Credit Transactions – First Exam Coverage 2016-2017

Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

ESTILLORE
thing that was borrowed amount, of the same
November 15, 2016
Part 1 of 3 amount and quality
Property Real or Personal Personal
LOAN Purpose Use or temporary Consumption
I. Concept possession of the
subject matter
Demand of Return may be Bailor may not demand
Title XI. - LOAN the return demanded before its return before the
GENERAL PROVISIONS of the expiration of the term, in lapse of the term
Art. 1933. subject case of urgent need agreed upon
By the contract of loan, one of the parties delivers to another, either matter
something not consumable so that the latter may use the same for a Loss of the Loss of the subject Borrower suffers the
subject matter is suffered loss even if caused
certain time and return it, in which case the contract is called a
matter by the bailor since he is exclusively
commodatum; or money or other consumable thing, upon the condition the owner by a fortuitous event
that the same amount of the same kind and quality shall be paid, in and he is not, therefore,
which case the contract is simply called a loan or mutuum. discharged from his
duty to pay
Commodatum is essentially gratuitous. Nature Purely personal Not purely personal

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned,
while in simple loan, ownership passes to the borrower. (1740a)
KINDS OF LOAN
(1) Commodatum
(2) Mutuum (Simple Loan)
Do not confuse Contracts of Loan from other concepts. In a Contract of
Loan, what matters is delivery by one party to another person, and the
other person receives the object, to which if it is a mutuum, the recipient
becomes the owner of what is being delivered, with an obligation to repay
the same amount, of the same kind and quality.
CREDIT
Credit refers to ability 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.
It can also be referred to, yung sa accounting books noh, debit and
credit. Credit refers to the sum credited on the books of the company to a
person who appears entitled to that sum. So yun ang credit that must be
differentiated from the term loan.
DISCOUNTING
Ang discounting, loan. Although, when we say discounting, it is more or
less a mode of loaning money.
What happens in discounting? May check in-issue
and it is a post-dated check. You will find a person who would discount a check,
wherein, instead of going to the bank, you now immediately discount the check but
the cash equivalent you will receive is lesser than the value of the check.
Doon magka- ung nag-discount.
Essentially, in discounting, an interest is deducted. So what is deducted
from the amount you are supposed to receive refers to the interest.
Art. 1934.
An accepted promise to deliver something by way of commodatum or simple
loan is binding upon parties, but the commodatum or simple loan itself shall
not be perfected until the delivery of the object of the contract.
(n)
This emphasizes that a Contract of Loan, whether it is a commodatum or mutuum,
is a real contract perfected by delivery. If the thing subject of commodatum or
mutuum is not yet delivered, no contract of loan is yet perfected.
What about if there is an agreement they will enter into a Contract of Loan?
That I will let you borrow this thing, that I will loan you money? But the money
or thing has not yet been delivered. Do you have a perfected contract? Yes, an
ordinary consensual contract. But it will not give rise to either commodatum or
mutuum unless the very thing as agreed upon is already been delivered.
Again, commodatum or mutuum will only be perfected upon delivery of the
subject matter. Any agreement to enter into a contact of loan will be
considered as a perfected contract, consensual in nature. But it will not yet be
considered as a loan agreement until the subject matter has been delivered.
II. Commodatum
What are the characteristics of a Commodatum?
PAJUYO vs. CA
FACTS:
Petitioner Pajuyo paid P400 to a certain Pedro Perez for the rights over a
250-square meter lot. Pajuyo then constructed a house on the lot where he
and his family lived for 6 years.
Later on, Pajuyo and PR Guevarra executed a Kasunduan. It voluntarily agreed
that Pajuyo, as owner of the house, will allow Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house.

-dated checks that is negotiated to one person to After some time, Pajuyo informed Guevarra of his need of the house and
another, demanded that Guevarra vacate the house. However, Guevarra refused
na sila makapunta sa bangko, so maghanap sila nang mag-discount sa check. causing Pajuyo to file an ejectment case against Guevarra.

Guevarra claimed that Pajuyo had no valid title or right of possession over the
That discounting is different from the loan as defined in 1933. lot because like him, Pajuyo is a mere squatter on the lot. He also contended
that the property was reserved by the government for socialized housing.
Again, 1933 emphasizes commodatum to be distinguished from simple loan.
The RTC ruled that the Kasunduan entered into between the parties was akin
to a landlord-tenant contract.
COMMODATUM MUTUUM
Object Ordinary involves Involves money or
The CA reversed the decision and held that Kasunduan is not a lease
something which is not other consumable
contract but a commodatum because the agreement is not for a price certain.
consumable. thing
Ownership Ownership is retained Ownership is ISSUE: W/N the Kasunduan entered into between Pajuyo and Guevarra was
by the lender transferred to the a commodatum.
borrower
Cause Essentially gratuitous Maybe gratuitous or RULING: NO
onerous (with In a contract of commodatum, one of the parties delivers to another something not
stipulation to pay consumable so that the latter may use the same for a certain time and return it.
interest)
Obligation To return the same To pay the same

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An essential feature of commodatum is that it is gratuitous. Another is that the use
of the thing belonging to another is for a certain period. Thus, the bailor cannot
demand the return of the thing loaned until after expiration of the period stipulated,
or after accomplishment of the use for which the commodatum is constituted.
If the bailor should have urgent need of the thing, he may demand its return
for temporary use. If the use of the thing is merely tolerated by the bailor, he
can demand the return of the thing at will, in which case the contractual
relation is called a precarium, a kind of commodatum.
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra
was not essentially gratuitous. While the Kasunduan did not require Guevarra to
pay rent, it obligated him to maintain the property in good condition. The imposition
of this obligation makes the Kasunduan 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
unlawful.
Even assuming that the relationship between Pajuyo and Guevarra is one of
commodatum, Guevarra as bailee would still have the duty to turn over
possession of the property to Pajuyo, the bailor. The obligation to deliver or to
return the thing received attaches to contracts for safekeeping, or contracts of
commission, administration and commodatum. These contracts certainly
involve the obligation to deliver or return the thing received.
Having freely entered into the Kasunduan, Guevarra cannot now impugn the
Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.
CHARACTERISTICS OF COMMODATUM
(1) Real
− Perfected by delivery
(2) Unilateral
− You must have read on the subsequent provisions that
there would be obligations imposed. Nevertheless, those
bilateral contract. But rather, the obligations mentioned
in the subsequent articles on the part of the bailor, are
just necessary consequences of commodatum.
(3) Nominate
(4) Principal
− Not dependent to another contract
(5) Informal in nature
− It is not required to be in writing or in any particular
form in order to be valid
(6) Essentially gratuitous
− Once it stops to be gratuitous, it is not a
commodatum anymore.
CHAPTER 1. COMMODATUM
SECTION 1. NATURE OF COMMODATUM
Art. 1935.
The bailee in commodatum acquires the used of the thing loaned
but not its fruits; if any compensation is to be paid by him who
acquires the use, the contract ceases to be a commodatum. (1941a)
This is what happened in Pajuyo vs. CA. It turned out that it was not essentially
gratuitous because there was an obligation on the part of the bailee. Not really
monetary in nature, but still it made the contract not gratuitous in nature. And
therefore it could not be considered as a contract of commodatum.
Again, it ceases to be a commodatum if any compensation is to be paid by the
borrower to acquire the use. As mentioned in the case Pajuyo, it can be
considered as a landlord-tenant relationship, where there is contract of lease,
use is granted to the lessee in exchange for compensation.
PARTIES IN COMMODATUM
(1) Bailor
− The one who lends the subject matter
(2) Bailee
− Recipient
It is not required that the bailor in a commodatum is the owner of the thing. Why?
Because there is no transfer of ownership. As long as he has possessory rights,
such as that of a usufructuary or a lessee who is not prohibited to sublease
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
the property or let other people use it, then he could still have a valid
contract of commodatum.
As we have mentioned, a commodatum is an informal contract as it is not
required to be in writing to be valid. But do remember the provisions
under the Statute of Frauds (Article 1403). If it would be performed after
one year from the execution of the contract, then it has to be in writing but
for purposes of being enforceable and not for validity.
It is also obvious that since this is a gratuitous contract, it is therefore
similar to a donation as it confers benefit to a recipient.
1935 emphasizes the purpose of a commodatum, the use of the thing loaned.
s stipulated by the
parties. The purpose here is the use but it has to be emphasized, it is
only a temporary use of the subject matter excluding the fruits unless
otherwise agreed upon by the parties.
Art. 1936.
Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as
when it is merely for exhibition. (n)
Art. 1937.
Movable or immovable property may be the object of commodatum. (n)
What do we mean by consumable goods? In 1936, it is mentioned that
consumable goods maybe the subject of commodatum
mentioned earlier that the subject matter in a
commodatum refers only to non-consumable goods?
PRODUCERS BANK vs. CA
FACTS:
Sanchez asked PR Franklin Vives to deposit in a bank a certain amount of money
in the bank account of Sterela Marketing and Services for purposes of its
incorporation. Relying on the assurances and representations of Sanchez and
Doronilla, PR Vives deposited P200k in the Producers Bank in favor of Sterela.
Later on, Vives found out that Sterela was no longer holding office in the address
previously given to him. They went to the bank to verify if their money was still intact.
They were informed that part of the money was already withdrawn by Doronilla and only
P900k was left in the account. They could not however withdraw the money because
they had to answer for the postdated checks issued by Doronilla. They further found out
that Doronilla was able to obtain a loan worth P175k.
PR Vives demanded the return of his money from Doronilla. When Doronilla failed
to do so, PR Vives instituted an action for recovery of sum of money.
Petitioner Producers Bank contended the transaction between Vives and Doronilla
was a simple loan or mutuum since all the elements of a mutuum are present:
1. What was delivered by Vives to Doronilla was money, a consumable
thing; and
2. The transaction was onerous as Doronilla was obliged to pay interest.
PR Vives countered that the transaction between him and Doronilla was not a mutuum but an
accommodation since he did not actually part with the ownership of his money. In fact, he asked
his wife to deposit said amount in the account of Sterela so that a certification can be issued to
the effect that Sterela had sufficient funds for purposes of its incorporation.
ISSUE: W/N the transaction between Vives and Doronilla was a commodatum.
RULING: YES
Article 1993 of the CC seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However,
there are some instances where a commodatum may have for its object a
consumable thing as provided under Article 1936.
If consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at
the end of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. In case of doubt,
the contemporaneous and subsequent acts of the parties shall be considered in
such determination.
In this case, Vives merely accommodated
Doronilla by lending his money, without
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consideration, as a favor to his good friend Sanchez. It was however clear to the parties that
Vives after the lapse of 30 days.
P200k which the latter
P12k, allegedly representing
interest on the mutuum, did not convert the transaction from a commodatum into a
mutuum because such was not the intent of the parties. Furthermore, the additional P12k
corresponds to the fruits of the lending of the P200k. Article 1935 of the CC expressly states that
the bailee acquires only the use of the thing loaned but not its fruits. Hence, it was only proper for
Doronilla to remit to private
money deposited with petitioner.
Why would it matter if it is a commodatum or a mutuum? Remember one of
the distinctions between these 2 contracts is that in commodatum, there is no
transfer of ownership while in mutuum there is a transfer of ownership. It was
cannot be held liable to return the P200,000. However, the SC held that looking at
the intention of the parties, the transaction was deemed to be a commodatum as the
money deposited in the account was specifically for the purpose of making it appear
that the firm had sufficient capitalization to form a corporation.
Article 1936 was mentioned to which it emphasized pwede consumable goods be
subject of a commodatum as long as the purpose is not for consumption but for
exhibition. However do take note that this case is very unique in nature. Why?
Again, distinction between mutuum and commodatum in commodatum, the
obligation of the bailee is to return the exact same thing that was borrowed. If
deposited, with the specific serial number will be returned to you since that is
the exact same thing that you deposited and that is the obligation in
commodatum. But of course in the transaction here, that would not be
expected because once you put money in the bank, that is actually a contract
of loan. Iba yung obligation ng bank to the depositor and the transaction
between the depositor and from whom the money was transferred.
Be careful with this case. If ever this would be asked for the purposes of the bar
exam, you can cite this case but be very specific that the facts of this case is same
Otherwise, you could make the contract a mutuum. That is the better view
in lieu of the obligation of the bailee to return the equivalent, not the exact
thing that was borrowed. Take note of the uniqueness of this case as it
took primordially the intention of the parties.
In mentioning Article 1936, a contract of commodatum generally involves a non-
consumable thing. But pwede ring consumable as long as it is not consumed.
Example, a bottle of wine or money which will be used for purposes of exhibition.
Article 1937.
Movable or immovable property may be the object of commodatum. (n)
Now Article 1937 emphasizes that you could have, even a real property a
subject matter in a commodatum as what happened in the case of Mina
vs. Pascual. What happened in this case?
TITO
November 15, 2016
Part 2 of 3
MINA vs. PASCUAL
FACTS:
Francisco Fontanilla acquired a lot. Later on, with his consent, his brother Andres
Fontanilla erected a warehouse on a portion of the lot. When Francisco died, Mina
inherited the lot while Ruperta Pascual acquired the building as the successor of Andres.
Later on, Ruperta, as the guardian of her minor children, sought for court
authorization to sell a portion of the warehouse. Mina opposed alleging that the lot
where the warehouse stood belongs to them.
The trial court granted the sale at public auction of the warehouse and the lot
where it stood. Mina then presented an agreement the 9 th paragraph thereof
provides that there existed and still exists a commodatum by virtue of which the
guardianship had and has the use, and the plaintiffs the ownership of the property.
ISSUE: W/N there exist a commodatum between the parties.
RULING: NO
The phrase implies that while finding the Minas to be the owners of the lot, the
Pascuals only have the use of the lot. Furthermore, the SC found that:
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
(1) the lot
predecessor;
(2) The plaintiffs and the defendants are the co-owners of the warehouse;
(3) Neither Andres Fontanilla nor his successors paid any consideration or price
whatever for the use of the lot occupied by the warehouse causing both parties
Although both litigating parties may have agreed in their idea of the commodatum,
contracts are not to be interpreted in conformity with the name that the parties
thereto agree to give them, but must be construed, duly considering their
constitutive elements, as they are defined and denominated by law.
It is an essential feature of the commodatum that the use of the thing belonging to
another shall be for a certain period. Francisco did not fix any definite period or
time during which Andres could have the use of the lot whereon the latter was to
erect a stone warehouse of considerable value. Also it is for the past thirty years
that the lot has been used by both Andres and his successors in interest.
It never entered Francisco's mind to limit the period during which his brother Andres was
to have the use of the lot, because he expected that the warehouse would eventually fall
into the hands of his son, Fructuoso, called the adopted son of Andres, which did not
come to pass for the reason that Fructuoso died before his uncle Andres. With that
expectation in view, it appears more likely that Francisco intended to allow his brother
Andres a surface right; but this right supposes the payment of an annual rent, and
Andres had the gratuitous use of the lot.
The present contention of the Minas that Cu Joco, now in possession of the lot, should
pay rent for the use of the lot at the rate of P5 a month would destroy the theory of the
commodatum sustained by them since a commodatum is essentially gratuitous.
distinguished from the warehouse. I want to emphasize it since here we
have 2 different immovable properties.
Do we have a contract of commodatum? No.
Is it necessary for parties in a commodatum to agree that the commodatum or
the contract or the bailee would be allowed to use for a specific period of time?
What is required here for it to be considered a commodatum? For it to be a
commodatum, what must be agreed upon as to the period? That it is only for
temporary. We have the concept of procarium. They do not need to stipulate
for a specific period for a procarium to exist. What must be clearly agreed
upon by the parties is that the use is only temporary in nature for a certain
period but it is not necessary that they have to specifically indicate until when
the bailee is allowed to use.
So you mentione
commodatum, what is the nature of the commodatum here? Contract of lease.
What was the intention of the parties to determine that they intended to a
contract of lease and not a commodatum? The SC emphasized that the
parties considered it as a commodatum however the essential feature of
commodatum is that the use of the thing belonging to another shall be for
a certain period but the original parties to the contract, Francisco, did not
fix for a definite period which Andres could have used the lot.
It turns out that the present contention that the present possessor should pay
commodatum is essentially gratuitous.
The SC held that vis-à-vis with the evidence presented, it turns out that it never
warehouse will eventually fall into the hands of his son which however did
not come to pass. Why? Because patay na an son, si Fructoso.
So again, go back to the intention of the parties. They never intended that
Andres would use the property for a specific period or temporarily. It appears
more likely that Francisco intended to allow Andres merely a surface right
supposing the payment of an annual rent. Therefore, with that intention very
clear, they could not have entered into a commodatum but rather a contract of
lease. So again, we have here an immovable property an object of a
commodatum also emphasizing the gratuitous nature of such contract.
Article 1938. The bailor in commodatum need not be the owner of
the thing loaned. (n)
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Now Article 1938, the bailor in commodatum need not be the owner of the
thing loaned. We have emphasized this before because again in
commodatum, ownership does not pass to the bailee. As long as you
have a possessory interest, like either as a lessee or a usufructuary, you
can be a bailee in a commodatum. However, the bailee himself may not
lend or lease to a third person. This is clear under Article 1939.
Article 1939.
Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes
the contract;
(2) The bailee can neither lend nor lease the object of the contract to a
third person. However, the members of the bailee's household may
make use of the thing loaned, unless there is a stipulation to the
contrary, or unless the nature of the thing forbids such use.
(n)
Ok. Look at your seatmate, whether the one on your left or the one on your
right. Look at the stuff that you have libro, cellphone, ipad. Pahiramin mo ba
sa seatmate mo? (awkward silence) Alam na natin. Alangin kayong lahat
magsagot. (haha!)What do you think is the consideration before you enter in a
contract of commodatum? You take into consideration the character, the
credit, the conduct of that person/bailee before you allow him to make use of
the property. That makes commodatum a purely personal contract, unlike in a
mutuum. The difference here, in commodatum you do not expect anything in
return, gratuitous yan.
Now in relation to the purely personal nature of a contract of commodatum, one of
its effects is that the death of either the bailor or the bailee extinguishes the contract.
This would be an exception to Article 1178 under your obligations and contract.
Subject to the laws or rights acquired in virtue of an obligation are
transmissible by a stipulation of the parties.
Now do take not that if there are 2 or more bailees, death of 1 does not
extinguish the contract. Exception, unless there is a stipulation.
Very important to consider in Article 1939 is the second effect. The bailee cannot
lend nor lease the object of the contract to a third person. Di mo pwede ipahiram
household. Exception to the exception is if there is a stipulation to the
contrary. In the absence of a stipulation, the nature of the thing forbids
such use. Example, damit. Siguro pinahiram sa iyo ang damit kasi kasya
sa iyo. Wag ipilit na ipahiram sa kapatid, pinsan or kasama sa bahay kasi
kasya din. Anong mangyari niyan? There will be liabilities on your part.
Ang mali mo lang is pinahiram mo na di ka nagpaalam.
So again, take note, general rule, bailee cannot lend nor lease the object of
the contract to a third person. Exception, stipulation of the parties. Another
exception, with regard to the members of the bailee in the same household.
Exception to the exception, stipulation prohibiting members of the same
household to use the same or the nature of the thing forbids such.
Article 1940. A stipulation that the bailee may make use of the
fruits of the thing loaned is valid. (n)
Article 1940 is with regard to the fruits. This is a stipulation that the bailee may
make use of the fruits of the thing loaned is valid. So this is the exception we
have mentioned before. General rule, the use of the thing refers to the thing
itself, it does not extend to the fruits. Exception, it may extend to the fruits
provided there is a stipulation as provided in Article 1940.
The right to use is distinct from the right to enjoy the fruits of the thing.
Parties can stipulate the use of the fruits incidental to the use of the thing.
Otherwise, if the use is the main cause of the contract, that is not
commodatum but rather a usufruct, the right to use the fruits thereof.
OBLIGATIONS OF THE BAILEE
What are the primary obligations of the bailee? You can still apply here the
obligations of the debtor that you have already learned in your obligations and
contracts. First, to take care of the thing with the diligence of a good father of the
family unless the law requires another standard of care or unless otherwise
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
stipulated by the parties. What else? Since this is a commodatum, the parties
have entered into for the purpose of the temporary use, the bailee has the
obligation to use it for the purpose as agreed by them. Also we have learned
that the bailee has the obligation to pay for ordinary expenses and its primary
obligation is to return the thing that he has borrowed.
Now we have the case of Delos Santos vs. Jarra. What happened in this case?
DE LOS SANTOS vs. JARRA
FACTS:
Delos Santos alleged that Jimenea borrowed and obtained from him ten first-class
carabaos. It will be used at the animal-
recompense or remuneration whatsoever but under the sole condition that they should be
returned to the owner as soon as the work at the mill was terminated. However, Jimenea
did not return the carabaos despite the demands of Delos Santos.
Since Jimenea was already, Delos Santos brought the action against Agustina
Jarra, the administratrix of the estate of Jimenea.
Jarra admitted that Jimenea asked Delos Santos to loan him ten carabaos, but he
only obtained three second-class animals, which were later on sold to Jimenea.
The trial court ordered Agustina Jarra, as administratrix of the estate of Jimenea,
to return to Delos Santos the remaining six-second and third class carabaos, or
the value thereof at the rate of P120 each, or a total of P720 with the costs.
ISSUE: W/N the transaction between Delos Santos and Jimenea was a commodatum.
RULING: YES
The carabaos loaned or given on commodatum to Jimenea were not returned to
Delos Santos, and that it is not true that the carabaos were subsequently sold to
Jimenea. Since the carabaos were not the property of the deceased nor of any of
his descendants, it is the duty of the administratrix of the estate to return them or
indemnify the owner for their value.
The obligation of the bailee or of his successors to return either the thing loaned or its
value is sustained by the Supreme tribunal of Spain. In its decision of March 21, 1895, it
sets out with precision the legal doctrine touching commodatum as follows:
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, it is clear that
where public securities are involved, the trial court, in deferring to the claim of
the bailor that the amount loaned be returned him by the bailee in bonds of the
same class as those which constituted the contract, thereby properly applies law
9 of title 11 of partida 5.
When Delos Santos demanded for the return of the carabaos to him, Jimenea or
Jarra had the obligation to do so. However, since the object of the commodatum
itself cannot be returned because only six carabaos were left, Jarra is under
obligation to indemnify the owner thereof by paying him their value.
We have here a commodatum and it is emphasized that the carabaos delivered
here, not being returned, there is an obligation to indemnify the owner by paying its
value. It is imperative in commodatum that the bailee has the duty to return the thing
itself to its owner or to pay damages if through his fault, the thing has been lost or
injured. So the primary obligation of the bailee is emphasized here.
In relation to the intransmissibility of a contract of commodatum, do not confuse it
with the liability of the estate. The commodatum here was not extinguished by the
mere death of Magdaleno. The liability extends to the estate. Whatever the heirs of
Magdaleno may receive can be used to pay of the liability of Magdaleno in relation
to the damages which he should be held liable to the bailor Delos Santos.
SECTION 2. - OBLIGATIONS OF THE BAILEE
Article 1941. The bailee is obliged to pay for the ordinary expenses
for the use and preservation of the thing loaned. (1743a)
With that, Article 1941 also emphasizes another obligation of the bailee which is to
pay for the ordinary expenses for the use and preservation of the thing loaned.
Why is it that the bailee is liable for the ordinary expenses? Because he
acquires the use of the thing and these ordinary expenses are in relation to
the use of the thing. For example, if the subject matter of the commodatum is
the use of the car. So that would include fuel or magpa-carwash. So these are
ordinary expenses which should be shouldered by the bailee.
Article 1942. The bailee is liable for the loss of the thing, even if it should be
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through a fortuitous event:
(1) If he devotes the thing to any purpose different from that
for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum
has been constituted;
(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not
a member of his household;
(5) If, being able to save either the thing borrowed or his own
thing, he chose to save the latter. (1744a and 1745)
Now please take note of Article 1942. The general rule is that the bailee is not liable
for the loss of the thing. Why? Because owner bears the loss of the thing through a
fortuitous event. Ownership is not transferred to the bailee. Owner bears the loss.
1942 provides for the exceptions wherein the bailee can be held liable even if the
thing is lost due to a fortuitous event. What are these instances?
(1) If he devotes the thing to any purpose different from that for
which it has been loaned;
This would show bad faith on the part of the bailee.
(2) If he keeps it longer than the period stipulated, or after the accomplishment
of the use for which the commodatum has been constituted;
That would show dealy on the part of the bailee.
(4) If he lends or leases the thing to a third person, who is not a member
of his household;
Because again, a commodatum is purely personal in nature.
(5) If, being able to save either the thing borrowed or his own thing, he
chose to save the latter.
Because this shows gratitude.
(3) If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from responsibility in
case of a fortuitous event;
Number 3, however, shows that the bailee would still be liable even if there is
no bad faith on his part or no improper act on his part. As long as when the
thing was delivered, there was an appraisal as to how much was the value of
the thing. Why? Because having that appraisal, there is an intention that the
borrower shall be held liable unless of course, when there is a stipulation that
would exempt him from the liability in case of a fortuitous event.
What happened in the case of Republic vs. Bagtas?
REPUBLIC OF THE PHILIPPINES vs. BAGTAS
FACTS:
Jose Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls for a period of one year for breeding purposes subject
to a government charge of breeding fee of 10% of the book value of the bulls.
Upon the expiration of the term, Bagtas asked for a renewal thereof for another
year. However, the Secretary of Agriculture only approved the renewal for one bull
and requested the return of the other two.
Bagtas wrote to the Director of Animal Industry of his desire to purchase the three
bulls. The Director denied the request and reiterated the demand for the return of
the bulls or the payment of their book value.
When Bagtas failed to do so, the Republic filed a case against him praying that Bagtas be
ordered to return the three bulls loaned to him or to pay their book value in the total sum of
P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests.
While the case was pending, Bagtas died and was substituted by her wife as the
administratrix of the estate. The wife alleged that the two bulls were already
returned. Hence, she could no longer be held liable thereof. She further
contended that the third bull was accidentally killed from a gunshot wound inflicted
during a Huk raid. According to her, such death was due to force majeure thereby
she is relieved from the duty of returning the bull or paying its value.
ISSUES:
(1) W/N there was a contract of commodatum.
(2) W/N the death of the third bull was a fortuitous event which would
relieve Bagtas from returning or paying the value of the bull.
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RULING: BOTH NO
A contract of commodatum is essentially gratuitous. If the breeding fee will be
considered as a compensation, the contract cannot be considered as a commodatum.
However, the contract would be a lease of the bull. Under Article 1671 of the CC, the
lessee would be subject to the responsibilities of a possessor in bad faith, because she
had continued possession of the bull after the expiry of the contract.
Even assuming that the contract was a commodatum, Bagtas would still be liable
based on Article 1942 paragraph 2 and 3 of the CC.
The original period of the loan was one year which was later on renewed for
another year. However, Bagtas kept and used the bull despite the expiration of the
period granted to him and until it was killed by stray bullets. Furthermore, Bagtas
was appraised of the book value of the bulls and it was not stipulated that in case
of loss of the bull due to fortuitous event, Bagtas would be exempt from liability.
Since Bagtas already returned the two bulls to the Republic, the estate is only
liable for the sum of P859.63, or the value of the bull which has not been returned
because it was killed while in the custody of the administratrix.
First thing that you should to consider here is that there is no contract of
commodatum. Why? Because the contract was not gratuitous in nature.
There was a compensation, the breeding fee. And therefore, you apply
the laws of a contract of lease wherein the lessee would still be liable.
Nevertheless, even if it is considered a commodatum, you apply, 1942. The
bailee would still be liable for the loss of the thing through a fortuitous event,
as alleged by the wife, when one of the bulls was eventually killed.
Nevertheless, Bagtas kept the bulls longer than the period agreed upon and it
has been delivered with the appraisal of its value. Therefore, the estate should
be held liable for the value of the bull that was not returned to the Republic.
Article 1943.
The bailee does not answer for the deterioration of the thing loaned
due only to the use thereof and without his fault. (1746)
Now, Article 1943 refers to deterioration. This refers to the ordinary wear
and tear or depreciation. This must be borne by the bailor. The bailee
would only be held liable if he is at fault or negligent, example if he holds
the thing for a purpose different from that agreed upon by the parties.
AYALA
November 15, 2016
Part 3 of 3
Art. 1944.
The bailee cannot retain the thing loaned on the ground that the bailor owes
him something, even though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in Article 1951. (1747a)
So the Bailee as a general rule has no right to retain or hold on to the thing loaned
or to the subject matter of the commodatum as security for claims he has against
the bailor. Later on would say that extra ordinary expenses that the bailor would be
held liable kung si bailee na nagbayad sa extra-ordinary expenses and then he
would now seek reimbursement from the bailor and the bailor refuses to reimburse
the bailee can the bailee hold on, refuse to return the pay on the ground na wala pa
siya na reimburse ni bailor? 1944 is clear, he has no right to retain it. He has the
obligation to return it to the bailor but of course he can still demand for
reimbursement as to the expenses that should be shouldered by the bailor. The only
exception is the clause that is provided in Article 1951.
Now we have here the case of Catholic v Court of Appeals
CATHOLIC VICAR vs. CA
FACTS:
Petitioner Catholic Vicar filed an application for registration of Lots 1, 2, 3 and 4.
The heirs of Juan Valdez and the heirs of Egmidio Octaviano opposed the
registration of Lots 2 and 3 respectively, claiming ownership thereof.
Subsequently, they filed an action for recovery of possession of the two lots.
Petitioner Catholic Vicar alleged that they acquired the two lots by purchase. The trial court
granted the registration. However, the CA reversed the decision and ruled that there was
absolutely no documentary evidence to support the allege purchase of the property.
The CA further ruled that the that the predecessors of the heirs of Valdez and heirs of Octaviano
were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951.
Moreover, the Catholic Vicar was in possession as borrower in commodatum up to 1951, when
it repudiated the trust by declaring the properties in its name for taxation
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purposes. When it applied for registration of Lots 2 and 3 in 1962, it had been in
possession in concept of owner only for 11 years. Ordinary acquisitive prescription
requires possession for 10 years, but always with just title. Extraordinary
acquisitive prescription requires 30 years.
ISSUES:
(1) W/N the Catholic Vicar held Lots 2 and 3 in commodatum.
(2) W/N the Catholic Vicar successfully repudiated the ownership of the two lots.
RULING: YES and NO
First issue
The heirs of Valdez and Octaviano were able to prove that their predecessors' house
was merely borrowed by Catholic Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they allowed its free
use, they became bailors in commodatum and the Catholic Vicar as the bailee.
Second issue
The bailee's 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.
The Catholic Vicar is in bad faith. By its the very admission, Lots 2 and 3 were owned by
Valdez and Octaviano since 1906. When petitioner Vicar was notified of the oppositor's
claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were
surveyed by request of petitioner Vicar only in 1962 which is a clear sign of bad faith.
Hence, they must acquire ownership thereof for a period of at least 30 years.
Hence, the predecessors-in-interest and PR heirs were possessors under claim of
ownership in good faith from 1906 while that of petitioner Vicar was only a bailee in
commodatum; and that the adverse claim and repudiation of trust came only in 1951.
So it repudiated its title as a bailee of a property it now alleged ownership over
the property so it is only from 1951 from adverse possession from acquisitive
prescription began to ran. Because before 1951 Catholic was only allowed the
Free Use of the property. They are only considered as a bailee in a contract of
commodatum. Their failure to return the subject matter did not mean adverse
possession on their part and adverse possession only began in 1951 when it
repudiated the trust and declared the properties in its name.
You do not become an owner of a property even how long you possess it
in the concept of a bailee.
Art. 1945.
When there are two or more bailees to whom a thing is loaned in
the same contract, they are liable solidarily. (1748a)
lender.
Because remember you take into account the personal integrity and responsibility of
all the bailees and not just one. Its impossible na hindi ipahiram sa iyo kung
would be solidary in nature. Now take note this is an exception to the
general rule wherein the presumption is that debtors are presumed to be
jointly liable. The exceptions for joint obligation is when expressly
stipulated and when provided by law. Here it is very clear that article 1945
provides for the solidary liability for 2 or more bailees.
So in these provisions what are the obligations of bailees?
(1) The bailee is liable for ordinary expenses the borrower should
defray the expenses for the use and preservation of the thing
loaned for after all, he acquires the use of the same and he is
supposed to return the identical thing
(2) The borrower must take good care of the thing with the
diligence of a good father of a family (due diligence)
(3) Generally, the borrower would not be liable for the loss of a
thing due to a fortuitous event but he would be liable in case of
the following circumstances:
(a) If he devotes the thing to any purpose different from
that for which it has been loaned;
(b) If he keeps it longer than the period stipulated, or
after the accomplishment of the use for which the
commodatum has been constituted;
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(c) If the thing loaned has been delivered with appraisal of
its value, unless there is a stipulation exemption the
bailee from responsibility in case of a fortuitous event;
(d) If he lends or leases the thing to a third person, who
is not a member of his household;
(e) If, being able to save either the thing borrowed or his
own thing, he chose to save the latter.
(JPSP: should be considered as an exemption. This is
actually based on ingratitude. Nonetheless, this provision
(4) The bailee is not liable for the deterioration of the thing loaned
due only to the use thereof and without his fault
(5) He cannot retain the thing loaned on the ground that the bailor owes him
something, even though it may be for the reason of expenses. He can
have the right to retain though for damages as mentioned in
Article 1951
does not
advise the bailee of the same, shall be liable to the latter for the
(6) When there are two or more bailees to whom a thing is loaned
in the same contract, they are liable solidarily to the bailor
(a) To safeguard effectively the rights of the lender b.
Law presumes that the bailor takes into account the
personal integrity and responsibility of all the bailees
and that, therefore, he would not have constituted
the commodatum is there were only one liable
The only obligation of a bailor is a consequence of the nature of the commodatum
when in fact some of these emphasize not only obligation but rather rights.
SECTION 3. OBLIGATIONS OF THE BAILOR
Art. 1946.
The bailor cannot demand the return of the thing loaned till after the
expiration of the period stipulated, or after the accomplishment of
the use for which the commodatum has been constituted. However,
if in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is
suspended while the thing is in the possession of the bailor. (1749a)
So the primary Obligation of the bailor due to the nature of the commodatum is
to allow the bailee to use the thing loaned for the duration of the period
stipulated or accomplishment of its purpose. What is clear here is that the use
is only for a certain period or for a certain time. When can the bailor demand
for the return, temporary use of the thing, for urgent need such as a sick family
member pinaghiram ng sasakyan? Sa kanyang kapitbahay ngayong kailangan
niya kasi he will have to bring a family member to the hospital. Now that would
fall under urgent need.
Now what is the effect if the use by the bailor as in the instance is only
temporary in nature? The effect is that the commodatum is suspended, while
the thing is in the possession of the bailor and then it would be lifted once he
returns it back to the bailee wherein tapos na yung urgent need niya.
With regard to commodatum take note that there are 2 kinds of commodatum, we
have the ordinary commodatum and we have precarium. What is a precarium?
Art. 1947. The bailor may demand the thing at will, and the
contractual relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the
thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner. (1750a)
QUINTOS vs. BECK
FACTS:
Beck occupied the house of Quintos as tenant. Upon the novation of the contract of lease,
Quintos gratuitously granted Beck the use of the furniture subject to the condition that
Beck would return them to Quintos upon her demand.
Later on, Quintos sold the house and demanded from Beck the return of the furniture. However,
Beck wrote a letter to Quintos saying that he could not give up the three gas heaters and the
four electric lamps because he would still use them until the expiration of
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contract of lease.
Later on, before vacating the house, Beck deposited with the Sheriff all the
furniture belonging to Quintos. The furniture was then placed in a warehouse in
the custody of the sheriff.
The trial court ruled that Quintos failed to comply with her obligation to get the
furniture when they were offered to her. Hence, she must bear the consequence
and the expenses thereof.
ISSUES:
(1) W/N the contract between the parties was a commodatum.
(2) W/N Beck complied with his obligation to return the furniture to Quintos.
RULING: YES and NO
First issue
The contract entered into between the parties is one of commodatum. Under the
contract, Quintos gratuitously granted the use of the furniture to Beck, reserving
for herself the ownership thereof, while Beck bound himself to return the furniture
to Quintos upon demand.
Second issue
demand means that he should return all of them to Quintos at the her residence or house. Beck
did not comply with this obligation when he merely placed them at the disposal of Quintos,
retaining for his benefit the three gas heaters and the four eletric lamps.
Since Beck had voluntarily undertaken to return all the furniture to Quintos, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by
furniture on deposit; nor was Quintos under a duty to accept the offer to return the
furniture, because Beck wanted to retain the three gas heaters and the four
electric lamps. As to the value of the furniture, we do not believe that Quintos is
entitled to the payment thereof by Beck in case of his inability to return some of
the furniture because under paragraph 6 of the stipulation of facts, Beck has
neither agreed to nor admitted the correctness of the said value. Should Beck fail
to deliver some of the furniture, the value thereof should be later determined by
the trial court through the evidence which the parties may desire to present.
The costs in both instances should be borne by Beck because Quintos is the prevailing
party. Beck was the one who breached the contract of commodatum, and without any
reason he refused to return and deliver all the furniture upon Quint
circumstances, it is just and equitable that he pay the legal expenses and other judicial
costs which Quintos would not have otherwise defrayed.
There is a precarium where the bailor may demand the thing at will, the
contract by which the owner of the thing at the request of another person
gives the latter the thing for use as long as the owner shall please. So the
bailor may demand the return in time.
If there is no duration of the contract or no purpose to which it is devoted or when
the use is merely tolerated by the bailor we have a precarium. In the case of
Quintos v Beck there was a gratuitous grant of the furnature to the defendant so
that would be commodatum but specifically it is a precarium because the furniture
would be returned only upon the demand of the bailor now the refusal to return
everything would be violation of the obligation of the bailee.
What would be the effect? Even if he were ready to return the furniture other
than the gas lamps, the refusal of quintos to accept the delivery of the
furniture subsequently deposited to the sheriff was valid because the
agreement was to return everything. Applying the general rules on Obligations
and Contracts you cannot compel the creditor to accept partial delivery. With
that you will be liable for the expenses incurred of the deposit of the furniture.
It will not be the bailor. The bailee is liable when demanded by the bailor.
In Ordinary commodatum the possession of the bailee is secured, he has
the right to retain the thing loaned until the expiration of the period agreed
between them or upon the accomplishment of the use for which the
commodatum has been constituted,
Do take note however in 1947 (2) merely tolerated by the owner, be
careful of that word owner because again we have emphasized it is not
required that the bailor be the owner of the thing. The bailor has
suppository interest over the property.
Art. 1948.
The bailor may demand the immediate return of the thing if the
bailee commits any act of ingratitude specified in Article 765. (n)
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There is similarity between commodatum and donation, we are gratuitous
in nature to which we can apply 765 in relation to acts of ingratitude.
Because in the case of commodatum similar to that of donation the bailee
is still unworthy of the trust imposed upon him by the bailor.
Art. 765. The donation may also be revoked at the instance of the donor,
by reason of ingratitude in the following cases:
1. If the donee should commit some offense against the person,
the honor or the property of the donor, or of his wife or children
under his parental authority;
2. If the donee imputes to the donor any criminal offense, or any
act involving moral turpitude, even though he should prove it,
unless the crime or the act has been committed against the
donee himself, his wife or children under his authority;
3. If he unduly refuses him support when the donee is legally or
morally bound to give support to the donor. (648a)
Art. 1949.
The bailor shall refund the extraordinary expenses during the contract for the
preservation of the thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except when they are so
urgent that the reply to the notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual
use of the thing by the bailee, even though he acted without fault,
they shall be borne equally by both the bailor and the bailee, unless
there is a stipulation to the contrary. (1751a)
So we are already clear that when it comes to ordinary expenses it is the bailee who
should shoulder it. 1949 covers extraordinary expenses. There are 2 kinds. If it
refers to extraordinary expenses for the preservation of the thing loaned like for
example the roof of a house subject of commodatum that was damaged by a
typhoon. Who will bear the expenses? It will be the bailor as it will be the bailor who
will profit from the said expenses. If the bailee who has incurred these extraordinary
expenses the bailor must refund the bailee provided that the bailee inform the bailor
before incurring them. It is possible that the bailor did not want
an exception to the notice, notice to the bailor is not required if it is urgent in nature.
Again extraordinary expenses for preservation borne against the bailor.
There are also extraordinary expenses which arise from ordinary use of
the thing for example sasakyan, nabangga who will bear the loss? 50-50
Equally by both the bailor and bailee unless there is a stipulation to the
contraty. Take note of these extraordinary expenses.
For other types of expenses you have article 1950.
Art. 1950.
If, for the purpose of making use of the thing, the bailee incurs
expenses other than those referred to in Articles 1941 and 1949, he
is not entitled to reimbursement. (n)
Example mga ostentatious expenses like in a car, the tires or for example
a spare tire. Di man yan mahulog sa ordinary or extraordinary expenses
so it will be shouldered by the bailee. He is not entitled to reimbursement.
We mentioned in 1944 that an exception to the right to retain is article 1951.
Art. 1951.
The bailor who, knowing the flaws of the thing loaned, does not
advise the bailee of the same, shall be liable to the latter for the
damages which he may suffer by reason thereof. (1752)
This is the instance, the only instance wherein the bailee may hold the
thing or subject of commodatum. What are the requisites of 1951.
(1) There is a flaw or defect;
(2) It is hidden or latent;
(3) The bailor must be aware of such defect,
(4) Despite such knowledge the bailor does not advice the bailee
of the said flaw or defect; and
(5) Because of that defect the bailee suffers damages.
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If all of these are present the bailee has the right to hold on and retain the
thing until damages are paid. Because here the bailor is in bad faith. The
right given here is only to retain the thing but not to sell the thing to
recover expenses for the damages.
For example the brake is not working, or may defect sa engine. The
bailee would suffer damages, apply 1951.
However if the bailee could have known of the defect after inspection the
bailor cannot be held liable and article 1951 cannot be applied.
If the bailor is not aware of the hidden defect he will not also be liable and
there is no right to retain the thing.
Art. 1952.
The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee. (n)
Whats the reason behind this provision? The expenses or damages may exceed the
value of the thing loaned, and it would be unfair if the bailor would just
absence of 1952 the bailor would just abandon the thing instead of paying
kawawa naman yung bailee. He cannot abandon the thing to exempt himself
for the damages for example the extraordinary expenses in 1949 or the
damages that would arise from the incidents mentioned in article 1951.
(1) The primary obligation of the bailor is to allow the bailee the
use of the thing loaned for the duration of the period stipulated
or until the accomplishment of the purpose for which the
commodatum was constituted
(a) However, the lender may demand its return or
temporary use if he has the urgent need of the thing
or if the borrower commits an act of ingratitude
(2) PRECARIUM: a kind of commodatum where the bailor may demand the
thing at will. In this kind of commodatum, the lender may demand at will
the return of thing under the following circumstances:
(a) If neither the duration of the contract nor the use to
which the thing loaned should be devoted, has been
stipulated; or
(b) If the use of the thing is merely tolerated by the owner.
(c) the law recognizes the urgency as well as it is gratuitous.
(d) Take note that in precarium, there is no stipulated
period or the use is merely tolerated
(3) He may demand the immediate return of the thing if the bailee
commits any act of ingratitude
(a) If the bailee should commit some offenses against
the person, honor or the property of the bailor, or of
his wife, and children under his parental authority
(b) If the bailee imputes to the bailor any criminal offense or
any act involving moral turpitude, even though he should
prove it, unless the crime or act has been committed
against himself, his wife and children under his authority
(c) If the bailee unduly refuses the bailor support when
the bailee is legally or morally bound to give support
(4) He has the obligation to refund extraordinary expenses for the
preservation of the thing loaned it is him who profits from the
said expenses anyway.
(a) As a rule, notice is required because it is possible
that the bailor may not want to incur the
extraordinary expenses at all
(b) An exception of course is where there is urgency that the
reply to the notification cannot be awaited without danger
(c) you have to determine if its ordinary or extraordinary
(d) why would you advance for the extraordinary
expenses when you can return the thing and make
the lender pay for the expenses?
(5) Regarding, extraordinary expenses arising from the actual use
of the thing, the division of liability between the bailor and
bailee is 50-50. This is the default rule but the parties may
stipulate for a different apportionment.
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(6) For expenses other than ordinary expenses and expenses for the
preservation and use of the thing, the bailor is not liable for the same.
(7) He is liable to the bailee for damages in case he has knowledge of flaws
of the thing loaned, and he didn't advise the bailee of the same
(a) There is flaw or defect in the thing loaned
(b) The flaw or defect is hidden
(c) The bailor is aware thereof
(d) He doesn't advise the bailee of the same
(e) The bailee suffers damages by reason of the said
flaw or defect
(8) He cannot excuse himself from liability for any expense or
damages by abandoning the thing to the bailee
III. Mutuum and Usury Law
Q: What is a Mutuum?
A: Mutuum is a contract where one party delivers to another money or
other consumable thing with the understanding that the same amount will
be paid to the creditor.
Q: In the case of Yong Chan we have a Commodatum or a Mutuuum?
Q: What happened in this case?
YONG CHAN KIM vs. PEOPLE
FACTS:
Petitioner Yong Chan Kim was employed as a researcher at the SEAFDEC, which
requires him to travel to various selected provinces in the country. Yong Chan was
issued a first travel order where he received P6,438.00 as cash advance to defray
his travel expenses. Another travel order was issued to him where he received
another cash advance of P495.00. The dispute arose when Yong Chan allegedly
failed to return P1,230.00 out of the cash advance which he received under the
first travel order. Yong Chan argued that he has no obligation to return the excess
of the cash advanced to him for the same was intended as loan.
Nevertheless, for the alleged failure of Yong Chan to return the amount, he was
charged with the crime of estafa under Article 315, paragraph 1(b) of the RPC. In
order to be convicted of the crime, it must be proven that Yong Chan had the
obligation to deliver or return the same money, good or personal property that he
had received from respondent SEAFDEC.
ISSUES:
(1) W/N Yong Chan is under obligation to return the cash advance he had
received from SEAFDEC. NO
(2) W/N there was transfer of ownership of the cash advance to Yong Chan. YES
(3) W/N Yong Chan could be held liable for estafa. NO
RULING:
First issue
Yong Chan merely has the obligation to liquidate his expenses but not to return
the cash advanced to him by SEAFDEC.
Liquidation simply means the settling of an indebtedness. An employee 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, as per diems and allowances.
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. In other words, the money advanced by either party is actually
a loan to the other. Hence, Yong Chan was under no legal obligation to return the same cash or
money, i.e., the bills or coins, which he received from SEAFDEC.
Second issue
The ownership of the money was transferred to Yong Chan. Based on the cross
examination of the witness, it was found that the transfer of ownership was subject
to a suspensive condition that Yong Chan liquidates the amount of cash advance
upon return to station and completion of the travel.
Third issue
Since ownership of the money (cash advance) was transferred to Yong Chan, no
fiduciary relationship was created. Absent this fiduciary relationship between Yong
Chan and SEAFDEC, which is an essential element of the crime of estafa by
misappropriation or conversion, Yong Chan could not have committed estafa.
Q: What do you mean by liquidation here?
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A: Liquidation means the settling of an indebtedness. An employee, such
as herein petitioner, 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.
Q: What would be the nature of a contract, whether it is a commodatum
or mutuum, that is relevant in determining the liability for estafa?
A: It is relevant maam because if it is a contract of mutuum, then the
ownership was already transferred to Kim.
Q: In this case, is Kim liable for estafa?
Q: Why not?
A: Because it is a contract of mutuum, the ownership is transferred to Kim.
Q:So? What if it is transferred? What is its relation to the case of estafa?
A: There is no fiduciary relation
Q:What is the nature of the criminal liability?
A:ahhm
Q: Essentially what happens in estafa? Why is it in a contract of mutuum,
the borrower cannot be held liable for estafa as in this case?
A: In this case maam, fiduciary relationship is an essential element of
estafa, where there is a misappropriation or conversion with that Kim
cannot be held liable for estafa.
in estafa? In this case, estafa is by means of misappropriation or conversion
wherein a sum of money or property is entrusted to the person liable for estafa. In
this case, it was determined that there can be no liability for estafa because the
liability of the petitioner arose from a contract of mutuum. Again, take note of the
features of a mutuum. One of which is that there is no obligation to return the exact
same thing but only the value thereof. Moreover and more importantly, in mutuum
there is a transfer of ownership. Being the owner thereof he can do whatever he
want with the money. His obligation is only to liquidate and report. Kung kulang,
what would be the effect? Kung kulang ang binnigay sa kanya nap era, he could
seek reimbursement. Kung sobra naman his obligation would be to return the
excess not in the form of commudatum but base on his obligation to repay as that of
the contract of mutuum. The liquidation or the obligation of the petitioner here to
liquidate is simply means settling of the 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. So if the amount of the cash
advance he received is less than what he has travelled, he has the right to demand
for reimbursement from his employer to which the amount advance is actually a
loan. Therefore there has no obligation to return the exact same cash which he
received from his employer. So with that, there was transfer of ownership and there
was no fiduciary relationship transferred to the petitioner by virtue of the cash
advances, he cannot be held liable for the crime of estafa by misappropriation or
conversion. So again take note of that feature of loan.
CHAPTER 2. SIMPLE LOAN OR MUTUUM
Art. 1953.
A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality. (1753a)
So, again when we talk of simple loan or mutuum, it is a contract whereby one of
the parties delivers to another money or other consumable thing with the
understanding that the same amount of the same kind or quality shall be paid. So
equivalent only and not the identical thing because again ownership has already
been transferred to the borrower to which he can dispose of the thing borrowed and
his act will not be considered misappropriation as to constitute estafa.
So with that, we should also take into consideration what are the
characteristics of a simple loan or mutuum. Similar to commodatum, it is
unilateral, it is also nominate. It is also a principal contract as it can stand on
its own. It is informal because it does not require a particular form for its
perfection. However, unlike commodatum which is essentially gratuitous, in
mutuum it may be gratuitous or onerous. But of course we all know both of
them are real contracts perfected by delivery. So we have the case of BPI.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
BPI INVESTMENT CORPORATION vs. CA
FACTS:
Frank Roa obtained a loan from AIDC, the predecessor of petitioner BPIIC, for the
construction of a house. The house and lot were mortgaged to AIDC to secure the
loan. Later on, Roa sold the house and lot to ALS and Antonio Litonjua causing
them to assume the loan obligations of Roa.
In March 1981, ALS and Litonjua executed a mortgage deed payment of the monthly
amortization shall commence on May 1, 1981. On August 13, 1982, ALS and Litonjua updated
turn was liquidated by BPIIC.
On September 13, 1982, BPIIC released to ALS and Litonjua P7,146.87, purporting to be what
However, BPIIC instituted foreclosure proceedings against ALS and Litonjua on the ground that
they failed to pay the mortgage indebtedness from May 1, 1981 to June 30, 1984.
ALS and Litonjua argued that they were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they should not be made to pay
amortization before the actual release of the P500k loan in August and September 1982.
The CA ruled that a simple loan existed between the parties which was perfected only
upon the delivery of the object of the contract which was on September 13, 1982.
Evidence further showed that there was overpayment on the part of ALS and Litonjua.
Hence, there was no basis for BPIIC to extra-judicially foreclose the mortgage by reason
of the A alleged delinquency in payment of their loan.
BPIIC appealed the decision arguing that a contract of loan is a consensual contract, and a loan
contract is perfected at the time the contract of mortgage is executed on March 31, 1981.
Hence, the amortization and interests on the loan should be computed from said date.
ISSUES:
(1) W/N a simple loan is a consensual contract which is perfected by mere
consent. NO
(2) W/N there was delay on the part of ALS and Litonjua. NO
RULING:
First issue
A loan contract is not a consensual contract but a real contract. It is perfected only
upon the delivery of the object of the contract.
In this case, the contract of loan between BPIIC and ALS and Litonjua was perfected only on
September 13, 1982, the date when BPIIC released the purported balance of the P500k loan
parties, the payment of the monthly amortization should commence only on
October 13, 1982, a month after the perfection of the contract, despite their
express agreement that payment shall commence on May 1, 1981.
Second issue
A contract of loan involves a reciprocal obligation, wherein the obligation or
promise of each party is the consideration for that of the other.
In this case, the consideration for BPIIC in entering into the loan contract is the promise of ALS
and Litonjua to pay the monthly amortization. For the latter, it is the promise of BPIIC to deliver
the money. In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. Only when a party
has performed his part of the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in.
Therefore, ALS and Litonjua did not incur in delay when they did not commence paying
the monthly amortization on May 1, 1981, as it was only on September 13, 1982 when
BPIIC fully complied with its obligation under the loan contract. Therefore, in computing
the amount due as of the date when BPIIC extra-judicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 and not May 1, 1981.
Q: why is it necessary to determine when the contract of loan is perfected?
A:it is necessary maam for the foreclosure by the bank to be justified.
Q:When was it perfected?
A:September 13, 1982
Q: Why not in 1981?
A:Because the actual release of the loan maam was on 1982.
Q:So, there was no perfected contract yet on 1981?
A:Yes maam.
Q: Are you sure? Was there a perfected contract on 1981? What kind of contract?
A:Consensual contract only maam
So, Consensual Contract only, to enter into a contract of loan but the loan itself is
not perfected until the money is released to respondents on September 1982.
Page | 9

