The items in bold face are the important/relevant ones:
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, repairs, 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 their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to travelers 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.
First, you must remember that, aside from item (1) on taxes imposed in connection with the movable, 2141 does establish the order of priority among these claims. It just enumerates the preferred claims with respect to specific movables.
With respect to the same specific movable or immovable, creditors merely concur. There is no preference among them, except that the State always gets paid the taxes imposed on the property first.
(1) Taxes
The tax must be due on the movable itself.
(2) Misappropriation, breach of trust, malfeasance of public officers The acquisition must have been in the performance of official functions.
Also, the property must still be in the hands of the public official. If it is sold to a purchaser for value and in good faith, there can be no more claim on the movable.
(4) Guaranteed with a pledge or chattel mortgage
To be a preferred credit:
If it’s a pledge, it must be in a public instrument.
If it’s a chattel mortgage, it must be registered in the chattel mortgage registry.
Last paragraph of 2241
If the movable is wrongfully taken, the preferred creditor may get it back within 30 days through an accion subrogatoria, exercising the right of the debtor to recover property wrongfully taken from him granted under Article 559.
Problem: The Debtor’s only property is a Jaguar worth P2.5M. His liabilities are:
a. to the Government: Income tax of P1M
Import duties on the car worth P1M b. chattel mortgage on the car worth P2M
c. unpaid price of the car of P1M d. P1M promissory note (notarized)
What are the preferred claims with respect to the Jaguar?
1. P1M import duties on the car 2. P2M chattel mortgage 3. P1M unpaid price
These are the only preferred claims because they are the ones attached to the movable itself.
The income tax and the promissory note are not preferred because they are not attached to the car.
How do you prioritize the preferred claims?
1. P1M import duties – the State is always the priority with respect to preferred claims 2. The chattel mortgagee and the unpaid seller will then proportionally share the P1.5M
left: P1M will go to the mortgagee and 500K will go to the unpaid seller.
Note, however, that taxes are not always preferred. For example, income tax is not preferred with respect to the Jaguar. In order to be preferred, the tax must be imposed on the movable itself.
Õ This has to be done in the context of insolvency proceedings.
Problem: Government official used public funds to acquire a Jaguar from a seller in good faith. Government official becomes insolvent. The Government wants to recover the car. If you’re government counsel, how should you proceed?
The textbook answer would be that the government can go after the car in insolvency proceedings. It has a preferred claim over the car under par. (2) of 2241. But, the
disadvantage of this is that, unlike the government claim for tax credits, it is not prioritized over other special preferred claims. The government would have to share with the other creditors who likewise have a special preferred claim on the Jaguar, such as an unpaid seller.
The better alternative is to characterize it as an implied TRUST. When funds belonging to another (in this case, the government) are used to purchase a movable under the name of another person (the corrupt government official), there is an implied trust. The trustor is the government, while the trustee is the government official. The trustor/government actually owns the car. There is thus no need to go through the insolvency proceedings, since the Jaguar is not among the properties of the insolvent debtor.
Under a trust agreement, X gave Investment House some money. Investment House placed the money in a time deposit. Investment House issued promissory notes for its obligations to other creditors.
If Investment House becomes insolvent, X can show that the money is not owned by Investment House, so it should be excluded from the insolvency proceedings.
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 an 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-heir 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.
(1) Taxes
Capital gains tax is NOT a preferred credit because it is really a tax on income and not on the property itself.
This provision covers real property taxes.
(2) Unpaid Seller
There is no need to register the sale in order for the unpaid seller to have a preferred claim against the immovable.
(5) Mortgage
The mortgage must be registered in the Registry of Property in order for the credit to be a preferred claim against the immovable.
(7) Credits annotated in the Registry of Property in virtue of judicial order, attachment, or execution
The credits must also be registered in order to be preferred.
The preference is only with respect to LATER CREDITS.
The credit is preferred only with respect to other attachments, not to other kinds of credit.
Therefore, this does not share equally with the other claims. It merely provides that a credit by virtue of judicial order, attachment, or execution that is first registered in the Registry of
Property is preferred over other credits of the same nature, which are registered at a later date.
Unlike the other special preferred credits, these credits do not share
proportionately in the property upon which they are imposed. To determine the
order of priority among several credits of this kind, their dates should be the basis.
The first one to be registered will be prioritized over the others.
Õ Again, 2242, is not an order of priority, with the exception of taxes imposed upon the immovable, which is prioritized. 2242 is merely an enumeration.
Why isn’t there a provision for malfeasance or misfeasance with respect to immovables?
Corrupt public officials can easily hide movables, which is why it would be more difficult to recover them. Hence, there is a provision giving the government preference with respect to movables. But in the case of immovables, the corrupt public officials cannot really hide them.
The government can establish a preferred claim over them simply by attaching. (This is the reason given by JPSP. For the reason of the Code Commission, ask Pelagio Cuison).
Problem: Debtor’s only assets are a house and lot worth P5M, a car worth P1M, and jewelry worth 500K. Among Debtor’s liabilities are a real estate mortgage on the house and lot to secure a loan worth P3M and a chattel mortgage on the car to secure a loan worth P500K.
Debtor has other obligations worth P6M. What are the preferred credits? How much free property does Debtor have?
With respect to the house and lot, the real estate mortgage is preferred. With respect to the car, the chattel mortgage is preferred.
To determine the value of the Debtor’s free property, pay off the preferred claims first:
House and Lot worth P5M – P3M REM obligation = P2M excess Car worth P1M – 500K chattel mortgage obligation = 500K excess
The excess after the preferred claims have been satisfied will go to the free property of the debtor:
Free property = Jewelry worth 500K + P2M excess from House and Lot + 500K excess from car
= 500K + 2M + 500K
= 3M
The free property of Debtor is worth P3M. The other creditors for P6M will then line up for this portion according to the order of priority established in Art. 2244 if they are ordinary preferred credits and 2245 if they are common credits.
Problem: Realty Company entered into a contract to sell with X. Under the contract to sell, X will sell the lot to Realty Company, and Realty Company will pay the price in installments.
Realty Company failed to pay the installments in full. The lot was used in a condominium project. How can X collect from Realty Company, in case it becomes insolvent?
X should claim that he still owns the lot since the contract was merely a contract TO sell.
Therefore, the lot should not be included in the insolvency proceedings concerning Realty Company. X can also claim that the condominium project on the lot cannot be included in the insolvency proceedings either because it is an improvement on a lot owned by X, not by Realty Company. This way, if Realty Company becomes insolvent, X does not have to line up and compete with other creditors’ claims, because he can say that he is the owner of the property.
Õ JPSP says that if you’re a creditor, you should avoid the preferred claim route because you would rather not line up along with the other creditors. You should find a way to be the owner of the thing that you’re after – such as, proving that it’s an implied trust or a contract to sell, etc.
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 article 2241, and No. 1, article 2242, shall first be satisfied.
2243 gives the rule that taxes due on the movable or on the immovable concerned should be satisfied first. The rest of the special preferred claims share equal preference among
themselves.