CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. …docshare01.docshare.tips/files/30629/306294922.pdf ·...

1 CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

November 13, 2015 (Tongo)

PART I: CONCEPT OF CREDIT TRANSACTIONS

We will discuss transactions such as transactions

involving purchase or loan of goods or money or

even services wherein the loan or purchase is at

present with a promise to repay or deliver in the

future.

With the concept of this credit transactions ..

exchanges is possible in the xx

commerce..because instead of waiting that you

have money to be able to purchase goods you get

to enjoy at present then pay it later. Or pay or

deliver it in the future.

Contract of bailments, usury, suretyship, guaranty,

mortgage, antichresis, terms and preference of

credits these are essentially contracts that we

would be discussing. So we have here contracts of

security.

There are two kinds of security contracts

1. Secured transactions- when you have properties

whether personal or real which serve as a collateral

or property is encumbered such as that of a

mortgaged, pledge, antichresis or charged as lien

thereon.

2. Unsecured transactions- also known as personal

security. There is no property involved but rather

what serve as a security is a promise to pay the

person, the personal guaranty or commitment of the

guarantor or surety.

Now contracts of security, with this type of contract

something is given, deposited or serve as a means

to ensure the fulfillment or the enforcement of an

obligation or protecting some interest in the

property. We will be discussing contracts of

bailments ito yung contracts of loan, deposit.

What happens in bailment? Bailment means may

delivery of something, delivery of a property from

one person to another in trust for a specific purpose

with a contract express or implied. That the trust

should be faithfully executed and the property

returned or duly accounted for when the special

purpose is accomplished or kept until the bailor

retains it. Again this is a contract.

We have two parties, the bailor and the bailee. The

bailor is referred to as the commodatario, he is the

one who delivers possession or custody of the thing

bailed. He need not be the owner of the thing but

what is important is that he has possessory

interest of the said property. In other words he

has the right to deliver it to another person.

A lessee can be a bailor, a usurfructuary can be a

bailor even if he was not the owner of the property

subject of the bailment.

We also have the bailee, the recipient of the

property. He receives the custody or possession of

the thing delivered. Essentially in a contract of

bailment there is the obligation to restore or return

the subject of the bailment whether if the same or

other form has been delivered.

Kinds of bailment

1. Sole benefit of the bailorit is gratuitous deposit

such as mandatum?

2. Sole benefit of the bailee- commodatum.

Gratituous, simple loan or mutuum.

3. For the benefit of boh the bailor or the bailee

such a deposit with compensation, involuntary

deposit, pledge and xx for hire.

The first two kinds of bailment for the sole benefits

of the bailor, bailee.. these are gratuitous bailments

where there is no consideration but parties have

their respective obligations.

For mutual benefit bailments, here the bailment

involved are transactions such as deposit or

compensation.

What about bailments for hire? this is also a

bailment for the benefit of both parties since

compensation is involved. It can be for the hire of

things which will now be considered as a contract of

lease, hire of service which is a contract of piece of

work under 1467, hire for carriage of goods—

common carrier and hire of custody for storage and

those covered under warehouse receipts law.

PART II: LOAN

I. CONCEPT

II. COMMODATUM

The first kind of credit transaction we have to

discuss is a contract of loan and we have article

1933

1933. By the contract of loan, one of the parties

delivers to another, either something not

consumable so that the latter may use the same

for a certain time and return it, in which case the

contract is called a commodatum; or money or

other consumable thing, upon the condition that

the same amount of the same kind and quality

shall be paid, in which case the contract is

simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a

stipulation to pay interest.

In commodatum the bailor retains the

ownership of the thing loaned, while in simple

loan, ownership passes to the borrower.



1953 discusses what a contract of loan is… to

deliver something to another person consumable or

not so that the latter may use the same for a certain

time and return it.

Under 1933 we have two kinds of loan. We have

commodatum or simple loan or mutuum.

Now if we say mutuum or loan the first that comes

to your mind is money, mag-utang. Actually that is

only one type of loan. That refers to a simple loan

or mutuum. Because loan or contract of loan is also

involved for example, if we borrow somebody else’s

book that is commodatum, that is a contract of loan.

Now these contracts of loan whether commodatum

or mutuum are real contracts as they are perfected

by delivery. They are also considered as unilateral

contract because once the subject matter has been

delivered, it creates obligation to the part of the

borrower. But again as you will see in the

succeeding discussions, the bailor has still

obligations to comply with.

Now do not confuse loan from other terms such as

credit and discounting. Again when we talk about

loan the first thing comes to our mind is loan of

money, mutuum or simple loan, wherein there is

delivery by other party and the recieve by other

party who becomes the owner of the sum of money

that has been delivered or some other consumable

thing upon the agreement express or implied with

the obligation to repay the same amount of the

same kind and quality with or without interest.

Credit on the other hand is your ability to borrow

money or things by virtue of the confidence or trust

reposed by a lender that he will pay what was

promised within a specified period.

On accounting its credit.. means the sum that is

credited on the books of the company purse to a

person who appears to be entitled to it.

Discounting is different from loan. What happens

when you discount checks? Discounting usually

happens pag post dated yung check or malayo pa

yung bangko for sa encashment or walay account

ang payee sa cheke so instead of waiting for the

maturity or due date of the check you will find

another person, ‘puwede pa discount?’ so what

would happen? If the amount of check is 20000

what would happen when it is discounted the

amount that will be received by the payee or the

holder will be lesser, bawas na yung interest. Now

there is no contract of loan, what you have there is

merely discounting, interest deducted in advance

unlike contract of loan or the general concept of a

contract of loan it is only considered as a single

paper or only the signature of the maker appears

therein.

However if you have discounting you have two

signatures appearing therein both parties who are

liable for payment that would be considered as

double paper.

Two kinds of loan

Commodatum Simple loan

Object Ordinary the object that is something that is not consumable

Subject matter is money or consumable thing

ownership No transfer of ownership as ownership is retained by the payor or lender

There is a transfer of ownership or payee

Cause Essentially gratuitous, under article 1933 it is very clear.

Maybe gratuitous or onerous. For example loan there is interest

Obligation involve

The bailee has the obligation to return the exact same thing to the bailor

To pay the same amount of the same kind and quality, not the exact thing that was loaned

property Real or personal property

Personal property only. Money, consumable

purpose Use or temporary possession

Consumption

Demand the return of the subject matter

you can demand the return of the thing before the expiration of the term agreed upon if there is an urgent need.

You cannot demand the return before the lapse of the period agreed upon.

Who suffers loss

The bailor. Why? Res peruit domino, owner bears the loss

Since in mutuum there is transfer of ownership then the bailee suffers the loss.

As being personal

Personal in nature

Not personal

Two different kinds of commodatum

1. ordinary commodatum

2. precarium

Do not confuse loan as well from contract of lease,

deposit, usufruct and barter.

In lease one of the parties binds himself to give to

another the enjoyment or use of that property for a

price certain,

In deposit there is delivery but the purpose is not

the use thereof but for safekeeping

In usufruct the enjoyment of the fruits is the main

cause.

Barter—onerous because you exchange something

for another thing.



Let’s have specific provision

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.

Two things are emphasized here

1. purpose is use of the thing loan as a general rule

hindi kasama ang fruits.

2. if there is compensation it could not be

considered as a commoadtum anymore. Why?

Refer to 1933, commodatum is essentially

gratuitous.

Pajuyo vs CA

Pajuyo vs. CA(430 SCRA 492, G.R. No. 146364,

June 3, 2004)

COLITO T. PAJUYO, petitioner, vs. COURT OF

APPEALS and EDDIE GUEVARRA, respondents.

FACTS:

Petitioner Pajuyo paid P400 to a certain Pedro Perez for the rights over a lot, where Pajuyo subsequently built a house. In 1985, Pajuyo and private respondent Guevarra executed a Kasunduan wherein Pajuyo allowed Guevarra to live in the house for free, on the condition that Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he would vacate the premises upon Pajuyo’s demand.

In 1994, Pajuyo informed Guevarra of his need of the house and demanded that the latter vacate the house. Guevarra refused. Pajuyo filed an ejectment case against Guevarra before the MTC.

Guevarra claimed that Pajuyo had no valid title over the lot since it is within the area set aside for socialized housing. MTC rendered its decision in favor of Pajuyo, which was affirmed by RTC. (MTC and RTC basically ruled that the Kasunduan created a legal tie akin to that of a landlord and tenant relationship).

CA reversed the RTC decision, stating that the ejectment case is without legal basis since both Pajuyo and Guevarra illegally occupied the said lot. CA further stated that both parties are in pari delicto; thus, the court will leave them where they are. CA ruled that the Kasunduan is not a lease contract, but a commodatum because the agreement is not for a price certain.

ISSUE: WON the contractual relationship between

Pajuyo and Guevarra was that of a commodatum NO

HELD:

In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium. Under the Civil Code, precarium is a kind of commodatum.

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes the Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of permission would result in the termination of the lease. The tenant’s withholding of the property would then be unlawful.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission, administration and commodatum.70 These contracts certainly involve the obligation to deliver or return the thing received.

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter. Guevarra should know that there must be honor even between squatters. Guevarra freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to physical possession of the contested property. The Kasunduan is the undeniable evidence of Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is clearly a possessor in bad faith. The absence of a contract would not yield a different result, as there would still be an implied promise to vacate.

What kind of contract is involved here?

This is an innominate contract. I give that you may

do. Do ut facias.

Assuming that it is a contract of commodatum what

is the liability on the part of the bailee?



Guevarra as bailee has the obligation to return the

house upon demand of pajuyo

Why is it important to determine whether there is a

commodatum or not, again because the case

involved ejectment, unlawful detainer, who has the

better right to possess the property. Now take note

here the contention that pajuyo had no valid title is

not relevant. Why? Because whether it is

commodatum, lease as we have mentioned an

innominate contract, ownership is not required. In

the first place there was already an agreement

between the parties that pajuyo would allow

guevarra to make use of the poperty.

When you will have provrem, important thing to

determine is solely who has the better right to

possess. The one who questions or the one who

demands possession of the property need not be

the owner thereof.

Again here this emphasizes the nature of a

commodatum which is essentially gratuitous and

what we have in pajuyo is an innominate contract, I

give that you may do.

Also take note that there is a similarity between

donation and commodatum.

Both are gratuitious in nature, the benefit is to the

recipient of the contracts.

Now with regard to commodatum, there is a

presumption that the bailor has no use of the thing

that he has loaned to another person. However the

difference to donation is that donation has a

transfer of ownership but not in commodatum

1935 also emphasizes the main purpose of a

commodatum

2. use to the thing that was loaned. Take note fruits

are excluded as a general rule. Why? Because it

would be the bailor or the owner who would be

naturally entitled to the enjoyment of the fruits.

Fruits may be subject of the commodatum by

stipulation of the parties.

Remember the purpose of a contract of

commodatum, it is for the temporary use of the

thing loaned and also for a certain time.

Producers bank vs CA

Producers Bank vs CA

(397 SCRA 651, G.R. No. 115324, February 19, 2003) PRODUCERS BANK OF THE PHILIPPINES (now

FIRST INTERNATIONAL BANK), petitioner, vs. HON. COURT OF APPEALS AND FRANKLIN

VIVES, respondents. FACTS:

Private respondent Vives was asked by his friend Sanchez to help Col. Arturo Doronilla in incorporating Doronilla’s business, the Sterela Marketing and Services (Sterela).

Specifically, Sanchez asked Vives to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She assured Vives that he could

withdraw his money from said account within a month’s time.

Vives issued a check worth P 200,000 in favor of Sterela. Said money was used to open a savings account in the name of Sterela in petitioner Producers Bank (Bank).

However, when Vives and his wife later went to the bank to verify if their money in Sterela’s account was still intact, they were informed that part of the money in the savings account had been withdrawn by Doronilla and that only P 90,000 remained therein. They were also told that said remaining amount cannot be withdrawn because it had to answer for some postdated checks issued by Doronilla.

When Vives tried to get in touch with Doronilla through Sanchez, he was again reassured that his money was intact and would be returned to him.

Doronilla thereafter issued a postdated check for P212,000 in favor of Vives. However, this check was dishonored.

Vives instituted an action for recovery of sum of money in the RTC against Doronilla.

RTC ruled in favor of Vives, and held petitioner bank jointly and severally liable with Doronilla because the bank’s employee Mr. Atienza was found partly responsible for the loss of Vives’s money. CA affirmed in toto.

Petitioner bank’s contention: The transaction between Vives and Doronilla is a simple loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of P212,000.00

ISSUE: WON the transaction between Doronilla and Vives was one of simple loan (mutuum)– NO, it was a commodatum. HELD:* Commodatum even if what is involved is

a consumable thing The transaction between Vives and

Doronilla was a commodatum and not a mutuum. A circumspect examination of the records reveals that the transaction between them was a commodatum. Article 1933 of the CC distinguishes between the

two kinds of loans (see provision for reference). The said provision seems to imply that if

the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of the CC provides: 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.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of

the period agreed upon, the loan is a commodatum and not a mutuum.



The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination.

In the case at bar, evidence shows that Vives agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days." Vives merely "accommodated" Doronilla by lending his money

without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterela’s savings account and would be returned to Vives after thirty (30) days. * The additional P 12,000 did not convert commodatum to mutuum

Doronilla’s attempts to return to Vives the amount of P200,000 which the latter deposited in Sterela’s account together with an additional P12,000, allegedly representing interest on the mutuum, did not convert the transaction from a commodatum into a mutuum because such was NOT THE INTENT of the parties and

because the additional P12,000 corresponds to the fruits of the lending of the P200,000. Article 1935 of the CC expressly states that "the bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only

proper for Doronilla to remit to Vives the interest accruing to the latter’s money deposited with petitioner bank.Petition denied. Take note SC said that whether it is a mutuum or a commodatum has no bearing on the question of bank’s liability for the return of Vives’s money because the factual circumstances of the case clearly show that petitioner bank, through its employee Mr. Atienza, was partly responsible for the loss of Vives’s money and is liable for its restitution.POLICY: You cannot

automatically say that contract is mutuum if the subject matter is a consumable thing, such as money. Such contract may be commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. The INTENTION of the parties must always be ascertained.

What are the subject matter in a commodatum?

Real and personal property

What is the subject matter here?

Money

Can money be a valid subject matter of a

commodatum?

Yes, if its for exhibition purpose and not for

consumption.

In this case do we have a commodatum?

Yes. The Court said that it is the intention of the

parties should prevail and in this case the intention

was merely for exhibition and not to use it.

Regarding 12,000 Php interest? Who is entitled to

12,000?

The one entitled with12,000 is the bailor citing1935

Take note of 1936

Article 1936. Consumable goods may be the

subject of commodatum if the purpose of the

contract is not consumption of the object, as

when it is merely for exhibition.

So I have mentioned earlier one of the main

disctinction between commodatum and mutuum is

that in commodatum ordinarily involved is

something that is not consumable but in this case

what we have here is money. Nevertheless the

Supreme Court ruled that what was enetered into is

commodatum and not mutuum. Again, to determine

the nature of the contract we always go back to the

intention of the parties.

The intention of the parties shall be afforded

primordial consideration in determining the actual

xx of a contract, the contemporaneous and

subsequent act of the parties shall be considered in

such determination. In this case it was shown that

the private respondent agreed to deposit his money

in the account of sterela, specifically for the purpose

of making it appear that the said firm sufficient

capitalization for the purpose of incorporation with

the promise that the amount shall be returned within

30 days. In this case there was merely an

accommodation. The money was not for

consumption but only to show that there was

compliance with capitalization purposes.

How about the 12,000 pesos? It was alleged that

the 12,000 pesos converted the transaction into a

mutuum however that was not the intention of the

parties. Nevertheless the bailor in this case is

entitled with the 12000 as it is considered the fruit of

the lendee of the 200000 pesos applying 1935.

However take note class that this is a unique type

of commodatum, why? Because when you strictly

speak of commodatum what is to be returned is the

exact the same thing that was borrowed. In this

case although the purpose is not for consumption

but merely for exhibition… still considered as a

commodatum, the money that was deposited in the

account is not exactly the money you will return to

the bailor, not exact series number, denomination.

Take note it is very unique in that sense and do not

forget that essentially when we talk about

commodatum, you return the exact same thing that

was borrowed.

Also with regard to subject matter, the general rule

is non consumable, it could be movable or

immovable as provided by article 1937.

Art 1937. Movable or immovable property may

be the object of commodatum.



Another good example is a wine, inexhibit ang wine

collection mo not for the purpose of drinking it but to

exhibit it with the intention to return the exact wine

to you then it would be considered commodatum.

Again take note when you talk of consumable

things these are things which cannot be used

without being consumed.

Mina vs Pascual

Mina vs Pascual

(G.R. No. 8321, October 14, 1913) ALEJANDRA MINA, ET AL., plaintiffs-appellants, vs. RUPERTA PASCUAL, ET AL., defendants-

appellees. FACTS:

Francisco Fontanilla and Andres Fontanilla were brothers. Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of Francisco’s lot.

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were recognized without discussion as his heirs. Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized likes without discussion. The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder thereof.

This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of

the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs — that is Alejandra Mina, et al. — opposed the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the warehouse, which they claimed was their exclusive property. All this action was taken in a special proceeding in re guardianship.

The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered the sale of the warehouse together with the lot at a public auction to Cu Joco. There was an agreement: the ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court which found for them by holding that they are the owners of the lot in question, although there existed and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of the lower court that ordered the sale.

ISSUES:

1. WON the contract of sale to Cu Joco is valid. NO

2. WON there is commodatum. NO

HELD:

As respects this action for recovery, this Supreme Court finds:

1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty years ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in interest.

2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the coowners of the warehouse.

3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his successors paid any consideration or price whatever for the use of the lot occupied by the said building; whence it is, perhaps, that both parties have denominated that use a commodatum.

pon the premise of these facts, or even merely upon that of the first of them, the sentencing of the defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made in the present case.

The defendants do not hold lawful possession of the lot in question. But, although both litigating parties may have agreed in their idea of the commodatum, on account of its not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in conformity with the name that the parties thereto agree to give them, but must be construed, duly considering their constitutive elements, as they are defined and denominated by law.

By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during the certain period and return it to the former, in which case it is called commodatum . . . (art. 1740, Civil Code).

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past thirty years of the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now in possession of the lot, should



pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them, since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs

themselves aver on page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period during which his brother Andres was to have the use of the lot, because he expected that the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that Fructuoso died before his uncle Andres. With that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous use of the lot.

Hence, as the facts aforestated only show that a building was erected on another's ground, the question should be decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to article 361, the owner of the land on which a building is erected in good faith has a right to appropriate such edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land. Such, and no other, is the right to which the plaintiff are entitled.

For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta Pascual, in representation of her minor children, to Cu Joco, and to

maintain the latter in the use of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of the Civil Code.

What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership, and they themselves only the use, of the said lot. On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner in which the sale was effected, whether judicially or extrajudicially. He who has only the use of a thing cannot validly sell the thing itself. The effect of

the sale being a transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and void. The defendants never were the owners of the lot sold. The sale of it by them is necessarily null and void. One cannot convey to another what he has never had himself.

How many years were they in possession of the

property. more than 30 years.

Was there a commodatum? No.

Lets take into consideration the inention of the

parties when it was allowed to be used by andres,

what was the intention therein for the use of said

property? why was there no agreement as to

period.

Because it is for the benefit of his child. Hwoever it

did not materialized because fructos oalready died

ahead of andres.

The intention here was not really for commodatum,

use for a certain period of time but rather the

possession would fall to the hands of fructoso, son

of andres but it did not happen because fructuoso

died ahead of andres. It appears more likely that

Francisco allowed his brother with the intention of

lease.

Emphasis on ‘for certain period of time’ and that

commodatum is essentially gratuituous. Demand of

payment would destroy their theory of commodatum

because commodatum is essentially gratituous in

nature.

In this case the property involve is a real property it

is possible that a real property can be subject of

commodatum will be used to build something for

use but without rentals without intention to pay

rents. So looking at the intention of the parties

herein there could be no commodatum.

1938. The bailor in commodatum need not to be

the owner of the thing.

Again if there is delivery of the subject matter in a

commodatum ownership is not transferred to the

bailee and in fact a lessee, usufructuary can be a

bailor in a commodatum unless otherwise

prohibited by the true owner of the lessor therein.

1939. Commodatum is purely personal in

character. Consequently:

(1) The death of either the bailor or the bailee

extinguishes the contract;

(2) The bailee can neither lend nor lease the

object of the contract to a third person.

However, the members of the bailee’s

household may make use of the thing loaned,

unless there is a stipulation to the contrary, or

unless the nature of the thing forbids such use.

(n)

Commodatum can be personal in nature. You take

into consideration the character, conduct, his credit.

That is what you mean that commodatum is purely

personal you take into consideration the character

and conduct of the bailee.

What is the effect if commodatum is purely personal

in character? If either of the bailee or the bailor dies

then the commodatum is extinguished. The trust

reposed by the bailor to the bailee is not

transferrable to their respective heirs. This is the

trust that is intransmissible so that is why the death

of either of the parties terminates the contract

unless stipulated by the parties that it is

transmissible.



Also take note that if there are two or more bailees

the death of one bailee does not extinguish the

contract. It will continue because you still have one

bailee. Exception: stipulation of the parties.

So first paragraph

No 1 in 1939 these are exception of 1178 of your

obligations and contracts.

1178. Subject to the laws, all rights acquired in

virtue of an obligation are transmissible, if there

has been no stipulation to the contrary.

- under 1939 in the absence of stipulation it is

STILL intransmissible because it is clearly

provided under the law.

How about the second paragraph? Remember

ownership is not required on the part of the bailorit

is sufficient that he has possessory interest. How

about on the part of the bailee? Is he allowed to

lend or the let other person use the property that

was loaned to him? As a general rule he cannot do

so exception: (p2) members of the bailee’s

household may make use of the thing loaned,

exception to the exception.

unless there is a stipulation to the contrary, or

unless the nature of the thing forbids such use.

(n)

for example pinahiram ka ng damit, that is a

commodatum pero by the nature of the thing usuall

hindi mo siya pinahihiram sa kapitbahay most likely

ikaw lang may kasya nyan.

1940. A stipulation that the bailee may make use

of the fruits of the thing loaned is valid. (n)

This is the exception to 1935, by stipulation the

bailee is entitled to make use of the principal thing

but also the fruits, there could be a stipulation.

However take note that the use of the fruits is only

incidental to the principal thing because of the main

cause of the contract is to allow the bailee to make

use of the fruits then that is not a commodatum

anymore that would become a usufruct.

De Los Santos vs Jarra

De Los Santos vs Jarra

(G.R. No. 4150, February 10, 1910) FELIX DE LOS SANTOS, plaintiff-

appelle, vs.AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-appellant.

FACTS:

In the latter part of 1901, Magdaleno Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the animal-power mill of his hacienda during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under the sole

condition that they should be returned to the owner as soon as the work at the mill was terminated.

Plaintiff alleges in the present suit, however that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff claimed their return after the work at the mill was finished. The suit was brought against Agustina Jarra , administratrix of Magadaleno after the latter’s death.

Jarra alleges that Magdaleno was actually only able to obtain 3 carabaos from De Los Santos and that these carabaos were afterwards transferred by sale to Magdaleno.

The trial Court ruled in favor of De Los Santos and ordered the return of the remaining 6 carabaos (4 have already died) or to pay the value thereof. ISSUE: WON Jarra, as administratrix, can be compelled to return the carabaos. YES HELD:

There was enough witnesses and evidence to prove that indeed ten carabaos were obtained by Magdaleno and not ten. The Court also noted that there was no official document evidencing the transfer of the large cattle.

The Court found that the six carabaos were not the property of the deceased nor of any of his descendants. Therefore , it is the duty of the administratrix of the estate to return them or indemnify the owner for their value.

The Civil Code, in dealing with loans in general, from which generic denomination the specific one of commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the following articles:

ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during a certain period and return it to the former, in which case it is called commodatum, or money or any other perishable thing, under the condition to return an equal amount of the same kind and quality, in which case it is merely called a loan. Commodatum is essentially gratuitous. A simple loan may be gratuitous, or made under a stipulation to pay interest. ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use, the agreement ceases to be a commodatum.

ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both contracting parties, unless the loan has been in consideration for the person of the bailee, in which case his heirs shall not have the right to continue using the thing loaned. The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt that she is under obligation to indemnify the owner thereof by paying him their value. Article 1101 of said code reads: Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any



manner whatsoever act in contravention of the stipulations of the same, shall be subjected to indemnify for the losses and damages caused thereby.

The obligation of the bailee or of his

successors to return either the thing loaned or its value, is sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the legal doctrine touching commodatum as follows:

Although it is true that in a contract of commodatum the bailor retains the ownership of the thing loaned, and at the expiration of the period, or after the use for which it was loaned has been accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay him damages if through the fault of the bailee the thing should have been lost or injured, it is clear that where public securities are involved, the trial court, in deferring to the claim of the bailor that the amount loaned be returned him by the bailee in bonds of the same class as those which constituted the contract, thereby properly applies law 9 of title 11 of partida 5. Was there a contract of commodatum? Yes.

If the thing itself cannot be returned what is the

liability?

Indemnify of the owner the value of the thing that

was the subject of commodatum.

Take note here , let us not detract from the fact that

death of the bailee terminates the contract of

commodatum, because here who is held liable?

The estate of the deceased it is not individually the

heirs but the estate. Again,the commodatum

obligation of the parties are still intransimissible.

Again this emphasizes the primary obligation of the

bailee that is to return the thing that was loaned to

the bailor however in this case the carabaos

delivered could not be returned therefore there was

an obligation to indemnify on the part of the estate

the bailor bypaying the value thereof. It is the

imperative duty to return the thing to the owner or

pay damages if through the fault of bailee the thing

was lost or injured.

November 16, 2015 (Damalerio)

We discussed the distinctions between a commodatum and mutuum, and from other contracts and arrangements. We also emphasized as to the subject matter: as a general rule, we have non-consumable goods for commodatum, but consumable goods can be a subject matter of commodatum provided its purpose is for exhibition. Ownership on the part of the bailor is not required in a valid commodatum since there is no transfer of ownership in commodatum.

Art. 1939.

Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use.

Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid.

In the case of Delos Santos last time, it was emphasized that the bailee has the obligation to return the subject matter. Remember in commodatum, there is no transfer of ownership, so the bailee has the obligation to return the EXACT same thing. So that’s the primary obligation of the bailee. Along with Art. 1941.

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

Take note, what we have here are ORDINARY EXPENSES. Why is it that the bailee must shoulder these expenses? Because the bailee acquires the use of the same. So it’s just proper that for the ordinary expenses, he should be the one to shoulder it. Along with this obligation for ordinary expenses, we also take into consideration the standard diligence. Diligence of a good father of the family is applicable here. The bailee has the obligation to take good care of the thing with the diligence of a good father of the family. Example, sasakyan as the subject of a commodatum. Ordinary expenses, we have gasoline, change oil, cleaning, washing, among others. Now one of the important provisions with regard to commodatum is Art. 1942.

Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

(1) If he devotes the thing to any purpose different from that for which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted;

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a member of his household;

(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.



Remember the general rule, owner bears the loss. Res perit domino. That’s still the general rule with regard to commodatum. However, we have 1942 as the exceptions to the res perit domino rule. In these instances, the BAILEE would be liable for the loss even if the loss of the thing is due to a fortuitous event. We have here: if he devotes the thing to any purpose different from that for which it has been loaned. Why? It shows BAD FAITH on the part of the bailee. If he keeps it longer than the period stipulated, or after the accomplishment of the use, obviously this refers to DELAY. So if there is delay, we already know that even if the thing was lost due to a fortuitous event, the bailee would still be liable. As to the 3

rd instance, if there is appraisal. Why?

Because by putting a value to the thing subject of commodatum, there is an INTENTION that the borrower shall be liable. Unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event, even if there is an appraisal. As for the 4

th instance, in relation to 1939,

remember a commodatum is PURELY PERSONAL in character, and therefore if he lends it to a 3

rd

person who is not a member of his household, and without the consent of the bailor, he would be liable. As to the 5

th instance: by instinct, we save our own

personal belongings. However, if there is a commodatum, and you choose to save your own things rather than the thing loaned to you gratuitously, it could be considered as an INGRATITUDE on your part, and therefore you would still be held liable. We have here the case of Republic vs. Bagtas:

REPUBLIC VS. JOSE BAGTAS

FACTS: On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry 3 bulls for 1 year for breeding purposes, subject to breeding fee for 10% of the book value of the bulls. Upon the expiration of the contract, Bagtas asked for a renewal for another year. The renewal granted was only for 1 bull. Bagtas offered to buy the bulls at book value less depreciation, but the Bureau told him that he should either return the bulls or pay for their book value. Bagtas failed to pay the book value, and so the Republic commenced an action with the CFI Manila to order the return of the bulls of the payment of book value. Felicidad Bagtas, the surviving spouse and administratrix of the decedent’s estate, stated that the 2 bulls have already been returned in 1952, and that the remaining one died of gunshot during a Huk raid. As regards the two bulls, is was proven that they were returned and thus, there is no more obligation on the part of the appellant. As to the bull not returned, Felicidad contends that the obligation is extinguished since the contract is that of a commodatum and that the loss through fortuitous event should be borne by the owner. ISSUE:

Whether, depending on the nature of the contract, the respondent is liable for the death of the bull HELD: A contract of commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum - . . . is liable for loss of the things, even if it should be through a fortuitous event: (2) If he keeps it longer than the period stipulated . . . (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court.

So applying Art. 1942, did the Supreme Court say that we had a commodatum here? Can it be considered as a commodatum?

NO, the SC did not categorically state that there is commodatum in this case because there is a consideration of 10% bidding fee. If this bidding fee is considered as a compensation, then the contract entered into is not a commodatum, but a Lease. And of course, there was delivery with appraisal of the value of the said goods. Now in this case, if the bidding fee will be considered as a compensation, there won’t be a commodatum because again, commodatum is essentially gratuitous. So it could be a Lease. Nevertheless, whether it is a lease or a commodatum, the SC held that Bagtas will be liable under his continued possession after the expiration of the contract. If it is commodatum, the applicable provision is 1942, specifically paragraphs 2 and 3 – liable for the loss even if it was thru a fortuitous thing.



The gunshot wounds suffered by the bulls here shall be considered fortuitous event, however Bagtas will still be liable because again:

1) He kept them longer than the period stipulated

2) There was delivery with appraisal, without stipulation exempting them from liability. Considering that the 2 bulls were already returned, it is only the value of the bull which was killed in the custody of the administratrix of his estate.

We said that commodatum is a personal contract extinguished by the death of the party, take note here that it was the estate that was held liable. Therefore, we do not say that the obligation was already extinguished just because Bagtas is already dead. It was his estate which was made liable for the value of the bull that died.

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

What do we have here? Depreciation expense. Ordinary wear and tear, borne by the bailor. Bailee, of course, will be liable if he’s at fault or negligent or devotes the thing to any purpose different from the nature of the thing, or different from which they have agreed upon.

Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951.

Going back to our example last meeting. Jan Michael loaned his car to Lyzzaik. Now while there is a commodatum between them, let’s say that JM also borrowed money from Lyzzaik. So there’s a simple loan. Now the time has come for Lyzzaik to return the car to JM, so JM demanded the return of the car. Lyzzaik cannot say “I will not return the car unless you pay me the obligation, your debt is already due and demandable.” That could not be used as a defense of the bailee to refuse the return of the thing. The bailee CANNOT retain the thing loaned even as security for claims he has against the bailor. There is only one exception, under Art. 1951, in case of hidden defects on the subject of the thing loaned. Now JM, let us say Lyzzaik failed to return the subject matter to you, will it now constitute adverse possession? What happened in the case of Catholic vs. CA.

CATHOLIC VICAR VS. CA FACTS: 1962: Catholic Vicar Apostolic of the Mountain Province (Vicar), petitioner, filed with the court an application for the registration of title over lots 1, 2, 3 and 4 situated in Poblacion Central, Benguet, said

lots being used as sites of the Catholic Church, building, convents, high school building, school gymnasium, dormitories, social hall and stonewalls. 1963: Heirs of Juan Valdez and Heirs of Egmidio Octaviano claimed that they have ownership over lots 1, 2 and 3. (2 separate civil cases) 1965: The land registration court confirmed the registrable title of Vicar to lots 1, 2, 3 and 4. Upon appeal by the private respondents (heirs), the decision of the lower court was reversed. Title for lots 2 and 3 were cancelled. VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his application for registration of Lots 2 and 3. During trial, the Heirs of Octaviano presented one (1) witness, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano; his written demand to Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000 per month. On the other hand, Vicar presented the Register of Deeds for the Province of Benguet, Atty. Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the heirs. Vicar dispensed with the testimony of Mons. Brasseur when the heirs admitted that the witness if called to the witness stand, would testify that Vicar has been in possession of Lot 3, for 75 years continuously and peacefully and has constructed permanent structures thereon. ISSUE: WON Vicar had been in possession of lots 2 and 3 merely as bailee borrower in commodatum, a gratuitous loan for use. HELD:

YES. Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. The Court of Appeals found that petitioner Vicar did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to



support the same and the alleged purchases were never mentioned in the application for registration.

What was the issue here with regard to Lots 2 & 3? Who was in possession thereof? In what concept? Was is in the concept of an owner? Do you have commodatum here, at any point in time? What if there was no commodatum and you do not own the subject matter? You’re not obliged to return the thing to the owner? Still obliged! What is the relevance here of adverse possession? Why was it necessary to determine that it was in 1951 that Catholic Vicar was deemed in adverse possession of the parcel land, not anymore in the concept of a bailee in commodatum? For acquisitive prescription. 10 years in good faith and with just title; if without good faith and just title, 30 years. Now when Catholic vicar was in possession of the property in 1951 onwards, what was the nature of its possession? IN BAD FAITH. That means, who would now be entitled to the property in dispute? The land now belongs to the State. So here, petitioner was in possession as borrower in commodatum only up to 1951. What happened in 1951? Catholic repudiated the trust by declaring the properties in its name for taxation purposes. Now acquisitive prescription: 10 years in good faith with just title, 30 years extraordinary acquisitive prescription when in bad faith. Why is Catholic deemed to be in possession in bad faith? Because before 1951, it had knowledge that it was the heirs of Valdez who have the right to possess the property. The heirs were able to prove that their predecessors’ house was borrowed by petitioner after the Church and the convent were destroyed. They never asked for the return of the house, and when they allowed its free use, they became bailors in commodatum and petitioner as bailee. The mere failure to return on the part of the bailee did not mean adverse possession on the part of the borrower. So the acquisitive prescriptive period did not yet begin to run. It was only in 1951 when they were declared for taxation purposes. So predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906, and that petitioner was only a bailee in commodatum, and that the adverse claim and repudiation of trust came only in 1951.

Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily.

Remember the general rule under obligations and contracts, obligation is presumed to be joint. Instances when it is solidary: by law, by stipulation of the parties, and by nature of the obligation. Under 1945, the law specifically provides that when there are 2 or more bailees, they are liable solidarily. This is to safeguard effectively the rights

of the lender, wherein it takes into account the personal integrity and responsibility of both the bailees. So this is an exception to Art. 1208, and in consonance with 1207. There is solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires liability. So here we can now say that the following are the obligations of the bailee:

1) To return the thing 2) To pay for ordinary expenses 3) To take good care of the thing with the

diligence of a good father of the family 4) For ostentatious expenses, it may be the

bailee who will be liable 5) For extraordinary expenses, we will discuss

that in 1949 6) Loss due to fortuitous event, as a general

rule, bailee is not liable unless instances in 1942 are present

7) With regard to deterioration, bailee is not liable. Exception, if it is shown that bailee is negligent, at fault, or have used the thing for other purposes not stipulated

8) No right to retain the subject matter unless 1951

9) Solidary liability of 2 or more bailees How about on the part of the bailor? We have Art. 1946.

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.