Take note, Simple Loan or Mutuum is a real contract, perfected upon delivery
of the object of the contract. So even if the parties had already executed the
loan contract on March 1, 1981, there was no obligation on the part of
respondents to pay any amortization or interest beginning 1981 because the
money was not yet released. It was only on September 13, 1982 that the full
loan was released to them. So it is only from that time that his obligation to
pay amortization or interest should begin to run. Actually he was obligated to
pay the loan a month after that as per their agreement.
A perfected loan agreement imposes reciprocal obligations, where the obligation or
promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private
respondents to pay the monthly amortization. For the latter, it is the promise of
BPIIC to deliver the money. In reciprocal obligations, 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. Therefore, private respondents conclude, they did not incur in
delay when they did not commence paying the monthly amortization on May 1,
1981, as it was only on September 13, 1982 when petitioner fully complied with its
obligation under the loan contract. A loan contract is not a consensual contract but a
real contract. It is perfected only upon the delivery of the object of the contract. But
in March 1981while it is true that there was no perfected contract of loan there was
already a consensual contract to enter into a contract of loan. Remember we
already discussed Article 1934. So what happened in 1981 was merely a
consensual contract but the contract of loan was only perfected on September 13,
1982.
Remember that a contract of loan is different from contract of rent/lease. As we have
mentioned in loan, it signifies the delivery of money or some consumable thing to
another with the promise to repay at equivalent amount of the same kind or quality.
On the other hand, rent signifies delivery to another some non-comsumable thing so
that the latter (renter) may use it at a certain period and return it to the
landlord/lessor for a consideration. In contract of loan we have the Creditor-Debtor.
In Rent we have Landlord-Tenant. In Loan the creditor receives payment. In Rent
the owner receives compensation or price.
Now, another thing that we need to consider is to distinguish loan from a trust
receipt. If you take a look at the course outline, we will discuss later the trust
receipt law. And do remember that a trust receipt is a written or printed
document signed by the entrustee in favor of the entruster containing terms
and conditions substantially complying the provisions of the trust receipt law
essentially possession of goods covered by those indicated by trust receipt
law. It is different from a contract of loan because later on if you take a look at
the trust receipt law it does not say ___(17:55) of the loan but rather the trust
receipts law punishes the dishonesty and abuse of confidence in the handling
of the money or goods subject of the trust receipt. So again when we go to the
trust receipt law, we will see more of the distinctions between loan and
issuance of the trust receipt. Do not confuse one from the other.
Now, also notice in Article 1953, it refers to the subject matter money or
any other fungible things. When we talk about fungible things, these are
things which usually dealt with number, weight or measure. Such as
those refer to oil, rice or gas. So that any given unit or portion is rated as
the equivalent of any other unit or portion or to those which belong to the
same genus, which includes several species of the same kind.
Now, under the New Civil Code, the terms fungible and cosumable goods are
used interchangeably to which fungible things refer also same to definition ng
consumable thing those cannot be used without being consumed.
With regard to extinguishment of the contract of loan we apply what we already
learned, the different modes of extinguishment of obligations under obligations
and contracts. We have payment or performance, condonation, confusion,
compensation and novation. B
Because the obligation here
in loan refers to the generic thing and as we know, genus never perishes.
Do also familiarize yourselves with common loan terminologies. When we say
Principal it refers to the amount of the loan. Maturity Date is the date on which the
amounts due under the loan agreement must be fully paid. Bullet payment or
Balloon payment when the principal is due and payable on the maturity date. The
most common type are those loans subject to amortization which the portions of the
principal are payable over the life of the loan. Fixed interest rate is the interest rate
that does not change during the term of the loan. Floating interest rate is the interest
rate that changes based on the market rates. Interest payment dates are the dates
on which interest is due and payable. Covenant refers to the obligation
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
of the borrower to do or not to do something. It is also important to know whether
you will be allowed to prepay your loan, pay the amortizations of the loan in
advance, there will be a voluntary prepayment clause wherein you will be allowed to
prepay the loan probably on specified date or there will be instances that you will be
allowed to pay in advance but you have to pay fees and charges. Why would there
be such an agreement with regard to loans or mutuum? Because remember the
creditor would earn income through interest and if you pay earlier than what was
agreed upon so that would change, they will take that into consideration. So to be
fair to the creditor, it is possible that if you decide to pay in advance, you will also
pay fees and charges. We also have this mandatory prepayment clause it is a
stipulation that gives the lender the right to require prepayment of the loan upon
occurrence of certain events. Breakage costs refers
-pay
under the conditions agreed upon. Prepayment
premium refers to the fee
collected by the lender from the borrower for prepaying the loan. Cure period or
grace period is the period of time given to the borrower to remedy a default under
the loan agreement. Default refers to the breach by the borrower of the loan
agreement. And then acceleration clause gives the lender the right to declare the
loan immediately due and payable upon the occurrence of an event of default.
Art. 1954.
A contract whereby one person transfers the ownership of non-fungible
things to another with the obligation on the part of the latter to give things of
the same kind, quantity, and quality shall be considered a barter. (n)
Barter is defined in Article 1638. By the contract of barter or exchange, one of the
give another thing.
Be able to distinguish barter from mutuum. In mutuum the subject matter
is money or any fungible thing. While in barter it is non-fungible thing.
In commodatum, the bailee is bound to return the identical thing borrowed
when the time has expired or the purpose has been served.in mutuum as we
have discussed to return the equivalent thereof of same kind or quality. In
barter the equivalent thing is given in return for what has been received.
Lastly, with regard to consideration, in mutuum it may be gratuitous. In
commodatum it is always gratuitous. While in barter, is always onerous
contract similar to a contract of sale.
Art. 1955.
The obligation of a person who borrows money shall be governed
by the provisions of Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes
another thing of the same kind, quantity and quality, even if it should
change in value. In case it is impossible to deliver the same kind, its
value at the time of the perfection of the loan shall be paid. (1754a)
Article 1249.
The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance.
Article 1250.
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of
the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there
is an agreement to the contrary.
Page | 10

So here, if it is a loan of money we apply Articles 1249 and 1250. Recall the Article
1249 of the civil code, it is in relation to payment diba? payment or performance,
payment must be in the currency stipulated, in the absence of a specific currency, it
must be that of the legal tender of the Philippines. What is the legal tender in the
Philippines? If I owe you 1M can I pay you 20 peso bills? When it comes to bills or
notes there is no limitation. But what about coins? If I owe you 1,000.00? can I
compel you to accept my 1.00 coins amounting to 1,000.00? Yes. What if I owe you
5,000.00 can I compel you to accept my 1.00 coins amounting to 5,000.00? NO.
Why not? Because again what is considered legal tender in the Philippines?
(1.00, 5.00 and 10.00) it is up to 1,000.00 only. When it comes to centavos (.25,
er to as legal tender. That
would also mean that in the payment of the loan, you cannot force your creditor
legal tender. What is the effect if the creditor accepts your check as your
payment, would that extinguish your obligation? Not yet unless napa encash
na or was impaired through the fault of the creditor. When we talk about loan
of money we also take into consideration Article 1250 in relation to
extraordinary inflation or deflation. The following requisites must be proven:
(1) There was an official declaration of extraordinary inflation or
deflation from BSP
(2) The obligation was contractual in nature
(3) The parties expressly agreed to consider the effects of the
extraordinary inflation or deflation.
In the absence of express declaration we cannot apply Article 1250.
If what was loaned is a fungible thing pay the lender thing of the same
kind, quantity and quality. What if it is impossible to do so? Pay its value
at the time of perfection of the loan.
Art. 1956.
No interest shall be due unless it has been expressly stipulated in
writing. (1755a)
The article is very short but the rest of the cases we have under mutuum
falls under that article revolving around interest. So very INTERESTING!
First thing you should take note is that the requirement here to impose interest must
be expressly stipulated in writing. Take note also that this article is only applicable in
simple loan or mutuum. We cannot apply it to interests arising from damages
because we have a separate provision governing torts or damages.
Interest may be paid either as compensation for the use of money
(monetary interest) referred to in Article 1956 or imposed by law or by
courts as penalty or indemnity for damages (compensatory interest)
under Articles 2209 and 2212 for breach of contractual obligations.
What are the kinds of interest:
(1) Simple interest that which is paid for the principal at a certain
rate fixed or stipulated by the parties.
(2) Compound interest that which is imposed upon interest due
and unpaid. The accrued interest is added to the principal sum
and the whole (principal and accrued interest) is treated as new
principal upon which the interest for the next period is
calculated. GENERAL RULE : compound interest cannot be
collected unless agreed upon by the parties.
(3) Legal interest- that which the law directs to be charged in the
absence of any agreement as to the rate between the parties.
(4) Lawful Interest - Interest, which the law allows or does not
prohibit; that which is the maximum interest allowed by law.
(5) Unlawful Interest or Usurious Interest rate stipulated that is
beyond the maximum rate allowed by law.
CAUBANG
November 22, 2016
Part 1 of 2
We stopped in Article 1956.
Article 1956 - No interest shall be due unless it has been expressly
stipulated in writing.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
As I have emphasized before, this requirement, that the interest must be
expressly stipulated in writing is required only in relation to contracts of loan.
You relate this to the provisions under the chapter of Loan in the Civil Code.
So with that, we have to make a distinction between a monetary interest, which is
what is referred to in Article 1956. So its interest paid as compensation for the use of
money. And to distinguish it from compensatory interest, which will be discussed
under Torts and Damages, as penalty or indemnity.
Last meeting we have also mentioned the kinds of interest.
(1) Simple interest - paid for the principal as stipulated by the parties
(2) Compound interest - an interest imposed upon interest due and
unpaid
(3) Accrued interest - interest which is already earned but not yet
received, added to the principal. So the principal plus the
accrued interest shall be treated as the new principal from
which the new interest shall be calculated.
Take note in the later provisions, compound interest can only
be imposed upon agreement of both parties
(4) Legal interest - it's in the case of Eastern Shipping. The Ruling
in Eastern Shipping serves as a guideline in the imposition of
what is deemed as legal interest.
EASTERN SHIPPING LINES vs. CA
FACTS:
A vessel owned by petitioner Eastern Shipping Lines delivered for shipment two fiber drums of
riboflavin from Japan. The shipment was insured by Mercantile Insurance Company.
Inc. which observed that one drum was in bad order. When Allied Brokerage
withdrew the shipment from Metro Port, one drum was found opened without seal
but the contents thereof was intact. Finally, when the drums reached the consignee,
one drum was found with adulterated/faked contents.
MIC contended that due to the losses/damage sustained by the drum, the consignee suffered
losses totaling P19,032.95, due to the fault and negligence of Eastern Shipping, Metro Port and
Allied Brokerage. As a consequence, MIC was compelled to pay the consignee so that it became
subrogated to all the rights of action of the consignee against them.
Eastern Shipping, Metro Port and Allied Brokerage denied liability.
The lower court ruled Eastern Shipping (carrier), Metro Port (arrastre operator), and Allied
(broker) solidarily liable and ordered them to pay MIC for the losses it suffered with the
present legal interest of 12% per annum from the date of filing of this complaints.
Eastern appealed the decision arguing that they should be held liable of the interest only
from the date of the decision of the trial court and only at the rate of 6 percent per annum
putably unliquidated.
ISSUE:
(1) W/N Eastern, Metro Port and Allied are solidarily liable. YES
(2) W/N Eastern, Metro Port and Allied may be held to pay the 12% interest
per annum from the date of filing of this complaints. NO
RULING:
First issue
The losses/damages were sustained while in the respective and/or successive
custody and possession of Eastern, Metro Port and Allied Brokerage and therefore
they are liable to MIC as subrogee for the amount it paid to the consignee.
Second issue
In the "first group of cases", the basic issue focuses on the application of either the 6%
(under the Civil Code) or 12% (under the Central Bank Circular) interest per annum.
In these cases, there has been a consistent holding that the Central Bank Circular imposing the
12% interest per annum applies only to loans or forbearance of money, goods or credits, as well
as to judgments involving such loan or forbearance of money, goods or credits.
On the other hand, the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general. A common
time frame in the computation of the 6% interest per annum has been applied which
is from the time the complaint is filed until fully paid.
The "second group", did not alter the pronounced rule on the application of the 6%
or 12% interest per annum. However, varied on the commencement of the running
of the legal interest.
Hence, the SC laid down the following rules of thumb for future guidance by way of
clarification and reconciliation.
Page | 11

I. When an obligation, regardless of its source: law, contracts, quasi-contracts,
delicts or quasi-delicts 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.
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:
1. 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. 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 of the CC
2. 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
extra-judicially (Article 1169, CC) 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.
3. 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.
So please take note of the guidelines in this case of Eastern Shipping.
Eastern Shipping is reiterated in the succeeding cases.
So what are the rules here? Pls. Take note.
(1) Obligations, regardless of its source, can be held liable for
damages, you apply the provisions on damages as provided in
the Civil Code. While the award of interest in the concept of
actual and compensatory damages, are as follows:
- If there's a breach in an obligation, and it consists in a payment
of a sum of money, loan, or forbearance of money, interest is
stipulated in writing, and interest due shall earn legal interest
from the time it is judicially demanded.
- In the absence of stipulation, 12% per annum from default,
from judicial of extrajudicial demand.
(2) Obligations not constitution loan or forbearance of money is
breached. An interest in the amount of damages may be
imposed at 6% per annum. No interest, however, shall be
adjudged in unliquidated claims or damages, except where the
demand can be ascertained with reasonable certainty.
Where the demand is established with reasonable certainty, interest
shall begin to rum from the time the claim is made judicially or
extrajudicially. But when such certainty cannot be so reasonably
established at the time the demand is made, interest begins to run
from the date of judgement is made. Actual base of the computation
of interest shall be from the amount adjudged.
(3) When the judgement awarding a sum of money becomes final and
executory, the interest shall be 12% from finality until satisfaction.
So in this case, 6% from decision, and 12% upon finality and until satisfaction.
I am emphasizing this because this has been asked in the bar. Yan talaga
ang answer na ine-expect ng SC.
However, you should take note that the legal interest rate has already
been changed to 6%, effective July 1, 2013.
Any decision or obligation prior to July 1, 2013, we apply the guidelines
and ruling in Eastern Shipping- 12% if what you have is a loan or
forbearance of money, goods, or credit. 6% - otherwise.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
M: What do we mean by forbearance?
S: A forbearance is a contractual obligation of a creditor to refrain from, during
a period of time, from requiring the debtor to repay the amount that was lent.
What happened in Crismina Garments vs. CA?
CRISMINA GARMENTS vs. CA
FACTS:
Crismina was engaged in the export of girls' denim pants. It contracted the services of Norma
was obliged to pay Norma an amount of P76,410.00 for her services. However,
despite the delivery of the sewed materials, Crismina failed to pay Norma.
Norma demanded payment from Crismina. However, Crismina alleged that 6,164
pairs of the sewed jeans were defective and demanded a refund of P49,925.51 or
the value of the damaged pairs of denim pants from Norma.
Norma filed for the collection of the principal amount of P76,410.00 against
Crismina. The trial court ordered Crismina to pay Norma the amount with interest at
12% per annum, to be counted from the filing of the complaint until fully paid.
Crismina appealed the decision arguing that the complaint was an action for the
enforcement of an obligation for payment of money arising from a contract for a piece of
work. Hence, the interest rate should be 6% pursuant to Article 2209 of the CC.
Norma countered that the 12% per annum interest rate based on CBC should apply
since the money sought to be recovered by her is in the form of forbearance.
ISSUES:
1. W/N the obligation was a forbearance of money.
2. W/N the 12% per annum interest rate should be imposed.
RULING: BOTH NO
First issue
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.
Second issue
The amount due arose from a contract for a piece of work, not from a loan or forbearance
of money. Hence, the legal interest of 6% per annum should be applied.
Furthermore, since the amount of the demand could be established with certainty when the
complaint was filed, 6% interest should be computed from the filing of the complaint until
the finality of the judgment. But after the judgment becomes final and executory until the
obligation is satisfied, the interest should be reckoned at 12% per year.
Again, when an obligation not constituting a loan or forbearance of money
is breached, the interest rate imposed at the discretion of the court, is at
the rate of 6% per annum. However, in this case, it does not involve a loan
or forbearance of money or judgement, as it arose from a contract of sale,
so the applicable rate is 6% and 12% from the time the judgement
becomes final and executory until fully satisfied.
PNB vs. IBARROLA
FACTS:
The Province of Isabela issued several checks drawn against its account with petitioner
PNB for the payment of the medicines it purchased from Lyndon Pharmaceuticals
Laboratories, a business operated by respondent Ibarrola. However, 23 checks amounting
to P98,691.90 were not delivered to Ibarrola. For her failure to receive the full payment for
the medicines, Ibarrola filed an action for collection of sum of money against the Province
of Isabela, its Treasurer, the two agents and PNB.
The trial court ordered that the Province of Isable, the two agents and the PNB are
solidarily liable to pay Ibarrola the amount of P98,691.90 with interest at the legal
rate from the date of the filing of the complaint until the entire amount is fully paid.
However, the decision did not specify whether the legal rate of interest referred to in the judgment
is 6% or 12%. When the decision became final and executory, the sheriff computed the interest at
12%. PNB opposed arguing that the 6% legal interest should be applied.
ISSUES:
1. W/N the transaction among the parties involves a loan or forbearance of money.
NO
2. W/N the legal interest should be 12%. NO
RULING:
First issue
The transaction 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.
Second issue
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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 CBC No. 416.
Furthermore, the 6% interest rate shall be computed from the time of the filing of the complaint
considering that the amount adjudged can be established with reasonable certainty. However,
once the judgment becomes final and executory, the interim period from the finality of judgment
awarding a monetary claim and until payment thereof, is deemed to be equivalent to a
forbearance of credit. Thus, the rate of 12% per annum should be imposed, and to be computed
from the time the judgment became final and executory on November 26, 1993 until fully
satisfied. The actual base for the computation of this 12% interest after the judgment in this
damage suit became final shall be the amount adjudged (P98,691.90).
PILIPINAS BANK vs. COURT OF APPEALS
FACTS:
Greatland Realty executed a Dacion en Pago covering several parcels of land in
favor of petitioner Pilipinas Bank. Greatland assigned P2.3M out of the total
consideration of the dacion en pago to respondent Lilia Echaus. However, despite
her repeated demands for payment, petitioner failed to pay the assigned amount.
The trial court ordered petitioner to pay the respondent the amount due with interest plus
damages. Upon payment, petitioner applied the 6% interest rate. Respondent Echaus opposed
alleging that the interest rate imposed should be 12% per annum pursuant to CBC
should be 12% per annum in accordance with the CBC 416 since the transaction
between the parties involves forbearance of money.
Petitioner appealed the decision arguing that Article 2209 of the CC should apply. It further
contended that the CA should have ordered respondent to pay interest at the rate of 12% on the
overpayment collected by her pursuant to the advance execution of the judgment.
ISSUE: W/N the 12% interest rate should be imposed.
RULING: NO
The P2.3M is a portion of the amount which petitioner is obligated to pay Greatland
Realty for the sale of several parcels of land. 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 CC and not the rate of 12% per annum as provided in Circular 416.
Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the
order for the execution pending appeal of the judgment of the trial court. On appeal, the
CA reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to
be refunded by private respondent to petitioner. In an execution pending appeal, funds
are advanced by the losing party to the prevailing party with the implied obligation of the
latter to repay former, in case the appellate court cancels or reduces the monetary award.
In the case at bar, the excess amount ordered to be refunded by private respondent
falls within the ruling in Viloria and Buiser that Circular No. 416 applies to cases
where money is transferred from one person to another and the obligation to return
the same or a portion thereof is subsequently adjudged.
In conclusion, the amount of P2.3M adjudged to be paid by petitioner to private
respondent shall earn interest of 6% per annum and the amount of P1,898,623.67 to be
refunded by private respondent to petitioner shall earn interest of 12% per annum.
So again, 12% if the obligation arises from a loan or forbearance of money,
goods or credit. However, in this case, the P2.3M obligation arose from a
contract of purchase and sale, and not from a contract of loan or mutuum. So
what was applied was the 6% interest rate per annum. Also take note that
there was a judgement here regarding the alleged excess amount. The SC
here ordered that the alleged excess amount now falls within the Central Bank
Circular. Where money is transferred from one person to another, and the
obligation to return the same subsequently adjudged. So with that, the SC
held that the amount of P2.3M to be paid by petitioner shall earn 6% per
annum. Then the excess amount to be refunded by respondent shall earn
12% per annum, because such falls within the term of forbearance.
ESTORES vs. SPOUSES SUPANGAN
FACTS:
Petitioner Estores and respondent spouses Supangan entered into a Conditional
Deed of Sale involving a parcel of land in the sum of P4.7M. However, despite the
lapse of seven years from the execution of the contract and notwithstanding
payment of P3.5M on the part of spouses Supangan, Estores still failed to comply
with her obligations. As a result, the spouses Supangan demanded with the return
of their money plus 12% interest rate compounded annually.
Estores is willing to return the principal amount of P3.5M but she insists that she is
not bound to pay the 12% interest rate because it was not agreed upon. According
to her, the Conditional Deed of Sale only provided for the return of the
downpayment in case of her failure to comply with her obligations.
The spouses Supangan countered that it is only fair that an interest be imposed to Estores
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
considering that she failed to return the principal amount upon demand and that she
had been using the money for her benefit.
The trial court ruled that spouse Supangan are entitled to legal interest but only at the rate
of 6% per annum from the date of the transaction (October 1993) until fully paid.
The CA modified the decision and ruled that the 6% interest rate is proper but it will
be computed from the date when spouses Supangan formally demanded the return
of their money (September 2000) until full payment thereof.
ISSUES:
1. W/N it is proper to impose an interest in the absence of stipulation of the
parties. YES
2. W/N the 12% interest rate should be imposed. YES
RULING: BOTH YES
First issue
Interest may be imposed even in the absence of stipulation in the contract as
provided under Article 2210 of the CC.
Petitioner Estores is legally obligated to return the P3.5M because of her failure to
fulfill the obligation under the Conditional Deed of Sale, despite demand. Petitioner
enjoyed the use of the money from the time it was given to her hence she is already
in default of her obligation from the date of demand (September 2000).
Second issue
The interest at the rate of 12% is applicable in the instant case. The general rule is
that the applicable rate of interest "shall be computed in accordance with the
stipulation of the parties."
Absent any stipulation, the applicable rate of interest shall be 12% per annum "when the
obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall
be 6%." In this case, the parties did not stipulate as to the applicable rate of interest.
The contract involved in this case is 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.
In the case at bar, petitioner Estores failed to comply with her obligations and is
considered in default from the time the demand to return the money was made on
September 2000. Hence, even if the transaction involved a Conditional Deed of
Sale, the stipulation governing the return of the money can be considered as a
forbearance of money which required payment of interest at the rate of 12%.
The phrase "forbearance of money, goods or credits" 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.
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.
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.
-
spouses amounts to forbearance of money which can be considered as an involuntary loan.
Thus, the applicable rate of interest is 12% per annum.
Since the date of demand which is September 27, 2000 was satisfactorily
established during trial, then the interest rate of 12% should be reckoned from said
date of demand until the principal amount and the interest thereon is fully satisfied.
Alright, so here, the SC emphasized that it is proper to impose interest
notwithstanding the absence of stipulation in the contract.
Take note in this case, the contract involved was not a loan, but a conditional
deed of sale. The contract, however, provides that the seller must return the
payment made by the buyer if the conditions are not fulfilled. It has not been
fulfilled, and notwithstanding demand from the buyer, the seller has failed to
return the money, and should be considered in default. Even if the transaction
involved here is a conditional deed of sale, the SC imposed 12%. Why? Again,
take note of the definition of forbearance. It is not limited to a contract of loan
or mutuum.
Page | 13

