VI. PLEDGE
A stipulation whereby the thing pledged or
A. Definition
Pledge is a contract by virtue of which the debtor
delivers to the creditor or to a third person a
movable (Article 2094) or document evidencing
incorporeal rights (Article 2095) for the purpose of
securing the fulfillment of a principal obligation
with the understanding that when the obligation is
fulfilled, the thing delivered shall be returned with
all its fruits and accessions.
B. Characteristics
1. A real contract because it is perfected by the
delivery of the thing pledged by the debtor who
is called the pledgor to the creditor who is the
pledge, or to a third person by common
agreement;
2. An accessory contract because it has
independent existence of its own;
3. A unilateral contract because it creates an
obligation solely on the part of the creditor to
return the thing subject thereof upon the
fulfillment of the principal obligation;
4. A subsidiary contract because the obligation
incurred does not arise until the fulfillment of the
principal obligation to which it is secured.
C. Essential Requirements
1. The pledge is constituted to secure
fulfillment of a principal obligation.
2. The pledgor or mortgagor is the absolute owner
of the thing pledged or mortgaged.
3. The persons constituting the pledge or mortgage
have the free disposal of their property, and in
the absence thereof, that they be legally
authorized for the purpose.
4. The thing pledged must be delivered to the
creditor or to a third person by common
agreement.
D. Common Provisions Governing Pledge
Mortgage
1. Contract may be constituted only by the
absolute owner of the thing pledged or
mortgaged otherwise, the pledge or mortgage is
void, such as that constituted by an impostor.
(see De Lara vs. Ayroso, 95 Phil. 185 [1954];
Parqui vs. Philippine National Bank, 96 Phil. 157
[1954])
2. A mortgage of conjugal property by one of the
spouses is valid only as to one-half (1/2) of the
entire property. (Philippine National Bank vs.
Court of Appeals, 98 SCRA 207 [1960]).
3. While it is true that under Article 2085 it is
essential that the mortgagor be the absolute
owner of the property mortgaged, a mortgagee
has the right to rely upon what appears in the
certificate of title and does not have to inquire
further. Stated differently, an innocent
purchaser for value (like a mortgagee) relying on
a torrens title issued is protected. (Duran vs.
Intermediate Appellate Court, 138 SCRA 491
[19685])
4.
mortgaged or under antichresis (Article 2137)
shall automatically become the property of the
creditor in the event of non-payment of the debt
within the term fixed is known as pactum
commisorium or pacto commissorio which is
forbidden by law and declared null and void
(article 2088)
E. Disctinctions between Pledge and Real
MOrtgage
Pledge Real
Mortgage
1 Movable property 1 Immovable property
2 Delivery of the object 2 Delivery of the thing
pledged to the mortgaged is not
no pledgee or a third necessary
3 person 3 Mortgage is not valid
Pledge is not valid against third persons
against third persons if not registered.
unless a description of
the thing pledged and
the date of the pledge
appear in a public
instrument.
F. Provisions Applicable only to Pledge
1. .The pledgor retains his ownership of the
thing pledged. He may, therefore, sell the
the
same provided the pledgee consents to the
sale. As soon as the pledgee gives his
consent, the ownership of the thing
pledged is transferred to the vendee
subject to the rights of the pledgee,
namely, that the thing sold may be
alienated to satisfy the obligation (Article
2112) and that the pledgee must continue
in possession during the existence of the
pledge. (Article 2093, 2098).
2. The possession of the pledgee constitutes
his security. Hence, the debtor cannot
or demand for its return until the debt
secured by it is paid. (See Article 2105;
Serrano vs. Court of Appeals, 196 SCRA
107 [1991]) But the right of retention is
limited only to the fulfillment of the
principal obligation for which the pledge
was created. (Article 2098).
3. Pledgee has the obligation to take care of
the thing pledged with the diligence of a
good father of the family. He is entitled to
reimbursement of the expenses incurred
for its preservation and he is liable for loss
or deterioration by reason of fraud,
negligence, delay or violation of the terms
of the contract. (Articles 1174, 1170).
4. Pledgee is not authorized to transfer
possession of the thing pledged to a third
person.
Exception: stipulation authorizing pledgee
to transfer possession. (Article 2100)
5. The pledgee has no right to use the thing
pledged or to appropriate the fruits thereof
without the authority of the owner (Article
2104; see Article 1977). But the pledgee
can apply the fruits, income, dividends, or
1
 interest, if owing and thereafter to the
principal of his credit. (see Article 2132).
Exception: contrary stipulation
6. The pledgor may ask that the thing
pledged be deposited judicially or
extrajudicially.
a) if the creditor uses the thing
without authority;
b) if he misuses the thing in any
other way (Article 2104);
c) if the thing is in danger of
being lost or impaired because
of the negligence or willful act
of the pledge.
7. Pledgor cannot ask for the return of the
thing pledged until said obligation is fully
paid including interest due thereon and
expenses incurred for its preservation
(Article 2099).
a) Exception: Pledgor is allowed to
substitute the thing pledged
which is in danger of
destruction or impairment with
another thing of the same kind
and quality (Article 2107).
8. The possession of the thing pledged by the
debtor or owner subsequent to the
perfection of the pledge gives rise to a
prima facie presumption that the thing has
been returned and, therefore, that the
pledge has been extinguished.
9. When the thing pledged is later found in
the hands of the pledgor or the owner, only
the accessory obligation of pledge is
presumed remitted, not the principal
obligation itself (Article 1274).
10. The sale of the thing pledged extinguishes
the principal obligation whether the price of
the sale is more or less than the amount
due.
a) If the price of the sale is more
than the amount due the
creditor, the debtor is not
entitled to the excess unless
the contrary is provided;
b) In the same way, if the price of
the sale is less, neither is the
creditor entitled to recover the
deficiency. A contrary
stipulation is void (Article
2115).
VII. REAL MORTGAGE
A. Definition
Real Mortgage is a contract whereby the debtor
secures to the creditor the fulfillment of a principal
obligation, specially subjecting to such security
immovable property or real rights over immovable
property in case the principal obligation is not
complied with at the time stipulated.
B. Characteristics
1. It is an accessory and subsidiary contract.
2. It is also unilateral because it creates only an
obligation on the part of the creditor who must
2
free the property from the encumbrance once
the obligation is fulfilled.
3. The mortgagor, as a general rule, retains
possession of the property mortgaged as
security for the payment of the sum borrowed
from the mortgagee, and pays the latter a
certain percent thereof as interest on his
principal by way of compensation for his
sacrifice in depriving himself of the use of said
money and the enjoyment of its fruits, in order
to give them to the mortgagor.
4. The objects of a real mortgage are immovable
(Article 415) and alienable real rights imposed
upon immovables.