Remember the obligation on the part of the bailor: it is to allow the bailee to use the thing for the duration of the period stipulated or until the accomplishment of the purpose, so for a certain time. So with that, as a general rule, the bailor cannot demand the return of the thing unless the period stipulated has arrived or unless the use or the purpose has already been accomplished. 1946 provides for an exception: in case of urgent need of the thing, wherein the bailor may demand for its return or temporary use. So let us say ang pinahiram is sasakyan. But the bailor’s relative is very sick and he has no other vehicle, he has to take the relative to the hospital. So he can demand form the bailee the temporary use of the car subject of the commodatum. Again, it is solely for temporary use. And as clearly provided in 1946, the commodatum is suspended while the thing is in the possession of the bailor.

Art. 1947



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

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or

(2) If the use of the thing is merely tolerated by the owner.

Do we have a precarium in the case of Quintos vs. Beck?

MARGARITA QUINTOS vs. BECK FACTS:

BECK was a tenant of the Quintos and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between them, the former gratuitously granted to the latter the use of the furniture subject to the condition that the BECK would return them to the Quintos upon the latter's demand. Quintos sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified BECK of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after Quintos required BECK to return all the furniture transferred to him for them in the house where they were found. On November 5, 1936, BECK, through another person, wrote to Quintos reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, he wrote another letter to Quintos informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease in due to expire. Quintos refused to get the furniture in view of the fact that BECK had declined to make delivery of all of them. On November 15th, before vacating the house, the BECK deposited with the Sheriff all the furniture belonging to Quintos and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff. ISSUE 1:

WON BECK complied with his obligation to return the furniture upon the Quintos’ demand. NO. HELD 1:

The contract entered into between the parties is one of commadatum, because under it Quintos gratuitously granted the use of the furniture to BECK, reserving for herself the ownership thereof; by this contract he bound himself to return the furniture to Quintos, upon the latter’s demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by BECK to return the furniture upon demand, means that he should return all of them to Quintos at the latter's residence or house. BECK did not comply with this obligation when he merely placed them at the disposal of the Quintos, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the Quintos failed to comply with

her obligation to get the furniture when they were offered to her. ISSUE 2: WON Quintos is bound to bear the deposit fees. NO. HELD 2: As BECK had voluntarily undertaken to return all the furniture to the Quintos, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the BECK's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was Quintos under a duty to accept the offer to return the furniture, because he wanted to retain the three gas heaters and the four electric lamps. As to the value of the furniture, we do not believe that Quintos is entitled to the payment thereof by BECK in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of facts, BECK has neither agreed to nor admitted the correctness of the said value. Should he fail to deliver some of the furniture, the value thereof should be later determined by the trial Court through evidence which the parties may desire to present. ISSUE 3:

WON Quintos is entitled to the costs of litigation. YES. HELD 3:

The costs in both instances should be borne by BECK because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). He was the one who breached the contract of commodatum, and without any reason he refused to return and deliver all the furniture upon demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed. POLICY:

Commodatum is a contract where the bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the identical thing.

Is there a difference between commodatum and precarium? Or is precarium a classification of commodatum? Yes it is. Let’s apply the general rule on obligations and contracts. For payment or performance to extinguish the obligation of the debtor, what should be the nature of the payment or performance? So here, the debtor is the bailee. So to extinguish his obligation as a bailee, he should return the thing to the bailor. Isn’t it that he is willing to return it to the bailor? Yes ma’am. So why is it that he is still liable for the expenses for the deposit of the furniture to the sheriff? Apply the rule in obligations and contracts, Payment or performance must be COMPLETE.



Here, he said that he would still use it and decided not to return it. So with that, the refusal of Quintos was valid. Creditor, as in this case the bailor, cannot be compelled to accept PARTIAL delivery, or partial return of the subject matter. So even if it was deposited with the sheriff, bailee would still be liable for the expenses because there was valid refusal to accept performance on the part of the bailor. So here, you have a PRECARIUM because of the fact that the use of the furniture is subject to the condition that the defendant would return them to the plaintiff upon the latter’s demand. That is the contract here, a Precarium, and not just an ordinary commodatum. Remember there are 2 classifications of commodatum:

1) Ordinary Commodatum – stipulated therein the return of the thing, or the purpose thereof is specific, wherein it must be return after the accomplishment of the use or such purpose

2) Precarium – as provided under 1947, if neither the duration or where the use should be devoted is stipulated, or if the use of the thing is merely tolerated by the owner

In this case, plaintiff gratuitously granted the use of the furniture to the defendant reserving for herself the ownership thereof. And the defendant bound himself to return the furniture to the plaintiff upon the latter’s demand. It means, he should return ALL of them to the plaintiff at the latter’s residence or house. Here, the defendant did not comply with the obligation when he merely placed them at the disposal of the plaintiff and retained for his benefit the heaters and the electric lamps. The court did not legally compel Quintos to bear the expenses occasioned by the deposit of the furniture of the defendant’s behest. The latter was not entitled to place the furniture on deposit. Nor was the plaintiff under the duty to accept the offer to return the furniture because, again, defendant wanted to retain the heaters and lamps. So the cost should be borne by the defendant because the plaintiff is the prevailing party. So again, in Ordinary Commodatum, possession of the bailee si more secure because he has the right to retain the thing loaned until the expiration of the period agreed upon, or the accomplishment of the use for which the commodatum has been constituted. Unlike that in Precarium, it is less secure on the part of the bailee. Bailor may demand the return of the thing at will, at anytime. Contract by which the owner of the thing, at the request of another person, gives the latter the thing for use as long as the owner shall please. So it’s subject to revocation by the bailor at anytime.

Art. 1948.

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

So yung acts of ingratitude as to donation. Apply it to commodatum, 765 will now be:

1) Bailee should commit an offense against the person or property of the bailor, or his wife or children under his parental authority. So act of ingratitude yan.

2) When bailee imputes to the bailor any criminal offense or any act involving moral turpitude, even though he should prove it, unless the act or the crime has been committed against the bailee himself, his wife or children under his authority.

3) Bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor

Same premise that we have before, similarity between commodatum and donation is that they are essentially gratuitous. So as in a donation, wherein the donee is unworthy of the trust reposed upon him by virtue of his acts of ingratitude, we apply the same to a bailee in a commodatum.

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

Who shall bear the extraordinary expenses? 1949 provides the answer. First take note, what is the nature of the extraordinary expense? If it is for the preservation of the thing loaned, it shall be borne by the bailor. Because by virtue of this extraordinary expense, it is the bailor who will benefit from it. Why? Because he is still the owner thereof. For example, a property is damaged due to a calamity. So extraordinary expense yan. Now take note, if the bailee incurs the expenses for this extraordinary expense, the bailor has the obligation to refund the bailee, provided the bailee has notified or informed the bailor before incurring such. As a general rule, if the bailee fails to notify the bailor before this extraordinary expense is incurred, the bailor has no liability to refund the bailee, UNLESS the need for the extraordinary expense is so urgent that notice or informing the bailor would only delay the said repairs necessary. However, if the extraordinary expenses are those from the ACTUAL use of the thing loaned, for example, you borrowed a car and then while driving, it had a collision. Now, 50/50. 50% from the



bailee, and 50% from the bailor. Why? Sino gumamit? Arising from the use, Bailee. Nevertheless, it would be returned to the bailor, so ownership, Bailor. So general rule, 50/50 sila UNLESS otherwise stipulated.

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

So what do we have here? Yung expenses for display or ostentatious expenses. For this type of expense, it would be the bailee who would be held liable.

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.

This is the exception with regard to the retention of the subject matter. Again as a general rule, the bailee CANNOT RETAIN the thing for any other liability of the bailor, unless 1951 is applicable. When do you apply 1951?

1) If there is a flaw or defect of the thing subject of the commodatum

2) The flaw or defect is hidden or latent 3) The bailor is aware of the said defect 4) The bailor does not advise the bailee of the

said flaw or defect 5) The bailee suffers damages by reason of

the said flaw or defect If ALL of these requisites are present, the bailee can RETAIN the thing until he is reimbursed for the expenses, or he is indemnified for the damages he has suffered. Take note in Sales, sa warranty against hidden defects, good faith on the part of the seller is NOT a defense. He would still be liable. But under 1951, while it talks about hidden defects, it is required that the bailor is in bad faith. Bailor must be aware thereof in order for 1951 to be applied. Now bailor is in bad faith, and all other requisites in 1951 are present, bailee has the right to retain the subject matter until damages are paid. Take note, RIGHT TO RETAIN, but he has no right to sell it to other persons. He has NO right to exercise ownership over the subject matter. Example, may sira or defect pala sa brake ng sasakyan, the bailor was aware thereof and did not tell the bailee, so while driving di nagwork yung brake, the bailee suffered damages. However, if the bailee could have known after inspection, 1951 is NOT applicable. Bailor could not be held liable. Why? Because the defect is not anymore hidden. And if the bailor has no knowledge or was not aware of the said defect, the bailor will not be liable. Why is it that there is a difference between a Sale and Commodatum with regard to this hidden

defect? Because unlike Sale, a commodatum is essentially gratuitous. Sale is onerous in nature.

Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee.

Why? This would be unfair to the bailee. In a sense na hindi pwede sabihin ng bailor na, “imuha nalang ng sakyanan bai, di nalang nako kuhaon, pero di na tika i-reimburse for the expenses.” Why unfair? Because the expenses would be MORE THAN the value of the thing. And it would now be unfair to allow the bailor to just abandon the thing instead of paying the said expenses or damages. Again, he cannot exempt himself by abandoning the thing to the bailee. He will still be liable. So with that, what are the obligations of the BAILOR?

1) The right to demand the return of the thing 2) If what you have is an ordinary

commodatum, right to demand only upon expiration of the period or accomplishment of the purpose agreed upon, unless there is an urgent need

3) If it is Precarium, there is right to demand the return of the subject matter anytime

4) Bailor is given the right of the immediate return of the thing in case of ingratitude on the part of the bailee

5) Liable to refund the bailee for Extraordinary expenses incurred, provided that he was notified before the said expenses were incurred, UNLESS urgent

6) Liability for damages under 1951 7) Under 1952, bailor has no right to abandon

the subject matter instead of paying the expenses and damages

November 17, 2015 (Calatrava)

III. MUTUUM

Now, under Article 1953 states:

Art. 1953. A person who receives a loan of

money or any other fungible thing acquires the

ownership thereof, and is bound to pay to the

creditor an equal amount of the same kind and

quality. (1753a)

So, simple loan or mutuum is a contract whereby

one of the parties delivers to another, money or

other consumable thing with the understanding that

the same amount of the same kind or quality shall

be paid.

Notice it involves the return of the equivalent only

and not the identical thing because the borrower

acquires ownership of the subject matter. Also

notice in 1953, you have the term there, ‘bound to

pay’ and not to return, because again, the bailee

here is obliged to give back, pay the equivalent of

what he has received. So here, in mutuum, since

there is a transfer of ownership, the borrower can

dispose of the thing borrowed and his act will not be

considered a misappropriation. In other words, hindi

siya mahulog na estafa.



Now, do distinguish loan from a contract of lease or

rent.

LOAN RENT/LEASE

Signifies the delivery of money or some other consumable thing to another with a promise to repay an equivalent amount of the same kind and quality, but not a promise to return the same thing loaned which becomes the property of the obligor.

A contract by which one of the parties delivers to another some non-consumable thing in order that the latter may use it during a certain period and return it to the former.

There is a transfer of ownership; the borrower becomes the owner of the thing loaned.

In a contract of rent, the owner or lessor of the property does not lose his ownership. He simply loses his control over the property rented during the period of the contract.

The relation between the parties is that of obligor and oblige.

In a contract of “rent,” the relation is that of landlord and tenant.

The creditor receives payment for his loan.

The owner of the property receives the compensation or price either in money, provisions, chattels, or labor from the occupant thereof in return for its use.

Now, when we distinguish simple loan from

commodatum, we emphasized that the subject

matter in a mutuum is money or a consumable

thing. But if you take a look at 1953, you have there

fungible thing. So if you recall what is a fungible

thing, these are things which are dealt by number or

measurement. Just like rice, oil or sugar since they

are measured by kilos or liters among others

wherein any given unit or portion is treated as

equivalent to any other given unit or portion. Now, if

you strictly define a consumable thing, these are

things which are used or consumed by being used.

However, under this concept of loan, the terms

fungible thing or consumable thing are used

interchangeably. So fungible things are considered

those which cannot be used without being

consumed, again similar to that of a consumable

thing.

Now, we have here the case of BPI vs CA.

BPI INVESTMENT CORPORATION vs. HON.

COURT OF APPEALS and ALS MANAGEMENT

& DEVELOPMENT CORPORATION

FACTS: Frank Roa obtained a loan at an interest

rate of 16.25% per annum from Ayala Investment

and Development Corporation (AIDC), the

predecessor of petitioner BPIIC, for the construction

of a house on his lot in New Alabang Village,

Muntinlupa. Said house and lot were mortgaged to

AIDC to secure the loan. Sometime in 1980, Roa

sold the house and lot to private respondents ALS

and Antonio Litonjua for P850,000. They paid

P350,000 in cash and assumed the P500,000

balance of Roa’s indebtedness with AIDC.

AIDC, however, was not willing to extend the old

interest rate to ALS and proposed to grant them a

new loan of P500,000 to be applied to Roa’s debt

and secured by the same property, at an interest

rate of 20% per annum and service fee of 1% per

annum on the outstanding principal balance

payable within ten years in equal monthly

amortization.

Consequently, on March 1981, ALS executed a

mortgage deed containing the above stipulations

with the provision that payment of the monthly

amortization shall commence on May 1, 1981.

On August 1982, ALS and Litonjua updated Roa’s

arrearages by paying BPIIC the sum of

P190,601.35. This reduced Roa’s principal balance

to P457,204.90 which, in turn, was liquidated when

BPIIC applied thereto the proceeds of ALS’s loan of

P500,000.

On September 13, 1982, BPIIC released to ALS

P7,146.87, purporting to be what was left of their

loan after full payment of Roa’s loan.

In June 1984, BPIIC instituted foreclosure

proceedings against ALS on the ground that they

failed to pay the mortgage indebtedness which from

May 1, 1981 to June 30, 1984, amounted to

P475,585.31.

ALS and Litonjua filed a civil case against BPIIC.

They alleged, among others, that they were not in

arrears in their payment, but in fact made an

overpayment as of June 30, 1984. They maintained

that they should not be made to pay amortization

before the actual release of the P500,000 loan in

August and September 1982. Further, out of the

P500,000 loan, only the total amount of

P464,351.77 was released to ALS.

RTC favored ALS and Litonjua. CA affirmed in toto.

CA reasoned that a simple loan is perfected only

upon the delivery of the object of the contract. The

contract of loan between BPIIC and ALS & Litonjua

was perfected only on September 13, 1982, the

date when BPIIC released the purported balance of

the P500,000 loan after deducting therefrom the

value of Roa’s indebtedness. Thus, payment of the

monthly amortization should commence only a

month after the said date, as can be inferred from

the stipulations in the contract. This, despite the

express agreement of the parties that payment shall

commence on May 1, 1981. From October 1982 to

June 1984, the total amortization due was only

P194,960.43. Evidence showed that ALS had an

overpayment. Therefore, there was no basis for

BPIIC to extrajudicially foreclose the mortgage.

BPIIC contends among others that CA erred in

ruling that because a simple loan is perfected upon

the delivery of the object of the contract, the loan

contract in this case was perfected only on

September 13, 1982. BPIIC claims that a contract

of loan is a consensual contract, and a loan

contract is perfected at the time the contract of



mortgage is executed conformably with SC’s ruling

in Bonnevie v. CA, 125 SCRA 122.

ISSUE: WON a contract of loan is a consensual

contract. NO, A CONTRACT OF LOAN IS A REAL

CONTRACT.

HELD: A loan contract is not a consensual

contract but a real contract. It is perfected only upon

the DELIVERY of the object of the contract. BPIIC

misapplied Bonnevie. The contract in Bonnevie

declared by this Court as a perfected consensual

contract falls under the first clause of Article 1934,

CC. It is an accepted promise to deliver something

by way of simple loan. A perfected consensual

contract, as shown above, can give rise to an action

for damages. However, said contract does not

constitute the real contract of loan which requires

the delivery of the object of the contract for its

perfection and which gives rise to obligations only

on the part of the borrower.

In the present case, the loan contract between BPI,

on the one hand, and ALS and Litonjua, on the

other, was perfected only on September 13, 1982,

the date of the second release of the loan.

Following the intentions of the parties on the

commencement of the monthly amortization, as

found by the CA, ALS’s obligation to pay

commenced only on October 13, 1982, a month

after the perfection of the contract. A contract of

loan involves a reciprocal obligation, wherein the

obligation or promise of each party is the

consideration for that of the other.

As averred by ALS, the promise of BPIIC to extend

and deliver the loan is upon the consideration that

ALS and Litonjua shall pay the monthly amortization

commencing on May 1, 1981, one month after the

supposed release of the loan. It is a basic principle

in reciprocal obligations that neither party incurs in

delay, if the other does not comply or is not ready to

comply in a proper manner with what is incumbent

upon him. Only when a party has performed his part

of the contract can he demand that the other party

also fulfills his own obligation and if the latter fails,

default sets in.

Consequently, petitioner could only demand for the

payment of the monthly amortization after

September 13, 1982 for it was only then when it

complied with its obligation under the loan contract.

Therefore, in computing the amount due as of the

date when BPIIC extrajudicially caused the

foreclosure of the mortgage, the starting date is

October 13, 1982 and not May 1, 1981.

Other points raised by BPIIC in connection with this

issue, such as the date of actual release of the loan

and whether ALS were the cause of the delay in the

release of the loan, are factual.

CA decision was affirmed but with modification as

to the award of damages.

Q: So why was there an issue here as to the perfection of the contract? A: There was an issue here because upon the perfection of the contract, it will then start the

payment of the monthly amortization of ALS and Litonjua. Q: Wherein it would include?

A: It would also include the payment for interest. Q: Now, between the allegations of the parties here, which was upheld by the Supreme Court? A: The contention of ALS and Litonjua was upheld by the Supreme Court. It was held that the contract was perfected on September 13, 1982 and that the contract of mutuum or commodatum is a real contract. Q: But in this case, what kind of loan was involved?

A: Simple loan.

BPI vs CA: So again here, whether it is a

commodatum or mutuum, it is perfected by delivery.

Or it is a contract perfected by delivery and

therefore a real contract. In this case, even if the

loan contract was signed on March 13, 1981, it was

only perfected on September 13, 1982 when the full

loan was released to private respondents. A

perfected loan agreement imposes reciprocal

obligations where the obligation or promise of each

party is the consideration of the other. The

consideration for BPIIC for entering into the loan

contract is the promise of the private respondents to

pay the monthly amortization. On the part of the

private respondent, the promise of BPIIC to deliver

the money. As mentioned in reciprocal obligations,

neither party occurs in delay if the other does not

comply or is not ready to comply in a proper

manner with what is incumbent upon him. In this

case, there was no delay when they did not

commence paying the monthly amortization on May

1, 1981 as it was only in September 13, 1982 when

petitioner fully complied with its obligation.

Again, a loan contract is not a consensual contract

but a real contract perfected only upon delivery.

And it is a contract which involves reciprocal

obligations.

So, what happens here? If you try to borrow money

from a bank and let us say the bank instead of

giving you cash delivers a check, so is there a

simple loan already perfected? If what was

delivered to you was a mere check, is the simple

loan already perfected? There is the delivery of the

check pero it’s not the subject matter yet. When is

the contract of loan perfected in that scenario?

When the check has already been encashed. So,

mere issuance of the check does not perfect a

contract of loan.

Now, what if the thing loaned was destroyed? The

thing loaned here is money. So would it extinguish

the obligation? No. Why? Genus never perishes.

Genus nunquam perit. Destruction of the thing

loaned does not extinguish the obligation.

Now we also have here the case of Yong Cham

Kim vs People.

YONG CHAN KIM vs. PEOPLE OF THE

PHILIPPINES, HON. EDGAR D. GUSTILO

Presiding Judge, RTC, 6th Judicial Region,

Branch 28 Iloilo City and COURT OF APPEALS

(13th Division), SOUTHEAST ASIAN FISHERIES



DEVELOPMENT CENTER AQUACULTURE

DEPARTMENT (SEAFDEC)

FACTS: Petitioner Yong Chan Kim was employed

as a Researcher at the Aquaculture Department of

the Southeast Asian Fisheries Development Center

(SEAFDEC) with head station at Tigbauan,

Province of Iloilo. As Head of the Economics Unit of

the Research Division, he conducted prawn surveys

which required him to travel to various selected

provinces in the country where there are potentials

for prawn culture.

On 15 June 1982, petitioner was issued Travel

Order No. 2222 which covered his travels to

different places in Luzon from 16 June to 21 July

1982, a period of thirty five (35) days. Under this

travel order, he received P6,438.00 as cash

advance to defray his travel expenses.

Within the same period, petitioner was issued

another travel order, T.O. 2268, requiring him to

travel from the Head Station at Tigbauan, Iloilo to

Roxas City from 30 June to 4 July 1982, a period of

five (5) days. For this travel order, petitioner

received a cash advance of P495.00.

On 14 January 1983, petitioner presented both

travel orders for liquidation, submitting Travel

Expense Reports to the Accounting Section. When

the Travel Expense Reports were audited, it was

discovered that there was an overlap of four (4)

days (30 June to 3 July 1982) in the two (2) travel

orders for which petitioner collected per

diems twice. In sum, the total amount in the form

of per diems and allowances charged and collected

by petitioner under Travel Order No. 2222, when he

did not actually and physically travel as represented

by his liquidation papers, was P1,230.00.

Petitioner was required to comment on the internal

auditor's report regarding the alleged anomalous

claim for per diems. In his reply, petitioner denied

the alleged anomaly, claiming that he made make-

up trips to compensate for the trips he failed to

undertake under T.O. 2222 because he was

recalled to the head office and given another

assignment.

In September 1983, two (2) complaints for Estafa

were filed against the petitioner before the

Municipal Circuit Trial Court at Guimbal, Iloilo.

ISSUE: Whether or not petitioner can be held

criminally liable on the ground of failure to liquidate

her traveling expenses. NO.

RULING: It is undisputed that petitioner received a

cash advance from private respondent SEAFDEC

to defray his travel expenses under T.O. 2222. It is

likewise admitted that within the period covered by

T.O. 2222, petitioner was recalled to the head

station in Iloilo and given another assignment which

was covered by T.O. 2268. The dispute arose when

petitioner allegedly failed to return P1,230.00 out of

the cash advance which he received under T.O.

2222. For the alleged failure of petitioner to return

the amount of P1,230.00, he was charged with the

crime of Estafa under Article 315, par. 1(b) of the

Revised Penal Code.

In order that a person can be convicted under the

above-quoted provision, it must be proven that he

had the obligation to deliver or return the same

money, good or personal property that he had

received. Was petitioner under obligation to return

the same money (cash advance) which he had

received? We believe not.

Liquidation simply means the settling of

indebtedness. An employee, such as herein

petitioner, who liquidates a cash advance is in fact

paying back his debt in the form of a loan of money

advanced to him by his employer, as per diems and

allowances.

Similarly, as stated in the assailed decision of the

lower court, "if the amount of the cash advance he

received is less than the amount he spent for actual

travel . . . he has the right to demand

reimbursement from his employer the amount he

spent coming from his personal funds.

In other words, the money advanced by either party

is actually a loan to the other. Hence, petitioner was

under no legal obligation to return the same cash or

money, i.e., the bills or coins, which he received

from the private respondent.

Article 1933 and Article 1953 of the Civil Code

define the nature of a simple loan.

Art. 1933. By the contract of loan, one of the parties

delivers to another, either something not

consumable so that the latter may use the same for

a certain time and return it, in which case the

contract is called a commodatum; or money or

other consumable thing, upon the condition that the

same amount of the same kind and quality shall be

paid, in which case the contract is simply called a

loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation

to pay interest.

In commodatum the bailor retains the ownership of

the thing loaned, while in simple loan, ownership

passes to the borrower.

Art. 1953.— A person who receives a loan of

money or any other fungible thing acquires the

ownership thereof, and is bound to pay to the

creditor an equal amount of the same kind and

quality.

The ruling of the trial judge that ownership of the

cash advanced to the petitioner by private

respondent was not transferred to the latter is

erroneous. Ownership of the money was

transferred to the petitioner.

Since ownership of the money (cash advance) was

transferred to petitioner, no fiduciary relationship

was created. Absent this fiduciary relationship

between petitioner and private respondent, which is

an essential element of the crime of estafa by

misappropriation or conversion, petitioner could not

have committed estafa.



Additionally, it has been the policy of private

respondent that all cash advances not liquidated

are to be deducted correspondingly from the salary

of the employee concerned. The evidence shows

that the corresponding salary deduction was made

in the case of petitioner vis-a-vis the cash advance

in question.

(Failure of bank to return the amount deposited,

not a case of estafa)

Q: What was the defense here of Yong Chan? A: He said that the cash advances were actually a simple loan and that there was no obligation on his part to return the excess. Q: What was his obligation if it does not include the obligation to return the excess?

A: Only to pay such (?) and not just to pay the excess. Q: So what was the ruling of the Court? A: So the Supreme Court here ruled that cash advances are in the form of simple loan, so there is a transfer of ownership. And, being that there is a transfer of ownership, Yong Chan, since there was no fiduciary relationship created between him and the one who gave the cash advances, he cannot be made liable since that is the basis for the liability for estafa. And also, based on the policy of the agency, SEAFDEC, in case there was no liquidation, it will only be deducted from the salary of Yong Chan and he cannot be sued for estafa. Q: So was there liability here on the part of Yong Chan? A: Yes. There is a liability for him to pay but that will only be deducted from his salary but he cannot be held liable for estafa.

YONG CHAN KIM vs PEOPLE: So, there is only

civil liability but no criminal liability. So what do you

have here? A situation wherein money is released,

per diems, allowances to an employee and the

employee fails to return the excess back to the

employer.

Now, with regard to estafa, in order for a person to

be convicted for estafa, you have here Article 315,

par. 1 (b), it must be proven that he had the

obligation to deliver or return the money, good or

personal property that he had received. In this case,

Yong Chan had no obligation to do so. His

obligation was first, liquidation. Liquidation means

the settling of an indebtedness. An employee who

liquidates a cash advance is in fact paying his debt

in the form of a loan of money advanced to him by

his employer, as per diems and allowances. So the

Supreme Court emphasized the decision of the

lower court, kasi what if the cash advance received

by the employee is less than the amount for actual

travel. He can actually demand reimbursement from

his employer. So with that, the money that was

released to the employee was in the form of loan

and therefore there was no legal obligation for

petitioner to return the same cash or money which

he received from the private respondent. Now when

we say same cash (?) here, do not confuse it with

commodatum. Because what you have here is

money or consumable thing and the intention here

was to transfer ownership. The ruling of the trial

judge that the ownership of the cash transfer to the

petitioner by private respondent was not transferred

to the latter was erroneous. Again, since what we

have here is a simple loan, ownership was

transferred to Yong Chan.

Again, it was emphasized also that there was no

fiduciary relationship when the cash advance was

released to the employee. Absent this fiduciary

relationship which is an essential element of the

crime of estafa by misappropriation or conversion,

petitioner could not have committed estafa.

And then we have the case of Spouses Tan vs

Villapaz.

SPOUSES ANTONIO and LOLITA TAN vs.

CARMELITO VILLAPAZ

FACTS: On February 6, 1992, respondent Villapaz

issued a Philippine Bank of Communications

(PBCom) crossed check in the amount of

P250,000.00, payable to the order of petitioner

Tony Tan. On that date, the check was deposited at

the drawee bank, PBCom Davao City branch at

Monteverde Avenue, to the account of petitioner

Antonio Tan also at said bank.

On November 7, 1994 respondent filed a Complaint

for sum of money against the spouses, alleging that

on February 6, 1992, the spouses went to his place

of business at Malita, Davao and obtained a loan of

P250,000.00, hence, his issuance of the February

6, 1992 PBCom crossed check which loan was to

be settled interest-free in six (6) months.

On the maturity date of the loan or on August 6,

1992, petitioner Antonio Tan failed to settle the

same, and despite repeated demands, petitioners

never did, drawing Villapaz to file the complaint;

and on account of the willful refusal of petitioners to

honor their obligation, he suffered moral damages

in the amount of P50,000.00, among other things.

The spouses denied having gone to Malita and

having obtained a loan from respondent, alleging

that the check was issued by respondent in Davao

City on February 6, 1992 "in exchange for

equivalent cash"; they never received from

respondent any demand for payment, be it verbal or

written, respecting the alleged loan; since the

alleged loan was one with a period payable in six

months, it should have been expressly stipulated

upon in writing by the parties but it was not, hence,

the essential requisite for the validity and

enforceability of a loan is wanting; and the check is

inadmissible to prove the existence of a loan for

P250,000.00.

Petitioners maintain that they did not secure a loan

from respondent, insisting that they encashed in

Davao City respondent's February 6, 1992 crossed

check; in the ordinary course of business, prudence

dictates that a contract of loan must be in writing as

in fact the New Civil Code provides that to be

enforceable "contracts where the amount involved

exceed[s] P500.00 must appear in writing even a

private one," hence, respondent's "self-serving"

claim does not suffice to prove the existence of a

loan; respondent's allegation that no memorandum

in writing of the transaction was executed because

he and they are "kumpadres" does not inspire belief



for respondent, being a businessman himself, was

with more reason expected to be more prudent; and

the mere encashment of the check is not a

contractual transaction such as a sale or a loan

which ordinarily requires a receipt and that explains

why they did not issue a receipt when they

encashed the check of respondent.

Petitioners furthermore maintain that they were

financially stable on February 6, 1992 as shown by

the entries of their bank passbook hence, there was

no reason for them to go to a distant place like

Malita to borrow money.

The lower Court gave four reasons for ruling out a

loan:

(a) the defense of spouses Tan that they did not go

to Villapaz's place on February 6, 1992, date the

check was given to them;

(b) Spouses Tan could not have borrowed money

on that date because from January to March, 1992,

they had an average daily deposit of P700,000 and

on February 6, 1992, they had P1,211,400.64 in the

bank, hence, they had "surely no reason nor logic"

to borrow money from Villapaz;

(c) the alleged loan was not reduced in writing and

the check could not be a competent evidence of

loan.

ISSUE: Whether or not the transaction in dispute

was a contract of loan and not a mere matter of

check encashment as found by the trial court. YES.

HELD: The four-fold reasoning cannot be

sustained. They are faulty and do not accord either

with law or ordinary conduct of men. For one thing,

the first two given reasons partake more of alibi and

speculation, hence, deserve scant consideration.

For another, the last two miss the applicable

provisions of law.

The existence of a contract of loan cannot be

denied merely because it is not reduced in writing.

Surely, there can be a verbal loan. Contracts are

binding between the parties, whether oral or written.

The law is explicit that contracts shall be obligatory

in whatever form they may have been entered into,

provided all the essential requisites for their validity

are present. A loan (simple loan or mutuum) exists

when a person receives a loan of money or any

other fungible thing and acquires the ownership

thereof. He is bound to pay to the creditor the equal

amount of the same kind and quality.

Contracts are perfected by mere consent, and from

that moment the parties are bound not only to the

fulfillment of what has been expressly stipulated but

also to all the consequences which, according to

their nature, maybe in keeping with good faith,

usage and law.

The lower Court misplaced its reliance on Article

1358 of the Civil Code providing that to be

enforceable, contracts where the amount involved

exceed five hundred pesos, must appear in writing.

Such requirement, it has been held, is only for

convenience, not for validity. It bears emphasis that

at the time Villapaz delivered the crossed-check to

the petitioner spouses, Villapaz had no account

whatsoever with them. Spouses' contention that

they did not obtain any loan but merely exchanged

the latter's check for cash is not borne by any

evidence.

That apart from the check, no written proof of the

grant of the loan was executed was credibly

explained by respondent when he declared that

petitioners' son being his godson, he, out of trust

and respect, believed that the crossed check

sufficed to prove their transaction.

As for petitioners' reliance on Art. 1358[22] of the

Civil Code, the same is misplaced for the

requirement that contracts where the amount

involved exceeds P500.00 must appear in writing is

only for convenience.

At all events, a check, the entries of which are no

doubt in writing, could prove a loan transaction.

Q: First, what was the contract entered into? A: Loan. Q: So it was a loan, specifically what kind? A: Mutuum. Q: So with that what was the other issue that was needed to be addressed considering that what we have here was a simple loan or mutuum?

A: W/N the contract of mutuum should be reduced into writing to be enforceable. The Court here ruled in the negative ruling that in a contract of loan, it is not a consensual contract but rather it is a real contract perfected upon delivery. So, form is not necessary and that it is already perfected upon delivery of the same. Furthermore, it was ruled by the Court that a contract is not one of those enforceable contracts that need to be reduced into writing to be enforceable. Q: Now how about with regard to the defense that there was no promissory note issued in relation to that release of the check? How was the check considered here? How was the loan transaction proven?

A: Through the mere existence of the check.

SPOUSES TAN vs VILLAPAZ: The mere

existence of the check would already show that

there is already a contract of loan. You already

have negotiable instruments. Wala pa kayo nag

abot ng section 1 but tapos na kayo sa functions?

One of the functions of a negotiable instrument is

that it is an evidence of indebtedness. So that was

taken into consideration here. It was raised as an

issue that number 1, there was nothing in writing to

show that naghiram ng pera. What they have was

only the check. So they were asking that there must

be a promissory note to make the contract

enforceable. First, it was not necessary because

number 1, the contract involved here was not one of

those mentioned under Article 1403 (2), statute of

frauds, for the contract to be enforceable. Second,

as mentioned, again, a contract of loan is perfected

by delivery. When the proceeds of the check was

released, there was already a perfected contract of

loan. And third, in relation to your negotiable

instruments, there was no necessity to issue a



separate paper contract to show that a contract of

loan was perfected. Because the mere issuance of

the check could prove that there was a loan

transaction. Again, one of the functions of a

negotiable instrument as in this case a check, is

that it is an evidence of indebtedness.

Notice in this case it was in Digos, Davao del Sur

and I think this was a bank here in Davao, PBCOM

Monteverde Branch. And I think it was among

friends because there was an allegation that the

check was not merely, he did not borrow money

because he has money in the bank. That does not

mean, as held by the Supreme Court, that it is

impossible to believe that if a businessman has

such an outstanding balance in his account, he

would have no need to borrow an extra amount. So

no defense in that instance.

Now, Article 1954.

Art. 1954. A contract whereby one person

transfers the ownership of non-fungible things

to another with the obligation on the part of the

latter to give things of the same kind, quantity,

and quality shall be considered a barter. (n)

Alright, distinctions between barter or exchange and

mutuum.

Art. 1638. By the contract of barter or exchange one

of the parties binds himself to give one thing in

consideration of the other's promise to give another

thing.

Mutuum, commodatum, barter, they are different

contracts.

COMMODATUM/MUTUUM BARTER

In mutuum the subject matter is money or consumable things. In commodatum as a general rule, non-consumable.

The subject matter is non-fungible or non-consumable.

In commodatum, the bailee is bound to return the identical thing borrowed. In mutuum, equivalent of the thing that was loaned.

The equivalent thing is given in return for what has been received.

Mutuum may be gratuitous and commodatum is essentially gratuitous.

Barter is always onerous.

Art. 1955. The obligation of a person who

borrows money shall be governed by the

provisions of Articles 1249 and 1250 of this

Code.

If what was loaned is a fungible thing other than

money, the debtor owes another thing of the

same kind, quantity and quality, even if it

should change in value. In case it is impossible

to deliver the same kind, its value at the time of

the perfection of the loan shall be paid. (1754a)

Art. 1249. The payment of debts in money shall

be made in the currency stipulated, and if it is

not possible to deliver such currency, then in

the currency which is legal tender in the

Philippines.

