CREDTRANS

CREDIT TRANSACTION
Transcriptions
Atty. Joseph San Pedro
Special Class E 2019
Credit Transactions Atty. Joseph San Pedro
Week 01 to 17
TABLE OF CONTENTS
Legal and Judicial Bonds. 46
WEEK 01 LOAN 4 SURETY FORM 46
09 AUGUST 2017 4 WEEK 05 PART 03 GALLARDO, CHRISTIAN ANDREW 46
WEEK 01 PART 01 ABATA, MAV 4 INDEMNITY FORM 47
REVIEW OF CONTRACTS 4
OVERVIEW OF TOPICS 4 WEEK 06 MORTGAGE AND PLEDGE 49
LOAN 5
WEEK 01 PART 02 ALFARO, AILEENE 6 13 SEPTEMBER 2017 49
COMMODATUM 8 WEEK 06 PART 01 HAO, TRISTAN JEREMY 49
WEEK 01 PART 03 ALVAREZ, ALEX 9 MORTGAGE AND PLEDGE 49
WEEK 01 PART 04 BATUNGBACAL, ROBERTO 12 WEEK 06 PART 02 LADEZA, DOMINIC 51
SIMPLE LOAN 12 PACTUM COMMISSORIUM 54
WEEK 06 PART 03 LOPEZ, ROBYNNE 54
WEEK 06 PART 04 MELO, KATRINA MAY 57
WEEK 02 LOAN 15 PLEDGE 58
16 AUGUST 2017 15 WEEK 06 PART 05 MONDEJAR, CARL 60
WEEK 02 PART 01 ACUYONG, SIDARTHA 15
INTEREST 15 WEEK 07 PLEDGE 63
WEEK 02 PART 02 BILIRAN, CHEZA MARIE DIESTRO 17
WEEK 02 PART 03 CATIPAY, RALPH RONALD 19 20 AUGUST 2017 63
PRESENT VALUE OF MONEY 21 WEEK 07 PART 01 MONSANTO, BRET BACALLA 63
COMPOUNDING INTEREST 21 WEEK 07 PART 02 PARAS, ERIKA BIANCA GONZALES 65
INTERESTS 21 WEEK 07 PART 03 SABLAN, JUSTINE ABIGAIL CRUZ 68
WEEK 02 PART 04 CONTREREAS, CESAR CLARENCE 22 WEEK 07 PART 04 SALVADOR, JHERALDINE 70
LOAN FORMS 22 WEEK 07 PART 05 SORIANO, AIRISH MADRIAGA 73
WEEK 02 PART 05 SABLAN, JUSTINE ABIGAIL CRUZ 24
WEEK 08 REAL ESTATE MORTGAGE 76
WEEK 03 LOAN 28 27 SEPTEMBER 2017 76
23 AUGUST 2017 28 WEEK 08 PART 01 SORIANO, BIANCA 76
WEEK 03, PART 01, BARROSO, FRANCES ANGELOE 28 WEEK 08 PART 02 SORIANO, GLYSSA CAMILLE GARCIA 79
WEEK 03, PART 02, DAYANGHIRANG, ELAINE 32 WEEK 08 PART 03 TAMAYO, RYAN JOSEPH EMMANUEL MENDOZA 84
WEEK 03, PART 03, DINSAY, KEVIN 33 WEEK 08 PART 04 ABATA, MARIVIR GUEVARA & ALFARO, MARIA AILEENE ANTONIO 86
WEEK 03, PART 04, DONES, ANTONIO MIGUEL 37 WEEK 08 PART 05 ALVAREZ, ALEXANDRA CZARINA LOUISE BUMANGLAG 88
WEEK 04 FREE CUT 41 WEEK 09 MIDTERMS WEEK 01 92

04 OCTOBER 2017 92
WEEK 05 GUARANTEE AND SURETYSHIP 42
06 SEPTEMBER 2017 42 WEEK 10 MIDTERMS WEEK 02 93
WEEK 05 PART 01 ENRILE INTON, ANGELICA 42 OCTOBER 11, 2017 93
EXTINGUISHMENT OF GUARANTY 44
WEEK 05 PART 02 GABA, JOHN ELLAND 45 WEEK 11 REDEMPTION, ANTICHRESIS & CHATTEL MORTGAGE 94
Special Class E2017 Page 2 of 149

Abata | Acuyong | Alfaro | Alvarez | Barroso | Batungbacal | Biliran | Catipay | Contreras | Cruz | Dayanghirang | Dinsay | Dones | Enril-Inton | Gaba | Gallardo |
Gesta | Hao | Ladeza | Lee | Lopez | Melo | Mondejar | Monsanto | Paras | Pesueña | Sablan | Salvador | Soriano, A. | Soriano, B. | Soriano, G. | Tamayo
Week 01 to 17
OCTOBER 18, 2017 94 WEEK 16 PART 03 MELO, KATRINA 138

WEEK 11 PART 01 ACUYONG, SIDARTHA 94 NEW CENTRAL BANK ACT OF 1993 140
WEEK 11 PART 02 BATUNGBACAL, ROBERTO 95 CONSERVATORSHIP 140
REVIEW ON REAL ESTATE MORTGAGE 95 RECEIVERSHIP 141
DRAGNET CLAUSE 96 LIQUIDATION 141
WEEK 11 PART 03 BILIRAN, CHEZA 97
ANTICHRESIS 98 WEEK 17 DEPOSIT & WAREHOUSE RECEIPTS LAW 143
WEEK 11 PART 04 CATIPAY, RALPH RONALD 99
CHATTEL MORTGAGE 99 NOVEMBER 29, 2017 143
WEEK 11 PART 05 CONTRERAS, CESAR CLARENCE 99 WEEK 17 PART 01 MONDEJAR, CARL VINCENT 143
WEEK 17 PART 02 MONSANTO, BRET 144
WEEK 12 CHATTEL MORTGAGE LAW & PREFERENCE AND WEEK 17 PART 03 PARAS, ERIKA BIANCA 144
CONCURRENCE OF CREDIT 101 WEEK 17 PART 04 SABLAN, JUSTINE ABIGAIL 145
WEEK 17 PART 05 SALVADOR, JHERALDIN 146
OCTOBER 25, 2017 101 WEEK 17 PART 06 SORIANO, AIRISH 146
WEEK 12 PART 01 CRUZ, MARY ABIGAIL 101 WAREHOUSE RECEIPTS 147
WEEK 12, PART 02 DAYANGHIRANG, ELAINE VIKTORIA 102 WEEK 17 PART 07 SORIANO, BIANCA ISABEL 147
WEEK 12 PART 03 DINSAY, KEVIN DOMINIC 103 WEEK 17 PART 08 SORIANO, GLYSSA CAMILLE 148
WEEK 12 PART 05 BARROSO, FRANCES ANGELIE 104 WEEK 17 PART 09 TAMAYO, RYAN 149
WEEK 12 PART 05 ENRILE-INTON, ANGELICA 106
WEEK 13 HOLIDAY 109

NOVEMBER 01, 2017 109
WEEK 14 FRIA 110

NOVEMBER 08, 2017 110
WEEK 14 PART 01 DONES, ANTONIO MIGUEL 110
WEEK 14 PART 02 GABA, JOHN ELLAND 114
WEEK 14 PART 03 GALLARDO, CHRISTIAN ANDREW 119
WEEK 14 PART 04 HAO, TRISTAN JEREMY 123
WEEK 15 HOLIDAY 128

NOVEMBER 15, 2017 128
WEEK 16 FRIA & NEW CENTRAL BANK ACT 129

NOVEMBER 22, 2017 129
WEEK 16 PART 01 LADEZA, DOM 129
REVIEW ON FRIA 129
WEEK 16 PART 01 LOPEZ, ROBYNNE 135
PRE-NEGOTIATED REHABILITATION 136
OUT OF COURT OR INFORMAL RESTRUCTURING AGREEMENTS 136
LIQUIDATION OF INSOLVENT JURIDICAL DEBTOR 138
INSOLVENCY OF AN INDIVIDUAL DEBTOR 138

Week 01 Loan
Week 01 Loan
09 August 2017
Week 01 Part 01 Abata, Mav ought to return the property.
Ø So that’s generally basic contact
REVIEW OF CONTRACTS
When you have a contract, you have this creditor who will have this basic
remedies, so sometimes you will have this special provisions of law providing
Contracts has the following: for some other remedies.
1. Parties Example #03: Security Arrangements
a. Creditor But let’s say the creditor will not be satisfied with just the basic remedies, now we will have
b. Debtor the security arrangements.
2. Object This is a loan contract.
3. Cause Lender 10M, borrower to pay.
4. Consent Sometimes lender will lend not based on the strength of an undertaking of the borrower to pay
5. Exchange of Prestations on the due day -- it will not be enough. Let’s say, you may transact with your classmate
OVERVIEW OF TOPICS involving a huge amount, you will not just give your classmate money on the mere
undertaking that your classmate will pay on due date because your classmate does not have a
Example #01: Loan Contract job and won’t be able to pay, so you will ask for security.
Creditor lends 10M to debtor on day 1 and on day 2, the due date, debtor should pay 10M. What will be a security?
So you have here a contract of loan, the creditor lends 10M while the debtor pays on the due
• The first contact we will discuss will be loan, where the creditor or
date. lender allows a borrower to use property within a certain period. The
If the debtor defaults, there will be basic remedies. What are the basic borrower with an obligation to pay on due date.
remedies? What do you understand with payments? Payment of money only?
1. Specific performance
• No, it’s also the performance of the prestations due so better now we
2. Resolution/Rescission and/or damages
ask for security.
In this example, what will be the remedy?
What are the types of security we will discuss?
• Specific performance basically collection.
• First we have real estate mortgage
o Sue the debtor
• We will start with guarantee or surety
§ To collect the contract
What is a guarantee or a surety?
§ To claim for damages (by way of interest)
o It is a 3rd party undertaking to pay in case of default by the
Will resolution be proper in this case?
borrower.
• No, there is nothing to resolve. Later on you will learn that the guarantor will be liable only if
What if, on the other hand, you have contract of sale? the borrower defaults and the creditor complies with certain
Example #02: Remedies requisites to hold the guarantor liable. On the other hand, the
Seller conveys property to the buyer on Day 1. Where the buyer has the obligation to pay the surety is more akin to a solidary debtor.
price on Day 2. Next one will be Real Estate Mortgage
If the buyer defaults, again you have alternative remedies. Example #04: Real Estate Mortagage
Here you can have resolution with or without damages or you can have let’s say a house and lot be mortgaged by the borrower or a third party.
Specific Performance again with or without damages. When you mortgage a property, a lien is created on the property. There is a charge on
o If Specific Performance, the seller may collect the price the property that should the borrow default, there will be foreclosure so the lender can
o If Resolution, contract will be cancelled then the buyer
Week 01 Loan
either sue for SP or the lender can opt for foreclosure and then apply the proceeds to the of the same kind and quality shall be paid, in which case the contract is simply
payment of the loan. called a loan or mutuum.
Another example of a security, let’s say this is a sale of a car, your usual car Commodatum is essentially gratuitous.
transaction. Simple loan may be gratuitous or with a stipulation to pay interest.
Example #05: Chattel Mortgage In commodatum the bailor retains the ownership of the thing loaned, while in
Seller sells a car to B. B cannot pay the price so there will be payment on installments. simple loan, ownership passes to the borrower. (1740a)
To secure it there will be financing, so there will be a chattel of the car the car will be the So now, first we have LOAN.
security. The buyer acquires title to the car but the buyer will mortgage the car to the What is a contract of loan?
seller, for example, as security for the payment of the price. • Student: A contract of loan is a contract whereby one party agrees to
Another security, which can be made also by a third party – A pledge. deliver something, either personal or real and another party pays for
What is a pledge? it and agrees to deliver it when it is due or when the lender ask for it.
o It is basically, giving personal property as security for a loan. so, you have a contract of loan, who are the parties?
What we call in the vernacular as what you do in pawnshop • Student: Lender and borrower
basically. What are the elements of a contract?
Let’s say you have jewelry; you hand over the jewelry as security for the payment of the loan. • Student: Consent by both parties, Object, Cause
Then after discussing these security arrangements there’s antichresis. What is the object in a Contract of Loan?
We will discuss concurrence and preference of credits • Student: The property, real or personal.
What do we mean by concurrence and preference of credits? Sometime when so you can have a loan involving real property?
the borrower defaults, the borrower will have other creditors so the borrower
• Student: Yes
will have other payables to other creditors. At this point, the borrower will
What kind of loan?
have assets less than liabilities. Meaning, the assets will not be sufficient in
paying all liabilities including this one to the lender and other obligations to • Student: Commodatum
these other creditors. So what will happen? So if I say a CoL can involve real property will that statement be true?
You will now apply the rules on concurrence and preference of credits because • Student: Yes, because when you’re dealing with loan you have two
you have an insolvent debtor. So you will have a proceeding whereby the kinds COMMODATUM and MUTUUM or simple loan
assets of the insolvent debtor will be liquidated and applied following the rules COMMODATUM – object is real property
of concurrence and preference of credits. MUTUUM or simple loan – object is real or personal property
The ultimate topic will be the financial rehabilitation and the insolvency act. What will be the cause from the PoV of the lender?
Ø This is a proceeding involving debtors in financial distress. • Payment (or the right to demand its return or its equivalent)
And then finally we will discuss useless topics such as deposit and warehouse Will payment be the same in Commodatum and Mutuum?
receipts. They are not asked in the bar so practically, they are useless. You
• Student: No. In Commodatum - exact same thing should be returned
won’t encounter them on practice, you’ll encounter them in law school once
In Mutuum- not same thing, just the payment of the equivalent
and then maybe in the Bar.
Let’s say the Borrower defaults in the payment of the loan, whether
This is the overview of our topics.
Commodatum or Mutuum. Will the lender have the same remedy whether it’s
LOAN Commodatum or Mutuum?
• Student: Basically yes. It’s basically a suit for SP.
Art. 1933. By the contract of loan, one of the parties delivers to another, either In Commodatum, the return of the thing or
something not consumable so that the latter may use the same for a certain In Mutuum, the payment of amount due
time and return it, in which case the contract is called a commodatum; or Is there a difference? Will there be additional liability if it’s Commodatum or
money or other consumable thing, upon the condition that the same amount Mutuum? Let’s say in a Commodatum, you want a remedy that will give you
Week 01 Loan
leverage, what possible action can you take? B does not want to return • Student: It will be borrower because he will be the one using the
property. Aside form SP, is there any other action you can resort to? Let’s say property.
you want to extort monetary concessions, what’s the best way and cheapest Now the borrower will use the property, then borrower will have to clean the
way (aside from hiring goons)? What legal action will you file if you want to house, pay for certain expenses during the 3 day period, say some laundry etc.
exert pressure with the least cost? In SP, what will apply? Will that still be Commodatum if borrower will have to pay for certain costs in
• Student: Civil the course of the 3 days like pay for water gas of the 3 day period
Is it possible to file a criminal case if there is non-return? • Student: Yes. It would still qualify as Commodatum. These may be
• Student: Yes. Estafa. considered as ordinary expenses for the use of the house.
Why estafa? Yes. It does not detract form the nature of a commodatum notwithstanding
• Student: In commodatum, ownership does not transfer to the that B pays for the use and preservation. In fact, this is an obligation B in a
borrower so if you hold it for a longer time than you’re supposed to commodatum.
or you don’t want to give it back there can be estafa. But there is an anomalous case which you ought to know. This is Caguyo v.
If that’s the case, Why not theft? What is the real reason? CA June 3 2004. Read it if you have time.
In commodatum, ownership does not transfer. Ø Here, the SC held that if the borrower has the obligation to pay
That’s why the lender need not be the owner in a commodatum because for the maintenance of the property it’s not commodatum.
there is no conveyance of ownership. If I lend you money, you will get Ø This wrong really, the borrower will have to maintain the
ownership. In simple loan, ownership transfers but its still possible to have property during the commodatum by paying for ordinary
estafa in a simple loan if there is fraud or deceit. expenses for use and preservation.
The real reason is that in Commodatum, the borrower receives property in So the basic structure of a loan is basically the lender allows the borrower to
trust with an obligation to return the property. If the borrower does not return use property in a certain period and the borrower pays or return the property
and there is compliance with other requisites of estafa then there will be estafa. whether its commodatum or mutuum.
Week 01 Part 02 Alfaro, Aileene
T or F a contract of loan is by default gratuitous
And the borrower pays or returns the property, whether it’s mutuum or
• Student: True. Whether it be a Commodatum or Mutuum commodatum. The only difference, as we said earlier is in commodatum, the
In Commodatum, what is the requirement? It may or may not be gratuitous? borrower returns the exact same thing.
• Student: No. It is always gratuitous. If you borrow a car for free, and In mutuum, it’s just payment of the equivalent because in mutuum, what kind
the only obligation is to return then it is a commodatum. of object?
If upon return, you pay X amount to the lender, will that be commodatum? • Student: In mutuum it’s money or other consumable thing.
• Student: No. It can be some other contract but it will not be a So can you have a consumable as an object of commodatum?
commodatum. Commodatum is essentially gratuitous. • Student: There is a provision which says that a consumable thing can
What about in Mutuum? Why is the statement true? be an object of commodatum if the object will not be consumed but
• Student: If simple loan, it is generally gratuitous but there is an it is mainly for display or for example exhibit of the consumable
exception, and that is when there is a written provision as to the thing.
amount of interest. So even if were dealing with simple loan, interest Like?
will only be due if the parties have an agreement in writing on the • Student: One example would be a bottle of wine.
payment of interest. So it has to be gratuitous
Example #07 Mutuum or Commodatum
Example #06 Commodatum
Or let’s say a misprinted peso. You just lend it. The same thing will be
Let’s say in a Commodatum, Lender lends house and lot to borrower for Day 1-Day3.
returned. So it doesn’t mean that if the object is a consumable, it cannot be
Now let’s say between day and day 3, who will have possession? commodatum. As long as the intention of the parties is to return the exact
same thing. You’ve taken up Corp? So you know how to set up a corporation?

Week 01 Loan
Let’s say X wants to set up a corporation. To set up a corporation, you will • Student: Upon meeting of the minds.
have to subscribe. Let’s say shares with a par value of 1 million. X subscribes General rule is a contract is consensual. There will be a contract as long as the
to 1 million shares. X will have to pay how much minimum? 25%. So X should parties agree on the object and the cause. Then you have all the requisites of a
pay at least 250,000. Remember when you incorporate, of the authorized contract. But in a case of a loan, a loan contract, whether commodatum or
capital stock, 25% should be subscribed and of the subscription 25% should mutuum, it is a real contract. It is perfected only upon delivery.
be paid. But X doesn’t have the money so X goes to Y, a friend. Y gave Example #09 Perfecting Loan Contract
250,000 which X deposited in a bank. Why a bank? Because when you So let’s say ABC Corp. needs funds for operations so it applied for a credit facility from a
incorporate there must be a certificate of bank deposit to show proof that bank. Under the credit agreement, the bank will lend up to the maximum amount of 20
there was payment of the minimum subscription or the minimum paid up million. Borrower will pay following a certain schedule.
capital. Day 1 - signed credit agreement
Day 1 - Y lent 250,000 Day 3 - ABC Corp. drew from the credit line (5M)
Day 2 - X has an obligation to pay Day 6 - another drawdown (10M)
What kind of loan contract do you have here? Commodatum or mutuum? Day 7 - drawdown (5M)
• Student: Mutuum. When did the parties enter into a contract?
Mutuum? • Student: Day 1 because that’s when they agreed as to the object and
Example #08 Mutuum the cause.
X will return the 250,000 after so this is only for show. To lead the SEC to believe that When was the contract of loan perfected?
there was payment made for the subscription. Still mutuum? Even if it’s show money? It’s • Student: Day 7.
for display to the SEC. Day 7? Upon full release of the proceeds? No. As of day 3 there’s already a
• Student: But they are not required to return the exact same money contract of loan. Upon partial release, there’s already delivery at least with
with the exact same serial number. respect to the 5M, you have a perfected contract of loan. You cannot say
Correct! But there is again an anomalous case wherein the SC said that this is there’s no perfected contract of loan until day 7. There is as of day 5 as to the
commodatum. How stupid can that be? This isn’t commodatum because the 5M. Day 6 with respect to the 10M. Because when you have a credit
borrower does not pay the exact same thing. When you say it’s exact same agreement, normally every drawdown or every release of the proceeds will be a
thing, when you’re dealing with money, how do you do it? separate loan. That’s why normally the documentation, there will be a
• Student: It should be the same exact serial number. promissory note for each drawdown. So you have to note that distinction.
Yes! So identical bills. You have the same serial numbers, and then the same When you have a credit agreement or credit contract, it doesn’t mean that if
denomination and then you return. Let’s you’re going to display a collection of there’s no release of the loan proceeds, there will be no contract. There is. You
money. Then you’ll return the exact same thing. If you’re interested in the SC have a contract as of day 1 but it’s not a perfected contract of loan. The loan
case you have Producers Bank v. Court of Appeals, February 19, 2003. So contract was perfected as of day 3 with respect to the released proceeds.
money given for a certificate of deposit for purposes of incorporation was Are you familiar with constructive delivery? What is it?
considered a commodatum, which is wrong. So you stick by the rule. If there’s • Student: It’s short of actual delivery. So for example, endorsement of
only a payment of the equivalent, then it’s a simple loan. a check. There was a case (in nego) where the wife endorsed a check
What are the stages of a contract? and left it on the table of the husband. There was no actual delivery
• Student: Negotiation, perfection and consummation. yet but it was already considered as a constructive delivery to the
How do you perfect a contract of loan? husband.
• Student: Upon delivery. Let’s say you have a credit facility agreement. Lender agreed to lend 10M.
Because a loan contract is what kind of contract? Borrower paid on due date. But there is a provision in the agreement that the
proceeds should be released to X. When will the loan be perfected?
• Student: A real contract.
General rule is a contract is perfected when? • Student: When the proceeds are received.

Week 01 Loan
And that is an example of constructive delivery to? • Student: It can be.

• Student: X. So you can still have commodatum even if the borrower can use the fruits?
No, there’s actual delivery to X. There’s constructive delivery to the The parties agree. B can also use the fruits. So there is commodatum. Let’s say
borrower. That’s why there’s perfection of the loan. When there’s delivery to the agreement went like this. The borrower borrows the dog but can use the
X, it’s as if it were delivered to B because it’s upon the instruction of B. puppies for food.
What kind of transaction is this? • Student: I don’t know if it’s possible because the exact same thing has
A provision mandating the payment to X. Stipulation in favor of a third party-- to be returned.
stipulation pour atrui. Remember in ObliCon, the rule is a contract binds only the But you said there can be use.
parties. One of the exceptions is a stipulation pour atrui wherein a favor, a benefit • Student: But not consumption.
is given to a third party. Of course, assuming there’s compliance with the So there can still be commodatum if there was an agreement with respect to
requisites of a stipulation pour atrui. the use of the fruits but the borrower should return the dog and the puppies.
So you’ve taken up Nego? This will be what kind of transaction? No more no less. The moment there is use of the puppies as food, it’s no
There’s a credit agreement. It’s actually a loan. longer commodatum. Because there’s consumption.
Example #10 Letter of Credit and Loan Connection Recap: the lender need not be the owner because the lender does not transfer
Then there will be a release to X. What do you call that financial instrument? Wherein you ownership. The minimum requirement of the lender in a commodatum is
apply to a bank for a facility and the bank will pay a third party upon compliance by the what? The lender should have what? So let’s say you have a house help. Can
third party of certain documentary requirements. Let’s say borrower’s buying from X. X will your house help lend your house by way of commodatum?
not sell and ship without an assurance. So there will be this document from a bank. • Student: The lender should be in possession.
It’s a letter of credit. It’s a loan by the borrower from the lender but the proceeds will be The house help is in possession.
released to X. X will get the proceeds provided X complies with the documentary • Student. No.
requirements for the release of proceeds. Why not? What is required? If ownership is not required, what is required of a
Again, taking this example, when will the contract be perfected? lender in commodatum?
Upon release of the proceeds to X because that will be constructive delivery of • Student: Authority.
the loan proceeds to the borrower. Authority to lend the property by way of commodatum. What will be the form
COMMODATUM of that authority?
In commodatum you have 2 parties. The lender allows borrower use of a • Student: A special power of attorney.
property. What kind of property? That’s correct. SPA to lend, let’s say, a house and lot by way of commodatum.
We said it can be real property or personal property. Commodatum is basically your freeloader transaction. It has somehow a
On the other hand, the principal obligation of the borrower is to return the cultural premise that we have this habit of borrowing and then returning
exact same thing. So the borrower will have use of the property but the without paying anything.
borrower has to return. This personal property may or may not be consumable The law provides that commodatum is purely personal in character. What does
as long as the borrower returns the exact same thing you will still have a that mean?
commodatum. • Student: It’s only binding to the parties.
Example #11: Fruits of Commodatum That’s the general rule. Remember relativity of contracts, it only binds the
Let’s say the borrower borrowed a bitch because B will use it as a guard dog for 3 months. It parties. So it’s not special. Why is commodatum purely personal? That’s why I
turned out the dog is pregnant. So the dog gave birth to puppies. gave you the cultural background of commodatum.
Will the commodatum extend to the puppies? • Student: Because you have to return the exact same thing.
• Student: No, if there is no stipulation. Example #12: Commodatum
If there is a stipulation?

Week 01 Loan
Let’s say you have a car. Will you lend a car to one of the cleaners? The cleaner unsanitary. The nature of the thing is that only the lactating mother should use
said, “can I borrow your car?” And he’s familiar with commodatum. He says, it.
“by way of commodatum only. I will return the exact same thing?” In commodatum, what is the principal obligation of the borrower?
• Student: No. Because there was no trust established. Example #13
That is what is meant by purely personal. You enter into a contract of Let’s say you have here… this is Day 1 and this is Day 3. So what is the principal
commodatum because you have certain personal considerations. There is obligation? From Day 1 to Day 3, who will have possession?
some kind of fiduciary relation between the borrower and the lender. You just • Student: The borrower.
don’t lend to anybody by way of commodatum. So it’s purely personal in Borrower will have possession from Day 1 to Day 3. What will be the
character. consequence of that possession? What kind of obligation is this? Is it an
Now we go to the consequence. That’s why when one party dies, what obligation to give, to do, or not to do?
happens to the commodatum? • Student: It is an obligation to give.
• Student: It’s extinguished. You’re returning. So it is an obligation to give, to return the thing. And the
With respect to the object? borrower has possession from Day 1 to 3. What is the consequent obligation?
• Student: Only the borrower can use the object. If you are a debtor, you have possession of a property that you are supposed
Except the members of the household can use. Give me an example of to return on a certain day. In the meantime, what other obligation will you
something you will borrow but the members of your household can also use. have? Just for the mere fact that you have possession and have the obligation
• Student: Juicer. If I borrow your juicer, then my sister who’s also a to return,
health buff can also use the juicer because we live in the same house. What are you supposed to do form Day 1 to Day 3?
So what do you mean by member of the household. Your driver is also a • Student: Sir, to take care of the thing.
health buff. Can your driver use the juicer? Take care of the thing. Remember that. It’s a basic obligation. Take care of the
• Student: If the driver has a separate room in our house, he can. thing using what standard of care?
When you say member of the household, meaning under one roof. It • Student: Due diligence.
doesn’t have to be family member. Let’s say a car, if I have a driver, my Due diligence. The borrower has to take care of the thing. If the thing is lost
driver can use it. Of course upon my instruction. Because the driver is a during the commodatum, is the borrower liable to pay?
member of the household. But there’s also an exception. The answer is the borrower will be liable if the thing is lost during the
Even members of the household cannot use if? commodatum.
• Student: If there’s a stipulation. Why?
Yes. So the parties agreed that only you should use. • Student: Sir, the borrower has the obligation to return. He has the
• Student: And if by the nature, you cannot use. obligation to take care of the thing
Example. And if it is lost? If something is lost in the possession of the debtor, what is
• Student: Toothbrush. the inference?
You don’t lend your toothbrush! • Student: He cannot return the thing since it is lost.
• Student: A laptop with confidential files. If the debtor in an obligation to give loses the thing while it is in his
Yeah maybe, possibly. But it’s not strictly possession, the presumption is the debtor is at fault. So, if I just tell you, there
Week 01 Part 03 Alvarez, Alex is a commodatum and the thing is lost while in commodatum, who’s at fault?
Yeah, maybe. Possibly. But it’s not the nature of the computer. Computer can The answer is the borrower. The borrower was in possession and the thing
be used by anyone. This is the only example I can think of: Breast pump – the was lost. The law presumes fault on the part of the borrower because the
one for lactating mothers. Let’s say a lactating mother borrowed a breast borrower was the one in control at the time of the lost. So we just assumed
pump. You cannot allow the members of your household to use it. First, it’s there would have been fault. The burden now will be on the borrower. To
show what?

Week 01 Loan
• Student: To show he was not at fault. • Student: No, sir.

And what can the borrower show to evade any liability? Yes, you will be liable. That’s the ingratitude portion. When the borrower,
• Student: Sir that the loss was due to a fortuitous event. having the opportunity to save the borrowed property, opted to save his own
I will assume that you know the requisites of a fortuitous event. What is the property – then there will be liability. That’s really the exception. The other
most important? Just give me the most important one. one is when you borrow something and then there is an appraisal, which is
• Student: Sir, that the borrower has no part in it. unusual. Have you tried that one? Can I borrow your car? And then you’ll
That the borrower has no participation. That the fortuitous event was not be… oh here’s the appraisal report, just in case it is lost. Well, the law assumes
humanized by the former negligence of the borrower. So the borrower has to that with appraisal there is an agreement to pay even in the case it would be
show that one. If the borrower establishes a fortuitous event, the borrower will useless (?). But I’m not interested in that one.
not be liable. Absolutely. Never. So in commodatum, if an object is lost to a So, general rule, in case there is lost in a commodatum, who will be liable?
fortuitous event, the borrower will never be liable? • Student: The borrower.
• Student: False, Sir. There are exceptions. The borrower. Because there is a presumption that the borrower is at fault. If
What are these exceptions? it is lost through a fortuitous event, you’ve seen the possibility of the borrower
• Student: Sir, I think the list of these exceptions is provided by law. being liable.
The five items? No, that’s not the answer. So even if it is lost in a fortuitous Is there any other instance wherein the borrower will be liable? Say the
event, generally, the borrower… Let’s enumerate these five items. What are borrower is not guilty of ingratitude. It’s the loss of the thing in a fortuitous
those instances? event. Will the borrower in commodatum be liable in case of loss though a
fortuitous event?
• Student: One is when it is used for a different purpose.
In that case, is that a fortuitous event? Will that qualify as a fortuitous event? • Student: Sir, there was no negligence?
Because? There will be? The debtor cannot invoke fortuitous event because It’s truly a fortuitous event.
there will be a concurring breach so there’s already default. So how can there • Student: There may be an instance, Sir.
be a fortuitous event? Second? When? What is that instance?
• Student: If the borrower held the thing for a longer period of time. • Student: When the fortuitous event happened while the borrower was
Will that be a fortuitous event? Again, because there will be default. Next. using the property.
• Student: Sir, an act of ingratitude. So the thing was lost during the use of the property?
Oh, an act of ingratitude. What kind of ingratitude? Ah, so you took up • Student: Yes, sir.
donations. Right? So you know acts of ingratitude that will… And it was lost during a fortuitous event. The borrower will be liable…
• Student: No, sir. • Student: For only 50% of the value.
Ah, not yet. But you’ve taken that up? You’ve not come across it? Take note of that. That is something you do not take into account when you
• Student: In passing borrow.
Okay. So that is an act of ingratitude created by the provision where in the Example #15
borrower will be liable even if the loss is due to a fortuitous event. What kind Let’s say somebody borrows a rest house for a weekend and its hit by lightning during that
of ingratitude was that? Actually, that’s the only exception because the law weekend while in use. Technically, under the law, the borrower has to pay 50%. If there’s no
provides insurance, the borrower can be held liable because that’s a provision in law. So take note of
Example #14 that. If you borrow something, yes, it’s for free. But in case there is lost though a fortuitous
Let’s say you borrowed a care because your car does not work and you parked it in your event, the borrower will be liable for half of the value.
garage. And then there’s a fire. We will assume the fire was a fortuitous event. During the What’s the underlying reason?
fire, you moved your car to push it out the garage so it will not be damaged by fire. So the • Student: The lender lends the property to the borrower under the
borrowed car was damaged. presumption that the borrower will take care of it.
Will you be liable? Example #16 Fortuitous Event
Week 01 Loan
It’s a fortuitous event. There is no issue of care. In fortuitous event there is no The issue there, what I’m driving at, is what constitutes ordinary expense for
concurring fault or negligence on the part of the borrower. So why does the use or preservation? In that example, I don’t think that qualifies as ordinary
law impose a burden on the borrower? Imagine. In the example there’s a rest expense for use or preservation. You borrow a car for a week. You don’t
house worth, let’s say, 10 million - to be used only for the weekend. And expect that you will pay for the replacement of all tires, right? I’d rather get a
during the use, it was destroyed by fire through no fault of the borrower. The rental rather than do commodatum because I will be paying for the new tires.
borrower will now be paying 5 million. But let’s say the commodatum was for one year. After eight months, there is a
Why? Why does the law impose that one? Does that sound fair to you? From need to replace the tires. That may qualify as ordinary expense for use and
whose perspective do you think the law is coming from? preservation. The tires have been worn out by the use of the borrower.
• Student: From the perspective of the lender. Example #19
Yes. Specifically? Let’s say in a separate transaction, that is transaction 1, in transaction 2 lender has to pay
• Student: That he had incurred lost while lending the property to the 1 million to the borrower. Lender already defaulted. Then borrower refused to return in the
borrower. meantime until lender pays the obligation in transaction 2.
I think the basis for that is because it is in gratuitous nature. Kasi you got it for • Student: Sir, the borrower cannot retain the thing since that is not a
free. But there’s too much a cost in there, just for borrowing something for part of the contract. He can instead file a case for specific
free. Take note of that. It’s in the law, there’s no actual case yet. Hopefully, in performance.
the future, you will litigate something of that sort. Always? The borrower has no right to retain the thing if the borrower has a
Example #17 claim against the lender? So, general rule, the borrower cannot retain the thing
So let’s say during the commodatum, the object is a car. The borrower borrowed the car for a to collect something from the lender. Except? There is only one exception. Do
week. After two days, all four tires of the car burst. There is a need to replace all. you remember hidden defect? What is a hidden defect?
Who should pay? • Student: When the lender lends the property without telling the
• Student: Sir, was there negligence on the part of the borrower? borrower that there is a defect in the property and the property
None. incurred lost while in the possession of the borrower, the lender
• Student: Sir, in that case, I think the 50% rule should still apply. cannot impose liability on the buyer to pay damages.
Let’s say it’s due to wear and tear. Example #20
• Student: Sir, it’s still the borrower. Let’s say for example, a pilot borrowed a plane – propeller type. The owner
The borrower? Why is that an obligation of the borrower? Is that the did not disclose to the borrower that every so often one of the propellers does
obligation of the borrower, to pay for the maintenance? What is the obligation not work. The owner failed to mention that one. So during that flight, one
imposed by law? propeller will not work. Pilot figured in an accident.
• Student: To be liable for the ordinary expense and for the use and Will the lender be liable for the hidden defect?
preservation of the property. • Student: Yes, because the law provides that when the lender does not
Is that an ordinary expense? disclose the defect of the property the lender will be liable for the
• Student: I think it’s extraordinary, sir, but because it’s a wear and tear damages incurred by the borrower.
case it should still be the borrower who should be liable. No. Why not? You know what a propeller is? Just like an electric fan. So you
Example #18 know. Can it be a hidden defect? Why not?
The borrower should be liable in that case? So let’s say I lent you a car for • Student: Because the borrower should be able to see…
three days. I know the car had moving tires. So during the first day, all the tires Yes, the pilot, before flying, would do checks. The pilot would see if one
blew up. You had to replace them. propeller isn’t working. It cannot be a hidden defect. It’s like somebody
So you’re telling me you’re supposed to pay the cost? borrowing a car that overheats after a certain distance. The lender fails to
disclose and the borrower proceeded to use the car then it suddenly explodes,
• Student: If I’m aware, sir, then I should pay.
then there’s smoke coming from the hood and you open the radiator cap and

Week 01 Loan
astounded by the boiling water coming from the radiator. The borrower did • Student: Sir, for the wear and tear of the object. He is the one who is
not claim hidden defect and hold the lender liable. The answer is no because supposed to pay for it.
you do not have a hidden defect. When you have a hidden defect, if the defect No, wear and tear… it’s not really the lender. The owner – whoever the owner
is known to the lender and did not disclose it, and the borrower is in no is. Now, when can the lender demand the return?
position to know the defect by exercise of due diligence… if the borrower • Student: Usually, when there is a stipulation, sir, and then stipulation
could have known the defect then there is no hidden defect. This is akin to as regards the period for borrowing has ended. And when the
those voidable contracts by reason of mistake or fraud. A party cannot claim purpose has been accomplished.
mistake or fraud if that party has access to such mistake or fraud by exercise of So, the parties can either agree on a period of the commodatum or has
due diligence. stipulated use. The moment the use has been accomplished or the period has
So in this case, you have a plane that could have been readily checked and the expired, the object has to be returned. What is precarium?
borrower could have readily seen one propeller is not working so that cannot • Student: Precarium is when the lender can demand the return of the
be a hidden defect. A hidden defect is something known only to the lender and object at will. There are several instances given by the codal
unknown to the borrower notwithstanding the exercise of due diligence. provisions. First is when the period or purpose of use is not
When there are two or more borrowers, what is the nature of their liability to stipulated in the agreement. The other one is when the use is by mere
the lender if it’s a commodatum? tolerance. There’s also another one. I’m not sure if it is under
• Student: Solidary, sir. precarium. When there is an urgent need, the lender can demand the
Why? return of the object from the time being.
• Student: It is an exception- No, that’s not precarium.
Why? I know it is an exception to the default rule of joint liability. Why? Week 01 Part 04 Batungbacal, Roberto
• Student: Sir, because they are borrowing as a team. Example #21
Why? The solidary liability relates to what? Let’s say you borrowed a car, by way of commodatum, by mere tolerance by
• Student: It’s the nature of the object they are borrowing. the owner. One day, you were driving from ateneo, going home to cavite, and
So? What if it’s divisible? Let’s say two cars. One borrowed one. The other then the owner was jogging along, so it rained and the owner flagged you
borrowed one. Commodatum. One contract. Why solidary liability bin case of down and told you he needed the car now.
commodatum? Is it precarium?
• Student: Because of the nature of the obligation. • Student: Yes.
Because there are two persons borrowing. Why would you have to make it a No liability?
burden on the lender? So, the lender can demand from any of them because it • Student: There is liability under Art. 19 of the Civil Code – The abuse
is solidary. Back to the example. What happened? We are done with the of rights doctrine.
obligations of the borrower. Does the lender have any obligation in In precarium, the lender can demand the thing anytime, generally without
commodatum? liability. A possible liability arises from the abuse of right.
• Student: Yes, sir. To disclose the hidden defects, sir.
Yes. What’s the primary obligation of the lender in commodatum? SIMPLE LOAN
• Student: It’s to deliver the object. From now on, when we say loan, it refers to mutuum/simple loan. What is the
Yes. To lend the object of the commodatum. And then you have that object?
obligation to disclose any hidden defect. • Student: Money or consumable object/fungible. With an obligation
• Student: Another obligation sir, is if there is any deterioration, he is to pay an equivalent.
the one that is supposed to pay. What if the object is non-consumable?
What expenses? • Student: It is a barter, according to the Civil Code. The Law of Sales
will apply.

Week 01 Loan
Example #22 • Student: There is a law that says when the check is cleared and
Cites example of a barter. Car 1 for car 2. Different cars. This will not be a delivered then it could be considered as payment.
loan, because it’s a non-consumable. It is a swap. Because payment was effected upon encashment. RA 7613. So GR is that
I have an example of a loan of a consumable. payment by check is not payment by legal tender. There is jurisprudence that
• Student: When you loan spam. The payment of the borrow has to be payment by manager’s or cashier’s check could be considered as valid payment.
an object of the same kind, quality and amount. I guess another can I’d rather follow follow the general rule, but if you are confronted with such a
of spam. situation, just know you can also use court decisions as authority.
Example #22 So let’s say you have this example. 10M will be paid on day 3. Will interest be
due?
Let’s use money. Lender lent 10M. Payment should be on the 3rd day. On the
due date, can borrow pay 50% and the other half the next day? • Student: No, because there is no agreement in writing to that effect.
Can the lender refused payment? Example #23
• Student: Yes. Because of there is a provision in the civil code which 10 million 10 years from now, if you factor in interest, will be 12 million. On
states that a lender cannot be compelled to accept payment when it is due date. Borrower pays 10 million. Lender says that’s not enough, because the
not paid in full – Integrity of payment. Payment should be complete value now is larger. The 10M on due date is let’s say 7 million only 10 years
unless there is an agreement or law stating otherwise. ago.
On due date, can borrower pay in gold worth 12M? Is lender entitled to If you’re given 10M today and 10M in the future, you’re better off under what
refuse? scenario? 10M now or 10M years from now?
• Student: Lender is entitled to refuse, because of the rule on identity • Student: 10 million now
of payments. He must pay the prestations mandated by the payment. Correct. Because your 10M now is definitely more valuable down the road
Can the borrow insist on paying in US dollars? than 10M 10 years from now.
• Student: If there is a stipulation. If none, then the default rule is that Can lender persist that the borrower pay him a larger sum on due date since
it cannot be used. the value of what he lent increased due to inflation?
What should be used? • Student: No.
• Student: What is legal tender in the PH. Philippine pesos. Can the lender insist on being paid the amount lent using the value on due
Borrower can pay in pesos and that will be legal tender? date, invoking extraordinary inflation?
• Student: It is a general rule. The BSP circular gave exceptions so it • Student: No. The extraordinary fluctuation provision (aritlce 1250) is
states that coins of 1, 5 or 10 pesos, payment can only be up to a dead law. Difficult to invoke. There must be a declaration from the
P1000. BSP. The standard set in case law is very high. Must be similar to the
If it exceeds P1000, the creditor can refused, because? german depression. The value of the currency was going down by the
2nd. If they borrowed money, they had to spend it immediately,
• Student: It is not legal tender.
because if they waited a little longer, the value of the money would
Can borrower pay by check?
have decreased, hence prices would go up.
• Student: It’s not considered legal tender. So a loan is by default gratuitious, because interest will be due if there is an
What kind of check? Manager’s check? agreement in writing. Is there an instance wherein interest will be due despite
• Student: I think it’s also not allowed. the lack of any written agreement?
What’s a manager’s check? • Student: If the borrow is in default, meaning when there has been
• Student: It is a check drawn by the bank against itself. demand.
It that legal tender? Let’s assume borrower default. How will interest come in? Interest will accrue
• Student: No sir. when?
There is no way? • Student: From the time of demand until actual payment.

Week 01 Loan
What is the interest rate? • Student: Valid if in writing.

• Student: 6%. If 2%?
Let’s say the due date was 2010. • Student: Yes.
• Student: Interest will be 12% until the time it was changed by the If 3%?
BSP circular, which is in 2013. • Student: Yes.
The rule is, if there is no agreement as to interest, no interest due. If borrow You don’t have a threshold? Is there a cap right now?
default, borrow will pay interest by damages, pursuant to the legal right, which • Student: No cap.
right now, is 6% per annum. There was a time it’s 12%. Remember the cut off Where do you find the cap?
date! • Student: If it’s unconscionable.
So for interest to accrue, there must be an agreement in writing. The written
Example #24
agreement, is that a formal requirement? Validity or enforceability?
Based on jurisprudence right now, if you hit 3% a month, or 36% per annum,
• Student: Validity for interest. If not in writing, it is void.
you’re in the danger zone. If you’re below this, it would be valid. However,
Is there a formal requirement for a loan contract?
setting that aside, how do you validate an interest agreement, to make sure it
• Student: No sir. stands judicial scrutiny? Let’s say it’s 5% per month.
Even if it’s a 1 billion loan? Notwithstanding the provision stating transactions How would you validate it?
exceeding 500 Pesos should be in a public instrument? You have to go back to the negotiation stage. How they acted during that
• Student: Yes. phase. The quality of the agreement. Who advised them, what considerations
Let’s use statute of frauds. Let’s say it’s commodatum involving real property. were factored in, etc. In which case, in case of litigation, you can show the
Should it be in writing to be enforceable under the statute of fraud? parties truly understood the interest rate stipulation, so no one can back out of
• Student: No. Statute of frauds cover only sales. that. Show how the stipulation was reached.
So what about the provision stating transactions exceeding 500 Pesos should What’s the purpose of the interest right?
be in a public instrument? • Student: Because of the fluctuating value of money sir. Like when 10
• Student: Not a formal requirement. It is merely for convenience. million now is better than 10 million in the future.
So there must be an agreement in writing for the payment of interest. So the It’s the cost of money. It’s the fee. That’s why you stipulate an interest.
parties agreed on interest of 1% per month. Valid?

Week 02 Loan
Week 02 Loan
16 August 2017
Week 02 Part 01 Acuyong, Sidartha No. Because there was no agreement in writing on the payment of the interest.
There will be no interest. The 10 million will be paid five years after. If you
INTEREST look at this, the value of 10 million five years down the road, definitely lower
Just a recap. When you have a loan contract, you have a lender and a borrower. than 10 million now because of the present value of 10 million will be way less.
Lender would lend 10 million. Borrower on due date would pay the amount. Let's assume that for there to be an equivalent payment, this should be 15
So it's a contract. You have two parties consenting to the object and the cause. million to account for the real value of the peso after five years. There is now a
From the prospective of the lender, this is the cause - the payment of the decline of the payment of 10 million. This 10 million is not really the same on
borrower of the loan on due date. You learned somehow in your Oblicon who Day 1. Can the lender now ask for an adjustment without any payment of
should pay the loan on due date. The answer is it should be the borrower. If a interest? Adjustment because of extraordinary inflation?
third party pays, technically the lender can refuse payment. But, normally, as a The answer you've learned is no because extraordinary inflation in Art. 1250 is
fact of the matter, if a third party pays the lender, the lender will accept. Unless basically dead. It's very difficult to invoke because it requires a declaration of
there is some red flag in the payment like it's a possible money laundering the Bangko Sentral ng Pilipinas that there is an extraordinary inflation. At the
scheme and that would be a basis for refusal. same time, the standard set by jurisprudence for extraordinary inflation is very
What would be the consequence? hard to fulfill. The jurisprudence requires, citing the German experience in the
The third party can pay but the third party's rights will be defined by whether 1930s, that the peso value should decline by the minute for it to be classified as
the borrower knows or consents to the payment. extraordinary inflation. Without an agreement on the payment of interest, the
If the borrower knows the payment and does not object or otherwise consents lender will be technically getting less in terms of real value.
to the payment, then what will happen? Example:
X will be subrogated to the rights of the borrower. If there is a mortgage, X We know this practice of office workers or friends contribute every month 1000 each. It's not
will now be the creditor as well as the mortgagee. a contest because it's called paluwagan with 24 persons participating. The first guy will get
However, if the borrower was unaware of the payment and did not consent, 24000 on the first month, second and so forth. There is no interest. It's a useless exercise.
what will be the consequence? It's useful if you're maybe numbers 1 to 10. Because if you're number 24, you are saving
X will still be entitled to reimbursement but only to the extent that the twenty-four thousand to get it twenty-four months down the road and it's not the twenty-four
payment benefited the borrower. thousand you save because there is no interest at all. The one will benefit will be basically the
Now, on the other hand, who should be paid? first guys who get the amounts because they are basically borrowing without interest. In case
As we learned, the lender should be paid. No other. The lender or any you encounter that practice, you get 1, 2 or 3. You participate immediately because it's
authorized representative of the lender. You've learned there are other interest-free loan. If there is no interest, there's no accounting for the cost of money.
instances when payment to a third party may be valid. That is why it is important that if you have a loan transaction, there must be a
Example: Payment to an assignee of the lender. Payment to a third party who subsequently stipulation on the framework of the interest in writing to account for the cost
acquires the loan obligation from the lender can be a valid payment. of money.
We learned also what should be the payment by borrower on due date? What is that cost of money?
Since it's a monetary obligation, borrower should pay, in absence of It's basically the cost of the lender in allowing the borrower to use the loaned
stipulation, Philippine currency, which is legal tender. You learned last time amount during the term of the loan.
that not all payment in peso will be valid payment. Coins are legal tender only Example:
up to 1000. So technically, lender can refuse payment in coins if it's not I am a lawyer. I have a bill to be paid by the client for 5 million. The client does not pay.
considered as legal tender. He makes the payment for several months. In the meantime, I am incurring overhead one
What if, let's say, the period between Day 1 and Day 2 is five years. So here, million a month to pay employees, rent, etc. and other costs. But I don't have the money.
will interest be due? What will I do? I will borrow from the bank for 2 million to make sure I fulfill my

Week 02 Loan
obligations monthly. I will pay interest. In the meantime, my client delays. That client will When was that effective?
have a free ride. The client basically is using the money in the meantime without paying • Student: July 2013.
interest while I shoulder the cost. It's good to have a stipulation on late payments. If there is That’s good enough. July 1, 2013.
late payment, interest will accrue to a given rate. It's difficult when you're practicing. You Don’t forget that one. When you are in practice, you will encounter cases like
rarely see that among lawyers or professionals. You have an engagement letter wherein there is that. In cases involving transactions before 2013, then you have to use a two-
a provision saying, "In case of failure to pay on due date, interest shall accrue." It's rarely tiered interest rate. Twelve percent (12%) before July 1, 2013 and six percent
done but it can be done. (6%) onwards. There’s a likelihood that the 6% will be changed depending
There should be a stipulation on interest. There should be a stipulation in on… I expect that it will not be steady at this time. There will soon be an
writing for interest to accrue. adjustment of the legal rate.
In this example, interest will not accrue because there is no agreement in You have instead a contract of sale. Seller sells property to buyer on Day 1. On
writing on the payment of interest. Will there be no instance where the Day 2, buyer should pay the price of 10 million. Buyer defaults on day 2. Seller
borrower is liable to pay interest at all? sued to collect, an action for specific performance. Seller was successful. What
• Student: There is, sir. should be the award of the court?
What would be that instance? • Student: The court shall award damages of 6%, sir.
• Student: In lieu of damages. If, for example, there is default by the Only?
borrower. • Student: Six percent on the 10 million.
And then what will happen? The award will be six percent of the 10 million?
• Student: Then the borrower shall be obliged to pay for interest as • Student: Six percent from the moment of demand up to the finality
damages sir. of the decision that the buyer should pay and another interest from
How? the moment of finality…
• Student: According to the Civil Code, sir. Wait wait wait. The default happened in 2010. The award was made 2011.
I know but how will the lender reach the point wherein the borrower will be How do you compute interest rate?
liable to pay interest by way of damages? • Student: From 2010, from the demand up to the final judgement,
• Student: When there is demand and the borrower has defaulted. there will be an interest of 12%.
So there's default, so automatically the borrower will be liable to pay? 12%! Here you have 12%. After 2011?
• No, the lender can file a case against the borrower. • Student: From 2011 up to 2013, then if it’s not paid until 2013, then
The lender has to file. Let's say borrower defaults on Day 2, lender sues for it shall be 12%.
collection, the award, if lender is successful, will be the principal (10 million) You want payment? Payment was made only 2015.
plus interest by way of damages. At what rate? • Student: Then there shall be damages from 2011, finality of
• Student: 6% sir judgement to 2015. In 2013, the interest rate shall be reduced to 6%.
Let's say the award was made in 2012? So 6% from July 1, 2013. Why?
• Student: 12% • Student: Because from 2010 to 2011, there must be interest because it
And it's paid only today? is considered also a forbearance of money, even though it is of a
• Student: If it's paid only today... contract of sale.
The award was made 12%, final and executory award, on January 1, 2012. Forbearance of money. This is a forbearance of money? It’s the same!
What would be the rate? • Student: Because the buyer is obliged to pay…
• Student: From 2012 to 2013, it must be… Yes, I know. So therefore, your sense now is every payment obligation,
The whole 2013? monetary obligation, as long as it requires payment of money, regardless of
• Student: Until the effectivity of the BSP Circular, sir. For loan or whether it is a loan or a sale, it’s a lease, for example, the interest rate will be,
forbearance of money, the interest rate is 6%. before July 2013, 12%.

Week 02 Loan
• Student: No sir Right now, it is easy to remember the interest because they are the same. For
That’s what you said! loans and forbearance of money, it is 6%. For any other obligation, it is 6%.
• Student: I retract my answer. But you have to know what the statutory basis for each because these rates
You retract your answer? may change. Somehow, the Civil Code may not change. It is there. Nobody
• Student: From 2010 to 2011, I think it must be 6% bothers to adjust the interest rate there.
Why?! In Estores vs. Supangan, there was a sale of land. The seller conveyed land
to buyer but the seller should fulfill certain conditions. Clearing the property of
• Student: Because it is the interest required as damages for non-
any occupants and structures and getting certain government approvals. Then,
payment in case of a contract of sale.
there is buyer who is supposed to pay the price. Buyer paid the down payment.
And your authority for that is?
Seller defaulted on the payment of the conditions. The sale was cancelled.
• Student: Civil Code. Article 22. There is a thing that said an interest Seller now is obliged to return the down payment. Buyer sued because the
for damages is 6% the appropriate interest. seller did not return the down payment. There is default on the return of the
If you have a loan and there is no agreement in writing of the payment of down payment. Buyer sued and asked for the return of the down payment.
interest, interest will not be due. However, if the borrower defaults, the The question now is what should be the interest rate.
borrower will pay interest by way of damages. There is default. The Let’s assume the award was made after July 1, 2013. The answer will be simply
consequence will be interest by way of damages. At what rate? If before July 1, 6%. The question is what is the statutory basis of the 6%. BSP Circular or
2013, it is twelve percent (12%) per annum. After or from July 1, 2013, it is six Article 2206? This will be a loan or forbearance of money. That was explained
percent (6%) per annum. What is the statutory basis? The BSP Circular setting in Estores v. Supangan. The obligation of the seller to return the down
the legal rate for loans and forbearance of money. When your transaction payment was a forbearance of money because the buyer allowed the seller to
involves a loan or forbearance of money, and you speak of legal rate, the legal use the down payment in the meantime prior to the failure to fulfill the
rate will be the one imposed by the BSP. Originally, it was 12% but reduced condition. When the seller failed to return, there was an obligation to pay
effective July 1, 2013 to 6% per annum. interest by way of damages or an obligation involving forbearance of money.
Example: This happened before July 1, 2013, the interest rate would be 12%.
A contract of sale. It is not correct when you say immediately that it is a sale, the rate should be
On Day 1, seller sells property to buyer. Article 2206 because the specific obligation of a party in a non-loan contract
Buyer supposed to pay on Day 2. can involve a forbearance of money as illustrated in the case of Estores v.
Buyer defaults on Day 2. Supangan.
Buyer defaults on January 1, 2010.
Seller sues for specific performance and got an award on January 1, 2012. Week 02 Part 02 Biliran, Cheza Marie Diestro
Actual payment was made on June 1, 2015. Apo Fruits Corp. v. LBP
The seller would be entitled first to the price because it is collection of the price, 10 million. • Student: Apo Fruits and Hijo owned five parcels of land and they
Because there is default, damages would be due. There would be interest by way of damages. offered to sell these lands to the government under the
The question now is at what rate? The answer is 6% based on Article 2206 of the Civil Comprehensive Agrarian Reform Program.
Code. Because this is not a loan or forbearance of money. It is a sale. That is the rule. Also So Apo voluntarily conveyed the lands to the government for the purpose of
from the default, the damages would accrue at the rate of 6% per annum. But there was an CARP.
award on January 1, 2012, final and executory. This now is a monetary award so whatever • Student: They were negotiating for just compensation.
you compute this, 10 million plus the interest. The interest rate now will become 12% per Because when there is voluntary sale to the government, there should be
annum because from January 1, 2012, it became an obligation to pay money. Therefore, the payment of just compensation. Was there payment? How much was the total
interest rate applicable will be 12% per annum again based on the BSP Circular. Then, just compensation?
from the cut-off, July 2013, the interest rate will be reduced to 6% per annum. • Student: Around 70 to 80 Million.
Was there an initial payment?
Week 02 Loan
• Student: Yes. it is actually a sale. It’s Apo selling to the government, and the government
Why? What’s the purpose of the initial payment? paying a price-just compensation. This is not an Estores v. Supangan situation.
• Student: So they can take the property. What should you follow now?
Yes, this is just like expropriation. The government takes the land and You follow the Apo case because it is an en banc decision.
distributes it under CARP. Eventually, there is a balance. What happened to What’s peculiar about this en banc decision?
the balance? SC reversed its decision en banc upon an MR. That decision was eventually
• Student: They paid the initial payment. Apo filed an action in court affirmed. There was a subsequent MR from the government, but the decision
claiming that the payment was not enough and not in accordance was affirmed. You have here a situation where the SC could have ruled that
with the FMV. The court ruled that Apo was correct, that the just the legal rate should be 6%, but they did not. Of course, this was the interest
compensation should have been much higher, billions. prior to July 1, 2013. So, after that, there’s no difference. But before July 1,
The point there is that Apo conveyed land by way of voluntary sale to the 2013, the difference was around 600 Million. Strange, but it’s there. So if you
government, and should get just compensation. Govt paid initial payment, but encounter that, you can go back to the basic principle that if it’s not a contract
not pay the balance. Eventually, this amount was fixed by the court. There was involving a loan or forbearance of money, you apply the legal rate of 6% based
nonpayment of the balance. on Article 2206.
Apo sues, and it should get the principal amount and payment of interest by • Student: Is it 6% because it is a contract of sale, and in Apo is 12%
way of damages because there was default. The question is, AT WHAT even though it is not forbearance of money?
RATE? No, the Court said that it is a forbearance of money, otherwise there will be no
• Student: 12%. justification for applying the 12%.
Why? Is this a forbearance of money or a contract of sale? What is special about this case is that it’s an expropriation case. In the bar
exams, you can say that if it’s an expropriation case, it should be 12%.
• Student: It was a forbearance of money.
But it’s not a forbearance of money right? It’s a sale, conveyance of land in • Student: Will there be a difference if there is a judgment?
exchange for a price. If there’s a judgment, it now becomes a monetary obligation. So the interest
rate will be BSP Circular-based. After the judgment, the interest rate will be
• Student: It was a forbearance of money because Apo was deprived of
12% of whatever is in the BSP Circular. But before that, it should have
the use of the property…
followed Art. 2206.
In the contract of sale, the buyer is able to enjoy the property and the seller is
Let’s say you have a loan for 10 Million. Interest of 10% per annum. Lender
not able to use the money, but the rate is only 6%. Why is it 12% in the case of
will pay after 2 years, principal and interest. How much will be paid?
Apo? How much was the interest in the end?
• Student: 10 Million for principal, 2 Million for interest.
• Student: 1.2 Billion. Here sir, it was not a sale.
Is it simple interest?
It was basically a voluntary surrender, which is like a sale to the government
under CARP. • Student: Yes, it is simple interest. For there to be compound interest,
there has to be a written stipulation or agreement.
• Student: However, Apo did not approve of the just compensation.
If there’s compounding, what will be an example of a stipulation?
But that was already fixed by the court. The only question is at what rate
The borrower shall pay interest at the rate of 10% per annum computed and
should the interest be. What should it be?
compounded monthly/quarterly/annually.
• Student: 12%. How does compounded interest work? How much does lender have to pay?
How much was the interest in terms of amount?
• Student: 10 Million as principal, plus 1 Million for the first year, plus
• Student: 1.2 Billion. 1.1 Million for the second year.
If you apply the rule that it is not a K of loan or forbearance of money, the When you have compounding, the accrued interest will become part of the
interest will be 6% or 600 Million. Therefore, the government will lose 600 principal and earn interest. If there’s no agreement in the compounding
Million. The SC said that the legal rate should be that for K of loan or interest, will accrued interest earn interest at all?
forbearance of money. But if you look at the basic structure of the transaction,
Week 02 Loan
Example: Q: What’s the difference between Solidbank vs PNB v. Manalo?

