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I.

Chattel Mortgage Law Special Laws

Chattel Mortgage (Act No. 1508)


A. Definition

Law

chattel mortgage is broken. (Sec. 13) Mortgagor can sell property mortgaged, subject to the mortgage Pledgor can sell thing with consent of pledgee

By chattel mortgage, personal property is recorded in the Chattel Mortgage Registry as security for the performance of an obligation. (Art. 2140, Civil Code.)

Cannot secure future obligations

Can secure future obligations

The old definition under Sec. 3 of Act No. 1508 which considered a chattel mortgage as a conditional sale was considered inaccurate by the Code Commission. (Serra v. Rodriguez, 1974). Act 1508 primarily governs chattel mortgage while the provisions of the Civil Code on the contract of pledge apply in so far as they are not in conflict with CML. NOTE: The Ship Mortgage Decree of 1978 (Pres. Decree No. 1521) governs the mortgage of vessels of domestic ownership.

NOTE: Even if the property mortgaged is in the possession of the debtor, creditors are protected in that the chattel mortgage is made effective against third persons by the process of registration, to protect creditors against possible disposal of the property by the debtor. Land Settlement & Dev. Corp. v. Carlos (68) Should the creditor bring an action on the principal obligation, like suing on the promissory note, this amounts to a discharge of the chattel mortgage so that the debtor may now dispose of the personal property given in a chattel mortgage without the necessity of a release of the mortgage. The debtor does not thereby commit estafa. Movido v. RFC (59) A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it. (Also Serra v. Rodriguez, 1974). Southern Motors v. Moscoso (61) The complaint is an ordinary civil action for recovery of the remaining unpaid balance due on the promissory note. The plaintiff had not adopted the procedure or methods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for ordinary civil actions. Since herein appellee has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the judgment that may be favorably rendered hereon, on all personal and real properties of the latter not exempt from execution sufficient to satisfy such judgment.
CHATTEL MORTGAGE Accessory contract PACTO DE RECTO SALE Principal contract

B. Characteristics
1. Accessory contract: purpose: to secure the performance of a principal obligation; 2. Formal contract: registration in the CM Register is indispensable; 3. Unilateral contract: produces only obligations on the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation (De Leon).

C. Comparison with Pledge


CHATTEL MORTGAGE PLEDGE

both refer to personal property Property remains in possession of debtor Delivery of the property to the mortgagee is not necessary Registration in the Chattel Mortgage Register is necessary for validity Procedure for the sale is found in Sec. 14, Act No. 1508 Can recover deficiency judgment Excess of proceeds from foreclosure goes to persons holding subsequent mortgages, then to mortgagor (S14) Creditor takes possession of prop Delivery of the property to the pledgee is necessary Registration in the Registry of Property is not necessary for validity Procedure for the sale is found in Art. 2112 of the Civil Code No recovery deficiency. of

Title to the thing Title to the subject matter is mortgaged is not transferred to the vendee but transferred subject to the redemption of the vendor Affidavit of good Affidavit of good faith is not faith is required required

CHATTEL MORTGAGE REAL MORTGAGE Personal property Real property

ESTATE

Debtor not entitled to excess, unless stipulated

Affidavit of good faith Affidavit of good faith is is required not required Mortgagor cannot Mortgagor can alienate the alienate the thing thing mortgaged without

Debtor can redeem before the No redemption sale, when the condition of the

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mortgaged without the the written consent of the written consent of the mortgagee and any such mortgagee provision is void No right of redemption There can be a right of redemption in extrajudicial foreclosure and in judicial foreclosure by banks Can secure future obligations Piansay vs David (64) Regardless of the validity of a contract constituting a chattel mortgage on a house, as between the parties to said contract, the same cannot and does not bind third persons, who are not parties to the aforementioned contract or their privies Tumalad vs Vicencio (71) The house on rented land is not only expressly designated as Chattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage the property together with its leasehold rights over the lot on which it is constructed and participation." Moreover, the subject house stood on a rented lot to which defendants-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty. Makati Leasing v. Wearever Textile (83) Although machineries permanently affixed to a building are classified as real property under the Civil Code, the parties may validly subject such machineries to a chattel mortgage and shall be found by the validity therefore by the doctrine of estoppel. Such an arrangement however cannot prejudice the rights of third parties to whom the machineries would still be treated as real property.

Cannot secure future obligations

D. Proper Subject Matter


1. Sec. 2, read with Sec. 7: Only personal property may be subject of chattel mortgage (personal property as defined by the Civil Code). a. Shares of stock; b. Interest in business;

Machinery treated as personal property subsequently installed on leased land (Davao Sawmill v. Castillo); d. Vessels recorded in the office of the Philippine Coast Guard to be effective as to third persons; not necessary to be recorded in the Office of the Register of Deeds; e. Motor vehicles mortgage registered in the LTO (for vehicles used for public services); f. House of mixed material; g. House built on leased land; G.R.: Immovable property Exc.: Treated as movable by estoppel of parties h. i. demolished; House intended to be

c.

E. Extent
1. 2. obligations Existing Afteracquired (future) obligations The chattel mortgage shall cover only the property described in the deed and not any other like or substituted property. (Sec. 7)

House of strong materials, for purposes of executing a CM as between the parties to the contract if parties so agree and no innocent third party will be prejudiced.

2. Exceptions: By exercising the freedom to contract that the law gives them, parties may stipulate that as between them, real property, such as building, may be considered personal for purposes of the chattel mortgage law. But this cannot affect third persons. (Navarro v. Pineda, 63): Tumulad v. Vicencio, 71). BUT: It shall still be executed as a real property and subject to the rules on foreclosure of real estate mortgage. Section 6: a chattel mortgage can be executed on growing crops (which under the Civil Code are real property). BUT: If the creditor wants to attach growing crops, the procedure is still the same as in attachment of real property.

a.

b.

Exception: Where the debtor gives as security, the stock or merchandise in his store and it is the intention of the parties that the mortgage shall cover the stock that will take its place in the course of the business. (Torres v. Limjap, '31) Torres v. Limjap (31) The provision of Sec. 7 is deemed not to apply to stores open to the public for retail business where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry goods stores, etc. A stipulation in the mortgage extending its coverage to properties acquired after its constitution 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. 3. After-Incurred Obligations

Acme Shoe, Rubber & Plastic Corp. v. CA (96) While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are

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accurately described, a chattel mortgage can only cover obligations existing at the time the mortgage is constituted. Therefore, although a promise expressed in the 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 form prescribed by the CML. This ruling is due to the requirement in the Affidavit of Good Faith which must contain an oath that 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 which makes it obvious that the debt referred to in the law is current, not an obligation that is yet merely contemplated. ii. Register with the Register of Deeds where the motor vehicle is located; and

iii.

Register with the Motor Vehicle Commission, now Land Transportation Office. (Borlough v. Fortune Enterprises, 57)

Otherwise, the failure of the mortgagee to report the mortgage executed in his favor has the effect of making said mortgage ineffective against a purchaser in good faith who registers his purchase in the motor vehicle office. d. ii. i. Register Coastguard Vessels with the Philippine

Must also be registered in the Bureau of Customs in Manila (if in Manila) or in the Office of the Collector of Customs in the port of entry (if outside Manila)

F. Requirements

1.

Registration Requirements to make Chattel Mortgage Binding against 3rd Parties Under Sec. 4, a chattel mortgage leaves the property in the possession of the debtor. Hence, this section lays down the requisites which must be complied with in order to make a chattel mortgage affect third parties for the protection of the creditor.

e. Motor vehicle which is public utility and loan is not repayable within 1 year

Register with the Land Transportation Franchising and Regulatory Board

G. Formal Requirements
1. Affidavit of Good Faith It is an oath wherein the parties severally 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 one not entered into for the purpose of fraud. (Sec. 5) Lilius v. Manila Railroad Co. (35) Under Sec. 5, the absence of the affidavit vitiates a mortgage as against third parties without notice, like creditors and subsequent lienholders; but not as between the parties thereto, which remains valid as to them. Where a corporation is a party, the affidavit of good faith must be subscribed by an authorized officer. (Sec. 6) 2. Other Formal Requirements a. Must be signed in the presence of at least 2 witnesses b. Certificate of oath / Notarial acknowledgment

a.

G.R.: The chattel mortgage must be registered with the Register of Deeds where the debtor resides in order to bind third persons. (Sec. 4) If mortgagor resides abroad, must be registered in the province where the property is located

But note: Art 2125, CC says that a chattel mortgage is binding between the mortgagor and mortgagee even if not registered (Filipinas Marble Corp vs. IAC, 86) b. i. ii. Share of Stock: Must be registered with the Register of Deeds where the debtor resides; and Must also be registered with the Register of Deeds where the corporation has its principal office.

NOTE: Registration in the stock and transfer book of the corporation is not necessary. (Chua Guan v. Samahang Magsasaka, 35). c. i. Motor Vehicles Register with the Register of Deeds where the debtor resides;

Sec. 198 of the RAC Sec. 198. Registration of chattel mortgages and fees collectible in connection therewith. Every register of deeds shall keep a primary entry book and a registration book for chattel mortgages. The recording of a mortgage shall be effected by making an entry, setting forth the names of the mortgages and the mortgagor, the sum or obligation guaranteed, date of the instrument,

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name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving the proper file number thereof. The register of deeds shall also certify the officer's return of sale upon any mortgage, and a reference of such return on the record of the mortgage itself, and give a certified copy thereof; Parties may agree on private sale rather than sale at public auction. Place must be designated in the contract; otherwise the creditor is liable for conversion. Note: SC Circular 7-2002 : GUIDELINES FOR THE ENFORCEMENT OF SC RESOLUTION OF DEC 14, 1999 IN A.M. 99-10-05-0 (RE: PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE) Sec. 1. All applications for extra-judicial foreclosure of mortgage shall be filed with the Executive Judge, through the Clerk of Court. Sec. 2. The Clerk of Court shall: xxx c. Collect the appropriate filing fees and issues the corresponding official receipt. d. In case the application is for real estates and/or chattels in different locations covering one indebtedness, issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, for purposes of having the application docketed with the Clerks of Court in the places where the other properties are located. Sec. 4. The Sheriff shall: In case of foreclosure of a chattel mortgage, post the notice for at least 10 days in 2 or more public places in the municipality where the mortgagor resides or where the property is situated Sec. 5. Conduct of the extra-judicial foreclosure sale

H. Liabilities
1. Where the debtor performs and the creditor refuses to release the mortgage Debtor may go to court for relief. (Sec. 8) 2. Sections 9 to 12 have been repealed by Art. 319 of the Revised Penal Code on crimes on Chattel Mortgage: a. Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage, without the written consent of the mortgagee; b. Selling or pledging personal property already mortgaged, without the consent of the mortgagee written on the back of the mortgage and duly recorded in the Chattel Mortgage Register.

