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FAQs OF ATTY. DE LEON-MANZANO (for finals) (Atty. Manzanos strict instruction is that we answer only what is asked. There are by-the-way statements contained here under the heading, NOTE. These were inserted for review purposes, not necessarily as supporting answers. Know by heart those in asterisk. ) I. PLEDGE

Pledge is a contract wherein the debtor delivers to the creditor or to a third person a movable (Art. 2094) or document evidencing incorporeal rights (Art. 2095) for the purpose of securing 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. Pledgee (creditor) one who possess the thing pledged as security for a debt Pledgor (debtor) owner of the thing given as a security How can a contract of pledge bind third persons? To bind third persons, a contract of pledge must be embodied in a public instrument. Art. 2096 provides that a pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge is not embodied in a public document, even if all the essential requisites under Arts. 2085 and 2093 are present and there was delivery. NOTE: The object is to forestall fraud because a debtor may attempt to conceal his property from his creditors when he sees it in danger of execution. The rule is that of substantive law prescribing a condition without which the execution of a contract of pledge cannot affect third persons adversely. Can the pledgor alienate the thing pledged? Yes. Under Art. 2097, if the pledgee gives his consent, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledge consents to the alienation, but the latter shall continue in possession. Pledgor retains his ownership of the thing pledged. He may sell the same provided the pledgee consents. As soon as the pledgee consents, ownership shall transmit to the vendee subject to the rights of the pledgor, namely, that the thing may be alienated to satisfy the obligation (Art. 2112), and that the pledgee continues in possession during the existence of the pledge (Arts. 2093, 2098). NOTE: The pledge would not bind or adversely affect third persons unless Art. 2096 has been followed. Can the pledgor deposit the thing pledged to another? Yes. Art. 2016 provides that if through the negligence or willful act of the pledge, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person.

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NOTE: Art. 2104 also provides that the creditor cannot use the thing pledged without the authority of the owner, and if he should do so or should misuse the thing in any other way, owner may ask that it be judicially or extrajudicially deposited. Can the pledgee deposit the thing pledged with a third person? No, unless there is a stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing ledged. While the pledgee is entitled to retain the possession of the thing pledged until the debt is paid (Art. 2098), he is not authorized to transfer possession to a third person. NOTE: The prohibition is necessary for the protection of the pledgor. What are the remedies of a creditor-pledgee deceived on substance? Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either 1. Claim another thing in its stead, or 2. Demand immediate payment of the principal obligation The remedies are alternative, that is, he is privileged to choose only one and not both. Does the pledgee have the right to cause the sale of the thing pledge? If the answer is in the affirmative, discuss the procedure for the disposition of the thing pledged. Yes. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a PUBLIC SALE. The pledgee shall keep the proceeds of the sale as SECURITY for the fulfillment of the principal obligation. In other words, they shall belong to the pledgor (Art. 2108). Moreover, Art. 2112 provides that the creditor to whom the credit has not been satisfied in due time may proceed before a Notary Public to cause the sale of the thing pledged (D PNNB CEO):

1. If debt is DUE and UNPAID, the creditor may proceed to have the sale of the thing pledged
(Art. 2112)

2. The sale shall be made at a PUBLIC AUCTION (Art. 2112) 3. There must be NOTICE to the pledgor and owner, stating the AMOUNT due
a. No posting or publication is needed; notification to pledgor and owner is sufficient

4. Sale must be with the intervention of a NOTARY PUBLIC (Art. 2112)

a. Only a notary public can conduct a public auction after proper notice is sent to the pledgor and owner of the thing pledged (Art. 2112) 5. The pledgor and the pledgee may BID a. At the public auction, the pledgor/owner may bid. He shall have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder (Art. 2113) 6. Bid must be for CASH

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a. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have received the purchase price, insofar as the pledgor or owner is concerned (Art. 2114) 7. The sale of the thing pledged shall EXTINGUISH the principal obligation a. This applies whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case (Art. 2115) 8. After the public auction, the pledgee shall promptly advise the pledgor or OWNER of the result thereof (Art. 2116) NOTE: Article 2112 does not require posting of the notice of sale and publication. Notification to the pledgor and the owner of the thing pledged is sufficient. Only a notary public can conduct a public auction after proper notice is sent to the pledgor and owner of the thing pledged. NOTE: The pledgees right to have the thing pledged sold at a public sale granted under Art. 2108 is SUPERIOR to that given to the pledgor in Art. 2107. The law says the pledgor is given the right without prejudice to the right of the pledgee. See below: Art. 2107 Pledgor has the right to demand the return of the thing pledged upon offering another thing in pledge Art. 2108 Pledgee has the right to cause the thing in pledge to be sold at a public sale

NOTE: The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled o the excess, UNLESS it is otherwise agreed upon. Is the pledgee entitled to recover deficiency? (Art. 2115)

1. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to
the excess UNLESS the contrary is proved. 2. If the price of the sale is less, the creditor is NOT ENTITLED to recover the deficiency even if there is a stipulation to that effect. Any contrary stipulation is void. NOTE: The reasons are as follows: 1) to compel the creditor to hold an honest public sale, and (2) the creditor should see to it that he loans only as much as he is likely to realize at a public sale. When can the pledgor substitute the thing pledged? (Offer No exercise, Fear No fault - Art. 2107)

1. The pledgor has reasonable grounds to FEAR the destruction or impairment of the thing
pledged;

2. There is NO FAULT on the part of the pledgee; 3. The pledgor is OFFERING, in place of the thing, another thing in pledge which is of the same
kind and quality as the former; and

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4. The pledgee does NOT choose to EXERCISE his right to cause the thing pledged to be sold at
a public auction. When is pledge extinguished? (WrAPS R S)

1. 2. 3. 4. 5. 6.

