Credit Transactions

CREDIT TRANSACTIONS INTRODUCTION Credit Transactions include all transactions involving the purchase or loan of goods, services, or money in the present with a promise to pay or deliver in the future.

By the use of credit, (1) more exchanges are possible, (2) persons are able to enjoy a thing today but pay for it later, and (3) through the banking systems, actual money transfer is eliminated by cancellation of debts and credits. Credit transactions are really contracts of security. Secured transactions or contracts of real security – those supported by a collateral or an encumbrance of property; and Unsecured transactions or contracts of personal security – – Those the fulfillment of which by the principal debtor is secured or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety. Security is something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property. Bailment is the delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the specific purpose is accomplished or kept until the bailor reclaims it. Parties to a Bailment: (1) Bailor [Comodatario] – the giver; the party who delivers the possession or custody of the thing bailed; and (2) Bailee [Comodante] – the recipient; the party who receives the possession or custody of the thing thus delivered. Kinds of Contractual Bailment

1. 2. 3.

Those for the sole benefit of the bailor – Deposit/Mandatum; Those for the sole benefit of the bailee – Commodatum/Mutuum; Those for the benefit of both parties – deposit for a compensation: Involuntary Deposit/Pledge/Bailments Deposit/Pledge/Bailments for Hire. Mutual benefit bailments.

KINDS OF LOAN: 1. Commodatum – where the bailor (lender) delivers to the bailee (borrower) a non-consumable thing so that the latter may use it for a certain time and return the identical thing; and – the lender delivers to the borrower money or 2. Simple loan or mutuum – other consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality. Consumable thing is consumed when used in a manner appropriate to its purpose or nature, like rice, gasoline, money, fruit, firewood, etc. “LOANS” DISTINGUISHED DISTINGUISHED FROM “CREDIT” “CREDIT” The credit of an individual is his ability to borrow money or thing by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period. A loan , on the other hand, is the contract where a party delivers money or other consumable to another upon an agreement to repay the same amount or the same kind and quality. The concession of a “credit” necessarily involves the granting of “loans” up to the limit of the amount fixed in the “credit”. “CREDIT” AS OPPOSED TO TO “DEBT” Credit is a sum credited on the books of a company to person who appears to be entitled to it. It presupposes a creditor-debtor relationship. It is a debt from the creditor’s point of view. Example, if A loaned money to B, A has a debt to B and B has a credit in A ’s books (a claim against A’s assets). “LOAN DISTINGUISHED DISTINGUISHED FROM FROM “DISCOUNTING “DISCOUNTING OF PAPER” PAPER”

To discount a paper is a mode of loaning money. M executed a promissory note payable to P for P1,000, representing the amount borrowed by M. Here, there is a loan transaction. If P, who is in need of cash, but the note has not yet matured, sold the note to D for P900, there is discounting. Such that, D would receive P900, the difference of P100 representing the discount or interest collected in advance. D then, as the holder of the note, can collect from M P1,000 upon due date. COMMODATUM VS. MUTUUM (SIMPLE LOAN)

TITLE XI. LOAN (Art. 1933-1961) GENERAL PROVISIONS Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum . Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. CHARACTERISTICS OF THE CONTRACT OF LOAN: 1. Real Contract – the delivery of the thing loaned is necessary for the perfection of the contract (Art. 1934); 2. Unilateral Contract – once the subject matter has been delivered, it creates obligations on the part of only one of the parties, i.e., the borrower. CAUSE OR CONSIDERATION IN A CONTRACT: 1. Borrower – the acquisition of the thing; 2. Lender – the right to demand the return or its equivalent.

COMMODATUM Thing: not consumable Ownership: retained by bailor (lender) Essentially gratuitous

Return: the same thing May involve real or personal property Purpose: for use or temporary possession Bailor may demand the return of the thing before expiration of the term in case of urgent need (Art. 1946) Loss: suffered by bailor Purely personal in character

MUTUUM Money or other consumable Passed on to the bailee (debtor)

May or may not be onerous, that is if there is interest or not Same amount or the same kind and quality Personal property only For consumption Lender may not require the debtor to pay before the lapse of the term agreed upon Suffered by bailee No such characteristic characteristic

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. BINDING EFFECT OF ACCEPTED PROMISE An accepted promise to make a future loan is a consensual contract and, therefore binding upon the parties but it is only after delivery, will the real contract of loan arise. SAURA IMPORT AND EXPORT CO., INC. VS. DBP (GR No. L-24968; April 27, 1972) - Saura Inc. applied to the Rehabilitation Finance Corp

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Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 CREDIT TRANSACTIONS

(before its conversion to DBP) for a loan of 500k secured by a first mortgage of the factory building to finance for the construction of a jute mill factory and purchase of factory implements. RFC accepted and approved the loan application subject to some conditions which Saura admitted it could not comply with. Without having received the amount being loaned, and sensing that it could not at anyway obtain the full amount of loan, Saura Inc. then asked for cancellation of the mortgage which RFC also approved. Nine years after the cancellation of the mortgage, Saura sued RFC for damages for its non-fulfillment of obligations arguing that there was indeed a perfected consensual contract between them. ISSUE: WON there is a real contract of loan which would warrant recovery of damages arising out of breach of such contract? HELD: No. Yes, there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code. There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages. The action thus taken by both parties —Saura's request for cancellation and RFC's subsequent approval of such cancellation —was in the nature of mutual desistance — what Manresa terms "mutuo disenso" — which is a mode of extinguishing obligations. It is a concept derived from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. In view of such extinguishment, said perfected consensual contract to deliver did not constitute a real contract of loan. BPI INVESTMENT CORP. (BPIIC) VS. CA (GR No. 133632; Feb 15, 2002) - Frank Roa obtained a loan at 16 1/4% interest rate per annum from Ayala Investment and Development Corporation. For security, Roa's house and lot were mortgaged. Later, Roa sold the house and lot to ALS and Antonio Litonjua, who assumed Roa's debt to Ayala Investment. Ayala Investment, however, granted a new loan to be applied to Roa's debt, secured by the same property at a different interest rate of 20% per annum. When ALS and Litonjua failed to pay, BPIIC, successor to Ayala Investment, filed for foreclosure of mortgage. ISSUE: WON a contract of loan is a consensual contract? HELD: No. A loan contract is not a consensual contract but a real contract. It is perfected upon delivery of the object of the contract. Although a perfected consensual contract can give rise to an action for damages, it does not constitute a real contract which requires delivery for perfection. A perfected real contract gives rise only to obligations on the part of the borrower. In the present case, the loan contract was only perfected on the date of the second release of the loan. A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in. The payment of amortization should accrue from the time BPIIC released the loan amount to ALS and Litonjua because it was only at that time (the delivery of the amount -- the object of the contract) that the loan contract was perfected. BONNEVIE VS. CA (GR No. L-49101; Oct. 24, 1983) - Spouses Lozano mortgaged their property to secure the payment of a loan amounting to P75,000 with private respondent Philippine Bank of Communication (PBCom). The deed of mortgage was executed on Dec. 6, 1966, but the loan proceeds were received only on Dec. 12, 1966. Two days after the execution of the deed of mortgage, the spouses sold the property to the petitioner Bonnevie for and in consideration of 100,000 —25,000 of which payable to the spouses and 75,000 as payment to PBCom. Afterwhich, Bonnevie defaulted payments to PBCom prompting the latter to auction the property after Bonnivie failed to settle despite subsequent demands, in order to recover the amount loaned. The latter now assails the validity of the mortgage between Lozano and Pbcom arguing that on the day the deed was executed there was yet no principal obligation to secure as the loan of P75,000.00 was not received by the Lozano spouses, so that in the absence of a principal obligation, there is want of consideration in the accessory contract, which consequently impairs its validity and fatally

