CREDIT TRANSACTIONS
INTRODUCTION
Definition and Scope
Credit Transactions include all transactions involving the purchase or loans
of goods, services, or money in the present with a promise to pay or deliver in
ithe future.
By the use of credit, more exhanges are possible, persons are able to
enjoy a thing today but pay for it later, and through the banking system, actual
money transfer is eliminated by cancellation of debts and credits.
Credit transactions are really contracts of security.
Two types:
1. Secured transactions or contracts of real security – those
supported by a collateral or an encumbrance or property; and
2. Unsecured transactions or contract of personal security – those
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.
The encumbrance is effected as follows:
a. Pledge – placing the movable property in the possession of the creditor
b. Chattel Mortgage – by the execution of the corresponding deed substantially
in the form prescribed by law.
c. Real Estate Mortgage – by the execution of a public instrument encumbering
the real property covered thereby
d. Antichresis – by a written instrument granting to the creditor the right to
receive the fruits of an immovable property with the obligation to apply such
fruits to the payment of the interest and principal obligation.
Bailment contracts, together with the other related subjects such as
usury, the contracts of guaranty and suretyship, mortgage, antichresis, and
concurrence and preference of credits, all make-up the so called CREDIT
TRANSACTIONS
SECURITY
Definition and Kinds
Security is something given, deposited, or serving as a means to ensure
the fulfillment or enforcement of an obligation or of protecting some interest in
property.
KINDS:
PERSONAL SECURITY - when an individual becomes a surety or a guarantor;
PROPERTY OR REAL SECURITY – as when 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.
BAILMENT
Definition
Comes from the French word “bailer” meaning “to deliver.”
It may be defined as 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 claims it.
1 DVOREF 2C Ab Initio
Creation
In general, bailment may be said to be a contractual relation. To be legally
enforceable, it must contain all the elements of a valid contract.
It does not necessarily mean that an agreement is always necessary to
create bailment. It may be created by operation of law.
Parties
1. BAILOR (COMODATARIO) - the giver; the party who delivers the possession
or custody of the thing bailed; and
2. BAILEE (COMODANTE) - the recipient; the party who receives the
possession or custody of the thing thus delivered.
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Kinds of Contractual Bailments
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The classification is generally with reference to compensation under which
bailments are divided into three heads, namely:
Gratuitous Bailments
(1) Those for the sole benefit of the bailor; (gratuitous deposits and
mandatum)
Mandatum is a 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; as simply to carry it, or keep it, or otherwise to do
something with respect to it gratuitously
(2) Those for the sole benefit of the bailee; and (commodatum and gratuitous
simple loan or muutum)
Mutual-benefit Bailments
(3) Those for the benefit of both parties. (deposit for a compensation
including involuntary deposits and bailments for hire)
Kinds of Bailment for Hire
Bailment for Hire (location et conductio) arises when goods are left with
the bailee for some use or service by him and is always for some compensation.
1. Hire of thing (locatio rei). Where goods are delivered for the temporary use
of the hirer (i.e. LEASE)
2. Hire of service (locatio operis faciendi). Where goods are delivered for
some work or labor upon it by the bailee (i.e. contract for a piece of work)
3. Hire for carriage of goods (locatio operis mercium vehendarum).
Where the goods are delivered either to a common carrier or to a private person
for the purpose of being carried from place to place.
4. Hire of custody (locatio custodiae). Where goods are delivered for storage
(Warehouse Receipts Law)
LOAN
General Provisions
ART. 1933 By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time
and return it, in which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same amount of the same
kind 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 a Contract
The Contract of Loan is:
1. Real Contract because the delivery of the thing loaned is necessary for the
perfection of the contract; and
2. Unilateral Contract because once the subject matter has been delivered, it
creates obligations on the part of only one of the parties, i.e., the borrower.
Causes or Considerations in a contract of loan
1. as to the borrower, the acquisition of the thing; and
2 DVOREF 2C Ab Initio
2. 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 Muutum – 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.
*A thing is consumable when it is consumed when used in a manner
appropriate to its purpose or nature, like rice, gasoline, money, fruit, firewood,
etc.
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Consumable things and Non-consumable things
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A thing is consumable when it cannot be used in a manner appropriate to Landlord-tenant relationship
its nature without being consumed (Art. 418, NCC) (e.g. food, firewood, BARTER
gasoline). Subject matter are non-fungible
On the other hand, a non-consumable thing is a movable thing which can be used things
in a manner appropriate to its nature without it being consumed (Art. 418, NCC) Always onerous
(e.g. car, television, radio). There is a mutual sale resulting in the
transfer of ownership on both sides
Fungible and Non-Fungible things The parties do not return the things
Fungible thing is one where the parties have agreed to allow the subject of the exchange
substitution of the thing given or delivered with an equivalent thing (3 Manresa
58). Non-fungible thing is one where the parties have the intention of having the DEPOSIT
same identical thing returned after the intended use. Safekeeping of the thing deposited.
Generally, the depositary cannot use
NOTE: As to whether a thing is consumable or not, it depends upon the nature of the thing deposited
the thing. Depositor can demand
the return of the thing
As to whether it is fungible or not, it depends upon the intention of the parties. deposited at any time
Fungibles are usually determined by number, weight or measure. Compensation not
applicable to things
Irreplaceability of Non-Fungible thing deposited
Relationship is one of depositor and
GR: Non-fungible things are irreplaceable. They must be returned to the lender
depositary.
after the purpose of the loan had been accomplished.
Obligations and Contract
LOAN
Subject matter is money or other
fungible things
May be gratuitous or onerous
In mutuum, there is transfer of
ownership, there is no sale
In commodatum, the bailee returns
the thing after the expiration of the
period agreed upon
LOAN
Lender grants the
borrower the use of the
thing learned
Generally, borrower pays
at the end of the period
Compensation of credits
Applicable
Relationship is one of
lender and borrower; or
creditor and debtor

XPN: Non-fungible things may be replaced by agreement of the parties. In such
case, the contract is barter and not loan
Loan distinguished from Credit, Discount, Rent, Barter and Deposit
CREDIT
Ability to borrow money by virtue of
the
confidence reposed by the lender unto
him that he will pay what he has
promised
DISCOUNT
Interest is deducted in advance
Always on double-name paper
RENT
The owner of property does not lose
3 DVOREF 2C Ab Initio
LOANS vs CREDIT
The credit of an individual means his ability to borrow money or things by
virtue of the confidence or trust reposed by a lender that he will pay what he may
promise within a specified period.
LOAN
Delivery by one party and the receipt The loan means the delivery by one party(lender/creditor), and the receipt
by the other party of a given sum of by the other party (borrower/debtor) who become the owner, of a given sum of
money, upon an agreement, money or other consumable thing upon an agreement, express or implied, to
expressed or implied, to repay the repay the same amount of the same kind and quality, with or without interest.
sum loaned, with or without interest
LOAN Meaning of Credit as Opposed to Debt
Interest is taken at the expiration of a
credit The term “credit,” in its usual meaning, is a sum credited on the books of
Generally on a single name paper a company to a person who appears to be entitled to it. It presupposes a
LOAN creditor-debtor relationship, and may be said to imply ability, by reason of
The things loaned becomes the property or estates, to make a promised payment. It is the correlative to debt or

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the ownership; he loses his control property of the obligor indebtedness,
over the property rented during the and that which is due to any person as distinguished from that which he owes.
period of contract.
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It is a debt considered from the creditor’s standpoint.
Loan distinguished from discounting of paper
To discount a paper is a mode of loaning money, with these distinctions:
(1) In a discount, interest is deducted in advance while in a loan, interest
is usually taken at the expiration of a credit; and
(2) A discount is always on a double-name paper, while a loan is
generally, on a single-name paper.
ART. 1934 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
The rule contained in the above article is a necessary consequence of the
fact that commodatum and mutuum are real contracts which require the delivery
of the subject matter thereof for their perfection.
1. Application for loan approved by corporation - 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.
2. Mortgage executed by virtue of loan granted. — 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 released under a loan agreement secured by
mortgage. — Where a bank and a borrower undertook reciprocal obligations by
entering an P80,000.00 loan agreement on April 28, 1965 when the borrower
executed a real estate mortgage, but the bank was able to release only
P17,000.00, the bank was held in default for P63,000.00 to the borrower.

 Art. 1316. Real contracts, such as deposit, pledge and commodatum, are Commodatum vs Muutum (Simple Loan)

not perfected until the delivery of the object of the obligation.
COMMODATUM
 Delivery is necessary in view of the purpose of the contract which is to Ordinarily involves something not
transfer either the use or ownership of the thing loaned. consumable (Art 1936)
Ownership of the thing loaned is
Binding effect of accepted promise to lend retained by the lender (Art 1933)
Essentially gratuitous
An accepted promise to make a future loan is a consensual contract,
and therefore, binding upon parties but it is only after delivery, with the real The borrower must return the same
contract of loan arise. thing loaned
May involve in real or personal
 Art. 1315. Contracts are perfected by mere consent, and from that property (Art 1937)
moment the parties are bound not only to the fulfi llment of what has Loan for use or temporary possession
been expressly stipulated but also to all the consequences which, (Art 1935)
according to their nature, may be in keeping with good faith, usage and The bailor may demand the return of
law. the thing loaned before the expiration
of the term in case of urgent need (Art
4 DVOREF 2C Ab Initio
MUUTUM (SIMPLE LOAN)
The subject matter is money or other
consumable thing;
The ownership is transferred to the
borrower
May be gratuitous or onerous, that is,
with stipulation to pay interest;
The borrower need only pay the same
amount of the same kind and quality;
Refers only to personal property
Loan for consumption
The Lender may not demand its return
before the lapse of the term agreed
upon; and

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Thus: 1946)
The loss of subject matter is suffered The borrower suffers the loss even if
by the bailor since he is the owner caused exclusively by a fortuitous
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(Art 1942; Art 1174) event and he is not, therefore,
discharge from his duty to pay.
KINDS OF COMMODATUM
1. Ordinary commodatum – bailor cannot just demand the return of the thing at
will, because there is a period agreed upon by the parties.
2. Precarium – one whereby the bailor may demand the thing loaned at will in the
following cases:
a. If the duration of the contract had not been stipulated;
b. If the use to which the thing loaned should be devoted had not been
stipulated;
c. If the use of the thing is merely by tolerance of the owner
NOTE: The word “owner” in Art. 1947 (2) is not proper because the bailor need
not be the owner of the thing (Pineda, 2006; Art. 1938).
Characteristics of a contract of commodatum
1. Real contract – delivery of the thing loaned is necessary for the perfection of
the contract
2. Unilateral contract – once subject matter is delivered, it creates obligations on
the part of only one of the parties (the borrower)
3. Essentially gratuitous
4. Purpose is to transfer the temporary use of the thing loaned
5. Principal contract
6. Purely personal contract
Consequence of purely personal character of commodatum
1. Death of a party
GR: Commodatum is purely personal in character hence death of either bailor or
bailee extinguishes the contract (Art. 1939, NCC).
XPN: By stipulation, the commodatum is transmitted to the heirs of either or
both party.
2. Lease of the thing subject of commodatum
GR: The bailee can neither lend nor lease the object of the contract to a third
person.
XPN: Members of the bailee’s household may make use of the thing loaned
because members of the bailee’s household are not considered as third persons.
NOTE: Household members are those permanently living or residing within the
same residence including the household helpers.
XPN to the XPN: Contrary stipulation; or Nature of the thing forbids such use.
3. Right of retention
GR: The bailee cannot exercise the right of retention against the bailor
XPN: However, he can exercise the right of retention on the account of damages
suffered by the bailee because of flaws that the bailor knew of but did not
disclose to the bailee
Use of fruits of the property by the bailee
The bailee in commodatum acquires only the use of the thing loaned but
not its fruits (Art. 1935, NCC).
A stipulation that the bailee may make use of the fruits of the thing loaned
is valid. It is understood that the enjoyment of the fruits must only be incidental
to the use of the thing. It should not be the main cause; otherwise, the contract
is not a commodatum but a usufruct (Art. 1940, NCC).
The stipulation that the bailee may make use of the fruits of the thing
5 DVOREF 2C Ab Initio
loaned will not impair the essence of commodatum because the actual cause or
consideration therefore is still the liberality of the bailor or lender.
Elements of commodatum
1. There must be a bailor and bailee;
2. the bailee acquires the use of the thing;
3. it must be gratuitous
Parties to a commodatum
1. Bailor/Comodatario/Commodans – The giver/lender - The party who delivers
the possession or custody of the thing bailed.
2. Bailee/Comodante/Commodatarius – The recipient/borrower - The party who
receives the possession or custody of the thing thus delivered.
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Liability when there are two or more bailees
When there are 2 or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily (Art. 1945, NCC).
 CREDIT TRANSACTIONS
Their liability is solidary in order to protect the bailor’s rights over the If the extraordinary expenses arise on the occasion of the actual use of
thing loaned. the thing loaned by the bailee, the expenses shall be borne by the bailor and
bailee equally, even though the bailee is without fault (Art. 1949, NCC).
Q: Following the principle of autonomy of contracts, may the parties to a
contract of commodatum validly stipulate that the liability of the bailees 3. To be liable for damages for known hidden defects.
shall be joint?
A: No. Article 1245 expressly provides that in a contract of commodatum, when 4. Cannot exempt himself from payment of expenses or damages by
there are two or more bailees to whom a thing is loaned in the same contract, abandonment of the thing to bailee.
they are liable solidarily. It constitutes as an exception to the general rule of
“joint obligations” where there are two or more debtors, who concur in one and Liability of the bailor for hidden defects
same obligation under Articles 1207 and 1208. Solidarity is provided to safeguard
effectively the rights of the bailor over the thing loaned. Requisites:
1. There was a flaw or defect in the thing loaned;
Subject matter of commodatum 2. The flaw or defect is hidden;
GR: Under Art. 1933, the subject matter of commodatum must be non- 3. The bailor is aware thereof;
consumable because the thing must be returned. 4. He does not advise the bailee of the same; and
5. The bailee suffers damages by reason of said flaw or defect.
XPN: Consumable goods may be the subject of commodatum if the purpose is
not to consume them such as when they were loaned merely for ad Cause of Action against bailor who did not disclose flaw or defect
ostentationem or
exhibition purposes. After the affair, the same and identical goods shall be The cause of action against the bailor who did not disclose the flaw or
returned to the lender or bailor (Art. 1936, NCC). defect is action for recovery of damages on the ground of quasi-delict because of
negligence or bad faith.

6 DVOREF 2C Ab Initio
Object of commodatum
Both movable and immovable property may be the object of commodatum (Art. Effect if both parties know the defect
1937, NCC).
The effect if both parties are aware of the flaws or defects is that the
Consideration in a commodatum bailee is deemed to have assumed a risk. The bailor is not liable for the damages
1. As to the borrower – The acquisition of thing loaned suffered by the bailee by reason thereof.
2. As to the lender – The right to demand the return of the same thing loaned
Rights of the bailor
Obligations of the bailor
Return of the thing loaned
1. Allow the bailee the use of the thing loaned for the duration of the period
stipulated or until the accomplishment of the purpose. GR: The return of the thing loaned may be demanded by the bailor only (1) after
the expiration of the period stipulated or (2) after the accomplishment of the use
2. Refund the extraordinary expenses the bailee incurred for the preservation of for which it is constituted.
the thing.
XPNs:
GR: The bailee must bring to the knowledge of the bailor such expenses before 1. In case of urgent need by the bailor

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incurring the same. 2. In case of precarium
3. If the bailee commits an act of ingratitude specified in Article 765 to the bailor
XPN: In case there is urgency and delay would cause imminent danger. (Art. 1948, NCC), to wit:
 CREDIT TRANSACTIONS
of event when:
a. If the bailee should commit some offenses against the person, honor or Fortuitous event 1. When being able to save either of
the property of the bailor, or his wife or children under his parental authority; the thing borrowed or his own thing,
b. If the bailee imputes to the bailor any criminial offense, or any act he chose to save the latter
involving moral turpitude, even though he should prove it, unless the crime or 2. He keeps it longer than the period
the act has been committed against the bailee, his wife or children under his stipulated, or after the
authority; or accomplishment of its use (in default);
c. If the bailee unduly refuses the bailor support when the bailee is legally 3. The thing loaned has been
or morally bound to give support to the bailor. delivered with appraisal of its value
4. When he lends or leases it to third
NOTE: The rationale for the application of Art. 765 which refers to donations is persons who are not members of his
the fact that commodatum, like donation, is gratuitous in nature. household
5. There is deviation from the Purpose
Q: If the contract of commodatum is a precarium, will Art. 1942 (1) and As to the deterioration of the Not liable for the deterioration of the
(2) still apply? thing thing loaned caused by the ordinary
loaned wear and tear of the thing loaned
A: It depends. If there has been a demand on the part of the bailor before the (Art. 1943, NCC).
loss of the thing under the circumstances set forth under Art. 1942 (1) and (2)
and NOTE: When there are two or more
the bailee did not return the thing, then the latter is liable. However, if there has bailees, their liability is solidary.
been no demand on the part of the bailor and the thing was lost, the bailor is
estopped and cannot hold the bailee liable for under a contract of precarium, the Rights of a Bailee
use of the thing by the bailee depends on the pleasure of the bailor and no time
is fixed for such use. Hence, demand on the part of the bailor is needed for the 1. Use of the thing;

return of the thing. Without such, loss of the thing on the hands of the bailee will
not make him liable.
Bailor and ownership of the thing loaned
The bailor in commodatum need not be the owner of the thing loaned. It is
sufficient that he has possessory interest over subject matter (Art. 1938, NCC).
NOTE: A mere lessee or usufructuary may gratuitously give the use of the thing
leased or in usufruct, provided there is no prohibition against such.
7 DVOREF 2C Ab Initio
2. Make use of the fruits of the thing when such right is stipulated in the
contract;
3. Not answerable for the deterioration of the thing loaned due to the use thereof
and without his fault; and
4. Right of retention for damages due to hidden defects or flaws of the thing of
which he was not advised by the bailor.
Q: Art. 1178 of the NCC provides that all rightsacquired by virtue of an
obligation are transmissible. Is the right to use the thing by virtue of a
contract of commodatum transmissible?