For the SAME causes as all other obligations RETURN of the thing pledged by the pledgee to the pledgor Statement in WRITING by the pledgee that he RENOUNCES or abandons the pledge PAYMENT of debt SALE of thing pledged at a public auction APPROPRIATION under Art. 2112 (if after the first and second auction, the thing is not sold, the creditor may appropriate the thing pledged. This is to be considered as full payment for his entire claim).

II. REAL MORTGAGE What is foreclosure of real mortgage? IV 1. It is a remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given. 2. It may be effected judicially or extra-judicially. 3. It is but a necessary consequence of non-payment of the principal obligation when due. 4. It is more than a mere demand to surrender possession of the object of the mortgage. It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and include the sale itself. NOTE: Validity and Effect of foreclosure of real mortgage: 1. When the principal obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold, and to apply the proceeds thereof to the payment of principal obligation. 2. The power to foreclose resides on the mortgagee 3. In case of deficiency, the debtor is required to pay the same even after foreclosure 4. The rule governing public notice of foreclosure must be strictly complied with and slight deviations will invalidate the sale or render it voidable. If the proceeds of the sale of the chattel mortgage do not fully satisfy the secured debt, can the mortgagee recover deficiency from the mortgagor? State the rules and exemptions, if any. Yes. The creditor may maintain an action for the deficiency. According to De Leon, although the Chattel Mortgage Law is silent on this point, it is submitted that such is allowed because the chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment. However, under Art. 1484 of the CC, where the mortgage is constituted as a security for the purchase of personal property payable in installments, recovery of the deficiency cannot be made and any agreement to the contrary is void.

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NOTE: The action must be brought within 10 years from the time the right of action accrues, even if not written upon the mortgage contract. This is because the obligation of the mortgagor to pay is one created by law. The action is in the nature of a mortgage action because its purpose is precisely to enforce the mortgage contract.

When may a mortgagee of real property foreclose extra-judicially?* An extrajudicial foreclosure is allowed when the mortgagee is given a SPECIAL POWER OF ATTORNEY to sell the mortgaged property by public auction. Extra-judicial foreclosure must be stipulated in the contract (Act. No. 3135). NOTE: No sale can be legally made outside the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in the said place in the municipal building of the municipality in which the property or part thereof is situated When may a mortgagee of personal property foreclose extra-judicially? Extra-judicial foreclosure may be had when there is a stipulation in the mortgage contract giving the mortgagee the power, upon default of the debtor, to foreclose the mortgage by selling the mortgaged property. There is no particular formality required in the creation of the power of sale. Any word is sufficient which evince an intention that the sale may be made upon default of the mortgagor. Discuss the procedure for extrajudicial foreclosure.* A.M. No. 99-10-05-0, January 15, 2000, further amended on August 07, 2001: 1. File a complaint for extrajudicial foreclosure with the Executive Judge. 2. Notice of Sale: a. Posting in at least 3 public places 20 days before the sale (e.g., Sheriffs Office, Assessors Office, and Register of Deeds). b. Publication in a newspaper of general circulation, once a week for at least 3 consecutive weeks if the value of the property exceeds Php 400. c. This needs to be done within a span of 21 days. d. The notice should contain the description of the property to be sold, date, time and place of the sale, and the principal obligation to be satisfied by the sale of the mortgaged property. e. There is no need for personal notice to the mortgagor unlike in a guaranty. This is because the mortgagor, having defaulted in the principal obligation, should expect that a foreclosure is forthcoming. If you are the mortgagee, you would want to surprise the mortgagor so that he cannot employ dilatory tactics such as getting an injunction in order to delay foreclosure.

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3. Public Auction a. Time for conducting a public sale is between 9 am to 4 pm. b. Manner of Conducting a Sale: the sale should be under the direction of the sheriff and of the province, the justice or auxiliary justice of the peace of the municipality, or of a notary public of the municipality, who shall be compensated with Php5 for each day of actual work performed. c. Who may bid: Anyone may bid at the sale, unless there are exceptions stipulated in the mortgage deed. Even the mortgagee/creditor may bid. And unlike in pledge, even if the mortgagee/creditor is the sole bidder, the sale is still valid because there is a right to redeem in extrajudicial foreclosure. Therefore, the lower the price at which it is sold, the better the chances of the mortgagor/debtor to redeem the property. Discuss the procedure for judicial foreclosure of real mortgage.* Rule 68 of Rules of Court: 1. Judicial action for the purpose a. Bring an action for foreclosure in the proper court which has jurisdiction over the area where the real property is situated. 2. Order the mortgagor to pay mortgage debt a. If the court finds the complaint well-founded, it shall order the mortgagor to pay the amount due upon the debt plus interest and other charges within not less than 90 days but not more than 120 days from entry of judgment. 3. Sale to highest bidder at public auction a. If mortgagor fails to pay, the court, upon motion, shall order the property to be sold to the highest bidder at a public auction. 4. Proceeds of sale shall be applied to the payment of the following: a. Costs of the sale b. The amount due the mortgage c. Claims to junior encumbrances or persons holding subsequent mortgages in the order of priority. d. The balance, if any, shall be paid to the mortgagor or his duly authorized agent, or to the person entitled to it. 5. Confirmation of sale a. Upon confirmation of the sale by the court upon motion, the rights shall be vested to the purchaser subject to the right of redemption of the seller-mortgagor. 6. Execution of Sheriffs Certificate a. The mortgage can be foreclosed only when the debt remains unpaid at the time. b. The foreclosure is not complete until the Sheriffs Certificate is executed, acknowledged, and recorded. In the absence of a Certificate of Sale, no title passes by the foreclosure proceedings to the vendee. c. It is only when the foreclosure proceedings are completed and the mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the property. Therefore, the mortgagor is liable for additional interests properly chargeable on the balance of the mortgage indebtedness during the period from the notice of sale to actual sale. This principle is applicable to extra-judicial foreclosures.

