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Stephanie V. Gomez-Somera U.P. College of Law

Nature of Credit Card Transactions Pantaleon v. American Express International, Inc., G.R. No. 174269, August 25, 2010, 629 SCRA 276.

Pantaleon decided to purchase some diamond pieces in Amsterdam. Pantaleon presented his American Express credit card to the sales clerk to pay for this purchase. In all, it took AMEX a total of 78 minutes to approve Pantaleon’s purchase and to transmit the approval to the jewelry store.

A credit card is defined as any card, plate, coupon book, or other credit device existing for the purpose of obtaining money, goods, property, labor or services or anything of value on credit. (R.A. 8484) Every credit card transaction involves three contracts: The sales contract between the credit card holder and the merchant or the business establishment which accepted the credit card; The loan agreement between the credit card issuer and the credit card holder; and lastly, The promise to pay between the credit card issuer and the merchant or business establishment.

When a credit card company gives the holder the privilege of charging items at establishments associated with the issuer, a necessary question in a legal analysis is: When does this relationship begin?

Gray v. American Express Company The card membership agreement itself is a binding contract between the credit card issuer and the card holder. In our jurisdiction, we generally adhere to the Gray ruling, recognizing the relationship between the credit card issuer and the credit card holder as a contractual one that is governed by the terms and conditions found in the card membership agreement.

From the loan agreement perspective, the contractual relationship begins to exist only upon the meeting of the offer and acceptance of the parties involved. In more concrete terms, when cardholders use their credit cards to pay for their purchases, they merely offer to enter into loan agreements with the credit card company. Only after the latter approves the purchase requests that the parties enter into binding loan contracts.

Interest Conventional Interest Escalation Clauses Spouses Juico v. China Banking Corporation, G.R. No. 187678, April 10, 2013.

Spouses Juico (petitioners) obtained a loan from China Banking (respondent). The loan was secured by a REM over petitioners’ property. Petitioners failed to pay and the mortgaged property was sold at public auction, with respondent as highest bidder. Petitioners received a demand letter from respondent for the payment of the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent filed a collection suit.

Whether the interest rates imposed by respondent are valid as they were not by virtue of any law, BSP regulation or any regulation passed by a government entity; that the interest rates were unilaterally imposed and thus violate the principle of mutuality of contracts; that the escalation clause does not give respondent the unbridled authority to increase the interest rate unilaterally.

“I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest rate/service charge presently stipulated in this note without any advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate government entities, increasing or decreasing such interest rate or service charge.�

Stipulation allowing an increase in the interest rate agreed upon by the contracting parties. There is nothing inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. But an escalation clause “which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement� is void as it violates the principle of mutuality of contracts.

“I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.” While escalation clauses in general are considered valid, we ruled that Banco Filipino may not increase the interest on respondent borrower’s loan, pursuant to Circular 494 issued by the Monetary Board on January 2, 1976, because said circular is not a law.

The increase of interest rate from 19% to 21% per annum made by petitioner bank was disallowed because it did not comply with the guidelines adopted by the Monetary Board to govern interest rate adjustments by banks and non-banks performing quasi-banking functions.

The promissory notes authorized PNB to increase the stipulated interest per annum “within the limits allowed by law at any time depending on whatever policy [PNB] may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board.� This Court declared the increases (from 18% to 32%, then to 41% and then to 48%) unilaterally imposed by PNB to be in violation of the principle of mutuality essential in contracts.

A similar ruling was made where the credit agreement provided that “[PNB] reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board�.

The Court invalidated escalation clauses authorizing PNB to raise the stipulated interest rate at any time without notice, within the limits allowed by law. The Court observed that there was no attempt made by PNB to secure the conformity of respondent borrower to the successive increases in the interest rate.

The following escalation clause was unreasonable: “The rate of interest and/or bank charges herein stipulated, during the terms of this promissory note, its extensions, renewals or other modifications, may be increased, decreased or otherwise changed from time to time within the rate of interest and charges allowed under present or future law(s) and/or government regulation(s) as the [PSBank] may prescribe for its debtors.�

The monthly upward/downward adjustment of the interest rate is left to the will of respondent bank alone. It violates the essence of mutuality of the contract.

The stipulations on interest rate repricing are valid because: The parties mutually agreed on said stipulations; Repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest rate; and Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate.

“If there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder.� This could not be considered an escalation clause for the reason that it neither states an increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate.

Guidelines on valid escalation clauses: First, the escalation clause must be paired with a de-escalation clause. Second, so as not to violate the principle of mutuality, the escalation must be pegged to the prevailing market rates, and not merely make a generalized reference to "any increase or decrease in the interest rate" in the event a law or a Central Bank regulation is passed. Third, consistent with the nature of contracts, the proposed modification must be the result of an agreement between the parties.

Interest Compensatory, Penalty or Indemnity Interest Forbearance of Money Estores v. Spouses Supangan, G.R. No. 175139, April 18, 2012.

Estores and Supangan entered into a Conditional Deed of Sale. After almost seven years and payment of P3.5 million on the part of respondent-spouses, petitioner failed to comply with paragraphs 4, 6, 7, 9 and 10 of the contract. Respondent-spouses demanded the return of the amount of P3.5 million. RTC rendered its Decision finding respondentspouses entitled to interest but only at the rate of 6% per annum and not 12% as prayed by them. CA rendered the assailed Decision affirming the ruling of the RTC.

Whether the imposition of interest is proper. Whether the 6% as provided under Article 2209 of the Civil Code, or 12% under Central Bank Circular 416, is due. Can the stipulation governing the return of the money be considered a forbearance of money which required payment of interest at the rate of 12%.

