CREDIT TRANSACTIONS

A1
Chuy Lu Tan and Romeo Tanco obtained five loans from Metropolitan Bank and Trust likewise does not expressly or impliedly prohibit recovery. To recover deficiency, the extrajudicial
Company (Metrobank) with aggregate amount of Nineteen Million Nine Hundred Thousand Pesos foreclosure must be valid.
(P19,900,000.00). These loans are evidenced by five Promissory Notes executed by them on C. Can Metrobank instead collect the deficiency of the loan from the surety?
various dates. As security for the said loans, Chuy and Tanco executed a Real Estate Mortgage
over a 1,449.70 square meter parcel of land in Quezon City covered by TCT No. RT-53314 ANS:
(288923). In addition to the said mortgage, Sy Se Hiong and Tan Chu Hsiu Yen also executed a As a general rule, an accommodation mortgagor is not liable for the payment of any
Continuing Surety Agreement whereby they bound themselves to be solidarily liable with Chuy deficiency, without expressly assuming personal liability for the debtor’s debt, should the property
and Tanco as may be incurred by Metrobank before or after the date of Surety Agreement. not be sufficient to cover the debt.
Subsequently, Chuy and Tanco failed to settle their loans despite Metrobank’s repeated
demands for payment. Consequently, Metrobank extrajudicially foreclosed the mortgage and the D. What is equity of redemption? Can Chuy and Tanco exercise the same in the case at
property was sold to it as highest bidder for the amount of P24,572,268.00. However, in separate bar?
letters to the debtors, Metrobank claimed that there remained a deficiency of P1,641,815.00.
Thus, it filed a suit for collection of sums of money with the RTC. Chuy and Tanco argued that ANS:
Metrobank is not entitled to collect the deficiency because the property was sold at an amount Equity of Redemption refers to the right of the mortgagor in case of judicial foreclosure to
less than its market value. 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.
A. Differentiate: In the case at bar, Chuy Lu Tan and Romero Tanco cannot exercise equity of redemption
because the mortgaged property was extrajudicially foreclosed and not judicially foreclosed. They
a1. Real Estate Mortgage from Chattel Mortgage can, however, exercise their right of redemption. And even if the property was foreclosed
ANS: judicially, their right of redemption is recognized because the mortgagee is a banking institution.
Real Estate Mortgage is constituted on immovables while chattel mortgage is constituted on
movables. A2.
REM guarantees both present debts and debts to be incurred while CM guarantees present Nica is insolvent. Her assets available for payment are: 2storey building valued at
debts only. P2,000,000.00; her jewelry which has a total market value of P100,000.00; her 2018 Toyota
In REM, it must be registered with the Office of the Register of Deeds in order to be valid Fortuner with latest value at P1,200,000.00 and her Chanel Bag worth P100,000.00. Her
against third persons. In CM, it must be registered with Chattel Mortgage Register for its entire obligations are as follows:
validity as such and not just as against third persons. 1. Income Tax ------------------------------------------P100,000.00
In REM, specifically in an extrajudicial foreclosure of the mortgaged property, the mortgagor 2. Loan secured by a chattel
has the right of redemption which may only be exercised within one year from the date of the
registration of the certificate of sale with the appropriate Register of Deeds. In CM, there is no mortgage of the bag ----------------------------------P30,000.00
right of redemption because after the foreclosure of the property all rights of ownership is vested 3. Unpaid salaries of her househelpers ---------P35,000.00
to the purchaser. 4. Unpaid salaries of her employees -------------P40,000.00
a2. Real Estate Mortgage from Antichresis 5. Loan secured by a pledge of the car ----------P300,000.00
ANS: 6. Unpaid balance of the price of the car --------P1,000,000.00
In Real Estate Mortgage, delivery is not necessary and the debtor usually retains possession 7. Loan secured by a real estate
of the property. In Antichresis, the property is delivered to the creditor.
mortgage of the building -----------------------------P1,450,000.00
In REM, it creates a real right over the property which is enforceable against the whole world.
In Antichresis, it does not produce a real right since the creditor acquires only the right to receive 8. Unpaid salaries of the carpenters,
the fruits of the property. masons in the construction of the building -----P300,000.00
In REM, the creditor or mortgagee has no obligation. In Antichresis, the creditor is obliged to 9. Unpaid construction supplies used in
pay the taxes and charges upon the property. Also, there is an obligation on the part of the the construction of the building ---------------------P250,000.00
creditor to apply the fruits to the payment of interests, if owing, and thereafter to the principal of
the credit. 10. unpaid salaries of the foreman

B. Is Metrobank entitled to recover the deficiency considering that the property was sold at and helpers in the construction of
an amount less than its market value? the drainage where the building is erected-------P150,000.00
ANS: 11. Unpaid real property tax for the building-----P100,000.00
Yes, in extrajudicial foreclosures of mortgage it is not expressly provided under Act No. 3135 12. Unpaid customs tax for the jewelry -----------P30,000.00
that a mortgagee has the right to recover deficiency after the public auction sale. However, it 13. Unpaid customs tax for the bag ---------------P10,000.00
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14. Loan secured by a chattel
mortgage of the jewelry-------------------------------P50,000.00 A4.
Kaye purchased on installment a brand-new Mustang from Ford, Maasin, Southern
Leyte. In order to secure the payment of the balance of the purchase price, Kaye executed a
15. Unpaid balance of the jewelry ---------------- P20,000.00 chattel

