Credit Transactions - Reviewer

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Key Notes and Lectures – Atty. Lerma Credit Transactions Book – De Leon (2013) With Help from Notes by Mickey Ingles

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INTRODUCTION •

Credit Transactions 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 Credit transactions are usually contracts of security Security – something given, deposited or serving as means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property • •

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Two Types of Credit Transactions Secured transactions or contracts of real security Supported by a collateral or an encumbrance of o property Ex. Pledge, mortgage, antichresis, etc. o Unsecured transactions or contracts of personal security Secured or supported only by a promise to pay or the o personal commitment of another o Ex. Guarantor/surety •

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Bailment The delivery of property of one person to another in trust for a specific purpose; returned when special purpose is accomplished With a contract, express or implied, that the trust shall be faithfully executed & the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it Generally only involves personal or movable property o BUT commodatum, a form of bailment, can involve movable or immovable property May be by contractual relation or by operation of law “Bailment” is more specific & falls within the umbrella of “credit transactions” No purchase is involved •

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May be an express or implied contract Parties to bailment— (1) Bailor (comodatario) – the giver; the party who delivers the possession or custody of the thing bailed (2) Bailee (comodante) – the recipient; the party who receives the possession or custody of the thing bailed In bailment, there is also involved a substantial measure of control over the property, rather than just mere custody

Kinds of Contractual Bailment (1) Those for the sole benefit of the bailor Gratuitous deposit Mandatum – bailment of gods without recompense Gratuitous, with obligations imposed by law (2) Those for the sole benefit of the bailee Commodatum Gratuitous simple loan or mutuum Gratuitous, with obligations imposed by law (3) Those for the benefit of both parties (mutual-benefit bailments) Deposit for a compensation Usually resulting from business transactions Ex. involuntary deposit, bailments for hire, pledge • • •

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Kinds of Bailment for Hire (locatio et conductio) Arises when goods are left with the bailee for some use or service by him; always for some compensation (1) Hire of things (locatio rei) – where goods are delivered for the temporary use of the hirer (i.e., lease) (2) Hire of service (locatio operis faciendi) – where goods are delivered for some work or labor upon it by the bailee (i.e., contract for a piece-of-work) (3) Hire for carriage of goods (locatio operis mercium vehendarum) – where goods are delivered either to a common carrier, or to a private person for the purpose of being carried from place to place (4) Hire for custody (locatio custodiae) – where goods are delivered for storage •

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Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

Lerma’s Lectures

Bailment involves a specific purpose + return of the same thing or same quantity of same kind of same type. It involves the duration & purchase; thus, it’s more specific [than credit transactions]. There is no purchase involved, only lending. TITLE XI. LOAN 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 & 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.

Cause/Consideration in a Contract of Loan As to the borrower – the acquisition of the thing As to the lender – the right to demand its return or its equivalent • •

Two Kinds of Loan 1. Commodatum – the bailor will deliver to the bailee a nonconsumable thing so that the bailee may use it for a certain time & return the identical thing 2. Simple loan or mutuum – the lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay the same amount of the same kind & quality Consumable – when it is consumed when used in a manner appropriate to its nature or purpose (e.g. rice, gas, money, fruitwood, etc.) •

Characteristics of the Contract 1. Real – delivery of the thing loaned is necessary for the perfection of the contract


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Unilateral – once the subject matter has been delivered, it creates obligations on the part of only one of the parties (i.e., the borrower)

Credit v. Loan Credit – ability to borrow money or things by virtue of the trust or confidence reposed by the lender in the borrower that he will pay as promised within a specified period The concession of a “credit” necessarily involves the o granting of “loans” up to the limit of the amount fixed in the “credit” Loan (mutuum) – the delivery by one party & the receipt by the other, the latter becoming the owner, of a given sum of money or other consumable upon agreement that such will be repaid in the same amount of the same kind & quality, with or without interest •

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Credit v. Loan (Illustrative Example) If bank gives you credit of P300,000, the bank believes that you have, based on your money, assets, etc. that that is the extent of their trust in your ability to pay them back. It helps them determine how much of a loan they would be willing to grant you. If bank gives you a loan of P300,000, the bank will loan you P300,000 and you may have to pay interest as well. Credit v. Debt Credit – the sum credited on the books of a company to a person who seems to be entitled to it; implies the ability to make a promised payment Debt considered from the creditor’s standpoint o Debt – the amount owed by a debtor to his creditor •

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Discount (mode of loaning money) Interest is deducted in advance Double-name paper – one in which 2 signatures appear with both parties liable for payment Slightly more expensive for the borrow, as interest is calculated on

Loan Interest is usually taken at the expiration of the credit Single-name paper – no indorsement other than the signature of the maker Interest is deducted at expiration of the credit, making it cheaper

Bailment involves a specific purpose + return of the same thing or same quantity of same kind of same type. It involves the duration & purchase; thus, it’s more specific [than credit transactions]. There is no purchase involved, only lending. TITLE XI. LOAN 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 & 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.

Cause/Consideration in a Contract of Loan As to the borrower – the acquisition of the thing As to the lender – the right to demand its return or its equivalent • •

Two Kinds of Loan 1. Commodatum – the bailor will deliver to the bailee a nonconsumable thing so that the bailee may use it for a certain time & return the identical thing 2. Simple loan or mutuum – the lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay the same amount of the same kind & quality Consumable – when it is consumed when used in a manner appropriate to its nature or purpose (e.g. rice, gas, money, fruitwood, etc.) •

Characteristics of the Contract 1. Real – delivery of the thing loaned is necessary for the perfection of the contract


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Unilateral – once the subject matter has been delivered, it creates obligations on the part of only one of the parties (i.e., the borrower)

Credit v. Loan Credit – ability to borrow money or things by virtue of the trust or confidence reposed by the lender in the borrower that he will pay as promised within a specified period The concession of a “credit” necessarily involves the o granting of “loans” up to the limit of the amount fixed in the “credit” Loan (mutuum) – the delivery by one party & the receipt by the other, the latter becoming the owner, of a given sum of money or other consumable upon agreement that such will be repaid in the same amount of the same kind & quality, with or without interest •

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Credit v. Loan (Illustrative Example) If bank gives you credit of P300,000, the bank believes that you have, based on your money, assets, etc. that that is the extent of their trust in your ability to pay them back. It helps them determine how much of a loan they would be willing to grant you. If bank gives you a loan of P300,000, the bank will loan you P300,000 and you may have to pay interest as well. Credit v. Debt Credit – the sum credited on the books of a company to a person who seems to be entitled to it; implies the ability to make a promised payment Debt considered from the creditor’s standpoint o Debt – the amount owed by a debtor to his creditor •

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Discount (mode of loaning money) Interest is deducted in advance Double-name paper – one in which 2 signatures appear with both parties liable for payment Slightly more expensive for the borrow, as interest is calculated on

Loan Interest is usually taken at the expiration of the credit Single-name paper – no indorsement other than the signature of the maker Interest is deducted at expiration of the credit, making it cheaper

the loan & not on the amount actually received

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Illustration: Discounting a Paper v. Loan On a loan of P1,000 at 16% interest p.a. If loan – the borrower would pay P1,160 at the end of the year. If discounted – the interest is deducted from the principal in advance & thus would only receive P840, needing to pay back P1,000 at the end of the year Discount – P160 o o Proceeds – P840 • •

Subject Matter Ownership Consideration

Property Involved Possession Demand

Loss

Personal

Commodatum Ordinarily involves something not consumable Retained by the lender Essentially gratuitous

May involve real or personal property Use or temporary possession May be before expiration of the term in case of urgent need Suffered by bailor, since he is the owner

Purely personal in character

People v. Concepcion Facts: X is the President of PNB. He authorized an extension of credit of P300,000 to a partnership which is 50% owned by his wife. A law, however, states that as President of PNB he cannot directly or indirectly extend loans to himself. Held: The extension of credit is essentially a loan. The concession of a “credit” necessarily involves the granting of “loans” up to the limit of the amount fixed in the “credit.” Though the loan was granted to a partnership partly owned by his wife, it was still considered an indirect loan.

Mutuum Money or other consumable thing Transferred to the borrower May be gratuitous, but may also be onerous (with stipulated interest) Only personal property Consumption Lender may not demand return before the lapse of the term agreed upon Borrower suffers the loss even if caused exclusively by a fortuitous event; he is NOT discharged from duty to pay Not purely personal

Kinds of Commodatum Ordinary commodatum Precarium – one whereby the bailor may demand the thing loaned at will • •

Case Doctrines


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De los Santos v. Jarra Facts: X lent Y 10 1st class carabaos. Y died without ever giving them bank. X sued Y’s estate. Held: This is a contract of commodatum & X is entitled to the carabaos themselves or their value if the carabaos have died. •

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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.

Gratuitous Loan If the loan promised is gratuitous, since there is no consideration, the owner may terminate the arrangement, provided he acts in good faith, to protect his interest Accepted Promise to Lend has Binding Effect An accepted promise to make a future loan is a consensual contract; it has binding effect upon the parties but it is only after delivery that the real contract of loan will arise Class Scenario Q: X agrees to lend Y P100,000 and signs the promissory note and hands it to Y. What is this contract between the two parties called? A: There is a contractual relationship. It’s only an accepted promise to loan. But the accepted promise to loan will only turn into a real contract of loan only by delivery. BUT there is a contract & Y can ask for damages if X does not deliver the P100,000.

Case Doctrines Saura Import v. DBP Facts: X applied for a loan with DBP for the building of X’s factory & for the purchase of machinery. X already bought the machines under a letter of credit with Prudential. DBP approved the loan via board resolution; however, it did so with the promise that X’s goods would all be locally produced. The loan would be secured by the mortgage on the factory & machinery bought by X. Later, however, DBP found out that X could not fulfill its requirements (i.e., that the items would be locally produced) so X decided to cancel the mortgage. X failed to pay Prudential & now wants to sue DBP for reneging on their contract. DBP insists there was no contract. Held: There was a perfected consensual contract of loan. But the parties mutually desisted, & by their mutual desistance, the contract was extinguished. Thus, DBP cannot be held liable. Naguait v. CA Facts: X loaned P100,000 from Y through a check. X paid Y back with a check as well, with a mortgage attached. However, X’s check bounced when Y tried to encash it. When Y made a demand on X, X said he never encashed the check given by Y, & thus could not be made liable. Y tried to foreclose on the mortgage. Held: Y cannot foreclose, as the loan was not perfected. The Civil Code provides that the delivery of checks shall produce the effect of payment only when they have been cashed. It is only after the checks have been produced the effect of payment that the contract of loan may have been perfected.

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CHAPTER 1. – COMMODATUM Section 1. - Nature of Commodatum Commodatum Art. 1935. The bailee in commodatum acquires the use 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 Gratuitous If any compensation is to be paid by the borrow to acquire the use of the thing, it becomes a lease contract; if the consideration is service, an innominate contract will result


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As a result, commodatum is not enforceable as contract Any agreement to lend property by way of commodatum at a future time would be terminable at any time by the owner without giving rise to action for damages Ex. When a borrower must pay a breeding fee for carabaos borrowed, the contract is a lease

Extent of Bailor’s Right to Use Right is limited to the thing loaned but not its fruits, unless the contrary is stipulated Purpose of the Contract Temporary use of the thing loaned for a certain time If the bailee is not entitled to use the thing, the contract may be a deposit •

Case Doctrines Republic v. Bagtas Facts: X borrowed 3 bulls from the government, for breeding purposes, subject to a 10% breeding fee for 1 year. After 1 year, X offered to buy the bulls at a discounted price, which the government refused. The bulls then died in a Huk raid. X claims he is not liable, since it was commodatum. Held: The contract is a commodatum, which ordinarily would mean that the bailee is not liable for fortuitous events. But X is liable, despite the occurrence being force majeure, because he did not return the bulls at the expiration of the certain time given. •

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Pajuyo v. CA Facts: X allowed Y to live in X’s house, as long as Y kept the house clean & maintained it. X now wants Y out and he claims that the contract between them was one of commodatum which was a precarium—thus, the non-consumable thing (i.e., the house) should have been demandable at will. Held: The fact that Y was tasked to keep the house clean & maintain it is already considered a forbearance, which is contrary to the essentially gratuitous nature of the contract of commodatum; thus, this is no longer a commodatum contract, but a contract of loan. •

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Lerma’s Lecture: The contract in Pajuya is actually a commodatum. It’s technically use and preservation of the property (recall that ordinary expenses is charged to the bailee in a commodatum). Any bailee in a commodatum needs to maintain the property. If X lends Y an iPad, Y is supposed to take care of it so that the iPad does not break and is kept well. BUT for the purposes of THE BAR, Pajuyo v. CA still prevails. 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.

