Credit Transactions

I.
II.

III.

IV.
V.
VI.

I.
II.

The carabaos delivered to be used not being returned by the defendant

upon demand, there is no doubt that she is under obligation to
indemnify the owner thereof by paying him their value.
Although it is true that in a contract of commodatum the bailor retains
the ownership of the thing loaned, and at the expiration of the period,
or after the use for which it was loaned has been accomplished, it is
the imperative duty of the bailee to return the thing itself to its
owner, or to pay him damages if through the fault of the bailee the
thing should have been lost or injured

CONCEPT OF CREDIT TRANSACTIONS

LOAN
a. CONCEPT
b. COMMODATUM
c. MUTUUM & USURY LAW
DEPOSIT
a. DEPOSIT IN GENERAL AND ITS DIFFERENT
KINDS
b. EXTRAJUDICIAL
i. VOLUNTARY DEPOSIT
ii. NECESSARY DEPOSIT
c. JUDICIAL DEPOSIT OR SEQUESTRATION
WAREHOUSE RECEIPTS LAW
TRUST RECEIPTS LAW
LETTERS OF CREDIT

5) RP VS BAGTAS
Issue: As the death of the bull was due to force majeure, is B
relieved from the duty of paying its value?
Held: No. A contract of commodatum is essentially gratuitous. If the
breeding fee be considered compensation, then the contract would be
a lease of the bull. Under Article 1671 of the Civil Code, the lessee
would be subject to the responsibilities of a possessor in bad faith
because she had continued possession of the bull after the expiration
of the contract. And even if the contract be commodatum, still B is
liable under Article 1942(2, 3) Recall: PDALI under 1942

CONCEPT OF CREDIT TRANSACTIONS

LOAN
a. CONCEPT
b. COMMODATUM

6) CATHOLIC VICAR VS CA
The bailees' failure 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 Vicar
by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.

1) PAJUYO VS CA
1935 USE OF THE THING LOANED; ESSENTIALLY GRATUITOUS
The Kasunduan was not essentially gratuitous for while it did not
require Guevarra to pay rent, it obligated him to maintain the property
in good condition. The imposition of this obligation makes it a contract
different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has
treated relationship based on tolerance as one that is akin to a
landlord-tenant relationship where the withdrawal of permission would
result in the termination of the lease. The tenants withholding of the
property would then be unlawful.

7) QUINTOS VS BECK
Held: Gratuitous use of furniture was subject to the condition that
lessee would return them upon lessors demand (precarium) but
notwithstanding such demand, former continued to use furniture until
expiration of lease.

2) PRODUCERS BANK VS CA

When there is precarium

No stipulation as to period

Use of the thing is merely tolerated by the owner

SUBJECT MATTER IS MONEY, BUT MERELY FOR EXHIBITION

GR: if the subject of the contract is a consumable thing, such as
money, the contract would be a mutuum.
XPN: 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.
In this case, evidence shows that PR 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 thirty (30) days.

[t]he bailee in commodatum acquires the use of the thing loaned

but NOT its fruits. Hence, it was only proper for Doronilla to remit
to PR the interest accruing to the latters money deposited with
petitioner.

When there is ordinary commodatum

Stipulation as to period

Accomplishment of the use

c. MUTUUM & USURY LAW

1) YONG CHAN KIM VS PEOPLE
Liquidation simply means the settling of an indebtedness. An
employee, such as herein petitioner, who liquidates a cash advance is
in fact paying back his debt in the form of a loan of money
advanced to him by his employer, asper diems and allowances.
Similarly, "if the amount of the cash advance he received is less than
the amount he spent for actual travel . . . he has the right to demand
reimbursement from his employer the amount he spent coming from
his personal funds. 12 In other words, the money advanced by either
party is actually a loan to the other. Hence, petitioner was under no
legal obligation to return the same cash or money, i.e., the bills or
coins, which he received from the private respondent. 13

3) MINA VS PASCUAL
Held: An example of commodatum involving real property is when a
person allowed another to build a warehouse on the formers land so
that the latter may use the property for a certain period without any
payment of rentals. If no time for use of the land is specified, the
contract would be that specie of commodatum which is called
precarium under 1947. If rental is paid, the contract would be one of
lease.

The ruling of the trial judge that ownership of the cash advanced to the
petitioner by private respondent was not transferred to the latter is
erroneous. Ownership of the money was transferred to the
petitioner. Since ownership of the money (cash advance) was
transferred to petitioner, no fiduciary relationship was created. Absent
this fiduciary relationship between petitioner and PR, which is an
essential element of the crime of estafa by misappropriation or
conversion, petitioner could not have committed estafa.

4) DELOS SANTOS VS JARRA

OBLIGATION TO
COMMODATUM

RETURN

THE

THING

SUBJECT

OF

2) BPI VS CA
1

Credit Transactions
LOAN IS A REAL CONTRACT PERFECTED BY DELIVERY.
the loan contract between BPI, on the one hand, and ALS and Litonjua,
on the other, was perfected only on September 13, 1982, the date of
the second release of the loan. Following the intentions of the parties
on the commencement of the monthly amortization, PRs obligation to
pay commenced only on October 13, 1982, a month after the
perfection of the contract.
The promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization
commencing on May 1, 1981, one month after the supposed release of
the loan. 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

Private respondent maintains that the twelve percent (12%) interest

should be imposed, because the obligation arose from a forbearance
of money.[22] This is erroneous. In Eastern Shipping,[23] the Court
observed that a FORBEARANCE in the context of the usury law is
a contractual obligation of lender or creditor to refrain, during a
given period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable. Using this standard,
the obligation in this case was obviously not a forbearance of
money, goods or credit.

5) PNB VS IBARROLA
The case at bench does not involve a loan. Forbearance of money
or judgment involving a loan or forbearance of money as it arose
from a contract of sale whereby Ibarrola did not receive full
payment for her merchandise. When an obligation arises from a
contract of purchase and sale and not from a contract of loan or
mutuum, the applicable rate is 6% per annum as provided in Article
2209 of the NCC and not the rate of 12% per annum as provided in
(CB) Cir. No. 416

3) EASTERN SHIPPING LINES VS CA

RULES OF THUMB FOR FUTURE GUIDANCE.
I.
When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts 18 is breached, the
contravenor can be held liable for damages.
II.

1.

2.

3.

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:

6) MEDEL VS CA
stipulated rate of interest at 5.5% per month on the P500,000.00 loan
is excessive, iniquitous, unconscionable and exorbitant. However, we
can not consider the rate "usurious" because this Court has
consistently held that Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Law and that the Usury Law is now "legally
inexistent."

When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. 21 Furthermore, the interest due shall
itself earn legal interest from the time it is judicially
demanded. 22 In the absence of 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 Article 1169 23 of the Civil Code.
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 (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand
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
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 paragraph 1 or paragraph 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.

SC previously held that the circular did not repeal nor in any way
amend the Usury Law but simply suspended the latters effectivity."
"Usury has been legally non-existent in our jurisdiction. Interest can
now be charged as lender and borrower may agree upon."