Distribute her assets in accordance with the rules on concurrence and preference mortgage on the car in favor of BDO, Inc. The Chattel Mortgage Contract contained a provision
of credits. that the same shall apply to subsequent purchases on installment of Kaye. One year after, Kaye
defaulted in the payment of her monthly installment. Thus, the bank, which financed the loan,
foreclosed the Mustang. Kaye filed an action for annulment of foreclosure on the ground that the
A3.
chattel mortgage contract is void as it has no Affidavit of Good Faith.
Sara obtained a loan in the amount of One Million Pesos from Jane Bank. She
1. Is an Affidavit of Good Faith, an indispensable requirement for the validity of the chattel
executed a Deed of Real Estate Mortgage over a parcel of land, which is only covered by a Tax
mortgage?
Declaration. She made representation with the Bank that an application for the issuance of
certificate of title is pending. Thus, on the basis of her representation, the bank approved her loan. ANS:
Later, Sara failed to pay her obligation. The bank applied for an extra-judicial foreclosure of the No, an Affidavit of Good Faith is not an indispensable requirement for the validity of the
property, which she mortgaged with the bank. However, it appears that Sara was not the owner of chattel mortgage. It is required only for the purpose of transforming an already valid chattel
the same. mortgage into a preferred one.
Absence of the affidavit vitiates a mortgage only as against third persons without notice like
A. Explain the Doctrine of Mortgagee in Good Faith. creditors and subsequent encumbrance.
ANS: 2. Can the chattel mortgage executed by Kaye apply to subsequent purchases by
installment obtained by her?
The Doctrine of Mortgagee in Good Faith refers to the right of the mortgagee to rely in good
faith on what appears on the certificate of title of the mortgagor to the property given as security ANS:
and absent anything to No, the executed chattel mortgaged cannot apply to subsequent purchases by installment
excite suspicion, the mortgagee is under no obligation to look beyond the certificate and obtained by Kaye.
investigate the title of the mortgagor appearing on the face of the certificate. Although a promise expressed in a chattel mortgage to include debts that are yet to be
B. In the case at bar, would you consider Jane Bank as Mortgagee in Good Faith? contracted can be a binding commitment that can be called upon, the security can only come into
existence or arise until after a chattel mortgage agreement covering the newly contracted debt is
ANS:
executed either by concluding a fresh chattel mortgage or by amending the old contract.
No, Jane Bank is cannot be considered as a Mortgagee in Good Faith. This is because the
3. If the proceeds in the foreclosure are less than the amount of the obligation, is the bank
rule does not apply to banks which are required of greater care, diligence and prudence in
entitled to collect the balance?
handling real estate transactions.
ANS:
When the mortgagee is a bank or a financing institution, its business being impressed with
public interest, the rule that a purchaser or mortgagee could rely in good faith on the title of the As a general rule, the mortgagee may recover from the mortgagor the deficiency in case the
mortgagor does not apply. proceeds of the foreclosure sale of the mortgaged property are insufficient.
C. Would your answer be the same if at the time Sara applied for a loan and executed a However, the law likewise specifically provides that in a chattel mortgage as security for a
Deed of Real Estate Mortgage, the property is already covered by a Certificate of Title in purchase of personal property payable in installments, no deficiency judgment can be asked. And
her name? any agreement to the contrary is void.
ANS: 4. Does Kaye have a right of redemption in the case at bar?
Yes, my answer would still be the same. ANS:
The bank is not relieved of the responsibility to conduct an exhaustive investigation on the title No, in the case at bar, Kaye has no right of redemption because in a chattel mortgage there is
of the mortgagor simply because said title which is offered as security is, on its face, free of any actually no right of redemption.
encumbrance or lien. The considered right of redemption in a chattel mortgage pertains to the right of the mortgagor
D. What is Real Estate Mortgage with a Dragnet Clause? to pay or deliver to the mortgagee the amount due on such mortgage after his default in the
performance of the conditions of the mortgage but before the sale of the property. In other words,
ANS:
there really is no right of redemption.
A REM with a dragnet clause, also called Blanket Mortgage Clause, means that a mortgage is
not limited to just a fixed amount but also covers excess accommodations. It secures future loans
or other indebtedness in addition to already obtained or specified in the contract. A5.
It operates as a convenience and accommodation to the borrower as it makes available Spouses Jerry and Julie Ann obtained a loan in the amount of One Hundred Thousand
additional funds without having to execute additional security documents. Pesos (P100,000.00) from Ramon Savings Bank. By way of security of the loan, they executed a

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real estate mortgage over their two (2) lots situated in Hilongos, Leyte. Meanwhile, the spouses b. While in its possession, can Milan Shipping Corporation use the tugboat?
defaulted in the payment of their loan obligation, thus, the bank extrajudicially foreclosed the ANS:
mortgaged properties. Ramon Bank was the highest bidder and thereafter the Certificate of Sale
was registered with the Register of Deeds on April 05, 2017. Delivery of the thing pledged to the pledgee is required in a contract of pledge since it is a real
contract. Also, the pledgee has a right to retain the thing in his possession until the debt is paid.
a. What is the prescriptive period for the foreclosure of real estate mortgage?