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NOTE: Re confirmation of sale, before the confirmation of a judicial foreclosure sale, the court retains control of the proceedings by exercising sound discretion in regard to it, either granting or withholding confirmation as the rights and interest of the parties and that ends of justice may require. From this standpoint, any order, which neither sets aside nor confirms the foreclosure, is merely interlocutory in character. NOTE: Re application of proceeds of sale, if the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone will not affect the validity of the foreclosure sale but simply give the mortgagor a cause of action to recover surplus. The mortgagee, who has been ordered by the court to return the surplus but failed to do so, may be cited for contempt. NOTE: Re execution of Sheriffs Certificate, a sheriffs report on the auction sale is clothed with the presumption of regularity where no objection has been raised against it. What is redemption? Redemption is a transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created. Discuss the kinds of redemption and the period within which they may be exercised.* A. Equity of redemption The right of the mortgagor in a JUDICIAL FORECLOSURE to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the confirmation of the sale of the mortgaged property. This may be exercised before but NOT after the sale is confirmed by the court. The mortgagor has a right to extinguish the mortgage and retain ownership o the property by paying the secured debt within the period of not less than 90 days nor more than 120 days from the entry of judgment (Sec. 2 of Rule 68, ROC), or even after the foreclosure sale but prior to its confirmation. B. Right of Redemption The right of the mortgagor in case of EXTRAJUDICIAL FORECLOSURE to redeem the mortgaged property within a certain period after it was sold for the satisfaction the mortgage debt. In all cases, it may be exercised at any time within the term of one year from and after the date of registration of the certificate of sale with the appropriate Registry of Deeds. Who are entitled to exercise the right of redemption? According to Section 29, Rule 39 of the Rules of Court, they are as follows: 1. Mortgagor (judgment-debtor) or one in privity of title with the mortgagor a. The manner of redemption is wholly statutory. As a general principle, if one is in privity of title with the mortgagor, and he has such an interest that he would be a loser by the foreclosure, he may redeem.

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2. Successor-in-interest a. The right of redemption provided for in Sec. 6 of Act No. 3135 (extrajudicial foreclosure), like any other property right, may be transferred or assigned by its owner. The transferee of such rights stand in the position of a successor-in-interest of the mortgagor III. ANTICHRESIS What is antichresis?* An antichresis is a contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit (Art. 2132). An antichresis is also indivisible in nature. In antichresis, the debtor cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the creditor. Distinguish antichresis from real mortgage. Antichresis Property is DELIVERED to the creditor Creditor acquires only the right to receive the FRUITS of the property NOT a real right The creditor, is obliged to PAY the taxes and charges upon the estate, unless there is stipulation to the contrary It is expressly stipulated that the creditor given possession of the property shall apply all the fruits thereof to the payment of interest, if owing, and thereafter to the principal Subject-matter is real property Real Mortgage Debtor usually retains POSSESSION of the property Creditor does NOT have any right to receive the fruits; Creates a REAL right over the property The creditor has no such obligation

There is no such obligation on the part of mortgagee

Same

What are the obligations of the antichretic creditor? (TEAR)* 1. To pay the TAXES and charges upon the estate, unless there is a contrary stipulation. If he does not pay the taxes, he is required to pay indemnity for damages to the debtor. If the debtor pays the taxes, the amount paid shall be applied to the payment of the debt (Art. 1170). a. NOTE: If the debtor paid for the taxes on the property which the creditor shouldhave paid, the amount is to be applied to the payment of the debt and the debtor is entitled to the return of the property free from all encumberances if he, by advancing the taxes, in effect had already been discharged from the debt. 2. To bear the EXPENSE necessary for its preservation. 3. To APPLY the fruits to its interest, if owing, and thereafter, to the principal (Art. 2132) 4. To RENDER an account of said fruits to the debtor a. NOTE: This carries with it the corresponding right of the debtor to apply the

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said fruits to the debt (Art. 2133, 2138) How can antichretic creditors exempt themselves from the payment of taxes and necessary repairs? To exempt himself from the payment of taxes and necessary repairs, he may compel the debtor to reacquire enjoyment of the property, except when there is stipulation to the contrary (Art. 2136).

