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CREDIT TRANSACTIONS

Introduction

Meaning and scope of credit transactions

Credit transactions all transactions involving the purchase or loan of goods, services, or money in the
present with a promise to pay or deliver in the future

Credit transactions as contracts of security

(a) Secured transactions or contracts of security: those supported by a collateral or an encumbrance


of property;
(b) Unsecured transactions or contracts of personal security: the fulfillment of which by the
principal debtor is secured or supported only by a promise to pay or the personal commitment
of another such as a guarantor or surety

Credit transactions include:

- Bailment contracts
- Usury
- Guaranty and suretyship
- Mortgage
- Antichresis
- Concurrence and preference of credits

Meaning and kinds of security

Security something given, deposited, or serving as a means to ensure the fulfillment or enforcement of
an obligation or of protecting some interest in property;

a) Personal security: when an individual becomes a surety or a guarantor;


b) Property or real security: when a mortgage, pledge, antichresis, charge or lien or other
device used to have property held, out of which the person to be made secure can be
compensated for loss

Secured creditor one who holds a security from his debtor for payment of the latters debts

Meaning of bailment

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

Creation of bailment as a contractual relation must contain all the elements of a valid contract;

- May be created by operation of law


Parties in bailment

1) Bailor (comodatario): the giver; party who delivers the possession or custody of the thing bailed;
2) Bailee (comodante): the recipient; party who receives the possession or custody of the thing
thus delivered
Kinds of contractual bailment:
Note: In every bailment, there is an obligation on the part of the bailee to restore the subject of the
bailment in the same or in altered form or to account therefor.
1) Those for the sole benefit of the bailor: gratuitous bailment (no consideration; considered more
as a favor by one party to the party benefited)
o Gratuitous deposit
o Mandatum bailment of goods without recompense where the mandatory or person to
whom the property is delivered undertakes to do some act with respect to the same
2) Those for the sole benefit of the bailee: gratuitous bailment (no consideration; considered more
as a favor by one party to the party benefited)
o Commodatum
o Gratuitous simple loan or muttum
3) Those for the benefit of both parties: mutual-benefit bailment
o Deposit for a compensation
o Involuntary deposit
o Pledge
o Bailments for hire

Kinds of bailment for hire (location et conduction)

- Arises when goods are left with the bailee for some use or service by him and is always for some
compensation.

a. Hire of things (location rei) where goods are delivered for the temporary use of the
hirer (i.e. lease)

b. Hire of service (location operis faciendi) where goods are delivered for some work or
labor upon it by the bailee (i.e. contractor for a piece of work)

c. Hire for carriage of goods (location ioperis mercium vehendarum) where goods are
delivered either to a common carrier or to a private person for the purpose of being
carried from place to place

d. Hire of custody (location custodiae) where goods are delivered for storage

I. 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 commodatum; or money or other consumable thing, upon the condition
that the sane 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 ownerships of the thing loaned, while in simple loan,
ownership passes to the borrower.

Characteristics of the contract

(1) A real contract: the delivery of the thing loaned is necessary for the perfection of the contract;

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

Cause or consideration in a contract of loan

(a) As to the borrower: the acquisition of the thing;

(b) As to the lender: the right to demand its return or its equivalent

Kinds of loan

(1) Commodatum where the bailor (lender) delivers to the bailee (borrower) a non-consumable
thing so that the latter may use it for a certain time and return the identical thing; and

(2) Simple loan or mutuum where the lender delivers to the borrower money or other consumable
thing upon the condition that the latter shall pay the same amount of the same kind and quality

Consumable when a thing is consumed when used in a manner appropriate to its purpose or
nature

Loans distinguished from credit

Credit Loan (mutuum)

Ability of an individual to borrow money or things Delivery by one party (lender/creditor), and the
by virtue of the confidence or trust reposed by a receipt by the other party (borrower/debtor) who
lender that he will pay what he may promise become the owner, of a given sum of money or
within a specific period. other consumable thing upon an agreement,
express or implied, to repay the same amount of
the same kind and quality, with or without interest.
concession of a credit: involves the granting of loans up to the limit of the amount fixed in the
credit.

Meaning of credit as opposed to debt

credit a sum credited on the books of a company to a person who appears to be entitled to it

- Presupposes a creditor-debtor relationship; to imply ability, by reason of property estates, to


make a promised payment;

- Debt or indebtedness; that which is due to any person as distinguished from that which he owes.

- A debt from the creditors standpoint;

- May consist of money, goods or services

Loan distinguished from discounting of paper

Discount Loan

Interest is deducted in advance Interest is usually taken at the expiration of a credit

Always on a double-name paper On a single-name paper

Slightly more expensive for the borrower because * discount and interest rates for similar loans are
interest is calculated on the amount loaned and identical
not on the amount actually received.

People vs Concepcion: FACTS: Credit was extended by PNB to a partnership, the only security required
consisted of demand notes which were paid, together with interest, on maturity.

HELD: The concession of a credit necessarily involves the granting of loans up to the limit
of the amount fixed in the credit

The demand notes signed by the firm were not discount papers but were mere evidences
of indebtedness, because (a) interest was not deducted from the face of the notes, but was paid
when the notes fell due; and (b) they were single-name and not double-name paper. Prohibition
was violated.