7) TOLEDO VS HYDEN
The 6% to 7% interest per month paid by Jocelyn is not excessive
under the circumstances of this case.
in Medel v. Court of Appeals,[16] we annulled a stipulated 5.5% per
month or 66% per annum interest with additional service charge of 2%
per annum and penalty charge of 1% per month on a P500,000.00 loan
for being excessive, iniquitous, unconscionable and exorbitant.
In this case, however, we cannot consider the disputed 6% to 7%
monthly interest rate to be iniquitous or unconscionable vis--vis the
principle laid down in Medel. Noteworthy is the fact that in Medel, the
defendant-spouses were never able to pay their indebtedness from the
very beginning and when their obligations ballooned into a staggering
sum, the creditors filed a collection case against them. In this case, It
was clearly shown that before Jocelyn availed of said loans, she knew
fully well that the same carried with it an interest rate of 6% to 7% per
month, yet she did not complain. In fact, when she availed of said
loans, an advance interest of 6% to 7% was already deducted from the
loan amount, yet she never uttered a word of protest.

8) ESTORES VS SPS SUPANGAN

The contract involved in this case is admittedly not a loan but a
Conditional Deed of Sale. However, the contract provides that the
seller (petitioner) must return the payment made by the buyer
(respondent-spouses)
if
the
conditions
are
not
fulfilled.
Notwithstanding demands, the seller (petitioner) has failed to return the
money and should be considered in default from the time that demand
was made on September 27, 2000. This stipulation governing the
return of the money is considered as a forbearance of money
which required payment of interest at the rate of 12%

Here, the interest rate applicable is 6% p.a. since the contract is sale
and transportation of goods.

4) CRISMINA GARMENTS VS CA
Because the amount due in this case arose from a contract for a
piece of work, not from a loan or forbearance of money, the legal
interest of six percent (6%) per annum should be applied.
Furthermore, since the amount of the demand could be established
with certainty when the Complaint was filed, the six percent (6%)
interest should be computed from the filing of the said Complaint. But
after the judgment becomes final and executory until the obligation is
satisfied, the interest should be reckoned at twelve percent (12%) per
year.

In Crismina Garments, Inc. v. Court of Appeals,

FORBEARANCE was defined as a contractual obligation of

lender or creditor to refrain during a given period of time, from

Credit Transactions
requiring the borrower or debtor to repay a loan or debt then due
and payable.
This definition describes a loan where a debtor is given a period within
which to pay a loan or debt. In such case, forbearance of money,
goods or credits will have no distinct definition from a loan. We believe
however, that this is meant to have a separate meaning from a loan,
otherwise there would have been no need to add that phrase as a loan
is already sufficiently defined in the Civil Code.[34]

Forbearance of money, goods or credits should therefore refer to

arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or credits
pending happening of certain events or fulfillment of certain
conditions.

the lower courts because it did not express the real intention of the
parties, is substantial proof that the bank lending rate at the time of
default was 18% per annum. Absent any evidence of fraud, undue
influence or any vice of consent exercised by petitioners against the
respondent, the interest rate agreed upon is binding on them

10)

PRISMA VS MENCHAVEZ

Article 1956 of the Civil Code specifically mandates that no interest

shall be due unless it has been expressly stipulated in writing. Under
this provision, the payment of interest in loans or forbearance of money
is allowed only if: (1) there was an express stipulation for the payment
of interest; and (2) the agreement for the payment of interest was
reduced in writing. The concurrence of the two conditions is required
for the payment of interest at a stipulated rate.

In this case, the respondent-spouses parted with their money even

before the conditions were fulfilled. They have therefore allowed or
granted forbearance to the seller (petitioner) to use their money
pending fulfillment of the conditions. They were deprived of the use of
their money for the period pending fulfillment of the conditions and
when those conditions were breached, they are entitled not only to the
return of the principal amount paid, but also to compensation for the
use of their money. And the compensation for the use of their money,
absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a
loan. Petitioners unwarranted withholding of the money which rightfully
pertains to respondent-spouses amounts to forbearance of money
which can be considered as an involuntary loan. Thus, the applicable
rate of interest is 12% per annum.

Applying this provision, we find that the interest of P40,000.00 per

month corresponds only to the six (6)-month period of the loan, or from
January 8, 1994 to June 8, 1994, as agreed upon by the parties in the
promissory note. Thereafter, the interest on the loan should be at the
legal interest rate of 12% per annum, consistent with our ruling in
Eastern Shipping Lines.
no issue on the excessiveness of the stipulated amount of P40,000.00
per month was ever put in issue by the petitioners; [41] they only assailed
the application of a 4% interest rate, since it was not agreed upon.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall
earn P40,000.00 per month for a period of six (6) months, or from
December 8, 1993 to June 8, 1994, for a total principal and interest
amount of P1,240,000.00. Thereafter, interest at the rate of 12% per
annum shall apply. The amounts already paid by the petitioners during
the pendency of the suit, amounting to P1,228,772.00 as of
February 12, 1999,[43] should be deducted from the total amount due,
computed as indicated above. We remand the case to the trial court for
the actual computation of the total amount due

9) PAN PACIFIC VS EQUITABLE

CA went beyond the intent of the parties by requiring respondent to
give its consent to the imposition of interest before petitioners can hold
respondent liable for interest at the current bank lending rate. This is
erroneous. A review of Section 2.6 of the Agreement and Section 60.10
of the General Conditions shows that the consent of the respondent is
not needed for the imposition of interest at the current bank lending
rate, which occurs upon any delay in payment.

11)
Article 1956 of the Civil Code, which refers to monetary interest,
specifically mandates that no interest shall be due unless it has been
expressly stipulated in writing. Therefore, payment of monetary interest
is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the
payment of monetary interest.[33]
In case of default, the consent of the respondent is not needed in order
to impose interest at the current bank lending rate.

PILIPINAS BANK VS CA

RULING:
Note that Circular No. 416, fixing the rate of interest at 12% per
annum, deals with (1) loans; (2) forbearance of any money, goods or
credit; and (3) Judgments
SC previously held that judgments spoken of and referred to in Circular
No. 416 are "judgments in litigation involving loans or forbearance of
any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with nor involving loans or forbearance of any
money, goods or credits does not fall within the coverage of the said
law for it is not, within the ambit of the authority granted to the Central
Bank

Applicable Interest Rate

Under Article 2209 of the Civil Code, 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. Finally, 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 forbearances of
money, 12% per annum.[34]It is only when the parties to a contract have
failed to fix the rate of interest or when such amount is unwarranted
that the Court will apply the 12% interest per annum on a loan or
forbearance of money.[35]

Circular No. 416 does not apply to judgments involving damages and
compensation in expropriation proceedings; also payment of
unliquidated cash advances to an employee by his employer, and the
return of money paid by a buyer of a leasehold right but which contract
was voided due to the fault of the seller.
What then is the nature of the judgment ordering PB to pay Echaus the
amount of 2.3m?
The said amount was a portion of the P7,776,335.69 which petitioner
was obligated to pay Greatland as consideration for the sale of several
parcels of land by Greatland to petitioner. The amount of
P2,300,000.00 was assigned by Greatland in favor of private
respondent. 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 in Article
2209 of the Civil Code of the Philippines and not the rate of 12% per
annum as provided in Circular No. 416.

The written agreement in the PN entered into between petitioners and

respondent provides for an interest at the current bank lending rate in
case of delay in payment and the promissory note charged an interest
of 18%.
To prove petitioners entitlement to the 18% bank lending rate of
interest, petitioners presented the promissory note [36]prepared by
respondent bank itself. This promissory note, although declared void by

But 12% as to the excess amount ordered to refunded by private

respondent since Circular No. 416 applies to cases where money is

Credit Transactions
transferred from one person to another and the obligation to
return the same or a portion thereof is subsequently adjudged.

