I.

Credit Transactions
A. Credit, defined
- It means the ability of an individual to borrow
money or things by virtue of the confidence
or trust reposed by a lender that he will pay
what he may promise within a specified
period
B. Credit transactions, defined
- It includes all transactions involving the
purchase or loan of goods, services, or
money in the present with a promise to pay
or deliver in the future.
C. Distinguished
from
Bailments,
Secured
Transactions
Bailment
- The delivery of property of one person to
another in trust for a specific purpose, with a
contract, 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
reclaims it.
Security
- Something given, deposited, or serving as a
means to ensure the fulfillment or
enforcement of an obligation or of protecting
some interest in property.
D. Scope of Credit Transactions
- Bailment contracts
- Guaranty and suretyship
- Pledge
- Mortgage
- Antichresis
- Concurrence and preference of credits

II.

Loan
A. Definition

Acuario Notes
Credit Transactions

1
Article 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.

B. Kinds of loan
Commodatum
Subject Matter
Not consumable
Gratuitous?

Essentially
gratuitous

ownerhsip

Retained by the
lender
Borrower must
return the same
thing loaned

Obligation of
borrower

Kind of property
Purpose
When lender may
demand

Real or personal
property
Temporary use or
possession
Before the
expiration of the
term in case of
urgent need

Loss of the thing

Suffered by the
lender

Punishment
(Do not return the
thing)

Estafa

Simple Loan
Money or other
consumable thing
May be gratuitous
or with stipulation
to pay interest
Passes to the
borrower
Borrower should
pay the same
amount of the
same kind and
quality
Personal only
Consumption
May not demand
the return of the
thing before the
lapse of the term
agreed upon
Suffered by the
borrower even if
through fortuitous
event
Civil liability for
breach of the
obligation to pay.

Acuario Notes
Credit Transactions

C. Characteristics of the contract of loan

1. Real contract
The delivery of the thing loaned is necessary
for the perfection of the contract.
2. Unilateral
Once the subject matter has been delivered,
it creates obligation on the part of only one
of the parties (borrower).
Nature of commodatum
1. The bailee acquires the use of the thing but
not its fruits, unless there is a stipulation to
the contrary.
2. It is essentially gratuitous
3. The purpose of the contract is the temporary
use of the thing loaned
4. The subject matter is generally nonconsumable real or personal property
5. The lender need not be the owner of the
thing loaned.
6. It is purely personal in character.
a. The death of either party extinguishes the
contract unless there is a stipulation for
commodatum to subsist until the purpose
is accomplished.
b. The borrower cannot lend or lease the
thing to a third person. However,
members of the borrowers household
may make use of the thing loaned except:
i.
If there is a stipulation to the
contrary;
ii.
If the nature of the thing forbids it
use.
Cases:
Catholic Vicar Apostolic vs CA
September 21, 1988
The bailees failure to return the subject matter of
commodatum to the bailor did not mean adverse

2
possession on the part of the borrower. The bailee held
in trust the property subject matter of commodatum.

Republic vs Bagtas
October 25, 1962
A contract of commodatum is essentially gratuitous. If
the breeding fee be considered compensation, then
the contract would be a lease of 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
expiry o the contract. And even if the contract be
commodatum, still the appellant is liable.
Saura Import & Export Co. Inc. vs Development Bank of the
Phil.
April 27, 1972
Where an application for a loan of money was
approved by resolution of the defendant corporation
and the corresponding mortgage was executed and
registered, there arises a perfected consensual
contract of loan.
Extinguishment of obligations by mutual desistance.
Mutuo disenso (Manresa) which is a mode of
extinguishing obligations. It is a concept that since
mutual agreement can create a contract, mutual
disagreement by the parties can cause its
extinguishment.
Herrera vs Petrophil Corporation
December 29, 1986
The contract between the parties is one of lease and
not of loan.
No usury where there was no money given by
defendant to plaintiff, nor did it allow him to use its
money already in his possession, and there was
neither loan nor forbearance but a mere discount.
Discount vs loan or forbearance. Discount does not
have to be repaid while loan or forbearance is subject

