CONCURRENCE & PREFERENCE OF CREDITS WHEN RULE OF PREFERENCE APPLICABLE

(Articles 2236-2251) 1. Apply only where two or more creditors have separate
and distinct claims against the same debtor who
has an insufficient property
CONCURRENCE OF CREDITS, definition.
2. Is applicable when the debtor is insolvent—having
It implies possession by two or more creditors of equal right or
more liabilities than his assets
privileges over the same property or all of the property of a debtor.
3. It is a matter of necessity and log that the
question of preference should arise only when the
PREFERENCE OF CREDIT, definition. debtor’s assets are insufficient to pay his debts in full
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 PREFERENCE

GENERAL PROVISIONS
1. 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 ART. 2236 The debtor is liable with all his property, present and future,
creates simply a right of one creditor to be paid first the for the fulfillment of his obligations, subject to the exemptions provided by
proceeds of the sale of property as against another creditor. law.
3. The law does not give the creditor who has a preference a
right to take the property or sell it as against another  What can the creditor do if the debtor has no money?
creditor. It is not a question who takes or sells, it is one of 1. Attach property not exempt from attachment;
the application of the proceeds after the sale—of payment
of the debt.  Properties exempt from attachment:
4. The right of preference is one which can be made a) The family home, except in certain
only by being asserted and maintained. If the right cases; (Art. 155)
claimed is not asserted or maintained, it is lost.
5. Where a creditor released his levy, leaving the Art. 152. The family home, constituted jointly by the husband and
property in possession of the debtor, thereby indicating the wife or by an unmarried head of a family, is the dwelling
that he did not intend to press his claim further as to house where they and their family reside, and the land on
that specific property, after that act, his claim to
which it is situated.
preference, if one had been asserted y him, could not exist
because he had ceased to contest.
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
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continues to be such and is exempt from execution, forced sale or e) In certain cases, homesteads acquired
attachment except as hereinafter provided and to the extent of the under the Public Land Act; ( Future
value allowed by law. property ) and
f) Those mentioned in Rule 39, Sec. 13,
Art. 154. The beneficiaries of a family home are: Rules of Court.
(1) The husband and wife, or an unmarried person who is the head
of a family; Sec. 13. Property exempt from execution.
(2) Their parents, ascendants, descendants, brothers and sisters, Except as otherwise expressly provided by law, the following
whether the relationship be legitimate or illegitimate, who are property, and no other, shall be exempt from execution:
living in the family home and who depend upon the head of
the family for legal support. (a) The judgment obligor's family home as provided by law, or the
homestead in which he resides, and land necessarily used in
Art. 155. The family home shall be exempt from execution, connection therewith;
forced sale or attachment except: (b) Ordinary tools and implements personally used by him in his
(1) For nonpayment of taxes; trade, employment, or livelihood;
(2) For debts incurred prior to the constitution of the family (c) Three horses, or three cows, or three carabaos, or other
home; beasts of burden such as the judgment obligor may select
(3) For debts secured by mortgages on the premises before or after necessarily used by him in his ordinary occupation;
such constitution; and (d) His necessary clothing and articles for ordinary personal
(4) For debts due to laborers, mechanics, architects, builders, use, excluding jewelry;
material men and others who have rendered service or (e) Household furniture and utensils necessary for
furnished material for the construction of the building. housekeeping, and used for that purpose by the judgment
obligor and his family, such as the judgment obligor may
Art. 205. The right to receive support under this Title as well as any select, of a value not exceeding one hundred thousand pesos;
money or property obtained as such support shall not be levied (f) Provisions for individual or family use sufficient for four
upon on attachment or execution. months;
(g) The professional libraries and equipment of judges,
b) The right to support, annuities, lawyers, physicians, pharmacists, dentists, engineers,
pensions (in certain instances); surveyors, clergymen, teachers, and other professionals, not
c) Properties in custodia legis; exceeding three hundred thousand pesos in value;
d) Properties of a municipal corporation
used for governmental purposes;
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(h) One fishing boat and accessories not exceeding the total terms, it refers to an act of discharging a debt
value of one hundred thousand pesos owned by a fisherman by giving something instead of paying in
and by the lawful use of which he earns his livelihood; money. In this method any movable or
(i) So much of the salaries, wages, or earnings of the immovable property can be given to the
judgment obligor of his personal services within the four creditor instead of money to satisfy the
months preceding the levy as are necessary for the support of his creditors claim.
family;  Cession. Refers to the assignment of
(j) Lettered gravestones; property to another entity.
(k) Monies benefits, privileges, or annuities accruing or in any  Reg. Insolvency Proccedings : Insolvency
manner growing out of any life insurance; proceedings can only be resorted to if all the
(l) The right to receive legal support, or money or property requisite conditions are present.
obtained as such support, or any pension or gratuity from the 5. Wait until the debtor has money or property in the
Government; future.
(m) Properties specially exempt by law.  Requisite: The obligations must already be
due.
But no article or species of property mentioned in his section
shall be exempt from execution issued upon a judgment ART. 2237 Insolvency shall be governed by special laws insofar as they
