similarly situated or
similarly used in the restaurant of the mortgagor
located in front of the San Juan de Dos Hospital at
Dewey Boulevard, Pasay City, which articles can be
definitely pointed out or ascertain by simple inquiry at
or about the premises.
Remember the distinction between real estate mortgage
and chattel mortgage. In the chattel mortgage law, it does
not demand a minute and specific description of every
chattel mortgaged in the deal of mortgage but only
requires that the description of the properties be such "as

CREDIT TRANSACTIONS
to enable the parties in the mortgage, or any other person,
after reasonable inquiry and investigation to identify the
same". General description have been held by the Court.
So here, such person may identify the chattels observed,
but it is not essential that the description be so specific
that the property may be identified by it alone, if such
description or means of identification which, if pursued will
disclose the property conveyed."
So in chattel mortgage, substantial compliance with the
"reasonable description rule" fixed by the chattel
Mortgage Act will be sufficient. The phrase "furnitures,
fixture and equipment" referred to are properties of like
nature, similarly situated or similarly used in the
restaurant of the mortgagor located in front of the San
Juan de Dos Hospital at Dewey Boulevard, Pasay City,
which articles can be definitely pointed out or ascertain by
simple inquiry at or about the premises. Note that the
limitation found in the last paragraph of section 7 of the
Chattel Mortgage Law on "like or subsituted properties"
make reference to those "thereafter acquired by the
mortgagor and placed in the same depository as the
property originally mortgaged", not to those already
existing and originally included at the date of the
constitution of the chattel mortgage. Here the properties
were more or less fixed, or at least permanently situated
or used in the premises of the mortgagor's restaurant. So
you have again section 7 again of Act 1508.
In the extent of the chattel mortgage is also provided in
Section 7 of Act 1508:
Sec. 7. Descriptions of property. The description of
the mortgaged property shall be such as to enable the
parties to the mortgage, or any other person, after
reasonable inquiry and investigation, to identify the
same.
If the property mortgaged be large cattle," as defined
by section one of Act Numbered Eleven and fortyseven, 2 and the amendments thereof, the description
of said property in the mortgage shall contain the
brands, class, sex, age, knots of radiated hair
commonly known as remolinos, or cowlicks, and other
marks of ownership as described and set forth in the
certificate of ownership of said animal or animals,
together with the number and place of issue of such
certificates
of
ownership.
If growing crops be mortgaged the mortgage may
contain an agreement stipulating that the mortgagor
binds himself properly to tend, care for and protect the
crop while growing, and faithfully and without delay to
harvest the same, and that in default of the
performance of such duties the mortgage may enter
upon the premises, take all the necessary measures for
the protection of said crop, and retain possession
thereof and sell the same, and from the proceeds of
such sale pay all expenses incurred in caring for,
harvesting, and selling the crop and the amount of the
indebtedness or obligation secured by the mortgage,
and the surplus thereof, if any shall be paid to the
mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only the
property described therein and not like or substituted
property thereafter acquired by the mortgagor and
placed in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary
notwithstanding.
So the coverage only extends to those properly described
therein. But again, remember that in the Saldana case,
reasonable description would be sufficient.
A stipulation in the mortgage extending the scope which
makes reference to like or substituted property thereafter

acquired, it is valid and binding where the after-acquired
property is in renewal of, or in substitution for, goods on
hand when the mortgage was executed, or is purchased
with the proceeds of the sale of such goods. So we have
mentioned before that after-acquired properties can be a
subject matter of a mortgage. For example, during the
inventory of a subject matter of the mortgage, it is a valid
subject of the mortgage even if at the time the mortgage
was executed it was not yet of existence. So afteracquired properties are valid, depending on the nature of
such property.
In the case of Standard Oil, the duty of the register of
deeds are purely ministerial.
Now, we have to recall the affidavit of good faith required
in a chattel mortgage which is not a requirement sa real
estate mortgage. So what is an affidavit of good faith?
It is an oath in a contract of chattel mortgage wherein the
parties severally swear that the mortgage is made for the
purpose of securing the obligation specified in the
conditions thereof and for no other purposes and that the
same is a just and valid obligation and one not entered
into for the purpose of fraud. Remember that in a chattel
mortgage, you do not deliver the possession of the chattel
mortgage to the mortgagee. The mortgagor remains in
possession thereof. Now, what happpens if for example
the mortgagor obtained a loan and mortgaged [a
property], but in reality he did not obtain a loan as it was
only done to defraud third person. So to avoid that, there
is a requirement of an affidavit of good faith to secure the
fulfillment of the obligation and not to defraud third
persons.
Remember that this is an affidavit. It requires a statement
that you attest that the obligation is true and the mortgage
is executed for an existing principal obligation. Now if you
lied in your affidavit, you are not only liable civilly such as
damages, you are also liable criminally, specifically
perjury.
So what is the effect if there is no affidavit of good faith?
We have here the case of Lillius vs Manila Railroad. What
happened in this case?
Lillius vs Manila Railroad
Q: Assuming that there was a document, a chattel
mortgage executed before a notary public. Assuming
that it was presented before the court, can the court
rule in favor of the creditors?
A: No.
Q: Why not?
A: In order to gain preference, there must be an
affidavit of good faith executed over the chattel
mortgage.
Q: So what is the effect of the absence of the affidavit
of good faith? Would that invalidate a chattel
mortgage?
A: No. it is valid as between parties. However, one of
the parties would not have a valid preference over the
other creditors should the debtor become insolvent.
Q: So again, if there is no affidavit of good faith, the
chattel mortgage will still be valid. But as to third
persons?
A: To acquire a right in case the debtor becomes
insolvent, the mortgagee does not have the preferred
right.
As against creditors and subsequent encumbrances, the
law does require an affidavit of good faith appended to the
mortgage and recorded with it. A chattel mortgage may,
however, be valid as between the parties without such an
affidavit of good faith. As between the parties and as to

CREDIT TRANSACTIONS

third persons who have no rights against the mortgagor,

no affidavit of good faith is necessary. It will thus be seen
that under the law, a valid mortgage may exist between
the parties without its being evidenced by a public
document. You will see later on that when we go to
preference of credits, that for creditors and after-creditors
to be preferred than the others, the fact that it should be
made in a public instrument, you will also enjoy the
preference as compared to those promissory notes that
are not in a public instrument.
attorney, shall make and subscribe an affidavit in

substance as hereinafter set forth, which affidavit,
signed by the parties to the mortgage as above
stated, and the certificate of the oath signed by the
authority administering the same, shall be
appended to such mortgage and recorded
therewith.
So just take note here the effect as to the affidavit of good

faith. As to the parties themselves, the mortgage is valid
even if there is no affidavit of good faith executed by the
mortgagor and the mortgagee.
CHATTEL MORTGAGE LAW
Definition of Chattel mortgage under section 3 is already
inoperative as we already have the definition of Chattel
Mortgage
under
Article
2140.
Sec. 3. Chattel mortgage defined. A chattel
mortgage is a conditional sale of personal property
as security for the payment of a debt, or the
performance of some other obligation specified
therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum
of money or doing some other act named. If the
condition is performed according to its terms the
mortgage and sale immediately become void, and
the mortgagee is thereby divested of his title.
So notice there that under Section 3, A chattel mortgage
must be considered as a conditional sale, NOT
ANYMORE. The definition of the Chattel Mortgage is a
contract of security as defined under Article 2140.
Sec. 4. Validity. A chattel mortgage shall not be
valid against any person except the mortgagor, his
executors
or
administrators,
unless
the
possession of the property is delivered to and
retained by the mortgagee or unless the mortgage
is recorded in the office of the register of deeds of
the province in which the mortgagor resides at the
time of making the same, or, if he resides without
the Philippine Islands, in the province in which the
property is situated: Provided, however, That if the
property is situated in a different province from that
in which the mortgagor resides, the mortgage shall
be recorded in the office of the register of deeds of
both the province in which the mortgagor resides
and that in which the property is situated, and for
the purposes of this Act the city of Manila shall be
deemed to be a province.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

"This mortgage made this ____ day of
______19____ by _______________, a resident of
the municipality of ______________, Province of
____________, Philippine Islands mortgagor, to
____________, a resident of the municipality of
___________, Province of ______________,
Philippine
Islands,
mortgagee,
witnesseth:
"That the said mortgagor hereby conveys and
mortgages to the said mortgagee all of the
following-described personal property situated in
the municipality of ______________, Province of
____________ and now in the possession of said
mortgagor,
to
wit:
(Here insert specific description of the property
mortgaged.)
"This mortgage is given as security for the
payment to the said ______, mortgagee, of
promissory notes for the sum of ____________
pesos, with (or without, as the case may be)
interest thereon at the rate of ___________ per
centum per annum, according to the terms of
__________, certain promissory notes, dated
_________, and in the words and figures following
(here insert copy of the note or notes secured).
"(If the mortgage is given for the performance of
some other obligation aside from the payment of
promissory notes, describe correctly but concisely
the obligation to be performed.)
"The conditions of this obligation are such that if
the mortgagor, his heirs, executors, or
administrators shall well and truly perform the full
obligation (or obligations) above stated according
to the terms thereof, then this obligation shall be
null and void.
"Executed at the municipality of _________, in the
Province of ________, this _____ day of 19_____
____________________
(Signature of mortgagor.)
"In the presence of
Section 4 is also inoperative. Why? Because under the

Civil Code, if there is delivery of the subject property, that
will be considered as pledge. In other words, going back
to what we have discussed last time, the mortgage must
of course be recorded in the registry of deeds to bind
against 3rd person. We have mentioned last time
depending on the nature of the personal property we also
have to register it, for example with the coast guard, or
LTO, so that it can bind 3rd person because of the other
special laws.
Sec. 5. Form. A chattel mortgage shall be
deemed to be sufficient when made substantially in
accordance with the following form, and shall be
signed by the person or persons executing the
same, in the presence of two witnesses, who shall
sign the mortgage as witnesses to the execution
thereof, and each mortgagor and mortgagee, or, in
the absence of the mortgagee, his agent or
"_________________
"_________________
(Two witnesses sign here.)
FORM OF OATH.
"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."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________,
personally appeared ____________, the parties
who signed the foregoing affidavit and made oath
to the truth thereof before me.
"_____________________________"

