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CREDIT TRANSACTIONS Atty. R. Vasquez I.

INTRODUCTION
B. As to their existence 1. PRINCIPAL CONTRACTS They can exist alone. Their existence does not depend on the existence of another contract (e.g., commodatum and mutuum) 2. ACCESSORY CONTRACTS They have to depend on another contract. These accessory contracts depend on the existence of a principal contract of loan (e.g., guaranty proper, suretyship, pledge, mortgage, and antichresis) C. As to their consideration 1. ONEROUS This is a contract where there is a consideration or burden imposed like interest 2. GRATUITOUS This is a contract where there is no consideration or burden imposed (e.g. commodatum) BAILMENT The delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor claims it May be created by contract or operation of law (De Leon, 2006 ed.). To be legally enforceable, a bailment must contain all the elements of a valid contract, which are consent, object, and cause or consideration. PARTIES IN BAILMENT 1. BAILOR One who delivers the possession or custody of the thing bailed 2. BAILEE One who receives custody or possession of the thing thus delivered KINDS OF CONTRACTUAL BAILMENT 1. For sole benefit of bailee bailment of goods where the bailee gratuitously undertakes to do some act with respect to the property a. Commodatum b. Gratuitous simple loan/mutuum 2. For sole benefit of bailor a. Gratuitous deposit b. Mandatum

CREDIT It is a persons ability to borrow money by virtue of the confidence or trust reposed in him by the lender that he will pay what he may promise. CREDIT TRANSACTIONS All transactions involving the purchase or loan of goods, services, or money with a promise to pay or deliver in the future; contracts of security CREDIT TRANSACTIONS INCLUDE All transactions involving loans of: 1. Goods 2. Services 3. Money extended to another either gratuitously or onerously with a promise to pay or deliver in the future SECURITY Something given, deposited, or serving as a means to ensure enforcement of an obligation or of protecting some interest in property TYPES OF CONTRACTS OF SECURITY 1. SECURED TRANSACTIONS (CONTRACTS OF REAL SECURITY) transactions supported by a collateral or an encumbrance of property 2. UNSECURED TRANSACTIONS (CONTRACTS O PERSONAL SECURITY) Transactions supported only by a promise, or commitment of another such as a guarantor or surety KINDS OF CREDIT TRANSACTIONS A. As to contracts of security 1. CONTRACTS OF REAL SECURITY These contracts supported by collateral/s or burdened by an encumbrance on property such as mortgage and pledge 2. CONTRACTS OF PERSONAL SECURITY These are contracts where performance by principal debtor is not supported by collateral/s but only a promise to pay or by personal undertaking or commitment of another person such as in surety or guaranty

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By: M. Mejia
3. For a. b. c. d. benefit of both parties Deposit for compensation Involuntary deposit Pledge Bailments for hire NATURE OF OBLIGATIONS UNDER THE CIVIL CODE 1. CIVIL OBLIGATIONS Obligations which give the creditor or obligee the right of action in courts of justice to enforce their performance 2. NATURAL OBLIGATIONS Not being based on positive law, but on equity and natural law, these obligations do not grant a right of action to enforce their performance although in case of voluntary fulfillment by the debtor, the latter may not recover what has been delivered or rendered by reason thereof (Art 1423) ESSENTIAL REQUISITES OF AN OBLIGATION 1. PASSIVE SUBJECT (debtor or obligor) The person who is bound to the fulfillment of the obligation; he who has a duty 2. ACTIVE SUBJECT (creditor or obligee) The person who is entitled to demand the fulfillment of the obligation; he who has a right 3. OBJECT (prestation) The conduct required to be observed by the debtor or obligor; subject matter of the obligation 4. JURIDICAL TIE (efficient cause) That which binds the parties to the obligation, which can be determined by knowing the source obligation KINDS OF OBLIGATION ACCORDING TO SUBJECT MATTER 1. REAL OBLIGATION (Obligation to give) That in which the subject matter is a thing which the obligor must deliver to the obligee 2. PERSONAL OBLIGATION (Obligation to do or not to do) That in which the subject matter is an act to be done or not to be done a. POSITIVE PERSONAL OBLIGATION Obligation to do or to render service b. NEGATIVE PERSONAL OBLIGATION Obligation not to do Art 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. REQUISITES OF A CONTRACT 1. Consent Conformity of the parties to the terms of the contract

NOTE: Nos. 1 and 2 are gratuitous bailments. There is no consideration because they are considered more as a favor by one party to the other. Bailments under no. 3 are mutual-benefits bailments, and they usually result from business transactions BAILMENT FOR HIRE Arises when goods are left with the bailee for some use or service by him and is always for some compensation KINDS OF BAILMENTS FOR HIRE a. Hire of things goods are delivered for the temporary use of the hirer b. Hire of service goods are delivered for some work or labor upon it by the bailee c. Hire for carriage of goods goods are delivered either to a common carrier or to a private person for the purpose of being carried from place to place d. Hire for custody goods are delivered for storage

II.

LOAN

Art 1156. An obligation is a juridical necessity to give, to do or not to do. OBLIGATION It is a tie of law or juridical bond by virtue of which one is bound in favor of another to render something Manresa: A legal relation established between one party and another, whereby the latter is bound to the fulfillment of a prestation which the former may demand of him) Art 1156 merely stresses the duty of the debtor/obligor when it speaks of obligation as a juridical necessity JURIDICAL NECESSITY Obligation is a juridical necessity because in case of non-compliance, the courts of justice may be called upon to enforce its fulfillment or, in default thereof, the economic value that it represents

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CREDIT TRANSACTIONS Atty. R. Vasquez


There must a concurrence between the offer which is definite and intentional, and an acceptance which is express, unqualified, and unconditional 2. Object The thing or service which is the subject matter of the obligation arising from the contract REQUISITES: a. Lawful b. Actual or possible c. Transmissible Within the commerce of man d. Determinate or determinable o All a. b. c. d. e. things or services may be the object of contracts EXCEPT: Things which are outside the commerce of man Intransmissible rights Future inheritance except in cases authorized by law Impossible things or services Objects which are indeterminable as to their kind, the genus must be expressed which, according to their nature, may be in keeping with good faith, usage and law 5. RELATIVITY OF CONTRACTS Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations arising therefrom are not transmissible by their nature, or by stipulation, or by provision of law EXCEPTION: a. Accion Pauliana b. Accion Directa c. Stipulation Pour Autrui CLASSIFICATION OF CONTRACTS A. According to name or designation 1. Nominate That which has a specific name or designation in law (e.g. sales, commodatum, etc) 2. Innominate That which has no specific name or designation in law B. According to perfection 1. Consensual Perfected by mere consent or agreement of the parties 2. Real Perfected by delivery of object (e.g. commodatum, pledge, deposit) C. According to cause 1. Onerous With valuable consideration 2. Remuneratory or Remunerative Prestation is given for service previously rendered not as obligation 3. Gratuitous Founded in liberality D. According to form 1. Informal or Common 2. Formal or Solemn Must conform to certain formalities to be valid or perfected E. According to obligatory force 1. Valid 2. Rescissible 3. Voidable 4. Unenforceable 5. Void F. According to the person obliged 1. Unilateral Only one of the parties has an obligation 2. Bilateral Both parties are required to render reciprocal obligations

3. Cause It is the impelling reason for which a party assumes an obligation under a contract REQUISITES: a. Existing b. Licit or lawful c. True CHARACTERISTICS OF A CONTRACT 1. FREEDOM OF AUTONOMY OF CONTRACTS The parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient provided that they are not contrary to law, morals, good customs, public order and public policy 2. OBLIGATORINESS OF CONTRACTS Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith 3. MUTUALITY OF CONTRACTS Contracts must bind both and not one of the contracting parties; their validity or compliance cannot be left to the will of one of them 4. CONSENSUALITY OF CONTRACTS Contracts are perfect, s a general rule, by mere consent, and from that moment the parties are bound not only by the fulfillment of what has been expressly stipulated but also to all the consequences

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G. According to dependence to another contract 1. Preparatory When it is entered into as a means to an end (e.g. agency, partnership) 2. Accessory When it is dependent upon another contract it secures or guarantees for its existence and validity (e.g. mortgage, guaranty) 3. Principal When it does not depend for its existence and validity upon another contract but is an indispensable condition for the existence of an accessory contract H. According to risks 1. Commutative When the undertaking of one party is considered to the equivalent of that of the other (e.g. sale, lease) 2. Aleatory When it depends upon an uncertain event or contingency both as to benefit or loss (e.g. insurance, sale of hope) RESCISSIBLE CONTRACTS Cause (Art Contracts of When the acts of 1381, guardians administration 1382) causes LESION or damage to the ward they represent by more than 25% of the value of the thing Defect When the acts of administration causes LESION or damage to the WARD they represent by more than 25% of the value of the thing When the acts of administration causes LESION or damage to the ABSENTEE they represent by more than 25% of the value of the thing Who can rescind creditors NO Rescission if: 1. Injured party has other legal means to obtain reparation (Art 1383) 2. Plaintiff cannot return his part of the obligation (Art 1385 par 1) 3. Object of the contract is in the rd hands of a 3 person, onerously acquired by him in good faith (Art 1385 par 2) 4. If the court approves the contracts under Art 1381 par 1 and 2 (Art 1386) NO Rescission if: 1. Injured party has other legal means to obtain reparation (Art 1383) 2. Plaintiff cannot return his part of the obligation (Art 1385 par 1) 3. Object of the contract rd is in the hands of a 3 person, onerously acquired by him in good faith (Art 1385 par 2) By creditor/s By party litigant

Contracts entered to defraud existing debtors

Contracts referring to things in litigation

In general, by injured party By ward or by guardian ad litem of ward during incapacity of ward in an action against the original guardian 4 years from gaining capacity

By absentee

When the creditors cannot in any manner collect the claims due them

If entered by the defendant without the knowledge and approval of the litigants or competent judicial authority

Prescriptio n (Art 1389)

4 years from knowledge of domicile of absentee

4 years from knowledge of fraudulent contract

4 years from knowledge of fraudulent contract

Effect Rescission

Valid until rescinded (Art 1380) Direct action (different from action Accion Pauliana for for rescission under Art 1191) contracts in fraud of

VOIDABLE CONTRACT Defect Incapacity of one party to the contract

Vices of consent: mistake, violence, intimidation, undue influence or fraud (FIVUM)


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CREDIT TRANSACTIONS Atty. R. Vasquez


Effect How to annul Valid until annulled by competent court (Art 1390 last par) 1. Directly by an action for annulment 2. Indirectly by a counterclaim asking for positive action of the court to set aside the contract Annulment CANNOT proceed when: 1. The object of the contract is lost through fraud or deceit of the person with right to institute proceedings (Art 1401 par 1) 2. The right of action is based upon the incapacity of any one of the contracting parties and the thing is lost through the fault or default of the plaintiff (Art 1401 par 2) 1. Parties who are obligated principally or subsidiarily 2. Persons who are capable CANNOT allege the incapacity of those with whom they contracted 3. Persons who exerted intimidation, violence or undue influence or employed fraud, or caused mistake, CANNOT base their action upon these flaws of the contract 4 years after guardianship of 4 years minors or incapacitated persons a. After intimidation, ceases violence or undue influence b. From the time of discovery of mistake or fraud 1. Mutual restitution of the things delivered, along with fruits and price paid with interest (Art 1398) 2. Damages to be paid by party who caused defect of the contract, by virtue of Art 20 and 21 NCC Express (written or oral manifestation) or tacit ratification (acts or conduct) by injured party or guardian of incapacitated person NOTE: Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment (Art 1395) UNENFORCEABLE CONTRACTS Nature (Art Contract Contracts 1403) entered into without authority of, or in excess of authority given by owner covered by both parties are Statute of Frauds incapable of which did not giving consent to comply with the contract written memorandum requirement (Art 1403 par 2) No effect unless ratified. Cannot be enforced by a proper action in court Not by direct Not by direction Not by direct action action action As a defense, by MTD on the ground that the contract is unenforceable 1. As a defense, by MTD on the ground that the contract is unenforceable 2. Objection to the presentation of evidence to prove an oral contract (Art 1405) By party against whom the contract is being enforced; or his privies As a defense, by MTD on the ground that the contract is unenforceable

Effect How to assail

Who can/cannot annul (Art 397)

Prescription (Art 1391)

Effect of Annulment

How to cure defect (Art 1392-1396)

Who can assail NOTE: Unenforceable contracts cannot be assailed by rd 3 persons (Art 1408) When How to cure defect (Art 1403)

By person whose name the contract was entered into; owner of property

Con tract where

By party against whom the contract is being enforced or his privies; or parents or guardians, as it is a personal defense When a party asks the court to enforce the contract Ratification by 1. Ratification by By ratification of person whose party against party against name the whom the whom the contract was contract is contract is being entered into being enforced enforced, or his 2. By failure to privies or parents object to the or guardians

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By: M. Mejia
presentation of oral evidence to prove an oral contract or by the acceptance of benefits under the contract (Art 1405) VOID OR INEXISTENT CONTRACTS Cause Contracts cause, Inexistent object of purpose contracts or is contrary to law, contracts whose morals, good essential customs, public elements are order public policy absent (Art 1409 (Art 1409 par 1) par 2, 3, 4 and 5) upon court interests are discretion directly 3. Incapacitated affected by the person who is a contract (Art party to an 1421) illegal contract, upon court discretion (Art 1415) 4. Any person whose interests are directly affected by the contract (Art 1421) No prescription (Art 1410) contract (Art 1421) 2. By party for whose protection the prohibition of the law is designed (Art 1416)

The ratification by one party converts the contract into VOIDABLE contract (Art 1407)

Void ab initio (Art 1409)

How to assail

Who can assail

Contracts expressly prohibited or declared void by law (Art 1409 par 7); Contracts which are direct results of previous illegal contract (Art 1422) 1. Those whose cause, object of purpose is contrary to law, morals, good customs, public order or public policy 2. Those which are absolutely simulated or fictitious 3. Those whose cause or object did not exist at the time of the transaction 4. Those whose object is outside the commerce of men 5. Those which contemplate an impossible service 6. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained 7. Those expressly prohibited or declared void by law 1. File an action for declaration of inexistence or nullity of contract 2. As a defense during trial (Art 1409 last par). Such rd defense is not available to 3 parties 3. In pari delicto applies when cause or object of contract constitutes a criminal offense (Art 1411) 1. Innocent party 1. Any of the 1. Any person (Art 1411 par 2; parties whose interests 1412 par 2) 2. Any person are directly 2. Less-guilty party, whose affected by the

Prescription

Art 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. LIMITATIONS ON CONTRACTUAL STIPULATIONS 1. LAW Law is superior to a contract. Acts executed against the provisions of mandatory or prohibitory laws are void, except when the law itself authorizes their validity (Art 5) 2. POLICE POWER Public welfare is superior to private rights. When there is no law in existence or the law is silent, the will of the parties prevail unless their contract contravenes the limitation of morals, good customs, public order or public policy Art 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. CLASSIFICATION OF CONTRACTS ACCORDING TO PERFECTION 1. CONSENSUAL That which is perfected by mere consent (e.g. sale, lease, agency) 2. REAL That which is perfected, in addition to consent, by the delivery of the thing subject matter of the contract (e.g. depositum, pledge, commodatum) 3. SOLEMN (Formal) That which requires compliance with certain formalities required by law such prescribed from
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CREDIT TRANSACTIONS Atty. R. Vasquez


being thereby an essential element thereof (e.g. donation of real property) STAGES IN THE LIFE OF A CONTRACT 1. PREPARATION (Negotiation) Includes all the steps taken by prospective parties from the time they manifest interest into entering into a contract, leading to the perfection of the contract. At this stage, the parties have not yet arrived at any definite agreement. Either party may stop the negotiation or withdraw an offer made (No contract yet) 2. PERFECTION (Birth) Takes place when the parties have come to a definite agreement or meeting of minds regarding the terms, i.e. subject matter and cause of the contract (concurrence of the elements of the contract). Here, the offer must be absolutely accepted 3. CONSUMMATION (Termination) Takes place when the parties have fulfilled or performed their respective obligations or undertakings under the contract and the contract may be said to have been fully accomplished or executed, resulting in the extinguishment thereof Art 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. LOAN A contract where one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it or money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid. ESSENTIAL ELEMENTS OF A CONTRACT IN THE CONTEXT OF A LOAN Consent of the parties Object Cause or consideration Borrower and lender Property For the lender: right to demand the return of the thing For the borrower: acquisition of the thing CHARACTERISTICS 1. REAL CONTRACT Delivery of a thing loaned is necessary for the perfection of the contract REASON: Delivery is necessary in view of the purpose of the contract which is to transfer either the use or the ownership of the thing loaned NOTE: An accepted promise to make a future loan is a consensual contract, and therefore binding upon the parties but it is only after the delivery of the subject matter, will the real contract of loan arise (Art 1934) 2. BILATERAL CONTRACT Both parties are mutually bond to each other (as bailor and bailee) a. Reciprocal Those which arise from the same cause in which each party is debtor and creditor of the other, such that the performance of one is designed to be the equivalent and the condition for the performance of the other. GENERAL RULE: Neither party incurs delay if the other does not comply or is not ready to comply with what is incumbent upon him (Art 1169) b. Non-reciprocal Those which do not impose simultaneous and correlative performance on both parties. The performance of one party is not dependent upon the simultaneous performance by the other NOTE: Not all loans are reciprocal, but they are bilateral. LOAN AND CREDIT DISTINGUISHED LOAN CREDIT Delivery by one party and the receipt of Ability of a person to borrow money or

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another of a given sum of money or other consumable thing upon an agreement, express or implied, to repay the same amount of the same kind and quality, with or without interest things by virtue of trust or confidence reposed by the lender that he will pay what he promised within a specified period THING TO BE RETURNED WHO BEARS RISK OF LOSS WHEN TO RETURN Exact thing loaned Bailor In case of urgent need and commission of any acts of ingratitude even before the expiration of the term Equal amount of the same kind and quality Debtor/bailee Upon expiration of the term only

NOTE: The concession of credit necessarily involves the granting of loans up to the limit of the amount fixed in the credit (People v. Concepcion, G.R. no L-18535, August 15, 1922). LOAN AND DISCOUNTING OF PAPER DISTINGUISHED LOAN DISCOUNTING OF PAPER Interest taken at the expiration of credit Interest is taken in advance Always on a double name paper (one on Always on a single name paper (one on which 2 signatures appear with both which no other endorsement, other parties liable for payment) than the signature of the maker appears) KINDS OF LOAN 1. COMMODATUM When the bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the identical thing 2. SIMPLE LOAN (MUTUUM) Lender delivers to the borrower money or other consumable thing upon the condition that the latter shall return the same amount of the same kind and quality NOTE: Consumables are those things which cannot be used in a manner appropriate to their nature without their being consumed (Art 418). COMMODATUM AND MUTUUM DISTINGUISHED COMMONDATUM MUTUUM OBJECT Non-consumable Consumable Exception: Art 1936 Gratuitous Use or temporary possession Any property Retained by bailor Correlate with Art 418 Gratuitous or not Consumption Personal property Passes to the debtor

NOTE: In case of temporary use of the bailor, the contract of commodatum is suspended while the thing is in possession of the bailor (Art 1946) CONSUMABLE AND NON-CONSUMABLE DISTINGUISHED A thing is CONSUMABLE when it cannot be used in a manner appropriate to its nature without being consumed. (Art 418) (e.g. food, firewood, gasoline). On the other hand, a NON CONSUMABLE THING is a movable thing which can be used in a manner appropriate to its nature without it being consumed. (Art 418) (e.g. car, television, radio). FUNGIBLE AND NON-FUNGIBLE DISTINGUISHED FUNGIBLE THING is one where the parties have agreed to allow the substitution of the thing given or delivered with an equivalent thing. NONFUNGIBLE THING is one where the parties have the intention of having the same identical thing returned after the intended use. NOTES: As to whether a thing is consumable or not, it depends upon the nature of the thing. As to whether it is fungible or not, it depends upon the intention of the parties. Fungibles are usually determined by number, weight or measure. Q: May a non-consumable thing be the subject of a commodatum? A: As a general rule the objects of commodatum are nonconsumable things. However, a consumable thing may be the subject of a commodatum when the same is used for exhibition or display. This is because the purpose of commodatum is the temporary use of a thing.
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CAUSE PURPOSE SUBJECT MATTER OWNERSHIP OF THING

THE

CREDIT TRANSACTIONS Atty. R. Vasquez


Q: What does consumable mean in Art 1933? A: In consumable things the use of a thing results to its deterioration, destruction, loss or change in its nature. But since mutuum requires the return of the equivalent thing, the law contemplates the object to be returned as fungible. The law should have stated that the object of mutuum is both consumable and fungible. Art 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. DELIVERY ESSENTIAL TO PERFECTION OF LOAN Since commodatum and mutuum are real contracts, they are perfected by delivery of the subject matter of the contract. Delivery is necessary in view of the purpose of the contract which is to transfer either the use or ownership of the thing loaned. BINDING EFFECT OF ACCEPTED PROMISE TO LEND It does not mean that a promise to lend would be without efficacy and judicial value. An accepted promise to make a future loan is a consensual contract and therefore, binding upon the parties but it is only after delivery, will the real contract of loan arise. Q: What is the effect of an accepted promise to delivery by way of commodatum or mutuum? A: It is binding upon the parties but the contract of loan shall not be perfected until delivery of the contract (Art 1934). CONTRACT OF LOAN AND CONTRACT TO LOAN DISTINGUISHED CONTRACT OF LOAN CONTRACT TO LOAN Real contract, requires delivery for Contract to loan is simply an offer to perfection loan which must be accepted. It is similar to a promise to loan or promise to deliver. There is already a perfected consensual contract Remedy: Specific performance with Remedy: Specific performance with damages (of loan itself) damages (of promise to loan) These are two different stages/phases that are part of a single transaction CASES: SAURA IMPORT & EXPORT CO INC V. DEVELOPMENT BANK OF THE PHILIPPINES, 44 SCRA 445 (1972) FACTS: In July 1953, plaintiff Saura Imports applied with Rehabilitation Finance Corp (RFC), now DBP, for an industrial loan of P500,000, to be used for the construction of a factory building (manufacture of jute sacks) and payment of the jute mill machinery and equipment 1. RFC passed a resolution approving the loan application for P500,000 to be secured by a first mortgage on the factory building to be constructed and the machinery and equipment to be installed. The resolution also provided that the proceeds of the loan shall be used exclusively for construction of the factory and the purchase of the machinery and equipment 2. Saura requested a modification of the terms of the loan, i.e. that in lieu of having China Engineers Ltd sign as co-maker on the promissory notes issued by Saura, Saura will put a bond for P123,500. RFC will re-examine all aspects of the loan 3. Saura notified RFC that China Engineers again agreed to sign as comaker for the loan 4. In April 1954, the loan documents were executed and the promissory note was signed by FR Halling as representative of China Engineers, and the corresponding deed of mortgage 5. Despite the formal execution of the loan agreement, RFC reduced the loan from P500,000 to P300,000. 6. Subsequently, China Engineers informed RFC that it no longer wished to avail of the loan and that the loan shall be considered as cancelled. 7. Saura, on the other hand, had written RFC requesting that the loan of P500K be granted. However, RFC notified Saura that China Engineers had already informed them that they are cancelling the loan 8. On Sauras assurance that China Engineers will co -sign the loan upon the approval of the loan, RFC passed a resolution restoring the loan to the original amount of P500K on the following conditions: that the Department of Agriculture (DA) shall certify that the materials needed by Saura are available in the immediate vicinity; and there is an prospect of increased production to sufficient for the requirements of the Sauras factory. 9. Petitioner Saura later informed RFC that the local materials are not sufficient for the operation of the factory and instead, requested that it be allowed to import jute materials. RFC reiterated its conditions and as a result, the negotiations were deadlocked. 10. Instead of pursuing the loan, Saura requested that the loan be cancelled.

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NOTE: Saura mortgaged its property to Prudential Bank in August 1954, under which it had until December of the same year to pay its obligation. Saura failed to comply with its obligation so Prudential Bank sued Saura 11. 9 years later, Saura filed the present suit for damages against RFC, alleging that it failed to comply with its obligation in releasing the amount of the loan after it had been approved 12. The trial court held in favor of Saura, citing that there was a perfected contract between RFC and Saura and that the former was guilty of breach thereof ISSUES: 1. WON there was a perfected contract in this case 2. WON Saura is entitled to damages HELD: FIRST ISSUE: Yes, there is a perfected consensual contract as provided in Art 1934 NCC: An accepted promise to deliver something, by way of Commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. There was undoubtedly offer and acceptance in this case: the application of Saura for a loan of P500k was approved by RFC and the corresponding mortgage was executed and registered. However, this alone does not resolve the claim that RFC did not comply with its obligation. SECOND ISSUE: No. RFC entertained the loan application on the assumption that the factory to be constructed will utilize locally grown raw materials. This imposition was by no means a deviation from the terms of the contract, but a step in its implementation; the condition did not contradict RFCs resolution approving the loan. The action taken by both parties (Sauras request to cancel the mortgage) was in the nature of a mutual desistance (mutuo disenso), which is a mode of extinguishing obligations. It is derived from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. CAB: Saura did not protest any alleged breach of contract by RFC when it insisted on using locally sourced raw materials. Its request for cancellation did not carry any reservation of whatever rights it believed to have against RFC for the latters non-compliance. It was only after 9 years that Saura initiated the action for damages. All these circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual desistance and that on the initiate of the petitioner itself. BONNEVIE V. COURT OF APPEALS, 125 SCRA 122 (1983) FACTS: Spouses Lozano obtained a loan from private respondent Philippine Bank of Commerce (PBCOM) for the amount of P75,000, which was secured by a mortgage executed by the spouses. 1. Spouses Lozano executed a Deed of Sale with Assumption of Mortgage in favor of plaintiff Honesto Bonnevie for the amount of P100,000 (P20K payable to spouses Lozano and the balance is payable to respondent Bank) NOTE: When Lozano sold the property to Bonnevie, the loan amount was not yet released 2. From April 1967 to July 1968, Honesto made payments to PBCOM amounting to a total of P18,944.22 3. In May 1968, Honesto assigned all his rights under the Deed of Sale to his brother Raoul (intervenor) 4. PBCOM subsequently applied for the foreclosure of the subject property and a notice of sale was published in the Luzon Weekly Courier. Respondent bank purchased on the property during the auction sale 5. Honesto tried to redeem the property but the same failed. 6. As such, Honesto filed an action to annul the Deed of Mortgage as well as the extrajudicial foreclosure. He alleged that: a. The Deed of Mortgage lacks consideration b. The mortgage was executed by one who was not the owner of the mortgaged property c. The property was foreclosed without complying with the requirements of a valid foreclosure 7. The bank denied Honestos allegations and averred that: a. The bank did not consent to the (no written consent) sale of the mortgage property to plaintiff Bonnevie as well as the assumption of the loan b. It was only informed of the alleged sale to Bonnevie after it had foreclosed the Lozano mortgage c. The law on contracts requires that the banks consent, being a party to the agreement, before Lozano can be released from his bilateral agreement and before Bonnevie may substitute for Lozano d. The mortgage did not lack consideration because the execution and registration of the securing mortgage, signing of the promissory note and disbursement of loan proceeds are mere implementation of the basic consensual contract of loan ISSUE: WON there was a perfected contract of loan
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CREDIT TRANSACTIONS Atty. R. Vasquez


HELD: No, there is no perfected contract of loan since there was no delivery of the loan proceeds. What was perfected was a contract to loan. A contract to loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of mortgage was executed. The promissory note is only an evidence of indebtedness and does not indicate lack of consideration. FORECLOSURE OF THE PROPERTY Petitioners argument that the mortgage was void f or being executed by one who is not owner of the property is likewise untenable. Petitioners failed to consider the provisions of the Deed of Mortgage which prohibits the sale, disposition or mortgage of the property without the written consent of the mortgagee and in spite of said provision if the mortgaged property is sold, the vendee shall assume the mortgage in the terms and conditions under which it was constituted. These were expressly stipulated in the Deed of Sale with Assumption of Mortgage. In the case at bar, petitioners did not secure the consent of the bank to the sale with assumption of mortgage. Since the sale/assignment was not registered, the title remained in the name of the spouses Lozano insofar as the respondent bank was concerned. The bank had every right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the mortgagors title, the doctrine of innocent purchaser for value being applicable to an innocent mortgagee for value. Moreover, a mortgage follows the property whoever the possessor may be and subjects the fulfillment of the obligation for whose security it was constituted. It can also be said that petitioners voluntarily assumed the mortgage when they entered into the Deed of Sale with Assumption of Mortgage. As such, they are stopped from impugning its validity. ROSE PACKING CO V. COURT OF APPEALS, 167 SCRA 309 (1988) FACTS: In December 1962, respondent bank PCIB approved petitioners request to reactivate its overdraft line of P50,000, discounting line of P100,000 and letter of credit-trust receipt line of P550,000, as well as loan of P300,000 on fully secured real estate and chattel mortgage 1. In November 1965, National Investment and Devt Corp (NIDC), the subsidiary of PNB, approved petitioners loan for P2.6 million. Pursuant to such, NIDC released the amount of P100,000. Petitioner subsequently purchased 5 parcels of land in Pasig 2. In January 1966, NIDC released another P100,000 to petitioner Rose Packing, the total amount was applied to the payment of preferred stock which NIDC subscribed in Rose Packing to partially implement its investment scheme. However, NIDC refused to make further releases on the loan amount In August and October 1966, respondent PCIB approved the petitioners additional accommodations consisting of: P710,000 loan for the payment of the Pasig properties; P500,000 loan for operating capital; P200,000 loan to be paid directly to petitioners creditorsall amounting to P1,597,000 secured by real estate and chattel mortgages. However, of the total amount, PCIB only released P300,000 of the P710,000 approved loan and P300,000 for operating capital In June 1967, DBP approved petitioners loan application for P1.84 million and guarantee of $652,6882 for the purchase of canning equipment. Upon notice of the approval of the loan, petitioner informed PCIB of the availability of P800,000 to partially payoff its account and requested the release of the titles to the Pasig lots for delivery to DBP. However, PCIB advised refused, stating that all obligations should be liquidated before the release of the titles. As such, petitioner purchased a parcel of land at Valenzuela with the P800,000 DBP loan Subsequently, PCIB filed a complaint against Rose Packing and its president for the collection of petitioners indebtedness. PCIB gave notice that it would cause the real estate mortgage to be foreclosed at an auction sale Consequently, petitioner filed a complaint to enjoin PCIB and the sheriff from proceeding with the foreclosure sale and asked the court to fix a new period of payment of petitioners obligation to PCIB The lower court denied the application of preliminary injunction and dissolved its restraining order. The properties were sold at a public auction with PCIB as the purchaser.