ANS:
c. Was the taking of the tugboat and barge, legal? What are the rights of Orais Bank and
The prescriptive period for the foreclosure of real estate mortgage is ten (10) years which will Trust Corporation in relation to such act?
commence on the date when the obligation becomes due as provided in Article 1169.
ANS:
b. Can spouses Jerry and Julie Ann still redeem the property?
No, the taking of the tugboat and the barge is not legal. Although the pledgor remains the
ANS: owner over these properties, he can only sell the same with the consent of the pledgee. Without
Yes, spouses Jerry and Julie can still redeem the foreclosed property within the term of one the pledgee’s consent, there is no valid sale and thus no valid transfer to Jinkee Pacquiao.
year to be reckoned from the date of the certificate of sale with the Register of Deeds. d. When can the pledgee demand the sale of the tugboat and barge even if Milan Shipping
In the case at bar, spouses Jerry and Julie has until April 06, 2018 to redeem the property. Corporation is paying its obligations?
c. Would your answer be the same if it was Bulak Financial Corporation who obtained the ANS:
loan and mortgaged her property in Maasin City to Ramon Bank?
ANS: e. What are the pledge created by operation of law?
No, in the case of Bulak Financial Corporation, which is a juridical person and not a natural ANS:
person, the redemption period is only three (3) months to begin from the date of the foreclosure
sale but not after the registration of the certificate of sale with the appropriate Registry of Deeds. The following are the pledge created by law:
Thus, in the present case, Bulak Financial Corporation can no longer exercise its right of  Art. 546. Necessary expenses shall be refunded to every possessor but only the
redemption since the certificate of sale has already been registered with the Registry of Deeds. possessor in good faith may retain the thing until he has reimbursed thereof. Useful
expenses shall be refunded only to the possessor in good faith with the same right
d. Is Ramon Bank entitled to possession of the property during the period of redemption. If to retention, the person who has defeated him in the possession having the option
not, what action would it institute in order to possess the property? of refunding the amount of the expenses or of paying the increase in value which
ANS: the thing may have acquired by reason thereof.”
No, Ramon Bank is not entitled to possession of the property during the period of redemption.  Art. 1731. He who has executed work upon a movable has a right to retain it by way
During the period of redemption, the mortgagor being still the owner of the foreclosed property, of pledge until he has paid.
remains entitled to the physical possession.  Art. 1914. The agent may retain in pledge the things which are the object of the
agency until the principal effects the reimbursement and pays the indemnity set
However, Ramon Bank, being the purchaser, has the right to petition the court to give him
forth in the two preceding articles.
possession through a writ of possession and to file a bond.
 Art. 1707. The laborer’s wages shall be a lien on the goods manufactured or the
work done.
B1  Art. 1994. Legal pledge referring to a depositary
Milan Shipping Co., Inc. applied for and was granted a loan by Orais Bank and Trust  Art. 2004. Legal pledge referring to a hotelkeeper
Corporation. To secure the fulfillment of the obligation, Milan Shipping Company gave additional
securities as collaterals in the form of a pledge in favor of the bank, its barge and tugboat. B2.
Milan Shipping Co., Inc. failed to pay its obligations to Orais Bank and Trust Paula obtained a loan from Rejoice in the amount of P1,000,000.00. As a security for its
Corporation. The creditor Bank had to sell the pledged properties. Nevertheless, when the payment, Paula allows Rejoice to possess her 2 hectare rice field so Rejoice can harvest the
pledgee bank was to sell the pledged properties, it found out that the tugboat and the barge had palays in the meantime that she has not yet paid her obligation. However, there is no written
surreptitiously been taken without its knowledge. It appears that the corporation sold the same to contract signed by the parties relative to such agreement because of the trust and confidence that
Jinkee Pacquiao. Paula had for Rejoice as they are law school classmates.
a. Was the contract of sale entered into by Milan Shipping Corporation and Jinkee a. What contract did Paula and Rejoice entered into in relation to the security of the
Pacquiao over the barge and tugboat valid? former’s obligations? Explain its characteristics.
ANS: ANS:
No, the contract of sale entered into by Milan Shipping Corporation and Jinkee Pacquiao over The contract entered into by Paula and Rejoice is one of a mortgage.
the properties is not valid.
The contract does not stipulate that the fruits shall applied for the payment of interest,
The pledgor, for retaining ownership over the properties pledged, may sell the same provided if owing, and to the principal of her credit. Although it provided for the delivery to Rejoice
the pledgee consents to the sale. In the case at bar, Milan Shipping Corporation sold the barge
and tugboat to Jinkee Pacquiao without the consent of the Bank, thus, the sale is not valid.
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the rice field as a security for the payment of Paula’s loan, it cannot be considered as a a. After the Bar exams, Cruz asked for the return of his car. Jose said he would return it as soon
contract of antichresis due to the absence of the written contract which is a requirement. as Cruz has reimbursed him for the case maintenance and repainting costs of P18,000.00. Is
b. What are the obligations of Rejoice in relation to the contract agreed upon? Jose’s refusal justified?
ANS: ANS:
In relation to the contract agreed upon by Paula and Rejoice, the obligations of the Rejoice No, Jose's refusal is not justified.
as a mortgagee in possession are similar to those of an antichretic creditor. The expenses he incurred are useful for the preservation of the thing loaned. It is Jose's
obligation to shoulder these useful expenses. In commodatum, the bailee is obliged to pay for the
ordinary expenses for the use and preservation of the thing loaned.
Rejoice is under obligation to collect the credit with interest from the fruits, to return to the
debtor the balance, if any, after deducting the expenses. Rejoice is likewise obliged to account
for the fruits that she received.
c. Is the contract valid? The bailee, Jose, has no right of retention on the ground that the bailor owes him something,
ANS: even if it may be by reason of expenses. He can only retain it if he suffers damages by reason of
a flaw or defect in the thing loaned of which the bailor knows.
Yes, the contract in the present case is valid.
b. During the Bar exam month, Jose lent the car to his girlfriend, Jolie, who parked the cat at the
Paula constituted the contract to secure the fulfillment of the principal obligation. She is the Mall of Asia’s open parking lot, with the ignition key inside the car. Car thieves broke into and took
absolute owner of the rice field mortgaged. She has the free disposal of the property. the car. Is Jose liable to Cruz for the loss of the car due to Jolie’s negligence?
And although in a contract of real estate mortgage delivery of the property by the debtor to the ANS:
creditor is not required, the same is not prohibited. Hence, Rejoice, the mortgagee, may take
possession of the property. Yes, Jose is liable to Cruz. Since Jose lent the car to Jolie without Cruz's consent, Jose must
bear the consequent loss of the car.
Despite the fact that the mortgage is not written and thus not registered in the Register of
Deeds does not affect its validity. Rejoice has the right to compel Paula to execute the contract in The bailee is liable for the loss of the thing, even if it should be through a fortuitous event if he
the form prescribed by law. lends or leases the thing to a third person, who is not a member of his household
d. Paula also executed an undated Deed of Sale over the said rice field in favor of c. Siga-an granted a loan to Villanueva in the amount of P540,000.00. Such agreement was not
Rejoice. They agreed that if Paula cannot pay her obligation within two (2) years, reduced to writing. Siga-an demanded interest which was paid by Villanueva in cash and checks.
Rejoice could register the sale and transfer the same in her name. Is the agreement The total amount Villanueva paid accumulated to P1,200,000.00. Upon advice of her lawyer,
valid? Villanueva demanded for the return of the excess amount of P660,000.00 which was ignored by
Siga-an.
ANS:
1. Is the payment of interest valid? Explain.
No, the agreement is not valid for it is in the nature of a pactum commisorium.
ANS:
Pactum commisorium a stipulation whereby the thing pledged/mortgaged/antichresis will
automatically become the property of the creditor in the event of non-payment of the debt within No, Article 1956, Civil Code, provides that “no interest shall be due unless it has been
the term fixed. expressly stipulated in writing.”
In the present case, the requisites of pactum commisorium are met: 2. Is solutio indebiti applicable? Explain.
 That there is a contract of pledge/mortgage/antichresis by way of security of ANS:
payment of the principal debt; Yes, Solutio Indebiti is applicable because Villanueva Overpaid by P600,000.00 representing
 b. That there is a stipulation for an automatic appropriation by the creditor in the interest payment which is not due. He can, therefore, demand its return.
event of non oayment of the obligation within the stipulated period.
e. If Paula cannot pay her obligations, what are the rights of Rejoice? B4.
ANS: a. Maingat deposited her personal computer (PC) machine in the warehouse of Bodeguero who
In the event that Paula fails to pay her obligations, Rejoice has the right to foreclose the issued a negotiable warehouse receipt undertaking the delivery of the computer to Mayaman or
mortgage and move for the sale of the property mortgaged with the formalities required by law bearer. Mayaman entrusted the receipt to Secretario, his secretary, who in turn delivered the
in order to collect the amount of his claim from the proceeds. receipt to Bumibili, a purchaser for value and in good faith. Secretario needed money to pay his
gambling debts.
1. Who has better title to the computer, Mayaman or Bumibili?
B3.
ANS:
Cruz lent Jose his car until Jose finished his Bar exams. Soon after Cruz delivered the car,
Jose brought it to Mitsubishi Cubao for maintenance check up and incurred costs of P8,000.00. Bumibili (the purchaser for value and in good faith) has better title to the PC compared to
Seeing the car’s peeling and faded paint, Jose also had the car repainted for P10,000.00. Answer Mayaman. In the case at bar, Mayaman entrusted the negotiable receipt to Secretario. By the act
the two questions below based on these common facts. of Mayaman, he is estopped under Sec. 47 to question the delivery of the warehouse receipt to
Bumibili.

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Under Sec. 47, the validity of the negotiation of the receipt is not impaired by the fact that  When the officious manager withdraws from the Management
such negotiation was a breach of duty on the part of the person making the negotiation, or by the  By death, civil interdiction, insanity or insolvency of the owner or the officious manager.
fact where the owner of the receipt was induced by fraud, mistake or duress, or to entrust the
c. When is the officious manager liable for fortuitous event?
possession or custody of the receipt to such person if the person to whom the receipt was
negotiated, or a person to whom the receipt was subsequently negotiated paid value therefore ANS:
without notice of the breach of duty or fraud, mistake or duress.  If he undertakes risky operations which the owner was not accustomed to embark upon
Thus, by the act of Mayaman of entrusting the receipt to Secretario despite the fact that the  If he has preferred his own interest to that of the owner
receipt can be negotiated by mere delivery, Mayaman is estopped to question the subsequent  If he fails to return the property or business after demand by the owner
negotiation thereof to Bumibili who purchased the same for value and in good faith.  If he assumed the management in bad faith.

