Bulk Sales Law; Covered Transactions (2000)

By: Lapuz
Company X, engaged in the business of manufacturing car parts
and accessories, operates a factory with equipment, machinery and
tools for this purpose. The manufactured goods are sold wholesale
to distributors and dealers throughout the Philippines. Company X
was among the business entities adversely hit by the 1997 Asian
business crisis. Its sales dropped with the decline in car sales and
its operating costs escalated, while its creditor banks and other
financial institutions tightened their loan portfolios. Company X
was faced with the dismal choice of either suspending its
operations or selling its business. It chose the latter. Having struck
a deal with Company Z, a more viable entity engaged in the same
business, Company X sold its entire business to the former without
much fanfare or any form of publicity. In fact, evidence exists that
the transaction was furtively entered into to avoid the prying eyes
of Company X‘s creditors. The creditor banks and other financial
institutions sued Company X for violation of the Bulk Sales Law.
Decide. (5%)
SUGGESTED ANSWER:
Company X violated the Bulk Sales Law when it sold its entire
business to Company Z furtively to avoid the prying eyes of its
creditors. Its manufactured goods are sold wholesale to
distributors and dealers. The sale of all or substantially all of
its stocks, not in the ordinary course of business, constitutes
bulk sale. The transaction being a bulk sale, entering into such
transaction without complying with the requirements of the
Bulk Sales Law, Company X violated said law.
 Chattel Mortgage vs. After-Incurred Obligations (1999)
By: Lapuz

On December 1, 1996, Borrower executed a chattel mortgage in

favor of the Bank to secure a loan of P3M. In due time the loan
was paid. On December 1, 1997, Borrower obtained another loan
for P2M which the Bank granted under the same security as that
which secured the first loan.
For the second loan, Borrower merely delivered a promissory note;
no new chattel mortgage agreement was executed as the parties
relied on a provision in the 1996 chattel mortgage agreement
which included future debts as among the obligations secured by
the mortgage. The provision reads:
―In case the Mortgagor executes subsequent promissory note or
notes either as a renewal, as an extension, or as a new loan, this
mortgage shall also stand as security for the payment of said
promissory note or notes without necessity of executing a new
contract and this mortgage shall have the same force and effect as
if the said promissory note or notes were existing on date hereof.ǁ
As Borrower failed to pay the second loan, the Bank proceeded to
foreclose the Chattel Mortgage.Borrower sued the Bank claiming
that the mortgage was no longer in force. Borrower claimed that a
fresh chattel mortgage should have been executed when the second
loan was granted.
a) Decide the case and ratiocinate. (4%)
b) Suppose the chattel mortgage was not registered, would its
validity and effectiveness be impaired? Explain. (4%)
SUGGESTED ANSWER:
A. The foreclosure of the chattel mortgage regarding the
second loan is not valid. A chattel mortgage cannot validly
secure after incurred obligations. The affidavit of good faith
required under the chattel mortgage law expressly provides
that ―the foregoing mortgage is made for securing the
obligation specified in the conditions hereof, and for no other
purpose.ǁ The after-incurred obligation not being specified in
the affidavit, is not secured by mortgage.
B. Yes. The chattel mortgage is not valid as against any person,
except the mortgagor, his executors and administrators.

Credit Transactions (1999)

