Concurrence & Preference of Credits Report

8/12/2019 Concurrence & Preference of Credits Report

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Concurrence &Preferenceof Credits

Kc Garcia

Karyl Villanueva



Concurrence and Preference of credits

The civil code establishes this system in thecontext of Insolvency proceedings, inorder to properly recognize creditor rights,respect priority of claims, and ensure theequitable treatment of similarly situatedcreditors.



R.A. No. 10142, Sec. 62. Contents ofRehabilitation Plan

It states that the Rehabilitation Plan, shallensure that payments under the plan follow thepriority established under the provisions of theCivil Code on concurrence and preference ofcredits and other applicable laws…



Sec. 133. Concurrence And Preference ofCredits

The Liquidation Plan and its implementationshall ensure that the concurrence and preferenceof credits as enumerated in the Civil Code of thePhilippines and other relevant laws shall be

observed, unless a preferred creditor voluntarily waives his preferred right…



CONCURRENCE OF CREDITS,

It implies possession by two or more creditors ofequal right or privileges over the same propertyor all of the property of a debtor



PREFERENCE OF CREDIT

It is the right held by a creditor to bepreferred in the payment of his claimabove other out of the debtor’s assets

It does not necessarily create a lien onproperty

It is merely a method adopted todetermine and specify the order in which credits should be paid



Concurrence of Credits

The property of debtor is subjected to theclaims of two or mode creditors and the valueof such property is insufficient to pay in full allthe claims.

Necessarily, some creditors will not be paid orsome creditors will not obtain the full satisfactionof their claims.



The claims of the creditors may be paid:

Concurrently and Pro-rata:

proportional to the amount of therespective claims/credits

Preference of Credits established:

priority of payments are made for which the creditors will be paid ahead of

others.



Concurrence and Preference of

Credits do not apply when? When the situation does not involve two or

more creditors having separate anddistinct claims against the same debtor who

has insufficient property.

It only arises when the creditor cannot pay hisdebts in full



Special Preferred Credits

Article 2241 to 2242 of the CivilCode:

Enumerate the special preferred credits that

enjoy preference with respect to specificmovable and specific immovable propertyof the debtor, and exclude all other claims tothe extent of the value of the affected property.

These claims are: mortgages, pledges of real orpersonal property, or liens, within the purview oflegal provisions governing insolvency.



CLASSIFICATION OF

CREDITS

1. Special preferred Credits



Taxes – only taxes enjoy preference

All other claims listed in Article 2241-2242 all come after taxes;

they are not preferred and there in only concurrence of credits.

Article 2241-2242 and Article 2246-2249 establish a two-tier order of preference.

1. 1st tier- only taxes, duties and fees due on specific movable or

immovable of property2. 2nd tier- all other special preferred credits; paid pro-rata out ofany residual value of the specific property to which such creditrelate

However, Section 136 of R.A. No. 10142 creates another tierin the order of preference:

1. Trade-related claims of clients upon the trade related assets suchas cash, securities and trading rights.

enjoys ABSOLUTE PRIORITY over other claims and amendsin the order of preference in Art. 2241 and 2242



De Barretto v. Villanueva

Rosario Cruzado, wife and administratrix of Pedro obtained from Rehabilitation Finance Corp (RFC) a

loan of 11k. As security, she mortgaged their land. Failure to pay resulted in the foreclosure andacquisition of the property by RFC for 11k, subject to redemption. Upon application, land was sold backconditionally to Rosario for P14,269.03, payable in 7 years.

Rosario was authorized to sell the land for 19k to Pura L. Villanueva, with RFC’s consent. Termsstated that Pura assumes to pay RFC, the amount Rosario still owed which is P11, 009.52, under thesame terms and conditions in that deed of sale dated 7/26/51. Pura paid 1,500 and subsequently anadditional payment of 5,500 plus PN. Thereafter she secured a TCT in her name, covering the property .Pura mortgaged the property to Magdalena C. Barretto as security for a loan of 30k.

Pura Villanueva failed to pay remaining balance of 12k, so a complaint for recovery of the amount wasfiled against her Rosario Cruzado in her right and in behalf of her minor children. Decision renderedordering Pura and her husband to solidarily pay Cruzado 12k+interest +1.5k atty. fees.

