CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
February 14 – Amparo
REAL ESTATE MORTGAGE
 It is a contract whereby the debtor secures to the creditor the
fulfillment of a principal obligation, specially subjecting to such
security immovable property OR real rights over immovable property
which obligation shall be satisfied with the proceeds of sale of said
property or rights in case the principal obligation is not complied with
at the time stipulated.
 This is one of the contracts of real security.
Characteristics:
a) It is a contract of real security
b) It is an accessory contract
o Its existence and validity depends upon the principal obligation.
c) As a contract, it has to have the elements of consent, object and
consideration.
o It may have a different consideration from the principal contract.
o But even if it does not have a different consideration, it will still
have the same consideration as that of the principal contract from
which it receives its life and without which it cannot exist as an
independent contract, although the obligation is secured or
incurred by a third person.
o So even if we have a third person that acts as a mortgagor who is
allowed under Art. 2085, even if there is no separate consideration
in favor of that third person-mortgagor, still such mortgage is valid
provided all the other elements are present. The consideration will
be that of the principal contract. It will be valid if the principal
obligation is valid and cannot be avoided on the ground of lack of
consideration.
DBP VS. CA and SPS. MANGUBAT
(G.R. No. 110053, October 16, 1995)
FACTS: On April 27, 1965, Pacifico Chica mortgaged the land to DBP to
secure a loan of P6, 000.00. However, he defaulted in the payment of the
loan, hence DBP caused the extrajudicial foreclosure of the mortgage.
In the auction sale held on September 9, 1970, DBP acquired the property as
the highest bidder and was issued a certificate of sale on September 17,
1970 by the sheriff. Pacifico Chica failed to redeem the property, and DBP
consolidated its ownership over the same.
On October 14, 1980, respondent spouses offered to buy the property for
P18, 599.99. DBP made a counter- offer of P25, 500.00 which was accepted
by respondent spouses. The parties further agreed that payment was to be
made within six months thereafter for it to be considered as cash payment.
On July 20, 1981, the deed of absolute sale, which is now being assailed
herein, was executed by DBP in favor of respondent spouses. Thereafter,
respondent spouses applied for an industrial tree-planting loan with DBP.
The latter required the former to submit a certification from the Bureau of
Forest Development that the land is alienable and disposable. However, on
October 29, 1981, said office issued a certificate attesting to the fact that the
said property was classified as timberland, hence not subject to disposition.
The loan application of respondent spouses was nevertheless eventually
approved by DBP in the sum of P140, 000.00, despite the aforesaid
certification of the bureau.
To secure payment of the loan, respondent spouses executed a real estate
mortgage over the land on March 17, 1982, which document was registered
in the Registry of Deeds pursuant to Act No. 3344. However, DBP did not
release the entire amount of the loan ostensibly because the release of the
land from the then Ministry of Natural Resources had not been obtained. On
July 7, 1983, respondent spouses, as plaintiffs, filed a complaint against DBP
` Page 1 of 63
in the trial court seeking the annulment of the subject deed of absolute sale
on the ground that it belongs to the lands of the public domain.
RTC rendered judgment in favor of respondent spouses, annulling the deed
of absolute sale. CA affirmed.
ISSUES:
(1) WON private respondent spouses Celebrada and Abner Mangubat should
be ordered to pay petitioner DBP their loan obligation due under the
mortgage contract executed between them and DBP.
(2) WON petitioner should reimburse respondent spouses the purchase price
of the property and the amount of P11, 980.00 for taxes and expenses for
the relocation Survey.
HELD 1: YES
Considering that neither party questioned the legality and correctness of the
judgment of the court a quo, as affirmed by respondent court, ordering the
annulment of the deed of absolute sale, such decreed nullification of the
document has already achieved finality.
In its legal context, the contract of loan executed between the parties is
entirely different and discrete from the deed of sale they entered into. The
annulment of the sale will not have an effect on the existence and
demandability of the loan. One who has received money as a loan is bound
to pay to the creditor an equal amount of the same kind and quality.
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. Where a
mortgage is not valid, as where it is executed by one who is not the owner of
the property, or the consideration of the contract is simulated or false, the
principal obligation, which it guarantees, is not thereby rendered null and
void. That obligation matures and becomes demandable in accordance with
the stipulations pertaining to it.
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. In case of nullity, the mortgage deed
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.
HELD 2: DBP should reimburse the spouses for the purchase price but not
for taxes and expenses for relocation.
A contract, which the law denounces as void, is necessarily no contract
whatever, and the acts of the parties in an effort to create one can in no wise
bring about a change of their legal status.
As a general rule, if one buys the land of another, to which the latter is
supposed to have a good title, and, in consequence of facts unknown alike to
both parties, he has no title at all, equity will cancel the transaction and
cause the purchase money to be restored to the buyer, putting both parties
in status quo.
Thus, on both local and foreign legal principles, the return by DBP to
respondent spouses of the purchase price, plus corresponding interest
thereon, is ineluctably called for. However, despite that admission of
respondent spouses’ list of damages as evidence, the Court agrees with
petitioner that the same cannot constitute sufficient legal basis for an award
of P4, 000.00 and P7, 980.00 as reimbursement for land taxes and expenses
for the relocation survey, respectively. Respondent spouses prepared the list
of damages extrajudicially by themselves without any supporting receipts as
bases thereof or to substantiate the same. That list, per se, is necessarily
self-serving and, on that account, should have been declared inadmissible in
evidence as the factum probans.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Notwithstanding that the mortgage is null and void since the mortgagor
thereof was not the owner of the property. What could be the use of said
Real Estate Mortgage? Does the REM still have relevance?
SC said that such mortgage would nevertheless be used as an evidence of
the obligation.
Discussion:
Here, there was no valid sale because the sale involved a timberland,
which is an inalienable property of the public domain and not a valid subject
matter of a sale. By the nullity of said sale, ownership would not have
transferred to Sps. Mangubat here, and therefore, they could not have
executed a valid mortgage in favor of DBP. So null and void ang sale, null and
void din yung mortgage.
However, the SC emphasized that the principal obligation of the
contract of loan supposedly secured by the REM is separate and distinct
from the nullity of the sale.
The fact that the sale will also result in the invalidity of the mortgage
does not have an effect on the validity and the 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. Why? Because
in the end, nakahiram parin nang pera yung Sps. Mangubat. So no valid
mortgage but the loan is nevertheless valid. The principal obligation, which it
guarantees, is not thereby rendered null and void by the nullity of the
mortgage.
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. While the mortgage is null and void, it 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.
Additional characteristics of a mortgage aside from being accessory in
nature, it is:
a) Subsidiary- similar to the other security contracts we have discussed.
b) Unilateral- the obligation is only on the part of the creditor who must
free the property from the encumbrance once the obligation is fulfilled.
Three kinds of Mortgages:
1. Voluntary Mortgage
 A conventional mortgage agreed between the parties and
constituted with the will of the owner of the property of which it
is created
2. Legal Mortgage
 Such required by the law to be executed in favor of certain
persons.
3. Equitable Mortgage
 Article 1602 gives the circumstances. Such equitable mortgage
lacks the proper formalities or other requisites of a mortgage
required by law. Nevertheless, it reveals the intention of the
parties to burden a real property as a security for a debt
(inaudible) it’s nothing impossible or contrary to law.
Valid objects of a 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 objects of a chattel
mortgage. (1874a)
` Page 2 of 63
In your Law on Property, the following shall be considered immovables:
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. (334a)
SORIANO vs. SPOUSES GALIT
(G.R. No. 156295, September 23, 2003)
FACTS: Respondent Ricardo Galit contracted a loan from petitioner Marcelo
Soriano amounting to P480,000.00. This loan was secured by a REM over a
parcel of land covered by OCT. No. 569. When respondent defaulted in his
obligation, Soriano filed a complaint for sum of money against him with the
RTC of Balanga City.
Upon failure of the respondent spouses Galit to file their answer, the trial
court declared the spouses in default and it thereafter rendered judgment in
favor of petitioner Soriano ordering the respondents to pay. The judgment
became final and executory. Deputy Sheriff Renato E. Robles levied on the
following real properties of the Galit spouses:
(1) A parcel of land covered by OCT No. T-569 (Homestead Patent
No. 14692)
(2)STORE/HOUSE – CONSTRUCTED on Lot No. 1103; and
(3)BODEGA – constructed on Lot 1103.
On December 23, 1998, petitioner emerged as the highest and only bidder
with a bid price of P483,000.00. Thus, on February 4, 1999, Deputy Sheriff
Robles issued a Certificate of Sale of Execution of Real Property. On April 23,
1999, petitioner caused the registration of the “Certificate of Sale on
Execution of Real Property” with the Registry of Deeds.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
10 months from the time the Certificate of Sale on Execution was registered
with the Registry of Deeds, petitioner moved for the issuance of a writ of
possession, which was granted by the RTC. This was, however, subsequently
nullified by the Court of Appeals because it included a parcel of land (OCT No.
T-40785) which was not among those explicitly enumerated in the Certificate
of Sale issued by the Deputy Sheriff, but on which stand the immovables (the
BODEGA and STORE/HOUSE) covered by the said Certificate. Petitioner
contends that the sale of these immovables necessarily encompasses the
land on which they stand.
ISSUES:
(1) WON the land on which the buildings levied upon in execution is
necessarily included.
(2) WON the cert. of sale on execution of real property and the writ of
possession are null and void despite the fact that they enjoy the
presumption of regularity being public documents.
HELD:
(1) NO. Art. 415 of the Civil Code enumerates land and buildings separately.
This can only mean that a building is, by itself, considered immovable. Thus,
it has been held that while it is true that a mortgage of land necessarily
includes, in the absence of stipulation of the improvements thereon,
buildings, still 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.
In this case, 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 respondent spouses, the same
should be regarded as separate and distinct from the conveyance of the lot
on which they stand.
(2) YES. No reason has been offered how and why the questioned entry was
subsequently intercalated in the copy of the certificate of sale subsequently
registered with the Registry of Deeds. Absent any satisfactory explanation as
to why said entry was belatedly inserted, the surreptitiousness of its
inclusion coupled with the furtive manner of its intercalation casts serious
doubt on the authenticity of petitioner’s copy of the Certificate of Sale. Thus,
it has been held that while a public document like a notarized deed of sale is
vested with the presumption of regularity, this is not a guarantee of the
validity of its contents.
It must be pointed out in this regard that the issuance of a Certificate of Sale
is an end result of judicial foreclosure where statutory requirements are
strictly adhered. Among these requirements is an explicit enumeration and
correct description of what properties are to be sold stated in the notice. 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.
The certificate of sale is an accurate record of what properties were actually
sold to satisfy the debt. The strictness in the observance of accuracy and
correctness in the description of the properties renders the enumeration in
the certificate exclusive. Thus, subsequently including properties, which have
not been explicitly mentioned therein for registration purposes under
suspicious circumstances smacks of fraud. The explanation that the land on
which the properties sold is necessarily included and, hence, was belatedly
typed on the dorsal portion of the copy of the certificate subsequently
registered is at best a lame excuse unworthy of belief.
The appellate court correctly observed that there was a marked difference in
the appearance of the typewritten words appearing on the first page of the
copy of the Certificate of Sale registered with the Registry of Deeds and
those appearing at the dorsal portion thereof.
` Page 3 of 63
Underscoring the irregularity of the intercalation is the clearly devious
attempt to let such an insertion pass unnoticed by typing the same at the
back of the first page instead of on the second page which was merely half-
filled and could accommodate the entry with room to spare.
Discussion:
Here, the SC emphasized that in the foreclosure of a mortgage and the
subsequent sale thereof, it must include an explicit enumeration and correct
description of what properties are sold. This must be stated in the notice of
foreclosure.
In fact, 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. Here,
subsequently including properties, which have not been explicitly mentioned
therein for registration purposes under suspicious circumstances smacks of
fraud.
Also in this case, the land itself is separate from the building and vice
versa. What was subject in the mortgage here is the storehouse and the
bodega, and hindi kasama yung land. SC emphasized that a mortgage of land
necessarily includes, in the absence of stipulation of the improvements
thereon, buildings. But still a building by itself, like in this case a bodega and
a storehouse, 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 an immovable property even if dealt with
separately and apart from the land.
What was sold by virtue of the writ of execution was merely the
storehouse and bodega constructed on the parcel of land which by
themselves are real properties of respondent spouses, the same should be
regarded as separate and distinct from the conveyance of the lot on which
they stand.
(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
 Rights over the immovables; right to use such property such as
usufruct.
 It is not the property itself but your right over the property.
 A real right over a real property can be a subject of a mortgage
Also, under Art. 2124 what does the word “ONLY” mean?
 These 2 objects mentioned are the only valid subject matters of a
mortgage.
 Meaning the list under said article is EXCLUSIVE.
However, if what you have are movable properties, then what you have
there is a chattel mortgage.
In relation to Art. 2085, one of the essential requisites to the contract of
mortgage is that the mortgagor must be the absolute owner of the thing
mortgaged, so:
General Rule: Future property cannot be a valid subject matter of a
mortgage. Because if it is not yet in existence, how could one possibly own
the same.
MENDOZA, also doing business under the name and style of ATLANTIC
EXCHANGE PHILIPPINES, vs. CA, PNB. Et.al
(G.R. No. 116710, June 25, 2001)
FACTS: Danilo D. Mendoza is engaged in the domestic and international
trading of raw materials and chemicals. He operates under the business
name Atlantic Exchange Philippines (Atlantic).
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Sometime in 1978 he was granted by respondent PNB a 500,000.00 credit
line and a 1,000,000.00 Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations and for those that may
thereinafter be granted, petitioner mortgaged to respondent PNB 3 parcels
of land with improvements; his house and lot and several pieces of
machinery and equipment in his Pasig cocochemical plant.
Petitioner executed in favor of respondent PNB 3 promissory notes covering
the P500, 000.00 credit line. Petitioner made use of his LC/TR line to
purchase raw materials from foreign importers.
On March 9, 1981, he wrote a letter to respondent PNB requesting for the
restructuring of his past due accounts into a five-year term loan and for an
additional LC/TR line of P2, 000,000.00. He reasoned that because of the
shutdown of his end-user companies and the huge amount spent for the
expansion of his business, petitioner failed to pay to respondent bank his
LC/TR accounts as they became due and demandable. PNB Mandaluyong
replied on behalf of the respondent bank and required petitioner to submit
documents: Audited Financial Statements for 1979 and 1980; Projected cash
flow (cash in - cash out) for 5 years detailed yearly; and the List of additional
machinery and equipment and proof of ownership thereof.
On September 25, 1981, petitioner sent another letter addressed to PNB
Vice-President Jose Salvador, regarding his request for restructuring of his
loans. He offered respondent PNB the following proposals:
1) The disposal his house and lot and a vacant lot in order to pay
the overdue trust receipts;
2) Capitalization and conversion of the balance into a 5-year term
loan payable semi-annually or on annual installments;
3) a new P2,000,000.00 LC/TR line in order to enable Atlantic
Exchange Philippines to operate at full capacity.
Fernando Maramag, PNB Executive Vice- President, disapproved the
proposed release of the mortgaged properties and reduced the proposed
new LC/TR line P1,000,000.00. Petitioner claimed that he was forced to
agree to these changes and that the respondent PNB approved his proposal.
He further claimed that he and his wife were asked to sign 2 blank
promissory note forms. And that they were made to believe that the blank
promissory notes were to be filled out by respondent PNB to conform with
the 5-year restructuring plan allegedly agreed upon.
Petitioner testified that respondent PNB allegedly contravened their verbal
agreement by affixing dates on the 2 subject promissory notes to make them
mature in 2 years instead of 5 years as supposedly agreed upon.
Upon their failure to make good of the said loans PNB extra-judicially
foreclosed the real and chattel mortgages, and the mortgaged properties
were sold at public auction to respondent PNB, as highest bidder, for a total
of P3, 798,719.50.
ISSUE: WON the foreclosure sale was proper.
HELD: YES
The court found out that PNB did not categorically agree to
petitioner’s proposal to extend the credit line to five years.
On the substantive issue of mortgage:
Petitioner did not present any proof as to when he acquired the subject
movables and hence it is not to be believe that the same were "after
acquired" chattels not covered by the chattel and real estate mortgages.
In asserting its rights over the subject movables, respondent PNB relies on a
common provision in the 2 subject Promissory Notes which is clear, however
that respondent bank is authorized, 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."
` Page 4 of 63
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.
More importantly, respondent bank makes a valid argument for the
retention of the subject movables. PNB asserts that those movables were in
fact "immovables by destination" under Art. 415 (5) of the Civil Code. 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.
What is the intention of the parties here?
Those properties will secure the mortgage and authorizing the bank to sell
the same in case there is failure to pay.
What are after-acquired properties?
Those properties acquired after the execution of the mortgage.
Can this be a valid subject of a mortgage?
Yes, 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.
Is this definition of after-acquired properties applicable in this case?
Yes these properties according to the SC are immovables. Under Article 415,
if these machineries are 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,
then it is considered as an immovable by destination.
Discussion:
Here, the bank was authorized 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." The petitioner here executed not only a chattel
mortgage but also a real estate mortgage to secure his loan obligations to
respondent bank.
The SC emphasized that after-acquired properties or properties
acquired after the execution of a mortgage may still be valid subject matter
of a mortgage 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 that definition,
this more pertains to movable or personal properties.
For example: Inventory sa tindahan. Those goods that are part of the
inventory could be a subject of a chattel mortgage. What will happen? Since
part sya sa tindahan, mabenta sya then i-replenish naman ng inventory.
Notwithstanding that you have used stocks in the inventory, the fact that
you have stipulated that the said inventory of the store would constitute or
form part of the mortgage, it is still a valid subject matter thereof.
Also, 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 even if you have machinery, which you can
describe as a movable property, still, go back to what are considered as
immovable properties under the law. If bolted yung movable, yung intention
dyan, magiging immovable na sya by destination.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR

Pledge Real Estate Mortgage Thus, PCI Bank extrajudicially foreclosed the mortgage before the Regional
Involves personal property Involves real properties Trial Court (RTC) and that the mortgaged properties were sold at a public
Requires delivery for its Does not require delivery for auction.
perfection perfection
Pledgee has possession of the It is not required that the Respondent contended that the absence of stipulation in the mortgage
thing pledge mortgagee will possess the contract securing the payment of 15% interest per annum on the principal
real property loan, as well as the 3% penalty fee per month on the outstanding amount, is
Extrajudicial foreclosure Judicial or extrajudicial immaterial since the mortgage contract is "a mere accessory contract which
foreclosure must take its bearings from the principal Credit Line Agreement."
Pledgee has the right to Such right is not available to
receive the fruits and apply the mortgagee in the REM ISSUE: WON the mortgage contract also secured the penalty fee per month
the same to the obligation unless otherwise stipulated on the outstanding amount as stipulated in the Credit Line Agreement.
by the parties
HELD: NO. A mortgage must "sufficiently describe the debt sought to be
General Rule: The mortgagor retains possession of the property mortgaged secured, which description must not be such as to mislead or deceive, and an
as security for the payment of the sum borrowed from the mortgagee. obligation is not secured by a mortgage unless it comes fairly within the
 The debtor merely subjects the property to a lien but ownership is not terms of the mortgage.
parted with.
The Real Estate Mortgage contract states its coverage, thus: That for and in
XPN: The parties may stipulate that pending the performance or payment of consideration of certain loans, credit and other banking facilities obtained x
the obligation, the mortgagee will have possession of the mortgaged xx from the Mortgagee, the principal amount of which is PESOS FOUR
property. MILLION SEVEN HUNDERED THOUSAND ONLY (P4,700,000.00) Philippine
 So pwede by stipulation but not required for validity ha. Currency, and for the purpose of securing the payment thereof, including the
 The reason for this is that it is not an essential requisite of the contract interest and bank charges accruing thereon, xxx
of mortgage that the property remains in possession of the mortgagor.
 The mortgagor may deliver the property to the mortgagee without The immediately quoted provision of the mortgage contract does not
altering the nature of the contract. specifically mention that, aside from the principal loan obligation, it also
secures the payment of "a penalty fee of three percent (3%) per month of
the outstanding amount to be computed from the day deficiency is incurred
Article 2085. xxx
up to the date of full payment thereon,”
Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. (1857)
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
So, a third person can act as a mortgagor. Sometimes, what will happen obligation is not mentioned in the mortgage, it must be excluded from the
is that, this owner will execute an SPA in favor of the principal debtor to computation of the amount secured by the mortgage.
which the principal debtor is the one who will sign the REM. Pwede ba yan?
Actually, YES. Regarding CA decision that the phrase "including the interest and bank
charges" in the mortgage contract "refers to the penalty charges stipulated
What do you have to make sure, especially if you are a creditor, it must in the Credit Line Agreement" is unavailing.
be clearly stipulated therein that he signs the same for and in behalf of the
owner mortgagor. Because even if the said debtor is actually authorized by "Penalty fee" is entirely different from "bank charges." The phrase "bank
the owner-mortgagor, if the REM signed by the debtor not indicating that he charges" is normally understood to refer to compensation for services. A
is only acting in behalf of said third person who is the owner-mortgagor or as "penalty fee" is likened to a compensation for damages in case of breach of
an agent, who is considered as the mortgagor is still the principal debtor not the obligation. Being penal in nature, such fee must be specific and fixed by
the true owner of the property. the contracting parties, unlike in the present case which slaps a 3% penalty
fee per month of the outstanding amount of the obligation.
EFFECT: The mortgagor is not the true owner of the property mortgaged, so
there is no valid mortgage to speak of. Moreover, the "penalty fee" does not belong to the species of obligation
enumerated in the mortgage contract, namely: "loans, credit and other
SPOUSES VIOLA vs. EQUITABLE banking facilities obtained x xx from the Mortgagee, . . . including the
(2008) interest and bank charges, . . . the costs of collecting the same and of taking
possession of and keeping the mortgaged properties, and all other expenses
FACTS: March 31, 1997 Spouses Viola of Leo-Mers Commercial, Inc. obtained to which the Mortgagee may be put in connection with or as an incident to
a loan through a credit line facility in the maximum amount of P this mortgage . . ."
4,700,000.00 from Equitable PCI Bank, Inc. The Agreement stipulated that
the loan would bear interest at the "prevailing PCI Bank lending rate" per In Philippine Bank of Communications v. Court of Appeals, which raised a
annum on the principal obligation and a "penalty fee of three percent (3%) similar issue, this Court held:
per month on the outstanding amount."
The court held, indeed, a mortgage must sufficiently describe the debt sought
To secure the payment of the loan, an REM over their 2 parcels of land in to be secured, which description must not be such as to mislead or deceive,
favor of PCI Bank was executed. Spouses Viola made partial payments which and an obligation is not secured by a mortgage unless it comes fairly within
totaled P 3,669,210.67; PCI Bank contends however, that Spouses Viola the terms of the mortgage.
made no further payments since Nov. 24, 2000 despite demand they failed
to pay their outstanding obligation which as of September 30, 2002. Under the rule of ejusdem generis, where a description of things of a
particular class or kind is "accompanied by words of a generic character, the
generic words will usually be limited to things of a kindred nature with those