A forbearance is a contractual obligation of a creditor to refrain from,
during a period of time, from requiring the debtor to repay the amount due
and demandable.
The SC says that forbearance of money, goods, or credit is different from a loan.
Forbearance of money, goods, or credit refer to arrangements other than loans.
So take into consideration from what kind of contract the obligation arose from.
Also consider the nature of the obligation, because in this case, it was a conditional
deed of sale, but the obligation was to return the money because the condition was
not fulfilled. The respondents parted with their money before the condition was
fulfilled. They have therefore allowed the forbearance of money, and to use their
money. They were deprived the use of their money pending fulfilment of the
conditions. When those conditions were breached, they were entitled not only to the
return of the principal amount paid, but also for the compensation for allowing the
use of their money. So that would be interest. And the compensation for the use of
their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan. Petitioner's unwarranted withholding of the money, which
rightfully pertains to the respondents amounts to a forbearance of money, which can
be considered as an involuntary loan.
So the applicable interest rate is 12% per annum from the date of
demand, until the principal amount and the interest thereof is fully paid.
You have to take note when would the 12% interest be applied, as held in
the case of Eastern Shipping. -- loan or forbearance of money, or from
finality of judgement.
So with that, you memorize the guidelines in Eastern Shipping.
You should know forbearance of money so you can apply the correct interest
rate. Memorize the definitions, memorize the distinctions, memorize the
elements and requisites so you can apply it in a given set of facts.
So take note as of July 1, 2013, the applicable interest rate is already 6%. However,
take note that there were old cases that were decided before. So you have to
distinguish what is considered as legal interest, as distinguished from lawful interest
or unlawful interest, because this is in relation to the Usury Law.
Maam: What is this Usury Law?
The Usury Law imposed a ceiling in the interest.
Banuelos
November 22, 2016
Part 2 of 2
MEDEL vs. COURT OF APPEALS
FACTS:
Servando Franco and Leticia Medel obtained four loans from Veronica Gonzales in the
total amount of P500k. As security for payment of the loan, Servando and Leticia
executed a promissory notes where they stipulated that they will pay 5.5% interest per
month plus 2% service charge per annum from date of its execution until fully paid, and
additional penalty charge of 1% per month of the amount due and demandable and the
further sum of 25% as Attorney's Fee whether actually incurred or not.
Servando and Medel failed to pay causing Veronica to file a case for collection of
money against them.
The lower court declared that the due execution and genuineness of the four promissory
notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by Veronica son the loans was unconscionable and revolting to the
conscience. Hence, the trial court applied the provision of the NCC that the legal rate of
interest for loan or forbearance of money, goods or credit is 12% per annum.
Veronica argued that the promissory note, which consolidated all the unpaid loans
of Sevando and Leticia, is the law that governs the parties. They further argued
that the CBC No. 416 prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the absence of a
stipulation on interest rate, but not when the parties agreed thereon.
ISSUE: W/N the interest rate stipulated by the parties is valid.
RULING: NO
The stipulated rate of interest at 5.5% per month on the P500k loan is excessive, iniquitous,
unconscionable and exorbitant. However, the rate cannot be considered "usurious" because the
CBC 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.
Nevertheless, the interest at 5.5% per month, or 66% per annum, stipulated upon by the
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
parties in the promissory note is iniquitous or unconscionable, and, hence, contrary
to morals ("contra bonos mores"), if not against the law. Being such, the stipulation
is void. The courts shall reduce equitably liquidated damages, whether intended as
an indemnity or a penalty if they are iniquitous or unconscionable.
Consequently, the CA erred in upholding the stipulation of the parties. Rather, we
agree with the trial court that, under the circumstances, interest at 12% per annum,
and an additional 1% a month penalty charge as liquidated damages until the
entire amount is paid in full may be more reasonable.
Q: So with that the 5.5% per month is valid and legally binding?
unconscionable, excessive and e
Q: So what rate was imposed? Or was there any interest rate imposed?
A: The court agreed with
annum and additional
1% month penalty charge as liquidated damages was more reasonable.
Usury Contracting form to receive something in excess of the amount
allowed by law for loan and forbearance of money. The taking of more
interest for the use of money more than the law allow. There can be no
Usury, if there is no loan or forbearance of money to speak of.
Forbearance in the context of Usury law a contractual obligation of
the creditor to refrain, for a given period of time, from requiring the
borrower to pay the amount that is due and demandable.
Usurious Interest it is the interest that is unlawful and illegal.
However, we have the Usury law before, Act. No. 2655 enacted on
February 1916 and took effect on May 1, 1916.
What was the purpose of the Usury Law? For the protection of borrowers from the
imposition of the unscrupulous lenders from taking undue advantage of the
necessities of others. Under the Usury Law, the monetary board was authorized to
prescribe the maximum rate of interest for the loan or the renewal thereof or the
forbearance of money, goods or credits. However, by virtue of authority granted
therein, the Usury Law prescribed in 1974 the interest at 12%.
This, do take note, as mentioned in the case of Medel, in its CB resolution which took
effect January 1, 1983, it was resolved that the rate of interest that maybe charged or
collected by any person will not be subject to any ceiling under the
Usury Law.
So while, it was stated that we have 12%, that is the legal interest rate, but it is
not the maximum or the ceiling interest rate, because of the suspension of the
Usury Law. So even if the legal interest rate continued to be 12% per annum at
that time, the effectivity of the Usury Law was suspended. Take note, it is
suspended, it cannot be repealed because the Usury Law is a law and it
cannot be repealed by a resolution of the monetary board.
It was merely suspended. And as such, no ceiling was imposed on the interest rates
that are agreed upon by the parties. According to the Supreme Court, the Circular
that was issued by the Central Bank, did not repeal or amend the Usury
cannot repeal a law, as only a law can repeal another law.
So, that is still the relevance why we still have to discuss the Usury law
because it is only suspended. Suspension can be lifted anytime. Although
since 1982, nothing has been done to lift.
On the case of Medel, the SC deemed that the 5.5% interest per month was
not deemed usurious because of the suspension of the Usury Law, which is
now legally nonexistent. Nevertheless, the SC held that such 5.5% interest per
month or 66% interest per annum which is stipulated by the parties, in other
words, it complies with the requirement under Article 1956.
Being contrary to morals, if not against the law, the stipulation is void. But it does not
mean that the borrower will not pay interest anymore, but the Court will just reduce
equitably the said interest rate. As in this case, the rate was reduced to
Page | 14

12% per annum plus 1% penalty charge per month as stipulated
damages. This is based on what is reasonable under the circumstances.
So what happen in the case of Chua vs. Timan?
CHUA vs. TIMAN
FACTS:
Petitioners Chua granted respondents Timan several loans evidenced by promissory
notes with interest rates of 7% per month, which was later reduced to 5% per month.
Later on, respondents filed a complaint questioning the validity of the agreed
interest rates. They invoked the case of Medel arguing 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.
Petitioners countered that the stipulated interest of 5% monthly and higher cannot
be considered unconscionable because these rates are not usurious by virtue of
CBC No. 905-82 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.
ISSUE: W/N the stipulated interest rates by the parties are iniquitous,
unconscionable and exorbitant.
RULING: YES
The stipulated interes
be equitably reduced to 1% per month or 12% per annum.
We need not unsettle the principle we had affirmed in a plethora of cases that stipulated
interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and
exorbitant. Such stipulations are void for being contrary to morals, if not against the law.
While CBC No. 905-82 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.
Hence, the stipulated interest rates of 7% and 5% per month are void for being
excessive, iniquitous, unconscionable and exorbitant and should be reduced to
12% per annum. Petitioners are also ordered to refund the respondents all interest
payments in excess of 12% per annum.
Q:What do you mean by Carte Blanche
Authority? creditors want.
So here, do take note, that the CB Circular suspending the Usury law. It
may seem that the contracting parties may establish such stipulations,
clauses, terms and conditions as they may deemed convenient. Provided
that they are not again contrary to law, morals, customs, public order and
public policy. But as emphasized in this case of Chua vs. Timan, nothing
in the said circular can possibly be read as grant 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.
So, they do not have a free hand or blanket authority to say just as high of the said
interest rate to be imposed. As the SC can still reduce interest rates that are
deemed excessive, iniquitous or exorbitant. Again, such interest rates as mentioned
in the case of Medel and Chua, the stipulated interest was not deemed usurious.
Nevertheless, the SC equitably reduced the interest rates stipulated by the parties.
In this case, it was reduced to 1% per month or 12% per annum.
So what happened in the case of Pan Pacific?
PAN PACIFIC vs. EQUITABLE
FACTS:
Petitioner Pan Pacific and respondent Equitable Bank entered into a contract of
mechanical works. The parties stipulated that in case of increase in labor costs
and prices of materials, Pan Pacific shall be entitled to a price adjustment.
Later on Pan Pacific claimed price adjustment in accordance with the contract. Instead of
P1.8M. Pan Pacific
reluctantly agreed to the loan and was constrained to execute a promissory note as security
for the loaned amount. Upon maturity of the loan, respondents demanded
payment plus interest and penalty. However, petitioner refused to pay the loan.
The CA ruled that although the contract 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%, such
provision does not authorize petitioner to unilaterally raise the interest rate without the
spondent
for the imposition of 18% interest on the adjusted price. To unilaterally increase the interest
rate of the adjusted price would be violative of the principle of mutuality of contracts.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
ISSUE: W/N the 18% bank lending rate should be applied.
RULING: YES
A review of the contract shows that the consent of the respondent is not needed
for the imposition of the 18% current bank lending rate, which occurs upon any
delay in payment. When the terms of a contract are clear and leave no doubt as to
the intention of the contracting parties, the literal meaning of its stipulations
governs. In these cases, courts have no authority to alter a contract by
construction or to make a new contract for the parties.
Under Article 2209 of the CC, 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. 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.
The written agreement entered into between the parties clearly 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%. In other words, in case of default, the
consent of the respondent is not needed in order to impose interest at the current
bank lending rate in accordance with the contract.
The promissory note, although declared void by 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.
Q: Was there any agreement as to the adjustment of the price of the parties?
A: Yes. It is stated in their contract that as may deemed applicable, it may
unilaterally raise such interest rate. So, Pan Pacific allowed Equitable to do so.
Q:What do you call that? What kind of clause?
A:It is an escalation clause.
note?
Q: What about the promissory note? What is the ruling of the Supreme Court
as regards as to the promissory note? Was there a real contract of loan as
evidenced by the promissory note? What was the reason why it was issued?
A: It was issued so that Pan Pacific can continue with the project.
However, it was treated as advance payment of what was Pan Pacific
was supposed to collect from Equitable.
Atty. Jazzie: In Other words, there was no consideration of the contract of loan.
But rather than an advance payment.
We have here, the SC pointed out that in their agreement, with regard to the
escalation clause: price adjustment in case of increase of the labor cost and
prices of materials. Furthermore, as stated in the agreement it was also
stipulated that in the delay of payment, consent of the responded was not
needed for the imposition of the interest at the current bank lending rate.
Do remember, as the parties have agreed, even if it was not a true contract of loan
but rather a contract of mechanical works and air conditioning system. The parties
have stipulated as to what interest rate should be imposed: current bank lending
rate. The promissory note was taken into consideration as an evidence as to what is
considered as to what lending rate. And based on that promissory note, it was 18%
per annum. So here, the SC ordered the respondent paid the interest at the bank
lending rate of 18% until the amount it fully paid.
So what happened on the case of Solid Bank vs. Permanent Homes?
SOLIDBANK vs. PERMANENT HOMES
FACTS:
Solidbank granted Permanent Homes a loan worth P60M covered by three promissory notes. In
the promissory notes, Permanent Homes stipulated that it authorizes Solidbank to increase or
decrease at any time the interest rate agreed upon on the basis of, among others, prevailing
rates in the local or international capital markets. The interest rates shall be effective from the
date indicated in the written notice to be sent by the bank, or if no date is indicated, from the
time the notice was sent. Furthermore, if Permanent Homes failed to pay the amount with the
interest rate within 30 days from the receipt by anyone of us of the written notice, they shall be
deemed to have given their consent to the interest
Page | 15

rate adjustment.
Contrary, however, to the specific provisions of the promissory note, there was a
standing agreement between the parties that any increase or decrease in interest
rates shall be subject to their mutual agreement.
Later on, Permanent Homes filed a complaint for the annulment of the increase in
interest rates on the loans it obtained alleging that Solidbank unilaterally and
arbitrarily accelerated the interest rates without any notice to Permanent Homes in
violation of the principle of mutuality of agreement of the parties. It also prayed for
the fixing of the interest rates at the applicable interest rate.
Solidbank countered that by virtue of the promissory notes, it was authorized to periodically
adjust the interest rates upon due notice to Permanent Homes. Hence, Permanent Homes
should not be allowed to renege on its contractual obligations, it freely and voluntarily bound
itself to the provisions of the Omnibus Credit Line and the promissory notes.
ISSUES: W/N the increases in the interest rates are void for having been
unilaterally imposed without basis.
RULING: NO
Upon the suspension of the Usury Law the parties are allowed to agree on any interest that may
be charged on a loan. However, 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. The
stipulations on interest rate repricing are valid because:
1. The parties mutually agreed on said stipulations;
2. Repricing
new interest rate; and
3. Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate.
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.
A contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties is void. However, in the case at bar,
there was no showing that either Solidbank or Permanent coerced each other to enter
into the loan agreements. The terms of the Omnibus Line Agreement and the promissory
notes were mutually and freely agreed upon by the parties.
ng rates were consistent with "prevailing rates in
the local or international capital markets." The repriced interest rates were not
unconscionably out of line with the upper range of lending rates to other borrowers.
The interest rate repricing happened at the height of the Asian financial crises in
late 1997, when banks clamped down on lendings because of higher credit risks
across industries, particularly the real estate industry.
Solidbank admitted that it did not promptly send Permanent written repriced rates, but
Therefore, the interest due from Permanent Homes should be adjusted to take
effect only written notice from Solidbank.
Q: Is the Escalation Clause: Increase or Decrease based prevailing rates in the local
or international capital markets on the Promissory Note considered valid?
A:Yes.
Q: What makes the revising of the interest rate valid?
A: It was valid since it is consistent to the prevailing rates in the local or
international capital markets. As what have stipulated by the parties.
Q: Can we not say that the increasing the interest rate is dependent on the
will of Solidbank?
A: No. Because the court did not find that there was a coercion and both
parties mutually agreed to increase the interest rate.
So again, the SC emphasized that the Usury Law deem ineffective. So the
parties may now again, agree on any interest that may be charged on the loan.
The limitation is that it should not be iniquitous, excessive, exorbitant or
unconscionable. It appears to this case that Permanent Homes irrevocably
authorize Solidbank to increase or decrease the interest rate.
The SC said that this, remember in ObliCon in relation to escalation clause, a
contract subject to a condition which makes it fulfillment depended upon the sole will
of one of the contracting parties is void. What do you call that condition?
Potestative. So we all already know, that potestative condition dependent on the
sole will of the debtor is considered void that was the basis here. But the SC held
here that the interest rate here, was not purely dependent on the part of Solidbank.
For the imposition of interest rates, please take note of the requisites:
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
if there is an escalation clause, there should also be a descalation clause, which
Second, that it must be peg in the prevailing market rates. Third, there is
an agreement between the parties as what happened in this case.
So here the stipulation of the interest rate or pricing was valid:
The stipulations on interest rate repricing are valid because:
(1) The parties mutually agreed on said stipulations;
(2) Repricing takes effect only upon Solidbanks written notice to
Permanent of the new interest rate; and
(3) Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate.
It appears that you need the consent of the debtor or Permanent. 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.
So what was the reason of repricing here? Again it was not deemed
unconscionable as it was during the hype of the Asian Financial Crisis of 1997.
Considering there was an agreement that the new interest rate will be effective
upon receipt of the written notice from Solidbank that was deemed the ruling of
the court. Again take note of the requisites of a valid escalation clause and
change of interest rates imposed by the creditor in a contract of loan.
So what happened in the case of Toledo?
TOLEDO vs. HYDEN
FACTS:
Petitioner Jocelyn Toledo obtained several loans from respondent Marilou Hyden
in the total amount of P290k with an interest rate of 6% to 7% per month.
Later on, they executed a document entitled Acknowledgment of Debt representing the
principal consolidated amount of P290k. However, after honoring several checks, Jocelyn
filed for the annulment of the document contending that Marilou forced, threatened and
intimidated her into signing the document and the application of her total payment of
P528,550.00 to interest alone is illegal, unfounded, unjust, oppressive and contrary to
law because there was no written agreement to pay interest.
Marilou countered that Jocelyn voluntarily obtained the loans knowing fully well
that the interest rate was at 6% to 7% per month. In fact, a 6% to 7% advance
interest was already deducted from the loan amount given to Jocelyn.
The trial court ruled that the Acknowledgment of Debt is valid and ordered Jocelyn
to pay Marilou in the amount of P271k with a 12% interest per annum or 1%
interest per month until such time that the said amount shall have been fully paid.
Jocelyn appealed arguing that even assuming that the execution of the document
was not attended with vices of consent, it must nevertheless be declared null and
void for being contrary to law and public policy by the fact that the payments in the
total amount of P778k was applied to interest payment alone. This only proves that
the transaction was iniquitous, excessive, oppressive and unconscionable.
ISSUE: W/N the interest rate of 6% to 7% per month is contrary to law, morals,
good customs, public order or public policy.
RULING: NO
Upon the suspension of the Usury Law ceiling on interests, parties to a loan
agreement have wide latitude to stipulate interest rates. Nevertheless, such
stipulated interest rates may be declared as illegal if the same is unconscionable.
In this case, the disputed 6% to 7% monthly interest rate cannot be considered to
be iniquitous or unconscionable.
There was no urgency of the need for money on the part of Jocelyn, the debtor, which
compelled her to enter into said loan transactions. She used the money from the loans to
make advance payments for prospective clients of educational plans offered by her
employer. In this way, her sales production would increase, thereby entitling her to 50%
rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of this nature between Jocelyn and Marilou
continued for more than five years. Jocelyn religiously paid the agreed amount of interest
until she ordered for stop payment on some of the checks issued to Marilou. The checks
were in fact sufficiently funded when she ordered the stop payment and then filed a case
questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or
unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the
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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.
After years of benefiting from the proceeds of the loans bearing an interest rate of
6% to 7% per month and paying for the same, Jocelyn cannot now go to court to
have the said interest rate annulled on the ground that it is excessive, iniquitous,
unconscionable, exorbitant, and absolutely revolting to the conscience of man. In
other words, Jocelyn is now estopped to assail the validity of the interest rates.
Q: How do you reconcile this case with the other case which the
imposition of 6% to 7% interest deemed valid?
A: The SC made a distinction regarding the circumstances of the case. In the case
of Medel, the spouses never paid their indebtedness from the very beginning and
because of their unpaid obligation it ballooned to a staggering sum and the creditors
action should fail. However in this case, there is no really urgency of the need for
money on Jocelyn, the debtor, because, it has to be noted that the money here that
was used by Jocelyn was for the reason of her sale production to increase. If such
increase, it will entitled her to 50% of her sales. This is the reason
So it has to be noted that there was initial payment and Jocelyn has religiously
paid the amount of interest until she ordered for the stop for payment. It was
clearly shown that Jocelyn availed for the said loan with knowing fully well that
such was the imposition of the interest. Yet she did not complain.
Q: How about to the issue of the acknowledgement of debt signed by
Jocelyn? Why such issue raised?
A: Such acknowledgement was made through force, threat or intimidation
for being contrary to law and public policy. The SC held that the 6% to 7%
was not contrary to law and public policy because of the specific
circumstances that was present in the case at bar.
Notice here, in the previous cases, we have seen: 5.5% per month deemed
excessive, the other case 7% per month and 5 % per month, deemed also
excessive. But this time, in the case of Toledo, the 6% to 7% per month
interest was NOT deemed excessive. So here now, the SC take into
consideration the circumstances of each case. The Medel case was clearly
not applied on the case of Toledo, as pointed out in Medel, the spouses never
able to pay their indebtedness. As in this case of Toledo there was no urgency
to need the money as this was used to make advance payment for
prospective clients of educational plans to increasing her sales production
entitling her to 50% rebate on her sales and this continued for 5 years.
Jocelyn religiously paid the agreed amount of interest until she ordered for
stop payment on some of the checks issued to Marilou.
Further, Jocelyn know fully well that the same carried 6% to 7% monthly interest.
Yet she did not complain. In fact, when she availed of such loans, the said interest
was already deducted from the said amount. After years of availing the proceeds,
Jocelyn cannot go to court and question the validity of the interest rates. Here the
SC emphasized the maxims of equity (1) he who seeks equity must do equity, and
(2) he who comes into equity must come with clean hands. Also, the SC
emphasized the principle of estoppel in relation to that the SC also upheld the
issuance of the acknowledgement of debt. There was no evidence that she was
coerced and witnesses are presented to testify its due execution wherein Jocelyn
from impugning the validity of such debt.
So what happened in the case of Prisma?
PRISMA vs. MENCHAVEZ
FACTS:
PRISMA, thru Pantaleon, obtained a loan with a monthly interest of P40k payable
for six months from respondent Menchavez. PRISMA executed a r note as
security for the loan. PRISMA made several payments but it still has remaining
unpaid balance. When PRISMA failed to pay, Menchavez filed a case to enforce
payment to the unpaid balance plus 4% monthly interest.
The CA ruled that the parties agreed to a 4% monthly interest pursuant to a board
resolution. Nevertheless, it reduced the interest rate at 12% per annum computed
from the filing of the complaint until finality of judgment should be applied.
The petitioners admitted the loan but denied the 4% monthly interest arguing that
the same was not provided nor stipulated in the promissory note. Even assuming
that the loan is subject to 4% monthly interest, it covers the period of 6 months
only and cannot be interpreted to apply beyond it.
The respondent countered that the petitioners are estopped from assailing the 4% monthly
interest, since they agreed to pay the 4% monthly interest on the principal amount under
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
the promissory note and the board resolution.
ISSUES:
1. W/N the parties agreed to the 4% monthly interest on the loan. NO
2. W/N the P40k monthly interest rate applies only to the period of 6 months.
YES
RULING:
First issue
The parties agreed that loan shall earn an interest of P40k per month for the six-
month period. Although the P40k can be computed at 4% interest per month, no
rate of interest was stipulated in the promissory note; rather a fixed sum
equivalent to this rate was agreed upon. The facts show that the parties agreed to
the payment of a specific sum of money of P40k per month for six months, not to
a 4% rate of interest payable within a 6-month period.
Second issue
The case of Medel finds no application in the present case where no other stipulation exists for
the payment of any extra amount except a specific sum of P40k per month on the principal of a
loan payable within six months. Additionally, no issue on the excessiveness of the stipulated
amount of P40k per month was ever put in issue by the petitioners; they only assailed the
application of a 4% interest rate, since it was not agreed upon.
Article 1956 of the CC 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.
Applying Article 1956, the interest of P40k per month corresponds only to the 6-month
period of the loan 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.
Therefore, as agreed by the parties, the loan shall earn P40k per month for a period of
six months. Thereafter, interest at the rate of 12% per annum shall apply.
Q: Why 12%? What is the basis of imposition of the legal interest? What
have we learned?
A: It is because in the absence of the stipulation of the parties, it is
deemed at 12% being a forbearance of goods, money or credit.
So here, there was an issue, whether the 4% monthly interest loan should be
applied. What was the basis? It appears that they agree that the loan shall be
subject to an interest of 40,000 per month for the 6 month period. The SC,
there was no agreement or stipulation of the parties that the legal interest rate
is to be imposed is 4% interest until fully paid by the debtor. What was clearly
agreed upon was the 40,000 interest per month for the 6 month period.
Notice, even if it is really computed on the 4% per month, the SC upheld such
validity for the 6 months period. It is a fixed sum agreed upon by the parties
which was only imposed for only such period. Remember the imposition of the
loans or forbearance of money. First requirement under 1956, express
stipulation for the payment of interest and such same provision require that
such agreement will be reduced into writing. These two must exist. What only
exist in the case at bar is the 40,000 interest per month for the 6 months.
Beyond that, wala ng stipulation between parties. So after the 6 months after due
date, the interest rate to be imposed to the loan is the legal interest rate of 12% per
annum. Again what we have here is a loan. Why is Medel not applicable? Medel
finds no application to the present case where no other stipulation exists for the
payment of the extra amount except for the 40,000 per month on the loan
t raise or put into
issue. They only assail the 4% interest until payment. Since it was not agreed
upon.
So what happen in the case of Dio?
DIO vs. SPOUSES JAPOR
FACTS:
Respondents spouses Japor obtained a loan amounting to P128k from the
Quezon Development Bank (QDB) as evidenced by a duly executed Deed of Real
Estate Mortgage. The spouses failed to pay their loan obligations. However,
before the foreclosure of the property, the spouses Japor offered to mortgage their
properties to petitioner Teresita Dio after obtaining from her a loan worth P350k. A
new Deed of Real Estate Mortgage was executed in favor of petitioner Dio.
Under the terms of the deed, the respondents agreed to pay petitioner a 5%
interest rate per month for a period of two months with an additional 5% penalty
rate for every month in case of default or delay.
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However, despite repeated demands, respondents failed to pay causing petitioner
to foreclose the mortgage.
The respondents filed a petition for the fixing of their contractual obligation. They alleged
that the Deed of Real Estate Mortgage was null and void since it did not state the true
intent of the parties, which limited the 5% interest rate to only two months from the date of
the loan and which did not provide for penalties and other charges in the event of default
or delay. Respondents vehemently contend that they never consented to the said
stipulations and hence, should not be bound by them.
Petitioner countered that the upon the suspension of the Usury Law, interest rates may
accordingly be pegged at such levels or rates as the lender and the borrower may agree
upon. Petitioner further points out that the 5% interest rate was proposed by the
respondents and have only themselves to blame if the interests and penalties ballooned
to its present amount due to their willful delay and default in payment.
charge per month.
ISSUES:
1. W/N the 5% interest rate is iniquitous, unconscionable, and exorbitant. YES
2. W/N the 5% interest rate for two months should be applied. YES
3. W/N the spouses Japor are entitled to the surplus. NO
RULING:
First issue
Although the parties to a contract of loan may agree upon the interest rates, the court
may, nevertheless, reduce the same if it finds it to be iniquitous, unconscionable, and
exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law.
What is iniquitous, unconscionable, and exorbitant shall depend upon the factual
circumstances of each case. In the case at bar, the interest and penalty rates in the Deed
are excessive, hence legally impermissible and should therefore be reduced.
Second issue
Even if the agreed interest rate is deemed excessive, the respondents are now estopped
from claiming otherwise because evidence shows that it was them who proposed the 5%
interest rate per month for two months. However, for the succeeding period after the two
months, the interest rate should be reduced to 12% per annum and the penalty rate to
1% per month, in accordance with Article 2227 of the CC.
Third issue
There is no "surplus" to speak of. In adjusting the interest and penalty rates to
equitable and conscionable levels, what the Court did was merely to reflect the true
price of the land in the foreclosure sale. No surplus in the purchase price was thus
created to which the respondents as the mortgagors have a vested right.
In conclusion, the interest rate for the subject loan owing to QDB, or whoever is now the
party mortgagee, is hereby fixed at 5% for the first two months following the date of
execution of the Deed of Real Estate Mortgage, and 12% for the succeeding period. The
penalty rate is fixed at 1% per month. Petitioner Dio is free of any obligation to return to
the respondents Spouses Japor any surplus in the foreclosure sale price.
Q: Was the agreement really of 5% interest until fully paid?
A: In this case, what the respondents admit, that they maintain that the
REM is null and void since it does not really intend the true agreement of
the parties. According to them, they only agreed for the 5% interest rate
for 2 months. However, they did not provide penalties or other charges in
case of default or delay?
Q: So what was the ruling of the court? was the 5% interest really upheld?
A: In this case mam, the SC only applied 5% for the first 2 months. With
regard to the penalty, it was pegged at 12% per annum.
Q: Why 12%?
A: Since in this case one what we have is loan or forbearance of money.
Q:Aside from the 12%, was there any other interest imposed?
A:There was also a penalty rate imposed at 1% per month.
So here, what was agreed upon by the parties, respondents agreed to pay
interest of 5% per month in the period of 2 months. In the event of default,
additional interest of the amount due will be charged by them. The SC
upheld the 5% interest per month for 2 months. Repondents proposed the
5% for the 2 month period. Having agreed they are now estopped from
claiming otherwise. For the succeeding period, the CA correctly reduced it
12% per annum and a penalty rate of 1% per month.
So, again take not here, what did you notice with regard to interest rate of 7%, 6% or
5% per month that was upheld by the court that were not deemed excessive or
unconscionable? STIPULATED ON A FIXED PERIOD. Okay, that is
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
one of the things that you would notice. Second, there was a case where
the excessiveness was never put into issue. Okay, on the other case, it
was upheld due to the circumstances wherein applying the principle of
estoppel how the money borrowed was used by debtor.
With that, it is clear, that THERE IS NO FIXED RATE. All of this cases, it is true
that there is a number of cases that the SC applying the ruling in Medel
wherein the 5% per month was deemed iniquitous or unconscionable. It is not
a fixed rate. That in all instances when the creditor imposes a 5% interest per
month it is already deemed iniquitous or unconscionable. Why? Because the
SC will always take into consideration the factual circumstances of each case.
There is no law, since there is no more Usury law, that being suspended.
Which states what is deemed lawful interest. Furthermore there is no ruling by
the SC which again state what is deemed iniquitous, unconscionable, or
excessive. Again always based on the circumstances of each case. In
exercising the power to determine what is iniquitous or unconscionable courts
must consider the circumstances of each case. Since what could be iniquitous
in one case may be totally just and equitable on the other.
Dulay
November 24, 2016
Part 1 of 1
Review
Last time we discussed the different kinds of interest, so you have simple and
compound. At present, with the suspension of the usury law, we do not refer to
interest whether they are lawful or unlawful because there is no more maximum
or ceiling rates for interest rates to be imposed. As to guidelines as to what
interest rates are to be imposed we take into consideration the ruling in Eastern
Shipping. But again, it is only effective until June 30, 2013. Moreover, we have
also discussed that even if the parties have expressly stipulated in writing the
imposition of an interest, if it is iniquitous, excessive, exorbitant or
unconscionable, the courts may reduce the same as we have mentioned in the
case of Medal and the succeeding cases.
Now, we mentioned that the Eastern Shipping is only effective until June 30,
2013; the reason for this is the Resolution No. 796 dated May 16, 2013 of the
Monetary Board which approved the revisions governing the rate of interests in
the absence of stipulation in loan contracts thereby amending the Section 2 of
Circular No. 905 series of 1982 wherein now it states that the rates of interest
for the loan or forbearance of any money, goods or credits and the rate allowed
in judgements in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum. So this was applied in the case f Nacar
vs. Gallery Frames. What happened in this case?
NACAR vs. GALLERY FRAMES
FACTS:
Petitioner Dario Nacar filed a complaint for constructive dismissal against
respondents Gallery Frames. On October 15, 1998, the LA ruled that petitioner was
illegally dismissed thereby awarding him backwages and separation pay in the
amount of P158,919.92 computed only up to promulgation of the decision.
Petitioner filed a motion for the re-computation of the monetary award (backwages)
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the SC on May 27, 2002 and to include the appropriate interests.
Respondent opposed alleging that re-computation is no longer allowed since the decision
was already final and executory. Respondent insists that since the decision clearly stated
that the separation pay and backwages are "computed only up to the promulgation of this
decision," and considering that petitioner no longer appealed the decision, petitioner is only
entitled to the award as computed by the LA in the total amount of P158,919.92.
The LA granted the motion for re-computation but held that it is the October 15, 1998
Decision that should be enforced considering that it was the one that became final
and executory. Since petitioner already received P147,560.19, he is only entitled to
the balance of P11,459.73.
ISSUE:
1. W/N a re- nal computation of the awards is proper.
YES
2. W/N legal interest should be paid. YES
RULING:
First issue
The backwages should be computed from the time petitioner was illegally dismissed on January 24,
1997 up to the time when the SC resolution became final and executory on May 27, 2002. The re-
computation of the consequences of illegal dismissal upon execution of the decision does not
constitute an alteration or amendment of the final decision being implemented. The illegal dismissal
ruling stands; only the computation of monetary
Page | 18