CREDIT TRANSACTIONS
(Notary public, justice of the peace, 1 or other
officer, as the case may be.)
Section 5 of the law provides for the form of a chattel
mortgage, form of oath and certificate of oath. Take note
that we have mentioned last time the affidavit of good
faith. We mentioned that it is not required for the validity
of the mortgage but bind 3rd persons and of course to be
given preference of credit.
Sec. 6. Corporations. When a corporation is a
party to such mortgage the affidavit required may
be made and subscribed by a director, trustee,
cashier, treasurer, or manager thereof, or by a
person authorized on the part of such corporation
to make or to receive such mortgage. When a
partnership is a party to the mortgage the affidavit
may be made and subscribed by one member
thereof.
Sec. 7. Descriptions of property. The description
of the mortgaged property shall be such as to
enable the parties to the mortgage, or any other
person, after reasonable inquiry and investigation,
to
identify
the
same.
If the property mortgaged be large cattle," as
defined by section one of Act Numbered Eleven
and forty-seven, 2 and the amendments thereof,
the description of said property in the mortgage
shall contain the brands, class, sex, age, knots of
radiated hair commonly known as remolinos, or
cowlicks, and other marks of ownership as
described and set forth in the certificate of
ownership of said animal or animals, together with
the number and place of issue of such certificates
of
ownership.
If growing crops be mortgaged the mortgage may
contain an agreement stipulating that the
mortgagor binds himself properly to tend, care for
and protect the crop while growing, and faithfully
and without delay to harvest the same, and that in
default of the performance of such duties the
mortgage may enter upon the premises, take all the
necessary measures for the protection of said
crop, and retain possession thereof and sell the
same, and from the proceeds of such sale pay all
expenses incurred in caring for, harvesting, and
selling the crop and the amount of the
indebtedness or obligation secured by the
mortgage, and the surplus thereof, if any shall be
paid to the mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only
the property described therein and not like or
substituted property thereafter acquired by the
mortgagor and placed in the same depository as
the property originally mortgaged, anything in the
mortgage to the contrary notwithstanding.
Under Section 7, description of the mortgage property
shall be such as to enable the parties to the mortgage or
any other person after reasonable inquiry and
investigation to identify the xxx. We also have the case
last time emphasizing this requirement.
Reasonable description rule which must be distinguished
with real estate mortgage. It was again a strict rule
requirement for the real estate mortgage, in a Chattel
Mortgage, reasonable description as long as we could
find out which is the subject property after reasonable
inquiry and investigation.
However take note that under section 7, paragraph 4
"A chattel mortgage shall be deemed to cover only the

property described therein and not like of substituted
property thereafter acquired by the mortgagor and place
in the same depositary as the property originally
mortgaged, anything in the mortgage to the contrary
notwithstanding."
Sec. 14. Sale of property at public auction; Officer's
return; Fees; Disposition of proceeds. The
mortgagee, his executor, administrator, or assign,
may, after thirty days from the time of condition
broken, cause the mortgaged property, or any part
thereof, to be sold at public auction by a public
officer at a public place in the municipality where
the mortgagor resides, or where the property is
situated, provided at least ten days' notice of the
time, place, and purpose of such sale has been
posted at two or more public places in such
municipality, and the mortgagee, his executor,
administrator, or assign, shall notify the mortgagor
or person holding under him and the persons
holding subsequent mortgages of the time and
place of sale, either by notice in writing directed to
him or left at his abode, if within the municipality,
or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.
The officer making the sale shall, within thirty days
thereafter, make in writing a return of his doings
and file the same in the office of the register of
deeds where the mortgage is recorded, and the
register of deeds shall record the same. The fees of
the officer for selling the property shall be the same
as in the case of sale on execution as provided in
Act Numbered One hundred and ninety, 4 and the
amendments thereto, and the fees of the register
of deeds for registering the officer's return shall be
taxed as a part of the costs of sale, which the
officer shall pay to the register of deeds. The return
shall particularly describe the articles sold, and
state the amount received for each article, and shall
operate as a discharge of the lien thereon created
by the mortgage. The proceeds of such sale shall
be applied to the payment, first, of the costs and
expenses of keeping and sale, and then to the
payment of the demand or obligation secured by
such mortgage, and the residue shall be paid to
persons holding subsequent mortgages in their
order, and the balance, after paying the mortgages,
shall be paid to the mortgagor or person holding
under him on demand.
If the sale includes any "large cattle," a certificate
of transfer as required by section sixteen of Act
Numbered Eleven hundred and forty-seven 5 shall
be issued by the treasurer of the municipality
where the sale was held to the purchaser thereof.
Also take note of section 14, when can the mortgagee
cause the mortgage property to be sold? AFTER 30
DAYS FROM THE TIME THE CONDITION IS BROKEN,
to be sold at a public auction by the public officer at the
public place in the municipality where the mortgagor
resides or where the property is situated provided at least
10-day notice of time, place and purpose to be posted at
two or more public places and there is a requirement that
it shall notify the mortgagor or the person holding under
him is another distinction sa real estate mortgage. Kasi
sa REM, walang requirement to notify the mortgagor,
posting and publication lang. Dito sa Chattel Mortgage,
posting and notification sa mortgagor or person holding
under him and the persons holding subsequent
mortgages.
Also in the last sentence, second paragraph, the
application of the proceeds of the sale. First, the costs and
expenses in keeping the sale, payment of the obligation,

CREDIT TRANSACTIONS
residue shall be paid to the subsequent mortgages and
any
balance
shall
be
deemed
to
the
mortgagor. Distinguish this with pledge: again in pledge
the general rule is the creditor is entitled to the excess
unless otherwise stipulated, in REM, the debtor is entitled
to the excess; however in a chattel mortgage, any residue
is paid to the mortgagor. In other words, the excess is
returned to the mortgagor. However, under the Chattel
Mortgage Law, the residue shall be paid to the mortgagor
but in REM, there is no express or implied stipulation but
a practice and the SC upheld that the excess be returned
to the debtor-mortgagor.
However, with regard to the deficiency, Chattel mortgage
law as well as the real estate mortgage are both silent.
Nevertheless, you will see it later on as a general rule, the
creditor-mortgagee can file an action for deficiency if the
proceeds of the sale of the mortgage property is not
sufficient to pay the obligation.
So again, take note in the case that was discussed last
time, Lilius v. Manila Railroad, the absence of the
affidavit vitiates the mortgage only as against 3rd persons
without notice like creditors and subsequent
encumbrances.
Cebu International Finance vs CA
Q: Who is the mortgagor?
A: Ong
Q: Mortgagee would be?
Q: You said that issue is WON there is a valid Chattel
mortgage.
Q: Now remember that the requirements in 2085that
the mortgagor must be the owner of the thing, it is also
applicable to chattel mortgage. So in this case you said
that the mortgagor is Ong, who was the owner of the
subject property?
Q: Therefore, it complied with the requirement of the
absolute owner of the vessel. Can we say that the
mortgage was valid? What is that paragraph 3? The
next issue is the right of Cebu International as
mortgagee over that of the claim of?
Q: What is the effect of the absence of the affidavit of
good faith?
A: The effect of affidavit of good faith is only to convert
the status of the mortgage to that of a preferred
mortgage and does not affect the validity of the
mortgage.
The SC ruled that the contract between Cebu
International and Ong was a Chattel Mortgage and the
Cebu International was the mortgagee in good faith. The
mortgagee has the right to rely in the good faith in the
certificate of title of the mortgagor to the property given as
a security and in the absence of any sign that may arouse
suspicion and has no obligation to undertake further
investigation. Purchaser in good faith, mortgagee in good
faith it can be applied in chattel mortgage.
How about the affidavit of good faith? An affidavit of good
faith is required only for the purpose of transforming an
already valid mortgage into a preferred mortgage. The
above mentioned affidavit is not necessary for the validity
of the chattel mortgage itself but only to convert to a
preferred status. So even if there was no affidavit if good
faith executed which means Cebu International and Ong
that did not invalidate, or that did not affect the right of
Cebu International as a mortgagee in good faith. So Ang
Tay here his principal are bound by the chattel mortgage
of the subject vessel. Again, the absence of the affidavit
of good faith, mortgage will still be consider valid and with

the existence of the affidavit of good faith, the credits
secured by the mortgage does not assume the position of
the preferred credit wherein the mortgage will be in the
same footing with the other ordinary creditors. What is left
with the assets of the debtor after it has been apportioned
to the preferred creditors, will be divided to the ordinary
creditors.
When we discussed mortgage or real estate mortgage we
already mentioned after-acquired assets. We said that
after-acquired assets can be subject of mortgage as long
as xxx. How about after-acquired obligations? Pledge,
REM, antichresis, may secure after-acquired obligations
so long as future debts are accurately described. Which
means that, at the time the mortgage was executed it is
possible that there is yet no obligation. But we know that
it is a valid stipulation wherein a property may afteracquired obligations, obligations incurred after the
execution of a mortgage.
But what about the chattel mortgage? A chattel mortgage
can only cover obligations existing at the time of the
mortgage. Although a promise expressed in the chattel
mortgage includes debts that are yet to be contracted to
be considered as a binding commitment the security xxxx
until after the chattel mortgage agreement covering the
newly contracted debt is executed either by during xxx.
Why do we have here a chattel mortgage that is not valid
with regard to after-acquired obligations? Because
remember the requirement for affidavit of good faith, can
one properly secure after acquired obligation or a future
obligation? Therefore, you cannot constitute a chattel
mortgage to secure the performance of a future
obligation. What happened there? You will execute a
chattel mortgage: this car would secure any and all the
obligations in favor of the creditor. That would not be
consider as a valid chattel mortgage.
With regard to after acquired obligation, meaning the
obligation or the contract of loan was perfected after the
execution of the chattel mortgagethat is not allowed
with regard to chattel mortgage. It may be allowed as long
as you renew or re-execute or revise or extend the old
chattel mortgage executed. Do not confuse after acquired
obligations with after acquired properties. Because after
acquired properties, the general rule, they are not allowed
because the property that you have to act as a security
must be the same property that will be foreclosed and sold
at the public auction. As pointed out, in the ordinary
course of business, the subject matter is goods that will
replenished and be subject of inventory. Then that would
be a valid subject matter of a chattel mortgage.
After-acquired obligation, on the other hand, is not
allowed in a chattel mortgage unless the parties will
execute a subsequent chattel mortgage contract.
Because we have specifically identified or described the
obligation. With regard to after acquired properties on
movable properties as a general rule, NOT ALLOWED
UNLESS the nature of the property is subject to
replenishment.
EXAMPLE:
Ichattel mortgage mo ang stocks mo sa tindahan, sa sari
sari store, hindi naman pwede na huwag mong ibenta
yung goods mo ngayon kasi yan yung ihold mo to secure
your obligation. Pero since by the nature of the goods,
magreplenish siya because of your inventory, so ibenta
mo yung present at the time executed ang mortgage since
may bago na magpalit, covers the chattel mortgage.
Q: Can you assign your right as a creditor-mortgagee in a

chattel mortgage?
A: The creditor can assign the mortgage credit to some
other person. We also have the similar articles in REM