2. Would the answer be the same if, by the terms of Bodeguero’s receipt, the computer is d. What are the liabilities of a payee who accepts an undue payment in bad faith?
deliverable to the order of Mayaman? Explain. ANS:
ANS: The payee is liable for interest and for fruits, and for damages pursuant to fortuitous events.
No. Because in this case the warehouse receipt can only be negotiated by indorsement. It will The payee assumes all risks having acted fraudulently.
need the indorsement of Mayaman for further valid negotiation. e. What are the essential requisites for negotiorum gestio?
ANS:
b. Mr. Bakal deposited with a warehouseman two crates of goods for which he received two 1. There is no meeting of the minds;
warehouse receipts (one for each crate) -one being a negotiable warehouse receipt and the other 2. Taking charge of anothers’ business or property;
a non-negotiable warehouse receipt. Title to both warehouse receipts were transferred on 3. The property or the business which was been taken charge of must have been
December 1, 1985 to Mr. Tigas. The warehouseman was not notified of the transfer of the abandoned or neglected, otherwise, the rule on authorized contracts would apply;
receipts. Meanwhile, Mr. Tapang, a judgment creditor of Mr. Bakal, served a notice of levy over 4. The officious manager must have not been expressly or impliedly authorized;
the goods on the warehouseman. 5. The officious manager should have voluntarily taken charge, that is there must be no
Between Mr. Tigas and Mr. Tapang, who would have preference over the goods vitiated consent such as error in thinking that he owned the property or the business;
covered by the negotiable warehouse receipts? Reasons. How about the goods covered by 6. Diligence required
the non-negotiable warehouse receipt?
ANS:
Mr. Tigas shall be preferred over the goods covered by the negotiable warehouse receipt.
I.
Under the law, a person whom receipt has been transferred but not duly negotiated acquires
Lourdes obtained a loan in the amount of One Million Pesos (P1,000,000.00) from Teresita.
title of the goods to the terms of any agreement with the transferor. The goods cannot be attached
Antonio, Samuel, Diosdado and Marvic are the guarantors of the said debt. Meanwhile, Lourdes
or levied under the execution unless the receipt is surrendered, impounded by the court or that
obtained another loan in the amount of Five Hundred Thousand Pesos (P500,000.00) still from
the negotiation is enjoined. In this case, the above requirements are not met.
Teresita with same guarantors. Lourdes failed to pay her obligation despite exhausting all her
properties.
B5.
a. What are quasi-contracts? Give at least two examples of quasi-contracts. A. Can Teresita demand the entire amount of the debt from Antonio? Explain.
ANS: ANS:
Quasi-contracts are lawful, voluntary and unilateral acts which generally require a person to Yes, Teresita can demand the entire amount of the debt from Antonio, but only if the payment
reimburse or compensate another in accordance with the principle that no one shall be unjustly is made by virtue of Judicial demand or because the principal debtor is insolvent. Provided that
benefited at the expense of another. there is only one debtor for the same debt and several guarantors.
 Negotirum Gestio – arises when a person without the express or implied authority In the case at bar, the requisites are not present because there are 2 debts which is
of, or opposition from the owner of a business or property which is neglected or 1,000,000 and 500,000.
abandoned, takes charge of the agency or management therof.
B. If Antonio pays all the debts, can he seek reimbursement from other co-guarantors?
 Solutio Indebiti – arises when the person is obliged to return whatever was received Explain.
by him through error or mistake received by him although there was no right
demand it. ANS:
b. What are the causes for the extinguishment of officious management? Yes, Antonio can seek reimbursement from other co-guarantors provided that the payment is
made by virtue of a judicial demand or because the principal debtor is insolvent.
ANS:
C. If Marvic is insolvent, will his share be borne by other guarantors? Explain.
 When the owner repudiates it or puts an end thereto
ANS:
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Yes, when Marvic is insolvent his share shall be borne by other guarantors. The code Spouses Gabby and Sharon secured loans from the Rural Bank of Macrohon, Inc. in the amount
provides that if any of the guarantor should be insolvent, his share shall be borne by the others of Five Hundred Thousand Pesos (P500,000.00). They executed a promissory note payable to
including paying the guarantor in the same proportion. the order of the Rural Bank of Macrohon. As a security of the loan, the spouses likewise executed
a Deed of Real Estate Mortgage over a parcel of land located in Maasin City.
II. Meanwhile, Rural Bank of Macrohon, Inc. obtained a loan with Landbank of the Philippines in the
amount of Five Million Pesos (P5,000,000.00). The Rural Bank executed a document
A. Kawasaki and FFMCCI formed a consortium for the purpose of contracting with the Philippine denominated as “promissory note with trust receipt agreement”. As a security for the loan, the
Government for the construction of a fishing port network in Pangasinan. To guarantee the faithful rural bank pledged and deposited to Landbank promissory notes with supporting Transfer
performance of its obligation, the Consortium obtained from the Philippine Commercial Certificate of Titles including the promissory note and Transfer Certificate of Title mortgaged with
International Bank (PCIB) letter of credit in favor of the government. In turn, FFMCCI ceased it by the spouses.
performing its work
The Rural Bank of Macrohon failed to pay their obligation. Thus, Lanbank filed and application for
extrajudicial foreclosure against the mortgage security of the Spouses Gabby and Sharon with the
in the Project after suffering problems and business reverses. After discussions, Kawasaki and
FFMCCI then executed a New Agreement wherein Kawasaki recognized the Completed Portion
of Work in FFMCCI and agreed to take over the unfinished portion of work. Kawasaki then rural bank. However, the spouses contested the extrajudicial foreclosure on the ground that there
demanded from CCCIC about the cessation of operations of FFMCCI and the latter’s failure to is no privity of contract between them and Landbank as the latter was not authorized by Rural
perform its obligation and repay the advance payment made by Kawasaki. CCCIC denied any Bank of Macrohon to act on its behalf nor was the mortgage assigned to it.
liability on the following grounds: 1) Kawasaki and FFMCCI without the consent of CCCIC, a. Differentiate Pledge from Real Estate Mortgage.
executed a new agreement novating the terms of the Consortium Agreement, which prevented ANS:
CCCIC from being subrogated to the right of Kawasaki against FFMCI and 2) its obligation was
extinguished when the government granted the Consortium an extension of time to complete the Pledge is constituted on movables while real estate mortgage is constituted on immovables.
project without its consent. Decide. In the contract of pledge, the property is delivered to the pledgee or to a third person by
ANS: common consent of the contracting parties. In real estate mortgage, delivery is to the mortgagee
by the mortgagor is not necessary.
CCCIC cannot deny any liability and is not released from its obligations in the performance
bond. A contract of pledge is not valid against third persons if the same is not in a public document
providing the description and the date of the pledge. A real estate mortgage is not valid as to third
In the present case, there are two principal contracts. The Republic is not a party to the persons if not registered in the Register of Deeds.
consortium agreement and to the surety and performance bond of FFMCCI to Kawasaki. Any
action or omission on its part has no effect on the liability of CCCIC. The surety and performance In pledge, the pledgor can sell the property so long as there is a consent of the pledgee. In
bond state that their purpose was to secure the full and faithful performance of FEMCCI’s part on real estate mortgage, the mortgagor can sell the property without the need of obtaining the
the said undertaking. This is the only undertaking expressly guaranteed by the bonds, the consent of the mortgagee.
fulfillment of which by FFMCCI would release CCCIC from its obligations as surety. Hence, the b. Was the promissory note and the Transfer Certificate of Title of Spouses Gabby and
non-performance of which would give rise to the liabilities of CCCIC as surety. Sharon validly pledge by the Rural Bank of Macrohon to Landbank?
Since FFMCCI defaulted, CCCIC as surety became directly, primarily and absolutely liable to ANS:
Kawasaki as the oblige under the surety and performance bonds. No. It was not valid. Under the law, requisites essential to the contract of Pledge are the
B. One Virtual placed with GILAT a purchase order for various telecommunications equipment, following;
accessories, spares, services and software at a total price of US $ 2,128,250.00. of the said a. Constituted to secure the fulfillment of a principal obligation.
purchase price for the goods delivered, One Virtual promised to pay a portion thereof totaling to
b. The pledgor or mortgagor be the absolute owner of the thing pledge.
US $ 1.2 M. The agreement contained an arbitration clause. To ensure prompt payment of this
amount, it obtained from UCPB General Insurance Co., Inc. surety bond. However, One Virtual c. That the person constituting the pledge have the free disposal of their property, and in the
failed to pay its obligation. Thus, GILAT demanded against UCPB General Insurance Co., Inc. absence thereof, that they be legally authorized for the purpose.
however, the insurance company invoked the arbitration clause contained in the principal contract Here in this case, Rural Bank was not vested authority with special power of attorney by the
between One Virtual and GILAT before it can be held liable. Is the defense interposed by the spouses. Hence, the contract of pledge by the Rural bank of Macrohon to Landbank was not
insurance company meritorious? Explain. valid.
ANS:
No, the defense interposed by the insurance company is not meritorious. UCPB, as a surety, IV.
cannot invoke the arbitration clause because it is not a party to the contract signed and executed
Pia obtained a loan from Gerald in the amount of One Hundred Thousand Pesos (P100,000.00)
between GILAT and One Virtual.
payable in 10 months. As a security of the loan, Pia pledged her 100 sacks of rice deposited in
The existence of the surety agreement does not give the surety a right to intervene in the Bea’s Warehouse. Meanwhile, Bea informed Gerald that 20 of the 100 sacks of rice deposited
principal contract. Nor can an arbitration clause between the buyer and the seller be invoked by a were being eaten by mice and that the moist started to blacken its color. Gerald caused the 100
non-party such as the surety. sacks of rice to be sold in public auction. Pia objected the sale as she intends to withdraw the 20
III. sacks and replace the same with another sacks of rice.
a. Would the sale of the 100 sacks of rice extinguish the pledge?
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ANS: d. If the price of the sale is more than the amount of the necessary expenses, who is
No, the sale will not extinguish the pledge. This is because the proceeds of the sale in entitled to the excess?
situations, like in the present case, is still owned by the pledgor. Only that the pledge shall ANS:
continue with the proceeds. If the price at sale is more than the value of the obligation, the excess shall go to the creditor,
b. Is the opposition of Pia as to the intended sale of the 100 sacks of rice meritorious? unless the contrary is stipulated. Thus, parties can stipulate only regarding the excess but not
ANS: when there is a deficiency.
No, the opposition of Pia is not meritorious. Although the pledgor can demand the return of
the thing pledged when she has reasonable grounds to fear the destruction or impairment of the VI.
thing pledged without the fault of the pledgee. And that the she is offering in place of the thing Lourdes secured a loan in the amount of Five Hundred Thousand Pesos (P500,000.00) from
pledged another thing of the same kind and quality of the former. Rural Bank of Maasin City, Southern Leyte. To secure the payment of the loan, Lourdes executed
in favor of the Bank a Continuing Real Estate Mortgage over her 2-storey residential building with
warehouse spaces. Lourdes was able to pay the same. Subsequently, she obtained another loan
of which she failed to pay. Thus, the bank foreclosed the mortgage, which was constituted over
The pledgee has the superior right to cause the thing pledged to be sold. He has the priority her
of the choice. Thus, if the pledgee chooses to sell the thing at public auction, the pledgor cannot
demand for the return of the thing even if he will give a substitute.
residential building. In the meantime, Lourdes objected to the foreclosure sale on the ground that
Real Estate Mortgage, which she first executed, pertains only to the first loan which was paid
V. already.
Cloie deposited her laptop with Lord Aumar as the former is travelling to Boracay for leisure with A.
her friends. Lord Aumar incurred necessary expenses for the preservation of the laptop. Upon the
demand of Cloie for the return of the laptop, Lord Aumar demanded the payment of the expenses B. Can the 2-storey residential building be subject of Real Estate Mortgage?
incurred by him. However, Cloie failed to pay, thus he refused to return the laptop and instead sell ANS:
the same at public auction. Yes. Under the law, building in itself may be mortgaged by itself apart from the land on which
a. Can Lord Aumar, the depositary, demand reimbursement of the necessary expenses it is built. Such a mortgage would still be considered as REM for the building would still be
incurred by him? considered under the civil code as immovable property even if dealt with separately and apart
ANS: from the land.
Yes, Lord Aumar the depositary can demand reimbursement of the necessary expenses. C. Is the opposition of Lourdes, meritorious?
The law provides that the depositary has the obligation to exercise due diligence because he ANS:
is obliged to return the thing in good condition, thus he may incur necessary expenses for the No, Lourdes’ opposition is not meritorious.
preservation of the thing. Under the law, Continuing Real Estate mortgage or Mortgage with a dragnet clause is similar
However, the law imposes the obligation for the necessary expenses to the depositor. So if to continuing suretyship or guaranty. It means that the mortgage is not limited to the just fix
the depositor doesn’t yet reimburse him of necessary the expenses he incurred, he has the right amount but also cover other credit accommodation in excess thereof. It can secure loans or
of retention over the thing deposited. Thus, the depositary may retain the thing in pledge until the advances and other indebtedness in addition to those already paid or specified in the contract. It
full payment of what may be due him by reason of the deposit. will make available funds without there having executing additional security documents thereby
b. When Lord Aumar retained the laptop, what contract was created between him and saving time and travel.
Cloie? Applying the above rule, Lourdes is not legally correct. Thus, the Bank has the right to
ANS: foreclose the said property.
The contract created here is pledge created by operation of law. The law provides that the
depositary may retain the thing in pledge until the full payment of what may be due him by reason VII. & VIII.
of the deposit.
c. Was the remedy availed of by Lord Aumar appropriate? IX.
ANS: A. Liza obtained a loan from Bagani Credit Corporation for One Hundred Thousand Pesos
Yes, the remedy availed by Lord Aumar was appropriate. (P100,000.00) payable in one (1) year. To further secure the payment of the loan, Liza executed a
In the case at bar, Lord Aumar has the right of retention because Cloie failed to reimburse chattel mortgage over a motor vehicle. The contract of chattel mortgage provided among others,
Lord for the necessary expenses incurred for the preservation of thing. In this instance, the that the motor vehicle shall stand as a security for the first loan and all other obligations of every
depositary can sell the thing retained by him. Because this is a pledge created by operation of kind already incurred or which may hereafter incurred. The subject loan was fully paid.
law. So, the depositor can sell the thing deposited provided the formalities for the sale of the thing Subsequently Liza obtained another loan in the amount of Two Hundred Thousaand Pesos
deposited have been complied with. (P200,000.00). however, she failed to pay prompting Bagani Credit Corporation to file a complaint
for judicial foreclosure of the chattel mortgage. Liza objected the complaint on the ground that the
chattel mortgage could not validly covered the second loan. Decide.
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ANS: XI.
The only obligation specified in the chattel mortgage contract was the first loan which the a. Differentiate Concurrence of Credits from Preference of Credits.
petitioner later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the ANS:
obligation automatically rendered the chattel mortgage terminated; the chattel mortgage had
ceased to exist upon full payment of the first loan. Being merely an accessory in nature, it cannot Concurrence of credits implies the possession by two or more creditors of equal rights or
exist independently of the principal obligation. privileges over the same property or all of the property of a debtor. (All the creditors have equal
rights to the debtor)
The parties did not execute a fresh chattel mortgage nor did they amend the chattel mortgage
to comply with the Chattel Mortgage Law which requires that the obligation must be specified in While, Preference of credit is the right held by a creditor to be preferred in the payment of his
the affidavit of good faith. Simply put, there no longer was any chattel mortgage that could cover claim above others (i.e., to be paid first) out of the debtor’s assets. (Paid first before the assets)
the second loan upon full payment of the first loan. The order to foreclose the motor vehicle b. What are the three (3) categories of credits?
therefore had no legal basis ANS:
B. Enrique bought on installment basis an air-conditioning unit at Regean Marketing Inc. To 1. Special preferred credit
secure the payment of the price, he executed a chattel mortgage over the air-conditioning unit.
Meanwhile, he defaulted in the payment of three (3) installments prompting RMI to foreclose the 2. Ordinary preferred credit
chattel mortgage. Because of the high depreciation value, the air-conditioning unit was sold in an 3. Common credit
amount