Note: While a mortgage of land
necessarily includes, in the absence
of stipulation, the improvements
thereon, a building by itself may be
mortgaged apart from the land on
which it is built. Possessory rights
over said property before title is
vested on the grantee may be
validly transferred or conveyed as
in a deed of mortgage. (prudential
Bank vs. Panis, 153 SCRA 390
[1967]); Nartales vs. GSIS, 156
SCRA 205 [1987]).
5. In order that a mortgage may be validly
constituted, it must appear in a public
document duly recorded in the Registry of
Property (see Gaotian vs. Gaffud, 24 SCRA 706
[1969])
Note: If the instrument of mortgage is
not recorded, the mortgage is
nevertheless binding between the parties.
6. A mortgage creates a real right (see Tuazon vs.
Grosco, 5 Phil. 596 [1905]), a lien inseparable
from the property mortgaged, which is
enforceable against the whole world. Until
discharged, it follows the property wherever it
goes and subsists notwithstanding changes of
ownership.
Note:
a) If the mortgagor sells the mortgaged
property, the property remains subject to
the fulfillment of the obligation secured by
it. (see Bonnevie vs. Court of Appeals, 125
SCRA 122 [1983]) All subsequent
purchasers of the property must respect the
mortgage, whether the transfer to them be
with or without the consent of the
mortgagee. But the mortgage must be
registered (Article 2125) or, if not
registered, the buyer must know of its
existence. (see Phil. National Bank & Trust
Corp. vs. Court of Appeals, 193 SCRA 158
[1991]) The mortgagor may not be the
principal debtor (Article 2085, 2nd par.).
b) The right or lien of an innocent mortgagee
for value upon the mortgaged property must
be respected and protected, even if the
mortgagor obtained his title through fraud.
The remedy of the persons prejudiced is to
bring an action for damages against the
person who caused the fraud and if the
latter is insolvent, an action against the
Treasurer of the Philippines may be filed for
 the recovery of damages against the
Assurance Fund (Philippine National Bank
vs. Court of Appeals, 187 SCRA 735 [1990])
C. Effect of Mortgage
1. The only right of a mortgagee in case of
non-payment of a debt secured by real
mortgage would be to foreclose the
mortgage and have the encumbered
property sold to satisfy the outstanding
indebtedness (Guanzon vs. Argel, 33 SCRA
474 [1970])
2. The mortgagor’s default does not operate
to vest in the mortgagee the ownership of
the encumbered property. His failure to
redeem the property does not
automatically vest ownership of the
property to the mortgagee which would
grant the latter the right to appropriate the
property or dispose of it for such effect is
against public policy as enunciated by
Article 2088. (Reyes vs. Sierra, 93 SCRA
472 [1979]).
Adlawan vs. Torres
(233 SCRA 645)
By mortgaging a piece of
property, a debtor merely
subjects it to a lien but ownership
thereof is not parted with.
D. Extent of Mortgage
General Rule: A mortgage constituted
on immovable property is not
limited to the property itself but
also extends to all its accessions,
improvements, growing fruits and
rents or income (see Article 2102)
as well as to the proceeds of
insurance should the property be
destroyed of the expropriation
value of the property should it be
expropriated.
Exception: contrary stipulation
E. Alienation or Assignment of Mortgage
1. Said assignment is valid and assignee may
foreclose the mortgage in case of nonpayment of
the mortgage indebtedness. (Santiago vs.
Pioneer Savings and Loan Bank, 157 SCRA 100
[1988]).
2. The fact that the mortgagor has transferred the
mortgaged property to a third person does not
relieve him from his obligation to pay the debt to
the mortgage creditor in the absence of novation
(McCallough & Co. vs. Sierra, 41 Phil. 1 [1921]).
3. The mortgage credit being a real right which
follows the property, the creditor may demand
from any possessor the payment of the credit
secured by said property. It is necessary,
however, that prior demand for payment must
have been made on the debtor and the latter
failed to pay. (Bank of the Phil. Island vs.
Concepcion & Hijos, Inc., 53 Phil. 906 [1929])
3
4. An assignee cannot acquire greater rights than
those pertaining to an assignor (Koa vs. Court of
Appeals, 219 SCRA 541).
F. Stipulation Forbidding Alienation of
Mortgaged Property
1. Such a stipulation is void. However, if the
mortgagor alienates the property, the transferee is
bound to respect the encumbrance because being
a real right, the property remains subject to the
fulfillment of the obligation for whose guaranty it
was constituted (Article 2126).
G. Foreclosure of Mortgages
1. Judicial foreclosure governed by Rule 68 of the
Rules of Court.
2. Extrajudicial Foreclosure governed by Act. No.
3135 as amended, if and when the mortgagee is
given a specific power or express authority to do
so.
a. Public auction must be conducted in the
province where the property is situated.
b. Posting of notice of sale in at least 3 public
places therein
c. Publication in a newspaper of general
circulation
d. Personal notice to mortgagor is not
required (Bonnevie vs. Court of Appeals,
125 SCRA 122 [1983]; GSIS vs. Court of
Appeals, 170 SCRA 533 [1989]).
e. Debtor has the right to redeem the
property sold within the term of one year
from and after the date of the sale
(Section 6). The reckoning date in case of
registered land is from the registration of
the certificate of sale since it is only from
such date that the sale takes effect as a
conveyance. (Jose vs. Blue, 42 SCRA 351,
[1971]; Gorospe vs. Santos, 69 SCRA 191
[1976]; General vs. Barrameda, 60 SCRA
162 [1976]. “Every conveyance of lands
acquired under the free patent or
homestead provisions, when proper, shall
be subject to repurchase by the applicant,
his widow or legal heirs, within a period of
five years from the date of the
conveyance.” (Section 119, C.A. No. 141
[Public Land Law], as amended) or
foreclosure sale (Tupas vs. Damasco, 132
SCRA 593 [1984]).
Note: Cerna vs. CA (220 SCRA 517): The
filing of a collection suit bars the
foreclosure of mortgage.
H. Right of Mortgagee to Recover Deficiency
1. If there be a balance due to the mortgagee
after applying the proceeds of the sale, the
mortgagee is entitled to recover the deficiency.
(Development Bank of the Philippines vs.
Mirang, 66 SCRA 141 [1975]. In judicial
foreclosure, the Rules of Court specifically gives
the mortgagee the right to claim for deficiency
in case a deficiency exists (Section 6, Rule 70).
While Act No. 3135 governing extrajudicial
foreclosures of mortgage does not give a
mortgagee the right to recover deficiency after
 the public auction sale, neither does it
expressly or impliedly prohibit such recovery.
Note: This right to recover deficiency had been
categorically resolved in State Investment vs.