` Page 5 of 63
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
particularly enumerated . . . " A penalty charge does not belong to the
species of obligations enumerated in the mortgage, hence, the said contract
cannot be understood to secure the penalty.
Regarding Respondent’s contention that absence of stipulation for the
penalty fee in the mortgage contract is of no consequence as the deed of
mortgage is merely an “accessory contract” that "must take its bearings from
the principal Credit Line Agreement,".
Such absence is significant as it creates an ambiguity between the two
contracts, which ambiguity must be resolved in favor of petitioners and
against respondent who drafted the contracts. Again, as stressed by the
Court in Philippine Bank of Communications:
A mortgage and a note secured by it are deemed parts of one transaction
and are construed together, thus, an ambiguity is created when the notes
provide for the payment of a penalty but the mortgage contract does not.
Construing the ambiguity against the petitioner, it follows that no penalty
was intended to be covered by the mortgage. Plainly, the petitioner can be as
specific as it wants to be, yet it simply did not specify nor even allude to, that
the penalty in the promissory notes would be secured by the mortgage. This
can then only be interpreted to mean that the petitioner had no design of
including the penalty in the amount secured.
Therefore, the "penalty fee" per month of the outstanding obligation is
excluded in the computation of the amount secured by the Real Estate
Mortgage executed by petitioners in respondent’s favor.
Discussion:
The SC here emphasized that 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.
Clearly, there was a distinction between what was provided under the
Credit Line Agreement and under the REM. While it is true that the Spouses
here agreed to pay the obligation, collection expenses, and the penalty of 3%
per month, it does not automatically mean that they have the same
coverage under the REM. Because the REM here only states that the sale
was for the purpose of securing the payment of the principal obligation
including the interest and bank charges. So it was not mentioned in the REM
that it would cover the 3% per month penalty.
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.
Also, in this case, the SC differentiated bank charges and penalty fee
since bank charges were included in the REM.
Bank Charges Penalty fee
Compensation for services. Compensation for damages
in case of break;
It is penal in nature;
Such fee must be specific and
fixed by the contracting
parties.
In this case, there such stipulation for penalty fee in the REM is absent.
So the effect is that the penalty fee should be excluded from the
computation of the amount secured by the Real Estate Mortgage executed
by petitioners in respondent’s favor.
` Page 6 of 63
February 21 – Pabalan
Art. 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. (1874a)
Art. 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)
You have to distinguish mortgage from a contract of pledge. In a contract of
pledge, registration is not needed to bind third parties.
CASE:
G.R. No. L-38745 August 6, 1975
TAN vs. VALDEHUEZA
Facts:
The Valdehuezas have executed two documents of DEED OF PACTO DE
RETRO SALE (Deed of Sale with right to repurchase) in favor of the LUCIA
TAN of two portions of a parcel of land.
Despite the execution of the Deed of Sale with right to repurchase, the
Valdehuezas remained in the possession of the land; that land taxes to the
said land were paid by the same said defendants. As such, the contracts
which purported to be pacto de retro transactions are presumed to be
equitable mortgages. At issue is the equitable mortgage that was not
registered.
The controversy arose when a suit was filed by Tan to foreclose the
unregistered mortgage.
The Valdehuezas argued that no suit lies to foreclose an unregistered
(equitable) mortgage.
Issue:
Whether or not an unregistered mortgage may be foreclosed
Whether or not an unregistered mortgage is binding between the parties
Ruling:
An order for foreclosure cannot be refused on the ground that the mortgage
had not been registered. The unregistered mortgage is still binding between
the parties provided no innocent third parties are involved.
An order for foreclosure cannot be refused on the ground that the mortgage
had not been registered. The registered or unregistered mortgage is binding
between the parties.
We have to compare this case to the earlier case of Hechanova vs. Adil
where the Court held that no valid mortgage is constituted where the
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
alleged deed of mortgage is a mere private document and, therefore, is not
registered.
If a mortgage is in a private document, it could not be registered. The
creditor may nevertheless recover the loan, although the mortgage
evidenced in the loan was not registered being a private document.
However the creditor has the right to compel the debtor to execute a
contract of mortgage in a public document.
If the mortgage is in a public instrument but the mortgage is not registered,
the mortgage is nevertheless binding on the parties as provided in Article
2125, and the registration will only operate as a notice on the mortgage to
third persons but it neither adds to the validity nor does it convert a valid
mortgage into a valid one.
In relation to mortgages, we also have to consider the “Doctrine of a
Mortgagee in Good Faith”.
Doctrine of mortgagee in good faith:
A mortgagee has a 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, has no obligation to undertake further
investigation. Hence, even if the mortgagor is not the rightful owner of, or
does not have a valid title to, the mortgaged property, the mortgagee in
good faith is nonetheless entitled to protection.
EXCEPTIONS:
(This was discussed by Atty. Sarona in the later part of the lecture. I just
placed it here for a better flow.)
1.Where the purchaser or mortgagee has knowledge of a defect or lack of
title in the vendor
2.The mortgagee does not directly deal with the registered owner of real
property. or
3.The mortgagee was aware of sufficient facts to induce a reasonably
prudent man to inquire into the status of a property in litigation.
4. When the purchaser or mortgagee is a bank or financing institution, the
general rule that a purchaser or mortgagee of land is not required to look
further than what appears on the face of the title does not apply. A
mortgagee-bank is expected to exercise greater care and prudence before
entering into a mortgage contract even those involving registered lands in its
dealings than private individuals as their business is impressed with public
interest.
G.R. No. 115548. March 5, 1996
STATE INVESTMENT HOUSE INC vs. CA
Facts: A contract to sell was executed between Spouses Oreta, and Solid
Homes. The sale involved a parcel of land (511 sq. m.).
Upon signing of the contract, Spouses Oreta made payment with the
agreement that the balance shall be paid in installments. The sale of the
property was however not registered.
Meanwhile. Solid Homes executed several mortgages in favor of State
Investment over its subdivided parcels of land, including the subject of land
of the mentioned contract to sell with the Spouses Oreta. The mortgage
executed by Solid Homes was registered under Torrens.
` Page 7 of 63
Such mortgage was foreclosed upon failure of Solid to comply with its
obligations. Thereafter, Solid through a MOA, negotiated for the deferment
of consolidation of ownership over the foreclosed properties. It further
committed itself to redeem the properties.
Spouses Oreta after a few years filed a complaint before the HLURB against
Solid and State for failure on the part of Solid to execute the necessary
absolute deed of sale as well as to deliver title to property subject of the
contract to sell despite full payment.
Solid alleged that its obligations under the contract have become so difficult
for performance.
Solid, in effect, asked to be partially released from its obligations by
delivering another parcel of land in substitution to the subject of the sale.
State Investment, on the other hand averred that unless Solid pays the
redemption price, it has a right to hold on to the foreclosed properties.
However, HLURB ordered State to execute a deed of conveyance in favor of
complainants and deliver the title to the land.
Issue: Who has a better right over the property?
(Spouse Oreta who were the buyers of the subject property but the sale was
unregistered OR State Investment holding a registered mortgage against
Solid Homes)
Ruling: Spouses Oreta have the better right over the subject property.
State Investment’s registered mortgage right over the property is inferior to
that of respondents' unregistered right. The unrecorded sale is preferred for
the reason that if the original owner (Solid) had parted with the ownership
of the thing sold, he would no longer have the free disposal of it and would
not be able to mortgage it. Registration of the mortgage is not important
since it is understood to be without prejudice to the rights of third persons.
As a general rule, where there is nothing in the title to indicate any cloud or
vice in the ownership thereof, the purchaser is not required to explore
further.
An exception to this is when the mortgagee or purchaser has knowledge of a
defect or lack of title on the part of the vendor or that he was aware of
sufficient facts to induce a reasonably prudent man to inquire further.
In this case, State Investment knows full well that Solid Holmes is engaged in
selling subdivision lots. Therefore, as founded on jurisprudence, it should
have taken necessary precautions to ascertain any flaw.
Moreover, the uniform practice of financing institutions is to investigate,
examine, and assess real property offered as security. State Investment is
therefore not a mortgagee in good faith.
STATE’s registered mortgage right over the property is inferior to that of
respondents-spouses unregistered right. The unrecorded sale between
respondents-spouses and SOLID is preferred for the reason that if the
original owner (SOLID, in this case) had parted with his ownership of the
thing sold then he no longer had ownership and free disposal of that thing so
as to be able to mortgage it again.[
Registration of the mortgage is of no moment since it is understood to be
without prejudice to the better right of third parties.
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.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
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 was well aware that it was dealing with SOLID, a
business entity engaged in the business of selling subdivision lots.
State Investment’s constructive knowledge of the defect in the title of the
subject property, or lack of such knowledge due to its negligence, takes the
place of registration of the rights of respondents-spouses. Respondent court
thus correctly ruled that 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.
G.R. No. 180945 February 12, 2010
PHILIPPINE NATIONAL BANK vs. CORPUZ
* FACTS are from full text, in toto
Facts: On October 4, 1974 respondent Mercedes Corpuz delivered her
owners duplicate copy of Transfer Certificate of Title (TCT) 32815 to Dagupan
City Rural Bank as security against any liability she might incur as its cashier.
She later left her job and went to the United States.
On October 24, 1994 the rural bank where she worked cancelled its lien on
Corpuzs title, she having incurred no liability to her employer. Without
Corpuzs knowledge and consent, however, Natividad Alano, the rural banks
manager, turned over Corpuzs title to Julita Camacho and Amparo Callejo.
Conniving with someone from the assessors office, Alano, Camacho, and
Callejo prepared a falsified deed of sale, making it appear that on February
23, 1995 Corpuz sold her land to one Mary Bondoc for P50,000.00. They
caused the registration of the deed of sale, resulting in the the issuance of a
TCT in Bondocs name. About a month later or on March 27, 1995 the trio
executed another fictitious deed of sale with Mary Bondoc selling the
property to the spouses Rufo and Teresa Palaganas for only P15,000.00. This
sale resulted in the issuance of TCT 63466 in favor of the Palaganases.
Nine days later or on April 5, 1995 the Palaganases executed a deed of sale
in favor of spouses Virgilio and Elena Songcuan for P50,000.00, resulting in
the issuance of TCT 63528.
Finally, four months later or on August 10, 1995 the Songcuans took out a
loan of P1.1 million from petitioner Philippine National Bank (PNB) and, to
secure payment, they executed a real estate mortgage on their title. Before
granting the loan, the PNB had the title verified and the property inspected.
On November 20, 1995 respondent Corpuz filed, through an attorney-in-fact,
a complaint before the Dagupan Regional Trial Court (RTC) against Mary
Bondoc, the Palaganases, the Songcuans, and petitioner PNB, asking for the
annulment of the layers of deeds of sale covering the land, the cancellation
of TCTs 63262, 63466, and 63528, and the reinstatement of TCT 32815 in her
name.
Issue: Whether or not petitioner PNB is a mortgagee in good faith
Ruling: As discussed by Atty. Sarona:
No. As a rule, the Court would not expect a mortgagee to conduct an
exhaustive investigation of the history of the mortgagors title before he
extends a loan..
But petitioner PNB is not an ordinary mortgagee; it is a bank.
` Page 8 of 63
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.
In this case is that in the course of its verification, petitioner PNB was
informed of the previous TCTs covering the subject property.
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.
The above information in turn 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: 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.
G.R. No. 196118 July 30, 2014
LEONARDO C. CASTILLO vs. SECURITY BANK CORPORATION
Facts: Leonardo and Leon Castillo are siblings. Leon and his wife own a
poultry business. The spouses later on obtained a loan from Security Bank.
As a security of such loan, they mortgaged 11 parcels of land co-owned by
the Castillo siblings, including Leonardo. Eventually, the spouses failed in
their obligation to Security Bank, thus the mortgages involving the 11 parcels
of land were foreclosed. The spouses however were able to redeem the
properties except the portion which was supposed to be the share of
Leonardo.
Leonardo then filed an action to annul the real estate mortgage. Leonardo
asserts that his signature in the SPA authorizing his brother, Leon, to
mortgage his property was forged/falsified. He claims that he was in America
at the time of its execution. As proof of the forgery, he focuses on his alleged
CTC used for the notarization of the SPA on May 5, 1993 and points out that
it appears to have been issued on January 11, 1993 when, in fact, he only
obtained it on May 17, 1993.
Issue: Whether or not Security Bank is a mortgagee in good faith?
Ruling:
Yes.
Allegations of forgery, like all other allegations, must be proved by clear,
positive, and convincing evidence by the party alleging it. It should not be
presumed, but must be established by comparing the alleged forged
signature with the genuine signatures.11 Here, Leonardo simply relied on his
self-serving declarations and refused to present further corroborative
evidence, saying that the falsified document itself is the best evidence.12 He
did not even bother comparing the alleged forged signature on the SPA with
samples of his real and actual signature. What he consistently utilized as lone
support for his allegation was the supposed discrepancy on the date of
issuance of his CTC as reflected on the subject SPA’s notarial
acknowledgment.
Thus, failing to prove such forgery, the presumption of regularity applies to
the SPA.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Atty. Sarona reads a part of the ruling in toto:
True, banks and other financing institutions, in entering into mortgage
contracts, are expected to exercise due diligence. The ascertainment of the
status or condition of a property offered to it as security for a loan must be a
standard and indispensable part of its operations. In this case, however, no
evidence was presented to show that SBC was remiss in the exercise of the
standard care and prudence required of it or that it was negligent in
accepting the mortgage. SBC could not likewise be faulted for relying on the
presumption of regularity of the notarized SPA when it entered into the
subject mortgage agreement.
G.R. No. 112160 February 28, 2000
OSMUNDO S. CANLAS and ANGELINA CANLAS, vs. COURT OF APPEALS and
ASIAN SECURITY BANK (ASB)
Facts: Canlas and Mañosca decided to venture in business. To raise capital,
Canlas executed an SPA authorizing Mañosca to mortgage 2 parcels of land.
Eventually, Canlas agreed to sell these to Mañosca for 850k. Canlas delivered
the TCTs, and Mañosca issued postdated checks (40k, 460k), but the check
for 460k was not sufficiently funded.
Mañosca was able to mortgage the parcels of land to an Atty. Magno
with the help of impostors who misrepresented themselves as Sps. Canlas
[fake couple]. Mañosca was granted a 500k loan by Asian Savings Bank [ASB]
with the involvement of the fake couple. [TOWARDS THE END OF THE CASE,
it was said that Canlas was with Mañosca when the latter submitted
documents for the loan application. Mañosca showed Canlas several TCTs,
which were collaterals for the loan, and Canlas was confident that his parcels
of land were not involved. However, Mañosca used Sps. Canlas’ parcels of
land as collaterals. A 200k check was released, and Canlas received it as
payment of the parcels of land he sold to Mañosca.
The loan was not paid so the mortgage was foreclosed. Canlas wrote to ASB,
saying that the execution of the mortgage was without their authority, so
steps should be taken to annul the mortgage. Canlas also wrote the sheriff to
cancel the auction sale; however, the sale pushed through.
Sps. Canlas instituted a case for annulment of deed of real estate
mortgage [REM], with prayer for the issuance of a writ of preliminary
injunction. RTC issued an order restraining the sheriff from issuing the
Certificate of Sheriff’s Sale, and it annulled the REM. CA reversed RTC,
holding that the REM was valid, that Sps. Canlas are not entitled to relief
because of their negligence. CA said ASB exercised due diligence in granting
loan application, and that it did not act with bad faith.
Issue: Whether or not the bank is a mortgagee in good faith
Whether the Doctrine of Last Clear Chance is applicable
Ruling:
As stated by Atty Sarona from the case in toto:
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 supposed 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.
Under the doctrine of last clear chance, which is applicable here, the
respondent bank must suffer the resulting loss. In essence, the doctrine of
` Page 9 of 63
last clear chance is to the effect that where both parties are negligent but
the negligent act of one is appreciably later in point of time than that of the
other, or where it is impossible to determine whose fault or negligence
brought about the occurrence of the incident, the one who had the last clear
opportunity to avoid the impending harm but failed to do so, is chargeable
with the consequences arising therefrom. Stated differently, the rule is that
the antecedent negligence of a person does not preclude recovery of
damages caused by the supervening negligence of the latter, who had the
last fair chance to prevent the impending harm by the exercise of due
diligence.
Here the court emphasized that the degree of diligence required of banks is
more than that of a good father of a family; in keeping with their
responsibility to exercise the necessary care and prudence in dealing even on
a registered or titled property. The business of a bank is affected with public
interest, holding in trust the money of the depositors, which bank deposits
the bank should guard against loss due to negligence or bad faith, by reason
of which the bank would be denied the protective mantle of the land
registration law, accorded only to purchasers or mortgagees for value and in
good faith.
In the case under consideration, from the evidence on hand it can be
gleaned unerringly that 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.
As stated by Atty Sarona from the case in toto:
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 supposed 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.
As applied in this case, in the DOCTRINE OF LAST CLEAR CHANCE
The respondent bank must suffer the resulting loss. In essence, the doctrine
of last clear chance is to the effect that where both parties are negligent but
the negligent act of one is appreciably later in point of time than that of the
other, or where it is impossible to determine whose fault or negligence
brought about the occurrence of the incident, the one who had the last clear
opportunity to avoid the impending harm but failed to do so, is chargeable
with the consequences arising therefrom.
Stated differently, the rule is that the antecedent negligence of a person
does not preclude recovery of damages caused by the supervening
negligence of the latter, who had the last fair chance to prevent the
impending harm by the exercise of due diligence.
A contract of mortgage must be constituted only by the absolute owner on
the property mortgaged; a mortgage, constituted by an impostor is void.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Considering that it was established indubitably that the contract of mortgage
sued upon was entered into and signed by impostors who misrepresented
themselves as the spouses Osmundo Canlas and Angelina Canlas, the Court is
of the ineluctible conclusion and finding that subject contract of mortgage is
a complete nullity.
Atty. Sarona reviews: Again, take note of the Doctrine of Mortgagee in Good
Faith. This does not apply when the title is in the name of the lawful or
rightful owner and the mortgagor is a person different, pretending to be the
owner of the property.
EXCEPTIONS to the Doctrine of Mortgagee in Good Faith:
1.Where the purchaser or mortgagee has knowledge of a defect or lack of
title in the vendor
2.The mortgagee does not directly deal with the registered owner of real
property. or
3.The mortgagee was aware of sufficient facts to induce a reasonably
prudent man to inquire into the status of a property in litigation.
4. When the purchaser or mortgagee is a bank or financing institution, the
general rule that a purchaser or mortgagee of land is not required to look
further than what appears on the face of the title does not apply. A
mortgagee-bank is expected to exercise greater care and prudence before
entering into a mortgage contract even those involving registered lands in its
dealings than private individuals as their business is impressed with public
interest.
With regard to REGISTRATION OF MORTGAGE:
Registration of mortgage does not to its validity. Proceedings for registration
do not determine validity of mortgage or its effect.
Once a mortgage has been signed in due form, the mortgagee is entitled to
its registration as a matter of right. So we have the case of
G.R. No. L-13313 April 28, 1960
AGRICULTURAL CREDIT COOPERATIVE ASSOCIATION OF HINIGARAN vs.
ESTANISLAO YULO YUSAY
Facts:
Rafaela Yulo executed in favor of ‘Agricultural” a mortgage. A motion was
presented to the court by ‘Agricultural’ demanding the surrender of the
owner's duplicate certificate of title that he may annotate said mortgage at
the back of the certificate. And register it. Estanislao Yusay, a part owner of
the lot, opposed the petition on the ground that he is owner of a part of the
property in question; that the granting of the motion or the registration of
the mortgage would operate to his prejudice, as he has not participated in
the mortgage cited in the motion.
Issue: Whether or not he registration and annotation of the mortgage passes
on its invalidity or effect
Ruling: as discussed by Atty. Sarona
No. The proceeding to register the mortgage does not purport to determine
the supposed invalidity of the mortgage or its effect. 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.
` Page 10 of 63
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 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.
February 23 – Cabreros
Recap:
Doctrine of a mortgagee in good faith. Take note of the general rule
and the exceptions therein. Among which, remember the diligence observed
by banking institutions, more that of a good father of a family (inaudible).
Now with regard to registration, again, we also have to emphasize that it is a
mere ministerial act, since again noh, the register of deeds has no discretion
to refuse registration on such mortgage. Moreover, registration is not a
requirement for the validity of the mortgage. Even if it’s registered, it can
still be subsequently questioned if all the essential requisites for a valid
mortgage are not present.
Now as discussed in persons and sales. If you recall your person under
the family code, whether it’s absolute community or conjugal partnership of
gains, the requirement for any disposition or encumbrance requires the
written consent of the other spouse or the authority of the court otherwise
the sale will be considered void. Notice there the phrase noh, “any
disposition or encumbrance”. So disposition, mahulog yung sale. What about
encumbrance? It will include mortgages. So in other words, if what was
involved is a conjugal property or covered by absolute community, there
must be written consent of the other spouse, otherwise the said
encumbrance will be void. So we have the case of Ross vs. PNB.
ROSS vs. PNB
Q: Oh since what you have here is an encumbrance, what is required here
under the law?
A: The consent of the wife.
Q: What kind of consent? Is it required to be in writing? What was
applicable here?
A: At that time, the Civil code was applied.
Q: Why?
A: The mortgage took place on 1983.
Q: What is required under the civil code for a valid mortgage?
A: The husband may alienate the conjugal property with the consent of the
wife
Q: We’re not talking about alienation here. Alienation lang ba?
A: And encumbrance.
Q: What is the effect if the wife will not give her consent to such
encumbrance?
A: It will only be voidable. Meaning it is valid until annulled.
Q: What are the requisites for it to be annulled..without the consent of the
wife? When can you question it?
A: Within 10 years during the execution of the contract and during the
existence of the marriage.
Q: So in this instance, did the wife give her consent to the mortgage?
A: No maam.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Again noh, take into consideration that mortgage is regarded as an
encumbrance. In this case the Civil Code was applied because the
encumbrance took place before the effectivity of the Family Code. The Civil
Code provides that the husband cannot alienate or encumber any property
without the consent express or implied of the wife. Should the husband do
so, the contract is voidable.
Again noh, make a distinction between the civil code and the family
code. In this case, do also take note that the wife or the spouse who did not
give consent can go to court within:
1.) 10 years within the execution of the contract; and
2.) During the existence of the marriage.
However, in this instance, the Supreme Court ruled that the documents
were acknowledged by the notary public and therefore there is a prima facie
evidence of a valid execution thereof and cannot be disproved by the mere
denial of the wife. Moreover, the petitioners also admitted in their
memorandum that Ross forged the wife’s signature, to which Ross cannot
use that as a defense for the nullity of the contract because remember the
spouses were who questioned and filed for the annulment of the mortgage.
Now, what about if the husband already died? What is the right of the
wife with regard to the property? Can she mortgage the same? Under the
laws on succession, she can validly mortgage, alienate, or encumber her
proportionate share therein. So remember this is a conjugal property. At the
time of the death, the surviving spouse is entitled to her ½ share. To which
she can subject her undivided share or interest in the property, encumber it
and have it mortgaged and subsequently have it registered to bind 3rd
persons. Now do take note in these instances, without the consent of the
wife or absence of the consent of the other spouse, the status that is
affected is the accessory contract. What is considered void is only the
accessory contract that is the mortgage and not the loan. The principal
obligation/loan is still valid and standing. What is lost is the right of the
creditor to foreclose the mortgage. And in fact, the mortgage executed by
the other spouse can be used as an evidence of the existence of the
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)
Okay. So again noh, a registered mortgage creates a real right. It is
inseparable from the property and therefore being a real right it is
enforceable against the whole world. The mortgage itself attaches to the
property and therefore the mortgage follows the property wherever it goes
notwithstanding any change in the ownership. The personality of the owner
is disregarded and whoever acquires or subsequently acquires the property
carries with him the obligation to observe the mortgage of course provided
the mortgage is registered. Subsequent purchasers must then respect the
registered mortgage…even in the absence of registration but has personal
knowledge of such mortgage. So there is no prohibition for the mortgagor to
sell his property to another person because in a mortgage again walang
transfer of ownership. Now, if he sells it to another person and prior to the
sale, the property was mortgaged which was duly registered. If the
mortgagor fails to pay his obligation, the creditor mortgagee will be entitled
to foreclose the property and the subsequent purchaser cannot question the
said foreclosure. He cannot say “hindi na yan sa mortgagor/debtor ang may
ari” “akin na ito”. Again, as long as the mortgage was registered, the
subsequent purchaser must respect the mortgage to which the mortgagee is
entitled to foreclose the same notwithstanding that the property was
already sold to another person.
However, of course the subsequent buyer cannot be personally liable
for any subsequent (inaudible) Kung baga yung sa kanya lang, to the extent
lang nung property na nasa kanya. Hindi na siya pwede habulin for any
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deficiency of the principal debtor as to the obligation unless of course there
is a novation wherein the subsequent purchaser, will now be the one who
will pay the principal obligation.
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)
Ok so this is another provision showing that a mortgage is inseparable
from the property. This provision tells us what the extent of this mortgage is.
The mortgage extends to all its accessions, improvements, income, as well as
proceeds of insurance if the property is subsequently destroyed. It also
extends to the just compensation received if it is subsequently expropriated.
How about the fruits? If the fruits were harvested before the obligation is
due and demandable it will not be part of the mortgage that will be
foreclosed. But if it is still attached to the property when the obligation
becomes due then part siya sa mortgage. To exclude the fruits, accessions,
etc among others there must be an express stipulation in the mortgage
contract. Otherwise the following are deemed included. Accrued and paid
interest etc. belonging to the mortgaged debtor installed. Also includes all
objects permanently attached even if placed after the execution of the
mortgage. Now in this instance, included in the foreclosure unless otherwise
excluded.
Now we also have to distinguish this becayse 2127 tells us what is the
extent of the mortgage. Ano yung pwede iforlcose. So I think before we
mentioned after acquired properties, improvements subsequently attached
to the property. So again no we apply 2127. What are the obligations
covered by the mortgage. As a general rule noh an action to foreclose the
mortgage must be limited to the amount mentioned therein. However, as an
exception, the amount as a consideration in a contract of mortgage do no
limit the amount for which the mortgage may stand as long as there is an
intention to secure the fulfillment of future loans, advancements, and other
indebtedness.
PRODUCERS BANK vs. EXCEALSA
Facts: Excelsa applied for a credit advance with Producers which was
supported by a letter of credit issued by Kwang Ju Bank. Producers later
approved the credit line. Prior to this, Excelsahad already obtained a loan
with Produces secured by a real estate mortgage over the properties of
Excelsa. Thereafter, Excelsa presented to Producers drafts drawn under the
letter or credit from Kwang Ju. Producer purchased the drafts and export
documents. Producers demanded for the payment for the equivalent of the
export documents they have already purchased. Excelsa was not able to pay
so Producers extrajudicially foreclosed the mortgaged real properties.
Excelsa argues that the REM over their properties was merely to secure the
existing debts and not their future debts they have accumulated.
Issue: WON the real estate mortgage also served as security for the drafts
from Kwang Ju Bank, or future debts.
Ruling: Yes, there was a dragnet clause.
The court held that dragnet clause operates as convenience to
the parties so that there would be no need to execute an additional security.
As to the validity of the foreclosure, it was held to be valid. The requirement
of publication was complied with. Xxx
PRUDENTIAL vs. ALVIAR
Facts: Spouses Alviar are the registered owners of a piece of land and they
executed a REM in favor of Prudential to secure the payment of a loan worth
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Php250,000. For this, they executed a promissory note secured by a REM
containing a dragnet clause.
Alviar executed another promissory note signifying that it was secured by a
hold-out agreement. Another one was executed by the spouses with a clean
face-out deed of assignment. The spouses paid the first loan for Php250,000
covering the first security which was secured by the REM. The bank then
moved for the extrajudicial foreclosure of the property since according to
them, the spouses had a total obligation of Php1M for their obligations
covered under the 3 promissory notes executed by the spouses.
Spouses Alviar filed for a writ of preliminary injunction claiming that they
have already paid the principal loan of Php250,000 and thus the foreclosure
was invalid. The bank maintains that because of the dragnet clause in the
REM, it expressly covers not only the Php250,000 but also the 2 other
promissory notes.
Issue: WON the dragnet clause applies even in the subsequent advancement
for which other securities were intended
Ruling: The dragnet clause will not be applied using the reliance on security
test. The parties having conformed to the blanket mortgage clause or
dragnet clause, it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be secured by other
securities, as the subsequent loans will be secured by the first mortgage.
In other words, the sufficiency of the first security is a corollary component
of the dragnet clause. But of course, there is no prohibition, as in the
mortgage contract in issue, against contractually requiring other securities
for the subsequent loans. Thus, when the mortgagor takes another loan for
which another security was given it could not be inferred that such loan was
made in reliance solely on the original security with the dragnet clause, but
rather, on the new security given.
Q: Did the Supreme Court say that the dragnet clause will not apply to
subsequent securities? What is the exception? Isn’t it that the Supreme
Court discussed 2 schools of thought? Which one did the Supreme Court
hold as controlling?
A: The Supreme Court relied on the Security Test.
Q: What is this test?
A: According to this test maam, the parties conform to a certain dragnet
clause which implies an understanding that subsequent loans need not be
secured by other securities. The subsequent loans would be secured by the
first mortgage covered by the dragnet clause. However, there was no
prohibition for them to secure the subsequent loans with other securities.
Q: So does that mean that it will not be covered by the dragnet clause
because it was covered by separate securities?
A: The Supreme Court did not say that it will not be applicable to subsequent
loans secured by different properties. The SC further held that the party
must first exhaust the corresponding securities and if such security is
insufficient, then that is the time that dragnet clause will be used as a
defense to foreclose the property.
Okay. So take note of the 2 schools of thought that were discussed
here by the Supreme Court. Again, what are the facts here? There was
initially a real estate mortgage containing a blanket mortgage clause. The
Supreme Court upheld its validity and existence. Subsequent to that
mortgage contract, there subsequent contracts and securities entered into
like hold out agreements, different deeds of assignment, chattel mortgage.
The Supreme Court here discussed, that such dragnet clause may still apply
to subsequent loans even if they are secured by different properties.
However, as mentioned, the Supreme Court emphasized na before habulin
yung mortgage contract under the dragnet clause, there must first be
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exhaustion the properties used as collateral specifically for this separate
obligations. Kung kulang, and there is a deficiency that’s the time that you
can foreclose the mortgage containing the dragnet clause. So with that take
note of the security test which was more preferred by the Supreme Court.
You have a valid mortgage clause, and then subsequent loans are entered
into with separate collaterals or security.
PCSO vs NEW DAGUPAN
Facts: Purita Peralta is a registered owner of a parcel of land. To
secure payment for lottery tickets, she mortgaged the land. There was a
stipulation that it cannot be sold during the lifetime of the mortgage.
However, Peralta sold her property to New Dagupan. When PCSO found out
about this, it caused the annotation of the mortgaged lien on the TCT of the
property. It also applied for extrajudicial foreclosure over the land and
obtained a certification that the land belonged to it. New Dagupan filed for
the annulment of TCT in the name of PCSO and contended that it was a
buyer in good faith. PCSO argues that it had the authority to foreclose the
property in lieu of the unpaid tickets obtained by Galang.
Issue: WON there was a dragnet clause in the REM
Ruling: No. It is clear in the mortgage executed that it only
covered the Php450,000 amount of the tickets obtained by Galang. It was
found in the records that this was already paid by Galang, as supported also
by testimonies of the PCSO officers. This means that the mortgaged property
no longer covers as security for future debts that may incurred by Galang.
Q: What provision was considered by the court in stating that there was no
dragnet clause but covered a specific obligation?
A: That part where “Upon the full payment of the tickets, they will be
discharged from their obligation” The use of the terms “outstanding”
“unpaid” militate against PCSO’s claim that future ticket purchases are also
secured. The ambiguity and the phrase after each draw and other provisions
which mention with particularity the amount 450,000 php outstanding
balance secured by the subject mortgage should be construed against PCSO.
Anent the issue regarding the cancellation that was argued by PCSO, the
court ruled also that there was no need for the cancellation of the said
mortgage because at that time it was registered, there was no mortgage to
speak of. It was already terminated when they paid the 450,000 php.
Q: Alright. So with that who has a better right over the property?
A: New Dagupan has a better right.
So first we take into consideration. Did the mortgage contract here executed
in favor of PCSO cover future obligations? The Supreme Court said there’s no
dragnet clause here. The use of the terms outstanding and unpaid again
militate against the claim that future purchases are likewise construed. And
since this was also a contract of adhesion, it was really construed against
PCSO. So with that, since there was already full payment of the obligation in
that real estate mortgage contract, it did not cover subsequent obligations of
Peralta in favor of PCSO.
Now with regard to registration, again noh, do take note that PCSO also did
not mortgage the said property until thereafter. It was only on May 20 1992
that PCSO registered its mortgage and the at that time New Dagupan had
already purchased said property under a conditional sale. So here, New
Dagupan was considered as a purchaser in good faith and therefore had a
better right that PCSO.
So again noh take note of the purpose of the dragnet clause also known as
blanket mortgage clause provides continuing dealings avoiding the expense
and inconvenience of executing new security of each new transaction. It is
specifically phrased to subsume all debts from the past and future. This is
actually similar to continuing guaranty or continuing suretyship. For its
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
interpretation, it is strictly construed and carefully scrutinized more so if
what you have is a contract of adhesion prepared by the mortgagee.
ASIA TRUST V. CARMELO TUBLE
FACTS: Carmelo Tube, who served as the vice president of
Asiatrust Development Bank, availedhimself of the car incentive plan and
loan privileges offered by the bank. The arrangement was made to appear as
a lease agreement requiringonly the payment of monthly rentals.
Accordingly, the lease would be terminated in case of employee’s
resignation or retirement prior to full payment of the price. Meanwhile, as
for theloans, he obtained 3 separate loans.
The first loan involved a real estate mortgage loan evidenced by a
promissory note 0142. The second loan was a consumption loan (P/N 0143)
and the third loan a salary loan. When he resigned, he was given the option
to either return the vehicle without any further obligation or retain the unit
and pay its remaining book value. His obligations, aside from the purchase or
return of the vehicle, are the Php100,000.00 as consumption loan,
Php421,800.00 as real estate loan and Php16,250 as salary loan.
On the other hand, the petitioner owed Tuble hispro-rata share in
the DIP, which was to be issued after the bank had given the resigned
employee’s clearance, and Php25,797.35 representing his final salary and
corresponding 13thmonth pay.
Tuble claimed that since he and the bank were debtors and
creditors of each other, theoffsetting of loans could legally take place.
However, the bank sent him a demand letter obliging him to pay his debts
and to return the vehicle. As for the real estate loan, a petition for extra-
judicial foreclosure was filed but was redeemed by Tuble for
Php1,318,401.91. After payment of such amount, Tuble questioned how the
foreclosure basis of Php421,800.00 ballooned to Php1,318,401.91 in a
matter of 1 year.
ISSUE/S:
1. W/N Asiatrust should recover the other obligations of Tuble to
the real estate mortgage.
2. W/N Asiatrust is justified in reposing the 18% annual interest of
the redemption price by way of the dragnet clause.
HELD: In Spouses Romero v. Court of Appeals, SC held that the
mortgage indebtedness was extinguished with the foreclosure and sale of
the mortgaged property, and that what remained was the right of
redemption granted by law.
Consequently, since the Real Estate Mortgage Contract is already
extinguished, petitioner can no longer rely on it or invoke its provisions,
including the dragnet clause stipulated therein. It follows that the bank
cannot refer to the 18% annual interest charged in Promissory Note No.
0143, an obligation allegedly covered by the terms of the Contract.
Neither can the bank use the consummated contract to collect on
the rest of the obligations, which were not included when it earlier instituted
the foreclosure proceedings. It cannot be allowed to use the same security
to collect on the other loans. To do so would be akin to foreclosing an
already foreclosed property.
Q: So with that we have a valid mortgage with dragnet clause?
A: Yes. Issue is won they may still use the same security in order to cover the
other loans.
So here, first there was a loan. With the mortgage containing the
dragnet clause and the dragnet clause is valid. Subsequent to that other
loans were entered into such as the construction loan. Now with the first
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loan, the debtor in that instance failed to pay his obligation, the mortgage
covering the first loan was foreclosed. And when the property was thereafter
sold, nag bayad ng redemption price, notwithstanding that by virtue of the
forclosure the REM was extinguished because that foreclosure had the
purpose of extinguishing the principal obligation. So accessory follows the
principal. With the extinguishment of the mortgage, wala na rin yung
dragnet clause which could have covered the consumption loan. With the
the consumption loan or the same property cannot again answer for the
obligation in a subsequent consumption loan.
In foreclosure, the mortgaged property is subjected to the proceedings
for the satisfaction of the obligation. The mortgage was extinguished with
the foreclosure and sale of the mortgaged property and what remains is the
right of redemption provided by law. Since the mortgaged contract is already
extinguished, the bank can no longer rely on its provisions even if it included
the dragnet clause. The bank cannot refer to the % on interest which was
allegedly covered by the terms of the contract. Neither can the bank use the
consummated contract on the rest of the obligations which are not included
when there was a foreclosure proceeding. It cannot be allowed to use the
same security to collect from the other loans for to do so would be akin to
foreclosure of an already foreclosed property. Rather than relying on an
expired contract, the bank should have collected on the excluded loans by
instituting the proper actions by action to recover sums of money. Petitioner
should have ran after Tuble separately instead of the property used to
secure the debts. The bank here cannot alter that right by imposing
additional charges and the power to decide whether or not to foreclose is
also the prerogative of the mortgagee. But one a decision is made, which is
to have the property mortgaged foreclosed, the act shall be governed by
mortgage laws.
The dragnet clause does not justify the imposition of the 80% interest
but in this instance there was no specific mention of interest to be added in
case of either default or redemption. Also take note again the Supreme
Court discussed the reliance on the security test.
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)
So the subject in this article is the mortgaged credit. The right of the
mortgagee itself over the property may be alienated or assigned to a 3rd
person in whole or in part.
If the creditor mortgagee assigns his right to a 3rd person what is the effect?
It transfers his right to a 3rd person. If the debtor fails to pay when the
obligation it due, the assignee can foreclose the property subject of the
mortgage. Do remember here that alienation or transfer of the mortgaged
credit is valid even if it is not registered.
Now how about the mortgaged property itself? Can the mortgagor alienate
the same? Can he sell it? Yes. We have seen that in the cases because again
in a mortgage there is no transfer of ownership, in fact as we will see later on,
a stipulation saying that upon non-payment the property will be
automatically forfeited in favor of the mortgagee is Void. Moreover, as we
will see later, a stipulation which prohibits a mortgagor from transferring
property to another person would also be considered void.
VEGA vs. SSS
FACTS: Magdalena Reyes owned a piece of titled land. On August 17, 1979,
she got a housing loan from SSS for which she mortgaged her land. Late
1979, Reyes asked the Sps. Vega to assume the loan and buy her house and
lot since she was to emigrate. An employee at SSS said, however, that SSS
did not approve of members transferring their mortgaged homes.
But the Sps Vega (Vegas) could make a private arrangement with Reyes
provided that they pay the monthly amortizations on time. Vegas agreed for
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Reyes to execute in their favor a deed of assignment of real property with
assumption of mortgage and paid Reyes P20,000 after she undertook to
update the amortizations before leaving the country. The Vegas took
possession of the house in January 1981. Reyes did not execute the deed of
assignment.
She left the country and left her sister (Julieta Ofilada) a special power of
attorney to convey ownership of property. Sometime between 1983 and
1984, Ofilada executed the deed of assignment in favor of the Vegas, kept
the original and gave the Vegas two copies, one to be given to the Home
Development Mortgage Fund and kept the other. A storm in 1984 resulted in
flood and destroyed their personal copy.
ISSUE/S: Whether Reyes validly sold her SSS mortgaged property to the
Vegas given a provision in the mortgage agreement that she could not do so
without the written consent of SSS.
HELD: Yes. The Vegas were able to present adequate proof of Reye’s sale of
the property to them. The Vegas proved the loss of the deed of assignment
in their favor and what it contained, they offered strong corroboration of the
fact of Reyes’ sale of the property to them. They took possession of the
house and lot after they bought it.
They also paid for the amortizations to the SSS. And when SSS wanted to
foreclose the property, the Vegas sent a manager’s check for the balance of
the loan. Article 1237 of the Civil Code cannot apply in this case since the
debtor (Reyes) consented to the transfer of ownership of the mortgaged
property to the Vegas.
Although Paragraph 4 of the mortgage agreement which states that Reyes
must secure the consent of SSS before selling the property, is valid and
binding in the sense that SSS cannot be compelled to recognize the sale
before the loan is completely paid, it does not absolutely forbid her, as
owner, from selling the property while the loan remained unpaid. Such
stipulation is against public policy, being an undue impediment or
interference on the transmission of property.
Article 2129 of the Civil Code gives SSS the option of collecting from the third
person in possession of the mortgaged property.
So you take note of this case because this is very common with regard
to financial institutions like those persons who borrow from pag-ibig or sss
then they execute a REM in favor of said institutions however later on it
turns out di pala nila kaya bayaran. So what they do is that they enter into a
contract of sale with the assumption of mortgage in favor of a 3rd person,
which is what happened in this case. Now, notice also here that there was a
provision in the mortgage contract that consent of sss (mortgagee) was
required for the sale thereof. This cannot be interpreted as absolutely.
February 28 – Nitura
REVIEW: We already discussed Article 2130.
Article 2130. A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void. (n)
Any stipulation forbidding the owner from alienating the mortgaged
property will be void. We have emphasized this in the case of SSS vs. Vega, a
stipulation requiring the consent will circumvent what is required in Art.
2130 to which, in effect, nevertheless the said sale will be valid as held in the
case of Vega vs SSS.
Now also, we have pointed out a second mortgagor is entitled to purchase
the property or pay the first mortgagee for the release of the first mortgage.
Usually, the second mortgagee, if he is really interested with the property
` Page 14 of 63
will pay the first mortgagee so that he would now be the preferred
mortgagor.
Remember the second mortgage is still valid although it does not usually
happen that often because the mortgagee will hesitate to have a property
that has already been previously mortgaged. Pero pa rin siya and being a
mortgagee, he will be considered as one having an interest to the obligation
to which he can force the creditor to accept the payment.
Now Art. 2130, a stipulation forbidding the owner from the selling the
property shall be void. Any agreement with regard to the right to first refusal
is valid. If the mortgagor would want to sell the property, and then there is
an agreement with the mortgagee that if he decides to do so he may first
offer it to the creditor-mortgagee, then such is considered as a valid
stipulation and that is not contrary to Art. 2130.
Now, we have also emphasized last time that the registration of the
mortgage is required to bind third persons. Such registration serves as a
constructive notice to the whole world and as a General Rule he is not
obliged to look beyond the title. Of course we have to take note of the
exceptions. If the same is not registered, the mortgage can nevertheless
become valid between the parties but not as against third person.
It is also possible that mortgages are not registered but third persons would
still be bound by such mortgage if they have actual knowledge. Now we have
the case of Pineda.
Pineda vs CA, GR 114172, August 25, 2003
Reporter: Suico
Facts (from cdasia): On 4 January 1982, the Spouses Virgilio and Adorita
Benitez mortgaged a house and lotcovered by TCT 8361 in favor of Juanita P.
Pineda and Leila P. Sayoc. Spouses Benitez delivered TCT 8361 to Pineda, but
did not register the said mortgage with the Register of Deeds. Later, with the
consent of Pineda, Spouses Benitez sold the houseto Olivia G. Mojica. Mojica,
in turn, filed a petition for the issuance of a second owner's duplicate of TCT
8361 by alleging that it was lost. Thus, the trial court granted the petition.
On 12 December 1983, spouses Benitez sold the lotcovered by TCT 8361 to
Mojica, and TCT 13138 in replacement of TCT 8361 was issued in the name
of Mojica. On 22 February 1985, Mojica mortgaged the said property to
Teresita A. Gonzales. The latter caused the annotation of said mortgage on
TCT 13138. On 8 May 1985, Pineda and Sayoc filed a complaint for the
cancellation of the second owner's duplicate of TCT 8361. On 18 August 1986,
they caused an annotation of notice of lis pendens on the original of TCT
8361 with the Register of Deeds. Thereafter, the trial court rendered
judgment declaring the second owner's duplicate of TCT 8361 as null and
void.
Meanwhile, Mojica defaulted in paying her obligation to Gonzales, hence,
the latter extrajudicially foreclosed the mortgage, purchased the said
property at public auction, and for failure of Mojica to redeem, consolidated
its title. Consequently, the Register of Deeds cancelled TCT 13138 and issued
TCT 16084 in the name of Gonzales. On appeal, the Court of Appeals
affirmed the trial court's decision. However, the writ of execution was
returned unsatisfied since the Register of Deeds had already cancelled TCT
8361 and issued TCT 16084 in the name of Gonzales. Later, the trial court
issued an order declaring void the original and the owner's duplicate of TCT
16084 in the name of Gonzales. When Gonzales raised this issue to the Court
of Appeals, the appellate court declared the said order of the trial court as
null and void. Hence, this petition.
Issue1: WON Pineda can still validly sell the subject property in favor of
Mojica considering that it was mortgaged. YES
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Held1: SC said that Spouses Pineda still have the right to sell the property
since a mortgage is simply an encumbrance on the property. It is still the
spouses Pineda who are the owners of the property
Issue2: Can Gonzales be considered a purchaser in good faith? YES.
Held2: SC said that Gonzales is a purchaser in good faith because Gonzales
does not have any knowledge of the mortgage and also that the said
mortgage was not registered. Since it was not registered, it cannot bind 3rd
persons as registration is required to bind third persons.
Q: But isn’t it that the title that was issued by Mojica was declared void by
the court?
A: Yes, ma’am.
Q: Why was it declared void?
A: Because in acquiring the title, Mojica presented the second owner’s
duplicate copy which… ≠
Q: Again again now, why is it considered void? Why is the title in favor of
Mojica wherein the same title was presented to Gonzales for the Mortgage
considered void?
A: It is void ma’am because in acquiring the same TCT, Mojica presented the
deed of sale and the second owner’s duplicate copy which Mojica acquired
through fraud.
Q: What was the allegation regarding the second owner’s duplicate title, it
was in the name of?
A: In the name of Spouses Pinedas, ma’am.
Q: How did Mojica acquire the said title?
A: On February 9 mam, when the lot was sold to him, Mojica alleged that the
owner’s duplicate of title was delivered to him. However, in acquiring the
second owner’s duplicate, Mojica alleged that it was lost.
Q: Where is the title?
A: It was with Pineda and Sayoc, Ma’am.
Q: What is the effect of the void title in relation to the sale in favor of
Mojica?
A: The SC held that the nullity of the said title does not affect the validity of
the sale in favor of Mojica since there was an execution of a deed of sale
which serves as an actual or physical delivery in favor of Mojica so there is a
transfer of ownership.
Q: Now since the title was void and the mortgage of Gonzales was
registered in the said void title, did it not affect the mortgage in favor or
Gonzales?
A: The SC held ma’am that the annotation of the mortgage on the void title
does not mean that the mortgage was also void but to be considered as a
valid mortgage… the annotation of the mortgage was considered an
annotation in good faith.
Atty. Jazzie: So here, take note, Benitez mortgaged the property in favor of
Pineda and Sayoc and title was delivered to Pineda. Thereafter, Benitez sold
the property to Mojica. The sale is valid because the mortgage was merely
an encumbrance and it does not divest the mortgagor to sell the property.
Now do take note that the mortgage in favor of Pineda and Sayoc was not
registered. So when Mojica applied for the issuance of a new title in favor of
the alleged lost one, but actually hindi naman siya nawala, the new title that
was issued was actually void because the court had no jurisdiction to issue
the said title because the title was not actually lost.
Notwithstanding such fact, SC emphasized that the sale is nevertheless valid
because you also have to consider that what is void is only the TCT and not
` Page 15 of 63
the title over the property. Title in favor of Mojica was validly transferred by
virtue of the execution of the deed of sale as Certificate of Title is not
equivalent to title itself. So there was a valid transfer of ownership to Mojica
to which since Mojica is the owner, she can now validly mortgage the
property in favor of Gonzales.
The prior mortgage in favor of Pineda and Sayoc did not prevent the spouses
Benitez to sell the property to Mojica because a mortgage is merely an
encumbrance and thus will not extinguish the title of a debtor who does not
lose his principal attribute as the owner. Pointing out Art. 2130, the law even
considers void a stipulation prohibiting the owner from selling the
mortgaged immovable. However, the nullity of the second owner’s title did
not affect the validity of the sale between Benitez and Mojica. The rule is
that a mortgage annotated in a void title is valid.
So the mortgage is valid if it was registered in good faith. Gonzales registered
the mortgage in good faith as he had no knowledge of the previous
mortgage in favor of Pineda and Sayoc considering that the same was not
registered. To bind third parties to an unregistered encumbrance, the law
requires valid notice. In this instance, no registration, no actual notice.
When Gonzales purchased the property in the action sale, Pineda already
annotated the lis pendens. However, the mortgage was validly registered
prior to the annotation of the lis pendens. Pineda and Sayoc were considered
negligent in not registering their mortgage. Gonzales on the other diligently
exercised her right to foreclose the property. The unregistered mortgage of
Pineda and Sayoc was extinguished upon foreclosure of Gonzales’ mortgage.
Even assuming assuming for the sake of argument that the latter mortgage
was unregistered. Between two unregistered mortgagees both being in good
faith, the first to foreclose mortgage prevails over the other. Of course while
Pineda and Sayoc cannot foreclose the property anymore, the mortgage is
deemed extinguished, the principal obligation still exists to which said Pineda
and Sayoc can still go after Benitez for the unpaid principal obligation. The
TCT issued in the name of Gonzales is considered as valid.
So again registration is required to bind third persons. With regard to the
sale, it is valid despite the mortgage even if the mortgage was registered and
the sale was not registered. But if the sale is registered, the subsequent
purchaser must the sale. And what if the effect if the property is
subsequently foreclosed? If it is registered, the property will be foreclosed
and the mortgagee will have a better right over the subsequent purchaser
but of course the purchaser cannot be held be held liable for any further
deficiency.
With regard to dragnet clause which we discussed last time and with the
dragnet clause, we have a mortgage which can cover future obligations
which must be clearly stipulated in the Real Estate Mortgage (REM). Do not
confuse dragnet clause from after acquired properties. Dragnet clause, and
scope niyan, future obligations with the same property mortgaged, but it can
cover past and future obligations. With regard to after acquired properties,
ang scope ng mortgage, ano ang pwedeng I-foreclose ng mortgage?
General Rule: After acquired properties cannot be mortgaged because the
requirement is that at the time of the mortgage, you must be the absolute
owner thereof. You cannot execute a REM that any property that I own from
this day forward will be and can be used as a security for my obligation to
you. Hindi pwede. You must specify the property.
Exception: However, if what you have as your mortgage are inventories, that
could be a valid subject matter for mortgage wherein the inventory will be
replenished from time to time. But these are chattel mortgage kasi personal
property man siya. So at the time that you executed the mortgage, siyempre
iba man ‘yung inventories mo. When the time it was already due and
demandable, nabenta na ‘yung stocks at the time that the mortgage was
executed but nevertheless, if is provided that the inventory will cover
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
whatever you have in your store, that would be considered valid under after
acquired properties.
And we have also discussed last time, what is the extent. ‘di ba fruits,
improvements among others. Let’s have Article 2131.
Article 2131. The form, extent and consequences of a mortgage, both as to
its constitution, 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.
You may have notice that there are only few Civil Code provisions with
respect to REM. So, with regard to extrajudicial foreclosure, we have a
special law, Act. 3135. We also have the General Banking Law of 2000. We
could also apply the Land Registration Law and with regard to judicial
foreclosure, we have Rule 68 of the Rules of Court.
Now what happens if the debtor fails to pay his obligation?
The creditor of mortgagee has two rights:
1. He can foreclose the property; or
2. He can file a collection for sum of money.
Now these remedies are alternative in nature. Of course the
foreclosure may be extrajudicial or judicial depending on the circumstances
of each case. But once he chooses foreclosure, he cannot file an action for
collection of sum of money because again these are alternative in nature.
Otherwise if may collection and foreclosure, applying your civil procedure,
you can file a motion to dismiss for splitting the cause of action.
So with that, we have foreclosure. Foreclosure is a remedy available to the
mortgagee by which he subjects the mortgaged property to the satisfaction
of the obligation to secure which the mortgage has given (sic). Mortgage
may be foreclosed only when the debt remains unpaid at the time it is due.
Do take note that foreclosure proceedings have in their favor the
presumption of regularity and the burden of evidence to rebut the same is
within the party that seeks to challenge the said proceedings.
We have two (2) kinds of foreclosure:
1. Judicial Foreclosure - is a foreclosure filed before the court and is
governed by Rule 68 of Special Civil Actions.
2. Extrajudicial Foreclosure - we will take more of extrajudicial foreclosure
under Act 3135. This foreclosure is done without the aid of the court.
Meaning walang hearing at judge, this is through the clerk of court or the
sheriff.
However, let us take into consideration judicial foreclosure so that we can be
able to distinguish it from extrajudicial foreclosure. Under judicial
foreclosure we have Rule 68. What is important and what I want you to take
note in judicial foreclosure is what we have there which is what we call
Equity of Redemption. We have have the case of Spouses Rosales.
Spouses Rosales vs Spouses Suba, GR 137792, August 12, 2003
Reporter: Campaner
Facts: There was this final decision by the RTC of Manila which required the
Spouses Rosales to deposit to the Clerk of Court payment to Macaspac. From
Cdasia Synopsis - After the petitioners-judgment debtors failed to pay the
judgment debt, the trial court issued a writ of execution ordering the sale of
the property subject of litigation for the satisfaction of the judgment. The
property was sold at public auction and the Spouses Suba were the highest
bidders. The trial court issued an order confirming the sale of the property to
the Spouses Suba and subsequently granted respondent's prayer for a writ of
possession.
` Page 16 of 63
The Spouses Rosales filed a motion for reconsideration of the trial court's
orders, but were denied. The CA dismissed their petition for certiorari for
lack of merit, holding that there is no right of redemption in case of judicial
foreclosure of mortgage. Hence, this petition for review.
Issue: WON Spouses Rosales can still redeem the property even through this
was a judicial foreclosure. NO.
Held: In denying the petition, thereby affirming the CA decision on appeal,
the Supreme Court ruled that since the parties' transaction is an equitable
mortgage and 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. There is no right of redemption in case of a judicial foreclosure
of a mortgage.
The only exemption is when the mortgagee is the Phil. National Bank or a
bank or a banking institution. Since the mortgagee in this case is not one of
those mentioned, no right of redemption exists in favor of petitioners. They
merely have an equity of redemption which is their right, as mortgagor, to
extinguish the mortgage and retain ownership of the property by paying the
secured debt prior to the confirmation of the foreclosure sale. Petitioners, in
this case, failed to exercise this equity of redemption.
Q: What is the difference between right of redemption and equity of
redemption? What happens in right of redemption?
A: In right of redemption ma’am, there is already a foreclosure which has
been held. However in equity of redemption, the original owners can only
take their property again if they exercise this right before the confirmation of
the foreclosure sale… ≠
Q: Only before the confirmation? What is the period provided under Rule
68?
A: 90 days ma’am after the judgment becomes final.
Q: How is it different from right of redemption?
A: In right of redemption, the original owners may redeem the property even
after foreclosure for a 1 year period.
Q: What about the exemption that you mentioned? What is that?
A: The only exemption is when the mortgagee is the PNB or a bank or ≠
Q: That is an exemption with regard to what type of foreclosure?
A: Judicial foreclosure ma’am.
Atty. Jazzie: Under judicial foreclosure,
General Rule: Equity of Redemption
Exception as provided in the General Banking Law: When the mortgagee is a
bank or a banking institution
What do we mean by Equity of Redemption? After the entry of judgment of
foreclosure wherein you file a petition for foreclosure before the court and
now the court says that the foreclosure is proper, the order becomes final
and there is now an entry of judgment. Under Rule 68, Redeem but not less
than 90 days but more than 120 days from the entry of judgment, mortgagor
or debtor is ordered by the court to pay the obligation, interests and
expenses incurred.
Under Section 2 of Rule 68, Even if the rule says not more than 120 days, you
may still exercise this equity of redemption as long as the sale is not yet
confirmed. That would also mean that if you have judicial foreclosure is
available. When you say right of redemption, the redemption period is 1 year.
In judicial foreclosure after the sale has been confirmed, the mortgagor
cannot anymore redeem the property. The exemption is provided in the
General Banking law wherein the mortgagee is a bank, then the mortgagor
has a right of redemption - the one year redemption period.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
So in this case of Sps. Rosales, it was a judicial foreclosure after the court
upheld that the mortgage was an equitable one. When the foreclosure is
judicially effected, no equivalent right of redemption exists. No such right is
recognized in a judicial foreclosure except only when the mortgagee is the
PNB or a bank or a banking institution.
The right of redemption is not recognized in a judicial foreclosure. The right
of the defendant mortgagor to extinguish the mortgage and retain
ownership is by paying the secured debt within the 90-day period after the
judgment becomes final or even after the foreclosure sale but prior to its
confirmation. This is the mortgagors equity not right of redemption which
may be exercised by him even beyond the 90-day period from date of the
service of order even after foreclosure sale provided again it is before the
order of confirmation.
In this instance they only had an equity of redemption. It is simply their right
to extinguish the mortgage and retain ownership by paying the secured
obligation prior to the confirmation of the sale. However, instead of
exercising this equity of redemption, petitioners chose to delay the
proceedings by filing several manifestations (?) in the court. So take note of
the General Banking Law which provides for the exception - 1 year
redemption period as long as the mortgagee is a banking institution.
So essentially, what happens in a judicial foreclosure? You file an
action/petition with the court. Court ito ha which has jurisdiction over the
location of the subject matter. Court can order the payment within the 90-
120 days. In the meantime, tatakbo na ang equity of redemption. If no
payment, the court orders the sale of the subject matter to the highest
bidder after which the parties will be called for a confirmation of the sale.
Now once there has been a confirmation of the sale, the mortgagor cannot
anymore enforce or demand that his payment be received.
Now, in this instance of judicial foreclosure, there is a hearing for the
confirmation of the sale. Why is that required? So that the mortgagor has
the opportunity to assail the validity of the action sale. So again, in judicial
foreclosure, it is possible that even after the sale, equity of redemption is
available as long as there is no confirmation. If you want to exercise this
Equity of Redemption, you have to pay the amount of the debt/obligation an
not the purchase price.
Who can redeem? Under the the Rules of Court:
1. The mortgagor or one who is in privity of title with the mortgagor
2. The successors-in-interest; it could be
a) The person whom which the debtor has transferred his right
b) The person whom the debtor conveyed his interest for the
subject matter
c) The one who succeeds to interest of the debtor
d) The joint debtors or joint owners of the subject matter
e) Compulsory heirs
What happens if there is a deficiency? If the property was judicially
foreclosed and sold but nevertheless the proceeds are not sufficient to pay
the obligation.
- The creditor can still recover within 10 years (the prescriptive period
under the Civil Code from the time right of action accrues.) He may
recover even within the period of Equity of Redemption. He may
also pray that the deficiency judgment be incorporated in the
judicial foreclosure. Just take note of that because you will discuss
more on Judicial Foreclosure in your Special Civil Action.
Now let us take into consideration extrajudicial foreclosure under Act 3135.
As I mentioned, if you have the book by de Leon, you have copy at the
appendix. Otherwise you should have a copy of this special law. It is an old
law but this is still the same law that is applied today but of course there are
` Page 17 of 63
slight deviations specially with regard to fees pero with regard to the more
important provisions, it is the same.
How does extrajudicial foreclosure take place? Of course the mortgagor
would have to execute a deed of real estate mortgage (REM). For an
extrajudicial foreclosure to be availed of by the mortgagee, the mortgage
contract must contain an authorization by the mortgagor given to the
mortgagee to extrajudicially foreclose the property. So the Deed of REM
must contain a special power authorizing the mortgagee, that in case the
obligation is not paid, the property will be sold and the proceeds will be
applied to pay for the obligation. Now this is very important because if you
executed a REM and it does not contain this authority, this clause or this
special power given to the mortgagee, then you cannot extrajudicially
foreclose the property. So what is the remedy of the creditor? Judicial
foreclosure or mag-file siya ng collection for sum of money.
This would also be relevant in the sense that extrajudicial foreclosure
proceeding is faster kasi hindi ka magdaan ng hearing, hindi ka magdaan ng
court. Simply file a petition in the office of the Clerk of Court and the sheriff.
Walang hearing but you have to comply with the requirements of notice of
sale and publication, public action takes place. Ganun lang. Mas mabilis siya.
And, it does not require lawyers. So lesser fees, no more filing fees and faster
time to the advantage of the creditor-mortgagee.
Do remember that this authorization is essentially an agency wherein the
mortgagor is the principal and the mortgagee is the agent. Under the rules of
agency, the general rule is that when the principal dies, the agency is
extinguished. So what happens if the obligation has already become due and
demandable but the at time of the application for foreclosure, namatay na si
mortgagor, will that be ground to question the REM? Hindi. No such
extinguishment because the power given to the mortgagee to foreclose the
property covered by the REM is for the benefit of the mortgagee. It is not for
the interest of the mortgagor but rather the mortgagee. So notwithstanding
the death of the mortgagor or debtor, the mortgagee may still extrajudicially
foreclose the property wherein the agency or authorization given therein is
not extinguished for this is considered to be an agency coupled with interest.
Now sabi natin, what is available in judicial foreclosure is equity of
redemption as a general rule. But what about extra judicial foreclosure? We
have the right of redemption. Naferteri, what happened in the case of
Spouses Landrito?
Spouses Landrito vs CA, GR 133079, August 9, 2005
Reporter: Kuit
Facts: Spouses Landrito obtained a loan of P350,000 from Carmencita San
Diego. To secure such loan, they executed a REM in favor of San Diego.
Sometime thereafter, they made several payments, however it was not yet
complete. A subsequent loan was made by spouses Landrito, this time
amounting to P1,000,000. To secure the payment of the loan, they executed
an amended REM stipulating that the loan be paid within 6 months from
Sept. 16, 1991 and if not paid within the said period, the mortgagee will have
the right to declare the debt to and immediately foreclose the REM either
judicially or extrajudicially in accordance with law.
It appears here that the Sps. Landrito defaulted in payment and despite the
notice sent by San Diego, they still failed to pay which prompted San Diego
to send a final notice of demand. Now this time the obligation already
amounted to P1.9M and they still failed to pay which prompted Carmencita
to file an extrajudicial foreclosure of the property which they used to acquire
the said loan.
Subsequenty, the sheriff sent several notices to the parties announcing the
sale. On August 11, 1993, the date of sale, the Sps. Landrito did not attend
the foreclosure sale and a certificate of sale was given to San Diego being the
highest bidder. The amount of the property became P2M.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
On October 29, 1993, San Diego registered the Certificate of the Sale after
that within the 1 year redemption period, still the Spouses Ladrito failed to
redeem the said property. Instead On November 1994, the spouses sought
for the annulment to the said foreclosure sale. They allege that it was null
and void because it failed to comply with the requirement of Act 3135 of the
publication and notice and that the foreclosure should have been limited to
the amount of the debt. In this case, it should only have been 1M but the
sale already amounted to P1.95M.
The husband of San Diego gave the Spouses Landrito an extension which
allowed them to pay the obligation until November 11, 1994. Spouses San
Diego here sought for the dismissal of the case which was granted by the
RTC and upheld by the CA.
Issue: Can Spouses Landrito still redeem the property? NO.
Held: SC held that Spouses Landrito can no longer redeem the property
because as found by the CA, even if the amount of the foreclosure sale
should be limited to the amount of the debt secured by the REM, because of
the several notice and the publication, they still failed to raise a question or
attend the foreclosure sale… ≠
Q: What time is the redemption period counted?
A: From October 29, 1993 because it was the registry of the sale.
Q: Was there sufficient evidence showing that indeed there was an
extension given to the petitioners in this case?
A: No, ma’am.
Q: Assuming that there was an agreement for an extension, will it stop the
running of the one year redemption period?
A: It will not stop the one year redemption period ma’am.
Q: Why not? Because this is provided under the law. With regard to the
period of redemption, it must be 1 year from the date of?
A. The registration ma’am.
Q: In this instance was there are offer to pay or redeem on the part of
Spouses Landrito?
A: According to the the SC, Spouses Landrito never exercised their right to
redeem the property.
Q: What about any action filed for the annulment of the foreclosure
proceeding would it stop the one year redemption period?
A: No, ma’am.
Q: So what happens if the 1 year period already expired?
A: After the 1 year period already expired, the party who is redeeming the
property is barred from redeeming it ma’am.
Atty. Jazzie: Very important dito ang redemption because when you say
redemption, the mortgagor may force the mortgagee or the highest bidder
to sell back the property to the mortgagor. But once na nag-lapse na yan,
absolute na ang ownership. You cannot again force the highest bidder to sell
it to the mortgagor.
Here, you have an extrajudicial foreclosure, they applied Act 3135.
In Extrajudicial Foreclosure:
General Rule: Right of Redemption
Exception: if the mortgagor is juridical entity, such as a corporation, the 1
year period does not apply
` Page 18 of 63
What you need to take note of here, huwag I-partner ang dalawang E. Kapag
extrajudicial, Right. Kapag judicial, Equity of Redemption. Ang right of
redemption under Act 3135, ang nakalagay diyan date of sale. But
jurisprudence has been consistent that the one year period shall start from
the registration of the sheriff’s certificate of sale. Act 3135 says “1 year from
and after the date of sale” which should be interpreted from the time the
certificate of sale is registered.
In this instance, there was no sufficient evidence that redemption was made
or that there was an extension. Even if there was, you cannot circumvent the
right of redemption available under Act 3135. When the period allowed to
redeem will lapse, the action to enforce redemption will not prosper
anymore even if the action is brought within the prescriptive period.
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 the person exercising this right has offered to redeem the property within
the period fixed, he is considered to have complied with this condition.
Moreover, the period is not suspended by the institution of an action to
foreclose/annul the foreclosure sale. Petitioner have lost any right or
interest over the subject property primarily because of their failure to
redeem the same in the manner and within the period prescribed by law.
Just take note the general rule on the right of redemption, if you want to
redeem the property, pay the mortgagee this time the purchase price plus
expenses and interest incurred. Again from the date of the confirmation of
sale ang 1 year period.
Do take note that of the exception under the general banking law wherein
even if the mortgagee is a bank, if the mortgagor is juridical entity, such as a
corporation, the 1 year period does not apply. Under section 47, juridical
persons whose properties are sold can redeem until the registration of
foreclosure or 3 months after the foreclosure whichever is earlier. You take
note of that ha which is under the General Banking Law. This is sometimes
referred to as equity of redemption, but this is different from the equity of
redemption under Rule 68.
March 2 – Pastor
The general rule for judicial foreclosure is equity of redemption. The period
as provided in Rule 68, however as an exception, if the mortgagee is a bank
or a banking institution, we have the 1 year right of redemption counted
from the date of registration. For extrajudicial foreclosure, the general rule is
that there is right of redemption and the one year period is counted from
the registration of the sale. So between the two, in extrajudicial foreclosure,
you have lesser expenses and it is easier than judicial foreclosure.
How to go about the extrajudicial foreclosure:
1. File an application or petition for foreclosure with the clerk of
court who has jurisdiction over the property;
2. Comply, through the office of the clerk of court, and the sheriffs’,
with the requirements of notice and publication;
3. The application will thereafter be raffled among the sheriffs; and
4. Public auction will take place.
5. The highest bidder will be declared as the purchaser.
The mortgagor, as a general rule, is entitled to his right of redemption.
However, under RA 8791, there is also the General Banking Law, we have to
take note of the period provided therein if the mortgagor is a juridical person.
Section 47, General Banking Law. Juridical persons whose properties are
being sold can redeem until the registration of the certificate of foreclosure
or 90 days or 3months after the foreclosure, whichever is earlier.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
G.R. No. 195540 March 13, 2013
Goldenway v Equitable PCI Bank
DOCTRINE: Section 47 did not divest juridical persons of the right to redeem
their foreclosed properties but only modified the time for the exercise of
such right by reducing the one-year period originally provided in Act
No. 3135. The new redemption period commences from the date of
foreclosure sale, and expires upon registration of the certificate of sale or
three months after foreclosure, whichever is earlier. There is likewise no
retroactive application of the new redemption period because Section 47
exempts from its operation those properties foreclosed prior to its effectivity
and whose owners shall retain their redemption rights under Act No. 3135.
FACTS: On November 29, 1985, petitioner Goldenway Merchandising
Corporation executed a Real Estate Mortgage in favor of Equitable PCI
Bank over three parcels of land as security for a Php2,000,000 loan
granted to the petitioner.
Petitioner eventually failed to settles its loan obligation, leading respondent
to extrajudicially foreclose the mortgage on December 13, 2000.
Subsequently, a Certificate of Sale was issued to respondent on January 26,
2001.
In a letter dated March 7, 2001, petitioner offered to redeem the
foreclosed properties by tendering a check. Petitioner and respondent
met on March 12, 2001. However, petitioner was told that redemption
was no longer possible since the certificate of sale had already been
registered; the title to the foreclosed properties were consolidated in
favor of the respondent on March 9, 2001.
Petitioner filed a complaint for specific performance and damages
contending that the 1-year period of redemption under Act 3135 should
apply, and not the shorter redemption period under RA 8791 as
applying RA 8791 would result in the impairment of obligations of
contracts and would violate the equal protection clause under the
constitution.
The RTC dismissed the action of the petitioner ruling that redemption
was made belatedly and that there was no redemption made at all. The
Court of Appeals affirmed the RTC.
ISSUE: Whether or not the redemption period should be the 1-year
period provided under Act 3135, and not the shorter period under RA
8791 as the parties expressly agreed that foreclosure would be in accordance
with Act 3135
RULING: The shorter period under RA 8791 should apply.
The one-year period of redemption is counted from the date of the
registration of the certificate of sale. In this case, the parties provided in
their real estate mortgage contract that upon petitioner’s default and
the latter’s entire loan obligation becoming due, respondent may
immediately foreclose the mortgage judicially in accordance with the
Rules of Court, or extrajudicially in accordance with Act No. 3135, as
amended. But under Sec 47 of RA 8791, an exception is thus made in
the case of juridical persons which are allowed to exercise the right of
redemption only "until, but not after, the registration of the certificate of
foreclosure sale" and in no case more than three (3) months after
foreclosure, whichever comes first.
Section 47 did not divest juridical persons of the right to redeem their
foreclosed properties but only modified the time for the exercise of
such right by reducing the one-year period originally provided in Act
No. 3135. The new redemption period commences from the date of
foreclosure sale, and expires upon registration of the certificate of sale or
three months after foreclosure, whichever is earlier. There is likewise no
retroactive application of the new redemption period because Section 47
` Page 19 of 63
exempts from its operation those properties foreclosed prior to its effectivity
and whose owners shall retain their redemption rights under Act No. 3135.
We agree with the CA that the legislature clearly intended to shorten the
period of redemption for juridical persons whose properties were foreclosed
and sold in accordance with the provisions of Act No. 3135. The difference
in the treatment of juridical persons and natural persons was based on
the nature of the properties foreclosed – whether these are used as
residence, for which the more liberal one-year redemption period is
retained, or used for industrial or commercial purposes, in which case a
shorter term is deemed necessary to reduce the period of uncertainty in the
ownership of property and enable mortgagee-banks to dispose sooner of
these acquired assets.
It must be underscored that the General Banking Law of 2000, crafted in the
aftermath of the 1997 Southeast Asian financial crisis, sought to reform the
General Banking Act of 1949 by fashioning a legal framework for maintaining
a safe and sound banking system. In this context, the amendment
introduced by Section 47 embodied one of such safe and sound practices
aimed at ensuring the solvency and liquidity of our banks. It cannot
therefore be disputed that the said provision amending the redemption
period in Act 3135 was based on a reasonable classification and
germane to the purpose of the law.
The right of redemption being statutory, it must be exercised in the manner
prescribed by the statute, and within the prescribed time limit, to make it
effective. Furthermore, as with other individual rights to contract and to
property, it has to give way to police power exercised for public welfare.
The concept of police power is well-established in this jurisdiction. It has
been defined as the "state authority to enact legislation that may interfere
with personal liberty or property in order to promote the general welfare."
Its scope, ever-expanding to meet the exigencies of the times, even to
anticipate the future where it could be done, provides enough room for an
efficient and flexible response to conditions and circumstances thus
assuming the greatest benefits.
The freedom to contract is not absolute; all contracts and all rights are
subject to the police power of the State and not only may regulations which
affect them be established by the State, but all such regulations must be
subject to change from time to time, as the general well-being of the
community may require, or as the circumstances may change, or as
experience may demonstrate the necessity. Settled is the rule that the
non-impairment clause of the Constitution must yield to the loftier purposes
targeted by the Government. The right granted by this provision must submit
to the demands and necessities of the State’s power of regulation.
Such authority to regulate businesses extends to the banking industry
which, as this Court has time and again emphasized, is undeniably
imbued with public interest. Having ruled that the assailed Section 47 of
R.A. No. 8791 is constitutional, we find no reversible error committed by the
CA in holding that petitioner can no longer exercise the right of
redemption over its foreclosed properties after the certificate of sale in
favor of respondent had been registered
Q: What is this provided period in the General Banking Law?
A: In the case of juridical persons which are allowed to exercise the right of
redemption, the period is only "until, but not after, the registration of the
certificate of foreclosure sale" and in no case more than three (3) months
after foreclosure, whichever comes first.
Q: Is Goldenway correct in its contention?
A: No since Goldenway is a juridical person what should apply is the ____. In
this case, the period within which the right of redemption was exercised was
way beyond the allowable period.
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2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Q: What about the Constitutional issues that were raised by Goldenway
here?
A: The Supreme Court said that it was not unconstitutional.
Q: Would it not be a violation of the equal protection clause?
A: There is no violation of the equal protection clause because Goldenway as
a juridical person was given an opportunity to redeem the property it’s just
that as to juridical persons the period is shorter.
Q: Why is there a necessity to treat juridical persons differently from
natural persons? What is the basis for it to be shorter?
A: The difference in the treatment of juridical persons and natural
persons was based on the nature of the properties foreclosed – whether
these are used as residence, for which the more liberal one-year redemption
period is retained, or used for industrial or commercial purposes, in which
case a shorter term is deemed necessary to reduce the period of uncertainty
in the ownership of property and enable mortgagee-banks to dispose sooner
of these acquired assets.
The exemption with regard to an extrajudicial foreclosure where the
mortgagor is a juridical person— even if the mortgagee is a bank, as long as
the mortgagor is a juridical person, we apply Sec. 47 of RA 8791, the General
Banking Law of 2000 which states that: 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 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.
There was no violation of the non-impairment clause. There is an
impairment if a subsequent law changes the terms of the contract between
the parties. In this case, Section 47 did not divest juridical persons of the
right to redeem their foreclosed properties but only modified the time for
the exercise of such right by reducing the one-year period originally provided
in Act No. 3135.
With regard to the alleged violation of the equal protection clause— The
difference in the treatment of juridical persons and natural persons
was based on the nature of the properties foreclosed – whether these
are used as residence, for which the more liberal one-year redemption
period is retained, or used for industrial or commercial purposes, in which
case a shorter term is deemed necessary to reduce the period of uncertainty
in the ownership of property and enable mortgagee-banks to dispose sooner
of these acquired assets.
A corporation has limited liability. The stockholders, the directors, cannot be
personally liable for the unpaid subscription. But if you are a natural person,
you can be held personally liable, the shorter period is fair because it will be
easier for the corporation to dispose of properties because of its limited
feature of liability.
SC also took into consideration when the General Banking Law was crafted,
and in essence, the right of redemption that is provided under Section 47 is
therefore constitutional.
Sometimes this provision in sec. 47 can be technically referred to as Equity of
Redemption but the period provided under sec. 47 is different from the 90 to
120 days period provided under the Rules of Court’s Equity of Redemption in
case of judicial foreclosure. For right of redemption, the period is one year
from the date of registration.
` Page 20 of 63
G.R. No. 171033 August 3, 2010
CITY MAYOR, CITY TREASURER, CITY ASSESSOR, ALL OF QUEZON CITY, and
ALVIN EMERSON S. YU vs. RIZAL COMMERCIAL BANKING CORPORATION
Facts: The spouses Roberto and Monette Naval obtained a loan from
respondent Rizal Commercial Banking Corporation, secured by a real estate
mortgage of properties covered by Transfer Certificate of Title (TCT) Nos. N-
167986, N167987, and N-167988. In 1998, the real estate mortgage was
later foreclosed and the properties were sold at public auction with
respondent as the highest bidder. The corresponding Certificates of Sale
were issued in favor of respondent on August 4, 1998. However, the
certificates of sale were allegedly registered only on February 10, 2004.
Meanwhile, on May 30, 2003, an auction sale of tax delinquent properties
was conducted by the City Treasurer of Quezon City. Included in the
properties that were auctioned were two (2) townhouse units covered by
TCT Nos. N-167986 and N-167987 and the parcel of land covered by TCT No.
N-167988. For these delinquent properties, Alvin Emerson S. Yu was
adjudged as the highest bidder. Upon payment of the tax delinquencies, he
was issued the corresponding Certificate of Sale of Delinquent Property.
On February 10, 2004, the Certificate of Sale of Delinquent Property was
registered with the Office of the Register of Deeds of Quezon City.
On June 10, 2004, respondent tendered payment for all of the assessed tax
delinquencies, interest, and other costs of the subject properties with the
Office of the City Treasurer, Quezon City. However, the Office of the City
Treasurer refused to accept said tender of payment.
Undeterred, on June 15, 2004, respondent filed before the Office of the City
Treasurer a Petition for the acceptance of its tender of payment and for the
subsequent issuance of the certificate of redemption in its favor.
Nevertheless, respondent’s subsequent tender of payment was also denied.
Consequently, respondent filed a Petition for Mandamus with Prayer for
Issuance of a Temporary Restraining Order and a Writ of Preliminary
Injunction3 before the RTC. Petitioners contended, among other things, that
it had until February 10, 2005, or one (1) year from the date of registration
of the certificate of sale on February 10, 2004, within which to redeem the
subject properties, pursuant to Section 78 of Presidential Decree (P.D.) No.
464 or the Real Property Tax Code.
After the parties filed their respective pleadings, the RTC initially denied the
petition in the Order4 dated December 6, 2004. In denying the petition, the
RTC opined that respondent’s reliance on Section 78 of P.D. No. 464 as basis
of the reckoning period in counting the one (1) year period within which to
redeem the subject properties was misplaced, since P.D. No. 464 has been
expressly repealed by Republic Act (R.A.) No. 7160, or the Local Government
Code.
It has to be noted that in this case Quezon City has an ordinance which
provides that he one-year redemption period should be counted from the
date of the annotation of the sale of the property at the proper registry.
ISSUE:
1. What law applies for the determination of the correct redemption
period?
2. What was involved here was foreclosure due to non-payment of
property taxes.
RULING:
The owner or any person holding a lien or claim over a tax delinquent
property sold at public auction has one (1) year from the date of registration
of sale to redeem the property. However, since the passing of R.A. No. 7160,
such is no longer controlling. The issue of whether or not R.A No. 7160 or the
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
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2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Local Government Code, repealed P.D. No. 464 or the Real Property Tax
