Addendum to Sectrans

ADDENDUM TO SECTRANS

PROVISIONS COMMON TO PLEDGE AND MORTGAGE (Art 2085-2123)

PLEDGE (definition) – A contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

Essential Requisites to Contracts of Pledge and Mortgage

  1. constituted to secure the fulfillment of a principal obligation
  2. pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged
  3. the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose
  4. cannot exist without a valid obligation
  5. when the principal obligation becomes due, the thing in which the pledge or mortgage consists may be alienated for the payment to the creditor.
    • third persons not parties to the principal obligation may secure the latter  by pledging or mortgaging their own property
    • but may be constituted to secure fulfillment of a voidable or unenforceable or natural obligation
    • in case of pledge, the thing pledged must be delivered to the creditor or to a third person by common agreement
    • in case of mortgage, as a general rule, the mortgagor retains he possession of the property mortgaged

Kinds of Pledge:

  1. Voluntary or conventional – created by agreement of the parties
  2. Legal –  created by operation of law

Characteristics of Pledge:

  1. real  – perfected   by delivery
  2. accessory  – has no independent existence of its own
  3. unilateral – creates obligation solely on the part of the creditor to return the thing subject upon the fulfillment of the principal obligation
  4. subsidiary – obligation incurred does not arise until the fulfillment of the principal obligation

Cause or Consideration in Pledge

  1. principal obligation – in so far as the pledgor is concerned
  2. compensation stipulated for the pledge or mere liberality of the pledgor – if pledgor is not the debtor

Important Points:

  1. future property cannot be pledged or mortgaged
  2. pledge or mortgage executed by one  who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it.
  3. mortgage of a conjugal property by one of the spouses is valid only as to ½ of the entire property
  4. in case of property covered by Torrens title a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further.
  5. pledgor or mortgagor has free disposal of property
  6. thing pledged or mortgaged  may be alienated.
  7. creditor not required to sue to enforce his credit
  8. pledgor or mortgagor may be third person

PLEDGE

MORTGAGE

Constituted on movables Constituted on immovables
Property is delivered to the pledgee, or by common consent to a 3rd person Delivery not necessay
Not valid against 3rd persons unless a description of the thing pledged and  the date of the pledge appear in a  public instrument Not valid against 3rd persons if not registered

Right of Creditor where Debtor fails to Comply with his Obligation

  1. creditor is merely entitled to move for the sale of the thing pledged or mortgaged with the formalities required by law in order to collect
  1. creditor cannot appropriate to himself the thing nor can he dispose of the same as owner.

Prohibition against pactum commissorium

  1. stipulation is null and void –  stipulation where thing  or mortgaged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed
  2. Requisites of pactum commissorium:
    1. there should be a pledge or mortgage
    2. there should be a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment
  3. Effect on Security Contract

-nullity of the stipulation does not affect validity and efficacy of the principal  contract.

Permissible Stipulations with regard to pactum commissorium:

  1. subsequent modification of original contract by agreement of parties
  2. subsequent voluntary act of the debtor making cession of property in payment of the debt
  3. promise to assign or sell said property in payment of the obligation if, upon its maturity, it is not paid
  4. authorizing the mortgagee to take possession of the mortgaged premises upon the foreclosure of a mortgage
  5. if after the first and second auctions, the thing is not sold

Important Points:

  1. debtor-owner bears the risk of loss of the property
  2. pledge or mortgage is indivisible:
    1. every portion of the property is answerable for the whole obligation
    2. when several things are pledged or mortgaged, all of them are liable for the totality of the debt. Creditor does not have to divide his action by distributing the debt, among the various things pledged or mortgaged
    3. the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinction of the pledge or mortgage nor can the creditor’s heir who has received his share of the debt return the pledge or cancel the mortgages if the debt is not yet completely satisfied
    4. EXCEPTIONS  to the rule of INDIVISIBILITY:
  1. where  each one of several things guarantees determinate portion of credit
  2. where only portion of loan was released
  3. where there was failure of consideration
  1. rule that real property, consisting of several lots should be sold separately, applies to sales in execution, and not to foreclosure of mortgages
  2. the mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole
  3. contract of pledge or mortgage may secure all kinds of obligation, be they pure or subject to a suspensive or resolutory condition
  4. a promise to constitute pledge or mortgage creates no real right, only a personal right biding upon the parties, only right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet
  5. under RPC, estafa is committed  by a person  who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same knowing that the real property is encumbered shall dispose of the same as unencumbered. It is essential that fraud or deceit be practiced upon the vendee at the time of the sale.

