CREDIT TRANSACTIONS Fourth YearFirst Session

TOPICS INCLUDED1. SPECIAL CONTRACTS (CIVIL CODE)LoanDepositGuaranty and SuretyshipPledgeChattel MortgageReal MortgageAntichresisPreference and concurrence of credits

TOPICS2. SPECIAL LAWSFinancial Rehabilitation and Insolvency LawChattel Mortgage LawExtrajudicial Foreclosure of Real Mortgage

CREDIT TRANSACTIONS IN GENERAL

ConceptWhat makes an act, contract or transaction a credit transaction?

The concurrence of the following:

RECEIPT OF GOODS OR MONEY BY THE OBLIGOR FROM THE OBLIGEE IN THE PRESENT;TRUST OR FAITH IN THE OBLIGORS CREDIT OR ABILITY TO PAY OR RETURN; and PAYMENT OR RETURN IN THE FUTURE.

Characteristics of Credit TransactionsThere are always two parties involved.Example 1: Bangs borrows Andis book. Andi voluntarily lends it. This is a commodatum. Two parties are involved.Example 2: Bangs borrows Andis book without Andis knowledge. This is theft. No trust or faith is involved.There is a time element (Obligor receives something now but he must return the same thing or its equivalent later).Trust and faith must always attend the transaction, which may take the form of a security or guaranty.

Types of Contracts in CTPRINCIPAL CONTRACTS or contracts founded on trust, belief or credit. They are contracts that can stand on their own and which do not depend upon the existence of other contracts to themselves be valid. As distinguished with preparatory contracts, principal contracts are ends in themselves and do not merely serve as precursors to other contracts.

Examples of preparatory contracts are contracts of agency and partnership.

By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another. A contract of agency is not an end in itself. It is preparatory to the commencement of another contractual relationship.

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. The partners contribute money, property or industry to a common fund but the intention of dividing profits cannot be obtained without doing something to their contributions. The partners must necessarily enter into further contracts to obtain profit.

The PRINCIPAL CONTRACTS/CREDIT TRANSACTIONS are LOAN and DEPOSIT. They are also collectively called BAILMENT CONTRACTS.

BAILMENT - Delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor claims it.

PARTIESBAILOR the one who lends a thing; Need not be the owner but must have possessory interest in the SMLessee (Article 1643, in relation to Article 1650)Usufructuary (Article 562)

BAILEE the one who borrows the thing

Bar Question 2007The parties to a bailment are:A. bailorB. baileeC. comodatarioD. all of the aboveE. letters A and B

Answer: ENOTE: Comodatario is the agent to whom property involved in a bailment is delivered.

ACCESSORY CONTRACTS those which depend upon the existence of PRINCIPAL CONTRACTS and which tend to strengthen the said belief or trust because of the security given. They may be further classified as contracts of:PERSONAL GUARANTY or SECURITY, where a persons personal credit is involved as in guaranty proper and suretyship;

REAL GUARANTY or SECURITY, where the debtor reciprocates the trust given to him by the creditor by furnishing the latter with security that consists in the use of property:

real mortgage and antichresis, if the property given is real property; andpledge and chattel mortgage, if the property given is personal property.

This is the reason why the contracts of guaranty, suretyship, pledge, mortgage and antichresis are also called SECURITY CONTRACTS.

LOAN(Articles 1933-1961)

Definition 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 kind and quality shall be paid, in which case the contract is simply called a loan or mutuum (Article 1933).

TWO KINDS OF LOANSCOMMODATUM is a contract of loan whereby 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, the former retaining the ownership of the thing loaned.

MUTUUM is a contract of loan whereby one of the parties delivers to another money or other consumable thing, the ownership of which passes to the latter, upon the condition that the same amount of the same kind and quality shall be paid.

COMMON CHARACTERISTICSNominate given a particular name by law;Principal does not depend on the existence or validity of other contracts;Real perfected by delivery;Unilateral - only one of the parties is principally obliged;Gratuitous per se consideration is liberality;

LEGAL CONSEQUENCESNominate governed by specific provisions of lawPrincipal in contrast to an accessory contract (ex. pledge, mortgage and antichresis), loan can stand on its own and does not depend on another contract for its validity or existence; in contrast to a preparatory contract (ex. agency and partnership) because it is an end in itself not as a means through which future contracts or transactions may be made.Real perfected only by delivery so the obligations of the bailee/borrower do not arise until the subject matter is delivered.

Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation.

QUESTION: Only commodatum is mentioned in Article 1316. Is mutuum also a real contract?ANSWER: Yes, for two reasons:Article 1316 is not an exclusive enumeration of what are real contracts. Note the words such as.The nature of mutuum as a real contract is revealed by Article 1934 which provides that: Art. 1934. XXX the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.

Take note of the case of Bonnevie versus Court of Appeals, GR No. 49101, October 24, 1983, where the Supreme Court made an aberrant pronouncement that: A contract of loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of mortgage was executed.

BPI INVESTMENT CORPORATION versus CAG.R. No. 133632, February 15, 2002Borrower entered into a contract of loan with mortgage with BPI. The contract stipulates that the obligation to pay monthly amortizations will begin after release of the proceeds of the loan to the borrower. The loaned amount was released in two batches: first part on March 31, 1981 and the remainder on September 13, 1982. Borrower was not able to faithfully comply with his amortization schedule. BPI foreclosed on the mortgage and computed interest beginning May 1, 1981. The Court of Appeals ruled 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. BPI 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 Bonnevie v. Court of Appeals, 125 SCRA 122.ISSUE: When was the contract of loan perfected?

RULING: The loan contract was perfected only on September 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, the borrowers 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. It is a basic principle 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. 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 BPI extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 (one month after the loan was delivered in full) and not May 1, 1981 (one month after the mortgage was executed).

In addition to the three elements, delivery is required in the principal contracts of bailment. Why? Because it is only after delivery that a party can begin fulfilling his obligations. In commodatum, the borrower is obliged to exercise due diligence over the thing loaned. This obligation cannot be done unless the thing subject of the loan is delivered to him.In mutuum, the borrower is obliged to return the money that was borrowed. This obligation does not arise unless there is a debt in the first place.In deposit, the depositary is obliged to keep the object safely. This obligation cannot be done unless the thing subject of the deposit is delivered to him.ANOTHER EXAMPLE is contract of carriage, because unless the carrier is actually used, the carrier cannot be said to have already assumed his obligations.

QUESTION: A promised to lend B his book (COMMODATUM) on January 14. On January 14, A refused to deliver the book. May B sue A for damages?

ANSWER: YES, but not for breach of contract of commodatum because it was not yet perfected. B may sue A for breach of the consensual contract to make a commodatum which is perfected by mere consent (see Article 1934).

UNILATERAL - once the subject matter has been delivered, it creates obligations on the part of only one of the parties, namely the borrower.

GRATUITOUS - Under Article 1933, commodatum is essentially gratuitous while simple loan may be gratuitous or with a stipulation to pay interest. This means that mutuum is not gratuitous only when the parties agree that, in addition to the return of the money, interest is also to be computed and paid.

ConsiderationA asks B if he could borrow the latters fountain pen. B agrees and gives his pen to A but tells A to return the same within one week.

QUESTION: What is the consideration of the contract insofar as B is concerned?ANSWER: Pure liberality. B receives nothing.

QUESTION: What if, before B lends his pen to A, B asks him to pay P50 and to return the pen within one week?ANSWER: No more commodatum because commodatum is essentially gratuitous. Once valuable consideration other than liberality is imposed, the transaction becomes another contract. Because of the obligation to return, the contract is a lease. If there is payment with no obligation to return, then the contract is a sale. Without the obligation to return and without valuable consideration, the contract is a donation.

CONSEQUENCEArt. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

DISTINCTIONS - COMMODATUM AND MUTUUM (BAR 2004)

PRODUCERS BANK versus CAG.R. No. 115324, Feb 19, 2003 FACTS: Sometime in 1979, Vives was asked by his neighbor and friend Sanchez to help her friend and townmate, Doronilla, in incorporating his business, Sterela Marketing and Services. 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 private respondent that he could withdraw his money from said account within a months time. Relying on the assurances and representations of Sanchez and Doronilla, Franklin Vives issued a check in the amount of P200,000.00 in favor of Sterela. When Vives went to the bank to verify if the money was still intact, the bank informed them that part of the money had been withdrawn by Doronilla, and that only P90,000.00 remained therein. On June 29, 1979, Vives received a letter from Doronilla, assuring him that his money was intact and would be returned to him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of Vives. However, upon presentment thereof, the check was dishonored.