3.

4.

5.

6.

7.

8. 9.

ISSUE: WON there was a perfected contract of loan HELD: No. The loan agreements between Rose Packing and PCI are reciprocal obligations, i.e. the obligation or promise of each party is the consideration for that of the other. A contract of loan is not a unilateral contract as PCIB thinks it is. The promise of petitioner to pay is the consideration for the obligation of PCIB to furnish the loan PCIBs designation of its own choice of people holding key positions in petitioner corporation tied the hands of petitioners board of directors to make decisions for the interest of the corporation, in fact, undermined the corporations financial stability. During the 18 months of Ledesmas

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By: M. Mejia
management, Rose Packing produced only P200,000 worth of canned goods which is only equivalent to its normal production in 3 weeks. A. Elements of a contract: Consideration It is apparent that it is respondent bank practically managing petitioner corporation through its representatives occupying key positions therein. Thus, if ever petitioner was in financial straits, it was because of the mismanagement of the PCIB through its representatives in petitioner corporation. B. Foreclosure of the Pasig properties Art 2089, however, is not applicable to the instant case as it presupposes several heirs of the debtor or creditor which does not obtain in this case. Furthermore, granting that there was consolidation of the entire loan, the rule of indivisibility of mortgage cannot apply where there was failure on the part of respondent bank for the mismanagement of the affairs of petitioner corporation and where said bank is in default in complying with its obligation to release the amount of P710,000. In fact, the real estate mortgage becomes unenforceable. And as already stated the exact amount of petitioners total debt is still unknown. BPI INVESTMENT CORP V. COURT OF APPEALS, 377 SCRA 117 (2002) FACTS: Frank Roa obtained a loan at an interest rate of 16.25% from Ayala Investment and Devt Corp (now BPI Investment Corp) for the construction of his house. To secure the loan, Roa executed a Deed of Mortgage over the house and lot in favor of BPIIC. 1. Sometime in 1980, Roa sold his house and lot to private respondents ALS Management and Antonio Litonjua for P850,000. Private respondents paid P350,000 and assumed the P500,000 balance of Roas indebtedness with BPIIC. 2. However, BPIIC was not willing to extend the old interest rate to private respondents. Instead, it proposed to grant a new loan to be applied at Roas debt and secured by the same property at the rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within 10 years and penalty interest rate of 21% per annum per day from the date the amortization became due and demandable 3. Consequently, in March 1981, private respondents executed a mortgage deed stipulating that the amortization shall start on May 1, 1981 4. On August 13, 1982, ALS and Litonjua updated Roas loan by paying BPIIC the sum of P190,601.35; this reduced the loan to P457,204.90 5. On September 13, 1982, BPIIC released the balance of the loan after full payment of Roas loan 6. In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to pay the mortgage indebtedness from May 1, 1981 to June 30, 1984 7. Subsequently, ALS and Litonjua filed an action against BPIIC alleging that: a. They were not in arrears in their payment but in fact made an overpayment in June 1984 b. They should not be made to pay amortization before the actual release of the P500,000 loan in August and September 1982 c. Out of the P500,000 loan, only the total amount of P464,351.71 was released to private respondents. Applying the effects of legal compensation, the balance of P35,648.23 should be applied to the initial monthly amortization of the loan 8. The trial court ruled in favor ALS and Litonjua and held that the amount of loan was only P464,351.77 9. On appeal, CA affirmed the same. CA cited that a simple loan is perfected only upon the delivery of the object of the contract. In the present case, the loan contact was only perfected on September 13, 1982 when BPIIC released the balance of the loan. Thus the payment of the monthly amortization should commence only a month after the said date, despite the express agreement of the parties that payment shall commence on May 1, 1981. Evidence also showed that private respondents had an overpayment as of June 1984; as such there is no cause for extrajudicial foreclosure 10. On the other hand, BPIIC averred that: a. A contact of loan is consensual and a loan contract is perfected at the time the contract of mortgage is executed following the ruling in Bonnevie v. CA b. The loan was actually released on March 31, 1871 when BPIIC issued a cancellation of the mortgage of Roas loan 11. Private respondents maintained that following Art 1934 NCC, a simple loan is perfected upon the delivery of the object of the contract, hence a real contract. The ruling in Bonnevie should be construed to mean that while the contract to extend the loan was perfected on March 1981, the loan itself was only perfected upon the delivery of the full loan on September 13, 1982. a. Even if the loan contract was perfected on March 31, 1981, their payment did not start a month thereafter, so no default took place. b. Private respondents contended that a perfected loan agreement imposes reciprocal obligations. In reciprocal obligations, neither party incurs a delay if the other does not comply or is not ready to comply with his obligation. Applying this, private respondents did not incur delay since it was only

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CREDIT TRANSACTIONS Atty. R. Vasquez


on September 13 that BPIIC fully complied with its obligation under the loan contract ISSUE: WON a contract of loan is a consensual contact in the light of the rule laid down in Bonnevie v. CA HELD: No, a loan contract is not a consensual contract but a real contract. It is perfected only but the delivery of the object of the contract. Petitioner misapplied the ruling in Bonnevie. The contract in Bonnevie falls under the first clause of Art 1934, it is an accepted promise to deliver something by way of simple loan. As held in the case of Saura Import v. DBP, a perfected consensual contract can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection, and which gives rise to obligations only on the part of the borrower. CAB: The loan contract between BPIIC and ALS and Litonjua, was only perfected on September 13, 1982, the date the full loan was released. As such, the obligation of the private respondents to pay commenced only on October 13, 1982, a month after the perfection of the contract. Moreover, a contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. Here, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua will pay the monthly amortization beginning May 1, 1981. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the contract can he demand that the other party also fulfill his obligation. As such, BPIIC can only demand payment after September 13, 1982 and the starting date for foreclosure is October 13, 1982. PANTALEON V. AMERICAN EXPRESS INTL, 629 SCRA 276 (2010) FACTS: Spouses Pantaleon and their children joined an escorted tour of Western Europe. While visiting Amsterdam, Mrs. Pantaleon wanted to purchase a 2.5 karat diamond at Coster Diamond House. Said jewelry amounted to $13,826 1. Pantaleon used his American Express credit card to pay for his purchase. 10 minutes later, his Amex Card had not yet been approved. Worried that he was already inconveniencing the tour group, Pantaleon asked the store clerk to cancel the transaction. The store manager asked Pantaleon to wait a few more minutes but after 15 minutes, the manager informed Pantaleon that respondent bank demanded bank references to which Pantaleon acceded. 2. 45 Minutes after first presenting his card and 30 minutes after the group was supposed to leave the store, Coster decided to release the items without respondents approval of the purchase 3. It appears that the approval code was transmitted to Amex Amsterdam 78 minutes after the purchases were electronically transmitted by the jewelry store to respondents Amsterdam office 4. The delay occurred two more times while plaintiff was in the US purchasing golf equipment and childrens shoes 5. Upon returning in Manila, Pantaleon sent a letter to respondent bank demanding an apology for the delay in providing credit authorization for the purchases he made. Amex explained that Pantaleons purchase of $13,826 was out of the usual charge pattern established. 6. As such, Pantaleon filed an action for damages. The trial court held in favor of Pantaleon. The trial court ruled that respondent failed to exercise diligent efforts to effect the approval of the purchases 7. On appeal, CA reversed the trial court decision citing that respondent bank did not breach its obligations to petitioner 8. Petitioner argues that respondents failure to timely a pprove or disapprove the purchase constituted mora solvendi on the part of the respondent in the performance of its obligation. CA erred in applying the principle of mora accipiendi, which relates to delay on the part of the obligee in accepting the performance of the obligation by the obligor. NOTE: 1. Mora solvendi delay on the part of the debtor to fulfill his obligation by reason of a cause imputable to him Requisites: a. Obligation is demandable and liquidated b. Debtor delays performance c. Creditor judicially or extra-judicially requires the debtors performance Effects: a. Debtor is guilty of breach b. Debtor is liable for interest in case of obligations to pay money or damages in other obligations c. Debtor is liable even for a fortuitous event when the obligation is to deliver a determinate thing 2. Mora accipiendi delay on the part of the creditor without justifiable reason to accept the performance of the obligation Requisites:

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By: M. Mejia
a. b. c. An offer of performance by the debtor who has the required capacity The offer must be to comply with the prestation as it should be performed; and The creditor refuses the performance without just cause COMMODATUM Loan whereby the bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the exact same thing CHARACTERISTICS 1. CAUSE Essentially gratuitous, otherwise if there is compensation, it might be a lease 2. PURPSOSE Temporary use of the thing loaned but not to its fruits, unless stipulated or is incidental (Art 1940). Otherwise, if the bailee is not entitled to the use of the thing, it might be a deposit. If the primary purpose is use of the fruits, the contract is a usufruct 3. SUBJECT MATTER Generally non-consumable goods but if the consumable goods are not for consumption, such may be the subject of the commodatum, as when merely for exhibition or display (Art 1396) 4. Bailor need not be the owner of the thing loaned (Art 1938) It is sufficient that he has a possessory interest o A mere lessee or usufructuary may lend but the borrower or bailee himself may not lend or lease the thing loaned to him to a 3rd person (Art 1932 par 2) 5. PURELY PERSONAL o Death of either party terminates the contract unless there is a stipulation to the contrary o Generally, bailee can neither lend nor lease the object to a 3rd person in the absence of some agreement to that effect o Use of the thing loaned may extend to the bailees household (who are not considered 3rd persons) EXCEPT: (a) When there is a contrary stipulation (b) Nature of the thing forbids such use 6. ENJOYMENT OF FRUITS A stipulation to make the use of fruits is valid, but it is never presumed. The enjoyment of fruits must only be incidental to the use of the thing itself, for if it is the main cause, the contract may be one of usufruct NATURE OF COMMODATUM GENERAL RULE: Bailee acquires the temporary use of the thing but not its fruits since the bailor remains the owner (Art 1935)

ISSUE: What is the nature of credit card transactions? HELD: Every credit card transaction involves three contracts: (a) Sales contract between the card holder and the merchant or business establishment which accepted the credit card; (b) Loan agreement between the credit card issuer and the credit card holder; and (c) Promise to pay between the credit card issuer and the merchant or business establishment. Although we recognize the existence of a relationship between the credit card issuer and the credit card holder upon the acceptance by the cardholder of the terms of the card membership agreement, we have to distinguish this contractual relationship from the creditor-debtor relationship which only arises after the credit card issuer has approved the cardholders purchase request. The first relates merely to an agreement providing for credit facility to the cardholder. The latter involves the actual credit on loan agreement involving three contracts: the sales contract between the cardholder and the merchant or business establishment; the loan agreement between the card issuer and the cardholder; and the promise to pay between the credit card issuer and the merchant or business establishment. From the loan agreement perspective, the contractual relationship begins to exist only upon the meeting of the offer and the acceptance of the parties involved. In other words, when the cardholders use their credit cards to pay for their purchases, they merely offer to enter into loan agreements with the credit card issuer, Only after the latter approves the purchase requests that the parties enter into binding loan contracts in keeping with Art 1319. CAB: AMEX has no obligation to approve any and all charge requests made by its cardholders pursuant to the card membership agreement. Art 1935. The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.

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CREDIT TRANSACTIONS Atty. R. Vasquez


EXCEPTION: A stipulation that the bailee may make use of the fruits of the thing loaned is valid (Art 1940), provided that the use of the fruits is merely incidental; otherwise, it is usufruct (De Leon). If the bailee is not entitled to the use of the thing, the contract is deposit. CONTRACT AKIN TO DONATION Both confer benefit to the recipient. The presumption is that the bailor loaned the thing has no need therefor (Second sentence, Art 1946). KINDS OF COMMODATUM 1. ORDINARY COMMODATUM Use of the thing by the bailee is for a certain period of time 2. PRECARIUM One whereby the bailor may demand the thing loaned at will; if any of the following exist: a. The duration and purpose of the contract is not stipulated b. The use of the thing is merely tolerated by the owner CAUSE It is essentially gratuitous but: a. If any compensation is to be paid by the borrower there arises a lease contract b. If the consideration is to render some service, an innominate contract will result Art 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Art 1937. Movable or immovable property may be the object of commodatum. SUBJECT MATTER GENERAL RULE: Non-consumable goods, whether movable or immovable property (Art 1936-1937) EXCEPTION: Consumable goods may be the subject matter of commodatum if the purpose of the contract is not the consumption of the object (Art 1936) Art 1938. The bailor in commodatum need not be the owner of the thing loaned. BAILOR NEED NOT BE OWNER It is sufficient that the bailor has 1. Possessory interest; or 2. The right to use which he may assert against the bailee or 3rd persons but not the rightful owner Q: Who can be a bailor in commodatum? A: 1. Anyone. The bailor in commodatum need not be the owner of the thing loaned (Art 1938) 2. But the bailee himself may not lend nor lease the thing loaned to him by a third person (Art 1939 par 2) Art 1939. Commodatum is purely personal in character. Consequently: (1) The death of either the bailor or the bailee extinguishes the contract; (2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. PURELY PERSONAL CHARACTER OF COMMODATUM Unlike mutuum, commodatum is purely personal contract, the lender having in view the character, credit and conduct of the borrower. Hence, the death of either party terminates the contract, unless by stipulation, the commodatum is transmitted to heirs of either or both parties (Art 1306). RIGHT OF BAILEE TO LEND THE THING LOANED TO THIRD PERSONS GENERAL RULE: A bailee can neither lend nor lease the object of the contract to a third person, in the absence of some understanding or agreement to that effect

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By: M. Mejia
EXCEPTION: Use of the thing loaned may extend to members of the bailees household EXCEPTION TO THE EXCEPTION: Bailees house may NOT use it when 1. There is contrary stipulation; or 2. Nature of the thing forbids such use (par 2, Art 1939) Art 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. CONTRARY STIPULATON AS TO FRUITS The bailee is entitled only to the use of the thing loaned and not to its fruits as a general rule. The enjoyment of fruits must only be incidental to the use of the thing itself for if it is the main cause, the contract may be one of usufruct (Art 562). OBLIGATIONS OF THE BAILEE A. PRINCIPAL OBLIGATIONS 1. Take care of the thing with diligence of a good father of a family (Art 1163, 1169, 1170 and 1173) 2. Return the IDENTICAL thing loaned upon the expiration of the term or upon the accomplishment of the purpose (Art 1933) B. OTHER OBLIGATIONS 1. Pay for the ORDINARY EXPENSES for preservation of the thing loaned (Art 1941) the use and d. REASON: The law presumes that the parties intended that the borrower shall be liable for loss of the thing even if it is due to a fortuitous event for otherwise they would not have appraised the thing (Republic v. Bagtas) When, being able to SAVE either the thing borrowed or his own things, he chose to save the latter REASON: The bailee shows his ingratitude after the thing is gratuitously loaned to him When the bailee DEVOTED the thing for a different use from that agreed upon REASON: The bailee acts in bad faith

e.

GENERAL RULE: Bailee is not liable for deterioration due to the use of the thing and without his fault EXCEPTIONS: (1) If expressly stipulated (2) If guilty of fault or negligence (Art 1170); or (3) If he devotes the thing to any purpose different from that which it has been loaned (Art 1942, par 1) 2. Pay for EXTRAORDINARY EXPENSES arising from the actual use of the thing, which shall be borne by both the bailor and the bailee even though the bailee acted without fault, unless there is a stipulation to the contrary (Art 1949 par 2) NOTES: o The bailee has no right to retain the thing loaned as security for claims he has against the bailor even for extraordinary expenses (Art 1944) EXCEPT for a claim for damages suffered by the bailee because of hidden flaws known to the bailor (Art 1951) o Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or a bailee in commodatum (Art 1287) o The right of retention ceases when the bailee is reimbursed o The bailee cannot lawfully sell the thing to satisfy the damages o Retention or adverse claim of bailee cannot ripen into title by ordinary acquisitive prescription

GENERAL RULE: Bailee is not liable for loss due to fortuitous events because ownership remains with the bailor. EXCEPTIONS: Bailee is liable for loss even if it should be through a fortuitous event in the following cases (KLAS-D): a. When the KEEPS it longer than the period stipulated or after the accomplishment of its use (delay) b. When he LENDS or leases it to third persons who are not members of his household c. When the thing loaned has been delivered with APPRAISAL of its value unless there is a stipulation exempting the bailee from responsibility in case of fortuitous event

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CREDIT TRANSACTIONS Atty. R. Vasquez


3. Pay for the expenses OTHER than those under Art 1941 and 1949 (e.g., ordinary expenses for the preservation and expenses for ostentation) NOTE: In case there are multiple bailees, their obligation shall be solidary. This is an exception by express provision of law to the general rule that the concurrence of two or more parties in the same obligation gives rise only to a joint obligation (Art 1207, 1208) REASON: To effectively safeguard the rights of the bailor 4. The bailee has no right to RETAIN the thing loaned as security for claims he has against the bailor, even though they may be by reason of extraordinary expenses (Art 1944) 5. A bailee does not answer for the DETERIORATION of the thing loaned due only to the use thereof and without his fault 6. Liability when there are 2 or more bailees: The presumption is that they are solidarily liable (Art 1945) REASON: To safeguard effectively the right of the bailor. The law presumes that the bailor takes into account the personal integrity and responsibility of all bailees, and that, therefore, he would not have constituted the commodatum if there were only one bailee Q: What are the remedies of the bailor if the bailee refuses to return the thing loaned? A: 1. The bailor may file an action for specific performance to compel the return of the object. 2. He may also file an action for replevin or for the return of personal property. 3. File an action for recovery of possession either as writ of possession 4. Writ of possession if the bailor wants to recover possession only (real property) NOTE: A lesee can be a bailor. He can even assert his possessory rights against the owner of the object. Ownership is not necessary in commodatum. But in mutuum, ownership is necessary because the object is meant to be consumed and returned with a fungible object. TYPES OF EXPENSES 1. Ordinary expenses those incurred in the normal, natural or everyday use or preservation of the thing 2. Extraordinary expenses those incurred by exceptional circumstances or those caused by the natural use of the thing, but not necessary for its preservation 3. Ornamental expenses Those incurred for ostentation and are not necessary for the preservation of the thing Art 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. LIABILITY FOR ORDINARY EXPENSES It is logical that the borrower should defray the expenses for the use and preservation of the thing loaned for after all, he acquires use of the same and he is supposed to return the identical thing. As a rule, the borrower is obliged to take good care of the thing with the diligence of a good father of a family (Art 1163). Art 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. LIABILITY FOR THE LOSS OF THING LOANED As a general rule, the bailee is not is liable for loss or damage due to a fortuitous event (Art 1174). The reason is that the bailor retains ownership of the thing loaned. Art 1492 specifies the instances when the bailee is liable even for a loss due to a fortuitous event. Art punishes the bailee for his improper acts although he may not be the proximate cause of the loss

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By: M. Mejia
1. Bailee devotes the thing to any purpose different from that for which it was loaned Bad faith 2. He keeps it longer than the period stipulated or after the accomplishment of the purpose for which the loan has been constituted Delay 3. If the thing loaned has been delivered with an appraisal value unless there is a stipulation exempting the bailee from responsibility in case of fortuitous event Assumption of risk. The law presumes that the parties intended that the borrower shall be liable for the loss of the thing even if due to a fortuitous event otherwise they would not have appraised the thing 4. If he lends it to a third person who is not a member of his household Breach of the tenor of the obligation; commodatum is purely personal 5. If, being able to save either the thing owned or his own thing, he chose to save his own Ingratitude Art 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. LIABILITY FOR DETERIORATION OF THING LOANED The parties to the contract know that the thing borrowed cannot be used without deterioration due to ordinary wear and tear. In the absence of a contrary stipulation, the depreciation caused by the reasonable and natural use of the thing is borne by the bailor. The bailee is liable if he is guilty of fault or negligence (Art 1170) or if he devotes the thing to any purpose different from that for which it was loaned (Art 1492[1]). GENERAL RULE: Bailee is liable for the deterioration of the thing loaned. EXCEPTION: The deterioration of the thing is due only to the use thereof and nto without his fault (Art 1943) Art 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. OBLIGATION TO RETURN THE THING LOANED Except for claim for damages suffered because of the thing loaned (Art 1951), the borrower has no right to retain the thing loaned as security for claims he has against the lender even though they may be by reason of extraordinary expenses 1. Ownership remains in bailor The bailee acquires only temporary use of the thing the ownership of which remains in the lender. It would be extremely harsh if the bailor, after benefitting the bailee, should be deprived of its enjoyment on the excuse of the expenses more or less certain or just 2. Only temporary use is given to bailee The bailee would be violating the bailors trust in him to return the thing as soon as the period stipulated expires or the purpose has been accomplished EFFECT OF RETENTION OR ADVSERSE CLAIM BY BAILEE The mere failure of the bailee to return the subject matter of the commodatum to the bailor does not constitute adverse possession on the part of the bailee who holds the same in trust. Such adverse claim cannot ripen into title by way of ordinary acquisitive prescription because of the absence of just title. RIGHT OF RETENTION FOR DAMAGES The exception is of evident justice. However, the bailees right extends no further than to the retention of the thing loaned until he is reimbursed for the damages suffered by him. He cannot lawfully sell the thing to satisfy said damages. Art 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. LIABILITY WHEN THERE ARE TWO OR MORE BAILEES The reason for imposing solidary liability where there are 2 or more borrowers is to safeguard effectively the rights of the lender. The law presumes that the bailor takes into account the personal integrity and responsibility of all the bailees and therefore, he would not have constituted the commodatum if there were only one bailee. NOTE: This is an exception by express provision of law to the general rule that the concurrence of 2 or more parties in the same obligation gives rise only to a joint obligation (Art 1207, 1208).

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CREDIT TRANSACTIONS Atty. R. Vasquez


OBLIGATIONS OF THE BAILOR 1. To RESPECT THE DURATION of the loan because the bailor is bound by the terms of the contract of commodatum which is for a certain time GENERAL RULE: Bailor cannot demand return before the expiration of the period or accomplishment of the use EXCEPTIONS: a. In case of urgent need of the thing, bailor may demand its return or temporary use REASON: Commodatum is essentially gratuitous (Art 1946) EFFECT: Contract of commodatum is suspended while the thing is in the possession of the bailor b. If the bailee commits any act of ingratitude specified in Art 765 (1) If The bailee should commit an offense against the person, the honor or the property of the bailor, or of the wife or children under his parental authority (2) If the bailee imputes to the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it unless the crime or act has been committed against the bailee himself, his wife or children under his parental authority (3) If the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor REASON: Similarity of commodatum with donation (Art 1948). The person who commits any of the acts of ingratitude makes himself unworthy of the trust reposed upon him by the bailor Precarium (Art 1948) (1) If duration of the contract has not been stipulated (2) If use or purpose of the thing has not been stipulated (3) If use of the thing is merely tolerated by the owner 2. REFUND to the bailee extraordinary expenses incurred for the preservation of the thing, provided the bailee brings the same to the knowledge of the bailor before incurring them except when the reply to the notification cannot be awaited without danger (Art 1949, par 1) However, if the extraordinary expenses arise on the occasion of the actual use by the bailee, even though he acted without fault, they shall be borne equally by both bailor and bailee, UNLESS there is a stipulation to the contrary (Art 1949, par 2) GENERAL RULE: Bailor and bailee shall be equally liable EXCEPTION: If there is a stipulation for a different apportionment NOTE: Ornamental expenses are not included because they are deemed to be incurred by the bailee on caprice or whim. Extraordinary expenses refer to expense are those which are not ordinarily incurred in the course of the use of thing but are necessary for its preservation or continued use. RULES ON REIMBURSEMENT: GENERAL RULE: Notice should be given by the bailee to the bailor regarding such extraordinary expenses REASON: Notice is required because it is possible that the bailor may not want to incur the extraordinary expense at all EXCEPTION: Where extraordinary expenses are so urgent that reply to the notification cannot be awaited without danger 3. If the EXTRAORDINARY EXPENSES arise from the actual use of the thing and even though the bailee acted without fault, the expenses shall be born equally by both bailor and bailee (Art 1949, par 2) REASONS: a. Bailee pays because the benefit derived from the use of the thing loaned to him b. Bailor pays the other because he is the owner and the thing will be returned to him

c.

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By: M. Mejia
EXCEPTION: Stipulation to the contrary that provide for a different apportionment of such expenses or that they shall be borne by the bailee or bailor alone 4. ALL OTHER EXPENSES which are not necessary for the use and preservation of the thing must be shouldered by the borrower (bailee) 5. The DEPRECIATION caused by reasonable and natural use of the thing is borne by the bailor (Art 1943) REASON: The parties to the contract know that the thing borrowed cannot be used without deteriorations due to ordinary wear and tear EXCEPTIONS: a. When there is a contrary stipulation b. When the bailee is guilty of fault or negligence c. If he devotes the thing to any purpose different from that for which it has been loaned 6. To be liable to the bailee for damages for KNOWN HIDDEN FLAWs (Art 1951) REQUISITES: a. Existence of FLAW or defect b. The flaw or defect is HIDDEN c. The bailor is NOT aware thereof; and d. Bailee SUFFERS damages by reason of said flaw or defect NOTES: o If the above requisites concur, the bailee has the right of retention for damages o The bailor is made liable for his bad faith o The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee REASON: The expenses or damages may exceed the value of the thing loaned (Art 1952) o If in making use of the thing, the bailee incurred expenses other than ordinary and extraordinary expenses, he is not entitled to reimbursement EXCEPTION: When the defect is not known to the bailor, he is not liable because the commodatum is gratuitous 7. The bailor has no right of ABANDONMENT for expenses and damages (Art 1952) REASON: The expenses and/or damages may exceed the value of the thing loaned Art 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. OBLIGATION TO RESPECT DURATION OF LOAN The primary obligation of the bailor is to allow the bailee the use of the thing loaned for the duration of the period stipulated or until accomplishment of the purpose for which the commodatum was constituted. This is because the bailor is bound by the terms of the commodatum which is for a certain time (Art 1933, 1935). However, if he should have an urgent need of the thing or if the borrower commits any act of ingratitude (Art 1948), he may demand its return or temporary use. This is because the a commodatum is essentially gratuitous. Under Art 1946, in case of temporary use of the thing by the bailor, the rights and duties of the parties are likewise temporarily suspended (Art 1946, par 2) Art 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases: (1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or (2) If the use of the thing is merely tolerated by the owner. PRECARIUM a kind of commodatum where the bailor may demand the thing at will. It has been defined as a contract by which the owner of the thing, at the request of another person, gives the latter the thing for use as long as the owner shall please

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CREDIT TRANSACTIONS Atty. R. Vasquez


Art 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765. RIGHT OF BAILOR TO DEMAND RETURN OF THINGS FOR ACTS OF INGRATITUDE Under Art 1948, the acts of ingratitude enumerated in Art 765 are applicable because like donation, commodatum is essentially gratuitous. The bailee who commits any of the acts of ingratitude makes himself unworthy of the trust reposed upon him by the bailor. Hence, the bailor has the right to demand the immediate return of the thing loaned. 1. If the bailee should commit an offense against he person, honor or property of the bailor, his wife or his children under his parental authority 2. If the bailee imputes to the bailor any criminal offense or acts involving moral turpitude, even though he should prove it, unless the crime or act has been committed against the bailee himself, his wife or children under his authority; and 3. If the bailee unduly refuses to provide support when the bailee legally or morally bound to give support to the bailor NOTE: Art 1948 contemplates only ordinary commodatum since in a precarium, the bailor can always demanded the thing loaned at will. Art 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger. If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. OBLIGATION TO REFUND EXTRAORDINARY EXPENSES 1. Extraordinary expenses for the preservation of the thing loaned Such expenses shall be borne by the bailor. This is because it is the bailor who profits by said expenses. If they are incurred by the bailee, the bailor must refund them provided the bailee notifies the bailor before incurring the expenses. As a rule, notice is required because it is possible that the bailor may not want to incur the extraordinary expenses at all. EXCEPTION: Where extraordinary expenses are so urgent that the reply to the notification cannot be awaited without danger. 2. Extraordinary expenses arising from the actual use of the thing loaned Such expenses arising on the occasion of the actual use of the thing loaned shall be borne by the bailor and bailee alike on a 50-50 basis. The parties, however may, by stipulation provide for a different apportionment of such expenses, or that they shall be borne by the bailee or bailor alone. Art 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimbursement. NO OBLIGATION TO ASSUME ALL OTHER EXPENSES All expenses other than those referred to in Art 1941 and 149 for the purpose of making use of the thing i.e., not necessary for the use and preservation of the thing, must be shouldered by the borrower. This is only proper since he makes use of the thing. Expenses for ostentation are to be borne by the bailee because they are not necessary for the preservation of the thing. Art 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. LIABILITY TO PAY DAMAGES FOR KNOWN HIDDEN FLAWS The following are the requisites which must concur for the application to Art 1951: 1. There is flaw or defect in the thing loaned 2. The flaw or defect is hidden 3. The bailor is aware thereof 4. He does not advise the bailee of the same; and 5. The bailee suffers damages by reason of said flaw or defect The bailor is made liable for his bad faith. The bailee is given the right of retention until he is paid damages (Art 1944).