Interest may be imposed even in the absence of stipulation in the contract. Article 2210 of the Civil Code expressly provides that “interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract." The applicable rate of interest "shall be computed in accordance with the stipulation of the parties." Absent any stipulation, the applicable rate of interest shall be 12% per annum "when the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be 6%."

“Forbearance" was defined as a "contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable."

The phrase is meant to have a separate meaning from a loan. Forbearance of money, goods or credits refers to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions. Petitioner’s unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to forbearance of money which can be considered as an involuntary loan. Thus, the applicable rate of interest is 12% per annum.

Interest Legal Interest Rate Central Bank Circular 799, Series of 2013, effective July 1, 2013 Nacar v. Gallery Frames and/or Bordey, G.R. No. 189871, August 13, 2013, EN BANC.

Sec. 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be 6% per annum. Sec. 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q. 1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly. This Circular shall take effect on 1 July 2013.

Modification of Eastern Shipping Lines, Inc. v. Court of Appeals: I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages� of the Civil Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.

Interest Usury Constitutionality of the Suspension of the Usury Law Advocates for Truth in Lending, Inc. and Olaguer v. Bangko Sentral Monetary Board, G.R. No. 192986, January 15, 2013, EN BANC.

R.A. 265, created the CB and empowered the CB-MB to set the maximum interest rates which banks may charge for all types of loans and other credit operations, within limits prescribed by the Usury Law. The Usury Law was amended by P.D. 1684, giving the CB-MB authority to prescribe different maximum rates of interest which may be imposed for a loan or renewal thereof or the forbearance of any money, goods or credits, provided that the changes are effected gradually and announced in advance. Resolution No. 2224 dated December 3, 1982, the CB-MB issued CB Circular 905, Series of 1982, effective on January 1, 1983. Section 1 of the Circular, under its General Provisions, removed the ceilings on interest rates on loans or forbearance of any money, goods or credits. R.A. 7653 established the BSP to replace the CB.

CB Circular 905 did not repeal nor in anyway amend the Usury Law but simply suspended the latter’s effectivity; that a [CB] Circular cannot repeal a law, [for] only a law can repeal another law; that by virtue of CB Circular 905, the Usury Law has been rendered ineffective; and Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.

Central Bank Circular 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity. The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law.

P.D. 1684 and C.B. Circular 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated.

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoiliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.

The lifting of the ceilings for interest rates does not authorize stipulations charging excessive, unconscionable, and iniquitous interest. It is settled that nothing in CB Circular 905 grants lenders a carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

Kinds of Security Transactions Effect of R.A. 10142, Sec. 4 (p) (ll) (kk) (jj) (qq) (pp) (t)

Distinguished from Financial Leasing PCI Leasing & Finance, Inc. v. Trojan Metal Industries Inc., et al., G.R. No. 176381, December 15, 2010, 638 SCRA 615.

Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan, PCILF offered to buy various equipment TMI owned.

Whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel mortgage.

Financial leasing is defined as: A mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

In a true financial leasing, whether under RA 5980 or RA 8556, a finance company purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but, due to financial limitations, is incapable of doing so. The finance company then leases the equipment to the lessee in exchange for the latter’s periodic payment of a fixed amount of rental. In this case, however, TMI already owned the subject equipment before it transacted with PCILF. Therefore, the transaction between the parties in this case cannot be deemed to be in the nature of a financial leasing as defined by law.

The transaction between CCCC and MLFC was not one of financial leasing as defined by law, but simply a loan secured by a chattel mortgage over CCCC’s equipment. The Court went on to explain that where the client already owned the equipment but needed additional working capital and the finance company purchased such equipment with the intention of leasing it back to him, the lease agreement was simulated to disguise the true transaction that was a loan with security.

The transaction between the parties was not a true financial leasing because the intention of the parties was not to enable the borrower-lessee to acquire and use the heavy equipment and machinery, which already belonged to him, but to extend to him a loan to use as capital for his construction and logging business.

Effect and Extent Star Two (SPV-AMC), Inc. v. Paper City Corp. of the Phil. , G.R. No. 169211, March 06, 2013.

Paper City was granted loans and credit accommodations by RCBC. By contracts, all uncontested in this case, machineries and equipments are included in the mortgage in favor of RCBC, in the foreclosure of the mortgage and in the consequent sale on foreclosure also in favor of petitioner.

“Parcels of land, including the buildings and existing improvements thereon, as well as of the machinery and equipment more particularly described and listed that is to say, the real and personal properties listed in Annexes “A” and “B” hereof.” “Various machineries and equipment owned by the [Paper City], located in and bolted to and forming part of the following, more particularly described and listed in Annexes “A” and “B” which are attached and made integral parts of this Amendment. The machineries and equipment listed in Annexes “A” and “B” form part of the improvements listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the REM.” “To be secured against the existing properties composed of land, building, machineries and equipment and inventories more particularly described in Annexes “A” and “B” of the INDENTURE.” “Composed of newly constructed two (2)-storey building, other land improvements and machinery and equipment all of which are located at the existing Plant Site in Valenzuela, Metro Manila and more particularly described in Annex “A” hereof.”

Chattels permanently located in a building, either useful or ornamental, or for the service of some industry even though they were placed there after the creation of the mortgage shall be considered as mortgaged with the estate, provided they belong to the owner of said estate.

The machineries were integral parts of said sugar central hence included following the principle of law that the accessory follows the principal.

The Court approved the inclusion of machineries and accessories installed at the time of the mortgage, as well as all the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof.

Right to Alienate Collateral Garcia v. Villar, G.R. No. 158891, June 27, 2012.