12)

The evidence shows that it was indeed the respondents who proposed
the 5% interest rate per month for two (2) months. Having agreed to
said rate, the parties are now estopped from claiming otherwise. For
the succeeding period after the two months, however, the Court of
Appeals correctly reduced the interest rate to 12% per annum and the
penalty rate to 1% per month, in accordance with Article 2227[18] of
the Civil Code.

SOLIDBANK VS PERMANENT HOMES

Although interest rates are no longer subject to a ceiling, the

lender still does not have an unbridled license to impose
increased interest rates. The lender and the borrower should agree
on the imposed rate, and such imposed rate should be in writing.
a)
b)
c)

The stipulations on interest rate repricing are valid because

the parties mutually agreed on said stipulations
repricing takes effect only upon Solidbanks written notice to Permanent
of the new interest rate; and
Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate.

15)

The phrases irrevocably authorize, at any time and adjustment of the

interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time
the notice was sent, emphasize that Permanent should receive a
written notice from Solidbank as a condition for the adjustment of
the interest rates. We rule that Solidbanks computation of the interest
due from Permanent should be adjusted to take effect only upon
Permanents receipt of the written notice from Solidbank.

13)

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 an express contract as to such rate of interest, shall
be six percent (6%) per annum.
It should be noted, nonetheless, that the new rate could only be
applied prospectively and not retroactively. Consequently, the twelve
percent (12%) per annum legal interest shall apply only until June 30,
2013. Come July 1, 2013 the new rate of six percent (6%) per annum
shall be the prevailing rate of interest when applicable.

CHUA VS TIMAN

Petitioners aver that the stipulated interest of 5% monthly and higher

cannot be considered unconscionable because these rates are not
usurious by virtue of Central Bank (C.B.) Circular No. 905-826 which
had expressly removed the interest ceilings prescribed by the Usury
Law. Petitioners add that respondents were in pari delicto since they
agreed on the stipulated interest rates of 7% and 5% per month. They
further aver they honestly believed that the interest rates they imposed
on respondents loans were not usurious.

To recapitulate and for future guidance, the guidelines laid down in the
case of Eastern Shipping Lines 42 are accordingly modified to embody
BSP-MB Circular No. 799, as follows:
I.
When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held
liable for damages. The provisions under Title
XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable
damages.1wphi1
II.
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:

Respondents, invoking Medel v. Court of Appeals,7 counter that the

stipulated interest rates of 7% and 5% per month are iniquitous,
unconscionable and exorbitant, thus, they are entitled to the return of
the excessive interest paid.
RULING: The stipulated interest rates of 7% and 5% per month
imposed on respondents loans must be equitably reduced to 1% per
month or 12% per annum. stipulated interest rates of 3%9 per month
and higher10 are excessive, iniquitous, unconscionable and
exorbitant

When the obligation is breached, and it consists in the payment of

a sum of money, i.e., a 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 stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.

While C.B. Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said circular
could possibly be read as granting carte blanche authority to lenders to
raise interest rates to levels which would either enslave their borrowers
or lead to a hemorrhaging of their assets.

14)

NACAR VS GALLERY FRAMES

See Eastern Shipping Guideline

Recently, however, the BSP Monetary Board (BSP-MB), in its
Resolution No. 796, approved the amendment of Section 234 of
Circular No. 905, Series of 1982 and, accordingly, issued Circular No.
799, Series of 2013, effective July 1, 2013, the pertinent portion of
which reads: xxx

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
(Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand 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 computation of
legal interest shall, in any case, be on the amount finally adjudged.

DIO VS SPS JAPOR

Central Bank Circular No. 905, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity. However, nothing in said
Circular grants lenders carte blanche authority to impose interest
rates which would result in the enslavement of their borrowers or
to the hemorrhaging of their assets. What is iniquitous,
unconscionable, and exorbitant shall depend upon the factual
circumstances of each case.
In the instant case, the CA found that the 5% interest rate per month
and 5% penalty rate per month for every month of default or delay is in
reality interest rate at 120% per annum. This Court has held that a
stipulated interest rate of 5.5% per month or 66% per annum is void for
being iniquitous or unconscionable. Likewise, rate of 6% per month or
72% per annum is outrageous and inordinate. Conformably to these
precedent cases, a combined interest and penalty rate at 10% per
month or 120% per annum, should be deemed iniquitous,
unconscionable, and inordinate.

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 paragraph 1 or paragraph 2, above, shall be 6% per annum from
such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein.

What then should the interest and penalty rates be?

Credit Transactions

16)

interest rate to be earned but also the manner of earning the same, if it
is to be compounded. Failure to specify the manner of earning interest,
however, shall not automatically render the stipulation imposing the
interest rate void since it is readily apparent from the contract itself that
the parties herein agreed for the loan to bear interest. Instead, in
default of any stipulation on the manner of earning interest, simple
interest shall accrue.

ECE REALTY VS HERNANDEZ (2014)

CONDOMINIUM UNIT CASE.

Article 2209 of the New Civil Code 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 the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per
annum." There is no doubt that ECE incurred in delay in delivering the
subject condominium unit. There being no stipulation as to interest,
under Article 2209 the imposable rate is six percent (6%) by way of
damages.
But since July 1, 2013, the rate of twelve percent (12%) per annum
from finality of the judgment until satisfaction has been brought back to
six percent (6%). Section 1 of Resolution No. 796 of the Monetary
Board of the Bangko Sentral ng Pilipinas dated May 16, 2013 provides:
"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 an express
contract as to such rate of interest, shall be six percent (6%) per
annum." Thus, the rate of interest to be imposed from finality of
judgments is now back at six percent (6%), the rate provided in Article
2209 of the Civil Code.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No.
120738 is AFFIRMED with MODIFICATION. Petitioner ECE Realty and
Development, Inc. is hereby ordered to pay respondent Haydyn
Hernandez the amount of P452,551.65 representing the total amount
he paid to petitioner ECE Realty and Development Incorporated, plus
six percent (6%) interest per annum from September 7, 2006 until
finality hereof by way of actual and compensatory damages. From
finality until full satisfaction, the total amount due now compounded
with interest due from September 7, 2006 up to finality, shall likewise
earn interest at six percent (6%) per annum until fully paid.

17)

respondent spouses herein imposed a 5% monthly interest in the loan

contracted by petitioners. Following the judicial pronouncements, the
interest rate so imposed herein is nullified for being unconscionable. In
lieu thereof, a simple interest of 12% per annum should be imposed.

19)

The penalty charge of two percent (2%) per month in the case at bar
began to accrue from the time of default by the petitioner. There is no
doubt that the petitioner is liable for both the stipulated monetary
interest and the stipulated penalty charge (aka penalty or
compensatory interest).
next issue to be resolved is whether interest may accrue on the penalty
or compensatory interest without violating the provisions of Article
1959? YES
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.

20)

SIGA-AN VS VILLANUEVA

Obligation arose from Solutio Indebiti NOT forbearance in money. 6%

interest should be imposed.
In the present case, petitioners obligation arose from a quasi-contract
of solutio indebiti and not from a loan or forbearance of money. Thus,
an interest of 6% per annum should be imposed on the amount to be
refunded as well as on the damages awarded and on the attorneys
fees, to be computed from the time of the extra-judicial demand on 3
March 1998,46 up to the finality of this Decision. In addition, the
interest shall become 12% per annum from the finality of this Decision
up to its satisfaction.