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By: M. Mejia
6. WHERE FLAW IS UNKNOWN TO BAILOR Where the defect is not known to the bailor, he is not liable because commodatum is gratuitous. Art 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. NO RIGHT OF ABANDONMENT FRO EXPENSES AND DAMAGES The reason for Art 1952 is that the expenses and/or damages may exceed the value of the thing loaned, and as such it would be unfair to allow the bailor to just abandon the thing instead of paying for said expenses and/or damages. CASES: REPUBLIC V. BAGTAS, 6 SCRA 262 (1962) FACTS: In May 1948, Jose Bagtas borrowed from the Republic, through the Bureau of Animal Industry, 3 bulls for a period of 1 year from May 1948 to May 1949 for breeding purposes subject to a breeding fee of 10% of the book value of the bulls. The three bulls were valued as: a. Sindhi P1,176.46 b. Bhagnari P1,320.56 c. Sahiniwal P744.46 (died during a Huk raid) 1. Upon the expiration of the contract, Bagtas asked for a renewal of another 1 year. However, the Secretary of Agriculture approved the renewal thereof of only 1 bull and requested the return of the other 2. 2. As such, Bagtas notified the Director of the Animal Industry of his intention to purchase the bulls subject to depreciation. The Director, however, advised him that the value of the 3 bulls could not be reduced and they either be returned or pay the book value not later than October 1950. 3. Bagtas failed to pay the book value or to return the bulls. As such, the Republic filed an action against Bagtas for the return of the 3 bulls loaned to him or the payment of their book value amounting to P3,241.45 and unpaid breeding fee, both with interests and cost. 4. Bagtas averred that he could not return the bulls nor pay their value because of the bad peace and order situation in Cagayan Valley, and pending the appeal he filed before the Secretary of Agriculture to deduct depreciation costs from the book value of the bulls 5. The trial court held in favor of the Republic and ordered Bagtas to pay the total value of the 3 bulls plus breeding fees with interests on both sums at the legal rate from the filing of the complaint As the surviving spouse of Bagtas, Felicidad filed a motion alleging that the two bulls were returned to the Bureau of Animal Industry sometime in November 1958 and the third bull, died from a gunshot wound during a Huk raid Respondent alleged that she could not be held liable for the two bulls as they had already been returned. Respondent alleged that the contract was a commodatum and as such, the Republic retained ownership or title to the bull should it suffer loss due to force majeure

7.

ISSUE: WON the respondent is liable for the loss of the bull even if due to a fortuitous event HELD: Yes. A contract of commodatum is essentially gratuitous. If the breeding is considered a compensation, then the contract would be a lease of the bull. Under Art 1671 NCC, the lessee would be subject to the responsibilities of a possessor in bad faith because she had continued possession of the bull after the expiry of the contract. Even if the contract is a commodatum, the respondent is still liable under Art 1942 which provides that a bailee in a contract of commodatum: 1. Is liable for the loss of things, even if it should be through a fortuitous event 2. If he keeps it longer than the period stipulated 3. If the thing loaned has been delivered with the appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of the fortuitous event CAB: The original period of the loan was from May 1948 to May 1949. The loan of one bull was renewed for another one year to end on May 1950. But Bagtas kept and used the bull until November 1953 when it was killed during a Huk raid. Furthermore, when it was delivered and loaned to Bagtas, the bulls each had an appraised value and there was no stipulation in the loan agreement that respondent is exempt from liability in case of the loss of the bull due to fortuitous event. Since Bagtas had already returned two bulls, the estate of the decedent is only liable for the sum of P859.63, the value of the bull which has not been returned. NOTE: This actually a lease as evidenced by the booking fee.

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CREDIT TRANSACTIONS Atty. R. Vasquez


REPUBLIC V. COURT OF APPEALS AND HEIRS OF DOMINGO BALOY, 146 SCRA 15 (1986) FACTS: This case originated from the decision of CFI Zambales, denying the application for registration of private respondents Baloy. 1. On appeal, CA reversed the CFI decision and approved the registration 2. Republic, through the Bureau of Lands, filed a motion for reconsideration alleging that the applicants possessory information title can no longer be invoked and that they were not able to prove a registerable title over the land 3. Applicants claim is anchored on their possessory information title coupled with their continuous, adverse and public possession of the subject property. It appears, however, that the possessory information title shows the said title had been acquired by applicants predecessor, Domingo Baloy, under the provisions of the Spanish Mortgage Law. 4. The director of lands, on the other hand, averred that the subject property had become public land through the operation of Act 627 of the Philippine Commission. (NOTE: In 1902, the area was declared within the US Naval reservation). Under Act 627, a period was fixed within which persons affected thereby could file their application (6 months from July 8, 1905) otherwise said lands or interest will be conclusively adjudged to be public lands and all claims on the par of private individuals will be forever barred. Since Domingo Baloy failed to file his claim within the prescribe period, the land had become irrevocably public and could not be subject of a valid registration for private ownership. 5. In arriving at its decision, CA noted that there was no formal order or decision of the court of Land Registration declaring the subject property to be public land, and as such there can be no judicial declaration to that effect. So during the interim the title of applicants was suspended. ISSUE: WON the occupancy of the US Navy over the subject property is in the concept of an owner, hence, such possession can be acquired by prescription HELD: No. The occupancy of the US Navy was not in the concept of owner. It partakes of the character of a commodatum. It cannot therefore militate against the title of Domingo Baloy and his successors in interest. Ones ownership of a thing may be lost by prescripti on by reason of anothers possession if such possession is under the claim of ownership, not where the possession is only intended to be transient, as in the case of the US Navys occupation of the land concerned, in which case the owner is not divested of his title, although it cannot be exercised in the meantime. CATHOLIC VICAR APOSTOLIC V. COURT OF APPEALS, 165 SCRA 515 (1988) FACTS: Plaintiff Catholic Vicar of the Mountain Province (Vicar) filed with CFI Baguio, an application for registration of several parcels (Lots 1-4) of land in La Trinidad, Benguet. Said lots are the sites of the Catholic Church building, convents, high school building and other structures. 1. Upon learning of the application, the heirs of Juan Valdez and heirs of Egmidio Octaviano filed their opposition on Lots 2 and 3, respectively, asserting ownership and title thereto. 2. The land registration court held in favor of the Vicar and confirmed the registration of the said properties. Both heirs of Valdez and Octaviano appealed to CA 3. CA modified the decision of the land registration court and found that: a. Lots 2 and 3 were possessed by private respondents under claim of ownership in good faith from 1906 to 1951 b. Petitioner had been possession of the same lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962 c. Petitioner had just been possession as owner for 11 years, hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years of possession without d. The principle of res judicata is a bar to the reopening of these questions of fact ISSUE: WON petitioner Vicars failure to return the subject property to private respondents constitutes an adverse possession which would entitle the Vicar to have just title over the subject properties HELD: No. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by the declaring the properties in its name for taxation purposes. When Vicar applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for 11 years. Ordinary acquisitive prescription requires possession for ten years but always with just title. Extraordinary prescription requires 30 years. As found by CA, petitioner did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it

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By: M. Mejia
satisfy the requirement of 10 years of ordinary acquisitive prescription because of the absence of just title. CA gave no credence to the evidenced adduced by petitioner since there was absolutely no documentary evidence to support its claim that it purchased the lots from Valdez and Octaviano. On the other hand, private respondents were able to prove that their predecessors house was borrowed by petitioner Vicar after the church and convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees fai lure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. PRODUCERS BANK OF THE PHILIPPINES V. COURT OF APPEALS, 397 SCRA 651 (2003) FACTS: Sometime in 1979, private respondent Vives was asked by his friend Angeles Sanchez to help Arturo Doronilla in incorporating his business, Sterela Marketing and Services (Sterela). Sanchez asked Vives to deposit in a bank a certain amount of money in the name of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money from said account within one month 1. Relying on the assurances and representation of Sanchez and Doronilla, private respondent issued a check for P200,000 in favor of Sterela. 2. Subsequently, Sanchez, Mrs. Vives and Dumagpi (Doronillas secretary) opened an account with petitioner Producers Bank under the name of Sterela. The passbook was thereafter issued to Mrs. Vives 3. Later private respondent learned that Sterela was no longer holding office in the address given to him. As such, he verified with the petitioner bank if their money was still intact. Private respondent was informed that only P90,000 remained therein, after being withdrawn by Doronilla. Atienza, the assistant manager, also informed Vives that she could not withdraw amount because it had to answer for the postdated checks issued by Doronilla 4. It appears that Doronilla opened a current account for Sterela and authorized the bank to debit the savings account for the amounts necessary to cover overdrawn checks. Doronilla also obtained a loan for P175,000 and to cover payments thereof, he issued 3 postdated checks, all of which were dishonored. In August 1979, Doronilla issued a postdated check for P212,0000 in favor of Vives but the same was dishonored by the bank. Upon demand, Doronilla issued another check for the same amount but the check was against dishonored for insufficiency of funds As such, private respondent filed an action for recovery of sum of money against Doronilla, Sanchez, Dumagpi and petitioner. He also filed criminal actions against Doronilla, Sanchez and Dumagpi The trial court ruled in favor of Vives and held Doronilla, Dumagpi and Producers Bank solidarily liable for the P200,000 and moral damages. CA affirmed the same Petitioner contends that the transaction between Doronilla and Vives is a simple loan since all the requirements of a mutuum are present: a. What was delivered to Doronilla was consumable thing (money) b. The transaction was onerous as Doronilla was obliged to pay interest As such, petitioner argues that it cannot be held liable for the return of Vives money because it is not privy to the transaction between the latter and Doronilla On the other hand, private respondent contends that the transaction between him and Doronilla is not a mutuum but an accommodation, since he did not actually part with the ownership of his P200,000 and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can be issued to the effect that Sterela had sufficient funds for its incorporation but at the same time, he retained some degree of control over his money through his wife who was made a signatory to the savings account and in whose possession the account passbook was given.

5.

6.

7.

8.

9.

ISSUE: WON the transaction between defendant Doronilla and private respondent Vives was one of simple loan (mutuum) HELD: No. CA did not err when it ruled that the transaction was a commodatum and not a mutuum as provided under Art 1933 NCC. Art 1933 seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are instances where a commodatum may have for its object a consumable thing. Art 1936 provides: Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the subject, as when it is merely for exhibition.

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CREDIT TRANSACTIONS Atty. R. Vasquez


Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed on, the loan is a commodatum and not a mutuum. The rule is that the intention of the parties shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination. 6. CAB: Vives agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within 30 days. Private respondent merely accommodated Doronilla by lending his money without consideration, as a favor to Sanchez. It was however clear that the money would not be removed from Sterelas savings account and would be returned to private respondent within 30 days. Doronillas attempt to return the amount of P212,000 does not convert the transaction from a commodatum to a mutuum because such was not the intent of the parties and because the additional P12,000 corresponds to the fruits of the lending of the P200,000. Art 1935 expressly states that the bailee in a commodatum acquires the use of the thing loaned but not its fruits. Hence, it was only proper for Doronilla to remit the interest accruing to the latters money deposited within petitioner. PAJUYO V. COURT OF APPEALS, 430 SCRA 492 (2004) FACTS: Petitioner Pajuyo paid P400 to a certain Pedro Perez for the rights over a parcel of land in Payatas, Quezon City. Pajuyo then constructed a shanty where he lived from 1979 to December 1985 1. In December 1985, Pajuyo and private respondent Guevarra executed an agreement allowing Guevarra to live in the house for free on the condition that he would maintain the property in good condition and that he would voluntarily vacate the premises on demand 2. In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra vacate the house. However, he refused. 3. As such, Pajuyo filed an ejectment case against Guevarra. In his answer, Guevarra claimed that Pajuyo had no valid title or right of possession as the property is within the land set aside for socialized housing under Proclamation no 137. 4. MTC held in favor of Pajuyo, citing that the subject of the agreement is the the house and not the lot. Pajuyo is the owner of the house and he allowed Guevarra to use the house on tolerance. Thus, his refusal to vacate the premises on Pajuyos demand made Guevarras continued possession of the house illegal On appeal, RTC affirmed the MTC decision. RTC upheld the agreement, which established a landlord-tenant relationship between Pajuyo and Guevarra. Under the terms of the agreement, Guevarra is bound to return possession of the house on demand. Moreover, in an ejectment case, the only issue for resolution is material or physical possession and not ownership Guevarra filed an appeal before CA. CA reversed the RTC decision. According to CA, the agreement is not a lease contract but a commodatum because the agreement was not for a price certain. Since Pajuyo only resurface in 1994 to claim the property, Guevarra who was in physical possession of the property, had first priority as beneficiary under the Code of Policies Beneficiary Selection and Disposition of Home lots of NHA

5.

ISSUE: WON the agreement is in the nature of a commodatum HELD: No. The agreement in the instant case is not one of commodatum. In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for certain time and return it. An essential feature of commodatum is that it is gratuitous and that the use of a thing belonging to another is for a certain period. Thus the bailor cannot demand the return of the thing loaned until after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum is constituted. If the bailor should have an urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contract is considered a precarium (a kind of commodatum). The agreement reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. It obligated Guevarra to maintain the property in good condition. The imposition of this obligation makes the instant agreement different from commodatum. Case law on ejectment has treated relationship based on tolerance as akin to landlord-tenant relationship where the withdrawal of the permission would result in the termination of the lease. Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee has the duty to return the property to Pajuyo, the bailor. The obligation to deliver or return the thing received

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By: M. Mejia
attaches to contracts for safekeeping, or contracts of commission, administration and commodatum. SIMPLE LOAN OR MUTUUM MUTUUM A contract whereby one of the parties delivers to another money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid (Art 1933) It involves the return of the equivalent amount only and not the identical thing because the borrower acquires ownership of the money or other consumable thing loaned (Art 1978) A loan of money may be payable in kind (Art 1958) As a RULE, if the subject of the contract is consumable, it would be mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Under the law, consumable goods may be the object of commodatum if the purpose of the contract is not consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is commodatum and not mutuum (Producers Bank of the Phils v. CA, G.R. no 115324, February 19, 2003) DEFINITION OF FUNGIBLE AND NON-FUNGIBLE GOODS 1. FUNGIBLE Those which belong to common genus which includes several species of the same kind (e.g., grain, wine, oil) 2. NON-FUNGIBLE Those that are specifically determined and cannot be substituted by others (e.g., specific land, building, particular house) NOTES: Mere issuance of checks to the debtor does not perfect the contract of loan. It is only after the checks have been encashed that by the debtor that the contract may be deemed perfected The destruction of the thing loaned does not extinguish ones obligation to pay because his obligation i s not to return the thing loaned but to pay a generic thing No estafa is committed by a person who refuses to pay his debt or denies its existence REASON: The borrower effectively acquires ownership MUTUUM AND RENT DISTINGUISHED MUTUUM RENT/LEASE Delivery of money or some consumable Delivery of some non-consumable thing thing with a promise to pay the in order that the other may use it equivalent of the same kind and quality during a certain period and return it to the former There is a transfer of ownership of the There is no transfer of ownership of the thing delivered thing delivered Relationship between the parties is that Relationship is that of a landlord and of obligor-obligee tenant Creditor receives payment for his loan Landlord receives compensation either in money, provisions, chattels or labor LOAN AND SALE DISTINGUISHED LOAN SALE Real contract Consensual contract Generally unilateral because only Bilateral and reciprocal borrower has obligations NOTE: If the property is sold but the real intent is only to give the object as security for a debt, as when the price is comparatively small, there is really a contract of loan with an equitable mortgage (Art 1602) BARTER A contract whereby one person transfers ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quality and quantity (Art 1954). COMMODATUM/MUTUUM AND BARTER DISTINGUISHED BASIS OF MUTUUM COMMODATUM BARTER COMPARISON SUBJECT Money or any other Personal or real Non-fungible or MATTER fungible thing property non-consumable (generally nonthing consumable) OBLIGATION OF Pay or deliver the Return the The equivalent
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CREDIT TRANSACTIONS Atty. R. Vasquez


BAILEE same kind or quality loaned to the bailee identical thing borrowed when the time has expired or the purpose has been served Always gratuitous thing is given in return for what has been received understanding that the same amount of the same kind and quality shall be paid (Art 1933). NO CRIMINAL LIABILITY FOR FAILURE TO PAY In simple loan or mutuum, in contrast with commodatum, the borrower acquires ownership of the money, goods or personal property borrowed. As the owner, the borrower can dispose of the thing borrowed and his act will not be considered a misappropriation thereof. MEANING OF FUNGIBLE THINGS Fungible things, are those which are usually dealt with by number, weight, or measure such as rice, oil, sugar etc so that any given unit or portion is treated as the equivalent of any other unit or portion. DISTINCTION BETWEEN FUNGIBLE AND CONSUMABLE THINGS Whether a thing is consumable or not depends upon its nature and whether it is fungible or not depends upon the intention of the parties. Thus, while wine is consumable by its nature, it is nonfungible if the intention is merely for display or exhibition (Art 1936) because the same wine must be returned. Art 1954. A contract whereby one person transfers the ownership of nonfungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. MUTUUM AND COMMODATUM DISTINGUISHED FROM BARTER By the contract of barter or exchange, one of the parties binds himself to give one thing in consideration of the others promise to give another thing (Art 1638). 1. The distinction between mutuum and barter lies in the subject matter: in mutuum, it is money or any other fungible thing; in barter, non-fungible (non-consumable) thing 2. In commodatum, the bailee is bound to return the identical thing borrowed when the time has expired or the purpose has been served. In barter, the equivalent thing is given in return for what has been received.

NATURE OF CONTRACT

May be gratuitous

Onerous

FORM OF PAYMENT 1. IF THE THING LOANED IS MONEY Payment must be made in the currency stipulated, otherwise that which is legal tender in the Philippines and in case of extraordinary inflation or deflation, payment shall be in the value of the currency at the time of the creation of the obligation 2. IF THE THING LOANED IS OTHER THAN MONEY Payment of another thing of the same kind, quality and quantity. In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of the loan NATURE OF MUTUUM 1. Bilateral Borrowers promise to pay is the consideration for the lenders obligation to furnish the loan 2. No criminal liability upon failure to pay SUBJECT MATTER 1. Fungible or non-consumable depending on the intent of the parties, that the return of the thing is equivalent only and not the identical thing 2. Money 3. If the transfer of ownership is on a non-fungible thing, with the obligation of the other to give things of the same kind, quantity and quality, it is a barter

Art 1953. A person who receives a loan of money or any other


fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. SIMPLE LOAN OR MUTUUM Simple loan or mutuum is a contract whereby one of the parties delivers to another money or other consumable thing with the

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3. Mutuum may be gratuitous and commodatum is always gratuitous. Barter, on the other hand, is an onerous contract, being a mutual sale (Art 1641). Art 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code. If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. FORM OF PAYMENT 1. LOAN OF MONEY If the thing loaned is money, payment must be made in the currency stipulated, if it is possible to deliver such currency; otherwise, it is payable in the currency which is legal tender of the Philippines (Art 1249) and in case of extraordinary inflation or deflation, the basis of payment shall be the value of the currency at the time of ht eh creation of the obligation (Art 1250). 2. LOAN OF FUNGIBLE THING If what was loaned was a fungible thing other than money, the borrower is under obligation to pay the lender another thing of the same kind, quality and quantity. In case it is impossible to do so, the borrower shall pay its value at the time of the perfection fo the loan Art 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. PAYMENT OF DEBTS IN MONEY PAYABLE IN PHILIPPINE CURRENCY The 1st par of Art 1249 is not applicable where the contract between the parties is to pay in Philippine currency. The phrase currency stipulated used in Art 1249 refers to money different fro which is the legal tender in the Philippines. LEGAL TENDER That currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount In the Philippines, all coins and notes issued by the Bangko Sentral ng Pilipinas constitute legal tender for al debts, both public and private. Unless otherwise fixed by its Monetary Board, coins are legal tender for amounts not exceeding P50 for denominations of P0.25 and above, and in amounts not exceeding P20 for denominations of P0.10 or less. NOTE: Under BSP Circular 537 (effective August 11, 2006), the maximum amount of coins to be considered legal is adjusted as follows: (1) P1,000 for denominations of P1, P5 and P10; and (2) P100 for denominations of P0.01, P0.05, P0.10 and P0.25 PAYMENT BY MEANS OF INSTRUMENTS OF CREDIT 1. RIGHT OF CREDITOR TO REFUSE OR ACCEPT Promissory notes, checks, bills of exchange and other commercial documents are not legal tender and as such, the creditor cannot be compelled to accept them. This is true even of the check is certified o The creditor, if he chooses, may accept them, without the acceptance producing the effect of payment. In the meantime, the demandability of the original obligation is suspended until payment by the commercial document is actually realized 2. PAYMENT FOR PURPOSE OF REDEMPTION Art 1249 deals with a mode of extinction of debts, while the right to redeem is not an obligation but an exercise of a right; nor is it intended to discharge a pre-existing debt. 3. EFFECT ON OBLIGATION Payment by means of commercial documents does not extinguish the obligation: o Until they have been cashed o Unless they have been impaired through the fault of the creditor

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CREDIT TRANSACTIONS Atty. R. Vasquez


Art 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. INFLATION A sharp sudden increase of money or credit or both without a corresponding increase in business transactions. Inflation causes a drop in the value of money, resulting in the rise of general price level There is inflation when there is an increase in the volume of money and credit relative to available goods resulting in substantial and continuing rise in the general price level DEFLATION It is the reduction in volume and circulation of the available money or credit, resulting in a decline of the general price level REQUISITES FOR THE APPLICATION OF ART 1250 1. There is an official declaration of extraordinary inflation or deflation from the BSP 2. The obligation is contractual in nature; and 3. The parties expressly agreed to consider the effects of the extraordinary inflation or deflation BASIS OF PAYMENT IN CASE OF EXTRAORDINARY INFLATION OR DEFLATION Under Art 1250, the purchasing value of the currency at the time of the establishment of the obligation shall the basis of payment, in case of any extraordinary increase or decrease of the purchasing power of the currency which the parties could not have reasonably foreseen. This, however, is subject to the agreement of the parties to the contrary. The burden of proving that there had been an extraordinary inflation or deflation of the currency is upon the party that alleges it. WHEN INFLATION OR DEFLATION IS EXTRAORDINARY Art 1250 is meant to abate the uncertainty of and confusion that affected contracts and entered into or payments made during WWII and to help provide a just solution to future cases. As such, the party alleging it must lay down the factual basis for the application of Art 1250. According to JBL Reyes, the better test as to when inflation or deflation is extraordinary is one that neither party had reason to foresee when the obligation was established or manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. Art 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. PLACE WHERE OBLIGATION SHALL BE PAID 1. If there is a stipulation, the payment shall be made in the place designated 2. If there is no stipulation and the thing to be delivered is specific, the payment shall be made at the place where the thing was, at the perfection of the contract 3. If there is no stipulation and the thing to be delivered is generic, the payment shall be the domicile of the debtor. In such case, the creditor bears the expenses in going to the debtors place to accept payment, subject to the rule in par 4. NOTE: The order is successive and exclusive as may be gleaned from the provision itself. CASES: CHEE KIONG YAM V. MALIK, 94 SCRA 30 (1979) FACTS: Petitioners Chee Kiong Yam filed a petition for certiorari, prohibition and mandamus with preliminary injunction alleging that respondent judge without or in excess of jurisdiction. 1. Petitioners alleged that the facts in the complaint did not constitute the crime of estafa and even if they did, they were not within the jurisdiction of the respondent judge 2. It appears that Amin filed three criminal complaints against Chee Kiong Yam for estafa through misappropriation of funds. But the

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complaint states that said petitioners received the amount from Amin as a loan Amin also filed an action of sum of money against petitioners in September 1975, alleging that the P50,000 was a simple business loan with interest and was originally demandable within six months against petitioner Equitable PCI Bank and its employees, Aimee Yu and Bejan Lionel Apas, alleging that: a. Petitioner bank induced them to avail of its peso and dollar credit facilities by offering low interest rates b. They signed pre-printed promissory notes on various dates beginning 1996, unaware of identical escalation clauses which granted Equitable Bank authority to increase rates without their consent 1. In its answer, Equitable Bank asserted that respondents knowingly accepted all the terms and conditions, and even availed of the credit facilities for 5 years 2. RTC upheld the validity of the promissory notes however it invalidated the escalation clause contained therein because it violated the principle of mutuality of contracts. RTC noted the steep depreciation of the peso during the intervening period and declared the existence of extraordinary inflation. Consequently, the trial court ordered the use of the 1996 dollar exchange rate in computing respondents dollar denominated loans ISSUES: 1. WON the promissory notes were valid 2. WON the escalation clause violated the principle of mutuality of contracts 3. WON there was extraordinary inflation HELD: FIRST ISSUE: Yes. A contract of adhesion is a contract whereby almost of its provisions are drafted by one party. The participation of the other party is limited in affixing his signature or his adhesion to the contract. For this reason, contracts of adhesion are strictly construed against the party who drafted it. It is wrong, however, to conclude that all contracts of adhesion are invalid per se. They are binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of adhesion becomes void only when the dominant party takes advantage of the weakness of the other party, completely depriving the latter of the opportunity to bargain on equal footing. CAB: If the terms and conditions offered by petitioner bank had been truly prejudicial to respondents, they would have walked out and negotiated with another bank at the first available instance. But they did not. Instead, they continuously availed of the banks credit facilities for 5 years. SECOND ISSUE: Yes. Escalation clauses are not void per se. however, one which grants the creditor an unbridled right to adjust the interest independently and upwardly,
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3.

ISSUE: What is the nature of the transaction in the case at bar? HELD: It is a simple loan or mutuum. The nature of simple loan is defined in Art 1933 and 1953 NCC: Art 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loam ownership passes to the borrower. Art 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. In a simple loan or mutuum, as contrasted to commodatum, the borrower acquires ownership of the money, goods or personal property borrowed. Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered misappropriation thereof. As held in US v. Ibanez, the debtor cannot be held liable for the crime of estafa under said article, by merely refusing to pay or by denying the indebtedness. It appears that respondent judge failed to appreciate the distinction between mutuum and commodatum, when he performed the questioned acts. He mistook the transaction between petitioners and private respondents to be commodatum wherein the borrower does not acquire ownership over the thing borrowed and has the duty to return the same thing to the lender. EQUITABLE PCI BANK V. NG SHEUNG NGOR, 541 SCRA 223 (2007) FACTS: Ng Sheung Ngor, Ken Appliance Division Inc and Benjamin Go filed an action for annulment and/or reformation of documents and contracts

CREDIT TRANSACTIONS Atty. R. Vasquez


completely depriving the debtor of the right to assent to an important modification of the agreement, is void. Clauses of that nature violate the principle of mutuality of contracts. Art 1308 states that a contract must bind both contracting parties; its validity or compliance cannot be left to the one of them. A valid escalation clause should provide: (1) That the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the Monetary Board of BSP; and (2) That the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause) CAB: Petitioner banks promissory notes uniformly stated that if the subject promissory note is extended, the interest for subsequent extensions shall be at such rate as shall be determined by the bank. Equitable dictated the interest rates if the term of the loan was extended. Respondents had no choice but to accept them. This was a violation of Art 1308. Furthermore, the assailed escalation clause did not contain the necessary provisions for its validity i.e., it neither provided that the interest rate would be increased only if allowed by law or by the Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause is void. THIRD ISSUE: Extraordinary inflation exists when there is an unusual decrease in the purchasing power of the currency and such decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary inflation, on the other hand, involves an inverse situation. Art 1250 provides: In case of an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the currency at the time of the establishment of the obligation shall be the basis of the payment, unless there is an agreement to the contrary. For extraordinary inflation (or deflation) to affect an obligation, the following must be proven: (1) There must be an official declaration of extraordinary inflation or deflation from the BSP (2) The obligation was contractual in nature; and (3) The parties expressly agreed to consider the effects of the extraordinary inflation or deflation CAB: BSP never declared the situation of extraordinary inflation. Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to recognize the effects of the extraordinary inflation (or deflation). There was no such stipulation in the promissory note or loan agreement. As such, the respondents should pay their dollar loan at the exchange rate fixed by the BSP at the time of maturity. ALMEDA V. BATHALA MARKETING, 542 SCRA 470 (2008) FACTS: Sometime in May 1997, respondent Bathala Marketing, as lessee, renewed its lease contract with Ponciano Almeda, as lessor (petitioners husband). Under the contract, Ponciano agreed to lease a portion of the Almeda compound consisting of 7,348.25 sqm for a monthly rental of P1,107,348.69 for a term of years unless terminated. The contract also provides that: a. The rental rate is based on the present rate of assessment on the property. In case the assessment is increase or any new tax or charge is imposed by authorized, the lesee shall pay the additional rental or charge. If the assessment or tax should be reduced, the lessee shall be entitled to reduction in the stipulated rental (condition 6) b. In case of an extraordinary inflation or devaluation of Philippine peso, the value of the peso at the time of the establishment of the obligation shall be the basis of payment (condition 7) 1. During the effectivity of the contract, Ponciano died. Thereafter, petitioners advised respondent that the former shall be charged VAT on its monthly rentals. Respondent argued that VAT may not be imposed on the rental since the VAT law is not a new tax imposed, but is already in effect prior to the execution of the lease contract 2. Petitioner subsequently informed respondents that the monthly rental shall be increased by 73% pursuant to condition 7 and Art 1250 NCC. Respondent opposed the demand, contending that there was no extraordinary inflation to warrant the application of the Art 1250 3. Respondent refused to pay the VAT and adjusted rentals but continued to pay the stipulated amount based on the contract 4. As such, respondent filed an action for declaratory relief to determine the correct interpretation of the lease contract 5. Petitioners, in turn, filed an ejectment suit with damages for failure of the respondent to vacate the premises after demand has been made. 6. Petitioners later moved for the dismissal of the declaratory relief for being an improper remedy since the respondent was already in breach of the obligation 7. The trial court held in favor of respondent and ruled that respondent was liable liable to pay VAT and rental adjustment. The trial court cited that the imposition of VAT is not proper since it was not a new

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tax that would call for the application of the clause in the contract. Moreover, there was no extraordinary inflation or devaluation. However the trial court ordered the restitution of the amounts paid despite the rule that in an action for declaratory relief, other than a declaration of rights and obligations, affirmative reliefs are not awarded to parties CA affirmed the same but deleted the return of the balance of the rental deposits and of amounts representing the VAT and rental adjustment and Romeo Porras who were the cashier and bookkeeper, respectively, of private complainant Rural Bank of Pototan 1. The informations filed against respondents alleged that respondents, with grave abuse of confidence, as cashier and bookkeeper of Rural Bank of Pototan, without the knowledge and/or consent of the management of the bank and with intent to gain, did then and there willfully, unlawfully and feloniously take, steal, and carry way the sum of P15,000 2. The trial court did not find the existence of probable cause, citing that: a. The element of taking without the consent of the owners was missing on the ground that the depositor-clients and not the bank, which filed the instant cases, are the owners of the money allegedly taken by the respondents and hence, are the real parties-in-interest b. The informations were bereft of the phrase alleging dependence, guardianship or vigilance between respondents and the offended party that would have created a high degree of confidence between them which the respondents could have abused 3. The trial court further noted that allowing the cases to push through would violate the respondents constituted right of respondents to be informed of the nature and cause of the accusation against them. As such, RTC dismissed the cases and refused to issue a warrant of arrest against Puig and Porras. (MR denied) 4. Petitioner filed a petition for review on certiorari under Rule 45 raising the issue: WON the 112 informations for qualified theft sufficiently alleged the element of taking without the consent of the owner, and the qualifying circumstance of grave abuse of confidence 5. Petitioner argued that under Art 1980 NCC fixed savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loans. Corollary thereto, Art 1953 provides that a person who receives a loan of money or any other fungible thing acquires ownership thereof, and is bound to pay the creditor an equal amount of the same kind and quality. Thus, it argues that the depositors who place their money with the bank are considered creditors of the bank. The bank acquires ownership of the money deposited by its clients, taking the money taken by respondents as belonging to the bank 6. Petitioner also contends that the informations sufficiently alleged all the elements of qualified theft, citing that a perusal of the informations will show that they specifically allege that the respondents were the cashier and bookkeeper of the bank, and that they took various amounts of money with grave abuse of confidence and without the knowledge and consent of the bank

8.

