CREDIT TRANSACTIONS Article 1972.

 The depositary is obliged to keep the thing

ST. MARY’S COLLEGE safely and to return it, when required, to the depositor, or to
College of Law his heirs and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to
Atty. Ryan Ric Bisnar the safekeeping and the loss of the thing, shall be governed by
2nd Semester SY 2019-2020 the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account
TITLE XII in determining the degree of care that the depositary must
DEPOSIT observe. (1766a)

CHAPTER 1 Article 1973. Unless there is a stipulation to the contrary, the

Deposit in General and its Different Kinds depositary cannot deposit the thing with a third person. If
Article 1962. A deposit is constituted from the moment a deposit with a third person is allowed, the depositary is liable
person receives a thing belonging to another, with the for the loss if he deposited the thing with a person who is
obligation of safely keeping it and of returning the same. If the manifestly careless or unfit. The depositary is responsible for
safekeeping of the thing delivered is not the principal purpose the negligence of his employees. (n)
of the contract, there is no deposit but some other contract.
(1758a) Article 1974. The depositary may change the way of the
deposit if under the circumstances he may reasonably presume
Article 1963. An agreement to constitute a deposit is binding, that the depositor would consent to the change if he knew of
but the deposit itself is not perfected until the delivery of the the facts of the situation. However, before the depositary may
thing. (n) make such change, he shall notify the depositor thereof and
wait for his decision, unless delay would cause danger. (n)
Article 1964. A deposit may be constituted judicially or
extrajudicially. (1759) Article 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be bound to
Article 1965. A deposit is a gratuitous contract, except when collect the latter when it becomes due, and to take such steps
there is an agreement to the contrary, or unless the depositary as may be necessary in order that the securities may preserve
is engaged in the business of storing goods. (1760a) their value and the rights corresponding to them according to
law.
Article 1966. Only movable things may be the object of a The above provision shall not apply to contracts for the rent of
deposit. (1761) safety deposit boxes. (n)

Article 1967. An extrajudicial deposit is either voluntary or Article 1976. Unless there is a stipulation to the contrary, the
necessary. (1762) depositary may commingle grain or other articles of the same
kind and quality, in which case the various depositors shall
CHAPTER 2 own or have a proportionate interest in the mass. (n)
Voluntary Deposit
SECTION 1 Article 1977. The depositary cannot make use of the thing
General Provisions deposited without the express permission of the depositor.
Otherwise, he shall be liable for damages.
Article 1968. A voluntary deposit is that wherein the delivery However, when the preservation of the thing deposited
is made by the will of the depositor. A deposit may also be requires its use, it must be used but only for that purpose.
made by two or more persons each of whom believes himself (1767a)
entitled to the thing deposited with a third person, who shall
deliver it in a proper case to the one to whom it belongs. Article 1978. When the depositary has permission to use the
(1763) thing deposited, the contract loses the concept of a deposit and
becomes a loan or commodatum, except where safekeeping is
Article 1969. A contract of deposit may be entered into orally still the principal purpose of the contract.
or in writing. (n) The permission shall not be presumed, and its existence must
be proved. (1768a)
Article 1970. If a person having capacity to contract accepts a
deposit made by one who is incapacitated, the former shall be Article 1979. The depositary is liable for the loss of the thing
subject to all the obligations of a depositary, and may be through a fortuitous event:
compelled to return the thing by the guardian, or (1) If it is so stipulated;
administrator, of the person who made the deposit, or by the (2) If he uses the thing without the depositor's
latter himself if he should acquire capacity. (1764) permission;
(3) If he delays its return;
Article 1971. If the deposit has been made by a capacitated (4) If he allows others to use it, even though he
person with another who is not, the depositor shall only have himself may have been authorized to use the same.
an action to recover the thing deposited while it is still in the (n)
possession of the depositary, or to compel the latter to pay him
the amount by which he may have enriched or benefited Article 1980. Fixed, savings, and current deposits of money in
himself with the thing or its price. However, if a third person banks and similar institutions shall be governed by the
who acquired the thing acted in bad faith, the depositor may provisions concerning simple loan. (n)
bring an action against him for its recovery. (1765a)
Article 1981. When the thing deposited is delivered closed
and sealed, the depositary must return it in the same condition,
SECTION 2 and he shall be liable for damages should the seal or lock be
Obligations of the Depositary broken through his fault.
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.

Page 1 of 10
As regards the value of the thing deposited, the statement of
the depositor shall be accepted, when the forcible opening is Article 1990. If the depositary by force majeure or
imputable to the depositary, should there be no proof to the government order loses the thing and receives money or
contrary. However, the courts may pass upon the credibility of another thing in its place, he shall deliver the sum or other
the depositor with respect to the value claimed by him. thing to the depositor. (1777a)
When the seal or lock is broken, with or without the
depositary's fault, he shall keep the secret of the deposit. Article 1991. The depositor's heir who in good faith may have
(1769a) sold the thing which he did not know was deposited, shall only
be bound to return the price he may have received or to assign
Article 1982. When it becomes necessary to open a locked his right of action against the buyer in case the price has not
box or receptacle, the depositary is presumed authorized to do been paid him. (1778)
so, if the key has been delivered to him; or when the
instructions of the depositor as regards the deposit cannot be SECTION 3
executed without opening the box or receptacle. (n) Obligations of the Depositor

Article 1983. The thing deposited shall be returned with all its Article 1992. If the deposit is gratuitous, the depositor is
products, accessories and accessions. obliged to reimburse the depositary for the expenses he may
Should the deposit consist of money, the provisions relative to have incurred for the preservation of the thing deposited.
agents in article 1896 shall be applied to the depositary. (1770) (1779a)