There’s default of 12 Million on Day 1. • Student: in latter case, the discretion as to payment of interest lies
Day 2 is the filing of the case. solely on the bank, however in the instant case, even though there
Day 3 is the awarding. was an escalation clause to increase the interest, the borrower can opt
From Day 1, there is interest on the accrued interest. Interest will continue to accrue. If you not to pay the interest.
file a case, there will be compounding based on the Civil Code. So there are only two Q: how much was involved in the case of Solidbank?
instances when compounding is allowed. • Student: P60M
First, is when the parties agree and the second when there is a judicial demand. Let’s say Borrower borrows 60M for construction. First year, borrower does
Who determines the interest in a loan contract? not have the P60M, but he has properties, so this loan was secured by a
Basically, it is the lender setting the interest rate to account for the costs to the mortgage. So borrower used the money to construct and develop property for
lender of the lending of the money to the borrower, but the parties should the first year, and completion will happen in 2 years. In the 2nd year, the bank
agree. increased the interest rate from 8% per annum to 16% per annum. What
How will you set the interest rate and what will you consider? should the borrower do? The borrower now has double the interest cost. Does
Risks, default, credit-worthiness, overall economic and financial conditions, the borrower have an option to reject and prepay?
opportunity costs. The SC said that this was a valid escalation clause, and yes, the bank can adjust
PNB v. Manalo unilaterally, but the borrower ought to or must consent. And if Borrower
Sps Manalo applied for an all-purpose credit facility from PNB for the purpose rejects, B has option to pre-pay.
of the construction of their house. There was a credit agreement whereby PNB So the question now is that is this realistic or possible for the Borrower?
agreed to lend 1 Million. In exchange, the obligation of Manalo was to pay the • Student: No its not realistic. I don’t think the borrower would be able
principal and the interest. However, no specific rate was provided for in the to pay the prepayment agreed upon plus the interest agreed upon.
agreement even though the parties agreed that interest will be paid. Therefore, So, let’s start here, normally if you have a long-term loan contract, you would
the rate was 6%, the default rate for a loan or forbearance of money. Payment have an escalation clause, or a periodic change in interest rates, normally
of the loan was secured by a real estate mortgage. In the subsequent years, the annually or quarterly. Here in the case of PNB v. Manalo, there was a loan that
credit facility was increased to 7 Million and there was a supplemental ballooned or was increased to 7M, and there was also an escalation clause. This
mortgage by Manalo. There was also an agreement that payment of interest escalation clause stated that the interest rate shall be “the bank’s prime rate
will be made every month, but Manalo defaulted. Several demands were made plus the spread”.
for the payment of interest. PNB filed a case for collection of sum of money. What’s this prime rate?
To make the long story short, PNB would be entitled to collect the principal. It means the rate given by the bank to valued clients who are not credit-risk
As to the interest, originally it was just the legal rate. Over the years, PNB clients. So, let’s say ordinary buyers will be paying 10% per annum, a prime
unilaterally increased the interest rate on the basis of the escalation clause rate would be as low as 2.5% per annum if you are a valued- client of a bank or
provided for in the credit agreement. However, according to the BSP circular, considered as a non-risky client by the bank.
for an escalation clause to be valid, there should be a counterpart descalation What’s the spread?
clause. In this case, the clause provided that the interest shall be based on the It’s the add-on interest to account for the risk related to the borrower. So if
bank’s prime rate plus the applicable spread. you’re a borrower who has a risky business or is deemed likely a default risk,
What’s wrong with the parties agreeing on a formula? We know the prime rate your rate will be higher. The margin for the risk accounts for the risk related to
and we also know the spread. the borrower or the transaction.
• Student: This violates the principle of mutuality of contracts because So there’s a spread of let’s say 3.5%. So there will be an adjustment, so this rate
Manalo was not notified and they did not have the chance to agree or can adjust depending on what the bank’s prime rate annually is, but the spread
reject the offer. would also change. It’s basically the bank determining the prime rate, as well as
Week 02 Part 03 Catipay, Ralph Ronald the spread. So, although it looked like a formula, it’s actually discretionary on
Solidbank Corp. v. Permanent Homes the part of the bank. So the SC said, this violated the mutuality of contracts
Week 02 Loan
because the bank determined an essential term of the loan contract. The bank So take note of this. It would have been better if the parties could not have a
increased the interest rate without the consent of the borrower, in this case the fixed rate. Normally a lender would not agree to a fixed rate because of the
Manalos. There’s a long line of PNB cases involving these situations. In other fluctuation in the cost of lending. So the borrower, would want an interest rate
PNB cases, the clause would state like this “the bank shall periodically adjust that would be adjusted periodically. So how do you adjust the interest rate
the interest rate after considering prevailing market rates, reserve requirements periodically, would it be quarterly or annually? PNB had the right idea to have
of bank, and other factors.” So it would seem that it’s not discretionary but it a formula, but it should be a formula whose factors DO NOT DEPEND
really is! Because the bank would consider those factors but eventually be the SOLELY ON THE WILL OF PNB.
one determining the interest rates. So, this provision then would violate the
mutuality of contracts. Example #1: Valid Escalation Clause
Now, there was an issue in Solidbank, and a student who recited earlier So for example, the usual is you have a reference rate or benchmark, and then you have a
mentioned about a notice given by the bank to the borrowers. Did this notice margin. This is how you set interest. So you have a loan contract, and you want an interest
cure the defect? rate that is not controlled by 1 party. So you can have a reference rate or benchmark plus a
No! it was not the notice, and even if said notice was given, it would not cure given margin, let’s say your reference rate will be for example, the traditional reference is the
the defect, because what’s required is for the borrower to CONSENT to such Treasury bill (T-Bill). TBills have maturity dates of less than 1 year, I think its
interest rate change, and this notice by the bank would not amount to a 91/182/364. Why these numbers? Because it’s supposed to be divisible by 7, so the
consent to the borrower. maturity date should end on a business day, supposedly. So that’s the reference rate? Why is
But there was a notice given, so does this mean the borrower should object or this a benchmark? The answer is because a TBill rate is basically a borrowing by the
reject? government. So the govt, by selling TBills, is actually borrowing from the public and there
The SC said that “silence (in this case by the borrower) does not mean would be a bidding, on what the rate shall be. So, there will be a rate, and let’s use the 91
consent”. Meaning, in a context wherein a party HAS NO OBLIGATION day Tbill rate. Let’s say this is 2% per annum. The margin as I said will account for the
TO REPLY, SILENCE CANNOT BE INTEREPRETED AS CONSENT. risk related to the transaction as well as the borrower’s. Let’s also say the margin is 3%. So
So the SC said that the Manalos were under NO OBLIGATION REPLY TO you now have a formula. What will the interest rate in the escalation clause provide? The
THE BANK’S NOTICES, and even if the Manalos paid the interest based on clause would let’s say state “The interest rate shall be adjusted quarterly based on the most
the increased/adjusted rate, the Manalos were NOT ESTOPPED to question recent rate for 91- day TBills plus 3%”. So every quarter, the parties will just check what
the unilateral adjustment of the rate, which was in violation of the mutuality of the most recent 91-day TBill rates are, and just add 3%. So it would be an automatic
contracts. adjustment based on factors not involving the discretion on either party.
Now let’s go to this case of Solidbank, basically the first part of the escalation This is a VALID stipulation since this complies with the MUTUALITY PRINCIPLE
clause was the same as the PNB case. The bank could adjust the interest rate, it of contracts.
could be upward or downward adjustment. But there was an additional clause, Now of course in certain cases, banks would be make sure that they get at least
that the borrower, upon receipt of the notice of the adjustment of the rate, a minimum, meaning they will have a floor rate a.k.a. the lowest rate, let’s say
could either accept the adjusted rate, or reject said adjusted rate and pre-pay 5.5%. So using the provision in the escalation clause aforementioned, there is
the loan. The SC said that this clause VALIDATED THE ESCALATION an addendum which states “in no case shall the rate be lower than 5.5% per
CLAUSE because now there was an OPTION on the part of the borrower to annum”. So if you have this situation, automatically the rate will be 5.5%.
reject the adjusted rate. So the SC said that there was no violation of mutuality, (since the rate aforementioned only amounts to 5% flat). Banks really want to
because if the borrower would not accept the adjusted rate, then the borrower have discretion on the interest rate. This case of solidbank I think, was a bank
can just pre-pay. BUT AS I SAID, this option is ILLUSORY. And why is this industry lobby, because right now if you borrow, you will still encounter the
illusory? I’ll give you an example. Let’s say you have a 10 year loan, in the first PNB clause, where the bank would determine unilaterally the interest rate.
year most likely you do not have the money to pay, and the rate was doubled When this was introduced or validated by the SC, a number of banks added an
after the 1st year. Would you really have an option to pre-pay? Not likely, and “additional clause”, that should the borrower reject the interest rate, the
the borrower (you) would just assume or accept the higher interest cost, borrower should pre-pay. So now this one was meant to be or considered to
because it would be very difficult to borrow somewhere else. But it’s there. be non-violative of the mutuality principle in contracts. But if you look at

Week 02 Loan
PNB, there was another citation that which stated that “the interest rate determination of present value. So in compounding, it is prospective and easy,
approximated the market rates”, which should not really be the basis, because because you will know the interest rate from the start. The problem in present
the PNB rates approximated the market rates at that time. So the real value on the other hand is the determination of the discount factor or rate. So
distinction therefore, is the OPTION OF THE PART ON THE you have to understand that.
BORROWER TO PRE-PAY. THIS WONT APPEAR IN EXAM, BUT IS SOMETHING YOU CAN
BRAG ABOUT TO YOUR FRIENDS. (for what)
PRESENT VALUE OF MONEY
You have to understand the concept of the present value of money. So let’s INTERESTS
say you have year 1 up to year 5. Let’s say you want to receive P1000 on year 5. So just a recap, interest will be due only if the parties agree to the payment of
And you want to sell that P1000 today. So we will assume that you will interest in writing. Even if there is NO agreement, interest will be due BY
definitely receive P1000 on year 5, and you want to sell that P1000 TODAY WAY OF DAMAGES in a loan or forbearance of money at the 6% per
and you want to get cash. How much should you get today? annum as per BSP Circular (this 6% legal rate for loans/forbearance of money
Definitely not P1000, because P1k today will be more valuable than P1k 5 yrs is effective only from july 1, 2013 ; before this date, the rate was 12% per
from now. So you have to find the present value of this P1000 5 yrs from now. annum). On the other hand, if there is a transaction NOT INVOLVING
How do you find it? loan/forbearance of money, and there is DEFAULT, interest will also be due
The formula for finding the present value is: but BY WAY OF DAMAGES. How much is the interest rate here? The
PV = C / (1 + i)t answer is 6%, as per Article 2209 of the civil code. And you can see this
t = the number of years, situation in the Case of Vitarich.
i = the discount rate or factor. Vitarich Case
In Vitarich, it was a case involving a sales contract. So the applicable rate was
Example: Present Value of Money 6% to measure damages, based on Art. 2209 of the civil code. BUT, if there is
So let’s compute, C here is P1000, and let’s assume that “i” (discount rate) is at 10% per already an award, you always use the legal rate for loans or forbearance of
annum. So its P1000 divided by (1.10 raised to the 5th power), and eventually you will get money (6% annually). Because the award here becomes a monetary obligation,
P620. 921. So, the problem in computing present value is knowing how to discount the so the legal rate of 6% annually in the BSP Circular will be used. Of course, we
income stream. So if youre receiving P1000, 5 yrs from now, and you want to sell it now, the are assuming that there is NO AGREEMENT, but if there is an agreement as
value, if you have a discount rate of 10% per annum, will be P620.921. to the interest rate, then follow said agreement. The agreement will trump all
COMPOUNDING INTEREST the other rates.
Of course, if the rate is high, what can the court do?
Compounding on the other hand is this. If the rate is characterized as unconscionable, the court can reduce the interest
Example: Compounding rate BUT NOT REMOVE THE INTEREST ALTOGETHER. Court can
Example, in a span of 5 yrs, with interest at 10% per annum. The loan is P620.91, the only reduce, if it finds the rate as unconscionable.
one above. So in the first year you multiply P620.91 with 1.10 ; in the 2nd year you What’s unconscionable?
multiply the product in the 1st year with 1.10, and so on until the 5th year. After the 5th Based on jurisprudence, if you hit 3% per month, or 36% per annum, then the
year, you will eventually get the final answer of P999.98, that is already equivalent to court will deem it as unconscionable, but if its lower than this, then such lower
P1000. interest rate has a better chance of being validated. This is based on current
Why am I teaching you this? jurisprudence. Of course, the best way to defend an interest rate is just to show
So that you’ll understand that basically, compounding is discounting in reverse. the process by which the parties agreed on the interest rate, like how they
And where did you see compounding? negotiated, or who advised them during the transactions, then you can show
In the case I assigned, in the case of “Heirs of Trias”, the separate opinion of now the QUALITY of the consent they gave to the interest rate. This then
Justice Leonen. Although it was illustrated as present value, what he was doing would take care any question as to the reasonableness of the interest rate.
was actually compounding. If you reverse the process, you will have the

Week 02 Loan
Now, for compounding of interest, this can only be done if the parties agreed definitions, whose purpose is to make sure that all the parties throughout the
in writing on the compounding of interest. The formula for this compounding contract are using the same words and meanings.
should be, “interest shall be compounded” and then you add the frequency of So what terms are important here?
the compounding, either its being compounded monthly, quarterly or annually. • A “commitment” here means the amount to be lent by the lenders.
Now, even if there is NO agreement on compounding, ACCRUED That is why in certain transactions, just for the participation of the
INTEREST shall earn its own interest at the agreed rate, OR the legal rate as lender in the transaction, there is a payment to the lender. A lender is
per art. 2212 of the Civil Code. From when? Answer is from the date of paid money just for participating in the loan transaction.
judicial demand. Take note. On other hand, which is interest by way of Interest rate, in this rate we have a fixed rate of 5 years. If you are a borrower
damages, will accrue beginning the date of default. Compounding, in the and you are not contented with the rate. You can set a formula to fix the rate
absence of written agreement, will happen only upon judicial demand meaning in the stipulations.
from the time an action is filed by the relevant party. Here we have two payment dates. Interest are to be paid quarterly. But the
Week 02 Part 04 Contrereas, Cesar Clarence principal would be paid at the end of the 5th year. Sometimes it’s referred to as
(NO Recitations here, only discussed by San Pedro.) a balloon payment, wherein principal is only paid at the end of the term of the
loan.
LOAN FORMS Section 2 contains the provisions on the lending. So first the loan. The
This is a sample loan contract, a typical long loan contract. The moment you lenders agreed to lend and allowed draw downs, which is a fancy way of saying
understand a thick loan contract like this one you’ve basically seen all loan release of the loan proceeds, from their respective commitments up to the
contracts. maximum amount of 600 millions on any business day during the availability
Loan contracts will normally have standard provisions, but depending on the period.
transaction will have special stipulations. The availability period is the period where the draw downs should be made
Of course you start with the title of the loan contract and what we have here is by the borrower. The borrower will have a definite period wherein he can draw
a Syndicated loan agreement. It is called a Syndicated Loan agreement from the facility.
because you have multiple lenders lending; because they are a group of lenders. Take note the lenders at anytime prior to the release of the loan proceeds can
When you do contracts you should learn to define terms that will be used withdraw from the transaction. Why is this necessary if you are a lender?
throughout the contracts, that is why we have “definitions” here. Here we Because from the date of the perfection of the Contract to lend to the date of
have eight lenders, and one borrower, Ayala Corporation. One of the lenders, the draw down, something may happen, like a financial scandal, so you will
Insular, acted as an agent. want to have that option to withdraw.
What is an agent? So the question now is, when will the loan contract be perfected here?
• Somebody acting in behalf of another in dealing with administrative • From the draw down, because that is when the loan proceeds are
matters in the loan transaction. released. So when the borrower draws from the facility, each draw
In loan contracts we have the title and the parties and also the whereas clauses. down will be covered by a promissory note. So you will have two
The whereas clauses are the recitals or the premises. In the sample contract, documentation, the loan agreement and the promissory notes from
it just stated that the borrower was borrowing to fund working capital the release of the loan proceeds. The issuance of the promissory
requirements. notes can serve as the perfection of the loan.
What is the purpose of whereas clauses? In Section 2.04. This contract also provides a penalty, a default penalty. 12%
• In case of litigation the whereas clauses will come in handy to provide per annum on top of the fixed interest rate. It says beginning on the 3rd day
the context of the transaction. from due date until full payment at the rate of 12%.
Then we have the parties agreeing, so after this one we have the terms and Why on the 3rd day?
conditions of the contracts. After this we also encounter a section on • Because later on there will be a referenced grace period of two days.
So after the grace period of two days there will be a penalty.

Week 02 Loan
So when you have a loan contract the first thing is, don’t forget the release of proceeds to the detriment of the borrower. Should there be a change of
the loan proceeds. Sometimes in the contract itself there will be an circumstance like an increase of cost such as tax rates, the amount will be
acknowledgment of the loan so there would be no need to issue a promissory grossed up so that in the end the bank will still receive x amount as stipulated.
notes. So in this clause it stipulates, that it no instance should the bank receive less
Remember in contracts if there is a term, who has the benefit of the term? than the agreed amount of interest.
Representations and Warranties:
• Both parties do, unless the provision indicates otherwise. So if you These are boiler claim provisions. These representations normally you see on
have a termed loan, the term shall be for the benefit of both lenders loans or some other transactions like, share purchase contracts and asset
and borrower. So for the borrower to be able to prepay there must be acquisitions. Basically they are referring to certain representations and
a stipulation to that effect. That is why there is a prepay stipulation in warranties of the borrower or the debtor.
this contract subject to various conditions to allow prepayment. As an example, for a corporate borrower to borrow what do you need?
Take note that at the time of this transaction this was a lender’s market so • A board resolution at the minimum.
there will be a prepayment penalty. How do you prove it?
When you do loan transactions in the future, let’s say you are a borrower, the A secretary’s certificate. But when you are dealing with large amounts lenders
prepayment penalty is something that you can ask to deal with. Why does a would require signed proof of the limits of the agreement and not just a
lender charge said penalty? secretary certificate. In certain cases, stockholder’s approval if it’s required in
• Because the lender uses the benefit of the period. Specifically, the the bylaws or somehow if the transaction involves substantially all the assets of
interest to be earned from the remaining term of the loan. So the the corporation. But normally, you just need a board resolution. Others are
compensate the lender there is a prepayment penalty. The underlying representation that the borrower is not in default with respect with any
reason is that the lender will not be able to immediately reinvest the obligation, that you are not involved in any litigation that will hamper ability to
amount prepaid. He already allocated the amount for this loan. So perform the obligation. Take note of this, they will be relevant later on.
there is penalty to compensate him for the opportunity loss. However Section 5. Covenants of the borrower.
as a borrower you would want to waive said penalty and depending Positive Covenants are obligations to do, Negatives are obligations not to do.
on the current situation of the market such would be possible.
Use of proceeds, in a loan contract if you are the lender you would want to Positive examples are periodic reports, procurement of relevant insurance and compliance with
control use of proceeds. So here it states that the proceeds will be used certain financial ratios.
exclusively to finance the working capital requirements of the proceeds. Note here that when you are dealing with accounting terms, don’t try to
Why, as the lender, would you want to be able to control the use of proceeds? lawyer. On the other hand, when the accountants are trying to lawyer, tell them
• To make sure that it would not be used for some other purpose that to stop because sometimes they don’t make sense. Here, it requires that
will increase the risk of default and to make sure that it would be periodically, the borrower should submit that the borrower is not in default in
used for the purpose that the lender assessed would insure payment. any obligation.
If you’re the lender you want to make sure you control the use of When you have a loan, the first thing is the release of the loan and receipt of
the loan by borrower.
proceeds.
The next thing is how do you insure payment?
Section 3. Taxes, duties, fees, and charges.
This section contains the Funding and Yield Protection clause, if you read • You will require a security, any security. In this case, there is no
it, it simply says that if the bank is supposed to receive X amount by way of security. Rather, what we have here is a negative pledge covenant.
interest. X amount shall be received by the bank net of any import, taxes, What is a negative pledge covenant?
deduction, etc. So the bank will be receiving x amounts. So when you are • It’s an undertaking by the borrower not to encumber any asset during
negotiating this as the borrower, this is the one you can exclude. Because for the subsistence of the loan. Here you will see that it says that the
example, the borrower should not be liable for the taxes due on the income of borrower should not secure any indebtedness unless security is also
the bank. This basically pasts all the costs as the lender and receiving the net extended to the lenders. So basically security being given by Ayala

Week 02 Loan
Corp is that they will not secure any loan, all our creditors will be • Well, I think Ayala asked for that for cases of inadvertence for failure
unsecured unless they have already been secured as of the date of the to be timely paid. So there’s a grace period of two days just for the
loan contract, when it is required by law, or when it is a security after administrative inadvertence. But normally, so this one you can ask
purchasing an asset. An example of the third is when a company buys but it’s very difficult to ask even a grace period so they ask you to pay
a fleet of cars and said cars will be used as a collateral, then they will on due date without notice or demand.
be exempted under this provision. Remember this Negative Pledge The second one is a non-monetary default. So, let’s say failure to fulfill
Covenant, which is an undertaking not to encumber any assets in certain undertakings in the loan agreement or representations. But there’s also
favor of other creditors. a grace period of five days assuming the default will be remedied.
• If you are the lawyer of the borrower, before stipulating Negative And then this one is a breach, false or misleading statement/representations
Pledge Covenants, make sure to know the plans of your client and warranties.
because they can restrict the business operations of your client; the D, what is D? 1
client will not be able to lend from institutions that require securities. • This is an event of default triggered by the default of the borrower in
Other securities that may be provided are on Ownership and Management, another contract or obligation. This is what you call a cross-default
wherein the borrower shall not cause or allow a substantial change in its provision.
ownership or management of substantial stock. This one you have to know. Example: Cross-default provision
Another is that the borrower shall not act as guarantor or surety for other So, let’s say you have two contracts: the syndicated loan agreement and contract B, okay, this
parties, subject to certain exemptions. is a five year term [pertaining to the syndicated loan agreement], this has a ten year term
Why would you want this as lender? [pertaining to contract B]. We will assume they are of the same amount. If the borrower
• Because it will increase the risk of default, that’s why the exclusions defaults in this transaction B, the entire obligation will be due and demandable. Can the
here are mostly part of the group to which the borrower belongs. lender demand payment immediately? The answer is NO and hence the borrower loss the
Conditions for borrowing: benefit of the period following the civil code provision like insolvency. Let’s say the default was
This is just a procedure for how the borrowing will proceed. It’s like a ritual, triggered by insolvency.
there will be a certificate for borrowing then the documents submitted. So the purpose of the cross-default provision is to place the lenders in the syndicated loan
After dealing with the securities we then come to the next important provision; obligation or agreement on equal footing with this other creditor. Because by this time, the
“In event of Default” creditor in this transaction would able now go after the assets of the borrower. So, for them to
What are the events of Default? have the same benefit there should be a cross-default provision. So the lenders would require
• The consequence of an event of default will be in section 7.2. that in case of default in another obligation, the borrower shall also be considered in default
Week 02 Part 05 Sablan, Justine Abigail Cruz in this loan contract.
What happens in the event of default? Take note, there is a threshold. The default should involve an amount greater
• The entire obligation shall be due and demandable. So this is what than ten million dollars.
you call an acceleration clause. It’s akin to that civil code provision Why do you place that threshold?
when the debtor loses the benefit of the period. Remember that one?
• Sometimes, you forget this one if you’re doing – this one is you have
When the debtor becomes insolvent among other instances there will
to remember when doing a loan contract. These are the ones that you
be a loss of the benefit of the period. So in case of an event of
have to look out for your client. Let’s say you’re lawyering for the
default, the entire obligation will be due and it will trigger the
borrower. You want to place this threshold.
penalties imposed under the contract. So this is the consequence of
Why?
default. Basically, the acceleration clause.
Let’s go now to the triggers for the acceleration clause. • Because it can be any default.
The first one is a payment default: payment of a monetary obligation. As I
said, there is a grace period of a two calendar days.
What’s the use of that grace period? Why only two days? 1 [letter d, page 22]
Week 02 Loan
So let’s say it’s just a credit card default. Let’s say you failed to pay 50,000 That’s the magic phrase rather: “materially and adversely affect the ability of
credit card debt. If you have a cross-default provision then that would trigger the borrower to pay the loan obligation.”
the default in this loan contract that’s why you have a threshold. Okay? So this
Again, this is cross-default provision. As I said, it will trigger the default; it will
one let’s say – what was the exchange rate then? Forty, that’s 400 million, so trigger the acceleration of payments, including the pre-payment penalty as well
almost equivalent to the principal amount. So it depends on the capacity or as the penalty of 12% per annum.
stature of your client, the borrower, and then you set the threshold.
Agent.4 It’s an administrative matter. The agent is like the coordinator for all
Of course this one is a case of insolvency, so that will be an automatic default.
the lenders. Of course, there’s an additional cost if you syndicated your
This one could potentially be an issue.2 If any adverse circumstance occurs,
agreement, you have a fee for the agent.
which in the reasonable opinion of the lender could materially or adversely
Miscellaneous.5 This, again, are boiler-free provisions.
affect the ability of the borrower to perform its loan obligations, in such
Right of set-off. Basically, what does this mean?
circumstance that it shall continue unremedied within 15 days after notice. So
it’s basically a determination of the lenders, that the lenders are not secure • The lenders will be entitled to apply any asset that may come in the
possession of the lenders to pay the obligation of the borrower.
enough in the payment of the loan.
Is there a problem with that provision? There was an old case before – involving similar provision. What happened
was there was money in transit being remitted and somehow it passed through
• It may be characterized as a purely potestative suspensive condition
a bank. The bank had a collectible from the one who remitted the money. So
dependent on the sole will of the debtor. The lender is the one
what did the bank do? The bank seized the money in transit being remitted, it
obliged to maintain the loan. Of course there is no case on this but
passed through the bank – just so you know, the bank can do that one –
it’s always there. If you’re the lender, you always insert that one. If
notwithstanding this provision because there was – I think it’s more of
you’re unsure, we can call it a default, basically. Unless you give us
banking rules there. So there was a remittance that passed somehow through
further assurance as borrower. the bank and the bank seized the payment. But generally, the provision – the
Attachment or garnishment or levy upon any property of the borrower,3 will
purpose of this – is to make sure that should there be default, any asset in the
also trigger a default under this loan.
hands of the lenders can be used to pay the loan obligation.
What’s wrong with this provision? By the way, I’m – we were lawyers here for
So it will be what kind of compensation?
the agent so we’re just facilitating the transaction. We’re neither for the
borrower nor for the lender‘s side. So this one, what’s wrong with this? If • It’s more facultative because as long as there’s an asset, even if not all
you’re acting on behalf of the borrower, what’s wrong with that provision? the requisites are present for legal compensation, the bank can pay
Any attachment – you know what an attachment is? Or garnishment or levy on the lenders, it can compensate.
execution on any property of the borrower, shall trigger a default and The same way the right to sell and transfer on the properties of the borrower. 6
accelerate the loan payment. So if the borrower is in default, the lender had assets of the borrower, the
lenders are authorized to sell and liquidate the assets and apply the proceeds in
• Student: It’s a blanket provision.
payment of the loan.
So all attachments. Remember our discussion of the cross-default provision?
Sharing of payments.7
It’s basically any attachment. So if an employee filed a claim for a hundred
This one8 you should also be careful because when they say liquidated damages
thousand and got an award and somehow a garnishment of an account of the
and attorney’s fees is equal to 15% of the total amount, that’s a huge amount.
borrower, that will trigger the default. So here it’s important to have a
Remember that when there is default, what are the dues demandable in this
threshold. For sometimes they cannot agree on a threshold, you just state there
contract?
that “the attachment, garnishment, or levy shall materially and adversely affect
the ability of the borrower to pay the loan obligation.” So you use that one.
4 [Section 8, page 25]
5 [Section 9, page 28]
6 [Section 9.02, page 29]
2 [Letter I, page 23] 7 [Section 9.05, page 30]
3 [Letter k, page 23] 8 [Section 9.10, page 33]

Week 02 Loan
• Interests of 1% plus penalty of 12%. even if this one is of a later date, this one will be paid ahead because it’s in a public
• 1.5% retainer penalty and in case of attorney’s fees, you have 15%, document. It will have a preference just because it’s in a public document.
and liquidated damages of 15%. So, by the time, assuming all of the That’s the one being avoided by this provision, that’s the waiver of Article
provisions will be enforced because there’s default, the lender’s will 2244(14)(a). Meaning, that should any lender get a notarized, the lender would
be collecting at least an additional 50%, on top of the interest. never have a priority or preference as against the other lenders. As I said, a
Now, Venue9 – this one you have to be careful. You don’t want – if you’re for preference will arise if your credit or entitlement is evidenced by a public
the borrower, you don’t want a home court for your opponent. Of course, in document, and this one [the sample loan form] is a private document, there is
this case, they are all in Makati, so it was easy to use. no notarization.
This one, waiver of Article 2244(14)(a).10 What does that mean? By the way, what kind of tax do you pay on a loan?
• So, let’s say this is the contract, you have the default, the acceleration • You pay Documentary Stamp Tax. So on the note, upon release of
clause, the consequences, and you have the signatories, the parties the note, you pay DST.
signing at the end. And then you have the witnesses. Optional, is So you have here11 the signatories. This is the one you check.
notarization. If you’re the lawyer, and you check on the document, you make sure that each
What do you have? party is authorized to enter and that the signatories have appropriate
• If you’re going to notarize it, you’ll have an acknowledgment. An authorization, meaning a Board Resolution authorizing the execution of the
acknowledgment is a confirmation that the parties that they executed loan and authorizing the signatories.
the syndicated loan agreement. It is different from a jurat, which is a Then you have the witnesses.12 Now if you want to when you have a contract.
statement under oath, and you just swear under oath to the truth of How should the parties sign? Just the signature page? Each and every page? Is
your statement. So it’s an acknowledgement. that a legal requirement?
Have you done that? Legal writing? Forms? Acknowledgment is – what’s the • Normally, this is how you do it. If you want to penalize your client or
form? the other parties, you asked them to sign each and every page: the
• It’s a notary will say “before me, a notary public appeared so and so signature page and on the margin of each and every page. You know
and they confirmed that they acknowledge before me that this is of this loan transaction, it’s usually this thick [47 pages long]. And
their voluntary act”, something to that effect. A jurat, on the other because you have many lenders, you’ll need 15-20 copies. By the time
hand, would just be “subscribing and swore before me on this day”. they’re done, maybe they’ll have tendonitis.
So it’s just an oath. This waiver of Article 2244 has to deal with the But if you’re kind enough, what do you do? Why do you need to sign each and
acknowledgment, the notarization. When we study that one, it’s a rule every page?
on concurrence and preference of credits. • For identification purposes. What you can have is you tell your
Let’s say you have three promissory notes (PN) issued by the lender. witnesses to work. The witnesses will sign each and every page, but
PN1 à Creditor 1 (dated day 1) the signatories will just sign each and every page. But for good
PN2 à Creditor 2 (dated day 2) measure, normally, the parties sign each and every page. But for me,
PN3 à Creditor 3 (dated day 3) – This is of a later date but this one is notarized, it’s not really a big deal, unless it’s more of a requirement. Just the
meaning there is an acknowledgment by the maker of the note. signature the page. Anyway, there will be a signature of the witnesses
Let’s say the debtor becomes insolvent, assets are less than liabilities. And the debtor now is in each and every page.
a subject of an insolvency proceeding, assets will be liquidated, and distributed among the • If there’s no notarization, you will have the seal. But if you have a
creditors. If you only have these three creditors, and the proceeds will not be, of course, seal, probably the seal will only appear on the first and last page, not
sufficient to pay them, what will happen? Who will be paid ahead? This one [creditor 3], on the pages in between.
9 [Section 9.11, page 33] 11 [page 35-37]

10 [Section 9.15 page 34] 12 [page 37]
Week 02 Loan
Here13 you have the commitment. That’s the statement of the amounts to be Why?
lent by each lender. I think there is a provision there saying that the obligation • Aside from being professional, you will rack up more billable time.
– reiterating that the obligations of the lender are joint. Meaning they are liable Because if you conduct due diligence, it takes up a lot of time. So if
only to the extent they committed, although, in fact, they can withdraw any the client’s budget is only 100K for your opinion, you say, “Okay, I’ll
time prior to the release. do it. But you give me a certification for each and every
Then you have the form of the promissory note.14 This is again a private representation and warranty so I can confirm.”
instrument. The PN will be issued upon perfection of the loan, meaning the This18 one: “the borrower has full power, authority and legal right.” What do
drawdown and it incorporates by reference to the terms and conditions of the you need?
loan agreement. • You get a Board’s Resolution. This one you just need the corporate
This15 is the lawyer’s job. Opinion of counsel to the borrower. When you document.
have a loan transaction or some big transaction, let’s say you shall purchase or Again, if you’re the lawyer, how will you know if the borrower’s in default?
acquisition, there will always be a required counsel’s opinion. And depending • If you are not being paid that much, again you ask the CFO to certify
on the parties, let’s say here the debtor will have a longer counsel’s opinion. that there is no default. And you rely based on the certification that
You see here16 is the opinion of the lender’s counsel. there is no default. Same thing in reassuring that there is no pending
The borrower’s counsel would probably be just the in-house counsel.17 Or you litigation that materially and adversely affects the liability of the buyer
can retain an external lawyer. to pay19.
What is the borrower’s counsel’s opinion all about? What do you do?
• You see the opinion in the representation. Aside from the • You ask for lawyers of the borrower to certify that they’ve disclosed
representations and warranties of the borrower which are personal all the pending litigation.
obligations of the borrower, you have the counsel reiterating the Take note of the opinion20 of the lender’s counsel: very short. They’re just
representations and warranties. saying that they have the required authorization or board resolution. If you’ve
For what purpose? done a complicated loan transaction, you can do other loan transactions.
• To give further assurance to the lender because we assume that if Last question, aside from getting money from the loan, what is the benefit of
you’re for the counsel, you’re rendering this opinion, you check – you entering into a loan contract? If you’re the borrower, why would you enter into
have a basis for each statement. That’s how you do a counsel’s a loan contract even if you don’t really need the money? Is there any benefit?
opinion. You will get the approval of the lenders. Because before the lenders will lend
Let’s say you read their counsel’s opinion that “the borrower is a corporation you, the lenders will conduct a due diligence; they will have a check of your
duly organized”, what’s your proof? finances, legal situation, and other conditions. Therefore, when you enter a
• You ask for the certificate of registration from the articles of the loan like a big transaction, it’s like a seal of approval in the banking industry.
borrower, and then you check with the SEC if it’s still a registered It’s like saying that this corporation has a good credit standing. Just to have a
corporation. credit reputation and good track record.
“In good standing” what’s your proof? You rely on what certificate?
• You go to the SEC again. You don’t ask for the certificate of good
standing, it’s the reverse; you ask if they had any penalties before. For
the licenses, you ask an officer to certify, if you’re in a hurry. If you
can do the due diligence, you do it.
13 [page 38]
14 [page 38]
15 [page 42] 18 [letter b, page 43]
16 [page 46] 19 [letter h, page 44]
17 [page 42] 20 [page 46]

Week 03 Loan
Week 03 Loan
23 August 2017
Week 03, Part 01, Barroso, Frances Angeloe • Student: Sir, Barbara and Rebecca mortgaged their own property, and
Make sure on the chances of full payment of the obligation. also Rosalina mortgaged her property.
So let’s take the worst, we’re going to start with persecuting the arrangement, So Barbara and Rebecca and Rosalina. Who’s Madeline?
sureties and guarantees. • Student: She was also a surety along with Rosalina but she was not
Let’s say you have the structure of a surety of guarantee, you have a loan. Lender needs to mentioned in the ruling
pay lets say 10M. Borrower will pay on due date principal plus interest. Let’s assume 5M. Okay, so what’s the under security?
Now as we said, if the borrower defaults in this scenario, the remedy of the • Student: Surety Agreement.
lender is to sue for collection plus a claim for damages. Chances of payment, Who were the sureties?
given the default, carrying the security and this is where guarantee would come • Student: Rosalina and Madeline. The principals were Barbara and
in. Rebecca.
So let’s say you have a surety or guarantee, by S or G. In case borrower Yes, the borrowers. So you have here, what’s the principal contract?
defaults, the lender, after complying with the all the requirements to hold the • Student: The loan contract.
surety or guarantee liable, can go after debt. So this is the security, so you have The loan contract and the collateral contract or accessory contract.
2 contracts you have the principal contract or obligation and you have
• Student: The real estate mortgage and the surety agreement
accessory contract, security or collateral agreement.
What happened?
CASE
• Student: Barbara and Rebecca defaulted in their payments, so CBC
• Student: Chinabank extended a loan to Barbara and Rebecca, for the
extra judicially foreclosed the real estate mortgage.
principal 2.2 Billion.
JSP: All?
Loan. And then…?
• Student: No, only Rosalina’s property.
• Student: They also executed a real estate mortgage.
So there’s default, CBC partial foreclosure. What happened to the other
No, what would be the obligation of Barbara and Rebecca as borrower?
properties?
• Student: To pay, sir.
• Student: They released the real estate mortgage.
Just pay principal and interest. Now, to secure payment of the loan
JSP: There was partial foreclosure and partial discharge of the mortgage.
obligations?
Upon foreclosure was there payment full payment?
• Student: They executed a real estate mortgage.
• Student: No, sir.
Both? Barbara and Rebecca?
JSP: So there’s deficiency—partial foreclosure resulting in a deficiency. What
• Student: Yes, sir. They executed the real estate mortgage of the did the bank do?
property of Rosalina.
• Student: They sued Barbara Rebecca and Rosalina for the
So who mortgaged?
deficiencies. But Rosalina’s defense was that she did not receive any
• Student: Rosalina, sir. part of the proceeds of the loans so she should not be held liable for
Only Rosalina? the deficiencies.
• Student: Sorry, all of them, sir. • Student: The issue in this case is whether or not Rosalina is liable to
All of them? They own properties and they mortgaged the properties? So pay the deficiencies.
Barbara, Rebecca and Rosalina? JSP: The first assertion of Rosalina was she did not receive any portion of the
• Student: And also Madeline, sir. loan. Therefore, as far as she is concerned there was no consideration for her
Okay. So let’s say there is a real estate mortgage, who were the mortgagors? undertaking. Is that correct?

Week 03 Loan
• Student: The Court said that Rosalina is considered an JSP: Yes.

accommodation mortgagor. Being an accommodation mortgagor, it • Student: Sir, because it is what motivated the parties.
does not matter if she did not receive any benefit from the loan JSP: Who?
contracts. Also, all the parties stated that she was also a surety • Student: Barbara and Rebecca.
Accommodation mortgagor or accommodation party? Remember in a reciprocal obligation the cause and object, can interchange at
• Student: The Court stated accommodation party. all, depending on the perspective. From the perspective of the borrowers they
Basically, a third party mortgagor? entered this contract based on this cost, the undertaking of the bank to lend.
• Student: Yes, sir. From the perspective if Barbara and Rebecca this was the cost for their
So a third party mortgagor, and a surety, they did not receive anything. What entering into this contract of loan, therefore the mortgagors and the sureties
was the consideration for Rosalina as accommodation mortgagor or as surety agreed also based on the same cost.
to enter into these contracts? Now, continue.
• Student: Sir to be paid back and be indemnified. • Student: The court differentiated the surety from the guarantee.
Oh, that’s the consideration? JSP: What’s the difference?
• Student: • Student: First, the court said that in a surety, the surety ensures that
JSP: Remember the contracts: the real estate mortgage and the surety debt will be paid.
contract. Who were the parties to these contracts? Barbara Rebecca Rosalina JSP: So in a surety, the surety ensures payment…?
and CBC? • Student: The payment of the debt. While in a guarantee, the
• Student: guarantor only ensures the solvency of the debtor.
Surety Agreement? Why?
• Student: Rosalina Madeline and CBC. • Student: Because in a guarantee, the creditor can only go after the
Okay so here, the object is to the mortgage of the property to secure payment, guarantor once he exhausts all the properties of the original debtor
here is the undertaking to pay, should borrowers default right? What is the and all of its remedies against the principal.
consideration for them to enter into these contracts? Okay so in a surety contract, the lender can go after the surety.
• Student: The consideration as the principal obligation. In a surety, what’s the only requirement?
As the principal obligation. So take note of that. • Student: The only requirement is that principal debtor has defaulted.
A third party mortgagor or a surety cannot claim that the contract lacks a cause Has defaulted because, the surety ensures payment. On the other hand, a
or consideration. When you have a security agreement as an accepting guarantor, if the debtor defaults, the borrower in that example, the guarantor
contract, the consideration for the security contract is not the same as will be liable only after…
the consideration or cause for the principal obligation, so you don’t find a • Student: After the creditor has exhausted all the properties and
cause here. The cause here, the reason or the consideration of cause for the remedies against the principal borrower.
mortgage and the surety undertaking was the banks’ agreement to lend to After the lender exhausted all assets of and indemnities against the borrower.
Barbara and Rebecca. So it’s the same cause as the principal obligation. Because as the Supreme Court said the guarantor ensures the solvency.
But how did this become a cause? This is the object actually right of the Is a surety the same as a solidary debtor?
contract? Was it the cause? • Student: No, because in the instance of a solidary debtor
• Student: No, sir. Even if you read Article 2047 correctly, let me ask you this. If, a person binds
No, it is. himself solidarily, with the original debtor, meaning, there is a solidary
How? guarantee. It says here that the provisions on solidary obligations govern and
• Student: Sir, because the purpose of the surety is… the contract shall be called a surety. Therefore, a surety is a solidary debtor. Is
No, in this contract of loan, how did this become the cause? that correct?
• Student: Of the loan sir?
Week 03 Loan
• Student: No, sir. It is not exactly the same, because in surety the Really? Think about it. So you can have a principal debtor, undertaking to
debtor has to default first so the creditor no longer has claims against indemnify the guarantor should the guarantor pay the principal obligation. The
the surety after the due date or after the debt has become due. guarantor pays the principal obligation and calls on the payment based on the
However, in solidary debtors the creditor can claim against any of the indemnity undertaking. Will it benefit before coming?
solidary debtors once no payment has been made or once there is • S: No, sir.
default. Why not?
Okay, so if you have 2 borrowers, say B1 and B2, they are solidary. On due • Student: Sir, because the fact that the debtor defaulted in paying the
date what will be the recourse of lender? creditor …
• Student: The lender will go against either B1, B2, or both of them. How do you know?
Can L go after the surety? • Student: Sir, because for the creditor to go after the guarantor the
• Student: Not yet. Only if B1 and B2 has defaulted. creditor should have exhausted first [all assets and possible remedies].
A solidary debtor is not the same as a surety. In the context of guarantee, a mere indemnity undertaking will be useless,
So take note, although a surety is akin to a solidary debtor, it is not because indemnity undertaking by the borrower/by the principal debtor will be
exactly a solidary debtor. Because remember this is a security contract, triggered only after the creditor exhausted all assets of the borrower and
ensuring payment. So the trigger for the liability of the surety is the default by guarantor pay. Therefore, by the time the guarantor enforces the indemnity,
the principal debtor. there’s nothing to get from the borrower/the principal debtor for the payment
What else? of the indemnity. That’s why aside from the indemnity, you will have a
• Student: Sir the court also stated that in a surety, the surety makes security. Let’s say a mortgage, pledge or whatever, it can be another guarantee
sure that you will pay when the debtor cannot pay while guarantor or another surety.
only pays when the debtor is unable to pay. So basically, only after The indemnity, how about if it is a surety, will it be useful without the security,
the creditor has exhausted the assets. the indemnity?
JSP: What does it mean that a guarantee or surety by default is gratuitous? The indemnity agreement will be useful. Because most likely the surety will
• Student: It means that the guarantor does not or the surety does not enter into this transaction after conducting a due diligence in determining that
give anything extra aside from the transaction, aside from being paid the borrower has assets to pay the obligation. So the surety being liable
or indemnified. immediately, the borrower can immediately go after the surety on the
JSP: What is that extra? assumption that the surety has assets, because there is no requirement of
• Student: There is no fee for extending the guarantor the sureties. excussion, in the case of a surety. That’s the distinction because the surety
In a usual contract, in a usual commercial contract involving a surety guarantee ensures payment so the only requirement to hold surety liable is the default of
the transaction will go like this: B will ask let us say S or G, a surety or a the principal debtor.
guarantee and for that B will first pay a fee. Because we usually do not do There is no requirement of excussion in surety.
anything without getting payment, there is a fee. Second will be an indemnity JSP: So you have here the security, will you have the same problem with the
undertaking by B1. guarantee?
But this indemnity let us say it is a guarantee, will this indemnity be useful? • Student: No, sir, because you can collect …
• Student: No, because it will just be the repayment of what the Again, but there’s that excussion? So after the exercise of the lender, most
guarantor [secures]. likely the security will also be taken.
Yes, but will it be something that will give the guarantor comfort? This • Student: The security can be from a third party.
undertaking to indemnify? So this will be relevant only if this comes from the third party, because if this
• Student: Yes, because it would ensure the guarantor will be paid back comes from the borrower, this is on the context of a guarantee, the lender will
but… have to exhaust also this asset if it is from the borrower.

Week 03 Loan
A guarantor ensures the solvency of the borrower, meaning the borrower • Student: No, the character of the guarantee should be that it is a
will have assets to pay. That’s why the guarantor will be liable only if the distinct person from the [principal debtor].
borrower has no assets to pay the obligation or conversely the lender has JSP: A guarantor or surety necessarily should be a third party, because it is
exhausted all assets of and remedies against the borrower, that’s the guarantee. another undertaking to pay.
On the other hand, the surety ensures payment. So the only trigger and What are the requirements of a guarantor?
requirement for the liability of the surety is the default of the principal debtor. • Student: That he has sufficient amount of property, integrity, and
The moment the principal debtor defaults, the lender can immediately go after able to sufficiently comply with the obligations of a guarantor.
the surety. The surety is somehow similar to a solidary debtor, the liability of JSP: What else? For any party to enter into a complete and valid contract
the surety will be coextensive, with the liability of the principal debtor. The only what is required on that part?
distinction is the requirement of default so you cannot say a surety is a solidary • Student: Legally able.
debtor, not exactly because for the surety to be liable, the principal debtor has JSP: Legally able? That party should have…?
to default. • Student: Legal capacity.
If someone signed as an accommodation party, that party is not a surety, that JSP: For an individual, it should be legal capacity.
party will be a solidary debtor. What is an accommodation party? We are now talking about guarantor, forget about the surety. So who would be
Example #01: Let’s say you have a loan, obviously you have the parties, the borrowers, the an ideal guarantor then?
debtor, and then you have the signatories, borrower lender then somebody will sign together • Student: Sir, a bank.
with the borrower. Let’s say X, will be considered here, this is also what they call a JSS – JSP: Why a bank?
Joint and Several Signature. So by signing, X will assume the obligation of a solidary • Student: A bank sir will always have sufficient assets and it has legal
debtor. So if X wants to limit the liability, X should say, X is only a surety. What’s the fine capacity to enter into contracts.
distinction? On due date, if X is a solidary debtor, debtor can technically demand payment, JSP: Not really. It is no guarantee, a bank can still belly up, it can still be
but normally practiced, if it’s an accommodation party the creditor will go after the principal dissolved.
debtor before asking payment from accommodation party. So why a bank? So a bank can act as guarantor is what you’re saying?
When we say a surety or guarantee is by default [gratuitous], it does not mean • Student: Yes, sir.
that a surety or guarantee will not get anything from the borrower. They will JSP: No.
still be entitled to a minimum to an indemnity of the whatever they paid of A bank cannot guarantee an obligation, because under the General Banking
course subject to certain rules. If there is no agreement between the principal Law (Section 54 of R.A. 8791), a bank cannot engage in the business of
debtor and the surety or guarantor, no fee will give you the surety or insurance. When you guarantee or act as surety you’re basically ensuring a
guarantor. The parties have to stipulate a fee just for acting as a surety or payment, subject to certain requirements. A bank shall not directly engage in
guarantor. the insurance business as the insurer. The key there is directly, so a guarantee
Example #02: Example for this is an insurance company acting as a surety. You pay a undertaking by the bank will be a direct insurance of the principal obligation.
premium or a fee for the surety undertaking by the insurance company; you will have these • Student: But then sir it says direct, so is it possible for a bank to enter
two other contracts indemnity and security. For those companies who are careful, will ask for into guarantee agreement.
a security, acceptable security. JSP: How?
In a contract of surety or guarantee, the object is the undertaking by the surety • Student: Through a loan…
or guarantee to perform the surety or guarantee undertaking, and the cause will JSP: How can that be?
be same cause as the principal obligation. • Student: Because when a bank loans to a person, in essence the bank
JSP: Who can act as a guarantor? is agreeing to answer for the credit line of the person.
• Student: The guarantor can be any third person. JSP: How will the bank guarantee?
JSP: Can it also be the principal debtor?

Week 03 Loan
• Student: By providing a loan to the lender, answerable for the debts into a contract with the bank – it may be a credit agreement, a loan facility, or a
of the lender, for future debts of the lender. credit facility. The contract will state that the bank will lend to D, and there
JSP: Payable to? will be a stipulation pour autrui, which means that the proceeds will be payable
• S: Payable to the debts of the borrower. should D default. That’s the trigger. So, is that a guaranty? No, it is a loan.
JSP: Again. From the top, so the bank will do what? Bank will loan to D, with the proceeds payable to a third party. It’s your typical
• Student: The bank will issue a loan to the borrower with regard to letter of credit. Let’s say, you’re buying goods from abroad. Your seller will
future indebtedness. require you a letter of credit, the proceeds of which will be payable to the seller
JSP: Future indebtedness? But if the borrower borrowed already 10M from upon presentation of certain documents. This is what you call a bank guaranty.
the lender, so another borrower will borrow again from the bank another It is the undertaking of the banks to lend to the borrower and the proceeds
10M? payable to L upon default by D in this obligation to pay.
Manny Pacquiao? Is he a good candidate? So a person with tons of money will
• Student: It starts with a credit line, the lender can go to the bank
be an ideal guarantor? True?
directly and ask for [the release of the loan].
JSP: How can the lender go? Is it a loan to the borrower? So the borrower • Student: Not necessarily.
borrowed from the bank? How can the lender collect from the bank? So what will you consider if you are getting a guarantor or surety in a situation
where all of them have the three characteristics – integrity, capacity to bind
• Student: No sir, the borrower asked money from the lender but
himself, sufficient property.
then…
JSP: Yes, the borrower borrowed from the lender • Student: Someone that I can trust, sir.
Practical consideration would be a guy that is trustworthy.
• Student: But then borrower has a credit line with the bank, so if
Let’s say I’m a third party, I acted as surety, I do not have an interest in that
borrower defaults in the payment, then lender can directly go to the
transaction and I will be required to pay Php 100M and I do not have this
bank…
indemnity and security undertaking. I was just asked, as a favor, to sign as
JSP: On what authority? What might that be? Remember the credit
surety. What do you think I will do, now that the principal creditor is asking
agreement, is a contract between the borrower and the bank. So how can the
me to pay Php 100M?
lender collect?
I’ll allocate X percent for litigation, I will not pay and in the meantime, I will
• S: Sir because the stipulation in a credit line is to answer for any debts put my assets beyond the reach of the creditor, because I will not part with
which the borrower. something in exchange for nothing.
JSP: No. First, a credit line or a credit facility is basically a loan facility, it is So, you have to consider whether the surety/guarantor will be readily available
an undertaking to lend. Okay, so there will be a loan, it’s not necessarily what to pay when obliged to do so. You get someone whom you trust will readily
you think, that the lender can collect from the credit line. pay.
So how can that happen? Let’s say L extended a loan to D, 10M, L asked D to provide a guarantor. D
• Student: Because of the loan specifically, between the borrower and provided Imee Marcos as guarantor and L accepted it. Later on, L changed her
the bank, the lender can go after the bank, it is a form of excussion. mind and said “She has no integrity, let’s assume, based on the
What excussion? recommendation of the prosecution, based on that congressional
• Student: Because when the borrower defaults, then the lender can go investigation.” Can L now ask a substitute guarantor?
to all the properties of the borrower, and in essence if there is a loan, The lender cannot ask for a substitute guarantor notwithstanding the lack of
between me and the bank, then he can go to the bank and collect the integrity of the provided guarantor, because Imee Marcos is a public person
10M. and you OUGHT TO KNOW that when the borrower offered her as
Week 03, Part 02, Dayanghirang, Elaine guarantor, by that time, you should know whether she has integrity. If later on
It can be a loan, it can also be a sale. It can be any contract. In short, D has an you change your mind, it will be difficult because you have the information,
obligation to pay L whatever the basis of that contract is. Now, to ensure you accepted her, and that amounts to waiver. For example, GMA, then you
payment, L says “I need a bank guaranty.” What would that entail? D will enter
Week 03 Loan
decided to change your mind. That cannot be done because the lender So the instance is when the benefit REDOUNDS TO THE BENEFIT OF
accepted knowing fully well the background of GMA. THE FAMILY. The lender can go after the conjugal assets to the EXTENT
Imee Marcos, you accepted her, you cannot ask for a replacement. But Imee is of the benefit that redounded to the family.
charged before the Sandiganbayan with the unlawful use of tobacco funds. Can Example #03: B is a corporation and you have husband and wife. H acted as guarantor.
the lender now ask for replacement? W did not consent but H is a major stockholder owning 10% of the company, and the
• Student: No. president of the corporation. The H gets compensation as president and gets dividends as
Trial went on, and she was convicted by the SB, but she appealed her shareholder aside from the fact that the value of the shares could increase due to this loan
conviction. The creditor can now ask for a replacement on the basis of transaction. Let’s say the loan is used to expand the business of the corporation. B
conviction. Article 2057! There can be a demand for substitution. It does not corporation defaults. Lender went through the books to hold the Husband liable as
have to be a final judgment. Substitution can happen as long as there is guarantor.
conviction, even if the case is on appeal. Can L now enforce the guaranty against the conjugal assets of H&W?
The law provides that when a creditor asks for a specific person to be the • Student: Yes, sir.
guarantor, the creditor cannot ask for substitution. No. Here, the husband earns a salary used for the family and the husband gets
Can a married woman act as guarantor? dividends from the corporation. That is NOT the benefit contemplated by law.
• Student: Yes. The case is Ayala v Court of Appeals (12 February 1998). The SC said that’s
To the extent of her separate assets only. not a benefit that redounded to the benefit of the family that will entitle the
What would be the exception? For example, G, a married person, guaranteed creditor to run after the conjugal assets. The benefit, according to that case, is
an obligation. How will that bind the conjugal assets? the loan itself should have some direct benefit to the family. Here, the benefit
You should get a spousal consent. It will give the creditor the right to go after is to the corporation. The benefit will be directly for the family if the husband
the conjugal assets. On the other hand, if you are lawyering for the married is in the business of guaranteeing obligations or acting as surety of obligations.
person, tell him to forget about your spouse. Do not involve her. But this case, will not be enough. You have to show something more, like the
What benefit do you get from this? What happens to the contract, when a family benefited from this directly, and something was earned by the family
married person signs the guaranty agreement without the marital consent? from this transaction.
• Student: Contract is void. Week 03, Part 03, Dinsay, Kevin
The contract is a disposition, only one signed, the spouse did not consent. It is JSP:… only if the husband is in the business of guaranteeing obligations or
a special kind of void. It is a CONTINUING OFFER. acting as surety of obligations but this case will not be enough you will have to
So is there no way the creditor can go after the conjugal assets? show something more like the family benefited from this one directly and
something was earned by the family through this transaction. Maybe that will
• Student: Yes, sir, because there is no spousal consent.
amount, but the fact that of this relationship each as shareholder, each as
Wrong!
president, that will not be considered the benefit sufficient to hold the conjugal
True or False. The spouse did not consent to the guaranty of the other spouse.
assets liable pursuant to the guarantee.
The creditor cannot go after the conjugal assets.
JSP; Who are the parties to guarantee? Is there a formal requirement for
• Student: False. validity of a guarantee?
So what is the instance when the creditor can go after the conjugal assets
• Student: It must be in expressed in writing.
notwithstanding the absence of spousal consent?
Otherwise? What is the consequence if it is not in writing?
What if the lender asks for the dissolution of the property regime. Is that
possible? • Student: If its not in writing then it may not be enforced.
Because?
• Student: No.
Because only the spouses can ask for the separation of property. A third party • Student: It must be express.
cannot do that. I know it must be expressed, in writing. It must be express. Because the
consequence will be?

Week 03 Loan
• Student: Void. million and B has no any other entitlement against L that could have reduced
Void? And where will you find that mandatory requirement as to form? the 10 million.
• Student: Civil Code. • Student: No subrogation of rights.
Just tell me the legal provision saying that it is void because it is not in writing. What’s subrogation?
• Student: The article states that a guarantee must be expressly stated in • Student: For example, the real estate mortgage he does not have the
writing. right to foreclose.
To be valid? So G now will not acquire the rights of the lender with respect to the
• Student: Yes. mortgage. Whether it’s by B or a third party. There will be no legal
No. subrogation.
What is a guarantee? A guarantee is based on an undertaking to answer for the But here now G, gave notice to B. That G will guarantee the obligation. That
default or debt of another. Therefore, it’s covered by the Statute of Frauds. So they signed the guarantee contract. B did nothing. B eventually defaulted in the
you find the formal requirement for enforceability of a guarantee or payment of the loan. G paid. Will there be reimbursement? Will there be
surety in the Statute of Frauds. Specifically, that item saying an undertaking subrogation?
to answer for the debt in the default of another. You will not find the • Student: Yes, sir.
requirement for enforceability under the section on guarantee rather in the Why?
Statute of Frauds. So there must be a written contract for it to be enforceable. Because since B had knowledge of the guarantee then there will already be
Now let’s say you have this guarantee. G entered into this guarantee because subrogation.
there is a security given by X. A real estate mortgage by X. The transaction was But silence does not mean consent. Remember that case? PNB. Silence does
B obtained a loan from L. B agreed to pay pursuant to the loan contract. There not mean consent.
was a security given. Say a mortgage by B and then there’s a guarantee. G now What’s the basis? Why will there be entitlement to full reimbursement and
entered into this guarantee contract. Who should consent to the guarantee subrogation? There was no consent, it was just awareness?
contract? • Student: But he could have objected. Since he already had
• Student: Even without consent… knowledge? Therefore?
No. • Student: Therefore, he is liable to pay.
Who should consent to the guarantee contract? Why? By mere awareness?
• Student: The lender. • Student: Yes… or with the knowledge…
Lender only? What is the requirement of law?
• Student: And guarantor. Payment by a third party with the knowledge or with the consent.
And guarantor, because they’re the parties. Borrower need not consent to the So why is it that if B has knowledge, G will now be entitled to full
guarantee. reimbursement. So we are not talking about benefit B and there will be no
So G entered into a guarantee contract with L without the knowledge of B. subrogation. Why?
What’s the consequence? So if B knew that G will enter into the guarantee contract. What? He knew. B
• Student: If G pays he can only get the reimbursement that he will should? Object or consent. So there is an obligation to reply?
get… • Student: No.
Let’s say B defaults and G pays immediately. Can G demand indemnity? Yes! Because if you read the provision of law. The third party to be entitled, G
• Student: Yes. is actually a third party paying the obligation, so for the third party to be
To what extent? entitled to full reimbursement and subrogation, there must be consent. But the
• Student: Only until from the benefit of the borrower. provision clause says notice or consent. If G gives notice, it’s incumbent upon
So most likely G paid what’s due the lender. So G can now have full B, B has the obligation to reply. This is different from the case of PNB. That is
reimbursement. Yes, because that’s the benefit. Say its 10 million, G paid 10 the notice of the increase of interest, where there’s no obligation on the part of

Week 03 Loan
the borrower to reply to that notice. Here, there is because if B does not reply, the past and would likely continue to do business in the future so they this good business
there will be implied consent. Because B has information, if B does not want relationship. G said give me a discount so I can earn more. So lender said ok let’s split the
to have the benefit of this guarantee, He should tell G he is not consenting, interest you just pay me 12.5 Million, so G paid 12.5 Million. G now went to B and said
that he is objecting. If B doesn’t do anything despite full notice, then G will indemnify me for 15 Million.
have the full benefit of third party paying with the consent of the debtor. Can G now get 15?
There will be subrogation. Yes. That’s the principal obligation.
I gave this example because why would a third party involve himself in a • Student: Yes, sir.
transaction wherein he will incur a liability? No! A compromise between the guarantor and the creditor should benefit the
Because there is an incentive. Let’s say G is interested in this property G debtor but should not prejudice the debtor. The same way the lender and B,
anticipates that B will not be able to pay, G will now pay and be subrogated in the compromise should benefit the guarantor. The compromise should not
the rights of L. And if B cannot pay then L can foreclose on the property. prejudice the guarantor. The answer here is that G will be entitled to get only
Example # 03: Now, let’s say you have here this amount. This amount payable is 15M. 12.5 million.
This is the amount due on maturity date. B defaulted. L went through the books of holding In case of a compromise between the guarantor and the creditor the
G liable. L complied with all requirements to hold G liable. compromise should benefit the principal debtor.
How much should G pay? The wording of the guarantee is “G guarantees all There’s no way that the guarantor can earn extra from the compromise like
obligations of B in favor of L.” this situation. The guarantor cannot say B should pay me 14 million instead of
• Student: 15 Million. 15 million and I get 1.5 million, that cannot be done. That rule works to the
What kind of guarantee was given by G in that example? benefit of the borrower.
Simple or indefinite so it comprehends the entire obligation, including Is that rule absolute?
accessory, including undertakings like interests and penalties.
• Student: Yes, sir.
Example #04: When they entered into this transaction, L said I want a real estate No. It’s not correct to say that it really works in favor of the debtor. That’s
mortgage as security, because that creates a lien on a property, I don’t want a mere why I gave you the perfect world scenario. Whatever happens, if G is held
undertaking. But B said the only thing I can give is a guarantee. So L said yes I will accept liable, G will get indemnity and this indemnity will be ensured by this security.
the guarantee provided that should I enforce the guarantee, it should be 15 Million plus 20% With that rule whereby if G enters into a compromise G will just be getting
for all the trouble. Because from the get-go lender did not want the guarantee, lender wanted a reimbursement to the extent the amount paid to the creditor.
mortgage, so lender said to reward me for entering into this guarantee contract you have to What does it do to G? In this perfect world scenario?
add extra 20% when I enforce the guarantee. So B defaulted. L fulfilled all requirements to
• Student: He will be subrogated.
hold G liable. No. There’s nothing to gain in subrogation.
• Student: 15 Million • Student: He is indemnified.
Why? According to the law and also if it’s on the rules let’s say a fee is paid by Yes, that even without the compromise G will get indemnity. So that rule
B to G this is? saying that if G is able to get a reduction G will not be entitled to get extra. In
• Student: No, sir. Because according to the law he cannot be held short that rule does what? That rule removes any incentive for G to enter work
liable to pay more than the principal obligation. on a compromise. Let’s say I’m G, why would I exert extra effort for a
Is there an instance when G will be paying more than the principal obligation compromise if I don’t get anything? If there’s nothing in it for me, I will not
secured? move. Anyway, whatever happens I will collect whatever I pay so I will be
Yes. Let’s say G unjustifiably refuses to pay etc., there will be entitlement whole under any circumstance. That rule in this perfect world set up may
because it’s the fault of G. It’s different. actually work against the borrower. Because there will be no incentive for G to
Example #05: Let’s take this commercial contract. This is the perfect set up. So you have work on a compromise. Clear? But you would want to have that benefit.
here Lender lends 10 million, B to pay 15 million on due date, B defaulted. L fulfilled all G wants to get extra. G will work for a compromise to get extra. Is that
requirements to hold G liable and went after G. So G and L, they did a lot of business in possible?

Week 03 Loan
• Student: No, sir. Can there be a guarantee saying that from day 1 up to a period say 5 years? I
No it’s possible. Nothing is impossible under the law. Except certain rules. will guarantee only up to a three-year period? Valid?
The way to do it is you have that mandatory rule in guarantee, what you do is So G enters a contract with L. Guarantee contract, G said I will guarantee the
you split the contract. So G will pay 12.5 Million to B. G wants to get an loan but only during the first 3 years the 2 years no more. Valid?
extra 1.5 for the effort. Because this is the only amount paid, G cannot get the Invalid because it defeats the purpose. The guarantee will not be there upon
1.5 from B. For G to get that, there must be another contract between G and maturity date. Technically this is valid. Why? Because the default can happen
B, like a contract for services. Like consultancy, financial services, whatever. during the 3-year period. So you’re guaranteeing only during the 3-year period.
Of course we’re assuming that there’s a factual basis to have that service. Let’s When will the borrower use the guarantee during the period?
say G is an investment house and G can really do a deal with L, so G proposes When the borrower becomes insolvent.
to L, I will advise you on how to work out this compromise but you will pay So during the 3-year period, if borrower becomes insolvent, lender can run
me extra. And that extra will be the 1.5. This will be a service contract between after G. So its defensible. Of course there’s a commentary saying that it defeats
B and G whereby B agreed to pay G 1.5 should G be able to work on a the purpose of the guarantee. Of course no one will accept that. If you are the
reduction on the total liability. So somehow there is a benefit to B. B saves 1 creditor you would want a guarantee till the end. What I’m saying is it’s
Million and G gets 1.5. Everybody should be happy. If you just use the law, possible that you can have a guarantee limited as to the amount and as to time.
this will not happen. What you’re basically doing here is you are taking the 1.5 Let’s say you’ll have a loan contract. Lender extended a loan to B. 10 million
outside the scope of the guarantee framework. So it’s not part of the due date… 3… 15 million including the interest agreed upon in writing by the
guarantee. It’s a separate contract. But as I said somehow there must be some parties. This is secured by a guarantee. Now the guarantee was entered into day
factual basis because later on if this involves a huge amount, B can just say no 1. You have a valid guarantee, right? Why is it a valid guarantee?
that’s prohibited, that’s a circumvention of the legal provision. Technically it is Because you have all the elements of a contract. We are assuming it is in
not, it is a separate contract. writing and enforceable. G consented to the object the undertaking of G to
Same goes here, L will accept 15 Million only if he gets extra. Should it be guarantee the obligation and the cause is the cause of the principal obligation,
necessary for L to enforce the guarantee how do you get the extra? You can it’s the same.
get a separate contract. A separate contract whereby, it can be any contract What if you have a guarantee saying G guarantees any obligation B may incur
let’s say, also with G, or with somebody else, it can be any party basically. This in favor of L. Day 2 the parties entered into the loan contract, on the same day
will be another contract whereby L end up having that extra 20% benefit. The L released the proceeds. Day 3 payment. B defaulted. L went through the
trigger will be the default of S. Let’s say G will provide L with an interest free requirements to hold G liable. Can G be held liable?
loan that will lend L the extra 20% or G will sell it will be an option, L will buy This guarantee is void, because there is no cause. It lacks an essential element
property from G at a discount equivalent to the 20%. as of day 1.
Will that be a circumvention? But it says in the guarantee that B can use it as security for future obligations?
No. It’s not a circumvention. It’s related to this transaction but independent of This is not it. You have a void contract because of lack of cause.
it, it’s just the trigger. That’s why when you practice, you cannot tell your It’s like I entered into… let’s say I act as guarantor today, I signed a guarantee
client, you just say oh that’s prohibited, just roll over and die. You will have to contract with L and then the transaction happens 5 years from now. Can I
find ways of working around. It’s not a circumvention. It may look bad to you relent on my obligation?
but it is legal. Is it unethical? Still ethical because it’s allowed by law. Yes. In fact, I can disown my obligation because at the time I entered into the
So a guarantee can be either simple or indefinite. Let’s say you have here a contract there was no valid cause.
guarantee. What will a simple or indefinite guarantee be? It will cover all It’s different though if you have this situation.
obligations of the debtor to the lender. Principal, interest, penalties, any other Example #05: On day 1, L and B entered into a loan contract. The contract was perfected
accessory undertakings. On the other hand the parties can stipulate to limit the only on day 2. B drew on the Credit line on day 2. On day 1 there is a guarantee. The
guarantee. So the guarantor can say I will only guarantee up to 10 Million, that guarantee states that G will guarantee obligations the obligations of B to L.
is valid. The guarantor and lender can agree for less than the principal Valid?
obligation.