ISSUE: WON the amount of rentals due respondents should be adjusted by reason of extraordinary inflation or devaluation HELD: No. When the parties speak of devaluation as stipulated in the lease contract, they really did not intend to depart from Art 1250. Thus, the clause should be read in harmony with Art 1250. Art 1250 reads: In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of the payment, unless there is an agreement to the contrary. Inflation has been defined as the sharp increase of money, or credit or both, without a corresponding increase in business transaction. There is inflation when there is an increase in the volume of money and credit relative to available goods, resulting in a substantial and continuing rise in the general price level. The SC explained extraordinary inflation as: There is extraordinary inflation when there exists a decrease or increase in the purchasing power of the Peso which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could have been reasonably foreseen or manifestly beyond the contemplation of the parties at the time of the obligation. Based on the facts presented, there is no extraordinary inflation or devaluation that would justify the application of Art 1250. Absent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, the effects of extraordinary inflation are not to be applied PEOPLE V. PUIG, 535 SCRA 564 (2008) FACTS: In November 2005, the Iloilo Prosecutors office filed before RTC Dumangas 12 cases of Qualified Theft against respondents Teresita Puig

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CREDIT TRANSACTIONS Atty. R. Vasquez


7. On the other hand, respondents contend that the instant petition is the wrong mode of appeal because a finding of a probable cause for the issuance of a warrant of arrest presupposes an evaluation of facts and circumstances. Moreover, it is the DOJ Secretary who should file the petition for review considering that the incident was endorsed by the DOJ In all cases, it is clear that the crime was committed with grave abuse of confidence and without knowledge or consent of the bank, without necessarily stating the phrase, of a relation by re ason of dependence, guardianship, or vigilance, between respondents and the offended party that has created a high degree of confidence between them, which respondents abused, and without using the word owner in lieu of the bank were considered to have satisfied the test of sufficiency of allegations. INTEREST GUIDELINES FOR THE APPLICATION OF PROPER INTEREST RATE 1. No interest shall be due unless it has been expressly stipulated in writing (Art 1956) REQUISITES FOR DEMANDABILITY OF INTEREST (LEW): a. Must be EXPRESSLY stipulated EXCEPTION: (1) Indemnity for damages The debtor in delay is liable to pay legal interest (6% or 12%) as indemnity for damages even in the absence of a stipulation for the payment of interest. Interest as indemnity for damages is payable only in case of default or non-performance of contract BASIS FOR COMPUTATION FOR INDEMNITY (a) CB Bank Circular 416 12% per annum in cases of: Loans Forbearance of money, goods or credits Judgments involving such loans or forbearance, in the absence of express agreement as to such rate of interest (b) Art 2209 NCC 6% per annum in cases of: Other sources (e.g. sale) Damages arising from injury of persons Loss of property which does no involve a loan (2) Interest accruing from unpaid interest Interest due shall earn interest from the time it is judicially demanded although the obligation may be silent on this point

ISSUE: WON the money deposited in banks is considered a commodatum or simple loan HELD: It is a simple loan or mutuum. Banks, on the other hand, where the monies are deposited, are considered the owners thereof. This is clearly not only from the express provisions of law but from established jurisprudence. The relationship between banks and depositors has been held to be that of a creditor and debtor as provided in Art 1953 and Art 1980. In a long line of cases involving qualified theft, the SC has firmly established the nature of possession by the bank of the money deposits therein, and the duties being performed by its employees who have custody of the money or who have come into possession of it. The SC has consistently considered the allegations in the information that such employees acted with grave abuse of confidence, to the damage and prejudice of the bank, without particularly referring to it as owner of the money deposits as sufficient to make out a case of qualified theft. In Roque v. People, the SC held: since the teller occupies a position of confidence, and the bank places money in the tellers possession due to the confidence reposed on the teller, the felony of qualified theft would be committed. Similarly, in the case of People v. Sison, the SC held: (appellant) could not committed the crime had he not been holding the position of Luneta Branch Operation Officer which gave him not only sole access to the bank vault. The management of the bank reposed its trust and confidence in the appellant as its branch operation officer, and it was this trust and confidence which he exploited to enrich himself to the damage and prejudice of the bank. In People v. Locson, the SC held: When the defendant, with grave abuse of confidence, removed the money and appropriated it to his own use without the consent of the bank, there was taking as contemplated in the crime of qualified theft.

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forbearance of money but has been applied by SC in cases involving default in the payment of price or consideration under a contract of sale and an action for damages for injury of persons and loss of property and an action for damages arising from unpaid insurance claims (Castelo v. CA, 244 SCRA 180, 1995). 4. When an obligation, regardless of its source is breached, the contravenor can be held liable for damages o Interest as indemnity for damages is payable only in case of default or non-performance of the contract. As they are distinct claims, they may be demanded separately (Sentinel Insurance v. CA, G.R. no L-52482, February 23, 1990) 5. With regard to an award of interest in the concept of damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: a. When the obligation breached consists of payment of sum of money, in the absence of an agreement, the rate shall be the legal rate computed from delay (By virtue of Central Bank Circular no 416 and no 905, the legal rate is increased from 6% to 12%) NOTE: The interest due shall itself earn legal interest from the time it is judicially demanded b. In other cases, the rate of interest shall be 6% per annum NOTE: No interest shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. When the demand cannot be established, the interest shall begin to run only from the date of the judgment of the court is made. c. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be

COMPOUND INTEREST GENERAL RULE: Unpaid interest shall not earn interest EXCEPTIONS: (1) When judicially demanded (2) When there is an express stipulation (must be in writing) that the interest due and unpaid shall be added to the principal obligation and the resulting total amount shall interest Compounding interest may be availed only when there is a written stipulation in the contract for the payment of interest. b. c. LAWFUL The agreement must be in WRITING

2. If a particular rate of interest has been expressly stipulated by the parties, that interest, not the legal rate of interest, shall be applied (Stipulated rate of interest) 3. If the exact rate of interest is not mentioned, the legal rate of 6% or 12% shall be payable and computed from the date of default. The legal rate depends upon whether it is a loan or forbearance of money or not. NOTE: Central Bank Circular no 416 fixing the rate of interest at 12% per annum deals with: a. Loans b. Forbearance of money, goods, or credits; and c. Judgments involving such loans or forbearance in the absence of express agreement to such rate If the obligation arises from other sources such as contract of sale, damages arising from injury to persons and loss of property which does not involve a loan, what is applicable is the rate of 6% annually as provided in Art 2209 (Terminal Facilities and Services Corp v. PPA, G.R. no 35639. February, 27, 2002). The obligation consisting in the payment of sum of money referred to in Art 2209 is not confined to a loan or

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CREDIT TRANSACTIONS Atty. R. Vasquez


by then an equivalent to a forbearance of credit (Eastern Shipping Lines v. CA, G.R. no 97412, July 12, 1994) Should the vendee opt to purchase a subdivision lot via the installment payment system, he is, in effect, paying interest on the cash price, whether the fact and rate of such interest payment are disclosed in the contract or not (Relucio v. Bullante-Garfin, 187 SCRA 405, 1990) NOTE: No increase in interest rate unless it is expressly stipulated (PNB v. CA, 196 SCRA 536). DETERMINATION OF INTEREST PAYABLE IN KIND Its value shall be appraised at the current price of the products or goods at the time and place of payment (Art 1958). Purpose: To make usury harder to perpetrate ART 1957 The form of contract is not conclusive. Parol evidence may be admitted to show that a written document though legal in form was in fact a cloak or device to cover usury (Briones v. Cammayo, 41 SCRA 404, 1971). A usurious contract shall be considered void only with respect to the interest involved. Surcharges and penalties agreed to be paid by debtor partake the nature of liquidated damages and shall be reduced if iniquitous and unconscionable (Art 2227). Payment of interest is separate and distinct from that of surcharges and penalties. A penalty stipulation is not necessarily preclusive of interest if there is an agreement to that effect (Digutan v. CA, 3776 SCRA 560, 2002). NOTE: Usury is now legally non-existent. The interest chargeable depends upon the agreement between the lender and the borrower (Liam Law v. Olympic Sawmill Co, 129 SCRA 438, 1984). VALIDITY OF UNCONSCIONABLE INTEREST RATE IN A LOAN The SC said that nothing in said circular suspending the Usury Law grants lenders authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets (Almeda v. CA, G.R. no 11342, April 17, 1996) In Medel v. CA (G.R. no 131622, November 27, 1998), it was ruled that while the stipulated interest of 5.5% per month on a loan is not usurious pursuant to Central Bank Circular no 906, the same must be equitably reduced for being iniquitous, unconscionable and exorbitant. It is contrary to morals. It was reduced to 12% per annum in consonant with justice and fair play When the agreed rate is iniquitous and unconscionable, the courts may reduce the same as reason and equity demand. (Imperial v. Jaucian, G.R. no 149004, April 14, 2004). The interest may also s be reduced if the principal obligation has been partially performed.

RECOVERY OF UNSTIPULATED INTEREST (Art 1960) 1. PAID BY MISTAKE The debtor may recover as in the case of solution indebiti or undue payment 2. VOLUNTARILY PAID No recovery as in the case of natural obligations The presence of escalation clause without the corresponding deescalation clause in the event of a reduction of interest as ordered by law makes the clause one-sided as to make it unreasonable. Any increase in the interest rate pursuant to an escalation clause must be the result of an agreement between the two parties. Increases unilaterally imposed by a bank are in violation of the principle of mutually of contracts. A contract containing a condition which makes its fulfillment dependent upon the controlled will of one of the contracting parties is void. (PNB v. CA, G.R. no 109563, July 9, 1996; Equitable PCI Bank v. Ng Sheung Ngor, G.R. no 171545, December 19, 2007). Art 1956. No interest shall be due unless it has been expressly stipulated in writing. REQUISITES FOR RECOVERY OF INTEREST 1. The payment of interest must be expressly stipulated 2. The agreement must be in writing 3. The interest must be lawful

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forbearance, in the absence of express agreement as to such interest rate. If the obligation arises from other sources (e.g. sale) or by way of damages arising from injury to persons and loss of property which does not involve a loan, what is applicable is the rate of 6% per annum as provided in Art 2209 and not 12% per annum rate provided by CB Circular 416. While the interest agreed upon forms part of the consideration of the contract itself, interest as indemnity for damages is payable only in case of default or nonperformance of contract. As they are distinct claims, they may be demanded separately.

EXISTENCE OF STIPULATION TO PAY INTEREST 1. If a particular interest rate has been expressly stipulated by the parties, such interest and not the legal interest rate shall be applied 2. If the exact rate of interest is not mentioned, the legal interest rate shall apply 3. No increase in interest shall be due unless such increase has also been expressly stipulated 4. It is only in contracts of loan, with or without security, that interest may be stipulated or demanded LIABILITY FOR INTEREST EVEN IN THE ABSENCE OF A STIPULATION Art 1956 is subject to two exceptions: 1. Indemnity for damages The debtor in delay is liable to pay legal interest (6% or 12%) as indemnity for damages even in the absence of stipulation for the payment of interest a. Under Art 2209, the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money, is the payment of penalty interest at the rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then payment of legal interest of 6% per annum or in case of loans or forbearance of money, 12% per annum. This is also applicable in cases involving default in the payment of price or consideration under a contract of sale and action for damages for injury to persons and an action for damages arising from unpaid insurance claims b. Under Art 2213, interest cannot be recovered upon unliquidated claims or damages except when the demand can be established with reasonable certainty (assessed and determined by the courts). After proof, interest rate of 6% per annum should be from the date the judgment of the court is made i.e., at the time the qualification of damages may be deemed to have been reasonably ascertained c. CB Circular 416 fixing the rate of interest at 12% per annum, deals with: loans; forbearance of any money, goods or credits; and judgments involving such loans or

d.

2. Interest accruing from unpaid interest Interest due shall earn interest from the time it is judicially demanded although the obligation may be silent on this point (Art 2212). Both Art 2212 NCC and Sec 5 Usury Law are applicable only where interest has been stipulated by the parties. Art 2212 contemplates the presence of stipulated or conventional interest which has accrued when demand was judicially made. In cases where no interest rate had been stipulated, no accrued conventional interest could further earn interest upon judicial demand. LIABILITY FOR SURCHARGES AND PENALTIES Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Sec 4, Chapter 3, Title XVIII NCC. Art 2227 provides that liquidated damages, whether intended as indemnity or penalty shall be equitably reduced if they are iniquitous and unconscionable as determined by the courts. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, since penalty and interest are two different concepts which may separately be demanded. What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite express stipulation, may not equally justify non-payment or reduction of interest. Art 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no

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CREDIT TRANSACTIONS Atty. R. Vasquez


stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. Art 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (1109a) Art 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonably certainty. RULES ON INTEREST 1. If there is a stipulation as to the rate of interest, apply the rate unless the rate is contrary to law, morals, and good customs, in which case apply the legal rate 2. If interest is imposed but no rate is stipulated, or there is delay, apply the legal rate (either 6% or 12% pa) a. When the obligation involves the payment of indemnities in the concept of damage, the legal interest rate is 6% pa computed as follows: (1) From date of demand if the amount of indemnities can be established with reasonable certainty (2) If not, from the date of the judgment of the trial court b. When the obligation consists of a loan or forbearance of money, goods or credits as well as judgment involving such loan or forbearance, the legal interest rate shall be 12% pa computed from default i.e., from judicial or extrajudicial demand c. In both cases, the legal rate of interest shall be 12% from the finality of judgment until the judgment is paid Art 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. USURIOUS CONTRACTS DECLARED VOID The form of contract is not conclusive. Parol evidence is admissible to show that a written document though legal in form was in fact a cloak or device to cover usury if from a construction of the whole transaction it becomes apparent there exists a corrupt intention to violate the laws of usury. A usurious contract should not be considered void in its entirety but only as to the interest involved. It is only the stipulation on usurious interest which should be treated as void so that the loan becomes without stipulation to pay interest. In a simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt which is the cause of the contract is not illegal. The nullity of the stipulation on the usurious interest does not affect the lenders right to receive back the principal of the loan. Art 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment. DETERMINATION OF INTEREST PAYABLE IN KIND This article has the same purpose: to make usury harder to perpetrate. Art 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. WHEN UNPAID INTEREST EARNS INTEREST As a general rule, accrued interest shall not earn interest EXCEPT: 1. When judicially demanded as provided for in Art 2212 2. When there is an express stipulation made by the parties that the interest due and unpaid shall be added to the principal obligation and he result total amount shall earn interest (compounding interest) Art 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solution indebiti, or natural obligations shall be applied as the case may be. RECOVERY OF UNSTIPULATED INTEREST PAID Art 1969 provides that if unstipulated interest is paid by mistake, the debtor may recover as this would be a case of solution indebiti or undue payment (Art 2154). But where the unstipulated interest, or interest stipulated, there being a stipulation but it is not in writing, is paid voluntarily because the debtor feels morally obliged

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By: M. Mejia
to do so, there can be no recovery as in the case of natural obligations (Art 1423). Art 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. USURIOUS TRANSACTIONS GOVERNED BY SPECIAL LAWS The Usury Law and other special laws apply only so far as they are not inconsistent with the Civil Code. NOTE: Usury is now legally non-existent. The interest legally chargeable depends upon the agreement of the lender and the borrower. CB Circular 905 removed the Usury Law ceiling on interest rates for secured and unsecured loans, regardless of maturity. However, according to the SC the Circular did not repeal or in any way amend the Usury Law but simply suspended its effectivity. But while the Usury Law ceiling on interest rates was lifted by CB Circular 905, nothing ins aid circular grants lenders carte blanche authority to raise interest to levels which either enslave their borrowers or lead to a hemorrhaging of their assets. As such, when the agreed rate is iniquitous and unconscionable, the courts may reduce the same as reason and equity demand. CASES: TAN V. VALDEHUEZA, 66 SCRA 61 (1975) FACTS: In May 1955, a parcel of land was the subject matter of a public auction sale in which plaintiff Tan was the highest bidder. Due to the failure of respondent Valdehueza to redeem the said property, the provincial sheriff executed a Deed of Absolute Sale in favor of Tan 1. Subsequently, Valdehueza executed two documents of Deed of Pacto de Recto Sale in favor of plaintiff, over 2 portions of a parcel of land for the amount of P1,500 2. However, from the execution of the pacto de recto sale, Valdehueza remained in possession of the land 3. As such, plaintiff Tan filed an action against Valdehueza for the declaration of ownership and recovery of possession of the parcel of land (one bought at auction); and consolidation of ownership of two portions of another parcel (unregistered) of land (subject of pacto de recto) 4. The trial court held in favor of plaintiff and ordered defendant to pay P1,200 with legal interest of 6% as of August 1966 within 90 days (first action) and; P300 with legal interest of 6% as guaranty of the said amount of payment (second action) ISSUE: WON the interest rate imposed by the court is valid HELD: No. The imposition of legal interest on the amounts subject of the equitable mortgages, P1200 and P300, respectively, is without legal basis, for, "No interest shall be due unless it has been expressly stipulated in writing." (Art 1956 NCC) Furthermore, the plaintiff did not pray for such interest; her thesis was a consolidation of ownership, which was properly rejected, the contracts being equitable mortgages. INTEGRATED REALTY CORP V. PHIIPPINE NATIONAL BANK, 198 SCRA 390 (1989) FACTS: In January 1967, petitioner Raul Santos made a deposit with Overseas Bank of Manila (OBM) in the amount of P500,000 and was issued a Certificate of Time deposit. The following month, Santos against made a deposit with OBM in the amount of P200,000 1. Integrated Realty Corp, through its president Raul Santos, applied for a loan and credit line in the amount of P700,000 with respondent bank PNB To secure the loan, Santos executed a Deed of Assignment of the two time deposits. OMB gave conformity to the assignment through a letter 2. However, when the time deposit became due, OMB did not pay PNB. PNB demanded payment from IRC and Santos; both argued that the obligation (loan) of IRC was deemed paid with the irrevocable assignment of the time deposit. 3. PNB filed a collection suit against IRC and Santos for the payment of the loan with interests. It impleaded OBM as defendant to compel it to redeem and pay to it Santos time deposit certificate with interests 4. In their answer, IRC and Santos alleged that PNB has no cause of action since their obligation is already extinguished upon the irrevocable assignment of the time deposit certificates, and that they are not answerable for the insolvency of OBM. IRC filed a counterclaim for damages against PNB and a cross-claim against OBM alleging that OBM acted fraudulently in refusing to pay the time deposit certificates thus exposing them to suit 5. OBM denied knowledge of the time deposit certificates because the alleged time deposit of Santos does not appear in their books. OBM later amended its answer acknowledging the receipt of the time deposit it issued to Santos and admitted its failure to pay the same. However, it alleged that its operations have been suspended by the Central Bank in August 1968 by reason of insolvency and that the time deposits ceased to earn interest from that time 6. The trial court ruled in favor of PNB holding IRC and Santos solidarily liable for the payment of the loan with interests at the rate of 9% per annum from the maturity dates of the two promissory notes on January 11 and February 6, 1968. The court also ordered OBM to pay

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CREDIT TRANSACTIONS Atty. R. Vasquez


IRC and Santos whatever amounts the latter will pay to PNB with interest from date of payment On appeal, CA affirmed the trial court decision but deleted the judgment ordering OBM to pay IRC and Santos whatever amount they will pay to PNB The applicable rule is that legal interest, in the nature of damages for noncompliance with an obligation to pay a sum of money, is recoverable from the date judicial or extrajudicial demand is made. In the case at bar, the demand was made by PNB after the maturity of the time deposit. The measure of such damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon in the certificate of deposit which is 6.5%. such interest due or accrued shall further earn legal interest from the time of judicial demand. OBM IS NOT LIABLE TO REIMBURSE IRC AND SANTOS It must be noted that their liability to pay the various interests of 9% on the principal obligation, 1.5% additional interest and 1% penalty interest is an offshoot of their failure to pay under the terms of the two promissory executed in favor of PNB. OBM was not a party to the promissory notes. There is no privity of contract between OBM and PNB which will justify the imposition of said interests upon OBM. STATE INVESTMENT HOUSE V. COURT OF APPEALS, 198 SCRA 390 (1993) FACTS: Respondent spouses Aquino pledged certain shares of stock to petitioner State Investment in order to secure a loan of P120,000. Prior to the execution of the pledge, respondent spouses together with Jose Aquino signed an agreement with petitioner State for the latters purchase of receivables amounting to P375,000 1. When the loan fell due, respondent spouses paid the same party with their own funds and partly from the proceeds of another loan which they obtained from petitioner. This new loan was secured by the same pledge agreement. 2. When the new loan matured, State demanded payment. Respondents expressed willingness to pay, requesting that upon payment, the shares of stock pledged be released. 3. Petitioner denied the request on the ground that the loan extended to spouses Aquino remained unpaid 4. Subsequently, State informed respondent spouses that by virtue of the pledge agreement, the shares of stock would be sold at a public auction. 5. As such, respondent spouses filed an action alleging that the intended foreclosure sale was illegal because from the time the obligation under the (old) loan became due, they were able and willing to pay the same but petitioner insisted that respondents even the loan of Jose Aquino which was not secured by the pledge. They further alleged that their failure to pay their loan was excused because petitioner itself had prevented the satisfaction of the obligation

7.

ISSUES: WON OBM should be held liable for interests on the deposit of IRC and Santos from the time in ceased operations until it resumed business HELD: No. It should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the Central Bank. This is because what enables a bank to pay stipulated interest on money deposited with it is that its ability to generate funds. A distinction must be made between the interest which the deposits should earn from their existence until the bank ceased to operate, and that which they may earn from the time the banks operations were st opped until the date of payment of the deposits. As to the first, it should be paid because such interest has been earned in the ordinary course of the banks businesses and before the latter has been declared in a state of liquidation. Moreover, the bank being authorized by law to make use of the deposits within the limitation stated, to invest the same in its business and other operations, it may be presumed that it bound itself to pay interest to the depositors as in fact it paid interest prior to the dates of the claims. As to the interest which may be charged from the date the bank ceased to do business because it was declared in a state of liquidation, said interests should not be paid. It is utterly unfair to award private respondent his prayer for payment of interest on his deposit during the period that the bank was not allowed by the Central Bank to operate. INTEREST PAID AS DAMAGES While it is true that under Art 1956 no interest shall be due unless it has been expressly stipulated in writing, this applies only to interest for the use of money. It does not comprehend interest paid as damages. This is true with respect to the stipulated interest, but the obligations consisting as they did in the payment of money under Art 1108 he has the right to recover damages resulting from the default of OBM and the measure of such damages is interest at the legal rate of 6% per annum on the amounts due and unpaid at the expiration of the periods respectively provided in the contracts.

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By: M. Mejia
6. 7. 8. The trial court ordered petitioner to release the pledge and deliver to respondents the shares of stock upon payment of the loan On appeal, CA affirmed the decision of the trial court. Thereafter, the CA and trial court decisions became final and executory However, there developed disagreement over the amount which respondent spouses should pay to release the shares of stock petitioner contends that that respondents should pay interest and respondents argue otherwise The trial court held that the earlier decision ordered petitioner State to release the shares of stock upon payment by respondents of the principal of the loan without interest, penalties and other charges

Where the creditor unjustly refuses to accept payment, the debtor desirous of being released from his obligation must comply with 2 conditions: (a) tender of payment and; (b) consignation of sum due. Tender of payment must be accompanied or followed by consignation in order that the effects of payment may be produced. CAB: respondent Aquino, while they are properly regarded as having made a written tender of payment to petitioner; failed to consign in court the amount due at the time of the maturity of the loan. It follows that their obligation to pay principal with regular or monetary interest under the terms and conditions of the loan was not extinguished by such tender of payment alone. For the respondents to continue in possession of the principal of the loan and to continue to use the same after maturity of the loan without payment of regular interest, would constitute unjust enrichment on the part of the respondent spouses at the expense of the petitioner even though they had not been guilty of mora. It is precisely this unjust enrichment which Art 1256 prevents by requiring, in addition to tender of payment, the consignation of the amount due in court which amount would thereafter be deposited by the Clerk of Court in a bank and earn interest to which the creditor would be entitled. CASA FILIPINO DEVT CORP V. DEPUTY EXECUTIVE SECRETARY, G.R. NO 96494 (1992) FACTS: In June 1986, private respondent Jose Valenzuela filed a complaint against petitioner Casa Filipina Devt Corp before the Office of Appeals, Adjudication and Legal Affairs (OAALA) of the then Human Settlements Regulatory Commission (now HLURB) for failure to execute and deliver the deed of sale and transfer of certificate title. 1. Valenzuela alleged that he entered into a contract to sell with petitioner on May 2, 1984 to purchase a parcel of land in Paranaque for the amount of P68,400 with the following conditions: a. Private respondent will pay P16,416 as down payment b. The balance of P51,984 shall be paid in 12 equal monthly installments of P4,915.16 with 24% interest per annum starting September 3, 1984 2. Valenzuela made his final payment on October 7, 1985 (as evidenced by OR no 6266) but despite full payment of the lot, petitioner refused to execute the necessary deed of absolute sale and deliver the corresponding TCT 3. Private respondent also averred that he has offered to pay for or reimburse petitioner for the transfer of the title but the latter refused to accept the same
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9.

10. ISSUE: If respondent Aquinos were not in delay, what should they have been held liable for in accordance with the law? HELD: Since spouses Aquino were not held to have been in delay, they are properly liable only for: (a) the principal of the loan; (b) regular monetary interest of 17% per annum. They were not liable for penalty or compensatory interest, fixed by the promissory note in the loan at 2% per month or 24% per annum. Art 2209 provides that: If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is 6% per annum. The appropriate measure for damages in case of delay in discharging the obligation consisting of the payment of a sum of money, is the payment of penalty interest at the rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then the additional interest rate equal to the regular monetary interest; and if no interest had been agreed upon, then payment of legal interest (6% pa). The fact that respondent Aquino were not in default did not mean that they were relieved from payment not only of penalty interest (24% pa) but also of regular monetary interest (17% pa). The regular monetary interest continued to accrue under the terms of the promissory note until actual payment is effected. The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount. Art 1256 provides: If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by t consignation of the thing or sum due.