IV. CHATTEL MORTGAGE Distinguish chattel mortgage from pledge.* Chattel Mortgage Delivery of the personal property to the mortgage is not necessary Registration in the Chattel Mortgage Registry is necessary for its validity The procedure for sale is found under Sec. 14 of Act. No. 1508, as amended If property is foreclosed, the excess over the amount due goes to the debtor If there is deficiency after foreclosure, creditor is entitled to recover the deficiency from the debtor, except under Art. 1484 Subject-matter is movable property Pledge Delivery of the thing pledged is necessary Registration not necessary to be valid The procedure for sale is found under 2112 of the Civil Code Debtor is not entitled to excess unless otherwise agreed or except in case of legal pledge If there is deficiency, creditor is not entitled to recover notwithstanding any stipulation to the contract Same

What is an affidavit of good faith? What is the effect of the absence of affidavit of good faith in a contract of chattel mortgage?* An affidavit of good faith is an oath in a contract of chattel mortgage wherein the parties severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud (Sec. 5, Chattel Mortgage Law) The special affidavit is required only for the purpose of transforming an already valid mortgage into preferred mortgage. Thus, it is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. In other words, its absence vitiates the mortgage only as against third persons without notice like creditors and subsequence encumberances. V. CONCURRENCE AND PREFERENCE OF CREDITS What is meant by concurrence of credit?*

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Possession by two or more creditors of equal rights or privileges over the same property or all of the property of the debtor. What is preference of credit? It is the right held by a creditor to be preferred in the payment of his clam above others out of the debtors assets. It is the right to be paid first. When are the rules on preference of credit applicable? The rules on preference will apply where two or more creditors have separate and distinct claims against the same debtor who has insufficient property. The question of preference should only arise when the debtors assets are insufficient to pay his debts in full. Hence, preferential rights of credits are significant only after the properties of the debtor have been inventoried and liquidated and the claims held by his various creditors have been established. Discuss the order of preference with respect to credits evidenced by public instruments and final judgments.* Credits evidenced by a public instrument and those evidenced by a final judgment are placed in the same order of preference. Preference among themselves is determined by considering the priority of the dates of the instruments and of the final judgments, respectively. That which is of an earlier date is preferred over that with the later date (Par. 14, Art. 2244). NOTE: A mortgage of a motor vehicle, in order to affect third persons, should not only be registered in the Chattel Mortgage Registry but the same should also be recorded in the LTO. Only then will the credit be considered preferred. However, if such is not the case, preference of public instruments and final judgments shall be prioritized according to the dates. How are non-preferred or common credits and unpaid preferred credits satisfied? A. Those credits which are 1. Non-preferred a. Do not enjoy any preference with respect to specific property because they are not among those enumerated in Arts. 2241 and 2242, and 2. Unpaid a. Included in said articles but are unpaid because the value of the property to which enjoy preference refers to is less than the preferred credits Shall be satisfied in the order established in Art. 2244 with reference to other real and/or personal property of the debtor. B. Common credits are satisfied through payment pro rata regardless of dates. Common credits are those which do not fall under Arts. 2241, 2242 and 2244. They do not enjoy preference.

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NOTE: Preferred credits, in order to be satisfied, are paid concurrently and pro rata with the exclusion of taxes and assessments upon specific movable and immovable properties which enjoy absolute preference and must be satisfied first. The pro rata, however, does not apply to credits annotated in the Registry of Property by virtue of a judicial order, by attachments and executions, which are preferred to as later credits. In satisfying several credits annotated by attachments or executions, the rule is still preference according to the priority of the credits in order of time. NOTE: Pro rata means in proportion or ratably, or a division according to share interest or liability to each. VI. INSOLVENCY LAW What is suspension of payment? It is the postponement, by court order, of payment of debts of one who, while possessing sufficient property to cover his debts, increases the impossibility of meeting them when they respectively fall due. In the petition to be filed, the debtor must 1. 2. 3. Possess sufficient property to cover all his debts Foresee the impossibility of meeting them when they respectively fall due, and Petition that he be declared in the state of suspension of payments

NOTE: The petition need not be verified. Procedure 1. Filing of the petition by the debtor 2. Issuance by the court of an order calling a meeting of creditors 3. Publication of the order and service of summons 4. Meeting of the creditors for the consideration of the debtors proposition 5. Approval by the creditors of the debtors proposition 6. Objections, if any, to the decision which must be made within 10 days following the meeting 7. Issuance of the order by the court, directing that the agreement be carried out in case the decision is declared valid, or when no objection to said decision has been presented. What are the effects of filing of the petition for suspension of payments? 1. No disposition in any manner of his property may be made by the petitioner except insofar as concerns the ordinary operations of commerce or of industry in which he is engaged. 2. No payments may be made by the petitioner except in the ordinary course of his business or industry.