consequences of this dismissal is affected, and this is not a violation of the principle
of immutability of final judgments.
Second issue
In the landmark case of Eastern Shipping vs. CA, the Court laid down the guidelines
regarding the manner of computing legal interest. However, the BSP Monetary Board
amended Section 2 of Circular No. 905 and the issued Circular No. 799 which took effect
on July 1, 2013. The Circular provides that 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 6% per annum.
By virtue of such amendment, in the absence of an express stipulation as to the rate
of interest that would govern the parties, the rate of legal interest for loans or
forbearance of any money, goods or credits and the rate allowed in judgments shall
no longer be 12% per annum but will now be 6% per annum effective July 1, 2013.
It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, 12% per annum legal interest
shall apply only until June 30, 2013. Come July 1, 2013 the new rate of 6% per
annum shall be the prevailing rate of interest when applicable.
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping 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 quasi-delicts 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 damage.
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:
1. 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.
2. 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 extra-judicially (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.
3. 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.
The 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.
In conclusion, the SC ruled that since the original case was decided in 2002, the
applicable interest rate is 12% per annum of the total monetary awards, computed
from May 27, 2002 to June 30, 2013 but the 6% per annum interest rate shall
accrue from July 1, 2013 until payment thereof is fully satisfied.
Student: The issue here is what interest should be applied. From 2002,
when the decision became final up to only June 31
M: Walang 31 ang June. Be careful of that. Why? In fairness di ka nag-
iisa. I already had exam notebooks checked that says up to June 31,
2013. Kahit leap year, walang 31 and June. Continue.
S: Until June 30, 2013, the basis should be the ruling and guidelines in
Eastern Shipping.
the case of Nacar?
S: The difference is that in Eastern Shipping, if it is a forbearance on
credit, the interest applied should be 12%, and if not, it would be 6%. And
upon finality of judgment it should be 12%. However, the said Central
Bank Circular passed on July 1, 2013 . . .
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
M: It was passed on May but took effect on July 1, 2013
S:. . . made no distinction. So whether or not it is a forbearance on credit
or any other liability under the Civil Code. So since this was decided in
August 13, 2013, the 12% interest on monetary award for damages
should only be applicable up until June 30, 2013.
M: What interest rate should that be?
S: 12% interest rate. Subsequently up to its finality it would be 6%.
Discussion
So notice no how did the new circular changing the legal interest rate to 6%,
effective July 1, 2013, affect or modify the ruling in Eastern Shipping. Again,
the difference is just that with regard to loans or forbearance of money, instead
of 12%, it should now be 6% per annum and with regard to judgment which
has become final and executory, instead of 12% per annum, it is now deemed
to be 6% per annum. Again, effective July 1, 2013.
So, do not totally disregard the items provided in Eastern Shipping because again
that is in effect until June 30, 2013. While Eastern Shipping is, of course, very easy
to remember because only one fixed rate per annum, 6% per annum, no need to
distinguish whether it is a loan or forbearance of money or otherwise, again we have
to take note of the case in Eastern Shipping or the guidelines in Eastern
imposition of interest rate until June 30, 2013. So take note of that. We
also have the case of ECE Realty. What happened in this case?
ECE REALTY vs. HERNANDEZ
FACTS:
Respondent Hernandez and Petitioner ECE entered into a Contact to Sell involving
a condominium unit. However, despite paying the required downpayment, petitioner
failed to deliver the unit. Respondent found out that petitioner already sold the unit
to another. This caused respondent to file a complaint praying that petitioner be
ordered to accept the payment of the balance without interest and that he be
awarded damages. In case the unit is no longer available, respondent prayed that
petitioner reimburse him the total amount he paid plus legal interest.
The CA ordered petitioner to reimburse the amount paid by respondent with 6%
interest citing Eastern Shipping vs. CA since the transaction is neither a loan nor a
forbearance of money, goods or credit. However, from the finality of the decision
until full payment, the interest rate shall be 12%.
ISSUE: W/N the reimbursement is proper with 6% interest rate.
RULING: YES
to 6%.
There is no doubt that petitioner ECE incurred in delay in delivering the subject
condominium unit, for which reason the award of interest to the respondent from the
filing of his complaint is proper. There being no stipulation as to interest, under
Article 2209 of the NCC, the imposable rate is 6% by way of damages as laid down
in the landmark case of Eastern Shipping vs. CA.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if
proper, and the applicable rate, as follows:
1. The 12% per annum rate under CBC No. 416 shall apply only to loans or
forbearance of money, goods, or credits, as well as to judgments
involving such loan or forbearance of money, goods, or credit;
2. The 6% per annum under Article 2209 of the CC applies when the transaction
involves the payment of indemnities in the concept of damage arising from the
breach or a delay in the performance of obligations in general;
3. The application of both rates is reckoned from the time the complaint
was filed until the adjudged amount is fully paid.
4. In either instance, the reckoning period for the commencement of the running of the
legal interest shall be subject to the condition that the courts are vested with
discretion, depending on the equities of each case, on the award of interest.
But since July 1, 2013, the rate of 12% per annum from finality of the judgment until
satisfaction has been brought back to 6% pursuant to Resolution No. 796 of the
BSP Monetary Board. Thus, the rate of interest to be imposed from finality of
judgments is now back at 6%, the rate provided in Article 2209 of the CC.
Petitioner ECE Realty is ordered to pay the total amount paid by respondent
Hernandez plus 6% interest per annum from the filing of the complaint (September
2007) until finality of the decision, and an interest rate of 6% per annum shall
likewise be imposed from finality of the decision until fully paid.
S:The issue in this case is Whether or not there should be
reimbursements done by . . .
M: In relation to our topic, what is the issue that we should take into
consideration?
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S: Regarding the reimbursement . . .
M: Whether or not there is entitlement to reimbursement?
S:Yes
M: Are you sure?
S:With the interest
M: What interest rate should be imposed?
S:It should be 6% per annum.
M: Why 6%?
S: 6% per annum since although in their contract there was no stipulation
as to how much interest should be paid but we are referring here on the
indemnity of damages due to the delay that has been incurred by the
respondent because they were so . . .
M: When is that 6% interest rate to be imposed?
S:It should be imposed as to the . . .
M: When? From what time until when?
S: Well since we are talking about breach of . . .
S: It should be
M: From when?
S: When the delay is incurred
M: Until?
S: The final judgment of the court.
M: Now, this case is promulgated in 2014, if this was promulgated prior to July
1, 2013, what would be the difference in the decision of the Supreme Court?
S: If it was promulgated prior to July 1, 2013, the imposed interest should
have been 12%
M: From what time?
S: From the incurrence of the delay
M: Are you sure? Do you have a loan or forbearance of money here?
S:So from still the incurrence of the delay.
M: Are you sure? Take your seat.
Discussion
Make sure you understand how to apply the ruling in Eastern Shipping and Nacar.
In this case, it is true that this was a case for damages so there is no loan or
forbearance of money so the interest to be imposed is 6% p.a. Now, notice in the
dispositive portion the Supreme Court did not outrightly say since this was
promulgated in 2014, the imposed rate is 6% from September 7, 2006 until fully paid
which it could have done so because of the change in the legal interest rate.
Nevertheless, the SC made a distinction 6% from September 7, 2006 until hereof
because it is already a 2014 case. From finality until full satisfaction, likewise earn
6% per annum until fully paid. I ask what would be the difference if this was
promulgated prior to July 1, 2013. Where could the difference lie? The 6% percent
would still be the same, Sept. 7, until finality. But, until finality until full
Court did not outrightly say 6% from this period until fully paid because
again it applied, although it did not outrightly say that it applied the case
of Nacar, but of course, it mentioned that since July 1, 2013, the 12% p.a.
from finality of judgment has already been brought back to 6%. So please
of how to apply guidelines in Eastern Shipping as well as with the
modifications thereof as provided in the case of Nacar.
Art. 1957.
Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The
borrower may recover in accordance with the laws on usury. (n)
As we have discussed, the usury law has already been suspended and
therefore 1957 is not that relevant anymore.
Credit Transactions – First Exam Coverage 2016-2017
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Art. 1958.
In the determination of the interest, if it is payable in kind, its value
shall be appraised at the current price of the products or goods at
the time and place of payment. (n)
Alright, distinguish this from Article 1955.
Art. 1955. The obligation of a person who borrows
money shall be governed by the provisions of
Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money,
the debtor owes another thing of the same kind, quantity
and quality, even if it should change in value. In case it is
impossible to deliver the same kind, its value at the time
of the perfection of the loan shall be paid. (1754a)
In 1955, we refer to the principal thing, whether it is a loan of money or loan of
fungible thing. Article 1958 is specific as to interest. Interest which is payable
in kind and not in money. Instead of paying money, and interest is for example,
yung harvest sa farm. How would value it? At the time and place of payment.
So take note of that and again distinguish it from Article 1955.
Now, also last meeting we have emphasized the distinction between
simple and compound interest. And compound interest is what is referred
to under 1959. Please read Article 1959.
Art. 1959.
Without prejudice to the provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the contracting parties may
by stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest. (n)
Alright, so we already know the general rule: Accrued interest or interest
due and unpaid shall not earn interest.
are two exception:
(1) Mentioned in 1959, express stipulation by parties; and
(2) Referring to Article 2212
Art. 2212.
Interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may
be silent upon this point.
So we have the case of Tan vs. Court of Appeals. What happened in this case?
TAN vs. COURT OF APPEALS
FACTS:
Petitioner Antonio Tan obtained two loans from respondent Cultural Center of the Philippines
evidenced by two promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. The promissory notes provides that petitioner will pay the principal amount loaned
with an interest rate of 14% per annum from the date of the execution of the promissory note until
paid plus 3% service charge. It further provides that in case of non-payment or default in payment
upon demand, a penalty charge of 2% per month on the total amount due until paid, payable and
computed monthly shall be imposed.
Petitioner defaulted in payment but after a few partial payments, the loans were
restructured by respondent CCP to payable in five installments. However, petitioner
still failed to pay any installment. This caused respondent CCP to file a complaint
against petitioner for the collection of sum of money. Pending litigation, petitioner
offered to tender partial payments to respondent.
The trial court ordered petitioner to pay the respondent with the corresponding stipulated
irregular performance of the contract. Nevertheless, t
fees to 5%.
Petitioner appealed the decision arguing that the compounding of interest on
surcharges is not provided in the promissory note. Furthermore, he claims that there
is no legal basis for the imposition of interest on the penalty charge since the NCC
only allows imposition of interest on monetary interest but not the charging of
interest on penalty. Hence, since there is no law that allows imposition of interest on
penalties, the penalties should not earn interest. He further invoked equity.
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ISSUES:
1. W/N the imposition of interest on surcharges is provided in the promissory note.
YES
2. W/N an interest may be imposed on penalty charges. YES
3. W/N interest may accrue on the penalty or compensatory interest without
violating the provisions of Article 1959 of the NCC. YES
4. W/N the principle of equity will apply. NO
5. W/N reduction of the partial payments is applicable. YES
RULING:
First issue
The promissory note expressly provides for the imposition of both interest and penalties in
case of default on the part of the petitioner in the payment of the subject restructured loan.
The stipulated14% per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the NCC. On the other
hand, the stipulated 2% per month penalty is in the form of penalty charge which is
separate and distinct from the monetary interest on the principal of the loan.
Second issue
Penalty on delinquent loans may take different forms. In GSIS vs. CA, the SC ruled that the
NCC permits an agreement upon a penalty apart from the monetary interest. If the parties
stipulate this kind of agreement, the penalty does not include the monetary interest, and as
such the two are different and distinct from each other and may be demanded separately.
Furthermore, in Equitable Banking vs. Liwanag, it was ruled that a stipulation about
payment of an additional interest rate partakes of the nature of a penalty clause which is
sanctioned by law, more particularly under Article 2209 of the NCC.
In this case, the penalty charge of 2% per month 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. The penalty charge is
also called penalty or compensatory interest.
Third issue
Penalty clauses can be in the form of penalty or compensatory interest. Thus, the
compounding of the penalty or compensatory interest is sanctioned by and allowed
pursuant to Article 1959 of the NCC considering that:
1. There is an express stipulation in the promissory note permitting the compounding of
interest. The fifth paragraph of the said promissory note provides that: "Any interest
which may be due if not paid shall be added to the total amount when due and shall
become part thereof, the whole amount to bear interest at the maximum rate allowed
by law." Therefore, any penalty interest not paid, when due, shall earn the legal
interest of 12% per annum in the absence of express stipulation on the specific rate of
interest, as in the case at bar.
2. Article 2212 of the NCC provides that "interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent
upon this point." In the instant case, interest likewise began to run on the
penalty interest upon the filing of the complaint in court by respondent CCP on
August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner
is bound to pay the interest on the total amount of the principal, the monetary
interest and the penalty interest.
Fourth issue
Equity cannot be considered inasmuch as there is a contractual stipulation in the
promissory note whereby the petitioner expressly agreed to the compounding of interest in
case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on
the compounding of interest has the force of law between the parties and does not appear
to be inequitable or unjust, the said written stipulation should be respected.
Fifth issue
There appears to be a justification for a reduction of the penalty charge. Inasmuch as
petitioner has made partial payments which showed his good faith, a reduction of the
penalty charge from 2% per month on the total amount due, compounded monthly, until
paid can be justified under Article 1229 of the NCC. The continued monthly accrual of the
2% penalty charge on the total amount due is unconscionable inasmuch as the same
appeared to have been compounded monthly.
the note for the 2% penalty charge per month on the total amount due, compounded
monthly, for 21 years since his default in 1980, it is fair and equitable to reduce the
penalty charge to a straight 12% per annum on the total amount due starting August
28, 1986, the date of the last Statement of Account.
M: So what is the issue here?
S:So the issue in this case is whether the interest here may accrue on the
penalty or compensatory interest without violating the provisions in 1959
of the Civil Code and the court ruled yes! Under Article 1959 without
prejudice to the provisions of Article 2212, interest due and unpaid shall
not earn interest. However, the contracting parties may by stipulation
capitalize the interest due and unpaid, which as added principal, shall earn
new interest. And in this case the court ruled that penalty clauses. . .
Credit Transactions – First Exam Coverage 2016-2017
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M: No. in this case was there the express stipulation of the compounding
of interest?
S:In the promissory note it expressly provided for the imposition of both
interest and penalties in case of default on the part of the petitioner in the
payment of the restructures loan and
M: Now how about the allegation here of the petitioner that the
compounding of interest is deemed eliminated applying the ruling in the
case of NAPOCOR? How did the SC rule as to the said allegation of the
petitioner that the ruling in NAPOCOR must be applied to the instant
case? What happened in NAPOCOR? Why was it cited by petitioner? And
why should it not be applied here? Take your seat.
M: What happened in the case of NAPOCOR that was cited by petitioner here and
whether the same is applicable or not? Remember this is one of the contention of the
petitioner. Why was the case of National Power Corporation vs. National
Merchandising Corporation shall not applicable? Did you read the case or did you
read the digest which did not include the citation. Take your seat.
Discussion
Alright, what happened in this case? So whether the compounding interest on
the surcharges is proper. There are two issues: imposition of the compounding
interest as well as to the penalties. Now, do remember that the Civil Code
permits an agreement upon a penalty apart from the monetary interest. So the
agreement with regard to whether it is simple or compound interest refers to
monetary interest. We have discussed this before. With regard to penalty, as in
this case, the parties agreed to a penalty charge of 2% per month, the same is
also valid and such penalty charge is considered as a compensatory interest.
Penalty clauses in the form of penalty or compensatory interest and the
compounding of the penalty or the compensatory interest is sanctioned and
allowed as provided in Article 1959 provided it has been expressly stipulated,
also, in writing by the parties. Again you have to connect Article 1959 with the
requirement in 1956 by stipulation, of course, it must also be in writing because
we are still referring to interest here, although compounded.
In this case, there is an express stipulation in the promissory note for making
the compounding of interest. Any interest which may be due, if not paid, shall
be added to the total amount when due and shall become part thereof. The
whole amount of bear interest at the maximum rate allowed by law. Therefore,
any penalty interest not paid when due, shall earn the interest of 12% per
annum in the absence of an express stipulation of a specific rate of interest as
in the case at bar. So interest likewise began to run on the penalty interest
upon the filing of the complaint in court citing Article 2212.
With regard to the allegation as to the applicability of the NAPOCOR case wherein
the compounded interest was eliminated the SC said the same is not applicable. The
elimination of the compounded interest rate in the case of NAPOCOR was based on
equitable considerations and on the fact that the said case lasted for 25 years
through no fault of the defendant. In this case, equity cannot be considered in as
much as there is a contractual stipulation in the promissory note whereby the
petitioner expressly agreed to the compounding of interest in case of failure on his
part to pay the loan at maturity. In as much as the said stipulation on the
compounding interest has the force of law between the parties and does not appear
to be inequitable and unjust, the said written stipulation should be respected. Do take
note, however, while the agreement as to the penalty charge is 2% per month, notice
that the SC reduced it 12% p.a. starting Aug. 28, 1996. So that would be 1% penalty
charge per month. What was the reason? Because of the good faith on the part of
the debtor, there were partial payments made.
What happened in the case of Spouses Albos?
SPOUSES ALBOS vs. EMBISAN
FACTS:
Petitioner spouses Albos entered into a contract of Loan with Real Estate Mortgage
with respondent spouses Embisan in the amount of P84k payable within 90 days with
a monthly interest rate of 5%.
Petitioner requested three times for the extension of the period for the payment of the loan.
When they still failed to pay, respondents foreclosed the property. When the petitioners
failed to redeem the property, the title thereof was transferred to the respondents.
Later on, petitioners filed a complaint for the annulment of the Loan with Real Estate
Mortgage. They allege that the foreclosure sale is void. They also contend that the
imposition of a 5% compounded interest on the loan without their consent or
knowledge is fraudulent and contrary to public morals.
Respondents, on the other hand, insisted that the compounding of the interest was agreed
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upon as a condition for the third and final extension of time given for the petitioners to
make good their promise to pay.
The CA ruled that the agreement to compound the interest was just and reasonable. It added
-compliance which prompted the imposition
of a compounded interest rate and, therefore, petitioners could no longer feign ignorance of
its imposition.
ISSUE:
RULING: YES
It is undisputed that the parties have agreed and stipulated in writing for the loan to earn 5%
monthly interest. The same stipulation was carried over when the period for payment was
extended. However, by the third extension of the loan, respondent spouses decided to alter
the agreement by changing the manner of earning interest rate by compounding it.
As a result, the first requisite that there be an express stipulation for the payment of interest under
Article 1956 is not sufficiently complied with, for purposes of imposing compounded interest on the
loan. The requirement does not only entail reducing in writing the interest rate to be earned but also
the manner of earning the same, if it is to be compounded. Nevertheless, the failure to specify the
manner of earning interest does 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.
Respondents, having imposed unilaterally the compounded interest rate, had the correlative
duty of clarifying and reducing in writing how the said interest shall be earned. Having failed
to do so, the silence of the agreement on the manner of earning interest is a valid argument
for prohibiting them from charging interest at a compounded rate. Therefore, in default of
any unequivocal wording in the contract, the legal interest stipulated by the parties should
be understood to be simple, not compounded.
Nevertheless, even if there was such an agreement that interest will be compounded, the 5%
monthly rate, be it simple or compounded, written or verbal, is void for being too exorbitant, thus
running afoul of Article 1306 of the NCC. The imposition of an unconscionable rate of interest on a
money debt, even if knowingly and voluntarily assumed, is immoral and unjust.
In conclusion, the 5% interest rate imposed is nullified for being unconscionable. In
lieu thereof, a simple interest of 12% per annum should be imposed. In view of the
nullity of the interest imposed on the loan which affected the total arrearages upon
which foreclosure was based, the foreclosure of mortgage is rendered void.
M: With that, what is the issue in relation to our topic?
S:In relation to our topic, the issue here is that whether or not the
imposition of a 5% monthly interest, whether compounded or simple, is
valid. And the ruling here is No, it is unconscionable . . .
M: Before it was rules by the SC as to unconscionable, again before we
deem on whether it is in excess (excessive) or unconscionable, what is
the first thing that you would look at? What is required under the law?
S:According to the law, what is required is a written consent
M: You call that written consent. Express stipulation by the parties in
writing. Is that present here?
S:No. It was not . . .
M: So there was no express stipulation of the parties with regard to
payment of any interest rate?
S:Yes.
M: Are you sure? Was there express stipulation that there be payment of
compounding of interest?
S: Yes, there was express stipulation. However, it was not reduced into writing.
M: Are you sure? There was no express stipulation for the payment of interest . . .
of compounding the interest. It was not sufficiently complied with for the imposing of
compounded interest because what happened here? There was an
there is an ambiguity whether such compounded interest is readily agreed upon
compounded interest rate and having failed to clarify the same, they
cannot charge interest at a compounded rate. So what is the effect of that
if the stipulation is ambiguous with regard to the imposition of
compounding of interest? What did the SC say? Take your seat.
Pre-Discussion
How long was your day today? Got an exam? Got other requirements?
Hundred cases? Everybody has four hours, di man siguro five hours ang
klase niyo ngayon no?
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Discussion Proper
Alright, in this case, there was no express stipulation in writing or the imposition of
the compounding of interest. The requirement does not only entail reducing in writing
the interest rate to be earned but also the manner of earning the same, if it is to be
compounded. In default of any stipulation on the manner of earning interest, simple
interest shall accrue provided it is in writing. It appears here that there was ambiguity
in the contract. Any ambiguity in a contract whose terms are susceptible of different
interpretations must be read against the party who drafted it. Here, respondent
spouses, having imposed, unilaterally at that, the compounded interest rate, had the
correlative duty of clarifying and reducing in writing how the said interest shall be
earned. Having failed to do so, the silence of the agreement on the manner of
earning interest is a valid argument for prohibiting them from charging interest at a
compounded rate. Therefore, in default of any unequivocal wording in the contract,
the legal interest stipulated by the parties should be understood to be simple, not
compounded.
So, tingnan niyo muna bago kayo, whether you determine the interest rate is
excessive or unconscionable know first if it has complied with the requirement
that it is expressly stipulated in writing. Wag kayo mag-diretso doon, excited,
excessive, and exorbitant. Bago niyo yan I-address, tingnan niyo muna if the
same is in writing. Nevertheless, as in this case, even if there was such an
agreement that it will be compounded, the 5% monthly rate, would be
considered void for being too exorbitant. The imposition of an unconscionable
rate of interest on a money debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It has no support in law. So with that, the interest rate to be
imposed here is nullified for being unconscionable, and in fact, could not be
compounded because it was not expressly stipulated in writing. So what was
imposed is only a simple interest of 12% interest p.a.
Now, what is the effect of the reduction of the interest rate here, very important, the
nullity or it nullified the foreclosure proceedings. The SC emphasized here that a
judgment ordering a foreclosure sale is conditioned upon a finding on the correct
amount of the unpaid obligation and the failure of the debtor to pay the said amount
citing the Espiritu case. Why? Because if the computation of the creditor when it
collected from the debtor an amount, if it was compounded when
could have been reduced; the debtor could have paid the same and therefore,
the foreclosure would not have taken place. So as in this case, the extra-
judicial foreclosure is declared null and void and of no legal effect.
Art. 1960.
If the borrower pays interest when there has been no stipulation
therefor, the provisions of this Code concerning solutio indebiti, or
natural obligations, shall be applied, as the case may be. (n)
M: What is solutio indebiti?
S:Solutio indebiti is a . . . it applies when there is a payment . . . when
payment is made then there is no binding . . . (INAUDIBLE codal definition
is Art. 2154. If something is received when there is no right to demand it,
and it was unduly delivered through mistake)
M: Or as we have learned in obligations and contracts, solutio indebiti is
payment by?
Chorus: Mistake.
M: Alright, what happened in the case of Sigaan?
SIGA-AN vs. VILLANUEVA
FACTS:
Respondent Villanueva filed a complaint for sum of money against petitioner Sebastian
Siga-an. According to her, petitioner offered to loan her the amount of P540k as capital for
her business transactions with the PNO. However, the loan agreement was not reduced in
writing and there was no stipulation as to the payment of interest for the loan.
Respondent paid a total of P1.2M without any receipt issued to her. Petitioner told
her that the excess thereof will be applied as payment for the interest. After
consulting a lawyer, respondent filed a complaint against petitioner for the
reimbursement of the excess payment she made.
Petitioner insisted that there was no overpayment because respondent admitted in
the promissory note that her obligation amounted to P1.2M inclusive of interest. He
maintained that to rule in favor of respondent is tantamount to concluding that the
loan was given interest-free.
monetary debt because there was no agreement between them regarding payment of interest.
Since respondent made an excess payment through mistake, petitioner should return the
Page | 22

amount to respondent pursuant to the principle of solutio indebiti.
Petitioner appealed the decision arguing that the application of Article 1956 should
not be absolute and an exception to this is when the borrower admits that a specific
rate of interest was agreed upon such as when respondent admitted in the BP 22
cases that there was an agreed 7% rate of interest on the loan. He further
contended that the principle of solutio indebiti does not apply. Thus, he cannot be
compelled to return the alleged excess amount paid by respondent as interest.
ISSUE: W/N reimbursement is proper pursuant to the principle of solution indebiti.
RULING: YES
Monetary interest is the interest fixed by the parties as a compensation for the use or
forbearance of money. On the other hand, compensatory interest is the interest imposed
by law or by courts as penalty or indemnity for damages. The right to interest arises only
by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan
on which interest is demanded. Hence, the collection of interest without any stipulation in
writing is prohibited by law pursuant to Article 1956 of the CC.
In this case, although petitioner and respondent entered into a valid oral contract of loan,
they did not agree nor intended the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two regarding the payment of interest.
It is evident that respondent did not really consent to the payment of interest for the loan
and that she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot
be gainfully said that such promissory note pertains to an express stipulation of interest or
written agreement of interest on the loan between petitioner and respondent.
In the BP 22 cases, the respondent merely testified that petitioner ordered her to
pay interest. She did not categorically declare that she and petitioner made an
express stipulation in writing as regards payment of interest at the rate of 7%.
An interest may be imposed even in the absence of express stipulation, verbal or written,
regarding payment of interest pursuant to Article 2209 of the CC. Likewise, Article 2212 of the
CCprovides that interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this point.
Nevertheless, the interest under these two instances may be imposed only as a
penalty or damages for breach of contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In other words, the two instances
apply only to compensatory interest and not to monetary interest.
claim for monetary interest.
Further, the compensatory interest is not chargeable in the instant case because it
was not duly proven that respondent defaulted in paying the loan. Also, no interest
was due on the loan because there was no written agreement as regards payment
of interest. The principle of solutio indebiti applies where
1. A payment is made when there exists no binding relation between the payor,
who has no duty to pay, and the person who received the payment; and
2. The payment is made through mistake, and not through liberality or
some other cause.
It was duly established that respondent paid interest to petitioner without the duty to
do so because there was no express stipulation in writing to that effect. The
payment was clearly a mistake. Since petitioner received something when there
was no right to demand it, he has an obligation to return it.
-contract of solutio indebiti and not
from a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed
to be computed from the time of the extra-judicial demand up to the finality of the
decision. In addition, the interest shall become 12% per annum from the finality of
this decision up to its satisfaction.
M: So what is the effect of payment of interest wherein there was no
express stipulation in writing?
S: When there was no express stipulation in writing, under the concept of
solutio indebiti, the petitioner must return he excess amount to the respondent.
M: Now, would the return or with the obligation of the creditor to return the
excess payment is subject to interest? Based on what we have learned.
S:Yes.
M: What rate?
S: monetary interest rate of 6%.
M: Are you sure?
S:Yes.
M: 6% from what? Depending if it is?
S:6% depending if it is. . .
M: Again, only stick into consideration the ruling in the case of Eastern Shipping
and Nacar. The obligation to return excess payments. So we have discussed that
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
in one case already. It was subject to interest rate. How much was the
interest rate imposed? 6 or 12? 6 if when?
S: June 30, 2013
M: Effective July 1, 2013 but prior to that, that is considered as a
forbearance of money. So it is subject to 12% interest. Okay, thank you.
Discussion
So in the case of Sigaan, take note what is the effect if interest is collected by
the creditor even if there was no express stipulation in writing. We apply Article
1960. If the borrower pays interest when there has been no stipulation
therefor, the provisions of The Civil Code concerning solutio indebiti shall be
applied. The principle of solutio indebiti is based on the principle no one shall
unjustly enrich himself at the expense of another. It applies where a payment
is made when (1) there is no binding relation between the payor, has no duty
to pay, and the person who received the payment and (2) the payment was
made through mistake and not through the liberality or some other cause.
- Dela Paz. What happened in this case?
DELA PAZ vs. L&J DEVELOPMENT
FACTS:
Rolando lent P350k without any security to L&J Development. The loan, with no
specified maturity date, carried a 6% monthly interest.
When L&J failed to pay despite repeated demands, Rolando filed a complaint alleging that
Atty. Salonga tricked him into parting with his money without the loan transaction being
reduced into writing. He insisted that the 6% monthly interest rate could not be
unconscionable as in the first place, the interest was not imposed by the creditor but was
in fact offered by the borrower, who also dictated all the terms of the loan. He stressed that
in cases where interest rates were declared unconscionable, those meant to be protected
by such declaration are helpless borrowers which is not the case here.
L&J insisted that the 6% monthly interest rate is unconscionable and immoral.
Hence, the 12% per annum legal interest should have been applied from the time of
the constitution of the obligation. At 12% per annum interest rate, it asserted that the
amount of interest paid over and above what is due should be applied or set off to
the principal loan resulting to its complete payment.
The CA ruled that the parties failed to stipulate in writing the imposition of interest on the
loan. Hence, no interest shall be due pursuant to Article 1956 of the CC. And even if
payment of interest has been stipulated in writing, the 6% monthly interest is still outrightly
illegal and unconscionable because it is contrary to morals, if not against the law. Being
void, this cannot be ratified and may be set up by the debtor as defense. For these
reasons, Rolando cannot collect any interest even if L&J offered to pay interest.
Consequently, he has to return all the interest payments to L&J.
ISSUE:
1. W/N the 6% interest rate cannot be applied for failure of the parties to
stipulate it in writing. YES
2. W/N L&J is guilty of fraud. NO
3. W/N the 6% interest rate if stipulated in writing is unconscionable or excessive.
YES
RULING:
First issue
The lack of a written stipulation to pay interest on the loaned amount disallows a
creditor from charging monetary interest pursuant to Article 1956. It is undisputed
that the parties did not put down in writing their agreement. Thus, no interest is due.
The collection of interest without any stipulation in writing is prohibited by law.
The fact that L&J continued paying the 6% monthly interest does not mean that they
are estopped from assailing its validity. Estoppel cannot give validity to an act that is
prohibited by law or one that is against public policy.
Second issue
There was no deception on the part of L&J and Atty. Salonga. For one, despite the lack of
a document stipulating the payment of interest, L&J nevertheless devotedly paid interests
on the loan. It only stopped when it suffered from financial difficulties that prevented it from
profession, Rolando who is an architect and an educated man himself could have been a
more reasonably prudent person under the circumstances. To top it all, he admitted that he
had no prior communication with Atty. Salonga. Despite Atty. Salonga being a complete
stranger, he immediately trusted him and lent his company a significant amount. Moreover,
as the creditor, he could have requested or required that all the terms and conditions of the
loan agreement, which include the payment of interest, be put down in writing to ensure
that he and L&J are on the same page. Rolando had a choice of not acceding and to insist
that their contract be put in written form as this will favor and safeguard him as a lender.
Unfortunately, he did not.
Third issue
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on
a loan is unconscionable, regardless of who between the parties proposed the rate.
Page | 23

Time and again, it has been ruled in a plethora of cases that stipulated interest rates
of 3% per month and higher, are excessive, iniquitous, unconscionable and
exorbitant. Such stipulations are void for being contrary to morals, if not against the
law. The Court, however, stresses that these rates shall be invalidated and shall be
reduced only in cases where the terms of the loans are open-ended, and where the
interest rates are applied for an indefinite period.
In this case, there is no specified period as to the payment of the loan. Hence,
levying 6% monthly or 72% interest per annum is definitely outrageous and
inordinate. The situation that it was the debtor who insisted on the interest rate will
not exempt Rolando from a ruling that the rate is void.
M: Who should pay the Php 226,000?
S:Rolando, the creditor.
M: Can we not apply the principle of estoppel that he is now estopped or it
is now L&J Development is now estopped to question the interest rate
considering that it has already paid the interest of 6% per month before?
S: the SC cited the case of Ching v. Nicdao that the daily payments of the debtor to
the lender were considered as payment and that the interest payments . . .
M: So my question is whether the principle of estoppel is applicable or not.
S:The SC said that the estoppel cannot give validity to an act that is
prohibited by law or one that is against public policy.
M: Alright because here, clearly, the collection of interest not in writing is
prohibited by law. Now with regard to the . . . Assuming that it is expressly
stipulated in writing, would the 6% interest be considered excessive and
unconscionable?
S: The SC held that just as ruled in a plethora of cases that stipulated
interest rates of 3% per month or higher are excessive, iniquitous,
unconscionable and exorbitant.
M: Now, how would you reconcile that with the previous cases we have discussed
before that interest rates of 5 to 7 percent per month were actually upheld by the
SC? What was the guideline or ruling that was stressed here by the court? And we
have actually discussed this before. Did the SC stipulate a fix rate to be deemed
rate shall be invalidated and reduced only in cases (diba sabi natin before based on
factual circumstances of each case) in this case, where the terms of loans are open-
ended and where the interest rates are applied for an indefinite period.
here, yung 40,000 for 6 months, yung 5% per month for 2 months, were
upheld by the courts.
Now, with regard to the Php 226,000 to be returned by the creditor, would
it be subject to interest rate?
S: Yes.
M: How much?
S: 6% per annum when the . . .
M: From what time until what time?
S: From the finality of the decision until fully paid.
M: Why 6% and not 12?
S:Because this case was decided after June 30, 2013 it was decided on
September 8, 2014.
Discussion
So here, it is undisputed that the parties did not put down in writing their agreement,
so therefore, no interest is due. The collection of interest without any stipulation in
writing is prohibited by law. Moreover, estoppel is not applicable as it cannot give
validity to an act that is prohibited by law. What is prohibited? Collection of interest
which is not expressly stipulated in writing or one that is against public policy. Even
so, the interest rate of 6% per month here was deemed iniquitous, unconscionable
and exorbitant. Even if the SC noted that time and again, in a plethora of cases that
stipulated interest rates of 3% per month and higher, are excessive, iniquitous,
unconscionable, again, such statement does not mean that that is the fixed rate that
once 3% per month, excessive na. Because again the Court stresses that these
rates shall be invalidated and shall be reduced only in cases where the terms of the
loans are open-ended, and where the interest rates are applied for an indefinite
period. Moreover, the obligation of Rolando to return the excess payment s of Php
226,000 is based on solutio indebiti under Article 1960 and subject to an interest of
6% p.a. from the finality of this decision.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Why? Because this was promulgated on September 8, 2014, so we apply
the ruling in Nacar. If it was prior to the effectivity of the new legal interest
rate, it would have been? What interest rate? Eastern Shipping 12% yung
finality of judgments. So take note of this cases.
And the last Article 1961, a usurious contract, again as we have mentioned
before, usury is now legally non-existent because of its suspension.
Balgoa
November 29, 2016
Part 1 of 3
DEPOSIT
I. Deposit in General & Its Different Kinds
Title XII. DEPOSIT.
CHAPTER 1. - DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
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. (1758a)
The characteristics of a contract of deposit are the following:
(1) It is a real contract (like commodatum and mutuum) because it
is perfected by the delivery of the subject matter.
(2) It may be unilateral contract because only the depositary
(depositorio) has an obligation.
(3) But when the deposit is for compensation, the juridical relation
created becomes bilateral because it gives rise to obligations
on the part of both the depositary and depositor (depositante).
(4) It is a nominate contract because it is given a name under the law.
(5) It is principal in nature.
Two parties in a contract of deposit:
(1) The Depositary or the depositorio who is the recipient, or the
one who receives the subject of the contract of deposit
belonging to another; and
(2) the Depositor or the depositante or the giver.
Under 1962, it is not required that the depositor be the owner of the thing
and there is no transfer of ownership from the depositor to the depositary
upon the delivery of the thing.
Remember that the principal purpose of a contract of deposit is merely for
safekeeping. If safekeeping is only an accessory obligation of the
contract, that would not be considered a contract of deposit or depositum,
but some other contract. For example, a lawyer who keeps a title of land
for his client, safekeeping is merely an accessory obligation in a contract
of agency, since the lawyer represents the client in that case.
DISTINCTIONS OF A CONTRACT OF DEPOSIT AND MUTUUM
DEPOSIT MUTUUM
Principal Purpose is For consumption
safekeeping
Depositor can demand for Must wait for the expiration
the return of the thing at will of period granted to the
Debtor
Subject matter can be Money or consumable
movable or immovable things
Parties are depositor and Lender and borrower
depositary
Generally gratuitous Subject to compensation
No transfer of ownership There is transfer of
ownership
BPI vs. IAC
FACTS:
Respondent Zshornack maintained in COMTRUST a dollar savings account and a
peso current account. Respondent entrusted to COMTRUST $3000 cash for
safekeeping. The agreement was embodied in a document where COMTRUST,
thru its Assistant Manager Garcia, acknowledged the receipt of the amount.
However, despite demands, the bank refused to return the money. This caused the
respondent to file a complaint against the bank.
Page | 24
 Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

COMTRUST did not deny the authenticity and due execution of the instrument. However, it It was clearly agreed upon by the parties that these US dollars shall be received by
the bank for safekeeping. With that purpose, it is clear that they entered into a
prevailing conversion rates. It explained that the sum was disposed of in this manner:
contract of deposit. The subsequent acts of the parties also showed that the intent
1. $2000 was sold on December 29, 1975 and the peso proceeds amounting to
was the safekeeping of the dollars and to return it to Zshornack at a later time. With
P the intention to safekeep the foreign exchange and return it later to Zshornack, the
accomplished by Garcia; and

2. The remaining $1000 was sold on February 3, 1976 and the peso
proceeds amounting to P8,350 were deposited to his current account
per deposit slip also accomplished by Garcia.
The bank further argued that the contract embodied in the document is the contract of
depositum under Article 1962 which banks do not enter into. The bank alleges that
Garcia exceeded his powers when he entered into the transaction. Hence, the bank
cannot be liable under the contract, and the obligation is purely personal to Garcia.
ISSUE: W/N the parties entered into a contract of deposit.
RULING: YES
he cause of action was based on an actionable document. It was therefore incumbent
upon the bank to specifically deny under oath the due execution of the document.
However, no sworn answer denying the due execution of the document, or questioning
the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the
contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's
authority, but also the bank's power, to enter into the contract in question.
The object of the contract between the respondent and COMTRUST was foreign
exchange. Hence, the transaction was covered by CBC No. 20, which provides
that within one business day upon taking ownership or receiving payment of
foreign exchange the aforementioned persons and entities shall sell such foreign
exchange to the authorized agents of the Central Bank.
In the case at bar, the document which embodies the contract states that the $3000 was
received by the bank for safekeeping. The subsequent acts of the parties also show that
the intent of the parties was really for the bank to safely keep the dollars and to return it
to respondent at a later time upon demand. However, the parties did not intended to sell
the US dollars to the Central Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank
within one business day from receipt, is a prohibited transaction which is not authorized
by CBC No. 20, it must be considered as one which falls under the general class of
prohibited transactions. Hence, pursuant to Article 5 of the CC, it is void, having been
executed against the provisions of a mandatory/prohibitory law. More importantly, it
affords neither of the parties a cause of action against the other. 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 pursuant to Article 1411of the NCC. The only remedy is one on behalf
of the State to prosecute the parties for violating the law.
Q:Do we have a deposit or a mutuum?
A:Deposit.
Q:Who is the depositor?
Q:Who is the depositary?
Q: Why was it considered a deposit?
A: The document which embodies the contract states that the US$3,000.00
was received by the bank for safekeeping. The subsequent acts of the parties
also show that the intent of the parties was really for the bank to safely keep
the dollars and to return it to Zshornack at a later time
SC emphasized that the mere safekeeping of the greenbacks or dollars by the bank
without selling them to the Central Bank is a transaction which is not authorized. It is
considered as a void transaction. There was no intention by the parties to sell the
dollars to the Central bank. Otherwise, it will not be anymore considered as a
contract of deposit.
Take note of the effect here. Since such contract of deposit is not allowed
by law what we have here is a bank with the obligation to sell the dollars
to the central bank the contract is void and the parties are deemed in pari
delicto. Therefore, Zshornack is not allowed to recover even if he entered
into a contract of deposit because such arrangement between the
depositor and the bank is not allowed by law.
Take note also of the distinctions between deposit and mutuum.
DISTINCTIONS BETWEEN DEPOSIT AND COMMODATUM
DEPOSIT COMMODATUM
Principal Purpose is
Transfer of the use
safekeeping
May be gratuitous Essentially and always gratuitous
(Extrajudicial Deposit) Only
movable or corporeal things Both movable and immovable
may be the object
Art. 1963.
An agreement to constitute a deposit is binding, but the deposit
itself is not perfected until the delivery of the thing.
Why? A contract of deposit is a real contract perfected by delivery. If there is already
an agreement that the parties may enter into a contract of deposit and that the
property will be delivered tomorrow for safekeeping, that is still a binding
consensual contract BUT for the rules of deposit to apply, there must be delivery.
Art. 1964.
A deposit may be constituted judicially or extrajudicially.
Kinds of deposit:
(1) judicial or one which takes place when an attachment or
seizure of property in litigation is ordered (Arts. 2005-2008.); or
(2) extrajudicial (Art. 1967.) which may be
(a) voluntary or one wherein the delivery is made by the
will of the depositor or by two or more persons each
of whom believes himself entitled to the thing
deposited (Arts. 1968-1995.); or
(b) necessary or one made in compliance with a legal
obligation, or on the occasion of any calamity, or by
travelers in hotels and inns (Arts. 1996-2004.) or by
travelers with common carriers. (Arts. 1734-1735.)