NOTE: Petitioner contends that the transaction between private respondent and Doronilla is a simple loan or mutuum since all the elements of a mutuum are present: first, what was delivered 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, or P12,000 more than what was deposited in Sterelas bank account.

The transaction was a commodatum, not a mutuum. Article 1933 implies that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are instances where a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides that consumable goods may be the subject of commodatum if the purpose 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.

The rule is that the intention of the parties shall be accorded primordial consideration in determining the true character of a contract. The 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."

Doronillas attempts to return to the amount of P200,000.00 together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the transaction from a commodatum into a mutuum. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private respondent the interest accruing to the money deposited.

COMMODATUM

Art. 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.

As to fruits, Art. 1940 provides that the parties may stipulate that the bailee may make use of the fruits of the thing loaned (See PRODUCERS BANK case)If there is compensation, the contract is one of LEASE.

Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. (ad ostentationem)

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. NOTE: Commodatum is purely personal in character which means that rights acquired by virtue of the same could not be transmitted to another. This makes perfect sense inasmuch as the bailor relies on the character, credit and conduct of the bailee when he contracts with the latter gratuitously.

Death of the BaileeHomer lends Patty his car gratuitously until the end of 2012. Should Homer die before the end of 2012, the commodatum is extinguished and Homers heirs can already demand from Patty to return the car even before the expiration of the period. In the same vein, should Patty die prior to the end of 2008, Homer can demand immediately the return of the car even before the expiration of the period agreed upon. This is because the bailors trust and confidence is exclusive to the bailee and does not extend to the bailees heirs or assigns.

If there are two or more borrowers, the death of one does not extinguish the commodatum as to the other, unless there is a stipulation to the contrary.

PROHIBITIONS AS TO USEHomer lends Patty his laptop computer. Patty cannot lend or lease this to her boyfriend, Domeng. But Pattys children and other members of her household may make use of the thing loaned unless there is a stipulation to the contrary.

However, the laptop cannot be used by either Patty or the members of her household as a pillow, because the nature of the laptop forbids its use as such. Finally, Patty can use the laptop as paperweight because the nature of the laptop does not really prohibit its use as such for as long as such use does not lead to possible.

Art. 1937. Movable or immovable property may be the object of commodatum.

This provision makes commodatum dissimilar to mutuum but similar to lease.Art. 1938. The bailor in commodatum need not be the owner of the thing loaned.

Rationale: There is no transfer of ownership in commodatum.

OBLIGATIONS OF THE BAILEEThe bailee is obliged to return the thing loaned upon the expiration of the period.In relation to the obligation to return, the bailee is obliged not to retain the thing loaned even if the bailor has outstanding liabilities to the bailee;The bailee is obliged to take care of and safely keep the thing loaned while in his possession, exercising the diligence of a good father of a family;In relation to the immediately preceding obligation, the bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned (Article 1941);

Suppose that A borrowed Bs jeep. A is obliged to pay for expenses to have the jeep washed, lubricants, oil, gas, etc.

For extraordinary expenses, Article 1949 is the governing rule:

Art. 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a)

Using the same example, A can have B reimburse expenses of having the engine repaired if required.

But take note of Article 1950 which bars reimbursement on account of expenses that are not covered by either Article 1941 and 1949. Thus:

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

Thus, if A installs a sound system on the jeep for his better use, he shall not be entitled to reimbursement.

The bailee is obliged to pay for damages under the circumstances provided in Article 1942 of the Civil Code.

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.

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

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

Art. 1951. 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.

Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (1748a)

OBLIGATIONS OF THE BAILORTake note that since commodatum is a unilateral contract, the obligations of the bailor are mere incidental ones.

Thus, the obligations of the bailor are the following:

Obligation to respect the duration of the loan or the period of the contract;Obligation to refund extraordinary expenses; andObligation to pay damages for hidden flaws.