By: Lapuz

Various buyers of lots in a subdivision brought actions to compel

either or both the developer and the bank to lease and deliver free
and clear the titles to their respective lots.
The problem arose because notwithstanding prior sales mostly on
installments – made by the developer to buyers, developer had
mortgaged the whole subdivision to a commercial bank. The
mortgage was duly executed and registered with the appropriate
governmental agencies. However, as the lot buyers were
completely unaware of the mortgage lien of the bank, they
religiously paid the installments due under their sale contracts.
As the developer failed to pay its loan, the mortgage was
foreclosed and the whole subdivision was acquired by the bank as
the highest bidder. a) May the bank dispossess prior purchasers of
individual lots or, alternatively, require them to pay again for the
paid lots? Discuss (3%)
b) What are the rights of the bank vis-à-vis those buyers with
remaining unpaid installments? Discuss. (3%) Recommendation:
Since the subject matter of these two (2) questions is not included
within the
scope of the Bar Questions in Mercantile Law, as it is within Civil
Law, it is suggested that whatever answer is given by the
examinee, or the lack of answer should be given full credit. If the
examinee gives a good answer, he should be given additional
credit.
SUGGESTED ANSWER:
A. No. The bank may not dispossess the prior purchasers of the
individual lots, much less require them to pay for the said lots.
The bank has to respect the rights of the prior purchasers of
the individual lots. The purchasers have the option to pay the
installments of the mortgagee.
B. The bank has to respect the rights of the buyers with
remaining unpaid installments. The purchaser has the option
to pay the installments to the mortgagee who should apply the
payments to the mortgage indebtedness.
Mortgage (1999)
By: Lapuz
Debtor purchased a parcel of land from a realty company payable
in five yearly installments. Under the contract of sale, title to the
lot would be transferred upon full payment of the purchase price.
But even before full payment, debtor constructed a house on the
lot. Sometime thereafter, debtor mortgaged the house to secure his
obligation arising from the issuance of a bond needed in the
conduct of his business. The mortgage was duly registered with the
proper chattel mortgage registry.
Five years later after completing payment of the purchase price,
debtor obtained title to the lot. And even as the chattel mortgage on
the house was still subsisting, debtor mortgaged to a bank the lot
and improvement thereon to secure a loan. This real estate
mortgage was duly registered and annotated at the back of the title.
Due to business reverses, debtor failed to pay his creditors. The
chattel mortgage was foreclosed when the debtor failed to
reimburse the surety company for payments made on the bond. In
the foreclosure sale, the surety company was awarded the house as
the highest bidder.
Only after the foreclosure sale did the surety company learn of the
real estate mortgage in favor of the lending investor on the lot and
the improvement thereon. Immediately, it filed a complaint praying
for the exclusion of the house from the real estate mortgage. It was
submitted that as the chattel mortgage was executed and registered
ahead, it was superior to the real estate mortgage.
On the suggestion that a chattel mortgage on a house- a real
property- was a nullity, the surety company countered that when
the chattel mortgage was executed, debtor was not yet the owner of
the lot on which the house was built. Accordingly, the house was a
personal property and a proper subject
of a chattel mortgage.
A. Discuss the validity of the position taken by the surety
company. (3%)
B. Who has a better claim to the house, the surety company or the
lending investor? Explain (3%)
C. Would the position of the surety company be bolstered by the
fact that it acquired title in a foreclosure sale conducted by the
Provincial Sheriff. Explain (3%)
SUGGESTED ANSWER:
a) The house is always a real property even though it was
constructed on a land not belonging to the builder. However,
the parties may treat it as a personal property and constitute a
chattel mortgage thereon. Such mortgage shall be valid and
binding but only on the parties. It will not bind or affect third
parties.
b) The lending investor has a better claim to the house. The
real estate mortgage covering the house and lot was duly
registered and binds the parties and third persons. On the
other hand, the chattel mortgage on the house securing the
credit of the surety company did not affect the rights of third
parties such as the lending investor despite registration of the
chattel mortgage.
c) No. The chattel mortgage over the house which was
foreclosed did not affect the rights of third parties like the
lending investor. Since the third parties are not bound by the
chattel mortgage, they are not also bound by any enforcement
of its provisions. The foreclosure of such chattel mortgage did
not bolster or add anything to the position of the surety
company.

Garnishment or Attachment of Goods (1999)

By: Lapuz
A Warehouse Company received for safekeeping 1000 bags of rice
from a merchant. To evidence the transaction, the Warehouse
Company issued a receipt expressly providing that the goods be
delivered to the order of said merchant. A month after, a creditor
obtained judgment against the said merchant for a sum of money.
The sheriff proceeded to levy on the rice and directed the
Warehouse Company to deliver to him the deposited rice.
a. What advice will you give the Warehouse Company? Explain
(2%)
b. Assuming that a week prior to the levy, the receipt was sold to a
rice mill on the basis of which it filed a claim with the sheriff.
Would the rice mill have better rights to the rice than the creditor?
Explain your answer. (2%)
SUGGESTED ANSWER:
a. The 1000 bags of rice were delivered to the Warehouse
Company by a merchant, and a negotiable receipt was issued
therefor. The rice cannot thereafter, while in the possession of
the Warehouse Company, be attached by garnishment or
otherwise, or be levied upon under an execution unless the
receipt be first surrendered to the warehouseman, or its
negotiation enjoined. The Warehouse Company cannot be
compelled to deliver the actual possession of the rice until the
receipt is surrendered to it or impounded by the court.
b. Yes. The rice mill, as a holder for value of the receipt, has a
better right to the rice than the creditor. It is the rice mill that
can surrender the receipt which is in its possession and can
comply with the other requirements which will oblige the
warehouseman to deliver the rice, namely, to sign a receipt for
the delivery of the rice, and to pay the warehouseman‘s liens
and fees and other charges.