recovered for its price or upon a judgment of foreclosure of a are not inconsistent with this Code.
mortgage thereon.
 The Civil Code prevails over special laws.
2. Exercise accion subrogatoria;  INSOLVENCY LAW WILL COME INTO PLAY
 Accion subrogatoria. The right to exercise all AFTER THE RULES OF PREFERENCE AND
rights and actions except those inherent in CONCURRENCE OF CREDITS.
the person.  DEBTOR MUST BE THE ABSOLUTE OWNER
3. Exercise accion pauliana;
 Accion pauliana . Impugn or rescind acts or ART. 2238 So long as the conjugal partnership or absolute community
contracts done by the debtor to defraud the subsists, its property shall not be among the assets to be taken possession
creditors. 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
4. Ask for dation in solutum, cession, file insolvency
is the husband who is insolvent, the administration of the conjugal
proceedings; and
partnership or absolute community may, by order of the court, be
 Datio in solutum. Roman word which
transferred to the wife or to a third person other than the assignee.
implies giving in payment or in clearer
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 Exemption of properties of the Conjugal Partnership or of  The shares of the other co-owners of course
the Absolute Community applies provided that: cannot be taken possession of by the assignee
 The conjugal partnership or the absolute
community subsists; and
 The obligation did not redound to the benefit of the CLASSIFICATION OF CREDITS
family.
ART. 2241 With reference to specific movable property of the debtor, the
ART. 2239 If there is property, other than that mentioned in the following claims or liens shall be preferred:
preceding article, owned by two or more persons, one of whom is the
insolvent debtor, his undivided share or interest therein shall be among 1. Duties, taxes and fees due thereon to the State or any
the assets to be taken possession of by the assignee for the payment of the subdivision thereof;
insolvent debtor’s obligations. 2. Claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the
 Rule in case of co-ownership: The undivided share or performance of their duties, on the movables, money or
interest shall be possessed by the assignee. securities obtained by them;
3. Claims for the unpaid price of movables sold, on said
ART. 2240 Property held by the insolvent debtor as a trustee of an movables, so long as they are in the possession of the
express or implied trust, shall be excluded from the insolvency debtor, up to the value of the same; and if the movable has
proceedings. 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
 Reason for the article: The trustee is not the owner of the the immobilization of the thing by destination, provided it
property held. Thus, it should not respond for the insolvent has not lost its form, substance and identity; neither is
trustee’s obligation. the right lost by the sale of the thing together with other
property for a lump sum, when the price thereof can be
RULES INVOLVING UNDIVIDED SHARE OR INTEREST determined proportionally;
OF A CO-OWNER 4. Credits guaranteed with a pledge so long as the things
pledged are in the hands of the creditor, or those
 If there is a co-ownership and of the co-owners is guaranteed by a chattel mortgage, upon the things
the insolvent debtor, his undivided share or pledged or mortgaged, up to the value thereof;
interest in the property shall be possessed by the 5. Credits for the making, repair, safekeeping or
assignee in insolvency proceedings because it is part of preservation of personal property, on the movable thus
his assets made, repaired, kept or possessed;
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6. Claims for laborers’ wages, on the goods manufactured or b) If there are two or more credits with respect to the
the work done; same movable property, they shall be satisfied pro
7. For expenses of salvage, upon the goods salvaged; rata, after the payment of duties, taxes, and fees due
8. Credits between the landlord and the tenant, arising from the State or any subdivision thereof (Art. 2246)
the contract of tenancy on shares, on the share of each in c) Duties, taxes, and fees due the Government enjoy
the fruits or harvest; priority only when they are with reference to a
9. Credits for transportation, upon the goods carried, for the specific movable property under Art. 2241 (1) or
price of the contract and incidental expenses until the immovable property under Art. 2242 (1) of the same
delivery and for thirty days thereafter; code.
10. Credits for lodging and supplies usually furnished to  Lien (defn). A charge upon property subject to lien. In a
travellers by hotel keepers, on the movables belonging to broad sense, it means the liability of property for a certain
the guest as long as such movables are in the hotel, but legal duty, or a right to resort to certain property to enforce
not for money loaned to the guests;
duty.
11. Credits for seeds and expenses for cultivation and harvest
 Preference vs Lien. Preference applies only to claims which
advanced to the debtor, upon the fruits harvested;
do not attach to specific properties. While a lien creates a
12. Credits for rent for one year, upon the personal property
charge on a particular property.
of the lessee existing on the immovable leased and on the
fruits of the same, but not on money or instruments of
GENERAL CATEGORIES OF CREDIT
credit;
1. Special preferred credits listed in Articles 2241 and 2242
13. Claims in favor of the depositor if the depositary has
2. Ordinary preferred credits listed in Article 2244
wrongfully sold the thing deposited, upon the price of the
3. Common credits under Article 2245
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
PREFERRED CREDITS WITH RESPECT TO SPECIFIC
any possessor, within thirty days from the unlawful seizure.
MOVABLE PROPERTY
 The order in this article is not important. What is important  Articles 2241 and 2242 don’t give the order of
preference or priority of payment
is…
 They merely enumerate the credits which enjoy
a) Those credits which enjoy preference with respect to
preference with respect to specific movables or
specific movables exclude all others to the extent of
immovables
the value of the personal property to which
preference refers. (Art. 2246)
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 With respect to the same specific movable or 6. Expenses for the preservation or improvement of real