Galas mortgaged the subject property to Villar as security for a loan. Galas mortgaged the same subject property to Garcia to secure her loan. Both mortgages were annotated at the back of the TCT. Galas sold the subject property to Villar “free and clear of all liens and encumbrances of any kind whatsoever.” The Deed of Sale was registered... Both Villar’s and Garcia’s mortgages were carried over and annotated at the back of Villar’s new TCT. Garcia filed his Complaint for Foreclosure of REM with Damages, claimed that when Villar purchased the subject property, Galas was relieved of her contractual obligation and the characters of creditor and debtor were merged in the person of Villar. RTC declared that the direct sale of the subject property to Villar, the first mortgagee, could not operate to deprive Garcia of his right as a second mortgagee, that upon Galas’s failure to pay her obligation, Villar should have foreclosed the subject property pursuant to Act No. 3135, and that Villar, as the new registered owner of the subject property with a subsisting mortgage, was liable for it. CA reversed the RTC and declared that Galas was free to mortgage the subject property even without Villar’s consent and that Garcia had no cause of action against Villar in the absence of evidence showing that the second mortgage executed in his favor had been violated and that he had made a demand for the payment of the obligation.

Propriety of Garcia’s demand upon Villar to either pay Galas’s debt or to judicially foreclose the subject property to satisfy the aforesaid debt: Whether or not the second mortgage to Garcia was valid; Whether or not the sale of the subject property to Villar was valid; Whether or not the sale of the subject property to Villar was in violation of the prohibition on pactum commissorium; Whether or not Garcia’s action for foreclosure of mortgage on the subject property can prosper.

Both are valid under the terms and conditions of the Deed of REM executed by Galas and Villar. If it were the intention of the parties to impose a restriction, they would have and should have stipulated such in the Deed. Nowhere was it stated in the Deed that Galas could not opt to sell the subject property to Villar, or to any other person. Such stipulation would have been void anyway, as it is not allowed under Article 2130 of the Civil Code.

The following are the elements of pactum commissorium: There should be a property mortgaged by way of security for the payment of the principal obligation; and There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. The power of attorney provision above did not provide that the ownership over the subject property would automatically pass to Villar upon Galas’s failure to pay the loan on time. What it granted was the mere appointment of Villar as attorney-in-fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to the payment of the loan. Galas’s decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was well within the scope of her rights as the owner of the subject property. The subject property was transferred to Villar by virtue of another and separate contract, which is the Deed of Sale.

A mortgage is a real right, which follows the property, even after subsequent transfers by the mortgagor. “A registered mortgage lien is considered inseparable from the property inasmuch as it is a right in rem.� While we agree with Garcia that since the second mortgage, of which he is the mortgagee, has not yet been discharged, we find that said mortgage subsists and is still enforceable. However, Villar, in buying the subject property with notice that it was mortgaged, only undertook to pay such mortgage or allow the subject property to be sold upon failure of the mortgage creditor to obtain payment from the principal debtor once the debt matures. Villar did not obligate herself to replace the debtor in the principal obligation, and could not do so in law without the creditor’s consent.

The creditor may demand of the third person in possession of the property mortgaged payment of such part of the debt, as is secured by the property in his possession, in the manner and form established by the law. The spirit of the Civil Code is to let the obligation of the debtor to pay the debt stand although the property mortgaged to secure the payment of said debt may have been transferred to a third person.

The mere fact that the purchaser of an immovable has notice that the acquired realty is encumbered with a mortgage does not render him liable for the payment of the debt guaranteed by the mortgage, in the absence of stipulation or condition that he is to assume payment of the mortgage debt. The reason is plain: the mortgage is merely an encumbrance on the property, an accessory undertaking for the convenience and security of the mortgage creditor, and exists independently of the obligation to pay the debt secured by it.

Garcia has no cause of action against Villar in the absence of evidence to show that the second mortgage executed in favor of Garcia has been violated by his debtors, Galas and Pingol, i.e., specifically that Garcia has made a demand on said debtors for the payment of the obligation secured by the second mortgage and they have failed to pay.

Extrajudicial Foreclosure Conduct of Sale Spouses Rabat v. Philippine National Bank, G.R. No. 158755, June 18, 2012.

RABATs signed a Credit Agreement and executed a REM. The RABATs failed to pay their outstanding balance on due date. PNB filed a petition for the extrajudicial foreclosure of the real estate mortgage. PNB was the lone and highest bidder. As the proceeds of the public auction were not enough to satisfy the entire obligation of the RABATs, the PNB sent anew demand letters. PNB eventually filed a complaint for a sum of money.

Whether the inadequacy of the bid price of PNB invalidated the forced sale of the properties. Whether PNB was entitled to recover any deficiency from the Spouses Rabat.

We have consistently held that the inadequacy of the bid price at a forced sale, unlike that in an ordinary sale, is immaterial and does not nullify the sale; in fact, in a forced sale, a low price is considered more beneficial to the mortgage debtor because it makes redemption of the property easier. We rule that PNB had the legal right to recover the deficiency amount.

In an ordinary sale, for reason of equity, a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks one’s conscience as to justify the courts to interfere; such does not follow when the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect redemption. When there is a right to redeem, inadequacy of price should not be material because the judgment debtor may reacquire the property or else sell his right to redeem and thus recover any loss he claims to have suffered by reason of the price obtained at the execution sale.

When the legislature intends to deny the right of a creditor to sue for any deficiency resulting from foreclosure of security given to guarantee an obligation it expressly provides as in the case of pledges and in chattel mortgages of a thing sold on installment basis. Act No. 3135, which governs the extrajudicial foreclosure of mortgages, while silent as to the mortgagee’s right to recover, does not, on the other hand, prohibit recovery of deficiency.