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affects its very existence. ISSUE: WON there is a perfected contract of loan? HELD: Yes. From the recitals of the mortgage deed itself, it is clearly seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution. CENTRAL BANK OF THE PHILIPPINES (CB) VS. CA (GR No. L-45710; Oct. 3, 1985) – Island Savings Bank (ISB) approved an P80,000 loan of Sulpicio M. Tolentino, private respondent, covered by the latter ’s 100 hectare lot, but ISB released only P17,000. Later on the Monetary Board of CB issued a resolution instructing Acting Superintendent of Banks to take charge of the assets of ISB, prohibiting the latter from doing further business, which resulted in Tolentino defaulting on his instalment payments. Later on ISB foreclosed the mortgage on said property. Sulpicio filed an action in court for ISB to release the remaining P63,000 which the court granted and the CA affirmed. Thus, the petition. ISSUE1: WON Sulpicio’s action for specific performance can prosper? HELD: No. There was a reciprocal obligation between the parties, which Tolentino was already willing to comply by executing the mortgage and thus made ISB in default. The proper remedy of Tolentino is to ask for specific performance or rescission plus damages. However, since ISB was already prohibited in doing further business, the only remedy left is rescission as to the P63,000 to which ISB was in default. ISSUE2: Since the P17,000 obligation of Tolentino subsists, can his real property be foreclosed to satisfy said amount? HELD: No. The consideration of a debtor in an accessory contract of mortgage is the existence of a valid, voidable or unenforceable debt. When a consideration is subsequent to a mortgage, the mortgage is not necessarily void for lack of consideration, but can only take effect when the debt secured by it is created as a binding contract to pay. When the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due. Since ISB failed to furnish P63,000 of the P80,000 loan, the real estate mortgage is unenforceable to such extent. Thus, the real estate mortgage is unenforceable to the extent of 78.75 hectares (63/80 of 100). 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. COMMODATUM ESSENTIALLY GR ATUITOUS Commodatum is essentially gratuitous. Hence, the contract ceases to be a commodatum if any compensation is to be paid by the borrower who acquires the use. In such a case, there arises a lease contract. If the consideration is the rendering of some service, an innominate contract will result. REPUBLIC VS. BAGTAS (6 SCRA 262 [1962]) – 4 bulls were borrowed from the Bureau of Animal Industry for a period of one year, which was later on renewed to another year, where 10% of the book value of the bulls were paid as breeding fee. Bagtas kept one of the bulls for four years which was later on killed in a Huk raid by stray bullets. ISSUE: WON there is a contract of commodatum and as such, the BAI, retaining ownership of the bull must suffer the loss? HELD: No. If the breeding fee be considered compensation, then the contract would be a lease of the bull. Accordingly, the lessee would be subject to responsibilities of a possessor in bad faith because of continued possession after the expiration of the contract. And even if it were a commodatum, he would still be liable under Art. 1942(2). CONTRACT SIMILAR TO DONATION Commodatum confers benefit to the recipient. The presumption is that the bailor loaned the thing for having no need therefor.

EXTENT OF BAILEE’S RIGHT TO USE It is limited to the thing loaned and does not include its fruits unless there is stipulation to the contrary, since the Bailor retains ownership thereto. PURPOSE OF THE CONTRACT Purpose of commodatum must be for temporary use of the thing loaned. If the bailee is not entitled to use of the thing, the contract may be of deposit. Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Art. 1937. Movable or immovable property may be the object of commodatum . SUBJECT MATTER of a commodatum is generally non-consumable, whether movable or immovable, real or personal, because the bailee cannot use and return the same thing which is consumed when used. Except as provided under Art. 1936, which involves consumable intended to be returned. Art. 1938. The bailor in commodatum need not be the owner of the thing loaned. BAILOR NEED NOT BE THE OWNER since ownership does not pass to the borrower. Hence, a lessee or usufructuary may lend the thing. However, the borrower or bailee cannot lend nor lease the thing loaned to him because commodatum is purely personal (Art. 1939[2]). Art. 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract; (2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. PURELY PERSONAL: Heirs of either parties may continue with the commodatum if it was stipulated.

Also, death of one of two or more borrowers, does not extinguish the commodatum in the absence of a contrary stipulation. THIRD PERSONS may use the property loaned in two cases: 1. There is stipulation to such effect; 2. Members of the household – subject to two exceptions: a. There is stipulation to the contrary; or b. The nature of the thing (e.g., dress) forbids such use. Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. SECTION 2. - Obligations of the Bailee Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. LIABILITY FOR ORDINARY EXPENSES It is logical that the borrower should defray the expenses for the use and preservation (gasoline, motor oil, washing, greasing and spraying of a car loaned) of the thing loaned since he acquires the use of the same, and he is supposed to return the same thing.