The delivery of promissory notes payable to

order, or bills of exchange or other mercantile

documents shall produce the effect of payment

only when they have been cashed, or when

through the fault of the creditor they have been

impaired.

In the meantime, the action derived from the

original obligation shall be held in the

abeyance. (1170)

Art. 1250. In case an extraordinary inflation or

deflation of the currency stipulated should

supervene, the value of the currency at the time

of the establishment of the obligation shall be

the basis of payment, unless there is an

agreement to the contrary. (n)

What is 1249 of the Civil Code? Payment. Legal

tender, in the currency stipulated or legal tender in

the Philippines. Mercantile checks, mercantile

documents, delivery thereof shall not be considered

as payment or performance until the same has

been encashed or impaired through the fault of the

debtor. In the meantime, demandability of the

obligation may be held in abeyance.

1250, inflation, extraordinary inflation or deflation.

That is also taken into consideration here since

what you have as a subject matter is money or

consumable thing. If the subject of mutuum is

money, payment must be made in the currency

stipulated. In case of extraordinary inflation or

deflation, the basis of the payment shall be the

value of the currency at the time of the creation of

the obligation. Distinguish it if the subject matter is a

fungible thing. Obligation is to pay the lender

another thing of the same kind, quantity and quality.

If impossible to do so, pay its value at the time of

the perfection of the loan. In case it is impossible to

deliver the same kind, the value at the time of the

perfection of the loan shall be paid.

And then we have Article 1956. Very short, but

actually, most of our cases and discussion revolve

within this provision in relation to interest.

Art. 1956. No interest shall be due unless it has

been expressly stipulated in writing. (1755a)

Now, if you take a look at that, we could say that

the following are requisites for interest:

1. It must be expressly stipulated; and

2. It must be in writing.

It is not enough that it is expressly stipulated, it

must also be in writing. And there is third requisite

which is mentioned in the discussion, that the

interest must be lawful. But, considered that the

usury law has already been suspended, then this

requisite that interest must be lawful is likewise not

necessary as of this time.

Now, with regard to payment of interest in relation

to 1956, considering this is within the chapter on

mutuum, therefore the requirement for the express

stipulation in writing of interest, is only required if



interest is demanded subject of a simple loan or

mutuum.

Now, contracting parties may stipulate freely on any

adjustment of interest rate because again, usury

law has already been suspended. However, as

most probably you have already learned in your

obligations and contracts, the law does not

authorize the increase of interest rate by one party

without the other party’s consent and any change

must be mutually agreed by the parties.

Now, with regard to interest, in the cases that you

have read and you will read, you will always

encounter this term, forbearance.

Q: What do you mean by forbearance?

A: Forbearance is a loan.

What happened in the case of PNB vs

IBARROLA?

PNB VS. CA AND IBARROLA

FACTS: Province of Isabela issued several checks

drawn against its account with PNB (P) in favor of

Lyndon Pharmaceuticals Laboratories, a business

operated by Ibarrola (R), as payments for the

purchase of medicines.

The checks were delivered to R’s agents who

turned them over to R, except 23 checks amounting

to P98k. Due to failure to receive full amount, R

filed case against P.

Trial Court, CA and SC ordered PNB to pay;

however, all 3 courts failed to specify the legal rate

of interest – 6% or 12%.

ISSUE: WoN the rate to be used is 6%.

HELD: YES. This case does not involve a loan,

forbearance of money or judgment involving a loan

or forbearance of money as it arose from a contract

of sale whereby R did not receive full payment for

her merchandise.

When an obligation arises “from a contract of

purchase and sale and not from a contract of loan

or mutuum,” the applicable rate is 6% per annum as

provided in Art. 2209 of the NCC and not the rate of

12% per annum as provided in (CB) Cir. No. 416.

The rate of 12% interest referred to in Cir. 416

applies only to: Loan or forbearance of money, or to

cases where money is transferred from one person

to another and the obligation to return the same or

a portion thereof is adjudged.

Any other monetary judgment which does not

involve or which has nothing to do with loans or

forbearance of any money, goods or credit does not

fall within its coverage for such imposition is not

within the ambit of the authority granted to the

Central Bank.

When an obligation not constituting a loan or

forbearance of money is breached then an interest

on the amount of damages awarded may be

imposed at the discretion of the court at the rate of

6% per annum in accordance with Art. 2209 of the

Civil Code. Indeed, the monetary judgment in favor

of private respondent does not involve a loan or

forbearance of money, hence the proper imposable

rate of interest is six (6%) per cent.

Therefore, the proper rate of interest referred to in

the judgment under execution is only 6%. This

interest shall be computed from the time of the filing

of the complaint considering that the amount

adjudged (P98,691.90) can be established with

reasonable certainty. Said amount being merely the

uncollected balance of the purchase price covered

by the 23 checks encashed and appropriated by

Ibarrola's agents. However, once the judgment

becomes final and executory, the "interim period

from the finality of judgment awarding a monetary

claim and until payment thereof, is deemed to be

equivalent to a forbearance of credit."

*6% from filing of complaint until full payment before

finality of judgment.

*12% from finality of judgment.

Q: Now first, before you go to the issue on 6% or 12%, is the requirement in 1956 applicable in this case? Is it required here that the stipulated interest be in writing?

A: No. Q: Why not? What was the basis for the claim for interest? It’s clear that there in entitlement for interest, the issue was whether 6% or 12 %. But why was there a demand for payment of interest in the first place?

A: There is a demand for payment of interest in the first place because of the failure of the Province of Isabela to pay the balance of P98,691 to Ibarrola. Q: Would that be considered as a forbearance of money? What is forbearance? In this case, how was it defined, forbearance of money? What is involved in forbearance? A: Money. Q: Why would it be relevant that the transaction herein involves forbearance? When do you apply 6%, when do you apply 12%? A: The 6% is applicable if it arises from a contract of sale just like in this case. Q: So only for contracts of sale? When do you apply the 12%? A: The 12% is applied if the obligation arises from a forbearance of money or a contract of loan. Q: So in this case, what is the applicable interest rate?

A: The applicable interest rate in this case is 6% because it arises from a contract of sale wherein it was due to the medicines purchased by the Province of Isabela. And according to the Supreme Court, 6% is applicable, aside from the obligation arising from a contract of sale, because the judgment here is not yet final so the 6% shall be computed from the date of the filing of the complaint until satisfaction of such before final judgment. And so the proper rate of interest here in the judgment rendered by the court is 6%. However, the Supreme Court here also cited the case of Eastern Shipping. According to the Supreme Court that, if the judgment becomes final, the interim period from the finality of the judgment which awards the money claim until full payment of such would be considered as a forbearance of credit or treated as a loan. Of which the 12% shall be applicable.



PNB vs IBARROLA: What was the action here? It

was actually an action for damages. The interest

was imposed based on the action for damages. So

there was no contract of loan involved here and

therefore 1956 is not an applicable provision. For

the demand of interest here, it is not required that it

must be stipulated in writing. Now, considering that,

here you do not have an obligation constituting a

loan or forbearance of money, an interest on the

amount of damages awarded may be imposed at

the discretion of the court at the rate of 6%. The

case at bench does not involve a loan, forbearance

of money, or judgment involving a loan or

forbearance of money as it arose from a contract of

sale. Forbearance is considered as a contractual

obligation of a lender or creditor to refrain during a

given period of time from requiring debtor/borrower

to repay the loan or debt then due or payable. The

rate of 12% only applies to such loan or

forbearance of money or cases where money is

transferred from one person to another and the

obligation is to return the same or a portion thereof

is adjudged. Once the judgment becomes final and

executory, the interim period from finality of

judgment awarding monetary claims until payment

from that time will now be considered as a

forbearance of credit wherein the 12% p.a. should

be imposed and again would be computed from the

time the judgment became final and executory until

fully satisfied.

So here, it was the 6% from filing of the complaint

until its full payment before finality of judgment. And

then, if the amount adjudged remains unpaid, the

interest shall be paid from the time the judgment

became final and executory, in this case on

November 1993 until fully satisfied.

Now, also another case dealing with forbearance is

the case of Estores vs Supangan.

HERMOJINA ESTORES VS. SPOUSES ARTURO

AND LAURA SUPANGAN

FACTS: In Oct. 1993, Hermojina Estores and

Spouses Supangan entered into a Conditional

Deed of Sale where Estores offered to sell, and

Spouses offered to buy a parcel of land in Cavite for

P4.7M.

After almost 7 years and despite the payment of

P3.5M by the Spouses, Estores still failed to comply

with her obligation to handle the peaceful transfer of

ownership as stated in 5 provisions in the contract.

In a letter in 2000, Spouses demanded the return of

the amount within 15 days from receipt. In reply,

Estores promised to return the same within 120

days. Spouses agreed but imposed an interest of

12% annually. Estores still failed despite demands.

Spouses filed a complaint with the RTC against

Estores and Roberto Arias (allegedly acted as

Estores’ agent).

In Answer, Estores said they were willing to pay the

principal amount but without the interest as it was

not agreed upon. That since the Conditional Deed

of Sale provided only for the return of the

downpayment in case of breach, they cant be liable

for legal interest as well.

RTC ruled saying that the Spouses are entitled to

the interest but only at 6% per annum and also

entitled to atty’s fees. On appeal, CA said that the

issue to resolve is whether it is proper to impose

interest for an obligation that does not involve a

loan or forbearance of money in the absence of

stipulation of the parties. CA affirmed RTC.

That interest should start on date of formal demand

by Spouses to return the money not when contract

was executed as stated by the RTC; That Arias not

be solidarily liable as he acted as agent only and

did not expressly bind himself or exceeded his

authority.

Estores contends: Not bound to pay interest

because the deed only provided for the return of the

downpayment in case of failure to comply with her

obligations; That atty fees not proper because both

RTC and CA sustained her contention that 12%

interest was uncalled for so it showed that Spouses

did not win.

Spouses contend: It is only fair that interest be

imposed because Estores failed to return the

amount upon demand and used the money for her

benefit.

Estores failed to relocate the house outside the

perimeter of the subject lot and complete the

necessary documents.

As to the fees, they claim that they were forced to

litigate when Estores unjustly held the amount.

ISSUES: Is the imposition of interest and attorney’s

fees is proper? YES

Interest based on Art 2209 of CC (6%) or under

Central Bank Circular 416 (12%)? 12%

HELD: Interest may be imposed even in the

absence of stipulation in the contract.

Article 2210 of the Civil Code expressly provides

that “interest may, in the discretion of the court, be

allowed upon damages awarded for breach of

contract.”

Estores failed on her obligations despite demand.

She admitted that the conditions were not fulfilled

and was willing to return the full amount of P3.5M

but hasn’t done so she is now in default.

The interest at the rate of 12% is applicable in

the instant case.

Gen Rule: the applicable interest rate shall be

computed in accordance with the stipulation of the

parties

Exc: if no stipulation, applicable rate of interest shall

be 12% per annum when obligation arises out of a

loan or forbearance of money, goods or credits. In

other cases, it shall be 6%

In this case, no stipulation was made.

Contract involved in this case is not a loan but a

Conditional Deed of Sale.



No question that the obligations were not met

and the return of money not made

Even if transaction was a Conditional Deed of

Sale, the stipulation governing the return of the

money can be considered as a forbearance of

money which requires 12% interest

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

Forbearance-- “contractual obligation of lender or

creditor to refrain during a given period of time, from

requiring the borrower or debtor to repay a loan or

debt then due and payable.”

In such case, “forbearance of money, goods or

credits” will have no distinct definition from a loan.

However, the phrase “forbearance of money, goods

or credits” is meant to have a separate meaning

from a loan, otherwise there would have been no

need to add that phrase as a loan is already

sufficiently defined in the Civil Code

Forbearance of money, goods or credits should

therefore refer to arrangements other than loan

agreements, where a person acquiesces to the

temporary use of his money, goods or credits

pending happening of certain events or fulfillment of

certain conditions.

Estores’ unwarranted withholding of the money

amounts to forbearance of money which can be

considered as an involuntary loan so rate is 12%

starting in Sept. 2000

The award of attorney’s fees is warranted.

No doubt that the Spouses were forced to litigate to

protect their interest, i.e., to recover their

money. The amount of P50,000.00 is more

appropriate.

Q: How was it defined here, the term forbearance of money?

A: The Supreme Court here defined a forbearance of money as a contractual obligation of the lender or creditor to refrain during a period of time to require the debtor to repay the loan. Q: So if there was a forbearance of money, it should be 12%?

A: Yes, Q: What was the rate imposed here?

A: it was 12%. Q: But wasn’t it that the basis here for interest was the breach of that conditional deed of sale? Isn’t it that in the case of Ibarrola, it was also a deed of sale, the rate imposed there was 6% and the 12% was only from the finality of judgment?

A: The Supreme Court here considered the stipulation in the return of the downpayment as a forbearance of money. Q: In other words, even if there was no loan, there was no lender, as you have mentioned in the definition and also the same in the case of Ibarrola was not exactly the same definition mentioned here by the Supreme Court. In fact it expounded on the definition. What was the definition here?

A: It was said that the phrase forbearance of money goods or credits will have no distinct definition from a loan otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code

Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions. Q: So again, why was the 12% imposed here and not the 6%? Even if there was no loan, even if it was a sale, why was it that 12% was the rate imposed? A: Because here, the respondent agreed that the temporary use of his money pending the happening of a condition.

ESTORES vs SUPANGAN: And even if all the

conditions were complied with, there was still

refusal to return the money as stipulated in the said

deed. The unwarranted withholding again resulted

to liability for interest since it is now considered as a

forbearance of money.

So here the Supreme Court noted the previous

definitions of forbearance as in the case of PNB vs

Ibarrola as a contractual obligation of lender or

refrain during a given period of time from requiring

the borrower or debtor to repay a loan or debt then

due and payable. Note that in mutuum, you give the

bailee a period to pay. You give time to pay the loan

already due and payable. Before that period, you

have no right to demand for the payment of the

return of whatever has been borrowed.

But in this case of Supangan and in subsequent

cases as well, the Supreme Court has already held

that the phrase forbearance of money, would have

a separate meaning from a loan. Otherwise there

would have been no need to add that phrase as a

loan is already sufficiently defined in the Civil Code

Forbearance of money, goods or credits should

therefore refer to arrangements other than loan

agreements, where a person acquiesces to the

temporary use of his money, goods or credits

pending happening of certain events or fulfillment of

certain conditions.

In this case, respondent spouses parted with their

money even before the conditions were fulfilled.

They have allowed or granted forbearance to

petitioner to use their money pending fulfillment of

the conditions. They were deprived for the use of

their money pending fulfillment of conditions. And

when those conditions were breached, they are

entitled not only to the principal amount but also to

the compensation for the use of their money. And

the compensation for the use of their money absent

any stipulation should be the same rate of legal

interest applicable to a loan since the use or

deprivation is similar to a loan. Petitioners

unwarranted withholding of the money which

rightfully pertains to spouses amounts to

forbearance of money which can be considered as

a voluntary loan and therefore the applicable rate of

interest is 12% p.a.

Notice the difference here in the case of PNB vs

Ibarrola and the case if Supangan. In the latter case

of Supangan, the definition of the term forbearance

of money was expounded. Again, it’s not just loan,

but the fact that you allow another person to use

your money in the meantime. So even if the basis



here was the deed of conditional sale, again the

rate that was imposed was 12%.

November 23, 2015 (Jala)

Still under interest for Mutuum. Again we have emphasized last time that under Art. 1956, no interest shall be due unless it has been expressly stipulated in writing. In 1956, the requirements indicated therein apply only to a simple loan of mutuum. The requisites for interest are it must be expressly stipulated and it must be in writing. The discussion by de Leon in his book, he noted that the third requisite, interest must be lawful is not required because of the suspension of the Usury Law. Also last time, we emphasized that we have in obligations and contracts, I am pretty sure you had your discussion in obligation and contract that contracting parties may stipulate on any adjustment on the interest rate of a loan or forbearance of money. As to what is forbearance of money, we have already discussed the definition in the earlier cases such as Ibarrola wherein the definition was expounded in the subsequent cases such as that of Estores Now, regarding interest rate adjustments, the law does not authorize increase of interest rate by one party without the other party’s consent kasi any change must be mutually agreed upon by the parties. But we have this case of Pan Pacific vs. Equitable …

PAN PACIFIC vs EQUITABLE PCI BANK FACTS: Pan Pacific is engaged in contracting mechanical works on airconditioning system. They entered into a contract of mechanical works with respondent for the total consideration for the whole project was P23,311,410.30. The Contract stipulated that Pan Pacific shall be entitled to a price adjustment in case of increase in labor costs and prices of materials under paragraphs 70.1 and 70.2 of the General Conditions for the Construction of PCIB Tower II Extension. Pan Pacific commenced the mechanical works in the project site. In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52. Respondents asked for a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment toP4,858,548.67. On 28 April 1992, respondent asked that the price adjustment should be pegged at P3,730,957.07, based on the DOLE Labor Indices and the General Conditions of their contract.

Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational capital was becoming inadequate for the project. However, respondent withheld the payment of the price adjustment under the escalation clause despite Pan Pacifics repeated demands. Instead, respondent offered Pan Pacific a loan of P1.8 million. Pan Pacific was constrained to execute a promissory note in the amount of P1.8

million as a requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million was released directly to laborers and suppliers and not a single centavo was given to Pan Pacific. Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to release the same. Meanwhile, the P1.8 million loan matured and respondent demanded payment plus interest and penalty. Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released the price adjustment on time. Pan Pacific alleged that the promissory note did not express the true agreement of the parties. Pan Pacific maintained that the P1.8 million was to be considered as an advance payment on the price adjustment. Therefore, there was really no consideration for the promissory note; hence, it is null and void from the beginning. Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset the price adjustment with Pan Pacifics outstanding balance of P3,226,186.01, representing the loan, interests, penalties and collection charges. Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as recommended by the TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million and P414,942 as advance payments. On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and damages against the respondent with the RTC. On 12 April 1999, the RTC declared the promissory note as null and void and ordered Pan Pacific to pay P1,389,111.10 REPRESENTING UNPAID BALANCE OF THE ADJUSTMENT PRICE, AND INTEREST AT THE LEGAL RATE OF TWELVE (12%) PERCENT PER ANNUM The CA removed the deduction ofP126,903.97 because it represented the final payment on the basic contract price. Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6 May 1994. On MR he CA increased the loan rate to 18%, rate of equitable PCI. ISSUE: Whether the CA, in awarding the unpaid

balance of the price adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate. YES HELD: The CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition of interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the consent of the respondent is not needed for the imposition of interest at the current bank lending rate, which occurs upon any delay in payment. Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no



interest shall be due unless it has been expressly stipulated in writing. Therefore, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest. The consent of the respondent is not needed in order to impose interest at the current bank lending rate. Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the regular monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per annum. It is only when the parties to a contract have failed to fix the rate of interest or when such amount is unwarranted that the Court will apply the 12% interest per annum on a loan or forbearance of money. The written agreement entered into between petitioners and respondent provides for an interest at the current bank lending rate in case of delay in payment and the promissory note charged an interest of 18%. To prove petitioners entitlement to the 18% bank lending rate of interest, petitioners presented the promissory note prepared by respondent bank itself. This promissory note, although declared void by the lower courts because it did not express the real intention of the parties, is substantial proof that the bank lending rate at the time of default was 18% per annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners against the respondent, the interest rate agreed upon is binding on them.

What was the basis of the 18%? Was there any liability for interest in this case? Was there any issue with regard to the principal amount? Was it proper to impose an interest rate? How do you reconcile their agreement with that of what is required under obligations and contracts? Was their agreement upheld by the Supreme Court? Why was it upheld? What is the reason interest was being imposed here? What is the basis (legal) of interest based on delay? What is the interest to be imposed? Even if the promissory note was void, the statement there, 18% was considered as evidence. The promissory note was used as an evidence to prove that the bank lending rate was 18%.

So here, it was agreed by the parties that consent of the repondent is not needed for the imposition of interest at the current bank lending rate which occurs upon any delay in payment. Here, in case of default or delay, the consent of the respondent is not needed in order to impose interest at the current bank lending rate. This is not similar to what I have mentioned earlier that the law does not authorize increase of interest rate without the other party’s consent because sometimes bank would include that. In Obligations and contracts, as what was discussed to you, that just because there is a stipulation such as increase in the lending rate valid na yun just because you agreed that your consent was not necessary. That has already been invalidated. That obligations has been considered void. But here it is different because the imposition of interest is based on delay and 2209 of the Civil Code merely provides for interest in case of delay. Under Article 2209 of the Civil Code merely provides for interest in case of delay. The appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. Clearly in their agreement, there was no specific interest rate. What they mentioned was the current bank lending rate. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the regular monetary interest becomes due and payable. So there was an issue, ok, there is liability based on delay. So what should it be, 18, 12 or 6? Because it was clear in their agreement that the current bank lending rate on the interest rate imposed they had to consider what was the current bank lending rate that time and they saw that on the promissory note. The promissory note, although it was considered void because it did not express the true intention of the parties, is substantial proof that the bank lending rate at that time of default was 18% per annum. Now we will be talking about interest, what are that requisites and what are the effects in a contract. But what is really an interest? What do we mean by interest? Why would there be a need to increase the principal sum?

PRISMA CONSTRUCTION vs. MENCHAVEZ

FACTS: December 8, 1993, Pantaleon, President

and Chairman of the Board of PRISMA, obtained a P1M loan from the respondent, with monthly interest of P40,000.00 payable for 6 months, or a total obligation of P1,240,000.00 payable within 6 months. To secure the payment of the loan, Pantaleon issued a promissory. Pantaleon signed the promissory note in his personal capacity and as duly authorized by the Board of Directors of PRISMA. The petitioners failed to completely pay the loan within the 6-month period. As of January 4, 1997, respondent found that the petitioners still had an outstanding balance of



P1,364,151.00, to which respondent applied a 4% monthly interest. On August 28, 1997, respondent filed a complaint for sum of money to enforce the unpaid balance, plus 4% monthly interest. The petitioners admitted the loan of P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he made himself personally liable and that he made representations that the loan would be repaid within six (6) months. RTC found that the respondent issued a check for P1M in favor of the petitioners for a loan that would earn an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month period. RTC ordered the petitioners to jointly and severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid. Petitioners appealed to CA insisting that there was no express stipulation on the 4% monthly interest. CA favored respondent but noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per annum. MR denied hence this petition. ISSUE: Whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest apply to the 6-month payment period only or until full payment of the loan? RULING: Interest due should be stipulated in

writing; otherwise, 12% per annum APPLIES. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs. Courts have no authority to alter the contract by construction or to make a new contract for the parties; a court’s duty is confined to the interpretation of the contract the parties made for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the contract words the contract does not contain. It is only when the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the parties’ intent. In the present case, the respondent issued a check for P1M. In turn, Pantaleon, in his personal capacity and as authorized by the Board, executed the promissory note. Thus, the P1M loan shall be payable within 6 months. The loan shall earn an interest of P40,000.00 per month, for a total obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month, but no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon. Article 1956 of the Civil Code specifically mandates that “no interest shall be due unless it has been expressly stipulated in writing.” The payment of interest in loans or forbearance of money is allowed only if: (1) there was an express stipulation for the

payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of interest at a stipulated rate. The collection of interest without any stipulation in writing is prohibited by law. The interest of P40,000.00 per month corresponds only to the six-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan should be at the legal interest rate of 12% per annum. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. The facts show that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a 6-month period. No issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners; they only assailed the application of a 4% interest rate, since it was not agreed upon. It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy. The payment of the specific sum of money of P40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation showing that petitioners were victims of fraud when they entered into the agreement with the respondent. Therefore, as agreed by the parties, the loan of P1M shall earn P40,000.00 per month for a period of 6 months, for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The amounts already paid by the petitioners during the pendency of the suit, amounting toP1,228,772.00 as of February 12, 1999, should be deducted from the total amount due, computed as indicated above. We remand the case to the trial court for the actual computation of the total amount due.

Did it comply with article 1956? Yes So what is the issue here? Application of 4% Why did the SC apply 12% The 4% to be applied to the 6-month period, can we say that it is excessive? Here, while there was a stipulated interest at 40 thousand per month for a 6-month period, the Supreme Court ruled that no such rate of interest



was stipulated in the promissory note. Rather, it was a fixed sum equivalent to the rate that was agreed upon, again only for that 6-month period. So with that stipulation, there is compliance of the requirement under 1956. However, as to the interest to be imposed beyond the 6-month period, the Supreme Court held that it was an interest of loan, the legal interest should be 12% per annum. As to whether the 4% per month is excessive, the Supreme Court held that this was not held that no issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners they only assailed the application of a 4% interest rate, since it was not agreed upon. What is the effect if deemed to excessive? Reduce to what extent?

CHUA vs. TIMAN FACTS:In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia Timan the following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000; e) P200,000; and f) P107,000. These loans were evidenced by promissory notes with interest of 7% per month, which was later reduced to 5% per month. Respondents paid the loans initially at 7% interest rate per month until September 1999 and then at 5% interest rate per month from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the loans through a Philippine National Bank manager’s check worth P764,000, but petitioners refused to accept the same insisting that the principal amount of the loans totalled P864,000. On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon City. Later, they filed a case for consignation and damages which was released to the petitioners. The RTC rendered a decision in favor of respondents which was affirmed by the CA. It ruled that the original stipulated interest rates of 7% and 5% per month were excessive. It further ordered petitioners to refund to respondents all interest payments in excess of the legal rate of 1% per month or 12% per annum. The Court of Appeals declared illegal the stipulated interest rates of 7% and 5% per month for being excessive, iniquitous, unconscionable and exorbitant. Accordingly, the Court of Appeals reduced the stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) to a fair and reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered petitioners to refund to respondents all interest payments in excess of 12% per annum. Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because these rates are not usurious by virtue of Central Bank (C.B.) Circular No. 905-82 which had expressly removed the

interest ceilings prescribed by the Usury Law. Petitioners add that respondents were in pari delicto since they agreed on the stipulated interest rates of 7% and 5% per month. They further aver they honestly believed that the interest rates they imposed on respondents’ loans were not usurious. ISSUE:Whether or not the original stipulated

interest rates of 7% and 5%, equivalent to 84% and 60% per annum, are unconscionable RULING: Yes. The stipulated interest rates of 7%

and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity,nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets. Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari delicto was not raised in the RTC, hence, such an issue cannot be raised for the first time on appeal. The defense of good faith must also fail because such an issue is a question of factwhich may not be properly raised in a petition for review under Rule 45 of the Rules of Civil Procedure which allows only questions of law. As well set forth in Medel:

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

In Security Bank and Trust Company vs. Regional Trial Court of Makati, it was held that CB Circular No. 905 "did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity." "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The stipulation is void.

What was the status of the rate that was agreed upon? The stipulation is void. What was the interest imposed by the SC? Why 12%?



What is the effect if the interest rate imposed by the creditor or agreed by the parties is iniquitous, unconscionable, excessive and exorbitant? As in this case the Supreme Court held that such stipulation being contrary to morals, if not against the law, is considered void. However, this does not mean that the debtor shall not be liable for any interest at all. In this case, the interest was equitably reduced to 1% per month or 12% per annum. Notice in this case that the Supreme Court held that there is no need to unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. However, there is no definite figure of interest rate which we can say is an excessive or iniquitous. In fact in the case we discussed, the parties agreed to the 4% interest per month. Nevertheless, the Supreme Court held that it was not placed as an issue and upheld the imposition of interest. So aside from the cases ruled by the Supreme Court, it is not an absolute rule that the 3% per month and above interest rate would automatically be unconscionable. We still have to know other circumstances in the case. Also it was held by the Supreme Court that even with the 5.5% per month, again it was not considered as usurious because the usury law has already been suspended. Kinds of interest, we have there, one classification, monetary and compensatory interest. Then you also have the kinds of interest classified as follows:

(1) Simple interest. — that which is paid for the principal at acertain rate fixed or stipulated by the parties

(2) Compound interest. — that which is imposed upon interest due and unpaid. The accrued interest is added to the principal sum and the whole (principal and accrued interest) is treated as a new principal upon which the interest for the next period is calculated. This is an interest already earned but not yet received on the part of the creditor.

(3) Legal interest. — that which the law directs to be charged in the absence of any agreement as to the rate between the parties.

If you look at the provisions of the new civil code which was enacted in 1950, you have therein the legal interest rate at 6%, but it was on 1974, with the resolution of the monetary board wherein the legal interest rate was 12%. Then, as we have mentioned before, that in january 1 (?), 2013, the legal interest rate is now 6%. Do not confuse the term legal interest from lawful interest. When we talk about lawful or unlawful interest it touches upon the interest rate being usurious or not. So when we say lawful it means it does not exceed the maximum prescribed by law. Again, there is no lawful or unlawful because there is no usury law which fixes the maximum interest rate.

PILIPINAS BANK vs. COURT OF APPEALS FACTS:Private respondent Lilia Echaus filed a complaint against petitioner and its president, Constantino Bautista, for collection of a sum of money. The complaint alleged: (1) that petitioner and Greatland Realty Corporation executed a "Dacion en Pago," wherein Greatland conveyed to petitioner several parcels of land in consideration of the sum of P7,776,335.69; (2) that Greatland assigned P2,300,000.00 out of the total consideration of the Dacion en Pago, in favor of private respondent; and (3) that notwithstanding her demand for payment, petitioner in bad faith, refused and failed to pay the said amount assigned to her. The trial court ordered petitioner and its co-defendant, jointly and severally, to pay private respondent P2,300,000.00 the total amount assigned by Greatland in her favor out of the P2,300,000.00 liability of defendant Pilipinas to Greatland plus legal interest from the dates of assignments until fully paid. On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals. On the same day, private respondent filed a motion for Immediate Execution Pending Appeal which the trial court granted. Petitioner complied with the writ of execution pending appeal by issuing two manager's checks in the total amount of P5,517,707.00 and which was encashed by the private respondent. On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017, which modified the judgment and ordered Pilipinas Bank to pay 2,300,000,00 Pesos, representing the total amount assigned by Greatland to her, with interest at the legal rate starting July 24, 1981, date when demand was first made. On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent to refund to her the excess payment of P1,898,623.67 with interests at 6%. Private respondent opposed the motion of petitioner with respect to the rate of interest to be charged on the amount of P2,300,000.00. According to private respondent, the legal interest on the principal amount of P2,300,000.00 due her should be 12% per annum pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner. On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest rate due on the amount of P2,300.000.00 at 12% per annum as proposed by private respondent, instead of 6% per annum as proposed by petitioner. The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against petitioner "involves forbearance of money, as the principal award to plaintiff-appellee (private respondent) in the amount of P2,300.000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the



defendant bank, the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the applicable rate of interest is 12% per annum. Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416. Said Article 2209 provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

ISSUE: Whether or not the legal rate of interest on the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent is 12% per annum. RULING:Presidential Decree No. 116 authorized

the Monetary Board 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 amended the Usury Law (Act No. 2655) for that purpose. As amended, the Usury Law now provides:

Sec. 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 six per centum per annum 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. 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 charge such rate or rates whenever warranted by prevailing economic and social conditions:Provided, That such changes shall not be made oftener that once every twelve months. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for 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.

Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central Bank issued Central Bank Circular No. 416, which provides:

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) per cent per annum. This Circular shall take effect

immediately.

Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1) loans; (2) forbearance of any money, goods or credit; and (3) judgments. What then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00? The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil Code of the Philippines and not the rate of 12% per annum as provided in Circular No. 416. Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to judgments involving the payment of loans or forbearance of money, goods and credit, the Court of Appeals should have ordered private respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance execution of the judgment. We sustain petitioner's contention as correct.Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the order for the execution pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an execution pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation of the latter to repay former, in case the appellate court cancels or reduces the monetary award. In the case before us, the excess amount ordered to refunded by private respondent falls within the ruling in Viloria and Buiser that Circular No. 416 applies to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is subsequently adjudged.

When we say 6% or 12%, when will it start to run? When do we begin to demand the interest rate?

EASTERN SHIPPING LINES, INC. vs.HON. COURT OF APPEALS

FACTS:This is an action against defendants

shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages. On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines. The shipment was insured under plaintiff's Marine Insurance



Policy No. 81/01177 for P36,382,466.38. Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff. On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal. On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake. Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same. As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants The Court, among others, ordered defendants to pay plaintiff, jointly and severally The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract) ISSUE:

1. Whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker. YES

2. Whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered. 3. Whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%). 6% HELD: 1. Solidary. Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee. The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or

unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable. 2. 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.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing.

Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.

In

the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169

of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court

at the rate of 6% per

annum. No interest, however, shall be adjudged on

unliquidated claims or damages except when or until the demand can be established with reasonable certainty.

Accordingly, where the

demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 3. The legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the



payment thereof. NOTE:The Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

*Focus on guidelines laid down in the case Here the cause of action was for damages (?) and the parties referred to different cases by the Supreme Court. The Supreme Court herein had groups of cases. With regard to the imposition of 6% or 12%, there was no issue. In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum from the time the complaint is filed until the adjudged amount is fully paid. The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum,

depending on whether or not the amount

involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest. That is why the Supreme Court, by way of clarification and reconciliation, to suggest the following rules 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.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in

writing. Furthermore, the interest due shall itself

earn legal interest from the time it is judicially demanded (from the time this is filed in court).

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. 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.

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. The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction… Which in this case was applied by the Supreme Court – the legal interest to be paid is 6% of the amount due and 12 % of the amount upon finality until payment. So that was the guideline that was used by the Supreme Court. Notice that in Pilipinas Bank did not refer to Eastern Shipping ruling, unlike the previous cases we discussed last time. Why? Because na una itong pilipinas bank. Subsequent cases dealing with issues on interest, Eastern shipping was the case referred to and guideline provided therein. With the amendment of the legal interest rate, actually it is still the same, kaya lang lahat 6%. Also take note that this guideline in Eastern Shipping, we could also take into consideration, articles 2209 – 2213 of the civil code. This article is about torts, but still in relation to interest.

Article 2209. If the obligation consists in the

payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. (1108) Article 2210. Interest may, in the discretion of the

court, be allowed upon damages awarded for breach of contract. Article 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in the discretion of the court. Article 2212. Interest due shall earn legal interest

from the time it is judicially demanded, although the obligation may be silent upon this point. (1109a) Article 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty.



November 24, 2015 (Romero) Given for example, the parties voluntarily agree as to interest rates (let us say 5%/month), can we not say that the debtor is already estopped from raising the defense that the interest rate is excessive? Can you apply the principle of estoppel even if the rates can be deemed as excessive? A: The interest rate agreed upon may be valid during the period stipulated upon by the parties.

DIO vs. SPOUSES JAPOR

FACTS: Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5 square-meter residential lot including its improvements. Adjacent to the Japor’s lot is another lot owned by respondent Marta Japor. On August 23, 1982, the respondents obtained a loan of P90,000 from the Quezon Development Bank (QDB), and as security therefor, they mortgaged the two lots as evidenced by a Deed of Real Estate Mortgage duly executed by and between the respondents and QDB. On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage increasing respondents’ loan to P128,000. The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the mortgage, respondents, thru their broker, one Lucia G. Orian, offered to mortgage their properties to petitioner Teresita Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby respondents mortgaged anew the two properties already mortgaged with QDB to secure the timely payment of a P350,000 loan that respondents had from petitioner Dio. Under the terms of the deed, respondents agreed to pay the petitioner interest at the rate of five percent (5%) a month, within a period of two months or until April 14, 1989. In the event of default, an additional interest equivalent to five percent (5%) of the amount then due, for every month of delay, would be charged on them. The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed deadline for settlement. On August 27, 1991, petitioner made written demands upon the respondents to pay their debt. Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial foreclosure of the mortgage. Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual Obligation with Prayer for Preliminary Mandatory Injunction/ Restraining Order, praying

that the Deed of Real Estate Mortgage dated February 13, 1989 be declared null and void, and the plea that the trial court fix the contractual obligations of the Japors with Dio.