Article 1984. The depositary cannot demand that the depositor Article 1993. The depositor shall reimburse the depositary for
prove his ownership of the thing deposited. any loss arising from the character of the thing deposited,
Nevertheless, should he discover that the thing has been stolen unless at the time of the constitution of the deposit the former
and who its true owner is, he must advise the latter of the was not aware of, or was not expected to know the dangerous
deposit. character of the thing, or unless he notified the depositary of
If the owner, in spite of such information, does not claim it the same, or the latter was aware of it without advice from the
within the period of one month, the depositary shall be depositor. (n)
relieved of all responsibility by returning the thing deposited
to the depositor. Article 1994. The depositary may retain the thing in pledge
If the depositary has reasonable grounds to believe that the until the full payment of what may be due him by reason of
thing has not been lawfully acquired by the depositor, the the deposit. (1780)
former may return the same. (1771a)
Article 1995. A deposit its extinguished:
Article 1985. When there are two or more depositors, if they (1) Upon the loss or destruction of the thing
are not solidary, and the thing admits of division, each one deposited;
cannot demand more than his share. (2) In case of a gratuitous deposit, upon the death of
When there is solidarity or the thing does not admit of either the depositor or the depositary. (n)
division, the provisions of articles 1212 and 1214 shall govern.
However, if there is a stipulation that the thing should be CHAPTER 3
returned to one of the depositors, the depositary shall return it Necessary Deposit
only to the person designated. (1772a)
Article 1996. A deposit is necessary:
Article 1986. If the depositor should lose his capacity to (1) When it is made in compliance with a legal
contract after having made the deposit, the thing cannot be obligation;
returned except to the persons who may have the (2) When it takes place on the occasion of any
administration of his property and rights. (1773) calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events. (1781a)
Article 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take Article 1997. The deposit referred to in No. 1 of the preceding
the thing deposited to such place; but the expenses for article shall be governed by the provisions of the law
transportation shall be borne by the depositor. establishing it, and in case of its deficiency, by the rules on
If no place has been designated for the return, it shall be made voluntary deposit.
where the thing deposited may be, even if it should not be the The deposit mentioned in No. 2 of the preceding article shall
same place where the deposit was made, provided that there be regulated by the provisions concerning voluntary deposit
was no malice on the part of the depositary. (1774) and by article 2168. (1782)

Article 1988. The thing deposited must be returned to the Article 1998. The deposit of effects made by travellers in
depositor upon demand, even though a specified period or hotels or inns shall also be regarded as necessary. The keepers
time for such return may have been fixed. of hotels or inns shall be responsible for them as depositaries,
This provision shall not apply when the thing is judicially provided that notice was given to them, or to their employees,
attached while in the depositary's possession, or should he of the effects brought by the guests and that, on the part of the
have been notified of the opposition of a third person to the latter, they take the precautions which said hotel-keepers or
return or the removal of the thing deposited. In these cases, the their substitutes advised relative to the care and vigilance of
depositary must immediately inform the depositor of the their effects. (1783)
attachment or opposition. (1775)
Article 1999. The hotel-keeper is liable for the vehicles,
Article 1989. Unless the deposit is for a valuable animals and articles which have been introduced or placed in
consideration, the depositary who may have justifiable reasons the annexes of the hotel. (n)
for not keeping the thing deposited may, even before the time
designated, return it to the depositor; and if the latter should Article 2000. The responsibility referred to in the two
refuse to receive it, the depositary may secure its consignation preceding articles shall include the loss of, or injury to the
from the court. (1776a) personal property of the guests caused by the servants or

Page 2 of 10
employees of the keepers of hotels or inns as well as strangers; NOTE: The rules apply when two or more creditors have
but not that which may proceed from any force majeure. The separate and distinct claims against the same debtor who has
fact that travellers are constrained to rely on the vigilance of insufficient property.
the keeper of the hotels or inns shall be considered in
determining the degree of care required of him. (1784a) Preference of credit and lien
Preference of credit applies only to claims which do not attach
Article 2001. The act of a thief or robber, who has entered the to specific properties while a lien creates a charge on a
hotel is not deemed force majeure, unless it is done with the particular property.
use of arms or through an irresistible force. (n)
Nature and effect of preference
Article 2002. The hotel-keeper is not liable for compensation GR: A debtor is liable with all his property, present and
if the loss is due to the acts of the guest, his family, servants or future, for the fulfillment of his obligations. The creditors have
visitors, or if the loss arises from the character of the things the right to pursue property in possession of the debtor to
brought into the hotel. (n) satisfy their claims.

Article 2003. The hotel-keeper cannot free himself from XPN: There should be no rules as to who should be paid first.
responsibility by posting notices to the effect that he is not Preference applies only when there are two or more creditors
liable for the articles brought by the guest. Any stipulation with separate claims against a debtor who has insufficient
between the hotel-keeper and the guest whereby the property to answer for all his obligations. Since it is an
responsibility of the former as set forth in articles 1998 to exception to the general rule, the law as to preference is
2001 is suppressed or diminished shall be void. (n) strictly construed.