Liability for extraordinary expenses, see Art. 1949 and 1950. Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted;

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(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. LIABILITY FOR LOSS General Rule: Bailee is not liable for loss in case of fortuitous event because ownership of the thing is retained by the bailor. However the following are the exceptions provided under Art. 1942: (1) The bailee acted in bad faith; (2) He incurs delay; (3) There was intention that the borrower shall be liable for the loss in case of fortuitous events; (4) Commodatum is purely personal; (5) Bailee shows his ingratitude. Art. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. LIABILITY FOR DETERIORATION Depreciation due to ordinary wear and tear, or reasonable and natural use of the thing, in the absence of agreement to the contrary, shall not be borne by the bailee, since the parties know that the thing cannot be used without deterioration. EXCEPT: (1) He is guilty of fault or negligence; or (2) He devotes the thing to any purpose different from that for which it has been loaned (Art. 1942[1]). 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. ART. 1951 involves claims for damages due to the known flaws of the thing the bailor did not inform the bailee of. OBLIGATION TO RETURN THING LOANED 1. Ownership is retained by the bailor – the bailee, the possession only. It would be extremely harsh of the bailor, after benefiting the bailee, should be deprived of the enjoyment of his property on the excuse of the expenses more or less certain or just; 2. Temporary use – was given to the bailee and it would be violative of the trust reposed on him if he fails to return the thing. EFFECT OF RETENTION OR ADVERSE CLAIM BY BAILEE CATHOLIC VICAR APOSTOLIC OF THE MT. PROVINCE VS. CA (GR No. 80294-95; Sept. 21, 1988) - Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed an application for registration of title over Lots 1, 2, 3, and 4, said Lots being the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc. The Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto since their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. After trial on the merits, the land registration court promulgated its Decision confirming the registrable title of VICAR to Lots 1, 2, 3, and 4. The Heirs of Juan Valdez appealed the decision of the land registration court to the then Court of Appeals, The Court of Appeals reversed the decision. Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his application for registration of Lots 2 and 3 . ISSUE: WON Petitioner who is in possession since 1906 but filed for Tax Declarations as owner only in 1951, can register the property in his name by 1962? HELD: No. When the true owners never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' 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. Accordingly, since there was no just title, a requirement for ordinary acquisitive prescription, there must be possession for 30 years for extraordinary acquisitive prescription to apply. Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. SOLIDARY LIABILITY OF TWO OR MORE BAILEES This is to safeguard the rights of the lender. It is presumed that the bailor takes into account the collective personal integrity and responsibility of the bailees, and that, therefore, he would not have constituted the commodatum if there were only one bailee. 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. GENERAL RULE ON DURATION OF LOAN: The bailor is to allow the bailee the use of the thing loaned for the duration of the period stipulated or until accomplishment of the purpose for which the commodatum was constituted since he is bound by the terms of the contract of commodatum which is “for a certain time”. EXCEPTIONS:

1. 2. 3.

There is urgent need of the thing (Art. 1946); The bailee commits any act of ingratitude under Art. 765 (Art. 1948); He may demand the thing at will (Precarium under Art 1947).

Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or (2) If the use of the thing is merely tolerated by the owner. PRECARIUM is a kind of commodatum where the bailor may demand the thing at will. QUINTOS AND ANSALDO VS. BECK (69 PHIL. 108 [1939]) – Beck was a tenant of the petitioner. Upon novation of the contract of lease, petitioner granted the use of furniture described therein subject to the condition that defendant would return them upon petitioner’ s demand. Petitioner later on sold the property to Maria Lopez and Rosario Lopez and they notified the defendant of the conveyance, giving him 60 days to vacate the premises. Petitioner refused to get the furniture in view of the fact that defendant declined to make delivery of all of them, and they were later on deposited in a warehouse in custody of the sheriff. ISSUE: WON Beck complied with his obligation to return? HELD: No. In the instant case, there was a commodatum on the furniture. Beck failed to comply with his obligation when he merely placed them at the petitioner’s disposal, retaining for his benefit 3 gas heaters. The obligation assumed by Beck to return the furniture means that he should return all of them to the petitioner’s residence or house. The defendant, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps. Art. 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765. Art. 765 is applicable, because like a donation, commodatum is essentially gratuitous. The bailee who commits any of the acts of ingratitude makes himself unworthy of the trust reposed upon him by the bailor. It provides: The

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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 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. EXTRAORDINARY EXPENSES FOR THE “PRESERVATION” OF THE THING LOANED: 1. Borne by the bailor (i.e., expenses for repairing borrowed house damaged by a typhoon), since he is still the owner of the property and he will benefit from said expense. Accordingly, if the bailee advanced the extraordinary expenses, the bailor should refund them. 2. Provided, it is brought to the knowledge of the bailor first, since he may not want to incur the extraordinary expenses at all. EXCEPT: where the repairs are so urgent that the reply to the notification cannot be awaited without danger. EXTRAORDINARY EXPENSES “ARISING OUT OF THE ACTUAL USE” OF THE THING LOANED: 1. Borne by the bailor and bailee alike on a 50-50 basis. 2. Example includes the repair of a jeep from the collision without the fault of the bailee. 3. Bailee shoulders half because he will benefit from the use of the thing and the bailor shoulders half because he is the owner and the thing will be returned to him. 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. EXPENSES NOT NECESSARY FOR USE (1941) AND PRESERVATION (1949) 1. Borne by the bailor. Like an extra tire for a borrowed car. 2. Reason: Since the bailor makes use of the thing, expenses for ostentation are to be borne by the bailee because they are not necessary for the preservation of the thing. 3. ORDINARY EXPENSES for preservation are also to be borne by the bailee as inferred from Art. 1949 (1 st par.) Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. LIABILITY TO PAY DAMAGES FOR KNOWN HIDDEN REQUISITES: (FHADS) 1. There is a flaw or defect on the thing loaned; 2. The flaw or defect is hidden; 3. The bailor is aware thereof; 4. He does not advise the bailee of the same; and 5. The bailee suffers damages by reason of said flaw or defect.

FLAWS,

REASON : The bailor is made liable for his bad faith. Consequently, the bailee is given right of retention until he is paid damages (Art. 1944). Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. REASON: Expenses and/or damages may exceed the value of the thing loaned, and it would therefore, be unfair to allow the bailor to just abandon the thing instead of paying for said expenses a nd/or damages. 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. BILATERAL CONTRACT: the promise of the borrower to pay is the consideration for the obligations of the lender to furnish the loan. NO CRIMINAL LIABILITY FOR FAILURE TO PAY : in mutuum, the borrower acquires ownership of the money, goods or personal property borrowed (Art. 1954). Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered misappropriation thereof. No estafa is committed by a person who refuses to pay his debt or denies its existence. SIMPLE LOAN VS. LEASE SIMPLE LOAN The delivery of the property transfers ownership and there will be a repayment of an equivalent amount of the same kind and quality. Relationship of parties are obligor and oblige Creditor receives payment

LEASE The delivery transfers possession or control during the period of the contract and the SAME property needs to be returned. Landlord and tenants The owner receives “rent” or compensation or price either in money, provisions, chattels, or labor from the occupant.

