COURSE: SECURITY TRANSACTIONS

PROFESSOR: ATTY. LERMA

10/2/2010

I. DIFFERENTIATING CONTRACTS OF COMMODATUM, MUTUUM, DEPOSIT, BARTER (UNDER ART.

1954) AND DEPOSIT UNDER THE WAREHOUSE RECEIPTS ACT (WRA).

COMMODATUM MUTUUM DEPOSIT BARTER DEPOSIT UNDER

WRA
Object of contract Non-consumable Fungible/consumable Movable/personal Non-consumable Movable/personal
except: consumable property property specifically
things for exhibition goods
(merchandise,
chattels)
Purpose Temporary use of Consumption Safekeeping Use or Store for profit
the thing consumption
Primary obligation of - take care of the - return a thing of the - take care of the To give a thing of - take care of the
bailee/depositary thing same kind and thing the same kind, goods
after receipt of the - return the exact quality - return the thing quantity and - to deliver them to
thing same thing upon when required quality the holder of the
expiration of period receipt
or accomplishment
of purpose
Status of ownership of Ownership retained Ownership passes to Ownership retained Ownership passes Ownership retained
the thing given by bailor bailee by depositor to the other party by depositor
Ability of Anytime if no period Only after expiration Anytime Cannot demand Anytime provided
owner/depositor/giver or purpose agreed of the period return because that:
of the thing given to upon or if by mere contract already - warehouse receipt
demand return tolerance existing between surrendered
(precarium) the parties; - payment of
Also, if there is an rescission only warehouseman’s
urgent necessity or when grounds exist lien
bailee commits acts - sign
of ingratitude acknowledgement
that goods delivered
Compensation given Essentially Gratuitous or Gratuitous or onerous onerous
gratuitous onerous onerous

II. CONCURRENCE AND PREFERENCE OF CREDITS

Specially preferred credits
Specific movable property (Art. Specific immovable property
2241) PLSTC HRD DRV ML
1. Credits guaranteed by
pledge or chattel mortgage
2. Claims for laborers’ wages
3. Expenses for salvage
4. Credits for transportation
of goods
5. Credits for seeds and
expenses for cultivation
6. Credits for lodging and
supplies for travelers by
hotel keepers on movables
7. Credits for making, repair,
preservation of movable
8. Duties, Taxes, fees to the
State; its subdivisions
9. Claims in favor of depositor
if depository wrongfully
sold the thing deposited
10. Credits for rent for one
year upon personal
property of the lessee
11. Unpaid price of movables
sold so long as in
possession of debtor
(Art. 2242) TAP WILD MUM
1. Taxes to the State; its
subdivisions
2. Credits annotated in the
Registry of Property by
virtue of judicial order
3. Expenses for the
preservation/improvemen
t of real property
4. Claims of co-heirs for
warranty in partition of
immovable
5. Credits of insurers upon
property insured
6. Claims of laborers, as well
as architects, contractors,
engineers engaged in
construction of said
buildings
7. Claims of donors of real
property
8. Mortgage credits recorded
in Registry of Property
9. Unpaid price of real
property sold
Ordinary preferred credits (Art. Common credits (Art. 2245)
2244) LFL-CSS-FENMC-DGC
1. Unpaid wages and other Everything else!
monetary claims of the
laborers and workers of the
insolvent
2. Funeral expenses
3. Expenses during the last illness
of the debtor or his/her
spouse/children
4. Compensation due the
laborers or their dependents in
cases of labor accident or
PHILOMATHEIA TIPS
illness resulting from work
5. Credits and advancements
made to the debtor for
support (before insolvency)
6. Support during the insolvency
proceedings
7. Fines and Civil indemnification
arising from a criminal offense
8. Legal expenses and expenses
incurred in the administration
of the insolvent’s estate
9. Taxes and assessments due
national government which

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 COURSE: SECURITY TRANSACTIONS
PROFESSOR: ATTY. LERMA
10/2/2010

(Vendor’s lien) 10. Claims of furnishers of are not specific

12. Misappropriation, breach
of trust by public officials
on movables, money
13. Credits between landlord
and tenant
materials used in 10. Taxes and assessments due any
construction province which are not specific
11. Taxes and assessments due any
city or municipality which are
not specific
12. Damages for death or personal
injuries caused by quasi-delict
13. Gifts due to public and private
institutions of charity
14. Credits which appear in (a) a
public instrument or (b) in a
final judgment.

How to solve the problems

IMPORTANT RULES
1. Taxes due on specific property first!
2. Second, all other special credits. If there are several
claims, they enjoy no preference.
3. If the value of the movable/immovable is not sufficient to
meet all the claims, satisfy the claims pro rata. (The
unpaid balance/deficiency shall become common credits)
4. Note that pro rata rule does not apply to credits
annotated in the Registry of Property by virtue of judicial
order for specific immovable. The rule is still preference
according to time.
5. Whatever excess there is after special credits satisfied,
add them to the free property.
6. 2241 and 2242 has no order of preference. There is
merely concurrence among them. 2244, however, has an
order. Memorize the order!