Pura also failed to pay the 30k indebetedness to Barreto, so the latter and her husband filed an action toforeclose on the mortgage. TC decision sentenced Villanuevas to pay Barrettos solidarily.Upon finality, Barrettos filed a motion for the issuance of a writ of execution and the Cruzados filed their"Vendor's Lien" in the amount of P12k, plus legal interest, over the real property subject of theforeclosure suit.Court ordered that property be sold at public auction in foreclosure proceedings, with Cruzados credited

their pro-rata share of proceeds pursuant to Art. 2248 and 2249 in relation to 2242 of NCC. Barretos were themselves, the highest bidder, for 49k. CFI issued order confirming the sale, and ordered Registerof deeds to issue them a certificate of title, subject to the order of vendor’s lien of the Cruzados.Barreto’s claims the decision of the CFI awarding 12k to Cruzado cannot constitute as basis for vendor’s lien, because civil case was a merely to recover the balance of a PN. Barretos sought reconsiderationgiving due course to vendor’s lien, but was denied.



Whether or not CFI erred in awarding Cruzado 12k, on the basis of vendor’s lien on the property.

HELD: NO; order appealed is affirmed. Cruzado isentitled to payment.RATIO:• Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-

rata with the appellants the proceeds of the foreclosure sale.

• Article 2242 of the new Civil, Code enumerates the claims,

mortgage and liens that constitute an encumbrance on specificimmovable property, and among them are:

(2) For the unpaid price of real property sold, upon the immovablesold; and

(5) Mortgage credits recorded in the Registry of Property.“

• Article 2249 provides that "if there are two or more credits withrespect to the same specific real property or real rights, they shall

be satisfied pro-rata after the payment of the taxes andassessment upon the immovable property or real rights.”



1962 Decision: The original decision should be set aside

• The vendor's lien, under Articles 2242 and 2243 of the new Civil Code of the Philippines,can only become effective in the event of insolvency of the vendee. There Is no proof that

Villanueva was insolvent.• . The previous decision failed to take fully into account the radical changes introduced by

the Civil Code the Philippines into the system of priorities among creditors ordained by theCivil Code of 1889.

• There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, didnot acquire the character and rank of a statutory lien co-equal to the mortgagee's recordedencumbrance, and must remain subordinate to the latter.

• Appellee Cruzado is not a true vendor of the foreclosed property. Spouses Villanueva

obtained a new Transfer Certificate of Title No. 32526 in their name.• Ownership of the property had passed to the Rehabilitation Finance Corporation since 1950,

when it consolidated its purchase at the foreclosure sale and obtained a certificate of title inits corporate name.

• The subsequent contract of resale in favor of the Cruzados did not revert ownership in them,since they failed to comply with its terms and conditions, and the contract itself providedthat the title should remain in the name of the RFC until the price was fully paid.

• Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property. Theymerely assigned whatever rights or claims they might still have thereto; the ownership of

the property rested with the RFC. The sale from Cruzado to Villanueva, therefore, was notmuch a sale of the land and its improvements as it was a quitclaim deed in favor of Villanueva.

• Cruzados transferred to Villanueva an option to acquire the property. They did not transferthe property itself. Their credit, therefore, cannot legally constitute a vendor's lien on thecorpus of the property that should stand on an equal footing with mortgaged credit held byappellants Barretto.



CASE LAW/ DOCTRINE:• In the event of insolvency, a principal objective

should be to effect an equitable distribution of theinsolvent’s property among his creditors. Toaccomplish this there must first be some

proceeding where notice to all of the insolvents’ creditors may be given and where the claims ofpreferred creditors may be bindingly adjudicated.

• Article 2243 states that the claims and liensenumerated in articles 2241 and 2242 shall beconsidered as mortgages or pledges of real orpersonal property, or liens within the purview oflegal provisions governing insolvency.



DBP v. CA• 1.

Marinduque Mining Industrial Corporation (Marinduque Mining), engaged inmanufacture of nickel, obtained from the PNB various loan accommodations. To secure theloans, it executed a Deed of Real Estate Mortgage and Chattel mortgage in favor of PNB. Themortgage covered all of its real properties in Surigao del Norte, Negros Occidental, and

Antipolo, Rizal, including improvements thereon. Loans extended amounted to P4Billion• 2. Marinduque Mining executed in favour of PNB and DBP a second Mortgage Trust

Agreement wherein it mortgaged to PNB and DBP all its real properties in same placesincluding improvements. The mortgage also covered all its chattels and assets whichMarinduque Mining may subsequently acquire in substitution to the properties covered bythe previous Deed of Real and Chattel Mortgage. Its loans totalled to P2Billion.