Week 03 Loan
Yes. Because as of day 1 there is an obligation. It’s not a perfected contract of So L went after G notwithstanding the information from G that debtor has
loan but there is a principal obligation. The undertaking of L to lend on day 2. P10 Million [asset]. Eventually, debtor lost the P10 Million [asset], so now L
So it doesn’t matter that perfection happens on day 2. As of day 1 the principal can hold G liable for P10 Million? How much can L collect from G in that
obligation is secured by the guarantee. example?
Take note, this is a recurring requirement for security arrangement. Because • Student: Nothing, sir.
when you have a security arrangement like a mortgage or a pledge, the cause None? Why?
will always be the cause of the principal obligation so if you don’t have a • Student: Because debtor has no more assets and so the guarantor may
principal obligation, you will have a void security contract, due to lack of cause. now be proceeded against.
What if same guarantee. On day 1 G says I will guarantee the obligation under
The rule is if the lender did not exhaust all assets of and remedies against the
this loan contract and any and or future obligations of B to L. Valid?
borrower, the guarantor will be free from liability.
Yes. That’s similar to a *** clause in a mortgage contract. It’s a guarantee of
any and all obligations of the debtor to the creditor. Present and future • Student: The guarantor in the example will be free from liability as to
obligations. the P10 Million guaranteed
Week 03, Part 04, Dones, Antonio Miguel So, in this example, the lender can collect how much?
What is the benefit of excussion? • Student: 10 Million.
• Student: The benefit of excussion is the benefit granted to 5 [Million]! Because G identified the 10 [Million in assets], and L did not go
guarantors wherein the assets of the principal debtor must first be after the 10 Million [assets]. L was negligent; eventually this asset was lost.
exhausted; and, on the part of the guarantor, the guarantor must Therefore, the loss [of the asset] will be the burden of L; it will be for the
point out the assets. account of L. So G will be liable only to pay 5 [Million]. Remember, G
Okay, so let’s say taking this example: B defaulted in the payment of the identified these assets as possible source of payment. L disregarded the
guaranteed obligation and A demanded or sued for payment from guarantor. information from G and proceeded against G. If these [assets are], as in fact
What can guarantor do? they were [in the example] lost, it would be for the account of L. So G would
• Student: The guarantor can put up the defense of excussion. be entitled, would be liable only for 5 [Million].
Invoke the benefit of excussion… So, G pointed out these assets; these are assets in, say, Singapore. G told L, “D
(debtor) has assets in Singapore worth P10 Million.” Does [L] have to exhaust
• Student: The guarantor must point out the assets of the principal
that? L did not do anything, D lost the 10 Million [asset]; how much will be the
debtor that must first be exhausted.
liability of G?
The benefit of excussion is the entitlement of the guarantor to require the • Student: 5 [Million].
creditor to exhaust all assets of and remedies against the debtor before 5 [Million] still?
proceeding against the guarantor. How should the guarantor invoke the benefit No!
of excussion? It’s not enough for the guarantor to just invoke the benefit of
excussion, the guarantor ought to identify the available assets of the debtor. To successfully invoke the benefit of excussion, the assets that should be
identified should be assets within the Philippines.
Example #06: Debtor [has a debt of P15 Million and] has assets amounting to P10
Since these assets are in Singapore, therefore, it’s not a valid claim of the
Million. So G (guarantor) should point to these assets; G should identify these assets. If G
benefit of excussion.
identified these assets, and the L (Lender) continued to claim against G. G notified L,
What are the instances when the guarantor loses the benefit of excussion?
“these are the assets that you should go after before running after me based on the guaranty.”
Express renunciation…?
L disregarded the information – the invocation by G of the benefit of excussion – and
insisted on holding G liable for P15 Million. • Student: When he binds himself solidarily liable with the debtor.
In which case, the guarantor is either a surety or a solidary debtor?
What will be the consequence? Let’s say debtor eventually lost this P10 Million
[asset]. How much can L collect from G? • Student: When the debtor becomes insolvent.
• Student: 10 Million. • Student: When the debtor has absconded and can no longer be sued

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• Student: And when the guarantor has not complied with the • Student: If summons cannot be received, publication.
requirements for the benefit of excussion which is… Publication? If you do it, so you sue somebody personally, you cannot find
And the fifth one? that person, you publish to summon? Always? What instance can you do
• Student: When the guarantor has failed to perform the requirements publication or substituted service?
of Article [inaudible]. • Student: When the cause of action is a real action.
Yes, aside from that… You actually made mistakes. So, how can that be a real action, if L sues B for collection?
Let’s say the debtor has assets but they’re all encumbered in favor of different So if it’s an asset in a bank you should garnish. If real property, you attach. In
creditors… that manner, the court will acquire jurisdiction by publication of summons. In
• Student: When the assets of the debtor can no longer satisfy. this scenario, L cannot say “B absconded cannot be sued in the Philippines.” B
When excussion will be a useless exercise; it’s futile to go after the debtor. can still be sued in the Philippines notwithstanding the absence of a legal
Example #07: B defaults, L exhausted all assets. Let’s assume on Day 2, B has no asset [inaudible]. How? By attaching or garnishing his asset, whatever this asset may
in [his] possession. However, X has an obligation to pay B; B has a receivable from X – be.
P10 Million. G identified the 10 Million. L said “it’s only a collectible; it’s not part of your Now, if you look at guaranty, it’s really a weak form of security. Why?
benefit of excussion.” The guarantor has the benefit of excussion. The lender has to exhaust all the
Is that correct? assets of the debtor and all remedies against the debtor. Only after exhausting
all those assets and remedies can the lender go after the guarantor.
• Student: No, sir, because B has a right to 10 Million even if it’s only a
What does that translate to? It means L has to sue B. And, this is from
receivable.
judicial demand, complaint, trial, judgment, and then final and executory and
So how can L collect it? How can L go after the 10 Million payable by X to B?
execution of Decision. The lender has to go through this process before going
• Student: He can ask for an assignment. after the guarantor. Unless it’s one of the exceptions whereby the guarantor
Assignment? What if when the time for litigation comes and nobody does not have the benefit of excussion. And in this case, the lender cannot
cooperates? You cannot ask for anything. So, it will be all unilateral action for include G as a defendant or respondent. The suit shall be against the debtor
L. How can L go after X? alone. The guarantor, based on law, may opt to participate – so it’s optional -
• Student: He can ask X that the 10 Million receivable be given to him. to present certain defenses. But even if G participates, G does not lose the
Why? On what basis? What action/accion should L file? L may sue X, on what benefit of excussion. It means that L cannot get an award directly against G.
basis? So, it will be a two-step litigation. If, let’s say execution fails, it’s the time when
Accion Subrogatoria. L may now exercise B’s right against creditor X. So L L will have to sue G for specific performance [of the guaranty obligation]. So
still has to exhaust all possible sources of payment. Remember, excussion it’s costly; that’s why getting a guaranty is a useless security because this is how
means that L should exhaust all assets of and remedies against B. That is a you will enforce it – that’s basically how you exhaust all the assets and
remedy. The 10 Million is also an asset although it’s a receivable. It’s remedies by suing the debtor. The execution should result to a failure to satisfy
something that B may collect; L must exhaust such asset if it’s located in the the judgment. That’s the time when you go after G.
Philippines. What’s the problem with this process?
B has an asset – let’s say worth 10 Million. B went to North Korea, one-way The problem is you have a period of time between this litigation [suit between
ticket. Can L now go after G directly? B and L] and the suit against G. And during that period, what may happen is
• Student: The law requires that it’s not enough… that G can place his assets beyond the reach of L. G can squander all assets
B absconded. B could not be sued in the Philippines. So can L now go after and, in the end, the guaranty will be useless. So if L wants to go after G, time
G? will be of the essence. But the law is stacked up against L because the law
• Student: Yes. mandates that there must be an exhaustion of all assets of and all remedies
No! L should still go after B. against B. At the same time, litigation should be only against the debtor. It’s
How? How could L proceed against B? B’s not here; he’s in North Korea and not possible to have a complaint against B and G with alternative prayers (i.e.
out of reach of our courts. How will the court acquire jurisdiction?
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if B is unable to pay, G should pay immediately). Based on the law, you have The benefit of division ceases in the same manner as the benefit of
to sue separately. excussion. First, if the guarantors waive the benefit – express renunciation.
When you have an execution, you cannot just file a motion and just say “G Second, if the guarantors bound themselves solidarily with the debtor – then
should be held liable based on the guaranty” because…? they’re sureties or solidary co-debtors. Third, in case of insolvency of the
• Student: He wasn’t a party to the case. debtor (understand Art. 2059 mutatis mutandis, debtor being referred to here
Yes! Because G was never a party so how can you execute on someone who’s is the co-guarantor; it cannot be the debtor because if it’s the debtor then the
not a party? So that’s why you have to sue separately. befit of division will be illusory since there will be no instance when multiple
So what do you do if you’re the lender? What’s your alternative? co-guarantors may invoke the benefit of division). Fourth, if it’s a useless
You take the chance, you gamble. You invoke one of the exceptions [to the exercise – you can hold a co-guarantor liable if the others are insolvent, then
benefit of excussion]. there’s no benefit of division.
What are the possible candidates? (1) Insolvency, or (2) the exercise being The references to “debtor” in Art. 2059, especially in items 3 and 5, will not
useless. Of course, that will be your risk. That it would turn out that there were make sense if you read it as references to the [actual debtor] because there will
assets available. Maybe G would be able to point to assets, but you’re banking be no instance when the benefit of division may be invoked.
on the fact that G will not be able to identify available assets. So you now go So if you have a guarantor, the guarantor will be entitled to indemnity as a
after G directly. In that case, G will not have the time to dissipate or hide the matter of law.
assets. So L will have a better chance of enforcing the guaranty. Let’s take this example. B defaulted, let’s assume L exhausted all assets and
That’s why early on, we were saying that if you’re choosing a guaranty or a remedies and then went after G. G paid 15 Million (the entire obligation).
surety, who will you choose? Somebody who you can trust will not warehouse How much can G get from B?
assets or place them beyond the reach of the creditor, who will honor the The minimum will be the amount paid.
undertaking. Very difficult to find that person. We’re assuming G paid this guaranty with the consent or knowledge of B. G
Again, a guaranty is a very weak form of security. So if you want an will be entitled to full reimbursement – the total amount of the debt paid –
undertaking, a security, you go for a surety. Or better yet, you get a JSS, a Joint that will be the indemnity.
and Several Signature. Next, interest. Assuming there is no stipulated interest in the obligation
What is the benefit of division? guaranteed, legal interest.
There is another benefit available to the guarantor. The benefit of division. On Day 2, G paid the obligation. G sent notice to B that G already paid.
Under the law, G will now be entitled to full payment of legal interest even if
Let’s take this example. B borrowed 5 Million. L went after G; G invoked the the obligation did not earn interest and the interest will be at 6%.
benefit of division. What does that mean?
The benefit of division assumes that you have multiple guarantors. G1, G2, Check the case of Carodan, where the Supreme Court distinguished the rate
and G3. of legal interest for forbearance of money and for loans, before and after July
The benefit of division reflects the rule on joint obligations – obligations, by 1, 2013; 6% after July 1, 2013).
default, are joint. Therefore, G1, G2 and G3 are liable only to pay 1/3 each. So, G will now be entitled to the reimbursement of the payment made with
They’re not liable to answer for the shares of the other guarantors. interest from Day 2, the date of notice to B. Why? Because from the date of
So L will have to run after B first, exhaust all assets and remedies, then L will notice, B was placed in a position to stop the accrual of interest by just paying
go after the guarantors. And the guarantors, assuming they still have assets, will G.
still have that benefit – “we are only jointly liable; we have the benefit of And, expenses incurred by the guarantor after having notified the debtor that
division so we pay only 5 Million.” In that case, L will have to sue all. If L sues payment had been demanded of him, take note of that. Let’s say L sued G. G
only G1, G1 will be the only one liable to pay the judgment, and that judgment told B “I’m being sued! You pay!” B does not pay; the legal cost will be for the
should not exceed the share of G1. And if L only sues G1, prescription will account of G.
continue to run in favor of G2 and G3. So L would have to sue them all And of course, damages which would always be due because debtor would be
because of that benefit of division. in breach of the obligation to indemnify if G had to sue B. Then G would be

Week 03 Loan
entitled to damages for the breach of contract – whether by default or fraud or On top of that, G, in a proper case, if he did not object to the guaranty, G will
negligence or some contravention of the debtor of the obligation. be entitled to subrogation; but subrogation will be relevant only if there is
The first entitlement of the guarantor is indemnity. Indemnity includes the another security by a third party (I say third party because if it’s by B, it will
total amount paid, legal interest from notice of the payment to the debtor, also be exhausted first i.e. excussion) - a third party security, say a mortgage,
expenses of litigation from the time guarantor notifies B of the demand for pledge, or some other form of security; there will be subrogation. So if G pays,
payment, and damages. G will be subrogated to the rights of L with respect to the mortgage and the
INDEMNITY = total amount paid + legal interest from notice of the pledge.
payment to the debtor + expenses of litigation from the time guarantor
notifies B of the demand + damages

Week 04 FREE CUT
Week 04 FREE CUT

30 August 2017

Week 05 Guarantee and Suretyship

06 September 2017
Week 05 Part 01 Enrile Inton, Angelica So let’s say Lender makes a demand, whether Judicial or Extrajudicial.
Example #01 What should Guarantor do?
(So, let’s say you have…) The structure of a guaranty is like this, so you have a loan for The Guarantor should notify Borrower that there’s a demand so if Borrower
example, (principal obligation), lender extends a loan to the Borrower, Borrower is oblige to does not solve this problem, this demand, does not settle the demand of the
pay on due date and this is secured by a guaranty. So let’s say Borrower defaults, Lender Lender then the G will be entitled to expenses that he incurred to defend or
exhausted all remedies and assets of the Borrower and then Guarantor pays. somehow handle this demand by the Lender.
In the absence of an agreement between the Borrower and Guarantor, the So what will these expense include?
Guarantor will be entitled to indemnity, as a matter of law. Of course, we are Most likely legal expenses.
assuming the guaranty is with the consent of the Borrower. 4. Damages.
If the Borrower did not consent to the guaranty, then you just apply the rule Damages will be due if the Debtor delays or is guilty of fraud, negligence or
on payment by a third party. The reimbursement will be to the extent that some other contravention of the obligation. So should the Borrower delay in
the Borrower benefitted from the payment and there will be no subrogation. the payment of the indemnity or violate any other obligation in favor of the
So in this case let’s assume now the Borrower consented to the guaranty there Guarantor, then Guarantor will be entitled to damages.
will be indemnity. So from this you would gather, what the step the Guarantor should do the
The indemnity will comprise of the following: moment the Creditor demands payment from the Guarantor?
1. The amount paid by the Guarantor. The G should, the first thing that the Guarantor should do the moment he
Of course we learned whatever the Guarantor paid, should not exceed the receives demand from the Creditor is… GIVE NOTICE. Because from the
principal obligation. notice will flow certain entitlement. Specifically, the accrual of interest and the
If the Guarantor paid less, the Guarantor can only get what the Guarantor entitlement to expenses that will be incurred by Guarantor in defending or
paid. So, the total amount paid by the Guarantor. settling the demand.
2. Interest. At the same time, the notice will also be relevant or significant, in what sense?
The Guarantor is also entitled to interest on the amount paid from the time What will the notice afford the Guarantor?
the Guarantor notified the Borrower. If the Guarantor gives notice… Let’s assume this guaranty was without the
So the indemnity will be: the debt payment plus interest consent of the Borrower, then the Borrower has to object, otherwise there will
Interest. Take note the interest will commence from the time the Guarantor be implied consent and the Guarantor will be entitled to full reimbursement.
notified the Borrower or the Principal Debtor of the payment even if Assuming that the Borrower consented to the guaranty, the Guarantor gives
there was no interest on the original obligation. notice, what will the notice afford the G. Aside from the entitlement to this,
So if this loan is non-interest bearing, the Guarantor will still be entitled to what?
interest. • Student: To prevent double payment
What’s the reason for that? To prevent double payment. Somehow the notice will preclude any defense
Because the Guarantor advanced the payment. So for the cost of advancing that may be raised by the Borrower later on. But the Guarantor notifies the
that payment, the Guarantor is entitled to legal interest, Borrower, The Borrower will now be obligated to tell the Guarantor that you
What’s the rate? cannot pay or you can only pay this much or some other defenses that the
6% per annum because it is a forbearance of money. Borrower has against the Lender. If the Borrower does not do anything, the
3. Expenses. Guarantor will be entitled to full reimbursement. Even if there was no
What expenses does the law refer to? complete benefit to the Borrower of the payment.
Expenses incurred by the Guarantor after having notified the debtor that So, in that case the notice affords the Guarantor not just the benefit of this
payment have been demanded of the Guarantor. entitlement to interest and expenses but also the pre-emption of the Borrower

from raising any defense to deny full or partial indemnity. circumstances. So the law allows the Guarantor to go after the Principal
Now, if the Guarantor pays, and the guaranty is with the consent of the Debtor even before paying because of the risk of the guaranty being enforced
Borrower, the Guarantor will also be entitled to subrogation. As I explained by the Creditor.
before, subrogation will be relevant only if there is an additional security, So what will be the remedy of the Guarantor in these instances?
whether by a third party or by Borrower himself. 1. Guarantor can either ask for a security.
Example #02 Security for what?
So, let’s say there’s a mortgage by M. If Lender demands from G, G may waive the Benefit To make sure that the Guarantor may be indemnified in case the Guarantor
of Excussion and G may pay. pays the Creditor.
What will be the consequence? What will be the ideal security in that case?
G will be automatically subrogated in the rights of the Lender. In which case, A security from a third party not from the Borrower.
Guarantor can collect from the Borrower and in case of default, Guarantor can Why from a third party?
go after the mortgage. Because before the lender can hold the Guarantor liable, the Lender has to
So the Guarantor need not wait for the excussion. That’s why if this is a exhaust all remedies against and assets of the Principal Debtor. So ideally, the
mortgage of B and Guarantor is interested in the property, the moment a security should be given by a third party so if the Guarantor pays, the
demand is made by the Lender, Guarantor can pay so Guarantor can be Guarantor will be assured of indemnity.
subrogated in the rights of the Lender. 2. The second remedy is for the Guarantor to ask for a discharge.
The Guarantor will be entitled to indemnity only if the Guarantor pays but Take note. The guaranty is a contract between the Lender and the Guarantor
before payment, is the Guarantor entitled to anything? principally. Of course, the Borrower may accede to the agreement.
Article 2071 provides that even before paying the Principal Creditor, the So if it is a contract between the Lender and the Guarantor, how can the
Guarantor can go after the Principal Debtor in the following instances: Borrower release the Guarantor from the guaranty. It should always be with
1. When he is sued for payment the consent of the Lender. It cannot be done unilaterally by the
2. In case of insolvency of the Principal Debtor. Borrower/Debtor.
Why? So the question (quiz): Can the remedies be afforded by the debtor to the
Because in that case there’s no more benefit of excussion. guarantor with respect to the discharge from the guaranty, that can be done
3. When the debtor has bound himself to relieve him from the guaranty within a only with the consent of the Lender as the contracting party to the contact of
specified period and the period expired. guaranty?
Is it possible to have a guaranty for less than the... A guaranty that will expire • So don’t be mislead by the provision saying that the guarantor can
prior to the maturity period? ask form the debtor a discharge from the guaranty. Yes, debtor can
Apparently it can be based on this provision. discharge but that will not be effective unless the Lender consents.
So let’s say, the guaranty… Payment date is on day 3. The guaranty is only up to day 2. Let’s say you have a loan. It is possible for there to be a guaranty and multiple guarantors
That can be done. So in this case, if the Borrower undertook to release the Guarantor from (G1, G2, G3).
the guaranty up to day 2, then it’s one of the instances. Let’s say borrower defaults, Lender sues the Guarantors. We will assume that at this point
4. That debt has become demandable by reason of the expiration of the period the guarantors no longer have the benefit of excussion.
5. Debt matures So what can the guarantors raise as against this demand by the Lender?
6. After the lapse of ten years when the principal obligation has no fixed period The Benefit of Division.
for its maturity Remember in the absence of an agreement for the Guarantors to be solidarily
7. There is a possible intent of the Principal Debtor to abscond liable then the Guarantors are only jointly liable. That’s why you will have the
8. The Principal Debtor is in imminent danger of becoming insolvent benefit of division among the Guarantors.
How will you sum up these instances? However, it may happen that the Lender makes a demand and let’s say G1, out
Basically, these are the instances when there is a potential liability. Potential of the kindness of his heart paid the entire obligation.
liability, the risk of liability on the part of the guarantor increases under these
What will be the entitlement of G1 against G2 and G3? may relate to the principal obligation, the guaranty or personal to them.
So let’s say G1 paid. Let’s say, for example, the guarantor can say that the guaranty is void because
Can G1 get reimbursement form G2 and G3? it was entered into prior to the constitution of the principal obligation or the
1. G1 can get reimbursement only if the demand is judicial. principal obligation is void therefore there’s nothing to pay. So… These are
What does that mean? defenses… Although G1 may be entitled to reimbursement, the entitlement of
It’s an enforcement of the guaranty. There’s a complaint to enforce the G1 to reimbursement will be subject to defenses the co-guarantors may raise
guaranty in court. against G1.
2. And second, the principal debtor is insolvent. Just a note on sub-guarantors.
Of course that won’t be a problem, most likely when the Lender sues, the What is a sub-guarantor?
Lender already exhausted all the remedies against and assets of the borrower (Although it doesn’t happen in real life…) It looks like this:
so there’s no more Benefit of Excussion. So, most likely the Lender Guaranty by G and this guaranty is guaranteed by another one, this is
[Borrower] will be insolvent at this point. the sub-guaranty.
But let’s assume the Lender sued directly the three [guarantors], and there’s What does that mean?
still a benefit of excussion meaning the Borrower is insolvent? So if B defaults, Lender goes after the Guarantor but Guarantor could not pay
G1 will not be entitled to any indemnity or reimbursement from the others. because the Guarantor is insolvent, then this obligation under the sub-guaranty
So the reimbursement under this section, this situation… Lender sued G1, G2 and G3. will be triggered.
G1 somehow paid the obligation. EXTINGUISHMENT OF GUARANTY
Why did G1 pay the entire obligation?
To prevent the accrual of costs. Of course, that does not make sense, if you Now, on extinction of guaranty. Extinction of a guaranty, of course, how can
have benefit of division then you just pay you share. But let’s assume G1 paid. the guaranty be extinguished?
G1 will now be entitled to reimbursement but make sure the demand is judicial The same way that any other obligation is extinguished: payment, prescription,
or the principal debtor is insolvent. waiver. But there are rules peculiar to guaranty.
So. What will be the reimbursement? Let’s say you have this situation:
Whatever the share of G2 and G3 in the guaranty obligation. We will assume Lender – Borrower. Borrower defaults in the principal obligation. Subsequently the parties
they are equal so each will pay one third. entered into a dacion en pago. Borrower paid the Lender in kind. Instead of money,
If let’s say G2 is insolvent, what will happen? Who will shoulder the share of Borrower conveyed an asset.
G2? What will happen to the guaranty?
G3 and G1 will share. So aside from the one third, they pay one sixth each to The guaranty will be extinguished by way of dacion because that’s payment.
correspond to the share of G2. However, let’s say, the Lender after the dacion, lost possession of the property
Take note, this is somehow peculiar because if G1 did not pay, and G2 is because somebody had a legal claim or entitlement to that property, will the
insolvent, who can the Lender hold liable? guaranty be resurrected?
NO ONE. Neither G1 [nor] G3, because they have the benefit of division. The answer is no. The moment the Lender accepts payment in kind, meaning
Their liability is joint. But when G1 pays and it is by virtue of a judicial payment by way of dacion en pago, the Guarantor will be unconditionally
demand or the Borrower is insolvent, they are now obliged to share. If one released, of course, there can be a stipulation to the contrary. They can state in
guarantor is insolvent like G2, G3 will now have an additional liability. So if dacion en pago that the Guarantor will continue to be liable until the Lender has
you have this situation, it doesn’t make sense really to pay the shares of the complete control/possession of the property.
others but somehow the law anticipated that somebody will make that mistake. Other situations:
So, in case that mistake is made, the rules will be as stated in Article 2073. Let’s say you have a guarnty by three persons (G1, G2, G3)
Of course, G2 and G3 just like the in the case of indemnification by the Lender gives a discharge to G1, to G1 only. What will be the consequence?
Borrower of the Guarantor. G2 and G3 can raise defenses against G1 which

Provision says: A release made by the creditor in favor of one of the guarantors without the Any material alteration of the principal obligation without the consent of the
consent of the others benefits all to the extent of the share of the guarantor to whom it has guarantor would release or discharge the guaranty.
been granted. What do we mean by material alteration?
So the Lender discharge G1 from the guaranty A modification of the principal obligation that will increase the burden of the
Will there be any prejudice to the guarantors? guarantor or the likelihood that the guarantor will be liable. Like for example,
Technically no. Because they have the benefit of division. extension.
So if G1 is released by the Lender, the payment of the loan will now be Will that be a burden? Will that increase the risk of the guaranty?
secured only to the extent of two thirds. So lender can go after G2 and G3 YES. Because now there is a longer period of payment – there is a longer
only for one third still. So, this will not make sense. So why? period to default.
Remember when we were discussing, if let’s say G2 is insolvent, it will be How about the shortening?
relevant only in this situation because remember who will share the one third SAME THING. The principal debtor may not be able to pay within the
of G2? shorter period. So any material modification of the principal obligation will
Both of them [referring to G1 and G3] discharge the guaranty.
So If this is a release, then there is 1/6 is missing. So if G3 paid, the payment Another example. The lender increased the loan amount. Without the consent of the
of G3 should only be one third and 1/6. Lender should return the 1/6 because guarantor, the guarantor will be discharged. If you are for the lender, and you’re accepting a
it will amount to an overpayment. That’s the only instance guaranty or a surety,
Week 05 Part 02 Gaba, John Elland What should you include?
L should return the 1/6 because it will amount to an overpayment – that’s the That the guarantor consents to any modification, amendment, change or other
only instance because if they’re solidary then the discharge will be the alteration of the principal obligation, even without notice to the guarantor. So
discharge for all. So, a discharge in favor of a co-guarantor will be relevant only it’s like a pre-approval by the guarantor of any modification of the principal
if one guarantor is insolvent and another guarantor paid the entire obligation. obligation. That means that should there be an amendment or change in the
So there will be an entitlement to a return of an overpayment by the creditor. principal obligation, the guarantor or the surety as the case may be will
Example continue to be liable.
So borrower defaulted, the lender, we will assume can go after the guarantor. But when So let’s say you have multiple guarantors and in addition to the guaranty there is a REM by
borrower defaulted, lender did not collect let’s say for two years he was not collecting anything M. So you have the principal obligation and two collaterals/accessory undertaking – the
from borrower. guaranty and the REM.
Can lender still go after the guarantor? So, borrower defaulted, lender did not Let’s say before the due date, lender released or grant a discharge to the
make a demand on the borrower to pay, will that discharge the guaranty? mortgage, what will happen to the guaranty?
Answer is NO. The failure of the lender to timely collect the obligation DOES The guaranty will be EXTINGUISHED because the lender, by discharging the
NOT amount to an extension of the term of the obligation that could have mortgage, pre-empted the right of the guarantors to be subrogated in the
amounted to a discharge of the guaranty. rights of the lender should the guarantors pay. So that’s the reason for Art
But say, this is day 1 and this is day 2. Later on, before day 2, borrower and lender agreed 2080.
that this would be extended to day 3. So there’s an extension on the payment date. Take note. A word of caution for Art. 2080. The guarantors, even though they
Guarantor was not privy to this extension, did not agree to this extension. may be solidary –
What would happen to the guaranty? What does that mean?
The guaranty would be EXTINGUISHED. They are solidarily bound, meaning, they don’t have the benefit of division, but
What if instead of extending, they shortened it to day 2. What would happen they are not sureties, they are not solidarily bound with the principal debtor.
to the guaranty? Take note. Art 2080. When the lender prevents the guarantor from being
The guaranty would also be EXTINGUISHED. subrogated in the rights of the creditor, the guaranty will be discharged. That
So what’s the rule then?

shall NOT apply to a surety. Authority is Ang v. Associated Bank. Sept 5, SURETY FORM
2007. So, Art 2080 DOES NOT apply to a surety. Here’s an example of a surety agreement. I gave you a surety agreement
Why is a surety denied of the benefit of Art 2080? because no one uses a guaranty in real life. Let’s say this is surety agreement
Because a surety is akin to a solidary debtor, the only requirement is the default issued in favor of a bank. Equitable Bank is now BDO. So you have the usual
by the principal debtor. The moment the principal debtor defaults, the surety set-up, you have the title of the contract, the agreement, and the parties, the
will be liable – no other condition. That’s the only explanation why 2080 does sureties. Normally you have sureties, let’s say an individual, they will be
not apply to a surety. Which means, basically, if you have a situation where spouses. So both of them will act as sureties.
there is a surety, lender could have opted to go after the surety and not the Week 05 Part 03 Gallardo, Christian Andrew
mortgage. So, surety could not complain. That’s why Art 2080 does not apply. No one uses a guaranty in real life. But of course if you are being asked to be a
Art 2081. The guarantor may set up against the creditor all the defenses which guarantor, you can readily accede. You just sign a plain guaranty, and it will be
pertain to the principal debtor and are inherent in debt; but not those that are really difficult to make you liable.
purely personal to the debtor. This is a surety agreement in favor of a bank. You have the usual set-up. You
What are these defenses? have the title of the contract, agreement and then the parties. Normally,
Like obligation already prescribed, obligation is void. When you deal with a sureties, as individuals, are spouses.
security arrangement, what’s the first thing you look into to assail the validity Can we have a corporation as a surety?
of the security arrangement – whether it’s a guaranty or a mortgage – you Yes. But that will require not only board approval but also SH approval, unless
analyze first the principal obligation and anything that may have to do with the the corp is an insurance company, because a surety undertaking is not in
principal obligation, like payment, partial payment, compensation, or matters accord with the primary purpose of the corp.
involving the validity or enforceability of the principal obligation. That will So you have the parties, and then of course the recitals, the premises and
translate into a complete or partial defense in the security arrangement. whereas clause that basically a borrower borrowed from a bank and the
sureties are there to provide a surety undertaking. Meaning, they are solidarily
Legal and Judicial Bonds. liable with the borrower in payment of the obligation.
What are these? Now when you are reviewing this kind of contract. If you are reviewing for the
They are basically surety bonds. bank, then this is the form. If you are reviewing from the perspective of the
Who issues surety bonds? borrower or the sureties, focus on this one…
Principally insurance companies. You have the same arrangement, you pay a What obligation is being secured?
premium, say you need to pay a bond to support some judicial request like an Because sometimes the lender will make the surety undertaking cover “any and
attachment, injunction or a bail bond. You apply to an insurance company to all present and future obligations”. So if you are the lawyer of the surety, limit
get the bond. Minimum, you pay a premium and then the insurance company it to the subject obligation.
will issue a bond. But normally the insurance company will not issue the bond Here it is a credit facility for 5 M.
based on payment of premium. What is an Omnibus Line?
What will they require? It is a credit facility that can be used for anything, subject of course to the
Payment of a fee, and then they will have an indemnity contract and a security. terms.
So if you are the one applying for a surety bond, you are basically asking for What is a domestic-based purchase line?
the name of the surety because when the surety is held liable, the surety can It is a credit facility whereby you can discount checks. So let’s say you have
collect using your collateral. post-dated checks and you want to get cash now, you somehow sell them to
In a judicial bond, because it is a surety bond, there is no benefit of excussion. the bank at a discount. So here, it says that surety will cover 5M. Take note. To
That makes sense because just imagine if you posted bond in court, and before make sure that the surety will not be discharged by any amendment or
the court can collect on the bond, the court has to sue for excussion. That modification of the principal obligation, you have that clause “including all
doesn’t make sense. extensions of payment, renewals, regrant, increase, novation of obligations and
all other obligations of whatever kind and nature”
Now here the bank (being sly) was trying to expand the coverage of surety If it is a corporation, put the name of the signatory and title or position (eg
undertaking by inserting that clause “whether such obligations be contracted President). Make sure it is of this format. Make sure it is presented this way.
before, during or after the execution of this agreement” So while it would Because it can be interpreted that XYZ signed in his personal capacity. It
seem to cover only 500M, it actually covers all obligations that borrower has in happened in a case before. While the intention was to act on behalf of
favor of the bank. So if you are the lawyer of the surety, you just take the corporation, the president became personally liable. So signature page may be
obligation under whatever document. You delete provisions like this. the basis of liability. So make sure that they sign in the capacity accurately
And then you have the line “including interest, penalties, charges owing by the described in the signature page.
borrower to the bank as well as attorney’s fees” You have here the witnesses signing in the presence of and the
So what kind of surety do you have here? acknowledgement. Basically, acknowledgement is an attestation of parties that
It will be indefinite since it covers all obligations of the borrower. But as I said, they voluntarily executed and signed the contract. You need a government
if you are the surety, it can be indefinite, but focus only in a specific principal issued ID.
obligation. Remove clauses expanding the surety undertaking.
INDEMNITY FORM
This paragraph. This is the distinction between a solidary debtor and a surety.
What triggers the liability of the surety? If you are acting as surety or guarantor, one thing you require from debtor is
The default by principal debtor. If it is a solidary debtor, the creditor can run an indemnity undertaking. You have the surety, corporation and debtor. So
after any of the solidary debtors. surety here is an insurance company who issued bonds to secure payment of
This provision. Sometimes includes this clause “the sureties agree to execute the obligation. Then you have here the SH undertaking to indemnify the surety
any other documents or acts to fully implement this contract” and then there is for whatever obligations surety may incur for this obligation.
a clause “the sureties constitute the banks as attorney-in-fact to execute those First thing, SH agreed to pay premium. Here, they specify the sharing of
acts” In certain transactions, let us say you are the creditor, and you need premium to be paid by SH, accompanied by cost such as documentary stamp
certain documents from debtor, it is good to provide this clause. Of course, tax. Here, the “SH undertakes to indemnify the surety for anything the surety
that is the undertaking of the debtor. It may happen that if you need those may incur under the bond” So basically this is the tenor of an indemnity
documents, the debtor may not cooperate. So you insert this Special power of undertaking
Attorney clause. In which case, the time comes when certain documents is Paragraph C. “If the surety receives notice of any claim action or proceeding…
needed, the creditor may execute acts in favor of the debtor. the surety shall promptly notify the SH in writing”. Remember the guaranty
This one. “The obligation of surety in this agreement shall not be affected provisions. Guarantor needs to notify debtor in case creditor demands
despite any stay orders or by any proceeding involving the borrower”. payment. This has same purpose. However, here, even if there is only a
Generally, any insolvency proceedings of the borrower does not affect the demand of surety, the surety will already have entitlement. In Guaranty
surety. provisions, the guaranty will only have the right for reimbursement upon
But this is just to clarify. Because before, a defense usually raised by paying. Here, by contract, they agree that surety will already have entitlement
surety is that the corporation is subject to a proceeding where all upon mere demand.
creditors are prevented from claiming anything from the debtor. So if What entitlement?
the debtor should get a court order saying “nothing can be collected The surety may retain counsel at cost of SH.
from the borrower”, that order will not benefit the sureties. Hence, Why do you need that?
they need a separate court order protecting them from collection You are being sued. You do not want to shoulder cost of legal defense and you
efforts from the creditor. want a counsel of choice for free.
This one. “the surety, if married, do hereby represent to have secured consent Why do you want to choose your counsel?
of the spouse”. Not enough. Because if I am a SH, I will just give you a cheap lawyer. But if you are the
So if you are doing transactions with a married individual, what do you ask? surety, get the best counsel.
Ask the actual spousal consent. But if you are the surety, forget spouse. Paragraph A mentions securities for indemnity. Here, certain bank deposits
Because that will not expose the conjugal assets. were given as security. Should the surety be made liable, the proceeds of such

will be paid to the surety. Because maybe the premium you are paying the surety will be below what your
This one. “the duties and obligations of SH will be several and not solidary”. cash collateral will earn before period of payment.
In PH law, several means solidary. So this is wrong. This form must If you make contracts and there is governing law, make sure it is PH law
have picked up from common law jurisdictions. because that is the only thing you know. Because any subsequent business is
Just like in an indemnity in favor of guarantor, there is payment of interest and for you.
penalty in case of delay in favor of indemnity. This is by agreement so it can be Is it possible for surety or guarantor, when demand is made to him, to seek
done. payment from debtor? By going after the security arrangement? Can that be
This is the security. “To secure payment, the SH has provided the cash done?
collaterals” That is valid. So that is what you do. The moment you are given a demand; the
When you have a surety undertaking, you are just using the name of borrower should pay the surety.
the surety. The surety will have this undertaking with indemnity and Why valid?
security and fee. This is just for seal of approval that the surety This arrangement is merely using the name of surety. Surety has assurance of
conducted due diligence. It gives an assurance to lender that payment indemnity and actual payment
is fore coming. But surety has a collateral to secure payment to him.
But why cash?

Week 06 Mortgage and Pledge

13 September 2017
Week 06 Part 01 Hao, Tristan Jeremy • Student: if the title is already delivered the title?
what do you mean by delivered the title? As in convey the title? What title?
MORTGAGE AND PLEDGE
Certificate of title. So seller, delivers deed of absolute sale together with the
Why is it necessary for a security arrangement to have an existing principal certificate of title. So if you’re X, the mortgagee you will accept the mortgage
obligation? Why is it required by law? What is the reason behind the of the mortgagor?
requirement? A REM is a contract, who are the parties? • Student: if the mortgagor show the title and he can promise that his
• Student: The mortgagor and the mortgagee mortgage will be annotated on the title
What are the other requirements of a mortgage or pledge as a contract? so as of day 2 does mortgagor have absolute ownership?
• Student: cause or object • Student: if he already has the title and he is already in possession.
As of day 1, there must be a principal obligation, to be secured by the He has the certificate and the deed of absolute sale?
mortgage, because without the principal obligation the mortgage will have no • Student: as long as he has possession.
cause as a contract. Remember that as a cause for a mortgage, pledge or a what do you mean possession? He has possession together with the certificate,
guarantee is the same cause for the principal obligation. The undertaking of the so is mortgagor now absolute owner?
creditor to lend the debtor. ABSOLUTE OWNERSHIP you have TWO COMPONENTS, beneficial title
there’s no jurisprudence about the retroactive effect of a suspensive condition. + legal title or ownership.
It’s a possibility, but the safer view is that the obligation must be existing at the When will mortgagor have title?
time of the constitution of the mortgage or the pledge. Upon registration.
Remember that according to article 2052 of guaranty, it mentions there that a So upon registration, there is no title yet. So if the mortgagor will mortgage will
guarantee can secure a voidable obligation. So as long as it is valid, meaning the mortgage be void? Valid?
you have all the requisites of a contract, consent of the parties to the object or • Student: yes,
the cause. It doesn’t matter if it has defect, as long as it is a valid obligation, it completely?
may be voidable but it’s fine it can still be secured by a mortgage or a pledge or • Student: no , the registration will make the REM valid, it retroacts.
a guarantee, but the obligation must be existing at the time of the constitution
Example: Absolute Ownership
of the principal obligation.
Seller sold to the mortgagor and delivered the deed of absolute sale, together with the title and
what’s the next requisite? possession. So mortgagor, after this transaction, became the beneficial owner, legal title is still
• Student: absolute ownership with the seller. So mortgagor mortgaged to X, is the mortgage valid?
what do you mean by absolute ownership? As between two of them it is valid, but as against 3rd parties, it may be assailed because,
• Student: naked title first, it was not registered, this transaction, second, mortgagor at the time of the mortgage was
Absolute ownership = beneficial title + legal title not absolute owner. Because what will appear in the title, it’s mortgagor mortgaging property
so let’s say you have a mortgagor, bought property from seller, day 1 there is a in the name of the seller.
contract of sale. Day 2, mortgagor, mortgage the property to X to secure a Normally what would be the documentation? The mortgage is like is saying,
loan. Day 3, registration of the sale. Do you have a valid mortgage? mortgagor bought property and is in the process of registration and mortgagor
• Student: as long as the title to the property has already been. is mortgaging to X. How will it appear on record the sequence or chain of
so there’s a sale, so title was vested in mortgagor, so on day 2 mortgagor can title?
mortgage to X. • Student: Even before the land title is registered in favour of the
• Student: yes mortgagor, like if there is already a REM, X can already annotate the
title.
Is there compliance with the requisite of absolute ownership?
Really? The ROD will accept that one? ROD will not accept that one. if you know that the trustee is only holding the property in trust, then this
What do you have to present? You know a Trust? Who are the parties? pledge or mortgage is void, so you have to take into considerations certain
Trustor, Trustee and Beneficary. Normally, you have the trustor who will also legal provisions, let’s say land titles or corporation code.
be the beneficiary, but of course a beneficiary can also be a 3rd party. But in all So let’s say you are dealing with shares, how do you check?
transaction, you will have a trustor and a trustee. You just look at the records of the company, you check the stock and transfer
Who will have legal title? book, stock certificate book, the stock certificate, you go to the SEC, you
Trustee will have legal title, and beneficial of course the trustor’s. check general information sheet showing the all the stockholders of the
So let’s say, Trust, shares of stock, so? corporation, etc. So based on the records, the trustee appears as legal owner,
• Student: the legal ownership of the shares will be that of the trustee, and there is no indication of the trust, then the Pledge in favour of X will be
but all of the dividends for the shares of stock will be for the valid.
beneficial owner. In the same manner, if it’s a certificate of title in the name of the trustee
On record, trustee will be the stockholder, but all economic benefit of the without any indication of the trust, it will be valid in favour of X. Because as
shareholding will be for the trustor/beneficiary. far as X is concerned, only the trustee is the owner, X can rely only on the
Who can pledge the shares? stock certificate or certificate of title. Take note of that.
• Student: both of them. So if you have this set-up and X is aware, only trustee is assigned, then this will
so let’s say trustee, pledges the shares to X to secure an obligation of trustee, in be void. But taking into consideration peculiar provisions of law, let’s say with
trustee’s personal capacity. So let’s say a payable to X of trustee is secured by a respect with land title, this will be valid even against trustor or beneficiary.
pledge of shares. Is the pledge valid? In fact, in reality, this is how it could happen, if you’re X, if you’re doing a
• Student: if trustee gets a consent of the beneficiary. trust, normally you don’t disclose the trustor or beneficiary. Like you want
trustee did not get the consent. Is it valid? shares, or you want property held by the trustee, most likely you don’t want to
• Student: then it is not valid since because the trustee only has legal appear if you are the trustor or beneficiary, you don’t want to appear as the
ownership/title. owner. So in that manner you are not protected, because trustee may mortgage
X dealt with trustee, the stockholder of record, trustee delivered stock or pledge the property. And as far as the pledgee or mortgagee is concerned
certificates indorsed in the name of trustee, so the pledge will now be void? the trustee is the absolute owner.
• Student: yes . So how do you protect yourself? Without indicating the trust arrangement.
let’s change it now a bit, instead of shares, it is TCT, legal ownership is in the in the case of minors, trustee is holding property in favour of the minor
name of trustee, now you have a mortgage in favour of X, a REM in favour of children, in that case how do you mortgage the property?
X. Mortgage valid? • Student: you get consent you have to get the consent of the
• Student: Sir, in land titles, you can trust what’s on the face of the title beneficiary (minor).
but it is still due diligence on the part of the buyer to check if there is so the minor should sign?
actual occupants of the property. • Student: or the legal guardian,
So there’s a difference? When is that required? That extra measure of doing an the trustee is the parent, so that will be enough? So let’s say the property is a
ocular inspection, checking the site, is that required in all mortgagees? condominium unit worth 10M held in trust for the minor by the parents. The
• Student: if they are only a bank. parent can now mortgage is as trustee?
because in that case there is a greater degree of care required of banks. • Student: yes,
• Student: if it is a person, he can rely on the face of the title. really? Did you take up special proceeding? It’s an issue because a mortgage is
then is the mortgage valid then? an act of dominion, because there is a potential conveyance in case of default.
• Student: I don’t think it’s valid. So in that case what will be required if you’re going to dispose of the property
of the minor? What will be required?
Court approval.

so going back to the original question, how will you protect yourself? You Yes because one is a duplicate original for the owner and one is on file with
want to prevent a pledge or mortgage by the trustee but without disclosing the the register of deeds. Let’s go back to the question so what do you do now?
trust arrangement. What can the trustor or benifiacry do that will alert X that You want to prevent the trustee from mortgaging or pledging the property of
there is some trust arrangement or some other arrangement regarding the the trustor-beneficiary without the beneficiary’s consent
property? • Student: You don’t give him the certificate of title
• Student: go to the corporate secretary, Yes you just withhold, you don’t give him the certificate the stock certificate,
when you’re X, you can go to the corporate secretary and the corporate you keep the TCT or OCT for that matter. That will now prevent a mortgage
secretary can certify that the trustee is the stockholder of the shares, it DOES or pledge of course nothing can stop the trustee form mortgaging but now you
NOT answer the question. can question the trustor-beneficiary can now question whether X was a
Let’s go through the process, let’s say you’re the pledgee or mortgagee, a pledgee or mortgagee in good faith. Because, X accepted the mortgage pledge
property is being offered to you, what will you do? or it can be a chattel mortgage because there will be no turn over of possession
• Student: I will check the property. trustor-beneficiary can now say that there was a red flag. X was actually acting
Week 06 Part 02 Ladeza, Dominic in bad faith in the absence of the title and the stock certificate.
How will you check the property? Third requirement? Essential requisite of a mortgage or pledge?
• Student: If it’s a share I will go to the corporation • Student: Third requirement would be that the person has the capacity
No. Let’s say it’s a corporation these are BPI shares you just don’t walk into to dispose
the BPI offices and ask for So, what does that mean?
• Student: I’ll look for the certificate first • Student: Meaning that the property is not subject to any claim by a
You will ask for a certificate or if it’s the mortgage, third person
• Student: The Title Have the free disposal of the property, or legal authority, a person’s
What title? As a counterpart to the Stock Certficate you will ask for? constituting the pledge or mortgage should have free disposal of their property
or the corresponding legal authority, so what does that mean?
• Student: The contract of sale?
No? You will ask for? Yes the title, what do you mean by title? • Student: It means not subject to any claim by a third person
• Student: The certificate of title Is not subject to any claim by a third person? So you took up land titles what
Ok so now let’s go back to the question, you’re the trustor-beneficiary; you can be a claim?
want to make sure that there will not be mortgage or pledge without your • Student: A lien?
consent What can be a claim? Let’s say X has a TCT what can be a claim?
• Student: So you write on the Certificate of Title? • Student: Y can say that owns actually the TCT
No! Then you disclose the trust arrangement. So what do you do to prevent a Exactly who has the TCT?
mortgage or a pledge? Let’s say you are the mortgagee, how do you make it • Student: Y can say that X owes him money and then he mortgaged it
binding on third parties? before
• Student: Register But there’s no mortgage contract let’s assume so it’s just a claim. How can Y
Register it, you took up land registration? To register it, what do you need? make it difficult for X, Y has a claim, Y has no proof but Y can harass X how?
• Student: you need a certificate of title • Student: File a case?
what are the certificates of title there are two kinds? No, without filing a case
• Student: The duplicate • Student: Write it on the TCT
What’s the duplicate? There are two titles one’s a duplicate original and one’s Of course X will not give the owner’s duplicate
an original why do you have two originals? • Student: By going to the Register of deeds
• Student: One for the register of deeds and one for you How? What will Y do? What legal action can Y take? What’s that you didn’t
take that up?
• Student: File a suit So what is free disposal?

No, there’s no court involvement because that’s costly this is a cheap form of • Student: That’s when X is prohibited
harassment So Y has a claim, and he’s saying that Y has an interest in the What’s the general requirement so we go by default so we have free disposal if
property whatever be it whatever basis be it a sale mortgage or some other you’re an individual?
transaction and without going to court X can now create some legal charge on • Student: You must be the absolute owner?
the property how? You don’t have to go to court but you can now create some No, the individual, what’s proof of legal authority? Or right to freely dispose of
form of charge on the property that nobody will deal with it unless that thing the property? What’s the minimum requirement?
is removed. What? • Student: That you’re 18 years old
• Student: Adverse Claim YES legal capacity so if it’s an individual then it’s just 18 years of age, if
Adverse claim! How is this done it will just be an affidavit. Y will execute an married?
affidavit go to the register of deeds and have it annotated on the title, not the • Student: You need consent of spouse
owner’s duplicate but on the title on file with X so it’s now subject of an Yes, to bind the conjugal assets If it’s a corporation
adverse claim. There’s now an adverse claim. • Student: Board resolution with the secretary certificate
So following your definition of free disposal or legal authority, this can no Board approval if it’s a mortgage or a pledge securing the obligation of the
longer be mortgaged. Because there’s a lien or a charge? corporation, if it’s a third party obligation? What will you need?
• Student: Yes • Student: The consent of the third party?
No! Let’s say instead of an adverse claim Y filed a case, so Y was going after Of course the mortgagee, No! It’s a corporation it’s a company mortgaging
the party, what will Y do in the mean time? Before actual decision? property to the bank? We will assume there’s a principal obligation, this
• Student: He may file injunction, he can file an attachment case obligation is, the liability of X, a loan payable to the bank.
No, land title provision is simple you just deal with the title, certificate of title • Student: So if it’s a corporation, obtaining a loan from the bank
just replicate that there is a claim or a possible charge or lien on the property. So X has a loan payable to the bank, it’s secured by a mortgage from the
Y will have an annotation of? corporation ordinarily you will require board approval, here, what do you
• Student: Annotation that there is an adverse claim? need?
No this is an adverse claim but there is a case it will be? It will be an • Student: Sir, you need the approval of the stockholders, 2/3 of the
annotation of? stockholders
• Student: The adverse claims 2/3s of what? Stockholders, what’s the correct? I know what you mean but
There’s an ongoing litigation you will annotate a? you have to represent it accurately. Stockholders?
• Student: Lis pendens • Student: Stockholders… 2/3 of the outstanding capital
This land now has a notice of lis pendens on it, can X now mortgage it? What? Stockholders Yes! Stockholder’s approval 2/3 of what?
• Student: Yes • Student: 2/3 of the outstanding capital stock
So you’re saying it’s subject of a lien or a charge, it can still be mortgaged? So Yes! Stockholders holding or representing 2/3 of the outstanding capital stock
it’s not the definition of free disposal or legal authority of the mortgagor. In of the corporation, why?
fact if, let’s say X mortgaged it to B this is first mortgage, second mortgage, X • Student: If the corporation is going to dispose of the property or the
subsequently mortgaged it to C? can that be done? assets
YES you can have two mortgages on the same properties. Nothing will stop Substantially all, this is not substantially all, let’s say one of the properties of
you of course there will be restrictions by B and it may not be acceptable to C. the corporation. Because you need stockholder’s approval
Because normally when you mortgage, you will surrender the title to the No, because most likely, this mortgage is not pursuant to? The business?
mortgagee. The primary purpose of the corporation as indicated in the articles of
So how will you be able to register the second mortgage? incorporation. So you may need stockholders’ approval
You can have a mortgage but it may not be registered.

So what will prevent a person from mortgaging or pledging property? Can you • Student: Rescission,
tell me some impediment that will prevent that person from having free Can Debtor question the foreclosure?
disposal of his/her approval or will have no legal authority? • Student: No
• Student: He may be incapacitated in signing an actual contract No? The answer is Yes So give me now the reason? Debtor can question the
So, below 18? foreclosure because
Will the mortgage be valid? If signed by the minor? • Student: There’s already a demand? Judicial demand?
Voidable, because below 18 So?
What is a legal restriction that can prevent you from mortgaging your property • Student: So if, such judicial deman pushes through, doing the
let’s say you want to mortgage your property you’re sane, you’re of legal foreclosure would be over what he owes C
capacity, you’re single so you don’t need consent of anyone but something will I told you, the creditor can only collect once whether through foreclosure or
stop you, what can stop you? What can be a legal restriction against you? judicial action or a combination?
a case being filed against you will stop you from mortgaging?
But if you have this scenario, Debtor defaults, creditor sued to collect, what’s
• Student: Yes , from disposing of the property in any way
the legal effect of that collection suit?
So, How will the court stop you from disposing or encumbering property?
That’s an abandonment of the mortgage. Remember this. This is true of
• Student: Preliminary Injunction mortgages and pledges.
Yes an Injunction, an attachment will not stop you from mortgaging because
the mortgage will only be subject to an attachment. If it’s registered ahead of a The moment the creditor sues for specific performance that will be considered
mortgage. an abandonment of the mortgage or pledge that’s not the same with a
Now, let’s say you have a loan, Debtor, Creditor, Creditor extended a 10M guaranty?
Loan, Debtor has to pay principal and interest (1) C (2) D This is secured by a • Student: Yes
real estate mortgage. Debtor defaults, on day 2 Creditor, made a demand No, because in a guaranty there must be excussion so necessarily there must be
although debtor is already is in default, creditor made a demand an a suit against the debtor. How about in a surety?
extrajudicial demand. Debtor did not pay so again Debtor (Creditor?) now • Student: No.
filed a complaint to collect the 10M with interest and the Debtor (Creditor?) Even so, it’s not applicable to a surety because a surety, let’s say this is secured
also went after the property foreclosed also by a surety then the creditor can go after the surety or go after the
any comment? mortgage.
• Student: He did not have to file a case? Take note, so in this case, why can the creditor foreclose? As we said when we
But? C wants to do it shotgun? All alternatives should be pursued. So C filed a started, a mortgage or a pledge creates a lien on the property as against a
case and then he foreclosed. Can D oppose the foreclosure? guaranty which is only personal undertaking of the guarantor that’s why when
• Student: Yes the debtor defaults the creditor immediately can go after the mortgage or the
Why? pledge by foreclosing it following the requirements of law and applying the
• Student: Because there’s already a case being filed for the demand? proceeds in payment of the principal obligation.
C can only collect once either through the case or through the foreclosure. If Let’s say you have a sale, you have a seller and a buyer. Seller sold property to
C collects through the foreclosure then the case should be dismissed the buyer in exchange for the price. Buyer will pay the price, there’s already
• Student: But that’s the point of the real estate mortgage? conveyance, this is a deed of absolute sale and then the price will be paid
So if there’s a mortgage, the creditor is forced to foreclorse? The creditor no downpayment let’s say 20% and balance in 60 monthly installments. Buyer
longer has the option of specific performance? paid the downpayment but defaulted on paying the first installment. What’s
• Student: Yes? the remedy of the seller?
No! Specific performance always remains as a remedy available to the creditor • Student: He may ask for default? Since he already defaulted he can
that’s why in this example, creditor is pursuing both. Foreclosure and? return the downpayment and get the property back?