A. Sample problem

Manuel died and he left behind the following assets and liabilities

Assets
A yacht called “Vicky” worth P15,000,000
One building in Makati City worth P85,000,000 PHILOMATHEIA TIPS
Cash amounting to P4,000,000 found in bayongs in his residence
A rare book collection on the topic of improving your IQ worth P1,000,000

Debts
• By virtue of an unpaid balance of a business transaction worth P2,500,000 on June 9, 1990, a judicial order of attachment
was prayed for by Ping and issued by the court on 08 February 2002 over the building
• Claim by Bong in the amount of P4,000,000, as mortgagee over the “Vicky” entered into on November 29, 1995
• Income taxes due to the BIR on account of his solo practice law firm (operated on the building) worth P80,000
• On account of an unpaid fine arising from a breach of trust committed while Manuel was a barangay official of City of
Manila, the City claims P3,000,000 on the rare book collection
• Real estate taxes relating to the building due to the City of Makati in the amount of P80,000,000

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 COURSE: SECURITY TRANSACTIONS
PROFESSOR: ATTY. LERMA
10/2/2010

• By virtue of an unpaid balance of a business transaction worth P3,500,000 on July 31, 1988, a judicial order of attachment
was prayed for by Joker and issued by the Court on March 10, 1999 over the building
• P12,000,000 in unpaid import duties due to the Bureau of Customs for the importation of “Vicky”
• Inday, his trusted and beloved yaya for the past years is owed P20,000 in wages for the past five years
• P 1,000,000 due to the Asian Hospital for his stay in the hospital during the last days of his life
• P500,000 due to Alfonso due to a loan agreement executed and notarized on September 15, 2002

Yacht P15,000,000 Building P85,000,000 Book Collection P1,000,000

Customs, unpaid import duties – P12,000,000
Remaining: P3,000,000
Bong, mortgage credit, – P4,000,000
Bong – P 3,000,000
(Bong has unpaid balance of P1,000,000)
City of Makati, real estate taxes – P80,000,000 City of Manila (unpaid fine) – P3,000,000
Remaining: P5,000,000 City of Manila (unpaid fine) – P1,000,000
(City has unpaid balance of P2,000,000)
(attachment, judicial order, pro rata does not
apply so based on priority in time)
Joker, credit by judicial order, 1999 –
P3,500,000
Remaining: P1,500,000

Ping, credit by judicial order, 2002, -

P2,500,000____________________________
Ping – P1,500,000
(Ping has unpaid balance of P1,000,000)

No excess

P4,000,000 (free property)

- Inday P20,000
P3,980,000
- Asian Hospital P1,000,000
P2,980,000
- BIR P80,000
P2,900,000
- Alfonso P500,000
P2,400,000

Common Credits left:

- Bong P1,000,000
- Ping P1,000,000
- City of Manila P2,000,000
P4,000,000

Apply pro rata

Bong P1,000,000/P4,000,000 x P2,400,000 = P600,000 (add this to the P3,000,000 already received)
Ping P1,000,000/P4,000,000 x P2,400,000 = P600,000 (add this to the P1,500,000 already received)

PHILOMATHEIA TIPS
City of Manila P2,000,000/P4,000,000 x P2,400,000 = P 1,200,000 (add this to the P1,000,000 already received)

Final Answers:
• PING – P2,100,000
• BONG – P3,600,000
• BIR – P80,000
• CITY OF MANILA – P2,200,000
• CITY OF MAKATI – P80,000,000
• JOKER – P3,500,000
• CUSTOMS – P12,000,000
• INDAY – P20,000
• ASIAN HOSPITAL – P1,000,000
• ALFONSO – P500,000

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 COURSE: SECURITY TRANSACTIONS
PROFESSOR: ATTY. LERMA
10/2/2010

B. Sample Problem 2

Raul died October 20, 2006. He was insolvent and he left behind the following assets

Assets
• One airplane worth P10,000,000
• One hacienda in Cagayan worth P160,000,000
• Cash amounting to P30,000,000
• One exotic antique car worth P8,000,000