to repayment and is therefore governed by the laws on

usury.
Requirements to constitute usury:
1. There must be loan or forbearance
2. The loan must be of money or something
circulation as money
3. It must be repayable absolutely and in all events
4. Something must be exacted for the use of the
money in excess of and in and in addition to
interest allowed by law.
Elements of Usury
1. A loan, express or implied
2. An understanding between the parties that the
money lent shall or may be returned
3. That for such loan a greater rate or interest that is
allowed by law shall be paid, or agreed to be paid,
as the case may be
4. A corrupt intent to take more than the legal rate for
the use of money loaned.
Integrated Realty Corporation vs PNB
June 28, 1989
D. Subject Matter
Republic vs Court of Appeals
November 26, 1986
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 prescription
by reason of anothers possession if such possession
be under claim of ownership, not where the possession
is only intended to be transient.
Quintos and Ansaldo vs Beck
November 3, 1939
The contract entered into between the parties is one of
commodatum, because under it the plaintiff

Acuario Notes
Credit Transactions

3
gratuitously granted the use of the furniture to the
defendant, reserving for herself the ownership thereof;
by this contract the defendant bound himself to return
the furniture to the plaintiff.
Expenses for deposit of furniture. As the defendant
had voluntarily undertaken to return all the furniture to
the plaintiff, upon the latters demand, the court could
not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the
defendants behest. The latter, as bailee, was not
entitled to place the furniture on deposit; nor was the
plaintiff under a duty to accept the offer to return the
furniture because the defendant wanted to retain the
three gas heaters and the four electric lamps.
The defendant was the one who breached the contract
of commodatum, and without any reason he refused to
return and deliver all the furniture upon the plaintiffs
demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other
judicial costs which the plaintiff would not have
otherwise defrayed.
Republic vs Grijaldo
December 31, 1965
The obligation of the appellant under promissory notes
was not to deliver a determinate thing, namely, the
crops to be harvested from his land, but to pay a
generic thing the amount of money representing the
total sum of his loans, with interest. The chattel
mortgage on the crops simply stood as a security for
the fulfillment of appellants obligation covered by
promissory notes, and the loss of the crops did not
extinguish his obligation to pay, because the account
could still be paid from other sources aside from the
mortgaged crops.
E. Rights and obligations of Bailor and Bailee

De los Santos vs Jarra

February 10, 1910

 In a contract of commodatum whereby one of the

parties thereto delivers to the other a thing that is not
perishable, to be used for a certain time and
afterwards returned, it is the imperative duty of the
bailee, if he should be unable to return the thing itself
to the owner, to pay damages to the latter if, through
the fault of the bailee, the thing loaned was lost or
destroyed, inasmuch as the bailor retains the
ownership thereof.
Mina vs Pascual
October 14, 1913
A sale of a land belonging to another, on which a
building of the vendors is located, is null and void, for
the vendor cannot sell or transfer property that does
not belong to him.
Briones vs Cammayo
October 4, 1971
F. Modes of Extinguishment
III.

Deposit

IV.

Guaranty and Suretyship

V.

Provisions common to pledge and mortgage

Article 2085. The following requisites are essential
to the contracts of pledge:
1. That they be constituted to secure the
fulfillment of a principal obligation;
2. That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
3. That the persons constituting the pledge or
mortgage have the free disposal of their
property, and in the absence thereof, that they
be legally authorized for the purpose.

Acuario Notes
Credit Transactions

4
Third persons who are not parties to the
principal obligation may secure the latter by
pledging or mortgaging their own property.

VI.

Pledge
A. In General
1. Pledge
- It is a contract by virtue of which the debtor
delivers to the creditor or to third person a
movable or document evidencing incorporeal
rights for the purpose of securing the
fulfillment of a principal obligation with the
understanding that when the obligation is
fulfilled, the thing delivered shall be returned
with all the fruits and accessions.
2. Kinds of Pledge
a. Voluntary or conventional
It is created by the agreement of the
parties.
b. Legal
It is created by operation of law.
3. Characteristics of pledge
a. Real contract
It is perfected by the delivery of the thing
pledged by the debtor/pledgor to the
creditor/pledge, or to a third person by
common agreement.
b. Accessory contract
It has no independent existence of its
own.
c. Unilateral contract
It creates an obligation solely on the part
of the creditor to return the thing subject
thereof upon the fulfillment of the
principal obligation
d. Subsidiary
The obligation incurred does not arise
until the fulfillment of the principal
obligation which is secured.