On May 8, 1996, the bidding invoving the properties was conducted, with petitioner Dio as the sole bidder, purchased the properties for P3,500,000. The appellate court affirmed the decision of the trial court with respect to the validity of the Deed of Real Estate Mortgage, but modified the interest and penalty rates for being unconscionable and exorbitant. ISSUE: Whether or not the stipulations on interest

and penalty in the Deed of Real Estate Mortgage is contrary to morals, if not illegal and were respondents entitled to any "surplus" on the auction sale price RULING: On the main issue, petitioner contends

that The Usury Law1 has been rendered ineffective

by Central Bank Circular No. 905, series of 1982 and accordingly, usury has become legally non-existent in this jurisdiction, thus, interest rates may accordingly be pegged at such levels or rates as the lender and the borrower may agree upon. Respondents admit they owe petitioner P350,000 and do not question any lawful interest on their loan but they maintain that the Deed of Real Estate Mortgage is null and void since it did not state the true intent of the parties, which limited the 5% interest rate to only two (2) months from the date of the loan and which did not provide for penalties and other charges in the event of default or delay. Respondents vehemently contend that they never consented to the said stipulations and hence, should not be bound by them. On the first issue, we are constrained to rule against the petitioner’s contentions.

Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants lenders carte blanche authority to impose interest rates, which would result in the enslavement of their borrowers or to the hemorrhaging of their assets. While a stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury now being legally non-existent in our jurisdiction, nonetheless, said rate may be equitably reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law. What is iniquitous, unconscionable, and exorbitant shall depend upon the factual circumstances of each case. In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable. We have likewise

ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate. Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage



in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract. What then should the interest and penalty rates be? The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per annumand the penalty rate to 1% per month, in accordance with Article 2227 of the Civil Code. But were respondents entitled to the "surplus" of P2,247,326

as a result of the "overpricing" in the

auction? We note that the "surplus" was the result of the computation by the Court of Appeals of respondents’ outstanding liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month. In the instant case, however, there is no "surplus" to speak of. In adjusting the interest and penalty rates to equitable and conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale. The amount of the petitioner’s bid merely represented the true amount of the mortgage debt. No surplus in the purchase price was thus created to which the respondents as the mortgagors have a vested right. ** The interest rate for the subject loan owing to

QDB is hereby fixed at five percent (5%) for the first two (2) months following the date of execution of the Deed of Real Estate Mortgage, and twelve percent (12%) for the succeeding period. The penalty rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita Dio is declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after the court below had applied our ruling in Sulit, respondents could not legally claim any overprice from the petitioner, much less the amount of P2,247,326.00.

Q: So in this case, it was 2 months, and in the case of Prisma it was 6 months, now what if the parties stipulated for 5% interest per month until fully paid? What will be taken into consideration by the court? Do you think the court will deem such interest rate as unconscionable? A: The court said that what is iniquitous and unconscionable would depend on the facts of the case, and in this case the 2 month period is where the 5% interest will apply. Q: But what if the parties voluntarily agreed that there will be a 5% interest until fully paid? Could the interest be deemed as excessive? A: It is excessive. Q: What is the effect if it is found to be excessive? A: The court will reduce the interest rate to 12% per annum. Take note, with regard to whether is deemed excessive or unconscionable, always take into

consideration the factual circumstances of the case. Take note, even if, for example in the case of Prisma and even in this case (wherein the SC said that the parties are now estopped from claiming that the 5% for 2 months is excessive), you cannot apply it in every scenario or case. Even if the parties stipulated for a 5% interest per month, again you cannot say that it is valid because in this case, such ruling that the parties are now estopped from claiming otherwise. We have discussed interest in obligations and contracts. If you recall your cases in obligations and contracts, again there is no exact rule as to what specific rate is considered is unconscionable or iniquitous. And in fact, you cannot always choose the defense or allegation, such as in this case of Dio, that the debtor could be held in estoppel because they already agreed to that 5% per month. I think what was also taken into consideration here is because of the 2 month period. If you compare it to the case of Prisma, it is also a 6 month period. But again, looking at the factual circumstances of the case, the interest for these 2 cases were not deemed iniquitous for that short period of time. So that is one factual circumstance to consider. Factual circumstances to consider:

Period of time

Interest rate

Purpose Again, there is no definite rate and you cannot always use estoppel, otherwise what will be the effect? The SC will now be bound to the stipulations they voluntarily agreed upon, and the SC will impose the interest agreed upon. Again, if we use the same premise, remember that the SC, in the same stipulation by the parties in the case of Dio vs Japor, as to the additional interest of 5% of month. In fact that was also voluntarily agreed upon by the parties, but the SC held that this time, this part of the interest should be reduced to 12% per annum. Plus the penalty rate of 1% per month for the succeeding period after 2 months. Again take note, there is no exact rule as to what specific rate should be considered as unconscionable or excessive. In the case of Medel vs CA (GR 131622 Nov 27, 1998), the stipulated rate of 5.5% is considered excessive but not usurious (since we all know that the Usury Law has already been suspended), so it was reduced to 12% per annum plus 1% per month as penalty charge as liquidated damages. Also take note there was a surplus as the result of the computation of the outstanding liability, so the SC held that in this case, there is no surplus to speak of in adjusting the interest and penalty rates to equitable levels, what the court did was merely to reflect true price of the land in the foreclosure sale. Last night we also discussed the case of Eastern Shipping, which laid down the guidelines for the imposition of interest, like when to apply 6% or when to 12%, as well as the guideline as to when will interest begin to run. Now after the Central Bank issued Circular 799, the new legal interest is now effective July 1, 2013 and one of the earlier cases applied to this circular is the case of NACAR vs GALLERY FRAMES.



DARIO NACAR vs GALLERY FRAMES AND/OR FELIPE BORDEY, JR.

FACTS: Petitioner Dario Nacar filed a complaint for constructive dismissal before the National Labor Relations Commission (NLRC) against Gallery Frames (GF) and/or Felipe Bordey, Jr. On October 15, 1998, the Labor Arbiter rendered a Decision in favor of petitioner and found that he was dismissed from employment without a valid or just cause and was never afforded due process. Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement, in the amount of P158,919.92, computed only up to promulgation of this decision. Length of service was 8 yrs and 1 day.

On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27, 2002. Upon recomputation, NLRC arrived at an updated amount

in the sum of P471,320.31.w

Respondents filed a Motion to Quash Writ of Execution, arguing that no more recomputation is required after the decision becomes final and executory, the same cannot be altered or amended anymore. Denied. Reappealed and a recomputation was granted but only in the amount of P147,560.19.

Nacar then filed a Motion praying for the recomputation of the monetary award to include the appropriate interests.

The Labor Arbiter granted the motion, but reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since petitioner already received P147,560.19, he is only entitled to the balance of P11,459.73.

Nacar appealed to the CA. Denied. It opined that since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce the said judgment.

ISSUE: WON a re-computation in the course of execution of the labor arbiter's original computation of the awards made is legally proper. YES

HELD: Computation should start from the time

Nacar was illegally dismissed until judgment has become final and executory on May 27, 2013. Moreover, a recomputation is necessary and is not a violation of the principle of immutability of final judgments. The recomputation of the consequences of illegal dismissal upon execution of the decision does not constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands; only the computation of

monetary consequences of the dismissal is affected.

As to the payment of legal interest, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or

forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

The Decision of the CA is reversed and set aside. The case is remanded back to the LA for the proper recomputation.

* The rate of interest starting July 1, 2013 is 6% per annum (since the original case was decided in 2002, 12% int was still applied) and applies prospectively. Computation of backwages and separation pay should start from the time an employee is illegally dismissed to the time judgment



has become final and executory. Interest of such amount acrrues until full payment is made.

Q: What were the interest rates applied in the decision of the SC? When did it begin and when did it end? A: 12% was applied from the date of the finality of judgment up to July 1, 2013 (this is with regard to the monetary award). Q: How about when you take into consideration the time when he was dismissed?(because we are talking about backwages) So when will the 12% interest begin to run? A: From May 27, 2002. It was when the judgment became final. Q: Until when? Just take note first that this is a labor case and this was an illegal dismissal case. So there was need for backwages and separation pay. The SC took into consideration Circular 799 stating the legal interest rate at 6% per annum effective July 1, 2013. The SC emphasized that the new rate will only be applied prospectively and not retroactively, and that is why we still discuss the cases as to the imposition and the guidelines mentioned in Eastern Shipping. In fact, in this case, this is an August 2013 case, the SC held that the (???) for backwages, for illegal dismissal, until finality, separation pay from August 1990 until May 27, 2002 (from the time he started employment in 1990). And interest, 12% per annum May 27, 2002, that is the time when the resolution of the board became final and executory to June 30, 2013, and another 6% from July 1, 2013 until their full satisfaction. Now consolidating what we have discussed, we all know that we take into consideration factual circumstances to determine whether the interest is usurious, excessive, or exorbitant. Generally, 3% and above is deemed excessive, but again that is not sufficient. You take into consideration factual circumstances, like what happened in the case of Dio and Prisma. Now what is the effect of this BSP Circular (6% legal interest rate). Because in the cases we have discussed where the interest rate is deemed excessive, it reduced the interest rate at 12% per month, and if there was a stipulation for penalties, just an additional 1% per month as a penalty. Now 12%, that was deemed applied most probably because that was the legal interest at the time that the SC promulgated the said decision. But with this BSP Circular, lowering the legal interest at 6%, does it mean that for cases deemed excessive and exorbitant, the SC will now reduce it to 6% or just 12%? Now in the recent 2014 cases, the SC still applied 12% interest rate. Take note of these cases:

ALBOS vs SPOUSES EMBISAN (GR 210831 Nov 26, 2014): 5% per month was

deemed as unconscionable and the SC imposed and called it a simple interest of 12% per annum. Kasi if you compare it to older cases that state: “reduce it to the legal interest of 12%”, in this case, it is still 12%

but it referred to simple interest of 12% per annum.

MCMP vs MONARK EQUIPMENT (GR 201001 Nov. 10, 2014): Again the SC reduced the interest to 12% and its guide was prevailing jurisprudence.

So these are all 2014 cases. Why did I mention these? Because it means that by reducing it to a reasonable rate, 12% is still deemed proper. In these cases, it is not necessary na 6% na ung interest rate, magbaba na rin dapat. When I discussed 2 years ago, when this BSP Circular took effect, we had no idea at that time as to whether reduction of interest would be 6% or if it will stay at 12%. So apparently the SC, despite the legal interest of 6%, the SC still applied the prevailing jurisprudence of reducing it to 12% per annum.

ART 1957 Contracts and stipulations, under any

cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury.

So usury refers to prohibitive interest. But again it was suspended as interest rates are no longer subject to a ceiling, the rate will depend on the agreement of the parties provided that it is not excessive or unconscionable. Take note that when we talk about usurious interest, it is with reference to a contract of loan or forbearance of money, goods, or credits. In other words, if there is no loan or forbearance, there could be no usury to speak of. With regard to usurious interest, the agreement as to the usurious interest will be considered void, but not the principal obligation. Why do I still include in your outline the Usury Law? Because it is just suspended. When you mean suspended, it can used again although I doubt that. So just take not of that.

ART 1958 In the determination of the interest, if it is

payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment.

I’d like you to differentiate that from Art 1955. Kasi sa Art 1955, borrows money Art 1249 and 1250. Basis: currency at the time the obligation was created. In Art 1955, wherein the subject matter is money or a fungible thing, remember the value thereof in case of extraordinary deflation or inflation. This is the payment for the value of money, its currency at the time of the creation of the obligation. If the subject of the loan is a fungible thing, same kind and quality, and if it is impossible, value thereof at the time of the perfection of the loan. But if we’re talking about interest, it is appraised at the time and place of payment. Q: What do you mean by compound interest? How is it different from a simple interest?

ANTONIO TAN v. COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES

FACTS: On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of (P2,000,000.00), or in the total principal amount of Four Million Pesos



(P4,000,000.00) from respondent Cultural Center of the Philippines (CCP) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note on August 31, 1979 in the amount of (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any installment on the said restructured loan of (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the petitioner’s restructured loan which as of April 30, 1984 amounted to (P6,088,735.03). On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen.

While the case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

TC: Ruled in favor of CCP. CA: Affirmed trial court’s decision.

ISSUE (1): Whether there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees. YES

HELD 1: The petitioner imputes error on the part of

the appellate court in not totally eliminating the award of attorney’s fees and in not reducing the penalties considering that the petitioner, contrary to the appellate court’s findings, has allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non- imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not

provided in the promissory note marked Exhibit “A”. The petitioner takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.

We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

In the case at bar, the promissory note (Exhibit “A”) expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent

portion of the

promissory note (Exhibit “A”) imposing interest and penalties provides that:

xxx xxx xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.

In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until paid, payable and computed monthly. Default of payment of this note or any portion thereof when due shall render all other installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable.

xxx xxx xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code. On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals, this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the



two are different and distinct from each other and may be demanded separately.

The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or compensatory interest.

ISSUE (2): whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code. YES

HELD 2: Art. 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should notearn interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:

First, there is an express stipulation in the promissory note (Exhibit “A”) permitting the compounding of interest. The fifth paragraph of the said promissory note provides that: “Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law.” Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum,

in

the absence of express stipulation on the specific rate of interest, as in the case at bar.

Second, Article 2212 of the New Civil Code provides that “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” In the instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.

In the case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be respected.

The said statement of account also shows that the amounts stated therein are net of the partial payments amounting to a total of (P452,561.43) which were made during the period from May 13, 1983 to September 30, 1983. The petitioner now seeks the reduction of the penalty due to the said partial payments. The principal amount of the promissory note (Exhibit “A”) was (P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced to (P2,838,454.68). Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: “The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.” Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.

There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code.

In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account.

Q: Was there a stipulation as to the term of interest? A: Yes. It is provided in the promissory note that the interest rate is 14% per annum, plus 3% for service charge. There is also stipulation that in case of default, there is an additional 2% penalty per month. Q: What kind of interest will a penalty clause be? A: The penalty clause is deemed to constitute a compensatory interest. Q: How about the 14% interest, what kind of interest is that? A: As provided by the PN, the 14% is with respect to the principal amount and it is a simple interest. Q: Did the SC upheld the imposition of the 14% interest and the 2% per month penalty? Was it deemed excessive?



A: Yes, but the SC reduced it because there was already partial payment that was made. Q: Compounding of the penalty interest, was it also upheld by the SC? Here, the PN expressly provides for the imposition for both interest and penalties. The stipulated 14% interest per annum charged until full payment constitutes as the monetary interest. In other words, they applied Art 1956, it is expressly stipulated in writing, so the SC upheld that. As to the stipulated 2% per month penalty, it is form of a penalty charge, separate and distinct from the monetary interest. The new Civil Code permits an agreement upon the penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest and as such they are different and distinct from each other and may be demanded separately. Now the penalty charge of 2% per month that begins at the time of default, there is no doubt that petitioner is liable for the stipulated monetary interest of 14% per annum and the stipulated penalty charge of 2% per month, which is considered as the compensatory interest. Penalty clauses can be in the form of penalty or compensatory interest. Compounding of the penalty or compensatory interest is sanctioned by the provisions of the CC. We have Art 1959

ART 1959 Without prejudice to the provisions of Art

2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

Here the PN provides that any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law. Therefore there is a stipulation for the compounding of interest rate. Any penalty interest not paid when due shall earn the legal interest of 12% per annum in the absence of an express stipulation on the specific rate of interest. Now Art 2212 also provides that…

ART 2212 Interest due shall earn legal interest from

the time it is judicially demanded, although the obligation may be silent upon this point.

So in this case, interest began to run on the penalty interest upon the filing of the complaint in court by respondent CCP. So the SC affirmed the findings of the CA, however it reduced the penalty charge to 12% per annum starting Aug 28, 1996 because of the good faith on the part of the debtor. November 27, 2015 (Gementiza)

ECE REALTY AND DEVELOPMENT, INC., VS. HAYDYN HERNANDEZ

FACTS: Haydn filed a complaint for specific

performance with damages against EMIR and ECE Realty due to the failure of the respondents to deliver a condominium unit which he purchased from them. The respondents allegedly promised to turn over to him the unit by December 31, 1999, but

failed to do so. Worse, he learned that the actual area was only 26 square meters, not 30 square meters as indicated in their contract to sell, and the company refused to grant his corresponding reduction in the purchase price; instead the companies told him to settle his arrears in amortizations. He learned later that that company sold Unit 808 to a third party. In their defense, the respondent faulted complainant for unjustifiably refusing to accept delivery of the condominium unit; that they were forced to cancel the contract to sell because of the refusal of the complainant to settle his past arrears. The HLURB ruled in favor of the complainant and ordered the company to reimburse the respondent the amount of P452,551.65, plus legal interest, from the filing of the complaint, and to pay the respondent P50,000.00 as moral damages, P50,000.00 as attorney’s fees, and P50,000.00 as exemplary damages.[11] The company appealed the case all the way to the CA and eventually to the Supreme Court. ISSUE: W/N ECE should be liable to reimburse Hernandez RULING: YES. The Supreme Court affirmed the

ruling of the lower four and tribunals, with a slight modification of the legal interest imposable: “Article 2209 of the New Civil Code provides that “If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.” There is no doubt that ECE incurred in delay in delivering the subject condominium unit, for which reason the trial court was justified in awarding interest to the respondent from the filing of his complaint. There being no stipulation as to interest, under Article 2209 the imposable rate is six percent (6%) by way of damages, following the guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals: II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so



reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.” “The term “forbearance,” within the context of usury law, has been described as a contractual obligation of a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due and payable. Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies “when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general,” with the application of both rates reckoned “from the time the complaint was filed until the [adjudged] amount is fully paid.” In either instance, the reckoning period for the commencement of the running of the legal interest shall be subject to the condition “that the courts are vested with discretion, depending on the equities of each case, on the award of interest.” (Emphasis ours) Thus, from the finality of the judgment awarding a sum of money until it is satisfied, the award shall be considered a forbearance of credit, regardless of whether the award in fact pertained to one. Pursuant to Central Bank Circular No. 416 issued on July 29, 1974, in the absence of written stipulation the interest rate to be imposed in judgments involving a forbearance of credit was twelve percent (12%) per annum, up from six percent (6%) under Article 2209 of the Civil Code. This was reiterated in Central Bank Circular No. 905, which suspended the effectivity of the Usury Law beginning on January 1, 1983. But since July 1, 2013, the rate of twelve percent (12%) per annum from finality of the judgment until satisfaction has been brought back to six percent (6%). Section 1 of Resolution No. 796 of the Monetary Board of the Bangko Sentral ng Pilipinas dated May 16, 2013 provides: “The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.” Thus, the rate of interest to be imposed from finality of judgments is now back at six percent (6%), the rate provided in Article 2209 of the Civil Code.”

Why 6%? Why did the SC ruled that six percent (6%) interest per annum from September 7, 2006 until finality hereof by way of actual and compensatory damages, and not 12%?

12% rate applies only to Forbearance of money. This Governed by guideline in ruling in Eastern Shipping because it is not a forbearance of money If interest is unconscionable, stipulation is void but the courts will reduce the interest rate (In cases 12%PA). in determining whether interest is unconscionable, we said that the factor to be considered is FACTUAL CIRCUMSTANCES OF THE CASE. As in the case of Prisma, the SC said that 3% or more PM is deemed unconscionable. That by itself does not mean that all obligations with 3% per month interest is already unconscionable. Because in cases of Prisma and Chua, the rates are higher than 3%, but nevertheless they are valid. In Prisma, the rate is valid because the parties did not raise it as an issue; and the other, 2 month period and interest rate were valid because it was the debtor who voluntarily offered the interest rate. But again do not say that by virtue of estoppel, a Dr cannot later say that it is unconscionable because again the principle of estoppel can not be predicated on an illegal contract, validity cannot be given to it if it is prohibited by law or is against public policy. Unconscionable interest rate is against Public Policy, even if it is not against the law(Usury law is suspended)

What is a compound interest under Art. 1959?

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

General Rule: Accrued interest (interest already due but unpaid) shall not earn interest except in two (2) instances:

1. As provided in Article 2212 wherein it states that, ―Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. 2. The second exception is by express stipulation made by the parties in which they can apply compounding interest. (TAN vs CA)

Article 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)

What is the effect if there is a contract of loan but the requirements under 1956 are not present?

SEBASTIAN SIGA-AN vs ALICIA VILLANUEVA

FACTS: Respondent Alicia Villanueva filed a

complaint for sum of money against petitioner Sebastian Siga-an alleging that she was a businesswoman engaged in supplying office materials and equipment to the Philippine Navy Office (PNO) while petitioner was a military officer and comptroller of the PNO. Respondent claimed that petitioner approached her inside the PNO and offered to loan her the amount of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioner’s proposal. The loan agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan.



Respondent issued a check worth P500,000.00 as partial payment of the loan, another check of P200,000.00 as payment of the remaining balance of the loan. Petitioner told her that since she paid a total amount of P700,000.00 for theP540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay additional interest and threatened to block or disapprove her transactions with the PNO if she would not comply. Thus she paid additional amounts for the loan. The total amount paid to petitioner for the loan and interest accumulated toP1,200,000.00. Respondent consulted a lawyer and her lawyer told her that petitioner could not validly collect interest because there was no agreement between her and petitioner regarding payment of interest thus she made overpayment to petitioner so she sent a demand letter to petitioner asking for the return of the excess amount of P660,000.00. But petitioner ignored her claim for reimbursement. ISSUE: WON respondent is entitled to reimbursement? YES HELD: Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest. The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded. Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. Payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law. Petitioner and respondent did not agree on the payment of interest for the loan. Neither was there convincing proof of written agreement between the two regarding the payment of interest. As to the contention of petitioner that respondent executed a promissory note: the presented promissory note was in her handwriting because Siga-an told her to copy it and she did because she feared the threats of Sigaan to block her deals with the PhilNavy. And as to the alleged admission in the BP 22 cases that they had agreed on the payment of interest at the rate of 7%, respondent merely testified that after paying the total amount of loan, petitioner ordered her to pay interest. Respondent did not categorically declare in the same case that she and respondent made an express stipulation in writing as regards payment of interest at the rate of 7%.

An interest may be imposed even in the absence of express stipulation, verbal or written, regarding payment of interest under Art 2209 of CC that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. It only applies to compensatory interest and not to monetary interest. The case at bar involves petitioner’s claim for monetary interest. Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that respondent defaulted in paying the loan. The principle of solutio indebiti applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. Respondent was under no duty to make such payment because there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to demand it, he has an obligation to return it. POLICY: No interest shall be due unless it has been expressly stipulated in writing.

Is there a contract of loan (Mutuum)? Yes

Is it required that it be reduced in writing? No

In this case was there a document signed by the Dr? No Did it affect the validity of the loan? No Interest, was there an agreement as to its payment? None Liable? Under 1956, she cannot be held liable. What happened to the payment she already made as to the interest? Entitled to reimbursement, basis thereof is solutio indebiti. In the absence of express stipulation in writing, the Dr cannot be held liable for interest. That is, monetary interest. But as to compensatory interest, she can be liable. We all know that solutio indebiti is one of the quasicontracts as provided by the Civil Code. Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest. The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded. It is based on the principle that no shall be unjustly enriched to the expense of the other. It applies in two instances: where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment and (2) the



payment is made through mistake, and not through liberality or some other cause. Respondent was under no duty to make such payment because there was no express stipulation in writing to that effect. In this case, the Court applied the first instance since there is no obligation to pay interest in the absence of stipulation in writing of the payment thereof. The loan is valid even though it is not in writing since it is a contract perfected by delivery and the amount is delivered to respondent. However, with regard to the interest, the respondent borrower would not be liable. Therefore, based on solutio indebiti, she can demand for the payment for the interest she had paid in favor of the creditor. In Article 2212 where the imposition of legal interest is 6%, remember, the Civil Code was enacted in 1950 and it was in 1974 where the legal interest became 12% and now it was changed in 2013. Also, As to the contention that what was paid was a compensatory interest, SC said that such is not chargeable in the instant case because it was not duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written agreement as regards payment of interest. Article 1960 covers not only solutio indebiti but also natural obligations. NATURAL OBLIGATION is not based on the positive law but on equity and natural law. It is the grant on right of action to enforce the performance that after voluntary fulfillment of the obligor they authorized the redemption of what has been delivered or rendered by reason thereof.

PART III: USURY LAW

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

So again Usury Law has already become legally inexistent. Interest depends upon the agreement of the parties but it must not be iniquitous and unconscionable. Usury Law (Act 2655) is just suspended and is not repealed so it can be lifted but for how many years, the suspension was not lifted. The rule with regard to Usury Law, as a brief history, is enacted in 1916 and took effect in May 1, 1916. It is for the protection of borrowers from the imposition of unscrupulous lenders who take undue advantage of the necessities of others. It is undoubtedly against public policy to charge excessive interest for the use of money. The elements of usury consist of the following:

(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; and

(4) The taking or agreeing to take for the use of the loan of something in excess of what is allowed by law.

It was enacted in 1916 and was amended in 1974 wherein it prescribed that the rate of monetary interest for loan or forbearance of money from the resolution of the monetary board, in the absence of express contract shall be 12% per annum. However, in January 1, 1983, the Usury Law has become legally inexistent due to the suspension thereof. Since it is merely suspended, the ceiling of interest rates may be restored by the Monetary Board. If there is no loan or forbearance involved, there is no usury. With that, it is NOT applicable to:

1. Rental in contract of lease; 2. Bona fide sale; 3. Increase in price of thing sold as a result of

a sale on credit; and 4. Bona fide Pacto de Retro sale.

Notice 1916 Usury Law took effect, New Civil Code took effect 1950. That's why meron talagang reference dyan sa Usury law and Usurious interest. It was only in 1974 when the Monetary Board prescribed that the interest for any forbearance of money, goods, or credit, shall be 12%PA. Balik sa Art 2209, anong legal interest nakalagay dyan, 6%. NCC took effect 1950, 6%. In 1974, 12% na. In 1983, the Usury Law was suspended but the legal interest still remained at 12%PA. And now you have Bangko Sentral Circular 799, July 1, 2013 wherein the legal interest is reduced to 6%.

SOLIDBANK vs PERMANENT HOMES FACTS: PERMANENT HOMES is a real estate development company, and to finance its housing project known as the “Buena Vida Townhomes” located within Merville Subdivision, Parañaque City, it applied and was subsequently granted by SOLIDBANK with an “Omnibus Line” credit facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as time loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing market rates, and subject to monthly repricing. The remaining ONE MILLION was available for domestic bills purchase. To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within the Buena Vida project in Parañaque. At the time, however, the instant complaint was filed against SOLIDBANK, a total of 36 townhouse units were mortgaged with said bank. Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered by three (3) promissory notes, which contain the following provisions, thus: “xxx 5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective



from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent. 6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment.” Contrary, however, to the specific provisions as afore- quoted, there was a standing agreement by the parties that any increase or decrease in interest rates shall be subject to the mutual agreement of the parties. For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6 MILLION, from the initial interest rate of14.25% per annum (p.a.), the rate was increased to 30% p.a. on January 16, 1998. For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a. on June 24, 1997 increased 30% p.a.from January 22, 1998 to

February 20, 1998. For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially pegged at 35% p.a., decreased at 29% p.a. for the

month of February. It is Permanent’s stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been informed of. This is contrary to their earlier agreement that any interest rate changes will be subject to mutual agreement of the parties. PERMANENT HOMES further admits that it was not able to protest such arbitrary increases at the time they were imposed by SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it extended to PERMANENT HOMES. Permanent filed a case before the trial court seeking the following: (1) the annulment of the increases in interest rates on the loans it obtained from SOLIDBANK, on the ground that it was violative of the principle of mutuality of agreement of the parties, as enunciated in Article 1409 of the New Civil Code, (2) the fixing of the interest rates at the applicable interest rate, and (3) for the trial court to order SOLIDBANK to make an accounting of the payments it made, so as to determine the amount of refund PERMANENT is entitled to, as well as to order SOLIDBANK to release the remaining available balance of the loan it extended to PERMANENT. In addition, Permanent prays for the payment of compensatory, moral and exemplary damages. SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in view of the pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK was authorized to, upon due notice, periodically adjust the interest rates on PERMANENT HOMES’ loan availments

during the monthly interest repricing dates, depending on the changes in prevailing interest rates in the local and international capital markets. SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the effect that, contrary to PERMANENT HOMES’ assertions that it was not promptly informed of the repriced interest rates, SOLIDBANK’s officers verbally advised PERMANENT HOMES of the repriced rates at the start of the period, and even added that their transaction[s] were based on trust. Aside from these allegations, however, no written memorandum or note was presented by SOLIDBANK to support their assertion that PERMANENT HOMES was timely advised of the repriced interests. The trial court promulgated its Decision in favor of Solidbank. Permanent filed an appeal before the appellate court. The appellate court granted the appeal, and set aside the trial court’s ruling. The appellate court not only recognized the validity of escalation clauses, but also underscored the necessity of a basis for the increase in interest rates and of the principle of mutuality of contracts. ISSUE: WON the increases in the interest rates on Permanent’s loans are void for having been unilaterally imposed without basis. YES.

HELD: The Usury Law had been rendered legally

ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The

lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing. The stipulations, contained in the 3 promissory notes on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases “irrevocably authorize,” “at any time” and “adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent,” emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates. Solidbank’s range of lending rates were consistent with “prevailing rates in the local or international capital markets.” The interest rate repricing happened at the height of the Asian financial crises in late 1997, when banks clamped down on



lendings because of higher credit risks across industries, particularly the real estate industry. The SC also recognize that Solidbank admitted that it did not promptly send Permanent written repriced rates, but rather verbally advised Permanent’s officers over the phone at the start of the period. Solidbank did not present any written memorandum to support its allegation that it promptly advised Permanent of the change in interest rates. Solidbank advised Permanent on the repriced interest rate applicable for the 30-day interest period only after the period had begun. Permanent presented a tabulation which showed that Solidbank either did not send a billing statement, or sent a billing statement 6 to 33 days late. Solidbank’s computation of the interest due from Permanent should be adjusted to take effect only upon Permanent’s receipt of the written notice from Solidbank.

How much is the interest rate? 30%PA.

Can we not say that it is unconscionable? No, considering the factual circumstance of the case. The interest rate repricing happened at the height of the Asian financial crises in late 1997, when banks clamped down on lendings because of higher credit risks across industries, particularly the real estate industry. Permanent is liable for 30% PA only upon Permanent Homes, Incorporated receipt of the written notice from Solidbank Corporation of the adjustment in interest rate. The stipulations on interest rate repricing are valid because:

(1) the parties mutually agreed on said stipulations;

(2) repricing takes effect only upon Solidbank‘s written notice to Permanent Homes of the new interest rate; and,

(3) Permanent Homes has the option to prepay its loan if Permanent Himes and Solidbank do not agree on the new interest rate.

The phrases irrevocably authorize, at any time and adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent, emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void. There was no showing that either Solidbank or Permanent coerced each other to enter into the loan agreements. The terms of the Omnibus Line Agreement and the promissory notes were mutually and freely agreed upon by the parties.

PART IV: DEPOSIT

I. DEPOSIT IN GENERAL & ITS

DIFFERENT KINDS

Article 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (1758a)

Who are the parties to a deposit?

In a contract of deposit, there are two parties here:

(1) the depositor, or the depositante or the giver; and

(2) the depositary, or the depositorio who is the recipient, or the one who receives the subject of the contract of deposit.

It is not required that the depositor be the owner of the thing since a contract of deposit does not involve transfer of ownership. Of course, if the depositary is the owner of the thing, then it cannot be considered as a contract of deposit because you are just giving it back to the owner. In that case, the purpose is no longer for safekeeping as the depositary [who is really the owner] can already abuse, use, and enjoy the fruits thereof. A deposit is perfected by delivery, same with commodatum, it is a real contract. A contract of deposit may be (1) unilateral and gratuitous, or (2) bilateral and subject to compensation. The principal purpose of a contract of deposit is safekeeping. If safekeeping is merely an accessory obligation, then it would not be considered as a contract of deposit. It may be another contract i.e. a contract of lease, commodatum, or a contract of agency. In a contract of deposit, the principal purpose is safekeeping. If safekeeping is only an accessory purpose, then it must be some other contract. Example: Delivery of records of a case to a lawyer you hired to represent you in court. You do not give it to the lawyer for safekeeping. You do not give it to a person for the purpose of safekeeping. Essentially, you have there a contract of agency. Example: When there is a balance as to the commission amount in the possession of the agent. It is a deposit and the agent must return it to the principal. It is a contract of agency, the money is not given for purposes of safekeeping. In fact it is the duty of the agent to return it, if he misappropriates it, he can be held liable for estafa.

BPI vs IAC FACTS: The original parties to the case were Zshornack and Commercial Bank and Trust Company of the Phils (Comtrust). In 1980, BPI absorbed Comtrust through a merger and was substituted as party to the case.

Zshornack and his wife maintained in Comtrust a dollar savings account and a peso current account. On Dec 8, 1975, Zshornack delivered to the bank $3000 for safekeeping. When he requested the return of the money, Comtrust explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso



proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia. Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia. ISSUE: WON the contract between petitioner and respondent bank is a deposit. YES. HELD: The document which embodies the contract

states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later. The above arrangement is that contract defined under Article 1962, New Civil Code, which reads: 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. Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. Under the said circular, safekeeping of the greenbacks without selling them to Central Bank within 1 business day from receipt, is a transaction which is not authorized. As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been

executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law. Therefore, Zshornack cannot recover under this cause of action.

DEPOSIT MUTUUM

Principal Purpose is safekeeping

For consumption

Depositor can demand for the return of the thing

Must wait for the expiration of period granted to the Debtor

Subject matter can be movable or immovable

Money or consumable things

Parties are depositor and depositary

Lender and borrower

December 1, 2015 (Batacan)

II. VOLUNTARY DEPOSIT So we begin tonight with voluntary deposit. As we have mentioned last meeting, there are two types of deposit, judicial and extra-judicial. And under extra-judicial deposit, we have voluntary deposit and involuntary deposit. So Chapter 2 in Deposit deals with voluntary deposit and let’s have Art 1968.

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.

Okay, so voluntary deposit, the term voluntary – the delivery is made by the will of the depositor. He gets to choose who will be the depositary. In a voluntary deposit, ordinarily, there are 2 parties/ 2 persons involved however, as said in 1968, 3 persons may be involved. In such case, the third person assumes the obligation who shall deliver it in a proper case to the one to whom it belongs. When would this happen? Let us say a thing was delivered to a person for the purpose of safekeeping. Or it could be that he has in his possession a thing which is to be delivered to a certain person which he believes has the right. What if yung bigyan nya or yang deliver-an nya or to whom he will deliver the property has already died? And here comes 2 persons who will say, ako ang bigyan mo dahil ako ang asawa, ako ang rightful heir. So both parties are contesting who among them should be entitled to the delivery of the thing. So that is the scenario covered under the second sentence of Art 1968. Wherein in that instance, para hindi maipit yung person who is in possession of the thing, he could file an action for what we call, interpleader. It is a special civil action, so kung sa 3

rd year

subject pa, whereby a person has property in his



possession or an obligation to render, whether fully or partially, without any claim or any right therein or an interest which is not disputed by the claimant comes to court and asks that the persons who considered themselves entitled, to demand compliance of the obligation be required to litigate among themselves, in order to determine who is entitled to the property. Para hindi sya maipit. Mamaya ibigay nya dito, eh wala pala syang right, andun pala sa isa. So he will go to court and file this special civil action of interpleader. So in that instance, the 3

rd person who

is in possession will be considered as a depositary. He can voluntary consider himself a depositary in the meantime that the interpleader case will be heard in court. Now, voluntary and necessary deposit:

Voluntary Necessary

The depositor has complete freedom in choosing the depositary.

