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CREDIT TRANSACTIONS_MIDTERMS 1

CREDIT TRANSACTIONS COMMODATUM

ART 1933 – By the contract of loan, one of the parties


Includes all kinds of transactions involving the purchase or delivers to another, either something not consumable so
loan of goods, services or money in the present with a that the latter may use the same for a certain time and
promise to pay or deliver in the future. return it, in which case the contract is called
Commodatum; or money or other consumable thing,
Security – something given, deposited, or serving as a means to
upon the condition that the same amount of the same
ensure the fulfillment of an obligation.
kind and quality shall be paid, in which case the contract is
1. Contracts of real security (secured transactions) – simply called a loan or mutuum.
supported by a collateral or encumbrance of a
CHARACTERISTICS:
property;[Mortgage] and
2. Contracts of personal security (unsecured transactions) 1. Real – delivery of the thing loaned is necessary for the
– fulfillment of which is supported only by a promise to perfection of the contract;
pay. [Loan] 2. Unilateral – once subject has been delivered, it creates
obligation on the part of only one of the parties.
Bailment – delivery of property of one person to another in trust
for a specific purpose, that the trust shall be faithfully executed CAUSE OR CONSIDERATION:
and the property returned or duly accounted for when the special
purpose is accomplished or kept until the bailor reclaims it.  Borrower – acquisition of the thing
 Lender – right to demand its return
PARTIES IN BAILMENT:
COMMODATUM MUTUUM
 Bailor – party who delivers the possession or custody of “Loan of use” “Loan of consumption”
the thing bailed; Non-consumable Consumable
 Bailee – party who receives Ownership is retained by Bailor Ownership is transferred to
borrower
KINDS OF CONTRACTUAL BAILMENT: Essentially gratuitous May be gratuitous or onerous
Must return the same thing Pay only the same amount of
1. Those for the sole benefit of the bailor (deposit, the same kind and quality
mandatum); May involve real, personal, or Refers only to personal
2. Those for the sole benefit of the bailee (commodatum); intangible property property
Loan for temporary possession Loan for consumption
3. Those for the benefit of both parties (compensation);
Bailor may demand return May not demand return before
4. Miserable bailment or fortuitous bailment (salvage,
before the expiration of the lapse of term
theft). term (emergency)
Bailor bears loss Bailee bears loss
KINDS OF BAILMENT FOR HIRE: *** EXAMPLE:

-arises when the goods are left with the bailee for some use or
 B borrowed A’s car, but did not use it.  not
service by him and is always for some compensation.
commodatum but deposit
 B borrowed A’s car, and gave A P10/day for the use of
1. Hire of things (location rei) – goods are delivered for the
temporary use of the hirer (lease); the car.  Lease; commodatum must be gratuitous
2. Hire of service (location operis faciendi) – goods are
Commodatum is essentially gratuitous. And the purpose is for the
delivered for some work or labor upon it by the bailee
temporary use of the thing loaned. The right to use is limited to
(contract for a piece of work);
the thing loaned and not to the fruits (1935) unless there is a
3. Hire for carriage of goods (location operis mercium
stipulation to the contrary (1940). Enjoyment of the thing used
vehendarum) – goods are delivered either to a common
must only be incidental to the use, otherwise, it is usufruct.
carrier or to a private person for the purpose of being
carried from place to place; KINDS OF COMMODATUM:
4. Hire for custody (location custodiae) – where goods are
delivered for storage. 1. Ordinary
2. Percarium – bailor may demand the thing loaned at will.

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CREDIT TRANSACTIONS_MIDTERMS 2

GR: SUBJECT MATTER of commodatum is NON-CONSUMMABLE but there must be notification + consent of
(real or personal). the Bailee.
 XPN to XPN: That they are so urgent
 XPN: CONSUMMABLE if merely for exhibition (1936). that the reply to the notification
cannot be awaited without danger.
Commodatum is purely personal in character. Death terminates
4. Bailor knowing the flaws of the thing loaned, does not
the contract unless stipulated. The Bailee cannot lease nor lend to
rd
advise the Bailee of the same, shall be liable to the
3 person without agreement. However, the members of the
latter for the damages which he may suffer by reason
Bailee’s household may make use of the thing loaned (1939).
thereof (1951). If flaw is unknown to bailor, he is not
liable because commodatum is gratuitous.
OBLIGATIONS OF BAILEE:
o Requisites:
1. Bailee is obliged to pay for the ordinary expenses for the  There is a flaw or defect in the thing;
use and preservation of the thing loaned (1941);  Flaw or defect is hidden;
2. Bailee is liable for the loss of the thing, even if it should  Bailor is aware thereof;
be through a fortuitous event in case of the 5 instances  Does not advise the bailee of the
under ART 1942; same; and
3. The bailee does not answer for the deterioration of the  Bailee suffers damages by reason of
thing loaned due only to the use thereof and without his said flaw or defect.
fault (1943); 5. Bailor cannot exempt himself from the payment of
4. Bailee cannot retain the thing loaned on the ground that expenses or damages by abandoning the thing to the
the bailor owes him something, even though it may be bailee (1952).
by reason of expenses. XPN: claim for damages suffered
from flaws of the thing loaned (1944).
5. If there are 2 or more Bailees to whom a thing is loaned
Republic v Bagtas
in the same contract, they are liable solidarily (1945).
[1962 – bulls; loss of the thing]
OBLIGATIONS OF BAILOR:
The loan by the appellee to the late defendant Bagtas of the 3
1. Bailor cannot demand the return of the thing loaned till
bulls for breeding purposes for a period of 1 year, and later on
after the expiration of the period stipulated, or after the
renewed for another year as regards one bull, was subject to the
accomplishment of the use for which the contract has
payment by the borrower of breeding fee of 10% of the book
been constituted XPN: urgent need of the thing or
value of the bulls. The appellant contends that the contract was
Bailee commits an act of ingratitude* (1946).
commodatum, for that reason, as the appellee retained
o Acts of ingratitude:
ownership or title to the bull it should suffer its loss due to force
 Baliee commits offense against the
majeure (bull was accidentally killed during a raid).
person, honor or the property of the
bailor, or of his wife or children SC – Not a contract of commodatum, but a contract of lease.
under his parental authority;
 Imputes to the bailor any criminal A contract of commodatum is essentially gratuitous. If the
offense or acts involving moral breeding fee be considered a compensation, then the contract
turpitude; and would be a lease of the bull. Thus, under art 1671 of the (old) civil
 Unduly refuses the bailor support code, the lessee would be subject to the responsibilities of a
when the bailee is legally or morally possessor in bad faith, because she had continued possession of
bound to give support to the bailor. the bull after the expiry of the contract. And even if the contract
2. Bailor may demand the thing at will (Precarium), if: 1) be commodatum, still the appellant is liable under art 1942,
neither the duration of the contract nor the use to where the bailee “is liable for loss of the thing, even if it should be
which the thing loaned should be devoted, has been through a fortuitous event: (2) if he keeps it longer than the
stipulated; or 2) if the use of the thing is merely period stipulated; (3) if the thing loaned has been delivered with
tolerated by the owner. (1947) appraisal of its value, unless there is a stipulation exempting the
3. GR: Extraordinary (actual use) – BOTH, unless otherwise bailee from responsibility in case of a fortuitous event.”
stipulated
o XPN: Bailor shall refund the extraordinary
expenses (for the preservation of the thing),