4. Extent of Pledge
Unless there is stipulation to the contrary,
the pledge shall extend to the interest and
earnings of the right pledged. (Art 2102)
B. Essential Requisites
1. Article 2085
2. That the thing pledged be placed in the
possession of the creditor, or of third person
by common agreement
Formal Requisites
No form but a pledge shall not take effect
against third persons if a description of the thing
pledged and the date of the pledge do not
appear in a public instrument. (Art 2096)
Yuliongsu vs PNB
February 17, 1968
The pledge can temporarily entrust the physical
possession of the chattels pledged to the pledgor
without invalidating the pledge. In this case, the
pledgor is regarded as holding the pledge property
merely as trustee for the pledge.
Constructive delivery is sufficient. The type of delivery
will depend upon the nature and circumstances of
each case.
Manila Surety & Fidelity vs Velayo
October 26, 1967
Sale of the thing pledged. If the price of the sale is
less, neither shall the creditor be entitled to recover
the deficiency notwithstanding any stipulation to the
contrary. By electing to sell the articles pledged,
instead of suing on the principal obligation, the
creditor has waived any other remedy, and must abide
by the results of the sale.
C. Rights and Obligations of the Pledgor (debtor or
third person)

Acuario Notes
Credit Transactions

5
Rights of the Pledgor
1. To demand the return in case of reasonable
grounds to fear destruction or impairment of
the thing without the pledgees fault, subject
to duty of replacement
Requisites:
a. Pledgor has reasonable grounds to fear
destruction or impairment of the thing
pledged;
b. No fault on the part of the pledgee;
c. Pledgor offers another thing which is of
the same kind and quality as the former;
d. Pledgee does not choose to exercise his
right to cause the thing to be sold at
public auction.
2. To bid and be preferred at the public auction
(Art 2113).
3. To alienate the thing pledged provided the
pledgee consents to the sale (Art 2097).
4. To ask the thing pledged be deposited in one
of the following cases:
a. If the creditor uses the thing without
authority (Art 2104).
b. He misuses the thing
c. The thing is in danger of being lost or
impaired because of negligence or willful
act of the pledge (Art 2106).
Pactum Commissorium
- Stipulation whereby the thing used as
security shall automatically become the
property of the creditor in the event of nonpayment of the principal obligation in due
time.
- The creditor would be able to acquire
ownership of the property given as security
without need of public sale or foreclosure
required by law.
- Requisites:
a. There should be a pledge, mortgage or
antichresis of property.

b. There is a stipulation for an automatic

appropriation by the creditor of the
property in the event of nonpayment of
principal obligation.
GR:

Pactum commissorium is forbidden by law

and any stipulation to that effect is declared
null and void.
Reason: The amount of the loan is ordinarily less
than the real value of the thing pledged or
mortgaged.
XPN: The pledgee may appropriate the thing
pledged if after the first and second auctions,
the thing is not sold (Art2112).
- The creditor shall be obliged to give an
acquittance to his entire claim and be
considered as full payment of the claim.
Permissible stipulations:
1. Subsequent modification of original contract
2. Subsequent voluntary cession of property
(Novation)
3. Promise to assign or sell
4. Authority to take possession of property upon
foreclosure.
Obligations of the pledgor
1. To advise the pledgee of the flaws of the thing.
2. Not to demand the return of the thing until after
full payment of the debt, including interest due
thereon and expenses incurred for its
preservation.
D. Rights and Obligations of the Pledgee (Creditor)
Rights of the Pledgee
1. Option to demand replacement or immediate
payment of the debt in case of deception as
to substance or quality.
2. To sell at public auction in case of reasonable
grounds to fear destruction or impairment of
the thing without his fault (Art 2108)