OBLIGATION TO RESPECT PERIODAs a rule, the bailor must respect the period and cannot require the premature return of the thing loaned.RATIONALE: Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other.Since commodatum is gratuitous, the period is deemed to have been designated in favor of the debtor, who in this case is the bailee.

RIGHT TO REQUIRE RETURNThe bailor can demand the return of the thing:

Upon expiration of the period or after the accomplishment of the use for which the commodatum has been constituted (Article 1946);

For temporary use in case of urgent need but the contract, and, by implication, the performance of the obligations of the bailee, are suspended in the meantime (Article 1946);

Right to demand the return of the thing at will in the case of precarium (Article 1947); and

Right to demand the return of the thing for acts of ingratitude committed by the bailee (Article 1948, in relation to Article 765);

Article 765 applies to commodatum because both commodatum and donation are gratuitous contracts.

ACTS OF INGRATITUDE IN COMMODATUM. The bailor may demand the immediate return of the thing:

If the bailee should commit some offense against the person, the honor or the property of the bailor, or of his wife or children under his parental authority; If the bailee imputes to the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the bailee himself, his wife or children under his authority; andIf the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor.

COMMODATUM versus DONATION

SUMMARYINSTANCES WHEN BAILOR MAY DEMAND RETURN IMMEDIATELY

Urgent need; (URGENCY) No stipulation as to duration; (DURATION)No stipulation as to purpose for use; (PURPOSE)Acts of ingratitude; (UNGRATEFULNESS)Expiration of period; (TERM) and Accomplishment of the purpose. (ACCOMPLISHMENT)

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

Bar 2005A left his adventure van to B before he left to work abroad. The parties agreed that B can use the van for 1 year. A did not tell B that the vans brakes are faulty. B had the brakes repaired and the van tuned up, spending P15,000. B discovered that the van consumed too much fuel. Hence, he leased the van to C. Two months later, A returned and asked B to return the van. However, the van was damaged while B was using it, without his fault.

Bar 2005Who shall bear the P15,000 spent for van repair?

Who shall bear the cost of the vans fuel?

Does A have the right to get the van before the lapse of one year?

ANSWER(a) Brakes (extraordinary) A Tuneup (ordinary) B

(b) Fuel (ordinary) B

(c) A cannot demand return before the period unless he has urgent need of the van.

SIMPLE LOAN OR MUTUUMArt. 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) An essential characteristic of mutuum is that there is a transfer of ownership from the lender to the borrower. The legal consequences of this characteristic are as follows:The obligation of the borrower is to PAY and NOT TO RETURN because the consumption is the object of mutuum;Due to the transfer of ownership, the rule in commodatum that the lender need not be the owner of the thing loaned does not apply. Nemo dat quod non habet. No one can give what one does not have;As there is transfer of ownership, there can be no criminal liability on the part of the borrower in case he fails to pay, without any circumstance indicating fraud or other elements that criminalize an act. The liability here is merely civil in nature.

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)

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. (1538a)

EXAMPLES

MUTUUM OF MONEY ===> A loans B P50,000 payable in one month. MUTUUM OF GOODS ===> A loans B 2 sacks of NFA rice (fungible, for consumption) for a period of 2 months. After two months, B is obliged to give 2 sacks of rice of the same kind and quality.

ARTICLE 1954 ===> A gives B a Mitsubishi Evolution VIII, an imported Japanese car because B will participate in a race. However, as a condition, B is obligated to give A another Mitsubishi Evolution VIII car to replace the car of A after the race. (This is now considered a barter)

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)

INTERESTGENERAL RULE: Article 1956 no interest shall be due unless it has been expressly stipulated in writing and is lawful

EXCEPTIONSIndemnity for damages debtor in delay must pay legal interest even if there is no stipulation

Interest accruing from unpaid interest interest due shall earn interest from the time it is judicially demanded although the obligation may be silent on this point (Article 2212)

Indemnity for Damages6% per annum transactions other than loans/forbearance of money

e.g. Monetary award arising from a contract for a piece of work, unpaid purchase price (Crismina Garments v. CA)

ExampleA purchased a car from B

The price shall be paid in 30 days

A delayed paying for one year

A will be liable for 6% interest per annum for the delay in paying the price

Indemnity for Damages12% per annum delay in paying loans, forbearance of money, judgments involving loans or forbearance in absence of stipulation computed from date of default (CB Circular 416)