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3. Upon request to the court, all pending executions against the debtor shall be suspended except execution against property especially mortgaged. What documents are required to be attached to the petition for suspension of payments? (VVSP) 1. A VERIFIED SCHEDULE containing a full and true statement of the debts and list of liabilities of the petitioner together with a list of creditors, including the residence, sum due each, nature of liability, consideration thereof, and any existing pledge, lien or security. 2. A VERIFIED INVENTORY containing a list of creditors, an accurate description of all the property, real and personal, of the petitioner including property exempt from execution and a statement as to the value of each item or property, its location and encumberances thereon, if any. 3. A STATEMENT of his assets and liabilities. 4. The PROPOSED agreements he requests of his creditors. Discuss the procedure for suspension of payments.* 1. File a petition with the RTC where the debtor has resided for 6 months prior to the filing of the petition. The petition should be accompanied by a verified list of all his creditors, debts, and liabilities, a statement of his assets and liabilities, and the proposed agreement that he requests from his creditors. 2. The Court will issue an order calling for the meeting of all creditors. The meeting should take place not less than 2 weeks nor more than 8 weeks from the date of the order. 3. The order will be published and notices sent to all the creditors of the debtors. 4. There will be a meeting of creditors in which they will decide whether to grant the petition. Take note that the amount of the debt is not reduced. The debtor merely buys more time to satisfy his obligations. Quorum Requirement: To have a valid meeting, the creditor present must present at least 60% of the total liabilities of the debtor. 5. The creditors will approve the proposition of the debtor. Majority required to approve the proposal: A double majority consisting in 2/3 of the number of creditors voting, 2/3 must represent at least 60% of the total liabilities of the debtor. 6. Objections, if any, to the decision must be made within 10 days following the meeting. 7. Issuance of the Order of the Court directing that the agreement be carried out in case the decision is declared valid or when no objection to said decision has been represented. Why is insolvency inconsistent with suspension of payments? When suspension of payments has been judicially declared, a declaration of insolvency is not legally possible unless proceedings for suspension have been terminated. The condition of suspension of payments is in law incompatible with that of simultaneous bankruptcy. Distinguish between suspension of payments and insolvency. Suspension of payments To suspend or delay the payment of debts Insolvency To discharge the debtor from the payment of debts

Purpose

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Property Amount Debtor has sufficient property to pay his debts Amount of indebtedness is not affected Debtor does not have sufficient property to pay all his debts Creditors receive less than their credits and in case where there are preferences, some creditors may not receive any amount at all In involuntary insolvency, three or more creditors are required

Number of creditors

Number of immaterial

creditors

is

What is a composition? A composition is an agreement, made upon a sufficient consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter for the sake of immediate or sooner payment, agree to accept a dividend less than the whole amount of their claims, to be distributed pro rata, in discharge and satisfaction of the whole debt. What are the requisites for a valid offer of composition?* (DAMA)

1. The offer of the terms of the composition must be MADE after the filing in court of the
schedule of property and submission of the list of creditors. 2. The offer must be ACCEPTED in writing by a majority of the creditors representing a majority of the claims which have been allowed. 3. It must be made after DEPRECIATION in such place designated by the court, the consideration to be paid and the cost of the proceedings. 4. The terms of the composition must be APPROVED or confirmed by the court. Discuss the procedure for voluntary insolvency.* 1. Filing of the petition by the debtor praying for the declaration of insolvency. 2. Issuance of an order of adjudication declaring the debtor insolvent. 3. Publication and services of the order to the creditor. 4. Meeting of the creditors to elect the assignee in insolvency. 5. Conveyance of the debtors property by the clerk of court to the assignee. 6. Liquidation of the debtors assets and payment of his debts. 7. Composition, if agreed upon. 8. Discharge of the debtor, upon his application, except if the debtor is a corporation. 9. Objection, if any, to the discharge. 10. Appeal to the Supreme Court in certain cases. Discuss the effects of the filing of the petition for voluntary insolvency. Once the petition is filed, it ipso facto takes away and deprives the debtor-petitioner of the right to do or commit any act of preference as to creditors, pending final adjudication. Discuss the procedure for involuntary insolvency.*

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1. Filing of the petition by 3 or more creditors in the RTC where the debtor resides or has his place of business. 2. Issuance of the order requiring the debtor to show cause why he should not be adjudged insolvent. 3. Service of order to show cause. 4. Filing of the debtors answer or motion to dismiss. 5. Hearing of the case. 6. Issuance of the order of decision adjudging the debtor insolvent. 7. Publication and service of order. 8. Meeting of the creditors for election of an assignee in insolvency. 9. Conveyance of debtors property by clerk of court to the assignee. 10. Liquidation of assets and payments of debts. 11. Composition, if agreed upon. 12. Discharge of the debtor on his application, except a corporation. 13. Objection, if any, to the discharge. 14. Appeal to the Supreme Court in certain cases. Enumerate the debts that may be proved against the estate of the debtor in insolvency proceedings. (DELL Cd)

1. All debts DUE and payable from the debtor at the time of the adjudication of insolvency. 2. All debts EXISTING at the time of the adjudication of insolvency but not payable until a future
time, a discount being made if no interest is payable on the terms of the contract. 3. Any debt of the insolvent arising from his LIABILITY as indorser, surety, bail, or guarantor, where such liability became absolute after the adjudication of insolvency but before the final dividend shall have been declared. 4. Other CONTINGENT DEBTS and contingent liabilities contracted by the insolvent if the contingency shall happen before the order of final dividend. 5. Any debt of the insolvent arising from his LIABILITY to any person liable as indorser, surety, bail, or guarantor or otherwise, for the insolvent, who shall have paid the debt in full or in part. What is a dividend in insolvency? A dividend in insolvency is a parcel of the fund arising from the assets of the estate, rightfully allotted to a creditor entitled to share in the fund, whether in the same proportion with other creditors or in a different proportion. What are the effects of assignment to the assignee in an insolvency proceeding? (TLA DVV)

1. The assignee TAKES the property in the plight and conditions that the insolvent held it. 2. Upon the appointment, the LEGAL title to all the property of the insolvent is vested in the
assignee and the control of the property is vested in the court.