A: No, it is not transmissible for 2 reasons:

a.) Art. 1178 provides that the transmissibility of said acquired rights are either
subject to the laws or to a contrary stipulation; and
Obligations of the Bailee
b.) Art. 1939 provides that a contract of commodatum is purely personal in

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As to the expenses Pay for the ordinary expenses for the character.
use and preservation of the thing
As to the lossof the thing in case Liable for loss even through fortuitous
 CREDIT TRANSACTIONS
To rule otherwise would be to run counter to the purely personal character stipulated, or after the accomplishment of the use for which the commodatum
of the commodatum and to the proviso that transmissibility is subject to the law has been constituted.
governing such obligations.
ART. 1935 The bailee in commodatum acquires the use of the thing
COMMODATUM VS LEASE 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 LEASE
Real Contract Consensual ART. 1936 Consumable goods may be the subject of commodatum if the
Object is a nonconsumable and non Object may even be work or service purpose of the contract is not the consumption of the object, as when it
fungible thing is merely for exhibition.
Essentially gratuitous Onerous
If the bailor is not aware of the flaws, Provisions governing warranty are ART. 1937 Movable or immovable property may be the object of
he is not liable for the resulting made applicable commodatum.
danger caused by such.
ART. 1938 The bailor in commodatum need not be the owner of the thing
Conversion of commodatum to lease loaned.
The legal effect if the bailee pays for the use of the thing is that the
contract ceases to be commodatum; it becomes lease. ART. 1939 Commodatum is purely personal in character. Consequently:

Right of retention in Commodatum (1) The death of either the bailor or the bailee extinguishes the
contract;
GR: There is no right of retention in commodatum. The bailee cannot retain the
thing loaned on the ground that the bailor owes the bailee. (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

XPN: The bailee has the right of retention for claims of damages which the bailee
incurred or suffered by reason of the hidden defects or flaws of the thing loaned,
of which he was not informed or advised by the bailor.
The reason for the general rule that there is no right of retention is that
“bailment implies a trust that as soon as the time has expired or the purpose
accomplished, the bailed property must be returned to the bailor.” Also, Art. 1287
provides that compensation shall not be proper when one of the debts arises
from the obligations of a bailee in commodatum (Art. 1287, reworded)
Q: Suppose during the said retention of the bailee by reason of hidden
defects, the thing is lost due to a fortuitous event. Can the bailor hold the
bailee liable for said loss based on Art.1942 (2)?
A: No, the bailee cannot be held liable for the loss. Art. 1942 (2) contemplates
wrongful retention or a situation where the bailee is not entitled to retain the
thing loaned.
8 DVOREF 2C Ab Initio
make use of the thing loaned, unless there is a stipulation to the
contrary, or unless the nature of the thing forbids such use.
ART. 1940 A stipulation that the bailee may make use of the fruits of the
thing loaned is valid.
ART. 1941 The bailee is obliged to pay for the ordinary expenses for the
use and preservation of the thing loaned.
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

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NOTE: Article 1942 (2) provides that the bailee is liable for the loss of the thing, constituted;
even if it should be through a fortuitous event if he keeps it longer than the
period
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(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;
(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. 1945. When there are two or more bailees to whom a thing is
loaned in the same contract, they are liable solidarily.
ART. 1946. The bailor cannot demand the return of the thing loaned till
after the expiration of the period stipulated, or after the accomplishment
of the use for which the commodatum has been constituted. However, if
in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession of the
bailor.
ART. 1947. The bailor may demand the thing at will, and the contractual
relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the thing
loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
ART. 1948. The bailor may demand the immediate return of the thing if
the bailee commits any acts of ingratitude specifi ed in Article 765.
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 notifi cation 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.
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.
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. 1952. The bailor cannot exempt himself from the payment of
expenses or damages by abandoning the thing to the bailee.
EXPENSES
Rules on who shall pay Ordinary, Extraordinary expenses and other
expenses
9 DVOREF 2C Ab Initio
1. Ordinary Expenses – for both the use and preservation of the thing, it shall be
paid or shouldered by the bailee (Art. 1941, NCC)
2. Extraordinary Expenses
a. Preservation – Bailor, 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 (Art. 1949,
NCC).
b. Use
GR: Borne equally by the bailor and bailee
XPN: Stipulation to the contrary (Art. 1949, NCC)
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3. Other expenses – Bailee (Art. 1950, NCC)
 CREDIT TRANSACTIONS
Q: What if the bailee is entitled to payment or reimbursement of
expenses incurred or damages suffered and the bailor offers the thing
loaned as payment for said expenses or damages, would such offer be
valid or not, in view of the prohibition under Art. 1952 which states that
the bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee?
A: The offer is not valid. It may be considered as dation in payment. In this
case, the abandonment done by the bailor was made in favor of the bailee for the
payment of the expenses incurred by the latter, hence, a violation of what the
law has expressly prohibited under Article 1952.
Entitlement for reimbursement
The bailee is not entitled to reimbursement for the expenses he incurred
if, for the purpose of making use and preservation of the thing, the bailee incurs
expenses other than those ordinary and extraordinary expenses.
Q: Before he left for Riyadh to work as a mechanic, Pedro left his van
with Tito, with the understanding that the latter could use it for one year
for his personal or family use while Pedro works in Riyadh. He did not
tell Tito that the brakes of the van were faulty. Tito had the van tuned up
and the brakes repaired. He spent a total amount of P15,000.00. After
using the
vehicle for two weeks, Tito discovered that it consumed too much fuel.
To make up for the expenses, he leased it to Annabelle. Two months
later, Pedro returned to the Philippines and asked Tito to return the van.
Unfortunately, while being driven by Tito, the van was accidentally
damaged by a cargo truck without his fault.
a. Who shall bear the P15,000.00 spent for the repair of the van?
Explain.
b. Who shall bear the costs for the van's fuel, oil and other materials
while it was with Tito? Explain.
c. Does Pedro have the right to retrieve the van even before the lapse of
one year? Explain.
d. Who shall bear the expenses for the accidental damage caused by the
cargo truck, granting that the truck driver and truck owner are
insolvent?
Explain. (2005 Bar Question)
A:
a) The contract between Pedro and Tito is one of commodatum. Of the P15,
000.00 spent, Pedro, the bailor, shall bear the expenses for the repair of the
faulty brakes, they being extraordinary expenses incurred due to the non-
disclosure by the bailor of the defect or fault; Tito, on the other hand, shall
shoulder "that part of the P15,000.00 spent for the tune-up”, said expense being
ordinary for the use and
preservation of the van.
b) The costs for the fuel and other materials are considered ordinary expenses,
and consequently Tito, the bailee, shall shoulder them (Art. 1941, NCC).
c) No, Pedro cannot demand the return of the van until after the expiration of the
one-year period stipulated. However, if in the meantime he should have urgent
need of the van, he may demand its return or temporary use. d) Both Tito and
Pedro shall bear equally the costs of the extraordinary expenses, having been
incurred on the occasion of actual use of the van by Tito, the bailee, even though
he acted without fault (Art. 1949(2)NCC).
PRECARIUM that use of the thing has been granted subject to revocation by the
bailor at any time, whether or not the use for which the thing has been loaned
has been accomplished.
SIMPLE LOAN OR MUTUUM
MUTUUM
It is a contract whereby one of the parties called the “lender” delivers to
10 DVOREF 2C Ab Initio
another called the “borrower”, money or other consumable thing subject to the
condition that the same amount of the same kind and quantity shall be paid.
Characteristics of a contract of mutuum
1. Borrower acquires ownership of the thing (Art 1953, NCC).
2. If the thing loaned is money, payment must be made in the currency which is
legal tender in the Philippines and in case of extraordinary deflation or inflation,
the basis of payment shall be the value of the currency at the time of the creation
of the obligation (Art 1249 and 1250, NCC).
3. If fungible thing was loaned, the borrower is obliged to pay the lender another
thing of the same kind, quality and quantity even if it should change in value.
Perfection of the Contract of Mutuum
Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation (Art. 1316, NCC). While
Page
mutuum or simple loan is not mentioned, it has the same character as
 CREDIT TRANSACTIONS
commodatum. Hence, mutuum is also a real contract which cannot be perfected
until the delivery of the object. Destruction of the thing loaned
An accepted promise to make a future loan is a consensual contract and
therefore, binding upon the parties but it is only after delivery, will the real The destruction of the thing loaned does not extinguish one’s obligation in
contract of loan arise. Mere issuance of checks does not perfect the contract of a simple loan because his obligation is not to return the thing loaned but to pay a
loan. It is only after the checks have been encashed that the contact may be generic thing.
deemed perfected.
Commodatum v. Mutuum
Consideration in a simple loan
BASIS COMMODATUM MUTUUM
1. As to the borrower – the acquisition of money or any other fungible thing Object Non-consumable Money or
and Non- fungible consumable thing
2. As to the lender – the right to demand the return of the money or any other
fungible thing or its equivalent Cause Gratuitous, otherwise it May or may not be
is a lease gratuitous
Object of mutuum Purpose Use or temporary Consumpton
possession of the thing
Money or fungible and consumable things. loaned but

Governing rules on payment of loan GR: not its fruit because

the bailor remains the
If the object of loan is: owner

1. Money – Governed by Arts. 1249 and 1250, NCC XPNs: use of the fruits

11 DVOREF 2C Ab Initio
is
GR: Payment shall be made in the currency stipulated. stipulated; enjoyment of
XPN: If not, that currency which is legal tender in the Philippines. the fruits is stipulated;
or enjoyment of the
In case of extraordinary inflation – value of the currency at the time of the fruits is incidental to its
creation of the obligation. Loan of money can be payable in kind if there is an use
agreement between the parties Subject Matter Real or personal Only personal property
property
2. Consumable or fungible thing – Debtor or borrower shall pay another thing of
the same kind, quality and quantity even if it should change in value. If cannot be Generally non
done, the value of the thing at the time of its perfection (delivery) shall be the consumable things but
basis of the payment of the loan (Art 1955, NCC). may cover consumables
if the purpose of the
Q: Can estafa be committed by a person who refuses to pay his debt or contract is for exhibition.
denies its existence? Ownership of the Retained by the bailor Passes to the debtor
thing
A: No, because the debtor in mutuum becomes the owner of the thing delivered Thing to be returned Exact thing loaned Equal amount of the
to him. If he consumed or disposed of the thing, the act which is an act of same kind and quality

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ownership is not misappropriation. Hence, there is no basis for a criminal Who bears risk of loss Bailor Debtor
prosecution. When to return In case of urgent need Only after the expiration
 CREDIT TRANSACTIONS
even before the of the term it should change in value. In case it is impossible to deliver the same
expiration of term (the kind, its value at the time of the perfection of the loan shall be paid.
contract is in the
meantime suspended) ART. 1956. No interest shall be due unless it has been expressly
Contract Contract of use Contract of consumption stipulated in writing.

Mutuum vs Lease and Barter
MUTUUM
Object is money or any consumable
(fungible) thing
There is transfer of ownership
Creditor-debtor relationship
Unilateral
LEASE
Object may be any thing, whether
movable or immovable, fungible or
non-fungible
No transfer of ownership
Lessor-lessee relationship
Bilateral
ART. 1957. Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury shall be void.
The borrower may recover in accordance with the laws on usury.
ART. 1958. In the determination of the interest, if it is payable in kind,
its value shall be appraised at the current price of the products or goods
at the time and place of payment.
ART. 1959. Without prejudice to the provisions of Article 2212, interest
due and unpaid shall not earn interest.

However, the contracting parties may by stipulation capitalize the

MUTUUM BARTER
interest due and unpaid, which as added principal, shall earn new
Subject matter is money or other Subject matter are non-fungible
interest.
fungible things things
May be gratuitous or onerous Always onerous
While in mutuum, there is transfer of There is a mutual sale resulting in the INTEREST AND THE SUSPENSION OF THE USURY LAW
ownership, there is no sale transfer of ownership on both sides
ART. 1960. If the borrower pays interest when there has been no

The money or consumable thing The parties do not return the things
loaned subject of the exchange
is not returned but the same amount
of the same kind and quantity shall be
paid.
ART. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.
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.
ART. 1955. The obligation of a person who borrows money shall be
governed by the provisions of Articles 1249 and 1250 of this Code.
12 DVOREF 2C Ab Initio
stipulation therefor, the provisions of this Code concerning solutio
indebiti, or natural obligations, shall be applied, as the case may be.
ART. 1961. Usurious contracts shall be governed by the Usury Law and
other special laws, so far as they are not inconsistent with this Code.
Interest
It is the compensation to be paid by the borrower for the use of the
money lent to him by the lender.
Classes of interest
1. Simple – Interest which is paid for the use of the money, at a certain rate
stipulated in writing by the parties.
2. Compound – Interest which is imposed upon accrued interest, that is, the
interest due and unpaid.