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Quintos v Beck De los Santos v Jarra

[Object is indivisible – return of gas heaters and electric lamps] [Commodatum v Sale]

The contract entered into between the parties is one of SC – Commodatum


commodatum, because under it the plaintiff gratuitously granted
the use of the furniture to the defendant, reserving for herself the Contention – carabaos were purchased
ownership thereof; by this contract the defendant bound himself
No evidence of sale made
to return the furniture to the plaintiff, upon the latter’s demand.
The obligation voluntarily assumed by the defendant to return the
1939 – purely personal, thus there is a duty to return precisely
furniture upon the plaintiff’s demand, means that he should
because the carabaos do not belong to them
return ALL of them to the plaintiff at the latter’s residence or
house. However, defendant retained for his benefit the 3 gas Manzano v Perez
heaters and the 4 electric lamps.
[Commodatum v Sale]
Pajuyo v CA
SC – Sale
[Commodatum v Lease]
There were proofs presented that shows that the contract
SC – Not commodatum entered into is one of “sale.” The property was mortgaged in the
names of respondent Perez. The court stated that indeed how
In a contract of commodatum, one of the parties delivers to
could one of them obtained a mortgaged over the property,
another something not consumable so that the latter may use the
without having dominion over it? Other proofs presented were
same for a certain time and return it.
the deed of absolute sale, title, payment of a portion, if she claims
she owns the whole.
The essential features are:
Producers Bank of the Philippines v CA
1. It is gratuitous;
[Consumable]
2. The use of the thing belonging to another is for a certain
period.
There are instances where a commodatum may have for its object
a consumable thing. If consumable goods are loaned only for
The Kasunduan reveals that the accommodation accorded by
purposes of exhibition or when the intention of the parties is to
Pajuyo to Guevarra was not essentially gratuitous. While Guevarra
lend consumable goods and to have the very same goods
was not required to pay rent, it obligated him to maintain the
returned at the end of the period agreed upon, the loan is
property in good condition. The imposition of this obligation
commodatum and not a mutuum.
makes the Kasunduan a contract different from a comomodatum.
The effects of the Kasunduan are also different from that a
In this case, the respondent agreed to deposit his money in the
commodatum, where in a case of ejectment the relationship
savings account of Sterela specifically for the purpose of making it
based on tolerance as one that is akin to a landlord-tenant
appear “that said firm had sufficient capitalization for
relationship where the withdrawal of permission would result in
incorporation, with the promise that the amount shall be
the termination of the lease, thus the withholding of the property
returned within 30 days.” (for incorporation purposes).
would then be unlawful.

Republic v CA

[Ownership – US Navy]

SC – Commodatum

The occupancy of the US Navy was not in the concept of owner.


Ownership retains to the original owner and it is not transferred
even if the property is borrowed.

Ownership cannot be lost by prescription if the possession is only


temporary and no ownership was divested/transferred.

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CREDIT TRANSACTIONS_MIDTERMS 4

SIMPLE LOAN (MUTUUM) 3. 1878(7) – an agent needs a special power of attorney


from his principal to “loan or borrow money, unless the
It is a contract whereby one of the parties delivers money latter act be urgent and indispensable for preservation
or other consumable thing to another who acquires of the things which are under administration.”
ownership thereof with the understanding or on condition
that the same amount of the same kind and quality shall OBLIGATION OF BORROWER  TO PAY:
be paid. (1933)
1. Equal amount of the same kind and quality.
2. Interest, if stipulated in writing.
It involves the return of the equivalent only and not the identical
thing because the borrower acquires ownership thereof.  What  Payment should be made in the currency
stipulated (1249). If agreement is silent, currency in
CHARACTERISTICS: (RUN PIGO) which the money was deliver. If it is not possible to
deliver in relevant currency, payment must be made in
1. Real – delivery of the thing loan is necessary for the the currency which is legal tender in the Philippines.
perfection of the contract; o Extraordinary inflation or deflation – basis:
2. Unilateral – because once the subject matter has been value of the currency at the time of the
delivered, it carries obligations on the part of only one creation of the obligation.
of the parties, i.e. the borrower; o Requisites: 1) there must be an official
3. Nominate – has a specific name in the Civil Code; declaration by the BPS; 2) the obligation was
4. Principal – existence does not depend on another contractual in nature; 3) the parties expressly
contract; agreed to consider the effects of the
5. Informal – no particular form is generally required; extraordinary inflation/deflation.
6. Gratuitous – if there is no stipulation to pay interest; or  Loan of fungible thing – obligation to pay the lender
7. Onerous – if there is a stipulation to pay interest. another thing of the same kind, quality, and quantity. In
case it is impossible to do so, the borrower shall pay its
ESSENTIAL REQUISITES:
value at the time of the perfection of the loan.
1. Consent – manifested by the meeting of the offer and  When  Returned on agreed period. Borrower loses
acceptance upon the thing. Must be given by parties the right to use the period in cases under Art 1198. If no
who have capacity to give consent. agreement, courts may fix (1197).
2. Object – money or any other consumable thing. May  Can the creditor demand payment or can the borrower
also cover fungible things under Art 1953 (if non- make payment prior to the maturity date? 1196 & 1197
fungible, and borrower has the obligation to give things applies.
of the same kind, quantity, and quality, the contract is a o No interest – yes, borrower can pay (no
“barter” [1954]). prejudice will be made to creditor).
3. Cause – gratuitous (liberality of the lender) or onerous o With interest – he cannot pay, nor can the
(if there is a stipulation to pay interest). GR: Gratuitous creditor demand payment (because the period
XPN: if expressly stipulated in writing to pay interest is established for the benefit of both the
(1956). creditor and borrower).
4. Delivery – because it is a real contract.  Where  payment will be made on the place
stipulated; if none, domicile of the debtor (1251).
FORM:  No criminal liability for failure to pay.

GR: No required form since it is a real contract and delivery of the Fungible things – those which are usually dealt with by number,
thing perfects the contract. weight, or measure so that any given unit or portion is treated as
equivalent of any other unit or portion.
XPN:
 whether a thing is consumable or not depends on its
1. 1956 – No interest shall be due unless it has been nature and whether it is fungible or not depends upon
expressly stipulated in writing. the intention of the parties.
2. 1358 – Statute of frauds: contracts where the amount
involved exceeds P500 must appear in writing (for Loss and deterioration  if borrower loses the money or the
convenience not validity). goods, this does not affect his obligation to repay the creditor, in