Q: What is the effect now that the contract is determined to be a contract DISTINCTIONS BETWEEN JUDICIAL AND EXTRAJUDICIAL DEPOSIT
of deposit? JUDICIAL EXTRAJUDICIAL
A: Since the mere safekeeping of the greenbacks, without selling them to Through the will of the Court Through the will of the parties
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 Ensures the right of the party to a
one which falls under the general class of prohibited transactions. Hence, property or to recovery for a For custody and safekeeping
pursuant to Article 5 of the Civil Code, it is void. favourable judgment
Generally involves immovable property Movable property only
Q: What is the effect of a void contract? Always onerous Generally gratuitous, possibly onerous
A:It produces no effect and there is no corresponding obligation.
Thing returned upon order of the Court Returned upon demand on the
Q:Can Zhornack demand for damages from the bank? or when obligation has ended depositor
ct Safekeeping is made on behalf of the
of the contract, and the act constitutes a criminal offense, both parties being in
On behalf of the depositor, or --
persons who has the right
pari delicto, they shall have no cause of action against each other. . ." [Art. 1411,
New Civil Code.]

Page | 25

Art. 1965.
A deposit is a gratuitous contract, except when there is an
agreement to the contrary, or unless the depositary is engaged in
the business of storing goods.
A contract of deposit is generally gratuitous, except--
(1) Where there is contrary stipulation. The first exception is
recognized in the general rule in contracts that the parties may establish
any stipulation they may deem convenient provided it is not contrary to
law, morals, good customs, public order, or public policy.
(2) Where depositary engaged in business of storing goods.
The second exception is based on the fact that the depositary is
engaged in the business of storing goods (as in the case of a
warehouseman) for compensation and not out of pure generosity.
(3) Where property saved from destruction without knowledge of the
owner. In involuntary deposit, where property is saved from
destruction during a calamity by another person without the
knowledge of the owner, the latter is bound to pay the former
just compensation.
Art. 1966.
Only movable things may be the object of a deposit.
This means that if what we have is extrajudicial deposit, the subject property
refers to movable things. Only movables or personal property may be the
object of extrajudicial deposit, whether it is voluntary or necessary, for the
purpose of safekeeping. The possibility that the subject property may
disappear, or may be lost or stolen, is not present in a real property.
However, in judicial deposits, it may cover not only movables, but also
immovable properties.
Take note that since what is covered under extrajudicial deposits is a movable
property, they are referring to corporeal things. It does not embrace incorporeal
property since it follows the person or the owner wherever he goes.
Art. 1967.
An extrajudicial deposit is either voluntary or necessary.
Deposit is generally voluntary. It becomes necessary in the three
cases mentioned in Articles 1996 and 1998, i.e., when made in
compliance with a legal obligation, on the occasion of any calamity,
or by travelers in hotels and inns.
The deposit of goods made by travelers or passengers with
common carriers may also be regarded as necessary.
II. Voluntary Deposit
CHAPTER 2. - VOLUNTARY DEPOSIT
SECTION 1. - GENERAL PROVISIONS
Art.1968.
A voluntary deposit is that wherein the delivery is made by the will of the
depositor. A deposit may also be made by two or more persons each of whom
believes himself entitled to the thing deposited with a third person, who shall
deliver it in a proper case to the one to whom it belongs.
DISTINCTIONS BETWEEN VOLUNTARY AND NECESSARY DEPOSITS
VOLUNTARY NECESSARY
Depositor has complete freedom in Lack of free choice in the depositary in
choosing the depositary the part of the depositor
Article 1968 defines what a voluntary deposit is. Delivery is made by the
will of the depositor. He gets to choose who will be the depositary. That
choice is not present in a necessary deposit.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Under a voluntary deposit, two persons are ordinarily involved. However,
it is possible that three people may be involved in a voluntary deposit
under the 2nd sentence of 1968.Here, 2 persons are alleging that they
have a right over the movable property. Pending the settlement of their
dispute, they can agree to deposit the thing to a third person.
There may also be a case where one of the depositors is not the owner.
The action to compel the depositors to settle their conflicting claims
among themselves would be in the nature of an interpleader Whenever
conflicting claims upon the same subject matter are or may be made
against a person who claims no interest whatever in the subject matter,
or an interest which in whole or in part is not disputed by the claimants,
he may bring an action against the conflicting claimants to compel them
to interplead and litigate their several claims among themselves.
Do take note of the main distinction between a voluntary and necessary
deposit. Again, in voluntary deposit the depositor gets to choose who will
be the depositary. BUT in necessary deposits there is no choice as to
who will be the depositary.
With regard to contractual deposits, it is possible that the depositor is not
the owner thereof. For example, we can have a carrier, the agent, or the
lessee, where they may temporarily deposit goods in their possession,
even if they are not the owner thereof.
Art. 1969.
A contract of deposit may be entered into orally or in writing.
Of course, for its perfection, as mentioned in 1963, there must be
delivery. With that, we apply the general rule under article 1356, that
contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are
present. Except for the delivery of the thing, there are no other formalities
required for the existence of a valid contract of deposit.
Art. 1970.
If a person having capacity to contract accepts a deposit made by
one who is incapacitated, the former shall be subject to all the
obligations of a depositary, and may be compelled to return the
thing by the guardian, or administrator, of the person who made the
deposit, or by the latter himself if he should acquire capacity.
Under 1970, the depositary, the one who [pays] it, is capacitated. The
depositor is incapacitated. If there is mistake or he is a minor, what is the
status of the contract? Voidable. We apply 1970. The depositary is
capacitated, so therefore he is subject to the obligation of a depositary,
regardless of the incapacity of the depositor. Even if the depositor is
incapacitated the depositary must return the property to the legal
representative or to the depositor himself if he should acquire capacity.
Again, what is the effect if the depositary returns the thing to the depositor
who is still incapacitated? It will not extinguish his obligation because capacity
must be present for payment or performance to extinguish the obligation.
Here, the legal representative of the incapacitated, or the incapacitated
who has now regained his capacity can demand the return. Do take note,
however, of what you have learned under Contracts. Persons who are
capable cannot allege the incapacity of those who executed the contract.
Here, the depositary who is capacitated cannot be allowed to go to court
and allege that he cannot be subject to the obligations agreed upon
saying that the contract is voidable due to the incapacity of the depositor.
The scenario is different under 1971.
Art. 1971.
If the deposit has been made by a capacitated person with another who is
not, the depositor shall only have an action to recover the thing deposited
while it is still in the possession of the depositary, or to compel the latter to
pay him the amount by which he may have enriched or benefited himself with
the thing or its price. However, if a third person who acquired the thing acted
in bad faith, the depositor may bring an action against him for its
Page | 26

recovery.
This time the depositary is incapacitated. Remember, if the depositor is
capacitated he will be obliged to the obligations of the depository,
regardless of the incapacity of the depositary. If the depositary is
incapacitated, we apply article 1971. He does not incur the obligation of a
depositary, but (1) he shall be liable for the return of the thing deposited
while still in his possession, or (2) to pay the depositor the amount by
which he may have benefited himself with the thing or its price subject to
the right of any third person who acquired the thing in good faith.
What if the thing deposited was delivered to a third person by the incapacitated
depositary and the third person is in bad faith (in the sense that he has knowledge
of the incapacity of the depositary or he has knowledge that the thing was in the
possession of the depositary only for the purpose of safekeeping)? The depositor
may recover the thing from the third person in bad faith.
If the third person is in good faith (he has no knowledge of the incapacity of the
depositary or he has no knowledge that the thing was in the possession of the
depositary. In this case, the depositor may compel depositary to return
the thing or the amount by which he may have been benefited.
What if the incapacitated depositary destroyed the thing and he may have been
benefited? No liability. Under Obligations and Contracts, the incapacitated
depositary acquires no liability in case of loss or destruction of the thing.
CHIU
November 29, 2016
Part 2 of 3
Article 1972 states the obligation of a depositary. The primary obligation
of the depositary is to:
1.) Keep the thing safe
2.) Return it when required by the depositor
3.) With regards to safekeeping, he should not use the thing.
Article 1972.
The depositary is obliged to keep the thing safely and to return it,
when required, to the depositor, or to his heirs and successors, or to
the person who may have been designated in the contract. His
responsibility, with regard to the safekeeping and the loss of the
thing, shall be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
The degree of care required here would be the same diligence he would exercise
confidence in the good faith and trustworthiness of the depositary. In a
contract of deposit, even if it subject for compensation, the purpose should still
be for safekeeping as agreed upon. The depositary cannot excuse himself
from liability in case of loss by claiming that he exercised the same amount of
care towards the thing deposited as towards his own property. In relation to
Oblicon, the default standard of care is the diligence of a good father of a
family, unless stipulated by the parties or a different degree of diligence
required by law (Ex. Common Carriers). Take note that whether the deposit is
gratuitous or onerous, the depositary is liable if the latter did not exercise the
diligence required. However, the liability will be lesser if the contract of deposit
is gratuitous compared to an onerous one.
CHAN vs. MACEDA
FACTS:
Respondent Maceda entered into a building construction contract with Moreman
Builders. Later on, respondent purchased various construction materials and
equipment. Moreman, in turn, deposited them in the warehouse of petitioners
Wilson and Lily Chan. The deposit was free of charge.
However, Moreman failed to finish the construction as agreed upon causing
respondent to file an action for rescission and damages against Moreman. Pending
litigation, respondent ordered petitioners to return to him the construction materials
and equipment which Moreman deposited in their warehouse. Petitioners, however,
told them that Moreman already withdrew those construction materials.
The trial court ruled in favor of responding reasoning that the inventory of other materials,
aside from the steel bars and cement is found highly reliable based on first, the affidavit of
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
secondly, the inventory shows deposit of assorted materials; thirdly, that there were
items in the warehouse as shown in the balance sheet of Moreman's stock clerk.
ISSUE:
1. W/N respondent was able to prove that the construction materials and
equipment were actually in petitioners' warehouse when the demand for turn
over was made. NO
2. W/N respondent have the right to demand the release of the materials and
equipment or claim for damages. NO
RULING: BOTH NO
First issue
Under Article 1311 of the CC, 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.
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. 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.
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.
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. However, 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.
Moreover, respondent also failed to prove that there were construction materials and
equipment in petitioners' warehouse at the time he made a demand for their return.
Second issue
Considering that respondent failed to prove (1) the existence of any contract of deposit
between him and petitioners, nor between the petitioners and Moreman in his favor, and
(2) that there were construction materials in petitioners' warehouse at the time of
respondent's demand to return the same, petitioners have no corresponding obligation or
liability to respondent with respect to those construction materials. As a consequence,
respondent has no right whatsoever to claim for damages.
Discussion: In this case, Moreman deposited the construction materials in the
warehouse of Chan. During the pendency of the case between Moreman and
Maceda, Maceda ordered the petitioners to return the things that Moreman
deposited. The obligation of a depositary is to safekeep the thing deposited and to
return it to depositor. However, there was no obligation in the part of petitioners to
Maceda. When there is no privity of contract, there is likewise no obligation to speak
about and thus no cause of action arises. The records are bereft of any contract of
deposit between Chan and Maceda. Respondent is not even an heir, successor or a
person who was designated in the contract. Granting that there was a contract
between Petitioners and Moreman, it was still incumbent for respondent to prove its
existence and was executed in favor of respondent.
respondent demanded for it.
Article 1973.
Unless there is a stipulation to the contrary, the depositary cannot
deposit the thing with a third person. If deposit with a third person
is allowed, the depositary is liable for the loss if he deposited the
thing with a person who is manifestly careless or unfit. The
depositary is responsible for the negligence of his employees.
General Rule: Depositary is not allowed to deposit the thing to a 3rd
person because the basis of a contract of deposit is trust and confidence.
Exception Unless authorized by express stipulation.
The effect when the depositary allows the thing to be deposited to a 3 rd person is
that the depositary will be liable for the loss under the following circumstances:
(1) He transfers the thing deposited to a 3rd person without authority
although there is no fault or negligence of the 3 rd party;
(2) Deposits the thing to a 3rd person who is manifestly careless or
unfit even though authorized;
(3) The thing lost was due to the negligence of the employee
whether or not the employee was careless
Page | 27

The depositary will be exempted from liability when the thing is lost
without the negligence of the 3rd person whom he has allowed to deposit
the thing if such 3rd person is not manifestly careless or unfit.
Article 1974.
The depositary may change the way of the deposit if under the circumstances
he may reasonably presume that the depositor would consent to the change if
he knew of the facts of the situation. However, before the depositary may
make such change, he shall notify the depositor thereof and wait for his
decision, unless delay would cause danger.
As a rule here, the depositary may change the manner of deposit if there
are circumstances indicating that the depositor would consent to the
change. Depositary therefore, should first notify the depositor in his
decision except such delay would cause danger.
Article 1975.
The depositary holding certificates, bonds, securities or instruments which
earn interest shall be bound to collect the latter when it becomes due, and to
take such steps as may be necessary in order that the securities may
preserve their value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes.
If the thing deposited should earn interest, the additional obligation of the
depositary is to collect the interest as it becomes due as well as to take
steps to preserve the value corresponding to them.
This shall not apply for the rent of safety deposit boxes.
CA AGRO-INDUSTRIAL vs. CA
FACTS:
Petitioner CA Agro and the spouses Pugaos entered into an agreement for the purchase of two
parcels of land. They further agreed that the TCTS of the two lots shall be deposited in a safety
deposit box of any bank, which could be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full payment of the purchase price.
The parties rented a safety deposit box of respondent Security Bank. For this
purpose, both signed a contract of lease with the conditions that:
1. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.
2. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith.
After the execution of the contract, two renter's keys were given to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of
the respondent Bank. The safety deposit box has two keyholes, one for the guard
key and the other for the renter's key, and can be opened only with the use of both
keys. Petitioner claims that the certificates of title were placed inside the said box.
Later on, Aguirre (petitioner), accompanied by the Pugaos went to the respondent to open
the safety deposit box and get the certificates of title in order to effect a sale to another
buyer. However, when it was opened, the box did not contain the certificates.
As a result, the petitioner filed a case against the respondent bank alleging that
regardless of nomenclature, the contract for the rent of the safety deposit box is
actually a contract of deposit and that the respondent Bank is liable for the loss of
the certificates. It further argues that the two conditions in the contract are contrary
to law and public policy and should be declared null and void under Article 1306.
The CA ruled that the contract between the petitioner and respondent Bank is in the
nature of a contract of lease by virtue of which the petitioner and its co-renter were
given control over the safety deposit box and its contents while the Bank retained
no right to open the said box because it had neither the possession nor control over
it and its contents. As such, the contract is governed by Article 1643 of the CC.
ISSUE: W/N the contract between CA Agro and the bank is a contract of deposit.
RULING: YES but a special kind of deposit
The contract in the case at bar is a special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full and absolute possession and
control of the safety deposit box was not given to the joint renters who are 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.
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Neither could Article 1975 be invoked. The first paragraph thereof 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.
The prevailing rule is that 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 bailor and
bailee, the bailment being for hire and mutual benefit.
Note that the primary function is still found within the parameters of a contract of
deposit, the receiving in custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not independent from,
but related to or in conjunction with, this principal function.
A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306, the
parties thereto may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order or public
policy. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty
of fraud, negligence, delay or contravention of the tenor of the agreement. In the absence of any
stipulation prescribing the degree of diligence required, that of a good father of a family is to be
observed. Hence, any stipulation exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay would be void for being contrary to
law and public policy.
The two provisions are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72(a) of the General Banking Act. Both exempt the latter from
any liability except as contemplated in condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who shall be admitted to any rented safe.
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual
practice of the Bank. It is not correct to assert that the Bank has neither the possession
nor control of the contents of the box since in fact, the safety deposit box itself is located
in its premises and is under its absolute control; moreover, the respondent Bank keeps
the guard key to the said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this guard key. Clearly then,
the conditions in the contract are void and ineffective.
In the instant case, the respondent Bank's exoneration cannot be based on or proceed from a
characterization of the impugned contract as a contract of lease, but rather on the fact that no
competent proof was 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
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.
SIA vs. COURT OF APPEALS
FACTS:
Petitioner Sia rented the safety deposit box of respondent Security Bank where he
placed his collection of stamps. However, his stamp collection were damaged due
to floods in 1985 and 1986. Petitioner claimed damages against the bank.
The bank denied liability for the damaged stamps collection on the bases of
paragraphs 9 and 13 of their Contract of Lease.
1. The bank alleged that by reason of the lease under paragraph 9, its liability is
limited to the exercise of the diligence to prevent the opening of the safe by any
person other than the Renter, his authorized agent or legal representative; and
2. Under paragraph 13, the Bank is not a depository of the contents of the
safe and it has neither the possession nor the control of the same. The
Bank has no interest whatsoever in said contents, except as herein
provided, and it assumes absolutely no liability in connection therewith.
The bank also contended that its contract with the plaintiff was one of lease and not of deposit
and, therefore, governed by the lease agreement which should be the applicable law.
fortuitous event which is beyond its obligation to notify the petitioner since there was no
ISSUE:
W/N a contract of deposit exists between the parties to hold the bank liable for the
damaged stamp collections.
RULING: YES
The SC cited the case of CA Agro. It observed that the two provisions in the contract of
lease are strikingly familiar as well as the limitation on the scope of the exercise of due
diligence by the banks which would seem that the bank is not bound to exercise diligence
of any kind at all. Hence, as held in the case of CA Agro, such provisions must be stricken
down for being contrary to law and public policy as they are meant to exempt the
respondent 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, respondent cannot take refuge under the said conditions.
Page | 28

It is true that the damage to the stamp collection was due to a fortuitous event. However,
the respondent failed to consider that it was guilty of negligence. The bank was aware of
the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where
the safe deposit box was located. In view thereof, it should have notified the petitioner in
order that the box could have been opened to retrieve the stamps, thus saving the same
from further deterioration and loss. In this respect, it failed to exercise the reasonable care
and prudence expected of a good father of a family, thereby becoming a party to the
aggravation of the injury or loss. Accordingly, the fourth characteristic of a fortuitous event
is absent pursuant to Article 1170 of the CC which provides that those who in the
performance of their obligation are guilty of fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are liable for damages.
The destruction or loss of the stamp collection which was the product of 27 years of patience and
diligence caused the petitioner pecuniary loss; hence, he must be compensated therefor.
Discussion: (In comparing the cases of Sia and Agro): A safety deposit box in a bank
is a special kind of deposit and not an ordinary one. It is not an ordinary contract
because the full control and the possession of the safety box is within the premises
of the bank and the renters cannot open it at will. This can be seen when the bank
has records on who can access it and the bank is in possession of a guard key for
which without it, the renter cannot open the safety deposit box. Going back to Art
1975 paragraph 2, this sentence would mean that the safety deposit boxes is not
governed by the rules on deposit and even in the rules on lease. The SC adopted
from an American jurisprudence which essentially states that the relationship
between a bank, with regards to a safety deposit box and its
-bailee.
In the case of Agro, there was no showing that the bank was made aware of any
agreement between Agro and the spouses. As to the bank, it only had knowledge as
to who is allowed to access the safety deposit box, which was an authorized
representatives of Agro or the spouses. The bank here, was not held liable since it
did not know that both the representative and one of the spouses should be present
in opening the box. Take note that there is no change of relation even if
liability is void, it does not automatically mean that the bank is the one liable.
The seeking for relief should prove that the bank committed fraud, negligent or
was made aware of the agreement between Agro and the spouses.
In the case of Sia, the bank was held liable because the safety deposit box which
kept the stamps was in the lower portion of the premises. There was a flood
because at the first instance that it had happened, it should have informed Sia of the
said flood since the bank cannot open the safety deposit box without the presence
of the depositor. The bank here was clearly guilty of negligence. So, any stipulation
exempting the bank from liability is not binding. The bank was aware of the flood,
knew that the flood waters affected the room where the safety deposit boxes were
located, it should have notified Sia about the flood and could have saved it from
further deterioration or loss. The bank failed to exercise the reasonable care and
prudence expected of a good father of a family hence it is liable for the deterioration
or loss. The obligor must be free from any participation in the aggravation or the
injury resulting to the creditor.
DEIPARINE
Novemver 29,2016
Part 3 of 3
Art. 1976.
Unless there is a stipulation to the contrary, the depositary may
commingle grain or other articles of the same kind and quality, in
which case the various depositors shall own or have a
proportionate interest in the mass. (n)
of the depositary? To return the exact same thing deposited.
Article 1976 is an exception wherein the thing deposited can now be
commingled with the same kind and quality.
Now, GENERAL RULE, the depositary may commingle grain or other articles
of the same kind and quality. Various depositors of the commingled goods
shall own the entire mass in common in proportionate shares.
For example, you have a warehouse, there are 100 sacks of rice. You
deposited there 10. If there is a fortuitous event, there is a loss, each
depositor shall be entitled to such portion of the entire mass. (The
depositors will suffer the loss proportionately.) However, if the parties
stipulate otherwise, commingling is not allowed.
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Again, this is another exception. If subject of the deposit is grain or other articles of
the same kind and quality, pwede ihalo, unless otherwise stipulated. If it is allowed
to be commingled, in the absence of stipulation, what will be returned by
deposit.
If it is not of the same kind and quality, the duty of the depositary is to
keep them separate or at least identifiable. He must return to the
depositor the identical article delivered.
Art. 1977.
The depositary cannot make use of the thing deposited without the
express permission of the depositor. Otherwise, he shall be liable for
damages. However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose. (1767a)
Deposit is for safekeeping and not for use. Unauthorized use may make the
depositary liable for damages. BUT, the depositary may use the thing even without
the express permission of the depositor? When? If such use is necessary for the
preservation of the thing. Of course, it is limited for that purpose only.
What property requires use for its preservation? Dba, sasakayan.
Paandarin mo yan. Wag mo lang i-drive from Davao to Panabo.
What else? Appliances. Paandarin mo yan para hindi madali masira.
Now, what happened in the case of Baron vs David.
BARON vs. DAVID
FACTS:
Respondent David is engaged in running a rice mill where petitioners Silvestra
Baron and Guillermo Baron placed a quantity of their palay. Silvestra deposited
1000 cavans and 24 kilos while Guillermo placed 1,800 cavans and 43 kilos.
On January 17, 1921, a fire occurred that destroyed the mill and its contents. As a
result, petitioner sought the recovery of the value of the palay. Petitioner alleged
that the palay which they delivered was sold to respondent.
Respondent countered that the palay was merely deposited to him subject to
future withdrawal by the depositors or subject to some future sale which was
never effected by virtue of the fire in January 1921. As a consequence of the fire,
he is relieved from all responsibility.
ISSUE: W/N a contract of deposit exists between the parties.
RULING: NO (the SC said that it could be commodatum or mutuum under
Article 1768 but actually it is a contract of sale since the plaintiffs are
seeking the proceeds of their palay)
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 case, petitioner
understanding that the respondent was at liberty to convert it into rice and dispose of it at his
pleasure. The mill was actively running during the entire season thus it was impossible to kee
palay was mixed with that of others.
Considering the fact that the defendant milled and thereafter sold the plaintiffs'
palay prior to the date of the fire, he should be bound to account for its value, and
his liability was not extinguished by the occurrence of the fire.
necessary that they should be able to establish that the plaintiffs' palay was delivered in
the character of a sale, and prove that the delivery to the defendant was made in the
character of deposit, the Supreme Court held that for even supposing that the palay may
have been delivered in the character of deposit, subject to future sale or withdrawal at
plaintiffs' election, nevertheless if it was understood that the defendant might mill the
palay and he has in fact appropriated it to his own use, he is of course bound to account
for its value under article 1768 of the Civil Code.
have to determine what is the obligation here of the petitioner.
The agreement was that it can be converted. So, to convert the palay into
rice. What will be the obligation of the defendant? It would be the
payment of the palay.
Page | 29

Was there a conversion of contract of deposit to sale? Or was there really a
contract of sale? Was the purpose really for safekeeping in the first place?
DISCUSSION:
So here, the understanding between the parties is that the defendant was
at liberty to convert the palay that was delivered, into rice, and dispose of
it at his pleasure. It was not really for safekeeping.
segregated, and it was
to the fire. Considering that the defendant had milled and sold the palay prior to the
fire, he is bound to account for its value and his liability was not extinguished by the
occurrence of the fire. Value---money. Genus never perishes.
Even supposing that the palay had been delivered in the character of a
deposit subject to future sale, nevertheless, it was understood that the
defendant might mill the palay and he has in fact appropriated it to his
own use, he is bound to account for its value.
Art. 1978.
When the depositary has permission to use the thing deposited, the contract
loses the concept of a deposit and becomes a loan or commodatum, except
where safekeeping is still the principal purpose of the contract.
The permission shall not be presumed, and its existence must be
proved. (1768a)
So here, there was no intention for safekeeping, even if it was a deposit.
xxx inaudible xxx
So here (referring to Baron case), the obligation is not extinguished by
the happening of a fortuitous event, because AGAIN, MONEY is the
subject matter. It is a generic thing. Genus never perishes.
Now, do take note, if the things deposited is not consumable, and the
depositary is allowed to use, it will now lose its character as a deposit and
become commodatum despite being denominated as a deposit.
Unless if safekeeping was the principal purpose of the contract.
If what was deposited is a money or consumable thing, and the
depositary is allowed to use, it will result into consumption. It will convert
the contract to a simple loan or mutuum.
However, if the safekeeping is still the principal purpose, it will now be
considered as an irregular deposit, which will be discussed under Article
1980. But before that, we have the case of Javellana vs Lim.
JAVELLANA vs. LIM
FACTS:
Defendants Lim and plaintiff Javellana entered into a contract of deposit whereby
the latter deposited, without interest, the sum of P2686 to the former.
subject interest.
Later on, the plaintiff sued the defendants to collect the amount deposited
together with its interest.
ISSUE: W/N there was a contract of deposit.
RULING: NO
deposited, the contract loses the character of a deposit and becomes a loan or bailment.
In this case, when defendant Lim went to the office of the plaintiff asking for an extension of one
year neither himself nor the other defendant were able to return the amount deposited, for which
reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a
matter of fact, he did not have in his possession the amount deposited, he having made use of
the same in his business and for his own profit; and the plaintiff, by granting them the extension,
evidently confirmed the express permission previously given to use and dispose of the amount
stated as having been deposited.
For this reason it must be understood that the debtors were lawfully authorized to make use of
the amount deposited, which they have done, as subsequent shown when asking for an
extension of the time for the return thereof, inasmuch as, acknowledging that they have
subjected the letter, their creditor, to losses and damages for not complying with what had
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been stipulated, and being conscious that they had used, for their own profit and gain,
the money that they received apparently as a deposit, they engaged to pay interest to
the creditor from the date named until the time when the refund should be made. Such
conduct on the part of the debtors is unquestionable evidence that the transaction
entered into between the interested parties was not a deposit, but a real contract of loan.
of deposit?
Can we say that at the renewal of the contract there was conversion to loan? No,
petitioner received the money by virtue of the loan and they were
authorized to dispose it.
Why is it the SC considered it as a loan? What was the obligation of Lim here?
thing that was given. Alright!
DISCUSSION:
So here, remember, the parties initially referred to the agreement as a
deposit and even the obligation referred to as the obligation to return.
But actually, the subsequent contract entered into show that the true
intention from the very beginning was a real loan of money with interest.
Notwithstanding that they referred to it as a contract of deposit.
There was no obligation to return the exact same thing of which the amount
deposited consisted. And they could have accomplished the return, agreed
upon by the delivery of a sum equal to the one received by them.
So take note of the distinction of a deposit and a loan.
Debtors are lawfully authorized to make use of the amount deposited,
which they have done. The creditor, by granting them the extension,
confirmed the express permission previously given them to use and
dispose of the amount stated as having been deposited.
There was no renewal of the deposit converted into loan because again the
defendants from the very beginning received the said amount by virtue of a loan
under the name of a deposit. But again it is actually a contract of loan. Always look
at the intention of the parties and not at the nomenclature that are used.
Art. 1979.
The depositary is liable for the loss of the thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may
have been authorized to use the same. (n)
So, general rule, the depositary is not liable for loss during a fortuitous event,
without his fault. We have 4 exceptions under 1979: so stipulated, he uses the
thing without permission, he delays its return and he allows others to use it,
even though he himself may have been authorized to use the same.
Relate that to Article 1973.
Art. 1973.
Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person.
If deposit with a third person is allowed, the depositary is
liable for the loss if he deposited the thing with a person
who is manifestly careless or unfit. The depositary is
responsible for the negligence of his employees. (n)
Art. 1980.
Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan. (n)
Page | 30