Extrajudicial Foreclosure Right of Redemption Statutory Right Goldenway Merchandising Corporation v. Equitable PCIBAnk, G.R. No. 195540, March 13, 2013.

Goldenway executed a REM in favor of Equitable PCI Bank to secure the loan granted by respondent to petitioner and was duly registered. As petitioner failed to settle its loan obligation, respondent extrajudicially foreclosed the mortgage. During the public auction, the mortgaged properties were sold to respondent. Accordingly, a Certificate of Sale was issued to respondent, which was registered and inscribed. Petitioner filed a complaint for specific performance and damages against the respondent, asserting that it is the one-year period of redemption under Act No. 3135 which should apply and not the shorter redemption period provided in R.A. 8791.

Petitioner contends that Section 47 of R.A. 8791 violates the constitutional proscription against impairment of the obligation of contract and infringes the equal protection clause as it discriminates mortgagors/property owners who are juridical persons.

The purpose of the non-impairment clause of the Constitution is to safeguard the integrity of contracts against unwarranted interference by the State. As a rule, contracts should not be tampered with by subsequent laws that would change or modify the rights and obligations of the parties. Impairment is anything that diminishes the efficacy of the contract. There is an impairment if a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the parties. Section 47 did not divest juridical persons of the right to redeem their foreclosed properties but only modified the time for the exercise of such right by reducing the one-year period originally provided in Act No. 3135. The new redemption period commences from the date of foreclosure sale, and expires upon registration of the certificate of sale or three months after foreclosure, whichever is earlier. There is likewise no retroactive application of the new redemption period because Section 47 exempts from its operation those properties foreclosed prior to its effectivity and whose owners shall retain their redemption rights under Act No. 3135.

The equal protection clause is directed principally against undue favor and individual or class privilege. It is not intended to prohibit legislation which is limited to the object to which it is directed or by the territory in which it is to operate. It does not require absolute equality, but merely that all persons be treated alike under like conditions both as to privileges conferred and liabilities imposed. Equal protection permits of reasonable classification. We have ruled that one class may be treated differently from another where the groupings are based on reasonable and real distinctions. If classification is germane to the purpose of the law, concerns all members of the class, and applies equally to present and future conditions, the classification does not violate the equal protection guarantee. The difference in the treatment of juridical persons and natural persons was based on the nature of the properties foreclosed – whether these are used as residence, for which the more liberal one-year redemption period is retained, or used for industrial or commercial purposes, in which case a shorter term is deemed necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee-banks to dispose sooner of these acquired assets.

The right of redemption being statutory, it must be exercised in the manner prescribed by the statute, and within the prescribed time limit, to make it effective. Furthermore, as with other individual rights to contract and to property, it has to give way to police power exercised for public welfare. The freedom to contract is not absolute; all contracts and all rights are subject to the police power of the State and not only may regulations which affect them be established by the State, but all such regulations must be subject to change from time to time, as the general well-being of the community may require, or as the circumstances may change, or as experience may demonstrate the necessity. Settled is the rule that the non- impairment clause of the Constitution must yield to the loftier purposes targeted by the Government. The right granted by this provision must submit to the demands and necessities of the State’s power of regulation.

Extrajudicial Foreclosure Right of Redemption How to Redeem Spouses Yap v. Spouses Dy, et al., G.R. NO. 171991 and 171868, July 27, 2011.

Tirambulos executed a first REM over certain Lots in favor of DRBI, and a second REM over other Lots in favor of the same bank. Tirambulos sold all seven mortgaged lots to the Dys and the Maxinos without the consent and knowledge of DRBI, followed by a default on the part of the Tirambulos to pay their loans to DRBI. Thus, DRBI extrajudicially foreclosed the first mortgage. DRBI was proclaimed the highest bidder but certificate of sale was not registered until almost a year later. DRBI sold 3 Lots to the Yaps including one Lot that was not among the five properties foreclosed and bought by DRBI. A Writ of Possession over the 3 Lots was issued in favor of the Yaps. The Dys and the Maxinos attempted to redeem the 3 Lots. DRBI and the Yaps both refused, contending that the redemption should be for the full amount of the winning bid for all the foreclosed properties. The Provincial Sheriff, issued a Certificate of Redemption in favor of the Dys and the Maxinos for 2 Lots and stated in said certificate that Lot 3 is not included in the foreclosure proceedings. The Dys and the Maxinos filed a Civil Case for accounting, injunction, declaration of nullity of the Deed of Sale with Agreement to Mortgage. The Yaps filed a Civil Case for consolidation of ownership, annulment of certificate of redemption, and damages against the Dys, the Maxinos, the Provincial Sheriff of Negros Oriental and DRBI. The Civil Cases were tried jointly. The trial court rendered decision in favor of the Yaps... The CA reversed but amended its decision.

Is Lot 3 among the foreclosed properties? To whom should the payment of redemption money be made? Did the Dys and Maxinos validly redeem Lots 1 and 6? and

As to the first issue, we find that the CA correctly ruled that the Dys and Maxinos were able to prove their claim that Lot 3 was not among the properties foreclosed and that it was merely inserted by the bank in the Sheriff's Certificate of Sale. As to the second issue regarding the question as to whom payment of the redemption money should be made, Section 31, Rule 39 (now 29 0f 39) of the Rules of Court was followed. The Dys and the Maxinos initially attempted to pay the redemption money not only to the purchaser, DRBI, but also to the Yaps. Because of their refusal, the Dys and Maxinos correctly availed of the alternative remedy by going to the sheriff who made the sale.

This Court declared valid the sale by the mortgagor of mortgaged property to a third person notwithstanding the lack of written consent by the mortgagee, and likewise recognized the third person's right to redeem the foreclosed property.