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3. All ACTIONS to recover the estate, debt, and effects of the insolvent shall be brought by the
assignee not by the creditors. 4. The assignment shall: a. DISSOLVE any attachment levied within 1 month next preceding the insolvency proceeding. b. VACATE and set aside judgment in any action commenced within 30 days from the commencement of the insolvency proceeding. c. VACATE and set aside any judgment entered by the default or consent of the debtor within 30 days from commencement of the insolvency proceeding. Enumerate the properties of the insolvent that pass to the assignee.* (FRAC U)

1. 2. 3. 4. 5.

ALL real and personal property Properties FRAUDULENTLY conveyed RIGHT of action for damages to real property UNDIVIDED shares of interest of the insolvent in the property held under co-ownership. In insolvency proceedings, CHOSES-IN-ACTION as well as corporeal property ordinarily pass to the assignee (e.g. book of accounts and other debts that are due to the insolvent.

Enumerate the properties of the insolvent that DO NOT pass to the assignee. (MAN At ETC)

1. Property EXEMPT from execution. 2. Property held in TRUST. 3. Property of the CONJUGAL partnership or absolute community so long as said partnership or
community exists except insofar as the insolvent debtors obligations have redounded to the benefit of the former. Property over which a MORTGAGE or pledge exists unless the creditor surrenders his security or lien. AFTER-ACQUIRED property (property acquired subsequent to the filing of the petition) except fruits and income of property owned by the debtor and which had passed to the assignee in insolvency. NON-LEVIABLE assets like life insurance policy which does not have any cash surrender value. Right of ACTION for TORT (e.g. libel, malicious prosecution) which is purely personal in nature.

4. 5.

6. 7.

What is a contingent claim? A claim in which liability depends on some future event which may or may not happen and which makes it uncertain whether there will be any liability. A claim based on a contingency which has not happened at the time of the pendency of the proceedings cannot be proved in the proceedings, as there is no real claim yet. But, if the contingency happens after the termination of the proceedings, the creditor can still claim from the debtor. The discharge granted the debtor from his existing debts does not cover those debts that could not have been proved in the insolvency proceedings.

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To illustrate, a contingent claim arises when a person is bound as surety or guarantor for a principal who is insolvent or dead. The surety has no claim whatsoever against his principal until he himself pays something by way of satisfaction upon the obligation which is secured. But until the surety has contributed something to the payment of the debt, he has no right of action against anybody no claim that can be reduced to judgment. NOTE: An absolute claim, on the other hand, is not subject to contingency and may be proved or allowed. What is a discharge? Discharge is the formal and judicial release of an insolvent debtor from his debts with the exception of those expressly reserved by law. When may an insolvent debtor apply for a discharge? A debtor may apply for a discharge at any time after the expiration of 3 months, but not later than 1 year, from the adjudication of insolvency, UNLESS the property of the insolvent has not been converted into money without his fault, thereby delaying the distribution of dividends among the creditors, in which case the court may extend the period. NOTE: Apply for a discharge to the Regional Trial Court. Any creditor may oppose the discharge by filing his objections thereto, specifying the grounds for opposition. After the debtor has filed and served his verified answer, the court shall try the issue/s raised. What debts are released by discharge? 1. All claims, debts, and liabilities and demands set forth in the schedule. 2. All claims, debts, and demands which were or might have been proved against the estate in insolvency. What debts are NOT released by discharge? (Taxes, Claims-CSUNieS, Debts-FDPSCNs [for easy recall, it means claims of California State University students, debts of Federal Department Prison Shit-Class nobodies])

1. TAXES or assessments due the government, whether national or local. 2. Any debt created by FRAUD or embezzlement of the debtor. 3. Any debt created by the DEFALCATION of the debtor as a public officer or while acting in a
fiduciary capacity.

4. Debt of any person liable for the SAME debt, for or with the insolvent debtor, either as
partner, joint contractor, indorser, surety, or otherwise.

5. Debts of a CORPORATION because a corporation is not granted discharge. 6. Claims of SUPPORT; otherwise, it will make the law a means of avoiding the enforcement of
the obligation, moral and legal, devolving upon the husband to support his family. 7. Discharged debt but revived by a subsequent new PROMISE to pay.