No, what’s the remedy of the seller? Default remedies? resolve the sale, because as far as the parties are concerned, the sale was
• Student: Seller can either go to court already completed.
To what? Go to court to do what? PACTUM COMMISSORIUM
• Student: To file an action for resolution of the contract
Resolution meaning undoing the sale or? What’s pactum commisorium?
• Student: Specific performance • Student: If the property mortgaged will be automatically appropriated
Yes, collection specific performance, So, Seller has the option to either resolve to the creditor
the sale and get back the property plus damages incurred or collect the balance Mortgage or pledge? Who will appropriate?
plus damages. • Student: The creditor or the lender
But in same facts but this time, this is secured by a real estate mortgage, the Week 06 Part 03 Lopez, Robynne
same property sold by S to B was mortgaged by B to S so let’s say this is a day Say you have a loan contract, lender lends 10M and there's payment of
1 also there’s a mortgage so B registered the property and then mortgaged it to principal and interest. This is secured by a REM. Now, borrow defaults. What
S the usual financing transaction, you’re buying property on credit normally will be the consequence of pactum commissorium?
there would be a counterpart mortgage on the same property B now defaulted, • Student: It will not invalidate the original pledge
the remedies available to B are or rather S No, in this case, if we will have pactum commissorium
• Student: He can foreclose. • Student: The legal consequence is automatic appropriation
He may ask for resolution or specific performance Specific performance but So, what do you mean by automatic appropriation?`Who will appropriate?
the consequence will be? • Student: The lender
• Student: The consequence will be the seller will be able to foreclose The lender will appropriate the?
on the real estate mortgage • Student: The REM or the secured property
Seller will have the mortgage as security. How about resolution? Can seller sue The mortgaged property. What do you mean by appropriate?
for resolution? • Student: You will take possession and ownership
• Student: He may sue for resolution So ownership will vest in the lender. Automatically? So that's pactum
But? What will happen to the mortgage? commissoruim. That's prohibited in mortgage and pledge, right?
• Student: The mortgage will also be deemed abandoned? • Student: Yes, .
In this scenario, this is an option, foreclosure is an option but resolution will Why?
NOT be an option, by jurisprudence Supreme Court said that the mortgage • Student: Because the mortgaged property is more than the value of
was deemed the cash payment. So if you have this transaction whereby seller what is secured by the obligation. So in a sense, it would be unfair for
sold on credit, buyer mortgaged the property, the only remedy of the seller in the borrower.
case of default by the buyer is either specific performance or foreclosure, But it can also happen in a pledge, the pledge property maybe of a value lower
resolution is not available, the reason being that the mortgage, Supreme Court than the value of the principal obligaiton. In which case?
said, consummated the sale, how? In effect the supreme court was saying that • Student: It will be unfair for the creditor
seller extended a loan to the buyer, this was not the explanation of the Because the creditor, in case of a foreclosure of the pledged property, the
supreme court. The supreme court only said that the mortgage was a cash creditor cannot collect the deficiency. So what does the prohibition of
payment but to make sense of it as a loan, the seller extended a loan to the pactum commissorium prevent?
buyer to pay the price and what the buyer is amortizing is the loan payment.
• Student: Unjust enrichment? I think it provides for a safeguard
So, this one this transaction, is already consummated, what’s left to be fulfilled
against...
would be the loan component so the buyer in case of default, seller can either
What does the prohibition achieve? What does it want to ensure? This is the
sue to collect the payables of the buyer or foreclose the mortgage but not
usual term used in government. Transparency! Why transparency? Because if
there is no pactum commissorium?
• Student: If there is no pactum commissorium, there would be certain Let's say the lessor is subject to a penalty of 1M, and the value is 1M, the lessee
circumventions of the law can appropriate the property in payment of the penalty. Pactum
No. If there is no pactum commissorium, what should lender do to get the commissorium? Lessee can transfer title immediately in his name upon default
property? by the lessor in his obligations.
• Student: If there is no pactum commissorium, he can already • Student: It is valid because it can serve as legal compensation
appropriate it for himself No. Its appropriation. The property will now be the lessee's. Pactum
No. If there is pactum commissorium, the lender can appropriate. If there is commissorium?
no pactum commissorium, what will the lender have to do to get the property? • Student: Yes, .
• Student: He will have to foreclose. And therefore void? Clearly, its pactum commissorium, there's automatic
So the lender has mortgagee or pledgee will have to go through the hoops of appropriation upon default, and whatever liability the lessor incurs by virtue of
foreclosure. And what does that achieve? that default. Void?
• Student: The foreclosure achieves, the proceeds of the sale will be for • Student: Void, .
the payment of the principal obligation No, because pactum commissorium, if you look, should be in a mortgage
The law thinks that with the foreclosure process there will be fairness and or pledge. This is a lease contract. So, it maybe challenged but on some other
transparency because it is a public process. Outsiders can participate, and there basis, but not on prohibition of pactum commissorium in mortgages and
may be competition. That's the sense of the law. pledges. So if you want that stipulation, automatic appropriation, you just
Is there any instance where the lender can appropriate? make the terms reasonable and place it in some other contract, and it has the
• Student: Sir, what the law prohibits is automatic appropriation potential of being valid after court challenge.
I want automatic appropriation. Is there any instance where the lender can Now let's go to what is pactum commissorium or not. These are the questions
automatically appropriate? Whether mortgage or a pledge? you'll have to answer. You are familiar with shares of stocks, right? You took
• Student: They can stipulate that upon default there is automatic up Corp, so you're an expert. (Situation 2) So let's say, you have X has stocks
appropriation certificates covering 1M ABC Corp shares. X has a payable to Y. To secure the
I want automatic, a real pactum commissorium. payable, X pledge the shares. How will X pledge the shares? Walk me through
the process.
• Student: They cant do anything about it
No, there is an exception. • Student: X will pledge the shares by giving the stock certificate
Just be giving the certificates? Just giving? Nothing more?
• Student: If upon failure of two public auctions, the creditor can
automatically appropriate it for himself • Student: Yes, .
In a mortgage or a pledge? How about endorsement? Is it required? Can you endorse a stock certificate?
• Student: Yes, . • Student: Yes, .
NO. In a pledge only. That's the only exception. If there is failure of two How? Why? How can you endorse? Have you seen a stock certificate?
auction of the pledge property. There is a legal provision, its because its by law. • Student: Yes, .
Its an exception carved out by the provision of law. So where do you usually endorse?
Let's say, you have a contract of lease. Lessor and lessee, property in exchange • Student: At the back. Its just plain.
for rent. And the lessor has certain covenants, lessor shall handle security of In front, you have the details of the shares, then at the back its just plain, you
the property, make sure there is no trespassers. This is by contract. There is just sign and endorse? Apparently you did not see a stock certificate in your
also penalty, among others. Let's assume lessor violated lessor's covenants, and corporation code class. Because its not plain, there is something there. What's
subject to penalty. Now, this contract has a clause, should the lessor defaults in there? Its a conveyance provision. There will be a space for the signature of
any of its obligations, and be liable to pay the penalty, the lessee can the stock holder. So if signed in blank, its like selling the shares. Is that
appropriate the property in payment of the obligations owed and there is a required of a pledge of stock certificates?
appropriation, and the property was given with a specified value. (Situation 1) • Student: What is required in a pledge is just the transfer

There is no need for endorsement? So this is pactum commissorium. How do you make it valid?
• Student: No, . • Student: Sir, by entering into another contract.
Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares No other contract. You will just add something.
of stock, bonds, warehouse receipts and similar documents may also be • Student: You can add a clause, like a SPA
pledged. The instrument proving the right pledged shall be delivered to the No SPA. I want this one, upon default Y transfers the shares in his name. It
creditor, and if negotiable, must be indorsed. So there's endorsement? will be valid if you have something. What will be that something? Why will Y
No, because it is not negotiable, not a negotiable instrument. need to get the shares in Y's name?
But as a matter of practice, when you pledge, you are required to indorse. • Student: So he can collect.
Why? It will be like a dacion en pago? So? I want this exact clause but i want it to be
It is to facilitate the auction. valid. So i want there "upon default Y can transfer the shares in Y's name". For
So, X will now hand the stock certificate with indorsement. What kind of what purpose?
contract is a pledge, by the way? • Student: For the proceeds to be applied to the principal obligation.
• Student: Its a real contract because there should be delivery Pactum commissorium prohibits appropriation of ownership. So what can you
So its just like in our discussion of loan, if the parties sign the pledge place here?
agreement on day 1, the pledge property was delivered on day 2, there is still a • Student: Just acts of administration, which may include collection of
contract as of day one, a contract to pledge, but the pledge will be the dividends.
consummated only on day 2 Let’s say you are not interested in dividends. What can that give you?
Now, we now have a pledge. We now go to the pactum commissorium. The
• Student: Voting rights.
clause states, upon default of X, Y can transfer shares in Y's name. Pactum
Voting rights. So, its possible to have this clause (for pactum commissorium) if
commissorium?
you add the clause for admin purposes, voting, collecting dividends accruing
• Student: Yes, . Because its automatic upon default on the shares and preserving the shares, then it's valid because there is no
Will it really be automatic? transfer of ownership. Clearly, there is no preemption of foreclosure.
• Student: There should be registration of the Corporate Secretary. (Situation 3) Number 3: Y wants to gets ownership upon default. Is there a
You bring this to the corporate secretary. You think he will register it? What way of doing it?
will he require? Minimum? • Student: You can enter into another contract, .
• Student: The corporate secretary will have to ask the contract of You know, the moment there is default, the other party will be uncooperative.
pledge, the documentary stamp tax (DST), and capital gains tax So entering into another contract will not be an option.
(CGT) • Student: But you can stipulate in the original agreement that upon
If there is transfer, this is how its done. So you are selling shares, this is in fact default of Y(X i think dapat) X (Y) will be authorized to sell what was
sale, so you have to pay CGT and DST on the sale. And what will you get pledge or will would be given the option to buy the pledge property.
from the BIR? In the pledge agreement, there will be?
• You will get a certificate authorizing registration, shorthand CAR. • Student: There will be authorization
This will now be used by the corporate secretary as basis for the There will be SPA to sell. Can Y, as agent of X, sell to himself?
transfer.
• Student: Sir, that would be possible
So let's say you did everything, this will now be pactum commissorium. But its
Is that allowed under Agency? Can an agent sell to himself
not automatic, you have to go through all these things, thats not automatic,
you have at least 4 steps. • Student: No, .
Are you sure? Because i did not study agency.
• Student: It will still be automatic even though you to go through all
these process because as of default, there is already a transfer of • Student: So what is just prohibited is for the agent to have conflicting
ownership in terms of the contracting parties. interest

So do you think if you are selling to yourself there will be conflict of interest? So you want that your property be sold at the best price. That's the same
So what will your SPA state? Potentially valid but how can do strengthen the issue that can be raised in this case.
possible validity? SPA to sell the property, what will you add? So how do you solve that?
• Student: To just sell to the creditor to X, or to other persons • Student: We can stipulate that upon default, the SPA would allow the
Yes, so? What will you add? SPA to sell the property. Let's say you're the lender to sell the property but it should not be sold lesser than this
agent. SPA to sell to 3rd party or to Y. So there's authorization, it can be sold amount, i will put a minimum price.
to the agent. What will be a potential issue if there is a sale by the agent to You will just insert a pre-agreed terms of the sale, at the minimum price.
himself or to 3rd party who is somehow related to the agent? What will be an You can have pre-agreed terms. It will just be mechanical on the part of
issue? the agent. If there is a buyer agreeing to the terms then Y will just have to
• Student: It will be a void contract, the selling of the property. execute the deed of sale with the given terms. For good measure, you can even
Is that prohibited? There is a specific authority. So the agent, Y, can sell to attach the form of the deed of absolute sale.
anyone including himself. My only issue is if you have this kind of SPA, what So this is pactum commisorium?
may be a challenge to this sale? No, not pactum commissorium.
• Student: It will be a simulated sale Week 06 Part 04 Melo, Katrina May
No, it will not be simulated because there will be actual transfer or conveyance. Now, you mentioned what’s the other thing that you mentioned? What can
• Student: It is of the essence a pactum commissorium. they have? That will not amount to pactum commissorium?
So you're saying this is pactum commissorium? Option to buy.
Option to buy, who can have the option?
• Student: It can be challenged
I know. Technically, this is not. Why? • Student: The lender
The creditor/ pledgee can have an option to buy. Why?
• Student: Because there is no automatic transfer.
So in a contract of pledge the parties will stipulate that in case of default, Y will
Why is there no automatic appropriation?
have an option to buy the pledged property. For it to be an option, what is
• Student: Because you have to go through another contact to sell aside required?
from the...
• Student: Sir there must be a stipulation first in the contract
This is not pactum commissorium because there is another legal step or
That is another matter. Right of first refusal. How is an option different from a
contract that will be taken on behalf of the pledgor because this one is an SPA,
right of first refusal? An option is like a what? What do you call that, in
so its another step being taken to convey ownership. But there may be a
contracts? It’s a complete offer. What’s a complete offer? What are the
challenge.
requisites of a complete offer?
What will be that challenge? Your property is sold by a third party. What will
lurk in your mind? There is a sale. What will be the primary question in your • Student: The offer must be absolute
mind with respect to the sale of your property by a 3rd party? JSP:What a complete offer? A complete offer ripens into a contract. When?
• Student: Because i might be at a loss. They might be in connivance • Student: Upon acceptance by the other party.
Not there is no connivance, you dont care about connivance. There is only So a complete offer has what?
thing you care about when your property is being sold by a third party • Student: Sir it has the price, terms of payment
• Student: If my property is being sold by a 3rd party, i want to make No. Just the price would be good. Why not the terms of payment? Do you
sure that it will be of value. have to stipulate the terms of payment?
What's your primary concern? How will you get profits? We are not talking • Student: Not necessarily
about pledge, its just a sale by a third party. What will be your primary Because? If you do not stipulate? By default there would be the immediate
concern? payment, in cash. So there’s no need to stipulate. So for an offer to be
• Student: My primary concern is that it will be sold for lesser value complete it should have the price, and?
that what it is • Student: The price, the object

The object. So in short a complete offer has? What? Yes that’s why it’s called an option contract.
• Student: The price the object But for it to be there when needed, whats required of an option? Let’s say you
The two essential elements of a contract. Whats left to be done is the have this option. In a separate contract, X grants to Y an option to buy the
acceptance by the offeree. An option is similar to that one because in an property at X price upon default by X of the other obligation. Will this option
option what do you have? now stand? Or there may be a risk on the part of Y. Whats the risk? There will
• Student: Sir you have two except the acceptance be a risk. Of course notwithstanding it’s a separate contract it can still be
Acceptance. Who will accept? challenged. But what is the risk if you have that simple contract? What can X
• Student: Sir the owner of the property do prior to default?
No. Who will accept? An option to buy is like an outstanding complete offer. • Student: He can. X can pull the option contract prior to default,
Who is to accept the outstanding complete offer? validly because it’s his property
The holder of the option by exercising the option will be accepting the offer. No because the option is not supported by a consideration distinct from the
Example: price. If it’s embedded in the pledge agreement, there is a consideration
So when you have an offer it’s like X making an offer to Y, Y being the owner of an option distinct from the price. This transaction the principal obligation and the terms
will now exercise it. So you have the price. Of course you know the object because it’s the and conditions of the pledge. If it’s in a separate contract, there is now no
pledged property. Pactum commissorium? separate consideration distinct from the price. You have to place there some
No because again there’s another step. But you have an option. distinct consideration. Either you cross reference it with those distractions (?)
which you may somehow negate your measure to strengthen your option
Do you think if X defaults, for him to complete the conveyance, what will you
contract. Or you can place them a token option money.
need?
Now right of first refusal. In the pledge contract the parties agree that should
• Student: You need to enter into a deed of absolute sale there be a sale of the property, Y shall have the right of first refusal or the right
Yes do you think X will execute? So this is useless? Right? to match. Valid?
• Student: Yes . • Student: Sir that would be valid
No what do you add? So unlike in an option, the right of first refusal is just an entitlement to have
Special power of attorney. Y will now be the agent of X for purpose of first rank in purchasing the property, whatever the terms may be so let’s say
executing the necessary documentation the deed of absolute sale in this case. you have a right of first refusal or a right to match and you have the bidding
So now remember when you do contracts, any contract and you think in the then the holder of the right to match can match the price
future you will need something from the other party, you stipulate that that
other party will execute other documents but will give you an SPA for the PLEDGE
purpose. So this is not technically pactum commissorium but in reality if this is So let’s now go to pledge proper. So in pledge contract is a real contract
presented in court it may be considered pactum commissorium. because it is consummated only upon delivery of the object thereof. So prior
How do you insulate your right if you’re the pledgee under this option? What to delivery there will be a contract but it is not a consummated contract of
can you do that will strengthen your option to buy? pledge, but rather a contract of pledge. So a pledge, you have the pledgee, the
So if presented in court most likely an unsophisticated judge will say that’s pledgor.
pactum commissorium so you lose, but you want to strengthen your defenses. What’s required for you to have a pledge? So a pledgor pledges shares together
So what else can you do during the execution of the contract? Remember our with delivery, this is good enough? Pledgor pledges shares to pledgee you have
discussion of the lease contract, if you have a pactum commissorium in a lease a valid contract?
contract? It’s not pactum commissorium that’s prohibited under the Civil code • Student: It should be endorsed
provisions of pledge and mortgage Yeah it’s endorsed. So our example pledgor pledges shares to pledgee. Valid?
• Student: It’s another contract So you have now a pledge contract
You have a separate! Separate contract. That will strengthen it. • Student: Yes it’s valid
Can you have a separate contract just an option? Whats missing? It is a contract? So what do you need?
• Student: Sir the principal obligation So how do you guard against it? What do you place exactly? So you will sign
So you have the principal obligation because that creates a cause and what will you place.
Because this is supposed to be a reciprocal obligation, there must be a You can qualify your endorsement for example pursuant to the pledge
counterpart. This is the object; you need a cause. What is the cause and what is agreement dated blank but creditors they don’t accept that. If it’s a bank then
the principal obligation? So you now have. What can be the object of a pledge? you can maybe there’s a level of trust unless you’re dealing with those banks in
• Student: Sir movable property a scandal recently so if you have a let’s say you endorse in blank you don’t
Movable property, instruments covering incorporeal rights. So can I pledge a endorse in blank you just qualify pursuant to the pledge agreement dated blank
condo certificate of title? so whoever will deal with the certificates would know that it’s subject of a
• Student: No because it’s covering real property pledge contract it’s not a conveyance it’s delivered only by way of security
What if I pledge it? What’s the consequence? Minimum consequence. Will it So let’s now change, reverse, you’re the pledgee, shares were delivered to you,
have any consequence at all? indorsed, of course you are the pledgee you want it indorsed in blank so
Owner pledges a condo certificate of title. So the contract whatever it is will there’s no qualification or even if it’s an instrument you want it indorsed what
just be valid between the parties. Ok now so shares of stocks of the shares as can you do with the shares if it’s indorsed in blank? Can you hold the shares?
we discussed earlier the stock certificate should be delivered with No. So if you’re the pledgee you want to hold the shares what do you need?
endorsement, although it’s not negotiable just to facilitate matters. A concern • Student: You need the title
in that is let’s say we have a stock certificate the dorsal portion would have that No where did you learn that in the corporation code? Well it can be an
endorsement maybe something like this is the conveyance part conveyance and arrangement that during the subsistence of the pledge the title will be vested
then signed below. So you sign as pledgor. What will be a concern? Youre with the pledgee for the purpose of voting. But short of that? What can be
pledging shares, endorsed it in blank, what will be a concern? You’re the done so the pledgee can vote? For a third party to vote the shares the third
absolute owner. Your concern as pledgor youre endorsing stock certificates party must have
covering the shares in blank what will be your concern as pledgor? • Student: Authorization
So we have a perfect setup youre now pledging shares you’re delivering stock Which involves? Power of attorney. Effectively it’s power of attorney but it’s
certificates covering the shares endorsed in blank. How do you endorse in technically called proxy. So the proxy can be the person, the attorney in fact or
blank? the document, the SPA. So if you’re the pledgee you don’t necessarily vote the
You just sign. shares you have to get a power of attorney or in the meantime pledge the
Youre endorsing the certificate in blank what will be a concern? shares in the name of the pledgee.
You know what a stock certificate is? It’s the evidence of ownership. It’s not a Where do you register a pledge agreement?
negotiable instrument but it is, how does the law characterize a stock • Student: it doesn’t need to be registered
certificate? It’s not a negotiable instrument but it is quasi-negotiable because So there’s no need to register a pledge agreement? How will it bind third
you can just endorse it and it’s good to go for purposes of conveyance. parties? What if you’re pledging a ring where will you specify? Theres no
So what will be your concern now? You’re the pledgor you’re endorsing stock certificate unless it’s with a certificate yes so it must be specified where?
certificates in blank what’s the immediate concern? So you have a better grasp • Student: In the title
at this the shares let’s say PLDT shares you’re dealing with 100,000 PLDT In the title? The ring has no title. So let’s say we’re dealing with shares you
shares each share is worth 1,700 so you’re talking of 170 million so you’re now specify in the stock certificate?
endorsing your shares in blank. What’s the risk? • Student: Yes
Somebody’s holding a certificate worth 170 million. He can sell the shares No there’s no place there for the specification so? To bind third parties there’s
because it’s endorsed in blank! If he wants to trade it he can go to his own nothing that can be done?
broker so he can be entered into the system now you can trade electronically • Student: No it must be specified in accordance with law
or you may just sell directly to anyone else so that’s a concern because you Which states? It must be specified in writing?
indorsed it in blank. The same with any negotiable instrument that is pledged.
• Student: Yes

So there is a formal requirement for the validity of pledge it must be written? • Student: with the SEC?
• Student: Between the parties it can be oral but to bind third parties it No, no such legal requirement. You may have come across this in corp. So
must be in writing how is it possible that registration be required? There’s no requirement of
So let’s say this is my stock certificate I indorsed it it’s in writing I give it to registration, but for some reason you are required to register.
you we now have a pledge binding on third parties? Does it sound right? • Student: if there is no certificate
• Student:It must be registered no, there is. For example, there’s a certificate.
Week 06 Part 05 Mondejar, Carl • Student: by Law? Securities and Regulation Code? In the book of the
where do you register a pledge agreement? corporate secretary.
• Student: Doesn’t need to be registered When?
Why, then how can it bind third parties? For the pledge of a ring where should • Student: when you assign the stock or pay the stocks you have to
it be registered? How can it bind third parties? register them
• Student: in a public instrument, . No. When? When do you register it to the company?
what public instrument? So you have a pledge contract, you have the usual • Student: when it is in the by-laws
parties, terms, signatories, witnesses. So how do you make it public? Yes! If it is in the by-laws in certain corporations. So when you’re doing pledge
• Student: Sir have it notarized. you have check the by-laws of the corporation.
so the notary public affixes the notarial seal and then sign in a pledge. Good Let’s say there was this club, I handled a pledge, a requirement is the pledge must be
enough? Does it make it a public instrument? registered with the corporate secretary and recorded in the books of the company to bind the
Two kinds of notarization: the Jurat and an Acknowledgement: club and the other members. So if its not registered, then the club has the option not to honor
• Acknowledgement - the notary public states that (you have to it. So if you’re dealing with pledge generally your safe, if you say there’s no requirement of
understand the essence of the acknowledgement) as their voluntary registration, for good measure you always check the by-laws or the articles of incorporation as
and free act and deed. there maybe a restriction. So it must be in a public instrument.
• Jurat - it is just subscribed and sworn to before me on this day by So let us assume now there’s principal obligation, so pledger, pledged property,
blank with identification blank. So its just a statement under oath. say, ring, and pledgee secured a principal obligation. Day 1, this the pledge, so
What’s the difference? there is delivery, completed pledge. Day 2, pledger, sold the ring, contract of
If you have a contract you use and acknowledgement, if by mistake you use a sale to X. Day 3, notarization. Day 4, notarization. Who has a better right?
jurat, then it’s a formal defect so let’s say instead of an acknowledgement, you So day 1, pledger pledged the ring, delivered it to pledgee to secure a principal
placed a jurat subscribed and sworn before me by the pledger and pledgee, obligation. Day 2, pledger sold the thing to X. Day 3, the contract of sale was
that’s not the public instrument required by law. It has to be an notarized. Day 4, the pledge agreement was notarized.
acknowledgement. So there’s a defect. So when you say public instrument, it • Student: , the pledgee had the better right than X because of the rule
should be acknowledged before a notary public. on least transmission of rights
Now, registration. No, there’s no ambiguity here. You have that rule only when there’s an
• Student: it should be registered with the pledgee if a vehicle ambiguity in a contract and it is applied only to the specific contract. The
that’s a chattel mortgage, not a pledge. question that you have to answer first is that can pledger sell the ring to X and
• Student: pledge does not need registration convey ownership?
absolutely? Can u think of a situation in which registration is required? • Student: Yes,
General Rule no registration required for the pledge to be binding to third how will pledger deliver the ring? Can you have delivery to transfer ownership?
parties, what is required is that it should be in a public instrument meaning You learned that in sales that there is transfer of ownership upon delivery. So
notarized, but there may be instances where registration in some office may be can there be transfer of ownership here? Can the pledger deliver?
required. • Student: No
shares?? NO, because it’s with the pledger, but can there be delivery?
So now you have to go back to your sales. The answer is YES! Because there is consent. If pledgee consents, then X will now be deemed the pledger under
what you call constructive delivery. the pledge contract because ownership would have vested in X.
Constructive delivery can happen if? When can there be constructive delivery But my question was, if you’re the pledgee, why will you withhold consent? Is
in a contract of sale? there anything you will gain by withholding consent considering that you are
If its in a public document or public instrument and there’s no reservation of already protected by the pledge binding on third parties. So now instead of just
ownership if there’s an intent to convey so this can be done. the pledger and the pledgee you now have X as the pledger. Will that be
So since there can be a completed sale, whose rights are superior to the other? problem? If you’re pledgee why will you withhold consent, what will be your
Sale or pledge? motivation? (JSP named the parties, X as Trillanes or Enrile or Parojinog).
• Student: Sale • There may be no material legal consequence to the pledge, but you’re
Because? bringing in a third party. The moment you bring in another party,
• Student: because there is already constructive delivery there maybe potential repercussions like it may be difficult for you to
Because the pledge was not binding on X as of day two and day three it was foreclose and the third party may tie the pledge in litigation, so that’s
only on a public instrument on day 4. So it became binding only to third why you want to minimize the involvement of other parties unless
parties as of day 4. So as far as X is concerned, the property sold to X is you’re friends. But for this purpose if you’re doing transactions you
unencumbered. Of course it’s a different matter getting the ring out of do not want a third party, you just want to be exclusive.
pledgee’s hand. X will have a better right over the ring. Can there be a prohibition in the pledge contract against disposal or further
So now we will change, day 1, public instrument, you have pledge in a public encumbrance of the property pledged? So the pledgee and the pledger stated in
instrument, completed one, there is delivery. Let’s use same example. Day 2, the pledge contract “the pledger shall not dispose of or encumber the property
sale, again public instrument. Clearly the pledge will bind third parties during the subsistence of the pledge.
including X as of day 1. So the sale will be inferior to the pledge, right? Pledgor • Student: that stipulation is void
sold the ring without the knowledge from pledgee, what is the status of the Wrong, because that stipulation is relevant only in mortgages, there is no
sale? counterpart provision in pledges. So the nullity of a prohibition of disposition
Valid. So here, the pledge binds X. you will find only in mortgages, not in pledge.
The question now is considering that the pledge binds X. What’s the status of Now let’s go back to this example so you have here shares of stock so pledgee
the sale? what’s the obligation of the pledgee? Take care of the pledged shares? Keep it
The sale without the knowledge and consent of pledgee. This is one is valid in a safe place. Let’s say dividends accruing on the shares, what should pledgee
but, notwithstanding that it is in a public instrument, and could have resulted do?
in the transfer of ownership by constructive delivery, ownership will not vest • Student: Apply it on the principal
to X because the law so provides. The transfer of ownership will be suspended Debt is not yet due. Cash dividends is accruing on the shares or stock
until the pledgee consents. dividends. What should pledgee do as an exercise of due diligence?
If you are the pledgee, why would you refuse to give consent? Anyway your • Student: take care
pledge binds third parties. Why will you refuse to give consent? How? How can the pledgee take care of the dividends? Where will the
• Student: If the Pledgor defaults, you will not be able to sell it dividends come from? The corporation will declare the dividends. So the
anymore pledgee should do what? Pledgee should collect the dividends. Do you think
NO, if you consent, the pledge will remain. So in case debtor defaults, pledger the pledgee can collect the dividends? So this scenario, the pledged shares
in this case, there can still be foreclosure. But the owner now will be X. and X covered by the stock certificate indorsed in blank by the pledger now
will be a third party pledger if there’s consent by the pledgee. So what will dividends accrued on the shares, can pledgee collect the dividends?
happen if there’s consent it will look like this. You have pledgee, the pledger • Student: there must be consent by the pledger
originally will now be just a debtor and now X will now be the pledger. So the why must there be consent by the pledger?
ring, and then this payable. So you now have different parties if there’s

Just like the discussion on voting rights, the pledgee cannot just collect the of an act of the pledge then they should execute a supplemental pledge
dividends because the shares are in the name of the pledger. So unless there is contract. The same goes with negotiable instruments, even if they are indorsed
a special power of attorney given to the pledgee, or the pledgee somehow is in blank, unless they are bearer instruments. So if they are named instruments,
placed as the stockholder of record the pledgee cannot get the dividends. So only the person named in the instrument can collect interest or other income
there is nothing for the pledgee to do. So the pledgee learns the dividends were accruing on the instrument. So if you have a pledge contract, you want to
declared. Pledgee can do something, let’s say pledger is outside the country. subject the income of the pledged property to the pledge, you need
What should the pledgee do as an act of diligence? authorization for the purpose to make sure that the pledgee will get hold of the
Pledgee became aware of the declaration of dividends. Pledgee cannot claim, fruits of the pledged property.
pledgee at the very least should notify the pledger that the dividends were
declared or if it is subject of their agreement that dividends will be the subject

Week 07 Pledge
Week 07 Pledge
20 August 2017
Week 07 Part 01 Monsanto, Bret Bacalla Court said that this is a new situation where both parties in a reciprocal
We said that a pledge is a real contract. What does that mean? obligation in a loan were in default. The debtor failed in his obligation to lend
• Student: Because it is perfected upon delivery. the entire amount. On the other hand, the borrower defaulted in the payment
We have a pledge, so to whom should the pledge property be delivered? Can of the released loan. So we now have a mutual default, or a situation of
he deliver it to a third party? compensation morae. Both parties in default may offset the damages. This case
Lets say you have a loan. Debtor has a loan of 10 million. Borrower has an involved a mortgage but it can still apply to a pledge. At the end of the day, the
obligation to pay on due date, secured by a pledge of shares. Let’s assume the Supreme Court said, since the debtor released only 5M or 50% of the money,
shares have 1 million ABC company shares worth Php50 each share [50 the mortgage should be effective only to that extent. So it was by that
million worth of shares]. Before due date, can Borrower prepay the loan jurisprudence where, if you have a situation like that, the mortgage will only be
without the consent of Lender? effected to the extent of the loan proceeds released by lender.
• Student: No, if there is a period both parties have the benefit of the So we have again the lender, the borrower, and security. So we have loan, an
term. Neither parties can ask for payment— the borrower cannot obligation to pay, secured by a pledge. Who will have possession of the shares
prepay and the lender cannot demand payment. during the pledge?
But let’s assume that the borrower has an option to pay. The borrower • Student: The pledgee who will we be the debtor unless the parties
prepaid. He paid 50% prepayment. The borrower realized the loan is agree on a third party.
overcollaterized. So we have shares worth 50 million, securing the principal How will we pledge the shares or deliver the shares?
amount of 5 million. So borrower asked the lender for the discharge of pledge • Student: Endorse the stock certificate covering the shares.
to extent of prepayment. Is the lender bound to comply? Lets say the stock certificates were lost during the pledge, will the render be
• Student: No. The general rule is that a pledge or mortgage is liable?
indivisible and secures the entire obligation. So even if there is Yes. The law presumes that the possessor is at fault if a thing is lost. The
prepayment, the mortgage or pledge will remain completely. So in lender has showing that he was without fault. For instance, a fortuitous event
this case, the pledge will still secure the balance unless the parties or beyond the control of the lender.
agree otherwise. In a pledge, who ever has possession will the primary obligation of…?
Let’s say your doing this kind of transaction for the borrower, it will be in your Taking care of the thing using the standard of ordinary care or due diligence
best interest to make sure to include a clause that the partial discharge of the unless the law requires a greater degree of care as required of bank where the
principal obligation shall result in the automatic discharge in the corresponding law requires a greater degree of diligence.
portion of the security, otherwise your security will be tied in the pledge So the stock certificates will be in the possession of the lender. Can the lender
contract. transfer the stock certificates to a third party?
Is there any other instance where the mortgage or pledge will be divisible? The lender cannot transfer the shares without the consent of the pledgor. But
There was one instance mentioned by the Supreme Court where the mortgage as an exercise of due diligence, the lender can transfer the local of the shares.
was divisible. Let’s say you have this situation: The lender agreed to lend 10 For instance, the stock certificates were caught in the mall of Marawi. A fire
million to the borrower for the borrower to pay on due date. On day 1.5, broke out and as an act of diligence, the lender transferred the certificates to a
borrower released only 5 million. After that, the lender was no longer able to safer place, to Davao City.
release any other fund because the lender was put into rehabilitation or Is there another instance where the lender can move the physical location of
receivership and was eventually liquidated. On the other hand, the 5 million the shares? Assume that there is no authorization in this case. Let’s say you are
should be paid in installments. There is default by the borrower. Let’s assume the pledgee, you want to keep it somewhere else, in the custody of another
the borrower paid 3 million but defaulted on the 2 million. There was a case person. Is the there a way out?
where one party sued the other and there was a counter claim. The Supreme

Week 07 Pledge
The lender can designate or get an agent to hold the shares. In that sense, its Lets say the lender without the consent of the borrower used the jewelry, what
not a third party holding the shares. can borrower do?
The law says that the pledgee cannot entrust the pledged property to a third The borrower may ask that the thing be judicially or extra-judicially deposited.
person. But he is responsible for the acts of his agents or employees with Will the pledge continue in that case?
respect to the thing pledged. So let’s say you're a pledgee, and you transfer the Yes, but its just that the pledged property will just be taken from the
shares to that guy in front of you. So its still possession by the lender through possession of the pledgee and placed in the possession of another party
an agent. whether judicially or extra judicially.
Instances when the lender can move the physical location of shares to a third Can the pledgor terminate the pledge? The law says the remedy is only judicial
party without the consent of pledgor: or extra-judicial deposit.
1. Pledgee exercises due diligence to take care of the thing; • Student: Yes, because it can constitute a breach of contract.
2. Pledgee transfers the shares to his agent or employees. That is a possibility especially if it’s pledged by a third party. Let’s say the
If you're the pledgor on the other hand, you’d be concerned. Let’s say what pledgee is B and there is a stipulation that the pledged property will never be
was pledged was a jewellery. You do not want the jewellery moving around. used without the consent of B. It can be considered a substantial breach and
How do you control it? Give me an example. the parties can ask for resolution. Although there is a tension in this provision
saying that in that instance the remedy is only deposit with another party, but
• Student: I’m the pledgor, and we will stipulate to just place it in the
arguably it can be done. Especially if its a third party pledge, a third party who
pledgee’s house.
has no interest in the principal obligation.
I think the pledgor will not agree to that. Yes you’re correct, you want to
Lets go back to my example, so we have pledged shares worth Php10M and
control the movement of the property, so you designate an address. You’re not
Php15M. Let’s assume they are listed shares in the PSE. So the shares were
wrong. But you just made an error in judgement.
So it was the call of the pledgor’s call to stipulate— i.e. bedside drawer, house dropping in value. Borrower is concerned that the pledge is deteriorating.
What can borrower/ pledgor do?
at this address. What’s the risk for the peldgor there?
It’s not safe. Let’s say the thing is lost, what can lender say? The lender can just • Student: The borrower can opt to sell the shares.
say that he exercised due diligence by showing the place and he could not The borrower may demand the return of the thing, upon the offering of
move it around because of the stipulation in this case. another thing in pledge, provided the latter is of the same kind as the former
So where should it be for the jewelry in this case? and not of inferior quality.
For instance, a safety deposit bank. On the other hand, what can lender do?
I think we discussed last time, let’s say what were pledged were shares. So the The pledgee may cause the thing sold at a public sale and hold the proceeds as
pledgee should take care of the stock certificates using due diligence in the security for the principal obligation.
absence of a contrary stipulation or legal provision. We also discussed what Why can’t the proceeds be applied as payment?
will happen if dividends accrued to the shares. What should the pledgee do? Because there is still a period. You have to continue to hold the proceeds by
The pledgee should notify the pledgor, because in the absence of an SPA or way of security.
proper authorization, the lender cannot collect dividends in behalf of the Two (2) alternatives on the part of ether parties:
borrower. As an exercise of diligence, the lender should notify the borrower. 1. Pledgor can replace the shares;
Instead of shares, you have jewelry. So the pieces of jewelry were in the 2. Lender can auction off the shares.
possession of the lender. So the lender went to attend a party. Can lender wear If there is a conflict, who’s right prevails?
the jewelry? The pledgee’s right prevails.
No. The lender cannot use the thing without the authority of the owner unless If the shares are auctioned off, the will now become money. Let’s assume what
the use thing is necessary for its preservation. In this case, using the jewelry is was realized was 12 Million. The 12 Million will just be held by the lender by
only exposing it to risk. way of security unless somehow the payment will be accelerated. Let’s say this
Voting of pledged shares, can you justify it as an act of preservation? is an interest bearing loan, the lender can insist on a maturity date. The lender
No. You need a proxy in favor of the pledgee.
Week 07 Pledge
will just hold the proceeds of the auction and the loan will continue and the • Student: Conspiracy.
interest will accrue. Conspiracy? No. There’s no such crime as conspiracy, generally, except..? Is
Because pledge is a real contract, the pledge should always be delivered to the there?
party. • Student: Crimes against the state.
Week 07 Part 02 Paras, Erika Bianca Gonzales When you forcibly get something from someone? It’s your property so it
If somehow, the borrower/the pledgor regains possession of the property? cannot be theft. It can be? Coercion? Do you remember that offense?
• Student: There’s a presumption that the pledge has been returned. Coercion? Is there such an offense?
So if it’s in the possession of the pledgor.. So, these are the facts: You have a • Student: No.
pledge, day 1. On day 5, pledgor turns out to have possession of the property, There is an offense called coercion. There’s grave coercion.
the pledged property. Anyway, so in that case, the lender has to show, can rebut the presumption.
• Student: In that case, the law assumes that the pledge has been The lender can show that the borrower took the thing forcibly or lender did
terminated. not, or lender lost it and somehow found by the borrower. Some other
No. circumstance to rebut the claim of a voluntary return.
What is the presumption? So let’s say you have this scenario. Borrower defaults, what are the options of
the lender?
• Student: The presumption is the lender returned the pledged thing to
the borrower. • Student: The lender can sell the pledge by public auction.
With that return, what happens now to the pledge? Or?
• Student: The pledge is terminated. • Student: …or he can ask for specific performance to collect.
The pledge is EXTINGUISHED. So you to do that 2-step. You cannot say So collection? However, the consequence of a collection suit is..?
that there is a presumption that the pledge is extinguished. The law says, the • Student: It will extinguish the security.
presumption is the pledged property was voluntarily returned by the pledgee to It will be an abandonment of the pledge. So you have the option.
the pledgor, in which case, there will be an extinction of the pledge. When will it be a real option, an attractive option for the lender to sue for
Can the presumption be disproved? collection?
• Student: Yes. • Student: If the pledge will not satisfy the..
Why? How, for example? What do you mean, will not satisfy?
• Student: The pledgee can say that the pledgor stole [ inaudible ]. • Student: Sir, the value of the pledged thing is lower than..
Can you steal something you own? How will it happen?
• Student: No, but you’re not supposed to gain possession. • Student: Sir for example, if there is an impairment.
So when you get a property that’s yours, can you steal it? In the value. Why will collection be a better option?
• Student: No, but [ inaudible ]. • Student: Sir, because he can collect for the exact obligation that was
What offense will you be committing? You cannot steal something you own, loaned plus the interest for the said amount.
but? Most likely, what offense can you possibly commit? Let’s say, you’re now Why, for a foreclosure of a pledge, what will be the consequence?
L (lender), you’re saying, I did not return. But it’s in the possession of B. B • Student: Sir, if it was a foreclosure of the pledge, the amount of the
may have committed what offense? pledged thing will, even if it’s lower than for example the loaned
• Student: Usurpation? obligation, it will already extinguish the obligation.
Usurpation? L is not a government official. You have to understand the So specific performance will be an attractive option if you have a situation
process. How can B get the pledged property? Possibly forcible entry, what where, let’s say the shares drastically dropped in value. Let’s say from 15M it
else? So L, holding the stock certificates? When you force someone to do went down to 3M. Then lender may opt to sue for collection rather than
something? You don’t know that offense? foreclose, because if lender will foreclose, even if there is a deficiency, the
obligation will be extinguished. That’s by provision of law.
Week 07 Pledge
Can the parties agree otherwise? Say, that in a case of a deficiency, the Notify. Yes, of course. There’s a demand, then say, you haven’t paid. There’s a
borrower shall pay the deficiency? demand. Borrower ignored the repeated demands of the lender. Lender now
• Student: Yes, sir. wants to foreclose.
No. There can be no contrary agreement. Whatever happens, the principal What’s the first step?
obligation will be extinguished. Remember that with respect to pledge. In a • Student: He can sell it.
pledge, if there is a foreclosure of the pledge, a sale by public auction of the How?
pledged property, regardless of the result, whether the proceeds are more or • Student: Through a public auction if there’s a stipulation.
less than the amount of the principal obligation, the principal obligation will be Did we have a stipulation in our example?
extinguished. That’s the reason why, as I said, we are going back to the option • S: No. So by default, it’s…
of collection. If this value goes down to 3M, collection may be an option. But A public auction? So how do you do a public auction?
let’s say the shares will fetch 15M now. What’s the incentive for the lender to • Student: You will proceed to the Notary Public.
foreclose rather than to sue for collection? We assume that we have a perfect First step, go to Notary. And then?
world. If lender sues, lender will collect the entire loan obligation of 10M and
• Student: Then you pay the Notary Public.
maybe 1M as damages, so there will be no cost at all to the lender. We will
Why? What’s a Notary Public? Do you know? Do you know how to become a
assume that there will be complete recovery by the lender.
Notary Public? Can you become a Notary Public?
What’s an incentive for the lender to foreclose?
• Student: No.
• Student: If lender forecloses, he still gets the 5M from the pledge.
You sure? Why? What’s the requirement for a Notary Public? You should be a
Why?
lawyer? I think if you read the Notarial Law, there was, a long long time ago. A
• Student: Sir, it’s provided in the law that if the thing pledged.. The non-lawyer can be a Notary Public, but I think right now all notaries are
borrower can’t get the excess of the amount of the thing pledged. lawyers. So, Notary Public. Is that automatic? If you’re a lawyer, you’re not
So the lender will get the excess? So if the shares are sold for 15M, the lender necessarily a Notary Public. Because you have to apply for a commission. File
gets an extra of 5M. Can the parties stipulate otherwise? a petition in court, ask for a commission as a Notary Public. So you go to a
• Student: No, sir. Notary Public, what do you do? So you ask the Notary. The Notary Public’s a
No! The parties can stipulate otherwise, meaning the parties can say that in lawyer, and…
case of an excess, the borrower will get the excess or some allocation of the • Student: You’re going to foreclose the pledge.
excess. Remember, with respect to the deficiency, the obligation will Of course. You have to tell the story. So most likely.
nevertheless be extinguished and there can be no stipulation to the contrary. What will be the next step? Let’s say you’re the lender, you went to the Notary,
Any stipulation to the contrary shall be void. With respect to the excess, the you agreed on the fee arrangement, what should Notary Public do now?
excess will go to the pledgee but the parties can stipulate otherwise. That’s
• Student: Notary Public will first notify the borrower.
allowed.
Notice to?
Now, so there’s now default. Lender wants foreclosure because the lender will
get an extra 5. How should lender proceed? What’s the first step? • Student: Borrower or owner of the pledged thing.
Debtor/pledgor. Because it may happen that you have a different pledgor
• Student: Public auction.
apart from the debtor. So there will be notice!
That’s the first step? Public auction?
What will the notice state?
• Student: Upon default…
• Student: That there will be a sale of the pledged thing.
So borrower defaults, so there’s already demand. Let’s assume, there’s now
That’s it?
default. What should lender do?
• Student: Sir, the description…
• Student: Lender shall notify the borrower.
Description of what?
• Student: Description of the thing that will be sold.

Week 07 Pledge
So you’ll say there will be an auction, this is the notarial sale. Sale of the Can you imagine; we’re holding an auction here. I’m the notary public, we have
pledged shares. 4 persons holding 15M cash each, at least. Because they want to bid. So we
• Student: And the description. now have, around, at least, 60M here. And somehow, announcements were
Yes, and? Why? So there’s a notice, the notice will say, the pledged shares shall made that there will be an auction. Is there a problem?
be sold, why? • Student: Yes, sir.
• Student: Because of the default of the borrower. Why, what’s the problem?
To pay the principal obligation. So those two (2) facts. • Student: In case of 4 people bringing 15M each, they can’t pay a
And then, what shall be indicated in the notice? So let’s say, I’ll give you the higher amount for…
notice. So, Notary Public, gives notice to the borrower saying the shares, with No. The problem there is you may be kidnapped here. People may get in. You
specification, shall be sold to pay the principal obligation. Signed, Notary have how many security guards here, maybe even 10. I can round up maybe 20
Public. Good? with long firearms, enter here, and then get out in 10 minutes with 60M cash.
• Student: Yes, sir. That’s why it’s a practical question. So now it’s a concern, so what will you put
No. in the notice? You may be minded to put in the notice! Of course the law says
What’s wrong with that notice? What’s the purpose of that notice? that payment shall be in cash and in full.
• Student: So that the borrower can still pay the principal obligation or So what will you place in the notice? All bids shall be…?
can purchase the pledged thing. All bids shall be payable by? By what? Not cash because it’s risky. But? An
During the auction? instrument. A blank instrument. What? You don’t want to carry 15M in cash.
• Student: Yes. What will be a substitute?
So the pledger can bid during the auction? • Student: Sir, if it’s payment in installments.
• Student: Yes, the pledgor can bid. No, you want payment in full. You’re the lender. Remember, when you’re
So I gave you that notice. Do you think the borrower will be able to bid? being paid, your option always is your preference, payment in full. So payment
by way of?
No! • Student: Check.
It’s just like receiving a birthday invitation. X will celebrate her 18th birthday Personal check?
to celebrate life. You are invited. Can you attend? • Student: Manager’s check.
• Student: The details of the sale… Or cashier’s check? Not personal check? What’s a manager’s check?
Yes! Of course you have to state the details of the auction. Where and when • Student: It’s issued by a bank.
the time the auction will be held. Against its own account. So maybe you can place in the notice certain terms
What else can be placed in the notice? You’re the lender, You want to make that the lender may want to be part of the rules of the auction. Let’s say
sure you get the money. What will you require? You’ll require in the bid, all payment shall be by manager’s check issued by Metro Manila Commercial or
payments should be in cash. Good idea? Universal Bank. That’s one way. So people won’t bring cash and you make
• Student: Yes. sure that, or bids may be submitted by way of manager’s check during the
So you have 4 bidders, you now have a room with 60M. Do you think it’s a auction. Just to make sure that everyone has a legitimate bid. Just imagine you
good idea to be in the middle of that room? 60M in cash. Let’s say here in have a bidding, if you have cash, to tender the bid, they will bring to you boxes
Rockwell, one of the rooms here in Ateneo. Good idea? And you’d send a and boxes of cash. Just to bid. So other terms, you can place in the notice
notice. This is not a trick question. You have to think. Do you want to be in a other terms.
room with 60M in cash during the day that somehow was announced to a Now, how is notice given?
number of people? • Student: Sir, it doesn’t have to be public notice.
• Student: Yes, sir. So there’s no need for a publication? Posting? In a public place? Where the
property may be?

Week 07 Pledge
• Student: No, sir. What’s important is notice to the debtor. implement, let’s say you’re the lawyer for the lender, 4:30p.m. you send your
How? messenger, because he’s in a habal-habal, to make sure he will reach the
• Student: Sir, it doesn’t have to be in publication. destination before 5:00p.m., before close of business. You send the notice, and
So how do you give the notice? then schedule the auction, first thing in the morning. Maybe, 8:30a.m. So
• Student: Sir by sending it to the debtor. notice today, to be sent before close of business, and then, the next day,
Email? Text? auction will be held 8:30a.m. You want the closer period within which to hold
the auction, the purpose of that is to make sure that the borrower cannot take
• Student: Sir it has to be in a public document.
steps to frustrate or derail the auction.
It has to be a personal notice.
What can the borrower do?
But how do you do the personal delivery of the notice? Text? Email? How do
The borrower can go to court. File an action but that would not be perfected
you send? How do you furnish a copy to one of the parties?
because there’s a notice the day before. The day before, the petition can be
• Student: By service, sir. filed. But the borrower cannot get a TRO or injunction because your auction
Mail? What kind of mail? Not electronic. will be before the court opens unless you have an over zealous judge who will
• Student: Post mail. issue the TRO midnight, and that will expose the judge to a possible
Yes, I know. Through the snail mail. administrative liability. So, that’s how you do it. Take note of that!
What kind? You just put a stamp and then send it out? So how do you send it? There’s no jurisprudence on this matter, but it has been done, and has never
I know its by mail. So you buy stamps, and then mail the copies to the parties. been questioned successfully in court. So if you’re confronted with this
No? What kind? You know registered mail? Registered mail, because…? What situation, you can do the auction, a day immediately after the notice.
do you want? In registered mail, what do you get? Why is it a registered mail The 30 days applies to a legal pledge, a pledge by operation of law. Now,
compared to an ordinary mail? What’s the difference? wouldn’t that be illegal? Basically the notice is useless. The answer to that is,
To send it by registered mail, there’s no need for publication, there’s no need the notice, there is prior notice still, you cannot say that the borrower has no
for posting of the notices, the only notice required is a personal notice to the sufficient information because the borrower upon default ought to know that
debtor and/or pledgor. The notice should be given by registered mail. the pledge may be foreclosed anytime. So there’re really no requirement for a
Week 07 Part 03 Sablan, Justine Abigail Cruz longer period within the prior notice.
What’s the period to give notice? Let’s say for example, one case we did, exactly this given situation, so aside
• Student: Sir for the pledgee, you can conduct the auction from difficulty of getting court intervention, the other difficulty that we had by
immediately. this short notice would be how to raise the funds for the bid, and normally the
Meaning this afternoon? notice will state: payment shall be made by manager’s check, so the banks will
• Student: Sir as long as the pledgor is… open 9:00a.m., of course at 5:00p.m. you can still go to a bank that closes by
No, because the law requires prior notice. 6:00p.m., go to a mall possibly. But if you do not have enough funds, it will be
It should be when? So you give the notice today, the soonest you can have the very difficult to raise the funds. So you use that to you're advantage as pledgee.
auction will be when? Now, if you’re the borrower, the moment you default, what do you do? You
• Student: Sir right after the receipt of the notice. begin your legal action, whatever it may be. You have to plot the moment you
This afternoon! So it was served this morning! After lunch you can have the default because the foreclosure would be forthcoming.
auction? When? The law says that there is no minimum period, the law does • Student: What if in the loan there’s the share, and the shares were 15
not require a period within which to give the notice. It can be given one day Million, but the loan is just 10 Million, so borrower wasn’t able to
before, or 30 days before the auction. Now, if you’re the lender, you’re pay. So they already agreed, okay you can just get the 15 Million in
incentive is complete the auction soonest. So how do you proceed? Because the shares, I won’t sell it. Then on day 3, okay I’ll give you the 15
the law does not require a period for the notice, then you can give the notice Million shares, you can get them now in order to pay the loan. Then,
today and hold the auction tomorrow. So you can do it very quickly. But how the next day, after they agreed, suddenly the shares dropped to 5
actually would you do it? So notice today, auction tomorrow. How do you
Week 07 Pledge
Pesos, it became worthless. Who will win in that case? Can the lender • Student: Sir, he’ll conduct the auction by presenting the pledged item,
say that the share that they have is not enough? letting the bidders bid their…
No, it depends. Let’s say, they agreed by way of dacion en pago, there’s an That’s it? There’s an actual bid, the bid is done, there’s a winning bidder.
assignment of the shares to L and then the next day after the dacion, the • Student: The wining bidder then pays the amount due, and then
shares dropped value, it will be for the account of L because there’s already whatever, the amount obtains in the bid, it will be paid to the lender.
conveyance to pay the loan. So it depends on what was actually agreed upon. If Yes! So lender gets the proceeds.
it is just a verbal agreement, there’s no transfer yet, it will be for the account of What’s the next step?
the owner of the shares. It depends on the documentation. • Student: The debtor or pledgor should be notified of the results of
• Student: Can an insurance policy be pledged? the auction.
If it’s an insurance policy, when the risk happens, it’s when you get something So there will be a notice again to the pledgor debtor. Why? Anyway the debtor
right? So until that risk happens, there’s no value, generally. But somehow gets the excess. There’s nothing for the borrower.
when you purchase an insurance let’s say life insurance, you pay a premium. • Student: It’s provided by the law that the pledgor there should be
Normally when you pay a premium, you’re just insured for a certain risk. But notice to the pledgor. This notice is to enable the debtor pledgor to
sometimes you pay more, so you get extra benefit. Let’s say you get a take any legal action or any action that it may or it thinks that it can
retirement premium after the end of the term and there will be dividends take against the auction sale. For example, Sir, he thinks that there is
accruing to the policy and then there would be cash surrender value. Let’s say some irregularity and then he can nullify the auction sale and obtain
you’re paying for premiums for insurance policy for 10 years, let say 100,000 a the pledged item.
year. Every year, there will be a cash surrender value and when you terminate What can be a possible irregularity?
the insurance policy, you will get the cash surrender value indicated in the
• Student: There was a dummy involved in the auction sale, it wasn’t
policy. Now, can you pledge the policy? It may be difficult, technically you can
done legitimately, the lender procured the dummy for …
because it is an incorporeal right. What will be the evidence of the policy? It
How can it be proved that there was a dummy?
will be an endorsement, you can indorse the policy assuming that there’s such
a document. But I haven’t seen a document where you can, it would be a • Student: If a manager’s check is used to pay the auction sale, the
separate endorsement of the policy in favor of the creditor. Or better yet what borrower can check who bought the manager’s check from the bank.
is being done is an assignment of the security of the proceeds or entitlements So the notice is necessary to afford the pledgor an opportunity to question the
of the policy. But it can be done, I think, with the proper documents. validity of the pledge. What’s the period to question?
Why is it not practical to pledge the policy? Let’s say it has a cash surrender • Student: There’s nothing stipulated in the law any period to question
value, normally a policy has what you call a loanable amount because it has a the sale. The borrower can immediately question the...
cash surrender value and you have dividends, you can also borrow from the No, what’s the period? Period for the pledgor to question the validity of the
policy. So there’s really no need to plegde, it’s just like you can get the money auction? What 30 days? 1 year?
from the insurance company. If you default, then they can go after whatever is • S: There’s no period for the questioning the auction sale.
left in your policy. Wrong. It’s ten (10) years because it may either be written contract or an action
What if I am pledging shares and they’re script less, meaning they are based on law. 10 years from receipt of the notice.
electronically recorded, how do you pledge them? During the bidding, what happens if on this [inaudible].
If there’s a facility, let’s say in the PH Stock Exchange, in the depository they • Student: If the pledgor, one of the pledgor, he will be prioritized, he
can just tag your shares as just pledged to someone. But it’s a special will be the winning bidder.
arrangement, I don’t think it’s a prevalent. But it can be done electronically, If the pledgor is the bidder, and pledgor’s bid equals another bid and they’re
you can deliver the shares electronically. both the highest bidders, then the pledgor will be preferred.
So after the auction, what’s the next step? A notice will now have an auction, Why?
actual auction. What should a notary public do? • Student: Sir because the law wants to preserve the ownership to the
debtor or pledgor.
Week 07 Pledge
So it’s a recurring policy of the law to preserve the ownership on the hands of actual transfer of shares to the winning bidder. Also it is in this context, that’s
the owner rather than transfer it to another party. why we require indorsement, even in stock certificates to facilitate the transfer.
What if there’s only one bidder? And it’s the pledgor? Would there be a valid So let’s say the shares during the pledge but prior to maturity date, the shares,
bid? there’s a possibility that the value of the shares will go down, meaning they can
• Student: Yes, sir it would be valid. The only instance where a single go below 10 Million. So you’re the lender, you’re negotiating the loan in pledge
bidder, the single bid would be void would be if the pledgee is the contracts. How do you guard against that provision? And the law saying that in
one who is bidding sir. If the pledgee is the only one who bids, that is case of deficiency upon foreclosure on the pledge, the creditor shall not have
void. any other claim against the pledgor or the debtor. The principal obligation
In that case, there would be a fail bid, right? And there should be another bid? would be extinguished. How do you guard against that rule on deficiency in
And you repeat this process until you get a valid bid? So you repeat the process case of pledge?
over again? • Student: There can be a stipulation on the contract of pledge that
• Student: It is provided in the law, Article 2112, in that if the auction there will be a minimum collateral security.
fails twice, the third auction, the pledgee can automatically Yes, that’s it 15Million.
appropriate. This would be an exception to the rule on pactum • S: With that minimum collateral security, if the value of the pledge
commissorium. goes down, the pledgor is obliged to provide additional security or
After two failing bids, in the third auction, the pledgee can now appropriate personal property to be pledged. This will be the provision: “In case
the thing. So there must be a third auction? Before appropriation? Would there the value of the pledge goes below the amount secured or amount
be third auction? loan…”
• Student: After the second option fails, the pledgee can automatically Week 07 Part 04 Salvador, Jheraldine
appropriate. There’s no need for a third auction. Give me the provision exactly. How will you word it?
And transfer into the name, in this case the shares, in the name of the pledgee? • Student: The minimum collateral security clause would be in case the
If you are the pledgee, and you have your eye on the excess, you want to have value of the pledge goes below the amount secured or the amount
this done quickly. You don’t want a fail bid. That’s why there was an issue on loaned.
the use of dummies. You want somebody to participate, but they should be What’s wrong with your provision? If the borrower does not provide
legitimate bidders. Meaning, they have the resources and they will really tender additional shares as agreed upon in their contract, what would be the
a value on the bid. So that’s the possible issue. Who do you get to participate? consequence?
Anyway it’s not an issue. If a third party to participates, the lender will have the • Student: A breach, Sir.
excess anyway, the lender will just mask? the bid. Let’s say 15 million and will That’s why you said there’s now default. Lender can now either sue for
get the shares. collection or foreclosure. But in foreclosure, there will be a down side because
After the auction, let’s say you’re a notary public, what’s your obligation? How if there was forecloses now, the obligation will be extinguished
can the winning bidder transfer the shares in his or her own name? notwithstanding now that only 7 million will be realized through the auction.
• Student: The notary public will procure a certification that the one So, this is problematic, why is it problematic? Because there’s a possibility even
who won the bid… with this provision, the lender with a pledge with an adequate value. So how
So, this is to certify that winning bidder won the bid? NO! do you cure? Remember before I emphasized, in a pledge there is no way the
• Student: Also a deed of conveyance. pledgee can collect a deficiency upon foreclosure, the obligation will be
Which will be in the form of? So it can be a certificate of sale meaning it extinguished regardless.
cannot be a deed of sale because borrower will not be signing. So it will be a What’s the problem with you provision? Your formula is correct, there is just
certificate of sale signed by the notary public that the shares were sold at the one wrong factor or variable. You avoid that situation wherein the lender will
public auction to the winning bidder. What’s the purpose of the certificate of be forced to collect or foreclose an insufficient pledge. You have to have a
sale? That would be the basis for payment of taxes and conveyance. Then margin, class let’s say 20%, so you’ll always have a buffer. There’s already
default, prior to the value dropping below the principal obligation.
Week 07 Pledge
So, the tricky part is, what should be the margin? Normally when you have a property. So, the point is, are you bound to comply with the requirements of a
pledge, they ask for a 50% margin at least, based on the contracts I dealt with. notarial sale or any public sale for that matter?
So maybe 30%, normally 50% would be a safe thing. Clear? So, if you have the • Student: Yes, Sir, it must be done to a public sale. SP: Yes, so it can
situation before you reach the point of the value of the pledge going below the be done by a sheriff, not necessarily by a notary, it can be done by
principal obligation then it is a right to foreclose.You can never really work someone who can conduct a public sale.
around, on that provision of deficiency by having this kind of stipulation. The So, if you look at the law there’s no cross reference, saying that the public sale
collateral value of the pledge should be always be equal to let’s say, 150% of should follow the process stated in the subsequent article.
the principal obligation. So, whenever it goes down below 150, the lender can So, what happens to the proceeds? After the sale?
now ask for additional collateral if the borrow does not give additional • Student: Sir, the ledger will use the proceeds to satisfy the secured
collateral, the Lender can foreclose, based on said default. When I say default obligation.
normally when you do transactions a default in the law, in the pledge will be Yes. So it will now be held by way of security, so now, instead of the 15
sufficient for the foreclosure of the pledge. I say default in the pledge because million worth of shares, the Lender will now have 12 million.
this obligation could provide additional collateral, normally you’ll find in the Due date comes borrower defaults, what happens to the 12 million?
pledge contract. • Student: Sir, the 12 million, will be applied to the due obligation.
But lender forgot so shares now dropping value, these are listed shares. So, 10 million. Who gets the 2?
let’s say, it can happen during the day, let’s say the shares were dropping in
• Student: The 2 million will be returned to the buyer, Sir.
value, so let’s say from 15 it’s now, 10:00, after an hour of the market open.
I thought the excess will pertain to the lender of the absence of a stipulation to
So, let’s say the previous day it’s 18 million, now it’s 12 million, after an hour.
the contrary?
But there’s no provision on the additional collateral, what can Lender do?
• Student: Sir, in this case, since what happened was there’s an
• Student: Impairment without the fault of the Lender.
impairment without the fault of the pledgee, the proceeds of the
So, remember our discussion early on, if there is a diminution in value of the
public sale done by the pledgee, the excess of the proceeds…
pledged property through no fault of the pledgee, you have two options:
Why? When it’s a sale of the pledge shares, it’s just like the foreclosure.
either pledger will give an additional, will give a substitute collateral, or the
lender can sell in a public auction the pledged property. • Student: Sir, this is what happened exactly in this case is not a
In that case, the pledgees right will prevail over the option of the Pledgor or foreclosure.
Debtor. So Lender can now sell. This is a public sale. Just like a in a notarial sale, it’s a public sale.
How? • Student: Sir, it’s a public sale, this is distinguished foreclosure… What
• Student: Lender will liquidate the shares by auctioning it, Sir. happened in this case was that, there was liquidation before the
By following the formalities of the notarial sale. default.
What’s the provision? So the reason why the lender will not get the excess is because of the sequence
of events, that’s your argument?
• Student: Sir, it’s provided that in case of impairment of the thing
pledged without the fault of the pledgee. The pledgee is not • Student: Yes Sir, because in a foreclosure proceeding, when the
prejudiced to exercise the right to liquidate the thing pledge. borrower defaults, and then after that default, the lender now
The provision states that the pledgee may cause the sale of the pledge property proceeds to foreclose the pledge. The provision then, that “the
at a public sale. Do you now follow the formalities of the notarial sale? borrower will not be entitled to the excess” will apply to that case.
Did you get that one? Clear? What he’s saying is this one is not the notarial sale
triggered by default. So, it’s not a sale pursuant to a foreclosure by pledge. So,
It doesn’t say so.
the rule on deficiency and excess will not apply. This one is public sale to
• Student: Sir, the notarial sale is a public sale. preserve the value of a pledged property due to an impairment in value
I know, but you have specific rules on a notarial sale to foreclose a pledge. without the fault of the pledgee.
This one is a public sale because of the impairment in value of the pledged

Week 07 Pledge
So, when the lender holds the cash by way of security and there is default, the money, what can you do? You cannot pay the loan, you have no other assets
lender will now have to apply, basically do what, in that case, will just be except the pledge shares, what can you do?
doing? You think you can argue that the lender, should only foreclose the SMC, but
• Student: Compensation. the lender will not follow you. The lender will foreclose it as an individual
Offset the principal obligation from the cash held by way of security. In which pledge. So, you will have to sue, again you don’t have the money.
case, the excess will go to the borrower. Take note of that peculiar situation. How can you sue? So what’s your alternative? What can you do with the
It’s possible to argue it that way. In fact, if there is a deficiency on the other shares?
hand, let’s say impairment, only 9 million is realized. The lender can possibly • Student: Borrower can sell the shares. The borrower just needs the
also ask for the deficiency because this was not an extinction of the principal consent of the pledgee for the ownership to be conveyed.
obligation due to the foreclosure of the pledge. It’s more of the, pledged To transfer the ownership for ownership to vest. But the sale can be done.
property was liquidated turned in to cash and then applied in payment of the B can sell the share to X. Let’s say you’re B, you will sell it for?
law. So, there’s still a deficiency. There is no jurisprudence on that matter but • Student: The value of the shares.
that is an opening. So, you can have an issue of either excess or deficiency and So, you’re so greedy? So you’ll sell it for 22 million (shares of PLDT, Globe
it’s possible to wiggle out of that rule that “in case of foreclosure the obligation &SMC)? Do you think X will buy?
will be extinguished regardless of the result and the excess, in the absence of a • Student: Discounted value.
contrary stipulation, will pertain to the pledgee. Yes, because there’s nothing in it for X. So, you set it a discount, you say
Let’s say you have here a pledge of shares. Say you have, three blocks of you’re not greedy because you think you will lose let’s say 12 million. What can
shares, PLDT, Globe and San Miguel. PLDT shares were 5 million, Globe you offer? Maybe you can say, I’ll sell it to you at a discount of, split the
shares 7 million and SMC shares 10 million. Borrower defaults. How should savings, 50/50, so you’ll get a discount of 6 million. You get to keep the 6. Of
the lender foreclose based on law? What can lender foreclose rather? course, most likely it would be less.
• Student: The lender can foreclose SMC shares. The law provides that So B can sell. What can the sale do?
if there are multiple things pledged the debtor will only foreclose • Student: You can at least provide the borrower with some assets or
those which are necessary to satisfy the obligation, Sir. cash.
Yes, that’s the provision of law, now I will tell you, you’re wrong, why? No, borrower can now have the funds to pay the obligation upon maturity. L
• Student: Yes Sir, the lender can go after all the things pledged will keep the balance.
because the general principle that pledge is indivisible and the lender Now you’re X, you want to make sure you will get the shares after the exercise,
can go after all the things pledged. what will it provide? How will you protect yourself?
Take note of that provision. The provision, as a matter of procedure, if two • Student: X will pay the obligation directly to L.
or more things are pledged, the pledgee may choose which he will cause to be So if it’s 10 million. 10 million to L directly and then the balance to B. Just to
sold, unless there’s a stipulation to the contrary. There’s no stipulation to the make sure the obligation will be discharged and there will be an assignment on
contrary. So, your state will be, Lender should only foreclose SMC shares. But the shares of the sale.
if you’re the Lender, what do you want to do? You want to foreclose That’s why this is an option. Debtor defaults and lender thinks that the debtor
everything, because in the absence of a stipulation you get the excess. So you can’t do anything. Cannot sue, cannot guard against a possible foreclosure, the
foreclose all the shares and what would be your basis? Your basis will be the possibility is to sell the pledged property and then have the money to pay the
pledge is indivisible, so you can foreclose all. principal obligation upon maturity.
GR: If two (2) or more things are pledged, the pledgee may choos which he Let’s say you have and lender and a borrower. Pledge was given by a 3rd party.
will cause to be sold. It’s a 3rd party pledge. B defaults. Can 3rd party pay?
E: There’s a stipulation to the contrary. • Student: Yes, Sir.
Now, you’re the borrower, and you’re in the situation and you think the lender 3rd party pays. Prevents a foreclosure. What will 3rd party get legally?
will foreclose and the excess will go to him. What can you do? You don’t have

Week 07 Pledge
• Student: Rules on 3rd party payment will apply. Meaning the 3rd Remember constructive delivery, you sign a deed of assignment. It’s a sale
party will be subrogated on the right of B. actually but when it is a share you call it an assignment of shares. It’s basically a
What kind of subrogation? sale. There will be a conveyance. It’s in a public instrument. That is
• Student: Legal subrogation, because the 3rd party pledgor is party constructive delivery. If it is in a public instrument, that is a constructive
interested in the fulfillment of the principal obligation. So there is delivery.
automatic legal subrogation. And even if there is no transfer of ownership, you’re still the owner. And
In this example it doesn’t make sense but it will make sense if you have a ownership will vest only upon the sending of a letter. But they can agree, that
double collateral. Let’s say a mortgage and a pledge. So the mortgage can still they will pre-pay the loan so that lender can retrieve the pledged shares.
be attractive to the 3rd party pledgor. • Student: Sir, if the pledgee does not agree to the sale, can he block
What is pledge by operation of law? Give me an example. the sale?
• Student: On the provision on necessary expenses and useful expenses No. The pledgee’s right is only to object and therefore prevent transfer of
of a possessor in good faith, the possessor in good faith can pay the ownership. But it will not invalidate the sale.
expenses and such possessor will have to retain the property due to [PLEDGE FORM]
the payment made. So this is an old form.
Week 07 Part 05 Soriano, Airish Madriaga So again, pledge agreement, you have the parties—the pledgor (normally the
debtor) and the pledgee (creditor). Sometimes the contract will be a contract
The thing under legal pledge may be sold only after demand. The public
between them, both parties will sign. Sometimes it can happen as the pledgor
auction shall take place, TAKE NOTE NOT AFTER, but within one month.
in favor of the pledgee, only the pledgor will be the one to sign. Will that be
So within the 30-day period from notice or demand, the auction should take
fine even if the pledgor is the only one to sign? YES. Because eventually the
place. If no auction is held, what will happen? The owner can retrieve the
pledgee will consent when the property pledged is surrendered to the pledgee.
properties held by way of legal pledge.
So you have a burden of proof on the document, a proof of the consent of the
If you have a legal pledge, you have a 30-day window from demand within pledgee will be the acceptance of the pledged property. Of course it’s good if
which to foreclose. How? How should foreclosure be done? Most likely you there are certain covenants to be performed by the pledgee in the contract,
follow the notarial sale. But of course you may have the public auction since then the pledgee wants to sign the contract.
you did not specify. To be safe because it is a legal pledge, use the notarial sale, Then you have again the recitals and the premises. The pledgor has an
besides it’s cheaper. Can you have a private sale? For pledge? Take note, it’s outstanding loan to the pledgee and there is a requirement of security under
not mandatory, the law does not provide an exclusive mode of foreclosure. So the loan contract so the pledge is constituted for that purpose. So the first
it can be a notarial sale by default but it can be something else. You can have a provision after the Whereas clause or the recitals will be the pledge.
private sale, or a negotiated sale done through an agent or by the pledgee, that So here there is a pledge of shares of stock to secure the principal obligation,
can be done. There is nothing wrong with that kind of arrangement. The only meaning the loan obligation.
question is will the terms be reasonable. If the terms are reasonable then you Provision No. 1. - Securities Not To Be Transferred. During the existence
have a good mode of disposition. and continuance of this Pledge, or any renewal, extension or amendment
Let’s say you have this, pledge of shares listed in the Philippine Stock hereof, the Pledgor promises not to sell, alienate, assign, negotiate or in any
Exchange. How do you sell them? You don’t do an auction. The best way to manner dispose of, or pledge, mortgage or encumber the Pledged Securities
find a good price is sell them at the Exchange. Otherwise, if you sell your without the written consent of the Pledgee first had and obtained.
shares in an auction, you get the certificates, you announce and you sell it at an This one is valid. Since as we explained before, there is no counterpart
auction then it will be costly. This is more efficient: If the parties agree that in provision in the Civil Code section on pledges similar to the one in Mortgages
case of default, the shares can be sold through an exchange, by let’s say a wherein a disposition of the mortgaged property shall be void. At any rate in
broker chosen by the parties beforehand. this case, it is not an outright prohibition, it is more of a regulation. There is a
• Student: Sir, a while ago you said you can sell the shares, how can you qualification “without the written consent of the pledgee/without the prior
sell it if it’s not withhold? consent of the pledgee”.