The redemption must be made within twelve (12) months from the time of the registration of the sale in the Office of the Register of Deeds; Payment of the purchase price of the property involved, plus 1% interest per month thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after the purchase, also with 1% interest on such last named amount; and Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the Register of Deeds of the province. The second requisite, the proper redemption price, is the main subject of contention of the opposing parties. The Yaps argue that the mortgage is indivisible so in order for the tender to be valid and effectual, it must be for the entire auction price plus legal interest. The doctrine of indivisibility of mortgage does not apply once the mortgage is extinguished by a complete foreclosure thereof as in the instant case. Clearly, the Dys and Maxinos can effect the redemption of even only two of the five properties foreclosed.

Extrajudicial Foreclosure Right to Deficiency Heirs of the Late Spouses Maglasang v. Manila Banking Corporation, G.R. No. 171206, September 23, 2013.

Maglasangs obtained a credit line from respondent secured by a real estate mortgage. After Flaviano Maglasang died intestate the probate court appointed Edgar as the administrator of Flaviano’s estate and issued a Notice to Creditors for the filing of money claims. The probate court terminated the proceedings with the surviving heirs executing an extra-judicial partition of the properties of Flaviano’s estate. The loan obligations owed by the estate to respondent, however, remained unsatisfied due to respondent’s certification that Flaviano’s account was undergoing a restructuring. Respondent proceeded to extra-judicially foreclose the mortgage and emerged as the highest bidder. There, however, remained a deficiency and respondent filed a suit to recover the deficiency amount.

Whether or not the CA erred in affirming the RTC’s award of the deficiency amount in favor of respondent.

Claims against deceased persons should be filed during the settlement proceedings of their estate. Such proceedings are primarily governed by special rules found under Rules 73 to 90 of the Rules, although rules governing ordinary actions may, as far as practicable, apply suppletorily. Jurisprudence breaks down the rule under Section 7, Rule 86 and explains that the secured creditor has three remedies: (a) waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim; (b) foreclose the mortgage judicially and prove the deficiency as an ordinary claim; and (c) rely on the mortgage exclusively, or other security and foreclose the same before it is barred by prescription, without the right to file a claim for any deficiency. The remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an election of one remedy operates as a waiver of the other.

Extrajudicial Foreclosure Right to Possession Chu, et al. v. Lacqui & Philippine Bank of Communications, G.R. No. 169190, February 11, 2010.

Petitioners obtained a loan from Philippine Bank of Communication and executed a Deed of REM and an Amendment to the Deed of REM. For failure of petitioners to pay upon demand, private respondent applied for the extrajudicial. Upon receipt of the notice petitioners filed a petition to annul the extrajudicial foreclosure sale. At the foreclosure sale, private respondent emerged as the highest bidder. A certificate of sale was executed and annotated. After the lapse of the one-year redemption period, private respondent filed in the Registry of Deeds of Quezon City an affidavit of consolidation, the Register of Deeds issued a new TCT. Private respondent applied for the issuance of a writ of possession. Petitioners filed an opposition.

Whether the writ of possession was properly issued despite the pendency of a case questioning the validity of the extrajudicial foreclosure sale and despite the fact that petitioners were declared in default in the proceeding for the issuance of a writ of possession.

Banco Filipino Savings and Mortgage Bank v. Pardo The purchaser at the auction sale was entitled to a writ of possession pending the lapse of the redemption period upon a simple motion and upon the posting of a bond. Navarra v. Court of Appeals The purchaser at an extrajudicial foreclosure sale has a right to the possession of the property even during the one-year redemption period provided the purchaser files an indemnity bond. After the lapse of the said period with no redemption having been made, that right becomes absolute and may be demanded by the purchaser even without the posting of a bond. Possession may then be obtained under a writ which may be applied for ex parte pursuant to Section 7 of Act No. 3135, as amended by Act No. 4118.

Once ownership has been consolidated, the issuance of the writ of possession becomes a ministerial duty of the court, upon proper application and proof of title. Petitioners are wrong in insisting that they were denied due process of law when they were declared in default despite the fact that they had filed their opposition to the issuance of a writ of possession. The application for the issuance of a writ of possession is in the form of an ex parte motion. It issues as a matter of course once the requirements are fulfilled. No discretion is left to the court. Petitioners cannot oppose or appeal the court’s order granting the writ of possession in an ex parte proceeding. The remedy of petitioners is to have the sale set aside and the writ of possession cancelled in accordance with Section 8 of Act No. 3135, as amended.

Extrajudicial Foreclosure Right to Possession Equitable PCI Bank. Inc. v. DNG Realty and Development Corporation, G.R. No. 168672, August 9, 2010, 627 SCRA 125.

After consolidation of ownership and the issuance of a new title in the name of the purchaser, a writ of possession will issue as a matter of course, without the filing and approval of a bond. After consolidation of title in the purchaser’s name due to the failure of the mortgagor to redeem, a writ of possession becomes a matter of right, and the issuance by the Court of such a writ is merely a ministerial function. The purchaser’s now unassailable right to possession of the property is founded on the right of ownership.

Extrajudicial Foreclosure Right to Possession BPI Family Savings Bank, Inc. v. Golden Power Diesel Sales Center, Inc., G.R. No. 176019, January 12, 2011, 639 SCRA 405.