Article 2004. The hotel-keeper has a right to retain the things 1. Does not create an interest in property – Preference
brought into the hotel by the guest, as a security for credits on simply creates a right to be paid first from the
account of lodging, and supplies usually furnished to hotel proceeds of the sale of property of the debtor. It does
guests. (n) not create a lien on the property itself, but merely a
preference in the application of the proceeds of the
CHAPTER 4 property after it is sold.
Sequestration or Judicial Deposit 2. The creditor does not have the right to take the
property and sell it as against another creditor –
Article 2005. A judicial deposit or sequestration takes place Preference applies after a sale, and it is a question of
when an attachment or seizure of property in litigation is application of the proceeds after it is sold.
ordered. (1785) 3. It must be asserted – If the right claimed is not
asserted and maintained, it is lost. If property has not
Article 2006. Movable as well as immovable property may be been seized, it is open to seizure by another.
the object of sequestration. (1786) 4. It must be maintained – Where a creditor released his
levy, leaving the property in possession of the debtor,
Article 2007. The depositary of property or objects thereby indicating that he did not intend to press his
sequestrated cannot be relieved of his responsibility until the claim further as to that specific property, he is
controversy which gave rise thereto has come to an end, unless deemed to have abandoned his claim of preference.
the court so orders. (1787a)
Rules on preference applicable when
Article 2008. The depositary of property sequestrated is 1. There are two or more creditors;
bound to comply, with respect to the same, with all the 2. With separate and distinct claims;
obligations of a good father of a family. (1788) 3. Against the same debtor; and
4. Such debtor has insufficient property (Pacific Farms
Article 2009. As to matters not provided for in this Code, Inc. v. Esguerra, G.R. No. L-21783, November 29,
judicial sequestration shall be governed by the Rules of Court. 1969).
(1789a)
There must be a proceeding such as an insolvency proceeding
TITLE XII wherein the creditors can file their respective claims. The right
CONCURRENCE AND PREFERENCE OF CREDITS becomes significant only after the properties of the debtor
CHAPTER 1 have been inventoried and liquidated, and the claims of the
General Provisions various creditors have been established (Barretto v.
Villanueva, G.R. No. 14038, December 29, 1962; Philippine
Concurrence of credit Savings Bank v. Lantin, G.R. No. 33929, September 2, 1983;
Concurrence of credit implies the possession by two or more DBP v. NLRC, G.R. No. 86932, June 27, 1990).
creditors of equal rights or privileges over the same property
or all the property of a debtor. Three (3) General Categories of Credit
1. Special preferred credits listed in Articles 2241 and
NOTE: This becomes material where the value of the assets is 2242;
not sufficient for then some creditors of necessity will not be 2. Ordinary preferred credits listed in Article 2244; and
paid or some creditors will not obtain the full satisfaction of 3. Common credits (non-preferred) under Article 2245
their claims (Rabuya, 2017). (Republic v. Peralta, GR No. L- 56568, May 20,
1987).
Preference of credit
Preference of credit is a right held by a creditor to be preferred Two Tier Order of Preference
in the payment of his claim above others out of the debtor’s 1. First Tier – Includes only taxes, duties, and fees due
assets. on specific movable or immovable property; and
2. Second Tier – All other special preferred (non-tax)
credits. These credits are to be satisfied paripassi and
pro rata, out of any residual value of the specific

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 property to which such other credits relate (Republic 12. Credits for rent for one year, upon the personal
v. Peralta, G.R. No. L-56568, May 20, 1987). property of the lessee existing on the immovable
leased on the fruits of the same, but not on money or
NOTE: The Pro rata rule does not apply to credits annotated instruments of credit; and
in the Registry of Property in virtue of a judicial order. 13. Claims in favor of the depositor if the depository has
wrongfully sold the thing deposited, upon the price of
Preferred credits on specific movables as provided in Art. the sale.
2241
1. Duties, taxes and fees due thereon to the state or any NOTE: In the foregoing cases, if the movables to which the
subdivision thereof; lien or preference attaches have been wrongfully taken, the
NOTE: The tax must be due on the movable. creditor may demand them from any possessor within 30days
2. Claims arising from misappropriation, breach of from the unlawful seizures through an accionsubrogatoria.
trust, or malfeasance by public officials committed in
the performance of their duties, on the movables, The claims listed in nos. 2 to 13 in Art. 2241 and nos. 2 to 10
money or securities obtained by them; in Art. 2242, all came after taxes in order of preference; such
claims enjoy their privileged character as liens and may be
NOTE: The acquisition must have been in performance of paid only to the extent that taxes have been paid from the
official functions and the property must still be in the hands of proceeds of the specific property involved and only in respect
the public official. If it is sold to a purchaser for value and in of the remaining balance of such proceeds. These non-tax
good faith, there can be no more claim on the said movable. credits, nevertheless are not preferred one over the other inter
se. They are to be treated on an equal basis and to be satisfied
3. Claims for the unpaid price of movable sold, on said concurrently and proportionately (Rabuya, 2017).
movables;
Summary:
NOTE: Claim is limited to the value of the movable Instances 1. Taxes;
when right to claim is not lost: 2. Malversation by public officials;
3. Vendor’s lien;
a. Immobilization of the thing by destination, 4. Pledge, chattel mortgage;
provided that it has not lost its form, substance, 5. Mechanic’s lien;
and identity; or 6. Laborer’s wages;
b. When the thing, together with other property, 7. Salvage;
was sold for a lump sum, provided that the price 8. Tenancy;
thereof can be determined proportionally. 9. Carrier’s lien;
10. Hotel’s lien;
4. Credits guaranteed with a pledge so long as the things 11. Crop loan;
pledged are in the hands of the creditor, or those 12. Rentals – one year; and
guaranteed by a chattel mortgage upon the things 13. Deposit.
mortgaged, up to the value thereof;
Preferred credits on specific immovables as provided in
NOTE: If the contract is a pledge, it must be embodied in a Art. 2242 are as follows:
public instrument. If chattel mortgage, it must be registered
with the Chattel Mortgage Registry. 1. Taxes due upon the land or building;