Provisions Applicable Only to Pledge

  1. transfer of possession to the creditor or to third person by common agreement is essential in pledge

– ACTUAL DELIVERY is important

– CONSTRUCTIVE delivery or symbolic delivery of the key to the warehouse is sufficient to show that the depositary appointed by common  consent of the parties was legally placed in possession.

  1. all movables within commerce of men may be pledged as long as susceptible of possession
  2. incorporeal right, evidenced by:
    1. negotiable instruments;
    2. bills of lading;
    3. shares of stock;
    4. bonds;
    5. warehouse receipts ;and
    6. similar documents

may be pledged. The instruments pledged shall be delivered to the creditor and if negotiable, must be indorsed.

  1. pledge shall take effect against 3rd persons only if the ff appears in a public instrument:
  1. description of the thing pledged
  2. date of the pledge
  3. shall take care of the thing pledged with the diligence of a good father of a family.
  4. has the right to the reimbursement of the expenses made for its preservation is liable  for its loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract, and not due to fortuitous event
  5. may bring the actions which pertain to the owner of the thing in order to recover it from, or defend it against a 3rd person
  6. cannot use the thing without the authority of the owner, and if he should do so, or misuse the thing, the owner may ask that it be judicially or extra-judicially deposited.
  7. may use the thing if it is necessary for the preservation of the thing
  8. may either claim another thing in pledge or demand immediate payment of the principal obligation if he is deceived on the substance or quality of the thing.
  9. cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so
  10. is responsible for the acts of his agents or employees with respect to the thing pledged.
  11. has  no right to use the thing or to appropriate the fruits without the authority of the owner can apply the  fruits, income , dividends or interest earned or produced by the thing pledged to the payment of the interest, and thereafter to the principal of his credit. Unless there is stipulation to the contrary, the interest and earnings of the right pledged and in case of animals, their offsprings are included in the pledge.
  12. may cause public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment or diminution in value of the thing. The proceeds of the auction shall be a security for the principal obligation.
  13. has the responsibility for flaws of the thing pledged.
  14. cannot ask for the return of the thing against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case
  15. is allowed to substitute  the thing which is in danger of destruction or impairment without any fault on the part of the pledgee, with another thing of the same kind and quality
  16. may require that  the thing be deposited with a 3rd person if through the negligence or willful act of the pledgee the thing is in danger of being lost or impaired
  1. thing pledged may be alienated by the pledgor or owner only if with the consent of the pledgee. Ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, butt he latter shall continue in possession
  2. contract of pledge gives right to the creditor to retain the thing in his possession or in that of a third person to whim it has been delivered, until the debt is paid
  3. creditor :
  1. pledgee:
  1. pledgor :

Extinguishment of Pledge

  • If the thing pledged is returned by the pledgee to the pledgor or owner, pledge is extinguished
  • A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish. For t his purpose, neither the acceptance by the pledgor o owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary.
  • If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is prima facie presumption that the thing has been returned by the pledgee
  • If the thing is in the possession of 3rd person who has received it from the pledgor or owner after the constitution of the pledge, there is prima facie presumption that the thing has been returned by the pledgee.