lesser than the remaining obligation of Enrique. Can RMI file an independent action against c. Are monetary claims of workers considered as special preferred credits?
Enrique to collect the balance? Explain.
ANS:
No, Article 110 of the Labor Code do not purport to create a lien in favor of the workers or
X. employees for unpaid wages upon properties owned by their employer. Article 110 of the LC did
a. Aside from Negotiorum Gestion and Solution Indebiti, cite at least three (3) forms of not upgrade the workers’ claims as absolutely preferred credit. Claims for unpaid wages do not
quasi-contracts. fall within the category of specially preferred claims except to the extent that such claims are
ANS: already covered by Articles 2241(6) and 2242(3).
1. Article 2170. When by accident or other fortuitous event, movables separately pertaining However, out of all the ordinary preferred credits, the monetary claims of workers were moved
to two or more persons are commingled or confused, the rules on co-ownership shall be up from second priority to first priority in the order of preference as to properties that are not
applicable. burdened with liens or encumbrances.
2. Article 2171. The rights and obligations of the finder of lost personal property shall be d. Sonia has one car, the taxes on which have not yet been paid. Once, the car fell into the sea,
governed by articles 719 and 720. was salvaged, was repaired and has now been pledged with a creditor. If Sonia is insolvent and
3. Article 2172. The right of every possessor in good faith to reimbursement for necessary has not yet paid for any of the acts done on her car, how will the following be paid: the
and useful expenses is governed by article 546. State, the person who salvaged it, the repairer, and the pledge?
4. Article 2173. When a third person, without the knowledge of the debtor, pays the debt, the ANS:
rights of the former are governed by articles 1236 and 1237
5. Article 2175. Any person who is constrained to pay the taxes of another shall be entitled
to reimbursement from the latter
b. Kris Digital Corporation granted its employees a 15-day vacation and
15-day sick leave thinking that it was mandated by law. Upon learning that what is mandatory is 1.
only 5-day service incentive leave, it withdraws the same and consequently demanded that the
Bulak is insolvent. Her assets available for payment are the following:
employees shall reimburse the monetary equivalent of the sick leave already availed of during the
year. Is this a case of solution indebiti. Explain.  A 2-storey apartment building P1,000,000.00
 Cameo pendant gold necklace P50,000.00
ANS:
 Agricultural lot P500,000.00
Yes, this is a case of solution indebiti.  2018 Montero Sport P1,000,000.00
SOLUTIO INDEBITI - is the quasi contract that arises when the person is obliged to return Her obligations are as follows:
whatever was received by him through error or mistake, or received by him although there was no
 Income Tax P300,000.00
right to demand it.
 Real Property Tax (2-storey building) P100,000.00
Essential requisites:  Loan secured by a chattel mortgage
1. There is receipt of something and not merely an acknowledgement; 2. There was no right of the jewelry P40,000.00
to demand it because the giver had no obligation;  Loan secured by real estate
Mortgage of the 2-storey apartment P350,000.00
3. And the undue delivery was because of mistake either of fact or of law.
 Business Tax P50,000.00