5. Credits for making repairs or preservation or personal NOTE: This pertains to real property taxes. Thus, capital
property on the movable thus made, repaired, kept or gains tax is not covered because it is a tax on income and not
possessed; on the property itself.
6. Claims for laborers wages, on the goods 2. For the unpaid price of real property sold upon the
manufactured or the work done; immovable sold;
NOTE: The law makes no distinction between registered and
NOTE: The laborer must have been employed by the owner unregistered vendor’s lien. Hence, any lien of this kind enjoys
of the goods and not by the contractor (Bautista v. Auditor the preference of credit status.
General, G.R. No. L-6799, June
29, 1955). 3. Claims of laborers,masons, mechanics and other
workmen, as well as of architects, engineers and
7. For expenses of salvage, upon the goods salvaged; contractors, engaged in the construction,
8. Credits between the landlord and the tenant arising reconstruction or repair of buildings, canals or other
from the contract of tenancy on shares, on the share works, upon said buildings, canals or other works;
of each in the fruits or harvest; 4. Claims of furnishers of materials used in the
9. Credits for transportation, upon the goods carried, for construction, reconstruction, or repair of buildings,
the price of the contract and incidental expenses, until canals, and other works, upon said buildings, canals
their delivery and for thirty days thereafter; or other works;
10. Credits for lodging and supplies usually furnished to 5. Mortgage credits recorded in the Registry of
travelers by hotelkeepers, on the movables belonging Property, upon the real estate mortgage;
to the guest as long as such movables are in the hotel,
but not for money loaned to the guests; NOTE: Mortgage must have been registered in the Registry of
Property. A recorded mortgage credit is superior to an
NOTE: This applies so long as movables are in the hotel. This unrecorded unpaid vendor’s lien (De Barretto v. Villanueva,
does not apply to money loaned to guests. G.R. No. L-14938, January 28, 1961).

11. Credits for seeds and expenses for cultivation and 6. Expenses for the preservation or improvement of real
harvest advanced to the debtor, upon the fruits property when the law authorizes reimbursement,
harvested; upon the immovable preserved or improved;

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 7. Credits annotated in the Registry of Property, by It shall be the duty of the court, upon petition and after
virtue of a judicial order, by attachments or hearing, to exempt and set apart, for the use and benefit of the
executions, upon the property affected, and only as to said insolvent, such real and personal property as is by law
later credits; exempt from execution, and also a homestead (FRIA, Sec.
130).
NOTE: The preference is according to the order of time they
were levied upon the property. Properties exempt from execution and sale
1. GR: Family home constituted jointly by husband and
8. Claims of co-heirs for warranty in the partition of an wife or by unmarried head of a family (Art. 152,
immovable among them, upon the real property thus FC);
divided; and
9. Claims of donors or real property for pecuniary XPNs: For:
charges or other conditions imposed upon the donee, a. Non-payment of taxes;
upon the immovable donated; b. Debts incurred prior to the constitution of the family home;
10. Credits of insurers, upon the property insured, for the c. Debts secured by mortgages on the premises before or after
insurance premium for two years. such constitution; and
d. Debts due to laborers, mechanics, architects, builders,
Summary: material men and others who have rendered service or
1. Taxes; furnished material for the construction of the building.
2. Vendor’s lien;
3. Contractor’s lien; 2. Right to receive support as well as any money or
4. Lien of materialmen; property obtained as such support (Art. 205, FC);
5. Mortgage; 3. Tools and implements necessarily used by him in his
6. Expenses of preservation; trade or employment;
7. Recorded attachments; 4. Two horses, or two cows, or two carabaos or other
8. Warranty in partition; Beasts of burden, such as the debtor may select, not
9. Conditional donations; and exceeding one thousand pesos in value and
10. Premiums for 2 year – insurers. necessarily used by him in his ordinary occupation;
5. His necessary clothing and that of all his family;
Liability of debtor’s property for his obligation 6. Household furniture and utensils necessary for
The debtor is liable with all his property, present and future, housekeeping and used for that purpose by the
for the fulfilment of his obligations, subject to the exemptions debtor, such as the debtor may select, of a value not
provided by law (NCC, Art. 2236). exceeding one thousand pesos;
7. Provisions for individual or family use insufficient
Exemption of conjugal partnership or absolute community for three months;
So long as the conjugal partnership or absolute community 8. The professional libraries of attorneys, judges,
subsists, its property shall not be among the assets to be taken physicians, pharmacists, dentist, engineers,
possession of by the assignee for the payment of the insolvent surveyors, clergymen, teachers and other
debtor's obligations, except insofar as the latter have professionals, not exceeding three thousand pesos in
redounded to the benefit of the family. If it is the husband who value;
is insolvent, the administration of the conjugal partnership of 9. One fishing boat and net, not exceeding the total
absolute community may, by order of the court, be transferred value of one thousand pesos, the property of any
to the wife or to a third person other than the assignee (NCC, fisherman, by the lawful use of which he earns a
Art. 2238). livelihood;
10. So much of the earnings of the debtor for his personal
NOTE: The insolvency of the husband does not have the services within the month preceding the levy as are
effect of dissolving the conjugal partnership or absolute necessary for the support of his family;
community (NCC, Art. 2238). 11. Lettered gravestones;
12. All moneys, benefits, privileges or annuities accruing
The exemption applies provided that: or in any manner growing out of any life insurance, if
a. The conjugal partnership or the absolute community the annual premiums paid do not exceed five hundred
subsists; and pesos, and if they exceed the sum, a like exemption
b. The obligation did NOT redound to the benefit of the shall exist which shall bear the same proportion to the
family (Paras, 2008). moneys, benefits privileges and annuities so accruing
or growing out of such insurance that said five
Rules on co-ownership hundred pesos bears to the whole premiums paid;
The undivided share or interest shall be possessed by the 13. Copyrights and other properties especially exempted
assignee (Paras, 2008). by law (Sec. 12, Rule 39); and
14. Property under legal custody and of the public
NOTE: Art. 2239 of the New Civil Code refers to co- dominion.
ownership other than that of conjugal partnership or absolute
community. Order of preference with respect to other properties of the
debtor under Art. 2244:
Rule involving property held in trust
Property held by the insolvent debtor as a trustee of an express 1. Credits for services rendered by laborers;
or implied trust, shall be excluded from the insolvency
proceedings (NCC, Art. 2240). The trustee is NOT the owner NOTE: Art. 110 of the Labor Code has modified Art. 2244 of
of the property held. Hence, it should not respond for the the Civil Code in two respects:
insolvent trustee’s obligations (Paras, 2008).
(a) firstly, by removing the one year limitation found in Art.
Duty to set apart exempt properties under FRIA 2244, number 2; and