SIMPLE LOAN DISTINGUISHED FROM “TRUST RECEIPT” 1. TRUST RECEIPT, under the Trust Receipts Law (PD 115), shall refer to the written or printed document signed by the entrustee in favour of the entruster containing terms and conditions substantially complying with the provisions of the Decree. 2. It is a document in which is expressed a security transaction, whereunder the lender having no prior title in the goods on which the lien is to be given, and not having possession which remains in the borrower, lends his money to the borrower on security of the goods, which the borrower is privileged to sell clear of the lien on agreement to pay all or part of the proceeds of the sale to the lender. CONSOLIDATED BANK AND TRUST CORPORATION VS. CA (GR No. 114286; April 19, 2001, citing Colinares vs. CA [339 SCRA 609(2000)]) Respondent Corporation obtained a letter of credit from Petitioner for the purchase of some liters of bunker fuel oil. It was not contested that Respondent Corporation paid to Petitioner a marginal deposit and subsequently issued a trust receipt in favor of the latter, with Respondent Lim as signatory. Petitioner, claiming that Respondent Corporation failed to turn over the goods covered by the said trust receipt, filed a complaint for sum of money with application for preliminary attachment. Respondent Company contended, among others, that the agreement they entered into was a merely a simple loan, and not a trust receipt transaction. Both trial and appellate courts ruled in favor of Respondent Company, hence, this petition. ISSUE: WON the transaction in the instant case falls under the meaning of a simple loan? HELD: Yes. In the case of Colinares vs. CA, it was held by the Court that where the debtor has received the goods covered by the trust receipt agreement before the trust receipt itself was entered into, the transaction should be considered as a simple loan. The instant case fell foursquare with the Colinares case, to wit, Respondent Corporation received the bunker fuel oil and used it all up long before the trust receipt was executed. The Court reiterated that the Trust Receipts

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Law does not intend to seek payment of loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. In the case at bar, Respondent Corporation had not been dishonest in its dealings with Petitioner. The reason why Respondent Corporation purchased oil was to use it in its operations and not for the reason of importing the same. Respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended to the former. In a pure trust receipt transaction, the goods belong to the bank and are only released to the importer in trust after the loan is granted. Hence, Petition for Review was denied. FUNGIBLE THINGS: are commercially interchangeable with other property of the same kind (Black’s Law Dictionary) and are those which are usually dealt with by number, weight, or measure such as rice, oil, sugar, etc. so that any given unit or portion is treated as equivalent of any other portion (De Leon). REPUBLIC VS. GRIJALDO (GR No. L-20240; 1965) - Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. evidenced by five promissory notes executed by him in favor of the latter. To secure the payment of the loans, Grijaldo executed a chattel mortgage on the standing crops on his land. Pursuant to the Philippine Property Act of 1946 of the United States, the assets of the said bank, including the loans in question, were subsequently transferred to the Republic of the Philippines, which subsequently made a written extrajudicial demand upon Grijaldo for the payment of the account in question. Because of an unfavorable judgment by the CFI of Negros Occidental upon appeal of petitioner, Grijaldo brought this action contending that Republic has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. ISSUE: WON Grijaldo’s obligation to pay the loans , secured by a chattel mortgage on the standing crops on a land owned by him, was extinguished due to destruction of the said security? HELD: No. The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant under the five promissory notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the value of the crops that would be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of money representing the total sum of the five loans, with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops. Art. 1954. A contract whereby one person transfers the ownership of nonfungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. DISTINCTIONS: 1. Mutuum vs. Barter: SUBJECT MATTER: In mutuum, it is money, or any other fungible things; In barter, it is non-fungible things; 2. Commodatum vs. Barter: In commodatum, the bailee is bound to return the IDENTICAL THING borrowed; In barter, the EQUIVALENT THING is given in return for what h as been received; 3. Mutuum may be gratuitous; Commodatum is always gratuitous; Barter is an onerous contract, a mutual sale (Art. 1641). Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid.

LOAN OF MONEY: 1. Payment must be made in the currency stipulated, if it is possible to deliver such currency; otherwise, it is payable in the currency which is legal tender in the Philippines (Art. 1249) and in case of extraordinary inflation or deflation, the basis of payment shall be the value of the currency at the time of the creation of the obligations (Art. 1250); 2. Inflation, example: A borrowed from X P5,000 payable after five years. On the maturity of the obligation, the value of P5,000 dropped to P2,500 because of inflation. – In this case, the basis of payment shall be equivalent to the value of the currency today five years ago. Hence A is liable to X P10,000 unless there is agreement to the contrary. LOAN OF FUNGIBLE THING : 1. He borrower is under obligation to pay the lender another thing of the same kind, quality, and quantity. In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of the perfection of the loan; 2. D borrowed from C two sacks of sinandomeng rice. At the time the loan was perfected, the price of each was P3,000. D should return to C two sacks of rice of the same kind and quality although at the time of payment, the price had increased to P5,000. If on due date of the obligation, the same kind of rice could not be delivered by D because it was not available for some reason, then D should pay C the sum of P3,000 instead, the value of the rice at the time of the perfection of the loan. Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. REQUISITES FOR RECOVERY OF INTEREST: (EWL) 1. The payment of interest must be EXPRESSLY STIPULATED ; 2. The agreement must be in WRITING; 3. The interest must be LAWFUL. CASA FILIPINA DEVELOPMENT CORPORATION VS. DEPUTY EXECUTIVE SECRETARY (209 SCRA 399[1992]) - Jose Valenzuela, Jr. filed a complaint against petitioner for its fa ilure to execute and deliver the deed of sale and TCT. He alleged therein that he entered into a contract to sell with petitioner for the purchase of a lot valued at P68,400 with P16,416.00 as downpayment and the balance to be paid in 12 monthly installments of P4,915.16 with 24% interest p.a.; that despite full payment, petitioner refused to execute the deed of absolute sale and deliver the corresponding TCT to him. Judgment was rendered in favor of PR. Petitioner then filed an appeal. ISSUE: WON the amount of 24% interest imposed is high and without basis? HELD: NO. The interest rate of 24% p.a. was mutually agreed upon by petitioner and PR in their contract to sell — this was the interest rate imposed on PR for the payment of the installments on the contract price and there is no reason why this same interest rate should not be equally applied to petitioner which is guilty of violating the reciprocal obligation. It is, thus, evident that if a particular rate of interest has been expressly stipulated by the parties, that interest, not the legal rate of interest, shall be applied. PNB VS. CA (GR No. 88880; April 30, 1991) - Private Respondent Ambrosio Padilla obtained a credit line from Petitioner, secured by a real estate mortgage with 18% inter may be increased accordingly “within the limits allowed by law at any time depending on whatever policy it PNB may adopt in the future” . Upon notice that his credit line was about to expire, Private Respondent requested, among others, that the increase of the interest rate of the mortgage loan be from 18% to 21% or 24%. Petitioner then informed Private Respondent that the bank already required a 32% interest rate for loans of more than one year, which was later on increased to 41% and 48% respectively. The trial court dismissed Private Respondent’s complaint, ruling that the said increases were properly made. Respondent Court reversed, hence, this petition for review. ISSUE: WON the increases on the interest rate in the instant case were valid? HELD: No. In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private respondent’s loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984.