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CREDIT TRANSACTIONS_MIDTERMS 5

accordance with the rule of res perit domino (“the thing perishes Naguiat v CA
to the owner”; owner bears risk).
[Object]
MUTUUM LEASE
Delivery of money or some Deliver non-consumable thing The mere issuance of checks did not result in the perfection of the
other consumable thing contract of loan. Delivery of such shall produce the effect of
Promise to repay an equivalent Lessee uses it during a certain payment only when they have been encashed.
amount of the same kind and period and return it to the
quality, but not the same thing lessor In this case, the objects of the contract are the loan proceeds
loaned which Queano would enjoy only upon the encashment of the
Thing loaned becomes Lessor does not loses his checks signed or indorsed by Naguiat. If indeed the checks were
property of the obligor. ownership
encashed or deposited, he would have certainly presented the
Obligor and obligee Landlord and tenant
Receives “payment” Receives “compensation” or corresponding documentary evidence.
“price”
Consequently, if there is no object, then there is no contract. And
if there is no contract (principal), then there is no mortgage
COMMODATUM MUTUUM BARTER contract (accessory).
Non-consumable Consumable, Non-consumable,
fungible non-fungible Cebu International Finance Corporation v CA
Same thing Same kind and Equivalent thing is
quality (not given [Money market]
exact thing)
Always gratuitous May be Onerous Alegre invested with CIFC P500k, which the latter issued checks
gratuitous or for the proceeds. Alegre’s wife deposited the checks and was
onerous dishonored by BPI because the checks were subject of an
use consume Sale investigation. Alegre sued for recovery of a sum of money against
CIFC. CIFC contends that since BPI accepted the instrument, the
bank became primarily liable for the payment of the check. And
Saura Import & Export Co, Inc. v DBP
consequently, when BPI offset the value of the check against the
[Perfection –1972, jute mill, kenaf; consensual] losses from the forged checks allegedly committed by Alegre, the
check was deemed paid.
SC – a perfected contract since there was a valid offer and
acceptance, which was extinguished by mutual desistance of the Money market is a market dealing in standardized short-term
parties. credit instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through a
This case is an accepted promise to deliver something by way of middle man or dealer in open market. The investor is a lender
simple loan, which falls under the first clause of Art 1934: “An who loans his money to a borrower through a middleman or
accepted promise to deliver something by way of commodatum dealer.
or simple loan is binding upon the parties, but the commodatum
or simple loan itself shall not be perfected until the delivery of the In the case at bar, the money market transaction between the
object of the contract.” petitioner and the private respondent is in the nature of a loan.
Alegre accepted the check, instead of requiring payment in money.
BPI Investment Corp v CA When he presented the check for encashment, the same was
dishonored by BPI. Under these circumstances, and after the
[Perfection – 2002, real] notice of dishonor, the holder has an immediate right of recourse
against the drawer, and consequently could immediately file an
SC – Real contracted. action for the recovery of the value of the check.

A loan contract is not a consensual contract but a real contract. It In a loan transaction, the obligation to pay a sum certain in money
is perfected only upon delivery of the object of the contract. may be paid in money, which is the legal tender or, by the use of a
check. A check is not a legal tender, and therefore cannot
constitute valid tender of payment. The obligation is not
extinguished and remains suspended until the payment by

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commercial document is actually realized (cashed, or through the


fault of the creditor they have been impaired).

BPI Family Bank v Franco

[Even if deposit, still a contract of loan]

BPI cannot unilaterally freeze Franco’s accounts and preclude him


from withdrawing his deposits. There is no doubt that BPI owns
the deposited monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC’s deposit to
Tevesteco’s account. The deposit of money in banks is governed
by provisions on simple loan or mutuum. As there is a debtor-
creditor relationship between a bank and its depositor, BPI
ultimately acquired ownership of Franco’s deposit, but such
ownership is coupled with a corresponding obligation to pay him
an equal amount on demand. However, although he owns the
deposits, it cannot prevent him from demanding payment of BPI’s
obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account. BPI does
not have a unilateral right to freeze the accounts of Franco. To
grant it, or any other bank for that matter, the right to take
whatever action it pleases on deposits which it supposes are
derived from shady transactions, would open the floodgates of
public distrust in the banking industry. The bank is under
obligation to treat the accounts of its depositors with meticulous
care, being a business affected with public interest.

Tolentino v Gonzales

[vs lease (rent)]

SC – RENT

Discussed the distinction between rent and loan.

In this case, the property in question was sold. During the period
of the redemption the relation which existed between the vendor
and the vendee was that of a landlord and tenant. Thus the
contract was one of rent.

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INTEREST AND THE USURY LAW - Consequence of an invalid EC = does not affect the
validity of the loan agreement. The interest rate payable
1956 – No interest shall be due unless it has been by the borrower should be the original interest rate
expressly stipulated in writing. agreed upon by the parties.
- Valid EC, but the borrower does not agree to the
KINDS OF INTEREST:
increased rate, he should have the option to prepay the
According to nature – loan.

1. Monetary interest – as compensation for the use of REQUISITES FOR A VALID EC:
money (1956); for the use of the money.
1. The EC must be paired with a de-escalation clause;
2. Compensatory interest – as penalty or indemnity for
2. It must be pegged to the prevailing market rates, and
damages for breach of contractual obligations imposed
not merely make a generalized reference to “any
by law or by courts (2209 & 2212); breach f contractual
increase or decrease in the interest rate” in the event a
obligations.
law or a Central bank regulation is passed;
According to how it accrues – 3. The proposed modification must be the result of an
agreement between the parties.
1. Simple – is paid for the principal at a certain rate fixed  The form of contract is not conclusive.
or stipulated by the parties (2209). [evenly applied to
the whole period]
1957 – Contracts and stipulations, under any cloak or
2. Compound – imposed upon interest due and unpaid. device whatever, intended to circumvent the laws against
usury shall be void. The borrower may recover in
Other – accordance with the laws on usury.

1. Legal – directed by law to be charged in absence of any  Only the interest is void, and not the whole contract. It
agreement as to the rate between the parties (BSP then becomes a loan without a stipulation to pay
Circular No 799 [2013] = 6% per annum) interest.
2. Lawful – the rate of interest within the maximum  Debtor has the right to recover the amount paid.
prescribed by law
3. Unlawful or usurious – that which is paid or stipulated GR: accrued interest (interest due and unpaid) shall not earn
to be paid beyond the maximum fixed by law.
1958 – In the determination of the interest, if it is payable
REQUISITES FOR RECOVERY OF INTEREST: in kind, its value shall be appraised at the current price of
the products or goods at the time and place of payment.
1. Payment of interest must be expressly stipulated.
2. Interest must be lawful. 1959 – without prejudice to the provisions of art 2212,
3. The agreement to pay interest must be in writing. interest due and unpaid shall not earn interest. However,
the contracting parties may be stipulation capitalize the
Note: If NO RATE of interest has been expressly stipulated, the
interest due and unpaid, which as added principal, shall
LEGAL rate of 6% shall be payable. Increase should also be
earn new interest.
expressly stipulated.

GR: If not stipulated in writing, cannot be demanded interest.

 XPN: 1) Judicial demand – interest accruing interest; 2)  XPN: 1) when judicially demanded as provided for in
Interest as damages 2212; 2) when there is an express stipulation made by
the parties (also called compounding interest [must be
ESCALATION CLAUSE – stipulation allowing the increase in the in writing]).
interest rate originally agreed upon by the parties (opposite = de-
escalation clause).

- EC are generally valid to maintain fiscal stability and to


retain the value of money on long term contracts.
- EC must not be solely potestative (mutuality of
contracts).

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Usury – contracting for or receiving something in excess upon interest until the debt is judicially claimed, and then the rate
of the amount allowed by law for the loan or forbearance at which interest upon accrued interest must be computed is fixed
of money, goods, or chattles. at 6% per annum.