Court of Appeals (217 SCRA 32 [1993]). Ergo,
the mortgagee is entitled to recover the
deficiency in case the sale proceeds are not
sufficient to cover the debt in extrajudicial
foreclosures.
2. The action to recover a deficiency after
foreclosures prescribes after ten (10) years
from the time the right of action accrues as
provided in Article 1144(2) of the Civil Code
(Development Bank of the Philippines vs.
Tomeldan, 101 SCRA 171 [1980].
I. Waiver of Security by Creditor
1. The mortgagee may waive the right to foreclose
his mortgage and maintain a personal action for
recovery of the indebtedness. There is no
statutory provision in our jurisdiction prohibiting
a personal action to recover a sum of money
even though a mortgage has been given as
security for the payment of the same. (Hijos de
I. de la Rama vs. Sajo, 45 Phil. 703 [1924];
Solomon and Lachica vs. Dantes, 63 Phil. 522
[1937]).
2. The mortgagee cannot have both remedies. He
has only one cause of action, i. e., non-payment
of the mortgage debt; hence, he cannot split up
his cause of action by filing a complaint for
payment of the debt and another complaint for
foreclosure. (Caltex Phils. Vs. Intermediate
Appellate Court, 176 SRCA 741 [1989]).
J. Kinds of Redemption
1. Equity of redemption or the right of the
mortgagor to redeem the mortgaged property
after his default in the performance of the
conditions of the mortgagee but before the sale
of the mortgaged property or confirmation of
the sale (see Top-Rate International Services,
Inc. vs. Intermediate Appellate Court, 142 SRCA
467 [1986]). The mortgagor’s equity of
redemption is simply the right of the mortgagor
to extinguish the mortgage and retain
ownership of the property by paying the
secured debt within the 90-day period after the
judgment becomes final, in accordance with
Section 2, Rule 68 of the Rules of Court or even
after the foreclosure sale but prior to its
confirmation. (Limpin vs. Intermediate
Appellate Court, 166 SCRA 87 [1988]).
2. Right of redemption or the right of the
mortgagor to redeem the mortgaged property
within a certain period(1 yr) after it was sold for
the satisfaction of the mortgaged debt.
K. Right of Redemption
1. In all cases of extrajudicial sale, the mortgagor
may redeem the property at any time within the
term of one year from and after the date of
registration of the sale (see Section 6, Act No.
3135; Reyes vs. Tolentino 42 SCRA 365
[1971]).
4
2. In judicial foreclosure of real estate mortgage,
there is a right of redemption which he can
exercise at any time after service of judgment
of foreclosure and within the 90-day period and
even thereafter provided he does so before the
foreclosure sale is confirmed by the court.
(Anderson vs. Reyes, 54 Phil 944). Confirmation
of the sale of mortgaged real property cuts off
all the rights or interests of the mortgagor and
of the mortgage and persons holding under
him, and with them the equity of redemption in
the property and vests them in the purchaser.
Confirmation retroacts to the date of the sale.
It is a final order, not interlocutory. (Ocampo
vs. Domalanta, 20 SRCA 1136 [1967];
Binalbagan Estate, Inc. vs. Gatuslao, 76 Phil.
128 [1946]; Villar vs. Javier, 97 Phil 604 [1955];
Lonzome vs. Amores, 134 SCRA 380 [1985].
Exception: However, if the property has
been mortgaged in favor of the
DBP (CA 459) Philippine National
Bank (RA 1300), banks, banking
and credit institutions (RA 337, or
the General Banking Act) or rural
banks (RA 2670), redemption is
allowed within one year from the
registration of the sale.
(Conzales vs. Phil. National Bank,
48 Phil. 824 [1926]). The
redemption must be made within
one year after the sale if the
mortgagee is a bank, banking or
credit institution (Section 78, R.
A. No. 337; Piano vs. Cayanog,
supra). Under the Revised
charter of the PNB, the period is
one year from the registration of
the foreclosure sale.
L. Requisites for Valid Redemption
1. The redemption must be made within 12
months from the time of the registration of the
sale.
2. Payment of the purchase price of the property
plus 1% interest per month together with the
taxes thereon, if any, paid by the purchaser
with the same rate of interest computed from
the date of registration of the sale; and
3. Written notice of the redemption must be
served on the officer who made the sale and a
duplicate filed with the proper Register of
Deeds. (Rosales vs. Yboa, 120 SCRA 869
[1983]).
Ramirez vs. Court of Appeals
(219 SCRA 598)
Acceptance of redemption price
after the expiration of the
statutory period for redemption is
deemed a waiver of the one-year
period to redeem foreclosed
property.
M. Recent Jurisprudence on Real
Mortgages
 Noel vs. Court of Appeals
(240 SCRA 78)
In the absence of proof of gross
inadequacy of the price, the fact
that the sale was made with what
might appear as an inadequate
consideration does not make the
contract one of mortgage.
Mercado vs. Court of Appeals
(240 SCRA 616)
A co-owner does not lose his part
ownership of a co-owned property
where his share is mortgaged by
another co-owner without the
former’s knowledge and consent.
Tarnate vs. Court of Appeals
(241 SCRA 254)
It is a settled rule that a
mortgagee may recover any
deficiency in the mortgage
account which is not realized in a
foreclosure sale and that the
action for recovery of that
deficiency may be filed even
during the redemption period.
Olea vs. Court of Appeals
(247 SCRA 274)
a) A stipulation that the ownership of the
property would automatically pass to the vendee in
case no redemption is effected within a stipulated
period is void for being a pactum commissorium
which enables the mortgagee to acquire ownership
of the mortgaged property without need of
foreclosure.
b) Where in a contract of sale with pacto
de retro, the vendor remains in physical possession
of the land sold as lessee or otherwise, the contract
should be considered an equitable mortgage.
c) Where the contract contains a
stipulation that upon payment by the vendor of the
purchase price within a certain period the
document shall become null and void and have no
legal force and effect, the purported sale should be
considered a mortgage contract.
d) In case of doubt, a contract purporting
to be sale with the right of purchase shall be
considered an equitable mortgage.
e) A mortgage action prescribes after 10
years.
DBP vs. Court of Appeals
(249 SCRA 331)
The fact that the annulment of
the sale will also result in the
invalidity of the mortgage does
not have an effect on the validity
and efficacy of the principal
obligation, for even an obligation
that is unsupported by any
security of the debtor may also
be enforced by means of an
ordinary action. Where a
mortgaged is not valid, as where
it is executed by one who is not
the owner of the property, or the
5
consideration of the contract is
simulated or false, the principal
obligation which it guaranteed is
not thereby rendered null and
void. That obligation matures
and becomes demandable in
accordance with the stipulations
pertaining to it.