CREDIT TRANSACTIONS

wherein the effect thereof is that third person assignee

can now hold the mortgage as against the debtor. The
assignee now steps into the shoes of the creditormortgagee, subrogated to the rights of the mortgagee and
therefore in case of default of the debtor-mortgagor, this
third person assignee may foreclose the property
mortgage.
There is the mortgagor a mere right of redemption only

this right passes to the second mortgagee. What would
happen here? The second mortgagee is given the right to
pay off the obligation to the first mortgagee creditor.
Is it required that this assignment of credit be registered

for it to be valid? Hindi. Register of the assignment is not
required to bind the debtor. What is the rule here? Again,
the creditor assign his right as a creditor to a third person.
You relate this to your obligation and contracts. Whats
the rule there? To whom payment must be made? Article
1240, in whose favor the obligation has been constituted,
successor in interest or any person authorized to receive
it. If you recall the discussion under your Obligations and
Contracts, you refer to that person in whose favor the
obligation has been constituted the creditor at the time of
payment. Not the creditor at the time of the perfection of
the contract. Why? It will happen that the credit has
already been assigned. But remember here that notice
would be relevant. Notice to the debtor. Again in your
Oblicon, if there is already an assignment of the credit,
assignment of the right of creditor-mortgagee then the
principal debtor was not informed, debtor paid the
obligation to the original creditor. Now here comes the
assignee third persons subrogated the right of the original
creditor. Maningil kay debtor, sabihin ni debtor na
nagbayad naman ako kay original creditor. Would that be
valid? That payment would be valid if the debtor had no
notice of the assignment. Otherwise, if there is notice then
nagbayad pa rin siya sa original creditor, then that
payment will not be valid. The assignee can demand
payment from the principal debtor and if he fails to pay,
he can foreclose the mortgage.
Q:What will happen pag mabayaran or maredeem ng

second mortgagee sa first mortgagee?
A:Then the first obligation will be extinguished. The first
mortgage will now be discharged.
Registration of the assignment of credit of the mortgagee

is not required for validity and in fact, even if it is
registered, if you did not notify the debtor of such
assignment, then it would not bind the debtor. If the debtor
has no actual knowledge of the assignment, even if it was
registered, the debtor cannot be prejudice by the
assignment. Actual knowledge ang basis dito. If the
debtor not knowing that the creditor has assigned the
mortgage to a third person given by him to the original
creditor is extinguished. So if there is an assignment if the
mortgage credit, there must be a registration, and there
must be actual knowledge on the part of the debtor. Notify
the debtor, otherwise, if he fails to pay to you, pag
nagbayad siya sa original creditor wala kang right to
foreclose the property.
Redemption
Who can redeem in case the debtor fails to pay the
obligation after demand was made? And then the property
sold in the public auction. Who can redeem the property?
Same thing with regards to REM?
1. The mortgagor
2. The person holding a subsequent mortgage
3. Or a subsequent attaching creditor
An attaching creditor may be subrogated to the rights of
the mortgagee and entitled to foreclose the mortgage.
Redemption made by paying or delivering to the
mortgagee the amount due on such mortgage and the
cost and expenses incurred by such breach of condition
for the sale. What happened here? You have a second
mortgagee. Let us us say we have a vehicle, you
mortgage it for the amount of 100K. kailangan mo pa ng
funds gusto mo siya imortgage. Pwede pa ba yan ng
subsequent mortgage? PWEDE. Basta tanggapin lang
nung mortgagee and makita nya na meron ng registered
na mortgage na 100 K mas mahal yung quality nung
sasakyan so ok, payag ako maging second mortgagee.
Before payment of the debt, the mortgagor has the right.
Q:Bakit niya bayaran?

A: Para hindi iforeclose,
para
hindi
ibenta.
Q:What is the effect?

A: First mortgagee na ngayon si second mortgagee.
So what would happen? If hindi mabayaran ni debtormortgagor si second mortgagee na ngayon ay first
mortgagee na, pwede na niyang iforeclose yung property.
Because what would be the effect of the second
mortgage? The second mortgagee cannot foreclose the
property, cannot have it sold in a public auction if that first
mortgage exist. Kasi yun talaga ang unang bayaran. So
what happen? Basta registered to bind third persons. So
if the first mortgage is registered, let us say December 31,
and the second mortgage was registered due October
30. Mauna magdue and second mortgage, if the debtor
fails to pay that second mortgage, default in payment,
despite the execution of the second mortgage, the second
mortgagee cannot foreclose the property unless bayaran
nya si first mortgagee. Yan yung effect. While the law
allows the second mortgage, although its not that often
that people would agree the second mortgagee xxx
nevertheless, pwede yan. Pero ito yung effect if you act
as a second mortgagee. You cannot foreclose the
mortgage until there is that first mortgage. You can
foreclose it if you redeem or pay off the first obligation. If
the second mortgagee pays the first mortgagee, then the
former becomes entitled to the mortgage. So thats why
we said pwede na bayaran yung utang sa first mortgage
or pwede niya iredeem.
With regard to possession of the subject property, chattel
mortgage. Its clear under 2140 that in chattel mortgage,
the mortgagee does not acquire possession of the
movable otherwise it will be considered as a pledge.
Before default, the chattel mortgagee is not entitled to the
possession of the property upon the execution of the
chattel mortgage, otherwise it will be considered as a
pledge. After default, the obligation, has already become
due and demandable, is the mortgagee entitled to the
possession? In this case, Yes. Because of his desire to
foreclose the subject matter. So the right of the creditor to
keep the mortgaged property after the debtor's default is
implied from the provision in the right to sell. The creditormortgagee can demand possession after default. If the
mortgagor refuses surrender possession, then the
creditor-mortgagee can file an action for judicial
foreclosure and also to secure the possession of the
subject property. As we all know hindi na nyan pwede
kunin lang take the law into his own hands yung personal
property from the hands of the debtor-mortgagor. He has
to file the proper proceeding in court.
With regard to automatic appropriation, just like in pledge,
antichresis and REM, no automatic appropriation as well
in a chattel mortgage it is in the provision under the law
against public policy, no pactum commissorium is
allowed. We cannot take the law into our own hands. We
cannot get it to the debtor-mortgagor, we have to file the
proper proceeding in court to acquire the possession of
the property from the debtor. But again, the purpose there
is for selling the property in public auction. No automatic
appropriation.
What if aside from the debtor, there are other parties who
claim ownership over the property mortgaged? The
creditor-mortgagee shall file an action and include in the

CREDIT TRANSACTIONS
case the other persons who are claiming ownership of
that same property. So the action now is not just against
the debtor-mortgagor because kahit successful ka to
redeem possession from the debtor-mortgagor, paano
naman doon sa other parties who claim they have
interest? Isama mo nalang sila sa iyong complaint. The
creditor shall include all persons claiming possesion or
ownership over the property mortgaged.
Foreclosure of chattel mortgage. If the debtor-mortgagor
fails to pay, the mortgagee must discharge the mortgage
in a manner provided by law, otherwise they may be held
liable for damages by any persons entitle to redeem the
mortgage. What is required by law? To public sale, to
public auction. There is no right to appropriate to the
creditor-mortgagee the personal property. More or less it
is the same procedure with Act 3135 sa REM, na meron
pang Public auction.
We have here the case involving foreclosure of mortgage.

specific performance of the obligation,
cancellation of the sale, foreclosure of the
sale. These remedies are alternative in
nature. As to the third one, foreclosure of the
mortgage, very clear under 1484, yung hindi
na makademand si seller sa deficiency. Kung
yun ang giapply, because the failure to pay
the remaining installment in the sale
of personal property , then not entitled to
revover the deficiency. But under the case of
Pameca, hindi yun applicable kasi nga this
case is chattel mortgage, nanghiram ng pera
and yung chattel mortgage ang security.
You also cannot apply article 2115 because it involves a
contract of pledge. What we have here is a chattel
mortgage. Please remember the rule on chattel mortgage
regarding the deficiency distinguish it from REM, actually
parehas sila kaya lang expressly provided sa 1508 ang
sa chattel mortgage law. We have discussed sa REM,
walang express provision sa deficiency. Also distinguish
it from recto law as well as contract of pledge.
PAMECA vs CA
Q:What is 1484?
A: Recto Law. Involves personal property payable in
installment basis.
Q: What about 2150?
A: Talks about pledge.
Q: Are they applicable in the instant case?
A: No. Since we are talking about chattel mortgage,
the applicable law is Act 1508, a special law.
Q: What is provided under Act1508?
Q: During the sale, how may bidders were there?
A: Only the bank.
Q: Would that invalidate the foreclosure sale?
A:No. No proof of existence of fraud. Foreclosure sale
is valid.
In the case of PAMECA, the mere fact that the mortgagee
was the sole bidder for the mortgage property in a public
sale does not warrant the conclusion that the transaction
was attended with fraud. It was a serious allegation
requires full and convincing evidence. On the same case,
PAMECA raised the defense article1484 and 2115. The
issue here is that after the foreclosure sale, the bank filed
an action to collect the balance of approximately 4M
pesos. Sabi ng Pameca, hindi na sila liable applying 1484
and 2115. But as mentioned, the foreclosure sale was
governed by the chattel mortgage law Act 1508 and not
2115 or 1484.
Under the Chattel mortgage law,
specifically section 14, the proceeds of such sale shall be
applied to the payment first of the cost or expenses of
keeping the sale, and then for payment from the demand
obligation secured by such mortgage and the residue
shall be given to persons holding subsequent mortgages
in their order, and the balance after paying the mortgage
shall be paid to the mortgagor or the persons holding
under it on demand. Section 14 of the chattel mortgage
law expressly entitles the mortgagor to the balance of the
proceeds upon the satisfaction of the principal obligation
and
cause.
Express
provision
under
1508.
General law sa foreclosure of chattel mortgage: pwede
makacollect ng deficiency as in this case.
Under 1508, it is provided that mortgagee may after 30

days from the time condition is broken, cause the
mortgage property to be sold at the public auction by the
public officer.
CABRAL vs. EVANGELISTA
Q: What do you mean by condition broken?
A: Violation of the condition of the mortgage.
Q: Who are the Cabral Spouses here?
A: Creditor.
Q: How about the Evangelista spouses? What are the
basis of their right?
A: They are also creditor.
Q: Do you have a chattel mortgage here?
A: Yes. In favor of the Cabral spouses.
Q: So between these two, Cabral and Evangelista, who
has a better right over the subject properties?
A: Cabral spouses because of the chattel mortgage
executed in their favor.
What was the allegation here of Evangelista, Cabral is not
entitled to the foreclosure of the subject property? What
was the basis of their allegation that the action has
prescribed? What was the prescription period here?
When was the condition violated or broken? When the
promissory note matures, nevertheless wala ng
bayaran. What is the effect here of Cabral not having
foreclose the property 30 days after the condition was
broken? Does it mean that they are not entitled to
foreclose the property anymore? NO. You mentioned Civil
code, what would be the prescription under the civil code
to recover movable properties? What is that 30 days,
would that be in contradiction with the 8 years provided in
the Civil code? What do you mean by that 30 day period
provided under 1508? Who has the better right here?
Cabral spouses. Was the mortgage registered? Yes it
was registered.
Exceptions:
Again, you have the 30 days from the condition is broken

provided under section 14 of Act 1508. But it does not
follow that the plaintiff immediately foreclose their
mortgage within the 30 day period.
1.) Article 1484