Note: Mortgagor remains owner of the property. He can therefore validly sell the chattel, although he will be criminally liable if he did not get consent of mortgagee.

Com pare with: If the mortgagee sells the credit, he only needs to notify the mortgagor, so mortgagor knows whom to pay (Servicewide Specialists vs. CA) Cerna v. CA (93) 3rd party mortgage or accommodation chattel mortgage does not by itself make the mortgagee personally liable for the loan that he accommodated.

a.

I. Remedies of Creditor (Sec. 13)


.1 Foreclosure Extra-judicial

The bidding shall be made through sealed bids which must be submitted to the Sheriff who shall conduct the sale between 9 am and 4 pm. The property shall be awarded to the party submitting the highest bid; in case of a tie, an open bidding shall be conducted between the highest bidders. Payments shall be made in cash or managers check, in Philippine currency, within 5 days from notice. b. The sale shall be made at a place in the municipality where the mortgagor resides or where the property is situated Sec. 6. The Clerk of Courts shall collect the appropriate fees, computed on the basis of the amount actually collected by him. This shall not be subject to a refund even if the foreclosed property is subsequently redeemed. Sec. 7 & 8. The Sheriff shall, within 30 days from the sale, prepare a return and file the same in the Office of the Registry of Deeds where the mortgage is recorded. He shall report the name/s of the bidder/s to the Clerk of Court.

Mambulao Lumber v. PNB (68) It presupposes voluntary surrender to sheriff of personal property by debtor. Creditor then files affidavit outlining right to possession and sale. Posting of notice of sale must be made on two places in the Presidencia plus notice to debtor 10 days before the sale. PNB v. Manila Investment (71)

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Sec. 9. The Clerk of Court shall issue and sign the Certificate of Sale, subject to the approval of the Executive Judge. Prior to the issuance of such, the Clerk of court shall, in extra-judicial foreclosure conducted under the sheriff, collect P300.00; in sales conducted under a notary public, the appropriate fees pursuant to Rule 141, 20(e). Sec. 10. The Clerk of Court shall keep the complete records for a period of 1 year from the date of registration of the certificate of sale with the Register of Deeds, after which the records shall be archived. Juridical persons whose property is sold pursuant to an extra-judicial foreclosure shall have the right to redeem the property until, but not later than, the registration of the certificate of foreclosure sale which in no case shall be more than 3 months after foreclosure, whichever is earlier. In case the property is redeemed, the Clerk of Court shall assess the redemptioners fee as provided in Section 7 (k), Rule 141. If the property is not redeemed, the Clerk of Court shall, as a requisite for the issuance of the final Deed of Sale, assess the highest bidder the amount of P300.00. 2. Should debtor refuse to surrender the property Creditor may take the preliminary step of replevin and once he has possession, proceed at public auction as in remedy No. 1. auction by a public officer. (Sec. 12, Act No. 1508)

There must be at least 10 days notice to the mortgagor and posting of public notice of time, place and purpose of such sale and is a period of grace for the mortgagor, to discharge the mortgage obligation. (Cabral v. Evangelista) 4. Application of Proceeds of Sale a. Costs and expenses of keeping and sale; b. Payment of the obligation secured by the mortgage; c. Claims of persons holding subsequent mortgages in their order; and d. The balance, if any, shall be paid to the mortgagor, or person holding under him. (Sec. 14, Act No. 1508)

K. Alternative Remedies of Mortgagee


1. Performance of the principal obligation by the mortgagor None; the CM becomes null and void

Important: Creditor must seek court remedy to obtain possession (Filinvest Credit Corp vs. CA, 95). Otherwise, that would be pactum commissorium (Esguerra vs. CA, 89)

2. Default by the mortgagor a. Extra-Judicial Foreclosure (Rule 68, RoC not applicable) b. Original action for collection of money effect: waiver of the chattel mortgage

L. Criminal Liability
Art. 319, RPC 1. Knowingly removing any personal property mortgaged under the CML to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent of the mortgagee; 2. Selling or pledging personal property already mortgaged or any part thereof under the terms of the CML without the consent of the mortgagee written on the back of the mortgage and duly recorded in the chattel mortgage registry.

3.

Judicial Foreclosure follow the same procedure as foreclosure of real estate mortgage under Sec. 8, Rule 68, Rules of Court.

4.

Sue on the Note waive the chattel mortgage; hence, one can levy on other properties. (Industrial Finance Corp. v. Ramirez, 77).

J. Foreclosure of Chattel Mortgage


1. Public Sale If the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of the mortgage, the creditor is permitted only to recover his credit from the proceeds of the sale of the property at public auction. 2. Private Sale There is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by the chattel mortgage. (De Leon) 3. Period to Foreclose Mortgage Mortgagee may, after 30 days from the time of the condition broken, cause the mortgaged property to be sold at public

2.

The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full (US v. Kilayko), or the mortgagor-seller informed the purchaser that the thing sold had been mortgaged (People v. Alvares).

M. Redemption
1. There is no right of redemption in chattel mortgage, only an equity of redemption. 2. Period: The following may redeem if the condition of the mortgage is broken; a. Mortgagor;

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b. A person holding a subsequent mortgage; c. A subsequent attaching creditor (Sec. 13, Act 1508). almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. Pacific Commercial Co. v. Dela Rama These remedies are alternative, not cumulative. Filipinas Investement v. Vitug (69) When the creditor can no longer recover from the maker of the note with chattel mortgage because the deficiency is covered by the Recto Law, after the foreclosure of the mortgage, said creditor can still recover balance from the endorse who endorsed with recourse. Cruz v. Filipinas Investment (68) C sold to D a car payable on installments. The car was given as security by way of chattel mortgage to secure payment. In addition, the debtor put up a real estate mortgage as further security for the payment of the debt. D did not pay 2 or more installments and so C foreclosed the chattel mortgage. The proceeds therefrom were insufficient and so C wanted to get a deficiency judgment and satisfy it by foreclosing on the real estate mortgage. The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery (whether by judicial or extrajudicial foreclosure) by the vendor, of any balance on the purchasers outstanding obligation not so satisfied by the public sale. To allow further recovery by the foreclosure of the real estate mortgage is contrary to public policy. Northern Motors v. Sapinoso (70) Northern Motors sold a car to Sapinoso on installments. A chattel mortgage was executed on the car sold. When S failed to pay 2 or more installments, NM sought to foreclose the chattel mortgage and asked the court for a writ of replevin. Meantime, S made several payments while the replevin suit was pending. The lower court ruled that NM, by bringing the suit, was barred from accepting any further payments from S and ordered NM to reimburse the amount collected. The court a quo erred in concluding that the legal effect of the filing of the action for replevin was to bar NM from accepting further payments on the promissory note. That the ultimate objective of the action was for the foreclosure of the chattel mortgage is of no moment, for it is the fact of foreclosure and actual sale at public auction of the mortgaged chattel that bars further recovery by the vendor of any balance on the buyers outstanding obligation not satisfied by the sale. Pascual v. Universal Motors (74) When the seller imposes a double security by a chattel mortgage of the thing sold on installments and another mortgage on another property of the buyer, such is contrary to the public policy sought to be protected by the Recto Law, and the foreclosure of the chattel mortgage on the object of the sale bars recovery on any deficiency. Ridad v. Filipinas Investment (83) The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and

N. Deficiency Judgment
1. General Rule: Creditor shall always be entitled to collect the deficiency judgement. (Ablaza v. Ignacio, 58). State Investment House, Inc. v. CA (93) When the proceeds of the sale are insufficient to cover the debts in an extra-judicial foreclosure of chattel mortgage, the mortgagee is entitled to claim the deficiency from the debtor.

2.

Ratio: mortgages as accessory contracts serve only as securities and not for the satisfaction of the principal obligation

3.

Prescriptive Period: Ten (10) years under Art, 1142 of the Civil Code. (DBP v. Tomeldan, 80). Exception: If the property was sold in installments, the mortgagee can no longer take any action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void. (Art. 1484, Civil Code, aka the Recto Law)

O. Recto Law
The Recto law, which is now reflected in Articles 1484-1485 of the Civil Code, which provides that in a contract of sale of personal property, the price of which is payable in installments, the vendor may exercise any of the following remedies:

(a) (b)

Exact fulfillment of the obligation, should the vendee fail to pay (specific performance);

Cancel the sale, should the vendee's failure to pay cover two or more installments (Note that this is not the same as rescission because here, the vendor gets back the object of the sale and retains the installments paid. However, this is not available in the absence of stipulation in the contract.); (c) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover 2 or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contract is void. The principal object of this amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then bringing the suit against the mortgagor for a deficiency judgment. The

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then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagorbuyer would find himself without the property and still owing practically the full amount of his original indebtedness. The corporation elected to foreclose its mortgage upon default by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned. Bicol Savings and Loan Asso. v. Guinhawa (90) The prohibition under the Recto Law against recovery does not apply to foreclosure of chattel mortgage constituted to secure a loan and not originating from a sales transaction.

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Real Estate Mortgage (Act 3135, as amended by RA 4118)


A. Definition
A Real Mortgage/ Real Estate Mortgage 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 the sale of said property or rights in case the said obligation is not complied with at the time stipulated.

F. Effects of Invalidity of Mortgage


1. Principal obligation remains valid; 2. Mortgage deed remains as evidence of personal obligation

G. Alternative Remedies of a Real Estate Mortgagee


1. Mortgagor is alive: a. Foreclosure: i. judicial ii. extra-judicial b. Ordinary action for collection of money effect: waiver of the real estate mortgage because the remedies are exclusive. 2. Mortgagor dies (Rule 86, Sec. 7, RoC): a. Waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim against the estate; b. Judicial foreclosure and claim the deficiency from the estate; c. Rely on the mortgage and foreclose the same at anytime within the period of the statute of limitations without right to claim for the deficiency; d. Extrajudicial foreclosure under Act 3135 before it is barred by prescription without right to file a claim for any deficiency. Lucena v. CA Failure to comply with the statutory requirements as to publication of notice of auction sale constitutes a jurisdictional defect which invalidates the sale.

B. Nature

It is a real right following the property, such that in subsequent transfers by the mortgagor, the transferee must respect the mortgage. A registered mortgage lien is considered inseparable from the property inasmuch as it is a right in rem.

C. Purpose
To regulate the sale of property under special powers inserted in or annexed to real estate mortgages and redemption thereof.