DE LA PAZ VS L&J DEVELOPMENT

As exhaustibly discussed,no monetary interest isdue Rolando pursuant

to Article 1956.1wphi1 The CA thus correctly adjudged that the excess
interest payments made by L&J should be applied to its principal loan.
As computed by the CA, Rolando is bound to return the excess
payment of P226,000.00 to L&J following the principle of solutio
indebiti.35
However, pursuant to Central Bank Circular No. 799 s. 2013 which took
effect on July 1, 2013,36 the interest imposed by the CA must be
accordingly modified. The P226,000.00 which Rolando is ordered to
pay L&J shall earn an interest of 6% per annumfrom the finality of this
Decision.

18)

TAN VS CA

III. DEPOSIT (1962-2009)

a. DEPOSIT IN GENERAL AND ITS
DIFFERENT KINDS
BPI VS IAC (1988)

SPS ALBOS VS EMBISAN

The compounding of interest should be in writing

Monetary interest

Article 1956.No interest shall be due unless it has been expressly

stipulated in writing.

ISSUE: is there a contract of deposit? YES; Can Zshornack recover

damages? NO
HELD:
CONTRACT OF DEPOSIT

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.

As mandated by the foregoing provision, payment of monetary interest

shall be due only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for such payment was
reduced in writing.
In the case at bar, it is undisputed that the parties have agreed for the
loan to earn 5% monthly interest, the stipulation to that effect put in
writing. When the petitioners defaulted, the period for payment was
extended, carrying over the terms of the original loan agreement,
including the 5% simple interest. However, by the third extension of the
loan, respondent spouses decided to alter the agreement by changing
the manner of earning interest rate, compounding it beginning June
1986. This is apparent from the Statement of Account prepared by the
spouses Embisan themselves.

However, 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 No. 20, it must
be considered as one which falls under the general class of prohibited
transactions. When the nullity proceeds from the illegality of the cause
or object of the contract, and the act constitutes a criminal offense,
both parties being in pari delicto, they shall have no cause of action
against each other

Given the circumstances, We rule that the first requirementthat there

be an express stipulation for the payment of interestis not sufficiently
complied with, for purposes of imposing compounded interest on the
loan. The requirement does not only entail reducing in writing the

Credit Transactions

BANK IS NOT LIABLE. In the instant case, there is no competent

proof presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect that the
certificates of title were withdrawable from the safety deposit box only
upon both parties' joint signatures, and that no evidence was submitted
to reveal that the loss of the certificates of title was due to the fraud or
negligence of the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (1)
renter's key, it was obvious that either of them could ask the Bank for
access to the safety deposit box and, with the use of such key and the
Bank's own guard key, could open the said box, without the other
renter being present.

b. VOLUNTARY DEPOSIT
1) CHAN VS MACEDA
NO PRIVITY OF CONTRACT BETWEEN SPS CHAN AND MACEDA.
Under Article 1311 of the Civil Code, contracts are binding upon the
parties (and their assigns and heirs) who execute them. When there is
no privity of contract, there is likewise no obligation or liability to speak
about and thus no cause of action arises. Specifically, in an action
against the depositary, the burden is on the plaintiff to prove the
bailment or deposit and the performance of conditions precedent
to the right of action.39 A depositary is obliged to return the thing to
the depositor, or to his heirs or successors, or to the person who may
have been designated in the contract.40

3) SIA VS CA

In the present case, the record is bereft of any contract of deposit, oral
or written, between petitioners and respondent. If at all, it was only
between petitioners and Moreman. And granting arguendo that there
was indeed a contract of deposit between petitioners and Moreman, it
is still incumbent upon respondent to prove its existence and that it was
executed in his favor. However, respondent miserably failed to do so.
The only pieces of evidence respondent presented to prove the
contract of deposit were the delivery receipts.41 Significantly, they
are unsigned and not duly received or authenticated by either
Moreman, petitioners or respondent or any of their authorized
representatives. Hence, those delivery receipts have no probative
value at all; every cause of action ex-contractu must be founded upon
a contract, oral or written, express or implied.

Contract for the use of safety deposit box is a special kind of

deposit and the relationship between the parties thereto, with
respect to the contents of the box, is that of a bailor and bailee,
the bailment being for hire and mutual benefit.
Although flooding could be considered a fortuitous event, failure
of the bank to give notice to the renter of such fact makes it liable
for damages, its negligence caused to aggravate injury or damage
to the renter; SBTCs negligence aggravated the injury or damage to
the petitioner which resulted from the loss or destruction of the stamp
collection. SBTC was aware of the floods of 1985 and 1986; it also
knew that the floodwaters inundated the room where Safe Deposit Box
No. 54 was located. In view thereof, it should have lost no time in
notifying the petitioner in order that the box could have been opened to
retrieve the stamps, thus saving the same from further deterioration
and loss. The destruction or loss of the stamp collection which was, in
the language of the trial court, the product of 27 years of patience and
diligence caused the petitioner pecuniary loss; hence, he must be
compensated therefor.

2) CA AGRO INDUSTRIAL VS CA
The contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in article 1643 of the civil code. However,
We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil
Code on deposit; 19the contract in the case at bar is a special kind of
deposit.

NOT LEASE UNDER 1643 because the full and absolute

possession and control of the safety deposit box was not given to
the joint renters the petitioner and the Pugaos. The guard key
of the box remained with the respondent Bank; without this key,
neither of the renters could open the box. On the other hand, the
respondent Bank could not likewise open the box without the
renter's key. In this case, the said key had a duplicate which was
made so that both renters could have access to the box.

No liability provisions are VOID. conditions No. 9 and No. 13 of the

"Lease Agreement" covering the safety deposit box in question
(Exhibits "A" and "1") 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 safety deposit
box which may arise from its own or its agents' fraud, negligence or
delay. Accordingly, SBTC cannot take refuge under the said conditions.

4) BARON VS DAVID
Under article 1768 of the Civil Code, when the depository has
permission to make use of the thing deposited, the contract loses
the character of mere deposit and becomes a loan or a
commodatum; and of course by appropriating the thing, the bailee
becomes responsible for its value. In this connection we wholly
reject the defendant's pretense that the palay delivered by the plaintiffs
or any part of it was actually consumed in the fire of January, 1921. Nor
is the liability of the defendant in any wise affected by the circumstance
that, by a custom prevailing among rice millers in this country, persons
placing palay with them without special agreement as to price are at
liberty to withdraw it later, proper allowance being made for storage
and shrinkage, a thing that is sometimes done, though rarely.

20

Hence, the authorities cited by the respondent Court on this point do

not apply. Neither could Article 1975, also relied upon by the
respondent Court, be invoked as an argument against the deposit
theory. Obviously, the first paragraph of such provision cannot apply to
a depositary of certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety deposit box. It is
clear that the depositary cannot open the box without the renter being
present.
BAILMENT FOR HIRE AND MUTUAL BENEFIT. The relation between
a bank renting out safe-deposit boxes and its customer with respect to
the contents of the box is that of a bail or and bailee, the bailment
being for hire and mutual benefit. In the context of our laws which
authorize banking institutions to rent out safety deposit boxes, it is
clear that in this jurisdiction, the prevailing rule in the United States has
been adopted. Section 72 of the General Banking Act 23 pertinently
provides:
Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building
and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable
objects, and rent safety deposit boxes for the
safeguarding of such effects. The banks shall perform
the services permitted under subsections (a), (b) and
(c) of this section as depositories or as agents. .