Code has long been laid to rest by this Court.
Jurisdiction thrives to the effect that R.A. No. 7160 repealed P.D. No. 464.
From January 1, 1992 onwards, the proper basis for the computation of the
real property tax payable, including penalties or interests, if applicable, must
be R. A. No. 7160.
Inasmuch as the crafter of the Local Government Code clearly worded the
above-cited Section to repeal P.D. No. 464, it is a clear showing of their
legislative intent that R.A. No. 7160 was to supersede P.D. No. 464. As such,
it is apparent that in case of sale of tax delinquent properties, R.A. No. 7160
is the general law applicable. Consequently, as regards redemption of tax
delinquent properties sold at public auction, the pertinent provision is
Section 261 of R.A. No. 7160, which provides:
“Section 261. Redemption of Property Sold. Within one (1) year from the
date of sale, the owner of the delinquent real property or person having
legal interest therein, or his representative, shall have the right to redeem
the property upon payment to the local treasurer of the amount of
delinquent tax, including the interest due thereon, and the expenses of sale
from the date of delinquency to the date of sale, plus interest of not more
than two percent (2%) per month on the purchase price from the date of
sale to the date of redemption. Such payment shall invalidate the certificate
of sale issued to the purchaser and the owner of the delinquent real
property or person having legal interest therein shall be entitled to a
certificate of redemption which shall be issued by the local treasurer or his
deputy.
From the date of sale until the expiration of the period of redemption, the
delinquent real property shall remain in the possession of the owner or
person having legal interest therein who shall remain in the possession of
the owner or person having legal interest therein who shall be entitled to the
income and other fruits thereof.
The local treasurer or his deputy, upon receipt from the purchaser of the
certificate of sale, shall forthwith return to the latter the entire amount paid
by him plus interest of not more than two percent (2%) per month.
Thereafter, the property shall be free from all lien of such delinquent tax,
interest due thereon and expenses of sale.”
From the foregoing, the owner of the delinquent real property or person
having legal interest therein, or his representative, has the right to redeem
the property within one (1) year from the date of sale upon payment of the
delinquent tax and other fees.
Verily, the period of redemption of tax delinquent properties should be
counted not from the date of registration of the certificate of sale, as
previously provided by Section 78 of P.D. No. 464, but rather on the date of
sale of the tax delinquent property, as explicitly provided by Section 261 of
R.A. No. 7160.
However since in the case at bar, there is an ordinance involved. At first
glance, this provision runs counter to that of Section 261 of R.A. No. 7160
which provides that the one year redemption period shall be counted from
the date of sale of the tax delinquent property. There is, therefore, a need to
reconcile these seemingly conflicting provisions of a general law and a
special law.
To harmonize the provisions of the two laws and to maintain the policy of
the law to aid rather than to defeat the owners right to redeem his property,
Section 14 (a), Paragraph 7 of City Ordinance No. SP-91, S-93 should be
construed as to define the phrase one (1) year from the date of sale as
appearing in Section 261 of R.A. No. 7160, to mean one (1) year from the
date of the annotation of the sale of the property at the proper registry.
` Page 21 of 63
Consequently, the counting of the one (1) year redemption period of
property sold at public auction for its tax delinquency should be counted
from the date of annotation of the certificate of sale in the proper Register
of Deeds. Applying the foregoing to the case at bar, from the date of
registration of the Certificate of Sale of Delinquent Property on February 10,
2004, respondent had until February 10, 2005 to redeem the subject
properties. Hence, its tender of payment of the subject properties tax
delinquencies and other fees on June 10, 2004, was well within the
redemption period, and it was manifest error on the part of petitioners to
have refused such tender of payment.
Absent an ordinance in any other case involving real property tax
delinquency, RA 7160 applies.
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
DISCUSSION
Q: What period is provided under the Local Government Code (LGC)?
A: Under the LGC it is now 1 year from the date of the sale.
Q: Does it have the same interpretation in ACT 3135 wherein even if the
provision stated that it is to be reckoned from the date of sale, it should be
interpreted as from the date of the registration of the sale?
A: No. It is to be reckoned from the date of the sale itself.
Q: In this case was the tender of payment made within the said period, 1
year from the date of sale?
A: In this case, the ordinance states that it should be reckoned from the date
of the annotation
Q: Is that not contrary to what is provided in the LCG? Which will prevail
the ordinance of the LGC?
A: NO. The interpretation of the ordinance because aside from the liberal
construction in order to protect the rights of the redemptioner, the rule in
Statutory Construction is that if there is a general law and a special law, the
special law should prevail. In this case, since the ordinance of Quezon City is
a specific law then it should prevail over the LGC.
The first thing to take note is that this involves not a judicial foreclosure sale
but a tax delinquency sale for failure to pay the real property taxes which
gives the local government the right to sell tax delinquent properties to pay
off the unpaid taxes. I decided to include this so you will not get confused
with the redemption period.
First thing that was alleged was the provision in PD 464, 1 year from the date
of registration. However, inasmuch as in the LGC there is a showing that the
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
legislative intent of RA 7160 was to supersede PD 464 in case of sale of tax
delinquent properties. RA 7160 is now the general law applicable to which
sec. 261 shall be applied within 1 year from the date of sale. The phrase
within 1 year from the date of sale should not be interpreted in the same
way as we interpret ACT 3135. This is from the date of actual sale and not of
registration.
Why is it that in this case, redemption was still allowed 1 year from the date
of annotation or registration?
It is because of the city ordinance which explicitly stated that the one year
period should be counted as within 1 year from the annotation of the sale of
the property at the property registry.
The SC discussed the statutory construction. “A general law and a special
law on the same subject should be accordingly read together and
harmonized, if possible, with a view to giving effect to both. Where there are
two acts, one of which is special and particular and the other general which,
if standing alone, would include the same matter and thus conflict with the
special act, the special must prevail, since it evinces the legislative intent
more clearly than that of the general statute and must be taken as intended
to constitute an exception to the rule.”
Furthermore, “the law protects the original owner. It is the policy of the law
to aid rather than to defeat the owners’ right. Therefore, redemption should
be looked upon with favor and where no injury will follow, a liberal
construction will be given to our redemption laws, specifically on the
exercise of the right to redeem.”
Take note of the law or ordinance applicable to a specific city or municipality.
In the absence of any ordinance similar to this in Quezon City, the
redemption period fora tax delinquent sale of property should be 1 year
from the date of sale as provided in the LGC.
G.R. No. 129572 June 26, 2000
PHILBANCOR FINANCE, INC. AND VICENTE HIZON, JR. vs. COURT OF
APPEALS, THE HONORABLE DEPARTMENT OF AGRARIAN REFORM
ADJUDICATION BOARD (DARAB), ALFREDO PARE, PABLO GALANG and
AMADO VIE
FACTS: Private respondents Alfredo Pare, Pablo Galang and Amado Vie, as
plaintiffs, filed with the Provincial Agrarian Reform Adjudication Board
(PARAB) a complaint for maintenance of possession with redemption and
tenancy right of pre-emption against petitioners Philbancor Finance, Inc. and
Vicente Hizon, Jr. Private respondents alleged, inter alia, that petitioner
Vicente Hizon, Jr. is the owner of the disputed agricultural lands and that
they (private respondents) are the legitimate and bona fide tenants thereof;
that on October 13, 1983, petitioner Hizon, without their knowledge,
mortgaged the disputed lots to petitioner Philbancor Finance, Inc.; that
petitioner Hizon failed to pay his obligations to petitioner Philbancor, which
eventually led to the sale of the mortgaged lots to the latter; that they came
to know of the transaction only when they were notified by petitioner
Philbancor to vacate the lots; that they have been tenants on the lots for
more than fifty (50) years; that petitioner Philbancor threatened to take
from them the actual or physical possession of the agricultural lots; that
unless the threatened acts of petitioner are restrained, they will suffer
substantial and irreparable injury.
In his answer, petitioner Hizon admitted that private respondents are his
bonafide and legitimate tenants but he averred, by way of affirmative
defenses, that he is not threatening to take possession of the disputed lots
as he is no longer the owner thereof after said lots were foreclosed by
petitioner Philbancor; that private respondents were aware when he
mortgaged the lots as they were with him when he tried to negotiate for
payment of his loan to petitioner Philbancor.
` Page 22 of 63
Philbancor alleged, among others, that it has no tenancy or agricultural
relationship with private respondents considering that it acquired ownership
over the disputed lots by virtue of an extra-judicial foreclosure sale pursuant
to Act 3135, as amended; that it is not an agricultural lessor as contemplated
in Section 10 of Republic Act (RA) No. 3844, as amended; that assuming
private respondents have the right to redeem the lots in question, such right
has already expired in accordance with Section 12 of R.A. 3844, which states
that the right of redemption may be exercised within two (2) years from the
registration of the sale.
Provincial adjudicator rendered a decision in favor of the private
respondents. Petitioners filed with the Court of Appeals a petition for review
of the decision of the DARAB. CA dismissed said petition.
ISSUE: Whether or not the private respondents could still exercise their right
of redemption of the parcels of land sold at public auction due to foreclosure
of the mortgages thereon considering that they invoked their right to
redeem only on July 14, 1992, seven years after the date of registration of
the certificate of sale with the Register of Deeds.
HELD: Yes. Republic Act No. 3844, Section 12, provides as follows:
In case the landholding is sold to a third person without the knowledge of
the agricultural lessee, the latter shall have the right to redeem the same at
a reasonable price and consideration. Provided, that the entire landholding
sold must be redeemed. Provided further, that where there are two or more
agricultural lessees, each shall be entitled to said right of redemption only to
the extent of the area actually cultivated by him. The right of redemption
under this section may be exercised within two (2) years from the
registration of the sale and shall have priority over any other right of legal
redemption.
In this case, the certificate of sale of the subject property, which was sold at
public auction, was registered with the Register of Deeds of Pampanga on
July 31, 1985. The two-year redemption period thus expired on July 31,
1987. The complaint for redemption was filed by respondents only on July
14, 1992, five (5) years after expiration of the redemption period prescribed
by law.
Nonetheless, private respondents may continue in possession and
enjoyment of the land in question as legitimate tenants because the right of
tenancy attaches to the landholding by operation of law. The leasehold
relation is not extinguished by the alienation or transfer of the legal
possession of the landholding.
DISCUSSION
Q: What is RA 3844?
A: The Agricultural Land Reform Act
Q: What is the period of redemption provided therein? Is it one year?
A: No, the period of redemption is 2 years from the registration of the sale.
“In this case, the certificate of sale of the subject property, which was sold at
public auction, was registered with the Register of Deeds of Pampanga on
July 31, 1985. The two-year redemption period thus expired on July 31, 1987.
The complaint for redemption was filed by respondents only on July 14, 1992,
five (5) years after expiration of the redemption period prescribed by law.
Nonetheless, private respondents may continue in possession and
enjoyment of the land in question as legitimate tenants because the right of
tenancy attaches to the landholding by operation of law. The leasehold
relation is not extinguished by the alienation or transfer of the legal
possession of the landholding.”
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
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2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Here, do take note that the procedure to be followed in relation to
extrajudicial foreclosure proceedings must be strictly complied with. The
importance of notice and publication, in an extrajudicial proceeding is
emphasized. For example, the property must be clearly identified, if in the as
publication, the title number or description of boundaries is wrong, then the
foreclosure proceedings will not be valid.
G.R. No. 125838. June 10, 2003
DEVELOPMENT BANK OF THE PHILIPPINES, vs. CA and EMERALD RESORT
HOTEL CORPORATION
FACTS: ERHC failed to pay its loan, DBP filed with the Office of the Sheriff,
Regional Trial Court of Iriga City, and an Application for Extra-judicial
Foreclosure of Real Estate and Chattel Mortgages.
Deputy Provincial Sheriffs Abel Ramos and Ruperto Galeon issued the
required notices of public auction sale of the personal and real properties.
However, Sheriffs Ramos and Galeon failed to execute the corresponding
certificates of posting of the notices. On 10 July 1986, the auction sale of the
personal properties proceeded.
The Office of the Sheriff scheduled on 12 August 1986 the public auction sale
of the real properties. The Bicol Tribune published on 18 July 1986, 25 July
1986 and 1 August 1986 the notice of auction sale of the real properties.
However, the Office of the Sheriff postponed the auction sale on 12 August
1986 to 11 September 1986 at the request of ERHC. DBP did not republish
the notice of the rescheduled auction sale because DBP and ERHC signed an
agreement to postpone the 12 August 1986 auction sale. ERHC, however,
disputes the authority of Jaime Nuevas who signed the agreement for ERHC.
In a letter dated 24 November 1986, ERHC informed DBP of its intention to
lease the foreclosed properties.
On 22 December 1986, ERHC filed with the Regional Trial Court of Iriga City a
complaint for annulment of the foreclosure sale of the personal and real
properties. Subsequently, ERHC filed a Supplemental Complaint. ERHC
alleged that the foreclosure was void mainly because (1) DBP failed to
comply with the procedural requirements prescribed by law; and (2) the
foreclosure was premature.
ISSUES and RULING:
1. Whether DBP complied with the posting and publication requirements
under applicable laws for a valid foreclosure.
ON THE POSTING OF AUCTION SALE NOTICES:
DBP insists that the non-execution of the certificate of posting of the auction
sale notices did not invalidate the foreclosure. CORRECT.
A certificate of posting is not required, much less considered indispensable
for the validity of an extrajudicial foreclosure sale of real property under Act
No. 3135. In the present case, the foreclosing sheriffs failed to execute the
certificate of posting of the auction sale notices. However, this fact alone
does not prove that the sheriffs failed to post the required notices. As held in
Bohanan, the fact alone that there is no certificate of posting attached to the
sheriff's records is not sufficient to prove the lack of posting.
Based on the records, DBP presented sufficient evidence to prove that the
sheriffs posted the notices of the extrajudicial sale.
In the absence of contrary evidence, as in this case, the presumption prevails
that the sheriffs performed their official duty of posting the notices of sale.
Consequently, we hold that the non-execution of the certificate of posting
cannot nullify the foreclosure of the chattel and real estate mortgages in the
instant case.
` Page 23 of 63
On whether there was publication of the notice of sale of the real properties
in compliance with Act No. 3135:
There is no question that DBP published the notice of auction sale scheduled
on 12 August 1986. However, no auction sale took place on 12 August 1986
because DBP, at the instance of ERHC, agreed to postpone the same to 11
September 1986. DBP contends that the agreement to postpone dispensed
with the need to publish again the notice of auction sale. Thus, DBP did not
anymore publish the notice of the 11 September 1986 auction sale. DBP
insists that the law does not require republication of the notice of a
rescheduled auction sale. Consequently, DBP argues vigorously that the
extrajudicial foreclosure of the real estate mortgage is valid. INCORRECT.
In Ouano v. Court of Appeals, it was held that republication in the manner
prescribed by Act No. 3135 is necessary for the validity of a postponed
extrajudicial foreclosure sale. Another publication is required in case the
auction sale is rescheduled, and the absence of such republication
invalidates the foreclosure sale.
2. If publication requirement may be waived by parties, SAME RULING IN
OUANO.
3. Is it possible to only have ONE PUBLISHED NOTICE OF SALE, but
the subsequent RESCHEDULED sale will be valid without need of another
publication?
YES. If the first notice of sale EXPRESSLY STATES AND ALLOWS the holding of
a rescheduled auction sale without reposting or republication of the notice.
However, the rescheduled auction sale will only be valid if the rescheduled
date of auction is clearly specified in the prior notice of sale. The rescheduled
dates must be SPECIFIED. The absence of this information in the prior notice
of sale will render the rescheduled auction sale void for lack of reposting or
republication. If the notice of auction sale contains this particular
information, whether or not the parties agreed to such rescheduled date,
there is no more need for the reposting or republication of the notice of the
rescheduled auction sale.
The Office of the Court Administrator issued Circular No. 72002 pursuant to
the 14 December 1999 Resolution of this Court in A.M. No. 99-10-05-0, as
amended by the Resolutions of 30 January 2001 and 7 August 2001. The
Court issued these Resolutions for two reasons.
First, the Court seeks to minimize the expenses which the mortgagee incurs
in publishing the notice of extrajudicial sale. With the added information in
the notice of sale, the mortgagee need not cause the reposting and
republication of the notice of the rescheduled auction sale. There is no
violation of the notice requirements under Acts Nos. 3135 and 1508
precisely because the interested parties as well as the public are informed of
the schedule of the next auction sale, if the first auction sale does not
proceed. Therefore, the purpose of a notice of sale, which is to notify the
mortgagor and the public of the foreclosure sale, is satisfied.
Second, the Court hopes to deter the practice of some mortgagors in
requesting postponement of the auction sale of real properties, then later
attacking the validity of the foreclosure for lack of republication. This
practice will only force mortgagees to deny outright requests for
postponement by mortgagors since it will only mean added publication
expense on the part of mortgagees. Such development will eventually work
against mortgagors because mortgagees will hesitate to grant
postponements to mortgagors.
In the instant case, there is no information in the notice of auction sale of
any date of a rescheduled auction sale. Even if such information were stated
in the notice of sale, the reposting and republication of the notice of sale
would still be necessary because Circular No. 7-2002 took effect only on 22
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
April 2002. There were no such guidelines in effect during the questioned
foreclosure.
DISCUSSION
Q: What is the requirement?
A: Publication, and posting of the notice of sale in conspicuous public places
Q: Was the requirement of posting duly complied with?
A: Yes. The sheriff posted the notices of the sale in places where the
property is situated, and further there is a presumption of regularity of in the
exercise of the official function of the sheriff.
Q: How about the issue to the publication?
A: It was not complied with. “The Court held recently in Ouano v. Court of
appeals that republication in the manner prescribed by Act No. 3135 is
necessary for the validity of a postponed extrajudicial foreclosure sale.
Another publication is required in case the auction sale is rescheduled, and
the absence of such republication invalidates the foreclosure sale.”
Q: Assuming that there was already an agreement between the mortgagor
and mortgagee, would it not be sufficient to make the publication not
required anymore?
A: No. The auction sale is a public auction so if only the parties agree to the
foreclosure date, it becomes a private sale.
“Publication, therefore, is required to give the foreclosure sale a reasonably
wide publicity such that those interested might attend the public sale. To
allow the parties to waive this jurisdictional requirement, result in converting
into a private sale what ought to be a public auction.”
Q: When is it possible that the sale would still comply with the
requirement of publication without the need for republication despite
transfer of the scheduled date of the sale?
A: The rescheduled auction sale will only be valid if the rescheduled date of
auction is clearly specified in the prior notice of sale. The absence of this
information in the prior notice of sale will render the rescheduled auction
sale void for lack of reposting or republication. If the notice of auction sale
contains this particular information, whether or not the parties agreed to
such rescheduled date, there is no more need for the reposting or
republication of the notice of the rescheduled auction sale.
This is based on Circular No. 7-2002 pursuant to the 14 December 1999
Resolution of this Court in A.M. No. 99-10-05-0, as amended by the
Resolutions of 30 January 2001 and 7 August 2001.
With the added information in the notice of sale, the mortgagee need not
cause the reposting and republication of the notice of the rescheduled
auction sale. There is no violation of the notice requirements under Acts Nos.
3135 and 1508 precisely because the interested parties as well as the public
are informed of the schedule of the next auction sale, if the first auction sale
does not proceed. Therefore, the purpose of a notice of sale, which is to
notify the mortgagor and the public of the foreclosure sale, is satisfied.
In the instant case, there is no information in the notice of auction sale of
any date of a rescheduled auction sale. Even if such information were stated
in the notice of sale, the reposting and republication of the notice of sale
would still be necessary because Circular No. 7-2002 took effect only on 22
April 2002. There were no such guidelines in effect during the questioned
foreclosure.
Clearly, DBP failed to comply with the publication requirement under Act No.
3135. There was no publication of the notice of the rescheduled auction sale
of the real properties. Therefore, the extrajudicial foreclosure of the real
estate mortgage is void.
` Page 24 of 63
DBP, however, complied with the mandatory posting of the notices of the
auction sale of the personal properties. Under the Chattel Mortgage Law, the
only requirement is posting of the notice of auction sale. There was no
postponement of the auction sale of the personal properties and the
foreclosure took place as scheduled. Thus, the extrajudicial foreclosure of
the chattel mortgage in the instant case suffers from no procedural infirmity.
Here you have to distinguish the requirement of posting as required in Act
3135 and the certificate of posting issued with the sheriff. The certificate of
posting is not required for the validity of an extrajudicial foreclosure. The
fact alone that there is no certificate of posting attached to the sheriff’s
record is not sufficient to prove the lack of posting. What the law requires is
the posting of the notice of sale, which is present in this case, and not the
execution of the certificate of posting. Moreover, the presumption prevails
that the sheriffs performed their official duty of posting the notices of sale.
Now, about the issue with regard to the publication. There was a publication
of the sale here in 3 different dates in a newspaper of general circulation but
the date provided therein is different from the date of the actual date of sale
because they moved the said sale.
We could apply the same rule here with regard to extrajudicial foreclosure
so that there would be less expenses for publication. But in this instance,
there is no provision in the notice of sale that in case the first sale or first
schedule the sale will not push through, the sale will be transferred to
another specific date. That is not present in the case. That is not compliance
with the foreclosure proceedings which made it invalid.
The Court, with this notice, hopes to deter the practice of some mortgagors
in requesting postponement of the auction sale of real properties, then later
attacking the validity of the foreclosure for lack of republication. This
practice will only force mortgagees to deny outright requests for
postponement by mortgagors since it will only mean added publication
expense on the part of mortgagees.
Moreover, differentiate this with the Chattel Mortgage Law. Under the
Chattel Mortgage Law, the only requirement is posting of the notice of
auction sale. In this case, there was no postponement of the auction sale of
the personal properties and the foreclosure took place as scheduled. Thus,
the extrajudicial foreclosure of the chattel mortgage in the instant case
suffers from no procedural infirmity.
Take note in this case of strict compliance with the requirement of notice of
publication as provided under Act 3135.
FIRST DIVISION [G.R. No. 129279. March 4, 2003]
ALFREDO M. OUANO, petitioner, vs. COURT OF APPEALS, and HEIRS OF
JULIETA M. OUANO
Facts: On June 8, 1977, respondent Julieta M. Ouano (Julieta), now
deceased, obtained a loan from the Philippine National Bank (PNB) in the
amount of P104, 280.00. As security for said loan, she executed a real estate
mortgage over two parcels of land located at Opao, Mandaue City. She
defaulted on her obligation. On September 29, 1980, PNB filed a petition for
extrajudicial foreclosure with the City Sheriff of Mandaue City.
On November 4, 1980, the sheriff prepared a notice of sale setting the date
of public auction of the two parcels of land on December 5, 1980 at 9:00
a.m. to 4:00 p.m. He caused the notice to be published in the Cebu Daily
Times, a newspaper of general circulation in Mandaue City, in its issues of
November 13, 20 and 27, 1980. He likewise posted copies thereof in public
places in Mandaue City and in the place where the properties are located.
However, the sale as scheduled and published did not take place as the
parties, on four separate dates, executed Agreements to Postpone Sale
(Agreements). These Agreements were addressed to the sheriff, requesting
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
the latter to defer the auction sale to another date at the same time and
place, without any further republication of the Notice. Petitioner, however,
insists that there was substantial compliance with the publication
requirement, considering that prior publication and posting of the notice of
the first date were made
ISSUES:
1. Whether the rescheduled extrajudicial foreclosure sale was valid despite
absence of republication of the Notice, despite agreement between
parties to do away with the republication
NO. The governing law for extrajudicial foreclosures is Act No. 3135 as
amended by Act No. 4118. The provision relevant to this case is Section 3,
which provides:
SEC. 3. Notice shall be given by posting notices of the sale for not
less than twenty (20) 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 of
city.
It is a well-settled rule that statutory provisions governing publication of
notice of mortgage foreclosure sales must be strictly complied with, and that
even slight deviations therefrom will invalidate the notice and render the
sale at least voidable. Where required by the statute or by the terms of the
foreclosure decree, public notice of the place and time of the mortgage
foreclosure sale must be given, a statute requiring it being held applicable to
subsequent sales as well as to the first advertised sale of the property.
The principal object of a notice of sale in a foreclosure of mortgage is not so
much to notify the mortgagor as to inform the public generally of the nature
and condition of the property to be sold, and of the time, place, and terms of
the sale. Notices are given to secure bidders and prevent a sacrifice of the
property. Clearly, the statutory requirements of posting and publication are
mandated, not for the mortgagors benefit, but for the public or third
persons. In fact, personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not even necessary, unless stipulated. As such, it is imbued
with public policy considerations and any waiver thereon would be
inconsistent with the intent and letter of Act No. 3135.
Publication, therefore, is required to give the foreclosure sale a reasonably
wide publicity such that those interested might attend the public sale. To
allow the parties to waive this jurisdictional requirement would result in
converting into a private sale what ought to be a public auction.
2. Whether publication may be waived as agreed by the parties
It cannot be waived. The principal object of a notice of sale in a foreclosure
of mortgage is not so much to notify the mortgagor as to inform the public
generally of the nature and condition of the property to be sold, and of the
time, place, and terms of the sale. Notices are given to secure bidders and
prevent a sacrifice of the property. Clearly, the statutory requirements of
posting and publication are mandated, not for the mortgagors benefit, but
for the public or third persons. In fact, personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not even necessary, unless
stipulated. As such, it is imbued with public policy considerations and any
waiver thereon would be inconsistent with the intent and letter of Act No.
3135.
3. Whether the Rules of Court applies to an extrajudicial foreclosure sale,
specifically, Rule 39, Section 24 Adjournment of Sale: By written consent
of debtor and creditor, the officer may adjourn any sale upon execution
to any date agreed upon in writing by the parties. Without such
agreement, he may adjourn the sale from day to day, if it becomes
` Page 25 of 63
necessary to do so for lack of time to complete the sale on the day fixed
in the notice.
No. At the outset, distinction should be made of the three different kinds of
sales under the law, namely: an ordinary execution sale, a judicial
foreclosure sale, and an extrajudicial foreclosure sale.
An ordinary execution sale is governed by the pertinent provisions of Rule 39
of the Rules of Court. Rule 68 of the Rules of Court applies in cases of
judicial foreclosure sale.
On the other hand, Act No. 3135, as amended by Act No. 4118 otherwise
known as An Act to Regulate the Sale of
Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages applies in cases of extrajudicial foreclosure sale.
A different set of law applies to each class of sale mentioned.
The cited provision in the Rules of Court hence does not apply to an
extrajudicial foreclosure sale.
4. Whether or not Julieta’s act of requesting the postponement and
repeatedly signing the Agreements (WAIVER) had placed her under
estoppel, barring her from challenging the lack of publication of the
auction sale.
NO. The waiver being void for being contrary to the express mandate of Act
No. 3135, such cannot be ratified by estoppel. Estoppel cannot give validity
to an act that is prohibited by law or one that is against public policy.
Neither can the defense of illegality be waived.
5. Whether or not there is laches when Julieta filed her complaint with the
trial court after almost two years from the May 29, 1981 auction sale
NO. An action or defense for the declaration of the inexistence of a contract
does not prescribe under Article 1410 of the Civil Code.
DISCUSSION
Q: Isn’t it that there was already a waiver of the publication?
A: Yes, there was a waiver. So the question to be answered is may the
requirement of publication and posting be waived by the parties? The
answer is NO. It cannot be waived by the parties. The SC said that publication
is a jurisdictional requirement such that if there is no publication or posting
of notice, jurisdiction will not be conferred upon the court.
Take note of the importance of posting of the notice of sale and the
publication, it must be strictly complied with. In this instance, waiver of the
posting and publication can never be valid. Because as stated in the earlier
case of DBP, the extrajudicial foreclosure sale is public in nature and never
just between the mortgagor and the mortgagee. So even if there was
publication of the notice for the first sale and then the first sale was
subsequently cancelled and postponed, there must be compliance with the
republication and posting of the notice where in the said publication or the
net publication or notice posted will now indicate the next scheduled date of
the foreclosure date. So actual date of sale must conform to what is
provided in the notice that was posted in conspicuous places usually at the
court, city hall, and the barangay where the property is located. And then of
course the requirement of publication.
Now, what happens after the redemption period has already expired, the
foreclosure proceeding was valid, and all the requisites were complied with?
What is the next step for highest bidder, who may be a third person or the
mortgagee? The next step is for such highest bidder to consolidate the title
in his name.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
UNIONBANK OF THE PHILIPPINES VS. THE COURT OF APPEALS and
FERMINA S. DARIO and REYNALDO S. DARIO
DOCTRINE: In real estate mortgage, when the principal obligation is not paid
when due, the mortgages has the right to foreclose the mortgage and to
have the property seized and sold with a view to applying the proceeds to
the payment of the principal obligation. Foreclosure may be effected either
judicially or extra-judicially. In a public bidding during extra-judicial
foreclosure, the creditor mortgagee, trustee, or other person authorized to
act for the creditor may participate and purchase the mortgaged property as
any other bidder. Thereafter the mortgagor has one year within which to
redeem the property from and after registration of sale with the Register of
Deeds. In case of non-redemption, the purchaser at foreclosure sale shall file
with the Register of Deeds, either a final deed of sale executed by the person
authorized by virtue of the power of attorney embodied in the deed or
mortgage, or his sworn statement attesting to the fact of non-redemption;
whereupon, the Register of Deeds shall issue a new certificate of title in
favor of the purchaser after the owner’s duplicate of the certificate has been
previously delivered and cancelled. Thus, upon failure to redeem foreclosed
realty, consolidation of title becomes a matter of right on the part of the
auction buyer, and the issuance of a certificate of title in favor of the
purchaser becomes ministerial upon the Register of Deeds.
FACTS: This case stemmed from a real estate mortgage executed by spouses
Leopoldo and Jessica Dario (hereafter mortgagors) in favor of UNIONBANK to
secure a P3 million loan, including interest and other charges. The mortgage
covered a Quezon City property in Leopoldo Dario’s name and was
annotated on the title on 18 December 1991. For non-payment of the
principal obligation, UNIONBANK extrajudicially foreclosed the property
mortgaged on 12 August 1993 and sold the same at public auction, with
itself posting the highest bid.
On 4 October 1994, one week before the one-year redemption period
expired, the DARIOs filed a complaint with the RTC of Quezon City against
the mortgagors, UNIONBANK, the Register of Deeds and the City Sheriff of
Quezon City. The complaint was for annulment of sale and real estate
mortgage with reconveyance and prayer for restraining order and
prohibitory injunction. A notice of lis pendens was annotated on the title.
On 10 October 1994, RTC issued a temporary restraining order (TRO)
enjoining the redemption of property within the statutory period and its
consolidation under UNIONBANK’s name.
In the meantime, without notifying the DARIOs, UNIONBANK consolidated its
title over the foreclosed property on 24 October 1994. TCT No. 41828 was
cancelled and TCT No. 120929 in UNIONBANK’s name was issued in its stead.
The DARIOs filed an amended complaint on 9 December 1994, alleging that
they, not the mortgagors, are the true owners of the property mortgaged
and insisting on the invalidity of both the mortgage and its subsequent
extrajudicial foreclosure. They claimed that the original title, TCT No. 61571,
was entrusted to a certain Atty. Reynaldo Singson preparatory to its
administrative reconstitution after a fire gutted the Quezon City Hall
building. Mortgagor Leopoldo, private respondent Fermina’s son, obtained
the property from Atty. Singson, had the title reconstituted under his name
without the DARIOs’ knowledge, executed an ante-dated deed of sale in his
favor and mortgaged the property to UNIONBANK.
The CA upheld Judge Capulong’s order admitting the amended complaint on
24 April 1995, UNIONBANK thereafter elevated its cause to this Court.
Meanwhile, on February 9, 1995, UNIONBANK filed its answer ad cautelam
asserting its status as an innocent mortgagee for value whose right or lien
upon the property mortgaged must be respected even if the mortgagor
obtained his title through fraud. It also averred that the action had become
“moot and academic by the consolidation of the foreclosed property on 24
` Page 26 of 63
October 1994” in its name, resulting to the issuance of TCT No. 120929 by
the Register of Deeds of Quezon City.
In its 19 August 1995 Order, the RTC held the mortgagors and the City Sheriff
of Quezon City in default and sustained UNIONBANK’s contention that the
act sought to be enjoined had been enforced, negating the need of hearing
the application for preliminary injunction.
After considering the arguments presented by the parties, the CA ruled that
despite its knowledge that the ownership of the property was being
questioned, UNIONBANK took advantage of the DARIOs’ procedural error by
consolidating title to the property, which “smacked of bad faith” and
“evinced a reprobate disposition of the part of its counsel to advance his
client’s cause by fair means or foul.” As a result thereof the transfer of title
was vitiated by non-adherence to procedural due process.
On 26 June 1997, CA nullified the consolidation of ownership, ordered the
Register of Deeds to cancel the certificate of title in UNIONBANK’s name and
to reinstate TCT No. 41828 with the notice of lis pendens annotated at the
back. The CA also set aside the portion of the assailed
RTC Orders that declared the DARIOs’ prayer for writ of preliminary
injunction as moot and academic. UNIONBANK’s motion for reconsideration
of the abovementioned decision was likewise rejected for lack of merit on 7
April 1998.
UNIONBANK’s contention: came to this Court claiming to be a mortgagee in
good faith and for value with a right to consolidate ownership over the
foreclosed property with the redemption period having expired and there
having been no redemptioners. UNIONBANK contends that the TRO which
provisionally enjoined the tolling of the redemption period was
automatically dissolved upon dismissal of the complaint on 17 October 1994.
Conformably, consolidation of title in its name and the issuance of TCT No.
120929 rendered further proceedings on the application for injunction
academic. Moreover, the alleged fraudulent mortgage was facilitated
through the DARIOs’ negligence so they must bear the loss. It also contends
that since the DARIOs had filed several pleadings, due process, being an
opportunity to be heard either through pleadings or oral arguments, was
observed.
Dario’s contention: that UNIONBANK’s consolidation of the title in its name
was in bad faith, vitiated a standing court order, and is against the law, thus
void ab initio. The application for preliminary injunction was not rendered
moot and academic by consolidation, which took place during the lifetime of
the TRO, and did not follow the proper legal procedure due to the
surreptitious manner it was accomplished. By treating the application for
preliminary injunction as moot and academic and denying the motion for
indirect contempt without hearing, the RTC order ran afoul with the
requirements of due process.
ISSUE: Whether or not the consolidation of title in UNIONBANK’s name
proper. YES
HELD: UNIONBANK’s consolidation of title over the property on 24 October
1994 was proper, though precipitate. Contrary to the DARIOs’ allegation
UNIONBANK violated no standing court order. The only bar to consolidation
was the temporary restraining order issued by Justice Lipana-Reyes on 10
October 1994 which effectively halted the tolling of the redemption period 7
days short of its expiration. When the DARIOs’ original complaint was
dismissed on 17 October 1994 for failure to append a certification of non-
forum shopping, the TRO, as an ancillary order that cannot stand
independent of the main proceeding, became functus officio. Thus the
tolling of the 12-month redemption period, interrupted by the filing of the
complaint and the TRO, recommenced and eventually expired 7 days
thereafter or on 24 October 1994, the date of the disputed consolidation.
The motion for reconsideration and to amend complaint filed by private
respondent on 20 October 1994 was of no moment, this Court recognizing
that “a dismissal, discontinuance or non-suit of an action in which a
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restraining order or temporary injunction has been granted operates as a
dissolution of the restraining order or temporary injunction,” regardless of
whether the period for filing a motion for reconsideration of the order
dismissing the case or appeal therefrom has expired. The rationale therefor
is that even in cases where an appeal is taken from a judgment dismissing an
action on the merits, the appeal does not suspend the judgment, hence the
general rule applies that a temporary injunction terminates automatically on
the dismissal of the action.
We disagree with the appellate court’s observation that consolidation
deprived the DARIOs of their property without due process. It is settled that
the buyer in a foreclosure sale becomes the absolute owner of the property
purchased if it is not redeemed during the period of one year after the
registration of the sale. Consolidation took place as a matter of right since
there was no redemption of the foreclosed property and the TRO expired
upon dismissal of the complaint. UNIONBANK need not have informed
private respondent that it was consolidating its title over the property, upon
the expiration of the redemption period, without the judgment debtor
having made use of his right of redemption, the ownership of the property
sold becomes consolidated in the purchaser. Notice to the mortgagors and
with more reason, to the DARIOs who are not even parties to the mortgage
contract nor to the extrajudicial sale is not necessary.
In real estate mortgage, when the principal obligation is not paid when due,
the mortgage has the right to foreclose the mortgage and to have the
property seized and sold with a view to applying the proceeds to the
payment of the principal obligation. Foreclosure may be effected either
judicially or extrajudicially.
In a public bidding during extra-judicial foreclosure, the creditor-mortgagee,
trustee, or other person authorized to act for the creditor may participate
and purchase the mortgaged property as any other bidder. Thereafter the
mortgagor has one year within which to redeem the property from and after
registration of sale with the Register of Deeds. In case of non-redemption,
the purchaser at foreclosure sale shall file with the Register of Deeds, either
a final deed of sale executed by the person authorized by virtue of the power
of attorney embodied in the deed or mortgage, or his sworn statement
attesting to the fact of non-redemption; whereupon, the Register of Deeds
shall issue a new certificate of title in favor of the purchaser after the
owner’s duplicate of the certificate has been previously delivered and
cancelled. Thus, upon failure to redeem foreclosed realty, consolidation of
title becomes a matter of right on the part of the auction buyer, and the
issuance of a certificate of title in favor of the purchaser becomes ministerial
upon the Register of Deeds.
DISCUSSION
Q: In the filing of the case on Oct. 4, did it stop the one year period from
running? Did it prevent the consolidation of the sale?
A: No. It did not prevent the consolidation.
Q: Would it not prejudice the mortgagor if eventually the annulment of the
foreclosure sale will be granted? Will the consolidation of the title in the
name of the highest bidder prejudice the right of the mortgagor owner of
the property in case the annulment of the foreclosure will be granted?
A: No. THE CONSOLIDATION OF OWNERSHIP OVER THE MORTGAGED
PROPERTY IN FAVOR OF PETITIONER AND THE ISSUANCE OF A NEW TITLE IN
ITS NAME DURING THE PENDENCY OF THE ACTION FOR ANNULMENT AND
RECONVEYANCE WILL NOT CAUSE IRREPARABLE INJURY TO PRIVATE
RESPONDENTS; THE NOTICE OF LIS PENDENS ANNOTATED ON PETITIONERS
TITLE SUBJECT TO THE OUTCOME OF THE LITIGATION, SUFFICIENTLY
PROTECTS THE INTEREST OF PRIVATE RESPONDENTS IN THE PROPERTY.
To be entitled to the injunctive writ, movant must show that there exists a
right to be protected which is directly threatened by an act sought to be
enjoined. Furthermore, there must be a showing that the invasion of the
` Page 27 of 63
right is material and substantial and that there is an urgent and paramount
necessity for the writ to prevent a serious damage. The injunctive remedy
prevents a threatened or continuous irremediable injury to some of the
parties before their claim can be thoroughly investigated and advisedly
adjudicated; it is resorted to only when there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any standard
compensation.
In the case at bar, 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.
This is because as purchaser at a public auction, UNIONBANK is only
substituted to and acquires the right, title, interest and claim of the
judgment debtors or mortgagors to the property at the time of levy. Perforce,
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 UNIONBANK.
More importantly, with the main action for reconveyance pending before
the RTC, the notice of lis pendens, which despite consolidation remains
annotated on UNIONBANKs transfer certificate of title subject to the
outcome of the litigation, sufficiently protects private respondents’ interest
over the property. A transferee pendente lite stands exactly in the shoes of
the transferor and is bound by any judgment or decree which may be
rendered for or against the transferor. Once a notice of lis pendens has been
duly registered, any cancellation or issuance of the title of the land involved
as well as any subsequent transaction affecting the same, would have to be
subject to the outcome of the litigation. In other words, upon the
termination of the litigation there can be no risk of losing the property or any
part thereof as a result of any conveyance of the land or any encumbrance
that may be made thereon posterior to the filing of the notice of lis pendens.
Q: To what extent will be the right of the highest bidder, as in this case,
Union Bank?
A: A buyer in a foreclosure sale becomes the absolute owner of the property
if it is not redeemed during the one year redemption period. Consolidation
takes place as a matter of right since there was no redemption of the
foreclosed property. More so, when the TRO expired upon the dismissal of
the complaint. Union bank need not inform the private respondents that it
was consolidating its title over the property. Consolidation is a matter of
right as to the highest bidder. Notice to the mortgagor-owner, to the private
respondents who are not even parties to the parties in the extrajudicial sale
is not necessary. The mortgagee has the right to foreclose the mortgage,
have the property seized and sold, with the view to apply the proceeds to
the principal obligation. The mortgagor has one year to redeem the property
from the registration of the sale, and upon failure to redeem consolidation
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 upon
the register of deeds. The consolidation of ownership in favour of Union
Bank and his issuance of new title in its name during the pendency of an
action for annulment and reconveyance will not cause irreparable injury to
the private respondents.
After the sale has already taken place, the sheriff will now issue a provisional
certificate of sale because there is still the 1 year redemption period.
Thereafter, the sale will be registered in the Registry of Deeds.
How to validly redeem?
You must pay within the redemption period as provided under the law. You
pay the purchase price plus one percent (1%) interest per month and taxes
from date of registration of sale until date of redemption. (One percent
because this was the previous legal interest rate. But with the new interest,
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
six percent (6%), legal interest rate effective July 1, 2013, then you apply the
appropriate interest rate effective from that date.) Payment is made to the
redemptioner or to the sale officer or the sheriff. The written official
redemption must be served on the officer who made the sale and a
duplicate with the Register of Deeds. If no redemption is made, the sheriff
will issue a final certificate of sale.
During the 1 year redemption period or even thereafter, who gets to have
possession of the property?
G.R. No. 169190 / February 11, 2010
CUA LAI CHU, CLARO G. CASTRO, and JUANITA CASTRO vs. HON. HILARIO L.
LAQUI
Doctrine: The right to possession of a purchaser at an extrajudicial
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.
FACTS: November 1994: Philippine Bank of Communication (respondent)
loaned P3, 200,000 to the petitioners. To secure the loan, petitioners
executed in favor of private respondent a Deed of Real Estate Mortgage.
August 1997: the mortgage was amended, and the loan was increased by P1,
800,000, making the amount P5, 000,000. For failure of petitioners to pay
the full amount of the outstanding loan upon demand, private respondent
applied for the extrajudicial foreclosure of the real estate mortgage.
TRIAL COURT: Granted respondent’s motion for a declaration of general
default and allowed them to present evidence ex parte.
COURT OF APPEALS: Petitioners appealed. However, it was dismissed since
the counsel for petitioners failed to indicate the updated PTR Number in the
said petition, which is a ground for outright dismissal under B.M 1132. The
court held that a proceeding for the issuance of a writ of possession is ex
parte in nature.
ISSUES: Whether the writ of possession was properly issued despite the
pendency of a case questioning the validity of the extrajudicial foreclosure
sale even when petitioners were declared in default.
HELD/REASON: The Supreme Court held that since the private respondent
had purchased the property at the foreclosure sale, their right over the said
property became absolute, vesting in it the corollary right of possession. -
Petitioners cannot oppose or appeal the court’s order granting the writ of
possession in an ex parte proceeding. The remedy of petitioners is to have
the sale set aside and the writ of possession cancelled in accordance with
Section 8 of Act No. 3135, as amended: SEC. 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.
PETITION DISMISSED.
DISCUSSION:
Q: How about within the 1 year redemption period can the highest bidder
file for a writ of possession even if the 1 year period has not yet lapsed?
A: Yes. Sec. 7 of Act 3135, which provides that there is a need to file for a
bond, but the bond is only required if he wants to possess the property
during the redemption period.
Q: Is there a violation of due process with this petition for writ of
possession when the mortgagors were declared in default?
A: No, because after the 1 year redemption period, it is already a ministerial
duty for the court to issue a writ of possession.
` Page 28 of 63
Q: Because what is the nature of this writ of possession?
A: It is ex-parte.
MALLARI vs. GOVERNMENT SERVICE INSURANCE SYSTEM
FACTS: In 1968, the petitioner obtained two loans totalling P34, 000.00 from
respondent GSIS. To secure the performance, he mortgaged two parcels of
land registered under his and his wife Marcelina Mallari’s names. However,
he paid GSIS about ten years after contracting the obligations only P10,
000.00 and P20, 000.00.
Nearly three years later (1984), GSIS applied for the extrajudicial foreclosure
of the mortgage by reason of his failure to settle his account. He requested
an updated computation of his outstanding account. He persuaded the
sheriff to hold the publication of the foreclosure to await action on his
pending request for final accounting (that is, taking his payments of P30,
000.00 made in 1978 into account). GSIS responded to his request. It finally
commenced extrajudicial foreclosure proceedings against him because he
had meanwhile made no further payments.
The petitioner sued GSIS (prelim injunction). The RTC decided in his favor,
nullifying the extrajudicial foreclosure and auction sale. GSIS appealed to the
CA, which reversed the RTC. Petitioner elevated the CA decision to this Court
via petition for review on certiorari.
This Court denied his petition for review and motion for reconsideration. As
a result, the CA decision became final and executory, rendering unassailable
both the extrajudicial foreclosure and auction sale.
Because of the petitioner’s request for an extension of time to vacate the
properties, GSIS acceded to the request. Yet, the petitioner did not
voluntarily vacate the properties, but instead filed a MR and/or to quash the
writ of execution and motion to hold GSIS in contempt of court for painting
the fence of the properties during the pendency of his said motion.
ISSUE: W/N the petitioner, as defaulting mortgagor, was not entitled under
Act 3135, as amended, and its pertinent jurisprudence to any prior notice of
the application for the issuance of the writ of possession.
HELD: No. The petitioner, as defaulting mortgagor, was not entitled under
Act 3135, as amended, and its pertinent jurisprudence to any prior notice of
the application for the issuance of the writ of possession.
A writ of possession, which commands the sheriff to place a person in
possession of real property, may be issued in:
(1) Land registration proceedings under Section 17 of Act No. 496;
(2) Judicial foreclosure, provided the debtor is in possession of the
mortgaged property, and no third person, not a party to the foreclosure suit,
had intervened;
(3) Extrajudicial foreclosure of a real estate mortgage, pending redemption
under Section 7 of Act No. 3135, as amended by Act No. 4118; and
(4) Execution sales, pursuant to the last paragraph of Section 33, Rule 39 of
the Rules of Court.
Anent the redemption of property sold in an extrajudicial foreclosure sale
made pursuant to the special power referred to in Section 132 of Act No.
3135, as amended, the debtor, his successor-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 has the right to redeem the property at any time within the
term of one year from and after the date of the sale, such redemption to be
governed by the provisions of Section 464 to Section 466 of the Code of Civil
Procedure, to the extent that said provisions were not inconsistent with the
provisions of Act 3135.
In this regard, we clarify that the redemption period envisioned under Act
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
3135 is reckoned from the date of the registration of the sale, not from and
after the date of the sale, as the text of Act 3135 shows. Although the
original Rules of Court (effective on July 1, 1940) incorporated Section 464 to
Section 466 of the Code of Civil Procedure as its Section 25 (Section 464);
Section 26 (Section 465); and Section 27 (Section 466) of Rule 39, with
Section 27 still expressly reckoning the redemption period to be "at any time
within twelve months after the sale;" and although the Revised Rules of
Court (effective on January 1, 1964) continued to provide in Section 30 of
Rule 39 that the redemption be made from the purchaser "at any time
within twelve (12) months after the sale," the 12-month period of
redemption came to be held as beginning "to run not from the date of the
sale but from the time of registration of the sale in the Office of the Register
of Deeds."36 This construction was due to the fact that the sheriff’s sale of
registered (and unregistered) lands did not take effect as a conveyance, or
did not bind the land, until the sale was registered in the Register of Deeds.
Desiring to avoid any confusion arising from the conflict between the texts of
the Rules of Court (1940 and 1964) and Act No. 3135, on one hand, and the
jurisprudence clarifying the reckoning of the redemption period in judicial
sales of real property, on the other hand, the Court has incorporated in
Section 28 of Rule 39 of the current Rules of Court (effective on July 1, 1997)
the foregoing judicial construction of reckoning the redemption period from
the date of the registration of the certificate of sale, to wit:
Sec. 28. Time and manner of, and amounts payable on, successive
redemptions; notice to be given and filed. — The judgment obligor, or
redemptioner, may redeem the property from the purchaser, at any time
within one (1) year from the date of the registration of the certificate of sale,
by paying the purchaser the amount of his purchase, with one per centum
per month interest thereon in addition, up to the time of redemption,
together with the amount of any assessments or taxes which the purchaser
may have paid thereon after purchase, and interest on such last named
amount at the same rate; and if the purchaser be also a creditor having a
prior lien to that of the redemptioner, other than the judgment under which
such purchase was made, the amount of such other lien, with interest.
Property so redeemed may again be redeemed within sixty (60) days after
the last redemption upon payment of the sum paid on the last redemption,
with two per centum thereon in addition, and the amount of any
assessments or taxes which the last redemptioner may have paid thereon
after redemption by him, with interest on such last-named amount, and in
addition, the amount of any liens held by said last redemptioner prior to his
own, with interest. The property may be again, and as often as a
redemptioner is so disposed, redeemed from any previous redemptioner
within sixty (60) days after the last redemption, on paying the sum paid on
the last previous redemption, with two per centum thereon in addition, and
the amounts of any assessments or taxes which the last previous
redemptioner paid after the redemption thereon, with interest thereon, and
the amount of any liens held by the last redemptioner prior to his own, with
interest.
Written notice of any redemption must be given to the officer who made the
sale and a duplicate filed with the registry of deeds of the place, and if any
assessments or taxes are paid by the redemptioner or if he has or acquires
any lien other than that upon which the redemption was made, notice
thereof must in like manner be given to the officer and filed with the registry
of deeds; if such notice be not filed, the property may be redeemed without
paying such assessments, taxes, or liens. (30a) (Emphasis supplied).
Accordingly, the mortgagor or his successor-in-interest must redeem the
foreclosed property within one year from the registration of the sale with
the Register of Deeds in order to avoid the title from consolidating in the
purchaser. By failing to redeem thus wise, the mortgagor loses all interest
over the foreclosed property.38 The purchaser, who has a right to
possession that extends beyond the expiration of the redemption period,
becomes the absolute owner of the property when no redemption is made,
` Page 29 of 63
that it is no longer necessary for the purchaser to file the bond required
under Section 7 of Act No. 3135, as amended, considering that the
possession of the land becomes his absolute right as the land’s confirmed
owner. The consolidation of ownership in the purchaser’s name and the
issuance to him of a new TCT then entitles him to demand possession of the
property at any time, and the issuance of a writ of possession to him
becomes a matter of right upon the consolidation of title in his name.
The court can neither halt nor hesitate to issue the writ of possession. It
cannot exercise any discretion to determine whether or not to issue the writ,
for the issuance of the writ to the purchaser in an extrajudicial foreclosure
sale becomes a ministerial function. Verily, a marked distinction exists
between a discretionary act and a ministerial one. A purely ministerial act or
duty is one that an officer or tribunal performs in a given state of facts, in a
prescribed manner, in obedience to the mandate of a legal authority,
without regard to or the exercise of his own judgment upon the propriety or
impropriety of the act done. If the law imposes a duty upon a public officer
and gives him the right to decide how or when the duty shall be performed,
such duty is discretionary, not ministerial. The duty is ministerial only when
its discharge requires neither the exercise of official discretion nor the
exercise of judgment.
The proceeding upon an application for a writ of possession is ex parte and
summary in nature, brought for the benefit of one party only and without
notice being sent by the court to any person adverse in interest. The relief is
granted even without giving an opportunity to be heard to the person
against whom the relief is sought. Its nature as an ex parte petition under
Act No. 3135, as amended, renders the application for the issuance of a writ
of possession a non-litigious proceeding.
It is clear from the foregoing that a non-redeeming mortgagor like the
petitioner had no more right to challenge the issuance of the writ of
execution cum writ of possession upon the ex parte application of GSIS. He
could not also impugn anymore the extrajudicial foreclosure, and could not
undo the consolidation in GSIS of the ownership of the properties covered by
TCT No. 284272-R and TCT No. 284273-R, which consolidation was already
irreversible. Hence, his moves against the writ of execution cum writ of
possession were tainted by bad faith, for he was only too aware, being his
own lawyer, of the dire consequences of his non-redemption within the
period provided by law for that purpose.
DISCUSSION:
Q: So aside from the fact that the provision of Mallari was denied, what
was ruling of the court?
A: Mallari as a lawyer was guilty of misconduct because he delayed the
proceedings.
The extrajudicial foreclosure was filed in 1984 but there were several
extensions, motions, cases of contempt of court, because as a lawyer,
Mallari would not incur attorney’s fees. Even if it was very clear that the
foreclosure is proper, nevertheless, it was extended up to 2010. The SC
pointed out that not only was his petition denied but he was also found
guilty of misconduct.
It’s a petition for writ of possession where the property is located and the
nature of this petition is ex-parte. In other words, notice to the mortgagor is
not required and it does not violate the right to due process of the
mortgagor in this kind of petition. Second, it is ministerial. As long as the
requisites have been complied with.
A writ of possession will be granted when the following requisites are
complied with:
1. There was an extra judicial foreclosure proceeding;
2. petitioner is the highest bidder; and
3. that there was consolidation and title was already issued in
petitioner’s name.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
What about if there is a deficiency?
If the sale took place however the proceeds are not sufficient to extinguish
the obligation, can the creditor mortgagee proceed against the debtor for
the deficiency? -- Not necessarily the mortgagor. Because the mortgagor will
be the third person and as a third person he cannot be liable for any
deficiency but if you say judicial foreclosure, the mortgagee can still recover
from the deficiency. If will be part of the judgment that if the there is a
deficiency, the mortgagee may still proceed against the debtor for the
deficiency. As to extrajudicial foreclosure, under Act 3135, there is no
provision which explicitly states that the debtor will be liable for the
deficiency. But the SC has been consistent in its ruling that the mortgagee
may still demand from the debtor the deficiency.
What if there is an excess?
Whether it is a judicial or extra-judicial, foreclosure, if there is an excess, it
shall be returned to the mortgagor.
What about if the sale or if the purchase price during the sale is inadequate?
Under obligations and contract, gross inadequacy of the price will not
necessarily invalidate the sale unless there is fraud or other vitiation of
consent. In an extra-judicial foreclosure sale or judicial foreclosure sale, if the
price of the thing is grossly inadequate, can the foreclosure sale be rescinded
on the ground that it is inadequate? Take note it is more liberal when it
comes to redemption. Why? Because with regard to whether it is equity of
redemption—which is before the sale or before the confirmation of the sale,
but essentially with these two foreclosure proceedings, if the price is grossly
inadequate, as a general rule, it will not justify the rescission of the sale.
Why? Because if the price is inadequate, it will be in favor of the mortgagor
redemptioner. So as we have seen in some cases that we have discussed, the
loss with be liberally construed in favor of the redemptioner. Exception to
the exception is if the inadequacy is shocking to the conscience of man. But
unless it can be proven that it is shocking to the conscience, mere
inadequacy of the price will not invalidate the sale because it is in favour of
the redemptioner.
In relation to foreclosure proceedings, we also have to take note of
equitable mortgage provided under Art. 1602 wherein a deed of sale or a
deed of sale with right to repurchase or an absolute sale could be deemed as
an equitable mortgage. One of the instances provided in Article 1602 is when
the price of the sale with the right to repurchase is unusually inadequate. So
no sale but what we have is an equitable mortgage. So again that would be
in favor of the owner of the property because it would only be subject to a
lien and thereafter we could seek for the reformation. Reformation is the
remedy here if what was executed was a deed of sale but the intention was
to have that property secure the principal obligation. So the owner of the
property can seek for reformation of the said contract. Why? There was an
agreement but not deed of sale, only a mortgage.
But what if the mortgagee, based on that pacto de retro sale or deed of
absolute sale, will file an action for recovery of possession against the owner
of the property?
That would be the time that the owner of the property can raise the defense
that what they had was not a deed of sale or a deed of absolute sale or a
pacto de retro sale but rather an equitable mortgage by showing that there
was a principal obligation and any of the circumstances in Article 1602 are
present. But with that defense and if it is duly proven, the owner of the
property would still continue in possession of that property and the
mortgagee would not be entitled thereto but he will be entitled to foreclose
the property if there is failure to pay the obligation.
March 7 – Kaye
Last meeting we discussed the relevant provisions with regard to real estate
mortgage in relation to Act 3135. Under the said law, it requires posting and
publication. We have emphasized in our past discussions the relevance of
` Page 30 of 63
such posting at conspicuous public places and we also have the publication
wherein failure to comply of these requirements will invalidate the
foreclosure. Let us check the case of Ramirez which emphasizes this notice
requirement.
JOSE T. RAMIREZ v. THE MANILA BANKING CORPORATIONG.R.
No. 198800, December 11, 2013
Reporter: Guinomla
Facts: Ramirez obtained a loan from Manila Banking and mortgaged his
property. In their contract of mortgage, it was expressly stipulated that:
“All correspondence relative to this MORTGAGE, including demand
letters, summons, subpoenas or notifications of any judicial or
extrajudicial actions shall be sent to the MORTGAGOR”
Ramirez defaulted in his obligation thus Manila Banking proceeded with the
extrajudicial foreclosure of the mortgaged property without giving notice to
Ramirez, contrary to what they have stipulated as mentioned above.
Issue: What is the legal effect of violating an express stipulation of the deed
of mortgage which requires personal notice to the petitioner–mortgagor by
the respondent–mortgagee bank?
The extrajudicial foreclosure sale is NULL AND VOID.
Personal notice to the mortgagor in extrajudicial foreclosure proceedings is
not necessary because Section 3 of Act No. 3135 only requires the posting of
the notice of sale in three public places and the publication of that notice in
a newspaper of general circulation HOWEVER, if there is an additional
requirement as to the manner of giving notice as agreed by the parties, IT
MUST BE COMPLIED WITH, otherwise the extrajudicial foreclosure sale will
be void.
The Act only requires:
(1) the posting of notices of sale in three public places, and
(2) the publication of the same in a newspaper of general circulation.
Personal notice to the mortgagor is not necessary. Nevertheless, the parties
to the mortgage contract are not precluded from exacting additional
requirements.
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 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 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 alien 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
Q: Does Act 3135 require notice to the mortgagor for the foreclosure sale?
A: No Maam.
Q: So what is the effect of that stipulation?
A: According to the Supreme court, the general rule is that notification is not
required in the foreclosure of properties. However, the parties are not
barred to stipulate such in their contract of mortgage. And in case, there is
such stipulation, the parties must comply with such.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Q: So what is the effect of failing to do so?
A: Failure to do so will render the foreclosure of the mortgage void.
Atty Sarona: So again now take note, that under Act 3135, personal notice
to the mortgagor is not necessary, it only requires the posting of the notice
in conspicuous public places and the publication in a newspaper of general
circulation. However, if the parties stipulate that the mortgagor must be
notified for the foreclosure proceeding as what happened in this case of
Ramirez, then such must be complied with. The respondents have no choice
but to comply with this contractual provision for the contract is still obligated
(? not clear). It’s not really an additional obligation imposed by law. But it is
an obligation by virtue of the contract between the parties. So unless the
parties stipulate personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not necessary.
We also pointed out last meeting that if there is failure to redeem the
property within the 1 year period, the mortgagee may submit an affidavit of
consolidation and cancel the old title and a new one will be issued in favor of
the highest purchaser to which after the title has been consolidated, the
highest purchaser will now be entitled to possession thereof. And in fact,
during the period of redemption, the highest bidder is also entitled to the
possession. However, it is required to post a bond.
Now how about in this case of Sps Dulnuan v Metrobank
SPS. DULNUAN v METROBANK
GR 19864 July 8, 2015
Reporter: Lagat
Facts:
The Sps entered into a contract of loan with Metrobank. To secure the
obligation, they instituted a real estate mortgage in their property. The
spouses defaulted in their obligation so Metrobank sought the extrajudicial
foreclosure of their property wherein it emerged as the highest bidder. After
the lapse of the period of redemption period without the Sps redeeming
their property, Metrobank sought the consolidation of title in its favor. The
Sps opposed such by filing a complaint for annulment of the mortgage
contending that consolidation was not proper because it was made during
the redemption period.
The courts decided in favor of Metrobank stating that in forclosure
proceedings the highest bidder whether the mortgagee or not is entitled to
possession. And during the redemption period, there has to be a bond that
must be issued.
Issue: WON Metrobank as the highest bidder entitled to possession
despite non-posting of the bond?
Yes
It is an established rule that the purchaser in an extra-judicial foreclosure
sale is entitled to the possession of the property and can demand that he be
placed inpossession of the same either during (with bond) or after the
expiration (without bond) of the redemption period therefor. 20 The non-
expiration of the period of redemption shall not preclude the purchaser from
taking possession of the property provided that the necessary is posted. The
buyer can in fact demand possession of the land even during the redemption
period except that he has to post a bond in accordance with Section 7 21 of
Act No. 3135, as amended. In the case at bar, Metrobank manifested its
willingness to post a bond but its application for the issuance of the writ of
possession was unjustly denied by the RTC.
Q: So in this case, was the possession prayed for by Metrobank made during
the period of redemption?
A: Yes Maam
` Page 31 of 63
Q: Did Metrobank post the required bond? As you said, as a requirement,
the highest bidder must post a bond. What was the basis of the the SC’s
ruling in favor of Metrobank? Is Metrobank entitled to possession?
A: No Maam, no bond was posted by MB
Q: So why as it entitled to possession when no bond was posted? What does
Sec 7 of Act 3135 provide?
Atty Sarona: Yes that is there is a difference if the possession is prayed for
during the redemption period because in that case, bond is required
Q: You said that Metrobank did not post a bond. But why was it that it was
still entitled to possession in this case?
A: Because the RTC denied their application for writ of possession.
Q: What is the effect of the action of the Sps Dulnuan in relation to the
prayer for possession?
Atty Sarona: So here even before the redemption period, the highest
purchaser in the foreclosure sale can still be entitled to possession. He can
demand that he be given possession of the same even during but with a
bond. After expiration of the redemption period, this time without a bond.
The expiration of the period of redemption shall not preclude the purchaser
from taking possession of the property provided that the necessary bond is
posted. The buyer may in fact demand possession of the land even during
the redemption period except that he has to post a bond.
In this case, Metrobank did not actually post a bond. But in its petition for
possession, it manifested its willingness to post a bond. But its application
for issuance was denied by the RTC. Secondly, the pendency of the action
filed by the Sps stating the validty of the mortgage again does not bar the
issuance of the writ of possession.
From the FT of the case The pendency of the action assailing the validity of
the mortgage should not bar the issuance of the writ of possession. A
pending action for annulment of mortgage or foreclosure does not stay the
issuance of a writ of possession. Regardless of the pendency of such suit, the
purchaser remains entitled to a writ of possession, without prejudice, of
course, to the eventual outcome of the pending annulment case.
DARCEN v GONZALES, GR 199747 April 3, 2015
Reporter: Mangadlao
Facts
The Darcens including the spouse are heirs to parcels of land which they
inherited from their patriarch. The wife, obtained a loan from Gonzales
Credit and mortgaged the inherited properties. Since she was not able to pay
her obligation, Gonzales Credit initiated an extrajudicial foreclosure
proceeding on the mortgaged property. There was a console dation of
ownership of the said properties under Gonzales Credit. The heirs were not
able to redeem the said properties within the redemption period.
Thereafter, a writ of possession was issued in favor of Gonzales.
CLAIM OF DARCENS: The issuance of the writ of possession possession is
improper as they are in adverse possession of the property. The issuance of
the writ shouldn’t have been ministerial. Thus the Darcens filed an action for
the annulment of the writ.
ISSUES:
1. Whether or not it is ministerial for the court toissue a writ of possession
after consolidation of the ownership of the property in the name of the
buyer.
YES. The long-settled rule in extrajudicial foreclosure ofreal estate mortgage
is that after consolidation of ownership of the foreclosed property, it is the
ministerial duty of the court to issue, as a matter of right, an ex parte writ of
possession to the buyer.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
The established rule is that the purchaser in an extrajudicial foreclosure sale
becomes the absolute owner of the property if no redemption is made
within one (1) year from the registration of the certificate of sale by those
who are entitled to redeem. Possession being a recognized essential
attribute of ownership, after consolidation of title the purchaser may
demand possession as a matter of right.29 Under Section 7 of Act No. 3135,
as amended by Act No. 4118, the issuance of the writ is merely a ministerial
function of the RTC, which the new owner may obtain through an ex parte
motion.
The possession may be granted to the buyer either
(a)within the one-year redemption period, upon the filing by the purchaser
of a bond, or
(b) after the lapse of the redemption period, without need of a bond.
2. Whether or not a pending action for the annulment of the writ stays the
issuance of the writ of possession.
NO.
As a GENERAL RULE:
It is settled that a pending action for annulment of mortgage or foreclosure
sale does not stay the issuance of the writ of possession. The trial court,
where the application for a writ of possession is filed, does not need to look
into the validity of the mortgage or the manner of its foreclosure. The
purchaser is entitled to a writ of possession without prejudice to the
outcome of the pending annulment case.
As an EXCEPTION:
The ministerial duty of the court to issue an ex parte writ of possession
ceases once it appears that there is a third party in possession of the
property, who is a stranger to the mortgage and who claims a right adverse
to that of the debtor/ mortgagor.
For the EXCEPTION TO APPLY:
The property need not only be possessed by a third party, but also held by
the third party adversely to the debtor/mortgagor.
Basis:
Section 33, Rule 39 of the Rules of Court provides that in an execution sale,
the possession of the property shall be given to the purchaser or last
redemptioner, unless a third
party is actually holding the property adversely to the judgment obligor.
The application of the above Section has been extended to extrajudicial
foreclosure sales pursuant to Section 6 of ActNo. 3135, to wit:
Sec. 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
alien on the property subsequent to the mortgage or deed oftrust 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 sale; and such redemption shall
be governed by the provisions of section four hundred and sixty-four to
fourhundred and sixty-six, inclusive, of the Code of CivilProcedure, in so far
as these are not inconsistent with the
provisions of this Act.
In this case, the DARCENS, were not able to prove that they are adverse
party claimants thus the issuance of the writ may be done ministerially.
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
` Page 32 of 63
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 shalldispose in his favor of all
or part of the bond furnished by 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.
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.
Q: What’s the significance of adverse possession in relation to the petition
for writ of possession?
A: Here Maam, as an exception to the general rule is in an adverse
possession of a third person, the issuance of a writ of possession will cease
to be a ministerial duty of the courts?
Q: Who are in possession of the property?
A: The Darcens
Q: Are they considered possessors having adverse rights to the morgagors?
A: Here Maam, they failed to establish that they are the adverse parties
Q: By what right then are they possessing the property?
A:
Q: Who are they, by the way?
A: They are the children of mortgagor
Atty Sarona: So therefore, they are not adverse 3rd parties because being
successors in interest, the right emanate from the mortgagor not adverse to
the said mortgagor . therefore, we apply the general rule that the issuance of
the writ of possession is ministerial
So here, not even the annulment of mortgage will stay the execution of the
writ of possession. Again, as a general rule, it is a ministerial duty of the
court to issue an ex-parte writ for possession.
As an exception, such ministerial duty ceases when it appears that there is a
3rd party in possession of the property who is a stranger to the mortgage and
whose rights are adverse to the debtor or mortgagor.
Case at bar
So in this case, there is no proof that the petitioners are adverse 3rd party
claimants. There is also no evidence that their right emanate from another
owner adverse to the mortgagor. In fact, it was established that they were
heirs or successors in interest of the said mortgagors. And therefore, they
are bound by the said mortgage. And they cannot question the issuance of
writ of possession by the courts. It is its ministerial duty.
SPS GATUSLAO v YANSON, GR 191540 August 26, 2014
Reporter: Campaner
Facts: The wife here Erlinda Gatuslao was the daughter of late Limsiaco who
was the original owner of the parcel of land. Limsiaco, during his lifetime
mortgage the herein properties that are subject of the complaint to PNB.
Due to Mr Limsiaco’s failure to pay the obligation, PNB extrajudicially
foreclosed the property and subsequently it emerged as the highest bidder.
After the lapse of the 1 year redemption period, the estate of Limsiaco did
not redeem the property. PNB caused the consolidation of the titles in its
favor.
Without a writ of possession being issued in favor of PNB, PNB sold the
properties to respondent Yanson. So Yanson filed a complaint before the RTC
for an ex-parte motion for writ of possession. So the petitioner (heirs of
Limsiaco) intervened contending that the respondent is not entitled to the
issuance of ex-parte writ of possession because it should be PNB(the
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
predecessor and seller of Yanson) that is entitled to such.
RTC granted the writ in favor of the Yansons
Issue: WON the subsequent buyer of the property is entitled to the issuance
of the writ of possession
Respondent is entitled to the issuance of writ of possession.
Petitioners insist that respondent is not entitled to the issuance of the writ of
possession under Section 7 of Act No. 3135 as he is only a buyer of the
subject properties in a contract of sale subsequently executed in his favor by
the actual purchaser, PNB. To them, it is only the actual purchaser of a
property at the public auction sale who can ask the court and be granted a
writ of possession.
This argument is not tenable. Respondent, as a transferee or successor-in-
interest of PNB by virtue of the contract of sale between them, is considered
to have stepped into the shoes of PNB. As such, he is necessarily entitled to
avail of the provisions of Section 7 of Act No. 3135, as amended, as if he is
PNB. This is apparent in the Deed of Absolute Sale 46 between the two, viz.:
1. The Vendor hereby sells, transfer[s] and convey[s] unto [and] in
favor of the Vendee, and the latter's assigns and successors-in-
interest, all of the former's rights and title to, interests and
participation in the Property on an "AS IS, WHERE IS" basis. It is thus
understood that the Vendee has inspected the Property and has
ascertained its condition.
2. The Vendor is selling only whatever rights and title to, interests and
participation it has acquired over the Property, and the Vendee
hereby acknowledges full knowledge of the nature and extent of the
Vendor's rights and title to, [and] interests and participation in the
Property.
3. The Vendee further agrees to undertake, at its/his/herexpense, the
ejectment of any occupant of the Property.
(Emphases in the original)
Verily, one of the rights that PNB acquired as purchaser of the subject
properties at the public auction sale; which it could validly convey by way of
its subsequent sale of the same to respondent, is the availment of a writ of
possession. This can be deduced from the above-quoted stipulation that
"[t]he [v]endee further agrees to undertake, at . . . his expense, the
ejectment of any occupant of the [p]roperty." Accordingly, respondent filed
the contentious ex parte motion for a writ of possession to eject petitioners
therefrom and take possession of the subject properties.
Q: Who filed for the petition for writ of possession?
A: Yanson, the subsequent purchaser of PNB (the highest bidder)
Q: Was the petition of writ of possession properly filed even if Mr Yanson
was not the highest bidder during the foreclosure sale?
A: Yes Maam. The SC said that the R is entitled to a writ of possession
because of the following reasons
1. PNB(it’s predecessor is entitled to such possession
2. Due to the transfer of ownership(sale) from PNB to respondent
Yanson, the latter acquired all the rights of PNB
Atty Sarona: This emphasized that the petition for writ of possession
remains to be ex-parte in nature. And the duty of the courts is a ministerial
duty to issue the same as long as the ones in possession are not strangers or
third party to the foreclosure sale.
` Page 33 of 63
Here, as Limsiaco’s successor’s in-interest, Petitioners merely stepped into
the shoes of and compelled not only to acknowledge but also to respect the
mortgage that it had earlier executed in favor or respondent. Not being 3rd
parties who have a right contrary to that of the mortgagor, the trial court is
justified in issuing the writ. So the writ of possession may be issued ex-parte.
And being ex-parte, no notice is required to be issued to the petitioners who
are in possession of the subject property. The ex-parte nature of the
proceedings does not deny due process to the petitioners because the
issuance of the same does not prevent a separate case for annulment of
mortgage and foreclosure sale. The court may grant the petition even
without the petitioner’s participation.
Case at bar: The record show that the petitioners were able to be heard or
were actually heard on their side of the controversy so there is no violation
of due process. With regard to the right of respondent, remember, Yanson
was not the highest bidder at the foreclosure sale. It was PNB. And PNB sold
the same to the respondent. As transferee or successor in-interest of PNB,
respondent is to be considered to also step into the shoes of PNB and
necessarily entitled to avail of the provisions of Sec 7 of Act 3135.
One of the rights that can be applied as a purchaser is that it could validly
convey by way of its subsequent sale of the same to respondent in the
availment of the writ of possession.
OKABE v SATURNINO; GR 196040 August 26, 2014
Reporter: Borbe
Facts: The subject of this case is a 81 sq. m. property that was donated in
Makati. The said property was registered in the same of the wife of Ernesto
Saturnino, respondent.
The Sps Saturnino obtained a loan from PNB and the loan was secured by the
said property. However, they failed to settle their loan obligation. So PNB
consolidated the property. The Spss were not able to redeem the property
during the redemption period .
PNB, without taking possession of the property sold it to Fe Okabe,
petitioner. Petitioner now filed an ex-parte issuance of a writ of possession
of the subject property. However, this was opposed by Saturnino(mortgagor
debtor)
RTC ruled in favor of Okabe. It held that the issuance of a writ is a ministerial
duty of the court
Issue: WON an ex-parte petition for the issuance of a writ of possession
was the proper remedy of the petitioner in obtaining possession of the
subject property.
Held: YES. Purchaser in the foreclosure sale may apply for a writ of
possession during the redemption period, 30 upon an ex parte motion and
after furnishing a bond. I n GC Dalton Industries, Inc. v. Equitable PCI Bank,
31 the Court held that the issuance of a writ of possession to a purchaser in
an extrajudicial foreclosure is summary and ministerial in nature as such
proceeding is merely an incident in the transfer of title. Also, in China
Banking Corporation v. Ordinario, 32 we held that under Section 7 of Act No.
3135, the purchaser in a foreclosure sale is entitled to possession of the
property.
Case at Bar: Here, petitioner does not fall under the circumstances of the
aforequoted case and the provisions of Section 7 of Act No. 3135, as
amended, since she bought the property long after the expiration of the
redemption period. Thus, it is PNB, if it was the purchaser in the foreclosure
sale, or the purchaser during the foreclosure sale, who can file the ex-parte
petition for the issuance of writ of possession during the redemption period,
but it will only issue upon compliance with the provisions of Section 7 of Act
No. 3135.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Q: So is Okabe entitled to the writ of possession?
A: It is only required when the third person is an adverse possessor.
Q: What do you mean by adverse possessor?
A: Because in this case, Okabe brought the property from PNB, hence Okabe
was subrogated the rights of PNB to file the writ of possession.
Atty Sarona: So take note the general rule for the issuance or writ of
possession. It is ministerial in nature. With regard to the court, it must issue
the writ of possession provided that the following requisites are present.
1. Foreclosure sale
2. The petitioner who is the highest bidder in the foreclosure sale
3. Title has been consolidated and registered in his name
When all of those are duly presented, then the court has the ministerial duty
to issue the writ of possession. Moreover, the proceeding is ex-parte. So
there is no need for the participation of motgagor or his heirs or any party in
possession thereof whose title is not adverse to that of the debtor
mortgagor.
However, take note the SC further noted that the remedy of the writ of
possession that is available to the mortgagee is made available to its
subsequent purchaser.
Is hearing required?
IT DEPENDS
Hearing is required to determine who is in possession of the property. Unlike
if the purchaser is the mortgagee or 3rd party during the redemption period
wherein a writ of possession may issue ex-parte or without hearing.
HEARING IS REQUIRED
1. Acquired by 3rd party
2. After redemption period
If the purchaser is a third party who acquired the property after the
redemption period, a hearing is conducted to determine whether who is in
possession of the subject property is still the mortgagor or is already in the
possession of a 3rd party holding the property adverse to the defaulting
debtor or mortgagor.
Why?
Because if it is in possession of the mortgagor, then a writ of possession can
be issued.
But if it is in possession of a third person whose title is adverse to the
mortgagor, the issuance of the writ of possession is not proper.
What is the remedy here of the subsequent purchaser?
File an action for ejectment.
1. Unlawful detainer
2. Recovery of possession: if it is more than 1 year na
Between the action for ejectment and the writ of possession, mas mabilis
talaga ang writ of possession kasi nga it’s ministerial and ex-parte. But you
have to take into possession, who is in possession of the property.
So there is no inconsistency between the case of Gatuslao and the present
case of Okabe. The SC here just elucidated that hearing is needed to
determine who is in possession thereof .If the one in possession does not
hold the property adverse from the mortgagor. When we say adverse, his
right does not emanate from the mortgagor. Example he purchased or
inherited it from another person or the tenants under the tenancy laws. In
these case, the remedy is not a writ of possession. You really have to file an
action for ejectment whether it is summary or more than 1 year.
SPS GUEVARA v THE COMMONER LENDING ; GR 204672
Reporter: Del Rosario
Facts: Sps Guevara obtained a 320k loan from PCLC which was secured by a
real estate mortgage over a land situated in Iloilo from a free patent granted
to them.
` Page 34 of 63
When the Sps defaulted in their payments, PCLC extrajudicially foreclosed
the mortgage in accordance with Act 3135. PCLC emerged as the highest
bidder. So a certificate of sale was issued to them. And the same was
registered. Sps. Guevara failed to redeem within 1 year so a new TCT was
issued to PCLC. When PCLC applied for writ of possession, the Sps opposed
the same . The challenged the validity of the foreclosure contending that
PCLC failed to observe the proper procedure. And they also assailed the
issuance of the final deed of sale saying that it is premature since they are
still entitled to redeem the property within 5 years from the expiration of the
1 year redemption period.
So the Sps Guevara filed an action for redemption maintaining that they still
have 5 years to redeem the property .
RTC while it granted the writ of possession and notice to vacate in favor of
TCLC, it also granted the petition in the cadastral case filed by the Sps
Guevara. The RTC also recognized the right to repurchase of the Sps within
the 5 year period provided under Sec 119 of the Public land act(CA 141)
Issue: What is the correct redemption period that must be followed?
Lending/ Credit Institution has 1 year
In an extra-judicial foreclosure of registered land acquired under a free
patent, the mortgagor may redeem the property within two (2) years from
the date of foreclosure if the land is mortgaged to a rural bank under
Republic Act No. (RA) 720, 41 as amended, otherwise known as the Rural
Banks Act, or within one (1) year from the registration of the certificate of
sale if the land is mortgaged to parties other than rural banks pursuant to
Act No. 3135. 42 If the mortgagor fails to exercise such right, he or his heirs
may still repurchase the property within five (5) years from the expiration of
the aforementioned redemption period 43 pursuant to Section 119 of the
Public Land Act, which states:
SEC. 119. Every conveyance of land acquired under the free patent
or homestead provisions, when proper, shall be subject to
repurchase by the applicant, his widow, or legal heirs, within a
period of five years from the date of the conveyance.
Case at bar:
In this case, the subject property was mortgaged to and foreclosed by TCLC,
which is a lending or credit institution, and not a rural bank; hence, the
redemption period is one (1) year from the registration of the certificate of
sale on August 25, 2000, or until August 25, 2001. Given that Sps. Guevarra
failed to redeem the subject property within the aforestated redemption
period, TCLC was entitled, as a matter of right, to consolidate its ownership
and to possess the same. 44 Nonetheless, such right should not negate Sps.
Guevarra's right to repurchase said property within five (5) years from the
expiration of the redemption period on August 25, 2001, or until August 25,
2006, in view of Section 119 of the Public Land Act as above-cited.
Q: So what is the redemption period in this case? Is it 1 year or 2 years?
A: 1 year Maam because TCLC is a credit institution and not a Rural Bank. So
the Sc also said that after the expiration of the 1 year period, PCL also have
the right but such should not negate the right of the Sps to redeem within
the 1 year period
Q: Counted from the?
A: Counted from August 25, 2005 or until August 25, 2006
Q: August 25, 2005 is what?
A: It is the registration of the certificate of sale
Q: How about the contention with regard to the purchase price? What was
the ruling of the court?
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR

From the FT of the case regarding the Purchase price that the creditor can receive the fruits and apply the same to the interest yet
The Court has, however, ruled 56 that redemptions from lending or credit owing and thereafter to the principal. Normally, the contract of antichresis
institutions, like TCLC, are governed by Section 78 57 of the General Banking covers all the fruits of an immovable property but the parties can stipulate
Act(now Section 47 of the General Banking Law of 2000), which amended otherwise.
Section 6 of Act No. 3135 in relation to the proper redemption price when
the mortgagee is a bank, or a banking or credit institution. 58 Do not confuse antichresis for pledge. While both are contracts of security
and in both instances, the debtor loses control over the property, they admit
Nonetheless, the Court cannot subscribe to TCLC's contention that it is of several differences:
entitled to its total claims under the promissory note and the mortgage
contract 59 in view of the settled rule that an action to foreclose must be Antichresis vs. Pledge
limited to the amount mentioned in the mortgage. Hence, amounts not ANTICHRESIS PLEDGE
stated therein must be excluded, like the penalty charges of three percent
(3%) per month included in TCLC's claim. 61 A penalty charge is likened to a As to subject Real property Personal property
compensation for damages in case of breach of the obligation. Being penal in matter
nature, it must be specific and fixed by the contracting parties. As to the kind of It is a formal contract It is a real contract
contract which requires to be in wherein delivery is
Moreover, the Court notes that the stipulated three percent (3%) monthly writing in order to be required for its
interest is excessive and unconscionable. In a plethora of cases, the Court perfected. perfection.
has affirmed that stipulated interest rates of three percent (3%) per month
and higher are excessive, iniquitous, unconscionable, and exorbitant Antichresis vs. Mortgage
ANTICHRESIS MORTGAGE
Atty Sarona: I gave you this case because you have here a different
As to delivery Subject matter is delivered to Delivery is not required
redemption period. While we have the general rule under Act 3135 , we also
the creditor not for the or possession of the
have to take into consideration if what was foreclosed is a registered land
perfection thereof but for the property to the
under a free patent. So redemption period is:
creditor to apply the fruits to mortgagee
1. Rural bank = 2 years
the obligation
2. Otherwise=apply Act 3135 ; 1 year from the registration of the As to the right The creditor acquires no real Creates real rights
sale to the fruits right to receive the fruits of although the mortgagee
the property. or creditor although the
However, there is an addition of 5 years. The 5 years should be counted from mortgagee does not
the expiration of the redemption period. have rights to receive
What is this 5 years? the fruits unless agreed
The right to repurchase on the part of the mortgagor within the said period upon.
This is because the land here was acquired through a free patent and the As to the Creditor is obliged to pay the Such obligation is not
applicable law is Sec 119 of the Public Land Act. obligation to taxes and charges upon the present in mortgage.
In the case at bar, the Sps Guevara had until Aug 26, 2006 to redeem the pay taxes and estate unless there is a
property. The tender of purchase price is not necessary for the preservation charges upon stipulation to the contrary.
of the right because in this case they filed the action within the 5 day period. the estate
So that is already a formal offer to redeem. Since it was entitled to redeem, As to the The creditor shall apply the No such obligation exists
the court also took into consideration that the PCLC(mortgagee) does not application of fruits to the interest if owing in a mortgage.
have the freedom to determine the price. the fruits to then thereafter apply to the
As emphasized by the courts, PCLC is entitled to its claims as provided in the the interest principal obligation.
promissory note and the mortgage contract in view of the settled rule that
the action to foreclose must be limited to the amount of the mortgage. So Now let’s go to the case of Alojado.
exclude ang penalty charge
Ang interest pwede ba? ALOJADO VS. SIONGCO
Yes but the SC said in this case that the 3% interest was excessive and GR 27084, December 31, 1927
unconscionable. And so it was reduced to 1 % per month.
Facts: Mabaquiao sold a parcel of land to Alegata for P7,744. The land was
March 9 – del Rosario included in the settlement of his estate thus was adjudicated to hs only
heirs, Lim Eng Teeng and Lim Kang Sang. They sold it to Lim Ponso & Co.
Chapter 4: ANTICHRESIS with the right to repurchase for the period of 1 year which expired without
the right being exercised. Lim Ponso & Co. transferred this land
Antichresis is a contract of real security. unconditionally to Siongco and Kingko.