Page 5 of 10
(b) secondly, by moving up claims for unpaid wages of 3. Segregate specific immovables and/or movables
laborers or workers of the Insolvent from second priority to mentioned under Arts. 2241 and 2242 of the NCC,
first priority in the order of preference established by Art. respectively;
2244 (Republic v. Peralta, G.R. No. L-56568, May 20, 1987). 4. Sell movables and determine if the proceeds are
sufficient to cover the special preferred credit in Art.
In the event of bankruptcy or liquidation of an employer's 2241 of the NCC; exclude all other credits to the
business, his workers shall enjoy first preference as regards extent of the value of the movable to which
wages due them for services rendered during the period prior preference refers. Pay No.1 credit in Art. 2241 of the
to the bankruptcy or liquidation (as amended by the Labor NCC; and if 2 or more credits in Art. 2241 of NCC
Code). concur, apply proceeds of sale pro rata to the credits
applying Arts. 2246 and 2247 of NCC. For
2. Proper funeral expenses for the debtor, or children immovables and real rights – sell immovable and real
under his or her parental authority who have no right and determine the proceeds of sale if sufficient
property of their own, when approved by the court; to cover the special preferred credits in Art. 2242 of
3. Expenses during the last illness of the debtor or of his NCC. Exclude all other credits to the extent of the
or her spouse and children under his or her parental value of the immovables and real rights to which
authority, if they have no property of their own; preference refers. Pay No. 1 in Art. 2242 of NCC; if
4. Compensation due to the laborers of their dependents 2 or more credits mentioned in Art. 2242 of NCC
under laws providing for indemnity for damages in concur, apply proceeds pro rata to the credits
cases of labor accident or illness resulting from the applying Articles 2248 and 2249 of the NCC.
nature of the employment; 5. If proceeds of sale from specific movable and
5. Credits and advancements made to the debtor for immovable are insufficient, the balance of said
support of himself or herself, and family, during the special preferred credits become common credits
last preceding insolvency; under Art. 2245 of the NCC.
6. Support during the insolvency proceedings, and for If proceeds of sale from specific movable and
three months thereafter; immovables exceed the total special preferred
7. Fines and civil indemnification arising from a credits, such excess becomes part of free property of
criminal offense; the debtor to be added to other assets in order to
8. Legal expenses, and expenses incurred in the satisfy the ordinary preferred credits under Art. 2250
administration of the insolvent’s estate for the of the NCC and then the common credits under Art.
common interest of the creditors, when properly 2245 of the NCC;
authorized and approved by the court; 6. With the excess cash sale of assets covered in
9. Taxes and assessments due the national government, Articles 2241 and 2242 of the NCC, if any, sell other
other those mentioned in Articles 2241, No. 1, and assets of debtor and satisfy the ordinary preferred
2242, No. 1; credits by applying proceeds of sale in accordance
10. Taxes and assessments due any province, other than with the order of preference of credits established in
those mentioned in Articles 2241, No. 1 and 2242, Art. 2244 of NCC. Rule on Preference applies; and
No. 1; 7. After applying the proceeds of sale of all properties
11. Taxes and assessments due any city or municipality under Step 6, Apply balance of the proceeds of the
other than those mentioned in Articles 2241, No.1 sale to common credits in accordance with the rule
and 2242, No. 1; provided in Art. 2251 of the NCC. Rule on
12. Damages for death or personal injuries caused by a concurrence applies, they are paid pro rata regardless
quasi-delict; of dates (NCC, Art. 2251)
13. Gifts due to public and private institutions of charity
or beneficence; Article 2236. The debtor is liable with all his property, present
14. Credits which without special privilege, appear in (a) and future, for the fulfillment of his obligations, subject to the
a public instrument; or (b) in the final judgment, if exemptions provided by law. (1911a)
they have been the subject of litigation. These credits
shall have preference among themselves in the order Article 2237. Insolvency shall be governed by special laws
of priority of the dates of the instruments and of the insofar as they are not inconsistent with this Code. (n)
judgments, respectively (Art. 2244 in relation to Art.
110 of the Labor Code). Article 2238. So long as the conjugal partnership or absolute
community subsists, its property shall not be among the assets
Summary: to be taken possession of by the assignee for the payment of
1. Wages of employees; the insolvent debtor's obligations, except insofar as the latter
2. Funeral expenses; have redounded to the benefit of the family. If it is the
3. Expenses of last illness; husband who is insolvent, the administration of the conjugal
4. Workmen’s compensation; partnership or absolute community may, by order of the court,
5. Support for one year; be transferred to the wife or to a third person other than the
6. Support during insolvency; assignee. (n)
7. Fines in crimes;
8. Legal expenses – administration; Article 2239. If there is property, other than that mentioned in
9. Taxes; the preceding article, owned by two or more persons, one of
10. Tort; whom is the insolvent debtor, his undivided share or interest
11. Donations; and therein shall be among the assets to be taken possession of by
12. Appearing in public instrument or final judgment. the assignee for the payment of the insolvent debtor's
obligations. (n)
Steps in applying the rules in preference and concurrence
of credit Article 2240. Property held by the insolvent debtor as a
1. Categorize the credits accordingly; trustee of an express or implied trust, shall be excluded from
2. Determine or make an inventory of the assets or the insolvency proceedings. (n)
properties of the insolvent;