D. Coverage
Governs sales made under a special power inserted in or attached to any real-estate mortgage, which is made as security for the payment of money or the fulfillment of any other obligation. Act 3135 will govern the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power. (Sec 1) Foreclosure from settlement of estate not included PNB v. CA (01) The case at bar involves a foreclosure of mortgage arising out of a settlement of estate, wherein the administrator mortgaged a property belonging to the estate of the decedent, pursuant to an authority given by the probate court. The Rules of Court on Special Proceedings comes into play decisively.

H. Foreclosure Sale
Foreclosure is a remedy available to mortgagee by which he subjects mortgaged property to the satisfaction of obligation, which was secured by mortgage. the the the the

E. Applicability
If a special power to sell is inserted in a contract of real mortgage, there can be an extra-judicial foreclosure sale under Act 3135. if the real mortgage contract is silent, Rule 68 on judicial foreclosure shall apply.

Nature of Power of Foreclosure by Extrajudicial Sale 1. It is an authority conferred upon the mortgagee for the latters own protection. 2. It is an ancillary stipulation supported by the same cause or consideration for the mortgage and forms an essential and inseparable part of the bilateral agreement. 3. To declare to foreclose or not is the prerogative of the mortgagee. 4. It is generally held that no particular formality is required in the creation of the power of sale. 1. 2. Extrajudicial Foreclosure (Act 3135) Express authority to sell given mortgagee (authority not extinguished death of mortgagor or mortgagee) Public sale after proper notice a. Type of Sale: Public auction to by

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b. c. d. Venue of Sale: Province where the property is situated Sale cannot be made legally outside of the province in which the property sold is situated If venue is subject to stipulation, such sale shall be made in said place (i.e., the place so stipulated) or in the municipal building of the municipality in which the property or part thereof is situated. Notice: Notices of the sale are to be posted in at least 3 public places of the municipality or city where the property is situated for not less than 20 days (Sheriffs Office, Assessors Office, Register of Deeds). Such notice shall likewise be published once a week for at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city. Personal notice to mortgagor not generally required. Posting of notice on mortgaged property is likewise not required. Republication in the manner prescribed by Act No. 3135 is necessary for the validity of a postponed extrajudicial foreclosure sale. The absence of such republication invalidates the foreclosure sale. Although the notice of foreclosure sale was duly published, the sale did not take place as scheduled on Sept 25, 1985. Instead, it was held more than two months after the published date of the sale or on Jan 7, 1986. This renders the sale void.

5.

Waiver of notice of sale

e.

f.

g. h.

DBP v. Emerald Resorts Hotel Facts: DBP published the notice of auction sale scheduled on 12 Aug 1986. However, the auction sale was moved to 11 Sept 1986. DBP contends that the agreement to postpone dispensed with the need to publish again the notice of auction sale. Held: 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. The last paragraph of the prescribed notice of sale (under SC Circular 7-2002) allows the holding of a rescheduled auction sale without reposting or republication of the notice: In the event the public auction should not take place on the said date, it shall be held on _____,____without further 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 absence of this information in the prior notice of sale will render the rescheduled auction sale void for lack of reposting or republication. 3. Content of notice: correct number of the certificate of title and correct technical description of the property. Object of notice: to inform the public of the nature and condition of the property sold and of the time, place and terms of the sale. 4. When sale not held on date specified DBP v. Aguirre (01)

PNB vs. Nepomuceno (02) & Ouano vs CA (03) The focal issue in this case is whether the parties to the mortgage can validly waive the posting and publication requirements mandated by Act No. 3135. We answer in the negative. Failure to publish the notice of sale constitutes a jurisdictional defect, which invalidates the sale. While it is established that rights may be waived, Art 6 of the Civil Code provides that such waiver is subject to the condition that it is not contrary to law, public order, public policy, morals, or good customs, or prejudicial to a third person with a right recognized by law. The statutory requirements of posting and publication are mandated for the public or third persons. As such, it is imbued with public policy considerations and any waiver thereon would be inconsistent with the intent and letter of Act No. 3135. 6. Newspaper of general circulation Perez vs. Perez (05) Petitioners argue that the Olongapo News where the notice of public auction was published was not a newspaper of general circulation in Morong, Bataan. To be a newspaper of general circulation, it is enough that it is published for the dissemination of local news and general information; that it has a bona fide subscription list of paying subscribers; and that it is published at regular intervals. The newspaper must not be devoted to the interests or entertainment of a particular class, profession, trade, calling, race or religious denomination. The newspaper need not have the largest circulation so long as it is of general circulation. 7. Time of Sale: Between 9 AM and 4 PM 8. Who a. b. c. may bid: The creditor; The trustee; Other persons authorized to act for the creditor; d. Other bidders not privy to the mortgage or trust deed

9. Procedure

1)

The mortgagee files an application for foreclosure with the Executive Judge through the Clerk of Court, who will receive and docket the application and collect the appropriate filing fees. (SC AM No. 99-10-05-0)

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I. Chattel Mortgage Law Special Laws 2)


Notice of the sale is posted in at least 3 public places of the municipality or city where the property is situated for not less than 20 days and published once a week for at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city. (Sec. 3, Act 3135) The auction sale is conducted under the direction of the sheriff, the Executive Judge, or a notary public of the municipality. (Sec. 4, Act 3135) At the sale, the creditor, trustee, or other persons authorized to act for the creditor may participate in the bidding and purchase under the same conditions as any other bidder unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made. (Sec. 5, Act 3135) There must be at least 2 participating bidders for the auction sale to be valid. If on the new date set for the sale there shall not be at least two bidders, the sale shall then proceed. (SC AM No. 99-10-05-0) Once the sale has been confirmed, the Clerk of Court signs and issues a certificate of sale to the winning bidder. (SC AM No. 99-10-05-0) Possession during the redemption period

3)

The mortgagee, in extrajudicial foreclosure, has the right to recover deficiency judgment within 10 years from the time the right of action accrues. Except: When the mortgagor is not debtor. The action for the recovery of such deficiency must be directed against the debtor. A foreclosure sale retroacts to the date of registration of the mortgage and that a person who takes a mortgage in good faith and for valuable consideration will be protected against equitable claims on the title in favor of third persons of which he had no actual or constructive notice. Valmonte v. CA The inadequacy of price would not nullify the sale unless the price is so inadequate so as to shock the conscience of the court. In fact, the property may be sold for less than its fair market value precisely because the lesser the price the easier for the owner to effect a redemption. Samson v. Rivera (04) The duty of the trial court to grant a writ of possession is ministerial. Such writ issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond. Any question regarding the regularity and validity of the sale is to be determined in a subsequent proceeding (Sec 8). Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte. A pending action for annulment of mortgage or foreclosure does not stay the issuance of a writ of possession. DBP v. Spouses Gatal (05) Once a mortgaged estate is extra-judicially sold, and is not redeemed within the reglementary period, no separate and independent action is necessary to obtain possession of the property. The purchaser at the public auction has only to file a petition for issuance of a writ of possession pursuant to Sec. 33 of Rule 39 of the RoC. Where the title is consolidated in the name of the mortgagee, the writ of possession becomes a matter of right on the part of the mortgagee, and it is a ministerial duty on the part of the trial court to issue the same. The pendency of a separate civil suit questioning the validity of the sale of the mortgaged property cannot bar the issuance of the writ of possession. The rule equally applies to separate civil suits questioning the validity of the mortgage or its foreclosure and the validity of the public auction sale. 7) Upon failure of the debtor to redeem the property within 1 year after the date of the registration of the certificate of sale, winning bidder becomes the absolute owner.

4)

5)

6)

G.R.: Purchaser must petition the court where the property is situated for possession during the redemption period. He must also give a bond equivalent to the use of the property for a period of twelve months to indemnify the debtor in case the sale is shown to violate the law (Sec 7, Act 3135). Within 30 days after the purchaser is given possession of the property, the debtor may petition that the sale be set aside on the ground that the mortgage was not violated or the sale was not made in accordance with the provisions of Act 3135. (Sec. 8)

Sales made under RA 8791 (General Banking Law): After the date of the confirmation of the auction sale, the winning bidder has the right to enter upon and take possession of such property and administer the same in accordance with law. At the sale, the creditor, trustee or any person authorized to act for the creditor, may participate in the bidding and purchase, as any other bidder, unless the contrary is expressly provided in the mortgage or trust deed under which the sale is made. (Sec. 5) The creditor is allowed to recover the deficiency from the sale of the property. Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor.

10. Remedies of mortgagee are not cumulative

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Caltex v. IAC (89) CALTEX made a mockery of our judicial system when it initially filed a collection suit then, during the pendency thereof foreclosed extra-judicially the mortgaged property which secured the indebtedness and still pursued the collection suit to the end. A mortgage creditor may institute either a personal action for debt or a real action to foreclose the mortgage. He may pursue either of the two remedies, for each of the two remedies is complete in itself. When the mortgagee chooses the foreclosure of the mortgage, he enforces his lien by the sale of the mortgaged property. The proceeds will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. On the other hand, if the mortgagee resorts to an action to collect the debt, he waives his mortgage lien. He will have no more priority over the mortgaged property. mortgagee need not recognize the redemption made by the third party.

6.

Where extrajudicial foreclosure is effected with fraud: it is null and void ab initio Requisites of a valid redemption 1. Made within 1 year from the date of the registration of the certificate of sale; 2. Payment of the purchase price of the property plus 1% interest per month together with the taxes thereon, if any, paid by the purchaser and the amount if his prior lien, if any with the same rate of interest computed from the date of registration of the sale up to the time of redemption. 3. Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the proper Registry of Deeds. Who may exercise the right of redemption 1. M ortgagor or one in privity of title with mortgagor; 2. S uccessor-in-interest: a. One to whom the debtor has transferred his right of redemption; b. One to whom the debtor has conveyed his interest ion the property for the proposed redemption; c. One who succeeds to the interest of the debtor by operation of law; d. One or more of debtors who were joint owners of the property sold; e. The wife as regards her husbands homestead by reason of the fact that some portion of her husbands title passes to her; f. Compulsory heir. 3. Under the Rules of Court: a. The judgment debtor or his successor-ininterest in the whole or any part of the property; b. A creditor having a lien by attachment, judgment or mortgage on the property sold or some part thereof. Subsequent to the judgment under which the property was sold.