Debts
• Unpaid balance for architectural services rendered by Architect Dante for the construction of the house on the
hacienda in the amount of P20,000,000. The services were rendered in 1995.
• A real estate mortgage claim by Bank of Cagayan in the amount of P80,000,000 as mortgage over the hacienda. The
mortgage was annotated on the title on December 15, 2000.
• An unpaid loan in the amount of P1,800,000 owed to Yoyong. The loan agreement was executed and notarized on
January 11, 1998.
• Unpaid income taxes due to the Bureau of Internal Revenue in the amount of P29,000,000
• Unpaid medical bills amounting to P5,500,000 to Makati Medical Center for Raulito’s last illness. Raulito is Raul’s son.
He was 40 years old at the time of his death and he was a rich and successful businessman. Raulito was confined in
the Makati Medical Center for two weeks in June 2006 prior to his untimely death
• On account of an unpaid fine arising from a breach of trust committed while Raul was an officer of the PCGG (a
government agency), the PCGG claims P3,000,000 on the antique car
• Unpaid donation to the Hospicio de San Jose orphanage in the amount of P500,000. Raul executed a contract with the
Hospicio de San Jose that he would donate this amount on October 21, 2006
• Carding, his family driver, all around assistant and beloved companion was owed P1,000,000 in wages for the past 12
months
• Jack was owed the unpaid balance of the selling price of the hacienda in the amount of P20,000,000. The hacienda
was purchased on 1998
• Real estate taxes on the hacienda due to the Province of Cagayan in the amount of P100,000,000. Taxes are due for
the years 2002 to 2006
• P20,000,000 in unpaid import duties due to the Bureau of Customs for the importation of the airplane. The plane was
imported on November 28, 1996.
• P2,000,000 claimed by Libingan ng Makati for the funeral of Raul

Airplane P10,000,000 Hacienda P160,000,000 Antique car P8,000,000

Customs – P20,000,000
Customs – P10,000,000
(Customs has unpaid balance
P10,000,000)
Province of Cagayan – P100,000,000 PCGG – P3,000,000
Province of Cagayan – P100,000,000 PCGG – P3,000,000
of Remaining: P60,000,000 Excess: P5,000,000
Arch. Dante – P20,000,000
Bank of Cagayan – P80,000,000
Jack – P20,000,000
Total Debts: P120,000,000

Claim > remaining value (so pro rata!) PHILOMATHEIA TIPS

Arch. Dante – P10,000,000
Bank of Cagayan – P40,000,000
Jack – 10,000,000

Unpaid Balance
Arch. Dante – P10,000,000
Bank of Cagayan – P40,000,000
Jack – P10,000,000

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 COURSE: SECURITY TRANSACTIONS
PROFESSOR: ATTY. LERMA
10/2/2010

Excess: P5,000,000
Cash: P30,000,000

P35,000,000 (free property)

- Libingan ng Makati P2,000,000
P33,000,000
- Carding P1,000,000
P32,000,000
- Makati Medical Center P5,500,000
P26,500,000
- BIR P29,000,000
BIR gets paid P26,500,000
BIR has unpaid balance of 1,500,000

NO MORE ASSETS!

- Hospicio P500,000 (won’t get paid, no more assets left)

- Yoyong P1,800,000 (won’t get paid, no more assets left)
- All those who have unpaid balances wont get anything more because there are no more assets

Final Answers:
• ARCH. DANTE – P10,000,000
• BANK OF CAGAYAN – P40,000,000
• YOYONG – 0
• BIR – P26,500,000
• MAKATI MEDICAL CENTER – P5,500,000
• PCGG – P3,000,000
• HOSPICIO – 0
• CARDING – P1,000,000
• JACK – P10,000,000
• PROVINCE OF CAGAYAN – P100,000,000
• BUREAU OF CUSTOMS – P10,000,000
• LIBINGAN NG MAKATI – P2,000,000

III. FINANCIAL REHABILITATION AND INSOLVENCY ACT (FRIA)

A. Insolvent Juridical Debtor

INSOLVENT JURIDICAL DEBTOR

CORPORATE REHABILITATION LIQUIDATION
COURT-SUPERVISED PRE-NEGOTIATED OUT-OF-COURT VOLUNTARY INVOLUNTARY
REHABILITATION REHABILITATION REHABILIATION
VOLUNTARY INVOLUNTARY Requirements: Requirements: Requirements: Requirements
Requirements: Requirements: - petition filed by - debtor must agree to - petition must be filed - petition filed by 3 or PHILOMATHEIA TIPS
- petition filed - petition filed insolvent debtor by the out-of-court plan by an insolvent debtor more creditors the
by insolvent by creditor or itself or jointly with any - approved by creditors w/ the court aggregate claim is at
debtor w/ group of of its creditors w/ court representing at least - petition must be least P1 million or at
court creditors with - the pre-negotiated 67% of the secured verified least 25% of capital
- petition must a claim or plan must be endorsed obligations - petition shall establish stock or partner’s
be verified to aggregate or approved by - approved by creditors insolvency of debtor contribution whichever
establish claim of at creditors holding at representing at least is higher w/ court
insolvency of least P1 least 2/3 of total 75% of the unsecured - petition must be
debtor and million or at liabilities, including obligations verified
viability or least 25% of secured creditors - approved by creditors - petition must show
rehabilitation capital stock holding > 50% of total holding at least 85% of that there is no genuine
or partner’s secured claims and the total liabilities, issue of fact or law and
contribution unsecured creditors secured and unsecured. no substantial