Case Doctrines Producers Bank v. CA Facts: X approached Y, claiming he needed help to get his business incorporated. X needed Y to put some money in the bank under his & Y’s account, so that X would be able to show authorities that he had money in the bank enough to incorporate. Y agreed, using a check to make the deposit. However, when Y checked the account again, X had already withdrawn all the money. Held: The contract was one of commodatum though it involved a consumable thing, because the money was meant only for exhibition, as per the agreement of X & Y. Y thus had no right to use the money & must now pay X.

Generally non-consumable things, whether real or personal Real property & commodatum – when a person allows another to build a warehouse on his land so that the latter may use the property for a certain period without payment of rentals If not time for use is specified, the contract is a o precarium If rental is paid, the contract is a lease 1 o If the purpose of the contract is not the consumption of the object but just the exhibition of it, consumable goods may be the subject of commodatum •

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Art. 1938. The bailor in commodatum need not be the owner of the thing loaned.

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Lerma’s Lecture: In this case, X lent P200,000 via check. Was Y tasked to return the exact same check? No. So is the case correct? NO, because what was asked to be returned was not actually the original money given. WHEN YOU INCORPORTE, one of the incorporators, X, will be asked to be a treasurer-in-trust. Said incorporator X will deposit money for the account on his name and also on the name of the corporation. That amount deposited cannot be touched until the SEC will look into the account and verify WON the amount is there. If the amount is there, SEC will approve the incorporation. That was the initial purpose of lending the money. Art. 1937. Movable or immovable property may be the object of commodatum.

Subject Matter of the Contract


Bailor Need Not be Owner It is sufficient that the bailor has such possessory interest in the subject matter or right to its use which he may assert against the bailee & third persons although not against the rightful owner A lessee of a thing or a usufructuary may lend the thing A lessee may sublet the thing leased, where there is no express prohibition in the lease contract BUT the bailee or borrower himself MAY NOT lend or lease the thing loaned to him to a third person • •

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Class Scenario Q1: X lent Y an iPad on commodatum. It turns out that X is not the owner, but Z is. Is the relationship between X & Y still a commodatum? A: YES. Q2: What if X stole the iPad from Z, who should Y return the iPad to & why? A: Z, because X never obtained possessory interest.

Art. 1939. Commodatum is purely personal in character. Consequently: (1) The death of either the bailor or the bailee extinguishes the contract; Art. 1643. In the lease of things, one of the parties binds himself to give another r the enjoyment or use of a thing for a price certain, & for a period which may be definite or indefinite. However, no lease for more than 99 years shall be valid. 1

(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.

A: NO. The nature of the dentist chair does not allow people who are not dentists to use the chair. Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid.

Commodatum: Purely Personal in Character Art. 1393 lists an exception to the general rule that all rights acquired by virtue of an obligation are transferable. Unlike mutuum, commodatum is purely personal, the lender considering the character, credit & conduct of the borrower BUT if there are 2 or more borrowers, the death of one does not extinguish the contract in the absence of stipulation to the contrary

Use of Fruits General Rule: The bailee is entitled to only the use of the thing loaned & not its fruits Ex. Where an animal is the thing loaned, its young subsequently born are not included in the contract, & belong to the bailor EXCEPT – If there is stipulation to the contrary BUT: The right to the enjoyment of the fruits must only be incidental to the use of the thing, otherwise the contract may be a usufruct.

Right of the Bailee to Lend the Thing Loaned to Third Persons General Rule: The bailee can neither lend nor lease the object of the contract to a third person, unless: (1) There is stipulation to the contrary; or (2) The use of the thing loaned is extended to just members of the household (who are not considered third persons), EXCEPT— a. If there is stipulation to the contrary; or b. Of the nature of the thing forbids such use (e.g. dress)

SECTION 2. - Obligations of the Bailee

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Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use & preservation of the thing loaned.

Liability for Ordinary Expenses The borrower must take good care of the thing with the diligence of a good father of a family. Ex. If B borrows the car of L, B must pay for the gas, motor oil, washing, etc. B cannot demand reimbursement for such expenses. •

Class Discussion Practical perspective: Why is commodatum purely personal in character? Because the bailor takes personal characteristics of the bailee into consideration before he entrusts the thing & because it’s for free. Members of the household pertain to your actual family members; yet this is actually an arguable idea. Class Scenarios Q1: X lends Y an antique sword. Y’s son starts playing with said antique sword. Did Y violate the commodatum? A: YES, because the nature of the thing would forbid Y from allowing the son to use it. Q2: X is a dentist. Y, also a dentist, lends X a dentist chair to be used in X’s home clinic. Can members of the family use the dentist chair?


Class Scenario Q1: X lent Y his iPhone to Y. What does Y have to pay for? A: The “load” that Y will use or whatever billings. Q2: What if Y decides to bejewel the iPhone, must X pay? A: NO. This is not an expense for use or preservation. Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (DKALS) (1) If he evotes the thing to any purpose different from that for which it has been loaned; (2) If he eeps 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 ppraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; (4) If he ends or leases the thing to a third person, who is not a member of his household; (5) If, being able to ave either the thing borrowed or his own thing, he chose to save the latter.

General Rule Bailee is NOT liable for loss or damage due to a fortuitous event. EXCEPT as listed in Art. 1942 •

Class Scenarios Q1: X lends Y an iPhone, but also gives Y the receipt showing how much the iPhone cost. A: This is appraisal.

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 Art. 1951.

Obligation to Return the Thing Loaned General Rule: The borrow has no right to retain the thing loaned as security for claims he has against the lender, even though they may be by reason of extraordinary expenses EXCEPT – when it is kept for a claim for damages suffered because of flaws of the thing loaned •

Effect of Failure to Return or Adverse Claim of Bailee Mere failure to return the subject matter of the commodatum to the bailor does not constitute adverse possession on the part of the bailee who holds the same in trust Declaring lots that were just borrowed from another for tax declaration purposes can be considered an adverse claim which cannot, however, ripen into title through ordinary acquisitive prescription •

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Q2: X lends Y an iPhone six months ago. It was supposed to be returned tomorrow, but today it was struck by lightning. When it got struck by lightning, Y was using it himself. BUT yesterday, Y let her yaya use it. Is Y liable to pay for the iPhone because Y let her yaya use it even if the phone was destroyed in Y’s possession and not her yaya’s? A: YES. WON the thing was destroyed while in someone else’s possession, the trust was violated.

Right of Retention for Damages The bailee’s right extends no further than to retention of the thing loaned until he is reimbursed for the damages suffered by him. Bailee cannot lawfully sell the thing to satisfy the damages •

Art. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof & without his fault.

Ordinary Wear & Tear Depreciation caused by the reasonable & natural use of the thing is borne by the bailor, unless there is stipulation to the contrary. BUT the bailee is liable if: He is guilty of fraud or negligence; or o He devotes the thing to any purpose different from that o for which it has been loaned •

Class Scenario Q: If X lent Y a phone and Y returned it but there were minor scratches. Is Y liable? A: NO. That’s just ordinary wear and tear.


Class Scenarios Q1: X lent Y his phone for 6 months. Prior to the lapse, Y lent X money, due one day before the phone was supposed to be returned to X. X did not pay and it is now the time that Y must return the phone to X. Must the phone still be returned? A: YES. Q2: X lent Y his phone. Suddenly the phone exploded. Who pays for the exploding phone? A: X, because it’s an extraordinary expense. Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily.

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.

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Thing is subject to revocation by the bailor at any time, whether or not the use for which the thing has been loaned has been accomplished As opposed to ordinary commodatum, where possession of the bailee is more secure & depends on the expiration or the period agreed upon or the accomplishment of the purpose

Case Doctrines Mina v. Pascual Facts: X let Y, his brother, use his land. Y built a warehouse on X’s land. Both of them died. Meanwhile, one of Y’s heirs sold a portion of the lot. Held: This is not a commodatum because there was no specific period given for the lending of the thing. General Commentary of Legal Scholars: This is actually a commodatum, & it’s a precarium. •

Instances Where the Thing Loaned is Returned (PAPUA) (1) After the eriod of time agreed upon has passed (2) ccomplishment of purpose for which the thing was loaned (3) recarium – when possession of the thing is by tolerance or there is no time or purpose specified for the thing (4) rgent need – suspends the commodatum (5) cts of ingratitude are committed by the borrower Obligation to Respect Duration of Loan Primary obligation of bailor: to allow the bailee to use the thing loaned for the duration of the period stipulated or until the accomplishment of the purpose for which the commodatum was constituted He is bound by the terms of the commodatum, which is for a certain time BUT the bailor may demand the return or temporary use of the thing, which may be permanent or temporary, if he has urgent need for it or the bailee commits acts of ingratitutde •

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Art. 1947. The bailor may demand the thing at will, & the contractual relation is called a precarium, in the ff. cases: (DUTO) (1) If neither the uration of the contract nor the se to which the thing loaned should be devoted, has been stipulated; or (2) If the use of the thing is merely lerated by the owner.2

Precarium A kind of commodatum where the bailor may demand the thing at will A contract where the owner of a thing, at the request of another person, gives the latter the thing for use as long as the owner shall please •

De Leon: Owner here should be bailor.

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Quintos v. Beck Facts: X leased Y his house. In the terms of the lease, X allowed Y to make use o f the furniture insid e the home, as long as Y returned the furniture upon X’s demand. When the period of the lease ended, X sold the lot to Z, & told Y to surrender all the furniture. Y said OK, but also said he wanted to keep some heaters & lamps. Furthermore, Y said that X could just swing by and pick them up. Held: The contract, being one of precarium, meant the furniture was demandable at will & Y should have given them all back, completely, to X, at the latter’s house. Y did not comply with this obligation when he merely placed the things at the disposal of X without physically returning them. •

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Art. 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Art. 765.

Art. 765: Acts of Ingratitude (OIR) (1) If the bailee should commit ffenses against the person, the honor or the property of the bailor, or of his wife, or children under his parental authority (2) If the bailee mputes to the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it,

unless the crime or act has been committed against the bailee himself, his wife or children under his authority (3) If the bailee unduly efuses the support when the bailee is legally or morally bound to give support to the bailor

Applies in Ordinary Commodatum In the case of precarium, the bailor can always demand the thing at will. Art. 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger. If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor & the bailee, unless there is a stipulation to the contrary.

Extraordinary Expenses for Preservation The expenses will be borne by the bailor (e.g., expenses for repairing a borrowed house damaged by a typhoon) If incurred by the bailee, the bailor must refund them provided the bailee brings the same to the knowledge of the bailor before incurring them Notice is required as bailor has the discretion to decide what can be done with his property EXCEPT when they are so urgent that the reply cannot o be awaited without danger The right of the bailee to reimbursement is subject to the 2nd par. of Art. 1949. •

Not ordinarily needed for use & preservation Borne by bailor

Use & preservation Borne by bailee

Art. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Art. 1941 & 1949, he is not entitled to reimbursement.

No Obligation for Bailor to Assume Other Expenses All other expenses are to be borne by the bailee for the purpose of making use of the thing (e.g., an extra tire on reserve for a trip) which are not actually necessary for use & preservation are to be borne by the bailee, including expenses for ostentation 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.