Commodatum and mutuum (simple loan) distinguished

As to Commodatum Mutuum (simple loan)

Subject matter Something consumable Involves money or other


consumable thing

Ownership of the thing loaned Retained by the lender Transferred to the borrower
Nature Essentially gratuitous May be gratuitous or onerous
(with stipulation to pay interest)

Obligation of the borrower Must return the same thing Only to pay the same amount of
loaned the same kind and quality

Property involved Real or personal Personal only

Purpose Loan for use or temporary Loan for consumption


possession

Limitations of the bailor/lender May demand return of the thing May NOT demand return before
loaned before the expiration of the lapse of the term agreed
the term in case of urgent need upon

Effect of loss Suffered by the bailor (as owner) Borrower suffers the loss even if
caused by a fortuitous event; not
discharged from the duty to pay

Character Purely personal Not so

Kinds of commodatum

(1) Ordinary commodatum (Art. 1933); and

(2) Precarium: the bailor may demand the thing loaned at will (Art. 1947)

Art. 1034. An accepted promise to deliver something by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be perfected
until the delivery of the object of the contract.

Delivery essential to perfection of loan

Commodatum and mutuum are real contracts which require the delivery of the subject matter
for its perfection.

Delivery as the transfer either the use or ownership of the thing loaned.

Binding effect of accepted promise to lend

An accepted promise to make a future loan is a consensual contract; binding upon the parties
only after the delivery real contract arises

1) Application for loan approved by corporation


Saura Import and Export Co., Inc. vs DBP, 44 SCRA 445: Where an application for a loan of money
was approved by resolution of the corporation (lender) and the corresponding mortgage was
executed and registered, there arises a perfected consensual contract of loan.

While a perfect contract of loan can give rise to an action for damages, said contract does not
constitute the real contract of loan. (BPI Investment Corp. vs CA, 377 SCRA 117)

2) Mortgage executed by virtue of loan granted

Bonnevie vs CA, 125 SCRA 122: Where the mortgage deed was executed for and on condition of
the loan granted to the mortgagors, the fact that the latter did not collect from the mortgagee
bank the consideration of the mortgage on the date it was executed but six (6) days later when
the mortgagors and their co-maker signed the promissory note is immaterial.

A contract of loan being consensual, it was perfected at the same time that the contract of
mortgage was executed, the promissory note being only an evidence of an indebtedness and did
not indicate lack of consideration of the mortgage at the time of its execution.

3) Only partial amount was released under a loan agreement secured by mortgage

Central Bank of the Philippines vs CA, 139 SCRA 45: FACTS: Where a bank and a borrower
undertook reciprocal obligations by entering an P80,000 loan agreement on April 28,1965 when
the borrower executed a real estate mortgage, but the bank was able to release only P17,000,
the bank was held in default for P63,000 to the borrower.

In reciprocal obligations, the obligation or promise of each party is the consideration for
that of the other, and when one party has performed or is ready or willing to perform his part of
the contract, the other party who has not performed or is not ready and willing to perform
incurs in delay.

The mere fact of insolvency of a debtor (bank) is never an excuse for the non-fulfillment of an
obligation but instead taken as a breach of the contract.

Chapter 1 COMMODATUM

Section 1. Nature of Commodatum

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

Commodatum essentially gratuitous

The contract ceases to be a commodatum if any compensation is to be paid by the borrower who
acquires the use lease contract.
Innominate contract: result when the consideration is the rendering of some service

Contract similar to donation

Commodatum similar to donation in that it confers a benefit to the recipient

Presumption: the bailor has loaned the thing for having no need therefor

Extent of bailees right of use

GR: The right to use is limited to the thing loaned but not to its fruits

Exc: Contrary is stipulated.

Bailor is naturally entitled to the fruits of the thing loaned.

Purpose of the contract

Temporary use of the thing loaned.

If the bailee is not entitled to the use of the thing: deposit

Essential feature of a contract of commodatum: use of property of another for a certain time

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

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

Subject matter of the contract

GR: Non-consumable things (real or personal)

Exc: If the purpose of the contract is not the consumption of the object (i.e. merely for
exhibition), consumable.

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

Bailor need not be owner

Rationale: Ownership does not pass to the borrower.

GR: A mere lessee of the thing or the usufructuary may lend but the borrower or bailee may not lend nor
lease the thing loaned to him to a third person.

Exc: A lesseemay sublet the thing leased where there is no express prohibition in the contract of
lease.
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 bailees 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.

Commodatum, purely personal in character

The lender having in view the character, credit and conduct of the borrower.

Death of either party terminates the contract unless, by stipulation, commodatum is transmitted to the
heirs valid.

2 or more borrowers: Death of one does not extinguish the contract in the absence of stipulation to the
contrary.

All rights acquired in virtue of an obligation are transmissible.

Right of bailee to lend the thing loaned to third persons

GR: Bailee can neither lend nor lease the object of the contract to a third person

Exc: No understanding/agreement to the effect

Use of the thing loaned may extend to the members of the bailees household not considered as third
persons, unless:

(1) There is a stipulation to the contrary; and

(2) 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.

Contrary stipulation as to fruits

Bailee is entitled only to the use of the thing loaned and not to its fruits.

The right to use a thing is distinct from the right to enjoy the fruits;
The parties may stipulate that the bailee may also make use of the fruits of the hearing cannot be
presumed.

The enjoyment of the fruits must only be incidental to the use of the thing itself.