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 Claims for salaries of workers P150,000.00
 Unpaid balance of the purchase 3.
price of the car P400,000.00
 Claims of contractors for the A. Due to the continuous heavy rainfall, the major streets in Manila became flooded. This
construction of the 2-storey apartment P500,000.00 compelled Cris to check-in at Square One Hotel. As soon as got off from his Toyota Altis, the
 Loan secured by a chattel mortgage Hotels’ parking attendant got the key of his car and gave him a valet parking customer’s claim
of the car P300,000.00 stub. The attendant parked his car at the basement of the hotel. Early in the morning, Cris was
 Real property tax (argri land) P80,000.00 informed by the hotel manager that his car was carnapped.
 Claims of laborers for construction
Of a drainage in the agri land P95,000..00  What contract, if any, was perfected between Cris and the Hotel when Cris
 Loan secured by a real estate surrendered the key of his car to the Hotel’s parking attendant?
mortgage of the agricultural lot P200,000.00
 Unpaid balance of the purchase ANS:
price of the agricultural lot P100,000.00 It was a contract of Deposit.
 Unpaid materials for the Under the Law, a contract of deposit is a contract whereby a person (depositor) delivers a
construction of the canal and 2-storey thing to another (depositary), or for principal purpose of safekeeping it, with the obligation of
apartment building P500,000.00 returning it when demanded.

Distribute her assets in accordance with the rules on concurrence and preference of Here, the surrender of the key is a symbolical delivery which nature circumstances would
credits. justify the actual delivery of the object because of its impossibility to carry. The depositary which is
the Hotel has the obligation for the safekeeping of the car in the hotel premises.
2.  What is the liability, if any, of the hotel for the loss of Cris’ car?
Distinguish: ANS:
a. Deposit from Commodatum The Hotel is liable for damages for the loss of Cris’ car.
ANS: The Hotel as depositary under the law is obliged to take care of the thing deposited with the
In deposit, the principal purpose is safekeeping of the property while in commodatum, the diligence of a good father of the family taking care as if of his own. When the depositor demanded
principal purpose is the transfer of the use of the property. its return, they shall return it without any damage as same condition as it was deposited.
Deposit may be gratuitous. Commodatum, on the other hand, is essentially and is always
gratuitous. B. Enumerate the instances when a contract of deposit becomes onerous.
In extrajudicial deposit, only movable things may be the object, while in commodatum, ANS:
both movable and immovable may be the object. 1. Where there is a contrary stipulation;
b. Deposit from Mutuum 2. Where the depositary is engaged in the business of storing goods;
ANS: 3. Where property is saved from destruction without the knowledge of the owner
In deposit, the principal purpose is safekeeping, while in mutuum, it is the consumption of
the subject matter. C. A deposited something with B, who is insane, B in turn disposed of it in favor of C. Can A go
against C?
In deposit, the depositor can demand the return of the thing at will. In mutuum, the lender
must wait for the expiration of the term granted to the debtor. ANS:
In deposit, both movable and immovable property may be the object, while in mutuum, No, A cannot go against C.
only money or other consumable thing. As a general rule, a capacitated depositor can only after the incapacitated depositary in order
c. Pledge from Chattel Mortgage to recover the thing deposited while the same is still with the incapacitated depositary’s
possession, or to compel him to pay the amount by which he has benefited with the thing or its
ANS: price.
In chattel mortgage, the delivery of the personal property to the mortgagee is not However, if the deposited thing is acquired by a third person who acted in bad faith, the
necessary, while in pledge, such delivery is necessary. depositor may bring an action against him for its recovery. In the present case, there is no
In chattel mortgage the registration is required by law, while in pledge registration in the showing that C acted in bad faith in acquiring the thing deposited.
registry of property is not necessary.
In chattel Mortgage, if the property is foreclose and there is deficiency the creditor is 4.
entitled to recover the deficiency from the debtor except if the chattel is a security for the
purchase of personal on installment plan, while in Pledge if the property is sold if their is
deficiency the creditor is not entitled to recover notwithstanding any stipulation to the contrary.