Acuario Notes
Credit Transactions

6
3. To bring actions pertaining to the owner or to
defend it against third persons (Art 2103.2)
4. To choose which of the several things
pledged shall be sold
5. To collect and receive amount due on credit
pledged
6. To bid at the public auction, unless he is the
only bidder (Art 2113.2)
7. To appropriate the thing in case of failure of
the second public auction (Art 2112)
8. To apply said fruits, interests or earnings to
the interest, if any, then to the principal of
the credit
9. To retain excess value received in the public
sale
10.To retain the thing until full payment of the
debt
11.To be reimbursed for the expenses made for
the preservation of the thing pledged
12.To object to the alienation of the thing
13.To possess the thing
14.To sell at public auction in case of nonpayment of debt
Obligations of the pledgee
1. Take care of the thing with the diligence of a
good father of a family and be liable for the
loss or deterioration of such (Art 2099)
2. Not to use the thing unless authorized by the
owner or its preservation requires its use.
3. Not to deposit the thing with a third person
unless so stipulated
4. Responsibility for acts of agents and
employees as regards the thing
5. To advise pledgor of danger to the thing
6. To advise the pledgor of the result of the
public auction
7. To return the thing upon payment of debt

E. Modes of Extinguishment of pledge

1. Payment of the debt

2. Sale of the thing pledge at public auction

3. Appropriation (Art 2112)
4. Return of the thing pledged by the pledgee
to the pledgor (Art 2110)
5. Statement in writing by the pledge that he
renounces or abandons the pledge (Art 2111)
Indivisibility of pledge (Art 2089)
- A pledge or mortgage is indivisible, even
though the debt may be divided among the
successors in interest of the debtor or of the
creditor.
VII.

Chattel Mortgage
A. In General
1. Definition and Purpose
Article 2140. By a chattel mortgage, personal
property is recorded in the Chattel Mortgage
Register as a security for the performance of
an obligation. If the movable, instead of
being recorded, is delivered to the creditor or
a third person, the contract is pledge and not
a chattel mortgage.
2. Characteristics of Chattel Mortgage
a. Accessory contract
It is for the purpose of securing the
performance of a principal obligation.
b. Formal Contract
Registration in the Chattel mortgage
Register is indispensable for its validity.
c. Unilateral contract
It produces only obligations on the part of
the creditor to free the thing from the
encumbrance upon fulfillment of the
obligation.
3. Extent of Mortgage
a. Coverage extends
described therein.

only

to

property

Acuario Notes
Credit Transactions

7
b. Stipulation
including
after-acquired
property
Where the after acquired property is in
renewal of, or in substitution for, goods
on hand when the mortgage was
executed, or is purchased with the
proceeds of the sale of such goods.

B. Essential Requisites
Formal Requisites
Affidavit of Good Faith
- Oath in a contract of chattel mortgage
wherein the parties severally swear that the
mortgage is made for the purpose of
securing the obligation specified in the
condition thereof and for no other purposes
and that the same is a just and valid
obligation and one not entered into for
purpose of fraud.
- Purpose:
Transforming an already valid mortgage into
preferred mortgage.
- Effect of absence:
Its absence vitiates the mortgage only as
against third persons without notice like
creditors and subsequent encumbrances.
Not necessary for the validity of the chattel
mortgage
Piansay vs David
October 30, 1964
Where the chattel mortgage and sale in favor of a
party had been annulled in the decision in one case,
which order became final and executor, it is held that
said party is now barred from asserting against the
same adverse party in another case that the said
chattel mortgage and sale are valid.

 Chattel mortgage on a house cannot bind third

persons not parties to said contract.
Makati Leasing and Finance Corp vs Wearever Textile
May 16, 1983
Where the chattel mortgage is constituted on
machinery permanently attached to the ground the
machinery is to be considered as personal property
and the chattel mortgage constituted thereon is not
null and void, regardless of who owns the land.
The parties to a contract may by agreement treat as
personal property that which by nature would be real
property, as long as no interest of third parties would
be prejudiced thereby.
Execution of chattel mortgage on machinery
permanently attached to the ground is only an
equitable ground for rendering the contract voidable
provided that the mortgagor has not been benefited by
the contract.
Return by mortgage creditor of property seized on
replevin does not make moot and academic the action
for judicial foreclosure where the return was expressly
made to be without prejudice.
C. Rights and Obligations of the Mortgagor (Debtor
or Third person)
D. Rights and Obligations of the Mortgagee
(Creditor)
Northern Motors vs Coquia
December 15, 1975