No free choice in the deposit, on the part of the depositor

Now, as we have mentioned earlier, in a deposit, whether it is voluntary or not, ownership is not required. Because there is no transfer of ownership upon delivery of the subject matter in a contract of deposit. Now we have the case of Calibo.

CALIBO, JR. VS COURT OF APPEALS

FACTS: In 1985, Mike Abella rented a house owned by Atty. Dionisio Calibo, Jr. Meanwhile, Dr. Pablo Abella, Mike’s father, entrusted to Mike a tractor. Pablo delivered the tractor to Mike in order for the latter to safe-keep the same. In November 1986, Mike defaulted in his rental payments to Calibo. Calibo repeatedly demanded payments but Mike failed to pay. However, Mike assured Calibo that he will soon pay and Mike used his father’s tractor as a security. Hence, Calibo took possession of the tractor. Later, Mike advised Calibo that he can sell the tractor as payment for his debts. Pablo learned of the foregoing and so he contacted Calibo. He offered to pay a portion of Mike’s debt and in return Calibo must return the tractor. Calibo refused and he wanted Pablo to guarantee all of Mike’s debt which Pablo does not want. Eventually, to redeem his tractor, Pablo filed a replevin suit against Calibo, which Pablo won. On appeal, Calibo invoked that the replevin should not have been granted as there was a valid contract of pledge between him and Mike; and that Mike was Pablo’s agent because Pablo was aware of the fact that Mike pledged the tractor to him. In the alternative, Calibo invoked that if there’s no contract of pledge, there is at least a contract of deposit since Mike himself left the tractor with him in the concept of an innkeeper. ISSUE: Whether or not the arguments of Calibo are

valid.

HELD: No. There is no contract of pledge.The

elements of a contract of pledge are as follows: 1. the pledge is constituted to secure the fulfillment

of a principal obligation;2. the pledgor be the

absolute owner of the thing pledged; and 3. the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. In this case, element number 2 is missing. Mike is not the absolute owner of the tractor. There is no contract of agency between Pablo and Mike. It was proven in court that Pablo only left the tractor in his son’s possession only for the purpose of safekeeping. Pablo was not aware that his son pledged it to Calibo and he never authorized his son to do so. There is no contract of deposit between Mike and Calibo. There is no deposit where the principal purpose for receiving the object is not safekeeping. In this case, Calibo himself admitted in court that Mike delivered the tractor to him as security for Mike’s debts. The judgment ordering Calibo to return the tractor to Pablo was affirmed by the Supreme Court.

QUESTIONS:

How about the that Mike’s son acted as agent of Pablo in delivering the tractor to Calibo? - No agency in this case. Requisites not present.

So under the facts of this case, there’s no deposit at all? –yes

So what was the nature of the contract when Pablo delivered the tractor to Mike? – for safekeeping. Deposit. – so while there was a deposit between the father and son, there was no contract of deposit between Mike and Calibo.

DISCUSSION: So here, the reason that Calibo was in possession of the said tractor was that it was a security for an obligation of Mike to him. So that could be , uhmm what he is alleging is that there is a contract of pledge. Delivery of a personal property to secure an obligation however, for a valid pledge to exist, one of the requisites is that the pledger must be the absolute owner of the thing pledge. However in this case, Mike was not the absolute owner thereof, and therefore there could be no valid pledge. In a contract of deposit, we all know that ownership is not required on the part of the depositor. However, Mike, when he delivered the tractor to Calibo, he delivered it not for the purpose of safekeeping but for the purpose of securing his obligation. So considering that the principal purpose of the delivery of the subject matter is not safekeeping, there could be no contract of deposit. There is no deposit where the principal purpose for receiving the object is not safekeeping. Also in this case, there also does not appear to be any agency as Pablo was categorical in stating that the only purpose for his leaving the subject tractor in the care and custody of Mike Abella was for safekeeping. So as between the father and son, there was a deposit but it was not for him to pledge



or alienate the same. If it were true that Mike pledged appellees tractor to appellant, then Mike was acting not only without appellees authority but without the latters knowledge as well. Now article 1969:

Art. 1969. A contract of deposit may be entered into orally or in writing. (n)

However, what is discussed here is with regard to formalities.. – except for the delivery of the thing, there are no formalities required for the existence of the contract. Again recall the general rules sa contracts under art 1356. 1356:

Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)

However, we have already discussed under Art. 1963, that there must be delivery to give rise to a contract of deposit. Article 1970:

Art. 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated, the former shall be subject to all the obligations of a depositary, and may be compelled to return the thing by the guardian, or administrator, of the person who made the deposit, or by the latter himself if he should acquire capacity. (1764)

So this deals with capacity on the part of the depositary. Regardless of the capacity or incapacity of the depositor, the one who delivered the subject matter, that as long as the depositary is capacitated, he will be subject to the obligations of a depositary. As such, if the depositor is incapacitated, the depositary must return the property to the legal representative or to the depositor himself if he should acquire capacity. What is the status of a contract if one of the parties or in this case the depositor is incapacitated? – Voidable. If both parties are incapacitated? – Unenforceable. Now if lets say you have here the depositor who is incapacitated, remember the obligation of the depositary is to return the thing. If ikaw yung depositary, would you return it to the incapacitated depositor? What is the effect if you return the thing to incapacitated depositor? Will your obligation be extinguished? No diba! Remember, for payment or performance, the person who receives such payment or performance must also be capacitated to receive otherwise it will not be considered valid so as to extinguish the obligation. So that is under your oblicon. So that’s the same premise here.

Depositary returns the property to the legal representative or to the depositary when he acquires capacity. Who can demand the return? Again the legal representative or the incapacitated person who has already acquired capacity. Also recall Art. 1397:

Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a)

Under your contracts, if you are the depositary, you cannot refuse to return the thing to the legal representative or to the incapacitated depositor who has acquired his capacity on the ground that the contract is voidable. Why? Coz again recall 1397, persons who are capable, cannot allege the incapacity of the party withholding the contract. Now incapacitated depositary, Art. 1971:

Art. 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. (1765a)

Okay, so an incapacitated depositary does not incur the obligation of a depositary. Section 2 under this chapter. However, liability will arise for the return of the thing deposited which was still in his possession or to pay the depositor the amount by which he may have benefited himself with the thing or its price, subject to the right of any 3

rd person who acquired

the thing in good faith. If you delivered the thing for safekeeping to an incapacitated depositary, you can demand the return of the thing if it is still in his possession. But what if he sold it to a third person? So you have to consider. If he sold it to the 3

rd person, you can

demand for the amount which he may have benefited himself. Remember, amount. Not the value of the thing. If the value of the thing you deposited or delivered to the incapacitated depositary is .. lets say 1k, tapos binenta nya ng 500. Anong ginawa nya sa 500, pinamili nya ng gamot, food. So to that extent he has been benefited, you can demand only up to that 500. But remember he is an incapacitated depositary, what if kinain nya mismo yung 500 bill, or gigisi nya. Di mo man masabi noh na nabusog sya sa 500 na kinain nya. So to that extent, wala, di sya nabenefit so the demand here to pay is with the limitation that the incapacitated depositary has been benfited. What if he has already sold it to a 3

rd person pero

wala pa nagbayad, or to some extent meron pang unpaid price. Here we have to take into consideration whether the 3

rd person who bought

the property from the incapacitated depositary is in bad faith. In other words he has knowledge of the



incapacity of the depositary, or that the thing was delivered to the incapacitated depositary for safekeeping. If the 3

rd person is in bad faith, the depositor may

recover the thing from the said 3rd

person. But if the 3

rd person is in good faith, the depositor’s action is

only against the depositary to compel him to return the price received or the amount by which he may have benefited himself. But you cannot go after the 3

rd person who was in good faith.

Obligations of the depositary, Art. 1972:

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. (1766a)

Okay, this article emphasizes the 2 primary obligations of the depositary.

to safe keep the property and

to return the thing when required The degree of care to be exercised by the depositary? Same diligence as he would exercise over his own properties. Remember we are talking about voluntary deposit here. The depositary enjoys the trust and confidence from the depositor. It involves the depositor’s confidence in the good faith and trustworthiness of the depositary otherwise he would not deliver the thing for safekeeping. The depositary takes into account the diligence which the depositor is accustomed with respect to his own property. Now remember, the depositary here cannot excuse himself from the liability in case of loss by claiming that he has exercised the same amount of care toward the thing deposited as he would toward his own. Like for example, mawala dyud na sa akua kay sa akong things, danghag(?) man ko, so what more sa imuha. If noh, that is not a valid defense because such care is less than that required by the circumstances. So with that, you still apply what we have learned under oblicon, the standard diligence of care under 1163. Diligence of a good father of a family unless different standard of diligence is required law or stipulation. In relation thereto, negligence on the part of the depositary, liability under 1170. The depositary is liable if loss is due to his fault or negligence. And art. 1265, presumption. Loss of the thing while in the possession of the debtor, in this case the depositary, ordinarily raises a presumption of fault on his part. As to whether the deposit is onerous or gratuitous, that is also taken into consideration with regard to liability.

Even if the deposit is gratuitous, due care is still required from the depositary. If it is for compensation, a higher degree of care is required than if it is a gratuitous contract of deposit. Chan vs Maceda..

CHAN VS. MACEDA, JR. FACTS: On July 28, 1976, Bonifacio S. Maceda,

Jr., herein respondent, obtained a P7.3 million loan from the Development Bank of the Philippines for the construction of his New Gran Hotel Project in Tacloban City. Thereafter, on September 29, 1976, respondent entered into a building construction contract with Moreman Builders Co., Inc., (Moreman). They agreed that the construction would be finished not later than December 22, 1977.

Respondent purchased various construction materials and equipment in Manila. Moreman, in turn, deposited them in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit was free of charge. Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated time. Hence, on February 1, 1978, respondent filed with the then Court of First Instance (CFI, now Regional Trial Court), Branch 39, Manila, an action for rescission and damages against Moreman, docketed as Civil Case No. 113498. Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him the construction materials and equipment which Moreman deposited in their warehouse. Petitioners, however, told them that Moreman withdrew those construction materials in 1977. Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160, Pasig City, an action for damages with an application for a writ of preliminary attachment against petitioners,7 docketed as Civil Case No. 53044. ISSUES: 1. Has respondent presented proof that the construction materials and equipment were actually in petitioners' warehouse when he asked that the same be turned over to him? NO 2. If so, does respondent have the right to demand the release of the said materials and equipment or claim for damages? NO HELD: Under Article 1311 of the Civil Code,

contracts are binding upon the parties (and their assigns and heirs) who execute them. When there is no privity of contract, there is likewise no obligation or liability to speak about and thus no cause of action arises. Specifically, in an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance of conditions precedent to the right of action. A depositary is obliged to return the thing to the depositor, or to his heirs or successors, or to the person who may have been designated in the contract. In the present case, the record is bereft of any contract of deposit, oral or written, between petitioners and respondent. If at all, it was only between petitioners and Moreman. And granting



arguendo that there was indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove its existence and that it was executed in his favor. However, respondent miserably failed to do so. The only pieces of evidence respondent presented to prove the contract of deposit were the delivery receipts. Significantly, they are unsigned and not duly received or authenticated by either Moreman, petitioners or respondent or any of their authorized representatives. Hence, those delivery receipts have no probative value at all. While our laws grant a person the remedial right to prosecute or institute a civil action against another for the enforcement or protection of a right, or the prevention or redress of a wrong, every cause of action ex-contractu must be founded upon a contract, oral or written, express or implied. Moreover, respondent also failed to prove that there were construction materials and equipment in petitioners' warehouse at the time he made a demand for their return. Considering that respondent failed to prove (1) the existence of any contract of deposit between him and petitioners, nor between the latter and Moreman in his favor, and (2) that there were construction materials in petitioners' warehouse at the time of respondent's demand to return the same, we hold that petitioners have no corresponding obligation or liability to respondent with respect to those construction materials. Anent the issue of damages, petitioners are still not liable because, as expressly provided for in Article 2199 of the Civil Code, actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the actual amount thereof. It must point out specific facts which could afford a basis for measuring whatever compensatory or actual damages are borne. Considering our findings that there was no contract of deposit between petitioners and respondent or Moreman and that actually there were no more construction materials or equipment in petitioners' warehouse when respondent made a demand for their return, we hold that he has no right whatsoever to claim for damages.

QUESTIONS:

But isn’t it that there are exemptions to the privity of the contracts under the principle of privity of contracts, because the general rule, contracts are binding upon the parties by themselves or their heirs or to their assignees. But under contracts, you already have discussed several exceptions. Can we not apply the exemptions or any of the exemptions in this case? – Yes maam. We can apply the stipulation pour atrui.

What is this stipulation pour atrui? – a stipulation is a contract clearly and deliberately conferring a benefit to a 3

rd person. However for

the said contract to be binding, in this case, Maceda should agree or should have

acknowledged between the contract of deposit that was executed.

First, was there even proof that such favor was granted in favor of Maceda? – No

DISCUSSION: So here the court emphasized the privity of contracts, as emphasized under art. 1311 of the NCC. So there is no privity of contract, where there is likewise no obligation or liability to speak about and thus no cause of action arises. A depositary is obliged to return the thing to the depositor or his heir or successors or to the person who may have been designated in the contract. As in this case, there was no contract of deposit between spouses Chan and Maceda. While it is true that there was a deposit, it was only between spouses Chan and Moreman. And moreover, respondent also failed to prove that there were construction materials and equipment in petitioners warehouse at the time he made a demand for their return. So therefore, no right whatsoever to claim for damages. Also, with regard to the exemptions to the privity of contract, the record bereft of any contract of deposit between petitioners and respondent. And granting that there was indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove its existence and that it was executed in his favor. However, respondent miserably failed to do so. So again,, take note of the nature of a contract of deposit and who are bound by the obligations. So the obligation on the part of spouses Chan to deliver was not as to Maceda because Maceda was not the depositor. So when Moreman demanded for the return of the said thing, or the things that were delivered to spouses Chan, spouses Chan just complied with their primary obligation as depositary. Art. 1973:

Art. 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a third person. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit. The depositary is responsible for the negligence of his employees. (n)

Okay so remember, a voluntary deposit is founded on trust and confidence. So the general rule is that, the depositary is not allowed to deposit the thing to a 3

rd person, exception: if there is an express

stipulation. So who will be liable for the loss in case the thing is deposited to a third person? If the depositary transfers the deposit to a third person without authority, he will be liable, even if there is no negligence on his part or even if there is no negligence on the part of the third person. However, if he is authorized, he can still be held liable for loss if he deposits it with the third person who is MANIFESTLY careless or unfit, even if there is no negligence. As long as there is a loss, and the third person is MANIFESTLY careless or unfit, the depositary shall be held liable even if he is authorized.



Another instance wherein the depositary is liable: If the thing was lost through the negligence of his employees. Since his employees are under his control and supervision. Whether the employees are MANIFESTLY careless or not, the depositary as an employer will be held liable. So when will be the depositary be exempted from liability even if he deposits it with a 3

rd person?

Obviously, he will not be responsible if there is no negligence on the part of the 3

rd person whom he

was allowed to deposit the thing. He was authorized. As long as such 3

rd person is not

MANIFESTLY careless or unfit. So again, take note, liability of the depositary in case of deposit to a third person. Art. 1974:

Art. 1974. The depositary may change the way of the deposit if under the circumstances he may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation. However, before the depositary may make such change, he shall notify the depositor thereof and wait for his decision, unless delay would cause danger. (n)

Okay, so depositary can change the way or manner of the deposit if there are circumstances indicating that the depositor would consent to the change. Way or manner – probably where it is placed, how it is placed, packaging, temperature among others. Depositary, however, should first notify the depositor and wait for the depositor’s decision, unless delay would cause danger, wherein, he is not required to notify and wait for the decision of the depositor. This is still in keeping with the obligation of the depositary to exercise diligence of a good father of a family. Art. 1975:

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

Obligations on the part of depositary if the thing deposited is with interest:

1. Obligation to collect the interest as it becomes due, as well as;

2. To take such steps as may be necessary to preserve its value and the rights corresponding to it.

Now 1975 is more important because of the last sentence, 2

nd paragraph of 1975… “The above

provision shall not apply to contracts for the rent of safety deposit boxes.” So rent, it is a contract of lease. But is it the same? .. What is the difference between an ordinary contract of lease and a lease or rent of a safety deposit box? What makes it special? What happened in the case of CA Agro? – (My pamily..

my pamily..) nasa case ang answer.

CA AGRO-INDUSTRIAL DEVELOPMENT CORP. vs CA and SECURITY BANK AND TRUST

COMPANY FACTS: On July 3, 1979, petitioner through its president Sergio Aguirre, and spouses Ramon and Paula Pugao entered into an agreement where the former purchased from the latter two parcels of land for P350,625. P75,725 was paid as downpayment while the balance was covered by three postdated checks. Among the terms and conditions of said agreement were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of title shall be deposited in a safety deposit box. The same could be withdrawn only upon the joint signatures of petitioner and spouses Pugaos upon full payment of the purchase price. Petitioner and spouses Pugaos then rented safety deposit box no. 1448 of respondent Security Bank and Trust Company and for this purpose both signed a contract of lease which contained the following conditions: 13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two lots and demanded the execution the deed of sale which necessarily entailed the production of the certificates of title. However, when the safety deposit box was open, the box yielded no such certificates. The delay in the reconstitution of the title compelled Mrs. Ramos to withdraw her offer and as a consequence, petitioner allegedly suffered a loss which forced the latter to file a complaint for damages against Security Bank and Trust Company. The Court of First Instance (Regional Trial Court) decided in favor of respondent bank citing paragraph 13 and 14 of the contract of lease which exonerates the bank from any liability. The Court of Appeals in turn affirmed the decision of the trial court on the theory that the contract executed between petitioner and respondent bank is a contract of lease (Article 1643) by virtue of which respondent bank was divested of any possession nor control over the safety deposit box. ISSUE: Is the contractual relation between

petitioner and respondent bank one of bailor and bailee or one of lessor and lessee? bailor and bailee HELD: The contract in the case at bar is a special kind of deposit.

The Court agrees with the petitioner that the contract for the rent of the safety deposit box is not an ordinary contract of lease. However, the Court cannot fully subscribe to the view that the same



contract is to be strictly governed by the provisions of the Civil Code on deposit. It cannot be characterized as a contract of lease because the full and absolute possession and control of the safety deposit box was not given to the joint renters. The guard key remained with the bank and without this, the renters cannot open the safety deposit box. On the other hand, the respondent bank could not likewise open the box without the renter's key. Thus, Article 1643 and Article 1975 which was invoked by the Court of Appeals does not apply in the present case. We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. This is just the prevailing view because: There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. In the context of Philippine laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rules in the United States has been adopted. Section 72 of the General Banking Act provides: Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as agents. . . .(emphasis supplied) It is to be noted that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. . A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. Accordingly, the depositary would be liable if, in

performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. N.B. 1. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. Thus, conditions 13 and 14 of the questioned contract of lease of the safety deposit box are void as they are contrary to law and public policy. 2. Although the contract between petitioner and respondent bank was considered as a contract of deposit, the Court still affirmed the CA's decision to dismiss the case because no competent proof was presented to show that respondent bank was aware of the agreement between the petitioner and spouses Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures. Also, no evidence was submitted to reveal that the loss of the certificates of title was due to fraud or negligence of the respondent bank.

QUESTIONS:

There were two provisions that were pointed out here.. – yes ma’am. *refer to the case digest please*

Why would it be contrary to public policy and law? (the provisions) – removes the due diligence needed by the banks to be practiced.

So with that, is the bank liable here? – not liable because no proof that bank was aware of the joint signatures or agreements of the parties.

DISCUSSION: So what happens when you lease noh, you pay an annual fee with the bank, here in the Philippines to lease that space. So that makes it a contract of lease. But it is a special kind of deposit because it also imposes diligence on the part of the bank to safe keep what you have put in your safety deposit box. However, the bank has no knowledge kung ano ang nilagay mo dyan. What happens is that, when you apply for a contract of lease for a safety deposit box, you will be given 2 keys, dalawang susi. And then you will fill out the form as to who are authorized to open the safety deposit box. You also submit pictures. So every time you try to open it, they have to check if you are authorized to open it, i-record when you open it, when you leave, then you also have to present your key. Kung ikaw andun ka pero di mo dala yung susi, they will not open. I don’t thing they can open because there are two keyholes in the safety deposit box. As mentioned, the guard key, as kept by the bank and the other key is in your possession as the lessee of the safety deposit box. Now also, if you have another person to open it, while he may have the key, pero hindi sya authorized, I doubt noh i-allow sya. Some may allow if may SPA, but I’m not sure if it is allowed in all instances. Now, what happens here. No change in relation between the bank and the lessee



depositor, even if the bank is not aware of the contents. Ang important dun is, since it is within its premises, they safe keep whatever ang nandoon. When you put things in your safety deposit box or when you get something from it, hindi man yan sila mag check. In fact, you don’t even indicate if you put something or got something from it. What they will do is just.. yung log in log out lang. Yung i-record ang time. So what happened in this case of CA Agro? 2 keys were given. 1 was in favor of Aguirre, and the other one to the Pugaos. The guard key was with the bank. Why is the bank not held liable here? Because it appears that the Pugaos were able to present the key and had access and the bank had no right to refuse access. Because they were duly authorized. Lessee sila dun. And they had the other key. There was nothing mentioned to the bank that they had this agreement between Aguirre and Pugaos na dapat sabay sila doon for the opening or access to the safety deposit box. That’s why the bank was not held liable. Now here, the SC emphasized that the contract for the rent of safety deposit box is not an ordinary contract of lease. It is a special kind of deposit, because the full and absolute possession and control of the safety deposit box was not given to the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; but the bank cannot open the box without the renter’s key. It was emphasized, relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. Two provisions here were raised noh, that the bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same; which is very contrary to the arrangement. It has the possession, it has the control. And in fact the general banking act, provides the renting noh as one of the functions or authorized operations of a bank. As to the next provision, par. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith.

– ano yung void

actually dyan? Yung assumes absolutely no liability in connection therewith, because again this would make them uhmm.. this limits the duty to exercise reasonable diligence, which of course, will be contrary to public policy. The safety deposit box itself is located in its premises and is under its absolute control; the Bank keeps the guard key to the said box and therefore it should exercise the diligence as that of a depositary. However the SC held that the bank could not be held liable. No competent proof was shown that the Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to

reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. So while it was a contract of deposit, special kind of deposit, either of them could ask the bank for access to the safety deposit box and therefore the bank is not held liable for damages. SIA vs CA..

SIA v. CA FACTS: Herein petitioner and respondent entered into a contract denominated as a Lease Agreement whereby the former rented a safety deposit box owned by the latter . Petitioner placed in the deposit box her stamp collection which was subsequently lost and damaged due to a flood that took place in 1985 and 1986. The defendant bank rejected the petitioner’ s claim for compensation for his damaged stamps collection, so, the plaintiff instituted an action for damages against the defendant bank.

The bank alleged that the contract was that of lease and its liability was limited to the exercise of the diligence to prevent the opening of the safe by any person other than the Renter, his authorized agent or legal representative; The Bank is not a depository of the contents of the safe and it has neither the possession nor the control of the same. The Bank has no interest whatsoever in said contents, except as herein provided, and it assumes absolutely no liability in connection therewith. RTC ruled in favor of petitioner. CA reversed the decision. ISSUE: Is SBTC liable for damages and loss? YES HELD: SBTC is a Depository Notwithstanding the Contract of Lease. In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, the Court held that the use of a safety deposit box is not a contract of lease and that it is actually a special kind of deposit. The prevailing rule in American jurisprudence — that the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment for hire and mutual benefit — has been adopted in this jurisdiction, thus: In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides: "Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safequarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section



asdepositories or as agents. . . ."(emphasis supplied) Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. Condition 13 and 14 of the Contract of Lease are Void. Conditions 13 and l4 of the questioned contract of lease of the safety deposit box, which read: "13. The bank is a depositary of the contents of the safe and it has neither the possession nor control of the same. "14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it assumes absolutely no liability in connection therewith." are void as they are contrary to law and public policy. Said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72 (a) of the General Banking Act. Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said: "With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law

from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that, of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limit its liability to some extent by agreement or stipulation. SBTC is Negligent. Respondent cannot invoke fortuitous event under Article 1174by reason of its negligence . SBTC's negligence aggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code is therefore applicable. Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

QUESTIONS: (none) DISCUSSION:

Alright, what is the basis of the liability? – Negligence. The cause of the damage noh as to the stamp collection was a fortuitous event. We all know noh that a fortuitous event can be the cause for the extinguishment of the obligation. However, what is the negligence here on the part of the bank? Its negligence aggravated the injury or damage to the stamp collection. The bank SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. It should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. So here, it clearly failed to exercise the reasonable care and prudence expected of a good father of a family. While it is true that it cannot open it because again, the key is with Sia, while it is true that the damage was primarily caused by the fortuitous event, again the aggravation was due to their negligence. The fourth characteristic of a fortuitous event is absent Article 1170, wherein the obligor must be free from any participation in the aggravation of the injury resulting to the creditor. December 04, 2015 (Cabangbang)



Ok so voluntary deposit, sa voluntary deposit we already discussed Article 1975 again take note of the last sentence therein that this provision in the first paragraph thereof is not applied to contracts for rent of safety deposit boxes. So we have already emphasized the distinctions between a contract of lease, an ordinary contract of lease and the lease of a safety deposit box. So we have emphasized that a lease of a safety deposit box is considered as a special kind of deposit, so we have discussed the cases of CA Agro as well as Sia. Now Article 1976

Art. 1976. Unless there is a stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and quality, in which case the various depositors shall own or have a proportionate interest in the mass. (n)

Right, so have the term here commingle noh, ihalo or together, depositary as general rule, depositary is permitted to commingle grains and other articles of the same kind and quality. Various depositors of the commingled goods shall own the entire mass in common and each depositor shall be entitled to such portion of the entire mass as the amount deposited by the millers being hold.

As an exception if the parties have stipulated that even the subject matter is a grain or some other articles if it is stipulated that it cannot be commingled with others of the same kind and quality and that will prevail, however, if it is not of the same kind and quality, the duty of the depositary is to keep them separate or at least identifiable as he must return to each depositor the identical articles delivered.

Now what's the relevance of this provision? In case of loss, in case of damage or deterioration. So let's say you have various depositors delivered let us say 1/2 sacks of rice each, they are the same kind and quality. So as the general rule, depositary can commingle it. now what's happen here there is a flood, wherein some of the sacks of rice, yung nasa baba, nadamage, so you cannot say for come/first in, first out, so kung sino yung unang nagdeposit sa kanya yung andun sa baba, so that will be unfair to the rest.

Now this 1976 provision would be relevant because with regard to the loss the depositors will suffer the loss proportionately. so that is the relevance, so again that is only applicable with regard to Articles 1976, are of the same kind and quality and in the absence of an express stipulation that the articles cannot be commingled.

Art. 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor. Otherwise, he shall be liable for damages. However, when the preservation of the thing deposited requires its use, it must be used but only for that purpose. (1767a)

So again noh, to emphasized principal purpose of a contract of deposit that is for safekeeping and not for use. Unauthorized use

makes the depository liable for damages; however, the depositary can make use of the thing even without the express permission of the depositor if such use is necessary for the preservation of the said thing. However the use must be limited to that purpose only. Example of things which must be used in order to preserved it, give me an example of things, na dapat gamitin to preserve it, CAR, the very least dapat paandarin, pero di mo rin pwede sabihin na idrive mo from Davao City to Panabo to preserve a car. Other examples, appliances, which is refrigerator; they say noh dapat gamitin and ref otherwise masira din yan siya katagalan. Now what is the effect if the depositary is permitted to use the thing? Student Answer: If the depository is permitted to use the thing Ma'am, it is converted into a loan or a commadatum. Now what happened in the case of Baron vs. David.

SILVESTRA BARON and GUILLERMO BARON vs. PABLO DAVID

FACTS: Silvestra and Guillermo are Pablo David’s aunt and uncle. Pablo owned a popular rice mill in Pampanga, which burned in a fire on Jan. 17 1921.

Prior to the fire, at around June 1920, Silvestra deposited 1k cavans and 24kilos of rice in Pablo’s mill. Guillermo placed another 1.8k cavans and 43kilos. Pablo made an advance to Guillermo in the amount of P2800. The Barons claim that they sold the palay to David; that the deliveries were made at David’s request, as he promised that he would resell the palay during the times when the selling price were the highest. He would then pay his aunt and uncle in December. David, on the other hand, claims that the palay were mere deposits subject to future withdrawal the depositors or subject to some future sale which was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921. ISSUES: 1.) What is the nature of the contract between the Barons and David? COMMODATUM 2.) WON David is liable for the value of the palay. YES HELD:

Contract of commodatum present if depository has permission to make use of the thing deposited Under article 1768 of the Civil Code, when the depository has permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. The Court further said that David’s lawyers were



under the mistaken impression that if they were to prove that the contract was that of a deposit, David would be absolved of liability. Even if the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value. David is liable, as he has appropriated the palay delivered by the Barons long before the fire The palay in question was placed by the plaintiffs in the defendant's mill with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In view of the nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921. Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and his liability was not extinguished by the occurrence of the fire.

QUESTIONS:

On what ground? On what ground that he seeks to be relieved from liability? - Because of a fortuitous event Ma'am, because of the fire. So was there really a contract of deposit here? - No Ma'am. Now why would that be relevant? Why was it that Pablo was asserting that this was a contract of deposit? - Because if it was a contract of deposit ma'am, he will not be liable for the loss of the palay due to the fortuitous event. Okay. Since it was not a deposit, did the Supreme Court state in its decision, what was the nature of the contract entered into by the parties? - It did not categorically state Ma'am but the SC held that it could be a loan or a commodatum. It can be a commodatum if it is to prove that the use of the cavans of play must only for it to be converted into rice and sold to other customer. It could be a loan or mutuum if Pablo himself converted it and consumed the rice for himself. For himself? - For his own consumption. Can we really say here that based on the facts of these case, can we really say that they entered into a commodatum? What’s the nature of

the contract of commodatum? - It's gratuitous Ma'am, essentially gratuitous. In this case, since it was not a contract of deposit, can we say it is a commodatum, can we say that it is essentially gratuitous contract between the parties here? - What’s the obligation of Pablo? - There was an implied understanding ma'am that he will convert it into rice and sell it. What happens to the proceeds if he sells it? - if he sells it he will give the proceeds to... So that's in consonance to the obligations involving a contract of commadatum? - No Ma'am, because there will already be compensation. Ok so it will not be essentially gratuitous and further it's a real contract of commodatum, he has the obligation to return the exact same thing. In this case, hindi noh. How about a simple loan or mutuum? Can we consider that the parties who would have entered into a mutuum in this case? So it's clear, it's not deposit and base on the facts defense say since the SC did not categorically state as to its nature, however we can say that it could not be a commodatum. How about mutuum? What is the obligation involved in a contract of mutuum? - to return the same thing. Ok to return the equivalent of the thing that was delivered. Does Pablo have the obligation to return the equivalent of what has been delivered to him? - No Ma'am. Because again what was his obligation? - to remit the proceeds of the same in case he converts it into rice. So if you look at the facts of this case, even if the SC referred to Article 1768, now 1978 of the CC. it could not be loan or commodatum, what do you think it could be? - Delivery of Palay in exchange for what? - Again, what's the obligation of Pablo here? - To give the proceeds.. Ok proceeds, the process contract would be? Contract of sale Ok contract of sale. Although again for emphasizing the SC did not state as to what was the real agreement. What is clear here is that there is not contract of deposit and wherefore, Pablo is not relieved from his obligation. DISCUSSIONS: Here the Supreme Court stated that the defendant was at liberty to convert it into rice and



dispose it at his pleasure. He’s bound to account for its value and his liability was not extinguished by the occurrence of the fire. In fact it was also pointed out, that it was certain that the palay which is put in for June 01, 1920, had been milled and disposed prior to the fire in February 17, 1921. Even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value. And then there's reference there to Article 1978, and the SC added that of course by appropriating the thing the bailee becomes responsible for its value. so again , the relevance here, determining there was a deposit or not is as to the liability of David, asserting that he could not be liable due to a fortuitous event. The SC said that there is not deposit; therefore he would still be liable to the Baron's, Silvestra and Guillermo. So that Article 1978.

Art. 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract.

The permission shall not be presumed, and its existence must be proved. (1768a)

So here you take into consideration the nature of the object. if the thing was deposited and the thing is not consumable but the depository was allowed to use the thing then the contract losses the character of a deposit and it becomes a commodatum. Notice in the case of Baron vs. David, what was the subject thereof? Rice. So what's the nature of rice? it is consumable thing. So we cannot apply, that's another reason that we can say it's not a commodatum. And even if you say consumable thing, which can be an object of commadatum the purpose must be merely for exhibition, which is again was not the purpose of Baron vs. David Case. Now here if is not consumable, depositary is allowed to use. Again it losses the character of deposit and become commodatum despite being denominated as deposit. Unless still keeping the principal purpose of a contract. however if the subject matter is money or consumable thing and the thing is deposited and the depositary is allowed to use it, it will result into consumption and converts the contract into a simple loan or mutuum. So with that take note of the distinction between a contract of loan and a deposit. And even if you say consumable thing, which can be an object of commodatum the purpose must be merely for exhibition, which is

again was not the purpose of Baron vs. David Case. Now here if is not consumable, depositary is allowed to use. Again it losses the character of deposit and become commodatum despite being denominated as deposit. Unless still keeping the principal purpose of a contract. however if the subject matter is money or consumable thing and the thing is deposited and the depositary is allowed to use it, it will result into consumption and converts the contract into a simple loan or mutuum. So with that take note of the distinction between a contract of loan and a deposit. Student Answer: In the contract of loan Ma'am, the principal purpose is the consumption of the subject matter while in contract of deposit it is for purposes of safekeeping. In deposit, depositor can demand the return of the subject matter at will while in contract of loan, it depends upon the expiration of the period. What happened in the case of Javellana?

ANGEL JAVELLANA vs. JOSE LIM, ET AL. FACTS: Angel Javellana filed a complaint on the 30th of October, 1906 against Jose Lim and Ceferino Domingo Lim. It was then alleged that on the 26th of May, 1897, Lim executed and subscribed a document, in favor of Javellana, reading as follows: We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of January, 1898. — Jaro, 26

th of May, 1897. — Signed Jose Lim. —

Signed: Ceferino Domingo Lim. It was also alleged that, when the obligation became due, Lim begged Javellana for an extension of time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which Javellana acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the exception of either capital or interest, had thereby been subjected to loss and damages. Lim answered that they admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of November, 1902, not, however, as payment of interest on the amount stated in the foregoing document, but on account of the principal, and denied that there had been any agreement as to an extension of the time for payment and the payment of interest at the rate of 15 per cent per annum. ISSUE: WON the contract is a deposit. NO, it was a contract of loan. HELD:



The document of indebtedness inserted in the complaint states that the Javellana left on deposit with Lim a given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but that, nevertheless, when the document written in the Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date thereof, the 15

th of November, 1902, that the amount

deposited had not yet been returned to Javellana. He was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further agreement that the amount deposited should bear interest at the rate of 15 per cent per annum from January 20. The 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would be included, and that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the amount deposited, which they have done, as subsequent shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction entered into between the interested parties was not a deposit, but a real contract of loan. Article 1767 of the Civil Code provides that — The depository cannot make use of the thing deposited without the express permission of the depositor. Otherwise he shall be liable for losses and damages. Article 1768 also provides that — When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment. The permission shall not be presumed, and its existence must be proven. Depository making use of the thing deposited: When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an extension of one year, in view of the fact the money was scare, and because neither himself nor the other defendant were able to return the amount deposited, for which reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the amount deposited, he having made use of the same in his business and for his own profit;

Express permission: Javellana, the creditor, by granting them the extension, evidently confirmed the express permission previously given to use and dispose of the amount stated as having been deposited, which, in accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code. Notwithstanding that it does not appear that Jose Lim signed the document executed in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the said document has not been contested as false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of the signatures of the witnesses who attested the execution of the same; and from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his joint co-debtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of the original document of deposit was thus made, and not the least proof is shown in the record that Jose Lim had ever paid the whole or any part of the capital stated in the original document. There was no renewal of the contract deposited converted into a loan, because, as has already been stated, the defendants received said amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown.