Gabonseng vs. Court of Appeals
(246 SCRA 472)
The application for foreclosure of
mortgage is premature where the
debtors have not yet defaulted on
the payment of either the
principal or the interest on their
loans.
Ajax Marketing & Development
Corporation Vs. Court of Appeals
(248 SCRA 222)
An action to foreclose a mortgage
is usually limited to the amount
mentioned in the mortgage but
where the intent of the
contracting parties is manifest
that the mortgaged property shall
also answer for future loans or
advancements then the same in
not improper as it is valid and
binding between the parties.
Filinvest Credit Corporation
Vs. Court of Appeals
(248 SCRA 549)
a) If the mortgagee cannot obtain
possession of a mortgaged property for its sale on
foreclosure, it must bring a civil action either to
recover such possession as a preliminary step to
the sale or to obtain judicial foreclosure.
b) Replevin is the appropriate action to
recover possession preliminary to the extrajudicial
foreclosure of a chattel mortgage.
Philippine Bank of Communications
Vs. Court of Appeals
(253 SCRA 241)
Issue: The mortgage contract
provides:
This mortgage is given as
security for the payment to the
MORTGAGEE on demand or at
maturity, as the case may be, of
all promissory notes, letters of
credit, trust receipts, bills of
exchange, drafts, overdrafts and
all other obligations of every kind
already incurred or which
hereafter may be incurred”
Can the bank charge penalty based on said
provision?
Held:
1. The obligation in this case was not a
series of indeterminate sums incurred over a period
of time, but two specific amounts procured in a
single instance. Thus, the inapplicability of the
ruling in Lim Julian vs. Lutero (49 Phil. 703) which
pertains only to mortgages securing future
advancements. Instead, what applies here is the
general rule that “an action to foreclose a
mortgage must be limited to the amount
mentioned in the mortgage.”
2. The mortgage provision relied upon by
the petitioner is known in American Jurisprudence
as a “dragnet” clause, which is specifically phrased
to subsume all debts of past or future origin. Such
clauses are carefully scrutinized and strictly
construed.”
3. The mortgage contract is also one of
adhesion as it was prepared solely by the petitioner
and the only participation of the other party was
the affixing of his signature or “adhesion” thereto.
Being a contract of adhesion, the mortgage is to be
strictly construed against the petitioner, the party
which prepared the agreement.
4. A reading, not only of the earlier
quoted provision, but of the entire mortgage
contract yields no mention of penalty charges.
Construing this silence strictly against the
petitioner, it can fairly be concluded that the
petitioner did not intend to include the penalties on
the promissory notes in the secured amount. This
explains the finding by the trial court, as affirmed
by the Court of Appeals, the “penalties and charges
are not due for want of stipulation in the mortgage
contract.”
5. Indeed, a mortgage must sufficiently
describe the debt sought to be secured, which
description must not be such as to mislead or
deceive, and an obligation is not secured by a
mortgage unless it comes fairly within the terms of
the mortgage. In this case, the mortgage contract
provides that it secures notes and other evidences
of indebtedness. Under the rule of ejusdem
generis, where a description of things of a
particular class or kind is “accompanied by words
of a generic character, the generic words will
usually be limited to things of a kindred nature with
those particularly enumerated….” A penalty
charge does not belong to the species of
obligations enumerated in the mortgage, hence,
the said contract cannot be understood to secure
the penalty.
6. A mortgage and a note secured by it
are deemed parts of one transaction and are
construed together, thus, an ambiguity is created
when the notes provide for the payment of a
penalty but the mortgage contract does not
Construing the ambiguity against the petitioner, it
follows that no penalty was intended to be covered
by the mortgage.
DBP vs. Court of Appeals
(253 SCRA 414)
Issue: Whether the land in dispute
could have been validly mortgaged while
still the subject of a Free Patent
Application with the government.
1. Petitioner bank did not acquire valid
title over the land in dispute because it was public
land when mortgaged to the bank. We cannot
accept petitioner’s contention that the lot in
dispute was no longer public land when mortgaged
to it since the Olidiana spouses had been in open,
continuous, adverse and public possession thereof
for more than thirty (30) years. In Visayan Realty,
Inc. vs. Meer (86 Phil. 515), we ruled that the
approval of a sales application merely authorized
the applicant to take possession of the land so that
6
he could comply with the requirements prescribed
by law before a final patent could be issued in his
favor. Meanwhile the government still remained
the owner thereof, as in fact the application could
still be canceled and the land awarded to another
applicant should it be shown that the legal
requirements had not been complied with. What
divests the government of title to the land is the
issuance of the sales patent and its subsequent
registration with the Register of Deeds. It is the
registration and issuance of the certificate of title
that segregate public lands from the mass of public
domain and convert it into private property. Since
the disputed lot in the case before us was still the
subject of a Free Patent Application when
mortgaged to petitioner and no patent was granted
to the Olidiana spouses, Lot No. 2029 (Pls-61)
remained part of the public domain.
2. With regard to the validity of the
mortgage contracts entered into by the parties, Art.
2085, par. 2 of the New Civil Code specifically
requires that the pledgor or mortgagor be the
absolute owner of the thing pledged or mortgaged.
Thus, since the disputed property was not owned
by the Olidiana spouses when they mortgaged it to
petitioner, the contracts of mortgage and all their
subsequent legal consequences as regards Lot No.
2029 (Pls-61) are null and void. In a much earlier
case (Vda. De Bautista vs. Marcos, 3 SCRA 434), we
held that it was an essential requisite for the
validity of a mortgage that the mortgagor be the
absolute owner of a property mortgaged, and it
appearing that the mortgage was constituted
before the issuance of the patent to the mortgagor,
the mortgage in question must of necessity be void
and ineffective. For the law explicitly requires an
imperative for the validity of a mortgage that the
mortgagor be the absolute owner of what is
mortgaged.
State Investment House, Inc.
vs. Court of Appeals
(254 SCRA 368)
1. STATE’s registered mortgage right
over the property is inferior to that of respondent-
spouses’ unregistered right. The unrecorded sale
between respondents-spouses and SOLID is
preferred for the reason that if the original owner
(SOLID, in this case) had parted with his ownership
of the thing sold then he no longer had ownership
and free disposal of that thing so as to be able to
mortgage it again. Registration of the mortgage is
of no moment since it is understood to be without
prejudice to the better right of third parties.
2. As a general rule, where there is
nothing in the certificate of title to indicate any
cloud or vice in the ownership of the property, or
any encumbrance thereon, the purchaser is not
required to explore further than what the Torrens
Title upon its face indicates in quest for any hidden
defect or inchoate right that may subsequently
defeat his right thereto. This rule, however, admits
of an exception as where the purchaser or
mortgagee has knowledge of a defect or lack of
title in his vendor, or that he was aware of
sufficient facts to induce a reasonably prudent man
to inquire into the status of the title of the property
in litigation. In this case, petitioner was well aware
that it was dealing with SOLID, a business entity
engaged in the business of selling subdivision lots.