• 3. Marinduque Mining executed in favor of PNB and DBP an Amendment to MortgageTrust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB andDBP all other real and personal properties and other real rights subsequently acquired byMarinduque Mining

• 4. For failure of Marinduque Mining to settle its loan obligations, PNB and DBPinstituted sometime on July and August 1984 extrajudicial foreclosure proceedings over themortgaged properties

• 5. PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely,in order to ensure the continued operation of the Nickel refinery plant and to prevent thedeterioration of the assets foreclosed, assigned and transferred to Nonoc Mining andIndustrial Corporation all their rights, interest and participation over the foreclosedproperties of MMIC located at Nonoc Island, Surigao del Norte for an initial considerationof P14,361,000,000.00

• 6. Also a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferredin favor of Maricalum Mining Corp. all its rights, interest and participation over theforeclosed properties of MMIC at Sipalay, Negros Occidental for



• Pursuant to Proclamation No. 50 as amended, again assigned,transferred and conveyed to the National Government thru the AssetPrivatization Trust (APT) all its existing rights and interest over theassets of MMIC, earlier assigned to Nonoc Mining and IndustrialCorporation, Maricalum Mining Corporation and Island Cement

• Between July 16, 1982 to October 4, 1983, Marinduque Miningpurchased and caused to be delivered construction materials andother merchandise from Remington Industrial Sales Corporation(Remington) worth P921,755.95

• The purchases remained unpaid as of August 1, 1984.Remington filed a complaint for a sum of money and damages

against Marinduque Mining, PNB and DBP, Nonoc Mining,Maricalum Mining, Island Cement Corp. for the value of the unpaidconstruction materials

• RTC: ruled in favour of Remington; ordered all defendants topay, jointly and severally, the sum of P920,755.95

• CA: affirmed decision of RTC• DBP and other defendants contends that Remington has no

cause of action against them• Remington contends that the transfer of properties was made

in fraud of creditors





• Under the PRESENT civil code - only taxes enjoy a similar absolutepreference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid prorata, i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:

• "If there are two or more credits with respect to the same specific realproperty or real rights, they shall be satisfied pro rata, after the payment of

the taxes and assessments upon the immovable property or real rights.“

• It is thus apparent that the full application of Articles 2249 and 2242demands that there must be first some proceeding where the claims of allthe preferred creditors may be bindingly adjudicated, such as insolvency,the settlement of decedent's estate under Rule 87 of the Rules of Court, orother liquidation proceedings of similar import.



• CASE LAW/ DOCTRINE:

One preferred creditor's third-party claim to theproceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated bylaw for the enforcement of preferences under Article 2242, unless the claimant were enforcing

a credit for taxes that enjoy absolute priority.

If none of the claims is for taxes, a dispute between two creditors will not enable the Court

to ascertain the pro rata dividend correspondingto each, because the rights of the other creditorslikewise enjoying preference under Article 2242can not be ascertained



JL Bernardo Construction vs CA• A Construction Agreement was entered into by the

Municipality of San Antonio thru Mayor Salonga (respondent)and petitioner J.L. Bernardo Construction

• The Municipality agreed to assume the expenses for thedemolition, clearing and site filling of the constructionsite(public market) in the amount of P1,150,000 and toprovide cash equity of P767,305.99 to be remitted directly to

petitioners

• J.L Construction alleged that when the whole amount of thecash equity became due, and when the market was almostfinished, the Municipality refused to pay the same, despiterepeated demands

• J.L. Construction filed a complaint for breach of contract,specific performance, and collection of a sum of money withprayer for preliminary injunction and enforcement ofcontractor’s lien against the Municipality and Salonga in hispersonal and official capacity as mayor.



• RTC: issued a writ of preliminary attachment prayed by J.LConstruction and granted it the right to maintain possession of the public market and to operate the same.

-trial court held that since plaintiffs have not been reimbursed for thecash equity and for the demolition, clearing and site filling expenses,they stand in the position of an unpaid contractor and as such areentitled, pursuant to articles 2242 and 2243 of the Civil Code, to a lienin the amount of P2,653,576.84 upon the market which they

constructed.-Said that the usual way is to sell property then apply proceeds topayment. However, it is more practical to let petitioners just operatemarket and apply its income to their claim.