CREDIT TRANSACTIONS Atty. R. Vasquez


4. In its defense, Casa Filipina contended that Valenzuelas action is premature because of his failure to comply with other conditional requirements of their contract, i.e. payment of transfer expenses OAALA held in favor of Valenzuela. It held that under Sec 25 of PD 957 (Regulating the Sale of Subdivision Lots and Condominiums), the owner or developer shall deliver the title of the lot or unit to the buyer upon full payment of the lot or unit. No fee except those required for the registration of the deed of sale in the RD shall be collected for the issuance of such title. As such, it ordered Casa Filipina to reimburse to complaint total payments amounting to P76,180.82 plus 24% interest per annum from June 30, 1986 (date of filing the complaint) until fully paid Petitioner filed an appeal and raised the following: a. Its original mortgagee bank Royal Savings bank was absorbed by Comsavings Bak due to bankruptcy b. Comsavings Bank is not amenable to petitioners earlier arrangement with Royal Savings Bank on individual redemption of title, thus it demanded that petitioners obligation be paid prior to release of any individual title c. Petitioner cannot seasonably meet such demand due to the inability of the past administration to put up a viable and progressive economic program HLURB dismissed the petitioners appeal for lack of merit and affirmed the decision of OAALA Petitioner contends that: a. the amount of 24% interest imposed by OAALA in case of refund is high and without basis since HLURB Resolution R421 (series of 1988) states that the maximum interest to be awarded in case of refund is 12%; b. Although the contract to sell provides for said rate of interest, it merely applies on installment payments but not with respect to refund; and c. since the contract between both parties is not a forbearance of money or loan the doctrine in the case of Reformina v. Tomol is applicable, i.e. except where the action involves forbearance of money or loan, interest which courts may award is only up to 12% 24% per annum was mutually agreed upon by petitioner and private respondent in their contract to sellthis was the interest rate imposed on the private respondent for the payment of the installments on the contract price and there is no reason why the same interest rate should be equally applied to petitioner who is guilty of violating the reciprocal obligation. In Solid Homes Inc v. CA, the SC held that the proper rate of interest is 12% expressly agreed upon in writing by the parties, as appearing in the invoices and sanctioned by Art 2209 is applicable. It is, thus, evident that if a particular rate of interest has been expressly stipulated by the parties, that interest, not the legal rate of interest, shall be applied. CASTELLO V. COURT OF APPEALS AND MILAGROS DELA ROSA, 224 SCRA 180 (1995) FACTS: In October 1982, petitioners Castello, Banson and Depante entered into a Contract of Conditional Sale with private respondent Dela Rosa over a parcel of land. The agreed price was P269,408. Upon signing the contract, Dela Rosa paid petitioners P106,000 leaving a balance of P163,408 1. the Deed of Conditional Sale stipulated that: a. The balance (P163,408) shall be paid on or before December 31, 1982 without interest and penalty charges b. Should the balance remain unpaid, the vendee (Dela Rosa) shall be given a grace period of 6 months (up to June 30, 1983) to pay the balance provided that the interest rate of 12% per annum shall be charged and 1% penalty charge a month shall be imposed on the remaining diminishing balance 2. Dela Rosa was unable to pay the remaining balance on or before June 30, 1983. As such, petitioners filed an action for specific performance with damages against private respondent 3. The RTC ordered the rescission of the Deed of Conditional sale 4. On appeal, petitioners question the trial courts decision in rescinding the deed of conditional sale. They claimed that rescission of the contract was only an alternative relief available under NCC, while they prayed for specific performance with damages 5. CA set aside the trial court decision and ordered Dela Rosa to pay the balance of the conditional sale with interest and in default thereof, rescission 6. Accordingly, a Sheriffs Notice to Pay Judgment was served on Dela Rosa requiring her to pay petitioners P197,723.68 based on: Principal P 163,408 Plus interest 12% (per contract)

5.

6.

7. 8.

ISSUE: WON the ruling in Reformina v. Tomol is applicable HELD: No. The ruling in Reformina v. Tomol deals exclusively with cases where damages in the form of interest is due but no specific rate has been previously set by the parties. In such cases the legal interest of 12% per annum must be applied. In the present case, however, the interest rate of

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By: M. Mejia
From Nov 21, 1986 to Sept 2, 1988 P 34,315.68 Petitioners filed an MR contending that the sum of P197,723.68 was erroneous because the obligation of the private respondent was to pay (a) interest at the rate of 12% per annum PLUS (b) 1% penalty charge per month, from default, i.e. from January 1, 1983 The trial court denied the MR, citing that the CA, in its dispositive portion, did not refer to the stipulation in the Deed of Conditional Sale but rather to the legal interest rate which commenced from February 12, 1987, the date of entry of judgment. Had it intended otherwise, the CA would have declared so 1% penalty charge a month to be imposed on the remaining diminishing balance. The contention of the private respondent that Art 2209 NCC is not applicable in this case because the interest referred to therein is given as compensation for the use of money, not for the incurring of delay as in the instant case, is untenable. Art 2209 governs transactions involving the payment of indemnity in the concept of damages arising from delay in the discharge of obligations consisting of the payment of a sum of money referred to in Art 2209 is not confined to a loan or forbearance of money. The SC has, for instance, consistently applied Art 2209 in the determination of interest properly payable where there was default in the payment of price or consideration under a contract of sale, as in the case at bar. The stipulation in the Deed of Conditional Sale requiring the payment of interest is not unlawful. The validity of the contract of conditional sale itself has not been put to question by private respondent and there is nothing in the record to suggest that the same may be contrary to law, morals, good custom and public order or public policy. Accordingly, the contractual stipulation must be regarded as binding and enforceable as the law between the parties. Therefore: (1) During the period from January 1, 1983 up to June 30, 1983, private respondent Dela Rosa was bound to pay interest at the rate of 12% per annum on the unpaid balance of P163,408 (2) Starting July 1, 1983 and until full payment, Dela Rosa was bound to pay interest at the rate of 12% per annum plus another 12% per annum (or 1% penalty charge per month), or a total of 24% per annum to be computed on the remaining diminishing balance. EASTERN SHIPPING LINES V. COURT OF APPEALS, 234 SCRA 78 (1994) FACTS: Two fiber drums of riboflavin were shipped from Japan for delivery in a vessel owned by petitioner Eastern Shipping. Said shipment was insured with respondent Mercantile Insurance for P36,382,466.38 1. Upon arrival of the shipment to Manila, it was discharged unto the custody of Metro Port Service Inc, which stated in its survey that 1 drum was in bad order 2. It was then received by Allied Brokerage wherein it stated in its survey that 1 drum was opened and without seal 3. Allied Brokerage then delivered the shipment to the consignees warehouse, which it excepted that 1 drum contained spillages while the rest were adulterated/fake

7.

8.

ISSUE: What is the correct interpretation of the phrase to pay interest set out in the dispositive portion of the CA decision in the instant case? HELD: The established doctrine is that when the dispositive portion of a judgment, which has become final and executory, contains a clerical error or an ambiguity arising from an inadvertent omission, such error or ambiguity may be clarified by reference to the body of the decision itself. It appears that the CA decision was ambiguous in the sense that it was too cryptic. Examination of the body of the decision, however, sheds no light on the reference intended by the ponente (J. Castro-Bartolome) in direct private respondent to pay interest. The SC interpreted the phrase to pay interest found in the dispositive of the CA decision must, under applicable law, refer to the interest stipulated by the parties in the Deed of Conditional Sale, which they had entered into on October 15, 1982. In the first place, the phrase comes to the preceding phrase to comply with the obligation under the conditional sale to pay the balance of P163,408. As strong inference thus arises that the interest required to be paid is the interest stipulated as part of the obligation of Dela Rosa under the conditional sale to pay the balance of the purchase price. In the second place, there is no question that Dela Rosa failed to pay the balance of P163,408 on or before December 31, 1982. Under Art 2209 NCC, the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest, at a rate equal to the regular monetary interest, becomes due and payable. If no regular interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal interest which is 6% or in the case of loans or forbearance of money, 12% per annum. Applying Art 2209 to the instant case, the SC referred to the Deed of Conditional Sale which specifically provided for interest at the rate of 12% per annum and a

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CREDIT TRANSACTIONS Atty. R. Vasquez


4. Respondent insurance then filed an action for damages against petitioner for the losses sustained by the consignee (which the insurance subrogated) The trial court ruled in favor of Mercantile Insurance and ordered Eastern Shipping to pay damages, however it failed to state when the interest rate should commencefrom the date of filing of the complaint at 12% pa or from date of judgment of the trial court at 6% pa computation of legal interest shall, in any case, be on the amount finally adjudged When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under par 1 or par 2 above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

c.

5.

ISSUE: When should the interest rate commence and at what rate? HELD: The applicable interest rate is 6% per annum to be computed from the date of the decision of the trial court and 12% from the date of finality of judgment until payment. The SC laid down the following guidelines on the application of interest: 1. When an obligation, regardless of its source, is breached, the contravenor can be held for damages. The provisions under Title XVIII on Damages of the Civil Code govern in determining the measure of recoverable damages. 2. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof is imposed as follows: a. When the obligation is breached, and it consists in the payment of sum of money (loan or forbearance of money), the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of a stipulation, the rate of interest shall be 12% per annum to be computed from default i.e., from judicial or extrajudicial demand under and subject to the provisions of At 1169 b. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially but when such certainty cannot be so reasonably established at the time the claim is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the

III. USURY LAW AND CB CIRCULAR 416 AND 905


USURY Contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money, goods or credit ELEMENTS OF USURY 1. A loan or forbearance 2. An understanding between the parties that the loan shall or may be returned 3. An unlawful intent to take more than the legal rate for the use of money or its equivalent; and 4. The taking or agreeing to take for the use of the loan of something in excess of what is allowed by law NOTE: The subject of usury is one of statutory regulation and prohibition. In the absence of the statute, any interest rate may be charged. APPLICATION OF USURY LAW Act 2566 or the Usury Law is an act fixing rates of interest upon loans and declaring the effect of receiving or taking usurious rates, and for other purposes. It covers: 1. Loan Within the purview of the Usury Law, would be mutuum and not commodatum since commodatum is essentially gratuitous 2. Forbearance Signifies the contractual obligation of the creditor to forbear during a given period to require the debtor, payment of an existing debt then due and payable. Such forbearance or giving time for the payment of a debt is, in substance, a loan

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By: M. Mejia
If there is no loan or forbearance, there can be no usury. CB CIRCULAR 905 Abolished interest rate ceilings. Conversely, with the promulgation of such circular, usury has become legally inexistent as the parties can know legally agree on any interest that may be charged on the loan. IMPORTANT: CB Circular 905 did not repeal, amend or alter the Usury Law since a mere administrative issuance cannot change an act of the legislature. What it did merely was to remove the interest ceiling rates for loans and forbearances, thus making usury legally inexistent. LEGALITY OF CB CIRCULAR 905 Under the Usury Law, the Monetary Board is authorized to prescribe the maximum rate/s of interest for the loan or renewal thereof or the forbearance of money, goods or credits and to change such rate/s whenever warranted by prevailing economic and social conditions. CB Circular 906 is of doubtful legality because it appears to be in excess of the authority granted to the Monetary Board which is only to prescribe the ceilings of interest rates and not to abolish or remove such ceilings. However, CB Circular 905 no more than allow the contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue or a loan or forbearance. It does not authorize either party to unilaterally raise or lower the interest rate without the others consent. (PNB v. CA, 238 SCRA 20, 1994; Security Bank & Trust Co v. RTC of Makati, 262 SCRA 483, 1996). PURPOSE, THEORY AND NATURE OF USURY LAW 1. Purpose: For the protection of the borrower from the imposition of unscrupulous lenders who are ready to take undue advantage of the necessities of others 2. Theory: A usurious loan is attributable to such inequality in the relation of the lender and borrower that the borrowers necessities deprive him of freedom in contracting and place him at the mercy of the lender. In theory, the borrower is put by law in the same category with persons with legal disability to contract (e.g. unemancipated minors and insane). As such, the law has imposed penalties on those who violate its provisions and fixed rules prescribing the rates of interest for the loan or forbearance of money. 3. Nature: Usury Law is both remedial and penal. IMPORTANT: The penal clause provided in the Usury Law are no longer in effect (favorable construction of the Usury Law in favor the accused). However, the remedies provided in the Usury Law (e.g. filing of action, prescription) are still in effect. CONSTRUCTION OF USURY LAW 1. In General In the construction of usury statutes, it is the duty of the court to ascertain the intent and purpose of the legislature. The general intent must be kept in view in determining the scope and meaning of any part of the law and must be held in mind that it was enacted for the protection of the borrower 2. Liberal or strict construction Usury laws which are penal in their nature are to be strictly construed. In other words, when operating on the contract or security taken, the statute, is not , strictly speaking, punitive in its character, and should be construed so as to repress the evil the legislature had in view of its enactment. But when the punishment of the person who committed usury is sought, it should be construed in all cases of doubt and uncertainty in favor of the accused 3. Prospective or retrospective operation The general rule is that unless there is clear legislative intent to the contrary, usury statutes will be construed to be prospective only , and not retrospective. a. Contracts previously non-usurious If a contract is legal at its inception, it cannot be rendered illegal by any subsequent legislation (non-impairment clause). It has been held that a person who collected usurious interest after the adoption of the Usury Law upon a contract made when there was no usury law in force could not be held responsible under the Usury Law b. Contracts previously usurious Usury statutes which do not impair the obligation of contracts by making contracts legal which were illegal at their inception may constitutionally made retrospective. Thus, the right of a debtor under a usurious contract may refuse to pay

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CREDIT TRANSACTIONS Atty. R. Vasquez


interest or to recover usury has been held not to be a vested constitutional right secured against legislative innovation but that it constitutes a mere privilege within the legislative power to take away. Where the contract entered into before the effectivity of the Usury Law stipulated itenrest at a rate (60% pa) contrary to the Usury Law, the borrower was held liable only for the legal rate both for the period prior to and after the date the law became effective. The SC considered the contract of loan as one stipulating no interest (Aguilar v. Rubiato and Gonzales, 40 PHIL 750, 1919). interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board. INTEREST The compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credit. KINDS OF INTEREST 1. SIMPLE INTEREST That which is paid for the principal at a certain rate fixed or stipulated by the parties (Art 2209) 2. COMPOUND INTEREST That which is imposed upon interest due and unpaid. The accrued interest is added to the principal sum and the total amount is treated as a new principal upon which the interest for the next period is calculated 3. LEGAL INTEREST That which the law directs to be charged in the absence of any agreement as to the rate between the parties (Art 2209). 4. LAWFUL INTEREST That which the law allows or does not prohibit i.e., the rate of interest within the maximum prescribed by law (Sec 2 & 3) 5. UNLAWFUL INTEREST That which is paid or stipulated to be paid beyond the maximum fixed by law NOTES: Under CB Circular 416, the legal rate of interest for loan or forbearance of money, goods or credit and the rate allowed in judgments, in the absence of express contract as to such rate, shall be 12% per annum Any other kind of monetary judgments which has nothing to do with nor involving loans or forbearance does not fall within the Usury Law. The law applicable is Art 2209 which states that the legal interest rate for such obligations is 6% per annum. Art 2209 applies to transactions requiring the payment of indemnities as damages in the form of interest at 6% pa, in connection with any delay in the performance of an obligation arising therefrom other than those involving loan or forbearance.

ACT No. 2655 (Usury Law)


Section 1. The rate of interest for the loan or forbearance of any money goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or an

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By: M. Mejia
Sec 1-a appears to be the actual and operative grant to the Monetary Board of BSP to prescribe maximum rates of interest where the parties have not stipulated thereon and it should be construed to be limited only to loans or forbearance There is no longer any ceiling on interest rates on loans (Liam Law v. Olympic Sawmill, 129 CSRA 439, 1984) intermediaries. It may change the maximum interest rate of loans whenever warranted by prevailing economic and social conditions. Such changes interest rates may be effected gradually on scheduled dates announced in advance i.e., on a staggered basis. SEC 2 AND 3 DISTINGUISHED SEC 2 Taking or receiving of usurious interest is penalized Loan or forbearance is secured by a registered real estate Maximum interest rate allowed: 12% per annum Commissions, fines, premiums and penalties are included in computation of interest

INTEREST RATES Under the Usury Law: 1. Legal rate 12% per annum 2. Maximum rate a. 12% per annum if the loan is secured inw hole or in part by a mortgage upon real estate with a Torrens title (Sec 2); or any agreement conveying such real estate or an interest therein. b. 12% per annum if the loan is not secured; or c. That prescribed by the Monetary Board. This allows for more flexible interest rate ceilings NOTE: CB Circular 817 (July 21, 1981) fixed the effect rates of interest as: 1. Not exceeding 16% per annum, including commissions, premiums, fees, and other charges for secured loans of 365 days or less 2. Not exceeding 18% per annum if such loans are unsecured; and 3. If the maturity of the loan is more than 365 days, the interest shall not be subject to any ceiling MULTI-TIERED INTEREST RATES Under Sec 1-a, the Monetary Board may prescribe higher maximum rates of interest for low priority loans than those loans used (productive) purposes. Low priority loans are enumerated in Sec 1-a. Loans made by pawnshops, finance companies, and other similar credit institutions may also be allowed to charge higher rates though the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is likewise authorized by the same provision to prescribe maximum rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial

SEC 3 Mere demanding or agreeing to charge excessive interest is also punishable It is not so secured or there is no security at all Maximum interest rate allowed: 14% per annum Not considered

NOTE: Under both Sec 2 and 3, it is only the creditor who is criminally liable. VALIDITY OF STIPULATION TO PAY PENALTY IN CASE OBLIGATION IS NOT FULFILLED Where a borrower has agreed to pay a rate of interest not forbidden by law, but has stipulated that, in the event of his default, the obligation shall bear a higher interest rate, the increased rate is regarded as a penalty. Such penalty does not include interest, and as such the two are distinct thing that may be demanded separately. This doctrine is good only with respect to transactions falling under Sec 3. Sec 2 includes penalties in the computation of interest for the purpose of determining whether the same exceeds rates fixed by law or not. DETERMINATION OF THE EXISTENCE OF USURY 1. Corrupt agreement must be present To constitute usury, there must be an intention knowingly to contract for or take usurious interest. The real intention of the parties must be ascertained from the circumstances surrounding the transaction and from the language of the document itself 2. Where consideration of loan is property or services of uncertain value A contract is ordinarily not usurious under which the creditor is to receive, in consideration of the loan
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CREDIT TRANSACTIONS Atty. R. Vasquez


or forbearance, property or services of uncertain value, even though the probable value is greater than lawful interest, unless the excess is so palpable as to show a corrupt intent to violate or evade the Usury Law 3. Form of contract not conclusive The form the contract is not conclusive. Parol evidence is admissible to show that a written document although legal in form was in fact a device to cover usury. If from the construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme to becloud the crime of usury WHEN USURY LAW NOT APPLICABLE Since the purpose of the Usury law is to prevent excessive charges for the use of money, it applies only to those contracts which in substance involve a loan or forbearance. It does not apply to: 1. Rental in contract of lease where the relation between the contractors is that of landlord and tenant and not that of borrower and lender 2. A bona fide sale 3. The increase of price of thing sold as a result of a sale on credit over its cash sales price (time-price differential) 4. A bona fide pacto de retro sale EFFECT WEHRE PRINCIPAL IS NOT ABSOLUTELY PAYABLE The usury statutes are intended to prevent the charging of an excessive interest rate for the lending of money. As such, to constitute usury the principal sum must be payable absolutely and at all events. The Usury Law is not applicable to those uncertain transactions in which the lender incurs risk of losing in whole or in part the principal sum lent. Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than two and one-half per centum per month when the sum lent is less than one hundred pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding five hundred pesos; and fourteen per centum per annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker's agent shall be considered such, for the benefits of this Act, only if he be duly licensed and has an establishment open to the public. It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn offered by a person into two or more fractions in order to collect greater interest than the permitted by this section. It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the article pawned. INTEREST RATE THAT CAN BE CHARGED BY PAWNSHOPS The Monetary Board has raised the basis of interest rates for pawnshops, effective February 29, 1980: 1. 21 % per month When the sum lent is not more than P2,000 2. 18% per annum When the sum lent is more than P2,000 Under Sec 4, the prohibition comprehends the act of stipulating or charging a higher rate of interest than that allowed by the section. Pawnbrokers are allowed to charge relatively higher interest rates or otherwise they will not make profits considering that the loans applied are usually for are usually very loan NOTE: Sec 10 of the Pawnshop Regulation Act, pawnshops may, in addition to interest charges, impose a maximum service charge of P5 but not exceeding 1% of the principal loan. DIVIDING PAWN IN SEVERAL FRACTIONS NOT ALLOWED Under Sec 4, pawnbrokers are not allowed to divide the pawn (object) into several fractions in order to collect greater interest than that permitted. Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever warranted by prevailing economic and social conditions. Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary Board shall be guided by the following: 1. The existing economic conditions in the country and the general requirements of the national economy;

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By: M. Mejia
2. The supply of and demand for credit; 3. The rate of increase in the price levels; and 4. Such other relevant criteria as the Monetary Board may adopt. Sec. 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement: Provided, That whenever compound interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary Board. No person or corporation shall require interest to be paid in advance for a period of more than one year: Provided, however, That whenever interest is paid in advance, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board. WHEN COMPOUND INTEREST ALLOWED Compound interest is only allowed in two cases: 1. When there is an express stipulation to that effect (Art 1959) or in default thereof; 2. Upon judicial demand. The debtor is not liable to pay compound interest even after judicial demand where there is no stipulation for the payment of interest DEMANDABILITY OF COMPOUND INTEREST 1. Agreement to charge interest on interest When there is an agreement to charge interest on interest, such fact should not be taken into consideration in determining whether the stipulated interest exceeds the limits prescribed by the Usury law 2. Judicial demand to pay debt with interest stipulated in contract Sec 5 provides that compound interest shall not be reckoned except by agreement or whenever the debt is judicially demanded, and Art 2212 NCC which stipulates that interest due shall earn interest from the time it is judicially demanded, although the obligation is silent on this point, contemplate the presence of stipulated or convention interest which had accrued when demand was judicially made. Both legal provisions are not applicable when no interest is stipulated in contract RIGHT OF DEBTOR TO CHARGE ADVANCE INTEREST 1. One year or less It is permissible under Sec 5 for the creditor to charge interest in advance corresponding to not more than on year whatever the duration of the loan may be. In principle, the contract is usurious because by deducting or paying in advance the interest at the time of the loan, the principal sum is thereby reduced with the result that the lender is compensated for the use of the amount which he has not loaned 2. More than one year Under Sec 5, the taking of interest in advance for more than 1 year is prohibited. However, interest may be taken in advance for more than 1 year as long as the interest rate charged by the creditor does not exceed the maximum prescribed by the Monetary Board TEST OF USURY: Whether the amount taken or deducted as interest exceeds the lawful maximum rate upon the money actually received and retained by the borrower, being the difference between the face amount of the amount and the amount so deducted. Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may recover the whole interest, commissions, premiums penalties and surcharges paid or delivered with costs and attorneys' fees in such sum as may be allowed by the court in an action against the person or corporation who took or received them if such action is brought within two years after such payment or delivery: Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year collected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and premiums do not exceed the rates fixed in this Act. BORROWERS RIGHT TO RECOVER USURIOUS INTEREST PAID Under Sec 6, a borrower who has paid or delivered usurious interest may recover the entire interest he paid with costs and attorneys fees. RIGHT UNDER THE CIVIL CODE Art 1413 provides: Interest paid in excess of the interest allowed by the usury law may be recovered by the debtor, with interest thereon from the date of payment.
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CREDIT TRANSACTIONS Atty. R. Vasquez


PARI DELICTO RULE NOT APPLICABLE IN USURY CASES In allowing the recovery of usurious interest paid, the law does not consider the debtor in pari delicto with the creditor on the theory that the payment has not been made voluntarily. The lender in usury is regarded as the criminal and the borrower the injured party. The law fixes the period of 2 years after payment or delivery within which civil actions to recover usurious interest paid must be brought. WHERE INTEREST ADDED TO PRINCIPAL BUT NOT PAID Usurious interest not actually paid but simply added to the capital from time to time, cannot be regarded as taken or received by the lender within the meaning of Sec 2, 3, 4 and 6 Usury Law. BORROWERS RIGHT TO RECOVER COSTS AND ATTORNEYS FEES Sec 6 provides that any person who has paid upon any usurious contract a higher rate than is allowed by law may recover the whole interest paid with costs and attorneys fees in which sum as may be allowed by the court. The court, then, is given discretion with regard to fixing the amount of fees; it may deny the allowance altogether. Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance of money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of interest, made without intent to evade any of the provisions of this Act, shall render a contract void: Provided, further, That parties to a loan agreement, the proceeds of which may be availed of partially or fully at some future time, may stipulate that the rate of interest agreed upon at the time the loan agreement is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent changes in the maximum rates that may be made by the Monetary Board: And Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase was not a part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney's fees as may be allowed by the court. USURIOUS LOAN VOID ONLY WITH RESPECT TO INTEREST Sec 7 avoids all usurious covenants and stipulations but immediately after this provision, it recognizes the validity of the usurious negotiable instruments, whenever acquired in good faith by a third person so that the usurious contract which is void is not absolutely void, but perfectly valid under certain circumstances. In using the word void in the Usury Law, the legislature did not intend complete nullity but merely a nullity with respect to the agreed interest. The loan is considered to be without stipulation as to interest. EFFECT CLERICAL ERROR IN COMPUTATION OF INTEREST Mere clerical error in the computation of interest, made without intent to evade any provisions of the Usury Law, shall not render a contract void. USURERS RIGHT TO RECOVER PRINCIPAL Under the Usury Law, a usurious loan is void but this does not mean that the debtor may keep the principal received by him as loan thus unjustly enriching himself at the expense of the creditor. The creditor has no right of action for the recovery of the stipulated interest, however, he may seek for the recovery of the principal loaned. Sec 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credit may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest in increased by law or by the Monetary Board; Provided, that such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, that the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (as amended by PD 1684).

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By: M. Mejia
ESCALATION CLAUSE IN LOAN AGREEMENT Sec 7-a applies to contractual stipulations providing for adjustments in the interest rates agreed upon in the event there is a change in the legal rate of interest effected by law or the Monetary Board. Such change should benefit both creditor and debtor. 1. Escalation clause must not be solely potestative While the Usury Law on interest rates was lifted by CB Circular 905, nothing in said circular grants a lender carte blanche authority to raise interest to levels which would either enslave the borrower or lead to an hemorrhaging of their assets. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 2. De-escalation clause also stipulated An escalation clause can be valid only if it also includes a de-escalation clause or a stipulation that the rate of interest agreed upon shall be reduced in the event that the maximum rate is reduced by law or by the Monetary Board. The purpose of mandating the inclusion of a de-escalation clause is to prevent the one-sidedness in favor of the lender which is considered repugnant to the principle of mutuality of contracts (Art 1308). Sec. 8. All loans under which payment is to be made in agricultural products or seed or in any other kind of commodities shall also be null and void unless they provide that such products or seed or other commodities shall be appraised at the time when the obligation falls due at the current local market price: Provided, That unless otherwise stated in a document written in a language or dialect intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to be repaid later in agricultural products or seed or any other kind of commodities shall be understood to be a loan, and any person or corporation having paid otherwise shall be entitled in case action is brought within two years after such payment or delivery to recover all the products or seed delivered as interest, or the value thereof, together with the costs and attorney's fees in such sum as may be allowed by the court. Nothing contained in this section shall be construed to prevent the lender from taking interest for the money lent, provided such interest be not in excess of the rates herein fixed. DETERMINATION OF INTEREST WHERE LOAN OF MONEY PAYABLE IN KIND Where interest for a loan or forbearance is paid in a medium other than money, the means of ascertaining whether the payment exceeds the rate allowed by law is to reduced the medium of payment to its equivalent in pesos at the time the obligation falls due at the current local market price. 1. When usurious It is usurious when the difference between the agreed price actual price exceeds the lawful interest upon the principal sum, except where the debtor is given the option of discharging his obligation the sum lawfully due from him within a specified time 2. When not usurious The transaction is not usurious if the money equivalent of the goods delivered does not exceed the lawful interest on the principal sum Sec. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. Sec. 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary to implement effectively the provisions of this Act. EFFECT OF FAILURE OF DEFENDANT TO MAKE DENIAL OF USURY UNDER LOAN Sec 9 is applicable only if the action brought is to recover the money charged or received in violation of the provisions of the Usury Law. If the person or corporation sued shall not file its answer under oath denying the allegation of usury by plaintiff (debtor), the defendant (creditor) shall be deemed to have admitted the usury. It does not apply to a case where it is the defendant (debtor) and not the plaintiff (creditor) in an action by the latter for collection, who is alleging usury (Liam Law v. Olympic Sawmill, 129 SCRA 439, 1984). REASONS FOR REQUIRING DENIAL OF USURY UNDER OATH The presumes that usury is existing when it is alleged unless denied under oath, thus demanding the guaranty of his oath, not in the allegation, but in the denial of this fact.