In fact, the OAALA found that “at the time the lot 3. The fruits of the immovable which is the
was mortgaged, respondent State Investment object of the antichresis must be appraised
House, Inc., (now petitioner) has been aware of the at their actual market value at the time of
lot’s location and that said lot formed part of the application. (see Article 2138)
Capital Parks/Homes Subdivision. In Sunshine 4. The property delivered stands as a security
Finance and Investment Corp. vs. Intermediate for the payment of the obligation of the
Appellate Court (203 SCRA 210), the Court, noting debtor in antichresis. Hence, the debtor
petitioner therein to be a financing corporation, cannot demand its return until the debt is
deviated from the general rule that a purchaser or totally paid.
mortgagee of a land is not required to look further
than what appears on the face of the Torrens Title. 5. A stipulation authorizing the antichretic
creditor to appropriate the property upon
3. The above-enunciated rule should the non-payment of the debt within the
apply in this case as petitioner admits of being a period agreed upon is void. (see Article
financing institution. We take judicial notice of the 2038).
uniform practice of financing institutions to
investigate, examine and assess the real property
offered as security for any loan application
C. Distinctions between Antichresis
especially where, as in this case, the subject and Pledge
property is a subdivision lot located at Quezon City, Antichresis Pledge
M. M. It is a settled rule that a purchaser or Refers to real 1 Refers to personal
mortgagee cannot close its eyes to facts which 1
property property
should put a reasonable man upon his guard, and Perfected by 2
then claim that he acted in good faith under the 2
mere consent Perfected by delivery
belief that there was no defect in the title of the Consensual 3
vendor or mortgagor. Petitioner’s constructive 3
contract Real contract
knowledge of the defect in the title of the subject
property, or lack of such knowledge due to its
negligence, takes the place of registration of the
rights of respondent’s spouses. Respondent court
thus correctly ruled that petitioner was not a
purchaser or mortgagee in good faith hence,
petitioner can not solely rely on what merely
appears on the face of the Torrens Title.
D. Distinctions between Antichresis and Real
Mortgage
VIII. ANTICHRESIS Antichresis Real Mortgage
A. Definition 1 Property is delivered to 1 Debtor usually retains the
Antichresis is a contract whereby the creditor the creditor possession of the
acquires the right to receive the fruits of an 2 Creditor requires only 2 property
immovable of his debtor, with the obligation to the right to receive the Creditor does not have
apply them to the payment of the interest, if owing fruits of the property; any right to receive the
and thereafter to the principal of his credit. hence it does not fruits, but mortgage
produce a real right creates a real right over
the property which is
B. Characteristics 3 Creditor, unless there is 3 enforceable against the
1. It is an accessory contract because it stipulation to the whole world
secures the performance of a principal contrary, is obliged to Creditor has no such
obligation. pay the taxes and obligation
charges upon the
2. It is a formal contract because the amount 4 estate (Article 2135) 4
of the principal and of the interest must Creditor given
both be in writing, otherwise the contract of possession of the Mortgagee has no such
antichresis is void. property shall supply obligation
Note: the fruits thereof to the
1. Delivery of the property to the payment of interest, if
creditor is required only in order owing, and thereafter
that the creditor may receive the to the principal of the
fruits and not for the validity of credit
the contract.
E. Obligations of Antichretic Creditor
2. It is not essential that the loan
should earn interest in order that 1. The creditor is obliged, unless there is a
it can be guaranteed with a stipulation to the contrary, to pay the taxes and
contract of antichresis. charges upon the estate. If he does not pay the
Antichresis is susceptible of taxes, he is, by law (Article 1170), required to
guaranteeing all kinds of pay indemnity for damages to the debtor.
obligations, pure or conditional. (Pando vs. Gimenez, 54 Phil. 459 [1930]).
(Javier vs. Valliser, (CA) N. 2648-
R, April 29, 1950; Sta. Rosa vs.
2. Another obligation of the creditor is to apply the
fruits, after receiving them to the interest, if
Noble, 35 O.G. 27241).
owing, and thereafter to the principal (Article
2132) in accordance with the provisions of

7
 Article 2133 or 2138. Hence, the duty of the chattel mortgage it executed in
creditor to render an account of said fruits to favor of respondent DBP.
the debtor and the corresponding right of the
latter that the said fruits be applied to the debt.
(Barretto vs. Barretto, 37 Phil. 234 [1917]; Diaz C. Distinction between Chattel
and Rubillos vs. De Mendezona, 48 Phil. 666 Mortgage and Pledge
[1926]; Macapilac vs. Gutierrez Recipe 43 Phil. Chattel Mortgage Pledge
770 [1922]). Delivery of personal 1 Delivery is
1
property to the necessary
F. Remedy of Creditor in Case of Default mortgagee is not
1. To bring an action for specific performance necessary
Registration in the 2 Registration in the
2
2. To petition for the sale of the real property as in Chattel Mortgage Registry of Property
a foreclosure of mortgages under Rule 68 of the Register is is not necessary for
Rules of Court. The parties, however, may necessary for its its validity
agree on an extrajudicial foreclosure in the validity 3 Procedure for sale
3
same manner as they are allowed in contracts Procedure for of pledged thing is
of mortgage and pledge (see Article 1307; sale of the found in Article
Tavera vs. El Hogar Filipino, Inc. 68 Phil. 712 mortgaged 2112 of the Civil
[1939]). property is Code
found in
Section 14 of 4
IX. CHATTEL MORTGAGE 4
RA 1508, as If property is sold,
A. Definition
amended the debtor is not
A chattel mortgage is If property is entitled to the
1. an accessory contract because it is for foreclosed, the excess
the purpose of securing the excess over the Exception
performance of a principal obligation; amount due s:
2. a formal contract because for its goes to the a) contrary
validity, registration in the Chattel debtor 5 stipulation
5
Mortgage Register is indispensable. (Article 2125)
b) legal pledge
3. a unilateral contract because it (Article 2121)
produces only obligations on the part If property is If property is
of the creditor to free the thing from foreclosed, creditor is sold, creditor is
the encumbrance upon fulfillment of entitled to recover the not entitled to
the obligation. deficiency from the recover the
debtor deficiency
Exception: if chattel notwithstanding
mortgage is a any stipulation to
security for the the contrary
Filipinas Marble Corporation vs. purchase of personal (Article 2115).