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 (4) Claims of furnishers of materials used in the
CHAPTER 2 construction, reconstruction, or repair of buildings,
Classification of Credits canals or other works, upon said buildings, canals or
other works;
Article 2241. With reference to specific movable property of (5) Mortgage credits recorded in the Registry of
the debtor, the following claims or liens shall be preferred: Property, upon the real estate mortgaged;
(1) Duties, taxes and fees due thereon to the State or (6) Expenses for the preservation or improvement of
any subdivision thereof; real property when the law authorizes reimbursement,
(2) Claims arising from misappropriation, breach of upon the immovable preserved or improved;
trust, or malfeasance by public officials committed in (7) Credits annotated in the Registry of Property, in
the performance of their duties, on the movables, virtue of a judicial order, by attachments or
money or securities obtained by them; executions, upon the property affected, and only as to
(3) Claims for the unpaid price of movables sold, on later credits;
said movables, so long as they are in the possession (8) Claims of co-heirs for warranty in the partition of
of the debtor, up to the value of the same; and if the an immovable among them, upon the real property
movable has been resold by the debtor and the price thus divided;
is still unpaid, the lien may be enforced on the price; (9) Claims of donors or real property for pecuniary
this right is not lost by the immobilization of the charges or other conditions imposed upon the donee,
thing by destination, provided it has not lost its form, upon the immovable donated;
substance and identity; neither is the right lost by the (10) Credits of insurers, upon the property insured,
sale of the thing together with other property for a for the insurance premium for two years. (1923a)
lump sum, when the price thereof can be determined
proportionally; Article 2243. The claims or credits enumerated in the two
(4) Credits guaranteed with a pledge so long as the preceding articles shall be considered as mortgages or pledges
things pledged are in the hands of the creditor, or of real or personal property, or liens within the purview of
those guaranteed by a chattel mortgage, upon the legal provisions governing insolvency. Taxes mentioned in
things pledged or mortgaged, up to the value thereof; No. 1, article 2241, and No. 1, article 2242, shall first be
(5) Credits for the making, repair, safekeeping or satisfied. (n)
preservation of personal property, on the movable
thus made, repaired, kept or possessed; Article 2244. With reference to other property, real and
(6) Claims for laborers' wages, on the goods personal, of the debtor, the following claims or credits shall be
manufactured or the work done; preferred in the order named:
(7) For expenses of salvage, upon the goods (1) Proper funeral expenses for the debtor, or children
salvaged; under his or her parental authority who have no
(8) Credits between the landlord and the tenant, property of their own, when approved by the court;
arising from the contract of tenancy on shares, on the (2) Credits for services rendered the insolvent by
share of each in the fruits or harvest; employees, laborers, or household helpers for one
(9) Credits for transportation, upon the goods carried, year preceding the commencement of the
for the price of the contract and incidental expenses, proceedings in insolvency;
until their delivery and for thirty days thereafter; (3) Expenses during the last illness of the debtor or of
(10) Credits for lodging and supplies usually his or her spouse and children under his or her
furnished to travellers by hotel keepers, on the parental authority, if they have no property of their
movables belonging to the guest as long as such own;
movables are in the hotel, but not for money loaned (4) Compensation due the laborers or their
to the guests; dependents under laws providing for indemnity for
(11) Credits for seeds and expenses for cultivation damages in cases of labor accident, or illness
and harvest advanced to the debtor, upon the fruits resulting from the nature of the employment;
harvested; (5) Credits and advancements made to the debtor for
(12) Credits for rent for one year, upon the personal support of himself or herself, and family, during the
property of the lessee existing on the immovable last year preceding the insolvency;
leased and on the fruits of the same, but not on (6) Support during the insolvency proceedings, and
money or instruments of credit; for three months thereafter;
(13) Claims in favor of the depositor if the depositary (7) Fines and civil indemnification arising from a
has wrongfully sold the thing deposited, upon the criminal offense;
price of the sale. (8) Legal expenses, and expenses incurred in the
In the foregoing cases, if the movables to which the lien or administration of the insolvent's estate for the
preference attaches have been wrongfully taken, the creditor common interest of the creditors, when properly
may demand them from any possessor, within thirty days from authorized and approved by the court;
the unlawful seizure. (1922a) (9) Taxes and assessments due the national
government, other than those mentioned in articles
Article 2242. With reference to specific immovable property 2241, No. 1, and 2242, No. 1;
and real rights of the debtor, the following claims, mortgages (10) Taxes and assessments due any province, other
and liens shall be preferred, and shall constitute an than those referred to in articles 2241, No. 1, and
encumbrance on the immovable or real right: 2242, No. 1;
(1) Taxes due upon the land or building; (11) Taxes and assessments due any city or
(2) For the unpaid price of real property sold, upon municipality, other than those indicated in articles
the immovable sold; 2241, No. 1, and 2242, No. 1;
(3) Claims of laborers, masons, mechanics and other (12) Damages for death or personal injuries caused
workmen, as well as of architects, engineers and by a quasi-delict;
contractors, engaged in the construction, (13) Gifts due to public and private institutions of
reconstruction or repair of buildings, canals or other charity or beneficence;
works, upon said buildings, canals or other works;

