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CONCURRENCE & PREFERENCE OF CREDITS(Articles 2236-2251)

CONCURRENCE OF CREDITS, definition.It implies possession by two or more creditors of equal right or privileges over the same property or all of the property of a debtor.

PREFERENCE OF CREDIT, definition.It is the right held by a creditor to be preferred in the payment of his claim above other out of the debtor’s assets.

NATURE AND EFFECT OF PREFERENCE1. A preference is an exception to the general rule. For this reason, the

law as to preferences is strictly construed. 2. Preference does not create an interest in property. It creates simply

a right of one creditor to be paid first the proceeds of the sale of property as against another creditor.

3. The law does not give the creditor who has a preference a right to take the property or sell it as against another creditor. It is not a question who takes or sells, it is one of the application of the proceeds after the sale—of payment of the debt.

4. The right of preference is one which can be made only by being asserted and maintained. If the right claimed is not asserted or maintained, it is lost.

5. Where a creditor released his levy, leaving the property in possession of the debtor, thereby indicating that he did not intend to press his claim further as to that specific property, after that act, his claim to preference, if one had been asserted y him, could not exist because he had ceased to contest.

WHEN RULE OF PREFERENCE APPLICABLE1. Apply only where two or more creditors have separate and

distinct claims against the same debtor who has an insufficient property

2. Is applicable when the debtor is insolvent—having more liabilities than his assets

3. It is a matter of necessity and log that the question of preference should arise only when the debtor’s assets are insufficient to pay his debts in full


GENERAL PROVISIONS

ART. 2236 The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law.

GENERAL RULE: Debtors is liable with all his property present and future for the fulfillment of his obligations.

EXEMPT PROPERTY: 1. Present property- provided under Articles 152, 153, 154, 155,

205(Family Code); Section 13 Rule 39 of the Rules of Court; Section 118 of CA 141

Art. 152. The family home, constituted jointly by the husband and the wife or by an unmarried head of a family, is the dwelling house where they and their family reside, and the land on which it is situated.

Art. 153. The family home is deemed constituted on a house and lot from the time it is occupied as a family residence. From the time of its constitution and so long as any of its beneficiaries actually resides therein, the family home continues to be such and is exempt from execution, forced sale or attachment except as hereinafter provided and to the extent of the value allowed by law.

Art. 154. The beneficiaries of a family home are: (1) The husband and wife, or an unmarried person who is the head of a family; (2) Their parents, ascendants, descendants, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support.

Art. 155. The family home shall be exempt from execution, forced sale or attachment except:

(1)For nonpayment of taxes; (2)For debts incurred prior to the constitution of the family

home; (3)For debts secured by mortgages on the premises before or

after such constitution; and (4)(4) For debts due to laborers, mechanics, architects, builders,

material men and others who have rendered service or furnished material for the construction of the building.

Art. 205. The right to receive support under this Title as well as any money or property obtained as such support shall not be levied upon on attachment or execution.

a) The right to support, annuities, pensions (in certain instances);b) Properties in custodia legis;


c) Properties of a municipal corporation used for governmental purposes;

d) In certain cases, homesteads acquired under the Public Land Act; ( Future property ) and

e) Those mentioned in Rule 39, Sec. 13, Rules of Court.

Sec. 13. Property exempt from execution. Except as otherwise expressly provided by law, the following property, and no other, shall be exempt from execution:

(a) The judgment obligor's family home as provided by law, or the homestead in which he resides, and land necessarily used in connection therewith;

(b) Ordinary tools and implements personally used by him in his trade, employment, or livelihood;

(c) Three horses, or three cows, or three carabaos, or other beasts of burden such as the judgment obligor may select necessarily used by him in his ordinary occupation;

(d) His necessary clothing and articles for ordinary personal use, excluding jewelry;

(e) Household furniture and utensils necessary for housekeeping, and used for that purpose by the judgment obligor and his family, such as the judgment obligor may select, of a value not exceeding one hundred thousand pesos;

