BULK SALES LAW

This was enacted during the Philippine Commission. It was patterned afte
r the laws of the different states in the United States but I think this was pat
terned after the bulk sales law of New York because the bulk sales law of the di
fferent states varies specially in the Midwest where the bulk sales law would ev
en cover agricultural products.
The bulk sales law must be interpreted strictly for two reasons:
(1) It is penal;
(2) It is in derogation of the natural right to dispose of one s property.
The purpose of the law is to prevent the fraudulent sale of the goods in bulk.
Section 2 defines what is a sale in bulk. It says sale, transfer, mortga
ge. So mortgage is included or assignment of stocks of goods, wares, etc.
There are three transactions contemplated here.
(1) A sale of stock of goods other than in the ordinary course of trade. So peo
ple just buy commodities in the department store and there is no violation. If
somebody goes there and buys everything, lock, stock and barrel, so that will be
a sales in bulk.
(2) A sale of all or substantially all of the business or trade. Again it would
cover sales, transfer, mortgage or assignment of all or substantially all of th
e business or trade.
(3) The sale, transfer , mortgage or assignment of all or substantially all of t
he fixtures and equipment used in the business of the seller. The book says the
term fixtures refers to things which merchants annex to their premises, which s
tores, handle and display their goods.
The commentators say that this law refers to first merchants, the middlem
an between the Manufacturer and the consumer. It does not apply to manufacturer
s. When Ford Philippines closed its factory here in 1978, they sold their plant
without complying with the bulk sales law. They were manufacturers. The bulk s
ales law did not apply to them. You must be a merchant. The only decisions we
have applying this law is from the Court of Appeals. An old case, somebody who
owned a foundry shop sold the shop and the C.A. said it was not covered by the l
aw because it was not engaged in selling goods. It was involved in lease of ser
vices because it would only fabricate some wrought iron products if the customer
goes there and makes an order and they would make it in accordance with his spe
cification. Like if the customer wants grills for his house, they will fabricat
e the grills incorporating the design that he wants. So if the customer wants a
steel gate, this fellow will fabricate in accordance with the design. Or he wa
nts a wrought iron set for his garden so this must be fabricated. That s why you
have more recently the Union Glass case where Union Glass became insolvent and t
hey liquidated their indebtedness to Development Bank. They made a dacion en pa
go of their factory and that was being questioned. The Court said that Union Gl
ass was engaged in the lease of services. They would only make a glass product
if a customer goes in and places the order in accordance with the specifications
of the latter. Example, here is somebody opening a restaurant and he would lik
e mirrors in the foyer to give a spacious look. So they will design it and lets
say put peacocks or flowers depending on the design which the customer wants.
In those two cases, it was held that the conveyance was not covered by the bulk
sales law.
The law also does not apply to sales by executors, administrators, recei
vers, assignees in insolvency or public officers acting under judicial force lik
e writ of execution, foreclosure of mortgage since the sale is made under the su
pervision of the court. The law presumes that it is not fraudulent so it is exe
mpted.
 If a sale is covered by the bulk sales law, there are three obligations w
hich the seller has to comply with.
(1) Under Section 3, he will prepare an affidavit stating an inventory of all hi
s debts. So that affidavit will indicate the names of his creditors, their addr
esses, and the amount due them. When we talk of creditors, we do not refer only
to a lender. It may be someone who has a claim for damages because he was inju
red in an accident or somebody suing damages for libel. So creditor here is com
prehensive. So that s the first obligation. They must prepare that sworn invento
ry and must register it with the Department of Trade and Industry. So you must
give an inventory to the buyer and register that with the Dept. of Trade and Ind
ustry. Before it was the Bureau of Commerce who was in charge of that and tha
t was transferred to the Bureau of Domestic Trade, although the last time I hear
d it was transferred to the Bureau of Consumer Protection of the Dept. of Trade
and Industry. So that is what you do. Prepare a sworn inventory, give a copy t
o the buyer, register it with the Dept. of Trade.
(2) At least 10 days before the delivery, you must make an inventory of the prop
erties that you will deliver and give the terms and conditions of the sale and g
ive that to his creditors.
(3) He must apply the proceeds of the sale in payment of the claims of his credi
tors pro rata.
If a sale is covered by this law and the seller does not comply with this
, the sale will be void. But there is an alternative way of complying with this
law. The other one is to get a written waiver from all your creditors. This wa
s asked in the bar exam many years ago, what are the alternative ways by which a
seller can comply with the bulk sales law? First one is he does these things-m
akes his inventory, give a copy to the buyer, register with DTI, and at least 10
days before the delivery he makes an inventory of the properties he will delive
r and state the terms and conditions of the sale and notify his creditors. The
third, he applies the proceeds to pay his creditors. The alternative method is
getting a written waiver from all his creditors.
THE CHATTEL MORTGAGE LAW
The requisites to constitute a chattel mortgage:
(1) It must be constituted to secure a principal obligation.
(2) The Civil Code provides that the mortgagor must be the absolute owner of the
property mortgaged.
You have that case of Cebu International Finance Corporation v. C.A. wher
e somebody sold his vessel but he has not yet been fully paid but he executed a
deed of absolute sale. There was an agreement between the parties that until th
e seller is fully paid, the buyer will not register the vessel in his name but i
n violation of this agreement, he registered the vessel in his name. After that
, he mortgaged the vessel. The sellers questioned the validity of the mortgage.
The Court said while the vessel was registered in the name of the mortgagor, t
he mortgagee had the right to rely in good faith on the certificate of registrat
ion. So the mortgage was valid.
(3) The mortgagor must have free disposal of his property. If not, you have to
get authorization from the guardianship court. So if he is a minor, someone ins
ane, deaf-mute who cannot read. Congressman Jalosjos because he will suffer civ
il interdiction. He cannot administer and dispose of his properties.
(4) The property must be personal property. Well what is personal property is m
entioned in the Civil Code. For instance a car, vessel, aircraft, shares of sto
ck, machinery placed by a tenant on property on which he does not own. The Civi
l Code says property may be treated as personal property for other purposes in o
ther special law. The Chattel Mortgage law provides that standing crops are con
sidered chattels for purposes of the law. Under the Civil Code they are conside
red real properties but for purposes of this law they are considered as personal
properties. Personal properties may be subject of the Chattel Mortgage Law. S
tock in trade can be subject of a chattel mortgage. The Court has also said tha
t building built on the land of another although real property, building built o
n land maybe subject of a chattel mortgage on the principle of estoppel. Since
the parties treated that as a chattel, they will be in estoppel. The Court appl
ied that also to the equipment in a textile mill. It was also subject of a chat
tel mortgage. The Court said that because of estoppel it will be considered as
a chattel between the parties. Only between the parties, not with respect to th
ird parties. So if a real estate mortgage should be constituted over that, the
real estate mortgagee will have a better right because it will not occur to him
to check with the chattel mortgage registry to find out if that property has bee
n mortgaged earlier. It says only between the parties and that s why when you for
eclose, you have to follow Act 3135, which governs the extrajudicial foreclosure
of real estate mortgage.