QUESTIONS:

So what where taken into considerations here by the Court in saying that there is no deposit but only a loan, despite the use of the term deposit in the first agreement that they executed?

Student Answer:`The look into account Article 1768 for in it was stated that, 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.

As well as Article 1767, when it provided that the depositary cannot keep the thing without the express..(cut-off..)

What is the evidence here that debtor was allowed to make use of the money that was delivered to them? - when Lim went to the office of the creditor asked him for the extension of 1 year, for the fact that he



did not have in his possession the amount deposited having made use of the same in his business. Now can we say that there was a conversion of contract of deposit to a contract of loan by virtue of that second agreement within the parties? - Yes Ma'am. It was a conversion from deposit and become a loan? - The Court said that even though the contract was under the name of deposit it was really a loan. So what does it mean? Was there a contract of deposit that was converted into a contract of loan? - What was the initial intention of the parties? Was it really for safekeeping or for the means to make use of the money delivered to them? - since the debtor here engage to pay the interest and even though they received apparently was a deposit, they engage between the interest of the creditor from the day until the time the refund should be made. So the contract on the part of the debtor is not a depository contract but of a loan. DISCUSSION: So here notice in the first contract that they executed they use the term deposit with the obligation to return the said amount to the creditor Javellana and then subsequently they executed the second document wherein this time they referred to the agreement with a real contract of loan with interest. Now with this case the SC held that they did not engage to return the same coins received and the ____ the amount to deposit consisted. And they could have accomplished the return, agreed upon by the delivery of a sum equal to the one received by them. For this it must be understood that the debtors were lawfully authorize to make use of the amount deposited which they have done. So it's not a deposit but a real contract of loan. by granting them the extension, it confirmed the express permission previously given them to use and dispose of the amount stated as having been deposited. There was no renewal of the deposit converted into the loan because again the defendants from the very beginning received the said amount by virtue of a loan under the name of a deposit. Since the so called bailees were forthwith authorized to dispose of the amount deposited. So take note that when you consider a contract, a loan or a deposit there was a difference. Yung obligation ng respective parties, aside from the purpose, deposit - safekeeping; loan - to use. Also take into consideration, what is the obligation in deposit? to return the exact same thing to the depositor while in contract of loan, to deliver the equivalent of what has been received. now under 1978, is also stated with regard to permission, that is not commissioned to use is not presumed. when such use is necessary for the

preservation of thing deposited and the burden is on the depositary that the permission has been given. Now Article 1979

Art. 1979. The depositary is liable for the loss of the thing through a fortuitous event:

(1) If it is so stipulated;

(2) If he uses the thing without the depositor's permission;

(3) If he delays its return;

(4) If he allows others to use it, even though he himself may have been authorized to use the same. (n)

Ok so the general rule, depositary is not liable for loss through a fortuitous event without his fault. So kung meron tayong exception sa commodatum meron din tayong exception sa deposit. Instances when the depositary is liable for the loss of the thing even if because due to a fortuitous event. So stipulated, uses the thing without permission of depositor, if there is delay, if he allows other to use it even though he himself may have been authorize to use the same. Now we proceed to article 1980.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (n)

Bank deposited are considered in a nature of an irregular deposit. What do you mean by an irregular deposit? - the benefit is on the depositor alone and that the depositor is preference over the creditors and depositors can demand the return thing/money anytime. What happened in the case of Rogers vs. Smith?

ROGERS VS. SMITH

FACTS: Plaintiff Jose Rogers (Rogers) brought this

action in the CFI city of Manila upon the following document:(the subject document of the case) No. 1418. $12,000.

The sum of pesos twelve thousand has been deposited with us, received from Jose Rogers, which sum we will pay on the last day of the six months after the presentation of this document, to the order of Mr. Jose Rogers. Manila, February 17, 1876. SMITH, BELL & CO.

The said sum of twelve thousand pesos shall bear interest at the rate of eight per centum (8%) per annum from this date, February 17, 1876.

SMITH, BELL & CO.

When this document was delivered by the



defendants Smith, Bell & CO. (Smith) to Rogers, 12,000 pesos in silver were worth more than 12,000 pesos in gold.

The only question in the case is, whether upon these documents Rogers is entitled to recover 12,000 pesos or 24,000 pesos. CFI held that he was entitled to recover only 12,000 pesos. Rogers has appealed. Rogers delivered to Smith, in consideration of the execution of the document, 12,000 in gold.

Soon thereafter Rogers moved to Barcelona and have since resided there. Smith remitted the interest to him every three months at the rate of 8 per cent per annum until the 30th day of January, 1888, when they notified him that thereafter the interest would be 6 per cent. Rogers accepted this reduction and interest and that rate was remitted to him by Smith until the 10th of February, 1904. This interest was remitted in silver; that is to say, every three months the Smith took 180 pesos in silver and with it bought exchange on Barcelona or other European point converted into pesetas. Rogers received these payments in silver without any protest whatever until the 10th day of February, 1904.

In his letter of that date, he called the attention of the Smith to the fact that by the new American law in force in the Philippines the gold standard had been introduced and that by reason thereof he was entitled to receive his interest in gold, in view of the fact that when he delivered the money to the Smith in 1876 he delivered it in gold coin.

In another letter of the 15th of December, 1904, he expressly refers to the act of Congress of March 2, 1903, and to the subsequent proclamations of the Governor-General relating to coinage.

Rogers claims that, having paid to Smith 12,000 pesos in gold coin, he is now entitled to receive from them the value of 12,000 pesos in gold coin; that is to say, 24,000 pesos in silver. It is necessary to determine in the first place the nature of the contract evidenced by the document of the 17th of February, 1876.

ISSUE: WON the document is an evidence of an

ordinary loan which created between the Rogers and the Smith the simple relation of debtor and creditor. YES

HELD: The document is an evidence of ordinary loan.

Rogers repeatedly calls it a deposit, that is, that the ownership of the particular coin which was delivered by him to Smith did not pass to Smith but remained in him and that Smith was bound to return to him the identical coin which they had received. It is apparent that no such claim could be maintained in view of that part of the instrument which provides for the payment of interest. But while not a deposit in the strict sense of the word, the document evidences what is known as an "irregular deposit."

The Supreme Court cited Manresa's discussion on the differences of a loan and an irregular deposit namely:

1. in irregular deposit the benefit accrues to the depositor alone whereas in loan the benefit is for both parties, the essential cause is the necessity of the borrower;

2. in irregular deposit the depositor has a preference over other creditors whereas in loan there is no such preference;

3. in irregular deposit the depositor can demand the return of the article at any time whereas in loan the parties are bound by the contract.

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

The second difference which exists, according to Manresa, between an irregular deposit and a loan lies in the fact that in an irregular deposit the depositor has a preference over other creditors in the distribution of the debtor's property. It is apparent, therefore, that this document does not state those requisites which are essential to an irregular deposit.

Nor does the contract in question fulfill the third requisite, which is, in an irregular deposit, the depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from the terms of this document that the plaintiff could not demand his money at any time. He was bound to give notice of his desire for its return and then to wait for six months before he could insist upon payment.

From the above discussions, it is very apparent that is was not for the sole benefit of Rogers. Like any other loan it was for the benefit of both parties. The benefit of Smith Bell Company was the use of the money while Jose Rogers' benefit was the interest on his money. Also, he was not able to demand for the money at any time for he is supposed to give notice and wait for six months first before payment. Thus, the transaction is that of an ordinary loan and not an irregular deposit.

QUESTIONS: What's the issue here? - the issue is whether the document is for an ordinary loan Why would that be an issue? - What was the allegation here on the part of Smith? Alright from the Smith and Bell Company what was the allegation? What is the allegation on



the part of the creditor Roger's? It is a deposit to him or considered as a loan? According to Roger's Ma'am it was a deposit and that the ownership of the coins is not transferred to Smith. Why does he want it to be considered as deposit and not a loan? - there was a passage of a law, new American law in force in the Philippines the gold standard had been introduced and that by reason thereof he was entitled to receive his interest in gold, in view of the fact that when he delivered the money to the Smith in 1876 he delivered it in gold coin. But if there was a certain interest, would it be contrary to his defense that it was a contract of deposit or contrary to his allegation that it must be considered as a deposit and not a loan? - Yes Ma'am So what do you have here? is it a loan or a deposit? - According to the SC it was loan and not a deposit, even if it will not be also considered as an irregular deposit because the three circumstances were not complied with. What are these three circumstances? it was not solely for the benefit of Roger's Smith; the main cause, the thing that was allegedly deposited was not solely for the benefit of Rogers but also for the benefit of Smith; Roger has no preference over the thing; the depositor can demand the return of the article, in the case Rogers cannot demand anytime the return of the articles. When can you demand for the return? - from the notice of his demand and he has also have to wait for 6 months from such notice to insist upon payment. So here, what you have is a contract of loan even if appellant Roger's repeated calls it a deposit. Why? Why was he is alleging that it was a deposit? Because here when the document, the note was delivered, 12, 000 that was the obligation, 12,000 pesos in silver were more than 2,000 pesos in gold. The plaintiff delivered to the defendant in consideration of the execution of the document 12,000 pesos in gold but subsequently what happened? The value of gold increased. So ngayon he is demanding na it's a deposit so he will now exactly revert the exact gold that I delivered to you. Rather than the 12,000 pesos in silver, this is now the equivalent thereof, if it would be considered as a contact of loan. But what was the obligation here of Smith Bell and Company? It was not to return the identical coins, gold coins that they have received, no such thing could be returned in lieu on the part of the instruments which provides for the payment of interest. Payment of interest is not present in a contract of deposit. Now, it was claimed that this could be an irregular deposit but the SC held that these could not be an irregular deposit. The benefit for a contract of loan is for the benefit of both parties while in contract of irregular deposit it only for the sole benefit of the creditor. in an irregular deposit the depositor can demand the return of the article at any time while if it is a contract of loan, a lender is

bound by the provisions of the contract and cannot seek restitution until the time of payment. As provided in the contract as already said. In this case plaintiff could not demand his money anytime. It is clearly stipulated in their agreement that they have to wait for six month from notice before he could insist for payment. Likewise, an irregular deposit has a preference over other creditors in the distribution of the debtor's properties. So here the document in questions shows that what they agreed into is an ordinary loan and the relation is that between of a debtor and a creditor. Now this case of Rogers vs. Smith was also mentioned in the case of Compania Agricola.

COMPAÑIA AGRICOLA VS. NEPOMUCENO

FACTS: On March 17, 1927, the registered

partnerships, Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were declared insolvent by the Court of First Instance of Manila.

On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim against one of the insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at the rate of 6 per cent per annum from April 5, 1918, until its full payment was a deposit with said Mariano Velasco & Co. and asked the court to declare it a preferred claim.

The assignee of the insolvency answered the claim by interposing a general denial. On September 23, 1929, the court rendered a decision declaring that the alleged deposit was a preferred claim for the sum mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid. From this decision the assignee appealed. The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt in writing, and the testimony of Jose Velasco who was manager of Mariano Velasco & Co. at the time the note was executed. The receipt reads as follows: MANILA, P. I., April 5, 1918. Received from the "Compania Agricola de Ultramar" the sum of ten thousand Philippine pesos as a deposit at the interest of six per cent annually, for the term of three months from date. In witness thereof, I sign the present. MARIANO VELASCO & CO. By (Sgd.) JOSE VELASCO Manager. P10,000.00. In his testimony, Jose Velasco stated that his signature on the receipt was authentic and that he received the said sum of P10,000 from the appellee and deposited it with the bank in the current account of Mariano Velasco & Co. ISSUE: WON the claim filed is that of a deposit or a



loan? LOAN

HELD: The Supreme Court reiterated the ruling in

the case of Gavieres vs. De Tavera (1 Phil., 17) which had a very similar facts to the present case. The court held that the transaction therein involved was a loan and not a deposit. The court said:

Although in the document in question a deposit is spoken of, nevertheless from an examination of the entire document it clearly appears that the contract was a loan and that such was the intention of the parties. It is unnecessary to recur to the cannons of interpretation to arrive at this conclusion. The obligation of the depository to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depository should have the right to make use of the amount deposited, since it was stipulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. (Art.1768, Civil Code.)

Article 1767 of the Civil Code provides that —"The depository cannot make use of the thing deposited without the express permission of the depositor." "Otherwise he shall be liable for losses and damages."

Article 1768 also provides that — "When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment." "The permission not be presumed, and its existence must be proven."

Moreover it may be inferred that there was no renewal of the contract of deposit converted into a loan, because, as has already been stated, the defendants received said amount by virtue of a real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown.

The ten thousand pesos delivered by the appellee to Mariano Velasco & Co. cannot be regarded as a technical deposit. But the appellee argues that it is at least an "irregular deposit." This argument is, we think, sufficiently answered in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319). There this court said:

…Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points of difference between a loan and an irregular deposit. The first difference which he points out consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in a loan the essential cause for the transaction is the necessity of the borrower.

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

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

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

For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in question must be regarded as a loan, without preference.

QUESTIONS: Why would it be necessary to determine the nature of the agreement? - because if the 10,000 will be considered as a deposit then the Compania as well do not have preferential right to pay such value. So what do you have here, a loan or a deposit? - it is a loan Ma'am Why was it considered as a loan? - it is considered as a loan by citing the case of Javellana, because this transaction involves, they have interest and it is also for the benefit of the parties Can we not say that what we have here is an irregular deposit? At the very least, it not be considered as irregular deposit? No Ma'am, because citing the case of Rogers vs. Smith, the three points different between and a loan and a deposited is not satisfied. DISCUSSIONS: So what's the relevance of determining the nature of a contract here? Remember the distinction between a deposit and a loan, is that with regard to a deposit if true deposit it would be considered as a preferred thing unlike an ordinary contract of loan. Now in this case of Compania vs. Nepomuceno, the SC again emphasized the distinctions between a contract of loan and that of an irregular deposit. Again an irregular deposit the only benefit is that each accrues to the depositor while in a loan the essential cause to the transaction is the necessity of the borrower. in irregular deposit , depositor can demand the return of the article any time while the debtor is bound by the provisions of the contract, it cannot seek restitution until the time for payment as provided in the contract. in this case, 3 months from the day the note or receipt was issued.



in the present case the transaction was clearly not for the sole benefit of Compania Agricola as it was for the benefit of both parties. Notice also, that here was payment for interest, even if they used the term deposit in the receipt, on in there agreement the SC, again said that what we have here is a contract of loan and not a deposit, not even an irregular deposit. Again contracts are determined not by the nomenclature or titles given by the parties but rather as defined by law based on the agreement with the parties. But we have here is a loan without preference. So what about the proceeds in banks? this is provided in 1980. notice in these cases of Compania and Rogers, the SC distinction an irregular deposit form that of a contract of loan. But they at look at the case of BPI vs. CA wherein the SC held that bank deposits, by nature, bank deposits is not of an irregular deposit however you apply the provisions as to loan. What happened in the case of BPI vs. CA?

BPI v. CA

FACTS: Private respondents Eastern Plywood

Corporation (Eastern) and Benigno D. Lim (Lim), held one joint bank account with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI).

Sometime in March 1975, a joint checking account with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim.

Velasco died. At the time of his death, the outstanding balance of the account stood at P662,522.87.

On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim one-half of these amounts was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. Thereafter, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital,". Eastern issued a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per annum. The note was signed by Lim. The loan is wholly/partly secured by the Hold-Out on a 1:1 on C/A No. 2310-001-42, which refers to the joint account of Velasco and Lim with a balance of P331,261.44. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement,"

On the other hand, a case for the settlement of Velasco's estate was filed. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. The intestate court granted motion of the heirs of Velasco to withdraw the balance and authorized the heirs to divide among themselves the amount withdrawn.

CBTC was merged with BPI. BPI filed a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. Defendants Lim and Eastern, in turn, filed a counterclaim against

BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note.

RTC dismissed the complaint and CA affirmed the decision.

BPI’s CONTENTION: BPI alleged that the Holdout Agreement in question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto." Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note.

EASTERN and LIM’s CONTENTION: Eastern and Lim dispute the "suspensive condition" argument of the petitioner that they are rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan.

ISSUES:

1. WON BPI can demand payment of the loan of

P73,000.00 despite the existence of the Holdout Agreement? YES

2. WON BPI is still liable to the private respondents

on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco? YES

HELD:

ISSUE 1: It is clear in paragraph 02 of the “Holdout

Agreement” that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise.

Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The "suspensive condition" theory of the petitioner is, therefore, untenable.

ISSUE 2: The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980



of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan."

In Serrano vs. Central Bank of the Philippines, we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor.

The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account.

Moreover, the order of the court merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. Because the ownership of the deposit remained undetermined, BPI, as the debtor, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern.

So what is the issue here? - So in this case Ma'am the issue is WON BPI can demand the payment of the loan despite the hold out agreement? So BPI is the one who filed the case against? Lim and Eastern, for the payment of their loan. What is the relevance of this case in relation to Article 1980? Because Ma'am Article 19802 of the Civil Code Provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." so in this case Ma'am the nature of their transaction was being questioned. Do you have a bank deposit here? - Yes Ma'am there exist a bank deposit in this case. On whose account? - the account in the name of Eastern and Velasco Alright it's a joint account of Lim and Velasco. what happened to that account?

Because here BPI demanded from Eastern and Lim the payment of their loan but Eastern and Lim made a counterclaim against BPI. What was the basis of their counter claim? - the balance of the said account was subject to a holdout agreement Because of what happened between that account of Lim and Velasco? - the said account has being claimed the Velasco's heirs Ma'am So aside from it was being claimed by the heirs of Velasco, what did the BPI or the CBTC, the previous bank did with this account? - BPI alleged here Ma'am that the hold out agreement was subject to a suspensive condition, that the P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto. What is that P331,261.44? where did that come from? - the whole balance of the account Ma'am what account? the account of Velasco and Lim Ma'am Ok then what did the bank do with that balance in the joint account of Velasco and Lim? the bank released the balance to the heirs of Velasco Ok, it released, actually half lang noh, because it appears that it is in the name of Velasco and Lim, it's a joint account. so in other words based on that the heirs made a claim that they are entitled and that should be part of the estate of Velasco. Now here, is BPI for the released of the amount to the heirs of Velasco? - Yes Ma'am. Why did they are liable when Velasco is one of the holders of the joint account? - Who is the true owner of the amount in the joint account of Velasco and Lim? - Eastern Ma'am What was the evidence here in the part of Eastern? - the hold out agreement Ok. Because of that hold out agreement. And with that what is the liability of the part of BPI? The hold out agreement serves as a, because the bank here acknowledges Ma'am that the holder of the account did not directly pertain to Velasco but to Eastern, so there was ....and that.. And that BPI, the bank should not have allowed such withdrawal by the heirs because they now in the first place that Velasco has no right to said amount to the said joint account. DISCUSSIONS:

So what we have here SC emphasized, banks deposit are in the nature of irregular deposits. They are really loans because they earn



interest. The relationship between a depositor and the bank, is one of a creditor and debtor. so even if people say it's a saving deposit account or current deposit account it's really in the nature of loan. You put money in the bank, you earn little interest. Sometimes no interest if it's an ATM account. On the part of the bank they get to use it, noh purpose in the contract of loan, they use the money that you deposited for investment or allow it to be lend to other person. Now in this case while it is true that the joint account was in the name of Velasco and Lim it was proven and established that the amount therein belongs to Eastern. So who is the real creditor here? Eastern and therefore has the right to withdraw it or demand payment from the bank. The bank cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. Petitioner should have allowed such withdrawal because it had already admitted in the hold out agreement the questioned ownership of the money deposited in the account. But in the absence of the hold out agreement, BPI would not have been liable to Eastern because again if you take a look in the account it is really in the name of Velasco and Lim, wherein the heirs the will be entitled to the said amount or account. However, here BPOI acknowledge that the true owners are not Velasco and Lim but rather Eastern; therefore, it is held liable to Eastern who is the real creditor of the Bank. December 7, 2015 (Tongo) Metrobank vs BA Finance

METROPOLITAN BANK vs .BA FINANCE

FACTS:

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,280

1loan to secure which, he mortgaged his

car to respondent BA Finance.2 The mortgage

contained the following stipulation:

The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove mortgaged to be insured against loss x x x x payable to the MORTGAGEE or its assigns as its interest may appear x x x.

Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan Insurance)

4 which issued a policy stipulating that,

inter alia, Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear.

The car was stolen. On Bitanga’s claim, Malayan Insurance issued a check payable to the order of "B.A. Finance Corporation and Lamberto Bitanga" for P224,500, drawn against China Banking Corporation (China Bank). The check was crossed

with the notation "For Deposit Payees’ Account Only."

6

Without the indorsement or authority of his co-

payee BA Finance, Bitanga deposited the check to his account with the Asianbank Corporation, now merged with herein petitioner Metropolitan Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.

BA Finance eventually learned of the loss of the car and of Malayan Insurance’s issuance of a crossed check payable to it and Bitanga, and of Bitanga’s depositing it in his account at Asianbank and withdrawing the entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from Asianbank

7 but to no

avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money and damages against Asianbank and Bitanga,

8 alleging that, inter alia, it is entitled to the

entire proceeds of the check.

In its Answer with Counterclaim,9 Asianbank alleged

that BA Finance "instituted [the] complaint in bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim, if any, is against Malayan [Insurance]. Asianbank thereafter filed a cross-claim against Bitanga,

11 alleging that he fraudulently induced its

personnel to release to him the full amount of the check; And Asianbank filed a third-party complaint against Malayan Insurance,

13 alleging that Malayan

Insurance was grossly negligent in issuing the check payable to both Bitanga and BA Finance and delivering it to Bitanga without the consent of BA Finance.

RTC ruled that Malayan Insurance cannot be faulted for negligence for issuing the check payable to both BA Finance and Bitanga. The Court ruled further that Asianbank was negligent in allowing Bitanga to deposit the check to his account and to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it or authorized him to indorse it in its behalf,

16 found

Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of the Negotiable Instruments Law and Associated Bank v. Court of Appeals.

17

Court of Appeals affirmed RTC’s decision.

ISSUE: Whether or not BA Finance is liable.

HELD: NO.

RATIO:

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the indorsement of BA Finance.

29

As has been repeatedly emphasized, the banking business is imbued with public interest such that the

http://www.lawphil.net/judjuris/juri2009/dec2009/gr_179952_2009.html














highest degree of diligence and highest standards of integrity and performance are expected of banks in order to maintain the trust and confidence of the public in general in the banking sector.

30 Undoubtedly, BA Finance has a cause of

action against petitioner.

The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law provide definitive justification for petitioner’s full liability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check upon presentment with the drawee bank, is an indorser.

[31] This is because in

indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the phrase "all prior endorsements and/or lack of endorsement guaranteed"

32 and, for all intents and purposes,

treats the check as a negotiable instrument, hence, assumes the warranty of an indorser.

33 Without

Asianbank’s warranty, the drawee bank (China Bank in this case) would not have paid the value of the subject check.

Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements. Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion to the non-indorsing payee for the entire amount of the check.

35

Is article 1980 applicable in this case? No

What should have asianbank done with regards to

the check? They should have waited for the xx.

Before they released the check. The two payees

must be present to endorsed the same check.

Why was there a need to determine whether art

1980 is applicable or not? What was present here is

a contract of agency and not a contract of loan thus

the applicable here is not 12% and not 6%

In this case who is the principal? The BA finance

and the asianbank is the agent.

So here just take note the discussion with regard to

endorsement and the deposit of a crossed check

and the effect thereof in relation to your negotiable

instruments. I would like to emphasized here is the

negligence on the part of the bank however, the

negligence on the part of the bank does not arise

from a contract of loan so article 1980 is not

applicable.

With that the interest to be imposed is not 12% as

what we have discussed in eastern shippings

because this was still a 2009 case. It is not 12%

due to the fact that it does not arise from load or

forbearance of money goods or credit. So the rate

that was imposed is only 6% as an issue of the

relationship between BA finance petitioner is one of

agency wherein the petitioner is considered as a

collecting bank and therefore deemed as an agent

of BA finance.

Here in the case of Metrobank the SC emphasizes

that banking business is imbued with public interest.

Reyes vs CA

Reyes vs. CA

Facts:

In view of the 20th Asian Racing Conference to be held in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI) sent 4 delegates to the conference. Petitioner Gregorio H. Reyes, VP for finance, racing manager, treasurer, and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to Far East Bank and Trust Company (FEBTC – private respondent) to apply for a foreign exchange demand draft in Australian dollars (AU$1,610.00).

Mr. Yasis, bank’s assistant cashier, denied the application because FEBTC did not have an Australian dollar account in any bank in Sydney. Since Godofredo asked if there could be a way for respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney, Yasis informed him of another way of effecting the requested remittance to Sydney.

FEBTC would draw a demand draft against Westpac Bank in Sydney, Australia (Westpac-Sydney) and have the latter reimburse itself from the U.S. dollar account of FEBTC in Westpac Bank in New York, U.S.A. (Westpac-New York). This arrangement has been customarily resorted to since the 1960's and the procedure has proven to be problem-free.

On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign Exchange Demand Draft (FXDD) No. 209968 in the sum applied for payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the drawee bank.

On August 10, 1988, upon due presentment of the foreign exchange demand draft the same was dishonoured because "xxx No account held with Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to FEBTC informing the latter that its dollar account in the sum of AU$ 1,610.00 was debited. The respondent bank informed Wespac-New York requesting the latter to honor the reimbursement claim of Wespac-Sydney. Upon its second presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same reason.

When petitioner Gregorio H. Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel Regent Sydney to register as a conference delegate. At the








registration desk, the conference secretariat said that he could not register because the foreign exchange demand draft for his registration fee had been dishonored for the second time. The same situation was experienced by his wife Consuelo who is a member of the House of Representatives representing the lone Congressional District of Makati, Metro Manila.

The petitioners filed a complaint for damages against FEBTC. The petitioners claim that as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock, social humiliation, and deep mental anguish in a foreign country, and in the presence of an international audience. RTC and CA ruled in favor of respondent.

Issue: WON the respondent bank was negligent.

Held: NO. The facts show that FEBTC did not

cause an erroneous transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous decoding of the cable message on the part of Westpac-Sydney that caused the dishonor of the foreign exchange demand draft.

The degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

FEBTC was not required to exert more than the diligence of a good father of a family in regard to the sale and issuance of foreign exchange demand draft. The case at bar does not involve the handling of petitioners' deposit, if any, with the FEBTC. Instead, the relationship involved was that of a buyer and seller (between FEBTC as the seller of demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing conference Secretariat in Sydney, Australia as the payee). As earlier mentioned, the said foreign exchange demand draft was intended for the payment of the registration fees of the petitioners as delegates of the PRCI to the 20th Asian Racing Conference in Sydney.

The evidence shows that FEBTC did everything within its power to prevent the dishonor of the foreign exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by an employee of the latter could not have been foreseen by FEBTC. Being unaware that its employee erroneously read the said cable message, Westpac-Sydney merely stated that FEBTC has no deposit account with it to cover for the amount of AU $1610.00 indicated in the foreign exchange demand draft.

Thus, the respondent bank had the impression that Westpac-New York had not yet made available the amount for reimbursement to

Westpac-Sydney despite the fact that respondent bank has a sufficient deposit dollar account with Westpac-New York. That was the reason why the respondent bank had to re-confirm and repeatedly notify Westpac-New York to debit its (respondent bank's) deposit dollar account with it and to transfer or credit the corresponding amount to Westpac-Sydney to cover the amount of the said demand draft.

Is the bank liable? NO. the bank is required to

exercise not extraordinary diligence in this case but

only ordinary diligence. Since the contract here is a

contract of sale wherein reyes spouses would be

the buyer and the bank is the seller of the foreign

xxx the standard required in this case is only

ordinary diligence.

So the degree of diligence required from banks is

more than that of a good father of a family where

the fiduciary nature of the relationship with their

depositors is concerned. In other words if what you

have is bank deposit wherein the provisions of law

are applicable.

Banks are duty bound with the deposit accounts of

their depositors with the highest degree of care. But

the said ruling only apply to the businesses wherein

bank act with their fiduciary capacity sa depositary

of the deposits of their depositors. But the same

higher degree of diligence is not expected to be

exerted by bank in commercial transactions that

would not involve their fiduciary relationship with

their depositors. Bank is not required more than the

diligence of a good father of a family in regard to

the sale and issuance of the subject foreign

exchange demand.

It was established here that the bank acted in good

faith and in fact was not the cause of the

embarrassment of the petitioners in Australia.

Guingona vs CA

TEOFISTO GUINGONA, JR., vs. THE CITY FISCAL OF MANILA

FACTS: On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary investigation

David charged petitioners (together with one Robert Marshall and the following directors of the Nation Savings and Loan Association (NSLA) with estafa and violation of Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions

From March 20, 1979 to March, 1981, David invested with NSLA P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and



US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne),

That David was induced into making the investments by Robert Marshall an Australian national said to be a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager;

March 21, 1981 NSLA was placed under receivership by the Central Bank, David filed claims for his investments and those of his sister. On July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments were entered in the records of NSLA; that the respondents in I.S. No. 81-31938 may have misappropriated the balance at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions;

After demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00.

Petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss

After presentation of David's principal witness, petitioners filed the instant petition because

(a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and Savings Account allegedly showed that the transactions between David and NSLA were simple loans, i.e., civil obligations of NSLA which were novated when Guingona, Jr. and Martin assumed them;

(b) David's principal witness allegedly testified that the duplicate originals of the instruments were all on file with NSLA, contrary to David's claim that some of his investments were not record

The sole issue for resolution is whether public respondents acted without jurisdiction when they investigated the charges in I.S. No. 81-31938

There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa.

ISSUE: WON failure of the Bank to return the

amount deposited will constitute estafa through misappropriation punishable under of the Revised Penal Code.

HELD: Not estafa through misappropriation but

simple loan.

In order that a person can be convicted under the above-quoted provision, it must be proven that he has the obligation to deliver or return the same

money, goods or personal property that he received Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. As clearly as stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans.

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979];

But even granting that the failure of the bank to pay the time and savings deposits of private respondent, any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor.

Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans.

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction.

If what you have is a contract of loan? Would

there be liability for estaffa through

misappropriation?

No.

How about the liability of Guingona and the

other officers?

No criminal liability but only civil liability.



Here it is a bank deposit. The contract that was

perfected was a simple loan or mutuum and not a

contract of deposit/depositum. So again the court

emphasized here that bank deposits are in the

nature of regular deposits they are really loans

because they earn interest. Failure of the

respondent bank to honor its time deposit is failure

to pay its obligation to the debtor and not a breach

of trust arising from a depositories failure to deliver

the subject matter in deposit. The ownership of the

amount deposited is then transmitted to the bank

upon perfection of the contract and delivery and

therefore the bank can use the amount deposited

for its banking operations. There was no obligation

to return the same money that was deposited and

the failure of the bank to return the amount

deposited will not constitute estaffa thru

misappropriation. It will only give rise to civil liability

and not criminal liability to which the public

respondent, city fiscal here have no jurisdiction.

Obligation to deliver the same money, goods or

personal property that he received petitioners, have

no such obligation to return the same money.

Province of Bataan vs Villafuerte

Province of Bataan vs. Villafuerte -

Facts: Involved in the present controversy is an expanse of real property situated at Mariveles, Bataan and formerly registered and titled in the name of either the Bataan Shipyard and Engineering Corporation (BASECO), the Philippine Dockyard Corporation or the Baseco Drydock and Construction Co., Inc..

Pursuant to PD No. 464, the Real Property Tax Code of 1974, the Provincial Treasurer of Bataan advertised for auction sale the BASECO property due to real estate tax delinquency amounting to P7,914,281.72, inclusive of penalties.

4 At the

auction sale held, no bidder vied for said property as a result of which, the Provincial Treasurer of Bataan adjudged the property to, and acquired the same for, and in the name of herein petitioner Province of Bataan. Upon the expiration of the one-year redemption period, and without the owner exercising its right to redeem the subject property, the Provincial Government of Bataan consolidated its title thereon.

Eventually, petitioner entered into a ten-year contract of lease with 7-R Port Services, Inc., whereby portions of the BASECO property including facilities and improvements thereon, were leased to the latter for a minimum escalating annual rental of P18 million. On 10 May 1993, petitioner forged another contract of lease with Marina Port Services, over a ten-hectare portion of the BASECO property.

On 11 May 1993, The Presidential Commission on Good Government (PCGG), for itself and on behalf of the Republic of the Philippines and the BASECO, the Philippine Dockyard Corporation and the Baseco Drydock and Construction Co. Inc., filed with the RTC-Bataan a complaint for annulment of sale principally assailing the validity of the tax

delinquency sale of the BASECO property in favor of petitioner Province of Bataan.

On 30 June 1993, the PCGG filed with the lower court an "Urgent Motion to Deposit Lease Rentals," alleging inter alia that the rentals amounting to "Hundreds of Millions of Pesos" are "in danger of being unlawfully spent, squandered and dissipated to the great and irreparable damage of plaintiffs who are the rightful owners of the property leased."

On 28 July 1993, the lower court granted the PCGG’s urgent motion and issued its assailed order. the dispositive portion of which reads:

"ACCORDINGLY, the defendant Province of Bataan is hereby ordered to remit to this Court the lease rentals it may receive from the defendant 7-R Port Services, Inc. and the Marina Port Services, Inc. to commence from its receipt of this Order and for the Clerk of Court of this Branch to deposit said amount under special time deposit with the Land Bank of the Philippines, Balanga Branch, in Balanga, Bataan in the name and/or account of this Court to be held in ESCROW for the person or persons, natural or juridical, who may be finally adjudged lawfully entitled thereto, and subject to further orders from this Court.”

The sole issue for resolution revolves around the propriety of the escrow order issued by the lower court in the civil suit for annulment of sale.

Petitioner insists that the issuance of the escrow order by the trial court "was patently irregular, if not downright anomalous", reasoning that "nowhere in the Revised Rules of Court is the trial court, or any court for that matter, authorized to issue such escrow order, whether as a provisional or permanent remedy." According to petitioner, "the escrow orders in question are null and void ab initio for having been issued absent any legal basis" and are "merely calculated to prejudice the petitioner province without any practical or worthwhile, much less legal objective."

Held: The SC do not agree. In our jurisdiction, an escrow order issued by a court of law may find ample basis and support in the court’s intrinsic power to issue orders and other ancillary writs and processes incidental or reasonably necessary to the exercise of its main jurisdiction. Evidently, judicial power connotes certain incidental and inherent attributes reasonably necessary for an effective administration of justice - the deposit of the rentals in escrow with the bank, in the name of the lower court, "is only an incident in the main proceeding." To be sure, placing property in litigation under judicial possession, whether in the hands of a receiver, and administrator, or as in this case, in a government bank, is an ancient and accepted procedure.

An escrow is a written instrument which by its terms imports a legal obligation and which is deposited by the grantor, promisor, or obligor, or his agent with a stranger or third party, to be kept by the depositary until the performance of a condition or the happening of a certain event, and then to be delivered over to the grantee, promisee, or obligee.



Under modern theories of law, the term escrow is not limited in its application to deeds, but is applied to the deposit of any written instrument with a third person. Particular instruments which have been held to be the subject of an escrow include bonds or covenants, deeds, mortgages, oil and gas leases, contracts for the sale of land or for the purchase of personal property, corporate stocks and stock subscriptions, promissory notes or other commercial paper, insurance applications and policies, contracts for the settlement of will-contest cases, indentures of apprenticeship, receipts assigning concessions and discontinuances and releases of causes of action. Moreover, it is no longer open to question that money may be delivered in escrow.