3. Legal – That interest which the law directs to be paid in the absence of any

Page
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 agreement as to the rate.
 CREDIT TRANSACTIONS
Rules on interest
GR: No interest shall be due unless it is stipulated in writing (Art. 1956, NCC).
XPN: In case of interest on damages or indemnity for damages, it need not be in
writing.
NOTE: Art. 1956 applies only to interest for the use of money and not to interest
imposed as items of damages.
Basis of the right to interest
The basis of the right to interest is it only arises by reason of the contract
(stipulation in writing) for the use of money or by reason of delay or failure to
pay principal on which interest is demanded due to a breach of an obligation
(Baretto v. Santa Marina, No. 11908, Feb. 4, 1918).
If the obligation consists of the payment of a sum of money, and the
debtor incurs delay, the indemnity for damages shall be the payment of legal
interest (Philrock, Inc. v. Construction Industry Arbitration Commission, G.R.
Nos. 132848-49, June 25, 2001)
. received the payment; and (2) the payment is made through mistake, and not
Equitable Mortgage
Equitable mortgage is one which, although it lacks the proper formalities
or other requisites of a mortgage required by law, nevertheless reveals the
intention of the parties to burden real property as a security for a debt, and
contains nothing impossible or contrary to law.
Interest in Equitable mortgage
There can be no interest to be collected in equitable mortgage because
the same is not stipulated in writing (Tan v. Valdehueza, G.R. No. L-38745, Aug.
6, 1975).
Recovery of unstipulated interest
A payment for unstipulated interest can be recovered if paid by mistake,
the debtor may recover as in the case of solutio indebiti or undue payment.
However if payment is made voluntarily, no recovery can be made as in the case
of natural obligation (Art. 1960, NCC).
Q: Siga-an granted a loan to Villanueva in the amount of P540,000.00.
Such agreement was not reduced to writing. Siga-an demanded interest
which was paid by Villanueva in cash and checks. The total amount
Villanueva paid accumulated to P1,200,000.00. Upon advice of her
lawyer, Villanueva demanded for the return of the excess amount of
P660,000.00 which was ignored by Siga-an.
1. Is the payment of interest valid?
2. Is solutio indebiti applicable? Explain. (2012 Bar Question)
A:
1. No. Payment of monetary interest is allowed only if:
a. There was an express stipulation for the payment of interest; and
b. The agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of
monetary interest. Thus, collection of interest without any stipulation therefor in
writing is prohibited by law.
2. Yes. The quasi-contract of solutio indebiti harks back to the ancient principle
that no one shall enrich himself unjustly at the expense of another.The principle
of solutio indebiti applies where (1) a payment is made when there exists no
binding
relation between the payor, who has no duty to pay, and the person who
through liberality or some other cause. We have held that the principle of solutio
indebiti applies in case of erroneous payment of undue interest (Siga-an v.
13 DVOREF 2C Ab Initio
Villanueva, G.R. No. 173227, Jan. 20, 2009).
Interest on unliquidated claims
GR: Interest may not be adjudged on unliquidated claims
XPN: Unless the same can be established with reasonable certainty (Atlantic Gulf
and Pacific Company of Manila, Inc. v. CA, G.R. Nos. 114841-42, Aug. 23, 1995).
Running of interest on unliquidated claims
If the interest is adjudged on unliquidated claim but the pleadings in court
did not spell out said amount with certitude, the legal interest thereon shall run
only from the promulgation of judgment of said court, it being at that stage that
the quantification of damages may be deemed to have been reasonably
Page
ascertained (Ibid).
 CREDIT TRANSACTIONS
The actual base for computing legal interest shall be the amount as finally
adjudged by the Supreme Court (Ibid).
Monetary Interest and Compensatory Interest
Monetary interest must be expressly stipulated in writing and it must be
lawful (Art. 1956, NCC).
Governing rate of interest effective July 1, 2013
The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract
as to such rate of interest, shall be six percent (6%) per annum (BSP Circular No.
799, July 1, 2013).
Prospective application of BSP Circular No. 799
It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of six percent (6%) per annum shall be the prevailing rate of interest
when applicable (Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013).
NOTE: If the obligation consists in the payment of a sum of money and the
debtor incurs in delay, the debtor is liable for damages (Art. 2209, NCC).
Basis for the interest rate for compensatory interest
1. Central Bank Circular No. 799 – 6% per annum in cases of:
a. Loans
b. Forbearance of money, goods and credits
c. Judgment involving such loan or forbearance
2. Art. 2209, NCC – 6% per annum in cases of:
a. Other sources (i.e. sale)
b. Damages arising from injury from person.
c. Loss of property which does not involve a loan.
3. Interest accruing from unpaid interest (compound interest) – There must first
be a stipulation for payment of interest due and this shall earn interest from the
time it is judicially demanded although the obligation may be silent upon this
point.
Forbearance
Forbearance signifies the contractual obligation of the creditor to forbear
during a given period of time to require the debtor payment of an existing debt
then due and payable. Such forbearance of giving time for the payment of a debt
is, in substance, a loan (91 C.J.S. 598).
Compounding of interest
There must first be a stipulation of payment of interest and this interest
may earn interest only when it is judicially demanded, although the obligation is
silent upon this point (Art. 2212, NCC).
Rule on compounding of interest
GR: Accrued interest (interest due and unpaid) shall not earn interest.
XPN: When:
1. There is express stipulation made by the parties –that the interest due
and unpaid shall be added to the principal obligation and the resulting total
amount
shall earn interest (Art. 1959, NCC); or
2. Judicial demand has been made upon the borrower (Art. 2212, NCC)
14 DVOREF 2C Ab Initio
Governing rule on usurious transactions
CB Circular No. 905 has expressly removed the interest ceilings prescribed
by Usury Law, thus, the said law has become legally non-existent.
NOTE: It did not repeal/amend the usury law but merely suspended its
effectivity.
Rationale behind the invalidity of unconscionable interest rate in a loan
despite the suspension of the Usury law
The Supreme Court said nothing in Circular 905 suspending Usury Law
that grants the lender the authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorraghing of their assets (Almeda
Page
v. CA, G.R. No. 113412, Apr. 17, 1996).
 CREDIT TRANSACTIONS
Courts may simply reduce unreasonable interests
In the case of Medel v. CA, G.R. No. 131622, Nov. 27, 1998, the court
ruled that while stipulated interest of 5.5% per month on a loan is usurious
pursuant to CBC No. 905, the same must be equitably reduced for being
iniquitous, unconscionable and exorbitant. It is contrary to morals. It was
reduced to 12% per annum in consonant with justice and fairplay. The Court had
previously tagged a 5% monthly interest rate agreed upon as “excessive,
iniquitous, unconscionable
and exorbitant, contrary to morals, and the law.” We need not unsettle the
principle we had affirmed in a plethora of cases that stipulated interest rates of
3% per month and higher are excessive, iniquitous, unconscionable, and
exorbitant (Arthur F. Mechavez v. Marlyn M, Bermudez, G.R. No. 185368, Oct.
11, 2012).
Floating interest
Floating interest is the interest stipulated by banks which is not fixed and
made to depend upon the prevailing market conditions, considering the
fluctuating economic conditions.
A stipulation for floating interest is not valid. A stipulation for a floating
rate of interest in a letter of credit in which there is no reference rate set either
by it or by the Central Bank, leaving the determination thereof to the sole will
and control of the lender bank is invalid. While it may be acceptable for practical
reasons given the fluctuating economic conditions for banks to stipulate that
interest rates on a loan not be fixed and instead be made dependent on
prevailing market conditions, there should be a reference rate upon which to peg
such variable interest rates (Consolidated Bank and Trust Corp (Solid Bank v. CA,
G.R. No. 114672, Apr. 19, 2001).
Q: Samuel borrowed P300,000.00 housing loan from the bank at 18%
per annum interest. However, the promissory note contained a proviso
that the bank "reserves the right to increase interest within the limits
allowed by law." By virtue of such proviso, over the objections of
Samuel, the bank increased the interest rate periodically until it reached
48% per annum. Finally, Samuel filed an action questioning the right of
the bank to increase the interest rate up to 48%. The bank raised the
defense that the Central
Bank of the Philippines had already suspended the Usury Law. Will the
action prosper or not? Why? (2001 Bar Question)
A: The action will prosper. While it is true that the interest ceilings set by the
Usury Law are no longer in force, it has been held that PD No. 1684 and CB
Circular
No. 905 merely allow contracting parties to stipulate freely on any adjustment in
the interest rate on a loan or forbearance of money but do not authorize a
unilateral
increase of the interest rate by one party without the other's consent (PNB v. CA,
G.R. No. 107569, Nov. 8, 1994).
To say otherwise will violate the principle of mutuality of contracts under
Article 1308 of the Civil Code. To be valid, therefore, any change of interest must
be mutually agreed upon by the parties (Dizon v. Magsaysay, G.R. No. L-23399,
May 31, 1974). In the present problem, the debtor not having given his consent
to the increase in interest, the increase is void.
CASES
People vs. Concepcion
(G.R. No. L-19190 November 29, 1922)
FACTS: Venancio Concepcion, President of the Philippine National Bank and a
member of theBoard thereof, authorized an extension of credit in favor of "Puno y
Concepcion, S. en C.” to themanager of the Aparri branch of the Philippine
National Bank. "Puno y Concepcion, S. en C."was a co-partnership where
Concepcion is a partner. Subsequently, Concepcion was charged andfound guilty
in the Court of First Instance of Cagayan with violation of section 35 of Act
15 DVOREF 2C Ab Initio
No.2747. Section 35 of Act No. 2747 provides that the National Bank shall not,
directly or indirectly, grant loans to any of the members of the board of directors
of the bank nor to agentsof the branch banks. Counsel for the defense argue that
the documents of record do not provethat authority to make a loan was given,
but only show the concession of a credit. They averredthat the granting of a
credit to the co-partnership "Puno y Concepcion, S. en C." by
VenancioConcepcion, President of the Philippine National Bank, is not a "loan"
within the meaning of section 35 of Act No. 2747.
ISSUE: Whether or not the granting of a credit of P300,000 to the co-
partnership "Puno y Concepcion, S. en C." by Venancio Concepcion,
President of the Philippine National Bank, a"loan" within the meaning of
section 35 of Act No. 2747.
HELD: The Supreme Court ruled in the affirmative. The "credit" of an individual
means hisability to borrow money by virtue of the confidence or trust reposed by
a lender that he will paywhat he may promise. A "loan" means the delivery by
one party and the receipt by the other party of a given sum of money, upon an
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agreement, express or implied, to repay the sum loaned,with or without interest.
 CREDIT TRANSACTIONS
The concession of a "credit" necessarily involves the granting of "loans"up to the
limit of the amount fixed in the "credit,"
Rose Packing Co. Inc. vs CA (167 SCRA 309)
FACTS: This is a petition for review on certiorari of the decision of the Court of
Appeals in CA-G.R. No. 431 98-12 promulgated on December 16, 1070.
On December 12, 1962 respondent bank Philippine Commercial and
Industrial Bank (PCIB) approved a letter request by petitioner for the reactivation
of its overdraft line of P50,000.00, discounting line of P100,000.00 and a letter of
credit-trust receipt line of P550,000.00 as well as an application for loan of
P300,000.00 on fully secured real estate and chattel mortgage and on the further
condition that respondent PCIB appoint its executive vice-president Roberto S.
Benedicto as its representative in petitioner’s board of directors.
On November 3, 1965 the National Investment and Development (NIDC),
approved a P2.6 million loan application of petitioner with certain conditions. The
NIDC released to petitioner the amount of P 100,000.00. Petitioner purchased
five (5) parcels of land in Pasig, Rizal making down payment thereon.
August 3, 1966 and October 5,, 1966, respondent PCIB approved
additional accommodations to petitioner consisting of P 710,000.00 loan for the
payment of the balance of the purchase price of those lots in Pasig. However,
PCIB released only P 300,000.00 of the P 710,000.00 on approved loan for the
payment of the Pasig lands and some P 300, 000.00 for operating capital.
On June 29 1967, the Development Bank of the Philippines approved on
application by petitioner for a loan of P 1,840,000.00 and a guarantee for $
652,682.00 for the purchase of can making equipment. Petitioner advised
respondent PCIB of the availability of P 800,000.00 to partially pay off its account
and requested the release of the titles to the Pasig lots for delivery to the DBP.
On January 5, 1968 respondent PCIB filed a complaint against petitioner
and Rene Knecht, its president for the collection of petitioner’s indebtedness to
respondent bank. The PCIB gave petitioner notice that it would cause the real
estate mortgage to be foreclosed at an auction sale.
Petitioner filed a complaint in the Court of First Instance of Rizal to enjoin
respondents PCIB and the sheriff from the proceeding with the foreclosure sale,
and to ask the lower court to fix a new period for the payment of the obligations
of petitioner to PCIB. The lower court issued an order denying the petition. The
petitioner filed with respondent Court of Appeals a petition for certiorari with
application for restraining order and preliminary injunction. Hence, the petition is
also denied.
ISSUE: Whether or not private respondent have the right to the extra-
judicial foreclosure sale of petitioner’s mortgaged properties before trial
on the merits.
HELD: (1)The decision of the Court of Appeals is REVERSED insofar as it
sustained (a) the lower court’s denial of petitioner’s application for preliminary
injunction and (b) the validity of the foreclosure sale; (2) the lower court is
ordered to proceed with the trial on the merits of the main case together with a
determination of exactly how much are petitioner’s liabilities in favor of
respondent bank PCIB so that proper measures may be taken for their eventual
liquidation; (3) the preliminary
Injunction issued by this Court on April 28, 1971 remains in force until the
merits of the main case are resolved; and (4) the motion of respondent bank
dated April 1, 1981, for leave to lease the real properties in custodia legis is
denied.
The loans of petitioner corporation from respondent bank were supposed
to become due only at the time that if receives from the NIDC and PDCP the
proceeds of the approved scheme. As it is, the conditions did not happen.
For an obligation to become due there must generally a demand. Default
generally begins from the moment the creditor demands the performance of the
16 DVOREF 2C Ab Initio
obligation. Without such demand, judicial or extra-judicial, the effects of default
will not arise.
BPI Investment Corp. vs. Court of Appeals, 377 SCRA 117
FACTS: Frank Roa obtained a loan from Ayala Investment and Development
Corporation (AIDC), for the construction of his house. Said house and lot were
mortgaged to AIDC to secure the loan. Roa sold the properties to ALS and
Litonjua, the latter paid in cash and assumed the balance of Roa’s indebtedness
wit AIDC. AIDC was not willing to extend the old interest to private respondents
and proposed a grant of new loan of P500,000 with higher interest to be applied
to Roa’s debt, secured by the same property. Private respondents executed a
mortgage deed containing the stipulation. The loan contract was signed on 31
March 1981 and was perfected on 13 September 1982, when the full loan was
released to private respondents.
BPIIC, AIDC’s predecessor, released to private respondents P7,146.87,
Page
purporting to be what was left of their loan after full payment of Roa’s loan. BPIIC
filed for foreclosure proceedings on the ground that private respondents failed to
 CREDIT TRANSACTIONS
pay the mortgage indebtedness. Private respondents maintained that they should
not be made to pay amortization before the actual release of the P500,000 loan.
The suit was dismissed and affirmed by the CA.
ISSUE: Whether or not a contract of loan is a consensual contract.
HELD: The Court held in the negative. A loan contract is not a consensual
contract but a real contract. It is perfected only upon delivery of the object of the
contract. A contract o 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 in reciprocal obligations that neither party incurs in delay, if the other
does not comply or is not ready to comply is a proper manner with what is
incumbent upon him
Central Bank of the Philippines vs. CA (139 SCRA 46)
FACTS
1. Island Savings Bank approved the loan application for P80K of Sulpicio
Tolentino who executed a real estate mortgage over his 100 hectare land.
2. The loan called for a lump sum of P80K, repayable in semi-annual installments
for 3 yrs, w/ 12% annual interest. It was required that Tolentino shall use the
loan solely as additional capital to develop his other property into a subdivision.
3. A mere P17K partial release of the loan was made by the bank and Tolentino
and his wife signed a promissory note for the P17K at 12% annual interest
payable w/in 3 yrs. An advance interest was deducted from the partial release
but this pre-deducted interest was refunded to Tolentino after being informed
that there was no fund yet for the release of the P63K balance.
4. The bank VP and Treasurer promised release of the balance.
5. Monetary Board of Central Bank, after finding that bank was suffering liquidity
problems, prohibited the bank fr making new loans and investments. And after
the bank failed to restore its solvency, the Central Bank prohibited Island Savings
Bank fr doing business in the Philippines.
6. Island Savings Bank in view of the non-payment of the P17K filed an
application for foreclosure of the real estate mortgage.
7. Tolentino filed petition for specific performance or rescission and damages w/
preliminary injunction, alleging that since the bank failed to deliver P63K, he is
entitled to specific performance and if not, to rescind the real estate mortgage.
8. Trial court found Tolentino’s petition unmeritorious.
9. CA affirmed dismissal of Tolentino’s petition for specific performance, but it
ruled that the bank can neither foreclose the real estate mortgage nor collect the
P17K loan.
ISSUES
1. WON Tolentino’s action for specific performance can prosper
2. WON Tolentino is liable to pay the P17K covered by the promissory
note
3. If liable to pay P17K, WON Tolentino’s real estate mortgage can be
foreclosed
HELD
1. NO. The loan agreement implied reciprocal obligations. When one party is
willing and ready to perform, the other party not ready nor willing incurs in delay.
When Tolentino executed real estate mortgage, he signified willingness to pay.
That time, the bank’s obligation to furnish the P80K loan accrued. Now, the
Central Bank resolution made it impossible for the bank to furnish the P63K
balance. Insolvency of debtor is not an excuse for non-fulfillment of obligation but
is a breach of contract. The bank’s asking for advance interest for the loan is
improper considering that the total loan hasn’t been released. A person can’t be
charged interest for non-existing debt. The bank was in default and Tolentino
may choose bet specific performance or rescission w/ damages in either case. But
considering that the bank is now prohibited from doing business, specific
performance cannot be granted. Rescission is the only remedy left, but the
rescission should only be for the P63K balance.
2. YES. The promissory note gave rise to this liability. His failure to pay made
him party in default, hence, not entitled to rescission. This time, it is the bank
which has right to rescind the promissory note. Since both Tolentino and the
bank are in default, both are liable for damages. Liability may be offset.
17 DVOREF 2C Ab Initio
3. NO. Since the bank failed to furnish the balance, the real estate mortgage
became unenforceable to such extent.
Bonnevie vs. CA (125 SCRA 122)
FACTS:
- Spouses Lozano execute a mortgage contract in favor of Philippine Bank of
Commerce for an amount of 75,000.
- Dec, 8 they executed a deed of sale with assumption f mortgage in favor of
Honesto Bonnevie in the amount of 100,000. 25K payable upon execution of
document. 75,000 payable to defendant-appellee (bank)
- Although the mortgage was executed in Dec. 6, 1966, the amount of the loan
was only received on Dec. 12.
- April 28, 1967 – July 12, 1968 Bonnevie made several payments to the
mortgage
- May 4, 1968 Honesto assigned all his rights to his brother Raoul Bonnevie.
- June 1968 bank sought to foreclose the property extra judicially
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- Bank was able to purchase the property through the public auction in the
amount of 84,387.00
 CREDIT TRANSACTIONS
- Petitioners sought to redeem the property but failed.
- Petitioners caused an adverse claim to be annotated on the title of the property.
- Petitioners contend that the mortgage is invalid for lack of cause or
consideration. A mortgage being an accessory contract should have a valid
principal contract.
ISSUE:
1. Whether or not the real estate mortgage executed by the spouses
Lozano in favor of respondent bank was validly and legally executed.
HELD: YES. The mortgage executed is perfectly valid. From the recitals of the
mortgage deed itself, it is clearly seen that the mortgage deed was executed for
and on condition of the loan granted to the Lozano spouses. The fact that the
latter did not collect from the respondent Bank the consideration of the mortgage
on the date it was executed is immaterial. 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. The promissory note executed on December 12, 1966
is only an evidence of indebtedness and does not indicate lack of consideration of
the mortgage at the time of its execution.
Regarding the argument that the subsequent renewal were void because
the property were already sold to Bonnevie, the Supreme Court held that This