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Those increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than once a year, even less so may a bank which is subordinate to the Board. No law was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate the increases. The agreement between the parties authorized the defendant bank to increase the interest rate beyond the original rate of 18% per annum but ‘within the limits allowed by law’ or ‘within the rate allowed by law,’ it being declared the obligation of the plaintiff as borrower to execute and deliver the corresponding documents and instruments to effectuate the increase. PNB’s successive increases of the inter est rate on the private respondent’s loan, over the latter’s protest, were arbitrary as they violated an express provision of the Credit Agreement that its terms “may be amended only by an instrument in writing signed by the party to be bound as burdened b y such amendment.” The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that “no interest shall be due unless it has been expressly stipulated in writing.” RELUCIO VS. BULLANTE-GARFIN (GR No. 76518; 1990) - Private respondent filed a complaint in the lower court for specific performance with damages against petitioner to compel the latter to execute a final deed of sale in favor of the former over two residential subdivision lots which was already paid in the following scheme: paid P200.00 as down payment and subsequently completed payment of 128 equal monthly installments of P89.45 each amounting to P11,450.00. Private respondent further contends that as the law allows the charging of interest only as monetary interest or as compensatory interest, none of which have obtained in her case, as she had never incurred in delay in the payment of installments due, the stipulated interest of 6% per annum on the outstanding balance is null and void. This was granted by the lower court which was affirmed by the CA, hence, the present petition. ISSUE: WON private respondent has fully paid the stipulated price in the contract so as to be entitled lawfully to demand the execution of a deed of absolute sale in her favor? HELD: Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is in effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the contract or not. The contract for the purchase and sale of a piece of land on the installment payment system in the case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our present day commercial life. ABSENCE OF STIPULATION: 1. Indemnity for damages – The debtor in delay is liable to pay legal interest (6%/12%) as indemnity for damages even in the absence of stipulation for the payment of interest. 2. Interest accruing from unpaid interest – Interest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point. EASTERN SHIPPING LINES, INC. VS. CA (GR No. 97412; July 12, 1994) - The private respondent Mercantile Insurance Company, Inc. paid consignee for the damages suffered by bad orders in a shipment covered by their insurance agreement for failure of petitioner and other parties to the shipment (Port and Broker) to pay such. Private respondent was thus subrogated to the rights of the consignee to go against the other parties for such claim. Upon finding that petitioner was thus solidarily liable with the Port and Broker, the trial court awarded herein private respondent P19,032.95 for the damages suffered by shipments plus 12% legal interest from the date of filing the complaints until full payment. ISSUE: WON the 12% legal interest imposed by the New Central Bank Act or the 6% legal interest under Art. 2209 of the New Civil Code is applicable and when? HELD: 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 damages. 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 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 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 extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 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. LOAN OR FORBEARANCE OF MONEY: 1. Interest shall be at the rate stipulated; In the absence of which, the legal interest of 12% shall apply. 2. The interest earned from the time the debtor incurs delay shall be compensatory interest and will be based on the stipulated interest, or in the absence of which, 12%. 3. From the time it was judicially demanded, the accrued interest shall be added to the principal and both will earn 12% interest, only when there has been a stipulated interest. OTHER THAN LOAN OR FORBEARANCE OF MONEY 1. If demand is established with REASONABLE CERTAINTY, the interest of 6% shall run from the time the judicial or extrajudicial demand was made; 2. When the certainty of the claim cannot be reasonably ascertained, 6% shall apply from the time of judgment until finality. 3. When the decision becomes final and executory, 12% shall apply, for it will be considered forbearance of money. SURCHARGES AND PENALTIES: partake the nature of liquidated damages, which is considered totally separate and distinct from interest (cost of money). 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. CONTRACT VOID AS TO INTEREST ONLY : The obligation is considered to subsist and the usurious stipulated interest is deemed void. However, interest may still be recovered from demand at the legal rate of 12%. RIGHT OF DEBTOR : Debtor may recover the amount paid as interest under a usurious agreement. 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. 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. ACCRUED INTEREST EARNS INTEREST (COMPOUNDING): 1. Upon judicial demand, and there was conventional interest stipulated;

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2.

When there is an express stipulation that the interest due and unpaid shall be added to the principal obligation and the resulting total shall earn interest. PHIL. AMERICAN ACCIDENT INS. CO. VS. FLORES (97 SCRA [1980]) – Art. 2212 of the Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation is silent on this point, it contemplates the presence of stipulated or conventional interest which had accrued when demand was judicially made. Art. 2212 and Sec. 5 of the Usury Law shall not apply where no interest is stipulated in the contract.

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. UNSTIPULATED INTEREST: which were paid voluntarily because the debtor feels morally obliged to do so, there can be no recovery. For this article to apply, the interest must have been MISTAKE in the payment in order to recover, such being a case of solution indebiti. Art. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code

THE USURY LAW (Act No. 2655) USURY is contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money, goods or chattels. ELEMENTS OF USURY: 1. Loan or forbearance of money; 2. Understanding between the parties that the loan shall or may be returned; 3. Unlawful intent to take more than the legal rate for the use of money or its equivalent; and 4. Taking or agreeing to take for the use of the loan of something in excess of what is allowed by law. FORBEARANCE OF MONEY , as used in the Usury Law, signifies the contractual obligation of the creditor to forbear during a given period to require the debtor payment of an existing debt then due and payable. For Loans, see previous discussions. NO CEILING PRESCRIBED: By virtue of the Resolution No. 244 of the Monetary Board of the Central Bank dated Dec. 3, 1982, the rate of interest shall not be subject to any ceiling prescribed under the Usury Law. LEGAL INTEREST: absent any stipulation of interest, the legal interest rate of 12% shall apply to loan or forbearance of money, goods or credit. NAKPIL & SONS VS. CA (160 SCRA 334 [1988]) – The legal rate of 12% may be imposed although there is neither a loan nor forbearance in case of delay in the payment of the sums adjudged in a final judgment, and not as part of the judgment for damages. SOLANGON VS. SALAZAR (360 SCRA 379 [2001]) – Nothing in the circular, that suspends the application of the Usury Law, grants lenders carte blanche authority (blanket authority) to raise interest rates to levels which either enslave their borrowers or lead to a haemorrhaging of their assets. MEDEL VS. CA (299 SCRA 481) – A stipulated rate at 5.5% per month on a 500,000 loan cannot be rendered usurious in view of Central Bank Circular No. 905 , but it is “excessive, iniquitous, unconscionable and exorbitant”.