(f) Provisions for individual or family use sufficient for four months;

(g) The professional libraries and equipment of judges, lawyers, physicians, pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other professionals, not exceeding three hundred thousand pesos in value;

(h) One fishing boat and accessories not exceeding the total value of one hundred thousand pesos owned by a fisherman and by the lawful use of which he earns his livelihood;

(i) So much of the salaries, wages, or earnings of the judgment obligor of his personal services within the four months preceding the levy as are necessary for the support of his family;

(j) Lettered gravestones; (k) Monies benefits, privileges, or annuities accruing or in any

manner growing out of any life insurance; (l) The right to receive legal support, or money or

property obtained as such support, or any pension or gratuity from the Government;


(m) Properties specially exempt by law.

But no article or species of property mentioned in this section shall be exempt from execution issued upon a judgment recovered for its price or upon a judgment of foreclosure of a mortgage thereon.

2. Future Property – Those related to insolvency of debtor

Note: Insolvency Law Sec. 68-69 provides that a debtor who obtains a

discharge from his debts on account of his insolvency, is not liable for the

unsatisfied claims of his creditors with said property subject to certain

exceptions expressly provided by law.

3. Property under legal custody and those owned by municipal

corporations necessary for governmental purposes.

What can the creditor do if the debtor has no money?1) Attach property not exempt from attachment;

Properties exempt from attachment:a) The family home, except in certain cases (Art.

155)—see exemption above

2) Exercise accion subrogatoria; Accion subrogatoria. The right to exercise all rights and

actions except those inherent in the person.

3) Exercise accion pauliana; Accion pauliana . Impugn or rescind acts or contracts

done by the debtor to defraud the creditors.

4) Ask for dation in solutum, cession, file insolvency proceedings; and

Datio in solutum. Roman word which implies giving in payment or in clearer terms, it refers to an act of discharging a debt by giving something instead of paying in money. In this method any movable or immovable property can be given to the creditor instead of money to satisfy the creditors claim.

Cession. Refers to the assignment of property to another entity.

Reg. Insolvency Proccedings : Insolvency proceedings can only be resorted to if all the requisite conditions are present.

5) Wait until the debtor has money or property in the future. Requisite: The obligations must already be due.


ART. 2237 Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code.

The Civil Code prevails over special laws. INSOLVENCY LAW WILL COME INTO PLAY AFTER THE RULES OF

PREFERENCE AND CONCURRENCE OF CREDITS. DEBTOR MUST BE THE ABSOLUTE OWNER

The civil code prevails over conflicts with special laws on insolvency

unless otherwise provided in the latter.

Art. 110 LC: “in the event of bankcruptcy or liqudation of an

employer’s business, his workers shall enjoy first preference as regards

unpaid wages and other monetary claims…before claims of the

government and other creditors may be paid”

o it covers unpaid wages and other monetary claims

ART. 2238 So long as the conjugal partnership or absolute community subsists, its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor’s obligations, except insofar as the latter have redounded to the benefit of the family. If it is the husband who is insolvent, the administration of the conjugal partnership or absolute community may, by order of the court, be transferred to the wife or to a third person other than the assignee.

Exemption of properties of the Conjugal Partnership or of the Absolute Community applies provided that:

The conjugal partnership or the absolute community subsists; and

The obligation did not redound to the benefit of the family.

ART. 2239 If there is property, other than that mentioned in the preceding article, owned by two or more persons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor’s obligations.

Rule in case of co-ownership: The undivided share or interest shall be possessed by the assignee.

ARTICLE 2238 AND 2239 DISTINGUISHED

Article 2238 Article 2239If one of the spouses is insolvent, the assets of the conjugal partnership of

If there is co-ownership and one of the co-owners is an insolvent debtor, his


gains (CPG) or absolute community (AC) do not pass to the assignee in insolvency elected by the creditors or appointed by the court.