CEDEC mortgaged two parcels of land in favor of BPI Family and the mortgage was duly annotated. CEDEC obtained from BPI Family additional loans and again mortgaged the same properties which were duly annotated. CEDEC defaulted in its mortgage obligations. BPI Family filed a verified petition for extrajudicial foreclosure. BPI Family, as the highest bidder, acquired the properties and the Certificate of Sheriff’s Sale was duly annotated. The one-year redemption period expired without CEDEC redeeming the properties. Thus, the titles were consolidated and new titles issued. CEDEC refused to vacate the properties and to surrender possession. BPI Family filed an Ex-Parte Petition for Writ of Possession. The trial court issued the Writ of Possession. Golden Power and Tan (respondents) filed a Motion to Hold Implementation of the Writ of Possession, and alleged that they are in possession of the properties which they acquired from CEDEC pursuant to a Deed of Absolute Sale with Assumption of Mortgage. BPI Family filed an Urgent Motion to Compel Honorable Sheriff and/or his Deputy to Enforce Writ of Possession and to Break Open the properties. The trial court denied BPI Family’s motion.

General rule Purchaser in a public auction sale of a foreclosed property is entitled to a writ of possession and, upon an ex parte petition of the purchaser, it is ministerial upon the trial court to issue the writ of possession in favor of the purchaser. Exception In an extrajudicial foreclosure of real property, when the foreclosed property is in the possession of a third party holding the same adversely to the judgment obligor, the issuance by the trial court of a writ of possession in favor of the purchaser of said real property ceases to be ministerial and may no longer be done ex parte. The procedure is for the trial court to order a hearing to determine the nature of the adverse possession. For the exception to apply, however, the property need not only be possessed by a third party, but also held by the third party adversely to the judgment obligor.

Roxas v. Buan Considering that the property had already been sold at public auction pursuant to an extrajudicial foreclosure, the only interest that may be transferred by Valentin to Roxas is the right to redeem it within the period prescribed by law. Roxas is therefore the successor-in-interest of Valentin, to whom the latter had conveyed his interest in the property for the purpose of redemption. Consequently, Roxas’ occupancy of the property cannot be considered adverse to Valentin. China Bank v. Lozada The meaning of "a third party who is actually holding the property adversely to the judgment obligor" contemplates a situation in which a third party holds the property by adverse title or right, such as that of a co-owner, tenant or usufructuary. The co-owner, agricultural tenant, and usufructuary possess the property in their own right, and they are not merely the successor or transferee of the right of possession of another co-owner or the owner of the property.

In this case respondents hold title to and possess the properties as CEDEC’s transferees and any right they have over the properties is derived from CEDEC. Respondents are the successors-ininterest of CEDEC and thus, respondents’ occupancy over the properties cannot be considered adverse to CEDEC.

Extrajudicial Foreclosure Right to Possession Spouses Tolosa v. United Coconut Planters Bank, G.R. No. 183058, April 03, 2013. Nagtalon v. United Coconut Planters Bank, G.R. No. 172504, July 31, 2013.

Whether the pendency of a civil case challenging the validity of the credit agreement, the promissory notes and the mortgage can bar the issuance of a writ of possession after the foreclosure and sale of the mortgaged properties and the lapse of the redemption period.

General rule Once title to the property has been consolidated in the buyer’s name upon failure of the mortgagor to redeem the property within the redemption period, the writ of possession becomes a matter of right belonging to the buyer. Consequently, the buyer can demand possession of the property at anytime. Its right to possession has then ripened into the right of a confirmed absolute owner and the issuance of the writ becomes a ministerial function that does not admit of the exercise of the court’s discretion. A pending action for annulment of mortgage or foreclosure (where the nullity of the loan documents and mortgage had been alleged) does not stay the issuance of a writ of possession. Exceptions Gross inadequacy of purchase price - Cometa v. Intermediate Appellate Court Third party claiming right adverse to debtor/mortgagor - Barican v. Intermediate Appellate Court Failure to pay the surplus proceeds of the sale to mortgagor - Sulit v. Court of Appeals Remedy The right to petition for the nullification of the sale and the cancellation of the writ of possession under Section 8 of Act. No. 3135.

Concurrence & Preference of Credits Concurrence and preference of credits can only be ascertained in the context of some proceeding, such as insolvency proceedings, where the claims of all the creditors may be bindingly adjudicated. Under the FRIA both rehabilitation proceedings and liquidation proceedings are considered insolvency proceedings, and the rules on concurrence and preference of credits are applicable to both.

Classification of Credits Special Preferred Credits R.A. 10142, Sec. 136 Articles 2241 and 2242 of the Civil Code enumerate the special preferred credits that enjoy preference with respect to specific movable and specific immovable property of the debtor, and exclude all other claims to the extent of the value of the affected property. Moreover, these claims are considered as mortgages or pledges of real or personal property, or liens, within the purview of legal provisions governing insolvency. As among the special preferred credits enumerated in Articles 2241 and 2242, only taxes enjoy a preference; the claims listed in Article 2241 (2) to (13) and Article 2242 (2) to (10), all come after taxes in order of precedence. Although such claims enjoy their privileged character as liens, they are not preferred over any other inter se; there is only a concurrence of credits. In other words, Articles 2241 and 2242, and Articles 2246 to 2249, establish a two-tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. But Section 136 of the FRIA creates a special preference of credit, another tier in the order of preference, in favor of trade-related claims of clients or customers upon the trade-related assets (such as cash, securities, and trading rights) of a securities market participant. This special preferred credit enjoys absolute priority over other claims and amends the order of preference in Articles 2241 and 2242.