Requisites for Liability to Pay Damages for Known Hidden Flaws (FHANS) (1) There is a Flaw or defect in the thing loaned; (2) The flaw or defect is Hidden; (3) The bailor is Aware thereof; (4) He does Not advise the bailee of the same; & (5) The bailee Suffers damages by reason of said flaw or defect

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Extraordinary Expenses Arising from Use The bailor & bailee bare the amount on a 50-50 basis when the expenses caused by a fortuitous event arise on the occasion of the actual use of the thing loaned (i.e., a borrowed jeep was damaged in a collision) BUT the parties, by stipulation, may provide for a different arrangement

Liability of Bailor The bailor is made liable for his bad faith, like a pledgor. The bailee is given the right of retention until he is paid damages BUT where bailor does not know of the flaw, he cannot be held liable •

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Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. CHAPTER 2. – SIMPLE LOAN OR MUTUUM

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Extraordinary Expenses

Art. 1953. A person who receives a loan of money or any other fungible 3

Ordinary Expenses For purposes of this class, this is the same as a consumable.

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thing acquires the ownership thereof, & is bound to pay to the creditor an equal amount of the same kind & quality.

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Simple loan or mutuum A contract whereby one party delivers to another money or other consumable thing with the understanding that the same amount of the same kind & quality will be paid Implies the return of the equivalent only, & not the identical thing The borrower acquires ownership of the thing loaned A loan of money, however, may be payable in kind The use of the word “to pay” implies consumption of the thing loaned May include the accessory duty of paying interest Bilateral – the promise of borrower to pay is the consideration giving rise to the obligation of the lender to furnish the loan •

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Ownership

Relationship Compensation

Rent Delivery of something non-consumable, to be used by the borrower & returned to the lender; the owner simply loses control over the property but does not loser ownership Landlord-tenant Owner of the thing receives compensation or price either in money, chattel, provisions from the occupant in return for its use

Simple Loan Delivery of money or some other consumable thing to another with a promise to repay the equivalent amount of the same kind or quality; loses ownership

WON a thing is consumable depends on its nature WON a thing is fungible depends on the intent of the parties Ex. Wine is consumable by nature, but it is non-fungible if the intention is to use it merely for display or exhibition

Case Doctrines Republic v. Grijaldo Facts: X obtained crop loans from the bank—these are loans of money which are secured by mortgaged crops growing on X’s land. Before X could pay the loans, however, WW2 came & his crops were destroyed during the war. X now claims his obligation to pay the loan was extinguished via force majeure. Held: X is still liable to pay the loan to the bank. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. Money is consumable & generic, thus, it can never be destroyed by fortuitous event. Furthermore, the crops were just the securities on the loan, not the loan itself. •

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Martinez v. Ramos Facts: X lent Y money. The document evidencing Y’s loan said, “I have received P3,000 from X which I will return in 3 years.” Y, however, did not want to pay when X made a demand. Y claimed that the money was actually used to finance his parents’ business, & he only signed on their behalf. Held: Y must pay X back. Whatever contract Y had with others did not change the nature of his debt to X, given that an obligation is binding between the parties that agree to it, & do not involve third parties not privy to the contract. Further, The contract states that Y, and nobody else, will return to X the money. Obligations arising from contracts have legal force between the contracting parties & must be fulfilled in accordance with their stipulations. •

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Obligor-obligee Creditor receives payment for his loan

Fungible Things Things which are usually dealt with by number, weight or measure such as rice, oil, sugar, etc. so that any given unit or portion is treated as the equivalent of any other unit or portion

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, & quality shall be considered a barter.

Fungible v. Consumable

Barter


Under Art. 1954, barter pertains to the transfer of ownership of a nonfungible thing; however, there are other definitions of barter which include fungible things, but which are covered by different provisions in the Civil Code (i.e., Art. 1638)

Subject Matter Thing Returned

Consideration

Barter Non-fungible (nonconsumable) things The equivalent of the thing is given in return for something received Always onerous; technically a mutual sale

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Loan Mutuum – money or other fungible thing Commodatum – bailee is bound to return the identical thing borrowed Mutuum – may be gratuitous Commodatum – always gratuitous

Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of Art. 1249 & 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 & quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid.

Form of Payment Object of simple loan may be either money or consumable or fungible thing Loan of money – payment must be in the currency stipulated, if it is possible to deliver such currency If not, it is payable in the currency which is legal tender o in the Philippines In case of extraordinary inflation or deflation, the basis o of payment will be the value of the currency at the time of the creation of the obligation Ex. D borrowed P50,000 from C, payable in 5 years. At maturity, value of the P50,000 dropped to P25,000 due to deflation. In this case, the basis for payment will be the equivalent of the currency 5 years ago & D will be liable to pay C P100,000, unless there is agreement to the contrary •

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A check is not legal tender & cannot constitute valid tender of payment Loan of fungible thing – If what was loaned was a fungible thing other than money, the borrower must pay the lender another: (1) Another thing of the same kind, quality & quantity; if this is impossible— (2) The borrower shall pay for its value at the time of the perfection of the loan Ex. D borrowed from C 2 sacks of rice of a certain kind & quality. At the time the loan was perfected, the price of each sack was P1,400. If the rice is not available for some reason on due date, D should pay C P2,800 for the 2 sacks. o

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Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.

Requisites for Charging Interest (EWL) (1) The payment of interest must be Expressly stipulated (2) The agreement must be in Writing (3) The interest must be Lawful Types of Interest Monetary interest – compensation for the use of money, as agreed by the parties; must be stipulated in writing Compensatory interest – imposed by law or by the courts as penalty or indemnity for damages; may be granted despite absence of stipulated interest •

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Existence of Stipulation to Pay Interest If a particular interest rate has been stipulated by the parties, that interest, not the legal rate of interest, shall be applied If the exact rate of interest is not mentioned but the parties agreed that there would be interest, the legal rate of 6% shall be payable No increase in interest shall be due unless the increase has also been expressly stipulated •

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Sales invoices or slips issued by a store to customers, stating interests & attorney’s fees, do not constitute express stipulation without the signature of the obligor Obligor would only be liable for 6% interest under Art. o 2209 if he incurs in delay It is only in contracts of loan, with or without security, that interest may be stipulated & demanded Extending the loan does not equate to extending the application of interest on said loan past the original maturity date, unless the parties again so stipulate Choosing to buy a lot by installment necessarily entails paying the interest, whether paying interest is disclosed in the contract or not

Liability for Interest in the Absence of Stipulation Indemnity for damages – under Art. 2209, if the obligation consists in the payment of a sum of money, & the debtor incurs in delay, the indemnity for damage shall be: The one stipulated by the parties; in the absence o thereof— The legal interest, at 6% p.a. 4 o *NOTE: Interest under Art. 2209 is not limited to loans or forbearances; it includes— Default in the payment of price or consideration under o a contract of sale An action for damages for injury to persons & loss of o property, & o Actions for unpaid insurance claims Interest accruing from unpaid interest – interest stipulated shall earn interest from the time it is judicially demanded, although the obligation may be silent on that point Where a court’s judgment which did not provide for o payment of interest has become final, no interest may be awarded Ex. D loaned from C P10,000. If 18% int. p.a. was agreed upon & D incurs in delay, D o will be liable to pay the interest agreed upon (18%) as damages, & not for the use of money •

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Check usury part of Reviewer for full discussion on application of interest rates.

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If this is judicially demanded 6 months after D incurred in delay, the interest due shall earn legal interest (6% p.a.) from the time there is judicial demand th at time until paym ent is made If no int. is stipulated, then no interest is due. If D incurs in delay, he is liable to pay at the current legal rate of 6% p.a. !

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Interest is Separate & Distinct from Penalty A penalty stipulation is not necessarily preclusive of interest; if there is an agreement for both penalty & interest, these may be separately demanded But penalty may be reduced if it is unconscionable & o iniquitous •

Case Doctrines Tan v. Valdehueza Facts: X & Y entered into a pacto de retro sale, where Y was the vendor a retro. Y failed to redeem, so X filed a case for consolidation of ownership. There was no stipulation of interest in their contract, but the trial court adjudged that Y should pay interest on the prices of the lots. Held: It was wrong for the lower court to impose interest on the price of the lots, as no interest was expressly stipulated between the parties. Furthermore, X’s petition was for consolidation of ownership, not for a claim of sum of money. However, SC imposed 6% int. p.a. from the finality of the decision. •

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Jardenil v. Solas Facts: X loaned Y money. In their agreement, Y would pay interest & the debt would mature on Mar. 31, 1934, & there was interest stipulated at 12% p.a. The agreement also allowed for an extension period of 1 year. Y made use of the grace period, but X wants to be paid 12% p.a. for the grace period as well. Held: X is not entitled to interest for the grace period, as the contract did not expressly stipulate that the interest would also be extended throughout the grace period if the extension of the •

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loan is exercised. Thus, interest can only be charged for the period agreed upon in the contract, that is, until Mar. 31, 1994. After that, no interest is due on the principal.

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Soncuya v. Azarraga Facts: X represented Y in a case, & the latter became indebted to X. To pay the debt, Y mortgaged his lands & allowed X to live on it until the expiration of 5 years, after which Y should have already fully paid his debt. When the debt became due, Y asked for an extension & agreed, after negotiating with X, to pay interest of 12% p.a. What kind of contract is this? Held: The contract is a contract of loan; it is only in loans that interest can be stipulated. In this case, whatever the contract between X & Y used to be, it is now to be considered a loan, & interest may be validly stipulated & paid. •

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Royal Shirt v. Co Bon Tic Facts: X & Y entered into an agreement where Y would sell X’s shoes. It was agreed that Y would own the shoes & pay for price of all of them, regardless of whether or not they were sold. In the receipt that evidenced the transaction, it was stipulated that there would be payment of 12% int. for late payment. However, Y never signed the re ceipt. Held: Had Y signed the receipt, he would be liable for 12% int. for the late payment. However, since he did not, it cannot be said that Y had knowledge & fully consented to the imposition of such interest. Thus, Y is only liable at the legal rate of 6% int. •

Facts: Ramos made a time deposit with Overseas Bank, which thereafter was suspended by the Central Bank (CB). Ramos wants to claim the interest on his time deposit. Held: Ramos cannot claim interest for the period of suspension of the bank. What enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation, it is able to generate funds to cover the payment of such interest. Unless a bank can engage in banking & financing activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. It should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank.

Ramos v. CB Facts: In a previous ruling (Tapia), SC held that a suspended bank is not liable to pay the interests of time deposits during the period of its closure or the suspension of its banking operations. CB contests. Held: Tapia ruling was upheld, & thus banks, while still liable to pay the principals of time deposits, are not liable for interest on these deposits during the period of their suspension. •

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Arwood Industries v. DM Consunji Facts: X was building a condominium for Y. Y failed to make the payments for the condo. Their contract stipulated that in case of default there would be 2% int. per month on the unpaid balance. Y protests the imposition of this interest. Held: The interest is valid, as the contract is the law between the parties. Y was in delay from the time that X finished constructing the condo & Y failed to pay; thus, X is entitled to damages, in the form of the 2% int. per month. •

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Overseas Bank v. Cordero


Lirag v. SSS Facts: SSS entered into a Purchasing Agreement with X Corp. It was stipulated there that SSS would buy P1M worth of X Corp.’s shares, but X Corp. would buy back the shares at various stipulated periods, while paying dividends at 8% p.a. The contract also came with an acceleration clause. X Corp. failed to buy back the shares in one of the promised periods, so SSS demanded the full sum plus dividends. On the issue of the dividends, X Corp. opposed, saying that a shareholder cannot demand dividends when the company has made no profits. Held: The transaction was actually a loan, & the dividends actually served as interest. The 8% p.a. was not meant to fluctuate, & the payments were due at specified periods. Thus, SSS had the right to demand the payments plus interest. •

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Art. 1957. Contracts & stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. Usurious Contracts Declared Void Form of contract is not conclusive; parol evidence may be admissible to show that a written document was meant to cover usury BUT in such a case, the contract would only be void as to the interest involved, so that the loan becomes without stipulation to pay interest Amount paid under usurious agreement is recoverable by the debtor, since the payment is deemed to have been made under restraint, rather than voluntarily •

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Case Doctrines Angel Jose v. Chelda Enterprises Facts: X lent Y about P40,000 with 2% int. per month. The trial court ruled that the interest rates were usurious. Held: X can still recover the principal amount. Art. 1420 of the Civil Code states that in case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. Thus, the principal can still be enforced as against the borrower. HOWEVER, as to the interest, the whole amount of the interest, & not just the usurious part of it, is void & cannot be recovered by X. Thus, X can recover only P40,000, with no interest. •

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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 & place of payment.