Reason: The CPG or AC is distinct from the individual spouses

undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets.

Exemption applies provided that: 1. the CPG or AC subsists;2. obligations of the insolvent spouse

have not redounded to the benefit of the family.

INSOLVENCY OF THE HUSBAND DOES NOT HAVE THE EFFECT OF DISSOLVING THE CPG OR AC.

ART. 2240 Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings.

Reason for the article: The trustee is not the owner of the property held. Thus, it should not respond for the insolvent trustee’s obligation.

RULES INVOLVING UNDIVIDED SHARE OR INTEREST OF A CO-OWNER

If there is a co-ownership and of the co-owners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets

The shares of the other co-owners of course cannot be taken possession of by the assignee

CLASSIFICATION OF CREDITS

ART. 2241 With reference to specific movable property of the debtor, the following claims or liens shall be preferred:

1. Duties, taxes and fees due thereon to the State or any subdivision thereof;

2. Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them;

3. Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the


value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally;

4. Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;

5. Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed;

6. Claims for laborers’ wages, on the goods manufactured or the work done;

7. For expenses of salvage, upon the goods salvaged;8. Credits between the landlord and the tenant, arising from the

contract of tenancy on shares, on the share of each in the fruits or harvest;

9. Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses until the delivery and for thirty days thereafter;

10. Credits for lodging and supplies usually furnished to travellers by hotel keepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests;

11. Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested;

12. Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit;

13. Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale.

In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure.

The order in this article is not important. What is important is…a) Those credits which enjoy preference with respect to specific

movables exclude all others to the extent of the value of the personal property to which preference refers. (Art. 2246)

b) If there are two or more credits with respect to the same movable property, they shall be satisfied pro rata, after the payment of duties, taxes, and fees due the State or any subdivision thereof (Art. 2246)

c) Duties, taxes, and fees due the Government enjoy priority only when they are with reference to a specific movable property


under Art. 2241 (1) or immovable property under Art. 2242 (1) of the same code.

Lien (definition). A charge upon property subject to lien. In a broad sense, it means the liability of property for a certain legal duty, or a right to resort to certain property to enforce duty.

Preference vs. Lien. Preference applies only to claims which do not attach to specific properties. While a lien creates a charge on a particular property.

GENERAL CATEGORIES OF CREDIT1. Special preferred credits listed in Articles 2241 and 2242 2. Ordinary preferred credits listed in Article 2244 3. Common credits under Article 2245

PREFERRED CREDITS WITH RESPECT TO SPECIFIC MOVABLE PROPERTY

Articles 2241 and 2242 don’t give the order of preference or priority of payment

They merely enumerate the credits which enjoy preference with respect to specific movables or immovables

With respect to the same specific movable or immovable, creditors with the exception of the State, merely concur

REMEMBER that preference is only given to #1 and the rest shall be treated equally

WRONGFUL TAKING OF MOVABLES TO WHICH LIEN ATTACHES

Last paragraph applies only when the right of ownership in such property continues in the debtor, and therefore, is not applicable to cases where the debtor has parted his ownership therein, as where he has sold the property

ART. 2242 With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute as encumbrance on the immovable or real right:

1. Taxes due upon the land or building;2. For the unpaid price of real property sold, upon the immovable

sold;3. Claims of laborers, masons, mechanics and other workmen, as

well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works;

4. Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works;

5. Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;


6. Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved;

7. Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits;

8. Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided;

9. Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;

10. Credits of insurers, upon the property insured, for the insurance premium for two years.

Like Art. 2241, the order in this article is not important. It must be stressed that with the sole exception of the State, the

creditors with respect to the same specific immovable merely concur, there is no preference.