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 (14) Credits which, without special privilege, appear 2. Taxes other than those imposed directly upon a
in (a) a public instrument; or (b) in a final judgment, movable or an immovable such as income taxes and
if they have been the subject of litigation. These license fees;
credits shall have preference among themselves in the (If we’re talking about license fees, the following
order of priority of the dates of the instruments and of order shall be followed: (1) National Government, (2)
the judgments, respectively. (1924a) Provincial Gov’t, and (3) City or Municipal
Government.)
[Audio Lecture] 3. Those credits in a final judgment or in a public
document such as: Notarized or Promissory Note;
Article 2245. Credits of any other kind or class, or by any Put the other credits, not falling under these three, together.
other right or title not comprised in the four preceding articles, These credits are your common claims (ex. Promissory Note
shall enjoy no preference. (1925) in a private instrument.)
 STEP THREE: To satisfy the Special Preferred Claims.
 If it is not among those mentioned in Article 2241, 2242 First, take the value of the specific movable or immovable
and 2244, it is a Common Credit. upon which the preferred claim is imposed. Second, pay
 Creditors with Common Credits will have to line-up for the taxes due on the property. Third, pay the preferred
the excess of the debtor’s property after claims under Arts. claim of the creditor.
2241, 2242 and 2244 have been satisfied.  What if you have more than one preferred creditor over the
 There’s no order of preference among common creditors, same property?
they share whatever is left in proportion to their credit Example: The claims against a car are import duties; you
regardless of the date. also have chattel mortgage, and a unpaid seller. In this
case, pay the taxes first, since the mortgage creditor and
CHAPTER 3 unpaid seller are both special preferred creditors, they will
Order of Preference of Credits share the balance proportionately. There will only be
proportionate sharing in case the value of the thing after
[RULES ON PREFRENCE OF CREDIT] payment of taxes is not enough to satisfy all of the special
preferred claims against. But if the value of the thing is
Steps: sufficient, then all the special preferred claims must be
paid in full.
 STEP ONE: Make an inventory of asset. List down all the  If after paying the taxes and other special preferred claims,
assets of the debtor and group the assets into two; The (1) there is an excess: take the value of the excess and add it to
Preferred Group and the (2) Free Property group. the debtor’s free property.
 Those assets with special preferred claims under Arts.  If the value of the specific property is not enough to satisfy
2241 and 2242 imposed upon them will belong to the the taxes and other special preferred claimed or deficiency:
Preferred Group. If the deficiency in a credit arising from a Pledge, Real
 Those assets without special preferred claims will Mortgage or Chattel Mortgage, put the deficiency in the
constitute the debtor’s Free Property. ordinary preferred credits group.
 NOTE: Please don’t forget to take out the properties held Why do we know that it is an Ordinary Preferred Credit?
by the debtor only in the capacity of a trustee. He may Because it is a credit in a Public Instrument, it is an
have the legal title but the beneficial title belongs to Ordinary Preferred Credit under Article 2244, Par. 14.
another person. Same goes to properties under Absolute (Requirement: it must be registered for REM and CM, and
Community Property or Conjugal Partnership of Gains. be in a public document for Pledge).
Also, properties held under as lessee or usufructuary.  If the deficiency is in a credit arising from transaction that
 STEP TWO: Group the claims. In grouping the claims, is not in a public document or not in contained in a final
make four (4) groups: judgment (ex: Unrecorded Sale: Put the deficiency in the
Common Credits group.
(1) Special Preferred Credits on Movables;  STEP FOUR: Update the inventory and list of credits.
(2) Special Preferred Credits on Immovables; After you have satisfied all of the Special Preferred
(3) Ordinary Preferred Credits; and Claims, update the following:
(4) Common Credits. o List of Inventory of Assets. You may have to add to
the free property group if after satisfying the special
 For the Special Preferred Claims, look out for the preferred claims you have an excess. Make sure to
following (for they are the most common): add the excess to the free property group.
o For Movables: o List of Ordinary Preferred Claims. If there is
1. There is import duties or other taxes imposed deficiency in satisfying special preferred claims, the
directly on the movable; deficiency will now become an Ordinary Preferred
2. An obligation secured by a Pledge or a Chattel Credit if it is a notarized or is contained in a final
Mortgage (it must be registered); judgment.
3. Claim of unpaid seller of the price of the movable. o List of Common Claims. If there was a deficiency
o For Immovables: that did not the Special Preferred Claims, the credit
1. Real Estate Taxes; will be Common Credit if not notarized or contained
2. Obligation secured by a Real Estate Mortgage; in a final judgment.
3. Claim of unpaid seller for the price of the  STEP FIVE: To satisfy the Ordinary Preferred Claims.
immovable; List down all the Ordinary Preferred Claims in the order
4. Credits annotated in the Registry of Property by listed in accordance with Article 2244. Most probably,
attachment or execution upon the immovable. there would be several credits in public instruments and
 After doing so, put the Ordinary Preferred Claims under final judgment and all of you have to do is arrange them by
Article 2244 together. List them down according to the date. Those falling on the same date would enjoy equal
order under Article 2244 because the said Article already preference will enjoy the balance of the free property
gave us the list for the order of preference. proportionately.
 Order of Preference:  STEP SIX: To satisfy the Common Claims. Whatever is
1. Labor claims; remaining to the debtor’s free property will be used to
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 satisfy the common claims. Since this is not enough to With respect to the car, we have to satisfy: (1)
satisfy the debtor’s remaining liabilities because by this Import Duty and (2) Chattel Mortgage on the car dated