Formalities required Sale by a Creditor if credit not paid in due time:

  1. the debt is due and unpaid
  2. the sale must be at a public auction
  3. there must be notice to the pledgor and owner, stating the amount due, and
  4. the sale must be made with the intervention of a notary public the th
    • The pledgee may appropriate the thing if  after the first and second auctions, the thing is not sold.
    • At the public auction, the pledgor or owner may bid.
    • Pledgor or owner  shall have a better right if he should offer the same terms as the highest bidder
    • Pledgee may also bid, but his offer shall not be valid if he is the only bidder. All bids at the public auction shall ofer to pay the purchase price at once.  BIDS MUST BE FOR CASH. If any other bid is accepted, the pledgee is deemed to have received the purchase price, as far as the pledgor or owner is concerned.

Effect of the Sale of the Thing Pledged

  1. extinguishes the principal obligation whether the price of the sale is more or less than the amount due
  2. if  the price is more than  amount due, the debtor is not entitled to the excess unless the contrary is provided
  3. if the price of the sale is less, neither is the creditor entitled to recover the deficiency. Contrary stipulation is void.
  • After public auction, the pledgee shall promptly advise the pledgor or owner of the result.
  • Any third person who has any right in the thing may satisfy the principal obligation as soon as the latter becomes due and demandable.
  • The right of choice given to the pledgee as to which of the things pledged he shall cause to be sold is limited only by stipulation. After sufficient property has been sold to satisfy the obligation plus interest and expenses, no more shall be sold.
  • A 3rd person who is not a party to the principal obligation may secure the latter by pledging his own property. He has the same as a guarantor and he cannot be prejudiced by any waiver of defense by the principal obligor

Legal Pledges:

  1. Necessary  expenses shall be refunded to every possessor, but only possessor in good faith may retain the thing until he has been reimbursed.

Useful expenses shall be refunded only to the possessor I n good faith with the same right  of retention, the person who has defeated him in the possession having the option of refunding  the amount of the expenses or of paying the increase in value which the thing may have acquired and by reason thereof (art 546)

  1. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.  (art 1731)
  2. The agent may retain the things which are the objects of agency until the principal effects the reimbursement and pays the indemnity. (art 1914)
  3. The laborer’s wages shall be a lien on the goods manufactured or the work done (art 1707).

Special Laws apply to pawnshops and establishment which are engaged in making loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily.

REAL MORTGAGE (Arts. 2124-2131) – It is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated.

Objects of Real Mortgage

  1. immovables
  2. alienable real rights in accordance with the laws, imposed upon immovables

* future property cannot be object of mortgage.

Important Points:

  1. As a general rule, the mortgagor retains possession of the property he may deliver said property to the mortgagee without altering the nature of the contract of mortgage.
  2. It is not an essential requisite that the principal of the credit bears interest, or that the interest as compensation for the use of the principal and the enjoyment of its fruits be in the form of a certain percent thereof.

Kinds of Mortgage:

  1. voluntary
  2. legal
  3. equitable – one which, although it lacks the proper formalities of a mortgage shows the intention of the parties to make the property as a security for a debt

(provisions governing equitable mortgage – arts 1365, 1450, 1454, 1602, 1603, 1604 and 1607).

Essential Requisites of Mortgage

  1. constituted to secure the fulfillment of a principal obligation
  2. pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged
  3. the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose
  4. cannot exist without a valid obligation
  5. when the principal obligation becomes due, the thing in which the pledge or mortgage consists may be alienated for the payment to the creditor.
  6. appears in a public document duly recorded in the Registry of Property to be validly constituted

*legal mortgage – the persons in whose favor the law establishes a mortgage have on other right than to demand the execution and the recording of the document in which the mortgage is formalized.

Incidents of Registration of Mortgage

  1. Mortgagee entitled to registration of mortgage as a matter of right
  2. Proceedings for registration do not determine validity of mortgage or its effect
  3. Registration is without prejudice to better right of third parties
  4. Mortgage deed once duly registered forms part of the records for the registration of the property mortgaged
  5. Mortgage by surviving spouse of his/her undivided share of conjugal property can be registered.