Week 07 Pledge
Now what is wrong with this pledge agreement? What is missing? Pactum commisorium?
There is no stipulation on collateral value. So to protect against a possible • This one, based on the context, it’s for the purpose of administering
deficiency, one way is to stipulate a collateral value. So you can have a the shares. It’s not really a transfer of ownership.
provision stating that at all times during the subsistence of a pledge, the
pledgor shall maintain a collateral value equal to x percent of the principal (ii) may, at its sole option, collect, by legal proceedings or otherwise, endorse,
obligation, let’s say 150% of the principal obligation. Should the value of the receive and receipt for all interests and other sums now or hereafter payable
pledged property go below the required collateral value, the pledgor shall upon or on account of said Pledged Securities, without any responsibility,
provide an additional collateral acceptable to the pledgee immediately without however, on the part of the Pledgee for its failure to do so.
the need of any notice or demand from the pledgee assuming of course that this one is for the purpose to collect whatever may accrue on the pledged
the pledgor will know. securities.
PAYMENT OF EXPENSES - So here the pledgor shall pay all expenses of And any additional amounts collected by the pledgee will form part of the
the pledge. What are the expenses? Payment of DST of the pledge, payment of security.
the notarization. By the way when you have documents to notarize in the Now this is what I mentioned to you. When you anticipate in a transaction that
province, they charge you based on the amount in the document. So the trick you will require the cooperation of the party, the pledgor in this case. It will be
here is you bring it to reputable law firm, they don’t charge much. [Sir said it is good to place a document of special power of attorney. So here (3b) for the
more expensive if you’ll bring it to someone whose sole business is notary] purpose of the implementation, the pledgor hereby constituted the pledgee as
Here, all the expenses shall be paid by the pledgor which is the practice. In all its attorney-in-fact to execute any and all acts or documents necessary or
transactions, who bears the most cost? The debtor, always. So if you are the appropriate under the premises.
creditor, and you can pass on the cost to the debtor, the pass on the cost. So So here you have an authorization that the pledgee is not obliged to deposit.
here the pledgor shall pay all the expenses. So here is an authorization of a Third Person Deposit. As I said if you want to
So now, what other provisions could they have inserted here? Because it is a control the pledgor, you want to control the movement, you place a
pledge of shares, what will be your interest if it is a pledge of shares? What counterpart provision instead. You place an address.
extra can you get as a pledgee? Let’s say the shares pledged are equivalent to Just to show that in Section 3, the transfer is only for administration, you have
20% of the entire outstanding capital stock of PLDT. Maybe you stipulate Section 5. This is where disposition will come in upon default. So this is the
dividends will be part of the pledge, but what else? Like what? Voting rights. one required in case of default. So should the pledgor default in the principal
You may want to get voting rights. You may get to control the company with obligation, the pledgee can sell the pledged securities in such order and
the voting rights because your creditor and the shares, you want to preserve quantity or by such lots as the Pledgee may choose which is actually not a good
the value of the shares, you may want to be part of the Board of Directors. So idea, as I said, you sell everything as one because if you foreclose one part, and
you get a provision to that effect. So you state there that during the subsistence the other party characterize it as a separate pledge, what happens now? The
of the pledge, the pledgee shall be the proxy of the pledgor with respect to the obligation will be extinguished so you can no longer foreclose the others. So it
exercise of rights pertaining to the shares. depends on the characterization of the pledge, so if there are several pledges,
If you are the pledgor here, your interest here will be that the securities are foreclosure of one will amount to an extinction of the principal obligation.
kept only in a specific place. There is no provision here. If you want to control Here there is an authorization of either public or private sale, so the authority
the movement of the securities, you place an address. Of course it is an of that will come when we discuss Chattel Mortgage. There is a case saying
additional cost as pledgor as you will likely pay the cost for the deposit. that public auction required under the Chattel Mortgage Law may be changed
RIGHTS OVER PLEDGED SECURITIES - In case of default of the by the parties by agreement, so there can be a private sale.
pledgee, in the payment of the loan, the pledgor can do the following: This one is very lawyerly. It’s just making sure that there will be no loophole in
(i) may have all or any portion of the Pledged Securities transferred to its name the provisions. (pertaining to Section 5 Effects of Default) There is no right
or to the name of its nominee, Transfer the pledged securities in the name of of redemption when you have a pledge. There is no right to redeem. Meaning
the pledgee or to its nominee. if after the sale, the pledgor will be cut off from any interest or ownership in
relation to the pledged property, but you have here a provision saying that “so
Week 07 Pledge
sold and hold the same thereafter in its own right free from any claim of the Substituted service? Okay. I believe you, I don’t know any better. Normally
Pledgor or right of redemption…”[5i]. There is no more right of redemption instead of regular mail, of course regular mail is faster now.
after foreclosure, but just to be sure because laws may change, just to cover This is the extinction of the pledge [Termination Provision]. The pledge shall
that so there is an insertion of that provision. be extinguished upon the payment of the obligation. Then you have the
If you’re the debtor/pledgor, what will you insert here? This is the default signatories. Because they’re all corporations so you have representatives and
provision, what can you insert? You make sure that there is a provision on the they will have here their respective board resolutions.
excess. If you look here (Section 5b), the pledgee shall apply the proceeds for Now this is what makes it a public document. The acknowledgment. This is an
the payment of the obligation, the payment of the outstanding loan. There is acknowledgment. “BEFORE ME, a Notary Public for and in the City of
no mention of the excess. So if you want to get the excess and you’re the Makati, Philippines, personally appeared:…” Again I said it’s different if you
debtor/pledgor, you have to stipulate. placed there a jurat, it’s not the proper form because it will just be subscribed
This is the continuing pledge so the pledge will cover the pledged securities or and sworn to. It’s a common mistake made by lawyers not because they are
any other property given in lieu thereof. But if you have additional pledge, you ignorant but because they just copy paste. Sometimes the secretary will just
should not rely on this continuing security provision. What do you do? Every copy it and what will be copied is just a jurat instead of an acknowledgment.
time there is an additional security on the pledge, you execute a supplemental So that will be a formal defect.
pledge contract or agreement saying that they will now form part of the pledge • Student: Sir, what I meant by messenger is like Facebook Messenger
and make sure it’s supplemental and NOT A SEPARATE pledge agreement. or Telegram, if you sent it, will that be allowed?
Because if you have two separate agreements, therefore foreclosure of one will No, unless there is an acknowledgment.
extinguish the principal obligation, you cannot foreclose the other. So it has to • Student: Like seen?
be just one pledge but executed in stages—one in the original and another in A seen by acknowledgment, because technically you can bring other [inaudible]
the supplemental contract. like Electronic Commerce Act. But you have to prove that you sent it to the
Then you have the no waiver provision here, notices… This is an old right address and it was received in that address and that the parties agreed that
provision here. What is the most convenient way of sending notices? Either by it will be sent to that address. That’s the way. If you can do so, then good,
electronically, with an acknowledgment of course. But if there is no there’s no problem. Sorry I don’t know with Facebook.
acknowledgment, as we said, courier service, we have a receipt, we have a Normally if it’s by registered mail, it will be the correct address. Whatever the
proof of delivery. address here in the contract, you send it there. If no one receives, then that’s
• Student: Sir, can you send it through messenger? the problem of the borrower. Because it’s the correct address, no one’s there
Yes, that is a personal delivery. The problem there is if the person refuses to to receive, then that’s fine.
receive. So you get an affidavit. What do you call that in procedure?

Week 08 Real Estate Mortgage

27 September 2017
Week 08 Part 01 Soriano, Bianca
(10) Contracts for public works, and servitudes and other real rights over
Let’s say you have a loan. Lender extended a loan, exchange for payment. On due date. immovable property. (334a)
This is secured by a REM. Just like a pledge, REM is an accessory contract securing the Cause or consideration of mortgage: same as the principal obligation
payment of an obligation. Formality Requirement:
Who are the parties? For validity:
• Student: Lender and the Borrower For enforceability: It has to be registered in order to be valid against
In this example, the Lender and the Borrower. Of course we’ve learned that the whole world
the Borrower, to be able to mortgage, should be?
ART. 2125. In addition to the requisites stated in Article 2085, it is
• Student: Should be the absolute owner of the property mortgaged
indispensable, in order that a mortgage may be validly constituted, that the
and has the authority to mortgage.
document in which it appears be recorded in the Registry of Property. If the
What’s the object?
instrument is not recorded, the mortgage is nevertheless binding between the
• Student: It’s a real property parties.
What’s real property? The persons in whose favor the law establishes a mortgage have no other right
• Student: So real property, those under 415. than to demand the execution and the recording of the document in which the
Art. 415. The following are immovable property: mortgage is formalized. (1875a)
(1) Land, buildings, roads and constructions of all kinds adhered to the soil; Do you have to deliver possession?
(2) Trees, plants, and growing fruits, while they are attached to the land or No, in a mortgage, delivery of possession is not essential,
form an integral part of an immovable; but can it be done (verbal REM)?
(3) Everything attached to an immovable in a fixed manner, in such a way that It can be done. So during the subsistence of the mortgage, the mortgagee may
it cannot be separated therefrom without breaking the material or deterioration have possession.
of the object; But aside from that, how do I prove now? What can I ask from you that
(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed somehow will allow me to later on prove that there was indeed a mortgage and
in buildings or on lands by the owner of the immovable in such a manner that I can now invoke Art. 1357, meaning the execution of the proper form for a
it reveals the intention to attach them permanently to the tenements; mortgage binding on 3rd parties?
(5) Machinery, receptacles, instruments or implements intended by the owner • Student: I can give to you my OCT or Deed
of the tenement for an industry or works which may be carried on in a Yes, so you can do a verbal transaction, you can just say I’m surrendering to
building or on a piece of land, and which tend directly to meet the needs of the you the Certificate of Title and somehow that can be an additional evidence,
said industry or works; that there was indeed an agreement. Of course, it’s still questionable. Let’s say
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of it’s for safekeeping only, so it’s difficult. So for purposes of the mortgage, as
similar nature, in case their owner has placed them or preserves them with the between the parties, there’s no form. They can mortgage in a private
intention to have them permanently attached to the land, and forming a document, verbal, but it’s always a question of proof.
permanent part of it; the animals in these places are included; But to be enforceable against 3rd parties, what’s required?
(7) Fertilizer actually used on a piece of land;
• Student: It must be executed in a public instrument, and that public
(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the
instrument must be registered in the Register of Deeds.
bed, and waters either running or stagnant;
Where?
(9) Docks and structures which, though floating, are intended by their nature
and object to remain at a fixed place on a river, lake, or coast;

• Student: In the Register of Deeds where the property is located So do you think by those documents the Register of Deeds will register the
having jurisdiction over the property mortgage?
Okay, so let’s say we have now the Borrower and the Lender, and the Lender • Student: I think that the REM must be annotated.
already released the loan to Borrower, and they have to execute a mortgage. So I know, that’s the registration part. So you will now have 2 documents. You’re
the first thing they have to do is? saying for the Register of Deeds to register the mortgage, you just have to have
• Student: So, in that case sir they will execute the REM contract the 2 documents – the notarized REM and the Certificate of Title? No other
Let’s say we have a Corporate Lender and a Corporate Borrower, who should requirement?
sign? • Student: As far as I know…
The person authorized by the corporate Board Resolution. No, first just like a pledge, what do you have to pay?
• If it’s a 3rd party mortgaged by a corporation, mostly you will need • Student: The Documentary Stamp Tax (DST)
stockholder’s approval or at least 2/3 of the outstanding capital You have to pay the DST first. And then when you go to the BIR, you will
stock. And then just like what we’ve discussed, if you’re dealing with present a document, the REM, and the BIR will assess the appropriate DST
a married person, you’re required spousal consent, as a good measure and somehow they will stamp one of the originals with a notation that you
always. already paid, and then you will get some form from the BIR confirming that
Now, they acquired the REM, what do they do now? this mortgage, the DST have been paid and can be registered with the
• Student: After that, they must go to a Notary Public appropriate Registry of Deeds. And then pay the updated real property tax at
So, notarization. So the REM should have what? the Makati City Hal with the City Treasurer or City Assessor (if the property is
What do they do before the Notary Public? what should they do before the located in Makati) The City Assessor will have the tax declaration, and then
Notary Public? you pay the RPT. And then now you’re ready to go to the Register of Deeds,
• They must appear before the Notary Public and have the contract because you now have proof of payment of DST and RPT. You go to the
acknowledge by the Notary Public that it is indeed the contract Register of Deeds.
between the lender and the borrower. So you acknowledge. When How will it be registered?
you say notarization, this one it’s a technical requirement, it must be • Student: So you present it….
in a public instrument, so being in a public instrument, it must be Yes, it’s presented. You pay the, what will you pay?
notarized. • Student: The registration fees.
But what kind of notarization? The registration fees, and then?
• It’s an acknowledgment. The parties will appear before the notary • Student: So after presenting to the ROD, so the lien will be
public and they will acknowledge the due execution of this contract. annotated.
So when you say “subscribed and sworn to” it’s a statement under What do you mean by annotation? So you took up Land Titles. So when you
oath, it’s a jurat. So notarization, and then? annotate, how do you annotate? What will be written? And where?
• Student: And then afterwards so it becomes a public instrument now, • Student: So on the back side, lower…
it must be recorded in the Register of Deeds On the back side?
No. So you present the document to notarize the REM to the… • Student: Or the front side
• Student: Along with the public instrument showing the REM, the On the front side?
deed… • Student: I’m not sure
What deed? The Certificate of Title. The owner’s duplicate of the Certificate of In one of the pages of the Title. What will be written?
Title. • Student: That there’s a REM
• Student: It must be obtained and both must be presented to the Have you seen one? You worked in an office. You were very proud that you
Register of Deeds. know how it’s done
• Student: Not that part, sir. Just the notarization.
You took up Land Titles. So how is an annotation done? Title is somewhere else. There is a process for the cancellation of that
• Student: So the annotation must state that there is a lien on the Title that is in the possession of the mortgagor, but that will take
property that it is being encumbered and that it is used to satisfy that some time, so it may defer participation in the auction. So just like a
certain obligation pledge, a mortgage, unlike a guaranty, creates a lien on the
The entire mortgage contract will be repeated on the Title? property, so there’s a direct charge on the property that justifies
• Student: Not the entire mortgage contract. I don’t think it will fit. the foreclosure.
How will it be identified? In the mortgage contract, can it be stipulated that during the subsistence of the
No, it will be done like this. There will be an entry number blank and REM mortgage, the mortgagor shall not dispose of the mortgaged property?
dated black entered in the notarial register of Notary Public so and so as blank • Student: No, sir.
as security for the payment of loan in X amount. That’s the entry, it will just be Why not?
a one paragraph. So the purpose of that is that anyone dealing with the Title • Student: According to the Civil Code that cannot be done
will know the specifics of the encumbrance. If let’s say I want to check the Because? If it’s done, what happens? What’s the status of the stipulation?
Title, I saw that entry. I will look for that document, and it’s also filed in the • Student: It’s void
Registry of Deeds, so I know the details of the document. That’s the reason It’s void. So the law states that the stipulation shall be void. What if we add a
why if it’s registered, all parties dealing with the land or the mortgage property clause, “during the subsistence of the mortgage, the mortgagor shall not
are bound by the registered mortgage, because they can go to the Register of dispose of the mortgaged property without the prior written consent of the
Deeds, check the Title and check the underlying documents. So that’s mortgagee”?
annotation. • No, it’s still not valid. According to the Supreme Court, it’s not. So
Where will it be annotated? remember that one. Supreme Court said that if you have a clause
• it’s in the Certificate of Title. So it will be annotated on both – the exactly like that one, if it’s a prohibition of disposition during the
one filed in the Register of Deeds and the duplicate copy of the mortgage, that’s void. Even if you add the clause “without the prior
owner. written consent of the mortgagee” it will also be void, that’s a
Who gets to keep the copy of the Certificate of Title? decision of the Supreme Court. Of course, my sense says that should
• Mortgagee have been allowed because it is not a prohibition, it is more of a
Let’s say you’re the mortgagee, will you accept a provision saying that during regulation. Especially if you add after the clause “without prior
the subsistence of the mortgage, the Title shall be in the custody of the written consent of the mortgagee, which consent shall not be
mortgagor? Why do you want as mortgagee the possession of the Certificate of unreasonably withheld”. So there’s even a standard for the grant or
Title? withholding of consent. But at any rate, jurisprudence is clear, if
• Student: Sir, because the Certificate of Title states that this property is you’re reading your text book by De Leon, you will come across that
encumbered, then I’m the mortgagee. So, it’s better if I keep this case wherein the Supreme Court said that cannot be done. As we
because if this will kept by the mortgagor, then he might be able to said, if you have a mortgage, and you’re the mortgagee, you prefer to
destroy this or to tamper it, and the copy also with the ROD might limit the persons you’re dealing with, so you don’t want a transfer.
be lost. So how can you prevent it, somehow the transfer without actually stipulating
Yah, that’s a possibility, that will require a lot of offenses to do it. They will it, because the stipulation will be void? How can you prevent it? That as far as
falsify a discharge of mortgage, and then register it with the Register of Deeds. you are concerned, you will only be dealing with the original mortgagor, not
But what’s that more important consideration for the mortgagee to keep the the transferee. Is there a practical way of preventing it or make it somehow
Certificate of Title? So the Title will be relevant when? difficult? Answer is yes, because? What power do you have to prevent a
• When there is a foreclosure. Because when there is a foreclosure, that conveyance?
will facilitate the foreclosure. Because otherwise, somebody will bid • Student: I think the only power that I have is that if the property is
during the auction, and during the auction, you will know that the mortgaged, then I can require similar.

No, what can you do as mortgagee? Yes. And then? What advantage would the lender, that example, have? Or
• Student: Maybe sir, I could stipulate what will the lender have after the registration?
No, there is no stipulation because the Supreme Court said you cannot have The certificate of title. The owner's duplicate.
that stipulation. Of course it’s a different matter. Let’s say your client asked When you have a mortgage, you always require that the mortgagee…if you are
you, I want that contract, will you include that stipulation not to dispose? No, for the mortgagee, you always require that the title be with the mortgagee. So?
of course you will include because your client wants. However, there is • Student: Ah, so it shows that I'm the presumptive owner of the…?
jurisprudence. What’s the benefit of including it? A prohibition against No, you cannot. That's Pactum Commissorium, because you're just a
disposition by the mortgagor during the subsistence of the mortgage. We’re mortgagee. You say you're the owner, it cannot be. That will be Pactum
digressing now, so you think of the answer to the original question. Now, Commissorium.
what’s the benefit even if it’s void? You have the owner's duplicate, the owner, the owner-mortgagor wants to
• This is what you have to know. Yes, it may be void, but if your client dispose of the property. How can you make it difficult?
wants it, this applies, unless it is criminal, don’t insert it. If it’s not, The registration of the sale and the issuance of a new title in lieu of the
you can insert, because your client wants it. previous one. So there will be a new title in the name of the buyer. So that's
What’s the practical benefit? Is there? As a lawyer, do you think there’s a impractical. In fact, that will…if you have a stipulation, that will be the trigger
practical benefit? Let’s say if it’s question now by the mortgagor? of the…most likely, that will be the…. Let's say, you have a prohibition in the
• The burden of initiating litigation. So for the mortgagor to question mortgage contract, and the mortgagor now wants to dispose. The mortgagee
it, the mortgagor will have to go to court. So if you say, go to court disapproves. The mortgagor questions now because there is no…the
first, get a decision, and then we’ll talk, So there’s a benefit to that. mortgagor disapproves and the mortgagor does not want to give the title.
So do not turn down a wish of a client, because it may have a Okay? So that can be the trigger of the litigation.
practical benefit. Of course your duty as counsel is to tell the Okay? So, that answers the issue of how to make it difficult. If you're the
client that that will be void, it will not be enforceable, but mortgagee, you just don't give the certificate of title. Next one.
nevertheless if it’s the wish of your client, you insert, unless it will The notice. So, instead of a prohibition, you can require in the mortgage
amount to a criminal offense. contract, a written…you can require written prior notice before any
Let’s us now go to the original question. Without that stipulation, how can you disposition.
prevent or make it difficult for the mortgagor to dispose of the property Why? That's valid because it's not a prohibition. Just information. So, it's a
subject of a registered mortgage? stipulation mandating the mortgagor to inform the mortgagee of any proposed
Week 08 Part 02 Soriano, Glyssa Camille Garcia disposition. So, additional example, if you're the lender-mortgagee, you want
• Instead of requiring approval by the mortgagee, the mortgagee will the notice because…?
You receive this information that your borrower is disposing the mortgage
just require that in case of any disposition, consent shall be given to
property to somebody else. That somebody else is also willing to be bound by
the mortgagee. Okay? Now, we're piling up questions.
the mortgage. Okay.
Why would you require that as mortgage?
Notice, the mortgagor shall give notice of any proposed disposition before what will you get from that information? The borrower is disposing property.
making a disposition. • The borrower may be in financial distress. Okay?
So in this stipulation, the mortgage contract, just a stipulation that any • So that's why you may want to require. Yes, you will still have a
disposition by the mortgagor shall be with prior written notice to the lender of security but sometimes, you don't want to go to the security, you just
mortgagee. want payment.
Remember when you do the registration? Remember when we discussed, at So, you have information of the financial condition of the borrower. Let's say
the end of the process, what will be the result? that the borrower will have possession of the property, right? So the borrower
• Student: it's binding on third parties. then will have the house and lot. The borrower, by the way, lease the property
to X. X, rather, will pay rent. Borrower defaulted. Can lender collect from X?
• Student: No, sir. You cannot collect from X, sir.
Why not? • Student: As long as, let's say sir, was a…that the….
• Student: Since X sir is not privy to the mortgage…. What? What will you…under what arrangement will have…will the third party
It's a registered mortgage binding on all parties, dealing with the lot, with the have possession, aside from lease?
property, rather. • Student: Usufruct.
• Student: Ah, yes sir. Because it's…X does not own the property sir. Usufuct, we'll use this. So instead of lease, usufruct. So, X now should pay?
Yes. X does not own the property. So can L collect from X? Under your example. I'm following your example.
• Student: No, sir. You cannot. • Student: No, sir. Still not.
Article 2128, the creditor…29 rather. The creditor may claim from a third So?
person in possession of the mortgage property, the payment of the part of the • Student: Still won't pay. I think possession sir, under the…. Well, no,
credit secured by the property. Exactly this example, 29. So? sir. X doesn't have….
• Student: Ah, sir, since…yes, sir. Because the…. No. Why? I know that. I told you the answer. No. Because?
Yes, now. So you're changing your answer? • Student: Because X is just a lessee on the property, sir. And that since
• Student: Ah, no, sir. Because the…. he's just a lessee on the property, he has no…him, X and L have no
No, what? No, yes, no, yes. privity relationship, sir.
• Student: No, sir. Because the third…. Well, but there's the law. That's the link between the two of them. And then,
You should hear that only in…. no. there's the mortgage binding on X.
• Student: The provision here, sir, said that the third person possesses. • Student: Because the last part of the provision, sir, also states that,
In possession. because of…that the mortgagee will only pay from X.
The law says, whoever is in possession of the mortgage property maybe The amount secured by the mortgage.
proceeded upon by the creditor for the purpose of collecting the amount • Student: Yes, sir.
secured by the mortgage. Yes. So basically collecting the loan.
• Student: Yes, sir. • Student: Yes, sir. It also adds the qualification so that, in terms and in
So, in this case, L demanded payment from X. Is X bound to pay? the formalities required by law, sir. So, that must be….
• Student: No, sir. What are those terms and…your citing them, I don't know them.
But there's a provision. • Student: I'm not so sure in this sentence, sir.
• Student: In that case, yes, sir. Right. X is not a party to this loan contract. Okay? So the mortgage binds X.
Huh? What? The answer is no. X is not bound. Why? So, in the hands of X, the property will be subject of the mortgage. Now, let's
• Student: Because sir, I think the…. assume it's a usufruct. So, can L also demand payment from X? X may pay for
Not withstanding that provision. the purpose of discharging the mortgage and retaining possession, but X is not
• Student: Yes, sir. Because of X is just a lessee on the property, sir. He obliged to pay.
doesn't own. What should X do if demand is made? X then just surrender possession and
The laws did not say claimant, just the one in possession. X is in possession. say, "You foreclosed, I'm giving up." Okay? If it's a lease, it's different because
you now have…deal with whether the lease is also binding on L, or the only
• Student: Yes sir, because I think the word possession here, sir, means
right of L if L successfully wins the auction of the property, is L will become
the….
the lessor. Okay? So, don't be mislead by that provision. You will think that
B? Should be a possession?
that provision somehow drags the third party into the principal obligation. The
• Student: Ah, no, sir. No, sir. third party remain a stranger to the principal obligation. So, the lender cannot
It can be any party. collect the principal obligation from third party, X in our example.
Yes.

Let's now…so you have the…we will now assume there's a valid mortgage. So • Student: Sir, because you can't just foreclose on the property, sir.
you have a mortgagee, mortgagor. So, mortgage, there's payment, there's You can do extrajudicial foreclosure.
default. Okay? What's the remedy of the mortgagee? • Student: Yes, sir. But in extrajudicial foreclosure, sir, there must also
• Student: He can foreclose…. be public seal of the property.
What are the remedies? Yes. So, why not extrajudicial? Why judicial, in that example? In short, the
• Student: Well, first sir, is for specific performance. answer is, in this example, mortgagee should foreclose judicially. Why?
Collection. • Student: He should foreclose judicially, sir, because….
• Student: And then if that fails, then, foreclose the property. Only.
Your answer is wrong. Why? Mortgagees before collection, was not able to • Student: Only? Ah, because sir, that there's a deficiency...
collect, forecloses the mortgage. No. Because that's the default rule. In our example, there was no mention of a
• Student: Ah, that's wrong sir because resort to one remedies waiver special stipulation authorizing extrajudicial foreclosure.
the other, so…. • Student: Yes.
No, that's wrong too. Because it's an absolute rule that you formulated, resort So in the absence of a stipulation authorizing extrajudicial foreclosure, the
to one remedy forecloses the other. default rule will be judicial foreclosure. That's why if you're doing mortgage
• Student: Ah, okay. In that case, sir, since the collection failed, then contracts, it's costly if you forget the provision on extrajudicial foreclosure.
the mortgagee may start foreclosure procedures. Why?
No. Because the rule is, if the mortgagee sues for specific performance • Student: Because sir, if you….
collection, the mortgagee abandons the mortgage but not the other way Why would it be costly?
around. If the mortgagee forecloses, the foreclosure somehow did not result to • Student: Yes, sir. Because you have to get lawyers, you have to…
the payment of the obligation, the mortgagee can still collect. Okay? So, your So?
rule…that's why your rule is wrong. • Student: … pay the court.
• Student: Yes, sir. Yes.
Now, so there's default, how should mortgagee does not want to… • Student: But then also….
• Student: To foreclose. No. You pay the court, you get lawyers. Even in extrajudicial foreclosure, you
…foreclose, to collect, rather? How should mortgagee foreclose? have to do both. You still pay the court, you still get lawyers.
• Student: Well, sir, with the formalities sir. By…. • Student: I think, sir, the main problem in judicial foreclosure is
In accordance with law, yes. What's that in accordance with law? the…that the mortgagor may be able to restrict or to get exemption.
• Student: Ah, so sir, he must then…so the mortgage there sir, can be No. It's already a judicial proceeding. So, it's under the control of the court.
either judicial or extrajudicial. What's the problem if it's judicial? The main problem?
Yeah. Another example, how can it be done? • Student: That the mortgagor, sir, could resort to dilatory tactics.
• Student: I think sir, you must…I think as a mortgagee sir, I prefer the So?
extrajudicial. • Student: So in that case, sir, the mortgagee doesn't have the money,
No. So now, you have that example. There's a mortgage, there's default, so there's also dilatory tactics by the mortgagor, then….
lender will now have to foreclose. The mortgagee will now have to foreclose. It's not an efficient way of foreclosing because it takes a lot of time. Assuming
How should mortgagee foreclose? we have equal cost, okay? So let's say, we have cost, the same cost for
• Student: So I must file a complaint, sir. extrajudicial foreclosure and judicial foreclosure. He may replace you?
Why? How do you know that you have to file a complaint? • Student: Sir?
• Student: Sir, it's…I think it's in article, ay, no, sir. It's in rule 68, sir. Do you need the sub?
No. Why do you have to file a case for foreclosure? • Student: I can still go. But sir, if they want to recite, I can….

No. I will allow you to redeem yourself in the next few questions. So, you have The complaint should state…?
to file a complaint for foreclosure. Where? • Student: The date of the….
• Student: Sir, with the court having jurisdiction over the property. No. First, have you seen a complaint?
Which means? • Student: Yes, sir.
• Student: So in the case…. Okay.
Let's say I'm the client, you're going to explain to me what you just said. I don't • Student: But a libel complaint. Not a….
know anything about jurisdiction. How will you tell me? We have to file the Yes. It's the same thing. You start with…?
complaint where? • Student: With the name of the parties.
• Student: In the court having…. You need the…? You have the caption…
What court? • Student: Yes.
• Student: The court having juris-…. …setting forth the parties.
What court? • Student: Yes.
• Student: The regional trial court. Who should be the parties in the foreclosure?
Regional trial court. • Student: So the lenders and the borrower. The mortgager and
• Student: Having jurisdiction over your prop-…you're the mortgagee.
mortgagor…ah, you're the… Any other party who may be included or who should be included?
Mortgagee. • Student: Maybe, sir, a buyer.
• Student: …mortgagee. Anyone having an interest or claim in the property. Okay?
Yes. • Student: Let's say sir, another creditor.
• Student: So I tell you, sir, that we have to file our complaint…. Yes. Okay. So…or let's say, a junior mortgagee.
In the RTC, where? • Student: Yes.
• Student: Let's say sir, in the Makati property, so we have to go to the What's a junior mortgagee? You said yes.
Makati RTC. • Student: Yes, sir. A junior mortgagee, sir, is someone who was….
So you have to find. That's how you explain, that the RTC having jurisdiction The son of a senior mortgagee.
over the location of the property. • Student: No, sir. He has also a claim on the property but it's inferior
• Student: Yes, sir. to the claimant.
Just don't say, "having jurisdiction" because you had to verify that that…what Why?
triggers jurisdiction is the location of the property. • Student: Because, sir, in that case, sir, the property is mortgaged but
• Student: Yes. Yes. the mortgagor also mortgaged it subsequently.
So, you file there. Okay? So what will you file? Okay. So, mortgage subsequent to the first mortgage.
• Student: A complaint for foreclosure. • Student: Original mortgage.
What will you state in the complaint? So, it's a junior mortgagee.
• Student: The principal obligations, sir, that the property has been • Student: Yes.
secured. So now, so you state the parties.
No. According to the rule…what's that? Rule sixty…? • Student: Yes.
• Student: Sixty-eight. Of course, you should know this in forms, you write….
Oh, yeah. According to the rules of court. • Student: Next semester.
• Student: Yes, sir. Well, so also the rule 68 mandates, sir, that the So you could state there, what a way out. Okay. I don't know any better.
foreclosure must….

So you have a caption, you state there the parties, the particulars of each party. No, that's not the allegation. What will you allege? So you have then allegation
Name, address, they're of legal age, blah, blah, blah. So the court will know describing the principal obligation, another allegation on the mortgage. And
where to send the summonses. then, what's next?
• Student: Yes. • Student: That the mortgagor failed to pay, sir.
Okay? So you have the parties there. And then, what else should you state So the default.
aside from setting forth the parties? • Student: Yes.
• Student: You must also state, sir, the principal obligation. Okay? And…? So you're done somehow. Okay? And then, what will be next?
What do you call those? The principal obligation will state the principal • Student: And then, sir, that the court will hear, sir, with both parties.
obligation, the existence of the mortgage ... You will state in the pleading, the complaint?
• Student: The details, sir, of the…. • Student: Ah, no sir.
What do you call those details? Basically, your complaint will have two parts. The court will hear both parties.
You have…? • Student: Ah, no sir.
• Student: So, say the facts, the facts…. What?
What kind of facts? You take this up na? No, not yet? • Student: After those….
• Student: Legal forms, not yet sir. No. You're still dealing with the complaint.
No. Proceedings. What…civpro? What do you allege in the complaint? Well, • Student: Ah, okay, sir.
facts? Now, this is how…you write a complaint, basically. Whatever complaint you
• Student: No, sir. The facts ng attendant sir. The relevant facts. So, will doing. Of course, aside from the parties, the caption, the parties, you will
state that…. state what we call ultimate facts.
What do we call those facts? What's the lawyerly language for that? The magic • Student: Yes.
words? Ultimate facts. Meaning, your narrative that will justify…?
• Student: Ah, yes, sir. The ultimate facts. • Student: The foreclosure.
Yeeeeeees. Ultimate facts. Okay. So ultimate facts will be? What will be the No. The prayer or the relief you ask from the court. So, the next part will now
ultimate facts in this case? be the prayer of the mortgagee. Okay? What should be the prayer?
• Student: So, that there's a principal obligation, sir. That the…. • Student: So, the prayer, sir, so I think starts with that…we humbly
You state the particulars of the principal obligation. pray….
• Student: Yes. Like the amount, the parties. We humbly? No.
Yes. And then? • Student: We request….
• Student: And that the…that this certain property in Makati is being We? No.
mortgaged to secure... • Student: That's the style ...
The particulars of the mortgage securing the obligation and…? That's how…that's the style? No. That's a ridiculous language, "We humbly."
• Student: That since failure to…because there was a failure to • Student: That the parties here, like, let's say, mortgagee pray for….
collect…. So you will state?
No, that's not…we cannot allege failure to collect. • Student: That the parties here, let's say mortgagee….
• Student: I'm sorry. Complainant.
Meaning it's your fault as mortgagee to collect. • Student: Complainant, sir…
• Student: Yes, sir. And that the time…. Prays…
• Student: …prays….
…the honorable court.

• Student: Yes, sir. Therefore? When we say entry of judgment, we are assuming that judgment is
You're always saying that, "honorable." already- final and executory. All appeals were exhausted or none were made.
• Student: Yes, sir. This is why I said at the start that it is really costly if you forget the stipulation
Somehow, suck up to the judge. on extra-judicial foreclosure. Because this can drag on for lets say 10-20 years.
• Student: Yes. Let’s say the mortgagor will not challenge it, how long do you think it will
Okay? Just don't say, that the court. Just say honorable even if it's…they're take? A couple of years just to foreclose. You will have trials! You will have
dishonorable. mediation, pre-trial, trial and a judgment! Incidents and appeals. Maybe you are
lucky if you finish after 5 years. So when you say the court will grant the
• Student: So, yes, sir. So to continue that sir, it must state that, we pray
mortgagor a period not earlier than 90 days but not more than 120 days from
the honorable court that the…that this property….
the entry of judgment within which to pay the principal obligation, we are
Wrong. So you will ask the court. It's judicial foreclosure.
saying that the judgment is already final and executory, this is the equity of
• Student: Yes. redemption. This equity of redemption can technically extend beyond—till
So, complainant prays that the honorable court, after due proceedings, issue an when?
order. Number one?
• Student: It can extend beyond the 120 days.
• Student: Granting the petition, sir, and that…granting the foreclosure Until when? Now you are guessing.
proceedings.
• Student: When the court finds sufficient reasons.
No.
Yes, what will be the sufficient reason? The policy of the law which is a
Week 08 Part 03 Tamayo, Ryan Joseph Emmanuel Mendoza common theme in a number of legal provisions, is to conserve ownership in
Nooo, im certain its not ever called a grace period
the owner, the real owner. So as much as possible, the law will want to
• Student: Its not a grace period because there’s still.. conserve ownership in the mortgagor. So you have a law allowing the
So what you call the equity of redemption, that’s the period wherein the mortgagor to redeem the property. So this equity of redemption can be
mortgagor is afforded the opportunity to pay the principal obligation before extended until when? Its not one year. Anyone? Until the COURT
the foreclosure, this period, when will it begin? Day 1! When do you reckon CONFIRMS THE SALE. This period, equity of redemption. Why the cut-off
day one? on the confirmation of sale?
• Student: Sir, from receipt of the notice from the judge. • Student: Confirmation means registration.
Okay, let’s say you’re the mortgagee, you receive the notice of the judgment NO! Confirmation is not registration. The confirmation happens after the sale.
today. The court ruled in your favor. You now count day 1? So?
• Student: Yes sir. • Student: Yes, because confirmation presupposes the sale. There is
No!! This is again a fair question. You have to count from the? Day 1 should already a buyer.
be what the rules in Civ Pro say? (Student enters classroom) She just entered. So? Why confirmation? You have the judgment then the sale and then you
• Student: Date of entry of judgment have the confirmation. So this is like your baptism, this is your confirmation.
Date of entry of judgment. Now what do you mean by entry of judgment? • Student: Yes sir!
When does it become final? Yes, yes, what?
• Student: The date of promulgation. • Student: Because the mortgagor cannot buy back the property no
Wrong!! Who enters the judgment? longer, because there is another owner.
• Student: The court. The court validates the auction, this is why and that will be the conveyance of
Yes, it’s a document. When do you have it? So there’s a judgment. Okay. How ownership. If there is a winning bidder… what about the right to redeem?
do you reach entry of judgment? What can happen in between? After the confirmation of sale?
• Student: What can happen in between? A motion? • Student: There is no more right of redemption after confirmation.

You are sure? NO, as a rule there is no right of redemption in judicial execution against other properties of the debtor. In an extra judicial
foreclosure, that’s the general rule, you have to find a law then that allows foreclosure because no case was filed in court, the collection of the deficiency
redemption in judicial foreclosure and that law will be…what is the law will be the subject of a separate legal action. Any questions on judicial
allowing redemption after judicial foreclosure? What? foreclosure? So for our purposes I just you to understand to the general rules
• Student: Im not sure sir. in judicial foreclosure, the details will be tackled in your remedial law. Any
The rectal law? When you go to the doctor? You know the Recto law? NO! It questions? So lets say the mortgagee wants extra judicial foreclosure, there
deals with chattel mortgage. must be a stipulation for that. How do you do it?
• Student: Sorry sir. • Student: There will be a stipulation for a special power.
What? An example will be the one I assigned to you, Section 47 of the General Where? In the mortgage contract or an attached document. How will the
Banking Law, so if its foreclosure by a bank and its judicial, it is one year from provision go? In case of default, the mortgagee shall have a right to
the sale. Now, do you still want to recite? extrajuducially foreclose… pursuant to the provisions of act 3135. Very
• Student: I can sit down. simple. Without stipulation extrajudicial foreclosure can never be done. So lets
NO! You redeem yourself. Now after that one there is a confirmation of sale. say, we have a mortgage. Lets say a loan. We have a real estate developer and
So there’s a judgment, then no payment, then the auction, the auction will be you have here a foreign bank. The real estate developer borrowed US dollars,
done through the sheriff, there will be formalities there you will learn this in lets say 20 million from the foreign bank, there is an obligation to pay principal
special proceedings, then after the auction there will be a certificate of sale and interest. To secure payment of the loan, the real estate develop constituted
issued by the sheriff, that there was sale to the winning bidder, that will be the a mortgage, a real estate mortgage, covering the inventory of the developer lets
one confirmed by the court upon motion to the relevant party. So there’s now say condo units and subdivision grounds. So this will called mortgage trust
a, the moment there is a confirmation of sale, the mortgagor will be cut off indenture covering a pool of assets. So lets say the mortgage will be worth,
from the property, no more right, unless there is a law allowing the right to after paying principal and interest, this will amount to 25 million, this in US
redeem. How to apply proceeds? dollars, the assets are equivalent to 40 million. Now, so you’re writing the
• Student: Principal Obligation first mortgage and you’re anticipating a possible foreclosure, by the way can a
Wrong. Cost, Principal obligation and the balance if any will go to the? foreign bank be a mortgagee?
• Student: Junior mortgagee. • Student: Yes.
As may be directed by the court in accordance with law. So if there are no Yes, because its not a transfer of ownership. So what will you place in the real
other claimants, the balance will go to the mortgagor, and if there are other estate mortgage to facilitate the foreclosure?
creditors, depending on the priority of their claim. Sub? • Student: For foreign mortgagees the default rule is judicial
• Student: Yes foreclosure.
Lopez. Do we wait? Lopez? They just sold you. They cannot be trusted. They Default rule. So the parties can stipulate on extra judicial foreclosure still? So if
volunteered you actually. Call Lopez the one who went out. So now were you are the lawyer of the foreign bank you will want to insert a provision on
discussing foreclosure. So there will be foreclosure, and proceeds will be extrajudicial foreclosure pursuant to Act 3135. That is allowed? The answer is
allocated, now we were discussing foreclosure, so there was a foreclosure and no. Because?
proceeds would be allocated as follows. • Student: Foreigners are not allowed to own property.
• Student: Creditor will have to file a different case. They’re not owning, when you foreclose they are not owning property. Why?
Because? Why not just file a motion? Because of? What prohibition? Because of Act 133, which I assigned. It states
that if the mortgagee is not qualified to own land meaning foreigners,
• Student: Because there is no action pending.
foreclosure shall only be done judicially, and the mortgagee can take
Yes, that is the difference between judicial foreclosure and extra judicial
possession of the property for a period of five years, pursuant to that judicial
foreclosure. In case of a deficiency in judicial foreclosure, the creditor only
proceeding. Okay. Why? Why do we have this law?
needs to file a motion in the same case, for the court to render a deficiency
judgment, and that judgment will be the subject for the court to render

• Student: Because uh, it’s a way to prevent the ownership of land by a The court? I thought it’s extra-judicial? (Side note: By the way, you should read first
foreigner. the law, Act 3135 and the other assignments I gave you. Then you read your annotated
No, because in foreclosure definitely the foreigner cannot own. How will there text.) It’s extra-judicial foreclosure. Right now it’s done generally through the
be circumvention? If you allow extrajudicial foreclosure what can a foreigner court sheriff. For you to have foreclosure through the sheriff, you still pay the
do? For you to extra judicially foreclose, what’s an important or desirable same filing fees. So you still go to court. That’s why the cost will be the same.
aspect of a foreclosure, you want to foreclose property extrajudicially, how will Of course the period is shorter. The sheriff can conduct the auction. Is there
you attract bidders? You have to get possession first, that’s why its problematic any other person who can conduct the auction?
if you want to foreclose extrajudicially yet you do not have possession. Bidders • Student: Notary public.
may be, will not be interested because they cannot get immediate possession, A notary public, technically, can do the auction. However, to make sure that
they have to file actions for a writ of possession. They have to file an action the court earns something out of the EJF, the court requires it to be done by
for that writ. So that rule, if you have extra judicial foreclosure, it can happen the court system. You need to get a sheriff for that purpose. What’s next?
that a mortgagee a foreigner will take over land under the guise of foreclosing, • Student: There will be an auction sale.
so it will be a circumvention in that effect. In the meantime the foreigner is Immediately?
holding the land. And even if it is judicial, the law assumes that there will be no • Student: First there must be given notice.
oversight and just regularity in the foreclosure, but the law limits the Who must be given notice?
possession of the property during the judicial proceedings. Can the foreigner- • Student: Notice should be placed in 3 conspicuous places in the
mortgagee possess the property? municipality where the property is located.
• Student: Only during the time of the foreclosure. 3 conspicuous places? It’s public places not conspicuous. If you’ve been to
Even after. Before and after? Of course not after the successful foreclosure. the hall of justice, you’ll see there a board with a lot of documents attached to
The mortgagee is not prevented from taking possession of the property in it. That’s one place. Where else can you post it? Bulletin board in the registry
some other capacity pursuant to valid contracts, lets say a mortgage coupled of deeds. Or if you’re dealing with condo units you place it in the condo.
with a contract of lease so the lessee will be the mortgagee, so the foreigner So there will be a requirement by posting only?
will be holding.. • Student: No sir. There’s also publication notice in a newspaper of
Q: Can the foreigner mortgagee possess the property before and after the general circulation once a week for 3 consecutive weeks.
foreclosure? What’s a newspaper of general circulation?
A: Mortgagee is not prevented from taking possession of the property in some
• Student: A newspaper circulated in that area where the property is
other capacity pursuant to a valid contract. Let’s say it’s a mortgage coupled
but there should not be specific readership.
with a contract of lease. So the lessee will be the mortgagee, the foreigner will
Yes, it’s catering to the general public. Example?
be holding the land as lessee and it will be under another contract. That’s not
prohibited by law because it’s a separate contract. • Student: Inquirer.
Week 08 Part 04 Abata, Marivir Guevara & Alfaro, Maria Aileene Antonio Libre? The one being given in LRT. It’s for free because it’s libre. Can you
The foreigner will be holding the land as lessee. And it will be under another publish there?
contract. That’s not prohibited by the law. It’s a separate contract. • Student: I don’t think it’s allowed.
Let’s assume X, a corporation, extended a loan to a borrower. So they inserted Palladium?
in a mortgage contract a provision allowing extra-judicial foreclosure pursuant • Student: No there’s a specific readership.
to Act 3135. Real estate developer defaults. How should X, the mortgagee, People’s Tonight?
proceed to conduct the EJF? Draft a complaint? • Student: Yes, sir.
• Student: Yes. Cosmopolitan?
JSP. No! It’s extra-judicial! • Student: It’s a magazine.
• Student: You ask authorization from the court to foreclose. Because it’s glossy?
• Student: No, it’s not considered a newspaper of general circulation.
Inquirer.net? So there’s no requirement of personal notice in EJF. Do you have the

• Student: There’s no specific requirement that it be printed but I think same notice requirement in case of judicial foreclosure?
it should be printed. • Student: No, sir. There will necessarily be personal notice because the
So it cannot be done? Manila Bulletin? court will summon the parties.
• Student: Yes, sir. Yes there’s personal notice.
So newspaper of general circulation meaning catering to the general public and Let’s now go to publication. There’s publication of the notice of the EJF but
there’s no defined or specific audience. no posting. Will you have a valid foreclosure?
You’re the mortgagee, where will you publish? The cheapest one of course. Do • Student: Yes.
you know the cost of publication? It’s per line. So the more space you occupy, I thought they’re mandatory requirements? So it’s either or? Not both? The
the more you pay. If you’re going to get a space, how big should be the space? requirement is both but if there’s no posting, it’s still valid because the
¼? ½? ⅛? The smallest possible space. SC said so. If you omit posting, but you had publication, that should be
Where? Multiple choice. Inquirer, Manila Bulletin, People’s Tonight. enough. But not the other way around. If you omit publication, then you
• Student: People’s Tonight. Because it’s cheaper. have a defective EJF.
Your answer is correct but that’s not the reason. Where will the foreclosure be held?
• Student: It’s not as widely read. • Student: At the place where the property is situated.
What benefit will you get? It’s supposed to be publication. You’re publishing Yes, so within the jurisdiction of the court where the property is located. I say
somewhere that will not be read. court because you get the sheriff from that same court.
• Student: So not that many people will participate if the mortgagee Let’s go back to the publication. Frequency?
wants to buy the property. • Student: Once a week for 3 consecutive weeks.
If you’re the mortgagee, what is your major concern? Your concern will be the So let’s say, Wednesday, Monday, Sunday then Monday, Sunday, Monday
mortgagor. What can the mortgagor do? Remember when we were discussing Sunday. When is the earliest day you can hold the auction?
pledge? You can give notice day before the auction and conduct the auction • Student: 3rd monday. Because it requires once a week publication. So
first thing in the morning. Same purpose. The purpose is to prevent the you publish one on Wednesday, one on Monday, and then on
mortgagor from taking action that will frustrate a successful foreclosure. What Monday. And then on the 3rd Monday you can hold the auction.
can the mortgagor do? Go to court, get a TRO or injunction and then tie this Why? You need 21 days in between the 1st publication and the auction? Does
foreclosure in litigation for several years. So you want to publish in a the law state that the auction should be held the week after the last week of
newspaper that will unlikely convey the information to the mortgagor. publication?
So if you publish: • Student: No Sir. So Tuesday.
If you can fit it into a 1/16 or 1/32 of the page, you do. That’s enough So that will amount only to 13 days. You can hold it immediately after the 3rd
because it’s still publication. There’s no required size publication. Because the SC said in a case, if you read Act 3135 as an appendix
Publish it in a newspaper of general circulation that is not likely read by the of your de Leon book, there will be a note there citing a case, I think it’s
mortgagor and the mortgagor’s agents. So sometimes a tabloid may not be Bonnevie, where the SC said that you need not have a full week in between. So
ideal because the mortgagor’s agents who’s a driver or househelp might be you can have the publication as long as it’s done once a week for 3 consecutive
reading the tabloid and they will see there the name of the mortgagor. So you weeks. After the 3rd day of publication, you can have the auction. So after 13
choose where you’ll publish. And of course the timing of the publication. days, you can have an auction, You need not have 21 days.
Sometimes in better to publish when? Weekday, no time to read. Weekend, What time?
they have. Besides, it’s more expensive if it’s a weekend publication. • Student: From 9am to 4pm.
So you give notice by posting, publication and personal notice? Can the sheriff hold it between 9 and 9:30?
• Student: No personal notice. • Student: Yes.
3:30 to 4?

• Student: Yes. Why Rules of Court? It’s an EJF. This is why you have to read the original.
If you’re the mortgagee, what time will you choose? You may know the result, but you have to know the process. How do we get
• Student: 9 to 9:30. to that conclusion that the redemption price should be this much.
The earliest possible time. Of course, in some cases, the entire day will be So let’s say you have a bid.
the entire period. It happened to a colleague. The auction was scheduled for Mortgagee 1, the first mortgagee Claim = 5M
the entire day. The lawyer was there to observe the auction on behalf of the Mortgagee 2 Claim = 5M
mortgagor, to challenge it in case of a defect. So they were there at 9 then Attaching creditor Claim = 5M
lunchtime came. They had to eat so they left. They came back before 1, the Owner
auction was over. Is that irregular? No because the notice will say, auction will Mortgaged property = 12M
be held between 9 to 4. So anytime within that period. So moral of the story: Mortgagee won the bid. Tendered 5M. The property now is with the
bring your own baon. You cannot leave, if there is a possibility that your mortgagee. Who can redeem?
opponent will try to do a trick when you’re gone. Week 08 Part 05 Alvarez, Alexandra Czarina Louise Bumanglag
So there will now be a foreclosure. And then there will be a winning bidder, This is why you have to read the original. Maybe you know the result, but you
let’s say the mortgagee and he is the only bidder. Will the auction be valid? have to know the process. How do we get that conclusion that the redemption
• Student: No. price should be this much?
Is there a law requiring that there should be another bidder aside from the So let's say you have a bid. You have A, B, and C. This is mortgagee 1 - the
mortgagee? It’s in pledge. There’s no legal provision. So the mortgagee can first mortgagee. You have a second mortgagee. You have an attaching creditor.
be the only bidder. Of course it’s a different question if there’s fraud Then you have the owner. Mortgagee has a claim of five million. Second
involved. mortgagee also has five million. Attaching creditor has five million. And then
Let’s say there were several bidders and a 3rd party won the bid. There will be the owner. The mortgaged property has a value of 12 million. So there's a bid.
a sale and a confirmation of sale. Can the title now be transferred to the 3rd Mortgagee won the bid and tendered 5 million. So the property now is with
party? the mortgagee. Who can redeem?
• Student: It must be entered first in the Registry of Deeds. • Student: Sir, the owner. And then the junior mortgagees.
What do you mean entered? Registered how? Will a title be issued in the name Yes, the attaching creditor. So the persons who can redeem will be the
of the winning bidder and the title of the mortgagor will be cancelled? No, the mortgagors and other creditors with subordinate entitlements. Subordinate will
title will not be transferred to the winning bidder. The sale will be be the first mortgagee in the example. So anyone who has a claim on the
registered and annotated in the relevant titles BUT no new title will be property. So let's say you have second mortgagee and attaching creditor. Both
issued in the name of the winning bidder because? of them want to redeem. Who will be preferred?
• Student: Because there’s right of redemption. • Student: Sir, the second mortgagee.
So in all cases of EJF, there will be a right to redeem? Yes, that’s based Yes, the sequence of course... this is the sequence of registration. Second
on Act 3135. One year from the registration of the sale. That’s the reason mortgage. And then the attachment was registered as subsequent to the second
why no title will be issued yet to the winning bidder, because there’s still mortgage. This will now be the better right or superior right as against the
a right to redeem. What will be done will be an entry. The confirmed sale will attaching creditor. So how much should be paid?
be annotated in the title. After one year, and there is no redemption, then Student : 5 million plus 1% interest.
the title in the name of the winning bidder will be issued. Otherwise, you So 5 million, this is the redemption price, plus 1% per month.
will have to cancel it again at the time of redemption. • Student: Plus taxes, Sir.
What’s the redemption price? Taxes. What, capital gains tax, documentary stamp tax?
• Student: The price of the bid + 1% interest. Student : Real property tax.
Where did you get that? Real property tax and assessments. So what are assessments, by the way? Do
you know? You know real property tax. It's the tax that you pay annually on
• Student: Rules of Court.
your real property. What are assessments? Special assessments. Let's say you
have a property. Your property benefitted from a certain local project. You can So you’re redeeming and this two let’s say will total 12 Million. If you redeem, you’re the
possibly be assessed specially a certain amount for that benefit. Of course, it's a owner, by paying 12 Million you get the property worth 20 Million. We assume that it was
special assessment. What else? Any other. sold only for 5 Million. So there’s redemption. After the two redemptions, total cost will be
Students: Sir, that's it. 12 Million. There’s residual value of 8 Million.
That's it. So this is the redemption price. So the property now is with the So it makes sense to redeem, right?
mortgagee and attaching creditor redeems by paying how much? • There’s an excess. But it does not make sense.
• Student: The total redemption price and the interest now will be 2% Because?
Redemption price plus 2% per month plus real property tax and assessments Let’s say there are other creditors with a total claim of 15 Million. It will not make sense for
plus? What? In our example, nothing more. What can be a possible the owner to redeem because if the owner will redeem, the owner will shell out 12 Million to
conclusion? Let's say... because it's only 12 Million. Let's say a lien on the redeem the property. But by getting back the property, the owner now will, instead of having
property. This is not fully satisfied and there's a residual amount. That residual cash that could have been stashed somewhere, the owner now will be exposing the property to
amount has to be paid by the next redemptioner. the possible claim not only of the attaching creditor but also of the other creditors. Remember,
Let's say a property costs 20 Million. 5 Million. After the redemption, the when there’s a foreclosure, what happens to the lien of the attaching creditor and the second
mortgagee will just reimburse this one. So it's basically 5 Million. The attaching mortgagee? They’re all gone. The foreclosure by the first mortgagee will remove all the liens.
creditor will have to pay this also because this is a lien of the second What they have is just the right to redeem. If you’re the owner and you have that cash, it
mortgagee. So it will be this one plus the lien of the second mortgagee. doesn’t make sense.
Because why? What is the basis? Because you are taking the property serving as
So what do you do? You still want to get the property.
security of the second mortgagee. The lien of the second mortgagee is also on
the same property that is being redeemed by the attaching creditor. So the • Student: Redeem it after.
rules of court require that this should also be paid. Aside from the redemption Redeem it after the period? Because the period already lapsed. Let’s digress
price, the original price paid to the first mortgagee plus interest plus real first. What’s the period to redeem?
property taxes and assessments that may have been paid in the meantime by • Student: Within one year.
the second mortgagee, the claim of the second mortgagee should also be paid One year from? The registration of the sale. So the mortgagee in this example
together with the interest that may have accrued in the meantime. Clear? So will have one year from the registration of the sale. So let’s say the second
let's go back. So let's say it's still 12 percent. I just said that it should be 20 mortgagee can redeem from mortgagee one within one year. In the hands of
because the attaching creditor will no longer have any incentive to redeem. the second mortgagee, what is the period to redeem?
Why? • Student: Sixty days.
• Student: Because there will no longer be an obligation to secure. Sixty days. Based on? Based on the Rules of Court. Let’s say there is
Because if it is only 12 Million and the attaching creditor will redeem, redemption. What’s the period?
it doesn't make sense because this one will amount to 12 Million plus • Student: Sixty days.
cost and there's no point in getting the property. It will just be JS{: And it can go on forever as you have junior encumberancers. Of course, it
throwing good money after bad. Most likely there will be no more will not go on forever. But meaning if after the first redemption, the period is
redemption by this guy. Should the owner redeem? You are the only 60 days. It’s no longer one year even if there is a balance after the first
owner. Will you redeem by paying this one? Let's assume now it's redemption. Clear? So let’s go back to the previous situation.
worth 20 Million. The attaching creditor, because it's just an We have 20 Million worth property. The redemption price is 12 Million. You
attachment opted not to redeem. are the owner. You have the cash but the redemption will expose the property
There’s no judgment yet in favor of the attaching creditor. Yes, let’s say you’re to the other creditors. What do you do? What’s a possibility? It’s not good to
the owner. Will you redeem? redeem because if you redeem, the junior liens will remain. So you don’t want
• Student: No, Sir. to redeem. Let’s now assume first mortgagee won the bid. No one wants to
JPSP: Why? redeem. The mortgagee tendered the bid of 12 Million. The residual value is 8
Million. Let’s assume all of them do not find it useful to redeem. What can

owner do in the meantime? What arrangement can the owner do with the first Yes, most likely a bond to perform your obligation when the time of
mortgagee? The owner wants to get the property but does not want to redemption comes or the damage that will be caused to the property in the
resurrect these liens which were already removed by the foreclosure. What? meantime. The bond will answer for the damages. Now, let’s say we have a real
Any idea? There can be conventional redemption. It’s called conventional estate mortgage in favor of a bank. For example, BPI. And this is to secure a
redemption but it is actually a repurchase. What do you do? This is really not 20 Million loan. The borrower borrowed the money, let’s say a company, used
fraudulent, but may appear fraudulent. You are the owner and you’re in this the money for operations. Borrower defaulted. BPI foreclosed extrajudicially
situation. What do you do? because there was an agreement. Can the borrower redeem? What’s the
This is a bank. We will assume this is a bank. The bank has no interest in period?
holding on the property. The bank wants cash. The owner can enter into a • Student: Sir, since the borrower is a bank, it’s still one year.
contract with the mortgagee wherein the owner will designate a buyer of the One year to redeem?
property after the lapse of the redemption period. Why after the lapse? To cut • Student: Yes, Sir.
off all the junior encumberancers. If it is a third party buying, the property can No.
no longer be subject to the claims of these creditors. What can the creditor get • Student: Sir, if it’s a juridical entity, it’s 90 days.
out of it? Possibly: 20 Million less 12 – maybe half of that can go back to the Who said juridical entity? Again, you have to read section 47 of?
owner. So it’s a possible arrangement. Instead of redeeming outright, you can
• Student: The General Banking Law.
have a conventional redemption or an agreement to repurchase but not by the
Of the General Banking Law. Which states that if the mortgagee is a bank
owner but by a designated assignee. It cannot be called legal redemption
and? What’s the other requirement? If it is an extrajudicial foreclosure by a
because a legal redemption can be subject to the claims of junior
bank as mortgagee and the mortgagor is a juridical person?
encumberancers.
Now, how did we know these rules? One year, sixty days to redeem? Because • Student: The period of redemption, Sir, is 90 days.
Act 3135… This is how you get there. In Act 3135, there is a section there 90 days. Can it be shorter?
stating the period to redeem. The period is one year and then the manner of • Student: Yes, Sir.
redemption and the redemption price are not stated in that provision. Rather, How? 90 days from when?
there is a cross-reference to the code of civil procedure which should lead you • Student: From the time of the registration of the sale.
to the Rules of Court Sec. 27-33 of Rule 39. That’s how you go about it. You From the registration of the sale?
may know the conclusion, but you should know how to get there. The answer • Student: Yes, Sir.
is: let’s say, why is the purchase price the redemption price the winning bid Can it be earlier? You know the number. You just don’t know from when to
plus the real property taxes? The answer to that is Act 3135 in reference to the reckon the period. 90 days from?
Rules of Court. That’s the basis and statutory authority for saying the • Student: From the time of the sale.
redemption price is this much and this is also the period. Clear? The sale or the registration of the sale? Confirmation of the sale?
So during the redemption period of one year, who will have possession? • Student: Sir, registration of the sale.
• Student: Still the mortgagor, Sir. The registration of the sale?
Can the winning bidder get possession? • Student: Yes, Sir.
• Student: Sir if he applies for possession. I’m shaking you off. It must be wrong. Who has section 47? What’s the
How? So there will be a petition for the issuance of a writ of possession. What provision?
will be required for the issuance of the writ of possession? What do you think? • Student: Notwithstanding Act 3135, juridical persons whose property
So let’s say you are the winning bidder. You want to get possession now. is being sold pursuant to an extrajudicial foreclosure shall have the
Meaning, during the redemption period. Prior to the lapse of the redemption right to redeem the property until but not after the registration of the
period. What do you think will be required by the court of you? certificate of foreclosure sale, which in no case shall be more than
• Student: A bond, Sir. three months after foreclosure.
So?
• Student: Whichever is earlier. Judicial foreclosure.

So 90 days from? • Student: Yes, sir.
• Student: From the sale, Sir. If it is extrajudicial and it’s a natural person?
From the sale. So if you are the bank, what do you do? Let’s say the bank is • Student: Sir if the mortgagee is a bank, it is only one year.
the winning bidder. The bank can possibly sell the property at a profit. You’re From the registration? Now, can the foreclosure by a bank be enjoined?
the bank, what should you do so you can immediately sell the property without Meaning the mortgagor goes to court and file a case for injunction.
any right of redemption? He just said the answer. What should you do to • Student: Yes, Sir.
prevent the redemption of the corporate borrower-mortgagor? Register the Yes? How? What’s the requirements before it can be entertained by the court?
sale immediately. So after the sale the bank or whoever the winning bidder Again you read section 47, which is a short paragraph, but a lot of things you
might be can register. That will preclude any redemption. That applies only if have to take up from there. Because form there, you will get the difference in
the mortgagor is a juridical person. Who will have possession of the property case of a foreclosure by a bank. As a matter of law, there can be no action
during the redemption period when the mortgagee is a bank, whatever the against a foreclosure by a bank unless certain requirements are fulfilled. The
period may be? court will just entertain the petition if there is posting of a bond for the
• Student: Still the mortgagor, Sir. damages that the bank may sustain.
Mortgagor? No. The rule is reversed. Possession will be taken immediately if it • Anyway, going back, what’s the redemption price in case of
is a foreclosure by a bank. So there is a reverse rule in case of mortgages with a redemption of a property foreclosed by a bank?
bank. Judicial foreclosure of a bank. Will there be a redemption? • Student: Sir, it’s the purchase price.
• Student: Yes, Sir. No. It’s the amount of the mortgaged obligation. The amount owing to the
What’s the period? One year from? From the registration or confirmation? bank plus interest and cost. So take note of that. It’s a different thing if it’s
• Student: From the registration, sir. redemption of a property foreclosed by a bank. The mortgage obligation plus
Registration of the sale? Not confirmation? cost should be paid to the bank first before there can be redemption.