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.
It is an accessory contract. It secures the performance of the principal
obligation and it is very clear under Art. 2132 that it is also a nominate
contract.
Alojado, as the administrator of Mabaquiao, brings this action against
Siongco, Kingko and Lim Ponso & Co. and prays that he be declared the
absolute owner of this land with the improvements thereon, and that the
defendants be ordered to restore and respect his right of ownership,
possession and usufruct of the property; and, moreover, that other
pronouncements be made as prayed for in his complaint. The court absolved
the defendants from the complaint and plaintiff appealed from this
judgment.

Take note: delivery of the property of the immovable to the creditor is not Alojado contends that the contract executed by Mabaquiao and Alegata was
necessary for the perfection of antichresis. However, delivery is required so not a contract of sale with the right to repurchase, but a contract of

` Page 35 of 63
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
antichresis.
Issue: Is the contract executed by Mabaquiao and Alegata a contract of
antichresis?
Ruling:
THE CONTRACT IS THAT OF SALE WITH A RIGHT OF REPURCHASE. It clearly
talks about a sale and the conveyance of land with the right to repurchase,
and the character of the contract is that of a sale with the right to
repurchase. But, examining it as a whole, it clearly appears that it was the
parties' intention that the vendor could repurchase the land without delay
when he had the means to pay the purchase price.
CONTRACT OF ANTICHRESIS IS ONE WHERE THE CREDITOR ACQUIRES THE
RIGHT TO RECEIVE THE FRUITS OF THE PROPERTY OF HIS DEBTOR WITH THE
OBLIGATION TO APPLY THEM TO THE PAYMENT OF INTEREST, IF ANY ID
DUE AND THEN TO THE PRINCIPAL OF HIS CREDIT.
Nowhere in the contract in question does the character of antichresis
appear.
Dela Vega s. Ballilos - while the contract is called mortgage by the parties,
the court held that it is really a contract of antichresis. The contract
stipulated that the debtor assigned and transfer the ownership and
possession of the land to the creditor for his management and enjoyment as
a profit from the amount for which it had been mortgaged.
THE RIGHT OF REDEMPTION NOT HAVING BEEN EXERCISED WITHIN THE
PERIOD OF 10 YEARS, THE TITLE OF ALEGATA, OR HIS HEIRS HAS BEEN
CONSOLIDATED. The action was brought in January 1922, 15 years after the
contract was entered into. The contract provided that the redemption will be
until Juana Mabaquiao, or her heirs has the means. Whether or not this is
considered a period, it is clear that the title transmitted to Nicolas Alegata
has been consolidated, According to article 1508 of the Civil Code, when no
period of redemption is fixed it shall last four years, and if it is fixed, it shall
not exceed ten years. The right of redemption not having been exercised
within the period of ten years, the title of Nicolas Alegata, or his heirs, has by
this fact alone been consolidated at any events.
Q: What is the period applicable to the right of repurchase? What was the
agreement of the parties regarding the right to repurchase? When can it be
repurchased?
A: When she has the means. Under obligations and contracts it is an
obligation with a period.
Q: So applying the law in sales in the period of redemption, what it the
applicable period here?
A: The period shall not exceed 10 years.
When it comes to civil law do not forget to relate it to your other civil
subjects. In this case, you can relate it to obligations and contracts and with
regard to sale, redemption.
For an antichresis to exist, the parties must agree that the creditor has the
right to receive the fruits of the property with the obligation to apply them
to the payment of the interest. No such intention exists in Alojado. What is
clear is that there was an agreement with the right to repurchase in which
Juana could repurchase the land when she had the means. With that, it has
been 15 years after the contract was entered into and no right to repurchase
was exercised.
If no period was fixed it shall last 4 years. Because of the phrase “when she
had the means,” we already know that that refers to a period, the period of
redemption should not exceed 10 years. Since the period of 10 years has
already lapsed, the right to repurchase the property is not available anymore.
` Page 36 of 63
Again, for an antichresis to exist, there must be an express agreement
entered into by the creditor and the debtor, that the creditor, having been
given the possession of a property as security, is to apply the fruits to the
payment of the interest if owing, and thereafter to the principal to the credit.
Art. 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.
Take note here: market value at the time the fruits will be applied to the
obligation. Not the market value at the time of the perfection of the
antichresis.
The purpose of the provision is to forestall the use of antichresis for usury.
Notwithstanding that the usury law has been suspended, you still apply the
same provision. <stopped at 10:16>
Now take note of Article 2134.
Art. 2134. The amount of the principal and of the interest shall be specified
in writing; otherwise, the contract of antichresis shall be void.
This is the basis of the perfection of a contract of antichresis which must be
in writing in order to be valid.
What happened in the case of Barretto?
BARRETTO VS. BARRETTO
GR No. L-11933, December 1, 1917
Facts: Alberto Barretto claims a portion of land part of Balintagac hacienda
as being his, together with its fruits or their value, and also of a lot situated
in the same hacienda together with the rents. He claims that Leonardo
Barretto is said to have usurped a portion of land of the hacienda and has
been receiving 2/3 of the fruits therein. He refused to return the fruits
received, or their value in spite of the fact that he has been required to do so
in writing by the plaintiff Alberto.
The counsel of Leonardo denied the allegations and alleged that his client is
in possession of the said lot as its true owner.
In the complaint of intervention, it was alleged that the hacienda was owned
and possessed by Juan Antonio Barretto, Sr. He had 8 children (1) Juan
Antonio Barretto, (2) Angelica Maria Barretto, (3) Leonardo Barretto, (4)
Fransisca Barretto, (5) Bartolome Barretto, (6) Jose A Barretto, (7) Leopoldo
Barretto — who succeeded him.
The heirs are at present in possession of the same through their agents and
representatives. The intervenors deny that Alberto Barreto is the owner of
any part of the hacienda.
The records show that Antonio Vicente Barretto as creditor and mortgagee
of the hacienda, was not able to collect his credit of P11,000 nor obtain the
adjudication in his favor of half of the hacienda which was mortgaged for the
security of the debt. He took possession of the said hacienda by virtue of the
voluntary assignment with the express consent of the heirs of the late Juan
Antonio Barretto, Sr.
Since 1888-1889, once the foreclosure proceedings brought about the
creditor Antonio Vicente Barrte against Juan Antonio Barretto, Jr. were
suspended, the creditor took possession of the hacienda and held it in
usufruct with the knowledge and express consent of its legitimate owners;
thus there has not been any opposition or protest against the possession
which by usufruct the creditor and his successors enjoyed, aside from the
usurpation of 2 small portions of that property done by Leonardo Barretto in
1912.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
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The possession and usufruct enjoyed was done by a verbal contract entered
by the owners of the hacienda and the creditor Antonio Vicente Barretto.
Since it is not shown that the debtors have delivered the whole hacienda to
the creditor by assignment of the property in payment of the debt.
Issue: Is the contract that of antichresis?
Ruling: IT IS AN ANTICHRESIS. In spite of the fact that the agreement
between the creditor and the debtors was not in writing, due to the
relationship that they have, it may safely be assumed that the debtors have
limited themselves to give to the creditor the right to collect his credit from
the fruits of the hacienda of Balintagac. As he was given the possession of
the property, but the dominion of which was not transferred to him.
Art. 1881 provides:
“By antichresis a creditor acquires a right to receive the fruits of
real property of his debtor, with the obligation to apply them to
the payment of the interest, if due, and afterwards to the
principal of his credit.”
ALTHOUGH ART. 1884 PROVIDES THAT THE CREDITOR DOES NOT ACQUIRE
THE OWNERSHIP OF THE PROPERTY DELIVERED BY VIRTUE OF AN
ANTICHRESIS, ART. 1883 PROVIDES THAT THE DEBTOR CANNOT RECOVER
THE USE OF IT. The debtor must first fully pay the creditor, who in case of
insolvency may ask for the sale of the real property which he possesses.
Since it is not shown that the debtors have delivered the whole hacienda to
the creditor by assignment of the property, it is to be presumed that the
debtors delivered not only one half, but the whole hacienda with a view that
the creditor might collect by usufruct his credit with the accrued interests.
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 that the debtors have limited
themselves to give to the creditor the right to collect his credit from the
fruits of the hacienda of Balintagac, conferring upon him the possession of
the property, but not transferring to him the dominion of the same, since
such transfer was not proved in the present action.
THE AGREEMENT OR VERBAL STIPULATION IS AN ANTICHRESIS AS DEFINED
BY ARTICLE 1881 OF THE CIVIL CODE, TO WIT:
By the antichresis a creditor acquires a right to receive the fruits of real
property of his debtor, with the obligation to apply them to the payment of
the interest, if due, and afterwards to the principal of his credit.
The perusal of articles 1882-1886 shows that the possession of the hacienda
enjoyed by the creditor Antonio Vicente and his successors up to the present
time was conferred to them by virtue of the stated contract or agreement in
antichresis. One of the administrators of the hacienda presented the sworn
declaration of ownership for the purposes of tax assessment and paid the
land tax in the name of the creditor who possessed and held the hacienda in
usufruct.
Although article 1884 states that the creditor does not acquire through
possession the ownership of the real property delivered by virtue of an
antichresis for failure to pay the debt within the stipulated time,
nevertheless, the debtor cannot recover the use of the real property given in
antichresis to the creditor, without previously
Alberto being in the legitimate possession and use of all the hacienda of
Balintagac which was voluntarily delivered to him by Juan Antonio, Jr. and
his co-heirs, with the object that the creditor Antonio Vicente might collect
the capital and interests which they owed and still owe him — a lawful
contractual act called by law a covenant in antichresis — the debtors cannot,
while the debt exists and is not fully paid, recover or reacquire the
possession and use of the real property delivered to the creditor, without
the latter giving his consent
` Page 37 of 63
Q: Was there a contract in writing for this antichresis to exist?
A: No. It was verbal.
Q: So how do you reconcile that with Art. 2134?
A: It applied the old Civil Code, specifically Art. 1881 which provides: “By
antichresis a creditor acquires a right to receive the fruits of real property of
his debtor, with the obligation to apply them to the payment of the interest,
if due, and afterwards to the principal of his credit.”
Q: Why can’t Art. 2134 be applied? Why is it in this case, the contract was
still considered as a contract of antichresis?
A: Because it is a 1917 case. Art. 2134 is a new provision in the New Civil
Code which was effective on August 30, 1950.
Take note that before the new civil code the contract of antichresis was
informal. Now, it is formal as it is required that it be in writing.
The possession of the Balintagac hacienda was taken by voluntary
assignment with the express consent of the heirs of the debtor. The
agreement they entered into was a contract of antichresis. The debtors have
limited themselves to give to the creditor the right to collect his credit from
the fruits of the hacienda – there was no transfer of ownership.
Since this is an old case, the ruling of the court was that the agreement or
the verbal stipulation which lead to the facts proved deserves in law the
name of antichresis. But again, reconcile that with Art. 2134 which is a new
provision in the Civil Code. With the effectivity of the New Civil Code, a
contract of antichresis must be in writing wherein the amount of the
principal with interest are clearly specified, otherwise, it shall be void.
How about in the case of Bangis?
BANGIS VS. HEIRS OF SERAFIN
GR 190875, June 13, 2012
Facts: Spouses Serafin, Sr. and Saludada Adolfo were the original registered
owners of a lot which was mortgaged to the DBP. Upon default in the
payment of the loan obligation, it was foreclosed and ownership was
consolidated in DBP’s name under a TCT. Serafin Adolfo, Sr. repurchased the
same and was issued a TCT a year after his wife died. He allegedly mortgaged
the subject property to Ancieto Bangis who took possession of the land but
their transaction was not reduced into writing. When Adolfo died, his heirs
executed a deed of extrajudicial partition covering the subject property and
TCT issued to them. The said property was subdivided and separate titles
were issued in names of the heirs of Adolfo. The heirs of Adolfo filed a
complaint for annulment of the deed of sale and declaration of the
purported contract of sale as antichresis, accounting and redemption of
property and damages against Bangis. The RTC rendered a decision in favor
of the heirs of Adolfo declaring that the contract as an antichresis, ordering
the defendant to deliver the possession of the property in question to the
plaintiffs and the TCT under Bangis as null and void. Thus, the heirs of Bangis
appealed before the CA.
CA affirmed the RTC finding that the contract between the parties was a
mortgage, not a sale. It noted that while Bangis was given possession of the
subject property, the certificate of title remained in the custody of Adolfo
and was never cancelled.
Issue: Whether the agreement entered into by the parties is that of
antichresis?
Ruling:
THERE NEITHER AN ANTICHRESIS NOR A SALE. For the contract of
antichresis to be valid, Article 2134 of the Civil Code requires that “the
amount of the principal and of the interest shall be specified in writing;
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otherwise the contract of antichresis shall be void.”
In this case, the Heirs of Adolfo were indisputably unable to produce any
document in support of their claim that the contract between Adolfo and
Bangis was an antichresis, hence, the CA properly held that no such
relationship existed between the parties.
The bare testimony of one of the Heirs of Bangis, Rodolfo Bangis, that the
subject document was only handed to him by his father, Aniceto, with the
information that the original thereof “could not be found” was insufficient to
justify its admissibility. The identification made by Notary Public Atty.
Valentin Murillo that he notarized such document cannot be given credence
as his conclusion was not verified against his own notarial records.
In sum, the Heirs of Bangis failed to establish the existence and due
execution of the subject deed on which their claim of ownership was
founded.
Q: So if there is no antichresis nor sale, what was the contract entered into
by the parties?
A: At least it is a mortgage. Even if there is no written agreement there can
still be a valid mortgage.
Q: Why was there an issue with regard to the nature of the contract i.e.
whether it was a sale, a mortgage, or an antichresis? Who was in
possession of the property?
A: The heirs of Bangis were in possession. Bangis is the mortgagee. The
effect of the possession of the mortgagee even for a number of years such
will not transfer the possession of the property.
Relate these cases to the previous subjects that you have already taken.
There is no antichresis here for failure to comply with the requirement under
Art. 2134. The principal or interest must be in writing otherwise the contract
of antichresis is void. There is also no proof that a contract of sale exists. The
SC held that at the very least the contract that they had is that of mortgage.
In a contract of mortgage, even if the mortgagee is in possession of the
property for a number of years, such possession is not in the concept of an
owner. Therefore, acquisitive prescription does not apply. The title remained
with Adolfo and the upon his demise transferred to his heirs. Moreover,
even if the property has been in the possession of the heirs of Adolfo for 28
years, the long period of time should not be taken against the true owners of
the mortgagors in this case.
The SC also pointed out that even if acquisitive possession is to be applied
considering that the heirs of Bangis were in bad faith, then you apply the 30
year adverse possession. In this case, only 28 years have passed. You can
relate this to Land Titles as well as to the Laws on Prescription.
Obligation of the creditor under Art. 2135:
Art. 2135. The creditor, unless there is a stipulation to the contrary, is
obliged to pay the taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its
preservation and repair.
The sums spent for the purposes stated in this article shall be
deducted from the fruits.
The obligation of the antichretic creditor: to pay the taxes and charges upon
the estate, unless there is a stipulation to the contrary.
If he does not pay taxes, he can be required to pay indemnity for damages. If
it is the debtor who paid the taxes, such amount shall be applied to the
payment of his debt. If such payment will result to the obligation being fully
paid, the creditor will not have the obligation to return the possession to the
owner.
` Page 38 of 63
The creditor is bound to pay the expenses necessary for the preservation and
repair of the property. Any sum spent for these purposes are deducted from
the fruits.
Art. 2136. The debtor cannot reacquire the enjoyment of the immovable
without first having totally paid what he owes the creditor.
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 first paragraph is very clear, the debtor cannot demand the return of the
possession of the immovable property until the debt is totally paid.
So let’s have the case of Macapinlac.
MACAPINLAC VS. REPIDE
GR 18574, September 20, 1922
Facts: On and prior to August 22, 1916, Jose Macapinlac was the owner of
the Hacienda Dolores, a property located in Pampanga. This property had
been registered and a Torrens certificate of title had been issued.
On the date above stated, Macapinlac was indebted to Bachrach Motor
Company for the price of an automobile and its accessories, purchased upon
credit; and as evidence of this indebtedness he executed 14 promissory
notes (PNs) payable to Bachrach amounting to the sum of P12,960.
Contemporaneously with the delivery of the PNs, Macapinlac executed what
purports to be a deed of sale, with privilege of repurchase, to be exercised
on or before October 2, 1917 (due date of the debt). This transfer covered
the Hacienda Dolores. In this conveyance E. M. Bachrach is named as
transferee.
On November 8, 1917, Francisco Repide acquired, for the sum of P5,000, all
the rights of E. M. Bachrach in the property which had been conveyed to the
latter. Repide was well aware that the transfer of the property to Bachrach
had been made by the Macapinlac for the purpose of securing a debt owing
to Bachrach Company, and he was also aware that part of the debt has been
paid and there was only balance of less than one-half of the sum of P12,960.
After Repide had acquired the interest in the hacienda in question, he
processed the certificate of title to be transferred to his own name.
To accomplish this, it was necessary to make it appear that the contract of
sale with pacto de retro noted in the original Torrens certificate was really
and truly what it appeared to be, that is, a contract of sale, not a mere
mortgage, and that the ownership had consolidated in the purchaser by
reason of the failure of the seller to repurchase the property before the
expiration of the time allowed for redemption. Inasmuch as it appeared that
the ownership had then consolidated in the purchaser, he directed the ROD
of Pampanga to register the property in the name of Francisco Gutierrez
Repide and to issue to him a new certificate of transfer, which was
accordingly done.
At the time of the filing of this complaint, Repide was in actual possession of
the property in question, and that he had in effect been enjoying possession
since August 1917.
Issue: Is there an equitable mortgage? What contract governs between
Macapinlac and Repide (as successor in interest of Bachrach) if the original
contract was an equitable mortgage?
Ruling:
THE ESTATE OF REPIDE OCCUPIES SUBSTANTIALLY THE POSITION OF A
MORTGAGEE IN POSSESSION. The question then arises as to what are the
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
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legal rights of the plaintiff as against the Repide estate.
 The solution of this
problem is to be found in the application of the doctrine formulated in
Barretto vs. Barretto. In that case the heirs of a mortgagee of an estate were
found in possession of mortgaged property more than thirty years after the
mortgage had been executed; and it was shown that the mortgage had
never been foreclosed. Upon this state of facts it was in effect held that the
rights of the parties, heirs of the mortgagor and mortgagee, were essentially
the same as under the contract of antichresis.
By reference to the appropriate provisions of the Civil Code (arts. 1881-
1884), in the chapter dealing with antichresis, it will be at once seen that
while non- payment of the debt does not vest the ownership of the property
in the creditor, nevertheless the debtor cannot recover the enjoyment of the
property without first paying in full what he owes to his creditor. 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, 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.
The respective rights and obligations of the parties to a contract of
antichresis may be taken to be established, namely:
 that if the mortgagee acquires possession in 
 any lawful
manner, he is entitled to retain such possession until the
indebtedness is satisfied and the property redeemed;
 that the non-payment of the debt within the term agreed does
not vest the ownership of the property in the creditor; 
 If creditor does not want to pay taxes and expenses
 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 
 Every stipulation to the contrary shall be void. But the creditor
 that the mortgagor can only enforce his rights to the land by an
equitable action for an account and to redeem. 
 shall apply.
Q: There is no antichresis in this case?
A: There is an antichresis.
Q: Why is the agreement considered as an antichresis?
A: The SC referred to the parties as mortgagee and mortgagor but it is really
an antichresis because their agreement involves the possession of the
property by the creditor until debtor pays all debts and charges and the
retention of the same until all valid claims against the estate are satisfied.
Ma’am: There was an intention to apply the fruits of the property to the
obligation. Again, make the distinction between the mortgage and
antichresis.
Q: In this instance, even if there was an antichresis, can Repide demand the
return of the property?
A: There can only be a return of the property if there has been a full
payment of the debt. Only then can the debtor ask for the return of the
possession of the property.
Q: Can Repide demand the return of the property? It was alleged that he
tendered the payment although with no amount. What is the effect of such
` Page 39 of 63
tender? He said that he was willing to pay but without indicating how
much he was willing to pay. What was the ruling of the court?
A: There is still a need to account for the ample amount that Macapinlac has
to pay to Repide as the antichretic creditor.
Again, SC discussed an antichresis. However, take note that the term here
which was used by the Court was mortgagee. But actually, it still refers to an
antichretic creditor based on the intention of the parties.
Considering that there was an antichresis and not just an equitable mortgage,
the one in possession of the property or the creditor can continue to retain
the same until all the claims are satisfied. In the complaint, the plaintiff had
made an offer – Macapinlac offered to pay Repide all debts and charges.
However it was Repide who refused to accept. It was alleged that no valid
tender of payment was made that considering that there was no indication
of a specific sum. Notwithstanding, the SC noted that in this instance that
tender was not necessary because the amount cannot be known until an
accounting is had – And the accounting can be made on the part of the
creditor with regard to the fruits (i.e. how much were the fruits, how was it
applied, to what extent has it been applied to the obligation of the debtor.)
Now, that’s a common issue regarding a contract of antichresis.
In connection with the obligation of the creditor to apply the fruits to the
interest if owing, and thereafter to the principal, he has to liquidate or make
an accounting of how much is the value of the fruits and whether it was
applied to the interest and principal.
Under Art.2136, also take note of the 2nd paragraph. Remember under Art.
2135 that as a general rule, the creditor has the obligation to pay the taxes
and expenses mentioned therein. If the creditor does not want to pay the
taxes and incur expenses as mentioned in Art. 2135, he may compel the
debtor to reacquire the enjoyment of the same, except when there is a
contrary stipulation.
Art. 2137. The creditor does not acquire the ownership of the real estate
for non-payment of the debt within the period agreed upon.
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
If the obligation is not paid, we are already clear that the debtor is not
entitled to the possession of the same.
Let us also be clear that failure to pay on the part of the debtor does not
mean that the creditor will now acquire ownership over the property. Again
what the creditor only acquires in a contract of antichresis is the right to
receive the fruits – There is no transfer of ownership.
What happened in the case of Ramirez?
RAMIREZ VS. CA
GR L-38185, September 24, 1986
Facts:
On September 15, 1959, petitioners-spouses Hilario Ramirez and Valentina
Bonifacio filed an application for registration of a parcel of riceland in
Pamplona, Las Pinas, Rizal. After notice and publication, nobody appeared to
oppose the application. An order of general default was issued and the court
allowed the petitioners to present evidence in support of their claim.
Thereafter, the petitioners presented parole evidence that they acquired the
land in question by purchase from Gregoria Pascual during the early part of
the American regime but the corresponding contract of sale was lost and no
copy or record of the same was available. On January 30, 1960, the court
ordered the issuance of the decree of registration and consequently, Original
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Certificate of Title No. 2273 of the Registry of Deeds of Rizal was issued in
the petitioners’ names. On March 30, 1960, private respondents filed a
petition to review the decree of registration on the ground of fraud. The
respondents alleged among others that they obtained a loan of P400.00
from the petitioners in which they secured with a mortgage on the land in
question by way of antichresis and that there were several attempts to
redeem the land but were refused by the petitioners.
The trial court ordered the cancellation of the original certificate of title. The
Court of Appeals affirmed the decision.
Issue: Can an antichretic creditor acquire land of debtor by prescription?
Ruling: NO.
AN ANTICHRETIC CREDITOR CANNOT ACQUIRE THE LAND OF A DEBTOR BY
PRESCRIPTION. AN ANTICHRETIC CREDITOR IS NOT A POSSESSOR IN THE
CONCEPT OF OWNER BUT A MERE HOLDER PLACED IN POSSESSION OF THE
LAND BY ITS OWNERS. Thus, possession of an antichretic creditor cannot
serve as a title for acquiring dominion. The court, from other cases like
Trillana v. Manansala, Valencia v. Acala and Barretto v. Barretto, held that
the antichretic creditor cannot ordinarily acquire by prescription the land
surrendered to him by the debtor. Holding: The decision appealed from is
affirmed with a modification that the respondents are ordered to pay the
petitioners the amount of P400.00 as principal for the contract of
antichresis, the fruits obtained from the possession of the land having been
applied to the interests on the loan.
Q: So first, it is established that you have here a contract of antichresis.
Who is in possession of the property?
A: The antichretic creditor.
Q: For how long? What is the effect of the possession of the creditor?
A: The prescriptive period will not run. Acquisitive prescription will only run
when such possession is in the concept of an owner.
Q: Is there a repudiation of the petitioner’s of their right as creditors?
A: No.
If there is a contract of antichresis the mortgagee creditors are only in
possession as creditors. They are not in possession thereof as owner – This
would be relevant to acquisitive prescription. Whether it is 10 years in good
faith or 30 years in bad faith, possession must be in the concept of an owner.
In relation to Land Titles, such possession in concept of an owner must be
open, continuous, exclusive, notorious, and adverse. Such must be present
so the acquisitive prescription shall run.
In this case, Petitioners are only antichretic creditors and it was admitted
that there was no repudiation for acquisitive prescription to run. The
antichretic creditor cannot ordinarily acquire by prescription the lands
surrendered to him by the debtor. Here, the Petitioners are not possessors in
the concept of an owner but mere holders placed in possession of the land
by its owners. Their possession cannot serve as a title for acquiring
possession.
Even if there is a stipulation that there is an acknowledgement that the
creditor is in possession by virtue of an antichresis and that if the creditor
continues to be in possession of the same for 30 years, he will become the
owner thereof, the such will be considered as void.
Again, possession must be in the concept of an owner which is different from
that of an antichretic creditor, unless he repudiates his status.
Pactum Commissorium is not applicable to pledge and antichresis
A pactum commissorium is not applicable to pledge and antichresis because
there is no automatic appropriation to the creditor or antichretic creditor in
case the debtor fails to pay his obligation. A stipulation authorizing the
` Page 40 of 63
antichretic creditor to appropriate the property of an unpayment of the debt
within the period agreed upon shall be void.
Remedies available to an antichretic creditor in case the debtor fails to pay
his obligation:
1. The creditor can file an action for specific performance or
collection for sum of money. He has to make sure that there will
still be a balance after the application of the fruits to the payment
2. Art. 2137, 2nd paragraph – foreclose the mortgages as provided in
the Rules of Court
3. Extajudicial foreclosure as allowed in contracts of mortgage and
pledge
Art. 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.
The antichretic creditor again is under the obligation to apply the fruits of
the property in satisfaction of the interest, if owing, and then to the principal.
Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are
applicable to this contract.
We already know that the last paragraph of Art. 2085 allows third persons
who are not parties to the contract to secure the principal obligation with
the pledgee or mortgagee with their own property. In this case, subject their
property to a contract of antichresis.
Under Articles 2089 to 2091, we have emphasized that contracts of pledge
and mortgage are indivisible – so the same with antichresis. A contract of
antichresis is also indivisible.
Under Art. 2091, it can also secure all kinds of obligation. Again, similar to a
pledge or mortgage: such obligation can be a pure obligation or subject to a
condition.
It is not that common at present that the parties enter into a contract of
antichresis. Rarely do you see or do you encounter a parties who would want
to enter such contract.
Aside from a mortgage, what is the other agreement that may be entered
into by the parties?
They will enter into a contract of mortgage, na para din siyang antichresis.
Mortgage siya because it is a real estate mortgage provided that they all
have requisites present. But there is a stipulation between the parties that
the mortgagee will be given the possession of the property, to which he will
be given the right to apply the fruits of the property to the obligation (i.e.
harvest.) So para din siyang antichresis – not strictly an antichresis, not
strictly a mortgage but nevertheless valid between the parties.
Another instance will be: a real estate mortgage where there is no transfer
of possession but there is an agreement that the harvest wil be applied to
the obligation. Minsan ang harvest pwede nilang paghatian (i.e. ½, 2/3.) The
harvest that will go to the creditor will be applied to the obligation and the
same will continue until the obligation is fulfilled.
Again, as long as all the valid requirements are present, an agreement is
valid between the parties. So though it may not be strictly an antichresis it
will still be considered a valid contract.
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c. Revised Penal Code – on criminal liablity: Art. 319 on