argument failed to consider the provision 2 of the contract of mortgage which
prohibits the sale, disposition of, mortgage and encumbrance of the mortgaged
properties, without the written consent of the mortgagee, as well as the
additional proviso that if in spite of said stipulation, the mortgaged property is
sold, the vendee shall assume the mortgage in the terms and conditions under
which it is constituted.
These provisions are expressly made part and parcel of the Deed of Sale
with Assumption of Mortgage. Petitioners admit that they did not secure the
consent of the bank coupled with the fact that the sale/assignment was not
registered so that the title remained in the name of the Lozano spouses, insofar
as respondent Bank was concerned, the Lozano spouses could rightfully and
validly mortgage the property. Also it can be said that petitioners voluntarily
assumed the mortgage when they entered into the Deed of Sale with Assumption
of Mortgage. They are, therefore, estopped from impugning its validity whether
on the original loan or renewals thereof.
Collateral issues:
Publication : It was met and the newspaper was proven to be of general
circulation in the locality of Rizal
As to personal notice: Bank was not a party to the deed of sale hence it did not
know of the transfer. Hence the bank had an excuse for not notifying them
personally.
As to right to redeem: No right to redeem because they were not substituted
as debtors because they did not secure the consent of the bank. Their rights were
never recorded and hence, respondent Bank is charged with the obligation to
recognize the right of redemption only of the Lozano spouses. Even assuming
they
had the right to redeem, the one year period had already lapsed.
Pajuyo vs. CA (430 SCRA 492)
Facts: Pajuyo entrusted a house to Guevara for the latter's use provided he
should return the same upon demand and with the condition that Guevara should
be responsible of the maintenance of the property. Upon demand Guevara
refused to return the property to Pajuyo. The petitioner then filed an ejectment
case against Guevara with the MTC who ruled in favor of the petitioner. On
appeal with the CA, the appellate court reversed the judgment of the lower court
on the ground that both parties are illegal settlers on the property thus have no
legal right so that the Court should leave the present situation with respect to
possession of the property as it is, and ruling further that the contractual
relationship of Pajuyo and
Guevara was that of a commodatum.
18 DVOREF 2C Ab Initio
Issue: Is the contractual relationship of Pajuyo and Guevara that of a
commodatum?
Held: No. The Court of Appeals’ theory that the Kasunduan is one of
commodatum is devoid of merit. In a contract of commodatum, one of the parties
delivers to another something not consumable so that the latter may use the
same for a certain time and return it. An essential feature of commodatum is that
it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period. Thus, the bailor cannot demand the
return of the thing loaned until after expiration of the period stipulated, or after
accomplishment of the use for which the commodatum is constituted. If the bailor
should have urgent need of the thing, he may demand its return for temporary
use. If the use of the thing is merely tolerated by the bailor, he can demand the
return of the thing at will, in which case the contractual relation is called a
precarium. Under the Civil Code, precarium is a kind of commodatum. The
Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was
not essentially gratuitous. While the Kasunduan did not require Guevarra to pay
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rent, it obligated him to maintain the property in good condition. The imposition
of this obligation makes the Kasunduan a contract different from a commodatum.
 CREDIT TRANSACTIONS
The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin
to a landlord-tenant relationship where the withdrawal of permission would result
in the termination of the lease. The tenant’s withholding of the property would
then be unlawful.
Producers Bank of the Philippines vs. CA (397 SCRA 651)
Facts:
 Vives (will be the creditor in this case) was asked by his friend Sanchez to
help the latter’s friend, Doronilla (will be the debtor in this case) in
incorporating Doronilla’s business “Strela”. This “help” basically involved
Vives depositing a certain amount of money in Strela’s bank account for
purposes of incorporation (rationale: Doronilla had to show that he had
sufficient funds for incorporation). This amount shall later be returned to
Vives.
 Relying on the assurances and representations of Sanchez and Doronilla,
Vives issued a check of P200,00 in favor of Strela and deposited the same
into Strela’s newly-opened bank account (the passbook was given to the
wife of Vives and the passbook had an instruction that no
withdrawals/deposits will be allowed unless the passbook is presented).
 Later on, Vives learned that Strela was no longer holding office in the
address previously given to him. He later found out that the funds had
already been withdrawn leaving only a balance of P90,000. The Vives
spouses tried to withdraw the amount, but it was unable to since the
balance had to answer for certain postdated checks issued by Doronilla.
 Doronilla made various tenders of check in favor of Vives in order to pay
his debt. All of which were dishonored.
 Hence, Vives filed an action for recovery of sum against Doronilla,
Sanchez, Dumagpi and Producer’s Bank.
 TC & CA: ruled in favor of Vives.
Issue/s:
(1) WON the transaction is a commodatum or a mutuum.
COMMODATUM.
(2) WON the fact that there is an additional P 12,000 (allegedly
representing interest) in the amount to be returned to Vives
converts the transaction from commodatum to mutuum. NO.
(3) WON Producer’s Bank is solidarily liable to Vives,
considering that it was not privy to the transaction between Vives
and Doronilla. YES.
Held/Ratio:
(1) The transaction is a commodatum.
 CC 1933 (the provision distinguishing between the two kinds of loans)
seem to imply that if the subject of the contract is a consummable thing,
such as money, the contract would be a mutuum. However, there are
instances when a commodatum may have for its object a consummable
thing. Such can be found in CC 1936 which states that “consummable
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”.
In this case, the intention of the parties was merely for exhibition. Vives
agreed to deposit his money in Strela’s account specifically for purpose of
making it appear that Streal had sufficient capitalization for incorporation,
with the promise that the amount should be returned withing 30 days.
(2) CC 1935 states that “the bailee in commodatum acquires the use of the thing
loaned but not its fruits”. In this case, the additional P 12,000 corresponds to
the fruits of the lending of the P 200,000.
(3) Atienza, the Branch Manager of Producer’s Bank, allowed the withdrawals on
the account of Strela despite the rule written in the passbook that neither a
deposit, nor a withdrawal will be permitted except upon the production of the
passbook (recall in this case that the passbook was in the possession of the
wife of Vives all along). Hence, this only proves to show that Atienza allowed
the withdrawals because he was party to Doronilla’s scheme of defrauding
Vives. By virtue of CC 2180, PNB, as employer, is held primarily and
solidarily liable for damages caused by their employees acting within the
19 DVOREF 2C Ab Initio
scope of their assigned tasks. Atienza’s acts, in helpong Doronilla, a customer
of the bank, were obviously done in furtherance of the business of the bank,
even though in the process, Atienza violated some rules.
Quintos and Ansaldo vs. Beck (69 Phil. 108)
FACTS: Quintos and Beck entered into a contract of lease, whereby the latter
occupied the former’s house. On Jan 14 1936, the contract of lease was novated,
wherein the Quintos gratuitously granted the Beck the use of furniture, subject to
the condition that Beck should return the furnitures to Quintos upon demand.
Thereafter, Quintos sold the property to Maria and Rosario Lopez. Beck was
notified of the conveyance and given him 60 days to vacate the premises. In
addition, Quintos required Beck to return all the furniture. Beck refused to return
3 gas heaters and 4 electric lamps since he would use them until the lease was
due to expire. Quintos refused to get the furniture since Beck had declined to
return all of them. Beck deposited all the furnitures belonging to Quintos to the
sheriff.
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 CREDIT TRANSACTIONS
ISSUE: WON Beck complied with his obligation of returning the
furnitures to Quintos when he deposited the furnitures to the sheriff
HELD: The contract entered between the parties is one of commodatum, because
under it the plaintiff gratuitously granted the use of the furniture to the
defendant, reserving for herself the ownership thereof; by this contract, the
defendant bound himself to return the furniture to the plaintiff, upon the latter’s
demand. The obligation voluntarily assumed by the defendant to return the
furniture upon the plaintiff’s demand, means that he should return all of them to
the plaintiff at the latter’s residence or house. The defendant did not comply with
this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four electric lamps.
As the defendant had voluntarily undertaken to return all the furniture to
the plaintiff, upon the latter’s demand, the Court couldnot legally compel her to
bear the expenses occasioned by the deposit of the furniture at the defendant’s
best. The latter, as bailee, was not entitled to place the furniture on deposit; nor
was the plaintiff under a duty to accept the offer to return the furniture, because
the defendant wanted to retain the three gas heaters and the four electric lamps.
Yong Chan Kim vs. People of the Philippines (193 SCRA 344)
FACTS: Petitioner Yong Chan Kim was employed as a Researcher at the
Aquaculture Department of the Southeast Asian Fisheries Development Center
(SEAFDEC) with head station at Tigbauan, Province of Iloilo. As Head of the
Economics Unit of the Research Division, he conducted prawn surveys which
required him to travel to various selected provinces in the country where there
are potentials for prawn culture.
On 15 June 1982, petitioner was issued Travel Order No. 2222 which
covered his travels to different places in Luzon from 16 June to 21 July 1982, a
period of thirty five (35) days. Under this travel order, he received P6,438.00 as
cash advance to defray his travel expenses.
Within the same period, petitioner was issued another travel order, T.O.
2268, requiring him to travel from the Head Station at Tigbauan, Iloilo to Roxas
City from 30 June to 4 July 1982, a period of five (5) days. For this travel order,
petitioner received a cash advance of P495.00.
On 14 January 1983, petitioner presented both travel orders for liquidation,
submitting Travel Expense Reports to the Accounting Section. When the Travel
Expense Reports were audited, it was discovered that there was an overlap of
four (4) days (30 June to 3 July 1982) in the two (2) travel orders for which
petitioner collected per diems twice. In sum, the total amount in the form of per
diems and allowances charged and collected by petitioner under Travel Order No.
2222, when he did not actually and physically travel as represented by his
liquidation papers, was P1,230.00.
Petitioner was required to comment on the internal auditor's report regarding the
alleged anomalous claim for per diems. In his reply, petitioner denied the alleged
anomaly, claiming that he made make-up trips to compensate for the trips he
failed to undertake under T.O. 2222 because he was recalled to the head office
and given another assignment.
In September 1983, two (2) complaints for Estafa were filed against the
petitioner before the Municipal Circuit Trial Court at Guimbal, Iloilo.
ISSUE:
Whether or not petitioner can be held criminally liable on the ground of
failure to liquidate her traveling expenses. NO.
RULING: It is undisputed that petitioner received a cash advance from private
respondent SEAFDEC to defray his travel expenses under T.O. 2222. It is likewise
admitted that within the period covered by T.O. 2222, petitioner was recalled to
the head station in Iloilo and given another assignment which was covered by
T.O. 2268. The dispute arose when petitioner allegedly failed to return P1,230.00
out of the cash advance which he received under T.O. 2222. For the alleged
failure of petitioner to return the amount of P1,230.00, he was charged with the
crime of Estafa under Article 315, par. 1(b) of the Revised Penal Code.
20 DVOREF 2C Ab Initio
In order that a person can be convicted under the above-quoted provision,
it must be proven that he had the obligation to deliver or return the same money,
good or personal property that he had received. Was petitioner under obligation
to return the same money (cash advance) which he had received? We believe
not.
Liquidation simply means the settling of indebtedness. An employee, such
as herein petitioner, who liquidates a cash advance is in fact paying back his debt
in the form of a loan of money advanced to him by his employer, as per
diems and allowances.
Similarly, as stated in the assailed decision of the lower court, "if the
amount of the cash advance he received is less than the amount he spent for
actual travel . . . he has the right to demand reimbursement from his employer
the amount he spent coming from his personal funds. 
In other words, the money advanced by either party is actually a loan to
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the other. Hence, petitioner was under no legal obligation to return the same
 CREDIT TRANSACTIONS
cash or money, i.e., the bills or coins, which he received from the private
respondent.  account with Consolidated Bank and Trust Corporation (now called Solidbank
Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan.
Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time
and return it, in which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan
or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In co\mmodatum the bailor retains the ownership of the thing loaned,
while in simple loan, ownership passes to the borrower.
Art. 1953.— A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.
The ruling of the trial judge that ownership of the cash advanced to the
petitioner by private respondent was not transferred to the latter is erroneous.
Ownership of the money was transferred to the petitioner.
Since ownership of the money (cash advance) was transferred to
petitioner, no fiduciary relationship was created. Absent this fiduciary relationship
between petitioner and private respondent, which is an essential element of the
crime of estafa by misappropriation or conversion, petitioner could not have
committed estafa. 
Additionally, it has been the policy of private respondent that all cash
advances not liquidated are to be deducted correspondingly from the salary of
the employee concerned. The evidence shows that the corresponding salary
deduction was made in the case of petitioner vis-a-vis the cash advance in
question.
Consolidated Bank and Trust Corporation vs Court of Appeals
(356 SCRA 671)
FACTS: L.C. Diaz and Company (LC Diaz), an accounting firm, has a savings
Corporation).
On August 14, 1991, the firm’s messenger, a certain Ismael Calapre,
deposited an amount with the bank but due to a long line and the fact that he
still needs to deposit a certain amount in another bank, the messenger left the
firm’s passbook with a teller of Solidbank. But when the messenger returned, the
passbook is already missing. Apparently, the teller returned the passbook to
someone else.
On August 15, 1991, LC Diaz made a formal request ordering Solidbank
not to honor any transaction concerning their account with them until the firm is
able to acquire a new passbook. It appears however that in the afternoon of
August 14, 1991, the amount of P300,000.00 was already withdrawn from the
firm’s account.
LC Diaz demanded Solidbank to refund the said amount which the bank refused.
LC Diaz then sued Solidbank.
In its defense, Solidbank contends that under their banking rules, they are
authorized to honor withdrawals if presented with the passbook; that when the
P300k was withdrawn, the passbook was presented. Further, the withdrawer
presented a withdrawal slip which bore the signatures of the representatives of
LC Diaz.
21 DVOREF 2C Ab Initio
The RTC ruled in favor of Solidbank. It found LC Diaz to be negligent in
handling its passbook. The loss of the P300k was not the result of Solidbank’s
negligence.
On appeal, the Court of Appeals reversed the decision of the RTC. The CA
used the rules on quasi-delict (Article 2176 of the Civil Code).
ISSUE: Whether or not the relations between Solidbank and LC Diaz, the
depositor, is governed by quasi-delict in determining the liability of
Solidbank.
HELD: No. Solidbank is liable for the loss of the P300k but it’s liability is
grounded on culpa contractual.
The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan (Article 1980, Civil Code). There is a
debtor-creditor relationship between the bank and its depositor.  The bank is the
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debtor and the depositor is the creditor.  The depositor lends the bank money
and the bank agrees to pay the depositor on demand.  The savings deposit
 CREDIT TRANSACTIONS
agreement between the bank and the depositor is the contract that determines
the rights and obligations of the parties.
Under their contract, it is the duty of LC Diaz to secure its passbook.
However, this duty is also applicable to Solidbank when it gains possession of
said passbook which it did when the messenger left it to the bank’s possession
through the bank’s teller. The act of the teller returning the passbook to someone
else other than Calapre, the firm’s authorized messenger, is a clear breach of
contract. Such negligence binds the bank under the principle of respondeat
superior or command responsibility.
No contract of trust between bank and depositor
The Supreme Court emphasized that the contractual relation between the
bank and the depositor is that of a simple loan. This is despite the wording of
Section 2 of Republic Act 8791 (The General Banking Law of 2000) which states
that the State recognizes the “fiduciary nature of banking that requires high
standards of integrity and performance.” That “the bank is under obligation to
treat the accounts of its depositors with  meticulous care, always having in mind
the fiduciary nature of their relationship.”
This fiduciary relationship means that the bank’s obligation to observe
“high standards of integrity and performance” is deemed written into every
deposit agreement between a bank and its depositor. The fiduciary nature of
banking requires banks to assume a degree of diligence higher than that of a
good father of a family.
However, the fiduciary nature of a bank-depositor relationship does not
convert the contract between the bank and its depositors from a simple loan to a
trust agreement, whether express or implied.  Failure by the bank to pay the
depositor is failure to pay a simple loan, and not a breach of trust.
In short, the General Banking Act simply imposes on the bank a higher
standard of integrity and performance in complying with its obligations under the
contract of simple loan, beyond those required of non-bank debtors under a
similar contract of simple loan. The General Banking Law in no way modified
Article 1980 of the Civil Code.
Colinares vs. Court of Appeals (339 SCRA 609)
FACTS: In 1979, petitioners Melvin Colinares and Lordino Veloso were contracted
by the Carmelite Sisters of Cagayan de Oro City to renovate the latter's convent
at Camaman-an, Cagayan de Oro City. On 30 October 1979, petitioners obtained
various construction materials from CM Builders Centre for the said project. The
following day, petitioners applied for a commercial letter of credit with the
Philippine Banking Corporation (PBC), Cagayan de Oro City Branch in favor of CM
Builders Centre. PBC approved the letter of credit to cover the full invoice value
of the goods. Petitioners signed the pro-forma trust receipt as security. The said
loan was due on 29 January 1980. However, petitioners failed to pay the whole
amount
on its due date. Several demand letters were sent to them. Petitioners proposed
that the terms of payment of the loan shall be modified. Pending approval of the
said proposal, petitioners paid some amounts. Concurrently with the separate
demand for attorney's fees by PBC's legal counsel, PBC continued to demand
payment of the balance. On 14 January 1983, petitioners were charged with
violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the
Revised Penal Code.
During trial, petitioners insisted that the transaction was that of an
ordinary loan. Subsequently, the trial court convicted the petitioners for the
offense charged.
On appeal, the Court of Appeals affirmed the conviction of petitioners and
increased the penalty imposed.
ISSUE: WON the true nature of the contract was an ordinary loan or a
trust receipt agreement.
22 DVOREF 2C Ab Initio
RULING: The transaction was an ordinary loan.
Petitioners received the merchandise from CM Builders Centre on 30
October 1979. On that day, ownership over the merchandise was already
transferred to Petitioners who were to use the materials for their construction
project. It was only a day later, 31 October 1979, that they went to the bank to
apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released to the
importer in trust subsequent to the grant of the loan. The bank acquires a
"security interest" in the goods as holder of a security title for the advances it
had made to the entrustee.
The ownership of the merchandise continues to be vested in the person
who had advanced payment until he has been paid in full, or if the merchandise
has already been sold, the proceeds of the sale should be turned over to him by
the importer or by his representative or successor-in-interest. To secure that the
bank
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shall be paid, it takes full title to the goods at the very beginning and continues
to hold that title as his indispensable security until the goods are sold and the
 CREDIT TRANSACTIONS
vendee is called upon to pay for them; hence, the importer has never owned the
goods and is not able to deliver possession. In a certain manner, trust receipts
partake of the nature of a conditional sale where the importer becomes absolute
owner of the imported merchandise as soon as he has paid its price.
People vs. Puig (563 SCRA 564)
Summary:
Depositors who place their money with the bank are considered creditors
of the bank. The bank acquires ownership of the money deposited by its clients,
making the money taken by respondents as belonging to the bank.
The relationship between banks and depositors has been held to be that of
creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as