immovable, creditors with the exception of the State, property when the law authorizes reimbursement, upon
merely concur the immovable preserved or improved;
 REMEMBER that preference is only given to #1 7. Credits annotated in the Registry of Property, in virtue of
and the rest shall be treated equally a judicial order, by attachments or executions, upon the
property affected, and only as to later credits;
WRONGFUL TAKING OF MOVABLES TO WHICH 8. Claims of co-heirs for warranty in the partition of an
LIEN ATTACHES immovable among them, upon the real property thus
 Last paragraph applies only when the right of divided;
ownership in such property continues in the debtor, 9. Claims of donors of real property for pecuniary charges or
and therefore, is not applicable to cases where the other conditions imposed upon the donee, upon the
debtor has parted his ownership therein, as where he immovable donated;
has sold the property 10. Credits of insurers, upon the property insured, for the
insurance premium for two years.
ART. 2242 With reference to specific immovable property and real rights
of the debtor, the following claims, mortgages and liens shall be preferred,  Like Art 2241, the order in this article is not important.
and shall constitute as encumbrance on the immovable or real right:  It must be stressed that with the sole exception of the State,
1. Taxes due upon the land or building; the creditors with respect to the same specific immovable
2. For the unpaid price of real property sold, upon the merely concur, there is no preference.
immovable sold;  Concurrence vs Preference
3. Claims of laborers, masons, mechanics and other o A concurrence of credit implies the possession by 2
workmen, as well as of architects, engineers and or more creditors of equal rights or privileges over
contractors, engaged in the construction, reconstruction
the same property or all of the property of the
or repair of buildings, canals or other works, upon said
debtor. A preference of credit is the right held by a
buildings, canals or other works;
creditor to be preferred in the payment of his claim
4. Claims of furnishers of materials used in the
above others out of the debtor’s assets.
construction, reconstruction, or repair of buildings,
o A concurrence or preference of credit does not
canals or other works, upon said buildings, canals or
create a lien. It merely creates a right of 1 creditor to
other works;
be paid first as against other creditors.
5. Mortgage credits recorded in the Registry of Property,
o A preference applies only to claims that do not
upon the real estate mortgaged;
attach to specific properties, while a lien creates a
charge on a particular property.
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o Concurrence of credits raises no question of 1. Proper funeral expenses for the debtor, or children under
consequence where value of property or asset not his or her parental authority who have no property of
sufficient. When property not sufficient, preference their own, when approved by the court;
arises. 2. Credits for services rendered the insolvent by employees,
o Where there is concurrence; credits stand equally, laborers, or household helpers for one year preceding the
without priority among themselves, and satisfied commencement of the proceedings in insolvency;
pro rata. 3. Expenses during the last illness of the debtor or of his or
her spouse and children under his or her parental
ART. 2243 The claims or credits enumerated in the two preceding authority, if they have no property of their own;
articles shall be considered as mortgages or pledges of real or personal 4. Compensation due the laborers or their dependents under
property, or liens within the purview of legal provisions governing laws providing for indemnity for damages in cases of
insolvency. Taxes mentioned in No. 1, Art. 2241, and No. 1, Art. 2242 labor accident, or illness resulting from the nature of the
shall first be satisfied. employment;
5. Credits and advancements made to the debtor for support
 This article speaks of the nature of claims or credits --- they of himself or herself, and family, during the last year
are considered as pledges or mortgages. preceding the insolvency;
6. Support during the insolvency proceedings, and for three
months thereafter;
NATURE OF CLAIMS OR CREDITS IN ARTICLES 2241
7. Fines and civil indemnification arising from a criminal
AND 2242
offense;
 Articles 2241 and 2242 apply only when there is a
8. Legal expenses, and expenses incurred in the
concurrence of credits when the same specific
administration of the insolvent’s estate for the common
property of the debtor is subjected to the claims of
interest of the creditors, when properly authorized and
several creditors and the value of such property is
approved by the court;
insufficient to pay in full all the creditors
9. Taxes and assessments due the national government,
 In such situation, the question of preference will
arise, there will be a need to determine which of other than those mentioned in Articles 2241, No.1 and
the creditors will be paid ahead of the others 2242, No. 1;
10. Taxes and assessment due any province, other than those
ART. 2244 With reference to other property, real and personal of the mentioned in Articles 2241, No.1 and 2242, No.1;
debtor, the following claims or credits shall be preferred in the order 11. Taxes and assessment due any city or municipality, other
named: than those mentioned in Articles 2241, No.1 and 2242,
No.1;
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12. Damages for death or personal injuries caused by a quasi- and to be paid in the order of preference
delict; therein provided
13. Gifts due to public and private institutions of charity or
beneficence; 2. Ordinary preferred credits—only in respect of
14. Credits which, without special privilege, appear in (a) a the insolvent’s free property, is an order of
public instrument; or (b) in a final judgment, if they have priority established. In this sequence, certain
been the subject of litigation. These credits shall have taxes and assessments also figure but, as already
preference among themselves in the order of priority of pointed out, these don’t have the same kind of
the dates of the instruments and of the judgments, overriding preference
respectively.