Chapter 5 Estafa, (1) for knowingly removing any personal
CHATTEL MORTGAGE property mortgaged under the Chattel Mortgage Law
to any province or city other than the one where it
This is another kind of security. The only difference herein is that the chattel was located and at the time of the execution of the
mortgage involves personal property. mortgage, without the written consent of the
mortgagee; (2) for selling or pledging personal
Art. 2140. By a chattel mortgage, personal property is recorded in the property already mortgage or any part thereof under
Chattel Mortgage Register as a security for the performance of an the terms of the Chattel Mortgage Law without the
obligation. If the movable, instead of being recorded, is delivered to the consent of the mortgagee written on the back of the
creditor or a third person, the contract is a pledge and not a chattel mortgage duly recorded in the Chattel Mortgage
mortgage. Register.

We have a personal property as a security of a principal obligation to which Criminal liability must be distinguished from civil liability. This means that the
such mortgage contract is recorded in a Chattel Mortgage Registry. mortgagor shall not necessarily be relieved of his criminal liability even if the
subsequently pays the mortgagee. He can still be liable under the provisions
It is an accessory contract. We can also say that it is formal because of Art. of Article 319 of the RPC. Moreover, if the mortgaged property is sold, the
2140 – for validity, registration is indispensable. Under Art. 2140, it is also same is valid provided all the requisites for a valid sale are present even if
clear that a chattel mortgage is a nominate contract. no written consent was obtained from the mortgagee. But the mortgagor or
the one who sold the property can be criminally liable under Art. 319 of the
Distinguish Chattel Mortgage from a Pledge RPC.
Similarities:
1. Both are accessory contracts entered into to secure the THE CHATTEL MORTGAGE LAW
performance of a principal obligation. Act No. 1508, as amended
2. Both contracts involve personal properties.
3. Both contracts are indivisible. Section 1. The short title of this act shall be “The Chattel Mortgage Law.”
4. Both contracts constitute a lien on the property.
5. In both contracts, the creditor cannot appropriate the property to Sec. 2. All personal property shall be subject to mortgage, agreeably to the
himself in case the debtor defaults in the payment. provisions of this Act, and a mortgage executed in pursuance thereof shall be
6. Both will be extinguished upon the fulfillment of the principal termed a chattel mortgage.
obligation or by the destruction of the property pledged or
mortgaged. 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
Differences: of some other obligation specified therein, the condition being that the sale
CHATTEL MORTGAGE PLEDGE shall be void upon the seller paying to the purchaser a sum of money or
Under Art. 2140, the Registration is not doing some other act named. If the condition is performed according to its
As to registration is required for required for validity. terms the mortgage and sale immediately becomes void, and the mortgagee
registration validity. is thereby divested of his title.

No delivery is required. If It is a real contract Sec. 4. Validity.- A chattel mortgage shall not be valid against any person
As to delivery there is delivery, it will be wherein there must be except the mortgagor, his executors or administrators, unless the possession
considered as a pledge. delivery. of the property is delivered to and retained by the mortgagee or unless the
Sale of the Act No. 1508 or the Chattel Art. 2112 of the CC mortgage is recorded in the office of the Register of Deeds of the province in
property in case Mortgage Law applies. applies. which the mortgagor resides at the time of making the same, or if, he resides
of default within the Philippines, in the province in which the property is situated:
The creditor can still sue for The creditor cannot sue Provided, however, That if the property is situated in a different province in
the deficiency except if for the balance. While which the mortgagor resides, the mortgage shall be recorded in the office of
what is involved is a sale of the debtor on the other the Register of Deeds of both the province in which the mortgagor resides
personal property or on hand, does not also get and that in which the property is situated, and for the purposes of this Act,
installment. In other words, the excess unless there is the City of Manila shall be deemed to be a province.
Art. 1484 of the Recto Law a stipulation to the
is applicable. The debtor is contrary Sec. 5. Form. - A chattel mortgage shall be deemed to be sufficient when
entitled to the excess. 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
Art. 2141. The provisions of this Code on pledge, insofar as they are not in
thereof, and each mortgagor and mortgagee, or in the absence of the
conflict with the Chattel Mortgage Law, shall be applicable to chattel
mortgagee, his agent or attorney, shall make and subscribe an affidavit in
mortgages.
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
What laws apply to Chattel Mortgage?
authority administering the same, shall be appended to such mortgage and
1. Act No. 1508 or the Chattel Mortgage Law – principally
recorded therewith.
2. Provisions of Pledge under the CC – suppletorily
3. There are other laws that can be applied depending on the
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
subject matter:
“This mortgage made this ____ day of ______19____ by _______________,
a. Vessels: Ship Mortgage Decree
a resident of the municipality of ______________, Province of
b. Revised Administrative Code
____________, Philippine Islands mortgagor, to ____________, a resident of