(5) The mortgage must be registered in the Chattel Mortgage Registry in the regi
stry of deeds. Now aside from that, if it s a motor vehicle, the mortgage will ha
ve to be registered also in the land transportation office. If it is an aircraf
t, the mortgage will also have to be registered in the Air Transportation Office
. If it s a vessel, with the Maritime Industry Authority. Now if the property is
located in another place, different from the residence of the mortgagor, it wil
l be have to be registered twice, the place where the property is located and in
the place where the mortgagor resides. In the case of shares of stock, their i
ntangible choses of action are considered to exist in the principal office of th
e corporation. So if somebody owns shares of stock in Ayala Corporation and he
will mortgage that but he resides in Quezon City, the mortgage will have to be r
egistered both in Makati and in Quezon City. Now the Supreme Court has said in
Filipinas Marble Corporation that a Chattel Mortgage is valid if between the par
ties even if it was not registered. It cited as basis Art. 2125 of the Civil co
de. Now Tolentino has criticized that because he said that while the SC cited A
rt 2125 of the Civil Code, that refers to real estate mortgages and not to chatt
el mortgages as what the Court has said.
If it involves properties of a public utility, the mortgage will have to
be approved by the regulatory agency like the Land Transportation Franchising Re
gulatory Board, the Board of Energy. But again, the mortgage will be valid only
as between the parties if it has not been approved by the regulatory agency. S
o if the mortgagor has a creditor, he can attach that. He will be protected.
(6) In addition, the parties are required to execute an affidavit of good faith.
Where the mortgagor and the mortgagee will swear that the mortgage is being co
nstituted to secure a valid obligation and not one for the purpose of defrauding
creditors. If there is no affidavit of good faith, the chattel mortgage is val
id as between the parties. It will only affect the validity as against creditor
s and subsequent encumbrancers. So if a subsequent party is not aware of the pr
evious mortgage, he will be protected. He is a buyer in good faith and for valu
e.
Due of the requirement that there must be a chattel mortgage, th
e SC has said you cannot constitute a chattel mortgage to secure a future indebt
edness because the parties are swearing that they are constituting the chattel m
ortgage to secure the payment of a valid obligation. If the obligation does not
yet exist and will still be contracted in the future, how can the parties swear
 to that. That s why you cannot constitute a chattel mortgage as a collateral for
a credit line because there is no loan yet. Remember, mutuum is a real contrac
t. It is perfected upon the delivery of the money they borrowed. The credit li
ne is given, the bank merely says we commit that should you borrow money in the
future, we make the money available. That s why we have that latest ruling of the
Acme Shoe Rubber Plastic case where the Court said, where a new debt is contrac
ted the parties must either amend the existing chattel mortgage to include the n
ew debt or if it has already been extinguished through payment of the first debt
, it must constitute a new chattel mortgage. Unlike a real estate mortgage whic
h can be constituted to secure a future debt. That s why banks try to help their
borrowers when they constitute a real estate mortgage to stipulate there that it
will cover future debts. That s why you save on documentary stamps and registrat
ion fees with the register of deeds.
Chattel Mortgage is an accessory obligation. That s why if the ca
r mortgaged was stolen, lost or wrecked, the principal obligation subsists and i
f somebody merely mortgaged his car (his property) to secure the debt of another
, but he did not bind himself solidarily, he will not become solidarily liable w
ith the borrower. So that if lets say the proceeds from the foreclosure are not
enough to pay for the debt, he will not be liable for any deficiency.
When the chattel mortgage has been registered, subsequent mortga
gees and creditors can only attach or hold a lien on the equity of redemption.
They will have to respect the prior mortgage. Since mortgage does not convey ow
nership, the mortgagor remains the owner. He can sell the property mortgaged.
Sale will be valid but he will be criminally liable under the Revised Penal Code
.. Usually the chattel mortgage will stipulate that if you sell the property,
that will accelerate and make the obligation immediately due and demandable. Mo
rtgagee must foreclose otherwise it will be a pactum commisorrium. He cannot ju
st appropriate the property and if the mortgagor refuses to surrender the proper
ty, he will have to file usually an action for replevin. Seize the property so
they can foreclose the mortgage.
In case of the foreclosure, the one who can foreclose may be a sheriff,
notary public, or the creditor if so authorized under the chattel mortgage. Usu
ally there will be a provision there authorizing the mortgagee to sell the prope
rty mortgaged. The sale will be made in a public place in the municipality wher
e the mortgagor resides or where the property is located. Usually the municipal
hall. Notice must be given at least 10 days in 2 or more public places in the
municipality like in the municipal hall and in the public market or park and the
mortgagee should be notified. If these notice requirements are not complied wi
th, then the sale will be void. If the sale was made in a different place again
the sale will be void. However, the parties may stipulate on where the sale wi
ll be made.
General Rule, if the mortgagor files a simple collection case, he abando
ns the mortgage. That may happen if lets say the property mortgaged is a car an
d it is so dilapidated that if the mortgagor forecloses it, it will be junk.
If the proceeds exceed the amount due the mortgagee, the excess
should be given to the mortgagor. If there is a deficiency, as a rule, you can
recover the deficiency except under Art. 1484 of the Civil Code. In case of sal
e of personal property on installment where the property was mortgaged to secure
payment of the purchase price. If the mortgage is foreclosed, the mortgagee ca
n no longer recover the deficiency . Remember that was an amendment to the old
Civil Code sponsored by Recto that was retained in the present Civil Code. If t
here is a co-signer who bound himself solidarily to the borrower, if there is a
deficiency the lender cannot run after the co-signer because remember if the co-
signor will be held liable to the creditor, under the Civil Code, the guarantor
is entitled to demand reimbursement from the principal debtor and therefore if w
e will allow that in effect that debtor will be held liable for the deficiency.
That s why you cannot run after the surety or guarantor if it was in the case of
sale of property in installment which was mortgaged. .

28 January 2002 Pepper Bruce

INSOLVENCY LAW
Our insolvency law, the portion of this on suspension of payment was copied form
the Code of Commerce for there is no such provision in the American law.
Chapter 2
Suspension of Payments
This chapter that deals with suspension of payments is different from the suspen
sion of payment that you file in the court with the transfer of jurisdiction of
intra-corporate cases to the RTC. The Insolvency law contemplates a situation wh
ere the borrower is not insolvent his assets exceeds his liability, except that
he has a liquidity problem. It contemplates a situation where the debtor will no
t be able to pay off his debts when they become due. Like when you have a real e
state developer and sales are poor. The developer has a numerous lots and houses
but since he cannot sell them, he doesn t have money to pay off his debts.
SECTION 2 says that when a debtor has sufficient properties to cover his debts b
ut he foresees that he will be unable to pay them when they become due, he may f
ile a petition for suspension of payment.
The following documents shall be attached to the petition:
1. A verified schedule containing a full and true statement of the debts and lia
bilities of the petitioner with a list of creditors, their addresses, sum due ea
ch, 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 property, real and personal, of the petitioner including property exempt
from execution and a statement of the value of each property, its location, and
encumbrances thereon, if any
3. The proposed agreement he requests of his creditors
The court will then call a meeting of the creditors to be published in a newspap
er of general circulation and in addition, notice to be sent to the creditors.
The filing of the petition will produce the following effects:
1. The court will enjoin the creditor from disposing of his properties except in
the ordinary course of business.
Example:
A department store can continue selling its merchandise to customers but it cann
ot enter into bulk sales.
2. The court shall enjoin the petitioner from making any payment other than nece
ssary expenses of business.
Example:
You will have to continue paying, for example, rent, employees salaries, electric
ity, and taxes.
3. Upon request to the court, all pending executions against the debtor shall be
suspended except execution against property especially mortgaged
If there is a writ of execution issued against the debtor, that will be suspende
d. The debtor should file a motion to suspend execution unless it is a mortgage
indebtedness because then the mortgagee may proceed to foreclose the mortgage
The court will send notices to creditors and only those creditors who were inclu
ded in the schedule filed by the petitioner shall be cited to appear and take pa
rt in the meeting of creditors. They will be required to bring with them written
proof of their respective claims, otherwise they will not be allowed to partici
pate in the meeting.