ELEMENTS: In this case, not compounded interest since the provision in the
mortgage merely requires the debtor to pay interest monthly,
1. A loan or forbearance;
such interest to be computed upon the capital of the loan not
2. An understanding between the parties that the loan
already paid. It does not therefore justify the charging of
shall or may be restored;
compound interet accruing upon the capital monthly.
3. An unlawful intent to take more than the legal rate for
the use of money or its equivalent; and Solidbank v Permanent Homes
4. The taking or agreeing to take for the use of the loan of
something in excess of what is allowed by law. [Validity of escalation clauses ]

USURY LAW  6% Legal rate, 12% ceiling (secured loans), 14% Whether the Honorable Court of Appeals was correct in ruling
ceiling (not secured). Suspended by CB CIRCULAR NO. 905 (Jan 1, that the increases in the interest rates on [Permanents] loans are
1982)  12 % Legal interest, no ceiling void for having been unilaterally imposed without basis.

NOW: BSP CIRCULAR NO. 799 (July 31, 2013) – 6% legal interest. The stipulations on interest rate repricing are valid because
(1) the parties mutually agreed on said stipulations; (2) repricing
Forbearance – contractual obligation of lender or creditor to takes effect only upon Solidbanks written notice to Permanent of
refrain, during given period of time, from requiring borrower or the new interest rate; and (3) Permanent has the option to prepay
debtor to repay loan or debt then due and payable (Bataan its loan if Permanent and Solidbank do not agree on the new
Seedling Association Inc v Republic). interest rate. The phrases irrevocably authorize, at any time
and adjustment of the interest rate shall be effective from the
Jadenil v Salas
date indicated in the written notice sent to us by the bank, or if no
[agree not only the rate of interest, but also when you should pay date is indicated, from the time the notice was sent, emphasize
it.] that Permanent should receive a written notice from Solidbank as
a condition for the adjustment of the interest rates.
1. Interest in order to be chargeable must be in writing;
2. The court can impose interest by way of exception. Silos v PNB

Integrated Realty Corp. v PNB [v. Solidbank; Unilateral increase of interest rate by the creditor
bank NOT VALID]
[Exception to 1956]
May the bank, on its own, modify the interest rate in a loan
Under Art 1956, no interest shall be due unless it has been agreement without violating the mutuality of contracts?
expressly stipulated in writing. This applies only to interest for the
use of money, and does not comprehend interest paid as No. Any modification in the contract, such as the interest rates,
damages. must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed
The legal interest, in the nature of damages for non-compliance modification, especially when it affects an important aspect of the
with an obligation to pay a sum of money, is recoverable from the agreement. In the case of loan agreements, the rate of interest is
date judicial or extrajudicial demand is made. a principal condition, if not the most important component.

The obligation of banks to pay interest ceases once its operation is Loan and credit arrangements may be made enticing by, or
suspended by Central bank  reason: the interest it earns from "sweetened" with, offers of low initial interest rates, but actually
rd
3 parties less interest paid to depositors = income of the bank. accompanied by provisions written in fine print that allow lenders
to later on increase or decrease interest rates unilaterally, without
Cu Unjieng e Hijos v Mabalacat Sugar Co. the consent of the borrower, and depending on complex and
subjective factors. Because they have been lured into these
[Compounding interest]
contracts by initially low interest rates, borrowers get caught and
stuck in the web of subsequent steep rates and penalties,
The parties may stipulate that interest shall be compounded. But
surcharges and the like. Being ordinary individuals or entities,
in absence of express stipulation, no interest can be collected

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CREDIT TRANSACTIONS_MIDTERMS 9

they naturally dread legal complications and cannot afford court Likewise, interest began to run on the penalty interest upon the
litigation; they succumb to whatever charges the lenders impose. filing of the complaint in Court. Hence, the lower courts did not
At the very least, borrowers should be charged rightly; but then err in ruling that the petitioner is bound to pay the interest on the
again this is not possible in a one-sided credit system where the total amount of the principal, the monetary interest and the
temptation to abuse is strong and the willingness to rectify is penalty interest.
made weak by the eternal desire for profit.
RCBC v CA
Difference:
[interest in banking; skipped]
Solidbank – notice is given before increase.
Interest is essential in the banking industry.
 basis of increase - prevailing interest rates.
The essence or rationale for the payment of interest or cost of
Silos – Unilateral increase money is separate and distinct from that of surcharges and
penalties. The charging of interest for loans forms a very essential
 increase or decrease is potestative. Does not require and fundamental element of the banking business, which may
prior consent. truly considered to be at the very core of its existence or being.

GSIS v CA Ligutan v CA

[Penalty clause] [Compensatory interest]

The Usury law applies only to interest by way of compensation for A penalty clause, expressly recognized by law is an accessory
the use or forbearance of money. Interest by way of damages is undertaking to assume greater liability on the part of an obligor in
governed by art 2209: case of breach of an obligation. It functions to strengthen the
coercive force of the obligation and to provide, in effect, for what
“If the obligation consists in the payment of a sum of moneys, and could be the liquidated damages resulting from such a
the debtor incurs in delay, the indemnity for damages, there breach. The obligor would then be bound to pay the stipulated
being no stipulation to the contrary, shall be the payment of the indemnity without the necessity of proof on the existence and on
interest agreed upon, x x x” the measure of damages caused by the breach. Although a court
may not at liberty ignore the freedom of the parties to agree on
The Code permits the agreement upon a penalty, apart from the
such terms and conditions as they see fit that contravene neither
interest. Should there be such an agreement, the penalty does not
law nor morals, good customs, public order or public policy, a
include the interest, and such the two are different and distinct
stipulated penalty, nevertheless, may be equitably reduced by the
things which may be demanded separately.
courts if it is iniquitous or unconscionable or if the principal
Tan v CA obligation has been partly or irregularly complied with.

[2212; penalty; skipped during discussion] The question of whether a penalty is reasonable or iniquitous can
be partly subjective and partly objective. Its resolution would
Whether interest may accrue on the penalty or compensatory depend on such factors as, but not necessarily confined to, the
interest without violating the provisions of 1959: “Without type, extent and purpose of the penalty, the nature of the
prejudice to the provisions of Art 2212, interest due and unpaid obligation, the mode of breach and its consequences, the
shall not earn interest. x x x” supervening realities, the standing and relationship of the parties,
and the like, the application of which, by and large, is addressed
Contention – since there is no law that allows imposition of to the sound discretion of the court. In Rizal Commercial Banking
interest on penalties, the penalties should not earn interest. Corp. vs. Court of Appeals just an example, the Court has
tempered the penalty charges after taking into account the
However, penalty clauses can be in the form of penalty or
debtors pitiful situation and its offer to settle the entire obligation
compensatory interest. In this case, there is an express stipulation
with the creditor bank. The stipulated penalty might likewise be
in the promissory note permitting the compounding of interest.
reduced when a partial or irregular performance is made by the
Art 2212, also, provides that “interest due shall earn legal interest
debtor The stipulated penalty might even be deleted such as
from the time it is judicially demanded, although the obligation
when there has been substantial performance in good faith by the
may be silent upon this point.”
obligor when the penalty clause itself suffers from fatal infirmity,
or when exceptional circumstances so exist as to warrant it.