Fixed, savings, and current deposits. For your part, your purpose is for
safekeeping. But for the bank, the bank can use the money you have
deposited for their ordinary transactions.
Remember, how does the bank earn profit from the money you
deposited? diba magpahiram sila ng pera. Loan.
that the bank is allowed to use YOUR money.
In other words, the money you have in the bank, sino ang creditor? Ikaw.
Ang Bangko ang debtor.
Alright, we have the case of Rogers vs Smith.
ROGERS vs. SMITH
FACTS:
Petitioner Rogers and respondent Smith entered into a contract. In consideration
for the execution of the contract, petitioner delivered 12k pesos in gold to
respondent. During this time, the silver was worth more than 2k pesos in gold.
They further stipulated that it shall bear an interest rate of 8% per annum. In turn,
petitioner executed a document acknowledging receipt of the said amount.
The respondent remitted the interest to petitioner every three months in silver.
Petitioner received these payments in silver without any protest until in February
1904 when, by virtue of an American law, the gold standard had been introduced
in the Philippines thereby increasing the value of gold.
According to petitioner, by reason of the new law, he was entitled to receive his interest
in gold since when he delivered the money to the respondent it was delivered in gold
coin. He claims that the contract between them is a deposit and not a loan. As such, the
ownership over the gold coins remained to him and was never transferred to
respondent. As a result, respondent was bound to return to him the identical coin which
they had received. He further argued that, while the contract is not a deposit in the strict
sense of the word, the document evidences an "irregular deposit."
ISSUE: W/N a contract of loan exists between the parties.
RULING: YES
Although petitioner repeatedly calls it a deposit, the contract between him and
respondent is a contract of loan. Furthermore, he cannot maintain his claim of
deposit in view of the fact that the instrument provides for the payment of interest.
There are three points of difference between a loan and an irregular deposit
according to Manresa.
1. In an irregular deposit the only benefit is that which accrues to the
depositor, while in loan the essential cause for the transaction is the
necessity of the borrower. The contract in question does not fulfill this
requirement. It is very apparent that the contract was not for the sole
benefit of petitioner but it was for the benefit of both parties. The
benefit which respondent received was the use of the money while the
benefit which petitioner received was the interest of his money.
2. In an irregular deposit the depositor has a preference over other
creditors in the distribution of the debtor's property
3. In an irregular deposit, the depositor can demand the return of the
article at any time, while a lender is bound by the 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
the document that the petitioner 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.
In conclusion, the document in question is evidence of an ordinary loan and
created between the plaintiff and defendants the relation of debtor and creditor.
DISCUSSION:
So here, the SC held that the contract was a contract of loan even if the
parties constantly refer to it as a contract of deposit.
Now, take note the subject of the loan was $12,000 payable on the last
day of the six months after presentation; and subsequently payment of
interest. There was no obligation to return the exact identical thing.
It could not have been an irregular deposit. Take note of the distinctions
that were emphasized here.
(1) In an irregular deposit, the only benefit is that which accrues to
the depositor; while in a loan, the essential cause is the
necessity of the borrower.
The contract here does not fulfill this requirement of an irregular
deposit. It is very apparent that is was not for the sole benefit of
Rogers. Like any other loan of money, it was for the benefit of both
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parties. Smith here benefited through the use of the money;
while Rogers received the interest of his money.
(2) In irregular deposit, the depositor can demand the return of the
article at any time, while a lender is bound by the provisions of the
contract and cannot seek restitution until the time for payment.
So plaintiff cannot demand his money at any time.
(3) in an irregular deposit the depositor has a preference over
other creditors in the distribution of the debtor's property.
So here the document in question would show that the
intention of the parties is really that of an ordinary loan and the
relationship of the parties is that of a debtor and creditor.
SABRIDO
December 1, 2016
Part 1 of 1
COMPAÑIA AGRICOLA vs. NEPOMUCENO
FACTS:
Mariano Velasco & Co. was a registered partnership which the court declared insolvent.
As a result, the Compañia Agricola filed a petition asking the court to declare it as a
preferred creditor. Petitioner alleged that it delivered P10k to Mariano Velasco & Co.
They agreed that the amount will earn an interest at the rate of 6% per annum until its
full payment for the term of three months. According to petitioner, the said transaction
was at least a contract of irregular deposit. As proof thereof, petitioner presented a
receipt in writing and the testimony of the manager of the respondent partnership.
ISSUE: W/N the claim of petitioner should be considered a deposit.
RULING: NO but it was a contract of loan
The claim of the petitioner should not be considered a deposit and a preferred claim. The P10k
delivered by petitioner to Mariano Velasco and Co. cannot de regarded as a technical deposit.
As ruled in the case of Javellana, the receipt in writing is actually a real contract of loan of
money with interest notwithstanding the fact that in the original document executed by the
debtors it is called a deposit. Not only this, they engaged to pay interest to the creditor from the
date named until the time when the refund should be made.
In the case of Rogers vs. Smith, Manresa made three distinctions between an irregular
deposit and a loan which are not present in the present case. For one, the transaction in
question was clearly not for the sole benefit of the Compania Agricola but 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.
Why is this a contract of loan and not an irregular deposit? That is exactly the point
of this case. Using the distinction mentioned in the case, why is this not deposit?
First, in an irregular deposit, the only benefit is that which accrues to the depositor,
while in a loan the essential cause for the transaction is the necessity of the
borrower. What else? In an irregular deposit, the depositor can demand the return of
the thing at any time while the lender is bound by the provisions of the contract and
cannot seek restitution until the time of payment as provided in the contract has
arisen. In this case, the purpose is not for the sole benefit of Compania Agricola. It
was for the benefit of both parties. Neither can the alleged depositor demand the
return of the thing until the expiration of the term of three months. So here, we have
a contract of loan without preference, which is one of the distinctions which was also
mentioned in the case of Rogers v. Smith. So an irregular deposit enjoys preference
while a simple loan does not.
What about in the case of BPI v. Court of Appeals, Roel?
BPI vs. COURT OF APPEALS
FACTS:
Respondents Eastern Plywood Corporation and Lim hold one joint account with the
Commercial Bank. Mariano Velasco opened a joint checking account with Lim in the
amount of P120k with funds withdrawn from the account of Eastern and/or Lim.
Later on, Velasco died leaving an outstanding balance of P662,522.87 in the account.
Lim then transferred one-half of the balance amount to the bank account of Eastern.
Thereafter, Eastern obtained a loan with interest at 14% per annum from COMTRUST evidenced
by a promissory note. In addition, Eastern and Lim, and COMTRUST signed a Holdout Agreement
in the joint name of Lim and Velasco. In the meantime, the court in the proceeding for the
settlement of the esta the whole remaining
balance in the joint account of Velasco and Lim.
Later on, petitioner filed a case against Lim and Eastern demanding payment of
the promissory note. Lim and Eastern, in turn, filed a counterclaim against BPI for
the return of the balance in the joint account subject of the Holdout Agreement
and the interests thereon after deducting the amount due on the promissory note.
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Petitioner contended that the Holdout Agreement was subject to a suspensive condition
interests to that amount are established as a result of a final and definitive judicial
action or a settlement between and among the contesting parties thereto.
Respondents denied that a suspensive condition exists since the money deposited in
the joint account of Velasco and Lim came from Eastern and Lim's own account who are
the rightful owners thereof. They further contended that by virtue of the Holdout
Agreement, petitioner has the duty to debit the account of the respondent under the
promissory note to set off the loan even though the same has no fixed maturity.
ISSUE: W/N BPI can demand payment of the loan despite the existence of the
Holdout Agreement.
RULING: YES
It is clear from the Holdout Agreement that BPI had every right to demand from
respondents the payment of the promissory note. However, it has no duty to apply
or to set off the deposit to the payment of a loan for such is merely a privilege
which the bank has the option to exercise.
The Holdout Agreement further provides that petitioner is not precluded from demanding
payment from Eastern and from instituting an action to recover payment of the loan,
which are alternative actions. Hence, when petitioner demanded payment of the debt
directly from Eastern and Lim, clearly it had opted not to exercise its right to apply part of
the deposit subject of the Holdout Agreement to the payment of the promissory note.
The "suspensive condition" theory of the petitioner is, therefore, untenable.
Important ruling
Pursuant to Article 1980, 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.
The account was proved and established to belong to Eastern even if it was deposited in
the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to
withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay
Eastern simply because it already allowed the heirs of Velasco to withdraw the whole
balance of the account. The petitioner should not have allowed such withdrawal because
it had admitted in the Holdout Agreement the questioned ownership of the money
deposited in the account really belongs to Eastern.
Moreover, the order of the court in the estate proceeding merely authorized the
heirs of Velasco to withdraw the account. BPI was not specifically ordered to
release the account to the said heirs.
Because the ownership of the deposit remained undetermined, BPI, as the debtor
with respect thereto, 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. The payment made by BPI to the heirs of Velasco, even if done in
good faith, did not extinguish its obligation to the true depositor, Eastern.
In conclusion, respondents are ordered to pay the petitioner the promissory note
for P73k with interest at 14% per annum on the principal, computed from the date
the loan was obtained (August 1978) until payment and 12% per annum on the
interest which had accrued up to the date of the filing of the complaint, computed
from that date until payment pursuant to Article 2212 of the CC. The award of
P331,264.44 in favor of the private respondents shall bear interest at the rate of
12% per annum computed from the filing of the counterclaim.
So here, the Supreme Court mentioned Article 1980.
Art. 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan. (n)
Bank deposits are in the nature of irregular deposits. They are really
loans. We apply the rule on loans because they earn interest and the
relationship is that of a creditor-debtor. The deposit under the questioned
account is an ordinary bank deposit and it was payable on the demand of
the depositor- in this instance, Eastern.
What happened in the case of Metrobank?
METROBANK vs. BA FINANCE
FACTS:
Bitanga obtained a loan from respondent BA Finance. As a security thereof,
Bitanga mortgaged his car. In the contract, Bitanga has the duty to insure the
mortgaged car and that in case of loss shall be payable to BA Finance. Bitanga
insured the car to Malayan Insurance Co.
The car was stolen causing Malayan Insurance to issue a check as payment thereof. However,
without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check
to his account with the Asianbank Corporation, which is now merged with petitioner Metrobank.
Bitanga subsequently withdrew the entire proceeds of the
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
check.
Upon knowledge thereof, respondent BA Finance demanded the payment of the
value of the check from Asianbank. However, Asianbank failed to do so. This
caused respondent to file a complaint against Asianbank and Bitanga alleging that
it is entitled to the entire proceeds of the check.
Petitioner denied liability alleging that BA Finance has no cause of action since it
has no legal right and title to the check considering that the check was not
delivered to BA Finance. The trial court ruled that Asianbank was negligent in
allowing Bitanga to deposit the check to his account and to withdraw the proceeds
thereof without his co-payee BA Finance having either indorsed it or authorized
him to indorse it in its behalf. It further ordered Asianbank and Bitanga jointly and
severally liable to BA Finance in the sum of P224,500 with interest thereon at the
rate of 12% from the date of the demand (September 25, 1992) until fully paid.
ISSUES:
1. W/N petitioner is liable to respondent BA Finance. YES
2. W/N the 12% interest rate is proper. NO
RULING:
First issue
In the present case, Bitanga is authorized to indorse the check as the drawer
names him as one of the payees. Moreover, his signature is not a forgery nor has
he or anyone forged the signature of the representative of BA Finance
Corporation. No unauthorized indorsement appears on the check.
Clearly, petitioner, through its employee, was negligent when it allowed the
deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly
ignoring the fact that the check did not carry the indorsement of BA Finance.
As has been repeatedly emphasized, the banking business is imbued with public
interest such that the highest degree of diligence and highest standards of
integrity and performance are expected of banks in order to maintain the trust and
confidence of the public in general in the banking sector.
Second issue
check is not proper. The obligation in this case did not arise out of a loan or forbearance of
money, goods or credit. Hence, Article 1980 of the CC does not apply since the nature of the
relationship between BA Finance and petitioner is one of agency whereby petitioner, as
collecting bank, is to collect for BA Finance the corresponding proceeds from the check.
Not being a loan or forbearance of money, the interest should be 6% per annum
computed from the date of extrajudicial demand on September 25, 1992 until
finality of judgment; and 12% per annum from finality of judgment until payment,
conformably with Eastern Shipping Lines vs. Court of Appeals.
The Supreme Court emphasized that what we have here is a contract of Agency.
The bank is a collecting bank to collect for the BA finance for the corresponding
proceeds of the check. As to the diligence, the same degree of diligence is required
from the bank with that in a contract of agency and even in a simple deposit.
With regard to the application interest, the Supreme Court emphasized
that Article 1980 does not apply because not being a loan or forbearance
of money, we have a contract of agency, and the interest should be 6%
per annum from the date of the extrajudicial demand and 12% per annum
from the finality of judgment.
What happened in the case of Reyes v. Court of Appeals?
REYES vs. COURT OF APPEALS
FACTS:
In view of the 20th Asian Racing Conference to be held in Sydney, Australia,
petitioner Reyes applied to respondent Far East Bank for a foreign exchange
demand draft in Australian dollars.
At first, the application was denied because respondent did not have an Australian dollar
account in any bank in Sydney. Nevertheless, petitioner asked if there could be a way
for respondent bank to accommodate PRCI's urgent need to remit Australian dollars to
Sydney. The respondent bank then informed them of a roundabout way of effecting the
requested remittance to Sydney. Respondent explained that it would draw a demand
draft against Westpac Bank in Sydney and have the latter reimburse itself from the US
dollar account of the respondent in Westpac Bank in New York. Petitioner agreed to
such arrangement in order to effect the urgent transfer of Australian dollars
The respondent bank approved the said application of PRCI and issued Foreign
Exchange Demand Draft. However, upon due presentment of the foreign
exchange demand draft, it was dishonored because the respondent bank has no
deposit dollar account with the drawee Wespac-Sydney.
Later on, when petitioners went to Sydney to attend the said racing conference, they could not
register because the foreign exchange demand draft for their registration fee had been
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dishonored. As a result, petitioners filed a case against the respondent bank.
The CA ruled that there is no basis to hold the respondent bank liable for
damages for the reason that the had done what an ordinary prudent person is
required to do in the particular situation, although petitioners expect the Bank to
have done more. The Bank having done everything necessary or usual in the
ordinary course of banking transaction, cannot be held liable for any
embarrassment and corresponding damage that petitioners may have incurred.
The petitioners contend that due to the fiduciary nature of the relationship between the
respondent bank and its clients, the respondent should have exercised a higher degree
of diligence than that expected of an ordinary prudent person in the handling of its affairs
as in the case at bar. The appellate court, according to petitioners, erred in applying the
standard of diligence of an ordinary prudent person only.
ISSUE: W/N the bank is liable for failure its to exercise higher degree of diligence
as required.
RULING: NO
In Philippine Bank of Commerce vs. CA, it was ruled that 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. However, such applies only to cases where banks act under their fiduciary
capacity, that is, as depositary of the deposits of their depositors. 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.
In the present case, the 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 foreign exchange demand draft.
The case at bar does not involve the handling of petitioners' deposit, if any, with
the respondent bank. Instead, the relationship involved was that of a buyer and
seller, between the respondent bank as the seller of the subject foreign exchange
demand draft, and PRCI as the buyer, with the 20 th Asian Racing conference
Secretariat in Sydney as the payee thereof. The said foreign exchange demand
draft was intended for the payment of the registration fees of the petitioners as
delegates of the PRCI to the 20th Asian Racing Conference in Sydney.
The evidence shows that the respondent bank did everything within its power to prevent
the dishonor of the subject foreign exchange demand draft. The erroneous reading of its
cable message to Westpac-Sydney by an employee of the Westpac-Sydney could not
have been foreseen by the respondent bank. If there was mistake committed by
Westpac-Sydney in decoding the cable message which caused the Bank's message to
be sent to the wrong department, the mistake was Westpac's, not the Bank's.
In conclusion, the dishonor of the subject foreign exchange demand draft is not
attributable to any fault of the respondent bank, whereas the petitioners are estopped
from denying the said arrangement or procedure, which have been a long standing
practice in banking to facilitate international commercial transactions.
The degree of diligence required of banks is more than that of a diligence of a good
father of a family where the fiduciary relationship with their depositors is concerned
in the case for example of irregular deposits. The banks are duty-bound to treat
the deposit accounts of their depositor with the highest degree of care. Again, this
applies only where the banks act under their fiduciary capacity-that is as depositary
of the deposits of their depositors. The same high degree of diligence is not
expected to be exercised by banks in their commercial transactions that do not
involve the fiduciary relationship with their depositor.
While it may be true that the spouses Reyes are depositors of the
respondent bank- they have money in the bank, the transactions involved
here between the bank and Reyes does not involve the fiduciary
relationship. Therefore, the respondent bank is not required to exert more
than the diligence of a good father of a family because what is involved
here is the sale and issuance of the subject Foreign Exchange Demand
Draft. The relationship here is just that of a buyer and seller. So the bank
is not required to exercise extraordinary diligence. The bank here was
able to prove that they exercised ordinary diligence and was in good faith.
Daphny, how about in the case of Guingona?
GUINGONA vs. CITY FISCAL
FACTS:
PR David, together with his sister, invested and deposited with the Nation Savings
and Loan Association (NSLA) certain amounts of money. However, the bank
was placed under receivership on March 1981. Nevertheless, upon the
request of PR David, petitioners y note in
assumed appeared to be bigger than the original claim because of the added interest and
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
When petitioners failed to pay the remaining balance of the investment, PR David
charged petitioners Guingona with estafa and for violation of the regulations on foreign
exchange transactions. PR alleged that petitioners misappropriated the said amounts.
Petitioners denied any criminal liability. They alleged that because NSLA was
urgently in need of funds and at David's insistence, his investments were treated
as special- accounts with interest above the legal rate. In other words, the
transactions between David and NSLA were simple loans which is a purely civil
obligation. Being such, the case should be dismissed for lack of jurisdiction.
The City Fiscal of Manila denied the motion to dismiss.
ISSUE: W/N a contract of deposit exists between the parties to hold petitioners
liable for estafa.
RULING: NO but a contract of loan or mutuum exists
jurisdiction over the charge of estafa.
When PR David invested his money with the bank, the contract that was perfected
was a contract of simple loan or mutuum and not a contract of deposit. Thus,
pursuant to Article 1980, it should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are not true deposits but are
considered simple loans and, as such, are not preferred credits.
Furthermore, 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.
Hence, the relationship between PR David and the NSLS 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.
While the Bank has the obligation to return the amount deposited, it has 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(1)(b) of the RPC, but it will only
give rise to civil liability over which the City Fiscal has no jurisdiction.
Even assuming that the failure of the bank to pay the time and savings deposits of
PR David would constitute estafa, novation resulted when petitioners assumed the
obligation of the bank to PR David thereby converting the original trust relation
between the bank and PR David into an ordinary debtor-creditor relation between
the petitioners and David. Consequently, the failure of the bank or petitioners to
pay the deposits of PR David would not constitute a breach of trust but would
merely be a failure to pay the obligation as a debtor.
What is the nature of the contract involved when David put his money in the Time
deposit? It was considered as a simple loan or Mutuum and not of a contract of
deposit for the purpose of safekeeping wherein the bank is expected to return the
exact same thing that he deposited in the bank. Again the Supreme Court
emphasized that current savings ad deposits in banks and similar institutions are
not true deposit. They are really loans because they earn interest. Failure of the
bank to honor the deposits is failure of the bank to pay its obligation as a debtor.
Remember the effect of a loan transfer of the ownership of the thing upon
delivery. While the bank has the obligation to return the amount deposited, it
has no obligation to return the very same money that was deposited. Failure of
the bank to return the amount deposited will not amount to Estafa through
misappropriation. It will only give rise to civil liability. In order for a person to be
held liable for Estafa through misappropriation, it must be proven that he has
the obligation to return the same money or personal property that he received.
Petitioners in this case have no such obligation to return the same money.
Dorothy, how about in the case of Province of Bataan?
PROVINCE OF BATAAN vs. VILLAFUERTE
FACTS:
A real property referred as the BASECO property was advertised for auction sale. No
bidder vied for the property thus the Province of Bataan acquired ownership thereof.
Later on, the Province of Bataan entered into a 10-year contract of lease with 7-R Port
Services for a minimum escalating annual rental of P18M. Another contract of lease was
also entered into between the Province of Bataan and Marina Port Services.
However, the auction sale of the BASECO property was subsequently declared
null and void by court order. The Province of Bataan was ordered to reconvey the
property to the Republic of the Philippines including all the proceeds and/or the
fruits that they have or may have receive from the property.
Not only this, upon learning of the lease contracts entered into by the petitioner, the PCGG
Page | 33

filed a petition to enjoin petitioner from collecting rental payments from the lessees.
The trial court granted the petition and the Province of Bataan ordered to remit the
lease rentals it may receive from the 7-R Port Services and the Marina Port
Services and to deposit it with the Land Bank of the Philippines in the name
and/or account of the Court to be held in escrow for the person or persons, natural
or juridical, who may be finally adjudged lawfully entitled thereto.
The Province of Bataan appealed the decision arguing that the trial court, or any
court for that matter, is not authorized to issue such escrow order, whether as a
provisional or permanent remedy absent any legal basis.
ISSUE: W/N the order to deposit in escrow the rental payments pertaining to the
Province of Bataan is erroneous.
RULING: NO
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.
While originally, the doctrine of escrow applied only to deeds by way of grant, or
instruments for the conveyance of land, under modern theories of law, the term
escrow is not limited in its application to deeds, but is applied to the deposit of any
written instrument with a third person.
Particular instruments which have been held to be the subject of an escrow include
bonds or covenants, deeds, mortgages, oil and gas leases, contracts for the sale of land
or for the purchase of personal property, corporate stocks and stock subscriptions,
promissory notes or other commercial paper, insurance applications and policies,
contracts for the settlement of will-contest cases, indentures of apprenticeship, receipts
assigning concessions and discontinuances and releases of causes of action.
Moreover, it is no longer open to question that money may be delivered in escrow.
Applying the foregoing principles and considering the peculiarities of the instant case, 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.
nd
resolve the issues raised in the principal suit. Stated differently, the deposit of the rentals in
escrow with the bank, in the name of the lower court, is only an incident in the main
proceeding. In conclusion, the escrow orders of the lower court were upheld.
I included this case so you can familiarize yourselves with the term Escrow. As
defined, an escrow is a written instrument which by its terms imports a legal
obligation and which is deposited by the grantor (so what you have here is a
contract of deposit), promisor, or obligor, or his agent with a stranger or third party,
to be kept by the depositary (so its for the purpose of safekeeping) until the
performance of a condition or the happening of a certain event (take note of that.
That is one of the distinctions of an escrow arrangement), and then to be delivered
over to the grantee, promisee, or obligee. However, escrow is not limited in its
application to deeds, but is applied to the deposit of any written instrument with a
third person and money may be delivered to an escrow as well. So what takes place
here? Money subject to escrow for the purposes of safekeeping. But this cannot be
considered as an irregular deposit because here there is a specific purpose to which
it will be kept by the depositary. The arrangement for escrow, we have here the bank
again with the condition that it will be released upon the happening of a certain
condition or event. Just take note of this escrow case.
FULGAR
December 6, 2016
Part 1 of 3
We emphasized the relevance of Article 1980, that when it comes to
fixed, savings, and current deposits of money in banks and similar
institutions, they shall be governed by the provisions concerning simple
loan and not of the civil code provisions governing deposits.
Art. 1981.
When the thing deposited is delivered closed and sealed, the depositary
must return it in the same condition, and he shall be liable for damages
should the seal or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
As regards the value of the thing deposited, the statement of the depositor
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
shall be accepted, when the forcible opening is imputable to the
depositary, should there be no proof to the contrary. However, the
courts may pass upon the credibility of the depositor with respect
to the value claimed by him.
When the seal or lock is broken, with or without the depositary's
fault, he shall keep the secret of the deposit. (1769a)
Art. 1982.
When it becomes necessary to open a locked box or receptacle, the
depositary is presumed authorized to do so, if the key has been delivered to
him; or when the instructions of the depositor as regards the deposit cannot
be executed without opening the box or receptacle. (n)
These articles include additional obligations on the part of the depositary
in relation to the nature of what has been delivered.
If the thing delivered is closed and sealed, the depositary has the obligation to
the return the thing exactly - closed and sealed. However, if the seal or lock
should be broken, he should be liable for damages and there is a presumption
that he is at fault, that he is the reason why the seal or lock has been broken,
and he has to show proof that he is not be liable for damages.
Also, Article 1981, if the seal or lock is broken, regardless of whether the
depositary is at fault or not, the depositary has the obligation to keep sacred
the deposit. This obligations are emphasized, otherwise there's a violation of
the trust reposed on the depositary. Remember, he must respect the secrets
the depositors desires to keep and guard, and this intention is because of the
nature of the thing delivered - it is sealed and locked.
As regards to the value deposited, statements of the value by the depositor
shall be accepted. But this is only a prima facie evidence, as provided in the
third paragraph of Article 1981: the courts may pass upon the credibility of the
statements made by the depositor with regard to the value claimed by him.
Under Article 1982, when can the depositary be allowed to open a locked
box or receptacle delivered to him for safety? Only in two instances:
(a) a presumed authority which can arise if, for example, a key is
given to him, or
(b) through necessity, when there were instructions given by the
depositor and they cannot be executed without opening the box.
Art. 1983.
The thing deposited shall be returned with all its products,
accessories and accessions.
Should the deposit consist of money, the provisions relative to
agents in article 1896 shall be applied to the depositary. (1770)
So who owns the products, accessories, and accessions of specific things?
The owner. So the depositor, as the owner, or the representative or who
represents the owner, he (the owner) should also be entitled to the return of
the products, accessories, and accessions. These are consequences of
ownership. If what was deposited was not money, the depositary has no right
to make use of thereof, otherwise it's not a contract of deposit anymore, and
there is no liability to pay interest. Recall Article 1978. Otherwise, if it involves
money, we apply 1980 - irregular deposit. Likewise, you can also apply the
rules with regard to agency under Article 1896.
Now, if the depositary is in delay or has used the money, he will be liable
for interest as indemnity. He owes interest on the sums he has applied to
his own use, from the day on which he did so and those which he still
owes after the extinguishment of the deposit. In other words, no need for
demand for you to be liable for interest.
Art. 1984.
The depositary cannot demand that the depositor prove his
ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen
and who its true owner is, he must advise the latter of the deposit.
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If the owner, in spite of such information, does not claim it within
the period of one month, the depositary shall be relieved of all
responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing
has not been lawfully acquired by the depositor, the former may
return the same. (1771a)
Ownership on the part of the depositor is not required for the validity of the
deposit. Likewise, the depositary cannot require the depositor to prove that he
owns the thing delivered because ownership is not required. Otherwise, this
may open the door to bad faith on the part of the depositary. Why? Because of
the pretense of requiring proof of ownership. Di ko to ibalik sayo unless you
show proof that you really own this subject matter. Then he can use that as a
reason to retain or keep the thing, which again has no basis because
ownership is not required for the perfection of the contract of deposit.
Article 1984 covers an instance wherein the depositary discovers that the
thing has been stolen and he knows who is thetrue owner. This imposes an
obligation upon him, provided this two requisites are present. What are the
steps he should take if he has knowledge that the thing in his possession for
safekeeping has been stolen, and he knows who the true owner is?
First, he must advise the true owner that he is in possession of the thing
subject of the contract of deposit, and he will give the true owner a period
of one month to claim. The true owner has one month to claim. This 30
day period is for the protection of the depositary.
The true owner can recover through other legal process. What do you mean
by that? If naglampas na yung 30 days form the time the true owner was
informed that the depositary was in the possession of the stolen thing, the
depositary can return the same to the depositor without any obligation to the
true owner. The true owner cannot go after the depositary ("habulin kita for
damages. Bakit gi release mo doon sa depositor knowing that it has been
stolen.") The defense of the depositary "i informed you, but within 30 days you
failed to claim. Under the law I am authorized to release it to the depositor."
On the part of the true owner, he has other legal means to go after the
depositor to recover the thing that was stolen.
Also provided under 1984, last paragraph, if the depositary has reasonable
grounds that the thing has not been lawfully acquired by the depositor, in other
words, it may be stolen, but he does not know who the true owner is. What is
the obligation here on the part of the depositary? He can return the thing to the
depositor. Also notice, he has no obligation to report it to the police, unless of
course, if by itself, it is an illegal substance. Kunwari drugs diay to. So I think
it's best if i-report niya. Pero if the thing itself is lawfully required, the
depositary has Article 1984 as his defense.
The problem here may arise wherein it is not covered by 1984. What if he
knows who is the true owner, and he informs the true owner thereof that he
can claim within 30 days. Kaso bago pa nag- lapse ng 30 days, the depositor
now demands for the return of the thing. Can the depositary refuse to return it
to the depositor on the ground na "you'll wait for 30 days diba?" since he
claims that he is the true owner. There's actually no provision in the civil code
regarding this instance. But if you look at the nature of the contract of deposit,
if the depositor demands the return of the thing, the depositary has the
obligation to return the thing to the depositor. Otherwise, it would be contrary
to the nature of a contract of deposit. You can also use it as a defense as with
regard to the true owner that the true owner has other legal remedies available
under the law, as long as here, ang depensa lang naman on the party of the
depositary, is that he has performed his duties as a depositary. And under the
rules on depositary, he has the obligation to return it upon the demand of the
depositor, and in a succeeding article, even if it subject to a period.
Art. 1985.
When there are two or more depositors, if they are not solidary, and the
thing admits of division, each one cannot demand more than his share.
When there is solidarity or the thing does not admit of division, the
provisions of Articles 1212 and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to one of the depositors,
the depositary shall return it only to the person designated. (1772a)
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Recall your obligations and contracts. Divisibility or indivisibility of a thing is
different from an obligation being solidary. That is also emphasized here in
1985. If the thing deposited is divisible, for example sacks of rice, and the
depositors are not solidary, in other words there is no stipulation that they will
be solidarily liable, there is no law which provides that they are solidarily liable,
and the obligations does not provide for solidarity, what would be the effect?
The depositary can only demand his proportionate share. But what if the
obligation is solidary, or that there is a stipulation that the obligation is solidary;
or the thing deposited is not divisible, like a car. So obligation solidary or thing
deposited not divisible. Article 1985 tells us that the rule on active solidarity
shall apply, so you have article 1212, 1214.
However, even if the depositors are solidary and it is stipulated that the
depositary is bound to return it to a specific or designated depositor, the
depositary has to return the subject matter to him, although that person
has not made any demand for its return.
For example, Pedro and Juan deposited a car. Indivisible thing. They
have stipulated that Pedro is the one who is entitled to the return of the
thing. If Juan made the demand, is the depositary obligated to return the
thing to Juan? No, because of the stipulation. If there is a stipulation that
the thing should be returned to one of the depositors, the depositary shall
return it only to the person designated.
Art. 1986.
If the depositor should lose his capacity to contract after having made
the deposit, the thing cannot be returned except to the persons who may
have the administration of his property and rights. (1773)
Do not confuse this with Article 1970. In Article 1970, at the time the contract
of deposit was perfected, the depositor was already capacitated. As we
learned in Article 1970, the property must be returned to his, guardian,
administrator, or to him, the depositor, should he acquire capacity.
Article 1986 tells us that at the time of perfection, both were capacitated.
Subsequently, the depositor loses his capacity. 1986 imposes an obligation to
the depositary that the subject of the deposit must be returned to his legal
representative. Article 1986 does not state that the obligation is suspended.
So the obligation of the depositary continues plus the obligation that he return
it to the legal representative of the depositor who has already lost his capacity.
Art. 1987.
If at the time the deposit was made a place was designated for the return
of the thing, the depositary must take the thing deposited to such place;
but the expenses for transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the same
place where the deposit was made, provided that there was no
malice on the part of the depositary. (1774)
Compare this with Article 1251, the general rules with regard to -----
obligations. Of course, if you have a stipulation that will govern in the absence
of stipulation you have to consider whether the subject matter is a determinate
thing or not. If it is a determinate thing, then it should be where the thing was
at that time the contract was perfected; which is different here because it
states that even if it should not be the same place where the original deposit
was made, where the thing deposited might be.
Art. 1988.
The thing deposited must be returned to the depositor upon demand, even
though a specified period or time for such return may have been fixed.
This provision shall not apply when the thing is judicially attached while
in the depositary's possession, or should he have been notified of the
opposition of a third person to the return or the removal of the thing
deposited. In these cases, the depositary must immediately inform the
depositor of the attachment or opposition. (1775)
This is the article referred to earlier, wherein the depositary has the obligation to
return the thing upon demand of the depositor. Remember the general rule: the
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depositor can demand the return of the thing deposited at will whether a
period has been stipulated or not. Whenever a period is agreed to, the same is
for the benefit of the depositor, but it may be validly waived by him. But what if
the deposit is subject to compensation. For example, the deposit is good for
one year and then you have agreed that the compensation that the depositary
is entitled to is 1000/month. If the depositor demands for the return of the
thing, the depositor has the obligation to pay the depositary for the whole
period agreed upon. So bayaran niya yung 1000 per month for the whole year,
that was the agreement. The depositary is entitled to the compensation
corresponding to the entire period agreed upon.
The exception to the general rule: if the thing is judicially attached while in the
depositary's possession, of course he cannot return it upon demand of the
depositor. Otherwise, the depositary would be disobeying the judicial order of
he court. Another instance would be if he is notified of the opposition of a third
person to the return or the removal of the thing deposited. So the depositary
should only be authorized in case of conflicting claims. This is an exception to
which the depositary can continue to retain the thing if there is a third person
opposing the right of the depositor as to the return of the thing. The better step
to be taken on the part of the depositary is to file before the court for an action
for interpleader. This third person, magsamok samok lang. What could happen
is that the depositary can go and file before the court and file an action for
interpleader, so that it will be resolved. Otherwise, forever niya ihold, to the
detriment of the depositor, just because of a third person presupposing it
without the filing of any case. So for the depository to be safe, it is better that
the conflicting claims be submitted to the court to which the depositary can file
an action for an interpleader.
Art. 1989.
Unless the deposit is for a valuable consideration, the depositary who may
have justifiable reasons for not keeping the thing deposited may, even before
the time designated, return it to the depositor; and if the latter should refuse
to receive it, the depositary may secure its consignation from the court.
Sa 1988, the depositor demands the return of the thing. Sa 1989, the
depositary will be the one who will initiate the return of thing. With that, you
determine if the deposit is gratuitous or subject to compensation. If it is
gratuitous, the depositary may return the thing deposited notwithstanding that
a period has been fixed, but it must be for a justifiable reason. If the depositor
refuses to receive the thing, the depositary, as his remedy, can deposit the
thing to a judicial authority, through an action for consignation. When there is
refusal to accept delivery, consignation may be resorted to.
Kasi gratuitous ito, so the law allows the depositary kasi wala namang
ginabayad sa kanyan ang depositor, provided it is for a justifiable reason.
If it is for a valuable consideration, the depositary has no right to return
the thing deposited before the expiration of the time designated, even if
he suffers inconvenience. Because form the very beginning, he already
knew of the nature and that it will be subject to compensation.
Art. 1990.
If the depositary by force majeure or government order loses the
thing and receives money or another thing in its place, he shall
deliver the sum or other thing to the depositor.
Article 1972 - the obligation of the depositary to return the exact same thing that was
deposited. Article 1990 provides the exception to which the thing was lost by force
majeure or by government order. Of course the obligation of the depositary will be
extinguished. However, if the depositary receives money or other things, he has the
obligation to deliver the same to the depositor. If for example, it s not that often that
a personal property may be expropriated, but for example it is expropriated so may
just compensation. The just compensation should be given to the depositor. That is
the obligation under 1990. Otherwise, the depositary would unjustly enrich himself
at the expense of the depositor.
Art. 1991.
The depositor's heir who in good faith may have sold the thing
which he did not know was deposited, shall only be bound to return
the price he may have received or to assign his right of action
against the buyer in case the price has not been paid him.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
The first thing you should take note here is that this refers to the depositary's
heirs, not the depositor's heirs, because were talking about possession, and
who is in possession? The depositary. So namatay yung depositary, and one
of his heirs noticed that there is this thing in the possession or among the
things of the depositary. So the depositary dies, the object is left to the heirs
and then the heirs in good faith, sells it to another person. What is the
obligation of the heirs? He must return the price received or if wala pa na-
collect, assign to the depositor to collect the same if it has not been paid, and
what is to be collected is the purchase price and not the value of the thing.
However, if the heir is in bad faith, to which he acknowledges that the object is
the subject matter of this deposit, the heir could be liable for damages. If the
heir had knowledge of the contract of deposit, any --- or appropriation of the
thing deposited constitutes estafa. Kasi alam man niya that it is subject to the
safekeeping, but despite of that he sells the same to another person.
The articles enumerate the obligations of the depositary. 1972 - to keep the things
safely, to return the thing as a general rule upon demand. 1989 - if gratuitous the
depositary can return the same provided there is justifiable reason, the depositary
likewise has the obligation to return the thing plus products, accessories, and
accession; if the thing is lost through a force majeure or government order and he
receives money or another thing in its place, the depositary has the obligation to
deliver the sum or the thing to the depositor. Where to be delivered? By agreement,
in the absence thereof, where the thing is deposited; obligation not to deposit to a
third person unless authorized; obligation under 1974 to change the way of deposit;
the earning of interest which we distinguished from the rent of safety deposit boxes;
the obligation not to comingle things if stipulated or if the things are of different kind
and quality; obligation not to make use of the thing deposited unless authorized;
liability for loss in cases of fortuitous events - what are those instances? Those are
exceptions to the general rule; obligations when the thing deposited is closed or
sealed; obligation to pay interest to sum converted to personal use if deposit
consists of money; obligation to advise the true owner when discovered that the
thing deposited was stolen.
On the part of the depositor what are his general obligations? To pay
expenses for preservation, and to pay for losses incurred by the
depositary due to the character of the thing deposited.
SECTION 3. - OBLIGATIONS OF THE DEPOSITOR
Art. 1992.
If the deposit is gratuitous, the depositor is obliged to reimburse the
depositary for the expenses he may have incurred for the
preservation of the thing deposited.
This applies to a gratuitous deposit. The rule here is based on equity. Why?
Becasue the depositor would have incurred expenses for preservation just the
same. Otherwise, the depositor would unjustly enrich himself at the expense
of the depositary. This is different from commodatum, Article 1941. In Article
1992, the depositor is the one obliged to reimburse the depositary. It covers
the right to reimbursement from the depositor, covers all expenses for
preservation, whether ordinary or extraordinary, as long as it is for necessary
expenses. Recall commodatum, you have to distinguish whether it is ordinary
or extraordinary. If it is extraordinary, is it for preservation of the thing or did it
arise from the use of the thing. In Article 1992, walang distinction. However, it
is also clear that with regard to useful expenses or charges for pure luxury or
pure pleasure, these are not governed.
What if the deposit is for compensation? The general rule is that the expenses
shall be borne by the depositary. Why? Because these expenses are deemed
already included in the consideration agreed upon by the parties. Of course,
as an exception, stipulation between the parties.
NARCA
December 6, 2016
Part 2 of 3
Article 1993.
The depositor shall reimburse the depositary for any loss arising from the
character of the thing deposited, unless at the time of the constitution of the
deposit the former was not aware of, or was not expected to know the
dangerous character of the thing, or unless he notified the depositary of the
same, or the latter was aware of it without advice from the depositor. (n)
The general is that a depositary must be reimburse for loss suffered by him because
of the character of thing deposited. It is possible that the thing deposited
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 Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

is flammable or may chemical bah. So if there is a loss suffered by the depositary, the heirs have a right to terminate the deposit even before the expiration
the depositor shall be held liable. However, take note of the four exceptions: of the term.
(1) If at the time of the constitution of the deposit, the depositor
was not aware of the character of thing deposited.
(2) The depositor was not expected to know the dangerous
character of the thing. III. NECESSARY DEPOSIT
(3) The depositary was notified of the character of the thing.
(4) The depositary was aware of it even if without any advice from We continue with the NECESSARY DEPOSIT.
the depositor.
Sabi natin 2 types of necessary deposit: VOLUNTARY and NECESSARY.
Those four instances the depositary cannot seek reimbursement from
any loss suffered.
CHAPTER 3. - NECESSARY DEPOSIT
Art. 1996.
Art. 1994. A deposit is necessary:
The depositary may retain the thing in pledge until the full payment (1) When it is made in compliance with a legal obligation;
of what may be due him by reason of the deposit. (1780) (2) When it takes place on the occasion of any calamity, such as fire,
storm, flood, pillage, shipwreck, or other similar events. (1781a)
What is placed here is a pledge created by law wherein the thing subject
of the deposit is retained by the depositary and serves as security for the
payment of what may due to the depositary by reason of the deposit.
Art. 1997.
The deposit referred to in No. 1 of the preceding article shall be
Like for example, the depositor shall be liable for the expenses for
governed by the provisions of the law establishing it, and in case of
preservation if the deposit is gratuitous. So meron na incur si depositary
its deficiency, by the rules on voluntary deposit.
pwede siyang magpareimburse, hindi man magbayad si depositor so
pwede i-hold or i-retain as a form of security. The deposit mentioned in No. 2 of the preceding article shall be regulated by
the provisions concerning voluntary deposit and by Article 2168. (1782)
What if may utang si depositor kay depositary? Pwede ba i-hold ni depositary ang
thing subject of a deposit? NO because it can only be retained by the depositary for
Remember the distinction between VOLUNTARY and NECESSARY deposit. Sa
whatever may be due to him by reason of the deposit not for any other reason.
VOLUNTARY deposit, the depositor has the free will to choose who will be the
depositary but such freedom is absent in this contract of NECESSARY deposit.
Another thing that you should take note of, what if the subject of the thing
Articles 1996 enumerates TWO NECESSARY DEPOSITS.
is already returned to the depositor but the depositor did not reimburse
the depositary and sabihin natin may iba pang gamit in the possession of
The first one:
the depositary. Again ibang obligation naman yun or ibang nature
sa..ahh..not in relation to the demand for reimbursment. So it cannot be
The second one:
retained by the depositary at that instance, so the thing to be retained
must be by virtue of the expenses in relation to the same contract of fire, storm, flood, pillage, shipwreck, or othe
MISERABLE DEPOSIT because you have there acts of calamity.
deposit. Not from other kind of obligation. Not from other kind of deposit.
Other instances are those which are covered in Art.1998, travelers in
motels and inns. And the other one is Art.1754 so transportation law na
Art. 1995. A deposit its extinguished:
yan, passengers with common carriers.
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either
the depositor or the depositary. (n)
Art. 1998.
The deposit of effects made by the travellers in hotels or inns shall also be
Take this list is not exclusive for there are other causes of regarded as necessary. The keepers of hotels or inns shall be responsible for
extinguishment of a deposit: them as depositaries, provided that notice was given to them, or to their
(1) Return of the thing
employees, of the effects brought by the guests and that, on the part of the
(2) Novation
latter, they take the precautions which said hotel-keepers or their substitutes
(3) Merger
advised relative to the care and vigilance of their effects. (1783)
(4) Expiration of the term
(5) Fulfillment of the resolutory condition
Art. 1754.
The provisions of Articles 1733 to 1753 shall apply to the
However, recall COMPENSATION cannot be a ground for the
passenger's baggage which is not in his personal
extinguishment of a deposit as provided under Article 1287.
custody or in that of his employee. As to other baggage,
the rules in Articles 1998 and 2000 to 2003 concerning
Art. 1287.
the responsibility of hotel-keepers shall be applicable.
Compensation shall not be proper when one of the debts
arises from a depositum or from the obligations of a
depositary or of a bailee in commodatum. The first one:
Legal obligations under Art.1996 (1), this shall be governed primarily by
Neither can compensation be set up against a the law, upon default we apply the rules on voluntary deposit.
creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of What are the instances of legal obligation?
paragraph 2 of Article 301. (1200a) (a) Art. 538. It is a Property provision. Judicial deposit of a thing
the possession of which is being disputed in a litigation by two
Now if the deposit is gratuitous, death of either depositor or depositary or more persons.
extinguishes the deposit. Again noh, because here the depositary is not
obliged to continue with the contract of deposit. Art. 538.
Possession as a fact cannot be recognized at the same time in
But if it is compensation, death of either party will not extinguish the deposit as the two different personalities except in the cases of co-possession.