ExampleA obtained a P1,000 loan from B payable in 30 days

A delayed in paying for one year

A will be liable for 12% interest since she delayed in paying the loan

Interest accruing from unpaid interestA borrowed P5,000 from B

Loan has 12% annual interest

A fails to pay P5,000 and the interest

Interest accruing from unpaid interestOne year after due date, there is a judicial demand for payment of P5,000 and 12% annual interest within 30 days from judgment

A pays 1 month after the 30-day period

The 12% interest will earn 12% annual legal interest (forbearance already) or 1% for each month of delay

Interest accruing from unpaid interestORIGINAL LOAN = P5,000 + 12% (per annum)= P5,000 + P600= P5,600

FORBEARANCE = 12% per annum or 1% a month of delay from judicial order= P5,600 + 1% (P56.00)= P6,160

Bar 2002Carlo sues Dino for

(a) collection on a promissory note for a loan, with NO agreement on interest on which Dino defaulted

(b) damages caused by Dino on Carlos priceless painting on which Dino accidentally spilled acid while transporting it. The court finds Dino liable for both obligations. What rates of interests may the court impose?

AnswerWith respect to the amount covered by a promissory note, an interest of 12% per annum may be imposed since it arose from a contract of loan

With respect to damages, it is 6% from the time of final demand until finality of judgment and 12% of the amount from final judgment until the debt is fully paid

INTERESTContracting parties may stipulate freely on any adjustment in the interest rate on a loan or forbearance of money.

However, the law does not authorize increase of interest rate by one party without the other partys consent.

Any change of interest must be mutually agreed by the parties

Bar 2001A obtained a P300,000 housing loan from X Bank at 18% per annum interest. The promissory note provides that X reserves the right to increase the interest within the limits allowed by law. X Bank increased the interest to 48% per annum. When A questioned the increase in court, X argued that the usury law is already legally suspended. Will the action prosper? Why?

AnswerThe action will prosper. While it is true that interest ceilings set by the Usury law are no longer in force, the court may still reduce interests which are unconscionable.

Contracting parties may stipulate freely on any adjustment in the interest rate on a loan or forbearance of money.

However, the law does not authorize increase of interest rate by one party without the other partys consent.

Any change of interest must be mutually agreed by the parties

INTERESTArticle 1960 - If the debtor pays interest when there is no stipulation therefor, the provisions on solutio indebiti or natural obligations will apply (debtor may recover)

KINDS OF INTEREST SIMPLE paid for the principal at a certain rate fixed or stipulated by the parties

KINDS OF INTEREST COMPOUND that which is imposed upon interest due and unpaid. The accrued interest is added to the principal sum and the whole (principal and interest) is treated as the new principal upon which the interest for the new period is calculated

DEPOSIT

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 returning the same.

If the safekeeping of the thing is not the principal purpose of the contract, there is NO deposit but some other contract.

The PARTIES are:DEPOSITOR, or the person who turns over possession and custody of the thing to another;DEPOSITARY, or the person who receives the thing under obligations to safely keep and preserve it.

CHARACTERISTICS OF DEPOSIT:It is a nominate contract;It is a real contract;It is a principal contract;It can be gratuitous and, when gratuitous, it is a unilateral contract; andIt can be for compensation and, when for compensation, it is a bilateral contract.

SAFEKEEPING MUST BE THE PRIMARY PURPOSEUnder Article 1962, the safekeeping of the thing loaned is the principal purpose of the contract of deposit. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract.

If a contract is therefore constituted and deposit is made as an accessory or preparatory contract, the principal purpose would no longer be safe-keeping.

A wants to sell his car. He deposits the car to B so that B can sell it to prospective buyers. Here, there exists a contract of agency and deposit is simply an accessory obligation. The act of depositing the car is merely preparatory to the ultimate contract which is an agency to sell the car.

A delivers to B his laptop computer so that B may repair it. While there is an obligation to safely keep and preserve the thing while B is repairing it, the principal purpose is repair. The contract therefore is one for labor or for a piece of work.