- Remember what is article 1484 for those who
have sales, 1484, the sale of personal
property in installments. Under 1484, the
seller has three remedies, you have the
In this case the condition was being broken Feb 12,1960

when the promissory note matured. It did not mean na
dapat xxx foreclosure on or before March 12. It does
mean that the failure to file for foreclosure resulted in the
prescription of the mortgage right and action. This 30 day

CREDIT TRANSACTIONS

period is the minimum period after the violation of the

mortgage condition for the mortgage creditor to cause the
sale at a public auction of the mortgage chattels. At least
10 days notice to the mortgagor and posting of public
notice of time, place and purpose of the sale. The 30 day
period and also yung 10 days period of grace for the
mortgagor who has no right of redemption after the sale
is held to discharge the mortgage obligation. So with that
compare it sa real estate mortgage,sa REM, you have to
distinguish
kung judicial or extrajudicial. Kung
extrajudicial, 1 year right of redemption from date of
registration. When it comes to movable properties, do not
wait for the foreclosure sale, you must redeem the
property before the foreclosure sale kasi wala kang right
of redemption. Ang right of redemption is before. In other
words, you are just given the opportunity to pay off the
obligation before, anytime before the sale. Wherein you
can compel the creditor-mortgagee to accept your
payment wherein you may discharge your mortgage and
extinguish your obligation. Pero if the foreclosure sale
already took place wala pang right to redeem the property
if the property involves a movable property. You could not
compel the mortgagee to accept your payment, unlike sa
REM, in general you have the 1year redemption period.
Q: What is the effect of the execution sale with regard

to Ong? Essentially, ano ba ang right dito ng purchaser,
in this case Ong?
Also, the SC pointed out the prescription period for

recovery of movables as provided in article 1140 of the
civil code is 8 years. Here, it was 8 months from the
mortgage debtor's default. Defendants-appellants'
purchase of the mortgaged chattels at the public sheriff's
sale and the delivery of the chattels to them with a
certificate of sale did not give them a superior right to the
chattels as against plaintiffs-mortgagees Cabral.
Remember their mortgage was registered. The sale on
the purchaser Evangelista all the right which the debtor
had to such property on the day of the execution or
attachment was levied. The right of those who acquires
said properties should not and cannot be superior to that
of a creditor who has in his favor an instrument of
mortgage instituted with the formalities of law, in good
faith and without the least indication of fraud. Take note
that the 30 day period is only the minimum period. It is not
a prescription period. And likewise after the sale of the
chattel at the public auction, the right of redemption is no
longer available. Distinguish that from REM. In a chattel
mortgage , the debtor has 10 days of notice of order of
the foreclosure to discharge his obligation. Nonetheless,
the creditor has other remedies. He is not compelled to
foreclose the property, the chattel mortgage since he can
file an ordinary action for the collection of the obligation.
Once you file an action for collection, he is deemed to
have abandoned the mortgage or security. These
remedies are alternative in nature but what could
happened here is magfile siya ng collection for sum of
money, and then iattach nya yung property, pero hindi yun
siya foreclosure of mortgage.
NORTHERN
MOTORS
vs.
COQUIA
So you have here a registered mortgage. Do not forget

here that in these two cases that we have discussed, we
have a purchaser in an execution sale, and the mortgagee
of the chattel mortgage. In these cases, the mortgagee
was deemed to have a superior right because first and
foremost the registration were duly registered. The
essence of the chattel mortgage, the mortgage chattel
should answer the mortgage credit and not of the
judgment credit of the mortgagor's unsecured creditor.
The mortgagee is not obligated to file an independent
action for the enforcement of his credit to require him to
do so would be nullification of his lien and defeat the
purpose of the chattel mortgage which is to give him
preference over the mortgaged chattels to the satisfaction
of his credit. He can choose to file an action for sum of
money or he could ask for the foreclosure of the subject
property but he is not obligated to file an independent
action for the enforcement of his credit. Ong's theory that
the breach of the chattel mortgage should not affect him
because he is not privy to such contract is untenable.
The chattel mortgage was registered, it is effective and
binding to him in his existence and such mortgage creates
a real right or lien over the property. To uphold the
contention, to destroy the essence of a chattel mortgage
as an encumbrance of the mortgage chattel. This is with
regards to Ong's allegation that siya, judgment creditor
his right should prevail over the chattel mortgagee
because he purchased it in a public auction should not
prevail. The third party claim filed by Northern motors
should not alerted the purchasers to the risks which they
were taking when they took part of the sale. As the earlier
case, the execution sale, the parties acquire only the right
of judgment debtor which in this case is only a mere right
of equity of redemption. However, the cabs here could not
be recovered anymore because they were sold to
unknown owners and the xxx sold at a public auction, but
since they cannot be recovered , the proceeds of the
execution sale will be regarded as a partial substitute for
the unrecoverable taxi cabs.
Mortgagee is not obligated to file independent action for
the enforcement of his credit. What if with regard to
deficiency? We have mentioned before that we could file
an action to demand for the remaining balance in a chattel
mortgage law unless it is a sale of personal property or
installments or unless what you have is a pledge and not
a chattel mortgage.
Application of proceeds of sale as we have mentioned
under section 14:
1) Costs and and expenses for keeping the sale
2) Payment of the obligation
3) Claims of persons holding subsequent
mortgages
4) And lastly if meron pang balance, shall be paid to
the mortgagor for the persons holding other
claim.
Q: Why are the taxi cabs unrecoverable?

Q: Who is Ong here?
Q: What is the issue here? Is the mortgage here
registered?
A: Yes. Because we have here the 3rd party being
bound by the REM.
Q: Since it is registered, who has a better right here?
Ong or Northern Motors?
A: Northern Motors.
CONCURRENCE &
PREFERENCE OF CREDITS
CONCURRENCE AND PREFERENCE OF CREDITS
We are talking about credits here so we have creditors.

Concurrence of credits implies the possession of two or
more creditors of equal rights or privileges over the same
property or all of the property of a debtor.

CREDIT TRANSACTIONS
Preference of Credit is the right held by a creditor to be

preferred in the payment of his claim above others (i.e.,
to be paid first) out of the debtors assets.
The debtors assets must be insufficient to pay his debts
in full. In other words, to apply these rules to concurrence
and preference of credit, the debtor must be insolvent. It
does not mean na wala na talaga siyang pera, it just
means that his assets are not sufficient to pay off his
obligations when they mature.
What is the nature and effect of this preference?
(de Leon, Page 512)
1) A preference is an exception to the general rule.
For this reason, the law as to preferences is
strictly construed.
- In other words the creditor cannot assert his
preference over the property of the debtor
unless he complies with all the requisites
provided by the law.
2) Preference does not create an interest in
property. It creates simply a right of one creditor
to be paid first the proceeds of the said property
as against another creditor. It creates no lien in
the property, and therefore, gives no interest in
property, specific or general, to the preferred
creditor but a preference in application of the
proceeds after the sale.
3) The law does not give the creditor who has a
preference, a right to take the property or sell it as
against another creditor. It is not a question of
who takes or sells; it is one of the application of
the proceeds after the sale-payment of the debt.
4) The right of preference is one in which can be
made effective only by being asserted and
maintained. If the right claimed is not asserted
and maintained, it is lost. And the preference shall
not of the credit and its significance only after the
properties of the debtor have been inventoried
and liquidated. Essentially, there would be an
inventory of the properties of the debtors and on
one hand, to identify the outstanding loans and
obligations if the debtor specifying the respective
creditors.
Preference is different from lien. A preference applies
only to claims which do not attach to specific properties. A
lien creates a charge on a particular property. It is obvious
that the credits here must already be due and
demandable. Kahit sabihin natin na may utang sa iyo si
debtor, if it is not yet due and demandable, you cannot
assert your right as a preferred creditor or your right is
similar to the other ordinary creditors.

used to satisfy the obligations with the creditors. However,
there are certain properties which are exempted from
satisfying liabilities. In other words, pag bayad or para
masubject sa concurrence and preference of credit, it
must not be exempted under the law. Also, even if these
properties are being exempted, its assets shall not be
exempted from execution.
What are these exempted properties?
Under the family code, the family home. Article 1052-1055
of the Family code.
A family home is generally exempted from execution and
therefore, hindi siya isama sa liquidation of the properties
of the debtor, in other words, hindi mag apply ang
concurrence and preference of credits sa family home.
However, there are exceptions to the limitation on the
execution on the family home:
(1) The family home will be executed for nonpayment of taxes. Sino ang mag execution sale
niyan? Ang Local government for failure to pay
real estate taxes.
(2) Debts incurred prior to the constitution of the
family home.
(3) For debts secured by mortgages on the premises
before or after such constitution;
- Naghiram ka ng pera, nag execute ka ng real
estate mortgage, family home yun, ngayon
hindi ka makanayad, marami ka ng creditors,
mag apply ba ang preference and
concurrence of credit? Yes. Because the
debt is secured by the mortgage in which you
voluntarily executed.
(4) For debts due to laborers, mechanics, architects,
builders, material men, and other who have
rendered service or furnished material for the
construction of the building.
The more extensive provision dealing with exempted
properties in relation to your civil procedure, Rule 39.
Nangutang ka, himdi yan siya pwede kunin ng sheriff para
pambayad ng utang mo. Hindi mag apply ang preference
and concurrence of credits kasi hindi yan siya
isama doon sa ibenta para manayaran ang creditors mo.
So, what are these properties under section 13, Rule 39,
Rules of Court?
Sec. 13. Property exempt from execution.
Except as otherwise expressly provided by law, the
following property, and no other, shall be exempt from
execution:
So the provisions under the civil code, we have article