Illustrative Example B borrowed P10,000 from L payable in palay in 1 year which shall be appraised at the current market price at the time & place of payment. When the contract was entered into, the price of palay was P1,000. On the due date, the price is P1,500. In this case, the value of the palay shall be appraised at P1,500 per cavan.

Art. 1959. Without prejudice to the provisions of Art. 2212, interest due & unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due & unpaid, which as added principal, shall earn new interest.

When Unpaid Interest Earns Interest General Rule: Accrued interest does not earn interest except— (1) When interest is judicially demanded (Art. 2212) (2) When there is express stipulation made by the parties Compounding interest – when the interest due & unpaid is added to the principal & the resulting total amount shall earn interest; allowed even under Usury Law, so long as there is express stipulation •

Case Doctrines Cu-Unjieng v. Mabalacat Facts: X loaned money from Y. The contract between them stated that there would be: “Interest, to be computed upon the still unpaid capital of the loan, shall be paid monthly, at the end of each month.” Y contests that this means there was compounded interest. Held: This is NOT compounded interest; it merely meant that the computation of the interest would be based on the unpaid balance of each month, which is not the equivalent of compounded interest. Thus, no compounded interest may be imposed by Y. •

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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. Recovery of Unstipulated Interest Paid If unstipulated interest is paid by mistake, the debtor may recover BUT where there is stipulation that is not In writing, & the debtor pays the interest voluntarily as he feels morally obliged to do so, there can be no more recovery as in the case of natural obligations (Art. 1423) •

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Case Doctrines Velez v. Balzarra

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Facts: X extended 5 loans to Y, which were secured by mortgages to 7 parcels of land belonging to Y. During the period of the loan, X lived on the land. Y paid X periodically, but X insisted that these should be applied as rent & interest, & not as the principal on the loan. Held: There was no express stipulation in the contract as to interest; thus, no interest could be charged. Furthermore, X was allowed enjoyment of the land, The amount must therefore be applied to the principal. As such, Y had already overpaid & is entitled to reimbursement from X. The two requisites for solutio indebiti are present: (1) there is no right to collect these excess sums; and (2) the amounts have been paid through mistake by defendants.

If the Monetary Board chooses to restore the ceiling rates, the Usury Law will apply again. The Circular did not amend or repeal the Usury Law; it only suspended the Law’s effectivity The Circular is of doubtful legality because the Usury Law only authorized the Monetary Board to fix the maximum rate & to change the rate depending on prevailing socio-economic conditions •

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Usury Contract where 2 parties agree to pay or receive something in excess of the amount allowed by law for the loan or forbearance of money, goods or chattels Elements (LUUT): (1) A Loan or forbearance (2) An Understanding between the parties that the loan shall or may be returned (3) An Unlawful intent to take more than the legal rate for the use of money or its equivalent (4) The Taking or agreeing to take for the use of the loan of something in excess of what is allowed by law •

Art. 1961. Usurious contracts shall be governed by the Usury Law & other special laws, so far as they are not inconsistent with this Code.

Usury Law Now Legally Non-Existent The effectivity of the Usury Law has been suspended by the Central Bank o SC: “The CB Circular did not repeal nor in any way amend the Usury Law, but simply suspended the latter’s effectivity.” Interest rate chargeable now depends on the agreement of the parties BUT where interest rate is excessive, even if voluntarily assumed, the courts may declare the rate illegal & reduce the same as reason & equity demand •

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USURY LAW & RELATED CIRCULARS

CB Circular No. 905 The Circular, effective on Jan. 1, 1983, lifted the ceiling rates in the Usury Law, & approved the ff. regulations governing interest rates in the absence of express stipulation in a contract: 12% p.a. – For loans or forbearances of any money, goods or credit, & judgments (as earlier implemented by CB Circular No. 416 as of July 29, 1974) The Circular was also given retroactive effect •

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Usury Law (Act No. 2566) Involves 2 transactions only: Loan – understood as mutuum, excluding commodatum Forbearance – the contractual obligation of the creditor to forbear during a given period to require the debtor to pay an existing debt then due & payable Giving time for the payment of a debt; in substance, o also a loan Where there is no loan or forbearance, there is no usury. Rentals are not loans Compensation for the past use of money does not count Discounts are not considered to be loans • •

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Usury statutes are to be applied prospectively only In the absence of stipulation. Contracts previously non-usurious – cannot be made usurious by a law, so that a person may collect usurious rates after the • •

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adoption of the Usury Law if that was what was stated in their contract Contracts previously usurious – where a person is made liable to pay 60% interest before the effectivity of the Usury Law, contrary to the older Usury Law, the borrower is liable only to pay the legal rate of 6% p.a. both for the period prior to & after the date the law became effective.

Sec. 1. The rate of interest for the loan or forbearance of any money goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be 6% p.a. or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted.

to loans secured by other types of security as may be specified by the Monetary Board. Sec. 3. No person or corporation shall directly or indirectly demand, take, receive or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits where such loan or forbearance is not secured as provided in Section two hereof, than 14% p.a. or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.

Interest/Forbearance Interest – the compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credits Subjecting a contract to conditions is not the equivalent of charging interest Forbearance – a contractual obligation of a lender of credit to refrain, during a certain period of time, from requiring the borrower or debtor to repay a loan or debt then due or payable Arrangements other than loan agreements where a person acquiesces to the temporary use of his money, goods or credits pending the happening of certain events or fulfillment of certain conditions •

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions.

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In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or an interest therein, than 12% p.a. or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply


Kinds of Interest (1) Simple interest – the interest paid for the principal at a certain rate fixed or stipulated by the parties (2) Compound interest – the interest imposed upon the interest due & unpaid The accrued interest is added to the sum & the whole is treated as a new principal upon which the interest for the next period is calculated New principal = (principal + unpaid accrued interest) (3) Lawful interest – the interest the law allows or does not prohibit; within the maximum prescribed by law (4) Unlawful interest – an interest stipulated that is beyond the maximum fixed by law (5) Legal interest – that which the law directs to be charged in the absence of any agreement as to the rate between the parties •

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Interest Stipulated Courts can reduce equitably liquidated damages, whether intended as an indemnity or penalty (Art. 1229)

For interest pertaining to damages, from the time of judicial or extrajud icial demand; how ever, if the demand cannot be ascertained with reasonable certainty, 5 then— From the date of the rendition of the judgment by o the trial court (3) The base amount for the computation of interest is always the amount adjudged by the court (4) From the time the judgment has been rendered by the trial court until the finality of the decision, the interest shall be at 6%/12% p.a. or the stipulated interest, whichever the court adjudged. (5) Whether or not interest adjudged by the trial court initially is at 6%/12% or that stipulated by the parties, 12% interest p.a. will be imposed from the finality of the decision until payment by the debtor is made, as that delay in payment of the judgment is considered a forbearance of credit The 12% interest here will be applied to the amount adjudged by the court •

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Penalty & Interest Penalty is separate from interest & they may be demanded separately when it comes to unsecured loans When it comes to secured loans, penalties are already included in the computation of interest •

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Application of Interest (1) Interest to be applied is: That which is stipulated by the parties; if none, either— Art. 2209. If the obligation consists in the payment o of a sum of money, & the debtor incurs in delay, the indemnity for damages shall be the legal interest of 6% p.a., awarded at the court’s discretion CB Circular No. 416 – for forbearances & loans of o money, goods or credit & judgments related to forbearances & loans, interest is 12% p.a. effective July 29, 1974. Has been held to apply to the payment of unliquidated cash advances to an employee by her employer Also applies to the return of money paid by a buyer of a leasehold right BSP-MB Circular No. 799 – effective July 1, 2013 o & applied prospectively, it fixed the rate for forbearances, loans & judgments on forbearances & loans at 6% p.a. NOTE: This now applies to interest on o interest, finality of judgment, & judgments on loans & forbearances Art. 2212. Interest stipulated shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on that point. (2) Interest begins to run from: For interest for loans or forbearances, from the time of extrajudicial or judicial demand •

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Case Doctrines Reformina v. Tomol Facts: In an Action for Damages where X’s boats were damaged by a fire caused by Y, the court ruled that was indebted to X, & must pay the sum with legal interest. X insists that the legal interest on the sum should be computed at 12%. Held: It should only be 6% pursuant to Art. 2209 which imposes that in the absence of express stipulation, a legal interest of 6% per annum in obligations not constituting a loan or forbearance of money. The 12% int. is imposable only on loans, forbearances & judgments on loans & forbearances, pursuant to the powers granted by law to the Monetary Board. •

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First Metro Investment v. Este del Sol

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This is to be interpreted in relation to Art. 1169: No interest shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. In assigned case PNB v. CA, the plaintiff was able to show the damages suffered—P98,691.90—representing 23 checks that were misappropriated by the plaintiff’s agents. Thus, as the amount could be established with reasonable certainty, SC applied the interest on said amount starting from the date of judicial demand & not from the date of the decision of the trial court. 5

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Facts: X loaned Y P7.38M with 16% int. p.a. Furthermore, X required that Y pay an underwriting fee, consultancy fee & supervision fee, even if X did not actually provide any services that would merit such fees. All the amounts due were also set to mature on the same date. Held: The fees were an attempt to circumvent the law on usury. As such, the entire interest is void, & X can now only claim the principal.

David v. CA Facts: X defaulted on paying a loan to Y. The trial court ruled in favor of X & computed legal interest, but no compound interest. X insists there should be compound interest. Furthermore, when X filed for a re-computation of interest, thus suspending the execution of the judgment, CB Circular No. 416 had taken effect on July 29, 1974, raising legal interest from 6% to 12%. Held: Because there was no stipulation on compounded interest, compounded interest is not due. The interest, however, was correctly modified by the judge, as the CB Circular is a supervening event which affects the judgment if the case is still pending. Thus, from the time of filing until July 28, 1974, interest was at 6%, & then at 12% from July 29, 1974 until Apr. 3, 1993.

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Investors v. Autoworld Facts: X approached Y, asking for a loan for X’s company, Autoworld. Y said he didn’t do loans, but was willing to do an “Installment Paper Purchase,” where X would execute a Contract to Sell of a parcel of land to Autoworld, & Autoworld would give X receivables, which X would sell to Y at a discounted value. Y would then “flow back” the amount to X. Held: The interest was declared void & X was only obliged to pay the original amount of the loan. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should & will permit no scheme, however ingenious, to becloud the crime of usury. •

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Mendoza v. CA


Facts: The bank extended loans to Y through 2 promissory notes. The notes stipulated: "Interest shall be at the rate of 9% per annum from the date(s) of the draft(s) to the date(s) of arrival of payment therefor in New York. The Bank, however, reserves the right to raise the interest charges at any time depending on whatever policy it may follow in the future." Held: Such stipulation of the bank is void. Y did not agree to the increase in the stipulated interest rate. The unilateral determination and imposition of increased interest rates by a bank is violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.