 The order of preference here in Art. 2244 is very important. ART. 2245 Credits of any other kind or class, or by any other right or
 The order of preference here does not refer to specific real title not comprised in the four preceding articles, shall enjoy no
or personal property. It refers to other property. preference.
 Taxes are placed only as pars 9, 10, 11. This rule applies to
property other than specific. If the property is specific, taxes NON-PREFERRED OR COMMON CREDITS
are given first preference.  Credits other than those mentioned in 2241, 2242,
 Regarding par. 14, it would seem here that an ordinary and 2244 shall enjoy no preference and such common
credit evidenced by a public instrument and a final credits shall be paid pro rata regardless of dates
judgment are placed on an equal plane; hence, if both are of
the same date, there will be a pro rata sharing. ORDER OF PREFERENCE OF CREDITS

ORDER OF PRIORITY ONLY WITH RESPECT TO ART. 2246 Those credits which enjoy preference with respect to specific
INSOLVENT’S FREE PROPERTY movables, exclude all others to the extent of the value of the personal
1. Specially preferred credits— credits which are property to which the preference refers.
specially preferred because they constitute liens
take precedence over ordinary preferred credits so ART. 2247 If there are two or more credits with respect to the same
far as concerns the property to which the liens are specific movable property, they shall be satisfied pro rata, after the
attached payment of duties, taxes, and fees due to the State or any subdivision
a. Specific property involved of greater value thereof. The credits over specific personal or movable properties are those
b. Specific property involved of lesser value— enumerated in Article 2241 of the Civil Code.
will be treated as ordinary preferred credits  Sample Problem: Sonia has one car, the taxes on which
have not yet been paid. Once, the car fell into the sea, was
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salvaged, was repaired, and has now been pledged with a proceeding where the claims of all the preferred
creditor. If Sonia is insolvent and has not paid for any of the creditors may be bindingly adjudicated, such as
acts done on her car, how will the following be paid: the insolvency, the settlement of decedent’s estate
State, the person who salvaged it, the repairer, and the under Rule 87 of the Rules of Court, or other
pledgee? liquidation proceedings of similar import.
o Answer:  Note: With the sole exception of the State, the creditors
a) All said 4 creditors have preference over the with respect to the same property merely concur; there is
car to the exclusion of all other creditors. no preference.
b) The State will first be paid for taxes on the
car. ART. 2250 The excess, if any after the payment of the credits which
c) The salvager, the repairman, and the preference with respect to specific property, real or personal, shall be
pledgee will all be paid pro rata from the added to the free property which the debtor may have, for the payment of
remaining value of the car. the other credits.