2236:
(a) The judgment obligor's family home as provided by

law, or the homestead in which he resides, and land
necessarily used in connection therewith;
(b) Ordinary tools and implements personally used by
him in hs trade, employment, or livelihood;
Article 2236. The debtor is liable with all his

property, present and future, for the fulfillment of
his obligations, subject to the exemptions provided
by law. (1911a)
(c) Three horses, or three cows, or three carabaos, or

other beasts of burden such as the judgment obligor
may select necessarily used by him in his ordinary
occupation;
Article 1177. The creditors, after having pursued

the property in possession of the debtor to satisfy
their claims, may exercise all the rights and bring
all the actions of the latter for the same purpose,
save those which are inherent in his person; they
may also impugn the acts which the debtor may
have done to defraud them. (1111)
(d) His necessary clothing and articles for ordinary

personal use, excluding jewelry;
(e) Household furniture and utensils necessary for
housekeeping, and used for that purpose by the
judgment obligor and his family, such as the judgment
obligor may select, of a value not exceeding one
hundred thousand pesos;
What do you have to take note here? Application of the

assets of the debtor to the credits. Assets here are to be

CREDIT TRANSACTIONS
(f) Provisions for individual or family use sufficient for
four months;
(g) The professional libraries and equipment of judges,
lawyers, physicians, pharmacists, dentists, engineers,
surveyors,
clergymen,
teachers,
and
other
professionals, not exceeding three hundred thousand
pesos in value;
(h) One fishing boat and accessories not exceeding the
total value of one hundred thousand pesos owned by a
fisherman and by the lawful use of which he earns his
livelihood;
(i) So much of the salaries, wages, or earnings of the
judgment obligor of his personal services within the four
months preceding the levy as are necessary for the
support of his family;
(j) Lettered gravestones;
(k) Monies benefits, privileges, or annuities accruing or
in any manner growing out of any life insurance;
(l) The right to receive legal support, or money or
property obtained as such support, or any pension or
gratuity from the Government;
(m) Properties specially exempt by law.
But no article or species of property mentioned in his
section shall be exempt from executio issued upon a
judgment recovered for its price or upon a judgment of
foreclosure of a mortgage thereon.
PREFERENCE OF CREDITS
Recap
Last meeting, we discussed the classifications of credit:
(1) Special preferred credits under 2241
(movables) and 2242 (immovables);
(2) Ordinary preferred credits under 2244; and,
(3) Common credits under 2245
Special preferred credits refer to a situation where a
particular property (movable under 2241 or immovable
under 2242) is subject to certain obligations. We have
already discussed 2241.
Article 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)
The enumeration in 2241 is not an order of preference
although the first one indicated therein enjoys preference
among the rest. So, duties, taxes and fees on the movable
shall be paid first, and any remaining balance shall be
distributed pro rata to the other credits. That is the same
rule in article 2242. The difference is just that 2242 refers
to special preferred credits on immovables.
Article 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;

CREDIT TRANSACTIONS
(7) Credits annotated in the Registry of
Property, in virtue of a judicial order, by
attachments or executions, upon the
property affected, and only as to later
credits;
(8) Claims of co-heirs for warranty in the
partition of an immovable among them,
upon the real property thus divided;
(9) Claims of donors or real property for
pecuniary charges or other conditions
imposed upon the donee, upon the
immovable donated;
(10)Credits of insurers, upon the property
insured, for the insurance premium for two
years. (1923a)
Notice that the first one indicated therein- taxes due upon
the land or building- will be paid first. When there is an
insolvency proceeding or a liquidation of the assets and
properties of the debtor, and that specific immovable will
be sold, the proceeds will be first applied to the taxes due
upon the land or building. If there is an excess in the
proceeds, it will be divided pro rata among the rest as
provided in 2242. (Reads items 1 to 7 in 2242)
With regard to (7) credits annotated in the Registry of
Property, by judicial order as among them, there will be a
preference among the attachments and executions in
accordance with the time they were entered or annotated
in the title. (Continue reading items 8 to 10 in 2242)
Let us say you have a house and lot. The value of the
house and lot is three (3) million pesos. Your liabilities are
as follows:
Taxes:
Unpaid price:
Engineers fee:
Improvements:
=P=500,000
=P=2,000,000
=P=500,000
=P=500,000
So, if the house and lot will be sold for 3 million, and the
total liability in relation to that property is 3.5 million,
prioritize first the payment of taxes worth =P=500,000. So,
the remaining liability would be 3 million but with regard to
the proceeds of 3 million less taxes paid worth
=P=500,000, the remaining proceeds is 2.5 million, which
is insufficient to pay this 3 million liability.
Again, as we have discussed before, you would have to
pro rata the remaining balance to the rest of the liabilities
i.e. unpaid price, engineers fee, and improvements. How
much will be applied to the unpaid price of the
immovable? We have:
2,000,000
3,000,000

im/movable. It is not an order of preference except that
taxes in relation to the im/movable will be preferred.
Barretto v. Villanueva
Q: Among the credits in 2242, what is involved here?
A: Unpaid price of the immovable and mortgage price
registered in the registry of deeds
Q: Can we apply 2242 here?
A: No. Article 2242 would only apply if there is an
insolvency proceeding.
Q: Who has the better right between a registered
mortgagee and the unpaid seller of the property if
article 2242 is not applicable?
A: The registered mortgagee.
Article 2242 demands that there be first some proceeding
where the claims of all the preferred creditors will be
bindingly adjudicated. In this case, the conflict between
the parties must be decided in an insolvency proceeding
or other equivalent liquidation of estate or some other
action.
In the absence of an insolvency proceeding or some other
action such as liquidation of assets, the conflict between
the parties must be decided pursuant to the wellestablished principle concerning registered lands. 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.
Remember that the obligation of Cruzado in favor of
Villanueva was not registered. So, even if there was an
unpaid price regarding the immovable, Cruzado managed
to subsequently mortgage the property to Barretto, who
has no knowledge of the previous obligation.
There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not require the character
and rank of a statutory lien co-equal to the mortgagee's
recorded encumbrance, and must remain subordinate to
the latter. So, the rule with respect to registration as well
as the rights of a mortgagee in good faith must be
respected. Otherwise, all confidence in Torrens titles
would be destroyed, and credit transactions on the faith
of such titles would be hampered, if not prevented, with
incalculable results. Loans on real estate security would
become aleatory and risky transactions, for no,
prospective lender could accurately estimate the hidden
liens on the property offered as security, unless he
indulged in complicated, tedious investigations. The
logical result might well be a contraction of credit
unforeseeable proportions that could lead to economic
disaster.
x 2,500,000 = 1, 666,666
For the amount of 2 million which is the unpaid price, only

=P=1.6 million will be paid. Do the same for the engineers
fee and improvements.
So, 2242 was not applied in this case because there was
no insolvency proceeding that took place.
Philippine Savings v. Lantin
Again, we have here a situation where the proceeds of

selling a specific immovable is not sufficient to answer for
all the liabilities in relation to that specific immovable. So,
a portion of the debt will be paid from the proceeds of the
house and lot while the unpaid portion will fall into
common credits. Meaning, if the debtor have other
properties which are not subject to a specific liability in
relation thereto, that can be used to pay all the other
creditors, including the unpaid balance from the sale of
the house and lot.
Q: When do you apply 2242 (and/or 2241)?

A: When the property of the debtor is insufficient to pay
the liabilities.
Again, we have the same rule with article 2241. All you
have in these two articles (2241 and 2242) is an
enumeration of the preferred credit of a specific to
Do not be confused with the rule on concurrence and

preference of credits. Otherwise, whenever the debtor
fails to pay, you would automatically apply 2242 or 2241.
It must be noted that there may still be other creditors.
Q: Under the facts of this case, Ramos already alleged

that there are no other creditors, so why do you think
there is still a need for an insolvency proceeding? Is
there proof that the properties of the debtor is
insufficient to pay all his creditors?
A: None. In fact, there was no insolvency proceeding.

CREDIT TRANSACTIONS

That is why it is required that there must be insolvency or

liquidation proceeding before this rule on concurrence
and preference of credits will apply.
Q: Now, which right is being compared here against the

contractors lien? Why is there a need for JL Bernardo
to allege that he has a contractors lien over the
immovable property under 2242?
A: JL Bernardo stands as an unpaid creditor against
the Municipality of San Rafael.
Concurrence of credit (among the credit enumerated in

2241 or 2242, as the case may be, except taxes, which is
preferred) occurs when the same specific property of the
debtor or all of his property is subjected to the claims of
several creditors.
The concurrence of credits raises no questions of
consequence where the value of the property or the value
of all assets of the debtor is sufficient to pay in full all
creditors. However, it becomes material when said assets
are insufficient. For then, some creditors will not obtain full
satisfaction of their claims. As mentioned in the case of
Barretto, there must be some proceeding where the
claims of all preferred creditors will be bindingly
adjudicated such as an insolvency proceeding.
In this case, there was no known creditors other than the
plaintiff and the defendant. But, again, this is not
conclusive. It will not bar other creditors in the event that
they show up and present their claims against the
petitioner bank, claiming that they also have preferred
liens against the property involved. Consequently, the title
issued in favor of the bank which is supposed to be
indefeasible would remain constantly unstable and
questionable. Remember, the mortgage in favor of the
bank was duly registered and subsequently, the bank
purchased it during the foreclosure sale. The title has
already been transferred.
What about the previous owner of the immovable? There
are still other liabilities such as the obligation to pay the
architect. That could have been a lien on the property.
The problem is that there is no insolvency proceeding, so
you cannot apply 2242. Otherwise, the indefeasibility of
title would be unstable. Again, if there is no insolvency
proceeding, you cannot apply 2242.
What was applied here by the court was the rule on the
indefeasibility of title and the fact that the bank is a
mortgagee in good faith. No liens and encumbrances are
attached when the property was mortgaged in favour of
Philippine Savings.
Also take note of the term refectionary credit, which is an
indebtedness incurred in the repair or reconstruction of
something previously made, such repair or construction
being made necessary by the deterioration or destruction
of the thing as it formerly existed, including the
construction. If there is a proceeding such as insolvency
or liquidation, refectionary credit can be included in the
judgment with regard to the specific immovable.
What is the basis of the priority of the taxes as to the
movable or immovable?
Article 2243. The claims or credits enumerated in
the two preceding articles shall be considered as
mortgages or pledges of real or personal property,
or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No. 1,
article 2241, and No. 1, article 2242, shall first be
satisfied. (n)
This is the basis of the preference of taxes mentioned in
2241 and 2242.
JL Bernardo Construction v. CA
The contractors lien is one of those enumerated in
2242. It cannot be applied because there is no
insolvency proceeding.
Q: Was there any other creditors of the municipality

claiming or asserting a right over the public market?
A: None. Again, concurrence and preference of credits
cannot apply because there was no insolvency
proceeding and not all of the creditors were included in
the action for specific performance and damages.
You have here a contractors lien. If you look at 2242, it is
one of those provided therein as 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. So, that would be a
refectionary credit, which shall be preferred with respect
to the specific dealing or other immovable property
constructed.
You only apply 2242 as well as 2241 when there is
concurrence of credit- when the same specific property of
the debtor is subjected to the claims of several creditors
and the value of such specific 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 this statutory lien should only
be enforced in the context of some kind of a proceeding
where the claims of all the preferred creditors will be
bindingly adjudicated, such as insolvency proceedings.
The action filed by the petitioners does not partake of the
nature of an insolvency proceeding as it is basically for
specific performance and damages. Such lien cannot be
enforced in the present action for there is no way of
determining whether or not there exist other preferred
creditors with claims over the San Antonio Public Market.
The records do not contain any allegation that petitioners
are the only creditors with respect to such property. The
mere fact that no third party claims have been filed in the
trial court will not bar other creditors from subsequently
bringing actions claiming that they also have preferred
liens against the property involved.
Atlantic v. Herbal Cove
Q: What is the effect of a notice of lis pendens?
A: A notice of lis pendens serves as a warning that
there is a pending case involving the property.
Q: Why is the notice of lis pendens not considered as
a contractors lien?
A: Because the Complaint merely asked for the
payment of construction services and materials plus
damages, without mentioning -- much less asserting -a lien or an encumbrance over the property. Verily, it
was a purely personal action and a simple collection
case. It did not contain any material averment of any
enforceable right, interest or lien in connection with the
subject property.
Q: What could have been done here so that a notice of
lis pendens may be availed of by Atlantic?
A: [Allege it properly in the complaint.]
Q: To apply 2242, is a notice of lis pendens required?
A: No. It is sufficient that there be an allegation of a lien
as specifically mentioned in 2242.
Q: Is 2242 applicable in this case?