E. Modes of Extinguishment
VIII.

Real Estate Mortgage

Lanuza vs De Leon
June 6, 1967

Acuario Notes
Credit Transactions

8
A conveyance of conjugal real property made by the
husband without the wifes consent is merely voidable.
Preference of credits: Unrecorded mortgage is inferior
to recorded mortgage of a later date.
While a pacto de retro sale of a house, which is in
reality an equitable mortgage, is valid between the
parties, it cannot prevail over a subsequent
recorded mortgage over the same property.
Preference of mortgage credits is determined by
the priority of registration, following the maxim
prior tempore, potior jure.

IX.

Antichresis
Article 2132. By the contract of antichresis the
creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to
apply them to the payment of interest, if owing,
and thereafter to the principal of his credit.
A. Characteristics o the contract
1. Accessory
- It secures the performance of a principal
obligation.
2. Formal contract
- It must be in writing to be valid.

Antichresis
Real property
Perfected by mere consent

Pledge
Personal property
Perfected by the delivery of
the thing pledged

Consensual contract
Debtor loses control of the
subject matter of the
contract

Real contract
Debtor loses control of the
subject matter of the
contract

Antichresis
The property is delivered to
the creditor
The creditor acquires only the
right to receive fruits of the
property
The creditor is obliged to pay
the taxes and charges upon
the estate
Application of the fruits to the
payment of interest
Real Property

Real Mortgage
The debtor usually retains
possession of the property
The creditor has a real right
over the property
The creditor has no such
obligation
None
Real Property

Obligation of the antichretic creditor

1. Payment of taxes and charges upon the estate
2. Application of the fruits of the estate
Right of the antichretic debtor
1. To comple the creditor to reacquire the property
Remedy of creditor in case of nonpayment of debt
1. Action for specific performance
2. Foreclosure of mortgage (R68)
X.

Concurrence and Preference of Credit

A. General Provisions
Concurrence of credits
- Implies the possession by two or more
creditors of equal rights and privileges over
the same property or all of the property of
the debtor.
Preference of credit

Acuario Notes
Credit Transactions

9
It is the right held by a creditor to be
preferred in the payment of his claim above
others out of the debtors assets.

Article 2236. The debtor is liable with all his property, present
and future, for the fulfillment of his obligations, subject to the
exemptions provided by law.
Exempt property
1. Present property
- Family home
- The right to receive support
- R39.13
2. Future property
- On account of the debtors insolvency
3. Property in custodia legis and of public dominion
- Those owned by municipal corporations
necessary for governmental purposes
Article 2237. Insolvency shall be governed by special laws
insofar as they are not inconsistent with this code.
By virtue of the above provisions, the Civil Code
prevails in case of conflict with special laws on insolvency
(Act No 1956, The Insolvency Law) unless otherwise
provided.
Article 2238.
Exemption of conjugal partnership or absolute community of
property
1. The partnership or community subsists; and
2. The obligations of the insolvent spouse have not
redounded to the benefit of the family
Article 2239.
Rule involving undivided share or interest of a co-owner
One of the co-owners is the insolvent debtor, his
undivided share or interest in the property shall be possessed
by the assignee in insolvency proceedings because it is part
of his assets.

Article 2240.
Rule involving property held in trust
Property held in trust by the insolvent debtor should be
excluded from the insolvency proceedings.
B. Classification of credits
General categories of credit
1. Special preferred credits (Art 2241 and 2242)
2. Ordinary preferred credits (Art 2244)

Acuario Notes
Credit Transactions

10

3. Common credits (Art 2245)

Refectionary credit
- It is primarily an indebtedness incurred in the
repair or reconstruction of something
previously made, such repair or construction
being made necessary by the deterioration
or destruction of the thing as it formerly
existed.