DEPOSIT; USE OF THING DEPOSITED; LIABILITY OF

DEPOSITARY.The owner of a rice mill who, in conformity with
custom prevailing in the trade, receives palay and converts it into rice,
selling the product for his own benefit, must account for the palay to
the owner at the price prevailing at the time demand is made.The
destruction of a rice mill, with its contents, by fire after palay thus
deposited has been milled and marketed does not affect the liability of
the miller.
.

5) JAVELLANA VS LIM

Credit Transactions
CONTRACT; BAILMENT OR DEPOSIT; LOAN.Where money,
consisting of coins of legal tender, is deposited with a person and the
latter is authorized by the depositor to use and dispose of the same,
the agreement thus entered into between the depositor and the
depositary is not a contract of deposit, but a loan.

provisions of the contract and cannot seek restitution until the time for
payment, as provided in the contract, has arisen. It is apparent from
the terms of this document that the plaintiff could not demand his
money at any time. He was bound to give notice of his desire for its
return and then to wait for six months before he could insist upon
payment.

Article 1767 of the Civil Code provides that

The depository cannot make use of the thing deposited
without the express permission of the depositor. Otherwise
he shall be liable for losses and damages.

Duh see full text discussion

7) COMPANIA AGRICOLA VS NEPOMUCENO

In the present case the transaction in question was clearly not for the
sole benefit of the Compania Agricola de Ultramar; it was evidently for
the benefit of both parties. Neither could the alleged depositor demand
payment until the expiration of the term of three months.

Article 1768 also provides that

When the depository has permission to make use of the
thing deposited, the contract loses the character of a deposit
and becomes a loan or bailment. The permission shall not be
presumed, and its existence must be proven.

8) BPI VS CA 1994

6) ROGERS VS SMITH

bank deposits are in the nature of irregular deposits; they are really
loans because they earn interest. The relationship then between a
depositor and a bank is one of creditor and debtor. The deposit under
the questioned account was an ordinary bank deposit; hence, it was
payable on demand of the depositor. Because the ownership of the
deposit remained undetermined, BPI, as the debtor, had no right to pay
to persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment is
indisputable. Payment made by the debtor to the wrong party does not
extinguish the obligation as to the creditor who is without fault or
negligence, even if the debtor acted in utmost good faith and by
mistake as to the person of the creditor, or through error induced by
fraud of a third person. The payment then by BPI to the heirs of
Velasco, even if done in good faith, did not extinguish its obligation to
the true depositor, Eastern.

whether or not this document is evidence of an ordinary loan which

created between the plaintiff and the defendants the simple relation of
debtor and creditor. The appellant in his brief repeatedly calls it a
deposit, but we do not understand that he claims that it is or ever was a
deposit in the technical sense of the term; that is, that he ownership of
the particular coin which was delivered by him to Smith, Bell & Co. did
not pass to Smith, Bell & Co. but remained in him and that Smith, Bell
& Co. was bound to return to him the identical coin which they had
received. It is apparent that no such claim could be maintained in view
of that part of the instrument which provides for the payment of
interest.
It is claimed, however, by the appellant, that while not a deposit in the
strict sense of the word, the document evidences what is known as an
"irregular deposit." The parties agree that the case must be decided
in this respect in view of the legislation in force prior to the adoption of
the Civil Code, and the appellant says that the definition of an irregular
deposit is found in Law II, Title III of the Fifth Partida. Manresa, in his
Commentaries on the Civil Code (vol. 11, p. 664), states that there are
three points of difference between a loan and an irregular deposit.
IRREGULAR DEPOSIT

LOAN

As to benefits
accrued

that which accrues

to the depositor

As to
Demandabilit
y

depositor can
demand the return
of the article at any
time

As to
Preference of
Credit

depositor has a
preference over
other creditors

the essential cause

for the transaction is
the necessity of the
borrower
Lender cannot seek
restitution until the
time for payment, as
provided in the
contract
No preference

9) METROBANK VS BA FINANCE
the obligation in this case did not arise out of a loan or forbearance of
money, goods, or credits. They did not have a bank deposit in this
account, no creditor and debtor relationship. Article 1980 is not
applicable since the nature of the relationship between B.A. Finance
and petitioner is one of agency. Whereby petitioner, as collecting bank,
was to collect for B.A. Finance the corresponding proceeds of the
check. Not being a loan or forbearance of money, interest is 6% per
annum from the day of extrajudicial demand until finality of judgment
and 12% from finality until payment.

10) REYES VS CA
The degree of diligence required of banks is more than that of a good
father of a family where the fiduciary nature of their relationship with
their depositors is concerned. In other words banks are duty bound to
treat the deposit accounts of their depositors with the highest degree of
care. But the said ruling applies only to cases where banks act under
their fiduciary capacity, that is, as depositary of the deposits of their
depositors. But the same higher degree of diligence is not expected to
be exerted by banks in commercial transactions that do not involve
their fiduciary relationship with their depositors. The case at bar does
not involve the handling of petitioners' deposit. Instead, the relationship
involved was that of a buyer and seller, that is, between the respondent
bank as the seller of the subject foreign exchange demand draft.
Hence, respondent bank was not required to exert more than the
diligence of a good father of a family in regard to the sale and issuance
of the subject FXDD.

The contract in question does not fulfill this requirement of an irregular

deposit. It is very apparent that is was not for the sole benefit of
Rogers. It, like any other loan of money, was for the benefit of both
parties. The benefit which Smith, Bell & Co. received was the use of
the money; the benefit which Rogers received was the interest of his
money. In the letter which Smith, Bell & Co. on the 30th of June, 1888,
notified the plaintiff of the reduction of the interest, they said: "We call
your attention to this matter in order that you may if you think best
employ your money in some other place."

11) GUINGONA VS CITY FISCAL PROVINCE OF

BATAAN VS VILLAFUERTE

The second difference which exists, according to Manresa, between an

irregular deposit and a loan lies in the fact that in an irregular deposit
the depositor has a preference over other creditors in the distribution of
the debtor's property.

when private respondent David invested his money with NSLA, the
contract that was perfected was a contract of simple loan or mutuum
and not a contract of deposit. Thus, Article 1980 of the New Civil Code
provides that fixed, savings, and current deposits of-money in banks
and similar institutions shall be governed by the provisions concerning

Nor does the contract in question fulfill the third requisite indicated by
Manresa, which is, in an irregular deposit, the depositor can demand
the return of the article at any time, while a lender is bound by the

Credit Transactions
simple loan. Bank deposits are 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. Current and saving
deposits, are loans to a bank because it can use the same. Hence, the
relationship between the private respondent and the Nation Savings
and Loan Association is that of creditor and debtor; consequently, the
ownership of the amount deposited was transmitted to the Bank upon
the perfection of the contract and it can make use of the amount
deposited for its banking operations, such as to pay interests on
deposits and to pay withdrawals.

through the negligence of Tropicanas employees both the employees

and YHT, as owner of Tropicana, should be held solidarily liable
pursuant to Art 2193.
the defense that Art. 2002 exempts the hotel-keeper from liability if the
loss is due to the acts of the guest, family or visitors fails because the
hotel is guilty of negligence as well. This provision presupposes that
the hotel-keeper is not guilty of concurrent negligence

d. SEQUESTRATION OR JUDICIAL
DEPOSIT
1) LOS BANOS VS AFRICA

While the Bank has the obligation to return the amount deposited, it
has, however, no obligation to return or deliver the same money that
was deposited. And the failure of the Bank to return the amount
deposited will not constitute estafa through misappropriation
punishable under Article 315, par. l(b) of the Revised Penal Code, but it
will only give rise to civil liability.