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8. Debts which have NOT been duly SCHEDULED in time for proof and allowance unless the
creditors had notice or actual knowledge of the insolvency proceedings, are not discharged as to such creditors. 9. Claims for UNLIQUIDATED damages arising out of pure tort. 10. Claims of SECURED creditors. 11. Claims NOT IN EXISTENCE or not mature at the time of the discharge are generally unaffected thereby. 12. Claims that are CONTINGENT at the time of the discharge are not barred thereby, and consequently, an action may be maintained against the debtor for collection thereof. Discuss the legal effects of discharge. A discharge, when granted, takes effect not from its date, but from the commencement of the insolvency proceedings. Its legal effects are as follows: 1. It releases the debtor from all claims, debts, liabilities, and demand set forth in the schedule or which were or might have been proved against his estate in insolvency. 2. It operates as a discharge of the insolvent and further acquisitions, but permits mortgagees and other lien creditors to have their satisfaction out of the mortgage or subject of the lien. 3. It is a special defense which may be pleaded and be a complete bar to all suits brought on any such debts, claims, liabilities, or demands. 4. Does not operate to release any person liable for the same debt, for or with the debtor, either as partner, joint, contractor, indorser, surety, or otherwise. 5. The certificate of discharge is prima facie evidence of the fact of release, and the regularity of such discharge. Where a debtor is judicially declared insolvent, the remedy of the guarantor or surety would be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities. When does fraudulent transfer exist? A fraudulent transfer is any payment, pledge, mortgage, conveyance, sale, assignment or transfer of property of whatever character made by the insolvent within one month before the filing of the petition in insolvency by or against him, except for a valuable consideration in good faith. Such transfer is void. In case of real property, the transfer shall be deemed to have been made at the time the instrument conveying such realty was filed for record in the Register of Deeds of the province or city where the same is located. The effect of fraudulent transfer as against the creditors of the insolvent, any conveyance or assignment fraudulently made is void. Hence, no title is acquired by the transferee. The assignee has the right to recover the property or its value. What are the effects of fraudulent transfer? As against the creditors of the insolvent, any conveyance or assignment fraudulently made is void. Hence, no title is acquired by the transferee. The provisions of the Civil Code on rescissible contracts which assume the validity of the contract cannot be invoked as to said transfer since the Insolvency Law regards the contract as void. Consequently, it is idle to talk of restitution, exhaustion of the debtors properties, sources of title, etc. under the Civil Code.

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Discuss the effect of death of the insolvent debtor pending the insolvency proceedings. 1. If the debtor shall die AFTER the order of adjudication, the proceedings shall be continued and concluded in like manner and with like validity, and effect as if he had lived. (Sec. 72) 2. If the death occurs BEFORE the order of adjudication, the proceedings shall be discontinue. The claims must be filed in the proper testate or intestate proceedings as provided for in the Rules of Court on the settlement of a decedents estate. VII. MISCELLANEOUS (Pawnshop Regulation Act, Truth in Lending Act, Corporate Rehabilitation Act, etc.)

PAWNSHOP REGULATION ACT How is a pawn disposed in case of default of the pawner?* Upon default, 1. The pawner has 90 days to redeem from the date of maturity by paying the principal debt with interest. 2. If the pawner still fails to pay, the pawnbroker may sell or dispose the articles pawned. 3. The pawner shall be notified of such sale before the termination of the 90-day period, the notice stating the date, hour and place of sale. 4. The sale must be made in a public auction in the place of business of the pawnbroker or within the municipality. 5. The notice shall be published once in at least two newspapers printed in the municipality during the week preceding the date of the sale. 6. If there are no newspapers circulated, posting of notice in conspicuous places within the municipality where the pawnshop has its place of business shall be required. 7. The notice, whether posted or published, shall be in English, Filipino, or in the local dialect The notice shall contain the name of the pawnshop, its owner, address of establishment, hour and date of the auction sale (Secs. 14-15 of the Pawnshop Regulation Act) FINANCING COMPANY ACT What are financing companies? Corporations, partnerships, except those regulated by the CBP, the Insurance Commissioner and Cooperatives Administration Office, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises, either by 1. Discounting or factoring commercial papers or accounts receivable, 2. Buying and selling contracts, leases, chattel mortgages, or other evidence of indebtedness, or 3. Financial leasing of movables as well as immovable property (Sec. 3a). NOTE: Exceptions to corporations and partnerships are banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws.

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What is a purchase discount? A purchase discount is the difference between the value of the receivable purchased or credit assigned, and the net amount paid by the finance company for such purchase or assignment, exclusive of fees, service charges, interest and other charges incident to the extension of credit. Discuss the information that a creditor should disclose to each person to whom a credit is extended.* (PAT DF PC) 1. The cash PRICE or delivered price of the property or service to be acquired The AMOUNTS, if any, to be credited as down payment and/or trade-in The DIFFERENCE between the amounts set forth under clauses 1 and 2 The CHARGES, individually itemized, which are paid or to be part by such persons in connection with the transaction but which are not incident to the extension of credit 5. The TOTAL amount to be financed 6. The FINANCE charge expressed in terms of pesos and centavos 7. The PERCENTAGE that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation (Sec. 4)

2. 3. 4.

What are included in finance charges? Finance charge includes interest, fees, collection charge discounts and such other charges incident to the extension of credit. TRUTH IN LENDING ACT What is meant by credit in Truth and Lending Act? 1. Any loan, mortgage, deed of trust, advance or discount 2. Any conditional sales contract; any contract to sell, or sale of real property or services, either for present or future delivery, under which part of all of the price is payable subsequent to the making of such sale or contract 3. Any rental-purchase contract 4. Any contract or arrangement for the ire, bailment or leasing of property 5. Any option, demand, lien, pledge or other claims against, or for the delivery of, property or money. 6. Any purchase or any credit upon the security of any obligation or claim arising out of any of the foregoing 7. Any transaction having a similar purpose or effect (Sec. 3[2]). What information must a creditor furnish in writing to each person to whom credit is extended prior to the consummation of the transaction?* (PADCTFP) Sec. 4 of the Truth in Lending Act provides: Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing stating forth,