Solangon v. Salazar Facts: Contract imposed 72% interest rate p.a. (or 6% int. per month). Held: Even an interest at 5.5% per month on a P500,000 loan was deemed by SC (in a previous case) to be excessive, iniquitous, unconscionable & exorbitant even if it cannot be declared usurious. SC reduced the interest rate to 12% p.a. Despite lifting of the ceiling on interest rates by the CB Circular 905, nothing in the said circular would grant lenders carte blanch authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. •

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Spouses Pascual v. Ramos Facts: The contracts here stipulated 7% int. per month & 5% int. per month on 2 separate loans. Held: This contract is valid because the parties freely agreed to such stipulation. Absent any evidence of fraud, undue influence, or any vice of consent, the interest agreed upon is binding upon them. The Court is not in a position to impose upon parties contractual stipulations different from what they have agreed upon. •

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Eastern Shipping Lines Inc. v. CA as discussed by Atty. Lerma *NOTE: The case was decided before the effectivity of BSP-MB Circular No. 799 (July 1, 2013) which applied prospectively the rate of 6% int. p.a. as legal interest for loans, forbearances & judgments on loans & forbearances.

I. II.

When an obligation is breached, the contravenor is liable for damages under the Civil Code In case interest is awarded as actual or compensatory damage, the rate of interest, as well as the accrual thereof, is imposed as follows: 1. When obligation breached is a loan or sum of money i. Stipulation ii. No stipulation – 12%* from the time there is a result, which starts from extrajudicial or judicial demand du e to non-payment 6 iii. Interest stipulated shall earn interest when it is judicially demande d 2. Not a loan or forbearance of money i. What is expressly stipulated ii. No stipulation – 6%, & the starting period depends on demand 1. Reasonable certainty of demand – runs from judicial or extrajudicial demand 2. No reasonable certainty of demand – runs from the time judgment is made iii. Quantifiable damage must be established by a certain date, because in order for interest to exist, there must be a principal that the interest can be tacked on 3. Non-payment of award that is awarded by final judgment is conside red a loan or forbearance which would set the interest at 12%*

Direct Quote from Eastern Shipping Case Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance. 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 damages. There should always be demand before default begins

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II.

1.

With regard particularly to an award of interest in the concept of actual & 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. Fu rthermore, 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 & subject to the provisions of Art. 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. 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.

RCBC v. Alfa RTW Calculation of Amounts Due Facts: In the case, the parties stipulated the ff.:

16% interest p.a. from date of execution of the Trust Receipt7 until paid 2% interest p.a. from date of execution of the Trust Receipt until paid 6% interest p.a. as penalty for the amount due & unpaid 10% attorney’s fees Relevant dates include: Sometime in 1981 – date of execution of the Trust Receipt March 9, 1982 – date of demand letter March 12, 1982 – date of filing of complaint in RTC August 19, 1991 – date that RTC promulgated its decision December 14, 2001* –finality of SC’s judgment •

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*NOTE: This was the date that the judgment was released by the SC and technically not the date of finality in the case, but is used here to serve as an illustrative example

Breakdown Total Amount Due as of Dec. 14, 2001 [Principal] [Interest] Service Charge Penalty Interest on Interest Interest on Total Amount Due until Paid Attorney’s fees

Input Amount [Principal] + [Interest] + [Service Charge] + [Penalty] + [Interest on Interest] Principal [Principal] x 16% p.a. x no. of years from “sometime in 1981” to Dec. 14, 2001 [Principal] x 2% p.a. x no. of years from “sometime in 1981” to Dec. 14, 2001 [Principal] x 6% p.a. x no. of years from March 9, 1982 until Dec. 14, 2001 [Interest] from March 12, 1982 until Dec. 14, 2001 x 12% p.a. x no. of years until Dec. 14, 2001 [Total Amount Due as of Dec. 14, 2001] x 12% p.a. until paid 10% x [Total Amount Due as of Dec. 14, 2001]

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 thru utilization, as collateral, of the merchandise imported or purchased. 7


Rodszzen v. Far East Bank Facts: The bank claimed that 12% interest should apply, rather than 6%, as the transaction was a loan. Held: Although the sum of money involved in this case was payable to a bank, the present factual milieu clearly shows that it was not a loan or forbearance of money. Petitioner is bound to pay interest at 6% p.a., computed from April 7, 1983, the time respondent bank demanded payment from petitioner. From the finality of the judgment until its satisfaction, the interest shall be 12% p.a. Lerma’s Lecture: It was actually a SALE transaction. Rodszzen, buyer, applied for letter of credit from Far o East Bank Ekman, the seller, will deliver the products to Rodszzen o & then, they go to Far East Bank to ask for payment Far East Bank will pay Ekman as an advance o Rodszzen will pay Far East Bank the money Far East o paid Ekman for the products bought This transaction is NOT A LOAN though it appears to be o a loan. The reason is that based on the totality of the transaction, it is actually a SALE and NOT A LOAN. This is just a funky way by which the seller is paid. o •

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Plantilla v. Baliwag Facts: The sheriff, rather than the judge, decided on which interest rate to impose. Held: The judge should have decided, not the sheriff. The judge, who has the best view of all the evidence, should decide on the proper interest, & the sheriff should merely execute the writ of the judge. •

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PNB v. CA Facts: 23 checks were misappropriated by X’s agents. Thus, X is suing them. The contract is a contract of sale. •

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Held: X must be paid 6% legal int. p.a.; when the judgment becomes final, int. p.a. will be at 12%. X was able to show the damages suffered—P98,691.90—representing 23 checks that were misappropriated by the plaintiff’s agents. Thus, as the amount could be established with reasonable certainty, SC applied the interest on said amount starting from the date of judicial demand & not from the date o f the decision o f the trial court.

Nacar v. Gallery Frames Facts: The question involved the proper computation of interest, given the New Circular during the litigation which changed the interest rate from 12% for loans or forbearances to 6%. Held: 12% prior to July 13, 2013; 6% starting July 1, 2013. 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% but will now be six percent 6% per annum effective July 1, 2013 , pursuant to Resolution No. 796. It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the 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. The proper computation as held by SC: Back wages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002, when the Resolution of this Court became final and executory. Interest of 12% p.a. of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and 6% p.a. from July 1, 2013 until their full satisfaction.

Scenarios Applying Interest Rules

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Reasons: (1) The P50K serves as an unliquidated claim arising from a claim other than a loan or forbearance. As such, it is only fully ascertainable & liquidated as of the rendering of the judgment of the court. Thus, legal interest of 6% arising from the claim of damages can only begin to run from the rendering of judgment of the court. (2) The 18% penalty interest is stipulated in their contract to begin when there is delay. Thus, the penalty will set in from the time X made an extrajudicial demand on Y, resulting in the latter’s default. Interest will only begin to run from there, as agreed upon by the parties.

(3) The 500K is a liquidated claim that can already be established with reasonable certainty as of the time of extrajudicial demand. According to Eastern Shipping Lines, when the amount of the claim can be established with reasonable certainty, interest will begun to run from either judicial or extrajudicial demand. (4) The total due as of the date of final judgment will be combined, and the total amount will earn 6% int. p.a. as of the date of the finality of judgment, until th e amount is finally pai d. Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than two and one-half per centum per month when the sum lent is less than one hundred pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding five hundred pesos; and fourteen per centum per annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker's agent shall be considered such, for the benefits of this Act, only if he be duly licensed and has an establishment open to the public. It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn offered by a person into two or more fractions in order to collect greater interest than the permitted by this section. It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the article pawned. Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever warranted by prevailing economic and social conditions.

Sec. 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement: Provided, That whenever compound interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary Board. No person or corporation shall require interest to be paid in advance for a period of more than one year: Provided, however, That whenever interest is paid in advance, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board. Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may recover the whole interest, commissions, premiums penalties and surcharges paid or delivered with costs and attorneys' fees in such sum as may be allowed by the court in an action against the person or corporation who took or received them if such action is brought within two years after such payment or delivery: Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year collected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and premiums do not exceed the rates fixed in this Act.

Borrower’s Right to Recover Usurious Interest A borrower who has paid or delivered usurious interest may recover the entire interest he paid with costs & attorney’s fees The stipulation imposing interest is deemed entirely void Ex. During the effectivity of the usury law, X loaned Y money with 50% interest p.a. In court, Y will be able to recover the entire 50% and not just 50% minus 12% (the lawful interest rate) The debtor will recover not only the interest paid, but the legal interest on said amount, from the date of payment Pari delicto does not apply in usury cases •

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Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary Board shall be guided by the following: (1) The existing economic conditions in the country and the general requirements of the national economy; (2) The supply of and demand for credit; (3) The rate of increase in the price levels; & (4) Such other relevant criteria as the Monetary Board may adopt.


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The right to recover is given only to the borrower who has already paid or delivered the usurious interest

Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance of money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of interest, made without intent to evade any of the provisions of this Act, shall render a contract void: Provided, further, That parties to a loan agreement, the proceeds of which may be availed of partially or fully at some future time, may stipulate that the rate of interest agreed upon at the time the loan agreement is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent changes in the maximum rates that may be made by the Monetary Board: And Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase was not a part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney's fees as may be allowed by the court.

Usurious Loans Void Only with respect to Interest The loan is to be considered without stipulation but will still be valid; only the usurious interest will be declared void Debtor will not have the right to recover the principal & the creditor may seek action on the principal Creditor will not get even legal interest, however; he will just get the principal •

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Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the


agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

Escalation Clauses in Loans The unilateral determination & imposition of increased interest by the lender will be violative of the principle of mutuality of contracts under Art. 1308 of the Civil Code Sec. 7-a deals with stipulations providing for adjustments in the interest rate agreed upon in the event that there is a change in the legal rate of interest effected by law or the Monetary Board Valid only if the escalation clause includes a de-escalation clause—thus, if the interest rate standard agreed upon increases, or decreases, it will apply to the contract But if the clause “authorizes the creditor to increase the rate of interest in the event of changes in the prevailing market rates,” it cannot be said to be dependent solely on the will of the creditor In this case, both an increase & decrease can be o applied by the parties, making it fair and valid •

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Sec. 8. All loans under which payment is to be made in agricultural products or seed or in any other kind of commodities shall also be null and void unless they provide that such products or seed or other commodities shall be appraised at the time when the obligation falls due at the current local market price: Provided, That unless otherwise stated in a document written in a language or dialect intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to be repaid later in agricultural products or seed or any other kind of commodities shall be understood to be a loan, and any person or corporation having paid otherwise shall be entitled in case action is brought within 2 years after such payment or delivery to recover all the products or seed delivered as interest, or the value thereof, together with the costs and attorney's fees in such sum as may be allowed by the court. Nothing contained in this section shall be construed to prevent the lender from taking interest for the money lent, provided such interest be not in excess of the rates herein fixed.

Paying Interest in Kind Reduce the medium of payment to its equivalent in pesos at the time the obligation falls due at the current local market place •

Title XII. – DEPOSIT

Q: Was there a deposit during the 2-year period? A: NO. This is more like an agency.

Principal purpose Can be demanded

Deposit Safekeeping At will by depositor

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.

Characteristics of Deposit Real – perfected by delivery of the subject matter When gratuitous – a unilateral contract because only the depositary (depositorio) has an obligation When for compensation – bilateral, giving rise to obligations for both depositary & depositor (depositante)

Property

Principal purpose Kind

Movable or immovable (judicial deposit) Deposit Safekeeping Could be gratuitous

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Safekeeping as Principal Purpose Agency – where the balance of a commission remains in the possession of the agent, the balance is converted into a deposit & the agent may not misappropriate the same or may be convicted of estafa UNLESS the parties agree that it shall be a loan o Banking – if a depositor leaves U.S. dollars in the bank for safekeeping, the bank cannot sell the dollars as this is a deposit, even if the peso equivalent was supposedly credited in the depositor’s account •

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Requisites for Depositary/Depositor Depositor need not be the owner, he just needs to have possessory right •

Q: X went abroad but he has a debt due in 2 years. So X told Y to pay his debt; X gave Y the money to do pay it in 2 years. Y paid it. Is this a deposit? A: NO. This is more like an agency where X would pay off his debts.