I. Redemption
A transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgagee may have created. Kinds of Redemption Equity of redemption or the right of the mortgagor in case of a judicial foreclosure to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the confirmation of the sale of the mortgaged property. 2. Right of redemption or the right, in case of an extrajudicial foreclosure, to redeem the mortgaged property within a certain period after it was sold for the satisfaction of the mortgage debt. 1. Right of redemption 1. Period within which to exercise right: 1 year from the date of registration of certificate of sale with the appropriate Registry of Deeds. 2. Effect of failure to exercise right: the purchaser has the absolute to a writ of possession. 3. Effect of exercise of right: elimination from his title thereto of the lien created by the levy or attachment or judgment or registration of the mortgage thereon. 4. Where mortgaged property sold to third party: transfers only the right to redeem the property and the right to possess, use and enjoy the same during the said period (in case of sale to a third person by the mortgagee after the foreclosure, the mortgagor may redeem it at the amount of the principal obligation plus interest until time of actual redemption.) 5. Where sale is not registered and made without the consent of mortgagee: the

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ONE UP LAW

II. Insolvency Law Special Laws

Insolvency Law (Act No. 1956, as amended)


A. Concept
Under Phil. law, bankruptcy is the same as insolvency. Defn of Insolvency: relative condition of a debtors assets and liabilities that the assets, if all made immediately available, would not be sufficient to pay the liabilities. Defn of Transfer: it includes the sale and every other and different modes of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift or security. A deposit of money is not a transfer.

VOLUNTARY INSOLVENCY Debtor is the petitioner Debtor may have only one creditor No requirements WRT creditors

INVOLUNTARY INSOLVENCY 3 or more creditors are the petitioner Debtor must have at least 3 creditors Creditors must be Phil. residents whose credits accrued in the Phils, and none of them became a creditor by assignment within 30 days prior to the filing of the petition A bond is required for insolvency proceedings

No bond is required for the petition

B. Purpose
1. Equitable distribution of the properties of the debtor among the creditors 2. To afford the individual debtor a fresh start in life BUT NOTE: the Insolvency Law does not grant discharge to a corporate debtor

Order of adjudication Order is granted only after a may be granted ex hearing parte Debtor must not have committed an act of insolvency Debtor must have committed an act of insolvency before the creditors can file the petition

C. Divisions of the Law


1. Suspension of Payments Debtor possesses sufficient property to cover all his debts, but foresees the impossibility of meeting them when they respectively fall due (Sec 2). Debtor asks for more time to convert some of his properties to cash to be able to pay his debts. 2. Insolvency Proceedings debtor has no cash or property to pay all his debts. a. Voluntary Insolvency: debtor files for insolvency b. Involuntary Insolvency: creditors file for debtors insolvency

Petition must be filed Length of residence of the with the RTC where debtor is immaterial petitioner-debtor resided for 6 months prior to the filing

SUSPENSION OF PAYMENTS Individual Corporation, Partnership or Association (CPA) Governing Law Act No. 1956 Act No. 1956 Jurisdiction RTC (Act No. 1956) RTC (Act No. 1956) Grounds Debtor has sufficient property but foresees the impossibility of meeting them when they respectively fall due C.P.A. debtor has sufficient property but foresees the impossibility of meeting them when they fall due a. C.P.A. has sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due, OR; b. C.P.A. has no sufficient assets to cover its liabilities but is under management of a Rehabilitation Receiver or Mngt. Committee (Sec. 5[d], P.D. 902-A RTC (R.A. No. 8799) P.D. No. 902-A

D. Comparisons
SUSPENSION OF PAYMENTS Purpose: To suspend or delay payments of debts INSOLVENCY PROCEEDINGS Purpose: to compel presentment of all debts, whether due or not, and to secure a complete discharge from such debts Creditors receive less than what they are entitled to, or some creditors may not even receive anything Debtors assets are not sufficient to cover liabilities

Amount of indebtedness is not affected, but only the time for paying them is postponed Debtor has sufficient property to cover his liabilities

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E. Sources
1. Spanish Code of Commerce SEC can only take custody and control of the assets of the corporation. Individual petitioner is merely a nominal party. His properties are not included in the rehabilitation receivership appointed by the SEC for the corporation. Hence, his creditors can file suits against him even during the rehabilitation receivership. PAL vs. Spouses Kurangking (02) A claim is said to be a right to payment, whether or not It is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured. In Finasia Investments, this Court has defined the word claim, contemplated in Sec. 6(c) of P.D. 902-A, as referring to debts or demands of a pecuniary nature and the assertion of a right to have money paid as well. The claim of private respondents against PAL is a money claim for the missing luggage, a financial demand that the law requires to be suspended pending the rehabilitation proceedings. The justification is to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the rescue of the debtor company Chas Realty v. Talavera (03) Rule 4, Sec. 2(k) of the Interim Rules on Corporate Rehabilitation provides that (a), the filing of the petition has been duly authorized and (b), the directors and stockholders have irrevocably consented to, in accordance with existing laws, all actions or matters necessary and desirable to rehabilitate the debtor If any extraordinary corporate actions are to be done, the petitioner would be bound get the approval of a majority of the directors and the affirmative votes of stockholders representing at least 2/3 of the outstanding capital stock. Where no such extraordinary corporate acts are contemplated, the approval of stockholders would only be by a majority. The rehabilitation plan submitted by petitioner merely consists of a repayment or re-structuring scheme. This would not require a vote of approval by the stockholders representing at least 2/3 of the outstanding capital stock MWSS v. Daway (04) Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. The participating banks obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case. 6. Where to file a. Individuals:

Mitsui v. HSBC (17) Act No. 1956 deals with 3 principal subjects: suspension of payments, voluntary insolvency, and involuntary insolvency. That part of the Act referring to the first appears to have been taken from the Spanish Code of Commerce, as amended by the law of June 10, 1897. The Act, in so far as it relates to voluntary and involuntary insolvency, is essentially a bankruptcy law because it discharges the honest debtor. 2. Insolvency Act of California of 1895 (as to voluntary and involuntary insolvency) SunLife vs. Ingersoll (21) Act No. 1956 is in great part a copy of the Insolvency Act of California, enacted in 1895, though it contains a few provisions from the American Bankruptcy Law of 1898. The California Insolvency Law of 1895 is precisely the provision which appears as section 32 of our Act, defining the property which passes as assets to the assignee in insolvency.

F. Suspension of Payments
1. Nature The debtor who, possessing sufficient property to cover all his debts, foresees the impossibility of meeting them when they fall due, may petition that he be declared in the state of suspension of payments by the court of the province / city in which he has resided for the preceding 6 months. (Sec 2) 2. Purpose: To seek postponement of the payment of debts in order to provide the debtor a given period to convert some of his properties to cash. 3. Basis: The probability of the debtors inability to meet his obligations when they respectively fall due, despite the fact that he has sufficient assets to cover all his liabilities. 4. Effect commences: upon the filing of the petition. 5. Who May File: a. An individual debtor; b. Corporation, partnership association (C.P.A.) (Sec. 2).

or

Chung Ka Bio v. IAC (88) If petition for suspension of payments is filed with SEC by a corporate entity and an individual stockholder (who is a surety for the corporation), SEC has no jurisdiction over the individual petitioner. Traders Royal Bank v. CA (89)

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RTC of the province where he has residence within 6 months previous to the filing of the case, if debtor is a natural person. Governing law: Insolvency Law b. Partnerships and corporations: Transferred from SEC to RTC by the Securities Regulation Code Governing Law: PD 902-A 7. Procedure for Individual Debtors 1. Debtor files petition in court The petition for suspension of payments must include as annex a statement of assets and liabilities, proposed agreement with creditors, inventory of assets and a detailed schedule of obligations, amounts and due dates. Effects of filing the petition: a. No disposition in any manner of his property may be made by the petitioner except insofar as concerns the ordinary operations of commerce or of industry in which he is engaged (Sec.3, par. 2); b. No payment may be made by petitioner except in the ordinary course of his business or industry; c. Upon request to the court, all pending executions against the debtor shall be suspended except execution against property especially mortgaged. d. As to the unsecured creditors: i. Any pending executions of the debtor shall be suspended except execution against property mortgaged (Sec. 6). ii. They cannot sue to collect their claims during the suspension of payments proceedings. meeting, in which case they shall not be bound by the agreements determined at such. (Sec 9) 4. Action by the creditors upon the debtors proposition. Approval must be by the majority, meaning : 2/3 of the creditors voting upon the position. Claims represented by the majority must amount to at least 3/5 of the total liabilities of the debtor. If decision is negative / no decision: Proceeding shall be terminated Parties may enforce their rights (Sec 11) If decision is favorable: Any creditor who attended the meeting and protested against the vote may object (Sec. 11) on the following grounds: Defects in the call for the meeting or in the deliberations, which prejudiced creditors rights Fraudulent connivance between one or more creditors and debtor to vote in favor of the proposed agreement Fraudulent connivance of claims to obtain a majority (Sec. 12) The court shall conduct a hearing. If the objection is meritorious, the proceedings will be terminated. Causes for which objection may be made to decision of the meeting: a. Defects in the call for the meeting, in the holding thereof, and in the deliberation had there at which prejudice the rights of the creditors; b. Fraudulent connivance between one or more creditors and the debtor to vote in favor of the proposed agreement; and c. Fraudulent conveyance of claims for the purpose of obtaining a majority. If decision has been declared valid/no opposition or objection: Court shall order that agreement be carried out (Sec. 11) If the debtor fails wholly/in part to perform the agreement, all the rights which the creditors had shall revest in them. The debtor may be made subject to bankruptcy and insolvency proceedings. (Sec. 13). O n execution pending against debtor If any execution be pending against the debtor, it shall be suspended before 8. Effect of Filing Petition

2.