Applying the foregoing principles and considering the peculiarities of the instant case, the lower court, in the course of adjudicating and resolving the issues presented in the main suit, is clearly empowered to control the proceedings therein through the adoption, formulation and issuance of orders and other ancillary writs, including the authority to place the properties in custodia legis, for the purpose of effectuating its judgment or decree and protecting further the interests of the rightful claimants of the subject property.

What is the money that was subject of escrow in

this case?

The rentals of the property of baseco that was paid

to the province of bataan.

Where was this money deposited as a subject of

an escrow?

landbank

was the order for escrow proper.

YES.

The Supreme Court discussed this escrow. It is a

written instrument by which its terms imports a legal

obligation and which is deposited by the grantor,

promisor or obligor or his agent to the stranger or

third party in this case landbank to be kept by the

depositary , the bank, until the performance of a

condition or the happening of a certain event and

then to be delivered over to the grantee, promissee

or obligee. There was still… as who is entitled to

the subject property which is subject to a lease so

the lease rentals payments are then made subject

to escrow. The doctrine applies only, originally to..

by way of grant, instruments for conveyance of

land.. under modern theories of law is not anymore

limited to these but likewise to any written

instruments to the third person such as bonds,

deeds, mortgages, oil and gas leases, contracts for

the sale of land, purchase for the sale of personal

property, corporate stocks, stock subscription,

promissory notes, other commercial paper,

insurance application and policies, contracts for the

sacrament of will contest cases, indentures of

apprenticeship, receipts assigining concessions and

it is no longer open to question that money may be

delivered in escrow.

So It is deposited with the bank, it is an escrow but

not a bank deposit. So, here just take note here of

what is considered as escrow arrangement and the

Supreme Court held here that the deposit of the

rentals in escrow in a bank pending the litigation of

a case was only incident of the main proceeding

and therefore it was deemed to be proper.

Again take note of article note of article 1980

1980. Fixed, savings and current deposits of

money in banks and similar institutions shall be

governed by the provisions concerning simple

loan. (n)

The savings are really loans to a bank because the

bank will use the same for its ordinary transactions

and for the banking business in which it is engaged

so take note of its nature.

Take note if there could be no liability in estaffa if

it’s a bank deposit

Take note of the diligence required as to the bank

being the depositary in that bank deposit.

And also recall your obligations and contracts with

regard to compensation or set off. In compensation

or set off as a mode of extinguishing the obligation

it is applicable to a contract of loan or mutuum but it

is not applicable to a contract of depositumm or real

contract of real deposit. Compensation is allowed in

mutuum but not in deposit that is under article 1287.

Article 1981. When the thing deposited is

delivered and 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.

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 regads the deposit cannot

be executed without opening the box or

receptacle.



Under these two articles what are the obligations of

the depositary, first return the thing deposited in the

same condition when delivered closed and seal.

Depositary shall be liable for damages should the

seal or lock be broken through his fault.

Presumption is he is at fault if the seal or lock is

broken unless he is able to prove otherwise.

Likewise there is an obligation to keep secret of the

deposit when the seal or lock is broken regardless if

he is at fault.

Essentially what we have here.. we have to take

into consideration obligation of the depositary with

regard to a sealed or closed thing deposited

otherwise this would constitute violation of trust by

being depositary. The depositary must respect the

secrets which the depositor desires to keep such

desire is evident when the thing was delivered

closed and sealed.

The statement the depositor.. primafacie evidence

only authorize to open under article 1982, take

note, is presumed to authorized to do so if the key

has been delivered to him or through necessity.

When the instructions of the depositor cannot be

executed without opening the box or receptacle.

Art. 1983 the thing deposited shall be returned

wiht all its products, accessories and

accessions.

Should the deposit consist of money, the

provisions relative to agents, in Article 1896

shall be applied to the depositary.

Again the depositor may be the owner or represents

owner of the thing deposited and he is entitled to

the fruits of the thing including accessions and

accessories ofcourse he maybe the owner. The

depositary has the obligation to return the thing

itself plus the products, fruits, accessions and

accessories which are a consequence of

ownership. Depositary has no right to make use

thereof

If the depositary is in delay or has used the money

he shall be liable for interest as indemnity. That is in

relation to article 1896 governing contracts of

agency wherein the depositary will owe interest for

the sums he has applied for its own use from the

day to which he did so and those which he still

owes after the extinguishment of the deposit.

Article 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

depostary shall be relieved of all responsibility

by returning the thing deposited to the

depositor.

If the depositary has a reasonable grounds to

believe that the thing has not been lawfully

acquired by the depositor, the former may

return the same.

So the depositary cannot require the depositor to

show proof that he is the owner otherwise the

depositary will not return the thing. Again ownership

is not required for the perfection of a contract of

deposit. If you would otherwise require the

depositary to require proof of ownership on the part

of the depositor then this may open door for

badfaith as this may be used by the depositary as a

ground on the pretense of requiring proof of

ownership then he will retain the subject matter.

Again it is not essential that the depositor be the

owner. However when the depositary discovers that

the thing has been stolen and he knows who is the

true owner thereof..what is the obligation of the

depositary? He must advise the true owner. The

requirement

1.) he knows it is stolen

2) he knows the true owner

Then he gives the true owner one month to claim

the thing from the depositary from the time of

notice. Now what is the effect if after one month the

true owner fails to claim the subject matter. The

depositary has the obligation to return it to the

depositor to return it upon demand. Now would it

that constitute bad faith upon the depositary and

would the depositary be liable for damages? Art.

1984 is clear that within one month he has to wait

and after the lapse of one month he will not be

liable anymore for the true owner. Again the true

owner must claim it within the one month period.

What is the effect kung wala na claim sa true

owner? The depositary would not be liable to him

but the true owner can nevertheless go after the

depositor who is in possession of the subject

matter. In otherwords the true owner can still

recover property through other legal

means/processes.

Under the same article 1984… reasonable grounds

that the thing has not been lawfully acquired .. in

other words it he is not sure if its stolen but he has

a reasonable grounds to believe that it could not

have been lawfully acquired by the depositor such

as when the depositor delivers various jewelries to

the depositary but the depositary is awared that the

depositor has no means with acquiring such thing

or has no means to possess such subject matter.

What is the remedy here on the part of the

depositary? The depositary may return the same.

Take note in the last paragraph obviously he does

not know who is the true owner thereof the only

basis is reasonable ground.



Now in relation to the article 1984 what if he knows

the true owner. He notifies the true owner pero wala

pa nag expire yung one month period here comes

the depositor who demands the return of the thing.

We very well know that the depositary has the

obligation to return the thing to the depositor upon

demand so if you take into consideration the nature

of the deposit the depositary must comply, return

the thing to the depositor otherwise it would be

contrary to the nature of the deposit but on the

other hand it is also risky on the part of the

depositary to return in to the depositor despite

notifying the true owner and the one month period

has not yet lapsed.

Now if you look at 1984 it does not cover the

scenario wherein demand is made by the depositor

within the one month period. So in other words what

is the best remedy on the part of the depositary.

You can file an action for interpleader.

So here depositary demands for the return of the

thing again based on the fact that he is the

depositor and on the other hand we have this

person who appears to be the true t owner thereof

so two different interest, depositary can file an

action for interpleader so two parties can litigate

among themselves who has the better right as to

possession of the subject matter.

So this could be better on the part of the depositary

so that he could not be subject to risk as well as to

damages

Art. 1985. When there are two or more

depositors, if they are not solidary, and the

thing admits of division, each one cannot

demand more than his share.

When there is solidarity or the thing does not

admit of division, the provisions of Articles 1212

and 1214 shall govern. However, if there is a

stipulation that the thing should be returned to

one of the depositors, the depositary shall

return it only to the person designated.

Recall your obligations and contracts sa

presumption on obligation is joint, exception it is

solidary by stipulation of the parties as provided by

law or due to the nature of the obligation. What

does 1985 stipulate? If the thing deposited is

divisible and depositors are not solidary then what

is the effect? Each depositor can only demand his

share.

So let us say we have two depositor depositing

1000 sacks of rice if only one will demand for the

return of sacks of rice then he can only demand his

proportionate share 500 sacks of rice. Thing is

divisible, depositor not solidary.. not solidary when

1) not stipulated 2) not due to the nature of the

obligation 3) the law does not provide for such

arrangement it to be considered as solidary.

However, if the obligation is solidary or the thing

deposited is not divisible then the rules on active

solidary shall apply as provided under 1212 and art

1214.

Art 1212. Each one of the solidary creditor may

do whatever may be useful to the others, but

not anything which may be prejudicial to others.

Art. 1214. The debtor may pay any one of the

solidary credits; but if any demand, judicial or

extrajudicial, has been made by one of them,

payment should be made to him.

Take note if the return of the deposit is stipulated to

return to return to the person designated then the

depositary is bound to return it to such person

designated even though that person has not made

any demand for its return

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.

When we talk about incapacity of one of the parties

it will affect the status of the contract if it existed at

the time the obligation was perfected. So if the time

of the delivery one of the parties is incapacitated

then we know that the contract is voidable-valid

until annulled. However if incapacity occurred or

happened after the contract was perfected we still

take note of the obligation of the parties. Here what

is the effect? Recall under 1970 property must be

returned to his guardian, administrator or to the

person who made the deposit or depositor himself if

he should acquire capacity. Under 1986 if the

depositor consequently loses his capacity then the

depositary must return the thing to the legal

representative of the depositor.

Likewise as we have mentioned earlier for the

obligation of the debtor in this case depositary to be

extinguished he must return or deliver the thing to

the party who is capacitated. Otherwise if he

delivered it to an incapacitated party even if he was

the depositor then it will not extinguished his

obligation. So ideliver niya to legal representative of

the depositor or the person who may have the

administration of the property and rights of the

depositor

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 lace 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.

Ofcourse if there is an agreement it should be in the

place agreed upon but the expenses shall be borne

by the depositor. In the absence of stipulation

where the thing deposited might be even if it should

not be the same place where the original deposit

was made provided that the transfer was

accomplished without malice on the part of the

depositary.

Differentiate this from contracts article 1251.. if

there is no express stipulation and it is a

determinate thing place of delivery wherever the

thing might be at the moment the obligation was

constituted which when you look at 1987 is

different.

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 provisions shall not apply when the thing

is judicially attached while in the depositary’s

possession, r 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.

Take note of the general rule the depositor can

demand the return of the thing deposited at will

whether the period was stipulated or not. Whenever

the period is agreed the same is for the benefit of

the depositor and therefore he can demand it

anytime as it will constitute waiver on his part. He

can validly waive his right.

If the deposit however is for compensation while it

is true that the depositor is entitled for the return the

thing the depositary is nevertheless entitled to the

compensation corresponding to the entire period

because that has already been agreed upon.

However take note of this exception wherein the

depositor cannot demand for the return of the thing.

when the thing is judicially attached when in

depositary’s possession otherwise the depositary

would be disobeying the judicial order of

attachment.

Another exception when he is notified of the

opposition of the third person to the return or

removal of the thing deposited. That is clearly

provided as an exception in 1988. Take note this

may be prone to abuse as the depositary should

only be authorized in conflicting claims to consign

the thing in court through anaction of interpleader.

Article 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.

If the deposit is gratituous, depositary may likewise

return the thing deposited notwithstanding the

period has been agreed upon by the parties but

again it must be for a justifiable reason. If the

depositor refuses to receive the thing the remedy

available to the depositary is to deposit the thing at

the disposal of a judicial authority through

consignation.

On the other hand if the deposit is subject to a

valuable consideration, depositary has no right to

return the thing deposited before the expiration of

the time designated even if he should suffer

inconvenience as a consequence.

Distinguish 1988 from 1989, 1988 the right of the

depositor to demand the return of the thing. 1989

the right of the depositary to return the thing that is

the subject matter of the deposit.

Article 1990. If the depositary by force majeure

or government order loses the thing and

receives money or another thing in its place, he

shall deliver the sum or other thing to the

depositor.

recall in 1972 depositary has the obligation to return

the exact thing that was the subject of the deposit.

1990 provides for the exception wherein depositary

is not liable for the loss of the thing by force

majeure or through government order. However, if

the depositary receives money or other thing

because of the loss then the depositary has the

duty to deliver to the depositor what he has

received otherwise there would be unjust

enrichment through the expense of the depositor.

Article 1991. The depositary’s heir who in good

faith may have sold the thing which he did not

know was deposited, shall only be bound to

return the pice he may have received or to

assign his right of action against the buyer in

case the price has not been paid to him.

Take note nakalagay diyan depositary’s heir it must

be depositary’s heir because depositary is the one

in possession of the subject matter however he died

and the his heir saw this subject matter of the

deposit. So what did the heir do with the subject of

this deposit, if in good faith he sells it the obligation

of the heir is to return the price he has received

from the sale or assign the right to collect the same

to the depositor if he has not been paid. Take note

price again not the real value of the thing.

However if there has been bad faith on the part of

the heir, he has knowledge of the subject of the

deposit but nevertheless sells it to a third person he

will be liable for damages.



So with that the following are the obligations of the

depositary

1. Art 1972 to safekeep the thing deposited. In the

same article to return the thing, general rule, upon

demand .

2. 1988 if gratituous there must be justifiable

reason.

3. Obligation to return if the product has fruits,

accessions and accessories.

4. If there is a force majeure or government… and

the depositary receives money or another thing in

place of the thing loss the obligation is to give it to

the depositor.

5. Where to return it? By agreement or in the

absence of stipulation where the thing is deposited

as provided under article 1987.

6. Obligation not to deposit with the third person

unless authorized

7. Under 1974, obligation to change the xx of the

deposit

8. 1975 obligation if the thing deposted earns

interest, collect interest plus capital preserve its

value

9. Again differentiate ordinary lease from a lease of

safety deposit box.

10. Obligation not to comingle things If so stipulated

or if it is of different kind and quantity.

11. Obligation not to make use of the thing

deposited unless authorized

12. Liability for loss incase of fortituous event take

note of the exceptions under 1979

13. Obligation when the thing deposited is delivered

sealed and closed

14. Obligation to pay interest of sums converted to

personal use if deposit consist of money.

15. And obligation to advise the true owner if

depositary discovers that the thing deposited was

stolen.

December 8, 2015 (Damalerio)

Let’s continue with the obligations of the depositor.

Art. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the expenses he may have incurred for the preservation of the thing deposited.

This emphasizes one of the obligations of the depositor to pay for the expenses for preservation.

Obviously Art. 1992 is applicable only to gratuitous deposit. The basis of this EQUITY, as the depositor would have incurred these expenses just the same.

Otherwise, depositor would unjustly enrich himself at the expense of the depositary. Take note of the difference between DEPOSIT and COMMODATUM. Art. 1941 with regard to commodatum, it’s the bailee who pays for this kind of expenses. However, there is a distinction that with regard to expenses for preservation, iba yung treatment if it is ordinary or extraordinary. But when it comes to contract of Deposit, no distinction. Right to reimbursement covers ALL expenses for preservation, whether ordinary or extraordinary. What is important is that this must be a NECESSARY expense for the preservation of the subject matter. With regard to useful expenses, or those for pure luxury/pleasure, it is NOT covered

under Art. 1992. What if the deposit is for compensation? The GR: expenses for preservation are borne by the depositary, since these expenses are deemed included in the compensation agreed upon by the parties, unless otherwise stipulated by them. Now the other obligation of the depositor is to pay for the losses incurred by the depositary due to the

character of the thing deposited.

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.

So the GR is that: a depositary MUST be reimbursed for the loss suffered by him because the character of the thing deposited. What do you mean here? The thing deposited may be flammable, may chemicals, etc. So if there is a loss suffered by the depositary, then he will be reimbursed by the depositor. However, take note of the following exceptions:

1) At the time of the constitution of the deposit, if the depositor was not aware of the character of the thing deposited, then he will not be obliged to reimburse the depositary;

2) If the depositor was not expected to know the dangerous character of the thing;

3) If the depositary was notified of the character of the subject matter;

4) If the depositary was aware of such character, even without advise from the depositor

Art. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit.

You have there a pledge created by operation of law. What is a PLEDGE? It is a contract of security wherein personal property is delivered for the security of a principal obligation. So pwede i-hold ng depositary ang subject matter if the depositor will not pay to him what is due.



Recall that this is contrary to the GR with regard to a commodatum. Because in commodatum, no right to retain – that is the GR. The only exception is with regard to hidden defects under Art. 1951. So essentially here, the thing retained in the deposit serves as security for the payment of what may be due to the depositary by reason of the deposit. Again, this is different from commodatum. But this is somewhat similar to a Contract of Agency, wherein the agent is also given the right to retain with regard to the obligation of the principal to reimburse the agent for expenses.

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.

This provides for modes of extinguishing a contract of deposit. But take note, these modes enumerated herein are not exclusive, as other causes extinguishing a deposit may also be present such as: Return of the thing, Novation, Merger, Expiration of the term, Fulfillment of a Resolutory condition. Now if the contract of deposit is gratuitous, then the death of either the depositor or depositary extinguishes the deposit. The depositary is not obliged to continue with the contract of deposit. However, distinguish it if it is a deposit for compensation, because the death of either party will not extinguish the contract as an onerous deposit is NOT personal, unlike that of a gratuitous deposit. So here, if the contract of deposit is for compensation, then we apply the GR that rights and obligations are transmissible to their respective heirs under Art. 1178. However the heirs of either party may have the right to terminate the deposit even before the expiration of the term.

III. NECESSARY DEPOSIT

Now let’s proceed to the 2nd

type of extrajudicial deposit: you have NECESSARY DEPOSIT.

What happens in necessary deposit? There is no

freedom to choose who will be the depositary, unlike that of voluntary deposit wherein the depositor has the freewill to choose who will be the depositary.

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

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

The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning voluntary deposit and by Article 2168.

Take note, Art. 2168 is just compensation. Now kinds of necessary deposit, the 3 of which are enumerated in 1996 and 1997:

1) By legal obligation (Art. 1996) 2) On occasion of any calamity (Art. 1996) 3) Art. 1998 4) With regard to passengers of common

carriers (Art. 1754) 1. By virtue of legal obligation, a necessary

deposit is deemed created. What are these instances? Some of these are already discussed in your Property.

1) Art. 538 – Judicial deposit of a thing,

the possession of which is being disputed in a litigation by 2 or more persons.

2) Art. 586 - Deposit with a bank or public

institution of public bonds or instruments of credit payable to order or bearer given

3) Art. 3104 – the deposit of the thing

pledged, when the creditor uses the same without the authority of the owner, or misuses it in any other way

4) Those required in suits as required by the Rules of Court

5) Those constituted to guarantee contracts with the government – in this case, the deposit arises from an obligation of public or administrative character

2. On the occasion of any calamity. So deposit

by accident or fortuitous event, the law imposes on the recipient the obligations of a bailee. The more immediate object is to save the property rather than its safekeeping. Sometimes it is referred to as a Quasi-Bailment, Involuntary bailment, Involuntary deposit, or Depositum Miserape – causal relation between the calamity and the constitution of the deposit. In this instance the governing rules would apply voluntary deposit, as well as Art. 2168 which govern quasi-contracts. What are the 2 quasi-contracts?

1. Solutio Indebiti 2. Negotiorum Gestio

Of the 2, which is more applicable with necessary deposit on the occasion of any calamity? Negotiorum Gestio. This was your example in your obligations and contracts. Like if may fire, so you get to save the belongings of your neighbor while he is not around. In the meantime, you will be considered as a depositary of his belongings.

Art. 2168. When during a fire, flood, storm, or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation.



Otherwise, there will be unjust enrichment.

3. Art. 1998 and 1999 – travelers in hotels or inns.

Art. 1998. The deposit of effects made by the travellers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects.

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

Travelers or guests, these are terms which are used synonymously. They refer to transients, not boarders. Non-transients, including boarders, shall be governed by the rules on contracts of lease. Hotel-keepers and innkeepers are also referred to synonymously. Technically speaking, we have there the definition of a hotel:

Hotel – public building of many rooms, chiefly for overnight accommodation of transients, in several floors served by elevators usually with --- (?) lobby

Inns – a public house for the lodging of travelers, for compensation and until capacity is reached

Personally, I don’t know how you classify nowadays the hotels and inns. Usually when you say hotels,, you refer to the big ones, but right now meron na yung maliliit na hotels which they refer to as Botique Hotels. So how do you distinguish a boutique hotel and inn? Ang boutique hotel ba, may elevator, ang inn wala? Im not sure. As long as someone can stay there overnight, then we don’t anymore take into consideration its definition. And in connection with necessary deposit, these 2 terms are referred to synonymously. And then you also have the term motels, which

came from the term “motorist hotels.” I don’t know if dit lang yan sa Philippines ang reference or definition ng motel, because if you really look at the definition of a motel: Motel – an establishment which provides lodging and parking, in which rooms are usually accessible from an outdoor parking area. This is what you see in Hollywood movies. Best example is Bates (?) Motel. Usually 2 floors lang and then may parking space outside the door. I don’t know how we came about the reference here, na when you say motel, we laugh, meron kaagad maisip. Nevertheless, Art. 1998 and 1999 are also applicable whether it is a hotel, inn, or a motel.

Now we’re talking here about the liability of a hotel-keeper or innkeeper as a depositary. Please take note of the following elements to hold hotel-keepers or innkeepers responsible as depositaries with regard to the effect of their guests:

1. That the hotel-keepers have been previously informed about the effect brought by the guests

2. The guests have taken precautions prescribed regarding the same

DURBAN APARTMENTS VS. PIONEER (639 SCRA 441, G.R. No. 179419, January 12,

2011) FACTS: On July 22, 2003, Pioneer Insurance and Surety Corporation, by right of subrogation, filed [with the RTC of Makati City] a Complaint for Recovery of Damages against Durban Apartments Corporation, doing business under the name and style of City Garden Hotel, and [defendant before the RTC] Vicente Justimbaste. Respondent’s contention:

Respondent averred that it is the insurer for loss and damage of Jeffrey See’s Suzuki Grand Vitara in the amount of P1,175,000. On April 30, 2002, See arrived and checked in at the City Garden Hotel in Makati corner Kalayaan Avenues, Makati City before midnight, and its parking attendant, defendant Justimbaste got the key to said Vitara from See to park it. On May 1, 2002 (1am) – the Hotel Chief Security Officer informed him that his car was carnapped while it was parked unattended at the parking area of Equitable PCI Bank along Makati Ave. See then reported the incident to the Operations Division of Makati City Police Anti-Carnapping unit and then conducted investigation. The car has not yet been recovered since July 23, 2002. Respondent paid P1,163,250 money claim of See and mortagee ABN AMRO Savings Bank as indemnity for the loss of the car. The car was lost due to the negligence of Durban Apartments and Justimbaste because it was discovered that this was the second time that a similar incident of carnapping happened in the valet parking service of Durban Apartments and no necessary precautions were taken to prevent its repetition. Defendant Justimbaste and Durban Apartments failed and refused to pay Pioneer’s valid, just, and lawful claim despite written demands. Petitioner’s contention: See did not check in at its hotel, on the contrary, he was a guest of a certain Ching Montero x x x; defendant x x x Justimbaste did not get the ignition key of See’s Vitara, on the contrary, it was See who requested a parking attendant to park the Vitara at any available parking space, and it was parked at the Equitable Bank parking area, which was within See’s view, while he and Montero were waiting in front of the hotel.



They made a written denial of the demand of [respondent] Pioneer Insurance for want of legal basis; valet parking services are provided by the hotel for the convenience of its customers looking for a parking space near the hotel premises; it is a special privilege that it gave to Montero and See; it does not include responsibility for any losses or damages to motor vehicles and its accessories in the parking area; and the same holds true even if it was See himself who parked his Vitara within the premises of the hotel as evidenced by the valet parking customer’s claim stub issued to him. Defendant Justimbaste saw the Vitara speeding away from the place where it was parked; he tried to run after it, and blocked its possible path but to no avail. RTC ruled in favor of respondent and ordered Durban Apartment to pay respondent the sum of P1, 163, 250.00. CA affirmed the decision of RTC. Hence, present petition. ISSUE:

Whether or not petitioner is liable to respondent for the loss of See’s vehicle.YES. HELD:

In this case, respondent substantiated the allegations in its complaint, i.e., a contract of necessary deposit existed between the insured See and petitioner. On this score, we find no error in the following disquisition of the appellate court. The records also reveal that upon arrival at the City Garden Hotel, See gave notice to the doorman and parking attendant of the said hotel, x x x Justimbaste, about his Vitara when he entrusted its ignition key to the latter. x x x Justimbaste issued a valet parking customer claim stub to See, parked the Vitara at the Equitable PCI Bank parking area, and placed the ignition key inside a safety key box while See proceeded to the hotel lobby to check in. The Equitable PCI Bank parking area became an annex of City Garden Hotel when the management of the said bank allowed the parking of the vehicles of hotel guests thereat in the evening after banking hours. Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a necessary deposit made by persons in hotels or inns: 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 returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects.

Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for safekeeping with petitioner, through the latter’s employee, Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfected from See’s delivery, when he handed over to Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely keeping and returning it. Ultimately, petitioner is liable for the loss of See’s vehicle. POLICY: A deposit is constituted from the moment

a person receives a thing belonging to another, with the obligation of safely keeping it and returning the same.

What makes it a necessary deposit when you are a traveler? Because you are going to stay in this place. You have no other choice but to entrust your belongings to these hotel-keepers or innkeepers. Now in this case of Durban Apartments, what happened? There was a necessary deposit perfected for the purpose of safekeeping when See delivered to Justimbaste, an employee of the hotel, the keys to his vehicle. And as such, it was received with the obligation of safely keeping the car and returning it. So therefore, Durban Apartments is liable for the loss of See’s vehicle even if the car was parked, not anymore within the premises of Durban hotel. What’s the basis? Take a look at Art. 1999. What does it mean? The parking space here of Equitable Bank was deemed as an annex of the hotel, as it was customary for them to park the vehicles of their guests after banking hours, with the permission of Equitable Bank. So just the same, the hotel was obliged to exercise the diligence required from a depositary even if the cars of their guests were parked within the premises of Equitable Bank. The same is already deemed an annex of the hotel. So liability is not limited to effects lost or damaged in the hotel rooms, which come under the terms “baggage” or “articles” such as clothings, but also include those lost or damaged in hotel annexes such as vehicles in a hotel’s garage, or in this case, in a property wherein it is deemed as an annex considering that it has been customary for the hotel to park the cars in the said parking space.

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.

So these 3 articles refer to those instances when the hotel-keeper is liable or not. Under these articles, the hotel keeper is liable REGARDLESS of the care exercised in the following instances:

1. Loss or injury caused by his servants or employees, as well as by strangers, provided that notice has been given and proper precautions taken (Art. 2000 in relation to the requisites in art. 1998).

2. Loss is caused by the act of a thief or a robber, done without the use of arms or

irresistible force (Art. 2001). In this instance, the HK is apparently negligent.

Instances when the HK is not liable:

1. When the loss is caused by force majeure (Art. 2000); Theft or robbery by a stranger, not a HK’s servant or employee, with the use of arms or irresistible force (Art. 2001), unless the HK is guilty of fraud or

negligence in failing to provide against the loss or injury

2. Loss is due to the acts of the guest, his family, servants or visitors (Art. 2002)

3. When the loss arises from the character of the things brought in the hotel (Art. 2002)

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void.

You always see this: “The management will not be liable for the loss of your belongings… Please take care of your things…” among others. Now mere posting of these notices will not free the HK from responsibility. We go back to the provisions similar to safety deposit boxes, wherein otherwise we just allow the HK to be negligent or to not exercise any degree of diligence at all because anyway, they will not be held liable. It’s very clear under Art. 2003 that such notice is not binding to guests, and any stipulation suppressing or diminishing such liability will be considered as VOID. This provision is similar to common carriers, where it is not allowed for common carriers to dispenses with or limit his responsibility by stipulation or by posting of notices. Again, this is in relation to your contracts, if it is contrary to law, morals and public policy then it will not be considered as valid. HK and IK as depositaries should be subjected to extraordinary degree of responsibility for the protection and safety of travelers who have no alternative but to rely on the good faith and care of

those with whom they paid lodging. HK and IK have supervision and control of their inns and premises thereof, it is not necessary in order to hold the IK liable that the effects of the guests be actually delivered to him or his employees. It is enough that they are within the inn.

YHT REALTY VS. CA (451 SCRA 638, G.R. No. 126780, February 17,

2005) FACTS: McLoughlin (private respondent), an Australian businessman, regularly stayed at Sheraton Hotel during trips to Philippines. McLoughlin became friends with Tan, who convinced the former to transfer from Sheraton Hotel to Tropicana Hotel were (petitioners) Lainez, Payam and Lopez. Lopez served as manager while Lainez and Payam had custody of the keys for the safety deposit boxes of Tropicana Hotel. The procedure for the safety deposit box at Tropicana Hotel was that it can be opened by 2 keys only. 1 key is given to the registered hotel guest while the other key is held by the hotel management. McLoughlin deposited $15,000 (US) and $10,000 (AUS) as well as letters, bankbooks, credit cards and a checkbook in the safety deposit box during his stay at Tropicana Hotel. After his trips abroad, McLoughlin discovered that some cash and valuables he deposited in the safety deposit box were missing. McLoughlin immediately confronted Lainez and Payam. Both admitted that Tan opened the safety deposit box with the key assigned to him. When McLoughlin confronted Tan, she admitted to have stolen the key with the assistance of Lopez, Payam and Lainez. A promissory note was written by Lopez, promising to pay the amount of $4,000 (AUS) and $2,000 (US). McLoughlin insisted that Tropicana Hotel be responsible for the loss. However, Lopez refused and relied on the conditions for renting the safety deposit box which provides that the hotel is free from any liability arising from loss should the key be lost and to return the key and execute the release in favor of the hotel upon giving up the use of the box. McLoughlin filed a case against petitioners. RTC ruled in favor of McLoughlin, making petitioners jointly and severally liable for the losses plus damages. The hotel conditions were ruled not valid for being contrary to Art 2003 of the NCC and public policy. The CA also ruled in favor of McLoughlin. ISSUE: Whether or not YHT Corporation is jointly and severally liable for the losses suffered by McLoughlin? – YES. HELD:

SC appreciated the facts found and proven by the lower court that McLoughlin indeed deposited such cash and valuables as he claimed.



The evidence also revealed that the hotel guest alone cannot open the safety deposit box without the assistance of the hotel management or its employees. In case of loss of any item deposited, it is inevitable to conclude that the management had at least a hand in the consummation of the taking, unless the reason for the loss is force majeure. Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the master key of the management when the loss took place. They even admitted that they assisted Tan on 3 separate occasions in opening McLoughlin’s safety deposit box. It is proved that Tropicana had prior knowledge that a person aside from the registered guest had access to the safety deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to discover the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the negligence of its employees. Tan’s acts should have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would have exercised due diligence required of them. Failure to do so warrants the conclusion that the management had been remiss in complying with the obligations imposed upon hotel-keepers under the law. Under Art 1170 of NCC, those who, in the performance of their obligations, are guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages, Art 2180 Par (4) of NCC provides that the owners and managers of an establishment are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer was negligent in selecting and/or supervising him for it is hard for the victim to prove the negligence of such employer. Thus, given the fact that the loss of McLoughlin’s money was consummated through the negligence of Tropicana’s employees in allowing Tan to open the safety deposit box without the guest’s consent, both the assisting employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant to Article 2193. Also, Art 2003 is controlling which provides that the hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void. Petitioners contend that McLoughlin’s case was mounted on the theory of contract, but the trial court and the appellate court upheld the grant of the claims of the latter on the basis of tort. There is

nothing anomalous in how the lower courts decided the controversy for this Court has pronounced a jurisprudential rule that tort liability can exist even if there are already contractual relations. The act that breaks the contract may also be tort.

Q: So what should have been done here in order for the hotel and its employees not to be deemed negligent? A: They should have ascertained as to the person of Tan, or gave notice to McLoughlin that Tan opened the safety deposit box at numerous instances. And the fact that Tan opened the safety deposit box at night when Mcloughlin was asleep, should have alerted the employees as to the authorization of Tan to open such. Again as we have discussed in cases of safety deposit boxes, it is not sufficient that you have the key. You must also be an authorized person. In this case, who was the lessee of the SDB? It was only Mcloughlin, not Tan. Tan was only his companion. At the same time, Mcloughlin could also not open it without the said key in his possession. So here, with regard to depositaries in the instance of HKs and their employees, he must exercise extraordinary diligence. Again it is not necessary that the effects of the guest be ACTUALLY DELIVERED to him (HK). In this case there was no actual delivery to the employees, but it was Mcloughlin who placed the cash and other belongings to the SDB. That is already sufficient for the hotel to exercise the diligence required for a HK.

Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests.

This is another instance where there is a Contract of Pledge created by operation of law, wherein the HK is given the right to retain the belongings of the guest to compensate them for the liabilities imposed upon by law. The bailee in commodatum may likewise retain, but again it is only with regard to damages by reason of defects. However take note, Art. 2004 only deals with the civil liability, in the sense that the object or the things of the guest may be retained by the HK. On the other hand, the HK can even hold the guest liable for estafa under Sec. 2 if the guest obtained full accommodation in the hotel or inn without paying therefor.

IV. SEQUESTRATION OR JUDICIAL DEPOSIT

Now very briefly, let us go over the JUDICIAL DEPOSIT or SEQUESTRATION.

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.

So judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered by court. Judicial = of course that is a court order. If there is a notice of lis pendens, does it is necessarily mean that the property is subject to judicial deposit? No.

What is a notice of lis pendens? It is an announcement to the whole world that the real property is subject of a pending litigation. It is also a warning to those who will acquire interest over the property, that they shall do so at their own risk, subject to the decision of the court.

LOS BAÑOS RURAL BANK VS AFRICA

FACTS: Pacita Africa is the widow of Alberto Africa and the rest of her co-petitioners are their children. In June 1989, the Register of Deeds was razed by fire, destroying some of its records/documents among which was the original TCT covering a parcel of land registered in the name of petitioner Pacita. The aforesaid property was part of the conjugal property of petitioner Pacita and her late husband Alberto Africa. On request of Pacita, private respondent Macy Africa, the common-law wife of petitioner Antonio Africa, worked for the reconstitution of the TCT. While the reconstituted title was in her possession, Macy allegedly forged, or caused the forgery of, Pacita’s signature on a Deed of Absolute Sale purporting to transfer ownership of the subject property to Macy. On the strength of the forged Deed of Absolute Sale, Macy was able to cause the issuance of a TCT in her name, without the knowledge of any of herein petitioners. In March 1994, petitioners discovered that the subject property was mortgaged by Macy to the respondent bank. To protect their interests over the subject property, petitioners lodged an action in court against Macy and the respondent bank for Annulment of Title, Deed of Absolute Sale and Deed of Mortgage. The respondent bank in utter bad faith, foreclosed the subject property on June 11, 1996 without due notice to the petitioners, prompting the petitioners to amend [their] complaint, this time incorporating therein a prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction, to stop the respondent bank from, among others, consolidating title to the subject property.

Petitioner argues that respondents do not have a right to the relief demanded, because they merely have possession of the property, as the legal title is in the name of Macy Africa.

9 Furthermore, it claims

that the consolidation of title in its name does not constitute an "invasion of a right that is material and substantial. On the other hand, respondents maintain that they would suffer great irreparable damage if the writ of preliminary injunction is not granted.

11 They likewise

contend that if petitioner is allowed to consolidate its title to the subject property, they would lose their ancestral home, a loss that would result in unnecessary and protracted proceedings involving third parties. ISSUE:

Whether the appellate court erred in issuing a writ of preliminary injunction to stop petitioner’s consolidation of its title to the subject property. HELD: Main Issue: Propriety of Preliminary Injunction We agree with respondents. The grounds for the issuance of a writ of preliminary injunction are enumerated in Rule 58, Section 3 of the Revised Rules of Court, which reads as follows: "Sec. 3. Grounds for issuance of preliminary injunction. – A preliminary injunction may be granted when it is established; (a)That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually; (b)That the commission, continuance or non-performance of the act or acts complained of during the litigation would probably work injustice to the applicant; or (c)That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual." Injunction is a preservative remedy aimed at no other purpose than to protect the complainant’s substantive rights and interests during the pendency of the principal action. A preliminary injunction, as the term itself suggests, is merely temporary. It is to be resorted to only when there is a pressing necessity to avoid injurious consequences that cannot be remedied under any standard of compensation.