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CREDIT TRANSACTIONS Atty. R. Vasquez


PRESUMPTIONS AND BURDEN OF PROOF 1. Generally speaking, usury will not be presumed and the party who alleges or asserts that a transaction is usurious has the burden of proof. However a usurious intent will be presumed where the instrument or transaction is so usurious on its face, or where the was an intentional doing of what is forbidden by the Usury Law i.e., an intentional charge of more than the legal rate of interest. 2. Where there is no allegation or evidence to exact usurious interest, the contract of loan cannot be considered usurious. Sec. 10. Without prejudice to the proper civil action violation of this Act and the implementing rules and regulations promulgated by the Monetary Board shall be subject to criminal prosecution and the guilty person shall, upon conviction, be sentenced to a fine of not less than fifty pesos nor more than five hundred pesos, or to imprisonment for not less than thirty days nor more than one year, or both, in the discretion of the court, and to return the entire sum received as interest from the party aggrieved, and in the case of non-payment, to suffer subsidiary imprisonment at the rate of one day for every two pesos: Provided, That in case of corporations, associations, societies, or companies the manager, administrator or gerent or the person who has charge of the management or administration of the business shall be criminally responsible for any violation of this Act. PRESCRIPTION OF CRIMINAL ACTION The crime of usury prescribes within 4 years from its commission. Where the accused received the annual usurious interest every year for 3 years, the prescriptive period is to be counted from the date of the last payment of usurious interest. When interest has been paid but the action to recover has already prescribed, such interest cannot be credited against and deducted against the principal. Moreover, in a series of usurious transactions, it cannot be said that as the transactions are linked together, the period of prescription must begin from the last transaction. In a series of crimes, the period of prescription runs form the occurrence of each offense. PNB V. COURT OF APPEALS AND PADILLA, 196 SCRA 536 (1991) FACTS: In July 1982, private respondent Padilla obtained a loan from PNB in the amount of P1.8 million, which was secured by a real estate mortgage, for a term of 2 years with 18% interest per annum. In turn, Padilla executed in favor of PNB a credit agreement, 2 promissory notes in the amount of P900,000 each and a real estate mortgage contract. 1. The promissory notes uniformly authorized PNB to increase the stipulated 18% interest per annum within the limits allowed by law at any time depending on whatever policy the bank may adopt in the future. The note also provided for a de-escalation clause 2. In June 1984, PNB informed private respondent that his credit line will expire and that respondent has an option to renew the loan provided that he pays at least 30% of the principal. Padilla complied with the requirement and paid P540,000 and requested that the balance be renewed for another 2 years under the same agreement and that the interest be increase from 18 to 21%. 3. PNB denied the request fro the reason that the loan policies of the bank requires 32% for loan of more than 1 year. 4. In August 1984, Padilla informed PNB of his intent to pay off the loan within 1 year and quested that the interest be fixed at 21% or 24%. 5. Subsequently, PNB informed respondent that the interest rate was adjusted from 32% to 41% effective September 1984. 6. The following month, PNB notified Padilla that the rate of his loan was adjusted from 41% to 48% pa effective October 1984. 7. In the meantime, Padilla made several payments to PNB thus reducing his principal loan obligation to P300,000 8. Padilla, then, filed an action against PNB alleging that the increase in the interest rates of his loan were illegal 9. PNB denied that the increase in interest rate were illegal, unilateral and excessive 10. The trial court dismissed the complaint because the increases were properly made.On appeal, CA reversed the trial court decision ISSUE: WON the bank, within the term of the loan which it granted to respondent, may unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased HELD: No. Although PD 116 authorized the Monetary Board to prescribe the maximum interest rates for loans or renewal thereof and to change such rate/s whenever warranted by prevailing economic conditions, it expressly provides that such changes shall not be made oftener than once every 12 months. CAB: PNB increased the interest rates 3 times within the year. Such increases are null and void. While the respondent-debtor agreed in the deed of real estate mortgage that the interest may be increased during the duration of the contract within the rate allowed by law, no law was ever passed in July to November 1984 increasing the interest rates on loans or

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By: M. Mejia
renewal thereof to 32%, 41% and 48%. And no documents were executed and delivered by the debtor to effectuate the increases. For an escalation clause to be valid, it should specifically provide: 1. There can be an increased in interest if increased by law or by the Monetary Board; 2. In order for such stipulation to be valid, it must include a provision for reduction of stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause) CB Circular 905 removed the Usury Law ceiling on interest rates but it did not authorize PNB or any other bank, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of 4 months in violation of PD 116 which limits such changes to once every 12 months. Moreover, the unilateral action of PNB to increase the interest rates on the loan violated the mutuality of contracts ordained in Art 1308. TIO KHE CHIO V. COURT OF APPEALS 202 SCRA 119 (1991) FACTS: Petitioner Tio Khe Chio imported 1000 bags of fishmeal from the US. The goods were insured with respondent EASCO and shipped in a vessel owned by Far Eastern Shipping. 1. When the goods reached Manila, they were discovered to have been damaged by seawater rendering the fishmeal useless. Petitioner then filed a claim with EASCO and Far Eastern Shipping but both refused to pay 2. Tio Khe Chio filed an action against EASCO and Far Eastern Shipping for damages. The trial court held EASCO and Far Eastern Shipping solidarily liable for damages less the amount of unpaid premiums with legal interest from the filing of the complaint. The judgment became final as to EASCO but the shipping company appealed to CA and was absolved from liability 3. Thereafter, the sheriff enforcing the writ of execution reportedly fixed the interest rate at 12% pa. 4. EASCO moved to quash the writ alleging that the legal interest should be 6% per annum in accordance with Art 2209. CA reversed the judgment and ruled that the applicable rate is 6% per annum. 5. On the other hand petitioner claims that since the present action is based on an insurance claim the pertinent provisions of the Insurance Code should apply and not the Civil Code. Thus, the applicable legal rate is 12% per annum. ISSUE: What is the legal rate of interest to be imposed on actions for damages arising from unpaid insurance claims? HELD: 6% per annum to be computed from the filing of the complaint. Sec 243 and 244 Insurance Code which petitioner claimed to be applicable are not pertinent to the instant case. they apply only when the court finds an unreasonable delay or refusal in the payment of the claims which is not the case here. Neither does CB Circular 416 applicable since the adjusted rate mentioned refers only to loan or forbearance but not to court judgments for damage arising from injury to persons or loss of property which does not involve a loan. In Philippine Rabbit Bus Lines v. Cruz, the SC held that the legal rate of interest is 6% per annum and not 12% where a judgment award is based on action for damages for personal injury, not use or forbearance of money, goods or credit. Clearly, the applicable law is Art 2209 NCC which provides that: If the obligation consists in the payment of a sum of money and the debtor incurs delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is 6% per annum. CAB: The contending parties did not allege the rate of interest stipulated in the insurance contract. As such the applicable rate is 6% per annum. PILIPINAS BANK V. COURT OF APPEALS, 225 SCRA 268 (1993) FACTS: Private respondent Echaus filed a complaint against petitioner Pilipinas Bank and its president Constantino Bautista for collection of sum of money. The complaint alleged that: a. Pilipinas Bank and Greatland Realty Corp executed a dacion en pago whereby Greatland agreed to convey several parcels of land in favor of the bank for the sum of P7,776,335.69 b. Greatland assigned P2.300 million out of the total consideration of the dacion en pago in favor of Echaus. Despite demand, Pilipinas refused to pay the said amount assigned to her 1. Petitioner bank admitted to the execution of the dacion en pago but claimed that: a. Its former president had no authority to enter into such agreement b. It never ratified the same
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CREDIT TRANSACTIONS Atty. R. Vasquez


And assuming arguendo that the agreement is binding, the conditions stipulated therein were never fulfilled The trial court held in favor of private respondent and ordered Greatland and Pilipinas bank solidarily liable to pay the P2.3 milllion total amount assigned by Greatland plus legal interest from the date of assignment until fully paid. CA modified the order by limiting the execution pending appeal against petitioner to P5,517,707. Petitioner then paid amount by issuing 2 managers checks totaling said amount Thereafter, CA rendered a decision which modified the judgment of the trial court. Petitioner filed a motion in the trial court praying that private respondent to refund to p Private respondent opposed the motion of petitioner with respect to the interest rate to be charged on the amount of P2.3 million. According to private respondent, the legal interest rate on the principal amount should be 12% per annum pursuant to CB Circular 416 CA was of the theory that the action originally filed by Echaus against petitioner involves forbearance of money, as the principal award to private respondent Petitioner, on the other hand, argues that the applicable law is Art 2009 which states that the interest rate is 6% per annum. c. Petitioner also contends that if the applicable law is CB Circular 416, then CA should have ordered private respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance execution of the judgment. CAB: Private respondent was paid in advance the amount of P5,517.707 by petitioner bank to the order for execution pending appeal of the judgment of the trial court. On appeal, CA reduced the amount of damages to P3,619,083.33 leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. Such excess amount to be refunded by private respondent falls within the ruling in Viloria and Buiser that CB Circular 416 applies to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is subsequently adjudged. Therefore, the amount of P2.3 million adjudged to be paid by petitioner bank to private respondent shall earn interest of 6% per annum and; the amount of P1,898.623.67 to be refunded by private respondent to petitioner bank shall earn interest of 12% per annum. SPOUSES ALMEDA V. COURT OF APPEALS, 256 SCRA 292 (1996) FACTS: In 1981, spouses Almeda obtained a loan from PNB amounting to P18 million payable in 6 years at an interest rate of 21% per annum. In turn, petitioner Almeda executed a real estate mortgage covering a parcel of land and its improvements in favor of respondent bank. 1. The loan contract also provides that loan shall likewise be subject to the appropriate service charge and penalty charge of 30% per annum to be imposed on any amount remaining unpaid or not rendered when due 2. It also provided for an escalation clause that the bank has the right to increase the interest rate within limits allowed by law at any timeprovided that the interest rate shall be correspondingly decreased in the event the applicable maximum interest rate is reduced by law or by the Monetary Board 3. Between 1981 and 1984, petitioner spouses made several partial payments totaling P7,735,004.66, a substantial portion of which was applied to accrued interest. 4. Subsequently, PNB increased the interest from 21% to 28% and between 1984 and 1986, PNB again increased the rate to 68% per annum 5. Before the loan was to mature in March 1988, Almeda filed a petition for declaratory relief seeking clarification as to whether or not PNB could unilaterally raise interest rates on the loan, pursuant to the

2.

3.

4. 5. 6.

7.

8.

ISSUE: What should be the correct legal rate of interest to be applied in the case at bar? HELD: 6% interest rate per annum. The P2.3 million which private respondent was assigned to was a portion of the P7,776,335.69 which petitioner was obliged to pay Greatland as consideration for the sale of several parcels of land by Greatland to petitioner bank. The said obligation, therefore, arose from a contract of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided by Art 2209 and not the rate of 12% as provided in CB Circular 416. In Reformina v. Tomol, the SC held that the judgments spoken of and referred to in CB Circular 416 are judgments in litigation involving loans or forbearance of money, goods or credit. Any other monetary judgment which has nothing to do with nor involving loans or forbearance does not fall within the coverage of the said law for it is not, within the ambit of authority granted to the Central Bank.

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credit agreements escalation clause and in relation to CB Circular 905. The trial court issued a writ of preliminary injunction against PNB and enforced the 21% interest rate as stipulated in the loan agreement. By this time, spouses were already in default of their loan obligation Subsequently, PNB ordered the extrajudicial foreclosure of the spouses property. However, petitioners tendered to PNB the amount of P40,142,518 consisting of the principal and the accrued interest computed at 21% pa. PNB refused to accept the payment. As such, petitioners formally consigned the amount with RTC PNB contends that the interest rats were illegal, unilateral and excessive, arguing that the escalated rates of interest imposed was based on the agreement of the parties PNB carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be within limits allowed by law. In PNB v. CA, the SC held that CB Circular 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of specific authority. CAB: Petitioners never agreed in writing to pay the increased interest rates demanded by PNB in contravention of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners already paid an amount equivalent to virtually half of the entire principal which was applied to interest alone. By the time the spouses tendered the amount of P40 million to settle their obligations, respondent bank was demanding P58 million over and above those amounts previously paid by the spouses Almeda. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. Here, not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored. CARPO V. CHUA AND DY, 471 SCRA 471 (2005) FACTS: Petitioners Carpo obtained a loan from respondents Chua and Dy in the amount of P175,000 for 6 months with interest of 6% per month. To secure the loan, petitioners mortgaged their residential house and lot 1. Petitioners defaulted in their payment. As such, the real estate mortgage was extrajudicially foreclosed and the mortgaged property was sold at a public auction with the respondents as the highest bidders 2. Petitioners then filed a complaint for annulment of real estate mortgage and the consequent foreclosure proceedings. 3. Petitioners claim that following the SCs ruling in Medel v. CA, the rate of interest stipulated in the principal loan agreement is clearly null and void. Consequently, the nullity of the agreed interest rate affects the validity of the real estate mortgage ISSUE: WON the invalidity of the stipulation on interest carries with it the invalidity of the principal obligation

6.

7. 8.

9.

ISSUE: WON PNB was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement. HELD: No. The binding effect of any agreement between the parties to a contract is premised on: (a) any obligation arising from contract has the force of law and; (b) there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is likewise invalid. CAB: Respondent PNB unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without prior assent of the latter. In fact, what has been stipulated in writing in the loan agreement was that petitioners were bound to pay 21% interest, subject to a possible escalation or de-escalation, within the limits provided by law and upon agreement. PNBs reliance on CB Circular 905 did not authorize the bank or any lending institution, to progressively increase the interest rates on borrowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. While escalation clauses on credit are perfectly valid and do not contravene public policy, such clauses are nonetheless still subject to laws and provisions governing agreements between the contracting parties. Consequently, while the Usury Law ceiling on interest rates was lifted by CB Circular 905, nothing in the said circular could possibly be read as granting

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CREDIT TRANSACTIONS Atty. R. Vasquez


HELD: No. A usurious loan transaction is not a complete nullity but defective only with respect to the agreed interest. In a long line of cases, the SC has invalidated similar stipulations on interest rates for being excessive, iniquitous, unconscionable and exorbitant. It is the same in the instant case. Pursuant to the freedom of contract principle embodied in Art 1306, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient provided they are not contrary to law, morals, good customs, public order or public policy. In the ordinary course, Art 13906 may be invoked to annul excessive stipulated interest. Petitioners Carpo fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations: the principal one is to pay the debt and the accessory stipulation is to pay interest thereon. And said two stipulations are divisible in the sense that the former can still stand without the latte as provided in Art 1273. Art 1420 clearly states that in case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. In a simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract is not illegal. The illegality lies only as to the prestation to pay the stipulated interest. Hence, being separable, the latter only should be deemed void since it is the only one that is illegal. y the same token, since the mortgage contract derives its vitality from the validity of the principal obligation, the invalid stipulation on interest rates is similarly insufficient to render void the ancillary mortgage contract. NOTE: It applies only to cases involving an extension of credit and not to those in cash basis. CREDITOR Any person engaged in the business of extending credit, and requires the payment of finance charge This includes any person who, as a regular business practice, makes loans, or sells or tents property or services on a time, credit or installment basis, either as a principal or agent OBLIGATION IMPOSED CREDITORS The law imposes upon creditors the obligation of furnishing to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing (disclosure statement) setting forth, to the extent possible, those enumerated under this law. CREDIT TRANSACTIONS INCLUDED 1. Loan, mortgage, deed of trust, advance or discount 2. Conditional sales contract 3. Contract to sell or contact of sale of property/services 4. Rental-purchase contract 5. Contract for hire, bailment or leasing of property 6. Option, demand, lien, pledge, or other claim against or for the delivery of property 7. Purchase or acquisition of any credit upon security of any obligation arising out of any of the above BANKS AND NON-BANK FINANCIAL INTERMEDIARIES AUTHORIZED TO ENGAGE IN QUASI-BANKING FUNCTIONS These are required to strictly adhere to the provisions of TILA and shall make the true and effective cost of borrowing an integral part of every loan conctract CREDIT TRANSACTIONS NOT INCLUDED 1. Those that do not involve payment of any finance charge by the debtor 2. Those in which the debtor is the one specifying a definite and fixed set of credit terms (such as bank deposits, insurance contracts, sale of bonds etc)

IV. TRUTH IN LENDING ACT


TRUTH IN LENDING ACT PURPOSE 1. To protect a debtor from the effects of misrepresentation and concealment 2. To allow him to fully appreciate and evaluate the real cost of his borrowing 3. To avoid circumvention of usury laws APPLICABILITY: The law applies creditors who extend loans, sales in installments and other credit transactions

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By: M. Mejia
DISCLOSURE REQUIREMENT Prior to consummation of a loan/sale, the creditor shall furnish to the debtor a written statement containing: 1. Cash price of the property/service 2. Amounts credited as down payment and/or trade in 3. Difference between (1) and (2) 4. Charges not incident to the extension of credit 5. Total amount to be financed 6. Finance charge 7. Percentage of the finance charge to the amount financed EFFECTS OF NON-DISCLOSURE 1. The validity or enforceability of the contract or transaction is not affected 2. The creditor is liable to the debtor for P100 or an amount equal to twice the finance charge, whichever is greater plus attorneys fees (provided that the liability shall not exceed P2000 on any credit transaction 3. The creditor can be held criminally liable 4. Finance charges may not be paid 5. Debtor may recover any interest payment made 6. A final judgment in any criminal proceeding under this act shall be prima facie evidence against the defendant under this Act as to all matters respecting which said judgment would be an estoppel between the parties thereto NOTES: Action to recover penalty: must be brought within 1 year from the date of the violation Phil government or any agency/political subdivision thereof: no penalty is provided by TILA to apply to them If the seller/lender is convicted: a fine ranging from P1000P5000 or imprisonment from 6 months to 1 year, or both FINANCE CHARGES The amounts to be paid by the debtor incident to the extension of credit E.g. interest, discounts, collection fees, credit investigation fees, and attorneys fees NON-FINANCE CHARGES The amounts advanced by a creditor for items normally associated with ownership of property or the availment of services purchased which are not incident to the extension of credit E.g. When a debtor purchases a car on credit, the creditor may advance the insurance premium, as well as the registration fee for the account of the debtor RULE ON INTEREST: The lifting of a ceiling on interest rates (CB Circular 905) does not give lenders carte blanche authority to raise interest rates. Rates found to be iniquitous or unconscionable are void, as if there was no express contract thereon. Section 1. This Act shall be known as the Truth in Lending Act. Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. POLICY BEHIND THE TRUTH IN LENDING ACT To protect people from lack of awareness of the true cost of credit by assuring full disclosure of such cost, with a view of preventing the uninformed use of credit to the detriment of national economy. Section 3. As used in this Act, the term (1) Board means the Monetary Board of the Central Bank of the Philippines. (2) Credit means any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect. (3) Finance charge includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Board may by regulation prescribe. (4) Creditor means any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sells or rents property or services on a time, credit, or installment basis,

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CREDIT TRANSACTIONS Atty. R. Vasquez


either as principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge. (5) Person means any individual, corporation, partnership, association, or other organized group of persons, or the legal successor or representative of the foregoing, and includes the Philippine Government or any agency thereof, or any other government, or of any of its political subdivisions, or any agency of the foregoing. WHO ARE COVERED The law covers any creditor, who is defined as any person engaged in the business of extending credit who requires as an incident to the extension of credit, the payment of finance charge. MEANING OF CREDIT
It means any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect.

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. REQUIREMENTS OF DISCLOSURE
(1) The cash price or delivered price of the property or service to be acquired; (2) The amounts, if any, to be credited as down payment and/or tradein; (3) The difference between the amounts set forth under clauses (1) and (2); (4) The charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (5) The total amount to be financed; (6) The finance charge expressed in terms of pesos and centavos; and (7) The percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

HOW FURNISHED
The information enumerated above must be disclosed to the debtor or borrower prior to the consummation of the transaction. The information must be clearly stated in writing.

FINANCE CHARGE DEFINED


A finance charge includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as may be prescribed by the Monetary Board of BSP through regulations.

Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: 1) the cash price or delivered price of the property or service to be acquired; (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the difference between the amounts set forth under clauses (1) and (2); (4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (5) the total amount to be financed; (6) the finance charge expressed in terms of pesos and centavos; and

Section 5. The Board shall prescribe such rules and regulations as may be necessary or proper in carrying out the provisions of this Act. Any rule or regulation prescribed hereunder may contain such classifications and differentiations as in the judgment of the Board are necessary or proper to effectuate the purposes of this Act or to prevent circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or regulation issued thereunder. Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and court costs as determined by the court.

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(b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation contained in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or transactions. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. (d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof. (e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto. Section 7. This Act shall become effective upon approval. Approved: June 22, 1963 EFFECT OF VIOLATIONS OF THIS ACT
The contract or transaction remains valid or enforceable, subject to the penalties discussed below.

PENALTIES 1. Any creditor who violates the law is liable in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. The action must be brought within one year from the date of the occurrence of the violation. 2. The creditor is also liable for reasonable attorneys fees and court costs as determined by the court. 3. Any person who willfully violates any provision of this law or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment of not less than 6 months, nor more than one year or both. However, no punishment or penalty under this law shall apply to the Philippine Government or any agency or any political subdivision thereof.

UCPB V. SPOUSES BELUSO, 530 SCRA 567 (2007) FACTS: In April 16, 1996, UCPB granted respondent spouses Beluso a promissory notes line under a credit agreement whereby the Belusos could avail a credit up to a maximum amount of P1.2 million for a term ending on April 30, 1997. The Belusos, in addition to the promissory notes, executed a real estate mortgage over some land in Roxas as additional security 1. Subsequently, their credit agreement was amended to increase the amount of the promissory notes line to P2.3 million. The term was also extended to February 23, 1998 2. The Belusos availed of 3 promissory notes amounting to P2 million, which were renewed several times. In April 1997, the paymen to fhte principal and interest of the last 2 notes were debited from their account with UCPB (amounting to P1.3 million). Later, they availed of a loan of P1.3 million under a promissory note the maturity date of which was February 28, 1998. 3. To completely avail of their P2.35 million credit line, the Belusos executed 2 more promissory notes amounting to P350,000. However, they alleged that the said amount was not realsed to them 4. Consequently, UCPB applied interest rates on the promissory notes ranging from 18% to 34%. 5. From 1996 to February 1998, spouses Beluso were able to pay a total amount of P763,692.03. 6. UCPB demanded that respondent Beluso pay their total obligation of P2.9 million plus 25% attorneys fees. For failure to fulfill their obligation, UCPB foreclosed the properties mortgaged by the spouses to secure their credit line 7. As such, Beluso filed a petition for annulment, accounting and damages against UCPB. RTC held in favor of the spouses Beluso, holding that the interest rates in the promissory notes were void. The trial court also imposed a fine for P26,000 for UCPBs violati on of the Truth in Lending Act (TILA) 8. CA affirmed the same, citing that the imposition of interest as provided in the promissory notes were determined solely by the bank and as such were void. ISSUES: 1. Are the interest rates valid? No. 2. Is UCPB liable for violation of TILA? Yes. HELD: VALIDITY OF INTEREST RATES: Arguments UCPB:

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CREDIT TRANSACTIONS Atty. R. Vasquez


While the rate was not quantified in the face of the promissory notes, it was fixed at the time of execution as: at the rate indicative of the DBP retail rate. This must be read with another stipulation in the promissory note that states: the interest rate may be increased or decreased by the lender considering, among others, the prevailing financial and monetary conditions, OR the rate and charges which other banks or financial institutions offer to charge for similar conditions, AND/OR the resulting profitability to the LENDER after due consideration with the borrower. These are valid reference rates akin to a prevailing rate or prime rate allowed in Polotan v. CA The imposition of the int rates did not infringe on the mutuality of contracts because the Belusos chose whether to renew their credit. Assuming there was any defect, it was cured by the subsequent act of availing of the credit line from Apr 1996-Feb 1998 without protest. Therefore, they are in estoppel. UCPBs arguments are untenable. The SC held in PNB v. CA: there must mutuality in contracts. The provision: interest shall be at the rate indicative of DBD retail rate OR as determined by the Branch Head means the int rates are solely on the will of UCPB. Under the provision, UCPB has 2 choices: 1. Rate indicative of the DBD rate 2. Rate as determined by the branch head Because UCPB has the choice, the rate should be determinable in BOTH choices. If either gives UCPB to determine the rate at will, then the bank can just do that, thus making the entire int rate provision violative of the principle of mutuality. CAB: BOTH are dependent solely on the will of UCPB. In the case of the rate indicative of the DBD rate it is not akin to a prevailing/prime rate in Polotan. In Polotan, the interest rate was interest per annum at 3% interest plus the prime rate of Security Bank and Trust Company In this case, there is a fixed margin over the reference rate: 3%. Parties can easily determine the rate by applying simple arithmetic In UCPBs provision, there is no specification of any margin above or below the DBD retail rate. It can peg the interest at any percentage above or below the DBD retail rate (giving it unfettered discretion in determining the interest rate. Also, the stipulation that the interest rate is subjected to a review is given to UCPB alone as the lender. (interest rate MAY be increased or decreased by the LENDER considering: prevailing financial and monetary conditions, rate of other banks or financial institutions, resulting profitability to the lender). ERROR IN COMPUTATION UCPB argues: While both RTC/CA voided the interest rates, they failed to include in the computation the legal interest rate of 12% per annum and that they are entitled to attorneys fees and penalties RTC/CA also erred in negating the Compounded interest agreed upon by the parties under Sec 2.02 of their Credit Agreement Belusos argue: The demand made by UCPB was considerably bigger and so the demand should be considered void. No valid demand = no default Since the foreclosure was improper = attorneys fees not warranted SC agrees with UCPB Default commences on demand. The excess amount in such demand does not nullify the demand with regard to the proper amt Belusos are considered in default with regard to the proper amount, therefore the interests and penalties began to run at that point As there was no valid stipulation to interest, legal interest shall be charged (the Belusos even originally asked the RTC to impose the legal interest rate. This shows that they acknowledge their obligation to pay 12% legal interest) This is proper bec what was voided was the stipulated interest and not the stipulation that the loan shall earn interest Also, uphold the compounding of interest Penalty = iniquitous (because this 30-36% is already over and above the compounded in rate Attorneys fees: both were forced to litigate so both parties are compensated. Merely affirm deletion of attorneys fees.

LIABILITY FOR VIOLATION OF TILA UCPB contests this: Barred by the 1 yr prescriptive period (latest of the promissory notes was executed on Jan 2, 1998, but original petition was filed on Feb 9, 1999) The original complain did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit the amended petition was made

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Being a criminal offense, it cannot be inferred nor implied from the allegations

V.

DEPOSIT

CA says (and the SC agrees): There was no explicit allegation but the infringement may be inferred from the allegations when the Belusos executed the promissory notes, the interest charged were left blank. Thus, UCPB failed to discharge its duty to disclose in full to the Belusos the charges applicable on their loans. SC held: the allegations in the complaint are controlling. SC adds some other parts in the complaint from which some violations can also be inferred: unilaterally imposed an increased interest rate by relying on the pro vision in the promissory note that granted it the power to unilaterally fix the interest rate. Such interest rate was not determined in the promissory note but was left solely to the will of the branch head. Tthis means the promissory notes did not contain a clear statement in writing of the finance charge expressed in terms of pesos and centavos/the percentage that the finance charge. SUBSTANTIAL COMPLIANCE UCPB argues: the Belusos were given copies of the promissory notes after their execution. Then they were duly notified = substantial compliance with the Act SC disagrees: Sec 4 of the Truth in Lending Act provides that the disclosure statement must be made prior to the consummation of the transaction Rationale: to protect users of credit from lack of awareness of the true cost, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount The law seeks to protect debtors by permitting them to fully appreciate the cost of their loan, to enable them to give full consent to the contract and to properly evaluate their options in arriving at business decisions Upholding the claim of substantial compliance would defeat the purposes of the Act Also, the promissory notes are not sufficient notification. The interest rate provision does not sufficiently indicate with particularity the interest rate to be applied.