CREDIT TRANSACTIONS
A: No. There was no insolvency proceeding. Therefore,
you cannot apply provisions regarding concurrence
and preference of credit (2241 and 2242).
So, what we have here is an action for a notice of lis
pendens. You can avail it in the following cases:
(1) An action to recover possession of real estate;
(2) An action for partition; and,
(3) Any other court proceedings that directly affect
the title to the land or the building thereon or the
use or the occupation thereof.
It also applies to suits seeking to establish a right to, or an
equitable estate or interest in, a specific real property; or
to enforce a lien, a charge or an encumbrance against it.
Under the facts of this case, the complaint reveals that no
such lien or claim was ever alleged. The Complaint
merely asked for the payment of construction services
and materials plus damages, without mentioning -- much
less asserting -- a lien or an encumbrance over the
property. So, the notice of lis pendens is not enforceable
because as we know, a notice of lis pendens merely
serves as a warning that the property is subject of a
litigation.
Here, it was a purely personal action and a simple
collection case. It did not contain any material averment
of any enforceable right, interest or lien in connection with
the subject property. However, take note, that just
because it is not a lien, it cannot fall under 2242.
Remember, what is the basis of the Court here in saying
that 2242 cannot be applied? It is because there was no
preference of credit here. 2242 can only be enforced in
the context of some kind of a proceeding where the claims
of all the preferred creditors will be bindingly adjudicated
such as insolvency proceedings.
Neither Article 2242 of the Civil Code nor the enforcement
of the lien thereunder is applicable here because
petitioners Complaint failed to satisfy the foregoing
requirements. Nowhere does it show that respondents
property was subject to the claims of other creditors or
was insufficient to pay for all concurring debts. Moreover,
the Complaint did not pertain to insolvency proceedings
or to any other action in which the adjudication of claims
of preferred creditors could be ascertained.
As we can see in all the cases we have discussed, there
must be an insolvency proceeding because that would
show if concurrence and preference of credit is at issue.
It would show if the property of the debtor is sufficient or
not.
It is emphasized in the two Articles (No. 1 of Article 2241
and No. 1 of Article 2122), there is a preference as to the
taxes. All the other credits mentioned in these two Articles
will share pro-rata as to the proceeds relative to the sale
of the specific movable or immovable property.
DBP vs CA
Q: What is the complaint filed by Remington before the
complaint of sum of money? As mentioned, it is a
collection case. Who are the defendants? Why is there
PNB, DBP and Remington here? Is DBP a party to the
complaint filed by Remington?
A: Yes because if not, they cannot enforce their
obligation.
Q: What is the basis of Remington in alleging that they
have a claim against DBP?
A: Unpaid construction materials obtained because
DBP the highest bidder in the foreclosure proceedings
with regard to the real and personal properties.

Q: What is the basis of Remington? What Article?

A: Article 2241 because they are talking about
construction materials which are not specific properties
specifically Par 3 and 4.
Q: What is Paragraph 3?
A: (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.
Q: What movable is involved here?
A: Construction materials.
Q: How is DBP came into the picture? Why is
Remington enforcing something against DBP?
A: Because DBP was the highest bidder in the
foreclosure.
Q: Can you apply concurrence and preference of
credit?
A: No, because in this case, there is no liquidation
proceeding.
Here, PNB and DBP are mandated to foreclose on the
mortgage when the past due account had incurred
arrearages of more than 20% of the total outstanding
obligation.PNB and DBP did not only have a right, but the
duty under said law, to foreclose upon the subject
properties. In the absence of liquidation proceedings,
however, the claim of Remington cannot be enforced
against DBP. With the list of cases tackled, the Supreme
Court is being consistent that there must be a liquidation
proceedings under the Civil Code so that the rules on
concurrence and preference of credit be applied.
In this case, the Court cited the case of Barreto wherein it
was ruled that the full application of Articles 2249 and
2242 demands that there must be first some proceeding
where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency.
Although Barretto involved specific immovable property,
the ruling therein should apply equally in this case where
specific movable property is involved. As the extrajudicial foreclosure instituted by PNB and DBP is not the
liquidation proceeding contemplated by the Civil Code,
Remington cannot claim its pro rata share from DBP.
Article 2244 refers to ordinary preferred credit. In the
provisions, there is Article 2241 for movable and Article
2242 on immovable. Ordinary preferred credit refers to a
situation wherein a particular credit is not secured by any
particular movable or immovable property. This credit is
one of those enumerated as ordinary preferred because
among the other credit, there is a preference or a priority
in the distribution of proceeds or whatever assets of the
debtor. In ordinary preferred credit, if there is movable or
immovable property, it will first be applied to Article 2241
and 2242. If there is excess, it will be distributed to what
are those distributed in Article 2244.
Unlike Article 2241 and 2242, Article 2244, this is an order
of preference or there is a hierarchy. The first payment will
go to the first enumerated, then, second, and so on. Also,
there may be properties that are not subject to lien so
there are no attached credits or encumbrances. Take note
that in Article 2244, there is a hierarchy application.
Article 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

CREDIT TRANSACTIONS

have no property of their own, when approved by

the court;
Article 110.
Worker preference in case of
bankruptcy. In the event of bankruptcy or
liquidation of an employer's business, his workers
shall enjoy first preference as regards their unpaid
wages and other monetary claims, any provision of
law to the contrary notwithstanding. Such unpaid
wages, and monetary claims shall be paid in full
before the claims of the Government and other
creditors may be paid.
(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;
Thus, Article 2244 enumerated the ordinary preferred

credits under the Civil Code and take note of the Labor
Code provision on wages. Also, the taxes and
assessments here are on Numbers (9), (10) and (11). Do
not confuse that in the taxes dues in priority under Article
2241 and 2242.
The things that will be observed are:
First, if there is already an insolvency
proceedings, identify the special preferred credit
which must be made in Article 2241 for movable
and Article 2242 for immovable. Under these
provision, taxes enjoyed priority and all the rest
will be paid proportionally.
If there are surplus in assets or proceeds, and the

taxes were paid under Article 2241 and Article
2242, then, go to Article 2244 on ordinary
preferred credit which will be paid in the order of
priority as they are enumerated.
In Article 2241 and Article 2242, you do not need

to memorize the order except the preference of
taxes. But in Article 2244, the order of preference
should be observed because it will really matter.
If lacking, other credits enumerated, will not be
paid since they are not proportionate. When there
is a free portion from Article 2241 and 2242, it will
be applied to 2244.
(9) Taxes and assessments due the national

government, other than those mentioned in articles
2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province,
other than those referred to in articles 2241, No. 1,
and 2242, No. 1;
(11) Taxes and assessments due any city or
municipality, other than those indicated in articles
2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused
by a quasi-delict;
(13) Gifts due to public and private institutions of
charity or beneficence;
(14) Credits which, without special privilege,
appear in (a) a public instrument; or (b) in a final
judgment, if they have been the subject of
litigation. These credits shall have preference
among themselves in the order of priority of the
dates of the instruments and of the judgments,
respectively. (1924a)
With regard to Number (2), please take note of Article 110
of the Labor Code with regard to workers preference in
case of bankruptcy. By virtue of Article 110, the Number
(2) in Article 2244 will be number (1) or preferred more
and the second priority will be the funeral expenses. This
is important because this time, there is hierarchy.
Example, if there are surplus in the assets of the debtor
and it is sufficient only to pay the laborers for services
rendered to the insolvent, then, there will no more
payment to the others next enumerated. After that shift in
(1) and (2), the order remains as to (3) to (14).
Please take note of Number (9) on taxes. This means that
taxes does not refer to specific property, example-income
taxes which are taxes due the national government is not
applicable in Article 2241 and 2242.
If there is still surplus after payment of credits in

Article 2244, the non-preferred credits will be paid
whatever free portion remains.
Example: There is a property worth P2Million. If there
is real estate taxes for that property for P200,000.
Then, P1.8 Million remains. Assuming there is no
other liens, no mortgage, no repair expenses. So, the
P1.8Million will be applied to the ordinary preferred
credit in Article 2244.
First, is there credit for the services rendered by the
employees? If there is none, go to ordinary expenses. If
there is excess, apply to expenses during the last illness,
then so on until Number (14). If it is only good until
Number (7) on Fines and civil indemnification arising from
a criminal offense. Then, all other subsequent
enumeration such as government taxes will not be paid.
The application of Article 110 of the Labor Code will be
applied to Article 2244. It does not create a lien in favor of
workers and employees for unpaid wages and other
monetary claims even upon all the monetary claims or
upon any particular property own by their employer
UNLESS such claim will fall under for example Article
2241 Number (6) on claims for laborers' wages, on the
goods manufactured or the work done or if there are
laborers under Article 2242 Number (3) and (4), there will
be a preference applying Article 2241 or Article 2242.
But if for example, a driver, waiter, cashier, etc who are
not related to those enumerated in movable or immovable
preference, then, if there is unpaid wages, Article 2244
will be applied in consonance of Article 110 of the Labor
Code. Claims for unpaid wages do not therefore, fall at all,
within the category of special preferred things under
Article 2241 and 2242 except to the extent that such claim

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for unpaid wages fall under Number (6) of Article 2241 or