Court orders meeting of creditors and publication (Ratio: Suspension of payments is a proceeding in rem, so publication is needed to acquire jurisdiction) Creditors not affected by the Order of Suspension of Payments: a. Those having claims for personal labor, maintenance, expenses of the last illness and funeral of wife or child of debtor, incurred during the 60 days immediately preceding the filing of the petition; b. Those having legal or contractual mortgages. 3. Meeting of creditors included in the schedule of creditors filed by the debtor. Creditors representing at least 3/5 of the liabilities must be present. (Sec 8) The ff creditors may also join the meeting: Persons having claims for personal labor, maintenance, expenses of the last illness and funeral of wife or child of debtor, incurred during the 60 days preceding the filing of the petition On the other hand they may also refrain from attending or voting at such

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the sale of the property thereunder PROVIDED the debtor request to the court before proceeding for suspension of is pending (Sec 6) is made

makes a which the payments

I mportant: RTC has jurisdiction over proceedings for voluntary and involuntary insolvency of corporations (Ching v. Land Bank, 91)

b. O n execution against property specially mortgaged The execution against property especially mortgaged is exempted from the provisions of this section (see above) (Sec 6) c. O n action to collect sum of money still to be filed against debtor No creditor other than those mentioned in Sec 91 shall institute proceedings to collect his claim from the moment that suspension of payments is applied for and while the proceedings are pending. (Sec 6) d. D ebtor may not dispose of his property, except in the ordinary course of the business in which he is engaged e. D ebtor cannot make any payments outside of the necessary or legitimate expenses of this business (Sec 3) Suspension of Payments under:
INSOLVENCY LAW 1. Applies to either individual or C.P.A. debtors 2. Suspensive effect covers unsecured creditors only 3. Absent any agreement among creditors, automatic stay expires after 3 months 4. Agreement is subject to qualifying majority votes P.D. NO. 902-A 1. Applies to C.P.A. debtors only 2. Suspensive effect covers secured and unsecured creditors 3. No time limit as long as C.P.A. debtor is under management committee/ rehabilitation receiver 4. No need to obtain creditors approval

Petitio n must state forth: Place of residence; Period of residence therein immediately prior to filing said petition; Inability to pay all his debts in full; Willingness to surrender all his property, testate and effects, not exempt from execution to the benefit of his creditors; and Application to be adjudged an insolvent (Sec. 14) Attach the ff: schedule of debts and creditors, inventory of all his properties not exempt from attachment or execution If a corporation, must have written assent of majority of the board The filing of such petition shall be an act of insolvency (Sec 14)

Phil. Trust Co. v. National Bank Effect of filing of Petition: It ipso facto takes away and deprives the petitioner of the right to do or commit any act of preference as to creditor, pending the final adjudication. 2. If the petition is in order, Court shall issue an Order of Adjudication (i.e. that the debtor is declared insolvent)

The order must be published. (Ratio: This is a proceeding in rem). All creditors must also be notified. Effects of order All assets of debtor placed in sheriffs custody until a receiver or assignee is assigned. Payment to debtor of any debt or delivery of any property due to him is forbidden. He also cannot transfer or convey any of his property. All civil proceedings vs. the insolvent are stayed, except those pertaining to foreclosure of secured liens.

a. b.

G. Voluntary Insolvency Proceedings


Procedure for Individual debtors, Partnerships, and Corporations 1. Filing of petition by insolvent debtor Debtor must owe at least P1,000. Petition must be filed in the RTC where he resided 6 months prior to the filing
1

c.

Persons having claims for personal labor, maintenance, expenses of last illness and funeral of wife/children of the debtor incurred 60 days prior to the petition and persons having legal or contractual mortgages

3. Meeting of creditors for election of an Assignee in Insolvency 4. Conveyance of debtors property to assignee in insolvency 5. Liquidation of assets and payment of debts 6. Composition, if agreed upon 7. Discharge of the debtor, except in case of composition Not applicable to corporations 8. 9. Objection to discharge of debtor, if any Appeal in certain cases

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H. Involuntary Insolvency
Who may petition for involuntary insolvency: 1. Debtors who have the qualifications required by the Insolvency Law; and 2. Their credits must be those contemplated by the Insolvency Law. Procedure for Individual Debtors, Partnerships, and Corporations: Filing of petition by 3 or more resident creditors (can be natural or juridical persons): Their credits must be worth at least P1,000; Credits must have accrued in the RP; None of whom has become such a creditor by assignment, within 30 days prior to the filing of the petition; Petition must be filed in the RTC of the place where debtor has residence or has his principal business; Must be verified by at least 1 petitioner Petition must be accompanied by a bond, approved by the court, with at least 2 sureties Date of Cleavage: Date when the petition is filed, from which we count forward or backward, in determining effects under the Insolvency Law. Count 30 days backward from date of cleavage. A creditor by assignment made within 30 days prior to the filing of the petition cannot file the petition. 2. Petition must allege at least 1 act of insolvency: a. Personal Debtor is about to depart in fraud of creditors He remains absent in fraud of creditors Conceals himself to avoid legal processes b. Judicial Debtor concealing property to avoid attachment He has suffered judgment to be attached for 3 days He has confessed judgment He has suffered judgment to be attached to give preference to certain creditors Preference Debtor transferred property to creditors to defraud others He has made transfers to hinder or delay creditors He has made transfers in contemplation of insolvency Merchant 4. 5. As merchant defaulted payments for 30 days He has failed to deliver money received as fiduciary within 30 days Execution issued against him is returned unsatisfied Assets of the insolvent which are ot exempt from execution will then be distributed among his creditors in accordance with the rules of concurrence in preference of credits in the Civil Code. Note the provision in the Labor Code which says that the claim of a laborer take priority over all others including taxes of the government. 3. After the petition is filed, the court shall issue an order of adjudication, which shall retroact to date of filing of petition. a. Effects of order i. All assets of debtor placed in sheriffs custody until a receiver or assignee is assigned ii. Payment to debtor of any debt or delivery of any property due to him is forbidden. He also cannot transfer or convey any of his property iii. All civil proceedings vs. the insolvent are stayed, except those pertaining to foreclosure of secured liens. b. c. The order must be published. Court shall also order debtor to show cause why he should not be declared insolvent

1.

c.

Summons to the debtor Answer or motion to dismiss filed by debtor 6. Hearing of petition 7. Order of adjudication declaring debtor insolvent 8. Publication and service of order of court 9. Meeting of creditors to elect an assignee in insolvency 10. Conveyance of debtors property to assignee in insolvency 11. Liquidation of assets and payment of debts 12. Composition, if agreed upon by debtors and creditors Composition: debtor offers to pay his creditors a certain percentage of their claims in consideration of his release from liability Requisites a. Offer must be made after filing of Schedule of Debtors property and the list of his creditors b. Offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed

d.

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c. d. Offer must be made only after the insolvent deposits the consideration to be paid to the creditors Offer must be accepted by majority of creditors holding majority of the claims, and must be confirmed by the court Effects of Composition: Insolvency Proceedings dismissed All debts are discharged are b. Nonleviable assets such as insurance policy without any cash surrender value c. Expectancy to inherit d. Right of action in personal injury cases which pertain exclusively to the debtor e. Property held in trust by debtor or merely leased by debtor f. Property exempt from execution Board of Liquidators v. Floro (60) Only the assignee can set aside preferences fraudulent

a. b. 13.

Discharge of the debtor, except in case of composition Discharge not applicable to corporations debtor, if any Objection to discharge of

14. 15.

Appeal to Supreme Court

I. Specific Provisions
Assignee Elected by majority of creditors who hold majority of the claims. The creditor must have filed his verified claim 2 days before the election. Creditors not entitled to vote in the election of assignee: Those who did not file their claims at least 2 days prior to the time appointed for such election (Sec. 29); Those whose claims are barred by the statute of limitations; Secured creditors unless they surrender their security or lien to the sheriff or receiver or unless they shall first have the value of such security fixed as provided in Sec. 59;

Assignee can ask for examination of persons suspected of having concealed, embezzled, or disposed of any property of the debtor. Liability shall be double the value of the property. Assignee is allowed necessary expenses and commissions (for the first P1k 7%; for above P1k but not exceeding P10k 4%). If there are 2/more assignees, the court shall order an equitable division.
Powers of assignee Duties of assignee the

To sue and possess all assets To inventory and uncollected credits of the property debtor To sell at auction said assets To redeem all mortgages To compromise insolvents debtors with

To collect all assets To convert all assets to cash

his To account for money received and paid out

Holders of claims for unliquidated damages arising out of pure tort (Schall v. Comors)

To recover properties To distribute the fraudulently conveyed by the assets to creditors debtor

Assignee converts the debtors property to cash and declares dividends to equitably distribute the property to the creditors Assignee may be substituted as the plaintiff in cases previously brought by debtor. Ratio: Causes of action also pass to the assignee. EXCEPT: Purely personal action The ff properties shall not pass to the assignee: a. Afteracquired property (acquired subsequent to the filing of the petition), except its fruits and income Examples of after-acquired property: donations, inheritance, provided he is a debtor in good faith who will later petition for a discharge

1. 2. 3.

Order of Distribution: Equitable claims under Sec. 48 (see Properties Excluded from Estate below); Preferred claims WRT specific movable property and specific immovable property under Art. 2241 and 2242, CC; Preferred claims as to unencumbered property of the debtor which shall be paid in the order named in Art. 2244; Common or ordinary credits which shall be paid pro rata regardless of dates under Art. 2245. Remedies of Secured Creditors The ff are secured claims: real estate mortgage, chattel mortgage and pledge Secured creditors have 3 remedies:

4.

1.

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a. Rely on the security. If he does, he cannot take part in the insolvency proceedings; b. Evaluate the security. If there is a part of the loan not secured, he can ask for this balance from the court; c. File a contingent claim in the insolvency proceedings in case the proceeds from the security is not enough to cover the loan Involuntary Insolvency: by 1 or more of the partners or 3 or more creditors of the partnership. Properties included in the Insolvency Proceedings: All the property of the partnership; and All the separate property of each of the partners, except: o Separate properties of limited partners; and o Properties which are exempt by law. Effect of Insolvency of Partnership or any Partner Right of partnership creditors a partnership may be declared insolvent notwithstanding the solvency of the partners constituting the same. A partnership is not necessarily insolvent because one of its members is insolvent. The solvent members are bound to wind up the partnership affairs. Under the law, a partnership is automatically dissolved by the insolvency of any partner or of the partnership (Art. 1830, CC). Insolvenc y of Corporations Who may petition for declaration of insolvency of a corporation: 1. Voluntary Insolvency: by any officer duly authorized by the vote of the board of directors or trustees at a meeting especially called for that purpose, or by assent in writing of a majority of the directors or trustees as the case may be (Sec. 52). 2. Involuntary Insolvency: a. First view: upon a creditors petition made and presented in the manner provided in respect to debtors. b. Second view: petition must be filed by at least 3 creditors of the corporation under the circumstances mentioned by law (De Leon). Effect of Declaration of Insolvency: its property and assets shall be distributed among the creditors but no discharge shall be granted to any corporation (Sec. 52). When the Act is not applicable: The Act does not apply to corporations engaged primarily in the banking business or any other corporation to which there is any special provision of law for its liquidation in case of insolvency. Contingent claim

This 3rd remedy is not available to chattel mortgages of movables sold under installments under Art 1484 of the Civil Code, and to pledges. Consequences of Attachments, Judgments, etc. Attachme nt levied upon within 30 days prior to the filing of the petition may be set aside Judgment s on cases filed and decided within 30 days prior to the filing may be set aside Judgment s on cases filed outside the 30 day period but decided within the 30 day period prior to the filing because the debtor confessed judgment or was declared in default will be set aside. Properties Excluded from Estate 1. Paraphernal property of the wife of the debtor 2. Property held on lease, administration or deposit 3. Merchandise held on commission, for forwarding or on consignment and price from sales on consignment 4. Bills of exchange sent to the debtor for remittance to others 5. Money in possession of debtor for remittance to others 6. Merchandise bought on credit if no delivery has been made 7. Goods wrongfully taken by debtor Insolvency Proceedings on Partnerships A partnership may be adjudged insolvent during the continuation of the partnership business or after its dissolution but before its final settlement thereof (Sec. 51). Individual creditors must prove their claims against such general partners, or else the general partners may be declared discharged Partnership property will be preferred to pay partnership debts, and property of individual partners will be preferred to pay individual debts Excess property of individual partners will be used to pay partnership debts. Who may petition for declaration of insolvency of a partnership: Voluntary Insolvency: by all the partners or any of them.