DEPOSIT A contract constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same PRINCIPAL PURPOSE (Art 1962) for safekeeping. If safekeeping is not the principal purpose, it may be either: 1. Commodatum 2. Lease; or 3. Agency The depositor need not be the owner of the thing deposited because the purpose of the contract is safekeeping and not transfer of ownership. The depositary cannot dispute the title of the depositor (Art 1984, par 1). The depositary is in estoppel )Art 1436). A contract of deposit may be made orally or in writing (Art 1969). CHARACTERISTICS 1. REAL CONTRACT perfected by the delivery of the subject matter. Where there has been no delivery, there is merely an agreement to deposit which however is binding and enforceable upon the parties 2. UNILATERAL when gratuitous because only depository has an obligation o An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing (Art 1963). 3. BILATERAL If with compensation, because it gives rise to obligations on the part of both the depository and depositor DEPOSIT AND MUTUUM DISTINGUISHED DEPOSIT PURPOSE For safekeeping or custody Depositor can demand MUTUUM Consumption

WHEN TO RETURN

Period must be respected by the

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return anytime SUBJECT MATTER RELATIONSHIP Any property Depositor and depositary Generally gratuitous (except by mutual agreement) lender Fungible things Lender and borrower NOTE: Another difference between a voluntary deposit and a necessary deposit is that in the former the depositor is free to choose the depositary, while in the latter there is lack of free choice in the depositor Only movable or personal property may be the object of an extrajudicial deposit, whether voluntary or necessary (Art 1966) Judicial deposit may cover movable as well as immovable JUDICIAL AND EXTRAJUDICIAL DEPOSIT DISTINGUISHED JUDICIAL EXTRAJUDICIAL CREATION Will of the court Will of the parties or contract Custody and safekeeping

COMPENSATION

There can be compensation

DEPOSIT AND COMMODATUM DISTINGUISHED DEPOSIT COMMODATUM Purpose is safekeeping Purpose is the transfer of the use Essentially gratuitous and always

PURPOSE

May be gratuitous

Movable/corporeal things only in case of extrajudicial deposit

Both movable and immovable may be the object

Insures the right of a party to property or to recover in case of a favorable judgment and to maintain the status quo during pendency of the case Generally immovable Always onerous Upon order of the court or when litigation is ended Person who has a right

SUBJECT MATTER CAUSE WHEN MUST THE THING BE RETURNED IN WHOSE BEHALF IT IS HELD

Movable only Generally gratuitous Upon demand of depositor

KINDS OF DEPOSIT (Art 1964) 1. JUDICIAL DEPOSIT (SEQUESTRATION) Takes place when an attachment or seizure of property in litigation is ordered 2. EXTRAJUDICIAL a. VOLUNTARY DEPOSIT Delivery is made by the will of the depositor or by two or more persons each of whom believes himself entitled to the thing deposited (Art 1968-1995) b. NECESSARY DEPOSIT Made in compliance with: (1) A legal obligation (2) On occasion of any calamity (3) By travelers in hotels and inns; or (4) By travelers in common carriers

Depositor or third person designated

DEPOSIT IS NOT GRATUITOUS IN THE FOLLOWING (Art 1965) 1. When there is a stipulation 2. Depositary is engaged in business of storing goods

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3. Property saved from destruction without knowledge of the owner NOTE: If two or more persons each claiming to be entitled to a thing, the depositary can file an action to compel the depositors to settle their conflicting claims among themselves in the nature of an interpleader (Sec 1, Rule 62 ROC) 2. Guardian or administrator of the person who made the deposit if the latter is incapacitated at the time of deposit or the latter himself should he acquire capacity (Art 1970) 3. Legal representative of the depositor should the latter subsequently lose his capacity during the deposit (Art 1986) TIME OF RETURN GENERAL RULE: Upon demand even though a specified period of time for such return may have been fixed EXCEPTIONS: (1) When the thing is judicially attached while the in the depositarys possession; or (2) Should he have been notified of the opposition of a 3 rd party to the return or removal of the thing deposited, in such instance, the depositary must immediately inform the depositor of the attachment or opposition (Art 1988) NOTE: If the deposit is gratuitous, the depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if justifiable reasons exist for its return. If the depositor refuses to receive it, the depositary may secure its consignation from the court If the deposit is for a valuable consideration, period must be followed even if the depositary suffers inconvenience as a consequence (Art 1989). WHAT TO RETURN (1) Product, accessories, and accessions of the thing deposited (Art 1983) (2) If by force majeure or government order, the depositary loses the thing, and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor

ART 1970-1971 If the depositary is capacitated, he is subject to all the obligations of a depositary whether or not the depositor is capacitated Under the law, persons who are capable cannot allege the incapacity of those with whom they contracted (Art 1397) On the other hand, the incapacitated depositary does not incur the obligation of a depositary. However, he is liable to: a. Return the thing deposited while still in his possession; and b. Pay the depositor the amount by which he may have benefited himself with the thing or its price subject to the right of any 3rd person who acquired the thing in good faith OBLIGATIONS OF THE DEPOSITARY A. To keep the thing SAFELY (Art 1972) RULES o He is liable if the loss occurs through his fault or negligence even if the thing is insured o The loss of the thing while in his possession ordinarily raises the presumption of fault on his part (Art 1265) o The required degree of care is greater if the deposit is for compensation B. To be LIABLE if the loss occurs through his fault or negligence (Art 1972) o Loss of the thing while in the depositarys possession raises a presumption of fault (Art 1265). o The required degree of care is greater if the deposit is for compensation than it is when it is gratuitous. C. To RETURN the thing (Art 1972) PERSON TO WHOM THE THING MUST BE RETURNED: 1. Depositor, to his heirs, and successors, or the person who may have been designated in the contract

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CREDIT TRANSACTIONS Atty. R. Vasquez


WHERE TO RETURN (1) Place agreed upon by the parties; or (2) At the time where the thing deposited might be even if it should not be the same place where the deposit was made provided there was no malice on the part of the depositary (Art 1987) D. Not to deposit the thing with a THIRD PERSON unless authorized by express stipulation (Art 1973) REASON: Deposit is founded on trust and confidence. THE DEPOSITOR IS LIABLE FOR THE LOSS UNDER THE FOLLOWING CIRCUMSTANCES (1) He transfers the deposit with a 3rd person without authority, although there is no negligence on his part and on the 3rd person (2) He deposits the thing with a 3rd person who is manifestly careless or unfit, although authorized, even in the absence of negligence; or (3) The thing is lost through the negligence of his employees whether the latter are manifestly careless or not EXCEPTION: If there is a contrary stipulation. EXEMPTION FROM LIABILITY: Depositary is not responsible for the loss of thing without negligence of the third person with whom he was allowed to deposit the thing if such 3rd person is not manifestly careless or unfit E. To change the way of the deposit of under the circumstances, the depositary may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation, provided that the former notifies the depositor thereof and wait for his decision, unless delay would cause danger (Art 1974) If the thing deposited should earn interest (Art 1975): 1. To collect interest and the capital itself as it falls due; and 2. To take steps to preserve its value and rights with regard to it NOTE: A contract for the rent of safety deposit boxes is a special kind of deposit; hence, it is not to be strictly governed by the provisions on deposit. The relation between a bank and its customer is that of a bailor and bailee, and is a contract of bailment for hire and mutual benefit It cannot be characterized as an ordinary contract of lease because full and absolute control of the safety boxes was not given to the joint renters (CA Argo Industrial Development Corp v. CA, G.R. no 90027, March 3, 1993) G. Not to COMMINGLE things deposited if so stipulated (Art 1976) o Depositary can only commingle if the articles are of the same kind and quality o If commingling is allowed, each depositor shall be entitled to each portion of the entire mass as the amount deposited by him bears to the whole EXCEPTION: When there is a stipulation to the contrary EFFECT OF COMMINGLING (1) The various depositors of the commingled goods shall own the entire mass in common (co-owners) (2) Each depositor shall be entitled to such portion of the entire mass as the amount deposited by him bears to the whole H. Not to make USE of the thing deposited unless authorized (Art 1977) GENERAL RULE: Deposit is not for use of the thing. Use by the depositary would make him liable for damages. EXCEPTIONS: (1) When the preservation of the thing deposited requires for its use, it must be used only for that purpose; or

F.

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(2) When authorized by the depositor (the authorization shall not be presumed and its existence must be proved) EFFECT IF PERMISSION TO USE IS GIVEN (1) If the thing deposited is non-consumable, the contract is a commodatum unless safekeeping is still the principal purpose (2) If the thing deposited consists of consumable things, the contract is converted into a simple loan or mutuum unless safekeeping is still the principal purpose in which case it is called an irregular deposit (e.g., bank deposits) IRREGULAR DEPOSIT AND MUTUUM DISTINGUISHED IRREGULAR DEPOSIT MUTUUM The consumable thing deposited may be demanded at will by the depositor. The lender cannot demand restitution until the time for payment, as provided in the contract, has arisen. 2. To pay for damages should the seal or lock be broken through his fault, which is presumed unless proven otherwise (par 2); and 3. To keep the secret of the deposit when the seal or lock is broken with or without his fault (par 3) NOTE: The depositary is authorized to open the thing deposited which is closed and sealed when (Art 1982): a. There is presumed authority; or b. There is necessity to do so K. To pay INTEREST or sums converted to personal use of the deposit consists of money from the day of conversion (Art 1983, 1896) NOTE: Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan (Art 1980) A bank can compensate or set off the deposit in its hands for the payment of any indebtedness to it on the part of the depositor. In true deposit, such compensation or set-off is not allowed L. Where the thing appears to be stolen and the depository knows the true owner, he must advise the true owner about the deposit. If the owner, in spite of such information, does not claim it within the period of one month, the depositary is from liability (Art 1984 par 2 and 3). If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, he may return the same (Art 1984 par 4). o To advise the true owner that a deposit has been made should he discover that the thing deposited was stolen from the owner (Art 1984) o IF the owner despite such information does not claim it within the period of 1 month, the depositary shall be relieved from all responsibility by returning the same to the depositor NOTE: If the depositary has reasonable grounds to believe to that the thing has not been lawfully acquired by the depositor, the former may return the same (Art 1984)

The only benefit is that which accrues to the depositor

Essential cause for the transaction is the necessity of the borrower Common creditors enjoy no preference in the distribution of the debtors property

The irregular repository has a preference over other creditors with respect to the thing deposited

I.

To 1. 2. 3. 4.

be liable for LOSS through fortuitous event (Art 1979): If stipulated If he uses the thing without the depositors permission If he delays its return If he allows others to use it, even though he himself may have been authorized to use the same 5. If there is fraud or negligence on his part (Art 1170) When the thing deposited is delivered, closed and sealed (Art 1981): 1. To return the thing deposited in the same condition (par 1)

J.

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CREDIT TRANSACTIONS Atty. R. Vasquez


M. Depositary who receives the thing in deposit cannot require the depositor to prove his ownership of the thing (Art 1984) RULE WHEN THERE ARE TWO OR MORE DEPOSITORS 1. Thing deposited is divisible and depositors are not solidary. Each depositor can demand only his proportionate share thereto 2. Obligation is solidary or the thing is not divisible: Rules on active solidarity shall apply, i.e. each one of the solidary depositors may do whatever may be useful to the others but not anything which may be prejudicial to the latter (Art 1212), and the depositary may return the thing to anyone of the solidary depositors unless a demand, judicial or extrajudicial, for its return has been made by one of them in which case, delivery should be made to him (Art 1214) 3. Return to one of the depositors stipulated: The depositary is bound to return it only to the person designated although he has not made any demand for its return NOTE: The depositary may return the thing in pledge until full payment is of what may be due him by reason of the deposit (Art 1994) The depositarys heir who is in good faith may have sold the thing which he did know was deposited, shall only be bound to return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him (Art 1991) LIABILITY OF THE DEPOSITARY Responsibility for loss and damage will attach to the depositary if: 1. The depositary DEPOSITS the object with a 3rd person, unless there is a stipulation allowing it 2. If the deposit with a third person is allowed, the depositary deposits the thing with a person who is manifestly CARELESS or unfit 3. The employees of the depositary are negligent 4. The depositary uses the object of the deposit, unless there was express permission of the depositor, or the use was necessary for the limited purpose of preservation 5. The SEAL or lock of the thing delivered closed and sealed is broken through the fault of the depositary. Fault is presumed, unless there is proof to the contrary. If the forcible opening of a thing delivered closed and sealed is imputable to the depositary, the value of the thing deposited shall be based on the statement of the depositor, unless: a. There is contrary proof b. The courts determine otherwise based on the credibility of the depositor 6. Even in case of a fortuitous event, the depositary is liable if: a. It has been stipulated b. The depositary uses the thing without the depositors permission c. The depositary delays the return of the object of the depositor; or d. The depositary allows others to use it, even though the depositary may have been authorized to do the same 7. Even if the depositary is not liable, if the depositary loses the thing by force majeure or government order, but receives money or a replacement, the depositary shall deliver the money or replacement to the depositor PERSON TO WHOM RETURN MUST BE MADE 1. The depositary is obliged to return the thing deposited, when required, to: a. The depositor b. To his heirs or successors; or c. To the person who may have been designated in the contract (Art 1972) 2. If the depositor was incapacitated at the thing of making the deposit, the property must be returned to: a. His guardian or administrator b. To the person who made the deposit c. To the depositor himself should he acquire capacity (Art 1970) 3. Even if the depositor had capacity of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative (Art 1986) PLACE OF RETURN (Art 1987) 1. At the place agreed upon by the parties 2. In the absence of stipulation, at the place where the original deposit was made, provided that there was no malice on the part of the depositary

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Art 1994 grants the depositary a right of retention over the property as a means or device by which the depositary is able to obtain payment of what may be due because of the deposit. NOTE: This is an example of a pledge created by operation of law (Art 2121) OBLIGATIONS OF THE DEPOSITOR A. To pay expenses for PRESERVATION (contemplates ordinary and extraordinary expenses) 1. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for expenses incurred for the preservation of the thing deposited (Art 1992) 2. If the deposit is for valuable consideration, expenses for preservation are borne by the depositary unless there is a contrary stipulation B. To pay LOSSES incurred by the depositary due to the character of the thing deposited GENERAL RULE: The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited EXCEPTIONS: (may return even before the end of the term) 1. At the time of the deposit, the depositor was not aware of the dangerous character of the thing 2. When the depositor was not expected to know the dangerous character of the thing 3. When the depositor notified the depository of the same; or 4. The depositary was aware of it without advice from the depositor LIABILITY OF THE DEPOSITOR Responsibility for loss or damage will attach to the depositor only if the depositor delivers a thing the character of which causes any loss or damage to the depositary EXCEPT: 1. At the time of the constitution of the deposit, the depositor was NOT aware of, or was not expected to know the dangerous character of the thing; or 2. The depositor NOTIFIED the depositary of the dangerous character of the thing, or the depositary was in any case aware of the character

TIME OF RETURN (Art 1988) GENERAL RULE: The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed. EXCEPTION: 1. When the thing is judicially attached while in the depositarys possession 2. When notified of the opposition of a third person to the return or the removal of the thing deposited RIGHT OF THE DEPOSITARY TO RETURN THE THING (Art 1989) GENERAL RULE: The depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if: 1. The deposit is gratuitous 2. The reason is justifiable NOTE: If the depositor refuses to receive the thing, the depositary may deposit the thing at the disposal at the judicial authority. EXCEPTION: When the deposit is for a valuable consideration, the depositary has no right to return the thing before the expiration of the time designated even if he should suffer inconvenience as a consequence. ALIENATION OF THE THING DEPOSITED BY DEPOSITARYS HEIR 1. When the alienation is done in GOOD FAITH, the heir is obliged to: a. Return the value of the thing deposited b. Assign the right to collect from the buyer NOTE: Their does not need to pay the actual price of the thing deposited 2. When the alienation is done in BAD FAITH, the heir must: a. Be liable for damages b. Pay the actual price of the thing deposited RIGHT OF RETENTION (Art 1994)

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LIABILITY FOR EXPENSES (Art 1992) If the deposit is gratuitous, the depositor bears the expenses for the preservation of the thing deposited. If the deposit is onerous, the depositary bears the expenses for preservation (Fee charged by depositary is considered to include the charges for preservation). EXTINGUISHMENT OF VOLUNTARY DEPOSIT (Art 1995) 1. Upon the loss or deterioration of the thing deposited 2. Upon the death of the de depositary, only in gratuitous deposits 3. Same as the causes for extinguishment of obligations in Art 1231 NCC: a. Novation b. Compensation c. Merger d. Remission e. Payment f. Prescription g. Rescission h. Fulfillment of resolutory condition i. Annulment NOTE: A deposit for compensation is not extinguished by the death of either party because, unlike a gratuitous deposit, an onerous deposit is not personal in nature (De Leon, p. 145). EFFECT OF DEATH OF DEPOSITOR OR DEPOSITARY (Art 1995) 1. Where deposit gratuitous Death of either depositor or depositary extinguishes the deposit (personal in nature). By the word extinguished, the law really means that the depositary is not obliged to continue with the contract of deposit 2. Where deposit for compensation Not extinguished by death of either parties NECESSARY DEPOSITS Deposit made in compliance with a legal obligation, or on the occasion of any calamity, or by travelers in hotels and inns (Art 1996-2004) or by travelers with common carriers (Art 1734-1735). KINDS OF NECESSARY DEPOSITS 1. It is one made in compliance with a legal obligation, in which case it is governed by the law establishing it, and in case of deficiency, the rules on voluntary deposit (e.g. Art 538, 586, 2104) 2. It takes place on the occasion of any calamity such as fire, storm, flood, pillage, shipwreck, or other similar events. There must be a causal relation between the calamity and the constitution of the deposit. In this case, the deposit is governed y the rules on voluntary deposit and Art 2168 (negotiorum gestio) 3. Made by passengers with common carriers (Art 1754) 4. Made by travelers in hotels or inns (Art 1998) Examples of necessary deposit in compliance with a legal obligation: 1. The judicial deposit of a thing the possession of which is being disputed in a litigation of two or more persons (Art 538) 2. The deposit with a bank or public institution of public bonds or instruments of credit payable to order or bearer given in usufruct when the depositary does not give proper security for their conservation (Art 586) 3. The deposit of a thing pledged when the creditor gives the same without the authority of the owner or misuses it in any other way (Art 2104) 4. Those required in suits as provided in the Rules of Court; and 5. Those constituted to guarantee contracts with the government (The deposit arises from an obligation of public or administrative character) NOTE: A deposit made in compliance with law is governed by the provisions of such law and in default thereof, by the rules on voluntary deposit (Art 1997, par 1) DEPOSIT BY TRAVELERS IN HOTELS AND INNS The keepers of hotels or inns shall be responsible as depositaries for the deposit of effects made by travelers provided: 1. Notice was given to them or to their employees of the effects brought by the guests

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2. The guests take precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects o This also applies to the passengers baggage which is in his personal custody (Art 1754). NOTE: Liability extends to vehicles, animals and articles, which have been introduced or placed in the annexes of the hotel EXTENT OF LIABILITY UNDER ART 1998 1. Liability in hotel rooms which come under the term baggage or articles such as clothing as are ordinarily used by travelers 2. Includes those lost or damaged in hotel annexes such as vehicles in the hotels garage 3. In the following cases, the hotelkeeper is liable WHEN HOTELKEEPER LIABLE Hotelkeepers are liable when the loss or injury is caused: 1. By his servant or employees as well as by strangers provided that the notice has been given and proper precautions taken; and 2. By the act of a thief or robber done with the use of arms or irresistible force, for in this case, the hotelkeeper is apparently negligent WHEN HOTELKEEPER IS NOT LIABLE When the loss or injury is caused by: 1. Force majeure, theft by a stranger with use of arms or irresistible force EXCEPTION: Hotelkeeper is not guilty of fault or negligence in failing to provide against the loss or injury from his cause (Art 1170 and 1174) 2. The acts of guests, his family, servants or visitors; or 3. Arises from the character of the things brought into the hotel NOTE: Under Art 2003, the hotelkeeper cannot free himself from the responsibility by posting notices to the effect that he is not liable for the articles brought by the guests. Any stipulation to such effect shall be void Art 2003 is an expression of public policy because the hotel business is imbued with public interest. The award of damages was not only contractual but also tortuous (YHT Realty Corp v. CA, G.R. no 126780, February 11, 2005) Notice is necessary only for suing civil liability but not in criminal liability

HOTELKEEPERS RIGHT TO RETENTION The hotelkeeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of: a. Lodging; and b. Supplies usually furnished to hotel guests NOTE: The right of retention recognized in this article is in the nature of a pledge created by operation of law. JUDICIAL DEPOSIT JUDICIAL DEPOSIT (Sequestration) Takes place when an attachment or seizure of property in litigation is ordered (Art 2005) Movable as well as immovable may be the object of sequestration (Art 2006) The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders (Art 2007) The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family (Art 2008) NOTE: As to matters provided not in the Civil Code, judicial sequestration shall be governed by the Rules of Court NATURE AND PURPOSE OF JUDICIAL DEPOSIT The deposit is judicial because it is auxiliary to a case pending in court The purpose is to maintain the status quo during the pendency of the litigation or to insure the right of the parties to the property in case of favorable judgment

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CREDIT TRANSACTIONS Atty. R. Vasquez


TYPES OF SECURITY 1. PERSONAL When an individual becomes surety or guarantor 2. REAL OR PROPERTY When an encumbrance is made on property DEPOSITARY OF SEQUESTERED PROPERTY A person appointed by the court (Art 2007) with the obligations: 1. To take care of the property with the diligence of a good father of the family (Art 2008) 2. To continue in his responsibility until the litigation is ended or the court so orders APPLICABLE LAW The law on judicial deposit is remedial in nature. Hence, the Rules of Court are applicable (Art 2009). Art 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. DEPOSIT It is constituted from the moment a person receives a thing belonging to another with the purpose of safely keeping it and the obligation to return the same (Art 1962) CHARACTERISTICS OF A DEPOSIT 1. REAL CONTRACT Like commodatum and mutuum, deposit is perfected by the delivery of the subject matter 2. When the deposit is gratuitous, it is a unilateral contract because only the depositary has an obligation. But when the deposit is for compensation, the juridical relation created becomes bilateral because it gives rise to the obligation to both depositary and depositor NOTE: If safekeeping is only an accessory or secondary obligation of the recipient of the thing, deposit is not constituted but some other contract like lease, commodatum or agency (Art 1868). The depositary cannot make use of the thing deposited except in two instances provided in Art 1977: 1. Express permission of depositor 2. The nature of the thing deposited requires its use DEPOSIT AND MUTUUM DISTINGUISHED DEPOSIT MUTUUM Principal purpose: safekeeping or mere Principal purpose: consumption of the custody subject matter Depositor can demand the return of the Lender must wait until the expiration of thing at will the period granted to the debtor Object: movable or immovable property Object: money and other fungible things DEPOSIT AND COMMODATUM DISTINGUISHED DEPOSIT COMMODATUM Principal purpose: safekeeping Principal purpose: transfer of the use May be gratuitous Essentially and always gratuitous In extrajudicial deposit, only movable Both movable and immovable property things may be the object Art 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing. BINDING EFFECT OF AGREEMENT TO DEPOSIT A deposit is a real contract and is therefore, perfected only upon delivery of the object of the contract. Where there has been no delivery, there is merely an agreement to deposit (contract of future deposit) which, however is binding and enforceable upon the parties. Hence, a contract of future deposit is consensual (See Art 1934). Art 1964. A deposit may be constituted judicially or extrajudicially. CREATION OF DEPOSIT A deposit may be created by virtue of a court order or by law and not by the will of the parties. This is why the Code used the term constituted in defining deposit. In a deposit, it is essential that the depositary is not the owner of the property deposited (Art 1962).

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proceeds from the object of a deposit which is safekeeping of a thing. The possibility that the ting may disappear or may be lost or stolen is not present in real property. Judicial deposit, however, may cover movable and immovable properties since its purpose is to protect the rights of the parties. NOTE: Art 1966 does not include incorporeal or intangible properties, such as rights and actions, because it follows the person of the owner, wherever he goes, and is not, by reason of its incorporeality, susceptible of custody in the tangible sense that deposit is juridically understood. Art 1967. An extrajudicial deposit is either voluntary or necessary. Art 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or unless the depositary is engaged in the business of storing goods. CONTRACT OF DEPOSIT IS GENERALLY GRATUITOUS Exceptions: 1. Where there is a contrary stipulation It is a general rule in contracts that the parties may establish any stipulation they may deemed convenient provided it is not contrary to law, morals, good customs, public order or public policy (Art 1306) 2. Where depositary is engaged in the business of storing goods This is based on the fact that the depositary is engaged in the business of storing goods (e.g. warehouseman) for compensation and not out of pure generosity 3. Where the property is saved from destruction without knowledge of the owner In involuntary deposit, where property is saved from destruction during a calamity by another person without the knowledge of the owner, the latter is bound to pay the former just compensation (Art 1996[2], Art 1997 par 2) Art 1966. Only movable things may be the object of a deposit. SUBJECT MATTER OF DEPOSIT Only movable or personal property may be the object of extrajudicial deposit, whether voluntary or necessary. Art 1966 KINDS OF EXTRAJUDICIAL DEPOSIT Deposit is generally voluntary. It becomes necessary in the 3 cases under Art 1996 and 1998 i.e., when made in compliance with a legal obligation, on the occasion of any calamity, or by travelers in hotels and inns. The deposit of goods made by travelers or passengers with common carriers may also be regarded as necessary. CASES: BANK OF THE PHILIPPINE ISLANDS V. IAC, 164 SCRA 630 (1988) FACTS: Private respondent Rizaldy Zshornack had a dollar savings account and a peso current account with Comtrust 1. In October 1975, an application for a dollar draft was accomplished by Virgilio Garcia (assistant branch manager) payable to a certain Leovigilda Dizon in the amount of $1000 2. In the application, Garcia indicated that account was to be charged to Dollar savings account 25-4109 (dollar savings account of Zshornacks) 3. Subsequently, Comtrust issued a check payable to the order of Leogivilda Dizon in the amount of $1,000 with an indication that it was to be charged to Zhornacks dollar account 4. When Zshornack discovered the withdrawal of $1000 from his account, he demanded an explanation from the bank 5. Comtrust alleged that the peso value of the amount withdrawn was given to Zshornacks brother when the latter encashed the Manila Bank cashiers check. It also claimed that the withdrawal as made pursuant to an agreement where Zshornack allegedly authorized
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KINDS OF DEPOSIT 1. JUDICIAL One which takes place when an attachment or seizure of property in litigation is ordered (Art 2005-2008) 2. EXTRAJUDICIAL a. VOLUNTARY One wherein the delivery is made by the will of the depositor or by 2 or more persons each of whom believes himself to be entitled to the thing deposited (Art 1968-1995) b. NECESSARY One made in compliance with a legal obligation or on the occasion of a calamity, or by travelers in hotels and inns (Art1996-2004); or by travelers with common carriers (Art 1734-1735)

CREDIT TRANSACTIONS Atty. R. Vasquez


the bank to withdraw from his dollar account such amount would be needed to fund his peso current account ISSUE: WON the contract between the respondent and petitioner bank is a deposit HELD: Yes. The documents which embodies the contract states that the $3000 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and return it to Zshornack at a later time. Such arrangement is defined as a deposit under Art 1962 NCC: A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. BOTH PARTIES ARE IN PARI DELICTO Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular 20, it must be considered as one which falls under the general class of prohibited transactions. Such transaction is void for having been executed against the provisions of a mandatory/prohibitory law. As such, it affords neither of the parties a cause of action against the other (in pari delicto rule). CA AGRO-INDUSTRIAL DEVELOPMENT CORP V. COURT OF APPEALS, 219 SCRA 426 (1993) FACTS: Petitioner, through its president, and the spouses Pugao entered into a contract of sale over 2 parcels of land. The contract provided that the titles to the said lots will be transferred upon full payment of the purchase price. The TCTs were deposited in a safety deposit box of private respondent Security Bank 1. After the execution of the contract, 2 renters keys were given to th e renters (Petitioner and Pugao). A guard key remained with the bank. The safety deposit box could be opened only with the use of both guard key and renters key. 2. Thereafter, a certain Ramos offered to buy from petitioner the 2 parcels of land. When Ramos demanded to see the TCTs, Pugao discovered that the TCTs were not inside the safety deposit box. As a result, Ramos withdrew her offer to purchase the lots 3. Petitioner, then, filed an action for damages against respondent bank. 4. In its answer, respondent bank alleged that petitioner has no cause of action since it cannot be held liable, pursuant to the lease contract of the safety deposit box, for the loss of any items or articles contained in the box. The trial court dismissed the complaint holding that under the contract executed by the bank and petitioner for the rent of the safety deposit box, the bank has no liability for the loss of the TCTs. The court held that the provisions are binding on the parties CA affirmed the same. CA noted that the contract in question is in the nature of a contract of lease by virtue of which petitioner and its corenter were given control over the safety deposit box and its contents while the bank retained no right to open the said box because it had neither possession nor control over it and its contents. Petitioner argues that regardless of nomenclature, the contract for the rent of the deposit box is actually a contract of deposit and that respondent bank is liable for the loss of TCTs pursuant to Art 1972

5.

6.

7.

ISSUE: What is a nature of the contractual relation between a commercial bank and another party in a contract of rent of a deposit box? HELD: The contract in the case at bar is a special kind of deposit. Petitioner is correct in maintaining that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Art 1643. However, it is also incorrect to conclude that the same is a contract of deposit to be governed by the provisions in the Civil Code on deposit. It cannot be an ordinary lease contract because the full and absolute possession and control of the deposit box was not given to the joint renters. In American Jurisprudence, the prevailing rule is that the relation between a bank renting out safety deposit boxes and its customer, with respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benefit. Our laws adopt this rule as clearly provided in Sec 72 General Banking Act. In Sec 72 General Banking Act, the primary function is still found within the parameters of a contact of deposit. The render out of the deposit safety boxes is not independent from, but related to or in conjunction with, this principal function. The depositarys responsibility for safekeeping of the objects deposited is governed by Title I Book IV NCC. Under these provisions, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In the absence of any stipulation prescribing the degree of diligence required, that

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of a good father of a family is to be observed. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence, or delay would be void for being contrary to law and public policy. In the instant case, the provisions of the contact of lease absolving the bank of any liability in case of loss is void. CA was correct to dismiss the petition however the basis of its dismissal is incorrect. Respondents exoneration cannot be based on or proceed from a characterization of the impugned contract as a lease contract, but rather on the fact that there was no competent proof to show that respondent bank was aware of the agreement of the renters that the TCTs can be withdrawn only upon joint signatures and that no evidence was presented to reveal that the loss of the TCTs was due to fraud or negligence of the bank. TRIPLE-V FOOD SERVICES V. FILIPINO MERCHANTS INSURANCE CO, G.R. NO 160544 (2005) FACTS: Sometime in March 1997, De Asis dined at petitioners Kamayan Restaurant. De Asis was using a company (Crispa) car assigned to her. 1. On said date, De Asis availed of the valet parking service of petitioner and entrusted her car key to petitioners valet c ounter. A corresponding parking ticket was issued as receipt for the car. 2. The car was then parked by the petitioners valet attendant. However, a few minutes later, the car was no longer in its parking slot and its key was not in the box where the valet attendants usually keep the keys of cars entrusted to them. 3. As such, Crispa filed a claim against its insurer, respondent Filipino Merchants Insurance Co Inc (FMICI). 4. Having indemnified Crispa for the loss of the vehicle, FMICI as subrogee filed an action for damags against petitioner Triple-V 5. Petitioner denied liability, arguing that in accepting the complimentary valet parking service, De Asis received a parking ticket which expressly provides that the company is not liable for any damage or loss incurred on the vehicle nor of valuables contained therein. Petitioner argues that De Asis knowingly assumed the risk of loss when she allowed petitioner to park her vehicle. 6. The trial court held in favor of FMICI. On appeal, CA affirmed the trial court decision and found that: a. Petitioner was a depositary of subject vehicle b. Petitioner was negligent in its duties as a depositary thereof and as employer of the valet attendant c. There was a valid subrogation of rights between Crispa and respondent FMICI ISSUE: WON the complimentary valet parking service of petitioner can be considered a deposit and thus hold petitioner liable for the loss of the subject car HELD: Yes. When De Asis entrusted the car in question to petitioners valet attendant while eating at petitioners restaurant, the former expected the cars safe return at the end of her meal. Thus, petitioner was constituted as a depositary of the same car. Petitioner cannot evade liability by arguing that neither a contract of deposit nor that of a insurance, guaranty or surety for the loss was constituted when De Asis availed of its free valet parking service. In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and returning the same. A deposit may be constituted even without any consideration. It is not necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted for safekeeping and to return it later to the depositor. The parking stub embodying the terms and conditions of the parking is essentially a contract of adhesion. While contracts of adhesion are not void in themselves, the court will not hesitate to rule out blind adherence thereto if they prove to be one-sided under the attendant facts and circumstances. As pointed out by CA, petitioner must not be allowed to use its parking claim stubs exclusionary stipulation as a shield from responsibility for any loss or damage to vehicles or to the valuables contained therein. VOLUNTARY DEPOSIT (ART 1968-1995) Art 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A deposit may also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs. VOLUNTARY DEPOSIT One wherein the delivery is made by te will of the depositor. Ordinarily, there are only 2 persons involved. Sometimes, however, the depositary may be a third person. VOLUNTARY AND NECESSARY DEPOSIT DISTINGUISHED The main difference between a voluntary deposit and a necessary deposit is that in the former, the depositor has complete freedom
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CREDIT TRANSACTIONS Atty. R. Vasquez


in choosing the depositary, whereas in the latter, there is lack of free choice in the depositor. DEPOSITOR NEED NOT BE THE OWNER OF THE THING Generally, the depositor must be the owner of the thing deposited. But it may belong to a person other than the depositor. As a matter of fact, the depositary cannot dispute the title of the depositor to the thing deposited (Art 1984 par 1). The depositary is in estoppel (See Art 1436). WHEN THERE ARE SEVERAL DEPOSITORS Two or more persons each claiming to be entitled to the thing may deposit the same with a 3rd person. In such case, the 3rd person assumes the obligation to deliver to the one to whom it belongs. The 3rd person as depositary can file interpleader to compel them to settle their conflicting claims among themselves. Art 1969. A contract of deposit may be entered into orally or in writing. FORM OF CONTRACT OF DEPOSIT Art 1969 follows the general rule that contracts shall be obligatory in whatever form they have been entered into provided that all the essential requisites for their validity are present. Art 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated, the former shall be subject to all the obligations of a depositary, and may be compelled to return the thing by the guardian, or administrator, of the person who made the deposit, or by the latter himself if he should acquire capacity. WHERE DEPOSITARY CAPACITATED AND DEPOSITOR INCAPACITATED If the depositary is capacitated, he is subject to all the obligations of a depositary whether or not the depositor is capacitated. In the latter case, the depositary must return the property to the legal representative or to the depositor himself if he should acquire capacity. Art 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. WHERE DEPOSITARY INCAPACITATED AND DEPOSITOR CAPACITATED The incapacitated depositary does not incur the obligation of a depositary. However, he is liable: 1. To return the thing deposited while still in his possession; and 2. To pay the depositor the amount which he may have benefitted himself with the thing or its price subject to the right of any 3rd person who acquired it in good faith. OBLIGATIONS OF THE DEPOSITARY Art 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. OBLIGATION TO KEEP THE THING DEPOSITED AND RETURN IT 1. Degree of care Ordinarily, the depositary must exercise over the thing deposited the same diligence as he would exercise over his property because: a. It is an essential requisite of the judicial relation which involves the depositors confidence in his good faith and trustworthiness; and b. The presumption that the depositor, in choosing the depositary, took into account the diligence which the depositary is accustomed with respect to his own property 2. Rules applicable The liability of the depositary for the care and delivery of the thing is governed by the rules on obligations:

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He is liable if the loss occurs through his fault or negligence even if the thing was insured (Art 2207) b. The loss of the thing while in his possession, ordinarily raises a presumption of fault on his part (Art 1265) c. The required degree of care is greater if the deposit is compensation than when it is gratuitous. 3. Return before specified term The thing deposited must be returned to the depositor whenever he claims it, even though a specified term or time for which may have been stipulated Art 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a third person. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit. The depositary is responsible for the negligence of his employees. CASES: SIA V. COURT OF APPEALS FACTS: Plaintiff Sia rented a safety deposit box of defendant bank SBTC wherein he placed his collection of stamps. The safety deposit box leased by plaintiff was at the bottom or at the lowest level of the safety deposit boxes of SBTC. 1. During the floods that took place in 1985 and 1986, floodwater entered into SBTCs premises and seeped into the safety deposit boxed leased by Sia, thus damaging his stamp collection 2. SBTC denied liability for the damaged stamps on the basis of the Rules and Regulations governing the Lease of Safety Deposit Boxes, particularly Sec 9 and 13. 3. The bank also contended that the subject contract is one of lease and not of deposit, and is therefore governed by the lease agreement 4. The trial court held in favor of Sia holding that the lease contract is a contract of adhesion and that SBTC failed to exercise the required diligence expected of a bank in maintaining the safety deposit box 5. On appeal, CA reversed the decision and ruled that the subject contract not a contract of deposit and that the provisions contained therein are not contrary to law and public policy ISSUE: What is the nature of contractual relations in the instant case? HELD: As held in CA Agro-Industrial Devt Corp v. CA, the contract for the use of a safety deposit box is a special kind of deposit. The prevailing rule in American Jurisprudencethat the relation between a bank renting out safety deposit boxes and its customer with respect to the a. contents of the box is that of a bailor and bailee, the bailment for hire and mutual benefit. This is rule is clearly adopted by our laws as evidenced by Sec 72 General Banking Act (RA 337). In contract for the use of a deposit box, the primary function is still within the parameters of deposit i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. Just as in the CA Agro-Industrial case, the provisions in Sec 9 and 13 absolving SBTC of liability must be stricken down for being contrary to law and public policy as they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of the deposit box which may arise from its own or its agents fault, negligence or delay. That SBTC is guilty of negligence is very clear. Although the flood is a fortuitous event, SBTCs negligence aggravated the injury the injury or damage to the stamp collection. SBTC was aware of the floods and that floodwaters inundated the room where the deposit box was located. In view thereof, it should have notified the depositor immediately in order to have the petitioner open the box and retrieve its contents. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. SERRANO V. CENTRAL BANK, 96 SCRA 96 (1980) FACTS: Serrano had P350,000 worth of time deposit in Overseas Bank of Manila. He made a series of encashment but were unsuccessful. As such, he filed a case against Overseas Bank and included the Central Bank so that the latter may also be solidarily liable. Serrano argued that Central Bank failed to supervise the acts of Overseas Bank and protect the interests of its depositors by virtue of constructive trust. In its defense, Central Bank argued that it has the duty to exercise a most rigid and stringent supervision of banks. Central Bank also denied that a constructive trust was created in favor Serrano and his predecessor in interest when their time deposits were made in 1966 and 1967 since at the time Overseas Bank was not yet an insolvent bank. ISSUE: WON time deposit in this case is a contract of deposit or loan HELD: Bank deposits are really in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings or current, are to be treated as loans and are to be covered by the law on loans (Art 1980 NCC). Current and savings
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CREDIT TRANSACTIONS Atty. R. Vasquez


deposits are loans to a bank because it can use the same. The petitioner here, in making time deposits that earn interests with Overseas Bank, was in reality a creditor of the bank and not a depositor. The bank, in turn, was a debtor of petitioner. Failure of the respondent bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from the depositarys failure to return the subject matter of the deposit. INVOLUNTARY DEPOSIT CASE: YHT REALTY CORP V. COURT OF APPEALS, 451 SCRA 638 (2005) FACTS: Private respondent McLoughlin, an Australian businessman, used to stay at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan convinced him to transfer from Sheraton Hotel to Tropicana. Petitioners Lainez and Payam, Tropi canas employees, had custody of the keys for the safety deposit boxes of the hotel. 1. In October 1987, McLoughlin checked in at Tropicana and rented a safety deposit box for his valuables. 2. According to the procedures of the hotel, the deposit box could only be opened through the use of two keys, one is given to the registered guest and the other remained in the possession of the hotel management. When a guest wishes to open his deposit box, only he alone could personally request the management who would then assign one of its employees to accompany the guest in opening the safety deposit box with the two keys 3. December 12, 1987: McLoughlin allegedly placed the following in his rented deposit box: two envelopes containing US$10,000 and US$5,000, another envelope with AUS$10,000, various letters and credit cards, bank books and checkbook, etc 4. Before leaving for Hong Kong, private respondent took out the envelopes containing US$5,000 and AUS$10,000. Upon arriving in Hong Kong, he discovered that the envelope contained only US$3,000 instead of US$5,000 (which he attributed to wrong accounting) 5. When he returned to Australia, McLoughlin discovered that the envelope with US$10,000 was short of US$5,000 and some jewelry be bought in Hong Kong were also missing 6. April 16,1988: McLoughlins money again went missing. When he confronted the hotel staff, Payam and his manager, Lopez, admitted that Tan opened the safety deposit box assigned to McLoughlin through the assistance of Lopez, Payam and Lainez. Lopez also informed that Tan stole the key from McLoughlin while he was asleep 7. McLoughlin demanded that the hotel should assume responsibility for the loss he suffered. However Lopez (the hotel manager) refused to accept responsibility relying on the conditions for renting the safety deposit box which provides that: To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising from any loss in the contents and/or use of the said deposit box for any cause whatsoever, including but not limited to the presentation or use thereof by any other person should the key be lost; 8. Subsequently, McLoughlin filed an action for damages against YHT Realty Corp, Lopez, Lainez, Payam and Tan for the loss of McLoughlins money which was discovered in April 1988. 9. During the trial, McLoughlin had incurred expenses for hotel bills, airfare and other expenses 10. RTC Manila held in favor of McLoughlin. The trial court found McLoughlins allegations as to the fact of loss and as to the amount of money he lost were sufficiently shown through his testimony. The taking was effected through the use of the master key which was in possession of the hotel management and that Payam and Lainez allowed Tan to use the master key without authority from McLoughlin. The trial court added that had he not lost his dollars, McLoughlin would not have gone through the trouble and personal inconvenience of seeking aid from the Office of the President, DOJ, police and City Fiscals office to recover his losses from the hotel management and Tan 11. The trial court also found that the defendants acted with gross negligence in the performance and exercise of their duties and obligations as innkeepers and were therefore liable to answer for the losses incurred by McLoughlin 12. It also ruled that the pertinent sections of the Undertaking for the Use of Safety Deposit Box was not valid for being contrary to the express mandate of Art 2003 NCC and against public policy. There being fraud or wanton conduct on the part of the defendants, they should be made liable for all damages which may be attributed to the nonperformance of their contractual obligations. CA affirmed the same ISSUE: WON the Undertaking for the Use of Safety Deposit Box executed by McLoughlin is void HELD: Yes. Art 2003 provides that: The hotelkeeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought about by the guest. Any stipulation between the

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hotelkeeper and the guest whereby the responsibility of the former as set forth in Art 1998 to 2001 is suppressed or diminished is void. Art 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature. In an earlier case, the SC held that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel or inn. With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guest's knowledge and consent from a safety deposit box provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the "undertaking" manifestly contravene Art 2003 for they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit box for any cause whatsoever. intended to bar any claim against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was incurred by Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure. It is the loss through force majeure that may spare the hotel-keeper from liability. In the case at bar, there is no showing that the act of the thief or robber was done with the use of arms or through an irresistible force to qualify the same as force majeure. Petitioners likewise anchor their defense on Art 2002 which exempts the hotel-keeper from liability if the loss is due to the acts of his guest, his family, or visitors. This provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of the loss. A depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss. Without the assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not the registered guest, to open the safety deposit box of McLoughlin, even assuming that the latter was also guilty of negligence in allowing another person to use his key. LIABLITY OF YHT REALTY CORP AS EMPLOYER Payam and Lainez, who were employees of Tropicana, had custody of the master key of the management when the loss took place. In fact, they even admitted that they assisted Tan on three separate occasions in opening McLoughlin's safety deposit box. This only proves that Tropicana had prior knowledge that a person aside from the registered guest had access to the safety deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to discover the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the negligence of its employees. The management contends, however, that McLoughlin, by his act, made its employees believe that Tan was his spouse for she was always with him most of the time. The evidence on record, however, is bereft of any showing that McLoughlin introduced Tan to the management as his wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from liability in the absence of any showing that he made the management believe that Tan was his wife or was duly authorized to have access to the safety deposit box. Mere close companionship and intimacy are not enough to warrant such conclusion considering that what is involved in the instant case is the very safety of McLoughlin's deposit. If only petitioners exercised due diligence in taking care of McLoughlin's safety deposit box, they should have confronted him as to his relationship with Tan considering that the latter had been observed opening McLoughlin's safety deposit box a number of times at the early hours of the morning. Under Art 1170 NCC, those who, in the performance of their obligations, are guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages, Art 2180, paragraph (4) of the same Code provides that the owners and managers of an establishment or enterprise are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer was negligent in selecting and/or supervising him for it is hard for the victim to prove the negligence of such employer. Thus, given the fact that the loss of McLoughlin's money was consummated through the negligence of Tropicana's employees in allowing Tan to open
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the safety deposit box without the guest's consent, both the assisting employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant to Article 2193. 2. The date of the issue 3. The consecutive number of the receipt 4. A statement whether the goods received will be delivered to bearer, to a specified person or to a person or his order 5. Fees 6. A description of the goods 7. The signature of the warehouseman 8. If the receipt is issued for goods of which the warehouseman is the owner, either solely or jointly or in common with others, the fact of such ownership; and 9. A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a lien (Sec 2 WRL) Q: What are the effects of omission of any of the essential terms? A: 1. A warehouseman shall be liable to any person injured thereby for all damages caused by the omission 2. Validity of receipt not affected 3. Negotiability of receipts not affected 4. Contract is converted to ordinary deposit (Gonzales v. Go Fiong & Luzon Surety Co., G.R. no 91776, August 30, 1958) Q: What is the effect when the goods deposited are incorrectly described? A: It does not make the receipt ineffective when the identity of the goods is fully established by evidence. Thus, the indorsement and the delivery shall constitute sufficient transfer of the title of the goods (American Foreign Banking Corp v. Herridge, G.R. no L21005, December 20, 1924) GENERAL RULE: A warehouseman shall be liable for damages for non-existence or mis-description of goods at the time of its issue. EXCEPTION: When the goods are described based on: 1. Series or labels upon them 2. Statement that the goods are of certain kind Q: What terms may and may not be inserted A: A warehouseman may insert in a receipt issued by him any other terms and conditions provided that such terms and conditions shall not be:

VI. WAREHOUSE RECEIPTS LAW


NATURE AND FUNCTIONS OF A WAREHOUSE RECEIPT WAREHOUSE RECEIPT written acknowledgment by the warehouseman that he has received and holds certain goods therein described in his warehouse for the person to whom the document is issued. The warehouse receipt has two-fold functions: it is a contract and a receipt (Telengtan Bros & Sons v. CA, G.R. no L-110581, September 21, 1994) WAREHOUSE RECEIPTS LAW DISTINGUISHED WAREHOUSE RECEIPTS LAW Warehouse receipts issued by warehouses, whether public or private, bonded or not AND DOCUMENTS OF TITLE

DOCUMENTS OF TITLE UNDER NCC Other receipts of documents issued in bailment contracts other than warehouse receipts (Art 1507-1520 NCC)

WAREHOUSEMAN A person, natural or juridical, lawfully engaged in the business of storing goods for profit (Sec 58 WRL) WAREHOUSE The building or place where goods are deposited and stored for profit WHO MAY ISSUE WAREHOUSE RECEIPT 1. A warehouseman, whether public or private, bonded or not (Sec 1) 2. A person authorized by a warehouseman FORM AND TERMS OF WAREHOUSE RECEIPT It need not be a particular form but must embody within its written or printed terms: 1. The location of the warehouse

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1. Contrary to the Warehouse Receipts Law (Sec 3) 2. Terms reducing the required diligence of the warehouseman 3. Contrary to law, morals, good customs, public order or public policy 4. Those exempting the warehouseman from liability for misdelivery or for not giving statutory notice in case of sale of goods 5. Those exempting the warehouseman from liability from negligence TO WHOM DELIVERED 1. To the person lawfully entitled to the possession of gods, or his agent; 2. To the person entitled to delivery under a non-negotiable instrument or with written authority; or 3. To the lawful order of a negotiable receipt (person in possession of a negotiable receipt; Sec 9) KINDS OF WAREHOUSE RECEIPTS 1. Negotiable warehouse receipt 2. Non-negotiable warehouse receipt NEGOTIABLE WAREHOUSE RECEIPT It is a receipt in which it states that the goods received will be delivered to the bearer or to the order of any person named in such receipt (Sec 5). It is negotiated either by delivery or indorsement plus delivery NOTE: No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision, if inserted, shall be void. A negotiable warehouse receipt cannot be converted into a nonnegotiable receipt (Sec 5). WHO MAY NEGOTIATE 1. The owner thereof 2. Any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the terms of the receipt, the goods are deliverable to the order of the person to whom the possession or custody of receipt has been entrusted or in such form that it may be negotiated be delivery (Sec 40) Q: What happens if the indorsement is necessary but the negotiable receipt was only delivered? A: 1. The transferee acquires title against the transferor 2. There is no direct obligation of the warehouseman; and 3. The transferee can compel the transferor to complete the negotiation by indorsing the instrument. Negotiation takes effect as of the time when the negotiation is actually made. Q: In case the signature of an owner of a negotiable receipt was forged and the forger who now holds the negotiable receipt was able to withdraw the goods from the warehouseman, what are the rights of the owner of the negotiable receipt? A: If under the terms of the negotiable warehouse receipt, the goods are deliverable to the depositor or his order, the owner of th said negotiable receipt may proceed against the warehouseman and/or the holder. Without the valid indorsement of the owner to the holder or in blank, the warehouseman is liable to the owner for conversion in the misdelivery. If, however, by the terms of the negotiable warehouse receipt, the goods are deliverable to bearer (either because it is so expressed in the warehouse receipt or because of a blank indorsement by a person to whose order the goods are deliverable) the owner may only proceed against the holder. The warehouseman is not liable for conversion where the goods are delivered to a person in possession of a bearer negotiable instrument Q: What is the rule when more than one negotiable receipt is issued for the same goods? A: A warehouseman shall be liable for all damages caused by his failure to do so to anyone who purchased the subsequent receipt for value supposing it to be an original, even though the purchase be after the delivery of the goods by the warehouseman to the holder of the original receipt (Sec 6). NOTE: The word duplicate shall be plainly placed upon the face of every such receipt, except the first one issued (Sec 6). WARRANTIES ON A WAREHOUSE RECEIPT A person who, for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a

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CREDIT TRANSACTIONS Atty. R. Vasquez


claim secured by a receipt, unless a contrary intention appears, warrants: 1. Receipt is genuine 2. Legal right to negotiate or transfer it 3. No knowledge of defects that may impair the validity or worth of the receipt 4. That he has a right to transfer title to the goods and that the goods are merchantable or fit for a particular purposes whenever such warranties would have been to transfer without a receipt of goods represented thereby (Sec 44) NOTE: The indorsee does not guarantee that the warehouseman will comply with his duties (Sec 45). A creditor receiving the warehouse receipt given as collateral makes no warranty (Sec 46). NON-NEGOTIABLE WAREHOUSE RECEIPT It is a receipt in which it states that the goods received will be delivered or to any other specified person (Sec 4) Q: What is required in a non-negotiable receipt? A: It shall have plainly placed upon its face by the warehouseman issuing it non-negotiable, or not negotiable. (Sec 7) Q: What is the effect of indorsement? A: Even if the receipt is indorsed, the transferee acquires no additional right (Sec 39). DISTINCTION BETWEEN A NEGOTIABLE INSTRUMENT AND A NEGOTIABLE WAREHOUSE RECEIPT NEGOTIABLE INSTRUMENT NEGOTIABLE WAREHOUSE RECEIPT Contains an unconditional promise to pay a sum certain in money The subject is money The negotiable instrument is the object of value Intermediate parties become Does not contain an unconditional promise to pay a sum certain in money The subject is merchandise The warehouse receipt is not the object of value Intermediate parties are not liable for secondarily liable the warehousemans failure to deliver the goods

RIGHTS OF A HOLDER OF NEGOTIABLE WAREHOUSE RECEIPT AS AGAISNT A TRANSFEREE OF A NON-NEGOTIABLE WAREHOUSE RECEIPT NEGOTIABLE WAREHOUSE RECEIPT NON-NEGOTIABLE WAREHOUSE RECEIPT May be acquired through negotiation May be acquired through transfer or assignment RIGHTS OF TRANSFEREE: 1. Acquires title to the goods subject to the terms of any agreement with the transferor Acquires the right to notify the warehouseman of the transfer and thereby acquires the direct obligation of the warehouseman to hold possession of the goods for him (Sec 42)

RIGHTS OF THE HOLDER OF RECEIPT 1. If INDORSED: a. Acquires title to the goods as the person negotiating (Sec 41) b. Acquires the direct obligation of the warehouseman to hold possession of the goods for him as if the warehouseman directly contracted with him If NOT indorsed: He may compel indorsement; otherwise, he would acquire title as that of an assignee (Sec 43)

2.

2.

NOTE: Prior to notice, the title of the transferee may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor or by a notification to the warehouseman by the transferor on a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor (Sec 42) Acquires a title as that of his transferor

Defeats the lien of the seller of goods covered thereby (Sec 49)

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By: M. Mejia
Goods covered cannot be garnished, attached or levied on execution by execution, unless: 1. 2. 3. Receipt is surrendered Its negotiation is enjoined by the court The goods are impounded by the court (Sec 25) Pending notification warehouseman, goods garnished, attached or execution to the can be levied on and to pay the warehousemans liens and fees and other charges (1999 Bar Question). Q: Bon took the goods from Angela without her consent and deposited the same with a warehouseman. The latter issued to Bon a negotiable receipt which she indorsed for value to Ryan. Between Angela and Ryan, who has a better right over the goods? A: Ryan has a better right to the goods. The goods are covered by a negotiable warehouse receipt which was indorsed to Ryan for value. The negotiation to Ryan was not impaired by the fact that Bon took the goods without the consent of Angela, as Ryan had no notice of such fact. Moreover, Ryan is in possession of the warehouse receipt and only he can surrender it to the warehouse (Sec 8 WRL). Q: What is the proper recourse of the warehouseman if he is uncertain as to who is entitled to the goods? A: Since there is a conflicting claim of ownership or title, the warehouseman should file a complaint in interpleader requiring Ryan and Angela to interplead. The matter involves a judicial question as to whose claim is valid (2005 Bar Question). Q: What is the rule where a warehouse receipt is transferred to secure payment of a loan by way of pledge or mortgage? A: The pledgee or mortgagee does not automatically become owner of the goods but merely retains the right to keep with the consent of the owner to sell them so as to satisfy the obligation form the proceeds for the simple reason that the transaction is not a sale but only a mortgage or pledge. Likewise, of the property is lost without the fault or negligence of the mortgagee or pledge, then said goods are to be regarded as lost on account of the reaol owner, mortgagor or pledgor (PNB v. Sayo Jr., G.R. no 129198, July 9, 1998). Q: Does the non-payment by the original depositors of the purchase price render the further negotiation of the receipt invalid? A: No, the negotiation of the warehouse receipt by the buyer of goods and purchased from and deposited to the warehouseman is valid even if the warehouseman who issued the negotiable warehouse receipt was not paid by the buyer. The validity of the negotiation cannot be impaired by the fact that the

NOTE: This shall not apply if the person depositing is not the owner of the goods or one who has no right to convey title to the goods binding upon the owner Protects the purchaser in good faith and for value

REASON: Absent such notice, both the warehouseman and the sheriff have the right to assume that the goods are still owned by the person whose name appears in the receipt

The assignee only steps into the shoes of the assignor

Q: Coco was issued by a warehouseman a negotiable receipt for safekeeping by the later of his goods. Can the judgment creditor of Coco levy by execution the goods covered by the negotiable receipt? A: The goods cannot, while in the possession of the warehouseman, 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 warehouseman cannot be compelled to deliver the actual possession of the goods until the receipt is surrendered to it or impounded by the court. Q: Assuming that prior to the levy, the receipt was sold to Yoyo on the basis that he filed a claim with the sheriff. Would Yoyo have better rights to the goods than the creditor? A: Yes. Yoyo, as a holder for value of the receipt, has a better right to the goods than the creditor. It is Yoyo 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 goods, namely, to sign a receipt for the delivery of the goods,

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CREDIT TRANSACTIONS Atty. R. Vasquez


owner/warehouseman was deprived of the possession of the same by fraud, mistake, or conversion (PNB v. Noahs Ark Sugar Refinery, G.R. no 107243, September 1, 1993). DUTIES OF A WAREHOUSEMAN OBLIGATIONS OF A WAREHOUSEMAN 1. To TAKE CARE of the goods entrusted to his safekeeping 2. To DELIVER them to the holder of the receipt or the depositor provided there is demand by the deposited accompanied by either: a. An offer to satisfy the warehousemans lien b. An offer to surrender the receipt, if negotiation with such indorsement as would be necessary for the negotiation of the receipts; or c. A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been delivered, if such signature is requested by the warehouseman (Sec 8) 3. To keep the goods SEPARATE from the goods of other depositors, except if authorized by agreement or by custom, fungible goods may be mingled with other goods of the same kind and grade. Q: When is the need for a demand by the depositor not necessary? A: When the warehouseman has rendered it beyond his power to deliver the goods. Q: When is refusal to delivery by the warehouseman justified? A: 1. If the warehousemans lien is not satisfied by the claimants (Sec 31) 2. Where the goods have already been sold to satisfy the warehousemans lien or because of their perishable or hazardous nature (Sec 34) 3. If the warehouse receipt is negotiated back to him 4. When the holder does not satisfy the conditions prescribed in Sec 8: a. Non-satisfaction of warehousemans lien b. Failure to surrender warehouse receipt c. Refusal to sign the acknowledgment receipt, acknowledging the receipt of the goods from the warehouse 5. The failure was not due to any fault on the part of the warehouseman: a. Upon request or on behalf of the person lawfully entitled (Sec 10) b. If he had information that the delivery about to be made was to one not lawfully entitled (Sec1 0) c. If several persons claim the goods (Sec 17) d. If the warehouseman needs reasonable time to ascertain the validity of the claim if someone other than the depositor claims title to the goods (Sec 18) e. If the goods are lost, despite ordinary care by the warehouseman Q: What if the receipts are lost or destroyed? A: A court of competent jurisdiction may order the delivery of the goods only: a. Upon satisfactory proof of the loss or destruction of the receipt; and b. Upon giving of a bond with sufficient sureties to be approved by the court (Sec 14) NOTE: The delivery of goods under an order of the court shall not relieve the warehouseman from the liability to a person to whom the negotiable receipt has been or shall be negotiated for value without notice of the proceedings or of the delivery of the goods (Sec 14) Q: When the does the duty to insure the goods arise? A: 1. Where the law provides 2. Where it was an inducement for the depositor to enter into the contract 3. Established practice; or 4. Where the warehouse receipt contains a representation to that effect CONVERSION An unauthorized assumption and exercise of the right of ownership over the goods belonging to another through the alteration of their condition or the exclusion of the owners right

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By: M. Mejia
Q: What are the instances where a warehouseman is liable for conversion? A: 1. Where the delivery is made to a person other than those authorized 2. Even if delivered to persons entitled, he may still be liable for conversion if prior to delivery: a. He had been requested not to make such delivery; or b. He had received notice of the adverse claim or title of a 3rd person EFFECTS OF ALTERATION OF RECEIPT ON THE LIABILITY OF WAREHOUSEMAN 1. ALTERATION IMMATERIAL Whether fraudulent or not, whether authorized or not, the warehouseman is liable on the altered receipt according to its original tenor 2. AUTHORIZED MATERIAL ALTERATION The warehouseman is liable according to the terms of the receipt as altered 3. MATERIAL ALTERATION INNOCENTLY MADE The warehouseman is liable on the altered receipt according to its original receipt 4. MATERIAL ALTERATION FRAUDULENTLY MADE A warehouseman is liable according to the original tenor of the receipt to a purchaser of the receipt for value without notice, and even to the alterer and subsequent purchasers with notice except that as regards to the last two, the warehousemans liability is limited only to delivery as he is excused from any liability Q: What are instances where a warehouseman is criminally liable for his acts? A: 1. Issuance of receipts for goods not received (Sec 50) 2. Issuance of receipt containing false statement (Sec 51) 3. Issuance of duplicate negotiable warehouse receipt not marked as such (Sec 52) 4. Issuance of a negotiable warehouse receipt of which is an owner without stating such fact of ownership (Sec 53) 5. Delivery of goods without obtaining negotiable warehouse receipt (Sec 54) 6. Negotiation of receipt for mortgaged goods (Sec 55) 7. Issuance of warehouse receipts for goods not received (Sec 50) 8. Commingling of goods (Sec 24) Q: What are other acts for which the warehouseman is liable? A: 1. Failure to stamp duplicate on copies of negotiable receipt (Sec 6) 2. Failure to place non-negotiable or not negotiable on a non-negotiable receipt (Sec 7) 3. Misdelivery of goods (Sec 10) 4. Failure to effect cancellation of a negotiable receipt upon delivery of the goods (Sec 11) 5. Issuing receipt for non-existing goods or mis-described goods (Sec 20) 6. Failure to take care of the goods (Sec 21) 7. Failure to give notice in case of sale of goods to satisfy lien (Sec 33) or because the goods are perishable or hazardous (Sec 34) WAREHOUSEMANS LIEN Q: What is covered by the warehousemans lien over the goods deposited or on the proceeds thereof? A: 1. Charges for storage and preservation of the goods (insurance and others may be included as long as it is stipulated) 2. Money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods 3. Charges and expenses for notice, and advertisements of sale, and for sale of the goods where default had been made in satisfying the warehousemans lien (Sec 27) Q: What are the remedies available to a warehouseman to enforce his warehousemans lien? A: 1. By refusing to deliver the goods until the lien is satisfied 2. By causing the extrajudicial sale of the property and applying the proceeds of the value of the lien

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CREDIT TRANSACTIONS Atty. R. Vasquez


NOTE: Where the sale was made without the publication required and before the time provided by the law, such sale is void and the purchases of the goods acquires no title to them 3. By filing a civil action for collection of the unpaid charges or by way of counterclaim in an action to recover the property from him or such other remedies allowed by law for the enforcement of a lien against personal property or to a creditor against his debtor, for the collection from the depositor of all the charges which the depositor has bound himself to pay Q: Against whose goods may the lien be enforced? A: 1. Goods belonging to the person who is liable as debtor; and 2. Goods belonging to others which have been deposited at any time by the debtor with authority to make a valid pledge (Sec 28) Q: How may the warehouseman lose his lien? A: 1. By surrendering possession thereof; or 2. By refusing to deliver the goods when a demand is made with which he is bound to comply (Sec 29) NOTE: Where a negotiable receipt is issued, with the exception of the charges for the storage or preservation of goods for which a negotiable receipt has been issued, the lien exists only for other charges expressly enumerated in the receipt so far as they are written although the amount of the said charge is not stated. Loss of lien does not mean that the warehouseman does not have any other remedy.

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