Intermediate Appellate Court property in
(142 SCRA 180) installments (Article
A mortgage is a mere accessory 1484)
contract and thus, its validity
would depend on the validity of D. Offenses Involving Chattel Mortgage
the loan secured by it. We 1. Knowingly removing any personal
however, reject the petitioner’s property mortgaged under the Chattel Mortgage
argument that since the chattel Law to any province or city other than the one in
mortgage involved was not which it was located at the time of the execution of
registered, the same is null and the mortgage without the written consent of the
void. Article 2125 of the Civil mortgagee; and
Code clearly provides that the
non-registration of the mortgage 2. Selling or pledging personal property
does not affect the immediate already mortgaged, or any part thereof, under the
parties. It states: terms of the Chattel Mortgage Law without the
consent of the mortgagee written on the bank of
“Article 2125. In addition to the
the mortgage and duly recorded in the Chattel
requisites in Article 2085, it is
Mortgage Register (Article 319, Revised Penal
indispensable, in order that a
Code).
mortgage may be validly
constituted that the document in Note: The mortgagor is not
which it appears be recorded in relieved of criminal liability even
the Registry of Property. If the if the mortgage indebtedness is
instrument is not recorded, the thereafter paid in full (U.S. vs.
mortgage is nevertheless binding Kilayko, 32 Phil. 61 [1915]), or
between the parties. the mortgagor-seller informed the
xxx xxx xxx purchaser that the thing sold had
The petitioner cannot invoke the been mortgaged. (People vs.
above provision to nullify the Alvares, 45 Phil. 472 [1923]).
But the sale is valid although no

8
 written consent was obtained
from the mortgagee but the
mortgagor lays himself open to
criminal prosecution.
(Servicewide Specialists, Inc. vs.
Intermediate Appellate Court,
174 SCRA 80 [1989]; Dy, Jr. vs.
Court of Appeals, 198 SCRA 826
[1981]).
E. Subject Matter of Chattel Mortgage
1. Shares of stock in a corporation
2. Interest in business
3. Machinery and house of mixed
materials treated by parties as personal property
and no innocent third person will be prejudiced
thereby (Makati Leasing and Finance Corporation
vs. Weaver Textile Mills, Inc., 122 SCRA 296 [1983].
4. Vessels, the mortgage of which have
been recorded with the Philippine Coast Guard in
order to be effective as to third persons
5. Motor vehicles, the mortgage of which
had been registered both with the Land
Transportation Commission and the Chattel
Mortgage Registry is order to affect third persons
6. House which is intended to be
demolished
7. Growing crops and large cattle
(section 7, paragraphs 2 and 3, Act No. 1508)
Note: Section 7 of the Chattel
Mortgage Law does not demand a
minute and specific description of
every chattel mortgaged in the
deed of mortgage, but only
requires that the description of
the mortgaged property be such
as to enable the parties to the
mortgage or any other person to
identify the same after a sufficient to constitute a good chattel mortgage,
reasonable investigation and
inquiry (Saldana vs. Phil.
Guaranty Co., Inc., 106 Phil. 919
[1960]); otherwise, the mortgage
is invalid.
F. Creation of Chattel Mortgage
1. The law as it now stands provides for
only one way for executing a valid chattel
mortgage, i.e., the registration of the personal
property in the Chattel Mortgage Register as
security for the performance of an obligation.
(Article 2140; see Article 2085). Under the Chattel
Mortgage Law, if the property as situated in a
different province from that in which the mortgagor
resides, the registration must be in both registers
(Section 4, Act No. 1508); otherwise, the chattel
mortgage is void.
2. It has been ruled however that if the
chattel mortgage is not recorded, it is nevertheless
binding between the parties. (Filipinas Marble
Corporation vs. Intermediate Appellate Court, 142
SCRA 180 [1986]; Article 2125).
G. Effect of Registration
The registration of the chattel
mortgage is an effective and
binding notice to other creditors
9
of its existence and creates a real
right or a lien which being
recorded follows the chattel
wherever it goes. The
registration gives the mortgagee
the symbolical possession.
(Northern Motors, Inc. vs. Coquia,
68 SCRA 374 [1975]).
H. Registration of Assignment and
Mortgage Optional
1. There is no law expressly requiring the
recording of the assignment of a mortgage. While
such assignment may be recorded, the law is
permissive and not mandatory.
2. The assignee is subrogated to the
rights and obligations of the assignor-mortgagee
with respect to the chattel mortgage constituted in
favor of the latter. Consequently, the assignee is
bound by the terms and conditions of the chattel
mortgage executed between the mortgagor and
the mortgagee. (BA Finance Corporation vs. Court
of Appeals, 201 SCRA 157 [1991]).
I. Affidavit of Good Faith
1. The affidavit of good faith is an oath in
a contract of chattel mortgage wherein the parties
“severally swear that the mortgage is made for the
purpose of securing the obligation specified in the
conditions thereof and for no other purpose and
that the same is just and valid obligation and one
not entered into for the purpose of fraud.
2. Under Section 5 of the Chattel
Mortgage Law, in describing what shall be deemed
includes the requirement of an affidavit of good
faith appended to the mortgage and recorded
therewith. But the absence of the affidavit vitiates
a mortgage only as against third persons without
notice like creditors and subsequent
encumbrances. (Lilius vs. Manila Railroad Co., 62
Phil. 50 [1935]; Phil. Refining Co. vs. Jarque, 61 Phil.
229 [1935]; Giberson vs. A. N. Jurreidini Bros., 44
Phil. 216 [1922]).
3. A deed of chattel mortgage is void
where it provides that the security stated therein
“is for the payment of any and all obligations
hereinbefore contracted and which may hereafter
be contracted by the mortgagor in favor of the
mortgagee”. A mortgage that contains a
stipulation in regard to future advances in the
credit will take effect only from the date the same
are made and not from the date of the mortgage.
(Jaca vs. Davao Lumber Co., 113 SCRA 107 [1982]).
J. Foreclosure of Chattel Mortgage
1. Public Sale – if the mortgagor
defaults in the payment of the secured debt or
otherwise fails to comply with the conditions of the
mortgage, the creditor has no right to appropriate
to himself the personal property (Article 2141,
2088) because he is permitted only to recover his
credit from the proceeds of the sale of the property
at public auction through a public officer in the
manner prescribed in Section 14 of Act No. 1508.
(Mahoney vs. Tuason, 39 Phil. 951 [1919]);
Esguerra vs. Court of Appeals, 173 SCRA 1 [1989]).
2. Private Sale – if there is an express
stipulation in the contract.