Concurrence vs. Preferenceo A concurrence of credit implies the possession by 2 or more

creditors of equal rights or privileges over the same property or all of the property of the debtor. A preference of credit is the right held by a creditor to be preferred in the payment of his claim above others out of the debtor’s assets.

o A concurrence or preference of credit does not create a lien. It merely creates a right of 1 creditor to be paid first as against other creditors.

o A preference applies only to claims that do not attach to specific properties, while a lien creates a charge on a particular property.

o Concurrence of credits raises no question of consequence where value of property or asset not sufficient. When property not sufficient, preference arises.

o Where there is concurrence; credits stand equally, without priority among themselves, and satisfied pro rata.

ART. 2243 The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Art. 2241, and No. 1, Art. 2242 shall first be satisfied.

This article speaks of the nature of claims or credits --- they are considered as pledges or mortgages.

NATURE OF CLAIMS OR CREDITS IN ARTICLES 2241 AND 2242 Articles 2241 and 2242 apply only when there is a

concurrence of credits when the same specific property of the debtor is subjected to the claims of several creditors and


the value of such property is insufficient to pay in full all the creditors

In such situation, the question of preference will arise, there will be a need to determine which of the creditors will be paid ahead of the others

ART. 2244 With reference to other property, real and personal of the debtor, the following claims or credits shall be preferred in the order named:

1. Proper funeral expenses for the debtor, or children under his or her parental authority who have no property 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 her parental authority, if they have no property of their own;

4. Compensation due the laborers or their dependents under laws providing for indemnity for damages 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, during the 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 the common 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 assessment due any province, other than those mentioned in Articles 2241, No.1 and 2242, No.1;

11. Taxes and assessment due any city or municipality, other than those mentioned 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 among themselves in the order of priority of the dates of the instruments and of the judgments, respectively.

The order of preference here in Art. 2244 is very important. The order of preference here does not refer to specific real or personal

property. It refers to other property.


Taxes are placed only as pars 9, 10, 11. This rule applies to property other than specific. If the property is specific, taxes are given first preference.

Regarding par. 14, it would seem here that an ordinary credit evidenced by a public instrument and a final judgment are placed on an equal plane; hence, if both are of the same date, there will be a pro rata sharing.

ORDER OF PRIORITY ONLY WITH RESPECT TO INSOLVENT’S FREE PROPERTY

1. Specially preferred credits— credits which are specially preferred because they constitute liens take precedence over ordinary preferred credits so far as concerns the property to which the liens are attached

a. Specific property involved of greater value b. Specific property involved of lesser value—will be

treated as ordinary preferred credits and to be paid in the order of preference therein provided

2. Ordinary preferred credits—only in respect of the insolvent’s free property, is an order of priority established. In this sequence, certain taxes and assessments also figure but, as already pointed out, these don’t have the same kind of overriding preference

ART. 2245 Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference.

NON-PREFERRED OR COMMON CREDITS Credits other than those mentioned in 2241, 2242, and

2244 shall enjoy no preference and such common credits shall be paid pro rata regardless of dates

ORDER OF PREFERENCE OF CREDITS

ART. 2246 Those credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers.

ART. 2247 If there are two or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes, and fees due to the State or any subdivision thereof. The


credits over specific personal or movable properties are those enumerated in Article 2241 of the Civil Code.

Sample Problem: Sonia has one car, the taxes on which have not yet been paid. Once, the car fell into the sea, was salvaged, was repaired, and has now been pledged with a creditor. If Sonia is insolvent and has not paid for any of the acts done on her car, how will the following be paid: the State, the person who salvaged it, the repairer, and the pledgee?

o Answer: a) All said 4 creditors have preference over the car to the

exclusion of all other creditors.b) The State will first be paid for taxes on the car.c) The salvager, the repairman, and the pledgee will all be

paid pro rata from the remaining value of the car.

ART. 2248 Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers.

ART. 2249 If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real rights. The credits, which refer to real rights or immovable properties, are enumerated in Article 2242 of the Civil Code.

When is prorating under the law applicable? In order to make prorating fully effective, the preferred creditors

enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened and the, and the import of their claims ascertained. It is thus apparent that the full application of Art. 2249 and 2242 demands that there must first be some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent’s estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.