DOUBLE MAJORITY
You need a double majority of the creditors to agree on the same proposition to
effect a suspension of payments. The majority shall be 2/3 of the creditors voti
ng upon th esame proposition, which 2/3 represent at least 3/5 of the total liab
ilities of the petitioner.
Example:
In the petition for suspension of payments, the borrower will state there that w
hat is his proposal. The proposal says payment in 2 years. The judge will call f
or a vote. Assuming that there are ten creditors, and the borrower owes them a t
otal of P1M. There should be 2/3, so at least 7 creditors must agree to that, an
d those who agree must represent at least 3/5 of the entire debt, meaning P600k.
If rejected, the court will ask for any other suggestion. Then someone will sug
gest 18 months. Vote again. Rejected again. Another suggests 1 year. Then they w
ill vote again. If you muster the required double majority, the court will order
the parties to abide by that. If no double majority could be mustered on any pr
oposal, then the court will dismiss the case and every creditor will be free to
pursue his claim.
The law provides for certain claims which could not be covered by suspension of
payments. Creditors not affected by order of suspension of payments:
1. Those having claims for personal labor, maintenance, expenses for the last il
lness and funeral of the wife or children of the debtor incurred in the 60 days
immediately preceding the filing of the petition
2. Those having legal contractual mortgages.
If the creditors agree on a proposition, anybody who does not agree may object b
ased on the three grounds mentioned in the law:
1. Defects in the call for the meeting, in the holding thereof, and the delibera
tions had thereat which prejudice the rights of the creditors
2. Fraudulent connivance between one or more creditors and the debtor to vote in
favor of the proposed agreement
3. Fraudulent conveyance of claims for the purpose of obtaining a majority
Example:
One of the creditors is a kumpadre of the debtor. He assigns his credit to 4 per
sons for the purpose of getting a majority and they will agree to what the debto
r is proposing.
So that vote, when approved by double majority, is binding upon all persons who
took part in the meeting, but not those who did not attend or did not vote unles
s they consent to the result of the voting.
If the debtor fails to comply with what was agreed upon, then the rights of the
creditors will be revived as if no suspension of payments took place.
CHAPTER 3
VOLUNTARY INSOLVENCY
Chapter 3 deals with voluntary insolvency. Here, the assets of the debtor are le
ss than his liabilities. The law says that if the debtor is insolvent, he can be
thrown into insolvency if he owes more than P1000. This was enacted in 1909 so
the amount is unrealistic.
Creditors
SUSPENSION
INSOLVENCY
Purpose
Debtor
The amount
has
does
isreceive
OFnotindebtedness
to
sufficient
of PAYMENTS
delay
discharge
have
less
orsufficient
properties
suspend
than
theistheir
debtor
not
the
properties
tocredits,
affected
payment
from
pay his
payment
ofdebts
to
and debts
pay
inofcases
his
debts
debts
where there are preferen
ces, some creditors may not receive anything at all
In voluntary insolvency, it is the debtor who will voluntarily file the petition
. He will file an inventory stating his assets and liabilities and he shall incl
ude even his properties which are exempt from execution because he should not ta
ke it upon himself to make the judgment that certain properties should not be in
cluded. He should let the court decide whether or not they should be excluded in
his estate for being exempt from execution.
If he failed to include certain assets or certain creditors in the inventory he
submitted, if he acted in good faith, that can be amended to correct the omissio
n. But if there was a fraudulent intent, then he will not be entitled to a disch
arge, because the main idea behind voluntary insolvency is to give somebody who
is insolvent a chance to be discharged of his debts and to make a fresh start.
When the court receives the petition, it will issue an order declaring the petit
ioner insolvent and will order the sheriff to take possession of his properties
except those which are exempt from execution. Meanwhile, the debtors of the peti
tioner will be prohibited from paying him or delivering to him any property belo
nging to him which may be in their possession.
The court will then call a meeting of the creditors to appoint an assignee, an a
dministrator who will take over all the assets of the insolvent in favor of the
creditors. The main idea behind this is to have an orderly and systematic way of
distributing the remaining assets among the creditors, otherwise it will be fre
e for all, each creditor trying to grab and attach whatever he can so he gets mo
re than the other creditors. So, to avoid that mad scramble where everybody s tryi
ng to get an advantage over the other, everything just goes to a common pot that
will be distributed according to the rules of concurrence and preference of cre
dits. So the court will call a meeting of the creditors that will be published i
n the newspaper and they will also be given copies of the order.
While action is pending, the insolvent shall be suspended (dunno what this means
). Once an assignee has been appointed by the court, the sheriff shall turn over
to him properties of the insolvent and legal title will be vested upon the assi
gnee for the benefit of the creditors.
If a claim is secured by a mortgage or a pledge, and a case is already pending,
the case shall be suspended until an assignee is appointed by the court. Once an
assignee is appointed, what the secured creditor should do is to file a MOTION
TO BE EXCLUDED from the insolvency proceeding because he intends to pursue his l
ien on the mortgage.
If the case has not yet been filed, the creditor should file in the insolvency c
ourt a MOTION FOR LEAVE OF COURT to file the case because he intends to enforce
his lien to foreclose the mortgage. Once the assignee has been appointed, he wil
l be allowed to proceed.
If the claim is unsecured and a complaint was already filed in court as an ordin
ary claim, the case may be allowed to continue but only for the purpose of deter
mining how much is really due to the creditor. Once there is a final judgment, t
he creditor cannot ask for execution. He has to join the other creditors in shar
ing the common pot according to the rules on concurrence and preference of credi
ts. He will now file a claim with the insolvency court based on the decision.
But if a case has not been filed, the creditor cannot file a claim because what
he should do is to file his claim in the insolvency proceedings once an assignee
has been appointed.
PHIL. TRUST CO. V NATIONAL BANK
Effect of filing a Petition: Once a petition is filed, it ipso facto takes away
and deprives the debtor petitioner of the right to do or commit any act of prefe
rence as to creditors, pending the final adjudication.
CHAPTER 4
INVOLUNTARY INSOLVENCY
Chapter 4 deals with involuntary insolvency. In this case, it is the creditors w
ho will file the petition. Three or more creditors who are residents of the Phil
ippines whose total credits exceed P1000. But none of them must have been a cred
itor by assignment within 30 days upon the filing of the petition.
Notice this recurring 30-day cut-off period in the law. The law usually presumes
that things done within 30 days before the filing of a petition is fraudulent i
n nature.
The creditors must be residents of the Philippines and their credits must have b
een approved in the Philippines.
STATE INVESTMENT HOUSE, INC.
Citybank, Bank of America and Standard Chartered Bank joined in filing a petitio
n to declare a debtor insolvent. It was argued that they are not residents becau
se they are foreign corporations. Held: Foreign corporations licensed to do busi
ness in the Philippines are residents and may therefore file a case for involunt
ary insolvency.
The debts must further be approved here. Taking, for example the above-mentioned
foreign banks, if the debt was approved from a branch abroad, then you cannot f
ile a petition here for insolvency.
The petitioners will be required to post a bond to answer for damages should the
petition be dismissed. This is important because once a petition for insolvency
is filed against the debtor, its reputation will definitely be tarnished and it
s name shall appear in the list circulated to Credit Managers Association of the
Philippines.