Week 09 Midterms Week 01

04 October 2017


October 11, 2017

Week 11 Redemption, Antichresis & Chattel Mortgage

October 18, 2017
Week 11 Part 01 Acuyong, Sidartha • If you want to preempt, you have to register.
A stipulation requiring prior notice to the mortgagee before the disposition. It • You may get confused because there is a provision saying that if it is
is valid. It does not prohibit; it requires only information. a juridical person, the right to redeem is always within 90 days or
Advantages of judicial foreclosure of real estate mortgage over an registration. That applies only if the mortgagee is a bank.
extrajudicial foreclosure from the perspective of the creditor-mortgagee: • If the mortgagee is another corporation or a natural person, that
1. There is no right to redeem. does not apply. You follow Act No. 3135. Remember Section 47 of
2. In case of a deficiency, there is only a need to file a motion for the General Banking Act applies only if the mortgagee is a bank or a
deficiency judgment. quasi-banking institution.
Number 3. In case of pledge wherein there was a first notarial sale. There was How do you distinguish the redemption price under Act No. 3135 from the
a publication of the notarial sale but no notice was given to the pledgor-debtor. redemption price under the General Banking Law?
It was cancelled to avoid any technicality. There was a second sale, this time • Act No. 3135: The base of the redemption price is the winning bid
with notice to the debtor-pledgor plus the publication. There was a failure of and then you add interest of 1% per month at least for the first
bid, can the pledgee appropriate? redemption. Subsequent redemption you add 2% plus taxes. The
• No, because technically the second sale is the first legitimate notarial basis of that is Act No. 3135 in reference to Section 28 of Rule 39 of
sale following procedure, therefore, it the second sale should be the Rules of Court. The redemption price is the purchase price plus
considered the first. 1% per month interest thereon together with any taxes or
If a pledge of shares worth ₱12,000,000 is given to secure a ₱15,000,000 loan, assessments paid on the property.
as the lender, would you accept the pledge? • General Banking Law: The redemption price will be the mortgage
• No, because you will always get a deficiency whenever you go after obligation, meaning the principal obligation secured plus interest at
the pledge. You are assured of a deficiency because the pledge does the rate stated in the mortgage or loan contract, plus cost and
not cover the entire obligation. Should lender foreclose the pledge, expenses incurred by the bank in foreclosing and holding the
there will be a deficiency but the obligation will be extinguished. property less any income that may have been derived. The interest
Under what conditions will you accept the pledge of said shares? will continue to accrue.
• It is simple. You split the loan, half will be secured, half will be o Purpose: Protection for the bank to ensure that the bank
unsecured. You get the excess for the ₱12,000,000. There will be just will get payment.
collection of the other half but you will always be secured. That is the o Because if it is Act 3135, the bank will not get full payment
only circumstance you can accept the pledge. possibly in case of redemption. In case a third party won the
bid, under Act 3135, the bank might not get full payment in
• If you answered, you can just lend ₱10,000,000 that is still good
case of redemption. But in case of redemption and the bank
because you will be secured. At least you got the idea that you
is the winning bidder, the requirement always is even if the
addressed the deficiency issue. (tip for finals)
purchase price is below the mortgage obligation, anyone
Number 5. A corporation mortgaged a parcel of land to Metrobank to secure
redeeming from the bank or anyone redeeming for that
payment of loan obligation. The corporation defaulted. Metrobank
matter, should pay the entire mortgage obligation.
extrajudicially foreclosed the mortgage. Metrobank is the highest bidder but
o Basically, the objective of that provision is the bank should
has not registered the sale to date. The foreclosure was made on July 3. Can
get net the payment of the principal obligation plus
XYZ Corp. redeem the property? If yes, until when? Within 90 days from the
interests. Because costs will also be covered after
date of sale or until registration of sale, whichever comes first. How do you
redemption less anything the bank may have earned from
preempt?
the property.
Redemption Price again, there is no contention there because there is a confirmation.

Act No. 3135 Take note of that.
First redemption: Winning bid + 1% per month • If it is a judicial or extrajudicial foreclosure by a bank, there is a
Subsequent redemption/s: Winning bid + 2% per month right to redeem. The period is one year from the sale of the property.
General Banking Law • If it is extrajudicial, definitely it is registration of the sale. If it is
Principal Obligation + Interest according to the interest rate stated in the loan judicial, I’d say it is still registration of the sale.
contract + Cost and expenses in the foreclosure – Any income that may be • However, if the mortgagor is a juridical person and the
derived foreclosure is extrajudicial, you have a different period: ninety (90)
As a mortgagor, in case of any deficiency in the foreclosure, why would you days or registration, whichever comes first.
not want to redeem? The bank extrajudicially foreclosed the mortgaged property of a corporation.
• If the mortgagor redeems the property, then the same property will The winning bidder wants to pre-empt any redemption, what can the winning
be exposed for possible execution in case of a deficiency judgment or bidder do upon winning the bid?
it can possibly be attached upon the commencement of the action for • Register the sale. It will entail payment of taxes and the registration
a deficiency judgment. fees. You register immediately the sale. That will cut off any right to
Now, what do you do? You are the mortgagor. How do you make money out redeem.
of this without shelling out money but getting somehow part of the residual Week 11 Part 02 Batungbacal, Roberto
value?
REVIEW ON REAL ESTATE MORTGAGE
• Assign it to someone else. For a consideration, the assignee will be
the one to redeem. That person will now get the property and the If a judicial or extra-judicial foreclosure of a bank: there is a right to
mortgagee cannot go after that property. Maybe the mortgagee will redeem for a period of 1-year, reckon from registration of the sale (if extra
go after whatever the mortgagor may have received in exchange for judicial). Judicial, I’d say also from registration of the sale.
the right to redeem. However, if the mortgagor is a juridical person, and the foreclosure is
The mortgagor mortgaged a property to a bank. For there to be extrajudicial EXTRAJUDICIAL, you have a different period, which is 90 days, or
foreclosure, what is required? registration, whichever comes first.
• There must be a special power allowing the bank to foreclose The bank foreclosed the property of a corporation. If the winning bidder (not
extrajudicially. necessarily the bank) wants to pre-empt redemption, what must the winning
What is the period? person do? Assume the mortgagor is a corporation.
• According to Section 47, there is a distinction. • The winning bidder must REGISTER THE SALE immediately –
o If it is extrajudicial foreclosure and the mortgagee is a that entails payment of taxes and the registration fees. – Registration
corporation, the redemption period is 90 days from the sale cuts of the right to redeem in THIS SITUATION only.
or registration of the sale whichever comes first. How is extrajudicial foreclosure different under Act. 1315 from that under sec.
o If it is judicial, it is always one year. There is a period to 47 of the General Banking Law other than REDEMPTION PRICE and
redeem. In the event of foreclosure, whether judicial or REDEMPTION PERIOD?
extrajudicial, a mortgagor can redeem within one year after • A natural person forecloses the property of another natural person.
the sale. During the 1 year period of redemption, who will have possession? If it’s
And when we say sale, what does that mean in that context of a judicial foreclosure by a bank on the property of a natural person?
foreclosure? • Under the General Banking Law (Sec. 47), the winning bidder,
• If you look at the provision, it just says “sale.” Remember in judicial whether it is the bank or a third party. Remember that the aim of the
foreclosure, there is that final act of confirmation of sale. For exam General Banking Law is to protect the banking system. That’s why if
purposes, it should be from the date of registration. But then it’s a foreclosure by a bank, immediately the winning bidder takes

possession. So during the redemption period, the winning bidder (it Judicial Foreclosure – Equity of Redemption
could be the bank or a THIRD PERSON) must take possession. The Extra-judicial Foreclosure – Right of Redemption
point is that in case there is a lapse of the redemption period, the Why is there a right to redeem in this case?
bank can be able to dispose of the property or during the redemption • Basis is Sec. 47 of the General Banking Act, which states that if the
period, the bank will realize something that will be used to pay the foreclosure is judicial, there is always a 1-year right to redeem period
principal obligation owing to it. reckoned from the date of sale. Regardless of the PERSONALITY
• The last sentence of the first paragraph of sec. 47. This was supposed of the mortgagor (corporation or natural). It will always be 1 year if
to make it difficult for an action to restrain a foreclosure or to its JUDICIAL FORECLOSURE (exception to the GR that no right
PREVENT ANY INJUNCTION – by requiring a BOND, which is to redeem in judicial foreclosures).
to protect the bank from any damages that the bank may sustain by The 90 days or registration, whichever comes earlier, applies only to
virtue of the action (This applies when the mortgagor wants to retain EXTRAJUDICIAL FORECLOSURES.
possession of the property during the redemption period – Also, in judicial foreclosures, if the mortgagee is a bank, there is BOTH a right
remember, default rule is that the winning bidder takes possession.) to redeem and an equity of redemption.
• This is to ensure immediate liquidation. Summary of Rules on Redemption:
• Immediate possession is an incentive for a person to participate in Judicial Foreclosure
the bid. GR: There is no right to redeem (only Equity of Redemption: right to pay the
• Property can be sold, but always subject to redemption, and the mortgage obligation at any time UNTIL confirmation of the sale of the
redemption price will always be constant, under sec. 47 of the property)
General Banking Law. Exception: Banks – 1 year right to redeem period reckoned from the date of
Under Act 1315, it is the mortgagor who remains in possession of the sale
property during the redemption period. The law prefers for the Extra-judicial Foreclosure
mortgagor/owner to continue possession. If the winning bidder wants to GR: There is a right of redemption within 1 year from the registration of the
obtain possession during the redemption period, the winning period must be certificate of sale. (Even if banks)
able to procure a WRIT OF POSSESSION in his favor. Exception: Banks are the mortagee and mortgagor is a juridical person in
Other differences between Act. 1315 and Sec. 47 of General Banking Law? which case the right to redeem will be 90 days from the sale or registration,
• Corporation-mortgagor has a payable to the bank, secured by a whichever shall come first.
mortgage.
The bank is a JAPANESE BANK (foreign bank), which has a branch in the DRAGNET CLAUSE
Philippines. Debtor defaulted. How should the bank foreclose The Dragnet Clause is also called the Anaconda Clause
EXTRAJUDICIALLY? • Usually, the Dragnet Clause will go like this: The mortgage will
• It cannot be extrajudicial, because the bank is a foreign bank, even secure principal obligation A, and any and all future obligations
though the branch is in the PH. that the mortgagor will incur in favor of the bank. - It’s basically
What is the period for the right to redeem? a security.
• 1 year to redeem. Because the foreclosure is automatically Example 1:
JUDICIAL, because the bank is a FOREIGN CORPORATION. Let’s say the obligation is P100M. If you have the dragnet clause, the mortgage
This is based from Act 133 as amended. This provides that if the will secure the P100M obtained by the mortgagor from the bank. Let’s say
mortgagee is not qualified to hold or own land, the mortgage should there is another loan for P50M involving the same parties, but this is
be JUDICIAL. The stipulation on extrajudicial foreclosure would be unsecured. If you have a dragnet clause, even the P50M will be covered.
VOID, for being contrary to law (Act 133). Is the dragnet clause valid? Yes.
Remember: Example 2:

Let’s say you have a mortgaged property worth P100M, which is registered, Let’s say forget about the creditor. You have a dragnet clause. What is your
hence binding on third parties. There are then 2 other transaction worth solution then to make sure that in the future if there is a question as to the
P100M in total, and there’s payment. If you have a dragnet clause, it will serve validity of the dragnet clause as against the creditor?
as a security for all 3 obligations. • You execute a supplemental mortgage to indicate the 50 million
Now, another creditor has a P150M receivable from mortgagor covered by a and 100 million each time. Or an alternative will be a mortgage trust
promissory note. Let’s assume the creditor’s claim is not registered, so indenture.
supposedly, the creditor cannot prejudice the mortgage containing the dragnet Let’s say you have a real estate developer and a bank. The bank will act as trustee, and at
clause. The creditor then claims the dragnet clause cannot affect his (the the same time one creditor. Let’s say the creditor is building a condominium. 1000 units.
creditor’s claim). Instead of mortgaging each of the units, it’s mortgaged as an entire pool of assets. The
Can the creditor do this? creditors are the bank, A, and B. let’s say this is worth 500 million. Bank is entitled to
• Yes. Based on the problem above, the mortgage cannot validly secure 100 million. A is entitled to 50 million, and B to 50 million.
the transactions amounting to P100M. So instead of mortgaging the units to each and every creditor, it’s mortgaged as part of
How can you support this argument? Again, dragnet clause states, “the indenture and the mortgaged will be administered and held by the bank as trustee. The bank
mortgage secures the P300M obligation, and all future obligations, supposedly will then issue mortgage participation certificates. If there’s a requirement of 200% collateral
covering the subsequent P100M loan.” If you’re the creditor, how will you cover, meaning for every 1 peso obligation there is a security of at least 2 pesos. The bank will
question this as to have priority over the properties of the debtor? How will now issue mortgage participation certificates to the bank and A and B, saying that it is
the creditor support his argument that the loans constituting the P100M is not entitled to a portion of said property corresponding to 200 million. 100 million for A, 100
secured? million for B. There is still a residual value of 100 million.
We say that since the DST, real property taxes and registration fees are based Let’s say the developer wants to borrow from C, he need not mortgage again. He will just
on the value of the obligation/debt at the time of the registration, than any instruct the bank to issue mortgage participation certificate in favour of C for the
subsequent obligation/debt not accounted for in the payment of the DST, real amount of 50 or 100 million as collateral cover. There is only one mortgage in this case.
property taxes and registration fees are not covered by the security for lack of a There is no need to supplement the mortgage every time there is a new creditor. There will just
valid registration (kasi kulang ‘yong bayad). There is somewhat an EVASION be issuances of the mortgage participation certificates. These certificates constitute an interest
OF PAYMENT OF TAXES if this security would be allowed to be valid and in this indenture or mortgage.
binding against third persons. It is valid between the parties, but not to third In the first example, you have to execute a supplemental mortgage and
parties. Valid only to third parties as to the covered P100M (first loan register it anew. In the case above, you just register once and just issue
obligation). No jurisprudence on this yet though. mortgage participation certificates until you use up the entire value of the
How do we register the REM transaction? mortgage trust indenture.
• First notarized, then pay the DST. The DST will be computed based Why is that valid and this one is not?
on the value of the obligation/debt, which in our example, at point of • Because there, you will register based on the maximum allowable
registration, is only P100M. loan. Let’s say if it’s 500 million, the maximum will be 200 million
• Real Property taxes shall then be paid based on the value of the because the collateral cover is 200%. The registration will be based
obligation/ debt. on the maximum. Here, the registration is based on the minimum. So
• Go to the Register of Deeds to pay the Registration Fees. unless you execute the supplemental mortgage, you are cheating the
Week 11 Part 03 Biliran, Cheza government of taxes and registration fees.
Creditor can now assail that the dragnet clause is valid and binding between Let’s say you have units worth 500 million. If the mortgage trust indenture provides that at
the parties. But as against the creditor, it is only valid and binding with respect all times it shall cover obligations up to 200% meaning for every 1 peso you have to have 2
to the mortgage as registered in relation to the 100 million. For the two pesos collateral cover. So the maximum will be 250 million. Most likely, you will say that
obligations, B and C, the mortgage was not properly registered. There’s no this is the value – the maximum obligation to be secured is 250 million. The registration of
jurisprudence for this, but I think this is a strong case because you are cheating the mortgage trust indenture’s basis will not be the loan actually given in the meantime. If at
the government by not paying the correct taxes and registration fees.
the time of registration , these were the only loans. You don’t pay based on these, but you pay only after, unless they have an agreement that the residual amount
based on the total amount of obligation that may be secured by the mortgage trust indenture. will be applied to the principal.
Should possession be with the creditor? Is that a requirement for antichresis
ANTICHRESIS to be valid? irrevocable spa - if coupled with interest
Antichresis – a contract whereby a creditor is given the right to the fruits of • In order for the creditor to be able to use the fruits, he has to have
an immovable owned by a debtor. The creditor is given the obligation to apply possession. or simple notice that creditor will collect rentals
such fruits to the interest, if there is owing, and to the principal thereafter. • There has to be a special power of attorney authorizing the creditor
(e.g. farmland, ricefield) to get the fruits if the creditor does not have possession.
Example: • The point here is: the law does not require in antichresis that
Let’s say you have a debtor and a creditor. Debtor owed 10 million. To secure this, there will possession be held by the creditor. What is important is the
be an antichresis. The object would be the Riceland. creditor gets the fruits of the property. As long as you have that
• Creditor is given the right to the products – the rice from the arrangement, the creditor will be considered an antichretic creditor.
ricefield in order to apply this to this interest and then to the What can the creditor do if the creditor is actually receiving less than the taxes
principal. and costs he pays? only taxes on the property - not included withholding taxes
• For antichresis to be valid, it must be in writing, stating the principal • The creditor can just give up the antichresis.
obligation and the interest (formal requirement). • There can be a stipulation stating that the debtor should pay the
• In order to collect the 10M plus interest, the debtor has to deliver taxes and costs as part of the principal obligation.
the property to the creditor in order for the creditor to be able to use • As the creditor, you will want a contrary stipulation. Because if there
the fruits. is no stipulation to the contrary, creditor has to pay. For creditor to
• The NCC provides that the creditor should be the one to pay the avoid the payment of taxes and costs, the creditor has to abandon the
real property taxes and necessary expenses in order to preserve property. So you can stipulate otherwise so that debtor will pay taxes
the property. The creditor pays for these for the account of the and costs.
debtor. • If the debtor doesn’t pay (even if there is a stipulation), that will
Let’s say tenant tills the land and for every harvest, there’s a share. Let’s say X amount to a breach of contract, which will most likely accelerate the
sacks of rice equivalent to 100K. So you have the principal obligation, interest, entire obligation. If the debtor cannot pay, the creditor can now go to
taxes and costs. court and ask for a judicial foreclosure of the property. It should be
Who will get the 100K? judicial because the laws says that should the debtor fail to pay his
• Creditor, and it will be applied first to the taxes and costs. Then, to obligation, the creditor cannot appropriate the property (pactum
the interest and the principal obligation. commisorium) but he will have the right to ask for judicial
So if you have this set up, the creditor will get a net amount only after payment of taxes and foreclosure.
costs. The creditor will pay them while the creditor has the benefit of the security. Then, to the Example. Debtor owes creditor 100 million. This is secured by REM of a
interest, then, if there’s any balance, to the principal obligation, assuming that the creditor property with net realizable value of 60M. You also have a pledge of shares
has minded to apply it to the principal obligation. Minded means creditor has the option not with net realizable value of 65M. G has a guaranty. You are the creditor,
to apply. debtor defaulted. How will you proceed to secure payment?
Let’s say 100K. after paying the taxes, costs, and interests, there’s a residual • Go for REM first through judicial foreclosure because that is the
amount of 30K. Should that be applied to the principal obligation? default rule and based on the facts there is no stipulation on
• Yes, if the parties agreed. However, the creditor can say that this is extrajudicial foreclosure. You have to go to REM first because that’s
not due. Remember they both have the benefit of the period and the the property of the debtor. For guaranty, you have to exhaust all the
creditor can apply the money as security in the meantime and apply it properties of the debtor first.
to accruing interest and costs. But the principal obligation will be paid • You should not file a deficiency judgment.

maximum & quick recovery:
Credit Transactions surety assuming no legal hurdles Atty. Joseph San Pedro
• In this scenario, if you’re the creditor, you foreclose the mortgage • If you are foreclosing a chattel mortgage, and YOU DO NOT have
first if you want the maximum realizable amount. Mortgage first, possession, bidders will not participate. After winning the bid, they
realize 60M and then go after the pledge, and get the 65M, and you have to go through the process of acquiring possession over the
can get the excess of 25M. property. (A creditor need not get possession before there is
Now lets say these are 3rd party pledges and mortgages. Lets say you have a guarantor, who foreclosure. You CAN STILL FORECLOSE EVEN WITHOUT
his willing and able to pay. What will be a deterrent for you to judicially foreclose? Because POSSESSION.)
in judicial foreclosure, it is a LONG PROCESS before you can get payment. That is the • When Chattel Mortgages will be preferred: Remember, in CM,
deterrent for judicial foreclosure. So your answer is dependent on the question. debtor has possession over property. So lets say the debtor has a fleet
Like if I ask in an exam “that you want immediate cash even if you get lower of cars being used as part of his transport business, and such cars are
than what you are entitled, because again you just want fast cash, whats your the properties being used as security, if you use a pledge (and thereby
best recourse?” the creditor/mortgagee gets possession) the debtor’s source of
• Answer is that you foreclose the pledge by notarial sale, although payment of the obligation is killed because said cars are being used by
you get lower than what you are entitled. the debtor/mortgagor in his business. In that situation, it is then
• If you want maximum benefit, go after the REM and then the better to have a chattel mortgage, since the debtor will need the
pledge after. properties to run his business or to operate.
What if the creditor just wants to get the EXACT AMOUNT DUE TO HIM, • Take note: The debtor/ mortgagor gets the excess in the foreclosure
what should this creditor do? What if I change this into antichresis, and you after satisfying creditor’s claims.
want to get the exact maximum benefit of these security arrangements? Chattel mortgage is NOT defined as “a CONDITIONAL SALE of personal
• The answer is still the same! You judicially foreclose in case of default property as security for payment of a debt or to secure the performance of any
of the antichretic debtor, and the antichretic creditor can foreclose kind of obligation specified therein” under the Mortgage Law. New Civil Code
the property subject to the antichresis, and if there is a deficiency, this provides for the controlling definition.
can be covered by the foreclosure on the pledge, not by deficiency So by chattel mortgage, we mean the mortgage of personal property by the
judgment. Don’t file for a resolution for deficiency judgment instead mortgagor in favor of the mortgagee and it should be registered. BUT IT
of foreclosing on the pledge because the latter one is FASTER! DOES NOT MEAN that it is not registered that it is void! IT IS STILL
Week 11 Part 04 Catipay, Ralph Ronald BINDING on the parties, in which case, what can a mortgagee do if the
chattel mortgage is not registered? The mortgagee may compel the debtor to
CHATTEL MORTGAGE execute the chattel mortgage in the proper form for its registration – because
Chattel Mortgage you have here a valid chattel mortgage binding on the parties, and the
mortgagee can rely on that provision of law entitling the mortgagee to require
• So you have a debtor and a loan payable or obligation, and is secured
the other party to execute the proper form.
by personal property.
Week 11 Part 05 Contreras, Cesar Clarence
• Parties: the debtor (the mortgagor here) and the creditor (the
To execute the proper form for registration of the mortgage because you have
mortgagee).
here a valid mortgage binding on the parties then, the mortgagee can rely on
• Object: Personal property. that provision of law entitling the mortgagee to require the other party to
• Cause/ consideration: the same one as the principal obligation. execute the proper forms.
• So a pledge and a chattel mortgage BOTH involve personal property. Form Requirement:
If you are a creditor, which would you prefer, chattel mortgage or pledge? • Must be in writing in order to be valid between parties.
• PLEDGE. You choose the pledge because there is possession by the • It must contain the description of the property
creditor/mortgagee. As a rule, it would be preferred to have a pledge • Affidavit of Good Faith – It provides that the chattel mortgage is
if you are the creditor since you get possession of the property and for a valid obligation and not for any fraudulent acts.
you can foreclose.
• To be binding on 3rd parties, it must be registered in the Chattel implements/equipment in farm in the land covered by TCT #. You
Mortgage Registry and that is found in the Registry of Deeds. have to describe each and every item under the chattel mortgage.
Place of Registration: That is why when you have a chattel mortgage covering security. The
Let’s say chattel mortgage a car, where will you register? Place of execution, annex listing personal properties will be a key component of the
place of payment, residence of debtor, or residence of mortgagee? At the time document. It is not sufficient just to state the location you have to
of chattel mortgage it was in QC. At the time of default it was in Makati. Place describe each and every item.
of execution was in Santa Rosa, Laguna. Place of payment was in Manila. • If there is no description, the mortgage will be invalid against 3rd
Residence of debtor was in Bulacan. Residence of mortgagee is in Marikina. parties at the very least as there will be no proper registration.
Where will you register? Can the chattel mortgage cover future property?
• Residence of the debtor and the location of the mortgaged property. • No, future property cannot be adequately described to the extent
If both are in different locations you have to register in both, needed in chattel mortgage. So as a rule you cannot actually execute a
registration in one registry will not suffice. It cannot be substantial chattel mortgage covering future property.
compliance. • If you want to do so, you can by either amending or supplementing
• If it’s a car it is also required by law to register it in the LTO. So aside the chattel mortgage, which will require certain cost because you have
from registering it in the Registry of Deeds of QC, where the car is to register again. Rule is there can be no chattel mortgage of
located, and the residence of the debtor, Bulacan, you also have to properties to be acquired in the future. Only exception given is by
register it with the LTO. jurisprudence, that because of the nature of the business of a
• Missing out on one will NOT invalidate the mortgage completely. department store, whose inventory is in constant flux, can be secured
Only partly. It will be binding between the parties but not valid as to by chattel mortgage otherwise it will be impossible to secure its
3rd parties due to the invalid registration. obligation.
Description: Let’s say the debtor defaults, how should the creditor proceed in foreclosing?
How will you particularly describe the car? At the minimum what is the best • Public Auction. There’s a required posting and personal notice.
way to particularly identify the car? This is just like in pledge, both require personal notice to the debtor
• License Plate or even to the pledgor of mortgage. The only difference is that the
What if, your mortgaging inventory of a store? Is it sufficient to state “All notice has to be given, a period in which the notice is to be given
goods located in a store at 1 Rockwell Drive, Makati”? unlike in pledge.
• It’s not a valid description. You have to particularly identify the What about deficiency can you recover it?
items subject of the chattel mortgage. • Yes, through extrajudicial means. So as a deficiency as a rule can be
• Normally it would be a control number that would be used to collected in case of a chattel mortgage.
indicate the fixture. It is not enough to say chair, it must be specific. Is there any instance where the deficiency cannot be collected in case of a
Let’s say you have a farm, the owner of the farm will borrow from the bank chattel mortgage?
and mortgage the entire farm. What mortgage will you do? • The exemption is the Recto Law.
• A REM to cover the land and a chattel mortgage to cover all the
equipment. You will need a schedule of all equipment and
implements in the farm. It’s not enough to say all farm

Week 12 Chattel Mortgage & Preference and Concurrence of Credit
Week 12 Chattel Mortgage Law & Preference and Concurrence of Credit

October 25, 2017
Week 12 Part 01 Cruz, Mary Abigail The default rule under chattel mortgage law is extrajudicial foreclosure. When
Continuance of the Chattel Mortgage Law is judicial action required?
How do you foreclose the chattel mortgage upon default by the debtor? When the debtor will not give you the property in order for you to sell.
• Through a public sale, because it’s an auction whether it’s You cannot force the mortgagor to surrender the property or even
extrajudicial or judicial. The default rule under the chattel mortgage trespass because you may be sued for coercion. You’re forcing
law, it’s extrajudicial foreclosure. It’s different from REM where the somebody to do something against that person’s will. You cannot do
default rule is when there is a stipulation authorizing extrajudicial it. That’s why there’s a problem in foreclosing in mortgage, if you
foreclosure. cannot get possession, you have to go to court either to foreclose or
Confirmation of sale occurs only if it’s a judicial foreclosure. So the court you get possession preparatory to foreclosure.
handling the case will do the confirmation of the sale upon submission of the • The default rule under the chattel mortgage law is extrajudicial
report by the court sheriff. foreclosure but if the mortgagee cannot get possession, then
necessarily, the mortgagee has to go to court. You seek the aid of the
Is there a right to redeem in chattel mortgage?
court in getting possession of the property. And that principle is
• There is NO right to redeem under the chattel mortgage law. Because called? What’s the lawyerly phrase for that? You have to go to court
the right to redeem mentioned in the chattel mortgage law is more because you cannot?
akin to an equity of redemption. Meaning, the mortgagor can pay the What is the Recto Law?
principal obligation to discharge the mortgage. But after foreclosure,
• It’s when the buyer is insolvent and then there’s default or failure to
there is no right on the part of the mortgagor to redeem or recover
pay the installments.
the property. So there is no right of redemption. What that right to
redeem mentioned in the law is the right to pay the principal • The seller will have alternative remedies. The remedies are:
obligation PRIOR to the sale of the mortgaged property. 1. Specific performance meaning collection
When should the judicial foreclosure be made? 2. Cancellation or resolution of the sale
3. Foreclosure of the chattel mortgage provided that there is
• After 30 days.
default in paying at least two installments.
What is the notice requirement?
• We were discussing this in connection with the right to recover a
• Posting or personal notice to the mortgagor and debtor, and other
deficiency in case of a foreclosure of a chattel mortgage.
parties who may have junior encumbrance in the favored.
Let’s say the mortgagee forecloses the chattel mortgage realizing an amount of
What if personal notice was given but there was no posting? Will the
10 million and the obligation is 15 million. Can the mortgagee recover the 5
foreclosure be valid?
million deficiency?
• Just like an extrajudicial foreclosure of a REM. If there is no
• Yes, by filing a separate action for deficiency judgment because the
compliance with posting requirement, but there’s publication, that
foreclosure is extrajudicial so there is a need to file an action to
foreclosure will be valid. The same with the foreclosure of a chattel
collect the deficiency. Filing an action to collect the balance basically.
mortgage: if there is no posting but there’s personal notice that
So now, as a rule, there can be a recovery of a deficiency under the
should be substantial compliance. The lack of posting of the notice
chattel mortgage law in case foreclosure results in a deficiency,
will not invalidate the foreclosure.
meaning proceeds are not enough to pay the principal obligation.
If you’re the creditor, what will you prefer? A chattel mortgage or a pledge?
• However, the exception is Article 1484 or the Recto Law wherein
• A pledge, because possession facilitates the sale or somehow insures
there can be no recovery of a deficiency, correct?
that there will be a successful public sale because bidders will be
o The law provides that when you choose the option to foreclose the
interested only if they can get immediate possession of the chattels.
property upon default on installments then there’s no other action
after that. You cannot go after the debtor anymore, or recover the 3. Expensive car – worth 20M
deficiency. Week 12, Part 02 Dayanghirang, Elaine Viktoria
So, seller sold a car. To pay the price, the bank extended a loan to the buyer, Debtor acted as surety in favor of creditor for a loan obligation of 100M by X
the proceeds of which were applied to payment of the price. The buyer paid to C. X defaulted. C went after the surety D. Debtor does not want to pay.
the down payment, the loan proceeds covered the balance. Because you have a What can the creditor use to get payment? What assets may be used to satisfy
counterpart, normally when you buy you don’t just borrow the entire amount. the award?
The down payment is called the equity or the counterpart of the buyer. The • House and lot X
buyer now has to pay the loan which is secured by a chattel mortgage on the • Shares of stock X (because it is held in trust; the
car. Buyer defaults. Let’s say the loan should be paid in sixty monthly equal beneficial owner is the client)
installments. The buyer defaulted in at least five installments. The bank • Car √
forecloses extrajudicially the chattel mortgage. The foreclosure realized Can it be enforced against conjugal assets?
proceeds less than the principal obligation. Can the bank still recover?
• No, unless you can prove that it redounded to the benefit of the
• In reality, whatever the law is, the bank does not recover because, family.
normally, your collateral whether it’s a chattel mortgage or a REM,
What is the presumption for the car?
they will sufficiently cover the principal obligation unless there is a
deep drop in the value of the collateral. Generally, as I said there’s a • Conjugal. Anything you acquire if you are married is conjugal
property.
margin. Normally, you can only borrow up to 60% against the value
of the collateral. So, again, going back here. The rule is: a creditor can enforce an obligation of the debtor against all
Is this covered by the Recto Law? properties EXCEPT those exempt from execution.
• No, because this is not a sale in installment. This is actually a loan So let’s assume that there is no proof of benefit. So creditor, because these are
transaction. So the Recto Law will not figure in this problem. So, for conjugal, asked the court, to get the ½ share of the debtor. Can the creditor do
the Recto Law to apply, it should be the buyer paying the price in that?
installments. So what he actually gave is a financing scheme: a loan • No, because a third party cannot cause the dissolution of the
transaction and it’s not covered by Article 1484. property regime. So, it cannot be done.
Let’s say you have a seller, buyer, a car, payment of the price, down payment, Let’s assume that there is a benefit or the spouse consented, both spouses
and installments. We will assume that there’s default in paying the installments signed the surety undertaking. The creditor can run after what assets?
that will trigger the Recto Law. However, the payment of the price is secured • Property 3 (car) – yes, because it is a conjugal asset and both spouses
by a chattel mortgage and a REM. Buyer defaulted, and seller forecloses the consented to the surety undertaking.
REM. There’s a deficiency. Can the seller recover the deficiency? Is there a • Property 1 (house and lot)– no, because it is a family home
case on that matter? o It can be subject to execution but subject to a threshold.
• Ask your [sales] professor. Because if you look at the Recto Law, it o If in Metro Manila, it is exempt from execution up to 5 million.
says only “foreclosure of the chattel mortgage”. So if there is a So the debtor aside from taking the surety undertaking of C, has the following
separate security, and that’s the one foreclosed, will that trigger the debts:
preemption of any right to recover a deficiency? But, anyway, that’s 1. Bank 1 – loan payable with the consent of the spouse worth 5M. It is
more sales than credit transactions. secured by a real estate mortgage - a house a lot.
Concurrence and Preference of Credits 2. Bank 2 – loan payable secured by a chattel mortgage – a car. This is
Let’s say you have a debtor. The debtor has assets. He is married. He has three 15M
properties in his name: Creditor is now collecting and went after the house and lot. Who will have
1. House and lot (residence of debtor) – worth 10M priority?
2. Shares of stock purchased by a client but registered in his name – • The bank.
worth 20M
Creditor levied on execution the house and lot. During the execution, Bank 1 (c) Three horses, or three cows, or three carabaos, or other beasts of burden,
intervened and said there should be no execution because I have priority. such as the judgment obligor may select necessarily used by him in his ordinary
• The bank’s action must fail and the creditor can execute on the house occupation;
and lot. However, the property in the hands of the creditor or (d) His necessary clothing and articles for ordinary personal use, excluding
whoever may win during the execution stage, will be subject to the jewelry;
mortgage (of course, we are assuming that this is a registered (e) Household furniture and utensils necessary for housekeeping, and used for
mortgage annotated on the certificate of title). that purpose by the judgment obligor and his family, such as the judgment
• So in that proceeding, the bank cannot intervene and say “I have obligor may select, of a value not exceeding one hundred thousand pesos;
priority”. The creditor can still proceed but the sale will be subject to (f) Provisions for individual or family use sufficient for four months;
the mortgage. (g) The professional libraries and equipment of judges, lawyers, physicians,
What is concurrence of credits? pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other
So you have a creditor a claim against the debtor over the debtor’s properties, professionals, not exceeding three hundred thousand pesos in value;
which are also subject of separate claims or obligations. (h) One fishing boat and accessories not exceeding the total value of one
What is preference? hundred thousand pesos owned by a fisherman and by the lawful use of which
• Student: when a debtor has a better right to be paid first he earns his livelihood;
As to the house and lot, who has preference? (i) So much of the salaries, wages, or earnings of the judgment obligor for his
personal services within the four months preceding the levy as are necessary
• The bank with the real estate mortgage.
for the support of his family;
Why was it not possible for the mortgagee-bank to stop the execution sale?
(j) Lettered gravestones;
• Because the rules on concurrence and preference of credits will not (k) Monies, benefits, privileges, or annuities accruing or in any manner growing
apply in that example because it is not a proper proceeding. out of any life insurance;
• In the example, it was just an action for specific performance. (l) The right to receive legal support, or money or property obtained as such
Examples of an action that will entail the application of concurrence support, or any pension or gratuity from the Government;
and preference of credits: (m) Properties specially exempted by law.
• Insolvency under FRIA But no article or species of property mentioned in this section shall be exempt
• Settlement of an estate – because all creditors of the deceased will be from execution issued upon a judgment recovered for its price or upon a
gathered to present their claims judgment of foreclosure of a mortgage thereon. (12a)
A proper proceeding is a proceeding that will require all creditors of the debtor Let’s say a lawyer has a library of law books – ancient ones. So the entire
to submit and prove their claims. library will be exempt from execution?
Note: A collection suit is not a proper proceeding. • No. You have to remember that the list provides a threshold. It’s
General Rule: The creditor can go after all assets of the debtor for the pretty useless because there is a threshold, like the family home.
purpose of exacting payment of an obligation. • The threshold is 300, 000.
Exception: Those exempt from execution under the Rules of Court Week 12 Part 03 Dinsay, Kevin Dominic
RULE 39 The question is really: what can you buy as a professional that will be exempt?
Section 13. Property exempt from execution. — Except as otherwise The law does not encourage investment in a family home—because it is
expressly provided by law, the following property, and no other, shall be exempt from execution.
exempt from execution: • On the one hand, people will invest in a family home because its
(a) The judgment obligor's family home as provided by law, or the homestead something that cannot be touched by the creditors. So I may be
in which he resides, and land necessarily used in connection therewith; bankrupt, but I have a 100M home. Which I cannot claim cos I don’t
(b) Ordinary tools and implements personally used by him in his trade, have the money, but I still have a 100M.
employment, or livelihood;
• But remember the exemption right now is 300K. Where will you get of the seller is a specially preferred credit with respect to the car in case the
a house or family home worth 300K? Maybe in Marawi City. You can buyer becomes insolvent and there is a proper proceeding.
get a big chunk of land there for 300K. Even then, the exemption Buyer sold the car to X. X already paid the price in full. Will seller still have a
from execution is not useful. So I’m thinking what can you possibly specially preferred credit with respect to the car?
buy as a lawyer? • No, because the car is no longer the property of the insolvent buyer.
Computer, pen—you invest in a expensive pen. Not a laptop because it will • The law provides that the seller may have a right of action on the
depreciate. unpaid price but not the car itself.
Take note: The classic is the lettered grave stone. Claims arising from misappropriation, breach of trust, or malfeasance
• The only explanation there is that some lettered-grave stones have by a public official in the performance of his duty on the money or
precious metals, and you may execute on them as a creditor. security received by them. Important things to remember:
The rules on concurrence and preference of creditors will be relevant 1. They must be public officials.
only when: The debtor is insolvent + There is a proper proceeding. 2. They must a commit an act of misappropriation or conversion; and
3. The preference will be with respect to the movables acquired by
What is the meaning of proceeding?
them.
• It is the gathering of all creditors of the insolvent debtor allowing So let’s say a congressman uses the PDAF to buy a luxury vehicle. The liability
them to present and prove their claims; and the court will apply the of that congressman for the misappropriated funds to purchase the vehicle will
rules on procedure and concurrence of credits. have a preference with respect to the vehicle.
What are the rules? What are the classifications of preferred credits?
• Let’s say Revilla (Bong) was charged with using the PDAF to acquire
• Special Preferred Credits: with respect to movables and immovable a vehicle. Revilla paid the price using the PDAF. The government
property will now sue Revilla.
• Ordinary Preferred Credit • Aside from charging him criminally, the government will seek
• Common credits restitution of the misappropriated funds. Assuming there was a
Specially preferred credits with respect to movable property judgment against Revilla that he misappropriated 50 million in public
Floating house? Like the one in Netherlands? Is it movable? It can be moved funds, this 50M can be enforced against the vehicle in the possession
to one place or another. Vessel? of Revilla.
• Depends on the intention. • Assuming Revilla is insolvent and there is a proper proceeding, the
The specially preferred credit are regarded as mortgages and pledges because 50M claim of the government will have priority. (We are assuming
they create a lien. However, that consideration is confined only in proceedings that the vehicle is still in the hands of Revilla at the time of the
involving insolvency. It does not mean that a specially preferred creditor can proceedings.)
foreclose. • Let’s say the vehicle is worth 5M. If liquidated during the proceeding,
• In case of default of the buyer, the seller cannot foreclose because it the 5M will go to the government.
only creates a preference/lien that will arise only if there is a proper Claims in favor of the depositor. If the depositary wrongfully sold the thing
proceeding – a gathering of all creditors of the insolvent debtor. deposited upon the price of the sale. It contemplates a situation of a deposit
Taxes and duties. The taxes should be accruing to the property itself. for safe-keeping.
• Documentary stamp tax X • Let’s say X gave personal property to Y for safe-keeping. That’s a
o A tax on the document or an action of executing a contract. deposit. Y sold it. In the possession of Y, the price is paid. With
• Income tax X respect to the price, the depositor will have a preference.
Credits of Unpaid seller. Under any circumstance. So you have a seller who Week 12 Part 05 Barroso, Frances Angelie
sold a car. There is a down payment and the balance is still unpaid. The claim Does Article 2241 establish an order of priority or preference?
• General rule: NO.

• Exception: • Special assessments are payments to be made by real property

§ Duties, taxes, and fees on the movable, payable to the owners who somehow benefited from certain gov’t works, they
government may be subject to special assessment of gov’t. That’s why,
Duties, taxes, and fees on the movable, payable to the government. remember when we discussed redemption, real property taxes
Revilla imported a car, has to pay the gov’t, so this is another one duties and or assessments, assessments may pertain to like those who
taxes, let’s say worth 1M, the vehicle. And the vehicle also cannot be benefited from certain gov’t works and were accordingly
mortgaged, you just have 2, let’s assume. assessed to pay a certain amount.
• This will be preferred, the 1M and the 50M, their credits preferred (2) For the unpaid price of real property sold, upon the immovable sold;
with respect to the vehicle. (3) Claims of laborers, masons, mechanics and other workmen, as well as
• 1M should be paid first for the duties and taxes, the balance will go of architects, engineers and contractors, engaged in the construction,
for the payment of the 50M. reconstruction or repair of buildings, canals or other works, upon
So buyer-seller, sold a car worth 5M, buyer will pay the price, 50% paid and said buildings, canals or other works;
unpaid. Buyer owes the mechanic who worked on the car, let’s say 500 (4) Claims of furnishers of materials used in the construction,
thousand; this is for works done on the car. gov’t, duties and taxes on the car reconstruction, or repair of buildings, canals or other works, upon
worth again 1M. We are assuming you have an insolvent debtor, again, buyer is said buildings, canals or other works;
insolvent and there is a proper proceeding. The first to be liquidated, let’s • Most recently because of the construction group, it’s a concern
assume, is the car. The car realized 5M, how do you apply the 5M, the when you’re doing contracts with contractors, whether suppliers
proceeds? These are all preferred credits, how do you apply? of materials or supplier of manpower.
• First, because this has priority, the duties and taxes first – 1M, so you • That’s why in certain contracts they will provide that every
have 4M. payment by let’s say, I’m the owner/developer, and I have a
• Next is the unpaid seller and the works on the car – 3M which can general contractor, the general contractor will have workers or
be accommodated by 4M. subcontractors, every payment the owner/developer will make
Let’s say it exceeded, this is 80%, so the total will be 4M unpaid and 500 will require proof of the payment of the fees of the suppliers of
thousand. How do you now apply the 4M? materials and suppliers of labor. For the purpose to make sure
• They will be applied pro-rata. So the ratio is 500K:4M, just get the that there is no lien that will be, not just for purposes of the
equivalent. preference of credits but generally a lien of these workers and
suppliers of labor and materials.
• It doesn’t mean that the first in date will be the first paid, there will
(5) Mortgage credits recorded in the Registry of Property, upon the real
be an application pro-rata.
estate mortgaged;
• In our earlier example, the 50-50, there will be an excess. This is (6) Expenses for the preservation or improvement of real property when
2.5M, there is a deduction of 3M 1M. The 3M is the 50% plus 100 the law authorizes reimbursement, upon the immovable preserved or
thousand. What will happen to the 1M? That will be part of the free improved;
property that will be given to other creditors who may have generally (7) Credits annotated in the Registry of Property, in virtue of a judicial
preferred credits or no preference at all. order, by attachments or executions, upon the property affected, and
Specially preferred credits with respect to immovable property only as to later credits;
Article 2242. With reference to specific immovable property and real rights of (8) Claims of co-heirs for warranty in the partition of an immovable
the debtor, the following claims, mortgages and liens shall be preferred, and among them, upon the real property thus divided;
shall constitute an encumbrance on the immovable or real right: (9) Claims of donors or real property for pecuniary charges or other
(1) Taxes due upon the land or building; -- real property taxes conditions imposed upon the donee, upon the immovable donated;
• They should attach to the property itself. (10) Credits of insurers, upon the property insured, for the insurance
premium for two years.
Example: (Please recheck the example, I’m not sure about the examples/questions here. Generally preferred credits
Only based it on the recording. I wasn’t able to copy what was on the board) Because of the provision of Article 110 of the Labor Code, #2 became #1.
Asset: Land worth 10M • Reason: When the labor code was adopted, the provisions says that
Liability: labor claims shall have preference or priority.
1. Government, taxes, and real property taxes 500K • What Art110 of the labor code changed was Art2244, under that #1
2. Unpaid seller 5M was proper funeral expenses, instead of that being #1, labor claims
3. Mortgage creditor C 3M were move up to #1, so notwithstanding the enumeration under
4. Attaching creditor D (registered May 2) 1M Art2244, labor claims will have first priority.
5. Attaching creditor E (registered May 3) 1M • The preference established with respect to specific properties,
6. Attaching creditor F (registered May 4) 3M movables and immovables, remained the same.
Order of Priority Amount Obtained Remaining Balance How is this different from the previous articles on specially preferred credits?
10,000,000 (starting balance) • Under Art2244 there is an order of priority. That’s why it was
Real property taxes 500,000 (1) 9,500,000 important to remember that Article 110 of the Labor Code, because
Unpaid seller 5,000,000 1,500,000 that altered the sequence of priority under Art2244.
and 3,000,000
• Unlike the previous articles, 2244 enumerated the generally preferred
Real estate mortgage 8,000,000 (2)
credits at the same time, imposed/established an order of priority,
Attaching creditor D 1,000,000 (3) 500,000 which is:
Attaching creditor E 500,000 (4) ---------------- o Labor claims
Attaching creditor F ------------ ---------------- o Funeral expenses that’s for your account
o Expenses last illness
Take not of the provision in item #7 – upon property affected and only as o Entitlements due to laborers and dependents
to later credits, so the preference is only as to later credits. • With respect to Nos. 9, 10, and 11, you have to take it into
• When you say attachment it’s an attachment that eventually ripened consideration with respect to taxes and assessments, following the
into an entitlement because if you have attachment you’re not order of priority:
necessarily entitled because you may lose the case, so we’re assuming o National government
there is a proper attachment that eventually prospers. o Province
Preference given to an attaching creditor, applies only with respect to later o City or municipality (ex. Business taxes or permit)
credits. Week 12 Part 05 Enrile-Inton, Angelica
Credits annotated in the registry of property in virtue of a judicial order by Art. 2244. With reference to other property, real and personal, of the debtor,
attachment or execution upon the property affected and only as to later the following claims or credits shall be preferred in the order named:
credits. …
• Reason: It would be open to fraudulent transactions; it can be used. (14) Credits which, without special privilege, appear in (a) a public instrument;
• Let’s say I’m a creditor, I anticipate an insolvency proceeding or (b) in a final judgment, if they have been the subject of litigation. These
involving my debtor. I’ll file a case now; I’ll make a case for an credits shall have preference among themselves in the order of priority of the
attachment and register it, by just the mere fact that I registered, I will dates of the instruments and of the judgments, respectively.
have a specially preferred credit that will have the same preference The preference of these credits will be based on the date of the public
with let’s say an earlier registered mortgage. document or the judgment. All others, they have no preference.
Example: (Please recheck the example, I’m not sure about the examples/questions here.
• So that’s what’s being avoided by the provision, that’s why it says,
Only based it on the recording. I wasn’t able to copy what was on the board)
only with respect to later credits. Because an attachment is easier to
Assets: 10M
do compared to a registered mortgage.
Liabilities: 2. Unpaid seller 5M

1. Real property taxes 500K 3. REM (Day 1) 5M
2. Unpaid seller 4M 4. PN1 (Day 2) 5M
3. REM 4M 5. PN2 (notarized) (Day 1) 3M
4. PN1 (Day 1) 5M Order of Priority Amount Amount Obtained Remaining
5. PN2 (notarized) (Day 2) 3M Obtained Cash (5M) Balance
Order of Priority Amount Obtained Remaining Balance Land (10M)
10,000,000 (starting) 15,000,000 (starting)
Real property taxes 2,000,000 (1) 13,000,000
Real property taxes 500,000 (1) 9,500,000
Unpaid seller 4,000,000 1,000,000 (3) 4,0000,000
Unpaid seller 4,000,000 1,500,000 and 4,000,000
and 4,000,000 Real estate mortgage 8,000,000 (2)
Real estate mortgage 8,000,000 (2) 1,000,000
PN2 (notarized) -------------
PN2 (notarized) 1,500,000 (3) ------------- 3,000,000
PN1 ------------ ------------- 4,000,000 (4)
PN1 ------------ -------------
Remember that once lender gets notarization, there is a deed of preference
there under Art. 2244. For the Cash:
Example: (Please recheck the example, I’m not sure about the examples/questions here. • The unpaid seller can have a general preference. Based on the last
Only based it on the recording. I wasn’t able to copy what was on the board) item of the provision.
Assets: 10M § Reason: First, for the mortgagor to get absolute ownership,
Creditors: there must be registration. Before the registration, you
1. Real property taxes 2M should have a contract of sale, and that sale should be in a
2. Unpaid seller 5M public document because you have to pay DST, CGT (and
3. REM 5M everything…) and then you register, so the credit of the
4. PN1 (Day 1) 5M unpaid seller is evidenced by a public document.
5. PN2 (notarized) (Day 2) 3M § Necessarily, it should have been executed before the
Order of Priority Amount Obtained Remaining Balance mortgage which is the same date as the promissory note.
10,000,000 (starting) That’s why the unpaid seller should be paid ahead because
Real property taxes 2,000,000 (1) 8,000,000 the deficiency is evidenced by a public document dated
Unpaid seller 4,000,000 ------------ earlier than day 1.
and 4,000,000 o The REM and PN shall share pro-rata.
Real estate mortgage 8,000,000 (2)
§ So be careful with certain specially preferred credits because
PN2 (notarized) ------------ -------------
PN1 ------------ -------------
aside from the special preference there may be general
Example: (Please recheck the example, I’m not sure about the examples/questions here. preference because of the documentation or it may be
Only based it on the recording. I wasn’t able to copy what was on the board) covered by a final and executory judgment.
Assets: Example: (Please recheck the example, I’m not sure about the examples/questions here.
1. Land 10M Only based it on the recording. I wasn’t able to copy what was on the board)
Insolvent debtor (corporation)
2. Cash 5M
Assets:
Liabilities:
1. Land 20M
1. Real property taxes 2M
2. Cash 4M
3. Car 1M special
4. Shares of stock 10M preference)
Creditors: Income 5,000,000 23,000,000
1. Income tax 5M tax (4)
2. Real property taxes 1M DST 500,000 22,500,000
(5)
3. DST on acquisition of the land 500K
Chattel 500,000 22,000,000
4. Chattel mortgage 1.5M mortgage (6)
5. Unpaid seller of the land 5M deficienc
6. PN1 10M y
7. PN2 (notarized) (Day 2) 10M PN2 10,000,00 12,000,000
8. PN3 (notarized) (Day 1) 10M notarized 0 (7)
Order of Land Cash Car Shares General Remaining PN3 10,000,00 2,000,000
Priority 20,000,00 4,000,00 1,000,00 of Stock Preferre Balance notarized 0 (8)
0 0 0 10,000,00 d Credit 35,000,000 PN1 2,000,000 ----------------
0 (starting) (remainin (9) --
Real 1,000,000 34,000,000 g 8M)
property (1) (special Let’s say there is another PN4 also for 10M. So, there is 2.5M left. Who will
taxes preferred get it?
credit)
• PN1 and PN4 will share equally the residual amount because there is
Unpaid 5,000,000 29,000,000
seller (2) (special
no longer preference.
preferred How do you go about the liquidation?
credit) 1. You start with properties with specially preferred credits.
Chattel 1,000,00 28,000,000 2. If there is residual value, you add that to the general pool of assets
Mortgage 0 (3) (special that will be used to satisfy:
(remainin preferred (a). The generally preferred credits
g 0.5K) credit) (b). The credits without any no preference.
(no more
• They share pro rata regardless of date.

Week 13 HOLIDAY
Week 13 HOLIDAY
November 01, 2017

Week 14 FRIA
Week 14 FRIA
November 08, 2017
Week 14 Part 01 Dones, Antonio Miguel him to accept and settle or contest. If the liquidator contests or disputes the
What are the remedies of the debtor under the Financial Rehabilitation and claim, the court shall allow, hear and resolve such contest except when the case
Insolvency Act? the remedies are either against or for the debtor in financial is already on appeal. In such a case, the suit may proceed to judgment, and any
distress; so what are these remedies? final and executor judgment therein for a claim against the debtor shall be filed
• The Debtor or Creditor may file a petition for rehabilitation. The and allowed in court; and
Court-Supervised Rehabilitation gives 2 options, voluntary and (e) no foreclosure proceeding shall be allowed for a period of one hundred
involuntary. If it’s voluntary, it’s the debtor himself who will file for eighty (180) days.
the petition. While if it’s involuntary, it is the creditor who will file for So liquidation can be by the debtor or by creditor. Why would a debtor ask for
rehabilitation of the debtor. liquidation? Meaning assets will be monetized and used to pay the creditors.
• The benefit that they will get out of it, for the debtor, the court will Most likely, the creditor will not get any because the debtor, in case of
suspend all claims against the debtor in order to give a chance to the liquidation, is insolvent. So, why will the debtor file a petition for liquidation?
debtor to earn enough money (his business) to pay of his existing What benefit would the debtor get out of liquidation?
debts (assuming Rehabilitation is possible) His assets will be pooled, • The debtor, who is a natural person, will be discharge from the
so that when he submits himself to or undergoes Rehabilitation, no obligations of the creditors who filed their claim in the FRIA court
one will be able to get hold of his assets or go after his assets. and all other claims that was not filed during the pendency of the
• . While for the creditor, it is to make sure that the assets of the debtor liquidation case will not be entertained.
is not used up as to make him insolvent.
What are the other remedies, aside from rehabilitation? Are there kinds of Section 3. Nature of Proceedings. - The proceedings under this Act shall be in
rehabilitation? So, any other remedy available either to a creditor or to a debtor rem. Jurisdiction over all persons affected by the proceedings shall be
under the FRIA? considered as acquired upon publication of the notice of the
• Student: Liquidation commencement of the proceedings in any newspaper of general
What’s liquidation? circulation in the Philippines in the manner prescribed by the rules of
procedure to be promulgated by the Supreme Court.
• When all assets of the debtor will be liquidated into a certain amount
The proceedings shall be conducted in a summary and non-adversarial manner
of money. Then that amount of money will be applied to the
consistent with the declared policies of this Act and in accordance with the
obligations of the debtor.
rules of procedure that the Supreme Court may promulgate.
Section 113. Effects of the Liquidation Order. - Upon the issuance of the
So creditors who did not file claims will not be affected by the proceedings?
Liquidation Order:
Creditors who did not participate in the proceedings will not be bound by the
(a) the juridical debtor shall be deemed dissolved and its corporate or juridical
proceedings?
existence terminated;
(b) legal title to and control of all the assets of the debtor, except those that • They will be bound because it is a proceeding in rem. It is binding to
may be exempt from execution, shall be deemed vested in the liquidator or, everyone, sir.
pending his election or appointment, with the court; How? Why is it binding on everyone?
(c) all contracts of the debtor shall be deemed terminated and/or breached, • Because once there has been publication according to the rules of
unless the liquidator, within ninety (90) days from the date of his assumption procedure, then there is constructive notice to everyone.
of office, declares otherwise and the contracting party agrees; So it’s a proceeding in rem because service of summons will be done only
(d) no separate action for the collection of an unsecured claim shall be through publication and regardless of the knowledge of the concerned party,
allowed. Such actions already pending will be transferred to the Liquidator for

Week 14 FRIA
that party will nevertheless be bound by the proceedings. So, going back now of the debtor and the viability of its rehabilitation, and include, whether as an
to the obligation… What obligation? All obligations will be discharged? attachment or as part of the body of the petition, as a minimum the following:
• The creditors who did not file [claims] will still be affected. (a) Identification of the debtor, its principal activities and its addresses;
So all obligations of the natural person maybe discharged based on a (b) Statement of the fact of and the cause of the debtor's insolvency or
proceeding under the FRIA? I thought you just said that it’s in rem? So what’s inability to pay its obligations as they become due;
the point of filing for liquidation if you’re the debtor, juridical or natural if you (c) The specific relief sought pursuant to this Act;
will not get a complete discharge from your liabilities? (d) The grounds upon which the petition is based;
• Sir, the creditors who did not file a claim the obligation in their favor (e) Other information that may be required under this Act depending on the
will be deemed discharged but to those who filed their claims. form of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors
One feature of this FRIA which is unlike the old Insolvency Law, if you’re an
with their addresses, amounts of claims and collaterals, or securities, if any;
individual debtor, meaning a natural person, and that natural person applies for
(g) An inventory of all its assets including receivables and claims against third
liquidation, all obligations will be discharged regardless of the nature –
parties;
whether it’s assets, or civil liabilities – everything will be discharged. The
(h) A Rehabilitation Plan;
law does not qualify. It just say a natural person can file a petition for a
(i) The names of at least three (3) nominees to the position of rehabilitation
discharge because the only requirement is that that person will cede all assets
receiver; and
in favor of the creditors.
(j) Other documents required to be filed with the petition pursuant to this Act
What do you call that when the creditor gives all assets to the creditors? What’s and the rules of procedure as may be promulgated by the Supreme Court.
that mode of payment? A group of debtors may jointly file a petition for rehabilitation under this Act
• Cession when one or more of its members foresee the impossibility of meeting debts
Yes, the only difference is there will be no discharge because the obligations when they respectively fall due, and the financial distress would likely adversely
will be extinguished in cession only to the extent that the proceeds cover the affect the financial condition and/or operations of the other members of the
liabilities. group and/or the participation of the other members of the group is essential
So, under the FRIA, there are basically two categories of remedies. under the terms and conditions of the proposed Rehabilitation Plan.
Rehabilitation and Liquidation.
Rehabilitation is further classified into three categories: What is a voluntary rehabilitation?
(1) Judicial/court-supervised rehabilitation which is either voluntary or • It is when the debtor files for rehabilitation.
involuntary, Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any
(2) Out-of-court rehabilitation, and creditor or group of creditors with a claim of, or the aggregate of whose
(3) Pre-negotiated rehabilitation. claims is, at least One Million Pesos (Php1,000,000.00) or at least twenty-
Section 12. Petition to Initiate Voluntary Proceedings by Debtor. - When approved by five percent (25%) of the subscribed capital stock or partners'
the owner in case of a sole proprietorship, or by a majority of the partners in contributions, whichever is higher, may initiate involuntary proceedings
case of a partnership, or in case of a corporation, by a majority vote of the against the debtor by filing a petition for rehabilitation with the court if:
board of directors or trustees and authorized by the vote of the stockholders (a) there is no genuine issue of fact on law on the claim/s of the petitioner/s,
representing at least two-thirds (2/3) of the outstanding capital stock, or in and that the due and demandable payments thereon have not been made for at
case of nonstock corporation, by the vote of at least two-thirds (2/3) of the least sixty (60) days or that the debtor has failed generally to meet its liabilities
members, in a stockholder's or member's meeting duly called for the purpose, as they fall due; or
an insolvent debtor may initiate voluntary proceedings under this Act by filing (b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings
a petition for rehabilitation with the court and on the grounds hereinafter against the debtor that will prevent the debtor from paying its debts as they
specifically provided. The petition shall be verified to establish the insolvency become due or will render it insolvent.

Week 14 FRIA
liquidation, depending on who initiates, what else? Is there any other remedy
Section 14. Petition to Initiate Involuntary Proceedings. - The creditor/s' petition for
aside from liquidation? Short of liquidation?
rehabilitation shall be verified to establish the substantial likelihood that the
debtor may be rehabilitated, and include: • Student: Suspension of payment.
(a) identification of the debtor its principal activities and its address; • Remember, there are special requirements here. For liquidation, you
(b) the circumstances sufficient to support a petition to initiate involuntary have liquidation of an insolvent juridical person and you have
rehabilitation proceedings under Section 13 of this Act; liquidation of an insolvent individual debtor which may be voluntary
(c) the specific relief sought under this Act; or involuntary. Aside from those, you can have suspension of
(d) a Rehabilitation Plan; payment for an individual debtor. Take note, it’s only for an
(e) the names of at least three (3) nominees to the position of rehabilitation individual debtor.
receiver; Why is that so? Why only for an individual debtor? Is there a counterpart
(f) other information that may be required under this Act depending on the remedy for a juridical person?
form of relief requested; and • Suspension of payment here is when the individual debtor cannot pay
(g) other documents required to be filed with the petition pursuant to this Act his or her obligations when they mature.
and the rules of procedure as may be promulgated by the Supreme Court. Is there a counterpart remedy for a creditor under the FRIA that will get that
effect/result [i.e. enforcement of obligations against juridical person-debtor
Involuntary? will be suspended or put on hold]?
• When it is the creditor who files. So it depends on who initiates the • Rehab! Remember, the effect of a rehab, the underlying intention is
petition for rehabilitation. that you want to put on hold or stop any enforcement of claims
What is the difference between pre-negotiated agreement and out-of-court by creditors.
rehabilitation? Let’s go to court-supervised rehabilitation. Who can file the petition?
• Pre-negotiated will still require some form of court approval or • Student: Sir, both the debtor and creditors. If it’s the debtor, he can
intervention but preliminarily, the debtor and the creditors [or a file for rehabilitation, stating the ground, his identity, that he is a
sufficient number of them voting favorably] will come to an natural person or juridical person as the case may be…
agreement as to a how rehabilitation will proceed. The other one is So let’s say I own a business and I’m encountering financial difficulties, let’s say my business
out-of-court, or an informal restructuring or rehabilitation. is trading and I’m doing it in my personal capacity. I file a petition for rehabilitation because
With respect to liquidation, you have to distinguish; I want to stop these creditors from pestering me in the meantime. So the only question is:
liquidation involving an insolvent juridical person and an insolvent
Do I have the capacity to file this petition as a debtor in financial distress?
individual debtor [considering that juridical person does not get
Assuming there is an existing ground to file the petition… We’re just talking of
any benefit from liquidation, unlike a natural person who gets a
capacity. Can I?
discharge/complete release of his or her obligations].
• Student: Yes sir, because if you are a sole proprietor then you can
(A) Suspension of Payments. file a petition for rehabilitation.
Section 94. Petition. - An individual debtor who, possessing sufficient property How did you know that I was a single proprietor? And just because I am a
to cover all his debts but foreseeing the impossibility of meeting them when single proprietor, I have capacity to file? There are no other requirements?
they respectively fall due, may file a verified petition that he be declared in the • Student: That you are unable to pay-off your debts, sir.
state of suspension of payments by the court of the province or city in which What’s the requirement? So I’m a sole proprietor, what’s the requirement for
he has resides for six (6) months prior to the filing of his petition. He shall me to file? So I can?
attach to his petition, as a minimum: (a) a schedule of debts and liabilities; (b) • Student: Yes sir, you can file. No, you can’t file.
an inventory of assess; and (c) a proposed agreement with his creditors. Why not? What do I have to show to allow me to file a petition as a single
What are the remedies available to an individual debtor aside from proprietor?
rehabilitation? What about liquidation? So it can be voluntary or involuntary
Week 14 FRIA
(k) Debtor shall refer to, unless specifically excluded by a provision of this Act, (a) Administrative expenses shall refer to those reasonable and necessary expenses:
a sole proprietorship duly registered with the Department of Trade and (1) incurred or arising from the filing of a petition under the provisions of this
Industry (DTI), a partnership duly registered with the Securities and Exchange Act;
Commission (SEC), a corporation duly organized and existing under (2) arising from, or in connection with, the conduct of the proceedings under
Philippine laws, or an individual debtor who has become insolvent as defined this Act, including those incurred for the rehabilitation or liquidation of the
herein. debtor;
(3) incurred in the ordinary course of business of the debtor after the
Go to “Definition of Terms”. Section 4. Who is a debtor under this law? Can a
commencement date;
natural person for purposes of rehab, file a petition for rehab? Sole
(4) for the payment of new obligations obtained after the commencement date
proprietorship duly registered in the DTI so a person doing business but not
to finance the rehabilitation of the debtor;
registered with the DTI cannot file. Absolutely? In that example, am I barred
(5) incurred for the fees of the rehabilitation receiver or liquidator and of the
from availing of the remedies under FRIA?
professionals engaged by them; and
• No, the easiest thing to do would be to just register. It’s just one (6) that are otherwise authorized or mandated under this Act or such other
form anyway. It doesn’t give you anything. Because sole expenses as may be allowed by the Supreme Court in its rules.
proprietorship, unlike registration of a corporation which gives you a
separate juridical personality for the corporation, in sole • Administrative expenses. These are the expenses reasonably
proprietorship you’re just registered. In fact what do you get, your necessary for the filing of the petition under the FRIA in connection
name is registered as the name under which you do business. with the proceedings under the FRIA, including the ordinary course
So let’s say, another situation. Let’s say a branch of a foreign company doing business in the of the business of the debtor, or the paying of obligations after
Philippines which encounters financial difficulties. So creditors are running after that branch, the commencement date.
and the branch wants to pursue a Rehabilitation Plan. o This is important because under the FRIA, these are
Can it file a petition under the FRIA? preferred credits; they are paid before the claims of the
• No! Always check the definition of “Debtor” under Section 4. Who creditors. There is a preference because these are the costs
is a debtor under the FRIA for purposes of Rehabilitation [for of the proceedings under the FRIA; since they are costs,
liquidation, registration is not necessary]? Debtor [under Sec. 4, for then they are paid ahead of anything. Costs first, then claims
purposes of Rehabilitation] means a sole proprietorship duly [claims depends on rules of concurrence and preference of
registered with the DTI, partnership registered with the SEC, and a
credits under the Civil Code]. You have to take into account
corporation existing and duly organized under Philippine laws.
these costs always. In practice, in rehabilitation, if you are
(o) Individual debtor shall refer to a natural person who is a resident and citizen hired as professional to undertake rehabilitation, you would
of the Philippines that has become insolvent as defined herein. want your salary to be categorized as administrative expense
so that you need not line up along with the creditors in
Another example. Let’s say an OFW went to the Middle East, worked there, and was able
to raise enough funds, send the funds here, managed under his name, but he’s no longer order to get paid. In fact, there is no need to wait for
staying here. He’s based now in the Middle East, but he has a business here which is liquidation; you will actually be paid in the course of the
registered with the DTI. The business encounters financial problems. proceedings.
Can he file for rehabilitation under FRIA? o Later on, we will be taking up labor wage costs/separation
• The law says that an individual debtor must be a resident and a pay costs that have special qualifications [as to whether they
citizen. Therefore, foreigners cannot file a petition under FRIA. A will be considered as administrative expenses or as creditor
non-resident cannot also avail of the remedies under the FRIA. claim]
These are the important definitions that we have to know.