• MR by Salonga was denied. Hence a petition for certiorari with CA.

• CA: reversed the ruling of RTC

-Article 2242 of the Civil Code finds application only in the context ofinsolvency proceedings, as expressly stated in Article 2243. Even if itis conceded that plaintiffs are entitled to retain possession of themarket under its contractor’s lien, the appellate court held that thesame right cannot be expanded to include the right to use the building



• ISSUE: Whether or not the CA erred inreversing the ruling of the trial court ofgranting the contractor’s lien in favor of J.L.ConstructionHELD: No. The Court upholds the CA’s ruling



RATIO:

• The contractor’s lien claimed by petitioners is granted under the third paragraph of Article2242 which provides that the claims of contractors engaged in the construction,reconstruction or repair of buildings or other works shall be preferred with respect to thespecific building or other immovable property constructed.

• Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditorsand the value of such property of the debtor is insufficient to pay in full all the creditors. Insuch a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process willdictate that this statutory lien should then only be enforced in the context of some kind of a

proceeding where the claims of all the preferred creditors may be bindingly adjudicated, suchas insolvency proceedings.

• The action filed by petitioners in the trial court does not partake of the nature of an insolvencyproceeding. It is basically for specific performance and damages.

• Thus, even if it is finally adjudicated that petitioners herein actually stand in the position ofunpaid contractors and are entitled to invoke the contractor’s lien granted under Article 2242,such lien cannot be enforced in the present action for there is no way of determining whetheror not there exist other preferred creditors with claims over the San Antonio Public Market.The records do not contain any allegation that petitioners are the only creditors with respectto such property.

• Petitioners may only obtain possession and use of the public market by means of apreliminary attachment upon such property, in the event that they obtain a favorable judgment in the trial court. The trial court’s order of September 5, 1991 granting possessionand use of the public market to petitioners does not adhere to the procedure for attachmentlaid out in the Rules of Court.



2. Ordinary prefereed Credits



• Article 2244 enumerates the ORDINARYPREFERRED CREDITS

• Enjoy a preference but only as against the value of property not otherwise subjected to

special preferred credit.

• Creates no liens on the specific property.

• Simply creates rights in favor of creditors tohave the free property of the debtor.

***special preferred credits take precedence overthis.



• Art. 2244. With reference to other property, real and personal, of the debtor, the following claims orcredits shall be preferred in the order named:

• (1) Proper funeral expenses for the debtor, or children under his or her parental authority who have noproperty of their own, when approved by the court;

• (2) Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency;

• (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or herparental authority, if they have no property of their own;

• (4) Compensation due the laborers or their dependents under laws providing for indemnity fordamages in cases of labor accident, or illness resulting from the nature of the employment;

• (5) Credits and advancements made to the debtor for support of himself or herself, and family, duringthe last year preceding the insolvency;

• (6) Support during the insolvency proceedings, and for three months thereafter;

• (7) Fines and civil indemnification arising from a criminal offense;

• (8) Legal expenses, and expenses incurred in the administration of the insolvent’s estate for thecommon interest of the creditors, when properly authorized and approved by the court;

• (9) Taxes and assessments due the national government, other than those mentioned in Articles 2241,No. 1, and 2242, No. 1;

• (10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and2242, No. 1;

• (11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241,No. 1, and 2242, No. 1;

• (12) Damages for death or personal injuries caused by a quasi-delict;

• (13) Gifts due to public and private institutions of charity or beneficence;

• (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference amongthemselves in the order of priority of the dates of the instruments and of the judgments, respectively.(1924a)



Labor Code:

• Article 110. Worker preference in case ofbankruptcy. In the event of bankruptcy orliquidation of an employer’s business, his workers shall enjoy first preference as regards

their wages and other monetary claims, anyprovisions of law to the contrarynotwithstanding. Such unpaid wages andmonetary claims shall be paid in full before

claims of the government and other creditorsmay be paid. (As amended by Section 1,Republic Act No. 6715, March 21, 1989



RA 10142

• Section 133. Concurrence and Preference of Credits. - TheLiquidation Plan and its Implementation shall ensure that theconcurrence and preference of credits as enumerated in theCivil Code of the Philippines and other relevant laws shall beobserved, unless a preferred creditor voluntarily waives his

preferred right. For purposes of this chapter, credits forservices rendered by employees or laborers to the debtor shallenjoy first preference under Article 2244 of the Civil Code,unless the claims constitute legal liens under Article 2241 and2242 thereof.