Exception: fraud or duress
Note:
1. The
mortgagee may, after thirty
(30) days from the time of
the condition broken, cause
the mortgaged property to
be sold at public auction by a
public officer (Section 14, Act
No. 1508)
2. The 30-day
period to foreclose a chattel
mortgage is the minimum
period after violation of the
mortgage condition for the
mortgage creditor with at
least ten (10) days notice to
the mortgagor and posting of
public notice of time, place
and purpose of such sale,
and is a period of grace for
the mortgagor, to discharge
the mortgage obligation.
After the sale of the chattel
at public auction, the right of
redemption is no longer
available to the mortgagor.
(Cabral vs. Evangelista, 28
SCRA 1000 [1969])
K. Right of Mortgagee to Recover
Deficiency
1. 1.The creditor may maintain an action
for the deficiency although the Chattel Mortgage
Law is silent on this point (Ablaza vs. Ignacio,
(unrep) 103 Phil. 1151 [1958]; Garrido vs. Tuason,
24 SCRA 727 [1968]’ Phil. National Bank vs. Manila
Investment & Construction, Inc., supra; Bank of the
Philippine Isalnd vs. Olutanga Lumber Co., 47 Phil.
20 [1924]). The action may be sought within ten
(10) years from the time the cause of action
accrues.
2. 2.If the chattel mortgage is
constituted, whether by the debtor-vendee or a
third person, as security for the purchase of
personal property payable in installments, no
deficiency judgment can be asked and any
agreement to the contrary shall be void (Article
1484).
3. 3.The chattel mortgagee is entitled to
deficiency judgment in an action for specific
performance (Article 1484 [1]) where the
mortgaged property is subsequently attached and
sold. The execution sale in such case is not a
foreclosure sale. (Industrial Finance Corporation
vs. Ramirez, 77 SCRA 152 [1977]).
X CONCURRENCE AND PREFERENCE OF
CREDITS
A. Liability for Obligations
10
The debtor is liable with all his property,
present and future, for the fulfillment of
his obligations, subject to the exemptions
provided by law.
B. Exempt Property
1. Family home constituted jointly by
husband and wife or by unmarried head of
a family (Article 152, Family Code).
Exceptions:
a) for non-payment of taxes;
b) for debts incurred prior to the
constitution of the family home;
c) for debts secured by mortgages
on the premises before or after such constitution;
and
d) for debts due to laborers,
mechanics, architects, builders, material men and
others who have rendered service or furnished
material for the construction of the building
2. Right to receive support as well as any money or
property obtained as such support. (Article 205,
Family Code)
3. Tools and implements necessarily used by him in
his trade or employment;
4. Two horses, or two cows, or two carabaos or
other beasts of burden, such as the debtor may
select, not exceeding one thousand pesos in
value and necessarily used by him in his
ordinary occupation;
5. His necessary clothing and that of all his family.
6. Household furniture and utensils necessary for
housekeeping and used for that purpose by the
debtor, such as the debtor may select, of a value
not exceeding one thousand pesos;
7. Provisions for individual or family use insufficient
for three months;
8. The professional libraries of attorney’s, judges,
physicians, pharmacists, dentist, engineers,
surveyors, clergymen, teachers and other
professionals, not exceeding three thousand
pesos in value;
9. One fishing boat and net, not exceeding the total
value of one thousand pesos, the property of any
fisherman, by the lawful use of which he earns a
livelihood;
10. So much of the earnings of the debtor for
his personal services within the month
preceding the levy as are necessary for the
support of his family;
11. Lettered gravestones;
12. All moneys, benefits, privileges or annuities
accruing or in any manner growing out of any
life insurance, if the annual premiums paid do
not exceed five hundred pesos, and if they
exceed the sum, a like exemption shall exist
which shall bear the same proportion to the
moneys, benefits privileges and annuities so
accruing or growing out of such insurance that
said five hundred pesos bears to the whole
premiums paid;
13. The right to receive legal support, or money or
property obtained as such support, or any
pension or gratuity from the government;
14. Copyrights and other properties especially
exempted by law (Section 12, Rule 39)
15. Property under legal custody and of the public
dominion.
C. Preferred Credits with Respect to Specific d) pledge, chattel mortgage
Movable Property e) mechanic’s lien
1. Duties, taxes and fees due thereon f) laborer’s wages
to the state or any subdivision thereof; g) salvage
h) tenancy
2. Claims arising from i) carrier’s lien
misappropriation, breach of trust, or j) hotel’s lien
malfeasance by public officials committed in the k) crop loan
performance of their duties, on the movables, l) rentals - one year
money or securities obtained by them; m) deposit
3. Claims for the unpaid price of Note: The foregoing enumeration is
movable sold, on said movables, so long as they not an order to preference (Articles 2248 –
are in the possession of the debtor, up to the 2249)
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; D. Preferred Credits with Respect to Specific
this right is not lost by the immobilization of the Immovable Property
thing by destination, provided it has not lost its 1. Taxes due upon the land or building;
form, substance and identity; neither is the 2. For the unpaid price of real property sold upon
right lost by the sale of the thing together with the immovable sold;
other property for a lump sum, when the price
thereof can be determined proportionally; 3. Claims of laborers. Masons, mechanics and
other workmen, as well as of architects,
4. Credits guaranteed with a pledge engineers and contractors, engaged in the
so long as the things pledged are in the hands construction, reconstruction or repair of
of the creditor, or those guaranteed by a chattel buildings, canals or other works, upon said
mortgage upon the things mortgaged, up to the buildings, canals or other works;
value thereof;
4. Claims of furnishers of materials used in the
5. Credits for making repairs, construction, reconstruction, or repair of
safekeeping or preservation or personal buildings, canals, and other works, upon said
property on the movable thus made, repaired, buildings, canals or other works;
kept or possessed;
5. Mortgage credits recorded in the Registry of
6. Claims for laborers wages, on the Property, upon the real estate mortgage;
goods manufactured or the work done;
6. Expenses for the preservation or improvement
7. For expenses of salvage, upon the of real property when the law authorizes
goods salvaged; reimbursement, upon the immovable preserved
8. Credits between the landlord and or improved;
the tenant arising from the contract of tenancy 7. Credits annotated in the Registry of Property,
on shares, on the share of each in the fruits or by virtue of a judicial order, by attachments or
harvest; executions, upon the property affected, and
9. Credits for transportation, upon the only as to later credits;
goods carried, for the price of the contract and 8. Claims of co-heirs for warranty in the partition
incidental expenses, until their delivery and for of an immovable among them, upon the real
thirty days thereafter; property thus divided;
10. Credits for lodging and supplies 9. Claims of donors or real property for pecuniary
usually furnished to travelers by hotelkeepers, charges or other conditions imposed upon the
on the movables belonging to the guest as long donee, upon the immovable donated;
as such movables are in the hotel, but not for
money loaned to the guests; 10. Credits of insurers, upon the property insured,
for the insurance premium for two years.