Week 14 FRIA
(d) Commencement date shall refer to the date on which the court issues the • Assets exempt from execution by law or some rule of court or assets
Commencement Order, which shall be retroactive to the date of filing of the held in trusts, meaning assets which are technically that properties of
the debtor.
petition for voluntary or involuntary proceedings.
(ff) Publication notice shall refer to notice through publication in a newspaper of
• Commencement Date. Let’s say a petition for rehabilitation is filed general circulation in the Philippines on a business day for two (2) consecutive
on day 1. Between, there will be actions taken by the court. weeks.
Eventually the court may issue on, let’s say Day 3, the
Commencement Order. The Commencement Order is basically an Next, we’ll go to obligation notice. Notice of the proceedings will only be
injunction against enforcement of claims against the debtor. So that’s published in the newspaper of general circulation and there is a requirement
that it must be on a business day?
the principal effect of a commencement order.
So let’s say somehow, between Day 1 and Day 3, a creditor was able • for two consecutive weeks.
to enforce his claim. Will they be affected by the commencement Why business day?
order? The answer is, yes! The Commencement Date is not the • I think they thought that they could read newspapers in business day
issuance of the Commencement Order. The effect of the rather than the actual one…the printed only during weekends or
Commencement Order retroacts to the date of the filing of the business day.
petition. So the Commencement Order is deemed to be effective as (gg) Rehabilitation shall refer to the restoration of the debtor to a condition of
of Day 1. Meaning, any act that may have been done between Day 1 successful operation and solvency, if it is shown that its continuance of
and Day 3 will be invalidated. Remember this. operation is economically feasible and its creditors can recover by way of the
• Debtor. [Check definition above] present value of payments projected in the plan, more if the debtor continues
as a going concern than if it is immediately liquidated.
(p) Insolvent shall refer to the financial condition of a debtor that is generally What does rehabilitation mean?
unable to pay its or his liabilities as they fall due in the ordinary course of
• It says here if you look at this definition, of course you are not
business or has liabilities that are greater than its or his assets. familiar with this obviously. It’s a century old law but it is a well-
• Insolvency under the FRIA. Unlike the old Insolvency Law, under thought, well-crafted law unlike the FRIA. Restoration of the letter to
the FRIA, it can either be: (1) practical insolvency meaning assets < a condition of successful operation in solvency, which we do not
liabilities, or (2) illiquidity meaning debtor has sufficient assets to know. There is no standard for this. Solvency yes because obviously
there is a formula but restoration of the letter to a condition of
cover all liabilities but cannot pay obligations as they mature. So, the
successful operation. Remember when you have a rehabilitation the
remedies are available to an insolvent as defined, regardless of
court will decide if the rehabilitation is worthwhile or its succeeding.
whether the person is practically insolvent or just not “liquid”; that But in this case, better to condition of successful operation.
person can avail of the remedies under the FRIA. What is successful?
Week 14 Part 02 Gaba, John Elland • There is no standard stated here. It shows that its continuous
The remedies are available to an installment as defined, so regardless operation is economically feasible.
of whether the person is practical insolvent or just liquid that person Let’s say you’re an accountant or a finance guy, by doing some financial projection, you can
can avail of the remedies under the FRIA. Insolvent better’s estate, make a deal look good, like after say 5 years or seven years it will be successful but in reality,
this we took up…remember the civil code provision. Liabilities or and they won’t. So, in economic feasibility you can show [it as a success] but it is difficult to
obligations of the debtor can be enforced against all assets of the realize. With that projection, you can now comply with the creditors if they can recover by way
debtor. of the present value of the payments projected in the plan or if the letter continues as a growing
What do we exclude?
Week 14 FRIA
concern. It’s like, one event that creditors will uncover under the rehab plan will be more than
(c) the related enterprise voluntarily accedes to join the debtor as party
what they will get in case of an immediate indication. But we will take that up later.
petitioner and to commingle its assets and liabilities with the debtor's; and
(d) The consolidation of assets and liabilities of the debtor and the related
Section 5. Exclusions. - The term debtor does not include banks, insurance enterprise is beneficial to all concerned and promotes the objectives of
companies, pre-need companies, and national and local government agencies rehabilitation.
or units. Provided, finally, That nothing in this section shall prevent the court from joining
For purposes of this section: other entities affiliated with the debtor as parties pursuant to the rules of
(a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially procedure as may be promulgated by the Supreme Court.
or actually subject to conservatorship, receivership or liquidation proceedings
under the New Central Bank Act (Republic Act No. 7653) or successor • Section 7, take note of this provision of the FRIA rehabilitation.
legislation; for example, Let’s say you have a group of companies. It is possible for the group of
(b) Insurance company shall refer to those companies that are potentially or companies to have one petition for rehabilitation under this section 7. Before under PD902a,
actually subject to insolvency proceedings under the Insurance Code it’s a gateway as matter of it being allowed under pd902a but there is no legal provision.
(Presidential Decree No. 1460) or successor legislation; and Normally when you file a petition, you only file one party, one petition. However, section 7
(c) Pre-need company shall refer to any corporation authorized/licensed to sell allows a consolidation of a petition by different entities who are somehow related, and they
or offer to sell pre-need plans. have to hear the requirements. So general rule, each entity or juridical person should file a
Provided, That government financial institutions other than banks and separate petition under the FRIA. However, if there is somehow affiliation, the
government-owned or controlled corporations shall be covered by this Act, parties/entities are related and there is co-mingling and aggregation of assets and liabilities,
unless their specific charter provides otherwise. there can be consolidation of the petition. So, they can have yearly requirements when…
• Take note, the FRIA does not apply to banks because they are So, the co-mingling or aggregation of assets and liabilities of the debtor, it goes
governed by a different law, and they are under the BSP. The FRIA in a related enterprise from the following commission. There was in fact
does not apply also to insurance companies because they are under operationally, co-mingling of assets and liabilities how will this happen?
the insurance commission, or was it APECO. Before it was under Remember, what kinds of businesses will have this kind of potential problems
one entity, when you study it was under insurance… There is pre- of issues? Corporations of what kind of business give me an example. Related
need? What is pre-need? Anyways so pre-need companies is not entities that file one petition for rehab like?
governed by the FRIA (they’re under the insurance code BTW). • Conglomerates yes or we can also say real estate companies like
Government financial institutions are covered by the FRIA unless Ayalaland. Ayalaland, different companies or different brands like
their charters provide otherwise. Avida, Premier or Alveo. Sometimes each project can be governed by
a corporation. For example, a real estate company or a real estate
Section 7. Substantive and Procedural Consolidation. - Each juridical entity shall be group with different companies and they encounter financial
considered as a separate entity under the proceedings in this Act. Under these fragments, they can file as one under this provision of law. So there’s
proceedings, the assets and liabilities of a debtor may not be commingled or just a requirement, there is actual co-mingling of assets and liabilities.
aggregated with those of another, unless the latter is a related enterprise that They have common creditors and it is more important to treat them
is owned or controlled directly or indirectly by the same interests: Provided, together, rather than separately. And of course, the other companies
however, That the commingling or aggregation of assets and liabilities of the should also consent.
debtor with those of a related enterprise may only be allowed where:
(a) there was commingling in fact of assets and liabilities of the debtor and the Section 10. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a
related enterprise prior to the commencement of the proceedings; Partnership, or Directors and Officers. - Individual debtor, owner of a sole
(b) the debtor and the related enterprise have common creditors and it will be proprietorship, partners in a partnership, or directors and officers of a debtor
more convenient to treat them together rather than separately; shall be liable for double the value of the property sold, embezzled or disposed
of or double the amount of the transaction involved, whichever is higher to be

Week 14 FRIA
recovered for benefit of the debtor and the creditors, if they, having notice of rehabilitation, these assets will be preserved. That’s basically the
the commencement of the proceedings, or having reason to believe that objective of the rehab.
proceedings are about to be commenced, or in contemplation of the Who will preserve this in the meantime?
proceedings, willfully commit the following acts: • NBU who pursue the business of the debtor in the hopes that it will
(a) Dispose or cause to be disposed of any property of the debtor other than in be successful operation.
the ordinary course of business or authorize or approve any transaction in So, let’s say you have now a rehab, in case of a failure what would happen?
fraud of creditors or in a manner grossly disadvantageous to the debtor and/or • Most likely, when we look at the value we will assume the worst case
creditors; or it will be zero. Let’s say it will succeed, hypothetically if it will succeed
(b) Conceal or authorize or approve the concealment, from the creditors, or it will increase by six folds or let’s say, six hundred million. So, zero
embezzles or misappropriates, any property of the debtor. as against six-hundred million. That’s the result of a successful rehab.
The court shall determine the extent of the liability of an owner, partner, Now if you have this situation, who is taking the risk in a rehabilitation?
director or officer under this section. In this connection, in case of • The creditors because this one hundred belongs to the creditors, the
partnerships and corporations, the court shall consider the amount of the debtor has nothing.
shareholding or partnership or equity interest of such partner, director or But in case of an upside, who gets the upside?
officer, the degree of control of such partner, director or officer over the
• The debtor because he just paid the liabilities and the debtor keeps
debtor, and the extent of the involvement of such partner, director or debtor
the excess. That’s why rehabilitation allows the creditors to get an
in the actual management of the operations of the debtor.
amount in the rehab plan greater than the amount they will get under
• Now, Section 10. These are just preliminary matters. Take note of immediate rehabilitation.
this especially later on when you may become lawyers, emphasis on So, if you’re the creditor would you want a rehab?
the “may.” You may encounter situations where companies hide Because if you’re a creditor, I’m risk-adverse, I pay two-thirds, but I get the dividend out of
assets, take note of this penalty under the FRIA. this one-hundred and, so I will get paid. But I get it now and then with that, let’s assume
Let’s say, the individual debtor, owner of the sole proprietorship partners in the partnership that I get the money now and maybe I can do my own business and recover my losses after a
of the directors or officers of a corporation shall be liable for twice the value for the assets or certain period and it will be all for my account. Win or lose it is my responsibility. Here, if
twice the value of the transaction, whichever is higher, in these cases. you have a rehabilitation you are basically placing assets belonging to the creditors already for
What are these cases? the debtor to use to pursue a business and in case of loss, creditors will bear the loss, and the
• Basically, these are instances when the debtor in anticipation of a debtor will get all the upside. That is why rehab is, from a personal perspective, is not a good
proceeding under the FRIA. This conceals or disposes of assets or idea for a creditor. So, if I’m a creditor, I’d rather have immediate liquidation. I can possibly
places them beyond the reach of the court and the creditors. So, it’s cut losses, just like in a business, you cut your losses now, recover some and work on
like sa prom? In those cases, the debtor and concerned parties, the something else. But it’s your doing it unlike in rehab you don’t have control if you are a
directors or officers are liable for twice the value of the property or creditor, notwithstanding the losses. Basically, you don’t have control under a rehab.
the value of the transaction whichever is higher. Take not of that. Of Next, of course if you are the debtor, you want this to be a rehab. Why?
course, it is difficult to prove when you’re talking about warehousing • Kasi, you have one hundred million. Let’s say this is cash. You have a
properties. Basically, those transactions will be what you know as hundred million,
simulated transactions, absolutely simulated transactions/contracts what do I do?
and placing assets under another parties name but there is no real • I allocate 10 million to my lawyers and legal cost and I may allow
consideration. them to litigate under the FRIA, hopefully we can get a
Before we take up the petitions, what happens in rehabilitation? commencement order. In the meantime, I feel like I will continue to
• So let’s say you have a debtor, the debtor has assets lesser than have access in the remainder for purposes of continuing the business.
liabilities. Let’s assume one hundred million and three hundred I preserve my access to the resources in the meantime. Second, from
million. So, you have a debtor who is insolvent. Now when you have the creditors perspective, I am not sure if not for this law. They

Week 14 FRIA
studied how the success rate of rehabilitation and recent memory they have Vistaland. Somehow they ran the business good, but it has also something to do
have been have encountered anyone who has been successful in with the political fortunes of Villar when he became speaker then Senate-President. Of
rehabilitation as a business. I can only think of one; Philippine course, the fortunes of the group somehow went along. But right now, you cannot say anything
Airlines used to be under rehab. That was a long time ago. But now I about the group but that time you can see that it is not because of rehabilitation. Now they
cannot think of any company that was placed under rehab and are successful because of their running it as a group business but before I’m not sure. If you
emerged successful. What happens actually is, based on experience, look at rehabilitation, under the law it says that it will restore the viability of the business in
let’s say I have a business, I will just mitigate. As I said, I have a reality. As far as I know as I’ve said, there should have been a study if rehabilitation was
hundred million, I will just litigate and file a petition under the FRIA successful. It doesn’t really resort to a rehab. It’s more of a war of attrition between the debtor
for rehab and then tire out the creditors. In the end, they will go to and the creditor as to who will have more resources to deal with prolonged mitigation. This
the negotiating table and settle with me and say, “Ok I will give policy, this FRIA works on the premise that rehab works, that it is useful based on the
you…” They split this one hundred million, they get 50 in the form premise that rehab rarely succeeds, then it should have provided a stringent requirement for
of properties and then I get the balance after a law mitigation. In the rehabilitation. I’m not using that you cannot have a rehab, I’m just saying that we should be
end it’s not really a successful rehab but more of a successful stricter in allowing a debtor in financial distress in entering into a rehabilitation because
bargaining against the creditors. That’s another thing. when you have rehabilitation, the creditors do not get payment. They get payment maybe not
What happens also in rehab? one hundred percent to a plan so what you’re doing when you have a rehab is placing/shifting
• You have a hundred million, it will be under the court and the the burden from the debtor to the creditors, so the creditors will absorb the burden in the
receiver. meantime that there will be a successful re4hab. If I were a creditor, I’d rather go to
What will happen to the one hundred million? It will be used in business? liquidation unless the debtor… of course there are things that will make a rehabilitation
• Maybe. But most likely, there will be a diversion of value here. attractive. Let’s say the debtor will put in a counterpart, but normally in a rehab they use
Professionals, remember the administrative expense? So, if you’re a only the same resource. The debtor will not add additional so let’s say you have a corporation;
creditor, in businesses they see lawyers, they see expenses. They don’t If the owners will put additional funds, your debtor or principal owners will be having
add value. They get value out of you. something at stake in the rehab, so if it fails, they also pay the hit. Unlike in the example,
Let’s say for the hundred million, who will you pay for the rehab? the rehab will be gambling all the assets of the creditors essential.
• The receiver or the professionals. So, there will be expenses necessary CHAPTER II
to pursue the business so if you are a creditor you would be thinking COURT-SUPERVISED REHABILITATION
why not get one hundred million intact; I will get it maybe 5 years (A) Initiation Proceedings.
down the road after a successful rehabilitation and it will be less. (1) Voluntary Proceedings.
That’s why this is only good for the debtor but not for the purpose of Section 12. Petition to Initiate Voluntary Proceedings by Debtor. - When approved by
turning around the business. If this continues in reality for the owner in case of a sole proprietorship, or by a majority of the partners in
preservation of access to their sources. Of course, there is a case of a partnership, or in case of a corporation, by a majority vote of the
successful rehab. board of directors or trustees and authorized by the vote of the stockholders
Story about example of rehabilitation (don’t read, skip mo na) representing at least two-thirds (2/3) of the outstanding capital stock, or in
Do you know Vistaland? Vistaland or Camelia homes? Who owns them?Villar. The story case of nonstock corporation, by the vote of at least two-thirds (2/3) of the
here is that the Villar group used to own real estate companies. Aside from that they owned members, in a stockholder's or member's meeting duly called for the purpose,
a bank. Capitol bank? You don’t know that one because it is closed. The entire group was an insolvent debtor may initiate voluntary proceedings under this Act by filing
on distress. I think they attempted for a rehab several decades ago. Do you know the mall a petition for rehabilitation with the court and on the grounds hereinafter
along Shaw? Starmall which does not look like a star at all. There was a time that to pay specifically provided. The petition shall be verified to establish the insolvency
creditors, they [Starmall] were giving up umbrellas. I’m not sure if it’s starmall or another of the debtor and the viability of its rehabilitation, and include, whether as an
business within starmall. Anyways, the group of Villar, encountered trouble I think during attachment or as part of the body of the petition, as a minimum the following:
the Asian financial crisis. They went for the rehab and of course they succeeded which is why (a) Identification of the debtor, its principal activities and its addresses;

Week 14 FRIA
(b) Statement of the fact of and the cause of the debtor's insolvency or (c) the specific relief sought under this Act;
(d) a Rehabilitation Plan;
inability to pay its obligations as they become due;
(e) the names of at least three (3) nominees to the position of rehabilitation
(c) The specific relief sought pursuant to this Act;
receiver;
(d) The grounds upon which the petition is based;
(f) other information that may be required under this Act depending on the
(e) Other information that may be required under this Act depending on the form of relief requested; and
form of relief requested;
(g) other documents required to be filed with the petition pursuant to this Act
(f) Schedule of the debtor's debts and liabilities including a list of creditors
and the rules of procedure as may be promulgated by the Supreme Court.
with their addresses, amounts of claims and collaterals, or securities, if any;
(g) An inventory of all its assets including receivables and claims against third So, let’s now go to court supervising rehabilitation. There are two kinds,
parties; voluntary and involuntary. For voluntary, it is initiated by the debtor while
(h) A Rehabilitation Plan; involuntary is initiated by the creditor. We took up the matter of who can put a
(i) The names of at least three (3) nominees to the position of rehabilitation voluntary probation. Remember that the individual debtor must be a sole
receiver; and proprietorship and must be a resident and citizen of the Philippines. If a
(j) Other documents required to be filed with the petition pursuant to this Act corporation must be incorporated under Philippine law and then the SCC,
and the rules of procedure as may be promulgated by the Supreme Court. then the partnership is also registered in SCC. Now,
A group of debtors may jointly file a petition for rehabilitation under this Act If it is involuntary, who can file it? Creditor? Creditors? Anyone? So, if you
when one or more of its members foresee the impossibility of meeting debts have ten creditors who can file? Is one creditor fine, Okay multiple choice:
when they respectively fall due, and the financial distress would likely adversely One, Some, All? One is sufficient? What’s the requirement/qualification of the
affect the financial condition and/or operations of the other members of the creditor?
group and/or the participation of the other members of the group is essential Let’s say you have a credit card and you owe Citibank fifty thousand. You did not pay.
under the terms and conditions of the proposed Rehabilitation Plan. Can Citibank file a petition for rehabilitation assuming you have a business?
(2) Involuntary Proceedings. • Take note, the creditor for involuntary probation...take note of the
Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any creditor requirement of the creditor; at least one creditor should file, that’s the
or group of creditors with a claim of, or the aggregate of whose claims is, at minimum requirement under the insolvency law before it was many
least One Million Pesos (Php1,000,000.00) or at least twenty-five percent now it’s just one creditor can file. The only qualification is the
(25%) of the subscribed capital stock or partners' contributions, whichever is creditor must have a claim of at least one million pesos or a t least
higher, may initiate involuntary proceedings against the debtor by filing a 25% subscribed capital stock. You know what subscribed capital
petition for rehabilitation with the court if: stock is? Or partner’s contributions whichever is higher. So,
(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, minimum should be one million, but it can go higher depending on
and that the due and demandable payments thereon have not been made for at the other requirement 25% of the subscribed capital stock or
least sixty (60) days or that the debtor has failed generally to meet its liabilities partner’s contributions.
as they fall due; or Now, what are the requirements for a petition? Voluntary petition for rehab?
(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings The debtor must file to the court. What court? MTC, RTC, CA, SC,
against the debtor that will prevent the debtor from paying its debts as they Sandiganbayan?
become due or will render it insolvent.
• RTC. The debtor must prove that he is insolvent or illiquid. You
Section 14. Petition to Initiate Involuntary Proceedings. - The creditor/s' petition for
have the requirements of a petition, you just go through them like
rehabilitation shall be verified to establish the substantial likelihood that the
letters of the debtor, the statement of fact and cause of the debtor’s
debtor may be rehabilitated, and include:
insolvency or inability to pay the obligations. Again this reiterates the
(a) identification of the debtor its principal activities and its address;
definition of insolvency. When you say insolvency, insolvent either
(b) the circumstances sufficient to support a petition to initiate involuntary
practically insolvent or liquid. The reason pursuant to the act, the
rehabilitation proceedings under Section 13 of this Act;
Week 14 FRIA
grounds for the petition, other information must be required by the • The only requirement is the section 13. For the petition.
act. Circumstances to initiate the involuntary rehab. the first one is there
What should be attached to the petition? is no genuine issue of fact or law that claims that the petitioner,
• The claims and the inventory of the properties of the debtor, and meaning it is uncontested (acknowledged for example by the debtor)
proof of the insolvency of the debtor. You have a schedule of the and a default for at least 60 days.
assets and liabilities and • Another situation is another creditor goes after the assets of the
what else? It is petition for rehab so most important part should be? insolvent... for closure proceedings against the debtor that will
• The petition should be accompanied by the creditor, the grounds, prevent the debtor from paying obligations
the background of the need for rehabilitation and the schedule of if you’re the debtor, why would you file for a rehab. what’s the objective?
assets and liabilities and most of all, because you’re asking for a • Student: to preserve the assets
rehabilitation there must be a receiver. How can you expect a court to Is there any other use?
supervise a business. There may be an expert receiver. That’s why the • If I’m the creditor, I will not file for rehab. I will file for liquidation.
rules require that the petition should include a rehabilitation plan. It is that’s for rehab but if you’re the creditor creditor.
a plan on how to turnaround the financial fortunes of this insolvent Is there a way to use the petition for something else other than intended
debtor, then the names of at least three nominees of the position of purpose? that’s how you use the law. How you can use it for something else
the rehabilitation receiver. other than its intended purpose?
Why do you have nominees? Is there a convention? The court will choose who • There may be some other use for it. ...... There are a lot of things you
among them will be the receiver. Who decides? can use for here.
• Ultimately, it’s the court who will decide who the receiver is. We have Is there any other use aside from preserving the assets?
the similar requirements under the petition for initiating involuntary • You take over the business of the debtor. Because if you have a rehab
proceedings. plan, you acquired a receiver that will supplant the governing body of
You have the same requirements? What’s missing? the debtor and it would be under the court. so if you’re the creditor
• The creditor aside for proving must prove the claim against the and you want to take over the business, that’s one way of doing it.
debtor also and must prove that the debtor is in fact insolvent and you file a petition for rehab. you’re not really interested in preserving
illiquid and he’s not required to provide liquidation plans. this you just want to run business of the debtor. Of course, you have
Week 14 Part 03 Gallardo, Christian Andrew to fulfil the requirements for filing the petition. I haven’t seen one
The petition for initiating voluntary proceedings you have the same yet. There was an attempt. But we didn’t push through the plan
requirements? • so it’s possible to do it. look at the requirement for a creditor to file a
• Student: No sir petition. (I) creditor other than petitioner has initiated foreclosure
What’s missing? proceedings, so it easy to fulfil or defaulted for 60 days. so if you’re
• Student: The creditor must prove the claim against the debtor and he the creditor, there’s no requirement of practical insolvency so you can
must prove that the debtor is insolvent and illiquid but he may not file for rehab. That’s why I have an issue with this because it excluded
provide for the rehabilitation plan. foreigners from the coverage of the FRIA. let’s say you have a debtor
No. He must provide a rehabilitation plan. The only difference is when the doing business here in the Philippines or somehow pursuing certain
creditor initiates the creditor does not have to attached the schedule of assets transactions in the Philippines and that debtor owes you. under the
and liabilities. Why? FRIA, if that debtor is a foreigner you cannot file a petition for rehab
• Student: because he might not have the access liquidation whatever. I’m not sure why they excluded. Im guessing
because the creditor does not know only the debtor will know the assets and the intention was to prevent foreigners from reaping the benefits of
liabilities of the debtor. the FRIA. But on the underhand it prevented locals from the benefits
of the FRIA against a foreign debtor. You may ask,

Week 14 FRIA
what can you do? working days from the filing of the petition, issue a Commencement Order. If,
• There was a case before under the old Insolvency Act, to extract within the same period, the court finds the petition deficient in form or
monetary concessions from a foreign debtor, the local creditors sue substance, the court may, in its discretion, give the petitioner/s a reasonable
them for insolvency under Philippine law. There’s nothing for the period of time within which to amend or supplement the petition, or to submit
debtor here except for the qualifying shares in the companies, such documents as may be necessary or proper to put the petition in proper
meaning 1 share worth maybe less than P 100. order. In such case, the five (5) working days provided above for the issuance
What’s the use of that? of the Commencement Order shall be reckoned from the date of the filing of
• You’re gonna sue somebody. That somebody has less than 1 share in the amended or supplemental petition or the submission of such documents.
a company. So the court under the FRIA, will have how many days to act on the petition?
What will be the use of that 1 share? • Upon filing of the petition, if the court finds the petition for rehab,
• Because you attach it. Now the Court can have jurisdiction at least to sufficient in form and substance, it shall within 5 working days issue a
that property. That was under the insolvency law. Locals sued commencement order. So you file a petition, you expect after 5
foreigner who has business interest here. But not directly. His only working days, you get commencement order. BUT there’s a provision
assets were some qualifying share in that company. The Court gave here: If the court finds the petition deficient in form or substance, it
due course to their petition. So what will you get if you are allowed to can ask the petitioner to amend the petition and the 5 days may start
file a petition against somebody who has no asset in the Philippines. after the completion of the petition. Inefficient
Is there any advantage that you can get? What is a commencement order?
• Student: if you acquired jurisdiction over the person already you may • The commencement order will include a stay suspension order.
get the properties even if not in the PH
Abroad? How do you enforce the judgment? Maybe file it in Courts abroad? (q) include s Stay or Suspension Order which shall:
• Remember, when you litigate, sometimes the objective is not to win. (1) suspend all actions or proceedings, in court or otherwise, for the
It is just to gain leverage and force the other party to negotiate. In enforcement of claims against the debtor;
that example, locals used foreigner and that foreigner was a known (2) suspend all actions to enforce any judgment, attachment or other
business person in another country. And because that person owned provisional remedies against the debtor;
shares in listed company. Now he’s forced to settle. It’s bad PR. A (3) prohibit the debtor from selling, encumbering, transferring or
major investor has an insolvency proceedings. disposing in any manner any of its properties except in the ordinary course of
Now what do you think is the payment? In Kind? business; and
• An infrastructure project was given to settle the matter. (4) prohibit the debtor from making any payment of its liabilities
Going back to the point there is something wrong with this FRIA, because outstanding as of the commencement date except as may be provided herein.
that window, that remedy available for locals against foreigner was now What is a stay suspension order?
removed. Now a foreigner cannot be sued for rehabilitation, let’s say you want • If you have a petition, the objective is to hold off the petition of
to take over a business of a foreigner, or you cannot liquidate the business of other debtors as to their claims. So your objective in filing a petition
that foreigner here. So what do you do? for rehab whether voluntary or involuntary is to get a
• You just go through normal route. File case maybe for collection but commencement order. That’s why, if you’re lawyering.
it doesn’t give you any ability to control a business How should you deal?
Do you need to verify a petition? • Get a substantial acceptance fee because it will require you a lot of
• Yes, you need to verify time. Of course you can deal based on time. Also, you can establish
Section 15. Action on the Petition. - If the court finds the petition for your milestones. First step is getting commencement order.
rehabilitation to be sufficient in form and substance, it shall, within five (5) why?

Week 14 FRIA
• Because it stops debtors from pursuing their claim. Because it Attempts to seek legal of other resource against the debtor outside these
includes stay or suspension order. But take note that criminal cases is proceedings shall be sufficient to support a finding of indirect contempt of
not included in the stay or suspension order.
court.
• Debtor cannot dispose assets. Of course there is a window: If it’s in • The commencement order. this is section 17b. Will also be a basis for
the ordinary course of business. And debtor cannot pay creditors
rendering null and void certain extrajudicial activity or process to hide
except when provided in this law or court. assets from collection or claim against the debtors after the
Also recall that commencement order has a retroactive effect to the date of commencement day. The only issue here is that it is not automatic. In
filing. old insolvency law, it is the same. It has a retroactive effect. UNLIKE
• Student; Sir question, even if the judgment was before filing, it will HERE. It just says. “basis for rendering null and void”
not... So what does it say?
• Yes. If it’s not yet executed. That’s why, if you’re a creditor, you want • You have to file an action for nullification. So the burden will be on
to avoid the effect of FRIA. You execute judgment. the receiver to file an action to nullify acts
• Aside from the stay or suspension order, the commencement order What are the exceptions on the commencement order?
will also vest in the rehab receiver the management of the debtor • Cases already pending or being appealed on supreme court. BUT
including anything, all assets of the debtors will be placed under the take note. Any final and executor judgment shall be referred to the
control of the rehab receiver. court for appropriate action. Meaning, SC can resolve the case but
the judgment cannot be executed. It should go to the rehab court.
Section 17. Effects of the Commencement Order. - Unless otherwise provided for in Same goes with cases under specialized Courts. They may proceed
this Act, the court's issuance of a Commencement Order shall, in addition to depending on order of rehab court but execution will be stayed and
the effects of a Stay or Suspension Order described in Section 16 hereof: referred to rehab court.
(a) vest the rehabilitation with all the powers and functions provided for this • Item c, So if you have sureties or other solidary co-debtors or other
Act, such as the right to review and obtain records to which the debtor's person liable with the debtor, the suspension does not benefit those
management and directors have access, including bank accounts or whatever persons. The stay or suspension order benefits only the debtor,
nature of the debtor subject to the approval by the court of the performance except if the third party is necessary for rehab. Which is unusual.. It
bond filed by the rehabilitation receiver; doesn’t happen. Meaning, surety may still be liable. Surety will have to
(b) prohibit or otherwise serve as the legal basis rendering null and void the pay and line up as creditor.
results of any extrajudicial activity or process to seize property, sell
encumbered property, or otherwise attempt to collection or enforce a claim Section 18. Exceptions to the Stay or Suspension Order. - The Stay or Suspension
against the debtor after commencement date unless otherwise allowed in this Order shall not apply:
Act, subject to the provisions of Section 50 hereof; (a) to cases already pending appeal in the Supreme Court as of commencement
(c) serve as the legal basis for rendering null and void any setoff after the date Provided, That any final and executory judgment arising from such appeal
commencement date of any debt owed to the debtor by any of the debtor's shall be referred to the court for appropriate action;
creditors; (b) subject to the discretion of the court, to cases pending or filed at a
(d) serve as the legal basis for rendering null and void the perfection of any lien specialized court or quasi-judicial agency which, upon determination by the
against the debtor's property after the commencement date; and court is capable of resolving the claim more quickly, fairly and efficiently than
(e) consolidate the resolution of all legal proceedings by and against the debtor the court: Provided, That any final and executory judgment of such court or
to the court Provided. However, That the court may allow the continuation of agency shall be referred to the court and shall be treated as a non-disputed
cases on other courts where the debtor had initiated the suit. claim;
(c) to the enforcement of claims against sureties and other persons solidarily
liable with the debtor, and third party or accommodation mortgagors as well as

Week 14 FRIA
issuers of letters of credit, unless the property subject of the third party or because criminal actions are not covered by suspension order. Eg
accommodation mortgage is necessary for the rehabilitation of the debtor as Estafa, BP22.
determined by the court upon recommendation by the rehabilitation receiver;
Section 19. Waiver of taxes and Fees Due to the National Government and to Local
(d) to any form of action of customers or clients of a securities market
Government Units (LGUs). - Upon issuance of the Commencement Order by the
participant to recover or otherwise claim moneys and securities entrusted to
the latter in the ordinary course of the latter's business as well as any action of court, and until the approval of the Rehabilitation Plan or dismissal of the
petition, whichever is earlier, the imposition of all taxes and fees including
such securities market participant or the appropriate regulatory agency or self-
penalties, interests and charges thereof due to the national government or to
regulatory organization to pay or settle such claims or liabilities;
LGUs shall be considered waived, in furtherance of the objectives of
(e) to the actions of a licensed broker or dealer to sell pledged securities of a
debtor pursuant to a securities pledge or margin agreement for the settlement rehabilitation.
of securities transactions in accordance with the provisions of the Securities Section 19, this one, as I told you, is an unintended consequence of the FRIA.
Regulation Code and its implementing rules and regulations; How do you use FRIA in another way?
(f) the clearing and settlement of financial transactions through the facilities of • When a commencement order is issued, take note, from the issuance
a clearing agency or similar entities duly authorized, registered and/or of the commencement order of the court until the approval of the
recognized by the appropriate regulatory agency like the Bangko Sentral ng rehab plan or dismissal of the petition, taxes and fees shall be
Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or considered waived in furtherance of objective of FRIA. So all
entities to reimburse themselves for any transactions settled for the debtor; transactions from here are not waived. So remember, the issuance
and retroacts to day 1. So from day 1 to 5, all transactions will be deemed
(g) any criminal action against individual debtor or owner, partner, director or taxless. So if you’re working the law,
officer of a debtor shall not be affected by any proceeding commend under how do you make use?
this Act. • Disposal of assets will entail payment of taxes eg withholding tax,
• Items d, e and f of section 18, these are lobbies made by the capital income tax, VAT, DST. For my scheme to be viable, I have to save
market. for taxes,
What do I do?
• Item D, they are not covered by the suspension order because they
are not the assets of the debtor. Let’s say you are trading. Shares with • I file a petition. Get a commencement order, Then do all transaction
broker will not be on your name. It will be under the name of the within Day 1-5. I don’t care if the rehabilitation plan is accepted. I
broker. That is why if they are being claimed by the customers, they just need a commencement order. Somebody from DOF must be
will not be included in the suspension orders. Customers can get sleeping during the deliberations of the transaction.
immediately. Section 21. Effectivity and Duration of Commencement Order. - Unless lifted by the
• The clearing and settlement of financial transactions. Another lobby court, the Commencement Order shall be for the effective for the duration of
by BSP and stock market. Otherwise, there will be a problem with the rehabilitation proceedings for as long as there is a substantial likelihood
the stock market. Remember when you’re dealing with the stock that the debtor will be successfully rehabilitated. In determining whether there
market, lets say the debtor is trading, before clearing of the is substantial likelihood for the debtor to be successfully rehabilitated, the
transaction there is stay or suspension order then there is settlement. court shall ensure that the following minimum requirements are met:
Debtor paid? (a) The proposed Rehabilitation Plan submitted complies with the minimum
• You cannot say that its anonymous when you trade in the stock contents prescribed by this Act;
market, so you cannot have a suspension order stopping that (b) There is sufficient monitoring by the rehabilitation receiver of the debtor's
transaction so its exempted from the suspension order. So remember business for the protection of creditors;
if you’re a debtor, lets say you have a client debtor, for rehab just (c) The debtor has met with its creditors to the extent reasonably possible in
make sure your client do not have the potential criminal liability attempts to reach consensus on the proposed Rehabilitation Plan;

Week 14 FRIA
manipulate your facts. I mean, in how to present your case. Example,

(d) The rehabilitation receiver submits a report, based on preliminary
in a financial projection, one person asked if business will be
evaluation, stating that the underlying assumptions and the goals stated in the
sustainable. And it looks good on paper. But business remained bad
petitioner's Rehabilitation Plan are realistic reasonable and reasonable or if not,
till the end of the period.
there is, in any case, a substantial likelihood for the debtor to be successfully
rehabilitated because, among others: • Look at section 21, item b, the petition is not a sham filing. Receiver
(1) there are sufficient assets with/which to rehabilitate the debtor; makes a report stating that assumptions and financial goals are
(2) there is sufficient cash flow to maintain the operations of the debtor; realistic, feasible and reasonable and the substantial likelihood that
(3) the debtor's, partners, stockholders, directors and officers have been acting the debtor will recover because, among others, the petition is not a
in good faith and which due diligence; sham filed to create delay.
(4) the petition is not s sham filing intended only to delay the enforcement of • But this in practice is the objective of all rehab petitions. Delay
the rights of the creditor's or of any group of creditors; and creditors for them to negotiate.
(5) the debtor would likely be able to pursue a viable Rehabilitation Plan; Week 14 Part 04 Hao, Tristan Jeremy
(e) The petition, the Rehabilitation Plan and the attachments thereto do not The real objective in practice of the rehab petition is to prevent the creditors
contain any materially false or misleading statement; to from getting the assets of the debtor and for getting leverage for the debtor
(f) If the petitioner is the debtor, that the debtor has met with its creditor/s to negotiate with the creditor.
representing at least three-fourths (3/4) of its total obligations to the extent For the commencement order to remain, there is no need for the creditor’s
reasonably possible and made a good faith effort to reach a consensus on the approval, you only need the court’s approval. If you are the debtor why is it a
proposed Rehabilitation Plan if the petitioner/s is/are a creditor or group of good thing?
creditors, that/ the petitioner/s has/have met with the debtor and made a • You only have to deal with the court, you only have to present to the
good faith effort to reach a consensus on the proposed Rehabilitation Plan; court that you have a meritorious case under the FRIA. The creditors
and cannot veto the decisions of the court, so you have to only deal with
(g) The debtor has not committed acts misrepresentation or in fraud of its the court.
creditor/s or a group of creditors. In the provision of FRIA, what is only required is for the debtor to exert good
faith effort to meet with the creditors. So there is no need for an agreement.
Now, what’s the duration of the commencement order?
• The only requirement is that the rehab plan is compliant with the
• Unless ordered otherwise by the rehab court, commencement order FRIA and that debtor is entitled to the CO and approval of the rehab
shall remain as long as there is substantial likelihood that debtor will plan.
be successful in rehabilitation. This the problem in our civil cases and
• Rehab proceedings are in REM, so because it’s by publication, some
commercial cases. Unlike crime where there is a formula, a
creditors may not know the existence of the proceedings so it’s
mathematical formula. Here, you have to rely on the court, Courts
possible that they may not be able to file their claims.
with no expertise. What is “substantial likelihood”?
Well, good for you if you are a debtor. Cause there’s no concrete number. Just Section 23. Effect of Failure to File Notice of Claim. - A creditor whose claim is
convince the Court. not listed in the schedule of debts and liabilities and who fails to file a notice of
• And these are the only minimum requirements provided by the law in claim in accordance with the Commencement Order but subsequently files a
determining if there is substantial likelihood that the rehabilitation belated claim shall not be entitled to participate in the rehabilitation
will be successful: (I) rehab plan complies with the requirements of proceedings but shall be entitled to receive distributions arising therefrom.
the act. (II) Debtor has met with creditors in attempt to get SEC 23- provides, the creditor whose claim is not listed in the schedule of
consensus. Nah, it’s just a meeting. You don’t have to agree. (III) debts and liabilities and fails to file a notice on the claims but subsequently files
There is a sufficient monitoring by rehab receiver (IV) Rehab receiver
a belated claim after the CO shall be entitled to receive dividends but may
issues a report. So, to cut it short, these are very malleable
requirement. You can prove them. It just depends on how you
Week 14 FRIA
cannot participate in the proceedings, they will not be part of the proceeding the court may be approval of the rehab plan or dismissal of the
but they will still get their entitlement as a creditor. petition with or without liquidation proceedings. If petition is
What will the court do after hearing with the petition? dismissed, court may require the debtor to pay the damages to
• Approve of rehab plan, or continue with the proceeding or dismiss prejudiced creditors.
the petition and convert it to a liquidation proceeding, so SEC. 25.
Section 28.Who May Serve as a Rehabilitation Receiver. - Any qualified natural or
Section 25. Giving Due Course to or Dismissal of Petition, or Conversion of juridical person may serve as a rehabilitation receiver: Provided, That if the
Proceedings. - Within ten (10) days from receipt of the report of the rehabilitation receiver is a juridical entity, it must designate a natural person/s
rehabilitation receiver mentioned in Section 24 hereof the court may: who possess/es all the qualifications and none of the disqualification’s as its
(a) give due course to the petition upon a finding that: representative, it being understood that the juridical entity and the
(1) the debtor is insolvent; and representative/s are solidarily liable for all obligations and responsibilities of
(2) there is a substantial likelihood for the debtor to be successfully the rehabilitation receiver.
rehabilitated; Sec 28. Who may be a receiver?
(b) dismiss the petition upon a finding that:
(1)debtor is not insolvent; • Natural or Juridical person. If it is a juridical person, it must
designate a natural person as an agent or representative and they must
(2) the petition i8 a sham filing intended only to delay the enforcement of the
have all the qualifications and none of the disqualifications of the
rights of the creditor/s or of any group of creditors;
receiver.
(3)the petition, the Rehabilitation Plan and the attachments thereto contain any
materially false or misleading statements; or Section 29.Qualifications of a Rehabilitation Receiver. - The rehabilitation receiver
(4)the debtor has committed acts of misrepresentation or in fraud of its shall have the following minimum qualifications:
creditor/s or a group of creditors; (a)A citizen of the Philippines or a resident of the Philippines in the six (6)
(c)convert the proceedings into one for the liquidation of the debtor upon a months immediately preceding his nomination;
finding that: (b)Of good moral character and with acknowledged integrity, impartiality and
(1)the debtor is insolvent; and independence;
(2)there is no substantial likelihood for the debtor to be successfully (c)Has the requisite knowledge of insolvency and other relevant commercial
rehabilitated as determined in accordance with the rules to be promulgated by laws, rules and procedures, as well as the relevant training and/or experience
the Supreme Court. that may be necessary to enable him to properly discharge the duties and
obligations of a rehabilitation receiver; and
SEC 25, the rehab receiver will report to the court, whether the rehab plan is
(d)Has no conflict of interest: Provided, That such conflict of interest may be
viable, and the court upon receiving the report under sec 24, the court may
waived, expressly or impliedly, by a party who may be prejudiced thereby.
give due course to the petition. What is the requirement?
Other qualifications and disqualification’s of the rehabilitation receiver shall be
• 1) Debtor is INSOLVENT set forth in procedural rules, taking into consideration the nature of the
• 2) There is substantial likelihood of rehabilitation business of the debtor and the need to protect the interest of all stakeholders
• 3) Or dismiss the petition, because that debtor is not insolvent. concerned.
Insolvent meaning?
• Debtor has assets more than liabilities and is liquid, so debtor just What are the qualifications?
doesn’t want to pay. • Sec 29, citizen of the PH or resident of the PH for the last 6 months
• Or it is a SHAM filling, the petition and rehab plan and the prior to the nomination.
attachments contain materially false statements, debtor committed Why?
acts of fraud or misrepresentation, so that’s a dismissal. The court • Because you want a receiver who will monitor the business. Of good
then may convert it into a liquidation proceedings. So the action of moral character and impartiality and independence.

Week 14 FRIA
• You can question the appointment of the receiver based on a lack of • Last paragraph sec 30, if a qualified natural person or entity is
impartiality and independence. So if you’re the creditor you can nominated by more than fifty percent (50%) of the secured creditors
question that the receiver is a previous employee of the debtor, so and the general unsecured creditors, and satisfactory evidence is
there is partiality in that case. submitted, the court shall appoint the creditors' nominee as
• Item C- has requisite knowledge of insolvency and other relevant rehabilitation receiver.
laws. This is not absolute, court can still appoint notwithstanding this, because it
o Best fit is a Lawyer. says here “SATISFACTORY EVIDENCE”, court can say there is conflict of
How much does a receiver get? interest.
• Now they regulated it but before, 10-15 years ago, they can earn as What are the malleable disqualifications?
much as 500k a month just being a receiver. So as a creditor you do • Lack if impartiality, conflict of interest. So ultimately court will
not want that. ultimately decide.
• Item D- no conflict of interest. The receiver reports only to the court, what does the receiver have?
o Provided that the conflict of interest may be waived 1. Control of the assets
expressly or impliedly by the person prejudiced. So it’s not 2. Control of the business
an absolute prohibition. 3. Dispositions will have to be done with court approval ( remember
So do you want to be a receiver as a lawyer? receiver acts only as management in the meantime, it can be given the
• YES, aside from you fee power of management and it can be excluded)
what can you get? Purpose of the receiver is to:
• Remember you have access to the business, so you can dole out 1. Get hold of the assets of the debtor
business to your friends, you can get a referral fee, so it is not a good 2. Preserve them, and
thing for creditors. 3. Run the business.
Section 30.Initial Appointment of the Rehabilitation Receiver. - The court shall Section 31.Powers, Duties and Responsibilities of the Rehabilitation Receiver. - The
initially appoint the rehabilitation receiver, who mayor may not be from among rehabilitation receiver shall be deemed an officer of the court with the
the nominees of the petitioner, However, at the initial hearing of the petition, principal duty of preserving and maximizing the value of the assets of the
the creditors and the debtor who are not petitioners may nominate other debtor during the rehabilitation proceedings, determining the viability of the
persons to the position. The court may retain the rehabilitation receiver rehabilitation of the debtor, preparing and recommending a Rehabilitation
initially appointed or appoint another who mayor may not be from among Plan to the court, and implementing the approved Rehabilitation Plan, To this
those nominated. end, and without limiting the generality of the foregoing, the rehabilitation
In case the debtor is a securities market participant, the court shall give priority receiver shall have the following powers, duties and responsibilities:
to the nominee of the appropriate securities or investor protection fund. (a)To verify the accuracy of the factual allegations in the petition and its
If a qualified natural person or entity is nominated by more than fifty percent annexes;
(50%) of the secured creditors and the general unsecured creditors, and (b)To verify and correct, if necessary, the inventory of all of the assets of the
satisfactory evidence is submitted, the court shall appoint the creditors' debtor, and their valuation;
nominee as rehabilitation receiver. (c)To verify and correct, if necessary, the schedule of debts and liabilities of
the debtor;
Take note of SEC 30- Initial Appointment of the Rehabilitation Receiver. (d)To evaluate the validity, genuineness and true amount of all the claims
• The court will always have the last say, there may be against the debtor;
recommendations and nominations from the creditors but the last say (e)To take possession, custody and control, and to preserve the value of all the
will be of the court. property of the debtor;

Week 14 FRIA
(m) To assume and exercise the powers of management of the debtor, if

(f)To sue and recover, with the approval of the court, all amounts owed to,
directed by the court pursuant to Section 36 hereof;
and all properties pertaining to the debtor;
The appointment of the receiver does not necessarily include the power of
(g)To have access to all information necessary, proper or relevant to the
management, it should be a granted power, because you can have a separate
operations and business of the debtor and for its rehabilitation;
management.
(h) To sue and recover, with the. approval of the court, all property or money What is the compensation of receiver?
of the debtor paid, transferred or disbursed in fraud of the debtor or its
creditors, or which constitute undue preference of creditor/s; • Court will decide, before you can get a percentage of the assets
(i) To monitor the operations and the business of the debtor to ensure that no liquidated.
payments or transfers of property are made other than in the ordinary course • Receiver, since he will have great power in the hold of the business, is
of business; also required to post a bond. Amount of bond will be determined by
(j) With the court's approval, to engage the services of or to employ persons or the court. Of course, you cannot be forced to be a receiver, you can
entities to assist him in the discharge of his functions; decline. So you will accept only a fee commensurate with the risk
(k) To determine the manner by which the debtor may be best rehabilitated, to assumed as a receiver. Bond is to assure that you will perform the
review) revise and/or recommend action on the Rehabilitation Plan and duties and responsibilities of a receiver.
submit the same or a new one to the court for approval; Section 32. Removal of the Rehabilitation Receiver. – The rehabilitation receiver
(1) To implement the Rehabilitation Plan as approved by the court, if 80 may be removed at any time by the court either motu proprio or upon motion by
provided under the Rehabilitation Plan; any creditor/s holding more than fifty percent (50%) of the total obligations of
(m) To assume and exercise the powers of management of the debtor, if the debtor, on such grounds as the rules of procedure may provide which shall
directed by the court pursuant to Section 36 hereof; include, but are not limited to, the following:
(n) To exercise such other powers as may, from time to time, be conferred (a) Incompetence, gross negligence, failure to perform or failure to exercise the
upon him by the court; and proper degree of care in the performance of his duties and powers;
To submit a status report on the rehabilitation proceedings every quarter or as (b) Lack of a particular or specialized competency required by the specific case;
may be required by the court motu proprio. or upon motion of any creditor. or as (c) Illegal acts or conduct in the performance of his duties and powers;
may be provided, in the Rehabilitation Plan. (d) Lack of qualification or presence of any disqualification;
Unless appointed by the court, pursuant to Section 36 hereof, the (e) Conflict of interest that arises after his appointment; and
rehabilitation receiver shall not take over the management and control of the (f) Manifest lack of independence that is detrimental to the general body of the
debtor but may recommend the appointment of a management committee stakeholders.
over the debtor in the cases provided by this Act.
Who can move for the removal of the receiver?
SEC 31- Powers, Duties and Responsibilities of the Rehabilitation Receiver • Court motu proprio or upon motion by any creditor/s holding more
(e) - To take possession, custody and control, and to preserve the value of all than fifty percent (50%) of the total obligations of the debtor.
the property of the debtor; In this example, it should be
(I) - to monitor the operations and the business of the debtor to ensure that no
• 150M plus 1.
payments or transfers of property are made other than in the ordinary course
What are the grounds?
of business;
(j) With the court's approval, to engage the services of or to employ persons or • Sec 32, (a) Incompetence, gross negligence, failure to perform or
entities to assist him in the discharge of his functions; (this is an attempt to failure to exercise the proper degree of care in the performance of his
regulate the practice before of getting professionals) duties and powers;
(l) To implement the Rehabilitation Plan as approved by the court, if 80 • (b) Lack of a particular or specialized competency required by the
provided under the Rehabilitation Plan; specific case;

Week 14 FRIA
• (c) Illegal acts or conduct in the performance of his duties and • So if you want to farm out the business more, you can have a receiver
powers; and a separate management committee.
What are the illegal acts? • These are the grounds, where the petitioner can cause the take over
• Getting commissions for dispositions, getting money from the the management.
business on the sly. o (a) Actual or imminent danger of dissipation, loss, wastage
Ex. Commissions, let’s say, I will talk to the buyer, we will sell this property for instead of or destruction of the debtor’s assets or other properties;
100, I will sell it for 95, I will get 3. These are illegal acts, not only fraud on the debtor but o (b) Paralyzation of the business operations of the debtor; or
also the creditors. o (c) Gross mismanagement of the debtor. or fraud or other
• Receiver will be appointed only upon issuance of CO. in the wrongful conduct on the part of, or gross or willful
meantime, violation of this Act by. Existing management of the debtor
what happens between days 1 to 3? Who controls the assets? Who’ll make Or the owner, partner, director, officer or representative/s
sure the preservation of the assets? in management of the debtor.
• INTERIM receiver. The interim receiver, is not the receiver under • So you can use the Involuntary petition for rehab to takeover.
the FRIA, so you still have control. Because you can ask for a receiver and as well as replacement of the
management. When I say management, if it’s a corporation, the
Section 36. Displacement of Existing Management by the Rehabilitation management will be the BOD and officers who will be replaced by
Receiver or Management Committee. – Upon motion of any interested party, the the said “management” who can also be the rehab receiver.
court may appoint and direct the rehabilitation receiver to assume the powers
of management of the debtor, or appoint a management committee that will Section 41. Immunity. - The rehabilitation receiver and all persons employed by
undertake the management of the debtor. upon clear and convincing evidence him, and the members of the management committee and all persons
of any of the following circumstances: employed by it, shall not be subject to any action. claim or demand in
(a) Actual or imminent danger of dissipation, loss, wastage or destruction of connection with any act done or omitted to be done by them in good
the debtor’s assets or other properties; faith in connection with the exercise of their powers and functions under
(b) Paralyzation of the business operations of the debtor; or this Act or other actions duly approved by the court.
(c) Gross mismanagement of the debtor. or fraud or other wrongful conduct What does this mean?
on the part of, or gross or willful violation of this Act by. existing management • You cannot sue the receiver and the members of the management
of the debtor Or the owner, partner, director, officer or representative/s in committee and employees if the perform acts in GF.
management of the debtor. How do you establish GF?
In case the court appoints the rehabilitation receiver to assume the powers of • The very employees employed by the receiver or management
management of the debtor. the court may: committee will be the justification in establishing GF (hiring of
(1) require the rehabilitation receiver to post an additional bond; lawyers to advice, accountants) so that is the showing of due
(2) authorize him to engage the services or to employ persona or entities to diligence, every step of the way you have consulted professionals.
assist him in the discharge of his managerial functions; and How do you show good faith in the business judgment rule (corporate law)?
(3) authorize a commensurate increase in his compensation.
• The board decided based on inputs of professionals and consultants.
Week 15ilmm
• Sec 36 – Court can appoint the receiver as the management of the

debtor or appoint a separate management committee.