` Page 41 of 63
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
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
“_________________ “_________________
(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.
“_____________________________”
(Notary public, justice of the peace, 1 or other officer, as the case may be.)
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.
` Page 42 of 63
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.
Sec. 8. Failure of mortgagee to discharge the mortgage. — If the mortgagee,
assign, administrator, executor, or either of them, after performance of the
condition before or after the breach thereof, or after tender of the
performance of the condition, at or after the time fixed for the performance,
does not within ten days after being requested thereto by any person
entitled to redeem, discharge the mortgage in the manner provided by law,
the person entitled to redeem may recover of the person whose duty it is to
discharge the same twenty pesos for his neglect and all damages occasioned
thereby in an action in any court having jurisdiction of the subject-matter
thereof.
Sec. 9-12. (inclusive) 3
Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or
person holding a subsequent mortgage, or a subsequent attaching creditor
may redeem the same by paying or delivering to the mortgagee the amount
due on such mortgage and the reasonable costs and expenses incurred by
such breach of condition before the sale thereof. An attaching creditor who
so redeems shall be subrogated to the rights of the mortgagee and entitled
to foreclose the mortgage in the same manner that the mortgagee could
foreclose it by the terms of this Act.
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
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
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.
Sec. 15. 6, 6a
Sec. 16. This Act shall take effect on August first, nineteen hundred and six.
Enacted, July 2, 1906.
Valid subject matter of a Chattel Mortgage:
General Rule: Personal or movable properties.
There may be variations allowed here:
1. You have shares of stock which is merely an evidence of an
intangible right – the latter being a personal property. The
requirement under the law is the registration of the Chattel
Mortgage in both provinces of the owner of the shares of
stock and the corporation which issued the shares.
2. Interest may also be subject of a chattel mortgage. Again
even if it is only an intangible property because just the
same, it is considered as a personal property.
3. Machineries treated by the parties as personal properties.
You might have already discussed under Property the Davao
Sungmin (?) case wherein between the parties even if the
machinery is heavy, bolted or cemented, the parties will
treat it as a personal property, subject the same to a chattel
mortgage, applying the principle of estoppel.
4. Vessels. The Ship Mortgage Decree requires registration in
the Philippine Coast Guard to be effective against third
persons
5. Motor vehicles. The mortgage must also be registered with
the LTO.
6. Public Utility Vehicle. It must be registered with the LTFRB
for the purpose of binding third persons.
What happened in the case of Borlough vs. Fortune?
BORLOUGH VS. FORTUNE
GR L-9451, March 29, 1957
Facts: United Car Exchange sold to Fortune Enterprises a chevrolet sedan
who sold it to Aguinaldo. The latter made a promissory note for P2400
payable in 20 installments with 12% per annum. He also executed a deed of
chattel mortgage over the car and registered the same in the RoD in Manila.
When Aguinaldo defaulted payment, he sold the same to Borlough for P4000
who registered the car with the Motor Vehicles Office.
Fortune brought an action against Aguinaldo to recover the balance of the
purchase price. Borlough filed a 3rd party Complaint claiming the vehicle.
vehicle was seized by the sheriff and sold it at public auction
CFI: in favor of Borlough; ordered Fortune to pay Borlough P4000
IAC: ordered Fajardo to pay P4000 plus atty’s fees
• plaintiff to pay to Borlough any amount received by it
in excess of its credits and judicial expenses
• mortgage was superior being prior in point of time, to
whatever rights may have been acquired by Borlough
bu reason of his possession and by registration of his
title
` Page 43 of 63
Issue: Which should prevail, a prior mortgage executed over a motor
vehicle, registered under the Chattel Mortgage Law only or a subsequent
registration of the vehicle in the MVO accompanied by actual possession?
Ruling:
BORLOUGH’S RIGHT SHOULD BE UPHELD. The failure of the respondent
motgagee to report the mortgage executed in its favor had the effect of
making said mortgage ineffective against Borlough.
The recording provisions of the Revised Motor Vehicles law are merely
complementary to those of the Chattel Mortgage Law. A mortgage to affect
3rd persons should be registered in the Chattel Mortgage Registry and
Motor Vehiles Office as required in Section 5(e) of the Revised Motor
Vehicles Law
chattel mortgage = RoD
registration of vehicle = LTO
Q: What were registered? What contracts are involved here?
A: As to Aguinaldo, it was a chattel mortgage. As to Borlough, it was a
contract of sale.
Q: You said both were registered, where were they registered?
A: As for Aguinaldo, it was registered with the RoD of Manila. As to Borlough,
it was registered with the Motor Vehicles Office.
Q: Who has a better right over the vehicle?
A: Borlough. The SC emphasized that there are 2 laws involved: (1) Chattel
Mortgage Law and the (2) Revised Motor Vehicles Law. Aguinaldo was
banking on the Chattel Mortgage Law for his registration while Borlough was
banking on the Motor Vehicles Law. SC upheld the rights of Borlough
because of the Revised Motor Vehicles Law. The purpose of the law is to
control the registration and operation of motor vehicles. The same also
added a requirement that there must still be a registration in accordance
with the Motor Vehicles Law in order for the registration to be effective to
third persons. In this case, Aguinaldo was not able to comply with such
requirement because he only registered the car before the RoD. As a result,
his registration was not effective against third persons.
Q: Can we not say that the registration with the Chattel Mortgage Register
of Deeds shall also bind the Borlough considering that the purpose of such
is to bind 3rd persons through constructive notice?
A: No. Because the Revised Motor Vehicles Law is a new law compared to
the Chattel Mortgage Law and it provides an additional requirement to
register the mortgage before the Motor Vehicles Office.
Ma’am: Registration with the Motor Vehicles Office now the Land
Transportation Office is really just an additional requirement to bind 3rd
persons.
Again we have a prior mortgage registered under the Chattel Mortgage Law
but was not registered in the Motor Vehicles Office. Its subsequent
registration by virtue of a sale with the Motor Vehicles Office accompanied
by actual possession.
The SC held that the RML is a special legislation to amend and compile the
laws relative to motor vehicles while the Chattel Mortgage Law is a general
law covering mortgages of all kinds of personal property. The Chattel
Mortgage was not repealed by the Revised Motor Vehicles Law. It does not
state that the registration is to be dispensed with. What we have under the
Revised Motor Vehicles Law is an additional requirement.
The recording provisions of the Revised Motor Vehicles Law are merely
complementary to those of the Chattel Mortgage Law. To affect third
persons, the mortgage of any motor vehicle should not only be registered in
the Chattel Mortgage Registry, but the should also be recorded in the Motor
Vehicles Office as required by section 5 (e) of the Revised Motor Vehicles
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Law. The failure of the mortgage to report the mortgage in his favor has the
effect of making said mortgage ineffective against a purchaser in good faith
(Borlough) who registers his purchase in the Motor Vehicles Office. Failure to
comply with this statute, the transferee’s title is rendered invalid as against
its subsequent purchaser who is enabled by such failure of compliance to
retain the indicia of ownership, such as a subsequent purchaser in good faith.
There was no evidence that Borlough here was a purchaser in good faith.
There was no evidence that he had prior notice of the mortgage executed in
favor of Fortune. So between the two, Borlough has a better right as against
Fortune Enterprises.
Other valid subject matter of chattel mortgage:
7. House of fixed materials. A house which is intended to be
demolished. This is has been upheld by the SC as a valid subject
matter of chattel mortgage.
8. House built on a rented land.
STANDARD OIL VS. JARAMILLO
GR 20329, March 16, 1923
Facts: Dela Rosa was the lessee of a land an owner of the building built
thereon. Subsequently he executed a chattel mortgage conveying to
Standard Oil both his leasehold interest in the land and the building which
was built over the leased land. In the document, it appeared that the clauses
were intended to be a mortgage. This document was acknowledged,
delivered and presented to RoD Jaramillo for the purpose of registering this
document. RoD Jaramillo refused to register because the interest did not
appear to be a personal property within the meaning of the Chattel
Mortgage Law.
Issue: Whether the RoD may refuse to register of the mortgage.
Ruling:
THE ROD MAY NOT REFUSE THE REGISTRATION OF THE MORTGAGE. It is
the ministerial duty for the RoD to register the mortgage. No provision of law
can be cited which confers upon him any judicial or quasi-judicial powers to
determine the nature of any document of which registration is sought as a
chattel mortgage.
THE REGISTRATION IS A CONSTRUCTIVE NOTICE OF AN EXISTENCE OF A
CONTRACT AND THE LEGAL EFFECTS OF THE CONTRACT MUST BE
DISCOVERED IN THE INSTRUMENT ITSELF. SUCH REGISTRATION ADDS
NOTHING TO THE INSTRUMENT.
Q: What is the effect of registering a chattel mortgage which actually
involves a real property?
A: Here, the SC held that the parties to the contract may treat as personal
property that which by its nature would be a real property.
Q: Will the chattel mortgage be invalid?
A: It will not invalidate the chattel mortgage only between the parties.
Because we apply the principle of estoppel.
Regardless of the nature of the property subject of a chattel mortgage, even
if it indicates as a subject matter a real property, the RoD has no right to
refuse the registration of the same on the ground that he finds that the
properties actually are real properties as his duties with respect to such
instruments are ministerial only.
As between the parties, if a real property – as you have discussed in
Property, Article 415 wherein those considered as real properties are
enumerated, if the same are made subject matter in a chattel mortgage, it
will not necessarily invalidate the chattel mortgage as between the parties.
As long as it is deemed to be the agreement between the parties, and no 3rd
parties are prejudiced, the mortgage will actually be upheld.
` Page 44 of 63
This is also an application of the principle of estoppel. The parties
themselves designated, deemed the property a personal property although
it is a real property. They cannot later on impugn the validity of the contract
as void as it did not comply with the requirements of the law to constitute a
chattel mortgage. The parties cannot say that the contract is void because it
does not comply with the provisions of the law but instead they will be
estopped from questioning the same. But as to third parties, it will
necessarily bind them when the mortgaged property is real instead of
personal. The chattel mortgage will no doubt be held effective against 3rd
persons.
But in the case of Standard Oil this was not ruled upon by the Courts because
the issue therein was the duty of the RoD to have the mortgage registered.
This shouldn’t stop you from memorizing Art. 415 of the CC.
As mentioned earlier, if you have incorporeal properties it can be considered
as a valid subject matter in a contract of chattel mortgage. As I mentioned
earlier, shares of stock as an evidence of incorporeal right, registration is
required both in the principal place of business of the corporation and where
the stockholder resides.
Now what about a subject matter described and identified in a chattel
mortgage – what’s the rule there? What happened in the case of Saldaña?
Reasonable Description Rule:
SALDAÑA VS. PHILIPPINE GUARANTY
GR L-13194, January 29, 1960
Facts: Josefina in order to secure a loan executed a chattel mortgage
covering properties described as follows:
A building of strong materials, used for restaurant business, located in
front of the San Juan de Dios Hospital at Dewey Boulevard, Pasay City,
and the following personal properties therein contained:
1 Radio, Zenith, cabinet type.
1 Cooler.
1 Electric range, stateside, 4 burners.
1 Frigidaire, 8 cubic feet.
1 G.E. Deepfreezer.
8 Tables, stateside.
32 Chromium chairs, stateside.
1 Sala set upholstered, 6 pieces.
1 Bedroom set, 6 pieces.
And all other furniture's, fixtures or equipment found in the said
premises.
Subsequent to the execution of the mortgage, a writ of execution was duly
issued as a result of a civil case instituted by Hospital de San Juan de Dios
against Josefina Eleazar; whereupon the following properties of Josefina
Eleazar were levied upon:
8 Tables with 4 (upholstered) chairs each.
1 Table with 4 (wooden) chairs.
1 Table (large) with 5 chairs. 1 Radio-phono (Zenith, 8 tubes).
2 Showcases (big, with mirrors).
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .
1 Wooden drawer.
1 Tocador (brown with mirror).
1 Aparador .
2 Beds (single type).
1 Freezer (deep freeze).
1 Gas range (magic chef, with 4 burners).
1 Freezer (G.E.).
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim
asserting that the above-described properties levied are subject to his
chattel mortgage of May 8, 1953. In virtue thereof, the sheriff released only
some of the property originally included in the levy of January 28, 1957, to
wit: 1 radio, 8 tables, 32 chromium chairs, 1 G.E. Freezer.
Appellant claims that the phrase “ and all other furnitures, fixtures and
equipment found in the said premises," validly and sufficiently covered
within its terms the personal properties disposed of in the auction sale.
ISSUE: Whether or not the properties levied are covered by the mortgage.
YES.
HELD: 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".
Gauged by this standard, general description have been
held by this Court. The description in the mortgage must point out its subject
matter so that 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.
The specifications in the chattel mortgage contract in the
instant case, we believe, in substantial compliance with the "reasonable
description rule" fixed by the Chattel Mortgage Act. We may notice in the
agreement, moreover, that the phrase in question is found after an
enumeration of other specific articles. It can thus be reasonably inferred
therefrom that 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 Dios Hospital at Dewey
Boulevard, Pasay City, which articles can be definitely pointed out or
ascertain by simple inquiry at or about the premises. A contrary view would
unduly impose a more rigid condition than what the law prescribes, which is
that the description be only such as to enable identification after a
reasonable inquiry and investigation.
Q: What is the issue here? What was included in the chattel mortgage
contracts? Did it include all the properties of the mortgagor? What is the
reasonable description rule? What does it require? Does the same specific
description in a real estate mortgage contract? What phrase in the chattel
mortgage?
Section 7 does not demand a specific description of every chattel or personal
property mortgage. In the deal of mortgage only requires that description of
the property be such as to enable the parties in a mortgage or any other
person, after reasonable inquiry and investigation to identify the same. That
is the reasonable description rule to which general description have been
upheld by the Court.
So as against third persons, the description must point out a subject matter
so that 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 him
alone in such description or by means of identification which if pursued will
disclose the property conveyed.
The phrase “and all other furnitures, fixtures, and equipment found in the
said premises,” placed after the enumeration of other specific articles, which
makes it reasonably inferred that the furniture, picture and equipment
referred to are properties of like nature similarly situated or similarly used in
` Page 45 of 63
the restaurant of the mortgagor, which articles can be definitely pointed out
or ascertained after a simple inquiry about the premises.
Again, under Section 7, like or subsituated properties made reference to
those thereafter acquired by the mortgagor and placed in the same
depository as a property originally mortgaged.
So take note of this rule with regard to the description of the personal
property mortgaged. Notice the difference when compared to a real estate
mortgage contract. Since in the latter, a mistake or typo in the number of the
title will invalidate the subsequent foreclosure proceeding. It must be really
specific. But here, there is leeway as long as it can be reasonably determined.
Affidavit of Good Faith
With regard to a chattel mortgage, there is a requirement for the execution
of an affidavit of good faith. This is an oath in a contract of a chattel
mortgage wherein the parties (mortgagor and mortgagee) severely swear
that the mortgage is made for the purpose of securing the obligations
specified in the conditions thereof and for no other purposes and that the
same is a just and valid obligation and not entered into for the purpose of
fraud.
You have the case of Lilius vs. Manila Railroad.
LILIUS VS. MANILA RAILROAD
GR 42551, September 4, 1935
Facts: In G.R. No. L-39587, Aleko E. Lilius, and his wife Sonja Maria Lilius, and
Brita Marianne Lilius, met an accident, wherein their Studebaker car, collided
with locomotive No. 713, Manila Railroad’s train. They were awarded by the
SC damages including interests and costs.
In G.R. No. 42551, Laura Shuman, the Manila Wine Merchants, Ltd., the Bank
of the Philippine Islands and the Manila Motor Co., Inc. (creditors of the
spouses Lilius) have appealed from the order of the CFI of Manila fixing the
degree of preference of the claimants distributing the proceeds of the
judgement of the this court in the case of Lilius vs. Manila Railroad.
Manila Motor claims that the lower court erred in not holding their claims,
evidenced by public document and final judgement, as preferred over all
other claims against Aleko E. Lilius. The public document refers to a
mortgage appearing in the evidence as the basis of its judgement, without
mentioning the date of execution of the exhibit.
Issue: Is there a valid chattel mortgage as alleged by Manila Motor?
Ruling: YES.
UNDER SECTION 5 OF ACT NO. 1507, AS AMENDED BY ACT NO. 2496, A
CHATTEL DOES NOT HAVE TO BE ACKNOWLEDGED BEFORE A NOTARY
PUBLIC. 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. The rule is expressly stated that as
between the parties and as to 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.
Q: Do you have a valid chattel mortgage here?
A: Yes. Because the Court said that the chattel does not need to be
acknowledged before a notary public. As against creditors and subsequent
encumbrances, the law requires an affidavit of good faith.
Q: What is the effect if there is no affidavit of good faith?
A: According to the Court, the mortgage is still valid despite the absence of
the affidavit of good faith.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Q: Why do we still need an affidavit of good faith?
A: Without it, the mortgage wouldn’t be binding against third parties who
were prejudiced or who have rights against the property.
The absence of an affidavit of good faith does not affect the validity of a
mortgage. The parties will still be bound by the mortgage as well as third
persons who have no rights against the mortgagor or have no rights as
against the property. But with regard to 3rd persons who will be prejudiced
by such mortgage or have rights against the mortgagor, an affidavit of good
faith is necessary. A valid mortgage may still exist between the parties, in
fact, even without it being evidenced by a public document. However, for it
to be registered, the RoD will require that the same be notarized.
How about the case of Cebu International?
CEBU INTERNATIONAL FINANCE VS. CA
GR 107554, February 13, 1997
Facts: On 4 March 1987, Jacinto Dy executed a Special Power of Attorney in
favor of private respondent Ang Tay, authorizing the latter to sell the cargo
vessel Owned by Dy and christened LCT “Asiatic.”
On 28 April 1987, through a Deed of Absolute Sale, Ang Tay sold
the subject vessel to private respondent Robert Ong (Ong) for P900,000.00.
Ong paid the purchase price by issuing three (3) checks in the following
amounts: P150,000.000, P600,000.00 and P150,000.00. However, since the
payment was not made in cash, it was specifically stipulated in the deed of
sale that the “LCT Asiatic shall not be registered or transferred to Robert Ong
until complete payment.”
Thereafter, Ong obtained possession of the subject vessel so he
could begin deriving economic benefits therefrom. He, likewise, obtained
copies of the unnotarized deed of sale allegedly to be shown to the banks to
enable him to acquire a loan to replenish his (Ong’s) capital. The
aforequoted condition, however, which was handwritten on the original
deed of sale, does not appear on Ong’s copies.
Contrary to the aforementioned agreements and without the
knowledge of Ang Tay, Ong had his copies of the deed of sale (on which the
aforementioned prohibition does not appear) notarized on 18 May 1987.
Ong presented the notarized deed to the Philippine Coast Guard which
subsequently issued him a Certificate of Ownership and a Certificate of
Philippine Register over the subject vessel on 27 May 1987. Ong also
succeeded in having the name of the vessel changed to LCT “Orient Hope.”
On 29 October 1987, Ong acquired a loan from petitioner in the
amount of P496,008.00 to be paid in instalments as evidenced by a
promissory note of even date. Eventually, he defaulted in his payments.
Issue: Is there a valid chattel mortgage?
Ruling:
THE CHATTEL MORTGAGE CONTRACT BETWEEN CEBU INTERNATIONAL
AND ONG IS VALID AND SUBSISTING. It cannot be disputed that it was Dy
who was the seller and Ong the buyer of the vessel. Petitioner is the
creditor-mortgagee and not the owner-seller. The mortgage contract which
expresses the true nature of the transaction between petitioner and Ong:
that it is a simple loan with chattel mortgage. The amount that was loaned to
Ong does not represent the balance of any purchase price since the
documents state that Ong is already the absolute owner of the subject
vessel.
CEBU INTERNATIONAL IS A MORTAGEE IN GOOD FAITH WHOSE RIGHTS
MUST BE RESPECTED. The prevailing jurisprudence is that “a mortgagee has
a right to rely in good faith on the certificate of title of the mortgagor to the
` Page 46 of 63
property given as security and in the absence of any sign that might arouse
suspicion, has no obligation to undertake further investigation. Hence, even
if the mortgagor is not the rightful owner of or does not have a valid title to
the mortgaged property, the mortgagee or transferee in good faith is
nonetheless entitled to protection.” Although this rule generally pertains to
real estate property, particularly registered land, it may also be applied by
analogy to personal property, in this case specifically, since ship owners are,
likewise, required by law to register their vessels with the PCG.
PETITIONER FAILED TO COMPLY WITH THE SPECIAL AFFIDAVIT OF GOOD
FAITH AS REQUIRED IN SEC. 4 OF PD 1521. The special affidavit of good
faith, is required only for the purpose of transforming an already valid
mortgage into a “preferred mortgage.” Thus, the abovementioned affidavit
is not necessary for the validity of the chattel mortgage itself but only to give
it a preferred status.
As between two innocent persons, the mortgagee and the owner of the
mortgaged property, one of whom must suffer the consequence of a breach
of trust, the one who made it possible by his act of confidence must bear the
loss, it is Ang Tay and his principal Jacinto Dy who must, unfortunately, suffer
the consequences thereof. They are considered bound by the chattel
mortgage on the subject vessel.
Q: Before it was registered, what did he do? What was the requirement
before it can be registered? What did he do to the copies of the deed of
sale?
A: He had them notarized.
Ma’am: Yes because if it is not notarized, it will not be registered.
Q: Was there an affidavit of good faith here?
A: None. But then the Court said that the affidavit of good faith is not
necessary because it would just add value to the mortgage but it would still
be valid between the parties. It’s effect aside from adding value, it turns…
You have a mortgagee in good faith. While it was true that there was yet no
valid deed of sale, or duly executed sale in favor of Ong, it appears that he
was able to have the same notarized and registered it. Remember with
regard to vessels that the Certificate of Ownership and Certificate of
Philippine Registry must be duly registered with the Philippine Coast Guard.
In this instance, you have a mortgagee who relied in good faith on the
Certificate of Title of the mortgagor to which the title was given as security –
which had no sign that might arouse suspicion. Therefore, Cebu International
had no obligation to undertake further investigation, applying mortgagee in
good faith. Even if the mortgagor is not the rightful owner does not have the
valid title to the mortgaged property, the mortgagee or transferee is
nonetheless entitled to protection.
The mortgagee in good faith that we have discussed in real estate mortgage
was applied in this instance by analogy to personal properties since the
vessel was duly registered in the Philippine Coast Guard.
Notice that there was no affidavit of good faith here but the SC still upheld
the mortgage in favor of Cebu International because the purpose of the
affidavit of good faith is not only to bind third persons (although it cannot be
applied to a mortgagee in good faith) but it can also, as an additional effect
thereof is that it may be considered as a preferred mortgage. So when you to
concurrence and preference of credits, when we say preferred mortgage and
it turns out that the debtor is insolvent and you have these vessels subject to
a mortgage, if there is an affidavit of good faith, the proceeds of the sale of
that vessel will be applied first to the mortgagee. If the mortgage does not
have an affidavit of good faith, you will not have any preference over the
proceeds of the sale of the vessel. You will be joined with the other creditors
and any of the remaining proceeds of the sale of the vessel will be shared
pro rata if hindi applicable yung hierarchy as to the preference of claims.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
I think you have the sample form in Art. 1508 and both parties will execute
such affidavit. Its purpose is to secure the fulfillment of the obligation and
not executed to defraud third persons. Its absence will only depreciate the
mortgage, will not bind the mortgagees as against 3rd persons who will be
prejudiced thereby and it will not transform an already valid mortgage into a
preferred mortgage. Such affidavit is not necessary for the validity of the
mortgage. Again such absence of the affidavit will still leave the mortgage as
valid between the parties but not binding as against third persons who have
rights against the mortgagor the contract is not valid. The credits secured by
the mortgage will also not assume the position of a preferred credit in the
absence of such affidavit.
Importance of an Affidavit of Good Faith
Very important ang affidavit of good faith, because remember, in a chattel
mortgage, the property is not delivered to the mortgagee-creditor. It
remains in possession of the debtor-mortgagor. Because once it is delivered
to the debtor-mortgagor, it is not considered as a mortgage anymore but a
pledge. What is the relevance there? For example, hahabulin yan kasi may
iba ka pang utang, tapos mamaya magexecute tayo ng mortgage para
walang makukuha sayo. With the affidavit of good faith, this is also to
prevent fraud in the sense na magexecute tayo ng chattel mortgage para
hindi ma-sheriff or habulin. With the execution of the affidavit of good faith,
you attest that the obligation is true and it exists na may utang ka talaga.
Because with an affidavit, you attest to the truthfulness that the there is a
valid obligation which exists and that the mortgage is not entered into to
defraud creditors.
March 14 – Kuit
Definition of Chattel Mortgage:
Art. 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.
A property subject of a chattel mortgage is not delivered to the creditor,
otherwise, it may be considered as a pledge.
In relation to the requirement of recording, let’s look at the case of:
FILIPINAS MABLE CORPORATION vs. THE HONORABLE INTERMEDIATE
APPELLATE COURT
[G.R. No. L-68010 May 30, 1986]
Facts: DBP granted a 5M loan to Filipinas. To secure the said loan, it
executed a deed of mortgage (chattel) and deed of assignment in favor of
DBP. Filipinas seeks to annul the deed of assignment and deed of mortgage
because allegedly the loan was never delivered to them.
Filipinas’ contention:
There was no valid loan contract for failure of consideration, the mortgage
cannot exist or stand by itself being a mere accessory contract. Additionally,
the chattel mortgage has not been registered. Therefore, the same is null
and void under Article 2125 of the New Civil Code
Issue: WON the failure to record the deed makes the latter null and void
Ruling: NO.
As regards the second assignment of error, we agree with the petitioner that
a mortgage is a mere accessory contract and, thus, its validity would depend
on the validity of the loan secured by it. We, however, reject the petitioner's
argument that since the chattel mortgage involved was not registered, the
same is null and void. Article 2125 of the Civil Code clearly provides that the
non-registration of the mortgage does not affect the immediate parties. It
states:
Art. 2125. In addition to the requisites stated in article 2085, it is
` Page 47 of 63
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.
xxxxxxxxx
The petitioner cannot invoke the above provision to nullify the chattel
mortgage it executed in favor of respondent DBP.
Discussion on the case:
Article 2125 is a provision under real estate mortgage, but in this case of
Filipinas, it applied the same provision to a chattel mortgage, wherein it was
ruled that even if it was not recorded, it is nevertheless binding between the
parties.
Filipinas cannot invoke the provision to nullify the chattel mortgage it
executed in favor of DBP.
Discussion on the provision/topic:
2140 does not automatically or necessarily say that if it is not recorded, the
mortgage is void. Although in the discussions, it is mentioned that for validity,
the registration is indispensable. If you try to reconcile that with Filipinas
case, applying 2125, SC emphasized that it is still valid despite the absence of
registration. There are no cases which repealed or superseded the ruling on
Filipinas which applied 2125 on a chattel mortgage.
Previously, we discussed that we apply the ruling in the case of Saldana
wherein it was ruled that: unlike in REM, in Chattel Mortgage Law, it does
not require a specific description. It only requires the description of the
mortgaged property sufficient to identify the same after a reasonable
investigation and inquiry.
Absence of affidavit of good faith: chattel mortgage is still valid. However,
absence thereof will vitiate mortgage only against third persons without
notice, creditors, and subsequent encumbrancers. Moreover, its absence will
convert the chattel mortgage to a preferred credit.
Similar to continuing guaranty, with regard to mortgage, as long as a
mortgage has a valid blanket clause, it will also secure even future debts.
But what about chattel mortgage?
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC vs. HON.
COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES and REGIONAL
SHERIFF OF CALOOCAN CITY
[G.R. No. 103576. August 22, 1996]
Facts: ACME obtained a P3M loan (1978) secured by a chattel mortgage from
Producers Bank, which the latter granted. The said loan was fully paid.
“In case the MORTGAGOR executes subsequent promissory note or notes
either as a renewal of the former note, as an extension thereof, or as a new
loan, or is given any other kind of accommodations such as overdrafts, letters
of credit, acceptances and bills of exchange, releases of import shipments on
Trust Receipts, etc., this mortgage shall also stand as security for the
payment of the said promissory note or notes and/or accommodations
without the necessity of executing a new contract and this mortgage shall
have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also
stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether
such obligations have been contracted before, during or after the
constitution of this mortgage.”
The bank again extended a P1M loan (1984) to ACME. However, the P1M
loan was not settled. Hence, Producers Bank applied for an extrajudicial
foreclosure of the chattel mortgage which secured the P3M loan.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Issue: WON chattel mortgage may cover future debts
Ruling: NO.
While a pledge, real estate mortgage, or antichresis may exceptionally
secure after-incurred obligations so long as these future debts are accurately
described, a chattel mortgage, however, can only cover obligations existing
at the time the mortgage is constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either
by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law. Refusal
on the part of the borrower to execute the agreement so as to cover the
after-incurred obligation can constitute an act of default on the part of the
borrower of the financing agreement whereon the promise is written but, of
course, the remedy of foreclosure can only cover the debts extant at the
time of constitution and during the life of the chattel mortgage sought to be
foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially
with the form prescribed by the Chattel Mortgage Law itself. One of the
requisites, under Section 5 thereof, is an affidavit of good faith. While it is
not doubted that if such an affidavit is not appended to the agreement, the
chattel mortgage would still be valid between the parties (not against third
persons acting in good faith]), the fact, however, that the statute has
provided that the parties to the contract must execute an oath that -
"x x x (the) 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."
makes it obvious that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated. In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract was
the P3,000,000.00 loan which petitioner corporation later fully paid. By
virtue of Section 3 of the Chattel Mortgage Law, the payment of the
obligation automatically rendered the chattel mortgage void or terminated.
Q: Do you have a provision in the mortgage which covers future debts?
A: Yes (see italicized portion of the case).
Q: Is the provision valid?
A: Yes but they must execute a new chattel mortgage or amend the old one.
Otherwise, it is without any effect.
Discussion on the case:
Ma’am reads ruling (see 1st paragraph in the ruling). In this instance, 1978
chattel mortgage already ceased to exist with the full payment of the P3M
loan. Remember, when the principal obligation is extinguished, the accessory
obligation is also extinguished. Therefore, there were no more chattel
mortgage that could cover the loans concluded thereafter. Take note of this
distinction (compared to pledge, REM, and guaranties and securities), that a
chattel mortgage may only cover obligations existing at the time the
mortgage is constituted. Even if there is a promise, as in the case of Acme,
the security itself does not come into existence until they will execute a new
chattel mortgage or amend the old one, specifically stating that in this
personal property there is a new obligation and it acts as a security for this
specific new obligation.
A deed of chattel mortgage shall be void if it provides that the security
stated is for the payment of any and all obligations contracted. Void in the
sense that it is without any effect until it will be amended or a new mortgage
contract will be contracted.
` Page 48 of 63
What is the purpose of affidavit of good faith?
"x x x (the) 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."
That the mortgage was executed to secure the fulfillment of an obligation,
which is a true obligation, and it is not executed to defraud third persons.
In other words, you really have to expressly and specifically provide that at
the time the mortgage was executed, there exists a true obligation.
Remember, that the property here is not delivered to the possession of the
mortgage. It remains in the possession of the debtor. The latter, in the event
the other creditors foreclose the property, cannot say that he does not own
the property or that it was mortgaged to avoid the foreclosure, there must
be a chattel mortgage executed and there is an affidavit of good faith, so as
not to defraud third persons.
Discussion on the topic:
In REM, does it cover the fruits of the mortgaged property? Yes, unless
there is an agreement to the contrary.
How about with regard to personal properties?
General Rule: It does not cover subsequently acquired personal properties.
Exception: inventories are mortgage – e.g sari sari store, etc.
If we’re talking of goods in the ordinary course of business, it can be
replenished and to which it can be a valid subject in a contract of chattel
mortgage. The after-acquired properties, since it can be replenished, may be
used to fulfill an obligation, even if at the time the chattel mortgage was
executed, the exact properties were not yet present.
Can a creditor of a chattel mortgage assign his rights to a third person? YES,
same rule with REM. The creditor can assign his credit to some other person
to which if the debtor fails to pay his obligation, the third person can hold
the same as against the debtor. If debtor fails to pay, the assignee can
foreclose the property.
Is it required that the assignment be registered to bind debtor? NO because
of 1240.
Art. 1240. Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or any person
authorized to receive it. (1162a)
Even if you merely registered the assignment credit and the same is without
the knowledge of the debtor, payment results to the extinguishment of the
obligation. Why? Because as to the debtor, the creditor is still the creditor at
the time of payment. So, what is required is personal knowledge. Mere
registration is not sufficient without the actual knowledge of the debtor.
The debtor cannot be prejudiced by the assignment. The remedy of the third
person is to go after the creditor. If the debtor has knowledge, even if not
registered, he has to pay to the assignee to extinguish the obligation.
Who may redeem? Technically speaking, when we’re talking about a chattel
mortgage, we’re not talking about the right of redemption. But, who may
pay the obligation to the creditor before it is sold?
1) Mortgagor;
2) a person holding a subsequent mortgage;
3) or a subsequent attaching creditor.
In other words, if a second mortgagee is allowed in REM, the same is also
allowed in a chattel mortgage.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
However, in a chattel mortgage, the second mortgage cannot foreclose the
property before the first mortgagee. What can he do? Pay debtor’s
obligation to first mortgagee, but of course, the debtor’s obligation to the
second mortgagee will increase (plus obligation to first mortgagee).
A second mortgagee is allowed, However, the latter cannot foreclose the
mortgage. What he can do is to redeem the property from the first
mortgagee, pay off the latter and in effect the second mortgagee will be
entitled to the mortgage.
What about possession of the property? We mentioned in our REM
discussion that the property need not be delivered to the mortgagee, unless
agreed otherwise.
How about in chattel mortgage?
1) Before default/foreclosure, the mortgagee is not entitled to the
possession of the property. Otherwise, it would be considered a
pledge.
2) After default, if the mortgagee desires to foreclose the property,
the creditor can take possession of the property. However, it is
not in the concept of an owner, but for purposes of selling the
property.
If the mortgagor, after default, refuses to deliver the property, the
mortgagee can file a judicial foreclosure for purposes of sale.
We also apply the rule (pactum commissorium) that the mortgagor cannot
automatically appropriate the property to himself.
If there is another party who is in possession of the property, the mortgagee
can implead those who are claiming possession or ownership of the same. So,
the creditor shall implead all persons claiming possession or ownership over
the property mortgaged.
Now Act No. 1508 (page 48) provides for the proceeding of the foreclosure
of a chattel mortgage to which the mortgagee must discharge the mortgage
in the manner provided in the said law. Otherwise, he can be held liable for
damages by any person entitled to redeem the property.
It is the same with pledge and real estate mortgage. What takes place here is
a public sale – a public auction. So again, the creditor has no right to
appropriate to himself the personal property.
If you take a look at Act No. 1508, more or less, the procedure prescribed
therein is more or less the same with a foreclosure of a mortgage. But you
will notice the difference in the number of days in absence of we call the
right redemption.
Although, same with Art. 2135, the mere fact that the mortgagee was sole
bidder for the mortgaged property in a public sale – so it must be really in a
public sale, does not warrant that the transaction was attended with fraud. It
is not sufficient that one alleges fraud, it requires full and convincing
evidence.
Take a look at Section 14 of Act No. 1508: there is a 30 day period stated
therein. What is this 30 day period? We have the case of Cabral.
CABRAL VS. EVANGELISTA
G.R. L-26860, July 30, 1969
Facts:
On 12 Dec 1959, George had executed in favor of Cabral Spouses a chattel
mortgage covering a Morrison English piano and a Frigidaire GM Electric
Stove as security for payment to the latter of a promissory note in the sum of
P1k executed on the same date in the Chattel Mortgage Register of Rizal on
14 Dec 1959. Meanwhile, the Evangelista spouses obtained a final money
` Page 49 of 63
judgment against Tunaya in a Civil Case. They caused the levy in execution on
Tunaya’s personal properties, including the piano and the stove mortgaged
to Cabral spouses.
The said mortgage chattels, together with other personal properties of the
judgment debtor, were sold at public auction to Evangelista spouses as the
highest bidders. The judgment credit of Evangelista spouses, as creditors in
the said Civil Case, was considered paid up and the Sheriff issued the
corresponding certificate of sale in their favor.
Subsequently, 8 months after the maturity of Tunaya’s promissory note and
his having defaulted in the payment thereof, Cabral spouses filed their
complaint against Tunaya and the Evangelista spouses, alleging that the
Evangelista spouses had refused their demands to pay the amount due to
Tunaya’s promissory note or to exercises their right of redemption.
Evangelista spouses now claim that their right over the mortgaged chattels
as purchasers at the public sale in execution of their judgment against their
debtor, Tunaya, should not be held subordinate to the mortgage lien of
Cabral spouses as mortgagees, by virtue of prescription and laches on the
part of said mortgagees as well as of their having purchased the chattels at a
public sheriffs sale.
Issues:
(1) Has the right of Cabral Spouses to recover the properties prescribed?
NO.
(2) Did the Certificate of Sale give the Evangelista Spouses superior right
against the Cabral Spouses? NO.
Ruling:
(1) This 30-day period is the minimum period after violation of the
mortgage condition for the mortgage creditor to cause the sale at
public auction of the mortgaged chattels, with at least ten days’ notice
to the mortgagor and posting of public notice of the time, place and
purpose of such sale, and is a period of grace for the mortgagor, who
has no right of redemption after the sale is held, to discharge the
mortgage obligation.
The prescription period for recovery of movables for foreclosure
purposes such as in the present case is eight years as provided in
Article 1140 of the Civil Code, and here plaintiffs had timely filed their
action within 8 months from the mortgage debtor's default.
By the same token , neither could laches properly be imputed against
plaintiffs, who filed their action promptly after they had been advised
by Tunaya of the public auction sale on June 24, 1960 of the chattels,
at the instance of Evangelista as his judgment creditor.
(2) Evangelista spouses’ 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 the
Cabral spouses.
It has long been settled by this Court that “The right of those who
acquire said properties should not and cannot be superior to that of
the creditor who has in his favor an instrument of mortgage executed
with the formalities of the law, in good faith, and without the least
indication of fraud.
In another case case between two mortgagees, we held that "As
between the first and second mortgagees, therefore, the second
mortgagee has at most only he right to redeem, and even when the
second mortgagee goes through the formality of an extrajudicial
foreclosure, the purchaser acquires no more than the right of
redemption from the first mortgagee.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
The superiority of the mortgagee's lien over that of a subsequent
judgment creditor is now expressly provided in Rule 39, section 16 of
the Revised Rules of Court, which states with regard to the effect of
levy on execution as to third persons that "The levy on execution shall
create a lien in favor of the judgment creditor over the right, title and
interest of the judgment debtor in such property at the time of the
levy, subject to liens or encumbrances then existing."
Q: What was the understanding of the Spouses Cabral in that provision?
A: According to Spouses Evangelista, the 30 day period is a prescriptive
period for Spouses Cabral to cause the foreclosure of the mortgage.
However the Court ruled that the 30-day period is actually a the minimum
period for the mortgage-creditor to cause the sale or auction of the
mortgaged property after the condition has been violated. In other words,
the said 30 day period serves as a period for the mortgagor-payor Tunaya to
discharge his obligations.
Q: How about right of redemption, is it present in a chattel mortgage?
Because, recall, in real estate mortgage, the general rule is that you have
that 1 year from registration of sale to redeem the property. Do we have a
similar provision in a chattel mortgage? What was the ruling of the court
here? Can the property be redeemed by the mortgagor after the sale has
already taken place?
The 30-day period provided in Section 14 is the minimum period after the
violation of the mortgage condition. Ang sabi diyan, “mortgagee may after
30 days from the condition broken,” in other words from the time of default,
you count the 30 days. From that you can now have the mortgaged property
sold at a public auction, provided that there is compliance with the
requirement: at least 10 days notice to the mortgagor prior to the sale; and
posting of the public notice of the time, the place and the purpose of such
sale.
Why is it required under the law that these notices be given to the
mortgagor? So within the 10 day period, he can redeem a property.
Why would that be relevant? Because after the personal property is sold in
a public auction, no right of redemption is available. Take note of this
distinction as to real estate mortgage. This 10-day period is a grace period
for the mortgagor who has no right of redemption after the sale is held to
discharge the mortgage obligation.
So the 30-day period is not a prescriptive period. In this case, the SC pointed
out that the prescriptive period to foreclosure of mortgages or chattel
mortgages is 8 years and we apply Art. 1140.
There could have been no laches. Moreover, the SC mentioned that the
purchase of the properties at the public sale and the delivery to them with
the certificate of sale did not give them a superior right to the chattels. Why?
Because again it was already mortgaged. The sale conveys to the purchaser
all the right which the debtor had in such property on the day the execution
or attachment was levied.
The sale that was conducted here was an execution sale – not the
foreclosure sale contemplated. If you apply the foreclosure sale in relation to
a chattel mortgage, then you apply Act No. 1508.
The right of those who acquired said properties cannot and should not be
superior to that of the creditor. In this case, there was an instrument of
mortgage executed with the formalities of the law in good faith without any
indication of fraud.
Again, the 30 day period is not a prescriptive period. Right of redemption
and equity of redemption: these are the terms we have used in real estate
` Page 50 of 63
mortgage. In a chattel mortgage the debtor has 10 days from notice of the
order of foreclosure but he has no right of redemption after the sale.
What are the remedies of the creditor-mortgagee? Even if there is a chattel
mortgage, he can file an action for collection of the obligation. When he
files the said case, he deemed to have abandoned his right to foreclose the
property. He can attach the same property in his action for collection of sum
of money but he will be required to produce a bond. Otherwise he will have
to wait until hearing can be conducted and the judgement will be rendered
in his favor so that he can execute all the properties of the debtor including
that which was covered by the chattel mortgage.
The remedies available to the creditor-mortgagee are alternative in nature
and not cumulative. If he files an action for mortgage he cannot later on file
an action for foreclosure.
NORTHERN MOTORS VS. COQUIA
G.R. L-40018, December 15, 1975
Facts:
Manila Yellow Taxicab, executed a chattel mortgage over several taxicabs in
favor of Northern Motors. TROPICAL is a judgment creditor of Yellow Taxicab
which assigned the credit to ONG.
MYT failed to pay its loan so On December 12 1974, Sheriff then levied upon
20 taxicabs in favor of Tropical, 8 of which are security for the chattel
mortgage. Northern Motors filed an intervention on December 18, 1974;
however, the levied taxicabs were sold the same day at 2pm although
agreement shows that it should have happened at 4pm. Indemnity bond was
posted by TROPICAL, but the bond was cancelled after the sale without
notice to Northern Motors.
A second levy was made upon 35 taxicabs, 7 of which are mortgaged to
Northern Motors. The taxies were levied and sold at an auction sale. The
auction sale proceeded and the purchasers were of unknown addresses,
hence the 8 taxicabs cannot be recovered. The proceeds of the auction were
contested by Northern Motors. Moreover, the sheriff deducted the expenses
of the execution sale from the proceeds.
Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration
contending that the lien of Northern Motors, as chattel mortgagee, over
certain taxicabs is not superior to the levy made on the said cabs by Honesto
Ong, the assignee of the unsecured judgment creditor of MYT.
On the other hand, Northern Motors prayed that the sheriff should be
required to deliver to it the proceeds of the execution sale of the mortgaged
taxicabs without deducting the expenses of execution.
ISSUES:
1. WON the expenses for the execution sale should be deducted from the
proceeds thereof. NO
2. WON the purchaser has a better right than the creditor/mortgagee. NO
HELD:
THOSE CABS CANNOT BE SOLD AT AN EXECUTION SALE BECAUSE THE LEVY
THEREON WAS WRONGFUL.
Ong had no right to levy upon the mortgaged taxicabs and that he could
have levied only upon the mortgagor's equity of redemption. The essence
of the chattel mortgage is that the mortgaged chattels should answer for the
mortgage credit and not for 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 a
nullification of his lien and would defeat the purpose of the chattel mortgage
which is to give him preference over the mortgaged chattels for the
satisfaction of his credit. (See art. 2087, Civil Code).
Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
should not affect him because he is not privy of such contract is untenable.
The registration of the chattel mortgage is an effective and binding notice
to him of its existence or a lien which, being recorded, follows the chattel
wherever it goes.
His contention that Northern Motors was negligent because it did not sue
the sheriff within the 120-day period provided for in section 17, Rule 39 of
the Rules of Court is not correct. Such action was filed on April 14, 1975.
However, instead of Honesto Ong, his assignor Tropical Commercial
Corporation, was impleaded as a defendant therein. That might explain his
unawareness of the pendency of such action.
Ong admits "that the mortgagee's right to the mortgaged property is
superior to that of the judgment creditor". But he contends that the rights of
the purchasers of the cars at the execution sale should be respected. He
reasons out they were not parties to the mortgage and that they acquired
the cars prior to the mortgagee's assertion of its rights thereto.
The third-party claim filed by Northern Motors, Inc. should have alerted the
purchasers to the risk which they were taking when they took part in the
auction sale. Moreover, at an execution sale the buyers acquire only the
right of the judgment debtor which in this case was a mere right or equity of
redemption. The sale did not extinguish the pre-existing mortgage lien.
We already held that the execution was not justified and that Northern
Motors, as mortgagee, was entitled to the possession of the eight taxicabs.
Those cabs should not have been levied upon and sold at public auction to
satisfy the judgment credit which was inferior to the chattel mortgage.
Since the cabs could no longer be recovered because they had been
transferred to persons whose addresses are unknown, the proceeds of the
execution sale may be regarded as a partial substitute for the
unrecoverable cabs. Northern Motors is entitled to the entire proceeds
without deduction of the expenses of execution.
POLICY: The mortgagee has a better right over the thing mortgaged than the
judgment creditors of the mortgagor. It is improper to deduct the expenses
of an illegal auction from the proceeds of thereof. Proceeds of the must be
delivered to the mortgagee in full.
Q: Who is the mortgagee here?
A: Northern
Q: Who is Honesto Ong?
A: He is an assignee.
Q: Was there a public sale here? By virtue of what?
A: Yes, by virtue of a judgement in favor of
Q: So sale, in what nature? Was it a foreclosure sale? What is the issue
here? Who has a better right over the vehicles?
A: Northern Motors has a better right because there has been a third party
clam filed it. This should have alerted Honesto in purchasing the taxis. Also
the Court said that Ong had no right to levy upon the mortgaged taxi cabs
and that he could have only levied upon the mortgagor’s equity of
redemption. The Court here discussed the essence of chattel mortgage to
the effect that it should answer for the mortgage credit and not for the
judgement credit of the mortgagor’s unsecured creditor.
Q: Where do the taxi cabs stay? Isn’t it that they have been sold to
unknown persons? Who will be liable to Northern Motors?
A: …
Ong is the assignee of an unsecured judgement creditor of Manila Yellow
Taxicabs. There was a court action, the sale which took place was actually an
execution sale and not a foreclosure sale. However, it must be noted that
there was already this mortgage in favor of Northern Motors.
` Page 51 of 63
SC emphasized that the mortgaged chattels should answer for the mortgage
credit and not for the judgement credit of the mortgagor’s unsecured
creditor. The mortgagee should not be obligated to file an independent
action. To require the mortgagee to do so would be a nullification of his lien
and would defeat the purpose of the chattel mortgage which is to give him
preference over the mortgaged chattels for the satisfaction of his credit.
Take note: even if Ong is not privy to the chattel mortgage, the SC said that
such contention is untenable. Why? Because the mortgage here was duly
registered and it is an effective and valid notice to him of its existence. A
mortgage creates a real right binding against the whole world. With that,
Northern Motors has a superior right than Ong. The third party claim filed by
Northern Motors should have alerted the purchasers to the risk they were
taking when they took part in the auction sale. At an execution sale, the
buyers acquire only the right of the judgement debtor which in this case was
a mere right or equity of redemption. Those cabs should not have been
levied and sold at public auction to satisfy the judgement of such credit
which was inferior to the chattel mortgage. Since the cabs can no longer be
recovered, the proceeds of the execution sale may be regarded as a partial
substitute for the unrecoverable cabs to which Northern Motors is entitled
thereto.
What happens after the property has been sold in a foreclosure of a chattel
mortgage?
Who is entitled to the deficiency? Can the creditor demand for the
deficiency?
PAMECA VS. CA AND DBP
G.R. 106435, July 14, 1999
Facts:
PAMECA Wood Treatment Plant, Inc. obtained a loan of US$267,881.67 or
P2M from DBP. As security for the said loan, aside from the promissory note
for the said amount, a chattel mortgage was also executed over PAMECA’s
properties in Dumaguete City, consisting of inventories, furniture and
equipment, to cover the whole value of the loan.
DBP extrajudicially foreclosed the chattel mortgage, as the highest bidder, it
purchased the properties for P322,350.
DBP filed a complaint for the collection of the balance of P4,366,332.46
against PAMECA and private petitioners as solidary debtors with PAMECA
under the promissory note.
RTC: ordered PAMECA and private petitioners to pay P4,366,332.46, plus
21% interest per annum and other charges from April 1, 1984 until the whole
amount is paid
CA: affirmed the RTC decision.
Issue: Can the creditor-pledgee the right to recover deficiency in case the
proceeds of the foreclosure sale are less than the amount of the principal
obligation? Can Art. 2115 be applied to foreclosures of chattel mortgage?
Ruling:
Article 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount
of the obligation, interest and expenses in a proper case. If the price of the
sale is more than said amount, the debtor shall not be entitled to the excess,
unless otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency notwithstanding any stipulation
to the contrary.
THE EFFECTS OF FORECLOSURE UNDER THE CHATTEL MORTGAGE LAW RUN
INCONSISTENT WITH THOSE OF PLEDGE UNDER ART. 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes the entire princpal
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
obligation, such that the pledgor may no longer recover proceeds of the sale
in excess of the amount of the principal obligation, Section 14 of the Chattel
Mortgage Law expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and costs.
SINCE THE CHATTEL MORTGAGE LAW BARS THE CREDITOR-MORTGAGEE
FROM RETAINING THE EXCESS OF THE SALE PROCEEDS THERE IS A
COROLLARY OBLIGATION ON THE PART OF THE DEBTOR-MORTGAGOR TO
PAY THE DEFICIENCY IN CASE OF A REDUCTION IN THE PRICE AT PUBLIC
AUCTION. In Manila Trading and Supply Co. vs. Tamaraw Plantation Co.,
Court “While it is true that section 3 of Act No. 1508 provides that ‘a chattel
mortgage is a conditional sale,’ it further provides that it ‘is a conditional sale
of personal property as security for the payment of a debt, or for the
performance of some other obligation specified therein.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as
other authors on the question of chattel mortgages, have said, that ‘in case
of a sale under a foreclosure of a chattel mortgage, there is no question that
the mortgagee or creditor may maintain an action for the deficiency, if any
should occur.’ And the fact that Act No. 1508 permits a private sale, such
sale is not, in fact, a satisfaction of the debt, to any greater extent than the
value of the property at the time of the sale. The amount received at the
time of the sale, of course, always requiring good faith and honesty in the
sale, is only a payment, pro tanto, and an action may be maintained for a
deficiency in the debt.”
ART. 1484, CC CANNOT BE APPLIED TO THIS CASE. The said article applies
clearly and solely to the sale of personal property the price of which is
payable in installments. Although Article 1484, paragraph (3) expressly bars
any further action against the purchaser to recover an unpaid balance of the
price, where the vendor opts to foreclose the chattel mortgage on the thing
sold, should the vendee’s failure to pay cover two or more installments, this
provision is specifically applicable to a sale on installments.
Q: Can the creditor-mortgagee demand from the deficiency?
A: Yes.
Q: What is your basis?
A: The Recto Law. (wrong)
Q: Isn’t it that the Recto Law governs sale of personal property in
installment which there is a chattel mortgage? Why will it not apply Art.
1484? Because it does not involve a sale of personal property in installment.
So what law is applicable?
A: The Chattel Mortgage Law will apply. Specifically, Section 14 which
expressly entitles the mortgagor to the balance of the proceeds, upon
satisfaction of the principal obligation and costs.
Both the chattel mortgage found in Act. 3135 do not contain any provision
which prohibits the mortgagee to from recovering the deficiency.
In this case, Section 14 in fact of the Chattel Mortgage Law expressly entitles
the mortgagor to the balance of the proceeds, upon satisfaction of the
principal obligation and costs. In other words, if sobra yung proceeds from
the auction sale, the mortgagor is entitled to the same – which is the same
rule sa real estate mortgage.
Since the chattel mortgage law bars the creditor-mortgagee from retaining
the excess of the sale proceeds, there is a corollary obligation on the part of
the debtor-mortgagor to pay the deficiency in case of a reduction in the
price at public auction.
The exception is Art. 1484 wherein it involves the sale of personal property
in installment. If you take a look at Art. 1484 there are remedies provided for
by law. These remedies are alternative in nature. If the unpaid seller will
` Page 52 of 63
avail of the foreclosure of the said chattel mortgage, he is not entitled to the
deficiency anymore. Since the remedies in Art. 1484 are alternative in
nature which is different if he files an action for specific performance. (?)
Also take note that this rule with regard to deficiency and excess is different
from what we have discussed in a contract of pledge.
In this case of Pameca, I reiterate that the fact that the mortgagee was the
sole bidder of the mortgage property in a public sale does not warrant the
conclusion that the transaction was attended by fraud – as fraud requires full
and convincing evidence which is not present in this case. Furthermore, since
this is a public auction sale, the presumption of regularity shall be upheld in
the absence of any contrary evidence.
Lastly, if the property is sold, what happens to the proceeds? How will it be
applied?
1. First, it will be applied to the costs and expenses of the leading the
sale,
2. Second, the amount will be used to pay the obligation
3. If there is still an excess, names of persons holding subsequent
mortgages in their order will be paid and any balance shall be paid
to be mortgagor or the person holding under him under Section 14.
March 23, 2017 Confesor
PART XII: CONCURRENCE AND PREFERENCE OF CREDITS.
So the first thing that you should take note of is that the rules here will only
apply to two or more creditors and the assets of the debtor are not sufficient
to cover the obligation to all creditors. In these rules, it answers who among
the creditors will be preferred?
Do remember that even if the debtor is insolvent, whether natural or
juridical, that does not mean that he doesn’t have properties anymore. He
may still have properties but only that they are not sufficient to cover all
obligations. To distinguish concurrence of credits from preference of credits,
Concurrence of Credits implies the possession by two or more creditors of
equal rights or privileges over the same property or all of the property of a
debtor.
Preference of Credit is the right held by a creditor to be preferred in the
payment of his claim above others.
 A preference is an exception to the general rule. For this reason, the
law to preferences is strictly construed.
 Preference does not create an interest in property. It creates simply a
right of one creditor to be paid first the proceeds of the sale of
property as against another creditor. It creates no lien on 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.
 Preference must be distinguished from lien because the latter attaches
to the property and creates an interest in the property.
 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 — of payment of the debt.
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)
The creditors have the right to go after the properties of the debtor to be
able to satisfy its obligations. It may cover properties which were in
existence at the time the obligation was incurred as well as future properties.
However, do take note, subject to the exceptions provided by law.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
What are the exceptions?
a) Family home – unless a mortgage is specifically made under such
family home
b) Right to receive support – should not be used to pay creditors
c) Rule 39, section 13 on Properties exempt from execution
d) Ordinary tools and implements personally used by him in his
trade, employment or livelihood
e) 3 horses or 3 cows, or 3 carabaos, or other beasts of burden, such
as the judgment obligor may select, necessarily used by him in his
ordinary occupation
f) Necessary clothing, and articles except jewelry
g) Household furniture and utensils necessary for housekeeping,
and used for that purpose by the judgment obligor and his family,
such as the judgment debtor may select, of a value not exceeding
one hundred thousand pesos
h) Provisions for individual or family use sufficient for four months;
i) The professional libraries of judges, lawyers, physicians,
pharmacists, dentists, engineers, surveyors, clergymen, teachers,
and other professionals, not exceeding three hundred thousand
pesos in value;
j) 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;
k) So much of the salaries, wages, or earnings of the judgment
debtor for his personal services within the four months preceding
the levy as are necessary for the support of his family;
l) Lettered gravestones;
m) Moneys, benefi ts, privileges, or annuities accruing or in any
manner growing out of any life insurance;
n) The right to receive legal support, or money or property obtained
as such support, or any pension or gratuity from the government;
o) Properties especially exempted by law.
p) Lands subject to the public land act. One issued by the
government within 5 years.
So those are instances where the properties cannot be included for the
purpose of applying the concurrence and preference of credits.
Article 2237. Insolvency shall be governed by special laws insofar as they
are not inconsistent with this Code. (n)
We had the insolvency law, Act. No. 1956 but now superseded by "FRIA"-
Republic Act 10142 (Financial Rehabilitation and Insolvency Act of 2010). It
provides for the procedure for rehabilitation, insolvency, liquidation of the
assets of the debtor, as well as suspension of payments.
Article 2238. So long as the conjugal partnership or absolute community
subsists, its property shall not be among the assets to be taken possession
of by the assignee for the payment of the insolvent debtor's obligations,
except insofar as the latter have redounded to the benefit of the family. If
it is the husband who is insolvent, the administration of the conjugal
partnership or absolute community may, by order of the court, be
transferred to the wife or to a third person other than the assignee.
Remember the properties covered by the conjugal properties or absolute
community, they do not belong to the individual spouses but rather to the
CPG or ACP. Such properties may be exempted to pay off the specific
obligations of the respective spouses unless it is proven that it has
redounded to the benefit of the family.
How about co-ownership under 2239?
Article 2239. If there is property, other than that mentioned in the
preceding article, owned by two or more persons, one of whom is the
insolvent debtor, his undivided share or interest therein shall be among the
assets to be taken possession of by the assignee for the payment of the
insolvent debtor's obligations. (n)
` Page 53 of 63
In a co-ownership, each co-owner has a specific undivided interest in the
property. Can his share be subject to the rules? Yes, because again, it will be
covered as long as the debtor owns the property. The share of the other co-
owners should not be included in applying the rules.
Article 2240. Property held by the insolvent debtor as a trustee of an
express or implied trust, shall be excluded from the insolvency
proceedings. (n)
In a trust, we have the trustee and the beneficiary. While the trustee may
have the legal title, who is the owner of the trust? That is the beneficiary.
That means, if in case the trustee is the person who is deemed insolvent, the
property entrusted to him will not be used to pay off his obligations. Why?
Because it belongs to the beneficiary.
Now, let’s go to the classification of credits. So general classification of
credits, you have-
(1) Special preferred credits under Art. 2241 and 2242
It is special and preferred in the sense that these credits are related
to a specific movable property under 2241, and immovable under
2242 to which they will be given preference to the sale of the
property involved.
(2) Ordinary preferred credits under Art. 2244
There is a hierarchy of preference but they are not attached to a
specific property. In other words, all the assets not covered under
2241 and 2242, the property will be sold and the proceeds will be
distributed under 2244.
(3) Common credits under Art. 2245
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
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
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 first thing that you should remember under 2241 is that it does not
provide for a hierarchy of preferences. Why is it considered special preferred
credits? Because these credits are preferred with regard to the proceeds of
specific personal property. Why? As among these 13 credits enumerated,
no.2 is not preferred over no. 3 or no. 4, etc. Except for number 1. Why?
Because that is preferred among other credits as provided under Art. 2243.
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)
 Some excerpts from 2016 TSN
Taxes and duties shall be first satisfied. That means the proceeds arising
from the sale of a specific property pambayad sa taxes due. So, what
happens here? If you have a car the value of which is P2 million and you have
the following liabilities- taxes and duties, sabihin natin luxury car so let us say
it has an unpaid balance of duties of P500,000 and then let us say it is subject
to a chattel mortgage, P500,000. Let us say there was also an unpaid price
amounting to P500,000. What are the other credits here, for example
expenses for repairs, P500,000. and then another expenses, let us say
safekeeping of the vehicle, also P500,000. So what do we have here? The
liabilities exceed the value of the movable property.
*So if it is sold for P2 million, how would the proceeds be applied? So first,
you apply it to the taxes and duties. So that would mean from P2 million
minus P500,000, P1.5 million nalang. share sila diyan(the remaining
liabilities). So pro-rata sila. So (P500,000/P2,000,000) times P1.5 million so
that is P375,000. So out of the liability for example covered by the chattel
mortgage, P375,000 would come from the proceeds of sale of the movable
property. What happens to the balance of P125,000? It is not extinguished
but doon na siya mahulog sa other credits. Hindi na siya special preferred. It
would now share together with the common credits. Ma’am says she will not
ask these types of computation questions in the exam 
Art. 2241 and 2242 do not give preference, order or priority of payment,
hindi yan siya 1,2,3,4 and 5. Una lang yung duties and taxes due to the
government in relation to that movable property. All the rest will concur to
the remaining proceeds of the sale of the subject property.
CORDOVA vs REYES
FACTS: Jose Cordova bought from Philfinance certificates of stock of
Celebrity Sports Plaza Inc (CSPI) and shares of stock of other corporations.
CSPI shares were delivered to former Filmanbank and Philtrust Banks (as
custodian banks to hold the shares in behalf of Cordova).
In 1981, Philfinance was placed under receivership by SEC. Thereafter,
private respondents Reyes and Atty Wendell Coronel were appointed as
liquidators. In 1991, without the knowledge and consent of Cordova and
without authority from SEC, private respondents withdrew the CSPI shares
from the custodian banks. They subsequently sold the shares to Northeast
Corporation and included the proceeds thereof in the funds of Philfinance.
` Page 54 of 63
Cordova filed a complaint against private respondents in the receivership
proceedings with the SEC for the return of the shares.
In 1998, SEC dismissed the petition, but granted it upon reconsideration. It
held that Cordova was the owner of the CSPI shares by virtue of a
confirmation sale (which was considered as a deed of assignment) issued to
him by Philfinance. But since the shares had already been sold and proceeds
commingled with other assets of Philfinance, Cordova’s status was converted
into that of an ordinary creditor for the value of such shares.
ISSUES:
1. whether petitioner should be considered as a preferred (and secured)
creditor of Philfinance;
2. whether petitioner can recover the full value of his CSPI shares or
merely 15% thereof like all other ordinary creditors of Philfinance
HELD: petitioner had become an ORDINARY creditor of Philfinance. Certainly,
petitioner had the right to demand the return of the shares. He filed a
complaint in the liquidation proceedings. He sought instead to recover their
monetary value.
The CSPI shares were specific or determinate movable properties. But after
they were sold, the money raised from the sale became generic and were
commingled with other assets of Philfinance. Unlike shares of stock, money
is generic. This means that once a certain amount is added to the cash
balance, one can no longer pinpoint the specific amount included which then
becomes part of a whole mass of money.
It thus became impossible to identify the exact proceeds of the sale of the
CSPI shares. Petitioner’s only remedy was to file a claim on the whole mass
of these assets, to which unfortunately all other creditors of Philfinance also
had a claim.
Petitioner’s right of action against Philfinance was a “claim” properly to be
litigated in the liquidation proceedings. He had a right to the payment of the
value of his shares. His demand was of a pecuniary nature since he was
claiming the monetary value of his shares. It was in this sense that he was a
creditor of Philfinance.
Like all the other ordinary creditors or claimants against Philfinance, he was
entitled to a rate of recovery of only 15% of his money claim.
Q1: what would be the advantage if Cordova is deemed a preferred creditor?
A1: the advantage would be---if he would be an ordinary creditor the
governing law would be 2245 which merely provides for pro-rata, unlike if a
preferred creditor which is entitled to the value of his claim.
Q2: What was the ruling of Court? Is Cordova an ordinary creditor in which
2245 will apply or 2241?
A2: He is an ordinary creditor, and hence he has no preference under 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. This
being so, Article 2251 (2) states that: Common credits referred to in Article
2245 shall be paid pro rata regardless of dates.Like all the other ordinary
creditors or claimants against Philfinance, he was entitled to a rate of
recovery of only 15% of his money claim.
So here we have Cordova who is deemed as an ordinary creditor of
PhiFinance and not as a preferred creditor. While it is true that shares of
petitioner were specific or determinate, it must be noted that the same is
already sold. He cannot claim preference or priority over the proceeds of the
said shares. However, the effect is that the money raised from the said sale
became generic. And as such were commingled with the assets of
PhilFinance. So here, remember to apply 2241, it must refer to a specific
movable property. While money is a movable property, it is not specific or
determinate. It is already a generic thing, so the claim of Cordova was for the
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
payment of money. Therefore 2241 is not applicable, but rather 2245 and is
deemed an ordinary creditor. What is the difference here? Because if
mahulog 2245, common credits shall be paid pro-rata regardless of the dates.
And you only have to consider kung meron bang maiwan na assets si debtor
after the payment of the credits under 2241, 2242, and later on 2244. Kung
wala na matira, wala ng paghatian ang common creditors under 2245. Under
the facts of this case, konti nalang naiwan in which like all creditors, the rate
of recovery is only 15% of their respective money claims.
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;
(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)
First, taxes due upon the building. Again that is the priority. All the rest will
concur.(same concept under Art. 2241) *repeats the illustration under Art.
2241 but changed subject property from a car to a house and lot.
Using the same example let’s say instead of a car, we have a parcel of land.
 Fare market value is 1.5m,
 Real property Taxes is 500k,
 unpaid price of 200k,
 REM of 500k,
 unpaid laborers, architects, etc is 300k.