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Imperial v Juacian Banco Filipino v CA

[Monetary interest] [Escalation clause]

“16% rate per month (192% per annum) and 5% penalty charge is Petitioner relied on Circular 494 to unilaterally raise the interest
iniquitous/ usurious “ rates on the loan.

While the Usury law had been effectively suspended, the lenders PD 1684 (March 17, 1980) – escalation clause should provide:
don’t have a carte blanche authority to raise interest rates to
levels which will either enslave or lead to the hemorrhaging of the 1. That there can be an increase in interest if increased by
debtor’s assets. law or by the Monetary Board; and
2. In order for such stipulation to be valid, it must include a
When the agreed rate is iniquitous such is considered null and provision for the reduction for the stipulated interest in
void but it will not cause the whole contract to be invalidated. the event that the maximum rate of interest is reduced
by law or by the Monetary Board.
First Fil-Sin Lending Corp v Padillo
The question now is could the petitioner increase the stipulated
[stipulation per month / per annum; construction of contracts] interest pursuant to the CB Circular 494 from 12% to 17%?

When the terms of the agreement are clear and explicit, the NO. EC in this case was before the enactment of PD 1684, thus the
terms are to be understood literally just as they appear on the basis used is Circular 494. However, although Circular 494 has the
face of the contract. Applying Art 1229, courts shall equitably force and effect of law, is not a law and is not the law
reduce the penalty when the principal obligation has been partly contemplated by the parties which authorized the petitioner to
or irregularly complied with, or if it is iniquitous or unconscionable. unilaterally raise the interest rate of the loan.

Penalty charges pegged at 1% per day of delay is highly Consolidated Bank & Trust Co. v CA
unconscionable as it would translate to 365% per annum. Thus, it
was reduced to 1% per month or 12% per annum. [Marginal deposits]

Advocates for FILA v BSMB As long as it is not left to the sole will of the parties, interest can
be determined by market rates, etc.
[Suspension of Usury law; CB Circular No. 905]
However, while it may be acceptable, for practical reasons given
Usury Law was amended by PD 1684, giving the CB-Monetary the fluctuating economic conditions, for banks to stipulate that
Board authority to prescribe different maximum rates of interest. interest rates on a loan not be fixed and instead be made
dependent upon prevailing market conditions, there should
CB-MB issued CB Circular No 905 (Jan 1, 1983) which removed the
always be a reference rate upon which to peg such variable
ceilings on interest rates on loans or forbearance of any money,
interest rates.
goods or credits. The Circular did not repeal nor in any way amend
the Usury Law but simply suspended the latter’s effectivity. By Mendoza v CA
lifting the interest ceiling, CB Circular No 905 merely upheld the
parties’ freedom of contract to freely agree on the rate of interest. [Consent]
The Court cited Art 1306 of the NCC, under which the contracting
parties may establish such stipulations, clauses, terms and The unilateral determination and imposition of increased interest
conditions as they may deem convenient, provided that they are rates by respondent bank is violative of the principle of mutuality
not contrary to law, morals, good customs, public order, or public of contracts. Changes in the contract must be made with the
policy. However, the lifting of the ceilings for interest rates does consent of the parties and cannot be left to the sole will of one of
not authorize stipulations charging excessive, unconscionable, and them.
iniquitous interest. Such are struck down for being contrary to
First Metro Investment Corp v Este del Sol Mountain
morals, if not against the law and are deemed void ab initio.
Nonetheless, the nullity of the stipulations of usurious interest
[1957]
does not affect the lender’s right to recover the principal of the
loan, nor affect the other terms thereof. Contention – the underwriting and consultancy agreements are
“mere subterfuges to camouflage the usurious interest charged”
by the petitioner.

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CREDIT TRANSACTIONS_MIDTERMS 11

SC – YES. In the instant case, several facts and circumstances extrajudicial demand under and subject to the
taken altogether show that the Underwriting and Consultancy provisions of Article 1169 of the Civil Code.
Agreements were simply cloaks or devices to cover an illegal
scheme employed by petitioner FMIC to conceal and collect 2. When an obligation, not constituting a loan or
excessively usurious interest. forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
The established facts and circumstances belie the contention that discretion of the court at the rate of 6% per annum. No
the Loan, Underwriting and Consultancy Agreements are separate interest, however, shall be adjudged on unliquidated
and independent transactions. The Underwriting and Consultancy claims or damages, except when or until the demand
Agreements which were executed and delivered on the same date can be established with reasonable certainty.
with the Loan Agreement were exacted by Petitioner as essential Accordingly, where the demand is established with
conditions for the grant of the loan. An apparently lawful loan is reasonable certainty, the interest shall begin to run
usurious when it is intended that additional compensation for the from the time the claim is made judicially or
loan be disguised by ostensibly unrelated contract providing for extrajudicially (Art. 1169, Civil Code), but when such
payment by the borrower for the lender’s services which are of certainty cannot be so reasonably established at the
little value or which are not in fact to be rendered. time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made
Art 1957 clearly provides that “contracts and stipulations, under (at which time the quantification of damages may be
any cloak or device whatsoever, intended to circumvent the laws deemed to have been reasonably ascertained). The
against usury shall be void. The borrower may recover in actual base for the computation of legal interest shall, in
accordance with the laws on usury.” any case, be on the amount finally adjudged.

In usurious loans, the entire obligation DOES NOT BECOME VOID 3. When the judgment of the court awarding a sum of
because of an agreement for usurious interest; the unpaid money becomes final and executory, the rate of legal
PRINCIPAL debt still stands and remains VALID but the stipulation interest, whether the case falls under paragraph 1 or
as to the usurious interest is VOID, consequently, the debt is to be paragraph 2, above, shall be 6% per annum from such
considered without stipulation as to the interest. finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
Eastern Shipping Lines v CA
credit.
[riboflavin case]  See Nacar for guidelines
And, in addition to the above, judgments that have become final
and executory prior to July 1, 2013, shall not be disturbed and
Nacar v Gallery Frames
shall continue to be implemented applying the rate of interest
[MEMORIZE GUIDELINES!!] fixed therein.
Modifications made:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the 1. Par II, No. 1 - Interest from 12% to 6%
contravenor can be held liable for damages. The provisions under
Title XVIII on “Damages” of the Civil Code govern in determining 2. Par II, No. 3 – Interest from 12% to 6%
the measure of recoverable damages.
3. Additional paragraph
II. With regard particularly to an award of interest in the concept
4. BSP Circular 799
of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
5. Interest for bonus were also changed (see footnote 30+)
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance Catungal v Hao
of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the [Eastern Shipping/Nacar Guideline II – no 1.]
interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, Interest due is from the time of extra-judicial demand applying “II.
the rate of interest shall be 6% per annum to be No.1” of the guidelines laid out in Eastern Shipping case. Also
computed from default, i.e., from judicial or expanded the definition of forbearance as it includes “rents.”