Effect of Invalidity of Mortgage on principal obligation:

  1. principal obligation remains valid
  2. mortgage deed remains as evidence of a personal obligation

Effect of Mortgage:

  1. creates real rights, a lien inseparable from the property mortgaged, enforceable against the whole world
  2. creates merely an encumbrance

Extent of Mortgage

a. the natural accessions

b.to the improvements,

  1. c.    growing fruits
  2. the rents or income not yet received when the obligation becomes due,

e. to the amount of the indemnity granted or owing to the proprietor from the insurers of the property,

  1. f.    in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of  a third person.

Important Points:

  1. Stipulation in mortgage contract including after-acquired properties is valid.
  2. Attachment of lien is retroactive
  3. Stipulation is necessary for mortgage to secure future advancements

Mortgage is a continuing security until the full amount of advances are paid.

  1. Mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law.

a. Alienation or assignment is valid even if not registered. Registration is necessary only to affect 3rd persons.

  1. Creditor may claim from a 3rd person in possession of the property the payment of the part of the credit secured by the property
  2. Stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

Laws governing Mortgage:

  1. New Civil Code
  2. PD 1952
  3. Revised Administrative Code
  4. RA 4882 , as regards aliens becoming mortgages

Foreclosure of Mortgage –    It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given.

Kinds of Foreclosure

  1. judicial
  2. extrajudicial
  • both should be distinguished from execution sale which is governed by Rule 39 of the Rules of Court

Judicial Foreclosure (governed by Rule 68 of Rules of Court)

  1. May be availed of by bringing an action in the proper court which has jurisdiction over the area wherein the real property involved or  apportion thereof is situated
  2. If the  court finds the complaint to be well-founded, it shall order the mortgagor to pay the amount due with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment.
  3. If the mortgagor fails to pay at time directed, the court, upon motion, shall order the property to be sold to the highest bidder at a public auction.
  4. Upon confirmation of the sale by the  court, also upon motion, it shall operates to divest the rights of all parties to the action and to vest their rights to the purchaser subject to such rights of redemption as may be allowed by law
  5. Before the confirmation, the court retains control of the proceedings.
  6. The proceeds of the sale shall be applied to the payment of the:

a. Costs of the sale;

b.Amount due the mortgagee;

  1. c.    Claims  of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and
  2. the balance, if any shall be paid to the mortgagor
  1. Sheriff’s certificate is executed, acknowledged and recorded to complete the foreclosure

Nature of Judicial Foreclosure Proceedings:

  1. quasi in rem action
  2. foreclosure is only the result or incident of the failure to pay debt
  3. survives death of mortgagor

Extrajudicial Foreclosure (governed by Act No, 3135, as amended)

  1. express authority to sell is given to the mortgagee.
  2. authority is not extinguished by death of mortgagor or mortgagee
  3. public sale should be made after proper notice
  4. surplus proceeds of foreclosure sale belong to the mortgagor
  5. debtor has the right to redeem the property sold within 1 year from and after the date of sale
  6. remedy of party aggrieved by foreclosure is a petition to set aside sale and cancellation of writ of possession.

Right of Mortgage to Recover Deficiency

  1. Mortgagee is entitled to recover deficiency
  2. If the deficiency is embodied in a judgment, it is referred to as deficiency judgment.
  3. Action for recovery of deficiency may be filed even during redemption period.
  4. Action to recover prescribes after 10 years from the time the right of action accrues.

Nature of Power of Foreclosure by Extrajudicial Sale

  1. conferred for mortgagee’s protection
  2. an ancillary stipulation
  3. a prerogative of the mortgagee

Note: Stipulation of upset price in mortgage contract is void.

Effect of Inadequacy of Price in Foreclosure Sale

  1. Where there is right to redeem

a. GR: Inadequacy of price is immaterial because the judgment debtor may redeem the property

b.EXCEPTION: the price is so inadequate as to shock the conscience of the court taking into consideration the peculiar circumstances

  1. Property may be sold for less than its fair market value upon the theory that the lesser the price the easier for the owner to redeem.
  2. The value of the mortgaged property has no bearing on the bid price at the public auction, provided that the public auction was regularly and honestly conducted.