When the petition is filed, the court will order the borrower to explain why he
should not be declared an insolvent. Meanwhile, all the people who owe him shall
be ordered not to deliver to him any money or property which are in their posse
ssion. If the court finds the petition is not meritorious, then it shall be dism
issed. On the other hand, if the court finds the petition to be meritorious, the
borrower will be declared insolvent and he will be required to submit a schedul
e of his assets and liabilities. The sheriff shall be ordered to take possession
of his properties until an assignee can be appointed by the court. The court, a
s in the case of voluntary insolvency, shall cause a notice to call a meeting of
the creditors for the appointment of an assignee and that will published in a n
ewspaper of general circulation and copies of the order shall be sent to the cre
ditors.
The rule on stay of cases against the insolvent is the same as in the case of vo
luntary insolvency.
If the interest of the parties shall be subserved by the sale, the court may ord
er property belonging to the debtor to be sold. The court cannot wait until the
case is finally terminated because some properties may be perishable or maybe th
e articles are stored in a warehouse and storage fees will only accumulate, or t
he articles may also deteriorate as in cement which will harden and will become
unfit for use and steel bars that will become rusty.

The court will call a meeting to elect an assignee, and for a creditor to be abl
e to participate he must file his claim at least 2 days before the meeting to el
ect the assignee and if the claim of a creditor is barred by prescription, he ca
nnot participate.
The case of people who have secured claims, mortgage or pledge, they cannot part
icipate as a rule because normally, what this fellow will do, is he will later o
n after assignment file a motion asking to be excluded because he intends to enf
orce his lien. But he may participate in two instances:
1. If he will waive his lien (but of course he would be crazy to do that because
he will become an unsecured creditor)
2. If the lien is not sufficient to pay for his claim (for the deficiency, the c
reditor may participate)
Again, a double majority is needed to agree on the assignee majority as to numbe
rs and majority as to amount. But if the creditors cannot agree, the court can a
lways appoint an assignee of its own choice. Once an assignee has been appointed
, he will take over the assets of the debtor in trust for the creditors.
Any attachment levied within one month before the filing of the insolvency case
shall be set aside. Any judgment entered in an action filed within 30 days befor
e the filing of the insolvency proceeding shall be set aside. The judgment enter
ed by default or confession of judgement within 30 days shall be set aside.
CASE
An attachment was issued more that 4 months before the filing of the petition fo
r insolvency. Held: Since the attachment was made more than 30 days prior to the
filing of the petition, such is not vacated by the filing of the petition for i
nsolvency.
The assignee will take over in prosecuting and defending actions involving the i
nsolvent except those which are personal in character. Can sue and be sued in be
half of the debtor and will be substituted in actions already pending. Sum of mo
ney substituted. Annulment of marriage on the ground of psychological incapacity
no substitution.
Debts contracted within 30 days before the filing of the petition cannot be set-
off. If you are a debtor of the insolvent, you cannot say that the insolvent als
o borrowed money from you so you are not anymore a debtor of the insolvent, if t
he transaction occurred within 30 days before the filing of the petition.
When the debtor knows that an insolvency case is filed and he disposes of his pr
operties. He tells his kumpadre Pare tago mo na muna tong mga alahas ko and the ku
mpadre keeps the jewelry, the kupadre will be liable for double the value of the
property.
Debts which cannot be collected without unreasonable delay may be assigned. If t
he amount is small and you will just incur expenses if you file a claim, you can
just assign that to a credit collection agency. But sometimes, people use the s
trong arm method to collect and every morning a van will be parked in front of y
our house or they will go to your office everyday or call you up in the middle o
f the night. Resort to high-handed methods of collecting is a quasi-delict and i
s actionable.
ACTS OF INSOLVENCY
In voluntary insolvency, the filing of a petition for voluntary insolvency is an
act of insolvency.
In involuntary insolvency, the following are considered act of insolvency and th
e petition for involuntary insolvency must set forth one or more of the followin
g:
1. Intention to depart from the Philippines with t defraud creditors
2. Absence from the Philippines to defraud creditors
3. Concealing self to avoid service of legal processes
4. concealing pr removing property to avoid its being attached or taken on legal
process
5. confession of judgment in favor of a creditor to defraud other creditors
6. allowing default judgment in favor of a creditor to defraud other creditors
7. Allowing property to be taken under legal process in preference of a particul
ar creditor to defraud other creditors
8. Making conveyance, assignment or transfer of his property to defraud his cred
itors
9. Making conveyance, assignment or transfer of his property in contemplation of
insolvency
10. Default of a merchant or tradesman to pay his current obligations for a peri
od of 30 days
11. Failure to pay money on deposit or received in a fiduciary capacity for a pe
riod of 30 days after demand
12. Insufficiency of property to satisfy execution against him

Edited Version
28 January 2002
Kat Zialcita
Continuation of Insolvency Law
Assets of the insolvent which are not exempt from execution will then be distrib
uted among his creditors in accordance with the rules of concurrence in preferen
ce of credits in the Civil Code. There is a provision in the Labor Code which
says the claim of laborer s take over and priority over all other place including
taxes of the government.
Notes: (since there is no real discussion on concurrence and preference of credi
ts I tried to make one.-)
*The Title on Concurrence and Preference of Credits refers to credits which are al
ready due.
Concurrence of credits implies the possession by two or more creditors of equal ri
ghts or privileges over the same property or all of the property of the debtor.
Preference of Credit-is the right held by a creditor to be preferred in payment
of his claim above others (i.e., to be paid first) out of the debtor s assets.
* Preference is an exception to the general rule
* Preference does not create an interest in property. It creates simply a right
of one creditor to be paid first the proceed of the sale of property as against
another creditor. It creates no lien on the property, and therefore, gives no in
terest in the property to the preferred creditor but a preference in application
of the proceeds after the sale.
* The rules on preference of credits apply only where two or more creditors have
separate and distinct claims against the same debtor who has an insufficient pr
operty.
General Categories of Credit
a. Special Preferred Credits Art 2241 and 2242 (NCC)
Nature of claims or credits They shall be considered as mortgages or pledges of re
al or personal property.
Art. 2241 With reference to specific movable property of the debtor, the following
claims or liens shall be preferred.
1. Duties, taxes and fees due thereon to the State or any subdivision thereof;
2. Claims arising from misappropriation, breach of trust or malfeasance by publi
c officials committed in the performance of their duties, on movables, money or
securities obtained by them.
3. Claims for unpaid price of movables sold on said movables,
* So long as they are in possession of the debtor, up to the value of the same;
* And if the movable has been resold by the debtor and the price is still unpaid
, the lien may be enforced on the price is still unpaid
* This right is not lost by the immobilization of the thing by destination, prov
ided it has not lost its form, substance and identity, neither is the right lost
by the sale of the thing together with other property for a lump sum, when the
price thereof can be determined proportionally;
4. Credits guaranteed with a pledge so long as the things pledged are in th
e hands of the creditor, or those guaranteed by a chattel mortgage, upon the thi
ngs pledged mortgaged, up to the value thereof;
5. Credits for making the repairs, safekeeping or preservation of personal
property, on the movable thus repaired kept or possessed
6. Claims for laborer s wages, on the goods manufactured or work done;
7. For expenses of salvage, upon the goods salvaged;
8. Credits between the landlord and tenant, arising form the contract of tenancy
on shares1, on the share of each in the fruits or harvest;
9. Credits for the transportation, upon the goods carried, for the price of the
contract and incidental expenses, until their delivery and for 30 days thereafte
r;
10. Credits for lodging and supplies usually furnished to travelers by hotel-kee
pers, on the movables belonging to the guest as long as such movables are in the
hotel, but not for money loaned to the guests;
11. Credits for seeds and expenses for cultivation and harvest advanced to the d
ebtor, upon the fruits harvested;
12. Credits for rent for one year, upon the personal property of the lessee exis
ting on the immovable leased and on the fruits of the same, but not one money or
instruments of credit;
13. Claims in favor of the depositor if the depositary has wrongfully sold the t
hing deposited, upon the price of the sale.