For extrajudicial deposit, only corporeal things (movables)

Mutuum Consumption Only at the expiration of the period granted to the debtor Only money or other fungible things

Commodatum Transfer of Use Essentially & always gratuitous Movables or immovable (primary requirement being that it is nonconsumable)

Case Doctrines Calibo v. CA Facts: X owns a tractor. X’s son used it as security for his payment of rent to Y. Y kept the tractor at his house without using it. When X made a demand, Y refused & told X to pay his sons rentals first. Is this a deposit? Held: NO. In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and of returning the same. Y received the tractor not to safely keep it but as a form of security. There is no deposit where the principal purpose for receiving the object is not safekeeping. Consequently, petitioner had no right to refuse delivery of the tractor to its lawful owner. •

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Art. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing. Q: X and Y agree that Y will deliver to X the iPad of Y and the sole reason is to keep the item away from Y’s kids. Is this a deposit?

A: NO. There is only an agreement and no delivery yet as deposit is a real contract which is constituted only upon delivery. Thus there is no deposit yet. Q2: If Y gives the iPad the next day but X refuses, is this actionable? A: YES. An agreement is a binding contract and since there was a promise to accept.

Consensual Contracts Agreement to constitute a deposit –binding on the parties Contract for future deposit • •

Art. 1964. A deposit may be constituted judicially or extrajudicially.

Creation of Deposit May be made: (1) by the will of the parties, (2) by court order or (3) by law The depositary cannot be the owner of the thing deposited •

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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.

When Deposit Not Gratuitous The general rule is that deposit is gratuitous but it is not essentially gratuitous, save for the exceptions: 1. Contrary stipulation 2. Depositary engaged in business of storing goods (e.g. warehouseman) 3. Where property saved from destruction without knowledge of owner (involuntary deposit) – the depositary is entitled to just compensation Art. 1966. Only movable things may be the object of a deposit.

Objects Deposited Extrajudicial deposit – only movables, whether voluntary or necessary If object may not be lost or stolen, then it’s likely o something else (e.g. the delivery of keys to a house is an agency & not a deposit because losing the keys will not lead to loss of the house, a real property) Judicial deposit – may cover movables & immovables Does not embrace incorporeal rights & actions Though deeds or documents evidencing these rights o can be the objects of deposit •

Kinds of Deposit 1. Judicial – attachment or seizure of property in litigation 2. Extrajudicial a. Voluntary – the general rule; 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 b. Necessary – one made either: In compliance with a legal obligation On the occasion of calamity By travellers in hotels & inns By travellers with common carriers 8 • • • •

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Art. 1967. An extrajudicial deposit is either voluntary or necessary. CHAPTER 2. – VOLUNTARY DEPOSIT

Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only: (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; (2) Act of the public enemy in war, whether international or civil; (3) Act of omission of the shipper or owner of the goods; (4) The character of the goods or defects in the packing or in the containers; (5) Order or act of competent public authority. Art. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, & 5 of the preceding article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as required in Art. 1733. 8


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 v. Necessary Deposit

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Voluntary – depositor may choose the depositary Necessary – lack of free choice in the depositor

third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery.

Depositor Need Not Be Owner of Thing Generally, depositor is owner of the thing BUT it may belong to a carrier, commission agent, lessee, etc. who deposits them temporarily in a depositor’s possession, since the contract does not involve the transfer of ownership A depositary cannot dispute the title of the depositor to the thing deposited as the former is in estoppel

Q: X gives W, a kid, his iPhone for safekeeping. W sold X’s phone for P100. The kid then spent P90 and then kept the P10. A: X can collect the whole P100 from the minor, because that is the total amount he sold it for & was benefited by. Q2: What if W exchanged the thing for a lottery ticket and won P50M? Can X claim the P50M? A: Yes, because that’s the amount by which the child was enriched.

Interpleader Action to compel two or more persons, each believing themselves to be entitled to a thing, to settle their conflicting claims by leaving the thing with a third person who will deliver it to whom it belongs One of the depositors is not the owner; the court will decide who the owner really is

SECTION 2. – Obligations of the Depositary

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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,9 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. 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

Art. 1972. The depositary is obliged to keep the thing safely & to return it, when required, to the depositor, or to his heirs & successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping & loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, the fact shall be taken into account in determining the degree of care that the depositary must observe.

When Object Lost 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 toward his own, IF such care is less than that required by the circumstances •

Applicable Rules are the Rules on Obligations (Title I of Civil Code) Loss – he is liable is the loss occurs through his fault or negligence, even if the thing was insured o Loss while in depositary’s possession creates presumption of depositary’s fault Required degree of care is greater when deposit is for compensation, though even in gratuitous deposit there must be care The depositary must exercise over the thing deposited the same diligence as he would exercise over his property o But it must be the care necessary, depending on the object & the circumstances that is actually deposited with the depositary •

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Art. 1327. The following cannot give consent to a contract: (1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. Art. 1329. The incapacity declared in Art. 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. 9


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BUT the depositor is not responsible in case the thing is lost without the negligence of the third person with whom he was allowed to deposit the thing if such person is NOT manifestly careless or unfit (3) The thing is lost through the negligence of his employees whether the latter are manifestly careless or not •

Return of Thing Thing must be returned when the depositor claims it, though the parties may have stipulated a term •

Case Doctrines Bishop of Jaro v. Dela Peña Facts: X kept the money that Y was holding in trust, to be used for a leprosarium. X put the money in his bank account & the funds were co-mingled with his. Meanwhile, X was arrested for being a supposed rebel & the Americans forfeited all his money. Y wants to make X ’s estate liable fo r the amount. Held: X is not liable. By placing the money in the bank & mixing it with his personal funds, X 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. Lerma agrees with the decision, though it is debatable. •

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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 A depositor is liable for the loss of the thing deposited if: (1) He transfers the deposit with a third person without authority although there is no negligence on his part & the third person (2) He deposits the thing with a third person who is manifestly careless or unfit although authorized, even in the absence of negligence

Class Scenario Q: L deposited a laptop with B for a period of 30 days. Can L get the laptop and give it to C? A: Generally, no, without permission of B. Q: If L & B agree that B can deposit it with a 3rd person. B deposits the laptop with C, but C is a minor. C damages the laptop & the repairs are worth P10,000. Who is liable for the damage? A: B, because C is legally incapacitated. Q: Must L prove that C was unfit? A: No, his being unfit will be presumed as he is a minor. Q: What if C is old but has a super low IQ? A: It depends. Can he comprehend his duties as a depositary? If C is clearly incapable of understanding the role, then definitely, B is liable. Q: If C leaves the laptop in the drawer, will B be liable? A: NO. This is normal. There is no manifest carelessness. Q: What if C was the employee of B? What if B was a lawyer? Does the fact that he is a lawyer matter? A: B’s being a lawyer matters, because his business is to hold things in trust for his client. If B were an owner of a restaurant & C is a waiter, L must prove that C was manifestly careless or unfit to be able to make B liable since B’s ownership of a restaurant has no bearing on the relationship between L & B. 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 & wait for his decision, unless delay would cause danger.

Obligation Not to Change the Way of the Deposit General Rule: The depositary must first notify the depositor & wait for the latter’s decision if he plans to change the way of the deposit EXCEPT – if delay could cause danger •


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Class Scenario Q: L has the laptop of N as N deposited it with L. Can L bring the laptop to X’s house because of some danger in L’s house? A: YES, if N agrees. Generally, the depositary must wait for the approval of the depositor. BUT if there is an imminent danger, L can move it.

Any stipulation exempting a bank from liability in case of fraud, negligence, delay or breach, when it is performing its duties as a depositary, is void.

Case Doctrines CA Agro v. CA Facts: X & Y entered into a contract where X would sell Y land. Prior to full payment, both parties agreed to put the TCT in a safety deposit box in a bank. When X tried to take the TCT out once, it was no longer there. X sued the bank for damages. The bank said it was not liable since the contract was one of lease & in their agreement with X & Y regarding the “lease” of the safety deposit box, it said they would not be liable for loss. Held: This is not a lease, but a special kind of deposit. Being a deposit, exemptions from any & all liability in performing duties as a depositary are void. However, the bank cannot be held liable, because it was not shown that the bank was aware of the agreement between X & Y & the fact that they had to bot be there to withdraw the TCT. •

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, & to take such steps as may be necessary in order that the securities may preserve their value & the rights corresponding to them according to law. The above provision shall not apply to contracts for the rent of safety deposit boxes.

Lerma’s Thoughts This provision is now obsolete; these days all these certificates, bonds, securities or instruments have the interests automatically deposited in the account of the holder of such instrument & there is no need to present the instrument to make the claim. Collecting for Depositor Depositary must: Collect the interest when it becomes due o Take such steps as may be necessary in order that the o securities may preserve their value & the rights corresponding to it Depositary is bound to collect not only the interest but also the capital itself when due •

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Contract for Rent of Safety Deposit Box Special kind of deposit; not an ordinary contract of lease of things Not strictly governed by provisions of deposit Relationship is generally considered as bailee & bailor In the operation of the box, the box & contents thereof are in the manual possession of the lessor BUT neither the lessor nor the rentor can be given o access to the contents of the box without the consent & cooperation of the other •

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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.

Class Scenarios Q: X is a depositary. 3 separate people deposited with you various amounts of sugar. X put it all in one pile & the 3 separate people complained. Do the 3 people have a cause of action against you? A: They may have a cause of action. If the sugar deposited were of different kind and quality. Just because one deposits sugar doesn’t mean that all deposits are the same. Same with everything else. Q: Assuming the sugar was fungible, do they have a cause of action? A: No, they no longer have a cause of action.

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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.

Use of Thing for Preservation General Rule: Unauthorized use would make a depositary liable for damages. EXCEPT – The depositary may use the thing if it is necessary for its preservation, even without the express permission of the depositor, but ONLY for that limited purpose Ex. A depositary may use a radio received in deposit o occasionally to prevent the accumulation of moisture •

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.

When Commodatum If the thing deposited is non-consumable & the depositary has permission to use the thing, it is not a contract of deposit, but commodatum, though was denominated as a deposit UNLESS safekeeping is still the principal purpose of the contract •

CLASS SCENARIOS Q: X deposited an iPad with A for a period of 30 days. Can A use the iPad? A: X cannot make use of the iPad because it is a deposit & A needs the permission of X to be able to use it. Q: X deposits an iPad with A & says A can use it for 30 days. What is the contract? A: It is commodatum. Q: What if X gives it to A and says, “use it for 30 days but please keep it safe”? A: It is commodatum. Q: Who determines the primary purpose of the contract? A: Depends what was said at the time the deposit was constituted. If it can be inferred that it was really for use, then it is not a deposit but a commodatum.

Case Doctrines Javellana v. Lim Facts: X & Y were given P1,102 by Z, evidenced by a document that said X & Y received the amount without interest & would give the amount back to Z in 3 years. When the due date passed, X approached Z & begged for an extension, agreeing to pay interest. X & Y failed to pay some of the amount even after the extension so Z filed a case for collection. X & Y’s defense is that the contract is a deposit, so they in fact already paid the whole amount, as the amount Z is claiming includes interest. Held: It is a contract of LOAN, because it was understood, as between the parties, that X & Y could make use of the amount & spend it. X & Y were not bound to return the same identical bills of money, but just the same amount of the same kind & quality.

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When Loan If the thing deposited is money or other consumable thing, the permission to use it will result in consumption & converts the contract into a simple loan or mutuum If safekeeping is still the primary purpose, it is an irregular deposit (e.g. bank deposits are in the nature of irregular deposits but they are really loans governed by the law on loans) •

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When Demand Can Be Made of Thing

Irregular Deposit May be demanded at will by the irregular depositor

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Essential Cause or Benefit Third Parties

Only benefit is that which accrues to the irregular depositor Depositor has preference over other creditors with respect to the thing deposited

Mutuum Lender is bound by the stipulations of the contract & cannot seek restitution until time of payment The necessity of the both parties; benefits them both No preference in the distribution of the debtor’s property

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Permission to Use Money Not Presumed In deposit, the permission to use money is not presumed except when such use is necessary for the preservation of the thing deposited and the burden is on the depositary to prove the permission has been given.