Waiver of Security by Creditor

  1. Mortgagee may waive right to foreclose his mortgage and maintain a personal action for recovery of theindebetness.
  2. Mortgagee cannot have both remedies

Note: Foreclosure retroacts to the date of registration of mortgage

Redemption – It is a transaction by which the mortgagor reacquires the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created.

Kinds of Redemption

  1. equity of redemption

–    right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property or confirmation of sale

  1. right of redemption

–    right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt.

Equity of Redemption

  1. exercised before confirmation of sale
  2. second mortgagee acquires only the equity of redemption vested in the mortgagor
  3. taking physical possession not necessary for levy

can be levied upon by means of writ of execution.

  1. remedy of mortgagee to obtain possession is to bring a civil action either to recover possession as a preliminary step to the sale or to obtain judicial foreclosure.

Right of Redemption

  1. may be exercised within 1 year from and after the date of registration of the certificate of sale with the appropriate Registry of Deeds.
  2. if no redemption is made within prescribed period, the purchaser has the absolute right to a writ of possession which is the final process to consummate extrajudicial foreclosure
  3. effect of seasonable redemption is not to recover ownership which was never lost  but the elimination from his title the lien created by the levy or attachment.
  4. sale by the mortgagor to a 3rd person during redemption period transfers only the right to redeem the property and the right to possess, use and enjoy the same during said period.
  5. if sale to a 3rd person is not registered and made without the consent of the mortagee, buyer was not validly substituted as a debtor thus has no right to redeem
  6. if extrajudicial foreclosure if effected with fraud, it is null nad void ab initio.

CHATTEL MORTGAGE (Arts. 2140-2141) – It is a contract by virtue of which a  personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation.

Note: If the movable, instead of being recorded is delivered to the creditor, it is pledge and not chattel mortgage.

CHATTEL MORTGAGE PLEDGE
Involves movable property Involves movable property
Delivery of the personal property is NOT necessary Delivery of the personal property is necessary
Registration is necessary for validity Registration is NOT necessary for validity
Procedure : Sec 14 of Act no 1508, as amended Procedure: Art 2112 of Civil Code
If the property is foreclosed, the excess over the amount due goes to the debtor If the property is sold, the debtor is not entitled to the to the excess UNLESS it is otherwise  agreed or in case of legal pledge
Creditor is entitled to deficiency from the debtor EXCEPT if it is a security for the purchase of personal property in installments Creditor is not entitled to recover deficiency notwithstanding any stipulation to the contrary

Laws governing Chattel Mortgage:

  1. Chattel Mortgage Law, Act No. 1508, as amended
  2. Civil Code
  3. Revised Administrative Code
  4. Revised Penal Code
  5. Ship Mortgage Decree of 1978 (PD 1521) governs mortgage of vessels of domestic ownership

Important points:

The provisions of Civil Code on pledge shall be applicable to chattel mortgage only insofar as they are not in conflict with the Chattel Mortgage Law

 

Subject matter of Chattel mortgage must be described and identified.

Extent of Chattel Mortgage – It is deemed to cover only the property described and not like or substituted property thereafter acquired by the mortgagor and placed in the same depositary as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding.

Effect of Registration

  1. creates real rights
  2. adds nothing to mortgage

Note: Registration of assignment of mortgage is not required

Right of Redemption

  1. when the condition of a chattel mortgage is broken, the ff may redeem:

a. mortgagor;

b.person holding a subsequent mortgage;

  1. c.    subsequent attaching creditor.
  1. an attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it
  2. the redemption is made by paying or delivering o the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale.

Foreclosure of Chattel Mortgage

  1. public sale
  2. private sale – there is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by chattel mortgage.