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CREDIT TRANSACTIONS_MIDTERMS 12

GUARANTY AND SURETYSHIP obligated itself as an original promissor. It bound itself jointly and
severally to the obligation with the respondent spouses. In fact,
Ong v PCIB SOLIDBANK need not resort to all other legal remedies or exhaust
respondent spouses' properties before it can hold petitioner liable
[Surety vs Guaranty] for the obligation.

Petitioners are sureties of Baliwag Mahogany Corporation with Article 2080 – Not applicable to surety – only to guaranty.
respect to a loan secured by the latter to PCIB. BMC defaulted in
the payment of the loan which led to the institution of a case for Tacao v CA
collection of sum of money. While the case was pending, a MOA
was executed by BMC and PCIB with the effect of suspending the [The rule is, contract of guaranty only has to be expressly made.
pending civil cases.
Exptn : When the same falls under the ambit of Statute of Frauds,
PCIB despite the MOA proceeded to collect the sum from it must be in writing.]
petitioners.
Petitioners on their part assert that the benefits under the MOA “His claim that he was merely a guarantor is belied by that
should be extended to them. personal act of proprietorship in the business. Moreover, if he
was indeed a guarantor of future debts of petitioner Tocao under
Issue : Whether or not the petitioners are entitled to the benefits Article 2053 of the Civil Code, he should have presented
granted to BMC under the MOA. documentary evidence therefor. While Article 2055 of the Civil
Code simply provides that guaranty must be express, Article 1403,
SC : No, there’s a difference between a surety and a guaranty. the Statute of Frauds, requires that a special promise to answer
Petitioners being sureties can’t raise the defense available to a for the debt, default or miscarriage of another be in writing. “
guarantor ( Art. 2063 and Art. 2081 ).
Astro Electronics Corp v Phil Export and Foreign Loan Guarantee
Surety is an insurer of the debt itself; whereas, guarantor is an Corp
insurer of the solvency of the debtor.
Issue: Whether or not Roxas should be liable jointly and severally
The obligation of ONG exists independently of BMC’s. In fact, the with ASTRO when according to him he signed the promissory
bank can proceed against petitioners without having to collect notes in his capacity as president.
from BMC.
“FOR VALUE RECEIVED, I/We jointly, severally and solidarily,
International Finance Corp. v Imperial Textile Mills promise to pay to PHILTRUST BANK or order…”

ITM and Grandtex agreed to act as guarantors of PPIC in the loan The phrase joint and several binds the makers jointly and
agreement of the latter with IFC, the same was evidenced by the individually to the payee so that all may be sued together for its
GUARANTEE AGREEMENT executed by ITM, grandtex in favor of enforcement, or the creditor may select one or more as the object
PPIC. of the suit. Having signed under such terms, Roxas assumed the
solidary liability of a debtor and Philtrust Bank may choose to
Issue : Whether ITM is a surety and not guarantor of PPIC.
enforce the notes against him alone or jointly with Astro.
SC: ITM is a surety and not a guarantor. ITM bound itself JOINTLY
Sps Toh v Solidbank
and severally with PPIC under the guarantee agreement. The
intent rather than the designation prevails. The contract further An extension of the period for enforcing the indebtedness does
stated that ITM was a primary obligor which only buttresses the not by itself bring about the discharge of the sureties unless the
fact that ITM bound itself as surety and not as guarantor. extra time is not permitted within the terms of the waiver, i.e.,
where there is no payment or there is deficient settlement of the
E. Zobel, Inc. v CA
marginal deposit and the twenty-five percent (25%) consideration,
The contract executed by petitioner in favor of SOLIDBANK, albeit in which case the illicit extension releases the sureties. Under Art.
denominated as a "Continuing Guaranty," is a contract of surety. 2055 of the Civil Code, the liability of a surety is measured by the
The terms of the contract categorically obligates petitioner as terms of his contract, and while he is liable to the full extent
"surety" to induce SOLIDBANK to extend credit to respondent thereof, his accountability is strictly limited to that assumed by its
spouses. The contract clearly disclose that petitioner assumed terms.
liability to SOLIDBANK, as a regular party to the undertaking and

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CREDIT TRANSACTIONS_MIDTERMS 13

In this case, future consent was given by the Sps Toh to Solidbank GR : Contract of guaranty or surety is gratuitous
to the effect that the latter may by itself extend the time of
payment, terms and conditions thereof. This waiver, however, is Willex Plastic Industries Corp v CA
valid only if the bank complies with other conditions or terms of
[ Benefit by the guarantor not material ; contract of guaranty
the waiver.
essentially gratuitous ]
* SPS WERE RELEASED FROM THEIR LIABILITY AS SURETIES
Same same;
BECAUSE OF THE FAILURE OF THE BANK TO COMPLY WITH THE
CONDITION THAT THE EXTENSION SHOULD BE ACCOMPANIED
Although a contract of suretyship is ordinarily prospective, in the
WITH A MARGINAL DEPOSIT AND 25 PERCENT CONSIDERATION.
end, the intention of the parties still prevails.
Filipinas Textile Mills v CA
It is not necessary that the surety receives any part or benefit, if
any , accruing to the principal. The consideration of the surety or
[Failure to collect does not equate to extension of time so as to
guaranty is the same as the consideration in the principal contract.
extinguish the liability of the guarantor]
Dino v CA
The neglect of the creditor to sue the principal at the time the
debt falls due does not discharge the surety, even if such delay
[ Future debts ]
continues until the principal becomes insolvent
The petitioner asserts that the continuing surety is not valid for the
The raison detre for the rule is that there is nothing to prevent the
obligations not yet in existence at the time the same was executed.
creditor from proceeding against the principal at any time. At any
rate, if the surety is dissatisfied with the degree of activity SC: under Article 2052 of the Civil Code, a guaranty "cannot exist
displayed by the creditor in the pursuit of his principal, he may without a valid obligation." We cannot agree. First of all, the
pay the debt himself and become subrogated to all the rights and succeeding article provides that "[a] guaranty may also be given
remedies of the creditor. as security for future debts, the amount of which is not yet
known." Secondly, Article 2052 speaks about a valid obligation, as
It may not be amiss to add that leniency shown to a debtor in
distinguished from a void obligation, and not an existing or
default, by delay permitted by the creditor without change in the
current obligation. This distinction is made clearer in the second
time when the debt might be demanded, does not constitute an
paragraph of Article 2052 which reads:
extension of the time of payment, which would release the surety.
In order to constitute an extension discharging the surety, it Nevertheless, a guaranty may be constituted to guarantee the
should appear that the extension was for a definite period, performance of a voidable or an unenforceable contract. It may
pursuant to an enforceable agreement between the principal and also guarantee a natural obligation.
the creditor, and that it was made without the consent of the
surety or with a reservation of rights with respect to him. The Atok Finance Corp v CA
contract must be one which precludes the creditor from, or at
least hinders him in, enforcing the principal contract within the [ Future debt ]
period during which he could otherwise have enforced it, and
Issue: Whether or not the Continuing surety agreement is null and
precludes the surety from paying the debt
void as having been executed without consideration and without
Severino v Severino a pre-existing principal obligation to sustain it.