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Claim in which liability depends on some future event that may or may not happen and which makes it uncertain whether there will be any liability. After the close of the insolvency proceedings and the happening of the contingency, the creditor may pursue any available remedy for the collection of his claim. Composition A proceeding in insolvency proceedings, which is voluntary on the part of the debtor and his creditors, in which a debtor offers to pay his creditors a certain percentage of their claims in consideration of his release from liability. Requisites: 1. Offer must be made after the filling of the Schedule of the debtors property and the list of his creditors. 2. Offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed; 3. Offer must be made only after the insolvent deposits the consideration to be paid to the creditors ; 4. Accepted offer must be confirmed by the court. Effects of Confirmation: 1. The consideration shall be distributed as the judge shall direct; 2. The insolvency proceedings shall be terminated. 3. The title to the insolvents estate shall revest in him. 4. The insolvent shall be released from his debts. When court may confirm a composition 1. It is for the best interest of the creditors; 2. The debtor has not been guilty of nay of the acts, or of a failure to perform any of the duties which would create a bar to his discharge; and 3. The offer and its acceptance are in good faith and have not been made or procured in a manner forbidden by the Act (De Leon). When confirmation may be set aside: Upon application of a party in interest within 6 months after the composition has been confirmed, the court may set aside the confirmation and reinstate the case if it shall be showed upon a trial that: 1. That fraud was practiced in the procuring of such composition; and 1. 2. 3. 4. 2. That the knowledge thereof has come to the petitioner since the confirmation of such composition (Sec. 63).

Insolvency Proceedings are quasi in rem Ratio: Claims are completely extinguished by discharge of the debtor. Discharge Definition: Judicial clearance of an insolvent debtor from all claims except those expressly reserved by law. Debts which are not discharged: 1. Taxes and assessments due to the Government, whether national or local; 2. Any debts created by fraud, embezzlement of the debtor; 3. Any debt created by the defalcation as a public officer or while acting in a fiduciary capacity; 4. Debt of any person liable for the same debt, for or with the insolvent debtor, either as partner, joint contractor, indorser, surety or otherwise; 5. Debts of a corporation; 6. Claim for support; 7. Discharged debt but revived by a subsequent new promise to pay; 8. Debts which have not been duly scheduled in time for proof and allowance, unless the creditors had notice or actual knowledge of the insolvency proceedings, are not discharged as to such creditors; 9. Claims for unliquidated damages arising out of pure tort; 10. Claims of secured creditors; 11. Claims not in existence or not mature at the time of discharge; 12. Claims that are contingent at the time of discharge. Rules: Debtor who has been declared insolvent must still obtain a discharge after 3 months, but not more than 1 year. Debtor must not commit any of the ACTS OF INSOLVENCY: Debtor submitted a false affidavit; He concealed part of his estate or effects; Debtor was guilty of fraud or neglect in care of his property; Debtor procured an attachment or execution on his property during the one month period prior to the insolvency proceedings; Debtor destroyed or falsified important papers and documents;

5.

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6. Debtor fraudulently gave certain creditors preferences; 7. Debtor failed to disclose that certain claims which had been proven were false or fraudulent; 8. Being a merchant, debtor failed to keep proper books of account; 9. Debtor influenced the action of any creditor by pecuniary means; 10. In contemplation of insolvency, debtor made fraudulent conveyances of or encumbrances upon his properties; 11. Debtor had been convicted of any of the penal provisions of the Insolvency Law; 12. In case of involuntary insolvency, debtor had already availed of the benefits of the Insolvency Law within the 6-year period preceding his application for discharge. When discharge may be revoked: Upon petition of any creditor: 1. Whose debt was proved or provable against the estate in insolvency, on the ground that the discharge was fraudulently obtained. 2. Who has discovered facts constituting the fraud subsequent to the discharge. 3. The petition is filed within 1 year after the date of the discharge (Sec. 69). under confession of judgment not for valuable consideration nor in good faith

Effect of Fraudulent Transfer: As against the creditors of the insolvent debtor, any conveyance or assignment fraudulently made is void.

If debtor dies before Order of Adjudication is issued, insolvency proceedings must be dismissed. Remedy: File a claim in the testate or intestate proceedings. If debtor dies after the Order of Adjudication is issued, proceedings will continue. Date of Cleavage: Importance Creditor by assignment of credit made within 30 days from date of cleavage shall be disqualified as petitioning creditor; Attachment levied upon within 30 days before the date of cleavage may be set aside by the assignee; Judgments on cases filed and decided within 30 days prior to the date of cleavage may be set aside by the assignee; Judgments on cases filed before 30 days from the date of cleavage but decided within 30 days because of confession of judgment or declaration of default may be set aside by action of assignee; Properties acquired after date of cleavage, after discharge of debtor in good faith shall not be liable for debts incurred prior to date of cleavage; Fraudulent preferences made within 30 days prior to date of cleavage may be set aside in an action brought by assignee.

Fraudulent Preference If debtor transferred property to any person to give him preference, and such transfer took place within 30 days period from the date of cleavage, such transfer may be set aside by proper court action by the assignee. A fraudulent preference is committed when the debtor procures any part of his property to be attached, sequestered or seized on execution or makes any payment, pledge, mortgage, assignment, transfer, sale or conveyance of any part of his property, whether directly or indirectly, absolutely or conditionally, to any one under the following circumstances: 1. The debtor is insolvent or in contemplation of insolvency; 2. The transaction in question is made within 30 days before the filing of a petition by or against the debtor; 3. It is made with a view to giving preference to any creditor or person having a claim against him; 4. and the person receiving a benefit thereby has reasonable cause to believe; 5. That the transfer is made with a view to prevent his property from coming to his assignee in insolvency or to prevent the same from being distributed ratably among his creditors or to defeat the object of or any way hinder the operation of or evade the provisions of the Insolvency Law. Presumed Fraudulent Transfer not in ordinary course of business

For Banks / Quasi-Banks (Secs 29-33, RA 7653) 1. Conservatorship Should the Monetary Board find that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Board may appoint a conservator who may take charge of the assets, liabilities, and the management thereof. This shall not exceed 1 year. The Board shall terminate the conservatorship when: the institution can continue to operate on its own; the continuance in business of the institution would involve probable loss to its depositors or creditors. 2. Receivership The Board may summarily designate the Philippine Deposit Insurance Corporation as receiver of a bank/quasi bank when such:

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a. Is unable to pay its liabilities in the ordinary course of business: Provided, this is not due to extraordinary demands induced by financial panic; or Has insufficient realizable assets, to meet its liabilities; or Cannot continue in business without involving probable losses to its depositors or creditors; or Has willfully violated a cease and desist order under Section 37, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; c. d. conceals himself is a foreign corporation with no managing agent/ cashier/ secretary in the RP The creditors shall be entitled to a court order directing the sheriff to take custody of a sufficient amount of property. The creditors must submit: affidavits a bond in double the amount of their claims (Sec 26)

b. c. d.

3. Election of assignee; conveyance; conversion of property; commissions (see previous section)

If the receiver determines that the institution cannot be rehabilitated, he shall convert the assets to money and dispose of these to creditors in accordance with Civil Code provisions. For insurance companies Insurance Code) (Secs 247-251,

4.

All debts due and payable from the debtor at the time of the adjudication, and all debts existing but not payable until a future time, may be proved against the estate of the debtor (Sec 53 et seq) 5. Discharge of debt (see previous section) Fraudulent Preferences and Transfers See previous section Dividends in Insolvency It is a parcel of the fund arising from the assets of the estate, rightfully allotted to a creditor entitled to share in the fund whether in the same proportion with other creditors or in a dividend proportion. It is paid by the assignee only upon order of the court (Sec. 43, 44). Concurrence and Preference of Credits

If an insurance company is in unsound condition, or its available cash assets, in the case of a domestic mutual company, or its security deposits, in the case of a foreign company, is impaired or deficient, or that the margin of solvency required is deficient, the Commissioner is authorized to suspend or revoke all certificates of authority granted to such. If the Commissioner finds that such company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity, he may appoint a conservator to take charge the assets, liabilities, and the management. If the company is insolvent, the Commissioner shall order the company to cease and desist from transacting business and shall designate a receiver to immediately take charge of its assets and liabilities.

For Property Registration (Secs 83-84, PD 1529) When proceedings in bankruptcy or insolvency are instituted against a debtor who owns registered land, the officer serving the notice of such on the debtor shall file a copy the Register of Deeds in the province or city where the land lies. When such proceeding is vacated by judgment, a certified copy of the judgment or order may be registered.

J. Provisions common to both Voluntary & Involuntary Insolvencies


Procedure if debtor defaults / found insolvent 1. Debtor to file schedule of debts and liabilities and inventory of property (Sec 24) 2. If the debtor: a. resides outside RP b. cannot be found

De Barreto v. Villanueva (62) The full application of Art 2249 and 2242 demands that there must first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of a decedent's estate under Rule 87 of the Rules of Court, or 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 articles1 shall be considered as mortgages or pledges of real or personal property or liens within the purview of legal provision 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 this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Involvency Law. DBP v. Secretary of Labor (89) The preferential right accorded to employees and workers under Article 110 may be invoked only during bankruptcy or judicial liquidation proceedings against the employer. A preference of credit bestows upon the preferred creditor an

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advantage of having his credit satisfied first ahead of other claims. Logically, it becomes material only when the properties and assets of the debtor are insufficient to pay his debts; for if the debtor is amply able to pay, how can the necessity exist to determine which of his creditors shall be paid first? JL Bernardo Construction v. CA (00) The contractor's lien is granted under the 3rd 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 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. 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 Art. 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. h. Attempting to account for any of his property by fictitious losses or expenses. 2. Within 3 months before commencement of insolvency proceedings: a. Obtaining on credit from any person, any goods, chattels, with intent to defraud, under the false pretense of carrying an ordinary course of business;

b.