Note: With the sole exception of the State, the creditors with respect to the same property merely concur; there is no preference.

ART. 2250 The excess, if any after the payment of the credits which preference with respect to specific property, real or personal, shall be added to the free property which the debtor may have, for the payment of the other credits.


ART. 2251 Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:

(1) In the order established in Article 2244;(2) Common credits referred to in Article 2245 shall be paid pro rata

regardless of dates.Unlike in Arts 2241 and 2242 which refers to movable and immovable properties, respectively; the order of preference in this provision refers to other properties.

Sample Problem: A, an insolvent owes P500,000.00 in favor of a funeral parlor, P1 million for the hospital expenses during the cancer illness of his wife, and P100,000 in favor of a pedestrian whom he had hurt while driving his car carelessly and for which he was criminally and civilly liable. Unfortunately, he has only P600,000.00 and an automobile, the purchase price of which he has not yet paid. Give the order of preference of the various creditors involved.

Answer: a) With respect to the automobile (specific personal property)

the unpaid seller shall be preferred.b) With respect to the P600,000.00, Art. 2244 should be

applied. The funeral parlor comes first, then the hospital, then the pedestrian. Here there is no pro rata sharing; there is a preference. Therefore, the funeral parlor will be given P500,000.00; the hospital only P100,000.00. The hospital cannot recover the deficiency of P900,000.00; and the pedestrian cannot recover his P100,000.00.

As regards the other kinds of credits, the rule is: there is no preference.

TWO-TIER ORDER OF PREFERENCE First tier includes only taxes, duties and fees due on a

specific movable or immovable property All other special preferred credits stand on the second tier to be

satisfied pari passu and pro rata, out of the residual value of the specific property to which such other credits relate

The pro-rata rule however doesn’t apply to credits annotated in the RD in virtue of a judicial order, by attachments and executions, which are preferred to later credits. In satisfying several credits annotated by attachments and executions, the rule is still preference according to the priority of credits in the order of time.

PROCEEDING FOR PAYMENT PRO RATA OF PREFERRED CREDITORS

Proceeding required for adjudication of claims of preferred creditors

Pro rata rule contemplates more than one creditor


Art. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:

(1)In the order established in Article 2244; (2)Common credits referred to in Article 2245 shall be paid pro rata

regardless of dates. SUMMARY AS TO ORDER OF PREFERENCE

1. Preferred lien on specific immovables 2. Preferred lien on specific movables 3. Special preferred credits 4. Distribute pro-rata to creditors without preference

What is preference of credit?It is the right held by a creditor to be preferred in the payment of his claim out of the debtor’s assets above others. In other words, it is the right to be paid first.

NATURE AND EFFECT OF PREFERENCE1. Exception to the general rule – Because, generally, you have

to pay your creditors when the debt becomes due. There should be no rules as to who should be paid first. Preference applies only when there are two or more creditors with separate claims against a debtor who has insufficient property. Since it is an exception to the general rule, the law as to preferences is strictly construed.

2. Does not create an interest in property – Preference simply creates a right to be paid first from the proceeds of the sale of property of the debtor. It does not create a lien on the property itself, but merely a preference in the application of the proceeds of the property after it is sold.

3. The creditor does not have the right to TAKE the property or SELL it as against another creditor – Preference is not a question as to who may take and sell property belonging to the debtor. Preference applies after a sale, and it is a question of application of the proceeds of the sale to satisfy the debt.

4. It must be asserted – If the right claimed is not asserted and maintained, it is lost. If property has not been seized, it is open to seizure by another.

5. It must be maintained – Where a creditor released his levy, leaving the property in possession of the debtor, thereby


indicating that he did not intend to press his claim further as to that specific property, he is deemed to have abandoned his claim of preference.

When are the rules on preference of credits applicable?The rules apply only where:

6. there are two or more creditors7. with separate and distinct claims8. against the same debtor9. who has insufficient property.