Primary defense : Enchause having received nothing from affixing SC: No. It is true that a guaranty or a suretyship agreement is an
his signature in a compromise agreement executed to end a accessory contract in the sence that it is entered into for the
litigation, he should not be held liable as the same was not purporse of securing the performance of another obligation
supported by a consideration which is denominated as the principal agreement. Of course, a
surety is not bound by a particular principal obligation until the
Issue: Whether or not contract of guaranty must have a principal obligation is born. But there is no theoretical or doctrinal
consideration difficulty inherent in saying that the suretyship agreement itself is
valid and binding even before the same was entered into before
SC : The guarantor or surety is bound by the same consideration the principal obligation intended to be secured thereby is born.
that makes the contract effective between the principal parties Comprehensive or continuing surety agreements are in fact quite
thereto. commonplace in present day financial and commercial practice. A

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CREDIT TRANSACTIONS_MIDTERMS 14

bank or a financing company which anticipates entering into a debtor, and has resorted to all the legal remedies against the
series of credit transactions with a particular company, commonly debtor.
requires the projected principal debtor to execute a continuing
surety agreement along with its sureties. By executing such an The liability of the guarantor is only subsidiary. The properties of
agreement, the principal places itself in a position to enter into the principal debtor must first be exhausted before his own is
the projected series of transactions with its creditor; with such levied upon. The creditor may hold the guarantor liable only after
suretyship agreement, there would be no need to execute a judgment has been obtained against the principal debtor and the
separate surety contract or bond for each financing or credit latter is unable to pay.
accommodation extended to the principal debtor. As we
In this case, the court stated that it is premature to determine
understand it, this is precisely what happened in the case at bar.
whether Baylon is liable as guarantor because no judgment was
Tanedo v Allied Banking Corp first obtained against the principal debtor, Rosita. It is useless to
speaek of a guarantor when no debtor has been held liable for the
[ Extension granted by the creditor to debtor will not have the obligation which is allegedly secured by such guarantee.
effect of releasing the guarantor from his obligation if he
consented to the same ] Wise & Co. Inc. v Tanglao

Issue: whether the execution by the respondent Bank of the A special power of attorney was issued by Tanglao to David
Fourth Amendatory Agreement extinguished petitioners empowering the latter to enter into a contract of suretyship and a
obligations as surety contract of mortgage of the property with Wise and Co.

The amendatory agreement ( extensions to the loan agreement )  David was not considered as a guarantor of Wise and Co
between the respondent Allied Banking Corporation and Cheng for the reason that the instrument executed by David
Ban Yek & Co., Inc. extended the maturity of the promissory notes and Wise and co. did not bind him to such a capacity.
without notice or consent of the petitioner as surety of the David only used the SPA in order to mortgage the
obligations. However, the continuing guarantee executed by the property described in the SPA and not to bind Tanglao
petitioner provided that he consents and agrees that the bank as a guarantor of David.
may, at any time or from time to time extend or change the time  No action was instituted by Wise and Co against
of payments and/or the manner, place or terms of payment of all Tanglao to foreclose the property mortgaged.
such instruments, loans, advances, credits or other obligations  Even assuming that Tanglao was a guarantor, Wise and
guaranteed by the surety. Hence, the extensions of the loans did Co can only proceed against him after exhausting the
not release the surety properties of David – In this case, David still has 2
properties the value of which far exceeds the value of
Southern Motors, Inc. v Barbosa the loan.

A real mortgage was executed to secure a principal obligation. Syquia v Jacinto


When the principal debtor failed to settle the obligation, the
creditor moved to foreclose the property The guarantor can only raise the defenses available to him under
Article 1830, 1832, 1834, 1852 only when demand for payment is
Whether or not the creditor is required to exhaust the property of made by the creditor to his person.
the principal debtor before foreclosing the mortgage.
Arroyo v Jungsay
SC – NO, the guarantor’s invocation of the right to demand
exhaustion of the property of the debtor under Art 2058 does not In here, the defendants invoke the benefit of excussion. Excussion
apply in this case – It does not apply when a pledge or mortgage is gives the benefit of a levy even when a judgment is rendered
given as a security. In such a case, the law on pledge and against both the surety and the principal. The effect is to stay
mortgage shall apply – TITLE 16 of the CC. proceedings against the surety until judgment has been obtained
against the principal debtor and execution against his property
Baylon v CA has proved insufficient

The petitioner is invoking the right of excussion under Article 2058 The following are the requisites cited in Hill and CO
which provides that the guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the property of the 1. The surety who wants to claim the benefit must
demand it in limine ( on the institution of the
proceedings)

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CREDIT TRANSACTIONS_MIDTERMS 15

2. He must point out to the creditor property of the Cohingyan Jr. v R&B Surety and Insurance Co.
principal debtor
3. The property must not be incumered subject to seizure [purpose of indemnity agreement ; holding in abeyance the claim;
and must furnish a sufficient sum to have the excussion effect ]
carried into effect.
PNB’s undertaking under the Trust Agreement to hold in
Must be located in the Philippines, must be salable/realizable, abeyance any action to enforce its claims does not amount to
must be sufficient to cover the debt. extension of payment so as to have the effect of extinguishing the
liability of the sureties.
In this case, the property pointed out to the creditor by the
guarantor is under claim of ownership by third parties – NOT Merely delay or negligence in proceeding against the principal will
SALABLE. not discharge a surety unless there is between the creditor and
the principal debtor a valid and binding agreement therefor, one
Luzon Steel Corp v Sia which tends to prejudice [the surety] or to deprive it of the power
of obtaining indemnity by presenting a legal objection for the
A guarantor can’t avail the benefit of excussion without pointing time, to the prosecution of an action on the original security
to sufficient leviable property of the debtion within the Philippine
territory. The guarantor being merely subsidiarily liable with the In the instant case, there was nothing to prevent the petitioners
debtor, exhaustion of the latter’s property is required before the from tendering payment, if they were so minded, to PNB of the
creditor can proceed against the guarantor. matured obligation on behalf of R & B Surety and thereupon
becoming subrogated to such remedies as R & B Surety may have
A surety can’t make use of this defense because he is solidarily against PAGRICO.
liable with the debtor. In fact, the creditor can proceed against
the surety even without proceeding against the principal debtor No novation as a result of the trust agreement – the only effect of
first. this is to introduce a new obligor which is not incompatible with
the indemnity agreement.
Towers Assurance Corp v Ororama Supermarket
The Indemnity Agreements are contracts of indemnification not
[DOCTRINE : A surety is not entitled to the benefit of excussion. only against actual loss but against liability as well. While in a
This however doesn’t mean that court can dispense with the contract of indemnity against loss as indemnitor will not be liable
requirement of notice and hearing before a counter bond be until the person to be indemnified makes payment or sustains loss,
awarded in favor of creditor] in a contract of indemnity against liability, as in this case,
the indemnitor's liability arises as soon as the liability of the
RULE 57, sec 17
person to be indemnified has arisen without regard to whether or
not he has suffered actual loss. Accordingly, R & B Surety was
Under section 17, in order that the judgment creditor might
entitled to proceed against petitioners not only for the partial
recover from the surety on the counterbond, it is necessary (1)
payments already made but for the full amount owed by PAGRICO
that execution be first issued against the principal debtor and that
to the PNB.
such execution was returned unsatisfied in whole or in part; (2)
that the creditor made a demand upon the surety for the
Mercantile Insurance Co. v Ysmael Jr & Co. Inc
satisfaction of the judgment, and (3) that the surety be given
notice and a summary hearing in the same action as to his liability [Collection on the basis of the indemnity agreement by the surety
for the judgment under his counterbond. even before payment to the principal creditor ]