CLASS SCENARIO Q: X gave Y P1,000 and said “I’m going away on a trip and coming back in 30 days. Please keep my money.” Does Y have a right to use the money? A: NO.

U.S. v. Igpuara Facts: X is the agent of Y. Y gave X money to pay Z, evidenced by a deposit certificate. However, when Z tried to get the money from X a few months after the transaction between him & Y, X gave the deposit certificate to Z as a negotiable instrument. Subsequently, an estafa case was filed against X. Held: X is guilty of estafa for misappropriating funds held in deposit for his principal. The fact that X did not surrender the money showed that he had used it, which is not allowed in a deposit. Also, the failure to claim at once or delay for sometime in demanding restitution of the things deposited, which was immediately due, does imply such permission to use the thing deposited as would convert the deposit into a loan. •

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Q: X gave Y the keys to his car, the manuals, insurance, etc. and the car itself and said, “I’m going abroad for 3 years. Please keep my car safe.” Can Y use it? A: Only for the sake of preserving the car, but otherwise, he cannot make use of the car as that would alter the principal purpose of the deposit and turn it into a commodatum.

Case Doctrines Gavieres v. Taverra Facts: The contract reads: "Received of X, P3,000, as a deposit payable on two months' notice in advance, with 6% int. p.a. with an hypothecation of the goods now owned by me or which may be owned hereafter, as security of the payment. "In witness whereof I sign in Binondo, January 31, 1859.” Held: This is a contract of loan, as it stipulates an interest. Furthermore, the fact that it was collective after 2 months’ notice showed that X intended to give the other party the opportunity to ensure availability of funds.

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.

Baron v. David Facts: Y left 1,000 cavans of palay in X’s mill for selling. A fire broke out in X’s mill. Now, X refuses to pay Y for the palay, claiming that the palay was left in his mill as a deposit & he could not be liable for force majeure. Held: The contract was NOT a deposit & X is liable to pay Y for the palay. Evidence showed that X had only 300 cavans left in his mill when the fire broke out, showing that he had sold the rest. Even assuming arguendo that X kept the palay for future sale & thus it was, at first, a deposit, 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.

Case Doctrines Palacio v. Sudario Facts: X took 81 cattles of Y on deposit. Upon demand, X was only able to return 40. X claimed fortuitous event, saying that the missing animals had drowned in a flood. Held: X failed to sufficiently establish the flood & that the flood was what killed the cattle. As a depositary, any loss of the thing deposited is presumed to be his fault & he has the burden of proving the fortuitous event, which in this case, he failed to do. Thus, X is liable for the loss of the cattle on deposit. Lerma’s lecture: If thing is lost while in the hands of the depositary, it is assumed to be the depositary’s fault. But if it’s due to fortuitous event, then the depositary will be exempt. BUT if you are going to raise fortuitous event as a means of denying

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General Rule The depositary is not liable for loss through a fortuitous event without his fault; exceptions are provided above •

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liability, you must be able to prove it in court. You cannot simple say “I lost it by fortuitous event and therefore I am not liable.” You must prove that the fortu itous event d id in fact occur. Art. 1980. Fixed, savings, & current deposits of money in banks & similar institutions shall be governed by the provisions concerning simple loan.

Contract of Loan Bank deposits are really contracts of loan, where the depositor loans money to the bank so that the bank can use the same for its ordinary transactions and banking business They are “irregular deposits” because they earn interest Governed by rules on simple loan or mutuum & rules o on imposition of legal interest Bank need not return the exact same money that was deposited; money is naturally commingled with other people’s money, creating a single fund from which depositors are paid •

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Relation of Creditor and Debtor Bank is the debtor & agrees to pay the creditor-depositor upon demand A bank’s failure to pay its obligation is not a breach of trust and cannot constitution estafa through misappropriation The payment of a bank extinguishes so much of the obligation of the bank as is represented by the check paid or honored by the bank out of the latter’s deposit A bank can compensate or set off the deposit in its hands for the payment of any indebtedness to it on the part of the depositor Bank can be held liable to depositor for fraud, negligence or delay based on internal banking rules When a bank is suspended, it still owes an obligation to its depositors, but it may not be made liable to pay interest on the deposit during the period of suspension •

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Q: In order for a valid offset to occur under the Civil Code, what needs to exist? A: Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, & that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, & also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated & demandable; (5) That over neither of them there be any retention or controversy, commenced by 3rd persons & communicated in due time to the debtor.

Case Doctrines Gullas v. PNB Facts: Gullas deposited a U.S. Treasury Warrant with PNB which turned out to be defective. PNB offset the amount under Gullas account & sent him a notice that they had already offset his account. However, Gullas didn’t receive the notice, as he was out of town, & Gullas had issued checks on the account that PNB offset. Gullas’ checks were dishonored, to his embarrassment, & he now wants PNB to be liable. Held: PNB is liable. As a general rule, the Civil Code states that PNB would have had a right to set off the deposits in its hands for the payment of any indebtedness to it, on the part of a depositor. However, the Negotiable Instruments Law contains certain provisions which clearly define and establish the liability of a general indorser in good faith. The general indorser of a negotiable instrument engages that if he were dishonored, and the necessary proceedings of dishonor are duly undertaken, then he will pay the amount thereof, to the holder. This is clearly seen in Sec. 66 of the Negotiable Instruments Law. The notice is dishonor is vital in order to charge all indorsers, & the right of action against the indorser does not accrue against him until notice is given. Lerma’s Lecture: The bank’s primary purpose in keeping your money is actually to use it. Offset cannot occur in a traditional type of deposit, as in a normal deposit, you are not mutual creditors and debtors, but depositors and depositaries. The fact that the bank’s deposits are irregular is what allows the bank to offset amounts deposited to them by depositors. •

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Serrano v. CB


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Facts: X wants to get his money back from Overseas Bank, which had its operations suspended. To make the claim, X stated that Overseas Bank held the funds in trust for its depositors, such as himself. Held: NO, bank deposits are not in the form of trusts & create no fiduciary relationship. Bank deposits are in the nature of irregular deposits. They are loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans. Current and savings deposit are loans to a bank because it can use the same. X is a creditor of the bank, & not its trustorbeneficiary. Lerma’s Lecture: There is no constructive trust between a bank and its depositors, because the relationship is debtor and creditor and not really a contract of deposit.

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 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. CLASS SCENARIO Q: X deposited a locked bag with Y without giving Y the key. At 9PM in the night, a strange odor so foul started to emanate from the bank, giving Y a difficult time to study. Can Y open it? A: NO. If Y does not have the key, X cannot do it. Q: If Y returns the bag to X and the bag is unsealed, and X sues Y, will the court grant X damages? A: YES, given Art. 1981. Q: What if through no fault of Y, the bag magically opens, but there is no damage. Inside are documents showing that X has multiple families. What is Y’s obligation under the Civil Code?

A: Y must keep the secret of the deposit, so Y cannot tell others about the multiple families. Q: X gave Y a locked bag filled with documents. X tells Y, “Please wipe my laptop so that no moisture and no dust will go in. Keep it safe.” The bag is locked, but X tells Y to please keep the laptop clean every 3 days. Can Y open the bag? A: YES, to follow X’s instructions. Q: What if X did not give Y a key? A: Y is presumed to have the authority provided that Y cannot fulfill the obligations X requested of Y without Y opening the locked bag. 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 Depositary (1) Return the thing deposited when delivered closed & sealed, in the same condition (2) Pay for damages should the seal or lock be broken through his fault; his fault is presumed unless proven otherwise (3) Keep the secret of the deposit when the seal or lock is broken, with or without his fault Credibility of Depositor’s Statement of Value Serves only as prima facie evidence which may be rebutted When Opening is Justified (1) Presumed authority; or (2) Necessity 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 Art. 1896 shall be applied to the depositary.

Obligation to Pay Interest on Money Converted to Personal Use Generally, when what is deposited is money, the depositary has no right to make use thereof & thus is not liable to pay interest, EXCEPT— When depositary is in delay •


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Has used money without permission – from the day on which he applies the money to his own use, & those which he still owes after the extinguishment of the deposit.

Products, Accessories, Accessions Products – fruits Accessory – things for embellishment (e.g. adding decorations or hydraulics to a car) Accession – something that is attached or incorporated into the thing given that is not necessarily a product (e.g. in a car, the side mirror is the accession) • •

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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 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.

Proof of Ownership Not Necessary To constitute a deposit, it is not essential that the depositor is the owner of the thing deposited. For Paragraph 2 to Apply (1) The thing deposited must have been stolen; & (2) The depositary must know who the true owner is Effect of Failure to Claim within 1 Month The 1 month period is meant to protect the depositary Depositary could unjustly be made liable for refusing to o return to the depositor The law, however, does not provide an answer for a o situation where the depositor demands the thing before the expiry of 1 month but the depositary has already discovered that the depositor is not the owner •


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If the thing is returned to the depositor after 1 month, the true owner of the thing may still recover the thing through other legal processes

CLASS SCENARIO Q: X gives Y a car by way of deposit for a period of 30 days. Y says he will not accept the deposit unless Y shows X a certificate of title. Can Y do this? A: NO as ownership need not be proved by the depositor. Q: What if Y accepts the deposit & finds out in the news that the car was stolen or has reason to believe that the stolen car on the TV was the same car that is now in his possession, but Y cannot contact the real owner as Y does not know that person. What will Y do? A: Y may return the car to X. Art. 1985. When there are 2 or more depositors, if they are not solidary, & 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 Art. 1212 & 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 Divisible & Depositors Not Solidary Each depositor can demand only his share proportionate to the deposit. Ex. If A & B deposited 150 & 300 cavans of rice, respectively, A can only demand 150 cavans •

Obligation is Solidary or Thing Deposited is Not Divisible Art. 1212 – Each of the solidary depositors may do whatever may be useful to the others but not anything which may be prejudicial to the latter Art. 1214 – The depositary may return the thing to any of the solidary depositors unless a demand, judicial or extrajudicial, is made by one of them, in which case delivery should be made to him •

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CLASS SCENARIO

Q: X & Y tell Z to please keep the SCRAs they have for them until they can enroll. X & Y are able to enroll. X goes back to Z & asks for the return of the SCRAs. Should Z give it back? A: A set of books are divisible so Q: If X & Y deposit a bike with Z without telling Z what kind of deposit it is, what rules apply? A: Art. 1212 & 1214 will apply because the thing that is the subject of the deposit does not admit of division. Thus, if X shows up to get the bike, that is valid and Z can give the bike to X even if Y is not there, because the thing is not divisible.

Lerma’s Lecture If there are 2 or more depositors are joint & the thing is divisible each one can get the share that the person is entitled to have. If the thing belongs 2 or more depositors and it is solidary or it does not admit of division, then one person can come to collect the entire indivisible object or solidary obligation. If the parties stipulate that the obligation is joint & the thing is indivisible, then the depositary must wait for all the owners to come forward and give the thing to them together. 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. CLASS SCENARIO Q: What happens if X deposits a bike with Y and goes to jail because X has a final judgment against him for murder. The time to return the bicycle has fallen due. Who should you return it to? A: X would be incapacitated, so the bike would go to the administrator of his estate. 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.


Lerma’s Lecture There should be no malice with respect to the depositary in terms of him choosing to move from one place to another. 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.