Number (3) of Article 2242. Article 110 of the Labor Code
did not alter Article 2241 and 2242, thus, so much as
creditors with lien over certain property are still given
special preferences over the proceeds of that property.
Claims for unpaid wages and other monetary claims of
laborers or workers of the insolvent from second, will not
become the first priority in the order of preference
established in Article 2244.
Q: Who has the better right over the property

mortgage? What is the remedy available to Ang when
Tropical is declared insolvent?
A: DBP has the better right and the remedy of Ang is
the insolvency proceedings and if there is excess, then,
he has the priority.
DBP vs NLRC
Q: Since Article 110 of the Labor Code does not apply,
what is the controversy here? This is a Labor case the
Labor Arbiter ruled Tropical primarily liable. Why do we
have DBP?
A: DBP foreclosed its plant facilities and equipment
resulting to the termination of employees.
Q: What is the claim of the dismissed employee?
A: Its claim should be preferred applying Article 110.
Q: Preferred against whom? Why do we have DBP
here? What is the action against DBP? Remember,
there is an employee who is illegally terminated
wherein there is a judgment award in his favour, on the
other hand, there is DBP because?
A: DBP is also asserting a claim by virtue of being a
mortgagee of specific property of Tropical, thus, Article
2242 applies. On the other hand, there is a dismissed
employee asserting preference under Article 110.
Q: Is there a conflict between two laws?
A: No. It is reconciled by the fact that the provision of
Article 110 (?)
Q: What does it mean? Because if Article 110 is
applied, the workers shall enjoy first preference as
regard to unpaid wages and other monetary claims,
any provision of law to the contrary notwithstanding.
Such unpaid wages, and monetary claims shall be paid
in full before the claims of the Government and other
creditors may be paid. So how do we reconcile this
provision and Article 224 and Article 2242?
A: A declaration of bankruptcy or a judicial liquidation
must be present before the worker's preference may be
enforced. And in this case, there is no liquidation
proceeding.
Q: Assuming that there is liquidation proceeding, what
are the rights of the dismissed employees on the
properties of Tropical?
A: The right under Article 2244 applies. Meaning, the in
preference under Article 2244, the said claim will be the
first priority. It is different from the right of DBP as a
mortgagee in the sense that.
Q: How do we interpret Article 110?
A: Article 110 does not purport to create a lien on the
property of the insolvent debtor in favour of workers so
it would fall under Article 2241 (6) or Article 2242 (3).
Q: In this case, does it fall under Article 2241 (6) or
Article 2242 (3)?
A: No. because the claim is an ordinary preferred credit
and not Article 2241 (6) or Article 2242 (3) because the
claim of Ang is not covered by either because Article
2241 refers to specific movable property and Article
2242 is for construction, etc and the functions of Ang is
not in relation to a movable or immovable property
being an executive secretary.
In this case, he is an executive secretary and clearly,
Article 2241 (6) or Article 2242 (3) which refers to a
movable or immovable property does not apply.
Take note that Article 110 should be read in conjunction

with the articles in the Civil Code. Again, a declaration of
bankruptcy or a judicial liquidation must be present before
the worker's preference may be enforced. Article 110 of
the Labor Code and its implementing rule cannot be
invoked by the respondents in this case absent a formal
declaration of bankruptcy or a liquidation order. In Article
110, there is a worker preference in case of bankruptcy.
It covers not only unpaid wages and other monetary
claims to which the claim of the government is
subordinate. The unpaid wages and other monetary
claims of the employees shall be given first preference
and shall be paid in full before the claims of the
government and other creditors be paid. It is not contrary
to Article 2241 and 2242. The right of preference of
workers under Article 110 cannot exist in any effective
way prior to the time of its presentation in distribution
proceedings. All creditors must be convened, their claims
ascertained and inventoried, and thereafter the
preferences determined. In the course of judicial
proceedings which have for their object the subjection of
the property of the debtor to the payment of his debts or
other lawful obligations. There is as yet no declaration of
bankruptcy nor judicial liquidation so it would be
premature to enforce the worker's preference.
Even if there is a liquidation proceeding, a preference
applies only to claims which do not attach to specific
properties. Thus, there is no change of Article 2241 and
2242. A lien creates a charge on a particular property. The
right of first preference as regards unpaid wages
recognized by Article 110 does not constitute a lien on the
property of the insolvent debtor in favor of workers. It is
but a preference of credit in their favor, a preference in
application.
Article 110 does not purport to create a lien in favour of
workers for unpaid wages or upon any particular property
owned by employer. The DBP anchors its claim on a
mortgage credit. A mortgage directly and immediately
subjects the property upon which it is imposed, whoever
the possessor may be, to the fulfilment of the obligation
for whose security it was constituted (Article 2176, Civil
Code). It creates a real right which is enforceable against
the whole world. It is a lien on an identified immovable
property, which a preference is not. A recorded mortgage
credit is a special preferred credit under Article 2242 (5)
of the Civil Code on classification of credits. The
preference given by Article 110, when not falling within
Article 2241 (6) and Article 2242 (3), of the Civil Code and
not attached to any specific property, is all ordinary
preferred credit although its impact is to move it from
second priority to first priority in the order of preference
established by Article 2244 of the Civil Code.
With regard to property mortgaged, DBP can foreclose it
and sell the property in public auction even with this claim
of unpaid wages or separation pay of a dismissed
employee. With regard to the proceeds, the dismissed
employees right is not under the special preferred credit.
In such case, all those enumerated in Article 2241 or 2242
should be paid. After which, the dismissed employee shall
have the right of the excess to the extent of the judgment
claim
Now also, notice in 2244 (no.2), it is stated there Credits
for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the

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commencement of the proceedings in insolvency. With
Article 110 of the Labor Code, it became no. 1. And
second thing you have to take note is, the 1 year limitation
no longer applies (helpers for one year preceding the
commencement of the proceedings in insolvency).

done; or no. 3 of 2242 claims of laborers and other
workers engaged in the construction, reconstruction or
repair of buildings, canals or or other works, upon said
buildings, canals or other works; to the extent that claims
for said wages fall outside of 2241, they would now come
within the ambit of 2244 under ordinary preferred credit.
REPUBLIC VS. PERALTA

Do we have an obligation to ____ here? Yes.
With regard to the issue, who is preferred among the
creditors?
Is there a limitation?
Can you apply 2244? Is it in the hierarchy?
So you would see that we have a priority in separation
pay. In this case, there is already an involuntary
insolvency proceedings. Clearly, we can apply the rules
on preference of credit. The case of the creditor, preferred
or not preferred, may be adjudicated in a binding manner.
Now, here, credits that are specially preferred take
precedence over ordinary preferred credits so far as
concerning the property to which the lien has attached.
Special preferred credits must be discharged first out of
the proceeds of the property to which they relate before
ordinary preferred credits may be claimed to any part of
such proceeds. Thats why in the customs duties, with
regard to movables, that is preferred. With regard to the
BIR tax dues, again those are preferred.
If the value of the specific property involved is greater than
total amount of the tax lien, to the other specially preferred
credit, the residual value will form part of the free
property of the insolvent. The free property will be
distributed, first, under Article 2244, again, in the order
provided in the said article in consonance with Article 110
(Labor Code). So if free property will be distributed in
accordance with Article 2244, free property, meaning,
property not subject to liens or encumbrances. But this
time, Article 2244 will apply, the taxes are not anymore
the priority. As mentioned, it is already no. 9, taxes due to
the national government. Thats if there is still free
property. And that is if it will still reach no. 9, because if
there is nothing left (to the free property), then he can get
nothing from it.
In contrast, with Article 2241 and 2242, 2244 provides no
liens on the determinate property which follows such
property (?), What article 2244 only creates are simply
rights in favor of certain creditors who have the cash(?),
as Ive mentioned earlier, and other aspects of the
insolvent in a certain sequence or order of priority. So the
claim of Bureau of Customs enjoys as established
specially preferred credit, Number 1 in 2241, only in the
__ of the 2 articles mentioned. The goods imported upon
location are not subject to a lien for customs duties and
taxes as set upon other importations, again what we refer
to are only those movable properties in relation to that
obligation.
The claim of BIR for the Tobacco inspection fees
constitutes a claim for unpaid internal revenue taxes
which gives rise to a tax lien upon all the properties and
assets, movable and immovable, of the insolvent under
2241, 2242, 2246 and 2249. This tax claim must be given
preference over any other claim of any other creditors,
again, in respect of any and all properties of the insolvent.
As to Article 110, again, it does not purport to create lien
in favor of workers or employees for unpaid wages and
even upon all of the properties or particular properties
owned by their employer. Claims for unpaid wages, again,
do not fall in the category under special preferred claims
under 2241 and 2242 except no. 6 in 2241 Claims for
laborers wages, on the goods manufactured or the work
It cannot be assumed that the legislative authority ___ in

Article 110 the words first preference in any provision of
the law to the contrary notwithstanding. It cannot be
assumed that such was intended to disrupt the elaborate
and symmetrical structure set up in the Civil Code. Neither
can it be assumed casually that Article 110 intended to
subsume the sovereign itself within the term other
creditors in stating that unpaid wages shall be paid in full
before other creditors may establish any claim to a share
in the assets of employer. The claim is insubordinate to
the government if we apply 2244, with regard to Article
110. So the use of the phrase first preference in Article
110 indicates that what the said article intended to modify
is the order of preference in 2244, to the property of the
insolvent that is not burdened with the liens and
encumbrances stated or recognized by 2241 and 2242.
Article 110 establishes the first preference for services
rendered during the period granted to the or bankruptcy
or litigation. A period that is now not limited to the year
immediately prior to the bankruptcy or liquidation. Again,
moving up claims for unpaid wages and removing the one
year period. The modification here in 110 removed the
one year limitation in 2244 and by moving up claims for
unpaid wages of laborers and workers of the insolvent
from second to first priority in the order of preference
established by 2244.
Also, lastly it is understood that the claim of the Unions
referred to above do not include the 10% claims for
attorneys fees. They do not stand on the same footing as
the Unions claims for separation pay of their members.
So with 2244, be very particular of the order of preference
provided therein.
Preference of credits evidenced by public instruments and
final judgments are in the same order of preference. A
preference among themselves is determined by the
priority dates of the instruments and of final judgments.
That is stated in 2244 with regard to mortgage having
been registered, otherwise, it cannot be considered as a
preferred claim. For example, your property is mortgaged
and it is only registered in first creditor then what would
happen is youre only 2nd mortgagee. The last part there
is the credits evidenced by a public instrument or a final
judgment, again, this is with reference to specific
immovable or movable property, since we will apply 2241
or 2242.
Article 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.
All other credits that does not fall under 2241, 2242, and
2244 will be considered as common credit. What happens
to this common credit? Theres no preference, theres no
hierarchy. If there really is a remaining amount, then it will
be used. Remember 2241, 2242, first, taxes in favor of the
government, the rest pro-rata. If there are remaining
proceeds, Article 2244, hierarchy, order of preference. If
there still remains that is not covered, apply pro rata in
common credit. No preference in such common credit, it
shall be pro rate regardless of the date.
Article 2246. Those credits which enjoy preference
with respect to specific movables, exclude all
others as to the extent of the value of the personal
property to which the preference refers.