ART. 2248 Those credits which enjoy preference in relation to specific ART. 2251 Those credits which do not enjoy any preference with respect
real property or real rights, exclude all others to the extent of the value of to specific property, and those which enjoy preference, as to the amount
the immovable or real right to which the preference refers. not paid, shall be satisfied according to the following rules:
(1) In the order established in Article 2244;
ART. 2249 If there are two or more credits with respect to the same (2) Common credits referred to in Article 2245 shall be paid pro
specific real property or real rights, they shall be satisfied pro rata, after rata regardless of dates.
the payment of the taxes and assessments upon the immovable property or Unlike in Arts 2241 and 2242 which refers to movable and immovable
real rights. The credits, which refer to real rights or immovable properties, properties, respectively; the order of preference in this provision refers to
are enumerated in Article 2242 of the Civil Code. other properties.

 When is prorating under the law applicable?  Sample Problem: A, an insolvent owes P500,000.00 in favor
 In order to make prorating fully effective, the of a funeral parlor, P1 million for the hospital expenses
preferred creditors enumerated in Nos. 2 to 14 of during the cancer illness of his wife, and P100,000 in favor
Article 2242 (or such of them as have credits of a pedestrian whom he had hurt while driving his car
outstanding) must necessarily be convened and the, carelessly and for which he was criminally and civilly
and the import of their claims ascertained. It is thus liable. Unfortunately, he has only P600,000.00 and an
apparent that the full application of Art. 2249 and automobile, the purchase price of which he has not yet
2242 demands that there must first be some paid. Give the order of preference of the various creditors
involved.
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 Answer: PROCEEDING FOR PAYMENT PRO RATA OF

a) With respect to the automobile (specific PREFERRED CREDITORS
personal property) the unpaid seller shall be
preferred.  Proceeding required for adjudication of claims of
b) With respect to the P600,000.00, Art. 2244 preferred creditors
should be applied. The funeral parlor comes  Pro rata rule contemplates more than one creditor
first, then the hospital, then the pedestrian.
Here there is no pro rata sharing; there is a Art. 2251. Those credits which do not enjoy any preference with
preference. Therefore, the funeral parlor will be respect to specific property, and those which enjoy preference,
given P500,000.00; the hospital only as to the amount not paid, shall be satisfied according to the
P100,000.00. The hospital cannot recover the following rules:
deficiency of P900,000.00; and the pedestrian
cannot recover his P100,000.00. (1) In the order established in Article 2244;
 As regards the other kinds of credits, the rule is: there is no (2) Common credits referred to in Article 2245 shall be paid pro
preference. rata regardless of dates.