Art. 2242 With reference to specific immovable property and real rights of the deb
tor, the following claims, mortgages or liens shall be preferred, and shall cons
titute as encumbrance on the immovable or real right:
1. Taxes due upon the land or building;
2. For the unpaid price of real property sold, upon the immovable sold; (Note: N
o distinction between registered and unregistered vendor s lien. Hence any lien of
that kind enjoys the preferred credit status.)
3. Claims of laborers, mason, mechanics and other workmen, as well as of archite
cts, engineers and contractors, engaged in the construction, reconstruction or r
epair of buildings, canals or other works, upon said buildings, canals or other
works;
4. Claims of furnishers of materials used in the construction, reconstruction or
repair of buildings, canals or other works, upon said buildings, canals or othe
r works;
5. Mortgage credits recorded in the Registry of Property, upon the real estate m
ortgaged;
6. expenses for the preservation or improvement of real property when the law au
thorizes reimbursement, upon immovable preserved or improved;
7. Credits annotated in the Registry of Property in virtue of a judicial order,
by attachments or executions, upon the property affected, and only as to later c
redits;
8. Claims of co-heirs for warranty in the partition of an immovable among them,
upon the real property thus divided;
9. Claims of donors of real property for pecuniary charges or other conditions i
mposed upon the donee, upon the immovable donated;
10. Credits of insurers, upon the property insured, for the insurance premium fo
r two years.
b. Ordinary Preferred Credits Art 2244
Art. 2244---With reference to other property, real and personal, of the debtor,
the following claims or credits shall be preferred in the order named:
1. Proper funeral expenses for the debtor, or children under his or her parental
authority who have no property of their own, when approved by the court;
2. Credits for services rendered the insolvent by the employees, laborers or hou
sehold helpers for one year preceding the commencement of the insolvency proceed
ings;
3. Expenses during the last illness of the debtor or of his or her spouses and c
hildren under his or her parental authority, if they have no property of their o
wn;
4. Compensation due the laborers of their independents under the laws providing
for indemnity for damages un cases of labor accident, or illness resulting from
the nature of the employment;
5. Credits and advancements made to the debtor for support of himself or herself
, and family, during the last preceding insolvency;
6. Support during the insolvency proceedings and for 3 months thereafter;
7. Fines and civil indemnification arising from a criminal offense;
8. Legal expenses and expenses incurred in the administration of the insolvent s e
state for the common interest of the creditors, when properly authorized and app
roved by the court;
9. Taxes and assessments due to the national government, other than those mentio
ned in Articles 2241 No. 1 and Art. 2242 No. 1;
10. Taxes and assessments due to any province, other than those mentioned in Art
icles 2241 No. 1 and Art. 2242 No. 1;
11. Taxes and assessments due to any city or municipality, other than those ment
ioned in Articles 2241 No. 1 and Art. 2242 No. 1;
12. Damages for death or personal injuries caused by a quasi-delict;
13. Gifts due to public and private institutions of charity or beneficence; (Thi
s is unbelievable! How will they find out?)
14. Credits which, without special privilege, appear in
(a) A public instrument; or
(b) In the final judgment, if they have been the subject of litigation.
These credits shall have preference among themselves in the order of prio
rity dates of the instruments and of the judgments, respectively.
*Note: In contrast with Arts. 2241-2242, Art. 2244 creates no lien on determinat
e property which follow such property. What Art. 2244 creates are simply rights
in favor of certain creditors to have the cash and other assets of the insolvent
applied in a certain order of priority.
c. Common Credits under Art.2245
Art. 2245---Credits of any other kind or class, or by any other right or title n
ot compromised in the four preceding articles, shall enjoy no preference.
INSOLVENCY LAW PARTNERSHIPS AND CORPORATIONS (SECS. 51-52)
SECTION 51. Partnerships. A partnership, during the continuation of the part
nership business, or after its dissolution and before the final settlement there
of, may be adjudged insolvent, either on the petition of the partners or any one
of them, or on the petition of three or more creditors of the partnership, qual
ified as provided in section twenty of this Act, in either of which cases the co
urt shall issue an order in the manner provided by this Act, upon which all the
property of the partnership, and also all the separate property of each of the p
artners, if they are liable, shall be taken, excepting such parts thereof as may
be exempt by law; and all creditors of the partnership, and the separate credit
ors of each partner, shall be allowed to prove their respective claims; and the
assignee shall be chosen by the creditors of the partnership, and shall also kee
p separate accounts of the property of the partnership, and of the separate esta
te of each member thereof. The expenses of the proceedings shall be paid from th
e partnership property and the individual property of the partners in such propo
rtions as the court shall determine. The net proceeds of the partnership propert
y shall be appropriated to the payment of the partnership debts and the net proc
eeds of the individual estate of each partner to the payment of his individual d
ebts. Should any surplus remain of the property of any partner after paying his
individual debts, such surplus shall be added to the partnership assets and be a
pplied to the payment of the partnership debts. Should any surplus of the partne
rship property remain after paying the partnership debts, such surplus shall be
added to the assets of the individual partners in the proportion of their respec
tive interests in the partnership. Certificate of discharge shall be granted or
refused to each partner as the same would or ought to be if the proceedings had
been by or against him alone under this Act; and in all other respects the proce
edings as to the partners shall be conducted in like manner as if they had been
commenced and prosecuted by or against one person alone. If such partners reside
in different provinces, the court in which the petition is first filed shall re
tain exclusive jurisdiction over the case. If the petition to be filed by less t
han all the partners of a partnership those partners who do not join in the peti
tion shall be ordered to show cause why they, as individuals, and said partnersh
ip, should not be adjudged to be insolvent, in the same manner as other debtors
are required to show cause upon a creditor's petition, as in this Act provided;
and no order of adjudication shall be made in said proceedings until after the h
earing of said order to show cause.
SECTION 52. Corporations and sociedades anonimas; Banking The provisions of t
his Act shall apply to corporations and sociedades anonimas, and upon the petiti
on of any officer of any corporation or sociedad anonima, duly authorized by the
vote of the board of directors or trustees, at a meeting specially called for t
hat purpose, or by the assent in writing of a majority of the directors or trust
ees as the case may be, or upon a creditor's petition made and presented in the
manner provided in respect to debtors, of the like proceedings shall be had and
taken as are provided in the case of debtors: Provided, That in case the article
s of association or by-laws of any corporation the or sociedad anonima provide a
method for such proceedings, such method shall be followed. All the provisions
of this Act which apply to the debtor, or set forth his duties, examination, and
liabilities, or prescribe penalties, or relate to fraudulent conveyances, payme
nts, and assignments, apply to each and every officer of any corporation or soci
edad anonima in relation to the same matters concerning the corporation. Wheneve
r any corporation is declared insolvent, its property and assets shall be distri
buted to the creditors; due at but no discharge shall be granted to any corporat
ion. The provisions of this Act shall not apply to corporations engaged principa
lly in the banking business, or to any other corporation as to which there is a
ny special provision of law for its liquidation in case of insolvency.
A Partnership may be declared insolvent by a petition of the partners or any one
of them or three or more creditors who can also petition for insolvency.
Note: A partnership may declared insolvent
* When: during the continuation of the partnership business or after its dissolu
tion and before the final settlement thereof
* By Whom:
In case of Voluntary Insolvency: either on the petition of the partners, or any
of them,
In case of Involuntary Insolvency: or on the petition of 3 or more creditors of
the partnership
In case of a corporation, by a majority of the directors upon petition of the cr
editors. Unlike other debtors, a corporation is not given a discharge because i
t has limited liability meaning the liability is limited to the subscription of t
he stocks and assets of the corporation.