A notice of lis pendens serves as an announcement to the whole world

that a particular real property is in litigation and as a warning that those
who acquire an interest in the property do so at their own risk -- they
gamble on the result of the litigation over it. However, the notice of lis
pendens does not suffice to protect herein respondents rights over the
property. It does not provide complete and ample protection. A notice
of lis pendens is not equivalent to a judicial deposit. It merely serves as
an announcement to the whole world that the property in question is
subject to litigation, and as a warning that those who have an interest
in the property do so at their own risk.

12) PROVINCE OF BATAAN VS VILLAFUERTE

An escrow is a written instrument which by its terms imports a legal
obligation and which is deposited by the grantor, promisor, or obligor,
or his agent with a stranger or third party, to be kept by the depositary
until the performance of a condition or the happening of a certain
event, and then to be delivered over to the grantee, promisee, or
obligee. it is no longer open to question that money may be delivered
in escrow. The lower court, in the course of adjudicating and resolving
the issues presented in the main suit, is clearly empowered to control
the proceedings therein through the adoption, formulation and
issuance of orders and other ancillary writs, including the authority to
place the properties in custodia legis, for the purpose of effectuating its
judgment or decree and protecting further the interests of the rightful
claimants of the subject property

The purpose of a judicial deposit is to maintain the status quo ante

during the litigation or to ensure the rights of the parties to the property
in case there is a favorable judgment. It is merely auxiliary to a case
pending in court. The depositary of the sequestrated property or the
property subject of judicial deposit is the person appointed by the court,
and under Article 2008, has the obligation to take care of the property
with the diligence of a good father of the family and may not be
relieved of this responsibility until the litigation is ended or the court so
orders.

c. NECESSARY DEPOSIT
1) DURBAN APARTMENTS VS PIONEER

IV. WAREHOUSE RECEIPTS LAW

V. TRUST RECEIPTS LAW

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. Art. 1998. The deposit of effects made by travelers in hotels
or inns shall also be regarded as necessary. The keepers of hotels or
inns shall be responsible for them as depositaries, provided that notice
was given to them, or to their employees, of the effects brought by the
guests and that, on the part of the latter, they take the precautions
which said hotel-keepers or their substitutes advised relative to the
care and vigilance of their effects. The insured deposited the vehicle
for safekeeping with the hotel, through its employee. This employee
issued a claim stub to the insured. The contract of deposit was
perfected from the delivery of the vehicle, when the keys were handed
over to the hotels employee, and which he received with the
obligation of safely keeping and returning it. This could conceivably be
used as basis for users of mall and other public parking lots to claim
indemnity for loss or damage to their vehicles. It would be interesting to
see if the practice of placing disclaimers of liability in the parking stub,
as well as in signages, would be upheld by the courts as binding on the
users. It does stand to reason that when you are made to park and
pay, parking lot providers owe a degree of care to insure your vehicle is
kept safe and sound. And if they fail to adhere to this standard, then
they should be sorry they didnt, as in this case.

1)

ROSARIO TEXTILE VS HOME BANKERS

a. w/n petitioners are not relieved of their obligation to pay their
loan after they tried to tender the goods to the bank which
refused to accept the same, and which goods were
subsequently lost in a fire;

It is thus clear that the principal transaction between petitioner RTMC

and the bank is a contract of loan. RTMC used the proceeds of this
loan to purchase raw materials from a supplier abroad. In order to
secure the payment of the loan, RTMC delivered the raw materials to
the bank as collateral. Trust receipts were executed by the parties to
evidence this security arrangement. Simply stated, the trust receipts
were mere securities.
In Samo vs. People,[5] we described a trust receipt as a security
transaction intended to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the
merchandise imported or purchased.[6]
In Vintola vs. Insular Bank of Asia and America,[7] we elucidated
further that a trust receipt, therefore, is a security agreement, pursuant
to which a bank acquires a security interest in the goods. It secures an
indebtedness and there can be no such thing as security interest that
secures no obligation.[8] Section 3 (h) of the Trust Receipts Law (P.D.
No. 115) defines a security interest as follows:

2) YHT REALTY VS CA
Art 2180, par (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.
Given the fact that the loss of McLoughlins money was consummated

(h) Security Interest means a property interest in goods, documents, or

instruments to secure performance of some obligation of the entrustee
or of some third persons to the entruster and includes title, whether or

Credit Transactions
not expressed to be absolute, whenever such title is in substance
taken or retained for security only.

In all trust receipt transactions, both obligations on the part of the

trustee exist in the alternative the return of the proceeds of the sale or
the return or recovery of the goods, whether raw or processed.[24]
When both parties enter into an agreement knowing that the return of
the goods subject of the trust receipt is not possible even without any
fault on the part of the trustee, it is not a trust receipt transaction
penalized under Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere loan,[25] where the
borrower is obligated to pay the bank the amount spent for the
purchase of the goods.

Petitioners insistence that the ownership of the raw materials remained

with the bank is untenable. In Sia vs. People,[9] Abad vs. Court of
Appeals,[10] and PNB vs. Pineda,[11] we held that:
If under the trust receipt, the bank is made to appear as the owner, it
was but an artificial expedient, more of legal fiction than fact, for if it
were really so, it could dispose of the goods in any manner it wants,
which it cannot do, just to give consistency with purpose of the trust
receipt of giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the inception of
the transaction would be to disregard the loan feature thereof...[12]

We note in this regard that at the onset of these transactions, LBP

knew and they were aware of the fact that there was no way they could
recover the buildings or constructions for which the materials subject of
the alleged trust receipts had been used. Notably, despite the
allegations in the affidavit-complaint wherein LBP sought the return of
the construction materials,[28] its demand letter dated May 4, 1999
sought the payment of the balance but failed to ask, as an alternative,
for the return of the construction materials or the buildings where these
materials had been used.[29]

Thus, petitioners cannot be relieved of their obligation to pay their loan

in favor of the bank.
the contract between the parties is a loan. What respondent bank
sought to collect as creditor was the loan it granted to petitioners.
Petitioners recourse is to sue their supplier, if indeed the materials
were defective.

2)

3)

LANDBANK VS PEREZ

HUR TIN YANG VS PEOPLE

Considering that the goods in this case were never intended for sale
but for use in the fabrication of steel communication towers, the trial
court erred in ruling that the agreement is a trust receipt transaction.

The disputed transactions are not trust receipts.

Section 4 of P.D. 115 defines a trust receipt transaction in this manner:

To emphasize, the Trust Receipts Law was created to "to aid in

financing importers and retail dealers who do not have sufficient funds
or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased." Since Asiatrust
knew that petitioner was neither an importer nor retail dealer, it should
have known that the said agreement could not possibly apply to
petitioner.