deposit is onerous and not personal as compared to a gratuitous deposit to which Should a question arise regarding the fact of possession, the
present possessor shall be preferred; if there are two possessors,
the rights and obligations may be transmitted to the respective heirs BUT
the one longer in possession; if the dates

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of the possession are the same, the one who presents a title;
and if all these conditions are equal, the thing shall be placed
in judicial deposit pending determination of its possession or
ownership through proper proceedings. (445)
(b) Deposit with a bank or public institutions of public bonds or
instruments of credit payable to order or bearer given.
Art. 586.
Should the usufructuary fail to give security in the cases
in which he is bound to give it, the owner may demand
that the immovables be placed under administration, that
the movables be sold, that the public bonds, instruments
of credit payable to order or to bearer be converted into
registered certificates or deposited in a bank or public
institution, and that the capital or sums in cash and the
proceeds of the sale of the movable property be invested
in safe securities.
The interest on the proceeds of the sale of the
movables and that on public securities and bonds,
and the proceeds of the property placed under
administration, shall belong to the usufructuary.
Furthermore, the owner may, if he so prefers, until the
usufructuary gives security or is excused from so doing,
retain in his possession the property in usufruct as
administrator, subject to the obligation to deliver to the
usufructuary the net proceeds thereof, after deducting
the sums which may be agreed upon or judicially allowed
him for such administration. (494)
(c) So under pledge na ito. Deposit of a thing pledged when a
creditor uses the same without authority of the owner or
misuses it without any other way.
Art. 2104.
The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it
be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be
used by the creditor but only for that purpose. (1870a)
(d) Another those suits required under the Rules of Court.
(e) Those constituted to guarantee contracts with the government
wherein the deposit arises from an obligation of public or
administrative character.
The second one:
The deposit here takes place by accident or fortuitous event. The law imposes on
the recipient the obligations of a bailee. Here, remember, the depositor does not yet
choose who will save his things in case there is fortuitous event. The more
immediate object here is to save the property rather than its safekeeping.
The owner of the house has left for a vacation. There is fire. The neighbor rescues
some of the things of the former who is in vacation. In the meantime na rescue niya,
hindi naman possession yan dahil binigay sa kanya or i-deniliver sa kanya for
safekeeping but again more to save the property and necessary deposit takes place
because if ____ pending the return of his neighbor.
You have here a quasi-bailment, voluntary bailment, or involuntary
deposit, as mentioned earlier miserable deposit or deposit of miserable,
causal relation between the calamity and the constitution of the deposit.
So governing rules we have rules on voluntary deposit as well as Art.
2168 (Quasi-Contract)
Art. 2186.
Every owner of a motor vehicle shall file with the proper
government office a bond executed by a government-
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
controlled corporation or office, to answer for damages
to third persons. The amount of the bond and other
terms shall be fixed by the competent public official. (n)
So we already know that. Otherwise there will be unjust enrichment.
We have Articles 1998 and 1999.
Art. 1998.
The deposit of effects made by the travellers 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. (1783)
Art. 1999.
The hotel-keeper is liable for the vehicles, animals and articles which
have been introduced or placed in the annexes of the hotel. (n)
So you have here the phrase travellers and guests there are used
synonymously. It refers to transients not borders. Non-transients including
borders are not governed under the rules on necessary deposit but rather
on the rules on contracts of lease.
speaking there may be difference but di naman masyado inaaply when we refer to a
hotel we have a building of many rooms, for overnight accommodation for transients
and several floors and elevators usually with a large open lobby.
If you are talking about an INN, it is a public house where the lodging of travelers for
compensation and until capacity is ___ public entertainment essentially.
And then you have also MOTEL. Saan galing ang word na motel?
Motorist hotel yan siya. (HAHAHA). What makes it a motorist hotel? 2
floors lang yan siya tapos sa labas grahe na. (Expert si maam..Hmmm). it
is an establishment that provides for lodging and parking in which the
rooms are accessible from an outdoor parking area.
So general rule, motel keepers are held responsible as depositaries with regard to
the effect of their guest. This is the THIRD KIND OF NECESSARY DEPOSIT.
Provided these TWO REQUISITES are present:
(1) They have been previously informed about the effect brought
by the guests; and
(2) The guests have taken precautions prescribed regarding safekeeping.
DURBAN APARTMENTS vs. PIONEER
FACTS:
See arrived and checked in at the City Garden Hotel. Justimbaste, who was a valet of the
for him in front of the hotel. Justimbaste then issued him a valet parking customers
claim stub.
However, the Vitara owned by See was carnapped while it was parked unattended
at the parking area of Equitable Bank. Upon payment of insurance to See, Pioneer
subrogated See and filed a complaint against petitioner.
Pioneer argued that the Vitara was lost due to the negligence of petitioner. It alleged
that a contract of necessary deposit existed between the insured See and petitioner.
Petitioner denied any liability arguing that it was See who requested a parking attendant to
park the Vitara at any available parking space, and it was parked at the Equitable Bank
parking area, which was within Sees view. Furthermore, it alleged that valet parking
services are provided by the hotel for the convenience of its customers looking for a
parking space near the hotel premises. But, it does not include responsibility for any losses
or damages to motor vehicles and its accessories in the parking.
ISSUE: W/N a contract of deposit exists between the parties to render petitioner
liable for the loss of the car.
RULING: YES
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of
deposit and a necessary deposit made by persons in hotels or inns.
In the present case, the insured See deposited his vehicle for safekeeping with petitioner,
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through the latters employee, Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus,
the contract of deposit was perfected from Sees delivery, when he handed over to Justimbaste the
keys to his vehicle, which Justimbaste received with the obligation of safely keeping and returning
it. Ultimately, petitioner is liable for the loss of Sees vehicle even if the car was not parked within
the premises of petitioner. The Equitable PCI Bank parking area became an annex of City Garden
Hotel when the management of the said bank allowed the parking of the vehicles of hotel guests
thereat in the evening after banking hours.
Here there was a contract of necessary deposit between See and the petitioner.
This was (protected?) when the Vitara was entrusted to the employee of Durban
Apartments. And as an exchange, a parking stub was given to him. Even if the
Vitara was not parked within the vicinity or not in the garage of the City Garden
Hotel, the Equitable PCI Bank parking area became an annex of the City Garden
Hotel when the management of the bank allowed the parking of hotetl guests in the
evening after banking hours. There was already an arrangement and this was
considered as an extension of the premises of the City garden Hotel. See deposited
his vehicle for safekeeping. A stub was issued. The contract of deposit is perfected
when he handed the keys of his vehicle to which Durban Apartments is liable for the
loss of the vehicle.
So again noh this would include the liabilities not limited to the effect loss or
damaged in the hotel rooms but include those loss or damages in hotel annexes
practice it is considered as annex of the City Garden Hotel
Take note of the succeeding Articles 2000, 2001 and 2002.
Art. 2000.
The responsibility referred to in the two preceding articles shall
include the loss of, or injury to the personal property of the guests
caused by the servants or employees of the keepers of hotels or
inns as well as strangers; but not that which may proceed from any
force majeure. The fact that travellers are constrained to rely on the
vigilance of the keeper of the hotels or inns shall be considered in
determining the degree of care required of him. (1784a)
Art. 2001.
The act of a thief or robber, who has entered the hotel is not
deemed force majeure, unless it is done with the use of arms or
through an irresistible force. (n)
Art. 2002.
The hotel-keeper is not liable for compensation if the loss is due to
the acts of the guest, his family, servants or visitors, or if the loss
arises from the character of the things brought into the hotel. (n)
These three provisions emphasize that a hotel business is a business that is
imbued with public interest to which the hotel keepers may be held liable with
regard to the care that to be exercised to the belongings to their guests.
To summarize these three provisions we categorize it in two ways when
is the hotel keepers liable regardless of the amount of care exercised:
(1) If there is loss or injury caused by the servants or employees
as well as by strangers (under Art. 2000). Do remember,
however, the requirement under Art. 1998, provided that notice
has been given and proper precautions taken.
(2) Another instance, when the loss is caused by the act of a thief or
robber done without the use of arms or irresistible force. Because
here the hotel keeper is apparently negligent (Art. 2001).
When is the hotel keepers not liable? We have three instances:
(1) When the loss or injuries caused by force majeure, thief or robbery by
a stranger, not hotel keeper servant or employee, WITH THE
USE OF ARMS OR IRRESISTIBLE FORCE (Art. 2001) unless
he is guilty of fault or negligence in failing to provide against the
loss or injury in this case. (Art. 2000)
(2) Loss is due to the acts of the guests, his family servants or
visitors. (Art 2002)
(3) When the loss arises from the character of the things brought
into the hotel. (Art. 2002)
Art. 2003.
The hotel-keeper cannot free himself from responsibility by posting notices
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
to the effect that he is not liable for the articles brought by the
guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in articles 1998
to 2001 is suppressed or diminished shall be void. (n)
Despite numerous instances you go to a hotel. The hotel will not be liable. Please
take care of your belongings. Hotel will not be liable in case of loss thereof. That
posting made by the hotel would not be binding as to the guests because it is very
clear under Art. 2003, any stipulation shall be considered void. Hotel keepers cannot
free himself from responsibility just because he posts such notices. This is similar
with the rule with regard to common carriers where the law does not allow to
dispense with or limit the responsibility by stipulation or by posting of notices.
Hotel keepers or inn keepers as depositaries should be subject to an
extraordinary degree of responsibility for the protection and safety of
travelers with no alternative but rely on the good faith and care of those
with whom they take lodging.
Inn keepers or hotel keepers have supervision and control of their
inns/hotel and the premises thereof. It is not necessary in order to hold an
inn-keeper liable that the effects of the guests be actually delivered to him
or his employees; it is enough that they are within the inn.
We have the case of YHT REALTY VS CA
YHT Realty vs. COURT OF APPEALS
FACTS:
suggestion. Lopez served as manager of the hotel while Lainez and Payam had
custody of the keys for the safety deposit boxes of Tropicana.
During his stay, PR McLoughlin rented a safety deposit box where he placed his important
belongings such as money, credit cards and pieces of jewelry. The safety deposit box
could only be opened through the use of two keys, one of which is given to the registered
guest, and the other remaining in the possession of the management of the hotel. When a
registered guest wished to open his safety deposit box, he alone could personally request
the management who then would assign one of its employees to accompany the guest
and assist him in opening the safety deposit box with the two keys.
At some point in time, McLoughlin discovered that some of the items inside his safety
deposit box were missing. He confronted Lainez and Payam who admitted that Tan
opened the safety deposit box three times with the key assigned to him. Tan also admitted
that she had stolen McLoughlin's key and was able to open the safety deposit box with the
assistance of Lopez, Payam and Lainez. Thereafter, Lopez executed a promissory note in
favor of McLoughlin. Nevertheless, McLoughlin insisted that it must be the hotel who must
assume responsibility for the loss he suffered.
Lopez refused to accept the responsibility relying on the conditions for renting the safety deposit
box entitled Undertaking For the Use Of Safety Deposit Box specifically paragraphs
(2)and (4) thereof which provides that:
(1) Tropicana Apartment Hotel is released from any liability arising from any
loss in the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use thereof
by any other person should the key be lost; and
(2) To return the key and execute the release in favor of Tropicana upon
giving up the use of the box.
McLoughlin alleged that YHT Realty Corporation, Lopez, Lainez, Payam and Tan acted
with gross negligence in the performance and exercise of their duties and obligations as
innkeepers and were therefore liable to answer for the losses he incurred. He further
contend that the conditions for the use of the safety deposit box are null and void for being
contrary to the express mandate of Article 2003 of the NCC and against public policy.
On the other hand, petitioners anchor their defense on Article 2002 which exempts the
hotel-keeper from liability if the loss is due to the acts of his guest, his family, or visitors.
ISSUES:
(1) W/N the condition for the use of the safety deposit box are null and void. YES
(2) W/N YHT Realty acted with gross negligence in the performance and exercise
of their duties and obligations as innkeepers and thus liable for the loss. YES
RULING: BOTH YES
First issue
Article 2003 was incorporated in the NCC as an expression of public policy precisely to apply to
situations such as that presented in this case. The hotel business like the common carrier's
business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide
not only lodging for hotel guests and security to their persons and belongings. The twin duty
constitutes the essence of the business. The law in turn does not allow such duty to the public to
be negated or diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear
in prepared forms imposed by hotel keepers on guests for their signature.
To hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they
be actually delivered to the innkeepers or their employees. It is enough that such effects
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are within the hotel or inn. With greater reason should the liability of the hotelkeeper
be enforced when the missing items are taken without the guest's knowledge and
consent from a safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of
the NCC for they allow Tropicana to be released from liability arising from any loss
in the contents and/or use of the safety deposit box for any cause whatsoever.
Evidently, the undertaking was intended to bar any claim against Tropicana for any loss of the
contents of the safety deposit box whether or not negligence was incurred by Tropicana or its
employees. The NCC is explicit that the responsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of the guests even if caused by servants or employees of the
keepers of hotels or inns as well as by strangers, except as it may proceed from any force
majeure. It is the loss through force majeure that may spare the hotel-keeper from liability.
Second issue
In the case at bar, there is no showing that the act of the thief or robber was done with the
use of arms or through an irresistible force to qualify the same as force majeure.
Article 2002 presupposes that the hotel-keeper is not guilty of concurrent negligence or has not
contributed in any degree to the occurrence of the loss. A depositary is not responsible for the loss
of goods by theft, unless his actionable negligence contributes to the loss.
In the case at bar, the responsibility of securing the safety deposit box was shared not only
by the guest himself but also by the management since two keys are necessary to open
the safety deposit box. Without the assistance of hotel employees, the loss would not have
occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was
not the registered guest, to open the safety deposit box of McLoughlin, even assuming
that the latter was also guilty of negligence in allowing another person to use his key.
To rule otherwise would result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow any person, under the
pretense of being a family member or a visitor of the guest, to have access to the safety
deposit box without fear of any liability that will attach thereafter in case such person turns
out to be a complete stranger. This will allow the hotel to evade responsibility for any
liability incurred by its employees in conspiracy with the guest's relatives and visitors.
If only petitioners exercised due diligence in taking care of McLoughlin's safety deposit box, they
should have confronted him as to his relationship with Tan considering that the latter had been
observed opening McLoughlin's safety deposit box a number of times at the early hours of the
morning. Tan's acts should have prompted the management to investigate her relationship with
McLoughlin. Then, petitioners would have exercised due diligence required of them. Failure to do
so warrants the conclusion that the management had been remiss in complying with the
obligations imposed upon hotel-keepers under the law.
What additional factors that the court considered that the management by
the hotel were clearly negligent? When was the safety deposit box
accessed? Suspicious circumstances, early hours in the morning AND
they just rely that he is a friend of the depositor.
MASANGUID
December 6, 2016
Part 3 of 3
Here, TROPICANA had prior knowledge to the person, aside from the registered
guest, had access to the safety deposit box. We have here a contract of SAFETY
deposit box between the hotel and the guest, to which TROPICANA should be held
responsible for the damages suffered by the guest by reason of the negligence of its
employees. Article 2003 was incorporated in the New Civil Code as an expression
of public policy precisely to apply to situations such as that presented in this case
such as common carrier. The hotel business like the common carriers business is
imbued with public interest. Catering to the public, hotelkeepers are bound to
provide not only lodging for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of the business. The law in turn
does not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called undertakings that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature. Evidently, the undertaking
was intended to bar any claim against Tropicana for any loss of the contents of the
safety deposit box whether or not negligence was incurred by Tropicana or its
employees. The New Civil Code is explicit that the responsibility of the hotel-keeper
shall extend to loss of, or injury to, the personal property of the guests even if
caused by servants or employees of the keepers of hotels or inns as well as by
strangers, except as it may proceed from any force majeure. It is the loss through
force majeure that may spare the hotel-keeper from liability. In the case at bar, there
is no showing that the act of the thief or robber was done with the use of arms or
through an irresistible force to qualify the same as force majeure.
Petitioners likewise anchor their defense on Article 2002 which exempts the hotel-
keeper from liability if the loss is due to the acts of his guest, his family, or visitors.
This provision presupposes that the hotel is not guilty of negligence. Even a cursory
reading of the provision would lead us to reject petitioners contention.
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The justification they raise would render nugatory the public interest sought to
be protected by the provision. What if the negligence of the employer or its
employees facilitated the consummation of a crime committed by the
registered guests relatives or visitor? Should the law exculpate the hotel from
liability since the loss was due to the act of the visitor of the registered guest of
the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty
of concurrent negligence or has not contributed in any degree to the
occurrence of the loss. A depositary is not responsible for the loss of goods by
theft, unless his actionable negligence contributes to the loss.
In the case at bar, the responsibility of securing the safety deposit box was
shared not only by the guest himself but also by the management since two
keys are necessary to open the safety deposit box. Without the assistance of
hotel employees, the loss would not have occurred. Thus, Tropicana was
guilty of concurrent negligence in allowing Tan, who was not the registered
guest, to open the safety deposit box of McLoughlin, even assuming that the
latter was also guilty of negligence in allowing another person to use his key.
To rule otherwise would result in undermining the safety of the safety deposit
boxes in hotels for the management will be given imprimatur to allow any
person, under the pretense of being a family member or a visitor of the guest,
to have access to the safety deposit box without fear of any liability that will
attach thereafter in case such person turns out to be a complete stranger. This
will allow the hotel to evade responsibility for any liability incurred by its
employees in conspiracy with the guests, relatives and visitors.
Art. 2004.
The hotel-keeper has a right to retain the things brought into the
hotel by the guest, as a security for credits on account of lodging,
and supplies usually furnished to hotel guests.
So, there is a right to retain. This is another instance wherein contract of
pledge is created by operation of law. The hotel -keepers must compensate
them due to the liabilities impose to them by law. The bailee in commodatum
may likewise return the thing loaned by reason of the hidden defects thereof.
Do remember however that an act obtaining accommodation, food, etc
without paying constitutes estafa. So, there is a right to retain with regard
to civil and estafa with regard to criminal liability.
IV. Sequestration and Necessary Deposit
CHAPTER 4. - SEQUESTRATION OR JUDICIAL DEPOSIT
Art. 2005.
A judicial deposit or sequestration takes place when an attachment
or seizure of property in litigation is ordered. (1785)
Since it is judicial, it is ordered by the court. Attachment by sheriff, receiver by
the court, Replevin. The properties here may be attached by the sheriff upon
the filing of a complaint or a receiver may be appointed by the court to
administer and preserve the property in litigation. If it is a personal property, it
may be seized by the sheriff in actions such as replevin or manual delivery of
personal property. The depositary here is appointed by the court.
Art. 2006.
Movable as well as immovable property may be the object of
sequestration. (1786)
Art. 2007.
The depositary of property or objects sequestrated cannot be
relieved of his responsibility until the controversy which gave rise
thereto has come to an end, unless the court so orders. (1787a)
Art. 2008.
The depositary of property sequestrated is bound to comply, with respect to
the same, with all the obligations of a good father of a family. (1788)
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Art. 2009. these islands.

As to matters not provided for in this Code, judicial sequestration
"Delivery" means voluntary transfer of possession from one person to another.
shall be governed by the Rules of Court.
"Fungible goods" means goods of which any unit is, from its nature by
JUDICIAL DEPOSIT EXTRA-JUDICIAL DEPOSIT mercantile custom, treated as the equivalent of any other unit.
How it happens By the will of the court By the will of the parties
(contract) "Goods" means chattels or merchandise in storage or which has been or
is about to be stored.
Security For the safekeeping of the
(secure the right of the party in property "Holder" of a receipt means a person who has both actual possession of
case of a favorable judgement) such receipt and a right of property therein.
Subject matter Generally immovable Only movable property
"Order" means an order by indorsement on the receipt.
Remuneration Always onerous May be gratuitous or
"Owner" does not include mortgagee.
subject to compensation
"Person" includes a corporation or partnership or two or more persons
For whom In behalf of the person who In behalf of the depositor
having a joint or common interest.
in judgment has a right or third party who
deposited To "purchase" includes to take as mortgagee or as pledgee.
Right of return Through the order of the court Upon demand of the
or when litigation has ended depositor "Receipt" means a warehouse receipt.

What is Notice of lis pendens? It serves as a notice to third persons that "Value" is any consideration sufficient to support a simple contract. An
the property is under litigation. antecedent or pre-existing obligation, whether for money or not,
constitutes value where a receipt is taken either in satisfaction thereof or
LOS BAÑOS vs. AFRICA as security therefor.
FACTS:
The TCT registered in the name of respondent Pacita Africa was destroyed when a fire razed
"Warehouseman" means a person lawfully engaged in the business of
storing goods for profit.
the ROD. The TCT was reconstituted and was again registered in the name of respondent.

the property to Macy.
By virtue of the forged DAS, Macy caused the issuance of a TCT in her name,
without the knowledge of the respondents. Later on, the respondents discovered
that Macy mortgaged the property to petitioner Los Baños. To protect their
interests, respondents sought the annulment of the TCT in the name of Macy, the
DAS and the mortgage. However, pending litigation, petitioner foreclosed the
property. This caused respondents to file a writ of preliminary injunction to stop the
respondent bank from consolidating title to the subject property.
Petitioner contended that respondents are not entitled to the relief prayed for because they
caused the annotation of a notice of lis pendens at the back of TCT registered in the name of
Macy. Thus, the said notice provided ample protection of their rights and interests.
ISSUE: W/N the notice of lis pendens provided ample protection of the rights and
interests of petitioner.
RULING: NO
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 cancellation of
such notice may be ordered by the court that has jurisdiction over it at any given time. Its
continuance or removal -- like the continuance or the removal of a preliminary attachment or
injunction -- is not contingent on the existence of a final judgment on the action and ordinarily
has no effect on the merits thereof. Thus, the notice of lis pendens
complete and ample protection.
Since the notice of lis pendens merely serves as a warning that the property is
involved in litigation and that two requisites for the issuance of the writ of
preliminary injunction were satisfied, the issuance thereof is proper and the
petitioner bank is enjoined from consolidating title over the subject property.
(b) A thing is done "in good faith" within the meaning of this Act when it is in
fact done honestly, whether it be done negligently or not.
Sec. 2. Form of receipts; essential terms. Warehouse receipts need not be in any particular
form but every such receipt must embody within its written or printed terms:
(a) The location of the warehouse where the goods are stored,
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
(d) A statement whether the goods received will be delivered to the bearer,
to a specified person or to a specified person or his order,
(e) The rate of storage charges,
(f) A description of the goods or of the packages containing them,
(g) The signature of the warehouseman which may be made by his authorized agent,
(h) If the receipt is issued for goods of which the warehouseman is owner, either
solely or jointly or in common with others, the fact of such ownership, and
(i) A statement of the amount of advances made and of liabilities incurred
for which the warehouseman claims a lien. If the precise amount of such
advances made or of such liabilities incurred is, at the time of the issue
of, unknown to the warehouseman or to his agent who issues it, a
statement of the fact that advances have been made or liabilities
incurred and the purpose thereof is sufficient.
A warehouseman shall be liable to any person injured thereby for all damages caused by
the omission from a negotiable receipt of any of the terms herein required.
Sec. 3. Form of receipts. What terms may be inserted. A warehouseman may
insert in a receipt issued by him any other terms and conditions provided that such
terms and conditions shall not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of care in the
safe-keeping of the goods entrusted to him which is reasonably careful
man would exercise in regard to similar goods of his own.

Sec. 4. Definition of non-negotiable receipt. A receipt in which it is stated that the

Discussion: So, here lis pendens is not a judicial deposit. goods received will be delivered to the depositor or to any other specified person, is
a non-negotiable receipt.

Sec. 5. Definition of negotiable receipt. A receipt in which it is stated that the

goods received will be delivered to the bearer or to the order of any person named
ACT NO. 2137 - THE WAREHOUSE RECEIPTS LAW in such receipt is a negotiable receipt.
Purpose:
(1) To regulate the status, rights, and liabilities of a person in a warehousing No provision shall be inserted in a negotiable receipt that it is non-negotiable.
contract; Such provision, if inserted shall be void.
(2) To protect those who in good faith and for value, acquire negotiable
warehouse receipts by negotiation; Sec. 6. Duplicate receipts must be so marked. When more than one negotiable receipt is
(3) To render the title to and right of possession of property stored in issued for the same goods, the word "duplicate" shall be plainly placed upon the face of every
warehouses more easily convertible; such receipt, except the first one issued. A warehouseman shall be liable for all damages caused
(4) To facilitate the use of warehouse receipts as documents of title; by his failure so to do to any one who purchased the subsequent receipt for value supposing it to
(5) To place greater responsibility on the warehouseman be an original, even though the purchase be after the delivery of the goods by
the warehouseman to the holder of the original receipt.
Sec. 58. Definitions.
(a) In this Act, unless the content or subject matter otherwise requires: "Action" Sec. 7. Failure to mark "non-negotiable." A non-negotiable receipt shall have plainly placed
includes counterclaim, set-off, and suits in equity as provided by law in upon its face by the warehouseman issuing it "non-negotiable," or "not negotiable." In case of the
warehouseman's failure so to do, a holder of the receipt who purchased it for