Moreover, injunction, like other equitable remedies, should be issued only at the instance of a suitor who has sufficient interest in or title to the right or the property sought to be protected. It is proper only when the plaintiff appears to be entitled to the relief demanded in the complaint. In particular, the existence of the right and the violation thereof must appear in the allegations of the complaint and must constitute at least a prima facie showing of a right to the final relief. Thus, there are two requisite conditions for the issuance of a preliminary



injunction, namely, (1) the right to be protected exists prima facie, and (2) the acts sought to be enjoined are violative of that right. It must be proven that the violation sought to be prevented would cause an irreparable injustice. Further, while a clear showing of the right is necessary, its existence need not be conclusively established. In fact, the evidence required to justify the issuance of a writ of preliminary injunction in the hearing thereon need not be conclusive or complete. The evidence need only be a "sampling" intended merely to give the court an idea of the justification for the preliminary injunction, pending the decision of the case on the merits. Thus, to be entitled to the writ, respondents are only required to show that they have the ostensible right to the final relief prayed for in their Complaint.

First Requisite:Existence of the Right

In the case at bar, we find ample justification for the issuance of a writ of preliminary injunction. Evidently, the question on whether or not respondents possess the requisite right hinges on the prima facie existence of their legal title to the subject property. They have shown that they have that right, and that it is directly threatened by the act sought to be enjoined.

First, Respondent Pacita Africa is the registered owner of the subject property. Her ownership is evidenced by the reconstituted Transfer Certificate of Title. Second, the validity of the Deed of Sale dated December 29, 1992, is still in dispute because Respondent Pacita Africa claims that her signature was forged by the vendee, Macy Africa.

Third, there is doubt as to the validity of the mortgage in favor of petitioner, because there exists on record two TCTs covering the mortgaged property: (1) TCT No. 81519 registered in the name of Pacita Africa and (2) TCT No. 81519 registered in the name of Macy Africa. If indeed the Deed of Sale is a forgery, no parcel of land was ever transferred to the purported buyer who, not being the owner, could not have validly mortgaged the property. Consequently, neither has petitioner -- the buyer and mortgagee of the same lot -- ever acquired any title thereto. Significantly, no evidence was presented by petitioner to controvert these allegations put forward by respondents. Clearly then, on the basis of the evidence presented, respondents possess the right to prevent petitioner from consolidating the title in its name. The first requisite -- the existence of a right to be protected -- is thus present.

Second Requisite:Violation of Applicant’s

Right As to the second requisite, what is sought to be enjoined by respondents is the consolidation of the title to the subject property in petitioner’s name. After having discovered that the property had been mortgaged to petitioner, respondents filed on June 12, 1994 an action for Annulment of Title, Deed of Sale, and Mortgage to protect their rights over the property. This notwithstanding, petitioner foreclosed it on June 11, 1996. To enjoin petitioner from consolidating the title in its name, respondents then

filed an Amended Complaint, praying for a writ of preliminary injunction. Unless legally stopped, petitioner may consolidate title to the property in its name and enjoy the unbridled freedom to dispose of it to third persons, to the damage and prejudice of respondents. What respondents stand to lose is material and substantial. They would lose their ancestral home even without the benefit of a trial.

Clearly, the act

sought to be enjoined is violative of their proprietary right over the property.

A writ of preliminary injunction is issued precisely to preserve threatened or continuous irremediable injury to some of the parties before their claims can be thoroughly studied and adjudicated. Denial of the application for the writ may make the Complaint of respondents moot and academic. Furthermore, it would render ineffectual a final judgment in their favor or, at the very least, compel them to litigate needlessly with third persons who may have acquired an interest in the property. Such a situation cannot be countenanced.

Lis Pendens Petitioner further contends that respondents are not entitled to the relief prayed for, because they caused a notice of lis pendens to be annotated at the back of TCT No. 81519, registered in the name of Macy P. Africa; thus, that notice provided ample protection of their rights and interests.

We are not persuaded. A notice of lis pendens serves as an announcement to the whole world that a particular real property is in litigation and as a warning that those who acquire an interest in the property do so at their own risk -- they gamble on the result of the litigation over it. However, the cancellation of such notice may be ordered by the court that has jurisdiction over it at any given time. Its continuance or removal -- like the continuance or the removal of a preliminary attachment or injunction -- is not contingent on the existence of a final judgment on the action and ordinarily has no effect on the merits thereof. Thus, the notice of lis pendens does not suffice to protect herein respondents’ rights over the property. It does not provide complete and ample protection. Status Quo Ante

Petitioner further claims that the RTC erred in enjoining the foreclosure sale of the subject property. It argues that the foreclosure may no longer be enjoined, because it has long been effected since 1996. We agree with petitioner. It is a well-entrenched rule that consummated acts can no longer be restrained by injunction whose sole objective is to preserve the status quo until the merits of the case are fully heard. Status quo is defined as the last actual peaceful uncontested situation that precedes a controversy, and its preservation is the office of an injunctive writ.

In the instant case, the status quo was the situation of the parties at the time of the filing of the Amended Complaint with a prayer for a writ of preliminary injunction. It was that point at which petitioner had already foreclosed the subject property and, hence, could no longer be enjoined



from going on with the foreclosure. However, the last actual uncontested status that preceded the controversy was when the property in dispute was still registered in the name of Macy Africa, petitioner not having consolidated in its name the title thereto. Thus, the issuance of the writ would no doubt preserve the status quo.

We cannot rule on the allegation of petitioner that this case is a "scam perpetrated by private respondents" to defraud it. The truth or the falsity of that assertion cannot be ascertained by this Court at this time. Verily, we refrain from expressing any opinion on the merits of the case, pending a full consideration of the evidence that would be presented by the parties.

So was the issuance of the writ of preliminary injunction proper? Yes. It was proper because they complied with the 2 requisites. Because they allege that the notice of lis pendens was sufficient to protect the rights of the respondents, so that’s why they opposed to the issuance of the writ of preliminary injunction. The SC held here that the notice of lis pendens serves merely as an announcement to the whole world that the particular property is in litigation, and a warning that those who acquire interest in the property do so at their own risk. They gamble on the result of the litigation over it. The notice of lis pendens does not suffice to protect respondents’ right over the property as it does not provide complete and actual protection. So the issuance of PI was proper as the notice was merely a warning. In fact, rights to the property can be transferred, but again subject to the notice that it is under litigation. Again, Notice of lis pendens is different from Judicial Deposit.

Art. 2009. As to matters not provided for in this Code, judicial sequestration shall be governed by the Rules of Court.

So we only have 5 provisions on judicial deposit because this is procedural in nature, therefore the Rules of Court is applicable. Take note of the distinctions between JUDICIAL and EXTRAJUDICIAL DEPOSIT:

1) Judicial - by the will of the court. Extrajudicial - by the will of the parties.

2) Judicial - the purpose of which is to secure the right of the party to recover in case of a favorable judgment. Extrajudicial - for custody and safekeeping.

3) As to subject matter: Judicial - maybe movable or immovable but generally immovable. Extrajudicial - only movable property.

4) Remuneration: Judicial - always onerous. Extrajudicial - maybe gratuitous or subject to compensation.

5) Judicial - it is in behalf of the person who, by judgment, has a right. Extrajudicial - in behalf of the depositor or 3

rd person

designated.

6) Judicial - auxiliary to a case pending in court, its purpose is to maintain the status quo during litigation or to ensure the rights of the parties. The depositary is the person appointed by the court, with the obligation to exercise the diligence of a good father of a family (Art. 2008), and he may not be relieved of his responsibility until the litigation is ended, or the court so orders (Art. 2007).

December 11, 2015 (Calatrava)

PART V: THE WAREHOUSE RECEIPTS LAW

So The Warehouse Receipts Law, that’s Act 2137.

What is the purpose of Warehouse Receipts Law?

1. To regulate the status, rights, and liabilities of a

person in a warehousing contract;

2. To protect those who in good faith and for value,

acquire negotiable warehouse receipts by

negotiation;

3. To render the title to and right of possession of

property stored in warehouses more easily

convertible;

4. To facilitate the use of warehouse receipts as

documents of title;

5. In order to accomplish these, to place much

greater responsibility on the warehouseman.

The scope of this law covers all warehouses,

whether public or private, whether bonded or not.

However we also have the General Bonding

Warehouse Act which specifically regulates

warehouses which put up a bond. So in other

words, the Warehouse Receipts Law is suppletory

to the General Bonding Warehouse Act with

regarded to bonded warehouse.

Now, the Warehouse Receipts Law on the other

hand prescribes mutual duties and the rights of a

warehouseman who issues warehouse receipts to

the depositor and covers all warehouses whether

bonded or not.

Applicability: it applies to warehouse receipts issued

by a warehouseman as defined under Section 58 of

the Warehouse Receipts Law. Civil Code on the

other hand applies to cases or receipts not issued

by the warehouseman. Take note that what

happens herein, if you deliver things in a

warehouse, essentially it is a contract of deposit. So

if what is involved is a warehouse receipt, you have

the special law. In circumstances if there is no

warehouse receipt issued, we apply the rules on

deposit under the Civil Code.

Now, under the Civil Code the depositor is not

necessarily a holder of a warehouse receipt. On the

other hand, if you are under the Warehouse

Receipts Law, you have the warehouseman as the

depositary of such arrangement. So the

warehouseman is a person lawfully engaged in the

business of storing goods for profit. The warehouse

of course, that is the building or place where goods

are deposited and stored for profit.



Now, the warehouse receipt, it is a written

acknowledgment by a warehouseman that he has

received and holds certain goods therein described

in his warehouse for the person to whom it is

issued. It is one of those documents of title as

provided under Article 1636 of the New Civil Code.

Characteristics of a warehouse receipt are as

follows:

1. A contract- a contract of deposit and in

certain instances it is considered as a

contract of carriage;

2. Evidence of the receipt of goods; and

3. Represents the goods and operates as a

transferable document of title.

Those who were with me under Sales, we have

briefly covered Documents of Title. A warehouse

receipt is a document of title which must be

distinguished from your negotiable instruments.

Because take note, documents of title can be

negotiable or non-negotiable. Remember, in a

negotiable instrument, what is the subject matter?

Money. However, in warehouse receipts you have

merchandise. Object of value in a negotiable

instrument is the instrument itself. In a negotiable

warehouse receipt, the goods subject of the

deposit. In a negotiable instrument you have parties

who are secondarily liable. But under the

warehouse receipts law with regard to negotiable

documents, there is no distinction between primary

and secondary liable. In a negotiable instrument,

original bearer instrument will always be considered

as original bearer instrument. However, with regard

to a negotiable warehouse receipt, even if it is

originally a bearer instrument, if it is especially

endorsed, it is converted into an order instrument.

Now again, take note here of these distinctions. The

terms here bearer and order, same siya with your

negotiable instruments. Bearer instrument or bearer

document, negotiated by mere delivery. Order

document or order negotiable instrument,

negotiated by indorsement plus delivery. However,

there is no concept of a holder in due course in

negotiable warehouse receipts. But that is available

in a negotiable instrument where a holder in due

course can have a better title than the transferor.

Sa negotiable warehouse receipt, he only gets the

subsequent holder, transferee only gets the same

title as that of the transferor.

Now take note section 2 of the law, you have the

essential terms of a warehouse receipt.

Sec. 2. Form of receipts; essential terms. —

Warehouse receipts need not be in any

particular form but every such receipt must

embody within its written or printed terms:

(a) The location of the warehouse where the

goods are stored,

(b) The date of the issue of the receipt,

(c) The consecutive number of the receipt,

(d) A statement whether the goods received will

be delivered to the bearer, to a specified person

or to a specified person or his order,

(e) The rate of storage charges,

(f) A description of the goods or of the

packages containing them,

(g) The signature of the warehouseman which

may be made by his authorized agent,

(h) If the receipt is issued for goods of which

the warehouseman is owner, either solely or

jointly or in common with others, the fact of

such ownership, and

(i) A statement of the amount of advances made

and of liabilities incurred for which the

warehouseman claims a lien. If the precise

amount of such advances made or of such

liabilities incurred is, at the time of the issue of,

unknown to the warehouseman or to his agent

who issues it, a statement of the fact that

advances have been made or liabilities incurred

and the purpose thereof is sufficient.

A warehouseman shall be liable to any person

injured thereby for all damages caused by the

omission from a negotiable receipt of any of the

terms herein required.

If the goods are incorrectly described, it would not

necessarily make the warehouse receipt ineffective

when identity of the goods is fully established by

evidence.

What is the effect if these essential terms or any of

these essential terms are omitted or are not present

in a warehouse receipt?

1. As a general rule it will not affect the validity

of the warehouse receipt;

2. However the warehouseman may be liable

for damages;

3. The negotiability of the receipts will not

necessarily be affected;

4. However it is possible that the contract will

be converted to an ordinary contract of

deposit.

Arrangement or contract involving a warehouse

receipt is similar with other contracts. The

agreement between the depositor and the

warehouseman must be of course not contrary to

law, morals, public order, and customs among

others. And there must be no exemption exempting

the warehouseman from any liability for misdelivery

or negligence. So same discussion we had for

exemption of liability for example we had in the

provisions of the lease of safety deposit box. Again

if is present for example here in a warehouse

receipt, that stipulation will be considered void

because it would essentially making the

warehouseman or it is essentially saying that the

warehouseman need not exercise any form of

diligence.

Now, sections 4 and 5, you have therein the kinds

of warehouse receipt.



Sec. 4. Definition of non-negotiable receipt. — A

receipt in which it is stated that the goods

received will be delivered to the depositor or to

any other specified person, is a non-negotiable

receipt.

Sec. 5. Definition of negotiable receipt. — A

receipt in which it is stated that the goods

received will be delivered to the bearer or to the

order of any person named in such receipt is a

negotiable receipt.

Again it is a document of title that can be negotiable

or non-negotiable. However, unlike sa negotiable

instruments, we have section 1, the requisites to

consider whether the instrument is negotiable or

not. However, with regard to warehouse receipts,

we consider it negotiable if the goods are delivered

to order or bearer. If there is a provision in the

negotiable warehouse receipt, usually the term

negotiable is written or printed on the face of the

negotiable warehouse receipt. However, the failure

to mark it as negotiable will not render it non-

negotiable if it contains any of the words of

negotiability: bearer or order.

Now, it is non-negotiable if the words are

deliverable to a depositor or any specified person. It

should be stamped on its face as non-negotiable. It

cannot be negotiated but can be transferred or

assigned. Mark them non-negotiable or not

negotiable otherwise, they shall be considered as

negotiable. However, take note that failure to mark

negotiable will not render it non-negotiable again if

it contains words of negotiability. So essentially,

how you determine the document is negotiable or

not, it contains the words bearer or order or any

terms indicating that it is indeed negotiable. So isa

lang yung requirement unlike in negotiable

instruments.

Now, negotiable warehouse receipt if you say

bearer document of title, negotiated by delivery.

However, take note when it comes to warehouse

receipts, even if it is originally bearer warehouse

receipt, it is not always a bearer document of title if

it has been specially indorsed. (questions re: Nego)

Dito, even if it is originally bearer, the last

indorsement is a special indorsement, it will now be

converted into an order instrument. You have this

section in indorsement, I think section 40,

emphasizes that an originally bearer instrument

would still be considered as a bearer instrument

negotiated by mere delivery even if it is specially

indorsed. Just take note of that distinction.

Now, of course if it is an order document,

indorsement plus delivery for a valid negotiation.

Now if non-negotiable, transferee must notify the

warehouseman of the transfer to him of such

receipt. Notice here is required, prior notice does

not affect a writ of attachment or execution.

However, if it is negotiable, notice is not required

because it is as if the subsequent transferee is the

person to whom the warehouseman directly issued

the receipt.

NIL NWR

Subject matter is money Subject matter is goods

Object of value is the instrument itself

Object of value refers to the goods deposited

There are parties secondarily liable

No parties that are secondarily liable

An original bearer instrument will always be considered a bearer instrument, thus can be negotiated by mere delivery.

An original bearer instrument subsequently indorsed, it becomes an order instrument.

There is a concept of holder in due course who has a better title than the transferor

There is no concept of holder in due course

Under Section 8, you have therein the obligations of

a warehouseman.

Sec. 8. Obligation of warehousemen to deliver.

— A warehouseman, in the absence of some

lawful excuse provided by this Act, is bound to

deliver the goods upon a demand made either

by the holder of a receipt for the goods or by

the depositor; if such demand is accompanied

with:

(a) An offer to satisfy the warehouseman's lien;

(b) An offer to surrender the receipt, if

negotiable, with such indorsements as would be

necessary for the negotiation of the receipt; and

(c) A readiness and willingness to sign, when

the goods are delivered, an acknowledgment

that they have been delivered, if such signature

is requested by the warehouseman.

In case the warehouseman refuses or fails to

deliver the goods in compliance with a demand

by the holder or depositor so accompanied, the

burden shall be upon the warehouseman to

establish the existence of a lawful excuse for

such refusal.

Obviously, to issue the warehouse receipt; to take

good care of the goods; to deliver the goods to the

person lawfully entitled thereto; not to comingle the

goods deposited unless fungible and same kind and

grade, so similar to an ordinary contract of deposit;

to insure the goods in covered circumstances; to

mark a non-negotiable warehouse receipt as such;

to mark as such the duplicates of a warehouse

receipt; give proper notice in case the sale of the

goods; and pick up and cancel the warehouse

receipt whenever the goods are delivered. There

would be no liability on the part of the

warehouseman if he does not or fails to deliver

without the surrender of the warehouse receipt.

Because again, here, the warehouse receipt, it is an

evidence for the receipt of goods, and as a rule, you

have to surrender it to the warehouseman so that

the warehouseman can release the goods to you.

Now Section 14.

Sec. 14. Lost or destroyed receipts. — Where a

negotiable receipt has been lost or destroyed, a

court of competent jurisdiction may order the

delivery of the goods upon satisfactory proof of

such loss or destruction and upon the giving of



a bond with sufficient sureties to be approved

by the court to protect the warehouseman from

any liability or expense, which he or any person

injured by such delivery may incur by reason of

the original receipt remaining outstanding. The

court may also in its discretion order the

payment of the warehouseman's reasonable

costs and counsel fees.

The delivery of the goods under an order of the

court as provided in this section, shall not

relieve the warehouseman from liability to a

person to whom the negotiable receipt has been

or shall be negotiated for value without notice

of the proceedings or of the delivery of the

goods.

So yun ang exception sa rules sa surrender for

delivery.

Section 25.

Sec. 25. Attachment or levy upon goods for

which a negotiable receipt has been issued. — If

goods are delivered to a warehouseman by the

owner or by a person whose act in conveying

the title to them to a purchaser in good faith for

value would bind the owner, and a negotiable

receipt is issued for them, they can not

thereafter, while in the possession of the

warehouseman, be attached by garnishment or

otherwise, or be levied upon under an execution

unless the receipt be first surrendered to the

warehouseman or its negotiation enjoined. The

warehouseman shall in no case be compelled to

deliver up the actual possession of the goods

until the receipt is surrendered to him or

impounded by the court.

Goods covered by the negotiable receipt cannot be

attached or levied upon directly. The creditors must

resort to attaching or levying the receipt while in the

hands of the debtor-transferor. Being in the hands

of the holder, it is freed from the legal attachment or

levy of transferor’s creditors.

So here, the rights of the warehouseman are as

follows:

1. Obviously, he has to be paid because a

warehouse receipt transaction is a contract

of deposit which is onerous in nature, there

is a consideration;

2. The warehouseman has the right to

exercise his lien on the goods if not paid, so

he can retain it;

3. To refuse delivery in proper legal

circumstances.

Under Section 27.

Sec. 27. What claims are included in the

warehouseman's lien. — Subject to the

provisions of section thirty, a warehouseman

shall have a lien on goods deposited or on the

proceeds thereof in his hands, for all lawful

charges for storage and preservation of the

goods; also for all lawful claims for money

advanced, interest, insurance, transportation,

labor, weighing, coopering and other charges

and expenses in relation to such goods, also for

all reasonable charges and expenses for notice,

and advertisements of sale, and for sale of the

goods where default had been made in

satisfying the warehouseman's lien.

Extent of the warehouseman’s lien. It is over the

goods deposited to him is his security, just like in a

contract of pledge or mortgage. For the payment of

charges, money advanced as provided in section

27.

Then you have Section 30.

Sec. 30. Negotiable receipt must state charges

for which the lien is claimed. — If a negotiable

receipt is issued for goods, the warehouseman

shall have no lien thereon except for charges

for storage of goods subsequent to the date of

the receipt unless the receipt expressly

enumerated other charges for which a lien is

claimed. In such case, there shall be a lien for

the charges enumerated so far as they are

within the terms of section twenty-seven

although the amount of the charges so

enumerated is not stated in the receipt.

Unless the charges are so specified in the

negotiable receipt, then it is understood that the

warehouseman’s lien is limited to charges for

storage of the goods subsequent to the date of

receipt.

Also take note of Section 36.

Sec. 36. Effect of sale. — After goods have been

lawfully sold to satisfy a warehouseman's lien,

or have been lawfully sold or disposed of

because of their perishable or hazardous

nature, the warehouseman shall not thereafter

be liable for failure to deliver the goods to the

depositor or owner of the goods or to a holder

of the receipt given for the goods when they

were deposited, even if such receipt be

negotiable.

Remedies available to a warehouseman for

enforcing his lien. He can refuse to deliver the

goods until the lien has been satisfied. He can also

cause the extrajudicial sale of the property and

applying the proceeds to the value of the lien. You

have there sections 33 and 34. Or he can file an

action for collection of unpaid charges or by way of

counterclaim in an action to recover the property

from him or such other remedies as allowed by law.

Now you also have Section 41.

Sec. 41. Rights of person to whom a receipt has

been negotiated. — A person to whom a

negotiable receipt has been duly negotiated

acquires thereby:

(a) Such title to the goods as the person

negotiating the receipt to him had or had ability

to convey to a purchaser in good faith for value,

and also such title to the goods as the depositor

or person to whose order the goods were to be

delivered by the terms of the receipt had or had



ability to convey to a purchaser in good faith for

value, and

b) The direct obligation of the warehouseman to

hold possession of the goods for him according

to the terms of the receipt as fully as if the

warehouseman and contracted directly with

him.

Proper negotiation ipso jure grants to the holder not

only the title to the transferor of the goods but also

the title of the depositor. The direct obligation of the

warehouseman who holds possession of the goods

for him without need of notice.

And then Section 42.

Sec. 42. Rights of person to whom receipt has

been transferred. — A person to whom a receipt

has been transferred but not negotiated

acquires thereby, as against the transferor, the

title of the goods subject to the terms of any

agreement with the transferor.

If the receipt is non-negotiable, such person

also acquires the right to notify the

warehouseman of the transfer to him of such

receipt and thereby to acquire the direct

obligation of the warehouseman to hold

possession of the goods for him according to

the terms of the receipt.

Prior to the notification of the warehouseman by

the transferor or transferee of a non-negotiable

receipt, the title of the transferee to the goods

and the right to acquire the obligation of the

warehouseman may be defeated by the levy of

an attachment or execution upon the goods by

a creditor of the transferor or by a notification to

the warehouseman by the transferor or a

subsequent purchaser from the transferor of a

subsequent sale of the goods by the transferor.

When an order receipt is delivered without

indorsement nevertheless, mere delivery of the

negotiable receipts transfers title to the goods to the

holder as against the transferor and it grants to the

holder the right to compel transfer or indorse the

receipt but effects of negotiation shall be placed

upon actual indorsement.

Warranties. Kung may warranties ang indorser or

the other parties in a negotiable instrument, we also

have warranties in case of sale of a warehouse

receipt, where the warehouse receipt is transferred

or negotiated for value. The following are the

warranties for the transferor:

Sec. 44. Warranties of a sale of receipt. — A

person who, for value, negotiates or transfers a

receipt by indorsement or delivery, including

one who assigns for value a claim secured by a

receipt, unless a contrary intention appears,

warrants:

(a) That the receipt is genuine,

(b) That he has a legal right to negotiate or

transfer it,

(c) That he has knowledge of no fact which

would impair the validity or worth of the receipt,

and

(d) That he has a right to transfer the title to the

goods and that the goods are merchantable or

fit for a particular purpose whenever such

warranties would have been implied, if the

contract of the parties had been to transfer

without a receipt of the goods represented

thereby.

Now Section 45

Sec. 45. Indorser not a guarantor. — The

indorsement of a receipt shall not make the

indorser liable for any failure on the part of the

warehouseman or previous indorsers of the

receipt to fulfill their respective obligations.

Indorsement of a negotiable receipt does not make

an indorser liable for the failure of the

warehouseman or previous indorsers to comply

with their obligations. So no warranty as to that

effect.

Section 46.

Sec. 46. No warranty implied from accepting

payment of a debt. — A mortgagee, pledgee, or

holder for security of a receipt who, in good

faith, demands or receives payment of the debt

for which such receipt is security, whether from

a party to a draft drawn for such debt or from

any other person, shall not, by so doing, be

deemed to represent or to warrant the

genuineness of such receipt or the quantity or

quality of the goods therein described.

A mortgagee, pledgee, or holder for security who

demands or receives payment for the debt for which

such receipt is security such receipt of payment

shall not be deemed to represent or to warrant the

genuineness of the receipt nor the quality or

quantity of goods.

And then Section 49.

Sec. 49. Negotiation defeats vendor's lien. —

Where a negotiable receipt has been issued for

goods, no seller's lien or right of stoppage in

transitu shall defeat the rights of any purchaser

for value in good faith to whom such receipt has

been negotiated, whether such negotiation be

prior or subsequent to the notification to the

warehouseman who issued such receipt of the

seller's claim to a lien or right of stoppage in

transitu. Nor shall the warehouseman be

obliged to deliver or justified in delivering the

goods to an unpaid seller unless the receipt is

first surrendered for cancellation.

Now take note here as to the question whether the

goods in possession of the warehouseman can be

subject of attachment or subject of execution will

depend if the goods are subject of a negotiable

warehouse receipt or a non-negotiable warehouse

receipt. Because if it is subject to a negotiable

warehouse receipt, the goods therein cannot just be

subject to attachment or execution. There must be



the surrender of the warehouse receipt itself, the

negotiation of that warehouse receipt must be

enjoined and that the warehouse receipt is

impounded by the court. Because essentially what

happens when you negotiate this negotiable

warehouse receipt? Ikaw ang nagdeposit with the

warehouseman.You negotiate the warehouse

receipt to another person, delivery if it is bearer

then indorsement plus delivery if it is an order

instrument or document. Now what happens? You

transfer title to the subsequent holder or transferee.

So essentially, who has the right over the goods?

Not you anymore as the depositor but the

subsequent transferee of the negotiable warehouse

receipt. So kung ako may utang sa creditor who

filed a case against me, you can file an issuance for

the writ of attachment or then found to be liable, so

a writ of execution, you cannot just go immediately

have the goods subject of the attachment or

execution. Because in the first place, it is not mine

anymore. Second, the warehouseman knows that it

is subject to a negotiable warehouse receipt, at the

very least, makita niya na nasurrender sa kanya

ang warehouse receipt. Because again here, the

warehouse receipt is negotiable in nature.

Distinguish it if it is non-negotiable, it can be

attached with the absence of the prior notification to

the warehouseman of transfer. Remember, a non-

negotiable warehouse receipt cannot be negotiated,

it can be assigned or transferred. Now, without prior

notification to the warehouseman, as far as he

knows, ako yung may title sa goods. So if it will be

subject of an attachment or execution which I am

the obligor or the debtor, then pwede ma-attach,

ma-execute. So that is one of the relevance

between a negotiable warehouse receipt and a non-

negotiable warehouse receipt.

*Chika about why Warehouse Receipts and Trust

Receipts has been included.

PART VI: TRUST RECEIPTS LAW.

Now, under The Trust Receipts Law you have

Section 4. Under section 4 of the trust receipt law

trust receipt is defined as a written document

signed by the trustee in favor of the entruster

whereby the latter releases the goods to the

possession of the former upon the trustee‘s promise

to hold the said goods in trust for the entruster (the

one who delivered the goods) to sell or dispose of

the goods and to return the proceeds thereof to the

extent of the amount owing to the entruster or to

return the goods if unsold or not otherwise

disposed.

Purpose of the law:

(1) To punish dishonesty and abuse of

confidence of one who tends in the

handling of money or goods to the

prejudice of the owner regardless of

whether or not the latter is the owner.

(crime of estafa);

(2) To encourage and promote the use of trust

receipts as an additional and convenient

aid to commerce and trade;

(3) To regulate of trust receipts transactions in

order to assure the protection of the rights

and enforcement of obligations of the

parties involved therein;

(4) To declare the misuse and/or

misappropriation of goods or proceeds

realized from the sale of goods, released

under trust receipts as a criminal offense

punishable under the revised penal code.

(art 315)

Under section 4 of the same law the trust receipt need not be in any particular form however it must substantially contain the following essential terms:

(a) a description of the goods, value of the goods, undertaking or a commitment of the entrustee to hold in trust for the entruster the goods;

(b) to dispose of them in the manner provided for in the trust receipt; and

(c) to turn over the proceeds of the sale of the goods

In a trust receipt transaction, no agency relationship is established. However, as you have learned in Criminal Law, an entrustee‘s breach of trust may subject him to criminal liability like for estafa as well as civil liability. What is the coverage of a trust receipt agreement? It applies to items destined for sale, process as a component of a product ultimately sold and manufactured, and used to repair equipment used to maintain in business. The trust receipt law does not cover the sale of goods, document or instruments by a person in the business of selling goods, documents or instruments for profit who has general property rights in such goods documents or installments or sells the same to the buyer on credit retaining title and other interest as security of the payment of the purchase price. There is no trust receipt transaction if the agreement is for mere consignment of goods with the obligation on the part of the person to whom it is delivered to remit proceeds of the sale or return when unsold. Distinguish a trust receipt transaction from a contract of pledge. In a trust receipt transaction, there is a person who is being financed, possesses the property. In a contract of pledge, it is the financer that possesses the property as a form of security. In a trust receipt transaction there is no contract of sale. To be distinguished from a conditional contract of sale. In a trust receipt, there is no lien created over the goods that were delivered unlike that of a chattel mortgage which subjects the property to lien. In a trust receipts you have three parties. However the seller does not retain title to the property. Compare it to consignment, you have the consignor and the consignee, bipartite, where the consignor retains ownership of the property. So who are essentially the parties here? You have the seller, entruster and entrustee. These three are the parties in a true trust receipt agreement. However, the seller here is not strictly a party to a



trust receipt transaction but he is a party to the contract of sale wherein he is the seller and who is the buyer? It is the buyer/importer-entrustee. Now you have here the entruster. The entruster here is the lender or the financier. He is the person holding title over the goods. He holds title over the goods but he is not the owner of the good but merely a holder of security interest. On the other hand you have the entrustee, the borrower, the buyer, the importer, to whom the goods are delivered for sale or processing in trust with the obligation to return the proceeds of the sale or to return the goods if unsold. So essentially the entrustee here is considered as the owner of the goods. While the entruster holds title as a form of security. So the law imposes on the entrustee the risk of loss of the goods. So take note here it is a unique arrangement. As a general rule, res perit domino. Owner bears the loss. But here, if you take into consideration the entruster holds title of the goods but you cannot say if the goods were lost due to a fortuitous event, the entruster would be the one who would suffer the loss. Now in relation to that, just take note of this case Rosario Textile Mills Corp. vs Home Bankers Savings and Trust Company, GR No. 137232, June 29, 2005. I think in that case the trust receipt was defined as a security transaction intended to aid financing importers and retail dealers who do not have sufficient funds as resources to finance the importation or purchase of merchandise. Now in that case, the Supreme Court held, here the trust receipt was issued by the bank, so the bank was deemed the entruster/lender/financier. However, the Supreme Court held in that case that to consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof. Because again, the bank here is considered the holder of the title merely for purpose of security. Now recall our brief discussion with regard to letters of credit. If you recall the cases that you have read involving letters of credit, it is also possible that it involves the issuance of a trust receipt. Let us say you have X here who wants to purchase goods from Y. This is an international transaction. You could not _______ if he is hesitant to pay prior to delivery. On the part of Y as the supplier, of course he would also be hesitant to deliver without payment. So what do they usually resort to? In this case, X will apply a letter of credit with the bank, let us say BDO. Then BDO will be the one who will transact with Y and in this instance, you are dealing with a financial institution. So must stable siya and less risky. And more often than not, a letter of credit transaction is bank to bank. So let us say there, HSBC. So ano mangyari niyan? The goods will now be delivered in the name of BDO and it will release it to X and then payment will be released by BDO to Y through HSBC. Now what is the security here of the bank? More often than not, they will issue a trust receipt. As a form of security, because here, when the letter of credit was issued it was actually in the form of a loan. Wherein the bank is the financier who will pay off Y in this illustration, and then, that would be for and behalf of the goods purchased by X. In the meantime, kung hindi pa makabayad si X sa bank, the bank will release the goods to X by virtue of what we have which is a trust receipt.

X- Philippines Y- Hong Kong Letter of Credit- BDO HSBC

However take note, if you look at this, the purpose for a trust receipt is merely for security of a contract of loan. So it is not strictly the trust receipt transaction or trust receipt agreement covered under the trust receipts law. That’s why you also take into consideration one of the cases Land Bank of the Philippine vs Perez et al, GR No. 166884, June 13, 2012, wherein what is the effect thereof? There was a demand or in this case, a complaint was filed against the entrustee for estafa. But the Supreme Court held therein that this was not the trust receipt agreement covered under the trust receipts law to be held liable for estafa. Because the arrangement here was that the trust receipt was issued merely to secure the contract of loan by virtue of the letter of credit. So read that case for you to understand more when to make a person liable for estafa under the trust receipt law and when is he not liable. Because, if you take into consideration criminal liability for estafa for violation of the trust receipts law, the entrustee fails to turn over the proceeds of the sale of goods covered by the trust receipt to the entruster. Or the entrustee fails to return the goods under the trust agreement if not disposed in accordance with the agreement of the trust receipt. But if you take a look at the true nature of this kinds of transaction, on the part of X, his obligation is not really to return the goods subject of the trust receipt if it is not sold or if it is sold to remit the proceeds. His obligation is just to pay the loan and the trust receipt was issued as a form of security-interest. So take note that in a true trust receipt agreement covered by the trust receipts law, what are the rights available to the entruster? (1) Entitled to the proceeds (2) Entitled to the return of the goods if unsold (3) As against an innocent purchaser for value of the goods subject to a trust receipts agreement. As against an innocent purchaser for value, the entruster is not preferred. As against the creditors of the entrustee, the entruster is preferred. (Section 11) (4) The entruster has the right to transfer the trust take possession of the goods and to sell the goods in a public sale (Section 12) (5) The entruster likewise has the right to purchase the same goods at the intended public sale (Section 7) Obligations of an entruster (1) to give possession of the goods to the entrustee and to give at least 5 day notice to the entrustee of the intention to sell the goods at an intended public sale. The entrustee on the other hand has the right to receive the surplus in case of a public sale as provided under section 7.



(2) To have possession of the goods as a condition for his liability. Obligations of the entrustee (1) To hold the goods or the sale proceeds; (2) To return the goods in the event of non-sale or upon demand of the entruster; (3) To comply with his alternative obligation to return the proceeds or the goods. The return of the proceeds- entre garla. The obligation to return the goods unsold- vevol vera; (4) To ensure against loss of the goods; (5) To keep the goods and sale proceeds separate and identifiable; (6) If there are other conditions provided under the trust receipt, observe those conditions. Continuous effort - not strength or intelligence -

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