Section 4. What constitutes a trust receipt transaction. A trust receipt

transaction, within the meaning of this Decree, is any transaction by
and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over
certain specified goods, documents or instruments, releases the same
to the possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:

Thus, in concluding that the transaction was a loan and not a trust
receipt, we noted in Colinares that the industry or line of work that the
borrowers were engaged in was construction. We pointed out that the
borrowers were not importers acquiring goods for resale. Indeed,
goods sold in retail are often within the custody or control of the trustee
until they are purchased. In the case of materials used in the
manufacture of finished products, these finished products if not the
raw materials or their components similarly remain in the possession
of the trustee until they are sold. But the goods and the materials that
are used for a construction project are often placed under the control
and custody of the clients employing the contractor, who can only be
compelled to return the materials if they fail to pay the contractor and
often only after the requisite legal proceedings. The contractors
difficulty and uncertainty in claiming these materials (or the buildings
and structures which they become part of), as soon as the bank
demands them, disqualify them from being covered by trust receipt
agreements.19

1. In the case of goods or documents, (a) to sell the goods or procure

their sale; or (b) to manufacture or process the goods with the purpose
of ultimate sale: Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether
in its original or processed form until the entrustee has complied fully
with his obligation under the trust receipt; or (c) to load, unload, ship or
tranship or otherwise deal with them in a manner preliminary or
necessary to their sale[.]

VI. LETTERS OF CREDIT

(a) PRUDENTIAL BANK VS IAC
The transaction in the case at bar stemmed from Philippine Rayon's
application for a commercial letter of credit with the petitioner in the
amount of $128,548.78 to cover the former's contract to purchase and
import loom and textile machinery from Nissho Company, Ltd. of Japan
under a five-year deferred payment plan. Petitioner approved the
application. As correctly ruled by the trial court in its Order of 6 March
1975: 9

There are two obligations in a trust receipt transaction.

1) covered by the provision that refers to money under the obligation
to deliver it (entregarla) to the owner of the merchandise sold.
2) covered by the provision referring to merchandise received under
the obligation to return it (devolvera) to the owner.
Thus, under TRL, intent to defraud is presumed when
(1) the entrustee fails to turn over the proceeds of the sale of goods
covered by the trust receipt to the entruster; or
(2) when the entrustee fails to return the goods under trust, if they
are not disposed of in accordance with the terms of the trust
receipts.[23]

. . . By virtue of said Application and Agreement for Commercial Letter

of Credit, plaintiff bank 10 was under obligation to pay through its
correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd.,
periodically drew against said letter of credit from 1963 to 1968,
pursuant to plaintiff's contract with the defendant Philippine Rayon
Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated

Credit Transactions
to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic)
Company, Ltd. against said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the terms and conditions
stipulated in the Application and Agreement of Commercial Letter of
Credit Annex "A".

bottom a security title, as it has sometimes been called, and the banker
is always under the obligation to reconvey; but only after his advances
have been fully repaid and after the importer has fulfilled the other
terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22
trust receipts:

A letter of credit is defined as an engagement by a bank or other

person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the
conditions specified in the credit. Through a letter of credit, the bank
merely substitutes its own promise to pay for one of its customers who
in return promises to pay the bank the amount of funds mentioned in
the letter of credit plus credit or commitment fees mutually agreed
upon. In the instant case then, the drawee was necessarily the herein
petitioner. It was to the latter that the drafts were presented for
payment. In fact, there was no need for acceptance as the issued
drafts are sight drafts. Presentment for acceptance is necessary only in
the cases expressly provided for in Section 143 of the Negotiable
Instruments Law (NIL).

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale

as provided by the Chattel Mortgage Law, that is, the importer
becomes absolute owner of the imported merchandise as soon an he
has paid its price. The ownership of the merchandise continues to be
vested in the owner thereof or in the person who has advanced
payment, until he has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale should be turned over to
him by the importer or by his representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which
took effect on 29 January 1973, a trust receipt transaction is defined as
"any transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as the
entrustee, whereby the entruster, who owns or holds absolute title or
security interests' over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed
document called the "trust receipt" wherein the entrustee binds himself
to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the
proceeds thereof to the extent of the amount owing to the entruster or
as appears in the trust receipt or the goods, instruments themselves if
they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trusts receipt, or for other
purposes substantially equivalent to any one of the following: . . ."

. . . In the instant case the drafts being at sight, they are supposed to
be payable upon acceptance unless plaintiff bank has given the
Philippine Rayon Mills Inc. time within which to pay the same. The first
two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as
indicated on their face (sic), and upon such acceptance should have
been paid forthwith. These two drafts were not paid and although
Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are
still unpaid. 16
Commercial letters of credit have come into general use in international
sales transactions where much time necessarily elapses between the
sale and the receipt by a purchaser of the merchandise, during which
interval great price changes may occur. Buyers and sellers struggle for
the advantage of position. The seller is desirous of being paid as surely
and as soon as possible, realizing that the vendee at a distant point
has it in his power to reject on trivial grounds merchandise on arrival,
and cause considerable hardship to the shipper. Letters of credit meet
this condition by affording celerity and certainty of payment. Their
purpose is to insure to a seller payment of a definite amount upon
presentation of documents. The bank deals only with documents. It has
nothing to do with the quality of the merchandise. Disputes as to the
merchandise shipped may arise and be litigated later between vendor
and vendee, but they may not impede acceptance of drafts and
payment by the issuing bank when the proper documents are
presented.

It is alleged in the complaint that private respondents "not only have

presumably put said machinery to good use and have profited by its
operation and/or disposition but very recent information that (sic)
reached plaintiff bank that defendants already sold the machinery
covered by the trust receipt to Yupangco Cotton Mills," and that "as
trustees of the property covered by the trust receipt, . . . and therefore
acting in fiduciary (sic) capacity, defendants have willfully violated their
duty to account for the whereabouts of the machinery covered by the
trust receipt or for the proceeds of any lease, sale or other disposition
of the same that they may have made, notwithstanding demands
therefor; defendants have fraudulently misapplied or converted to their
own use any money realized from the lease, sale, and other disposition
of said machinery." 23 While there is no specific prayer for the delivery
to the petitioner by Philippine Rayon of the proceeds of the sale of the
machinery covered by the trust receipt, such relief is covered by the
general prayer for "such further and other relief as may be just and
equitable on the premises." 24 And although it is true that the petitioner
commenced a criminal action for the violation of the Trust Receipts
Law, no legal obstacle prevented it from enforcing the civil liability
arising out of the trust, receipt in a separate civil action. Under Section
13 of the Trust Receipts Law, the failure of an entrustee to turn over the
proceeds of the sale of goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as
appear in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article 315, paragraph 1(b) of the
Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil
action for damages, entirely separate and distinct from the criminal
action, may be brought by the injured party in cases of defamation,
fraud and physical injuries. Estafa falls under fraud.

The trial court and the public respondent likewise erred in disregarding
the trust receipt and in not holding that Philippine Rayon was liable
thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of
a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending
importer, and thereby lends the aid of capital, of credit, or of business
facilities and agencies abroad, to the enterprise of foreign commerce.
Much of this trade could hardly be carried on by any other means, and
therefore it is of the first importance that the fundamental factor in the
transaction, the banker's advance of money and credit, should receive
the amplest protection. Accordingly, in order to secure that the banker
shall be repaid at the critical point that is, when the imported goods
finally reach the hands of the intended vendee the banker takes the
full title to the goods at the very beginning; he takes it as soon as the
goods are bought and settled for by his payments or acceptances in
the foreign country, and he continues to hold that title as his
indispensable security until the goods are sold in the United States and
the vendee is called upon to pay for them. This security is not an
ordinary pledge by the importer to the banker, for the importer has
never owned the goods, and moreover he is not able to deliver the
possession; but the security is the complete title vested originally in the
bankers, and this characteristic of the transaction has again and again
been recognized and protected by the courts. Of course, the title is at

We also conclude, for the reason hereinafter discussed, and not for
that adduced by the public respondent, that private respondent Chi's
signature in the dorsal portion of the trust receipt did not bind him
solidarily with Philippine Rayon.