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value supposing it to be negotiable, may, at his option, treat such receipt as
imposing upon the warehouseman the same liabilities he would have incurred had
the receipt been negotiable.
This section shall not apply, however, to letters, memoranda, or written
acknowledgment of an informal character.
OBLIGATIONS AND RIGHTS OF WAREHOUSEMEN UPON THEIR RECEIPTS
Sec. 8. Obligation of warehousemen to deliver. A warehouseman, in the absence
of some lawful excuse provided by this Act, is bound to deliver the goods upon a
demand made either by the holder of a receipt for the goods or by the depositor; if
such demand is accompanied with:
(a) An offer to satisfy the warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable, with such indorsements
as would be necessary for the negotiation of the receipt; and
(c) A readiness and willingness to sign, when the goods are delivered, an
acknowledgment that they have been delivered, if such signature is
requested by the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in compliance with a
demand by the holder or depositor so accompanied, the burden shall be upon the
warehouseman to establish the existence of a lawful excuse for such refusal.
Sec. 9. Justification of warehouseman in delivering. A warehouseman is justified in delivering
the goods, subject to the provisions of the three following sections, to one who is:
(a) The person lawfully entitled to the possession of the goods, or his agent;
(b) A person who is either himself entitled to delivery by the terms of a non-
negotiable receipt issued for the goods, or who has written authority
from the person so entitled either indorsed upon the receipt or written
upon another paper; or
(c) A person in possession of a negotiable receipt by the terms of which the
goods are deliverable to him or order, or to bearer, or which has been
indorsed to him or in blank by the person to whom delivery was promised by
the terms of the receipt or by his mediate or immediate indorser.
Sec. 10. Warehouseman's liability for misdelivery. Where a warehouseman delivers
the goods to one who is not in fact lawfully entitled to the possession of them, the
warehouseman shall be liable as for conversion to all having a right of property or
possession in the goods if he delivered the goods otherwise than as authorized by
subdivisions (b) and (c) of the preceding section, and though he delivered the goods as
authorized by said subdivisions, he shall be so liable, if prior to such delivery he had either:
(a) Been requested, by or on behalf of the person lawfully entitled to a right
of property or possession in the goods, not to make such deliver; or
(b) Had information that the delivery about to be made was to one not
lawfully entitled to the possession of the goods.
Sec. 14. Lost or destroyed receipts. Where a negotiable receipt has been lost or
destroyed, a court of competent jurisdiction may order the delivery of the goods upon
satisfactory proof of such loss or destruction and upon the giving of a bond with
sufficient sureties to be approved by the court to protect the warehouseman from any
liability or expense, which he or any person injured by such delivery may incur by reason
of the original receipt remaining outstanding. The court may also in its discretion order the
payment of the warehouseman's reasonable costs and counsel fees.
The delivery of the goods under an order of the court as provided in this section,
shall not relieve the warehouseman from liability to a person to whom the negotiable
receipt has been or shall be negotiated for value without notice of the proceedings
or of the delivery of the goods.
Sec. 16. Warehouseman cannot set up title in himself . No title or right to the possession of the
goods, on the part of the warehouseman, unless such title or right is derived directly or indirectly
from a transfer made by the depositor at the time of or subsequent to the deposit for storage, or
from the warehouseman's lien, shall excuse the warehouseman from liability for refusing to deliver
the goods according to the terms of the receipt.
Sec. 17. Interpleader of adverse claimants. If more than one person claims the
title or possession of the goods, the warehouseman may, either as a defense to an
action brought against him for non-delivery of the goods or as an original suit,
whichever is appropriate, require all known claimants to interplead.
Sec. 18. Warehouseman has reasonable time to determine validity of claims.
If someone other than the depositor or person claiming under him has a claim to
the title or possession of goods, and the warehouseman has information of such
claim, the warehouseman shall be excused from liability for refusing to deliver the
goods, either to the depositor or person claiming under him or to the adverse
claimant until the warehouseman has had a reasonable time to ascertain the validity
of the adverse claim or to bring legal proceedings to compel claimants to interplead.
Sec. 19. Adverse title is no defense except as above provided. Except as provided in the two
preceding sections and in sections nine and thirty-six, no right or title of a third person shall be a
defense to an action brought by the depositor or person claiming under him against the
warehouseman for failure to deliver the goods according to the terms of the receipt.
Sec. 20. Liability for non-existence or misdescription of goods. A warehouseman shall be
liable to the holder of a receipt for damages caused by the non-existence of the goods or by the
failure of the goods to correspond with the description thereof in the receipt at the
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time of its issue. If, however, the goods are described in a receipt merely by a
statement of marks or labels upon them or upon packages containing them or by a
statement that the goods are said to be goods of a certain kind or that the packages
containing the goods are said to contain goods of a certain kind or by words of like
purport, such statements, if true, shall not make liable the warehouseman issuing
the receipt, although the goods are not of the kind which the marks or labels upon
them indicate or of the kind they were said to be by the depositor.
Sec. 21. Liability for care of goods. A warehouseman shall be liable for any loss
or injury to the goods caused by his failure to exercise such care in regard to them
as reasonably careful owner of similar goods would exercise, but he shall not be
liable, in the absence of an agreement to the contrary, for any loss or injury to the
goods which could not have been avoided by the exercise of such care.
Sec. 22. Goods must be kept separate. Except as provided in the following section, a
warehouseman shall keep the goods so far separate from goods of other depositors and
from other goods of the same depositor for which a separate receipt has been issued, as
to permit at all times the identification and redelivery of the goods deposited.
Sec. 23. Fungible goods may be commingled if warehouseman authorized. If
authorized by agreement or by custom, a warehouseman may mingle fungible goods with
other goods of the same kind and grade. In such case, the various depositors of the
mingled goods shall own the entire mass in common and each depositor shall be entitled
to such portion thereof as the amount deposited by him bears to the whole.
Sec. 24. Liability of warehouseman to depositors of commingled goods.
The warehouseman shall be severally liable to each depositor for the care and
redelivery of his share of such mass to the same extent and under the same
circumstances as if the goods had been kept separate.
Sec. 25. Attachment or levy upon goods for which a negotiable receipt has been issued. If
goods are delivered to a warehouseman by the owner or by a person whose act in conveying the
title to them to a purchaser in good faith for value would bind the owner, and a negotiable receipt
is issued for them, they can not thereafter, while in the possession of the warehouseman, be
attached by garnishment or otherwise, or be levied upon under an execution unless the
receipt be first surrendered to the warehouseman or its negotiation enjoined. The warehouseman
shall in no case be compelled to deliver up the actual
possession of the goods until the receipt is surrendered to him or impounded by the court.
Sec. 26. Creditor's remedies to reach negotiable receipts. A creditor whose debtor is
the owner of a negotiable receipt shall be entitled to such aid from courts of appropriate
jurisdiction, by injunction and otherwise, in attaching such receipt or in satisfying the claim
by means thereof as is allowed at law or in equity in these islands in regard to property
which can not readily be attached or levied upon by ordinary legal process.
Sec. 27. What claims are included in the warehouseman's lien. Subject to the
provisions of section thirty, a warehouseman shall have a lien on goods deposited or on
the proceeds thereof in his hands, for all lawful charges for storage and preservation of the
goods; also for all lawful claims for money advanced, interest, insurance, transportation,
labor, weighing, coopering and other charges and expenses in relation to such goods, also
for all reasonable charges and expenses for notice, and advertisements of sale, and for
sale of the goods where default had been made in satisfying the warehouseman's lien.
Sec. 30. Negotiable receipt must state charges for which the lien is claimed. If a negotiable
receipt is issued for goods, the warehouseman shall have no lien thereon except for charges for
storage of goods subsequent to the date of the receipt unless the receipt expressly enumerated
other charges for which a lien is claimed. In such case, there shall be a lien for the charges
enumerated so far as they are within the terms of section twenty-seven although the amount of the
charges so enumerated is not stated in the receipt.
Sec. 35. Other methods of enforcing lien. The remedy for enforcing a lien herein
provided does not preclude any other remedies allowed by law for the enforcement of a
lien against personal property nor bar the right to recover so much of the warehouseman's
claim as shall not be paid by the proceeds of the sale of the property.
Sec. 36. Effect of sale. After goods have been lawfully sold to satisfy a warehouseman's
lien, or have been lawfully sold or disposed of because of their perishable or hazardous
nature, the warehouseman shall not thereafter be liable for failure to deliver the goods to
the depositor or owner of the goods or to a holder of the receipt given for the goods when
they were deposited, even if such receipt be negotiable.
Sec. 40. Who may negotiate a receipt. A negotiable receipt may be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the receipt has been entrusted
by the owner, if, by the terms of the receipt, the warehouseman undertakes to deliver
the goods to the order of the person to whom the possession or custody of the
receipt has been entrusted, or if, at the time of such entrusting, the receipt is in such
form that it may be negotiated by delivery.
Sec. 41. Rights of person to whom a receipt has been negotiated. A person to
whom a negotiable receipt has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him had
or had ability to convey to a purchaser in good faith for value, and also
such title to the goods as the depositor or person to whose order the
goods were to be delivered by the terms of the receipt had or had ability
to convey to a purchaser in good faith for value, and
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(b) The direct obligation of the warehouseman to hold possession of the
goods for him according to the terms of the receipt as fully as if the
warehouseman and contracted directly with him.
Sec. 42. Rights of person to whom receipt has been transferred. A person to whom a
receipt has been transferred but not negotiated acquires thereby, as against the transferor,
the title of the goods subject to the terms of any agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the right to notify the
warehouseman of the transfer to him of such receipt and thereby to acquire the
direct obligation of the warehouseman to hold possession of the goods for him
according to the terms of the receipt.
Prior to the notification of the warehouseman by the transferor or transferee of a
non-negotiable receipt, the title of the transferee to the goods and the right to
acquire the obligation of the warehouseman may be defeated by the levy of an
attachment or execution upon the goods by a creditor of the transferor or by a
notification to the warehouseman by the transferor or a subsequent purchaser from
the transferor of a subsequent sale of the goods by the transferor.
Sec. 44. Warranties of a sale of receipt. A person who, for value, negotiates or
transfers a receipt by indorsement or delivery, including one who assigns for value a
claim secured by a receipt, unless a contrary intention appears, warrants:
(a) That the receipt is genuine,
(b) That he has a legal right to negotiate or transfer it,
(c) That he has knowledge of no fact which would impair the validity or
worth of the receipt, and
(d) That he has a right to transfer the title to the goods and that the goods
are merchantable or fit for a particular purpose whenever such
warranties would have been implied, if the contract of the parties had
been to transfer without a receipt of the goods represented thereby.
Sec. 45. Indorser not a guarantor. The indorsement of a receipt shall not make the
indorser liable for any failure on the part of the warehouseman or previous indorsers
of the receipt to fulfill their respective obligations.
Sec. 46. No warranty implied from accepting payment of a debt. A mortgagee, pledgee, or
holder for security of a receipt who, in good faith, demands or receives payment of the debt for
which such receipt is security, whether from a party to a draft drawn for such debt or from any
other person, shall not, by so doing, be deemed to represent or to warrant the genuineness of
such receipt or the quantity or quality of the goods therein described.
Sec. 49. Negotiation defeats vendor's lien. Where a negotiable receipt has been issued
for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any
purchaser for value in good faith to whom such receipt has been negotiated, whether such
negotiation be prior or subsequent to the notification to the warehouseman who issued
such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the
warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller
unless the receipt is first surrendered for cancellation.
What is the scope of the Warehouse Receipts Law? It covers all types of
warehouses whether public or private warehouses bonded or not bonded.
However there is a special law towards bonded warehouses (General
Bonded Warehouse Act).
GBWA regulates and supervises warehouses which puts up a bond.
While the WRL, describes mutual duties and rights of a warehouseman
who issues warehouse receipts to the depositor; and covers all
warehouses whether bonded or not.
Applicability of the WRL: it applies to warehouse receipts issued by a
warehouseman as defined under Section 58 of the WRL. The civil code (specifically
provisions on documents of title) is applied to all other instances where the receipt is
not issued by the warehouseman. This is in connection to a contract of deposit
wherein you deliver the goods to a warehouse man for the purpose of security.
However, a depositary is not necessarily a holder of a warehouse receipt.
Warehouse receipts are considered as a negotiable document of title, as
distinguished from your negotiable instruments. Warehouseman is a
person lawfully engaged in the business of storing goods for profit.
Warehouse, on the other hand, is defined as a building or place where
the goods are deposited and stored for profit.
Take note of what is described as a warehouse receipt. It is a written
acknowledgment by a warehouseman that he has received and holds
certain goods therein described in store for the person whom it is issued.
As document of title. It is provided under Art 1636.
It therefore has a threefold nature:
(1) A contract a contract of deposit or a contract of carriage
(2) Evidence of receipt of goods
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
(3) Operates as a transferable document of title
Negotiable Instruments Law Warehouse Receipt Law
Subject matter is money Subject matter is goods
Object of value is the instrument Object of value refers to the
itself goods deposited
There are parties secondarily liableNo parties that are secondarily
liable
An original bearer instrument will An original bearer instrument
always be considered a bearer subsequently indorsed, it
instrument, thus can be negotiated becomes an order instrument
by mere delivery
There is a concept of holder in due There is no concept of holder in
course who has a better title than due course In negotiable
the transferor instruments, an originally
bearer instrument, can still be
negotiated by delivery even if it
has been indorsed.
CANDOLITA
December 8, 2016
Part 1 of 1
V. Trust Receipts Law
TRUST RECEIPTS LAW
Now, under The Trust Receipts Law you have Section 4. Under section 4 of the trust
receipt law trust receipt is defined as a written document signed by the trustee in
favor of the entruster whereby the latter releases the goods to the
trust for the entruster (the one who delivered the goods) to sell or dispose of the
goods and to return the proceeds thereof to the extent of the amount owing to the
entruster or to return the goods if unsold or not otherwise disposed.
Purpose of the law:
 To punish dishonesty and abuse of confidence of one who tends in the
handling of money or goods to the prejudice of the owner regardless of
whether or not the latter is the owner. (crime of estafa);
 To encourage and promote the use of trust receipts as an
additional and convenient aid to commerce and trade;
 To regulate of trust receipts transactions in order to assure the
protection of the rights and enforcement of obligations of the
parties involved therein;
 To declare the misuse and/or misappropriation of goods or proceeds
realized from the sale of goods, released under trust receipts as a
criminal offense punishable under the revised penal code. (Art. 315)
Under section 4 of the same law the trust receipt need not be in any particular
form however it must substantially contain the following essential terms:
 a description of the goods, value of the goods, undertaking or a
commitment of the entrustee to hold in trust for the entruster
the goods;
 to dispose of them in the manner provided for in the trust receipt; and
 to turn over the proceeds of the sale of the goods
In a trust receipt transaction, no agency relationship is established. However, as
to criminal liability like for estafa as well as civil liability.
What is the coverage of a trust receipt agreement? It applies to items destined
for sale, process as a component of a product ultimately sold and manufactured,
and used to repair equipment used to maintain in business. Under the same
section, section 4, the trust receipt law does not cover the sale of goods, document
or instruments by a person in the business of selling goods, documents or
instruments for profit who has general property rights in such goods documents or
installments or sells the same to the buyer on credit retaining title and other interest
as security of the payment of the purchase price.
So you have to distinguish a trust receipt transaction from other arrangements.
There is no trust receipt transaction if the agreement is for mere
consignment of goods with the obligation on the part of the person to
whom it is delivered to remit proceeds of the sale or return when unsold.
Distinguish a trust receipt transaction from a contract of pledge. In a trust
receipt transaction, there is a person who is being financed, possesses the
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property. In a contract of pledge, it is the financer that possesses the
property as a form of security.
In a trust receipt transaction there is no contract of sale. In a trust receipt,
there is no lien created over the goods that were delivered unlike that of a
chattel mortgage which subjects the property to lien.
In a trust receipts you have three parties. However the seller does not
retain title to the property. Compare it to consignment, you have the consignor
and the consignee, bipartite, where the consignor retains ownership of the
property. So who are essentially the parties here? You have the seller,
entruster and entrustee. These three are the parties in a true trust receipt
agreement. However, the seller here is not strictly a party to a trust receipt
transaction but he is a party to the contract of sale wherein he is the seller and
who is the buyer? It is the buyer/importer-entrustee. Now you have here the
entruster. The entruster here is the lender or the financier. He is the person
holding title over the goods. He holds title over the goods but he is not the
owner of the good but actually, he is merely a holder of security interest.
On the other hand you have the entrustee, the borrower, the buyer, the
importer, to whom the goods are delivered for sale or processing in trust
with the obligation to return the proceeds of the sale or to return the
goods if unsold. So essentially the entrustee here is considered as the
owner of the goods. While the entruster holds title as a form of security.
So the law imposes on the entrustee the risk of loss of the goods.
So take note here it is a unique arrangement. As a general rule, res perit
domino. Owner bears the loss. But here, if you take into consideration the
entruster holds title of the goods but you cannot say if the goods were lost due
to a fortuitous event, the entruster would be the one who would suffer the loss.
So take note that in a true trust receipt agreement covered by the trust
receipts law, what are the rights available to the entruster?
(1) Entitled to the proceeds
(2) Entitled to the return of the goods if unsold
(3) As against an innocent purchaser for value of the goods subject to
a trust receipts agreement. As against an innocent purchaser for
value, the entruster is not preferred. As against the creditors of the
entrustee, the entruster is preferred. (Section 11)
(4) The entruster has the right to transfer the trust take possession
of the goods and to sell the goods in a public sale (Section 12)
(5) The entruster likewise has the right to purchase the same
goods at the intended public sale(Section 7)
Obligations of an entruster
(1) to give possession of the goods to the entrustee and to give at least 5
day notice to the entrusteeof the intention to sell the goods at an
intended public sale. The entrustee on the other hand has the right to
receive the surplus in case of a public sale as provided under section 7.
(2) To have possession of the goods as a condition for his liability.
Obligations of the entrustee
(1) To hold the goods or the sale proceeds;
(2) To return the goods in the event of non-sale or upon demand of
the entruster;
(3) To comply with his alternative obligation to return the proceeds
or the goods. The return of the proceeds- entre garla. The
obligation to return the goods unsold- vevol vera;
(4) To ensure against loss of the goods;
(5) To keep the goods and sale proceeds separate and identifiable;
(6) If there are other conditions provided under the trust receipt,
observe those conditions.
ROSARIO TEXTILE vs. HOME BANKERS
FACTS:
RTMC filed with the Home Bankers an application for a credit line in the amount of P10M,
but only P8M was approved. RTMC then made withdrawals from this credit line and
issued several promissory notes and trust receipts in favor of the bank. Yujuico signed a
surety agreement in favor of the bank binding himself solidarily liable with RTMC.
However, despite the lapse of the respective due dates under the promissory notes and
filed a complaint for sum of money against RTMC and Yujuico.
RTMC and Yujuico denied any liability claiming that the importation of raw materials under
the credit line was with a grant of option to them to turn-over to the bank the imported raw
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
materials should these fail to meet their manufacturing requirements. However, when they
turned it over, the bank refused to accept the materials until a fire destroyed it.
Hence, according to petitioners, under the trust receipt contracts between the
parties, they merely held the goods described therein in trust for respondent Home
Bankers who are the real owners of the said goods. Since the ownership of the
goods remains with the bank, it should bear the loss in accordance with the
principle of res perit domino. With the destruction of the goods by fire, petitioners
should have been relieved of any obligation to pay.
ISSUE: W/N the transaction between the parties is trust receipts.
RULING: NO but it is a contract of loan
A credit line is that amount of money or merchandise which a banker, merchant, or
supplier agrees to supply to a person on credit and generally agreed to in advance.
Hence, 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.
A trust receipt is 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. A trust receipt, therefore, is a security
indebtedness and there can be no such thing as security interest that secures no
obligation. 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. 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. Peti
indeed the materials were defective.
Q: How is security interest defined in trust receipt law?
A: 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 not expressed to be absolute,
whenever such title is in substance taken or retained for security only.
Q: How do you reconcile it with the fact that the trust receipts were
executed as security for the contract of loan? Why is it that there is no
violation even if it were trust receipts issued as security or collateral?
A: (Si maam nagsagot sa sarili nyang tanong) The trust receipts executed
were mere securities. No violation because security sya for the contract of
loan, wherein the obligation of Rosario Textiles is isa lang: To pay. If under the
Trust receipt, the bank was made to appear as the owner, more of legal fiction
that in fact, it could not be considered as owner of the raw materials. The
Supreme Court held, here the trust receipt was issued by the bank, so the
bank was deemed the entruster/lender/financier. To consider the bank as the
true owner from the inception of the transaction would be to disregard the loan
feature thereof. Because again, the bank here is considered the holder of the
title merely for purpose of security. If the materials were indeed defective, RT
could not go after the bank kasi di naman ang bank ang nag supply sa kanila.
LAND BANK vs. PEREZ
FACTS:
LBP extended a credit accommodation to ACDC through the execution of an
Omnibus Credit Line Agreement. ACDC used the Letters of Credit/Trust Receipts
Facility of the Agreement to buy construction materials. The respondents then
executed trust receipts in connection with the construction materials.
. Later on, the trust receipts matured, but ACDC failed to return to LBP the proceeds of
the construction projects or the construction materials subject of the trust receipts. When
ACDC failed to pay upon demand, LBP filed a complaint for estafa against ACDC.
ACDC denied criminal liability alleging that the trust receipt documents actually pertains
as security to the contract of loan it entered into with petitioner. It further alleged that it
cannot be held liable for estafa since its clients for the construction projects have not yet
paid them. Thus, ACDC had yet to receive the proceeds of the construction materials that
were the subject of the trust receipts. As there were no proceeds received from these
clients, no misappropriation thereof could have taken place.
The CA ruled that the case did not involve a trust receipt transaction, but a mere loan. The
construction materials, which are the subject of the trust receipt transaction, were delivered to
ACDC even before the trust receipts were executed. LBP did not offer proof that the goods were
received by ACDC, and that the trust receipts did not contain a description of the
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goods, their invoice value, the amount of the draft to be paid, and their maturity dates.
ISSUE: W/N the transactions between LBP and ACDC were trust receipts to render
ACDC liable for estafa.
RULING: NO, not trust receipts but a mere loan
There are two obligations in a trust receipt transaction:
(1) The first is covered by the provision that refers to money under the
obligation to deliver it (entregarla) to the owner of the merchandise sold.
(2) The second is covered by the provision referring to merchandise
received under the obligation to return it (devolvera) to the owner.
Under the Trust Receipts Law, 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.
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.
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 PD 115. In such case, 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, where the borrower is obligated
to pay the bank the amount spent for the purchase of the goods.
Pursuant to Article 1371 of the CC, the contemporaneous actions of the parties
may be examined in order to understand the transaction through their intent rather
than to rely purely on the trust receipts that they signed.
In the present case, LBP knew that ACDC was in the construction business and that the
materials that it sought to buy under the letters of credit were to be used for construction
projects. LBP was aware of the fact that there was no way it could recover the buildings or
constructions for which the materials subject of the trust receipts had been used.
Nevertheless, LBP had authorized the delivery of these materials to a construction site of
two government projects for which they were used. When it had done so, LBP should
have been aware that it could not possibly recover the processed materials as they would
become part of government projects. As an immovable property, the ownership of
whatever was constructed with those materials would presumably belong to the owner of
the land, under Article 445 of the CC.
Even if we consider the vague possibility that the materials, consisting of cement,
bolts and reinforcing steel bars, would be used for the construction of a movable
property, the ownership of these properties would still pertain to the government
and not remain with the bank as they would be classified as property of the public
domain under Article 420 of the CC.
Furthermore, despite the allegations in the affidavit-complaint wherein LBP sought
the return of the construction materials, its demand letter actually 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.
The following scenarios are in contrast with trust receipt transaction because it is
fundamental in a trust receipt transaction that the person who advanced payment
for the merchandise becomes the absolute owner of said merchandise and
continues as owner until he or she is paid in full, or if the goods had already been
sold, the proceeds should be turned over to him or to her.
In the case of Colinares, the SC ruled that 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 contr
buildings and structures
which they become part of), as soon as the bank demands them, disqualify them from being
covered by trust receipt agreements.
Based on these premises, the agreements between the parties in this case to be
trust receipt transactions because
(1) From the start, the parties were aware that ACDC could not possibly be
obligated to reconvey to LBP the materials or the end product for which
they were used; and
(2) From the moment the materials were used for the government projects, they
Since these transactions are not trust receipts, an action for estafa should not be
brought against the respondents, who are liable only for a loan.
Even assuming that the transactions were trust receipts, the complaint should still be dismissed.
The Trust Receipts Law punishes the dishonesty and abuse of confidence in the
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
handling of money or goods to the prejudice of another, regardless of whether the latter is
the owner or not. The law does not singularly seek to enforce payment of the loan, as
"there can be no violation of the right against imprisonment for non-payment of a debt."
In this case, the misappropriation could be committed if the entrustee fails to turn over the
proceeds of the sale of the goods covered by the trust receipt transaction or fails to return
the goods themselves. In the present case, respondents could not have failed to return
the proceeds since their allegations that the clients of ACDC had not paid for the projects
it had undertaken with them at the time the case was filed had never been questioned or
denied by LBP. What can only be attributed to the respondents would be the failure to
return the goods subject of the trust receipts.
Q: In this case what is the obligation of the officers of ACDC?
A: To pay the loan acquired from Landbank.
Q: Was there a violation of the trust receipt law?
A: No, there was none. The obligation of ACDC was to pay the loan and
not return the materials.
In Land Bank of the Philippine vs Perez et al, wherein what is the effect thereof?
There was a demand or in this case, a complaint was filed against the entrustee for
estafa. But the Supreme Court held therein that this was not the trust receipt
agreement covered under the trust receipts law to be held liable for estafa. Because
the arrangement here was that the trust receipt was issued merely to secure the
contract of loan by virtue of the letter of credit. So read that case for you to
understand more when to make a person liable for estafa under the trust receipt law
and when is he not liable. Because, if you take into consideration criminal liability for
estafa for violation of the trust receipts law, the entrustee fails to turn over the
proceeds of the sale of goods covered by the trust receipt to the entruster. Or the
entrustee fails to return the goods under the trust agreement if not disposed in
accordance with the agreement of the trust receipt. But if you take a look at the true
nature of this kinds of transaction, on the part of X, his obligation is not really to
return the goods subject of the trust receipt if it is not sold or if it is sold to remit the
proceeds. His obligation is just to pay the loan and the trust receipt was issued as a
form of security-interest.
Do also take note that in this case the SC also enumerated the elements of
estafa in relation to the trust receipts law, in this case no dishonesty or abuse
of confidence is present in the handling of the construction of materials.
HUR TIN YANG vs. PEOPLE
FACTS:
Supermax is engaged in construction business. Metrobank extended several commercial
letters of credit to Supermax. These commercial LCs were used by Supermax to pay for
the delivery of several construction materials which will be used in their construction
business. Thereafter, Metrobank required petitioner to sign 24 trust receipts as security for
the construction materials and to hold those materials or the proceeds of the sales in trust
for Metrobank to the extent of the amount stated in the trust receipts.
The 24 trust receipts fell due but Supermax failed to pay or deliver the goods or proceeds to
Metrobank. As a consequence, Metrobank filed a case for estafa against petitioner Hur Tin
Petitioner admitted that he signed the trust receipts. However, he argued that said trust
receipts were demanded by Metrobank as additional security for the loans it extended to
Supermax for the purchase of construction equipment and materials. In fact, the
construction materials covered by the trust receipts were delivered way before petitioner
signed the corresponding trust receipts. Not only this, petitioner argued that Metrobank
knew all along that the construction materials subject of the trust receipts were not
intended for resale but for personal use of Supermax relating to its construction business.
ISSUE:
construction business is a valid defense against estafa.
RULING: YES
In determining the nature of a contract, the intention of the parties by their conduct,
words, actions and deeds should govern and not the title they give to such contract.
The dealing between petitioner and Metrobank was not a trust receipt transaction but one of
prove that the transaction was, indeed, a trust receipts transaction. In contrast to
the nomenclature of the transaction, the parties really intended a contract of loan.
The fact that the entruster bank knew even before the execution of the trust receipt
agreements that the construction materials covered were never intended by the
entrustee for resale or for the manufacture of items to be sold is sufficient to prove
that the transaction was a simple loan and not a trust receipts transaction.
A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not sold, to return the merchandise to
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the entruster.
Nonetheless, when both parties enter into an agreement knowing fully well 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 PD 115 in relation to estafa
under the RPC, as 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, where the borrower
is obligated to pay the bank the amount spent for the purchase of the goods.
In the case of Ng vs. People, the Court ruled that the Trust Receipts Law was created 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.
Following the precept of the law, such transactions affect situations wherein the entruster,
who owns or holds absolute title or security interests over specified goods, documents or
instruments, releases the subject goods to the possession of the entrustee. The release
of such goods to the entrustee is conditioned upon his execution and delivery to the
entruster of a trust receipt wherein the former binds himself to hold the specific 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 to the extent of the amount owing to the entruster or the goods, documents or
instruments themselves if they are unsold. The entruster is entitled only to the proceeds
derived from the sale of goods released under a trust receipt to the entrustee.
As ruled in the case of Land Bank vs. Perez, 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. 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, where the borrower is obligated
to pay the bank the amount spent for the purchase of the goods.
The practice of banks of making borrowers sign trust receipts to facilitate collection
of loans and place them under the threats of criminal prosecution should they be
unable to pay it may be unjust and inequitable. if not reprehensible. Such
agreements are contracts of adhesion which borrowers have no option but to sign
lest their loan be disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks and is prone to misinterpretation.
Q: In other words, when could the issuance of a trust receipt be
considered within the scope of the trust receipt law?
A: When the goods will be delivered to the entrustee, the intention should
be to sell, which is not present in the cases we discussed. The intention
was only for loan. No intention of resale of the goods, which is why not
covered by Trust Receipt Law.
It has been the practice of banks to make borrowers sign trust receipts to
facilitate collection of loans and then place them under the criminal threat for
estafa should they be unable to pay. The SC said this is unjust and equitable
since these agreements are contracts of adhesion. The mere fact that there
are trust receipts issued does not automatically make it covered under the
trust receipts law or that the entrustee would be liable for estafa. In this case
the bank knew even before the execution of the trust receipt agreement that
the construction materials covered were never intended for resale or for the
manufacture of items to be sold. It was a simple loan.
So you look at the intention. And look at WON the entrustee has the
alternative obligation to deliver the proceeds of the sale of the goods
covered by the trust receipts or to return the goods unsold. The
transaction becomes a mere loan where the borrower is obligated to pay
the bank the amount spent for the purchase of goods.
Now notice here that the information of this case were all dated March 15, 2002,
The trial court would find them guilty, the Court of
appeals would uphold the decision, and the SC even initially dismissed
the case. Tingnan nyo, 2002 gi-file ang criminal action until 2013 na-
dismiss na lahat ng criminal liability for estafa.
VI. LETTERS OF CREDIT
How about letters of credit? LOC in Code of Commerce specifically
Articles 567 to 572.
Art. 567
Letters of credit are those issued by one merchant to another or for
the purpose of attending to a commercial transaction.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
However, this definition has become obsolete, since nowadays, LOC are strictly
bank-to-bank transactions. It is issued by a bank that guarantees its clients ability to
pay for imported goods or services. The underlying idea of a letter of credit is to
ensure certainty of payment. Seller is assured of payment because the bank
intervenes and makes the commitment to pay. The idea behind it is like your credit
card. You walk into a department store and they sell to you on credit although
w your credit card, which means that
the bank which issued the credit card tells the seller that it will pay the
goods being bought.
A basic principle in letters of credit is that the bank deals with documents only. Aside
from certain conditions, the seller will be required to submit certain documents
together with the draft that he will draw in order to collect. These documents shall be
negotiated and agreed upon between the buyer and the seller. Normally, the seller
would have to submit together with the draft a bill of lading, packing list, commercial
invoice. As banks deal with documents only, they are not
one type of goods. They will act on the basis of the documents only.
A letter of credit is also not a contract of guarantee or suretyship,
because it entails a primary liability on the part of the issuer-borrowee in
default. And moreover, it is not a negotiable instrument.
PRUDENTIAL BANK vs. IAC
FACTS:
Respondent Philippine Rayon applied for a commercial letter of credit with
petitioner Prudential Bank to effect payment for the importation of machineries with
Nissho Company. By virtue of the application, the petitioner bank opened a Letter of
Credit in favor of respondent. Against this letter of credit, drafts were drawn and
issued by Nissho which were all paid by petitioner bank.
Upon the arrival of the machineries, the petitioner bank indorsed the shipping documents
to respondent which accepted the delivery. To enable the respondent to take delivery of
the machineries, it executed a trust receipt in favor of petitioner bank.
Later on, respondent ceased business operation. However, its obligation arising
from the letter of credit and the trust receipt remained unpaid and unliquidated
despite the repeated demands of petitioner bank.
The IAC ruled that the relationship existing between the petitioner and respondent is
governed by specific contracts, namely the application for letters of credit, the promissory
note, the drafts and the trust receipt. It further ruled that respondent could only be held
liable for the 2 drafts because only these appear to have been accepted by the latter after
due presentment. However, the liability for the remaining 10 drafts did not arise because
the same were not presented for acceptance. The IAC concluded that acceptance of the
drafts by Philippine Rayon was indispensable to make it liable.
ISSUE: W/N respondent Philippine Rayon is liable on the basis of the trust receipt.
RULING: YES
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, by virtue of the Application and Agreement for Commercial Letter of
Credit, petitioner bank as under obligation to pay through its correspondent bank in Japan
the drafts that Nissho Company periodically drew against said letter of credit pursuant to
petitioner's contract with respondent. In turn, respondent was obligated to pay petitioner
bank the amounts of the drafts drawn by Nissho Company against petitioner 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.
Hence, the drawee was necessarily the petitioner bank. It was to the petitioner 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 NIL.
Furthermore, respondent not only have presumably put said machinery to good use and
have profited by its operation and/or disposition but respondent already sold the
machinery covered by the trust receipt to Yupangco Cotton Mills. Clearly, respondent
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.
Q: Is there a contract of sale here?
A: Yes, between Phil. Rayon and Nissho.
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Q: Will the validity of the sale be affected by the letter of credit
arrangement between Phil. Rayon and Prudential?
A: No, maam.
Q: So, when will the obligation of the bank to Nissho arise?
Q: Can it refuse to pay on the ground of breach of contract or on the
ground that the goods delivered were not in accordance with what was
agreed between Phil. Rayon and Nissho?
Q: Do we have here a true trust receipt transaction covered by the trust
receipt law?
So here, Phil. Rayon immediately became liable upon payment of
Prudential to Nissho. A different conclusion would invalidate the principle
upon which a commercial letter or credit is founded.
When is a letter of credit availed of? Usually in international transactions.
Phil. Rayon would not be willing to pay for such a huge amount without the
assurance that upon payment the goods will be delivered. Remember that a
letter of credit is a financial device developed as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of the 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.
To break the impasse, the buyer may be required to contract a bank to issue a
letter 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. The buyer and 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
Once the letter of credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents and
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. The seller gets paid only if he delivers the
documents of title over the goods while the buyer acquires the said documents and
control over the goods only after reimbursing the bank.
ESTILLORE
December 13, 2016
Part 1 of 1
BANK OF AMERICA vs. CA
FACTS:
Petitioner Bank of America received an Irrevocable Letter of Credit issued by Bank
of Ayudhya for the account of General Chemicals of Thailand to cover the sale of
plastic ropes and "agricultural files," with the petitioner as advising bank and
respondent Inter-Resin as beneficiary.
Upon receipt of the letter-advice with the letter of credit, respondent sent Atty.
Tanay to petitioner to have the letter of credit confirmed. The bank did not. A bank
employee in charge of letters of credit, however, explained to Atty. Tanay that there
was no need for confirmation because the letter of credit would not have been
transmitted if it were not genuine.
Respondent sought to make a partial availment under the letter of credit by submitting to
petitioner invoices, covering the shipment of ropes to General Chemicals, the
corresponding packing list, export declaration and bill of lading. Finally, after being
satisfied that respondent's documents conformed with the conditions expressed in the
letter of credit, petitioner issued in favor of respondent a Cashier's Check.
Petitioner wrote Bank of Ayudhya advising the latter of the availment under the
letter of credit and sought the corresponding reimbursement therefor.
Meanwhile, respondent presented to petitioner the documents for the second availment under the
same letter of credit for the second shipment of goods. Immediately upon receipt of a telex from
the Bank of Ayudhya declaring the letter of credit fraudulent, petitioner stopped the processing of
respondent's documents and sent a telex to its branch office in Thailand requesting assistance in
determining the authenticity of the letter of credit.
Petitioner sued respondent for the recovery of the peso equivalent of the draft on the partial
availment of the now disowned letter of credit. On the other hand, respondent claimed that not
only was it entitled to retain the amount on its first shipment but also to the balance
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
covering the second shipment.
ISSUES:
(1) W/N the Bank of America is a mere advising bank under the letter of
credit hence it cannot be held liable. YES
(2) W/N the Bank of America may recover against Inter-Resin under the
draft executed in its partial availment of the letter of credit. YES
RULING: BOTH YES
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.
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. 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.
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.
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.
There would at least be 3 parties:
(a) The buyer, who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipts of the documents of title;
(b) The bank issuing the letter of credit, 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) The 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.
First issue
Bank of America has only been an advising bank as evidenced 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 respondent Inter-Resin that it has paid the same.
The fact that petitioner asked respondent to submit documents required by the letter of
credit and eventually has paid the proceeds thereof did not make it a confirming bank.
Likewise, the fact 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.
Most importantly, the Bank of America's letters expressly stated that "the enclosure is
solely an advise of credit opened by the abovementioned correspondent and conveys no
engagement by us." This written reservation by Bank of America in limiting its obligation
only to being an advising bank is in consonance with the provisions of UCP.
As an advising or notifying bank, petitioner 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. The bare statement of the bank employees on the authenticity of
the letter of credit did not have the effect of novating the letter of credit and
petitioner's letter of advise, 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. 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. In the ordinary course
of business, the perfection of contract precedes the issuance of a letter of credit.
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
Article 18 of the UCP which states that: "Banks assume no liability or responsibility for the
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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, petitioner is bound only
to check the "apparent authenticity" of the letter of credit, which it did.
Second issue
The kind of transaction between the parties 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. 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.
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
giventhe 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 fact 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. Hence, Inter-Resin is ordered to
refund to petitioner Bank of America.
M: Who applied for the Letter of Credit?
S: General Chemicals Ltd., Inc
M: Who issued the Letter of Credit?
S: Bank of Ayudhya from Thailand
M: In whose favor was the Letter of Credit supposed to be?
S: Inter-Resin through Bank of America.
This is more or less similar to Prudential Bank. The difference, however,
is here, ang nag-issue is from another country. Unlike in Prudential Bank,
the letter of credit was issued here in the Philippines.
M: What is the role here of Bank of America?
S: As an advising bank, its role is only to advise or notify Inter-Resin that
a Letter authenticity thereof.
M: Is Inter-Resin liable to Bank of America?
S: Yes. Bank of America already released the money assming that the
Letter of Credit was genuine.
M: What do you mean by Independence Principle?
S: It states that 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.
So here, the SC defined a LETTER OF CREDIT as 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.
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.
The engagement of the issuing bank to pay the seller of the draft and the
required shipping documents are presented to it.
Bank of America.
In relation thereto, please take note of the 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. So, whether there was a perfected sale, whether
actual delivery took place, whether there is a breach of warranty.. That issues are
independent with regard to the compliance of the Letter of Credit.
Also in this case, the SC mentioned that there would at least be three (3) parties:
(a) the BUYER, who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipts of the documents of title;
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
(b) the bank issuing the letter of credit, 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) the 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.
It may be increased as there maybe 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 paying bank, which undertakes to
encash the drafts drawn by the exporter.
In this case, Bank of America was only an advising and nor a confirming bank,
as clearly provided in the letter of advice. 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. As an advising bank, the Bank of America is bound only to check the
apparent authenticity of the Letter of Credit, in 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? Yes, to which the SC
held that such transaction is considered as a discounting arrangement.
Bank of America has acted independently as a negotiating bank, saving
Inter-Resin from the hardship of presenting the documents directly to
Bank of Ayudhya to recover payment. As a negotiating bank, Bank of
America has a right to recourse against the issuer bank and until
reimbursement is made. And in this case, Inter-Resin is considered as
the drawer of the draft, continues to assume a contingent liability.
Bank of America, as a notifying bank, did not assume the responsibility of
a confirming bank.
ESSENTIAL CONDITIONS OF A LETTER OF CREDIT
(1) It is issued in favor of a definite person and not to order. When you
had negotiable instruments, letters of credit is not a negotiable
instrument because it is payable to a specific person.
(2) Limited to fixed or specified amount, or to one or more
undetermined amounts, but with maximum stated limit.
Also, in relation to letters of credit, as mentioned in the Bank of America, we
have three parties: buyer, issuing bank, and the seller. And then as an
additional party, we have either advising, notifying, confirming or paying bank.
In this transaction involving letters of credit, there are separate
independent contracts involved. Of course, there would be a Contract of
Sale between the buyer and the seller. And then the contract of the buyer
would be with the issuing bank and then there is a letter of credit proper.
As mentioned in the case of Bank of America, take note of the Independence
Principle in a letter of credit. A bank, in determining compliance of the terms of a
letter of credit, is required only to examine only the shipping documents presented
by the seller. And, again, it is precluded from determining whether the
main contract is actually accomplished or not. Independent This
arrangement assures the seller from payment, independent of a breach
of the sales contract.
Now, RULE OF STRICT COMPLIANCE IN THE LETTER OF CREDIT TRANSACTION.
That the documents tendered by the seller or the beneficiary must strictly conform
to the terms of the letter of credit. So naka-specify letters of credit. A
corresponding bank, which departs from what has been stipulated under the
letter of credit as when it accepts a faulty tender, acts on its own risk, and
it
may not thereafter be able to recover from the buyer or issuing bank, as
the case may be, the money thus paid to the beneficiary.
Another term where you should also be familiar with as the STAND-BY LETTER OF
CREDIT. This is a bank issued option on the loan involving three parties: the bank
issues the credit, the party requesting for such issuance, and then we have the
beneficiary. The beneficiary has the right to trigger(?) the loan option if the party fails
to fulfill its commitment, the standby letter of credit, meron nang maximum amount
specified therein in which case the issuing bank disburses a specified sum to the
beneficiary and books an equivalent loan. It will consider it as a loan of its customer.
Such standby letter of credit may support one financial obligation such
as those of bidder. Yung mag-bid ka specially for those which involve huge
Credit Transactions – First Exam Coverage 2016-2017
amounts. So kung mag-bid ka, hindi ka pa man maglabas ng pera pero dapat
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
meron kang available na pera. As a proof you can have a standby letters of credit.
Or financial obligations as those of borrowers. Do take note that standby letters of
credit may be considered as a security arrangement but they are not

guarantor.

TYPES OF LETTER OF CREDIT

(1) Irrevocable
− Obligates the issuing bank to honor trust drawn in
compliance with the credit and cannot be cancelled
− It cannot be modified without the consent of all the
parties including the beneficiary-exporter.
(2) Revocable
− It can be cancelled or amended at any time before
payment and intended to serve as a means of arranging
payment, but it is not a guarantee of payment
(3) Confirmed
− Both banks are obligated to honor drafts drawn in
compliance with the credit
(4) Unconfirmed
− Obligation only of the issuing bank and issued if exporter
has doubts about the foreign banks ability to be paid.
Such doubts may arise if the exporter is unsure of the
financial standing of the foreign bank or if political or
economic conditions of the foreign country are unstable.
A confirming bank is better able to judge the credibility of
a bank issuing a letter of credit
(5) Non-revolving
− Valid only for one transaction.
(6) Revolving
− Valid for several transactions over a given period of time.
Most revolving letters of credit are revocable in form
(7) Cumulative
− Undrawn amounts can be carried over to future periods
(8) Non-cumulative
− A revolving letter of credit maybe non-cumulative, in which
case, any amount not used by the beneficiary during a
specified period, may not be drawn against a latter periods

-Case Digests by GUMBOC

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