appropriately pointed out by petitioner, provide as follows:
Article 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.
Article 1980. (supra)
In summary, the Bank acquires ownership of the money deposited by its
clients; and the employees of the Bank, who are entrusted with the possession of
money of the Bank due to the confidence reposed in them, occupy positions of
confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.
Facts: On 7 November 2005, the Iloilo Provincial Prosecutor's Office filed before
RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents
Teresita Puig (Puig) and Romeo Porras (Porras) who were the Cashier and
Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc. It
was alleged in the information that Teresita Puig and Romeo Porras took away
P15,000 without the consent of the owner Bank to the prejudice and damage of
the bank. The RTC dismissed the case for insufficiency of the information ruling
that the real parties in interest are the depositors-clients and not the bank
because the bank does not acquire ownership of the money deposited in it. Hence
petitioner Rural Bank went directly to the court via petition for certiorari.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings,
and current deposits of money in banks and similar institutions shall be governed
by the provisions concerning simple loans."
Corollary thereto, Article 1953 of the same Code provides that "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." Thus, it posits that the depositors who place their money with the
bank are considered creditors of the bank. The bank acquires ownership of the
money deposited by its clients, making the money taken by respondents as
belonging to the bank.
Issue: Whether or not the Bank acquired ownership of the money
deposited in it to be able to hold the respondents liable for qualified theft
which requires that there must be taking of the money without the
consent of the owners.
Held: The petition is meritorious. Banks where monies are deposited, are
considered the owners thereof. This is very clear not only from the express
provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor.
Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by
petitioner, provide as follows:
 Article 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.
23 DVOREF 2C Ab Initio
 Article 1980. Fixed, savings, and current deposits of money in banks and
similar
institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, the Court has firmly
established the nature of possession by the Bank of the money deposits therein,
and the duties being performed by its employees who have custody of the
money or have come into possession of it. The Court has consistently considered
the allegations in the Information that such employees acted with grave abuse of
confidence, to the damage and prejudice of the Bank, without particularly
referring to it as owner of the money deposits, as sufficient to make out a case of
Qualified Theft. In summary, the Bank acquires ownership of the money
deposited by its clients; and the employees of the Bank, who are entrusted with
the possession of money of the Bank due to the confidence reposed in them,
occupy positions of confidence. The informations, therefore, sufficiently allege all
the essential elements constituting the crime of Qualified Theft.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby
Page
GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC
 CREDIT TRANSACTIONS
dismissing Criminal cases No. 05-3054 to 05-3165 are REVERSED and SET
ASIDE.
BPI Family Bank vs. Franco (538 SCRA 184)
FACTS: On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc.
(Tevesteco) opened a savings and current account with BPI-FB.
On August 25, 1989, First Metro Investment Corporation (FMIC) also
opened a time deposit account with the same branch of BPI-FB with a deposit of
P100M, to mature one year thence.
On August 31, 1989, Franco opened three accounts, namely, a current,
savings, and time deposit, with BPI-FB. The total amount of P2M used to open
these accounts is traceable to a check issued by Tevesteco allegedly in
consideration of Francos introduction of Eladio Teves, The total amount of P2M
used to open these accounts is traceable to a check issued by Tevesteco allegedly
in consideration of Francos introduction of Eladio Teves, who was looking for a
conduit bank to facilitate Tevestecos business transactions, to Jaime Sebastian,
who was then BPI-FB SFDMs Branch Manager. The funding for the P2M check was
part of the P80,000,000.00 debited by BPI-FB from FMICs time deposit account
and credited to Tevestecos current account pursuant to an Authority to Debit
purportedly signed by FMICs officers.
It appears, however, that the signatures of FMICs officers on the Authority
to Debit were forged. On September 4, 1989, Antonio Ong, upon being shown the
Authority to Debit, personally declared his signature therein to be a forgery.
Tevetesco already effected several withdrawals from its current account
amounting to P37,455,410.54 including the P2M paid to respondent Franco.
On September 8, 1989, BPI-FB, instructed Jesus Arangorin to debit
Francos savings and current accounts for the amounts remaining therein.
However, Francos time deposit account could not be debited due to the capacity
limitations of BPI-FBs computer. Two checks drawn by Franco against his BPI-FB
current account were dishonored upon presentment for payment, and stamped
with a notation account under garnishment. Notably, the dishonored checks were
issued by Franco and presented for payment at BPI-FB prior to Franco’s receipt of
notice that his accounts were under garnishment. In fact, at the time the Notice
of Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet
to be impleaded in the Makati case where the writ of attachment was issued. It
was only on May 15, 1990 that Franco was impleaded in the Makati case.
Immediately, upon receipt of such copy, Franco filed a Motion to Discharge
Attachment which the Makati RTC granted on May 16, 1990.
With respect to Francos savings account, it appears that Franco agreed to
an arrangement, as a favor to Sebastian, whereby P400,000.00 from his savings
account was temporarily transferred to Domingo Quiaoits savings account,
subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan Embassy. As
part of the arrangement, Sebastian retained custody of Quiaoits savings account
passbook to ensure that no withdrawal would be effected therefrom, and to
preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB
deducted the amount of P63,189.00 from the remaining balance of the time
deposit account representing advance interest paid to him.
Consequently, in light of BPI-FBs refusal to heed Francos demands to
unfreeze his accounts and release his deposits therein, the latter filed on June 4,
1990 with the Manila RTC the subject suit.
ISSUE: WON Franco had a better right to the deposits in the subject
accounts which are part of the proceeds of a forged Authority to Debit.
HELD: YES. There is no doubt that BPI-FB owns the deposited monies in the
accounts of Franco, but not as a legal consequence of its unauthorized transfer of
FMICs deposits to Tevestecos account. BPI-FB conveniently forgets that the
24 DVOREF 2C Ab Initio
deposit of money in banks is governed by the Civil Code provisions on simple
loan or mutuum. As there is a debtor-creditor relationship between a bank and its
depositor, BPI-FB ultimately acquired ownership of Francos deposits, but such
ownership is coupled with a corresponding obligation to pay him an equal amount
on demand. Although BPI-FB owns the deposits in Francos accounts, it cannot
prevent him from demanding payment of BPI-FBs obligation by drawing checks
against his current account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his current account, he
had every right as creditor to expect that those checks would be honored by BPI-
FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the
accounts of Franco based on its mere suspicion that the funds therein were
proceeds of the multi-million peso scam Franco was allegedly involved in. To
grant BPI-FB, or any 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.
Page
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty
bound to know the signatures of its customers. Having failed to detect the
 CREDIT TRANSACTIONS
forgery in the Authority to Debit and in the process inadvertently facilitate the
FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco and
the other payees of checks issued by Tevesteco, or prevent withdrawals from
their respective accounts without the appropriate court writ or a favorable final
judgment.
De Lima vs. Laguna Tayabas Co. (160 SCRA 70)
FACTS: On June 3, 1958, an accident between a Laguna Tayabas Co. (LTB) bus
and Seven-up Bottlers Co. delivery truck resulted to the death of an LTB
passenger named Petra dela Cruz. Two other LTB passengers namely Eladia de
Lima and Nemesio Flores also incurred physical injuries. De Lima, Flores and the
Potenciano Requijo, heir of dela Cruz, filed suits to the bus company.
On December 29, 1971, petitioners filed a motion with CA for an
immediate decision of the case with a prayer for the granting of legal interest
from the date of the decision of the court. By January 31, 1972, the decision was
given. Petitioners moved for a reconsideration of this decision seeking its
modification so that the legal interest awarded by the Appellate, Court will start
to run from the date of the decision of the trial court on December 27, 1963
instead of January 31, 1972, the date of the decision of the Court of Appeals.
Petitioner Requijo sought an increase in the civil indemnity of P3,000.00 to P
12,000.00.
The appellate court turned down the motion for reconsideration of the
plaintiffs indicating that an appeal should have been filed for the awarding of the
legal interest.
ISSUE:
1. WON the granting legal interest on damages to start from the date of
the trial court’s decision.
2. WON CA erred in not increasing the indemnity for the death of Petra
de La Cruz from P3,000 to P12,000.00.
HELD:
1. Yes. The court granted the petition noting that the plaintiffs were unable to
make an appeal in the lower court due to the fact that the petitioners are seeking
judicial remedy as impoverished individuals. The heirs of the victim in the traffic
accident chose not to appeal in the hope that the transportation company will pay
the damages awarded by the lower court but unfortunately said company still
appealed to the Court of Appeals, which step was obviously dilatory and
oppressive of the rights of the said claimants: that the case had been pending in
court for about 30 years from the date of the accident in 1958 so that as an
exception to the general rule aforestated, the said heirs who did not appeal the
judgment, should be afforded equitable relief by the courts as it must be vigilant
for their protection. The claim for legal interest and increase in the indemnity
should be entertained in spite of the failure of the claimants to appeal the
judgment.
2. Yes. Civil indemnity for the death of Petra de la Cruz was properly awarded
caused by the breach of contract by a common carrier. If the transportation
company had only accepted the judgment of the trial court and paid its just
awards instead of appealing the same to the Court of Appeals, no further delay
would have been occasioned on the simple issue of interest and indemnity. To
mitigate the impact of such a great delay in this case the Court finds ample
justification in the aforesaid award for interest and indemnity. In accordance with
prevailing jurisprudence the indemnity of P3,000.00 should be increased to
P30,000.00 and not P12,000.00 as prayed for by petitioner.
Phil. Airlines vs. Court of Appeals (275 SCRA 621)
FACTS: On October 23, 1988, Leovegildo Pantejo, then City Fiscal of Surigao
City, boarded a PAL plane in Manila and disembarked in Cebu City where he was
supposed to take his connecting flight to Surigao City. However, due to typhoon
Osang, the connecting flight to Surigao City was cancelled. PAL initially gave out
cash assistance of P100 and, the next day, P200 for their expected stay of two
25 DVOREF 2C Ab Initio
days in Cebu. Pantejo requested instead that he be accommodated in a hotel at
the expense of PAL as he did not have cash with him at that time but PAL
refused. Fortunately, Pantejo was accommodated by Andoni Dumlao and he
shared a room with the latter at Sky View Hotel with the promise to pay his share
of the expenses upon reaching Surigao. When the flight for Surigao was resumed,
Pantejo was informed that the hotel expenses of his co-passengers were
reimbursed by PAL. At this point, Pantejo informed the Manager for Departure
Services of PAL at Mactan Airport that he was going to sue the airline for
discriminating against him. The manager offered to pay Pantejo P300 which the
latter declined. Pantejo filed a suit for damages against PAL in the Regional Trial
Court of Surigao City. Said court rendered judgment in favor of Pantejo, ordering
PAL to pay Pantejo P300 for actual damages, P150,000 as moral damages,
P100,000 as exemplary damages, P15,000 as attorney's fees, and 6% interest
from the time of the filing of the complaint until said amounts shall have been
fully paid, plus costs of suit. On appeal, CA affirmed the decision, but with the
exclusion of the award of attorney's fees and litigation expenses. Hence, this
petition.
Page
ISSUE:
1. Whether or not PAL was liable for damages.
 CREDIT TRANSACTIONS
2. Whether or not the interest of 6% imposed should be computed
from the date of rendition of judgment and not from the filing
of the complaint.
HELD:
1. YES. A contract to transport passengers is quite different in kind and
degree from any other contractual relation because of the relation which an air
carrier sustains with the public. Its business is mainly with the travelling public. It
invites people to avail of the comforts and advantages it offers. The contract of
air carriage, therefore, generates a relation attended with a public duty. Neglect
or malfeasance of the carrier's employees naturally could give ground for an
action for damages.
In this case, there was bad faith on the part of PAL. Contrary to the claim
of PAL that cash assistance was given instead because of non-availability of
rooms in hotels, the evidence showed that Sky View Hotel, where respondent
Pantejo was billeted, had plenty of rooms available. Pantejo only came to know
about the reimbursements when other passengers informed him that they were
able to obtain the refund for their own hotel expenses. PAL offered to pay
P300.00 to Pantejo only after the latter had confronted the manager of PAL about
the discrimination committed against Pantejo, which the manager realized was an
actionable wrong. The hotel accommodation was not a mere amenity or privilege.
It was a company policy whenever a flight is cancelled as testified by several
witnesses. And even if it was a mere privilege, PAL was still liable for damages for
its blatant refusal to accord the so-called amenities equally to all its stranded
passengers. No compelling or justifying reason was advanced for such
discriminatory and prejudicial conduct. It was not also true that Pantejo was not
listening to the announcements. In fact, Pantejo immediately proceeded to the
office of PAL and requested for hotel accommodations. He was not only refused
accommodations, but he was not even informed that he may later on be
reimbursed for his hotel expenses. The refund of hotel expenses was
surreptitiously and discriminatorily made by PAL as only handful of passengers
knew about it. Pantejo was exposed to humiliation and embarrassment especially
because of his government position and social prominence. The discriminatory act
of PAL against Pantejo made PAL liable for moral damages under Article 21 in
relation to Article 2219 (10) of the Civil Code. As held in Alitalia Airways vs. CA,
such inattention to and lack of care by petitioner airline for the interest of its
passengers who were entitled to its utmost consideration, particularly as to their
convenience, amounted to bad faith which entitled the passenger to the award of
moral damages. Under the peculiar circumstances of this case, the awards for
actual, moral and exemplary damages granted in the judgment of CA were just
and equitable.
2. YES. The Court agreed with the contention that the interest of 6%
imposed by respondent court should be computed from the date of rendition of
judgment and not from the filing of the complaint. The rule has been laid down
in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al. 14 that:
When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
This is because at the time of the filing of the complaint, the amount of
damages to which plaintiff may be entitled remains unliquidated and not known,
until it is definitely ascertained, assessed and determined by the court, and only
after the presentation of proof thereon.
Ching vs. Nicdao (522 SCRA 316)
26 DVOREF 2C Ab Initio
Facts:
 Nicdao was charged eleven (11) counts of violation of Batas Pambansa
Bilang (BP) 22.
 MTC found her of guilty of said offenses. RTC affirmed.
 Nicdao filed an appeal to the Court of Appeals. CA reversed the decision
and acquitted accused.
 Ching is now appealing the civil aspect of the case to the Supreme Court.
Ching vigorously argues that notwithstanding respondent Nicdao’s acquittal
by the CA, the Supreme Court has the jurisdiction and authority to resolve and
rule on her civil liability. He anchors his contention on Rule 111, Sec 1B: The
criminal action for violation of Batas Pambansa Blg. 22 shall be deemed to
necessarily include the corresponding civil action, and no reservation to file such
civil action separately shall be allowed or recognized. Moreover, under the above-
quoted provision, the criminal action for violation of BP 22 necessarily includes
the corresponding civil action, which is the recovery of the amount of the
dishonored check representing the civil obligation of the drawer to the payee.
Page
Nicdao’s defense: Sec 2 of Rule 111 — Except in the cases provided for in
Section 3 hereof, after the criminal action has been commenced, the civil action
 CREDIT TRANSACTIONS
which has been reserved cannot be instituted until final judgment in the criminal
action. Accdg to her, CA’s decision is equivalent to a finding that the facts upon
which her civil liability may arise do not exist. The instant petition, which seeks to
enforce her civil liability based on the eleven (11) checks, is thus allegedly
already barred by the final and executory decision acquitting her.
Issue:
1. WON Ching may appeal the civil aspect of the case within the
reglementary period?
2. WON Nicdao civilly liable?
Held:
1. YES. Ching is entitled to appeal the civil aspect of the case within the
reglementary period.
“Every person criminally liable for a felony is also civilly liable. Extinction of
the penal action does not carry with it extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment that the fact from which the civil
might arise did not exist.
Petitioner Ching correctly argued that he, as the offended party, may appeal
the civil aspect of the case notwithstanding respondent Nicdao’s acquittal by the
CA. The civil action was impliedly instituted with the criminal action since he did
not reserve his right to institute it separately nor did he institute the civil action
prior to the criminal action.
If the accused is acquitted on reasonable doubt but the court renders
judgment on the civil aspect of the criminal case, the prosecution cannot appeal
from the judgment of acquittal as it would place the accused in double jeopardy.
However, the aggrieved party, the offended party or the accused or both may
appeal from the judgment on the civil aspect of the case within the period
therefor.
GENERAL RULE:
Civil liability is not extinguished by acquittal:
1. where the acquittal is based on reasonable doubt;
2. where the court expressly declares that the liability of the accused is
not criminal but only civil in nature; and
3. where the civil liability is not derived from or based on the criminal act
of which the accused is acquitted.
2. NO. A painstaking review of the case leads to the conclusion that
respondent Nicdao’s acquittal likewise carried with it the extinction of the action
to enforce her civil liability. There is simply no basis to hold respondent Nicdao
civilly liable to petitioner Ching.
CA’s acquittal of respondent Nicdao is not merely based on reasonable
doubt. Rather, it is based on the finding that she did not commit the act
penalized under BP 22. In particular, the CA found that the P20,000,000.00 check
was a stolen check which was never issued nor delivered by respondent Nicdao to
petitioner Ching.
CA did not adjudge her to be civilly liable to petitioner Ching. In fact, the
CA explicitly stated that she had already fully paid her obligations. The finding
relative to the P20,000,000.00 check that it was a stolen check necessarily
absolved respondent Nicdao of any civil liability thereon as well.
Under the circumstances which have just been discussed lengthily, such acquittal
carried with it the extinction of her civil liability as well.
Phil. Phosphate Fertilizer Corp. vs. Kamalig Resources, Inc.
(540 SCRA 139)
FACTS: This is a case for collection of sum of money representing
overwithdrawals by respondent Kamalig Resources, Inc. (Kamalig) of fertilizer
stocks of various grades from the Iloilo and Manila warehouses of petitioner
27 DVOREF 2C Ab Initio
Philippine Phosphate Fertilizer Corporation (Philphos).
Kamalig purchased fertilizer products from Philphos for eventual sale to its
customers. The agreement governing the business transaction consisted of
advance payment to Philphos for Kamaligs purchases of fertilizer products,
followed by Philphoss issuance of a Sales Official Receipt and an Authority to
Withdraw, indicating the kind of fertilizer product purchased and the location of
the warehouse where the merchandise would be picked up. Kamalig would
subsequently resell the fertilizer products and issue to its customers the
corresponding Delivery Orders signed only by its authorized officers. The
customers would then present the Delivery Orders to the proper Philphos
warehouse for the release of the fertilizer products.
On 30 September 1985, Kamalig purchased from and made advance
payments for fertilizer products of various grades to Philphos in the total sum
of P4,548,152.53 , embodied in Sales Official Receipt No. 03539, covering the
following commercial invoices: (a) Commercial Invoice (CI) No. 04891 for
Page
fertilizer products to be withdrawn from the warehouse in Poro Point; (b) CI No.
04892 for fertilizer products to be withdrawn from the Manila supply point; (c) CI
 CREDIT TRANSACTIONS
No. 04893 for such products to be withdrawn from the Iloilo warehouse; and (d)
CI No. 04894 for the products to be withdrawn from the Davao supply point.
In a subsequent letter dated 14 October 1985, Kamalig requested another
adjustment, this time a conversion of its stocks in Davao to be delivered and
picked up in Manila.
 