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Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure payment, Lito No. Under the law, the guarantor cannot be compelled to pay the creditor unless the latter has
executed a chattek mortgage on a Toyota Avanza and a real estate mortgage on a 200-square exhausted all the property of the debtor, and has resorted to all the legal remedies against the
meter piece of property. debtor.
Thus, Basilio should exhaust first all the legal remedies against Amador before he can compel
 Would it be legally significant- from the point of view of validity and enforceability- if Cacho to pay.
the loan and the mortgages were in public or private instruments?  If Amador sells his rental residential house and lot to Diego, can Basilio foreclose the real
ANS: estate mortgage?
Yes. It has legal significant because the Real Estate Mortgage contract is covered by statutes ANS:
of frauds. It has to be in a Public Instrument and registered to bind third persons and even not Yes, Basilio can foreclose the real estate mortgage if the principal obligation is already due
registered but the third person knows the existence of the mortgage it is binding unto him. and demandable.
On the other hand, Chattel Mortgage to be in Public Instrument and needs to be registered in Under the law, Foreclosure is the remedy which is an action quasi in REM which is based on
the LTO to bind third persons as well. personal claim against the specific property of the defendant. Its purpose is to have the property
 Lito’s failure to pay led to the extrajudicial foreclosure of the mortgaged real cease and sold by the court order in order to satisfy the obligation and the proceeds will be
property. Within a year from foreclosure, Lito tendered a manager’s check to Ferdie applied by the creditor’s claims which is Basilio.
to redeem the property. Ferdie refused to accept the check on the ground that he C. When can the right of redemption be exercised in extrajudicial foreclosure of mortgage?
wanted payment in cash: the check does not qualify as legal tender and does not ANS:
include the interest payment. Is Ferdie’s refusal justified?
In extrajudicial foreclosure of mortgage, the right of redemption can be exercised by the
mortgagor by redeeming the mortgaged property at any time within the term of one year from the
date of the registration of the certificate of sale with the appropriate Register of Deeds.
ANS: 6.
Yes. The contention of Ferdie’s refusal was justified. A.
Under the law, Legal Tender in the Philippines is to be paid in Cash. Check is not a legal
tender per se. Lito should pay in cash so that he can exercise the right of redemption over his B.
property.
C. What is the formalities required in a contract of guaranty?
Thus, Ferdie is correct.
ANS:
5.
It should Formal or written in form.
A. A, B, C and D are solidary debtors of X for P40,000. X released D from the payment of his
share of P10,000. When the obligation became due and demandable, C turned out to be The law explicitly provides; the contract of guaranty is governed by statute of frauds because
insolvent. Should the share of the insolvent debtor C be divided only between the two other it is a special promise to answer the debt or miscarriage of another. Hence an oral promise to
remaining debtor, A and B? guaranty is not enforceable.
ANS: 7.
No. Under the law, a release made by the creditor in favour of one of the debtors, without the 8.
consent of the others, benefits all to the extent of the share of the debtor to whom it has been 9.
granted. A. What is contract of antichresis? Enumerate its characteristics.
In this case, there was no mention of consent from the other debtors regarding the release of ANS:
D. Hence, A, B, C will only be responsible on their proportionate share which is P10,000.
However, C is insolvent. So, C’s share will be divided proportionately to A and B owing to each of By the contract of antichresis, the creditor acquires the right to receive the fruits of an
them P15,000 as debt to X. immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing,
and thereafter to the principal of his credit.
The following are the characteristics of a contract of antichersis:
B. Amador obtained a loan of P300,000 from Basilio payable on March 25, 2012. As security for
the payment of his loan, Amador constituted a mortgage on his residential house and lot in 1. Accessory
Basilio’s favor. Cacho, a good friend of Amador, guaranteed and obligated himself to pay Basilio, 2. Formal as there is a requirement with respect to its form
in case Amador fails to pay his loan at maturity. 3. Nominate
 If Amador fails to pay Basilio his loan on March 25, 2012, can Basilio compel Cacho to 4. Consensual
pay?
B. What are the two obligations of the creditor in a contract of antichresis?
ANS:
ANS:
The two obligations of the creditor in a contract of antichresis are the following:

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1. Pay the taxes and charges upon the estate, unless there is a stipulation to the liabilities and it is able to turn a monthly profit, it could not pay its loan installments to Bank X as
contrary they fall due.
2. Apply the fruits to the interest, if owing, and thereafter to the principal of his credit A. What is the concept of insolvency under the Financial Rehabilitation and Insolvency
C. Is an affidavit of good faith an indispensable requirement for the validity of a chattel Act? May W Medical, Inc. be considered insolvent under FRIA?
mortgage? ANS:
ANS: Under the FRIA, the term “insolvency” refers to the financial incapacity of the debtors to pay
No, an affidavit of good faith an indispensable requirement for the validity of a chattel their liabilities as they fall due in the ordinary course of the business or whenever their liabilities
mortgage. Absence of the affidavit vitiates a chattel mortgage only as against third persons are greater than their assets. Under the FRIA, insolvency covers both “bankruptcy” and
without notice like creditors and subsequent encumbrance. “illiquidity”.
It is required only for the purpose of transforming an already valid mortgage into a preferred In the present case, W Medical may be considered insolvent under FRIA despite the fact that
one. its assets are more than its liabilities because it could not pay its loan installments to Bank X as
they fall due.
D. When is the right of redemption in a chattel mortgage?
B. Assuming that W Medical, Inc. is considered insolvent, may it file a petition for suspension
ANS: of payments under the FRIA?
The right of redemption in chattel mortgage is made by paying or delivering to the mortgagee ANS:
the amount due on such mortgage and the cost and expenses incurred by the breach of the
condition before the sale. Otherwise stated, there is no right of redemption in a chattel mortgage No, W Medical, Inc. may not file a petition for suspension of payments under the FRIA.
since all rights of ownership leave the mortgagor and vests to the purchaser upon the sale of the This is because suspension of payments is a remedy available ONLY to INDIVIDUAL
personal property. insolvent debtors, not to sole proprietorships, partnerships, and corporations.
C. Assuming that W Medical, Inc. is considered insolvent, what are the legally recognized
modes of rehabilitation it may opt to avail of?
ANS:
W Medical, Inc. may opt to avail of the following legally recognized modes of rehabilitation:
1. Court-Supervised
a. Voluntary proceedings
10. b. Involuntary proceedings
A. Define Insolvency under Financial Rehabilitation and Insolvency Act of 2010.
ANS: 2. Pre-Negotiated Rehabilitation
3. Out-of-Court or Informal Restructuring Agreement or Rehabilitation Plan.
Under the FRIA, the term “insolvency” refers to the financial incapacity of the debtors to pay
their liabilities as they fall due in the ordinary course of the business or whenever their liabilities D. If W Medical, Inc., files a petition for rehabilitation before the court, is it possible for the
are greater than their assets. Under the FRIA, insolvency covers both “bankruptcy” and rehabilitation proceedings to be converted into one for liquidation?
“illiquidity”. ANS:
B. What are the remedies under FRIA for those who are insolvent? Yes, it is possible for the rehabilitation proceedings to be converted into one for liquidation if
ANS: there is not substantial likelihood for the debtor to be successfully rehabilitated.
The following are the remedies under FRIA for those who are insolvent: Rehabilitation proceedings may be converted into liquidation proceedings in the following
instances:
1. Rehabilitation
1. The debtor is insolvent;
2. Liquidation 2. No substantial likelihood for the debtor to be successfully rehabilitated;
3. Out-of-court restructuring 3. If no rehabilitation plan is confirmed within one (1) year from the date of the filing of the
4. Petition for suspension of payment for individual debtors petition for rehabilitation;
4. If the termination of the rehabilitation proceedings was due to failure of the rehabilitation
or dismissal of the petition for reasons other than technical grounds;
5. If the court determines that the debtor or creditor supporting the Rehabilitation Plan
acted in bad faith, or that the objection is not curable
I.
W Medical, Inc., operated a full-service hospital named WMed. Using its stockholders’
II.
advance and a mortgage loan from Bank X, W Medical, Inc. commenced the construction of a
new 11-storey WMed Annex Building. Unfortunately, due to financial constraints, only seven (7) Yellow Fin Tuna Corporation, a domestic corporation, applied for a credit facility in the
floors were constructed and the WMed Annex Building remained unfinished. amount of P50 million with Yengzi Financial Corporation. The application was approved and the
Credit Agreement was signed and took effect. Yska and Yuan, Yellow Fin Chairman and
Despite the non-completion of the WMed Annex Building, W Medical Inc. continued its
President, respectively, executed a Continuing Suretyship Agreement in favor of Yengzi wherein
operations and earned modest revenues. While W Medical Inc.’s assets are more than its
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CREDIT TRANSACTIONS
they guaranteed the due and full payment and performance of Yellow Fin’s guarantee obligations c. two-thirds vote of the Board of Directors and authorized by the vote of the
under the credit facility. YFC soon discovered material inconsistencies in the financial statements stockholders representing at least a majority of the outstanding capital stock
given by Yellow Fin, Drawing YFC to conclude that Yellow Fin committed misrepresentation. d. two-thirds vote of the Board of Directors and authorized by the vote of the
Under the Credit Agreement, any misrepresentation by Yellow Fin or its sureties will constitute an stockholders representing at least least two-thirds of the outstanding capital stock
event of default. YFC thus called an event of default and filed a complaint for sum of money
against Yellow Fin, Ysko and Yuan. Immediately thereafter, Yellow Fin filed a petition for
rehabilitation. The court suspended the proceeding in YFC’s complaint until the rehabilitation court 2. PA Assurance was incorporate in 1980 to engage in the sale of pre-need educational plans. It
disposed of the petition for rehabilitation. YFC posits that the suspension of the proceedings sold open-ended educational plans which guaranteed the payment of tuition and other fees to
should only be with respect to Yellow Fin but not with respect to Ysko and Yuan. planholders irrespective of the cost at the time of availment. It also engaged in the sale of fixed
Is YFC correct? value plans which guaranteed the payment of a pre-determined amount to planholders. In 1982,
PA was among the country’s top corporations. However, it subsequently suffered financial
ANS: difficulties.
Yes, YFC is correct. On September 8, 2005, PA filed a petition for Corporate Rehabilitation before the RTC
Actions or proceedings against the surety of the insolvent debtor that filed a petition for of Makati City. On October 17, 29005, ten (10) plan holders filed an opposition and Motion to
rehabilitation are not subject to the stay order. Consequently, the suit may continue against him Exclude Plan Holders from Stay Order on the groung that planholders are not creditors as they
(Section 18 (c) of FRIA). have a trust relationship with PA. Are the planholders correct?
ANS:
III. The plan-holders are not correct. Section 6 of the Supreme Court Interim Rules of Procedure
Procopio, a Director and the CEO of Parisian Hotel Co., Inc., was charged along with on Corporate Rehabilitation of 2000 (which was amended and replaced by the Rules of Procedure
other company officials with several counts of estafa in connection with the non-remittance of SSS on Corporate Rehabilitation of 2009) do not provide that a claim arising from a pre-need contract
premiums the company had collected from its employees. During the pendency of the cases, is an exception to the power of the trial court to stay enforcement of all claims if the court finds the
Parisian filed a petition for rehabilitation. The court, finding the petition to be sufficient in form and petition for rehabilitation to be sufficient in form and substance.
substance, issued a commencement order together with a stay or suspension order. V.
Citing the commencement order, Procopio and the other officers facing the criminal A. Discuss the nature of the proceedings in FRIA.
charges moved to suspend the proceeding in the estafa cases. ANS:
The proceedings under FRIA are proceedings in rem. In rem actions are against the thing
itself and they are binding upon the whole world.

A. What is a commencement order, and what is the effect of its issuance?

ANS:
A commencement order is an order issued by the Rehabilitation Court if the petition for The court need not acquire jurisdiction over the person of the defendant in actions in rem
rehabilitation filed by the financially distressed debtor or by its creditor is sufficient in form and because they are not directed against any person. The court need only to acquire jurisdiction over
substance. The rehabilitation proceedings are commenced, upon issuance by the rehabilitation the res.
court of commencement order. The stay order which is included in the commencement order shall B. What are the advantages of the judicial remedies under FRIA.
suspend all actions or proceedings for the enforcement of claims against the debtor (Section 16 of
FRIA). ANS:
B. Suppose you are the trial judge, will you grant the motion to suspend of Procopio, et The following are the advantages of the judicial remedies under the FRIA:
al.? 1. Retention of Management
2. Non-withholding of Supply
ANS:
3. Protection from certain actions and processes
Under Section 18 of FRIA, the stay order does not include criminal action against the 4. Exemption from taxes
individual debtor, or owner, partner, director or officer of the debtor. 5. Compromise binding
6. Cram-down Power
IV. 7. Binding effect of Rehabilitation Plan
1. Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a petition for
voluntary rehabilitation must be approved by:
a. a majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least a majority of the outstanding capital stock
b. a majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least two-thirds of the outstanding capital stock

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