Therefore, with respect to deposit, the effect of Article 1962 (providing that the safekeeping of the thing loaned must be the principal purpose of the contract of deposit; otherwise, there is no deposit but some other contract) seems to be that deposit has to be constituted as a principal contract. If it is constituted as a mere preparatory contract or accessory contract, custody and preservation would no longer be the principal end.

Article 1963. An agreement to constitute a deposit is binding but the deposit is NOT perfected until the delivery of the thingDeposit is a real contract

Nature of Deposit Based on ConsiderationArt. 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or unless the depositary is engaged in the business of storing goods.

If gratuitous, it is a unilateral contract because only one of the parties (the depositary) is principally obliged.

If onerous, it is a bilateral contract because the undertaking of the depositary to safely keep the thing is the reason why the depositor pays compensation.

As a general rule, only movable things may be the object of a deposit (Article 1966).

Judicial deposit, however, may cover immovable or movable things (Articles 2005-2009)Subject Matter

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

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

Judicial by means of an order by the courtExtrajudicial necessary or voluntary.Form and Constitution

JUDICIAL DEPOSITAlso known as sequestration

Primary purpose: to maintain status quo during the pendency of litigation or to insure the rights of parties to property.

Art. 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. (1785)

Art. 2006. Movable as well as immovable property may be the object of sequestration. (1786) Judicial Deposit/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. (1787a)

Art. 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family.

Rule 57 (Preliminary attachment) attachment by sheriff upon filing of complaint.

Rule 59 (Receivership) - a receiver may be appointed by the court to administer and preserve the property in litigation.

Rule 60 (Replevin) - personal property may be seized by sheriffs in suits of replevin or manual delivery of personal property.

Rule 127 attachment in criminal cases.Examples of Judicial Deposit

NECESSARY DEPOSITArt. 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.

OTHER INSTANCESWhen travellers deposit effects in hotels or inns (Article 1998)

When made by passengers of common carriers when entering into a contract of carriage of persons.

Deposit is necessary when made in compliance with a legal obligation Art. 538. Possession as a fact cannot be recognized at the same time in two different personalities except in the cases of co-possession. Should a question arise regarding the fact of possession, the present possessor shall be preferred; if there are two possessors, the one longer in possession; if the dates of the possession are the same, the one who presents a title; and if all these conditions are equal, the thing shall be placed in judicial deposit pending determination of its possession or ownership through proper proceedings.

Deposit is necessary when made in compliance with a legal obligationArt. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose.

When during a fire, flood, storm, or other calamity a property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation (Article 2168)

Possession passes by accident from one person to another and the law imposes on the recipient the obligations of a bailee

Primary purpose: to save the property On the occasion of a calamity

The keepers of hotels on inns shall be responsible as depositaries for effects deposited by guests provided: Notice was given to them about the effectsGuests have taken precautions prescribed regarding their safekeeping (Article 1998)

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. When made by travellers

Liable for loss or injury through:Acts of servants or employees of the keeperActs of strangersActs of robbers UNATTENDED by use of arms or irresistible force

NOT liable for loss or injury through:Force majeureActs of robbers with arms or using irresistible forceActs of guests, his family, servants or visitorsCharacter of the thing deposited

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void.

Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests.

VOLUNTARY DEPOSIT

Article 1968 - Delivery of the thing is made by the will of the depositor or by two or more persons each of whom believes himself entitled to the thing deposited

DIFFERENCE WITH NECESSARY DEPOSIT: The depositor in voluntary deposit has complete freedom in choosing the depositary.CONCEPT

A depositary has a LOT of obligations, which can be grouped into the following:

Obligations relative to preservation;Obligations relative to information or notice; andObligations relative to delivery and return.

Obligations of the Depositary

AS TO PRESERVATIONThe 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 (Art. 1972).

When the thing deposited consists in securities, the depositary is obliged to take such steps in order that the same may preserve their value (Art. 1975).

The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due (Art. 1975).

The depositary is obliged to use the thing deposited if its preservation requires its use. It must be used but only for that purpose (Art. 1977).

AS TO INFORMATIONThe depositary is obliged to notify the depositor and wait for the latters decision in case the former changes the way of the deposit (Art. 1974).

When the thing deposited is delivered closed and sealed but its seal or lock is broken, the depositary shall keep the secret of the deposit (Art. 1981).