The first requisite mentioned above is not applicable to this case Issue : Whether or not surety can be allowed indemnification
because Towers Assurance Corporation assumed a solidary from the defendants-appellant upon the latter’s default even
liability for the satisfaction of the judgment. A surety is not before the former has paid to the creditor.
entitled to the exhaustion of the properties of the principal
debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L- [LIABILITY vs ACTUAL LOSS]
26449, May 15, 1969, 28 SCRA 58, 63).
Same same ;
But certainly, the surety is entitled to be heard before an
execution can be issued against him since he is not a party in the The Indemnity Agreements are contracts of indemnification not
case involving his principal. Notice and hearing constitute the only against actual loss but against liability as well. While in a
essence of procedural due process. contract of indemnity against loss as indemnitor will not be liable

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CREDIT TRANSACTIONS_MIDTERMS 16

until the person to be indemnified makes payment or sustains loss, PNB v Manila Surety & Fidelity Co.
in a contract of indemnity against liability, as in this case,
the indemnitor's liability arises as soon as the liability of the [ If by the act of the creditor the surety could not be subrogated to
person to be indemnified has arisen without regard to whether or the rights, mortgages and preferences of the latter, the latter shall
not he has suffered actual loss. be released from their obligation ]

PNB v CA Even if the assignment with power of attorney from the principal
debtor were considered as mere additional security still, by
It is a well-settled maxim of law and equity that when one of two allowing the assigned funds to be exhausted without notifying the
(2) innocent persons must suffer by the wrongful act of a third surety, the Bank deprived the former of any possibility of
person, the loss must be borne by the one whose negligence was recoursing against that security. The Bank thereby exonerated the
the proximate cause of the loss or who put it into the power of surety, pursuant to Article 2080 of the Civil Code:
the third person to perpetrate the wrong
ART. 2080. — The guarantors, even though they be solidary, are
People’s Bank and Trust Co. v Tambunting released from their obligation whenever by come act of the
creditor they cannot be subrogated to the rights, mortgages and
[ Waiver - The law does not prohibit the debtor-guarantor from preferences of the latter. (Emphasis supplied.)
agreeing in advance and without notice to the release of any
security which had been given to assure payment of the  The surety her would effectively be deprived of his right
obligation.” ] to be subrogated to the rights of the creditor.
 The creditor failed to collect the amount due which
There was a stipulation in the contract of absolute guaranty that made it possible for other creditors of the principal
authorized the plaintiff bank to extend the time of payment and debtor to collect.
to release or surrender any security or part thereof held by it  If surety should be made to shoulder the debt – the
without notice to, the consent of, Santana. surety would no longer have any recourse to the
amount due in BPW because through the negligence of
It could have been different if there were no such contract of
the creditor, the same had been impaired.
absolute guaranty to which appellant was a party under the
aforesaid Article 2080. He would have been freed from the Prudencio v CA
obligation as a result of plaintiff releasing to the Tambuntings
without his consent the 135 shares of the International Sports Accommodation makers – are primarily and unconditionally liable
Development Corporation pledged to plaintiff bank to secure the on the promissory note to a holder for value.
overdraft line. For thereby subrogation became meaningless. Such
a provision is intended for the benefit of a surety. That was a right IS PNB A holder for value In this case?
he could avail of. He is not precluded however from waiving it.
That was what appellant did precisely when he agreed to the SC: NO.PNB is not a holder for value and in due course. It had
contract of absolute guaranty. Again the law is clear. A right may knowledge that the accommodation makers signed only In such a
be waived unless it would be contrary to law, public order, public capacity.
6
policy, morals or good customs. There is no occasion here for
The petitioners can validly set up their personal defense of release
the exceptions coming into play. It has been traditional in the
from the real estate mortgage against PNB. The latter, in
Philippine for parents to extend all available aid and assistance to
authorizing the third payment to the Company after the
their children. That is a custom of long standing. Nor is there
promissory note became due, in effect, extended the term of the
anything offensive to morals by an assumption of contingent
payment of the note without the consent of the accommodation
liability as thus worded. The law has not been thwarted. Neither is
makers who stand as sureties to the accommodated party and to
public order nor public policy disregarded. The lower court was
7 all other parties who are not holders in due course or who do not
right thereto in yielding full assent to the waiver in question. The
derive their right from the same, including PNB.
vigor with which counsel for appellant impugned the lower
decision cannot therefore be attended with success. It can stand
its ground notwithstanding such a sustained and spirited attack.

AUF-SOL | 2017 | CANLAS.SALTA


CREDIT TRANSACTIONS_MIDTERMS 17

Security Bank and Trust Co. v Cuenca The theory behind Article 2079 is that an extension of time given
to the principal debtor by the creditor without the suretys consent
[Doctrines: a surety agreement is strictly construed against the would deprive the surety of his right to pay the creditor and to be
creditor, and every doubt is resolved in favor of the solidary immediately subrogated to the creditors remedies against the
debtor.] principal debtor upon the maturity date. The surety is said to be
entitled to protect himself against the contingency of the principal
Respondent was no longer the principal officer or major debtor or the indemnitors becoming insolvent during the extended
stockholder of the corporate debtor at the time the later period.
obligations were incurred. He was thus no longer in a position to
compel the debtor to pay the creditor and had no more reason to JN Development Corp. v. Phil Export
bind himself anew to the subsequent obligations.
The benefit of excussion and the waiver of the right to be notified
On the alleged waiver of consent, respondent bound himself or to give consent to extensions are rights available to the
under the Indemnity agreement liable for the credit guarantor. These rights are personal to him so that the principal
accommodating including its substitution and renewal. debtor can’t escape its liability to reimburse the guarantor for
whatever the latter has paid to the initial creditor by invoking
SC – while respondent held himself liable for the credit such rights.
accommodation or any modification thereof, such clause should
be understood in the context of the P8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines any
license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of
respondent who was solidarily liable. Taking the banks submission
to the extreme, respondent (or his successors) would be liable for
loans even amounting to, say,P100 billion obtained 100 years
after the expiration of the credit accommodation, on the ground
that he consented to all alterations and extensions thereof.

The Indemnity Agreement was subject to the two limitations of


the credit accommodation: (1) that the obligation should not
exceed P8 million, and (2) that the accommodation should expire
not later than November 30, 1981. Hence, itwas a continuing
surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of P8
million.

Even if the indemnity Agreement is a continuing surety, petitioner


can’t unilaterally change its terms and condition.

There was also novation of the contract as opposed to the claim


of the petitioner that the new loan agreement was merely an
extension of the old one.

The 1989 Loan Agreement expressly stipulated that its purpose


was to liquidate, not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to
the 1989 Loan Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety
should be deemed extinguished, pursuant to Article 2079 of the
Civil Code, which specifically states that [a]n extension granted to
the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. x x x. In an earlier case, the Court
explained the rationale of this provision in this wise:

AUF-SOL | 2017 | CANLAS.SALTA