time the debtor is insolvent, the common creditors will March 1, 2019.
share the balance in proportion to the amount of their Fourth Step, update the list of credit as to the
credit regardless of the date. Ordinary Preferred Claims and Common Claims. For the
Ordinary Preferred Claims: (1) Income Tax, (2) License
Example #1: In January 1, 2019, the debtor issued a Fee owing to the City Gov’t for the business of the Debtor,
promissory note for Php 500,000.00, however, it was and (3) Notarized Promissory Note dated March 1, 2019.
written in a private instrument. In March 1, 2019, he However, we mentioned a while ago that we have a
executed a REM over his house and lot worth Php deficiency in settling the claims of the creditors with
3,000,000.00 to secure a loan of Php 5,000,000.00. On the respect to the house and lot. What we are going to do here
same date, March 1, 2019, he also executed a notarized to the Ordinary Preferred Claims is to add the deficiency
promissory note for Php 1,000,000.00. On September 1, claim of the (1) Real Estate Mortgage, (2) Unpaid Seller,
2019, a creditor was able to obtain a favourable judgment and the (3) Judgment dated March 1, 2019 with attachment
against the debtor for Php 100,000.00. By this time, the to the House and Lot dated January 1, 2019. Under the
debtor becomes insolvent. What is the order of priority his Common Claims, the remaining credit here is only the
creditor’s claims? Acknowledgement Receipt of debt dated March 1, 2019.
Answer: The order of the priority of the creditor’s claim Fifth Step, we have to pay the Ordinary
are as follows: (1) The mortgage creditor should be Preferred Claims out of the Free Property on the following
satisfied first. But since it is for Php 5M and the house and order: (1) Income Tax, (2) License Fee, (3) Proportionate
lot is only Php 3M, there is a deficiency of Php 2M. The sharing on the Notarized Promissory Note dated March 1,
deficiency will be an Ordinary Preferred Credit. (2) The 2019, Unpaid Seller’s Sale dated March 1, 2019, Judgment
Notarized Promissory Note for Php 1M and the Php 2M dated March 1, 2019 with attachment to the House and Lot
deficiency on the mortgage credit. They are both Ordinary dated January 1, 2019, and the Real Estate Mortgage dated
Preffered Credit according to Par 14, Article 2244. Since June 1, 2019.
they were executed on the same date would enjoy equal Last and final step, Sixth Step, pay the
preference will enjoy the balance of the free property Common Claims out of the Free Property which is the
proportionately. (3) Last to be satisfied is the Promissory Acknowledgement Receipt of debt dated March 1, 2019.
Note executed in a Private Instrument which is a Common
Credit.
Article 2246. Those credits which enjoy preference with
Example #2: The debtor’s assets consist only of three: A respect to specific movables, exclude all others to the extent of
house and lot, a car and cash. However, the debtor is the value of the personal property to which the preference
insolvent. His obligations are as follows: (1) Real Estate refers.
Mortgage dated June 1, 2019, (2) Chattel Mortgage on the
car dated March 1, 2019, (3) Real Property Tax on the Article 2247. If there are two or more credits with respect to
House and Lot, (4) Income Tax, (5) Import Duty of the car, the same specific movable property, they shall be satisfied pro
(6) Unpaid Seller of the lot sold to him on March 1, 2019, rata, after the payment of duties, taxes and fees due the State
(7) License Fee owing to the city government for business, or any subdivision thereof. (1926a)
(8) Notarized Promissory Note dated March 1, 2019, (9)
Acknowledgement Receipt of debt dated March 1, 2019, Article 2248. Those credits which enjoy preference in relation
and a (10) Judgment dated March 1, 2019 with attachment to specific real property or real rights, exclude all others to the
to the House and Lot dated January 1, 2019. What is the extent of the value of the immovable or real right to which the
order of preference of credit? preference refers.
Answer: First step, you have to make an inventory.
Immovable property with special preferred claim which is Article 2249. If there are two or more credits with respect to
the house and lot, Movable property with special preferred the same specific real property or real rights, they shall be
claim which is the car, and the Free Property is the cash. satisfied pro rata, after the payment of the taxes and
Second step, you have to group the credits. For assessments upon the immovable property or real right.
the Special Preferred Claims over immovable property: (1) (1927a)
Real Estate Mortgage dated June 1, 2019, (2) Real
Property Tax on the House and Lot, (3) Unpaid Seller of Article 2250. The excess, if any, after the payment of the
the lot sold to him on March 1, 2019, (4) Judgment dated credits which enjoy preference with respect to specific
March 1, 2019 with attachment to the House and Lot dated property, real or personal, shall be added to the free property
January 1, 2019. For the Special Preferred Claim on the which the debtor may have, for the payment of the other
movable property: (1) Import Duty of the car, and (2) credits. (1928a)
Chattel Mortgage on the car dated March 1, 2019. For the
Ordinary Preferred Claims: (1) Income Tax, (2) License Article 2251. Those credits which do not enjoy any preference
Fee owing to the City Gov’t for the debtor’s business, and with respect to specific property, and those which enjoy
the (3) Notarized Promissory Note dated March 1, 2019. preference, as to the amount not paid, shall be satisfied
Lastly, for the Common Claims: the Acknowledgement according to the following rules:
Receipt of debt dated March 1, 2019. (1) In the order established in article 2244;
Third Step, we have to satisfy special preferred (2) Common credits referred to in article 2245 shall
claims. With respect to the House and Lot, you pay the be paid pro rata regardless of dates. (1929a)
Real Property Tax. The following will share the
proportionate with the balance after paying the Real
Property Tax: (1) Real Estate Mortgage, (2) Unpaid Seller,
and the (3) Judgment dated March 1, 2019 with attachment
to the House and Lot dated January 1, 2019.
[Naay follow-up question si Atty: To make
things more complicated, let’s assume that there was a
deficiency in settling the claims of these three creditors.]

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