Who may petition for the declaration of Insolvency of a corporation:
Sec. 52: The petition may be filed by any officer duly authorized by the vote of
the board of directors or trustees at a meeting especially called for that purp
ose, or by the assent in writing of the majority of the directors, or trustees,
as the case may be.
Effect when corporation declared insolvent:
Whenever any corporation is declared insolvent, its property and assets shall be
distributed to the creditors, but no DISCHARGE shall be granted to any corporat
ion. (sec. 52)
*Discharge is the formal and judicial release of an insolvent debtor from his debt
s with the exception of those expressly reserved by law.
There is an advantage for a creditor in filing a case for insolvency against a c
orporation.
For example, a corporation is favoring one creditor as against the other credito
rs because that creditor is a good friend of a corporation, so that nothing left
for the other corporation. They may file a petition for insolvency so that in t
he distribution assets they would share in the remaining assets of the corporat
ion, if any. We have to file claims and those claims would be litigated just li
ke collection case. Otherwise those claims are barred by prescription and cann
ot be entertained. If you have a creditor who files the claims but in turn owes
the corporation, there would be compensation. Therefore only the excess of the
amount due to him [the creditor] would be filed as a claim against the corpora
tion. But no set-off should be allowed if the claim should be transferred to
him before the filing of the petition within 30 days.
In the case of the mortgagee or the pledgee, the normal practice is for him to f
ile a motion asking that he be excluded from the proceedings because he has a le
ad [mortgage-collateral] already and he intends to pursue his lead. If the mort
gage is not enough to satisfy his claim, then he can still file a claim for def
iciency. (Note that the mortgagee can only claim for deficiency if he elects to
be excluded from the insolvency proceeding.)
If the proceeds of the sale of the property exceeds the amount of the claim, lik
e in a sale of P10M and sold for P8m. The amount of P2M surplus will be turned
over to the assignee to be distributed to the creditors in accordance with the
rules of concurrence and preference of credit.
If someone and other creditor has been given a new preference, as in substantial
ly paid, it cannot prove the claim unless he surrenders the property for payment
given to him and that gave him preference three months from the time the debto
r was declared insolvent but not later than one year, he should file a petition
to be discharge. After that he can make a fresh start without being hampered by
unpaid debts. If he fails to file that motion, he should not be discharged, for
that he will file a motion to be discharged.
SECTION 64. Discharge. At any time after the expiration of three months from
the adjudication of insolvency, but not later than one year from such adjudicat
ion, unless the property of the insolvent has not been converted unto money, the
debtor may apply to the court for a discharge from his debts, and the court sha
ll thereupon order notice to be given to all creditors who have proved their deb
ts to appear on a day appointed for that purpose and show cause why a discharge
should not be granted to the debtor; said notice shall be given by registered ma
il and by publication 28 at least once a week, for six weeks, in a newspaper pub
lished in the province or city, or, if there be none, in a newspaper which, in t
he opinion of the judge, will best give notice to the creditors of the said inso
lvent: Provided, That if no debts have been proven, such notice shall not be req
uired.
SECTION 65. Invalid discharge. No discharge shall be granted, or if granted
shall be valid,
(1) if the debtor shall have sworn falsely in his affidavit annexed to his petit
ion, schedule, or inventory, or upon any examination in the course of the procee
dings in insolvency, in relation to any material fact concerning his estate or h
is debts or to any other material fact; or
(2) if he has concealed any part of his estate or effects, or any books or writi
ng relating thereto; or
(3) if he has been guilty of fraud or willful neglect in the care or custody of
his property or in the delivery to the assignee of the property belonging to him
at the time of the presentation of his petition and inventory, excepting such p
roperty as he is permitted to retain under the provisions of this Act; or
(4) if, within one month before the commencement of such proceedings, he has pro
cured his real estate, goods, moneys, or chattels to be attached or seized on ex
ecution; or
(5) if he has destroyed, mutilated, altered, or falsified any of his books, docu
ments, papers, writings, or securities, or has made, or been privy to the making
of, any false or fraudulent entry in any book of account or other document with
intent to defraud his creditors; or
(6) if he has given any fraudulent preference, contrary to the provisions of thi
s Act, or has made any fraudulent payment, gift, transfer, conveyance, or assign
ment of any part of his property, or has admitted a false or fictitious debt aga
inst his estate; or
(7) if, having knowledge that any person has proven such false or fictitious de
bt, he has not disclosed the same to his assignee within one month after such kn
owledge; or
(8) if, being a merchant or tradesman, he has not kept proper books of account
in Arabic numerals and in accordance with the provisions of the Code of Commerce
; or
(9) if he, or any other person on his account, or in his behalf, has influenced
the action of any creditor, at any stage of the proceedings, by any pecuniary co
nsideration or obligation; or
(10) if he has, in contemplation of becoming insolvent, made any pledge, payment
, transfer, assignment, or conveyance of any part of his property, directly or i
ndirectly, absolutely or conditionally, for the purpose of preferring any credit
or or person having a claim against him, or who is, or may be, under liability f
or him, or for the purpose of preventing the property from coming into the hands
of the assignee, or of being distributed under this Act in satisfaction of his
debts; or
(11) if he has been convicted of any misdemeanor under this Act, or has been gui
lty of fraud contrary to the true intent of this Act; or
(12) in case of voluntary insolvency, has received the benefit of this or any o
ther Act of insolvency or bankruptcy within six years next preceding his applica
tion for discharge; or
(13) if insolvency proceedings in which he could have applied for a discharge a
re pending by or against him in the Court of First Instance of any other provinc
e or city in the Philippine Islands. Before any discharge is granted, the debtor
shall take and subscribe an oath to the effect that he has not done, suffered,
or been privy to any act, matter, or thing specified in this Act as grounds for
withholding such discharge or as invalidating such discharge, if granted.
SECTION 68. Debts not released under this Act No tax or assessment due the I
nsular Government or any provincial or municipal government, whether proved or
not as provided for in this Act, shall be discharged. Nor shall any debt created
by the fraud or embezzlement of the debtor, or by his defalcation as a public o
fficer or while acting in a fiduciary capacity, be discharged under this Act, bu
t the debt may be proved, and the dividend thereon shall be a payment on account
of said debt. No discharge solvent granted under this Act shall release, discha
rge, or affect any person liable for the same debt, for or with the debtor, eith
er as partner, joint contractor, indorser, surety, or otherwise.
SECTION 69. Effect of discharge under this Act A discharge, duly granted und
er this Act, shall, with the exceptions aforesaid, release the debtor from all c
laims, debts, liabilities, and demands set forth in his schedule, or which were
or might have been proved against his estate in insolvency, and may be pleaded b
y a simple averment that on the day of its date such discharge was granted to hi
m, setting forth the same in full, and the same shall be a complete bar to all s
uits brought on any such debts, claims, liabilities, or demands, and the certifi
cate shall be prima facie evidence in favor of such fact and of the regularity o
f such discharge: Provided, however, That any creditor whose debt was proved or
provable against the estate in insolvency who shall see fit to contest the valid
ity of such discharge on the ground that it was fraudulently obtained and who ha
s discovered the facts constituting the fraud subsequent to the discharge, may,
at any time within one year after the date thereof, apply to the court which gra
nted it to set it aside and annul the same.
If they committed fraud, discharge will not be granted, like he conceal some of
his assets or made undue preference to some creditors and if a creditor discover
s fraud, e.g., 1 yr. From the time of discharge was granted within which to have
a discharge set aside.