There must be a proceeding such as an insolvency proceeding wherein the creditors can file their claims. The right becomes significant only after the properties of the debtor have been inventoried and liquidated, and the claims of the various creditors have been established. Because before that, you have no way of knowing who the creditors are, and you have no liquidated property out of which you can pay them.

APPLYING THE RULES

STEP 1: MAKE AN INVENTORY OF ASSETS

List down all the assets of the debtor.

Group these assets into two: the Preferred Group and the Free Property Group.Those assets with special preferred claims under 2241 and 2242 imposed upon them belong to the Preferred Group.

Those without special preferred claims will constitute the debtor’s Free Property. Remember to take out property held by the debtor only in the capacity of trustee. He may have legal title to it, but the beneficial title and ownership actually belong to another person. Since the property does not belong to the debtor, they should not be included in the proceedings. The same goes for property of the AC of CPG, property held as lessee or usufructuary, etc.

STEP 2: GROUP THE CLAIMSMake four groups – (1) special preferred credits on movables, (2) special preferred credits on immovables, (3) ordinary preferred credits, and (4) common credits.

Put the ordinary preferred claims under 2244 together. List them down according to the order under2244, since 2244 already gives the order of preference. Remember, though, that labor claims are on top.Put the other credits not falling under these three together. These are the common claims. The usual example is a promissory note in a private instrument.


STEP 3: SATISFY THE SPECIAL PREFERRED CLAIMS

First: Take the value of the specific movable/immovable upon which the preferred claim is imposed.

Second: Pay the taxes due on the property.

Third: Pay the preferred claim of the creditor.

Fourth: If, after paying the taxes and other special preferred claims, there is an excess, take the valueof the excess and add it to the debtor’s Free Property.

Fifth: If the value of the specific property is not enough to satisfy the taxes and other special preferredclaims, and there is a deficiency, follows these rules:

a. If the deficiency is in a credit arising from a pledge, real mortgage, or chattel mortgage,put the deficiency in the ordinary preferred credits group. Why do we know right awaythat it is an ordinary preferred credit? It is a credit in a public instrument, so it is anordinary preferred credit under (14) of 2244. You know it’s in a public instrument becauseit was treated at first as a special preferred credit, and the requirement under 2241 and2242 is that these transactions be registered (for real and chattel mortgage) or be in apublic document (for pledge).

b. If the deficiency is in a credit arising from a transaction that is not in a public document oris not contained in a final judgment (ex: unrecorded sale), put the deficiency in thecommon credits group.

STEP 4: UPDATE THE INVENTORY AND LIST OF CREDITSAfter you have satisfied all of the special preferred claims, update the following:

1. The inventory of assets -- You may have to add to the Free Property Group if, after satisfying the special preferred claims, you have an excess. Make sure that you add the excess to the Free Property Group. Add up the entire value of the Free Property Group because this is what you will use to settle the ordinary preferred claims and the common claims.

2. The list of ordinary preferred claims. If there was a deficiency in satisfying the special preferred claims, the deficiency will be an ordinary preferred credit if it is notarized or is contained in a final judgment.


3. The list of common claims. If there was a deficiency in satisfying the special preferred claims, the credit will be a common credit if it is not notarized or contained in a final judgment.

STEP 5: SATISFY THE ORDINARY PREFERRED CLAIMSList down all the ordinary preferred claims in the order in which they are listed in 2244. This is theorder of preference among them.Most probably, there will be several credits in public instruments and final judgments. Arrange theseby date. Those falling on the same date will enjoy equal preference and will share the balance of thefree property proportionately.

STEP 6: SATISFY THE COMMON CLAIMSWhatever is remaining of the debtor’s free property will be used to satisfy the common claims. Since these will not be enough to cover the debtor’s remaining liabilities (he’s insolvent), the common creditors will share the balance in proportion to the amount of their credit, regardless of the date.

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