The depositary, who discovers that the thing deposited has been stolen and who its true owner is, must advise the latter of the deposit (Art. 1984).

The depositary is obliged to immediately inform the depositor if the thing deposited is judicially attached or if its return or removal is opposed by a third person (Art. 1988).

AS TO RETURNWhen the thing deposited is delivered closed and sealed, the depositary is obliged to return it in the same condition (Art. 1981).

The depositary is obliged to return the thing deposited with all its products, accessories and accessions (Art. 1983).

In a deposit with multiple depositors with stipulation that the thing should be returned to one of them, the depositary is obliged to return it only to the person designated (Art. 1985).

The depositary is obliged to take the thing deposited to the place designated for the return of the thing. If no place has been designated for the return, the depositary is obliged to take the thing deposited to the place where the thing deposited may be (Art. 1987).

The depositary is obliged to return the thing deposited to the depositor upon demand, even if a specified period for such return had been fixed (Art. 1988).

The depositary who, by force majeure or government order, loses the thing and receives money or another thing in its place, must deliver the sum or other thing to the depositor (Art. 1990).

PROHIBITIONS AND LIMITATIONS ON THE DEPOSITARYThe depositary cannot deposit the thing with a third person, unless there is a stipulation to the contrary (Art. 1972).

The depositary cannot make use of the thing deposited without the express permission of the depositor. (Art. 1977).

The depositary cannot demand that the depositor prove his ownership of the thing deposited (Art. 1984).

If the depositor becomes incapacitated to contract after having made the deposit, the depositary cannot return the thing except to the administrators of his property and rights (Art. 1986).

LIABILITIESThe depositary is liable for acts of third persons in the following cases:

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 (Art. 1973).

The depositary makes use of the thing deposited without the express permission of the depositor is liable for damages. (Art. 1977).

The depositary is liable for the loss of the thing through a fortuitous event: If it is so stipulated;If he uses the thing without the depositor's permission; If he delays its return; If he allows others to use it, even though he himself may have been authorized to use the same.

When the thing is delivered closed and sealed, the depositary 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 (Art. 1981).

If the deposit consists in sums of money, the depositary is liable to pay interest on the sums he has applied to his own use from the day on which he did so, and on those which he still owes after the extinguishment of the deposit (Arts. 1896 and 1983).

RIGHTS OF THE DEPOSITARYIf there is a stipulation or if the depositary is engaged in the business of storing goods, the depositary is entitled to adequate compensation for his services (Art. 1965).

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 (Art. 1974).

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

The depositary may open a locked box or receptacle if the key has been delivered to him or when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle (Art. 1982).

The depositary, who discovers that the thing deposited has been stolen and who advises the true owner of the deposit, shall be relieved of responsibility by returning the thing deposited to the depositor if the owner does not claim it within the period of one month (Art. 1984).

If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same (Art. 1984).

In case of gratuitous deposit, if he has justifiable reasons for not keeping the thing may, even before the time designated, return it to the depositor (Art. 1989).

If the depositor refuses to receive the thing, the depositary may secure its consignation from the court (Art. 1989).

The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit (Art. 1994).

OBLIGATIONS OF THE DEPOSITORIf 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 (Art. 1987).

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 (Art. 1992)

If the deposit is not gratuitous, the depositor is obliged to pay compensation to the depositary. Should the depositor fail to pay, the depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit (Art. 1994).

The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited, except in the following cases:If 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 If he notified the depositary of the same, or the latter was aware of it without advice from the depositor (Art. 1993).

Art. 1995. A deposit its extinguished: (1) Upon the loss or destruction of the thing deposited; (2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary.

NOTE: Other causes (novation, merger, expiration of the term, fulfillment of resolutory condition)

Extinguishment of Voluntary Deposit

A deposit made in compliance with a legal obligation is:(a) an extrajudicial deposit(b) a voluntary deposit(c) a necessary deposit(d) a deposit with a warehouseman(e) letters a and b

ANSWER: CBar 2007

Judicial Deposit vs. Extrajudicial DepositAlways remuneratedMay be gratuitous or onerousHeld in behalf of prevailing partyHeld in behalf of depositor

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