CREDIT TRANSACTIONS
Article 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)
This explains what we have discussed in 2241.
Article 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.
This is similar in 2246 only that it refers to immovable
properties as well as real rights.
Article 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)
This is the basis of our discussion in Article 2242 in saying
that preference on taxes and assessment upon the
immovable, all the other credits in 2242 shall be satisfied
pro-rata.
Article 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)
So free property will be applied first, to 2244, in the order
of preference, and then 2245, as provided in Article 2251.
Article 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)
LETTERS OF CREDIT
Our Code of Commerce provides for the definition of
Letters of Credit.
Article 561 refers to the Letters of Credit as those issued
by a merchant to another for the purpose of attending to
a commercial transaction.
But in the cases that we have discussed, this is already
considered as a bank-to-bank transaction. So moderate
Letters of Credit are strictly bank-to-bank transactions
wherein the letter of credit is issued by the bank
[guaranteeing its client for its ability to pay for imported
goods or services, authorizing an individual or firm to draw
drafts on the bank or on its correspondent or bank
account under certain conditions in the credit.]
(I cannot be sure of this definition. The sentence in the
bracket is not verbatim as other words are barely
bearable. However, heres a substitute definition, in any
case. I only researched these.)
1. By definition, a letter of credit is a written
instrument whereby the writer requests or
authorizes the addressee to pay money or deliver
goods to a 3rd person and assumes no
responsibility for payment of debt therefore to the

addressee. (Transfield Philippines vs. Luzon
Hydro Corporation)
2. We have also defined a letter of credit as 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. (MWSS vs. Daway)
Opening of a letter of credit, there must be a mode of
payment. What we have here is a contract of sale
between two parties. The bank is not the vendor or the
buyer
on
the
said
contract
of
sale.
So, you have a buyer here in the Philippines interested to
buy goods in another country. We have the seller, and
lets say in Hong Kong. So again, more often than not,
letters of credit are used to bank-to-bank transaction, and
more often, international transactions.
It could be very hard for the buyer to pay for the goods
which are yet to be imported in the Philippines. Perhaps,
if he will pay, there would be a problem if the ordered
goods will not be delivered. On the other hand, the seller,
of course, will not deliver if theres no payment. So here
comes the letter of credit, whereby, the buyer would apply
for a letter of credit to a bank. The bank would be the one
to issue the letter of credit, actually in favor of the seller.
But, more often than not, you will also have here a bank
to whom this local bank will transact. Since when it is a
bank-to-bank transaction, theres already a contract,
there will be a trust now. The processing of money and
documents will come smooth.
So, in this letter of credit, what you have is there is a
contract of sale between the buyer and the seller, but it
does not affect the issuance of letter of credit (LOC). Now,
the LOC does not prevent the perfection of a Contract of
Sale, it is a consensual contract. It is perfected from the
moment the two consented to it.
Now, also, in LOC, it is not a contract of guaranty or
suretyship. The bank here, the one who issued the LOC,
does not guaranty or does not act as a surety of the buyer.
Neither as the buyer acts as a guarantor or a surety of the
bank. We have here a primary liability on the part of the
issuer following a default. The bank here will be liable to
the seller to that international bank upon the issuance of
LOC. But there is this condition, in the LOC, that the
international seller should comply before the LOC be
issued and eventually be encashed.
Now, the purpose of the letter of credit is to substitute and
support the agreement of the buyer-importer to bind
money under the contract or other arrangement. But
again, the issuance or the application for LOC is not a
condition for the perfection of that arrangement, which is
a contract of sale.
What are the essential conditions of a letter of credit?
1. It must be issued in favor of the ___ person
(seller) and not to order.
- In your Nego, you learned that an LOC
is not a negotiable instrument. Why?
Because it does not conform with the
requirements under Section 1, that the
instrument must be payable to order or
bearer. But in this case, it is payable to a
specific person or entity, in this case the
seller.
2. It is limited to a fixed or specified amount or to an
undetermined amount but within the maximum
limit which must be stated exactly.
- Sometimes we have there, in some
cases, a standby letter of credit, you

CREDIT TRANSACTIONS
have a LOC to an amount depending on
their transaction.
Now, when does an LOC become void? Under Article 572
of the Code of Commerce, it becomes void if the bearer
of the letter of credit does not make use thereof within the
period agreed upon with the drawer. We use the term
drawer even though it is not a negotiable instrument.
Who draws? The LOC, it is the bank.

be able to recover from the buyer, as the case maybe, the
money paid the beneficiary.
Standby Letter of Credit
It is issued by the bank involving parties, which are the
issuing bank, the party requesting for such issuance, and
the beneficiary. This have a maximum amount or
sometimes a specific date and a beneficiary has the right
to ___ the loan option.
Who are the parties of the LOC?

We have here the buyer, who procured the LOC and
obliges himself to reimburse the issuing bank upon receipt
of documents of title. We have the issuing bank, the bank
who issued the LOC, and who undertakes to pay the
seller, upon receipt of the drafts and proper documents of
title and to surrender the documents to the buyer upon
reimbursement.
Of course, we have the seller, in compliance with the
Contract of Sale, ships the goods to the buyer and the
delivers documents of title to the issuing bank to recover
payment.
So what is involved in an LOC is merely the payment of
money. When the bank issues LOC to the seller, it obliges
itself to pay the seller upon conforming of all the
requirements like shipping documents and among others.
The buyer here would be obliged to pay off the bank.
The LOC is an obligation between the buyer and the bank.
Now, if the seller subsequently delivers the goods and the
documents are complete, the bank will issue an LOC and
thereafter the LOC will now be granted to a draft. The
bank will pay the obligation of the seller.
What will happen if the goods are not in conformity
with the contract entered into by the buyer and the
seller?
Failure to conform to the subject matter of the contract of
sale is strictly between the buyer and the seller. The only
obligation of the bank is to look whether the documents
provided in the LOC are complete. If it is complete, the
bank is obliged to release the money in favor of the seller.
You have to, again, distinguish the issuance of the LOC
as to the Contract of Sale.
Independence Principle
Independence principle in the letter of credit, the issuing
bank in determine compliance in the terms of the LOC is
required to examine only the shipping documents or what
is enumerated or required in the LOC as presented by the
seller and is precluded from determining whether the main
contract is actually accomplished or not. The contract is
an independent transaction from the LOC, the bank will
still collect from the buyer. This arrangement assures the
seller of prompt payment independent of any breach of
the sales contract.
Standard Letter of Credit can also be used for a bidding.

Sometimes, it is required in a bidding that you have a
Standard LOC. That in case you become liable, you have
something to get payment from. While an LOC is a
security arrangement, LOC is not a contract of guaranty.
What are the types of LOC?
It can be irrevocable or revocable. Irrevocable LOC
obligates the issuing bank to honor the drafts drawn in
compliance of the credit and it cannot be cancelled or
modified without the consent of all parties. Revocable
LOC can be cancelled or amended at any time before
payment, and it is intended to serve as a means of
arranging payment but again not as a guaranty of
payment.
It may be confirmed or unconfirmed. If confirmed, both
banks are obligated to honor that. An unconfirmed LOC is
the obligation only of the issuing bank and issued it
________. Such applies if the exporter is unsure of the
financial standing of the foreign bank or if there is political
or economic instability in that foreign country. A
confirming bank is better able to judge the credibility of the
bank issuing the LOC.
Another classification, revolving or non-revolving. Nonrevolving is valid for one transaction only. Revolving is
valid for several transactions over a period of time. Most
revolving
LOC
are
revocable.
Lastly, it can be cumulative or non-cumulative. Noncumulative, any amount not previously used cannot be
drawn against later transaction. In cumulative, any
undrawn amounts can be carried over to future
transactions.
With regard to the buyer, when the goods will be delivered
it is more often delivered to the bank, it will not be given
or delivered directly to the buyer. It is for the purpose of
security on the part of the bank. The goods would be sold
to the bank, LOC will be issued to the seller, to this
international bank, but the goods will be delivered the
(issuing) bank, after which, it will be delivered to the buyer
by
issuing
a
trust
receipt.
In the trust receipt, the buyer is obligated to return any
unsold products or to remit the proceeds from the sale of
the said products. Again, take note of this concept.
Strict Compliance
The documents tendered by the seller or the beneficiary
must strictly comply with the terms of the LOC. It must
include all the documents required or enumerated in the
LOC. If the correspondent bank which requires from what
has been stipulated under the LOC and accepts what is
tendered then it acts in its own risk and cannot thereafter


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CREDIT TRANSACTIONS

Atty. Jazzie M. Sarona, CPA

REAL MORTGAGE &

Real Mortgage to Concurrence & Preference of Credits

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

Article 2125. In addition to the requisites stated in

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

Sps Viola vs Equitable

Q: Which is superior between a contract to sell and

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

location and that said lot formed part of Capital

bank? How was it discovered that they were

It is already settled that the banks and financial institutions

Registration is a mere ministerial act by which a deed,

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

and subsisting interest in land; it is merely a declaration

A: Without the consent of the spouse, and since it is the

In registration and annotation of the mortgage it does not

Do remember that with regard to real estate mortgage the

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

So this is another instance that would show that the

Q: What is the basis for the action to annul?

For the use of ALL students under Atty Sarona

Q: Was the loan already paid?

Real Mortgage to Concurrence & Preference of Credits

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

Alviar. While contracts of adhesion are also considered

Q: So what is a foreclosure sale by virtue of a real

Mortgaged credit, this refers to the right of the mortgagee.

Q: So with that, there was a sale in favor of PDC in a

That right is provided under Article 2128 wherein the

Q: Is it possible for PDC to considered as a purchaser

Now on the part of the mortgaged property again, on the

So what do you have here? We have here Reyes who

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

Article 2130. A stipulation forbidding the owner

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

the first mortgage secures a principal obligation lesser

modification and extinguishment, and as to other

What about the right of first refusal? Before Giovanni can

In fact we have the Chattel Mortgage Law and the Land

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

Spouses Rosales v. Spouses Suba

one year period from the date of the registration of sale to

An equitable mortgage is not different from a real estate

1.) The mortgagee would file a a petition for judicial

For the use of ALL students under Atty Sarona

Real Mortgage to Concurrence & Preference of Credits

assail the validity of the option or question the

executive judge or the vice executive judge in his absence

7.) There will be execution of the judgment,

8.) Thereafter, a registration of the certified true copy