All these requests were approved by Philphos.
 
In the letter dated 21 July 1986, Philphos informed Kamalig of its
overwithdrawal of various fertilizer stocks in the supply depots
in Manila and Iloilo. This consisted of 291.45 metric tons (MT) of fertilizer grade
21-0-0 from the Manila supply point and 50 MT each of fertilizer grades 14-14-
14, 16-20-0, and 21-0-0 from the Iloilo supply station. According to Philphos, the
cost of these overwithdrawals by Kamalig amounted to P1,016,994.21. But since
Philphos also had an obligation to Kamalig in the amount of P470,348.91
representing the Capital Recovery Component, partial compensation took place
by operation of law thereby reducing Kamaligs obligation to P546,645.30. Thus,
Philphos demanded that this sum be settled on or before 31 July 1986, otherwise
Kamalig would be charged 34% interest per annum. Kamalig, however, denied
that it had exceeded its withdrawals of fertilizer and thus contended that it should
not be made liable for any amount.
On 20 August 1987, Philphos filed the case for collection of a sum of
money against Kamalig before the RTC of Makati City. During pre-trial, the
parties agreed to confine the issue to whether or not Kamalig overwithdrew 150
MT or 3,000 bags of various grades of fertilizer products amounting
to P441,738.50 from Philphoss warehouse in Iloilo and 291.45 MT or 5,829 bags
of fertilizer grade 21-0-0 amounting to P575,255.71 from Philphoss warehouse in
Manila. Hence, this petition.
ISSUE:
(1) WON Philphos is liable to Kamalig for the sum of P645,190.29,
considering that based on Philphoss evidence, it is Kamalig who is
indebted to Philphos for the sum of P538,486.74
(2) Whether there was basis for the imposition of the award of
attorney’s fees.
HELD:
(1) YES. Under Article 1956 of the Civil Code, no interest shall be due unless it
has been expressly stipulated in writing. Philphos presented only its demand
letters insisting on payment of the value of the overwithdrawals and imposition of
34% interest per annum if payment is not made in due time. Said unilateral
impositions of interest do not suffice as proof of agreement on the alleged 34%
per annum interest.
(2) Philphos claims attorney’s fees under Article 2208 of the Civil Code which
provides that attorney’s fees may be granted where “the defendant acted in gross
and evident bad faith in refusing to satisfy the plaintiff’s plainly valid, just and
demandable claim.” Suffice it to say the evidence does not bear out any gross
and evident bad faith on the part of Kamalig.
As to the Court of Appeals’ award of attorney’s fees to Kamalig, it appears
that the award was granted under the auspices of Art. 2208, par. (4) which
provides that attorney’s fees may be recovered “in case of a clearly unfounded
civil action or proceeding against the plaintiff”—or in this case, against then
defendant Kamalig—since the appellate court reasoned that Kamalig was
compelled to hire the services of a lawyer to defend itself. In this case,
overwithdrawals of fertilizer products in Iloilo had been proven, showing that
indeed there was cause for filing of a complaint against Kamalig. Kamalig is
thus not entitled to attorney’s fees. The general rule is that attorney’s fees
cannot be recovered as part of damages because no premium should be placed
on the right to litigate. In short, the grant of attorney’s fees as part of damages
is the exception rather than the rule, and counsel’s fees are not awarded every
time a party prevails in a suit.
28 DVOREF 2C Ab Initio
De la Paz vs. L&J Development Company (734 SCRA 364)
FACTS: Out of trust and confidence, Rolando dela Paz lent a sum of money worth
Php 350,000 to L & J Development Corporation, a property developer represented
by Atty. Esteban Salonga as its president and general manager.
The loan was executed without any security and no maturity date. It was
however agreed between the parties that the loan will have a 6% monthly
interest (amounting to Php 21,000). So far, L&J paid a total of Php 576,000
already – including interest charges from December 2000 to August 2003.
L&J later failed to make payments due to financial difficulties in the
business. Rolando then filed a collection case with the MTC and alleged as of
January 2005, L&J still owes him Php 772,000 inclusive of monthly interests.
L&J (represented by Atty. Salonga) did not deny that they did incurred a
debt from Rolando, and admitted that they failed to pay due to a fortuitous event
(financial difficulties). They also contended that the 6% monthly interest is
Page
unconscionable and that their total payment of Php 576,000 should be applied to
the principal loan which only amounts to Php 350,000.
 CREDIT TRANSACTIONS
Rolando also contends that Atty. Salonga tricked him to execute the said
loan plus interest without reducing the agreement in writing. He also said that
the 6% interest rate was at the suggestion and insistence of L&J.
The MTC rendered judgment in favor of Rolando and upheld the 6%
interest rate as valid since L&J complied to it as evidenced by the payment they
made from December 2000 to August 2003. L&J is now estopped to impugn said
interest rate.
The MTC also reduced the legal interest rate to 12% per annum on the remaining
loan for reasons of equity. They did not grant the prayer of moral damages to
Rolando since there was no bad faith on the part of L&J.
L&J appealed the decision to the RTC – contending once again that the 6%
interest rate is unconscionable, and that their previous payment which totaled
Php 576,000 should be used to set off the principal loan of Php 350,000. RTC
however affirmed the decision of the MTC. L&J appealed to the CA.
CA ruled in favor of L&J, noting that the agreed 6% interest rate was not
reduced in a written agreement and hence, it should not be considered due. CA
ruled that the loan was already paid, and that Rolando should return the excess
Php 226,000 with interest of 12% per annum. The case has now reached the
Supreme Court.
ISSUE: Whether or not the unwritten 6% interest agreement should be
honored.
HELD: No. The Supreme Court held that, as provided under the Civil Code, an
agreement regarding loan interests should be stipulated in writing. Even if the
6% monthly rate was done in writing, it will still be void for being unconscionable
and contrary to morals and public policy – for at this time, an interest rate of 3%
and higher is considered excessive and exorbitant.
Furthermore, the lack of maturity date puts the total interest to a
whooping 72% per annum which the Supreme Court considered to be “definitely
outrageous and inordinate.” The Supreme Court affirmed CA’s ruling, but as to
Rolando’s obligation to pay the excess Php 226,000, the interest rate was
reduced from 12% to 6% per annum.
Nacar vs. Gallery Frames and/or Felipe Bordey, Jr.
(703 SCRA 439)
(Compensatory, Penalty or Indemnity Interest)
*Amending the Eastern Shipping Doctrine
*Important: because this case discusses the amendment of the legal interest in
loan and forbearance of money, credits or goods from 12% to 6% effective July
1, 2013.
Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution
No. 796, approved the amendment of Section 2 of Circular No. 905, Series of
1982 and, accordingly, issued Circular No. 799, Series of 2013, effective July 1,
2013, the pertinent portion of which reads: Section 1. The rate of interest for the
loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall
be six percent (6%) per annum.
Thus, from the foregoing, in the absence of an express stipulation as to
the rate of interest that would govern the parties, the rate of legal interest for
loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be 12% per annum but will now be 6% per annum
effective July 1, 2013. Ø It should be noted, nonetheless, that the new rate could
only be applied prospectively and not retroactively. Consequently, the 12% per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of 6% per annum shall be the prevailing rate of interest when
applicable.
To recapitulate and for future guidance, the guidelines laid down in the
case of Eastern Shipping Lines are accordingly modified to embody BSP-MB
29 DVOREF 2C Ab Initio
Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held liable
for damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
New guidelines in the award of interest:
1.) When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
Page
2.) When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
 CREDIT TRANSACTIONS
discretion of the court at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
3.) When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
Application in this case: The interest of 12% per annum of the total
monetary awards, computed from May 27, 2002 to June 30, 2013 and 6% per
annum from July 1, 2013 until their full satisfaction, is awarded.
David vs. Court of Appeals (310 SCRA 710)
FACTS: A writ of attachment over the real property owned by Valentin Afable, Jr.
RTC ordered Afable to pay David 66,500 plus interest from July 24, 1974, until
fully paid. RTC amended its decision and ruled that legal rate of interest should
be computed from 4 1986, instead of June 24 1974.
Afable appealed to the CA and then to the SC. In both instances, the
decision of the lower court was affirmed.
An Alias Writ of Execution was issued by virtue of which respondent
Sheriff Pena conducted a political nod.
Sheriff Peña informed the petitioner that the total amount of the judgment
is P270,940.52. The amount included a computation of simple interest.
Afable, however, claimed that the judgment award should be
3,027,238.50, because the amount due ought to be based on compounded
interest. Although the auctioned properties were sold to the petitioner, Sheriff
Peña did not issue the Certificate of Sale because there was an excess in the bid
price in the amount of P2,941,524.47, which the petitioner failed to pay despite
notice. David filed a Motion praying that respondent Judge Cruz issue an order
directing respondent Sheriff Peña to prepare and execute a certificate of sale in
his favor. His reason is that compound interest, which is allowed by Article 2212
of the Civil Code, should apply in this case.
David claim that in computing the interest due of the P66,500.00, interest
should be computed at 6% on the principal sum of P66,500.00 pursuant to Article
2209 and then “interest on the legal interest” should also be computed in
accordance with the language of Article 2212 of the Civil Code.
ISSUE: WON the amount of due to subject to a simple hearing with
simple interest or compounded interest
HELD: In cases where no interest stipulated, no compounded interest could be
further earned.
The Court ruled that Article 2212 contemplates the presence of stipulated
or conventional interest which has accrued when demand was judicially made. In
cases where no interest had been stipulated by the parties, as in the case of
Philippine American Accident Insurance, no accrued conventional interest could
further earn interest upon judicial demand.
In this case, no interest was stipulated by the parties. In the promissory
note denominated “Compromise Agreement”' signed by the Afable, Jr. which was
duly accepted by the David no interest was mentioned. 'That being the case, the
30 DVOREF 2C Ab Initio
interest should only be subject to a simple interest.
Ligutan vs. Court of Appeals (376 SCRA 560)
DOCTRINE: A penalty clause, expressly recognized by law, is an accessory
undertaking to assume greater liability on the part of an obligor in case of breach
of an obligation. It functions to strengthen the coercive force of the obligation
and to provide, in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages
caused by the breach. Although a court may not at liberty ignore the freedom of
the parties to agree on such terms and conditions as they see fit that contravene
neither law nor morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly or irregularly
complied with.
FACTS: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in
Page
the amount of P120,000.00 from respondent Security Bank and Trust Company
on on 11 May 1981. The loan was evidenced by a promissory note with interest
 CREDIT TRANSACTIONS
of 15.189% per annum, a penalty of 5% every month on the outstanding
principal and interest in case of default. The obligation matured on 8 September
1981; the bank, however, granted an extension but only up until 29 December
1981.
Despite several demands from the Security Bank, petitioners failed to
settle the debt which, as of 20 May 1982, amounted to P114,416.10. On 30
September 1982, the bank sent a final demand letter to petitioners informing
them that they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the bank filed on 3
November 1982, with the Regional Trial Court of Makati, Branch 143, a complaint
for recovery of the due amount. RTC ruled in favor of the plaintiff and against the
defendants, ordering the latter to pay, jointly and severally, to the plaintiff.
Petitioners interposed an appeal with the Court of Appeals, assailing the
imposition of the 2% service charge, the 5% per month penalty charge and 10%
attorney's fees.
In its decision of 7 March 1996, the appellate court affirmed the judgment
of the trial court except on the matter of the 2% service charge which was
deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with the
decision of the appellate court, both parties filed their respective motions for
reconsideration. Petitioners prayed for the reduction of the 5% stipulated penalty
for being unconscionable. The bank, on the other hand, asked that the payment
of interest and penalty be commenced not from the date of filing of complaint but
from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions
thusly:
"We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00
with interest thereon must commence not on the date of filing of the complaint as
we have previously held in our decision but on the date when the obligation
became due. Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render the
obligor in default when the obligation or the law so provides. In the case at bar,
defendants-appellants executed a promissory note where they undertook to pay
the obligation on its maturity date 'without necessity of demand.' They also
agreed to pay the interest in case of non-payment from the date of default.
Aggrieved by the decision and resolutions of the Court of Appeals,
petitioners elevated their case to this Court on 9 July 1999 via a petition for
review on certiorari under Rule 45 of the Rules of Court, submitting thusly - "I.
The respondent Court of Appeals seriously erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month or thirty-six (36%)
percent per annum imposed by private respondent bank on petitioners’ loan
obligation are still manifestly exorbitant, iniquitous and unconscionable.
Respondent bank, which did not take an appeal, would, however, have it
that the penalty sought to be deleted by petitioners was even insufficient to fully
cover and compensate for the cost of money brought about by the radical
devaluation and decrease in the purchasing power of the peso, particularly vis-a-
vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank
would stress that only the amount of P5,584.00 had been remitted out of the
entire loan of P120,000.
ISSUE: Whether or not the 15.189% interest and the penalty of 3% per
month (36% per annum) is exorbitant, iniquitous, and unconscionable.
RULING:
Petition is DENIED.
HELD:
The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution will depend on such factors as, but
not confined to, the type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like, the application of which,
31 DVOREF 2C Ab Initio
by and large, is addressed to the sound discretion of the court.
The Court of Appeals, exercising its good judgement has reduced the
penalty interest from 5% a month to 3% a month. Given the circumstances and
the repeated acts of breach by petitioners of their contractual obligation, the
Court sees no cogent ground to modify the ruling of the appellate court.
The stipulated interest of 15.189% per annum, does not appear as being
excessive. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that as a surcharge or a
penalty. A penalty stipulation is not necessarily preclusive of interest, if there is
an agreement to that effect, the two being distinct concepts which may
separately be demanded. The interest prescribed in loan financing arrangements
is a fundamental part of the banking business and the core of a banks existence.
Silos vs. Philippine National Bank
(G.R. 181045, July 2, 2014)
Page
 CREDIT TRANSACTIONS
FACTS: In loan agreements, it cannot be denied that the rate of interest is a
principal condition, if not the most important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it has no binding effect.
Spouses Eduardo and Lydia Silos secured a revolving credit line with
Philippine National Bank (PNB)through a real estate mortgage as a security. After
two years, their credit line increased. Spouses Silos then signed a Credit
Agreement, which was also amended two years later, and several Promissory
Notes (PN) as regards their Credit Agreements with PNB.
The said loan was initially subjected to a 19.5% interest rate per annum.
In the Credit Agreements, Spouses Silos bound themselves to the power of PNB
to modify the interest rate depending on whatever policy that PNB may adopt in
the future, without the need of notice upon them. Thus, the said interest rates
played from 16% to as high as 32% per annum.
Spouses Silos acceded to the policy by pre-signing a total of twenty-six
(26) PNs leaving the individual applicable interest rates at hand blank since it
would be subject to modification by PNB. Spouses Silos regularly renewed and
made good on their PNs, religiously paid the interests without objection or fail.
However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the
interest rates soared. Spouses Silos ’ 26th PN became past due, and despite
repeated demands by PNB, they failed to make good on the note . Thus, PNB
foreclosed and auctioned the involved security for the mortgage. Spouses Silos
instituted an action to annul the foreclosure sale on the ground that the
succeeding interest rates used in their loan agreements was left to the sole will of
PNB, the same fixed by the latter without their prior consent and thus, void. The
Regional Trial Court (RTC) ruled that such stipulation authorizing both the
increase and decrease of interest rates as may be applicable is valid. The Court of
Appeals (CA) affirmed the RTC decision.
ISSUE: May the bank, on its own, modify the interest rate in a loan
agreement without violating the mutuality of contracts?
HELD: No. Any modification in the contract, such as the interest rates, must be made with
the consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the agreement. In
the case of loan agreements, the rate of interest is a principal condition, if not the most
important component. Loan and credit arrangements may be made enticing by, or
"sweetened" with, offers of low initial interest rates, but actually accompanied by provisions
written in fine print that allow lenders to later on increase or decrease interest rates
unilaterally, without the consent of the borrower, and depending on complex and subjective
factors. Because they have been lured into these contracts by initially low interest rates,
borrowers get caught and stuck in the web of subsequent steep rates and penalties,
surcharges and the like. Being ordinary individuals or entities, they naturally dread legal
complications and cannot afford court litigation; they succumb to whatever charges the
lenders impose. At the very least, borrowers should be charged rightly; but then again this is
not possible in a one-sided credit system where the temptation to abuse is strong and the
willingness to rectify is made weak by the eternal desire for profit.
Solidbank Corporation vs. Permanent Homes, Incorporated
(625 SCRA 275)
FACTS: The records disclose that PERMANENT HOMES is a real estate
development company, and to finance its housing project known as the “Buena
Vida Townhome” located within Merville Subdivision, Parañaque City, it applied
and was subsequently granted by SOLIDBANK with an “Omnibus Line” credit
facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY
NINE MILLION as time loan for a term of up to three hundred sixty (360) days,
with interest thereon at prevailing market rates, and subject to monthly
repricing. The remaining ONE MILLION was available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged
three(3) townhouse units within the Buena Vida project in Parañaque. At the
time, however, the instant complaint was filed against SOLIDBANK, a total of
thirty six (36) townhouse units were mortgaged with said bank. Of the 60 million
32 DVOREF 2C Ab Initio
available to PERMANENT HOMES, it availed of a total of 41.5 million pesos
covered by three(3) promissory notes. There was a standing agreement by the
parties that any increase or decrease in interest rates shall be subject to the
mutual agreement of the parties.
For the three loan availments that PERMANENT HOMES obtained, the
herein respondent argued that SOLIDBANK unilaterally and arbitrarily accelerated
the interest rates without any declared basis of such increases, of which
PERMANENT HOMES had not agreed to, or at the very least, been informed of.
On July 5, 2002, the trial court promulgated its Decision in favor of
Solidbank. Permanent then filed an appeal before the appellate court which was
granted, in which reversed and set aside the assailed decision dated July 5, 2002.
Hence, the present petition.
ISSUES:
(1) WON the Honorable Court of Appeals was correct in ruling that the
increases in the interest rates on Permanent’s loans are void for having
been unilaterally imposed without basis.
Page
 CREDIT TRANSACTIONS
(2) WON the Honorable Court of Appeals was correct in ordering the
parties to enter into an express agreement regarding the applicable
interest rates on Permanent’s loan availments subsequent to the initial
thirty-day (30) period.
RULING: (1) Yes. Although interest rates are no longer subject to a ceiling, the
lender still does not have an unbridled license to impose increased interest rates.
The lender and the borrower should agree on the imposed rate, and such
imposed rate should be in writing of which was not provided by petitioner.
(2) Yes. In order that obligations arising from contracts may have the force of
law between the parties, there must be mutuality between the parties based on
their essential quality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties is void. There was no showing that either Solidbank or
Permanent coerced each other to enter into the loan agreements. The terms of
the Omnibus Line Agreement and the promissory notes were mutually and freely
agreed upon by the parties.
Polotan vs. Court of Appeals (296 SCRA 247)
FACTS: Private respondent Security Diners International Corporation (Diners
Club), a credit card company, extends credit accomodations to its cardholders for
the purchase of goods and other services from member establishments. Said
goods and services are reimbursed later on by cardholders upon proper billing.
Petitioner Rodelo G. Polotan, Sr. applied for membership and credit
accomodations with Diners Club in October 1985. The application form contained
terms and conditions governing the use and availment of the Diners Club card,
among which is for the cardholder to pay all charges made through the use of
said card within the period indicated in the statement of account and any
remaining unpaid balance to earn 3% interest per annum plus prime rate of
Security Bank & Trust Company. Notably, in the application form submitted by
petitioner, Ofricano Canlas obligated himself to pay jointly and severally with
petitioner the latters obligation to private respondent.
Upon acceptance of his application, petitioner was issued Diners Club card
No. 3651-212766-3005. As of May 8, 1987, petitioner incurred credit charges
plus appropriate interest and service charges in the aggregate amount of
P33,819.84 which had become due and demandable.
Demands for payment made against petitioner proved futile. Hence,
private respondent filed a Complaint for Collection of Sum of Money against
petitioner before the lower court.
The lower court rendered judgment ordering defendants to pay jointly and
severally plaintiff:
a) The amount of P33,819.84 and interest of 3% per annum plus prime
rate of SBTC and service charges of 2% per month starting May 9, 1987 until the
entire obligation is fully paid;
b) An amount equivalent to 25% of any and all amounts due and payable
as attorneys fees, plus costs of suit.
With respect to the cross-claim of defendant Ofricano Canlas, defendant
Rodelo G. Polotan, Sr. is ordered to indemnify and/or reimburse the former for
whatever he may be ordered to pay plaintiff.
The Court of Appeals affirmed the ruling of the lower court. 
ISSUE: WON RESPONDENT COURT OF APPEALS COMMITTED AN ERROR
OF LAW IN RULING AS VALID AND LEGAL THE FOLLOWING PROVISION
ON INTEREST IN THE DINERS CARD CONTRACT
RULING:
This Court finds petitioner’s contentions without merit.
The core issue is basically one of fact. This case stemmed from a simple
33 DVOREF 2C Ab Initio
complaint for collection of sum of money. The lower court and the Court of
Appeals found that petitioner indeed owed Diners Club the amount being
demanded.
In the instant case, a review of the decisions of the lower court, as well as
the Court of Appeals, shows that the conclusions have been logically arrived at
and substantially supported by the evidence presented by the parties.
The Petitioner’s claim that since the contract he signed with Diners Club
was a contract of adhesion, the obscure provision on interest should be resolved
in his favor.
A contract of adhesion is one in which one of the contracting parties
imposes a ready-made form of contract which the other party may accept or
reject, but cannot modify. One party prepares the stipulation in the contract,
while the other party merely affixes his signature or his adhesion thereto, giving
no room for negotiation and depriving the latter of the opportunity to bargain on
equal footing.
Page
Admittedly, the contract containing standard stipulations imposed upon those
who seek to avail of its credit services was prepared by Diners Club.  There is no
 CREDIT TRANSACTIONS
way a prospective credit card holder can object to any onerous provision as it is
offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity
in its provisions must be construed against private respondent.
Indeed, the terms prime rate, prevailing market rate, 2% penalty charge,
service fee, and guiding rate are technical terms which are beyond the ken of an
ordinary layman. To be sure, petitioner hardly falls into the category of an
ordinary layman as by his own admission he is a lawyer by profession, a
reputable businessman and a noted leader of a number of socio-civic
organizations. With such impressive credentials, this Court is hard-put to fathom
someone of his calibre entering into a contract with eyes blindfolded.
Nevertheless, these types of contracts have been declared as binding as
ordinary contracts, the reason being that the party who adheres to the contract is
free to reject it entirely.
The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising from a contract
has the force of law between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any contract which appears
to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance
of the contract which is left solely to the will of one of the parties, is likewise,
invalid. It is important to stress that the Court is not precluded from ruling out
blind adherence to their terms if the attendant facts and circumstances show that
they should be ignored for being obviously too one-sided.
In this case, petitioner, in effect, claims that the subject contract is one-
sided in that the contract allows for the escalation of interests, but does not
provide for a downward adjustment of the same in violation of Central Bank
Circular 905.
The claim is without basis. First, by signing the contract, petitioner and
private respondent agreed upon the rate as stipulated in the subject
contract. Such is now allowed by C.B. Circular 905. Second, petitioner failed to
cite any particular provision of said Circular which was allegedly violated by the
subject contract.
Be that as it may, there is nothing inherently wrong with escalation
clauses. Escalation clauses are valid stipulations in commercial contracts to
maintain fiscal stability and to retain the value of money in long term contracts.
Petitioner further argues that the interest rate was unilaterally imposed
and based on the standards and rate formulated solely by Diners Club.
The contractual provision in question states that if there occurs any
change in the prevailing market rates, the new interest rate shall be the guiding
rate in computing the interest due on the outstanding obligation without need of
serving notice to the Cardhoder other than the required posting on the monthly
statement served to the Cardholder. This could not be considered an escalation
clause for the reason that it neither states an increase nor a decrease in interest
rate. Said clause simply states that the interest rate should be based on the
prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a
reduction in interest rate, it nevertheless provides a leeway for the interest rate
to be reduced in case the prevailing market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which
provides that the Cardholder hereby authorizes Security Diners to
correspondingly increase the rate of such interest in the event of changes in
prevailing market rates x x x is an escalation clause. However, it cannot be said
to be dependent solely on the will of private respondent as it is also dependent
on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as long
as they are not solely potestative but based on reasonable and valid
grounds. Obviously, the fluctuation in the market rates is beyond the control of
private respondent.
34 DVOREF 2C Ab Initio
Briones vs. Cammayo (41 SCRA 404)
FACTS: Aurelio G. Briones filed an action in the Municipal Court of Manila against
Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover
from them, jointly and severally, the amount of P1,500.00, plus damages,
attorney's fees and costs of suit.
Defendants executed the real estate mortgage as security for the loan of
P1,200.00 given to Primitivo P. Cammayo upon the usurious agreement that
defendant pays to the plaintiff, out of the alleged loan of P1,500.00 (which
includes as interest the sum of P300.00) for one year.
Although the mortgage contract was executed for securing the payment of
P1,500.00 for a period of one year, without interest, the truth and the real fact is
that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of
P1,200.00 and withheld the sum of P300.00 which was intended as advance
interest for one year.
Page
 CREDIT TRANSACTIONS
On account of said loan of P1,200.00, defendant Primitivo P. Cammayo
paid to the plaintiff during the period from October 1955 to July 1956 the total
sum of
P330.00 which plaintiff, illegally and unlawfully refused to acknowledge as part
payment of the account but as in interest of the said loan for an extension of
another term of one year.
ISSUE: Can Briones recover the amount of P1,500.00?
RULING: Loan is valid but usurious interest is void. Creditor has the right to
recover his capital by judicial action. To discourage stipulations on usurious
interest, said stipulations are treated as wholly void, so that the loan becomes
one without stipulation as to payment of interest.
It should not, however, be interpreted to mean forfeiture even of the
principal, for this would unjustly enrich the borrower at the expense of the
lender. Furthermore, penal sanctions are available against a usurious lender, as a
further deterrence to usury.
In simple loan with stipulation of usurious interest, the prestation of the
debtor to pay the principal debt, which is the cause of the contract (Article 1350,
Civil Code), is not illegal. The illegality lies only as to the prestation to pay the
stipulated interest; hence, being separable, the latter only should be deemed
void, since it is the only one that is illegal.
Barrredo, J., concurring
The Usury law is clear that he may recover only all interests, including of
course, the legal part thereof, with legal interests from the date of judicial
demand, without maintaining that he can also recover the principal he has
already paid to the lender.
Castro Fernando, and Conception, JJ., dissenting
In a contract which is tainted with usury, that is, with a stipulation
(whether written or unwritten) to pay usurious interest, the prestation to pay
such interest is an integral part of the cause of the contract. It is also the
controlling cause, for a usurer lends his money not just to have it returned but
indeed, to acquire in coordinate gain.
Article l957, which declares the contract itself – not
merely the stipulation to pay usurious interest -- void,
necessarily regards the prestation to pay usurious interest
as an integral part of the cause, making it illegal.
First Metro Investment Corp. vs. Este Del Sol Mountain
Reserve, Inc. (369 SCRA 99)
FACTS: Petitioner FMIC granted respondent a loan of Seven Million Three
Hundred Eighty Five Thousand Five Hundred Pesos (P7,385,500.00) to finance
the construction of a sports complex at Montalban, Rizal. Respondent also
executed, as provided for by the Loan Agreement, an Underwriting Agreement
with underwriting fee, annual supervision fee and consultancy fee with
Consultancy Agreement for four (4) years, coinciding with the term of the loan.
The said fees were deducted from the first release of loan. Respondent failed to
meet the schedule of repayment. Petitioner instituted an instant collection suit.
The trial court rendered its decision in favor of petitioner. The Court of Appeals
reversed the decision of the trial court in favor of herein respondents after its
factual findings and conclusion.
ISSUE: Whether or not the Underwriting and Consultancy Agreements
were mere subterfuges to camouflage the usurious interest charged by
the petitioner.
HELD: YES. In the instant case, several facts and circumstances taken altogether
show that the Underwriting and Consultancy Agreements were simply cloaks or
devices to cover an illegal scheme employed by petitioner FMIC to conceal and
collect excessively usurious interest. “Art. 1957.  Contracts and stipulations,
under any cloak or device whatever, intended to circumvent the laws against
35 DVOREF 2C Ab Initio
usury shall be void.  The stipulated penalties, liquidated damages and attorney’s
fees, excessive, iniquitous and unconscionable and revolting to the conscience as
they hardly allow the borrower any chance of survival in case of default. Hence,
the instant petition was denied and the assailed decision of the appellate court is
affirmed.
Tan vs. Court of Appeals (367 SCRA 571)
FACTS:
1. Petition for review.
2. TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.
1. Executed a promissory note in amount of P3,411,421.32; payable
in 5 installments. 
2. TAN failed to pay any installment on the said restructured loa.
3. In a letter, TAN requested and proposed to respondent CCP a mode
of paying the restructured loan
                                              i.     20% of the principal amount of the loan
Page
upon the respondent giving its conformity to his proposal
 CREDIT TRANSACTIONS
                                             ii.     Balance on the principal obligation payable
36 monthly installments until fully paid. 
4. TAN requested for a moratorium on his loan obligation until the ISSUES: WON there are contractual and legal bases for the imposition of
following year allegedly due to a substantial deduction in the the penalty, interest on the penalty and attorney’s fees.
volume of his business and on account of the peso devaluation. 
                                              i.     No favorable response was made to said
letters.  HELD: CA DECISION AFFIRMED with MODIFICATION in that the penalty charge
                                             ii.     CCP demanded full payment, within ten (10) of two percent (2%) per month on the total amount due, compounded monthly,
days from receipt of said letter P6,088,735.03. is hereby reduced to a straight twelve percent (12%) per annum starting from
3. CCP FILED COMPLAINT collection of a sum of money August 28, 1986.  With costs against the petitioner.
1. TAN interposed the defense that he accommodated a friend who
asked for help to obtain a loan from CCP.  1. WON there are contractual and legal bases for the imposition of the
                                              i.     Claimed that cannot find the friend. penalty, interest on the penalty and attorney’s fees. –YES. WITH LEGAL
2. TAN filed a Manifestation wherein he proposed to settle his BASES.
indebtedness to CCP by down payment of P140,000.00 and to 1. ART 1226: In obligations with a penal clause, the penalty shall
issue1 2 checks every beginning of the year to cover installment substitute the indemnity for damages and the payment of interests
payments for one year, and every year thereafter until the balance in case of non-compliance, if there is no stipulation to the
is fully paid.  contrary.  Nevertheless, damages shall be paid if the obligor
                                              i.     CCP did not agree to the petitioner’s refuses to pay the penalty or is guilty of fraud in the fulfillment of
proposals and so the trial of the case ensued. the obligation.
4. TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67, representing                                               i.     The penalty may be enforced only when it is
defendant’s outstanding account as of August 28, 1986, with the demandable in accordance with the provisions of this Code.
corresponding stipulated interest and charges thereof, until fully paid, plus 2. CASE AT BAR: promissory note expressed the imposition of both
attorney’s fees in an amount equivalent to 25% of said outstanding interest and penalties in case of default on the part of the