Classification of Credits Ordinary Preferred Credits R. A. No. 10142, Sec. 133 Article 2244 of the Civil Code enumerates the ordinary preferred credits that enjoy a preference, excluding the credits that are later in order, but only as against the value of property not otherwise subjected to any special preferred credit. In contrast with Articles 2241 and 2242, Article 2244 creates no liens on specific property. Article 2244 simply creates rights in favor of certain creditors to have the free property of the debtor, or property not subjected to any special preferred credit, applied in accordance with an order of preference. Section 133 of the FRIA reiterates jurisprudence to the effect that Article 110 of the Labor Code does not create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by the employer. Claims for unpaid wages do not fall within the category of special preferred credits established under Articles 2241 and 2242, except to the extent that such claims for unpaid wages are already covered by Article 2241 (6) or Article 2242 (3). Instead, the first preference provided in Article 110 modifies the order of preference in Article 2244 by removing the one-year limitation found in Article 2244 (2) and by moving claims for unpaid wages of laborers or workers from second priority to first priority in the order of preference established by Article 2244.

Stay or Suspension Order Town and Country Enterprises, Inc. v. Quisumbing et al., G.R. No. 173610, October 01, 2012.

TCEI obtained loans from Metrobank and executed a thrice amended Deed of REM over twenty parcels of land registered in its name and/or its corporate officers. Metrobank caused the real estate mortgage to be extrajudicially foreclosed. As highest bidder, Metrobank was issued a Certificate of Sale which was registered. Metrobank filed a petition for issuance of a writ of possession. TCEI filed a petition for declaration of a state of suspension of payments, with approval of a proposed rehabilitation plan with the same court. With the issuance of a Stay Order TCEI a motion to suspend the writ of possession proceedings which was granted. The CA directed the respondent judge to continue with the writ of possession proceedings and a writ was eventually granted. Metrobank consolidated its ownership and new titles were issued. Maintaining that the transfers of title were invalid and ineffective, TCEI filed a motion to “bring back the titles in [its] name.�

Whether the subject properties were placed in custodia legis upon approval of TCEI’s rehabilitation plan and that the grant of the writ of possession in favor of Metrobank was tantamount to taking said properties away from the rehabilitation receiver.

Metrobank had already acquired ownership over the subject realties when TCEI commenced its petition for corporate rehabilitation. The rule is settled that the mortgagor loses all interest over the foreclosed property after the expiration of the redemption period and the purchaser becomes the absolute owner thereof when no redemption is made. While it is true that the function ceases to be ministerial where the property is in the possession of a third party claiming a right adverse to that of the judgment debtor, the rehabilitation receiver’s power to take possession, control and custody of TCEI’s assets is far from adverse to the latter. A rehabilitation receiver is an officer of the court who is appointed for the protection of the interests of the corporate investors and creditors. It has been ruled that there is nothing in the concept of corporate rehabilitation that would ipso facto deprive the officers of a debtor corporation of control over its business or properties. TCEI loses sight of the fact, that the proceedings in corporate rehabilitation cases are also summary and non-adversarial and do not impair the debtor’s contracts or diminish the status of preferred creditors. Concededly, the issuance of the Stay Order suspends the enforcement of all claims against the debtor, whether for money or otherwise, and whether such enforcement is by court action or otherwise, effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. This does not, however, apply to Metrobank which already acquired ownership over the subject realties even before TCEI filed its petition for rehabilitation.

Stay or Suspension Order Situs Development Corp. et al., v. Asiatrust Bank et al., G.R. No. 180036, July 25, 2012. Situs Development Corp. et al., v. ASiatrust Bank et al., G.R. No. 180036, January 16, 2013.

Whether the dismissal of the Petition for Rehabilitation is in order. Whether the Stay Order affects foreclosure proceedings involving properties mortgaged by stockholders to secure corporate debts. Whether the subject properties should be included in the ambit of the Stay Order by virtue of the provisions of the Financial Rehabilitation and Insolvency Act of 2010 (FRIA), which should be given a retroactive effect.

The Rules provide that "the petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of the initial hearing." While the Rules expressly provide that the period may be extended, such extension may be granted only "if it appears by convincing and compelling evidence that the debtor may successfully be rehabilitated.” The trial court’s only justification for approving the Second Amended Rehabilitation Program is that "the creditor banks are fully aware that the real property on which the building structure of Situs Development sits is more than sufficient to answer for all the outstanding obligations of the petitioners.” A corporation is a juridical entity with a legal personality separate and distinct from the people comprising it. In this case, the parcels of land mortgaged to respondent banks are owned not by petitioners, but by spouses Chua. Applying the doctrine of separate juridical personality, these properties cannot be considered as part of the corporate assets. Thus, the parcels of land in question cannot be included in the inventory of assets of petitioner corporations. The Stay Order can only cover those claims directed against petitioner corporations or their properties, against petitioners’ guarantors, or against petitioners’ sureties who are not solidarily liable with them. While spouses Chua executed Continuing Guaranty and Comprehensive Surety undertakings in favor of Allied Bank, the bank did not proceed against them as individual guarantors or sureties. Rather, by initiating extrajudicial foreclosure proceedings, the bank was directly proceeding against the property mortgaged to them by the spouses as security. The Civil Code provides that the property upon which a mortgage is imposed is directly and immediately subjected to the fulfillment of the obligation for whose security the mortgage was constituted. Even assuming that the properties in question fall under the ambit of the Stay Order, the issuance thereof should not affect the execution of the Certificate of Sale. Clearly, the foreclosure proceedings commenced and the auction sale was conducted before the issuance of the Stay Order and the appointment of the Rehabilitation Receiver.