If these are the credits in relation to a specific real or immovable property,
and then this property is sold for 1.5m  again, walang problema. Bayaran
silang lahat. But what if let us say, meron pang unpaid laborers 500k. so
kulang ito. Again, priority, real property taxes, you still have 1m remaining,
but the remaining credit is 1.2m. so anong mangyari ditto? 200k over 1m.
200k x1m. 1/6 over 1m. yung portion nay un pambayad. What about the
remaining balance of this 200 kasi di man sya manfully-paid. Mahulug siya
dun sa other credits if under 2244 or 2245 kung di siya mag-apply sa 2244. If
the proceeds in relation to the sale of specific immovable or movable
property are not sufficient for specially preferred credits, it does not mean
that it will not be paid with the remaining balance at all. Because the latter is
pwede masalo sa 2244 or 2245. Again, that is if meron pang properties si
debtor which can be sold to pay of the other credits.
` Page 55 of 63
Also take note of this term, refectionary credit. A refectionary credit is an
indebtedness incurred for the repair or reconstruction of something
previously made such as a repair or construction made necessary by the
deterioration or destruction of the property. This credit may be applied to
Art. 2241 and 2242, yung expenses for improvements and repairs.
Now we have the case of Barretto vs Villanueva-
BARRETO vs VILLANUEVA
FACTS: Rosario Cruzado sold all her right, title, and interest and that of her
children in the house and lot herein involved to Villanueva for P19K. The
purchaser paid P1,500 in advance, and executed a promissory note for the
balance. However, the buyer could only pay P5,500 on account of the note,
for which reason the vendor obtained judgment for the unpaid balance. In
the meantime, the buyer Villanueva was able to secure a clean certificate of
title and mortgaged the property to Barretto to secure a loan of P30K, said
mortgage having been duly recorded.
Villanueva defaulted on the mortgage loan in favor of Barretto. The latter
foreclosed the mortgage in her favor, obtained judgment, and upon its
becoming final asked for execution. Cruzado filed a motion for recognition
for her "vendor's lien" invoking Articles 2242, 2243, and 2249 of the new
Civil Code. After hearing, the court below ordered the "lien" annotated on
the back of the title, with the proviso that in case of sale under the
foreclosure decree the vendor's lien and the mortgage credit of appellant
Barretto should be paid pro rata from the proceeds.
ISSUE: Won a proceeding, like an insolvency proceeding, is required before
claims of preferred creditors could be ascertained?
HELD:
Under the system of the Civil Code of the Philippines, only taxes enjoy a
similar absolute preference. All the remaining thirteen classes of preferred
creditors under Article 2242 enjoy no priority among themselves, but must
be paid pro-rata i.e., in proportion to the amount of the respective credits.
The full application of Articles 2249 and 2242 demands that there must be
first some proceedings where the claims of all the preferred creditors may
be bindingly adjudicated, such as:
1. insolvency,
2. the settlement of decedents estate under Rule 87 of the
Rules of Court, or
3. other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that —
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.
And the rule is further clarified in the Report of the Code Commission, as
follows:
The question as to whether the Civil Code and the insolvency Law can be
harmonized is settled by Article 2243. The preferences named in Articles
2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with
the Insolvency Law."
Thus, it becomes evident that one preferred creditor's third-party claim to
the proceeds of a foreclosure sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of preferences under
Article 2242, unless the claimant were enforcing a credit for taxes that enjoy
absolute priority. If none of the claims is for taxes, a dispute between two
creditors will not enable the Court to ascertain the pro-rata dividend
corresponding to each, because the rights of the other creditors likewise"
enjoying preference under Article 2242 cannot be ascertained.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
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 what I want to emphasize here, under Art. 2242 no priority for those
credits mentioned therein except for taxes. The recurring theme as can be
observed in the cases is to be able to apply the rules, there must be a
proceeding where the claims of the creditors may be validly adjudicated. In
the absence of insolvency proceedings (or other equivalent general
liquidation of the debtor's estate), the conflict between the parties now
before us must be decided pursuant to the well established principle
concerning registered lands; that a purchaser in good faith and for value (as
the appellant concededly is) takes registered property free from liens and
encumbrances other than statutory liens and those recorded in the
certificate of title. 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.
PHILIPPINE SAVINGS vs LANTIN
FACTS:Involved in this case is a duplex-apartment house on a lot covered by
TCT No. 86195 situated at San Diego Street, Sampaloc, Manila, and owned by
the spouses Filomeno and Socorro Tabligan.
The duplex-apartment house was built for the spouses by private respondent
Candido Ramos, a duly licensed architect and building contractor, at a total
cost of P32,927.00. The spouses paid private respondent the sum of
P7,139.00 only. Hence, the latter used his own money, P25,788.50 in all, to
finish the construction of the duplex-apartment.
Meanwhile, the spouses Tabligan obtained from petitioner Philippine Savings
Bank three (3) loans in the total amount of P35,000.00, the purpose of which
was to complete the construction of the duplex-apartment.
On December 19, 1966, the petitioner registered the December 16, 1966
deed of real estate mortgage with the Register of Deeds of Manila. At the
time of the registration of these mortgages, Transfer Certificate of Title No.
86195 was free from all liens and encumbrances.
The spouses failed to pay their monthly amortizations. As a result thereof,
the petitioner bank foreclosed the mortgages, and at the public auction held
on July 23, 1969, was the highest bidder.
Upon the other hand, the private respondent filed an action against the
spouses to collect the unpaid cost of the construction of the duplex-
apartment. During its pendency, the private respondent succeeded in
obtaining the issuance of a writ of preliminary attachment, and pursuant
thereto, had the property in question attached. Consequently, a notice of
adverse claim was annotated at the back of Transfer Certificate of Title No.
86195.
On August 26, 1968, a decision was rendered in Civil Case No. 69228 in favor
of the private respondent and against the spouses. A writ of execution was
accordingly issued but was returned unsatisfied.
As the spouses did not have any properties to satisfy the judgment in Civil
Case No. 69228, the private respondent addressed a letter to the petitioner
for the delivery to him (private respondent) of his pro-rata share in the value
of the duplex-apartment in accordance with Article 2242 of the Civil Code.
The petitioner refused to pay the pro-rata value prompting the private
respondent to file the instant action. A decision was rendered in favor of the
private Respondent.
` Page 56 of 63
ISSUE: whether or not Ramos is entitled to claim a pro-rata share in the
value of the property in question? NO
RULING: Concurrence of credits occurs when the same specific property of
the debtor or all of his property is subjected to the claims of several
creditors. The concurrence of credits raises no questions of consequence
were the value of the property or the value of all assets of the debtor is
sufficient to pay in fall all the creditors. However, it becomes material when
said assets are insufficient for then some creditors of necessity will not be
paid or some creditors will not obtain the full satisfaction of their claims. In
this situation, the question of preference will then arise, that is to say who of
the creditors will be paid the all of the others.
The proceedings in the court below do not partake of the nature of the
insolvency proceedings or settlement of a decedent’s estate. The action filed
by Ramos was only to collect the unpaid cost of the construction of the
duplex apartment. It is far from being a general liquidation of the estate of
the Tabligan spouses.
Insolvency proceedings and settlement of a decedent’s estate are both
proceedings in rem which are binding against the whole world. All persons
having interest in the subject matter involved, whether they were notified or
not, are equally bound. Consequently, a liquidation of similar import or
"other equivalent general liquidation’ must also necessarily be a proceeding
in rem so that all interested persons whether known to the parties or not
may be bound by such proceeding.
In the case at bar, although the lower court found that "there were no
known creditors other than the plaintiff and the defendant herein", this
cannot be conclusive. It will not bar other creditors in the event they show
up and present their claims against the petitioner bank, claiming that they
also have preferred liens against the property involved. Consequently,
Transfer Certificate of Title No. 101864 issued in favor of the bank which is
supposed to be indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of Article 2243 of the
Civil Code although it considers claims and credits under Article 2242 as
statutory liens. Neither does the De Barretto case sanction such instability.
Q1: what kind of proceeding is required to apply these provisions (2241,
2242)?
A1: it is not necessary to be an insolvency proceeding, but a proceeding that
would adjudicate the claims of all the creditors. It may cover a proceeding
regarding the estate of a deceased person, for example.
Q2: was there such kind of proceeding here?
A2: None. The proceedings did not partake of the nature of the insolvency
proceedings or settlement of a decedent’s estate. The action filed by Ramos
was only to collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the estate of the
Tabligan spouses.
Again take note, Concurrence of credits occurs when the same specific
property of the debtor or all of his property is subjected to the claims of
several creditors. The concurrence of credits raises no questions of
consequence were the value of the property or the value of all assets of the
debtor is sufficient to pay in fall all the creditors. However, it becomes
material when said assets are insufficient for then some creditors of
necessity will not be paid or some creditors will not obtain the full
satisfaction of their claims. In this situation, the question of preference will
then arise, that is to say who of the creditors will be paid the all of the others.
As emphasize in the Barretto case and here in the case of Philippine Savings,
there must be some proceeding where the claims of all the preferred
creditors may be bindingly adjudicated such as an insolvency proceeding or
settlement of estate or other liquidation proceedings. Now here it is merely
an action for collection. Although the lower court found that there were no
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
known creditors other than Philippine Savings and Ramos, this cannot be
conclusive. It will not bar other creditors to show up and present their claims
against the bank claiming also they have preferred liens.
In this case, the foreclosure was proper. Now both these cases of Barretto
and Philippine Savings emphasize the indefeasibility of a certificate of
Torrens title. So, it is indefeasible and to rule otherwise in favor of applying
these rules on preference of credits would make the title to one's property
unstable and questionable. Because anytime somebody would alleged that I
have this preferred claim under Art. 2242. So here it is emphasizes the
principle that the purchaser in good faith and for value takes registered land
free from liens and encumbrances, other than statutory lien and those
recorded on the certificate of title, in respecting the indefeasibility of such
title. So those enumerated under Art. 2241 and 2242 would be considered as
mortgages or pledges in a sense that is really a lien or encumbrance of a
specific property. And this Art. 2243 is the basis. So what we have discussed
earlier, the taxes in relation to the property are preferred. It shall be satisfied
first. All the rest will concur.
J.L. BERNARDO VS CA
FACTS: Sometime in 1990, the municipal government of San Antonio, Nueva
Ecija approved the construction of the San Antonio Public Market.
On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay,
submitted its bid together with other qualified bidders. After evaluating the
bids, the municipal pre-qualification bids and awards committee, headed by
respondent Jose L. Salonga (then incumbent municipal mayor of San
Antonio) as Chairman, awarded the contract to petitioners. On June 8, 1990,
a Construction Agreement was entered into by the Municipality of San
Antonio thru respondent Salonga and petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this Construction Agreement, the
Municipality agreed to assume the expenses for the demolition, clearing and
site filling of the construction site in the amount of P1,150,000 and, in
addition, to provide cash equity of P767,305.99 to be remitted directly to
petitioners.
Petitioners allege that, although the whole amount of the cash equity
became due, the Municipality refused to pay the same, despite repeated
demands and notwithstanding that the public market was more than ninety-
eight percent (98%) complete as of July 20, 1991.
On July 31, 1991, J.L. Bernardo Construction filed a complaint for breach of
contract, specific performance, and collection of a sum of money, with
prayer for preliminary attachment and enforcement of contractors lien
against the Municipality of San Antonio, Nueva Ecija and Salonga, in his
personal and official capacity as municipal mayor.
On September 5, 1991, the Regional Trial Court issued the writ of preliminary
attachment prayed for by plaintiffs. It also granted J.L. Bernardo
Construction the right to maintain possession of the public market and to
operate the same.
ISSUE: Whether or not the grant of writ of attachment and the contractor’s
lien proper?
HELD: There is no contractor’s lien in favor of petitioners.
Articles 2241 and 2242 of the Civil Code enumerates certain credits which
enjoy preference with respect to specific personal or real property of the
debtor. Specifically, the contractor’s lien claimed by petitioners is granted
under the third paragraph of Article 2242 which provides that the claims of
contractors engaged in the construction, reconstruction or repair of
buildings or other works shall be preferred with respect to the specific
` Page 57 of 63
building or other immovable property constructed.
However, Article 2242 only finds application when there is a concurrence of
credits, i.e. when the same specific property of the debtor is subjected to the
claims of several creditors and the value of such property of the debtor is
insufficient to pay in full all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to determine which of the
creditors will be paid ahead of the others. Fundamental tenets of due
process will dictate that this statutory lien should then only be enforced in
the context of some kind of a proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such as insolvency
proceedings.
This is made explicit by Article 2243 which states that the claims and liens
enumerated in articles 2241 and 2242 shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal
provisions governing insolvency.
The action filed by petitioners in the trial court does not partake of the
nature of an insolvency proceeding. It is basically for specific performance
and damages. Thus, even if it is finally adjudicated that petitioners herein
actually stand in the position of unpaid contractors and are entitled to
invoke the contractor’s lien granted under Article 2242, 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 fact that no third party
claims have been filed in the trial court will not bar other creditors from
subsequently bringing actions and claiming that they also have preferred
liens against the property involved.
Q1: How about the fact that there were no other creditors or 3rd parties
asserting claims over the markert?
A1: Although there were no other claims over the market, it does not bar
other creditors from subsequently claiming because this is a specific
performance case and not adjudication of claims.
In this case although it is stated under paragraph 3(of Art. 2242), it only
applies when there is concurrence of credits and as defined here in this case,
there is concurrence of credits if the same specific property of the debtor is
subjected to the claims of several creditors and the value of such property of
the debtor is insufficient to pay in full all the creditors in such a situation. The
question of preference will arise if there is a need to determine which among
the creditors should be paid ahead of the others. However in this case, due
process dictates that this statutory lien will only be enforced in the context
of some proceeding where the claims of all preferred creditors will be
bindingly adjudicated such as an insolvency proceeding. In this case the
action filed by J.L. Bernardo does not partake the nature of an insolvency
proceeding because it is only an action for specific performance and there is
no way in determining whether or not other preferred creditors exist.
The action filed by petitioners in the trial court does not partake of the
nature of an insolvency proceeding. It is basically for specific performance
and damages. Thus, even if it is finally adjudicated that petitioners herein
actually stand in the position of unpaid contractors and are entitled to
invoke the contractors lien granted under Article 2242, 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 fact that no third party
claims have been filed in the trial court will not bar other creditors from
subsequently bringing actions and claiming that they also have preferred
liens against the property involved.
Similar to the earlier case of Philippine Savings Bank. So do take note here
that it does not mean that the obligation in favor of the contractor will now
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
be extinguished. This case just tells us that we cannot use 2242 to assert
contractor’s lien over the proceeds of the sale of the property. The trial court
can still rule that the contractor as in this case is still entitled to be paid. But
it would still depend if there are other properties of the debtor that can be
executed to pay the obligation.
Atlantic vs. Herbal Cove
FACTS: In 1996, Atlantic Erectors (AE) and Herbal Cove (HCC) entered into a
contract to construct townhouses. HCC was not able to complete the project
in time. AE then filed for damages and won the suit. HCC was ordered to pay
in damages and fees. The cause of action is a money claim by only one
creditor. In 1997, AE caused a notice of lispendens on several TCTs, which
carried over when the lots were further divided into 50 lots. In 1998, HCC
filed a motion to cancel the notice of lispendens, as AE’s action is purely a
personal action to collect a sum of money and damages, and does not
directly affect title to, use or possession of real property.
In opposition, AE argued that the money claim constitutes a lien that can
be enforced to secure payment for the said obligations. It argues that, to
preserve the alleged improvement it had made on the subject land, such
annotation on the property titles of respondent is necessary. On the other
hand, HCC argues that the annotation is bereft of any factual or legal basis,
because the action does not directly affect the title to the property, or the
use or the possession thereof. The annotation is baseless and cannot be
made through the enforcement of a contractor’s lien under Art. 2242 as said
provision applies only to cases in which there are several creditors carrying
on a legal action against an insolvent debtor.
ISSUE: WON money claims representing cost of materials and labor are
proper liens for annotations of lispendens on the property title.
RULING: No.
As a general rule, the only instances in which a notice of lispendens may be
availed of are as follows: (a) an action to recover possession of real estate;
(b) an action for partition; and (c) any other court proceedings that directly
affect the title to the land or the building thereon or the use or the
occupation thereof.
A careful examination of petitioner's Complaint, as well as the reliefs it
seeks, reveals that no such lien or interest over the property 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. 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.
Even assuming that petitioner had sufficiently alleged such lien or
encumbrance in its Complaint, the annotation of the Notice of Lis Pendens
would still be unjustified, because a complaint for collection and damages is
not the proper mode for the enforcement of a contractor's lien.
Fundamental tenets of due process will dictate that this statutory lien should
then only be enforced in the context of some kind of a proceeding where the
claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency proceedings.
Article 2242 finds application when there is a concurrence of credits, i.e.,
when the same specific property of the debtor is subjected to the claims of
several creditors and the value of such property of the debtor is insufficient
to pay in full all the creditors. In such a situation, the question of preference
will arise, that is, there will be a need to determine which of the creditors
will be paid ahead of the others. In this case, there is no concurrence of
credit since there is only one creditor.
` Page 58 of 63
Q1: Was the notice of lis pendens here proper or not? SC notes of the
instances when notice of lispendensmay be availed of; these are,
a) In an action to recover possession of real estate;
b) An action for partition;
c) Any other court proceedings that directly affect the title to
the land or the building thereon or the use of the
occupation thereof.
Even though we call this contractor’s lien, it does not create a lien or interest
over the subject property. Now, 2242 cannot be applied in this case. . 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.
Moreover again, in similar cases, Article 2242 finds application when there
is a concurrence of credits, i.e., when the same specific property of the
debtor is subjected to the claims of several creditors and the value of such
property of the debtor is insufficient to pay in full all the creditors. In such a
situation, the question of preference will arise, that is, there will be a need to
determine which of the creditors will be paid ahead of the
others. Fundamental tenets of due process will dictate that this statutory
lien should then only be enforced in the context of some kind of a
proceeding where the claims of all the preferred creditors may 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.
Development Bank vs. CA
FACTS: Marinduque Mining-Industrial Corporation obtained from PNB and
DBP various loan accommodations. To secure the loans, Marinduque Mining
mortgaged to PNB and DBP all its real and personal properties. Marinduque
Mining failed to settle its loan obligations, thus PNB and DBP instituted
sometime on July and August 1984 extrajudicial foreclosure proceedings
over the mortgaged properties.
In the meantime, between July 1982 to October 1983, Marinduque Mining
purchased and caused to be delivered construction materials and other
merchandise from Remington Industrial Sales Corporation The purchases
remained unpaid as of August 1, 1984 when Remington filed a complaint for
a sum of money and damages against Marinduque Mining for the value of
the unpaid construction materials and other merchandise purchased by
Marinduque Mining. Remington's original complaint was later amended to
implead PNB and DBP in view of the foreclosure by the latter of the real and
chattel mortgages).
ISSUE: WON Remington can enforce its claim (for the payment of the
construction materials purchasedby Marinduque Mining) against DBP.
RULING: No.
Remington cannot enforce its lien against DBP because there was no
liquidation proceeding. The liquidation proceeding contemplated by the CC
is not the extrajudicial foreclosure done by DBP over Marinduque Mining’s
properties. The kind of proceeding contemplated is where the claims of all
the preferred creditors may be bindingly adjudicated, such as insolvency, the
settlement of decedent's estate under Rule 87 of the Rules of Court, or other
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR

liquidation proceedings of similar import. The extrajudicial foreclosure subject of litigation. These credits shall have preference
instituted by PNB and DBP is not the liquidation proceeding contemplated by among themselves in the order of priority of the dates of the
the Civil Code; thus, Remington cannot claimits pro rata share from DBP and instruments and of the judgments, respectively.
PNB.
So it is clear that Art. 2244 emphasizes order of preference in the order
Q1: what’s the role of DBP here?
named. However, we have to take note of these services rendered by
A1: it is a preferred creditor.
employees, labourers, and household helpers, we have the case of DBP v
NLRC.
Q2: but there’s no proceeding?
A2: Here, Remmington can only go after---
DBP vs. NLRC
Q3: What’s the basis of DBP’s rights over the proceeds over the properties?
FACTS:
Because again, it is a mortgagee who foreclosed the property. That
Leonor Ang is an employee of petitioner Tropical Philippine Woods
foreclosure proceeding is not the one contemplated by law to apply the
Industries, Inc. (TPWII).
rules on preference of credits.
DBP, a mortgagee of TPWII foreclosed the latter’s plant, equipments , and
In relation to concurrence and preference of credits, again it is emphasized
facilities. As a result, the operations of stopped and Leonor Ang was verbally
that in the absence of any liquidation proceeding, the claim of the creditor
terminated.
cannot be enforced against any mortgagee in good faith. As in the
extrajudicial foreclosure executed by PNB and DBP is not the liquidation
On December 14, 1987 aggrieved by the termination of her employment,
proceeding contemplated by the Civil Code, then Remington cannot claim its
private respondent filed with the Labor Arbiter a complaint for separation
pro-rata share from DBP.
pay, 13th month pay, vacation and sick leave pay, salaries and allowances
against TPWII, its General Manager, and Tropical.
Take note when to apply Arts. 2241 and 2242. Now let’s take a look at Art.
2244. It refers to ordinary preferred credits. Unlike to Arts. 2241 and 2241,
Tropical was held subsidiarily liable by LA for the unpaid wages applying
Art. 2244 must be in order.
Art. 110 of the Labor Code. Thus, Tropical now questions the application of
said labor code provision which refers to worker preference in case of
Art. 2244. With reference to other property, real and personal, of the
bankruptcy or liquidation of an employer's business against a mortgage.
debtor, the following claims or credits shall be preferred in the order
named:
ISSUE: WON Article 110 of the Labor Code is applicable in the case.
1) Proper funeral expenses for the debtor, or children under his
RULING:
or her parental authority who have no property of their own,
NO
when approved by the court;
Art. 110 should not be treated apart from other laws but applied in
2) Credits for services rendered the insolvent by employees,
conjunction with the pertinent provisions of the Civil Code and the
laborers, or household helpers for one year preceding the
Insolvency Law to the extent that piece-meal distribution of the assets of the
commencement of the proceedings in insolvency;
debtor is avoided.
3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if
A declaration of bankruptcy or a judicial liquidation must be present before
they have no property of their own;
the worker's preference may be enforced. Thus, Article 110 of the Labor
4) Compensation due the laborers or their dependents under
Code and its implementing rule cannot be invoked by the respondents in this
laws providing for indemnity for damages in cases of labor
case absent a formal declaration of bankruptcy or a liquidation order.
accident, or illness resulting from the nature of the
employment;
A preference applies only to claims which do not attach to specific
5) Credits and advancements made to the debtor for support of
properties. A lien creates a charge on a particular property. The right of first
himself or herself, and family, during the last year preceding
preference as regards unpaid wages recognized by Article 110 does not
the insolvency;
constitute a lien on the property of the insolvent debtor in favor of workers.
6) Support during the insolvency proceedings, and for three
It is but a preference of credit in their favor, a preference in application. On
months thereafter;
the other hand, DBP anchors its claim on a mortgage credit. A mortgage
7) Fines and civil indemnification arising from a criminal offense;
directly and immediately subjects the property upon which it is imposed,
8) Legal expenses, and expenses incurred in the administration
whoever the possessor may be, to the fulfillment of the obligation for whose
of the insolvent’s estate for the common interest of the
security it was constituted. It creates a real right which is enforceable against
creditors, when properly authorized and approved by the
the whole world. It is a lien on an identified immovable property, which a
court;
preference is not. A recorded mortgage credit is a special preferred credit
9) Taxes and assessments due the national government, other
under Article 2242 (5) of the Civil Code on classification of credits. The
than those mentioned in Articles 2241, No. 1, and 2242, No. 1;
preference given by Article 1l0, when not falling within Article 2241 (6) and
10) Taxes and assessments due any province, other than those
Article 2242 (3), of the Civil Code and not attached to any specific property,
referred to in Articles 2241, No. 1, and 2242, No. 1;
is all ordinary preferred credit although its impact is to move it from second
11) Taxes and assessments due any city or municipality, other
priority to first priority in the order of preference established by Article 2244
than those indicated in Articles 2241, No. 1, and 2242, No. 1;
of the Civil Code.
12) Damages for death or personal injuries caused by a quasi-
delict;
13) Gifts due to public and private institutions of charity or Maam: How do you reconcile the preference mentioned in Art. 110 of the
beneficence; Labor Code and those provisions here under the Civil Code in relation to
14) Credits which, without special privilege, appear in (a) a public concurrence and preference of credits?
instrument; or (b) in a final judgment, if they have been the

` Page 59 of 63
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
Sir J: The SC ruled that it did not take preference or no. 1 preference or
making better or higher the or should I say superior than the tax preference
or dues. In fact, the tax dues would always be preferred first, however, in
relation to what (*interrupted)
Mam: In relation to what? We have to be specific..
Sir J: In relation to taxes that is found under Arts. 2241(1) and 2242(1) the SC
held that these would not be preferred given that the obligation would fall
under Art. 2241(6) and Art. 2242(3). Also what really happened was that the
legislature enacted this law it complicate 2 things because in Art. 2243 there
are still limitation within the 1 year prior the insolvency (inaudible) 1st it
removed that 1 year limitation and 2nd it gained a superior order and
upgraded preference from a second priority to first priority but only second
to taxes falling under Art. 2241(1)
Mam: To distinguish it from Arts. 2241 and 2242. Alright. You are already
familiar with Art. 110 of the Labor Code referring to worker preference in
case of bankruptcy. The employers and workers shall enjoy 1st preference as
regards to their unpaid wages and other monetary claims any provision of
the 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. Now first thing that was emphasized in this case is
that in the absence of any proceedings to enforce the rule as to the
preference and concurrence of credit notwithstanding the absence thereof,
the SC nevertheless discussed the applicability or the non-applicability of Art.
110 of the LC and how it relates with the other provisions in the Civil Code
specifically concurrence and preference of credits. Art. 110 did not
necessarily repeal the provisions in Arts. 2241, 2242, and 2244. In other
words, the preference mentioned in Art. 110 did not alter Arts. 2241 and
2242. In other words, in those articles, taxes in relation to the specific
property or those duties in favor of the government would still to be
preferred and then now the claims of the labourers in relation to that work
of the specific property will share pro-rata with the other credits.
How is this Art. 110 to be applied? That is in relation to Art. 2244. Now, the
effect of Art. 110 is that hindi pwede yung no. 2 is that the credit rendered in
services is insolvent by the labourers or household helpers will now become
the no. 1 noh, first preference followed by the proper funeral expenses so
that is the first effect. The second effect is that tinanggal na yung 1 year
proceeding, the commencement of the proceeding in insolvency. So here
what happened? Eto na yung preference of a worker’s preference ahead of
the taxes and duties in favour of the government because here tax dues are
nos. 9, 10, and 11. Again, very relevant ang Art. 2244 in the sense that you
should take note to the order as mentioned here and to which the
application of course is very much different as compared to Arts. 2241 and
2244. Here again there was no liquidation proceeding, no declaration of a
bankruptcy and judicial litigation so it would be first premature to enforce
the worker’s preference. Now preference applies only to claims attached to
the specific property is the right of the first preference is recognized in Art.
110 again does not constitute a lien on the property of the insolvent debtor
in favour of workers, a preference of credit in their favour. Moreover, Art.
110 does not purport to create a lien in favour of employees’ unpaid wages
even upon all properties or any particular property owned by their
employers. Here DBP anchored its claim to mortgage credit. The properties
subjected thereto it creates a real right which is enforceable against the
whole world. Lien on the identified movable property which again must be
distinguish from a preference. The preference given by Art. 110 when not
falling under Art. 2241(6) and Art. 2242(3) is an ordinary preferred credit
although its impact move to second priority to the first priority under Art.
2244 of the Civil Code. Again, no conflict ang Art. 110 from Art. 2244. Take
note of the order of preference which must be followed under Art. 2244. So
anong mangyari dito? There are other properties which can be sold and the
proceeds would be applied in the order provided under Art. 2244. Another
scenario would be for example specific property would be sold tapos
` Page 60 of 63
mabayaran na ang specific credit tapos meron pang proceeds pano iapply
yang proceeds? Lahat ng proceeds na sobra na naiwan will be applied in the
order of credits enumerated in Art. 2244. Of course again, the second
preference for the worker’s lien on unpaid wages moved to no. 1 and move
expenses to no.2 hanggang maubos. Remember this is not pro-rata, it is in
the order provided.
Now notice also here that we have taxes and assessments due to the
government so magkasunod yan sila nauna ang favor sa National Gov’t then
sa province then sa City and Municipality. What would be the examples of
taxes in favour of the National Gov’t? Income taxes (not covered to specific
property). Take note that these refers to free property not subject to 2241
and 2242 and applied the order enumerated under 2244 in consideration of
Art. 110 of the LC.
Take note under no. 14 – Eg. Promissory note that is duly notarized. It is a
public instrument, it does not enjoy special privilege in the absence of real
estate mortgage and among these credits in the public instrument of
judgment they will be in the order of priority of the dates of the instruments
and judgments, respectively.
Art. 2245. Credits of any other kind or class, or by any other right or title
not comprised in the four preceding articles, shall enjoy no preference.
What if the debtor still has proceeds of the sale of his assets and all the
credits mentioned under Arts. 2241, 2242 and 2244 having paid. May sobra
pa meron pang common credits na hindi nabayaran. Now this time, they will
share pro-rata. No preference and common credits shall be paid pro-rata
regardless of the dates.
We have the case of Republic v Peralta
Republic vs. Peralta
FACTS: In the voluntary insolvency proceedings commenced in May 1977 by
Quality Tobacco Corporation (the "Insolvent"), the following claims of
creditors were filed:
(i) P2,806,729.92, by the USTC Association of Employees and workers Union-
PTGWO USTC as separation pay for their members. This amount plus an
additional sum of P280,672.99 as attorney's fees had been awarded by the
National Labor Relations Commission in NLRC Case No. RB-IV-9775-77.
(ii) P53,805.05 by the Federacion de la IndustriaTabaquera y
OtrosTrabajadores de Filipinas ("FOITAF), as separation pay for their
members, an amount similarly awarded by the NLRC in the same NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection
fees covering the period 1 October 1967 to 28 February 1973;
(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes
payable on various importations by the Insolvent. These obligations appear
to be secured by surety bonds. 2 Some of these imported items are
apparently still in customs custody so far as the record before this Court
goes.
In its questioned Order of 17 November 1980, the trial court held that the
above-enumerated claims of USTC and FOITAF ("Unions") for separation pay
of their respective members embodied in final awards of the National Labor
Relations Commission were to be preferred over the claims of the Bureau of
Customs and the Bureau of Internal Revenue. The trial court, in so ruling,
relied primarily upon Article 110 of the Labor Code which reads thus:
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 wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any provision of law to the
contrary notwithstanding. Union paid wages shall be paid in full before other
creditors may establish any claim to a share in the assets of the employer.
The Solicitor General, in seeking the reversal of the questioned Orders,
argues that Article 110 of the Labor Code is not applicable as it speaks of
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
"wages," a term which he asserts does not include the separation pay
claimed by the Unions. "Separation pay," the Solicitor General contends, is
given to a laborer for a separation from employment computed on the basis
of the number of years the laborer was employed by the employer; it is a
form of penalty or damage against the employer in favor of the employee for
the latter's dismissal or separation from service.
ISSUE 1: WON the above-enumerated claims of USTC and FOITAF ("Unions")
for separation pay of their respective members embodied in final awards of
the National Labor Relations Commission were to be preferred over the
claims of the Bureau of Customs and the Bureau of Internal Revenue.
HELD 1: Article 97 (f) of the Labor Code defines "wages" in the following
terms:
Wage' paid to any employee shall mean the remuneration or earnings,
however designated, capable of being expressed in terms of money, whether
fixed or ascertained on a time, task, piece, or commission basis, or other
method of calculating the same, which is payable by an employer to an
employee under a written or unwritten contract of employment for work
done or to be done, or for services rendered or to be rendered, and includes
the fair and reasonable value, as determined by the Secretary of Labor, of
board, lodging, or other facilities customarily furnished by the employer to
the employee. 'Fair and reasonable value' shall not include any profit to the
employer or to any person affiliated with the employer.
We are unable to subscribe to the view urged by the Solicitor General. For
the specific purposes of Article 110 and in the context of insolvency
termination or separation pay is reasonably regarded as forming part of the
remuneration or other money benefits accruing to employees or workers by
reason of their having previously rendered services to their employer; as
such, they fall within the scope of "remuneration or earnings — for services
rendered or to be rendered — ." Liability for separation pay might indeed
have the effect of a penalty, so far as the employer is concerned. So far as
concerns the employees, however, separation pay is additional
remuneration to which they become entitled because, having previously
rendered services, they are separated from the employer's service. The
relationship between separation pay and services rendered is underscored
by the fact that separation pay is measured by the amount (i.e., length) of
the services rendered. This construction is sustained both by the specific
terms of Article 110 and by the major purposes and basic policy embodied in
the Labor Code. It is also the construction that is suggested by Article 4 of
the Labor Code which directs that doubts — assuming that any substantial
rather than merely frivolous doubts remain-in the interpretation of the
provisions of the labor Code and its implementing rules and regulations shall
be "resolved in favor of labor."
Article 110 must be read in relation to the provisions of the Civil Code
concerning the classification, concurrence and preference of credits, which
provisions find particular application in insolvency proceedings where the
claims of all creditors, preferred or non-preferred, may be adjudicated in a
binding manner.
Those provisions may be seen to classify credits against a particular insolvent
into three general categories, namely: (a) special preferred credits listed in
Articles 2241 and 2242, (b) ordinary preferred credits listed in Article 2244;
and (c) common credits under Article 2245.
Turning first to special preferred credits under Articles 2241 and 2242, it
should be noted at once that these credits constitute liens or encumbrances
on the specific movable or immovable property to which they relate. Article
2243 makes clear that these credits "shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal
provisions governing insolvency." It should be emphasized in this connection
that "duties, taxes and fees due [on specific movable property of the
insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and
"taxes due upon the insolvent's land or building (2242 [1])"stand first in
` Page 61 of 63
preference in respect of the particular movable or immovable property to
which the tax liens have attached. Article 2243 is quite explicit: "[T]axes
mentioned in number 1, Article 2241 and number 1, Article 2242 shall first
be satisfied." The claims listed in numbers 2 to 13 in Article 2241 and in
numbers 2 to 10 in Articles 2242, all come after taxes in order of precedence;
such claims enjoy their privileged character as liens and may be paid only to
the extent that taxes have been paid from the proceeds of the specific
property involved (or from any other sources) and only in respect of the
remaining balance of such proceeds. What is more, these other (non-tax)
credits, although constituting liens attaching to particular property, are not
preferred one over another inter se. Provided tax liens shall have been
satisfied, non-tax liens or special preferred credits which subsist in respect of
specific movable or immovable property are to be treated on an equal basis
and to be satisfied concurrently and proportionately. Put succinctly, Articles
2241 and 2242 jointly with Articles 2246 to2249 establish a two-tier order of
preference. The first tier includes only taxes, duties and fees due on specific
movable or immovable property. All other special preferred credits stand on
the same second tier to be satisfied, paripassu and pro rata, out of any
residual value of the specific property to which such other credits relate.
Credits which are specially preferred because they constitute liens (tax or
non-tax) in turn, take precedence over ordinary preferred credits so far as
concerns the property to which the liens have attached. The specially
preferred credits must be discharged first out of the proceeds of the
property to which they relate, before ordinary preferred creditors may lay
claim to any part of such proceeds.
If the value of the specific property involved is greater than the sum total of
the tax liens and other specially preferred credits, the residual value will
form part of the "free property" of the insolvent — i.e., property not
impressed with liens by operation of Articles 2241 and 2242. If, on the other
hand, the value of the specific movable or immovable is less than the
aggregate of the tax liens and other specially preferred credits, the
unsatisfied balance of the tax liens and other such credits are to the treated
as ordinary credits under Article 2244 and to be paid in the order of
preference there set up.
In contrast with Articles 2241 and 2242, Article 2244 creates no liens on
determinate property which follow such property. What Article 2244 creates
are simply rights in favor of certain creditors to have the cash and other
assets of the insolvent applied in a certain sequence or order of priority.
Only in respect of the insolvent's "free property" is an order of priority
established by Article 2244. In this sequence, certain taxes and assessments
also figure but these do not have the same kind of overriding preference that
Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens on
the taxpayer's property. Under Article 2244,
(a) taxes and assessments due to the national government, excluding those
which result in tax liens under Articles 2241 No. 1 and 2242 No. 1 but
including the balance thereof not satisfied out of the movable or immovable
property to which such liens attached, are ninth in priority; (b) taxes and
assessments due any province, excluding those impressed as tax liens under
Articles 2241 No. 1 and 2242 No. 1, but including the balance thereof not
satisfied out of the movable or immovable property to which such liens
attached, are tenth in priority; and
(c) taxes and assessments due any city or municipality, excluding those
impressed as tax liens under Articles 2241 No. I and 2242 No. 2 but including
the balance thereof not satisfied out of the movable or immovable property
to which such liens attached, are eleventh in priority.
ISSUE 2: What is the impact Article 110 of the labor Code has had on those
provisions of the Civil Code?
HELD 2: A. Claim of the Bureau of Customs for Unpaid Customs Duties and
Taxes- Under Section 1204 of the Tariff and Customs Code.
Clearly, the claim of the Bureau of Customs for unpaid customs duties and
taxes enjoys the status of a specially preferred credit under Article 2241, No.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR
1, of the Civil Code. only in respect of the articles importation of which by
the Insolvent resulted in the assessment of the unpaid taxes and duties, and
which are still in the custody or subject to the control of the Bureau of
Customs. The goods imported on one occasion are not subject to a lien for
customs duties and taxes assessed upon other importations though also
effected by the Insolvent. Customs duties and taxes which remain unsatisfied
after levy upon the imported articles on which such duties and taxes are due,
would have to be paid out of the Insolvent's "free property" in accordance
with the order of preference embodied in Article 2244 of the Civil Code. Such
unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of
the Civil Code and hence would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees —
Under Section 315 of the National Internal Revenue Code ("old Tax Code")
It follows that the claim of the Bureau of Internal Revenue for unpaid
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 as taxpayer. Clearly, under Articles 2241 No. 1,
2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given
preference over any other claim of any other creditor, in respect of any and
all properties of the Insolvent.
C. Claims of the Unions for Separation Pay of Their Members — Article 110
of the Labor Code does not purport to create a lien in favor of workers or
employees for unpaid wages either upon all of the properties or upon any
particular property owned by their employer. Claims for unpaid wages do
not therefore fall at all within the category of speciallypreferred claims
established under Articles 2241 and 2242 of the Civil Code, except to the
extent that such claims for unpaid wages are already covered by Article
2241, number 6. "claims for laborers' wages, on the goods manufactured or
the work done;" or by Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or other works." To the
extent that claims for unpaid wages fall outside the scope of Article 2241,
number 6 and 2242, number 3, they would come within the ambit of the
category of ordinary preferred credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the Unions
for separation pay of their members constitute liens attaching to the
processed leaf tobacco, cigars and cigarettes and other products produced
or manufactured by the Insolvent, but not to other assets owned by the
Insolvent. And even in respect of such tobacco and tobacco products
produced by the Insolvent, the claims of the Unions may be given effect only
after the Bureau of Internal Revenue's claim for unpaid tobacco inspection
fees shall have been satisfied out of the products so manufactured by the
Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a building
or other real property of the Insolvent in favor of workmen who constructed
or repaired such building or other real property. Article 2242, number 3,
does not however appear relevant in the instant case, since the members of
the Unions to whom separation pay is due rendered services to the Insolvent
not (so far as the record of this case would show) in the construction or
repair of buildings or other real property, but rather, in the regular course of
the manufacturing operations of the Insolvent. The Unions' claims do not
therefore constitute a lien or encumbrance upon any immovable property
owned by the Insolvent, but rather, as already indicated, upon the
Insolvent's existing inventory (if any of processed tobacco and tobacco
products.
Article 110 of the Labor Code did not sweep away the overriding preference
accorded under the scheme of the Civil Code to tax claims of the government
or any subdivision thereof which constitute a lien upon properties of the
Insolvent. It is frequently said that taxes are the very lifeblood of
government. The effective collection of taxes is a task of highest importance
for the sovereign. It is critical indeed for its own survival. It follows that
` Page 62 of 63
language of a much higher degree of specificity than that exhibited in Article
110 of the Labor Code is necessary to set aside the intent and purpose of the
legislator that shines through the precisely crafted provisions of the Civil
Code. It cannot be assumed simpliciter that the legislative authority, by using
in Article 110 the words "first preference" and "any provision of law to the
contrary notwithstanding" 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." Insistent considerations of public policy prevent us from giving to
"other creditors" a linguistically unlimited scope that would embrace the
universe of creditors save only unpaid employees.
We, however, do not believe that Article 110 has had no impact at all upon
the provisions of the Civil Code. Bearing in mind the overriding precedence
given to taxes, duties and fees by the Civil Code and the fact that the Labor
Code does not impress any lien on the property of an employer, the use of
the phrase "first preference" in Article 110 indicates that what Article 110
intended to modify is the order of preference found in Article 2244, which
order relates, as we have seen, to property of the Insolvent that is not
burdened with the liens or encumbrances created or recognized by Articles
2241 and 2242. We have noted that Article 2244, number 2, establishes
second priority for claims for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the commencement of the
proceedings in insolvency." Article 110 of the Labor Code establishes "first
preference" for services rendered "during the period prior to the bankruptcy
or liquidation, " a period not limited to the year immediately prior to the
bankruptcy or liquidation. Thus, very substantial effect may be given to the
provisions of Article 110 without grievously distorting the framework
established in the Civil Code by holding, as we so hold, that Article 110 of the
Labor Code has modified Article 2244 of the Civil Code in two respects: (a)
firstly, by removing the one year limitation found in Article 2244, number 2;
and (b) secondly, by moving up claims for unpaid wages of laborers or
workers of the Insolvent from second priority to first priority in the order of
preference established I by Article 2244.
Accordingly, and by way of recapitulating the application of Civil Code and
Labor Code provisions to the facts herein, the trial court should inventory
the properties of the Insolvent so as to determine specifically: (a) whether
the assets of the Insolvent before the trial court includes stocks of processed
or manufactured tobacco products; and (b) whether the Bureau of Customs
still has in its custody or control articles imported by the Insolvent and
subject to the lien of the government for unpaid customs duties and taxes.
In respect of (a), if the Insolvent has inventories of processed or
manufactured tobacco products, such inventories must be subjected firstly
to the claim of theBureau of Internal Revenue for unpaid tobacco inspection
fees. The remaining value of such inventories after satisfaction of such fees
(or should such inspection fees be satisfied out of other properties of the
Insolvent) will be subject to a lien in favor of the Unions by virtue of Article
2241, number 6. In case, upon the other hand, the Insolvent no longer has
any inventory of processed or manufactured product, then the claim of the
Unions for separation pay would have to be satisfied out of the "free
property" of the Insolvent under Article 2244 of the Civil Code. as modified
by Article 110 of the Labor Code.
Turning to (b), should the Bureau of Customs no longer have any
importations by the Insolvent still within customs custody or control, or
should the importations still held by the Bureau of Customs be or have
become insufficient in value for the purpose, customs duties and taxes
remaining unpaid would have only ninth priority by virtue of Article 2244,
number 9. In respect therefore of the Insolvent's "free property, " the claims
of the Unions will enjoy first priority under Article 2244 as modified and will
be paid ahead of the claims of the Bureau of Customs for any customs duties
and taxes still remaining unsatisfied.
 CREDIT TRANSACTIONS FINAL EXAM TRANSCRIPTION
Based on the Lectures of Atty. Jazzie Sarona
2 MANRESA SY 16-17 - AMPARO • CABREROS • CHANYEE • CONFESOR • DEL ROSARIO • KUIT • NITURA • PABALAN • PASTOR

It is understood that the claims of the Unions referred to above do not
include the 10% claim for attorney's fees. Attorney's fees incurred by the
Unions do not stand on the same footing as the Unions' claims for separation
pay of their members.
Mam: First, do we have a liquidation proceeding/insolvency proceeding that
is required by law in this case?
Cid: There was a voluntary proceeding.
Mam: Yes this time, we already have a proceeding to which we can apply all
these articles.
***
Mam: Remember, we apply Art. 2241 to specific movable property. In this
case, what is the specific movable property in relation to the claim of the
BOC?
Cid: The imported goods Mam
Mam: Okay in relation to that of Tabacco
***
Mam: Here this time, we already have insolvency __ proceeding involving
voluntary __ proceeding involving the claims of several creditors, unions
including separation pay for workers Tobacco fees in favour of the BIR,
customs duties and taxes payable on various importations by the BOC.
The SC emphasized that taxes in favour of BOC and the BIR mentioned here
in relation to specific movable properties and therefore Art. 2241(1) shall be
applied these customs duties and taxes in favour of BOC enjoy the status of a
specially preferred credit only in respect of the articles importation. The
goods imported on one location are not subject again for customs duties and
taxes assessed upon other importations. Customs duties and taxes which
remained unsatisfied after levy upon the imported articles on which such
duties and taxes are due will now then be paid up of the insolvent’s free
property under Art. 2244. So kung kulang yung imported goods to pay off
the customs duties in favour of the BOC, then saan mahulog? Art. 2244(9) in
favour of the government because that is a National tax. As to the claim of
the BIR for __ inspection fees Art. 2241 is also applicable even in respect of
any properties insolvent in relation to Art. 2241.
Separation pay – construed in favour of the labor unions. Claims for unpaid
wages do not fall within the catergory of specially preferred claims under
Arts. 2241 and 2242 unless it is covered by par. 6 of Art. 2241 and par. 3 of
Art. 2242. Now again in those provisions, wala silang preference to share
together with all other credits after taxes.
SC pointed out that it cannot be assumed that the legislative authority by
using in Article 110 the words "first preference" and "any provision of law to
the contrary notwithstanding" 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." Again, it only indicates that it is only intended to modify the
order of preference in Art. 2244 to which from No. 2 it will now be first in the
preference and the 1 year period will be removed. So the effect first is
removing the 1 year limitation and moving unclaimed wages of labourers
and workers from 2nd to 1st priority as provided under Art. 2244.
Art. 2247. If there are two or more credits with respect to the same specific
movable property, they shall be satisfied pro rata, after the payment of
duties, taxes and fees due the State or any subdivision thereof.
“pro-rata” this is our basis that 2-14 of Art. 2244 is pro-rata
Art. 2248. Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of the
immovable or real right to which the preference refers.
Art. 2249. If there are two or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro rata, after the
payment of the taxes and assessments upon the immovable property or
real right.
Arts. 2248-2249 are similar to Arts. 2246-2247 it is just that this Arts. 2248-
2249 refer to immovable properties. Still the same.
Art. 2250. The excess, if any, after the payment of the credits which enjoy
preference with respect to specific property, real or personal, shall be
added to the free property which the debtor may have, for the payment of
the other credits. (1928a)
Other credits here refer to the enumerations under Art. 2244 in the order
made taking into consideration Art. 110 of the LC.
Art. 2251. Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount not
paid, shall be satisfied according to the following rules:
(1) In the order established in Article 2244;
(2) Common credits referred to in Article 2245 shall be paid pro rata
regardless of dates.
Again, it emphasized the order in Art. 2244 and if there still remaining
proceeds it shall be applied to common credits as mentioned under Art.
2245 but this time pro-rata regardless of the dates.
This rule on preference of credits is not often ask in the bar exams, some say
that hindi na daw siya ganun ka-relevant but it is not just common why?
Because you apply this only when there is a proceeding. I requires a
liquidation and insolvency proceedings or the settlement of one’s estate, in
the absence of that you cannot apply rules on concurrence and preference
of credits. But once you have the proceeding, that’s the time when you can
apply these rules on concurrence and preference of credits. Among the
proceedings mentioned, nothing in the said proceedings made mention who
among the creditors will be preferred, that would be answered by these
rules.

SC also pointed out that the claims as to the attorney’s fees are not deemed
included for separation pay.
Art. 2246. Those credits which enjoy preference with respect to specific
movables, exclude all others to the extent of the value of the personal
property to which the preference refers.

In relation thereto, we have Art. 2247

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