Time of Return Generally dependent on the will of the depositor, who may even waive a period set by him. However, the period is generally binding upon the depositary. If deposit is for a compensation, the depositary is entitled to compensation corresponding to the entire period. •

When Depositary Not Obliged to Return the Thing Deposited (1) When to do so would mean disobeying the judicial order of attachment (2) When there is a conflicting claim coming from a 3 rd person, in which case the thing should be consigned with the court through an action of interpleader Case Doctrines Aboitiz v. Orquina Facts: X died. Y was his administrator. Y made a claim on X’s life insurance & deposited the amount with Company W, which issued a receipt, referring to the amount as a deposit. Later, Y committed suicide, so Z replaced Y as X’s administrator. Z demanded the amount from Company W, which refused to release it, claiming that, since no time was given for the release of the amount in the agreement between Y & W, Z must resort to a judicial order to get the money out. Held: The amount is a deposit, & is therefore demandable at any time the depositor makes such demand, whether or not there is a stipulated period. W must give the deposited amount to Z. •

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Note: This deposit had accruing interest, but SC still ruled it was a deposit.

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.

Depositary May Return the Thing Deposited Notwithstanding Period Fixed for the Deposit When— (1) The deposit is gratuitous & (2) For justifiable reasons (e.g. depositary is going abroad)

CLASS SCENARIO Q: X dies. Y, his heir, sells X’s iPad for P2,000 which he finds in X’s things. Later on he finds out it is actually owned by Z and Z gave it to X by virtue of deposit. A: Right to collect or the amount earned should be returned to Z. 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. Obligation to Pay Expenses for Preservation Gratuitous – Depositor must pay all expenses for preservation, whether ordinary or extraordinary so long as they are necessary expenses Useful expenses or those for pure luxury or pleasure o are not covered Compensated – Expenses of preservation should be borne by depositary absent contrary stipulation Stems from onerous nature of a deposit for valuable o consideration •

Deposit for Valuable Consideration If so, depositary has no right to return the thing deposited before the expiration of the time designated. 1988 v. 1989 1988 governs the rules with respect to the depositor, whereas 1989 deals with the rules with respect to the depositary. Art. 1990. If the depositary by force majeure or government order loses the thing & receives money or another thing in its place, he shall deliver the sum or other thing to the depositor. Art. 1991. The depositor's10 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.

Good Faith of Depositary’s Heir Provision contemplates a situation where the depositary dies & the heir, in good faith, sells the thing deposited. Heir must return the price received or assign the right to collect the same to the depositor BUT if heir is in bad faith, depositor can sue heir for damages & heir can be liable for estafa •

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CLASS SCENARIO Q: A vehicle was deposited. The ashtray of the car broke. Who pays? A: The depositor. 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.

General Rule on Loss & Exceptions Depositary must be reimbursed for any loss suffered because of the character of the thing deposited, EXCEPT IF— (1) At the time of the constitution of the deposit, the depositor was not aware of the dangerous character of the thing (2) At the time of the constitution of the deposit, the depositor was not expected to know the dangerous character of the thing

(3) The depositor notified the depositary of the same (4) The depositary was aware of the fact without advice from the depositor CLASS SCENARIO Q: If X deposits with Y 10 liters of kerosene, & Y’s house burns down, is X liable to Y? A: NO, because in this case, Y should have been aware that since it was kerosene, it had a dangerous nature. Q: Would it be the same if X gave Y an unlabeled bottle, but told Y it was kerosene? A: YES, X would still not be liable because X informed Y of the character of the thing deposited. 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.

Depositary’s Right of Retention A pledge can be created by operation of law & the deposited thing will serve as security for the payment of what is due to the depositary by reason of the deposit, similar to the right granted to an agent. Distinguish from commodatum, where retention is only possible if there are hidden defects that injure the bailee •

CLASS SCENARIO Q: X owes Y P1,000 2 weeks ago. Last week, Y deposited his iPad with X. Today is the due date of the return of Y’s iPad. When Y made the demand for P1,000, X refused to return the iPad of Y because Y still owed X P1,000. If X & Y go to court, who would win? A: Y would win, because the right of retention has to be by virtue of the deposit (i.e., the retention should be because of expenses for the preservation of the iPad), and has nothing to do with other obligations due from the depositor to the depositary even if said obligation still exists at the time the deposit is demanded by the depositor. Art. 1995. A deposit is 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.

Causes of Extinguishment of Deposit


List is not exclusive & other causes can exist, such as novation, merger, fulfillment of the resolutory condition, etc. The return of the thing also extinguishes the deposit •

Effect of Death of Depositor (1) Gratuitous – since a deposit that is gratuitous is personal in nature, the depositary is not obliged to continue with the contract of deposit Lerma: There is a certain trust committed and the heirs have to hold it and keep it safely until it is claimed by the depositary (2) Compensated – An onerous deposit is not personal, so the rights & obligations arising therefrom will be transmitted to the respective heirs. BUT the heirs of either party have a right to terminate the deposit even before the expiration of the term •

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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, & 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 Art. 2168.

Four Kinds of Necessary Deposit (LOCTP) As opposed to a voluntary deposit, a necessary deposit does not involve freedom of choice. (1) When it is made in compliance with a Legal Obligation Judicial deposit of a thing which is being disputed in a litigation by 2 or more persons Deposit of a thing pledged when the creditor uses the same without authority of the owner or misuses it in any other way •

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Required in suits by the Rules of Court Deposit with a bank or public institution of bonds or instruments of credit payable to order or bearer given in usufruct when the usufructuary does not give proper security for their conversion Those constituted to guarantee contracts with the government (2) When it takes place on occasion of any Calamity (3) When made by Travelers in hotels or inns (4) When made by Passengers with common carriers • •

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Necessary Deposit on Occasion of Calamity Depositary gains the obligations of a bailee & the immediate object would be to save the property rather than its safekeeping. Ex. If X saves Y’s TV set in a fire, X is supposed to be o the depositary There must be a causal relation between the calamity & the constitution of the deposit Such a deposit is a quasi-bailment, otherwise known as o involuntary bailment or involuntary deposit, or deposito miserable Quasi-contract (Art. 2168) – The depositary must be paid by the depositor a just compensation for saving the property from destruction •

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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 hotelkeepers or their substitutes advised relative to the care and vigilance of their effects.

Art. 1999. The hotel-keeper is liable for the vehicles, animals & articles which have been introduced or placed in the annexes of the hotel.

Requisites for Keepers of Hotels or Inns to be Responsible (1) The keepers have been previously informed or has notice about the effects brought by the guests; & (2) The guests have taken the precautions prescribed regarding their safekeeping. Extent of Liability of Keepers of Hotels & Inns Liability is not limited to baggage or articles of clothing, but include those lost or damaged in hotel annexes, such as vehicles in the hotel’s garage. o Contract of deposit is perfected when the hotel guest hands over his keys to his vehicle, & the latter received the obligation to safely keep & return it Hotel-keepers cannot waive this because they are tasked with taking extraordinary care with the safety & well-being of their guests & their guests’ things Responsibility extends to all those who offer lodging for compensation, whatever may be their character. Innkeepers are also subsidiarily liable for restitution of goods taken by theft or robbery within their houses from guests •

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Case Doctrines Tan Khey v. De los Santos Facts: X stayed at a hotel owned by Y. X left his stuff with the staff of Y in the afternoon, consisting of his bag & revolver, & then came back in the evening & retired to his room. When X •


woke up the next day, his pants, bag, the contents of the bag, & his revolver were gone. X sought to make Y liable. Held: Y is liable for the pants, the bag & the revolver, because for these 3, Y had notice that X had them with him, as X deposited the revolver & bag with Y’s staff & X was walking around in that pair of pants the whole day. However, Y is not liable for the things he is not aware of—the contents of the bag, which neither Y nor his staff ever saw. It is not necessary in order to hold an innkeeper liable that the effects of the guest are actually delivered to him; it is enough that they were in the inn. Also, though the notices of the hotel said that valuables such as revolvers, money, jewelry, etc. should be deposited with staff, otherwise the management would not be liable for loss, Y could not escape liability in the situation, because X had exercised due diligence with his things & even locked the room, whereas Y failed to provide adequate security for his guests.

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lodging therein & for the payment of the values thereof (Revised Penal Code)

Travellers or Guests Defined Transients who enter hotels or inns to seek temporary lodging Must be accepted without discrimination; accommodation may be refused without liability only for justifiable reasons NOT the same as boarders in dorms who are there for an extended or contracted period

Provided that notice has been given & proper precautions taken by the guest (2) The loss is caused by the act of a thief or robber done without use of arms or irresistible force •

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When Hotel-Keeper Not Liable (FTAC) (1) Loss or injury is via orce majeure (2) heft or robbery is by a stranger (not a hotel employee or servant) & there is use of arms or irresistible force UNLESS the hotel-keeper is guilty of fault or negligence in failing to provide against the loss or injury from his cause (Art. 1170-74) (3) Loss is due to the cts of the guest, his family, servants or visitors (4) Loss arises from the haracter of the things brought to the hotel •

CLASS SCENARIO Q: X lives in a dorm. X took precautions told by the dorm-keeper, yet X’s items were lost. Is the dorm-keeper liable? A: NO. The provision refers to transients, or travelers who are only temporarily in a certain lodging or hotel. CLASS SCENARIO Q: What if the loss occurred in the tennis court of a hotel. Is the hotel liable? A: YES, as the annexes of the hotel are included. 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. 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.

When Hotel-Keeper is Liable Regardless of Amount of Care (1) The loss or injury to the personal property of the guest is caused by his servants, employees or strangers


Supervision or Control For innkeepers or hotel-keepers to be liable for the effects of the guests, it is not necessary that these are delivered to him or his employees; it is enough that they are WITHIN the inn. CLASS SCENARIO Q1: X is a guest in Y’s hotel. Z is the culprit. X loses his things, including his pants. If Z is a waiter, who is ultimately liable to X? A: Y will be liable because it is the staff who did it. Q2: Z is a pedestrian walking by the hotel. He looks up and sees through the window X’s pants, & says “I like those pants and says he will steal them. Is Y liable to the guest? A: Y is liable because it was committed with theft without use of arms or force. Q3: What if the pants were hanging from the premises, would Y be liable? A: Yes because it was still hanging on the premises of the hotel and was still within the vicinity of the hotel. Q4: Z is a well-known thief, sneaks in, takes the pants & other valuables. Is Y liable? A: Y would still be liable. The only instance where thieves would be liable is when they employ force. Q5: What if Z is a guest of X? Is X liable?

A: It depends. Y must prove that the relative was a GUEST of X. Absent that, Y would be liable. Q6: What would happen if Z was not aware that the goods he was stealing belonged to his cousin? A: Y would not be liable because the mere fact of the relationship between X & Z exempts Z. Q7: What if what was damaged were plants brought in by the guest? Will Y be liable? A: NO, because the damage is due to the character of the thing brought in. 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 Art. 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, & supplies usually furnished to hotel guests.

Notice of Lis Pendens Serves as notice to the whole world that a particular real property is in litigation & warns those who may acquire an interest over the property to do so at his own risk. Custodia Legis A thing is in custodia legis when it is shown that it has been & is subjected to the official custody of a judicial or executive officer pursuant to the execution of a legal writ To effect proper custodia legis, property must be lawfully taken by virtue of legal process. •

Escrow Order A written instrument which by its terms imports a legal obligation & 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, & then to be delivered over to the grantee, promisee or obligee Involves any written instrument with a third person (can involve land, money representing rentals or otherwise, etc.) May be issued by a court in the exercise of its intrinsic powers to issue orders •

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Not Paying for Food or Accommodation The act of obtaining food or accommodation in a hotel or inn without paying therefor constitutes estafa. 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 Deposit or Sequestration Properties may be attached by the sheriff upon filing of a complaint Receiver (a disinterested party) may be appointed by the court to administer & preserve the property in litigation Personal property may be seized by the sheriff in suits of replevin or manual delivery of personal property •

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Description Cause or Origin

Judicial By will of the court

Purpose

Secures the right of a party to recover in case of a favorable judgment Movable or immovable, but generally immovable Remunerated (onerous)

Subject Matter Remuneration

Extrajudicial By will of the parties; there is a contract Custody & safekeeping of the thing Only movable property May be compensated or

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