Title XII.- DEPOSIT CHAPTER 1: DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS

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.

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 .

GENERAL RULE: is that deposits are gratuitous, EXCEPTIONS: (1) when there is contrary stipulation; or (2) depositary is engaged in the business of storing goods, such as a warehouseman; and (3) When property is saved from destruction without knowledge of the owner (Art. 1996 and 1997).

SAFEKEEPING : is the principal purpose of a deposit, otherwise it is considered some other contract.

Art. 1966. Only movable things may be the object of a deposit.

CHARACTERISTICS: 1. Real Contract – it is perfected by the delivery of the subject matter; 2. Gratuitous if there is no consideration, therefore it is also Unilateral , since only the depositary (depositorio) has an obligation – to return. 3. Onerous if there is compensation, and it becomes Bilateral because it gives rise to obligations on both depositary (to return) and the depositor (to pay compensation) (depositante). US VS IGPUARA (27 PHIL 619 [1913]) – The balance of a commission account which remains in possession of the agent at the principal’s disposal acquires the character of deposit and the former must return or restore to the latter at any time it is demanded. The agent undoubtedly commits estafa if he appropriates it or diverts it for his own use. It can only become his as a loan, if so expressly agreed by its owner who would then be obligated not to demand it until the expiration of the period. BPI VS. IAC (164 SCRA 630 [1988] – Where the documents which embodies the contract states that the US dollars in cash were received by the bank for safekeeping, and the subsequent acts of the parties also show that the intent was really for the bank to safely keep the dollars and return it to the plaintiff who demanded the return of the money about 5 month later, the above arrangement is the contract of deposit under Art. 1962. The bank violates its obligation if it sells the dollars and it cannot defeat the plaintiff’s claim by asserting that the peso proceeds of the sale were properly credited to the latter’s current account. DEPOSIT VS. MUTUUM DEPOSIT The Principal purpose is safekeeping or mere custody. The depositor can demand the return of the subject matter at will. Both movable and immovable property may be the object

MUTUUM The consumption is the subject matter. The lender must wait until the expiration of the period granted. Only money and other fungible thing.

DEPOSIT VS. COMMODATUM DEPOSIT The Principal purpose is safekeeping or mere custody. Deposit may be gratuitous.

Only movable things may be the object (extrajudicial) Depositary is not allowed to make use of the thing except under Art. 1977.

COMMODATUM The transfer of the use.

Essentially and always gratuitous. Both movable and immovable property may be the object. Bailee is granted the possession and use of 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. Art. 1964. A deposit may be constituted judicially or extrajudicially. JUDICIAL DEPOSIT is under Arts. 2005-2008 EXTRAJUDICIAL DEPOSIT : VOLUNTARY DEPOSIT (Arts. NECESSARY DEPOSIT (Arts. 1996-2004 and Arts. 1734-1735)

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1968-1995);

This applies only to EXTRAJUDICIAL DEPOSIT since delivery is necessary and the primary purpose is safekeeping. The possibility that the thing may be lost or stolen is not present in immovable properties. JUDICIAL DEPOSIT, on the other hand, may cover movables and immovable, the purpose being to protect the rights of parties to a suit. Art. 1967. An extrajudicial deposit is either voluntary or necessary. 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. VOLUNTARY DEPOSIT: there is freedom in choosing the depositary, even a third person where property is deposited by two or more persons, while in NECESSARY DEPOSIT, there is no free choice as to the depositary. Art. 1969. A contract of deposit may be entered into orally or in writing. 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. DEPOSITARY HAS CAPACITY TO CONTRACT: Even if the depositor is incapacitated, he is subject to all the obligations of a depositary. He has a duty to return the thing when the guardian, or administrator, of the person who made the deposit, compel him. Art. 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. DEPOSITARY IS INCAPACITATED : He does not incur the obligation of a depositary. However he is liable: (1) to return the thing deposited while still in his possession and (2) to pay the depositor the amount 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. THIRD PERSON ACQUIRED PROPERTY IN BAD FAITH : Depositary is not liable, but the Depositor may bring an action against such third person for its recovery. SECTION 2. - Obligations of the Depositary Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. DEGREE OF CARE: is the same diligence that the depositary has with regards his own property. However, the depositary cannot excuse himself from liability in the event of loss by claiming that he exercised the same amount of care toward the thing deposited as he would towards his own if such care is less that that required by the circumstances. RULES APPLICABLE: 1. The depositary is liable if the loss occurs through his fault or negligence (Art. 1170). 2. The loss of the thing while in possession, ordinarily raises a presumption of fault on his part (Art. 1265). 3. The required degree of care is greater if the deposit is for compensation that when it is gratuitous. This is similar to the rule in agency (Art. 1909) and common carriers (Art. 1733). But even when it is gratuitous, due care must still be exercised. RETURN : can be demanded by the depositor even though a specified term or time for such may have been stipulated in the contract. ROMAN CATHOLIC BISHOP OF JARO VS. DELA PENA (26 PHIL 144 [1913]) – Dela Pena, the administrator of the church head, had in his possession P6,641 representing donations for the construction of a leper hospital. The same amount was deposited together with the personal account of Father Dela Pena with Hongkong and Shanghai Bank at IloIlo which was confiscated by the government when Fr. Dela Pena was arrested as a political prisoner. ISSUE: WON Fr. Dela Pena was liable for the loss of the said amount? HELD: No. By placing the money in the bank and mixing it with his personal funds De la Peña did not thereby assume an obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the money at all hazards. If the money had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of the Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all hazards. 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. LIABILITY FOR LOSS: The Depositary is liable for the loss of the thing if: 1. He transfers the deposit with a third person without authority, even if there be absence of negligence; 2. He transfers with authority but the third person is manifestly careless and unfit; If such third person is NOT manifestly careless or unfit, and he was authorized to make the transfer, the depositary shall not be liable if the thing is lost without negligence of the third person. 3. If the thing is loss through the negligence of his employees whether the latter be manifestly careless or not. Art. 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 .