Petitioners argue that the trial court was correct in including the subject properties in the ambit of the Stay Order. Under the FRIA, the Stay Order may now cover third-party or accommodation mortgages, in which the "mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver." The FRIA likewise provides that its provisions may be applicable to further proceedings in pending cases, except to the extent that, in the opinion of the court, their application would not be feasible or would work injustice. Sec. 146 of the FRIA, which makes it applicable to "all further proceedings in insolvency, suspension of payments and rehabilitation cases x x x except to the extent that in the opinion of the court their application would not be feasible or would work injustice," still presupposes a prospective application. The wording of the law clearly shows that it is applicable to all further proceedings. In no way could it be made retrospectively applicable to the Stay Order issued by the rehabilitation court back in 2002. At the time of the issuance of the Stay Order, the rules in force were the 2000 Interim Rules of Procedure on Corporate Rehabilitation (the "Interim Rules"). To repeat, when the Stay Order was issued, the rehabilitation court was only empowered to suspend claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor. Thus, it was beyond the jurisdiction of the rehabilitation court to suspend foreclosure proceedings against properties of third-party mortgagor.

Exceptions to Stay or Suspension Order Panlilio, et al. v. Regional Trial Court, Branch 51, City of Manila, G.R. No. 173846, February 2, 2011, 641 SCRA 438.

At the time of the filing of the petition for rehabilitation, there were a number of criminal charges pending against petitioners in Branch 51 of the RTC of Manila. These criminal charges were initiated by respondent Social Security System (SSS) and involved charges of violations of Section 28 (h) of R.A. 8282, or the Social Security Act of 1997 (SSS law), in relation to Article 315 (1) (b) of the Revised Penal Code, or Estafa.

Does the suspension of “all claims� as an incident to a corporate rehabilitation also contemplate the suspension of criminal charges filed against the corporate officers of the distressed corporation?

Consequently, the filing of the case for violation of B.P. Blg. 22 is not a "claim" that can be enjoined within the purview of P.D. 902-A. True, although conviction of the accused for the alleged crime could result in the restitution, reparation or indemnification of the private offended party for the damage or injury he sustained by reason of the felonious act of the accused, nevertheless, prosecution for violation of B.P. Blg. 22 is a criminal action.

There is no reason why criminal proceedings should be suspended during corporate rehabilitation, more so, since the prime purpose of the criminal action is to punish the offender in order to deter him and others from committing the same or similar offense, to isolate him from society, reform and rehabilitate him or, in general, to maintain social order. As correctly observed in Rosario, it would be absurd for one who has engaged in criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the corporation of which he is an officer. On a final note, this Court would like to point out that Congress has recently enacted R.A. 10142, or the Financial Rehabilitation and Insolvency Act of 2010. Section 18 thereof explicitly provides that criminal actions against the individual officer of a corporation are not subject to the Stay or Suspension Order in rehabilitation proceedings.

Rehabilitation Plan Cram Down Effect Bank of the Philippine Islands v. Sarabia Manor Hotel Corp., G.R. No. 175844, July 29, 2013

Because of the delayed completion of its New Building, Sarabia incurred various cash flow problems, and despite the fact that it had more assets than liabilities at that time it filed a Petition for corporate rehabilitation.

Whether or not the CA correctly affirmed Sarabia’s rehabilitation plan as approved by the RTC, with the modification on the reinstatement of the surety obligations of Sarabia’s stockholders.

The Interim Rules of Procedure on Corporate Rehabilitation states that a rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is manifestly unreasonable. Also known as the “cram-down” clause, this provision, which is currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.

Wonder Book Corporation v. Philippine Bank of Communications Liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations, has a definite source of financing for its proper and full implementation, and anchored on realistic assumptions and goals. This remedy should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by the following: The absence of a sound and workable business plan; Baseless and unexplained assumptions, targets and goals; Speculative capital infusion or complete lack thereof for the execution of the business plan; Cash flow cannot sustain daily operations; and Negative net worth and the assets are near full depreciation or fully depreciated.

Opposition of a distressed corporation’s majority creditor is manifestly unreasonable if it counter-proposes unrealistic payment terms and conditions which would, more likely than not, impede rather than aid its rehabilitation. The unreasonableness becomes further manifest if the rehabilitation plan, in fact, provides for adequate safeguards to fulfill the majority creditor’s claims, and yet the latter persists on speculative or unfounded assumptions that his credit would remain unfulfilled. Oppositions which push for high interests rates are generally frowned upon in rehabilitation proceedings given that the inherent purpose of a rehabilitation is to find ways and means to minimize the expenses of the distressed corporation during the rehabilitation period. It is the objective of a rehabilitation proceeding to provide the best possible framework for the corporation to gradually regain or achieve a sustainable operating form. Hence, if a creditor, whose interests remain well-preserved under the existing rehabilitation plan, still declines to accept interests pegged at reasonable rates during the period of rehabilitation, and, in turn, proposes rates which are largely counterproductive to the rehabilitation, then it may be said that the creditor’s opposition is manifestly unreasonable.

Treatment of Secured Creditor Claims Yngson v. Philippine National Bank, G.R. No. 171132, August 15, 2012

Whether PNB, as a secured creditor, can foreclose on the mortgaged properties of a corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC. Whether the right of first preference for unpaid wages may not be invoked in this case to nullify the foreclosure sales conducted pursuant to PNB's right as a secured creditor to enforce its lien on specific properties of its debtor.

If rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the preference and prove their credits as ordinary claims. The creditormortgagee has the right to foreclose the mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditormortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order.

A distinction should be made between a preference of credit and a lien. A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 of the Labor Code, does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a first preference in the discharge of the funds of the judgment debtor. Consequently, the right of first preference for unpaid wages may not be invoked in this case to nullify the foreclosure sales conducted pursuant to PNB 's right as a secured creditor to enforce its lien on specific properties of its debtor, ARCAM.

Developments in the Law on Credit Transactions 2010-2013  

Presentation for the UP Law Center MCLE Lecture