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to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: 1. 2. 3. 4. The cash PRICE or delivered price of the property or service to be acquired; The AMOUNTS, if any, to be credited as down payment and/or trade-in; The DIFFERENCE between the amounts set forth under clauses (1) and (2); The CHARGES, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; 5. The TOTAL amount to be financed; 6. The FINANCE charge expressed in terms of pesos and centavos; and 7. The PERCENTAGE that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. What is meant by credit in the Truth in Lending Act? 1. Any loan, mortgage, deed of trust, advance or discount 2. Any conditional sales contract, any contract to sell, or sale of property or services, either for present or future delivery, under which part of all of the price is payable subsequent to the making of such sale or contract 3. Any rental-purchase contract 4. Any contract or arrangement for the hire, bailment, or leasing of property 5. Any option, demand, lien, pledge, or other claim against or for the delivery of property or money 6. Any purchase or other acquisition of, arising out of any of the foregoing 7. Any transaction or series of transactions having a similar purpose or effect CORPORATE REHABILITATION ACT When shall the rehabilitation court issue a stay order?* If the court finds the petition to be sufficient in form and substance, it shall not later than 5 days from the filing of the petition, issue a stay order. Under the interim rules of procedure on corporate rehabilitation, what should be included in a rehabilitation plan?* (GTFM LaO)

1. The desired business targets or GOALS and the duration and coverage of the rehabilitation. 2. The TERMS and conditions of such rehabilitation which shall include the manner of its
implementation, giving due regard to the interest of secured creditors. 3. The material FINANCIAL commitments to support the rehabilitation plan. 4. The MEANS for execution of the rehabilitation. 5. A LIQUIDATION ANALYSIS that estimates the proportion of the claims that the creditors and shareholders would receive if the debtors properties were liquidated. 6. Such OTHER relevant information to enable a decision on the feasibility of the rehabilitation plan.

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What material facts must be included in the petition for rehabilitation? (PTCH NMN)

1. 2. 3. 4. 5.

NAME and business of the debtor. NATURE of the business of the debtor. HISTORY of the debtor. CAUSE of its inability to pay its debts. All the PENDING ACTIONS or proceedings known to the debtor and the courts where they are pending. 6. THREATS or demands to enforce claims or liens against the debtor. 7. MANNER by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees, and stockholders. Discuss the principles laid down in the following cases: (Check the digests )

a) Eastern Shipping re application of interest

When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts, is breached, the contravenor can be held liable for damages. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: When the obligation is breached, and it consists in the payment of a sum of money (i.e., a loan or forbearance of money), the interest due should be that which may have been stipulated in writing. Further, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

b) Central Bank v Morfe Bank deposits are not preferred credits but simple loans.

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Where a suit of recovery of a bank deposit was filed after the bank has been declared insolvent by the Central bank, a judgment in favor of the depositor cannot be considered a preferred credit under Art. 2244 (1) of the Civil Code. A non-preferred credit cannot be raised to that category simply because a depositor, taking advantage of long interval of time between declaration of insolvency and filing of judicial assistance, was able to secure a judgment for payment of his deposit. c) Atok Finance Corp. v CA Art. 2053- a guaranty may also be given as a security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. There is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. d) Integrated Realty Corp. v PNB (loans) Pledge is not equivalent to payment but only security. The deed of assignment in the instant case is actually a pledge. The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of transfer was. A transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existences and is not discharged by the transfer, and that accordingly, the use of terms ordinarily importing conveyance of ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. The deed of assignment has satisfied the requirements of a contract of pledge: o That it be constituted to secure the fulfillment of an obligation. o That the pledgor be the absolute owner of the thing pledged. o That the persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. The further requirement that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement was complied with by the execution of the deed of assignment in favor of PNB. A contract of loan or mutuum is created when Santos invested his money in time deposit with petitioner bank.

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e) DBP v NLRC Art. 110 of the Labor Code cannot be invoked absent a formal declaration of bankruptcy or liquidation order. Under the new law, even mortgage credits are subordinate to workers claim. R.A. No. 6715, however, took effect only on March 21, 1989. The amendment cannot therefore be retroactively applied to nor can it affect the mortgage credit which was secured by the petitioner several years prior to its effectivity. To give Art. 110 retroactive effect would be to wipe out the mortgage in DBPs favor and expose it to a risk which it sought to protect itself against by requiring a collateral in the form of real property. f) State Investment House, Inc. v Citibank A foreign corporation doing business in the Philippines is considered a "resident" of the Philippines. (Note that while the Insolvency Law itself does not have a definition of the term resident, it may be obtained from other statutes (e.g. NIRC, the Offshore Banking Law, and the General Banking Act). Although no substantive law exists explicitly granting foreign banks the right or power to petition for a Philippine corporation to be declared bankrupt, no law exists also granting the same solely to domestic banks. The Insolvency Law just grants to a juridical person the power to petition for the adjudication of bankruptcy of any person, natural or juridical, provided that it is a resident corporation and joins at least 2 other residents in presenting the petition to the Insolvency Court. For answering: Correct or incorrect? * The mortgaged credit may not be alienated or assigned to a third person. * A stipulation in a mortgage contract including after-acquired properties valid.

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