36 DVOREF 2C Ab Initio
account, plus P50,000.00, as exemplary damages, plus costs. petitioner in the payment of  the  subject  restructured loan. 
1. REASONS: 3. PENALTY IN MANY FORMS:
                                              i.     Reason of loan for accommodation of friend                                               i.     If the parties stipulate penalty apart
was not credible. monetary interest, two are different and distinct from each other and may be
                                             ii.     Assuming, arguendo, that the TAN did not demanded separately. 
personally benefit from loan, he should have filed a 3 rd-party complaint against                                              ii.     If stipulation about payment of an additional
Wilson Lucmen interest rate partakes of the nature of a penalty clause which is sanctioned by
                                           iii.     3 times the petitioner offered to settle his law:
loan obligation with CCP.  1.   ART 2209: If the obligation consists in the payment of a sum of money, and
                                           iv.     TAN may not avoid his liability to pay his the debtor incurs in delay, the indemnity for damages, there being no stipulation
obligation under the promissory note which he must comply with in good faith.  to the contrary, shall be the payment of the interest agreed upon, and in the
                                             v.     TAN is estopped from denying his liability or absence of stipulation, the legal interest, which is six per cent per annum.
loan obligation to the private respondent. 4. CASE AT BAR: Penalty charge of 2% per month began to accrue
5. TAN APPEALED TO CA, asked for the reduction of the penalties and from the time of default by the petitioner. 
charges on his loan obligation.                                               i.     No doubt petitioner is liable for both the
1. Judgment appealed from is hereby AFFIRMED. stipulated monetary interest and the stipulated penalty charge. 
1.   No alleged partial or irregular performance. 1.   PENALTY CHARGE = penalty or compensatory interest. 
2.   However, the appellate court modified the decision of the trial court by