Making any pledge or disposition of, otherwise then by bona fide transactions in the ordinary course of his trade, with intent to defraud, any of his goods or chattels which have been obtained on credit and remain unpaid for; c. Suffering loss in any kind of gaming when such loss is one of the causes determining the commencement of insolvency proceedings; d. Selling at a loss or for less than the current price any goods bought on credit and still unpaid for; or e. Advancing payment to the prejudice of his creditors. 3. During proceedings for suspension of payments: a. Concealing or destroying any property belonging to his estate; b. Destroying, altering, mutilating or falsifying any book, deed, document or writing relating thereto; c. Making any payment, gift, sale, assignment; transfer or conveyance of property belonging to his estate with like intent; d. Spending any part thereof in gaming; e. Falsely swearing to the schedule and inventory with intent to defraud the creditors; or f. Violating the injunction issued by the court under Sec. 3 (Sec. 71).

K. Liabilities
Acts criminally punishable under the Insolvency Law After the commencement of insolvency proceedings: a. Concealing any part of his estate; b. Destroying, altering, mutilating or falsifying any book, deed, document or writing relating thereto; c. Removing the same with intent to prevent or delay its recovery by the assignee; d. Making any payment, gift, sale, assignment, transfer or conveyance of property belonging to his estate with like intent; e. Spending any part thereof in gaming; f. Concealing from his assignee or omitting from the schedule any part of his property with intent to defraud; g. Failing to disclose to his assignee the fact that a person has proved a false or fictitious claim against his estate within one month after coming to the knowledge or belief thereof; or

1.

L. Dismissal of Petition
1. 2. 3. Voluntary petition: upon application of the debtor, if no creditor files written objections; Upon the application of the petitioning creditors; or By written consent of all creditors filed in court. After appointment of an assignee, dismissal is not allowed without the consent of all parties interested in or affected thereby (Sec. 81).

M. Appeal to the Supreme Court


1. From an order granting or refusing an adjudication in insolvency and in the latter case, from the order fixing the amount of cost, expenses, damages and attorneys fees allowed the debtor;

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2. 3. From any order allowing or rejecting a creditors claim when the amount in dispute exceeds P3000; From an order allowing or rejecting a claim for property not belonging to the insolvent, presented under Sec. 48; From an order settling an account of an assignee; From an order against or in favor of settling apart homestead or other property claimed as exempt from execution; and From an order granting or refusing a discharge to the debtor (Sec. 82).

4. 5.

6.

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Corporate Rehabilitation (AM No. 00-8-10-SC, Nov. 21, 2000)


A. Definitions

allegations therein are true and correct of his personal knowledge or based on authentic records and shall contain as annexes such documents as may be deemed by the party submitting the same as supportive of the allegations.

D. Procedure
Where to File Petition RTC having jurisdiction over the territory where the debtor's principal office is located. Who May Petition Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, or Any creditor or creditors holding at least 25% of the debtor's total liabilities 1. Contents of Petition a. Debtor-initiated Petitions The petition must be verified and must set forth: i. the name and business of the debtor; ii. the nature of the business iii. the history of the debtor; iv. the cause of its inability to pay its debts; v. all the pending actions or proceedings known to the debtor and the courts or tribunals where they are pending; vi. threats or demands to enforce claims or liens against the debtor; and vii. the manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees, and stockholders. The petition (5 copies) shall be accompanied by the following documents: i. An audited financial statement as of its last fiscal year; ii. Interim financial statements as of the end of the month prior to the filing iii. Schedule of Debts and Liabilities iv. An Inventory of Assets The Inventory shall include a Schedule of Accounts Receivable v. A rehabilitation plan vi. A Schedule of Payments and disposition of assets which the debtor may have effected within 3 months immediately preceding the filing of the petition; vii. A Schedule of the Cash Flow of the debtor for 3 months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding 3 months;

Claim: includes all claims or demands of whatever nature or character against a debtor or its property, whether for money or otherwise.

Creditor: any holder of a Claim.

Debtor: any corporation, partnership, or association, whether supervised or regulated by the SEC or other government agencies, on whose behalf a petition for rehabilitation has been filed under these Rules.

B. Coverage & Construction


1. 2. These Rules shall apply to: Petitions for rehabilitation filed by corporations, partnerships, and associations pursuant to PD 902-A; Cases for rehabilitation transferred from the SEC to the RTCs pursuant to RA 8799. Application: Liberal construction to carry out the objectives of Sec. 5(d), 6(c) and 6(d) of PD No. 902-A, as amended, and to assist the parties in obtaining a just, expeditious, and inexpensive determination of cases. Where applicable, the Rules of Court shall apply suppletorily to proceedings under these Rules.

C. Nature of Proceedings
Any proceeding initiated under these Rules shall be:

1.
2.

In rem. Jurisdiction over all those affected shall be considered as acquired upon publication in any newspaper of general circulation Summary and non-adversarial in nature. The following pleadings are prohibited: a. Motion to dismiss; b. Motion for a bill of particulars; c. Motion for new trial or for reconsideration; d. Petition for relief; e. Motion for extension; f. Memorandum; g. Motion for postponement; h. Reply or Rejoinder; i. Third party complaint; and j. Intervention. Any pleading, motion, opposition, defense, or claim filed by any interested party shall be supported by verified statements that the affiant has read the same and that the factual

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viii. A Statement of Possible Claims by or against the debtor ix. An Affidavit of General Financial Condition x. At least 3 nominees for the position of Rehabilitation Receiver xi. A Certificate attesting, under oath, that the filing of the petition has been duly authorized the directors and stockholders have irrevocably approved and/or consented to all actions or matters necessary and desirable to rehabilitate the debtor The petition must be verified by an affidavit of a responsible officer of the debtor. b. Creditor-initiated Petitions It is sufficient that the petition is: accompanied by a rehabilitation plan and a list of nominees to the position of Rehabilitation Receiver and verified by a sworn statement that the affiant has read the petition and that its contents are true and correct of his personal knowledge or based on authentic records obtained from the debtor. Opposition to or comment to the petition Every creditor of the debtor or any interested party shall file his verified opposition to or comment on the petition not later than 10 days before the date of the initial hearing (see below). After such time, no creditor or interested party shall be allowed to file any comment or opposition thereto without leave of court. If the Schedule of Debts and Liabilities omits a claim or liability, the creditor concerned shall attach a verified statement of the obligations allegedly due it to its comment or opposition. The court shall likewise require the SEC to comment on the petition ii. the terms and conditions of such rehabilitation; iii. the material financial commitments to support the rehabilitation plan; iv. the means for the execution of the rehabilitation plan; v. a liquidation analysis that estimates the proportion of the claims that the creditors and shareholders would receive if the debtor's properties were liquidated; and vi. other relevant information Approval by Court The court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. In determining whether or not the opposition of the creditors is manifestly unreasonable, the court shall consider the following: i. That the plan would likely provide the objecting class of creditors with compensation greater than that which they would have received if the assets of the debtor were sold by a liquidator within a 3-month period; ii. That the shareholders or owners of the debtor lose at least their controlling interest as a result of the plan; and iii. The Rehabilitation Receiver has recommended approval of the plan. d. Effects of the Rehabilitation Plan. i. The plan and its provisions shall be binding upon the debtor and all persons who may be affected by it WON such persons have participated in the proceedings or opposed the plan or WON their claims have been scheduled; ii. The debtor shall comply with the provisions of the plan iii. Payments shall be made to the creditors in accordance with the provisions of the plan; iv. Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the plan; and v. Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the plan is successfully implemented. e. Revocation of the Rehabilitation Plan on Grounds of Fraud c.

Rehabilitation Plan a. Who may petition: Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, or any creditor or creditors holding at least 25% of the debtors total liabilities, may petition the proper RTC to have the debtor placed under rehabilitation. b. Contents The rehabilitation plan shall include: i. the desired business targets or goals and the duration and coverage of the rehabilitation;

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On motion or motu proprio, within 90 days from the approval of the rehabilitation plan, and after notice and hearing, the court may revoke the approval thereof on the ground that the same was secured through fraud. PAL v. Spouses Kurangking (02) WON the proceedings before the TC (re money claim v. PAL for missing luggage) should have been suspended after the court was informed that a rehabilitation receiver had been appointed? The interim rules must be read and applied along with Sec 6(c) of PD 902-A, directing that upon the appointment of a management committee, rehabilitation receiver, board or body pursuant to the decree, "all actions" for claims against the distressed corporation "pending before any court, tribunal, board or body shall be suspended accordingly." Verily, the claim of private respondents against petitioner PAL is a money claim for the missing luggage, a financial demand that the law requires to be suspended pending the rehabilitation proceedings. In B.F. Homes, Inc. v. CA, the Court has ratiocinated: "The reason for suspending actions is not really to enable the management committee or the rehabilitation receiver to substitute the defendant in any pending action against it. The real justification is to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra judicial interference that might unduly hinder or prevent the 'rescue' of the debtor company. Non-suspension of claims against guarantors / sureties solidarily liable with debtor: MWSS v. Daway (04) Sec. 6(b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating banks' obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor's assets. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as held in Traders Royal Bank v. CA and reiterated in Philippine Blooming Mills, Inc. v. CA where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. Relief from Stay Order The court may: a. Terminate; b. Modify; c. Set conditions for the continuance of; or

f. Alteration or Modification of the Rehabilitation Plan An approved rehabilitation plan may, on motion, be altered or modified if, in the judgment of the court, such alteration or modification is necessary to achieve the desired targets or goals set forth therein. Stay Order If the court finds the petition to be sufficient in form and substance, it shall, not later than 5 days from the filing of the petition, issue an Order: a. appointing a Rehabilitation Receiver and fixing his bond; b. staying enforcement of all claims, against the debtor, its guarantors and sureties not solidarily liable with the debtor; c. prohibiting the debtor from selling, encumbering, transferring, or disposing of its properties except in the ordinary course of business; d. prohibiting the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition; e. prohibiting the debtor's suppliers from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for such after the issuance of the stay order; f. directing the payment in full of all administrative expenses g. fixing the initial hearing on the petition h. directing the petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week for 2 consecutive weeks; i. directing all creditors and all interested parties to file and serve on the debtor a verified comment on or opposition to the petition, and putting them on notice that their failure to do so will bar them from participating in the proceedings; and j. directing the creditors and interested parties to secure from the court copies of the petition and its annexes

Upon motion or motu proprio, the court may declare void any transfer of property or any other conveyance, sale, payment, or agreement made in violation of its stay order or in violation of these Rules. The stay order shall be effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. Suspension of Money Claims:

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d. Relieve a claim from the coverage of the stay order, Upon showing that: a. any of the allegations in the petition, or any of the contents of any attachment, or the verification thereof has ceased to be true; b. a creditor does not have adequate protection over property securing its claim; or c. the debtor's secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary for the rehabilitation of the debtor. instance, however, shall the period for approving or disapproving a rehabilitation plan exceed 18 months from the date of filing of the petition. Termination of Proceedings a. In case of the failure of the debtor to submit the rehabilitation plan; or b. the disapproval of the plan; or c. the failure of the rehabilitation because of failure to achieve the desired targets or goals; or d. the failure of the debtor to perform its obligations under the plan; or e. a determination that the rehabilitation plan may no longer be implemented