There are certain debts which are not discharged.(Justice Vitug, Chairman) What
are these claims? First, taxes due the National government of any provincial /mu
nicipal government. Secondly, debts created by fraud, embezzlement, defalcation
as a public officer or while acting in a fiduciary capacity. The former one inv
olves taxes with the government, the latter involves a public officer in a confi
dential or fiduciary capacity.
*Debts not discharged
1. Taxes and assessments due the Government, whether national or local
2. Any debt created by the fraud or embezzlement of the debtor;
3. Any debt created by the defalcation of the debtor as a public officer or whil
e acting in a fiduciary capacity;
4. Debt of any person liable for the same debt, for or with the insolvent debtor
, either as partner, joint contractor, indorser, surety or otherwise
5. Debts of a corporation
6. claim for support
7. discharged debt but revived by a subsequent new promise to pay
8. debts which have not been duly scheduled in time for proof and allowance, unl
ess the creditors had notice or actual knowledge of the insolvency proceedings,
are not discharged as to such creditors;
9. claims for unliquidated damages arising out of pure tort;
10. claims of secured creditors
11. claims not in existence or not mature at the time of discharge
12. claims that are contingent at the time of discharge
FRAUDULENT PREFERENCES (Sec. 70)
* If any debtor, being insolvent, or in contemplation of insolvency,
* within thirty days before the filing of a petition by or against him,
* with a view to giving a preference to any creditor or person having a claim ag
ainst him or who is under any liability for him,
o procures any part of his property to be attached, sequestered, or seized on ex
ecution,
o or makes any payment, pledge, mortgage, assignment, transfer, sale, or convey
ance of any part of his property, either directly or indirectly, absolutely or c
onditionally, to anyone,
o the person receiving such payment, pledge, mortgage, assignment, transfer, sal
e, or conveyance, or to be benefited thereby, or by such attachment or seizure,
* having reasonable cause to believe that such debtor is insolvent, and that suc
h attachment, sequestration, seizure, payment, pledge, mortgage, conveyance, tra
nsfer, sale, or assignment is made with a view to prevent his property from comi
ng to his assignee in insolvency,
* or to prevent the same from being distributed ratably among his creditors, or
to defeat the object of, or in any way hinder, impede, or delay the operation of
or to evade any of the provisions of this Act,
? such attachment, sequestration, seizure, payment, pledge, mortgage, transfer,
sale, assignment, or conveyance is void,
? and the assignee, or the receiver, may recover the property, or the value ther
eof, as assets of such insolvent debtor.
? If such payment, pledge, mortgage, conveyance, sale, assignment, or transfer i
s not made in the usual and ordinary course of business of the debtor, or if suc
h seizure is made under a judgment which the debtor has confessed or offered to
allow, that fact shall be prima facie evidence of fraud.
* Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of pr
operty of whatever character made by the insolvent within one month before the f
iling of a petition in insolvency by or against him, except for a valuable pecun
iary consideration made in good faith, shall be void.
* All assignments, transfers, conveyances, mortgages, or encumbrances of real es
tate shall be deemed, under this section, to have been made at the time the inst
rument conveying or affecting such realty was filed for record in the office of
the register of deeds of the province or city where the same is situated.
If the payment is not made in the usual course of business or attachment is made
under a confession of judgment, that will be considered prima facie evidence o
f fraud. The fact that it was not in the ordinary course of business or the att
achment is made by confession of judgment, any payment, transfer or property, pl
edge, mortgage made in one month before the quotation except for a valuable pecu
niary consideration made in good faith shall be void. Note that the mortgages,
conveyance of property made within one month are not absolutely void. If they w
ere made in good faith and for value, the conveyance will still be valid.
Fraudulent preference is committed when the debtor procures any part of his proper
ty to be attached, sequestered, or seized on execution or makes any payment, ple
dge, mortgage, assignment, transfer, sale or conveyance of any part of his prope
rty, whether directly or indirectly, absolutely or conditionally, to any one und
er the following circumstances:
1. The debtor is insolvent or in contemplation of insolvency;
2. The transaction in question is made within 30 days before the filing of a pet
ition by or against the debtor;
3. It is made with a view to giving preference to any creditor or person having
a claim against him;
4. and the person receiving a benefit thereby has reasonable cause to believe
5. that the transfer is made with a view to prevent his property from coming to
his assignee in insolvency or to prevent the same from being distributed ratably
among his creditors or to defeat the object of or any way hinder the operation
of or evade the provisions of the Insolvency Law. (sec. 70)
When Presumption of Fraud exists.
If such payment, pledge, mortgage, assignment, transfer, sale or conveyance is n
ot made in the usual and ordinary course of business of the debtor, or if such s
eizure is made under a judgment which the debtor has confessed or offered to all
ow, that fact shall be prima facie evidence of fraud.
*Jack said that if it is made in good faith and for value it is a valid conveyance
.
Meaning of transfer under Insolvency Law includes the sale and every other and dif
ferent modes of disposing of or parting with property, or the possession of prop
erty, absolutely or conditionally, as a payment, pledge, mortgage, gift or secur
ity. A deposit of money is NOT transfer.
Equal exchange not preference An exchange of securities within the 30 day period i
s not a fraudulent preference under the law even when both parties know that the
debtor is insolvent, if the security given up is a valid one at the time the ex
change is made and of equal value with the one received in exchange. The reason
is that the exchange takes away nothing from the other creditor.
Effect of fraudulent transfer---As against the creditors of the insolvent debtor
, any conveyance or assignment fraudulently made is void.
* In all actions to set aside or nullify fraudulent preference or transactions a
s void under the provisions of sec. 70, the assignee appears form and represents
the general creditors. The creditors of the insolvent are not authorized to ins
titute an independent action to annul such fraudulent preferences.
29 January 2002
Shy Sison
Real Estate Mortgage
Foreclosure
In the foreclosure of Real Estate Mortgages, the SC has issued a circular. Unde
r that circular:
* Even if the foreclosure will not be conducted by the sheriff but by a notary p
ublic, the mortgagee still has to pay the court.
* Pay to the clerk of court the same fees as if it were the sheriff conducting i
t.
* The certificate of sale will have to be submitted to the executive judge.
* The judge will approve the sale, just like a judicial foreclosure.

Case:
Facts: Real Estate Mortgage was executed to secure payment of the loan. Bank of
America filed a collection case in Hong Kong, England. Later on they filed a p
etition for the extrajudicial foreclosure of the REM. They proceeded with the f
oreclosure and the mortgagor filed an action for damages.
Held: By filing a collection case abroad, Bank of America abandoned the mortgag
e and can no longer foreclose the mortgage extrajudicailly. Bank of America arg
ued that the loan document stipulated that it will be governed by English law.
And under English law, the filing of a collection case does not waive the mortga
ge. The court ruled that under the Civil Code, it is provided that foreign laws
will not be given effect if it is contrary to public policy. They said that it
is true that such a provision that is contrary to public policy, which goes aga
inst existing rules for the election of remedies.
Now, since in a foreclosure of a mortgage, the mortgagee is trying to enforce a
lien, you don t levy on the property. You levy on property if you are executing a
money judgment.
Place of Sale
Section 2 says the sale cannot be made outside the city or province where the pr
operty is located. But the parties can stipulate a place, the province or the c
ity where the sale is to be made. And under such stipulation, the sale must be
made there. But if there is no stipulation, it should be held in the municipal
hall in the municipality where the property is located.
Case:
Facts: The document provided that the sale will be conducted in the capital of t
he province. But instead the sale was held in the municipality where the propert
y was located.