11. Credits for seeds and expenses for
cultivation and harvest advanced to the debtor, Summary:
upon the fruits harvested; a. taxes
12. Credits for rent for one year, upon b. vendor’s lien
the personal property of the lessee existing on c. contractor’s lien
the immovable leased on the fruits of the same, d. lien of materialmen
but not on money or instruments of credit; e. mortgage
f. expensesof preservation
13. Claims in favor of the depositor if g. recorded attachments
the depository has wrongfully sold the thing h. warranty in partition
deposited, upon the price of the sale. i. conditional donations
14. In the foregoing cases, if the j. premiums for 2 year – insurers
movables to which the lien or preference Note: The foregoing enumeration is not
attaches have been wrongfully taken, the an order of preference (Carried
creditor may demand them from any possessor Lumber Co. vs. ACCFA, 83 SCRA
within thirty (30) days from the unlawful 411 [1975]).
seizures.
E. Order of Preference with Respect to Other
Summary: Properties of the Debtor
a) taxes 1. Proper funeral expenses for the debtor, or
b) malversation by public officials children under his or her parental authority who
c) vendor’s lien

11
 have no property of their own, when approved and other assets of the insolvent applied in
by the court; a certain sequence or order of priority
2. Credits for services rendered the insolvent by (Republic vs. Peralta, 150 SCRA 37 [1987]).
employees, laborers, or household helpers for 2. Article 2244 relates to the property of the
one year preceding the commencement of the insolvent that is not burdened with the liens
proceedings in insolvency; or encumbrances created or recognized by
3. Expenses during the last illness of the debtor or Article 2241 and 2242.
of his or her spouse and children under his or 3. Recent Jurisprudence on Concurrence
her parental authority, if they have no property
and Preference of Credits
of their own;
4. Compensation due to the laborers of their a) A foreclosing bank creditor cannot be
dependents under laws providing for indemnity held liable for unpaid wages and the
for damages in cases of labor accident or illness like of the employees of the
resulting from the nature of the employment; mortgagor. The employees should file
5. Credits and advancements made to the debtor their claims in a proceeding in
for support of himself or herself, and family, bankruptcy on their employer.
during the last preceding insolvency; (Development Bank of the Philippines
vs. National Labor Relations
6. Support during the insolvency proceedings, and Commissions, 186 SCRA 841 [1990]).
for three months thereafter;
7. Fines and civil indemnification arising from a b) From the provisions of Article 110 of
criminal offense; the Labor Code and Section 10, Rule
VIII, Book III of the Revised Rules and
8. Legal expenses, and expenses incurred in the
Regulations Implementing the Labor
administration of the insolvent’s estate for the
Code, a declaration of bankruptcy or a
common interest of the creditors, when
judicial liquidation must be present
properly authorized and approved by the court;
before the worker’s preference may
9. Taxes and assessments due the national enforced. (Development Bank of the
government, other those mentioned in Articles Philippines vs. Santos, 171 SCRA 138
2241, No.1, & 2242, No. 1; [1989]).

10. Taxes and assessments due any province, DBP vs. NLRC
other than those mentioned in Articles 2241, (236 SCRA 117)
No. 1 & 2242, No. 1;
1. To the extent that claims for
11. Taxes and assessments due any city or unpaid wages fall outside the scope of Articles
municipality other than those mentioned in 2241(6) and 2242(3), they would come within the
Articles 2241,No.1 & 2242,No. 1; ambit of the category of ordinary preferred credits
under Article 2242.
12. Damages fro death or personal injuries caused
by a quasi-delict; 2. The right of first preference
as regards unpaid wages recognized by Article 110
13. Gifts due to public and private institutions of of the Labor Code does not constitute a lien on the
charity or beneficence; property of the insolvent debtor in favor or workers.
14. Credits which without special privilege, appear It is a right to a first preference in the discharge of
in (a) a public instrument; or (b) in the final the funds of the judgment debtor.
judgment, if they have been the subject of
litigation. These credits shall have preference BPI vs. Court of Appeals
among themselves in the order of priority of the (229 SCRA 223)
dates of the instruments and of the judgments, Whenever a distressed
respectively (Article 2244) corporation asks SEC for
Summary: rehabilitation and suspension of
a) funeral expenses payments, preferred creditor may
b) wages of employees – one year no longer assert such preference,
c) expenses of last illness but shall stand on equal footing
d) workmen’s compensation with other creditors. This rule will
e) support for one year enable the rehabilitation receiver
f) support during insolvency to effectively exercise his powers
g) fines in crimes free from judicial and
h) legal expenses - administration extrajudicial interference that
i) taxes might unduly hinder rescue of the
j) tort company.
k) donations
l) appearing in publicinstrument or final DBP vs. NLRC
judgment (229 SCRA 350)

Note: 1. Article 110 of the Labor Code as

amended must be viewed and read in
1. In contrast with Articles 2241 and 2242, conjunction with the provisions of the
Article 2244 creates no liens on determinate Civil Code on concurrence and
property which follow such property. What preference of credits.
Article 2244 creates are simply rights in 2. The Civil Code and Labor Code
favor or certain creditors to have the cash provisions require judicial proceedings

12
 in rem in adjudication of creditor’s
claims against the debtor’s assets to
become operative.
3. RA 6715 expanded “worker
preference” to cover not only unpaid
wages but also other monetary claims
of laborers, to which even claims of
the Government must be deemed
subordinate.
4. Amendatory provisions of RA 5715
which became effective on 21 March
1989 should only be given
prospective application.
F. Order of Preference of Credits
1. Those credits which enjoy preference
with respect to specific movable,
excluded all others to the extent of the
value of the personal property to which
the preference refers (Article 2246).
2. If there are two or more credits with
respect to the same specific movable
property, they shall be satisfied pro-rata,
after the payment of duties, taxes, and
fees due the State or any subdivision
thereof (Article 2247).
3. Those credits which enjoy preference in
relation to specific real property or real
rights, exclude all others to the extent of
the value of the immovable or real right
to which the preference refers (Article
8).
4. If there are two or more credits with
respect to the same specific real
property or real rights, they shall be
satisfied pro rata, after the payment of
the taxes and assessments upon the
immovable property or real right (Article
2249).
5. The excess, if any, after the payment of
the credits which enjoy preference with
respect to specific property, real or
personal, shall be added to the free
property which the debtor may have, for
the payment of the other credits (Article
2250).
6. Those credits which do not enjoy any
preference with respect to specific
property and those which enjoy
preference, as to the amount not paid,
shall be satisfied according to the
following rules:
a. In the order established in Article
2244;
b. Common credits referred to in
Article 2245 shall enjoy no
preference and shall be paid pro
rata regardless of dated (Article
2251).

13