3. Common Credits



• Are those that enjoy no preference

• Must only be paid after payment of theordinary preferred credits.

• There is only a concurrence of credits andmust be paid pro rate regardless of dates

• Are not liens.



CORDOVA VS REYES ETC LAW OFFICE• Petitioner Jose C. Cordova bought from PHILFINANCE certificates of stock of

Celebrity Sports Plaza Incorporated and shares of stock of various other corporations.

He was issued a confirmation of sale. The CSPI shares were physically delivered byPhilfinance to the former Filmanbank and Philtrust Bank, as custodian banks, to holdthese shares in behalf of and for the benefit of petitioner.

• Later, PHILFINANCE was placed under receivership by public respondent Securitiesand Exchange Commission (SEC). Thereafter, private respondents were appointed asliquidators. Without the knowledge and consent of petitioner and without authorityfrom the SEC, private respondents withdrew the CSPI shares from the custodianbanks. The private respondents sold the shares to Northeast Corporation and

included the proceeds thereof in the funds of Philfinance.• Petitioner learned about the unauthorized sale of his shares. He lodged a complaint

with private respondents but the latter ignored it prompting him to file a formalcomplaint against private respondents in the receivership proceedings with the SEC,for the return of the shares.

• SEC’S RULING: dismissing the petition. However, it reconsidered this decision in aresolution and granted the claims of petitioner. It held that petitioner was the owner ofthe CSPI shares by virtue of a confirmation of sale (which was considered as a deed of

assignment) issued to him by Philfinance. But since the shares had already been soldand the proceeds commingled with the other assets of Philfinance, petitioner’s status

was converted into that of an ordinary creditor for the value of such shares.

• CA’s RULING: affirmed the SEC. It agreed that petitioner was indeed the owner of theCSPI shares but the recovery of such shares had become impossible. Petitioner’smotion for reconsideration was denied.



• ISSUE:

• 1. Whether or not petitioner was indeed a creditor ofPhilfinance;

• 2. If YES, whether or not petitioner should be

considered as a preferred (and secured) creditor ofPhilfinance;

• 3. Whether or not petitioner can recover the full value ofhis CSPI shares or merely 15% thereof like all otherordinary creditors of Philfinance; and

• 4. Whether petitioner is entitled to legal interest.



RATIO:

• 1. YES, the petitioner become a creditor of Philfinance. The SEC, afterholding that petitioner was the owner of the shares, stated:

•

• “Petitioner is seeking the return of his CSPI shares which, for thepresent, is no longer possible, considering that the same had already been sold by the respondents, the proceeds of which are ADMITTEDLY commingled with the assets of PHILFINANCE.”

•

• Since the proceeds from the sale to Northeast are now admittedlycomingled with the assets of PHILFINANCE, petitioner is now but aclaimant for the value of those shares. As a claimant, he shall be

treated as an ordinary creditor in so far as the value of thosecertificates is concerned. Certainly, petitioner had the right to demandthe return of his CSPI shares.



• 2. No, the petitioner is not a preferred creditor.He is only an ORDINARY CREDITOR.Petitioner’s argument that he is a preferredcreditor is incorrect. He invoked the Civil Code

provision Article 2241 but Article 2241refers only to specific movable property. His claim was for the payment of money isgeneric property and not specific or

determinate.



• 3. YES, like all the other ordinary creditors orclaimants against Philfinance, he was entitledto a rate of recovery of only 15% of his moneyclaim.



• 4. NO, under this ruling, petitioner was not entitled to legalinterest of 12% per annum (from demand) because theamount owing to him was not a loan or forbearance of money.

• Neither was he entitled to legal interest of 6% per annum

under Article 2209 of the Civil Code since this provisionapplies only when there is a delay in the payment of a sum ofmoney which is not applicable in the given case.

• ***Considering that petitioner had already received theamount of P5,062,500, the obligation of the SEC as liquidatorof Philfinance was totally extinguished.

Documents

Concurrence & Preference of Credits Report