Period to Foreclosure

  1. After 30 days from the time of the condition is broken
  2. The 30-day period is the minimum period after violation of the mortgage condition for the creditor to cause the sale at public auction with at least 10 days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the obligation.
  3. After the sale at public auction, the right of redemption is no longer available to the mortgagor.

Civil Action to Recover Credit

  1. independent action not required
  2. mortgage lien deemed abandoned by obtaining a personal judgment

Right of Mortgage to Recover Deficiency

  1. where mortgage foreclosed

– Creditor may maintain action for deficiency although Chattel Mortgage Law is silent on this point. Reason is chattel mortgage is only given as a security and not as payment of the debt.

  1. where mortgage constituted as security for purchase of personal property payable in installments

– No deficiency judgment can be asked and any agreement to the contrary shall be void

  1. where mortgaged property subsequently attached and sold

– Mortgagee is entitle to deficiency judgment in an action for specific performance.

Application of Proceeds of Sale

  1. costs and expenses of keeping and sale
  2. payment of the obligation
  3. claims of persons holding subsequent mortgages in their order
  4. balance, if any, shall be paid to the mortgagor, or person holding under him.

CONCURRENCE AND PREFERENCE OF CREDITS (Arts. 2236-2251) –

Concurrence of credit – It implies possession by two or more creditors of equal right or privileges over the same property or all of the property of a debtor.

Preference of Credit – It is the right held by a creditor to be preferred in the payment of his claim above other out of the debtor’s assets.

General Provisions:

  1. the debtor is liable with all his property, present and future, for the fulfillment of his obligations, subjects to exemptions provided by law

–    exempt property:

  1. present property
  2. family home (Arts 152, 153 & 155, NCC)
  3. right to receive support as well as money or property obtained by such support shall not be levied  upon on attachment or execution (Art 205, NCC)
  4. Sec 13, Rule 39, Rules of Court
  5. Sec 118, the public Land Act,( CA No. 141, as amended)
    1. future property

– a debtor who obtains a discharge from his debts on account of insolvency, is not liable for the unsatisfied claims of his creditors with said property (Secs. 68 & 69, Insolvency Law, Act No. 1956

  1. property in custodia legis and of public dominion
  1. insolvency shall be governed by the Insolvency Lae (Act No. 1956, as amended)
  2. Exemption of conjugal property or absolute community or property provided that:

a. Partnership or community subsists

b.Obligations of the insolvent spouse have not redounded to the benefit of the family

  1. if there is co-ownership, and one of the co-owners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets
  2. property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings.

Classification of Credits

1. Special preferred credits (Arts 2241 & 2242 of NCC)

a. considered as mortgages or pledges of real or personal property or liens within the purview of legal provisions governing insolvency

b.taxes due to the State shall first be satisfied

2. Ordinary preferred credits (Art 2244)

– preferred in the order given by law

3. Common credits (Art 2245)

–    credits of any other kind or class, or by any other right or title not comprised in Arts 2241-2244 shall enjoy  no preference.

Order of Preference of Credit

  1. Credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers.
  2. If there are 2 or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof
  3. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers.
  4. If there are 2 or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessment of the taxes and assessments upon the immovable property or real right.
  5. The excess, if any, after the payment of the credits which enjoy preference with respect to specific property, real or personal, shall be added to the free property which the debtor may have, for the payment of other credits.
  6. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:

–    order established by Art 2244

–    common credits referred to in Art 2245 shall be paid pro rata regardless of dates.

Reference: 

Security Transactions Memory Aid

Ateneo Central Bar Operations 2001

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About Magz

First of all, I am not a lawyer. I'm a graduate of AB Political Science and went to the College of Law but stopped going to law school for some reasons. I'm a passionate teacher who has been teaching English to speakers of other languages and a person who likes writing and blogging. I lost some important files and software when my computer broke down so the reason I created this website is to preserve the notes, reviewers and digests I collected when I was at the law school and at the same time, I want to help out law students who do not have enough time to go and read books in the library.

Posted on December 19, 2011, in Commercial Law and tagged . Bookmark the permalink. Leave a comment.

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