Held: Acknowledging the rules on venue, the court said that the stipulation that
the sale will be conducted in the provincial capitol is not exclusive. Therefo
re, it could be held in the place where the property is located.
Notice of Sale
The notice of the sale should be given by:
* posting notices at least 20 days before the scheduled sale
* in 3 public places the municipal hall, the public market, post office, the plaz
a
* the notice must be published once a week, for 3 consecutive weeks in a newspap
er of general circulation.
If you do not comply with the notice requirements, the sale will be void.
The court said, clerical errors in the notice of the sale is not sufficient to n
ullify the sale. For example, the technical description of the property as publ
ished in the notice is a clerical error that will not nullify the sale.
If the sale was postponed, as a general rule, you must give notices again. You m
ust post the notices again, and you must publish again in a newspaper of general
circulation. Exceptions:
1. If the sale was not finished that day and it will continue the following the
day. Let s say the sale is not finished; you continue the following day until it
is completed you don t need republication.
2. If there s waiver. So, one bank tried to foreclose a mortgage extrajudicially,
notices published in a newspaper. Then the mortgagor approached the bank and p
leads; Can you please give me a little bit more time? There s this transaction whic
h I expect to raise some money. Just give me two months, I am confident I will
be able to produce the money. The bank agrees. A joint motion for a postponement,
and they put a stipulation that the mortgagor is waiving all notices including
the publication of the notice in a newspaper. So you don t have to publish in a n
ewspaper.
The court has said that the law requires the notice to be published once a week
for three consecutive weeks. And a week consists of seven days. So you can t pub
lish the 1st notice on Monday, then the 2nd notice on Wednesday of the 2nd week
and the 3rd notice on Friday the 3rd week and say that that s once a week. It mus
t be 7 days apart. So, if the 1st notice was published on a Monday, the 2nd and
3rd notices must also be published on a Monday.
Personal notice to the mortgagor is not required. However, the parties may, by s
tipulation, require that personal notice should be given to the mortgagor.
Concepcion case:
Facts: This is a common provision in mortgage that would usually be one of the l
ast provisions in a mortgage document, saying that all notices intended for the
mortgagor, including notice of foreclosure sale shall be sent at the following a
ddress.
Held: Justice Vitug interpreted that stipulation to mean that the parties are st
ipulating that personal notice must also be given to the mortgagor. And since h
e was not given personal notice, the notice was not valid.
Date of Sale
The sale will be held on the day stated in the notice.
Case:
Facts: The foreclosure sale that will be held in QC was scheduled on August 19.
But then the president declared August 19 a public holiday in QC. But the sheri
ff proceeded to foreclose the mortgage and the sale that day.
Held: The court said the foreclosure is valid. The mere fact that the date when
the foreclosure was scheduled was a declared a public holiday, does not affect
the validity of the sale. The sale is still valid.
Applicability of the Rules of Court
The court has said that the sale is valid even if all the lots were sold in one
sale. The court said that if there were several parcels of land that were mortg
aged, they can all be sold in one lump sum. The court said provisions of the Ru
les of Court applicable to foreclosure sale, in extrajudicial foreclosure, is on
ly with respect to the provisions on redemption. The other provisions of Rule 39
are not applicable. So, the provision in Rule 39 that if you levy on several pa
rcels of land, and you will sell them at public auction, you must sell them one
lot at a time that does not applicable to extrajudicial foreclosure of REM. You co
uld sell all of them in one public sale.
If there s a deficiency, the mortgagee can sue the debtor for the deficiency. If
the proceeds of the sale are in excess of the amount claimed by the mortgagee, t
he excess must be turned over to the mortgagor.
Redemption
Now, in extrajudicial foreclosure of REM, the general rule is there is a 1-year
redemption period. And that is counted from the day the sale is registered if th
e land is covered by Torrens title. When the land is covered by the Torrens syst
em, it is registration that will bind the land.
However, by way of exception, the GENERAL BANKING LAW provides: in the case of e
xtrajudicial foreclosure of REM, if the mortgagor is a corporation, there is no
right of redemption. But there is equity of redemption until the foreclosure But
if the mortgagor is a private individual, it is still given one year redemption
period. So that if the mortgagor is a corporation, you only have equity of red
emption. You can stop the sale provided you pay for the sheriff s fee.
Case:
Facts: The sheriff placed in the certificate of sale that the mortgagor has 2 ye
ars to redeem. The bank did not object.
Held: Since it did not object, it is deemed to have agreed to give the mortgagor
a 2-year period. The court said, if the mortgagor filed a case to redeem the pr
operty, it is not necessary to tender the redemption money. The filing of the ca
se is equivalent to an offer to redeem.
And even if the mortgagee accepts the redemption money although the 1-year perio
d had expired, it will be valid because he will be deemed to have waived the 1-y
ear limitation period.
Now, the money to be tendered to redeem is fixed in the Rules of Court. Rule 39
prescribes how much should be paid for redemption. The amount for which the pro
perty was sold, the expenses of the sale, if you have interest, real estate taxe
s but if the mortgagee collected rentals or fruits, that will be deducted form the
redemption price. EXCEPTION: in case of mortgages under the General Banking A
ct. Because the General Banking Law provides that the interest that will be pai
d by the mortgagor will be the rate stipulated in the mortgage loan NOT the lega
l interest under the Rules of Court.

Writ of Possession
Section 7 says, the buyer even during the redemption period, can file a petition
that it be given possession of the property. So he will file a petition ex-part
e for the issuance of a writ of possession. The docket no. will be the land regi
stration LRC #. The court has said it is ministerial for the court to issue the
writ of possession. So even if the mortgagor is questioning the validity of the
foreclosure, the writ of possession must be issued. And the court has said, he
will be required to post a bond equivalent to the valuation of the property for
one year.
If the mortgagor sold the property though the mortgage had already been foreclos
ed, the buyer in the foreclosure case can enforce the writ of possession against
the one who bought the property from the mortgagor because he merely stepped in
to the shoes of the mortgagor. And, after the expiration of the 1-year redempti
on period, file a petition for writ of possession and he will not be required to
post a bond anymore. The court said, if the buyer can ask for a writ of posses
sion while the mortgagor still has a right of redemption, with more reason he sh
ould be entitled be summarily issued a writ of possession when the right of rede
mption has expired. The difference when there is a redemption period is that yo
u will be required to post a bond. When the redemption period has already expir
ed, you no longer need a bond.
If there s a tenant in possession of the property and the lease has not yet expire
d, as a rule, a buyer can obtain a writ of possession against that tenant. EXCE
PTIONS:
1. he has actual knowledge of the lease;
2. if the lease was annotated on the title.
In those cases, you will have to respect the contract of lease.
Now, if a party wants to question the foreclosure, you will have to comply with
section 8. That in the same proceeding where possession was issued, LRC # that i
s where you will file a petition to annul the sale. And that should be filed no
t later than 30 days after he was given possession.
Case:
Facts: The mortgagor was already dead and the mortgagee knew that. So, he sent
a letter of demand addressed to the mortgagor even if he knew he was dead. And
then he foreclosed the mortgage extrajudicially and bought the property. When t
he heirs expressed interest in the property, he told them, No, the loan is not ye
t due . He misled them in claiming that the loan was not yet due except for the m
ortgage that he foreclosed.
Held: The court said his conduct was fraudulent, therefore the foreclosure shou
ld be considered void.
1 Share tenancy has been abolished and converted to agricultural leasehold (Sec.
4, R.A. 3844, as amended.)
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(Bulk Sales Law, Chattel Mortgage Law, Insolvency Law, Real Estate Mortgage)
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