10

Credit Transactions

(b) BANK OF AMERICA VS CA

The following issues are raised by Bank of America:

(a) whether it has warranted the genuineness and authenticity of the
letter of credit and, corollarily, whether it has acted merely as an
advising bank or as a confirming bank;
(b) whether Inter-Resin has actually shipped the ropes specified by
the letter of credit; and
(c) following the dishonor of the letter of credit by Bank of Ayudhya,
whether Bank of America may recover against Inter-Resin under
the draft executed in its partial availment of the letter of credit.

paying bank, which undertakes to encash the drafts drawn

by the exporter.
Further, instead of going to the place of the issuing bank to
claim payment, the buyer may approach another bank w/c is
the negotiating bank, to have the draft discounted.

whether under the "letter of credit," Bank of America has

incurred any liability to the "beneficiary" thereof, an issue that
largely is dependent on the bank's participation in that transaction; as a
mere advising or notifying bank, it would not be liable, but as a
confirming bank, had this been the case, it could be considered as
having incurred that liability. 22

RE how, in its modern use, a letter of credit is employed in trade

transactions.

BANK OF AMERICA IS ONLY AN ADVISING BANK not confirming,

bank, and this much is clearly evident, among other things, by the
provisions of the letter of credit itself, the petitioner bank's letter of
advice, its request for payment of advising fee, and the admission of
Inter-Resin that it has paid the same. That Bank of America has asked
Inter-Resin to submit documents required by the letter of credit and
eventually has paid the proceeds thereof, did not obviously make it a
confirming bank. The fact, too, that the draft required by the letter of
credit is to be drawn under the account of General Chemicals (buyer)
only means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that the letter
of credit is an engagement of the issuing bank, not the advising bank,
to pay the draft.

A letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. 9 To break the impasse, the buyer
may be required to contract a bank to issue a letter of credit in favor of
the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents required by
the letter of credit. 10 The buyer and the seller agree on what
documents are to be presented for payment, but ordinarily they are
documents of title evidencing or attesting to the shipment of the goods
to the buyer.

No less important is that Bank of America's letter of 11 March 1981 has

expressly stated that "[t]he enclosure is solely an advise of credit
opened by the abovementioned correspondent and conveys no
engagement by us." 24 This written reservation by Bank of America in
limiting its obligation only to being an advising bank is in consonance
with the provisions of U.C.P.

Once the credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and presents
it together with the required documents to the issuing bank. The
issuing bank redeems the draft and pays cash to the seller if it finds
that the documents submitted by the seller conform with what the letter
of credit requires. The bank then obtains possession of the documents
upon paying the seller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling him
to the goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the buyer acquires
said documents and control over the goods only after reimbursing the
bank.

As an advising or notifying bank, Bank of America did not incur

any obligation more than just notifying Inter-Resin of the letter of
credit issued in its favor, let alone to confirm the letter of credit. 25
The bare statement of the bank employees, aforementioned, in
responding to the inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of the letter of credit certainly did not
have the effect of novating the letter of credit and Bank of America's
letter of advise, 26 nor can it justify the conclusion that the bank must
now assume total liability on the letter of credit. Indeed, Inter-Resin
itself cannot claim to have been all that free from fault. As the seller,
the issuance of the letter of credit should have obviously been a great
concern to it. 27 It would have, in fact, been strange if it did not, prior to
the letter of credit, enter into a contract, or negotiated at the every
least, with General Chemicals. 28 In the ordinary course of business,
the perfection of contract precedes the issuance of a letter of credit.

What characterizes letters of credit, as distinguished from other

accessory contracts, is the engagement of the issuing bank to pay the
seller of the draft and the required shipping documents are presented
to it. In turn, this arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the
letter of credit only by examining the shipping documents presented; it
is precluded from determining whether the main contract is actually
accomplished or not. 11

Bringing the letter of credit to the attention of the seller is the

primordial obligation of an advising bank. The view that Bank of
America should have first checked the authenticity of the letter of credit
with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no
real support in U.C.P. Article 18 of the U.C.P. states that: "Banks
assume no liability or responsibility for the consequences arising out of
the delay and/or loss in transit of any messages, letters or documents,
or for delay, mutilation or other errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of America is
bound only to check the "apparent authenticity" of the letter of
credit, which it did.
May Bank of America then recover what it has paid under the
letter of credit when the corresponding draft for partial availment
thereunder and the required documents were later negotiated with
it by Inter-Resin? The answer is yes. This kind of transaction is what
is commonly referred to as a DISCOUNTING ARRANGEMENT. This
time, Bank of America has acted independently as a negotiating bank,
thus saving Inter-Resin from the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment. (Inter-Resin, of
course, could have chosen other banks with which to negotiate the

There would at least be three (3) parties:

(a) buyer, who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipts of the documents of
title;
(b) bank issuing the letter of credit, 13 which undertakes to pay the
seller upon receipt of the draft and proper document of titles and
to surrender the documents to the buyer upon reimbursement;
and,
(c) seller, who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to
the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services of an

advising (notifying) bank may be utilized to convey to the

seller the existence of the credit; or, of a

confirming bank which will lend credence to the letter of

credit issued by a lesser known issuing bank; or, of a

11

Credit Transactions
draft and the documents.) As a negotiating bank, Bank of America has
a right to recourse against the issuer bank and until reimbursement is
obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon. 31

drafts drawn in pursuance of the credit are indicated to be without

recourse therefore, the negotiating bank has the ordinary right of
recourse against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the negotiating bank may
be one and the same does not affect its rights and obligations in either
capacity, although a special agreement is always a possibility . . . 33

While bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possible then allowed it to even go
after the indorsers of the draft, this failure, 32/ nonetheless, does not
preclude petitioner bank's right (as negotiating bank) of recovery from
Inter-Resin itself. Inter-Resin admits having received P10,219,093.20
from bank of America on the letter of credit and in having executed the
corresponding draft. The payment to Inter-Resin has given, as
aforesaid, Bank of America the right of reimbursement from the issuing
bank, Bank of Ayudhya which, in turn, would then seek indemnification
from the buyer (the General Chemicals of Thailand). Since Bank of
Ayudhya disowned the letter of credit, however, Bank of America may
now turn to Inter-Resin for restitution.

The additional ground raised by the petitioner, i.e., that Inter-Resin sent
waste instead of its products, is really of no consequence. In the
operation of a letter of credit, the involved banks deal only with
documents and not on goods described in those documents. 34
Conclusions

Bank of America has acted merely as a notifying bank and did not
assume the responsibility of a confirming bank; and

Between the seller and the negotiating bank there is the usual
relationship existing between a drawer and purchaser of drafts. Unless

12

petitioner bank, as a negotiating bank, is entitled to recover on

Inter-Resin's partial availment as beneficiary of the letter of credit
which has been disowned by the alleged issuer bank.