TWO-TIER ORDER OF PREFERENCE SUMMARY AS TO ORDER OF PREFERENCE

1. Preferred lien on specific immovables
 First tier includes only taxes, duties and fees due 2. Preferred lien on specific movables
on a specific movable or immovable property 3. Special preferred credits
 All other special preferred credits stand on the second 4. Distribute pro-rata to creditors without preference
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.
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March 20, 2003 Respondent mainly attacks as baseless the annotation of the notice
ATLANTIC ERECTORS, INC. vs. HERBAL COVE of lis pendens thru the enforcement of a contractor’s lien under
REALTY CORPORATION Art. 2242. It points out that said provision only applies where there
are several creditors carrying on a legal action against an insolvent
J. PANGANIBAN debtor.

Facts: Issue: WON money claims representing costs of materials for and
On June 20, 1996, respondent and petitioner entered into a labor on the houses constructed on property are a proper lien for
Construction Contract whereby the former agreed to construct 4 annotation of lis pendens on the property title.
units of townhouses and 1 single detached unit for an original
contract price of P15,726,745.19 which later adjusted to another Ruling: Petition is denied; notices of lis pendens cancelled.
million as a result of additional works. The contract period is 180
days commencing on July 7, 1996 and to terminate on July 7, 1997. Ratio Decidendi:
Said period was not followed due to reasons attributable to the The pendency of a simple collection suit arising from the alleged
respondent, as claimed by the petitioner. non-payment of construction services, materials, unrealized
income, and damages does not justify the annotation of a notice of
Petitioner filed a complaint for sum of money with damages and lis pendens on the title to a property where construction has been
filed a notice of lis pendens for annotation of the pendency of Civil done.
Case. Atlantic Erectors Inc. avers that its money claim on the cost
of labor and materials for the townhouses it constructed on Herbal As a general rule, the only instances in which a notice of lis
Cove’s land is a proper lien that justifies the annotation of a notice pendens may be availed of are:
of lis pendens on the land title. a) An action to recover possession of real estate;
b) An action for partition;
Petitioner points out that the money claim constitutes a lien that c) Any other court proceedings that directly affect the title to
can be enforced to secure payment for the said obligations. the land or the building thereon or the use or occupation
thereof;
Respondent Herbal Cove argues that the annotation is bereft of d) Also applies to suits seeking to establish a right to or an
any factual or legal basis, because petitioner’s complaint does not equitable estate or interest in a specific real property.
directly affect the title to the property, or the use of the possession
thereof. It also claims that petitioner’s complaint did not assert Petitioner apparently relied on the premise that its money claim
ownership of the property or any right to possess it. involves the enforcement of a lien since the money claim is for the
nonpayment of materials and labor used in the construction of
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townhouses, the lien referred to would have to be that provided

under Art. 2242 of the Civil Code.

Petitioner’s complaint however merely asked for the payment of

the construction services and materials plus damages, without
mentioning – much less asserting – a lien or encumbrance over the
property. It was simply a collection case. Indeed, the nature of an
action is determined by the allegations of the complaint.

Even assuming that petitioner has sufficiently alleged such lien or

encumbrance in its complaint, the annotation of the notice of lis
pendens would still be unjustified because a complaint for
collection and damages is not the proper mode of the
enforcement of a contractor’s lien.

Moreover, Art. 2242 is not applicable in this case since nowhere

does it show that respondent’s property was subject to the claims
of other creditors or was insufficient to pay for all concurring
debts.

Clearly then, neither Article 2242 of the Civil Code nor the
enforcement of the lien thereunder is applicable here, because
petitioner’s Complaint failed to satisfy the foregoing requirements.
Moreover, the Complaint did not pertain to insolvency
proceedings or to any other action in which the adjudication of
claims of preferred creditors could be ascertained.