Suspension of Payments; Rehabilitation Receiver (1999)

By: Lapuz
Debtor Corporation and its principal stockholders filed with the
Securities and Exchange Commission (SEC) a petition for
rehabilitation and declaration of a state of suspension of payments
under PD 902- A. The objective was for SEC to take control of the
corporation and all its assets and liabilities, earnings and
operations, and to determine the feasibility of continuing
operations and rehabilitating the company for the benefit of
investors and creditors.
Generally, the unsecured creditors had manifested willingness to
cooperate with Debtor Corporation. The secured creditors,
however, expressed serious objections and reservations.
First Bank had already initiated judicial foreclosure proceedings on
the mortgage constituted on the factory of Debtor Corporation.
Second Bank had already initiated foreclosure proceedings on a
third-party mortgage constituted on certain assets of the principal
stockholders.
Third Bank had already filed a suit against the principal
stockholders who had held themselves liable jointly and severally
for the loans of Debtor Corporation with said Bank.
After hearing, the SEC directed the appointment of a rehabilitation
receiver and ordered the suspension of all actions and claims
against the Debtor corporation as well as against the principal
stockholders.
a) Discuss the validity of the SEC order or suspension?(2%)
b) Discuss the effects of the SEC order of suspension on the
judicial foreclosure proceedings initiated by First Bank. (2%)
c) Would the order of suspension have any effect on the
foreclosure proceedings initiated by Second Bank? Explain (2%)
d) Would the order of suspension have any effect on the suit filed
by Third Bank? Explain. (2%) e) What are the legal consequences
of a rehabilitation receivership? (2%)
f) What measures may the
receiver take to preserve the assets of Debtor Corporation? (2%)
SUGGESTED ANSWER:
a. The SEC order of suspension of payment is valid with
respect to the debtor corporation, but not with respect to the
principal stockholders. The SEC has jurisdiction to declare
suspension of payments with respect to corporations,
partnership or associations, but not with respect to individuals.
:
b. The SEC order of suspension of payment suspended the
judicial proceedings initiated by the First Bank. According to
the Supreme Court in a line of cases, the suspension order
applies to secured creditors and to the action to enforce the
security against the corporation regardless of the stage thereof.
c. The order of suspension of payments suspended the
foreclosure proceedings initiated by the Second Bank. While
the foreclosure is against the property of a third party, it is in
reality an action to collect the principal obligation owned by
the corporation. During the time that the payment of the
principal obligation is suspended, the debtor corporation is
considered to be not in default and, therefore, even the right to
enforce the security, whether owned by the debtor-corporation
or of a third party, has not yet arisen.
ALTERNATIVE ANSWER:
c. The suspension order does not apply to a third party
mortgage because in such a case, the credit is not yet being
enforced against the corporation but against the third party
mortgagor‘s property.
d. For the same reason as in (c), the order of suspension of
payments suspended the suit filed by Third Bank against the
principal stockholders.
ALTERNATIVE ANSWER:
d. The action against the principal stockholders‘ surety in
favor of the corporation is not suspended as it is not an action
against the corporation but against the stockholders whose
personality is separate from that of the corporation.
e. Under PD 902A, the appointment of a rehabilitation receiver
will suspend all actions for claims against the corporation and
the corporation will be placed under rehabilitation in
accordance with a rehabilitation plan approved by the SEC.
f. To preserve the assets of the Debtor Corporation, the
receiver may take custody of, and control over, all the existing
assets and property of the corporation; evaluate existing assets
and liabilities, earnings and operations of the corporation; and
determine the best way to salvage and protect the interest of
the investors and creditors.