The creditor shall lack adequate protection if it can be shown that: a. the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured; b. the debtor fails or refuses to take commercially reasonable steps to maintain the property; or c. the property has depreciated to an extent that the creditor is undersecured. Upon showing of a lack of adequate protection, the court shall order the rehabilitation receiver to: a. make arrangements to provide for the insurance or maintenance of the property; or b. make payments or provide additional or replacement security such that the obligation is fully secured; or c. if such arrangements are not feasible, the court shall modify the stay order to allow the secured creditor to enforce its claim against the debtor The court may deny the creditor these remedies if such would prevent the continuation of the debtor as a going concern or otherwise prevent the approval and implementation of a rehabilitation plan. Court Action on the Petition If, after the initial hearing, the court is satisfied that there is merit in the petition, it shall immediately refer the petition to the Rehabilitation Receiver who shall evaluate the rehabilitation plan and submit his recommendations to the court. The court shall likewise require the SEC to comment on the petition. SEC shall coordinate with the government agency concerned in appropriate cases for purposes of filing its comment. The petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of the initial hearing. The court may grant an extension beyond this period only if it appears by convincing and compelling evidence that the debtor may successfully be rehabilitated. In no

The court shall upon motion, motu proprio, or upon the recommendation of the Rehabilitation Receiver, terminate the proceedings. The proceeding shall also terminate upon the successful implementation of the rehabilitation plan. a. Any order issued by the court under these Rules is immediately executory. b. A petition for review or an appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court.

E. Rehabilitation Officer
Disqualifications: A Rehabilitation Receiver (RR) may be deemed to have a conflict of interest if: a. He is a creditor or stockholder of the debtor; b. He is engaged in a line of business which competes with the debtor; c. He is, or was within 2 years from the filing of the petition, a director, officer, or employee of the debtor or any of its present creditors, or the auditor or accountant of the debtor; d. He is, or was within 2 years from the filing of the petition, an underwriter of the outstanding securities of the debtor; e. He is related by consanguinity or affinity within the fourth civil degree to any creditor, stockholder, director, officer, employee, or underwriter of the debtor; or f. He has any other direct or indirect material interest in the debtor or any creditor. Powers and Functions The RR shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings. The RR shall be considered as an officer of the court.

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He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor's property is reasonably maintained, as well as implement the rehabilitation plan after its approval. a. b. Powers and functions: To verify the accuracy of the petition To accept and incorporate amendments to the Schedule of Debts and Liabilities; c. To recommend to the court the disallowance of claims and rejection of amendments to the Schedule of Debts and Liabilities d. To submit a revised Schedule of Debts and Liabilities; e. To investigate the acts, conduct, properties, liabilities, and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof; and, any other relevant matter f. To examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate; g. To make available to the creditors documents and notices necessary for them to follow and participate in the proceedings; h. To report to the court any fact ascertained by him pertaining to the causes of the debtor's problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement, and irregularities committed by the stockholders, directors, management, or any other person against the debtor; i. To employ such person or persons such as lawyers, accountants, appraisers, and staff as are necessary in performing his functions j. To monitor the operations of the debtor k. To evaluate the existing assets and liabilities, earnings and operations of the debtor; l. To determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders, and the general public; m. To study the rehabilitation plan n. To prohibit any encumbrance, transfer, or disposition of the debtor's property outside of the ordinary course of business or what is allowed by the court; o. To prohibit any payments outside of the ordinary course of business; p. To have unlimited access to the debtor's employees, premises, books, records, and financial documents during business hours; q. To inspect, copy, photocopy, or photograph any document, paper, book, account, or letter, r. To gain entry into any property for the purpose of inspecting, measuring, surveying, or photographing it; s. To take possession, control, and custody of the debtor's assets; t. To notify counterparties and the court as to contracts that the debtor has decided to continue to perform or breach; u. To be notified of, and to attend all meetings of the board of directors and stockholders of the debtor; v. To recommend any modification of an approved rehabilitation plan w. To bring to the attention of the court any material change affecting the debtor's ability to meet its obligations x. To recommend the appointment of a management committee y. To recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors, or the general public; z. To apply to the court for any order or directive that he may deem necessary or desirable aa. To exercise such other powers as may from time to time be conferred upon him by the court. Oaths and Bonds Before entering upon his powers, duties, and functions, the RR must be sworn to perform them faithfully, and Must post a bond executed in favor of the debtor in such sum as the court may direct, to guarantee that he will faithfully discharge his duties and obey the orders of the court. If necessary, he shall also declare under oath that he will perform the duties of a trustee of the assets of the debtor, will act honestly and in good faith, and deal with the assets of the debtor in a commercially reasonable manner. Fees and Expenses RR and the persons hired by him shall be entitled to reasonable professional fees and reimbursement of expenses which shall be considered as administrative expenses. Reports Every 3 months to the court or as often as the court may require on the general condition of the debtor. Immunity from Suit Not be subject to any action, claim, or demand in connection with any act done or omitted by him in good faith in the exercise of his functions and powers herein conferred. Dismissal of RR

By the court, upon motion or motu proprio, on account of conflict of interest, or on any of the grounds for removing a trustee under the general principles of trusts.

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F. Effectivity
These Rules shall take effect on Dec 15, 2000.

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Truth in Lending Act (RA 3765) (An Act to require the disclosure of financial charges in connection with extensions of credits)
A. Purpose
It is the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. 1. To protect the debtor form the effects of misrepresentation and concealment; 2. to permit him to fully appreciate and evaluate the real cost of his borrowing; and 3. To avoid circumvention of usury laws.

installment basis, either as principal or as agent Includes, but not limited to, banks and banking institutions, insurance and bonding companies, savings ad loan associations, credit unions, financing companies, installment houses, real estate dealers, lending investors and pawnshops

C. Obligations of Creditors
Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth the following information: 1. the cash price or delivered price of the property or service to be acquired; Cash or delivered price: in trade transactions, it is the amount of money which would constitute full payment upon delivery of the property or service purchased at the creditors place of business; in financial transactions, it is the amount of money received by the debtor upon consumption of the credit transaction, net of finance charges collected at the time the credit is extended, if any. 2. the amounts, if any, to be credited as down payment and/or trade-in; Down payment: amount paid by the debtor at the time of the transaction in partial payment for the property or service purchased. Trade-in: value of an asset, agreed upon by the creditor and debtor, given at the time of the transaction in partial payment for the property or service purchased 3. the difference between the amounts under clauses (1) and (2) 4. the charges which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; Non-finance charges: amounts advanced by the creditor for items normally associated with the ownership of the property or of the availment of the service purchased which are not incident to the extension of credit. 5. the total amount to be financed; Amount financed: consists of the cash price plus non-finance charge less the amount of the down payment and value of the trade-in. 6. the finance charge expressed in terms of pesos and centavos; and Finance charge: the amount to be paid by the debtor incident to the extension of credit such as interest or

B. Definitions
Credit (Sec. 3[2], R.A. No. 3765) Any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect. Finance Charge Includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit. Creditor (Sec. 3[4]. R.A. No. 3765) Any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge. Includes any person who as a regular business practice make loans or sells or rents property or services on a time, credit or

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discounts, collection fees, credit investigation fees, attorneys fees and other service charges (also, see definition of terms) Total finance charge represents the difference between (1) the aggregate consideration (down payment + installments) on the part of the debtor and (2) the sum of the cash price and non-finance charges 7. the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. Simple annual rate: uniform percentage which represents the ratio, on an annual basis, between the finance charges and the amount to be financed Consolidated Bank v. CA (95) As to handling charges, banks are authorized under Central Bank Circular No. 504 to collect such charges 1. Which do not involve the payment of any payment of any finance charge by the debtor; 2. In which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance contracts, sale of bonds,etc.

E. Consequences of Non-Compliance
1. Any creditor who fails to disclose to any person any information in violation of this shall be liable to such person in the amount of : a. P100; or b. in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater. Except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. 2. The creditor shall be liable for reasonable attorney's fees and court costs as determined by the court. 3. Any person who wilfully violates any provision of this Act shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. 4. No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof.

on loans over P500,000.00 with a maturity of 730 days or less at the rate of 2% per annum on the principal or the outstanding balance thereof, whichever is lower; 1.75% on loans over P500,000.00 but not over P1,000,000.00; 1.50% on loans over P1,000,000.00 but not over 2,000,000.00, etc. Section 7 of the same Circular, however, provides that all banks and non-bank financial intermediaries authorized to engage in quasibanking functions are required to strictly adhere to the provisions of Republic Act No. 3765 otherwise known as the "Truth in Lending Act" and shall make the true and effective cost of borrowing an integral part of every loan contract.

F. Prescription
Prescriptive Period within which a debtor may recover (Sec. 6[a], RA No. 3765) Must be brought within 1 year from the date of the occurrence of the violation, in any court of competent jurisdiction New Sampaguita Builders Cionstruction, Inc. v. PNB (04) The lending bank may not collect the undisclosed chages if the bank fails to provide the Disclosure Statement under the Truth in Lending Act prior to the draw down or disbursement of the loam.

D. Applicability
Transactions wherein truth in lending Act applies (Sec. 3, CB Circ. 158) 1. Any loans, mortgages, deeds of trust, advances and discounts; 2. Any conditional sales contract, any contract of sell or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; 3. Any rental-purchase contract; 4. Any contract or arrangement for the hire, bailment, leasing of property; 5. Any option, demand, lien, pledge or other claim against or for delivery of, property or money; 6. Any purchase or other acquisition of, or any credit upon the security of, any obligation or claim arising out of any of the foregoing; 7. Any transaction or series of transactions having a similar purpose or effect. Transactions not covered by the Act (Sec. 3, CB Circ. 158)

G. Effect of Final Judgment


Effect of a final judgment on the creditor A final judgment rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall eb prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto

H. Officers
Officers tasked with enforcing the provisions of the law (Sec. 1, CB Circ. 431)

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1. Central Bank (Bangko Sentral ng Pilipinas) and its officers; 2. Dept. of Commercial and Savings Banks WRT commercial, savings and development banks and building and loan associations; 3. Dept. of Rural Banks and Savings and Loan Associations, WRT rural banks and savings and loan associations; 4. Office of Non-Bank Financial Intermediaries, WRT non-bank financial institutions and other persons, whether natural or judicial, covered by the Act and not otherwise assigned to the above departments.

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