Week 15 HOLIDAY
Week 15 HOLIDAY
November 15, 2017

Week 16 FRIA & Central Bank Act
Week 16 FRIA & New Central Bank Act

November 22, 2017
Week 16 Part 01 Ladeza, Dom
In the election of the creditors' representatives, the rehabilitation receiver or
REVIEW ON FRIA his representative shall attend such meeting and extend the appropriate
What’s a commencement order? assistance as may be defined in the procedural rules.
Section 43. Role of Creditors' Committee. The creditors' committee when
To illustrate: constituted pursuant to Section 42 of this Act shall assist the rehabilitation
Day 1 would be filing of petition receiver in communicating with the creditors and shall be the primary liaison
Day 2 would be the Commencement order including the stay or suspension between the rehabilitation receiver and the creditors. The creditors' committee
order and the appointment of the receiver or the managing committee cannot exercise or waive any right or give any consent on behalf of any
normally it would just be the receiver. creditor unless specifically authorized in writing by such creditor. The
Day 3 would be either the approval or confirmation the rehab plan or creditors' committee may be authorized by the court or by the rehabilitation
dismissal. receiver to perform such other tasks and functions as may be defined by the
Of course a dismissal can happen at any point if you have a non compliant or procedural rules in order to facilitate the rehabilitation process.
deficient petition, the court can dismiss the petition. Of course the law
provides that the court may allow the petitioner to correct deficiencies. Yeah we start with 43 so as we said the court can appoint a receiver separate
from the management committee based on practice. At least the receiver will
• So dismissal can proceed directly to liquidation so the rehab might
be in charge also of management and will also be assisted by relevant
proceed directly to liquidation. So in between these day 2 and day 3
professionals or service providers. So, under section 42, the creditors may be
you will have here the filing and validation of claims, claims of
classified into different categories and they may form committees these
creditors, because the validated claims will be relevant in the
committees they are not really possessing powers over the creditors they’re just
implementation of the rehab plan let’s say what claims will be given
for administrative purposes. Let’s say communicating with the members of the
to certain creditors and also in liquidation. So, the moment you have
class of creditors normally, the classifications are secured and unsecured but
validated claims and also the liquidator with the approval of the court
you can have other classifications like trade creditors and suppliers, employees
will just distribute the proceeds of the liquidation in accordance with
but basically the distinction will only be secured and unsecured. So the court
the rules in concurrence and preference of credits.
may direct the formation of committees for the purpose of facilitating
• So now with respect to the debtor, the debtor will have transactions communication and coordination with the various members of the different
here, what do you mean by transactions? Any kind of business classes of creditors. These committees do not decide for the creditors they’re
transaction: sales, purchase of supplies and engagement of just administrative.
contractors and also we have transactions here. So we discussed last
time I think we’re done with the filing of the petition. Section 44. Registry of Claims. Within twenty (20) days from his assumption
into office, the rehabilitation receiver shall establish a preliminary registry of
Section 42. Creditors' Committee. After the creditors' meeting called pursuant claims. The rehabilitation receiver shall make the registry available for public
to Section 63 hereof, the creditors belonging to a class may formally organize a inspection and provide publication notice to the debtor, creditors and
committee among themselves. In addition, the creditors may, as a body, agree stakeholders on where and when they may inspect it. All claims included in the
to form a creditors' committee composed of a representative from each class registry of claims must be duly supported by sufficient evidence.
of creditors, such as the following: Section 45. Opposition or Challenge of Claims. – Within thirty (30) days from the
(a) Secured creditors; expiration of the period stated in the immediately preceding section, the
(b) Unsecured creditors; debtor, creditors, stakeholders and other interested parties may submit a
(c) Trade creditors and suppliers; and challenge to claim/s to the court, serving a certified copy on the rehabilitation
(d) Employees of the debtor. receiver and the creditor holding the challenged claim/so Upon the expiration

of the thirty (30)day period, the rehabilitation receiver shall submit to the applicable law/s and agreement/s, if any, on the election or appointment of
court the registry of claims which shall include undisputed claims that have not directors, managers Or managing partner. However, all disbursements,
been subject to challenge. payments or sale, disposal, assignment, transfer or encumbrance of property ,
Section 46. Appeal. Any decision of the rehabilitation receiver regarding a or any other act affecting title or interest in property, shall be subject to the
claim may be appealed to the court. approval of the rehabilitation receiver and/or the court, as provided in the
following subchapter.
• So sections 44, 45, and 46 these provisions refer to this part of the
proceedings: the filing and validation of claims, remember, the • Section 47 as we said the management may be given to a receiver or
commencement order will include a directive for relevant parties it can be given to the management committee or of course it can
meaning creditors to file their claims. So there will be a filing of remain with the governing body of the debtor.
claims and the claims will be vetted by the receiver.
Section 48. Use or Disposition of Assets. Except as otherwise provided herein,
How will it be done?
no funds or property of the debtor shall he used or disposed of except in the
• Of course, again this is another business that the receiver can farm ordinary course of business of the debtor, or unless necessary to finance the
out, the validating or verification of the claims of the creditors. administrative expenses of the rehabilitation proceedings.
Example: Section 49. Sale of Assets. The court, upon application of the rehabilitation
Let’s say there’s a company in financial distress, and under rehab or under receiver, may authorize the sale of unencumbered property of the debtor
liquidation. Parties/Creditors will be gathered they will be asked to file their outside the ordinary course of business upon a showing that the property, by
claims. These will include the particulars of the creditor, the supporting its nature or because of other circumstance, is perishable, costly to maintain,
documents of the claim. Let’s say, if the creditor is a lender then the loan susceptible to devaluation or otherwise in jeopardy.
contract the promissory notes, proof of release of proceeds, those kinds of Section 50. Sale or Disposal of Encumbered Property of the Debtor and Assets of Third
documents. So that will be filed by the creditor. Parties Held by Debtor. The court may authorize the sale, transfer, conveyance or
On the other hand on the part of the debtor acting through the receiver, there disposal of encumbered property of the debtor, or property of others held by
will be a comparison, of course, the debtor will have it’s own records of the the debtor where there is a security interest pertaining to third parties under a
liability of the debtor and you can now vet. Of course, these, Who will do this financial, credit or other similar transactions if, upon application of the
it’s not the receiver, it will be done normally by an auditing firm or accounting rehabilitation receiver and with the consent of the affected owners of the
firm they will check the records if they have legal questions it will be submitted property, or secured creditor/s in the case of encumbered property of the
or referred to a counsel hired also by a receiver. Remember this process of
debtor and, after notice and hearing, the court determines that:
referring to professionals like accountants and counsel this is meant to ensure
that the receiver or persons acting under him they are acting in good faith. • Now, sections 48, 49, and 50. As a rule there can be no disposition or
Remember if they are acting in good faith in the discharge of their duties they encumbrance of assets when a debtor is under rehabilitation without
have immunity under the FRIA. the approval of the court. That’s the rule even under the old
• So after that one there’s now a validation generally there will be a list insolvency law in fact it’s stricter under the old insolvency law.
or registry of the claimants of course other parties may challenge this, However, under the FRIA there is now a window where there is
the creditors or the debtor may challenge because there may be disposal and encumbrance without court approval the only
fraudulent claims fielded by the debtor to inflate the liabilities and requirement is it must be in the ordinary course of business and of
somehow get part of the payments or bogus claims by third parties course as you can see from section 48 if it’s necessary to pay admin
who want to make money so there’s a need for validation and expenses there can be disposition.
verification of claims. • Now, the court can approve disposal of assets or any assets, it can
Section 47.Management. Unless otherwise provided herein, the management also allow the disposition of encumbered assets of the debtor that’s
under section 50, the only requirement is that the disposition must be
of the juridical debtor shall remain with the existing management subject to the
with the consent of the affected party or the creditor and the court

determines that the disposition is necessary for the operation of the wasn’t a CO but an adjudication of insolvency. The same goes under
debtor’s business and the debtor will provide a substitute security or the FRIA the only problem with the FRIA is it’s not automotive it
collateral to the secured creditor. Because under the FRIA, the only says that the court may rescind or declare null and void these
rehabilitation proceedings do not diminish the right of a secured transactions and dispositions whether property or bonds may be
creditor, the secured creditor will have all the rights the mortgage nullified or rescinded the law is not even clear when do you rescind
holder will continue to have a lien on the property subject of the and when do you nullify. Remember, these are two different things,
mortgage. If there is a disposition, the disposition will remain subject recission you have different requirements for recission, for nullity
to the encumbrance. So to deal with that issue, because nobody will that’s a different matter too so under the FRIA now, the burden will
buy a property with an encumbrance the law provides the court be on the receiver to ask for the nullification or recission of this
cannot do the disposition without the consent of the affected party transaction it’s not automatic which is contrary somehow to the
the creditor and with a substitute collateral or some other objective of the FRIA which is to preserve the assets of the debtor
arrangement. during the proceedings.
Section 52. Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets. • So the only defense in an action to rescind or nullify the transaction
The court may rescind or declare as null and void any sale, payment, transfer will be that the transaction was in the ordinary course of business.
or conveyance of the debtor's unencumbered property or any encumbering Now, of course, after the commencement order, the receiver or the
thereof by the debtor or its agents or representatives after the commencement management committee may enter into transactions. These transactions
date which are not in the ordinary course of the business of the debtor: especially if they are approved by the court will be valid, how will they be
Provided, however, That the unencumbered property may be sold, encumbered or treated?
otherwise disposed of upon order of the court after notice and hearing: • They will not be treated as claims of creditors, they will be treated as
(a) if such are in the interest of administering the debtor and facilitating the administrative expenses. Meaning they will be paid ahead of the
preparation and implementation of a Rehabilitation Plan; creditors whose rights accrued before the filing of the petition. The
(b) in order to provide a substitute lien, mortgage or pledge of property under same goes with employee claims, these claims have two kinds:
this Act; • First, compensation of employees required to continue the business
(c) for payments made to meet administrative expenses as they arise; shall be considered an administrative expense.
(d) for payments to victims of quasi delicts upon a showing that the claim is • So let’s say the rehab plan will require continued operation of the
valid and the debtor has insurance to reimburse the debtor for the payments debtor or expenses/payments to employees shall be considered an
made; administrative expense meaning they need not wait for dividend
(e) for payments made to repurchase property of the debtor that is auctioned payments according to the rehab plan they may be paid as they
off in a judicial or extrajudicial sale under. This Act; or accrue. Claims of separation pay for month’s work prior to x will be
(f) for payments made to reclaim property of the debtor held pursuant to a considered a pre-commencement expense which means that in
possessory lien. case of rehab they would be treated as an unsecured claim but
preferred, the first general preferred is labor claims.
• Section 52 Remember I mentioned earlier after the commencement • Claims for salary and separation pay for work performed after the
date which is day 1 the filing of the petition because the CO retroacts commencement date or day 1 shall be an administrative expense
to day 1. Under the old insolvency law the transactions between day 1 again paid ahead of the creditors.
and day 2 will be nullified if done without court approval because as
• Example: Let’s say for example you have a voluntary retirement plan
of day 1 the control over the assets of the debtor in an insolvency
that certain employees can avail. Let’s say employee 1 avails before
proceeding under the old insolvency law will be vested in the receiver
day 1, employee 2 avails after commencement date they’ll be treated
so any disposition done by the debtor without court approval would
differently. employee 1’s claim will be considered in the rehab plan.
be nullified because the debtor would not have authority to dispose
Employee 2 on the other hand will be claiming compensation and
of assets as of day 1 due to the retroactive effect of the at that time it
separation pay as an administrative expense, it will be paid ahead so creditors or which constitute undue preference of creditors. Without limiting
that’s the difference. the generality of the foregoing, a disputable presumption of such design shall
• It’s important for the employees it will be better if you do it after arise if the transaction:
the commencement date. Of course it’s better to get paid before. (a) provides unreasonably inadequate consideration to the debtor and is
Because you have a debtor in financial distress but if you just file and executed within ninety (90) days prior to the commencement date;
you’re not paid that’s a problem because you’re claim will now be a (b) involves an accelerated payment of a claim to a creditor within ninety (90)
claim of the creditor. days prior to the commencement date;
(c) provides security or additional security executed within ninety (90) days
Section 57. Treatment of Contracts. Unless cancelled by virtue of a final prior to the commencement date;
judgment of a court of competent jurisdiction issued prior to the issuance of (d) involves creditors, where a creditor obtained, or received the benefit of,
the Commencement Order, or at anytime thereafter by the court before which more than its pro rata share in the assets of the debtor, executed at a time
the rehabilitation proceedings are pending, all valid and subbsisting contracts when the debtor was insolvent; or
of the debtor with creditors and other third parties as at the commencement (e) is intended to defeat, delay or hinder the ability of the creditors to collect
date shall continue in force: Provided, That within ninety (90) days following claims where the effect of the transaction is to put assets of the debtor beyond
the commencement of proceedings, the debtor, with the consent of the the reach of creditors or to otherwise prejudice the interests of creditors.
rehabilitation receiver, shall notify each contractual counterparty of whether it Provided, however, That nothing in this section shall prevent the court from
is confirming the particular contract. Contractual obligations of the debtor rescinding or declaring as null and void a transaction on other grounds
arising or performed during this period, and afterwards for confirmed provided by relevant legislation and jurisprudence: Provided, further, That the
contracts, shall be considered administrative expenses. Contracts not provisions of the Civil Code on rescission shall in any case apply to these
confirmed within the required deadline shall be considered terminated. Claims transactions.
for actual damages, if any, arising as a result of the election to terminate a
contract shall be considered a precommencement claim against the debtor. • Now Section 58 deals with transactions before the
Nothing contained herein shall prevent the cancellation or termination of any commencement date.
contract of the debtor for any ground provided by law. • To give you a historical perspective under the old insolvency law,
transactions between the 90 day period prior to the commencement
• Now, contracts, section 57 these are contracts of the debtor.
they’re automatically nullified as fraudulent transactions so the
Contracts of the debtor with third parties will continue unless
presumption is transactions done within the 90 day period prior to
cancelled by parties before the CO or by a relevant court.
the filing of the petition would be considered fraudulent transactions
• However, these contracts need to be confirmed by the relevant and therefore void. The burden would be on the relevant creditor to
counterparties. prove that there was a fair exchange. Meaning, the debtor disposed of
• Let’s say the debtor has a supply contract with a counter party, that an asset but got in value commensurate to the asset disposed. So for
counter party would have to confirm that it’s proceeding with the example in a sale the price should be equal to the value of the
contract so if they proceed so we have a contract here. So let’s say property.
they will continue, confirmation, so the parties, the debtor and the • Under section 58 the rule again is different, the rule is any transaction
relevant counter party will decide to continue what happens now? occurring prior to the commencement date entered into by the
Payments after day 1 they are administrative expenses. But liabilities debtor involving accounts assets may be rescinded or void. The
which accrued before day 1 they should be treated as a claim. burden is shifted on the receiver to rescind or nullify these
Section 58. Rescission or Nullity of Certain Precommencement Transactions. Any transactions prior to the commencement date so it’s not automatic.
transaction occurring prior to commencement date entered into by the debtor • So there’s a change in policy under the FRIA although it’s avowed
or involving its funds or assets may be rescinded or declared null and void on objective is to preserve the assets of the debtor somehow, it placed
the ground that the same was executed with intent to defraud a creditor or the burden on the receiver or those who want to preserve the assets

of the debtor to go after certain transactions which would have been

(a) specify the underlying assumptions, the financial goals and the procedures
void under the old insolvency law.
proposed to accomplish such goals;
• This is significant because as burden shifted, the cost of litigation (b) compare the amounts expected to be received by the creditors under
would fell on the receiver. Unlike before, the burden of proof would the Rehabilitation Plan with those that they will receive if liquidation
be on the creditor to say the transactions were valid. They involved a ensues within the next one hundred twenty (120) days;
fair exchange a value. Now, it would be a cost on the part of the (c) contain information sufficient to give the various classes of creditors
receiver and the rehab plan to question these transactions. a reasonable basis for determining whether supporting the Plan is in
• Now, take note of the last paragraph of section 58, these transactions their financial interest when compared to the immediate liquidation of
although these only deal with the transactions done within the period the debtor, including any reduction of principal interest and penalties
specified, the remedy under section 58 is not exclusive. Transactions payable to the creditors;
done before the filing of the suit may also be nullified or rescinded (d) establish classes of voting creditors;
based on relevant applicable laws. For example that the transaction is (e) establish subclasses of voting creditors if prior approval has been granted
a fully simulated sale for the purpose of warehousing the assets of the by the court;
receiver or the rehabilitating corporation. The remedy that may be (f) indicate how the insolvent debtor will be rehabilitated including, but not
available is in addition to other possible remedies available under limited to, debt forgiveness, debt rescheduling, reorganization or
relevant laws. quasireorganization. dacion en pago, debtequity conversion and sale of the
business (or parts of it) as a going concern, or settingup of a new business
Section 59. Actions for Rescission or Nullity. (a) The rehabilitation receiver or, entity or other similar arrangements as may be necessary to restore the
with his conformity, any creditor may initiate and prosecute any action to financial wellbeing and visibility of the insolvent debtor;
rescind, or declare null and void any transaction described in Section 58 (g) specify the treatment of each class or subclass described in subsections (d)
hereof. If the rehabilitation receiver does not consent to the filing or and (e);
prosecution of such action, (h) provide for equal treatment of all claims within the same class or subclass,
(b) If leave of court is granted under subsection (a), the rehabilitation receiver unless a particular creditor voluntarily agrees to less favorable treatment;
shall assign and transfer to the creditor all rights, title and interest in the chose (i) ensure that the payments made under the plan follow the priority
in action or subject matter of the proceeding, including any document in established under the provisions of the Civil Code on concurrence and
support thereof. preference of credits and other applicable laws;
(c) Any benefit derived from a proceeding taken pursuant to subsection (a), to (j) maintain the security interest of secured creditors and preserve the
the extent of his claim and the costs, belongs exclusively to the creditor liquidation value of the security unless such has been waived or modified
instituting the proceeding, and the surplus, if any, belongs to the estate. voluntarily;
(d) Where, before an order is made under subsection (a), the rehabilitation (k) disclose all payments to creditors for precommencement debts made
receiver (or liquidator) signifies to the court his readiness to institute the during the proceedings and the justifications thereof;
proceeding for the benefit of the creditors, the order shall fix the time within (1) describe the disputed claims and the provisioning of funds to account for
which he shall do so and, m that case, the benefit derived from the proceeding, appropriate payments should the claim be ruled valid or its amount adjusted;
if instituted within the time limits so fixed, belongs to the estate. (m) identify the debtor's role in the implementation of the Plan;
Now who can file the action for nullification or recission? (n) state any rehabilitation covenants of the debtor, the breach of which shall
be considered a material breach of the Plan;
• The receiver or a creditor, the creditor upon compliance with the
(o) identify those responsible for the future management of the debtor and the
requirements under section 59.
supervision and implementation of the Plan, their affiliation with the debtor
Section 62. Contents of a Rehabilitation Plan. – The Rehabilitation Plan shall, as a and their remuneration;
minimum: (p) address the treatment of claims arising after the confirmation of the
Rehabilitation Plan;

said class vote in favor of the Plan. The votes of the creditors shall be based
(q) require the debtor and its counterparties to adhere to the terms of all
solely on the amount of their respective claims based on the registry of claims
contracts that the debtor has chosen to confirm;
submitted by the rehabilitation receiver pursuant to Section 44 hereof.
(r) arrange for the payment of all outstanding administrative expenses as a
Notwithstanding the rejection of the Rehabilitation Plan, the court may
condition to the Plan's approval unless such condition has been waived in
confirm the Rehabilitation Plan if all of the following circumstances are
writing by the creditors concerned; present:
(s) arrange for the payment" of all outstanding taxes and assessments, or an
(a)The Rehabilitation Plan complies with the requirements specified in this
adjusted amount pursuant to a compromise settlement with the BlR Or other
applicable tax authorities; Act. (b) The rehabilitation receiver recommends the confirmation of the
(t) include a certified copy of a certificate of tax clearance or evidence of a Rehabilitation Plan;
compromise settlement with the BIR; (c) The shareholders, owners or partners of the juridical debtor lose at least
(u) include a valid and binding r(,solution of a meeting of the debtor's their controlling interest as a result of the Rehabilitation Plan; and
stockholders to increase the shares by the required amount in cases where the (d) The Rehabilitation Plan would likely provide the objecting class of creditors
Plan contemplates an additional issuance of shares by the debtor; with compensation which has a net present value greater than that which they
(v) state the compensation and status, if any, of the rehabilitation receiver after would have received if the debtor were under liquidation.
the approval of the Plan; and • Now who will approve the rehab plan that’s section 64. The
(w) contain provisions for conciliation and/or mediation as a prerequisite to creditor’s can approve the rehab plan, for a plan to be approved:
court assistance or intervention in the event of any disagreement in the 1. All classes of creditors must approve the plan so if you have secured and
interpretation or implementation of the Rehabilitation Plan. unsecured creditors both classes should approve the plan.
• Section 62 the rehab plan. A major component of the petition will be • What is the approval requirement 50% of the total claims + 1 it
the inclusion of a rehab plan. Section 62 provides the minimum should be more than 50% of the total claims of the class.
requirements for a rehab plan just take note of item B and item C. • So let’s say you have secured and unsecured, secured will be let’s say
• The rehab plan should include a comparison of the amounts to be 100M unsecured will be 200M. What’s the vote required? You have
received by the creditor according to the rehab plan as against the to get 50% + 1 of the 100M and 50% + 1 of the 200M. Let’s say all
amounts the creditors will receive under liquidation within 120 day the unsecured creditors unanimously approved but the secured
period. creditors did not? Although 200M will amount to more than 50% it
• Remember, a standard used for the approval of the rehab plan will be will not be considered an approval.
the creditor’s will be receiving more under the rehab plan as 2. Now, However, even if the creditors reject the plan the court can still
compared to what they will receive in an immediate liquidation. approve that’s why the FRIA is a good deal to a creditor in financial distress
you only have one audience to convince, the judge.
• Under item C the rehab plan should provide the creditors with the
relevant information in order to support or object to the rehab plan. • The moment you convince the judge you will have all the benefits of
the FRIA because even if the creditors reject the rehab plan the court
Section 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver may still approve the plan if the following requisites are present,
shall notify the creditors and stakeholders that the Plan is ready for their which are easy:
examination. Within twenty (2Q) days from the said notification, the 1. Rehab plan complies with the FRIA
rehabilitation receiver shall convene the creditors, either as a whole or per 2. Rehab receiver recommends the plan, (most likely if you are the
class, for purposes of voting on the approval of the Plan. The Plan shall be petitioner you will get a receiver that’s friendly to you that’s why we
deemed rejected unless approved by all classes of creditors w hose rights are said that the FRIA can also be used for the purpose of taking over
adversely modified or affected by the Plan. For purposes of this section, the the operations of the debtor)
Plan is deemed to have been approved by a class of creditors if members of 3. The rehab plan would likely provide the objecting creditors with
the said class holding more than fifty percent (50%) of the total claims of the compensation which has net present value greater than what they
would receive under liquidation so this is just an • A: The debtor, to get approval of the creditor, gave payment on the
assumption/projection. That if they follow the rehab plan they will side to the creditor.
make this much money and the creditors will have more benefit than Most likely, if there is a challenge to the Rehab Plan, it will be based on (a) or
an immediate liquidation (b), and (c) will easy to determine. If it existed that there is no support by the
• The difficult one is item C (number 3) if the debtor files the petition voting creditors then you can have an objection to the Rehab Plan. But in the
a requirement is that the shareholders of the juridical debtor lose at end, the decision will be a court matter.
least their controlling interest in corporation as part of the rehab plan. Upon confirmation of the Rehab Plan, it will bind all concerned parties
o So let’s say you have a company owned by the debtor 100%, because of the in rem nature of the proceedings. All payment plans will be
they should lose at least 50%+1. That’s the general rule binding on the creditors. Of course there can be claims that can be filed after
when you say they’ll lose their controlling interest as a result the confirmation.
of the rehab plan. It’s easy if this is 100% then they should • Exception: If the debtor transacted after the approval of the Rehab
lose 50% +1. Because the rehab plan sometimes involves a Plan without court approval or without the concurrence of the
conversion of liabilities into equity. So let’s say creditors will receiver. Those will be treated a separate claims.
get 51%. The problem is it just says controlling interest and
controlling interest may be different. Section 70. Liability of General Partners of a Partnership for Unpaid Balances Under
Week 16 Part 01 Lopez, Robynne an Approved Plan. - The approval of the Plan shall not affect the rights of
creditors to pursue actions against the general partners of a partnership to the
Example:
extent they are liable under relevant legislation for the debts thereof.
Let’s say you have a publicly listed company like SM. Let's assume SM PH has a
capitalization of 1 Trillion, and the public ownership is 70% and 30% by SM. When you Of course nobody sues a law firm for insolvency, but just in case, there is this
have a publicly owned company, you need not get 50% to control, especially if there is because general partners may be liable personally.
dispersal of ownership. Sometimes 20-25% will be enough. So you have to bear in mind
what controlling interest means. Although we take it is more than 50%, it can be less and Section 71. Treatment of Amounts of Indebtedness or Obligations Forgiven or Reduced. -
involve further reduction. But there is no jurisprudence on it yet. There may be situations Amounts of any indebtedness or obligations reduced or forgiven in connection
where a person who is considered as a minority may have control. with a Plan's approval shall not be subject to any tax in furtherance of the
purposes of this Act.
GR: Controlling interest means more than 50%.
Section 66. Filing of Objections to Rehabilitation Plan. – A creditor may file an Example:
objection to the Rehabilitation Plan within twenty (20) days from receipt of Let's say you have a creditor 1 and creditor 2. They have a validated claim of 10M each.
notice from the court that the Rehabilitation Plan has been submitted for Under the Rehab Plan, they agreed to a payment scheme where they will only get 5M each so
confirmation. Objections to a Rehabilitation Plan shall be limited to the there is a haircut of 5M.
following: • To clarify why you have section 71: There is a short fall of 5M each
(a) The creditors' support was induced by fraud; where this will be considered by the BIR as donation and will be
(b)The documents or data relied upon in the Rehabilitation Plan are materially subject to donor's tax. Should the creditors waive a part of their claim
false or misleading; or or accepts a lower amount, that waiver should not be subject to tax
(c)The Rehabilitation Plan is in fact not supported by the voting creditors. and not considered as a donation.
This section provides the instances when the creditor may object to the To illustrate the situation:
approval or confirmation of the Rehab Plan. • There is a client who sold a property at 50M - its the real price agreed
upon by the parties and not under declared. The zonal value is 70M.
Example of (a): The BIR will assess the CGT or withholding tax based on 70M, the
Q: How do you induce a creditor? higher of the two amounts. The BIR will also assess the seller donor's
tax for the discrepancy of 20M because in effect, by selling the

property less than the zonal value (which is the market price), then
(d) a summary of disputed claims against the debtor and a report on the
there was a donation.
provisioning of funds to account for appropriate payments should any such
Section 72. Period for Confirmation of the Rehabilitation Plan. - The court shall have claims be ruled valid or their amounts adjusted.
a maximum period of one (1) year from the date of the filing of the petition to This is the same as the voluntary or involuntary rehab petition. The only
confirm a Rehabilitation Plan. difference is that before the filing of the petition here, the creditors and the
If no Rehabilitation Plan is confirmed within the said period, the proceedings debtor will come to an agreement on the filing of the petition for rehab. So
may upon motion or motu propio, be converted into one for the liquidation of you have to know the requirements.
the debtor Q: Who can file?
Q: Does the court have a period within which to approve or confirm the • A: The debtor, with or without the creditors. The only requirement is
Rehab Plan? that the creditor should approve the filing of the petition.
Q: What are the vote requirements?
• A: Yes, 1 year from the filling of the petition. But the proceeding can
go on for years. • A: Creditors: 2/3 of the total liabilities.
• The proceedings may terminate at any point from filling. The court • Secured creditors: more than 50%
can dismiss it for being deficient in form and substance, or a failed • Unsecured creditors: more than 50%
Rehab petition. If its approved then, just proceed in accordance with Let's illustrate:
the plan. The total liabilities: 1B
• If there is dismissal, the court can also proceed directly to liquidation, Secured creditors: 700M
meaning monetize all assets of the debtor and allocate them in favor Unsecured creditors: 300M
of the creditors in accordance with the liquidation plan formulated -------------------------------------
that is consistent with the rules on concurrence and preference of 2/3 of total liabilities: 670M
credits. To get an approval, you need to get 2/3 of the total liabilities. Lets the unsecured creditors
• The moment there is dismissal or termination of the proceeding, the supported it - 200M voted in favor. How much will you need? You will need 470M. So it is
orders will be vacated. not enough for you to get the 50%.
You need to comply with the 50% threshold as well as the 2/3 threshold.
PRE-NEGOTIATED REHABILITATION Another situation for same example:
Lets say, 100% of the secured creditors voted then the unsecured voted only 50M. In this
Section 76. Petition by Debtor. - An insolvent debtor, by itself or jointly with any case, you cannot file the pre-negotiated rehab petition.
of its creditors, may file a verified petition with the court for the approval of a
pre-negotiated Rehabilitation Plan which has been endorsed or approved by OUT OF COURT OR INFORMAL RESTRUCTURING AGREEMENTS
creditors holding at least two-thirds (2/3) of the total liabilities of the debtor,
including secured creditors holding more than fifty percent (50%) of the total Section 83. Out-of-Court or Informal Restructuring Agreements and Rehabilitation
secured claims of the debtor and unsecured creditors holding more than fifty Plans. - An out-of-court or informal restructuring agreement or Rehabilitation
percent (50%) of the total unsecured claims of the debtor. The petition shall Plan that meets the minimum requirements prescribed in this chapter is hereby
include as a minimum: recognized as consistent with the objectives of this Act.
(a) a schedule of the debtor's debts and liabilities; Section 84. Minimum Requirements of Out-of-Court or Informal Restructuring
(b) an inventory of the debtor's assets; Agreements and Rehabilitation Plans - For an out-of-court or informal
(c) the pre-negotiated Rehabilitation Plan, including the names of at least three restructuring/workout agreement or Rehabilitation Plan to qualify under this
(3) qualified nominees for rehabilitation receiver; and chapter, it must meet the following minimum requirements:
(a) The debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan;

negotiation for out-of-court rehabilitation or restructuring agreement and

(b) It must be approved by creditors representing at least sixty-seven (67%) of
notify them that said agreement will be binding on all creditors if the required
the secured obligations of the debtor;
majority votes prescribed in Section 84 of this Act are met.
(c) It must be approved by creditors representing at least seventy-five percent
(75%) of the unsecured obligations of the debtor; and During the negotiation of the out of court agreement, the creditors and the
(d) It must be approved by creditors holding at least eighty-five percent (85%) debtor can agree on a standstill period.
of the total liabilities, secured and unsecured, of the debtor Q: What is a standstill period?
This do not involve judicial action. It will be an agreement only between the • A: It a period within which nobody should be enforcing a claim
creditor or debtor. It is required that there should be concurrence by the against the debtor. It is like the Stay or Suspension Order. However,
creditors and the debtor. for there to be a standstill period, there is an approval requirement -
Q: What is required? more than 50% of the total liabilities of the debtor. There is also a
notice requirement, and the period should not exceed 120 days
• A: Debtor should agree. For the creditors, it must be supported by at
meaning that within the 120 day period, the parties should be able to
least 67% of the secured creditors, at least 75% of the unsecured
come to an agreement. If no agreement is reached, then it will be a
creditors, and the total should be at least 85% of the total liabilities. free for all, the creditors can run after the debtor.
To illustrate (Same as previous example):
The total liabilities: 1B Section 86. Cram Down Effect. - A restructuring/workout agreement or
Secured creditors: 700M Rehabilitation Plan that is approved pursuant to an informal workout
Unsecured creditors: 300M framework referred to in this chapter shall have the same legal effect as
------------------------------------ confirmation of a Plan under Section 69 hereof. The notice of the
85% of total liabilities: 850M Rehabilitation Plan or restructuring agreement or Plan shall be published once
You will need the approval of the creditors owning at least 850M. Creditors owning at least a week for at least three (3) consecutive weeks in a newspaper of general
67% for the secured and 75% for the unsecured. circulation in the Philippines. The Rehabilitation Plan or restructuring
Let's say you have an out of court agreement, 100% of the secured creditors approve but no agreement shall take effect upon the lapse of fifteen (15) days from the date of
concurrence of the unsecured, there can be no out of court agreement. the last publication of the notice thereof.
Q: Why is there is a higher vote requirement? Q: What's a cram down effect?
• A: Because this is an out of court agreement which will bind even • A: It's the fancy way of saying that the out of court agreement binds
creditors who are not participating in the transaction. all parties. It has the same effect as the confirmed Plan under the
• So let's say, there is an approval by the 85%, the creditors holding the court supervised rehab meaning the plan it binds all parties. If you get
15% will still be bound by the out of court agreement. this approval, then the remaining 15% will be bound by it.
Section 85. Standstill Period. - A standstill period that may be agreed upon by • But it’s difficult to achieve this especially if you have a lot creditors.
the parties pending negotiation and finalization of the out-of-court or informal This will only happen if you have a few creditors.
restructuring/workout agreement or Rehabilitation Plan contemplated herein Section 88. Effect of Court Action or Other Proceedings. - Any court action or other
shall be effective and enforceable not only against the contracting parties but proceedings arising from, or relating to, the out-of-court or informal
also against the other creditors: Provided, That (a) such agreement is approved restructuring/workout agreement or Rehabilitation Plan shall not stay its
by creditors representing more than fifty percent (50%) of the total liabilities implementation, unless the relevant party is able to secure a temporary
of the debtor; (b) notice thereof is publishing in a newspaper of general restraining order or injunctive relief from the Court of Appeals.
circulation in the Philippines once a week for two (2) consecutive weeks; and
(c) the standstill period does not exceed one hundred twenty (120) days from • If the interested party want to enjoin an out of court agreement, it
the date of effectivity. The notice must invite creditors to participate in the can only do so by filing a petition with the CA and will issue a TRO
or injunction. Before, you can just go to any court but just to make
sure that certain actions will be difficult to restrain, the action will be He shall attach to his petition a schedule of debts and liabilities and an
through the CA. inventory of assets. The filing of such petition shall be an act of insolvency.
LIQUIDATION OF INSOLVENT JURIDICAL DEBTOR • For an individual debtor, it will make sense to file a petition for
Q: Who can file? voluntary liquidation.
• A: The petition can either be filed by the debtor (voluntary) or the Q: What's the requirement?
creditors (involuntary). • A: The individual debtor who is practically insolvent, meaning assets
• If you have a juridical debtor it will not make sense to file a petition are less than liabilities, and owning debts owning exceeding 500K
for liquidation because a petition for liquidation will result in the may apply to be discharged by filing the petition. The petition will
juridical debtor ceding all assets to the liquidation court. entail the debtor's cession of all assets to the liquidation court. So the
This is what happens in liquidation: debtor will part all assets in exchange for a discharge.
Q: What is a discharge?
• Let's say you have a debtor who has assets that are less than the
liabilities. Assets are 500M and liabilities are 1B. If you have this, in • A: Its a complete release from the liabilities.
liquidation, if the debtor files for voluntary liquidation, he will have to So let's say you have a debtor who has assets worth 1M and liabilities worth 30M. If the
cede the 500M and without getting anything in return. debtor files a petition for voluntary liquidation and gets a discharge, there is a shortfall of
Q: What does not getting anything in return mean? 29M. The 29M will be completely wiped out and the debtor will start fresh. So if there is a
• A: If its an individual debtor, the debtor starts fresh meaning the discharge by the liquidation court, then there will be a complete release from this obligation.
debtor will get a discharge. Here for a juridical debtor, there will be • That is why there is a benefit to an individual debtor.
liquidation but the liabilities remain so there is no point. But of Week 16 Part 03 Melo, Katrina
course this is juridical person so you can only run after the assets. Of course a potential issue here is they can use remember did you take that up
Q: But lets say the corporation has good will even if it is in financial distress in oblicon, compensation?
then everything will be lost, you dont get to retain anything. So it doesnt make • Wherein there’s a court decision saying taxes are not debts, they may
sense to go out right to liquidation. So what do you do? use that one. But generally it says debts I think when they say debts
• A: You try for rehabilitation. You get to preserve the asset and in the under the FRIA it means liabilities. So it can cover taxes. Under the
meantime find a way to utilize the resources through the old insolvency law, a debtor can avail of the discharge only once
rehabilitation proceedings. every five years, maximum of two availments. Here, it’s limitless,
Liquidation can also be filed by the creditor. This time the creditor should be you can do it every year actually so every year you go to the mall then
at least 3 and the claim should at least by 1M or at least 25% of the subscribed there are guys giving out credit cards, you apply you total one million,
capital stock, whichever is higher. you max out the cards and then apply for a discharge. You can get a
If you have liquidation, more often that not, it will be initiated by the creditors. discharge under 103 and you will start fresh again of course it will
If the juridical debtor has assets, it will not be in the interest of the debtor to reflect on your credit history, but you’re free.
go directly to liquidation. If the owners of the juridical debtor wants to Is there a criminal liability if you don’t pay your credit card?
preserve its assets then liquidation will not be an option. • No. See so you can do that. You can be liable for estafa of course. So
INSOLVENCY OF AN INDIVIDUAL DEBTOR now this one this is beneficial to individuals in financial distress in
fact if lets say people who will ask me you just don’t pay if you don’t
Section 103. Application. - An individual debtor whose properties are not have assets because if you have assets you duke it out with your
sufficient to cover his liabilities, and owing debts exceeding Five hundred creditors because you want to preserve assets but if you do not have
thousand pesos (Php500,000.00), may apply to be discharged from his debts assets lets say you have this situation, might as well forego the 1 M.
and liabilities by filing a verified petition with the court of the province or city What can you do with 1 M when you have this complete release from
in which he has resided for six (6) months prior to the filing of such petition.

the 30M liability, then you start fresh so that’s the important one
(2) that the claims represented by said majority vote amount to at least
here, sec 103.
threefifths (3/5) of the total liabilities of the debtor mentioned in the petition;
Of course there is a remedy for an individual debtor called the suspension of
and
payments. Suspension of payments is not equivalent to the stay or (e) After the result of the voting has been announced, all protests made against
suspension order in the Rehab proceedings. It’s not also equivalent to the the majority vote shall be drawn up, and the commissioner and the individual
suspension of payments under PD 9028 because suspension of payments debtor together with all creditors taking part in the voting shall sign the
under PD9028 is equivalent to a stay or suspension order under the FRIA. affirmed propositions.
• In the suspension of payments, you have a debtor who is solvent, No creditor who incurred his credit within ninety (90) days prior to the filing
assets are more than liabilities, but not liquid, meaning the debtor of the petition shall be entitled to vote.
cannot comply with obligations as they mature because they have
• In sec 97, there should be a meeting of the creditors.
money problems. So a creditor can file a petition for suspension of
payments. The suspension of payments will not affect secured • To have a quorum you have to have 3/5 of the total liabilities should
creditors. So it’s not really a viable alternative. So let’s say you’re a be present.
debtor. You want to ward off actions by your creditors, this one is • Just to illustrate, you have lets say creditors. Their total for unsecured
not a good alternative. Because first it will not bind secured creditors. creditors is 100. Lets say you have 100 individuals. The total claim of
Secured creditors can proceed not withstanding a suspension of 1 has a claim of 10M, another one has a claim of 10M, and 98 have
payments order under this chapter 6. And theres another exception, claims of 100K each. So that will amount to 29M 800K. So you have
that’s just claims of creditors against claims for labor maintenance, 98 persons with a claim of the 100K. Now the quorum will require,
funerals. The big issue here will be the secured creditors. Aside from for quorum purposes, you have a meeting of creditors it should be
that, why is this useless? The suspension of payments will require 3/5 of the 98.
concurrence by the creditors. You have a vote requirement you can For the approval, what’s required?
find that in Sec 97. • For the concurrence by the creditors, what’s required is 2/3 of the
creditors and the 2/3 should be 3/5 of the total liabilities. In order to
Section 97. Creditors' Meeting. The presence of creditors holding claims beat this 3/5, roughly 18 Million is required.
amounting to at least threefifths (3/5) of the liabilities shall be necessary for So if the two creditors holding ten million each will vote in favor of
holding a meeting. The commissioner appointed by the court shall preside suspension of payments, we will have an approved suspension of payments?
over the meeting and the clerk of court shall act as the secretary thereof,
• No because you need 2/3 in number meaning at least 67 of the
subject to the following rules:
creditors and 3/5 of the total. You will need the concurrence of, if
(a) The clerk shall record the creditors present and amount of their respective
these two will concur you will need at least 65 more from the 98. So
claims;
the first 2/3 of the creditors means number of creditors irrespective
(b) The commissioner shall examine the written evidence of the claims. If the
of the claim or liability. The 3/5 refers to the liabilities.
creditors present hold at least threefifths (3/5) of the liabilities of the
As I said, this is not a good remedy, it’s useless. You don’t have to go to court
individual debtor, the commissioner shall declare the meeting open for
for this. If you have a solvent debtor but illiquid, it may be easier to deal with
business;
creditors extrajudicially. The secured creditors can still go after the debtor and
(c) The creditors and individual debtor shall discuss the propositions in the
normally that’s the problem because they can go after assets of the debtor
proposed agreement and put them to a vote;
assets used in the business.
(d) To form a majority, it is necessary:
(1) that twothirds (2/3) of the creditors voting unite upon the same • 2/3 in number, let’s say you have 100 individuals you need 2/3 of the
proposition; and individuals so you say 67 creditors and the 67 creditors should
represent at least 3/5 or around 18 million of total liabilities. That’s
why if you have two creditors with 20 million, concurring, you will
comply with the 3/5 but not with the 2/3. So for there to be
compliance, of the 98 you will need 65 to go with the other two. If Board and shall have the power to overrule or revoke the actions of the
theres a stipulation then you now apply the rules on concurrence and previous management and board of directors of the bank or quasi-bank.
preference of credits. Remember this is an example of that The conservator should be competent and knowledgeable in bank operations
appropriate proceeding where the concurrence and preference of and management. The conservatorship shall not exceed one (1) year.
credits will be relevant. The conservator shall receive remuneration to be fixed by the Monetary Board
No foreclosure shall be allowed for a period of 180 days this is irrelevant in an amount not to exceed two-thirds (2/3) of the salary of the president of
because if you have liquidation the secured creditors will get priority over the institution in one (1) year, payable in twelve (12) equal monthly payments:
certain assets. If there’s a stipulation you just distribute in accordance with the Provided, That, if at any time within the one-year period, the conservatorship
rules on concurrence and preference of credits. is terminated on the ground that the institution can operate on its own, the
conservator shall receive the balance of the remuneration which he would have
Section 103. Application. An individual debtor whose properties are not
received up to the end of the year; but if the conservatorship is terminated on
sufficient to cover his liabilities, and owing debts exceeding Five hundred
other grounds, the conservator shall not be entitled to such remaining balance.
thousand pesos (Php500,000.00), may apply to be discharged from his debts
The Monetary Board may appoint a conservator connected with the Bangko
and liabilities by filing a verified petition with the court of the province or city Sentral, in which case he shall not be entitled to receive any remuneration or
in which he has resided for six (6) months prior to the filing of such petition.
emolument from the Bangko Sentral during the conservatorship. The expenses
He shall attach to his petition a schedule of debts and liabilities and an
attendant to the conservatorship shall be borne by the bank or quasi-bank
inventory of assets. The filing of such petition shall be an act of insolvency. concerned.
• As can be gleaned from the last section of 130 there is a possibility The Monetary Board shall terminate the conservatorship when it is satisfied
that if the liquidation proceedings fail the secured creditors can go that the institution can continue to operate on its own and the conservatorship
after the relevant collaterals. is no longer necessary. The conservatorship shall likewise be terminated should
the Monetary Board, on the basis of the report of the conservator or of its
NEW CENTRAL BANK ACT OF 1993 own findings, determine that the continuance in business of the institution
Let’s now go to the special law for banks. The FRIA does not apply to certain would involve probable loss to its depositors or creditors, in which case the
entities specially banks and insurance companies. provisions of Section 30 shall apply.
So what are the remedies of a bank in financial distress?
There are three remedies under a bank in financial distress under the law: CONSERVATORSHIP
• Conservatorship, • Sec 29 of RA 7653 provides how the conservatorship may be
• Receivership, initiated. With respect to banks or quasi-banks under the jurisdiction
• Liquidation of the BSP, periodically they submit reports and they are examined.
So you just have an additional layer compared to FRIA – conservatorship. There are periodic examination of these banks.
SEC. 29. Appointment of Conservator. Whenever, on the basis of a report • On the basis of a report submitted by an examining department the
submitted by the appropriate supervising or examining department, the monetary board may place a bank/quasi bank under conservatorship.
Monetary Board finds that a bank or a quasi-bank is in a state of • The ground is there is a state of continuing inability or
continuing inability or unwillingness to maintain a condition of liquidity unwillingness to maintain a condition of liquidity adequate to
deemed adequate to protect the interest of depositors and creditors, the protect the interests of depositors and creditors.
Monetary Board may appoint a conservator with such powers as the What’s the requirement for a conservator?
Monetary Board shall deem necessary to take charge of the assets, liabilities, • A conservator should be competent and knowledgeable in the
and the management thereof, reorganize the management, collect all monies banking system. And there’s a maximum term for the
and debts due said institution, and exercise all powers necessary to restore its conservatorship – 1 year. And this is business because the
viability. The conservator shall report and be responsible to the Monetary conservator will be taking control of the management of the bank,

there should be compensation so the law provides the compensation • If you trade shares in the stock exchange through a broker and the
– the fee of the conservator should not exceed 2/3 of the salary of broker bellied up so you have a claim part of that can be paid by the
the president for one year. And the compensation will be equal in 12 SIPF it’s the counterpart of the PDIC. So if a securities market
equal monthly payments – no bonus, no 13th month pay. participant that is placed under receivership the fund will be the
• However if the conservator is able to turn around the operations of preferred receiver. But under this law it’s automatic nobody can be a
the bank, the conservator gets the balance as a reward. receiver except the PDIC because most likely the PDIC will be the
Take note of the sentence in the 3rd par. The monetary board may appoint a substantial creditor because the PDIC will have to pay the creditors
conservator connected with the BSP in which case he shall not receive any up to 500K each maximum. Before, this is given to different persons
remuneration or payment from the BSP. who made money, in fact banks in financial distress before still have
So why will you do it? cases against receivers who somehow made money out of the
• Of course the monetary board can terminate the conservatorship financial problems. To address that issue, in case of a receivership, it
before the lapse of the period if it thinks the bank can continue will be PDIC. If it’s a quasi bank it can be anybody with relevant
regular operations or it can convert it to receivership. competence.
• Conservatorship is rarely resorted to by the BSP because if you place Now a receiver under this law is the same as a receiver under the FRIA. It will
a bank under conservatorship it will just alarm the creditors and take charge of the assets and operation and management of the bank.
depositors so normally the BSP will go directly to receivership not Because this is a bank, it’s stricter what’s the minimum to approve the rehab
conservatorship. For small banks it’s possible for big banks most plan?
likely it will just ripen into receivership so might as well go directly to • 1 year here the receiver has 90 days to determine whether the
receivership. institution may be rehabilitated which means time is of the essence to
• Conservatorship is exclusively decided by the monetary board. There answer the question do we continue with the receivership or do we
is no court intervention unlike the proceedings under the FRIA. just liquidate.
• So if the receiver decides that there can be no rehabilitation, it can
RECEIVERSHIP report to the monetary board and the monetary board can direct the
Now, receivership this is again based on a report by the relevant supervising filing of liquidation proceedings.
examining department of the BSP and these are the grounds: • This is the point where the court will be involved. So in liquidation,
• Unable to pay its liabilities as they become due in the ordinary course conservatorship, receivership they’re exclusively within the powers of
of business meaning illiquidity (excluded in this is a bank run because the monetary board of the BSP.
of panic) • The monetary board = Board of Directors in a corporation. The
• Has insufficient realizable assets as determined by the BSP for its receiver will now file a petition for liquidation with the relevant court
liabilities: practical insolvency and there will be a liquidation plan. Again the PDIC will be part of
• Cannot continue in business without involving probable losses to its this liquidation plan as a major creditor.
depositors or creditors: judgment call of monetary board based on Under Sec 29, normally when you have a bank in financial distress so there’s a
the evaluation of the relevant supervising or examining department receiver the incentive of the bank in financial distress, the owners in particular
• Has willfully violated a cease and desist order issued under Sec 37 of would be to challenge the order of the BSP. It provides here that the actions of
the law. the monetary board under Sec 29 the conservatorship receivership, liquidation
Who will be the receiver? may not be restrained or set aside by the court except of course by petition on
• The receiver will be the PDIC. certiorari and the petition should be filed by stockholders of record
representing majority of the capital stock of the corporation within ten days
• When you’re dealing with a securities market participant such as a
from receipt of the directive for receivership liquidation or conservatorship.
broker placed under receivership normally the receiver will be the
investors protection fund because they will pay. LIQUIDATION

Sec 31 if there’s liquidation the court will just follow the concurrence and were previously operating: Provided, That whatever proceeds may be realized
preference of credits. There may be a liquidation plan but the liquidation plan from such award shall be subject to the appropriate exclusive disposition of
must be consistent with the rules on concurrence and preference of credit. the Monetary Board.
SEC. 33. Disposition of Banking Franchise. _ The Bangko Sentral may, if Sec 33 – Among assets that may be part of liquidation is the banks franchise.
public interest so requires, award to an institution, upon such terms and The BSP may award to an institution the banking franchise of a bank under
conditions as the Monetary Board may approve, the banking franchise of a liquidation to raise additional funds.
bank under liquidation to operate in the area where said bank or its branches

Week 17 Deposit & Warehouse Receipts Law

November 29, 2017
Week 17 Part 01 Mondejar, Carl Vincent • You have to pay higher your parking fee if it’s really a deposit since
Deposit is a contract whereby a party, the depositor, entrust property to they have to get insurance, additional security, to fulfill their
another, the depositary for the purpose of safekeeping. The principal purpose obligations.
of a deposit should be safekeeping. If it is otherwise, it may be another A deposit as a contract has no required form.
contract, like for example if safekeeping is only an incident. • It can be any form, verbal or written.
Let’s say the other party who receives the property has the right to use, what • However, just like a loan or a pledge, a deposit is a REAL contract,
will be that contract? it’s perfected upon delivery.
• If it is gratuitous—commodatum. • But that does not mean that if there’s a contract TO deposit, that
• If it is for a fee—lease. would not be a contract.
Deposit will arise only if the principal objective of the contract is safekeeping. Articles 1970 and 1971 deal with deposit when one of the parties is
• It is possible the depositary may use the thing only for the purpose of incapacitated. These instances pose a tricky issue.
preserving it. If it is for some other purpose, it may be another If a minor entrust the jewelry to the reception of a hotel for safekeeping.
contract. What’s the status of the contract?
Deposit vs. Bank Deposit • VOIDABLE, because one party is incapacitated (minor).
• Deposit is merely for safekeeping. After the party, the minor goes back to the reception and asks for the jewelry
back, that now poses an issue, should the hotel return the jewelry? If the hotel
• Bank deposit is actually a loan, not a deposit contemplated by this
returns the jewelry, and the minor loses it, can the hotel be held liable?
title of the Civil Code. In a bank deposit, the depositor is the lender
and the bank is the borrower. So that’s not the deposit contemplated • YES. Remember when somebody pays to an incapacitated party, the
under this title. payment will be valid only to the extent that benefits the
When you go to a department store and you check your bag with the counter, incapacitated party or that incapacitated party retains it. Of course
is that a deposit? Question there is “is it for safekeeping?” you’re instinct will be to return, but it causes a legal issue, although it
is not practical.
• NO, its not. It’s to keep the store safe from you because you may lift
On the other hand, if the hotel does not return, because of that concern, what
things from the store and store it in your bag that’s why they ask you
will be the consequence?
to deposit your bag. It’s not a contract of deposit, it’s not for
safekeeping. The purpose there is to make sure that the potential • Estafa because the jewelry was received with an obligation to return
shoplifters will not be able to use some bag to bring things out of the and there’s failure to return upon demand that will be estafa.
store. What’s the safest thing to do?
How about parking? • File an action for consignation and consign it with the court, but
• NO, it’s not for safekeeping—it is more of a lease. When you park, nobody will do it.
you use a space, and when you use a valet its only for convenience If you’re the hotel owner what will you do? To pre-empt it?
for parking in that given space. • Do not accept the deposit or ask the parents of the minor before
• From a legal standpoint, it will impose a greater responsibility or accepting the item for deposit otherwise it will be a tricky issue on the
obligation on the part of the depositary because of the deposit date of the return.
transaction and therefore if it is considered a deposit there will be • If it’s the reverse, where its the depositary who is the incapacitated
economic consequences. party, then the depositary will only be liable to the extent of the
benefit to the depositary or as long as the depositary retains the
object.
Week 17 Part 02 Monsanto, Bret Deposit Warehouse Receipts Law

Three (3) principal obligations of a depositary: GR: The depositary may co-mingle GR: The depositary may not co-
1. Safekeeping grain or other articles of the same mingle grain or other articles of the
2. Exercise of due care or due diligence kind or quality. same kind or quality.
• Because the deposit is gratuitous. If not, there is an • Reason: deposit is • Reason: deposit is for a fee
expectation of a greater degree of care. gratuitous (a greater obligation is
3. Obligation to return imposed by law)
Art. 1973—1974 Week 17 Part 03 Paras, Erika Bianca
These articles will remind you of our discussion in pledge. In pledge, how do The depositary cannot use the thing.
you determine the location of pledged property? You stipulate an address and
that will restrict the movement of the pledged property. However, the pledgee • If the depositary has the right to use, except for preservation, then it
may also justify the movement of the property to protect the property in the is a different contract. It’s not a deposit.
exercise of due diligence. We have thesame situation in deposit. Art. 1979
Provides instances where the depositary will be liable for the loss of the thing
General Rule: The depositary cannot deposit the thing with a third person.
even if it was lost through fortuitous event.
Exceptions:
1. There is a stipulation of the parties. • If you go to the enumeration, we’ve encountered a similar provision
2. In the exercise of due diligence in furtherance of safekeeping. before. These technically are not fortuitous events.
Exception to the Exceptions: Appoint an agent (technically still a third o #1: fortuitous event (technically an assumption of risk)
person). o #2: breach of contract
o #3: default
Art. 1975 o #4: breach of contract
Again, this will remind you of a pledge. Here, the depositary who will receive Art. 1981
securities or negotiable instruments, will have the obligation to collect the This is the Pandora’s box provision of deposit.
fruits and the instruments.
General Rule: If the depositary receives a thing for deposit in a sealed
• This can be done only if the instrument are bearer instruments or
container, the depositary cannot open it.
were indorsed in blank. Otherwise, the depositary will have no
Exception: There is an authority given by the depositor, express or implied.
capacity to collect the fruits accruing to the negotiable instruments or
securities. If the sealed container is open on date of return, the depositary is presumed at
• At the very least, if the depositary is the contact point of the fault.
information of the accrual of interest and other fruits, the only • Reason: The depositary has control over the thing deposited.
obligation of the depositary will be to inform the depositor of the • The depositary will now have the burden of showing otherwise—that
accrual on the fruits. it happened through a fortuitous event, or through acts beyond the
Use of a safety deposit box is actually a lease, it’s part lease and part control of the depositary.
safekeeping. If the depositary has suspicions as to the contents, will that justify the opening?
• The bank or depositor has no control over the access to the box. The • No, mere suspicion is not an authorization.
bank cannot access the contents while the depositor cannot enter the If the depositary found contraband inside the container. Can that be used as
premises without the cooperation of the bank. evidence against the depositor?
• The depository in using a safety deposit box may not have that • Yes, because it was done by a private person, not by the State. The
obligation of collecting the fruits because the depositary may never depositary can report it, the depositary will have a civil liability, but
have access to the contents of the box. the information will be used against the depositor.
Art. 1976

• What should the depositary do is go to the police, report it, so that o The safest thing to do is interpleader, consign the thing in
will be the excuse. If it’s opened, well, the police opened it because of court, but not the most practical.
suspicion. • There’s a Civil Code provision saying that if the depositary becomes
If somehow the sealed container is open through no fault of the depositary, aware that the property is stolen and the depositary knows the
the depositary has the obligation to keep confidential the contents. There is probable owner, the depositary shall inform, and if there’s no action
an expectation of confidentiality. taken within a certain period, a 30-day period, the depositary will be
free to return to the depositor the thing deposited without incurring
• If you deposit an object with the depositary, it’s not in a any liability. But it doesn’t really answer the question.
container, there is no expectation of confidentiality. Obligations of the depositor
• If there is a sealed container, there is an expectation of 1. Expenses for preservation
confidentiality. • If the deposit is gratuitous, the depositor is obliged to reimburse
Obligation to Return the depositary for expenses made for preservation.
General Rule: The depositary has an obligation to return. (Reason: the • If it’s onerous, the law assumes that the fee paid to the depositary
deposit is gratuitous.) includes those expenses unless the parties stipulate otherwise.
Exceptions: o You factor in always the other costs whether a deposit or
(1) When the depositor has unpaid fees. lease so you don’t lose in the transaction and you have a net
(2) If there are legal restrictions (like a court order enjoining the return or amount you think you should receive.
attaching the property deposited). 2. Loss or damage that the thing deposited may have caused the
Let’s say on the date of the return, the depositary asked the depositor to give depositary.
two (2) valid IDs issued by the government—license and passport. Then show • This is similar to the hidden defect provision in commodatum.
me the receipt covering the deposit. Depositor invokes the article. Depositor • If the depositary suffers any loss from the nature of the object,
says, you cannot require me to prove my ownership. Is depositor correct? the depositary will be compensated but he liability by the depositor
• No, because that is not proof of ownership. It’s proof of identity. will depend on whether the depositor or depositary has the
That the party claiming the deposited thing is really the depositor. It’s information.
not proof of ownership. o If the depositary knew the information, then the
Where return should be made depositary cannot claim. He could have taken the necessary
General Rule: Return should be made where the thing deposited may be. precaution i.e., inform the depositary.
Exception: There is a stipulation by the parties. § The depositor will be liable assuming that the
Week 17 Part 04 Sablan, Justine Abigail depositary could not have known with the exercise
What if two parties are claiming? What should the depositary do? of due diligence.
• File for an action for interpleader. Let the parties establish their If the depositor does not pay whatever is due the depositary, the depositary
claims in court. may retain the thing by way of legal pledge.
o But that would be costly for the depositary. In practical Recap: What is the main distinction of legal pledge from conventional pledge?
terms, you don’t listen to the information. The more • Notice requirement and period within which foreclosure should be
information you have, it will complicate your life. Just insist made.
on dealing with the depositor. So, might as well say there’s Two (2) categories of deposit:
information on theft, but I did not know that information, I 1. Judicial
acted on information as per contract and I acted in good 2. Extrajudicial
faith. a. Voluntary or conventional
b. Necessary deposit
Necessary Deposit What is required only by the law is the guest should follow the precautions
Four (4) kinds of necessary deposit: given by the hotel and the guest declares the effects brought in the hotel.
1. Deposit made in compliance with a legal obligation
When you say declaration, does that mean that the guest should bring an
2. Deposit during a calamity inventory of the effects and then, let’s say upon checking in saying, “by the
3. Deposits made by travelers in hotels and inns way these are my effects?” Will that be the notice required?
4. Deposit with common carriers when travelling (Note: this kind is not
covered by the Civil Code provision) • No. As long as you brought them in, you don’t have to declare
anything. That will be sufficient.
Week 17 Part 05 Salvador, Jheraldin
If the guest brought in effects and used the safety deposit box,
If you’re forced to check, it’s a necessary deposit. notwithstanding a notice saying, “Valuables should not be placed in this safety
Deposit made during a calamity. deposit box but rather should be entrusted with the reception or the
A deposit done during a calamity must always be for safe keeping still. If it’s concierge.” Will the hotel be liable?
for gain or some other purpose, it’s not a deposit. • Yes, because the fact that somebody was able to enter you room,
Let’s say during a fire some students took out this old tv sets and brought there must be negligence there somehow. There may be defense
them to their dorm. Will that be a deposit? under the necessary deposit, by saying the instruction was not
• No. Most likely that’s looting. It doesn’t matter it’s not a necessary followed, but there will still be a liability whether under necessary
deposit. deposit or under general rules on negligence, liability based on
Deposits made by travels in hotels and guests. negligence.
What will the hotel include? What if instead the effect of the guests were taken at gunpoint. Will the hotel
• All facilities, including parking anything forming part of an be liable? Because the law says, the act of thief or robber using arms or using a
establishment will be covered by the deposit. resistible force shall be deemed force majeure. So will the hotel owner be
• A guest bringing in a for example, a car, parking a car in the hotel. liable?
That would be a deposit under this provision of law. • Maybe it will be a defense under necessary deposit but other general
Why is that important to make that distinction? rules in liability or negligence, the hotel will be liable.
• Because if it’s a deposit, the hotel will have a greater responsibility. Week 17 Part 06 Soriano, Airish
• So notices posted like “The hotel shall not be liable for any loss or Let’s say you have a hotel in Marawi, and before the war in Marawi there were
damage in the vehicles in the parking area.” That won’t work if it’s a already reports that it was a terrorist infested area. But in spite of that you’re
necessary deposit that will be the void imposition. just maintaining 2 guards, one at the back and one in front, and a band of
Who is a guest or traveler? robbers entered the hotel and robbed all the guests.
• There is no jurisprudence on what is the extent of the coverage of the • That may be a defense in the case of a liability under necessary
term traveler and the term guest. deposit, that will not be a defense under the general liability based on
• Traveler, maybe, let’s say, somebody who got a room in a hotel. negligence because the hotel owner will be negligent in that case
because notwithstanding the reports/security concerns, there was a
• If somebody gets a room, in a hotel, brought in effects including
failure of necessary precaution and measures.
parking a car in the hotel. That’s a necessary deposit. The effects
brought in by the guest will be covered by the provisions on • Of course it is a different matter if it is like the Oakwood takeover,
necessary deposit. that’s clearly force majeure. There’s nothing you can do about it.
Sequestration or Judicial Deposit
• As long as you pay, the hotel gets business from you, you ought to be
The object of deposit is ORDINARILY a personal property. But if you are
a guest, treated as a guest but there is no jurisprudence. It may be
asked, can a deposit have real property as its object? The answer is YES,
limited later on to just one with a room. So, if you just use parking
because there are two kinds of deposit—Judicial and Extrajudicial. Judicial
and you pay there, you may not be considered.
deposits can cover real property. Of course it does not prevent you from

having a deposit involving safekeeping of certificates of title. It can be a o That’s why in Section 2 it just says there that any omission
subject of a voluntary deposit because what is being kept safe is the document of the particular will only mean liability of the
of the underlying property. So when you have a judicial deposit, it basically warehouseman to any party prejudiced by that omission. It
places the property under the control of the court, like when you do a will not take the receipt out of the coverage of the
consignation as an incident or as an interpleader. That will be a judicial deposit: Warehouse Receipts Law.
properties placed under the control of the court. • The recourse of the warehouseman is to demand from the original
WAREHOUSE RECEIPTS depositor.
Week 17 Part 07 Soriano, Bianca Isabel
This law is pretty useless. The warehouseman can include anything in the receipt, as long as it is:
Purpose of the law: The law is meant to facilitate transactions involving 1. Not contrary to law, particularly the Warehouse Receipts Law
goods covered by the receipt. Instead of directly transacting the goods, the (following the rule on autonomy of contracts)
parties can just transact using the receipt. So you pass the title of the goods by 2. Should not reduce or run contrary to the obligation of the
transacting with the receipts. warehouseman to keep the thing safe.
• There is a premium given in the receipt under the WRL as can be There are two (2) kinds of receipt:
gleamed on the title itself. 1. Negotiable
How do you trigger the application of the law? i. Bearer receipt
• There’s only one requirement to trigger the provision of the law, the • Negotiated by mere delivery
receipt must be issued by a warehouseman. ii. Order receipt
Who is a warehouseman? • Negotiated by indorsement and delivery
• One who accepts deposit for a fee as a business. 2. Non-negotiable
• So as long as the receipt is given by someone doing warehousing, • It can still be transferred by sale, donation, assignment, or
then the receipt will be under the WRL and it will trigger its some other mode of conveyance.
application of the law. Sections 6 and 7. They emphasize the obligation of the warehouseman to
Information that must be stated by the receipt, such as: (Section 2) diligently discharge his obligations in the issuance of a receipt. The following
• Location of the warehouse are:
• Serial number of the receipt • Mark a duplicate as duplicate
• Statement whether the goods be delivered to order, or to bearer, or o Reason: Only the original should be used in transacting. If
to a specified person the duplicates are not properly marked, it can be used to
• Other details defraud a party dealing in good faith in acquiring a worthless
duplicate.
Take note that these details and particulars under Section 2 are not required
for the purpose of triggering the application of the law. • Mark a non-negotiable as non-negotiable
o Failure by the warehouseman will render him liable to a
• They are only there to define the obligation of the warehouseman. party dealing in good faith.
• If there is/are omission/s, the warehouseman shall be liable to any o However, there is a provision there, it says “supposing” –
person prejudiced by that omission. that’s the operative term in that clause. “Supposing it could
Example: The fees of the warehouseman is omitted in the receipt, and the be negotiable”. So there must be some indication in the
receipt is negotiable. receipt that it is negotiable.
• The warehouseman cannot demand payment from party that is § Example: the receipt says “The goods shall be
unaware of the fees. delivered to X and X alone. For the avoidance of

doubt to no one else, only X.” It’s not marked Summary: Requirements for a valid demand for return:
non-negotiable. 1. Offer to pay the warehouseman’s lien
§ The third party can no longer claim negligence of 2. Offer to surrender the receipt
the warehouseman because just by exercising of 3. Offer to sign the acknowledgement receipt
diligence—ordinary diligence, that person should Summary: Instances when warehouseman will lose lien upon the thing:
know that it is a non-negotiable receipt, because 1. Upon delivery; or
the receipt on its face says “goods shall be 2. Upon refusal, without justifiable cause, to return the thing
delivered to X and no one else.” Instances when a warehouseman may refuse to return the thing:
o Assumes that somehow there is a basis for a party to 1. Two (2) or more claimants
SUPPOSE or to infer that the receipt is negotiable. If it’s
• Same remedy as in deposit, file an action for interpleader.
totally clear that it’s non-negotiable, notwithstanding the
2. Court order
absence of the marking, the warehouseman may avoid
liability. • The attachment should be on both the goods and the
receipt—or even the receipt only, because its stops
• Safekeeping, taking care of the thing with due care, or some other
negotiation or transfer (Section 25).
standard by contract.
To whom delivery is to be made.
• Return the thing.
• The warehouseman should deliver to the creditor.
o Warehouseman as an obligation of the depositor has offered
o The one entitled to the delivery based on the receipt or
to pay the warehouseman’s lien.
somebody acting for or on their behalf.
§ A warehouseman’s lien arose from an unpaid fee
If the warehouseman delivers to the wrong person, what would be the liability?
(deposit of the goods + fee) of the depositor.
o The warehouseman can enforce the lien not only against the • The liability will be losses conversion is equivalent to estafa. Because
goods covered by a specific receipt but also on other goods again, the warehouseman delivers to the wrong person, therefore,
of the depositor with the warehouseman (Section 28). tend to return the thing received in trust.
§ However, the warehouseman may enforce the lien Whenever the warehouseman returns the goods covered by the receipt, the
on other goods of the depositor if the depositor warehouseman should cancel in whole or in part the receipt.
has authority to pledge the goods. Based on the structure of the warehouse receipts law, parties deal only with the
§ Example: If D (depositor) deposited the goods in receipts so if the goods were already delivered in whole or in part, the receipts
behalf of X, the warehouseman may enforce lien should be cancelled completely or partly.
on such property if there was a Special Power of Alteration of receipts.
Attorney to act on behalf of X. If somebody altered it without the authority of the warehouseman or without
o The warehouseman will lose the lien upon delivery. the participation of the warehouseman, the liability of the warehouseman will
o If it is a negotiable receipt, the warehouseman must require always remain based on the original issued receipt. The alteration will be the
surrender of the negotiable receipt upon the return of the responsibility of whoever altered it.
thing. Co-mingling of goods.
§ Reason: The warehouseman will be liable for Deposit Warehouse Receipts Law
anyone who transacted with the receipt on the GR: The depositary may co-mingle GR: The depositary may not co-
premise that the goods were still with the grain or other articles of the same mingle grain or other articles of the
warehouseman. kind or quality. same kind or quality.
Week 17 Part 08 Soriano, Glyssa Camille • Reason: deposit is • Reason: deposit is for a fee
Of course, the claimant of the goods must be willing to sign an gratuitous (a greater obligation is
acknowledgement receipt.
imposed by law) • As compared to the Negotiable Instruments Law where it will

Usual remedies by the warehouseman to collect the claim or amounts depend on what type of holder the third party in good faith is.
owed to him:
1. Specific performance/collection Section 41. A person to whom a negotiable receipt has been negotiated
2. Auction off the goods and apply the proceeds for payment of acquires the title to the goods as the person negotiating the receipt will have or
outstanding debt have the ability to convey.
Warehouse Receipts in connection with concurrence and preference of • If you’re a thief, you have nothing so you convey nothing.
credits Criminal offenses. Again I haven’t seen one prosecuted for violating the
• The goods will be regarded like a pledge. Remember, if the depositor warehouse receipts law. But you might become the first. So you have to know
does not pay the depositary, the depositary can retain the thing by that there are criminal offenses under the Warehouse Receipts Law. If you will
way of pledge. It can be treated as a legal pledge. have an opportunity to prosecute an offense under this law
Week 17 Part 09 Tamayo, Ryan
Negotiation.
Two (2) ways of negotiating a negotiable receipt:
1. Bearer receipt: by delivery.
2. Order receipt: by indorsement and delivery.
Example: A warehouseman issues a bearer receipt
to depositor. Depositor can negotiate by either delivery or indorsement plus
delivery. Depositor chooses to indorse and then deliver to X.
How should X negotiate?
• X can no longer deliver by delivery. In warehouse receipts, if its
specially endorsed, X now will have to endorse, X cannot negotiate
by mere delivery.
• As compared to Negotiable Instruments Law where a special
indorsement of a bearer instrument does not affect the effectivity of
negotiation by mere delivery.
Example: In continuation of the earlier example, the receipt negotiated to X
was stolen by T. T endorsed it to Y, and then Z. These two, they are innocent
purchasers for value, transacted in good faith and will pay good money for the
receipt.
Can Z claim against the warehouse man? Assuming that all subsequent
negotiations were proper.
• Under the Warehouse Receipts Law, the moment there is theft, any
innocent purchaser for value can no longer claim.
o Reason: Under the Warehouse Receipts Law, somebody
negotiating a receipt can only transfer what that person has.
So if T has no right to the receipt, T transferred nothing.
o Even if these two parties acted in good faith they acquired
nothing as against the warehouse man. Of course they will
have recourse against T but not against the warehouse man.


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WEEK 04 FREE CUT 41 WEEK 09 MIDTERMS WEEK 01 92

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OCTOBER 18, 2017 94 WEEK 16 PART 03 MELO, KATRINA 138

WEEK 13 HOLIDAY 109

WEEK 14 FRIA 110

WEEK 15 HOLIDAY 128

WEEK 16 FRIA & NEW CENTRAL BANK ACT 129

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And that is an example of constructive delivery to? • Student: It can be.

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• Student: To show he was not at fault. • Student: No, sir.

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What is the interest rate? • Student: Valid if in writing.

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Example: Q: What’s the difference between Solidbank vs PNB v. Manalo?

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9 [Section 9.11, page 33] 11 [page 35-37]

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• Student: The Court said that Rosalina is considered an JSP: Yes.

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Week 04 FREE CUT

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Week 05 Guarantee and Suretyship

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Week 06 Mortgage and Pledge

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• Student: File a suit So what is free disposal?

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