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 COURSE: SECURITY TRANSACTIONS
PROFESSOR: ATTY. LERMA
10/2/2010

whichever is holding > 50% of total likelihood debtor be

higher w/ unsecured claims rehabilitated
court

B. Insolvent Individual Debtor

INSOLVENT INDIVIDUAL DEBTOR

SUSPENSION OF PAYMENTS
Requirements:
- petition must be filed by a debtor (a)
possessing sufficient property to cover all
debts; foreseeing the impossibility of
meeting them when they respectively fall
due; and (c) petitioning that he be declared
in the state of suspension of payments
- petition must be verified
LIQUIDATION
VOLUNTARY
Requirements:
- petition to be filed by an insolvent debtor
owing debts exceeding in amount of
P500,000 in the court of the province or city
in which he has resided for 6 months prior to
the filing of such petition
- petition must be verified
INVOLUNTARY
Requirements:
- petition to be filed by any creditor or group
of creditors with claim or with aggregate
claim of at least P500,000 in the court of the
province or city in which the individual
debtor resides
- petition must be verified
- petitioning creditor must post a bond

C. Sample Problem

Ricardo borrowed P1 million plus interest from Julian as seed money for an internet cafe business. To secure the obligation,
Ricardo mortgaged his computers, printers, desks and chairs in the café. Ricardo and Julian entered into the proper legal
documentation to evidence their agreement. Ricardo also borrowed money from other third parties for his other businesses (a
printing press and a barber shop). Two years after, due to business losses from his printing press and barbershop, Ricardo was
unable to pay all his creditors on time. His default has lasted for over 30 days already. Julian has engaged you as counsel for the
purpose of collecting his claim P1 million plus interest. Eric and Jojo, who are also creditors of Ricardo for an amount of
P50,000, also decided to engage you for the same purpose of collection. Eric and Jojo are owed the amount by Ricardo because
Eric is the supplier of paper used for printing in the café and Jojo is the supplier of coffee sold regularly in the café. Both paper
and coffee are indispensable to the operations of Ricardo.

a. Which among the following proceedings will you recommend to your clients for them to file?
• Suspension of payments
• Voluntary insolvency
• Involuntary insolvency
• Corporate Rehabilitation PHILOMATHEIA TIPS
Why?

Suggested Answer: Involuntary Insolvency

From the procedural viewpoint: Since creditors will be filing the petition, suspension of payments and voluntary insolvency are
not options because these are filed by the insolvent debtor. Corporate rehabilitation or liquidation in any form cannot be
applied as there is no showing of fact that it is a single proprietorship duly registered with the Department of Trade and
Industry. Moreover, the wording of the problem implies a individual debtor or a natural person. Hence, the only real option
available to the clients is INVOLUNTARY INSOLVENCY which is to be filed by any creditor or group of creditors against an
insolvent individual debtor.

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 COURSE: SECURITY TRANSACTIONS
PROFESSOR: ATTY. LERMA
10/2/2010

From the substantive viewpoint: Based on the facts of the case, there is no indication that Ricardo is simply not liquid to pay
his liabilities. His default has in fact lasted for over 30 days. He would have filed for a petition to have himself declared to be in a
state of suspension of payment. The logical conclusion in this case is that he no longer has sufficient property to cover all his
liabilities. With that said, the recommended remedy for the clients is to file a petition for involuntary insolvency so as to
impound all of Ricardo’s non-exempt property and distributed it equitably among the creditors in accordance with law
governing concurrence and preference of credits.

b. What facts will you have to establish in order to properly file the case (i.e. jurisdictional requirements)? Where will
you file the case?

The requirements for filing a petition for involuntary insolvency are:

1. petition to be filed by any creditor or group of creditors with claim or with aggregate claim of at least P500,000 in the
court of the province or city in which the individual debtor resides
2. petition must be verified
3. petitioning creditor must post a bond

The case shall be filed at the court designated by the Supreme Court. At present, no rules issued by Supreme Court but it is
likely that such cases will be filed in the Regional Trial Court designated as Commercial Courts.

IV. OTHER REMARKS

1. Please review and focus on pledge, mortgage, chattel mortgage and antichresis as one problem
will be taken from here (specifically focus on mortgages and foreclosures, know the law
governing it).
2. Expect either multiple choice or true or false. For this, review your codals and breeze through
Mickey Ingles’ reviewer. Check sample exams as well.

We are what we repeatedly do.

Excellence is not an act but a habit.
God speed Philomatheians!

PHILOMATHEIA TIPS

Tips prepared by
Pierre Martin Reyes, HSP’10

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