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deleting exemplary damages because not proportionate to actual damage caused 2. WON interest may accrue on the penalty or compensatory interest without
by the non-performance of the contract violating ART 1959.
 CREDIT TRANSACTIONS
1. Penalty clauses can be in the form of penalty or compensatory
interest.                                                i.     Running of the interest and surcharge was
                                              i.     Thus, the compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant to the above-
quoted provision of Article 1959 of the New Civil Code considering that:
1.   There is an express stipulation in the promissory note (Exhibit “A”) permitting
the compounding of interest. 
a.    5th paragraph of the said promissory note provides that:  “Any interest
which may be due if not paid shall be added to the total amount when due and
shall become part thereof, the whole amount to bear interest at the maximum
rate allowed by law.”.
2.    Therefore, any penalty interest not paid, when due, shall earn the legal
interest of twelve percent (12%) per annum, in the absence of express
stipulation on the specific rate of interest, as in the case at bar.
2. ART 2212: “Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon
this point.”
3. CASE AT BAR: interest began to run on the penalty interest upon
the filing of the complaint in court by CCP.  other cost incident thereto.  The petitioner again failed to pay their obligation by
                                              i.     Hence, the courts did not err in ruling that
the petitioner is bound to pay the interest on the total amount of the principal,
the monetary interest and the penalty interest.
3. WON TAN can file reduction of penalty due to made partial payments. –
YES. BUT NOT 10% REDUCTION AS SUGGESTED BY PETITIONER.
1. REDUCED TO 2% REDUCTION:
                                              i.     PARTIAL PAYMENTS showed his good faith
despite difficulty in complying with his loan obligation due to his financial
problems. 
1.   However, we are not unmindful of the respondent’s long overdue deprivation
of the use of its money collectible.
4. The petitioner also imputes error on the part of the appellate court for not
declaring the suspension of the running of the interest during period when
the CCP allegedly failed to assist the petitioner in applying for relief from
liability
1. Alleges that his obligation to pay the interest and surcharge should
have been suspended because the obligation to pay such interest
and surcharge has become conditional
                                              i.     Dependent on a future and uncertain event
which consists of whether the petitioner’s request for condonation of interest and
surcharge would be recommended by the Commission on Audit.  P800,000.00 to respondent Cesario Gravador (Cesario), with respondents Norma
1.   Since the condition has not happened due to the private respondent’s
reneging on its promise, his liability to pay the interest and surcharge on the loan
has not arisen.  mortgage executed by Cesario over his property. Respondents paid the first
2. COURT ANSWER:
not suspended.
                                             ii.     CCP correctly asserted that it was the
primary responsibility of petitioner to inform the Commission on Audit of his
application for condonation of interest and surcharge. 
Liam Law vs. Olympic Sawmill Co. (129 SCRA 439)
Facts:
On or about September 7, 1957, the petitioner loaned P10,000.00, without
interest, to the respondent.  The loan became ultimately due on January 31,
1960 but was not paid.  The petitioner asked for a 3-month extension, or up to
April 30, 1960.  On March 17, 1960, the parties executed another loan document
for the payment of P10, 000.00 extended up to April 30, 1960 but the obligation
was increased by P6,000.00 to answer for the attorney’s fees, legal interest, and
April 30, 1960.  On September 23, 1957, the respondent instituted a collection
case.  The petitioner admitted the P10, 000.00 principal obligation  but claimed
that the additional P6, 000.00 constituted usurious interest.
37 DVOREF 2C Ab Initio
Issue:
Whether or not the additional P6, 000.00 constituted usurious interest.
Held:
No.  Usury has been legally non-existent.  Interest can now be charged as lender
and borrower may agree upon.  In the present case, the petitioner had not
proven that the P6, 000.00 additional obligation was illegal.
Asian Cathay Finance and Leasing Corporation vs. Gravador
(623 SCRA 517)
Facts: Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of
de Vera and Emma Concepcion Dumigpi as his co-makers. The loan was payable
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in 60 monthly installments of P24,000.00 each and secured by a real estate
 CREDIT TRANSACTIONS
installment for November 1999 but failed to pay the subsequent installments. In
February 2000, ACFLC demanded payment of P1,871,480.00 from respondents.
Respondents asked for more time to pay but ACFLC denied their request.
Respondents filed a case for annulment of the real estate mortgage and
promissory note before the Regional Trial Court (RTC). Respondents averred that
the mortgage did not make reference to the promissory note and contained a
provision on the waiver of the mortgagor’s right of redemption, which is contrary
to law and public policy. Respondents added that the promissory note did not
specify the maturity date of the loan, the interest rate, and the mode of payment,
and illegally imposed liquidated damages. ACFLC filed a petition for extrajudicial
foreclosure of mortgage with the office of the Deputy Sheriff. The RTC dismissed
respondents’ complaint for annulment of mortgage for lack of cause of action,
holding that respondents were well-educated individuals who could not feign
naiveté in the execution of the loan documents. The RTC further held that the
alleged defects in the promissory note and in the deed of real estate mortgage
were too insubstantial to warrant the nullification of the mortgage. It added that
a promissory note was not one of the essential elements of a mortgage, thus,
reference to a promissory note was neither indispensable nor imperative for the
validity of the mortgage. Respondents appealed to the Court of Appeals (CA)
which reversed the RTC. The CA held that the amount of P1,871,480.00
demanded by ACFLC from respondents was unconscionable and excessive. The
CA fixed the interest rate at 12% per annum and reduced the penalty charge to
1% per month. The CA also invalidated the waiver of respondents’ right of
redemption for reasons of public policy. When the CA denied ACFLC’s motion for
reconsideration, ACFLC brought the case to the Supreme Court, insisting on the
validity of the real estate mortgage and promissory note. ACFLC argued that right
of redemption was a privilege which respondents could waive as they did in this
case. It further argued that respondents’ action for annulment of mortgage was a
collateral attack on its certificate of title.
Issues:
(1) Whether or not the interest imposed by ACFLC was unconscionable
and excessive;
(2) Whether or not the provision in the real estate mortgage on the
mortgagor’s waiver of right of redemption should be voided for being
against public policy; and
(3) Whether or not the action for annulment of mortgage was a collateral
attack on ACFLC’s certificate of title.
Held: (1) It is true that parties to a loan agreement have a wide latitude to
stipulate on any interest rate in view of Central Bank Circular No. 905, series of
1982, which suspended the Usury Law ceiling on interest rate effective 1 January
1983. However, interest rates, whenever unconscionable, may be equitably
reduced or even invalidated. In a span of 3 months (from the payment of the
initial installment for November 1999 up to ACFLC’s demand on 1 February
2000), respondents’ principal obligation of P800,000.00 ballooned by more than
P1,000,000.00
ACFLC failed to show any computation on how much interest was imposed
and on the penalties charged. Thus, the amount claimed by ACFLC was
unconscionable. Stipulations authorizing the imposition of iniquitous or
unconscionable interest are contrary to morals, if not against the law. Under
Article 1409 of the Civil Code, these contracts are inexistent and void from the
beginning. They cannot be ratified nor the right to set up their illegality as a
defense be waived.
The nullity of the stipulation on the usurious interest does not, however,
affect the lender’s right to recover the principal of the loan. Nor would it affect
the terms of the real estate mortgage. The right to foreclose the mortgage
remains with the creditors, and said right can be exercised upon the failure of the
debtors to pay the debt due. The debt due is to be considered without the
stipulation of the excessive interest. A legal interest of 12% per annum will be
added in place of the excessive interest formerly imposed. The nullification by the
CA of the interest rate and the penalty charge and the consequent imposition of
an interest rate of 12% and penalty charge of 1% per month cannot, therefore,
be considered a reversible error.
The Court cited Spouses Castro vs. Tan, et al. (G.R. No. 168940; 24
38 DVOREF 2C Ab Initio
November 2009), where it held that: “The imposition of an unconscionable rate of
interest on a money debt, even if knowingly and voluntarily assumed, is immoral
and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man. It has no support
in law, in principles of justice, or in the human conscience nor is there any reason
whatsoever which may justify such imposition as righteous and as one that may
be sustained within the sphere of public or private morals.”
(2) Settled is the rule that for a waiver to be valid and effective, it must, in the
first place, be couched in clear and unequivocal terms which will leave no doubt
as to the intention of a party to give up a right or benefit which legally pertains to
him. The intention to waive a right or an advantage must be shown clearly and
convincingly. ACFLC failed to convince the Court that respondents waived their
right of redemption voluntarily. The Court agreed with the CA’s explanation in
invalidating the waiver: The supposed waiver was in fine print and in the form
and language prepared by ACFLC, partaking of the nature of a contract of
adhesion. Doubts in the interpretation of stipulations in contracts of adhesion
should be resolved against the party that prepared them.
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 CREDIT TRANSACTIONS
This principle especially holds true with regard to waivers, which are not
presumed, but which must be clearly and convincingly shown. ACFLC failed to
show the efficacy of this waiver. Moreover, to say that the mortgagor’s right of
redemption may be waived through a fine print in a mortgage contract is, in the
last analysis, tantamount to placing at the mortgagee’s absolute disposal the
property foreclosed. It would render practically nugatory this right that is
provided by law for the mortgagor for reasons of public policy. A contract of
adhesion may be struck down as void and unenforceable for being subversive to
public policy, when the weaker party is completely deprived of the opportunity to
bargain on equal footing.
(3) The case for annulment of mortgage was filed long before the consolidation of
ACFLC’s title over the property. In fact, when respondents filed said case at the
first instance, the title to the property was still in Cesario’s name. It was pending
with the RTC when ACFLC filed a petition for foreclosure of mortgage and even
when a writ of possession was issued. Clearly, ACFLC’s title was subject to the
final outcome of the case for annulment of mortgage.
Herrera vs. Petrophil Corporation (146 SCRA 385)
FACTS: Plaintiff and defendant entered into an contract of lease whereby the
former agreed to leased portion of his property for a period of 20 years. One of
the stipulation provides that, the lessor is paid 8 years advance based on the
agreed rental amount at 12% per annum. In short there was a discount.
Pursuant to the contract, the defendant paid 8 years in advance subtracting
therefrom the discounted amount. The plaintiff sued the defendant claiming that
the interest was in violation of the usury law.
ISSUE: Whether or not the contention of plaintiff is tenable?
RULING: The contract was denominated as LEASE CONTRACT. Nowhere in the
contract showing that the parties intended a loan rather than a lease. There was
no usury because there was no money given by the defendant to the plaintiff for
the latter to use. It was only a discount for paying the 8 years advance. The
difference between a discount and loan or forbearance is that the former does not
have to be paid. The latter is subject to repayment and therefor governed by
usury law. It should be of money or something circulating; it must be repayable
in all events; and it is in excess allowed by law.
Herrera vs Petrophil Corporation (146 SCRA 385)
FACTS: Francisco Herrera and ESSO Standard Eastern. Inc., (later substituted by
Petrophil Corporation) entered into a "Lease Agreement" whereby Herrera leased
to the latter a portion of his property for a period of twenty (20) years.
The “Lease Agreement” contained a stipulation to the interest which state
that the Lessor is paid 8 years advance rental based on P2, 930.70 per month
discounted at 12% interest per annum or a total net amount of P130, 288.47
before registration of lease.
Petrophil paid to Herrera advance rentals for the first eight years,
subtracting there from the amount of P101,010.73, the amount it computed as
constituting the interest or discount for the first eight years, in the total sum
P180,288.47, however explaining that there has been mistake in computation in
the additional sum of P2,182.70, Petrophil paid to the appellant the amount of
only P98,828.03.
Herrera sued Petrophil for the sum of P98,828.03, with interest, claiming
this had been illegally deducted from him in violation of the Usury Law. Petrophil
argued that the amount deducted was not usurious interest but a given to it for
paying the rentals in advance for eight years. The Trial Court rendered Judgment
in favor of Petrophil.
ISSUE: Whether or not the interest was excessive and violative of the
Usury Law?
39 DVOREF 2C Ab Initio
HELD: Herrera argued that the interest collected by defendant out of the rentals
for the first eight years was excessive and beyond that allowable by law, because
the total interest on the said amount is only P33,755.90 at P4,219.4880 per
yearly rental; and considering that the interest should be computed excluding the
first year rental because at the time the amount of P281, 199.20 was paid it was
already due under the lease contract hence no interest should be collected from
the rental for the first year, the amount of P29,536.42 only as the total interest
should have been deducted by defendant from the sum of P281,299.20.
The elements of usury are (1) a loan, express or implied; (2) an
understanding between the parties that the money lent shall or may be returned;
(3) that for such loan a greater rate or interest that is allowed by law shall be
paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take
more than the legal rate for the use of money loaned. Unless these four things
concur in every transaction, it is safe to affirm that no case of usury can be
declared.
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The contract between the parties is one of lease and not of loan. It is clearly
denominated a "LEASE AGREEMENT." Nowhere in the contract is there any
 CREDIT TRANSACTIONS
showing that the parties intended a loan rather than a lease. The provision for
the payment of rentals in advance cannot be construed as a repayment of a loan
because there was no grant or forbearance of money as to constitute
indebtedness on the part of the lessor.
There is no usury in this case because no money was given by the
defendant-appellee to the plaintiff-appellant, nor did it allow him to use its money
already in his possession. There was neither loan nor forbearance but a mere
discount which the plaintiff-appellant allowed the defendant-appellee to deduct
from the total payments because they were being made in advance for eight
years. The discount was in effect a reduction of the rentals which the lessor had
the right to determine, and any reduction thereof, by any amount, would not
contravene the Usury Law.
To constitute usury, "there must be loan or forbearance; the loan
must be of money or something circulating as money; it must be repayable
absolutely and in all events; and something must be exacted for the use of the
money in excess of and in addition to interest allowed by law."
Advocates for Truth in Lending, Inc. vs.
Bangko Sentral Monetary Board (288 SCRA 530)
FACTS: Advocates for Truth in Lending, Inc. and its President, Eduardo Olaguer
claim that they are raising issues of transcendental importance to the public and
so they filed Petition for Certiorari under Rule 65 ROC seeking to declare that the
Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the Central Bank
Monetary Board (CB-MB) by virtue of R.A. No. 7653, has no authority to continue
enforcing Central Bank Circular No. 905, issued by the CB-MB in 1982, which
"suspended" the Usury Law of 1916 (Act No. 2655).
R.A. No. 265, which created the Central Bank (CB) of the Philippines,
empowered the CB-MB to, among others, set the maximum interest rates which
banks may charge for all types of loans and other credit operations, within limits
prescribed by the Usury Law.
In its Resolution No. 2224, the CB-MB issued CB Circular No. 905, Series
of 1982. Section 1 of the Circular, under its General Provisions, removed the
ceilings on interest rates on loans or forbearance of any money, goods or credits.
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653
establishing the Bangko Sentral ng Pilipinas (BSP) to replace the CB.
ISSUE/S:
1.    Whether the CB-MB exceeded its authority when it issued CB Circular
No. 905, which removed all interest ceilings and thus suspended Act No.
2655 as regards usurious interest rates. NO
2.      Whether under R.A. No. 7653, the BSP-MB may continue to enforce
CB Circular No. 905. YES
RULING:
1. The CB-MB merely suspended the effectivity of the Usury Law when it issued
CB Circular No. 905. The power of the CB to effectively suspend the Usury Law
pursuant to P.D. No. 1684 has long been recognized and upheld in many cases.
As the Court explained in the landmark case of Medel v. CA, citing several cases,
CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter’s effectivity;" that "a CB Circular cannot repeal a law,
[for] only a law can repeal another law;" that "by virtue of CB Circular No. 905,
the Usury Law has been rendered ineffective;" and "Usury has been legally non-
existent in our jurisdiction. Interest can now be charged as lender and borrower
may agree upon."
By lifting the interest ceiling, CB Circular No. 905 merely upheld the
parties’ freedom of contract to agree freely on the rate of interest. It cited Article
1306 of the New Civil Code, under which the contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or
40 DVOREF 2C Ab Initio
public policy.
2. The BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that, "The rate of interest, including
commissions, premiums, fees and other charges, on a loan or forbearance of any
money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or
juridical, shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended." It does not purport to suspend the Usury Law only as it
applies to banks, but to all lenders.
Petitioners contend that, granting that the CB had power to "suspend" the
Usury Law, the new BSP-MB did not retain this power of its predecessor, in view
of Section 135 of R.A. No. 7653, which expressly repealed R.A. No. 265. The
petitioners point out that R.A. No. 7653 did not reenact a provision similar to
Section 109 of R.A. No. 265.
A closer perusal shows that Section 109 of R.A. No. 265 covered only
Page
loans extended by banks, whereas under Section 1-a of the Usury Law, as
amended, the BSP-MB may prescribe the maximum rate or rates of interest for
 CREDIT TRANSACTIONS
all loans or renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans, as well as such
loans made by pawnshops, finance companies and similar credit institutions. It
even authorizes the BSP-MB to prescribe different maximum rate or rates for
different types of borrowings, including deposits and deposit substitutes, or loans
of financial intermediaries. Act No. 2655, an earlier law, is much broader in
scope, whereas R.A. No. 265, now R.A. No. 7653, merely supplemented it as it
concerns loans by banks and other financial institutions. Had R.A. No. 7653 been
intended to repeal Section 1-a of Act No. 2655, it would have so stated in
unequivocal terms.
Further, the lifting of the ceilings for interest rates does not authorize
stipulations charging excessive, unconscionable, and iniquitous interest. It is
settled that nothing in CB Circular No. 905 grants lenders a carte blanche
authority to raise interest rates to levels which will either enslave their borrowers
or lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous or
unconscionable interests have been invariably struck down for being contrary to
morals, if not against the law.
Land Bank of the Phils. vs. Ong (636 SCRA 266)
FACTS: Spouses Johnson and Evangeline Sy secured a loan from Land Bank
Legazpi City in the amount of PhP 16 million. The loan was secured by three (3)
residential lots, five (5) cargo trucks, and a warehouse. Subsequently, however,
the Spouses Sy found they could no longer pay their loan. They sold three (3) of
their mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong, under a
Deed of Sale with Assumption of Mortgage. Atty. Edna Hingco, the Legazpi City
Land Bank Branch Head, told Alfredo and his counsel Atty. Ireneo de Lumen that
there was nothing wrong with the agreement. They were also told that Alfredo
should pay part of the principal which was computed at PhP 750,000 and to
update due or accrued interests on the promissory notes so that Atty. Hingco
could easily approve the assumption of mortgage. Alfredo later found out that his
application for assumption of mortgage was not approved by Land Bank. On
December 12, 1997, Alfredo initiated an action for recovery of sum of money with
damages against Land Bank, as Alfredos payment was not returned by Land
Bank. Alfredo maintained that Land Banks foreclosure without informing him of
the denial of his assumption of the mortgage was done in bad faith.
The RTC held that the contract approving the assumption of mortgage was
not perfected as a result of the credit investigation conducted on Alfredo. It ruled
that under the principle of equity and justice, the bank should return the amount
Alfredo had paid with interest at 12% per annum computed from the filing of the
complaint. Moreover, according to the appellate court, the payment of PhP
750,000 was for the approval of his assumption of mortgage and not for payment
of arrears incurred by the Sy spouses. Although Land Bank was not bound by the
Deed between Alfredo and the Spouses Sy, the appellate court found that Alfredo
and Land Banks active preparations for Alfredos assumption of mortgage
essentially novated the agreement.
ISSUE:
Whether the Trial Court erred in holding that Art. 1236 of the Civil Code
does not apply and in finding that there is no novation.
RULING:
Land Bank contends that Art. 1236 of the Civil Code backs their claim that
Alfredo should have sought recourse against the Spouses Sy instead of Land
Bank. Art. 1236 provides:
 
The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor, he
can recover only insofar as the payment has been beneficial to the debtor.
Land Bank was not bound to accept Alfredos payment, since as far as the
41 DVOREF 2C Ab Initio
former was concerned, he did not have an interest in the payment of the loan of
the Spouses Sy. However, in the context of the second part of said paragraph,
Alfredo was not making payment to fulfill the obligation of the Spouses Sy.Alfredo
made a conditional payment so that the properties subject of the Deed of Sale
with Assumption of Mortgage would be titled in his name.
Alfredo, as a third person, did not, therefore, have an interest in the
fulfillment of the obligation of the Spouses Sy, since his interest hinged on Land
Banks approval of his application, which was denied. And as Alfredo was not
paying for another, he cannot demand from the debtors, the Spouses Sy, what
he has paid.
Land Bank also faults the CA for finding that novation applies to the
instant case. We do not agree, then, with the CA in holding that there was a
novation in the contract between the parties. Not all the elements of novation
were present: (1) a previous valid obligation; (2) an agreement of all parties
concerned to a new contract; (3) the extinguishment of the old obligation; and
(4) the birth of a valid new obligation. Novation must be expressly consented to.
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 CREDIT TRANSACTIONS
The SC rule that Land Bank is still liable for the return of the PhP 750,000
based on the principle of unjust enrichment. By accepting Alfredo’s payment and
keeping silent on the status of Alfredo’s application, Land Bank misled Alfredo to
believe that he had for all intents and purposes stepped into the shoes of the
Spouses Sy.
Spouses Solangon vs Salazar (GR No. 125944, June 29,
2001)
FACTS: On 1986, 1987, and 1990 the Solangons’ executed 3 real estate
mortgages in which they mortgaged a parcel of land situated in Sta. Maria,
Bulacan, in favor of the Salazar to secure payment of a loan of P60, 000.00
payable within a period of four (4) months, with interest thereon at the rate of
6% per month, to secure payment of a loan of P136, 512.00, payable within a
period of one (1) year, with interest thereon at the legal rate, and to secure
payment of a loan in the amount of P230, 000.00 payable within a period of four
(4) months, with interest thereon at the legal rate.
This action was initiated by the Solangons to prevent the foreclosure of
the mortgaged property. They alleged that they obtained only one loan from the
defendant-appellee, and that was for the amount of P60, 000.00, the payment of
which was secured by the first of the above-mentioned mortgages. The
subsequent mortgages were merely continuations of the first one, which is null
and void because it provided for unconscionable rate of interest. They have
already paid the defendant-appellee P78, 000.00 and tendered P47, 000.00
more, but the latter has initiated foreclosure proceedings for their alleged failure
to pay the loan P230, 000.00 plus interest.
ISSUE: Is a loan obligation that is secured by a real estate mortgage with
an interest of 72% p.a. or 6% a month unconscionable?
HELD: Yes, although the C.B. Circular No 905 lifted the ceiling on interest rates
there is nothing in the said circular that grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to
hemorrhaging of their assets. In the case of Medel vs. C.A., the Supreme Court
has held that 5.5% per month was reduced for being iniquitous, unconscionable
and exorbitant hence it is contrary to morals (contra bonos mores). In this case
the Solangons’ are in a worse situation than the Medel case (6% per month
interest rate) the said interest rate should be reduced equitably.
WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject
to the MODIFICATION that the interest rate of 72% per annum is ordered
reduced to 12 % per annum.
Private Development Corporation of the Philippines vs IAC
(213 SCRA 282)
FACTS: 
On May 21, 1974, Davao Timber Corporation, DATICOR for brevity, and
the
Private Development Corporation (PDCP) entered into a loan agreement. It was
stipulated in the loan agreement, that the foreign currency loan was to be paid
with an interest rate of eleven and three fourths (11-3/4%) per cent per annum
on the disbursed amount of the foreign currency; and the peso loan at the rate of
twelve (12%) per cent per annum on the disbursed amount of the peso loan
outstanding, commencing on the several dates on which disbursements of the
proceeds of the loans were made.
A total of P3,000,000.00 was already paid by Del Rosario to PDCP and
which the latter applied to interests, service fees and penalty charges, such that
according to PDCP, DATICOR still has an outstanding balance on the principal
loan of P10,887,856.99 as of May 15, 1983.
DATICOR filed a case in the Court of First Instance of Davao Oriental
seeking a writ of injunction to prevent PDCP from foreclosing its properties in
Davao, and likewise praying for the annulment of the loan contract as it is in
42 DVOREF 2C Ab Initio
violation of the Usury Law and damages.
The then Intermediate Appellate Court set aside the decision appealed
declared the stipulations of interest in the loan agreement between DATICOR and
PDCP void and of no effect, as if the loan agreement is without stipulation as to
payment of interest."
ISSUE: 
Whether or not stipulations on usurious interest should be interpreted to
mean forfeiture even of the principal.
RULING: 
NO. As held in Angel Jose Warehousing Co., Inc. v. Chelda Enterprises, et al: "In
simple loan with stipulation of usurious interest, the prestation of the debtor to
pay the principal debt, which is the cause of the contract (Article 1350, Civil
Code), is not illegal. The illegality lies only as to the prestation to pay the
stipulated interest: hence, being separable, the latter only should be deemed
void, since it is only one that is illegal.." . . "The foregoing interpretation is
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reached with the philosophy of usury legislation in mind; to discourage
stipulations on usurious interest, said stipulations are treated as wholly void, so
 CREDIT TRANSACTIONS
that the loan becomes one without stipulation as to the payment of interest. It
should not, however, be interpreted to mean forfeiture even of the principal, for
this would unjustly enrich the borrower at the expense of the lender.
Furthermore, penal sanctions are available against a usurious lender, as a further
deterrence to usury. "The principal debt remaining without stipulation for
payment of interest can thus be recovered by judicial action."

43 DVOREF 2C Ab Initio
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