OBLIGATIONS OF DEPOSITARY WHEN THE THING EARNS INTEREST: 1. To collect the interest as it becomes due; and 2. To take such steps as may be necessary to preserve its value and the rights corresponding to it. CONTRACT FOR RENT OF SAFETY DEPOSIT: 1. It is not an ordinary contract of lease of things but a special kind of deposit; hence it is not to be strictly governed by the provisions on deposit. 2. Where a safe-deposit company leases a safe-deposit box or safe and the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of the bailee and the bailor is created between the parties to the transaction as to such securities or other valuables. 3. Art. 1975 does not apply since, obviously, the renter must be present to open the safe-deposit box. 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. Art. 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor.

Otherwise, he shall be liable for da mages. However, when the preservation of the thing deposited requires its use, it must be used but only for that purpose. USE OF THE DEPOSITARY: when necessary for the preservation of the thing shall be allowed even without the express permission of the depositor, like the use of a radio to prevent accumulation of moisture – such use however shall be limited for that purpose. 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. IRREGULAR DEPOSIT: When the thing deposited is money or other fungible things and the depositary is allowed to use the same, it is converted to a simple loan or mutuum; however, when the primary purpose is still safekeeping, it is still a deposit called an irregular deposit . JAVELLANA VS. LIM (GR No.4015; Aug. 24, 1908) – Jose Lim and Ceferino Domingo Lim obtained from petitioner Angel Javellana the amount of P2,686.58 as “deposit without interest” . On the due date indicated in their signed document, the defendants begged Javellana for an extension and agreed to pay 15% interest. An action for recovery of the said amount and 15% interest was later on filed and the trial court decided in favour of the plaintiff. ISSUE: WON the contract entered into is a deposit or a loan? HELD: Loan. Art. 1767 provides that the depositary is not allowed to make use of the thing deposited without express permission from the depositor. Asking for an extension and agreeing to pay 15% interest, Jose Lim in fact, did not have possession of the money because he used it in business. The defendants received the said amount by virtue of a real contract of loan under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. IRREGULAR DEPOSIT VS. MUTUUM

Art. 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.

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IRREGULAR DEPOSIT Depositor may demand the return at will.

Only benefit is that accrues to the depositor.

which

MUTUUM Lender is bound by the period stipulated and cannot demand immediate payment. Essential cause for the contract is the necessity to the borrower.

Depositor has preference over other creditors (Art. 2214[13])

Common creditors enjoy no preference in the distribution of the debtor’ s property

GAVIERES VS. TAVERA (GR No. L-6; Nov. 14, 1901) – Don Manuel Garcia Gavieres, heir of Dona Ignacia de Gorricho, seeked recovery of the balance of deposit made by Dona Gorricho to Don Felix Pardo de Tavera. The document evidencing such claim indicates that the amount was received “as a deposit payable in two months” . ISSUE: WON said document is an evidence of a deposit or a loan? HELD: Loan. Although in the document a “deposit” is spoken nevertheless, it clearly appears therefrom that the contract was a loan and that was the intention of the parties. obligation of the depositary to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depositary should have the right to make use of the amount deposited, since it was stimulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. PERMISSION TO USE NOT PRESUMED: US VS. IGPUARA (supra) – Failure to claim at once or delay for some time in demanding restitution of the thing deposited, which was immediately due, does not imply permission to use the thing deposited as would convert the deposit into loan. 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. Similar to Art. 1942 when bailee is liable for loss of the thing even if it should be through a fortuitous event. Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. GUINGONA VS. CITY FISCAL OF MANILA (GR No. 60033; April 4, 1984) – Petitioners were charged with private respondent David with estafa and violation of Central Bank Circular No. 364. Private respondent together with her sister invested in National Savings and Loans Association. When said institution was placed under receivership by the Central Bank, petitioners Guingona and Martin, upon request of David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of P1,336,614.02 and US$75,000.00. This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent, which appears to be bigger than the original claim. Petitioners move to dismiss the complaint because it was a purely civil claim, to which the City Fiscal ’ s office had no jurisdiction. ISSUE: WON City Fiscal had jurisdiction over the complaint? HELD: No. When David invested his money on time and savings deposits with NSLA, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. The relationship between David and NSLA is that of creditor and debto r. 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. NSLA’s failure to return the amount deposited will not constitute estafa through misappropriation, but it will only give rise to civil liability over which the public respondents have no jurisdiction. 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.

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As regards the value of the thing deposited, the statement of the depositor 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. 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. OBLIGATIONS OF THE DEPOSITARY WHEN THING IS DELIVERED CLOSED AND SEALED: 1. Return the thing deposited when delivered closed and sealed, in the same conditions; 2. Pay for damages should the seal or lock be broken through his fault which is presumed unless proved otherwise; and 3. Keep the secret of the deposit when the seal or lock is broken, with or without his fault. DEPOSITARY IS ALLOWED TO OPEN: 1. When there is presumed authority when the key has been delivered and there is necessity to open; or 2. When there is necessity to open because the instructions of the depositor cannot be executed without doing so. 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. Art. 1896: The agent owes interest on the sums he has applied to his own use from the day on which he did so, and on those which he still owes after the extinguishment of the agency. GENERALLY: The depositary is not liable for interest since he has no right to make use thereof (Art. 1978). But should he do so, he shall be liable as an agent under Art. 1896. 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. If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall b e 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. WHEN THIRD PERSON APPEARS TO BE THE OWNER: 1. Should the depositary discover that the thing has been stolen and who its true owner is, he must the advice said owner of the deposit; 2. Owner must claim it within the period of one month, otherwise, depositary is relieved of all responsibilities upon return of the thing to the depositor. 3. Should the depositary have reasonable grounds to believe that the thing was unlawfully acquired by the depositor, he may return the same. 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.

THING IS DIVISIBLE AND DEPOSITORS NOT SOLIDARY : Each depositor can demand his share proportionate thereto.

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.

OBLIGATION SOLIDARY OR THING DEPOSITED IS INDIVISIBLE : The rules on active solidarity shall apply, to the effect that: 1. Each of the solidary depositors may do whatever may useful to the other but not anything prejudicial to the latter (Art. 1212). 2. Depositary may return the thing to any one of the solidary depositors unless a demand, judicial or extrajudicial, for its return has been made by any one of them in which case delivery should be made to him (Art. 1214). 3. If by stipulation, the thing should be returned to one of the depositors, the depositary is about to return it only to the person designated although he has not made any demand for its return.

OBLIGATION OF THE HEIR : is limited to the return of the price received or to assign the right to collect the same if it has not been paid and not the real value of the thing.

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. Art. 1987. If at the time the dep osit 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. PLACE OF RETURN: 1. The place agreed upon by the parties, the expenses of transportation shall be borne by the depositor; 2. In the absence of stipulation, at the place where the thing is located even if different from the place where the deposit was made provided the transfer was accomplished without malice on the part of the depositary. 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. INTERPLEADER : necessary, as in the case in the second paragraph, when there are conflicting claims over the property deposited. The thing should be deposited in court. 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. GRATUITOUS DEPOSIT: The depositary may return the property if there are justifiable reasons exists (e.g., necessity of his going abroad) and should the depositor refused its return, the depositary may secure its consignation in court. DEPOSIT FOR A VALUABLE CONSIDERATION: Depositary may not return the thing deposited before the expiration of the time designated. He is bound by the period and restitution before its expiration constitutes breach of his obligation. 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. Art. 1991. The depositor's (should be depositary) heir who in good faith may have sold the thing which he did not know was deposited, shall only be

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BAD FAITH: 1. If the PURCHASER acted in bad faith, the depositor may bring an action for recovery of the thing. 2. If the HEIR acted in bad faith, he will be liable for damages. The sale constituting estafa. 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. DEPOSIT FOR CONSIDERATION : The DEPOSITARY is liable for the expenses of preservation, since it is deemed included in the compensation. USEFUL OR LUXURIOUS EXPENSES : Not NECESSARY for the preservation of the thing, shall be borne by the depositary. Art. 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. LOSSES INCURRED BY THE DEPOSITARY : due to the character of the thing deposited should be reimbursed by the depositor, EXCEPT: 1. When the depositor was not a ware of such character; 2. When the depositor was not expected to know the dangerous character of the thing; 3. When the depositor notified the depositary of the same; 4. When the depositary was aware of it without advice from the depositor. Art. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. PLEDGE CREATED BY LAW: Art. 2121. The thing serves as security for the payment of what may be due to the depositary by reason of the deposit. Art. 1995. A deposit its extinguished: (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. OTHER CAUSES OF EXTINGUISHMENT : 1. Novation; 2. Merger; 3. Expiration of the term; 4. Fulfillment of the resolutory condition. DEPOSIT FOR COMPENSATION: EFFECT OF DEATH: Does not extinguish the obligation, because unlike a gratuitous deposit, it is not personal in nature. The rights and obligations are transmissible to their heirs. But the heirs of either party have a right to terminate the deposit even before the expiration of the term. CHAPTER 3: NECESSARY DEPOSIT

Art. 1996. A deposit is necessary: (1) When it is made in compliance with a legal obligation; (2) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events.

Art. 1997. The deposit referred to in No. 1 of the preceding article shall be governed by the provisions of the law establishing it, and in case of its deficiency, by the rules on voluntary deposit.

The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning voluntary deposit and by Article 2168. NECESSARY DEPOSITS IN COMPLIANCE WITH A LEGAL OBLIGATION: 1. Judicial deposit of a thing the possession of which is disputed in a litigation by two or more persons; 2. Deposit with a bank or a public institution of public bonds or instruments of credit payable to order or bearer given in usufruct when the usufructuary does not give proper security for their conservations (Art. 586); 3. The deposit of a thing pledged when the creditor uses the same without the authority of the owner or misuses it in any other way (Art. 2104); 4. Those required in suits as provided in the Rules of Court; and 5. Those constituted to guarantee contracts with the government.

Deposits made in compliance with law are governed primarily by such law, and in default thereof, by the rules on voluntary deposit. NECESSARY DEPOSITS MADE ON THE OCCASION OF A CALAMITY: 1. The possession of movable property passes from one person to another by accident or fortuitously through force of circumstance and which the law imposes on the recipient the obligations of the bailee. 2. Immediate object is to SAVE THE PROPERTY rather than its safekeeping. 3. Ordinarily distinguished as involuntary bailment or involuntary deposit. 4. There must be causal relation between the calamity and the constitution of the deposit. 5. Aside from rules on voluntary deposit, this kind shall be governed by Art. 2168: “When during a fire, flood, storm, or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation.” 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. 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. DEPOSIT BY TRAVELLERS IN HOTELS AND INNS : 1. The hotels are informed of the effects brought by guests; 2. The hotels have taken precautions prescribed regarding their safekeeping. 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. 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. HOTEL KEEPER IS LIABLE: 1. For the loss or injury caused by his servants or employees as well as by strangers, provided that notice has been given and proper precautions taken (Art. 1998); and 2. For the loss caused by the act of a thief or robber done without the use of arms and irresistible force for in this case, the hotel-keeper is apparently negligent. 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.

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HOTEL KEEPER IS NOT LIABLE: 1. For loss brought by force majeure including theft with the use of arms or irresistible force; 2. For loss due to the acts of the guests, his family, servants or visitors; and 3. For loss arising from the character of the things brought in to the hotel.

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices 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 . 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. 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 . Art. 2006. Movable as well as immovable property may be the object of sequestration. 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. 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. JUDICIAL DEPOSITS, HOW DONE: 1. By ATTACHMENT, upon filing of a complaint (Rule 57); 2. By a RECEIVER appointed by the court to administer and preserve the property (rule 59); 3. SEIZURE, in cases of replevin or manual delivery of personal property (Rule 60). JUDICIAL VS. EXTRAJUDICIAL DEPOSITS: JUDICIAL EXTRAJUDICIAL Cause or origin: Will of the court Will of the parties Purpose: Security and to secure Custody and safekeeping the right of a party to recover Subject matter: Either movable or Only movable immovable Remuneration: Always May be compensated or not, but remunerated (onerous) generally gratuitous In whose behalf it is held: In behalf Depositor or third person of the person who, by the designated judgment, has a right Art. 2009 . As to matters not provided for in this Code, judicial sequestration shall be governed by the Rules of Court. Rule 57 – Preliminary Attachment; Rule 59 – Receivership; Rule 60 – Replevin; Rule 127 – Attachment in criminal cases.

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